JDS Uniphase DEF 14A 2005
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
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JDS Uniphase Corporation
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October 21, 2005
Fiscal 2005 was a year of heavy-lifting as we embarked on major activities to reengineer our business model to focus on those products and markets that make best use of our core competencies to meet our growth and profitability targets. Although the emphasis of these activities through most of the year was on sustainable cost reductions, we were able to grow revenues and gain market share in our communications business, as well as significantly diversify our markets, products and customer base. Key accomplishments included:
Moving to the bottom line, we were extremely focused in fiscal 2005 on executing sustainable profitability improvements. We started with a critical examination of the realities of our industry, so that we could ensure our evolving strategy embraced these considerations:
With these facts in mind, we engaged in a comprehensive program early in the fiscal year to fundamentally improve profitability. Actions taken can broadly be grouped under two segments: cost reducing our core business and expanding our market opportunity through select acquisitions.
Cost reducing the past is critical to our future success because we must gain profitability leverage from our operations as we take costs out of our infrastructure. During fiscal 2005, we executed a series of initiatives designed to right-size our operations, including:
We expect these initiatives to start positively impacting our income statement in the first quarter of fiscal 2006, which ended on September 30, 2005. We have targeted aggregate quarterly cost savings of $4 million in the first quarter of fiscal 2006, $9 million in the second, $17 million in the third and $22 million in the fourth, when compared with our fiscal 2005 third quarter results. Taken together, and when fully implemented in the quarter ending June 30, 2006, we expect these initiatives to deliver annualized cost savings of $88 million, when compared with our fiscal 2005 third quarter results. As a result of these initiatives, core JDSU headcount is expected to decline by approximately 1,480, although we note that overall headcount will increase as we welcome employees associated with our recent acquisitions.
Investing in Our Future
I believe that cost reducing the past, by itself, is not enough to move JDSU to a satisfactory position of strength and profitability. And that brings me to the second category of initiatives which is the expansion of our market opportunity and fortification of our current business through acquisition.
Few, if any, of our competitors can match our strong balance sheet. With more than $1.3 billion in cash, cash equivalents and short term investments as we exited fiscal year 2005, I believe JDSU has an opportunity that is unique in our industry, which is to simultaneously invest in the future through acquisitions while engaging in major cost reduction activities. Companies acquired during fiscal 2005 included:
Our acquisition strategy has been to identify high growth opportunities that will allow JDSU to expand its addressable market and improve our longer term profitability performance. The adjacent communications market of test and measurement, for example, is growing at a compound annual growth rate of 510%, and tends to
enjoy stronger margins than JDSUs traditional businesses. To take advantage of this opportunity, we closed the acquisition of Acterna, Inc. in August 2005. With this acquisition, JDSU becomes a leading supplier of broadband and optical test and measurement solutions for service providers and network equipment manufacturers worldwide. With Acterna revenues of $448 million and gross margin of 56% for its most recent fiscal year, the acquisition is also expected to have an immediate and positive impact on JDSUs business model. We are pleased that Acternas former independent auditor, PricewaterhouseCoopers, LLP, has agreed to act as JDSUs independent auditor starting with our first fiscal quarter of 2006.
Another high growth technology is tunable transponders, which is expected to grow at a compound annual growth rate of 50% through 2009, according to industry analyst Ovum-RHK. In response to this opportunity, we recently announced a definitive agreement to acquire Agility Communications, a leading provider of widely tunable laser solutions for optical networks. This acquisition, which is expected to close in the quarter ending December 31, 2005, reconfirms JDSUs commitment to its core optical communications business by further augmenting our continuing leadership in enabling agile networks based on reconfigurable optical add/drop multiplexers (or ROADMs) and other wavelength management modules.
By leading in these key technologies and products, I believe JDSU is building a uniquely comprehensive portfolio of solutions to capitalize on growing opportunities.
Other Corporate Initiatives
As discussed in the enclosed Proxy Statement, and in preparation for our Annual Meeting of Stockholders on December 1, 2005, we have invited stockholders to authorize our Board of Directors to execute a reverse stock split and a reduction in the number of authorized shares. If effected, the proposed reverse split is intended to offer greater visibility into our earnings performance on a per share basis. We also believe that the impact of a reverse stock split may expand the Companys appeal to a broader range of institutional investors, many of whom are currently unable to invest in stocks trading below $5. If approved by stockholders, the Board of Directors can, in its discretion, execute a reverse split in the approved range at any time prior to December 1, 2006.
Fiscal 2005 was the first year JDSU was required to comply with the assessment and attestation provisions of S404 of Sarbanes-Oxley (SOX certification), which pertains to internal controls over financial reporting. As we prepared for SOX certification, several hundred key controls were introduced or strengthened across the corporation. In final SOX testing, the vast majority of our key controls were found to be effective. And importantly, both the Company and our independent auditor signed off on our reported fiscal 2005 results.
However, the SOX certification process did uncover a number of material weaknesses in our internal controls over financial reporting. Specifically, we have room for improvement in the design and operating effectiveness of controls related to documentation and analysis of goodwill impairment. While the necessary adjustment was made prior to the announcement of our fiscal 2005 fourth quarter results, our new CFO is looking closely at how the existing procedures need to be strengthened.
The second area for improvement relates to the additional strain placed on our finance and accounting organization due to the high volume of complex, non-routine transactions executed during fiscal 2005 and designed to strengthen our business model over time. Our testing confirmed the need to continue to strengthen our finance and accounting teams and improve certain processes, which we are committed to achieving through fiscal 2006.
In September 2005, we launched a new corporate identity including the new common usage name of JDSU. While our legal identity has not changedit remains JDS Uniphase Corporation, we believe that our new name
and logo capture the many changes underway. Put simply, JDSU is a very different company today than it was even twelve months ago.
While re-engineering JDSU is still a work in progress, the path to breakeven has been laid and management is focused on execution. We expect that we will start to see the benefits of much of fiscal 2005s heavy lifting during fiscal 2006. The integration of Acterna will have an immediate and significant impact on our business model and profitability performance, starting with a partial quarter benefit in the quarter ending September 30, 2005. Coupled with the cost reduction initiatives outlined above, we believe that our actions in fiscal 2005 have significantly accelerated JDSUs path to profitability.
Both the management team and the Board of Directors are committed to delivering long term shareholder value for our investors. If you are interested in learning more about the many profitability-enhancing initiatives underway at JDSU, please do not hesitate to contact our Investor Relations department at firstname.lastname@example.org or on (408) 546-4445.
Kevin J. Kennedy
Statements contained in this letter which are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as anticipate that, believes, can impact, continue to, estimates, expects to, hopes, intends, plans, to be, will be, will continue to be, continuing, ongoing, or similar words. Management cautions that forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, including, without limitation, the following: (i) due to, among other things, the Companys limited visibility, our ability to perceive or predict market trends (including, among other things, any stabilization recovery or growth thereof) is limited and uncertain; (ii) our ongoing integration, cost reduction, reorganization and restructuring efforts may not be successful in achieving their expected cost reductions and other benefits, may be insufficient to align the our operations with customer demand and the changes affecting its industry, or may be more costly or extensive than currently anticipated; (iii) our ability to predict financial performance for future periods continues to be difficult; (iv) ongoing efforts to improve our execution and design and introduce products that meet customers future need and to manufacture such products at competitive costs may not be successful, and (v) the expected increases in revenues and customer and market penetration resulting from our recent acquisitions may not materialize to the extent anticipated and these expected benefits maybe further offset by costs and diversion of our managements time with respect to the integration of these acquisitions with us. Forward-looking statements are made only as of the date of this letter and JDS Uniphase Corporation assumes no obligation to update any of the forward-looking statements after the date of this letter to conform such statements to actual results or to changes in our expectations.
JDS UNIPHASE CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 1, 2005
By Order of the Board of Directors,
Kevin J. Kennedy
Chief Executive Officer
San Jose, California
October 21, 2005
JDS UNIPHASE CORPORATION
1768 Automation Parkway
San Jose, California 95131
Why am I receiving these proxy materials?
The Board of Directors (the Board or Board of Directors) of JDS Uniphase Corporation, a Delaware corporation (the Company), is furnishing these proxy materials to you in connection with the Companys 2005 annual meeting of stockholders (the Annual Meeting). The Annual Meeting will be held at the Companys corporate offices located at 1768 Automation Parkway, San Jose, California 95131, on December 1, 2005 at 8:30 a.m., Pacific Standard Time. You are invited to attend the Annual Meeting and are entitled and requested to vote on the proposals outlined in this proxy statement (Proxy Statement).
What proposals will be voted on at the Annual Meeting?
There are four proposals scheduled to be voted on at the Annual Meeting:
1. To elect two Class III directors to serve until the 2008 annual meeting of stockholders and until their successors are elected and qualified.
2. To approve an amendment to the Companys Restated Certificate of Incorporation which will effect a reverse stock split of the common stock of the Company by a ratio of not less than one-for-eight and not more than one-for-ten at any time prior to December 1, 2006, with the exact ratio to be set at a whole number within this range to be determined by the Board of Directors in its discretion and to reduce the number of authorized shares of the Companys common stock.
3. To ratify the appointment of PricewaterhouseCoopers LLP as the Companys independent registered public accounting firm (hereinafter referred to as independent auditors) for the fiscal year ending June 30, 2006.
4. To consider such other business as may properly come before the Annual Meeting and any adjournment or postponement thereof.
As to any other business which may properly come before the Annual Meeting, the persons named on the enclosed proxy card will vote according to their best judgment. The Company does not know now of any other matters to be presented or acted upon at the Annual Meeting.
What are the recommendations of the Companys Board of Directors?
The Board recommends that you vote FOR the election of the two Class III directors, FOR approval of the amendment to the Companys Restated Certificate of Incorporation to effect a reverse split based on a ratio between one-for-eight and one-for-ten of all of the Companys outstanding common stock, and FOR the ratification of the appointment of PricewaterhouseCoopers LLP as the Companys independent auditors for the fiscal year ending June 30, 2006.
What is the record date and what does it mean?
The record date for the Annual Meeting is October 11, 2005. The record date is established by the Board of Directors as required by Delaware law. Holders of shares of the Companys common stock and holders of exchangeable shares of JDS Uniphase Canada Ltd., a subsidiary of the Company, at the close of business on the record date are entitled to receive notice of the Annual Meeting and to vote at the Annual Meeting and any adjournments or postponements thereof.
What shares can I vote?
Each stockholder of the Companys common stock, par value $.001 per share (Common Stock), is entitled to one vote for each share of Common Stock owned as of the record date, and CIBC Mellon Trust Company (the Trustee), the holder of the Companys special voting share (Special Voting Share), is entitled to one vote for each exchangeable share of JDS Uniphase Canada Ltd., a subsidiary of the Company (Exchangeable Shares), outstanding as of the record date (other than Exchangeable Shares owned by the Company and its affiliates). Holders of Common Stock and the Exchangeable Shares are collectively referred to as Stockholders. Votes cast with respect to Exchangeable Shares will be voted through the Special Voting Share by the Trustee as directed by the holders of Exchangeable Shares, except votes cast with respect to Exchangeable Shares whose holders request to vote directly in person as proxy for the Trustee at the Annual Meeting.
At the record date, 1,594,226,763 shares of Common Stock were issued and outstanding, one share of the Companys Special Voting Share was issued and outstanding, and 58,184,798 Exchangeable Shares were issued and outstanding (excluding Exchangeable Shares owned by the Company and its affiliates which are not voted). Each Exchangeable Share is exchangeable at any time, at the option of its holder, for one share of the Companys Common Stock.
What constitutes a quorum?
The presence at the Annual Meeting, in person or by proxy, of the holders of a majority of the shares of Common Stock and Exchangeable Shares outstanding and entitled to vote on the record date will constitute a quorum permitting the Annual Meeting to conduct its business.
How are abstentions and broker non-votes treated?
Under the General Corporation Law of the State of Delaware, an abstaining vote and a broker non-vote are counted as present and are, therefore, included for purposes of determining whether a quorum of shares is present at the Annual Meeting. Broker non-votes are not included in the tabulation of the voting results on the election of directors or issues requiring approval of a majority of the shares present or represented by proxy and entitled to vote at the Annual Meeting and, therefore, do not have an effect on Proposals 1 or 3. However, with respect to Proposal No. 2, a broker non-vote will have the same effect as a negative vote. A broker non-vote occurs when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have the discretionary voting instructions with respect to that item and has not received instructions from the beneficial owner. Under the rules that govern brokers who are voting with respect to shares held by them as nominee, brokers have the discretion to vote such shares only on routine matters. Routine matters include, among others, the election of directors and ratification of auditors. Non-routine matters include, among others, the proposed amendment to the Companys Restated Certificate of Incorporation. For the purpose of determining whether the Stockholders have approved matters other than the election of directors, abstentions are treated as shares present or represented and voting, so abstentions have the same effect as negative votes. Shares held by brokers who do not have discretionary authority to vote on a particular matter and have not received voting instructions from their customers are not counted or deemed to be present or represented for purposes of determining whether Stockholders have approved that matter.
What is the voting requirement to approve each of the proposals?
Proposal 1. The two candidates receiving the greatest number of affirmative votes of the votes attached to shares of Common Stock and the Special Voting Share present in person, or represented by proxy, and entitled to vote at the Annual Meeting will be elected, provided a quorum is present and voting. Abstentions and broker non-votes will not be counted toward a nominees total.
Proposal 2. Approval to amend the Companys Restated Certificate of Incorporation to effect a reverse stock split of the Companys outstanding Common Stock at a ratio of not less than one-for-eight and not more than one-for-ten, with the exact ratio to be set a whole number within this range to be determined by the Board of
Directors, together with the reduction in the number of authorized shares of the Companys Common Stock requires the affirmative vote of a majority of the outstanding shares of Common Stock and a majority of the votes represented by the Special Voting Share. As a result, abstentions and broker non-votes will have the same effect as negative votes.
Proposal 3. Ratification of the appointment of PricewaterhouseCoopers LLP as the Companys independent auditors will require the affirmative vote of a majority of the shares of Common Stock and a majority of the votes represented by the Special Voting Share Special Voting Share present in person, or represented by proxy, and entitled to vote at the Annual Meeting. Abstentions and broker non-votes will not be counted as having been voted on Proposal 3.
All shares of Common Stock and the Special Voting Share represented by valid proxies will be voted in accordance with the instructions contained therein. Votes with respect to Exchangeable Shares represented by valid voting instructions received by the Trustee will be cast by the Trustee in accordance with those instructions. In the absence of instructions, proxies from holders of Common Stock will be voted FOR Proposals 1, 2 and 3. If no instructions are received by the Trustee from a holder of Exchangeable Shares, the votes to which such holder is entitled will not be exercised.
How do I vote my shares?
If you are a common stockholder of record, you can either attend the Annual Meeting and vote in person or give a proxy to be voted at the Annual Meeting:
The Internet and telephone voting procedures have been set up for your convenience and are designed to authenticate Stockholders identities, to allow Stockholders to provide their voting instructions, and to confirm that their instructions have been recorded properly. The Company believes the procedures which have been put in place are consistent with the requirements of applicable law. Specific instructions for Stockholders of record who wish to use the Internet or telephone voting procedures are set forth on the enclosed proxy card.
If you are a record holder of Exchangeable Shares, you can either attend the Annual Meeting and vote in person or give a proxy to be voted at the Annual Meeting by mailing the enclosed voting instruction card to the Trustee.
If a holder of Exchangeable Shares does not provide the Trustee with voting instructions, your Exchangeable Shares will not be voted.
Who will tabulate the votes?
An automated system administered by ADP Investor Communication Services (ADP) will tabulate votes cast by proxy at the Annual Meeting and a representative of the Company will tabulate votes cast in person at the Annual Meeting.
Is my vote confidential?
Proxy instructions, ballots and voting tabulations that identify individual Stockholders are handled in a manner that protects your voting privacy. Your vote will not be disclosed either within the Company or to third parties, except (i) as necessary to meet applicable legal requirements, or (ii) to allow for the tabulation and/or certification of the vote.
Can I change my vote after submitting my proxy?
You may revoke your proxy at any time before the final vote at the Annual Meeting. You may do so by one of the following four ways:
If you hold Exchangeable Shares and you wish to direct the Trustee to change the vote attached to the Special Voting Share on your behalf, you should follow carefully the instructions provided by the Trustee, which accompany this Proxy Statement. The procedure for instructing the Trustee differs in certain respects from the procedure for delivering a proxy, including the place for depositing the instructions and the manner for revoking the proxy.
Who is paying for this proxy solicitation?
This Proxy Statement and the accompanying proxy were first sent by mail to common stockholders, the Trustee for the Special Voting Share, and holders of Exchangeable Shares on or about October 21, 2005. The Company will bear the cost of soliciting proxies, including preparation, assembly, printing and mailing of the Proxy Statement. The Company has retained the services of The Proxy Advisory Group of Strategic Stock Surveillance, LLC, to assist in the solicitation of proxies and provide related advice and informational support, for a services fee and the reimbursement of customary disbursements that are not expected to exceed $13,500 in the aggregate. In addition, the Company will reimburse brokerage firms and other persons representing beneficial owners of shares for their expenses in forwarding solicitation materials to such beneficial owners. Proxies may be solicited by certain of the Companys directors, officers and regular employees, without additional compensation, either personally, by telephone, facsimile, or telegram.
How can I find out the voting results?
The Company will announce the preliminary results at the Annual Meeting and publish the final results in the Companys Quarterly Report on Form 10-Q for the second quarter of fiscal 2006.
How do I receive electronic access to proxy materials for the current and future annual meetings?
Stockholders who have previously elected to receive the Proxy Statement and annual report over the Internet will be receiving an e-mail on or about October 21, 2005 with information on how to access Stockholder information and instructions for voting over the Internet. Stockholders of record may vote via the Internet until 11:59 p.m. Eastern Time, November 30, 2005.
If your shares are registered in the name of a brokerage firm and you have not elected to receive your Proxy Statement and annual report over the Internet, you still may be eligible to vote your shares electronically over the Internet. A large number of brokerage firms are participating in the ADP online program, which provides eligible Stockholders who receive a paper copy of this Proxy Statement the opportunity to vote via the Internet. If your brokerage firm is participating in ADPs program, your proxy card will provide instructions for voting online. If your proxy card does not reference Internet information, please complete and return the proxy card in the postage-paid envelope provided.
Stockholders can elect to view future proxy statements and annual reports over the Internet instead of receiving paper copies, which results in cost savings for the Company. If you are a Stockholder of record and would like to receive future Stockholder materials electronically, you can elect this option by following the instructions provided when you vote your proxy over the Internet at www.ProxyVote.com.
If you chose to view future proxy statements and annual reports over the Internet, you will receive an e-mail notification next year with instructions containing the Internet address of those materials. Your choice to view future proxy statements and annual reports over the Internet will remain in effect until you contact either your broker or the Company to rescind your instructions. You do not have to elect Internet access each year.
If you elected to receive this Proxy Statement electronically over the Internet and would now like to receive a paper copy of this Proxy Statement so that you may submit a paper proxy in lieu of an electronic proxy, you should contact your broker or the Company.
How can I avoid having duplicate copies of the proxy statement sent to my household?
Some brokers and other nominee record holders may be participating in the practice of householding proxy statements and annual reports, which results in cost savings for the Company. The practice of householding means that only one copy of the proxy statement and annual report will be sent to multiple Stockholders in a Stockholders household. The Company will promptly deliver a separate copy of either document to any Stockholder who contacts the Companys investor relations department at (408) 546-5000 requesting such copies. If a Stockholder is receiving multiple copies of the proxy statement and annual report at the Stockholders household and would like to receive a single copy of those documents for a Stockholders household in the future, that Stockholder should contact their broker, other nominee record holder, or the Companys investor relations department to request mailing of a single copy of the proxy statement and annual report.
When are stockholder proposals due for next years annual meeting?
In order for Stockholder proposals to be considered properly brought before an annual meeting by a Stockholder, the Stockholder must have given timely notice in writing to the Secretary of the Company. To be timely for the 2006 annual meeting of stockholders (the 2006 Annual Meeting), a Stockholders notice must be received by the Company at its principal executive offices not less than 30 days nor more than 60 days prior to the 2006 Annual Meeting; provided however that in the event less than 40 days notice or prior public disclosure of the date of the meeting is made or given to the Stockholders, notice by the Stockholder to be on time must be received not later than the close of business on the tenth day following the day on which notice of the 2006 Annual Meeting was mailed or public disclosure was made. A Stockholders notice to the Secretary must set forth as to each matter the Stockholder proposes to bring before the 2006 Annual Meeting: (i) a brief description of the business desired to be brought before the 2006 Annual Meeting and the reasons for conducting such business at the 2006 Annual Meeting; (ii) the name and record address of the Stockholder proposing such business; (iii) the class and number of shares of the Company which are beneficially owned by the Stockholder; and (iv) any material interest of the Stockholder in such business.
Subject to applicable laws and regulations, the Company has discretion over what Stockholder proposals will be included in the agenda for the 2006 Annual Meeting and/or in the related proxy materials and will also have discretionary authority to vote all shares for which it has proxies in opposition to a matter if the Companys fails to receive notice of a Stockholder proposal for next years annual meeting by September 6, 2006. Stockholder proposals submitted pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended, and intended to be presented at the Companys 2006 Annual Meeting must be received by the Company not later than June 23, 2006 in order to be considered for inclusion in the Companys proxy materials.
ELECTION OF CLASS III DIRECTORS
The Board is divided into three classes as nearly equal in number as possible. The members of each class of directors serve staggered three-year terms. Currently, the Board is composed of the following eight members:
In February 2005, the Board of Directors, upon the recommendation of the Corporate Governance Committee, appointed Richard E. Belluzzo as a director. Prior to Mr. Belluzzos appointment, the Board increased the authorized number of directors to eight.
The Corporate Governance Committee of the Board of Directors has recommended, and the Board of Directors has nominated, the two nominees named below for election as Class III directors of the Company, each to serve a three-year term until the 2008 annual meeting of stockholders and until a qualified successor is elected or until the directors earlier resignation or removal. Each of the nominees, who is a current director of the Company, has consented, if elected as a Class III director of the Company, to serve until his term expires. The Board of Directors has no reason to believe each of the nominees will not serve if elected, but if either one of them should become unavailable to serve as a director, and if the Board designates a substitute nominee, the persons named as proxies will vote for the substitute nominee designated by the Board.
Class III DirectorNominees For Three Year Terms That Will Expire in 2008
THE BOARD RECOMMENDS A VOTE FOR THE ELECTION
TO THE BOARD OF EACH OF THE NOMINEES NAMED ABOVE
The Companys directors listed below will continue in office for the remainder of their terms or earlier in accordance with the Companys Bylaws. Information regarding the business experience of each such director is provided below.
Class I Directors Whose Terms Will Expire in 2007
Class II Directors Whose Terms Will Expire in 2006
Board Committees and Meetings
During fiscal 20051, the Board held seven meetings. The Board has four committees: Audit Committee, Compensation Committee, Corporate Governance Committee, and Corporate Development Committee. The members of the committees during fiscal 2005 are identified in the following table:
No director attended fewer than 75% of all Board meetings and committees on which he served after becoming a member of the Board of Directors, except Mr. Skrzypczak who was unable to attend one of the three Corporate Governance Committee meetings held prior to his resignation. The Company encourages, but does not require, its Board members to attend the annual stockholders meeting. All of the then-current members of the Companys Board of Directors attended the 2004 annual meeting of stockholders.
The Audit Committee met twelve times in fiscal 2005. The Audit Committee is responsible for assisting the full Board of Directors in fulfilling its oversight responsibilities relative to the Companys financial statements, financial reporting practices, systems of internal accounting and financial controls, the internal audit function, annual independent audits of the Companys financial statements, and such legal and ethics programs as may established from time to time by the Board. The Audit Committee is empowered to investigate any matter brought to its attention with full access to all books, records, facilities, and personnel of the Company and may retain external consultants at its sole discretion. In addition, the Audit Committee considers whether the Companys independent auditors provision of non-audit services is compatible with maintaining the independence of the independent auditors. The Board has determined that all members of the Audit Committee are independent as that term is defined in Rule 4200 of the Marketplace Rules of the Nasdaq Stock Market, Inc. The Board has further determined that Bruce D. Day and Peter A. Guglielmi are audit committee financial expert(s) as defined by Item 401(h) of Regulation S-K of the Securities Exchange Act of 1934, as amended (the Exchange Act) and are independent as defined by Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act. A copy of the Audit Committee charter, as amended, was attached as Appendix A to the Companys 2003 proxy statement. A copy of the Audit Committee charter can also be viewed at the Companys website at www.jdsu.com.
The Compensation Committee met six times in fiscal 2005. The Compensation Committee of the Board of Directors is responsible for insuring that the Company adopts and maintains responsible and responsive compensation programs for its employees, officers and directors consistent with the long-range interests of Stockholders. The Compensation Committee is also responsible for administering certain other compensation programs for such individuals, subject in each instance to approval by the full Board. The Compensation Committee also has the exclusive responsibility for the administration of the Companys employee stock purchase plans and equity incentive plans. The chair of the Compensation Committee reports on the Compensation Committees actions and recommendations at Board meetings. In addition, the Compensation
Committee has the authority to engage the services of outside advisors, experts and others to provide assistance as needed. All members of the Compensation Committee are independent as that term is defined in Rule 4200 of the Marketplace Rules of the Nasdaq Stock Market, Inc. A copy of the Compensation Committee charter can be viewed at the Companys website at www.jdsu.com.
The Corporate Development Committee met three times in fiscal 2005. The Corporate Development Committee oversees the Companys strategic acquisition and investment activities. The Corporate Development Committee reviews and approves strategic transactions for which approval of the full Board of Directors is not required and makes recommendations to the Board of Directors regarding those transactions for which the consideration of the full Board of Directors is appropriate. A copy of the Corporate Development Committee charter can be viewed at the Companys website at www.jdsu.com.
The Corporate Governance Committee met five times in fiscal 2005. The Corporate Governance Committee, which serves as the Companys nominating committee, reviews current trends and practices in corporate governance and recommends to the Board of Directors the adoption of programs pertinent to the Company. As provided in the charter of the Corporate Governance Committee, nominations for director may be made by the Corporate Governance Committee or by a Stockholder of record entitled to vote. The Corporate Governance Committee will consider and make recommendations to the Board of Directors regarding any Stockholder recommendations for candidates to serve on the Board of Directors. Stockholders wishing to recommend candidates for consideration by the Corporate Governance Committee may do so by writing to the Companys Investor Relations Department-Attention Corporate Governance Committee at 1768 Automation Parkway, San Jose, California 95131 providing the candidates name, biographical data and qualifications, a document indicating the candidates willingness to act if elected, and evidence of the nominating Stockholders ownership of Companys stock at least 120 days prior to the next annual meeting to assure time for meaningful consideration by the Corporate Governance Committee. There are no differences in the manner in which the Corporate Governance Committee evaluates nominees for director based on whether the nominee is recommended by a Stockholder. All members of the Corporate Governance Committee are independent as that term is defined in Rule 4200 of the Marketplace Rules of the Nasdaq Stock Market, Inc.
In reviewing potential candidates for the Board, the Corporate Governance Committee considers the individuals experience in the Companys industry, the general business or other experience of the candidate, the needs of the Company for an additional or replacement director, the personality of the candidate, the candidates interest in the business of the Company, as well as numerous other subjective criteria. Of greatest importance is the individuals integrity, willingness to be involved and ability to bring to the Company experience and knowledge in areas that are most beneficial to the Company. The Board intends to continue to evaluate candidates for election to the Board on the basis of the foregoing criteria. A detailed description of the criteria used by the Corporate Governance Committee in evaluating potential candidates may be found in the charter of the Corporate Governance Committee.
The Corporate Governance Committee operates under a written charter setting forth the functions and responsibilities of the committee. A copy of the charter can be viewed at the Companys website at www.jdsu.com.
Code of Ethics
The Company has adopted a Code of Ethics (known as the Code of Business Conduct) for its directors, officers and other employees. The Company will post on its website any amendments to, or waivers from, any provision of its Code of Business Conduct. A copy of the Code of Business Conduct is available on the Companys website at www.jdsu.com.
Communication between Stockholders and Directors
Shareholders may communicate with the Companys Board of Directors through the Companys Secretary by sending an email to email@example.com, or by writing to the following address: Chairman of the Board, c/o Secretary,
JDSU, 1768 Automation Parkway, San Jose, California 95131. The Companys Secretary will forward all correspondence to the Board of Directors, except for spam, junk mail, mass mailings, product complaints or inquiries, job inquiries, surveys, business solicitations or advertisements, or patently offensive or otherwise inappropriate material. The Companys Secretary may forward certain correspondence, such as product-related inquiries, elsewhere within the Company for review and possible response.
Each non-employee director of the Company, except the Chairman, receives an annual cash retainer of $48,000 which is paid in monthly installments of $4,000. Additionally, each non-employee director receives a grant of Common Stock having a value on the date of grant of $40,000, net of applicable taxes at the discretion of each non-employee director. Such shares of Common Stock are subject to a restricted stock purchase agreement which provides for vesting over a three year period. Each non-employee director, except the Chairman, receives $1,500 for each meeting of the Board of Directors attended. In addition, each non-employee director serving on a committee of the Board receives an annual cash retainer of $7,500, and each non-employee director serving as a committee chair receives an additional cash retainer of $6,000. Each non-employee director serving on a committee of the Board also receives a stipend of $500 per committee meeting attended.
Mr. Kaplan, who serves as Chairman of the Board, receives an annual cash retainer of $80,000 as compensation for his services which is paid in quarterly installments of $20,000. In addition, Mr. Kaplan receives $3,000 for each meeting of the Board of Directors attended.
Additionally, immediately after each annual meeting of stockholders, each individual who is continuing to serve as a non-employee director is granted an option to purchase 10,000 shares of the Companys Common Stock. The individual who is serving as the Chairman is granted an option to purchase an additional 60,000 shares of the Companys Common Stock. Upon initial appointment to the Board, each non-employee director is granted an option to purchase 40,000 shares of the Companys Common Stock. In its discretion, the Companys Board may make grants of additional options to non-employee directors. No such additional grants were made in fiscal year 2005. In addition, all non-employee directors who are serving as chair of one of the committees of the Board receive an annual option grant of 3,000 shares of the Companys Common Stock upon their initial appointment as chair and an automatic option grant of 3,000 shares of the Companys Common Stock immediately after each annual meeting of stockholders if the non-employee director continues as chair for the ensuing year. Options granted to non-employee directors have an exercise price equal to 100% of the fair market value of the Companys Common Stock on the date of grant, vest over twelve months and terminate eight years from the date of grant, except for the option grant made upon initial appointment to the Board which vests monthly over 36 months. Upon retirement of a non-employee director, all unvested options and restricted shares of the Companys Common Stock will automatically become fully vested, and the exercise period for such options will be extended to expire on the expiration date of such options, which is eight years from the date of grant.
Directors who are also employed by the Company do not receive any compensation for their services as directors. All directors are reimbursed for expenses incurred in connection with attending Board and committee meetings.
Relationships Among Directors or Executive Officers
There are no family relationships among any of the Companys directors or executive officers.
Certain Relationships and Related Transactions
In fiscal 2005, Bruce D. Day, Robert E. Enos, Peter A. Guglielmi, Martin A. Kaplan, Richard T. Liebhaber and Casimir S. Skrzypczak were each granted an option to purchase 10,000 shares of the Companys Common
Stock at a price of $3.18 per share, and Martin A. Kaplan, as Chairman of the Board, was granted an option to purchase 60,000 shares of the Companys Common Stock at a price of $3.18 per share. In addition, Bruce D. Day, Robert E. Enos, Richard T. Liebhaber, and Casimir S. Skrzypczak, as committee chairs, were each granted options to purchase 3,000 shares of the Companys Common Stock at a price of $3.18 per share.
Upon his appointment to the Board, Richard E. Belluzzo was granted an option to purchase 40,000 shares of the Companys Common Stock at a price of $1.92 per share.
In fiscal year 2005, Bruce D. Day, Robert E. Enos, Peter A. Guglielmi, Martin A. Kaplan, Richard T. Liebhaber, and Casimir S. Skrzypczak each received a grant of 12,578 shares of restricted Common Stock with a fair market value at the date of grant at $3.18 per share.
The Company has entered into certain employment and change of control agreements with certain of its Named Executive Officers (as defined below), Kevin J. Kennedy, Ronald C. Foster, and Mark S. Sobey (see Employment Contracts, Termination of Employment and Change in Control Arrangements below).
The Company has entered into indemnification agreements with Kevin J. Kennedy and Richard T. Liebhaber. The indemnity agreements provide, among other things, that the Company will indemnify Mr. Kennedy and Mr. Liebhaber under the circumstances and to the extent provided therein, for expenses, damages, judgments, fines and settlements each may be required to pay in actions or proceedings which either of them may be made a party by reason of their positions as a director or other agent of the Company, and otherwise to the fullest extent permitted under Delaware law and the Companys Bylaws.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between any member of the Companys Board or Compensation Committee and any member of the board of directors or compensation committee of any other companies, nor has such interlocking relationship existed in the past.
The following sets forth certain information regarding the Companys executive officers:
Kevin J. Kennedy became a member of the Companys Board in November 2001, and became Chief Executive Officer of the Company on September 1, 2003. From August 2001 to September 2003, Mr. Kennedy was the Chief Operating Officer of Openwave Systems, Inc. Prior to joining Openwave Systems Inc., Mr. Kennedy served seven years at Cisco Systems, Inc. (Cisco), most recently as Senior Vice President of the Service Provider Line of Business and Software Technologies Division, and 17 years at Bell Laboratories. Mr. Kennedy is a director of Freescale Semiconductor Corporation and Rambus Corporation.
David Vellequette joined the Company in July 2004 as Vice President and Operations Controller and served in those positions until July 2005 when he accepted the position of Chief Financial Officer. Prior to
joining the Company, Mr. Vellequette was Vice President of Worldwide Sales and Services Operations at Openwave Systems, Inc. from April 2002 to July 2004. Between 1992 and 2002, Mr. Vellequette held increasingly responsible positions at Cisco, first as Corporate Controller of StrataCom Corporation (acquired by Cisco in 1996) and later as Vice President of Finance. Mr. Vellequette holds a B.S. degree in accounting from the University of California, Berkeley.
Christopher S. Dewees has served as the Companys Senior Vice President and General Counsel since July 2003. From February 2003 until July 2003, Mr. Dewees served as Vice President and General Counsel, prior to which he was Acting General Counsel from October 2002 until February 2003. Mr. Dewees joined the Companys Legal Department in October 1999. Prior to October 1999, Mr. Dewees was employed at Morrison & Foerster LLP, where he represented the Company, and other Silicon Valley public and private companies. Mr. Dewees earned his A.B. degree from Dartmouth College in 1986, and his J.D. degree from Northwestern University in 1989.
David Gudmundson has served as Senior Vice President, Corporate Development and Marketing since June 2004. From April 2004 to June 2004, Mr. Gudmundson was Vice President, Corporate Development and Marketing, and he commenced his service with the Company in December 2003 as Vice President, Corporate Development. From May 1991 to August 2003, Mr. Gudmundson held a series of increasingly senior leadership roles at Cisco, culminating in his service as Vice President and General Manager responsible for Ciscos security server, DSL, and edge routing business units. Prior to Cisco, Mr. Gudmundson held various hardware and software development and systems engineering positions at ArgoSystems, Inc. (now part of Boeing Company Inc.) and ESL Incorporated (now part of TRW). Mr. Gudmundson holds a B.S.E.E. degree from University of Missouri-Rolla and an MBA degree from San Jose State University.
John Peeler joined the Company as Executive Vice President, Test & Measurement Group, upon the close of the Companys merger with Acterna, Inc. (Acterna), on August 3, 2005. Before joining the Company, Mr. Peeler served as President and Chief Executive Officer of Acterna. Mr Peeler joined a predecessor of Acterna in 1980 and served in a series of increasingly senior leadership roles including Vice President of Product Development, Executive Vice President and Chief Operating Officer, and President and CEO of TTC, the Communications Test subsidiary. Mr. Peeler was appointed as President and CEO of Acterna in 2003. Mr. Peeler earned a B.S. degree in Electrical Engineering and graduated with high distinction from the University of Virginia. He received the Virginia Governors Fellowship and subsequently earned a masters degree in Electrical Engineering, also from the University of Virginia.
Mark S. Sobey, Ph.D. has served as the Companys Senior Vice President, Sales since April, 2004. From May 2002 to April 2004, Dr. Sobey served as Senior Vice President, Global Sales and Marketing. From January 2001 to May 2002, Dr. Sobey was Vice President of Sales, North America. Dr. Sobey was Director of Sales, North America from July 2000 to January 2001, and from December 1999 to June 2000, Dr. Sobey was Director of Sales, North America with E-TEK Dynamics, Inc. Prior to E-TEK Dynamics, Inc., Dr. Sobey was Vice President/General Manager with Spectra-Physic, Inc.
Debora Shoquist joined the Company in March 2004 as Senior Vice President, Operations. Prior to joining the Company, Ms. Shoquist served as Senior Vice President and General Manager of the Electro-Optics Group at Coherent, Inc. From 1991 to 2001, Ms. Shoquist held several roles at Quantum Corporation, including service as President and General Manager of the Personal Computing Storage Division and Executive Vice President of Hard Disk Drive Operations. From 1981 to 1991, Ms. Shoquist served in various engineering, production, and manufacturing roles at Hewlett Packard Corporation.
Thomas Znotins, Ph.D. joined the Company in September 1999 and serves as Senior Vice President, Subsystems Product Group. Prior to his current role, Dr. Znotins led the Companys instrumentation business. From 1984 to 1999, Dr. Znotins held a series of senior positions in marketing, business development research and design at Lumonics, Inc. (now GSI Lumonics, Inc.), culminating in his service as General Manager of Lumonics Kanata, Canada facility. Dr. Znotins holds a Ph.D. in laser physics from McMaster University and completed the Executive Development Program at Northeastern University in 1989.
Michael Ricci has served as Senior Vice President, Components and Modules Group, since November 2004. Prior to joining the Company, Mr. Ricci served for five years as Vice President and General Manager at Intel Corporations Telecom Products Division, the Optical Products Group and Intels Business Development Group. Before Intel, Mr. Ricci served for two years as Vice President of Level One Communications, Inc., leading Level Ones Telecom Business Unit. From 1981 to 1997, Mr. Ricci was employed at Advanced Micro Devices in a series of increasingly senior roles, including engineering and product development. Mr. Ricci began his career at Siliconnix, Inc. Mr. Ricci holds a bachelors degree in Electrical Engineering from Stanford University.
APPROVAL TO AMEND THE COMPANYS RESTATED CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT AT A RATIO OF NOT LESS THAN ONE-FOR-EIGHT AND NOT MORE THAN ONE-FOR-TEN AT ANY TIME PRIOR TO DECEMBER 1, 2006, WITH THE EXACT RATIO TO BE DETERMINED BY THE BOARD OF DIRECTORS AND TO REDUCE THE NUMBER OF AUTHORIZED SHARES OF THE COMPANYS COMMON STOCK
The Board of Directors has approved and is hereby soliciting Stockholder approval of an amendment to the Companys Restated Certificate of Incorporation to effect a reverse stock split at a ratio of between 1 for 8 to 1 for 10 in the form set forth in Appendix A to this proxy statement (the Amendment). A vote FOR Proposal 2 will constitute approval of the Amendment providing for the combination of any whole number of shares of Common Stock between and including eight and ten into one share of Common Stock and will grant the Board of Directors the authority to select which of the approved exchange ratios within that range will be implemented. If the Stockholders approve this proposal, the Board of Directors will have the authority, but not the obligation, in its sole discretion, and without further action on the part of the Stockholders, to select one of the approved reverse stock split ratios and effect the approved reverse stock split by filing the Amendment with the Delaware Secretary of State at any time after the approval of the Amendment. If the Amendment has not been filed with the Delaware Secretary of State by the close of business on December 1, 2006, the Board of Directors will abandon the Amendment constituting the reverse stock split. If the reverse stock split is implemented, the Amendment also would reduce the number of authorized shares of the Companys Common Stock from 6,000,000,000 to 1,000,000,000, but would not change the par value of a share of the Companys Common Stock. Except for any changes as a result of the treatment of fractional shares, each Stockholder will hold the same percentage of Common Stock outstanding immediately prior to the reverse stock split as such Stockholder held immediately prior to the reverse stock split.
The Board of Directors believes that by reducing the number of shares of Common Stock outstanding through the reverse stock split and thereby proportionately increasing the per share price of the Companys Common Stock, the Companys Common Stock may be more appealing to institutional investors and institutional funds. The Board of Directors also believes that the Stockholders also may benefit from a higher priced stock because of improved liquidity as a result of an increased interest from institutional investors and investment funds and lower trading costs.
The Board believes that Stockholder approval of an exchange ratio range (rather than an exact exchange ratio) provides the Board with maximum flexibility to achieve the purposes of the reverse stock split. If the Stockholders approve Proposal 2, the reserve stock split will be effected, if at all, only upon a determination by the Board that the reverse stock split is in the Companys and the Stockholders best interests at that time. In connection with any determination to effect the reverse stock split, the Board will set the time for such a split and select a specific ratio within the range. These determinations will be made by the Board with the intention to create the greatest marketability for the Companys Common Stock based upon prevailing market conditions at that time.
If Proposal 2 is approved by the Stockholders, JDS Uniphase Canada Ltd. will effect a comparable reverse stock split of the Exchangeable Shares at the same ratio as finally determined by the Companys Board of
Directors. Such reverse stock split does not require the approval of the holders of the Exchangeable Shares and will only occur if Proposal No. 2 is approved by the Stockholders and implemented by the Board.
The Board reserves its right to elect not to proceed, and abandon, the reverse stock split if it determines, in its sole discretion, that this proposal is no longer in the best interests of the Companys Stockholders.
Purpose of the Reverse Stock Split
The purpose of the reverse stock split is to increase the per share trading value of the Companys Common Stock. The Board intends to effect the proposed reverse stock split only if it believes that a decrease in the number of shares outstanding is likely to improve the trading price for the Companys Common Stock, and only if the implementation of a reverse stock split is determined by the Board to be in the best interests of the Company and its Stockholders. The Board may exercise its discretion not to implement a reverse stock split.
The Company believes that a number of institutional investors and investment funds are reluctant to invest, and in some cases may be prohibited from investing, in lower-priced stocks and that brokerage firms are reluctant to recommend lower-priced stocks to their clients. By effecting a reverse stock split, the Company believes it may be able to raise its Common Stock price to a level where the Companys Common Stock could be viewed more favorably by potential investors.
Other investors may also be dissuaded from purchasing lower-priced stocks because the brokerage commissions, as a percentage of the total transaction, tend to be higher for lower-priced stocks. A higher stock price after a reverse stock split could alleviate this concern.
The combination of lower transaction costs and increased interest from institutional investors and investment funds could have the effect of improving the trading liquidity of the Companys Common Stock.
The Companys Common Stock currently trades on the Nasdaq National Market under the symbol JDSU. The Nasdaq National Market has several continued listing criteria that companies must satisfy in order to remain listed on the exchange. One of these criteria is that the Companys Common Stock have a trading price that is greater than or equal to $1.00 per share. Currently, the Company meets all of the Nasdaq National Markets continued listing criteria, including the minimum trading price requirement. Although the Companys trading price is above the minimum trading price required of the Nasdaq National Market, the Company believes that approval of this proposal would significantly reduce the Companys risk of not meeting this continued listing standard in the future.
Certain Risk Factors Associated with the Reverse Stock Split
Impact of the Proposed Reverse Stock Split if Implemented
If approved and effected, the reverse stock split will be realized simultaneously and in the same ratio for all of the Companys Common Stock. The reverse stock split will affect all holders of the Companys Common Stock uniformly and will not affect any Stockholders percentage ownership interest in the Company, except to the extent that the reverse stock split would result in any holder of the Companys Common Stock receiving cash in lieu of fractional shares. As described below, holders of the Companys Common Stock otherwise entitled to fractional shares as a result of the reverse stock split will receive a cash payment in lieu of such fractional shares. These cash payments will reduce the number of post-reverse stock split holders of the Companys Common Stock to the extent there are concurrently Stockholders who would otherwise receive less than one share of Common Stock after the reverse stock split. In addition, the reverse stock split will not affect any Stockholders proportionate voting power (subject to the treatment of fractional shares). After the reverse stock split, the number of authorized shares of Common Stock will be 1,000,000,000 shares and the number of unissued shares of Common Stock will be approximately 793,481,939 to 834,785,581 shares depending upon the reverse stock split ratio selected by the Board. The Company does not have any current plans, proposals or arrangements (written or otherwise) to issue any additional shares other than pursuant to equity plans and registration statements currently in existence and previously publicly announced transactions.
The principal effects of the reverse stock split will be that:
In addition, if approved and implemented, the reverse stock split may result in some Stockholders owning odd lots of less than 100 shares of Common Stock or Exchangeable Shares. Odd lot shares may be more difficult to sell, and brokerage commissions and other costs of transactions in odd lots are generally somewhat higher than the costs of transactions in round lots of even multiples of 100 shares. The Board believes, however, that these potential effects are substantially outweighed by the benefits of the reverse stock split.
The proposed reverse stock split of the Common Stock and Exchangeable Shares would become effective as of 11:59 p.m., Eastern Time, (the Effective Date) on the date of filing the Amendment with the office of the Delaware Secretary of State. Except as explained below with respect to fractional shares, on the Effective Date, shares of the Companys Common Stock issued and outstanding immediately prior thereto will be combined, automatically and without any action on the part of the Stockholders, into one share of the Companys Common Stock in accordance with the reverse stock split ratio determined by the Board and a corresponding combination will be made with respect to the outstanding Exchangeable Shares.
After the Effective Date, the Companys Common Stock and Exchangeable Shares will each have new committee on uniform securities identification procedures (CUSIP) numbers, which is a number used to identify the Companys equity securities, and stock certificates with the older CUSIP numbers will need to be exchanged for stock certificates with the new CUSIP numbers by following the procedures described below.
After the Effective Date, the Company will continue to be subject to periodic reporting and other requirements of the Exchange Act. The Companys Common Stock will continue to be reported on the Nasdaq National Market under the symbol JDSU, although Nasdaq will add the letter D to the end of the trading symbol for a period of 20 trading days after the Effective Date to indicate that the reverse stock split has occurred. The Exchangeable shares will continue to be reported on the Toronto Stock Exchange under the symbol JDU. No adjustment to the trading symbol will be made for the Exchangeable Shares after the Effective Date.
Board Discretion to Implement the Reverse Stock Split
If the reverse stock split is approved by the Companys Stockholders, it will be effected, if at all, only upon a determination by the Board of Directors that a reverse stock split (at a ratio determined by the Board as described above) is in the best interests of the Company and the Stockholders. The Boards determination as to whether the reverse stock split will be effected and, if so, at what ratio, will be based upon certain factors, including existing and expected marketability and liquidity of the Companys Common Stock, prevailing market conditions and the likely effect on the market price of the Companys Common Stock. If the Board determines to effect the reverse stock split, the Board will consider various factors in selecting the ratio including the overall market conditions at the time and the recent trading history of the Common Stock.
Stockholders will not receive fractional post-reverse stock split shares in connection with the reverse stock split. Instead, the Companys transfer agents for the registered Stockholders, American Stock Transfer and Trust Company for the Common Stock and CIBC Mellon Trust Company for the Exchangeable Shares, will aggregate all fractional shares and arrange for them to be sold as soon as practicable after the Effective Date at the then prevailing prices on the open market on behalf of those Stockholders who would otherwise be entitled to receive a fractional share. The Company expects that the transfer agents will cause the sale to be conducted in an orderly fashion at a reasonable pace and that it may take several days to sell all of the aggregated fractional shares of Common Stock. After completing the sale, Stockholders will receive a cash payment from either the Common Stock or or Exchangeable Share transfer agent in an amount equal to the Stockholders pro rata share of the total net proceeds of these sales. No transaction costs will be assessed on the sale. However, the proceeds will be subject to certain taxes as discussed below. In addition, Stockholders will not be entitled to receive interest for the period of time between the Effective Date and the date a Stockholder receives payment for the cashed-out shares. The payment amount will be paid to the Stockholder in the form of a check in accordance with the procedures outlined below.
After the reverse stock split, a Stockholder will have no further interest in the Company with respect to their cashed-out shares. A person otherwise entitled to a fractional interest will not have any voting, dividend or other rights except to receive payment as described above.
If a Stockholder does not hold sufficient shares of the Companys Common Stock or Exchangeable Shares to receive at least one share in the reverse stock split and wants to continue to hold the Companys Common Stock or Exchangeable Shares after the reverse stock split, a Stockholder may do so by taking either of the following actions far enough in advance so that it is completed by the Effective Date:
1) purchase a sufficient number of shares of the Companys Common Stock or Exchangeable Shares so that the Stockholder holds at least an amount of shares of the Companys Common Stock or Exchangeable Shares in their account prior to the reverse stock split that would entitle the Stockholder to receive at least one share of the Companys Common Stock or Exchangeable Shares on a post-reverse stock split basis; or
2) if applicable, consolidate the Stockholders accounts so that the Stockholder holds at least an amount of shares of the Companys Common Stock or Exchangeable Shares in one account prior to the reverse stock split that would entitle the Stockholder to receive at least one share of Common Stock or Exchangeable Shares on a post-reverse stock split basis. Shares held in registered form (that is, by the Stockholder in the Stockholders name in the Companys stock records maintained by the Companys transfer agent) and shares held in street name (that is, shares held by a Stockholder through a bank, broker or other nominee), for the same investor will be considered held in separate accounts and will not be aggregated when effecting the reverse stock split.
Stockholders of the Companys Common Stock should be aware that, under the escheat laws of the various jurisdictions where a Stockholder resides, where the Company is domiciled and where the funds will be deposited, sums due for fractional interests that are not timely claimed after the Effective Date may be required to be paid to the designated agent for each such jurisdiction. Thereafter holders of the Companys Common Stock otherwise entitled to receive such funds may have to seek to obtain them directly from the state to which they were paid.
Effect on Beneficial Holders of Common Stock and Exchangeable Shares (i.e. Stockholders who hold in street name)
Upon the reverse stock split, the Company intends to treat shares held by Stockholders in street name, through a bank, broker or other nominee, in the same manner as registered Stockholders whose shares are registered in their names. Banks, brokers or other nominees will be instructed to effect the reverse stock split for their beneficial holders holding the Companys Common Stock or Exchangeable Shares in street name. However, these banks, brokers or other nominees may have different procedures than registered Stockholders for processing the reverse stock split and making payment for fractional shares. If a Stockholder holds shares of the Companys Common Stock or Exchangeable Shares with a bank, broker or other nominee and has any questions in this regard, Stockholders are encouraged to contact their bank, broker or other nominee.
Effect on Registered Book-Entry Holders of Common Stock (i.e. Stockholders that are registered on the transfer agents books and records but do not hold stock certificates)
Certain of the Companys registered holders of Common Stock may hold some or all of their shares electronically in book-entry form with the Companys transfer agent. These Stockholders do not have stock certificates evidencing their ownership of the Companys Common Stock. They are, however, provided with a statement reflecting the number of shares registered in their accounts.
If a Stockholder holds registered shares in book-entry form with the transfer agent, no action needs to be taken to receive post-reverse stock split shares or cash payment in lieu of any fractional share interest, if applicable. If a Stockholder is entitled to post-reverse stock split shares, a transaction statement will automatically be sent to the Stockholders address of record indicating the number of shares of Common Stock held following the reverse stock split.
If a Stockholder is entitled to a payment in lieu of any fractional share interest, a check will be mailed to the Stockholders registered address as soon as practicable after the Effective Date. By signing and cashing the check, Stockholders will warrant that they owned the shares of Common Stock for which they received a cash payment. The cash payment is subject to applicable federal and state income tax and state abandoned property laws. In addition, Stockholders will not be entitled to receive interest for the period of time between the Effective Date of the reverse stock split and the date payment is received.
Currently, no Exchangeable Shares are held in book-entry form.
Effect on Certificated Shares
Stockholders holding shares of the Companys Common Stock or Exchangeable Shares in certificate form will be sent a transmittal letter by American Stock Transfer and Trust Company or CIBC Mellon Trust Company as soon as practicable after the Effective Date. The letter of transmittal will contain instructions on how a Stockholder should surrender his or her certificate(s) representing shares of the Companys Common Stock or Exchangeable Shares (Old Certificates) to the transfer agent in exchange for certificates representing the appropriate number of whole shares of post-reverse stock split Common Stock or Exchangeable Shares (New Certificates). No New Certificates will be issued to a Stockholder until such Stockholder has surrendered all Old Certificates, together with a properly completed and executed letter of transmittal, to the appropriate transfer agent. No Stockholder will be required to pay a transfer or other fee to exchange his, her or its Old Certificates.
Stockholders will then receive a New Certificate(s) representing the number of whole shares of Common Stock or Exchangeable Shares to which they are entitled as a result of the reverse stock split. Until surrendered, the Company will deem outstanding Old Certificates held by Stockholders to be canceled and only to represented the number of whole shares of post-reverse stock split Common Stock to which these Stockholders are entitled.
Any Old Certificates submitted for exchange, whether because of a sale, transfer or other disposition of stock, will automatically be exchanged for New Certificates.
If an Old Certificate has a restrictive legend on the back of the Old Certificate(s), the New Certificate will be issued with the same restrictive legends that are on the back of the Old Certificate(s).
If a Stockholder is entitled to a payment in lieu of any fractional share interest, such payment will be made as described above under Fractional Shares.
STOCKHOLDERS SHOULD NOT DESTROY ANY STOCK CERTIFICATE(S) AND SHOULD NOT SUBMIT ANY STOCK CERTIFICATE(S) UNTIL REQUESTED TO DO SO.
The reverse stock split will not affect the par value of a share of the Companys Common Stock. As a result, as of the Effective Date of the reverse stock split, the stated capital attributable to Common Stock on the Companys balance sheet will be reduced proportionately based on the reverse stock split ratio (including a retroactive adjustment of prior periods), and the additional paid-in capital account will be credited with the amount by which the stated capital is reduced. Reported per share net income or loss will be higher because there will be fewer shares of Common Stock outstanding.
Potential Anti-Takeover Effect
The proportion of unissued authorized shares to issued shares could, under certain circumstances, have an anti-takeover effect. For example, the issuance of a large block of Common Stock could dilute the stock ownership of a person seeking to effect a change in the composition of the Board of Directors or contemplating a
tender offer or other transaction for the combination of the Company with another company. However, the reverse stock split proposal is not being proposed in response to any effort of which the Company is aware to accumulate shares of Common stock or obtain control of the Company, nor is it part of a plan by management to recommend to the Board and Stockholders a series of amendments to the Companys Restated Certificate of Incorporation. Other than the proposal for the reverse stock split, the Board of Directors does not currently contemplate recommending the adoption of any other amendments to the Companys Restated Certificate of Incorporation that could be construed to reduce or interfere with the ability of third parties to take over or change the control of the Company.
No Appraisal Rights
Under the Delaware General Corporation Law, the Companys Stockholders are not entitled to appraisal rights with respect to the reverse stock split, and the Company will not independently provide Stockholders with any such right.
United States Federal Income Tax Consequences of the Reverse Stock Split
The following is a summary of certain material United States federal income tax consequences of the reverse stock split and does not purport to be a complete discussion of all of the possible federal income tax consequences of the reverse stock split. This summary is included for general information only. Further, it does not address any state, local or foreign income or other tax consequences. Also, it does not address the tax consequences to holders that are subject to special tax rules, such as banks, insurance companies, regulated investment companies, personal holding companies, foreign entities, nonresident alien individuals, broker-dealers and tax-exempt entities. The discussion is based on the provision of the United States federal income tax law as of the date hereof, which is subject to change retroactively as well as prospectively. This summary also assumes that the pre-reverse stock split shares were, and the post-reverse stock split shares will be, held as a capital asset, as defined in the Internal Revenue Code of 1986, as amended (i.e., generally, property held for investment). The tax treatment of a Stockholder may vary depending upon the particular facts and circumstances of such Stockholder. Each Stockholder is urged to consult with such Stockholders own tax advisor with respect to the tax consequences of the reverse stock split. As used herein, the term United States holder means a Stockholder that is, for federal income tax purposes: a citizen or resident of the United States; a corporation or other entity taxed as a corporation created or organized in or under the laws of the United States, any state of the United States or the District of Columbia; an estate the income of which is subject to federal income tax regardless of its source; or a trust if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decision of the trust.
Other than the cash payments for fractional shares discussed below, no gain or loss should be recognized by a Stockholder upon such Stockholders exchange of pre-reverse stock split shares for post-reverse stock split shares pursuant to the reverse stock split.
In the reverse stock split (including any fraction of a post-reverse stock split share deemed to have been received), the tax basis will be the same as the Stockholders aggregate tax basis in the pre-reverse stock split shares exchanged therefore. In general, Stockholders who receive cash in exchange for their fractional share interests in the post-reverse stock split shares as a result of the reverse stock split will recognize gain or loss based on their adjusted basis in the fractional share interests redeemed. The Stockholders holding period for the post-reverse stock split shares will include the period during which the Stockholder held the pre-reverse stock split shares surrendered in the reverse stock split. The receipt of cash instead of a fractional share of Common Stock by a United States holder of Common Stock will result in a taxable gain or loss to such holder for federal income tax purposes based upon the difference between the amount of cash received by such holder and the adjusted tax basis in the fractional shares as set forth above. The gain or loss will constitute a capital gain or loss and will constitute long-term capital gain or loss if the holders holding period is greater than one year as of the Effective Date.
The Companys view regarding the tax consequences of the reverse stock split is not binding on the Internal Revenue Service or the courts. Accordingly, each Stockholder should consult with his or her own tax advisor with respect to all of the potential tax consequences to him or her of the reverse stock split.
TO ENSURE COMPLIANCE WITH TREASURY DEPARTMENT CIRCULAR 230, STOCKHOLDERS ARE HEREBY NOTIFIED THAT: (A) ANY DISCUSSION OF FEDERAL TAX ISSUES IN THIS PROXY STATEMENT IS NOT INTENDED OR WRITTEN TO BE RELIED UPON, AND CANNOT BE RELIED UPON BY STOCKHOLDERS FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON STOCKHOLDERS UNDER THE INTERNAL REVENUE CODE; (B) SUCH DISCUSSION IS INCLUDED HEREIN BY THE COMPANY IN CONNECTION WITH THE PROMOTION OR MARKETING (WITHIN THE MEANING OF CIRCULAR 230) BY THE COMPANY OF THE TRANSACTIONS OR MATTERS ADDRESSED HEREIN; AND (C) STOCKHOLDERS SHOULD SEEK ADVICE BASED ON THEIR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
Canadian Federal Income Tax Considerations of the Reverse Stock Split
The following summary describes the principal Canadian federal income tax considerations under the Income Tax Act (Canada) (the Tax Act) generally applicable to Stockholders whose shares are consolidated pursuant to the reverse stock split and who, for purposes of the Tax Act, are resident in Canada, hold their shares as capital property and deal at arms length and are not affiliated with the Company.
This summary is based on the current provisions of the Tax Act, the regulations thereunder (the Regulations), and Canadian counsels understanding of the current published administrative and assessing practices of the Canada Revenue Agency and takes into account all specific proposals to amend the Tax Act and the Regulations publicly announced by the Minister of Finance (Canada) prior to the date hereof. This summary does not take into account or anticipate any other changes in law or administrative practices, whether by judicial, governmental or legislative action or decision, nor does it take into account provincial, territorial or foreign income tax legislation or considerations.
This summary is of a general nature only and is not intended to be, and should not be construed to be, legal or tax advice to any particular Stockholder. Stockholders should consult their own tax advisors as to the tax consequences in their particular circumstances.
A Stockholder will not realize a capital gain or a capital loss as a result of the reverse stock split, other than with respect to a cash payment received on the sale of fractional shares as discussed below. The aggregate adjusted cost base to a Stockholder of all their shares (including any fractional shares received as a result of the reverse stock split and sold on behalf of the Stockholder) will be the same after the reverse stock split as it was before the reverse stock split.
A Stockholder who receives a cash payment on the sale of fractional shares following the reverse stock split will realize a capital gain or a capital loss equal to the difference between the cash received and the Stockholders adjusted cost base of the fractional shares. Generally, one-half of any capital gain (taxable capital gain) realized must be included in income and one-half of any capital loss (allowable capital loss) realized may be deducted against taxable capital gains in accordance with the detailed provisions of the Tax Act.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSAL TO AMEND THE COMPANYS RESTATED CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT AT A RATIO OF NOT LESS THAN ONE-FOR-EIGHT AND NOT MORE THAN ONE-FOR-TEN ANY TIME PRIOR TO DECEMBER 1, 2006, WITH THE EXACT RATIO TO BE DETERMINED BY THE BOARD OF DIRECTORS AND TO REDUCE THE NUMBER OF AUTHORIZED SHARES OF THE COMPANYS COMMON STOCK.
RATIFICATION OF INDEPENDENT AUDITORS
The Audit Committee of the Board of Directors has appointed PricewaterhouseCoopers LLP as the Companys independent auditors for the fiscal year ending June 30, 2006, and the Board has directed that the selection of independent auditors be submitted for ratification by the Stockholders at the Annual Meeting.
Although the Company is not required to seek Stockholder approval of its selection of independent auditors, the Board believes it to be sound corporate governance to do so. If the appointment is not ratified, the Board will investigate the reasons for Stockholder rejection and will reconsider its selection of independent auditors. Even if the appointment is ratified, the Audit Committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the fiscal year if the Audit Committee determines that such a change would be in the Companys and its Stockholders best interests.
Representatives of PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting. They will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions. Representatives of Ernst & Young LLP, the Companys independent registered public accounting firm for the year ended June 30, 2005, are not expected to be present at the Annual Meeting.
Change in Independent Auditors
On October 3, 2005, the Audit Committee of the Board of Directors dismissed Ernst & Young LLP as the Companys independent registered public accounting firm and selected PricewaterhouseCoopers LLP as the Companys independent auditors to audit the Companys financial statements for the fiscal year ending June 30, 2006.
The audit reports of Ernst & Young LLP on the Companys financial statements as of and for the two fiscal years ended June 30, 2005 did not contain any adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the two fiscal years ended June 30, 2005, and during the subsequent interim period ended October 3, 2005, there were no disagreements between the Company and Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Ernst & Young LLPs satisfaction, would have caused Ernst & Young LLP to make reference to the subject matter of the disagreement in connection with its reports on the financial statements of the Company for such years; and for the same periods there were no reportable events as described in Item 304(a)(1)(v) of Regulation S-K except that Ernst & Young LLP advised that the Company did not maintain effective internal control over financial reporting as of June 30, 2005 because of the effect of the following material weaknesses identified in managements assessment:
The Company provided Ernst & Young LLP with a copy of the disclosures in the foregoing paragraph, which were made under Item 4.01 in a Current Report on Form 8-K that the Company filed with the SEC on October 6, 2005, and requested that Ernst & Young LLP furnish the Company with a letter addressed to the SEC stating whether or not it agrees with the above statements. A letter from Ernst & Young LLP to the SEC, dated October 6, 2005, was attached as Exhibit 16.1 to the Current Report on Form 8-K that the Company filed with the SEC on October 6, 2005. In that letter Ernst & Young LLP did not disagree with any of the above statements.
During the two fiscal years ended June 30, 2005, and during the subsequent interim period ended October 3, 2005, the Company did not consult with PricewaterhouseCoopers LLP regarding the application of accounting principles to a specified transaction, either completed or proposed, the type of audit opinion that might be rendered on the Companys financial statements, or any other matters or reportable events described in Item 304(a)(2)(ii) of Regulation S-K.
Audit and Non-Audit Fees
The following table presents fees for professional audit services rendered by Ernst & Young LLP for the audit of the Companys annual financial statements for the years ended June 30, 2005 and June 30, 2004 and fees billed for other services rendered by Ernst & Young LLP during those periods.
For fiscal year 2005, the Audit Committee considered whether services other than audit and audit-related services provided by Ernst & Young LLP are compatible with maintaining the independence of Ernst & Young LLP and concluded that the independence of Ernst & Young LLP was maintained.
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. The
Audit Committee has adopted a policy for the pre-approval of services provided by the independent auditors. Under the policy, pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is subject to a specific budget. In addition, the Audit Committee may also pre-approve particular services on a case-by-case basis. For each proposed service, the independent auditors are required to provide detailed back-up documentation at the time of approval.
The Audit Committee pre-approved 100% of the audit fees, 100% of the audit-related fees, and 100% of the tax fees for fiscal 2005. In total, the Audit Committee pre-approved 100% of the total fees for fiscal 2005. 99.9% of the fiscal 2004 fees were pre-approved by the Audit Committee.
THE BOARD RECOMMENDS A VOTE FOR THE RATIFICATION OF THE APPOINTMENT OF
PRICEWATERHOUSECOOPERS LLP AS THE COMPANYS INDEPENDENT AUDITORS
FOR THE YEAR ENDING JUNE 30, 2006
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company with respect to the beneficial ownership as of August 15, 2005, by (i) all persons who are beneficial owners of five percent (5%) or more of the Companys Common Stock including Exchangeable Shares, (ii) each director and nominee, (iii) the Named Executive Officers (as defined in the Compensation of Executive Officers section below), and (iv) all current directors and executive officers as a group.
As of August 15, 2005, 1,593,959,701 shares of the Companys Common Stock were outstanding, and 58,184,798 Exchangeable Shares were outstanding. As of August 15, 2005, no person beneficially owned more than five percent (5%) or more of the Companys Common Stock including Exchangeable Shares. The amounts and percentages of Common Stock beneficially owned are reported on the basis of regulations of the Securities and Exchange Commission (SEC) governing the determination of beneficial ownership of securities. Under the SEC rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or to direct the voting of such security, or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of securities as to which such person has no economic interest.
Summary Compensation Table
The following table sets forth certain information concerning compensation of (i) each person that served as the Chief Executive Officer of the Company during the fiscal year ended June 30, 2005, (ii) the four other most highly compensated executive officers of the Company whose aggregate cash compensation exceeded $100,000 during the fiscal year ended June 30, 2005, and (iii) up to two former executive officers of the Company who would have been one of the Companys four most highly compensated officers had such officer been serving as such at the end of the Companys fiscal year ending June 30, 2005 (collectively, the Named Executive Officers):
Employment Contracts, Termination of Employment and Change in Control Arrangements
The Company and Kevin J. Kennedy are parties to an employment agreement dated August 18, 2003 (the Kennedy Agreement). The term of the Kennedy Agreement commenced on September 1, 2003 and expires on August 31, 2007, unless sooner terminated pursuant to the terms of the Kennedy Agreement. Mr. Kennedys current annual base salary under the Kennedy Agreement is $500,000, subject to adjustment from time to time by the Company, and subject to increase to $575,000 upon the first anniversary of Dr. Kennedys employment. In addition, Mr. Kennedy is eligible to earn an annual bonus with a target bonus of 100% of his annual base salary and a maximum bonus of up to 200% of his base salary, based upon achievement of objectives determined by the Company from time to time. The Kennedy Agreement provided for, and Mr. Kennedy received, a one-time new hire bonus of $500,000 and a one-time stock purchase bonus of $250,000 (grossed up for applicable deductions and withholdings) to purchase shares of the Companys Common Stock. Such shares of Common Stock are subject to a restricted stock agreement which provides for full vesting after six months of employment as Chief Executive Officer of the Company. Mr. Kennedy further received, pursuant to the Kennedy Agreement, an option to purchase 2,000,000 shares of the Companys Common Stock at an exercise price equal to the fair market value at the date of grant and, upon achieving certain performance goals determined by the Board, Mr. Kennedy received options to purchase a minimum of 1,500,000 shares of the Companys Common Stock over the 18 month period following his commencement of service as Chief Executive Officer, 1,000,000 of which shares were granted within 12 months of Mr. Kennedys commencement of employment. The Kennedy Agreement also provides for 24 months medical insurance coverage upon termination of the Kennedy Agreement. Further, in the event the Kennedy Agreement is terminated (i) by the Company without cause (as that term is defined in the Kennedy Agreement); (ii) as a result of the death or disability of Mr. Kennedy; or (iii) by Mr. Kennedy for good reason (as that term is defined in the Kennedy Agreement), Mr. Kennedy shall receive (a) payment of severance in the amount of three years salary and three years bonus based upon previous bonuses paid to Mr. Kennedy if employment is terminated prior to the second anniversary of the Kennedy Agreement, or if termination follows a change of control of the Company, (b) payment of severance in the amount of two years salary and two years bonus based upon previous bonuses paid to Mr. Kennedy if employment is terminated after the second anniversary of the Kennedy Agreement, and (c) partial acceleration of vesting of Mr. Kennedys options. If termination of employment occurs prior to the completion of two or three years of employment, the bonus portion of the severance payment will be calculated in accordance with the terms of the Kennedy Agreement. Effective June 16, 2004 the Kennedy Agreement was amended (the Kennedy Amendment) to provide that, notwithstanding the terms of the Kennedy Agreement and notwithstanding achievement of certain personal performance milestones previously determined by the Board of Directors, any bonus payment otherwise due for fiscal year 2004 pursuant to the Kennedy Agreement will not be considered earned and payable until the sooner of (y) achievement by the Company of certain financial performance objectives, or (z) the termination of Mr. Kennedys employment. Effective August 4, 2004 the Kennedy Agreement was further amended (the Second Kennedy Amendment) to provide that, notwithstanding the terms of the Kennedy Agreement, Mr. Kennedys base annual salary shall remain at $500,000 until such time as the Company achieves certain financial milestones, at which time Mr. Kennedys base annual salary shall be increased to $575,000 retroactive to September 1, 2004.
The Company and Ronald C. Foster were parties to an employment agreement dated January 30, 2003 (the Foster Agreement). The term of the Foster Agreement commenced on February 17, 2003 and was to expire on July 31, 2007, unless sooner terminated pursuant to the terms of the Foster Agreement. Mr. Fosters fiscal year 2005 annual base salary under the Foster Agreement was $350,000. Further, in the event the Foster Agreement was terminated (i) by the Company without cause (as that term is defined in the Foster Agreement); (ii) as a result of the death or disability of Mr. Foster; or (iii) by Mr. Foster for good reason (as that term is defined in the Foster Agreement), Mr. Foster shall receive (a) payment of severance in the amount of two years salary and two years bonus based upon previous bonuses paid to Mr. Foster if employment is terminated prior to the second anniversary of the Foster Agreement; (b) 24 months medical insurance coverage; and (c) partial acceleration of vesting of Mr. Fosters stock options. Mr. Fosters employment with the Company terminated on March 1, 2005 and the Foster Agreement was terminated at that time.
The Company and Mark S. Sobey, Ph.D. are parties to a change of control agreement dated August 4, 2004 (the Sobey Change of Control Agreement). The term of the Sobey Change of Control Agreement expires on August 4, 2006 unless sooner terminated pursuant to the terms of the Sobey Change of Control Agreement. On August 4, 2006 and at the end of each two-year period thereafter, the term will automatically be extended for an additional two-year period, provided Dr. Sobeys most recent performance rating meets expectations. Dr. Sobeys current base salary is $255,000, subject to adjustment from time to time by the Company. In addition, Dr. Sobey is eligible to earn an annual bonus with a target bonus of 50% of his annual base salary and a maximum bonus of up to 200% of his target bonus. The Sobey Change of Control Agreement provides for payment of severance in the amount of six months salary and partial acceleration of vesting of Dr. Sobeys previously granted equity incentive awards if prior to the expiration of the term and within six months following a change of control (as that term is defined in the Sobey Change of Control Agreement), his employment is terminated by the Company other than for cause (as that term is defined in the Sobey Change of Control Agreement) or by him for good reason (as that term is defined in the Sobey Change of Control Agreement), conditioned upon Dr. Sobey executing and delivering to the Company a release of claims reasonably acceptable to the Company. Prior to a change of control, the Company or Dr. Sobey may terminate the Sobey Change of Control Agreement for convenience upon delivery of a written notice to the other.
Stock Option Grants in Last Fiscal Year
The following table set forth information regarding stock options granted to the Named Executive Officers for the fiscal year ended June 30, 2005:
Aggregated Stock Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth certain information with respect to stock options exercised by the Named Executive Officers during fiscal 2005, including the shares acquired on exercise and the aggregate value of gains on the date of exercise. In addition, the table sets forth the number of underlying stock options as of June 30, 2005 and value of in-the-money stock options, which represents the difference between the exercise price of a stock option and the market price of the shares subject to such option:
EQUITY COMPENSATION PLANS
The following table sets forth information about shares of the Companys Common Stock and Exchangeable Shares that may be issued under the Companys equity compensation plans, including compensation plans that were approved by the Companys Stockholders as well as compensation plans that were not approved by the Companys Stockholders. Information in the table is as of June 30, 2005.
The following are descriptions of the material features of the Companys equity compensation plans that were not approved by the Companys Stockholders:
1996 Non-Qualified Stock Option Plan
The Board of Directors adopted the 1996 Non-Qualified Stock Option Plan (the 1996 Plan) in November 1996. The 1996 Plan is administered by the Compensation Committee. Pursuant to the 1996 Plan, the Compensation Committee may grant nonqualified stock options only to employees, independent contractors and consultants of the Company or any parent or subsidiary corporation of the Company. Only nonqualified stock options may be issued under the 1996 Plan. Stock options may not be granted to officers and directors of the Company. The 1996 Plan will continue in effect until terminated by the Board of Directors. The Company last granted stock options under the 1996 Plan on April 17, 1998. The Company presently does not intend to grant any additional options under the 1996 Plan.
An aggregate of 19,136,000 shares has been reserved for the grant of stock options under the 1996 Plan. Shares underlying awards that are forfeited or canceled are not counted as having been issued under the 1996 Plan. Stock options issued under the 1996 Plan must have an exercise price of not less than 85% of the fair market value of the Companys Common Stock on the date of grant of the option. Options are generally non-transferable. The term of all options granted under the Plan shall not exceed eight years from the date of grant.
Amended and Restated 1999 Canadian Employee Stock Purchase Plan
The Amended and Restated 1999 Canadian Employee Stock Purchase Plan (the Canadian ESPP) was adopted by the Board of Directors in August 1999 and is administered by the Board of Directors. An aggregate of 10,000,000 shares of Common Stock has been reserved for issuance under the Canadian ESPP. Only employees of JDS Uniphase Inc. (which generally includes all Company employees in Ottawa) and corporate affiliates of the Company as designated by the Board of Directors are eligible to participate in the Canadian ESPP. The Canadian ESPP is not intended to qualify as an Employee Stock Purchase Plan under Section 423 of the Internal Revenue Code of 1986, as amended (the Code).
The terms of the Canadian ESPP provide that shares of the Companys Common Stock are offered for purchase through a series of successive or overlapping purchase periods (the Purchase Periods), each of a duration (not to exceed twenty-four months) as determined by the Board of Directors. Participants enrolled in a Purchase Period are granted a purchase right which entitles the participating employee to specify a level of payroll deduction between 1% and 10% of compensation to be in effect on each pay day during the Purchase Period, and the accumulated payroll deductions are applied to the purchase of the shares when the purchase right is exercised. No rights or accumulated payroll deductions of a participant under the Canadian ESPP may be transferred (other than by will or by the laws of descent and distribution).
Outstanding purchase rights are automatically exercised on successive quarterly or semi-annual purchase dates as determined by the Board of Directors. The purchase right is exercised by applying the accumulated payroll deductions to the purchase of whole shares on each quarterly or semi-annual purchase date. The purchase price per share is the lesser of (i) 85% of the fair market value per share on the date the Purchase Period begins or (ii) 85% of the fair market value per share on the date the purchase right is exercised. The Canadian ESPP limits purchase rights to a maximum of (i) $25,000 worth of stock (determined at the fair market value of the shares at the time the purchase right is granted) in any calendar year, and (ii) 20,000 shares in any Purchase Period.
The Board of Directors amended the Canadian ESPP on July 31, 2002 to provide that no new Purchase Periods shall commence under the Canadian ESPP on or after August 1, 2002, except as otherwise determined by the Board of Directors. Although the Canadian ESPP will not terminate by its terms until July 1, 2009, all Purchase Periods under the Canadian ESPP were terminated on July 31, 2002. The Company has since integrated former participants in the Canadian ESPP into the Companys Stockholder approved Amended and Restated 1998 Employee Stock Purchase Plan and it is the Companys present intention to utilize for future purchase periods only this single Stockholder approved employee stock purchase plan for the benefit of all eligible employees of the Company and its corporate affiliates.
REPORT OF COMPENSATION COMMITTEE
The information contained in the following report shall not be deemed to be soliciting material or to be filed with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the 1934 Securities Exchange Act, as amended, except to the extent that the Company specifically incorporates it by reference in such filing.
The Compensation Committee of the Board of Directors is responsible for insuring that the Company adopts and maintains responsible and responsive compensation programs for its employees, officers and directors consistent with the long-range interests of Stockholders. In furtherance of this task, the Compensation Committee has the obligation to (a) ensure that the Company adopts and maintains responsible and competitive compensation programs for its employees, officers and directors consistent with the acquisition and retention of
talent and the strategy and imperatives of the Company and the long-term interests of Stockholders, (b) review and approve compensation programs that are aligned to actual performance and results, and (c) require that management properly and fully performs all of the Companys public disclosure obligations with respect to its compensation programs and director and executive officer compensation. The Compensation Committee is also responsible for administering certain other compensation programs for such individuals, subject in each instance to approval by the full Board. The Compensation Committee also has the exclusive responsibility for the administration of the Companys employee stock purchase plans and equity incentive plans. The Compensation Committee chairman reports on Compensation Committees actions and recommendations at Board meetings. The Companys Compensation and Benefits Group within the Companys Human Resources department supports the work of the Compensation Committee and in some cases acts pursuant to delegated authority to fulfill various functions in administering the Companys compensation programs. In addition, the Compensation Committee has the authority to engage the services of outside advisors, experts and others to provide assistance as needed. The Compensation Committee is composed solely of non-employee directors, as such term is defined in Rule 16b-3 under the Securities and Exchange Act of 1934, as amended, each of whom must at all times meet all other applicable federal securities and NASDAQ listing requirements to qualify as an independent director.
The fundamental policy of the Compensation Committee is to provide the Companys chief executive officer and other executive officers with competitive compensation opportunities based upon the overall financial performance of the company, their specific contribution to the financial success of the Company and their personal performance relative to related business performance objectives. It is the Compensation Committees objective to have a substantial portion of each executive officers compensation contingent upon the Companys performance as well as upon his or her own level of performance. Accordingly, the compensation package for the chief executive officer and other executive officers is comprised of three elements: (i) base salary which reflects individual performance and is designed primarily to be competitive with salary levels in the industry, (ii) annual variable performance awards payable in cash and tied to the Companys achievement of financial performance targets, and (iii) long-term stock-based incentive awards which strengthen the mutuality of interests between the executive officers and the Companys Stockholders. As an executive officers level of responsibility increases, it is the intent of the Compensation Committee, and the current plan is designed, such that a greater portion of his or her total compensation is dependent upon Company financial performance rather than base salary.
Several of the more important factors which the Compensation Committee considered in establishing the components of each executive officers compensation package for the 2005 fiscal year are summarized below. Additional factors were also taken into account, and the Compensation Committee may in its discretion apply entirely different factors, particularly different measures of financial performance, in setting executive compensation for future fiscal years.
Base Salary. The base salary for each executive officer is determined on the basis of the following factors: experience, personal performance, the average salary levels in effect for comparable positions within and without the industry and internal comparability considerations. The weight given to each of these factors differs from individual to individual, as the Compensation Committee deems appropriate. In selecting comparable companies for the purposes of maintaining competitive compensation, the Compensation Committee considers many factors including geographic location, growth rate, annual revenue and profitability. The Compensation Committee also considers companies outside the industry which may compete with the Company in recruiting executive talent.
Annual Incentive Compensation. Annual bonuses are earned by each executive officer primarily on the basis of the Companys achievement of certain corporate financial performance and customer satisfaction goals established for each fiscal year. For fiscal 2005, the criteria for determination of payment of bonuses was based on the following factors: (i) the Companys consolidated operating profit performance net of certain non-recurring adjustments, relative to the target established by the Compensation Committee, (ii) the revenue and operating profit performance of the respective reporting segment relative to the targets established by the Compensation Committee, and (iii) the Companys performance against certain customer satisfaction improvement objectives. Actual bonuses, if any, earned in fiscal 2005 by each of the current executive officers named in the Summary Compensation Table is indicated in the Bonus and Commission column.
Deferred Compensation Plan. The Company maintains a deferred compensation plan, pursuant to which certain members of management (including the executive officers) may elect to defer a portion of his or her annual compensation. The participants funds are invested among various funds designated by the plan administrator and currently may not be invested in the Companys Common Stock or other Company securities. Upon the death or retirement of a participant, the funds attributable to the participant (including any earnings on contributions) are distributed to the participant or the participants beneficiary in a lump sum or in annual installments over a period not to exceed fifteen years.
Long-Term Compensation. Long-term incentives are provided through stock option, restricted stock, and/or restricted stock unit grants. The Compensation Committee believes that stock-based compensation aligns the interests of employees and long-term Stockholders and forms an important element of the Companys compensation practices by providing each executive officer with a significant incentive to manage the Company from the perspective of an owner with an equity stake in the business. The Compensation Committee approves the equity grants to the executive officers based on a variety of factors, including the individual performance of the executive officer, an assessment of the value of the individuals services to the Company, the awards given to other executives, and the desire to keep the Companys overall compensation competitive. Additionally, the Compensation Committee generally grants equity awards to executive officers upon commencement of their employment with the Company, with the level of award based on factors similar to those considered in connection with annual awards to existing executive officers. The number of shares of Common Stock subject to each grant is set at a level intended to create a meaningful opportunity for stock ownership based on the executive officers current position with the Company, the base salary associated with that position, the average size of comparable awards made to executive officers in similar positions within the industry, the executive officers potential for increased responsibility and promotion over the grant term, and the executive officers personal performance in recent periods. The Compensation Committee also takes into account the number of vested and unvested options and other equity incentives held by the executive officer in order to maintain an appropriate level of equity incentive for that executive officer. The Compensation Committee does not adhere to any specific guidelines as to the relative equity incentive holdings of the Companys executive officers. The equity incentive awards granted in fiscal 2005 to each of the current executive officers named in the Summary Compensation Table is indicated in the Long-Term Compensation Awards column.
When awarded, stock options are granted at a fixed price per share (not lower than the market price on the grant date) and have a term not to exceed eight years. Stock options generally become exercisable at the rate of 25% of the shares subject thereto one year from the grant date and as to approximately 6.25% of the shares subject to the option at the end of each three-month period thereafter such that the option is fully exercisable four years from the grant date, contingent upon the executive officers continued employment with the Company. Accordingly, the option will provide the maximum return to the executive officer only if the executive officer remains employed by the Company for the four-year vesting period, and then only if the market price of the underlying shares of Common Stock appreciates over the option term. Similarly, restricted stock units and shares of restricted stock are granted with transfer and reconveyance restrictions or conversion privileges related to the passage of time, the occurrence of one or more events, and/or the satisfaction of performance or financial criteria or other conditions. The restricted stock or restricted stock unit grant will provide a return to the executive officer only if the executive officer remains employed by the Company during a specified period, and the date of vesting of the grant may be determined based upon the achievement of specified Stockholder-aligned performance criteria.
Compensation of the Chief Executive Officer. The compensation of the Chief Executive Officer is reviewed annually on the same basis as discussed above for all executive officers. The Compensation Committee has reviewed all components of the Companys Chief Executive Officer and four other most highly compensated executive officers compensation, including salary, bonus, equity and long-term incentive compensation, accumulated and unrealized stock option and restricted stock gains, and the dollar value to the executive and the cost to the Company of all perquisites and other personal benefits.
Mr. Kennedys base salary for fiscal 2005 was $500,000. The Compensation Committee recommended, and the Board of Directors approved, Mr. Kennedys base salary and stock option and restricted stock grants in part by
comparing the base salaries of chief executive officers at other companies. Mr. Kennedys base salary was set at the approximate median of the base salary range for chief executive officers of comparative companies chosen based upon geographic location, annual revenue and profitability, market capitalization and those which may compete with the Company in recruiting executive talent. Mr. Kennedys base annual salary is to remain at $500,000 until such time as the Company achieves certain financial milestones, at which time Mr. Kennedys base annual salary will be increased to $575,000 retroactive to September 1, 2004. Based on the Compensation Committees criteria described above and in accordance with the terms of Mr. Kennedys employment agreement, in fiscal 2005 Mr. Kennedy was awarded options to purchase 500,000 shares of Common Stock at a purchase price of $1.61 and received a grant of 525,000 restricted stock units. Additionally, the Compensation Committee recommended, and the Board of Directors and Mr. Kennedy have approved, an amendment to the Kennedy Agreement to provide that, notwithstanding achievement of certain personal performance milestones previously determined by the Board of Directors, any bonus payment otherwise due for fiscal year 2004 pursuant to the Kennedy Agreement will not be considered earned and payable until the sooner of (a) achievement by the Company of certain financial performance objectives, or (b) the termination of Mr. Kennedys employment by either party.
The Company is required to disclose its policy regarding qualifying executive compensation for deductibility under Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code) which provides that, for purposes of the regular income tax and the alternative minimum tax, the otherwise allowable deduction for compensation, excluding performance-based compensation, paid or accrued with respect to a covered employee of a publicly-held corporation is limited to no more than $1 million per year. Compensation programs will generally qualify as performance-based if (i) compensation is based on pre-established objective performance targets, (ii) the programs material features have been approved by the Companys Stockholders, and (iii) there is no discretion to increase payments after the performance targets have been established for the performance period.
The Compensation Committee endeavors to maximize deductibility of compensation under Section 162(m) to the extent practicable while maintaining a competitive, performance-based compensation program. However, tax consequences, including, but not limited to tax deductibility, are subject to many factors (such as, among others, changes in the tax laws and regulations or interpretations thereof) beyond the control of either the Compensation Committee or the Company. In addition, the Audit Committee believes that it is important for it to retain maximum flexibility in designing compensation programs that meet its stated objectives and fit within the Companys guiding principles. Finally, based on the amount of deductions the Company can take each year, the actual impact of the loss of deduction for compensation paid to the Chief Executive Officer and the other top four highly compensated executives over the $1 million limitation is extremely small and has a de minimus impact on the Companys overall tax position. For all of the foregoing reasons, the Compensation Committee, while considering tax deductibility as one of the factors in determining compensation, will not limit compensation to those levels or types of compensation that will be deductible. The Compensation Committee will, of course, consider alternative forms of compensation that, consistent with its compensation goals, preserve deductibility.
The cash compensation paid to the Companys executive officers for fiscal 2005 did not exceed the $1 million limit per officer. The Companys 2003 Equity Incentive Plan (the 2003 Plan) is structured so that any compensation deemed paid to an executive officer when he or she exercises an outstanding option under the 2003 Plan, with an exercise price equal to the fair market value of the option shares on the grant date, will qualify as performance-based compensation which will not be subject to the $1 million limitation. In addition, other stock based awards issued under the 2003 Plan may be exempt from the $1 million limitation if such awards are subject to performance criteria and administered in accordance with Section 162(m) of the Code. The Company has discretion to issue other stock based awards which are intended to be exempt from the $1 million limitation as well as other stock based awards that are not intended to be exempt from the $1 million limitation.
Casimir S. Skrzypczak, Chair
Richard E. Belluzzo
Peter A. Guglielmi
Martin A. Kaplan
REPORT OF THE AUDIT COMMITTEE
The information contained in the following report shall not be deemed to be soliciting material or to be filed with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the 1934 Securities Exchange Act, as amended, except to the extent that the Company specifically incorporates it by reference in such filing.
The Audit Committee of the Board of Directors is responsible for assisting the full Board of Directors in fulfilling its oversight responsibilities relative to the Companys financial statements, financial reporting practices, systems of internal accounting and financial controls, the internal audit function, annual independent audits of the Companys financial statements, and such legal and ethics programs as may established from time to time by the Board. The Audit Committee is empowered to investigate any matter brought to its attention with full access to all books, records, facilities, and personnel of the Company and may retain external consultants at its sole discretion. The Audit Committee is composed solely of non-employee directors, as such term is defined in Rule 16b-3 under the Securities and Exchange Act of 1934, as amended, all of whom shall satisfy the independence, financial literacy and experience requirements of Section 10A of the Securities Exchange Act of 1934, as amended, the Sarbanes-Oxley Act of 2002, rules applicable to NASDAQ-listed issuers, and any other regulatory requirements. All members of the Committee are required to have a working knowledge of basic finance and accounting, and at all times at least one member of the Committee qualifies as a financial expert as defined by the Sarbanes-Oxley Act of 2002.
Management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls. The independent registered public accounting firm is responsible for performing an independent audit of the Companys consolidated financial statements in accordance with generally accepted auditing standards and for issuing a report thereon. The Audit Committee has the general oversight responsibility with respect to the Companys financial reporting and reviews the scope of the internal independent audits, the results of the audits and other non-audit services provided by the Companys independent registered public accounting firm.
The following is the Report of the Audit Committee with respect to the Companys audited financial statements for the fiscal year ended June 30, 2005, which includes the consolidated balance sheets of the Company as of June 30, 2005 and 2004, and the related consolidated statements of operations, stockholders equity (deficit) and cash flows for each of the three years in the period ended June 30, 2005, and the notes thereto.
Review with Management
The Audit Committee has reviewed and discussed the Companys audited financial statements with management.
Review and Discussions with Independent Auditors
The Audit Committee has discussed with Ernst & Young LLP (Ernst & Young), the Companys independent auditors, the matters required to be discussed by Statement on Accounting Standards No. 61, Communications with Audit Committees which includes, among other items, matters related to the conduct of the audit of the Companys financial statements, and both with and without management present, discussed and reviewed the results of Ernst & Youngs examination of the financial statements..
The Audit Committee has also received written disclosures and the letter from Ernst & Young describing all relationships between the Company and the independent registered public accounting firm that bear on the accountants independence consistent with the Independence Standards Board Standard No. 1 (which relates to the auditors independence from the Company and its related entities). The Audit Committee has discussed with
Ernst & Young any relationships that may impact on its objectivity and independence and also considered whether the provision of non-audit services by Ernst & Young is compatible with maintaining the accountants independence and satisfied itself as to Ernst & Youngs independence.
During the course of fiscal 2005, management completed the documentation, testing and evaluation of the Companys system of internal control over financial reporting in response to the requirements set forth in Section 404 of the Sarbanes-Oxley Act of 2002 and related regulations. The Audit Committee was kept apprised of the progress of the evaluation and provided oversight and advice to management during the process. In connection with this oversight, the Audit Committee received periodic updates provided by management and Ernst & Young at each regularly scheduled Audit Committee meeting. The Audit Committee also held a number of special meetings to discuss issues as they arose. At the conclusion of the process, management provided the Audit Committee with, and the Audit Committee reviewed, a report on the effectiveness of the Companys internal control over financial reporting. The Audit Committee continues to oversee the Companys efforts related to its internal control over financing reporting and managements preparations for the evaluation for fiscal 2006.
Based on the review and discussions referred to above, the Audit Committee recommended to the Companys Board that the Companys audited financial statements be included in the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2005.
Bruce D. Day, Chair
Peter A. Guglielmi
Richard T. Liebhaber
Casimir S. Skrzypczak
STOCK PERFORMANCE GRAPH
The information contained in the following graph shall not be deemed to be soliciting material or to be filed with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the 1934 Securities Exchange Act, as amended, except to the extent that the Company specifically incorporates it by reference in such filing.
The following graph and table set forth the Companys total cumulative Stockholder return of an investment of $100 in June 2000 and ending June 2005 in: (i) the Companys Common Stock, (ii) the S&P 500 Index, (iii) the Nasdaq Stock Market (U.S.) Index and, (iv) the Nasdaq Telecommunications Index. Total return assumes reinvestment of dividends. Historical stock price performance is not necessarily indicative of future stock price performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG JDS UNIPHASE CORPORATION
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Companys directors, executive officers and any persons who directly or indirectly hold more than 10 percent of the Companys Common Stock (Reporting Persons) to file reports of ownership and changes in ownership with the SEC. Reporting Persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received and written representations from certain Reporting Persons that no such forms were required, the Company believes that during fiscal 2005, all Reporting Persons complied with the applicable filing requirements on a timely basis.
The Company knows of no other matters that will be presented for consideration at the Annual Meeting. If any other matters properly come before the Annual Meeting, it is intended that proxies in the enclosed form will be voted in respect thereof in accordance with the judgments of the persons voting the proxies.
ANNUAL REPORT ON FORM 10-K AND ANNUAL REPORT TO STOCKHOLDERS
UPON WRITTEN REQUEST TO THE CORPORATE SECRETARY, JDS UNIPHASE CORPORATION, 1768 AUTOMATION PARKWAY, SAN JOSE, CALIFORNIA 95131, THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON SOLICITED A COPY OF THE FISCAL 2005 REPORT, INCLUDING FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FILED THEREWITH.
By Order of the Board of Directors,
Kevin J. Kennedy
Chief Executive Officer
October 21, 2005
San Jose, California
PROPOSED AMENDMENT TO THE COMPANYS RESTATED
CERTIFICATE OF INCORPORATION
FORM OF CERTIFICATE OF AMENDMENT
RESTATED CERTIFICATE OF INCORPORATION
JDS UNIPHASE CORPORATION
The undersigned, Kevin J. Kennedy and Christopher S. Dewees, hereby certify that:
FIRST: They are the Chief Executive Officer and Secretary, respectively, of JDS Uniphase Corporation, a Delaware corporation (the Corporation), the original Certificate of Incorporation of which was filed with the Secretary of State of the State of Delaware on June 23, 1993.
SECOND: Article 4, Subparagraph 4.1 of the Restated Certificate of Incorporation of the Corporation is amended and restated to read in its entirety as follows:
4.1. Authorized Capital Stock. The Corporation is authorized to issue two classes of stock to be designated, respectively, Common Stock and Preferred Stock. The total number of shares which the Corporation is authorized to issue is One Billion One Million (1,001,000,000) shares. One Billion (1,000,000,000) shares shall be Common Stock, each having a par value of one-tenth of one cent ($.001), and One Million (1,000,000) shares shall be Preferred Stock, each having a par value of one-tenth of one cent ($.001).
Upon the effectiveness of the amendment to the Restated Certificate of Incorporation adding this paragraph thereto, (the Effective Date), every [ * ( )] shares of the Corporations common stock, par value $.001 per share (the Old Common Stock) issued and outstanding immediately prior to the Effective Date will be automatically and without any action on the part of the respective holders thereof, be combined and reclassified into one (1) share of common stock, par value $.001, of the Corporation (the New Common Stock) (and such combination and conversion, the Reverse Stock Split).
Notwithstanding the immediately preceding sentence, no fractional shares of New Common Stock shall be issued to the holders of record of Old Common Stock in connection with the foregoing reclassification of shares of Old Common Stock and the Corporation shall not recognize on its stock record books any purported transfer of any fractional share of New Common Stock. In lieu thereof, the aggregate of all fractional shares otherwise issuable to the holders of record of Old Common Stock shall be issued to American Stock Transfer and Trust Company, the transfer agent, as agent for the accounts of all holders of record of Old Common Stock and otherwise entitled to have a fraction of a share issued to them. The sale of all of the fractional interests will be effected by the transfer agent as soon as practicable after the Effective Date on the basis of the prevailing market prices of the New Common Stock at the time of the sale. After such sale and upon the surrender of the stockholders stock certificates, the transfer agent will pay to such holders of record their pro rata share of the total net proceeds derived from the sale of the fractional interests. Each stock certificate that, immediately prior to the Effective Date, represented shares of Old Common Stock shall, from and after the Effective Date, automatically and without the necessity of presenting the same for exchange, represent that number of whole shares of New Common Stock into which the shares of Old Common Stock represented by such certificate shall have been reclassified (as well as the right to receive cash in lieu of any fractional shares of New Common Stock as set forth above), provided, however, that each holder of record of a certificate that represented shares of Old Common Stock shall receive, upon surrender of such certificate, a new certificate representing the number of whole shares of New Common Stock into which the shares of Old Common Stock represented by such certificate shall have been reclassified, as well as any cash in lieu of fractional shares of New Common Stock to which such holder may be entitled as set forth above.
THIRD: This Certificate of Amendment has been duly adopted by the Board of Directors and stockholders of this Corporation in accordance with Section 242 of the General Corporation Law of the State of Delaware.
FOURTH: The Effective Date and time of this Certificate of Amendment and the amendment effected thereby shall be 11:59 p.m. EDT/EST on , 20 .
IN WITNESS WHEREOF, the undersigned have executed this Certificate of Amendment of Restated Certificate of Incorporation on , 200 .
2005 ANNUAL REPORT
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
FOR ANNUAL AND TRANSITION
REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2005*
For the transition period from ____________ to ____________
Commission File Number 0-22874
JDS UNIPHASE CORPORATION
(Exact name of Registrant as specified in its charter)
1768 Automation Parkway, San Jose, California 95131
(Address of principal executive offices including Zip code)
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value of $.001 per share
Preferred Stock Purchase Rights
(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 þ 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 Registrants 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. þ
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of December 31, 2004 the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $4.6 billion, based upon the closing sale prices of the common stock and exchangeable shares as reported on the NASDAQ National Market and the Toronto Stock Exchange, respectively. Shares of common stock and exchangeable shares held by executive officers and directors 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 August 31, 2005, the Registrant had 1,652,154,979 shares of common stock outstanding, including 58,184,798 exchangeable shares.
Documents Incorporated by Reference: Not applicable.
We are filing this Form 10-K/A Amendment No. 1 to correct administrative errors in the content of Exhibits 31.1 and 31.2 to our Annual Report on Form 10-K for the fiscal year ended June 30, 2005 as filed on September 30, 2005.
TABLE OF CONTENTS
Statements contained in this Annual Report on Form 10-K which are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as anticipate that, believes, can impact, continue to, estimates, expects to, hopes, intends, plans, to be, will be, will continue to be, continuing, ongoing, or similar words.
Management cautions that forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, including, without limitation, the following: (i) due to, among other things, the Companys limited visibility, our ability to perceive or predict market trends (including, among other things, any stabilization recovery or growth thereof) is limited and uncertain; (ii) our ongoing integration, cost reduction, reorganization and restructuring efforts may not be successful in achieving their expected cost reductions and other benefits, may be insufficient to align the our operations with customer demand and the changes affecting its industry, or may be more costly, or may be more extensive than currently anticipated; (iii) our ability to predict financial performance for future periods continues to be difficult; (iv) ongoing efforts to improve our execution and design and introduce products that meet customers future need and to manufacture such products at competitive costs may not be successful, and (v) the expected increases in revenues and customer and market penetration resulting from our recent acquisitions may not materialize to the extent anticipated and these expected benefits maybe further offset by costs and diversion of our managements time with respect to the integration of these acquisitions with us. Further, our future business, financial condition and results of operations could differ materially from those anticipated by such forward-looking statements and are subject to risks and uncertainties including the risks set forth above and the Risk Factors set forth in this Annual Report on Form 10-K. Moreover, neither we assume nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. Forward-looking statements are made only as of the date of this Report and subsequent facts or circumstances may contradict, obviate, undermine or otherwise fail to support or substantiate such statements. We are under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform such statements to actual results or to changes in our expectations.
ITEM 1. BUSINESS
JDS Uniphase (JDSU) is a worldwide leader and innovator of optical technologies that enable dramatic improvements in the way we communicate, detect, present and experience information. Our products are used in communications, commercial and consumer applications including optical networks, brand protection, lasers, aerospace and defense.
The storage and distribution of content (in the form of high-data audio and video, including emerging HDTV, and multi-player games) are similarly transitioning away from physical storage (such as CDs and DVDs) and related distribution methods, to digital files transmitted over communications networks and stored on large-capacity servers and hard drives. These transformations require the support of higher capacity networks. Traffic generated over broadband access networks already accounts for the majority of data traffic, and continues to grow at a very high rate. As greater bandwidth capability is delivered closer to the end user, we expect consumers to increasingly demand and obtain higher content, real-time, interactive visual and audio experiences. Many of the forces driving demand for high-bandwidth communications networks (such as the emergence of high-data digital audio, video and gaming) are similarly transforming the consumer and commercial electronics industries from traditional analog cathode ray tube (CRT), smaller screen displays, to large, flat panel and projection digital microdisplays, as consumers and businesses are increasingly demanding the improved visual experiences offered by the new high-data content. We believe that we are well positioned to continue to lead in these industries due to our unique expertise in the application of light to innovative optical solutions, enabling new business opportunities for our original equipment manufacturer (OEM) customers worldwide.
Our Communications segment provides components, modules and subsystems used by communications equipment providers for telecommunications, and data communications. These products enable the transmission of video, audio and text data over high-capacity fiber optic cables. Although ultimately highly complex, these systems perform three basic functions: transmitting, routing (switching) and receiving information, in this case, information encoded on light signals. These products include transmitters, receivers, amplifiers, multiplexers and demultiplexers, add/drop modules, switches, optical performance monitors and couplers, splitters and circulators. We also provide test and measurement equipment used to assess performance of optical components in manufacturing, research and development, system development and network maintenance.
Our Commercial and Consumer segment provides lasers, coated optics and assemblies for defense, aerospace, instrumentation, biomedical and other applications. For example, we provide lasers for biotechnology, remote sensing, semiconductor, material processing, graphics and imaging and other applications. We also provide document authentication, brand protection and product differentiation solutions for a range of public and private sector markets. The products we provide for these applications control, enhance and modify the behavior of light, utilizing its reflection, absorption and transmission properties to achieve specific effects such as high reflectivity, anti-glare and spectral filtering. Specific product applications include computer monitors and flat panel displays, projection systems, photocopiers, facsimile machines, scanners, security products and decorative surface treatments.
The Company was incorporated in California in May 1979 and reincorporated in Delaware in October 1993. JDSU is the product of several significant mergers and acquisitions, including, among others, the combination of Uniphase Corporation and JDS FITEL Inc. to form JDSU Corporation on June 30, 1999, and major subsequent acquisitions, including Optical Coating Laboratory, Inc. (OCLI) on February 4, 2000, E-TEK Dynamics, Inc. (E-TEK) on June 30, 2000 and SDL, Inc. (SDL) on February 13, 2001.
Our Internet address is www.jdsu.com. We post all Securities and Exchange Commission (SEC) filings on our website at www.jdsu.com/investors as soon as reasonably practicable after they are electronically filed or
furnished to the SEC. All such filings on our Investor Relations web site are available free of charge. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
In fiscal 2005, the we offered innovative products, categorized into two segments, Communications Products Group and Commercial and Consumer Products Group. Collectively, these products serve the communications, display, commercial lasers, product and document security and brand differentiation markets.
Communications Products Group
Among the driving factors in the communications industry is the strong competitive dynamic between telecommunications, cable television, satellite and wireless service providers. Each of these provider types is vying for share of the market for the expected convergence of voice, text and video content. That is, while text, voice and video content are each currently generally delivered over disparate networks, expectations are that all digitized information (text, voice and video) will be delivered from single sources over a consolidated network architecture. Consequently, while service providers typically offer diversified services to both consumers and business markets, many are rapidly investing to deploy converged multi-service networks capable of delivering triple-play services, i.e. integrated voice, video and entertainment services. Potential benefits for service providers include increased Average Revenue per User (ARPU) and reduced customer turnover rates, thus increasing both profitability and long-term competitive advantage. This competitive trend is predominantly relevant in markets where government action has led to deregulation of the communications industry, in particular in North America, the European Union, and several countries in both Asia and South America.
Competition between service providers and the need to provide increasing types of services, including a larger percentage of video-based content such as news, movies, and gaming is generating strong growth in demand for network capacity and bandwidth rates which in turn drives demand for many types of networking, access and transport systems.
Within the Enterprise market, growing demand for broadband is driven by demand for intra-company (LAN or local area network) and inter-company (WAN or wide area network) information. In addition, many companies are embracing new productivity-enhancing applications, such as Voice over Internet Protocol (VoIP), which replaces traditional fixed circuit, point-to-point voice communications with packet-based network routed calls, and universal messaging systems that require greater bandwidth capability and data storage requirements.
Growing demand for network capacity and bandwidth is expected to result in greater adoption of optical communications products across all segments including: Long Haul, Metro (core and access), Cable TV (CATV), Submarine, and Fiber to the Premises (FTTP) in the Telecom sector and LAN, SAN or storage area networks and WAN for the Storage or Enterprise market. We believe that any deployment of fiber closer to the end user will result in increased demand on the metro and long-haul infrastructures into which these new deployments would feed. In general, all implementations move fiber closer to the consumer, displacing copper infrastructure and increasing the availability of wider bandwidth services. We believe that JDSU, with one of the broadest optical communications product portfolios in the industry, is poised to capitalize on these developments.
We do remain cautious, however, in attempting to forecast the future. Visibility remains limited, and we cannot provide any assurance as to the timing or scale of any new optical network deployments or sustained industry recovery, in general.
Commercial and Consumer Products Group
Our Commercial and Consumer segment offers innovative products for application in the following industries:
We provide high performance optics for application in commercial markets including semiconductors, materials processing and biotechnology. We also provide lasers for use in imaging, aerospace and defense applications.
Technology demands and trends shaping the adoption of high-performance optical solutions include:
These trends are generating growing demand for commercial laser products. Market growth is further stimulated by the continuous reductions in sizes and power driven by adoption of solid state laser technology. We believe that, as a leading provider of commercial laser and other supporting technologies, we are poised to benefit from the rapid development of these industry trends.
Brand owners in diverse industries worldwide are increasingly concerned with the loss of significant revenues to counterfeit products. Additional effects include risk to consumer health and safety, corporate liability issues, devaluation of brand image and weakening of brand loyalty. Products likely to be subject to counterfeit include pharmaceuticals, imaging supplies, apparel, automotive parts, consumer electronic products, and electronic media.
Multiple factors are contributing to the rapidly growing counterfeit market including, among others, the broad adoption of the Internet to facilitate distribution, ready availability of low-cost, very high-quality printing equipment to reproduce product packaging, the elimination of international trade barriers and an increasingly mobile global society.
Corporate brand owners are accelerating the introduction of protective measures, developing both overt and covert packaging strategies that provide consumers and/or their inspection personnel with the ability to quickly determine product authenticity, for instance, by visually detecting a color-shifting pattern on the package itself.
Our optical technology protects approximately 100 currencies worldwide and has been introduced by leading pharmaceutical companies on prescription drug packaging. Companies in other industry sectors are also implementing brand protection solutions using our color-shifting technology in an attempt to prevent counterfeiting of their most important brands. We believe that, as a leader in the design and manufacture of color-shifting technology for decorative, document and brand authentication solutions, we are poised to continue extending our industry impact and to broaden our reach to new areas.
We also participate in markets that are undergoing a significant evolution driven by the emergence of high-definition (HD) content, rapid adoption of DVDs and on-line gaming, and increased use of digital distribution
of films and video. Content providers and both satellite and cable television service providers are rapidly increasing supply of HD material that can provide up to 5 time higher resolution than traditional formats. Consumers have quickly come to appreciate the impact that higher resolution formats have on the entertainment experience.
There is also a migration from scheduled to on-demand content delivery. Television programming is undergoing a transformation from scheduled programming, tightly managed by the content providers, to on-demand consumption, driven by consumer demand for greater flexibility as to when and where content is experienced. This in turn, is expected to drive further growth of consumed content.
As a result of advances in microdisplay technology consumers can now enjoy very high image quality in large screen formats at an increasingly affordable cost, and demand for rear projection televisions (RPTVs) has fueled a multi-billion dollar market. We provide high-quality and high performance component and assembly level products to OEMs in the RPTV market, and believe we are therefore well positioned to benefit from these trends.
Since April 2001, we have significantly consolidated the Company and rationalized the manufacturing of our products based on core competencies, cost efficiency and alternative manufacturers, where appropriate. Among other things, we continue to strengthen our partnerships with contract manufacturers primarily for our telecommunications, data communications, lasers and display products. We are also centralizing in-house manufacturing to our lower-cost facility in Shenzhen, China. However, we may not be successful in our manufacturing strategy. There are many risks to be addressed, as more particularly described in the Risk Factors section.
In April 2005, we announced a restructuring program that would reduce the number of manufacturing facilities, dispose of businesses and product lines that were not strategic and/or were not capable of meeting our desired profitability goals. This restructuring program included the reduction of headcount at the Santa Rosa facility, the sale of our Fuzhou, China and Mountain Lakes, New Jersey businesses, the transfer of our manufacturing operations in Ewing, New Jersey to a contract manufacturer, and the sale of the CATV product line to a third party.
We have consolidated manufacturing, research and development, sales and administrative facilities through building and site closures. As of June 30, 2005, 38 sites and buildings in North America, Europe and Asia-Pacific have been closed. The process involves consolidating product lines, standardizing on global product designs, and transferring manufacturing to fewer locations. The 38 sites closed were as follows:
We have centralized and continue to centralize many administrative functions such as information technology, human resources and finance to take advantage of synergies, economies of scale and common processes and controls.
Our results of operations and financial condition were significantly affected by charges related to our restructuring activities, the write-downs of inventories, and the impairment of our investments and long-lived assets during fiscal 2005, 2004, and 2003.
Please refer to Managements Discussion and Analysis of Financial Condition and Results of Operations under Item 7 and Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K for further discussion on these charges.
As part of our strategy, we are committed to the ongoing evaluation of strategic opportunities and, where appropriate, to the acquisition of additional products, technologies or businesses that are complementary to, or broaden the markets for our products. During fiscal 2005 and into fiscal 2006, we continued execution of our strategy to better address our market needs and improve our business model by reducing cost structure, eliminating non-core products and seeking strategic partnerships.
On September 8, 2005, we announced the acquisition of Agility Communications, Inc. (Agility), a leading provider of widely tunable laser solutions for optical networks. The acquisition is expected to 1) solidify our leadership position in the rapidly growing market for tunable lasers and transponders; 2) offer an optimal path to high volume, high yield, tunable, pluggable solutions when combined with JDSUs manufacturing scalability; and 3) establish JDSU as the broadest end-to-end agile optical network portfolio provider in the marketplace today. The acquisition is expected be completed by the second quarter of fiscal 2006.
On August 3, 2005, we completed the acquisition of privately held Acterna, Inc. (Acterna), a leading worldwide provider of broadband and optical test and measurement (T&M) solutions for telecommunications and cable service providers and network equipment manufacturers, for approximately $450.0 million in cash and $310.0 million in JDS Uniphases common stock, which equated to approximately 200 million shares. With this acquisition, we become a leading provider of optical communications sub-systems and broadband T&M systems serving an expanded customer base that includes the largest 100 telecommunications and cable services providers, and system manufacturers worldwide. The combined portfolio of products and services are expected to enhance the deployment of Internet Protocol (IP)-based data, voice and video services over optical long haul, metro, fiber-to-the-home, DSL and cable networks. Starting the first quarter of fiscal 2006, the addition of Acternas T&M business will comprise a new reportable segment of our business.
In June 2005, we acquired Photonic Power Systems, Inc. (PPS). PPS is a company that has pioneered the delivery of electrical power over fiber. The acquisition of PPS supports our goal of technology innovation. The PPS technology opens up multiple new markets for us, including medical, wireless communications, electrical power, industrial sensors, and aerospace applications.
In May 2005, we acquired Lightwave Electronics Corporation (Lightwave). Lightwave is a leading provider of solid-state lasers for commercial markets including materials processing, semiconductor fabrication, and biotech. Lightwave enables us to expand our product line of solid-state lasers and broaden our customer base in growing laser market segments. The acquisition reinforces our commitment to the OEM laser business and significantly strengthens our portfolio in the higher-growth solid-state laser markets. Customers use solid-state lasers for applications such as PC board via-hole drilling, wafer singulation for solar cells and Light Emitting Diode (LEDs), wafer inspection and alignment, memory repair, and ultraviolet flow cytometry and confocal microscopy.
In July 2004, we acquired Advanced Digital Optics, Inc. (ADO). By acquiring ADO, we extended its capabilities in the design and manufacture of micro-display light engines that deliver leading performance and image quality for the high definition television market.
Please refer to Note 17. Mergers and Acquisitions and Note 22. Subsequent Events (Unaudited)of Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K for further discussion of the acquisitions completed during fiscal 2005 and completed or announced in fiscal 2006.
In May 2005, we entered into an agreement with EMCORE Corporation (Emcore) whereby it acquired the assets of our analog CATV and Radio Frequency (RF) business. Our decision to divest from the CATV business was driven by the nature of our CATV portfolio, which did not meet our profitability and strategic objectives.
In April 2005, we announced that we were executing against a set of cost reduction initiatives to reduce our investment in North American manufacturing and exit a number of products that did not meet our profitability targets. These products included: CATV, bulk optics, micro display windows, and light engines. As a result, we sold our Fuzhou, China bulk optics business and our Mountain Lakes, New Jersey precision glass business to Fabrinet; sold our CATV business to Emcore; transferred our manufacturing of products in Ewing, New Jersey and Melbourne, Florida to contract manufacturers. These actions along with the discontinuance of a number of other products are targeted to reduce our headcount by approximately 1,350 people. In November 2004, we announced a strategic decision to sell our Singapore and Bintan, Indonesia manufacturing operations to Fabrinet. The agreement provides us with long-term sourcing guarantees for the datacom transceivers currently being manufactured at these facilities. Research and development continues at all sites, except for the Mountain Lakes, New Jersey facility.
In August 2004, we sold the assets of our molded-optics business unit to Triformix, Inc. of Santa Rosa, California.
Operating Segments and Products
We operate in two principal segments through which we develop and manufacture our products: (i) Communication Products Group, which accounted for approximately 59% of our net revenue in fiscal 2005, and (ii) Commercial and Consumer Products Group, which accounted for approximately 41% of our net revenue in fiscal 2005.
Please refer to Note 18. Operating Segments and Geographic Information of Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K for further discussion of our operating segments.
Through our two segments, we serve customers in the communications, consumer, commercial and defense industries.
In the communications industry, we provide optical products and solutions to the telecommunications market, including submarine, long haul, metro, access and cross connect applications. We also serve the data communications market, including SAN, LAN, and Ethernet WAN applications
In the consumer industry, we provide optical solutions using light interference for document and currency authentication as well as for product authentication and brand protection. We also provide decorative coatings using light interference that provide product differentiation. In addition, we also provide coated optics and assemblies for displays for projection televisions.
In the commercial and defense industries, we provide laser, coated optics and assemblies that are used in biotechnology, material processing, semiconductor, graphics and imaging, aerospace and defense applications.
Communications Products Group
Our communications products include a broad range of components, modules and subsystems that can enable our customers to satisfy all of their requirements through one-stop shopping at a single supplier. We leverage our broad-based component portfolio to provide higher levels of integration in modules and subsystems to create value-added solutions for our customers. We also provide a family of instrumentation products used in a variety of applications including manufacturing and research and development (R&D). The breadth of our communications product offering is described below.
Source Lasers: These products provide the initial signal that is transmitted over an optical network. We provide continuous wave lasers and directly modulated lasers for telecom and cable television systems. In addition to fixed wavelength lasers, we also provide tunable lasers that can be adjusted to any frequency over a range of wavelengths. Our Transmission Optical Sub Assemblies (TOSAs) offer greatly reduced size and cost.
Photodetectors and Receivers: Photodetectors and receivers detect the optical signals and convert them back into electronic signals. Photodetectors, when co-packaged with an electronic preamplifier, are referred to as receivers. We expanded our broad offering of receivers this year to include Receive Optical Sub Assemblies (ROSAs) that offer greatly reduced size and cost compared to previous offerings
Modulators: Modulators are used to encode information being sent through the network. We supply a range of modulators including monolithically integrated internal and high performance lithium niobate external modulators.
Wavelength Lockers: We supply wavelength lockers that are used to stabilize the wavelength of lasers used in dense Wavelength Division Multiplexing (WDM) transmission systems.
WDM Couplers, Filters, Isolators and Circulators: Wavelength division multiplexer couplers are used to split and combine signals of different wavelengths. We also supply isolators and circulators, including fixed and tunable filters, which are used to control the direction and flow of light in a network.
Switches and Attenuators: Optical switches are used to route and switch signals to different destinations within networks. Attenuators are used to adjust the power of the optical signal to be compatible with the optical receivers within a network system.
High Power Pump Lasers: We supply 980-nanometer and14xx-nm (wavelength tailored) pump lasers that are utilized in erbium-doped fiber amplifiers (EDFAs) and Raman modules for amplification of optical signals. We also offer a line of high-power, high brightness products targeted for industrial fiber laser and fiber to the curb, node, or premise (FTTx) applications.
Submarine Applications: We offer the most comprehensive set of components for submarine applications. These include high power pump lasers and other active and passive components designed and manufactured to meet the stringent requirements of marine applications.
Modules and Subsystems:
Transmitters: We manufacture transmitter modules that combine source lasers, modulators, wavelength lockers and electronic drivers in one package to create and encode optical signals.
Tranceivers and Transponders: For the data communications market we offer one, two and four gigabits per second fiber channel and one and 10 Gb/s Ethernet transceivers. Form factors supported include GBIC SFP, X2 and XFP. In the telecom segment we offer a broad range of solutions for both Synchronous Optical Network/Synchronous Digital Hierarchy (SONET/SDH) and WDM markets. Solutions are offered as pluggable XFP and SFP transceivers and 300 pin transponders.
Amplifiers: Our amplifiers cover a wide range of functionality and are designed to boost optical signals, permitting an optical signal to travel a greater distance between electronic terminals and regenerators. We offer a broad line of standard and custom products for applications throughout the network.
Add-Drop Multiplexers: These modules allow systems to add and drop optical wavelengths without reconversion to an electrical signal. The modules include multiple components such as switches, wavelength mutiplexers/demultiplexers, and attenuators.
Optical Channel Monitors: These Optical Channel Monitors (OCM) allow optical network performance to be checked continuously in real-time. The OCM integrates all the functions needed to cost-effectively monitor wavelength, power and optical signal to noise ratio (OSNR) performance.
Wavelength Management Modules: These products are used to manipulate and route signals in the optical domain, eliminating the need for expensive Optical-Electrical-Optic (OEO) regeneration. JDSU is a leading provider of wavelength management modules, including wavelength blockers, multi-wavelength switches and its reconfigurable optical add/drop modules (ROADMs) which include C- and L-band models.
WaveReady Products: These low cost and easy to operate bit-rate and protocol independent modules, software, and shelves can be configured to deliver carrier class and enterprise optical transport solutions for LAN and SAN extension, Gigabit Ethernet, SONET, data and video and to help triple play deployments. The WaveReady solutions can be used with existing SONET based networks to add new services such as digital subscriber line (DSL) expansion, VoIP and provide a cost effective solution to adding new fiber to a network. The unique portfolio of WaveReady Network Ready Subsystems allows providers to enable bandwidth aggregation and design hybrid DWDM/CWDM optical networks. The WaveReady family is easy to manage through simple network management protocol (SNMP) and TL1 compatible communication modules as well as JDSU Node Manager software.
Optical Layer Subsystems: We provide amplifier, transponder, switching and other circuit pack subsystems which include optics and electronics on a circuit board and or otherwise packaged with an interface for telecommunication systems. These products contain higher levels of hardware and firmware integration, including increasing levels of embedded software intelligence.
Instrumentation: Our test instruments are used to measure the performance of optical components, modules and subsystems in R&D, manufacturing and qualification applications. Our product line includes optical switches for test automation, and swept wavelength systems for rapid measurement of DWDM and ROADM components. Our Multiple Application Platform (MAP), the next-generation platform for our line signal conditioning instrumentation, includes over 20 cassettes for a wide variety of applications including transponder manufacturing test systems and line card production.
Commercial and Consumer Products Group
Our commercial and consumer products represent our center of excellence for thin film coating, optical assembly, and laser technologies. Optical thin film coatings are microscopic layers of materials, such as silicon and magnesium fluoride, applied to the surface of a substrate, such as glass, plastic or metal, to alter its optical properties. Thin film coatings work by controlling, enhancing or modifying the behavior of light to produce specific effects such as reflection, refraction, absorption, abrasion resistance, anti-glare and electrical conductivity. This control is achieved as a result of the optical properties, number of layers and thickness of the thin film coatings in relation to wavelengths of light.
The Commercial and Consumer Products Group has direct responsibility for leveraging its technologies into the optics and displays markets.
Optics and Display:
The aerospace and medical/environmental instrumentation markets require sophisticated, custom, high-precision coated products and optical components that selectively absorb, transmit or reflect light in order to meet the specific performance requirements of advanced systems. Our products include infrared filters, beam splitters and optical sensors for aerospace applications, optical filters for medical instruments and solar cell covers for satellites. Our products in the office automation market include photoreceptors and front surface mirrors for photocopiers, document scanners, overhead projectors, facsimile machines and printers.
Display: In the display market, we manufacture and sell products for use in both home and business display systems. These products include front surface mirrors, color wheels, and other coated optics and assemblies.
Intelligent Lighting: We provide optical coatings and filters which are used to create dramatic lighting effects and project rich, saturated color in intelligent lighting systems for concerts, discotheques, stages, studios, and architectural lighting.
Infrared Products: We provide multi-cavity and linear variable infrared filters on a variety of substrates for a variety of applications including gas monitoring and analysis, thermal imaging, smart munitions, fire detection, spectroscopy, and pollution monitoring.
Solar Products: We provide solar cell cover glass and thermal control mirror technology. One or more of our solar products can be found on all U.S. manned spacecraft, on U.S. satellites, and on international satellites.
Custom Optics: We provide a wide array of precision optics in the visible or infrared portion of the light spectrum. Most products are custom optical filters that require one or more thin film coatings on either a simple or irregular shape. Uses for these custom optics can be found in normal commercial applications, scientific products and in the aerospace and defense industries.
Document Authentication and Brand Protection:
Light interference micro flakes create unique color-shifting characteristics that are utilized in security applications. Our security products use light interference technology, which allows inks or plastics to exhibit different colors and visual effects from different viewing angles. This technology is used to inhibit counterfeiting of currencies and other valuable documents. We also supply products incorporating proprietary interference technologies to provide brand authentication and security solutions that protect against product counterfeiting. Applications include pharmaceuticals, as well as premium brand apparel, imaging supplies, electronics, computer and other consumer goods. We offer these products in a wide range of flexible solutions by incorporating them into labels and packaging. In April 2005, we announced general availability of our SecureShift® Phantom labels, which use innovative optical brand protection technology to provide a significant advantage over alternative overt features such as holograms.
We have a line of decorative products that utilize similar manufacturing processes as our security products, but are designed to have certain color characteristics that make it attractive for applications in paints, cosmetics and plastics. The products create a durable color shifting finish for automotive, consumer electronics and other applications.
Our portfolio of laser products includes components and subsystems used in a wide variety of OEM applications. Our broad range of products, include high-reliability industrial laser diodes, industrial fiber lasers, helium-neon (HeNe) gas lasers, air-cooled argon gas lasers, and continuous wave and pulsed diode-pumped
solid-state lasers that allows us to meet the needs of our customers in markets and applications such as: biotechnology, materials processing, semiconductor, graphics and imaging, remote sensing/ranging and laser marking.
With the acquisition of Lightwave in May 2005, we have an expanded range of solid state lasers, including low- to high-power output, ultra violet (UV), visible and IR wavelength solid state lasers.
Diode-Pumped Solid-State Lasers: Our diode-pumped solid-state lasers with high output power, excellent beam quality, low noise, exceptional reliability, and very small packaging are ideal for use in biotechnology instrumentation, material processing, graphics and imaging, semiconductor manufacturing, and laser induced fluorescence applications.
Industrial Laser Diodes: We have leveraged our telecom expertise into a family of industrial laser diode products, including components, plug and play modules and fiber-coupled devices. These laser diodes address a wide variety of applications including laser pumping, thermal exposure, illumination, ophthalmology, image recording, printing, material processing, optical storage, and spectral analysis.
Argon Ion Lasers: We are a leading manufacturer of air-cooled argon ion lasers. Argon lasers are very stable and reliable over the entire range of operating currents and temperatures, making them well suited for complex, high-resolution OEM applications such as flow cytometry, Deoxyribonucleic Acid (DNA) sequencing, graphics and imaging, and semiconductor inspection.
Helium-Neon Lasers: We offer helium-neon lasers in the red, green, yellow, and orange wavelengths. These products provide high output power with low noise, offering excellent beam pointing and amplitude stability, and instant start-up. These lasers are used in various applications including bar code scanning, flow cytometry, metrology, photo processing, and alignment.
Fiber Lasers: Fiber lasers are compact in size, require simple wall-socket power, and are air-cooled, making them easy to integrate into a system. The nominal output wavelength of one micron makes them ideal for precision machining applications such as marking, bending and cutting, and selective soldering.
In our communications markets we compete against numerous fiber optic component, module, subsystem and instrumentation manufacturers, including independent merchant suppliers and business units within vertically integrated equipment manufacturers, some of whom are also our customers. A partial list of these competitors includes: Agilent Technologies (Agilent), Avanex, Bookham Technology, Finisar, Fujitsu, Furukawa Electric, Oplink Communications, and Sumitomo Electric. In addition to these established companies, we also face competition from other companies and from emerging start-ups. While each of our product families has multiple competitors, we believe that we have the broadest range of products and technologies available in the industry. We also believe that this range of products and technologies position us well as the industry continues to move towards module and subsystem level products.
In our commercial and consumer markets, we strive to be a principal supplier to most of our key customers. In our consumer markets, we face competition from providers of special effect pigments, including BASF and Merck KGaA. In our commercial markets, we face competition from Japanese coating companies such as Nidek, Toppan and Tore, and display component companies such as Viratec, Nitto Optical, Asahi, Nikon and Fuji Photo-Optical. In our commercial and defense markets we compete with optics companies such as Deposition Sciences, Barr Associates, and Sonoma Photonics. We also compete with laser companies such as Coherent, Melles Griot and the Spectra-Physics division of Newport.
Our objective is to continue to be a leading supplier of fiber optic components, modules and subsystems for all markets and industries we serve. Specifically, we plan to pursue the following product strategies:
Help accelerate our customers profitability and time-to-revenue via enhanced vertically integrated optical platforms, such as modules and circuit packs that leverage the broad optical components we also sell directly to OEMs.
Enable our customers next generation laser applications, such as laser-based solutions in bio-medical, graphical, remote sensing and material processing markets, by exploiting laser product transitions from gas to solid state.
Uniquely differentiate and effectively protect valuable brands via a secure, flexible and aesthetically innovative optical platform. Within our entertainment sub-segment, enable the highest quality entertainment experience with best in class optical components and assemblies, which provide high-contrast and high-brightness for the fast growing microdisplay-based HD RPTV market.
In support of these product strategies, we are pursuing a corporate strategy that we believe will best position us for future opportunities in all the markets we serve. The key elements of our corporate strategy include:
Although we expect to be successful in implementing our strategy, there are many internal and external factors that could impact our ability to meet any or all of our objectives. Some of these factors are discussed under Risk Factors.
Sales and Marketing
We market our products primarily to OEM, distributors and strategic partners in North America, Europe and Asia-Pacific. Our sales organizations communicate directly with customers engineering, manufacturing and purchasing personnel in determining the design, performance and cost specifications for customer product requirements. Our customers for optical communications solutions include Agilent, Alcatel, Ciena, Cisco Systems, Hewlett-Packard, Huawei, IBM, Lucent, Nortel, and Bell South. Our customers in our commercial and consumer markets include Agilent, Applied Biosystems, Eastman Kodak, Hitachi, Mitsubishi, SICPA, Sony, and Toshiba.
We believe that a high level of customer support is necessary to develop and maintain long-term relationships with our customers. Each relationship begins at the design-in phase and is maintained as customer needs change. We provide direct service and support to our customers through our offices in North America, Asia and Europe. We have aligned our sales organization in the communications business to offer customers a single point of contact for all of their product requirements, and created centers of excellence to streamline customer interactions with product line managers. We are also continuing to consolidate administrative functions to provide improved customer service and reduce our cost.
Research and Development
During fiscal 2005, 2004, and 2003, we incurred research and development expenses of $93.7 million, $99.5 million, and $153.7 million, respectively. Our total number of employees engaged in research and development has decreased to 532 as of June 30, 2005, compared to 647 as of June 30, 2004 and 674 at June 30, 2003.
We devote substantial resources to research and development in order to develop new and enhanced products to serve our communications, display, document and product security, medical/environmental instrumentation and laser markets. Once the design of a product is complete, our engineering efforts shift to enhancing both the performance of that product and our ability to manufacture it at high volumes and at lower cost.
For the communications market, we are increasing our focus on the most promising markets while maintaining our capability to provide products throughout the network. We are increasing our emphasis on the next generation optical components and modules, such as reconfigurable optical add drop multiplexers, tunable devices, FTTx products and intelligent modules, needed for long-haul, metro, access, local area network, storage area network, and enterprise markets. We are also responding to our customers requests for higher levels of integration, including the integration of optics, electronics and software in our modules, subsystems and circuit packs.
In our commercial and consumer markets, our research and development efforts concentrate on developing more innovative solutions such as economical and commercially suitable light interference pigments, color separation filters and various components for optical systems, and components, modules and assemblies to serve the display and instrumentation markets.
The following table sets forth our manufacturing locations and the primary products manufactured at each location as of June 30, 2005. Manufacturing facilities and products manufactured by our contract-manufacturing partners (located in California, New Jersey, Texas, China, Indonesia, Singapore and Thailand) are not included in the table below:
Sources and Availability of Raw Materials
Our intention is to establish at least two sources of supply for materials whenever possible, although we do have some sole source supply arrangements. The loss or interruption of such arrangements could have an impact on our ability to deliver certain products on a timely basis.
Patents and Proprietary Rights
Intellectual property rights that apply to our various products include patents, trade secrets and trademarks. We do not intend to broadly license our intellectual property rights unless we can obtain adequate consideration or enter into acceptable patent cross-license agreements. As of June 30, 2005, we held over 1,000 U.S. patents and several hundred foreign patents.
Backlog consists of purchase orders for products for which we have assigned shipment dates within the following 12 months. As of June 30, 2005, our backlog was approximately $142.4 million as compared to $147.0 million at June 30, 2004. Because of possible changes in product delivery schedules and cancellation of product orders, and because our sales will often reflect orders shipped in the same quarter in which they are received, our backlog at any particular date is not necessarily indicative of actual revenue or the level of orders for any succeeding period.
We had 5,022 employees as of June 30, 2005, as compared to 6,041 and 5,489 as of June 30, 2004 and 2003, respectively. Our workforce as of June 30, 2005 included 3,733 employees in manufacturing, 532 employees in research and development, 469 employees in general and administrative functions (including information technology, finance and human resources), and 288 employees in sales and marketing.
We have never experienced a work stoppage, slowdown or strike. Notwithstanding the reductions in force that have taken place, we consider our employee relations generally to be good.
Similar to other technology companies, particularly those located in Silicon Valley, we rely upon our ability to use stock options and other forms of stock-based compensation as key components of our executive and employee compensation structure. Historically, these components have been critical to our ability to retain important personnel and offer competitive compensation packages. Without these components, we would be required to significantly increase cash compensation levels (or develop alternative compensation structures) in order to retain our key employees, particularly as and when an industry recovery returns. Recent accounting rules relating to the expensing of stock-based compensation may result in us substantially reducing, or even eliminating, all or portions of our equity compensation programs which may negatively impact our ability to attract and retain key employees.
We cannot predict a return to profitability.
Although we have made progress in reducing elements of our expense structure, a confluence of factors may reduce the impact of these improvements, as well as our ability to enhance our revenues or to predict the timing of our return to long-term profitability. These factors include, among others:
Taken together, these factors limit our ability to predict and achieve profitability. While some of these factors may diminish over time as we improve our cost structure and focus on enhancing our product mix, several, such as continuous pricing pressure, increasing Asia-based competition, increasing commoditization of previously-differentiated products and a highly concentrated customer base are likely to remain endemic to our industries. If we fail to achieve our stockholders profitability expectations, our stock price, as well as our business and financial condition, will suffer.
If optical information networks do not continue to expand as expected, our communications business will suffer.
Our future success as a manufacturer of optical components, modules and subsystems ultimately depends on the continued growth of the communications industry and, in particular, the continued expansion of global information networks, particularly those directly or indirectly dependent upon a fiber optics infrastructure. As part of that growth, we are relying on increasing demand for high-content voice, video, text and other data delivered over high-speed connections (i.e., high bandwidth communications). As network usage and bandwidth demand increase, so do the need for advanced optical networks to provide the required bandwidth. Without network and bandwidth growth, the need for our advanced communications products, and hence our future growth as a manufacturer of these products, is jeopardized. Currently, while increasing demand for network services and for broadband access, in particular, is apparent, growth is limited by several factors, including, among others, an uncertain regulatory environment, reluctance from content providers to supply video and audio content over the communications infrastructure, and uncertainty regarding long term sustainable business models as multiple industries (cable, traditional telecommunications, wireless, satellite, etc.) offer non-complimentary and competing content delivery solutions. Ultimately, should long-term expectations for network growth and bandwidth demand not be realized or support a sustainable business model, our business would be significantly harmed.
Without stability and growth in our non-communications businesses our margins and profitability may suffer.
Our Commercial and Consumer Products Group represents a material, although varying, portion of our total net revenue. Gross margins associated with products in this segment often exceed those from products in our Communications Products Group. Revenue declines associated with Commercial and Consumer Products Group have had, and may in the future continue to have, a disproportionate impact on total Company profitability measures in any quarter. Accordingly, our strategy emphasizes the growth opportunities in both reported segments, as we seek to expand our markets and customer base, improve the profitability of our product portfolio and improve time to revenue. Therefore, we are engaged in or exploring new investment and product opportunities in our Commercial and Consumer Products Group, particularly in our coating technologies and laser businesses, as well as in our pigments business. Failures in these markets or in our execution of programs related to the same will significantly harm our business.
Our optics and display business has suffered significant recent setbacks and is subject to major transition and risk.
In recent periods, our optics and display revenues have declined substantially from historic levels, due to, among other things, product line terminations, market seasonality, increased competition, pricing pressures, and uncertain demand levels. In response, we have elected to phase out or divest certain products, outsource the manufacture of one product and consolidate the manufacturing resources related to the remainder of the business. We may in fact incur additional costs or suffer additional adverse financial and operational impacts related to declines in our optics and display business. Also, while we are currently investing in a new platform for optics and display components, we are in the early stages of this program and cannot yet predict the revenue or profitability levels, if any, that this investment will achieve.
Actions to improve our cost structure are costly and risky and the timing and extent of expected benefits is uncertain.
In response to our profitability concerns we are working vigorously to reduce our cost structure. We have taken, and expect to continue to take, significant actions (including site closures, product transfers, asset divestitures and product terminations) in furtherance of this goal. In this regard, we recently announced several major cost reduction initiatives including the transfer of manufacturing of certain of our products to contract manufacturing partners and our Shenzhen, China, facility, site consolidations and divestitures, product line and operations divestitures, end of life programs and significant headcount reductions. We expect to continue to take additional, similar actions for the foreseeable future opportunistically. We cannot be certain that these programs will be successful or completed as and when anticipated. These programs are costly, as we have incurred, and will continue to incur expenses to complete the same. In addition, these programs are risky, as they are time-consuming and disruptive to our operations, employees, customers (most significantly, our end of life programs) and suppliers, with no guarantee that the expected results (particularly cost savings and profitability expectations) will be achieved as and when projected (among other things, cost savings achieved through these programs may not be timely or sufficient enough to offset continuing pricing declines), or that the costs to complete these program will not increase above expected levels. Apart from ensuring the timely, cost-effective, execution of the actions planned, it is imperative that we conduct these programs with minimal adverse customer impact.
If our contract manufacturers fail to perform their obligations, our business will suffer.
We are increasing our use of contract manufacturers as an alternative to internal manufacturing. Among other things, we recently transferred, or have agreed to transfer, several of our facilities, assets and manufacturing operations to our contract manufacturer, Fabrinet, and have also agreed to transfer the manufacture of certain other products to an additional contract manufacturer. Accordingly, our reliance on these and other contract manufacturers as primary manufacturing resources is growing significantly. Consequently, we are increasingly exposed to the general risks associated with the businesses, operations and financial condition of our contract manufacturers, including, among other things, the risks of bankruptcy, insolvency, management changes, adverse change of control, natural disasters and local political or economic volatility or instability. Nevertheless, if our contract manufacturers do not fulfill their obligations to us on a timely basis, for any reason, or if we do not properly manage these relationships and the transition of assets, operations and product manufacturing to these contract manufacturers, our business and customer relationships will suffer. In addition, by undertaking these activities, we run the risk that the reputation and competitiveness of our products and services may deteriorate as a result of the reduction of our control over quality and delivery schedules. We also may experience supply interruptions, cost escalations and competitive disadvantages if our contract manufacturers fail to develop, implement or maintain manufacturing methods appropriate for our products and customers. In this regard, we have experienced, and continue to periodically experience, difficulties (such as delays, interruptions and quality problems) associated with products we have transferred to contract manufacturers. These may continue, resulting in, among other things, lost revenue opportunities, customer dissatisfaction and additional costs.
We have continuing concerns regarding the manufacture, quality and distribution of our products. These concerns are heightened as new product offerings increase.
Our success depends upon our ability to deliver high quality products on time to our customers at acceptable cost. As a technology company, we constantly encounter quality, volume and cost concerns. Currently, a combination of factors is exacerbating our concerns:
These factors have caused considerable strain on our execution capabilities and customer relations. Currently, we are (a) having periodic difficulty responding to customer delivery expectations for some of our products, (b) experiencing yield and quality problems, particularly with some of our new products and higher volume products, and (c) expending additional funds and other resources to respond to these execution challenges. We are currently losing revenue opportunities due to these concerns. We are also, in the short-term, diverting resources from new product research and development and other functions to assist with resolving these matters. If we do not improve our performance in all of these areas, our operating results will be harmed, the commercial viability of new products may be challenged and our customers may choose to reduce their purchases of our products and purchase additional products from our competitors.
If our customers do not qualify our manufacturing lines for volume shipments, our operating results could suffer.
Customers will not purchase certain of our products, other than limited numbers of evaluation units, prior to qualification of the manufacturing lines for the products. This concern is particularly relevant to us as we continue to take advantage of opportunities to further reduce costs through targeted, customer-driven, restructuring events, which will involve the relocation of certain of our manufacturing internally and to external manufacturers. Each new (including relocated) manufacturing line must undergo rigorous qualification testing with our customers. The qualification process can be lengthy and is expensive, with no guarantee that any particular product qualification process will lead to profitable product sales. The qualification process determines whether the manufacturing line achieves the customers quality, performance and reliability standards. Our expectations as to the time periods required to qualify a product line and ship products in volumes to customers may be erroneous. Delays in qualification can cause a long-term supply program to be cancelled. These delays will also impair the expected timing, and may impair the expected amount, of sales of the affected products. Nevertheless, we may, in fact, experience delays in obtaining qualification of our manufacturing lines and, as a consequence, our operating results and customer relationships would be harmed.
We could incur significant costs to correct defective products.
Our products are rigorously tested for quality both by our customers and us. Nevertheless, our products do, and may continue to, fail to meet customer expectations from time-to-time. Also, not all defects are immediately detectible. Customers testing procedures are limited to evaluating our products under likely and foreseeable failure scenarios. For various reasons (including, among others, the occurrence of performance problems that are unforeseeable in testing or that are detected only when products are fully deployed and operated under peak stress conditions), our products may fail to perform as expected long after customer acceptance. Failures could result from faulty design or problems in manufacturing. In either case, we could incur significant costs to repair and/or replace defective products under warranty, particularly when such failures occur in installed systems. We have experienced such failures in the past and remain exposed to such failures, as our products are widely deployed throughout the world in multiple demanding environments and applications. In some cases, product redesigns or additional capital equipment may be required to correct a defect. We have in the past increased our warranty reserves and have incurred significant expenses relating to certain communications products. Any significant product failure could result in lost future sales of the affected product and other products, as well as severe customer relations problems, litigation and damage to our reputation.
If we cannot develop new product offerings or if our new product offerings fail in the market, our business will suffer.
We are a technology-dependent company. Our success or failure depends, in large part, upon our ability to continuously and successfully introduce and market new products and technologies meeting or exceeding our customers expectations. Accordingly, we intend to continue to develop new product lines and improve the business for existing ones. However, we have considerably reduced our research and development spending from historic levels and some of our competitors now spend considerably higher percentages of their revenues on research and development than do we. If we fail to develop and sustain a robust, commercially viable product pipeline our business will suffer.
In recent periods, we have increased our focus on new products, particularly in our circuit pack, communications modules and optics and display businesses. Our current growth strategy emphasizes all of our businesses lines. Nevertheless, several of the key relevant products are untried and untested and have not yet demonstrated long-term commercial viability. Occasionally problems occur causing us to cancel or adjust new product programs. In this regard, we recently adjusted our light engine program to move from the mass production of integrated light engines for the broad consumer market to a focus on creating best in class components, integration techniques and systems integration for early market innovators. Current challenges across our new product efforts include establishing sustainable pricing and cost models, predictable and acceptable quality and yields, and adequate and reliable supply chains, as well as demonstrating our (and our suppliers) ability to scale and provide adequate facilities, personnel and other resources. Nonetheless, if we fail to successfully develop and commercialize some or all of these new products, our business could suffer.
Signs of market stability are not necessarily indicative of long-term growth.
Among other things, while our direct telecommunications customer base has remained largely intact, their customer base, the service providers, has been significantly reduced due to industry consolidations and the reduction of the competitive local exchange carriers. Notwithstanding signs of market stability, visibility into our markets, and particularly the telecommunications market remains limited, average selling prices continue to decline and revenue and profitability targets and projections are subject to uncertainty and variability. While we are generally encouraged by long-term growth prospects, our visibility remains limited and we remain cautious and cannot predict the timing or magnitude of growth for our industries or our business, at this time.
Stability concerns affecting many of our key suppliers could impair the quality, cost or availability of many of our important products, harming our revenue, profitability and customer relations.
We have numerous materials suppliers for our products and, frequently, many of our important products rely on single-source suppliers for critical materials. These products include several of our advanced components, modules and subsystem products across our businesses. Many of our important suppliers are small companies facing financial stability, quality, yield, scale or delivery concerns. Some of these companies may be acquired, undergo material reorganizations or become insolvent. Others are larger companies with limited dependency upon our business, resulting in unfavorable pricing, quantity or delivery terms. The recent signs of market stability in our business have exacerbated these concerns as we increase our purchasing to meet our customers demands. We are currently undertaking programs to ensure the long-term strength of our supply chain. Nevertheless, we are experiencing, and expect for the foreseeable future to continue to experience, strain on our supply chain and periodic supplier problems. We have incurred, and expect for the foreseeable future to continue to incur, costs to address these problems. In addition, these problems have impacted, and we expect for the foreseeable future will continue to impact, our ability to meet customer expectations. If we do not identify and implement long-term solutions to our supply chain concerns, our customer relationships and business will materially suffer.
The communications equipment industry has extremely long product development cycles requiring us to incur product development costs without assurances of an acceptable investment return.
The telecommunications industry is a capital-intensive industry similar, in many respects, to any other infrastructure development industry. Large volumes of equipment and support structures are installed over vast areas, with considerable expenditures of funds and other resources, with long investment return period expectations. Moreover, reliability requirements are intense. Consequently, there is significant resistance to network redesigns and upgrades. Consequently, redesigns and upgrades of installed systems are undertaken only as required in response to user demand and competitive pressures and generally only after the applicable carrier has received sufficient return on its considerable investment. At the component supplier level this reality creates considerable, typically multi-year, gaps between the commencement of new product development and volume purchases. Accordingly, we and our competitors often incur significant research and development and sales and marketing costs for products that, at a minimum, will be purchased by our customers long after much of the cost is incurred (very long time to cash) and, at a maximum, may never be purchased due to changes in industry or customer requirements in the interim.
Our business and financial condition could be harmed by our long-term growth strategy.
Notwithstanding the recent decline, our businesses have historically grown, at times rapidly, and we have grown accordingly. We have made, and expect in the future to make, significant investments to enable our future growth through, among other things, internal expansion programs, product development, acquisitions and other strategic relationships. We may grow our business through business combinations or other acquisitions of businesses, products or technologies. We continually evaluate and explore strategic opportunities as they arise, including business combinations, strategic partnerships, capital investments and the purchase, licensing or sale of assets. Acquisitions may require significant capital infusions, typically entail many risks and could result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies. If we fail to manage or anticipate our future growth effectively, particularly during periods of industry uncertainty, our business will suffer. Through our cost reductions measures we are balancing the need to consolidate our operations with the need to preserve our ability to grow and scale our operations as our markets stabilize and recover. If we fail to achieve this balance, our business will suffer to the extent our resources and operations are insufficient to respond to a return to growth.
Our sales are dependent upon a few key customers.
A few large customers account for most of our net revenue. During fiscal 2005 and 2004 no customer accounted for more than 10% of our total net revenue. During fiscal 2003, Texas Instruments accounted for 12% of our net revenue. Dependence on a limited number of customers exposes us to the risk that order reductions from any one customer can have a material adverse effect on periodic revenue.
One of our products is dependent upon a single customer for a majority of sales.
We have a strategic alliance with SICPA, our principal customer for our light interference pigments which are used to, among other things, provide security features in currency. Under a license and supply agreement, we rely exclusively on SICPA to market and sell to this market worldwide. The agreement requires SICPA to purchase minimum quantities of these pigments over the term of the agreement. If SICPA fails to purchase these quantities, as and when required by the agreement, for any reason, our business and operating results (including, among other things, our revenue and gross margin) will be harmed, at least in the short-term. In the long-term, we may be unable to find a substitute marketing and sales partner or develop these capabilities ourselves.
We depend on a limited number of vendors.
We depend on a limited number of contract manufacturers, and subcontractors, and suppliers for raw materials, packages and standard components. We generally purchase these single or limited source products
through standard purchase orders or one-year supply agreements and we have no long-term guaranteed supply agreements with such suppliers. While we seek to maintain a sufficient safety stock of such products and also endeavor to maintain ongoing communications with our suppliers to guard against interruptions or cessation of supply, our business and results of operations could be adversely affected by a stoppage or delay of supply, substitution of more expensive or less reliable products, receipt of defective parts or contaminated materials, an increase in the price of such supplies, or our inability to obtain reduced pricing from our suppliers in response to competitive pressures.
We generally use a rolling twelve and fifteen month forecast based on anticipated product orders, customer forecasts, product order history, warranty and service demand, and backlog to determine our material requirements. Lead times for the parts and components that we order vary significantly and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. If actual orders do not match our forecasts, we may have excess or shortfalls of some materials and components as well as excess inventory purchase commitments. We could experience reduced or delayed product shipments or incur additional inventory write-downs and cancellation charges or penalties, which would increase costs and could have a material adverse impact on our results of operations.
Any failure to remain competitive would harm our operating results.
The markets in which we sell our products are highly competitive and characterized by rapidly changing and converging technologies, as well as continuous pricing pressure. We face intense competition from established domestic and international competitors and the threat of future competition from new and emerging companies in all aspects of our business. Much of our current competition comes from large, diversified Asian corporations, and emerging, largely Chinese optical companies. These competitors have considerable optical expertise, and often very low cost structures. The competitive threat is exacerbated by the overall trend towards increased commoditization of traditionally highly differentiated products, particularly in our Communications Products Group. We expect Asian, and particularly Chinese, competition to increase. To remain competitive in both the current and future business climates, we believe we must maintain a substantial commitment to research and development, and significantly improve our cost structure. Our efforts to remain competitive may be unsuccessful.
Risks in acquisitions.
Our growth is dependent upon market growth, our ability to enhance our existing products and the introduction of new products on a timely basis. We have and will continue to address the need to develop new products through acquisitions of other companies and technologies. Acquisitions involve numerous risks, including the following:
Acquisitions may also cause us to:
Mergers and acquisitions of high-technology companies are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful or will not adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions could harm our business and operating results in a material way. Even when an acquired company has already developed and marketed products, there can be no assurance that product enhancements will be made in a timely fashion or that all pre-acquisition due diligence will have identified all possible issues that might arise with respect to such products.
Expenses relating to acquired in-process research and development costs are charged in the period in which an acquisiotion is completed. These charges may occur in future acquisitions resulting in variability in our quarterly earnings.
If we fail to attract and retain key personnel, our business could suffer.
Our future depends, in part, on our ability to attract and retain key personnel. We may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure. Our future also depends on the continued contributions of our executive management team and other key management and technical personnel, each of whom would be difficult to replace. The loss of service from these or other executive officers or key personnel or the inability to continue to attract qualified personnel could have a material adverse effect on our business. Retention of key talent is an increasing concern as we continue to implement cost improvement programs, including product transfers and site reductions, and as we continue to address our profitability concerns.
We recently experienced a significant amount of turnover within our corporate accounting and finance department, including the departure of our Chief Financial Officer, Vice-President and Corporate Controller, Treasurer, Corporate Accounting Manager and Corporate Reporting Manager. We have filled these positions and are actively recruiting to fill additional vacancies within our corporate and operations finance teams. In addition we are strengthening the technical capabilities of existing accounting and finance personnel.
Our finance personnel in new positions may require additional quarterly reporting cycles to be trained and fully familiar with our historical complex non-routine transactions. Should we be unable to recruit the additional personnel needed in the corporate accounting and finance function to strengthen our technical capabilities or should we increase the demands on our current resources with a large number of complex non routine transactions our internal controls over financial reporting could suffer and result in material weaknesses in our internal controls over financial reporting (see Item 9A. Controls and Procedures). We will also be challenged with the integration of Acterna which will further stretch our finance organization resources.
Similar to other technology companies, particularly those located in Silicon Valley, we rely upon our ability to use stock options and other forms of stock-based compensation as key components of our executive and employee compensation structure. Historically, these components have been critical to our ability to retain important personnel and offer competitive compensation packages. Without these components, we would be required to significantly increase cash compensation levels (or develop alternative compensation structures) in order to retain our key employees, particularly as and when an industry recovery returns. Recent requirements mandating the expensing of stock-based compensation awards may cause us to substantially reduce, or even eliminate, all or portions of our stock-based compensation programs which may negatively impact our ability to attract and retain key employees.
Certain of our non-telecommunications products are subject to governmental and industry regulations, certifications and approvals.
The commercialization of certain of the products we design, manufacture and distribute through our Commercial and Consumer Products Group may be more costly due to required government approval and industry acceptance processes. We have experienced delays in the commercialization of our light engine product in this segment. Development of applications for our light interference pigment products may require significant testing that could delay our sales. For example, certain uses in cosmetics may be regulated by the Food and Drug Administration, which has extensive and lengthy approval processes. Durability testing by the automobile industry of our pigments used with automotive paints can take up to three years. If we change a product for any reason including technological changes or changes in the manufacturing process, prior approvals or certifications may be invalid and we may need to go through the approval process again. If we are unable to obtain these or other government or industry certifications in a timely manner, or at all, our operating results could be adversely affected.
We face risks related to our international operations and revenue.
Our customers are located throughout the world. In addition, we have significant offshore operations, including manufacturing, sales and customer support operations. Our operations outside North America include facilities primarily in Asia-Pacific.
Our international presence exposes us to certain risks, including the following:
Net revenue from customers outside North America accounted for 34%, 36%, and 30% of our total net revenue in fiscal 2005, 2004, and 2003, respectively. We expect that net revenue from customers outside North America will continue to account for a significant portion of our total net revenue. Lower sales levels that typically occur during the summer months in Europe and some other overseas markets may materially and adversely affect our business. In addition, sales of many of our customers depend on international sales and consequently further expose us to the risks associated with such international sales.
The international dimensions of our operations and sales subject us to a myriad of domestic and foreign trade regulatory requirements. As part of our ongoing integration program, we are evaluating our current trade compliance practices and implementing improvements, where necessary. Among other things, we are auditing
our product export classification and customs procedures and are installing trade information and compliance systems using our global enterprise software platforms. We do not currently expect the costs of such evaluation or the implementation of any resulting improvements to have a material adverse effect on our operating results or business. However, our evaluation and related implementation are not yet complete and, accordingly, the costs could be greater than expected and such costs and the legal consequences of any failure to comply with applicable regulations could affect our business and operating results.
We are increasing manufacturing operations in China, which expose us to risks inherent in doing business in China.
As a result of our efforts to reduce costs, we have increased our manufacturing operations in China and those operations are subject to greater political, legal and economic risks than those faced by our other operations. In particular, the political, legal and economic climate in China (both at national and regional levels) is extremely fluid and unpredictable. Among other things, the legal system in China (both at the national and regional levels) remains highly underdeveloped and subject to change, with little or no prior notice, for political or other reasons. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations, such as those relating to taxation, import and export tariffs, environmental regulations, land use rights, intellectual property and other matters. Moreover, the enforceability of applicable existing Chinese laws and regulations is uncertain. These concerns are exacerbated for foreign businesses, such as ours, operating in China. Our business could be materially harmed by any changes to the political, legal or economic climate in China or the inability to enforce applicable Chinese laws and regulations.
Currently, we operate manufacturing facilities located in Shenzhen and Beijing, China. As part of our efforts to reduce costs, we continue to increase the scope and extent of our manufacturing operations in our Shenzhen facilities. Accordingly, we expect that our ability to operate successfully in China will become increasingly important to our overall success. As we continue to consolidate our manufacturing operations, we will incur additional costs to transfer product lines to our facilities located in China, which could have a material adverse impact on our operating results and financial condition.
We intend to export the majority of the products manufactured at our facilities in China. Accordingly, upon application to and approval by the relevant governmental authorities, we will not be subject to certain Chinese taxes and are exempt from customs duty assessment on imported components or materials when the finished products are exported from China. We are however required to pay income taxes in China, subject to certain tax relief. As the Chinese trade regulations are in a state of flux, we may become subject to other forms of taxation and duty assessments in China or may be required to pay for export license fees in the future. In the event that we become subject to any new Chinese forms of taxation, our results of operations could be materially and adversely affected.
Managing our inventory is complex and may include write-downs of excess or obsolete inventory.
Managing our inventory of components and finished products is a complex task. A number of factors, including, but not limited to, the need to maintain a significant inventory of certain components that are in short supply or that must be purchased in bulk to obtain favorable pricing or require long lead times, the general unpredictability of demand for specific products, may result in our maintaining large amounts of inventory. Inventory which is not used or expected to be used as and when planned may become excess or obsolete. Any excess or obsolete inventory could also result in sales price reductions and/or inventory write-downs, which we expect to continue, and historically have adversely affected our business and results of operations.
We may incur unanticipated costs and liabilities, including costs under environmental laws and regulations.
Our operations use certain substances and generate certain wastes that are regulated or may be deemed hazardous under environmental laws. Some of these laws impose liability for cleanup costs and damages relating
to releases of hazardous substances into the environment. Such laws may become more stringent in the future. In the past, costs and liabilities arising under such laws have not been material; however, we are not certain that such matters will not be material to us in the future.
Our business and operations would suffer in the event of a failure of our information technology infrastructure.
We rely upon the capacity, reliability and security of our information technology hardware and software infrastructure and our ability to expand and update this infrastructure in response to our changing needs. We are constantly updating our information technology infrastructure. Among other things, we have entered into an agreement with Oracle to provide and maintain our global ERP infrastructure on an outsourced basis. Any failure to manage, expand and update our information technology infrastructure or any failure in the operation of this infrastructure could harm our business.
Despite our implementation of security measures, our systems are vulnerable to damages from computer viruses, natural disasters, unauthorized access and other similar disruptions. Any system failure, accident or security breach could result in disruptions to our operations. To the extent that any disruptions or security breach results in a loss or damage to our data, or inappropriate disclosure of confidential information, it could harm our business. In addition, we may be required to spend additional costs and other resources to protect us against damages caused by these disruptions or security breaches in the future.
If we have insufficient proprietary rights or if we fail to protect those we have, our business would be materially harmed.
We may not obtain the intellectual property rights we require.
Others, including academic institutions, our competitors and other large technology-based companies, hold numerous patents in the industries in which we operate. Some of these patents may purport to cover our products. In response, we may seek to acquire license rights to these or other patents or other intellectual property to the extent necessary to ensure we possess sufficient intellectual property rights for the conduct of our business. Unless we are able to obtain such licenses on commercially reasonable terms, patents or other intellectual property held by others could inhibit our development of new products, impede the sale of some of our current products, or substantially increase the cost to provide these products to our customers. In the past, licenses generally have been available to us where third-party technology was necessary or useful for the development or production of our products, in the future licenses to third-party technology may not be available on commercially reasonable terms, if at all. Generally, a license, if granted, includes payments by us of up-front fees, ongoing royalties or a combination of both. Such royalty or other terms could have a significant adverse impact on our operating results. We are a licensee of a number of third-party technologies and intellectual property rights and are required to pay royalties to these third-party licensors on some of our telecommunications products and laser subsystems.
Our products may be subject to claims that they infringe the intellectual property rights of others.
The industry in which we operate experiences periodic claims of patent infringement or other intellectual property rights. We have received in the past and, from time to time, may in the future receive notices from third parties claiming that our products infringe upon third-party proprietary rights. One consequence of the recent economic downturn is that many companies have turned to their intellectual property portfolios as an alternative revenue source. This is particularly true of companies which no longer compete with us. Many of these companies have larger, more established intellectual property portfolios than ours. Typical for a growth-oriented technology company, at any one time we generally have various pending claims from third parties that one or more of our products or operations infringe or misappropriate their intellectual property rights or that one or more of our patents is invalid. We will continue to respond to these claims in the course of our business operations. In the past, the settlement and disposition of these disputes has not had a material adverse impact on
our business or financial condition, however this may not be the case in the future. Further, the litigation or settlement of these matters, regardless of the merit of the claims, could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not we are successful. If we are unsuccessful, we could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology that is the subject of the litigation. We may not be successful in such development or such licenses may not be available on terms acceptable to us, if at all. Without such a license, we could be enjoined from future sales of the infringing product or products.
Our intellectual property rights may not be adequately protected.
Our future depends in part upon our intellectual property, including trade secrets, know-how and continuing technological innovation. We currently hold numerous U.S. patents on products or processes and corresponding foreign patents and have applications for some patents currently pending. The steps taken by us to protect our intellectual property may not adequately prevent misappropriation or ensure that others will not develop competitive technologies or products. Other companies may be investigating or developing other technologies that are similar to our own. It is possible that patents may not be issued from any application pending or filed by us and, if patents do issue, the claims allowed may not be sufficiently broad to deter or prohibit others from marketing similar products. Any patents issued to us may be challenged, invalidated or circumvented. Further, the rights under our patents may not provide a competitive advantage to us. In addition, the laws of some territories in which our products are or may be developed, manufactured or sold, including Europe, Asia-Pacific or Latin America, may not protect our products and intellectual property rights to the same extent as the laws of the United States.
We face certain litigation risks that could harm our business.
We have had numerous lawsuits filed against us asserting various claims as noted in Part II of this filing, including securities and ERISA class actions and stockholder derivative actions. The results of complex legal proceedings are difficult to predict. Moreover, many of the complaints filed against us do not specify the amount of damages that plaintiffs seek and we therefore are unable to estimate the possible range of damages that might be incurred should these lawsuits be resolved against us. While we are unable to estimate the potential damages arising from such lawsuits, certain of them assert types of claims that, if resolved against us, could give rise to substantial damages. Thus, an unfavorable outcome or settlement of one or more of these lawsuits could have a material adverse effect on our financial position, liquidity and results of operations. Even if these lawsuits are not resolved against us, the uncertainty and expense associated with unresolved lawsuits could seriously harm our business, financial condition and reputation. Litigation can be costly, time-consuming and disruptive to normal business operations. The costs of defending these lawsuits, particularly the securities class actions and stockholder derivative actions, have been significant, will continue to be costly and may not be covered by our insurance policies. The defense of these lawsuits could also result in continued diversion of our managements time and attention away from business operations, which could harm our business.
Recently enacted and proposed regulatory changes will cause us to incur increased costs.
We continue to evaluate our internal control systems in order to allow our management to report on, and our independent auditors to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002. As a result, we continue to incur substantial expenses. In addition, we continue to acquire companies including Acterna, which we acquired in the first quarter of fiscal 2006. There can be no assurance that we will be able to properly integrate the internal controls processes of the acquired companies.
Based upon the evaluation of internal controls as of June 30th, 2005, we have determined we have material weaknesses in our system of internal control over financial reporting. If we are not able to remediate these material weaknesses, implement the requirements of Section 404 in a timely manner or implement them with adequate compliance with regard to the acquired companies, we might be subject to harm to our reputation and
could adversely affect our financial results and the market price of our common stock. Further, the impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers, which could harm our business.
If we fail to manage our exposure to worldwide financial and securities markets successfully, our operating results could suffer.
We are exposed to financial market risks, including changes in interest rates, foreign currency exchange rates and prices of marketable equity security and fixed-income securities. We do not use derivative financial instruments for speculative or trading purposes. The primary objective of most of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, a majority of our marketable investments are investment grade, liquid, short-term fixed-income securities and money market instruments denominated in U.S. dollars. A substantial portion of our net revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, some of these activities are conducted in other currencies, primarily Canadian, European and Asian currencies. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we may enter into foreign currency forward contracts. The contracts reduce, but do not always entirely eliminate, the impact of foreign currency exchange rate movements. Unhedged currency exposures may fluctuate in value and produce significant earnings and cash flow volatility.
As of June 30, 2005, we held investments in other public and private companies and had limited funds invested in private venture funds. Such investments represented approximately $29.2 million on our consolidated balance sheet at June 30, 2005. The stock prices of several of our investments fell in the recent economic downturn; we wrote down the value of these investments if the decline in fair value was deemed to be other-than-temporary. In addition to our investments in public companies, we have in the past and expect to continue to make investments in privately held companies as well as venture capital investments for strategic and commercial purposes. For example, we had a commitment to provide additional funding of up to $10.4 million to certain venture capital investment partnerships as of June 30, 2005. In recent months some of the private companies in which we held investments have ceased doing business and have either liquidated or are in bankruptcy proceedings. If the carrying value of our investments exceeds the fair value and the decline in fair value is deemed to be other-than-temporary, we will be required to further write down the value of our investments, which could materially harm our results of operations or financial condition.
We sold $475.0 million of senior convertible notes, which significantly decreased cash to debt ratio, and may cause our reported earnings per share to be more volatile because of the conversion contingency features of these notes.
On October 31, 2003, we issued $475.0 million of indebtedness in the form of senior convertible notes. The issuance of these notes substantially increased our principal payment obligations and we may not have enough cash to repay the notes when due. By incurring new indebtedness, the related risks that we now face could intensify. The degree to which we are leveraged could materially and adversely affect our ability to successfully obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures.
In addition, the holders of those notes are entitled to convert those notes into shares of our common stock under certain circumstances which would cause dilution to our existing stockholders and lower our reported per share earnings.
Our rights plan and our ability to issue additional preferred stock could harm the rights of our common stockholders.
In February 2003, we amended and restated our Stockholder Rights Agreement and currently each share of our outstanding common stock is associated with one right. Each right entitles stockholders to purchase 1/100,000 share of our Series B Preferred Stock at an exercise price of $21.00.
The rights only become exercisable in certain limited circumstances following the tenth day after a person or group announces acquisition of or tender offers for 15% or more of our common stock. For a limited period of time following the announcement of any such acquisition or offer, the rights are redeemable by us at a price of $0.01 per right. If the rights are not redeemed, each right will then entitle the holder to purchase common stock having the value of twice the then-current exercise price. For a limited period of time after the exercisability of the rights, each right, at the discretion of our Board of Directors, may be exchanged for either 1/100,000 share of Series B Preferred Stock or one share of common stock per right. The rights expire on June 22, 2013.
Our Board of Directors has the authority to issue up to 499,999 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 the consent of our stockholders. 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 Series B Preferred Stock or any preferred stock subsequently issued by our Board of Directors, under some circumstances, could have the effect of delaying, deferring or preventing a change in control.
Some provisions contained in the rights plan, and in the equivalent rights plan that our subsidiary, JDSU Canada Ltd., has adopted with respect to our exchangeable shares, may have the effect of discouraging a third party from making an acquisition proposal for us and may thereby inhibit a change in control. For example, such provisions may deter tender offers for shares of common stock or exchangeable shares, which offers may be attractive to stockholders, or deter purchases of large blocks of common stock or exchangeable shares, thereby limiting the opportunity for stockholders to receive a premium for their shares of common stock or exchangeable shares over the then-prevailing market prices.
Some anti-takeover provisions contained in our charter and under Delaware laws could hinder a takeover attempt.
We are subject to the provisions of Section 203 of the Delaware General Corporation Law prohibiting, under some circumstances, publicly-held Delaware corporations from engaging in business combinations with some stockholders for a specified period of time without the approval of the holders of substantially all of our 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 us, 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 some investors might be willing to pay in the future for shares of our common stock. Our certificate of incorporation and bylaws contain provisions relating to the limitations of liability and indemnification of our directors and officers, dividing our board of directors into three classes of directors serving three-year terms and providing that our 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 us.
ITEM 2. PROPERTIES
Our principal offices are located in San Jose, California, United States. The table below summarizes the properties that we owned and leased as of June 30, 2005:
As part of our Global Realignment Program and subsequent restructuring programs, we have completed and approved restructuring plans to close sites, vacate buildings at closed sites as well as at continuing operations and consolidate excess facilities worldwide. Of the total leased and owned square footage as of June 30, 2005, approximately 640,000 square feet were related to properties included in our Global Realignment Program and subsequent restructuring programs identified as surplus to our needs. Please see the description of our manufacturing sites under the heading Manufacturing in Item 1.
ITEM 3. LEGAL PROCEEDINGS
The Securities Class Actions:
As discussed in our previous filings, litigation under the federal securities laws has been pending against the Company and certain former and current officers and directors since March 27, 2002. The complaint in re JDS Uniphase Corporation Securities Litigation, C-02-1486 (N.D. Cal.), purports to be brought on behalf of a class consisting of those who acquired our securities from October 28, 1999, through July 26, 2001, as well as on behalf of subclasses consisting of those who acquired the our common stock pursuant to our acquisitions of OCLI, E-TEK, and SDL. The complaint seeks unspecified damages and alleges various violations of the federal securities laws, specifically Sections 10(b), 14(a), 20(a), and 20A of the Securities Exchange Act of 1934 and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. On July 15, 2005, the Court denied Lead Plaintiffs motion to strike parts of our answer to the complaint and also denied our motion for partial judgment on the pleadings. The Court also held a case management conference on July 15, 2005. At that conference, the Court ordered the parties to mediate, but declined to set a discovery cut-off or trial date.
On July 22, 2005, the Oklahoma Firefighters Pension and Retirement System moved to intervene, seeking to represent the purported subclass of plaintiffs who exchanged shares of OCLI stock for shares of JDSU stock in connection with the merger. No hearing on that motion has been set. On August 12, 2005, Lead Plaintiff moved for class certification. That motion will be heard on November 18, 2005. A further case management conference is also scheduled for November 18, 2005.
Document discovery is ongoing. Each party has noticed depositions of both party and non-party witnesses.
A related securities case, Zelman v. JDS Uniphase Corp., No. C-02-4656 (N.D. Cal.), is purportedly brought on behalf of a class of purchasers of debt securities that were allegedly linked to the price of our common stock. The Zelman complaint alleges that the debt securities were issued by an investment bank during the period from March 6, 2001 through July 26, 2001. The complaint names the Company and several of its former officers and directors as defendants, alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, and seeks unspecified damages. On April 6, 2005, Judge Claudia Wilken referred Defendants motion to dismiss the complaint to Judge William W Schwarzer of the District Court for the Northern District of California. On July 14, 2005, Judge Schwarzer denied our motion to dismiss, but granted the motion in part with leave to amend as to Mr. Kevin Kalkhoven. At a case management conference held on July 15, 2005, Judge Wilken advised the parties that the Zelman matter should be mediated at the same time as In re JDS Uniphase Corporation Securities Litigation.
On August 11, 2005, Plaintiff moved for class certification in the Zelman matter. That motion will be heard on November 18, 2005. On August 19, 2005, JDSU moved for leave to petition the Ninth Circuit Court of Appeals for interlocutory review of Judge Schwarzers order denying our motion to dismiss. No hearing on that motion has been set. On August 26, 2005, we answered the Amended Complaint.
The Derivative Actions:
As discussed in our previous filings, derivative actions purporting to be brought on our behalf have been filed in state and federal courts against several of our current and former officers and directors based on the same events alleged in the securities litigation. The complaint in Corwin v. Kaplan, No. C-02-2020 (N.D. Cal.), asserts state law claims for breach of fiduciary duty, misappropriation of confidential information, waste of corporate assets, indemnification, and insider trading. The complaint seeks unspecified damages. No activity has occurred in the Corwin action since our last filing and no trial date has been set.
In the California state derivative action, In re JDS Uniphase Corporation Derivative Litigation, Master File No. CV806911 (Santa Clara Super. Ct.), the complaint asserts claims for breach of fiduciary duty, waste of
corporate assets, abuse of control, gross mismanagement, unjust enrichment, and constructive fraud purportedly on behalf of the Company and certain of its current and former officers and directors. The complaint also asserts claims for violation of California Corporations Code Sections 25402 and 25502.5 against defendants who sold our stock and asserts claims for breach of contract, professional negligence, and negligent misrepresentation against our Independent Registered Public Accounting Firm, Ernst & Young LLP. The complaint seeks unspecified damages. Defendants demurrers to the complaint are scheduled to be heard on October 28, 2005. The Court will also hear Defendant Ernst & Young LLPs motion to compel arbitration of Plaintiffs claims against it on October 28, 2005. A case management conference is also scheduled for that day. As noted in our previous filings, the plaintiff in the California state derivative action has issued a shareholder inspection demand that has been disputed by us. The dispute remains unresolved. A case management conference in the shareholder inspection demand action is scheduled for October 28, 2005. No activity has occurred in Cromas v. Straus, Civil Action No. 19580 (Del. Ch. Ct.), the Delaware derivative action, since our last filing.
The OCLI and SDL Shareholder Actions:
As discussed in our previous filings, plaintiffs purporting to represent the former shareholders of OCLI and SDL have filed suit against the former directors of those companies, asserting that they breached their fiduciary duties in connection with the events alleged in the securities litigation against the Company. The plaintiffs in the OCLI action, Pang v. Dwight, No. 02-231989 (Sonoma Super. Ct.), purport to represent a class of former shareholders of OCLI who exchanged their OCLI shares for JDSU shares when JDSU acquired OCLI. The complaint names the former directors of OCLI as defendants, asserts causes of action for breach of fiduciary duty and breach of the duty of candor, and seeks unspecified damages. No activity has occurred in the OCLI action since our last filing. The plaintiffs in the SDL action, Cook v. Scifres, Master File No. CV814824 (Santa Clara Super. Ct.), purport to represent a class of former shareholders of SDL who exchanged their SDL shares for JDSU shares when the Company acquired SDL. The complaint names the former directors of SDL as defendants, asserts causes of action for breach of fiduciary duty and breach of the duty of disclosure, and seeks unspecified damages. Limited discovery in the SDL action has commenced. No trial date has been set in either the OCLI or SDL action.
The ERISA Actions:
As discussed in our previous filings, a consolidated action entitled In re JDS Uniphase Corporation ERISA Litigation, Master File No. C-03-4743 CW, is pending in the District Court for the Northern District of California against the Company, certain of its former and current officers and directors, and certain other current and former JDSU employees on behalf of a purported class of participants in the Companys 401(k) Plan. The complaint in the ERISA action alleges that the defendants violated the Employee Retirement Income Security Act by breaching their fiduciary duties to the Plan and its participants. The complaint alleges a purported class period from February 4, 2000, to the present and seeks an unspecified amount of damages, restitution, a constructive trust, and other equitable remedies. On April 6, 2005, Judge Wilken referred Defendants motion to dismiss the complaint to Judge Schwarzer. On July 14, 2005, Judge Schwarzer granted the motion in part with leave to amend and denied the motion in part. On July 20, 2005, Judge Wilken issued an order transferring the case for all purposes to Judge Schwarzer. Pursuant to Judge Schwarzers order on August 1, 2005, Plaintiffs deadline to file a second amended complaint is October 21, 2005.
Plaintiffs have begun taking discovery. No trial date has been set.
We believe that the factual allegations and circumstances underlying these securities class actions, derivative actions, the OCLI and SDL class actions, and the ERISA class actions are without merit. The expense of defending these lawsuits has been costly, will continue to be costly, and could be quite significant and may not be covered by our insurance policies. The defense of these lawsuits could also result in continued diversion of our managements time and attention away from business operations which could prove to be time consuming and disruptive to normal business operations. An unfavorable outcome or settlement of this litigation could have a material adverse effect on our financial position, liquidity or results of operations.
We are a party to other litigation matters and claims, which are normal in the course of its operations. While the results of such other litigation matters and claims cannot be predicted with certainty, we have no current reason to believe that their final outcome will have a material adverse impact on our financial position, liquidity, or results of operations.
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NASDAQ Stock Market under the symbol JDSU and our exchangeable shares of JDS Uniphase Canada Ltd. are traded on the Toronto Stock Exchange under the symbol JDU. Holders of exchangeable shares may tender their holdings for common stock on a one-for-one basis at any time. As of August 31, 2005, we had 1,652,154,979 shares of common stock outstanding, including 58,184,798 exchangeable shares. The closing price on August 31, 2005 was $1.58 for the common stock and Canadian $2.30 for the exchangeable shares. The following table summarizes the high and low closing sales prices for our common stock as reported on the NASDAQ Stock Market during fiscal 2005 and 2004:
As of August 31, 2005, we had 9,762 holders of record of our common stock and exchangeable shares. We have not paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected financial information for each of the last five fiscal years (in millions, except per share data):
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUR INDUSTRIES AND DEVELOPMENTS
We are a worldwide leader in optical technology. We design and manufacture products for fiber optic communications, as well as for markets where our core optics technologies provide innovative solutions for industrial, commercial and consumer applications. Our fiber optic components and modules are deployed by system manufacturers for the telecommunications, and data communications industries. We also offer products for display, security, medical/environmental instrumentation, decorative and aerospace and defense applications. We currently employ approximately 5,000 employees at 12 locations, principally located in North America and the Peoples Republic of China.
Customers for our Communications Products Group consist generally of:
We supply a broad portfolio of optical components, modules and subsystems to the equipment and system providers in each of these segments.
Our Commercial and Consumer Products Group markets consist generally of:
Overall, our communications markets are notable for, among other things, their high concentration of customers at each level of the industry, extremely long design cycles and increasing competition from Asian (principally China-based) suppliers. One consequence of a highly concentrated customer base and increasing Asian competition is systemic pricing pressure at each level of the industry. Large capital investment requirements, long return on investment periods, uncertain business models and complex and shifting regulatory hurdles, among other things, currently combine to limit opportunities for new carriers and their system suppliers to emerge. Thus, we expect that high customer concentration and its attendant pricing pressure and other effects on our communications markets will remain for the foreseeable future. Long design cycles mean that considerable resources must be spent to design and develop new products with limited visibility relative to the ultimate market opportunity for the products (pricing and volumes) or the timing thereof.
As a supplier of components and modules to this industry, we feel the effects most acutely, as system designs must first be initiated at the carrier level, communicated to the systems provider and then communicated to us and our competitors. During system design periods, shifts in economic, industry, customer or consumer conditions could and often do cause redesigns, delays or even cancellations to occur with their concomitant costs to those involved. Communications industry design cycles are often challenging for companies without the financial and infrastructural resources to sustain the long periods between project initiation and revenue realization. Our Commercial and Consumer Products Group, while more diverse, shares some of the customer concentration and design cycle attributes of our communications markets. We are working aggressively on a
strategy to expand our products, customers and distribution channels for several of our core competencies in these areas to, among other things, reduce our exposure to customer concentration and long design cycles across our company.
On August 3, 2005, we completed the acquisition of privately held Acterna, Inc. (Acterna), a leading worldwide provider of broadband and optical test and measurement (T&M) solutions for telecommunications and cable service providers and network equipment manufacturers, for approximately $450.0 million in cash and $310.0 million in JDS Uniphases common stock, which equated to approximately 200 million shares. With this acquisition, we become a leading provider of optical communications sub-systems and broadband T&M systems serving an expanded customer base that includes the largest 100 telecommunications and cable service providers, and system manufacturers worldwide. The combined portfolio of products and services are expected to enhance the deployment of Internet Protocol (IP)-based data, voice and video services over optical long haul, metro, fiber-to-the-home, DSL and cable networks. Starting the first quarter of fiscal 2006, the addition of Acternas T&M business will comprise a new reportable segment to our business.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 154
In June 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements (SFAS 154). The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior periods financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS 154 requires that a change in method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. Opinion 20 previously required that such a change be reported as a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not believe this pronouncement will have a material impact in our financial results.
EITF No. 05-6
In June 2005, the Emerging Issues Task Force (EITF) issued No. 05-6, Determining the Amortization Period for Leasehold Improvements (EITF 05-6). The pronouncement requires that leasehold improvements acquired in a business combination or purchase, subsequent to the inception of the lease, should be amortized over the lesser of the useful life of the asset or the lease term that includes reasonably assured lease renewals as determined on the date of the acquisition of the leasehold improvement. This pronouncement should be applied prospectively, and we will adopt it during the first quarter of fiscal 2006. We do not have unamortized leasehold improvements from acquisitions or business combinations and therefore, do not believe this pronouncement will have an impact on our financial results.
SFAS No. 123(R) and SAB 107
In December of 2004, the FASB issued Statement of Financial Accounting Standard No. 123, Share-Based Payment (Revised 2004) (SFAS 123(R)). SFAS 123(R) requires us to measure all employee share-based compensation awards using a fair value based method, estimate award forfeitures, and record the share-based compensation expense in our consolidated statements of operations if the requisite service to earn the award is provided. In addition, the adoption of SFAS 123(R) will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements. SFAS 123(R) is effective beginning in our first quarter of fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to the adoption of SFAS 123(R).
We plan to use the modified prospective transition method and Black-Scholes-Merton (BSM) model to adopt this new standard and expect the adoption will have a material impact on the consolidated results of operations. We anticipate that upon adoption of SFAS 123(R), we will recognize share-based compensation cost on a straight-line basis over the requisite service period of the award. For the historical impact of share-based compensation expense, see Note 1. Description of Business and Summary of Significant Accounting Policies. Uncertainties, including our future share-based compensation strategy, stock price volatility, estimated forfeitures and employee stock option exercise behavior, make it difficult to determine whether the share-based compensation expense that we will incur in future periods will be similar to the SFAS 123 pro forma expense disclosed in Note 1 of the Consolidated Financial Statements. In addition, the amount of stock-based compensation expense to be incurred in future periods will be reduced by our acceleration of certain unvested and out-of-the-money stock options in fiscal 2005 as disclosed in Note 11. Employee Benefit Plans of the Consolidated Financial Statements.
SFAS No. 153
In December of 2004, the FASB issued Statement of Financial Accounting Standard No. 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 addresses the measurement of exchanges of non-monetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS 153 is effective for non-monetary asset exchanges beginning in our first quarter of fiscal 2006. We do not believe adoption of SFAS 153 will have a material effect on our consolidated financial position or results of operations.
FSP No. FAS 109-2
In December 2004, the FASB issued FASB Staff Position No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP FAS 109-2). The American Jobs Creation Act introduces a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. We currently have no plans to avail ourselves of these provisions.
SFAS No. 151
In November 2004, the FASB issued Statement of Financial Accounting Standard No. 151, Inventory CostsAn Amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 clarifies treatment of abnormal amounts of idle facility expense, freight, handling costs and spoilage, specifying that such costs should be expensed as incurred and not included in overhead. The new statement also requires that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities. The provisions in SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Companies must apply the standard prospectively. We do not believe the impact of this new standard will have a material effect on our financial statements or results of operations.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, net revenue and expenses, and the related disclosures. We base our estimates on historical experience, our knowledge of economic and market factors and various other assumptions that we believe to be reasonable under the circumstances. Estimates and judgments used in the preparation of our financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, such as demand for our products and economic conditions. Accordingly, our estimates and judgments may prove to be incorrect and actual results may differ, perhaps significantly, from these estimates under different estimates, assumptions or conditions. We believe the following critical accounting policies are
affected by significant estimates, assumptions and judgments used in the preparation of our consolidated financial statements.
Revenue Recognition: We recognize revenue when persuasive evidence of a final agreement exists, delivery has occurred, the selling price is fixed or determinable and collectibility is reasonably assured. Revenue recognition on the shipment of evaluation units is generally deferred until customer acceptance. Revenue from sales to distributors with rights of return, price protection or stock rotation is not recognized until the products are sold through to end customers. Generally, revenue associated with contract cancellation payments from customers is not recognized until we receive payment for such charges.
We record provisions against our gross revenue for estimated product returns and allowances in the period when the related revenue is recorded. These estimates are based on factors that include, but are not limited to, historical sales returns, analyses of credit activities, current economic trends and changes in our customers demand. Should our actual product returns and allowances exceed our estimates, additional provisions against our revenue would result.
Allowances for Doubtful Accounts: We perform credit evaluations of our customers financial condition. We maintain allowances for doubtful accounts for estimated losses resulting from the inability or unwillingness of our customers to make required payments. We record our bad debt expenses as selling, general and administrative expenses. When we become aware that a specific customer is unable to meet its financial obligations to us, for example, as a result of bankruptcy or deterioration in the customers operating results or financial position, we record a specific allowance to reflect the level of credit risk in the customers outstanding receivable balance. In addition, we record additional allowances based on certain percentages of our aged receivable balances. These percentages are determined by a variety of factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience. We are not able to predict changes in the financial condition of our customers, and if circumstances related to our customers deteriorate, our estimates of the recoverability of our trade receivables could be materially affected and we may be required to record additional allowances. Alternatively, if we provide more allowances than we need, we may reverse a portion of such provisions in future periods based on our actual collection experience.
Investments: We hold equity interests in both publicly traded and privately held companies. When the carrying value of an investment exceeds its fair value and the decline in value is deemed to be other-than-temporary, we write down the value of the investment and establish a new cost basis. Fair values for investments in public companies are determined using quoted market prices. Fair values for investments in privately held companies are estimated based upon one or more of the following but not limited to: Assessment of the investees historical and forecasted financial condition; operating results and cash flows; the values of recent rounds of financing; and quoted market prices of comparable public companies. We regularly evaluate our investments based on criteria that include, but are not limited to, the duration and extent to which the fair value has been less than the carrying value, the current economic environment and the duration of any market decline, and the financial health and business outlook of the investees. We generally believe an other-than-temporary decline occurs when the fair value of an investment is below the carrying value for six consecutive months. Future adverse changes in these or other factors could result in an other-than-temporary decline in the value of our investments, thereby requiring us to write down such investments. Our ability to liquidate our investment positions in privately held companies will be affected to a significant degree by the lack of an actively traded market, and we may not be able to dispose of these investments in a timely manner.
Inventory Valuation: We assess the value of our inventory on a quarterly basis and write-down those inventories which are obsolete or in excess of our forecasted usage to their estimated realizable value. Our estimates of realizable value are based upon our analysis and assumptions including, but not limited to, forecasted sales levels by product, expected product lifecycle, product development plans and future demand requirements. Our marketing department plays a key role in our excess review process by providing updated sales forecasts, managing product rollovers and working with manufacturing to maximize recovery of excess
inventory. If actual market conditions are less favorable than our forecasts or actual demand from our customers is lower than our estimates, we may be required to record additional inventory write downs. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold, resulting in lower cost of sales and higher income from operations than expected in that period.
Goodwill Valuation: We test goodwill for possible impairment on an annual basis and at any other time if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Circumstances that could trigger an impairment test include but are not limited to: a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; loss of key personnel; the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed; results of testing for recoverability of a significant asset group within a reporting unit; and recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.
The determination as to whether a write down of goodwill is necessary involves significant judgment based on the short-term and long-term projections of the future performance of the reporting unit to which the goodwill is attributed. The assumptions supporting the estimated future cash flows of the reporting unit, including the discount rate used and estimated terminal value reflect our best estimates.
Long-lived asset valuation (property, plant and equipment and intangible assets):
Long-lived assets held and used
We test long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Circumstances which could trigger a review include, but are not limited to: Significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.
Recoverability is assessed based on the carrying amounts of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisals in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.
Long-lived assets held for sale
We classify long-lived assets as held for sale when certain criteria are met, including: Managements commitment to a plan to sell the assets; the availability of the assets for immediate sale in their present condition; whether an active program to locate buyers and other actions to sell the assets has been initiated; whether the sale of the assets is probable and their transfer is expected to qualify for recognition as a completed sale within one year; whether the assets are being marketed at reasonable prices in relation to their fair value; and how unlikely it is that significant changes will be made to the plan to sell the assets. Long-lived assets held for sale are classified as other current assets in the Consolidated Balance Sheet.
We measure long-lived assets to be disposed of by sale at the lower of carrying amounts or fair value less cost to sell. Fair value is determined using quoted market prices or the anticipated cash flows discounted at a rate commensurate with the risk involved.
Deferred Taxes: We regularly assess the likelihood that our deferred tax assets will be realized from recoverable income taxes or recovered from future taxable income, and we record a valuation allowance to
reduce our deferred tax assets to the amount that we believe to be more likely than not realizable. Due to the uncertain economic conditions in our industry, we have recorded deferred tax assets as of June 30, 2005 and June 30, 2004 only to the extent of certain offsetting deferred tax liabilities.
Warranty Accrual: We provide reserves for the estimated costs of product warranties at the time revenue is recognized. We estimate the costs of our warranty obligations based on our historical experience of known product failure rates, use of materials to repair or replace defective products and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. Should our actual experience relative to these factors differ from our estimates, we may be required to record additional warranty reserves. Alternatively, if we provide more reserves than we need, we may reverse a portion of such provisions in future periods.
Restructuring Accrual: In April 2001, we began to implement formalized restructuring programs based on our business strategies and economic outlook and recorded significant charges in connection with our Global Realignment Program. In connection with these plans, we have recorded estimated expenses for severance and outplacement costs, lease cancellations, asset write-offs and other restructuring costs. In accordance with Statement of Financial Accounting Standard No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146), generally costs associated with restructuring activities initiated after December 31, 2002 have been recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. However, in the case of leases, the expense is estimated and accrued when the property is vacated. Given the significance of, and the timing of the execution of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made, including evaluating real estate market conditions for expected vacancy periods and sub-lease rents. In addition, post-employment benefits accrued for workforce reductions related to restructuring activities initiated after December 31, 2002 are accounted for under Statement of Financial Accounting Standards No. 112, Employers Accounting for Post-employment Benefits (SFAS 112). A liability for post-employment benefits is recorded when payment is probable, the amount is reasonably estimable, and the obligation relates to rights that have vested or accumulated. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.
RESULTS OF OPERATIONS
The results of operations for the current period are not necessarily indicative of results to be expected for future years. The following table sets forth the components of our Consolidated Statements of Operations as a percentage of net revenue:
Financial Data for Fiscal 2005, 2004, and 2003:
The following table summarizes selected Consolidated Statement of Operations items (in millions, except for percentages):
Our net revenue increased by $76.3 million from fiscal 2004 to fiscal 2005. The increase in net revenue between fiscal 2004 and 2005 is mainly related to higher demand for products in our Communications Products Group (CPG), which had net revenue increase by $104.8 million year over year. The increase in CPG net revenue was primarily due to increased revenues from one of its main product lines, the subsystem group. Specific products that grew were the wavelength blocker, switch products, and the optical pumps product. This increase in net revenue was partially offset by a $28.5 million decrease in our Commercial and Consumer Products Group (CCPG) net revenue. This decrease was primarily due to rapidly declining revenue during fiscal 2005 from our micro display window products. We have terminated these product lines and are not anticipating meaningful revenue from such products in the future. In CCPG, the decline in net revenue was partially offset by revenue from solid state laser products from the Lightwave product portfolio, which we acquired in May 2005.
The decline in net revenue between fiscal 2003 and fiscal 2004 reflects a decrease in revenue from order cancellations (from $32.3 million in fiscal 2003 to $0.4 million in fiscal 2004), primarily in our CPG net revenue, overall lower demand for our communications products and lower average selling prices for these products. We also experienced a decline in our CCPG net revenue, primarily due to declines in our display revenue. The declines were partially offset by the inclusion of approximately $3.5 million in net revenue from E2O Communications (E2O) acquisition completed in the fourth quarter of fiscal 2004.
In the last few quarters, we have eliminated, or initiated programs to eliminate, certain of our product lines (through divestiture and end of life programs), such as our CATV, micro display window products and front surface mirrors product lines. These actions have eliminated revenue streams from our business. If we do not replace revenue from divested or discontinued products with revenue from other product sales, our future revenues will decline.
For our continuing portfolio, notwithstanding our net revenue improvement in fiscal 2005, the overall business climate continues to be hampered by limited visibility and strong, unpredictable pricing pressures across our portfolio, particularly in our CPG products. Nevertheless, our revenue expectations are based in part on our expectations for demand and pricing trends from existing products and new products from acquisitions. If we are incorrect in our assumptions, our revenue will decline. Also, the mix of revenues in any quarter continues to be driven by changes in demand from a small number of customers (particularly our communications customers) whose demands often vary quarter to quarter, thus limiting our predictability and performance expectations. We continue to encounter multiple and systemic execution challenges including yield, delivery and performance issues with our newer products, as well as concerns related to our ability to procure the required quantity and quality of parts from single and sole source suppliers, many of which are limited in size and financial resources. These challenges are exacerbated by the multiple cost reduction programs (including product transfers, end of life programs and site consolidations) for which we are currently engaged and which we expect to continue for the foreseeable future. The result is continuing product delivery uncertainty, yield and quality problems, systems strain and related customer dissatisfaction. Improving our overall execution will be a major priority for the foreseeable future. If we do not improve our execution and product quality, our operating results could be significantly harmed.
We operate primarily in three geographic regions: Americas, Europe and Asia. The following table presents net revenue by geographic regions (in millions):
Net revenue from customers outside the Americas represented 34%, 36%, and 30% of net revenue for the fiscal years ended 2005, 2004, and 2003, respectively. Net revenue was assigned to geographic regions based on the customers shipment locations. We expect revenue from international customers to continue to be an important part of our overall net revenue and an increasing focus for net revenue growth.
During fiscal 2005 and 2004, no customer accounted for more than 10% of net revenue. During fiscal 2003, Texas Instruments (a CCPG customer) accounted for 12% of net revenue.
The decrease in gross profit from fiscal 2004 to fiscal 2005 was principally due to (i) declining average selling prices across much of the portfolio, but most particularly in the CPG products; (ii) higher overhead absorption variances primarily due to lower utilization in CCPG resulting from the discontinuance of several products and additional costs related to product transition activities; (iii) product mix shift to generally lower margin CPG products (which grew in fiscal 2005 to 59% of net revenues as compared to 50% of net revenue in fiscal 2004), from generally higher margin CCPG products, due most notably to the decline and end of life of our micro display window products; and (iv) reduced net benefit from change in inventory reserves due to a reduction of $4.2 million in the sale of fully reserved inventory from $44.1 million in fiscal 2004 to $39.9 million in fiscal 2005.
The improvement in gross profit between fiscal 2003 and 2004 was due to (i) a decline in personnel-related expenses of approximately $64.3 million as a result of workforce reductions, site closures, product transfers to both lower cost locations and contract manufacturers; (ii) $29.8 million of write-downs of excess and obsolete inventories, as compared to $60.1 million in fiscal 2003; (iii) a decline in depreciation of $19.5 million due to the
write-downs of property, plant and equipment as a result of our impairment reviews and the removal and disposal of property, plant and equipment under our restructuring programs; (iv) a reduction in acquisition related stock-based compensation charges of $17.2 million; (v) a reduction in facilities and occupancy related costs of approximately $16.7 million; (vi) a reduction in royalty expense of $11.4 million; and (vii) reclassification to R&D of $4.5 million of expenses, previously included in cost of goods sold to better reflect the activities being performed. These favorable impacts to gross profit were partially offset by the following: (i) a decrease in the consumption of previously reserved excess or obsolete inventory of $23.3 million from $67.4 million in 2003 to $44.1 million in 2004; (ii) contract cancellation revenue of $0.4 million in fiscal 2004, compared to $32.3 million in fiscal 2003; and (iii) continued decline in average selling prices of our products resulting from continuing pricing pressures from our customers.
Looking ahead, we are engaged in a number of programs (including product transfers to lower-cost Asian manufacturing locations, end of life programs, divestitures and site consolidations) intended to bring significant, sustainable improvements to our gross profits. We have recently provided forecasts for the cost savings we anticipate to achieve from these programs. These savings are dependent upon a number of uncertainties, such as our ability to complete our programs as and when expected, and the cost savings we actually achieve, if any, may be materially less than those forecasted.
On an ongoing basis, our gross profits continue to be challenged by strong and uncertain pricing pressures across our portfolio, shifting mix from our generally higher margin CCPG products to our lower margin CPG products, systemic internal execution and supply chain management concerns and under-utilization of our facilities. Many of our newer products, such as ROADMs, optical switches, and high speed transponders are encountering significant yield, performance and delivery problems. In addition, our CPG products are frequently dependent upon one or more sole-source parts vendors, which are often small enterprises with scale and financial concerns. All of these execution issues have negatively impacted and could continue to negatively impact our gross profit. We expect gross profit pressures to remain for the foreseeable future and in particular expect pricing pressures, product mix, factory under-utilization, factory transitions, and new product issues to create variability in our gross margins. In the foreseeable future, actions designed to improve our gross margins (through product mix improvements, cost reductions associated with product transfers and product rationalization, and yield and quality improvements, among other things) will be a principal focus for us.
Research and Development (R&D):
R&D expenses for fiscal 2005 of $93.7 million were a decrease of $5.8 million when compared to fiscal 2004. The decrease in R&D was mainly related to reduced headcount in both product groups. The CPG expenses were lower by $2.8 million when compared to fiscal 2004. These savings were due to lower headcount and lower R&D material expenses as a result of centralizing development groups and divesting of product lines including CATV and Vitrocom communications products. The CCPG expenses were higher by $1.3 million when compared to fiscal 2004. The groups higher R&D materials, used primarily for investment in coating technology associated with the U-Class project, were partially offset by lower headcount and related expenses compared to the prior year. Our total headcount for R&D declined from 647 at the end of fiscal 2004 to 532 at the end of fiscal 2005.
The $54.2 million decrease in R&D from fiscal 2003 to fiscal and 2004 was attributable to (i) a decline in R&D materials of $24.2 million due primarily to the consolidation of sites performing R&D; (ii) a decline in personnel-related expenses of approximately $10.5 million as a result of workforce reductions, site closures and other cost cutting measures; (iii) a decline in acquisition related stock-based compensation charges of $10.4 million; (iv) a decline of approximately $5.6 million for facilities and occupancy related expenses due to the write-downs of property, plant and equipment as a result of our quarterly impairment reviews, site consolidations and the removal and disposal of property, plant and equipment; and (v) a decline of $1.6 million in charges other than restructuring associated with the Global Realignment Program. These decreases were offset in part by a reclassification to research and development of $4.5 million of expense, previously included in cost of goods sold, to better reflect the activities being performed.
We believe that investment in R&D is critical to attaining our strategic objectives. Historically, we have devoted significant engineering resources to assist with production, quality and delivery challenges which have had some negative impact on our new product development activities. Despite our continued efforts to reduce total operating expenses, there can be no assurance that our R&D expenses will continue to remain at the current level. In addition, there can be no assurance that such expenditures will be successful or that improved processes or commercial products, at acceptable volumes and pricing, will result from our investment in R&D.
Selling, General and Administrative (SG&A):
SG&A expenses for fiscal 2005 of $157.3 million were an increase of $12.6 million when compared to fiscal 2004. The increase in SG&A expenses was mainly due to higher expenses in the corporate functions, principally a $9.1 million increase in legal expenses associated with stockholder and other litigation costs and business support activities and a $4.7 million increase in audit and consulting costs associated with a number of projects including Sarbanes-Oxley compliance, reviews of accounting transactions, and strategic planning. These increases in expenses were partially offset by lower compensation and compensation related costs due to lower headcount and the reduction in the reserve for uncollectible receivables due to the reduction in delinquent customer accounts.
The decrease in SG&A between fiscal 2003 and fiscal 2004 was primarily due to: (i) a decline of $42.8 million of charges other than restructuring associated with our Global Realignment Program; (ii) a reduction in facility and occupancy related costs of approximately $33.4 million due to the write-downs of property, plant and equipment as a result of our quarterly impairment reviews, site consolidations and the removal and disposal of property, plant and equipment; (iii) a decline in acquisition related stock compensation charges of $21.4 million; and (iv) a decline in personnel-related expenses of approximately $19.9 million resulting from workforce reductions, site closures and other cost cutting measures implemented. These expense reductions were offset in part by increases in Sarbanes-Oxley compliance costs.
We intend to continually address our SG&A expenses and reduce these expenses as and when opportunities arise. We caution, however, that we have in the recent past experienced, and expect to continue to experience in the future, certain non-core expenses, such as litigation and dispute related settlements and accruals, which could increase our SG&A expenses, and impair our profitability expectations, in any particular quarter. None of these non-core expenses, however, are expected to have a material adverse impact on our financial condition. Also, we expect to continue to incur additional SG&A expenses as we continue to comply with the requirements of the Sarbanes-Oxley Act of 2002, in particular, Section 404 thereof, and continue to invest in personnel strategic to our business. There can be no assurance that we will develop a cost structure (including our SG&A expense), which will lead to profitability under current and expected revenue levels.
Amortization of Other Intangibles:
The increase in amortization expense between fiscal 2004 and fiscal 2005 was mainly due to the increase in our intangible assets subject to amortization as a result of recent acquisitions of E2O, ADO, Lightwave and PPS.
The decrease between fiscal 2003 and fiscal 2004 we