JDS Uniphase DEF 14A 2007
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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JDS UNIPHASE CORPORATION
430 North McCarthy Boulevard
Milpitas, California 95035
Notice of Annual Meeting of Stockholders
and Proxy Statement
2007 Annual Report
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It costs JDS Uniphase a significant sum each year to print and distribute this Proxy Statement and Annual Report to our stockholders.
You can help reduce costs and directly impact our bottom line by registering to receive your stockholder materials electronically. To register online see Page 4 of the following Proxy Statement or call the Investor Relations hotline at 408-546-4445 for assistance.
Fiscal 2007 was a year of revenue growth and earnings improvement for JDSU as we continued our focus on growing our markets and improving the business model in each of our business segments. While growth rates differed across our diversified portfolio, for the year the Company delivered:
Our strategy continues to be to execute as a company comprised of a portfolio of businesses with a focus on optical and broadband innovation. We embraced this view such that the composite company would be better able to navigate downturns in any one constituent business unit as demonstrated in 2007. The businesses units are as follows.
We continue to see favorable end market indicators for broadband services and network buildouts. Nevertheless, our Optical Communications business, primarily selling to network equipment manufacturers, was impacted mainly in the second half of the fiscal year by customer inventory initiatives and customer consolidation.
We believe broadband capacity will continue to expand as higher data rates are being delivered to the access edge accompanied by video applications. We also believe that as network operators respond to changing loads and consumer dynamics, networks must be agile in order to rapidly respond to the resulting changes in traffic patterns.
The onset of new technologies such as HDTV, interactive TV and video on demand as well as other rich media content continues to increase IP traffic and puts strains on existing networks. Accordingly, industry participants such as JDSU who enable agile optical networks should benefit.
We marked a major milestone this year with the shipment of our 10,000th ROADM. ROADMs, or reconfigurable optical add-drop multiplexers, are one of the key network elements that make it possible for operators to add capacity and flexibility to their network in order to deliver on-demand services to consumers. Video-on-demand, IPTV, online gaming and other rich media services are just a few of the applications enabled by ROADMs.
Communications Test and Measurement
Our test and measurement products address the needs for rapid network and service deployment, efficient installation and maintenance, and quality assurance, which are key competitive elements for our customers.
In the second half of fiscal 2007 we added two strategic acquisitions to our Communications Test and Measurement business. Casabyte expanded our presence in wireless service assurance, and positioned us to leverage our product portfolio to enable service assurance from the head-end to the handset. Innocor expanded our 10G Ethernet and Fiberchannel expertise into the network equipment manufacturers for lab and production testing and expanded our 40G set of solutions.
Advanced Optical Technologies and Commercial Lasers
The Advanced Optical Technologies business, which includes our variable optical pigments and coatings, also evidenced revenue growth. Some of this growth was through technology transitions that were enabled by expanding market opportunities for our new process technologies. The currency market provided recent upside for this business unit, making strong contributions in the third and fourth quarters, driven by new currency note introductions around the world. Additionally, anti-counterfeiting labels for our customers in the pharmaceutical and other industries are growing in popularity. As such, we recently applied our optical technology to develop a unique anti-counterfeiting covert security solution called Charms for document authentication and brand protection in these markets.
Our Commercial Lasers business, focused on the transition from gas lasers to more reliable solid state lasers, experienced double digit growth rates during the fiscal year as it served four main market spaces including semiconductor manufacturing, government/defense, biomedical, and machining. Our solid state laser offerings continue to replace our gas lasers as customers transition their laser platforms. In the solid state market, our FCD 488 blue solid-state laser, at one-third the size and generating one-third the heat of competing products, continues to gain positive marketplace traction.
Fiscal 2008 will be a year in which JDSU continues to advance its business model as each business within the portfolio expects to continue to improve individual operating results while maintaining a leadership market position. Our focus will be primarily on gross margin and cash flow improvement in all operating segments. At the same time, we will continue to seek opportunities to strategically expand our product portfolio through acquisition.
I look forward to updating you on our progress in the coming quarters. If you are interested in learning more about JDSU in the meantime, visit our website at www.jdsu.com/investors or contact our Investor Relations Department at firstname.lastname@example.org or (408) 546-4445. Thank you for your support of JDSU.
Kevin J. Kennedy
This letter includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are based on certain assumptions and reflect our current expectations. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements to differ materially from any future results, performance, or achievements discussed or implied by such forward-looking statements. Any forward-looking statement is qualified by reference to these risks, uncertainties and factors. For more information on the risks affecting the Companys business, please refer to the Risk Factors section included in the Companys Annual Report on Form 10-K for the year ended June 30, 2007 filed with the Securities and Exchange Commission, as well as in other filings on Forms 10-Q and 10-K. The forward-looking statements contained in this letter are made as of the date hereof and the Company does not assume any obligation to update the reasons why actual results could differ materially from those projected in the forward-looking statements.
JDS UNIPHASE CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 16, 2007
September 28, 2007
JDS UNIPHASE CORPORATION
430 North McCarthy Boulevard
Milpitas, California 95035
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 2007 annual meeting of Stockholders (the Annual Meeting). The Annual Meeting will be held at 690 North McCarthy Boulevard, Milpitas, California 95035, on November 16, 2007 at 9:00 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 three Class I directors to serve until the 2010 annual meeting of Stockholders and until their successors are elected and qualified.
2. To approve the extension of the Companys Amended and Restated 1998 Employee Stock Purchase Plan.
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, 2008.
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 three Class I directors, FOR approval of the extension of the Companys 1998 Employee Stock Purchase Plan, and FOR the ratification of the appointment of PricewaterhouseCoopers LLP as the Companys independent auditors for the fiscal year ending June 30, 2008.
What is the record date and what does it mean?
The record date for the Annual Meeting is September 21, 2007. 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, 213,550,084 shares of Common Stock were issued and outstanding, one share of the Companys Special Voting Share was issued and outstanding, and 5,858,861 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, 2 or 3. 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 extension of the Companys 1998 Employee Stock Purchase Plan. 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 three 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 of the extension of the Companys Amended and Restated 1998 Employee Stock Purchase Plan requires the affirmative vote of a majority of the shares of Common Stock and the votes represented by the Special Voting Share (all taken together as one class) present or represented by proxy and entitled to vote on this proposal at the Annual Meeting. As result, abstentions will have the same effect as votes against the proposal. Broker non-votes will have no effect on the outcome of this vote.
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 the votes represented by the Special Voting Share (all taken together as one class) present or represented by proxy and entitled to vote on this proposal at the Annual Meeting. As result, abstentions will have the same effect as votes against the proposal. Broker non-votes will have no effect on the outcome of this vote.
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 Broadridge Financial Services, Inc. (Broadridge) 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 September 28, 2007. The Company will bear the cost of soliciting proxies, including preparation, assembly, printing and mailing of the Proxy Statement. The Company has not retained the services of any proxy solicitor. 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 2008. Stockholders may also find out the final results by calling the Companys Investor Relations Department at (408) 546-4445.
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 September 28, 2007 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 15, 2007.
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.
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) 546-4445 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 2008 annual meeting of Stockholders (the 2008 Annual Meeting), a Stockholders notice must be received by the Company at its principal executive offices not less than 120 days before the date in 2007 on which the Company filed this Proxy Statement (specifically, since the Company filed this Proxy Statement on September 28, 2007, Stockholder proposals for the 2008 Annual Meeting must be received by the Company by May 31, 2008). 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 2008 Annual Meeting must be received by the Company not later than May 31, 2008 in order to be considered for inclusion in the Companys proxy materials. A Stockholders notice to the Secretary must set forth as to each matter the Stockholder proposes to bring before the 2008 Annual Meeting: (i) a brief description of the business desired to be brought before the 2008 Annual Meeting and the reasons for conducting such business at the 2008 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 2008 Annual Meeting and/or in the related proxy materials.
Subject to applicable laws and regulations, the Company will also have discretionary authority to vote all shares for which it has proxies regarding a Stockholder proposal if the Company fails to receive notice of the Stockholder proposal for next years annual meeting at least 45 days before the date in 2007 on which the Company filed this Proxy Statement (specifically, since the Company filed this fiscal 2007 proxy on September 28, 2007, the Company will have this discretionary authority if notice of a Stockholder proposal for the 2008 Annual Meeting is not received by the Company by August 14, 2008).
ELECTION OF CLASS I 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. As of September 28, 2007, the Board is composed of the following nine members:
In November 2006, Peter A. Guglielmi retired from the Board of Directors. As a result of these changes, as of September 28, 2007 the authorized number of directors on the Board is nine.
The Board is currently composed of three Class I directors (Mr. Day, Mr. Kaplan and Mr. Kennedy), three Class II directors (Mr. Belluzzo, Mr. Covert and Mr. Jabbar) and three Class III directors (Mr. Liebhaber, Mr. Skrzypczak and Mr. DeNuccio), whose terms will expire upon the election and qualification of directors at the Annual Meeting of Stockholders held in 2007, 2009 and 2008, respectively. At each Annual Meeting of Stockholders, directors will be elected for a full term of three years to succeed those directors whose terms are expiring.
At this Annual Meeting, the Stockholders will elect three Class I directors recommended by the Corporate Governance Committee (which serves as the Companys Nominating Committee) and nominated by the Board, each to serve a three year term until the 2010 Annual Meeting of Stockholders and until a qualified successor is elected and qualified or until the directors earlier resignation or removal. The Board has no reason to believe that the nominees named below will be unable or unwilling to serve as a director if elected.
Certain information about the Board of Directors nominees is furnished below.
Class I DirectorNominees For Three Year Terms That Will Expire in 2010
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 III Directors Whose Terms Will Expire in 2008
Class II Directors Whose Terms Will Expire in 2009
Code of Ethics
The Board and management of the Company believe that good corporate governance is an important component in enhancing investor confidence in the Company and increasing Stockholder value. The imperative to continue to develop and implement best practices throughout our corporate governance structure is fundamental to our strategy to enhance performance by creating an environment that increases operational efficiency and ensures long-term productivity growth. Solid corporate governance practices also ensure alignment with Stockholder interests by promoting fairness, transparency and accountability in business activities among employees, management and the Board.
Our corporate governance practices represent our firm commitment to the highest standards of corporate ethics, compliance with laws, financial transparency and reporting with objectivity and the highest degree of integrity. Representative steps we have taken to fulfill this commitment include, among others:
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.
In accordance with current NASDAQ listing standards, the Board of Directors, on an annual basis, affirmatively determines the independence of each Director and nominee for election as a Director. Our Director independence standards include all elements of independence set forth in the NASDAQ listing standards, which can be found in the Corporate Governance section of our website at www.jdsu.com.
Board Committees and Meetings
During fiscal 20071, the Board held ten meetings. The Board has four committees: Audit Committee, Compensation Committee, Corporate Governance Committee, and Corporate Development Committee. The members of the committees during fiscal 2007 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. Belluzzo who was unable to attend one of the ten Board meetings and three of the seven Compensation Committee meetings; and Mr. DeNuccio who was unable to attend three of the ten Board meetings. The Company encourages, but does not require, its Board members to attend the annual Stockholders meeting. All nine current Directors attended the 2006 annual meeting of Stockholders.
The Audit Committee met eleven times in fiscal 2007. 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 control, 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 Harold L. Covert and Bruce D. Day 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 can be viewed at the Companys website at www.jdsu.com.
The Compensation Committee met seven times in fiscal 2007. The Compensation Committee of the Board of Directors is responsible for ensuring 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. Additional information on the Compensation Committees processes and procedures for consideration of executive compensation are addressed in the Compensation Discussion and Analysis below.
The Corporate Development Committee met four times in fiscal 2007. The Corporate Development Committee oversees the Companys strategic acquisition and investment activities. The Corporate Development Committee reviews and approves certain 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 four times in fiscal 2007. 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 430 North McCarthy Boulevard, Milpitas, California 95035 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.
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. Messrs. Belluzo, DeNuccio, Jabbar, Kaplan and Skrzypczak were not at any time an officer or employee of JDSU. In addition, none of our executive officers serves as a member of the Board of Directors or Compensation Committee of any company that has one or more of its executive officers serving as a member of our Board of Directors or Compensation Committee.
Communication between Stockholders and Directors
Stockholders 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 Company Secretary, JDSU, 430 North McCarthy Boulevard, Milpitas, California 95035. 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 receives an annual cash retainer of $48,000 which is paid in quarterly installments of $12,000. Additionally, each non-employee director receives a grant of restricted stock units having a value on the date of grant of $40,000, net of applicable taxes at the discretion of each non-employee director. Such restricted stock units are subject to a grant agreement which provides for vesting over a three year period. Upon vesting each restricted stock unit is converted into one share of the Companys Common Stock. Each non-employee director 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.
In addition to the compensation described above, Mr. Kaplan, who serves as Chairman of the Board, receives an additional 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 $1,500 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 1,250 shares of the Companys Common Stock. The individual who is serving as the Chairman is granted an option to purchase an additional 7,500 shares of the Companys Common Stock. Upon initial appointment to the Board, each non-employee director is granted an option to purchase 5,000 shares of the Companys Common Stock. In its discretion, the Companys Board may make grants of additional equity incentives to non-employee directors. No such additional grants were made in fiscal year 2007. 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 375 shares of the Companys Common Stock upon their initial appointment as chair and an automatic option grant of 375 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.
All director compensation described above is summarized in the following table:
Non-Management Directors Compensation for Fiscal Year 2007
The director compensation policies summarized above resulted in the following total compensation for our non-management directors in fiscal year 2007:
DIRECTOR COMPENSATION TABLE
Relationships Among Directors or Executive Officers
There are no family relationships among any of the Companys directors or executive officers.
Certain Relationships and Related Person Transactions
Review and Approval of Related Person Transactions
We review all relationships and transaction in which the Company and our Directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest. The Companys legal staff is primarily responsible for the development and implementation of processes and controls to obtain information from the Directors and executive officers with respect to related person transactions and for then determining, based on the facts and circumstances, whether the Company or a related person has a direct or indirect material interest in the transaction. On an annual basis, all Directors and
executive officers must respond to a questionnaire requiring disclosure about any related person transactions, arrangements or relationships (including indebtedness). As required under SEC rules, any transactions that are determined to be directly or indirectly material to the Company or a related person are disclosed in the Companys Proxy Statement. In addition, the Audit Committee reviews and approves or ratifies any related person transaction that is required to be disclosed.
Related Person Transactions
The Company has entered into an employment and change in control agreement with Kevin J. Kennedy (see Employment Contracts, Termination of Employment and Change in Control Arrangements below).
In June 2006, the Audit Committee approved a policy applicable to the reimbursement of expenses incurred by Mr. Kennedy in the operation of his private aircraft when used by Mr. Kennedy for Company business purposes. The policy limits the reimbursement of direct expenses incurred by Mr. Kennedy for Company business purposes at $2,100 per flight hour plus a 12.5% fuel surcharge rate, for a total reimbursement cap of $2,362.50 per flight hour, and further limits such expense reimbursement to a maximum of $800,000 per fiscal year. No reimbursement is provided to Mr. Kennedy for any other expenses associated with his private aircraft. These reimbursement rates were established and approved by the Audit Committee of the Board following review of fair market rates applicable to the rental and use of similar aircraft.
The following sets forth certain information regarding the Companys executive officers:
Kevin J. Kennedy became a member of the Companys Board in November 2001, became Chief Executive Officer of the Company on September 1, 2003 and also became President of the Company in March 2004. 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 Rambus Corporation and KLA-Tencor 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 became Senior Vice President, Corporate Development and Chief Legal Officer in June 2006, prior to which he was Senior Vice President and General Counsel from July 2003 until June 2006. 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 joining the Company, 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.
Alan Al Etterman is Executive Vice President, Chief Administrative Officer and Chief Information Officer of the Company. He joined the Company in November 2004 and is responsible for Information Technology, Human Resources, Workplace Solutions and Customer Service. Before joining the Company, Mr. Etterman was Senior Vice President of Corporate Infrastructure and Chief Information Officer at Openwave Systems. In 2001, he co-founded and was Chief Operating Officer for TheoryR Capital Partners. Prior to that, Mr. Etterman was Ciscos Senior Director of Global communications and technology services where he implemented the worlds first large scale (10,000+ lines) voice over Internet protocol communications system. Mr. Ettermans experience also includes management roles at 3Com Corporation, IBM RealCom, LinCom, InteCom, and GTE Automatic Electric.
Helmut Berg joined the Company as Senior Vice President upon the close of the Company's merger with Acterna, Inc. (Acterna) in August 2005. In May 2007, he became President of the Communications Test & Measurement Group. Prior to that, Mr. Berg held executive positions with Honeywell and Tektronix. He holds Bachelor of Science and Master of Science degrees in computer science from the Universitaet des Saarlandes in Germany. Mr. Berg has a Ph.D. in computer science from the University of Minnesota and completed the General Management Program at the Wharton School of Management.
David Gudmundson became President of the Optical Communications Products Group in May 2007. Mr. Gudmundson joined the Company in 2003 as senior vice president of business development and corporate marketing. Before joining the Company, Mr. Gudmundson spent more than a decade at Cisco Systems where he held a series of increasingly senior leadership roles at Cisco Systems, culminating in his service as Vice President and General Manager responsible for Cisco's security server, DSL and edge routing business units. Prior to Cisco, Mr. Gudmundson held various hardware and software development and systems engineering positions at Argo Systems, Inc. (now part of Boeing Company Inc.) and ESL Incorporated (now part of TRW).
Roy Bie became Senior Vice President, Advanced Optical Technologies Products Group in 2006, prior to which he was Vice President and General Manager of the Flex Products Group from 2000 until 2006, and Vice President of Operations for Flex Products from 1996 to 2000. From 1993 to 1996, Mr. Bie served as Director of Operations for Flex Products. Prior to joining the Company, Mr. Bie held operational and management leadership positions with Xicor (now part of Intersil), Material Progress (now part of Komag), Mag-Media (bought by Polaroid), and began his career at National Semiconductor.
AMENDED AND RESTATED 1998 EMPLOYEE STOCK PURCHASE PLAN
The Company's Stockholders are being asked to approve the amendment and restatement of the Company's 1998 Employee Stock Purchase Plan (the Plan), which will have the effect of changing the termination date of the Plan. The Companys Plan was adopted in June 1998. The Plan was originally amended on November 9, 2001 and subsequently amended and restated on July 31, 2002 and November 10, 2005.
A comparison of material differences between the provisions of the Plan as previously approved by the Stockholders and the amended Plan is included in table format below. The capitalized terms used in this Proposal No. 2 shall have the same meaning as in the amended Plan unless otherwise indicated.
The Board of Directors believes that amending the Plan to extend the termination date to August 1, 2018 is critical in enabling the Company to continue offering benefits to employees under the Plan and to motivate high levels of performance through employee stock ownership in the Company.
Summary of Plan Amendment
At the Annual Meeting, the Stockholders are being asked to approve an amendment to the Plan to change the termination date of the Plan, which was originally established as either the earlier of (i) August 1, 2008 or (ii) the date on which all shares available for issuance under the Plan are sold in accordance with the Plan. As of November 16, 2007, the new termination date for the Plan will be the earlier of (i) August 1, 2018 or (ii) the date on which all shares available for issuance under the Plan are sold in accordance with the Plan. No other changes to the Plan are proposed through this amendment and restatement.
The Company's Stockholders previously authorized the Company to issue up to 6,250,000 shares of common stock (subject to adjustment upon certain changes in the capital structure of the Company) for purchase by employees under the 1998 Plan. As of August 1, 2007, a total of 2,025,016 shares remained available for future purchases. In this proposal, the Company is not requesting an increase in the number of shares available for issuance under the Plan.
Comparison of Material Differences between the Provisions of the Plan and the amended Plan
Summary of the Purchase Plan
The following summary of the Plan is qualified in its entirety by the specific language of the Plan, a copy of which is available to any Stockholder upon request or may be viewed without charge on the Securities and Exchange Commission website at www.sec.gov.
General. The Plan is intended to provide eligible employees of the Company and one or more of its Corporate Affiliates with the opportunity to purchase shares in the Company through participation in a stock purchase plan. It is also intended to qualify as an "employee stock purchase plan" under section 423 of the Internal Revenue Code. Each Participant in the Plan is granted at the beginning of each Purchase Period under the Plan the right to purchase through accumulated payroll deductions up to a number of shares of the common stock of the Company (referred to under this Proposal as a "Purchase Right") determined on the first day of the Purchase Period. The Purchase Right is automatically exercised on the last date of the Purchase Period provided the Purchase Right remains outstanding on such date.
Authorized Shares. An aggregate of 6,250,000 of the Company's authorized but unissued or reacquired shares of common stock have been authorized for issuance under the Plan. However, the maximum amount of shares purchased by Participants shall not exceed 5,000 shares pursuant to any one outstanding Purchase Right. Appropriate adjustments will be made to the number of shares authorized under the Plan and to outstanding Purchase Rights in the event of any recapitalization, stock dividend, stock split, combination of shares, or other change affecting the outstanding common stock of the Company. All outstanding Purchase Rights will be automatically exercised immediately prior to any sale, merger, reorganization, or liquidation of the Company.
Administration. The Plan is administered by the Plan Administrator, which is defined by the Plan as either the Board of Directors or a Committee of the Board (referred to under this Proposal collectively as the Board). The Board has full authority to construe, interpret, and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. All determinations of the Board are final and binding on all persons having an interest in the Plan or any Purchase Right.
Eligibility. Any Employee of the Company or of any present or future Corporate Affiliate designated by the Board for inclusion in the Plan is eligible to participate in a particular Purchase Period under the Plan so long as the Employee is customarily employed for more than 20 hours per week and more than five months in any calendar year. However, no Employee who owns or holds options to purchase, or who, as a result of participation in the Plan, would own or hold options to purchase, five percent or more of the total combined voting power or value of all classes of stock of the Company or of its Corporate Affiliates is eligible to participate in the Plan. The Employee must complete the enrollment forms prescribed by the Board and file the forms with the Company before the start of the Purchase Period. As of July 24, 2007, approximately 3,374 Employees, including seven executive officers, were eligible to participate in the Plan.
Purchase Periods. The Plan is implemented through offerings of approximately six months in duration, beginning on or about February 1 and August 1 of each year. Two separate Purchase Periods shall begin during a calendar year during which the Plan remains in existence.
Participation and Purchase of Shares. Participation in a Purchase Period under the Plan is limited to eligible Employees who authorize payroll deductions prior to the first day of a Purchase Period. Payroll deductions may be any multiple of 1% of Compensation paid to the Employee up to a maximum of 10%. An employee who becomes a Participant in the Plan will automatically participate in each subsequent Purchase Period beginning immediately after the last day of the Purchase Period in which he or she is a Participant until the employee withdraws from the Plan, becomes ineligible to participate, or terminates employment.
Subject to any notice requirements imposed by the Company, a Participant may decrease his or her rate of payroll deductions two times in each Purchase Period. The reduced rate shall stay in effect unless the Participant designates a different rate (up to the 10% maximum) before the beginning of the next Purchase Period. If the rate
is increased, the new rate will be effective for the first Purchase Period after the appropriate forms are filed with the Company. The Participant may withdraw from the Plan before any purchase date by filing the prescribed notice with the Company. Upon withdrawal, the Company will refund without interest the Participant's accumulated payroll deductions not previously applied to the purchase of shares. Once a Participant withdraws from a Purchase Period, that Participant may not again participate in the same Purchase Period.
Subject to certain limitations, the shares a Participant can acquire for a Purchase Period shall be the number of whole shares determined by dividing both the payroll deductions collected during the Purchase Period and any amount carried over from prior Purchase Periods, by the purchase price in effect for such purchase date. As a further limitation, no Participant may accrue a right to purchase shares of common stock under the Plan or any other employee stock purchase plan of the Company having a fair market value exceeding $25,000 (measured by the fair market value of such stock on the date or dates the rights are granted to the Participant) for each calendar year in which the Purchase Right is outstanding at any time. Purchase Rights are nontransferable unless by laws of descent and distribution, and may only be exercised by the Participant.
On the last day of each offering (referred to under this Proposal as "Purchase Date"), the Company issues to each Participant in the offering the number of shares of the Company's common stock determined by dividing the amount of payroll deductions accumulated for the Participant during the offering by the purchase price, limited in any case by the number of shares subject to the Participant's Purchase Right for that offering. The price at which shares are sold under the Plan is established by the Board but shall be the lesser of 95% of the fair market value of the share on the date the Purchase Right is granted or on the date it is exercised. The fair market value of the common stock on any relevant date generally will be the closing price per share as reported on the NASDAQ Stock Market. On June 29, 2007, the closing price per share of our common stock was $13.43. Any payroll deductions under the Purchase Plan not applied to the purchase of shares will be returned to the Participant without interest, unless the amount remaining is less than the amount necessary to purchase a whole share of common stock, in which case the remaining amount may be applied to the next Purchase Period if the Participant participates in the next Purchase Period.
Change in Control. If there is a disposal of all or substantially all of the assets or outstanding capital stock of the Company by means of a sale, merger, reorganization where the Company is not the surviving corporation, or in the event of a liquidation, then all outstanding Purchase Rights under the Plan shall automatically be exercised prior to such sale, merger, reorganization or liquidation. Subject to other limitations under the Plan, all purchase rights will be automatically exercised by applying previously collected payroll deductions to the purchase of whole shares of Stock.
Termination or Amendment. The Plan will continue until the earlier of: (i) the date it is terminated by the Company under the sole discretion of the Board, (ii) August 1, 2018, or (iii) until all of the shares reserved for issuance under the Plan have been issued. The Board may at any time alter, amend, suspend or terminate the Plan, except that no such action will become effective until after any outstanding Purchase Rights are exercised in a Purchase Period during which said action was authorized.
Purchases Under the Plan
The following table shows, as to each of our named executive officers and the other individuals and groups indicated, the number of shares of common stock purchased under the Plan from the inception of the Plan through the most recent Purchase Date:
Summary of U.S. Federal Income Tax Consequences
The following summary is intended only as a general guide to the U.S. federal income tax consequences of participation in the Plan and does not attempt to describe all possible federal or other tax consequences of such participation or tax consequences based on particular circumstances.
Generally, there are no tax consequences to an Employee of either becoming a Participant in the Plan or purchasing shares under the Plan. The tax consequences of a disposition of shares vary depending on the period such stock is held before its disposition. If a Participant disposes of shares within two years after the offer date or within one year after the purchase date on which the shares are acquired (a "disqualifying disposition"), the Participant recognizes ordinary income in the year of disposition in an amount equal to the difference between the fair market value of the shares on the purchase date and the purchase price. Any additional gain or resulting loss recognized by the Participant from the disposition of the shares is a capital gain or loss.
If the Participant disposes of shares at least two years after the offer date and at least one year after the purchase date on which the shares are acquired, the Participant recognizes ordinary income in the year of disposition in an amount equal to the lesser of (i) the difference between the fair market value of the shares on the date of disposition and the purchase price or (ii) the difference between the fair market value of the shares on the offering date and purchase price (determined as if the Purchase Right were exercised on the offering date). Any additional gain recognized by the Participant on the disposition of the shares is a capital gain. If the fair market value of the shares on the date of disposition is less than the purchase price, there is no ordinary income, and the loss recognized is a capital loss. If the Participant owns the shares at the time of the Participant's death, the lesser of (i) the difference between the fair market value of the shares on the date of death and the purchase price or (ii) the difference between the fair market value of the shares on the offer date and purchase price (determined as if the Purchase Right were exercised on the offering date) is recognized as ordinary income in the year of the Participant's death.
If the exercise of a Purchase Right does not constitute an exercise pursuant to an "employee stock purchase plan" under section 423 of the Internal Revenue Code, it will be treated as the exercise of a nonstatutory stock option. The Participant would therefore recognize ordinary income on the Purchase Date equal to the excess of the fair market value of the shares acquired over the purchase price. Such income is subject to withholding of income and employment taxes. Any gain or loss recognized on a subsequent sale of the shares, as measured by the difference between the sale proceeds and the sum of (i) the purchase price for such shares and (ii) the amount of ordinary income recognized on the exercise of the Purchase Right, will be treated as a capital gain or loss, as the case may be.
If the Participant disposes of the shares in a disqualifying disposition, the Company should be entitled to a deduction equal to the amount of ordinary income recognized by the Participant as a result of the disposition, except to the extent such deduction is limited by applicable provisions of the Internal Revenue Code. In all other cases, no deduction is allowed the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
AMENDMENT OF THE 1998 EMPLOYEE STOCK PURCHASE PLAN TO MODIFY
THE TERMINATION DATE.
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, 2008, and the Board has directed that the selection of the 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 the 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 the 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.
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, 2007 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 PricewaterhouseCoopers LLP and Ernst & Young LLP for the audit of the Companys annual financial statements for the years ended June 30, 2007 and June 30, 2006, respectively, and fees billed for other services rendered by PricewaterhouseCoopers LLP and Ernst & Young LLP and during those periods.
For fiscal year 2007, the Audit Committee considered whether audit-related services and services other than audit-related services provided by PricewaterhouseCoopers LLP are compatible with maintaining the independence of PricewaterhouseCoopers LLP and concluded that the independence of PricewaterhouseCoopers 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. Pursuant to the Sarbanes-Oxley Act of 2002, the fees and services provided as noted in the table above were authorized and approved by the Audit Committee in compliance with the pre-approval policies and procedures described herein.
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, 2008
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, 2007, 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, 2007, 213,360,770 shares of the Companys Common Stock were outstanding, and 5,933,861 Exchangeable Shares were outstanding. 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.
Compensation Discussion and Analysis
We believe that the quality, experience, skills, engagement and dedication of our executive officers are critical factors affecting the Companys performance and our ability to drive long-term growth of Stockholder value. These factors guide our primary executive compensation philosophy: that total compensation should be established at a competitive level to attract, retain and motivate the superior executive talent necessary to achieve our business objectives. Our compensation philosophy recognizes that we compete for superior executive talent in a highly competitive market and that retention of executive talent is enabled through reinforcement of a strong pay for performance compensation system which provides the opportunity to earn above average compensation in return for business and financial success, and the sustained delivery of the results, leadership and innovation necessary to drive long-term growth of Stockholder value. Additionally, as we have evolved and transformed to our present portfolio business model our compensation philosophy has evolved to enable the alignment of compensation with our portfolio structure. Finally, we recognize that especially with respect to centralized function roles we compete for superior executive talent not only within our industry, but also with companies outside our own markets and thus should consider role-specific factors when determining executive compensation.
In support of this compensation philosophy, the Compensation Committee of the Board (for purposes of this Compensation Discussion and Analysis, the Committee) utilizes three primary compensation elements each aligned with specific goals: (a) base salary, to attract and retain highly qualified executive talent; (b) annual, semi-annual and other cash incentive bonuses to incentivize and reward delivery of financial and business results that enable long-term sustained profitability and revenue growth within each operating segment and at a corporate level; and (c) long-term equity grants, including stock options and other stock-based incentive awards which align our executives interests with those of our Stockholders by providing opportunities to derive compensation through equity ownership and appreciation in the fair market value of our stock. Each of these compensation elements are discussed in detail below.
Throughout this Proxy Statement, the individuals who served as the Companys Chief Executive Officer (CEO) and Chief Financial Officer (CFO) during the fiscal year 2007, as well as the other individuals included in the Summary Compensation Table, are referred to as the named executive officers (or NEOs).
Determining Executive Compensation
It is the Committees intent that base salary, target bonus levels and target annual long-term incentive award values for the Companys named executive officers generally are to be established at or near the 60th percentile for cash compensation and 70-75th percentile for equity incentive compensation. The Committee believes that these percentile levels and targets are necessary and appropriate to achieve the Committees primary executive compensation goals discussed above in the highly competitive market for executive talent and during the Companys current phase in its evolution and business cycles. To assist the Committee in its review of named executive compensation, the Companys Human Resources Department, the Companys primary external compensation consultant, Compensia, Inc., (retained both by management and by the Committee) as well as Pearl, Meyer & Partners (retained solely by the Committee for assistance relative to CEO compensation), provide compensation data compiled both from executive compensation surveys (including proprietary surveys conducted by Radford Surveys + Consulting, Inc., Buck Consultants, LLC and Compensia, Inc.), and annual reports and proxy statements from companies that the Committee selects as a peer group of technology companies for executive compensation analysis purposes. The peer group utilized for this benchmarking purpose is determined based upon geographic location, annual revenue and other financial performance metrics including revenue growth, earnings, market capitalization, headcount, position within relevant business cycles, and the
Companys competition in recruiting executive talent. The Committees policy is to choose peer group members that have one or more attributes significantly similar to JDSU, including markets, manufacturing profile, level of integration, and enterprises with global operations. The peer group is periodically reviewed by the Committee and may be amended from time to time based on the criteria stated above. The current list of peer group companies is as follows:
Agilent Technologies, Inc., Avaya Inc., Corning, Inc., Sandisk Corporation, Beckman Coulter, Inc., Network Appliance Inc., Juniper Networks, Inc., Tellabs, Inc., KLA-Tencor Corporation, Applied Biosystems Inc., Agere Systems Inc., Palm, Inc., Applera Corporation (formerly Perkin Elmer), XO Holdings, Inc., Teradyne, Inc., AVX Corporation, ADC Telecommunications, Inc., Bio-Rad Laboratories, Inc., Tektronix, Inc., Broadwing Corporation, Quantum Corporation, Brocade Communications Systems, Inc., Coherent Communications Systems Corp, Ciena Corporation, Newport Corporation
To enable alignment of compensation decisions with actual individual performance the CEO periodically apprises the Committee of his personal assessment of each executive officers performance. In assessing each executive officer, the CEO reviews and documents each executive officers performance during the relevant year or portion thereof, including accomplishments, areas of strength, areas for development and long-term potential. The CEO bases this evaluation on his own knowledge of each executive officers performance, actual results achieved and feedback provided by others. In addition, the independent members of the Committee have periodic formal and informal interactions with each NEO each year including relative to the functions and/or business units for which such NEO is responsible. Prior to any Committee decision on compensation for named executive officers, the CEO, working with the Senior Vice President of Human Resources and the Compensation and Benefits group within the Human Resources Department, reviews the compensation data obtained as described in the preceding paragraph and budgetary data obtained from the Companys Finance Department, and provides a recommendation to the Committee for each named executive officers compensation, except for himself. The Committee ultimately is responsible for the final determination of all compensation for NEOs other than the CEO.
The CEOs annual performance is reviewed by the Committee using performance criteria developed by the Committee and approved by the full Boards independent directors for the fiscal year. The CEOs performance criteria established for fiscal year 2007 and methodology used for their determination are discussed below. In assessing CEO performance, the Committee and independent members of the Board review Company business, operational and financial performance, and feedback may be obtained from the CEOs direct reports and other employees. Additionally, the CEO performs a self-assessment which he provides to the Chairpersons of the Committee and the Board. The Committee recommends to the independent directors of the Board all elements of compensation for the CEO, including salary and incentive-based and equity-based compensation, for the Boards review, consideration and approval.
Named executive officers are not present for, nor do they participate in, Committee or Board discussions or approvals regarding their compensation.
Elements of Executive Compensation
The fundamental policy of the Committee is to provide the NEOs with competitive compensation opportunities based upon the overall financial performance of the Company and the Companys individual operating segments, their specific current and anticipated contributions to the financial success of the Company and their personal performance relative to associated business performance objectives. It is the Committees objective to have a significant portion of each named executive officers compensation contingent upon the Companys performance, and as applicable, individual operating segment performance, as well as upon his or her own individual contributions to the achievement of business objectives. The compensation package for NEOs is, and in fiscal year 2007 was, comprised of three elements: (i) base salary, which is designed primarily to be competitive with salary levels in the industry as well as reflect individual performance through merit increases;
(ii) annual and semi-annual variable cash bonuses tied to the Companys achievement of financial and business performance results and objectives within each operating segment and at a corporate level; and (iii) long-term equity-based incentive awards which provide enhanced executive compensation opportunities in return for performance intended to increase long-term Stockholder value. As an executive officers level of responsibility increases, a greater proportion of such executives total target compensation is comprised of cash incentive bonuses and equity compensation vehicles in order to align total target compensation with the actual achievement of Company and operating segment business and financial performance objectives.
The factors which the Committee considered in establishing the individual components of each NEOs compensation package for fiscal year 2007 are summarized below. The Committee may in its discretion apply entirely different factors, particularly different measures of financial performance, in setting NEO compensation.
Base Salary. The Company provides NEOs and other executives with a fixed base salary set at a level to allow the Company to attract, motivate and retain highly qualified executives. The base salary for each NEO is determined on the basis of the following factors: scope of responsibilities, experience, skill level, personal performance, potential for growth, and the average salary levels in effect for comparable positions within and outside the industry against which the Company competes for superior executive talent. The Committee also compares the compensation of NEOs with the compensation of other executive officers and Company employees for internal pay equity purposes. The weight given to each of these factors differs from individual to individual as the Committee deems appropriate and necessary to support the Companys business objectives. For the purposes of maintaining competitive compensation, the Committee refers to the compensation surveys and peer group discussed above. Salary levels generally are considered annually as part of the Companys performance review process as well as upon a promotion or other change of position or level of responsibility. Merit based increases to salaries of the Companys NEOs are based on the Committees (and in the case of the CEO, the independent directors of the full Board) assessment of the individuals performance, skill set and competitive market factors.
Cash Incentive Compensation. The Company utilizes three primary cash incentive programs relative to its NEOs which are designed to achieve the compensation goals discussed above: (i) the Annual Incentive Plan, in which the broad majority of Company personnel participate, (ii) the 2005 Executive Retention Program, in which a limited number of senior executives participate, and (iii) the CEO Incentive Program, in which participation is limited to Mr. Kennedy.
Annual Incentive Plan: Semi-annual incentive bonuses, designed to reward short-term performance and achievement of designated results, may be earned by each NEO under the Companys Annual Incentive Plan (AIP), in which the majority of Company employees participate. Awards under the AIP are based on Company performance as a whole and on the performance of individual operating segments, as determined with reference to financial and business performance objectives, projections and estimates established for each half of the fiscal year by the Committee (as to executive officers and employees other than the CEO) and the Board (as to the CEO). These goals are determined in a manner designed to align executives and Stockholders interests by making payouts under the AIP contingent on profitability improvement, revenue growth, and/or business performance objectives (such as innovation, enhancements in effective corporate governance and controls, customer satisfaction, employee retention, and operational excellence) consistent with long-term profitability, revenue growth and sustainable, long-term appreciation in Stockholder value.
Each participant in the AIP is assigned a target bonus of a percentage of his or her base salary, based upon the individuals grade level within the Companys standard leveling structure for all Company employees. For fiscal year 2007 the assigned target bonuses for each of the Companys NEOs were: 100% for Kevin Kennedy, 75% for each of David Vellequette and John Peeler, and 50% for Helmut Berg and Christopher Dewees. For the first half of fiscal year 2007 Al Etterman had an assigned target bonus of 50%, which was increased to 75% for the second half of fiscal year 2007 consistent with his promotion to the role of Executive Vice President and Chief Administrative Officer. The actual bonus payments earned by each employee annually under the AIP may be either less or greater than these target bonus percentages depending on whether and the extent to which the
various operating segment and Company performance goals (as discussed below) are achieved in the fiscal year, and may range from 0% to 150% of each employees assigned target bonus. Additionally, each employees actual bonus under the AIP may be adjusted lower or higher by a factor of 25% based upon subjective individual performance criteria (Individual Performance Factor or IPF). The CEO recommends to the Committee whether an IPF adjustment is warranted relative to executives other than himself, although the Committee (or in the case of the CEO the independent members of the Board) retains discretion to approve such adjustments. Actual bonuses earned by our NEOs in fiscal year 2007 are indicated in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table.
AIP goals are recommended by management and reviewed and approved by the Committee (and the independent members of the Board relative to the CEOs participation in the AIP) for each operating segment and for central function employees (Corporate) to align AIP compensation with our portfolio model, and are equally applicable to all employees eligible to participate in the AIP, regardless of grade level. These goals reflect financial and business performance objectives, projections and estimates approved by the Board of Directors upon the start of each half of the fiscal year utilized for purposes of financial and business planning and analysis. For fiscal year 2007, Kevin Kennedy, David Vellequette, Al Etterman and Christopher Dewees were treated as Corporate employees, and Helmut Berg and John Peeler as employees of the Companys Communications Test and Measurement operating segment (CommTest).
The Companys financial and business planning and performance objectives, projections and estimates approved by the Board of Directors upon the start of each half of the fiscal year and the corresponding AIP goals reflect the Companys confidential and commercially sensitive analysis, expectations and objectives for its financial, operating and overall business performance, taking into consideration then current forecasted economic conditions, the outlook for the industry and the Companys businesses, technology and new product development, and strategic objectives intended to drive growth in long-term Stockholder value, among other factors. Due to the confidential and commercially sensitive nature of these analyses, expectations and objectives and corresponding AIP goals, their specific disclosure would result in competitive harm to the Company. The use of financial metrics and defined operating objectives for the establishment of the Companys incentive bonus (and for equity compensation as discussed below) performance criteria is intended to set challenging yet reasonably achievable goals and is designed to ensure that all participants, including our NEOs, are focused on operating the Company in a disciplined manner in accordance with the Committees and Boards compensation objectives discussed above.
For the first half of fiscal year 2007, only NEOs within CommTest (including Mr. Berg and Mr. Peeler) were eligible to participate in the AIP based upon a determination by the Committee that the Companys other operating segments and the Company as a whole were deemed not to be generating a sufficient level of profitability to fund the broader payment of cash incentives under the AIP. The criteria for determination of payment of bonuses for CommTest were measured against the following factors: (i) first half fiscal year 2007 CommTest revenue, and (ii) first half fiscal year 2007 CommTest EBITDA. Based upon relative performance against these factors, eligible employees within CommTest, including Mr. Berg and Mr. Peeler, were paid 46.8% of their assigned target bonuses. No incentive bonuses under the AIP were paid to other NEOs for the first half of fiscal year 2007. No discretionary adjustments were made for either Mr. Berg or Mr. Peeler.
For the second half of fiscal year 2007, NEOs in all operating segments and Corporate were eligible to participate in the AIP. Corporate goals applicable to Messrs. Kennedy, Vellequette, Etterman and Dewees were as follows: (i) Company revenue, (ii) Company EBITDA, (iii) fourth fiscal quarter gross margin, (iv) Company earnings as a percentage of revenue, (v) Sarbanes-Oxley compliance, including elimination of identified fiscal year 2006 material weaknesses, and (vi) employee retention. CommTest goals applicable to Messrs. Berg and Peeler were as follows: (i) Company revenue, (ii) CommTest contribution margin, and (iii) CommTest market share. Based upon relative achievement of these goals, eligible employees within Corporate (including Messrs. Kennedy, Vellequette, Etterman and Dewees) earned 14% of their assigned target bonuses and eligible employees with CommTest, including Mr. Berg, earned 99% of their assigned target bonuses. However, as
discussed below in the description of the Executive Retention Program (ERP), since the incentive payment earned by Messrs. Vellequette, Etterman and Dewees under the ERP exceeded that which was earned by each of them under the AIP, no payment was made to these individuals under the AIP for fiscal year 2007. Mr. Berg received a discretionary IPF adjustment of 1.1, resulting in an increase of 10% in his incentive bonus over his target bonus under the AIP. Mr. Bergs IPF of 1.1 was recommended by the CEO and approved by the Committee, based upon the CEO and Committees overall evaluation of Mr. Bergs performance during the fiscal year, using the process discussed above. Mr. Peeler was paid 100% of his assigned target incentive bonus due to his departure from the Company at the end of fiscal year 2007 because at that time the Committee believed that an award of 100% of Mr. Peelers assigned target bonus would reasonably approximate the final percentage of assigned target bonuses that would be earned by personnel participating in the AIP and subject to CommTest performance goals once fiscal year 2007 financial performance results were finalized. While the Company anticipates actual payment of incentive bonuses earned in the second half of fiscal year 2007 to occur in October 2007, the amounts earned are reflected in the Non-Equity Incentive Plan Compensation column in the Summary Compensation Table.
Mr. Peelers fiscal year 2006 bonus payment under the AIP, which was paid and considered earned in fiscal year 2007 due to a previous Company policy regarding the timing of executive bonus compensation, was recommended by the CEO and approved by the Committee based upon CommTests financial performance against confidential and commercially sensitive revenue and EBITDA targets established under the AIP for fiscal year 2006, Mr. Peelers individual achievements in successfully managing CommTest through its acquisition and integration into the Company following the close of the acquisition of Acterna on August 3, 2005, and his strong contributions to the substantial progress made in integrating this operating segment fully into the Companys overall portfolio model during the course of fiscal year 2006. Based upon this evaluation Mr. Peeler was awarded an incentive bonus under the AIP in excess of his assigned target bonus. Thus for fiscal year 2006 Mr. Peeler earned an incentive bonus of 100% of his target bonus, which as discussed was paid in early fiscal year 2007.
Executive Retention Program: In fiscal year 2005 the Committee approved a supplementary cash incentive compensation program, the Executive Retention Program, under which Messrs. Vellequette, Etterman and Dewees participated in fiscal years 2006 and 2007. Eligibility for cash incentive payments under the terms of the ERP are subject to the achievement of certain Company EBITDA targets, continued employment in good standing and an individual performance rating for each participating executive of at least meets or exceeds expectations or their equivalents as determined by the Companys CEO and approved by the Committee. These metrics were selected to support achievement of the Companys profitability and individual performance objectives while ensuring incentive bonus payments are provided subject to continued service to the Company in good standing, and are intended to cause payment of incentives under the ERP to be reasonably probable. In each case eligibility for a cash incentive payment is determined following the close of a Company fiscal year. Each eligible employee may only receive the greater of such incentive bonus as may have been earned under the AIP or the ERP (but not both). In recognition of his increasing responsibilities since the ERP was first approved in fiscal year 2005, the ERP was amended by the Committee in fiscal year 2007 to increase Mr. Ettermans target cash incentive payment for fiscal year 2007 from $150,000 to $200,000, and to make Mr. Etterman eligible for a cash incentive payment for fiscal year 2008 in the amount of $400,000, in each case subject to his satisfaction of the criteria described above. Following completion of each of the Companys 2006 and 2007 fiscal years, Mr. Vellequette and Mr. Dewees were eligible for and received incentive cash payments of $300,000, and $150,000, respectively. Following completion of the Companys 2006 and 2007 fiscal year Mr. Etterman was eligible for and received cash incentive payments of $150,000 and $200,000, respectively. As discussed above, for each of Messrs. Etterman, Vellequette and Dewees the incentive payment earned under the ERP exceeded that which was earned under the AIP, and thus no payment was made to these individuals under the AIP for fiscal year 2007.
CEO Incentive Plan: In addition to his eligibility to participate in the AIP, as CEO Mr. Kennedy is eligible to participate in an additional annual incentive compensation plan (the CEO Incentive Plan) as defined within the 2003 Kevin Kennedy Employment Agreement (2003 Kennedy Agreement). Pursuant to the terms of the
CEO Incentive Plan, any incentive bonus earned by Mr. Kennedy under the AIP will reduce, dollar-for-dollar, the incentive bonus he is eligible to receive under the CEO Incentive Plan. For clarity, as administered, Mr. Kennedy is entitled to receive the greater of (a) what he would be entitled to under the AIP, or (b) his bonus under the CEO Incentive Plan, but not both.
Under the CEO Incentive Plan, in each of fiscal years 2006 and 2007 Mr. Kennedy was eligible to earn a minimum cash incentive bonus of $300,000 based upon performance criteria and performance evaluation recommended by the Committee and approved by the independent members of the Board for each fiscal year. For fiscal year 2007, performance criteria considered by the Committee and the independent members of the Board included a comprehensive evaluation of the Companys financial and business performance including revenue, gross margin and EBITDA, development of and progress towards implementation of the Companys growth and profitability strategy as approved by the Board in connection with fiscal year 2007 planning, and organizational development, including recruitment, performance management and succession planning.
Mr. Kennedys fiscal year 2007 bonus payment was recommended by the Committee and approved by the independent directors of the full Board based upon a comprehensive evaluation of Mr. Kennedys performance during the fiscal year. This review included an evaluation of the Companys performance against internal confidential and commercially sensitive expectations and objectives for its financial, operating and overall business performance and business model development, actual substantial year over year revenue growth, expense reductions and profitability improvements, as well as Mr. Kennedys strategy development, execution and leadership contributions. In particular, in determining Mr. Kennedys bonus under the CEO Incentive Plan for fiscal year 2007, the Committee and the independent members of the Board considered the substantial improvements in Company and segment financial performance during fiscal year 2007, including: (a) overall revenue growth of 16% (from approximately $1.2 to approximately $1.4 billion); (b) all Company segments demonstrated year over year revenue growth, ranging on a non-GAAP basis from 4 to 25% improvement over fiscal year 2006 revenues; (c) year over year gross margin improvement from 35% to 37.5%; (d) full Company adjusted EBITDA reaching 5%, the highest in the last five fiscal years; (e) for the first time in more than five fiscal years the Company demonstrated positive earnings per share on a non-GAAP basis in all four quarters of fiscal year 2007; and (f) the Company returned positive free cash flow for the entire second half of fiscal year 2007 for the first time in more than five years. Based upon this evaluation, the Committee determined that Mr. Kennedys performance warranted a CEO Incentive Bonus in excess of his fiscal year 2007 minimum bonus, and thus the Committee recommended, and the independent directors of the Board approved, a CEO Incentive Bonus of $425,000 for such fiscal year, equivalent to approximately 75% of Mr. Kennedys annual base salary for the fiscal year.
Mr. Kennedys fiscal year 2006 bonus payment under the CEO Incentive Plan of $400,000 was paid and considered earned in fiscal year 2007 due to a previous Company policy regarding the timing of executive bonus compensation. Mr. Kennedys fiscal year 2006 bonus payment was recommended by the Committee and approved by the independent directors of the full Board based upon a comprehensive evaluation of Mr. Kennedys performance during fiscal year 2006. This review included an evaluation of the Companys performance against internal confidential and commercially sensitive expectations and objectives for its financial, operating and overall business performance and business model development, actual substantial year over year revenue growth, expense reductions and profitability improvements, as well as Mr. Kennedys strategy development, execution and leadership contributions. Based upon this evaluation, the Committee determined that Mr. Kennedys performance warranted a CEO Incentive Bonus in excess of his fiscal year 2006 minimum bonus, and thus the Committee recommended to, and the independent directors of the Board, approved a CEO Incentive Bonus of $400,000 for such fiscal year.
In addition to annual incentive bonus payments, executive officers are eligible for individual recognition bonuses at the discretion of the Committee or, in the case of the CEO, the independent members of the Board, for exceptional achievement that exceeds the performance metrics set for that executive through the AIP or any other incentive bonus program. None of the Companys NEOs earned an individual recognition bonus in fiscal year 2007.
Long-Term Incentive Compensation. Long-term incentives are provided through stock option, restricted stock, and/or restricted stock unit grants. The Committee believes that stock-based compensation aligns the interests of employees with long-term stockholder value creation, providing each named executive officer with a significant incentive to manage the Company from the perspective of an owner driving long-term Stockholder value creation. The Committee also believes stock-based compensation provides the Company with a significant long-term retention tool in a highly competitive market for executive talent. The Committee sets equity grant levels to executive officers based on a variety of factors, including the individual performance of the executive officer, an assessment of the value of the individuals current and anticipated future services to the Company, relative business criticality of the position held, the awards given to other executives, and the desire to keep the Companys overall compensation competitive. Additionally, the 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 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 and resulting compensation opportunity based on the executive officers current position with the Company, the base salary associated with that position, the average size and potential returns 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 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 incentives for that executive officer. Finally, the Committee considers the number of shares of Common Stock which would be subject to proposed equity incentive awards to individual NEOs for consistency with the Committees objective to limit annual potential incremental dilution attributable to equity awards to Company employees to at or below a long-term average of 3%.
All 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 full four year vesting period, and then only if the market price of the underlying shares of Common Stock appreciate over the option term.
Similarly, restricted stock units are granted with vesting requirements related to (a) the passage of time, to encourage continued service and retention, (b) the occurrence of one or more events, and/or (c) the satisfaction of performance or financial goals or other conditions that are aligned with the Companys business and financial objectives designed to support growth in long-term Stockholder value. In all cases, vesting of restricted stock units is contingent upon the executive officers continued employment with the Company. The Company utilizes a mix of time and performance-based restricted stock unit awards for all of its named executive officers.
In June 2007 the Committee approved a change in long-term incentive compensation programs such that future awards for Company employees other than newly hired employees will be in the form of restricted stock units only. The Company and the Committee presently believe that restricted stock units are a better method than stock options to provide equity compensation opportunities to continuing employees in a manner that permits more predictable long-term rewards. Restricted stock units also reduce dilution of Stockholder value that other equity awards may cause, since fewer shares of Company Common Stock may be used to provide comparable
long-term compensation opportunities. Also, the use of restricted stock units allows the Company to recognize and provide employees with compensation opportunities based upon measurements of business improvement that are important for the long-term health, profitability and growth of the Company that may not be immediately reflected in the Companys stock price. Thus while our compensation tables include prior equity grants to NEOs in formats other than restricted stock units, the Company does not presently intend to issue long-term compensation in a form other than restricted stock units in fiscal year 2008 to the Companys current NEOs. However, the Committee periodically reviews available equity compensation vehicles and retains discretion to utilize other forms of equity compensation.
The Companys NEOs were awarded restricted stock units in June 2007 as an element of the Companys fiscal year 2007 annual review process. Actual awards to NEOs are shown in the Grants of Plan-Based Awards table. Restricted stock units awarded to NEOs were comprised of a mix of time based and performance based vesting requirements. 60% of each NEOs award was comprised of time-based vesting restricted stock units, which vest in three equal annual installments. The Committee believes that a three year vesting period for the fiscal year annual 2007 award will most effectively deliver competitive compensation opportunities while utilizing fewer shares, reducing dilution and aggregate financial expense than would a longer vesting term. The Committee intends to consider at least annually the Companys time-based vesting criteria and retains the discretion to utilize longer or shorter schedules for future grants. 40% of the fiscal year 2007 restricted stock unit awards to each NEO are subject to performance-based vesting criteria aligned to a full Company performance goal relative to fiscal year 2008 Company EBITDA (in the case of Messrs. Kennedy, Vellequette, Etterman and Dewees) and to CommTest goals relative to segment contribution margin and revenue (in the case of Mr. Berg). The Committee believes that aligning the corporate performance goal to Company EBITDA will most closely tie compensation of these NEOs to full Company profitability growth, while CommTest objectives will align with the contributions that operating segment can make to overall Company profitability and the growth of higher margin CommTest revenue. In the case of all performance based restricted stock unit awards to NEOs, the number of units that will be subject to vesting will depend upon the percentage achievement of the applicable financial criteria, subject to a minimum threshold achievement. As stated above, these performance criteria are based upon Board-approved financial and business performance objectives, projections and estimates, and as such are confidential and commercially sensitive.
In addition to the restricted stock units awarded in June 2007 to NEOs as an element of the Companys fiscal year 2007 annual review process as discussed above, Messrs. Etterman and Vellequette each were simultaneously awarded a grant of time-based restricted stock units cliff vesting on the first anniversary of the date of grant. These awards were granted as an additional short-term retention inducement in direct response to near-term executive talent market competition. These grants also are shown in the Grants of Plan-Based Awards table.
Current compensation and amounts realizable from prior compensation are considered in setting other elements of compensation, as the Committee actively tracks historical and prospective summaries of total compensation components for each NEO in order to gauge how much retention value previous grants and continuing cash incentive programs provide.
Other Compensation Programs and Policies. In addition to the components of compensation that the Company currently pays to its NEOs, below are two additional potential elements of compensation available to NEOs:
Deferred Compensation Plan. The Company maintains a deferred compensation plan, pursuant to which certain members of management (including 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 which are identical to those available in the Companys 401(k) Retirement Plan, and 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. During fiscal year 2007, none of the Companys NEOs participated in the deferred compensation plan.
Perquisites and Other Personal Benefits. We strongly believe that it is critical that the Company maintains an egalitarian culture in our facilities and operations, and that our executive officers are not entitled to operate under different standards than other employees. The Companys healthcare, insurance, and other welfare and employee benefit programs are the same for all eligible employees, including executive officers. The Company shares the cost of health and welfare benefits with its employees, a cost that is dependent on the level of benefits coverage that each employee elects. The Company does not have programs for providing personal benefit perquisites to NEOs, such as defraying the cost of financial or legal advice, personal entertainment, recreational club memberships or family travel, nor does it provide its officers with reserved parking spaces or separate dining or other facilities or services. The Company has no outstanding loans of any kind to any of its executive officers, and it expects its officers to be role models under its Code of Business Conduct, which applies equally to all employees.
Compensation Recovery Policy
The Committee will evaluate in appropriate circumstances whether to seek the reimbursement of certain compensation awards paid to an executive officer if such executive engages in misconduct that caused or partially caused a restatement of financial results, in accordance with section 304 of the Sarbanes-Oxley Act of 2002. If circumstances warrant, we will seek to claw back appropriate portions of the executive officers compensation for the relevant period, as provided by law.
Executive Stock Ownership Policy
The Committee recommended and the full Board approved formal stock ownership requirements for non-employee directors and executive officers of the Company in fiscal year 2005. Under the policy, each non-employee director of the Company should have a minimum equity interest in the Companys stock at least equal to that non-employee directors then current annual cash retainer by the later to occur of the fifth anniversary of his or her first election the Board or June 30, 2010. Likewise, each executive officer of the Company should have a minimum equity interest in the Companys stock at least equal to that executive officers then current annual base salary by the later to occur of the fifth anniversary of his or her commencement of employment with the Company or June 30, 2010. The shares that count towards this Company policy include stock owned outright, unvested and vested restricted stock and restricted stock units, and any stock options exercisable with 60 days of the valuation date. The equity incentive awards granted in fiscal year 2007 to each of the current named executive officers are listed in the Outstanding Equity At Fiscal Year End table.
Equity Grant Practices
All stock option awards made to our NEOs, as well as all other Company employees, have an exercise price equal to the fair market value of our common stock on the date of grant. Fair market value is defined under our equity compensation plans as the closing market price of a share of our common stock on NASDAQ on the date of grant. The Committee generally makes grants to our NEOs and other senior management on a once-a-year basis, but the Committee retains the discretion to make additional awards to NEOs at other times in connection with the initial hiring of a new officer, for retention purposes, or otherwise. Effective January 1, 2007 all new hire equity incentive awards for all employees, including officers, are granted on the 15th day of the month immediately following the first day of employment of such new employee.
The Company does not have any program, plan or practice to time equity compensation grants to its executives in coordination with the release of material nonpublic information. The Company does not set the grant date of its equity compensation grants to new executives in coordination with the release of material nonpublic information. The Company has not timed, nor does it plan to time, the release of material nonpublic
information for the purpose of affecting the value of executive compensation, nor are equity compensation grants timed with regard to current share price or factors which may affect future share price.
The Committee endeavors to maximize deductibility of compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code) 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 Committee or the Company. In addition, the 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 any NEO 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 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 Committee will, of course, consider alternative forms of compensation that, consistent with its compensation goals, preserve deductibility.
The Companys 2003 Plan is structured such that 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.
COMPENSATION COMMITTEE REPORT
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, except to the extent that the Company specifically requests that the information be treated as soliciting material or incorporates it by reference into a document filed under the Securities Act or the Exchange Act. The information will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management. Based on this review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.
Casimir S. Skrzypczak, Chair
Richard E. Belluzzo
Kevin A. DeNuccio
SUMMARY COMPENSATION TABLE
The following table summarized the total compensation of our Named Executive Officers in fiscal year 2007. The amounts shown below for stock awards (i.e. RSUs) and stock options represent the amounts we expensed during fiscal year 2007, rather than the amounts actually received by our NEOs, and includes compensation cost recognized in our consolidated financial statements with respect to awards granted in fiscal year 2007 and in prior years.
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, as amended June 16 and August 4, 2004 (the Kennedy Agreement). The term of the Kennedy Agreement commenced on September 1, 2003 and automatically extended by its terms for a one year period beyond its original four year term on August 31, 2007. It will automatically renew for another one year period on each anniversary of this original one year extension unless sooner terminated pursuant to the terms of the Kennedy Agreement. Mr. Kennedys current annual base salary under the Kennedy Agreement is $575,000, subject to adjustment from time to time by the Company. 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 250,000 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 187,500 shares of the Companys Common Stock over the 18 month period following his commencement of service as Chief Executive Officer, 125,000 of which shares were granted within 12 months of Mr. Kennedys commencement of employment.
Effective June 16, 2004 the Kennedy Agreement was amended 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. The Board of Directors reviewed the performance of Mr. Kennedy against these objectives and awarded his fiscal year 2004 bonus as of August 17, 2005. 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. These milestones were achieved and Mr. Kennedys salary was increased to $575,000 retroactive to September 1, 2004 as of February 15, 2006.
For a complete summary of the termination and change of control provisions of the Kennedy Agreement, please see the section Potential Payments Made Upon Termination or Change of Control below. A complete summary of the Executive Change of Control Severance Plan that the Company adopted on February 17, 2007, which explains the termination benefits available to the NEOs other than Mr. Kennedy, can also be found under that section heading below.
The Company and Helmut Berg are parties to an employment agreement dated August 31, 2007 (the Berg Agreement). The term of the Berg Agreement commenced on August 19, 2007. Mr. Bergs current annual base salary under the Berg Agreement is $400,000, subject to adjustment from time to time by the Company and by the terms of the Berg Agreement. Such terms include the provision that sixty days following Mr. Bergs eventual replacement as the President of the Communications Test & Measurement Group he will transition to the
Corporate Development group as a Vice President at an annual base salary of $225,000 and that at such time Mr. Berg will receive a retention bonus of $185,000. In addition, Mr. Berg is eligible to earn an annual bonus with a target bonus of 75% of his annual base salary and a minimum bonus of 35% of his base salary (with this 35% of base salary minimum bonus being guaranteed through fiscal year 2010), based upon achievement of objectives determined by the Company from time to time. Mr. Bergs target bonus will be reduced to 35% of his annual base salary upon his replacement as the President of the Communications Test & Measurement Group.
GRANTS OF PLAN-BASED AWARDS TABLE
The following table provides information about equity and non-equity awards granted to the Named Executive Officers in fiscal year 2007:
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
The following table provides information regarding outstanding equity awards, including stock options and RSUs, and applicable market values at the end of fiscal year 2007.
OPTION EXERCISES AND STOCK VESTED TABLE
The following Option Exercises and Stock Vested Table provides additional information about the value realized by the Named Executive Officers on RSU vesting during fiscal year 2007.
Potential Payments Made Upon Termination or Change of Control
The descriptions and table below reflect the amount of compensation to each of the Named Executive Officers of the Company in the event of termination of such executives employment. The amounts of compensation show below are payable to each named executive officer upon termination without cause or good reason, following a change of control, for non-renewal of an employment contract and in the event of death or disability of the executive. The figures shown below assume that such termination was effective as of June 30, 2007 (and therefore use the closing price of our Common Stock on NASDAQ as of June 29, 2007 for all equity-based calculations), and thus include amounts earned through such time and are estimates of the amounts which would be paid out to the executives upon their termination. The actual amounts to be paid out can only be determined at the time of such executives separation from the Company.
For a complete summary of the salary and bonus provisions of the employment agreement between the Company and Kevin Kennedy, our Chief Executive Officer and President (the Kennedy Agreement), please see the section Employment Contracts, Termination of Employment and Change in Control Arrangements following the Summary Compensation Table above. What follows below summarizes only the termination and change of control provisions of the Kennedy Agreement.
In the event the Kennedy Agreement is terminated (i) by the Company (other than for cause) other than by the Company following a change of control; (ii) by the Company without cause (as that term is defined in the Kennedy Agreement); (iii) as a result of the death or disability of Mr. Kennedy; or (iv) by Mr. Kennedy for good reason (as that term is defined in the Kennedy Agreement), Mr. Kennedy shall receive (a) a lump sum payment of severance in the amount of two years salary and two years bonus based upon previous bonuses paid to Mr. Kennedy, (b) two years worth of vesting acceleration of Mr. Kennedys equity holdings, and (c) two years worth of COBRA benefits continuation and medical insurance coverage.
In the event that the Kennedy Agreement is terminated by the Company following a change of control, Mr. Kennedy shall receive (a) a lump sum payment of severance in the amount of three years salary and three years bonus based upon previous bonuses paid to Mr. Kennedy, (b) three years worth of vesting acceleration of Mr. Kennedys equity holdings, and (c) two years worth of COBRA benefits continuation and medical insurance coverage.
In the event that the Kennedy Agreement is not renewed by the Company, Mr. Kennedy shall receive (a) a lump sum payment of severance in the amount of one years salary and one years bonus based upon previous bonuses paid to Mr. Kennedy, (b) one years worth of vesting acceleration of Mr. Kennedys equity holdings, and
(c) two years worth of COBRA benefits continuation and medical insurance coverage. All of the above termination benefits are conditioned upon Mr. Kennedy signing a release of claims with the Company.
All other individuals employed by the Company and its subsidiaries in the United States at the level of Senior Vice President and above reporting directly to the Chief Executive Officer and on a United States payroll (defined as Eligible Executives) are subject to the Executive Change of Control Severance Plan dated February 17, 2007 (the "Plan"). The Plan provides that in the event of a qualifying termination, each of the Eligible Executives will be entitled to receive (i) one year of accelerated vesting of unvested stock options and other securities or similar incentives held at the time of termination, (ii) a lump sum payment equal to six months base salary (less applicable tax and other withholdings) and (iii) reimbursement of COBRA premiums for up to one year. A qualifying termination under the Plan is any involuntary termination without cause, any voluntary termination for good reason, or any termination due to disability or death, in each case occurring upon or within six months following a change in control of the Company, as such terms are defined in the Plan.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE
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, 2007.
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 2,392,000 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 1,250,000 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.
2005 Acquisition Equity Incentive Plan
The Board of Directors adopted the 2005 Acquisition Equity Incentive Plan (the 2005 Plan) in August 2005. The 2005 Plan is administered by the Compensation Committee. Pursuant to the 2005 Plan, the Compensation Committee may grant stock options, SARs, Dividend Equivalent Rights, Restricted Stock, Restricted Stock Units and Performance Units to employees (including directors and officers) of the Company or
any parent or subsidiary corporation of the Company, or any other such entity in which the Company holds a substantial ownership interest. Pursuant to NASDAQ listing rules regarding equity compensation plans not approved by security holders, the Company can and will only issue awards under the 2005 Plan to individuals joining the Company as a result of acquisitions or related strategic transactions, and not for new grants to continuing employees of the Company, nor to regular new hires. The 2005 Plan will continue in effect until terminated by the Board of Directors.
An aggregate of 2,000,000 shares has been reserved for the grant of awards under the 2005 Plan. As of June 30, 2007, there were 332,607 shares remaining available for future grants under the 2005 Plan. Shares underlying awards that are forfeited, canceled or expired are not counted as having been issued under the 2005 Plan. Stock options and any awards intended to qualify as performance-based compensation issued under the 2005 Plan must have an exercise price of not less than 100% of the fair market value of the Companys Common Stock on the date of grant of the award. Awards are generally non-transferable. The term of all awards granted under the Plan shall not exceed eight years from the date of grant.
AUDIT COMMITTEE REPORT
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, except to the extent that the Company specifically requests that the information be treated as soliciting material or incorporates it by reference into a document filed under the Securities Act or the Exchange Act. The information will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
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 control, 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 included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2007, which includes the consolidated balance sheets of the Company as of June 30, 2007 and July 1, 2006, and the related consolidated statements of operations, Stockholders equity and cash flows for each of the three years in the period ended June 30, 2007, 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 Registered Public Accounting Firm
The Audit Committee has discussed with PricewaterhouseCoopers LLP (PricewaterhouseCoopers), the Companys independent registered public accounting firm, 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 PricewaterhouseCoopers examination of the financial statements.
The Audit Committee has also received written disclosures and the letter from PricewaterhouseCoopers 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 PricewaterhouseCoopers any relationships that may impact on its objectivity and independence and also considered whether the provision of non-audit services by PricewaterhouseCoopers is compatible with maintaining the accountants independence and satisfied itself as to PricewaterhouseCoopers independence.
During the course of fiscal year 2007 management engaged in 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 PricewaterhouseCoopers at several regularly scheduled Audit Committee meetings. 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 financial reporting and managements preparations for the evaluation for fiscal year 2008.
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, 2007.
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 2007, with the exception of a late Form 3 filing for David Gudmundson, 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, 430 NORTH MCCARTHY BOULEVARD, MILPITAS, CALIFORNIA 95035, THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON SOLICITED A COPY OF THE FISCAL 2007 REPORT, INCLUDING FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FILED THEREWITH.
September 28, 2007
AMENDED AND RESTATED 1998 EMPLOYEE STOCK PURCHASE PLAN
JDS UNIPHASE CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
As Amended on November 9, 2001
As Amended and Restated on July 31, 2002
As Amended and Restated on November 10, 2005
As Amended and Restated on , 2007
The JDS Uniphase Corporation 1998 EMPLOYEE STOCK PURCHASE PLAN (the Plan) is intended to provide eligible employees of the Company and one or more of its Corporate Affiliates with the opportunity to acquire a proprietary interest in the Company through participation in a plan designed to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code (the Code). The Plan was originally amended on November 9, 2001 and subsequently amended and restated on July 31, 2002 and November 10, 2005. This amendment and restatement of the Plan was made on , 2007 and shall be effective for offerings made under the Plan commencing on or after .
For purposes of administration of the Plan, the following terms shall have the meanings indicated:
Compensation means the (i) regular base salary paid to a Participant by one or more Participating Companies during such individuals period of participation in the Plan, plus (ii) any amounts contributed by the Corporation or any Corporate Affiliate pursuant to a salary reduction agreement which are not includible in the gross income of the Participant by reason of Code Sections 402(e)(3) or 125, plus (iii) all of the following amounts to the extent paid in cash: overtime payments, bonuses, commissions, profit-sharing distributions and other incentive-type payments. However, Eligible Earnings shall not include any contributions (other than those excludible from the Participants gross income under Code Sections 402(e)(3) or 125) made on the Participants behalf by the Corporation or any Corporate Affiliate to any deferred compensation plan or welfare benefit program now or hereafter established.
Board means the Board of Directors of the Company.
Company means JDS Uniphase Corporation, a Delaware corporation, and any corporate successor to all or substantially all of the assets or voting stock of JDS Uniphase Corporation, which shall by appropriate action adopt the Plan.
Corporate Affiliate means any company which is either the parent corporation or a subsidiary corporation of the Company (as determined in accordance with Section 424 of the Code), including any parent or subsidiary corporation which becomes such after the Effective Date.
Effective Date means August 1, 1998. However, should any Corporate Affiliate become a Participating Company in the Plan after such applicable date, then such entity shall have a designated separate Effective Date with respect to its employee-Participants.
Employee means any person who is regularly engaged, for a period of more than 20 hours per week and more than 5 months per calendar year, in the rendition of personal services to the Company or any other Participating Company for earnings considered wages under Section 3121(a) of the Code. For purposes of the Plan, a persons employment with the Company or a Participating Company terminates and the person ceases to be an Employee on the date on which such person ceases to provide continuous active service to the Company or Participating Company. In jurisdictions requiring notice in advance of an effective termination of an employees employment, an employees continuous active service shall be deemed terminated upon the actual cessation of
the active performance of duties or responsibilities in providing services to the Company or a Participating Company, notwithstanding any required notice period that must be fulfilled or pay in lieu of notice or severance pay that must be provided before a termination as an employee can otherwise become effective under applicable laws, regardless of whether such notice has been fulfilled or pay in lieu of notice or severance pay has been provided. Further, and notwithstanding anything else in the Plan, a persons employment with the Company or a Participating Company terminates and the person ceases to be an Employee on the date that he or she is notified that his or her employment is terminated for cause or for just cause. The terms termination of employment or cessation of Employee status or similar terms have meaning corresponding to this definition of Employee.
Participant means any Employee of a Participating Company who is actively participating in the Plan.
Participating Company means the Company and such Corporate Affiliate or Affiliates as may be designated from time to time by the Board.
Plan Administrator means either the Board or a Committee of the Board that is responsible for administration of the Plan.
Purchase Period means, effective February 1, 2006 and thereafter, each six-month period commencing on (1) any February 1 and ending on the subsequent July 31, or (2) commencing on August 1 and ending on the subsequent January 31.
Stock means shares of the common stock of the Company.
(a) The Plan shall be administered by the Plan Administrator which shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Plan Administrator shall, to the full extent permitted by applicable law, be final and binding upon all persons.
(b) No member of the Committee while serving as such shall be eligible to participate in the Plan.
(a) Stock shall be offered for purchase under the Plan through a series of successive six-month Purchase Periods until such time as (i) the maximum number of shares of Stock available for issuance under the Plan shall have been purchased or (ii) the Plan shall have been sooner terminated, discontinued, or suspended in accordance with Article X or Article XI. Two (2) separate Purchase Periods shall commence in each calendar year during which the Plan remains in existence.
(b) The Participant shall be granted a separate purchase right for each Purchase Period in which he/she participates. The purchase right shall be granted on the first day of the Purchase Period and shall be automatically exercised on the last day of such Purchase Period provided such purchase right remains outstanding on such date.
(c) The acquisition of Stock through participation in the Plan for any Purchase Period shall neither limit nor require the acquisition of Stock by the Participant in any subsequent Purchase Period, subject to the limitations of Sections V, VII, and VIII hereof.
(d) Under no circumstances shall any purchase rights granted under the Plan be exercised, nor shall any shares of Stock be issued hereunder, until such time as (i) the Plan shall have been approved by the Companys stockholders and (ii) the Company shall have complied with all applicable requirements of the
Securities Act of 1933 (as amended), all applicable listing requirements of any securities exchange on which the Stock is listed and all other applicable requirements established by law or regulation.
(a) Every Employee of a Participating Company shall be eligible to participate in the Plan on the first day of the first Purchase Period following the Employees commencement of service with the Company or any Corporate Affiliate, but in no event shall participation commence prior to the Effective Date.
(b) In order to participate in the Plan for a particular Purchase Period, the Employee must complete the enrollment forms prescribed by the Plan Administrator (including a purchase agreement and a payroll deduction authorization) and file such forms with the Plan Administrator (or its designate) prior to the commencement date of the Purchase Period.
(c) The payroll deduction authorized by a Participant for purposes of acquiring Stock under the Plan may be any multiple of 1% of Compensation paid to the Participant during the relevant Purchase Period, up to a maximum of 10%. The deduction rate so authorized shall continue in effect for the entire Purchase Period unless the Participant shall, prior to the end of the Purchase Period for which the purchase right is in effect, reduce the rate by filing the appropriate form with the Plan Administrator (or its designate). The reduced rate shall become effective as soon as practicable following the filing of such form. Each Participant shall be permitted such a rate reduction only two (2) times in each Purchase Period. The reduced rate shall continue in effect for the entire Purchase Period and for each subsequent Purchase Period, unless the Participant shall, prior to the commencement of any subsequent Purchase Period, designate a different rate (up to the 10% maximum) by filing the appropriate form with the Plan Administrator (or its designate). The new rate shall become effective for the first Purchase Period commencing after the filing of such form. Payroll deductions, however, will automatically cease upon the termination of the Participants purchase right in accordance with Section VII(d) or (e) below.
(d) With respect to Participants who are not United States residents, the amount deducted for each such Participant shall be deducted from the Participants salary in the currency in which such Participant is compensated and shall be converted to United States dollars by using the noon United States eastern time buying rate as reported by the Federal Reserve Bank of New York for the purchase of United States dollars with such currency on the day Stock is purchased for the Participants account.
(a) The Stock purchasable by Participants under the Plan shall, solely in the Boards discretion, be made available from either authorized but unissued Stock or from reacquired Stock, including shares of Stock purchased on the open market. The total number of shares of Stock which may be issued under the Plan shall not exceed Fifty Million (50,000,000) shares (subject to adjustment under Section VI(b)). With respect to any amendment to increase the total number of shares of Stock under the Plan, the Plan Administrator shall have discretion to disallow the purchase of any increased shares of Stock for the Purchase Period in existence at the time of such increase. If the Plan Administrator determines that on a given purchase date the number of shares with respect to which purchase rights are to be exercised may exceed the number of shares then available for sale under the Plan, the Plan Administrator may make a pro-rata allocation of the shares remaining available for purchase on such purchase date in as uniform a manner as shall be practicable and as it shall determine to be equitable and continue such Purchase Period. Any amount remaining in a Participants payroll account following such pro-rata allocation shall be promptly refunded to the Participant and shall not be carried over to any future Purchase Period.
(b) In the event any change is made to the Stock purchasable under the Plan by reason of any recapitalization, stock dividend, stock split, combination of shares or other change affecting the outstanding
common stock of the Company as a class without receipt of consideration, then appropriate adjustments shall be made by the Plan Administrator to the class and maximum number of shares purchasable under the Plan, the class and maximum number of shares purchasable per Participant under any purchase right outstanding at the time or purchasable per Participant over the term of the Plan, and the class and number of shares and the price per share of the Stock subject to outstanding purchase rights held by Participants under the Plan.
An Employee who participates in the Plan for a particular Purchase Period shall have the right to purchase Stock on the purchase date for such Purchase Period upon the terms and conditions set forth below and shall execute a purchase agreement embodying such terms and conditions and such other provisions (not inconsistent with the Plan) as the Plan Administrator may deem advisable.
(a) Purchase Price. The purchase price per share shall be the lesser of (i) 95% of the fair market value of a share of Stock on the date on which the purchase right is granted or (ii) 95% of the fair market value of a share of Stock on the date the purchase right is exercised. For purposes of determining such fair market value (and for all other valuation purposes under the Plan), the fair market value per share of Stock on any date shall be the closing selling price per share (or the closing bid, if no sales are reported on such date), as officially quoted on any established stock exchange or a national market system, including without limitation The Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, on the date of determination (or, if no closing selling price or closing bid was reported on that date, as applicable, on the last trading date such closing selling price or closing bid was reported), as reported in The Wall Street Journal or such other source as the Plan Administrator deems reliable;
(b) Number of Purchasable Shares. The number of shares purchasable by a Participant on a purchase date for a Purchase Period shall be the number of whole shares obtained by dividing the amount collected from the Participant through payroll deductions during the Purchase Period, together with any amount carried over from the prior Purchase Period pursuant to the provisions of Section VII(f), by the purchase price in effect for such purchase date. However, the maximum number of shares purchasable by the Participant pursuant to any one outstanding purchase right shall not exceed 40,000 shares (subject to adjustment under Section VI(b)).
Under no circumstances shall purchase rights be granted under the Plan to any Employee if such Employee would, immediately after the grant, own (within the meaning of Section 424(d) of the Code), or hold outstanding options or other rights to purchase, stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or any of its Corporate Affiliates.
(c) Payment. Payment for Stock purchased under the Plan shall be effected by means of the Participants authorized payroll deductions. Such deductions shall begin on the first pay day coincident with or immediately following the commencement date of the relevant Purchase Period and shall terminate with the pay day ending with or immediately prior to the last day of the Purchase Period. The amounts so collected shall be credited to the Participants individual account under the Plan, but no interest shall be paid on the balance from time to time outstanding in the account. The amounts collected from a Participant may be commingled with the general assets of the Company and may be used for general corporate purposes.
(d) Termination of Purchase Rights.
(i) A Participant may, prior to any purchase date, terminate his/her outstanding purchase right under the Plan by filing the prescribed notification form with the Plan Administrator (or its designate). The Company will then refund the payroll deductions which the Participant made with respect to the terminated purchase right, and no further amounts will be collected from the Participant with respect to such terminated right.
(ii) The termination shall be irrevocable with respect to the particular Purchase Period to which it pertains and shall also require the Participant to re-enroll in the Plan (by making a timely filing of a new purchase agreement and payroll deduction authorization) if the Participant wishes to resume participation in a subsequent Purchase Period.
(e) Termination of Employment. If a Participant ceases Employee status during any Purchase Period, then the Participants outstanding purchase right under the Plan shall immediately terminate and all sums previously collected from the Participant and not previously applied to the purchase of stock during such Purchase Period shall be promptly refunded. However, should the Participant die or become permanently disabled while in Employee status, then the Participant or the person or persons to whom the rights of the deceased Participant under the Plan are transferred by will or by the laws of descent and distribution (the successor) will have the election, exercisable at any time prior to the purchase date for the Purchase Period in which the Participant dies or becomes permanently disabled, to (i) withdraw all of the funds in the Participants payroll account at the time of his/her cessation of Employee status or (ii) have such funds held for purchase of shares of Stock on the purchase date. If the Plan Administrator (or its designate) does not receive such an election prior to the purchase date for such Purchase Period, the successor will be deemed to have elected to withdraw all of the funds in the Participants payroll account at the time of his/her cessation of Employee status and such funds shall be distributed to the successor as soon as administratively practicable. In no event, however, shall any further payroll deductions be added to the Participants account following his/her cessation of Employee status.
For purposes of the Plan, a Participant shall be deemed to be permanently disabled if he/she is unable, by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of at least twelve (12) months, to engage in any substantial gainful employment.
(f) Stock Purchase. Outstanding purchase rights shall be automatically exercised as provided in Section IV(b). The exercise shall be effected by applying the amount credited to the Participants account on the last date of the Purchase Period to the purchase of whole shares of Stock (subject to the limitations on the maximum number of purchasable shares set forth in Section VII(b)) at the purchase price in effect for such purchase date. Any amount remaining in the Participants account after such exercise representing a fractional share of Stock shall be held for the purchase of Stock on the next purchase date; provided, however, that any other amount not applied to the purchase of Stock at the end of a Purchase Period shall be refunded promptly after the close of the Purchase Period, including any amount not applied to the purchase of stock by reason by the Section VII(b) or the Section VIII limitations on the maximum number of purchasable shares.
(g) Rights as Stockholder. A Participant shall have no rights as a stockholder with respect to shares covered by the purchase rights granted to the Participant under the Plan until the shares are actually purchased on the Participants behalf in accordance with Section VII(f). No adjustments shall be made for dividends, distributions or other rights for which the record date is prior to the date of such purchase.
(h) Assignability. No purchase rights granted under the Plan shall be assignable or transferable by a Participant except by will or by the laws of descent and distribution, and the purchase rights shall, during the lifetime of the Participant, be exercisable only by such Participant.
(i) Merger or Liquidation of Company. In the event the Company or its stockholders enter into an agreement to dispose of all or substantially all of the assets or outstanding capital stock of the Company by means of a sale, merger or reorganization in which the Company will not be the surviving corporation (other than a reorganization effected primarily to change the State in which the Company is incorporated) or in the event the Company is liquidated, then all outstanding purchase rights under the Plan shall automatically be exercised immediately prior to such sale, merger, reorganization or liquidation by applying all sums previously collected from Participants pursuant to their payroll deductions in effect for such rights to the purchase of whole shares of Stock, subject, however, to the applicable limitations of Section VII(b) and Section VIII.
(a) No Participant shall be entitled to accrue rights to acquire Stock pursuant to any purchase right under this Plan if and to the extent such accrual, when aggregated with (I) Stock rights accrued under other purchase rights outstanding under this Plan and (II) similar rights accrued under other employee stock purchase plans (within the meaning of Section 423 of the Code) of the Company or its Corporate Affiliates, would otherwise permit such Participant to purchase more than $25,000 worth of stock of the Company or any Corporate Affiliate (determined on the basis of the fair market value of such stock on the date or dates such rights are granted to the Participant) for each calendar year such rights are at any time outstanding.
(b) For purposes of applying the accrual limitations of Section VIII(a), the right to acquire Stock pursuant to each purchase right outstanding under the Plan shall accrue as follows:
(i) The right to acquire Stock under each such purchase right shall accrue as and when the purchase right first becomes exercisable during the calendar year as provided in Section IV(b).
(ii) No right to acquire Stock under any outstanding purchase right shall accrue to the extent the Participant has already accrued in the same calendar year the right to acquire $25,000 worth of Stock (determined on the basis of the fair market value on the date or dates of grant) pursuant to that purchase right or one or more other purchase rights which may have been held by the Participant during such calendar year.
(iii) If by reason of the Section VIII(a) limitations, the Participants outstanding purchase right does not accrue for any Purchase Period, then the payroll deductions which the Participant made during that Purchase Period with respect to such purchase right shall be promptly refunded.
(c) In the event there is any conflict between the provisions of this Article VIII and one or more provisions of the Plan or any instrument issued thereunder, the provisions of this Article VIII shall be controlling.
(a) The Plan is designed to qualify as an employee stock purchase plan under Section 423 of the Code. However, after the Effective Date, the Plan Administrator may, at its discretion, cease to administer the Plan as a qualified employee stock purchase plan under Code Section 423. Accordingly, share purchases effected under the Plan at any time after the Plan ceases to be administered as a qualified employee stock purchase plan under Code Section 423 (whether pursuant to purchase rights granted before or after the Plan ceases to be qualified) shall result in taxable income to each Participant equal to the excess of (i) the fair market value of the purchased shares on the purchase date over (ii) the purchase price paid for such shares.
(b) To the extent required by law, the Companys obligation to deliver shares to the Participant upon the exercise of any outstanding purchase right shall be subject to the Participants satisfaction of all applicable federal, state and local income and employment and similar non-United States tax withholding requirements.
(a) The Board may from time to time alter, amend, suspend or discontinue the Plan; provided, however, that no such action shall become effective prior to the exercise of outstanding purchase rights at the end of the Purchase Period in which such action is authorized. To the extent necessary to comply with Code Section 423, the Company shall obtain stockholder approval in such a manner and to such a degree as required.
(b) The Company shall have the right, exercisable in the sole discretion of the Plan Administrator, to terminate the Plan immediately following the end of a Purchase Period. Should the Company elect to exercise its
right to terminate the Plan, then the Plan shall terminate in its entirety, and no further purchase rights shall thereafter be granted, and no further payroll deductions shall thereafter be collected, under the Plan.
(a) The Plan shall terminate upon the earlier of (i) August 1, 2018 or (ii) the date on which all shares available for issuance under the Plan shall have been sold pursuant to purchase rights exercised under the Plan.
(b) All costs and expenses incurred in the administration of the Plan shall be paid by the Company.
(c) Neither the action of the Company in establishing the Plan, nor any action taken under the Plan by the Plan Administrator, nor any provision of the Plan itself shall be construed so as to grant any person the right to remain in the employ of the Company or any of its Corporate Affiliates for any period of specific duration, and such persons employment may be terminated at any time, with or without cause. Termination of the Plan, or of a persons status as an Employee or a Participant under the Plan, shall not constitute a constructive dismissal of the Participants employment with the Company or a Participating Company. Further, no person shall have any rights or entitlement under the Plan after such person has ceased to be an Employee for purposes of the Plan or a Participant in the Plan.
(d) Governing Law. The Plan is to be construed in accordance with and governed by the internal laws of the State of California (as permitted by Section 1646.5 of the California Civil Code, or any similar successor provision) without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties, except to the extent the internal laws of the State of California are superseded by the laws of the United States. Should any provision of the Plan be determined by a court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable.
2007 ANNUAL REPORT
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission File Number 0-22874
JDS UNIPHASE CORPORATION
(Exact name of Registrant as specified in its charter)
430 North McCarthy Boulevard, Milpitas, California 95035
(Address of principal executive offices including Zip code)
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value of $0.001 per share
Preferred Stock Purchase Rights
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the 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. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of December 30, 2006 the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $3.5 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 July 27, 2007, the Registrant had 219,074,199 shares of common stock outstanding, including 5,933,861 exchangeable shares of JDS Uniphase Canada Ltd. Each exchangeable share is exchangeable at any time into common stock on a one-for-one basis, entitles a holder to dividend and other rights economically equivalent to those of the common stock, and through a voting trust, votes at meetings of stockholders of the Registrant.
Documents Incorporated by Reference: Portions of the Registrants Notice of Annual Meeting of stockholders and Proxy Statement to be filed pursuant to Regulation 14A within 120 days after Registrants fiscal year end of June 30, 2007 are incorporated by reference into Part III of this Report.
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 anticipates that, believes, can impact, continue to, estimates, expects to, intends, may, plans, potential, projects, to be, will be, will continue to be, continuing, ongoing, or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include statements regarding: our expectations regarding an increase in consumer demand for real-time, interactive visual and audio experiences; our beliefs regarding bandwidth growth over optical networks; our belief that we are well positioned to benefit from industry trends; our plan to expand opportunities in emerging geographies and through channel marketing; our strategy to operate as a Company comprised of a portfolio of businesses with a focus on optical and broadband innovation; our expectation that the growing demand for network capacity will result in greater adoption of optical communications products across the telecom sector; our belief that an increase in network capacity will increase the demand for optical products in the storage and enterprise sectors; our belief that the deployment of fiber closer to the end user increases the availability of high-bandwidth services and will result in increased demand on the metro and long-haul networks; our plan to continue to enable our customers to build systems for Agile Optical Networks (AON); our belief that we are well positioned to migrate from fixed to reconfigurable dense wavelength division multiplexer (DWDM) architectures and networks; our belief that increasing deployments of broadband access, the expansion of IP-based services, and the need to reduce deployment time and cost should result in increased demand for communications test and measurement instruments, systems, software and services; our belief that we have the broadest range of wire line products and solutions available in the communications test and measurement industry; our broad portfolio of test and measurement solutions position the company well to benefit from these improvements; our continued focus to enable network operators to accelerate deployment of new services, improve quality and reduce customer churn, and lower network operating expenses; our plan to continue to leverage our leading expertise in optics, light management and materials and our knowledge of the optical industry to develop solutions that provide unique advantages for our customers; our belief that there will be an increased demand for high-precision lasers for a variety of commercial markets; our belief that the Company is well positioned to benefit from the demand for high-precision commercial lasers and other supporting technologies; our plan to accelerate new customer applications enabled by using lasers coupled with high performance photonic power photovoltaic converters to provide power over fiber; our belief that the Company is a pioneer in the emerging market of photonic power; our objective to continue to be a leading supplier for all markets and industries we serve and the strategies we plan to pursue to achieve such objective; our commitment to invest organically through acquisitions and partnerships in new technologies, products and services; our commitment to the ongoing evaluation of strategic opportunities and the acquisition of additional products, technologies or businesses; our belief that we strengthened our business model by expanding our addressable market, customer base and expertise, diversifying our product portfolio and fortifying our core businesses through acquisitions as well as other organic initiatives; our plans to leverage the technologies, distribution relationships, products and services gained as a result of acquisitions; our belief that our acquisitions create new opportunities for the acquired products due to JDSUs direct sales and service organization serving the largest telecommunications and cable service providers worldwide; our plan to continue to strengthen our partnerships with contract manufacturers for our telecommunications, data communications and laser products; our intention to continue to centralize many administrative functions such as information technology, human resources and finance; our devotion of substantial resources to research and development in order to develop new and enhanced products to serve our markets and segments; our intention to establish at least two sources of supply for raw materials whenever possible; our intention not to broadly license our intellectual property rights; our belief that we have good employee relations; our expectation that seasonable demand fluctuations will cause significant, periodic variations in our financial results for our Communications Test and Measurement segment; our desire to expand our markets and customer base, improve the profitability of our product portfolio and improve time to revenue in our Advanced Optical Technologies segment and commercial lasers business and efforts to effect such changes; our efforts to reduce our cost structure; the impact of restructuring charges on our results of operations and cash
flows; our efforts to divert resources from new product research and development and other functions to assist with difficulties related to execution capabilities and customer relations; our continued experiences with product failures; our intention to continue to develop new product lines and improve the business for existing ones; our expectation that the introduction of new products will continue to incur higher start-up costs and increased yield and product quality risk among other issues; our expectations regarding our future growth; our continued reliance on a limited number of customers for a significant portion of our revenues; our belief that the telecommunications industry has entered a period of consolidation; our expectation that we will continue to experience strain on our supply chain and periodic supplier problems; our belief that we must maintain a substantial commitment to innovation and product differentiation, as well as significantly reduce cost structure to remain competitive in future business climates; our intention to continue to address the need to develop new products through acquisitions of other companies and technologies; our efforts to continue to recruit key personnel; our expectations that net revenue from international customers outside of North America will continue to account for a significant portion of our total revenue; our expectation that the costs of evaluating our current trade compliance practices and implementation of any resulting improvements will not have a material adverse effect on our operating results or business; our expectation to expand our research and development activities in China; our continued efforts to increase the scope and extent of our manufacturing operations in our Shenzhen facilities and our expectation that our ability to operate successfully in China will become increasingly important to our overall success; the expectation that we will incur additional costs to transfer product lines to our facilities located in China; our intention to export a majority of the products manufactured at our facilities in China; our intention to improve internal controls over financial reporting and our expectation that we will expend significant resources and efforts to do so; our expectation of the need to respond to and our intention to respond to intellectual property infringement claims in the course of our business operations from our competitors; our belief that we have complied with our obligations under the various applicable licenses for open source software; our expectation to continue to make investments in privately held companies as well as venture capital investments for strategic and commercial purposes; our belief that our existing properties including both owned and leased sites, are in good condition and suitable for the conduct of our business; our belief that our existing facilities are adequate to meet our immediate needs; our belief that the factual allegations and circumstances underlying the securities class actions, derivative actions, the OCLI and SDL actions, and the ERISA class actions are without merit and that the expense of defending such actions could be costly and may not be covered by our insurance policies; our belief that resolving claims that arise in the ordinary course of our business will not have a material adverse impact on our financial position or results of operations; our belief that various critical accounting policies are affected by significant estimates, assumptions and judgments used in the preparation of our consolidated financial statements; our belief that certain equipment is not software related and should be excluded from the scope of the AICPA SOP No. 97-2; our belief that using a combination of historical and market-based implied volatility from traded options on Company common stock is a better indicator of expected volatility and future stock price trends than relying solely on historical volatility; our anticipation that cash dividends will not be paid in the foreseeable future; our commitment to enabling broadband and optical innovation in the communications and commercial markets; our expectation that high customer concentration, attendant pricing pressure, and other effects on our communications markets will remain for the foreseeable future; our efforts to expand our products, customers and distribution channels for several of our core competencies; our expectations that seasonality in the Communications Test and Measurement segment will continue for the foreseeable future; our expectation that the adoption of certain accounting pronouncements will not have a material adverse effect on our financial statements; our estimates for costs associated with our restructuring plans; our assumptions related to pension and postretirement benefits; our expectation that we will continue to encounter a number of industry and market structural risks and uncertainties that will limit our business climate and market visibility; the continued North American assembly transitions; our belief that investment in research and development (R&D) is critical to attaining our strategic objectives; our continued efforts to reduce total operating spending; our intention to continue to address our selling, general and administrative (SG&A) expenses and reduce these expenses as and when opportunities arise; our expectations regarding future SG&A expenses; our expectation that none of the non-core SG&A expenses will have a material adverse impact on our financial condition; our efforts to take advantage of opportunities to reduce costs through targeted, customer-driven restructuring events; our expectation that
payments related to severance benefits will be paid off in the second quarter of fiscal 2008; our belief that we have provided adequate amounts for adjustments that may result from tax audits; our estimates for additional required investment in research and development in connection with our acquisitions; our expectation that our acquisitions will strengthen the Companys position in the related markets and help grow our business in various regions; our expectation that additional cost of developing the transceivers acquired in the Picolight acquisition will be completed in the fourth quarter of 2008; our expectation that the development of the multiple diode pumped solid state laser products acquired in the Lightwave acquisition will be completed during the third quarter of 2008; our belief that our existing cash balances and investments will be sufficient to meet our liquidity and capital spending requirements at least through the next 12 months; our expectation that gains and losses on derivatives will be offset by re-measurement gains and losses on the foreign currency dominated assets and liabilities; our ability to mitigate credit risk and marketability risk of our portfolio of investments; our intention to maintain a sufficient safety stock of products and to maintain ongoing communications with suppliers to guard against interruptions or cessation of supply; the expectation for the deductibility of goodwill associated with our acquisitions; our estimates for associated restructuring and non-recurring charges; our expectation that $51.0 million will be repatriated with no additional tax expense in China; our estimate that no additional taxes would have to be provided if the earnings were repatriated back to the U.S.; our belief that certain jurisdictions in which we received tax benefits attributable to the release of valuation allowances will generate future income; our expectation that the Full Value Awards will vest over one to five years except with respect to performance conditions, such conditions are achieved on a different timeline; our expectation to amortize $56.8 million of estimated stock based compensation expense related to stock option activity over a period of 2.9 years; our expectation to amortize $0.1 million of stock based compensation expense related to the employee stock purchase plan (ESPP) in the first quarter of fiscal 2008; our expectation to amortize $51.3 million of estimated stock based compensation expense related to Full Value Awards over an estimated amortization period of 2.9 years; our expectation to contribute $1.3 million to the Companys pension plans in fiscal 2008; our expectation to close $211.4 million in obligations to purchase inventory and other commitments within one year; and our expectation that the Companys potential tax liability related to a Dutch wage tax audit and a Texas franchise tax audit will be from zero to $46.2 million, plus interest and penalties.
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: incorrect assumptions regarding the basis for consumer demands; an unexpected decreased in the availability of broadband networks; our inability to successfully capitalize on our position in the market, industry trends and strategic opportunities; inability to successfully operate as a portfolio of businesses solely with a focus on optical and broadband innovation; inability to meet marketplace demands for optical communications products; inability to accurately assess the demand on the metro and long-haul networks into which high-bandwidth services feed; inability to support our customer growth in building systems for AONs; licensing issues related to our intellectual property; broader product offering of competitors; inaccuracies regarding the direction of the market to migrate from fixed to reconfigurable DWDM architectures and networks; inability to accurately assess the market demand for communications test and measurement instruments, systems, software and services; inability to enhance the Companys market position in the communications test and management segment to support the deployment of new services, improve the quality of our products, reduce customer churn and lower network operating expenses; inaccurate assumptions regarding the optical industry; inability to accurately predict the demand for high-precision lasers in various commercial markets; inability to quickly introduce customer applications into the marketplace to meet customer demands for commercial lasers; inaccuracies regarding the Companys position in the photonic power market; our inability to invest in new technologies; inaccuracies regarding promising markets and our ability to focus the companys resources towards developing products for potentially promising markets; unanticipated SG&A expenses and inaccuracies as to the impact of SG&A expenses on the Companys financial condition; inaccurate assumptions regarding the viability of certain product lines; unanticipated difficulties associated with the centralization of administrative functions; inability to timely and effectively develop, manufacture and market our new products, or enhance our existing products; our inability to accurately
and timely complete valuation analyses in connection with our acquisitions; our limited ability to perceive or predict market trends; decreases in our product portfolio and revenues; inaccuracies regarding our employee relations and inability to maintain a steady workforce; loss of a significant customer eliminating a significant portion of our future revenues; dependence on fewer customers limiting our ability to increase our profitability; unrealized customer and market penetration resulting from our recent acquisitions; inability to effectively execute programs related to our investments and partnerships; failure to reduce manufacturing costs through restructuring efforts; inability to accurately predict the volatility of future stock trends; introduction of new accounting pronouncements; lack of resources set aside for investment in R&D; inaccurate assessment of our tax liability as a result of acquisitions and tax audits; greater than anticipated tax exposure; unforeseen damage and repairs to the Companys leased and owned properties; need to expand or decrease the size of our existing facilities; excessive costs associated with defending various claims and suits brought against the Company and its directors; unexpected impairment of goodwill associated with our acquisitions; delays in bringing products to market due to development problems; excessively high costs in the future related to enhancing our existing systems; significant changes in customer preferences; the possibility that competitors will introduce products faster than us; unanticipated difficulties in building close working relationships with manufacturers; our inability to establish relationships with alternative suppliers of raw materials; growth in our business placing unexpected strains on our resources; international expansion beyond the capacities of our current properties; loss of key personnel to competitors and an inability to effectively recruit replacements; inherent uncertainty surrounding the litigation process and the fact that litigation could result in substantial cost and diversion of our managements attention; inability to obtain new orders from major customers; substantial technological changes in the Communications Test and Measurement solutions market; the timing of orders; an unanticipated lack of resources to invest in private companies; incorrect estimates, assumptions and judgments used in preparing the Companys consolidated financial statements; inaccuracies in categorizing equipment for accounting purposes; inaccuracies related to the assumptions used in assessing the Companys option-price; market rejection of new products; inaccuracies of the strength of various acquisitions on improving the Companys position within various markets; inability to accurately predict when various products acquired during our acquisitions will be fully developed and completed; inability to accurately assess additional tax expenses due to repatriation of certain earnings in China; unforeseen expenses related to the transfer of product lines to our facilities located in China; inability to accurately assess future income attributable to tax benefits; inability to predict the vesting period of the Companys Full Value Awards; difficulty in estimating the amortization period of stock based compensation expense of stock option activity and our ESPP; inability to accurately predict the amount of money the Company must contribute to its pension plans as legally mandated; inability to deliver inventory and collect payments due under purchase orders; and other factors set forth in Risk Factors and elsewhere herein. 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 in Part I, Item 1A Risk Factors set forth in this 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 Form 10-K to conform such statements to actual results or to changes in our expectations.
ITEM 1. BUSINESS
JDS Uniphase Corporation (JDSU) is a leading provider of communications test and measurement solutions and optical products for the telecommunications industry, which includes service providers, cable operators, and network equipment manufacturers. JDSUs innovation and portfolio of solutions enable other essential industries and applications, including biomedical and environmental instrumentation, semiconductor, visual display, brand protection, aerospace and defense, and decorative coatings.
To serve its markets, JDSU operates in the following business segments: Optical Communications, which accounted for approximately 37% of net revenue in fiscal 2007; Communications Test and Measurement, which accounted for approximately 44% of net revenue in fiscal 2007; Advanced Optical Technologies, which accounted for approximately 12% of net revenue in fiscal 2007; and Commercial Lasers, which accounted for approximately 7% of net revenue in fiscal 2007. The financial results for the Commercial Lasers business is reported in the All Other, Commercial Lasers segment in this document.
Demand for high-bandwidth communications continues to increase, powered by the growing number of broadband users worldwide and the greater reliance on high-bandwidth capabilities in many areas of our daily lives. For example, cell phones increasingly offer integrated audio, photo, video, email and Internet capabilities, and the number of digital music and video downloads to personal storage players is growing rapidly. As greater bandwidth capacity is delivered closer to the end user through broadband access networks, consumer demand for real-time, interactive visual and audio experiences will increase. The resulting traffic, in turn, impacts core networks that depend on optical technology. New deployments will also drive the need for test and measurement, as well as service assurance, solutions. JDSU is well-positioned to continue to benefit from these industry trends due to its leadership in the broadband test and measurement and optical networking markets.
In addition to communications, optical technologies are increasingly applied to solve complex problems in other industries. For example, our high precision lasers enable the trend toward smaller integrated circuits for use in todays compact consumer electronics, testing of new pharmaceuticals via induced fluorescence, and deoxyribonucleic acid (DNA) sequencing through the appropriate application of monochromatic light. Other JDSU solutions protect commercial and consumer products, ranging from medicines to electronics, against counterfeiting via secure labels with embedded optically variable micro flakes and other optical security devices. This technology is also used to inhibit counterfeiting of currencies and valuable documents.
Sales and Marketing
JDSU markets its products to telecommunications and cable television service providers, network equipment manufacturers, OEMs, distributors and strategic partners worldwide. Each business segment has a dedicated sales force that communicates directly with customers executive, technical, manufacturing and purchasing personnel as needed to determine design, performance, and cost requirements. In addition, all business segments are working to expand opportunities in emerging geographies and through alternate channels of distribution.
A high level of support is necessary to develop and maintain long-term relationships with our customers. JDSU engages the customer at the design-in phase and continues to build the relationship as customer needs change and develop. Service and support are provided through JDSU offices and those of its partners worldwide.
JDSU was incorporated in California in 1979 and reincorporated in Delaware in 1993. JDSU is the product of several significant mergers and acquisitions including, among others, the combination of Uniphase Corporation and JDS FITEL in 1999, and the acquisition of Acterna, Inc. in 2005. Our strategy is to operate as a company comprised of a portfolio of business with a focus on optical and broadband innovation.
We are subject to the information requirements of the Securities Exchange Act of 1934, or the Exchange Act. Therefore, we file periodic reports, proxy statements and other information with the Securities and Exchange Commission (SEC). Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330, by sending an electronic message to the SEC at firstname.lastname@example.org or by sending a fax to the SEC at 1-202-777-1027. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. We also post all 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.
JDSUs Optical Communications business segment provides the broadest portfolio of components, modules, subsystems, and solutions in the industry to support and maintain customers in our two market segments: telecommunications, including access (local), metro (intracity), long-haul (city-to-city and worldwide), and submarine (undersea) networks; and enterprise data communications, including storage access networks (SANs), local area networks (LANs), and Ethernet wide-area networks (WANs). JDSUs customers manufacture network equipment used for the transmission, transport and receiving of video, audio, and text data encoded in optical signals over high-capacity fiber optic cables.
In addition, JDSU provides the industry's broadest portfolio of optical communications solutions required to build and maintain Agile Optical Networks (AONs). AONs are designed to be dynamically and remotely reconfigurable, so that they can quickly and easily meet changes in network traffic patterns and demand. It is based on dense wavelength division multiplexer (DWDM) optical technology so that it offers very high capacity. AONs enable communication service providers to accelerate triple-play (voice, video, and data) service deployment to their customers, and enable advanced wavelength applications at decreased cost.
JDSU provides optical communications solutions to network equipment manufacturers, such as Agilent, Alcatel-Lucent, AT&T, Brocade, Ciena, Cisco, Ericsson, Fujitsu, Hewlett-Packard, Huawei, IBM, Nokia Siemens Networks, Nortel, and Tellabs.
Driven by the need to offer a broadening suite of digital services, network operators worldwide are migrating to Internet protocol (IP) networks, which offer an effective solution for delivering triple-play services while lowering capital and operating costs. In the data communications market segment, demand for broadband is driven by growing intracompany LAN and intercompany WAN information networks needs. In addition, many companies are embracing new productivity-enhancing applications, such as voice over IP (VoIP), that replace 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. This growing demand for network capacity is expected to result in greater adoption of optical communications
products across the telecom sector, including long haul, metro (core and access), cable television (CATV), submarine, and fiber to the premises (FTTP or FTTx). It will also increase demand for optical products in the storage and enterprise sectors, including LAN, SAN and WAN.
To remain competitive, telecommunications and cable television service providers must respond rapidly to keep up with the deployment of broadband triple-play services and the resulting increase in bandwidth demand. At the same time, they must reduce operating costs associated with high-capacity DWDM networks. Migrating to AONs, which employ reconfigurable optical add/drop multiplexers (ROADM), tunable transponders, and other agile optical products, provides an effective solution. With an AON, a service provider can add capacity, with minimal human intervention, by using remote management applications rather than by dispatching technicians to perform manual operations in the field.
The high-end routers, switches, and cross-connect equipment that must handle traffic in legacy, as well as IP, formats are becoming increasingly complex, requiring a higher degree of bandwidth, scalability, speed, and reliability in very compact designs. At the same time, those compact designs must meet requirements for emissions, performance, cost, and reduced power consumption.
Deployment of fiber closer to the end user increases the availability of high-bandwidth services and will result in increased demand on the metro and long-haul networks into which these services feed. The dynamically reconfigurable nature of an AON offers competitive and cost advantages, such as enabling communications service providers to more flexibly use and scale network capacity, streamline service provisioning, accelerate rerouting around points of failure, and modify network topology through simple point-and-click network management systems. JDSU, with its broad optical communications and AON product portfolios, is positioned to be the supplier of choice for next-generation networks.
JDSUs strategy is to accelerate customers profitability and time-to-revenue via enhanced vertically-integrated optical platforms, such as higher-performance modules and circuit packs that leverage its integrated photonics capabilities and broad optical components portfolio. JDSU will continue to enable its customers to build systems for AONs, which help service providers reduce their time to market and operating expenses.
JDSU competes against numerous public and private companies providing fiber optic components, modules, and subsystems, including independent merchant suppliers and business units within vertically integrated equipment manufacturers, some of whom are our customers. A partial list of public company competitors includes Avanex, Bookham Technology, Finisar, Fujitsu, Furukawa Electric, Optium, Opnext, Oplink Communications, and Sumitomo Electric.
In addition to these established companies, JDSU faces significant and focused competition from other companies and emerging startups. While each of its product families has multiple competitors, JDSU has the broadest range of products and technologies available in the industry. Furthermore, with the breadth and product leadership of its AON portfolio positions, JDSU is well positioned as the industry continues to migrate from fixed to reconfigurable DWDM architectures and networks.
As mentioned above, JDSUs optical communications segment addresses two marketstelecommunications and enterprise data communications. In addition to a full selection of active and passive components, JDSU offers increasing levels of functionality and integration in modules, circuit packs, and subsystems for transmission, amplification, wavelength management, and more. JDSUs optical communications product offerings include:
In the telecommunications segment, we offer solutions for the synchronous optical network (SONET), synchronous digital hierarchy (SDH) and wavelength division multiplexer (WDM) markets. Solutions offered include 300-pin small form factor (SFF) and large form factor (LFF) transponders, ROADMs, and optical amplifiers. JDSU also offers a broad portfolio of passive components and modules to support its customers throughout the network. These include attenuators, circulators, couplers/splitters/WDMs, gain flattening filters, hybrid passive components, interleavers, multiplexer/demultiplexers (mux/demux), polarization components, switches, and wavelength lockers. In addition to these fixed-wavelength telecom transponders, JDSU offers tunable telecom transponders as part of its agile transmission module family.
JDSU products used for sending and receiving data include transponders, transceivers and transmitter modules, as well as components such as detectors/receivers, modulators, and source lasers.
JDSU products used for transporting data include optical amplifiers, optical layer subsystems, passive components and modules (couplers, wavelength lockers, switches, attenuators), high-power pump lasers, ROADM and add/drop modules, and the WaveReady family of service provider solutions.
For the data communications market, which relies on storing and moving vast amounts of data, JDSU offers optical transceivers that support 1, 2, 4 and 8 Gigabits per second (Gbps) Fibre Channel, and 1 and 10 Gigabit Ethernet applications. Form factors supported include GBIC, SFF, SFP, SFP+, X2, XENPAK, and XFP.
In the data communications market, applications such as digital music, video, interactive games, social networking, e-mail, e-commerce, datacenter replication and disaster recovery continue to drive SAN bandwidth higher. To support this rapid growth, many storage system providers have migrated from 2 to 4 Gbps for interswitch links and host-bus adaptor (HBA) applications. Based upon the increasing bandwidth demands on SANs, another upgrade cycle from 4 to 8 Gbps is emerging. JDSU transceivers are also used throughout Ethernet connections from servers, routers, hubs and switches for Internet and email service.
Driving the next generation of optical transceivers is the need for higher speeds, increased system densities and low power. SFP+ pluggable transceivers address these requirements and support both Fibre Channel and Gigabit Ethernet protocols for transmission rates of 8 Gbps and 10 Gbps. For higher baud rates and design challenges, optical technologies, such as Vertical-Cavity Surface-Emitting Lasers (VCSELs), must be carefully matched to state-of-the-art, high-speed integrated circuits to optimize new parameters yet continue to satisfy the standard link specifications.
VCSELs are semiconductor lasers that can emit light vertically through the surface of a wafer rather than through its edges, as with edge-emitting lasers. VCSELs reduce power consumption, electromagnetic interference (EMI) and cost while increasing speed, reliability and link distance, addressing the concerns associated with new, more complex solutions. This optical technology offers an innovative solution for LANs, SANs, broadband Internet, and metro-area network applications that depend on high-end routers, switches and cross-connect equipment to handle legacy and IP traffic.
VCSEL technology offers a solution in very high throughput, very short reach (approximately 15 meters/50 feet or less) data communications applications, such as transferring data between subsystems in a data center. JDSU uses compact parallel arrays capable of combining up to 12 channels, at speeds of up to 40 Gbps. This solution significantly reduces the heat, EMI, and power consumption concerns inherent in densely-packed modules.
JDSU integrated fiber optic transceivers provide a high-speed serial electrical interface for connecting processors, switches, and peripherals using fiber optic technology. They are available in hot-pluggable or pin-through-hole versions with a small footprint for use in compact system designs. This allows manufacturers to double the density of transceivers on a board compared to conventional designs.
Communications Test and Measurement
JDSU provides instruments, service assurance systems and services for communications network operators and equipment manufacturers that deliver and/or operate broadband/IP networks (cable, fixed and mobile) deploying triple- and quad-play services (voice, video, data, and wireless). Our solutions help accelerate the deployment of new services, lower operating expenses, improve quality, reduce customer turnover, and increase productivity across each critical phase of the network lifecycle, including research and development, production, deployment, and service assurance. JDSU enables the effective management of services, such as VoIP and IPTV, by providing visibility into the end-user experience and also provides repair, calibration, instrument management and other services to aid its customers in the rapid deployment and repair of networks and services. JDSUs test solutions address lab and production (capacity expansion and 40G), field service (triple-play deployments for cable, telecom, FTTx, and home networking) and service assurance (quality of experience, or QoE, for Ethernet and IP services, including cable, wireless and fixed/telecom networks).
JDSU customers for communications test and measurement solutions include the worlds largest communications service providers, communications equipment manufacturers, government organizations, and large corporate customers. These include major telecom and cable operators such as AT&T, Bell Canada, British Telecom, China Telecom, Comcast, Deutsche Telecom, France Telecom, Telefonica, Telmex, TimeWarner, Verizon and many others. JDSUs test and measurement customers also include many of the network equipment manufacturers served by our optical communications group, including Alcatel-Lucent, Ciena, Cisco, Fujitsu, Huawei, Nortel, and Motorola.
As content providers in the communications industry are developing new business models to expand their distribution capabilities, they are increasingly adopting on-line channels for the distribution of rich broadband content such as music, gaming, video programming, and movies. Telecommunications service providers are, in turn, planning to increase their revenues and profitability by expanding the capabilities of their IP packet-based networks to increase their network capacity and to deliver sophisticated levels of quality of service required to meet the service requirements of the content providers and the consumers.
Telecommunications, cable television, satellite, and wireless service providers are competing with each other to offer content providers and consumers with the ability to carry virtually any type of content via bundled services. Potential benefits for service providers include increased average revenue per user (ARPU) and reduced customer turnover, thus increasing profitability and long-term competitive advantage. As a result, many providers are developing new, consolidated network architectures intended to enable a triple-play (integrated voice, data and video services) offering from a single provider rather than three separate services from three separate providers over three separate networks.
Additionally, the proliferation of new and higher bandwidth services, including 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.
Increasing deployments of broadband access, the expansion of IP-based services, and the need to reduce deployment time and cost should result in increased demand for communications test and measurement instruments, systems, software, and services. These communications test and measurement solutions support the rapid deployment of new services, increase customer satisfaction by helping technicians complete installation and repair work correctly the first time, and lower operating expenses by automating and improving network installation, maintenance, and management processes. JDSUs broad portfolio of test and measurement solutions position it well to benefit from these developments.
JDSUs Communications Test and Measurement business segment strives to enhance its market positionwhile continuing to improve profitabilityby providing communications test and management solutions that address the business challenges of network operators and communications equipment manufacturers. Its focus is to enable network operators to accelerate deployment of new services, improve quality and reduce customer churn, and lower network operating expenses.
JDSU competes against various companies, including Agilent, Anritsu, Exfo, Spirent, and Sunrise. While each of JDSUs product families have multiple competitors, the Company has one of the broadest range of wireline products and solutions available in the communications test and measurement industry.
JDSU provides the industrys most expansive set of communications-focused test and measurement solutions. This portfolio provides end-to-end test support across communications networks, including the core, metro, access, and home networking environments. JDSU is a leader in the test and measurement market and has an installed base of hundreds of thousands of test instruments and systems deployed in communications networks around the world. JDSUs test and measurement product portfolio includes:
Devices that perform various communications test and monitoring functions. Designed to be mobile devices, these products assist service provider technicians in assessing the performance of network elements and segments or verifying the integrity of the information being transmitted across the network. These instruments incorporate high levels of intelligence and have user interfaces that are designed to simplify operation and minimize training.JDSUs test instruments also include those used by network equipment manufacturers (NEMs) in the design and manufacture of next-generation network equipment. Thorough testing by NEMs plays a critical role in producing the components and equipment that are the building blocks of network infrastructure.
JDSU provides software products and custom software development services to its customers. Software products address applications for network capacity management, test operations support systems and workflow solutions. Software services are provided to customize software applications and to interface JDSU software to customer operations support systems.
JDSUs systems are test and management devices that reside in communication networks. Typically, these systems consist of hardware and software components. Using an integrated test and management system, JDSU
customers are able to analyze a variety of network elements, transmission technologies and protocols from a single console, simplifying the process of deploying, provisioning and managing network equipment and services. From a centralized location, technicians can access the test systems within the network and perform simultaneous test and monitoring functions on one or more elements, either manually or automatically. These capabilities allow network operators to initiate service to new customers faster, decrease the need for technicians to make on-site service calls, help to make necessary repairs faster and, as a result, provide higher quality and more reliable services.
JDSU offers a range of product support and professional services geared to comprehensively address its customers requirements. JDSU provides repair, calibration, and software support services for our products as well as technical assistance on a global basis. In addition, it offers product and technology training services as well as consulting services to our customers. Project management services are an integral part of the professional service offerings. These professional services are provided in conjunction with system integration projects that include installation and implementation.
Advanced Optical Technologies
The Advanced Optical Technologies (AOT) business segment consists of the Flex Products Group, which provides innovative solutions for security and decorative applications, and the Custom Optics Product Group (COPG), which produces precise, high performance optical thin-film coatings for a variety of applications.
JDSUs AOT business segment has developed its expertise over six decades of experience in thin-film optical coating technology. This expertise focuses on the management of light and/or color effects, through the use of optical and material technologies, to develop innovative solutions that meet the needs of a variety of markets.
The Flex Products Group offers innovative optically-based color-shifting solutions and other solutions that provide anticounterfeiting and other protection for brands in the pharmaceutical, consumer electronics, and fast-moving consumer goods. It also provides protection for currencies used in approximately 100 countries, and for other high-value documents. Flex Products also offers unique decorative solutions for product finishes and decorative packaging that can be applied to a wide variety of substrates.
COPG provides thin-film coatings that are used in government and aerospace, biomedical, telecommunications, office automation and other markets for applications such as night-vision goggles, satellite solar covers, medical instrumentation, optical communications components, fax machines and computer-driven projectors.
The AOT business segment serves customers such as Agilent, BAE Systems, Eastman Kodak, ITT, Mitsubishi, Northrup Grumman, SICPA, Siemens Medical, Sony, and Toshiba. JDSU technology is used to protect the currencies of China, the European Union, the United States, and other governments around the world. Leading pharmaceutical companies worldwide also use JDSU solutions to protect their brands. JDSU decorative product differentiation solutions are used by customers such as BASF, Dupont, and PPG.
Counterfeiting is a worldwide, multibillion dollar problem that poses consumer health and safety risks, corporate liability, devaluation of brand image, weakening of brand loyalty, and lost revenues. Products that have been targets for counterfeiting have included pharmaceuticals, imaging supplies, apparel, automotive parts,
consumer electronic products, and electronic media. Other issues, such as product diversion, where authorized and/or unauthorized distributors divert products intended for lower price markets to higher price markets, increasingly require brand protection solutions.
Multiple factors contributing to the spread of counterfeiting include the broad adoption of the Internet to facilitate distribution, ready availability of low-cost, extremely high-quality printing equipment to reproduce product packaging, the elimination of international trade barriers, and an increasingly mobile global society.
In addition to protecting brands, the need to protect high-value documents, including currency, and offer solutions for authenticating personal, identification and financial documents, is growing. Flex products from JDSUs AOT business segment offer brand protection and document authentication solutions.
Quite different from the challenge of protecting brands is the challenge of differentiating products to build brands. Global competition and an increasing range of product offerings are driving designers to look for innovative ways to increase the aesthetic value of their products and make them stand out. Flex decorative products are used in coatings and packaging to create a wide variety of unique and striking visual effects.
Demand for optical solutions to solve complex problems extends to the aerospace, defense and medical/environmental instrumentation markets, which require customized, high-precision coated products and optical components that selectively absorb, transmit or reflect light to meet the performance requirements of advanced systems. JDSUs Custom Optics product group provides a wide array of precision optics and advanced optical technologies from the ultraviolet to the far infrared portion of the light spectrum. Most products are custom optical filters, on either a simple or complex irregular shape, that require from one to several hundred layers to create the coating.
JDSUs AOT business segment aims to uniquely differentiate and effectively protect valuable brands via a secure, flexible, and aesthetically striking optical platform. It also strives to supply the highest quality, best-in-class optical components, and assemblies with innovative thin-film coating processes that help our customers effectively enable and/or differentiate their products. JDSU will continue to leverage its leading expertise in optics, light management and materials and its industry knowledge in its markets to develop solutions that provide a unique advantage to its customers.
In these markets, JDSU faces competition from providers of special-effect pigments, including BASF and Merck KGA, and from Japanese coating companies such as Nidek, Toppan, and Toray, as well as display-component companies such as Asahi, Fuji Photo-Optical, Nikon, Nitto Optical, and Viratec. JDSU also competes with optics companies such as Barr Associates, and Deposition Sciences.
Optical thin-film coatings are microscopic (nanometer to micrometer) layers of materials, such as silicon and magnesium fluoride, that are applied to the surface of a substrate, including glass, plastic or metal, to alter the substrates optical properties. Thin-film coatings work by controlling, enhancing or modifying the behavior of light at the surface of the substrate to produce specific effects such as reflection, refraction, absorption, abrasion resistance, antiglare, oxygen and/or moisture transmission, and electrical conductivity.
Flex Products Group
For brand protection and anticounterfeiting solutions, JDSU offers multilayer solutions for creating an effective product security program that combine secure authentication, flexible aesthetics, and ease of application for a broad range of products. For decorative product differentiation, a wide variety of products are designed with
JDSUs ChromaFlair and SpectraFlair pigments to create striking color effects that emphasize body contours, create a dynamic environment, or enhance a product in motion. Some of these products include eye-catching automobiles, spectacular sports equipment and cutting-edge electronics. JDSU pigments can be easily added to paints, plastics, or textiles to achieve dramatic and vivid effects.
Brand Protection and Document Authentication
In response to increased counterfeiting, many corporate brand owners are introducing protective measures of overt packaging that provides consumers and/or inspection personnel with the ability to quickly determine product authenticity by visually detecting a color effect on the package. Covert solutions provide an additional layer of protection that cannot be seen or detected without a visual aid.
JDSU offers both overt and covert solutions for security, including a line of products that use light interference technology, which allows inks or plastics to exhibit different colors and visual effects from different viewing angles. This technology is also used to inhibit counterfeiting of currencies, identification and other valuable documents. Applications include pharmaceuticals, imaging supplies, electronics, computer, and other consumer goods. JDSU offers these products in a wide range of flexible solutions by incorporating them into printing inks and labels and product packaging.
JDSU also uses its technology to provide security solutions for document authentication. JDSU documentation authentication has become a standard in currency counterfeit protection.
Decorative Product Differentiation
JDSUs line of decorative products use proprietary manufacturing processes and light interference (or diffractive) technology to provide products with certain color characteristics that are attractive for applications in paints, cosmetics, and plastics. The products create a durable finish with striking color properties for automotive, consumer electronics, and other applications.
Custom Optics Product Group
JDSU products include infrared filters, beam splitters, and optical sensors for aerospace applications, optical filters for medical instruments, and solar cell covers for satellites. Products for the office automation market include photoreceptors and mirrors for photocopiers, document scanners, computer-driven projectors, and facsimile machines.
Aerospace and defense
JDSU provides solar cell coverglass and thermal control mirror technology. One or more of JDSUs thin-film optics products can be found on U.S. manned spacecraft, U.S. satellites, and international satellites. In addition, JDSU supplies various types of filters used in military defense applications such as night vision goggles and electronic counter measures.
Consumer and commercial electronics
JDSU manufactures and sells products for use in home and business display systems. These products include dichroic filters, mirrors, polarization compensators, heater panels and other coated optics, and assemblies.
JDSU provides multicavity and linear variable optical filters on a variety of substrates for numerous applications, including gas monitoring and analysis, thermal imaging, smart munitions, fire detection, spectroscopy, and pollution monitoring. These filters are additionally used in biomedical applications including microscopy, cytology (the microscopic study of cells used for diagnosing abnormalities and malignancies)
semiconductor test systems, and test and measurement equipment. JDSU also provides advanced optical technologies and filters that are used to create dramatic lighting effects and project rich, saturated color in intelligent lighting systems for concerts, discotheques, stages, studios, and architectural lighting.
All Other, Commercial Lasers
JDSU participates in the gas, solid-state and fiber laser markets. Its portfolio of laser products includes components and subsystems used in a wide variety of original equipment manufacturer (OEM) applications from low- to high-power output, ultraviolet (UV), visible and IR wavelengths. This broad portfolio addresses the needs of customers in markets and applications such as biotechnology, materials processing, semiconductor, graphics and imaging, remote sensing/ranging, and laser marking.
JDSU provides commercial lasers to customers such as Applied Biosystems, ASML, Beckman Coulter, Disco, Eastman Kodak, Electro Scientific Instruments, General Dynamics, Hitachi, KLA Tencor, Northrup Grumman, Panasonic, and Sony.
There is increased demand for high-precision lasers for a variety of commercial markets, including semiconductor applications, materials processing and biotechnology, as well as for use in imaging, aerospace and defense applications. Technology demands and trends in these markets are generating growing demand for high-precision laser products. These trends include:
Market growth is further stimulated by the continuous reductions in size and power driven by adoption of solid-state laser technology and the need for higher reliability in products. As a leading provider of high- precision commercial lasers and other supporting technologies, JDSU is well-positioned to benefit from the development of these industry trends.
JDSUs Commercial Lasers business unit strives to enable its customers next-generation laser applications, such as laser-based solutions in biomedical, semiconductor inspection, microelectronics materials processing, remote sensing and other marking and materials processing markets. It is leveraging its telecommunications expertise to provide innovative advancements in laser design and manufacture. Furthermore, it plans to accelerate new customer applications enabled by using lasers coupled with high-performance photonic power photovoltaic converters to provide power over optical fiber.
JDSU competitors in its laser markets include companies such as Coherent and the Spectra-Physics division of Newport. JDSUs photonic power solutions feature a new, innovative technology for which there are not yet direct competitive offerings.
JDSUs broad range of products include high-reliability industrial diode lasers, fiber lasers, helium-neon (HeNe) gas lasers, air-cooled argon gas lasers, and continuous-wave and pulsed diode-pumped solid-state lasers:
Diode-pumped solid-state lasers with excellent beam quality, low noise, exceptional reliability, and extremely small packaging are used in biotechnology instrumentation, materials processing, graphics and imaging, semiconductor manufacturing, and laser-induced fluorescence applications. JDSU offers very low noise continuous-wave green lasers and blue lasers, high-repetition-rate near-infrared lasers, and high-power pulsed and very high-repetition-rate high-UV lasers.
Industrial diode lasers include components, plug-and-play modules and fiber-coupled devices. These diode lasers address a wide variety of applications, including laser pumping, thermal exposure, illumination, ophthalmology, image recording, printing, materials processing, optical storage, and spectral analysis.
Argon-ion lasers are very stable and reliable over the entire range of operating conditions, making them well suited for complex, high-resolution OEM applications such as flow cytometry, DNA sequencing, graphics and imaging, and semiconductor inspection.
Helium-neon lasers in the red, green, yellow, and orange wavelengths provide low noise, excellent beam pointing and amplitude stability, and instant start-up. These lasers are used in various applications, including barcode scanning, flow cytometry, metrology, photo processing, and alignment.
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 is ideal for precision machining applications, such as marking, bending and cutting, and selective soldering.
Traditional power provided over copper cables is susceptible to radio frequency (RF) and EMI interference. Photonic power is immune to RF and EMI, is lighter, generates less heat, and is spark-free. JDSU is a pioneer in this emerging market. This innovative power delivery system can be used to drive sensors, gauges, actuators, low-power communications devices, nanotechnology, microelectromechanical (MEM) systems, and innumerable other electronic devices. The isolated nature of the power delivery makes it ideal for applications that require a spark-free environment or that are operating under high levels of RF, EMI, or voltage, or other harsh environmental conditions. Power is provided without contributing any adverse effects. This technology can be used in an ever-increasing number of applications, including medical, energy, defense, aerospace, wireless communications, and industrial sensors.
JDSUs objective is to continue to be a leading provider for all markets and industries we serve, as detailed in previous sections. In support of our business segments, we are pursuing a corporate strategy that we believe will best position us for future opportunities. The key elements of our corporate strategy include:
We remain committed to streamlining our manufacturing operations and reducing costs by using contract manufacturers where appropriate for our less complex, high volume products, and by situating our factories in lower-cost locations capable of consistently meeting our customers quality and performance requirements.
Although we expect to successfully implement our strategy, internal and/or external factors could impact our ability to meet any, or all, of our objectives. Some of these factors are discussed under Risk Factors.
As part of our strategy, we are committed to the ongoing evaluation of strategic opportunities and, where appropriate, the acquisition of additional products, technologies or businesses that are complementary to, or broaden the markets for our products. We believe we strengthened our business model by expanding our addressable market, customer base, and expertise, diversifying our product portfolio, and fortifying our core businesses through acquisition as well as through organic initiatives.
In May 2007, we completed the acquisition of Innocor, a provider of broadband test solutions for network equipment manufacturers. The merger strengthened JDSUs position in the North American lab and production markets and helped grow our business in the EMEA and APAC regions. Innocor is included in our Communications Test and Measurement segment.
In May 2007, we completed the acquisition of Picolight, a designer and manufacturer of optical pluggable transceivers. By acquiring Picolight, we strengthened our position in high-growth pluggable optics for the enterprise market and added an established, vertically integrated manufacturing model. Picolight is included in our Optical Communications segment.
In January 2007, we completed the acquisition of Casabyte, a provider of service quality monitoring solutions for mobile network operations. By acquiring Casabyte, we accelerated our service assurance growth by capitalizing on a number of key assets, including Casabytes wireless service quality solutions expertise, technology and established customer relationships. We also plan to leverage our global direct sales organization and other distribution channels to increase Casabytes penetration into international markets. Casabyte is included in our Communications Test and Measurement segment.
In May 2006, we completed the acquisition of Test-Um Inc. (Test-Um), a provider of home networking test instruments for the FTTx and digital cable markets. By acquiring Test-Um, we expanded our channels for the sale of our broad portfolio of test instruments for broadband access networks, including the recently introduced SmartClass line of instruments. We leveraged Test-Um's network of several hundred distribution partners, making our access test instruments available to the service installation and electrical contractors served by Test-Um. In addition, the acquisition creates new market opportunities for Test-Um's products, available through JDSU's direct sales and service organization serving the largest telecommunications and cable service providers worldwide. Test-Um is included in our Communications Test and Measurement segment.
In November 2005, we completed the acquisition of Agility Communications, Inc. (Agility), a provider of widely tunable laser solutions for optical networks. The acquisition solidified our leadership position in the rapidly growing market for tunable lasers and transponders; offered a more efficient path to high volume, high yield, tunable, pluggable solutions when combined with JDSUs manufacturing scalability, and established JDSU as the broadest end-to-end agile optical network portfolio provider in the marketplace. Agility is included in our Optical Communications segment.
In August 2005, we completed the acquisition of Acterna, Inc. (Acterna), a leading worldwide provider of broadband and optical test and measurement solutions for telecommunications and cable service providers and network equipment manufacturers. With this acquisition, we have become a leading provider of broadband test and measurement systems serving an expanded customer base that includes many of the largest 100 telecommunications and cable services providers and system manufacturers worldwide. The combined portfolio of products and services enhanced the deployment of IP-based data, voice, and video services over optical long haul, metro, fiber-to-the-home, DSL, and cable networks. Starting in the first quarter of fiscal 2006, the addition of Acternas Test and Measurement business created a new reportable segment of our business.
Please refer to Note 3. Mergers and Acquisitions 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 2007, 2006 and 2005.
Restructuring Programs and Divestitures
Since April 2001, we have significantly consolidated 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, and laser products. We also are in the process of centralizing in-house manufacturing from
North America pertaining to product lines relating to primarily the Optical Communications segment to our lower-cost facility in Shenzhen, China.
In November 2004, we announced a strategic decision to sell our Singapore and Bintan, Indonesia, manufacturing operations to Fabrinet Co. Ltd. (Fabrinet), one of our contract manufacturers. The agreement provides us with long-term sourcing guarantees for datacom transceivers.
In April 2005, we announced restructuring programs designed to further reduce the number of manufacturing facilities, in addition to the divestiture or exit from selected 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 our 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 and Rochester, Minnesota to a contract manufacturer, and the sale of our CATV product line to a third party.
In September 2005, in further support of our cost reduction program and profitability objectives, we sold our front surface mirror product line.
In November 2005, we took steps to further commit to the consolidation of our manufacturing operations and the transfer of such operations to other of our facilities and to the facilities of our contract manufacturing partners. Specifically, we closed our Rochester, Minnesota facility and announced the transition of products manufactured at our Ottawa site to contract manufacturers and an additional phase of consolidation at our Santa Rosa facility.
In February 2006, we entered into an agreement with Fabrinet to transfer the manufacturing operations in Ottawa, Canada to company facilities in Shenzhen, China, and St. Etienne, France. In addition, certain manufacturing operations were transferred to Fabrinet facilities in Thailand. Non-manufacturing activities at the Ottawa site were unaffected by this agreement.
In May 2007, we announced a plan to reduce headcount related to our Optical Communications business segment by more than 300 people in the fourth quarter of fiscal year 2007.
We have consolidated manufacturing, research and development, sales and administrative facilities through building and site closures. As of June 30, 2007, 21 sites and buildings in North America, Europe and Asia-Pacific have been closed.
We continue to centralize many administrative functions such as information technology, human resources, and finance to take advantage of common processes and controls, and economies of scale.
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 2007, 2006, and 2005. We may not be successful in our manufacturing strategy, and there are many risks to be addressed as described in the Risk Factors section.
Please refer to Managements Discussion and Analysis of Financial Condition and Results of Operations under Item 7 and the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K for further discussion on these charges.
Research and Development
During fiscal 2007, 2006, and 2005, we incurred research and development expenses of $168.4 million, $155.5 million, and $93.7 million, respectively. The number of employees engaged in research and development was approximately 1,000 as of June 30, 2007 and July 1, 2006, compared to approximately 500 as of July 2, 2005.
We devote substantial resources to research and development to develop new and enhanced products to serve our 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 in volume and at lower cost.
For the optical 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 AON components and modules, such as ROADMs and tunable devices 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 communications test and measurement market, we are increasing our focus on the most promising market, the broadband triple-play segment, while maintaining our capability to serve all major network architecture and protocols needs.
In our advanced optical technologies and commercial laser markets, our research and development efforts concentrate on developing more innovative solutions such as economical and commercially suitable light interference micro flakes, color separation filters, solid state lasers, components for optical systems, modules and assemblies to serve the security, biomedical, aerospace and display industries.
The following table sets forth our major manufacturing locations and the primary products manufactured at each location as of June 30, 2007. Manufacturing facilities and products manufactured by our contract-manufacturing partners (located in California, Texas, Ottawa, China, Indonesia, Singapore, Malaysia, and Thailand) are not included in the table below:
Sources and Availability of Raw Materials
JDSU uses various companies and contract manufacturers to supply parts and components for the manufacture and support of multiple product lines. Although our intention is to establish at least two sources of supply for materials whenever possible, for certain components we do have sole or limited source supply arrangements. We may not be able to procure these components from alternative sources at acceptable prices within reasonable time; therefore the loss or interruption of such arrangements could have an impact on our ability to deliver certain products on a timely basis.
JDSU will continue its initiatives to reduce cost and risk of production interruptions and shortages of components by: (1) selecting and qualifying alternative sources of supplies for key components whenever possible, and (2) maintaining an appropriate safety stock of key components.
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, 2007, we owned 1,329 U.S. patents and 489 foreign patents, and were processing several hundred pending applications throughout the world.
Backlog consists of purchase orders for products for which we have assigned shipment dates within the following 12 months. As of June 30, 2007, our backlog was approximately $342.5 million as compared to $308.1 million at July 1, 2006. Because of possible changes in product delivery schedules and cancellation of product orders and our sales 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 employed approximately 7,000 employees as of June 30, 2007, as compared to approximately 7,100 and 5,000 as of July 1, 2006 and July 2, 2005, respectively. Our workforce as of June 30, 2007 included approximately 4,100 employees in manufacturing, 1,000 employees in research and development, 800 employees in general and administrative functions, and 1,100 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 in Silicon Valley, we rely upon our ability to use stock options, Full Value Awards, 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) to retain our key employees.
ITEM 1A. RISK FACTORS
We have a history of net losses, and our future profitability is not assured.
We incurred net losses of $26.3 million, $151.2 million, and $261.3 million in fiscal years 2007, 2006 and 2005, respectively. Factors that may undermine our ability to grow revenues or to achieve future profitability include, among others:
Taken together, these factors limit our ability to predict future profitability levels. While some of these factors may diminish over time as we improve our cost structure and focus on enhancing our product mix, several factors, such as continuous pricing pressure, increasing Asia-based competition, increasing commoditization of previously-differentiated products, a highly concentrated customer base for many of our product lines and seasonal Communications Test and Measurement segment revenue fluctuations, are likely to remain endemic to our businesses. If we fail to achieve profitability expectations, the price of our debt and equity securities, as well as our business and financial condition, may be adversely impacted.
If information networks do not continue to expand as expected, or if industry consolidation continues, our business will be adversely impacted.
Our future success as a manufacturer of optical components, modules and subsystems, and communications test and measurement products ultimately depends on the continued growth of the communications industry and, in particular, the continued expansion of global information networks. 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 does the need for advanced networks to provide the required bandwidth and for advanced instruments and equipment to facilitate the installation, maintenance and operation of these networks. Without network and bandwidth growth, the need for our 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-complementary and competing content delivery solutions. More broadly, current consolidation trends among communications service providers and network equipment manufacturers could
cause temporary or permanent delays in network expansion, which in the short term limits our demand visibility, and in the longer term could reduce our business potential. Ultimately, should long-term expectations for network growth and bandwidth demand not be realized or not support sustainable business models, our customers and our business would be significantly harmed.
We believe that we will continue to rely upon a limited number of customers for a significant portion of our revenues for each period for the foreseeable future and any failure by us to capture a significant share of these customers could materially harm our business. 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. We believe that the telecommunications industry has entered a period of consolidation. To the extent that our direct communications equipment manufacturer customer base and their customer base, the service providers, consolidates, we will have increased dependence on fewer customers who may be able to exert increased pressure on our prices and contractual terms in general. Customer consolidation activity and manufacturing and inventory initiatives could also create the potential for pauses in customer demand for our products as a consequence of their new decision frameworks and periods of operational streamlining. In particular, Optical Communications customer supply chain and inventory rationalization initiatives are limiting our demand visibility and could limit our short term business potential.
Our Communications Test and Measurement Segment is particularly vulnerable to seasonal variations in our business.
The majority of the products in our Communications Test and Measurement segment are subject to significant seasonal fluctuations in demand. Reasons for this seasonal variation include, among other things, the customary capital equipment and research and development buying patterns of the telecommunications carriers and cable service providers, which are the most significant customers for these products. As a consequence, we expect seasonal demand fluctuations to cause significant, periodic variations in our financial results for this reportable segment. Moreover, our overall financial results will be adversely impacted by these seasonal fluctuations to the extent that financial results from our other reportable segments do not offset the declines in our Communications Test and Measurement segment.
Without stability and growth in our non-communications businesses our margins and profitability may be adversely impacted.
The Advanced Optical Technologies segment and Commercial Lasers business unit represents a material, although varying, portion of our total net revenue. Gross margins associated with products in these segments often exceed those from products in the Optical Communications segment. While we believe that actions we have taken in recent years (including, among other things, divestitures and end of life programs associated with certain optics and display products within this segment) have significantly reduced the financial risk, revenue declines associated with Advanced Optical Technologies 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 all of our 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 exploring new investments, strategic partnerships and product opportunities in our Advanced Optical Technologies and Commercial Lasers businesses. Contractions in these markets or our failure to execute programs related to such investments, partnerships and opportunities may significantly harm our business.
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, during recent years we have initiated several major cost reduction initiatives. These initiatives include the transfer of manufacturing of certain
of our products to contract manufacturing partners and our Shenzhen, China, facilities, 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, and we have incurred, and will continue to incur, expenses to complete them. In addition, these programs are risky, as they are time-consuming and disruptive to our operations, employees, customers and suppliers, with no guarantee that the expected results (particularly cost savings and profitability expectations) will be achieved as and when projected or that the costs to complete these programs will not increase above expected levels. Cost savings achieved through these programs may not be timely or sufficient enough to offset continuing pricing declines.
If we incur more restructuring-related charges than currently anticipated, our consolidated financial condition and results of operations may be adversely impacted.
Since April 2001, we initiated the Global Realignment Program, or GRP, we have been restructuring our business in response to the economic downturn in our markets. In fiscal year 2007, we recorded total related restructuring charges of $14.7 million. These charges, have adversely affected, and will continue to adversely affect, our results of operations and cash flows for the periods in which such charges have been, or will be, incurred. In the future, we may incur additional charges or write-offs in connection with restructuring initiatives.
We have continuing concerns regarding the manufacture, quality and distribution of our products. These concerns are heightened with new product offerings and when overall demand increases.
Our success depends upon our ability to deliver both our current product offerings and new products and technologies on time and at acceptable cost to our customers. As a technology company, we constantly encounter quality, volume and cost concerns. The following factors are potential contributors to 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 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.
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. 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 major investment. At the component supplier level this 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 the earliest, will be purchased by our customers long after much of the cost is incurred and, in some cases, 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.
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 initiatives. We may continue to 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 typically entail many risks (see Risks in acquisitions). If we fail to manage or anticipate our future growth effectively, particularly during periods of industry uncertainty, our business will be adversely impacted. 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 be adversely impacted to the extent our resources and operations are insufficient to support growth.
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 microflakes that 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 one of these product lines, Optically Variable Pigment (OVP®), for document authentication applications 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, subcontractors, and suppliers for raw materials, packages and standard components. Some of our products rely on single-source suppliers for critical materials. These products include several of our advanced components, modules and subsystem products across our business. 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. In addition, 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. While we are currently undertaking programs to ensure the long-term strength of our supply chain, we are experiencing and expect to continue to experience, strain on our supply chain and periodic supplier problems. 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. In addition, these problems have affected, and will continue to affect, 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 be materially impacted.
We generally use a rolling twelve 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.
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 inherently entail risk, 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. We are currently devoting substantial resources to the integration of our recent acquisitions, which among other things, requires significant investment in IT systems and infrastructure. 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 acquisition 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 be adversely impacted.
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.
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.
If we fail to attract and retain key finance personnel, our ability to maintain internal control over financial reporting may be impaired.
Our key financial positions are currently staffed. Should we experience turnover or should the demands on our current resources increase due to an increase in the number of complex, non-routine transactions, our internal
control over financial reporting could be adversely impacted. This could result in material weaknesses in our internal controls over financial reporting.
Certain of our non-communications related 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 Advanced Optical Technologies segment and Commercial Lasers business unit may be more costly due to required government approval and industry acceptance processes. Development of applications for our light interference and diffractive microflakes 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 decorative microflakes 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 product development, manufacturing, sales and customer support operations. Our operations outside North America include product development and manufacturing facilities in Europe and Asia and service, sales and support offices worldwide.
Our international presence exposes us to certain risks, including the following:
Net revenue from customers outside the Americas accounted for 45%, 39% and 34% of our total net revenue for fiscal 2007, 2006 and 2005, 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, the revenues we derive from 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.
Changes in our effective tax rate or adverse outcomes resulting from tax audits may have an adverse impact our results.
As an international corporation, we are subject to taxation in the various jurisdictions in which we conduct business. Significant judgment is required in the determination of our worldwide provision for income taxes and this determination requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. Our effective tax rate may be adversely impacted by changes in the mix of earnings between countries which have different statutory tax rates, in the valuation of our deferred tax assets, and by changes in tax rules and regulations. We are subject to income tax audits in the respective jurisdictions in which we conduct business and we regularly assess the likelihood of adverse outcomes resulting from these tax audits to ascertain the adequacy of our provision for income taxes. There can be no assurance that the outcomes of these tax audits will not have an adverse impact on our results and financial condition.
We are expanding operations in China, which exposes us to risks inherent in doing business in China.
As a result of our efforts to reduce costs, we have expanded our manufacturing operations in China. Looking ahead we expect to expand our research and development activities in China. Our China-based activities are subject to greater political, legal and economic risks than those faced by our other operations. See We face risks related to our international operations and revenue. These concerns will increase as we expand our activities in China to include product research and development, which may expose our critical technology to foreign misappropriation. In particular, the political, legal and economic climate in China (both at national and regional levels) is extremely fluid and unpredictable. 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, which laws and regulations remain highly underdeveloped and subject to change, with little or no prior notice, for political or other reasons. Moreover, the enforceability of applicable existing Chinese laws and regulations is uncertain. These concerns are heightened for foreign businesses, such as ours, operating in China. In addition, we may not obtain the requisite legal permits to continue to operate in China and costs or operational limitations may be imposed in connection with obtaining and complying with such permits. 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, including costs of qualification testing with our customers, which could have a material adverse impact on our operating results and financial condition. Also see If our customers do not qualify our manufacturing lines for volume shipments, our operating results could be adversely impacted.
As a result of a government order to ration power for industrial use, operations in our Shenzhen facilities may be subject to possible interruptions or shutdowns. Our ability to complete manufacturing commitments on a timely basis may be adversely affected. If we are required to make significant investments in generating capacity to sustain uninterrupted operations at our Shenzhen facilities, we may not realize the reductions in costs
anticipated from our expansion in China. In addition, future outbreaks of avian influenza, or other communicable diseases, could result in quarantines or closures of our Beijing and Shenzhen facilities, thereby disrupting our operations and expansion in China.
We intend to export the majority of the products manufactured at our facilities in China. Previously, upon application to and approval by the relevant governmental authorities, we were not subject to certain Chinese taxes and were exempt from customs duty assessment on imported components or materials when the finished products were exported from China. We are, however, required to pay income taxes in China, subject to certain tax relief. As the Chinese income tax law and 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 increased taxes or new forms of taxation imposed by authorities in China, 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 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, may result in our maintaining large amounts of inventory. In addition, we base many of our operating decisions, and enter into purchase commitments, on the basis of anticipated revenue trends which are highly unpredictable. 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 historically have adversely affected our business and results of operations.
Our business and operations would be adversely impacted 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. For example, 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.
Our acquisition of Acterna created additional burden and risk. The integration of Acterna is of particular concern to our information technology infrastructure due to Acternas size and complexity. Converting Acternas business processes, data and applications to our standards continues to be a complex and time-consuming task. During this transition period, we are exposed to the risks associated with incompatible and complex reporting systems.
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 in inappropriate disclosure of confidential information, it could harm our business. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
We recently remediated certain material weakness in our internal control over financial reporting. Failure to maintain effective internal controls may adversely affect our stock price.
Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report by management on the effectiveness of the Companys internal control over financial reporting in their annual reports on Form 10-K. In addition, our independent registered public
accounting firm must attest to and report on managements assessment of the effectiveness of the internal control over financial reporting. The Company has in prior periods identified certain material weaknesses in its internal control over financial reporting. However, we believe the Company remediated those past material weaknesses, and we have not identified any material weaknesses in our internal control over financial reporting for the fiscal year ended June 30, 2007. Although we review our internal control over financial reporting in order to ensure compliance with the Section 404 requirements, if our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at which these controls are documented, designed, operated or reviewed, or if our independent registered public accounting firm interprets the requirements, rules and/or regulations differently from our interpretation, then they may decline to attest to managements assessment or may issue a report that is qualified. This could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which ultimately could negatively impact our stock price.
If we fail to timely file with the trustee of our Zero Coupon Senior Convertible Notes or our 1% Senior Convertible Notes certain information, documents and reports required to be filed by us with the SEC, such notes could become due and payable immediately. As a result, our liquidity position could be adversely impacted or we may not have enough cash to pay the note holders, which would harm our business and the trading price of our debt and equity securities.
Under the terms of both of the indentures governing our senior convertible notes, we must comply with certain covenants, agreements and conditions, including filing with the trustee certain information, documents and reports required to be filed by us with the SEC. Certain failures to comply with the filing of such reports with the trustee would constitute a default. Upon such a default, the trustee or holders of 25% of the outstanding principal of either series of notes have the option to send us a notice of default, demanding that such default be cured within 60 days. If we receive such a notice of default, we will be required to cure such default within 60 days or obtain a waiver from holders of a majority of the outstanding principal balance of each series of notes. If we cannot cure such default within 60 days or obtain a waiver, the notes could be accelerated. This could severely impact our liquidity position or, under certain circumstances, we may not have enough cash to pay the note holders, which would harm our business and the trading price of debt and equity securities.
Changes in the accounting treatment of our 1% convertible debt instruments could decrease our net income and earnings per share amounts.
New or different accounting pronouncements or regulatory rulings may emerge which could impact the way we are required to account for our convertible debt instruments that would have an adverse impact on our results of operations and earnings per share amount. With respect to our 1% Senior Convertible Notes, we are required under U.S. GAAP as presently in effect to include in outstanding shares for purposes of computing earnings per share only a number of shares underlying the convertible notes that, at the end of a given quarter, have a value in excess of the outstanding principal amount of the convertible notes. This is because of the net share settlement feature of the convertible notes, under which we are required to pay the principal amount of the convertible notes in cash. The accounting method for net share settled convertible securities is currently under consideration by the Financial Accounting Standards Board (FASB). At its meeting on July 25, 2007, FASB approved the preparation of a FASB staff position (FSP) adopting a new method of accounting for net share settled convertible debt instruments under which the debt and equity components of the instrument would be bifurcated and accounted for separately. The change, if enacted, is expected to take effect for fiscal years beginning after December 15, 2007. An exposure draft of the FSP is expected to be released for public comment shortly. If the proposed position is adopted by FASB, it would increase the interest expense reported on our statement of operations and, consequently, reduce our net income and earnings per share amounts.
If we have insufficient proprietary rights or if we fail to protect those we have, our business would be materially harmed.
Our intellectual property rights may not be adequate to protect our products or product roadmaps.
We seek to protect our products and our product roadmaps in part by developing and/or securing proprietary rights relating to those products, including patents, trade secrets, know-how and continuing technological innovation. 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 making, using or selling similar products. We do not own patents in every country in which we sell or distribute our products, and thus others may be able to offer identical products in countries in which we do not have intellectual property protection. 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.
Any patents issued to us may be challenged, invalidated or circumvented, and recent Supreme Court precedent may make it easier to invalidate some of our patents than in the past. Additionally, we are currently a licensee in all of our operating segments for a number of third-party technologies, software and intellectual property rights from academic institutions, our competitors and others, and are required to pay royalties to these licensors for the use thereof. 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, substantially increase the cost to provide these products to our customers, and could have a significant adverse impact on our operating results. 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.
Our products may be subject to claims that they infringe the intellectual property rights of others.
Lawsuits and allegations of patent infringement and violation of other intellectual property rights occur in our industry on a regular basis. We have received in the past, and anticipate that we will receive in the future, notices from third parties claiming that our products infringe third-party proprietary rights. Over the past few years there has been a marked increase in the number and potential severity of third party patent infringement claims, primarily from two distinct sources. First, large technology companies, including some of our customers and competitors, are seeking to monetize their patent portfolios and have developed large internal organizations that have approached us with demands to enter license agreements. Second, numerous patent-holding companies, entities that do not make or sell products (often referred to as patent trolls), have claimed that our products infringe upon their proprietary rights.In addition, our markets are extremely competitive and we expect to experience intellectual property infringement disputes with our competitors from time to time. 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, which could adversely affect our revenues and operating results.
The use of open source software in our products, as well as those of our suppliers, manufacturers and customers, may expose us to additional risks and harm our intellectual property position.
Certain of the software and/or firmware that we use and distribute (as well as that of our suppliers, manufacturers and customers) may be, be derived from, or contain, so-called open source software that is generally made available to the public by its authors and/or other third parties. Such open source software is often made available under licenses which impose obligations in the event the software or derivative works thereof are distributed or re-distributed. These obligations may require us to make source code for the derivative works available to the public, and/or license such derivative works under a particular type of license, rather than the forms of license customarily used to protect our own software products. While we believe we have complied with our obligations under the various applicable licenses for open source software, in the event that a court rules that these licenses are unenforceable, or in the event the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work. Additionally, open source licenses are subject to occasional revision. In the event future iterations of open source software are made available under a revised license, such license revisions may adversely affect our ability to use such future iterations.
We face certain litigation risks that could harm our business.
We have had numerous lawsuits filed against us asserting various claims, 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 condition, liquidity and results of operations. In particular, the securities class actions discussed in Item 3, Legal Proceedings, contained in Part I of this report, claim damages that exceed the total current assets of the Company and thus an unfavorable outcome or settlement of one or more of these securities class action lawsuits could have a substantial material adverse effect on our financial condition, 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 is 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. For additional information regarding certain of the lawsuits in which we are involved, see Item 3, Legal Proceedings, contained in Part I of this report.
If we fail to manage our exposure to worldwide financial and securities markets successfully, our operating results and financial statements could be materially impacted.
We are exposed to financial market risks, including changes in interest rates, foreign currency exchange rates and prices of marketable equity and fixed-income securities. 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 or other hedging instruments. We do not use derivative financial instruments for speculative or trading purposes. The contracts and other hedging instruments are intended to reduce, but not eliminate, the impact of foreign currency exchange rate movements.
We do not hedge all of our foreign currency risk and have no plans to do so in the foreseeable future. Because we do not hedge all of our foreign currency exposures and because there is no assurance that our foreign currency hedging activities will be successful, foreign currency gains and losses could have a material adverse effect on our financial results and cash flows.
As of June 30, 2007, we held investments in other public and private companies and had limited funds invested in private venture funds. Such investments represented approximately $3.3 million on our Consolidated Balance Sheets at June 30, 2007. In addition to our investments in public companies, we have in the past made, and expect to continue to make, investments in privately held companies as well as venture capital investments for strategic and commercial purposes. In the past some of the private companies in which we held investments have ceased doing business and have either liquidated or have entered into 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 may be subject to environmental liabilities which could increase our expenses and harm our operating results.
We are subject to various federal, state and foreign laws and regulations governing the environment, including those governing pollution and protection of human health and the environment and, recently, those restricting the presence of certain substances in electronic products and holding producers of those products financially responsible for the collection, treatment, recycling and disposal of certain products. Such laws and regulations have been passed in several jurisdictions in which we operate. Laws governing the environmental effects of electronic products have been passed in several European Union member countries, and similar laws are now pending in various jurisdictions within the United States. The European Union has enacted the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, or RoHS, and the Waste Electrical and Electronic Equipment, or WEEE, directives. The RoHS directive prohibits the use of certain substances, including lead, mercury, cadmium and chromium, in covered products placed on the market after July 1, 2006. The WEEE directive obligates parties that place electrical and electronic equipment onto the market in the European Union to clearly mark the equipment, register with and report to European Union regulators regarding distribution of the equipment, and provide a mechanism to recall and properly dispose of the equipment. Each European Union member country has enacted, or is expected to soon enact, legislation clarifying what is and what is not covered by the WEEE directive in that country. However, there is still some uncertainty in certain European Union countries as to which party involved in the manufacture, distribution and sale of electronic equipment will be ultimately held responsible. If we are deemed to be a manufacturer of covered products, we may be required to