16
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______________ to _______________
Commission file number 0-22874
Uniphase Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-2579683
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
163 Baypointe Parkway
San Jose, CA 95134
(Address of principal executive offices) (Zip Code)
(408) 434-1800
(Registrant's telephone number, including area code)
_________________________________________________________________________
(Former name, former address and former fiscal year if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No_____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of October 15, 1997.
Common Stock $.001 par value 17,191,989
Class Number of Shares
Part I--FINANCIAL INFORMATION
Item 1. Financial Statements
UNIPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data) Three months ended
September 30,
1997 1996
Net sales $38,473 $23,462
Cost of sales 19,954 12,208
-------- --------
Gross profit 18,519 11,254
Operating expenses:
Research and development 2,886 1,627
Royalty and license 485 409
Selling, general and administrative 6,293 4,450
-------- --------
Total operating expenses 9,664 6,486
-------- --------
Income from operations 8,855 4,768
Interest and other income, net 762 946
-------- --------
Income before income taxes 9,617 5,714
Income tax expense 3,414 2,114
-------- --------
Net income $ 6,203 $ 3,600
======== ========
Net income per share $ 0.34 $ 0.21
======== ========
Number of weighted average shares used in per
share amounts 18,510 17,493
======== ========
See accompanying notes on page 5
UNIPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, June 30,
1997 1997
ASSETS
(unaudited)
Current assets:
Cash and cash equivalents $32,470 $29,186
Short-term investments 50,527 52,009
Accounts receivable, less allowances for
returns and doubtful accounts of $880 at
September 30, 1997 and $1,877 at
June 30, 1997 24,844 20,317
Inventories 19,224 18,668
Refundable income taxes 6,007 6,010
Deferred income taxes and other current
assets 7,783 7,525
-------- --------
Total current assets 140,855 133,715
Property, plant and equipment, net 33,517 31,251
Intangible assets 10,931 10,969
Long-term deferred income taxes and other
assets 1,703 1,644
-------- ---------
Total assets $187,006 $177,579
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ 6,061
Accounts payable 7,031 4,781
Accrued payroll and related expenses 4,704 4,528
Other accrued expenses 9,712 9,957
-------- --------
Total current liabilities 21,447 25,327
Accrued pension and other non-current
liabilities 2,611 2,475
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares--1,000,000
None issued and outstanding -- --
Common stock, $0.001 par value:
Authorized shares--20,000,000
Issued and outstanding shares--
17,191,989 a September 30, 1997 and
16,921,967 at June 30, 1997 17 17
Additional paid-in capital 163,779 156,881
Retained earnings (deficit) (901) (7,104)
Net unrealized gain on securities available-
for-sale 53 11
Foreign currency translation adjustment -- (28)
-------- ---------
Total stockholders' equity 162,948 149,777
-------- ---------
Total liabilities and stockholders' equity $187,006 $177,579
======== =========
See accompanying notes on page 5
UNIPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) Three Months Ended
September 30,
1997 1996
Operating activities
Net income $6,203 $3,600
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 1,401 641
Amortization expense 538 312
Stock compensation expense 262 188
Change in operating assets and liabilities:
Accounts receivable (4,527) (969)
Inventories (556) (3,015)
Deferred income taxes and other current
assets (255) (471)
Accounts payable, accrued liabilities and
other accrued expenses 6,709 1,408
------- -------
Net cash provided by operating activities 9,775 1,694
======= =======
Investing activities
Purchase of short-term investments (24,398) (46,277)
Proceeds from sale of short-term investments 25,922 27,659
Purchase of property, plant and equipment (3,667) (2,445)
Purchase of patent (500) --
Increase in other assets (59) --
-------- --------
Net cash used in investing activities (2,702) (21,063)
Financing activities
Repayment of notes payable (6,061) (548)
Proceeds from issuance of common stock under stock
option and stock purchase plans 2,272 904
-------- --------
Net cash provided by (used in) financing activities (3,789) 356
Increase (decrease) in cash and cash equivalents 3,284 (19,013)
Cash and cash equivalents at beginning of period 29,186 52,463
-------- --------
Cash and cash equivalents at end of period $32,470 $33,450
======== ========
See accompanying notes on page 5
Supplemental Cash Flow Information
Tax benefits on stock option and stock purchase plan $ 4,364 $ --
======= =======
UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business Activities and Basis of Presentation
The financial information at September 30, 1997 and for the three-
month period ended September 30, 1997 and 1996 is unaudited, but includes
all adjustments (consisting only of normal recurring adjustments) that the
Company considers necessary for a fair presentation of the financial
information set forth herein, in accordance with generally accepted
accounting principles for interim financial information, the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for annual financial statements. For further
information, refer to the Consolidated Financial Statements and footnotes
thereto included or incorporated by reference in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1997.
The results for the three-month period ended September 30, 1997 are
not considered indicative of the results to be expected for any future
period or for the entire year.
Note 2. Inventories
The components of inventory consist of the following:
(in thousands) September 30, June 30,
1997 1996
Raw materials and purchased
parts $ 6,794 $ 5,876
Work in process 8,379 10,468
Finished goods 4,051 2,324
--------- ---------
$19,224 $18,668
========= =========
Note 3. Taxes
*
The effective tax rate used for the three-month periods ended
September 30, 1997 and 1996 were 35.5% and 37%, respectively.
Note 4. Earnings per Share
Net income per share for the three-month period ended September 30,
1997 and 1996 is computed using the weighted average number of common
shares outstanding plus primary common share equivalents which have a
dilutive effect on earnings per share. Since fully diluted earnings per
share differs from primary earnings per share by less than 3%, only primary
earnings per share is shown below. Shares and net income used in the per
share computations are as follows:
Three Months Ended
September 30,
1997 1996
Weighted average common shares 17,184 16,132
Primary common share equivalents 1,326 1,361
-------- --------
Total 18,510 17,493
======== ========
Net income $6,203 $3,600
======== ========
Net income per share $0.34 $ 0.21
======== ========
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which is required to be adopted
for the quarter ended December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share
and to restate all prior periods. Under the new requirements for
calculating earnings per share, the dilutive effect of stock options will
be excluded. This impact is expected to result in an increase in primary
earnings per share for the three months ended September 30, 1997 and 1996
of $0.02 and $0.01 per share, respectively. Dilutive earnings per share is
not materially different for the three months ended September 30, 1997 and
a decrease of $0.01 for the three months ended September 30, 1996.
Note 5. Line of Credit
The Company maintains a $5.0 million revolving bank line of credit
agreement that expires on January 28, 1999. Advances under the line of
credit bear interest at the bank's prime rate (8.5% at September 30, 1997)
and are secured by inventories and accounts receivable. Under the terms of
this agreement, the Company is required to maintain certain minimum working
capital, net worth, profitability levels and other specific financial
ratios. In addition, the line of credit prohibits the payment of cash
dividends and contains certain restrictions on the Company's ability to
lend money or purchase assets or interests in other entities without the
prior written consent of the bank. There were no borrowings under the line
of credit at September 30, 1997.
Note 6. Litigation and Contingencies
Certain former employees have commenced wrongful termination actions,
fraud and termination in violation of public policy claims against the
Company. The Company believes these claims are without merit and is
vigorously defending them. Even if these claims are adjudicated in favor of
the plaintiffs, the Company does not believe that the ultimate resolution
of these matters will have a material adverse impact on the Company or its
operations.
Certain claims and counter claims have been filed between the Uniphase
Telecommunications Products, Inc., ("UTP"), a subsidiary of the Company,
and Tacan Corporation ("Tacan") with the U.S. District Court for the
Southern District of California (the "Southern California Action") and the
U.S. District Court for the District of Connecticut (the "Connecticut
Action"). UTP seeks to recover in excess of $695,000 for amounts that Tacan
refused to pay for equipment ordered and/or received by Tacan, plus
punitive damages and treble damages. Tacan alleges claims of breach of
contract, breach of implied and express warranties, negligent
misrepresentation, conversion and negligent interference with perspective
economic advantage as well as unfair trade practices and seeks compensatory
damages in amounts allegedly exceeding $11.6 million plus punitives. On
October 17, 1997, Tacan agreed to dismiss the Southern California Action and
proceed with the Connecticut Action.
The Company believes the foregoing litigation with Tacan will not have
a material negative impact on the Company's financial condition or results
of operations. However, given the inherent uncertainty of litigation and
the early stage of discovery, there can be no assurance that the ultimate
outcome in the litigation will be in the Company's favor, or that the
diversion of management's attention, and any costs associated with the
lawsuit, will not have a material adverse effect on the Company's financial
condition or results of operations.
Note 7. Subsequent Events
In October 1997, the stockholders of the Company approved an amendment
to the Company's Certificate of Incorporation to increase the number of
shares of common stock which the Company is authorized to issue from
20,000,000 to 50,000,000 shares. The Company also announced a 100% stock
dividend to be paid on November 12, 1997 for all stockholders of record on
November 3, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The statements contained in this Report on Form 10-Q that are not
purely historical are forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding the Company's
expectations, hopes, intentions, beliefs or strategies regarding the
future. All forward looking statements included in this document are based
on information available to the Company on the date of this Report, and the
Company assumes no obligation to update any such forward looking statement.
It is important to note that the Company's actual results could differ
materially from those in such forward looking statements as a result of
certain risks including those risks set forth below under the heading
"Risks Factors," and elsewhere herein. You should also consult the risk
factors listed from time to time in the Company's Reports on Form 10-Q, 8-
K, 10-K, Annual Reports to Stockholders and other Securities and Exchange
Commission filing.
Risk Factors
Future Capital Requirements
The Company is devoting substantial resources for new facilities and
equipment for Uniphase Laser Enterprise and to the development of certain
other new products for the telecommunications markets. Although the
Company believes existing cash balances, cash flow from operations and
available lines of credit, will be sufficient to meet its capital
requirements at least through the end of fiscal 1998, the Company may be
required to seek additional equity or debt financing to compete effectively
in these markets. The timing and amount of such capital requirements
cannot be precisely determined at this time and will depend on several
factors, including the Company's acquisitions and the demand for the
Company's products and products under development. There can be no
assurance that such additional financing will be available when needed, or,
if available, will be on terms satisfactory to the Company.
Risks from Customer Concentration
A relatively limited number of OEM customers historically have
accounted for a substantial portion of the Company's telecommunications net
sales. Sales to any single customer are also subject to significant
variability from quarter to quarter. Such fluctuations could have a
material adverse effect on the Company's business, operating results or
financial condition. The Company expects that sales of telecommunications
products to a limited number of customers will continue to account for a
high percentage of the net sales for the foreseeable future. Moreover,
there can be no assurance that current customers will continue to place
orders or that the Company will be able to obtain new orders from new
customers.
Variability and Uncertainty of Quarterly Operating Results
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly results. The Company believes
that fluctuations in quarterly results may cause the market price of its
Common Stock to fluctuate, perhaps substantially. Factors which have had
an influence on and may continue to influence the Company's operating
results in a particular quarter include the timing of the receipt of orders
from major customers, product mix, competitive pricing pressures, the
relative proportions of domestic and international sales, costs associated
with the acquisition or disposition of businesses, products or
technologies, the Company's ability to design, manufacture, and ship
products on a cost effective and timely basis, the delay between incurrence
of expenses to further develop marketing and service capabilities and
realization of benefits from such improved capabilities, the announcement
and introduction of cost effective new products by the Company and by its
competitors, and expenses associated with any intellectual property
litigation. In addition, the Company's sales will often reflect orders
shipped in the same quarter that they are received. Moreover, customers
may cancel or reschedule shipments, and production difficulties could delay
shipments. The timing of sales of the Company's Ultrapointe Systems may
result in substantial fluctuations in quarterly operating results due to
the substantially higher per unit price of these products relative to the
Company's other products. In addition, the Company sells its
telecommunications equipment products to OEMs who typically order in large
quantities and therefore the timing of such sales may significantly affect
the Company's quarterly results. The timing of such OEM sales can be
affected by factors beyond the Company's control, including demand for the
OEM's products and manufacturing issues experienced by OEMs. In this
regard, the Company has experienced a temporary rescheduling of orders by
OEM telecommunications customers. As a result of the above factors, the
Company's results of operations are subject to significant variability from
quarter to quarter.
There can be no assurance that other acquisitions or dispositions of
businesses, products or technologies by the Company in the future will not
result in substantial charges or other expenses that may cause fluctuations
in the Company's quarterly operating results.
The Company's operating results in a particular quarter may also be
affected by the acquisition or disposition of other businesses, products or
technologies by the Company. For example, in the third quarter of fiscal
1997, the Company incurred charges totaling $33.3 million for acquired
in-process research and development in connection with the acquisition of
ULE. In the fourth quarter of fiscal 1996, the Company incurred charges
totaling $7.5 million for acquired in-process research and development
related to the acquisition of UFP and compensation expense in connection
with the cancellation of certain options of UTP and granted replacement
options to purchase Uniphase Common Stock to UTP employees. There can be
no assurance that acquisitions or dispositions of businesses, products or
technologies by the Company in the future will not result in substantial
charges or other expenses that may cause fluctuations in the Company's
quarterly operating results.
Dependence on Key OEM Relationships
In July 1997, the Company entered into an exclusive OEM Agreement (the
"Agreement") with KLA-Tencor pursuant to which KLA-Tencor will distribute
Ultrapointe Systems through its worldwide distribution channels. This
Agreement supercedes any and all prior OEM negotiations, correspondence,
understandings and agreements regarding the Companies' business
relationship. The Company currently expects that KLA-Tencor will account
for a majority of Ultrapointe's net sales for the foreseeable future for
Laser Imaging Systems used to analyze defects on semiconductor wafers and
photomasks during the manufacturing process as well as automatic defect
classification software products. The Agreement outlines minimum
quantities in the year of inception, product specifications, ongoing
research and development efforts on the product line, pricing and payment
terms. The Agreement is effective through June 30, 2000 and may be
extended for up to three (3) additional one year renewal periods
thereafter.
On April 30, 1997, Tencor and KLA Instruments merged and formed
KLA-Tencor Corporation. The Company believes that the timing of the
receipt of orders and the related product mix under the Agreement will not
be consistent with historical orders for Ultrapointe Systems given the size
and complexities associated with merging these organizations, consequently,
the Company's interim revenue levels and profit margins may be adversely
affected.
In addition, one laser subsystems customer, the Applied Biosystems
Division of Perkin-Elmer Corporation, accounted for approximately 10%, 12%
and 12% of the Company's net sales for fiscal years, 1997, 1996, and 1995,
respectively. The loss of orders from these or other OEM relationships
could have a materially adverse effect on the Company's business and
operating results.
Cyclicality of Semiconductor Industry
The Company's Ultrapointe Systems and a portion of its laser subsystems
businesses depend upon capital expenditures by manufacturers of
semiconductor devices, including manufacturers that are opening new or
expanding existing fabrication facilities, which, in turn, depend upon the
current and anticipated market demand for semiconductor devices and the
products utilizing such devices. The semiconductor industry is highly
cyclical, and historically has experienced periods of oversupply, resulting
in significantly reduced demand for capital equipment. Recently, the
semiconductor industry has experienced a downturn which has led certain of
the Company's customers to delay or cancel purchase of the Company's
Ultrapointe Systems. Results of operations for fiscal 1997, include sales
of Ultrapointe product totaling $15.4 million, down from $17.6 million in
fiscal 1996. There can be no assurance that the Company's operating results
will not be materially and adversely affected by these factors.
Furthermore, there can be no assurance that the semiconductor industry will
not experience further downturns or slowdowns in the future or that the
current backlog in Ultrapointe products will result in actual sales or such
backlog is indicative of a meaningful trend, which may materially and
adversely affect the Company's business and operating results.
Declining Market for Gas Lasers; Development and Other Risks Relating to
Solid State Laser Technologies
Gas laser subsystems sales accounted for 33.1% and 47.7% of total
Company's sales for the fiscal years ended 1997 and 1996, respectively.
The market for gas lasers is mature and is expected to decline as customers
transition from conventional lasers, including gas, to solid state lasers,
which are currently expected to be the primary commercial laser technology
in the future. In response to this transition, the Company has devoted
substantial resources to developing solid state laser products. To date,
sales of the Company's solid state laser products have been limited and
primarily for customer evaluation purposes. The Company believes that a
number of companies are further advanced than the Company in their
development efforts for solid state lasers and are competing with
evaluation units for many of the same design-in opportunities than the
Company is pursuing. It is anticipated that the average selling price of
solid state lasers may be significantly less in certain applications than
the gas laser products the Company is currently selling in these markets.
The Company further believes it will be necessary to continue to reduce the
cost of manufacturing and to broaden the wavelengths provided by its laser
products. There can be no assurance that the Company's solid state laser
products will not be rendered obsolete or uncompetitive by products of
other companies.
Intense Industry Competition
The laser, semiconductor capital equipment, CATV and telecommunications
industries in which the Company sells its products are highly competitive.
In each of the markets it serves, the Company faces intense competition
from established competitors, many of which have substantially greater
financial, engineering, research and development, manufacturing, marketing,
service and support resources. The Company is a recent entrant into the
semiconductor capital equipment, the CATV and telecommunications
marketplaces and competes with many companies in those markets that have
substantially greater resources, including greater name recognition, a
larger installed base of products and longer standing customer
relationships. In order to remain competitive, the Company must maintain a
high level of investment in research and development, marketing, and
customer service and support. There can be no assurance that the Company
will be able to compete successfully in the laser, semiconductor capital
equipment, CATV or telecommunications industries in the future, that the
Company will have sufficient resources to continue to make such
investments, that the Company will be able to make the technological
advances necessary to maintain its competitive position or that its
products will receive market acceptance. The semiconductor capital
equipment market is frequently affected by new product introductions and
new technologies that make existing production and inspection equipment
obsolete. There can be no assurance that others will not introduce
products which compete with the Ultrapointe System or which render the
Ultrapointe System obsolete or uncompetitive based on existing or new
technologies. In addition, there can be no assurance that technological
changes or development efforts by the Company's competitors will not render
the Company's products or technologies obsolete or uncompetitive.
Attract and Retain Key Personnel
The future success of the Company is dependent, in part, on its ability
to attract and retain certain key personnel. In particular, the Company's
research and development efforts are dependent on the Company being able to
hire and retain engineering staff with the requisite qualifications.
Competition in recruiting highly skilled engineering personnel is extremely
intense, and the Company is currently experiencing substantial difficulty
in identifying and hiring certain qualified engineering personnel in many
areas of its business. No assurance can be given that the Company will be
able to successfully hire such personnel at compensation levels that are
consistent with the Company's existing compensation and salary structure.
The Company's future success will also depend to a large extent on the
continued contributions of its executive officers and other key management
and technical personnel, none of whom has an employment agreement with the
Company and each of whom would be difficult to replace. The Company does
not maintain a key person life insurance policy on the Chief Executive
Officer. However, the loss of the services of one or more of the Company's
executive officers or key personnel or the inability to continue to attract
qualified personnel could delay product development cycles or otherwise
have a material adverse effect on the Company's business and operating
results.
Conflicting Patents and Intellectual Property Rights of Third Parties;
Potential Infringement Claims
The laser, semiconductor capital equipment, CATV and telecommunications
industries in which the Company sells its products are characterized by
frequent litigation regarding patent and other intellectual property
rights. Numerous patents in these industries are held by others, including
academic institutions and competitors of the Company. Such patents could
inhibit the Company's ability to develop new products for such markets.
The industry in which the Company operates is characterized by periodic
claims of patent infringement or other intellectual property rights. While
in the past licenses generally have been available to the Company where
third-party technology was necessary or useful for the development or
production of the Company's products, there can be no assurance that
licenses to third-party technology will be available on commercially
reasonable terms, if at all. Generally, a license, if granted, would
include payments by the Company of up-front fees, ongoing royalties or a
combination thereof. There can be no assurance that such royalty or other
terms would not have a significant adverse impact on the Company's
operating results. The Company is a licensee of a number of third party
technologies and intellectual property rights and is required to pay
royalties to these third party licensors on certain of its products,
including its Ultrapointe Systems and its solid state lasers. During
fiscal 1997 and 1996, the Company expensed $1.4 million and $1.3 million,
respectively, in license and royalty fees primarily in connection with its
gas laser subsystems. In addition, there can be no assurance that third
parties will not assert claims against the Company with the Company's
existing products or with respect to future products under development by
the Company. In the event of litigation to determine the validity of any
third-party claims, such litigation could result in significant expense to
the Company and divert the efforts of the Company's technical and
management personnel, whether or not such litigation is determined in favor
of the Company. In the event of an adverse result in any such litigation,
the Company could be required to expend significant resources to develop
non-infringing technology or to obtain licenses to the technology which is
the subject of the litigation. There can be no assurance that the Company
would be successful in such development or that any such licenses would be
available to the Company. In the absence of such a license, the Company
could be enjoined from future sales of the infringing product or products.
In fiscal years 1992 and 1993, the Company incurred substantial legal
expenses in connection with a patent infringement action relating to the
Company's current gas laser subsystems brought by Spectra-Physics Lasers,
Inc. ("Spectra-Physics"). While the Spectra-Physics case has since been
settled, no assurance can be given that, in the future, the Company will be
able to avoid similar actions by competitors or others or that the Company
will not be forced to initiate its own actions to protect its proprietary
position.
Limited Protection of Intellectual Property
The Company's future success depends in part upon its intellectual
property, including trade secrets, know-how and continuing technological
innovation. There can be no assurance that the steps taken by the Company
to protect its intellectual property will be adequate to prevent
misappropriation or that others will not develop competitive technologies
or products. The Company currently holds 30 U.S. patents on products or
processes and certain corresponding foreign patents and has applications
for certain patents currently pending. While three patents have been
issued with respect to the Company's Ultrapointe Systems, no assurance can
be given that competitors will not successfully challenge the validity of
these patents or design products that avoid infringement of the Company's
proprietary rights with respect to its Ultrapointe Systems. There can be
no assurance that other companies are not investigating or developing other
technologies that are similar to the Company's, that any patents will issue
from any application pending or filed by the Company or that, if patents do
issue, the claims allowed will be sufficiently broad to deter or prohibit
others from marketing similar products. In addition, there can be no
assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented, or that the rights thereunder will provide a
competitive advantage to the Company. Further, the laws of certain
territories in which the Company's products are or may be developed,
manufactured or sold, including Asia, Europe or Latin America, may not
protect the Company's products and intellectual property rights to the same
extent as the laws of the United States.
Dependence on Sole and Limited Source Suppliers
Various components included in the manufacture of the Company's
products are currently obtained from single or limited source suppliers. A
disruption or loss of supplies from these companies or an increase in price
of these components would have a material adverse effect on the Company's
results of operations, product quality and customer relationships. For
example, the Company obtains all the robotics, workstations and many
optical components used in its Ultrapointe Systems from Equipe
Technologies, Silicon Graphics, Inc., and Olympus Corporation,
respectively. The Company currently utilizes a sole source for the crystal
semiconductor chip sets incorporated in the Company's solid state
microlaser products and acquires its pump diodes for use in its solid state
laser products from Philips, Opto Power Corporation and GEC. The Company
also obtains lithium niobate wafers, gallium arsenide wafers, specialized
fiber components and certain lasers used in its UTP and ULE products
primarily from Crystal Technology, Inc., Fujikura, Ltd., Philips Key
Modules, and Sumitomo, respectively. The Company does not have a long-term
or volume purchase agreements with any of these suppliers, and no assurance
can be given that these components will be available in the quantities
required by the Company, if at all. Further, UTP depends on relatively
specialized components and it cannot be assured that its respective
suppliers will be able to continue to meet UTP's requirements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net Sales. In the first quarter of fiscal 1998, ended September 30,
1997, net sales were $38.5 million, which represented a $15.0 million or
64.0% increase over net sales of $23.5 million in the first quarter of
fiscal 1997. The increase was primarily attributable to an
increase of $14.9 million in sales of the Company's telecommunications
products. Results for the first quarter of fiscal 1998 included Uniphase
Laser Enterprises AG (ULE) which accounted for 24.7% of the
telecommunication product revenues and was acquired in a purchase
transaction in March 1997 from IBM's Zurich Research laboratory in
Switzerland. Sales of the Company's lasers subsystems and Ultrapointe Laser
Imaging Systems were relatively consistent with the first quarter of fiscal
1997.
Gross Profit. In the first quarter of fiscal 1998, the Company's
gross profit increased 64.6% to $18.5 million or 48.1% of net sales from
$11.3 million or 48.0% of net sales in the same period of fiscal 1997.
There can be no assurance that the Company will be able to sustain its gross
margin at current levels. The Company expects that there will continue to be
periodic fluctuations in its gross margin resulting from changes in its
sales and product mix, competitive pricing pressures, manufacturing yields,
inefficiencies associated with new product introductions and a variety of
other factors.
Research and Development Expense. In the first quarter of fiscal
1998, research and development expense was $2.9 million or 7.5% of net
sales which represented a $1.3 million or 77.4% increase over research and
development expense of $1.6 million or 6.9% of net sales in the first
quarter of fiscal 1997. The increase in research and development expense is
due to increased expenditures associated with the continued development and
enhancement of the Company's telecommunications product lines, which
included expenses of $355,000 from the recently acquired ULE
division. The Company also continues to invest in the development of solid
state lasers.
Royalty and License Expense. In the first quarter of fiscal 1998,
royalty and license expense of $485,000 was consistent with the $409,000 in
the same period of fiscal 1997. However, this expense decreased as a
percentage of net sales to 1.3% in the quarter ended September 30, 1997
from 1.7% in the same period in fiscal 1997. The decrease as a percentage
of net sales was due to the increasing proportion of revenues that the
Company derived from royalty-free telecommunications products.
The Company continues to develop products in solid state laser,
telecommunications and semiconductor equipment technology. There are
numerous patents in these areas that are held by others, including academic
institutions and competitors of the Company. Such patents could inhibit
the Company's ability to develop, manufacture and sell products in this
area. A number of the patents are conflicting. If there is conflict
between a competitor's patents or products and those of the Company, it
could be very costly for the Company to enforce its rights in an
infringement action or defend such an action brought by another party. In
addition, the Company may need to obtain license rights to certain patents
and may be required to make substantial payments, including continuing
royalties, in exchange for such license rights. There can be no assurance
that licenses to third party technology, if needed, will be available on
commercially reasonable terms.
Selling, General and Administrative Expense. In the first quarter of
fiscal 1998, selling, general and administrative expense was $6.3 million
or 16.4% of net sales, which represented a $1.8 million or 41.4% increase
over selling, general and administrative expense of $4.5 million or 19.0%
of net sales in the first quarter of fiscal 1997. The increase is due
primarily to expenses in support of UTP's Connecticut facility,
the addition of expenses of $672,000 from ULE, and the amortization of
intangible assets and compensation expense related to the acquisition of ULE.
Interest and Other Income, Net. In the first quarter of fiscal 1998,
interest and other income, net was $762,000, which represented a $184,000
decrease over interest and other income, net of $946,000 in the
first quarter of fiscal 1997. The decrease in the interest and other
income, net is due to the related interest on a reduced level of short-term
investments resulting from the cash payment to IBM of $45.0 million for the
asset acquisition of ULE in the third quarter of fiscal 1997.
Income Tax Expense. As stated in Note 3 of Notes to Consolidated
Financial Statements, the effective tax rate used for the first quarter of
fiscal 1998 was 35.5% as compared to 37% used in the same period of fiscal
1997. The reduction to the Company's effective tax rate is primarily due to
lower foreign taxes.
Liquidity and Capital Resources
At September 30, 1997, the Company's combined balance of cash, cash
equivalents and short-term investments was $83.0 million. The Company has
met its liquidity needs to date primarily through cash generated from
operating activities.
Cash provided by operating activities was $9.8 million in the first
quarter of fiscal 1998, compared with $1.7 million in the first quarter
of fiscal 1997. The increase in cash provided by operating activities
resulted primarily from increases in net income before depreciation and
amortization expense. Increase accounts payable and other accrued expenses
were primarily offset by an increase in accounts receivable and
inventories.
Cash used in investing activities was $2.7 million in the first
quarter of fiscal 1998. The Company incurred capital expenditures of
$3.7 million primarily in facilities improvements and the acquisition of
manufacturing and other equipment to expand its manufacturing facilities in
Connecticut and Switzerland. The Company also purchased a patent that it
believes will enhance its modulator product offerings in the first quarter
of fiscal 1998 for $500,000. These programs were primarily funded through
existing capital and the liquidation of short-term investments of $1.5
million during the first quarter of fiscal 1998.
The Company has a $5.0 million revolving line of credit with a bank.
There were no borrowings under the line of credit at September 30, 1997.
Advances under the line of credit bear interest at the bank's prime rate
(8.5% at September 30, 1997) and are secured by inventories and accounts
receivable. Under the terms of the line of credit agreement, the Company
is required to maintain certain minimum working capital, net worth,
profitability levels and other specific financial ratios. In addition, the
agreement prohibits the payment of cash dividends and contains certain
restrictions on the Company's ability to borrow money or purchase assets or
interests in other entities without the prior written consent of the bank.
The line of credit expires on January 28, 1999. There were no borrowings
under the line of credit at September 30, 1997. During the first quarter
of fiscal 1998, the Company retired approximately $6.3 million in notes
payable and the related interest payable originating from the acquisition
of UFP in May 1996.
The Company believes that its existing cash balances and short-term
investments, together with existing cash flow from operations and available
line of credit will be sufficient to meet its liquidity and capital
spending requirements at least through the end of calendar year 1998.
However, possible acquisitions of complementary businesses, products or
technologies may require additional financing prior to such time. There
can be no assurance that additional financing will be available when
required or, if available, will be on terms satisfactory to the Company.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Certain claims and counter claims have been filed between the Uniphase
Telecommunications Products, Inc., ("UTP"), a subsidiary of the Company,
and Tacan Corporation ("Tacan") with the U.S. District Court for the
Southern District of California (the "Southern California Action") and the
U.S. District Court for the District of Connecticut (the "Connecticut
Action"). UTP seeks to recover in excess of $695,000 for amounts that Tacan
refused to pay for equipment ordered and/or received by Tacan, plus
punitive damages and treble damages. Tacan alleges claims of breach of
contract, breach of implied and express warranties, negligent
misrepresentation, conversion and negligent interference with perspective
economic advantage as well as unfair trade practices and seeks compensatory
damages in amounts allegedly exceeding $11.6 million plus punitives. On
October 17, 1997, Tacan agreed to dismiss the Southern California Action and
proceed with the Connecticut Action.
The Company believes the foregoing litigation with Tacan will not have
a material negative impact on the Company's financial condition or results
of operations. However, given the inherent uncertainty of litigation and
the early stage of discovery, there can be no assurance that the ultimate
outcome in the litigation will be in the Company's favor, or that the
diversion of management's attention, and any costs associated with the
lawsuit, will not have a material adverse effect on the Company's financial
condition or results of operations.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
During the quarter ended September 30, 1997, no matters were submitted
for stockholders' vote.
On October 16, 1997, the Company submitted for the approval of, and
the stockholders approved, an amendment to the Company's Certificate of
Incorporation to increase the number of shares of common stock which the
Company is authorized to issue from 20,000,000 to 50,000,000 shares.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27. Financial Data Schedule
b) Forms 8-K
Amendment to Form 8-K originally filed with the Commission for
the purchase of the assets of IBM Laser Enterprise on March 25, 1997.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Uniphase Corporation
(Registrant)
Date 10-24-97 \s\ Danny E. Pettit
Danny E. Pettit, Vice President of Finance and CFO
(Principal Financial and Accounting Officer)
Date 10-24-97 \s\ Kevin Kalkhoven
Kevin N. Kalkhoven, Chairman and CEO
(Principal Executive Officer)
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