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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 MARCH 31, 1996
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission File Number 0-25688
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 April 30,
1996 was 7,354,346.
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SDL, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income for
the three months ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SDL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS - EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---- ----
(UNAUDITED) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,426 $ 2,793
Short-term investments 9,015 8,515
Accounts receivable, net 12,294 13,535
Inventories 10,552 9,006
Deferred income taxes 1,129 989
Prepaid expenses and other current assets 1,125 502
-------- --------
Total current assets 36,541 35,340
Property and equipment, net 17,588 16,470
Purchased intangibles, net 2,605 2,766
Deferred income taxes 1,840 1,840
Other assets 247 227
-------- --------
$ 58,821 $ 56,643
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,121 $ 6,257
Accrued payroll and related expenses 2,398 1,990
Accrued warranty 432 442
Unearned revenue 935 972
Acquisition obligations 102 1,592
Other accrued liabilities 1,604 1,438
-------- --------
Total current liabilities 10,592 12,691
Deferred acquisition obligations 2,680 2,680
Other long-term liabilities 752 772
Stockholders' equity:
Common stock, $0.001 par value, 21,000,000 shares authorized;
7,271,774 outstanding (7,085,410 at December 31, 1995) 7 7
Treasury stock (33) (33)
Additional paid-in-capital 65,086 63,038
Accumulated deficit ($32,084 relating to the repurchase
of common stock and recapitalization in 1992) (19,869) (22,028)
Cumulative translation adjustment (7) (6)
-------- --------
45,184 40,978
Less: common stockholders' notes receivable (387) (478)
-------- --------
Total stockholders' equity 44,797 40,500
-------- --------
$ 58,821 $ 56,643
======== ========
</TABLE>
(1) The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date.
See accompanying notes.
3
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SDL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA - UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
Total revenue:
Product revenue $ 17,348 $ 8,652
Research revenue 3,074 1,860
-------- --------
20,422 10,512
Cost of revenue:
Cost of product revenue 10,505 5,097
Cost of research revenue 2,242 1,410
-------- --------
Gross margin 7,675 4,005
Operating expenses:
Research and development 1,687 724
Selling, general and administrative 2,650 1,421
Amortization of purchased intangibles 161 --
-------- --------
Operating income 3,177 1,860
Interest (income) expense, net (145) 424
-------- --------
Income before income taxes 3,322 1,436
Provision for income taxes 1,163 531
-------- --------
Net income $ 2,159 $ 905
======== ========
Net income per share $ 0.27 $ 0.17
======== ========
Shares used in computing net income per share 8,049 5,375
======== ========
</TABLE>
See accompanying notes.
4
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SDL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS - UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,159 $ 905
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,100 618
Deferred income taxes (140) 136
Accrued interest -- (452)
Deferred rent (20) --
Changes in operating assets and liabilities:
Accounts receivable 1,241 (757)
Inventories (1,546) (402)
Accounts payable (1,136) 1,203
Income taxes payable 1,588 126
Accrued payroll and related expenses 408 212
Accrued warranty (10) --
Unearned revenue (37) 641
Other accrued liabilities 166 193
Other (332) (160)
-------- --------
Total adjustments 1,282 1,358
-------- --------
Net cash provided by operating activities 3,441 2,263
INVESTING ACTIVITIES
Acquisition of property and equipment, net (2,057) (1,350)
Payments of acquisition obligations (1,490) --
Purchase of short-term investments, net (500) (10,300)
-------- --------
Net cash used in investing activities (4,047) (11,650)
FINANCING ACTIVITIES
Payments of bank debt -- (2,592)
Payments of subordinated debt -- (21,580)
Proceeds from issuance of common stock -- 34,776
Purchase of treasury stock -- (22)
Issuance of stock pursuant to employee stock plans 148 33
Payments on stockholders' notes receivable 91 2
-------- --------
Net cash provided by financing activities 239 10,617
-------- --------
Net increase (decrease) in cash and cash equivalents (367) 1,230
Cash and cash equivalents at beginning of period 2,793 632
-------- --------
Cash and cash equivalents at end of period $ 2,426 $ 1,862
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) for income taxes $ (400) $ 265
Cash paid for interest $ -- $ 894
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
Conversion of convertible redeemable preferred stock to common stock $ -- $ 10,888
Stock issued for stockholders' notes receivable $ -- $ 34
</TABLE>
See accompanying notes.
5
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SDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1996
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 three-month period ended March
31, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. 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, 1995.
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 other (income) expense and were immaterial for all periods
presented.
2. NET INCOME PER SHARE
Net income per share 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).
3. SHORT-TERM INVESTMENTS
Available for sale short-term investments consist of the following (in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
<S> <C> <C>
Tax-exempt auction rate preferred stocks $7,500 $7,000
Municipal bonds 1,515 1,515
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$9,015 $8,515
====== ======
</TABLE>
Tax-exempt auction rate preferred stock contains contractual maturities
of less than one year.
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Municipal bonds mature within one to eight months.
Both realized and unrealized gains and losses on the sale of
available-for-sale securities were immaterial for the quarter ended March
31, 1996.
4. INVENTORIES
The components of inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
<S> <C> <C>
Raw materials $ 4,403 $ 4,151
Work in process 6,149 4,855
------- -------
$10,552 $ 9,006
======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
<S> <C> <C>
Costs incurred on uncompleted long-term contracts $48,885 $41,460
Estimated earnings 3,207 2,533
------- -------
Revenue recognized on uncompleted long-term contracts 52,092 43,993
Less billings to date 50,917 42,477
------- -------
Unbilled costs and estimated earnings $ 1,175 $ 1,516
======= =======
</TABLE>
The above balances are included in accounts receivable in the
accompanying balance sheets. Unbilled costs and estimated earnings on
uncompleted long-term contracts are generally billable in the subsequent
year.
Approximately $5.8 million and $4.0 million of revenue recognized on
long-term contracts is included in total revenue for the three month
periods ended March 31, 1996 and 1995, respectively.
6. CONTINGENCIES
See Part II, Item 1, Legal Proceedings for discussion of legal matters.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SDL designs, manufactures and markets semiconductor optoelectronic integrated
circuits (OEICs), high power semiconductor lasers and related products. 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,
cable television, satellite communications, printing, medical, data storage,
sensor, defense, materials processing and scientific markets.
The Company's research revenue is derived from customer-funded research
programs. The Company's research and engineering staff, which currently includes
over 40 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 45 U.S. patents and has over four dozen 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.
In November 1995, the Company and its subsidiary, SDL Optics, acquired the net
assets of Seastar Optics, Inc. whose operating results are included in the
accompanying consolidated financial statements from that date.
RESULTS OF OPERATIONS
REVENUE. Total revenue for the quarter ended March 31, 1996 increased 94% to
$20.4 million compared to $10.5 million in the corresponding 1995 quarter and
was 22% above total revenue for the quarter ended December 31, 1995. This
increase was driven by demand for the Company's semiconductor lasers and
optoelectronic solutions, revenue from SDL Optics, which was acquired in the
fourth quarter of 1995 and, to a lesser extent, research revenue growth.
Information-based products within the fiber-based telecommunications, satellite
communications, printing, medical and industrial markets continued to represent
approximately 70% of the Company's March 31, 1996 product revenue. The balance
represented products for the light replacement markets. Research revenue
continued to grow as compared to both the corresponding prior year quarter and
the December 31, 1995 quarter, but at a slower rate than that of product
revenue. For the three months ended March 31, 1996, research revenue
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represented 15% of total revenue as compared to 18% for the three months ended
March 31, 1995.
OEM product sales increased international revenue by 32% during the first
quarter of 1996 compared to the March 1995 quarter. However, international
revenue as a percentage of total revenue for the three months ended March 31,
1996 decreased to 17% compared to 25% for the corresponding 1995 quarter. This
decline was primarily due to the large percentage of SDL Optics' revenue within
the domestic communications markets.
Approximately 17% and 16% of the Company's revenue for the three month periods
ended March 31, 1996 and 1995, respectively, was received from Lockheed Martin.
This compares to approximately 23% of total revenue for the three month period
ending December 31, 1995. Continued demand for the Company's fiber-based
products during the first quarter of 1996 contributed to the percentage decline
in total revenue derived from Lockheed Martin. There can be no assurances 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. Total gross margin for the three months ended March 31, 1996
improved to 38% as compared to 37% for the quarter ended December 31, 1995, but
remained relatively constant when compared to the three months ended March 31,
1995. Influencing this gross margin improvement was the combination of increased
higher-margin product revenue and relatively flat cost-reimbursable revenue
during the first quarter of 1996 as compared to the December 1995 quarter.
However, product gross margins continue to be impacted primarily by the product
customization program for Lockheed Martin.
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. The Company's total research and development
activities consist of customer-funded research programs and internally-funded
research and development. Increased research revenue, together with increased
spending on new product development projects, cost reduction, reliability
improvement and the acquisition of the SDL Optics business resulted in the
growth in total research and development activities during the three months
ended March 31, 1996 to $3.9 million as compared to $2.1 million for the first
quarter of 1995. As a percentage of total revenue, the total of customer-funded
cost of research revenue and internally-funded research and development
decreased to 19% for the three months ended March 31, 1996 from 20% for the
corresponding 1995 quarter. The high relative growth in total revenue for the
reported periods is the primary reason for the decreased ratio of total Company
research and development activities on a year-over-year basis. Accordingly, the
level of research and development may vary based on future levels of
customer-funded research and development.
9
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SELLING, GENERAL AND ADMINISTRATIVE. The increase of selling, general and
administrative expense (SG&A) for the three months ended March 31, 1996 as
compared to the March 1995 quarter resulted primarily from the continuing
expansion of the Company's business, headcount increases, ongoing litigation
expense, and to a lesser extent, the acquisition of the SDL Optics business.
When litigation expenses are excluded, SG&A decreased as a percentage of total
revenue. The Company expects that SG&A expenses will continue to increase to
support the Company's current and expected future volumes 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. For the
next several quarters, it is expected that litigation expense will remain at
least at the level recorded during the most recent three month period.
INTEREST (INCOME) EXPENSE, NET. The Company recorded net interest income for the
first quarter of 1996 compared to net interest expense for the corresponding
three month period of 1995 due to the repayment of the outstanding subordinated
and bank debt, effective with the Company's March 1995 initial public stock
offering.
PROVISION FOR INCOME TAXES. The annualized estimated effective tax rate was 35%
and 37% for the three month periods ended March 31, 1996 and 1995, respectively.
The reduction in the effective tax rate is attributable to the benefits of the
Company's foreign sales corporation and tax exempt income, as well as a
reduction in the valuation allowance.
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LIQUIDITY AND CAPITAL RESOURCES
Increased net income and non-cash adjustments for depreciation and amortization,
the reduction of trade receivable days sales outstanding and the income tax
benefit received from the exercise of employee stock options were offset
slightly by increased inventory and trade payables to provide the Company with
net cash from operating activities of $3.4 million for the three months ended
March 31, 1996. In addition, the Company spent $2.1 million for planned
facilities expansion and capital equipment purchases during the quarter, and
reduced its remaining obligation for the acquisition of the SDL Optics business
by $1.5 million. As a result, the Company increased cash, cash equivalents and
short-term investments to $11.4 million at March 31, 1996 as compared to $11.3
million December 31, 1995.
The Company has an $8 million secured line of credit, which expires in January
1997. Any borrowings under this line would be limited to 80% of eligible
accounts receivable, as defined in the credit agreement (approximately $6.5
million of borrowings were available under the line at March 31, 1996), and bear
interest at the bank's prime rate (8.25% at March 31, 1996). The credit
agreement contains affirmative and negative covenants and, among other things,
requires the Company to maintain certain financial ratios and restricts the
ability to pay cash dividends.
The Company has future cash requirements to complete its acquisition of the SDL
Optics business of (i) $1.5 million payable on March 31, 1997, for which the
Company was contingently liable for a letter of credit at March 31, 1996 and
(ii) $1.2 million in cash or common stock of the Company (at the Company's
option) on March 31, 1997.
The Company currently expects to spend approximately $12 million for capital
equipment purchases and leasehold improvements during 1996.
The Company believes that current cash balances, cash generated from operations,
credit available under the bank line of credit and cash available through the
equity markets will be sufficient to fund capital equipment purchases,
acquisitions of complimentary businesses, products or technologies and working
capital requirements at least through 1996. 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 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, and
anticipated expense levels under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations". All forward looking
statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward looking statement. It is important to note that the Company's
actual results could differ materially from those in such forward looking
statements. Among the factors that could cause actual results to differ
materially are the 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.
11
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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. No assurances can be given that the Company
or its customers will continue their existing product development efforts, or if
continued that such efforts will be successful, that markets will develop for
any of the Company's or customer's products, that the Company's products will be
accepted in end-user markets, that the Company's technology or pricing will
enable such markets to develop, or that the Company's and its customer's
products will not be superseded by other technology or products.
MANUFACTURING RISKS. The Company relies on its own production capability in
computer-aided chip and package design, wafer fabrication, wafer processing,
device packaging, hybrid microelectronic 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 facilities, 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, 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 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, the loss of whom could affect
the Company's ability to effectively operate and service such equipment. The
Company has periodically experienced, and may in the future experience, lower
than expected production yields that have adversely affected gross margins and
delayed component, product and system shipment. There can be no assurance that
the Company will be able to maintain acceptable manufacturing yields or ship
products on time in the future. To the extent the Company does not achieve
acceptable manufacturing yields or experiences any shipment delays, the
Company's business and results of operations would be materially adversely
affected.
TECHNOLOGY AGREEMENT. At the time of its formation, the Company entered into a
technology agreement with Spectra-Physics, Inc. ("Spectra-Physics") and Xerox
Corporation ("Xerox"), (the "Technology Agreement") pursuant to which SDL
granted to Spectra-Physics and Xerox an irrevocable, royalty-free, worldwide,
non-exclusive license to patented and non-patented technology developed by SDL.
In March 1995, Spectra-Physics filed suit against SDL in the Santa Clara County,
California Superior Court, seeking, among other things, to enforce the claims of
Spectra-Physics and its affiliated company, Opto Power Corporation ("Opto
Power"), to SDL patented and non-patented technology developed through at least
June 1993. The Company believes that as a result of events subsequent to the
entering into of the Technology Agreement,
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there are questions concerning Spectra-Physics' or Opto Power's continuing
rights, if any, to such technology. The Company has answered the complaint and
has filed a cross-complaint against, among others, Spectra-Physics, Opto Power
and Spectra-Physics' former parent corporation, seeking a declaration of the
parties' rights under the Technology Agreement, damages and an injunction
against further requests by Spectra-Physics and Opto Power of the transfer of
SDL technology.
Discovery is proceeding. Trial of the matter is scheduled for July 8, 1996. The
Company and its attorneys are beginning to actively prepare for trial. The
Company believes that it has meritorious defenses to Spectra-Physics' claims.
There can be no assurance, however, that the Company will achieve a successful
result in this litigation. The litigation has involved and is expected to
continue to involve significant expense to the Company and to divert the
attention of the Company's technical and management personnel, and the outcome
could have a material adverse effect on the Company's business and results of
operations. If the Company does not prevail in such litigation, the Company
could face monetary damages and could be required to license and to transfer
valuable SDL trade secrets and technology to Spectra-Physics and possibly to
Opto Power, which is currently manufacturing optoelectronic devices that compete
with a number of the Company's products. Such a result could significantly
impair the Company's competitive advantage in certain technology areas with
respect to a number of products and could have a material adverse effect on the
Company's business and results of operations.
RISK OF PATENT INFRINGEMENT CLAIM. The semiconductor optoelectronics,
communications, information and laser industry is characterized by frequent
litigation regarding patent and other intellectual property rights. From time to
time, the Company has received, and may receive in the future, notice of claims
of infringement of other parties' proprietary rights. In 1985, the Company first
received correspondence from Rockwell International Corporation ("Rockwell")
alleging that a fabrication process used by the Company infringes Rockwell's
patent rights. In August 1993, Rockwell sued the Federal government alleging
infringement of these patent rights with respect to the contracts the Federal
government has had with at least 15 companies, including the Company (the
"Government Lawsuit"). The Federal government has asserted that, if it is held
liable to Rockwell for infringement of Rockwell's patent rights in connection
with some of its contracts with the Company, then the Company will be liable to
indemnify the Federal government for a portion of its liability. The Company has
intervened as a party in the Government Lawsuit. In February 1995, Rockwell
asserted its prior allegations and threatened to file suit against the Company
for injunctive relief and damages if the Company did not enter into an agreement
to license rights to the process that Rockwell claims to hold. In May 1995,
Rockwell filed such a suit against the Company in the United States District
Court for the Northern District of California (the "District Court Action"). The
District Court Action has been stayed pending the completion of certain
proceedings in the Government Lawsuit. The Company believes that it has
meritorious defenses to Rockwell's allegations, including among others, that the
Company's process does not infringe Rockwell's patent upon which its claim is
based and that such patent is invalid.
MULTISITE OPERATIONS; NEED TO MANAGE GROWTH. The Company has on occasion been
unable to manufacture certain products in quantities sufficient to meet the
demand of its existing customer base and of new customers. As a result, the
Company expanded its facilities by relocating its assembly, test and packaging
operations to another building and is in the process of remodeling its original
manufacturing facilities. In addition, the Company and its subsidiary, SDL
Optics,
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acquired the business of a company located in Victoria, British Columbia,
Canada. Prior to these developments, the Company had no experience in managing
operations in multiple sites and no assurance can be given that the Company will
not experience unexpected delays, inefficiencies or management problems arising
out of its multisite operations. Such delays or inefficiencies could materially
adversely affect the Company's business and results of operations.
The recent growth in the Company's revenue and 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 existing or new 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.
DEPENDENCE UPON GOVERNMENT PROGRAMS AND CONTRACTS. In 1994, 1995 and the first
three months of 1996, the Company derived approximately 36%, 45% and 46%,
respectively, of its revenue directly and indirectly from a variety of Federal
government sources. The Company received approximately 19% and 17% of its
revenue for fiscal 1995 and the first three months of 1996, respectively, from
Lockheed Martin through several government and commercial 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 1994, 1995 and the first three months of 1996 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.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Information disclosed in the Company's Form 10-K for the year ended December 31,
1995 under the heading PART I - Item 1, Legal Proceedings, is incorporated
herein by this reference. Since the date of that disclosure regarding the
Spectra-Physics litigation, the Company's cross-claims for damages against Ciba
have been dismissed. Some, but not all, of the Company's cross-claims against
Spectra and Opto have also been dismissed. The parties also have engaged in the
court-ordered mediation. That mediation was unsuccessful in reaching a
resolution of the disputes.
On March 4, 1996, Rockwell filed a motion for summary judgment that its patent
is not invalid. The Company has not yet filed its response to that motion.
ITEM 2. CHANGES IN SECURITIES. Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable
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
per Common and Common Equivalent Share
(b) Reports on Form 8-K
None
15
<PAGE> 16
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
May 9, 1996 /s/Gregory C. Lindholm
----------------------
Gregory C. Lindholm
Vice President, Finance
Chief Financial Officer and Treasurer
(duly authorized officer, and principal
financial and accounting officer)
16
<PAGE> 1
EXHIBIT 11.1
SDL, INC.
COMPUTATION OF NET INCOME PER
COMMON AND COMMON EQUIVALENT SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1995
---- ----
<S> <C> <C>
PRIMARY
Weighted average number of common shares outstanding 7,169 4,388
Incremental common shares attributable to
shares issuable under employee stock plans 880 987
------ ------
Total shares 8,049 5,375
====== ======
Net income
Amount $2,159 $ 905
====== ======
Per share $ 0.27 $ 0.17
====== ======
</TABLE>
Fully diluted computation not presented since such amounts differ by less than
3% of the net income per share amount shown above.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1995 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-K
</LEGEND>
<CIK> 0000934741
<NAME> SDL, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 2,793
<SECURITIES> 8,515
<RECEIVABLES> 14,020
<ALLOWANCES> 485
<INVENTORY> 9,006
<CURRENT-ASSETS> 35,340
<PP&E> 29,972
<DEPRECIATION> 13,502
<TOTAL-ASSETS> 56,643
<CURRENT-LIABILITIES> 12,691
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 40,493
<TOTAL-LIABILITY-AND-EQUITY> 56,643
<SALES> 45,277
<TOTAL-REVENUES> 53,894
<CGS> 26,871
<TOTAL-COSTS> 33,390
<OTHER-EXPENSES> 21,653
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (118)
<INCOME-PRETAX> (1,031)
<INCOME-TAX> 1,788
<INCOME-CONTINUING> (2,819)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,819)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-Q
</LEGEND>
<CIK> 0000934741
<NAME> SDL, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 2,426
<SECURITIES> 9,015
<RECEIVABLES> 12,679
<ALLOWANCES> 385
<INVENTORY> 10,552
<CURRENT-ASSETS> 36,541
<PP&E> 31,830
<DEPRECIATION> 14,242
<TOTAL-ASSETS> 58,821
<CURRENT-LIABILITIES> 10,592
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 44,790
<TOTAL-LIABILITY-AND-EQUITY> 58,821
<SALES> 17,348
<TOTAL-REVENUES> 20,422
<CGS> 10,505
<TOTAL-COSTS> 12,747
<OTHER-EXPENSES> 4,498
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (145)
<INCOME-PRETAX> 3,322
<INCOME-TAX> 1,163
<INCOME-CONTINUING> 2,159
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,159
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
