VIAV

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2003 (the third quarter of fiscal 2003) and the nine months ended March 31, 2003, for JDS Uniphase Corporation. The company designs and manufactures products for fiberoptic communications and industrial/commercial applications. The reporting period is characterized by a severe economic downturn in the telecommunications industry, leading to reduced capital spending by carriers, inventory destocking by customers, and significant price pressure. The company is actively executing a "Global Realignment Program" involving workforce reductions and facility closures to align costs with lower demand.

Key Financial Metrics

Cash Flow (Nine Months Ended Mar 31, 2003):

• Net cash used in operating activities: $(167.5) million
• Net cash used in investing activities: $(18.4) million
• Net cash provided by financing activities: $17.8 million

Material Changes Versus Prior Period

• Revenue Decline: Net sales decreased 37% in the quarter and 41% year-to-date compared to the prior year, driven by a dramatic downturn in the communications industry and lower average selling prices. Non-communications products (Thin Film) now account for 56% of total sales, up from 29% in the prior year quarter.
• Improved Loss Profile: While the company remains unprofitable, the net loss improved significantly compared to the prior year periods. The prior year losses were heavily impacted by massive goodwill and long-lived asset write-downs ($2.9 billion in Q3 2002 and $4.2 billion YTD 2002) which were not present in the current period due to the adoption of SFAS No. 142 (which eliminated goodwill amortization) and the timing of impairment reviews.
• Restructuring Charges: The company recorded $16.3 million in restructuring charges for the quarter and $115.1 million year-to-date as part of the Global Realignment Program, which aims to reduce the workforce by approximately 19,540 employees and close 28 sites.
• Asset Write-downs: Current period impairment charges were significantly lower than the prior year. Goodwill impairment was $0 for the quarter and $225.7 million YTD. Reductions of other long-lived assets were $11.2 million for the quarter and $165.8 million YTD.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Guidance: Management states it is unable to provide long-term guidance due to the uncertainty of the economic environment and capital spending plans of major telecommunications carriers. The company expects to use approximately $250 to $300 million in cash in fiscal 2003. It anticipates that revenue from the Communications Products Group will remain stable in the fourth quarter, while Thin Film Products Group revenue may decline slightly.

Unusual Items and Accounting Changes:

• Income Tax Provision: An $18.0 million tax expense was recorded related to a Canadian tax authority review, resulting in an increase in the valuation allowance for deferred tax assets. Management does not believe this is material to the current period but notes it may require a restatement of the prior fiscal year if deemed material.
• Patent License: The company finalized a royalty-bearing patent license agreement, recording $8.7 million in royalty expense in the quarter and reclassifying $8.3 million from SG&A to Cost of Sales.
• Investment Write-downs: The company recorded $9.8 million in reductions in fair value of investments for the quarter, primarily related to non-marketable equity securities (e.g., Adept Technology).

Risks and Contingencies:

• Litigation: The company is facing numerous securities class actions, derivative actions, and shareholder actions related to acquisitions (OCLI, SDL). While management believes the allegations are without merit, the costs of defense are significant and an unfavorable outcome could materially harm financial position.
• Customer Concentration: Two customers, Texas Instruments and SICPA, accounted for 13% and 11% of total net sales in the quarter, respectively.
• Lease Commitments: The company has a "synthetic lease" for facilities in Florida and North Carolina. Under new accounting rules (Interpretation No. 46), the company will be required to consolidate these assets and liabilities starting in the first quarter of fiscal 2004, which will impact the balance sheet.

Important Facts for Investor Verification

• Liquidity Position: Verify the sufficiency of the $1.26 billion in cash and short-term investments to fund operations through the next 12 months, given the continued operating cash burn of $167.5 million YTD.
• Restatement Risk: Monitor the status of the $18.0 million deferred tax asset adjustment and whether it triggers a restatement of the fiscal 2002 annual results.
• Restructuring Progress: Track the execution of the Global Realignment Program, specifically the timeline for workforce reductions (18,357 terminated as of March 31, 2003) and the realization of the projected $1.3 billion in annual cost savings.
• Lease Consolidation Impact: Assess the impact of the upcoming consolidation of the synthetic lease (effective Q1 fiscal 2004) on the company's debt levels and tangible net worth covenants.
• Legal Exposure: Review the status of the consolidated securities class actions and derivative lawsuits, as the potential damages are unspecified and could be material.