UNITED STATES
SECURITIES & 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, 1999
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 May 6,
1999 was 14,835,532.
<PAGE>
SDL, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
March 31, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item. 3 Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SDL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(unaudited) (1)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ....................... $4,305 $13,370
Short-term investments .......................... 15,053 12,494
Accounts receivable, net ........................ 27,593 22,070
Inventories ..................................... 22,651 19,679
Prepaid expenses and other current assets ....... 3,181 3,306
------------ ------------
Total current assets .............................. 72,783 70,919
Property and equipment, net ....................... 38,217 32,931
Long-term investments ............................. -- 3,552
Note due from related party ....................... 504 512
Other assets ...................................... 7,031 4,563
------------ ------------
Total assets ...................................... $118,535 $112,477
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $7,981 $9,385
Accrued payroll and related expenses ............ 2,696 2,354
Income taxes payable ............................ 1,565 1,890
Unearned revenue ................................ 618 643
Other accrued liabilities ....................... 2,873 2,289
------------ ------------
Total current liabilities ......................... 15,733 16,561
Long-term liabilities ............................. 3,580 2,669
Commitments and contingencies
Stockholders' equity:
Preferred stock.................................. -- --
Common stock..................................... 15 15
Additional paid-in capital ...................... 123,044 120,033
Accumulated other comprehensive income........... (50) (4)
Accumulated deficit, $26.3 million relating
to the repurchase of common stock in 1992
and $5.8 million relating to a
recapitalization in 1992 ...................... (23,747) (26,757)
------------ ------------
99,262 93,287
Less common stockholders' notes receivable ...... (40) (40)
------------ ------------
Total stockholders' equity ........................ 99,222 93,247
------------ ------------
Total liabilities and stockholders' equity ........ $118,535 $112,477
============ ============
</TABLE>
(1) The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date.
See accompanying notes.
<PAGE>
SDL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA - UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Total revenue:
Product revenue..................... $34,754 $22,140
Research revenue.................... 976 3,217
--------- ---------
35,730 25,357
Cost of revenue:
Cost of product revenue............. 20,773 14,778
Cost of research revenue............ 903 2,372
--------- ---------
Gross margin.......................... 14,054 8,207
Operating expenses:
Research and development.............. 3,348 2,476
Selling, general and administrative... 5,018 2,889
Amortization of purchased intangibles. 179 196
In-process research and development... 1,495 --
--------- ---------
Operating income...................... 4,014 2,646
Interest income and other, net........ 270 273
--------- ---------
Income before income taxes............ 4,284 2,919
Provision for income taxes............ 1,274 220
--------- ---------
Net income............................ $3,010 $2,699
========= =========
Net income per share - basic.......... $0.21 $0.20
========= =========
Net income per share - diluted........ $0.19 $0.19
========= =========
Number of weighted average
shares - basic...................... 14,479 13,708
Number of weighted average
shares - diluted.................... 15,509 14,545
</TABLE>
See accompanying notes
SDL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS - UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................. $3,010 $2,699
--------- ---------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 2,293 1,904
In-process research and development.............. 1,495 --
Changes in operating assets and liabilities:
Accounts receivable............................ (5,523) 783
Inventories.................................... (1,993) (589)
Accounts payable............................... (1,404) 227
Accrued payroll and related expenses........... 342 170
Income taxes payable........................... (325) (269)
Unearned revenue........................... (25) (22)
Other accrued liabilities...................... 340 (79)
Other long-term liabilities.................... 911 161
Other.......................................... 82 (224)
--------- ---------
Total adjustments...................................... (3,807) 2,062
--------- ---------
Net cash provided by (used in) operating activities.... (797) 4,761
--------- ---------
INVESTING ACTIVITIES:
Acquisition of property and equipment, net............ (7,171) (3,679)
Acquisition of the fiber laser business of Polaroid... (5,055) --
Sale of investments, net.............................. 947 3,261
--------- ---------
Net cash used in investing activities.................. (11,279) (418)
--------- ---------
FINANCING ACTIVITIES:
Issuance of stock pursuant to employee stock plans.... 3,011 286
--------- ---------
Net cash provided by financing activities.............. 3,011 286
--------- ---------
Net increase (decrease) in cash and cash equivalents.. (9,065) 4,629
Cash and cash equivalents at beginning of period....... 13,370 4,593
--------- ---------
Cash and cash equivalents at end of period............. $4,305 $9,222
========= =========
</TABLE>
See accompanying notes.
<PAGE>
SDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1999
1. Basis of Presentation and Business Activities
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, 1999
are not necessarily indicative of the results that may be expected
for the year ended December 31, 1999. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Registrant Company's Annual Report on Form 10-K/A
for the year ended December 31, 1998.
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.
The Company operates and reports financial results on a fiscal year
of 52 or 53 weeks ending on the Friday closest to December 31. The
first fiscal quarter of 1999 and 1998 ended on April 2, 1999 and
April 3, 1998, respectively. For ease of discussion and
presentation, all accompanying financial statements have been shown
as ending on the last day of the calendar month.
In March 1999, the Board of Directors authorized a two-for-one stock
split to be effected in the form of a stock dividend. The split is
subject to stockholders approval of an increase in the Company's
authorized shares of Common Stock to 70 million shares.
Stockholders will vote on the proposed increase in the authorized
capital at the Company's annual meeting of stockholders to be held
on May 13, 1999.
On March 31, 1999, the Company announced the signing of a Merger
Agreement, providing for the pending merger with IOC International
plc (IOC). IOC is a publicly held United Kingdom company (United
Kingdom Alternative Investment Market symbol "IOC") that designs
and manufactures lithium niobate opto-electronic devices for long
haul fiber optic transmission systems. The merger with IOC will be
accounted for as a pooling of interest transaction and is subject to
a number of contingencies including approval by stockholders of IOC
and certain closing conditions. As a result, there can be no
assurance that such merger will be consummated. The Merger
Agreement provides for the Company to acquire the whole of the share
capital of IOC in exchange for new SDL Common Stock on the basis of
1.815 shares of new SDL Common Stock for every 100 IOC shares
(before taking account of SDL's intention to declare a two-for-one
stock split by the way of a stock dividend).
2. Net Income Per Share
The following table sets forth the computation of basic and diluted
net income per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Numerator:
Net income........................ $3,010 $2,699
========= =========
Denominator:
Denominator for basic net income
per share - weighted average
shares.......................... 14,479 13,708
Incremental common shares
attributable to shares
issuable under employee stock
plans........................... 1,030 837
--------- ---------
Denominator for diluted net
income per share adjusted
weighted average shares and
assumed conversions............. 15,509 14,545
========= =========
Net income per share - basic...... $0.21 $0.20
========= =========
Net income per share - diluted.... $0.19 $0.19
========= =========
</TABLE>
3. Inventories
The components of inventories consist of the following (in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Raw materials ............. $10,548 $6,620
Work-in-process............ 12,103 13,059
------------ ------------
$22,651 $19,679
============ ============
</TABLE>
No significant amounts of finished goods are maintained.
4. Comprehensive Income
Accumulated other comprehensive income presented in the
accompanying consolidated balance sheet consists of the accumulated
net unrealized gains and losses on available-for-sale marketable
securities, net of the related tax effect. The tax effects for
other comprehensive income were immaterial for all periods
presented.
Total comprehensive income amounted to approximately $3.0 million
for the first quarter 1999 compared to a comprehensive income of
$2.7 million for the first quarter of 1998.
5. Segment Reporting
SDL has three reportable segments: communications, research, and
printing and materials processing. The communications business
unit develops, designs, manufactures and distributes lasers for
applications in the telecom, cable television, satellite and dense
wavelength division multiplexing markets. The research business
unit conducts research, development or product customization,
involving both communications and printing and material processing
applications, for Fortune 500 companies, major international
customers, smaller domestic and international companies, and
multiple Federal government agencies. The operating results of
the research business unit include the results generated
from that business unit which includes some revenue classified as
product revenue. The printing and materials processing business
unit develops, designs, manufacturers and distributes lasers for
applications in the surface heat treating, product labeling,
digital imaging, digital proofing, and thermal printing solutions
markets.
The operating segments reported below are the segments of the
Company for which separate financial information is available and
for which operating income/loss amounts are evaluated regularly by
executive management in deciding how to allocate resources and in
assessing performance. The accounting policies of the operating
segments are the same as those described in the summary of
accounting policies.
The Company's reportable segments are business units that offer
different products. The reportable segments are each managed
separately because they manufacture and distribute distinct
products with different applications. The Company does not
allocate assets to its individual operating segments.
Information about reported segment income or loss is as follows (in
thousands):
<TABLE>
<CAPTION>
Printing
Communica- and
tion Material
Products Research Processing Total
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Quarter ended March 31, 1999:
Revenue from external customers... $25,377 $1,255 $9,098 $35,730
Amortization...................... 78 -- 101 179
Segment Operating Income.......... $6,393 ($217) $33 $6,209
<CAPTION>
Printing
Communica- and
tion Material
Products Research Processing Total
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Quarter ended March 31, 1998:
Revenue from external customers... $10,952 $2,059 $12,346 $25,357
Amortization...................... 155 -- 41 196
Segment Operating Income (Loss)... $762 $201 $1,683 $2,646
</TABLE>
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as
follows (in thousands):
<TABLE>
<CAPTION>
Quarters Ended March 31,
----------------------
1999 1998
----------- ----------
<S> <C> <C>
Operating Income (Loss)
Total operating income from operating
segments............................... $6,209 $2,646
In-process R&d and related costs.......... (2,195) --
----------- ----------
Total consolidated operating income (loss).. $4,014 $2,646
=========== ==========
</TABLE>
6. Acquisitions
In February 1999, the Company acquired the fiber laser business of
Polaroid for $5.3 million, which includes related transaction
costs of $0.1 million. The business acquired includes all the
physical assets, intellectual property, including the assignment
of 38 patents and the licensing of 22 patents in the fiber laser
area, and the ongoing operation of the fiber manufacturing
facilities and fiber laser subsystem. The acquisition was
accounted for under the purchase method of accounting. The
Company recorded $1.5 million as in-process research and
development for development projects that had not yet reached
technological feasibility. Intangible assets are being amortized
straight-line over a seven year life. In addition, the Company
recorded $0.7 million to accrue for certain pre-existing
obligations to integrate the fiber laser business. The results of
the fiber laser business are not material to the Company's
historical consolidated results of operations.
The purchase price allocation for the fiber laser business
acquisition was recorded as follows (in thousands):
Inventory ................. $979
Property and equipment..... 229
Intangibles................ 2,596
In-process R&D............. 1,495
------------
Net assets acquired........ $5,299
============
Liabilities................ $244
Cash paid, including
transaction costs.......... 5,055
------------
Total purchase price....... $5,299
============
7. Contingencies
See Part II, Item 1, Legal Proceedings in the Company's Form 10-K
for the year ended December 31, 1998 for discussion of legal
matters.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SDL designs, manufactures and markets semiconductor lasers, fiber optic
related products and optoelectronic systems. Since 1996, the Company
strategy has strongly focused on providing solutions for optical
communications. The Company's optical communications products power the
transmission of data, voice and Internet information over fiber optic
networks to meet the needs of telecommunications, dense wavelength
division multiplexing, cable television and satellite communications
applications. In the quarter ended March 31, 1999, the Company derived
72% of its revenue from optical communication markets. With the
increased focus on commercial communications products, the proportion of
SDL's revenue derived from U. S. government related projects has declined
from 43% in fiscal 1996 to 17% in the first quarter of 1999. SDL's
optical products also serve a wide variety of non-communications
applications, including materials processing, printing, medical and
scientific instrumentation. 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. The Company's revenue also includes revenue from customer-
funded research programs.
Because of the diversity of products, customers and applications, gross
margins tend to fluctuate based in part on the mix of revenue in each
reported period. SDL's revenue growth in 1997-1998 was constrained in
part by a shortage in qualified manufacturing capacity, especially in the
wafer fabrication area. The Company's new wafer fabrication facility
received qualification in June 1998, for certain key product lines,
allowing a faster ramp-up in production in the quarter ended March 31,
1999.
The Company operates and reports financial results on a fiscal year of 52
or 53 weeks ending on the Friday closest to December 31. The first
fiscal quarter of 1999 and 1998 ended on April 2, 1999 and April 3, 1998,
respectively. For ease of discussion and presentation, all accompanying
financial statements have been shown as ending on the last day of the
calendar month.
RESULTS OF OPERATIONS
Revenue. Total revenue for the quarter ended March 31, 1999 increased
41% to $35.7 million compared to $25.4 million in the corresponding 1998
quarter. Sequentially, total revenue increased 22% over the $29.4 million
reported for the December 1998 fourth quarter. Product revenue reported
for the first quarter of 1999 increased 57% compared to product revenue
for the first quarter of 1998. The increase in product revenue resulted
primarily from growth in dense wavelength division multiplexing (DWDM)
product sales caused by a strong demand for SDL's 980nm pump laser
product (including submarine fiber products). DWDM product revenue
increased 204% from the prior year quarter. Research revenue declined
both in dollars and as a percentage of total revenue compared to the
corresponding first quarter of 1998. This downward trend in research
revenue has resulted as the Company continues to focus its longer-term
strategy on commercial communication product opportunities. Revenue
derived directly or indirectly from U.S. government sources declined to
17% of total revenue reported for the first three months of 1999,
compared to 31% for the first quarter of 1998.
Revenues from customers outside of the United States represented 27% and
21% of total revenues for the first quarter of 1999 and 1998,
respectively. Virtually all of this export growth was into the European
region, where revenue was up 323% over the prior year and represented 22%
of the first quarter 1999 revenue.
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. Excluding one-time charges of $0.7 million for the fiber
laser business acquisition, first quarter 1999 gross margin was 41.3%
compared with 32.4% for the first quarter of 1998. Three factors
contributed to the quarter-over-quarter increase in gross margin. These
were: (i) a more favorable mix of DWDM product sales as compared to
revenue derived from U.S. government contracts and non-communication
sales; (ii) increased yields and volumes from the Company's wafer fab;
and, (iii) reduction of costs related to the 980nm pump lasers.
The Company's gross margin can be affected by a number of factors,
including product mix, customer mix, applications mix, pricing pressures
and product yield. Generally, the cost of newer products has tended 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.
Considering these factors, gross margin fluctuations are difficult to
predict and there can be no assurance that the Company will achieve or
maintain gross margins at historical levels in future periods.
Research and Development. The Company incurred research and development
expense of $3.3 million and $2.5 million for the quarters ended March 31,
1999 and 1998, respectively. Research and development expense as a
percentage of total revenue was 9% and 10% for the March 1999 and 1998
quarters, respectively. The higher levels of 1999 spending were focused
on bringing new communication products to market. Approximately 80% of
the 1999 research and development spending was for new product
development in the communications market.
The Company is committed to continuing its significant research and
development expenditures and expects that the absolute dollar amount of
research and development expenses will increase as it invests in
developing new products, expanding and enhancing its existing product
lines, and reducing its costs, although research and development expenses
may vary as a percentage of revenue.
Selling, General and Administrative. For the three months ended March
31, 1999, selling, general and administrative (SG&A) expense was $5.0
million or 14% of revenue, compared to $2.9 million or 11% of revenue for
the corresponding 1998 three month period. The increase in SG&A was
principally the result of higher personnel-related costs to support the
increased level of sales and operations, implementation of the Company's
new enterprise resource planning software and other information system
projects. 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.
In-process research and development. The Company's acquisition of the
fiber laser business from Polaroid during the first quarter 1999 resulted
in the write-off of purchased in-process research and development of $1.5
million. In the future, additional in-process research and development
write-offs can be anticipated to the extent the Company may from time to
time acquire companies or new product lines.
Interest Income and other, net. Net interest income and other, net for
the three months ended March 31, 1999 was $270,000 compared to $273,000
recorded in the March 1998 quarter. Lower average cash and investment
balances during the first quarter of 1999 offset by lower returns on
investments in the first quarter of 1998 resulted in interest income and
other, net to be relatively unchanged.
Provision for Income Taxes. The Company recorded a provision for income
taxes of $1,274,000 and $220,000 for the three months ended March 31,
1999 and 1998, respectively. Excluding the impact of the in-process
research and development charge in 1999, the effective tax rate for the
first quarter 1999 was 22%, compared to 7.5% for the corresponding
quarter of 1998. In 1998, the Company benefited from previously
unrecognized tax loss carryforwards, generated from the 1997 legal
settlement, which reduced the federal and state provisions to minimum tax
levels. The increase in the 1999 tax rate is primarily attributable to
the Company's utilization of the remainder of tax loss carryforwards.
Although realization is not assured, the Company believes that it will
generate future taxable income sufficient to realize the benefit of the
$4.0 million of net deferred tax assets recorded. The amount of the net
deferred tax assets considered realizable could be reduced or increased
in the near term if estimates of future taxable income are changed.
Management intends to evaluate the realizability of the net deferred tax
assets on a quarterly basis to assess the need for the valuation
allowance.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company's combined balance of cash, cash
equivalents and marketable securities was $19.4 million. Cash used by
operating activities is primarily the result of increases in accounts
receivable and inventories and a decrease in accounts payable offset by
net income before depreciation and amortization expense.
Cash used in investing activities was $11.3 million in the three months
ended March 31, 1999. The Company incurred capital expenditures of $7.2
million for facilities expansion and capital equipment purchases to
expand its manufacturing capacities primarily for its communication
products. The Company currently expects to spend approximately $13
million for capital equipment purchases and leasehold improvements during
the remainder of 1999. In addition, the Company acquired Polaroid's
fiber laser business during the first quarter of 1999 which resulted in
cash payments of $5.1 million.
The Company generated $3.0 million from financing activities during the
first quarter of 1999 from the exercise of employee stock options.
The Company believes that current cash balances, cash generated from
operations, and cash available through the bank and equity markets will
be sufficient to fund capital equipment purchases, acquisitions of
complementary businesses, products or technologies and working capital
requirements for the foreseeable future. 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.
IMPACT OF YEAR 2000
Like many other companies, the year 2000 computer issue creates risks for
SDL. Some of the Company's older computer programs were written using
two digits rather than four to define the applicable year. As a result,
those computer programs have time-sensitive software that recognize a
date using "00" as the year 1900 rather than the year 2000. If
internal systems do not correctly recognize and process date information
beyond the year 1999, there could be a material adverse impact on the
Company's business and results of operations.
To address these year 2000 issues within its internal systems, the
Company has established a task team and initiated a comprehensive program
designed to deal with the most critical systems first. Assessment and
remediation are proceeding in tandem, and the Company currently plans to
have changes to critical systems completed and tested by mid-1999. These
activities are intended to encompass all systems software applications in
use by the Company, including front and back-end manufacturing,
facilities, sales, finance and human resources.
As newer, more functional software solutions are currently available and
are Year 2000 compliant, the Company has concluded that the conversion to
enterprise resource planning software programs supporting the Company's
manufacturing, finance, distribution / logistics and human resource
operations is more cost effective. The project is estimated to be
completed during the quarter ended June 30, 1999. In addition, as a
contingency plan, the Company's existing management information software
applications have been successfully upgraded to a year 2000 compliant
version.
Assessment and remediation of year 2000 issues in tertiary business
information systems is on-going. Well over 80% of the Company's
investment in desktop PC hardware is known to be year 2000 compliant.
Additionally, the Company has concluded that the purchase of newer, more
functional software for its network server applications is more cost
effective than upgrading its existing software to a year 2000 compliant
version. Completing the remediation of the Company's tertiary business
information systems is not expected to be a significant burden on the
Company.
To date, based on its current manufacturing process, SDL believes it has
no material exposure to contingencies directly related directly to the
Year 2000 issue for the products it has sold or will sell in the future.
SDL is also actively working with critical suppliers of products and
services to determine that the suppliers' operations and the products and
services they provide are year 2000 compatible or to monitor their
progress toward year 2000 compatibility. In addition, the Company has
commenced work on various types of contingency planning to address
potential problem areas with internal systems and with suppliers and
other third parties. It is expected that assessment, remediation and
contingency planning activities will be on-going throughout 1999 with the
goal of appropriately resolving all material internal systems and third
party issues.
The costs incurred to date related to these programs are less than $2.7
million. The Company currently expects that the total cost of these
programs, including both incremental spending and redeployed resources,
will total approximately $3.0 million, which includes $1.8 million for
the purchase of new software and hardware that will be capitalized and
$1.2 million that will be expensed as incurred. The Company expects
that operating activities will fund these year 2000 remediation costs.
In some instances, the installation schedule of new software and hardware
in the normal course of business is being accelerated to also afford a
solution to year 2000 capability issues. The Company has not delayed any
non-year 2000 projects as a consequence of its year 2000 remediation
efforts. The costs of these projects and dates on which the Company
believes it will complete the year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of
certain resources and other factors.
Based on currently available information, management does not believe
that the year 2000 matters discussed above related to internal systems or
products sold to customers will have a material adverse impact on the
Company's financial condition or overall trends in results of operations;
however, it is uncertain to what extent the Company may be affected by
such matters. Any failure to timely, successfully and cost-effectively
assess, identify, remediate and resolve the Company's year 2000 issues,
including those regarding its own as well as suppliers' and third
parties' internal systems, products, services and contingency plans, may
have a material adverse effect on the Company's business and results of
operations. The Company is continuing its efforts to ensure year 2000
readiness, and there is risk that there may be new year 2000 issues not
identified above and significant delays in or increased costs associated
with such efforts which could have a material adverse effect on the
Company's business and results of operations.
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 the Company's long-term
strategic focus on commercial communication product opportunities, the
ability to realize the benefit of net deferred tax assets, statements
regarding the Company's year 2000 plans, the impact and expenses of year
2000 issues, the Company's year 2000 readiness, and the Company's
liquidity and anticipated cash needs and availability 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 in the Company's Registration Statement on Form S-4 filed
with the SEC on April 2, 1999, as amended, and from time to time in the
Company's Reports on Forms 10-Q, 8-K, 10-K, 10-K/A and Annual Reports to
Stockholders.
Manufacturing Risks
The manufacture of semiconductor lasers and related products and systems
that we sell is highly complex and precise, requiring production in a
highly controlled and clean environment. Changes in the manufacturing
processes or the inadvertent use of defective or contaminated materials
by us or our suppliers have in the past and could in the future
significantly impair our ability to achieve acceptable manufacturing
yields and product reliability. If we do not achieve acceptable yields
or product reliability, our operating results and customer relationships
will be adversely affected. We rely almost exclusively on our own
production capability in:
o computer-aided chip and package design,
o wafer fabrication,
o wafer processing,
o device packaging,
o hybrid microelectronic packaging,
o printed circuit board testing, and
o final assembly and testing of products.
Because we manufacture, package and test these components, products and
systems at our own facility, and because these components, products and
systems are not readily available from other sources, our business and
results of operations will be significantly impaired if our
manufacturing is interrupted by any of the following:
o shortages of parts or equipment,
o equipment failures,
o poor yields,
o fire or natural disaster,
o labor or equipment shortages, or
o otherwise.
A significant portion of our production relies or occurs on equipment
for which we do not have a backup. To alleviate, at least in part, this
situation, we remodeled our front-end wafer fabrication facility and our
packaging and test facility. We cannot assure you that we will not
experience further start- up costs and yield problems in fully utilizing
our increased wafer capacity targeted by these remodeling efforts. In
addition, we are deploying a new manufacturing execution software system
designed to further automate and streamline our manufacturing processes,
and there may be unforeseen deficiencies in this system which could
adversely affect our manufacturing processes. In the event of any
disruption in production by one of these machines or systems, our
business and results of operations could be materially adversely
affected. Furthermore, we have a limited number of employees dedicated
to the operation and maintenance of our equipment, loss of whom could
affect our ability to effectively operate and service our equipment. We
experienced lower than expected production yields on some of our
products, including certain key product lines during 1997 and the first
half of 1998. This reduction in yields:
o adversely affected gross margins,
o delayed component, product and system shipments, and
o to a certain extent, delayed new orders booked.
Although more recently, our yields have improved, we cannot assure you
that yields will continue to improve or not decline in the future, nor
that in the future our manufacturing yields will be acceptable to ship
products on time. To the extent that we experience lower than expected
manufacturing yields or experience any shipment delays, gross margins
will likely be significantly reduced and we could lose customers and
experience reduced or delayed customer orders and cancellation of
existing backlog. We presently are ramping production of some of our
product lines by:
o changing our shift schedules and equipment coverage,
o hiring and training new personnel,
o acquiring new equipment, and
o expanding our packaging facilities and capabilities.
Difficulties in starting production to meet expected demand and
schedules have occurred in the past and may occur in the future
including the following:
o quality problems could arise, yields could fall, and gross margins
could be reduced during such a ramp.
o aggressive volume pricing for large long-term orders has been
provided to certain customers.
o cost reductions in manufacturing are required to avoid a drop in
gross margins for certain products sold to customers receiving volume
pricing.
These cost reductions may not occur rapidly enough to avoid a decrease
in gross margins on products sold under volume pricing terms. In that
event, our business and results of operations would be materially
adversely affected.
Competition
Our various markets are highly competitive. We face current or potential
competition from four primary sources:
o direct competitors,
o potential entrants,
o suppliers of potential new technologies, and
o suppliers of existing alternative technologies.
We offer a range of components, products and systems and have numerous
competitors worldwide in various segments of our markets. As the markets
for our products grow, new competitors have recently emerged and are
likely to continue to do so in the future. We also sell products and
services to companies with which we presently compete or in the future
may compete and certain of our customers have been or could be acquired
by, or enter into strategic relations with our competitors. In most of
our product lines, our competitors and we are working to develop new
technologies, or improvements and modifications to existing
technologies, which will obsolete present products. Many of our
competitors have significantly greater financial, technical,
manufacturing, marketing, sales and other resources than we do.
In addition, many of these competitors may be able to respond more
quickly to new or emerging technologies, evolving industry trends and
changes in customer requirements and to devote greater resources to the
development, promotion and sale of their products than we. We cannot
assure you that:
o our current or potential competitors have not already or will not in
the future develop or acquire products or technologies comparable or
superior to those that we developed,
o combine or merge with each other or our customers to form significant
competitors,
o expand production capacity to more quickly meet customer supply
requirements, or
o adapt more quickly than we do to new technologies, evolving industry
trends and changing customer requirements.
Increased competition has resulted and could, in the future, result in
price reductions, reduced margins or loss of market share, any of which
could materially and adversely affect our business and results of
operations. We cannot assure you that we will be able to compete
successfully against current and future competitors or that competitive
pressures we face will not have a material adverse effect on our
business and results of operations. We expect that both direct and
indirect competition will increase in the future. Additional competition
could have an adverse material effect on our results of operations
through price reductions and loss of market share.
Dependence on Emerging Applications and New Products
Our current products serve many applications in the communications and
materials processing and printing markets. In many cases, our products
are substantially completed, but the customer's product incorporating
our products is not yet completed or the applications or markets for the
customer's product are new or emerging. In addition, some of our
customers are currently in the process of developing new products that
are in various stages of development, testing and qualification, and
sometimes are in emerging applications or new markets.
We believe that rapid customer acceptance of our new products is key to
our financial results. A substantial portion of our products address
markets that are not now, and may never become, substantial commercial
markets. We have experienced, and are expected to continue to
experience, fluctuation in customer orders and competitive,
technological and pricing constraints that may preclude development of
markets for our products and our customers' products.
Our customers are often required to test and qualify laser pump modules,
transmitters, and marking systems among other new products for potential
volume applications. We cannot assure you that:
o we or our customers will continue their existing product development
efforts, or if continued that such efforts will be successful,
o markets will develop for any of our technology or that pricing will
enable such markets to develop, or
o other technology or products will not supersede our products or our
customer's products.
We may also be unable to develop new products on a timely schedule.
Moreover, even if we are successful in the timely development of new
products that are accepted in the market, we often experience lower
margins on these products. The lower margins are due to lower yields and
other factors, and thus we may be unable to manufacture and sell new
products at an acceptable cost so as to achieve acceptable gross
margins.
Need To Manage Growth
We have on occasion been unable to manufacture products in quantities
sufficient to meet demand of our existing customer base and new
customers. The expansion in the scope of our operations has placed a
considerable strain on our management, financial, manufacturing and
other resources and has required us to implement and improve a variety
of operating, financial and other systems, procedures and controls. In
addition, we are currently deploying a new enterprise resource planning
system and manufacturing execution system.
We cannot assure you that any existing or new systems, procedures or
controls will be adequate to support our operations or that our 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 our business could have a material adverse effect
on our business and results of operations.
Our future success is dependent, in part, on our ability to attract,
assimilate and retain additional employees, including certain key
personnel. We will continue to need a substantial number of additional
personnel, including those with specialized skills, to commercialize our
products and expand all areas of our business in order to continue to
grow. Competition for such personnel is intense, and we cannot assure
you that we will be able to attract, assimilate or retain additional
highly qualified personnel.
Risks of Acquisitions
Our strategy involves the acquisition and integration of additional
companies' products, technologies and personnel. We have limited
experience in acquiring outside businesses. Acquisition of businesses
requires substantial time and attention of management personnel and may
require additional equity or debt financings. Furthermore, integration
of newly established or acquired businesses is often disruptive. Since
we have acquired or in the future may acquire one or more businesses, we
cannot assure you that we will:
o identify appropriate targets,
o acquire such businesses on favorable terms,
o be able to successfully integrate or attain the anticipated synergies
expected by bringing such organizations into our business, or
o be able to improve or even maintain the operating results of such
businesses.
Failure to do so could significantly impair our business, financial
condition and results of operations and a have a material adverse effect
on our business and results of operations.
Dependence Upon Government Programs And Contracts
The Company derived approximately 17%, 28%, and 38% of its revenue
during the first quarter of 1999, fiscal 1998, and fiscal 1997,
respectively, directly and indirectly from a variety of Federal
government sources. The Company received approximately 13%, 14% and 19%
of its revenue for the first quarter of 1999, and fiscal 1998, and
fiscal 1997, respectively, from Lockheed Martin through several U.S.
government and commercial programs. Almost all of the Company's revenue
from Lockheed Martin during these periods was derived from Federally-
funded programs. Revenue from certain of these Lockheed Martin programs
are expected to decrease in the near term.
The demand for certain of our services and products is directly related
to the level of funding of government programs. We believe that the
success and further development of our business is dependent, in
significant part, upon the continued existence and funding of such
programs and upon our ability to participate in such programs. For
example, Federal programs funded substantially all of our research
revenue for 1998, 1997 and 1996. Most of our Federally-funded programs
are subject to renewal every one or two years, so that continued work by
us 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 we 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 our accounting methodology for computing indirect
rates and allocating indirect costs to government contracts. The
government is currently challenging certain indirect cost allocations.
While we believe that amounts recorded on our financial statements are
adequate to cover all related risks, the government has not concluded
its investigation or agreed to a settlement with us. Although the
outcome of this matter cannot be determined at this time, we do not
believe that its outcome will have a material adverse effect on our
financial position, results of operations and cash flows. However, based
on future developments, our estimate of the outcome of these matters
could change in the near term. In addition, a change in our accounting
practices in this area could result in reduced profit margins on
government contracts.
Dependence on Key Employees
Our future performance also depends in significant part upon the
continued service of our key technical and senior management personnel.
The loss of the services of one or more of our officers or other key
employees could significantly impair our business, operating results and
financial condition. While many of our current employees have many years
of service with us, there can be no assurance that we will be able to
retain our existing personnel. If we are unable to retain and hire
additional personnel, our business and results of operations could be
materially and adversely affected. See also "Our acquisition strategy
poses several risks" above.
Risk of Patent Infringement Claims
The semiconductor, optoelectronics, communications, information and
laser industries are characterized by frequent litigation regarding
patent and other intellectual property rights. From time to time we have
received and may receive in the future, notice of claims of infringement
of other parties' proprietary rights and licensing offers to
commercialize third party patent rights. In addition, we cannot assure
you that:
o additional infringement claims (or claims for indemnification
resulting from infringement claims) will not be asserted against us,
or
o that existing claims or any other assertions will not result in an
injunction against the sale of infringing products or otherwise
significantly impair our business and results of operations.
In 1985, we first received correspondence from Rockwell International
Corporation alleging that we used a fabrication process that infringes
Rockwell's patent rights. Those allegations led to two related lawsuits,
one of which is still pending. The first lawsuit was filed in August
1993, when Rockwell sued the Federal government in the United States
Court of Federal Claims, alleging infringement of these patent rights
with respect to the contracts the Federal government has had with at
least 15 companies, including us (Rockwell International Corporation v.
The United States of America, No. 93-542C (US Ct. Fed. Cl.)). We were
not originally named as a party to this lawsuit. However, the Federal
government has asserted that, if we were held liable to Rockwell for
infringement of Rockwell's patent rights in connection with some of its
contracts with us, then we would be liable to indemnify the Federal
government for a portion of its liability on certain contracts.
In June 1995, after Rockwell filed a second lawsuit, we filed a motion
to intervene in the lawsuit filed in August 1993. That motion was
granted on August 17, 1995. Upon intervening in the Federal government's
lawsuit, we filed an answer to Rockwell's complaint, alleging that:
o Rockwell's patent was invalid and that we did not infringe Rockwell's
patent,
o Rockwell's patent was unenforceable under the doctrine of inequitable
conduct, and
o Rockwell's action is barred by the doctrines of laches and equitable
estoppel.
After extensive discovery, we moved, as did the Federal government, for
summary judgment on the ground that Rockwell's patent was invalid. By
order dated February 5, 1997, the Court of Federal Claims granted those
motions and entered judgment in our favor and in favor of the Federal
government. However, Rockwell appealed the Court of Federal Claims'
decision, and on June 15, 1998, the United States Court of Appeals for
the Federal Circuit issued an opinion vacating the judgment that had
been entered in our favor and in favor of the Federal government. The US
Circuit Court for the Federal Circuit held that the Court of Federal
Claims had erred in finding that there were no genuine disputes of
material fact concerning the obviousness of the Rockwell patent, and
that the resolution of these disputes requires a trial. The Federal
Circuit:
o remanded the case back to the trial court for further proceedings,
and
o affirmed the Court of Federal Claims' denial of our motion for
summary judgment of invalidity based on anticipation, as well as the
Court of Federal Claims' claim construction.
Subsequent to the Federal Circuit's action, the United States agreed to
pay Rockwell $16.9 million in settlement of the lawsuit filed in August
1993. We did not participate in the settlement. The Federal government
has not again raised the issue of our potential indemnity obligation.
As noted above, we made our decision to intervene in the lawsuit filed
on August 1993 after Rockwell filed suit against us in the Northern
District of California in May 1995, alleging that we had infringed the
Rockwell patent in connection with our manufacture and sale of products
to customers other than the United States. Again, the complaint alleges
that we used a fabrication process that infringes the Rockwell patent
(Rockwell International Corporation v. SDL, Inc., No. C95-01729 MHP (US
Dist.Ct., N.D. Cal.)). By its complaint, Rockwell seeks a permanent
injunction against us to:
o enjoin us from infringement of the Rockwell patent,
o require us to pay damages in an unspecified amount for our alleged
past infringement of the patent, treble damages and attorneys' fees.
The complaint was served on us on June 30, 1995, and we filed an answer
to the complaint on August 18, 1995, alleging that:
o Rockwell's patent is invalid,
o we did not infringe Rockwell's patent,
o Rockwell's patent is unenforceable under the doctrine of inequitable
conduct, and
o Rockwell's action is barred by the doctrines of laches and equitable
estoppel.
On August 11, 1995, prior to filing our answer, we filed a motion to
stay this action based upon the pendency of the lawsuit brought by the
federal government. The District Court granted our motion to stay on
September 15, 1995. Subsequent to the settlement of this lawsuit, the
District Court lifted this stay, and discovery has re-commenced for the
lawsuit filed on May 1995.
Although the Court of Federal Claims ruled in our favor, finding the
patent invalid on motion for summary judgment, the Court of Appeals for
the Federal Circuit reversed the summary judgment ruling, meaning that
the issue of validity needed to go to trial. Such a trial would now
occur before a jury in California. The judge has also required that a
settlement conference between Rockwell and SDL be scheduled in June 1999
in order to see if the parties can resolve the dispute before trial.
We believe that we have meritorious defenses to Rockwell's allegations.
It should be noted that the resolution of intellectual property disputes
is often fact intensive and, therefore, the results are inherently
uncertain. There can be no assurance that Rockwell will not ultimately
prevail in this dispute. If Rockwell were to prevail, Rockwell could be
awarded substantial monetary damages and/or an injunction against us for
the sale of infringing products. If this injunction were entered, we may
seek to obtain a license to use Rockwell's patent.
We cannot assure you, however, that a license would be available on
reasonable terms or at all. The award of monetary damages against us, or
the grant of an injunction and failure to obtain a license to use
Rockwell's patent on commercially reasonable terms could have a material
adverse effect on our business and results of operations. Litigation of
Rockwell's claim against us is expected to involve significant expense
to us and could divert the attention of our technical and management
personnel and could have a material adverse effect on our business and
results of operations.
In addition, we are involved in various legal proceedings arising in the
ordinary course of our business.
Customer Order Fluctuations
Our product revenue is subject to fluctuations in customer orders.
Occasionally, some of our customers have ordered more products than they
need in a given period, thereby building up inventory and delaying
placement of subsequent orders until such inventory has been reduced. We
may also build inventory in anticipation of receiving new orders in the
future. Also, customers have occasionally placed large orders that they
have subsequently cancelled. In addition, due to the fact that our sales
of our 980 nm pump module products comprise a significant portion of our
total revenues, our revenues are particularly susceptible to customer
order fluctuations for this product. These fluctuations, cancellations
and the failure to receive new orders can have adverse effects on our
business and results of operations. We may also have incurred
significant inventory or other expenses in preparing to fill such orders
prior to their cancellation. Virtually our entire backlog is subject to
cancellation. Cancellation of significant portions of our backlog, or
delays in scheduled delivery dates, could have a material adverse effect
on our business and results of operations.
Dependence of Proprietary Technology
Our future success and competitive position is dependent in part upon
our proprietary technology, and we rely in part on patent, trade secret,
trademark and copyright law to protect our intellectual property. There
can be no assurance that:
o any of the 127 patents owned or approximately 134 patents licensed by
us will not be invalidated, circumvented, challenged or licensed to
others,
o the rights granted under the patents will provide competitive
advantages to us,
o any of our approximately 90 pending or future patent applications
will be issued with the scope of the claims sought by us, if at all,
or
o that others will not develop technologies that are similar or
superior to our technology, duplicate our technology or design around
the patents we own, or patent or assert patents on technology which
we might use or intend to use.
In addition, effective copyright and trade secret protection may be
unavailable, limited or not applied for in certain foreign countries.
Our technology is licensed on a non-exclusive basis from Xerox and other
third parties that may license such technology to others, including our
competitors. There can be no assurance that steps we take to protect
our technology will prevent misappropriation of such technology. In
addition, litigation has been necessary and may be necessary in the
future:
o to enforce our patents and other intellectual property rights,
o to protect our trade secrets,
o to determine the validity and scope of the proprietary rights of
others, or
o to defend against claims of infringement or invalidity of
intellectual property rights developed internally or acquired from
third parties.
Litigation of this type has resulted in substantial costs and diversion
of resources and could have a material adverse effect on our business
and results of operations. Moreover, we may be required to participate
in interference proceedings to determine the propriety of inventions.
These proceedings could result in substantial cost to us.
Competition
Our various markets are highly competitive. We face current or potential
competition from four primary sources:
o direct competitors,
o potential entrants,
o suppliers of potential new technologies, and
o suppliers of existing alternative technologies.
We offer a range of components, products and systems and have numerous
competitors worldwide in various segments of our markets. As the markets
for our products grow, new competitors have recently emerged and are
likely to continue to do so in the future. We also sell products and
services to companies with which we presently compete or in the future
may compete and certain of our customers have been or could be acquired
by, or enter into strategic relations with our competitors. In most of
our product lines, our competitors and we are working to develop new
technologies, or improvements and modifications to existing
technologies, which will obsolete present products. Many of our
competitors have significantly greater financial, technical,
manufacturing, marketing, sales and other resources than we do.
In addition, many of these competitors may be able to respond more
quickly to new or emerging technologies, evolving industry trends and
changes in customer requirements and to devote greater resources to the
development, promotion and sale of their products than we. We cannot
assure you that:
o our current or potential competitors have not already or will not in
the future develop or acquire products or technologies comparable or
superior to those that we developed,
o combine or merge with each other or our customers to form significant
competitors,
o expand production capacity to more quickly meet customer supply
requirements, or
o adapt more quickly than we do to new technologies, evolving industry
trends and changing customer requirements.
Increased competition and customer demands have resulted and could, in
the future, result in price reductions, reduced margins or loss of
market share, any of which could materially and adversely affect our
business and results of operations. We cannot assure you that we will be
able to compete successfully against current and future competitors or
that competitive pressures we face will not have a material adverse
effect on our business and results of operations. We expect that both
direct and indirect competition will increase in the future. Additional
competition could have an adverse material effect on our results of
operations through price reductions and loss of market share.
International Distribution Risks
Revenues from customers outside of the United States accounted for
approximately 27 percent, 24 percent and 17 percent, of our total revenue
in the first quarter of 1999, fiscal 1998 and 1997, respectively.
International revenue carries a number of inherent risks, including:
o reduced protection for intellectual property rights in some
countries,
o the impact of unstable environments in economies outside the United
States,
o generally longer receivable collection periods,
o changes in regulatory environments,
o tariffs, and
o other potential trade barriers.
In addition, some of our international revenue is subject to export
licensing and approvals by the Department of Commerce or other Federal
governmental agencies. Although to date, we have experienced little
difficulty in obtaining such licenses or approvals, the failure to
obtain these licenses or approvals or comply with such regulations in
the future could have a material adverse effect on our business and
results of operations.
We currently use local distributors in key industrialized countries and
local representatives in smaller markets. Although we have formal
distribution contracts with some of our distributors and
representatives, some of our relationships are currently on an informal
basis. Most of our international distributors and representatives offer
only our products; however, certain distributors offer competing
products and we cannot assure you that additional distributors and
representatives will not also offer products that are competitive with
our products. We cannot assure you that our international distributors
and representatives will enter into formal distribution agreements at
all or on acceptable terms, will not terminate informal or contractual
relationships, will continue to sell our products or that we will
provide the distributors and resellers with adequate levels of support.
Our business and results of operations will be affected adversely if we
lose a significant number of our international distributors and
representatives or experience a decrease in revenue from these
distributors and representatives.
Environmental Risks
We are subject to a variety of federal, state and local laws and
regulations concerning the storage, use, discharge and disposal of
toxic, volatile, or otherwise hazardous or regulated chemicals or
materials used in our manufacturing processes. Further, we are subject
to other safety, labeling and training regulations as required by local,
state and federal law. We have established an environmental and safety
compliance program to meet the objectives of applicable federal, state
and local laws. Our environmental and safety department administers this
compliance program which includes monitoring, measuring and reporting
compliance, establishing safety programs and training our personnel in
environmental and safety matters. We cannot assure you that changes in
these regulations and laws will not have an adverse economic effect on
us. Further, these local, state, and federal regulations could restrict
our ability to expand our operations. If we do not:
o obtain required permits for,
o operate within regulations for,
o control the use of, or
o adequately restrict the discharge of hazardous or regulated
substances or materials under present or future regulations, we may
be required to pay substantial penalties, to make costly changes in
our manufacturing processes or facilities or to suspend our
operations.
Dependence on Single Source And Other Third Party Suppliers
We depend on a single or limited number of outside contractors and
suppliers for raw materials, packages and standard components, and to
assemble printed circuitboards. We generally purchase these products
through standard purchase orders or one-year supply agreements. We do
not have long-term guaranteed supply agreements with these suppliers. We
seek to maintain a sufficient safety stock to overcome short-term
shipping delays or supply interruptions by our suppliers. We also
endeavor to maintain ongoing communications with our suppliers to guard
against interruptions in supply. To date, we have generally been able to
obtain sufficient supplies in a timely manner. However, our business and
results of operations have in the past been and could be impaired by:
o a stoppage or delay of supply,
o substitution of more expensive or less reliable parts,
o receipt of defective parts or contaminated materials, and
o an increase in the price of such supplies or our inability to obtain
reduced pricing from our suppliers in response to competitive
pressures.
Potential Volatility of Stock Price
The market price of our Common Stock may fluctuate significantly because
of:
o announcements of technological innovations,
o large customer orders,
o customer order delays or cancellations,
o customer qualification delays,
o new products by us, our competitors or third parties,
o possible acquisition of us by a third party,
o merger or acquisition announcements,
o production problems,
o quarterly variations in our actual or anticipated results of
operations, and
o developments in litigation in which we are or may become involved.
Furthermore, the stock market has experienced extreme price and volume
volatility, which has particularly affected the market prices of many
high technology companies. This volatility has often been unrelated to
the operating performance of such companies. This broad market
volatility may adversely affect the market price of our Common Stock.
Many companies in the optical communications industry have in the past
year experienced historical highs in the market prices of their stock.
We cannot assure you that the market price of our Common Stock will not
experience significant volatility in the future, including volatility
that is unrelated to our performance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Not Applicable
Item 2. Changes in Securities and Use of Proceeds. 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) List of Exhibits
Number Exhibit Description
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the
quarter ended March 31, 1999.
<PAGE>
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 12, 1999 /s/ Michael L. Foster
---------------------------------------
Michael L. Foster
Vice President, Finance
Chief Financial Officer
(Duly Authorized Officer, and Principal
Financial and Accounting Officer)
<PAGE>
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<INCOME-CONTINUING> 3,010
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,010
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.19
</TABLE>
