-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U5nSh9R93DI0cPkJffXVP83GeEM/pitT5douYrUwCJI+i5EdAcFR+2ZjU4+DqJq+ q/LVHGqdP3DdmXd6U++Gxw== 0000891618-97-003310.txt : 19970812 0000891618-97-003310.hdr.sgml : 19970812 ACCESSION NUMBER: 0000891618-97-003310 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970811 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SDL INC CENTRAL INDEX KEY: 0000934741 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770331449 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25688 FILM NUMBER: 97655490 BUSINESS ADDRESS: STREET 1: 80 ROSE ORCHARD WAY CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089439411 MAIL ADDRESS: STREET 1: 80 ROSE ORCHARD WAY CITY: SAN JOSE STATE: CA ZIP: 95134 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1997 1 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 June 30, 1997 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 0-25688 SDL, INC. (Exact name of registrant as specified in its charter) Delaware 77-0331449 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 80 Rose Orchard Way, San Jose, CA 95134-1365 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (408) 943-9411 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 [ ] The number of shares outstanding of the issuer's common stock as of August 1, 1997 was 13,533,790. 1 2 SDL, INC. INDEX
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at June 30, 1997 and December 31, 1996 3 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 1997 and 1996 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SDL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, DECEMBER 31, 1997 1996 ----------- ----------- (UNAUDITED) (1) ASSETS Current assets: Cash and cash equivalents $ 2,297 $ 2,605 Short-term investments 9,400 45,353 Accounts receivable, net 18,699 11,816 Inventories 12,495 13,441 Prepaid expenses and other current assets 4,734 3,902 ----------- ----------- Total current assets 47,625 77,117 Property and equipment, net 24,707 22,020 Long-term investments 10,700 10,325 Other assets 4,279 4,380 ----------- ----------- $ 87,311 $ 113,842 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,765 $ 6,777 Accrued payroll and related expenses 1,986 2,185 Unearned revenue 942 455 Accrued warranty 809 404 Income taxes payable 495 -- Accrued legal expenses 945 411 Acquisition obligations -- 2,712 Other accrued liabilities 1,109 930 ----------- ----------- Total current liabilities 15,051 13,874 Other long-term liabilities 907 741 Commitments and contingencies -- -- Stockholders' equity: Common stock 13 13 Additional paid-in-capital 115,560 114,421 Accumulated deficit ($32,084 relating to the repurchase of common stock and recapitalization in 1992) (43,969) (14,951) ----------- ----------- 71,604 99,483 Less: stockholders' notes receivable (251) (256) ----------- ----------- Total stockholders' equity 71,353 99,227 ----------- ----------- $ 87,311 $ 113,842 =========== ===========
(1) The balance sheet at December 31, 1996 has been derived from the audited financial statements at that date. See accompanying notes. 3 4 SDL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA - UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 1997 1996 1997 1996 -------- -------- -------- -------- Total revenue: Product revenue $ 18,182 $ 18,541 $ 34,957 $ 35,889 Research revenue 3,388 3,065 7,629 6,139 -------- -------- -------- -------- 21,570 21,606 42,586 42,028 Cost of revenue: Cost of product revenue 14,974 11,647 25,860 22,152 Cost of research revenue 3,359 2,111 6,491 4,353 -------- -------- -------- -------- Gross margin 3,237 7,848 10,235 15,523 Operating expenses: Research and development 2,473 1,358 5,309 3,045 Selling, general and administrative 30,178 2,823 34,075 5,472 Amortization of purchased intangibles 163 161 324 323 -------- -------- -------- -------- Operating income (loss) (29,577) 3,506 (29,473) 6,683 Interest income, net 430 124 1,061 269 Loss on sale of securities (324) -- (324) -- -------- -------- -------- -------- Income (loss) before income taxes (29,471) 3,630 (28,736) 6,952 Provision for income taxes -- 1,201 228 2,364 -------- -------- -------- -------- Net income (loss) $(29,471) $ 2,429 $(28,964) $ 4,588 ======== ======== ======== ======== Net income (loss) per share $ (2.19) $ 0.20 $ (2.16) $ 0.38 ======== ======== ======== ======== Shares used in computing net income (loss) per share 13,462 12,383 13,400 12,228 ======== ======== ======== ========
See accompanying notes. 4 5 SDL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS - UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------ 1997 1996 -------- -------- OPERATING ACTIVITIES: Net (loss) income $(28,964) $ 4,588 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,603 2,327 Loss on disposal of equipment -- 62 Deferred income taxes 477 (325) Deferred rent -- (30) Changes in operating assets and liabilities: Accounts receivable (6,883) 199 Inventories 946 (3,617) Accounts payable 1,988 579 Income taxes payable (278) 2,539 Accrued payroll and related expenses (199) (176) Unearned revenue 487 528 Accrued warranty 405 -- Accrued legal expenses 534 -- Other accrued liabilities 179 80 Other (381) (55) -------- -------- Total adjustments (122) 2,111 -------- -------- Net cash provided by (used in) operating activities (29,086) 6,699 INVESTING ACTIVITIES: Acquisition of property and equipment, net (5,000) (3,941) Payments on acquisition obligations (2,712) (1,482) Sale of investments, net 35,525 1,000 -------- -------- Net cash provided by (used in) investing activities 27,813 (4,423) FINANCING ACTIVITIES: Common stock offering costs -- (483) Issuance of stock pursuant to employee stock plans 960 886 Payments on stockholders' notes receivables 5 141 -------- -------- Net cash provided by financing activities 965 544 Net increase (decrease) in cash and cash equivalents (308) 2,820 Cash and cash equivalents at beginning of period 2,605 2,793 -------- -------- Cash and cash equivalents at end of period $ 2,297 $ 5,613 ======== ======== SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES: Unrealized loss on marketable securities $ 53 $ -- Stock issued for receivables from common stock offering $ -- $ 38,475 SUPPLEMENT DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for income taxes $ -- $ -- Cash paid for interest $ -- $ --
See accompanying notes. 5 6 SDL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with 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 complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant Company's Annual Report on Form 10-K for the year ended December 31, 1996. The consolidated financial statements include the accounts of SDL, Inc. and its wholly owned subsidiary, SDL Optics. Intercompany accounts and transactions have been eliminated in consolidation. The functional currency of the Company's foreign subsidiary is the U.S. dollar. Subsidiary financial statements are remeasured into U.S. dollars for consolidation. Foreign currency transaction gains and losses are included in interest income and were immaterial for all periods presented. 2. NET INCOME (LOSS) PER SHARE Net income per share for 1996 is computed using the weighted average number of shares of common stock outstanding and dilutive common equivalent shares from stock options (using the treasury stock method). Net loss per share for 1997 is computed using the weighted average number of shares of common stock outstanding. 3. RECENT PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in an increase in primary earnings per share for the three and six months ended June 30, 1996 of $0.02 and $0.04 per share, respectively, with no impact for the three and six months ended June 30, 1997. The impact of Statement 128 on the calculation of fully diluted earnings per share for these quarters is not expected to be material. In June 1997, the Financial Accounting Standards Board issued Statement Number 130, Reporting Comprehensive Income. This statement requires that all items that are to be required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This 6 7 statement is effective for fiscal years beginning after December 15, 1997, and will be adopted by the company for the year ended December 31, 1998. In addition, during June 1997, the Financial Accounting Standards Board issued Statement Number 131, Disclosures About Segments of an Enterprise and Related Information. This statement replaces Statement Number 14 and changes the way public companies report segment information. This statement is effective for fiscal years beginning after December 15, 1997 and will be adopted by the company for the year ended December 31, 1998. 4. INVENTORIES The components of inventories consist of the following (in thousands):
June 30, December 31, 1997 1996 ---------- ---------- Raw materials $ 5,060 $ 6,653 Work in process 7,435 6,788 ---------- ---------- $ 12,495 $ 13,441 ========== ==========
No significant amounts of finished goods are maintained. 5. COSTS AND ESTIMATED EARNINGS ON LONG-TERM CONTRACTS The following is a summary of research and product contract activity related to uncompleted long-term contracts from the inception of the contracts (in thousands):
June 30, December 31, 1997 1996 ---------- ---------- Costs incurred on uncompleted long-term contracts $ 56,971 $ 40,007 Estimated earnings 5,202 2,803 ---------- ---------- Revenue recognized on uncompleted long-term contracts 62,173 42,810 Less billings to date 59,078 41,906 ---------- ---------- Total unbilled costs and estimated earnings $ 3,095 $ 904 ========== ==========
Of the above balances, $3.0 million and $0.6 million are included in accounts receivable in the accompanying balance sheets at June 30, 1997 and December 31, 1996, respectively. Unbilled costs and estimated earnings on uncompleted long-term contracts are generally billable within one year. Revenue recognized on long-term contracts included in total revenue was approximately $5.5 million and $11.5 million for the three and six months ended June 30, 1997 and $6.0 million and $11.8 million of for the three and six months ended June 30, 1996. 6. CONTINGENCIES Trial of the Spectra-Physics v. SDL, Inc. litigation began before the Santa Clara County California Superior Court on May 7, 1997. On May 19, 1997, before the trial was concluded, the Company, Spectra-Physics and its subsidiary Opto Power Corporation, and Xerox Corporation made a comprehensive settlement of their disputes. 7 8 During the second quarter of fiscal 1997, the Company included approximately $27.5 million in general and administrative expenses for settlement and related legal costs associated with the resolution of the dispute with Spectra-Physics, Inc. See Part II, Item 1, Legal Proceedings for discussion of legal matters. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SDL designs, manufactures and markets semiconductor optoelectronic integrated circuits (OEICs), semiconductor lasers, fiber optic related products and optoelectronic systems. The Company's revenue consists of product and research revenue. The Company's product revenue is primarily derived from the sale of standard and customized products to a variety of customers, in volumes ranging from single products sold to numerous organizations to high unit volumes sold to certain original equipment manufacturer (OEM) customers. As a result, product gross margins tend to fluctuate based on the mix of products sold in any reported period. From the original products introduced in 1984, the Company has expanded its product offering to over 200 standard products in addition to providing custom design and packaging for OEM customers. OEM customers often fund the design or customization as well as the manufacturing and testing of their volume products. The primary applications for the Company's products include telecommunications, CATV, satellite communications, LAN, printing, medical, data storage, sensor, defense, materials processing and instrument markets. The Company's research revenue is derived from customer-funded research programs. The Company's research and engineering staff, which currently includes over 60 Ph.D.s, provides state-of-the-art research and proof-of-concept prototypes over a broad range of semiconductor OEIC and laser technologies. The Company has been issued over 55 U.S. patents and has approximately 70 U.S. patent applications pending. Customer-funded research revenue is typically based on material and labor costs incurred, plus coverage for overhead and operating expenses, and in most cases, an additional profit component. Cost-based pricing has generally resulted in lower gross margins for research revenue than for product revenue. The Company typically retains rights to the technology developed under customer-funded research programs and therefore is able to leverage these programs to continue to broaden its product and technology offerings. All internally-funded research and development costs are expensed in the period incurred. Certain of the statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations may be forward-looking statements regarding the Company's business, operations and prospects. The Company's actual results could differ materially from those in such forward-looking statements. See "Risk Factors." RESULTS OF OPERATIONS REVENUE. Total revenue for the quarter ended June 30, 1997 was $21.6 million, comparable to that reported for the corresponding 1996 quarter. Sequentially, total revenue increased 3% over revenue reported in the March 1997 quarter. For the six months ended June 30, 1997, total revenue increased to $42.6 million from $42.0 million reported for the comparable prior year period. Second quarter 1997 product revenue was primarily impacted by the longer than expected qualification process by new telecommunications customers for one of the Company's 980nm pump module products. This longer than expected qualification process, in combination with the transitional gap in new product shipments during the first quarter of 1997, resulted in a 3% decrease in product revenue reported for the six months ended June 30, 1997 when compared to the same six month period in 1996. Information based products within the fiber-based telecommunications, satellite communications, printing, data storage and displays markets continued to represent approximately 70% of product revenue for both the three and six month periods of 1997 and 1996, respectively. The balance is represented by products within the light replacement market. Research revenue reported for the three and six months ended June 30, 1997, represented 16% and 18% of total revenue, respectively, compared to 14% and 15% for the corresponding 1996 periods. Reduced product revenue during the first half of 1997 resulted in this percentage increase for research revenue. 9 10 International revenue, as a percentage of total revenue, remained at 16% for both the 1997 and 1996 six month reporting periods. Approximately 19% and 18% of the Company's revenue for the six months ended June 30, 1997 and 1996 was received from Lockheed Martin. The combination of several new programs for Lockheed Martin initiated during the first half of 1997 resulted in this percentage increase of revenue from Lockheed Martin. There can be no assurance that the application markets for SDL's products will grow in future periods at historical percentage rates. Further, there can be no assurance that the Company will be able to increase or maintain its market share in the future or to sustain historical growth rates. GROSS MARGIN. Gross margins decreased to 15% and 24% for the three and six months ended June 30, 1997 from 36% and 37% in the comparable 1996 periods. Second quarter 1997 product gross margins were impacted by start-up costs for the expansion of the Company's wafer fab and packaging capacities, together with write-offs totaling $1.4 million for excess and obsolete inventory related to the transition to new processes, designs and equipment. Additional reserves of approximately $1.6 million related to changes in estimable reimbursable costs also impacted gross margins for the three months ended June 1997. The Company's gross margin can be affected by a number of factors, including product mix, pricing pressures and product yield. Generally, the cost of newer products tends to be higher as a percentage of product revenue than that of more mature, higher volume products. In addition, the cost of research revenue is significantly higher as a percentage of revenue, as research revenue is typically based on costs incurred rather than market pricing. As a result of these factors, gross margin fluctuations are difficult to predict and there can be no assurance that the Company will maintain gross margins at current levels in future periods. RESEARCH AND DEVELOPMENT. Research and development expense for the three and six months ended June 30, 1997 increased to $2.5 million and $5.3 million, respectively, compared to $1.4 million and $3.0 million for the corresponding 1996 periods. Research and development expense as a percentage of total revenue was 12% and 7% for the six months ended June 30, 1997 and 1996, respectively. The increased research and development spending during the first half of 1997, as compared to the year earlier period, is primarily a result of increased manufacturing process development efforts, together with the development of new communications products. The Company believes these investments will further improve manufacturing yields and gross margins, as well as lead to several new product introductions, some of which were introduced during the first half of 1997. The level of research and development incurred in future periods may vary. In addition, there can be no assurance that expenditures for manufacturing improvements or for other advanced research projects will be successful, or that improved processes or commercial products will result from these projects. SELLING, GENERAL AND ADMINISTRATIVE. The increase of selling, general and administrative expense (SG&A) for the three and six months ended June 30, 1997 resulted primarily from a charge of approximately $27.5 million recorded in the second quarter of 1997 for the settlement and related legal costs associated with the Spectra-Physics vs. SDL, Inc. legal dispute and, to a lesser extent, the continuing expansion of the Company's business and headcount increases. When settlement and related legal costs are excluded, SG&A as a percentage of total revenue, was 12% for the three and six months ended June 30, 1997 as compared to 11% for the corresponding three and six month periods in 1996. The Company expects that SG&A, exclusive of the settlement and related legal costs for the Spectra-Physics dispute, will continue to increase to support the Company's current and expected future volumes 10 11 of business. However, there can be no assurances that current SG&A levels as a percentage of total revenue are indicative of future SG&A as a percentage of total revenue. INTEREST INCOME, NET. Net interest income for the three and six months ended June 30, 1997 increased over that of the corresponding 1996 periods due to the investment of cash received from the Company's June 1996 follow-on public offering. Net interest income will decline in future periods as a result of the decrease in investments related to the payment of $27.5 million in settlement and related legal costs associated with the resolution of the Spectra-Physics legal dispute in the second quarter of fiscal 1997. LOSS ON SALE OF SECURITIES. The early liquidation of investment securities to pay for the settlement and related legal costs of the Spectra-Physics legal dispute resulted in a loss on the sale of securities during the second quarter of 1997. PROVISION FOR INCOME TAXES. The income tax provision for the six months ended June 30, 1997 of $228,000 consists principally of foreign income taxes and state minimum taxes. No income tax benefit has been recognized for the loss incurred for the six months ended June 30, 1997. Although realization is not assured, the Company continues to believe that it will generate future taxable income sufficient to realize the benefit of the $3 million of net deferred tax assets previously recognized. The amount of the net deferred tax assets considered realizable could be reduced in the near term if estimates of future taxable income are reduced. Management intends to evaluate the realizability of the net deferred tax assets each quarter to assess the need for the valuation allowance. The effective tax rate for the six months ended June 30, 1996 was 34%, which differed from the combined federal and state statutory tax rate of 40% primarily due to the benefits of tax-exempt interest income and state tax credits, as well as a reduction in the valuation allowance. LIQUIDITY AND CAPITAL RESOURCES The payment of settlement and related legal costs of $27.5 million to conclude the Spectra-Physics legal dispute primarily contributed to the use of cash by the Company's operating activities for the six months ended June 30, 1997. The settlement payment was funded through sale of the Company's investment securities. In addition, the Company paid $5.0 million for planned facilities expansion and capital equipment purchases and completed its acquisition of the SDL Optics business through a cash payment of $2.7 million. As a result, cash, cash equivalents, short-term investments and long-term investments decreased from $58.3 million at December 31, 1996 to $22.4 million at June 30, 1997. The Company currently expects to spend approximately $9.0 million for capital equipment purchases and leasehold improvements during the second half of 1997. The Company believes that current cash balances, cash generated from operations, and cash available through the equity markets will be sufficient to fund capital equipment purchases, acquisitions of complementary businesses, products or technologies and working capital requirements at least through 1997. However, there can be no assurances that events in the future will not require the Company to seek additional capital sooner or, if so required, that adequate capital will be available on terms acceptable to the Company. 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 11 12 Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions, beliefs or strategies regarding the future. Forward looking statements include SDL's liquidity, anticipated cash needs and availability, anticipated expense levels, realizability of deferred tax assets, future gross margins, improvements in manufacturing yields, introduction of new products, continuing expansion of the Company's business, retention of rights under research and development programs, and ability to leverage such programs to broader product and technology offerings, 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 hereof, and SDL 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 factors 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. MANUFACTURING RISKS. The manufacture of semiconductor OEIC and laser components, products and systems such as those sold by the Company is highly complex and precise, requiring production in a highly controlled and clean environment. Changes in the Company's or its suppliers' manufacturing processes, designs, equipment or the inadvertent use of defective or contaminated materials by the Company or its suppliers has in the past and could in the future adversely affect the Company's ability to achieve acceptable manufacturing yields and product reliability. To the extent the Company does not achieve such yields or product reliability, its operating results and customer relationships would be adversely affected. The Company relies almost exclusively on its own production capability in computer-aided chip and package design, wafer fabrication, wafer processing, device packaging, hybrid microelectonic packaging, printed circuit board testing, final assembly and testing of products. Because the Company manufactures, packages and tests these components, products and systems at its own facility, and such components, products and systems are not readily available from other sources, any interruption in manufacturing resulting from shortages of parts or equipment, fire, natural disaster, equipment failures, poor yields or otherwise would have a material adverse effect on the Company's business and results of operations. In particular, a significant portion of the Company's production relies or occurs on equipment for which the Company does not have a backup. In order to alleviate, at least in part, this situation, the Company is in the process of remodeling part of its front-end wafer fabrication and packaging facilities. The Company incurred additional start-up costs from the expansion of its wafer fab capacity during the second quarter of 1997. Front-end production activities were operated in parallel to allow adequate time for customer acceptance and to validate yields, thereby increasing production costs. There can be no assurances that the Company will not experience further start-up costs and yield problems in fully utilizing its increased wafer capacity. In the event of any disruption in production by one of these machines, the Company's business and results of operations could be materially adversely affected. Furthermore, the Company has a limited number of employees dedicated to the operation and maintenance of its equipment, loss of whom could affect the Company's ability to effectively operate and service such equipment. The Company experienced lower than expected production yields on some its products, including certain key product lines, during the second half of 1996. Certain of these lower yields have continued into the first half of 1997. While the Company continues to aggressively address these problems, solutions on certain product lines have proven to be more difficult to identify and implement than anticipated. This reduction in yields adversely affected gross margins, delayed components, product and system shipments and, to a certain extent, new orders booked. There can be no assurance that the Company's manufacturing yields will be acceptable to ship products on time at profitable margins in the future. To the extent the Company continues to experience lower than expected manufacturing yields or experiences any shipment delays, the Company could continue to lose customers and experience reduced or delayed customer orders and cancellation of existing backlog. In such event, the Company's business and results of operations would be materially adversely affected. 12 13 DEPENDENCE ON EMERGING APPLICATIONS. The Company's current products serve many applications in the communications, information and light source replacement markets. In many cases, the Company's products are substantially completed, but the customer's product is not yet completed, and the applications are emerging or are otherwise in new markets. In addition, the Company and certain of its customers are currently in the process of developing new products, in various stages of development, testing and qualification, sometimes in emerging applications or new markets. A substantial portion of the Company's products address markets that are not now, and may never become substantial commercial markets. The Company has experienced, and is expected to experience, technological and pricing constraints that may preclude development of markets and fluctuation in customer orders. Currently, several of the Company's customers are testing and qualifying a new pump module for potential volume applications. No assurances can be given that the Company or its customers will continue their existing product development and new product qualification efforts, or if continued, that such efforts will be successful, that markets will develop for any of the Company's or customer's products, or that such products will not be superseded by other technology or products. DEPENDENCE UPON GOVERNMENT PROGRAMS AND CONTRACTS. The Company derived approximately 42%, 43% and 45 %, of its revenue directly and indirectly from a variety of Federal government sources during the first half of 1997 and fiscal 1996 and 1995, respectively. The Company received approximately 19%, 21% and 19% of its revenue from Lockheed Martin through several government and commercial programs for the first half of 1997, and fiscal 1996 and 1995. Almost all of the Company's revenue from Lockheed Martin during these periods was, and during the remainder of 1997 is expected to be, derived from Federally-funded programs. The demand for certain of the Company's services and products is directly related to the level of funding of government programs. The Company believes that the success and further development of its business is dependent, in significant part, upon the continued existence and funding of such programs and upon the Company's ability to participate in such programs. For example, substantially all of the Company's research revenue for 1996 and 1995 was funded by Federal programs. Most of the Company's Federally-funded programs are subject to renewal every one or two years, so that continued work by the Company under these programs in future periods is not assured. Federally-funded programs are subject to termination for convenience of the government agency, at which point the Company would be reimbursed for related allowable costs incurred to the termination date. Federally-funded contracts are subject to audit of pricing and actual costs incurred, which have resulted, and could result in the future, in price adjustments. The Federal government has in the past, and could in the future, challenge the Company's accounting methodology for computing indirect rates and allocating indirect costs to government contracts. The Federal government is currently challenging certain of the Company's allowable costs and indirect rates. A change in the Company's accounting practices in this area could result in reduced profit margins on government contracts. During the fourth quarter of 1996, the Company exceeded the maximum number of employees allowed under eligibility requirements for the U.S. government's Small Business Innovative Research (SBIR) programs and will no longer be able to compete for research contract awards within SBIR programs. Previously awarded SBIR contracts will not terminate but, depending on the contract, can continue through contract completion, which can be up to two years from the initial contract award date. SBIR contracts accounted for approximately 6%, 6% and 5% of revenue in the first half of 1997, and fiscal 1996 and 1995, respectively. NEED TO MANAGE GROWTH. The Company has on occasion been unable to manufacture certain products in quantities sufficient to meet demand of its existing customer base and new customers. The recent expansion in the scope of its operations has placed a considerable strain on its management, financial, manufacturing and other resources and has required the Company to implement and improve a variety of operating, financial and other systems, procedures and controls. There can be no assurance that any 13 14 existing or new systems, procedures or controls will be adequate to support the Company's operations or that its systems, procedures and controls will be designed, implemented or improved in a cost-effective and timely manner. Any failure to implement, improve and expand such systems, procedures and controls in an efficient manner at a pace consistent with the Company's business could have a material adverse effect on the Company's business and results of operations. The future success of the Company is dependent, in part, on its ability to attract, assimilate and retain additional employees, including certain key personnel. The Company will continue to need a substantial number of additional personnel, including those with specialized skills, to commercialize its products and expand all areas of its business in order to continue to grow. The Company intends to hire a significant number of additional personnel in 1997 and beyond. Competition for such personnel is intense, and there can be no assurance that the Company will be able to attract, assimilate or retain additional highly qualified personnel. 14 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Information disclosed in the Company's Form 10-K for the year ended December 31, 1996 under heading Part I Item 3, Legal Proceedings, is incorporated herein by this reference. Since the date of that disclosure, Rockwell has filed an appeal of the Court's order granting the Company's motion for summary judgment on the ground that Rockwell's patent was invalid. The appeal is currently pending before the United States Circuit Court of Appeals for the Federal Circuit. Trial of the Spectra-Physics v. SDL, Inc. litigation began before the Santa Clara County California Superior Court on May 7, 1997. On May 19, 1997, before the trial was concluded, the Company, Spectra-Physics ("Spectra") and its subsidiary Opto Power Corporation ("Opto Power"), and Xerox Corporation ("Xerox") made a comprehensive settlement of their disputes. Pursuant to the principal terms of the Release and Settlement Agreement (the "Agreement") entered into by the parties on May 19, 1997, the parties agreed as follows: (a) The Company made a one-time payment to Spectra in full settlement of Spectra's claims against the Company. This payment has been recorded in the Company's financial statements for the quarter ended June 30, 1997. (b) The Company confirmed the validity of Spectra's license to the Company's patents applied for or issued prior to June 25, 1993 as listed in the Agreement. (c) Spectra has no license to the Company's non-patented technical information except that which Spectra used in its catalog products before May 19, 1997. (d) The Agreement confirms Spectra's rights to sublicense the Company's patents and technical information (as described above in (b) and (c)) to its subsidiaries, but only so long as they are subsidiaries of Spectra. (e) The Company has no obligation to transfer or disclose any of the Company's technical information to Spectra or Opto Power. (f) The Company and Xerox, on the one hand, and Spectra and Opto Power, on the other hand, entered into mutual general releases and agreed to dismiss all claims against one another with prejudice. On May 17, 1997, the Company and Xerox separately agreed to settle claims asserted between them in the Spectra-Physics litigation. ITEM 2. CHANGES IN SECURITIES. Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not Applicable 15 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company held its Annual Meeting of Stockholders on May 12, 1997. The stockholders voted on proposals to: 1. Elect two Class 3 Directors of the Company 2. Ratify the appointment of Ernst & Young, LLP as the Company's auditors for 1997. The proposals were approved by the following votes: 1. Election of Directors
Director For Withheld -------- --- -------- Frederic N. Schwettman 9,882,116 64,710 Anthony B. Holbrook 9,921,866 24,960
2. Ratify appointment of Ernst & Young, LLP
For Against Abstain --- ------- ------- 9,920,456 10,501 15,869
ITEM 5. OTHER INFORMATION. Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Lists of Exhibits
Number Exhibit Description ------ ------------------- 11.1 Computation of Net Income (Loss) per Common and Common Equivalent Share 27 Financial Data Schedule
(b) Reports on Form 8-K None 16 17 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. SDL, INC. Registrant August 11, 1997 /s/Gregory C. Lindholm ---------------------------------------- Gregory C. Lindholm Vice President, Finance Chief Financial Officer and Treasurer (duly authorized officer, and principal financial and accounting officer) 17 18 Index to Exhibits
Number Exhibit Description ------ ------------------- 11.1 Computation of Net Income (Loss) per Common and Common Equivalent Share 27 Financial Data Schedule
EX-11.1 2 COMPUTATION OF NET INCOME (LOSS) PER SHARE 1 EXHIBIT 11.1 SDL, INC. COMPUTATION OF NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- 1997 1996 1997 1996 -------- -------- -------- -------- PRIMARY Weighted average number of common shares outstanding 13,462 11,097 13,400 10,925 Incremental common shares attributable to shares issuable under employee stock plans -- 1,286 -- 1,303 -------- -------- -------- -------- Total shares 13,462 12,383 13,400 12,228 ======== ======== ======== ======== Net income (loss) $(29,471) $ 2,429 $(28,964) $ 4,588 ======== ======== ======== ======== Net income (loss) per share $ (2.19) $ 0.20 $ (2.16) $ 0.38 ======== ======== ======== ========
There are no incremental common shares attributable to shares issuable under employee stock plans due to the net loss incurred during the three and six months ended June 30, 1997. These incremental shares would be anti-dilutive. A fully diluted computation is not presented since such amounts differ by less than 3% of the net income per share amount shown above. 18 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. 3-MOS DEC-31-1997 APR-01-1997 JUN-30-1997 2,297 9,400 18,699 0 12,495 47,625 43,983 19,276 87,311 15,051 0 0 0 13 71,340 71,353 18,182 21,570 14,974 18,333 32,814 0 (106) (29,471) 0 (29,471) 0 0 0 (29,471) (2.19) (2.19)
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