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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): November 25, 1998
Uniphase Corporation
(Exact name of Registrant as Specified in its Charter)
Delaware 0-22874 94-2579683
(State of Other (Commission File (IRS Employer Identification
Jurisdiction No.) No.)
of Incorporation)
163 Baypointe Parkway, San Jose, California 95134
(Address of Principal Executive Offices) (Zip Code)
(408) 434-1800
(Registrant's Telephone Number, Including Area Code)
<PAGE>
This form 8-K/A amends and supersedes, to the extent set forth herein,
Form 8-K filed with the Securities and Exchange Commission on January 7,
1999. As more particularly set forth below, the following financial and
related information has been updated in connection with the filing of the
restated financial statements included herein.
Item 5. Other Events
Uniphase Corporation ("the Company") has included herein the
consolidated balance sheets of the Company as of June 30, 1998 and 1997,
and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
June 30, 1998 ("the Consolidated Financials"). The Consolidated
Financials give retroactive effect to the merger of a wholly owned
subsidiary of the Company with and into Broadband Communications
Products, Inc. ("BCP") on November 25, 1998, which transaction has been
accounted for as a pooling of interests.
Selected Supplemental Financial Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended June 30, 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net sales..................................$185,215 $113,214 $73,701 $46,523 $36,305
Acquired in-process
research and development(2).............. $40,268 $33,314 $4,480 $4,460 $ --
Income (loss) from operations(2)...........($11,521) ($15,785) $5,849 $1,285 $3,890
Net income (loss)(2).......................($19,630) ($17,787) $3,212 $1,439 $2,874
Earnings (loss) per share:
Basic.................................... ($0.55) ($0.53) $0.13 $0.08 $0.19
Dilutive................................. ($0.55) ($0.53) $0.12 $0.07 $0.17
Shares used in per share calculation (1):
Basic.................................... 35,451 33,691 25,558 18,942 15,277
Dilutive................................. 35,451 33,691 27,912 20,897 17,281
At June 30, 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Consolidated Balance Sheet Data:
Working capital............................$121,428 $110,197 $132,239 $18,404 $19,846
Total assets...............................$332,871 $180,653 $175,692 $33,611 $27,579
Long-term obligations...................... $5,666 $2,478 $7,049 $244 $33
Total stockholders' equity.................$280,038 $152,033 $154,824 $26,196 $22,467
Dividends declared (1)..................... $642 $430 $173 $452 $51
</TABLE>
(1) BCP was a Subchapter S Corporation for income tax purposes prior to
acquisition, therefore its taxable income was includable in the personal
income tax returns of its stockholders. BCP made periodic dividend
distributions to its pre-merger stockholders based on their estimated tax
liability on the earnings of BCP.
(2) Subsequent to the Securities and Exchange Commission's letter to the
AICPA dated September 9, 1998, regarding its views on in-process
research and development, the Company re-evaluated its in-process
research and development charge with respect to its acquisition of
Uniphase Netherlands in June 1998, revised the purchase price allocation
and restated its financial statements. As a result, Uniphase made an
adjustment which decreased the amount of previously expensed in-process
research and development, increased the amount capitalized as goodwill
and other intangibles, decreased the net loss by $59.3 million and
decreased basic and diluted net loss per share by $1.68 for the year
ended June 30, 1998.
Item 7. Financial Statements and Exhibits
(a) (1) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Management's Discussion and Analysis of Financial Condition and Results
Of Operations
Report of Ernst & Young LLP, Independent Auditors
Consolidated Statements of Operations - Years ended June 30, 1998, 1997 and
1996
Consolidated Balance Sheets - June 30, 1998 and 1997
Consolidated Statement of Stockholders' Equity - Years ended June 30, 1998,
1997 and 1996
Consolidated Statements of Cash Flows - Years ended June 30,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a) (2) FINANCIAL STATEMENTS SCHEDULE
(c) EXHIBITS
23.1 Consent of Ernst & Young LLP, Independent auditors
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
In June 1998, the Company acquired 100% of the capital stock of
Philips Optoelectronics B.V., which became Uniphase Netherlands B.V.
("UNL") from Koninklijke Philips Electronics N.V. ("Philips"). The total
purchase price of $135.4 million consisted of 3.26 million restricted
shares of common stock, cash of $100,000, $4.0 million in related
acquisition costs, and 100,000 shares of Uniphase Series A Convertible
Preferred Stock that is convertible to Uniphase Common Stock based upon
(i) unit shipments of certain products by UNL through June 20, 2002, and
(ii) the trading price of Uniphase Common Stock at the time such earnout,
if any, is determined. At the closing of the UNL acquisition, Philips
became the largest stockholder of record at 8.5% of the Company's
outstanding common stock. Philips also appointed one representative to
the Uniphase Board of Directors upon the closing.
In November 1997, the Company acquired 100% of the capital stock of
Indx Pty Limited, which became Uniphase Fiber Components Pty Limited
("UFC"), and in connection therewith, obtained certain license rights
from Australian Photonics Pty Limited ("AP"). The total purchase price of
$6.9 million included a cash payment of $6.5 million to AP and
acquisition costs of $400,000. UFC designs and manufactures fiber Bragg
grating products for wavelength division multiplexing ("WDM")
applications. In January 1998, the Company created Uniphase Network
Components ("UNC") to develop grating-based modules for WDM applications.
In August 1998, the Company acquired certain assets of Chassis
Engineering, Inc. for $2.8 million. In November 1998, the Company merged
with Broadband Communications Products, Inc. ("BCP") through the issuance
of approximately 730,000 shares of common stock. Management's Discussion
and Analysis reflects the pooled entity. Additionally, the Company sold
the assets of Ultrapointe in December 1998 to KLA-Tencor Corp. and
recorded a loss of approximately $2.5 million in connection with this
transaction in fiscal 1999. See Notes 12 and 13 of Notes to
Consolidated Financial Statements.
The Company's acquisitions of UNL, UFC and Chassis Engineering, Inc.
were accounted for using the purchase method of accounting. Accordingly, the
total purchase price was allocated to the assets acquired and liabilities
assumed, including in-process research and development based on their
estimated fair values using valuation methods believed to be appropriate
at the time. With respect to UNL, the estimated fair value of the in-process
research and development of $93.0 million was expensed in the fourth quarter
of fiscal 1998 (the period in which the acquisition was consummated).
Subsequent to the Securities and Exchange Commission's letter to the AICPA
dated September 9, 1998, regarding its views on in-process research and
development, the Company has re-evaluated its in-process research and
development charge with respect to the UNL acquisition, revised the purchase
price allocation and restated its financial statements. As a result, Uniphase
made an adjustment to decrease the amount of previously expensed in-process
research and development and increase the amount capitalized as goodwill and
other intangibles by $59.3 million.
The effects of these adjustments on previously reported consolidated
financial statements as of and for the year ended June 30, 1998 are follows:
As As
Reported Restated
--------- ---------
Acquired in-process research
and development................. $99,568 $40,268
Income (loss) from operations..... (70,821) (11,521)
Net income (loss)................. (78,930) (19,630)
Basic earnings (loss) per share... (2.23) (0.55)
Diluted earnings (loss) per share. (2.23) (0.55)
Identified intangibles............ 23,364 23,964
Goodwill.......................... 20,315 79,015
Accumulated deficit............... (85,418) (26,118)
See also Note 1 of Notes to Consolidated Financial Statements and
"Acquired In-Process Research and Development" in this Management
Discussion and Analysis.
The Company's acquisition of BCP was accounted for as a pooling of
interests.
Results of Operations
The following table sets forth for the periods indicated certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0%
Cost of sales........................... 51.9% 52.9% 51.9%
---------- ---------- ----------
Gross profit 48.1% 47.1% 48.1%
---------- ---------- ----------
Operating expenses:
Research and development.............. 8.0% 8.7% 8.7%
Royalty and license................... 1.1% 1.2% 1.8%
Selling, general, and administrative.. 23.5% 21.7% 23.7%
Acquired in-process research and
development...................... 21.7% 29.4% 6.0%
---------- ---------- ----------
Total operating expenses................ 54.3% 61.0% 40.2%
---------- ---------- ----------
Income (loss) from operations........... (6.2)% (13.9)% 7.9%
Interest and other income, net........ 1.7% 3.0% 1.9%
---------- ---------- ----------
Income (loss) before income taxes..... (4.5)% (10.9)% 9.8%
Income tax expense...................... 6.1% 4.8% 5.4%
---------- ---------- ----------
Net income (loss)....................... (10.6)% (15.7)% 4.4%
========== ========== ==========
</TABLE>
Years Ended June 30, 1998, 1997 and 1996
Net Sales. Net sales of $185.2 million for fiscal 1998 represented
an increase of $72.0 million or 63.6% over fiscal 1997 net sales of
$113.2 million. The increase is primarily due to the increase across all
product lines in telecommunications and laser subsystem sales of $68.1
million, of which 43.7% was generated by businesses acquired during
fiscal 1998 and 1997. Ultrapointe sales increased $3.9 million in fiscal
1998 over the prior year, although a significant percentage of the
increase was attributable to orders for spare parts and engineering
services. Net sales of $113.2 million for fiscal 1997 represented an
increase of $39.5 million or 53.6% over fiscal 1996 net sales of $73.7
million. The increase in fiscal 1997 over 1996 was primarily due to the
increased sales of telecommunications and laser subsystem products of
$41.7 million. Ultrapointe sales decreased $2.2 million during fiscal
1997 as compared to fiscal 1996 as a downturn in the semiconductor
industry led certain customers to delay or cancel purchases of the
Company's Ultrapointe Systems.
Net sales to customers outside the United States accounted for
$71.7 million, $34.6 million and $18.5 million or 38.7%, 30.6% and 25.1%
of total sales for the years ended June 30, 1998, 1997 and 1996,
respectively. The increase of $37.1 million from fiscal 1997 to fiscal
1998 is primarily due to increased sales of telecommunications products.
The increase in international sales in 1998 was also due to a full year's
sales from ULE, the sales of UFC subsequent to November 26, 1997, and UNL
sales subsequent to June 9, 1998, all of which represented in the
aggregate 35.2% of the increase in international sales. The fiscal 1997
increase in international sales over fiscal 1996 of $16.1 million was due
primarily to a full year of UFP sales and the acquisition of ULE in March
1997 combined with other increases in telecommunications product sales.
See Note 10 of Notes to Consolidated Financial Statements.
Gross Profit. Gross profit of $89.1 million, or 48.1% of net sales
for fiscal 1998 represented an increase of $35.9 million or 67.5% over
fiscal 1997 gross profit of $53.2 million, which was 47.1% of net sales.
The increase in gross profit from telecommunications and laser subsystem
product sales of $37.7 million was due in part to an improvement in
manufacturing yields of gallium arsenide based lasers combined with the
lower costs of internally manufactured CATV amplifiers the Company
historically purchased from third parties. Fiscal 1998 amounts include a
full year's gross profit from ULE that also contributed to the increase.
Concurrent with the acquisition of UNL, the Company initiated
certain actions that resulted in reductions to fiscal 1998 gross profit.
Charges attributable to such actions were primarily for; (i) inventory
write-downs of $2.5 million as a result of product overlap of the UNL
lasers with some of the Company's existing products resulting in excess
quantities and obsolescence of certain products; (ii) inventory write-
downs of $1.0 million as a result of renegotiating certain provisions of
its distribution agreement with KLA-Tencor to provide reduced quantities
of Ultapointe products, resulting in excess inventory levels; and (iii)
inventory write-downs of $600,000 as a result of discontinuing a small
specialty product line.
Gross margin increased to 48.1% in fiscal 1998 from 47.1% in
fiscal 1997. The Company realized improved yields on certain
telecommunications products that more than offset a reduction in gross
margin from Ultrapointe products. Gross margin for Ultrapointe products
declined significantly in the second half of fiscal 1998 due to depressed
semiconductor equipment markets, volume discounts attributable to the
distribution agreement with KLA-Tencor, and inventory reserves recorded
in the fourth quarter. The Company's laser subsystem margins were
relatively consistent with the prior fiscal year. The Company experienced
a decrease in gross margins to 47.1% in fiscal 1997 from 48.1% in fiscal
1996. Inventory charges resulting from the Company's change in strategic
focus with respect to diode based laser applications and from the
modification of certain customer and product strategies incorporating
lower powered amplifiers at UTP contributed to the fiscal 1997 decline in
gross margin.
There can be no assurance that the Company will be able to
maintain its gross margins at current levels. The Company expects that
there will continue to be periodic fluctuations in its gross margins
resulting from changes in its sales and product mix, competitive pricing
pressures, higher costs resulting from new production facilities,
manufacturing yields, acquisitions of businesses that may have different
margins than the Company, inefficiencies associated with new product
introductions, and a variety of other factors.
Research and Development Expense. Research and development (R&D)
expense of $14.9 million or 8.0% of net sales represented an increase of
$5.0 million or 50.7% over fiscal 1997 expense of $9.9 million or 8.7% of
net sales. The increase in absolute dollar amounts is primarily due to
the continuing efforts to develop the Company's telecommunications
products, the additional R&D expenses of UFC and UNC in fiscal 1998 and a
full year of R&D expenses from ULE. R&D expense in fiscal 1997 was $9.9
million or 8.7% of net sales, which represented a $3.4 million or 53.0%
increase over fiscal 1996. The increase in R&D expense was largely due to
the continuing efforts to develop the Company's telecommunications
products and, to a lesser extent, the continued development and
modifications of the Ultrapointe Laser Imaging System and automatic
defect classification ("ADC") software.
The Company is committed to continuing its significant R&D
expenditures and expects that the absolute dollar amount of R&D expenses
will increase as it invests in developing new products and in expanding
and enhancing its existing product lines, although R&D expenses may vary
as a percentage of net sales in future periods.
Royalty and License Expense. Royalty and license expense increased
$628,000 to $2.0 million representing an increase of 45.5% over fiscal
1997 expense of $1.4 million. Royalty and license expense decreased as a
percentage of sales to 1.1% compared to 1.2% in fiscal 1997. In fiscal
1997, royalty and license expense increased $43,000 to $1.4 million from
$1.3 million in fiscal 1996, however decreased as a percentage of sales
to 1.2% from 1.8% in fiscal 1996. The decreases as a percentage of net
sales in both fiscal 1998 and fiscal 1997 were due to the increasing
proportion of sales derived from royalty-free telecommunications
products.
The Company continues to develop its telecommunications, solid
state laser, and semiconductor equipment products and technologies. There
are numerous patents on these technologies 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 the future. If there is a 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, or if
available, can be obtained on commercially reasonable terms.
Selling, General and Administrative Expense. Selling, general and
administrative (SG&A) expense of $43.5 million or 23.5% of net sales in
fiscal 1998 represents an increase of $19.0 million or 77.9% over fiscal
1997 expense of $24.4 million or 21.7% of net sales. As described below,
SG&A expenses in each year included charges incurred following
acquisitions.
In the fourth quarter of fiscal 1998, the Company recorded SG&A
charges related to certain initiatives taken following the acquisition of
UNL. These charges were for: (i) reorganizing the Company's management
and sales structure primarily consisting of $3.6 million for severance
costs related to management and other personnel terminated during the
quarter of which $2.9 million was a non-cash charge resulting from the
acceleration of stock option vesting. An additional $700,000 in SG&A
expenses related to costs incurred in connection with centralizing the
Company's sales function included hiring and relocating new sales
management and training the sales force; (ii) integrating the laser
packaging operations of UNL into the Company of which the primary
component was an impairment write-down of $3.6 million related to the
fixed assets and intangible assets recorded in connection with the
acquisition of UFP in 1996. Because of the product overlap between UNL
and UFP, the revised projected cash flows of UFP would not provide for
the recovery of the book value of these assets; (iii) providing for the
cost of changing the structure of Ultrapointe in connection with the
continuing downturn in semiconductor equipment markets. The primary
components of these charges are severance costs related to Ultrapointe
personnel terminated during the quarter of which $3.9 million was a non-
cash charge resulting from the acceleration of stock option vesting; and
(iv) costs of $1.1 million incurred in connection with obtaining a supply
agreement with a major CATV system customer. Future cash outflows in
connection with these actions were estimated to be $1.8 million which is
expected to be paid by the end of fiscal 1999.
In fiscal 1997, SG&A expense was $24.4 million or 21.7% of net
sales which represented a $7.1 million or 41.3% increase over SG&A
expense of $17.3 million or 23.7% of net sales in fiscal 1996. The
increase is due in part to the additional expenses of ULE, acquired in
March 1997, and a full year of expenses for UFP which was acquired in May
1996. As a result of the ULE acquisition and a change in strategic focus
for diode-based laser applications, the Company recorded charges to
consolidate its European laser research to Switzerland, close its
Uniphase Lasers, Ltd. facility in Rugby, England, consolidate laser
packaging operations and to recognize the modification of certain
customer and product strategies at UTP incorporating lower powered
amplifiers. The Company also increased its allowance for doubtful
accounts and certain other reserves in the third quarter of fiscal 1997.
The Company expects the amount of SG&A expenses to increase in the
future, although such expenses may vary as a percentage of net sales in
future periods. There can be no assurance that the Company will not incur
reorganization costs associated with managing the growth of its
operations similar to those recorded in fiscal 1998.
Acquired In-process Research and Development. In fiscal 1998,
the Company incurred charges for in-process research and development of
$40.3 million or 21.7% of net sales related to the acquisition of UNL
from Philips ($33.7 million) and UFC from AP ($6.6 million). In fiscal
1997, the Company incurred a charge for in-process research and
development of $33.3 million or 29.4% of net sales related to the
acquisition of the assets of ULE from IBM. In fiscal 1996, the Company
incurred a charge for in-process research and development of $4.5 million
or 6.1% of net sales related to the acquisition of UFP. See Note 9 of
Notes to Consolidated Financial Statements. These amounts were expensed
on the acquisition dates because the acquired technology had not yet
reached technological feasibility and had no future alternative uses.
There can be no assurance that acquisitions of businesses, products or
technologies by the Company in the future will not result in substantial
charges for acquired in-process research and development that may cause
fluctuations in the Company's quarterly or annual operating results.
A description of the acquired in-process technology, stage of
development, estimated completion costs and time to complete at the date
of acquisition is set forth below for each acquisition.
Uniphase Netherlands
The purchased in-process technology related to advanced
semiconductor lasers, modulators, and semiconductor optical amplifiers.
The purchased in-process technology was comprised of five main
categories: (i) Wavelength Division Multiplexing ("WDM") Lasers -
Continuous Wave ("CW") and Direct Modulation, (ii) WDM Lasers -
Distributed Feedback/Electro-Absorption Modulator; (iii) Semiconductor
Optical Amplifiers, (iv) Other Telecommunications Products, and (v) Cable
Television. The development cycle for the full product family (portfolio)
for each of these technologies, on average, takes approximately four
years to complete. The stages of development for each product in the
portfolio include: (i) idea generation, (ii) design process, (iii) wafer
growth, (iv) chip fabrication, (v) packaging, and (vi) qualification and
testing. Technological feasibility is achieved upon successful completion
of qualification and testing. This stage tests the reliability of the
technology (the most important measure to the end-user).
The following is a brief description of each acquired in-process
research and development project at the acquisition date:
WDM Lasers - CW and Direct Modulation. The portfolio of products
within the WDM market enabled by this technology category includes the
1550nm high power laser source used in the long haul (600km) dense WDM
(DWDM) transmitters and directly modulated WDM lasers used for shorter
(100km) links. The portfolio also includes the laser portion of
integrated laser/electro-absorption modulators ("EML's").
Excluding the research phase of the development cycle, the Company
estimated that the development time for products in this category was 36
months. At the time of acquisition, the initial complexity hurdles for
the development of these products had been achieved. The first generation
of these products had been released and the second generation was in the
wafer growth development stage and was estimated to be released in the
second half of calendar 1998 with the third generation of products in the
research stage and estimated to be released in fiscal 2002. At the
acquisition date, the estimated costs to complete the technology in this
category was approximately $8.2 million from the date of acquisition
through fiscal 2002. The Company believed the associated risks of
developing this technology into commercially viable products to be the
challenge of meeting the requirements and specifications of the market,
in particular with respect to reliability and customer qualification,
meeting product packaging standards, and risks related to semiconductor
processing such as the ability to make a qualified product at
commercially acceptable yields.
WDM Lasers - Distributed Feedback/Electro-Absorption Modulator. The
portfolio of technologies for EA modulators includes EML 1550nm laser
sources which contain an electro-absorption modulator that targets the
mid-range (300km) DWDM transmitters and EMLs laser sources for longer
distances (greater than 400km).
At the time of the acquisition, this portfolio of WDM EML lasers
had been in development for approximately 14 months, excluding the
research phase of the development cycle. The first generation of these
products had been released and the second generation was in the wafer
growth development stage and was estimated to be released in the second
half of calendar 1998 with the third generation of products in the
research stage and estimated to be released in fiscal 2002. At the
acquisition date, the estimated costs to complete the technology in this
category was approximately $16.3 million from the date of acquisition
through fiscal 2002. The Company believed the associated risks of
developing this technology into commercially viable products to be the
challenge of meeting the requirements and specifications of the market,
in particular with respect to reliability and customer qualification,
meeting packaging standards, and risks related to semiconductor
processing such as the ability to make a qualified product at
commercially acceptable yields.
Semiconductor Optical Amplifiers. Within this technology category,
the opportunity exists for the development of low power, low cost,
semiconductor optical amplifiers based on indium phosphide and for the
development of different versions which amplify 1550nm light or 1310nm
light.
Prior to acquisition, UNL did not have a developed semiconductor
optical amplifier product, the initial generation of products having not
proved to be viable. However, over 40% of the total research and
development budget of UNL prior to the acquisition had been invested in
all technologies in this category. The second generation of these
products was in the wafer growth development stage and was estimated to
be released in fiscal 1999 with the third generation of products in the
research stage and estimated to be released in fiscal 2002. At the
acquisition date, the estimated costs to complete the technology in this
category was approximately $2.3 million from the date of acquisition
through fiscal 2002. The Company believed the associated risks of
developing this technology into commercially viable products to be the
challenge of meeting the requirements and specifications of the market,
in particular with respect to reliability and customer qualification,
meeting product packaging standards, and risks related to semiconductor
processing such as the ability to make a qualified product at
commercially acceptable yields.
Other Telecommunications Products. The technology portfolio for
other telecommunications products includes 1480nm pump lasers which can
be used as an alternative to or in conjunction with 980nm pump lasers for
providing optical power to erbium-doped fiber amplifiers.
At the date of acquisition, the second generation of these products
was in the wafer growth development stage and was estimated to be
released in the second half of fiscal 1999 and the estimated cost to
complete was $2.3 million from the date of acquisition through fiscal
1999. The Company believed the associated risks of developing this
technology into commercially viable products to be the challenge of
meeting the requirements and specifications of the market, in particular
with respect to reliability and customer qualification, meeting product
packaging standards, and risks related to semiconductor processing such
as the ability to make a qualified product at commercially acceptable
yields.
Cable Television ("CATV"). The dominant technologies in this
category include the 1550nm continuous wave ("CW") laser and the 1310nm
linearized laser. Other technologies include return-path lasers and
photodiodes.
At the acquisition date, it was estimated that this portfolio of
products will take 30 months to develop, excluding the research phase of
the development cycle, which is approximately 6 months shorter than the
development time for the other products. The first generation of these
products had been released and the second generation was in the wafer
growth development stage and was estimated to be released in the second
half of calendar 1998 with the third generation of products in the
research stage and estimated to be released in fiscal 2002. At the
acquisition date, the estimated costs to complete the technology in this
category was approximately $3.3 million from the date of acquisition
through fiscal 2002. The Company believed the associated risks of
developing this technology into commercially viable products to be the
challenge of meeting the requirements and specifications of the market,
in particular with respect to reliability and customer qualification,
meeting packaging standards, and risks related to semiconductor
processing such as the ability to make a qualified product at
commercially acceptable yields.
Uniphase Fiber Components
The primary purchased in-process technology related to fiber Bragg
gratings for wavelength division multiplexing applications. The purchased
in-process technology was comprised of five main categories: (i)
temperature compensation, (ii) unpackaged, (iii) dispersion compensation,
and (iv) add-drop/DCM/circulators.
The following is a brief description of each acquired in-process
research and development project at the acquisition date. In each case it
is expected that each technology will result in a product family
(portfolio) introduced over many years.
Temperature Compensation. Temperature compensation is a type of
packaged fiber grating where the fiber grating is surrounded by a
temperature compensating package. When heated without this type of
package, the properties of the grating have a propensity to change.
However, when the fiber is put in this package, it is compressed and the
temperature effect is compensated so that grating properties are
maintained.
The Company estimated that the development cycle for the first
product from this technology would last 12 months and technological
feasibility would be reached at the end of the beta testing stage. At the
acquisition date, the release date for this product was expected to be in
the middle of fiscal 1998 and the estimated cost to complete was $0.1
million from the date of acquisition through fiscal 1998. The Company
believed the associated risks of developing this technology into
commercially viable products to be the challenge of having the package
meet the requirements and specifications of the market.
Unpackaged. Unpackaged refers to a fiber grating that is not
contained in a "package" or protective encasement. This product is
deployed in the telecommunications industry and in environments where
temperature is not a concern or can be controlled by alternative means
other than packaging.
The Company estimated that the development cycle for the first
product from this technology would last 12 months and technological
feasibility would be reached at the end of the beta testing stage. At the
date of acquisition, the release date for this product was expected to be
in the first or second quarter of fiscal 1999 and the estimated cost to
complete was $0.5 million from the date of acquisition through fiscal
1999. The Company believed the associated risks of developing this
technology into commercially viable products to be obtaining the
appropriate filter response and meeting customer/market performance
specifications.
Dispersion Compensation. Dispersion compensation provides a
reshaping of an optical pulse. The pulse "smearing" property as it
propagates over long fiber lengths is called dispersion. The pulse is
"smeared out" which leads to errors. The dispersion compensation
technology compensates for the smearing, thus resolving the errors.
The Company estimated that the development cycle for the first
product from this technology would last 18 months and technological
feasibility would be reached at the end of the beta testing stage. At the
date of acquisition, the release date for this product was expected to be
in the first or second quarter of fiscal 1999 and the estimated cost to
complete was $0.6 million from the date of acquisition through fiscal
1999. The Company believed the associated risks of developing this
technology into commercially viable products to be meeting
customer/market performance specifications.
Add-Drop/DCM/Circulators ("Add-Drop"). This technology consists
of fiber gratings and other optical components. Specifically, the
technology serves as an optical filter; as light comes in, the filter is
able to isolate (drop-off) one color (wavelength) and let all other
colors through. Colors can also be added back after they pass through.
Add-Drop is used for WDM purposes. The technology is growing very rapidly
and, at the time of the acquisition, was just recently emerging into the
marketplace.
The Company estimated that the development cycle for the first
product from this technology would last 18 months and technological
feasibility would be reached at the end of the beta testing stage. At the
acquisition date, the release date for the first version of this product
was expected to be in the first or second quarter of fiscal 1999 and the
estimated cost to complete was $1.1 million from the date of acquisition
through fiscal 1999. The Company believed the associated risks of
developing this technology into commercially viable products to be
meeting customer/market performance specifications.
Uniphase Laser Enterprise
The purchased in-process technology related to advanced 980nm
semiconductor lasers. The purchased in-process technology was comprised
of three main project categories: (i) Submount and Ridge Wave Guide (RWG)
Series, (ii) the distributed feedback laser ("DFB"), and (iii) high
power. The development cycle for all new technologies, on average, takes
approximately two years to complete. The stages of development include:
(i) R&D feasibility, (ii) fixing the design, (iii) engineering
performance evaluation, (iv) 5,000 hour life test, and (v) manufacturing.
Technological feasibility is achieved upon successful completion of the
5,000 hour life test. This stage tests the reliability of the technology
(the most important measure to the end-user).
The following is a brief description of each acquired in-process
research and development project at the acquisition date:
Submount and Ridge Wave Guide (RWG) Series. ULE's existing product
at the date of the acquisition was a 150mW 980nm pump laser. This project
consisted of developing a family of lasers with power in excess of the
existing 150mW lasers (up to 300mW). These lasers are used as pumps in
erbium-doped fiber optic amplifiers and enable optimized amplifier
performance. The lasers are specifically fabricated to ensure long
reliable lifetimes and inherently avoid the failure modes of other types
of 980nm lasers.
The Company estimated that the development cycle for the product
family would last 36 months. At the acquisition date, lasers with power
greater than 150mW were in the engineering performance evaluation stage
of the development cycle. The release date for the first version of this
product was expected to be in the fourth quarter of fiscal 1997 and the
estimated cost to complete was $2.8 million from the acquisition date
through fiscal 1998. The Company believed the associated risks of
developing this technology into commercially viable products to be the
challenge of meeting the requirements and specifications of the market,
in particular with respect to reliability and customer qualification, and
risks related to semiconductor processing such as the ability to make a
qualified product at commercially acceptable yields.
Distributed feedback laser. These lasers will be used as
transmitter sources for 1550nm communication systems. They rely on a
grating formed in the semiconductor laser structure to distribute the
feedback of the laser light, thereby enhancing the laser-signal fidelity.
It was envisioned that these lasers would be used in optically amplified
WDM systems.
The Company estimated that the development cycle for this product
family would last 24 months. At the acquisition date, the DFB was in the
R&D feasibility stage of the development cycle. The release date for the
first version of this product was expected to be in fiscal 1999 and the
estimated cost to complete was $3.8 million from the acquisition date
through fiscal 1999. The Company believed the associated risks of
developing this technology into commercially viable products to be the
challenge of meeting the requirements and specifications of the market,
in particular with respect to reliability and customer qualification, and
risks related to semiconductor processing such as the ability to make a
qualified product at commercially acceptable yields.
High power. High power project is the development of one to two
watt lasers. These lasers are a fundamentally different design than RWG,
in that they emit light from a broad-area (wide) stripe, require advanced
packaging due to higher heat dissipation requirements, and emit light at
different wavelengths. These lasers will be used for advanced amplifiers.
The Company estimated that the development cycle for this product
family would last 24 months. At the acquisition date, the one to two watt
release was in the engineering performance evaluation stage of the
development cycle. The release date for the first version of this product
was expected to be in fiscal 2000 and the estimated cost to complete was
$2.9 million from the acquisition date through fiscal 2000. The Company
believed the associated risks of developing this technology into
commercially viable products to be the challenge of meeting the
requirements and specifications of the market, in particular with respect
to reliability and customer qualification, and risks related to
semiconductor processing such as the ability to make a qualified product
at commercially acceptable yields.
Value Assigned to In-Process Research and Development
For each acquisition, the value assigned to in-process research and
development was determined by considering the importance of each project
to the overall development plan, estimating costs to develop the
purchased in-process research and development into commercially viable
products, estimating the resulting net cash flows from the projects when
completed and discounting the net cash flows to their present value. The
revenue estimates used to value the purchased in-process research and
development were based on estimates of relevant market sizes and growth
factors, expected trends in technology and the nature and expected timing
of new product introductions by the Company and its competitors.
The rates utilized to discount the net cash flows to their present
value are based on Company's weighted average cost of capital and the
weighted average return on assets. Given the nature of the risks
associated with the difficulties and uncertainties in completing each
project and thereby achieving technological feasibility, anticipated
market acceptance and penetration, market growth rates, and risks related
to the impact of potential changes in future target markets, the weighted
average cost of capital was adjusted. Based on these factors, discount
rates of 27%, 20%, and 20% were deemed appropriate for UNL, UFC, and ULE,
respectively.
The estimates used by the Company in valuing in-process research
and development were based upon assumptions the Company believes to be
reasonable but which are inherently uncertain and unpredictable. The
Company's assumptions may be incomplete or inaccurate, and no assurance
can be given that unanticipated events and circumstances will not occur.
Accordingly, actual results may vary from the projected results. Any such
variance may result in a material adverse effect on the financial
condition and results of operations of the Company. The value assigned
to each acquired in-process research and development project at the
respective acquisition dates were as follows:
(in millions)
------------
Uniphase Netherlands:
WDM Lasers - CW and Direct Modulation................ $17.2
WDM Lasers - Distributed Feedback
Electro-Absorption Modulator...................... 7.4
Semiconductor Optical Amplifiers..................... 4.1
Other Telecommunications Products.................... 1.3
Cable Television..................................... 3.7
------------
Total acquired in-process research and development.. $33.7
============
Uniphase Fiber Components:
Temperature Compensation............................. $0.8
Unpackaged........................................... 1.5
Dispersion Compensation.............................. 0.9
Add-Drop/DCM/Circulators............................. 3.4
------------
Total acquired in-process research and development.. $6.6
============
Uniphase Laser Enterprise:
Submount and Ridge Wave Guide Series................. $12.6
Distributed Feedback Laser........................... 14.4
High Power........................................... 6.3
------------
Total acquired in-process research and development.. $33.3
============
Current Status of Acquired In-Process Research and Development Projects
The Company periodically reviews the stage of completion and
likelihood of success of each of the in-process research and development
projects. The current status of the in-process research and development
projects for each acquisition are as follows:
Uniphase Netherlands
The product introductions for the WDM lasers - CW and direct
modulation and DFB/EA and modulator are either on schedule or are
approximately 6 months behind schedule. The WDM laser - direct modulation
is expected to have a lower revenue growth rate than originally
anticipated. The development of the semiconductor optical amplifier
technology has been delayed due to market demand for other products. The
development of the telecom technology is on schedule but the revenue
growth rate in initial periods is expected to be lower than originally
anticipated. Development of the CATV technologies is approximately 6
months behind schedule and is expected to take a higher level of
development effort to bring the technology to market. The Company has
incurred post-acquisition research and development expenses of
approximately $2.1 million in developing the acquired in-process
technology and estimates that cost to complete this technology, in
combination with the Company's other continuing research and development
expenses, will not be in excess of the Company's historic expenditures
for research and development as a percentage of the Company's net sales.
The differences between the actual outcome noted above and the
assumptions used in the original valuation of the technology are not
expected to ultimately impact the expected return on investment from the
acquisition of UNL or the Company's results of operations and financial
position.
Uniphase Fiber Components
The initial products developed from submarine and unpackaged
technology projects were completed approximately on schedule and post-
acquisition research and development expenses approximately equaled the
estimated cost to complete at the acquisition date. The Company is
experiencing higher levels of demand for the submarine products than
anticipated in the original estimates. The temperature compensation
project is behind schedule due to unforeseen technical difficulties in
maintaining specifications at the harshest environmental test points. The
dispersion compensation project is significantly behind schedule and the
market does not appear to be developing as anticipated. The Add-Drop
projects are progressing on schedule. The Company has incurred post-
acquisition research and development expenses of approximately $2.1
million in developing the acquired in-process technology and estimates
that cost to complete this technology, in combination with the Company's
other continuing research and development expenses, will not be in excess
of the Company's historic expenditures for research and development as a
percentage of the Company's net sales. The differences between the actual
outcome noted above and the assumptions used in the original valuation of
the technology are not expected to ultimately impact the expected return
on investment from the acquisition of UFC or the Company's results of
operations and financial position.
Uniphase Laser Enterprise
The Submount and RWG series products were released on schedule and
post-acquisition research and development expenses approximately equaled
the estimated cost to complete at the acquisition date. Actual revenue
for these products has significantly exceeded the estimates used in the
valuation of the technology. The Company did not pursue development of
the distributed feedback laser due to resources being redirected to
expand the Submount and RWG Series development program in response to
strong market demand. The high power project is somewhat delayed due to
shifting R&D resources to Submount/RWG because of RWG demand. The Company
has incurred post-acquisition research and development expenses of
approximately $3.2 million in developing the acquired in-process
technology and estimates that cost to complete this technology, in
combination with the Company's other continuing research and development
expenses, will not be in excess of the Company's historic expenditures
for research and development as a percentage of the Company's net sales.
The differences between the actual outcome noted above and the
assumptions used in the original valuation of the technology are not
expected to ultimately impact the expected return on investment from the
acquisition of ULE or the Company's results of operations and financial
position.
Interest and Other Income. Net interest and other income of $3.3
million for fiscal 1998 represented a decrease of $179,000 from fiscal
1997 income of $3.4 million. Fiscal 1997 net interest and other income
increased $2.0 million over fiscal 1996 income of $1.4 million. The
decrease in interest and other income in 1998 was primarily due to the
reduced level of short-term investments resulting from the cash payment
to IBM of $45 million for ULE in March 1997, and the payment to AP of
approximately $6.5 million for UFC and certain licensing rights in
November 1997. In addition, net interest and other income in fiscal 1998
includes lower interest expense as compared to fiscal 1997 resulting from
the retirement of approximately $6.1 million in notes payable in August
1997 originating from the fiscal 1996 acquisition of UFP. The fiscal 1997
increase over fiscal 1996 was due primarily to the increase in interest
earned on the net proceeds of the public offering of common stock in June
1996 and the private placement of common stock with KLA-Tencor in
November 1995.
Income Tax Expense. The Company recorded tax provisions of $11.4
million, $5.4 million and $4.0 million for fiscal 1998, 1997 and 1996,
respectively. The effective tax rates for fiscal 1998, 1997 and 1996 were
(137%), (44%) and 56%, respectively, due primarily to in-process research
and development expenses which provided no immediate tax benefit.
The Company has established a valuation allowance covering a
portion of the gross deferred tax assets originating from its European
subsidiaries acquired in fiscal 1997. Approximately $3 million
of the valuation allowance at June 30, 1998 relates to tax benefits of
stock option deductions that will be credited to equity when realized.
The valuation allowance reduces net deferred tax assets to amounts
considered realizable in the near future based on projected future
taxable income. As there can be no assurance that these European
subsidiaries will generate future taxable income, there can be no
assurance that these valuation allowances will be realized.
Liquidity and Capital Resources
At June 30, 1998, the Company's combined balance of cash, cash
equivalents and short-term investments was $95.4 million. During fiscal
1998, the Company met its liquidity needs primarily through cash
generated from operating activities. Net cash provided by operating
activities was $50.8 million in fiscal 1998, compared with $21.9 million
and $8.0 million for fiscal years 1997 and 1996, respectively.
Cash provided by operating activities during fiscal 1998 was
primarily the result of net losses of $19.6 million offset by noncash
charges during the year for depreciation and amortization of $10.2
million, acquired in-process research and development costs of $40.3
million, stock based compensation of $6.9 million and the write-off of
certain long-lived assets totaling $3.6 million. Increases in accounts
receivable of $12.4 million resulted from higher fourth quarter sales in
fiscal 1998 compared to the prior year and an increase in the number of
days receivable outstanding from 70 days at the end fiscal 1997 to 83
days in fiscal 1998. A higher percentage of outstanding receivables in
fiscal 1998 were derived from foreign operations where collection cycles
are generally longer than in the United States. In addition, the fiscal
1998 days sales in accounts receivable reflects receivables acquired from
Philips. Cash flow from operating activities also benefited from
decreases in all other operating assets totaling $4.5 million and
increases to all other operating liabilities of $19.4 million.
Cash used in investing activities was $38.5 million in fiscal 1998
compared with $48.9 million and $83.6 million for fiscal years 1997 and
1996, respectively. The Company's acquisitions of UNL and UFC in fiscal
1998 used $10.8 million. The Company incurred capital expenditures of
$24.3 million primarily for facilities improvements and equipment
purchases to expand its manufacturing capacity primarily for its
telecommunications product lines. The Company also purchased intellectual
property totaling $550,000 for its telecommunications products
businesses. The Company expects to continue to expand its worldwide
manufacturing capacity, primarily for telecommunications products, by
making approximately $35 million in capital expenditures for fiscal 1999.
The Company used $1.7 million in cash for financing activities in
fiscal 1998 as compared to cash provided by financing activities of $3.8
million in fiscal 1997. In fiscal 1998, the Company generated $4.9
million from the exercise of stock options and the sale of stock through
its employee stock purchase plan. Cash used for financing activities
included the repayment of $6.1 million of notes payable originating from
the acquisition of UFP in fiscal 1996. The Company has a $5.0 million
revolving line of credit with a bank. Advances under the line of credit
bear interest at the bank's prime rate (8.5% at June 30, 1998) and are
secured by inventories and accounts receivable. There were no borrowings
under the line as of June 30, 1998. The line of credit was pledged as
collateral to secure a letter of credit issued in connection with the
purchase of certain assets of Chassis Engineering, Inc. in August 1998.
See Note 12 of Notes to Consolidated Financial Statements. 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 financial conditions. 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. As of June 30, 1998, the Company was in compliance
with all convenants under the agreement.
The Company believes that its existing cash balances and
investments, together with cash flow from operations and available lines
of credit will be sufficient to meet its liquidity and capital spending
requirements at least through the end of fiscal 1999. However, possible
investments in or acquisitions of complementary businesses, products or
technologies may require additional financing prior to such time. There
can be no assurance that such additional debt or equity financing will be
available when required or, if available, can be secured on terms
satisfactory to the Company.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
UNIPHASE CORPORATION
We have audited the consolidated balance sheets of Uniphase
Corporation as of June 30, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1998. Our audits also included the
financial statement schedule listed in the index at Item 7. These financial
statements and schedule are the responsibility of the management of Uniphase
Corporation. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Uniphase Corporation at June 30, 1998 and 1997, and
the consolidated results of its operations and its cash flows for each of
the three years in the period ended June 30, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statements schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed more fully in Note 1, the Company has modified the methods
used to value acquired in-process research and development which was charged
to expense in connection with the Company's June 1998 acquisition of
Uniphase Netherlands B.V. and, accordingly, has restated the consolidated
financial statements for the fiscal year ended June 30, 1998 to reflect
this change.
\s\ Ernst & Young LLP
San Jose, California
January 7, 1999, except
for the first paragraph under
"Basis of Presentation" of
Note 1, as to which the
date is April 23, 1999
<PAGE>
UNIPHASE CORPORATION
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales............................... $185,215 $113,214 $73,701
Cost of sales........................... 96,130 60,001 38,287
---------- ---------- ----------
Gross profit 89,085 53,213 35,414
---------- ---------- ----------
Operating expenses:
Research and development.............. 14,857 9,861 6,445
Royalty and license................... 2,008 1,380 1,337
Selling, general, and administrative.. 43,473 24,443 17,303
Acquired in-process research and
development...................... 40,268 33,314 4,480
---------- ---------- ----------
Total operating expenses................ 100,606 68,998 29,565
---------- ---------- ----------
Income (loss) from operations........... (11,521) (15,785) 5,849
Interest income......................... 2,964 3,985 1,570
Interest expense........................ (69) (421) (79)
Other income (expense), net............. 356 (134) (92)
---------- ---------- ----------
Income (loss) before income taxes..... (8,270) (12,355) 7,248
Income tax expense...................... 11,360 5,432 4,036
---------- ---------- ----------
Net income (loss)....................... ($19,630) ($17,787) $3,212
========== ========== ==========
Basic earnings (loss) per share......... ($0.55) ($0.53) $0.13
========== ========== ==========
Dilutive earnings (loss) per share...... ($0.55) ($0.53) $0.12
========== ========== ==========
Shares used in per share calculation:
Basic................................ 35,451 33,691 25,558
========== ========== ==========
Dilutive............................. 35,451 33,691 27,912
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
UNIPHASE CORPORATION
Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................... $40,525 $29,727
Short-term investments............................ 54,831 52,009
Accounts receivable, less allowances for
doubtful accounts of $809 at June 30, 1998
and $1,877 at June 30, 1997..................... 41,922 21,763
Inventories....................................... 22,137 19,296
Refundable income taxes........................... 2,219 6,010
Deferred income taxes............................. 4,321 5,882
Other current assets.............................. 2,640 1,652
--------- ---------
Total current assets........................... 168,595 136,339
Property, plant, and equipment, net.................. 57,191 31,701
Long-term deferred income taxes...................... 3,976 1,581
Identified intangibles............................... 23,964 8,902
Goodwill............................................. 79,015 2,067
Other assets......................................... 130 63
--------- ---------
Total assets................................... $332,871 $180,653
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of notes payable.................. $ -- $6,061
Accounts payable.................................. 15,784 5,267
Accrued payroll and related expenses.............. 7,793 4,528
Income taxes payable.............................. 7,697 5,049
Other accrued expenses............................ 15,893 5,237
--------- ---------
Total current liabilities...................... 47,167 26,142
Accrued pension and other employee benefits.......... 4,835 2,392
Other non-current liabilities........................ 831 86
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares - 1,000,000
Issued and outstanding shares - 100,000 at
June 30, 1998 and none at June 30, 1997........ -- --
Common stock, $0.001 par value
Authorized shares - 50,000,000
Issued and outstanding shares - 38,919,966 at
June 30, 1998 and 34,570,597 at June 30, 1997.. 39 35
Additional paid-in capital........................ 307,447 156,896
Accumulated deficit............................... (26,118) (4,881)
Other stockholders' equity....................... (1,330) (17)
--------- ---------
Total stockholders' equity..................... 280,038 152,033
--------- ---------
Total liabilities and stockholders' equity..... $332,871 $180,653
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
UNIPHASE CORPORATION
Consolidated Statements of Stockholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Retained Other
------------------- ------------------ Paid-in Earnings Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity Total
--------- --------- --------- -------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995
as previously reported............. -- $ -- 19,032 $20 $15,741 $8,958 $89 $24,808
Adjustment in connection with BCP
pooling of interest............. -- -- 726 -- 33 1,339 -- 1,372
--------- --------- --------- -------- ---------- ---------- ------------ ---------
Balance at June 30, 1995 as
restated........................... -- -- 19,758 20 15,774 10,297 89 26,180
Shares issued under
employee stock plans
and related tax benefits........ -- -- 1,253 1 4,702 -- -- 4,703
Common stock issued upon
public offering................. -- -- 10,580 10 105,519 -- -- 105,529
Common stock issued to KLA-
Tencor.......................... -- -- 1,332 2 12,281 -- -- 12,283
Stock compensation................. -- -- -- -- 3,000 -- -- 3,000
Amortization of deferred
compensation.................... -- -- -- -- 94 -- -- 94
Net income (loss).................. -- -- -- -- -- 3,212 -- 3,212
Dividends declared on BCP stock.... -- -- -- -- -- (173) -- (173)
Net unrealized loss on
securities available-for-sale... -- -- -- -- -- -- (18) (18)
Foreign currency
translation adjustment.......... -- -- -- -- -- -- 14 14
--------- --------- --------- -------- ---------- ---------- ------------ ---------
Balance at June 30, 1996............. -- -- 32,923 33 141,370 13,336 85 154,824
Shares issued under
employee stock plans
and related tax benefits........ -- -- 1,648 2 14,655 -- -- 14,657
Amortization of deferred
compensation.................... -- -- -- -- 871 -- -- 871
Net income (loss).................. -- -- -- -- -- (17,787) -- (17,787)
Dividends declared on BCP stock.... -- -- -- -- -- (430) -- (430)
Net unrealized gain on
securities available-for-sale... -- -- -- -- -- -- 29 29
Foreign currency
translation adjustment.......... -- -- -- -- -- -- (131) (131)
--------- --------- --------- -------- ---------- ---------- ------------ ---------
Balance at June 30, 1997............. -- -- 34,571 35 156,896 (4,881) (17) 152,033
Shares issued under
employee stock plans
and related tax benefits........ -- -- 1,089 1 11,279 -- -- 11,280
Preferred and common stock
issued to Philips............... 100 -- 3,260 3 131,341 -- -- 131,344
Amortization of deferred
compensation.................... -- -- -- -- 1,051 -- -- 1,051
Stock Compensation................. -- -- -- -- 6,880 -- -- 6,880
Net income (loss).................. -- -- -- -- -- (19,630) -- (19,630)
Dividends declared on BCP stock.... -- -- -- -- -- (643) -- (643)
Net unrealized gain on
securities available-for-sale... -- -- -- -- -- -- 43 43
Foreign currency
translation adjustment.......... -- -- -- -- -- -- (1,356) (1,356)
Adjustments to conform BCP with
Company's fiscal year end....... -- -- -- -- -- (964) (964)
--------- --------- --------- -------- ---------- ---------- ------------ ---------
Balance at June 30, 1998............. 100 $ -- 38,920 $39 $307,447 ($26,118) ($1,330) $280,038
========= ========= ========= ======== ========== ========== ============ =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
UNIPHASE CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income (loss)................................ ($19,630) ($17,787) $3,212
BCP net income for the six months ended
December 31, 1997.............................. (964) -- --
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation expense........................ 6,193 3,204 1,686
Amortization expense........................ 4,002 1,617 499
Acquired in-process research and
development............................... 40,268 33,314 4,480
Stock compensation expense.................. 6,880 871 3,094
Write-off of property, equipment and
intangible assets......................... 3,605 1,977 --
Decrease in deferred income taxes, net...... (834) (1,591) (1,040)
Changes in operating assets and liabilities:
Accounts receivable......................... (12,386) 1,117 (6,633)
Inventories................................. 1,674 (5,389) (4,077)
Refundable income taxes..................... 3,791 (1,450) --
Other current assets........................ (988) 718 (89)
Income taxes payable........................ 9,042 2,652 587
Accounts payable, accrued liabilities,
and other accrued expenses................ 10,372 2,682 6,312
--------- --------- ---------
Net cash provided by operating activities.......... 51,025 21,935 8,031
--------- --------- ---------
Investing activities
Purchase of available-for-sale investments....... (187,246) (97,959) (74,326)
Sale of available-for-sale investments........... 184,467 107,258 17,726
Acquisition of Uniphase Netherlands B.V.......... (4,100) -- --
Acquisition of Uniphase Fiber Components
Ltd. Pty, net of cash acquired............... (6,696) -- --
Acquisition of net assets of Laser Enterprise.... -- (45,900) --
Acquisition of UTP Fibreoptics and remaining
interest in I.E. Optomech Ltd................. -- -- (9,387)
Acquisition of licenses (550) -- --
Purchase of property, plant and equipment........ (24,320) (12,239) (17,730)
Increase in other assets......................... (79) (11) (23)
Decrease in other assets........................ 12 -- 114
--------- --------- ---------
Net cash used in investing activities.............. (38,512) (48,851) (83,626)
--------- --------- ---------
Financing activities
Repayment of notes payable and lease obligations. (6,061) (548) (297)
Issuance of notes payable........................ -- -- 6,061
Proceeds from issuance of common stock other
than in the public offerings................... 4,886 4,464 1,704
Proceeds from offering of stock.................. -- -- 117,812
Dividends paid on BCP stock...................... (540) (126) (190)
--------- --------- ---------
Net cash provided by (used in) financing
activities. (1,715) 3,790 125,090
--------- --------- ---------
Increase (decrease) in cash and cash equivalents... 10,798 (23,126) 49,495
Cash and cash equivalents at beginning of period... 29,727 52,853 3,358
--------- --------- ---------
Cash and cash equivalents at end of period......... $40,525 $29,727 $52,853
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 BUSINESS ACTIVITIES and SUMMARY of SIGNIFICANT ACCOUNTING POLICIES
Business Activities
Uniphase Corporation (the "Company" or "Uniphase") designs,
develops, manufactures and markets components and modules for fiber optic
telecommunications and cable television (CATV) systems, laser subsystems,
and laser-based semiconductor wafer defect examination and analysis
equipment. The Company's telecommunications and CATV divisions design,
develop, manufacture and market semiconductor lasers, high-speed external
modulators and transmitters for fiber optic networks in the
telecommunications and CATV industries. The Company's Laser Division
designs, develops, manufactures and markets laser subsystems for a broad
range of OEM applications which include biotechnology, industrial process
control and measurement, graphics and printing, and semiconductor
equipment. The Company's Ultrapointe subsidiary designs, develops,
manufactures and markets advanced laser-based systems for semiconductor
wafer defect examination and analysis. The Company entered the
telecommunications market in May 1995. Currently, the Company's portfolio
of telecommunications products include those produced by Uniphase
Telecommunications Products ("UTP"), UTP Fibreoptics ("UFP"), Uniphase
Laser Enterprise ("ULE"), Uniphase Network Components ("UNC"), Uniphase
Fiber Components ("UFC") and Uniphase Netherlands ("UNL").
As more fully described in Note 13, a wholly owned subsidiary of
the Company merged with Broadband Communications Products, Inc. ("BCP")
in November 1998 in a pooling of interests transaction. The consolidated
financial statements for fiscal 1998, 1997 and 1996 have been restated to
include the financial position, results of operations and cash flows of
BCP. There were no transactions between BCP and the Company prior to the
combination and no significant adjustments were necessary to conform
BCP's accounting policies. Because of differing year ends, financial
information relating to Uniphase's fiscal years ended June 30, 1997 and
1996 has been combined with financial information relating to BCP's years
ended December 31, 1997 and 1996, respectively. The consolidated
statement of stockholders' equity for fiscal 1998 includes an adjustment
of $964,000 to reduce accumulated deficit for the income of BCP for the
six months ended December 31, 1997 which is included in the results of
operations twice. Net sales of BCP for the six months ended December 31,
1997 were approximately $4.1 million. BCP was a subchapter S Corporation
for income tax purposes and, therefore, did not pay U.S. federal income
taxes. BCP will be included in the Company's U.S. federal income tax
return effective November 25, 1998. BCP's net taxable temporary
differences were insignificant as of the date of the merger.
Basis of Presentation
As described in Note 9, Uniphase's acquisition of UNL was accounted
for using the purchase method of accounting. Accordingly, the total purchase
price was allocated to the assets acquired and liabilities assumed, including
in-process research and development based on their estimated fair values using
valuation methods believed to be appropriate at the time. The estimated fair
value of the in-process research and development of $93.0 million was expensed
in the fourth quarter of fiscal 1998 (the period in which the acquisition was
consummated). Subsequent to the Securities and Exchange Commission's letter to
the AICPA dated September 9, 1998, regarding its views on in-process research
and development, the Company has re-evaluated its in-process research and
development charge with respect to the UNL acquisition, revised the purchase
price allocation and restated its financial statements. As a result, Uniphase
made an adjustment to decrease the amount of previously expensed in-process
research and development and increase the amount capitalized as goodwill and
other intangibles by $59.3 million.
The effect of this adjustment on previously reported consolidated
financial statements as of and for the year ended June 30, 1998 as follows:
As As
Reported Restated
--------- ---------
Acquired in-process research
and development................. $99,568 $40,268
Income (loss) from operations..... $(70,821) $(11,521)
Net income (loss)................. $(78,930) $(19,630)
Basic earnings (loss) per share... $(2.23) $(0.55)
Diluted earnings (loss) per share. $(2.23) $(0.55)
Identified intangibles............ $23,364 $23,964
Goodwill.......................... $20,315 $79,015
Accumulated deficit............... $(85,418) $(26,118)
The consolidated financial statements include Uniphase and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Cash, Cash Equivalents and Short-term Investments
Uniphase considers all liquid investments with maturities of ninety
days or less when purchased to be cash equivalents. The Company's
short-term investments have maturities of greater than ninety days. The
Company's securities are classified as available-for-sale and are
recorded at fair value. Fair value is based upon market prices quoted on
the last day of the fiscal year. The cost of debt securities sold is
based on the specific identification method. Unrealized gains and losses
are reported as a separate component of stockholders' equity. Gross
realized gains and losses are included in interest income and have not
been material. The Company's investments consist of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- ---------
(in thousands)
<S> <C> <C> <C> <C>
JUNE 30, 1998:
Floating rate bonds........... $9,740 $ -- $ -- $9,740
Municipal bonds............... 60,216 64 10 60,270
Auction instruments........... 6,101 -- -- 6,101
Money market instruments...... 5,851 -- -- 5,851
---------- ----------- ----------- ---------
$81,908 $64 $10 $81,962
========== =========== =========== =========
JUNE 30, 1997:
Floating rate bonds........... $14,122 $ -- $ -- $14,122
Municipal bonds............... 42,008 38 27 42,019
Auction instruments........... 4,702 -- -- 4,702
Money market instruments...... 3,896 -- -- 3,896
---------- ----------- ----------- ---------
$64,728 $38 $27 $64,739
========== =========== =========== =========
</TABLE>
The following is a summary of contractual maturities of the company's
investments:
<TABLE>
<CAPTION>
JUNE 30, 1998:
Estimated
Amortized Fair
Cost Value
----------- ---------
(in thousands)
<S> <C> <C>
Money market funds..................................... $5,851 $5,851
Amounts maturing within one year....................... 56,996 57,047
Amounts maturing after one year, within five years..... 19,061 19,064
----------- ---------
$81,908 $81,962
=========== =========
</TABLE>
Fair Value of Financial Instruments
The Company has determined the estimated fair value of financial
instruments. The amounts reported for cash and cash equivalents, accounts
receivable, short-term borrowings, accounts payable, notes payable and
accrued expenses approximate the fair value due to their short
maturities. Investment securities and foreign currency exchange contracts
are reported at their estimated fair value based on quoted market prices
of comparable instruments.
Inventories
Inventories are valued at the lower of cost (first-in, first-out
method) or market. The components of inventory consist of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
----------- -----------
(in thousands)
<S> <C> <C>
Finished goods........................... $7,274 $2,636
Work in process.......................... 11,998 10,746
Raw materials and purchased parts........ 2,865 5,914
----------- -----------
$22,137 $19,296
=========== ===========
</TABLE>
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
computed by the straight-line method over the following estimated useful
lives of the assets: building and improvements, 5 to 40 years; machinery
and equipment, 2 to 5 years; furniture, fixtures, and office equipment, 5
years. Leasehold improvements are amortized by the straight-line method
over the shorter of the estimated useful lives of the assets or the term
of the lease. The components of property, plant and equipment are as
follows:
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
----------- -----------
(in thousands)
<S> <C> <C>
Land..................................... $4,868 $4,868
Building and improvements................ 8,772 8,556
Machinery and equipment.................. 36,566 21,839
Furniture, fixtures and office
equipment.............................. 8,051 5,729
Leasehold improvements................... 4,922 2,165
Construction in progress................. 12,162 722
----------- -----------
75,341 43,879
Less: accumulated depreciation and
amortization........................... (18,150) (12,178)
----------- -----------
$57,191 $31,701
=========== ===========
</TABLE>
Goodwill and Other Intangible Assets
Intangible assets primarily represent acquired developed technology
and the excess acquisition cost over the fair value of tangible and
intangible net assets of businesses acquired (goodwill). Intangible
assets are being amortized using the straight-line method over estimated
useful lives ranging from 3 to 7 years. Accumulated amortization of
intangible assets at June 30, 1998 and 1997 was $3,161,000 and $696,000,
respectively.
Long-lived assets are reviewed whenever indicators of impairment
are present and the undiscounted cash flows are not sufficient to recover
the related asset carrying amount. At June 30, 1997 intangible assets
included the excess of the investment in UFP over the fair value of the
net assets acquired of approximately $4.3 million. The intangible assets
were reviewed during the fourth quarter of 1998 following the Company's
acquisition of UNL. This review indicated that the UFP intangible assets
were impaired, as determined based on the projected cash flows from UFP
over the next three years. The cash flow projections take into effect the
net sales and expenses expected from UFP products, as well as maintaining
its current manufacturing capabilities. Consequently, the carrying value
of the UFP goodwill and other long-lived assets totaling $2.2 million and
$1.4 million, respectively, were written off as a component of operating
expenses during fiscal 1998.
At June 30, 1996, intangible assets included the excess of the
investment in I.E. Optomech ("Optomech") over the fair market value of
the net assets acquired of approximately $527,000. The intangible asset
was reviewed during the third quarter of 1997 in light of the Company's
acquisition of ULE and the resultant closure of Optomech. This review
indicated that the Optomech intangible asset was impaired, as determined
based on projected cash flows from Optomech over the remaining
amortization period. The cash flow projections take into effect the
change in strategic focus by the Company for semiconductor laser-based
applications due to the acquisition of ULE, the costs and expected
benefit from Optomech products prospectively, and management's intention
to cease capital funding at Optomech. Consequently, the carrying value of
the Optomech intangible assets totaling $477,000 was written off as a
component of operating expenses during fiscal 1997.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents,
short-term investments and trade receivables. The Company places its cash
equivalents and short-term investments with high credit-quality financial
institutions. The Company invests its excess cash primarily in auction
and money market instruments, and municipal and floating rate bonds. The
Company has established guidelines relative to credit ratings,
diversification and maturities that seek to maintain safety and
liquidity. The Company sells primarily to customers involved in the
application of laser technology, the manufacture of semiconductors, or
the manufacture of telecommunications equipment products. The Company
performs ongoing credit evaluations of its customers and does not require
collateral. The Company provides reserves for potential credit losses,
however such losses and yearly provisions have not been significant and
have been within management's expectations.
Foreign Currency Translation and Exchange Contracts
The Company's international subsidiaries use their local currency
as their functional currency. Assets and liabilities denominated in
foreign currencies are translated using the exchange rate on the balance
sheet dates. Net sales and expenses are translated using average rates of
exchange prevailing during the year. The translation adjustment resulting
from this process is shown separately as a component of other
stockholders' equity. Foreign currency transaction gains and losses are
not material and are included in the determination of net income.
During fiscal 1998, the Company entered into forward foreign
currency option contracts to hedge certain balance sheet accounts
denominated in Swiss Francs, Dutch Guilders, and German Marks. As of
June 30, 1998, the Company had foreign currency option contracts
outstanding in Swiss Francs, Dutch Guilders and German Marks for
approximately $2.4 million, $4.0 million and $600,000, respectively.
These foreign currency contracts expire on various dates in the first
quarter of fiscal 1999. The difference between the fair value and the
amortized contract value on foreign currency exchange contracts is
immaterial.
While the contract amounts provide one measure of the volume of the
transactions outstanding at June 30, 1998 they do not represent the
amount of the Company's exposure to credit risk. The Company's exposure
to credit risk (arising from the possible inability of the counterparts
to meet the terms of their contracts) is generally limited to the amount,
if any, by which the counterparts' obligations exceed the obligations of
the Company.
Revenue Recognition
The Company recognizes revenue generally at the time of shipment.
Revenue on the shipment of evaluation units is deferred until customer
acceptance. The Company provides for the estimated cost to repair
products under warranty at the time of sale.
Earnings (loss) per Share
In 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards 128, "Earnings per Share." Statement
No. 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. The
Company's diluted earnings per share are very similar to the previously
reported primary earnings per share. All earnings per share amounts for
all prior periods presented, where necessary, have been restated to
conform to the Statement 128 requirements and to reflect the 100% stock
dividend discussed in Note 8 to these consolidated financial statements.
As the Company incurred a loss in fiscal 1998 and 1997, the effect of
dilutive securities totaling 2,995,000 and 2,734,000 equivalent shares,
respectively, have been excluded from the 1998 and 1997 computation as
they are antidilutive. Dilutive securities exclude the conversion of
Series A Preferred Stock until the removal of all contingencies
attributable to their conversion is assured beyond a reasonable doubt.
The following table sets for the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Denominator for basic earnings (loss)
per share-weighted average shares.... 35,451 33,691 25,558
Effect of dilutive securities:
Stock options outstanding............ -- -- 2,354
---------- ---------- ----------
Denominator for diluted earnings
(loss) per share..................... 35,451 33,691 27,912
========== ========== ==========
Net income (loss)....................... ($19,630) ($17,787) $3,212
========== ========== ==========
Basic earnings (loss) per share......... ($0.55) ($0.53) $0.13
========== ========== ==========
Dilutive earnings (loss) per share...... ($0.55) ($0.53) $0.12
========== ========== ==========
</TABLE>
Stock-based Compensation
In accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees," the Company records and amortizes, over the related
vesting periods, deferred compensation representing the difference
between the price per share of stock issued or the exercise price of
stock options granted and the fair value of the Company's common stock at
the time of issuance or grant. Stock compensation costs are immediately
recognized to the extent the exercise price is below the fair value on
the date of grant and no future vesting criteria exist.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Impact of Recently Issued Accounting Standards
In 1997, the Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income," was issued and is
effective for fiscal years commencing after December 15, 1997.
In 1997, the Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures About Segments of an Enterprise and Related
Information," was issued and is effective for fiscal years commencing
after December 15, 1997.
In 1998, the Statement of Financial Accounting Standards No. 132
("SFAS 132"), "Employers' Disclosures about Pensions and Other
Postretirement Benefits," was issued and is effective for fiscal years
commencing after December 15, 1997.
The Company is required to adopt the provisions of SFAS 130, 131
and 132 in fiscal year 1999 and expects the adoption will not affect
results of operations or financial position but will require either
additional disclosures or modifications to previous disclosures.
In 1998, the Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instrument and Hedging
Activities," was issued and is effective for fiscal years commencing
after June 15, 1999. The effect of adopting SFAS 133 is currently being
evaluated but is not expected to have a material effect on the Company's
financial position or results of operations.
Reclassification
The Company separately classified goodwill on the Consolidated
Balance Sheets and has included stock based compensation as selling,
general and administrative expense on the Consolidated Statements of
Operations. For comparative purposes, amounts in the prior years have
been reclassified to conform to current year presentations.
NOTE 2. LINE of CREDIT
The Company has a $5.0 million revolving bank line of credit that
expires on January 28, 1999. Advances under the line of credit bear
interest at the bank's prime rate (8.5% at June 30, 1998) 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. There were no borrowings under the
line of credit at June 30, 1998.
NOTE 3. OTHER ACCRUED EXPENSES
The components of other accrued expenses are as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
----------- -----------
(in thousands)
<S> <C> <C>
Acquisition and reorganization costs..... $8,294 $1,335
Warranty reserve......................... 1,906 1,005
Royalties payable........................ 587 405
Other accrued liabilities................ 5,106 2,492
----------- -----------
$15,893 $5,237
=========== ===========
</TABLE>
Acquisition and reorganization costs include $5.0 million for
certain exit costs in connection with the acquisition of UNL (see Note
9), $1.5 million for accrued transaction costs in connection with the
acquisition of UNL and $1.8 million in connection with certain
reorganization actions undertaken by management.
NOTE 4. INCOME TAXES
The expense (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------
1998 1997 1996
---------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Federal:
Current........................ $7,848 $4,635 $4,381
Deferred....................... (361) (367) (934)
---------- ----------- -----------
7,487 4,268 3,447
State:
Current........................ 3,245 1,222 635
Deferred....................... (524) (160) (130)
---------- ----------- -----------
2,721 1,062 505
Foreign:
Current........................ 1,152 1,166 84
Deferred....................... -- (1,064) --
---------- ----------- -----------
1,152 102 84
---------- ----------- -----------
Income tax expense............ $11,360 $5,432 $4,036
========== =========== ===========
</TABLE>
The tax benefit associated with exercises of stock options reduced taxes
currently payable by $6.2 million, $10.2 million and $3.0 million for the years
ended June 30, 1998, 1997 and 1996, respectively.
A reconciliation of the income tax expense (benefit) at the federal
statutory rate to the income tax expense (benefit) at the effective tax rate is
as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------
1998 1997 1996
---------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Income taxes (benefit) computed
at federal statutory rate..... ($2,812) ($4,200) $2,464
State taxes, net of federal
benefit....................... 1,796 701 333
Acquired in-process research
and development for which no
tax benefit is currently
recognizable.................. 13,691 9,466 1,523
Realization of valuation
allowance..................... (1,547) -- --
Tax exempt income............... (527) (502) (213)
Pre-merger subchapter S taxes... (775) (379) (152)
Other........................... 1,534 346 81
---------- ----------- -----------
Income tax expense............ $11,360 $5,432 $4,036
========== =========== ===========
</TABLE>
The components of deferred taxes consist of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
----------- -----------
(in thousands)
<S> <C> <C>
Deferred tax assets:
AMT and research tax credit
carryforwards.......................... $2,813 $350
Net operating loss carryforwards........ -- 2,872
Inventory reserve....................... 1,336 447
Additional tax basis of intangibles..... 8,793 9,848
Deferred compensation................... 2,637 --
Warranty and other reserves............. 538 1,527
Other................................... 1,430 767
----------- -----------
Total deferred tax assets............. 17,547 15,811
Valuation allowance..................... ( 9,250) (7,797)
----------- -----------
Net deferred tax assets............... 8,297 8,014
Deferred tax liabilities:
Other................................... -- 551
----------- -----------
Total deferred tax liabilities........ -- 551
----------- -----------
Total net deferred tax assets......... $8,297 $7,463
=========== ===========
</TABLE>
Approximately $3.0 million of the valuation allowance at June 30,
1998 relates to tax benefits of stock option deductions, which will be
credited to equity when realized. The balance of the valuation allowance
relates to the additional tax basis of intangibles, which will be
realized, generally, over a 5-year period. The valuation allowance
reduces net deferred tax assets to amounts considered realizable in the
near future based on projected future taxable income.
NOTE 5. LEASE COMMITMENTS
The Company leases manufacturing and office space primarily in
Manteca, California; Bloomfield, Connecticut; Chalfont, Pennsylvania;
Witney, United Kingdom; Zurich, Switzerland; Sydney, Australia and
Eindhoven, the Netherlands under operating leases expiring at various
dates through December 2013 and containing certain renewal options
ranging from one to four years. The Company has the option of terminating
two of its lease agreements on December 25, 2003 upon six months written
notification.
Future minimum commitments for noncancelable operating leases are
as follows:
<TABLE>
<CAPTION>
Operating
Year Ending June 30, Leases
---------------------------------- -----------
(in thousands)
<S> <C>
1999............................ $4,211
2000............................ 4,583
2001............................ 4,446
2002............................ 4,273
2003............................ 4,001
Thereafter...................... 28,140
-----------
Total minimum lease payments.... $49,654
===========
</TABLE>
Rental expense for operating leases for the years ended June 30,
1998, 1997, and 1996 amounted to approximately $1,312,000, $1,006,000 and
$730,000, respectively.
NOTE 6. RELATED PARTY TRANSACTIONS
As discussed in Note 9, the Company acquired 100% of the capital
stock of Philips Optoelectronics B.V. from Koninklijke Philips
Electronics N.V. ("Philips"). Subsequent to the acquisition, Philips owns
approximately 8.5% of the Company's outstanding common stock and has one
seat on the Company's Board of Directors. The Company has operating
leases for manufacturing facilities and site service agreements for
network support and information systems at the Philips NATLAB Center in
Eindhoven, the Netherlands. In addition, the Company is obligated to
provide future design and development services on certain laser
technology to Philips that the Company believes will be of strategic
importance to Philips' existing consumer and business electronics
operations. The Company is obligated to provide 15 million Dutch Guilders
(approximately $7.5 million) of such services through April 2000, of
which approximately 10 million Dutch Guilders is expected to be provided
ratably between July 1998 and April 2000.
Pursuant to the Philips transaction, Philips has committed to
provide interim treasury, export, distribution and certain site services
to the Company for its operations in the Netherlands to minimize
disruptions to its business activity. Lease commitments to Philips
included in Note 5 above represent 76% of total future minimum
commitments for non-cancelable operating leases. Balances with related
parties that are included in the consolidated financial statements are
immaterial except for the following amounts with Philips:
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
----------- -----------
(in thousands)
<S> <C> <C>
Accounts Receivable...................... $6,805 $ --
Accounts Payable......................... $442 $ --
These balances are expected to settle on or before December 31, 1998.
</TABLE>
NOTE 7. PENSION and OTHER EMPLOYEE BENEFITS
Pensions
Through the acquisition of ULE in Switzerland, the Company assumed
two foreign defined-benefit pension plans related to the employees of
ULE. Benefits are based on years of service and annual compensation on
retirement. Plans are funded in accordance with applicable Swiss
regulations.
The funded status of the foreign defined-benefit plans is
summarized below:
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
----------- -----------
(in thousands)
<S> <C> <C>
Accumulated benefit obligation........... $3,819 $3,129
Vested benefit obligation................ $3,819 $3,129
Projected benefit obligation............. ($6,586) ($6,448)
Fair market value of plan assets......... 4,909 4,488
Unrecognized net asset................... (775) --
----------- -----------
Projected benefit obligation less than
(in excess of) plan assets............... ($2,452) ($1,960)
=========== ===========
</TABLE>
The components of net pension costs for 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
----------- -----------
(in thousands)
<S> <C> <C>
Service cost............................. $626 $458
Interest cost............................ 339 322
Expected return on plan assets........... (253) (224)
----------- -----------
Net pension expense...................... $712 $556
=========== ===========
</TABLE>
For fiscal 1998 and 1997, the weighted average discount rates and
long-term rates for compensation increases used for estimating the
benefit obligations and the expected return on plan assets were as follows:
Discount rate...................................... 5.0%
Rate of increase in compensation levels............ 3.5%
Expected long-term return on assets................ 4.0%
Plan assets of the foreign plans consist primarily of listed
stocks, bonds and cash surrender value life insurance policies.
In connection with the acquisition of UNL, the Company agreed to
continue to provide pension benefits to its qualified Holland employees
through a multi-employer defined benefit pension plan sponsored by the
Holland Metalworkers Union. Philips is obligated to fully fund the
pension benefit obligation for all periods prior to June 9, 1998 directly
to the Metalworkers Union Plan. The Company assumed a $2.0 million
liability at acquisition for the projected benefit obligation in excess
of assets expected to be transferred to the multi-employer plan by
Philips in accordance with SFAS No.87 "Employer's Accounting for
Pensions." Pension expense for fiscal 1998 under this plan was
immaterial. The amount of accumulated benefits and net assets of the
multi-employer plan is not currently available to the Company.
Other Employee and Postemployment Benefits
Uniphase has an employee 401(k) salary deferral plan, covering all
domestic employees. Employees may make contributions by withholding a
percentage of their salary up to $10,000 per year. Company contributions
consist of $.25 per dollar contributed by the employees with at least six
months of service. Company contributions were approximately $426,000,
$309,000 and $215,000 for the years ended June 30, 1998, 1997, and 1996,
respectively.
NOTE 8. STOCKHOLDERS' EQUITY
Preferred Stock
In connection with the acquisition of UNL, the Company issued
100,000 shares of non-voting, non-cumulative Series A Preferred Stock to
Philips having a par value of $.001 per share. The Series A Preferred
Stock is convertible into additional shares of common stock based on an
agreed upon formula for annual and cumulative shipments of certain
products during the four-year period ending June 30, 2002. The Preferred
Stock is also convertible into common stock upon the occurrence of a
Redemption Event, as defined in the Series A Preferred Stock Agreement.
In June 1998, the Company adopted a Stockholder Rights Agreement (a
"Right") for stockholders of record as of July 6, 1998. Each Right will
entitle stockholders to purchase 1/1000 share of the Company's Series B
Preferred Stock at an exercise price of $270. The Rights only become
exercisable in certain limited circumstances following the tenth day
after a person or group announces acquisitions of or tender offers for
15% or more of the Company's common stock. For a limited period of time
following the announcement of any such acquisition or offer, the Rights
are redeemable by the Company at a price of $.01 per Right. If the
Rights are not redeemed, each Right will then entitle the holder to
purchase common stock having the value of twice the then-current exercise
price. For a limited period of time after the exercisability of the
Rights, each Right, at the discretion of the Board, may be exchanged for
either 1/1000 share of the Company's Series A Preferred Stock or one
share of common stock per Right. The Rights expire on June 22, 2008.
The Board of Directors has the authority, without any further vote
or action by the stockholders, to provide for the issuance of an
additional 900,000 shares of Preferred Stock from time to time in one or
more series with such designations, rights, preferences and limitations
as the Board of Directors may determine, including the consideration
received therefore, the number of shares comprising each series, dividend
rates, redemption provisions, liquidation preferences, redemption fund
provisions, conversion rights and voting rights, all without the approval
of the holders of common stock.
Stock Option Plans
As of June 30, 1998, Uniphase has reserved approximately 8,224,000
shares of common stock for future issuance to employees, directors and
consultants under its 1984 Amended and Restated Stock Option Plan (the
"1984 Option Plan"), the Amended and Restated 1993 Flexible Stock
Incentive Plan (the "1993 Option Plan") and the 1996 Non-qualified Stock
Option Plan ("the 1996 Option Plan"). The Board of Directors has the
authority to determine the type of option and the number of shares
subject to option. The exercise price is generally equal to fair value of
the underlining stock at the date of grant. Options generally become
exercisable over a four-year period and, if not exercised, expire from
five to ten years from the date of grant. The following table summarizes
option activity through June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------
Weighted
Shares Average
Available Number Exercise
for Grant of shares Price
---------- ----------- -----------
(in thousands, except price per share)
<S> <C> <C> <C>
Balance at June 30, 1995........ 916 5,171 $2.21
Increase in authorized shares... 420 -- --
Granted......................... (1,408) 1,408 5.98
Canceled........................ 156 (492) 1.99
Exercised....................... -- (1,058) 1.22
---------- ----------- -----------
Balance at June 30, 1996........ 84 5,029 3.33
Increase in authorized shares... 2,742 -- --
Granted......................... (2,002) 2,002 20.15
Canceled........................ 236 (228) 12.44
Exercised....................... -- (1,428) 2.69
---------- ----------- -----------
Balance at June 30, 1997........ 1,060 5,375 9.41
Increase in authorized shares... 3,179 -- --
Granted......................... (2,424) 2,424 36.93
Canceled........................ 193 (193) 13.56
Exercised....................... -- (942) 4.04
Expired......................... (30) -- --
---------- ----------- -----------
Balance at June 30, 1998........ 1,978 6,664 $18.92
========== =========== ===========
</TABLE>
The following table summarizes the stock options outstanding as of
June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Average Range of Number Life Exercise Number Exercise
Exercise Prices Outstanding (in years) Price Exercisable Price
- --------------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 0.23 - $ 1.20 731,977 4.09 $ 0.92 731,977 $ 0.92
$ 1.94 - $ 3.05 687,731 5.80 $ 2.70 532,391 $ 2.65
$ 3.44 - $ 5.88 1,280,526 7.71 $ 5.50 892,184 $ 5.50
$ 7.31 - $15.00 227,546 5.92 $ 9.83 104,673 $ 8.53
$16.42 - $16.42 680,000 6.68 $16.42 212,500 $16.42
$17.00 - $25.00 837,970 6.57 $21.72 318,604 $22.37
$25.63 - $31.63 624,614 6.82 $29.35 78,864 $25.63
$32.38 - $36.53 686,896 7.29 $34.13 56,111 $32.95
$36.84 - $44.75 771,000 7.63 $39.30 2,222 $44.75
$52.75 - $56.13 135,650 7.91 $53.64 -- $ --
----------- ----------- ---------- ----------- ----------
$ 0.23 - $56.13 6,663,910 6.64 $18.92 2,929,526 $ 8.03
=========== ===========
</TABLE>
Employee Stock Purchase Plans
The Uniphase 1993 Employee Stock Purchase Plan (the "93 Purchase
Plan") was adopted in October 1993, amended during fiscal 1994 and
expires December, 1998. The Company has reserved 400,000 shares of common
stock for issuance under the 93 Purchase Plan. The 93 Purchase Plan
provides eligible employees with the opportunity to acquire an ownership
interest in Uniphase through participation in a program of periodic
payroll deductions applied at specific intervals to the purchase of
common stock. The 93 Purchase Plan is structured as a qualified employee
stock purchase plan under Section 423 of the amended Internal Revenue
Code of 1986. However, the 93 Purchase Plan is not intended to be a
qualified pension, profit sharing or stock bonus plan under Section
401(a) of the 1986 Code and is not subject to the provisions of the
Employee Retirement Income Security Act of 1974. During fiscal 1998,
employees purchased 147,835 shares of common stock under the 93 Purchase
Plan and 121,539 shares are available for future issuance. The Company
terminated the 93 Purchase Plan in August 1998 and cancelled any shares
then remaining but unissued.
The Uniphase 1998 Employee Stock Purchase Plan (the "98 Purchase
Plan") was adopted in June 1998. The Company has reserved 1,000,000
shares of common stock for issuance under the 98 Purchase Plan. The 98
Purchase Plan, effective August 1, 1998, provides eligible employees with
the opportunity to acquire an ownership interest in Uniphase through
participation in a program of periodic payroll deductions applied at
specific intervals to the purchase of common stock. The Purchase Plan is
structured as a qualified employee stock purchase plan under Section 423
of the amended Internal Revenue Code of 1986. However, the Purchase Plan
is not intended to be a qualified pension, profit sharing or stock bonus
plan under Section 401(a) of the 1986 Code and is not subject to the
provisions of the Employee Retirement Income Security Act of 1974. The
Purchase Plan will terminate upon the earlier of August 1, 2008 or the
date on which all shares available for issuance under the Purchase Plan
have been sold.
Stock Based Compensation
The Company has elected to follow APB Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for its employee stock
options because, as discussed below, the alternative fair value
accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB No. 25,
when the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no
compensation expense is recognized in the Company's financial statements.
During fiscal 1996, the Company replaced all options to purchase
UTP stock previously issued to UTP employees with options to purchase
stock of the Company. The Company incurred compensation expense totaling
$4.4 million in connection with such options granted which were effective
May 15, 1996. Of this total $3.0 million, related to options which have
vested as of the grant date, was charged to expense in the fiscal year
ended June 30, 1996. The remaining $1.4 million was charged to expense
over the remaining vesting period of three years. In conjunction with the
acquisition of ULE in fiscal 1997, the Company issued stock options to
key employees of ULE at a value that was less than the market value. The
Company is recognizing compensation expense for the total value of $2.0
million over the vesting period of four years. Stock based compensation
expense in fiscal 1998 was approximately $6.9 million and is included as
a component of operating expenses. These options had a weighted average
fair value of $42.95 per share.
Pro forma information regarding net income and earnings per share
is required by SFAS No. 123. This information is required to be
determined as if the Company had accounted for its employee stock options
(including shares issued under the Employee Stock Purchase Plan,
collectively called "options") granted subsequent to June 30, 1995 under
the fair value method of that statement. The fair value of options
granted in 1998, 1997 and 1996 reported below has been estimated at the
date of grant using a Black-Scholes option pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
Employee Stock
Employee Purchase
Stock Options Plan Shares
-------------------- --------------------
1998 1997 1996 1998 1997 1996
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years)... 5.5 5.5 5.5 0.5 0.5 0.5
Risk-free interest rate.... 6.4% 6.5% 5.9% 5.9% 5.4% 5.4%
Volatility................. 0.66 0.64 0.64 0.76 0.75 0.57
Dividend yield............. 0% 0% 0% 0% 0% 0%
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in the opinion of management, the existing
models do not necessarily provide a reliable single measure of the fair
value of its options. A total of approximately 2,005,000 options were
granted during fiscal 1998 with exercise prices equal to the market price
of the stock on the grant date. The weighted-average exercise price and
weighted-average fair value of these options were $36.93 and $23.32,
respectively. The weighted-average exercise price and weighted-average
fair value of stock options granted during fiscal 1997 was $22.07 and
$13.74 per share, respectively. The weighted average exercise price and
weighted average fair value of stock options granted during fiscal 1996
was $5.98 and $4.59, respectively. The weighted average fair value of
shares granted under the Employee Stock Purchase Plan during 1998, 1997
and 1996 was $10.63, $7.08 and $3.35, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Pro forma net income (loss).......... ($33,679) ($22,003) $2,140
Pro forma earnings (loss) per share.. $(0.95) $0.65 $0.07
</TABLE>
Pro forma net income represents the difference between compensation
expense recognized under APB 25 and the related expense using the fair
value method of SFAS No. 123 taking into account any additional tax
effects of applying SFAS No. 123. The effects on pro forma disclosures of
applying SFAS No. 123 are not likely to be representative of the effects
on pro forma disclosures of future years. Because SFAS No. 123 is
applicable only to options granted subsequent to June 30, 1995, the pro
forma effect will not be fully reflected until 1999.
NOTE 9. ACQUISITIONS
Uniphase Netherlands
On June 9, 1998, the Company acquired 100% of the capital stock of
Uniphase Netherlands B.V. (formerly Philips Optoelectronics B.V.) from
Philips. UNL designs, develops, manufactures and markets high performance
semiconductor lasers, photo diodes and components for telecommunications,
CATV, multimedia and printing markets. The total purchase price of
$135.4 million consisted of 3,259,646 shares of common stock, cash of
$100,000 and $4.0 million in related acquisition costs. The common stock
is subject to restrictions from trading for twelve months from the
transaction date, and Philips became the largest stockholder of record at
8.5% of the Company's common stock at the date of closing. In addition,
the Company issued 100,000 shares of Series A Preferred Stock to Philips
as contingent consideration and interest thereon worth up to 458 million
Dutch Guilders (approximately $285 million). The number of shares of
common stock to be issued upon conversion of this preferred stock is tied
to unit shipments of certain products by UNL during the four-year period
ending June 30, 2002 and the Company's stock price at the date the
contingency attributable to the unit shipments is removed. The contingent
consideration is not included in the acquisition cost above, but will be
recorded at the current fair value as additional purchase price
representing additional goodwill when the aggregate unit shipment
criteria are met. The additional goodwill will be amortized over its
remaining life.
The acquisition has been accounted for by the purchase method of
accounting and accordingly, the accompanying financial statements include
the results of operations of UNL subsequent to the acquisition date. The
purchase price was allocated to the net assets and in-process research
and development acquired. The purchased intangible assets and goodwill
are being amortized in accordance with the Company's policy for
intangible assets.
In-process research and development was identified and valued
through extensive interviews, analysis of data provided by UNL concerning
developmental products, their stage of development, the time and
resources needed to complete them, their expected income generating
ability, target markets and associated risks. The Income Approach, which
includes an analysis of the markets, cash flows, and risks associated
with achieving such cash flows, was the primary technique utilized in
valuing purchased research and development project.
The Company considered, among other factors, the importance of each
project to the overall development plan, and the projected incremental
cash flows from the projects when completed and any associated risks. The
projected incremental cash flows were discounted back to their present
value using a discount rate of 27%. This discount rate was determined
after consideration of the Company's weighted average cost of capital and
the weighted average return on assets. Associated risks include the
inherent difficulties and uncertainties in completing each project and
thereby achieving technological feasibility, anticipated levels of market
acceptance and penetration, market growth rates and risks related to the
impact of potential changes in future target markets. Since the
acquisition date, some of the acquired in-process research and
development projects have been completed and the related products have
been released. The third generation in-process research and development
projects acquired are still in development. The Company estimates that
these projects will be released upon completion through 2002.
This analysis resulted in a valuation of $33.7 million for acquired in-
process research and development that had not reached technological
feasibility and did not have alternative future uses. Therefore, in
accordance with generally accepted accounting principles, the $33.7 million
was expensed. The Company estimates that a total investment of
$32,666,000 in research and development over the next three years will be
required to complete the in-process research and development.
The following unaudited pro forma summary presents the consolidated
results of operations of the Company, excluding the charge for acquired
in-process research and development, as if the acquisition of UNL had
occurred at the beginning of fiscal 1997 and does not purport to be
indicative of what would have occurred had the acquisition been made as
of the beginning of fiscal 1997 or of results which may occur in the
future.
<TABLE>
<CAPTION>
June 30,
-------------------
1998 1997
--------- ---------
(in thousands)
<S> <C> <C>
Net sales................................ $213,753 $137,814
Net income (loss)........................ $3,862 ($30,400)
Earnings (loss) per share................ $0.10 ($0.82)
</TABLE>
The effects of the UNBV acquisition on the 1998 consolidated statement
of cash flows were as follows (in thousands):
<TABLE>
<S> <C>
Working capital (deficiency) acquired.... ($1,155)
Property, plant and equipment............ 7,084
Identified Intangibles.................. 16,000
Goodwill................................. 81,823
Other liabilities........................ (2,008)
In-process research and development...... 33,700
---------
Total purchase price..................... $135,444
=========
</TABLE>
The following table shows the accrued liabilities at June 30, 1998,
included in the working capital deficiency acquired above, for costs
associated with exit activities related to UNL in accordance with
management's preliminary plans and certain other costs related to the
acquisition. Due to the close proximity of the acquisition to the
Company's fiscal year end, management has not been able to finalize its
assessment of exit activities but intends to do so within one year
following the closing date of the acquisition.
<TABLE>
<CAPTION>
<S> <C>
Estimated costs associated with removal of gas
delivery and vacuum systems and other costs
to restore leased property to original condition
upon vacating........................................... $2,440
Cancellation fees in connection with facilities
design work and early termination of a services
agreement............................................... 764
Estimated lease termination costs......................... 1,437
Other..................................................... 331
---------
Total..................................................... $4,972
=========
</TABLE>
Uniphase Fiber Components
On November 26, 1997, the Company acquired 100% of the capital
stock of Uniphase Fiber Components Pty Ltd. (formerly INDX Pty Ltd.) and
obtained certain licensing rights from Australia Photonics Pty Limited
(AP). UFC designs and manufactures fiber optic reflection filters (fiber
Bragg gratings) for wavelength division multiplexing (WDM) applications.
The total purchase price of $6,896,000 included a cash payment of
$6,496,000 to AP and acquisition expenses of $400,000.
The acquisition has been accounted for as a purchase and
accordingly, the accompanying fiscal 1998 financial statements include
the results of operations of UFC subsequent to the acquisition date. The
purchase price was allocated to the net assets and the in-process
research and development acquired. The purchased intangible assets are
being amortized over the estimated useful life of 5 years. Pro forma
results of operations as if the transaction had occurred at the beginning
of the year are not shown as the effect would not be material.
In-process research and development was identified and valued
through extensive interviews, analysis of data provided by UFC concerning
developmental products, their stage of development, the time and
resources needed to complete them, their expected income generating
ability, target markets and associated risks. The Income Approach, which
includes an analysis of the markets, cash flows, and risks associated
with achieving such cash flows, was the primary technique utilized in
valuing purchased research and development project.
The Company considered, among other factors, the importance of each
project to the overall development plan, and the projected incremental
cash flows from the projects when completed and any associated risks. The
projected incremental cash flows were discounted back to their present
value using a discount rate of 27%. This discount rate was determined
after consideration of the Company's weighted average cost of capital and
the weighted average return on assets. Associated risks include the
inherent difficulties and uncertainties in completing each project and
thereby achieving technological feasibility, anticipated levels of market
acceptance and penetration, market growth rates and risks related to the
impact of potential changes in future target markets. Since the
acquisition date, some of the acquired in-process research and
development projects have been completed and the related products have
been released.
This analysis resulted in a valuation of $6,568,000 for acquired
in-process research and development that had not reached technological
feasibility and did not have alternative future uses. Therefore, in
accordance with generally accepted accounting principles, such $6,568,000
was charged to income. The Company estimates that a total investment of
$1.9 million in research and development over the next year will be
required to complete the in-process research and development.
The effects of the UFC acquisition on the 1998 consolidated
statement of cash flows were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Working capital (deficiency) acquired.... ($344)
Property, plant and equipment............ 279
Intangibles.............................. 193
In-process research and development...... 6,568
---------
Total purchase price..................... $6,696
=========
</TABLE>
Uniphase Laser Enterprise
On March 10, 1997, the Company acquired the net assets of ULE from
IBM. ULE designs and manufactures semiconductor diode laser chips used by
the telecommunications industry. The total purchase price of $45,900,000
includes a cash payment of $45,000,000 to IBM and acquisition expenses of
$900,000.
The acquisition has been accounted for by the purchase method of
accounting and accordingly, the accompanying financial statements include
the results of operations of ULE subsequent to the acquisition date. The
purchase was allocated to the net assets and in-process research and
development acquired. The purchased intangible assets are being amortized
over the estimated useful life of 5 years.
In-process research and development was identified and valued
through extensive interviews, analysis of data provided by ULE concerning
developmental products, their stage of development, the time and
resources needed to complete them, their expected income generating
ability, target markets and associated risks. The Income Approach, which
includes an analysis of the markets, cash flows, and risks associated
with achieving such cash flows, was the primary technique utilized in
valuing purchased research and development project.
The Company considered, among other factors, the importance of each
project to the overall development plan, and the projected incremental
cash flows from the projects when completed and any associated risks. The
projected incremental cash flows were discounted back to their present
value using a discount rate of 20%. This discount rate was determined
after consideration of the Company's weighted average cost of capital and
the weighted average return on assets. Associated risks include the
inherent difficulties and uncertainties in completing each project and
thereby achieving technological feasibility, anticipated levels of market
acceptance and penetration, market growth rates and risks related to the
impact of potential changes in future target markets. Since the
acquisition date, some of the acquired in-process research and
development projects have been completed and the related products have
been released.
This analysis resulted in a valuation of $33,314,000 for acquired
in-process research and development that had not reached technological
feasibility and did not have alternative future uses. Therefore, in
accordance with generally accepted accounting principles, the $33,314,000
was expensed.
The following unaudited pro forma summary presents the consolidated
results of operations of the Company, excluding the charge for acquired
in-process research and development, as if the acquisition of ULE had
occurred at the beginning of fiscal 1996 and does not purport to be
indicative of what would have occurred had the acquisition been made as
of the beginning of fiscal 1996 or of results which may occur in the
future.
<TABLE>
<CAPTION>
June 30,
-------------------
1997 1996
--------- ---------
(in thousands)
<S> <C> <C>
Net sales................................ $130,061 $92,892
Net income............................... $18,226 $7,038
Diluted earnings per share............... $0.54 $0.25
</TABLE>
The effects of the ULE acquisition on the 1997 consolidated statement
of cash flows were as follows (in thousands):
<TABLE>
<S> <C>
Working capital (deficiency) acquired.... $8,358
Property, plant and equipment............ 3,477
Prepaid lease and service agreements..... 1,064
Identified intangibles................... 4,733
Other liabilities........................ (5,046)
In-process research and development...... 33,314
---------
Total purchase price..................... $45,900
=========
</TABLE>
UTP Fibreoptics
On May 31, 1996, the Company acquired 100% of the outstanding
shares of GCA and FAS. GCA and FAS operates as UFP. UFP custom packages
laser diodes, light emitting diodes ("LEDs") and photodetectors for use
in fiber optic networks. The total purchase price of $9,150,000 consisted
of approximately $2,589,000 cash payment, and $6,061,000 notes payable to
the former stockholders and $500,000 in related acquisition costs. The
principal and accumulated interest on the notes was paid in August 1997.
The acquisition has been accounted for by the purchase method of
accounting and accordingly, the accompanying financial statements include
the results of operations of UFP subsequent to the acquisition date. The
purchase included net assets and acquired in-process research and
development of $4,827,000 at fair market value. The excess of $1,913,000
over the purchase price are being amortized over its estimated useful
life of 5 years.
The following unaudited pro forma summary presents the consolidated
results of operations of the Company as if the acquisition of UFP had
occurred at the beginning of fiscal 1995 and does not purport to be
indicative of what would have occurred had the acquisition been made as
of the beginning of fiscal 1995 or of results which may occur in the
future.
<TABLE>
<CAPTION>
June 30,
---------
1996
---------
(in thousands)
<S> <C>
Net sales................................ $79,409
Net income............................... $7,702
Diluted earnings per share............... $0.28
</TABLE>
The effects of the UFP acquisition on the 1996 consolidated statement
of cash flows were as follows (in thousands):
<TABLE>
<S> <C>
Working capital (deficiency) acquired.... $609
Property, plant and equipment............ 924
Intangibles and goodwill, net
of deferred taxes...................... 4,323
Other liabilities........................ (1,186)
In-process research and development...... 4,480
---------
Total purchase price..................... $9,150
=========
</TABLE>
NOTE 10. GEOGRAPHIC AND INDUSTRY SEGMENT INFORMATION
Uniphase operates in two geographic regions: the United States and
Europe. The Company operates in a single industry segment - the design,
manufacture and sale of laser subsystems and laser based products. The
following table shows sales, operating income (loss) and other financial
information by geographic region:
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------
(In thousands) 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales:
United States-domestic................ $114,701 $77,534 $55,321
United States-export.................. 51,823 22,542 15,362
Europe................................ 19,945 22,816 8,738
Intercompany.......................... (1,254) (9,678) (5,720)
---------- ---------- ----------
Total net sales..................... $185,215 $113,214 $73,701
========== ========== ==========
Operating income (loss):
United States......................... ($17,801) $13,519 $5,407
Europe................................ 6,530 (28,693) (77)
Eliminations.......................... (250) (611) 519
---------- ---------- ----------
Total operating income (loss)....... ($11,521) ($15,785) $5,849
========== ========== ==========
Identifiable assets:
United States......................... $240,628 $152,082 $169,963
Europe................................ 92,243 28,571 5,729
---------- ---------- ----------
Total assets........................ $332,871 $180,653 $175,692
========== ========== ==========
</TABLE>
Intercompany transfers represent products that are transferred
between geographic areas on a basis intended to reflect as nearly as
possible the market value of the products. Identifiable assets are those
assets of the Company that are identified with the operations of the
corresponding geographic area.
One telecommunications customer accounted for 11% of the Company's
consolidated net sales in fiscal 1998. Another customer purchased both
laser subsystems and Ultrapointe Systems that accounted for a combined
11% and 12% of the Company's consolidated net sales in fiscal 1998 and
1996, respectively. One other laser subsystem customer accounted for 11%
of the Company's consolidated net sales in fiscal year 1996.
NOTE 11. SUPPLEMENTAL CASH FLOW INFORMATION
The consolidated statement of cash flows for fiscal 1998 excludes
noncash investing activities of $131.3 million in common stock issued to
Philips. Net cash provided by operating activities reflects cash payments
for interest and income taxes as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------
1998 1997 1996
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Cash payments for:
Interest...................................... $69 $219 $43
Income taxes.................................. $2,318 $2,262 $1,107
</TABLE>
Note 12. SUBSEQUENT EVENT (UNAUDITED)
In August 1998, the Company acquired certain assets of Chassis
Engineering Inc. ("Chassis") for $70,000 in cash and convertible debt of
$2.73 million. Chassis designs, develops, markets and manufactures
packaging solutions for fiber optic and other high performance
components. The convertible debt is composed of a $1.93 million demand
obligation and two performance-based instruments totaling $800,000 that
become due upon achieving certain milestones over the ensuing 9 to 18
months. The convertible debt bears interest at 5.48% and principal can be
exchanged for newly issued shares of Uniphase common stock at a price of
$55.083 per share. The convertible debt is secured by a letter of credit
issued against the Company's unused revolving bank line of credit. In
February 1999, the holder tendered the original $1.93 million obligation
and a performance-based instrument valued at $500,000 for 44,115 shares
of common stock.
On December 31, 1998, the Company sold the assets of its
Ultrapointe subsidiary to KLA-Tencor Corporation. The Company recorded
a loss of approximately $2.5 million on such sale in fiscal 1999.
Note 13. BUSINESS COMBINATION
On November 25, 1998, the Company acquired BCP in a tax-free
reorganization in which a wholly owned subsidiary of the Company was
merged directly into BCP of Melbourne, Florida. BCP manufactures high-
speed and high-bandwidth fiber optic products including transmitters,
receivers and multiplexers used to extend the reach of fiber optic
transmission into metropolitan and local access networks. The Company has
exchanged 729,510 shares of Uniphase common stock and reserved 418,482
shares for BCP options assumed by the Company. Merger related expenses of
approximately $6.0 million will be recorded in the second quarter of
fiscal 1999. Separate net sales, net income (loss) and related earnings
(loss) per share amounts of the merged entities are presented in the
following table.
<TABLE>
<CAPTION>
Years Ended June 30,
(In thousands, except per share data)
-----------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales:
Uniphase.............................. $175,801 $106,966 $69,073
BCP................................... 9,414 6,248 4,628
--------- --------- ---------
Combined.............................. $185,215 $113,214 $73,701
========= ========= =========
Net income (loss):
Uniphase.............................. ($21,812) ($18,854) $2,792
BCP................................... 2,182 1,067 420
--------- --------- ---------
Net income as reported.................. ($19,630) ($17,787) $3,212
========= ========= =========
</TABLE>
UNIPHASE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance Charged Balance
at to Costs Charged to at
Beginning and Other Deduction End of
Description of Period Expenses Accounts(2) (1) Period
- --------------------------------- --------- --------- ----------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1998:
Allowance for doubtful accounts... $1,877 $377 $386 $1,831 $809
Year ended June 30, 1997:
Allowance for doubtful accounts... $285 $582 $1,083 $73 $1,877
Year ended June 30, 1996:
Allowance for doubtful accounts... $164 $139 $ -- $18 $285
</TABLE>
- ---------------
(1) Charges for uncollectible accounts, net of recoveries.
(2) Allowance assumed through the acquisition of UNBV and UFC in fiscal 1998
and ULE in fiscal 1997.
(a)(3) Exhibits
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as a part of this Form 8-K.
SIGNATURES
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 hereunto duly authorized.
UNIPHASE CORPORATION
By: /s/ Anthony R. Muller
Anthony R. Muller
Senior Vice President
of Finance and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Dated: April 28, 1999
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-74716) pertaining to the Uniphase Corporation 1984
Amended and Restated Stock Plan, the 1993 Flexible Stock Incentive Plan,
the 1993 Amended and Restated Employee Stock Purchase Plan; the
Registration Statement (Form S-8 No. 33-31722) pertaining to the Uniphase
Corporation Amended and Restated 1993 Flexible Stock Incentive Plan; the
Registration Statement (Form S-8 No. 333-09937) pertaining to the Uniphase
Telecommunications Products, Inc. 1995 Flexible Stock Incentive Plan; the
Registration Statement (Form S-8 No. 333-39423) pertaining to the Uniphase
Corporation Amended and Restated 1993 Flexible Stock Incentive Plan and
the 1996 Nonqualified Stock Option Plan; the Registration Statement (Form
S-8 No. 333-62465) pertaining to the Uniphase Corporation 1998 Employee
Stock Purchase Plan and the Amended and Restated 1993 Flexible Stock
Incentive Plan; and the Registration Statement (Form S-3/A No. 333-27931) of
Uniphase Corporation and in the related Prospectus of our report dated
January 7, 1999 (except for the first paragraph under "Basis of "Presentation"
of Note 1, as to which the date is April 23, 1999), with respect to the
consolidated financial statements and schedule of Uniphase Corporation
included in the Current Report on the Form 8-K/A dated April 28, 1999, filed
with the Securities and Exchange Commission.
\s\ Ernst & Young LLP
San Jose, California
April 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR
THE PERIOD ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER>1000
<S> <C>
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<PERIOD-TYPE> 12-MOS
<CASH> 40,525
<SECURITIES> 54,831
<RECEIVABLES> 42,731
<ALLOWANCES> 809
<INVENTORY> 22,137
<CURRENT-ASSETS> 168,595
<PP&E> 75,341
<DEPRECIATION> 18,150
<TOTAL-ASSETS> 332,871
<CURRENT-LIABILITIES> 47,167
<BONDS> 0
0
0
<COMMON> 39
<OTHER-SE> 279,999
<TOTAL-LIABILITY-AND-EQUITY> 332,871
<SALES> 185,215
<TOTAL-REVENUES> 185,215
<CGS> 96,130
<TOTAL-COSTS> 96,130
<OTHER-EXPENSES> 100,606
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69
<INCOME-PRETAX> (8,270)
<INCOME-TAX> 11,360
<INCOME-CONTINUING> (19,630)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,630)
<EPS-PRIMARY> ($0.55)
<EPS-DILUTED> ($0.55)
</TABLE>
