-----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, BGar7vvn0ealp/3Qphg9sPvh0vovTO3n7MT+uVm0P6hE45uZyNyjm876O67pVe9t lQ5c3QjPqdR+AChq3B0EUg== 0000912093-97-000020.txt : 19971028 0000912093-97-000020.hdr.sgml : 19971028 ACCESSION NUMBER: 0000912093-97-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971027 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-Q SEC ACT: SEC FILE NUMBER: 000-22874 FILM NUMBER: 97701136 BUSINESS ADDRESS: STREET 1: 163 BAYPOINTE PKWY 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-Q 1 16 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_______________ to _______________ Commission file number 0-22874 Uniphase Corporation (Exact name of registrant as specified in its charter) Delaware 94-2579683 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 163 Baypointe Parkway San Jose, CA 95134 (Address of principal executive offices) (Zip Code) (408) 434-1800 (Registrant's telephone number, including area code) _________________________________________________________________________ (Former name, former address and former fiscal year if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 15, 1997. Common Stock $.001 par value 17,191,989 Class Number of Shares Part I--FINANCIAL INFORMATION Item 1. Financial Statements UNIPHASE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data) Three months ended September 30, 1997 1996 Net sales $38,473 $23,462 Cost of sales 19,954 12,208 -------- -------- Gross profit 18,519 11,254 Operating expenses: Research and development 2,886 1,627 Royalty and license 485 409 Selling, general and administrative 6,293 4,450 -------- -------- Total operating expenses 9,664 6,486 -------- -------- Income from operations 8,855 4,768 Interest and other income, net 762 946 -------- -------- Income before income taxes 9,617 5,714 Income tax expense 3,414 2,114 -------- -------- Net income $ 6,203 $ 3,600 ======== ======== Net income per share $ 0.34 $ 0.21 ======== ======== Number of weighted average shares used in per share amounts 18,510 17,493 ======== ======== See accompanying notes on page 5 UNIPHASE CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data) September 30, June 30, 1997 1997 ASSETS (unaudited) Current assets: Cash and cash equivalents $32,470 $29,186 Short-term investments 50,527 52,009 Accounts receivable, less allowances for returns and doubtful accounts of $880 at September 30, 1997 and $1,877 at June 30, 1997 24,844 20,317 Inventories 19,224 18,668 Refundable income taxes 6,007 6,010 Deferred income taxes and other current assets 7,783 7,525 -------- -------- Total current assets 140,855 133,715 Property, plant and equipment, net 33,517 31,251 Intangible assets 10,931 10,969 Long-term deferred income taxes and other assets 1,703 1,644 -------- --------- Total assets $187,006 $177,579 ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ -- $ 6,061 Accounts payable 7,031 4,781 Accrued payroll and related expenses 4,704 4,528 Other accrued expenses 9,712 9,957 -------- -------- Total current liabilities 21,447 25,327 Accrued pension and other non-current liabilities 2,611 2,475 Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value: Authorized shares--1,000,000 None issued and outstanding -- -- Common stock, $0.001 par value: Authorized shares--20,000,000 Issued and outstanding shares-- 17,191,989 a September 30, 1997 and 16,921,967 at June 30, 1997 17 17 Additional paid-in capital 163,779 156,881 Retained earnings (deficit) (901) (7,104) Net unrealized gain on securities available- for-sale 53 11 Foreign currency translation adjustment -- (28) -------- --------- Total stockholders' equity 162,948 149,777 -------- --------- Total liabilities and stockholders' equity $187,006 $177,579 ======== ========= See accompanying notes on page 5 UNIPHASE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Three Months Ended September 30, 1997 1996 Operating activities Net income $6,203 $3,600 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 1,401 641 Amortization expense 538 312 Stock compensation expense 262 188 Change in operating assets and liabilities: Accounts receivable (4,527) (969) Inventories (556) (3,015) Deferred income taxes and other current assets (255) (471) Accounts payable, accrued liabilities and other accrued expenses 6,709 1,408 ------- ------- Net cash provided by operating activities 9,775 1,694 ======= ======= Investing activities Purchase of short-term investments (24,398) (46,277) Proceeds from sale of short-term investments 25,922 27,659 Purchase of property, plant and equipment (3,667) (2,445) Purchase of patent (500) -- Increase in other assets (59) -- -------- -------- Net cash used in investing activities (2,702) (21,063) Financing activities Repayment of notes payable (6,061) (548) Proceeds from issuance of common stock under stock option and stock purchase plans 2,272 904 -------- -------- Net cash provided by (used in) financing activities (3,789) 356 Increase (decrease) in cash and cash equivalents 3,284 (19,013) Cash and cash equivalents at beginning of period 29,186 52,463 -------- -------- Cash and cash equivalents at end of period $32,470 $33,450 ======== ======== See accompanying notes on page 5 Supplemental Cash Flow Information Tax benefits on stock option and stock purchase plan $ 4,364 $ -- ======= ======= UNIPHASE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Business Activities and Basis of Presentation The financial information at September 30, 1997 and for the three- month period ended September 30, 1997 and 1996 is unaudited, but includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial information set forth herein, in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. For further information, refer to the Consolidated Financial Statements and footnotes thereto included or incorporated by reference in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997. The results for the three-month period ended September 30, 1997 are not considered indicative of the results to be expected for any future period or for the entire year. Note 2. Inventories The components of inventory consist of the following: (in thousands) September 30, June 30, 1997 1996 Raw materials and purchased parts $ 6,794 $ 5,876 Work in process 8,379 10,468 Finished goods 4,051 2,324 --------- --------- $19,224 $18,668 ========= ========= Note 3. Taxes * The effective tax rate used for the three-month periods ended September 30, 1997 and 1996 were 35.5% and 37%, respectively. Note 4. Earnings per Share Net income per share for the three-month period ended September 30, 1997 and 1996 is computed using the weighted average number of common shares outstanding plus primary common share equivalents which have a dilutive effect on earnings per share. Since fully diluted earnings per share differs from primary earnings per share by less than 3%, only primary earnings per share is shown below. Shares and net income used in the per share computations are as follows: Three Months Ended September 30, 1997 1996 Weighted average common shares 17,184 16,132 Primary common share equivalents 1,326 1,361 -------- -------- Total 18,510 17,493 ======== ======== Net income $6,203 $3,600 ======== ======== Net income per share $0.34 $ 0.21 ======== ======== In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," which is required to be adopted for the quarter ended December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating earnings per share, the dilutive effect of stock options will be excluded. This impact is expected to result in an increase in primary earnings per share for the three months ended September 30, 1997 and 1996 of $0.02 and $0.01 per share, respectively. Dilutive earnings per share is not materially different for the three months ended September 30, 1997 and a decrease of $0.01 for the three months ended September 30, 1996. Note 5. Line of Credit The Company maintains a $5.0 million revolving bank line of credit agreement that expires on January 28, 1999. Advances under the line of credit bear interest at the bank's prime rate (8.5% at September 30, 1997) and are secured by inventories and accounts receivable. Under the terms of this agreement, the Company is required to maintain certain minimum working capital, net worth, profitability levels and other specific financial ratios. In addition, the line of credit prohibits the payment of cash dividends and contains certain restrictions on the Company's ability to lend money or purchase assets or interests in other entities without the prior written consent of the bank. There were no borrowings under the line of credit at September 30, 1997. Note 6. Litigation and Contingencies Certain former employees have commenced wrongful termination actions, fraud and termination in violation of public policy claims against the Company. The Company believes these claims are without merit and is vigorously defending them. Even if these claims are adjudicated in favor of the plaintiffs, the Company does not believe that the ultimate resolution of these matters will have a material adverse impact on the Company or its operations. Certain claims and counter claims have been filed between the Uniphase Telecommunications Products, Inc., ("UTP"), a subsidiary of the Company, and Tacan Corporation ("Tacan") with the U.S. District Court for the Southern District of California (the "Southern California Action") and the U.S. District Court for the District of Connecticut (the "Connecticut Action"). UTP seeks to recover in excess of $695,000 for amounts that Tacan refused to pay for equipment ordered and/or received by Tacan, plus punitive damages and treble damages. Tacan alleges claims of breach of contract, breach of implied and express warranties, negligent misrepresentation, conversion and negligent interference with perspective economic advantage as well as unfair trade practices and seeks compensatory damages in amounts allegedly exceeding $11.6 million plus punitives. On October 17, 1997, Tacan agreed to dismiss the Southern California Action and proceed with the Connecticut Action. The Company believes the foregoing litigation with Tacan will not have a material negative impact on the Company's financial condition or results of operations. However, given the inherent uncertainty of litigation and the early stage of discovery, there can be no assurance that the ultimate outcome in the litigation will be in the Company's favor, or that the diversion of management's attention, and any costs associated with the lawsuit, will not have a material adverse effect on the Company's financial condition or results of operations. Note 7. Subsequent Events In October 1997, the stockholders of the Company approved an amendment to the Company's Certificate of Incorporation to increase the number of shares of common stock which the Company is authorized to issue from 20,000,000 to 50,000,000 shares. The Company also announced a 100% stock dividend to be paid on November 12, 1997 for all stockholders of record on November 3, 1997. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The statements contained in this Report on Form 10-Q that are not purely historical are forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions, beliefs or strategies regarding the future. All forward looking statements included in this document are based on information available to the Company on the date of this Report, and the Company assumes no obligation to update any such forward looking statement. It is important to note that the Company's actual results could differ materially from those in such forward looking statements as a result of certain risks including those risks set forth below under the heading "Risks Factors," and elsewhere herein. You should also consult the risk factors listed from time to time in the Company's Reports on Form 10-Q, 8- K, 10-K, Annual Reports to Stockholders and other Securities and Exchange Commission filing. Risk Factors Future Capital Requirements The Company is devoting substantial resources for new facilities and equipment for Uniphase Laser Enterprise and to the development of certain other new products for the telecommunications markets. Although the Company believes existing cash balances, cash flow from operations and available lines of credit, will be sufficient to meet its capital requirements at least through the end of fiscal 1998, the Company may be required to seek additional equity or debt financing to compete effectively in these markets. The timing and amount of such capital requirements cannot be precisely determined at this time and will depend on several factors, including the Company's acquisitions and the demand for the Company's products and products under development. There can be no assurance that such additional financing will be available when needed, or, if available, will be on terms satisfactory to the Company. Risks from Customer Concentration A relatively limited number of OEM customers historically have accounted for a substantial portion of the Company's telecommunications net sales. Sales to any single customer are also subject to significant variability from quarter to quarter. Such fluctuations could have a material adverse effect on the Company's business, operating results or financial condition. The Company expects that sales of telecommunications products to a limited number of customers will continue to account for a high percentage of the net sales for the foreseeable future. Moreover, there can be no assurance that current customers will continue to place orders or that the Company will be able to obtain new orders from new customers. Variability and Uncertainty of Quarterly Operating Results The Company has experienced and expects to continue to experience significant fluctuations in its quarterly results. The Company believes that fluctuations in quarterly results may cause the market price of its Common Stock to fluctuate, perhaps substantially. Factors which have had an influence on and may continue to influence the Company's operating results in a particular quarter include the timing of the receipt of orders from major customers, product mix, competitive pricing pressures, the relative proportions of domestic and international sales, costs associated with the acquisition or disposition of businesses, products or technologies, the Company's ability to design, manufacture, and ship products on a cost effective and timely basis, the delay between incurrence of expenses to further develop marketing and service capabilities and realization of benefits from such improved capabilities, the announcement and introduction of cost effective new products by the Company and by its competitors, and expenses associated with any intellectual property litigation. In addition, the Company's sales will often reflect orders shipped in the same quarter that they are received. Moreover, customers may cancel or reschedule shipments, and production difficulties could delay shipments. The timing of sales of the Company's Ultrapointe Systems may result in substantial fluctuations in quarterly operating results due to the substantially higher per unit price of these products relative to the Company's other products. In addition, the Company sells its telecommunications equipment products to OEMs who typically order in large quantities and therefore the timing of such sales may significantly affect the Company's quarterly results. The timing of such OEM sales can be affected by factors beyond the Company's control, including demand for the OEM's products and manufacturing issues experienced by OEMs. In this regard, the Company has experienced a temporary rescheduling of orders by OEM telecommunications customers. As a result of the above factors, the Company's results of operations are subject to significant variability from quarter to quarter. There can be no assurance that other acquisitions or dispositions of businesses, products or technologies by the Company in the future will not result in substantial charges or other expenses that may cause fluctuations in the Company's quarterly operating results. The Company's operating results in a particular quarter may also be affected by the acquisition or disposition of other businesses, products or technologies by the Company. For example, in the third quarter of fiscal 1997, the Company incurred charges totaling $33.3 million for acquired in-process research and development in connection with the acquisition of ULE. In the fourth quarter of fiscal 1996, the Company incurred charges totaling $7.5 million for acquired in-process research and development related to the acquisition of UFP and compensation expense in connection with the cancellation of certain options of UTP and granted replacement options to purchase Uniphase Common Stock to UTP employees. There can be no assurance that acquisitions or dispositions of businesses, products or technologies by the Company in the future will not result in substantial charges or other expenses that may cause fluctuations in the Company's quarterly operating results. Dependence on Key OEM Relationships In July 1997, the Company entered into an exclusive OEM Agreement (the "Agreement") with KLA-Tencor pursuant to which KLA-Tencor will distribute Ultrapointe Systems through its worldwide distribution channels. This Agreement supercedes any and all prior OEM negotiations, correspondence, understandings and agreements regarding the Companies' business relationship. The Company currently expects that KLA-Tencor will account for a majority of Ultrapointe's net sales for the foreseeable future for Laser Imaging Systems used to analyze defects on semiconductor wafers and photomasks during the manufacturing process as well as automatic defect classification software products. The Agreement outlines minimum quantities in the year of inception, product specifications, ongoing research and development efforts on the product line, pricing and payment terms. The Agreement is effective through June 30, 2000 and may be extended for up to three (3) additional one year renewal periods thereafter. On April 30, 1997, Tencor and KLA Instruments merged and formed KLA-Tencor Corporation. The Company believes that the timing of the receipt of orders and the related product mix under the Agreement will not be consistent with historical orders for Ultrapointe Systems given the size and complexities associated with merging these organizations, consequently, the Company's interim revenue levels and profit margins may be adversely affected. In addition, one laser subsystems customer, the Applied Biosystems Division of Perkin-Elmer Corporation, accounted for approximately 10%, 12% and 12% of the Company's net sales for fiscal years, 1997, 1996, and 1995, respectively. The loss of orders from these or other OEM relationships could have a materially adverse effect on the Company's business and operating results. Cyclicality of Semiconductor Industry The Company's Ultrapointe Systems and a portion of its laser subsystems businesses depend upon capital expenditures by manufacturers of semiconductor devices, including manufacturers that are opening new or expanding existing fabrication facilities, which, in turn, depend upon the current and anticipated market demand for semiconductor devices and the products utilizing such devices. The semiconductor industry is highly cyclical, and historically has experienced periods of oversupply, resulting in significantly reduced demand for capital equipment. Recently, the semiconductor industry has experienced a downturn which has led certain of the Company's customers to delay or cancel purchase of the Company's Ultrapointe Systems. Results of operations for fiscal 1997, include sales of Ultrapointe product totaling $15.4 million, down from $17.6 million in fiscal 1996. There can be no assurance that the Company's operating results will not be materially and adversely affected by these factors. Furthermore, there can be no assurance that the semiconductor industry will not experience further downturns or slowdowns in the future or that the current backlog in Ultrapointe products will result in actual sales or such backlog is indicative of a meaningful trend, which may materially and adversely affect the Company's business and operating results. Declining Market for Gas Lasers; Development and Other Risks Relating to Solid State Laser Technologies Gas laser subsystems sales accounted for 33.1% and 47.7% of total Company's sales for the fiscal years ended 1997 and 1996, respectively. The market for gas lasers is mature and is expected to decline as customers transition from conventional lasers, including gas, to solid state lasers, which are currently expected to be the primary commercial laser technology in the future. In response to this transition, the Company has devoted substantial resources to developing solid state laser products. To date, sales of the Company's solid state laser products have been limited and primarily for customer evaluation purposes. The Company believes that a number of companies are further advanced than the Company in their development efforts for solid state lasers and are competing with evaluation units for many of the same design-in opportunities than the Company is pursuing. It is anticipated that the average selling price of solid state lasers may be significantly less in certain applications than the gas laser products the Company is currently selling in these markets. The Company further believes it will be necessary to continue to reduce the cost of manufacturing and to broaden the wavelengths provided by its laser products. There can be no assurance that the Company's solid state laser products will not be rendered obsolete or uncompetitive by products of other companies. Intense Industry Competition The laser, semiconductor capital equipment, CATV and telecommunications industries in which the Company sells its products are highly competitive. In each of the markets it serves, the Company faces intense competition from established competitors, many of which have substantially greater financial, engineering, research and development, manufacturing, marketing, service and support resources. The Company is a recent entrant into the semiconductor capital equipment, the CATV and telecommunications marketplaces and competes with many companies in those markets that have substantially greater resources, including greater name recognition, a larger installed base of products and longer standing customer relationships. In order to remain competitive, the Company must maintain a high level of investment in research and development, marketing, and customer service and support. There can be no assurance that the Company will be able to compete successfully in the laser, semiconductor capital equipment, CATV or telecommunications industries in the future, that the Company will have sufficient resources to continue to make such investments, that the Company will be able to make the technological advances necessary to maintain its competitive position or that its products will receive market acceptance. The semiconductor capital equipment market is frequently affected by new product introductions and new technologies that make existing production and inspection equipment obsolete. There can be no assurance that others will not introduce products which compete with the Ultrapointe System or which render the Ultrapointe System obsolete or uncompetitive based on existing or new technologies. In addition, there can be no assurance that technological changes or development efforts by the Company's competitors will not render the Company's products or technologies obsolete or uncompetitive. Attract and Retain Key Personnel The future success of the Company is dependent, in part, on its ability to attract and retain certain key personnel. In particular, the Company's research and development efforts are dependent on the Company being able to hire and retain engineering staff with the requisite qualifications. Competition in recruiting highly skilled engineering personnel is extremely intense, and the Company is currently experiencing substantial difficulty in identifying and hiring certain qualified engineering personnel in many areas of its business. No assurance can be given that the Company will be able to successfully hire such personnel at compensation levels that are consistent with the Company's existing compensation and salary structure. The Company's future success will also depend to a large extent on the continued contributions of its executive officers and other key management and technical personnel, none of whom has an employment agreement with the Company and each of whom would be difficult to replace. The Company does not maintain a key person life insurance policy on the Chief Executive Officer. However, the loss of the services of one or more of the Company's executive officers or key personnel or the inability to continue to attract qualified personnel could delay product development cycles or otherwise have a material adverse effect on the Company's business and operating results. Conflicting Patents and Intellectual Property Rights of Third Parties; Potential Infringement Claims The laser, semiconductor capital equipment, CATV and telecommunications industries in which the Company sells its products are characterized by frequent litigation regarding patent and other intellectual property rights. Numerous patents in these industries are held by others, including academic institutions and competitors of the Company. Such patents could inhibit the Company's ability to develop new products for such markets. The industry in which the Company operates is characterized by periodic claims of patent infringement or other intellectual property rights. While in the past licenses generally have been available to the Company where third-party technology was necessary or useful for the development or production of the Company's products, there can be no assurance that licenses to third-party technology will be available on commercially reasonable terms, if at all. Generally, a license, if granted, would include payments by the Company of up-front fees, ongoing royalties or a combination thereof. There can be no assurance that such royalty or other terms would not have a significant adverse impact on the Company's operating results. The Company is a licensee of a number of third party technologies and intellectual property rights and is required to pay royalties to these third party licensors on certain of its products, including its Ultrapointe Systems and its solid state lasers. During fiscal 1997 and 1996, the Company expensed $1.4 million and $1.3 million, respectively, in license and royalty fees primarily in connection with its gas laser subsystems. In addition, there can be no assurance that third parties will not assert claims against the Company with the Company's existing products or with respect to future products under development by the Company. In the event of litigation to determine the validity of any third-party claims, such litigation could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation is determined in favor of the Company. In the event of an adverse result in any such litigation, the Company could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology which is the subject of the litigation. There can be no assurance that the Company would be successful in such development or that any such licenses would be available to the Company. In the absence of such a license, the Company could be enjoined from future sales of the infringing product or products. In fiscal years 1992 and 1993, the Company incurred substantial legal expenses in connection with a patent infringement action relating to the Company's current gas laser subsystems brought by Spectra-Physics Lasers, Inc. ("Spectra-Physics"). While the Spectra-Physics case has since been settled, no assurance can be given that, in the future, the Company will be able to avoid similar actions by competitors or others or that the Company will not be forced to initiate its own actions to protect its proprietary position. Limited Protection of Intellectual Property The Company's future success depends in part upon its intellectual property, including trade secrets, know-how and continuing technological innovation. There can be no assurance that the steps taken by the Company to protect its intellectual property will be adequate to prevent misappropriation or that others will not develop competitive technologies or products. The Company currently holds 30 U.S. patents on products or processes and certain corresponding foreign patents and has applications for certain patents currently pending. While three patents have been issued with respect to the Company's Ultrapointe Systems, no assurance can be given that competitors will not successfully challenge the validity of these patents or design products that avoid infringement of the Company's proprietary rights with respect to its Ultrapointe Systems. There can be no assurance that other companies are not investigating or developing other technologies that are similar to the Company's, that any patents will issue from any application pending or filed by the Company or that, if patents do issue, the claims allowed will be sufficiently broad to deter or prohibit others from marketing similar products. In addition, there can be no assurance that any patents issued to the Company will not be challenged, invalidated or circumvented, or that the rights thereunder will provide a competitive advantage to the Company. Further, the laws of certain territories in which the Company's products are or may be developed, manufactured or sold, including Asia, Europe or Latin America, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. Dependence on Sole and Limited Source Suppliers Various components included in the manufacture of the Company's products are currently obtained from single or limited source suppliers. A disruption or loss of supplies from these companies or an increase in price of these components would have a material adverse effect on the Company's results of operations, product quality and customer relationships. For example, the Company obtains all the robotics, workstations and many optical components used in its Ultrapointe Systems from Equipe Technologies, Silicon Graphics, Inc., and Olympus Corporation, respectively. The Company currently utilizes a sole source for the crystal semiconductor chip sets incorporated in the Company's solid state microlaser products and acquires its pump diodes for use in its solid state laser products from Philips, Opto Power Corporation and GEC. The Company also obtains lithium niobate wafers, gallium arsenide wafers, specialized fiber components and certain lasers used in its UTP and ULE products primarily from Crystal Technology, Inc., Fujikura, Ltd., Philips Key Modules, and Sumitomo, respectively. The Company does not have a long-term or volume purchase agreements with any of these suppliers, and no assurance can be given that these components will be available in the quantities required by the Company, if at all. Further, UTP depends on relatively specialized components and it cannot be assured that its respective suppliers will be able to continue to meet UTP's requirements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net Sales. In the first quarter of fiscal 1998, ended September 30, 1997, net sales were $38.5 million, which represented a $15.0 million or 64.0% increase over net sales of $23.5 million in the first quarter of fiscal 1997. The increase was primarily attributable to an increase of $14.9 million in sales of the Company's telecommunications products. Results for the first quarter of fiscal 1998 included Uniphase Laser Enterprises AG (ULE) which accounted for 24.7% of the telecommunication product revenues and was acquired in a purchase transaction in March 1997 from IBM's Zurich Research laboratory in Switzerland. Sales of the Company's lasers subsystems and Ultrapointe Laser Imaging Systems were relatively consistent with the first quarter of fiscal 1997. Gross Profit. In the first quarter of fiscal 1998, the Company's gross profit increased 64.6% to $18.5 million or 48.1% of net sales from $11.3 million or 48.0% of net sales in the same period of fiscal 1997. There can be no assurance that the Company will be able to sustain its gross margin at current levels. The Company expects that there will continue to be periodic fluctuations in its gross margin resulting from changes in its sales and product mix, competitive pricing pressures, manufacturing yields, inefficiencies associated with new product introductions and a variety of other factors. Research and Development Expense. In the first quarter of fiscal 1998, research and development expense was $2.9 million or 7.5% of net sales which represented a $1.3 million or 77.4% increase over research and development expense of $1.6 million or 6.9% of net sales in the first quarter of fiscal 1997. The increase in research and development expense is due to increased expenditures associated with the continued development and enhancement of the Company's telecommunications product lines, which included expenses of $355,000 from the recently acquired ULE division. The Company also continues to invest in the development of solid state lasers. Royalty and License Expense. In the first quarter of fiscal 1998, royalty and license expense of $485,000 was consistent with the $409,000 in the same period of fiscal 1997. However, this expense decreased as a percentage of net sales to 1.3% in the quarter ended September 30, 1997 from 1.7% in the same period in fiscal 1997. The decrease as a percentage of net sales was due to the increasing proportion of revenues that the Company derived from royalty-free telecommunications products. The Company continues to develop products in solid state laser, telecommunications and semiconductor equipment technology. There are numerous patents in these areas that are held by others, including academic institutions and competitors of the Company. Such patents could inhibit the Company's ability to develop, manufacture and sell products in this area. A number of the patents are conflicting. If there is conflict between a competitor's patents or products and those of the Company, it could be very costly for the Company to enforce its rights in an infringement action or defend such an action brought by another party. In addition, the Company may need to obtain license rights to certain patents and may be required to make substantial payments, including continuing royalties, in exchange for such license rights. There can be no assurance that licenses to third party technology, if needed, will be available on commercially reasonable terms. Selling, General and Administrative Expense. In the first quarter of fiscal 1998, selling, general and administrative expense was $6.3 million or 16.4% of net sales, which represented a $1.8 million or 41.4% increase over selling, general and administrative expense of $4.5 million or 19.0% of net sales in the first quarter of fiscal 1997. The increase is due primarily to expenses in support of UTP's Connecticut facility, the addition of expenses of $672,000 from ULE, and the amortization of intangible assets and compensation expense related to the acquisition of ULE. Interest and Other Income, Net. In the first quarter of fiscal 1998, interest and other income, net was $762,000, which represented a $184,000 decrease over interest and other income, net of $946,000 in the first quarter of fiscal 1997. The decrease in the interest and other income, net is due to the related interest on a reduced level of short-term investments resulting from the cash payment to IBM of $45.0 million for the asset acquisition of ULE in the third quarter of fiscal 1997. Income Tax Expense. As stated in Note 3 of Notes to Consolidated Financial Statements, the effective tax rate used for the first quarter of fiscal 1998 was 35.5% as compared to 37% used in the same period of fiscal 1997. The reduction to the Company's effective tax rate is primarily due to lower foreign taxes. Liquidity and Capital Resources At September 30, 1997, the Company's combined balance of cash, cash equivalents and short-term investments was $83.0 million. The Company has met its liquidity needs to date primarily through cash generated from operating activities. Cash provided by operating activities was $9.8 million in the first quarter of fiscal 1998, compared with $1.7 million in the first quarter of fiscal 1997. The increase in cash provided by operating activities resulted primarily from increases in net income before depreciation and amortization expense. Increase accounts payable and other accrued expenses were primarily offset by an increase in accounts receivable and inventories. Cash used in investing activities was $2.7 million in the first quarter of fiscal 1998. The Company incurred capital expenditures of $3.7 million primarily in facilities improvements and the acquisition of manufacturing and other equipment to expand its manufacturing facilities in Connecticut and Switzerland. The Company also purchased a patent that it believes will enhance its modulator product offerings in the first quarter of fiscal 1998 for $500,000. These programs were primarily funded through existing capital and the liquidation of short-term investments of $1.5 million during the first quarter of fiscal 1998. The Company has a $5.0 million revolving line of credit with a bank. There were no borrowings under the line of credit at September 30, 1997. Advances under the line of credit bear interest at the bank's prime rate (8.5% at September 30, 1997) and are secured by inventories and accounts receivable. Under the terms of the line of credit agreement, the Company is required to maintain certain minimum working capital, net worth, profitability levels and other specific financial ratios. In addition, the agreement prohibits the payment of cash dividends and contains certain restrictions on the Company's ability to borrow money or purchase assets or interests in other entities without the prior written consent of the bank. The line of credit expires on January 28, 1999. There were no borrowings under the line of credit at September 30, 1997. During the first quarter of fiscal 1998, the Company retired approximately $6.3 million in notes payable and the related interest payable originating from the acquisition of UFP in May 1996. The Company believes that its existing cash balances and short-term investments, together with existing cash flow from operations and available line of credit will be sufficient to meet its liquidity and capital spending requirements at least through the end of calendar year 1998. However, possible acquisitions of complementary businesses, products or technologies may require additional financing prior to such time. There can be no assurance that additional financing will be available when required or, if available, will be on terms satisfactory to the Company. PART II--OTHER INFORMATION Item 1. Legal Proceedings Certain claims and counter claims have been filed between the Uniphase Telecommunications Products, Inc., ("UTP"), a subsidiary of the Company, and Tacan Corporation ("Tacan") with the U.S. District Court for the Southern District of California (the "Southern California Action") and the U.S. District Court for the District of Connecticut (the "Connecticut Action"). UTP seeks to recover in excess of $695,000 for amounts that Tacan refused to pay for equipment ordered and/or received by Tacan, plus punitive damages and treble damages. Tacan alleges claims of breach of contract, breach of implied and express warranties, negligent misrepresentation, conversion and negligent interference with perspective economic advantage as well as unfair trade practices and seeks compensatory damages in amounts allegedly exceeding $11.6 million plus punitives. On October 17, 1997, Tacan agreed to dismiss the Southern California Action and proceed with the Connecticut Action. The Company believes the foregoing litigation with Tacan will not have a material negative impact on the Company's financial condition or results of operations. However, given the inherent uncertainty of litigation and the early stage of discovery, there can be no assurance that the ultimate outcome in the litigation will be in the Company's favor, or that the diversion of management's attention, and any costs associated with the lawsuit, will not have a material adverse effect on the Company's financial condition or results of operations. Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders During the quarter ended September 30, 1997, no matters were submitted for stockholders' vote. On October 16, 1997, the Company submitted for the approval of, and the stockholders approved, an amendment to the Company's Certificate of Incorporation to increase the number of shares of common stock which the Company is authorized to issue from 20,000,000 to 50,000,000 shares. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a) Exhibits 27. Financial Data Schedule b) Forms 8-K Amendment to Form 8-K originally filed with the Commission for the purchase of the assets of IBM Laser Enterprise on March 25, 1997. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Uniphase Corporation (Registrant) Date 10-24-97 \s\ Danny E. Pettit Danny E. Pettit, Vice President of Finance and CFO (Principal Financial and Accounting Officer) Date 10-24-97 \s\ Kevin Kalkhoven Kevin N. Kalkhoven, Chairman and CEO (Principal Executive Officer) EX-27 2
5 0000912093 UNIPHASE CORPORATION 1000 3-MOS JUN-30-1998 SEP-30-1997 32470 50527 25724 880 19224 140855 46649 13132 187006 21447 0 0 0 17 162931 187006 38473 38473 19954 19954 9664 0 0 9617 3414 6203 0 0 0 6203 .34 .34
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