-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L5C+OLnvhMBL2xHS+gMzLGAQRkSueczWkZuqdDw93OsfVLndXH+tBrddL/WxoK2J 5ZUfrsbbov4dAbjIByGcMg== 0000891618-97-003870.txt : 19970926 0000891618-97-003870.hdr.sgml : 19970926 ACCESSION NUMBER: 0000891618-97-003870 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970925 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIPHASE CORP /CA/ CENTRAL INDEX KEY: 0000912093 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942579683 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22874 FILM NUMBER: 97685103 BUSINESS ADDRESS: STREET 1: 163 BAYPOINTE PARKWAY CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4084341800 MAIL ADDRESS: STREET 1: 163 BAYPOINTE PARKWAY CITY: SAN JOSE STATE: CA ZIP: 95134 10-K 1 FORM 10-K FOR FISCAL YEAR END JUNE 30, 1997 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-22874 ------------------------ UNIPHASE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 163 BAYPOINTE PKWY SAN JOSE, CA 95134 94-2579683 (STATE OR OTHER (ADDRESS OF PRINCIPAL (ZIP CODE) (I.R.S. EMPLOYER JURISDICTION OF EXECUTIVE OFFICES) IDENTIFICATION INCORPORATION OR NO.) ORGANIZATION)
Registrant's telephone number, including area code (408) 434-1800 Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - -------------------------------------------------------------------------------------------- None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.001 PER SHARE (TITLE OF CLASS) 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of September 15, 1997, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $793,456,741 based upon the average of the high and low prices of the Common Stock as reported on The Nasdaq National Market on such date. Shares of Common Stock held by officers, directors and holders of more than 5% of the outstanding Common Stock have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of September 15, 1997, the Registrant had 17,181,518 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE (To the Extent Indicated Herein) Portions of registrants 1997 Annual Report to Stockholders (Part II) Portions of registrant's Proxy Statement for its 1997 Annual Meeting of Stockholders (Part III) ================================================================================ 2 PART I ITEM 1. BUSINESS GENERAL Uniphase Corporation ("Uniphase" or the "Company") is an optoelectronics company that designs, develops, manufactures and markets fiber optic telecommunications equipment products, laser subsystems and laser-based semiconductor wafer defect examination and analysis equipment. Optoelectronics is a technology that extends the speed and capacity of conventional electronic solutions by addressing many of the constraints of the electron with the particle of light, the photon. Since its founding, Uniphase has shipped over one million lasers and is a supplier of laser subsystems for OEMs in the biotechnology, industrial process control, semiconductor wafer inspection, and graphics and printing markets. The Company's strategy is to leverage its core competencies in laser technology to develop highly focused and differentiated applications where there is a convergence of market need and optoelectronic technology. The Company extended its optoelectronic product offerings by acquiring Uniphase Telecommunications Products, Inc. ("UTP") in May 1995. UTP designs, develops, manufactures and markets high-speed external modulators and transmitters for fiber optic networks in the long-haul telecommunications and cable television ("CATV") industries. The UTP modulator and transmitter technology allow for more telecommunication information to travel longer distances through a fiber optic cable. These UTP products used in conjunction with the wavelength division multiplexing allows the telecommunication industry to increase capacity of a fiber route up to sixteen times by sending multiple signals through a single optical fiber. The UTP products are also used in the CATV industry to allow signal transmission over long distances and higher fidelity quality. In May 1996, the Company acquired two affiliated companies, GCA Fibreoptics Ltd. ("GCA") and Fiberoptic Alignment Solutions, Inc. ("FAS") which the Company operates as a division under the name of UTP Fibreoptics ("UFP"). UFP custom packages laser diodes, LEDs and photodetectors for OEMs for use in fiber optic networks for local telecommunications and data communications. In March 1997, the Company acquired the net assets of Uniphase Laser Enterprise ("ULE") from IBM Corporation's ("IBM") Zurich Research Laboratory in Switzerland. ULE designs, develops and manufactures the semiconductor chip used in erbium doped fiber amplifiers ("EDFA"). The ULE pump lasers are key components of optical amplifiers used by the telecommunications and CATV markets. These optical amplifiers allow optical signals to be transmitted over twice the distance of optoelectronic regenerators and are utilized in the CATV and telecom systems. The acquisitions of UFP and ULE expands the Company's presence in the optoelectronic communications markets. The Company's knowledge of laser technology enabled it to introduce an optoelectronics application for the semiconductor capital equipment industry, the Ultrapointe laser imaging system ("Ultrapointe System"), in June 1993. The Ultrapointe System works in conjunction with automated inspection systems from vendors such as KLA-Tencor Corporation ("KLA-Tencor," formerly known as KLA Instruments and Tencor Instruments prior to their merger in fiscal 1997) to enable semiconductor manufacturers to more accurately identify and classify defects. This defect examination and analysis procedure enables semiconductor manufacturers to improve yields by identifying and containing process problems. In May 1996, the Company introduced its IdentifierTM software product, an optional feature that provides automated defect classification ("ADC") capability for Ultrapointe Systems. Working in conjunction with the Ultrapointe System, the IdentifierTM software automates the defect classification process, thereby improving the precision and repeatability of defect classification. In July 1997, Ultrapointe and KLA-Tencor signed a new OEM agreement, that superceded all previous agreements, to be the exclusive reseller of the Ultrapointe System and ADC. COMPANY STRATEGY The Company seeks to leverage its expertise in optoelectronics to develop highly focused and differentiated applications where there is a convergence of market need and optoelectronic technology. Uniphase seeks 1 3 to integrate its strengths in photonics, electronics and software development to provide innovative and cost effective solutions to its customers. The key elements of Uniphase's business strategy are as follows: - Capitalize on Expertise in Laser Technology and Laser Manufacturing. Since its inception in 1979, Uniphase has sold over one million lasers to OEM customers. The Company is currently developing solid state lasers for its existing OEM customers and new applications. In this regard, Uniphase has commercially introduced a series of green wavelength solid state microlasers and a series of continuous wave and pulsed infrared solid state lasers. In addition, the Company is in the late stage of development of blue wavelength solid state microlasers. The Company believes that it is well positioned to continue development of and penetrate the market for solid state lasers, which the Company believes will be the primary commercial laser technology in the future. - Offer Applications Differentiated by Optoelectronic Technologies. The Company's expertise in laser technology has enabled it to successfully introduce and market applications products in the semiconductor capital equipment and telecommunications equipment markets. The Company's Ultrapointe Systems utilize high resolution laser imaging systems for the examination and analysis of wafer defects that are as small as 0.1 micron. The Company also develops and produces optical external modulators and associated transmitters for fiberoptic CATV transmission systems as well as modulators for long haul fiber optic digital transmission. The Company intends to offer custom packaged laser diodes and photodetectors for the efficient transmission of voice, data and video across local fiber optic systems. The Company also designs, manufactures, and markets pump lasers for optical amplifiers used in fiber optic telecommunications and CATV systems. - Provide Cost-Effective, Demand-Driven Solutions to its OEM Customers. The Company seeks, through close relationships, to understand its customers' needs at an early stage in the customers' product development cycles and to design its laser subsystems and telecommunications equipment products to meet these specific needs. The Company focuses on selling its subsystems to customers at the design-in phase of a product, creating the potential for recurring sales throughout a product's life. Following design-in of its products, the Company shifts its focus to obtaining manufacturing efficiencies, quality enhancements and cost reductions during the product life. - Maintain Industry and Customer Diversity. Uniphase sells its laser subsystems to numerous OEMs in the biotechnology, measurement systems, semiconductor equipment and graphics and printing system industries, which reduces the Company's vulnerability to a downturn in any specific industry or company. The Company has also increased the diversity of its industry and customer base by leveraging its expertise in laser technology to develop products for the semiconductor capital equipment and telecommunications equipment markets. PRODUCTS AND MARKETS The Company offers optoelectronic products in three principal product families: laser subsystems, semiconductor capital equipment and fiber optic telecommunications equipment products. The Company's laser subsystems were the Company's initial product offering and these operations have enabled the Company to invest in the further development of its laser technology and to offer new applications products. In fiscal 1994, the Company first shipped its Ultrapointe System for defect examination and analysis of semiconductor wafers. In May 1995, the Company acquired UTP to provide high-speed external modulators and transmitters for the fiber optic networks in the long-haul telecommunications and CATV industries. In May 1996, the Company acquired UFP, which custom packages laser diodes, LEDs and photodetectors for OEMs for use in fiber optic networks for local telecommunications and data communications. In March 1997, the Company 2 4 acquired ULE to manufacture semiconductor chips used in the optoelectronic communications market. The following table sets forth the Company's net sales by product family in fiscal years 1997 and 1996:
NET SALES FISCAL YEAR ENDED JUNE 30, -------------------- PRODUCT CATEGORY 1997 1996 ------------------------------------------------------ -------- ------- (IN THOUSANDS) Laser Subsystems...................................... $ 39,894 $36,565 Semiconductor Capital Equipment....................... 15,366 17,584 Telecommunications Equipment.......................... 51,706 14,924 -------- ------- $106,966 $69,073 ======== =======
LASER PRODUCTS Background Today, lasers are used in a variety of applications in the biotechnology, semiconductor, consumer electronics, graphic arts and industrial process control and measurement industries. For example, in the biotechnology field, lasers are incorporated in flow cytometers, which identify and analyze biological cells, in DNA sequencers, which measure and identify DNA patterns, and in certain surgical instruments. In the semiconductor field, lasers are used to perform automated test and measurement functions. In consumer electronics markets, lasers are an enabling technology in laser printers and compact disc players. In the industrial process control and measurement field, lasers are used for bar code scanning. The principal factors that distinguish different types of lasers and determine the particular laser suitable for a specific application are wavelength (color), cost, operating life and output power, which is measured in terms of watts ("W") or milliwatts ("mW"). Lasers are capable of emitting light from low frequency, long wavelength (greater than 700 nm) infrared light through the visible spectrum to high frequency, short wavelength (less than 400 nm) ultraviolet light. For example, the wavelength of the laser is of key importance in causing the fluorescence of dyes in biotechnology applications. In addition, laser light at shorter green and blue wavelengths is capable of being focused to smaller, more intense points of light, enabling higher resolution optoelectronic applications, such as semiconductor wafer inspection. Four types of lasers commonly available today are gas, liquid, semiconductor diode and solid state, each of which derives its classification from the lasing material it uses. Examples of gas lasers include argon lasers used for biotechnology applications and carbon dioxide lasers used for industrial welding applications. Liquid dye lasers are sold primarily in research markets. Semiconductor diode lasers are used in CD players and in telecommunications equipment. The Company believes that solid state lasers will ultimately address all of the applications currently served by gas lasers and that new applications for lasers, such as marking and micromachining, will be made possible by solid state technology. Solid state lasers use a solid material such as crystal, glass or certain fibers as their lasing medium and, in some cases, use a semiconductor diode laser as the energy source to stimulate their lasing medium. While infrared solid state lasers are commercially available, shorter wavelength green and blue solid state lasers have been commercialized on a very limited basis to date due to cost and performance issues. The Company believes that further development of green and blue solid state lasers may lead to significant market opportunities for these shorter wavelength laser subsystems. In order to provide its customers with the benefits of the smaller size and the improved efficiency of solid state lasers, the Company is developing microlaser products. Laser Subsystems Markets and Products Uniphase's principal laser subsystem products consist of air-cooled argon gas laser subsystems, which generally emit blue or green light, Helium Neon ("He-Ne") laser subsystems, which generally emit red or green light and solid state lasers, which generally emit infrared, blue or green light. These systems consist of a combination of a laser head containing the lasing medium, power supply, cabling and packaging, including 3 5 heat dissipation elements. Uniphase's principal laser subsystem products and representative applications include:
LASER TYPE WAVELENGTH POWER PRICE RANGE(1) APPLICATIONS ----------------------- ------------ --------- ---------------- -------------------- Gas: He-Ne 633 nm 1-25 mW $50-$1,500 CAE Photoplotting Argon 458-515 nm 3-75 mW $2,500-$12,000 Capillary Electrophoresis Color Separation Solid State: Microlaser 473-1064 nm 5-50 mW $4,000-$9,000 Direct-to-Plate Printing DNA Sequencing Flow Cytometry Particle Counting Semiconductor Wafer Inspection Stablelight 1064 nm Up to 4W $15,000-$20,000 Spectrometry
- --------------- (1) Product prices vary depending on order volume, power output and other customer requirements and configurations. The overall market for gas lasers is mature and is expected to decline as technology transitions from conventional lasers, including gas and liquid, to solid state lasers, which the Company expects to be the primary laser technology in the future. In comparison to gas lasers, solid state lasers are smaller and use less power. Sales of the Company's argon gas lasers have increased in recent years primarily as a result of increased sales of such products for use in biotechnology and semiconductor applications. Use of He-Ne gas lasers has substantially declined as most customers are now using semiconductor diode lasers to satisfy bar code scanning applications. Uniphase introduced a series of green wavelength solid state microlasers in May 1994. The Company is in the late stage of development of blue wavelength solid state lasers and the Company has shipped such lasers to certain customers for evaluation purposes. These products consist of a power supply and an infrared diode laser coupled to a proprietary crystal structure contained in a temperature controlled housing. The Company believes that these products will ultimately address the principal markets currently served by Uniphase's argon laser products. The Company also believes that the reduced size and power requirements of these microlasers will permit new applications for these products, although no assurance can be given that these microlasers will achieve commercial acceptance for use in existing or any new applications. Uniphase introduced a series of continuous wave and pulsed infrared solid state laser systems at the Conference on Laser and Electro-Optics in May 1995. These products consist of a power supply and a number of high power diodes or diode arrays coupled to a proprietary crystal structure in a stable mechanical structure. The continuous wave product, Stablelight, produces up to 4W of infrared power and is principally used by customers in industrial process control and measurement applications. SEMICONDUCTOR CAPITAL EQUIPMENT PRODUCTS Background Technological advances and demands for increasing levels of performance have led the semiconductor industry to develop more complicated devices with increasingly smaller geometries. A current state-of-the-art microprocessor may have four million transistors per square centimeter, four or five "wiring" levels and require 400 process steps during its manufacture, providing ample opportunities for particle contamination to occur on the wafer and cause defects. As semiconductor feature sizes decrease, devices become increasingly susceptible 4 6 to smaller defects during their manufacture. It has been estimated that 80% of the loss of manufacturing yield is caused by particle contamination that occurs on the wafer during the manufacturing process. One of the semiconductor industry's responses to the increasing vulnerability of semiconductor devices to smaller defects has been to employ defect detection and inspection that is closely linked to the manufacturing process. Semiconductor process engineers monitor their processes more closely, identifying defects and their origins in order to reduce their recurrence and maintain and improve process yields. Presently, automated inspection systems such as those manufactured by KLA-Tencor are used on-line to detect and locate defects as small as 0.1 micron. A single wafer may be inspected numerous times during its progression through manufacturing. These on-line detection systems use advanced image processing and innovative laser scanning technologies to achieve high sensitivity and speed. Detecting the presence of defects is only the first step in preventing their recurrence. After detection, the defects must be examined in order to identify their size, shape and the process step in which the defect occurred. This examination is called "defect classification." The resulting description of the defects is then added to a computer database. This database is used to monitor defect trends and to pinpoint the sources of defects and contaminating particles to specific process steps or pieces of equipment. Identification of the sources of defects in the lengthy and complex semiconductor manufacturing process has become essential for maintaining high yield production. While automated inspection systems have progressed to being able to detect submicron defects, the conventional optical microscopes that have traditionally been used for defect classification are not capable of examining such defects. With a state-of-the-art, conventional optical microscope, a 0.3 micron defect, which is nearly the entire minimum feature size of today's microprocessor, appears only as a dark speck. Further, certain types of defects that are embedded in or under films created during gas phase semiconductor manufacturing processes are not currently observable by such microscopes. Other very shallow defects, which are often only 0.1 micron high and which may occur during the chemical mechanical polishing ("CMP") process, are also not observable by conventional microscopes. The Ultrapointe System Solution The Company established its Ultrapointe subsidiary in fiscal 1992 and began shipping Ultrapointe Systems in fiscal 1994. The Ultrapointe System is a laser imaging system that is capable of examining microscopic defects with the ease and speed of conventional microscopes while also offering increased resolution and the ability to provide three-dimensional ("3-D") images. This system combines state-of-the-art high speed laser scanning technology, real-time confocal imaging and digital image reconstruction to allow for 3-D imaging of semiconductor defects as small as 0.1 micron. The Ultrapointe System works in conjunction with automated inspection systems from vendors such as KLA-Tencor to enable semiconductor manufacturers to more accurately identify and classify defects. This defect examination and analysis procedure enables semiconductor manufacturers to improve yields by identifying and containing process problems. Ultrapointe Systems operate in the manufacturing cleanroom, adjacent to automated inspection systems, and can in seconds produce detailed images of defects even when they are very small or embedded or buried in films. The Company believes that its Ultrapointe System is the only currently available, non-destructive wafer inspection tool with increased resolution and 3-D imaging capabilities that is capable of both examining certain sub-surface wafer defects and accurately analyzing the sources of defects. The Ultrapointe System utilizes an optical technique called scanning laser confocal microscopy. This technique uses, through high power microscopic optics, an argon laser as an intense light source to scan a wafer's surface numerous times. The return signal from the laser is processed by the system's computer workstation, which provides a complete topological image of the wafer's surface at the system's console and can display in a high resolution format defects as small as 0.1 micron. Typical magnifications afforded by Ultrapointe Systems approximate 35,000x, as compared with conventional white light microscopes upper magnification limits of approximately 6,000x. Through software developed by the Company, the system's workstation can also evaluate and classify defects, communicate with automated inspection systems and store images and other data. 5 7 The Ultrapointe System has a base list price of $368,000. The system can also be tailored, through software, to interface with various automated inspection systems and local area networks. The Ultrapointe System includes full wafer automation and handling and a Silicon Graphics workstation. The images available include a conventional, real time white light microscopy image, real time laser confocal "slices" and a multiple slice top view of the wafer surface and defect. The full resolving power of the laser images is available and surface, embedded and buried defects can be viewed. The product includes advanced two dimensional ("2-D") and 3-D imaging. The Ultrapointe System currently requires a human operator to classify defects. In May 1996, the Company introduced its first Identifier(TM) software product, an optional feature using white light that provides automatic defect classification capability for Ultrapointe Systems. Working in conjunction with the Ultrapointe System, the Identifier(TM) software automates the defect classification process, thereby improving the precision and repeatability of defect classification. In December 1996, a laser image version of the Identifier(TM) was introduced. The laser ADC product has improved classification capabilities for more complex "metal" layers of semiconductor devices. The ability to review defects using ADC software is becoming increasingly important to semiconductor manufacturers as it facilitates defect classification without direct operator evaluation at each defect site. This automation can improve reliability and consistency by eliminating operator-induced variations. In addition, such automation helps speed analysis of the vast amounts of defect data and classifications necessary for yield enhancement programs. The Company developed the Identifier(TM) software using technology licensed from ISOA, Inc. and in cooperation with the semiconductor industry consortium, SEMATECH. The Identifier(TM) has a base list price of $150,000. In July 1997, the Company entered into a three-year agreement with KLA-Tencor under which KLA-Tencor became the exclusive reseller for the Company's Ultrapointe Systems and the Identifier(TM), the Company's ADC software product. Under the Agreement, KLA-Tencor will distribute the Ultrapointe System under its own label worldwide and has the responsibility for installation and service of the systems it sells. TELECOMMUNICATIONS EQUIPMENT PRODUCTS Fiber optic cable is gaining widespread acceptance in upgrades and new installations of CATV and telecommunications systems worldwide. The use of fiber optic cable results in vastly improved performance, flexibility, reliability and lower installation and operating costs when compared to traditional copper and coaxial cable. Moreover, technological innovation and market forces are creating increased demand for communication transmission systems with multiple delivery capability and higher performance and reliability features. Further, telecommunications interexchange carriers are being required to provide higher speed data transmission over longer lengths of installed optical fiber between electronic repeater stations. Due to the high cost of new fiber installations, interexchange carriers seek to utilize the installed fiber base to the greatest extent possible. In the CATV industry, consolidation has resulted in a smaller number of multiple system operators controlling larger networks. These operators, who compete with other technologies such as direct broadcast satellite television, are upgrading their systems and seek economical solutions that will increase their network flexibility and reliability. The Company participates in these markets through its UTP, UFP and ULE subsidiaries. UTP Background The flexibility and performance of fiber optic systems has been enhanced through the use of two types of signal encoding techniques: direct modulation and external modulation. In direct modulation, the light output from a diode laser is switched on and off to generate a signal, similar to the operation of a flashlight. This frequent switching, however, causes wavelength instability, which limits the distance of transmission before signal regeneration is required. Further, the diode lasers used in direct modulation have limited power and modulation rate, thereby constraining the performance of the signal transmission system. In external modulation, the light output of a continuously powered laser is switched in a separate crystal of lithium niobate. Light from the laser travels along waveguides patterned into lithium niobate crystals and electrical 6 8 signals applied to electrodes alongside the waveguides encode the signal onto a light beam for transmission in the optical fiber. As compared to direct modulation, external modulation has the following advantages: - Longer Distances in Telecommunications. External modulators enable signal transmission over longer distances in telecommunications systems before signal regeneration is required. External modulation thereby reduces the required number of expensive repeaters or amplifiers, which are a significant cost in transmission systems. - Higher Capacity in Telecommunications. External modulation is being used by equipment suppliers that are developing transmission hardware incorporating wavelength division multiplexing ("WDM"). WDM is capable of increasing the capacity of a fiber route up to 16 times without upgrading to more expensive electronic multiplexing/demultiplexing equipment. WDM is compatible with the large installed base of fiber optic networks and can be used to increase significantly the data carrying capacity of such networks. External modulators also enable higher data rates (e.g. OC-192 or 10 Gbps) to be effectively transmitted over long distances. - Longer Distances and Higher Fidelity in CATV. External modulators operate at higher laser power and therefore allow signals to be transmitted over longer distances without detection and retransmission. In addition, external modulation provides inherently higher fidelity because of lower laser noise and low noise susceptibility to optical system reflections, such as those arising from existing fiber optic connections. External modulators are fully compatible with CATV distribution systems that utilize fiber optical amplifiers. UTP Products and Markets In May 1995, the Company purchased UTP, which designs, develops, manufactures and markets high-speed external modulators and transmitters for fiber optic networks in the CATV and telecommunications industries. The Company acquired UTP as part of its strategy to pursue selected opportunities where opto-electronic technology converges on specific market needs which have not been adequately addressed by conventional electronic solutions. The Company produces lithium niobate integrated optic circuits by using its proprietary Annealed Proton Exchange (APE(R)) fabrication process. The Company believes that this process produces modulators which can have higher optical power handling, and can be fabricated into a bias free mode (advantageous for digital systems) as compared with competing external modulators. The Company also sells customized external modulators for a variety of customer applications. The Company's principal modulator products include:
TYPE WAVELENGTH APPLICATION - ----------------------------------- ------------------- ----------------------------------- CATV Modulators.................... 1300 nm, 1550 nm CATV Super Trunk Transmitter 2.5 and 10 Gbps Digital Modulators....................... 1300 nm, 1550 nm OC-48 and OC-192 Telecommunications, respectively Microwave and Radio Frequency Modulators....................... 1300 nm, 1550 nm Antenna Links and Radar
UTP began to supply turn-key externally modulated CATV transmitters to CATV OEMs in September 1995. These transmitters incorporate a continuous-wave diode laser, a lithium niobate modulator and patented electronic linearity and control circuitry. The Company routinely customizes its transmitter to the specifications of the OEM customer. The Company also resells optical fiber amplifiers as part of providing complete optical transmission functionality to OEMs. The principal applications addressed by UTP products are as follows: - Long-Haul Telecommunications. The principal long-haul telecommunications application addressed by the Company is a 2.5 Gbps transmission system for long distance telephone interexchange carriers. The Company's external modulators are used in these systems to significantly increase the space between repeaters in such systems. The Company's modulators allow the transmission of up to 32,000 7 9 phone conversations over a single fiber to switching sites across distances of up to 350 miles. In addition, the Company's external modulators are well suited for WDM applications at 2.5 Gbps. In such applications, multiple wavelength telecommunications signals are transmitted over the same fiber, thereby multiplying the capacity of the fiber cable system. Telecommunications customers are presently deploying systems with up to 16 separate wavelengths in order to accommodate 40 Gpbs using UTP's OC-48 modulators. The Company is also developing a higher speed modulator to provide similar capability at 10 Gbps (OC-192 data rate). - Cable. The principal cable television applications addressed by the Company are externally modulated transmitters for trunk-line applications. These transmitters operate at the preferred optical wavelength of 1550 nm. They incorporate high power (20 mw) diode lasers and the Company's modulators to provide high optical powers for the transmission of broadcast television signals over long distances. In addition, they are compatible with existing optical amplifier technology, which allows the transmission distance or the subscriber area to be increased. The Company's modulated transmitters are designed for use in broadband systems, are operational over bandwidths of up to 1 Ghz and are compatible with hybrid fiber coax ("HFC") systems being developed by certain telecommunications equipment providers for the transmission of voice, data and video. - Specialty Products and Markets. In May 1996, UTP entered into an agreement with Sanders, a Lockheed Martin Company, to develop fiber optic transmitters for the United States government to be installed on high performance aircraft. Additional applications for the Company's integrated optic modulators include fiber optic gyroscopes ("FOGs"), analog RF fiber optic systems and laboratory and research and development activities. The Company is a leading commercial supplier of multi-function integrated optic signal processing chips for FOGs. FOGs are intended for use in commercial aviation, military/aerospace and industrial applications. The Company also offers a variety of integrated optic modulators and switches for use at frequencies to 20 Ghz that are being used in a large variety of industrial, government and university research and development programs. UFP Products and Markets In May 1996, the Company acquired UFP, which custom packages laser diodes, LEDs and photodetectors for OEMs for use in fiber optic networks. UFP uses its proprietary technologies of epoxy-based attachment and laser welding to attach fiber ("pigtailing") to these optoelectronic components in a variety of configurations to meet the specific needs of its OEM customers. The principal applications addressed by UFP are as follows: - Data communications. The ever-increasing use of computer networks is fueling a growth in fiber data communications systems. Fiber offers advantages over copper-wire links that include longer distance transmission, higher data rates, ease of multiplexing, and immunity from electromagnetic interference. UFP offers custom packaged optical sources and detectors for a variety of fiber-based data communications applications such as single-fiber Ethernet and Token Ring. - Local telecommunications. Low-cost diodes are used in the feeder and loop portions of the local telephone network to accommodate various data rates. The Company supplies custom packaged components to telecommunications equipment manufacturers. For example, UFP supplies custom laser-diode submodules for use as optical sources and detectors in SONET OC-3 (155 Mbps) networks. - Specialty Markets. UFP products are well suited for several specialty markets such as fiber optic test and measurement equipment, fiber optic sensors and military and aerospace data communications applications. For example, the Company pigtails red diode lasers for use in hand-held fiber optic fault locators. 8 10 ULE Background A major enhancement of fiber optic systems is due to the development and deployment of the optical fiber amplifier. This optical device amplifies in-coming optical signals without having to convert them to electrical signals, as was the case with the older-generation electronic regenerators. These optical amplifiers are higher performance and lower cost than regenerators. They operate in the 1550 nm wavelength range where optical fiber has its lowest transmission loss. An optical amplifier is composed on a fiber with specially introduced impurities (erbium), a diode laser for pumping (energizing) the fiber and a variety of other components such as couplers, isolators and control electronics. The key components are the fiber and pump laser, and very high reliability had to be established for each of these new components. The preferred pump laser is an GaInAs/GaAs structure operating at 980 nm. Advantages of optically amplified fiber communication systems, compared to their counterparts using electronic regenerators are: - Longer distances between amplifiers. Optical amplifiers can span over twice the distance achievable with optoelectronic regenerators. They also operate at the most transparent wavelength range of optical fiber. - Flexible and upgradeable signal content. Optical amplifiers are bit-rate transparent; for example 155 Mb/s and 2.5 Gb/s data can equally well be passed through the same amplifier. They also can simultaneously accommodate multiple wavelengths in a WDM system. Amplifiers are being deployed for CATV as well as telecom systems. - Lower cost equipment. Optical amplifiers used in high speed WDM systems offer considerable savings in regeneration than a comparable electrically regenerated system. ULE Products and Markets In March 1997, the Company acquired ULE, which designs, develops, manufactures and markets pump lasers for optical amplifiers used in fiber optic telecommunications and CATV systems. This acquisition enables the Company to provide an additional key component to high-performance fiber optic systems. ULE produces pump lasers in GaInAs/GaAs materials. These lasers operate at the preferred pump wavelength of 980 nm. ULE invented and brought to manufacturing a laser fabrication process that incorporates a special laser-facet passivation technique (referred to as E2) that provides the necessary laser lifetimes required to meet telecommunication-equipment reliability. ULE supplies these lasers in chip form and on submounts to companies that package them for incorporation into amplifiers by telecom OEMs. These lasers operate at a variety of power levels and wavelengths. The principal applications addressed by ULE products are as follows: - Long-haul telecommunications. Optical amplifiers are commonly used into today's fiber systems that span more than 150 km and operate in the low-loss 1550 nm wavelength range. The amplifiers are used in high-speed (OC-48) and WDM systems (up to 16 wavelengths) ULE provides pump for the majority of amplifiers used today in terrestrial applications. - Cable. Optical amplifiers are widely used in the trunking (backbone) portion of CATV networks. These trunking lines are typically 50-100 km in length, operate at 1550 nm, and achieve higher signal fidelity by incorporating the amplifiers. Amplifiers are beginning to be used for the distribution portion of some CATV networks, especially in international deployments. ULE provides high-power (200 mW) pumps for these amplifiers. SALES AND MARKETING Uniphase markets its laser subsystem products principally to OEMs through its own sales force in the United States, United Kingdom and Germany and through a worldwide network of representatives and 9 11 distributors to service smaller domestic accounts, including those in the research and education markets. The Company's sales and marketing strategy for its laser subsystem products is to establish long term relationships with its OEM customers through early design-in phase of its laser subsystems into customers applications and through high levels of customer service and support. The following chart sets forth the Company's principal OEM customers for laser subsystems by application:
WAFER INSPECTION BIOTECHNOLOGY INSTRUMENTS SYSTEMS GRAPHICS AND PRINTING SYSTEMS - ------------------------- ----------------- ------------------------------------------------ Applied Biosystems ADE Corporation Crosfield Electronics Ltd. Beckman Instruments Nikon Corporation Gerber Systems Corporation Coulter Corporation KLA-Tencor Optronics, a division of Intergraph Corporation Molecular Dynamics Purup Pre-Press A/S
One laser subsystems customer, the Applied Biosystems Division of Perkin-Elmer Corporation, accounted for approximately 10%, 12% and 12% of the Company's net sales for fiscal years 1997, 1996, and 1995, respectively. In addition, in fiscal 1996, KLA-Tencor (formerly known as Tencor) accounted for 13% of the Company's sales through the purchase of both laser subsystems and Ultrapointe Systems. A reduction or delay in orders from this customer could adversely affect the Company's results of operations. In fiscal 1997, Uniphase marketed its Ultrapointe Systems through KLA-Tencor's worldwide distribution channels and a network of four independent sales representatives in the United States. In Japan, the Company had a distribution agreement with KLA-Tencor and Innotech Corporation for sales to Japan's semiconductor industry. In Europe and the Pacific Rim, the Company distributes its products through KLA-Tencor; however, the Company has the right to market its products through its own distribution channels. In July 1997, Ultrapointe and KLA-Tencor signed a new OEM agreement, that superceded all previous agreements, to be the exclusive reseller of the Ultrapointe System and ADC software. Therefore, the distribution agreement with Innotech Corporation and the four independent sales representation agreements were terminated by Ultrapointe effective September 1997 and October 1997, respectively. As of June 30, 1997, the Company had sold 117 Ultrapointe Systems in the United States, Europe, Japan and the Pacific Rim. Customers for the Company's Ultrapointe System include: American Microsystems Microunity Analog Devices Motorola* Applied Materials Philips Semiconductors* Digital Equipment Corporation* Samsung* Fujitsu, Ltd.* SEMATECH IBM Corporation* Sony Corporation Intel* TSMC* LSI Logic Corporation* Toshiba* Lucent Technologies* Texas Instruments L.G. Semicon VLSI Technology* Matsushita Electric* VTC Micron Technology* Yamaha Corporation
- --------------- * Indicates customers that have purchased multiple Ultrapointe Systems. 10 12 The Company markets its telecommunications equipment products to OEMs through its own direct sales forces in Bloomfield, Connecticut; Chalfont, Pennsylvania; Switzerland; Germany and Scandinavia. In addition, UTP sells its products through distributors in select European countries, Japan, Taiwan, Korea and India. Customers for the Company's telecommunications equipment products include: Alcatel Lasertron Ciena Nortel General Instruments Scientific Atlanta GPT TRW
CUSTOMER SUPPORT AND SERVICE The Company believes that a high level of customer support is necessary to successfully develop and maintain long term relationships with its OEM customers in its laser subsystems and telecommunications equipment businesses. This close relationship begins at the design-in phase and is maintained as customer needs change and evolve. The Company provides direct service and support to its OEM customers through its offices in the United States. The Company's European laser subsystem customers are serviced through its sales and support offices in the United Kingdom and Germany. In Japan, the Company's laser subsystems distributor, Autex, assists in performing support and service functions. The Company provides support through both on-site customer service and telephone support from its various facilities that perform sales and service functions. The Company generally warrants all of its laser products for a period of one year from the date of shipment. Certain argon lasers carry warranties based on hours of use. A high level of customer support is also necessary when providing production instrumentation for the semiconductor industry. KLA-Tencor and all distributors of Ultrapointe Systems are responsible for sales, installation, warranty and post-warranty support. Ultrapointe Systems generally carry a one-year warranty from the date of installation or fifteen months from shipment, whichever occurs first. Service contracts are available for system support after the warranty period. RESEARCH AND DEVELOPMENT During fiscal years 1997, 1996, and 1995, Uniphase spent $9.3 million, $5.8 million, and $3.7 million, respectively, on research and development. In fiscal 1997, 1996 and 1995, Uniphase incurred charges totaling $33.3 million, $4.5 million and $4.5 million for acquired in-process research and development, which were incurred in connection with the acquisition of ULE in fiscal 1997, UFP in fiscal 1996 and UTP in fiscal 1995. In fiscal 1997, the Company's laser research and development efforts focus primarily on the continued development of solid state lasers. These programs are supported by a $1.4 million award, which expires in December 1998 from the Advanced Technologies Program of the Department of Commerce. The Company also has development and licensing agreements with Stanford University and the University of St. Andrews, Scotland which give the Company the right to manufacture and sell certain next generation laser products being developed by these universities. If the Company manufactures such products, it will be required to pay the universities certain royalties based on sales of the products. The Company continues to devote research and development resources to its Ultrapointe Systems product line. These efforts focus on the Company's Identifier(TM) software product and enhancement of laser images. In addition to the Identifier(TM), the Company is also exploring a number of methods to improve the resolution of the scanning laser confocal microscopy technique used in the Ultrapointe System and to accommodate future generations of higher density semiconductor devices. Ultrapointe's efforts regarding the next generation of semiconductor devices have also been in the handling of larger wafers (300 mm in diameter). The Company is developing new and enhanced telecommunications equipment products and enhancing its manufacturing capability for telecommunications equipment products. For example, higher performance modulators and transmitters are under development, as are advanced multi-gigabit modulators. In manufacturing, the Company is developing improved CAD design tools and advanced modulator packages. The 11 13 Company also participates in two national consortia: the Analog Optoelectronics Module Consortium, which seeks to develop new and cost-effective RF and microwave transmitters and receivers, and the National Transparent Optical Network Consortium, which is involved in advanced high capacity WDM fiber optic communications components and networks. The Company is also committed to the success of its ULE products by acquiring capital equipment in support of the research and development. ULE is currently focusing its research and development effort on the packaging of higher powered pump lasers and pump lasers at other frequencies. MANUFACTURING The Company manufactures its solid state lasers subsystem products and argon laser subsystems and related power supplies at its San Jose, California facility and its He-Ne lasers at its Manteca, California facility. The Company assembles and tests its Ultrapointe Systems and manufactures initial systems of its microlasers at its San Jose, California facility. The Company's modulator products are manufactured at its facility in Bloomfield, Connecticut and its transmitters are manufactured at its facility in Chalfont, Pennsylvania. UFP products are manufactured at the Company's facilities in Witney, United Kingdom. ULE lasers are manufactured in Zurich, Switzerland. The Company has purchasing, materials management, assembly, final testing and quality assurance functions at each location for the products that are manufactured at that facility. The manufacture of the Company's laser subsystems, Ultrapointe Systems and telecommunications equipment products is a highly complex and precise process, requiring production in a highly controlled environment. The Company maintains a 2,000 square foot class 100 clean room in which all Ultrapointe System assembly takes place. Systems are tested and then packaged for direct shipment into a customer's clean room. Changes in the Company's or its suppliers' manufacturing processes or the inadvertent use of defective or contaminated materials by the Company or its suppliers could adversely affect the Company's ability to achieve acceptable manufacturing yields and product reliability. To the extent the Company does not achieve such yields or product reliability, its operating results and customer relationships would be adversely affected. The raw materials and sub-components which the Company requires for the manufacture of its products are generally available from several sources. The Company purchases some raw materials and components from single sources, but has no reason to believe it could not purchase such materials and components from alternative sources of supply on comparable terms. The Company obtains all the robotics, workstations, and many optical components used in its Ultrapointe Systems from Equipe Technologies, Silicon Graphics, Inc., and Olympus Corporation, respectively. The Company currently utilizes a sole source for the crystal chip sets incorporated in its solid state microlaser products and acquires its pump diodes for use in its solid state laser products from Philips and Opto Power Corporation. Certain of these companies also manufacture products that compete with those of the Company. The Company obtains lithium niobate wafers and specialized fiber components used in its telecommunications products from primarily Crystal Technology, Inc. and Fujikura Ltd., respectively. From time to time, the Company has experienced delays in obtaining raw materials and components. However, to date such delays have not materially affected its operations. The Company does not have long-term volume purchase agreements with any of these suppliers, and no assurance can be given that these components will be available in the quantities required by the Company, if at all. COMPETITION The industries in which the Company sells its products are highly competitive. Uniphase's overall competitive position depends upon a number of factors, including the price and performance of its products, the level of customer service and quality of its manufacturing processes, the compatibility of its products with existing laser systems and Uniphase's ability to participate in the growth of emerging technologies, such as solid state lasers. In the argon laser market, Uniphase primarily competes with American Laser, Coherent, Ion Laser Technology, NEC, Omnichrome, Spectra-Physics, Toshiba and Carl Zeiss. In the He-Ne laser market, Uniphase considers Melles-Griot, NEC and Carl Zeiss to be its primary competitors. In the solid state laser 12 14 markets, Uniphase's competitors include Coherent, Hitachi, Lightwave, Opto Power Corporation, Philips, SDL, Inc., Siemens, Sony and Spectra-Physics. Significant competitive factors in the market for Ultrapointe Systems include specific system performance, cost of ownership, support and infrastructure and the ability to interface to existing automated inspection systems and local area networks. Ultrapointe Systems compete with the following three types of devices: scanning electron microscopes, conventional white light microscopes and laser confocal microscopes. The Company believes that its principal competitors include Amray, Hitachi, JEOL, Kinetek, Kensington, Lasertech, Leica, Nidek, Nikon, Stahl Research and Carl Zeiss. Competitive factors in the market for the Company's telecommunications equipment products include price, product performance and reliability, the capability to provide strong customer support and service, customer relationships and the breadth of product line. In this market, the Company faces competition from companies that have substantially greater financial, engineering, research, development, manufacturing, marketing, service and support resources, greater name recognition than the Company and long-standing customer relationships. With respect to modulator products for CATV and telecommunications equipment suppliers, the Company's competitors include Lucent Technologies, Crystal Technology, Inc., Fujitsu, Integrated Optical Components, Ltd., and Sumitomo Cement Opto Electronics Group. With respect to CATV 1550 nm transmitters for supply to OEMs, the Company's competitors include AEL, Harmonic Lightwaves, Kablerhydt, Ortel, Synchronous Communications and PAi. Other CATV equipment suppliers may also enter this market. With respect to laser diode products for data communications and local telecommunications equipment suppliers, the Company's competitors include Oz Optics and SDL-Optics as well as larger optoelectronic suppliers such as AMP and Hewlett-Packard. ULE competes with SDL, Inc. in the 980-nm-pump-diode laser market. Potential new technologies may also emerge to compete with the Company's products, such as electro-absorption modulators that are being introduced for long-haul telecommunications. PATENTS AND PROPRIETARY RIGHTS The Company holds 32 United States patents and certain corresponding foreign patents on the technologies related to its products and processes. The United States patents expire on dates ranging from 1999 to 2015. The Company has applied for additional patents related to its solid state laser products, its Ultrapointe Systems (five of which were recently issued) and its telecommunications products. The Company has also acquired several patent licenses involving areas such as end-pumped solid state lasers, diode-pumped blue light lasers and waveguides. The laser, semiconductor equipment, CATV and telecommunications industries in which the Company sells its products are characterized by frequent litigation regarding patent and other intellectual property rights. Numerous patents in these industries are held by others, including academic institutions and competitors of the Company. Such patents could inhibit the Company's ability to develop or sell new products for such markets. From time to time, the Company has received notices claiming that it has infringed third-party patents or other intellectual property rights. While in the past licenses generally have been available to the Company where third-party technology was necessary or useful for the development or production of the Company's products, there can be no assurance that licenses to third-party technology will be available on commercially reasonable terms, if at all. Generally, a license, if granted, would include payments by the Company of up-front fees, ongoing royalties or a combination thereof. There can be no assurance that such royalty or other terms would not have a significant adverse impact on the Company's operating results. The Company is a licensee of a number of third party technologies and intellectual property rights and is required to pay royalties to these third party licensors on certain of its products, including its Ultrapointe Systems and its solid state lasers. In fiscal 1997 and 1996, the Company expensed $1.4 million and $1.3 million, respectively, in license and royalty fees primarily in connection with its gas laser subsystems. In addition, there can be no assurance that third parties will not assert claims against the Company with respect to its existing products or with respect to future products under development by the Company. In the event of litigation to determine the validity of any third-party claims, such litigation could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such 13 15 litigation is determined in favor of the Company. In the event of an adverse result in any such litigation, the Company could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology which is the subject of the litigation. There can be no assurance that the Company would be successful in such development or that any such licenses would be available to the Company. In the absence of such a license, the Company could be enjoined from future sales of the infringing product or products. In fiscal years 1992 and 1993, the Company incurred substantial legal expenses in connection with a patent infringement action relating to the Company's current gas laser subsystems brought by Spectra-Physics Lasers, Inc. ("Spectra-Physics"). While the Spectra-Physics case has since been settled, no assurance can be given that, in the future, the Company will be able to avoid similar actions by competitors or others or not be forced to initiate its own actions to protect its proprietary position. BACKLOG Backlog consists of written purchase orders for products for which the Company has assigned shipment dates within the following 12 months. As of June 30, 1997 the Company's backlog was approximately $34.2 million, as compared with a backlog of approximately $20.7 million at June 30, 1996. Orders in backlog are firm, but are subject to cancellation or rescheduling by the customer. Because of possible changes in product delivery schedules and cancellation of product orders and because the Company's sales will often reflect orders shipped in the same quarter that they are received, the Company's backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. Certain of the Company's laser subsystems customers are adopting "just in time" techniques with respect to ordering the Company's products, which will cause the Company to have shorter lead times for providing products. Such shorter lead times are likely to result in lower backlog. EMPLOYEES At June 30, 1996, the Company had a total of 597 full-time employees worldwide, including 67 in research, development and engineering, 45 in sales, marketing and service, 418 in manufacturing, and 67 in general management, administration and finance. The Company intends to hire additional personnel during the next 12 months in each of these areas. The Company's future success will depend in part on its ability to attract, train, retain and motivate highly qualified employees, who are in great demand. There can be no assurance that the Company will be successful in attracting and retaining such personnel. The Company's employees are not represented by any collective bargaining organization, and the Company has never experienced a work stoppage, slowdown or strike. The Company considers its employee relations to be good. RISK FACTORS The statements contained in this Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including but not limited to statements regarding the Company's expectations, 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 number of factors, including those detailed in this "Risk Factors" portion as well as those set forth elsewhere in this Report on Form 10-K. 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. MANAGEMENT OF GROWTH; UFP AND ULE ACQUISITIONS The Company has experienced recent growth through increased levels of operations in its existing businesses, the acquisition of UTP in May 1995, the acquisition of UFP in May 1996 and the acquisition of ULE in March 1997. The Company is devoting significant resources to develop new solid state lasers for OEM customers, to improve products and increase market penetration of its Ultrapointe Systems and to increase its penetration of the CATV and telecommunications industries. In addition, the Company is now increasing its 14 16 marketing, customer support and administrative functions in order to support an increased level of operations primarily from sales of its telecommunications equipment products. No assurance can be given that the Company will be successful in creating this infrastructure or that any increase in the level of such operations will justify the increased expense levels associated with these businesses. In May 1996, the Company acquired UFP. As a result of acquiring UFP, the Company has entered the local telecommunications and data communications market in which it had no previous experience, and has expanded its employee base. The success of the UFP acquisition will be dependent on the Company's ability to integrate UFP into its existing operations. The Company's ability to manage UFP will be complicated by the geographical distance of UFP locations in the United Kingdom and in Batavia, Illinois. There can be no assurance that the operations of UFP will not strain the Company's available management, manufacturing, financial and other resources. In March 1997, the Company acquired ULE. As a result of acquiring ULE, the Company has gained access to a proven semiconductor based laser application for use in telecommunications. The success of the ULE acquisition will be dependent upon the Company's ability to integrate ULE 980 nm lasers and future products used in erbium doped fiber amplifiers (EDFA) and to many major telecommunication equipment manufacturers. There can be no assurance that the ULE operations will not strain the Company's available management, manufacturing, financial and other resources. The Company also made capital expenditures in fiscal 1996 to acquire certain properties in San Jose, California totaling 109,000 square feet, which included land, buildings and improvements for an aggregate purchase price of approximately $11.0 million and continues to invest in property, plant and equipment needed for its business requirements, including adding to manufacturing capacity throughout the Company. Any failure to utilize these areas in an efficient manner could have a material adverse effect on the Company. The Company currently has no commitments with respect to any future acquisitions. The Company, however, frequently evaluates the strategic opportunities available to it and may in the future pursue investments in or acquisitions of additional complementary products, technologies or businesses. Such acquisitions by the Company may result in the diversion of management's attention from the day-to-day operations of the Company's business and may include numerous other risks, including difficulties in the integration of the operations and products, integration and retention of personnel of the acquired companies and certain financial risks. Further acquisitions by the Company may result in dilutive issuances of equity securities, the incurrence of additional debt, reduction of existing cash balances, amortization expenses related to goodwill and other intangible assets and other charges to operations that may materially adversely affect the Company's business, financial condition or operating results. DIFFICULTIES IN MANUFACTURE OF THE COMPANY'S PRODUCTS The manufacture of the Company's products involves highly complex and precise processes, requiring production in highly controlled and clean environments. Changes in the Company's or its suppliers' manufacturing process or the inadvertent use of defective or contaminated materials by the Company or its suppliers could adversely affect the Company's ability to achieve acceptable manufacturing yields and product reliability. In addition, UTP has previously experienced certain manufacturing yield problems that have materially and adversely affected both UTP's ability to deliver products in a timely manner to its customers and its operating results. During the fourth quarter of fiscal 1997, the Company launched an additional production facility at UTP's Bloomfield, Connecticut facility. No assurance can be given that the Company will be successful in manufacturing UTP products in the future at performance or cost levels necessary to meet its customer needs, if at all. In addition, UTP established a transmitter production facility in Chalfont, Pennsylvania in March 1996 and consolidated the transmitter production line previously located in Bloomfield, Connecticut into this facility in April 1996. The Company has no assurance that this facility will be able to deliver the planned production qualities of transmitters to customers specifications at the cost and yield levels required. To the extent the Company or UTP does not achieve and maintain yields or product reliability, the Company's operating results and customer relationships will be adversely affected. 15 17 The Company is in the process of relocating the ULE operation from its current facility at the IBM Research Laboratories, which has been leased from IBM through 1999, to a larger manufacturing facility in Binz, Switzerland. The relocation of ULE will involve the establishment of a new manufacturing, research and development, sales and administration facility. Once the ULE relocation has been completed, the production line will need to be requalified to assure the high quality demanded by the industry is met by ULE products. ULE will also need to produce its products at a sufficient capacity and yield. There can be no assurance that the relocation will be successfully completed by the time the IBM lease expires or that qualified product can be produced at sufficient yields to successfully compete with other comparable products or technologies. The new facility will also need to develop new products to meet the growing demand for better and faster telecommunication products. There can be no assurance that these new products can be developed in a timely manner to meet the market needs, or if developed, that a market for such products developed will be readily available to the Company. To the extent ULE or the Company fails to recognize and resolve problems of producing its current and future products, the results could have an adverse effect on the Company's ability to service its customers. See also the "Gallium Arsenide" Risk Factor. The Company's UTP products continue to receive pressure from its customers to reduce cost and increase capacity. In an effort to meet the Company customers' needs, the Company intends to increase manufacturing capacity and reduce production costs by implementing an automated manufacturing system for the production of its OC-48 modulators. Any delay in increasing production through the completion of the automation of the manufacturing could materially effect UTP's and the Company's profit margin and net income. There can be no assurance the automated manufacturing will be completed in time to meet the demands of the market. The Company further intends to invest resources in capital equipment and research and development for the production of the next generation of UTP modulators, the OC-192. There can be no assurance UTP will be able to develop the OC-192 modulators to meet customers specifications, or if developed, that these modulators will be accepted by the market. GALLIUM ARSENIDE Gallium Arsenide, referred to as GaAs, is a semiconductor material that has an electron mobility that is up to five times faster than silicon. As a result, it is possible to design GaAs circuits that operate at significantly higher frequencies than silicon circuits. At similar frequencies, GaAs circuits will produce higher signal strength (gain) and lower background interference (noise) than silicon circuits, permitting the transmission and reception of information over longer distances. GaAs circuits can also be designed to consume less power and operate more efficiently at lower voltages than silicon circuits. The fabrication of integrated circuits, particularly GaAs devices such as those sold by ULE is a highly complex and precise process. Minute impurities, difficulties in the fabrication process, defects in the masks used to print circuits on a wafer, wafer breakage or other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional. Management considers wafer yields in excess of 18% achieving internal lot validation criteria to be acceptable. ULE has in the past and may be in the future experience lower than expected production yields, which could delay product shipments and adversely affect gross margins, and there can be no assurance that ULE will be able to maintain acceptable yields in the future. Because the majority of ULE manufacturing costs are relatively fixed, manufacturing yields are critical to the results of operations. To the extent ULE does not achieve acceptable manufacturing yields or experiences product shipment delays, its business, operating results and financial condition could be materially and adversely affected. CYCLICALITY OF SEMICONDUCTOR INDUSTRY The Company's Ultrapointe Systems and a portion of its laser subsystems businesses depend upon capital expenditures by manufacturers of semiconductor devices, including manufacturers that are opening new or expanding existing fabrication facilities, which, in turn, depend upon the current and anticipated market demand for semiconductor devices and the products utilizing such devices. The semiconductor industry is highly cyclical, and historically has experienced periods of oversupply, resulting in significantly reduced demand for capital equipment. Recently, the semiconductor industry has experienced a downturn which has 16 18 led certain of the Company's customers to delay or cancel purchase of the Company's Ultrapointe Systems. Results of operations for fiscal 1997, include sales of Ultrapointe product totaling $15.4 million, down from $17.6 million in fiscal 1996. The Company believes the short-term outlook for Ultrapointe products is improving as evidenced by an increase in backlog from 12 systems at the end of the third quarter of fiscal 1997 to 19 systems at the end of fiscal 1997. There can be no assurance that the Company's operating results will not be materially and adversely affected by these factors. Furthermore, there can be no assurance that the semiconductor industry will not experience further downturns or slowdowns in the future or that the current backlog in Ultrapointe products will result in actual sales or such backlog is indicative of a meaningful trend, which may materially and adversely affect the Company's business and operating results. RISKS FROM CUSTOMER CONCENTRATION A relatively limited number of OEM customers historically have accounted for a substantial portion of UTP's (including ULE) net sales. UTP's sales to any single customer are also subject to significant variability from quarter to quarter. Such fluctuations could have a material adverse effect on both UTP and the Company's business, operating results or financial condition. The Company expects that sales of UTP products to a limited number of customers will continue to account for a high percentage of the net sales for the foreseeable future. Moreover, there can be no assurance that UTP's current customers will continue to place orders or that UTP will be able to obtain new orders from new customers. DECLINING MARKET FOR GAS LASERS; DEVELOPMENT AND OTHER RISKS RELATING TO SOLID STATE LASER TECHNOLOGIES Gas laser subsystems sales accounted for 33.1% and 47.7% of total Company's sales for the fiscal years ended 1997 and 1996, respectively. The market for gas lasers is mature and is expected to decline as customers transition from conventional lasers, including gas, to solid state lasers, which are currently expected to be the primary commercial laser technology in the future. In response to this transition, the Company has devoted substantial resources to developing solid state laser products. To date, sales of the Company's solid state laser products have been limited and primarily for customer evaluation purposes. The Company believes that a number of companies are further advanced than the Company in their development efforts for solid state lasers and are competing with evaluation units for many of the same design-in opportunities than the Company is pursuing. It is anticipated that the average selling price of solid state lasers may be significantly less in certain applications than the gas laser products the Company is currently selling in these markets. The Company further believes it will be necessary to continue to reduce the cost of manufacturing and to broaden the wavelengths provided by its laser products. There can be no assurance that the Company's solid state laser products will not be rendered obsolete or uncompetitive by products of other companies. VARIABILITY AND UNCERTAINTY OF QUARTERLY OPERATING RESULTS The Company has experienced and expects to continue to experience significant fluctuations in its quarterly results. The Company believes that fluctuations in quarterly results may cause the market price of its Common Stock to fluctuate, perhaps substantially. Factors which have had an influence on and may continue to influence the Company's operating results in a particular quarter include the timing of the receipt of orders from major customers, product mix, competitive pricing pressures, the relative proportions of domestic and international sales, costs associated with the acquisition or disposition of businesses, products or technologies, the Company's ability to design, manufacture, and ship products on a cost effective and timely basis, the delay between incurrence of expenses to further develop marketing and service capabilities and realization of benefits from such improved capabilities, the announcement and introduction of cost effective new products by the Company and by its competitors, and expenses associated with any intellectual property litigation. In addition, the Company's sales will often reflect orders shipped in the same quarter that they are received. Moreover, customers may cancel or reschedule shipments, and production difficulties could delay shipments. The timing of sales of the Company's Ultrapointe Systems may result in substantial fluctuations in quarterly operating results due to the substantially higher per unit price of these products relative to the Company's other products. In addition, the Company sells its telecommunications equipment products to OEMs who typically order in large quantities and therefore the timing of such sales may significantly affect the Company's 17 19 quarterly results. The timing of such OEM sales can be affected by factors beyond the Company's control, including demand for the OEM's products and manufacturing issues experienced by OEMs. In this regard, the Company has experienced a temporary rescheduling of orders by OEM telecommunications customers. As a result of the above factors, the Company's results of operations are subject to significant variability from quarter to quarter. There can be no assurance that other acquisitions or dispositions of businesses, products or technologies by the Company in the future will not result in substantial charges or other expenses that may cause fluctuations in the Company's quarterly operating results. The Company's operating results in a particular quarter may also be affected by the acquisition or disposition of other businesses, products or technologies by the Company. For example, in the third quarter of fiscal 1997, the Company incurred charges totaling $33.3 million for acquired in-process research and development in connection with the acquisition of ULE. In the fourth quarter of fiscal 1996, the Company incurred charges totaling $7.5 million for acquired in-process research and development related to the acquisition of UFP and compensation expense in connection with the cancellation of certain options of UTP and granted replacement options to purchase Uniphase Common Stock to UTP employees. There can be no assurance that acquisitions or dispositions of businesses, products or technologies by the Company in the future will not result in substantial charges or other expenses that may cause fluctuations in the Company's quarterly operating results. INTENSE INDUSTRY COMPETITION The laser, semiconductor capital equipment, CATV and telecommunications industries in which the Company sells its products are highly competitive. In each of the markets it serves, the Company faces intense competition from established competitors, many of which have substantially greater financial, engineering, research and development, manufacturing, marketing, service and support resources. The Company is a recent entrant into the semiconductor capital equipment, the CATV and telecommunications marketplaces and competes with many companies in those markets that have substantially greater resources, including greater name recognition, a larger installed base of products and longer standing customer relationships. In order to remain competitive, the Company must maintain a high level of investment in research and development, marketing, and customer service and support. There can be no assurance that the Company will be able to compete successfully in the laser, semiconductor capital equipment, CATV or telecommunications industries in the future, that the Company will have sufficient resources to continue to make such investments, that the Company will be able to make the technological advances necessary to maintain its competitive position or that its products will receive market acceptance. The semiconductor capital equipment market is frequently affected by new product introductions and new technologies that make existing production and inspection equipment obsolete. There can be no assurance that others will not introduce products which compete with the Ultrapointe System or which render the Ultrapointe System obsolete or uncompetitive based on existing or new technologies. In addition, there can be no assurance that technological changes or development efforts by the Company's competitors will not render the Company's products or technologies obsolete or uncompetitive. DEPENDENCE ON KEY OEM RELATIONSHIPS In July 1997, the Company entered into an exclusive OEM Agreement (the "Agreement") with KLA-Tencor pursuant to which KLA-Tencor will distribute Ultrapointe Systems through its worldwide distribution channels. This Agreement supercedes any and all prior OEM negotiations, correspondence, understandings and agreements regarding the Companies' business relationship. The Company currently expects that KLA-Tencor will account for a majority of Ultrapointe's net sales for the foreseeable future for Laser Imaging Systems used to analyze defects on semiconductor wafers and photomasks during the manufacturing process as well as automatic defect classification software products. The Agreement outlines minimum quantities in the year of inception, product specifications, ongoing research and development efforts on the product line, pricing and payment terms. The Agreement is effective through June 30, 2000 and may be extended for up to three (3) additional one year renewal periods thereafter. 18 20 On April 30, 1997, Tencor and KLA Instruments merged and formed KLA-Tencor Corporation. The Company believes that the timing of the receipt of orders and the related product mix under the Agreement will not be consistent with historical orders for Ultrapointe Systems given the size and complexities associated with merging these organizations, consequently, the Company's interim revenue levels and profit margins may be adversely affected. In addition, one laser subsystems customer, the Applied Biosystems Division of Perkin-Elmer Corporation, accounted for approximately 10%, 12% and 12% of the Company's net sales for fiscal years, 1997, 1996, and 1995, respectively. The loss of orders from these or other OEM relationships could have a materially adverse effect on the Company's business and operating results. ATTRACT AND RETAIN KEY PERSONNEL The future success of the Company is dependent, in part, on its ability to attract and retain certain key personnel. In particular, the Company's research and development efforts are dependent on the Company being able to hire and retain engineering staff with the requisite qualifications. Competition in recruiting highly skilled engineering personnel is extremely intense, and the Company is currently experiencing substantial difficulty in identifying and hiring certain qualified engineering personnel in many areas of its business. No assurance can be given that the Company will be able to successfully hire such personnel at compensation levels that are consistent with the Company's existing compensation and salary structure. The Company's future success will also depend to a large extent on the continued contributions of its executive officers and other key management and technical personnel, none of whom has an employment agreement with the Company and each of whom would be difficult to replace. The Company does not maintains a key person life insurance policy on the Chief Executive Officer. However, the loss of the services of one or more of the Company's executive officers or key personnel or the inability to continue to attract qualified personnel could delay product development cycles or otherwise have a material adverse effect on the Company's business and operating results. CONFLICTING PATENTS AND INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES; POTENTIAL INFRINGEMENT CLAIMS The laser, semiconductor capital equipment, CATV and telecommunications industries in which the Company sells its products are characterized by frequent litigation regarding patent and other intellectual property rights. Numerous patents in these industries are held by others, including academic institutions and competitors of the Company. Such patents could inhibit the Company's ability to develop new products for such markets. The industry in which the Company operates is characterized by periodic claims of patent infringement or other intellectual property rights. While in the past licenses generally have been available to the Company where third-party technology was necessary or useful for the development or production of the Company's products, there can be no assurance that licenses to third-party technology will be available on commercially reasonable terms, if at all. Generally, a license, if granted, would include payments by the Company of up-front fees, ongoing royalties or a combination thereof. There can be no assurance that such royalty or other terms would not have a significant adverse impact on the Company's operating results. The Company is a licensee of a number of third party technologies and intellectual property rights and is required to pay royalties to these third party licensors on certain of its products, including its Ultrapointe Systems and its solid state lasers. During fiscal 1997 and 1996, the Company expensed $1.4 million and $1.3 million, respectively, in license and royalty fees primarily in connection with its gas laser subsystems. In addition, there can be no assurance that third parties will not assert claims against the Company with the Company's existing products or with respect to future products under development by the Company. In the event of litigation to determine the validity of any third-party claims, such litigation could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation is determined in favor of the Company. In the event of an adverse result in any such litigation, the Company could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology which is the subject of the litigation. There can be no assurance that the Company would be successful in such development or that any such licenses would be available to the Company. In the absence of such a license, the Company could be enjoined from future sales of the infringing product or 19 21 products. In fiscal years 1992 and 1993, the Company incurred substantial legal expenses in connection with a patent infringement action relating to the Company's current gas laser subsystems brought by Spectra-Physics Lasers, Inc. ("Spectra-Physics"). While the Spectra-Physics case has since been settled, no assurance can be given that, in the future, the Company will be able to avoid similar actions by competitors or others or that the Company will not be forced to initiate its own actions to protect its proprietary position. LIMITED PROTECTION OF INTELLECTUAL PROPERTY The Company's future success depends in part upon its intellectual property, including trade secrets, know-how and continuing technological innovation. There can be no assurance that the steps taken by the Company to protect its intellectual property will be adequate to prevent misappropriation or that others will not develop competitive technologies or products. The Company currently holds 30 U.S. patents on products or processes and certain corresponding foreign patents and has applications for certain patents currently pending. While three patents have been issued with respect to the Company's Ultrapointe Systems, no assurance can be given that competitors will not successfully challenge the validity of these patents or design products that avoid infringement of the Company's proprietary rights with respect to its Ultrapointe Systems. There can be no assurance that other companies are not investigating or developing other technologies that are similar to the Company's, that any patents will issue from any application pending or filed by the Company or that, if patents do issue, the claims allowed will be sufficiently broad to deter or prohibit others from marketing similar products. In addition, there can be no assurance that any patents issued to the Company will not be challenged, invalidated or circumvented, or that the rights thereunder will provide a competitive advantage to the Company. Further, the laws of certain territories in which the Company's products are or may be developed, manufactured or sold, including Asia, Europe or Latin America, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. DEPENDENCE ON SOLE AND LIMITED SOURCE SUPPLIERS Various components included in the manufacture of the Company's products are currently obtained from single or limited source suppliers. A disruption or loss of supplies from these companies or an increase in price of these components would have a material adverse effect on the Company's results of operations, product quality and customer relationships. For example, the Company obtains all the robotics, workstations and many optical components used in its Ultrapointe Systems from Equipe Technologies, Silicon Graphics, Inc., and Olympus Corporation, respectively. The Company currently utilizes a sole source for the crystal semiconductor chip sets incorporated in the Company's solid state microlaser products and acquires its pump diodes for use in its solid state laser products from Philips, Opto Power Corporation and GEC. The Company also obtains lithium niobate wafers, gallium arsenide wafers, specialized fiber components and certain lasers used in its UTP and ULE products primarily from Crystal Technology, Inc., Fujikura, Ltd., Philips Key Modules, and Sumitomo, respectively. The Company does not have a long-term or volume purchase agreements with any of these suppliers, and no assurance can be given that these components will be available in the quantities required by the Company, if at all. Further, UTP depends on relatively specialized components and it cannot be assured that its respective suppliers will be able to continue to meet UTP's requirements. FUTURE CAPITAL REQUIREMENTS The Company is devoting substantial resources for new facilities and equipment for Uniphase Laser Enterprise and to the development of new products for the solid state laser, semiconductor capital equipment, CATV and telecommunications markets. Although the Company believes existing cash balances, cash flow from operations and available lines of credit, will be sufficient to meet its capital requirements at least through the end of fiscal 1998, the Company may be required to seek additional equity or debt financing to compete effectively in these markets. The timing and amount of such capital requirements cannot be precisely determined at this time and will depend on several factors, including the Company's acquisitions and the demand for the Company's products and products under development. There can be no assurance that such additional financing will be available when needed, or, if available, will be on terms satisfactory to the Company. 20 22 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 the Company's operating results, announcements of technological innovations or new products by the Company or its competitors, governmental regulatory action, developments with respect to patents or proprietary rights, general market conditions and other factors. Further, the Company's net revenues or operating results 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. RISKS ASSOCIATED WITH INTERNATIONAL SALES International sales accounted for approximately 30.0%, 24.5% and 28.9% of the Company's net revenues in fiscal years 1997, 1996 and 1995, respectively, and the Company expects that international sales will continue to account for a significant portion of the Company's net revenues. The Company may continue to expand its operations outside of the United States and to enter additional international markets, both of which will require significant management attention and financial resources. International sales are subject to inherent risks, including unexpected changes in regulatory requirements, tariffs and other trade barriers, political and economic instability in foreign markets, difficulties in staffing and management and integration of foreign operations, longer payment cycles, greater difficulty in accounts receivable collection, currency fluctuations and potentially adverse tax consequences. Since substantially all of the Company's foreign sales are denominated in U.S. dollars, the Company's products may also become less price competitive in countries in which local currencies decline in value relative to the U.S. dollar. The Company's business and operating results may also be materially and adversely affected by lower sales levels which typically occur during the summer months in Europe and certain other overseas markets. Furthermore, the sales of many of the Company's OEM customers are dependent on international sales and, consequently, this further exposes the Company to the risks associated with such international sales. ISSUANCE OF PREFERRED STOCK; POTENTIAL ANTI-TAKEOVER EFFECTS OF DELAWARE LAW The Board of Directors has the authority to issue up to 1,000,000 shares of undesignated Preferred Stock and to determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly unissued shares of undesignated Preferred Stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by the Company's shareholders. The Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to those of the holders of Common Stock. The issuance of Preferred Stock under certain circumstances could have the effect of delaying, deferring or preventing a change in control of the Company. The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law prohibiting publicly-held Delaware corporations from engaging in business combinations with certain stockholders for a specified period of time without the approval of substantially all of its outstanding voting stock. Such provisions could delay or impede the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving the Company, even if such events could be beneficial, in the short term, to the interests of the stockholders. In addition, such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. The Company's Certificate of Incorporation and Bylaws contain provisions relating to the limitations of liability and indemnification of its directors and officers, dividing its Board of Directors into three classes of directors serving three-year terms and providing that its stockholders can take action only at a duly called annual or special meeting of stockholders. These provisions also may have the effect of deterring hostile takeovers or delaying changes in control or management of the Company. LEGAL PROCEEDINGS On May 19, 1997, Tacan Corporation ("Tacan") filed a lawsuit in the U.S. District Court for the Southern District of California (the "Southern California Action") against Uniphase Telecommunications 21 23 Products Inc. ("UTP") a subsidiary of the Company. The Complaint alleges claims of breach of contract, breach of implied and express warranties, negligent misrepresentation, conversion and negligent interference with perspective economic advantage. The claims arise out of sales to Tacan of products made by UTP that Tacan claims were defective and did not meet contract specifications, and as a result caused Tacan to suffer damages in the form of lost earnings and damage to its reputation and goodwill. The damages claimed are unspecified, but Tacan alleges that they are expected to exceed $1.6 million. Tacan also seeks punitive damages for UTP's alleged conversion of equipment ordered and built for Tacan but which UTP allegedly has refused to ship to Tacan. UTP has filed a motion, scheduled for hearing on November 3, 1997, to dismiss, or in the alternative, stay the Southern California action on the ground that there is a prior action pending between the parties regarding the same dispute. That prior action was filed by UTP on November 6, 1996 in the U.S. District Court for the District of Connecticut (the "Connecticut Action"). In the Connecticut Action, UTP alleges claims against Tacan for breach of contract, breach of the covenant of good faith and fair dealing, statutory theft, unjust enrichment and unfair competition. UTP seeks to recover in excess of $695,000 for amounts that Tacan refused to pay for equipment ordered and/or received by Tacan from UTP. UTP also seeks punitive damages and treble damages pursuant to Connecticut law. Tacan made a motion to dismiss the Connecticut Action for lack of personal jurisdiction over Tacan and for improper venue. On August 11, 1997, Tacan's motion to dismiss was denied and the Connecticut Action will therefore proceed. On September 19, 1997, Tacan responded to UTP's complaint in the Connecticut Action by denying liability, raising affirmative defenses, and asserting counterclaims against UTP. Tacan's counterclaims in the Connecticut Action largely duplicate the claims alleged by Tacan in the Southern California Action. In addition, however, Tacan has alleged a claim for unfair trade practices under Connecticut law. In its counterclaims, Tacan seeks damages in amounts to be proven at trial but allegedly exceeding $11.6 million. Tacan also seeks punitive damages under the Connecticut Unfair Trade Practice Act. No discovery has been taken in the Southern California action and no trial date has been set. Preliminary written discovery has been taken by UTP in the Connecticut action but no trial has been set. The Company believes the foregoing litigation with Tacan will not have a material negative impact on the Company's financial condition or results of operations. However, given the inherent uncertainty of litigation and the early stage of discovery, there can be no assurance that the ultimate outcome in the litigation will be in the Company's favor, or that the diversion of management's attention, and any costs associated with the lawsuit, will not have a material adverse effect on the Company's financial condition or results of operations. ITEM 2. PROPERTIES The Company owns two properties in San Jose, California, totaling 109,000 square feet, which included land, buildings and improvements. The Company's principal sales, marketing, technical support, administration, and research and development operations as well as manufacturing operations for the argon and solid state lasers and Ultrapointe products occupy these facilities. The Company is currently leasing unused space to a tenant. The Company's manufacturing facilities for its He-Ne laser products occupy a 20,000 square foot building in Manteca, California. The building is leased through September 1998. The Company's facilities for its telecommunications equipment products occupy two leased buildings of 33,000 and 20,000 square feet in Bloomfield, Connecticut, where its modulator products are manufactured and a 18,000 square foot leased building in Chalfont, Pennsylvania where its transmitter products are manufactured. UFP products are manufactured at the Company's 7,000 square foot facility in Witney, United Kingdom and its engineering efforts are performed at a 5,000 square foot facility in Batavia, Illinois. Leases for the Bloomfield, Chalfont, Witney and Batavia facilities expire in July 2002 (with a lease extension available through 2007), February 2001, December 2013, and July 1999, respectively. As a part of the acquisition of ULE, the Company leased certain clean rooms, laboratories, and office space totaling 12,000 square feet at the IBM Research Facility in Zurich, Switzerland, from IBM. ULE utilizes these facilities to manufacture 980 nm lasers. As this lease with IBM expires in 1999, the Company has leased a 60,000 square foot building expiring in 2007 in Binz, Switzerland for the purposes of relocating the ULE operations. The Company also maintains sales and service offices in both the United Kingdom and Germany to support its European operations. 22 24 ITEM 3. LEGAL PROCEEDINGS On May 19, 1997, Tacan Corporation ("Tacan") filed a lawsuit in the U.S. District Court for the Southern District of California (the "Southern California Action") against Uniphase Telecommunications Products Inc. ("UTP") a subsidiary of the Company. The Complaint alleges claims of breach of contract, breach of implied and express warranties, negligent misrepresentation, conversion and negligent interference with perspective economic advantage. The Company believes the Southern California Action will not have a material negative impact on the Company's financial condition or results of operations. However, given the inherent uncertainty of litigation and the early stage of discovery, there can be no assurance that the ultimate outcome in the Southern California Action will be in the Company's favor, or that the diversion of management's attention, and any costs associated with the lawsuit, will not have a material adverse effect on the Company's financial condition or results of operations. Several former employees have commenced wrongful termination actions against the Company. The Company believes these claims are without merit and is vigorously defending them. Even if these claims are adjudicated in favor of the plaintiffs, the Company does not believe that the ultimate resolution of these matters will have material adverse impact on the Company or its operations. In the ordinary course of business, various lawsuits and claims are filed against the Company. While the outcome of these matters is currently not determinable, management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this Item is included on the inside back cover and on page 42 of the Company's 1997 Annual Report to Stockholders and is incorporated herein by reference. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 2 of Notes to Consolidated Financial Statements contained in Item 8. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is included in the Financial Highlights for the five years ended June 30, 1997, which appears on page 1 of the Company's 1997 Annual Report to Stockholders and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is included in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," which appears on pages 15 to 21 of the Company's 1997 Annual Report to Stockholders and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is included on pages 22 to 41 of the Company's 1997 Annual Report to Stockholders and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 23 25 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER OFFICERS OF THE REGISTRANT The information required by this Item is included in the Proposal One: Elections of Directors, Directors and Executive Officers, and Section 16(a) Beneficial Ownership Reporting Compliance sections of the Company's Proxy Statement to be filed in connection with the Company's 1997 Annual Meeting of Stockholders and is incorporated hereby by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is included in the Executive Compensation and Related Information sections of the Company's Proxy Statement to be filed in connection with the Company's 1997 Annual Meeting of Stockholders and is incorporated hereby by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is included in the Security Ownership of Certain Beneficial Owners and Management section of the Company's Proxy Statement to be filed in connection with the Company's 1997 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is included in the Compensation Committee Interlocks and Insider Participation and Certain Transactions sections of the Company's Proxy Statement to be filed in connection with the Company's 1997 Annual Meeting of Stockholders and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS The financial statements listed in the accompanying index to financial statements and financial statement schedules are filed or incorporated by reference as part of this annual report. (a)(2) FINANCIAL STATEMENT SCHEDULES The financial statements listed in the accompanying index to financial statements and financial statement schedules are filed or incorporated by reference as part of this annual report. (a)(3) EXHIBITS The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as a part of this annual report. (b) REPORTS ON FORM 8-K The Company filed reports on form 8-K/A Amendment 1 and Amendment 2 on May 23, 1997 and June 10, 1997, respectively, reporting the purchase of ULE and including the audited financial statements of Laser Enterprise, a division of International Business Machines in accordance with Rule 3.05 of Regulation S-X and the pro forma financial information required by Article 11 of Regulation S-X. 24 26 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
REFERENCE PAGE ------------------------------------ 1997 ANNUAL FORM 10-K REPORT TO STOCKHOLDERS --------- ---------------------- Consolidated Statements of Operations -- Years ended June 30, 1997, 1996 and 1995......................................... -- 22 Consolidated Balance Sheets -- June 30, 1997 and 1996......... -- 23 Consolidated Statements of Stockholders' Equity -- Years ended June 30, 1997, 1996 and 1995................................ -- 24 Consolidated Statements of Cash Flows -- Years ended June 30, 1997, 1996 and 1995......................................... -- 25 Notes to Consolidated Financial Statements.................... -- 25 Report of Ernst & Young LLP, Independent Auditors............. -- 26-40 Schedule II -- Valuation and Qualifying Accounts -- June 30, 1997, 1996 and 1995......................................... 26 --
All other financial statement schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Company's consolidated financial statements set forth in Item 8 of this Form 10-K and the notes thereto. 25 27 UNIPHASE CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS ------------------------ BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COST AND OTHER DEDUCTION END OF DESCRIPTIONS OF PERIOD EXPENSES ACCOUNTS(2) (1) PERIOD - -------------------------------------------- ---------- ---------- ----------- --------- ---------- (IN THOUSANDS) Year ended June 30, 1997 Allowance for doubtful accounts........... $285 $582 $ 1,083 $73 $1,877 Year ended June 30, 1996 Allowance for doubtful accounts........... $164 $139 $ -- $18 $ 285 Year ended June 30, 1995 Allowance for doubtful accounts........... $100 $ 59 $ -- $ 5 $ 164
- --------------- (1) Charges for uncollectible accounts, net of recoveries. (2) Allowance assumed through the acquisition of ULE. 26 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: September 24, 1997 UNIPHASE CORPORATION By: /s/ KEVIN N. KALKHOVEN ------------------------------------ Kevin N. Kalkhoven Chairman and Chief Executive KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kevin N. Kalkhoven and Danny E. Pettit, and each of them, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ----------------------------------------------- ------------------------- ------------------- /s/ KEVIN N. KALKHOVEN Chairman and Chief September 24, 1997 - ----------------------------------------------- Executive Officer Kevin N. Kalkhoven (Principal Executive Officer) /s/ DANNY E. PETTIT Vice President, Finance, September 24, 1997 - ----------------------------------------------- Chief Financial Officer Danny E. Pettit and Secretary (Principal Financial and Accounting Officer) /s/ WILLIAM B. BRIDGES Director September 24, 1997 - ----------------------------------------------- William B. Bridges /s/ ROBERT C. FINK Director September 24, 1997 - ----------------------------------------------- Robert C. Fink /s/ CATHERINE P. LEGO Director September 24, 1997 - ----------------------------------------------- Catherine P. Lego Director - ----------------------------------------------- Stephen C. Johnson /s/ ANTHONY R. MULLER Director September 24, 1997 - ----------------------------------------------- Anthony R. Muller Director - ----------------------------------------------- Wilson Sibbett, Ph.D. Director - ----------------------------------------------- Casimir S. Skrzypczak
27 29 UNIPHASE CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1997
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------------- ---------------------------------------------------------------------------- 3(i)(b)(2) Amended and Restated Certificate of Incorporation. 3(ii)(c)(7) Bylaws of the Registrant, as amended. 10.1(2) Superseding Patent License Agreement, dated June 21, 1989, between Patlex 10.2(2) Corporation and the Registrant. Agreement, dated December 2, 1991, between Crosfield Electronics Limited and the Registrant. 10.3(2) License Agreement, dated December 18, 1991, between The Regents of University of California and the Registrant. 10.4(2) License Agreement, dated August 2, 1993, between Research Corporation Technologies, Inc., and the Registrant. 10.5(3) 1984 Amended and Restated Stock Plan. 10.6(3) 1993 Flexible Stock Incentive Plan. 10.7(3) 1993 Amended and Restated Employee Stock Purchase Plan. 10.8(2) Patent License Agreement, dated October 29, 1993, by and between the Registrant and Molecular Dynamics, Inc. 10.9(4) License Agreement, May 9, 1994, between I.E. Optomech Ltd. and the Registrant. 10.10(5) Loan and Security Agreement, dated January 28, 1997 between Bank of the West and the Registrant. 10.11(6) Distributor Agreement, dated October 1, 1994, between Innotech Corporation and the Registrant. 10.12(6) Joint Venture Agreement, dated July 24, 1995, between Daniel Guillot and the Registrant. 10.13(6) Amendment, dated July 14, 1995, to Lease, dated November 6, 1984, between Alexander/Dorothy Scheflo and the Registrant. 10.14(6) Laser Technology Sublicense Agreement, dated October 13, 1994, between The University Court of The University of St. Andrews through I.E. Optomech and theRegistrant. 10.15(6) Nonexclusive Sublicense Agreement, dated July 14, 1995, between Coherent, Inc. and the Registrant. 10.16(6) Sublicense Agreement, dated May 26, 1995, between Stanford University and the Registrant. 10.17(6) License Agreement, dated June 8, 1995, between ISOA, Inc. and the Registrant. 10.18(6) Research and Development Contract, dated January 18, 1995, between the National Institute of Standards and Technology to the Registrant. 10.19(8) Purchase and Sale Agreement between Registrant and Tasman-Sterling Associates, a California general partnership, dated January 30, 1996. 10.20(9) Form of Stock Purchase Agreement between Registrant, Fiberoptic Alignment Solutions, Inc., an Illinois corporation ("FAS"), Uniphase Telecommunications Products, Inc., a Delaware corporation, and the shareholders of FAS named therein, and Amendment No. 1 thereto datedas of May 31, 1996.
28 30
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------------- ---------------------------------------------------------------------------- 10.21(10) Form of Agreement between Registrant and GCA Fibreoptics Limited for the Sale and Purchase of the entire issued shares capital of GCA Fibreoptics Limited as of May 24, 1996. 10.22(7) Joint Venture agreement, dated July 24, 1995, between Daniel Guillot and the Registrant, as amended October 6, 1995. 10.23(7) OEM Agreement, dated November 20, 1995, between the Registrant and Tencor Instruments. 10.24(7) License Agreement, dated November 20, 1995, between the Registrant and Tencor Instruments. 10.25(11) Amended and Restated 1993 Flexible Stock Incentive Plan. 10.26(12) OEM Agreement dated July 24, 1997 by and between KLA-Tencor Corporation and the Registrant. 10.28(1) Purchase Agreement among Uniphase Corporation, International Business Machines Corporation, and Uniphase Laser Enterprise AG 10.29(1) Technology License Agreement 10.30(1) Patent License Agreement 10.31(1) The Agreement for Exchange of Confidential Information 13 Portions of the 1997 Annual Report to Stockholders expressly incorporated by reference herein. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, independent auditors. 24.1 Powers of Attorney. (See Page 26) 27 Financial Data Schedule
- --------------- (1) Incorporated by reference to the exhibit to the Company's current Report on Form 8-K filed March 25, 1997. (2) Incorporated by reference to the exhibits filed with the Registrant's registration statement on Form S-1, file number 33-68790, which was declared effective November 17, 1993. (3) Incorporated by reference to the exhibits filed with the Registrant's registration statement on Form S-8, file number 33-74716 filed with the Securities and Exchange Commission on February 1, 1994. (4) Incorporated by reference to the exhibits filed with the Registrant's annual report on Form 10-K for the period ended June 30, 1994. (5) Incorporated by reference to the exhibits filed with the Registrant's quarterly report on Form 10-Q for the period ended December 31, 1996 as filed on February 14, 1997. (6) Incorporated by reference to the exhibit filed with the Registrant's annual report on form 10-K for the period ended June 30, 1995. (7) Incorporated by reference to exhibits filed with the Registrant's quarterly report on Form 10-Q for the period ended December 31, 1995. (8) Incorporated by reference to the exhibit to the Company's current Report on Form 8-K filed February 22, 1996. (9) Incorporated by reference to the exhibit to the Company's form S-3/A filed June 7, 1996. (10) Incorporated by reference to the exhibit to the Company's Post-Effective Amendment No. 1 to Registration Statement on Form S-3 filed June 20, 1996. 29 31 (11) Incorporated by reference to exhibits filed with the Registrant's registration statement on form S-8, file number 33-31722 filed with the Securities and Exchange Commission on February 27, 1996. (12) Incorporated by reference to exhibits filed with Registrant's registration statement on form S-3A, Amendment No. 2, file number 333-27931 filed with the Securities and Exchange Commission on August 12, 1997. 30 EX-13 2 PORTIONS OF THE 1997 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13 FINANCIAL HIGHLIGHTS
Years Ended June 30, 1997 1996 1995 1994 1993 (in thousands, except per share amounts) --------- --------- --------- --------- --------- Consolidated Statement of Operations Data: Net sales $ 106,966 $ 69,073 $ 42,282 $ 32,922 $ 27,314 Income (loss) from operations(1,2,3,4) $ (16,852) $ 5,429 $ 581 $ 3,247 $ (1,326) Net income (loss)(1,2,3,4) $ (18,854) $ 2,792 $ 735 $ 2,231 $ (798) Net income (loss) per share(1,2,3,4) $ (1.14) $ 0.21 $ 0.07 $ 0.27 $ (0.14) Shares used in per share calculation 16,482 13,577 10,082 8,274 5,510 --------- --------- --------- --------- --------- Consolidated Balance Sheet Data: Working capital $ 108,388 $ 130,991 $ 17,316 $ 18,943 $ 5,002 Total assets 177,579 173,824 31,910 26,214 11,785 Long-term obligations 2,475 7,036 221 -- 132 Total stockholders' equity 149,777 153,205 24,808 21,331 6,731
1 During fiscal year 1993, the Company accrued litigation costs of $2.4 million, pertaining primarily to a patent infringement action brought against the Company, and to a lesser extent, for actions against the Company by certain former employees. The patent infringement action was settled in fiscal 1993. Due to the settlement of one of the former employee actions in fiscal 1994 at a cost less than anticipated and the re-evaluation of the potential liability with respect to the remaining outstanding lawsuit, the Company reversed $355,000 of accrued legal expense in fiscal 1994. In fiscal 1995, such remaining lawsuit was dismissed. 2 During fiscal 1995, the Company incurred $5.4 million of charges, primarily for acquired in-process research and development and, to a lesser extent, for the loss on the sale of the Company's diode laser product line. The acquired in-process research and development resulted primarily from the cash purchase of UTP from United Technologies Corporation for a total purchase price, including acquisition expenses, of $8.7 million. Such charges reduced net income per share for fiscal 1995 by $0.33. 3 During fiscal 1996, the Company incurred charges totaling $4.5 million for acquired in-process research and development related to the acquisition of UTP Fibreoptics. The Company also incurred an additional $3.0 million of compensation expense in connection with the cancellation of certain options of UTP and granted replacement options to purchase Uniphase Common Stock to UTP employees in order to operate UTP Fibreoptics as a division. These charges resulted in a reduction of net income per share for fiscal 1996 by $0.46. 4 During fiscal 1997, the Company incurred a charge of $33.3 million for acquired in-process research and development related to the acquisition of ULE. This charge reduced net income per share in fiscal 1997 by $2.02. [Graph of Net Sales Numbers Presented Above] one 2 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS MANAGEMENT'S DISCUSSION AND ANALYSIS FIFTEEN CONSOLIDATED STATEMENTS OF OPERATIONS TWENTY-TWO CONSOLIDATED BALANCE SHEETS TWENTY-THREE CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY TWENTY-FOUR CONSOLIDATED STATEMENTS OF CASH FLOWS TWENTY-FIVE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TWENTY-SIX REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS FORTY-ONE 3 MANAGEMENT'S DISCUSSION and ANALYSIS of Financial Condition and Results of Operations INTRODUCTION Uniphase Corporation and its subsidiaries (the "Company" or "Uniphase") designs, develops, manufactures and markets fiber optic telecommunications equipment products, laser subsystems and laser-based semiconductor wafer defect examination and analysis equipment. The Company's laser division designs, develops, manufactures and markets laser subsystems for a broad range of OEM applications which include biotechnology, industrial process control and measurement, graphics and printing, and semiconductor equipment. The Company's Ultrapointe subsidiary designs, develops, manufactures and markets advanced laser-based systems for semiconductor wafer defect examination and analysis. The Company entered the telecommunications market in May 1995, which includes the products produced by Uniphase Telecommunications Products ("UTP"), UTP Fibreoptics ("UFP"), and Uniphase Laser Enterprise ("ULE"). UTP designs, develops, manufactures and markets high-speed external modulators and transmitters for fiber optic networks in the cable television ("CATV") and long-haul telecommunications industries. UFP custom packages laser diodes, LEDs and photodetectors for OEMs for use in fiber optic networks for local telecommunications and data communications. In March 1997, the Company acquired the net assets of ULE from the Zurich research laboratory of International Business Machines ("IBM"). The total purchase price of $45.9 million included cash consideration of $45 million and transaction costs of $900,000. ULE develops and manufactures semiconductor diode laser chips used in the long-haul telecommunication industry. RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain financial data as a percentage of net sales:
Fiscal Years Ended June 30, 1997 1996 1995 ------ ------ ------ Net sales 100.0% 100.0% 100.0% Cost of sales 53.7 52.5 57.0 ------ ------ ------ Gross profit 46.3 47.5 43.0 Operating expenses: Research and development 8.7 8.4 8.8 Royalty and license 1.3 1.9 2.8 Selling, general and administrative 20.9 18.4 17.4 Infrequent or unusual charges: Acquired in-process research and development 31.1 6.5 10.5 Compensation expense -- 4.3 -- Loss on sale of product line -- -- 2.1 ------ ------ ------ Total operating expenses 62.0 39.5 41.6 ------ ------ ------ Income (loss) from operations (15.7) 8.0 1.4 Interest and other income, net 3.2 1.9 1.3 ------ ------ ------ Income (loss) before income taxes (12.5) 9.9 2.7 Income tax expense 5.1 5.9 1.0 ------ ------ ------ Net income (loss) (17.6)% 4.0% 1.7% ====== ====== ======
YEARS ENDED JUNE 30, 1997, 1996 AND 1995 Net Sales. Net sales of $107.0 million for fiscal 1997 represented an increase of $37.9 million or 54.9% over fiscal 1996 net sales of $69.1 million. The increase is primarily due to the increase in telecommunications sales of $36.8 million, of which $14.4 million resulted from a full year's revenue from UFP and the revenues from ULE subsequent to March 10, 1997. UNIPHASE CORPORATION FIFTEEN 4 MANAGEMENT'S DISCUSSION and ANALYSIS of Financial Condition and Results of Operations (cont.) The sale of the Company's laser subsystems increased by $3.3 million but were offset by a decrease of $2.2 million in sales of Ultrapointe laser imaging system. A downturn in the semiconductor industry during fiscal 1997 led certain of Ultrapointe's customers to delay or cancel purchases of the Company's Ultrapointe Systems. International revenues, which are defined by the Company as sales outside the United States of America, accounted for $32.1 million, $16.9 million, and $12.2 million or 30.0%, 24.5%, and 28.9%, of total revenues for the years ended June 30, 1997, 1996, and 1995, respectively. The increase of $15.2 million in international sales from fiscal 1996 to fiscal 1997 is due primarily to a full year of UFP sales of $5.6 million, the 1997 acquisition of ULE in March 1997 contributed $3.4 million and $4.3 million from the international expansion in the telecommunications market. And to a lesser extent, the increase is also due to the continued penetration of the Ultrapointe system in the Asian market place. The fiscal 1996 increase over fiscal 1995 of $4.7 million is primarily due to the increased demand for the Company's laser subsystems, and to a lesser extent, the increasing sales from the Ultrapointe System and sales revenues from UTP, which was acquired in May 1995. Net sales for fiscal 1996 were $69.1 million, which represented a $26.8 million or 63.4% increase over net sales of $42.3 million in fiscal 1995. The increase is primarily due to a full year's revenues from UTP, which accounted for a $13.9 million increase, and increased sales of the Company's Ultrapointe Systems which accounted for $10.2 million of the increase in net sales. Net sales of laser subsystems for fiscal 1996 increased $2.7 million due primarily to an increase in sales of the Company's argon gas lasers, principally for use in biotechnology and semiconductor applications, and to a lesser extent solid state lasers. Together, these sales offset the decline in the sales of the Company's mature Helium-Neon ("He-Ne") product line principally in the bar code scanning market. Gross Profit. Gross profit of $49.6 million for fiscal 1997 represented an increase of $16.8 million or 51.2% over fiscal 1996 gross profit of $32.8 million. The increase in gross profit from telecommunication product sales of 213.4% is partially offset by a decline in net sales of relatively high margin Ultrapointe Systems. Fiscal 1997 amounts include a full year's contribution from UFP and approximately four months from ULE. The Company experienced a decrease in gross margins to 46.3% in fiscal 1997 from 47.5% in fiscal 1996. Inventory charges resulting from the Company's change in strategic focus with respect to diode based laser applications and from the modification of certain customer and product strategies incorporating lower powered amplifiers at UTP contributed to the decline in gross profit and gross margins. The Company's laser subsystems margins remained relatively consistent with the prior fiscal year. There can be no assurance that the Company will be able to sustain its gross margin at current levels. The Company expects that there will continue to be periodic fluctuations in its gross margin resulting from changes in its sales and product mix, competitive pricing pressures, manufacturing yields, inefficiencies associated with new product introductions and a variety of other factors. Gross profit in fiscal 1996 increased to $32.8 million or 47.5% of net sales compared with $18.2 million or 43.0% of net sales in fiscal 1995. Gross profit increased $14.6 million or 80.4% in fiscal 1996 primarily due to the addition of the Company's UTP product line and the increased sales volumes of Ultrapointe Systems, both of which experienced higher gross margins than the Company's laser subsystems. In addition, the Ultrapointe Systems had a favorable impact on gross margin through improved economies of scale resulting from higher production and purchasing volumes of components. Research and Development Expense. Research and development expense of $9.3 million or 8.7% of net sales represented an increase of $3.5 million or 59.8% increase over fiscal 1996 expense of $5.8 million or 8.4% of net sales. The increase is primarily due to the continuing efforts to develop the Company's telecommunication products and, to a lesser extent, the continued development and modifications of the Ultrapointe Laser Imaging System and automatic defect classification ("ADC") software. The Company is committed to continuing its significant research and development expenditures and expects that the absolute dollar UNIPHASE CORPORATION SIXTEEN 5 MANAGEMENT'S DISCUSSION and ANALYSIS of Financial Condition and Results of Operations (cont.) amount of research and development expense will increase as it invests in developing new products and in expanding and enhancing its existing product lines, although such expenses may vary as a percentage of net sales from year to year. Research and development expense in fiscal 1996 was $5.8 million or 8.4% of net sales which represented a $2.1 million or 57.1% increase over fiscal 1995. The increase in research and development expense was primarily due to a full year of expenses from UTP which included expenditures associated with the development of transmitters, and to a lesser extent, to an increase in Ultrapointe expenditures in support of accelerated ADC software development. For the year ended June 30, 1996, laser subsystems experienced a decrease in expenditures primarily due to the sale of the laser division's diode laser product line in June 1995, the redeployment of certain engineering support to manufacturing and increased reimbursements on expenses from a certain cooperative agreement with the federal government. This agreement is scheduled to end on December 31, 1997. Royalty and License Expense. Royalty and license expense of $1.4 million represents an increase of 3.2% over fiscal 1996 expense of $1.3 million. The royalty and license expense has decreased as a percentage of sales to 1.3% compared to 1.9% in fiscal 1996. The decrease as a percentage of sales is due primarily to the increased sales of royalty-free telecommunication products. For fiscal 1996, royalty and license expense increased $165,000 to $1.3 million from $1.2 million in fiscal 1995 and decreased as a percentage of sales to 1.9% from 2.8% in fiscal 1995. The decrease as a percentage of net sales was due to the increasing proportion of revenues that the Company derived from Ultrapointe Systems, which bear a lower royalty rate than laser subsystems, and from royalty-free telecommunications products. The Company continues to develop its solid state laser, semiconductor equipment and telecommunication technologies. There are numerous patents on these technologies that are held by others, including academic institutions and competitors of the Company. Such patents could inhibit the Company's ability to develop, manufacture and sell products in this area. If there is a conflict between a competitor's patents or products and those of the Company, it could be very costly for the Company to enforce its rights in an infringement action or defend such an action brought by another party. In addition, the Company may need to obtain license rights to certain patents and may be required to make substantial payments, including continuing royalties, in exchange for such license rights. There can be no assurance that licenses to third party technology, if needed, will be available, or if available, can be obtained on commercially reasonable terms. Selling, General and Administrative Expense. Selling, general and administrative expense of $22.4 million or 20.9% of net sales represents an increase of $9.7 million or 76.4% over fiscal 1996 expense of $12.7 million or 18.4% of net sales. The increase is due (in part) to the additional expenses of ULE, acquired in March 1997, and a full year of expenses for UFP which was acquired in May 1996. As a result of the ULE acquisition and a change in strategic focus for diode-based laser applications, the Company recorded charges of $3.2 million to consolidate its European Laser research to Switzerland, close its Uniphase Lasers, Ltd. facility in Rugby, England, consolidate laser packaging operations and to recognize the modification of certain customer and product strategies at UTP incorporating lower powered amplifiers. The Company also increased its allowance for doubtful accounts and certain other reserves unrelated to the ULE acquisition by $1.3 million during the third quarter, primarily related to its telecommunications operations. The Company expects the dollar amount of its selling, general and administrative expenditures to increase in the future, although such expenses may vary as a percentage of net sales from year to year. In fiscal 1996, selling, general and administrative expense was $12.7 million or 18.4% of net sales which represented a $5.3 million or 72.7% increase over selling, general and administrative expense of $7.4 million or 17.4% of net sales in fiscal 1995. The increase was attributable to the addition of UTP expenditures (which included increased expenditures to support the transmitter product line and the amortization of acquired intangible assets), sales commissions on increased sales volume of Ultrapointe Systems, increased staffing levels and increased selling expenses to support the Company's product lines. UNIPHASE CORPORATION SEVENTEEN 6 MANAGEMENT'S DISCUSSION and ANALYSIS of Financial Condition and Results of Operations (cont.) Infrequent or Unusual Charges. In fiscal 1997, the Company incurred a charge for in-process research and development of $33.3 million or 31.1% of net sales, related to the acquisition of the net assets of ULE from IBM on March 10, 1997. See Note 9 of Notes to Consolidated Financial Statements. In fiscal 1996, the Company incurred infrequent or unusual charges which amounted to $7.5 million or 10.8% of net sales. These charges consisted of acquired in-process research and development expense and compensation expense. The acquired in-process research and development expense was $4.5 million or 6.5% of net sales and was attributable to the Company's purchase of UFP from its shareholders in June 1996. The compensation expense was $3.0 million or 4.3% of net sales and resulted from the cancellation of certain UTP options and granting of replacement options to purchase Uniphase Common Stock to UTP employees. See Note 9 of Notes to Consolidated Financial Statements. In fiscal 1995, the Company incurred infrequent or unusual charges which amounted to $5.4 million or 12.7% of net sales. These charges consisted of acquired in-process research and development expense and loss on sale of a product line. The acquired in-process research and development expense in fiscal 1995 of $4.5 million or 10.5% of net sales resulted primarily from the Company's purchase of UTP from United Technologies Corporation in May 1995. In June 1995, the Company incurred a loss of $891,000 on the sale of its diode laser product line. As part of the sale agreement, the Company obtained a limited non-exclusive sublicense to a solid state technology patent at a reduced royalty rate. The diode laser product line was sold primarily due to the commercial availability of low-cost diode laser component parts from third party manufacturers and the determination that these external sources will provide sufficient supply of the components for the foreseeable future. See Note 10 of Notes to Consolidated Financial Statements. Interest and Other Income, Net. Interest and other income, net of $3.4 million for fiscal 1997 represented an increase of $2.0 million over fiscal 1996 income of $1.4 million. Fiscal 1996 interest and other income, net increased $849,000 over fiscal 1995 of $550,000. The fiscal 1997 and 1996 increases are due primarily to the increase in interest income earned on the net proceeds of the two public follow-on offerings of common shares in June 1996 and October 1995 and the private placement of common stock with KLA-Tencor (formerly known as Tencor Corporation prior to its merger with KLA) in November 1995. Income Tax Expense. The Company recorded tax provisions of $5,432,000 and $4,036,000 for fiscal 1997 and fiscal 1996, respectively, which were primarily attributable to non-deductible acquired in-process research and development resulting from the acquisition of ULE assets in fiscal 1997 and the UTP Fibreoptics stock purchase in fiscal 1996. Exclusive of these items, the Company's effective tax rate in fiscal 1997 and 1996 would have been approximately 35%. The Company's effective tax rate was 35% in fiscal 1995. The Company has established a valuation allowance covering a portion of the gross deferred tax assets related to its Swiss subsidiary and the in-process technology that was expensed during the current year. The amount of the valuation allowance is based on management's expectations of future taxable income. The company believes that since the other net deferred tax assets are more likely than not to be realized from the Company's ongoing operations, no additional valuation allowance is deemed necessary. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997, the Company's combined balance of cash, cash equivalents and short-term investments was $81.2 million. During fiscal 1997, the Company met its liquidity needs primarily through cash generated from operations. Net cash provided by operating activities was $21.5 million in fiscal 1997, compared with $7.8 million and $3.2 million for fiscal years 1996 and 1995, respectively. Cash provided by operating activities during fiscal 1997 is primarily the result of net losses of $18.9 million reduced by noncash charges during the year for depreciation and amortization of $4.7 million, acquired in-process research and development costs of UNIPHASE CORPORATION EIGHTEEN 7 MANAGEMENT'S DISCUSSION and ANALYSIS of Financial Condition and Results of Operations (cont.) $33.3 million, amortization of deferred compensation of $900,000 and the write off of certain assets due to the change in strategic focus for laser diode-based applications of $2.0 million. Increases to all other operating assets (including deferred income taxes) totaling $14.5 million were substantially offset by increases in all other operating liabilities of $14.0 million. Cash used in investing activities was $48.7 million in fiscal 1997 compared with $83.5 million and $4.3 million for fiscal years 1996 and 1995, respectively. The acquisition of ULE accounted for $45.9 million of investing activity. The Company incurred capital expenditures of $12.0 million primarily in facilities improvements and the acquisition of manufacturing and other equipment to expand its manufacturing capacities and research and development efforts primarily in its telecommunications product line. These programs were primarily funded through existing capital and the liquidation of short-term investments of $9.3 million during fiscal 1997. The Company expects to continue to expand its worldwide manufacturing capacity, primarily for telecommunication products by investing approximately $30 million in capital expenditure for fiscal 1998. The Company generated $3.9 million from financing activities during fiscal 1997 due primarily to the exercise of stock options and the sale of stock through an employee stock purchase plan. The Company has a $5.0 million revolving line of credit with a bank. Advances under the line of credit bear interest at the bank's prime rate (8.50% at June 30, 1997) and are secured by inventories and accounts receivable. There were no borrowings under the line of credit as of June 30, 1997. 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. The agreement also prohibits the payment of cash dividends and contains certain restrictions on the Company's ability to borrow money or purchase assets or interests in other entities without the prior written consent of the bank. The line of credit expires on January 28, 1999. The interest and notes payable relating to the acquisition of UFP become due on August 31, 1997. The aggregate payments of approximately $6.3 million were made to the note holders. See Note 2 of Notes to Consolidated Financial Statements. In August 1997, the Company circulated a request of its stockholders to increase the number of authorized shares of common stock from 20,000,000 to 50,000,000 shares. Additionally, the Company announced that it is currently negotiating the acquisition of a 49% interest in INDX for approximately $2.0 million. The investment is subject to a number of contingencies including the negotiation of terms of a definitive agreement, satisfactory completion of due diligence and customary closing conditions. Accordingly, there can be no assurance that the acquisition of such interest in INDX will be completed. See Note 14 of Notes to Consolidated Financial Statements. The Company believes that its existing cash balances and investments, together with cash flow from operations and available lines of credit will be sufficient to meet its liquidity and capital spending requirements at least through the end of fiscal year 1998. However, possible investments or acquisitions of complementary businesses, products or technologies may require additional financing prior to such time. There can be no assurance that additional debt or equity financing will be available when required or, if available, can be secured on terms satisfactory to the Company. BUSINESS OUTLOOK The statements contained in this Annual Report that are not purely historical are forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, beliefs, intentions or strategies regarding the future, such as the Company's belief that future demand for data transmission will continue to increase substantially and that the Company's products are positioned to be successful in the industries in which it competes. Actual results could differ from those projected in any forward-looking statements for the reasons detailed in the Company's Annual Report on Form 10-K under the headings of "Description of Business" and "Risk Factors." The fact that some of the risk factors may be the same or similar to the Company's past filings means only that the risks are present in multiple periods. The Company believes that many of the risks detailed here and in the Company's Securities and Exchange Commission filings are part of doing business in the industry in which the Company competes and will likely be present in all periods reported. The fact that certain risks are endemic to the industry does not lessen the significance of the risk. The forward- UNIPHASE CORPORATION NINETEEN 8 MANAGEMENT'S DISCUSSION and ANALYSIS of Financial Condition and Results of Operations (cont.) looking statements are made as of the date of this Annual Report and the Company assumes no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. The Company expects to continue to experience growth through increased levels of operations in its existing telecommunications businesses and the acquisition of ULE in March 1997. The Company is devoting significant resources to develop new solid state lasers for OEM customers and to increase its penetration of the CATV and telecommunications industries. In addition, the Company is now increasing its marketing, customer support and administrative functions in order to support an increased level of operations primarily from sales of its telecommunications equipment products. Finally, the Company intends to either maintain or increase its market share in an otherwise declining market for its gas laser products. No assurance can be given that the Company will be successful in creating this infrastructure or that any increase in the level of such operations will be realized or if realized will justify the increased expense levels associated with these businesses. In March 1997, the Company acquired ULE. As a result of acquiring ULE, the Company has gained access to semiconductor based laser applications for use in telecommunications. The success of the ULE acquisition will be dependent upon the Company's ability to provide ULE 980 nm lasers and future products used in erbium doped fiber amplifiers ("EDFA") and the continued demand for ULE products by major telecommunication equipment manufacturers. In July 1997, the Company entered into an exclusive OEM Agreement ("Agreement") with KLA-Tencor Corporation ("KLA-Tencor," formerly known as KLA Instruments and Tencor Instruments prior to their merger) pursuant to which KLA-Tencor will distribute Ultrapointe Systems through its worldwide distribution channels. This Agreement supersedes any and all prior OEM negotiations, correspondence, understandings and agreements regarding the Company's business relationship with KLA-Tencor. The Company currently expects that KLA-Tencor will account for a majority of Ultrapointe's net sales for the foreseeable future for Laser Imaging Systems used to analyze defects on semiconductor wafers and photomasks during the manufacturing process as well as automatic defect classification software products. The Agreement outlines minimum quantities to be purchased by KLA-Tencor in the year of inception, product specifications, ongoing research and development efforts on the product line, pricing and payment terms. The Agreement is effective through June 30, 2000 and may be extended for up to three (3) additional one-year renewal periods thereafter. On April 30, 1997, Tencor Instruments and KLA Instruments merged and formed KLA-Tencor Corporation. The Company believes that the timing of the receipt of orders and the related product mix under the Agreement will not be consistent with historical orders for Ultrapointe Systems given the size and complexities associated with merging these organizations. Consequently, interim revenue levels and profit margins may be adversely affected. The Company's Ultrapointe Systems and a portion of its laser subsystems businesses depend upon capital expenditures by manufacturers of semiconductor devices, including manufacturers that are opening new or expanding existing fabrication facilities, which, in turn, depend upon the current and anticipated market demand for semiconductor devices and the products utilizing such devices. The semiconductor industry is highly cyclical, and has historically experienced periods of oversupply, resulting in significantly reduced demand for capital equipment. During the first nine months of fiscal 1997, the semiconductor industry has experienced a downturn which has led certain of the Company's customers to delay or cancel purchase of the Company's Ultrapointe Systems. There can be no assurance that the semiconductor industry will not experience further downturns or slowdowns in the future, which may materially and adversely affect the Company's business and operating results. The Company is devoting substantial resources for new facilities and equipment for Uniphase Laser Enterprise and to the development of new products for the solid state laser and telecommunications markets. Although the Company believes existing cash balances, cash flow from operations and available lines of credit will be sufficient to meet its capital requirements through the end of calendar year 1997, the Company may be required to seek additional equity or debt financing to compete effectively in these markets. The timing and amount of such capital requirements cannot be precisely determined at this time and will depend on several factors, UNIPHASE CORPORATION TWENTY 9 MANAGEMENT'S DISCUSSION and ANALYSIS of Financial Condition and Results of Operations (cont.) including the Company's acquisitions and the demand for the Company's products and products under development. There can be no assurance that such additional financing will be available when needed or, if available, will be on terms satisfactory to the Company. The Company has experienced and expects to continue to experience significant fluctuations in its quarterly results. The Company believes that fluctuations in quarterly results may cause the market price of its Common Stock to fluctuate, perhaps substantially. Factors which have had an influence on and may continue to influence the Company's operating results in a particular quarter include the timing of the receipt of orders from major customers, product mix, competitive pricing pressures, the relative proportions of domestic and international sales, costs associated with the acquisition or disposition of businesses, products or technologies, the Company's ability to design, manufacture, and ship products on a cost-effective and timely basis, the delay between incurrence of expenses to further develop marketing and service capabilities and realization of benefits from such improved capabilities, the announcement and introduction of cost-effective new products by the Company and by its competitors, and expenses associated with any intellectual property litigation. In addition, the Company's sales will often reflect orders shipped in the same quarter that they are received. Moreover, customers may cancel or reschedule shipments, and production difficulties could delay shipments. The timing of sales of the Company's Ultrapointe Systems may result in substantial fluctuations in quarterly operating revenues due to the substantially higher per unit price of these products relative to the Company's other products. In addition, the Company sells its telecommunications equipment products to OEMs who typically order in large quantities and therefore the timing of such sales may significantly affect the Company's quarterly results. The timing of such OEM sales can be affected by factors beyond the Company's control, including demand for the OEM's products and manufacturing issues experienced by OEMs. In this regard, the Company has in the past and may continue to experience a temporary rescheduling of orders by OEM telecommunications customers. As a result of the above factors, the Company's results of operations are subject to significant variability from quarter to quarter. There can be no assurance that other acquisitions or dispositions of businesses, products or technologies by the Company in the future will not result in substantial charges or other expenses that may cause fluctuations in the Company's quarterly operating results. The 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 the Company's operating results, announcements of technological innovations or new products by the Company or its competitors, governmental regulatory action, developments with respect to patents or proprietary rights, general market conditions and other factors. Further, the Company's net revenues or operating results 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 Company currently has no commitments with respect to any future acquisitions. The Company, however, frequently evaluates the strategic opportunities available to it and may in the future pursue investments in or acquisitions of additional complementary products, technologies or businesses. Such acquisitions by the Company may result in the diversion of management's attention from the day-to-day operations of the Company's business and may include numerous other risks, including difficulties in the integration of the operations and products, integration and retention of personnel of the acquired companies and certain financial risks. Further acquisitions by the Company may result in dilutive issuances of equity securities, the incurrence of additional debt, reduction of existing cash balances, amortization expenses related to goodwill and other intangible assets and other charges to operations that may materially adversely affect the Company's business, financial condition or operating results. In addition to the factors discussed in the Outlook Section of this Annual Report, other factors which could have a material effect on the Company's actual results include: challenges associated with gallium arsenide manufacturing; customer concentration; intense industry competition; the Company's ability to attract and retain key personnel; conflicting patents and intellectual property rights of third parties; potential infringement claims; limited protection of intellectual property; dependence on sole and limited source suppliers; and risks associated with international sales. UNIPHASE CORPORATION TWENTY-ONE 10 CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1997 1996 1995 (in thousands, except per share data) --------- --------- --------- Net sales $ 106,966 $ 69,073 $ 42,282 Cost of sales 57,411 36,300 24,113 --------- --------- --------- Gross profit 49,555 32,773 18,169 Operating expenses: Research and development 9,312 5,828 3,710 Royalty and license 1,380 1,337 1,172 Selling, general, and administrative 22,401 12,699 7,355 Infrequent or unusual charges: Acquired in-process research and development 33,314 4,480 4,460 Compensation expense -- 3,000 -- Loss on sale of a product line -- -- 891 --------- --------- --------- Total operating expenses 66,407 27,344 17,588 --------- --------- --------- Income (loss) from operations (16,852) 5,429 581 Interest income 3,985 1,570 487 Interest expense (421) (79) (25) Other income (expense), net (134) (92) 88 --------- --------- --------- Income (loss) before income taxes (13,422) 6,828 1,131 Income tax expense 5,432 4,036 396 --------- --------- --------- Net income (loss) $ (18,854) $ 2,792 $ 735 ========= ========= ========= Net income (loss) per share $ (1.14) $ 0.21 $ 0.07 ========= ========= ========= Shares used in per share calculation 16,482 13,577 10,082 ========= ========= =========
See accompanying notes to consolidated financial statements. UNIPHASE CORPORATION TWENTY-TWO 11 CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 1996 (in thousands, except share and per share data) --------- --------- ASSETS Current assets: Cash and cash equivalents $ 29,186 $ 52,463 Short-term investments 52,009 61,279 Accounts receivable, less allowances for doubtful accounts of $1,877 at June 30, 1997 and $285 at June 30, 1996 20,317 16,700 Inventories 18,668 10,641 Refundable income taxes 6,010 -- Deferred income taxes 5,882 2,191 Other current assets 1,643 1,300 --------- --------- Total current assets 133,715 144,574 Property, plant, and equipment, net 31,251 20,305 Long-term deferred income taxes 1,581 -- Intangible assets 10,969 8,894 Other assets 63 51 --------- --------- Total assets $ 177,579 $ 173,824 ========= ========= Liabilities and Stockholders' Equity Current liabilities: Current portion of notes payable $ 6,061 $ -- Notes payable to bank -- 548 Accounts payable 4,781 5,391 Accrued payroll and related expenses 4,528 3,180 Other accrued expenses 9,957 4,464 --------- --------- Total current liabilities 25,327 13,583 Notes payable -- 6,061 Deferred income taxes -- 656 Accrued pension and other employee benefits 2,392 -- Other non-current liabilities 83 319 Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value: 1,000,000 shares authorized, none issued and outstanding -- -- Common stock, $0.001 par value Authorized shares - 20,000,000 Issued and outstanding shares - 16,921,967 at June 30, 1997 and 16,097,855 at June 30, 1996 17 16 Additional paid-in capital 156,881 141,354 Retained earnings (deficit) (7,104) 11,750 Net unrealized gain (loss) on securities available-for-sale 11 (18) Foreign currency translation adjustment (28) 103 --------- --------- Total stockholders' equity 149,777 153,205 --------- --------- Total liabilities and stockholders' equity $ 177,579 $ 173,824 ========= =========
See accompanying notes to consolidated financial statements. UNIPHASE CORPORATION TWENTY-THREE 12 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NET STOCK UNREALIZED FOREIGN ADDITIONAL PURCHASE RETAINED GAIN CURRENCY COMMON STOCK PAID-IN NOTE EARNINGS (LOSS) ON TRANSLATION (in thousands) SHARES AMOUNT CAPITAL RECEIVABLE (DEFICIT) SECURITIES ADJUSTMENT TOTAL -------- --------- --------- --------- --------- ---------- ----------- --------- Balance at June 30, 1994 8,812 $ 8 $ 13,093 $ (18) $ 8,223 $ 11 $ 14 $ 21,331 Exercise of stock options and related tax benefits 704 2 2,658 -- -- -- -- 2,660 Repayment of stock purchase note -- -- -- 18 -- -- -- 18 Net income -- -- -- -- 735 -- -- 735 Net unrealized loss on securities available-for-sale -- -- -- -- -- (11) -- (11) Foreign currency translation adjustment -- -- -- -- -- -- 75 75 ------ --------- --------- --------- --------- --------- --------- --------- Balance at June 30, 1995 9,516 10 15,751 -- 8,958 -- 89 24,808 Exercise of stock options and related tax benefits 626 -- 4,703 -- -- -- -- 4,703 Common stock issued upon public offering, net of issuance costs 5,290 5 105,524 -- -- -- -- 105,529 Common stock issued to KLA- Tencor, net of issuance costs 666 1 12,282 -- -- -- -- 12,283 Uniphase Telecommunications Products stock option compensation -- -- 3,000 -- -- -- -- 3,000 Amortization of deferred compensation -- -- 94 -- -- -- -- 94 Net income -- -- -- -- 2,792 -- -- 2,792 Net unrealized loss on securities available-for-sale -- -- -- -- -- (18) -- (18) Foreign currency translation adjustment -- -- -- -- -- -- 14 14 ------ --------- --------- --------- --------- --------- --------- --------- Balance at June 30, 1996 16,098 16 141,354 -- 11,750 (18) 103 153,205 Exercise of stock options and related tax benefits 824 1 14,656 -- -- -- -- 14,657 Amortization of deferred compensation -- -- 871 -- -- -- -- 871 Net loss -- -- -- -- (18,854) -- -- (18,854) Net unrealized gain on securities available-for-sale -- -- -- -- -- 29 -- 29 Foreign currency translation adjustment -- -- -- -- -- -- (131) (131) ------ --------- --------- --------- --------- --------- --------- --------- Balance at June 30, 1997 16,922 $ 17 $ 156,881 $ -- $ (7,104) $ 11 $ (28) $ 149,777 ====== ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements. UNIPHASE CORPORATION TWENTY-FOUR 13 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997 1996 1995 --------- --------- --------- (in thousands) Operating activities Net income (loss) $ (18,854) $ 2,792 $ 735 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation expense 3,079 1,582 1,013 Amortization expense 1,617 499 123 Acquired in-process research and development 33,314 4,480 4,460 Stock compensation expense 871 3,094 -- Write-off of property, equipment and intangible assets 1,977 -- -- Undistributed earnings of affiliate -- -- (114) Decrease in deferred income taxes, net (1,591) (1,040) (2,188) Loss on sale of product line -- -- 891 Changes in operating assets and liabilities: Accounts receivable 1,883 (6,432) (3,286) Inventories (5,169) (4,087) (1,244) Refundable income taxes (1,450) -- -- Other current assets 721 (90) (391) Accounts payable, accrued liabilities, and other accrued expenses 5,069 6,962 3,221 --------- --------- --------- Net cash provided by operating activities 21,467 7,760 3,220 --------- --------- --------- Investing activities Purchase of available-for-sale investments (97,959) (74,326) (10,604) Sale of available-for-sale investments 107,258 17,726 17,081 Acquisition of net assets of Laser Enterprise (45,900) -- -- Acquisition of UTP Fibreoptics -- (9,150) -- Acquisition of remaining interest in I.E. Optomech Ltd. -- (237) (12) Acquisition of net assets of United Technologies Photonics, Inc. -- -- (8,747) Acquisition of licenses -- -- (600) Proceeds from sale of product line -- -- 375 Purchase of property, plant and equipment (12,048) (17,561) (1,808) Decrease (increase) in other assets (11) 91 17 --------- --------- --------- Net cash used in investing activities (48,660) (83,457) (4,298) --------- --------- --------- Financing activities Repayment of notes payable and lease obligations (548) (297) (132) Issuance of notes payable -- 6,061 -- Repayment of stock purchase note -- -- 18 Proceeds from issuance of common stock other than in the public offerings 4,464 1,704 1,024 Proceeds from offering of stock -- 117,812 -- --------- --------- --------- Net cash provided by financing activities 3,916 125,280 910 --------- --------- --------- Increase (decrease) in cash and cash equivalents (23,277) 49,583 (168) Cash and cash equivalents at beginning of period 52,463 2,880 3,048 --------- --------- --------- Cash and cash equivalents at end of period $ 29,186 $ 52,463 $ 2,880 ========= ========= =========
See accompanying notes to consolidated financial statements. UNIPHASE CORPORATION TWENTY-FIVE 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 BUSINESS ACTIVITIES and SUMMARY of SIGNIFICANT ACCOUNTING POLICIES BUSINESS ACTIVITIES Uniphase Corporation (the "Company" or "Uniphase") designs, develops, manufactures and markets fiber optic telecommunications equipment products, laser subsystems and laser-based semiconductor wafer defect examination and analysis equipment. Uniphase engages in manufacturing activities in the United States, the United Kingdom and Switzerland. The Company's laser division designs, develops, manufactures and markets laser subsystems for a broad range of OEM applications, which include biotechnology, industrial process control and measurement, graphics and printing and semiconductor equipment. Uniphase's domestic wholly-owned subsidiary, Ultrapointe Corporation, designs, develops, manufactures and markets advanced laser-based systems for semiconductor wafer defect examination and analysis. In May 1995, Uniphase acquired certain net assets of United Technologies Photonics, Inc., which designs, develops, manufactures and markets high-speed external modulators and transmitters for fiber optic networks in the CATV and long-haul telecommunications industries, and which is being operated as a Uniphase subsidiary, Uniphase Telecommunications Products, Inc. ("UTP"). In June 1996, the Company acquired two affiliated companies, GCA Fibreoptics Ltd. ("GCA") and Fiberoptic Alignment Solutions, Inc. ("FAS") which the Company combined and operates under the name UTP Fibreoptics ("UFP"). UFP custom packages laser diodes, light emitting diodes ("LEDs") and photodetectors for OEMs for use in fiber optic networks. In March 1997, the Company acquired the net assets of Uniphase Laser Enterprise AG ("ULE"), formerly the laser operations of IBM Corporation's ("IBM") Zurich Research Laboratory in Switzerland. Uniphase also has wholly-owned subsidiaries in Germany and the United Kingdom to market and service its products in Europe. Concurrent with the acquisition of ULE in the third quarter of fiscal 1997, the Company consolidated its European laser research to Switzerland, closed Uniphase Lasers Ltd. (formerly I.E. Optomech), located in Rugby, England and consolidated the laser packaging operations of UFP resulting in $2.2 million of charges, including a charge for the impairment of goodwill. In addition, certain customer and product strategies at UTP incorporating lower-powered amplifiers were modified resulting in charges of $2.0 million related to the write down of existing assets and an increase in inventory reserves. Of the total charges, approximately $1.0 million was recorded in cost of sales as an inventory writedown and approximately $3.2 million was included in selling, general and administrative expenses. BASIS OF PRESENTATION The consolidated financial statements include Uniphase and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Uniphase considers all liquid investments with maturities of ninety days or less when purchased to be cash equivalents. The Company's short-term investments have maturities of greater than ninety days. The Company's securities are classified as available-for-sale and are recorded at fair value. Fair value is based upon quoted market prices on the last day of the fiscal year. The cost of debt securities sold is based on the specific identification method. Unrealized gains and losses are reported as a separate component UNIPHASE CORPORATION TWENTY-SIX 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) of stockholders' equity. Gross realized gains and losses are included in interest income and have not been material. The Company's investments consist of the following:
JUNE 30, 1997 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- (in thousands) Floating rate bonds $14,122 $ -- $ -- $14,122 Municipal bonds 42,008 38 27 42,019 Auction instruments 4,702 -- -- 4,702 Money market instruments 3,896 -- -- 3,896 ------- ------- ------- ------- $64,728 $ 38 $ 27 $64,739 ======= ======= ======= =======
JUNE 30, 1996 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- (in thousands) Floating rate bonds $ 15,660 $ -- $ -- $ 15,660 Municipal bonds 56,114 28 46 56,096 Auction instruments 25,839 -- -- 25,839 Money market instruments 13,474 -- -- 13,474 -------- -------- ------- -------- $111,087 $ 28 $ 46 $111,069 ======== ======== ======= ========
The following is a summary of contractual maturities of the company's investments:
JUNE 30, 1997 Estimated Amortized Fair Cost Value --------- --------- (in thousands) Money market funds $ 3,896 $ 3,896 Amounts maturing within one year 49,572 49,593 Amounts maturing after one year, within five years 11,260 11,250 ------- ------- $64,728 $64,739 ======= =======
FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has evaluated the estimated fair value of financial instruments. The amounts reported for cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable, notes payable and accrued expenses approximate the fair value due to their short maturities. Investment securities are reported at their estimated fair value based on quoted market prices. UNIPHASE CORPORATION TWENTY-SEVEN 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) INVENTORIES Inventories are valued at the lower of cost (first-in, first-out method) or market. The components of inventory consist of the following:
JUNE 30, 1997 1996 ------- ------- (in thousands) Finished goods $ 2,324 $ 2,159 Work in process 10,468 4,382 Raw materials and purchased parts 5,876 4,100 ------- ------- $18,668 $10,641 ======= =======
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation is computed by the straight-line method over the following estimated useful lives of the assets: building and improvements, 5 to 40 years; machinery and equipment, 2 to 5 years; furniture, fixtures, and office equipment, 5 years. Leasehold improvements are amortized by the straight-line method over the shorter of the estimated useful lives of the assets or the term of the lease. The components of property, plant and equipment are as follows:
JUNE 30, 1997 1996 -------- -------- (in thousands) Land $ 4,868 $ 4,868 Building and improvements 8,556 7,582 Machinery and equipment 22,561 8,342 Furniture, fixtures and office equipment 4,882 3,788 Leasehold improvements 2,114 1,439 -------- -------- 42,981 26,019 Less: accumulated depreciation and amortization (11,730) (5,714) -------- -------- $ 31,251 $ 20,305 ======== ========
AMORTIZATION OF INTANGIBLE ASSETS Intangible assets primarily represent acquired developed technology and the excess acquisition cost over the fair value of tangible net assets of businesses acquired. Intangible assets are being amortized using the straight-line method over estimated useful lives ranging from 5 to 7 years. Accumulated amortization expense at fiscal year ended June 30, 1997 and 1996 was $696,000 and $1,199,000, respectively. At June 30, 1996, intangible assets included the excess of the investment in I.E. Optomech ("Optomech") over the fair market value of the net assets acquired of approximately $527,000. The intangible asset was reviewed during the third quarter 1997 in light of the Company's acquisition of ULE and the resultant closure of Optomech. This review suggested that the Optomech intangible asset was impaired, as determined based on projected cash flows from Optomech over the remaining amortization period. The cash flow projections take into effect the change in strategic focus by the Company for semiconductor laser-based applications due to ULE, the costs and expected benefit from Optomech products prospectively, and management's intention to cease capital funding at UNIPHASE CORPORATION TWENTY-EIGHT 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) Optomech. Consequently, the carrying value of the Optomech intangible assets totaling $477,000 was written off as a component of operating expenses during fiscal 1997. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments and trade receivables. The Company places its cash equivalents and short-term investments with high credit-quality financial institutions. The Company invests its excess cash primarily in auction and money market instruments, and municipal and floating rate bonds. The Company has established guidelines relative to credit ratings, diversification and maturities that seek to maintain safety and liquidity. The Company sells primarily to customers involved in the application of laser technology, the manufacture of semiconductors, or the manufacture of telecommunication equipment products. The Company performs ongoing credit evaluations of its customers and does not require collateral. The Company provides reserves for potential credit losses, and such losses and yearly provisions have not been significant and have been within management's expectations. FOREIGN CURRENCY TRANSLATION The Company's international subsidiaries use their local currency as their functional currency. Assets and liabilities denominated in foreign currencies are translated using the exchange rate on the balance sheet dates. Revenues and expenses are translated using average rates of exchange prevailing during the year. The translation adjustment resulting from this process is shown separately as a component of stockholders' equity. Foreign currency transaction gains and losses are not material and are included in the determination of net income. REVENUE RECOGNITION The Company recognizes revenue generally at the time of shipment. Revenue on the shipment of Ultrapointe Systems on evaluation is deferred until customer acceptance. The Company provides for the estimated cost to repair products under warranty at the time of sale. Revenues from UTP's research contracts are recognized on the percentage-of-completion method, measured by costs incurred to date to estimated total costs for each contract. Under this method, revenues are recognized as various stages of research contracts are completed. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The Company is party to certain research and development contracts with third parties whereby the Company is obligated to spend certain specified amounts over periods ranging from two to three years on certain research and development activities and will be reimbursed by the third party participants for a portion of such expenditures. During fiscal 1997, 1996, and 1995, the Company earned reimbursements of $355,000, $704,000, and $245,000 in connection with these contracts which were recorded as credits to research and development expense. At June 30, 1997, a total of approximately $778,000 remains to be expended under these contracts for which the Company will receive reimbursements of approximately $388,000. The research activities covered by the contracts are complementary to the Company's own research and development activities. At the end of the contracts, the Company will own or have access to the technology developed in connection with the contracts. NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed using the weighted average number of shares of common stock and dilutive common equivalent shares from stock options using the treasury stock method. As the Company incurred a loss in its most recent fiscal year, UNIPHASE CORPORATION TWENTY-NINE 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) common share equivalents have been excluded from the computation for 1997 as they are antidilutive. Since fully diluted earnings per share is not materially different, only primary earnings per share is shown below. Shares used in the per share computations are as follows:
JUNE 30, 1997 1996 1995 ------ ------ ------ (in thousands) Weighted average common shares 16,482 12,416 9,108 Effect of stock options -- 1,161 974 ------ ------ ------ Total 16,482 13,577 10,082 ====== ====== ======
In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," which is required to be adopted for the quarter ended December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating earnings per share, the dilutive effect of stock options will be excluded. There is no impact on primary earnings per share for the year ended June 30, 1997. The impact to the results of the fiscal years ended June 30, 1996 and 1995 would have been an increase of $0.02 and $0.01 per share, respectively. Diluted earnings per share is not materially different for the fiscal years ended June 30, 1997, 1996, and 1995, as reported. STOCK-BASED COMPENSATION In accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," the Company records and amortizes, over the related vesting periods, deferred compensation representing the difference between the price per share of stock issued or the exercise price of stock options granted and the fair value of the Company's common stock at the time of issuance or grant. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In 1997, the Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," was issued and is effective for fiscal years commencing after December 15, 1997. In 1997, the Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures About Segments of an Enterprise and Related Information," was issued and is effective for fiscal years commencing after December 15, 1997. The Company is required to adopt the provisions of SFAS 130 and 131 in fiscal year 1999 and expects the adoption will not impact results of operations or financial position but will require additional disclosures. RECLASSIFICATIONS The Company reclassified its available-for-sale investments as short-term investments to reflect the Company's intention regarding the securities. For comparative purposes, amounts in prior years have been reclassified to conform to current year presentations. UNIPHASE CORPORATION THIRTY 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) NOTE 2. LINE of CREDIT The Company has a $5.0 million revolving bank line of credit that expires on January 28, 1999. Advances under the line of credit bear interest at the bank's prime rate (8.50% at June 30, 1997) and are secured by inventories and accounts receivable. Under the terms of the line of credit agreement, the Company is required to maintain certain minimum working capital, net worth, profitability levels and other specific financial ratios. In addition, the agreement prohibits the payment of cash dividends and contains certain restrictions on the Company's ability to borrow money or purchase assets or interests in other entities without the prior written consent of the bank. There were no borrowings under the line of credit at June 30, 1997. NOTE 3. OTHER ACCRUED EXPENSES The components of other accrued expenses are as follows:
JUNE 30, 1997 1996 ------ ------ (in thousands) Income taxes payable $5,049 $ 807 Royalties payable 405 536 Warranty reserve 1,005 598 Other accrued liabilities 3,498 2,523 ------ ------ $9,957 $4,464 ====== ======
NOTE 4. INCOME TAXES The expense (benefit) for income taxes consists of the following:
YEAR ENDED JUNE 30, 1997 1996 1995 ------- ------- ------- (in thousands) Federal: Current $ 4,169 $ 4,381 $ 1,967 Deferred 99 (934) (1,688) ------- ------- ------- 4,268 3,447 279 State: Current 1,222 635 550 Deferred (160) (130) (500) ------- ------- ------- 1,062 505 50 Foreign: Current 1,632 84 67 Deferred (1,530) -- -- ------- ------- ------- 102 84 67 ------- ------- ------- Income tax expense $ 5,432 $ 4,036 $ 396 ======= ======= =======
UNIPHASE CORPORATION THIRTY-ONE 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) a reconciliation of the income tax expense (benefit) at the federal statutory rate to the income tax expense (benefit) at the effective tax rate is as follows:
YEAR ENDED JUNE 30, 1997 1996 1995 ------- ------- ------- (in thousands) Income taxes (benefit) computed at federal statutory rate $(4,563) $ 2,321 $ 385 State taxes, net of federal benefit 701 333 33 Acquired in-process research and development for which no tax benefit is currently recognizable 9,466 1,523 -- Foreign taxes in excess of federal statutory rate 330 -- -- Tax exempt income (502) (213) -- Research, development, and foreign tax credits -- -- (15) Other -- 72 (7) ------- ------- ------- $ 5,432 $ 4,036 $ 396 ======= ======= =======
As of June 30, 1997, the Company has federal and state net operating loss carryforwards of approximately $8,000,000 and $3,000,000, respectively, that will expire in the fiscal years 2012 and 2002, respectively, if not utilized. The components of deferred taxes consist of the following:
YEAR ENDED JUNE 30, 1997 1996 -------- -------- (in thousands) Deferred tax assets: State taxes $ -- $ 188 AMT and state credit carryforwards 350 -- Net operating loss carryforwards 2,872 -- Accounts receivable reserves 450 -- Inventory reserve 447 268 Vacation accruals -- 123 Deferred compensation -- 1,168 Intangibles and acquired in-process research and development 10,651 1,591 Warranty and other reserves 1,077 223 Other accruals not deductible for tax 767 268 -------- -------- Total deferred tax assets 16,614 3,829 Valuation allowance (7,797) -- -------- -------- Net deferred tax assets 8,817 3,829 Deferred tax liabilities: Interest charge DISC commission 493 551 UTP Fibreoptics intangibles 803 1,711 Other 58 32 -------- -------- Total deferred tax liabilities 1,354 2,294 -------- -------- Total net deferred tax assets $ 7,463 $ 1,535 ======== ========
UNIPHASE CORPORATION THIRTY-TWO 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) The Company has established a valuation allowance covering a portion of the gross deferred tax assets related to its Swiss subsidiary and the in-process technology that was expensed during the current year. This amount of the valuation allowance is based on management's expectations of future taxable income and the actual taxable income. The Company believes that since the other net deferred tax assets are more likely than not to be realized from the Company's ongoing operations, no additional valuation allowance is deemed necessary. Cumulative undistributed earnings of Uniphase's foreign subsidiaries were approximately $2,037,000, $736,000 and $568,000 at June 30, 1997, 1996 and 1995, respectively. These amounts have been permanently reinvested, and accordingly, no provision for federal and state income taxes has been provided thereon. The tax benefit associated with exercises of stock options reduced taxes currently payable by $10,192,000, $2,999,000 and $1,636,000 for the years ended June 30, 1997, 1996 and 1995, respectively. Such benefits are credited to additional paid-in capital when realized. NOTE 5. LEASE COMMITMENTS The Company leases manufacturing and office space primarily in Manteca, California; Bloomfield, Connecticut; Chalfont, Pennsylvania; Witney, United Kingdom and Zurich, Switzerland under operating leases expiring at various dates through December 2013 and containing certain renewal options ranging from one to four years. The Company has the option of terminating two of the lease agreements on December 25, 2003 upon six months written notification. Future minimum commitments for noncancelable operating leases are as follows:
Operating Leases (in thousands) 1998 $1,357 1999 1,291 2000 1,222 2001 1,144 2002 985 Thereafter 5,372 ------- Total minimum lease payments $11,371 =======
Rental expense for operating leases for the years ended June 30, 1997, 1996, and 1995 amounted to approximately $904,000, $685,000 and $605,000, respectively. NOTE 6. EMPLOYEE BENEFIT PLAN Uniphase has an employee 401(k) salary deferral plan, covering all domestic employees. Employees may make contributions by withholding a percentage of their salary up to $9,500 per year. Company contributions consist of $.25 per dollar contributed by the employees with at least six months of service. Company contributions were approximately $309,000, $215,000 and $131,000 for the years ended June 30, 1997, 1996, and 1995, respectively. NOTE 7. PENSION and OTHER EMPLOYEE BENEFITS Pension Through the acquisition of ULE in Switzerland, the Company assumed two foreign defined-benefit pension plans, related to the employees of ULE. Benefits are based on years of service and annual compensation on retirement. Plans are funded in accordance with applicable Swiss regulations. UNIPHASE CORPORATION THIRTY-THREE 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) The funded status of the foreign defined-benefit plans as of June 30, 1997 is summarized below: (in thousands) Vested benefit obligation $ 3,129 Accumulated benefit obligation $ 3,129 Projected benefit obligation $(6,448) Fair market value of plan assets 4,488 ------- Projected benefit obligation less than (in excess of) plan assets $(1,960) =======
The components of net pension costs for 1997 are as follows: (in thousands) Service cost $ 458 Interest cost 322 Expected return on plan assets (224) ----- Net pension expense $ 556 =====
At June 30, 1997, the weighted average discount rates and long-term rates for compensation increases used for estimating the benefit obligations and the expected return on plan assets were as follows: Discount rate 5.0% Rate of increase in compensation levels 3.5% Expected long-term return on assets 4.0% Plan assets of the foreign plans consist primarily of listed stocks, bonds and cash surrender value life insurance policies. OTHER POSTEMPLOYMENT BENEFITS The Company has adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 112, "Employers' Accounting for Postemployment Benefits." There was no material impact on the Company's financial statements for the periods presented. NOTE 8. STOCKHOLDERS' EQUITY PREFERRED STOCK The Board of Directors has the authority, without any further vote or action by the stockholders, to provide for the issuance of 1,000,000 shares of preferred stock from time to time in one or more series with such designations, rights, preferences and limitations as the Board of Directors may determine, including the consideration received therefore, the number of shares comprising each series, dividend rates, redemption provisions, liquidation preferences, redemption fund provisions, conversion rights and voting rights, all without the approval of the holders of common stock. STOCK OPTION PLANS As of June 30, 1997, Uniphase has reserved approximately 3,218,000 shares of common stock for future issuance to employees, directors and consultants under its 1984 Amended and UNIPHASE CORPORATION THIRTY-FOUR 23 NOTES to CONSOLIDATED FINANCIAL STATEMENTS (CONT.) Restated Stock Option Plan (the "1984 Option Plan") and Amended and Restated 1993 Flexible Stock Incentive Plan (the "1993 Option Plan"). The Board of Directors has the authority to determine the type of option and the number of shares subject to option. The exercise price is generally equal to fair value of the underlining stock at the date of grant. Options generally become exercisable over a four-year period and, if not exercised, expire from five to ten years from the date of grant. The following table summarizes option activity through June 30, 1997:
Options Outstanding ------------------------------------ Shares Weighted Available Number Average for grant of shares Exercise Price --------- --------- -------------- (in thousands, except price per share) Balance at June 30, 1995 458 2,586 $ 4.41 Increase in authorized shares 210 -- -- Granted (704) 704 11.95 Canceled 78 (246) 3.99 Exercised -- (529) 2.43 ------- -------- --------- Balance at June 30, 1996 42 2,515 6.65 Increase in authorized shares 1,371 -- -- Granted (1,001) 1,001 40.29 Canceled 118 (114) 24.88 Exercised -- (714) 5.39 ------- -------- --------- Balance at June 30, 1997 530 2,688 $ 18.81 ======= ======== =========
The following table summarizes information about options outstanding at June 30, 1997:
Options Outstanding Options Exercisable ------------------------------------------- ------------------------------ Weighted Average Range Number Remaining Weighted Number Weighted of Exercise Outstanding Contractual Average Exercisable Average Prices at 6/30/97 Life (Years) Exercise Price at 6/30/97 Exercise Price - ---------------- ----------- ------------ ---------------- ----------- -------------- (shares in thousands) $ 0.46 - $ 6.13 990 5.94 $ 3.51 701 $ 2.84 6.88 - 32.83 1,120 8.22 18.69 244 11.54 34.00 - 51.25 578 8.56 45.25 17 50.00 ----- ---- ----- --- ---- 2,688 7.45 18.81 962 5.90 ===== ==== ===== === ====
During fiscal 1996, the Company replaced all options to purchase UTP stock previously issued to UTP employees with options to purchase stock of the Company. The Company will incur compensation expense totaling $4,400,000 in connection with such options granted which were effective May 15, 1996. Of this total $3,000,000, related to options which have vested as of the grant date, has been charged to expense in the fiscal year ended June 30, 1996. The remaining $1,400,000 is being charged to expense over the remaining vesting period of three years. The Company has elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized in the Company's financial statements. UNIPHASE CORPORATION THIRTY-FIVE 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) In conjunction with the acquisition of ULE in fiscal 1997, the Company issued stock options to key employees of ULE at a value that was less than the market value. Management believed this decision was necessary to ensure the continued success of ULE. The Company will recognize compensation expense for the total value of $1,970,000 over the vesting period of four years. Pro forma information regarding net income and earnings per share is required by SFAS No. 123. This information is required to be determined as if the Company had accounted for its employee stock options (including shares issued under the Employee Stock Purchase Plan, collectively called "options") granted subsequent to June 30, 1995 under the fair value method of that statement. The fair value of options granted in 1997 and 1996 reported below has been estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
EMPLOYEE EMPLOYEE STOCK PURCHASE STOCK OPTIONS PLAN SHARES -------------------- ----------------------- 1997 1996 1997 1996 ------- ------- ------- ------- Expected life (in years) 5.5 5.5 .5 .5 Risk-free interest rate 6.5% 5.9% 5.4% 5.4% Volatility .64 .64 .75 .57 Dividend yield 0% 0% 0% 0%
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its options. A total of approximately 661,000 options were granted during fiscal 1997 with exercise prices equal to the market price of the stock on the grant date. The weighted-average exercise price and weighted-average fair value of these options were $44.13 and $27.48, respectively. A total of 340,000 options were granted during fiscal 1997 with exercise prices less than the market price of the stock on the grant date. The weighted-average exercise price and weighted-average fair value of these options were $32.83 and $25.37, respectively. The weighted-average exercise price and weighted-average fair value of stock options granted during fiscal 1996 was $11.95 and $9.18 per share, respectively. The weighted average fair value of shares granted under the Employee Stock Purchase Plan during 1997 and 1996 was $14.16 and $6.70, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
YEAR ENDED JUNE 30, 1997 1996 --------- ------ Pro forma net income $(23,070) $1,720 Pro forma earnings per share $ (1.40) $ 0.13
Pro-forma net income represents the difference between compensation expense recognized under APB 25 and the related expense using the fair value method of SFAS No. 123 taking into account any additional tax effects of applying SFAS No. 123. The effects on pro forma disclosures of applying SFAS No. 123 are not likely to be representative of the effects on pro forma disclosures of future years. Because SFAS No. 123 is applicable only to options granted subsequent to June 30, 1995, the pro forma effect will not be fully reflected until 1999. UNIPHASE CORPORATION THIRTY-SIX 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) EMPLOYEE STOCK PURCHASE PLAN The Uniphase 1993 Employee Stock Purchase Plan (the "Purchase Plan") was adopted in October 1993 and amended during fiscal 1994. The Company has reserved 400,000 shares of common stock for issuance under the Purchase Plan. The Purchase Plan, effective February 1, 1994, provides eligible employees with the opportunity to acquire an ownership interest in Uniphase through participation in a program of periodic payroll deductions applied at specific intervals to the purchase of common stock. The Purchase Plan is structured as a qualified employee stock purchase plan under Section 423 of the amended Internal Revenue Code of 1986. However, the Purchase Plan is not intended to be a qualified pension, profit sharing or stock bonus plan under Section 401(a) of the 1986 Code and is not subject to the provisions of the Employee Retirement Income Security Act of 1974. The Purchase Plan will terminate upon the earlier of December 31, 1998 or the date on which all shares available for issuance under the Purchase Plan have been sold. During fiscal 1997, employees purchased 110,287 shares of common stock under the Purchase Plan and 134,687 shares are available for future issuance. NOTE 9. ACQUISITIONS UTP FIBREOPTICS On May 31, 1996, the Company acquired 100% of the outstanding shares of GCA and FAS. GCA and FAS operates as UFP. UFP custom packages laser diodes, light emitting diodes ("LEDs") and photodectectors for use in fiber optic networks. The total purchase price of $9,150,000 consisted of approximately $2,589,000 cash payment, and $6,061,000 notes payable to the former shareholders and $500,000 in related acquisition costs. The principal and accumulated interest on the notes payable is due and payable in full in August 1997. The notes earn interest at a rate of 6% compounded annually. Accrued interest expense as of June 30, 1997 and 1996 was $176,000 and $30,000, respectively. The acquisition has been accounted for by the purchase method of accounting and accordingly, the accompanying financial statements include the results of operations of UFP subsequent to the acquisition date. The purchase included net assets and acquired in-process research and development of $4,827,000 at fair market value. The excess of $1,413,000 over the purchase price is being amortized over the estimated useful life of 7 years. The following unaudited pro forma summary presents the consolidated results of operations of the Company as if the acquisition of UFP had occurred at the beginning of fiscal 1995 and does not purport to be indicative of what would have occurred had the acquisition been made as of the beginning of fiscal 1995 or of results which may occur in the future.
YEAR ENDED JUNE 30, 1996 1995 ------- ------- (in thousands, except per share data) Net sales $74,781 $48,104 Net income 6,635 $1,078 Net income per share $ 0.49 $ 0.11
The effects of the UFP acquisition on the 1996 consolidated statement of cash flows were as follows (in thousands): Working capital acquired $ 609 Property, plant and equipment 924 Intangibles and goodwill, net of deferred taxes 4,323 Other liabilities (1,186) In-process research and development 4,480 ------- Total purchase price $ 9,150 =======
UNIPHASE CORPORATION THIRTY-SEVEN 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) UNIPHASE LASER ENTERPRISE On March 10, 1997, the Company acquired the net assets of ULE from IBM. ULE designs and manufactures semiconductor diode laser chips used by the telecommunication industry. The total purchase price of $45,900,000 includes a cash payment of $45,000,000 to IBM and acquisition expenses of $900,000. The acquisition has been accounted for by the purchase method of accounting and accordingly, the accompanying financial statements include the results of operations of ULE subsequent to the acquisition date. The purchase included net assets and acquired in-process research and development of $33,314,000 at fair market value. The purchased intangible assets are being amortized over the estimated useful life of 5 years. To determine the value of the acquired in-process research and development, the Company considered, among other factors, the stage of development of each project, the time and resources needed to complete each project, expected income, target markets and associated risks. Associated risks included inherent difficulties and uncertainties in completing the project and thereby achieving technical feasibility, and risks related to the viability of and potential changes in future target markets. The Company applied a discount rate of 20% in the valuation of in-process technology. This analysis resulted in a valuation of $33,314,000 for acquired in-process research and development that had not reached technological feasibility and did not have alternative future uses. Therefore, in accordance with generally accepted accounting principles, the $33,314,000 was expensed. The Company estimates that a total investment of $9,400,000 in research and development over the next three years will be required to complete the in-process research and development. The following unaudited pro forma summary presents the consolidated results of operations of the Company, excluding the charge for acquired in-process research and development, as if the acquisition of ULE had occurred at the beginning of fiscal 1996 and does not purport to be indicative of what would have occurred had the acquisition been made as of the beginning of fiscal 1996 or of results which may occur in the future.
YEAR ENDED JUNE 30, 1997 1996 -------- -------- (in thousands, except per share data) Net sales $123,813 $ 88,264 Net income 17,159 $ 6,618 Net income per share $ 1.04 $ 0.49
The effects of the ULE acquisition on the 1997 consolidated statement of cash flows were as follows (in thousands): Working capital acquired $ 8,358 Property, plant and equipment 3,477 Prepaid lease and service agreement 1,064 Intangibles 4,733 Other liabilities (5,046) In-process research and development 33,314 -------- Total purchase price $ 45,900 ========
NOTE 10. SALE of DIODE LASER PRODUCT LINE The Company sold its diode laser product line for $375,000 in cash on June 30, 1995. The loss on sale of the product line was $891,000. In conjunction with the sale, the Company also obtained a limited non-exclusive sublicense to a solid state technology patent at a reduced royalty rate. UNIPHASE CORPORATION THIRTY-EIGHT 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) NOTE 11. LITIGATION AND CONTINGENCIES On May 19, 1997, Tacan Corporation ("Tacan") filed a lawsuit in the U.S. District Court for the Southern District of California (the "Southern California Action") against UTP. The Complaint alleges claims of breach of contract, breach of implied and express warranties, negligent misrepresentation, conversion and negligent interference with perspective economic advantage. The Company believes the Southern California Action will not have a material negative impact on the Company's financial condition or results of operations. However, given the inherent uncertainty of litigation and the early stage of discovery, there can be no assurance that the ultimate outcome in the Southern California Action will be in the Company's favor. During fiscal 1996, two former employees commenced wrongful termination actions against the Company. The Company believes these claims are without merit and is vigorously defending them. Even if these claims are adjudicated in favor of the plaintiffs, the Company does not believe that the ultimate resolution of these matters will have a material adverse impact on the Company or its operations. In the ordinary course of business, various lawsuits and claims are filed against the Company. While the outcome of these matters is currently not determinable, management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial statements. NOTE 12. GEOGRAPHIC AND INDUSTRY SEGMENT INFORMATION Uniphase operates in two geographic regions: the United States and Europe. The Company operates in a single industry segment, the design, manufacture and sale of laser subsystems and laser based products. The following table shows sales, operating income (loss) and other financial information by geographic region:
YEAR ENDED JUNE 30, 1997 1996 1995 --------- --------- --------- (in thousands) Net sales: United States-domestic $ 73,785 $ 52,313 $ 29,456 United States-export 20,043 13,742 10,967 Europe 22,816 8,738 7,100 Intercompany (9,678) (5,720) (5,241) --------- --------- --------- Total net sales $ 106,966 $ 69,073 $ 42,282 ========= ========= ========= Operating income (loss): United States $ 12,452 $ 4,987 $ 276 Europe (28,693) (77) 299 Eliminations (611) 519 6 --------- --------- --------- Total operating income (loss) $ (16,852) $ 5,429 $ 581 ========= ========= ========= Identifiable assets: United States $ 149,008 $ 168,095 $ 28,785 Europe 28,571 5,729 3,125 --------- --------- --------- Total assets $ 177,579 $ 173,824 $ 31,910 ========= ========= =========
UNIPHASE CORPORATION THIRTY-NINE 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) Intercompany transfers represent products that are transferred between geographic areas on a basis intended to reflect as nearly as possible the market value of the products. Identifiable assets are those assets of the Company that are identified with the operations of the corresponding geographic area. One customer purchased both laser subsystems and Ultrapointe Systems accounted for a combined 13% of the Company's consolidated net sales in fiscal 1996. One laser subsystem customer accounted for 10%, 12% and 12% of the Company's consolidated net sales in years ended June 30, 1997, 1996, and 1995, respectively. NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED JUNE 30, 1997 1996 1995 ------ ------ ------ (in thousands) Cash payments for: Interest $ 217 $ 43 $ 11 Income taxes $2,262 $1,107 $1,213
NOTE 14. SUBSEQUENT EVENTS (UNAUDITED) In August 1997, the Company circulated notice of a special meeting of stockholders for the approval of an amendment to the Company's Certificate of Incorporation to increase the number of shares of Common Stock which the Company is authorized to issue from 20,000,000 to 50,000,000 shares. Additionally, the Company announced that it is currently negotiating the acquisition of a 49% interest in INDX, a supplier of fiber bragg grating for wavelength division multiplexing applications, for approximately $2.0 million. As currently contemplated, such acquisition would include options to acquire the remaining interest in installments beginning one year after the initial investment, and the Company would enter into a loan agreement with INDX for an undetermined amount at commercial rates beginning one year after the consummation of a definitive agreement. The investment is subject to a number of contingencies including the negotiation of terms of a definitive agreement, satisfactory completion of due diligence and customary closing conditions. Accordingly, there can be no assurance that the acquisition of such interest in INDX will be completed. UNIPHASE CORPORATION FORTY 29 REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND STOCKHOLDERS UNIPHASE CORPORATION We have audited the accompanying consolidated balance sheets of Uniphase Corporation as of June 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Uniphase Corporation at June 30, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. San Jose, California July 30, 1997 UNIPHASE CORPORATION FORTY-ONE 30 COMMON STOCK MARKET PRICE At September 15, 1997, the Company had approximately 86 holders of record of its Common Stock and 17,181,518 shares outstanding. The Company has not paid dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. The following high and low closing bid prices indicated for Uniphase Common Stock are as reported on the Nasdaq National Market during each of the quarters indicated.
FISCAL 1996 QUARTER ENDED FISCAL 1997 QUARTER ENDED SEPT 30 DEC 31 MAR 31 JUN 30 SEPT 30 DEC 31 MAR 31 JUN 30 ------- ------ ------ ------ ------- ------ ------ ------ High 19 1/16 19 21 1/4 35 1/2 42 1/4 59 1/2 49 1/2 60 5/8 Low 10 3/8 12 1/2 14 7/8 18 5/8 20 3/8 41 1/4 31 13/16 35 1/8
UNIPHASE CORPORATION FORTY-TWO EX-21.1 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 UNIPHASE CORPORATION SUBSIDIARIES (ALL 100% OWNED) Uniphase Ltd. (Incorporated in the United Kingdom) Uniphase GmbH (Incorporated in Germany) Uniphase Laser Ltd. (Formerly known as I.E. Optomech, Ltd.) (Incorporated in the United Kingdom) Uniphase Telecommunications Products, Inc. (Incorporated in Delaware) Uniphase International (Barbados) Limited (Incorporated in Barbados) Uniphase International Limited (Incorporated in Bermuda) UTP Fibreoptics Limited (Incorporated in the United Kingdom) Uniphase Laser Enterprise AG (Incorporated in Switzerland) EX-23.1 4 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Uniphase Corporation of our report dated July 30, 1997, included in the 1997 Annual Report to Stockholders of Uniphase Corporation. Our audits also included the financial statement schedule of Uniphase Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements pertaining to the Uniphase Corporation 1984 Amended and Restated Stock Option Plan, the Amended and Restated 1993 Flexible Stock Incentive Plan, the 1993 Amended and Restated Employee Stock Purchase Plan and the Uniphase Telecommunications Products, Inc. 1995 Flexible Stock Incentive Plan of our report dated July 30, 1997, with respect to the consolidated financial statements incorporated herein by reference in this Annual Report (Form 10-K) for the year ended June 30, 1997. \s\ Ernst & Young LLP San Jose, California September 24, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 29,186 52,009 22,194 1,877 18,668 133,715 42,981 11,730 177,579 25,327 0 0 0 17 149,760 177,579 106,966 106,966 57,411 57,411 65,825 582 421 (13,422) 5,432 (18,854) 0 0 0 (18,854) (1.14) (1.14)
-----END PRIVACY-ENHANCED MESSAGE-----