8-K/A 1 0001.txt FORM 8-K/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 8-K/A CURRENT REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): APRIL 3, 2000 Commission File Number: 0-25688 SDL, INC. -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 77-0331449 ----------------------------------- ------------------------ (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 80 Rose Orchard Way, San Jose, California 95134 --------------------------------------------- ---------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (408) 943-9411 This form 8-K/A amends Form 8-K filed with the Securities and Exchange Commission on April 11, 2000 (the "Original Form 8-K") by including the financial statements and pro forma financial information referred to below. ITEM 5. OTHER EVENTS SDL, Inc. (SDL) has included herein the financial statements of Veritech Microwave, Inc. (Veritech) for the years ended December 31, 1998 and 1999 and for the three months ended March 31, 2000 (unaudited) and pro forma financial information giving effect to the merger between SDL and Veritech. SDL recently completed the acquisition of Queensgate Instruments (Queensgate) and for periods in which the effects of Queensgate are not included in the historical financial statements of SDL the accompanying pro forma financial information also gives effect to this transaction. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS (a) Financial Statements of Business Acquired (Veritech Microwave, Inc.) i. Report of Independent Certified Public Accountants ii. Balance Sheets as of December 31, 1998 and 1999 and March 31, 2000 (unaudited) iii. Statements of Income for the years ended December 31, 1998 and 1999 and for the three months ended March 31, 1999 and 2000 (unaudited) iv. Statements of Stockholders Equity for the year end 1999 and for the three months ended March 31, 2000 (unaudited) v. Statements of Cash Flow for the years ended December 31, 1998 and 1999 and for the three months ended March 31, 1999 and 2000 (unaudited) vi. Notes to Financial Statements (b) Pro Forma Financial Information Pro Forma Combined Consolidated Financial Statements (unaudited) i. Pro Forma Combined Consolidated Balance Sheet as of March 31, 2000 2 ii. Pro Forma Combined Consolidated Statements of Operations for the year ended December 31, 1999 iii. Pro Forma Combined Consolidated Statements of Operations for the quarter ended March 31, 2000 iv. Notes to Pro Forma Combined Consolidated Financial Statements (c) Exhibits 23.1 Consent of Grant Thornton LLP, Independent Certified Public Accountants 3 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders VERITECH MICROWAVE, INC. We have audited the accompanying balance sheets of Veritech Microwave, Inc. as of December 31, 1998 and 1999, and the related statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Veritech Microwave, Inc. as of December 31, 1998 and 1999, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. /s/ GRANT THORNTON LLP Edison, New Jersey January 28, 2000 4 Veritech Microwave, Inc. BALANCE SHEETS
December 31, ---------------------------- March 31, ASSETS 1998 1999 2000 ----------- ----------- ----------- (unaudited) CURRENT ASSETS Cash and cash equivalents $ 1,818,694 $ 3,249,165 $11,911,346 Short-term investment 7,066,773 11,418,050 3,572,762 Trade accounts receivable, less allowances for doubtful accounts and sales returns of $10,000, $10,000 and $1,133,500, respectively 2,619,277 5,051,408 5,788,427 Inventory 969,842 1,811,413 2,329,733 Deferred income tax assets 113,000 140,000 140,000 Prepaid transaction costs 193,500 Other current assets 8,424 57,772 45,471 ----------- ----------- ----------- Total current assets 12,596,010 21,727,808 23,981,239 PROPERTY AND EQUIPMENT, NET 1,746,955 2,177,699 2,632,329 OTHER ASSETS 14,250 18,000 18,000 ----------- ----------- ----------- $14,357,215 $23,923,507 $26,631,568 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable $ 272,279 $ 482,010 $ 722,028 Accrued expenses and other 982,199 1,657,981 1,775,914 Income taxes payable 504,000 609,000 1,081,766 ----------- ----------- ----------- Total current liabilities 1,758,478 2,748,991 3,579,708 DEFERRED INCOME TAX LIABILITY 138,000 204,000 204,000 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $.01 par value; authorized, 5,000,000 shares; issued and outstanding, 3,655,333 shares 36,553 36,553 36,553 Retained earnings 12,424,184 20,933,963 22,811,307 ----------- ----------- ----------- 12,460,737 20,970,516 22,847,860 ----------- ----------- ----------- $14,357,215 $23,923,507 $26,631,568 =========== =========== ===========
The accompanying notes are an integral part of these statements. 5 Veritech Microwave, Inc. STATEMENTS OF INCOME
Year ended Three months ended December 31, March 31, ----------------------------- ------------------------ 1998 1999 1999 2000 ------------ ------------ ---------- ---------- (unaudited) Net sales $ 15,253,977 $ 22,276,625 $5,803,655 $6,520,995 Cost of goods sold 3,953,161 5,334,544 1,818,552 1,727,604 ------------ ------------ ---------- ---------- Gross profit 11,300,816 16,942,081 3,985,103 4,793,391 Operating expenses Research and development 602,778 614,416 146,578 176,438 Selling, general and administrative 2,005,913 2,895,895 344,227 1,691,000 ------------ ------------ ---------- ---------- Total operating expenses 2,608,691 3,510,311 490,805 1,867,438 ------------ ------------ ---------- ---------- Operating income 8,692,125 13,431,770 3,494,298 2,925,953 ------------ ------------ ---------- ---------- Other income (expense) Investment income 325,629 583,788 105,599 203,391 Interest expense (56,164) (7,709) -- -- ------------ ------------ ---------- ---------- Total other income, net 269,465 576,079 105,599 203,391 ------------ ------------ ---------- ---------- Income before income tax expense 8,961,590 14,007,849 3,599,897 3,129,344 Income tax expense 3,797,420 5,498,070 1,430,000 1,252,000 ------------ ------------ ---------- ---------- NET INCOME $ 5,164,170 $ 8,509,779 $2,169,897 $1,877,344 ============ ============ ========== ==========
The accompanying notes are an integral part of these statements. 6 Veritech Microwave, Inc. STATEMENT OF STOCKHOLDERS' EQUITY Years ended December 31, 1998 and 1999 and three months ended March 31, 2000 (unaudited)
Common stock --------------------- Retained Shares Dollars earnings Total --------- -------- ----------- ----------- Balance at January 1, 1998 (as reported) 3,655,333 $ 36,553 $ 6,894,211 $ 6,930,764 Net income 5,164,170 5,164,170 Prior period adjustment (net of income taxes of $243,000) 365,803 365,803 --------- -------- ----------- ----------- Balance at December 31, 1998 3,655,333 36,553 12,424,184 12,460,737 Net income 8,509,779 8,509,779 --------- -------- ----------- ----------- Balance at December 31, 1999 3,655,333 36,553 20,933,963 20,970,516 Net income 1,877,344 1,877,344 --------- -------- ----------- ----------- BALANCE AT MARCH 31, 2000 (UNAUDITED) 3,655,333 $ 36,553 $22,811,307 $22,847,860 ========= ======== =========== ===========
The accompanying notes are an integral part of this statement. 7 Veritech Microwave, Inc. STATEMENTS OF CASH FLOWS
Year ended Three months ended December 31, March 31, -------------------------- --------------------------- 1998 1999 1999 2000 ----------- ----------- ----------- ------------ (unaudited) Cash flows from operating activities Net income $ 5,164,170 $ 8,509,779 $ 2,169,897 $ 1,877,344 Adjustments to reconcile net income to net cash provided by operating activities Prior period adjustment 365,803 Depreciation 419,877 634,197 158,000 200,779 Non-cash interest 56,164 Deferred income taxes (25,000) 39,000 Changes in operating assets and liabilities Trade accounts receivable, net (1,840,410) (2,432,131) (1,351,223) (737,019) Inventory (442,578) (841,571) 355,117 (518,320) Other current assets and other assets 9,052 (53,098) (23,472) (181,199) Trade accounts payable 60,497 209,731 88,809 240,018 Accrued expenses and other 639,156 675,782 (638,960) 117,933 Income taxes payable 312,077 105,000 1,125,930 472,766 ----------- ----------- ----------- ------------ Net cash provided by operating activities 4,718,808 6,846,689 1,884,098 1,472,302 ----------- ----------- ----------- ------------ Cash flows from investing activities Purchases of property and equipment (1,036,758) (1,064,941) (172,224) (655,409) Sales of short-term investments -- -- -- 7,845,288 Purchases of short-term investments (7,066,773) (4,351,277) (80,316) -- ----------- ----------- ----------- ------------ Net cash (used in) provided by investing activities (8,103,531) (5,416,218) (252,540) 7,189,879 ----------- ----------- ----------- ------------ Cash flows from financing activities Principal payments under capital lease obligations (873,395) -- -- -- ----------- ----------- ----------- ------------ Net cash used in financing activities (873,395) -- -- -- ----------- ----------- ----------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,258,118) 1,430,471 1,631,558 8,662,181 Cash and cash equivalents at beginning of period 6,076,812 1,818,694 1,818,694 3,249,165 ----------- ----------- ----------- ------------ Cash and cash equivalents at end of period $ 1,818,694 $ 3,249,165 $ 3,450,252 $ 11,911,346 =========== =========== =========== ============ Supplemental disclosures of cash flow information: Cash paid during the period for Interest $ 56,000 $ 7,700 $ -- $ -- Income taxes 3,450,000 5,350,000 $ 300,000 $ 773,000
The accompanying notes are an integral part of these statements. 8 Veritech Microwave, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998 and 1999 NOTE A - DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS Veritech Microwave, Inc. (the "Company"), a Delaware corporation, was founded in 1986. The Company designs and manufactures high technology microwave components, multifunction components and subsystems for the industrial and commercial microwave and fiber-optic markets. The Company sells its products to customers in North America and Europe. The Company has received a letter of intent from an unrelated party setting forth the terms and conditions of a possible acquisition of the Company. The Company is bound by confidentiality clauses from disclosing the terms of such letter. Management believes that the proposed purchase price would exceed the carrying value of the Company's assets. (See Note L.) NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES 1. Cash and Cash Equivalents The Company considers all highly liquid instruments with maturities of three months or less when purchased to be cash equivalents. 2. Short-term Investment Short-term investment consists of an investment in a money market fund that invests primarily in corporate debt securities. Such investment is carried at fair value and is classified as available for sale. There are no unrealized holding gains from such investment at December 31, 1998 and 1999. 3. Inventory Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method. 9 Veritech Microwave, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1998 and 1999 NOTE B (CONTINUED) 4. Property and Equipment Property and equipment are stated at cost and are being depreciated primarily on a straight-line basis over the estimated useful lives of the assets which generally range from 5 to 7 years. Leasehold improvements are depreciated over their estimated useful lives (generally 5 years) or the life of the lease, whichever is shorter. Repairs and maintenance costs are expensed as incurred. Depreciation expense for tax purposes is calculated using MACRS. 5. Revenue Recognition Revenue is recognized upon product shipment. 6. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 7. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 8. Stock Option Plan The Company has elected to continue to account for its stock option plan in accordance with the provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees," and related interpretations, and pro forma disclosure provisions of SFAS No. 123, "Accounting for Stock Based Compensation." As disclosed in Note G, since the Company did not grant any options in 1998 and 1999, the disclosure provisions of SFAS No. 123 are currently not applicable. 10 Veritech Microwave, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1998 and 1999 NOTE B (CONTINUED) 9. Warranty Liabilities The Company provides an accrual for estimated future warranty costs based upon the historical relationship of warranty costs to sales 10. Other Comprehensive Income Other comprehensive income, as defined, includes all changes in equity during a period from non-owner sources. To date, the Company has not had any transactions that are required to be reported as other comprehensive income. 11. Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities," which defines derivatives, requires that all derivatives be carried at fair value, and provides for hedge accounting when certain conditions are met. SFAS No. 133 is effective for the Company in 2002. The Company does not believe that the adoption of this statement will have a material impact on the Company's financial position or results of operations. 12. Segment Information Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 established standards for the way companies report information about operating segments in annual financial statements. It also established standards for related disclosures about geographic areas and major customers. The Company has determined that it operates as one business segment. 13. Interim Financial Statements (Unaudited) The accompanying balance sheet as of March 31, 2000, and the statements of income for the three months ended March 31, 1999 and 2000, stockholders' equity for the three months ended March 31, 2000, and cash flows for the three months ended March 31, 1999 and 2000, are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which 11 Veritech Microwave, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1998 and 1999 NOTE B (CONTINUED) include only normal recurring adjustments, necessary to present fairly the Company's financial position as of March 31, 2000, and results of operations and cash flows as of and for the three months ended March 31, 1999 and 2000. The results of operations for the three months ended March 31, 2000 are not necessarily indicative of the results to be expected for the entire year. NOTE C - INVENTORY Inventory consists of the following:
December 31, ------------------------ MARCH 31, 1998 1999 2000 ---------- ---------- ---------- (UNAUDITED) Raw materials $ 442,697 $1,112,036 $1,382,136 Work-in-progress 497,407 643,229 877,409 Finished goods 29,738 56,148 70,188 ---------- ---------- ---------- $ 969,842 $1,811,413 $2,329,733 ========== ========== ==========
NOTE D - PROPERTY AND EQUIPMENT Property and equipment consist of:
December 31, ------------------------- 1998 1999 ---------- ---------- Machinery and equipment $4,049,501 $4,983,285 Furniture and fixtures 119,352 160,960 Leasehold improvements 62,051 151,600 ---------- ---------- 4,230,904 5,295,845 Less accumulated depreciation 2,483,949 3,118,146 ---------- ---------- $1,746,955 $2,177,699 ========== ==========
Depreciation expense was approximately $420,000 and $634,000 for the years ended December 31, 1998 and 1999, respectively. 12 Veritech Microwave, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1998 and 1999 NOTE E - PRIOR PERIOD ADJUSTMENT During 1998, the Company discovered that it had made miscalculations related to its inventory costing and warranty liabilities. These miscalculations resulted in an understatement of the Company's prior year net income of approximately $609,000. Such prior period adjustment is recorded as an adjustment of retained earnings at December 31,1997 net of income taxes of $243,000. NOTE F - COMMITMENTS AND CONTINGENCIES The Company was obligated under various capital leases for certain machinery and equipment that expire on various dates through 2002. In December 1998, the Company prepaid its balance due on its capital lease obligations. The total prepayment was $648,948 including a prepayment penalty of approximately $183,000, which was added to the cost of property and equipment. The Company also has noncancellable operating leases for building space and two motor vehicles that expire in July 2001, November 2001, and September 2002, respectively. Rent expense for these operating leases during the years ended December 31, 1998 and 1999 was approximately $112,000 and $176,000, respectively. Future minimum lease payments under noncancellable operating leases as of December 31, 1999 are as follows:
Year ending December 31: 2000 $183,440 2001 115,079 2002 9,256 -------- Total minimum lease payments $307,775 =======
13 Veritech Microwave, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1998 and 1999 NOTE G - INCOME TAXES Income tax expense (benefit) consists of the following:
Year ended December 31, ----------------------------- 1998 1999 ----------- ----------- Current Federal $ 2,944,000 $ 4,272,000 State 878,420 1,187,070 ----------- ----------- 3,822,420 5,459,070 ----------- ----------- Deferred Federal (20,000) 42,000 State (5,000) (3,000) ----------- ----------- (25,000) 39,000 ----------- ----------- Total income tax expense $ 3,797,420 $ 5,498,070 =========== ===========
A reconciliation between the income tax expense computed at the United States Federal income tax rate and the Company's effective tax rate is as follows:
Year ended December 31, -------------------------- 1998 1999 ---------- ---------- Computed income tax provision based on the Federal statutory rate $3,047,000 $4,763,000 State and local income taxes, net of Federal benefit 748,000 732,000 Other 2,420 3,070 ---------- ---------- $3,797,420 $5,498,070 ========== ==========
14 Veritech Microwave, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1998 and 1999 NOTE G (CONTINUED) The tax effect of temporary differences that give rise to the Company's deferred tax assets and liabilities is as follows:
December 31, ------------------------- 1998 1999 --------- --------- Deferred tax assets - current Accounts receivable, principally due to allowance for doubtful accounts $ 4,000 $ 4,000 Unpaid vacation and bonuses, principally due to accruals for financial reporting purposes 89,000 116,000 Warranty reserve, principally due to accrual for financial reporting purposes 20,000 20,000 --------- --------- Total deferred tax assets - current $ 113,000 $ 140,000 ========= ========= Deferred tax liability - noncurrent Depreciation, principally due to difference between accelerated and straight - line methods $(138,000) $(204,000) ========= =========
NOTE H - CAPITAL STOCK AND STOCK OPTIONS Each share of the Company's outstanding capital stock as of December 31, 1998 and 1999 has equal voting privileges and rights. The Company had a stock option plan which provided for the grant of options to purchase up to 750,000 shares of the Company's common stock at an exercise price of $.01 per share. Options granted under the plan were subject to various vesting schedules as determined by the board of directors. Options were exercisable commencing three months from the date of grant and expired ten years thereafter. At December 31, 1998 and 1999, all 750,000 stock options had been granted and exercised. NOTE I - RETIREMENT PLAN The Company has a 401(k) retirement plan (the "Plan") covering substantially all full-time employees. Under the Plan, the Company is required to match 25% of the first $200 of employees' quarterly qualified contributions based on the Company's prior quarter profits. The Company has a maximum annual contribution of $200 per employee. Employer contributions of approximately $5,000 and $7,000 were made during the years ended December 31, 1998 and 1999, respectively. 15 Veritech Microwave, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1998 and 1999 NOTE I (CONTINUED) The Company plans to amend the plan in the first quarter of the 2000 plan year whereby it will be required to match 50% of the first $300 of employees' quarterly qualified contributions based on the Company's prior quarter profits. The maximum annual contribution will be increased to $600 per employee. NOTE J - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS The Company maintains cash balances at several financial institutions located in New Jersey. Each account is insured by the Federal Deposit Insurance Corporation up to $100,000. Uninsured balances aggregated approximately $1,400,000 and $3,600,000 at December 31, 1998 and 1999, respectively. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. At December 31, 1998 and 1999, the Company's largest customer accounts for approximately 71% and 38% of accounts receivable, respectively, and represented 60% and 43% of sales for the years then ended. No other customer represented more than 10% of sales in 1998 and 1999. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specified customers, historical trends and other information. The Company has historically not suffered from credit losses relating to its accounts receivable. NOTE K - GEOGRAPHIC AREAS Information about the Company's revenues from domestic and foreign sources follows:
Year ended December 31, ------------------------------- 1998 1999 ----------- ----------- United States $12,803,256 $12,736,472 Europe 2,450,721 9,540,153 ----------- ----------- $15,253,977 $22,276,625 =========== ===========
16 Veritech Microwave, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1998 and 1999 NOTE L - SUBSEQUENT EVENTS (UNAUDITED) 1. During the quarter ended March 31, 2000, the Company became aware of an uncertainty regarding the technological acceptance of a particular batch of product sold to one individual customer during the fourth quarter of 1999 and the first quarter of 2000. The collectibility of the related accounts receivable is doubtful due to the above uncertainty. Therefore, during the three months ended March 31, 2000, the Company recorded a provision for sales returns aggregating approximately $1,100,000 relating to these sales, which represents the Company's estimate of its potential losses from these sales. 2. On April 3, 2000, SDL, Inc. ("SDL"), a Delaware corporation, acquired by merger the Company pursuant to an Agreement and Plan of Merger (the "Agreement") dated as of February 28, 2000 among SDL, VMI Acquisition Corporation, a Delaware corporation, Veritech and certain shareholders of Veritech. The Agreement calls for the payment by SDL of consideration of 3,000,000 shares of common stock of SDL to the shareholders of Veritech. The fair value of the SDL common stock has an estimated fair value of approximately $621 million on the date of acquisition, determined based on the quoted market price of such shares. Additionally, fees of approximately $8.8 million were paid in connection with such transaction. 3. In February 2000, the Company declared a special bonus aggregating $1,000,000 to certain employees of the Company. The first half of the bonus was paid in April 2000, with the remainder due to be paid in April 2001. The bonus is reflected in selling, general and administrative expenses for the first quarter of 2000. 17 ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS (CONTINUED) (b) Pro Forma Financial Information The following unaudited pro forma combined consolidated financial statements are presented for illustrative purposes only and are not necessarily indicative of the combined financial position or results of operations for future periods or the results of operations or financial position that actually would have been realized had SDL, Inc., Veritech Microwave, Inc., and Queensgate Instruments been a combined company during the specified periods, and do not purport to represent the future results of operations of the Company. The unaudited pro forma combined consolidated financial statements should be read in conjunction with SDL's Annual Report on Form 10-K for the year ended 1999, SDL's Form 10-Q for the quarter ended March 31, 2000, and SDL's Form 8-K/A filed May 22, 2000. Unaudited pro forma combined consolidated balance sheet information as of March 31, 2000 is based on the historical financial statements of SDL, Inc. and Veritech, after giving effect to the merger with Veritech under the purchase method of accounting as if the acquisition occurred on March 31, 2000. Queensgate is not separately presented in the unaudited pro-forma combined consolidated balance sheet as the historical consolidated financial statements as of March 31, 2000, already reflect the acquisition of Queensgate. The unaudited pro forma combined consolidated statement of operations for the year ended December 31, 1999, includes the historical results of SDL, Veritech and Queensgate for the 12 months ended December 31, 1999, and adjustments (including the amortization of purchased intangible assets) necessary to reflect the acquisitions of Veritech and Queensgate as if both occurred on the first day of the fiscal 1999. The unaudited pro forma combined consolidated statement of operations for the three months ended March 31, 2000, include the historical results of SDL, Veritech, and Queensgate for the three months ended March 31, 2000, and adjustments (including the amortization of purchased intangible assets and the elimination of non-recurring in-process research and development charges related to the Queensgate acquisition) necessary to reflect the acquisitions of Veritech and Queensgate as if both had occurred at the beginning of fiscal 1999. 18 SDL, INC. UNAUDITED PROFORMA COMBINED CONSOLIDATED BALANCE SHEET MARCH 31, 2000 (IN THOUSANDS)
PRO FORMA PRO FORMA ADJUST- SDL SDL VERITECH MENTS COMBINED -------- -------- ----------- ---------- ASSETS Current Assets: Cash and cash equivalents $238,239 $ 11,911 $ (8,800)(2A) $ 241,350 Short-term marketable securities 76,903 3,573 -- 80,476 Accounts receivable, net 49,652 5,788 -- 55,440 Inventories 36,971 2,330 555(2A) 39,856 Prepaid expenses and other current assets 3,628 379 -- 4,007 -------- -------- ----------- ---------- Total current assets: 405,393 23,981 (8,245) 421,129 Property and equipment, net 65,670 2,632 -- 68,302 Restricted cash 680 -- -- 680 Purchased intangibles, net 93,258 -- 609,155(2A) 701,858 Other assets 15,271 18 -- 15,289 -------- -------- ----------- ---------- $580,272 $ 26,631 $ 600,910 $1,207,258 ======== ======== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 19,151 $ 722 $ -- $ 19,873 Accrued payroll and related expenses 4,118 -- -- 4,118 Income taxes payable 8,854 1,082 -- 9,936 Current portion of leases 874 -- -- 874 Other accrued liabilities 7,498 1,776 -- 9,274 -------- -------- ----------- ---------- Total current liabilities 40,495 3,580 -- 44,075 Long-term leases 860 -- -- 860 Other 13,667 204 -- 13,871 -------- -------- ----------- ---------- Total long-term liabilities 14,527 204 -- 14,731 -------- -------- ----------- ---------- Total Stockholders' Equity 525,250 22,847 600,910(2A) 1,148,452 -------- -------- ----------- ---------- $580,272 $ 26,631 $ 600,910 $1,207,258 ======== ======== =========== ==========
See accompanying notes to unaudited pro forma combined consolidated financial statements. 19 SDL, INC. UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA ADJUST- SDL SDL VERITECH QUEENSGATE MENTS COMBINED -------- -------- ---------- --------- --------- Revenue $187,021 $22,277 $ 8,259 $ -- $ 217,557 Cost of revenue 107,238 5,335 4,628 -- 117,201 -------- ------- -------- --------- --------- Gross profit 79,783 16,942 3,631 -- 100,356 Operating expenses: Research and development 19,043 614 1,606 -- 21,263 Selling, general, and administrative 26,695 2,896 5,576 -- 35,167 Merger costs 2,677 -- -- -- 2,677 In process research and development 1,495 -- -- -- 1,495 Amortization of purchased 809 -- -- 121,831(2B) 141,051 intangibles 18,411(2E) -------- ------- -------- --------- --------- Total operating expenses 50,719 3,510 7,182 140,242 201,653 -------- ------- -------- --------- --------- Operating income (loss) 29,064 13,432 (3,551) (140,242) (101,297) Interest income (expense), net 5,429 576 (163) -- 5,842 -------- ------- -------- --------- --------- Income (loss) before income taxes 34,493 14,008 (3,714) (140,242) (95,455) Provision (benefit) for income taxes 9,280 5,498 (538) (5,655)(2C) 6,849 (1,736)(2G) -------- ------- -------- --------- --------- Net income (loss) $ 25,213 $ 8,510 $ (3,176) $(132,851) $(102,304) ======== ======= ======== ========= ========= Earnings (loss) per share - basic $ 0.39 $ (1.51) ======== ========= Earnings (loss) per share - diluted $ 0.37 $ (1.51) ======== ========= Shares outstanding - basic 64,320 3,000(2D) 67,668 348(2H) Share outstanding - diluted 68,470 3,000(2D) 67,668 348(2H) (4,150)(2I)
See accompanying notes to unaudited pro forma combined consolidated financial statements. 20 SDL, INC. UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS MARCH 31, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA ADJUST- SDL SDL VERITECH QUEENSGATE MENTS COMBINED ------- ------ ---------- -------- -------- Revenue $72,206 $6,521 $ 2,461 $ -- $ 81,188 Cost of revenue 37,616 1,728 1,798 -- 41,142 ------- ------ ------- -------- -------- Gross profit 34,590 4,793 663 -- 40,046 Operating expenses: Research and development 5,903 176 352 -- 6,431 Selling, general, and administrative 7,298 1,691 605 -- 9,594 In process research and development 1,200 -- -- (1,200)(2F) -- Amortization of purchased 1,744 -- -- 30,458(2B) 35,270 intangibles 3,068(2E) ------- ------ ------- -------- -------- Total operating expenses 16,145 1,867 957 32,326 51,295 ------- ------ ------- -------- -------- Operating income (loss) 18,445 2,926 (294) (32,326) (11,249) Interest income (expense), net 4,485 203 (56) -- 4,632 ------- ------ ------- -------- -------- Income (loss) before income taxes 22,930 3,129 (350) (32,326) (6,617) Provision (benefit) for income taxes 8,686 1,252 -- (1,416)(2C) 8,233 (289)(2G) ------- ------ ------- -------- -------- Net income (loss) $14,244 $1,877 $ (350) $(30,621) $(14,850) ======= ====== ======= ======== ======== Earnings (loss) per share - basic $ 0.20 $ (0.20) ======= ======== Earnings (loss) per share - diluted $ 0.19 $ (0.20) ======= ======== Shares outstanding - basic 72,019 3,000(2D) 75,252 233(2H) Share outstanding - diluted 76,507 3,000(2D) 75,252 233(2H) (4,488)(2I)
See accompanying notes to unaudited pro forma combined consolidated financial statements. 21 SDL, INC. NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS 1) BASIS OF PRESENTATION Unaudited pro forma combined consolidated balance sheet information as of March 31, 2000 is based on the historical financial statements of SDL, Inc. and Veritech, after giving effect to the merger with Veritech under the purchase method of accounting as if the acquisition was on March 31, 2000. Queensgate is not separately presented in the unaudited pro forma combined consolidated balance sheet as the historical consolidated financial statements as of March 31, 2000, already reflect the acquisition of Queensgate. The unaudited pro forma combined consolidated statement of operations for the year ended December 31, 1999, includes the historical results of SDL, Veritech and Queensgate for the 12 months ended December 31, 1999, and adjustments (including the amortization of purchased intangible assets) necessary to reflect the acquisitions of Veritech and Queensgate as if both occurred on the first day of the fiscal 1999. The unaudited pro forma combined consolidated statement of operations for the three months ended March 31, 2000, include the historical results of SDL, Veritech, and Queensgate for the three months ended March 31, 2000, and adjustments (including the amortization of purchased intangible assets and the elimination of non-recurring in-process research and development charges related to the Queensgate acquisition) necessary to reflect the acquisitions of Veritech and Queensgate as if both had occurred at the beginning of fiscal 1999. Veritech The unaudited pro forma combined consolidated financial statements reflect the issuance of 3,000,000 SDL common shares for all of Veritech's shares outstanding as of April 3, 2000. The average market price per SDL common share of $206.843 per share was used to determine the consideration paid to Veritech shareholders. The average market price per share of SDL common share is based on the average closing price for a range of trading days (February 24 through March 3, 2000) around the announcement date (February 29, 2000) of the acquisition. The estimated direct transaction expenses of $8.8 million have been included as a part of the total estimated purchase cost. The total purchase cost of the Veritech acquisition is as follows (in thousands): Value of securities issued .................................. $620,529 Estimated transaction costs ................................. 8,800 -------- Total purchase cost ......................................... $629,329
Annual Useful Amount Amortization Lives --------- ------------ ------- Purchase Price Allocation: Tangible net assets $ 23,402 n/a n/a Core\existing technology 67,800 13,560 5 years In process research and development 25,100 n/a n/a Workforce 2,500 500 5 years Design tools and device library 521 104 5 years Goodwill 538,334 107,667 5 years Deferred tax liabilities (28,328) n/a n/a --------- -------- Total estimated purchase price: $ 629,329 $121,831
The Company has performed an allocation of the total purchase price of Veritech to its individual assets. The purchase price allocation is preliminary and, therefore, subject to change based on the Company's final analysis. Of the total purchase price, $25.1 million has been allocated to in-process research and development and will be charged to expense in the quarter ending June 30, 2000. Due to their non-recurring nature, the in-process research and development attributed to the Veritech transaction and the transaction costs incurred by Veritech estimated at $8.8 million have been excluded in the unaudited pro forma combined consolidated statements of operations. 22 In addition to allocating value to the in-process research and development projects and Veritech's tangible assets, specific intangible assets were also identified and valued. The related amortization of the identifiable intangible assets is reflected as a pro forma adjustment to the unaudited pro forma combined consolidated statement of operations for the 12 months ended December 31, 1999 and the three months ended March 31, 2000. The identifiable intangible assets include existing /core technology, assembled workforce, and design tools and device library. The acquired existing/core technology is comprised of products in Veritech's portfolio that are technologically feasible. These products represent Veritech's trade secrets and patents developed through years of experience designing and manufacturing high speed optoelectronic modules. This know-how enables the Company to develop new and improve existing high speed optoelectronic modules, processes, and manufacturing equipment, thereby providing Veritech with a distinct advantage over its competitors and providing the Company with a reputation for technological superiority in the industry. The Company expects to amortize the acquired existing / core technology of approximately $67.8 million on a straight-line basis over an estimated remaining useful life of 5 years. The acquired assembled workforce is comprised of over 100 skilled employees across Veritech's General and Administration, Research and Development, Sales and Marketing, and Manufacturing groups. The Company expects to amortize the assembled workforce of approximately $2.5 million on a straight-line basis over an estimated remaining useful life of 5 years. The acquired design tools and device library is comprised of the software code for customization of various products. The Company expects to amortize the acquired design tools and device library of approximately $0.5 million on a straight-line basis over an estimated remaining useful life of 5 years. Goodwill, which represents the excess of the purchase price of Veritech over the fair value of the underlying net identifiable assets, will be amortized on a straight-line basis over an estimated useful life of 5 years. The Company has a deferred tax liability that will be generated as a result of a temporary difference between the book and tax basis of purchased intangibles other than in-process research and development and goodwill. The deferred tax liability will allow immediate realization of an equal amount of deferred tax assets that have resulted from stock compensation related operating loss carryforwards. As a result, the deferred tax asset and liability will offset and an adjustment will be recorded in additional paid in capital for the stock compensation related amounts. Queensgate The acquisition agreement between SDL and Queensgate provided for initial consideration of $3 million of cash and 347,962 shares of SDL's common stock with a fair value of approximately $77 million, and contingent payments of up to an additional $150 million in common stock based on Queensgate's pretax profits for the 10 months ended December 31, 2000 and the twelve months ended December 31, 2001. In addition, SDL issued options in exchange for outstanding Queensgate options with the number of shares and the exercise price appropriately adjusted by the exchange ratio. The unaudited pro forma combined consolidated financial statements reflect the issuance of 347,962 SDL common shares for all of Queensgate's shares outstanding as of March 8, 2000. The average market price per SDL common share of $222.37 per share was used to determine the consideration paid to Queensgate shareholders. The average market price per share of SDL common share is based on the average closing price for a range of trading days (March 3 through March 13, 2000) around the announcement date (March 8, 2000) of the acquisition. The estimated fair value of the options, as well as estimated direct transaction expenses of $1.1 million, have been included as a part of the total estimated purchase cost. The total purchase cost of the Queensgate acquisition is as follows (in thousands): Value of securities issued ................................... $77,376 Cash ......................................................... 3,000 Assumption of Queensgate options ............................. 1,502 ------- 81,878 Estimated transaction costs .................................. 1,125 ------- Total purchase cost .......................................... $83,003
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Annual Useful Amount Amortization Lives -------- ------------ ------- Purchase Price Allocation: Tangible net deficit $ (1,570) n/a n/a Tradename 2,000 $ 400 5 years Core technology 12,000 2,400 5 years Existing technology 6,200 1,240 5 years In process research and development 1,200 n/a n/a Workforce 1,500 300 5 years Goodwill 70,353 14,071 5 years Deferred tax liabilities (8,680) n/a n/a -------- ------- Total estimated purchase price: $ 83,003 $18,411
The Company has performed an allocation of the total purchase price of Queensgate to its individual assets. The purchase price allocation is preliminary and, therefore, subject to change based on Company's final analysis. Of the total purchase price, $1.2 million has been allocated to in-process research and development and was charged to expense in the quarter ending March 31, 2000. Due to the non-recurring nature of in-process research and development, the $1.2 million charge has been excluded in the unaudited pro forma combined consolidated statements of operations. In addition to allocating value to the in-process research and development projects and Queensgate's tangible assets, specific intangible assets were also identified and valued. The related amortization of the identifiable intangible assets is reflected as a pro forma adjustment to the unaudited pro forma combined consolidated statement of operations. The identifiable intangible assets include existing technology, core technology, trade name, and assembled workforce. The acquired existing technology is comprised of products in Queensgate portfolio that are already technologically feasible. The Company expects to amortize the acquired existing technology of approximately $6.2 million on a straight-line basis over an estimated remaining useful life of 5 years. The core technology represents Queensgate trade secrets and patents developed through years of experience designing and manufacturing optical network monitoring modules. This know-how enables the Company to develop new products and technology and improve existing optical network monitoring modules, processes, and manufacturing equipment, thereby providing Queensgate with a distinct advantage over its competitors and providing the Company with a reputation for technological superiority in the industry. The Company expects to amortize the core technology of approximately $12.0 million on a straight-line basis over an average estimated remaining useful life of 5 years. The trade names include the Queensgate trademark and trade name as well as all branded Queensgate products. The Company expects to amortize the trade names of approximately $2.0 million on a straight-line basis over an estimated remaining useful life of 5 years. The acquired assembled workforce is comprised of over 100 skilled employees across Queensgate's General and Administration, Research and Development, Sales and Marketing, and Manufacturing groups. The Company expects to amortize the assembled workforce of approximately $1.5 million on a straight-line basis over an estimated remaining useful life of 5 years. Goodwill, which represents the excess of the purchase price of Queensgate over the fair value of the underlying net identifiable assets, will be amortized on a straight-line basis over an estimated useful life of 5 years. The Company has a deferred tax liability that will be generated as a result of a temporary difference between the book and tax basis of purchased intangibles other than in-process research and development and goodwill. The deferred tax liability will allow immediate realization of an equal amount of deferred tax assets that have resulted from stock compensation related operating loss carryforwards. As a result, the deferred tax asset and liability will offset and an adjustment will be recorded in additional paid in capital for the stock compensation related amounts. 2. Pro forma adjustments: Veritech (A) To reflect the issuance of 3,000,000 shares of SDL, Inc. common stock and estimated transaction costs of $8.8 million. (B) To record twelve months of amortization for purchased intangible assets for fiscal 1999 and the three months ended March 31, 2000. Of the total purchase price, $25.1 million has been allocated to in-process research and development and will be charged to expense in the period the transaction closes. Due to its non-recurring nature, the in-process research and development attributed to the Veritech transaction has been excluded. 24 (C) To record tax benefits relating to amortization of purchased intangibles. (D) The pro forma basic and diluted loss per share are based on the historical weighted average number of SDL common shares outstanding during each period and are adjusted to reflect the issuance, as of January 1, 1999, of 3,000,000 shares of SDL common stock. Queensgate (E) To record twelve months of amortization for purchased intangible assets for fiscal 1999 and to record additional amortization expense for purchased intangibles assets for the period from January 1, 2000 to March 8, 2000 (date of acquisition). Amortization expense for the period subsequent to the acquisition from March 9, 2000 to March 31, 2000 is already included in the historical financial results of the Company. (F) To eliminate non-recurring charges related to in-process research and development written off at the date of acquisition on March 8, 2000. (G) To record tax benefits relating to amortization of purchased intangibles. (H) The pro forma basic and diluted loss per share are based on the historical weighted average number of SDL common shares outstanding during each period and are adjusted to reflect the issuance, as of January 1, 1999, of 347,962 shares of SDL common stock. (I) Diluted outstanding shares excludes common equivalent shares issuable upon conversion of stock options because such shares would be anti-dilutive. 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. SDL, INC. June 15, 2000 By: /s/Michael L. Foster ------------------------------------- Michael L. Foster Chief Financial Officer and Secretary (Duly Authorized Officer and Principal Financial and Accounting Officer) 26
Exhibit Number Exhibit Description ------- ------------------- 23.1 Consent of Grant Thornton LLP, Independent Certified Public Accountants