16 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-22874 Uniphase Corporation (Exact name of registrant as specified in its charter) Delaware 94-2579683 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 163 Baypointe Parkway San Jose, CA 95134 (Address of principal executive offices) (Zip Code) (408) 434-1800 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of January 31, 1997 . Common Stock $.001 par value 16,611,968 Class Number of Shares Part I--FINANCIAL INFORMATION Item 1. Financial Statements UNIPHASE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share Three months Six months ended data) ended December 31, December 31, 1996 1995 1996 1995 Net sales $22,683 $15,672 $46,146 $28,465 Cost of sales 12,256 8,310 24,464 15,283 ------ ------ ------- ------- Gross profit 10,427 7,362 21,682 13,182 Operating expenses: Research and development 2,128 1,548 3,755 2,459 Royalty and license 416 386 825 749 Selling, general and administrative 4,216 3,033 8,665 5,666 ------ ------ ------ ------ Total operating expenses 6,760 4,967 13,245 8,874 ------ ------ ------ ------ Income from operations 3,667 2,395 8,437 4,308 Interest and other income, net 982 391 1,928 438 ------ ----- ------ ------ Income before income taxes 4,649 2,786 10,365 4,746 Income tax expense 1,513 893 3,628 1,638 ------ ----- ------ ------ Net income $ 3,136 $1,893 $ 6,737 $ 3,108 ======= ====== ======= ======= Net income per share $ 0.18 $ 0.14 $ 0.38 $ 0.26 ======= ====== ======= ======= Number of weighted average shares used in per share amounts 17,742 13,520 17,617 12,092 ======= ====== ====== ====== See accompanying notes on page 5 UNIPHASE CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31 June 30, 1996 1996 ASSETS (unaudited) Current assets: Cash and cash equivalents $ 26,994 $ 52,463 Short-term investments 88,830 61,279 Accounts receivable, less allowances for returns and doubtful accounts of $433 at December 31, 1996 and $285 at June 30, 1996 16,240 16,700 Inventories 16,186 10,641 Refundable income taxes 3,974 -- Deferred income taxes and other current assets 3,792 3,542 -------- -------- Total current assets 156,016 144,625 Property, plant and equipment, net 24,372 20,305 Intangible assets 7,748 8,894 -------- -------- Total assets $188,136 $173,824 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to bank $ -- $ 548 Current portion of notes payable 6,061 -- Accounts payable 7,720 5,391 Accrued payroll and related expenses 2,831 3,180 Other accrued expenses 2,504 4,464 -------- ------- Total current liabilities 19,116 13,583 Notes payable -- 6,061 Deferred income taxes 12 656 Other non-current liabilities 120 319 Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value: Authorized shares--1,000,000 None issued and outstanding -- -- Common stock, $0.001 par value: Authorized shares--20,000,000 Issued and outstanding shares--16,551,412 at December 31, 1996 and 16,097,855 at June 30, 1996 17 16 Additional paid-in capital 150,025 141,354 Retained earnings 18,487 11,750 Net unrealized gain (loss) on securities 126 (18) Foreign currency translation adjustment 233 103 ------- ------- Total stockholders' equity 168,888 153,205 ------- ------- Total liabilities and stockholders' equity$188,136 $173,824 ======== ======== See accompanying notes on page 5 UNIPHASE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended December 31, 1996 1995 ---- ---- Operating activities Net income $ 6,737 $ 3,108 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 2,233 938 Change in operating assets and liabilities: Accounts receivable 460 (1,728) Inventories (5,545) (2,543) Deferred income taxes and other current assets 1,823 193 Accounts payable, accrued liabilities and other (49) 1,847 ------- ------- Net cash provided by operating activities 5,659 1,815 ------- ------- Investing activities Increase in other assets -- (87) Purchase of short-term investments (69,432 (22,459) Proceeds from sale of short-term investments 42.025 2,030 Optomech -- (238) ------- -------- Net cash used in investing activities (32,752) (22,917) -------- -------- Financing activities Notes payable to bank (548) -- Proceeds from issuance of common stock from public and other offerings -- 52,912 Proceeds from issuance of common stock under stock option and stock purchase plans 2,172 961 ------- ------- Net cash provided by financing activities 1,624 53,873 ------- ------ Increase (decrease) in cash and cash equivalents (25,469) 32,771 Cash and cash equivalents at beginning of period 52,463 2,880 ------- ------ Cash and cash equivalents at end of period $ 26,994 $35,651 ======== ======= Supplemental Cash Flow Information Tax benefits on stock option and stock purchase plans $ 6,126 $ -- ========= ======= See accompanying notes on page 5 UNIPHASE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Business Activities and Basis of Presentation The financial information at December 31, 1996 and for the three-month and six-month periods ended December 31, 1996 and 1995 is unaudited, but includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial information set forth herein, in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. For further information, refer to the Consolidated Financial Statements and footnotes thereto included or incorporated by reference in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. Certain reclassifications, relating to investments, have been made to the fiscal 1996 presentation to conform to the fiscal 1997 presentation. The results for the three-month and six-month periods ended December 31, 1996 are not considered indicative of the results to be expected for any future period or for the entire year. Note 2. Inventories The components of inventory consist of the following: (in thousands) December 31, June 30, 1996 1996 Raw materials and purchased parts $ 8,609 $ 4,100 Work in process 4,551 4,382 Finished goods 3,026 2,159 ------- ------- $16,186 $10,641 ======= ======= Note 3. Taxes The effective tax rate used for the six-month period ended December 31, 1996 was 35%. This rate is based on the estimated annual tax rate complying with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Note 4. Earnings per Share Net income per share for the three-month and six-month periods ended December 31, 1996 and 1995 is computed using the weighted average number of common shares outstanding plus primary common share equivalents which have a dilutive effect on earnings per share. Since fully diluted earnings per share differs from primary earnings per share by less than 3%, only primary earnings per share is shown below. Shares and net income used in the per share computations are as follows: Three Monthd Ended Six Months Ended December 31 December 31 1996 1995 1996 1995 Weighted average common shares 16,347 12,374 16,239 10,976 Primary common share equivalents 1,395 1,146 1,378 1,116 ------ ------ ------ ------ Total 17,742 13,520 17,617 12,092 ====== ====== ====== ====== Net income $3,136 $1,893 $6,737 $3,108 ====== ====== ====== ====== Net income per share $ 0.18 $ 0.14 $ 0.38 $ 0.26 ====== ====== ====== ====== Note 5. Line of Credit The Company maintains a $5.0 million revolving bank line of credit agreement that expires on January 28, 1999. Advances under the line of credit bear interest at the bank's prime rate (8.25% at December 31, 1996) and are secured by inventories and accounts receivable. Under the terms of this agreement, the Company is required to maintain certain minimum working capital, net worth, profitability levels and other specific financial ratios. In addition, the line of credit prohibits the payment of cash dividends and contains certain restrictions on the Company's ability to lend money or purchase assets or interests in other entities without the prior written consent of the bank. There were no borrowings under the line of credit at December 31, 1996. Through the acquisition of UTP Fibreoptics, the Company assumed certain previously established lines of credit. All outstanding borrowings against these lines of credit were paid off in September 1996. Note 6. Litigation and Contingencies During fiscal 1996, two former employees commenced wrongful termination actions against the Company. In September 1996, the Company received notification of two additional lawsuits from two former employees alleging fraud and termination in violation of public policy. The Company believes these claims are without merit and is vigorously defending them. Even if these claims are adjudicated in favor of the plaintiffs, the Company does not believe that the ultimate resolution of these matters will have a material adverse impact on the Company or its operations. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations UNIPHASE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Risk Factors The statements contained in this Report on Form 10-Q that are not purely historical are forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions, beliefs or strategies regarding the future. Forward looking statements include the Company's' expectations concerning periodic fluctuations in gross margins and the Company's liquidity, anticipated cash needs and availability, and anticipated expense levels under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." All forward looking statements included in this document are based on information available to the Company on the date of this Report, and the Company assumes no obligation to update any such forward looking statement. It is important to note that the Company's actual results could differ materially from those in such forward looking statements. Among the factors that could cause actual results to differ materially are: the cyclicality of the semiconductor industry, the declining market for gas lasers, development and other risks relating to solid state laser technologies, management of growth, UTP Fibreoptics acquisition, variability and uncertainty of quarterly operating results, dependence on key OEM relationships, dependence on sole and limited source suppliers, difficulties in manufacture of the Company's products and future capital requirements, as detailed below. You should also consult the risk factors listed from time to time in the Company's Reports on Form 10-Q, 8-K, 10-K and Annual Reports to Stockholders. Cyclicality of Semiconductor Industry The Company's Ultrapointe Systems and a portion of its laser subsystems businesses depend upon capital expenditures by manufacturers of semiconductor devices, including manufacturers that are opening new or expanding existing fabrication facilities, which, in turn, depend upon the current and anticipated market demand for semiconductor devices and the products utilizing such devices. The semiconductor industry is highly cyclical, and historically has experienced periods of oversupply, resulting in significantly reduced demand for capital equipment. The semiconductor industry is currently experiencing a downturn which has led many semiconductor manufacturers to delay or cancel capital expenditures. Certain of the Company's customers have delayed or canceled purchase of the Company's Ultrapointe Systems. There can be no assurance that the Company's operating results will not be materially and adversely affected by these factors. Furthermore, there can be no assurance that the semiconductor industry will not experience further downturns or slowdowns in the future, which may materially and adversely affect the Company's business and operating results. Management of Growth; UTP Fibreoptics Acquisition The Company has experienced recent growth through both increased levels of operations in its existing businesses and the acquisition of UTP in May 1995. The Company is devoting significant resources to develop new solid state lasers for OEM customers, to improve products and increase market penetration of its Ultrapointe Systems and to increase its penetration of the CATV and telecommunications industries. In addition, the Company is now increasing its marketing, customer support and administrative functions in order to support an increased level of operations primarily from sales of its telecommunications equipment products. No assurance can be given that the Company will be successful in creating this infrastructure or that any increase in the level of such operations will justify the increased expense levels associated with these businesses. In May 1996, the Company acquired UTP Fibreoptics. The total purchase price of $9.1 million included aggregate consideration of $8.6 million, payable through a combination of cash and notes, and estimated direct transaction costs of $500,000. As a result of acquiring UTP Fibreoptics, the Company has entered the local telecommunications and data communications market in which it had no previous experience, and has expanded its employee base by approximately 45 persons. The success of the UTP Fibreoptics acquisition will be dependent on the Company's ability to integrate UTP Fibreoptics into its existing operations as a division of UTP. UTP's ability to manage UTP Fibreoptics will be complicated by the geographical distance between UTP's facilities in Bloomfield, Connecticut and Chalfont, Pennsylvania and UTP Fibreoptics's locations in the United Kingdom and in Batavia, Illinois. There can be no assurance that the operations of UTP Fibreoptics can be successfully integrated into UTP or that such integration will not strain the Company's available management, manufacturing, financial and other resources. The Company also made capital expenditures to acquire certain properties in San Jose, California totaling 109,000 square feet, which included land, buildings and improvements for an aggregate purchase price of approximately $11.0 million and continues to invest in property, plant and equipment needed for its business requirements, including adding to manufacturing capacity throughout the Company. Any failure to utilize these areas in an efficient manner could have a material adverse effect on the Company. The Company currently has no commitments with respect to any future acquisitions. The Company, however, frequently evaluates the strategic opportunities available to it and may in the future pursue acquisitions of additional complementary products, technologies or businesses. Such acquisitions by the Company may result in the diversion of management's attention from the day-to- day operations of the Company's business and may include numerous other risks, including difficulties in the integration of the operations and products, integration and retention of personnel of the acquired companies and certain financial risks. Further acquisitions by the Company may result in dilutive issuances of equity securities, the incurrence of additional debt, reduction of existing cash balances, amortization expenses related to goodwill and other intangible assets and other charges to operations that may materially adversely affect the Company's business, financial condition or operating results. Declining Market for Gas Lasers; Development and Other Risks Relating to Solid State Laser Technologies To date, a substantial portion of the Company's revenue has been derived from sales of gas laser subsystems. The market for gas lasers is mature and is expected to decline as customers transition from conventional lasers, including gas, to solid state lasers, which are currently expected to be the primary commercial laser technology in the future. In response to this transition, the Company has devoted substantial resources to developing solid state laser products and has introduced its initial solid state products. To date, sales of the Company's solid state laser products have been limited and primarily for customer evaluation purposes. Solid state laser products are still evolving, and there can be no assurance that the Company's solid state laser products will be successfully designed into customers' products or achieve commercial sales volumes. The Company believes that a number of companies are further advanced than the Company in their development efforts for solid state lasers and are competing with evaluation units for many of the same design-in opportunities than the Company is pursuing. It is anticipated that the average selling price of solid state lasers may be significantly less in certain applications than the gas laser products the Company is currently selling in these markets. If the Company is unable to successfully make this transition from gas to solid state lasers, its business, operating results and financial condition will be materially and adversely affected. The Company further believes it will be necessary to continue to reduce the cost of manufacturing and to broaden the wavelengths provided by its laser products. There can be no assurance that the Company will successfully develop new solid state laser products, or that any solid state laser products will achieve market acceptance or not be rendered obsolete or uncompetitive by products of other companies. Variability and Uncertainty of Quarterly Operating Results The Company has experienced and expects to continue to experience significant fluctuations in its quarterly results. The Company believes that fluctuations in quarterly results may cause the market price of its Common Stock to fluctuate, perhaps substantially. Factors which have had an influence on and may continue to influence the Company's operating results in a particular quarter include the timing of the receipt of orders from major customers, product mix, competitive pricing pressures, the relative proportions of domestic and international sales, costs associated with the acquisition or disposition of businesses, products or technologies, the Company's ability to design, manufacture, and ship products on a cost effective and timely basis, the delay between incurrence of expenses to further develop marketing and service capabilities and realization of benefits from such improved capabilities, the announcement and introduction of cost effective new products by the Company and by its competitors, and expenses associated with any intellectual property litigation. In addition, the Company's sales will often reflect orders shipped in the same quarter that they are received. Moreover, customers may cancel or reschedule shipments, and production difficulties could delay shipments. The timing of sales of the Company's Ultrapointe Systems may result in substantial fluctuations in quarterly operating results due to the substantially higher per unit price of these products relative to the Company's other products. In addition, the Company sells its telecommunications equipment products to OEMs who typically order in large quantities and therefore the timing of such sales may significantly affect the Company's quarterly results. The timing of such OEM sales can be affected by factors beyond the Company's control, including demand for the OEM's products and manufacturing issues experienced by OEMs. In this regard, the Company has experienced a temporary rescheduling of orders by OEM telecommunications customers. As a result of the above factors, the Company's results of operations are subject to significant variability from quarter to quarter. The Company's operating results in a particular quarter may also be affected by the acquisition or disposition of other businesses, products or technologies by the Company. For example, during the quarter ended June 30, 1996, the Company incurred a charge of approximately $3.0 million in connection with the cancellation of certain UTP options and granting of replacement options to purchase Uniphase Common Stock to UTP employees in order to operate UTP Fibreoptics as a division of UTP. The Company also incurred a charge of $4.8 million for acquired in- process research and development in connection with the acquisition of UTP Fibreoptics in the quarter ended June 30, 1996. There can be no assurance that other acquisitions or dispositions of businesses, products or technologies by the Company in the future will not result in substantial charges or other expenses that may cause fluctuations in the Company's quarterly operating results. Dependence on Key OEM Relationships In November 1995, the Company entered into an exclusive OEM resale agreement with Tencor pursuant to which Tencor will distribute Ultrapointe Systems through its worldwide distribution channels. As a result of such agreement, the Company currently expects that Tencor will account for a majority of Ultrapointe's net sales for the foreseeable future. In addition, one laser subsystems customer, the Applied Biosystems Division of Perkin- Elmer Corporation, accounted for approximately 12% of the Company's net sales for fiscal years 1996, 1995, and 1994, respectively. The loss of orders from these or other OEM relationships could have a materially adverse effect on the Company's business and operating results. Dependence on Sole and Limited Source Suppliers Various components included in the manufacture of the Company's products are currently obtained from single or limited source suppliers. A disruption or loss of supplies from these companies or an increase in price of these components would have a material adverse effect on the Company's results of operations, product quality and customer relationships. For example, the Company obtains all the robotics, workstations and many optical components used in its Ultrapointe Systems from Equipe Technologies, Silicon Graphics, Inc., and Olympus Corporation, respectively. The Company currently utilizes a sole source for the crystal semiconductor chip sets incorporated in the Company's solid state microlaser products and acquires its pump diodes for use in its solid state laser products from SDL, Inc., Opto Power Corporation and GEC. The Company also obtains lithium niobate wafers, specialized fiber components and certain lasers used in its UTP products primarily from Crystal Technology, Inc., Fujikura, Ltd. and Philips Key Modules, respectively. The Company does not have long-term or volume purchase agreements with any of these suppliers, and no assurance can be given that these components will be available in the quantities required by the Company, if at all. Further, UTP depends on relatively specialized components and it cannot be assured that its respective suppliers will be able to continue to meet UTP's requirements. Difficulties in Manufacture of the Company's Products The manufacture of the Company's products involves highly complex and precise processes, requiring production in highly controlled and clean environments. Changes in the Company's or its suppliers' manufacturing process or the inadvertent use of defective or contaminated materials by the Company or its suppliers could adversely affect the Company's ability to achieve acceptable manufacturing yields and product reliability. In addition, UTP has previously experienced certain manufacturing yield problems that have materially and adversely affected both UTP's ability to deliver products in a timely manner to its customers and its operating results. The Company recently began manufacturing UTP products at its newly constructed clean room at UTP's Bloomfield, Connecticut facility and in May 1996 vacated the clean room space leased from UTP's former parent corporation. No assurance can be given that the Company will be successful in manufacturing UTP products in the future at performance or cost levels necessary to meet its customer needs, if at all. In addition, UTP established a new transmitter production facility in Chalfont, Pennsylvania in March 1996 and consolidated the transmitter production line previously located in Bloomfield, Connecticut into this facility in April 1996. The Company has no assurance that this facility will be able to deliver the planned production qualities of transmitters to customers specifications at the cost and yield levels required. To the extent the Company or UTP does not achieve and maintain yields or product reliability, the Company's operating results and customer relationships will be adversely affected. Future Capital Requirements The Company is devoting substantial resources to the development of new products for the solid state laser, semiconductor capital equipment, CATV and telecommunications markets. Although the Company believes existing cash balances, cash flow from operations and available lines of credit, will be sufficient to meet its capital requirements at least through the end of calendar year 1997, the Company may be required to seek additional equity or debt financing to compete effectively in these markets. The timing and amount of such capital requirements cannot be precisely determined at this time and will depend on several factors, including the Company's acquisitions and the demand for the Company's products and products under development. There can be no assurance that such additional financing will be available when needed, or, if available, will be on terms satisfactory to the Company. Results of Operations Net Sales In the second quarter of fiscal 1997, ended December 31, 1996, net sales were $22.7 million, which represented a $7.0 million or 44.7% increase over net sales of $15.7 million in the second quarter of fiscal 1996. For the first six months of fiscal 1997, net sales were $46.1 million, which represented a $17.7 million or 62.1% increase over net sales of $28.5 million in the same period of fiscal 1996. The increase for both the quarter and six-month periods were primarily due to increased sales of $7.4 million and $14.2 million, respectively by the Company's Uniphase Telecommunications Products ("UTP"), which included sales of $2.5 million for the second quarter and $4.8 million for the first six months fo fiscal 1997 resulting from the acquisition of UTP Fibreoptics in a purchase transaction in May 1996. The Company continued to experience increased laser sales, primarily from increased sales of argon laser subsystems. The Company's Ultrapointe division experienced a decrease in sales in the second quarter of fiscal 1997 and relatively flat sales for the first six months of fiscal 1997 as compared to the same periods in fiscal 1996. Gross Profit In the second quarter of fiscal 1997, the Company's gross profit increased 41.6% to $10.4 million or 46.0% of net sales from $7.4 million or 47.0% of net sales in the same period of fiscal 1996. For the first six months of fiscal 1997, gross profits increased 64.5% to $21.7 million or 47.0% of net sales from $13.2 million or 46.3% of net sales in the same period of fiscal 1996. The Company's increase in gross profit for the quarter and the six-month period is due to higher sales volume and the addition of UTP Fibreoptics over fiscal 1996. Gross margins declined in the second quarter which is due primarily to the decline in net sales of relatively high margin Ultrapointe Systems and a higher proportion of revenue from certain low margin telecommunication components. Gross margin for the six- month period increased over the same period in fiscal 1996. The increase is due primarily to the growth in sales of the Company's relatively high margin UTP products. There can be no assurance that these trends will continue and that the Company will be able to sustain its gross margin at current levels. The Company expects that there will continue to be periodic fluctuations in its gross margin resulting from changes in its sales and product mix, competitive pricing pressures, manufacturing yields, inefficiencies associated with new product introductions and a variety of other factors. Research and Development Expense In the second quarter of fiscal 1997, research and development expense was $2.1 million or 9.4% of net sales which represented a $580,000 or 37.5% increase over research and development expense of $1.5 million or 9.9% of net sales in the second quarter of fiscal 1996. For the first six months of fiscal 1997, research and development expense was $3.8 million or 8.1% of net sales which represents a $1.3 million or 52.7% increase over the same period in fiscal 1996. The increase in research and development expense is due to increased expenditures associated with the continued development and enhancement of the Company's Ultrapointe and telecommunications product lines, which included expenses of the newly acquired UTP Fibreoptics division. The Company also continues to invest in the development of solid state lasers. Royalty and License Expense In the second quarter of fiscal 1997, royalty and license expense increased $30,000 to $416,000 from $386,000 in the same period of fiscal 1996 and decreased as a percentage of net sales to 1.8% in the quarter ended December 31, 1996 from 2.5% in the same period in fiscal 1996. For the first six months of fiscal 1997, royalty and license expense increased $76,000 to $825,000 from $749,000 in the same period of fiscal 1996 and decreased as a percentage of sales to 1.8% from 2.6% in the same period of fiscal 1996. The decrease as a percentage of net sales was due to the increasing proportion of revenues that the Company derived from royalty-free UTP products. The Company continues to develop products in solid state laser, telecommunications and semiconductor equipment technology. There are numerous patents in these areas that are held by others, including academic institutions and competitors of the Company. Such patents could inhibit the Company's ability to develop, manufacture and sell products in this area. A number of the patents are conflicting. If there is conflict between a competitor's patents or products and those of the Company, it could be very costly for the Company to enforce its rights in an infringement action or defend such an action brought by another party. In addition, the Company may need to obtain license rights to certain patents and may be required to make substantial payments, including continuing royalties, in exchange for such license rights. There can be no assurance that licenses to third party technology, if needed, will be available on commercially reasonable terms. Selling, General and Administrative Expense In the second quarter of fiscal 1997, selling, general and administrative expense was $4.2 million or 18.6% of net sales, which represented a $1.2 million or 39.0% increase over selling, general and administrative expense of $3.0 million or 19.4% of net sales in the second quarter of fiscal 1996. For the six months of fiscal 1997, selling, general and administrative expense was $8.7 million or 18.8% of net sales which represented a $3.0 million or 52.9% increase over selling and administrative expense of $5.7 million or 19.9% of net sales in the same period of fiscal 1996. The increase is due primarily to additional expenses due to amortization of intangible assets and compensation expense associated with the acquisition of UFP Fibreoptics in May 1996 and to support UTP's Pennsylvania facility, which was established in April 1996. Interest and Other Income, Net In the second quarter of fiscal 1997, interest and other income, net was $982,000, which represented a $591,000 or 1,872.5% increase over $391,000 in the second quarter of fiscal 1996. For the first six months of fiscal 1997, interest and other income, net increased to $1.9 million from $438,000 in the same period of fiscal 1996. The increase in the interest and other income, net is due to the related interest on investment of fundsproceeds received on sale of common stock in June 1996. Income Tax Expense As stated in Note 3 of Notes to Consolidated Financial Statements, the effective tax rate used for the first six months of fiscal 1997 was 35% as compared to 35% used in the same period of fiscal 1996. Liquidity and Capital Resources At December 31, 1996 the Company's combined balance of cash, cash equivalents and short-term investments was $115.8 million. The Company has met its liquidity needs to date primarily through cash generated from operations. Cash provided by operations was $5.7 million for the first six months of fiscal 1997. The primary provider of cash in operations was from net income before deprecation and amortization expense and the creation of refundable income taxes. These uses of cash were offset by increased inventory levels. Cash used in investing activities was $32.8 million for the first six months of fiscal 1997. The Companys' net investment of excess cash accounted for $27.4 million of cash usage. The Company incurred capital expenditures of $5.3 million primarily in facilities improvements and the acquisition of manufacturing and other equipment to expand its manufacturing capacities and research and development efforts primarily in its telecommunications product line. The Company also anticipates additional capital expenditures of approximately $5.3 million for the remainder of the fiscal year. The Company has a $5.0 million revolving line of credit with a bank. There were no borrowings under the line of credit at December 31, 1996. Advances under the line of credit bear interest at the bank's prime rate (8.25% at December 31, 1996) and are secured by inventories and accounts receivable. Under the terms of the line of credit agreement, the Company is required to maintain certain minimum working capital, net worth, profitability levels and other specific financial ratios. In addition, the agreement prohibits the payment of cash dividends and contains certain restrictions on the Company's ability to borrow money or purchase assets or interests in other entities without the prior written consent of the bank. The line of credit expires on January 28, 1999. Through the acquisition of UTP Fibreoptics, the Company assumed certain previously established lines of credit. All outstanding borrowing against these lines of credit were repaid in September 1996. The Company believes that its existing cash balances and short-term investments, together with existing cash flow from operations and available line of credit will be sufficient to meet its liquidity and capital spending requirements at least through the end of calendar year 1997. However, possible acquisitions of complementary businesses, products or technologies may require additional financing prior to such time. There can be no assurance that additional financing will be available when required or, if available, will be on terms satisfactory to the Company. PART II--OTHER INFORMATION Item 1. Legal Proceedings Reference is made to Item 3. Legal Proceedings, in the Registrant's Annual Report on Form 10-K for the year ended June 30, 1996 and Part II, Item 1. Legal Proceedings in the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996. Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders (the "Annual Meeting") of the Company was held on November 7, 1996. At the Company's Annual Meeting, the following persons were duly elected as Class III of the Board of Directors by the stockholders, for a three-year term and until their successors are elected and qualified: Kevin N. Kalkhoven, 14,524,395 shares for and 233,092 shares withheld and Catherine P. Lego (formerly known as Catherine P. Goodrich), 14,524,991 shares for and 232,496 shares withheld. The terms of each of the following Class I and Class II directors continued after the Annual Meeting: William B. Bridges, Robert C. Fink, Stephen C. Johnson, Anthony R. Muller and Wilson Sibbett. The stockholders ratified and approved the increase in the number of shares reserved for issuance under the Company's 1993 Flexible Stock Incentive Plan from 1,550,000 to 2,225,000 shares of Common Stock by a vote of 13,314,211 shares for, 1,353,500 shares against, 8,778 shares abstaining, and 80,998 broker non-votes. The stockholders further ratified the appointment of Ernst and Young, LLP as the Company's independent auditors for the fiscal year ending June 30, 1996 by a vote of 14,735,509 shares for 10,800 shares against and 11,178 shares abstaining. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a) Exhibits 10.1 Loan and Security Agreement, dated January 28, 1997, between Bank of the West and Registrant. 27. Financial Data Schedule b) Forms 8-K None Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Uniphase Corporation (Registrant) Date February 14, 1997 \s\ Danny E. Pettit Danny E. Pettit, Vice President of Finance and CFO (Principal Financial and Accounting Officer) Date February 14, 1997 \s\ Kevin Kalkhoven Kevin N. Kalkhoven, Chairman and CEO (Principal Executive Officer)