UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-22874
Uniphase Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-2579683
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
163 Baypointe Parkway
San Jose, CA 95134
(Address of principal executive offices) (Zip Code)
(408) 434-1800
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of January 27, 1999.
Common Stock $.001 par value 39,694,809
Class Number of Shares
<PAGE>
UNIPHASE CORPORATION
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales............................. $63,772 $45,479 $121,192 $85,501
Cost of sales......................... 33,538 23,242 62,436 43,762
---------- ---------- ---------- ----------
Gross profit........................ 30,234 22,237 58,756 41,739
---------- ---------- ---------- ----------
Operating expenses:
Research and development............ 5,785 3,359 11,448 6,368
Royalty and license................. 498 490 926 975
Selling, general and administrative. 9,795 7,339 18,205 14,127
Merger costs........................ 5,877 -- 5,877 --
Loss on sale of product line........ 382 -- 382 --
Acquired in-process research and
development....................... -- 6,568 -- 6,568
---------- ---------- ---------- ----------
Total operating expenses.............. 22,337 17,756 36,838 28,038
---------- ---------- ---------- ----------
Income from operations................ 7,897 4,481 21,918 13,701
Interest and other income, net........ 844 760 1,763 1,522
---------- ---------- ---------- ----------
Income before income taxes.......... 8,741 5,241 23,681 15,223
Income tax expense.................... 4,223 3,979 8,898 7,393
---------- ---------- ---------- ----------
Net income ........................... $4,518 $1,262 $14,783 $7,830
========== ========== ========== ==========
Basic earnings per share.............. $0.11 $0.04 $0.38 $0.22
========== ========== ========== ==========
Dilutive earnings per share........... $0.11 $0.03 $0.35 $0.21
========== ========== ========== ==========
Weighted average common shares
outstanding......................... 39,530 35,194 39,321 34,967
Dilutive effect of stock options
outstanding......................... 2,728 2,705 2,781 2,766
---------- ---------- ---------- ----------
Weighted average common shares
outstanding, assuming dilution...... 42,258 37,899 42,102 37,733
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
UNIPHASE CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ ------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................... $29,331 $40,525
Short-term investments............................ 84,905 54,831
Accounts receivable, less allowances for returns
and doubtful accounts of $871 at December 31,
1998 and $809 at June 30, 1998.................. 39,920 41,922
Inventories....................................... 26,180 22,137
Deferred income taxes............................. 4,321 4,321
Refundable income taxes and other current assets.. 4,898 4,859
------------ ------------
Total current assets........................... 189,555 168,595
Property, plant, and equipment, net.................. 72,733 57,191
Intangible assets, including goodwill................ 45,438 43,679
Long-term deferred income taxes and other assets..... 4,483 4,106
------------ ------------
Total assets................................... $312,209 $273,571
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable..................................... $2,375 $ --
Accounts payable.................................. 22,207 15,784
Accrued payroll and related expenses.............. 8,103 7,793
Income taxes payable.............................. 2,017 7,697
Other accrued expenses............................ 11,461 15,893
------------ ------------
Total current liabilities...................... 46,163 47,167
Accrued pension and other employee benefits.......... 6,204 4,835
Other non-current liabilities........................ 862 831
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares - 1,000,000
Issued and outstanding shares - 100,000 at
December 31, and June 30, 1998................. -- --
Common stock, $0.001 par value
Authorized shares - 100,000,000
Issued and outstanding shares - 39,683,763
at December 31, 1998 and 38,919,966 at
June 30, 1998.................................. 40 39
Additional paid-in capital........................ 325,997 307,447
Accumulated deficit............................... (71,283) (85,418)
Other stockerholders' equity...................... 4,226 (1,330)
------------ ------------
Total stockholders' equity..................... 258,980 220,738
------------ ------------
Total liabilities and stockholders' equity..... $312,209 $273,571
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
UNIPHASE CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Operating activities
Net income........................................... $14,783 $7,830
UBP net income for the six months ended
December 31, 1997.................................. -- (964)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 10,158 3,943
Write-off of product line inventory and equipment.. 1,977 --
Stock compensation expense......................... 246 525
Acquired in-process research and development....... -- 6,568
Change in operating assets and liabilities:
Accounts receivable............................. 2,002 (4,529)
Inventories..................................... (5,638) (452)
Deferred income taxes and other current assets.. (39) --
Accounts payable, accrued liabilities and
other current liabilities..................... 6,100 12,188
---------- ----------
Net cash provided by operating activities.............. 29,589 25,109
---------- ----------
Investing activities
Purchase of short-term investments................... (153,433) (39,951)
Proceeds from sale of short-term investments......... 123,707 37,435
Purchase of property, plant and equipment............ (18,956) (11,833)
Acquisition of Chassis Engineering, Inc.............. (112) --
Acquisition of UFC................................... -- (6,696)
Increase in other assets............................. (377) (78)
---------- ----------
Net cash used in investing activities.................. (49,171) (21,123)
---------- ----------
Financing activities
Repayment of notes payable........................... -- (6,061)
Proceeds from issuance of common stock under
stock option and stock purchase plans.......... 9,036 3,323
Pre-merger dividends paid on BCP stock............... (648) (126)
---------- ----------
Net cash provided by (used in) financing activities.... 8,388 (2,864)
---------- ----------
Increase (decrease) in cash and cash equivalents....... (11,194) 1,122
Cash and cash equivalents at beginning of period....... 40,525 29,727
---------- ----------
Cash and cash equivalents at end of period............. $29,331 $30,849
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Tax benefits from stock option and stock
purchase plans................................. $8,189 $6,854
Issuance of notes payable......................... $2,375 $--
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
UNIPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Business Activities and Basis of Presentation
The financial information at December 31, 1998 and for the three
and six month periods ended December 31, 1998 and 1997 is unaudited, but
includes all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair
presentation of the financial information set forth herein, in
accordance with generally accepted accounting principles for interim
financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, such information does not include all of
the information and footnotes required by generally accepted accounting
principles for annual audited financial statements. For further
information, refer to the Consolidated Financial Statements and
footnotes thereto included in the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998.
On November 25, 1998, the Company acquired Broadband
Communications Products, Inc. ("BCP") in a pooling of interests
transaction. The Company exchanged 729,510 shares of common stock for
all the outstanding shares of BCP common stock and reserved 418,482
shares for issuance on exercise of BCP options assumed by the Company.
Merger related expenses during the second quarter of fiscal 1999 totaled
$5.9 million primarily for legal and accounting services and fees paid
to BCP's financial advisors. The financial information for the three and
six month periods ended December 31, 1997 and at June 30, 1998 has 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 cash flows for the six
month period ended December 31, 1997 includes an adjustment of $964,000
to reduce cash flow from operations 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. Prior to November 25, 1998, 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. BCP will operate as Uniphase Broadband Products,
Inc. ("UBP").
On December 31, 1998, the Company sold substantially all of the
assets of its Ultrapointe subsidiary to KLA-Tencor Corporation ("K-T").
The Company recorded unusual charges to cost of sales and operating
expenses of $1.6 million and $382,000 respectively, in connection with
the K-T transaction.
The results for the three and six month periods ended December 31,
1998 may not be indicative of results for the fiscal year ending June
30, 1999 or any future period.
Impact of Recently Issued Accounting Standards
The Company has adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," as of
the first quarter of fiscal 1999. SFAS No. 130 establishes new rules for
the reporting and display of comprehensive income and its components,
however it has no impact on the Company's net income or stockholders'
equity. Comprehensive income consists of accumulated net unrealized gain
on available-for-sale investments and foreign currency translation
adjustments. These components of comprehensive income are included in
other stockholders' equity on the accompanying consolidated balance
sheets.
The components of comprehensive income, net of tax, are as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income........................ $4,518 $1,262 $14,783 $7,830
Change in unrealized gain on
available-for-sale investments.. 66 (2) 235 25
Change in foreign currency
translation..................... 2 (16) 3,515 1
--------- --------- --------- ---------
Comprehensive income.............. $4,586 $1,244 $18,533 $7,856
========= ========= ========= =========
</TABLE>
In 1997, the Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures About Segments of an Enterprise and Related
Information" was issued. In 1998, the Statement of Financial Accounting
Standards No. 132 ("SFAS 132"), "Employers' Disclosures about Pensions
and Other Post-retirement Benefits" was issued. The Company is required
to adopt the provisions of SFAS 131 and 132 in fiscal year 1999. These
adoptions are not expected to 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 Instruments and Hedging
Activities" was also 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.
Income Taxes
The effective tax rates used for the second quarter and the first
six months of fiscal 1999 were 48.3% and 37.6% compared to 75.9% and
48.6% used in the same periods of fiscal 1998. Decreases in the
effective tax rate were primarily attributable to an increase in foreign
earnings taxed at a lower rate and the exclusion of taxable income
derived from UBP as a Subchapter S Corporation through November 24,
1998. The fiscal 1999 provision for income taxes excludes any effect
from non-deductible merger costs incurred in connection with the
acquisition of UBP, whereas fiscal 1998 amounts exclude any effect from
non-deductible acquired in-process research and development expenses.
Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ ------------
<S> <C> <C>
Raw materials and purchased parts........... $6,077 $2,865
Work in process............................. 13,768 11,998
Finished goods.............................. 6,335 7,274
------------ ------------
$26,180 $22,137
============ ============
</TABLE>
Litigation and Contingencies
Two former employees have pending wrongful termination actions
against the Company. Summary judgment dismissal in both claims has been
issued and subsequent appeals have been undertaken. The Company believes
these claims are without merit and is vigorously defending them. Even if
these claims are adjudicated in favor of the plaintiffs, the Company
does not believe that the ultimate resolution of these matters will have
material adverse impact on the Company or its operations.
Acquisition of Chassis Engineering Inc.
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 discounted $1.92
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 Company recorded an increase of $500,000 to
the demand obligation during the quarter ended December 31, 1998 to
reflect satisfaction of the first Chassis milestone. The convertible
debt bears interest at 5.48% and the 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.
The effects of the Chassis acquisition on the fiscal 1999 interim
consolidated statement of cash flows were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Working capital (deficiency) acquired.............. ($41)
Property and equipment............................. 25
Intangibles........................................ 2,503
---------------
Net assets acquired................................ $2,487
===============
Convertible debt issued............................ $2,375
Cash paid, including transaction costs............. 112
---------------
Total purchase price............................... $2,487
===============
</TABLE>
Subsequent Events
On January 28, 1999, the Company announced the signing of a Merger
Agreement, providing for the pending merger with JDS Fitel, Inc.
("JDS"). JDS is a publicly held Canadian company (Toronto Stock Exchange
symbol "JDS") that designs and manufactures a broad range of fiberoptic
products and instruments for the telecommunications industry. The merger
with JDS will be accounted for as a purchase transaction and is subject
to a number of contingencies including approval by stockholders of both
companies and certain closing conditions, including regulatory
approvals. As a result, there can be no assurance that such merger will
be consummated. The Merger Agreement provides for the Company to issue
common stock of its wholly owned Canadian subsidiary that is
exchangeable for an equivalent amount of the Company's common stock
("Exchangeable Shares") to the stockholders of JDS. As a result of such
issuance and assuming conversion of all Exchangeable Shares, JDS
shareholders will own 50% of the Company's outstanding common stock.
The Company anticipates that a significant portion of the purchase price
would result in the recognition of intangible assets in excess of $2
billion in the period of consummation, thereby resulting in a net loss
in the foreseeable future due to the amortization of such intangibles.
<PAGE>
UNIPHASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Recent Events
On January 28, 1999, the Company announced the signing of a Merger
Agreement, providing for the pending merger with JDS-Fitel, Inc.
("JDS"). JDS is a publicly held Canadian company (Toronto Stock Exchange
symbol "JDS") that designs and manufactures a broad range of fiberoptic
products and instruments for the telecommunications industry. The merger
with JDS will be accounted for as a purchase transaction and is subject
to a number of contingencies including approval by stockholders of both
companies and certain closing conditions, including regulatory
approvals. As a result, there can be no assurance that such merger will
be consummated. The Merger Agreement provides for the Company to issue
common stock of its wholly-owned Canadian subsidiary that is
exchangeable for an equivalent amount of the Company's commons stock
("Exchangeable Shares") to the stockholders of JDS. As a result of such
issuance and assuming conversion of all Exchangeable Shares, JDS
shareholders will own 50% of the Company's outstanding common stock.
The Company anticipates that a significant portion of the purchase price
would result in the recognition of intangible assets in excess of $2
billion in the period of consummation, thereby resulting in a net loss
in the foreseeable future due to the amortization of such intangibles.
On November 25, 1998, the Company acquired Broadband
Communications Products, Inc. ("BCP") in a transaction accounted for as
a pooling of interests. See Notes to Interim Consolidated Financial
Statements. BCP will operate as Uniphase Broadband Products, Inc.
("UBP"). UBP 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. Results for the second quarter include $5.9 million of
costs associated with the merger.
On December 31, 1998, the company sold substantially all of the
assets of its Ultrapointe subsidiary to KLA-Tencor Corporation ("K-T")
and recognized a pre-tax charge of $382,000 and a charge to cost of
sales of $1.6 million in connection with the transaction.
Net Sales
In the second quarter of fiscal 1999, ended December 31, 1998, net
sales were $63.8 million, which represented a 40% increase over net
sales of $45.5 million reported for the second quarter of fiscal 1998.
For the first six months of fiscal 1999, net sales were $121.2 million,
which represented a 42% increase over net sales of $85.5 million in the
same period of fiscal 1998. The increase in net sales for the quarter
and six-month periods was primarily due to increased sales of the
Company's telecommunications products and the addition of certain
recently acquired businesses offset by lower levels of net sales from
Ultrapointe products. Results for the six-month period ended December
31, 1998 included the operations of Uniphase Netherlands (UNL) which was
acquired in a purchase transaction in June, 1998. Net sales increased
$6.4 million or 11% over the first quarter of fiscal 1999 amount of
$57.4 million, primarily because of growth in telecommunications product
sales. No customer represented 10% or more of the Company's net sales
for either the quarter or six months ended December 31, 1998.
Results for the three and six-month periods ended December 31,
1998 are not considered indicative of the results to be expected for any
future period or for the entire year. In addition, there can be no
assurance that the market for the Company's products will grow in future
periods at its historical percentage rate or that certain market
segments will not decline. Further, there can be no assurance that the
Company will be able to increase or maintain its market share in the
future or to achieve historical growth rates.
Gross Profit
In the second quarter of fiscal 1999, the Company's gross profit
increased 36% to $30.2 million or 47% of net sales from gross profit of
$22.2 million or 49% of net sales in the same period of fiscal 1998.
Gross margin as a percentage of net sales for the quarter declined as
compared to the prior year because of the charge resulting from the
disposal of Ultrapointe assets. Gross margin for the second quarter
increased because of a $1.1 million decrease in certain inventory
reserves, offset by a $1.0 million increase in reserve provisions
related to certain new products shipped to customers. For the first six
months of fiscal 1999, gross profit increased 41% to $58.8 million or
48% of net sales from $41.7 million or 49% of net sales in the same
period of fiscal 1998. The increase in gross profit over fiscal 1998 for
the six-month period is due to increased sales of certain
telecommunications products and a $1.4 million reduction in excess
manufacturing related reserves (in addition to the aforementioned
reserve changes in the second quarter), offset by the lower gross margin
rates of certain businesses acquired in fiscal 1998. Gross profit
increased $1.7 million or 6% over the first quarter of fiscal 1999 when
it represented 50% of net sales.
There can be no assurance that the Company will be able to
maintain its gross margin at current levels in future periods. In
addition, cessation in sales of Ultrapointe systems will result in
reduced gross profit that may not be offset by an increase in gross
profit from the sale of other products. The Company expects that there
will continue to be periodic fluctuations in its gross margin resulting
from changes in its sales and product mix, competitive pricing
pressures, higher cost 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
In the second quarter of fiscal 1999, research and development
(R&D) expense was $5.8 million or 9% of net sales, which represented a
$2.4 million or 72% increase over R&D expense of $3.4 million or 7% of
net sales in the second quarter of fiscal 1998. For the first six months
of fiscal 1999, R&D expense was $11.4 million or 9% of net sales, which
represents a $5.1 million or 80% increase over R&D expense of $6.4
million or 7% of net sales in the same period in fiscal 1998. The
increase in R&D expense is primarily due to expenses of the Company's
recently acquired Netherlands subsidiary and continued development and
enhancement of the Company's existing telecommunications product lines.
R&D expense increased 2% over the first quarter of fiscal 1999, although
it decreased as a percentage of sales from 10% to 9% due to higher
sequential growth in net sales for the comparable periods and a decline
in Ultrapointe R&D expenses.
The Company anticipates that R&D expense will continue to increase
in amounts in future periods, although R&D expense may fluctuate as a
percentage of net sales. In addition, there can be no assurance that
expenditures for R&D will be successful or that improved processes or
commercial products will result from these projects.
Royalty and License
In the second quarter of fiscal 1999, royalty and license expense
of $498,000 was consistent with the same quarter in fiscal 1998 and the
first quarter of fiscal 1999. For the first six months of fiscal 1999,
royalty and license expense of $926,000 was comparable to the
corresponding fiscal 1998 amount of $975,000.
The Company continues to develop products for its solid state
laser and telecommunications markets. There are numerous patents for
these products, some of which 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. A
number of the patents in these industries are conflicting. If there is
conflict between a third-party's patents or products and those of the
Company, it could be very costly for the Company to enforce its rights
in an infringement action or defend such an action brought by another
party. In addition, the Company may need to obtain license rights to
certain patents and may be required to make substantial payments,
including continuing royalties, in exchange for such license rights.
There can be no assurance that licenses to third party technology, if
needed, will be available on commercially reasonable terms.
Selling, General and Administrative
In the second quarter of fiscal 1999, selling, general and
administrative (SG&A) expense was $9.8 million or 15% of net sales,
which represented a $2.5 million or 33% increase over SG&A expense of
$7.3 million or 16% of net sales in the second quarter of fiscal 1998.
For the first six months of fiscal 1999, SG&A expense was $18.2 million or 15%
of net sales which represented a $4.1 million or 29% increase over SG&A
expense of $14.1 million or 17% of net sales in the same period of
fiscal 1998. SG&A expense increased $1.4 million or 16% over the first
quarter of fiscal 1999 amount of $8.4 million or 15% of net sales.
Decreases in SG&A expense as a percentage of net sales for both the
quarter and the six month periods compared to the prior year reflect the
elimination of certain costs attributable to the UTP headquarters and
the write-off of certain long lived assets at UTP-Fibreoptics in the
fourth quarter of fiscal 1998 as well as reduced marketing and overhead
costs of the Ultrapointe product line, offset by higher costs to support
certain telecommunications products. Increases in SG&A expense over the
first quarter include increases in certain personnel costs and higher
amortization of intangible assets resulting from recent business
acquisitions.
The Company expects SG&A expenses to increase in the future,
although such expenses may vary as a percentage of sales.
Other Operating Expenses
In the second quarter of fiscal 1999, the Company recorded pre-tax
merger related costs of $5.9 million in connection with the acquisition
of UBP in a transaction accounted for a pooling of interests. In
addition, the Company recognized a $382,000 pre-tax loss on the disposal
of substantially all the assets of its Ultrapointe product line. In the
second quarter of fiscal 1998, the Company recognized a pre-tax charge
of $6.6 million in acquired in-process research and development charges
in connection with its acquisition of Indx Pty Ltd. of Australia.
Interest and Other Income, Net
In the second quarter of fiscal 1999, interest and other income,
net was $844,000, which was comparable with interest income of $760,000
in the second quarter of fiscal 1998. For the first six months of fiscal
1999, interest and other income, net increased to $1.8 million from $1.5
million in the same period of fiscal 1998. The increase in interest and
other income is primarily the result of interest income on higher levels
of investments.
Income Taxes
The effective tax rates for the second quarter and the first six
months of fiscal 1999 were 48.3% and 37.6% compared to 75.9% and 48.6%
used in the same periods of fiscal 1998. Decreases in the effective tax
rates were primarily attributable to an increase in foreign earnings
taxed at a lower rate and the exclusion of taxable income derived from
UBP as a Subchapter S Corporation through November 24, 1998. The fiscal
1999 provision for income taxes excludes the effect of non-deductible
merger costs incurred in connection with the acquisition of UBP, whereas
fiscal 1998 amounts exclude the effect of non-deductible acquired in-
process research and development expenses.
Liquidity and Capital Resources
At December 31, 1998 the Company's combined balance of cash, cash
equivalents and short-term investments was $114.2 million. The Company
has met its liquidity needs during fiscal 1999 primarily through cash
generated from operating activities totaling $29.6 million. Cash
provided by operating activities is primarily the result of net income
before depreciation, amortization, asset write-offs, lower accounts
receivable and increased current liabilities, offset in part by
increases in inventories.
Cash used in investing activities was $49.2 million for the first
six months of fiscal 1999. The Company incurred capital expenditures of
$19.0 million primarily for facilities and equipment purchases to expand
its manufacturing capacities. The Company expects to continue to expand
its worldwide manufacturing capacity, primarily for telecommunication
products by investing approximately $18 million in capital expenditures
for the remainder of fiscal 1999.
The Company generated $8.4 million from financing activities
during fiscal 1999 resulting from the exercise of stock options and the
sale of stock through an employee stock purchase plan. Cash used for
financing activities relates to dividends of $648,000 paid to the former
shareholders of BCP prior to its acquisition by the Company on
on November 25, 1998.
The Company has a $5.0 million revolving line of credit with a
bank. There were no borrowings under the line of credit at December 31,
1998. Advances under the line of credit bear interest at the bank's
prime rate (7.75% at December 31, 1998) and are unsecured. Under the
terms of the line of credit agreement, the Company is required to
maintain certain minimum working capital, net worth, profitability
levels and other specific financial ratios. In addition, the agreement
prohibits the payment of cash dividends and contains certain
restrictions on the Company's ability to borrow money or purchase assets
or interests in other entities without the prior written consent of the
bank. The line of credit expires on March 30, 1999.
In connection with the acquisition of UNL in June 1998, the
Company may be obligated for additional consideration and interest thereon in
the form of the Company's common stock with a maximum value of 458 million
Dutch Guilders (approximately $285 million). The number of shares of common
stock to be issued for the contingent consideration is dependent upon the unit
shipments of certain UNL products during the four-year period ending June 30,
2002 and the price of the Company's common stock at the time the contingent
consideration is determined. The contingent consideration will be recorded as
additional acquisition cost in the Company's financial statements at the time
payment of such amounts are probable. As of December 31, 1998 the Company is
not obligated to recognize any contingent consideration resulting from the UNL
acquisition.
The Company believes that its existing cash balances and short-
term investments, together with existing cash flow from operations and
available line of credit will be sufficient to meet its liquidity and
capital spending requirements at least through the end of calendar year
1999. However, possible acquisitions of businesses, products or
technologies may require additional financing prior to such time. There
can be no assurance that additional financing would be available when
required or, if available, would be on terms satisfactory to the
Company.
Risk Factors
Variability and Uncertainty of Quarterly Operating Results
We have experienced and expect to continue to experience
significant fluctuations in our quarterly results. Fluctuations in our
quarterly results may cause substantial fluctuations in the market price
of our common stock. Factors which have influenced and may continue to
influence our operating results in a particular quarter include:
- the timing of the receipt of product orders from a limited
number of major customers,
- our ability to manufacture technically advanced products
with satisfactory yields on a timely basis,
- product mix,
- competitive pricing pressures,
- relative proportions of domestic and international sales,
- costs associated with the acquisition or disposition of
businesses,
- our ability to timely and cost effectively design,
manufacture and ship products,
- the timing differences between when we incur expenses to
increase our marketing and sales capabilities and when we
realize benefits, if any, from such expenditures,
- the announcement and introduction of new products by us and
by our competitors, and
- expenses associated with any intellectual property
litigation.
In addition, our sales often reflect orders shipped in the same
quarter that they are received. Also, customers may cancel or reschedule
shipments near the end of a particular quarter, and production
difficulties could delay shipments. We frequently ship more CATV
products in the third month of each quarter than in each of the first
two months of the quarter and shipments in the third month generally are
higher at the end of the month. In addition, we sell our
telecommunications equipment products to Original Equipment
Manufacturers (OEMs) who typically order in large quantities and
therefore the timing of such sales may significantly affect our
quarterly results. The timing of such OEM sales can be affected by
factors beyond our control, such as demand for the OEMs' products and
manufacturing risks experienced by OEMs. In this regard, we have
experienced rescheduling of orders by customers in each of our markets
and may experience similar rescheduling in the future. As a result of
all of these factors, the Company's results from operations may vary
significantly from quarter to quarter.
Be advised that future mergers, acquisitions or dispositions of
businesses, products or technologies by the Company may result in
substantial charges or other expenses that may cause fluctuations in the
Company's quarterly operating results. The mergers, acquisition or
disposition of other businesses, products or technologies may also
affect the Company's operating results in any particular quarter. For
example, the Company has recorded significant acquisition or
disposition-related charges in each of its fiscal years since 1995. In
the second quarter of fiscal 1999, we recorded charges of $5.9 million
in connection with our merger with UBP and charges of $1.6 million and
$382,000 for inventory and asset write-offs associated with the sale of
the Ultrapointe product line, respectively. In the second and fourth
quarters of fiscal 1998, we incurred charges of $6.6 million and $93.0
million, respectively, for acquired in-process research and development
in connection with the acquisition of UFC and UNL. In the third quarter
of fiscal 1997, we incurred charges of $33.3 million for acquired in-
process research and development in connection with the acquisition of
ULE. In addition, we incurred other charges in connection with
acquisitions completed in fiscal 1999, 1998 and 1997. Be advised that
future mergers, acquisitions or dispositions of businesses, products or
technologies by the Company may result in reorganization of its
operations, substantial charges or other expenses that may cause
fluctuations in the Company's quarterly operating results and its cash
flows.
Management of Growth; Acquisition Risks
We have historically achieved our growth through a combination of
mergers, acquisitions and internally developed new products. As part of
our strategy to sustain growth, we expect to continue to pursue mergers
and acquisitions of other companies, technologies and complementary
product lines. We also expect to continue developing new solid state
lasers, components and other products for OEM customers and attempting
to further penetrate the telecommunications and CATV markets through
these new products. Both courses of action involve certain risks to the
Company.
In March 1997, the Company acquired ULE, which manufactures our
980-nm pump lasers for optical amplifiers. In June 1998, we acquired UNL
which manufactures our source lasers, external modulators and optical
amplifiers. In the case of both acquisitions, we acquired businesses
that had previously been engaged primarily in research and development
and that needed to make the transition from a research activity to a
commercial business with sales and profit levels that are consistent
with our overall financial goals for the Company. This transition has
not yet been completed at UNL, which continues to operate at higher
expense levels and lower gross margins than those required to meet our
profitability goals. As previously discussed in this Form 10-Q, we have
also signed a Merger Agreement, providing for the pending combination
with JDS-Fitel, Inc. of Ottawa, Canada. In addition, in August 1998, the
Company acquired certain assets of Chassis, and in November 1998
acquired Broadband Communications Products, Inc. The success of each of
these mergers and acquisitions will depend upon our ability to
manufacture and sell high power lasers and other components, modules and
subsystems used in wavelength division multiplexing applications and
continued demand for these acquired products by telecommunications and
CATV customers. Our ability to manage our growth effectively depends
upon the integration into the Company of the merged and acquired
entities operations, products and personnel, the retention of key
personnel of the merged and acquired entities and the expansion of our
financial and management controls and reporting systems and procedures.
The Company cannot assure that we will successfully manufacture and sell
these products or successfully manage such growth, and failure to do so
could have a material adverse effect on the Company's business,
financial condition and operating results. Since 1997, when we acquired
ULE, we have increased our marketing, customer support and
administrative functions to support an increased level of operations
primarily from our telecommunications products. The Company cannot and
does not assure success in creating this infrastructure nor can it or
will it ensure any increase in the level of its sales and operations
through its new products. We commenced and developed start-up operations
at UTP in 1996 to penetrate CATV markets, and at UNC in 1998 to develop
and market a line of complementary optical components for our
telecommunications customers. In each case, we hired development,
manufacturing and other staff in anticipation of developing and selling
new products. The Company cannot and will not assure that its operations
will achieve levels sufficient to justify the increased expense levels
associated with these new businesses.
Risks from Customer Concentration
Historically, orders from a relatively limited number of OEM
customers accounted for a substantial portion of our net sales from
telecommunications products. In telecommunications markets, our
customers evaluate our products and competitive products for deployment
in large telecommunications systems that they are installing. Our
failure to be selected by a customer for particular system projects can
significantly and adversely effect our business, operating results and
financial condition. Similarly, if our customers are not selected as the
primary supplier for an overall system installation, we can be similarly
adversely affected. Further, sales to any single customer may vary
significantly from quarter to quarter. Such fluctuations could have a
material adverse effect on the Company's business, operating results and
financial condition. We expect that, for the foreseeable future, sales
to a limited number of customers will continue to account for a high
percentage of our net sales. The Company cannot and does not assure that
current customers will continue to place orders or that the Company will
obtain new orders from new customers.
One telecommunications customer, CIENA Corporation, accounted for
approximately 11% of our net sales for fiscal 1998. One laser subsystems
customer, the Applied Biosystems Division of Perkin-Elmer Corporation,
accounted for approximately 11% of our net sales for fiscal 1996. One
additional customer, KLA-Tencor Corporation, purchased both Laser subsystems
and Ultrapointe systems and accounted for 11% and 12% of our consolidated net
sales in fiscal 1998 and 1996, respectively. the Ultrapointe product line was
sold to KLA-Tencor Corporation in December 1998 and will not be a source of
future sales for the Company. No other customers represented 10% or more of
total sales during fiscal 1998. The loss or delay of orders from these or
other OEM customers could have a materially adverse effect on the Company's
business, financial condition and operating results.
Year 2000
We are aware of the risks associated with the operation of
information technology ("IT") and non-information technology ("non-IT")
systems as the millennium (year 2000) approaches. The "Year 2000"
problem is pervasive and complex, and may affect many IT and non-IT
systems. The Year 2000 problem results from the rollover of the two
digit year value from "99" to "00". Systems that do not properly
recognize such date-sensitive information could generate erroneous data
or fail. In addition to our own systems we rely on external systems of
our customers, suppliers, creditors, financial organizations, utilities
providers and government entities, both domestic and international
(which we collectively refer to as "Third Parties"). Consequently, we
could be affected by disruptions in the operations of Third Parties with
which we interact. Furthermore, as customers expend resources to correct
their own systems, they may reduce their purchasing frequency and volume
of our products.
We are using both internal and external resources to assess:
- the Company's state of readiness (including the readiness of
Third Parties, with which we interact) concerning the Year
2000 problem,
- our costs to correct material Year 2000 problems related to
our internal IT and non-IT systems,
- the known risks related to any failure to correct any Year
2000 problems we identify, and
- the contingency plan, if any, that we should adopt should
and identified Year 2000 problems not be corrected.
We continue to evaluate the estimated costs associated with the
efforts to prepare for Year 2000 based on actual experience. While the
efforts will involve additional costs, we believe, based on available
information, that we will manage our total Year 2000 transition without
any material adverse effect on the Company's business operations,
products or financial prospects. The actual outcomes and results could
be affected by future factors including, but not limited to:
- the continued availability of skilled personnel,
- cost control,
- the ability to locate and remediate software code problems,
- critical suppliers and subcontractors meeting their Year
2000 compliance commitments, and
- timely actions by customers.
We anticipate that we will remediate all Year 2000 risks and be
able to conduct normal operations without having to establish a Year
2000 contingency plan.
We are working with our software system suppliers and believe that
certain of these systems are currently not Year 2000 compliant. However, we
anticipate that such systems will be corrected for the Year 2000 problem prior
to December 31, 1999. We are working with those Third Parties to identify any
Year 2000 problems affecting such Third Parties that could have a material
adverse affect on our business, financial condition or results of operations.
However, it would be impracticable for us to attempt to address all potential
Year 2000 problems of Third Parties that have been or may in the future be
identified. Specifically, Year 2000 problems have arisen or may arise
regarding the IT and non-IT systems of Third Parties having widespread
national and international interactions with persons and entities generally
(for example, certain IT and non-IT Systems of governmental agencies,
utilities and information and financial networks) that, if uncorrected, could
have a material adverse impact on the Company's business, financial condition
or results of operations. We are still assessing the effect the Year 2000
problem will have on its suppliers and, at this time, cannot determine such
impact.
Euro Currency
On January 1, 1999, several member countries of the European Union
established fixed conversion rates between their existing sovereign
currencies and adopted the Euro as their new common legal currency. The
Euro has and will trade on currency exchanges and the legacy currencies
will remain legal tender in the participating countries for a transition
period through January 1, 2002. During the transition period, noncash
payments can be made in the Euro, and parties can elect to pay for goods
and services and transact business using either the Euro or a legacy
currency. Between January 1, 2002 and July 1, 2002 the participating
countries will introduce Euro notes and coins and withdraw all legacy
currencies, which will no longer be available. The Euro conversion may
affect cross-border competition by creating cross-border price
transparency. We are assessing our pricing/marketing strategy in order
to insure that we remain competitive in a broader European market. We
are also assessing our information technology systems to allow for
transactions to take place in both the legacy currencies and the Euro
and the eventual elimination of the legacy currencies, and reviewing
whether certain existing contracts will need to be modified. Our
currency risk and risk management for operations in participating
countries may be reduced as the legacy currencies are converted to the
Euro. Final accounting, tax and governmental legal and regulatory
guidance are not yet available. We will continue to evaluate issues
involving introduction of the Euro. Based on current information and our
current assessment, we do not expect that the Euro conversion will have
a material adverse effect on the Company's business, financial condition
or results from operations.
Potential Volatility of Common Stock Price
The market price of the Company's Common Stock has recently been and
is likely to continue to be highly volatile and significantly affected by
factors such as:
- fluctuations in our operating results,
- announcements of technological innovations or new products
by us or our competitors,
- governmental regulatory action,
- developments with respect to patents or proprietary rights,
and
- general market conditions.
Further, our sales, operating results or cash flows in future
quarters may be below the expectations of public market securities
analysts and investors. In such event, the price of the Company's Common
Stock would likely decline, perhaps substantially. In addition, the
stock market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies.
The statements contained in this Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such forward-looking statements
include, but are not limited to, statements regarding the Company's
expectations, anticipations, hopes, beliefs, intentions or strategies
regarding the future, such as future anticipated R&D expenses of the
Company and expectations as to sales to a limited number of customers
continuing to account for a high percentage of the Company's sales.
Actual results could differ materially from those projected in any
forward-looking statements as a result of a change in the Company's
policies or current intentions, as well as a number of other factors,
including those detailed in the "Risk Factors" portion as well as those
set forth from time to time in the Company's Reports on Form 10-K, 10-Q
and Annual Reports to Stockholders. The forward-looking statements are
made as of the date hereof and the Company assumes no obligation to
update the forward-looking statements, or to update the reasons why
actual results could differ materially from those projected in the
forward-looking statements.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3. Legal Proceedings, in the
Registrant's Annual Report on Form 10-K for the year ended June 30, 1998
and Part II, Item 1. Legal Proceedings in the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1998.
Item 2. Changes in Securities
In November 1998, the stockholders of the Company approved an
increase in the number of shares of common stock authorized from
50,000,000 to 100,000,000 shares.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders (the "Annual Meeting") of the
Company was held on November 10, 1998.
At the Annual Meeting, three items were put to a vote of the
stockholders:
1. The election of three Class II directors of the Company to serve
until the 2001 Annual Meeting of Stockholders, and until their
successors are elected and qualified;
2. An amendment to increase the aggregate number of shares of
common stock which the Company is authorized to issue from
50,000,000 to 100,000,000 shares.
3. The appointment of Ernst & Young LLP as the independent auditors
for the Company for the fiscal year ending June 30, 1999.
The voting results were:
<TABLE>
<CAPTION>
Item For Against Abstained
------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
1. Directors
Peter Guglielmi................ 35,204,837 0 52,820
Professor Wilson Sibbett....... 35,204,837 0 52,820
Willem Haverkamp............... 35,204,837 0 52,820
2. Increase in authorized
share capital................ 34,293,798 915,964 47,895
3. Appointment of auditors........ 35,197,693 7,290 52,674
</TABLE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
3(i)(b)(2) Amended and Restated Certificate of Incorporation
27.1 Financial Data Schedule
b) Reports on Form 8-K
The Company filed a report on Form 8-K dated January 9, 1999
to report the merger of a wholly-owned subsidiary with and into
Broadband Communications Products, Inc. ("BCP") on November 25, 1998,
which transaction has been accounted for as a pooling of interests.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Uniphase Corporation
------------------------------
(Registrant)
Date February 1, 1999 \s\ Anthony R. Muller
Anthony R. Muller,
Senior Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
CERTIFICATE OF AMENDMENT
TO
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
Uniphase Corporation, a corporation organized and existing under
the laws of the State of Delaware, (the "Corporation") hereby certifies
as follows:
FIRST: That, at a meeting of the Board of Directors of the
Corporation held on August 15, 1998, the Board of Directors adopted a
resolution proposing and declaring advisable the following amendment to
the Amended and Restated Certificate of Incorporation of the
Corporation:
RESOLVED, that paragraph 4.1 of Article 4 of
the Corporation's Amended and Restated Certificate of
Incorporation shall be amended, subject to stockholder
approval, to read in its entirety as follows:
"4.1. Authorized Capital Stock.
The Corporation is authorized to issue two
classes of stock to be designated,
respectively, 'Common Stock' and
'Preferred Stock.' The total number of
shares which the Corporation is authorized
to issue is one hundred-one million
(101,000,000) shares. One Hundred million
(100,000,000) shares shall be Common
Stock, each having a par value of
one-tenth of one cent ($.001). One
million (1,000,000) shares shall be
Preferred Stock, each having a par value
of one-tenth of one cent ($.001)."
SECOND: That the stockholders of the Corporation have approved at
the Annual Meeting of Stockholders held on November 10, 1998 said
amendment in accordance with the provisions of Section 228 of the
General Corporation Law of the State of Delaware.
THIRD: That the aforesaid amendment was duly adopted in
accordance with applicable provisions of Sections 242 and 228 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Uniphase Corporation has caused this
Certificate of Amendment to Amended and Restated Certificate of
Incorporation to be signed by its President and attested to by its
Secretary this 10th day of November, 1998.
UNIPHASE CORPORATION
By \s\ Kevin Kalkhoven
Kevin Kalkhoven
President
ATTEST:
\s\ Anthony R. Muller
Anthony R. Muller
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM CONDENSED CONSOLIDATED BALANCE SHEETS,
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1999
<PERIOD-START> JUL-01-1998 JUL-01-1998
<PERIOD-END> SEP-30-1998 DEC-31-1998
<CASH> 31,479 29,331
<SECURITIES> 75,627 84,905
<RECEIVABLES> 40,841 40,729
<ALLOWANCES> 809 871
<INVENTORY> 24,207 26,180
<CURRENT-ASSETS> 179,384 189,555
<PP&E> 87,789 95,804
<DEPRECIATION> 22,543 23,071
<TOTAL-ASSETS> 295,766 312,209
<CURRENT-LIABILITIES> 46,163 46,163
<BONDS> 0 0
0 0
0 0
<COMMON> 39 40
<OTHER-SE> 247,028 258,940
<TOTAL-LIABILITY-AND-EQUITY> 295,766 312,209
<SALES> 57,420 121,192
<TOTAL-REVENUES> 57,420 121,192
<CGS> 28,898 62,436
<TOTAL-COSTS> 28,898 62,436
<OTHER-EXPENSES> 14,501 36,838
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 14,940 23,681
<INCOME-TAX> 4,675 8,898
<INCOME-CONTINUING> 10,265 14,783
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,265 14,783
<EPS-PRIMARY> $0.26 $0.38
<EPS-DILUTED> $0.24 $0.35
</TABLE>
