UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
' ----------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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 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)
(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 April 30, 1999.
Common Stock $.001 par value 40,400,601
Class Number of Shares
Part I--FINANCIAL INFORMATION
Item 1. Financial Statements
UNIPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales............................. $74,502 $47,922 $195,694 $133,423
Cost of sales......................... 36,271 23,183 98,707 66,945
---------- ---------- ---------- ----------
Gross profit........................ 38,231 24,739 96,987 66,478
---------- ---------- ---------- ----------
Operating expenses:
Research and development............ 7,326 4,050 18,774 10,418
Selling, general and administrative. 9,076 7,083 24,539 21,293
Amortization of purchased
intangibles....................... 3,905 457 11,807 1,349
Merger costs........................ -- -- 5,877 --
Loss on sale of product line........ 500 -- 882 --
Acquired in-process research and
development....................... -- -- -- 6,568
---------- ---------- ---------- ----------
Total operating expenses.............. 20,807 11,590 61,879 39,628
---------- ---------- ---------- ----------
Income from operations................ 17,424 13,149 35,108 26,850
Interest and other income, net........ 885 749 2,648 2,271
---------- ---------- ---------- ----------
Income before income taxes.......... 18,309 13,898 37,756 29,121
Income tax expense.................... 5,539 4,635 14,437 12,028
---------- ---------- ---------- ----------
Net income ........................... $12,770 $9,263 $23,319 $17,093
========== ========== ========== ==========
Basic earnings per share.............. $0.32 $0.26 $0.59 $0.49
========== ========== ========== ==========
Dilutive earnings per share........... $0.29 $0.24 $0.55 $0.45
========== ========== ========== ==========
Weighted average common shares
Outstanding......................... 40,038 35,489 39,556 35,139
Dilutive effect of stock options
Outstanding......................... 3,366 2,697 3,103 2,689
---------- ---------- ---------- ----------
Weighted average common shares
Outstanding, assuming dilution...... 43,404 38,186 42,659 37,828
========== ========== ========== ==========
</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>
March 31, June 30,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................... $31,319 $40,525
Short-term investments............................ 81,775 54,831
Accounts receivable, less allowances for returns
and doubtful accounts of $888 at March 31,
1999 and $809 at June 30, 1998.................. 51,773 41,922
Inventories....................................... 26,680 22,137
Deferred income taxes............................. 4,321 4,321
Refundable income taxes and other current assets.. 6,037 4,859
------------ ------------
Total current assets........................... 201,905 168,595
Property, plant, and equipment, net.................. 79,800 57,191
Intangible assets, including goodwill................ 93,540 102,979
Long-term deferred income taxes and other assets..... 7,627 4,106
------------ ------------
Total assets................................... $382,872 $332,871
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................. $19,566 $15,784
Accrued payroll and related expenses.............. 8,443 7,793
Income taxes payable.............................. 269 7,697
Other accrued expenses............................ 11,650 15,893
------------ ------------
Total current liabilities...................... 39,928 47,167
Accrued pension and other employee benefits.......... 6,408 4,835
Other non-current liabilities........................ 1,221 831
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares - 1,000,000
Issued and outstanding shares - 100,000 at
March 31, 1999 and June 30, 1998............... -- --
Common stock, $0.001 par value
Authorized shares - 100,000,000
Issued and outstanding shares - 40,386,601
at March 31, 1999 and 38,919,966 at
June 30, 1998.................................. 40 39
Additional paid-in capital........................ 340,655 307,447
Accumulated deficit............................... (3,447) (26,118)
Other stockholders' equity........................ (1,933) (1,330)
------------ ------------
Total stockholders' equity..................... 335,315 280,038
------------ ------------
Total liabilities and stockholders' equity..... $382,872 $332,871
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
UNIPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating activities
Net income............................................ $23,319 $17,093
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....................... 22,058 6,128
Write-off of product line inventory and equipment... 2,477 --
Stock compensation expense.......................... 369 787
Acquired in-process research and development........ -- 6,568
Change in operating assets and liabilities:
Accounts receivable.............................. (9,851) (10,334)
Inventories...................................... (6,138) (1,028)
Deferred income taxes and other current assets... (1,178) 673
Accounts payable, accrued liabilities and
other current liabilities...................... 9,353 18,959
---------- ----------
Net cash provided by operating activities............... 40,409 37,882
---------- ----------
Investing activities
Purchase of short-term investments.................... (173,449) (52,204)
Proceeds from sale of short-term investments.......... 146,746 57,298
Purchase of property, plant and equipment............. (32,460) (18,842)
Costs incurred in connection with proposed JDS merger. (3,470) --
Acquisition of UFC.................................... -- (6,696)
Other purchase accounting transactions................ (210) --
Increase in other assets.............................. (51) (287)
---------- ----------
Net cash used in investing activities................... (62,894) (20,731)
---------- ----------
Financing activities
Repayment of notes payable............................ -- (6,061)
Proceeds from issuance of common stock under
stock option and stock purchase plans........... 13,927 5,056
Pre-merger dividends paid on BCP stock................ (648) (126)
---------- ----------
Net cash provided by (used in) financing activities..... 13,279 (1,131)
---------- ----------
Increase (decrease) in cash and cash equivalents........ (9,206) 16,020
Cash and cash equivalents at beginning of period........ 40,525 29,727
---------- ----------
Cash and cash equivalents at end of period.............. $31,319 $45,747
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Tax benefits from stock option and stock
purchase plans.................................. $14,189 $9,376
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
UNIPHASE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Business Activities and Basis of Presentation
The financial information at March 31, 1999 and for the three and nine
month periods ended March 31, 1999 and 1998 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 financial statements. For further information, refer to the
Consolidated Financial Statements and footnotes thereto included or
incorporated by reference in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1998.
The results for the three and nine month periods ended March 31,
1999 may not be indicative of results for the fiscal year ending June
30, 1999 or any future period.
Recent Events
On January 28, 1999, Uniphase agreed to merge with JDS FITEL, Inc.
(Toronto: JDS) in a merger of equals. The combined company would have a total
market value of US $6.1 billion based on the January 27, 1999 closing prices
of each company's stock. After the merger, the combined company will be named
JDS Uniphase Corporation.
Under the terms of the agreement, JDS FITEL shareholders resident in
Canada will be entitled to receive 0.50855 shares of exchangeable stock of JDS
Uniphase Canada, a wholly owned subsidiary of Uniphase, or, at their option,
0.50855 shares of Uniphase Corporation, for each JDS FITEL share they hold.
The exchangeable shares are the economic and voting equivalent of Uniphase
common stock and will be exchangeable on a one-for-one basis at any time. The
current stockholders and JDS FITEL's current shareholders will each own
approximately 50 percent of the combined company following the merger. The
structure of the transaction is expected to provide the opportunity for a
tax-free exchange for Canadian holders of JDS FITEL stock. The completion of
the merger is conditioned upon regulatory approvals, as well as approvals by
stockholders and JDS FITEL's shareholders.
The Company anticipates recording a charge of approximately $180
million for acquired in- process research and development upon closing of the
merger as well as amortization of goodwill and other intangibles in excess of
$3.2 billion over a five year period following the merger, thereby resulting
in net losses for the foreseeable future.
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 nine month periods ended March 31, 1998 and at June 30,
1998 has been restated to include the financial position, results of
operations and cash flows of BCP for the corresponding periods. 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 different fiscal year ends, financial information related 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 nine
month period ended March 31, 1998 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 and net income of BCP for the six months ended December 31, 1997 which
are included in the Consolidated Statements of Operations for both fiscal 1998
and 1997 were approximately $4.1 million and $964,000, respectively. 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 asses
of its Ultrapointe subsidiary to KLA-Tencor Corporation . The Company recorded
unusual charges to cost of sales and operating expenses of $1.6 million and
$882,000 respectively, in connection with the KLA-Tencor transaction during
the first nine months ended of fiscal 1999.
Restatement of Financial Statements
The Company's acquisition of Uniphase Netherlands B.V. ("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 its financial
statements for the year ended June 30, 1998 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.
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 Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income............................. $12,770 $9,263 $23,319 $17,093
Change in unrealized gain on
available-for-sale investments....... (68) 3 167 28
Change in foreign currency translation. (4,102) (391) (587) (390)
--------- --------- --------- ---------
Comprehensive income................... $8,600 $8,875 $22,899 $16,731
========= ========= ========= =========
</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.
Reclassifications
The Company separately classified amortization of goodwill and other
identified intangible assets arising from transactions accounted for as
purchases and has included royalty and license costs as selling, general and
administrative expense on the Consolidated Statement of Operations. For
comparative purposes, amounts in the prior year have been reclassified to
conform to the current period presentation.
Income Taxes
The effective tax rates used for the third quarter and the first nine
months of fiscal 1999 were 30.3% and 38.2% compared to 33.4% and 41.3% 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 that are permanently re- invested offshore. 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 originating from the acquisition of UFC.
Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
---------- ----------
<S> <C> <C>
Raw materials and purchased parts........... $7,734 $2,865
Work in process............................. 12,241 11,998
Finished goods.............................. 6,705 7,274
---------- ----------
$26,680 $22,137
========== ==========
</TABLE>
Acquisition of Assets from Chassis Engineering Inc.
In August 1998, the Company acquired certain assets including
inventories and production equipment and certain trade liabilities 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. In February
1999, the holder tendered $2.4 million of the convertible debt for 44,115
shares of common stock.
The remaining $300,000 convertible instrument will become due upon
achieving certain milestones over the ensuing 9 months, bear 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 effects of the Chassis asset purchase 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........................................ 2,533
---------------
Net assets acquired................................ $2,517
===============
Convertible debt issued............................ $2,405
Cash paid, including transaction costs............. 112
---------------
Total purchase price............................... $2,517
===============
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 agreed to merge with JDS FITEL, Inc.
(Toronto: JDS) in a merger of equals. The combined company would have a total
market value of US $6.1 billion based on the January 27, 1999 closing prices
of each company's stock. After the merger, the combined company will be named
JDS Uniphase Corporation. Under the terms of the agreement, JDS FITEL
shareholders resident in Canada will be entitled to receive 0.50855 shares of
exchangeable stock of JDS Uniphase Canada, a wholly owned subsidiary of
Uniphase, or, at their option, 0.50855 shares of Uniphase Corporation, for
each JDS FITEL share they hold. The exchangeable shares are the economic and
voting equivalent of Uniphase common stock and will be exchangeable on a one-
for-one basis at any time. The current stockholders and JDS FITEL shareholders
will each own approximately 50 percent of the combined company following the
merger. The structure of the transaction is expected to provide the
opportunity for a tax-free exchange for Canadian holders of JDS FITEL stock.
The completion of the merger is conditioned upon regulatory approvals, as well
as approvals by our stockholders and JDS FITEL shareholders. JDS Uniphase
Corporation will be quoted on the Nasdaq National Market and will reports its
financial result in U.S. dollars. JDS Uniphase will be led by an integrated
executive team from both companies, Kevin Kalkhoven from Uniphase will be
Co-chairman and Chief Executive Officer. Jozef Straus from JDS FITEL will
become Co-chairman, President and Chief Operating Officer. Both companies will
each nominate one half of the board. The Company anticipates recording a
charge of approximately $180 million for acquired in-process research and
development upon closing of the merger as well as amortization of goodwill and
other intangibles in excess of $3.2 billion over a five year period following
the merger, thereby resulting in net losses for the foreseeable future.
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 fiscal
1999 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 and has recognized a
pre-tax charge of $882,000 and a charge to cost of sales of $1.6 million in
connection with the transaction during the first nine months of fiscal 1999.
Net Sales
In the third quarter of fiscal 1999, ended March 31, 1999, net sales
were $74.5 million, which represented a $26.6 million or 55% increase over net
sales of $47.9 million reported for the third quarter of fiscal 1998. For the
first nine months of fiscal 1999, net sales were $195.7 million, which
represented a $62.3 million or 47% increase over net sales of $133.4 million
in the same period of fiscal 1998. Increases in net sales from each of the
Company's major telecommunications product lines and net sales generated by
Uniphase Netherlands (UNL), which was acquired in June 1998 in a transaction
accounted for as a purchase, contributed to the growth in net sales over the
comparable quarter and nine month periods of fiscal 1998. The increase in net
sales was offset by a reduction in sales of Ultrapointe products due to the
sale of the product line at the end of the second quarter of fiscal 1999. Net
sales increased $10.7 million or 17% over the second quarter of fiscal 1999
amount of $63.8 million because of the same factors.
Results for the three and nine-month periods ended March 31, 1999 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 third quarter of fiscal 1999, the Company's gross profit
increased 55% to $38.2 million or 51% of net sales from $24.7 million or 52%
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 due to the
costs of qualifying certain new telecommunications products in the third
quarter of fiscal 1999 and a reduction to certain inventory reserves in fiscal
1998 totaling $1.0 million. For the first nine months of fiscal 1999, gross
profit increased 46% to $97.0 million or 50% of net sales from $66.5 million
or 50% of net sales in the same period of fiscal 1998. Gross profit for the
nine-month period includes a $1.6 million charge to cost of sales in the
second quarter of fiscal 1999 resulting from the sale of Ultrapointe assets to
KLA-Tencor Corporation. Gross profit increased $8.0 million or 26% over the
second quarter of fiscal 1999 due to a combination of growth in certain
telecommunications product lines with high gross margins offset by a cessation
of gross profits as a result of the sale of the Ultrapointe product line that
generated lower gross margins.
There can be no assurance that the Company will be able to maintain
its gross margin at current levels in future periods. In addition, the
cessation in gross profits due to the sale of the Ultrapointe product line 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 third quarter of fiscal 1999, research and development (R&D)
expense was $7.3 million or 10% of net sales which represented a $3.3 million
or 81% increase over R&D expense of $4.1 million or 8% of net sales in the
third quarter of fiscal 1998. For the first nine months of fiscal 1999,
research and development expense was $18.8 million or 10% of net sales which
represented a $8.4 million or 80% increase over the same period in fiscal
1998. The increase in R&D expense is primarily due to increased expenditures
associated with the continued development and enhancement of the Company's
telecommunications and fiber optic product lines and the addition of
Uniphase Netherlands in June 1998. R&D expense increased $1.5 million or 27%
over the second quarter of fiscal 1999 resulting from increases in development
costs for telecommunications products, offset in part by the cessation of R&D
expenses from Ultrapointe systems.
The Company anticipates that R&D expense will continue to increase in
dollar 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.
Selling, General and Administrative
In the third quarter of fiscal 1999, selling, general and
administrative (SG&A) expense was $9.1 million or 12% of net sales, which
represented a $2.0 million or 28% increase from SG&A expense of $7.1 million
or 15% of net sales in the third quarter of fiscal 1998. For the first nine
months of fiscal 1999, SG&A expense was $24.5 million or 13% of net sales
which represented a $3.2 million or 15% increase over SG&A expense of $21.3
million or 16% of net sales in the same period of fiscal 1998. The dollar
increase in SG&A expense for both the third quarter and first nine-months of
fiscal 1999 as compared to the prior year is primarily due to higher sales and
marketing costs to support telecommunications and CATV products and the
addition of UNL in June 1998 offset by a reduction in SG&A expense of the
Ultrapointe product line.
The Company expects SG&A expenses to increase in the future,
although such expense may vary as a percentage of sales.
Amortization of Purchased Intangibles
Since fiscal 1995, the Company has entered into several strategic
acquisitions that generated approximately $115.0 million in identified
intangibles (primarily developed technology) and goodwill. In the third
quarter of fiscal 1999, amortization of purchased intangibles ("API") was $3.9
million or 5% of net sales, which represented a $3.4 million or 754% increase
from API expense of $457,000 or 1% of net sales in the third quarter of fiscal
1998. For the first nine months of fiscal 1999, API was $11.8 million or 6% of
net sales which represented a $10.5 million or 775% increase over API of $1.3
million or 1% of net sales in the same period of fiscal 1998. The increase in
API is primarily due to the intangible assets generated from the acquisition
of UNL in June 1998 and the purchase of certain assets from Chassis
Engineering in September 1998. API for the third quarter was comparable to API
of $4.0 million in the second quarter of fiscal 1999.
The Company anticipates that API will significantly increase in
amounts upon closing of its contemplated merger with JDS FITEL, Inc. and, as a
result, the Company expects to generate net losses for the foreseeable future.
Additionally, future API could change due to other acquisitions or impairment
of existing identified intangible assets and goodwill.
Other Operating Expenses
In the third quarter of fiscal 1999, the Company revised its estimate
of the costs recorded upon the sale of Ultrapointe assets resulting in an
operating charge of $500,000 in the quarter. 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 and a pre- tax loss of $382,000 on the disposal of
substantially all the assets of its Ultrapointe product line. In the second
quarter of fiscal 1998, the Company recorded a pre-tax charge of $6.6 million
related to acquired in-process research and development charges in connection
with its acquisition of Indx Pty Ltd. of Australia.
Current Status of Acquired In-process Research and Development.
In fiscal 1998, the Company incurred charges for in-process research
and development of $40.3 million 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 related to the acquisition of the assets of ULE from IBM.
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
In the third quarter of fiscal 1999, interest and other income, net
was $885,000, an increase from the fiscal 1998 amount of $749,000. For the
first nine months of fiscal 1999, interest and other income, net increased to
$2.7 million from $2.3 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 third quarter and the first nine
months of fiscal 1999 were 30.3% and 38.2% compared to 33.4% and 41.3% 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 that are permanently re-invested offshore. 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 originating from the acquisition of UFC.
Liquidity and Capital Resources
At March 31, 1999 the Company's combined balance of cash, cash
equivalents and short-term investments was $113.1 million. The Company has
met its liquidity needs during fiscal 1999 primarily through cash generated
from operating activities totaling $40.4 million. Cash provided by operating
activities is primarily the result of net income before depreciation,
amortization, asset write-off and stock compensation expense. Net working
capital used $7.8 million in cash, primarily resulting from an increase in
accounts receivable totaling $9.9 million.
Cash used in investing activities was $62.9 million for the first nine
months of fiscal 1999. The Company incurred capital expenditures of $32.5
million primarily to expand its telecommunications manufacturing capacity,
facilities improvement and equipment purchases. The Company expects to
continue to expand its worldwide manufacturing capacity, primarily for
telecommunication products by investing approximately $14 million in capital
expenditures for the remainder of fiscal 1999. In addition, the Company
invested excess net cash of $26.7 million in short-term investments during the
first nine months of fiscal 1999.
During fiacal 1999 the Company generated $13.9 million from the
exercise of stock options and the sale of stock through an employee stock
purchase plan. Cash used for financing activities include dividends of
$648,000 paid to former shareholders of BCP prior to its acquisition on
November 25, 1998.
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 $230 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 becomes probable. The contingent consideration will be recorded
at the current fair value as additional goodwill when the aggregate unit
shipment criteria are met. As of March 31, 1999 the Company is not obligated
to recognize any contingent consideration resulting from the UNL acquisition.
The Company believes that its existing cash balances and shortterm
investments, together with cash flow from operations will be sufficient to
meet its liquidity and capital spending requirements at least through the end
of calendar 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
Our Merger with JDS Faces Integration, Financial and Accounting Risks
Which Will Cause Dilution
Uncertainties Associated with the Integration of Uniphase and JDS
The merger with JDS involves a combination of two companies that have
complementary business operations located principally in the United States,
Canada and Europe. The success of the merger will be dependent in large part
on the success of the management of the combined entity in integrating these
operations and the technologies and personnel of the two companies following
the closing. Management of JDS Uniphase will come from the respective
management teams of both of Uniphase and JDS and many members of management
will not have previously worked and communicated with other members of
management. The overall integration of the two businesses can result in
unanticipated operations problems, expense and liabilities and diversion of
management attention. There can be no assurance that such integration will be
successful or that the combination will not adversely affect the business,
financial condition or operating results of JDS Uniphase.
Purchase Accounting Treatment; Impact of Amortization of
Substantial Goodwill and Other Intangibles on Operating Results
The merger will be accounted for using the purchase method of
accounting. Under purchase accounting, the estimated market value of Uniphase
common shares and exchangeable shares issued in the arrangement, the fair
value of the replacement options expected to be issued to JDS employees and
the direct transaction costs will be recorded as the cost of acquiring the
business of JDS. That cost will be allocated to the individual assets acquired
and liabilities assumed, including various identifiable intangible assets such
as in-process research and development, acquired technology, acquired
trademarks and tradenames and acquired workforce, based on their respective
fair values. The excess of the purchase cost over the fair value of the net
assets is allocated to goodwill. In-process research and development, which is
approxiately $180 million, will be expensed immediately. Intangible assets
including goodwill will be amortized over a five-year period. The amount of
purchase cost allocated to goodwill and other intangibles is estimated to be
approximately $3.2 billion, including the related deferred tax effect. If
goodwill and other intangible assets were amortized in equal quarterly amounts
over a five year period following completion of the merger, the accounting
charge attributable to these items would be $161 million per quarter and $643
million per fiscal year. As a result, purchase accounting treatment of the
merger will result in a net loss for JDS Uniphase in the foreseeable future
which could have a material and adverse effect on the market value of JDS
Uniphase common stock following completion of the merger.
Execution by Combined Sales and Marketing Forces
Uniphase and JDS may experience disruption in sales and
marketing as a result of attempting to integrate their respective
sales channels, and may be unable to smoothly or effectively correct
such disruption, or to successfully execute their sales and marketing
objectives, even after the companies' respective sales and marketing
forces have been integrated. In addition, sales cycles and sales
models for the various products may vary significantly from product to
product. Sales personnel not accustomed to the different sales cycles
and approaches required for products newly added to their portfolio
may experience delays and difficulties in selling these newly added
products. Furthermore, it may be difficult to retain key sales
personnel during the period prior to and after the effective date of
the merger. As a result, Uniphase and JDS may be unable to take full
advantage of the combined sales forces' efforts , and the sales
approach and distribution channels of one company may be ineffective
in promoting the products of the other, which may have a material
adverse effect on the business, financial condition or operating
results of JDS Uniphase.
Dilution Resulting from the Grant of Options
Uniphase has agreed to grant options to acquire 4,110,260 common
shares upon the closing of the merger to be allocated to those
employees of JDS designated by the chief executive officer of JDS,
with the prior approval of the compensation committee of the JDS Board
of Directors. The grant of these options, which will be dilutive to
both the former shareholders of JDS and the Uniphase Stockholders, is
intended to cause the employees of JDS to have equivalent stock option
participation in JDS Uniphase following completion of the merger as
the employees of Uniphase. These options will have an exercise price
equal to the closing price of Uniphase common shares on NASDAQ on the
effective date of the merger and will vest over the ensuing four year
period. Such options may negatively impact the book value per share
and earnings per share of JDS Uniphase on a diluted basis in future
periods.
It is anticipated that JDS Uniphase will continue, in the
ordinary course of business, to grant options to acquire common shares
from time to time to new and existing officers, directors and
employees of the combined entity after completion of the merger. Any
such grants shall be made in the discretion of the board of directors
of JDS Uniphase. The grant of additional options will cause further
dilution in periods following the effective time of the merger as
holders exercise such options.
Cost of Integration; Transaction Expenses
Uniphase and JDS estimate they will collectively incur direct
transaction costs of approximately $12 million associated with the
merger which will be included as a part of the total purchase cost for
accounting purposes. Uniphase and JDS believe the combined entity may
incur charges to operations, which are not currently reasonably
estimable, in the quarter in which the effective time of the merger
occurs or the following quarters, to reflect costs associated with
integrating the two companies. There can be no assurance that the
combined company will not incur additional material charges in
subsequent quarters to reflect additional costs associated with the
merger.
Our Mergers, Acquisitions and Growth Strategies May Create Risks to
Our Business
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 Uniphase Laser Enterprise
(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 Engineering, and in November 1998, the
Company 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.
Our Quarterly Operating Results are Uncertain and May Vary
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 $33.7 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.
We expect to record charges of approximately $180 million for acquired
in-process research and development in connection with our merger with
JDS FITEL. The JDS merger is also expected to generate goodwill and
other intangible assets of approximately $3.2 billion that will be
amortized over a five-year period, thereby resulting in net losses for
the foreseeable future. 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.
We are Dependent on a Limited Number of Customers
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,
identified Year 2000 problems not be corrected.
To date, we have incurred costs not exceeding $1.0 million on
upgrades to IT and non-IT systems to, among other things, make such
systems Year 2000 compliant. 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 (i) available information, (ii) amounts spent to
date, and (iii) the fact that our IT and non-IT systems depend on
third-party software, which we believe has been or is being updated to
address the Year 2000 problem, that we will manage our total Year 2000
transition without any material adverse effect on the Company's
business, financial condition, operating results, 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 are working with our software system suppliers and believe
that certain of these systems are currently not Year 2000 compliant. We have
targeted September 30, 1999 as the date by which these systems shall be Year
2000 compliant. In any event, we anticipate that such systems will be
corrected for the Year 2000 problem prior to December 31, 1999. We are working
with 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. However, we have identified alternative
suppliers and, in the event that any significant supplier suffers unresolved
material Year 2000 problems, we believe that Uniphase would only experience
short term disruptions in supply, not exceeding 90 days, while such supplier
is replaced.
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. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Foreign Exchange
Uniphase generates a significant portion of its sales from sales
to customers located outside the United States, principally in Europe.
International sales are made mostly from the Company's foreign
subsidiaries in the local countries and are typically denominated in
either U.S. dollar or the local currency of each country. These
subsidiaries also incur most of their expenses in the local currency.
Accordingly, all foreign subsidiaries use the local currency as their
functional currency.
The Company's international business is subject to risks typical
of an international business, including, but not limited to: differing
economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange
rate volatility. Accordingly, the Company's future results could be
materially adversely impacted by changes in these or other factors.
Uniphase uses forward foreign exchange contracts as the vehicle
for hedging certain assets and liabilities denominated in foreign
currencies. In general, these forward foreign exchange contracts have
three months or less to maturity. Gains and losses on hedges are
recorded in non-operating other income as offset against losses and
gains on the underlying exposures. Management of the foreign exchange
hedging program is done in accordance with corporate policy.
At March 31, 1999, hedge positions totaled U.S. dollar $10.7
million equivalent. All hedge positions are carried at fair value and
all hedge positions had maturity dates within three months.
Interest Rates
The Company invests its cash in a variety of financial
instruments, including floating rate bonds, municipal bonds, auction
instruments and money market instruments. These investments are
denominated in U.S. dollars. Cash balances in foreign currencies
overseas are operating balances and are only invested in short term
deposits of the local operating bank.
Investments in both fixed rate and floating rate interest
earning instruments carry a degree of interest rate risk. Fixed rate
securities may have their fair market value adversely impacted due to a
rise in interest rates, while floating rate securities may produce less
income than expected if interest rates fall. Due in part to these
factors, the Company's future investment income may fall short of
expectations due to changes in interest rates or the Company may suffer
loses in principal if forced to sell securities which have seen a
decline in market value due to changes in interest rates.
The Company's investments are made in accordance with an
investment policy approved by the Board of Directors. No investment
securities had maturities exceeding three years, however the average
duration of the portfolio does not exceed eighteen months.
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.
Item 2. Changes in Securities
In February, the Company issued 44,115 shares of common stock in
exchange for $2.4 million of convertible debt issued in connection
with its purchase of certain assets from Chassis Engineering, Inc.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27. Financial Data Schedule
b) Reports on Form 8-K
1) Report on Form 8-K as filed on January 9, 1999 and
2) Report on Form 8-K/A as filed on April 28, 1999
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)
By: /s/ Anthony R. Muller
Anthony R. Muller
Senior Vice President
of Finance and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Dated: May 4, 1999
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