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When Would Market to Book Be Less Than One? Does Acquisition by Stock Explain JDS Uniphase Corp.?

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When Would Market to Book Be Less Than One? Does Acquisition by Stock Explain JDS Uniphase Corp.? CASE TOPICS OUTLINE 1. JDS Uniphase Corp. 10-Q Filing A. Press Release and Media Commentary B. SEC Advice Sought and Results Noted 2. Revaluation Market to book is a term applied to the ratio of a company’s market value of equity (capitalization) to the book value of the equity of the company, and descriptive statistics in the literature for empirical samples of thousands of public companies over the past decades report medians (i.e., midway points within the sample, with half of the companies lying above and half lying below) of approximately 2. The 10-Q for March 31, 2001, filed on May 11, 2001, by JDS Uniphase Corp. included the following disclosures: The Company is currently evaluating the carrying value of certain long-lived assets and acquired equity method investments, consisting primarily of $56.2 billion of goodwill and the Company’s $757 million equity method investment in ADVA (see Note 10) recorded on its balance sheet at March 31, 2001. Pursuant to accounting rules, the majority of the goodwill was recorded based on stock prices at the time merger agreements were executed and announced. The Company’s policy is to assess enterprise level goodwill if the market capitalization of the Company is less than its net assets. Goodwill will be reduced to the extent that net assets are greater than market capitalization. At March 31, 2001, the value of the Company’s net assets, including unamortized goodwill exceeded the Company’s market capitalization by approximately $39.5 billion. The Company also examines the carrying value of equity method investments for recoverability on a regular basis, based on a number of factors including financial condition and business prospects of the investee 5.5-1 5.5-2 CASES TO ACCOMPANY FARS BY W.A. WALLACE and the market value of the investee’s common stock. Downturns in telecommunications equipment and financial markets have created unique circumstances with regard to the assessment of goodwill and equity method investments for recoverability, and the Company has sought the counsel of the Staff of the SEC on the interpretation of generally accepted accounting principles with regard to these matters. The Company anticipates recording additional charges to reduce the carrying value of the unamortized goodwill and acquired equity method investments and such adjustments could represent a substantial portion of their carrying value. Some of these charges may be recorded as an adjustment to the Company’s financial statements at March 31, 2001 and should they be, the Company would restate its March 31, 2001 financial statements in subsequent SEC filings. . . . Note 10. Equity Method of Accounting As of March 31, 2001, the Company had a 29 percent ownership stake in ADVA, a
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publicly traded German company that develops and manufactures fiber optic components and products and a 40 percent ownership stake in the Photonics Fund (“Photonics Fund”), LLP, a California limited liability partnership (the “Partnership”), which emphasizes privately negotiated venture capital equity investments. The Company accounts for its investments in ADVA and the Photonics Fund under the equity method. Due to the limited availability of timely data, the Company records the adjustments to its equity method investments in the subsequent quarter. For the three and nine months ended March 31, 2001, the Company recorded $44.5 million and $133.7 million, respectively, in amortization expense related to the difference between the cost of the investment and the underlying equity in the net assets of ADVA. At June 30, 2000, the Company’s cost and estimated fair value of its investment in ADVA was $701.1 million. In the process of completing the E-TEK purchase accounting, the Company increased the cost and estimated fair value of its investment in ADVA to $931.5 million during the first fiscal quarter. The difference between the cost of the investment and the underlying equity in the net assets of ADVA is being amortized over a 5 year period. For the three and nine months ended March 31, 2001, the Company recorded a $0.6 million and $5.7 million net loss in ADVA relating to their three and six months ended December 30, 2000 financial results, respectfully. As of May 7, 2001, ADVA had not announced their financial results for the three months ended March 31, 2000. The Company will record its share of the income or loss of ADVA in the three months ended June 30, 2001. In the three and nine months ended March 31, 2001, the Company recorded a loss of $0.3 million and a gain of $0.6 million, which represented the Company’s share of the earnings of the Photonics Fund Partnership for the three and six months ended December 30, 2000. The Company’s share of the gain of the Partnership for the three months ended March 31, 2001 was approximately $0.8 million, which will be recorded by the Company during the three months ended June 30, 2001. (Source: 10-Q filed 5/11/01) The company later issued an 8-K that includes a press release containing the following related discussion: Goodwill discussion As we announced in April and reported in our 10-Q, the Company has evaluated the carrying value of certain long-lived assets and acquired equity investments, consisting When Would Market to Book Be Less Than One? Does Acquisition by Stock Explain JDS Uniphase Corp.? Page 5.5-3 primarily of goodwill and . . . our investment in ADVA. Pursuant to accounting rules, the majority of the goodwill was recorded based on stock prices at the time merger agreements were executed and announced. The Company’s policy is to assess enterprise level goodwill if the market capitalization of the Company is less than its net assets, with goodwill being reduced to the extent net assets are greater than market capitalization. Downturns in telecommunications equipment and financial markets have created unique circumstances with regard to the assessment of long-lived assets, and we sought the counsel of the Staff of the Securities and Exchange Commission on the interpretation of generally accepted accounting principles with regard to this matter. We have had communications with the Staff of the SEC, and we will amend our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 to reduce the carrying value of goodwill by $38.7 billion for that quarter. In addition, we recorded a $6.1 billion reduction for
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