================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 1, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER: 0-25688
SDL, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0331449
- -------------------------------- ---------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
80 Rose Orchard Way, San Jose, California 95134
- ----------------------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (408) 943-9411
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
------------------- ------------------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value
----------------
(Title of Class)
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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant, based on the closing sale price of the
Common Stock on March 19, 1999, as reported by Nasdaq was $635,232,358.
Shares of Common Stock held by each officer and director and by each person who
owns 5 percent or more of the outstanding Common Stock have been excluded from
this computation in that such persons may be deemed to be affiliates. This
determination of affiliate status is not a conclusive determination for other
purposes.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of March 19, 1999 the registrant had outstanding 14,650,862 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of this Report on Form 10-K incorporates information by reference from
Registrant's 1998 Annual Report to Stockholders. Part III of this Report on
Form 10-K incorporates information by reference from Registrant's Proxy
Statement for its 1999 Annual Meeting of Stockholders.
<PAGE>
PART I
ITEM 1. BUSINESS
Introduction
SDL, Inc. was established in 1983 as a joint venture between Xerox and
Spectra-Physics to develop and commercialize semiconductor laser
technology. SDL management led a group to buy-out the joint venture
partners in 1992 and the Company went public in 1995. SDL designs,
manufactures and markets semiconductor lasers, fiber optic related
products and optoelectronic systems. Historically, the Company has been
technology-driven, leading the deployment of semiconductor laser
technology into a wide variety of applications including fiber optic and
satellite communications, cable television, materials processing,
printing, data storage, cancer and other medical treatment, display,
defense and scientific instrumentation. The Company's technical staff,
including over fifty PhDs, represents one of the largest investments in
core technology in the photonics industry. From the original products
introduced in 1984, SDL 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.
By 1995, SDL management recognized that its core technical strengths of
high reliability and high power were particularly well-suited to the
growing market opportunity in fiber optic communications. Since the
acquisition of Seastar Optics in 1995, the Company's strategy has
increasingly focused on providing solutions for optical communications.
SDL'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
(DWDM), cable television and satellite communications applications. Led
by growth in shipments of its flagship 980 nm semiconductor laser pump
module, revenue from fiber optic products for terrestrial, undersea and
cable television communications increased by greater than 100% in 1998
over 1997. Overall communications-related revenue increased to 66% of
total revenue in the fourth quarter of 1998.
Demand for Company communications products is benefiting from the build-
out of fiber optic networks to meet the bandwidth needs created by the
growth of the Internet. The existing telecommunications infrastructure
has proved insufficient to meet the massive traffic flow created by the
Internet. To solve the demand for bandwidth, network providers have
begun implementing DWDM technology to increase the capacity of existing
fiber optic systems as well as implementing DWDM in new construction.
SDL's fiber optic products, such as its high power, wavelength-stabilized
pump module, are essential elements in DWDM systems.
With the increased focus on commercial communications products, the
proportion of revenue derived from U.S. government-related projects
declined from 43% in 1996 to 28% for all of 1998 and to 21% in the fourth
quarter of 1998. SDL's revenue growth in 1997 - 1998 was constrained by
a shortage in qualified manufacturing capacity, especially in the wafer
fabrication area. The Company's new wafer fabrication facility received
full qualification in June 1998, allowing a faster ramp-up in production
to meet customer's DWDM demand. In order to satisfy customer
requirements for DWDM products, the Company is also in the process of
doubling the size of its semiconductor laser diode assembly and test
facility, and constructing a new 40,000 square feet pump module packaging
facility.
Company Strategy
SDL's objective is to be the customer's first choice for optoelectronics
products by providing high levels of customer satisfaction, in terms of
technology, value, quality, delivery and service. The key elements of
SDL's business strategy are as follows:
Focus on Fiber Optic (DWDM) Communications
The demand for greater bandwidth capacity over fiber optic networks has
created a strong demand for DWDM systems. DWDM offers the highest amount
of bandwidth capacity for the lowest cost by enabling the transmission of
multiple signals over a single optical fiber. SDL is a market leader in
supplying high power semiconductor laser and amplifier components that
power DWDM systems. DWDM-related revenue increased by greater than 100%
in 1998 over 1997. The Company believes that there is an excellent match
between its core technical strengths in high power, high reliability and
wavelength stabilization, and the growing product requirements in the
DWDM market.
Expand and Leverage Technology Leadership
The Company believes it is a technology leader in the semiconductor pump
laser area and in many other product and market areas in which the
Company is a primary competitor. With over 120 patents owned and over 90
patents pending, and with over fifty PhDs on staff, SDL's proprietary
photonics technology base has expanded rapidly in the past several years.
The Company plans to leverage its strong technology base in power,
reliability and wavelength stabilization to maximize its market share in
the pump laser area, for terrestrial, undersea and cable television
applications, and to expand into other DWDM fiber optic product areas
requiring high power and high reliability.
Increase Breadth of Fiber Optic Product Offering to Existing Customer
Base
SDL has over twenty customers for its DWDM and fiber optics products.
In the fourth quarter of 1998, six of these customers purchased over $1
million of products while another two bought over $500,000. Since SDL
has already qualified its technology and manufacturing and quality
processes with these customers, the Company believes it has the
opportunity to successfully market additional products to these same
customers. Through both internal product development and acquisition of
advanced products developed by others, the Company intends to provide a
wide variety of solutions to the optical communications needs of its
existing customer base.
Increase Level of Integration on the Wafer
SDL pioneered the design of, and commercially developed, the first
optoelectronic integrated circuit (OEIC) containing multiple
semiconductor lasers. Semiconductor OEICs are expected to revolutionize
the type and number of applications that can be served by
optoelectronics. The Company believes that, as with silicon integrated
circuits, advanced semiconductor OEICs in conjunction with new fiber
optic technologies will, in the long run, represent an increasing portion
of the communication network's value.
Upgrade Bellcore-Qualified Manufacturing Capability
The Company is pursuing programs to significantly expand manufacturing
capacity, improve yields and reduce unit costs in key product areas.
Bellcore-qualified wafer fabrication capacity is in place in San Jose,
California to meet expected product demand into early 2000. Two
additional reactors are on order and scheduled to be qualified in time to
meet the potential increased product demands in 2000-2001. Construction
is nearing completion on a doubling of semiconductor laser diode assembly
and test floor space at the Company's Santa Clara, California facility.
Construction of a new 40,000 square foot pump module packaging facility
is also in process near Victoria, British Columbia, Canada; the Company
expects to begin shipments from this facility by the fourth quarter of
1999. Due largely to improved yields in manufacturing, the Company was
able to reduce pump laser costs in 1998 and increase overall corporate
gross margins by over five percentage points. Continuous yield
improvement remains a high priority.
Partner with Leaders
SDL strives to be the market share leader in each of the product segments
in which it competes, and seeks partnerships with the largest customers
in each segment. Typically, such major system business leaders are
attracted by the Company's technical leadership at the component and
subsystem level. For example, many of the largest manufacturers of high-
channel-count optical amplifiers have partnered with SDL because its high
power, wavelength-stabilized pump module improves amplifier performance.
The Company continues to expand its worldwide sales and marketing
organization with a goal of providing superior solutions and service.
Examples of successful partnerships include DWDM-- Alcatel, Corning and
Lucent; Printing-Kodak, Panasonic and Polaroid.
Increase Profitability of Non-Communications Businesses
Product and research revenue from non-communications markets, such as
printing and materials processing, remains a significant proportion of
total revenue (34% in the fourth quarter of 1998). These products are
also important to overall manufacturing overhead utilization because all
of the Company's semiconductor laser products are made in the same wafer
fabrication and assembly facilities. This business area has been
generally profitable but may not have the same growth prospects as SDL's
communications business. Therefore, the Company is investing in non-
communications product lines only where it has a credible plan for
profitable growth. The Company discontinued several low margin non-
communications product lines in 1998. Conversely, responding to an
opportunity to increase margins through more vertical integration, the
Company invested $5.2 million to acquire the fiber laser business of
Polaroid Corporation in early 1999.
Products and Markets
The Company derives revenue from three principal market areas: fiber
optic and satellite communications, printing and material processing and
contract research.
Fiber Optic Communications
Dense wavelength division multiplexing (DWDM) technology is
revolutionizing modern communications by dramatically increasing the
amount of information that can be transported across fiber optic
networks. It is very costly to install fiber cabling for long distance
communication. Once cable is installed, therefore, there is a great
incentive to utilize it to the greatest extent possible, rather than
having to install additional cable. Rather than transmitting a single
light signal over a fiber (as was historically done), with DWDM several
different light signals each at a different wavelength, are combined
(multiplexed) and transmitted over the fiber simultaneously. At the
output end of the fiber cable, the various signals can be separated
(demultiplexed) because each signal is at a slightly different
wavelength. With technological improvements, the number of different
wavelengths (or channels) that can be transmitted simultaneously
continues to increase, from 28 to 40 to 80 to over 100.
With long haul fiber optic systems, light signals may travel over
thousands of miles of fiber optic cable before reaching the destination.
The light signals degrade and must be amplified periodically as they
travel across the fiber. Optical amplifiers accomplish this task, and
one of the most important elements in an optical amplifier is the
semiconductor laser pump module.
OPTICAL AMPLIFIER WITH PUMP MODULE
| ----------------------------------------|
| |
| |-------------| |
| |Semiconductor| OPTICAL |
| | Laser Pump | AMPLIFIER |
| | Module | |
| |-------------| |
| | |
| | |
| | |
INPUT | | |---------| | OUTPUT
- ------------ | ----> | Optical | | ---------
Transmitted | | Coupler |--------------------> Amplified
Light Signal------------------> |---------| Doped Optical | Light
(Source) | Fiber | Signal
| |
| ----------------------------------------|
As shown above, the incoming source signal is combined with laser light
produced by a semiconductor laser pump module via an optical coupler.
The energy from the pump module excites the erbium dopant atoms in the
doped fiber cable. When the input signal light enters the doped fiber,
the input signal light causes the dopant atoms to "relax" and give off
many photons at the same wavelength and with the same pulse shape as the
input source signal. As a result, the output of the optical amplifier is
a greatly boosted or amplified version of the input source signal.
SDL is a leading supplier of 980 nm pump modules for DWDM applications.
The major component within a pump module is the semiconductor laser that
actually produces the laser light. The Company also sells stand-alone
semiconductor lasers to certain customers that prefer to build their own
fiber optic modules. In addition to the laser, the module includes
monitor photodiodes (to measure output of the module), a thermistor (to
monitor temperature) and a cooler (to prevent overheating). The module
also aligns the laser output with an optical fiber. Built into the
output fiber of each SDL pump module is a proprietary fiber Bragg
grating. Fiber Bragg gratings are precise incisions made into the fiber
that act as reflective mirrors for particular wavelengths. Bragg
gratings in conjunction with the semiconductor laser, produce more
precise pump wavelengths resulting in improved DWDM amplifiers enabling
greater bandwidth capacity.
SDL has also designed a series of powerful optical amplifiers, including
erbium-doped fiber amplifiers, to complement its pump module product
line.
The majority of SDL's DWDM revenue has been into the terrestrial long-
haul market. However, the Company also provides products for DWDM
systems for undersea and cable television communications.
The undersea market is emerging as the next large potential market for
DWDM systems because it is very expensive to deploy fiber cable across
oceans. Qualification testing for undersea cable equipment is
particularly rigorous and time consuming because once deployed, equipment
generally cannot be repaired. SDL was recently selected by Alcatel to
supply its 980 nm pump lasers and fiber Bragg gratings for undersea DWDM
systems. The Company also has received contracts to qualify its 980 nm
pump laser and module for two additional undersea DWDM system
contractors. Further, SDL recently announced the introduction of a 1480
nm pump laser module which delivers 1.5 watts of optical power, or about
ten times the power available from traditional pump lasers. This product
enables remote pumping of optical amplifiers for short-haul repeaterless
undersea fiber optic networks such as those connecting islands or cities
along a common coastline.
Cable television (CATV) represents another major potential market for
DWDM equipment. A large portion of the CATV infrastructure is fiber optic
cable and CATV operators have begun implementing DWDM in order to offer
bi-directional services and Internet access. DWDM is well-suited for
transmitting data between cable headends and hubs. SDL supplies 980 nm
pump modules for use in CATV amplifiers.
Satellite Communications
SDL has been the leading supplier of fiber optic semiconductor laser
components to the satellite communications industry since the mid- 1980s.
The expertise gained in developing high power, space-qualified laser
devices provided the technical and reliability base from which to
successfully enter the terrestrial and undersea fiber optic
communications markets in the 1990s. The Company's satellite products
have been used for satellite-to-satellite and satellite-to-ground
communications, and to provide a local area fiber optic network within a
satellite. Laser-based solutions are selected, over microwave or coaxial
cable technology, due to smaller size, lighter weight and greater
efficiency or speed. To date, most satellite laser sales have been to
programs funded by the U.S. government or foreign governments. However,
recently, large commercial satellite projects have begun to consider
laser-based communication solutions.
Printing and Material Processing
SDL offers a broad range of semiconductor laser-based products to a
variety of non-communications markets. Historically, most of these
functions were accomplished either electronically or by using solid state
or gas lasers. These solutions had inherent performance limitations in
terms of capacity, speed, noise, size, durability or reliability. Using
its advanced semiconductor laser technology, the Company designs and
manufactures products to overcome certain of the limitations of
traditional electronic and optical technology.
Printing
The thermal printing industry currently represents SDL's largest non-
communications market. The Company's laser diodes and fiber lasers serve
as heat sources or light sources in high quality printing systems. SDL's
fiber-coupled laser diodes enable customers to write high-resolution
color images directly from computer files onto a printing press plate or
film, thus eliminating a number of processing steps and resulting in
significant cost savings for commercial printers. The Company also
offers a line of fiber lasers for thermal printing applications. These
are optical fibers which are pumped with high reliability semiconductor
lasers. Printing customers are attracted to SDL's fiber lasers because
of their high optical power and good beam quality. SDL recently
announced the acquisition of Polaroid's fiber laser business. This
element of Polaroid was both a supplier and a customer in the chain of
supply of fiber laser technology into the printing market. Therefore,
the Company believes that this acquisition will improve its ability to
profitably service the needs of the printing industry.
Medical
Lasers are increasingly being used in medical applications. SDL provides
high reliability laser diodes for these applications. For example, in
1998, the Company announced the highest-power, lowest-wavelength
semiconductor laser for use in photo dynamic treatment of cancer cells.
Treatment modalities include lung cancer and esophageal cancer.
Material Processing
Lasers are used in a variety of material processing applications,
including welding, cutting, soldering, heat treating and marking. SDL
provides high power semiconductor lasers and fiber laser-based systems
for certain of these applications. In the market for laser marking
systems, SDL's laser pumped products are generally smaller, more reliable
and more efficient than competing lamp-pumped systems. Other laser pump
products provide optical power to manufacturers of solid state lasers for
material processing. For example, in 1998, the Company was selected to
supply high power laser diode pump arrays for an advanced solid state
laser capable of generating extreme ultra violet light that is designed
to enable advanced photolithography for next-generation semiconductor
integrated circuit manufacturing.
Instrumentation
SDL offers a variety of instrumentation products which provide control,
power, interface or scientific measurement functions. For example, a
fiber amplifier coupled to a wavelength tunable semiconductor laser,
provides what the Company believes is the highest power tunable light
source in the 1550 nm range of wavelengths serving the DWDM market.
Contract Research
In addition to developing standard products, SDL seeks contract research
projects which complement its strategy. Historically, a majority of
these projects have been funded by agencies of the U.S. government.
Under such programs, the Company may bill the customers for a fixed non-
recurring engineering charge or may bill for actual burdened costs. On
some of these projects, the Company teams with a group of contractors to
present a vertically integrated system solution. Certain of these
projects also require research and development cost-sharing by the
Company.
While not a significant direct contributor to Company earnings,
management believes that this business activity has benefited the Company
in two principal ways. First, the technology developed under these
contracts is often directly or indirectly applicable to future product
development. Second, the projects attract top technical talent to the
Company.
Sales and Marketing
The Company markets its products through product line specific direct
sales forces headquartered in San Jose, California. The Company also
maintains technical support in the U.K., Canada and Japan. In addition,
the Company sells its products through distributors in Europe, Japan and
Southeast Asia and a worldwide network of representatives.
The Company seeks partnerships with the largest customers in each segment
in which it competes. It believes that the key elements in attracting
and maintaining such partners are superior technology, value, quality,
delivery and service, which the Company strives to provide. Selected
customers for communications products include Alcatel, Antec, Corning,
JDS Fitel, Lockeed Martin, Lucent Technologies, Pirelli and Scientific
Atlanta. Selected customers for non-communication products include
Kodak, Panasonic, Polaroid and TRW.
The Company received approximately 14 percent, 19 percent and 21 percent
of its 1998, 1997 and 1996 revenue, respectively, from Lockheed Martin
Corporation through several U.S. government and commercial satellite
communications programs. See "Factors Affecting Earnings and Stock Price
- -- Dependence Upon Government Programs and Contracts."
Research and Development
During 1998, 1997 and 1996, SDL incurred $10.7 million, $9.8 million and
$6.7 million respectively, of research and development expense. In
addition, the Company recorded cost of sales on customer-funded research
contracts of $7.5 million, $11.6 million and $9.6 million in 1998, 1997
and 1996, respectively.
Research and development in the semiconductor laser and fiber optics
industry is characterized primarily by product design and product
engineering that invents new products or improves performance and
functionality in existing products. The Company believes that its
ability to successfully compete will be substantially dependent on its
ability to design, develop and introduce, in a timely manner, new product
offerings. In addition, the Company also focuses on reducing the cost of
existing manufacturing processes, developing new process capabilities and
adding new features to existing products.
The Company's product development strategy emphasizes highly
differentiated standard products that are based on customer input and
requests, as well as custom product design. The Company often develops
new products at the customer's systems design stage in order to better
optimize compatibility with the customer's system or requirements and to
better ensure market performance.
The Company has successfully introduced what it believes to be leading
edge products and has received numerous new product awards. There can be
no assurance that the Company will succeed in identifying new product
opportunities, or in developing and bringing to market any such new
products, or that the Company will be able to respond effectively to
technological advances by others. There also can be no assurance that
the Company's end markets will accept the Company's new products.
Moreover, the end markets for the Company's new standard products are
subject to rapid technological change and there can be no assurance that
as such markets change, the Company's product offerings will remain
current.
Manufacturing
The Company's primary manufacturing operations are located at the
Company's headquarters in San Jose, California, at a nearby facility in
Santa Clara, California and near Victoria, British Columbia, Canada. The
Company's manufacturing operation is vertically integrated and has
capabilities in computer-aided chip and package design, wafer
fabrication, wafer processing, device packaging, hybrid microelectronic
packaging, printed circuit board testing, and final assembly and testing.
Many of the functions within the Company's manufacturing operation are
computer monitored or controlled, which are designed to enhance
reliability and yield. The Company employs flexible manufacturing
techniques, allowing the Company to switch readily, reliably and
efficiently from one product to another. The Company believes that its
flexible manufacturing capability differentiates it from its competitors.
The Company's semiconductor lasers and fiber optic products are
fabricated using many proprietary processes and customized manufacturing
equipment. Therefore, almost all steps in the manufacturing of the
semiconductor lasers are performed by the Company. Any interruption in
manufacturing resulting from shortages of parts or equipment, earthquake,
fire, equipment failures, yield fluctuations or otherwise could 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. See "Factors Affecting Earnings and Stock Price --
Manufacturing Risks" and "Factors Affecting Earrings and Stock Price --
Need to Manage Growth". Outside contractors and suppliers are used to
supply raw materials, packages and standard components, and to assemble
printed circuit boards. The Company depends on a single or a limited
number of suppliers. The Company generally purchases these single or
limited source products through standard purchase orders or one year
agreements. The Company seeks to maintain a sufficient safety stock to
overcome shipping delays or supply interruptions by its suppliers. The
Company also endeavors to maintain ongoing communications with its
suppliers to guard against interruptions in supply and has, to date,
generally (although not always) been able to obtain sufficient supplies
in a timely manner. Operating results could be adversely affected by a
stoppage or delay of supply, substitution of more expensive or less
reliable alternate parts, receipt of defective parts or contaminated
materials, an increase in pricing of such parts, or the Company's
inability to obtain reduced pricing from its suppliers in response to
competitive pressures. See "Factors Affecting Earnings and Stock Price -
- - Dependence on Single Source and Other Third Party Suppliers."
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. In addition, the delivery of certain products has
on a number of occasions been late causing a loss of market share. As a
result, the Company expanded and requalified its wafer fabrication
facility in San Jose, California in 1997-1998 and intends to further
expand and remodel its manufacturing facilities in the near future. In
the first half of 1999, the Company plans to complete construction of a
doubling of semiconductor laser assembly and test floor space in Santa
Clara, California. Construction of a new 40,000 square foot pump module
packaging facility is also in process near Victoria, British Columbia,
Canada. In addition, two additional reactors are on order and scheduled
to be qualified in time to meet potential increased wafer fabrication
demands in 2000-2001. The Company has experienced, and may in the future
experience, lower than expected production yields on many of its
products, including some of its key product lines. This reduction in
yields adversely affects gross margins and delays component, product and
system shipments. There can be no assurance that the Company will be
able to achieve acceptable manufacturing yields or ship products on time
in the future. Further, the Company's sales contracts often include
sizeable price discounts for volume orders which require future
manufacturing cost reductions to achieve desired margins. There is no
guarantee that such manufacturing cost reduction activities will be
successful in maintaining margins. See "Factors Affecting Earnings and
Stock Price -- Manufacturing Risks" and "Factors Affecting Earnings and
Stock Price -- Need to Manage Growth."
Environmental Regulations
The Company is 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 its manufacturing processes. Further, the Company is subject to other
safety, labeling and training regulations as required by local, state and
federal law. The Company has established an environmental and safety
compliance program to meet the objective of applicable federal, state and
local laws. This compliance program is administered by the environmental
and safety department of the Company and includes monitoring, measuring
and reporting compliance, establishing safety programs and training
Company personnel in environmental and safety matters. There can be no
assurance that changes in or failure to meet regulations or laws will not
have an adverse economic effect on the Company. Further, such
regulations could restrict the Company's ability to expand its
operations. Any failure by the Company to obtain required permits or
operate within regulations for, control the use of, or adequately
restrict the discharge of hazardous or regulated substances or materials
under present or future regulations could subject the Company to
substantial liability, require costly changes in the Company's
manufacturing processes or facilities or cause its operations to be
suspended.
Backlog
As of December 31, 1998, the Company's backlog was approximately $40.1
million. Orders constituting the Company's backlog are subject to
delivery rescheduling, price renegotiations and cancellation at the
option of the buyer without significant penalty. A significant portion
of the Company's business, in line with that of much of the semiconductor
and communications industries, is characterized by short lead-time orders
and quick delivery schedules.
Competition
The Company's various markets are highly competitive. The Company faces
current or potential competition from four primary sources: (i) direct
competitors, (ii) potential entrants, (iii) suppliers of potential new
technologies and (iv) suppliers of existing alternative technologies.
Competitive factors in SDL's major markets include product performance,
reliability, price, customer service, delivery and quality. SDL's
competitors' products may often be preferred by customers with regard to
one or more of these competitive factors. Also, many of the Company's
competitors have significantly greater financial, technical,
manufacturing, marketing, sales and other resources than SDL. 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 the Company.
SDL has numerous competitors worldwide in each of its business areas. In
communications, direct competitors include Uniphase, Nortel, Lasertron
and Furukawa. In printing and material processing, direct competitors
include Spectra-Physics, Coherent, Sony and Sanyo. The Company often
competes with David Sarnoff Research Laboratories, among others, for
research contract funding. The Company also sells its products to
current competitors and companies with the capability of becoming
competitors. Merger, joint ventures or acquisitions of the Company's
customers with the Company's competitors has occurred in the past and
could occur in the future causing the loss of sales by the Company. If
the markets for the Company's products continue to grow, new competitors
are likely to emerge and present competitors may increase their market
share.
Potential new technologies may emerge to compete with the Company's
products. In most of the Company's product lines, both the Company and
competitors are working to develop or acquire new technologies, or
improvements and modifications to existing technologies, which will
obsolete present products. There can be no assurances that the Company
will continue its development efforts, or that such efforts, if
continued, will be successful. In addition, there can be no assurances
that markets will develop for any such products, or that any such
products would be competitive with other technologies or products that
may be developed by others. There can be no assurance that the Company's
current or potential competitors or customers will not develop or acquire
products comparable or superior to those developed by the Company,
combine or merge to form significant competitors, or adapt more quickly
than the Company 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 the
Company's business and results of operations. There can be no assurance
that the Company will be able to compete successfully against current and
future competitors or that competitive pressures faced by the Company
would not have a material adverse effect on its business and results of
operations. The Company expects that both direct and indirect
competition will increase in the future. Additional competition could
adversely affect the Company's results of operations through price
reductions and loss of market share. See "Factors Affecting Earnings and
Stock Price -- Competition"
Intellectual Property
The Company has been a leader in the development of new technologies in
the optoelectronics field and as such, has actively sought to patent its
inventions. The Company frequently reviews it inventions, and attempts
to determine which inventions will provide substantial differentiation,
or represent substantial advancement, between the Company's products and
those of its competitors. In certain cases, the Company may also choose
to keep an invention or a process as a trade secret. Trade secrets are
routinely employed in the Company's manufacturing processes. The Company
has entered into non-disclosure agreements to protect its proprietary
technology with its employees and consultants, and in some instances,
with its suppliers and customers.
To date, the Company owns over 120 U. S. Patents, domestic and foreign,
on devices, processes, packages and systems. Over 90 additional patent
applications are pending. The Company also has a royalty-free license to
approximately 50 Xerox U.S. patents. It also has five royalty-bearing
licenses under which the Company licenses additional patents from third
parties. Management believes that the breadth of its issued and pending
patents and licenses will allow the Company to compete effectively in its
present and future businesses. However, because of rapid technological
developments in the communications, electronics, optics and semiconductor
industries and the broad and rapidly developing patent coverage, the
patent position of any manufacturer, including the Company, is subject to
uncertainties and may involve complex legal and factual issues.
Consequently, the Company may encounter patents from other parties which
may require licensing or may keep the Company from designing,
manufacturing or selling certain products, or using certain process and
could materially adversely effect the Company's results of operations
(See Litigation, Risk of Patent Infringement Claims). Additionally,
although the Company holds certain patents, is licensed under other
patents and is currently prosecuting additional patent applications,
there can be no assurance that patents will issue from any of the
Company's pending applications or that claims allowed by any existing or
future patents issued or licensed to the Company will not be challenged,
invalidated, or circumvented, or that any rights granted thereunder will
provide adequate protection to the Company. Moreover, the Company may be
required to participate in interference proceedings to determine the
priority of inventions, which could result in substantial cost to the
Company. See "Factors Affecting Earnings and Stock Price -- Risk of
Patent Infringement Claims and -- Dependence on Proprietary Technology."
Due to collaborative efforts with others, some of the Company's pending
patent applications or issued patents are filed under undivided joint
ownership. Approximately 39 of the Company's issued patents and pending
applications were developed under Federal government funding and contain
a provision for a non-exclusive, royalty-free license for Federal
government use.
The Company participates in a number of research or product development
consortia in which the Company has agreed to grant other partners or
consortia members, along with the Federal government, a non-exclusive
license to technologies developed with consortia funding. Some of these
cross-license grants are royalty-free while others provide for market
rate license fees. In certain situations, these consortia require the
Company to invest its own research and development funds to match Federal
government funds. The inventions of the Company and other consortia or
team members made with matching research and development funds are also
often subject to such cross-license grant provisions. Joint inventions
made in such collaborations are normally jointly owned.
The Company has registered the letters SDL and its logo with the U.S.
Patent and Trademark Office as trademarks.
Employees
As of December 31, 1998, the Company employed 738 people, including 470
in manufacturing, 170 in engineering, research and development, 34 in
sales and marketing, and 64 in general and administrative capacities.
The Company also employs, from time to time, a number of temporary
employees and consultants on a contract basis. As of December 31, 1998,
the Company employed 19 such people. None of the Company's employees is
represented by a labor union. The Company has not experienced any work
stoppages and considers it relations with its employees to be good.
FACTORS AFFECTING EARNINGS AND STOCK PRICE
The statements contained in this Report on Form 10-K 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, beliefs, intentions or strategies regarding the
future. Forward looking statements include: the Company's plans to
leverage its technology base to maximize its market share; the Company's
ability to market additional products to existing customers; the
Company's plans to provide a wide variety of customer solutions; ability
to ramp manufacturing to meet demand, ability to reduce manufacturing
costs and maintain margins on volume orders, the Company's ability to
profitability serve the printing industry, all under the heading
"Business-Company Strategy;" expected future levels of research and
development (R&D) expenditures, under the heading "Business-Research and
Development;" the Company's ability to switch readily, reliably and
efficiently from manufacture of one product to another, under the heading
"Business-Manufacturing," the Company's ability to compete effectively
in the future, under the heading "Business-Intellectual Property;" the
effect of R&D expenditures on manufacturing yields, gross margin and
product introduction; the amount of future R&D and selling, general and
administrative (SG&A) expenditures; the amount and realizability of the
Company's net deferred tax assets; the amount and timing of capital
equipment and leasehold improvements expenditures; the sufficiency of
anticipated cash resources to meet the Company's future cash needs; and
the expense, timing and impact of Year 2000 issues and solutions, all
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
consult the risk factors listed from time to time in the Company's
Reports on Forms 10-Q and 8-K and the Company's Annual Reports to
Stockholders.
Fluctuations In Quarterly Operating Results.
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly results of operations due to a
number of factors, many of which are beyond the Company's control. Among
the factors that have in the past and/or could in the future affect the
Company's results are: changes in market demand, market acceptance of
new and existing products, receipt or cancellation of large customer
orders, the Company's ability to timely and cost-effectively design,
manufacture and ship products, the mix of products sold, the mix of
customers, competitive pricing pressures, the introduction of new
products by competitors and costs associated with the acquisition of
businesses, products or technologies. In addition, the Company sells its
products to large OEM manufacturers, customers in the research and
development market and government customers. Sales to these customers
can vary significantly due to many factors, including the development of
markets for the Company's customers' products, market acceptance of the
Company's customers' products, year-end budgetary constraints and
government spending patterns. As a result of the above factors,
operations are subject to significant variability and uncertainty from
quarter to quarter.
Manufacturing Risks.
The manufacture of semiconductor lasers and related products and systems
such as those sold by the Company is highly complex and precise,
requiring production in a highly controlled and clean environment.
Changes in the Company's or its suppliers' manufacturing processes or the
inadvertent use of defective or contaminated materials by the Company or
its suppliers has in the past and could in the future adversely affect
the Company's ability to achieve acceptable manufacturing yields and
product reliability. To the extent the Company does not achieve such
yields or product reliability, its operating results and customer
relationships would be adversely affected. The Company relies almost
exclusively on its own production capability in computer-aided chip and
package design, wafer fabrication, wafer processing, device packaging,
hybrid 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
facility, and such components, products and systems are not readily
available from other sources, any interruption in manufacturing resulting
from shortages of parts of equipment, fire, natural disaster, equipment
failures, poor yields or otherwise would have a material adverse effect
on the Company's business and results of operations. A significant
portion of the Company's production relies or occurs on equipment for
which the Company does not have a backup. To alleviate, at least in part,
this situation, the Company remodeled its front-end wafer fabrication
facility and its packaging and test facility. There can be no
assurances that the Company will not experience further start-up costs
and yield problems in fully utilizing its increased wafer capacity
targeted by these remodeling efforts. In addition, the Company is
deploying a new manufacturing execution software system designed to
further automate and streamline its manufacturing processes, and there
may be unforeseen deficiencies in this system which could adversely
affect the Company's manufacturing processes. In the event of any
disruption in production by one of these machines or systems, the
Company's business and results of operations could be materially
adversely affected. Furthermore, the Company has a limited number of
employees dedicated to the operation and maintenance of its equipment,
loss of whom could affect the Company's ability to effectively operate
and service such equipment. The Company experienced lower than expected
production yields on some of its products, including certain key product
lines during 1997 and the first half of 1998. This reduction in yields
adversely affected gross margins, delayed component, product and system
shipments and, to a certain extent, new orders booked. Although more
recently the Company's yields have improved, there can be no assurance
yields will continue to improve or not decline in the future, nor that in
the future the Company's manufacturing yields will be acceptable to ship
products on time. To the extent the Company experiences lower than
expected manufacturing yields or experiences any shipment delays, gross
margins will likely be adversely affected and the Company could lose
customers and experience reduced or delayed customer orders and
cancellation of existing backlog. The Company presently is ramping
production of certain of its product lines. This requires hiring and
training of new personnel, acquiring new equipment, and expanding its
packaging facilities and capabilities. Difficulties in ramping production
to meet expected demand and schedules have occurred in the past and may
occur in the future. Quality problems could arise, yields could fall,
and gross margins could be adversely impacted during such a ramp.
Aggressive volume pricing for large long-term orders has been provided to
certain customers. Cost reductions in manufacturing are required to avoid
a drop in gross margins for certain products sold to such customers. Such
cost reductions may not occur rapidly enough to avoid a decrease in gross
margins on these products that could result from such volume pricing
terms. In such event, the Company's business and results of operations
would be materially adversely affected.
Competition.
The Company's various markets are highly competitive. The Company faces
current or potential competition from four primary sources: (i) direct
competitors, (ii) potential entrants, (iii) suppliers of potential new
technologies and (iv) suppliers of existing alternative technologies. The
Company offers a range of components, products and systems and has
numerous competitors worldwide in various segments of its markets. As the
markets for the Company's products grow, new competitors have recently
emerged and are likely to continue to do so in the future. The Company
also sells products and services to companies with which it presently
competes or in the future may compete and certain of the Company's
customers have been or could be acquired by, or enter into strategic
relations with the Company's competitors. In most of the Company's
product lines, both the Company and competitors are working to develop
new technologies, or improvements and modifications to existing
technologies, which will obsolete present products. Many of the Company's
competitors have significantly greater financial, technical,
manufacturing, marketing, sales and other resources than SDL. 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 the Company. There can be no
assurance that the Company's current or potential competitors have not
already or will not in the future develop or acquire products or
technologies comparable or superior to those developed by the Company,
combine or merge with each other or the Company's customers to form
significant competitors, expand production capacity to more quickly meet
customer supply requirements, or adapt more quickly than the Company 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 the Company's
business and results of operations. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company would not
have a material adverse effect on its business and results of operations.
The Company expects that both direct and indirect competition will
increase in the future. Additional competition could have a material
adverse effect on the Company's results of operations through price
reductions and loss of market share.
Dependence On Emerging Applications And New Products.
The Company's current products serve many applications in the
communications and materials processing and printing markets. In many
cases, the Company's products are substantially completed, but the
customer's product incorporating the Company's products is not yet
completed or the applications or markets for the customer's product are
new or emerging. 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. The Company believes that rapid customer
acceptance of its new products is key to the Company's financial results.
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 continue to experience,
fluctuation in customer orders and competitive, technological and pricing
constraints that may preclude development of markets for its products and
its customers' products. The Company's customers are often required to
test and qualify laser pump modules, transmitters, and marking systems
among other new products for potential volume applications. No assurances
can be given that the Company or its customers will qualify these new
products, 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 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. The Company may also be
unable to develop new products on a timely schedule. Moreover, even if
the Company is successful in the timely development of new products and
such products are accepted in the market, the Company often initially
experiences lower margins on new products due to lower yields and other
factors, and thus the Company may be unable to manufacture and sell such
new products at an acceptable cost so as to achieve acceptable gross
margins.
Need To Manage Growth.
The Company has on occasion been unable to manufacture certain products
in quantities sufficient to meet demand of its existing customer base and
new customers. The 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. In
addition, the Company is currently deploying a new enterprise resource
planning (ERP) system. There can be no assurance that any existing or new
systems, procedures or controls will be adequate to support the Company's
operations or that its systems, procedures and controls will be designed,
implemented or improved in a cost-effective and timely manner. Any
failure to implement, improve and expand such systems, procedures and
controls in an efficient manner at a pace consistent with the Company's
business could have a material adverse effect on the Company's business
and results of operations. The future success of the Company is
dependent, in part, on its ability to attract, assimilate and retain
additional employees, including certain key personnel. The Company will
continue to need a substantial number of additional personnel, including
those with specialized skills, to commercialize its products and expand
all areas of its business in order to continue to grow. Competition for
such personnel is intense, and there can be no assurance that the Company
will be able to attract, assimilate or retain additional highly qualified
personnel.
Risks Of Acquisitions.
The Company's strategy involves the acquisition and integration of
additional companies' products, technologies and personnel. The Company
has limited experience in acquiring outside businesses. Acquisition of
businesses requires substantial time and attention of management
personnel and may require also additional equity or debt financings.
Further, integration of newly established or acquired businesses is often
disruptive. Since the Company has acquired or in the future may acquire
one or more businesses, there can be no assurance that the Company will
identify appropriate targets, will acquire such businesses on favorable
terms, or will be able to successfully integrate such organizations into
its business. Failure to do so could materially adversely affect the
Company's business, financial condition and results of operations.
Dependence Upon Government Programs And Contracts.
The Company derived approximately 28%, 38%, and 43% of its revenue during
fiscal 1998, 1997, and 1996, respectively, directly and indirectly from a
variety of Federal government sources. The Company received approximately
14%, 19% and 21% of its revenue for fiscal 1998, 1997 and 1996,
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.
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 1998, 1997 and 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. The Federal government has in the
past, and could in the future, challenge the Company's accounting
methodology for computing indirect rates and allocating indirect costs to
government contracts. The government is currently challenging certain
indirect cost allocations. While management believes that amounts
recorded on its financial statements are adequate to cover all related
risks, the government has not concluded its investigation or agreed to a
settlement with the Company. Although the outcome of this matter cannot
be determined at this time, management does not believe that its outcome
will have a material adverse effect on the Company's financial position,
results of operations and cash flows. However, based on future
developments, the Company's estimate of the outcome of these matters
could change in the near term. In addition, a change in the Company's
accounting practices in this area could result in reduced profit margins
on government contracts.
Dependence On Key Employees.
The Company's future performance also depends in significant part upon
the continued service of its key technical and senior management
personnel. The loss of the services of one or more of the Company's
officers or other key employees could have a material adverse effect on
the Company's business, operating results and financial condition. While
many of the Company's current employees have many years of service with
the Company, there can be no assurance that the Company will be able to
retain its existing personnel. If the Company is unable to retain and
hire additional personnel, the Company's business and results of
operations could be materially and adversely affected. See " -- Need to
Manage Growth."
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 the Company has
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, there can be no
assurance that additional infringement claims (or claims for
indemnification resulting from infringement claims) will not be asserted
against the Company, or that existing claims or any other assertions will
not result in an injunction against the sale of infringing products or
otherwise materially adversely affect the Company's business and results
of its operations.
In 1985, the Company first received correspondence from Rockwell
corporation alleging that a fabrication process used by the Company
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 the Company. Rockwell International
Corporation v. The United States of America, No. 93-542C (U.S. Ct. Fed.
Cl.) (the "Government Lawsuit"). The Company was not originally named as
a party to the Government Lawsuit. However, the Federal government has
asserted that, if it was held liable to Rockwell for infringement of
Rockwell's patent rights in connection with some of its contracts with the
Company, then the Company 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 (the "California Lawsuit,"
described below), the Company filed a motion to intervene in the
Government Lawsuit. That motion was granted on August 17, 1995. Upon
intervening in the Government Lawsuit, the Company filed an answer to
Rockwell's complaint, alleging that Rockwell's patent was invalid, that
Rockwell's patent was not infringed by the Company, that Rockwell's patent
was unenforceable under the doctrine of inequitable conduct, and that
Rockwell's action is barred by the doctrines of laches and equitable
estoppel. After extensive discovery, both the Government and the Company
moved 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 favor of the Government and
the Company. 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 has been
entered in favor of the Company and the Federal government. The U.S.
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
thus remanded the case back to the trial court for further proceedings.
The Federal Circuit also affirmed the Court of Federal Claims' denial of
the Company's 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, Rockwell and the United States
reached a settlement in the Government Lawsuit. Pursuant to the
settlement ending the Government Lawsuit, a judgment was entered in
Rockwell's favor against the Federal government in the amount of
$16,900,000. The Company did not participate in the settlement. The
Federal government has not again raised the issue of the Company's
potential indemnity obligation.
As noted above, the Company's decision to intervene in the Government
Lawsuit was made after Rockwell filed suit against the Company in the
Northern District of California in May 1995, alleging that the Company had
infringed the Rockwell patent in connection with the Company's manufacture
and sale of products to customers other than the United States. Again, the
complaint alleges that a fabrication process used by the Company infringes
the Rockwell patent.(Rockwell International Corporation v. SDL, Inc., No.
C95-01729 MHP (U.S. Dist.Ct., N.D. Cal.)). By its complaint, Rockwell
seeks a permanent injunction against the Company enjoining it from
infringement of the Rockwell patent, damages in an unspecified amount for
the Company's alleged past infringement of the patent, treble damages and
attorneys' fees. The complaint was served on the Company on June 30, 1995,
and the Company filed an answer to the complaint on August 18, 1995,
alleging that Rockwell's patent is invalid, that Rockwell's patent is not
infringed by the Company, that Rockwell's patent is unenforceable under
the doctrine of inequitable conduct, and that Rockwell's action is barred
by the doctrines of laches and equitable estoppel. On August 11, 1995,
prior to filing its answer, the Company filed a motion to stay this action
based upon the pendency of the Government Lawsuit. The District Court
granted the Company's motion to stay on September 15, 1995. Subsequent to
the settlement of the Government Lawsuit, the District Court lifted this
stay, and discovery has re-commenced for the California Lawsuit. See
"Factors Affecting Earnings and Stock Price--Risk of Patent Infringement
Claims."
Although the Court of Federal Claims ruled in the Company's 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 Company believes that it has 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, it could be awarded substantial monetary damages and/or
an injunction against the sale of infringing products by the Company. If
such an injunction were entered, the Company may seek to obtain a license
to use Rockwell's patent. There can be no assurance, however, that a
license would be available on reasonable terms or at all. The award of
monetary damages against the Company, 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 the Company's
business and results of operations. Litigation of Rockwell's claim
against the Company is expected to involve significant expense to the
Company and could divert the attention of the Company's technical and
management personnel and could have a material adverse effect on the
Company's business and results of operations. In addition, the Company is
involved in various legal proceedings arising in the ordinary course of
its business.
Customer Order Fluctuations.
The Company's product revenue is subject to fluctuations in customer
orders. Occasionally, some of the Company's 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. The Company may also build inventory in anticipation of
receiving new orders in the future. Also, customers have occasionally
placed large orders which they have subsequently canceled. In addition,
due to the fact that the Company's sales of its 980 nm pump module
products comprise a significant portion of the Company's total revenues,
the Company's revenues are particularly susceptible to customer order
fluctuations for this product. Such fluctuations, cancellations and the
failure to receive such new orders can have adverse effects on the
Company's business and results of operations. The Company may also have
incurred significant inventory or other expenses in preparing to fill
such orders prior to their cancellation. Virtually all of the Company's
backlog is subject to cancellation. Cancellation of significant portions
of the Company's backlog, delays in scheduled delivery dates, or failure
of the Company to sell the inventory built up in anticipation of orders,
could have a material adverse effect on the Company's business and
results of operations.
Dependence On Proprietary Technology.
The Company's future success and competitive position is dependent in
part upon its proprietary technology, and the Company relies in part on
patent, trade secret, trademark and copyright law to protect its
intellectual property. There can be no assurance that any of the more
than 120 patents owned or approximately 13 patents licensed by the
Company will not be invalidated, circumvented, challenged or licensed to
others, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's approximately 90
pending or future patent applications will be issued with the scope of
the claims sought by the Company, if at all. Furthermore, there can be no
assurance that others will not develop technologies that are similar or
superior to the Company's technology, duplicate the Company's technology
or design around the patents owned by the Company, or patent or assert
patents on technology which the Company 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.
Certain of the Company's technology is licensed on a non-exclusive basis
from Xerox and other third parties which may license such technology to
others, including competitors of the Company. There can be no assurance
that steps taken by the Company to protect its technology will prevent
misappropriation of such technology. In addition, litigation has been
necessary and may be necessary in the future to enforce the Company's
patents and other intellectual property rights, to protect the Company's
trade secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement or
invalidity of intellectual property rights developed internally or
acquired from third parties. Such litigation has resulted in substantial
costs and diversion of resources and could have a material adverse effect
on the Company's business and results of operations. Moreover, the
Company may be required to participate in interference proceedings to
determine the priority of inventions which could result in substantial
cost to the Company. See" Business -- Intellectual Property."
International Distribution Risks.
Revenues from customers outside of the United States accounted for
approximately 24 percent, 17 percent and 15 percent, of the Company's
total revenue in 1998, 1997 and 1996, respectively. International revenue
carries a number of inherent risks, including reduced protection for
intellectual property rights in some countries, the impact of unstable
environments in economies outside the United States, generally longer
receivable collection periods, changes in regulatory environments,
tariffs and other potential trade barriers. In addition, certain of the
Company's international revenue is subject to export licensing and
approvals by the DoC or other Federal governmental agencies. Although
not related to the distribution of any of the Company's products, a sales
representative for the Company's products in China has been indicted for
violation of the U.S. Export Control Act and, as a result, the Company is
seeking another sale representative in China. To date, the Company has
experienced little difficulty in obtaining such export licenses or
approvals. However, the failure to obtain such export licenses or
approvals or comply with such regulations in the future could have a
material adverse effect on the Company's business and results of
operations.
The Company currently uses local distributors in key industrialized
countries and local representatives in smaller markets. Although the
Company has formal distribution contracts with certain of its
distributors and representatives, some of the Company's relationships are
currently on an informal basis. Most of the Company's international
distributors and representatives offer only the Company's products;
however, certain distributors offer competing products and there can be
no assurance that additional distributors and representatives will not
also offer products that are competitive with the Company's products.
There can be no assurance that the Company's 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 the Company's products or that the
Company will provide the distributors and resellers with adequate levels
of support. The loss of, or a significant reduction in revenue through, a
significant number of the Company's international distributors and
representatives would have a material adverse effect on the Company's
business and results of operations.
Environmental Risks.
The Company is 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 its manufacturing processes. Further, the Company is subject to other
safety, labeling and training regulations as required by local, state and
federal law. The Company has established an environmental and safety
compliance program to meet the objectives of applicable federal, state
and local laws. This compliance program is administered by the
environmental and safety department of the Company and includes
monitoring, measuring and reporting compliance, establishing safety
programs and training Company personnel in environmental and safety
matters. There can be no assurance that changes in regulations and laws
will not have an adverse economic effect on the Company. Further, such
regulations could restrict the Company's ability to expand its
operations. Any failure by the Company to obtain required permits or
operate within regulations for, control the use of, or adequately
restrict the discharge of hazardous or regulated substances or materials
under present or future regulations could subject the Company to
substantial liability, require costly changes in the Company's
manufacturing processes or facilities or cause its operations to be
suspended.
Dependence On Single Source And Other Third Party Suppliers.
The Company depends on a single or limited number of outside contractors
and suppliers for raw materials, packages and standard components, and to
assemble printed circuitboards. The Company generally purchases these
single or limited source products through standard purchase orders or one
year supply agreements and has no long-term guaranteed supply agreements
with such suppliers. The Company seeks to maintain a sufficient safety
stock to overcome short-term shipping delays or supply interruptions by
its suppliers. The Company also endeavors to maintain ongoing
communications with its suppliers to guard against interruptions in
supply and has, to date, generally been able to obtain sufficient
supplies in a timely manner. However, the Company's business and results
of operations have in the past been and could in the future be adversely
affected by a stoppage or delay of supply, substitution of more expensive
or less reliable parts, receipt of defective parts or contaminated
materials, an increase in the price of such supplies or the Company's
inability to obtain reduced pricing from its suppliers in response to
competitive pressures.
Potential Volatility Of Stock Price.
Factors such as announcements of technological innovations, large
customer orders, customer order delays or cancellations, customer
qualification delays or new products by the Company, its competitors or
third parties, possible acquisition of SDL by a third party, merger or
acquisition announcements, acquisitions or mergers by competitors or
customers, production problems as well as quarterly variations in the
Company's actual or anticipated results of operations and developments in
litigation involving the Company, may cause the market price of the
Company's Common Stock to fluctuate significantly. Furthermore, the stock
market has experienced extreme price and volume fluctuations, which have
particularly affected the market prices of many high technology companies
and which have often been unrelated to the operating performance of such
companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. Many companies in the optical
communications industry have in the past year experienced historical
highs in the market prices of their stock. There can be no assurance that
the market price of the Company's Common Stock will not experience
significant fluctuations in the future, including fluctuations that are
unrelated to the Company's performance.
ITEM 2. PROPERTIES
The company leases two adjacent buildings comprising approximately 64,000
square feet of office and manufacturing space in San Jose, California.
These facilities serve as the Company's headquarters and include
manufacturing, marketing, research, engineering and administrative
functions. The present leases expire in November 2001. The Company has
renewal options to extend these leases through November 2016.
In January 1995, the Company leased an additional 50,000 square feet of
manufacturing and office space in Santa Clara, California, approximately
three miles from its headquarters. In 1997, the Company exercised an
option for an adjacent additional 50,000 square feet. This lease,
including the additional space, expires in March 2002. The Company has
renewal options to extend this lease through 2017.
In April 1996, the Company leased an additional 10,000 square feet of
office space in Santa Clara, California. This lease expires in April
1999.
SDL Optics leases 23,100 square feet of manufacturing and office space,
and adjacent parking space, near Victoria, British Columbia, Canada.
These facilities serve as SDL Optics' headquarters and include
manufacturing, marketing, research, engineering and administrative
functions. The present leases expire in December 1999. SDL Optics has
an option to extend the leases for an additional three months.
During 1998, SDL Optics entered into a lease for a new building with an
initial capacity of approximately 40,000 square feet located near
Victoria, British Columbia, where it plans to expand in the third quarter
of 1999. The Company has options to extend this lease through July 2009.
The Company also leases smaller facilities in Cambridge, Massachusetts
and Bensalem, Pennsylvania.
ITEM 3. LEGAL PROCEEDINGS
In 1985, the Company first received correspondence from Rockwell
corporation alleging that a fabrication process used by the Company
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 the Company. Rockwell International
Corporation v. The United States of America, No. 93-542C (U.S. Ct. Fed.
Cl.) (the "Government Lawsuit"). The Company was not originally named as
a party to the Government Lawsuit. However, the Federal government has
asserted that, if it was held liable to Rockwell for infringement of
Rockwell's patent rights in connection with some of its contracts with the
Company, then the Company 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 (the "California Lawsuit,"
described below), the Company filed a motion to intervene in the
Government Lawsuit. That motion was granted on August 17, 1995. Upon
intervening in the Government Lawsuit, the Company filed an answer to
Rockwell's complaint, alleging that Rockwell's patent was invalid, that
Rockwell's patent was not infringed by the Company, that Rockwell's patent
was unenforceable under the doctrine of inequitable conduct, and that
Rockwell's action is barred by the doctrines of laches and equitable
estoppel. After extensive discovery, both the Government and the Company
moved 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 favor of the Government and
the Company. 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 has been
entered in favor of the Company and the Federal government. The U.S.
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
thus remanded the case back to the trial court for further proceedings.
The Federal Circuit also affirmed the Court of Federal Claims' denial of
the Company's 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, Rockwell and the United States
reached a settlement in the Government Lawsuit. Pursuant to the
settlement ending the Government Lawsuit, a judgment was entered in
Rockwell's favor against the Federal government in the amount of
$16,900,000. The Company did not participate in the settlement. The
Federal government has not again raised the issue of the Company's
potential indemnity obligation.
As noted above, the Company's decision to intervene in the Government
Lawsuit was made after Rockwell filed suit against the Company in the
Northern District of California in May 1995, alleging that the Company had
infringed the Rockwell patent in connection with the Company's manufacture
and sale of products to customers other than the United States. Again, the
complaint alleges that a fabrication process used by the Company infringes
the Rockwell patent.(Rockwell International Corporation v. SDL, Inc., No.
C95-01729 MHP (U.S. Dist.Ct., N.D. Cal.)). By its complaint, Rockwell
seeks a permanent injunction against the Company enjoining it from
infringement of the Rockwell patent, damages in an unspecified amount for
the Company's alleged past infringement of the patent, treble damages and
attorneys' fees. The complaint was served on the Company on June 30, 1995,
and the Company filed an answer to the complaint on August 18, 1995,
alleging that Rockwell's patent is invalid, that Rockwell's patent is not
infringed by the Company, that Rockwell's patent is unenforceable under
the doctrine of inequitable conduct, and that Rockwell's action is barred
by the doctrines of laches and equitable estoppel. On August 11, 1995,
prior to filing its answer, the Company filed a motion to stay this action
based upon the pendency of the Government Lawsuit. The District Court
granted the Company's motion to stay on September 15, 1995. Subsequent to
the settlement of the Government Lawsuit, the District Court lifted this
stay, and discovery has re-commenced for the California Lawsuit. See
"Factors Affecting Earnings and Stock Price--Risk of Patent Infringement
Claims."
Although the Court of Federal Claims ruled in the Company's 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 Company believes that it has 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, it could be awarded substantial monetary damages and/or
an injunction against the sale of infringing products by the Company. If
such an injunction were entered, the Company may seek to obtain a license
to use Rockwell's patent. There can be no assurance, however, that a
license would be available on reasonable terms or at all. The award of
monetary damages against the Company, 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 the Company's
business and results of operations. Litigation of Rockwell's claim
against the Company is expected to involve significant expense to the
Company and could divert the attention of the Company's technical and
management personnel and could have a material adverse effect on the
Company's business and results of operations. In addition, the Company is
involved in various legal proceedings arising in the ordinary course of
its business.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the
Company during the fourth quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this item is included under the
heading "Corporate Information" in the Company's 1998 Annual Report to
Stockholders, and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included under the
heading "Selected Consolidated Financial Data" in the Company's 1998
Annual Report to Stockholders, and is incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by this item is included under the
heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's 1998 Annual Report to
Stockholders, and is incorporated by reference.
ITEM 7A Disclosures About Market Risk
The information required by this item is included under the heading
"Interest Rate Risk" in the Company's 1998 Annual Report to
Stockholders and is incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in the
Company's 1998 Annual Report to Stockholders under the headings listed
under Item 14(a). of Part IV of this Report on Form 10-K and under the
heading "Unaudited Quarterly Consolidated Financial Data" in the
Company's 1998 Annual Report to Stockholders, and is incorporated by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS AND REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS
The following consolidated financial statements of the Registrant and
Report of Ernst & Young LLP, Independent Auditors, are contained in the
Company's 1998 Annual Report to Stockholders and are incorporated by
reference in Item 8 of Part II of this Report on Form 10-K:
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Operations for the years Ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the years Ended
December 31, 1998, 1997, and 1996.
Consolidated Statements of Cash Flow for the years Ended December 31,
1998, 1997, and 1996.
Notes to Consolidated Financial Statements.
Report of Ernst & Young LLP, Independent Auditors.
2. FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedule is filed as part of this Report on Form 10-K on page 26 and
should be read in conjunction with the Consolidated Financial Statements
of SDL, Inc.:
Schedule II--Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
Consolidated Financial Statements or notes thereto.
3. EXHIBITS.
Exhibit
Number Exhibit Description
- ---------- ------------------------------------------------------------
3.1 Form of Registrant's Restated Certificate of
Incorporation.(1)
3.1.1 Form of Registrant's Certificate of Designation of the Series B
Preferred Stock.
3.1.2 Form of Registrant's Certificate of Correction of Restated
Certificate of Incorporation.
3.2 Form of Registrant's Amended and Restated Bylaws.(1)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Common Stock certificate.(1)
4.3 Rights Agreement, dated as of November 6, 1997, between the
Company and ChaseMellon Shareholder Services, L.L.C.
together with: Exhibit A, Form of Rights Certificate;
Exhibit B, Summary of Rights to Purchase Preferred Stock;
and Exhibit C Form of Certificates of Designation of the
Series B Preferred Stock.(2)
4.3.1 First Amended and Restated Rights Agreement, dated as of
February 11, 1999, between the Company and Chase Mellon
Shareholder Services, L.L.C., a New Jersey limited
liability company. (3)
10.3 * Form of Registrant's 1995 Stock Option Plan, including forms
of option agreements thereunder.(1)
10.4 * Form of Registrant's 1995 Employee Stock Purchase Plan, as
amended.(1)
10.5 Technology Agreement between Xerox Corporation,
Spectra-Physics, Inc. and the Registrant effective March 31,
1983 and Amendment No. 1 thereto, dated March 31, 1988.(1)
10.10 Lease Agreement between Rose Orchard I a Joint Venture and
the Registrant, dated May 16, 1986, as amended October 24,
1989.(1)
10.11 Lease Agreement between Rose Orchard I a Joint Venture and
the Registrant, dated April 28, 1989, as amended October 24,
1989.(1)
10.12 * Employment Agreement between Donald R. Scifres and the
Registrant, dated July 17, 1992, and amendments thereto,
dated February 19, 1993 and July 29, 1994.(1)
10.13 * Form of Employment Agreement between officers of the
Registrant and the Registrant.(1)
10.14 Lease Agreement between Triangle Development Company and
Registrant dated January 13, 1995, and Addendum thereto,
dated January 13, 1995.(1)
10.15 Employment Agreement between Gregory P. Dougherty and the
Registrant, dated October 1, 1998.
10.16 Promissory Note Secured by Deed of Trust dated May 1, 1997
made by Gregory P. Doughtery and Nancy E. Dougherty payable
to the Company.
13.1 SDL, Inc. 1998 Annual Report to Stockholders. This Annual Report
shall not be deemed to be filed except to the extent that the
information is specifically incorporated by reference.
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial data schedule
- ----------
(1) Incorporated by reference to identically numbered Exhibit to the Company's
Registration Statement on Form 8-1 (Commission File No. 33-87752), which
became effective on March 15, 1995.
(2) Incorporated by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A (Commission File No. 000-25688), filed with the
SEC on November 7, 1997.
(3) Incorporated by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-AA filed with the SEC on March 19, 1999.
(4) Incorporated by reference to identically numbered Exhibit to the
Company's Registration Statement on Form 10-K, filed with the SEC on
March 4, 1998.
* Management contracts or compensatory plans or arrangements.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SDL, INC.
March 24, 1999 By: /s/ Michael L. Foster
--------------------------------------
Michael L. Foster
Chief Financial Officer and Secretary
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------- --------------------------------- ---------------
<S> <C> <C>
/s/ Donald R. Scifres Chairman of the Board and March 24, 1999
----------------------- Chief Executive Officer
Donald R. Scifres (Principal Executive Officer)
/s/ Michael L. Foster Chief Financial Officer and March 24, 1999
----------------------- Treasurer ( Principal Financial
Michael L. Foster and Accounting Officer)
/s/ John P. Melton Director March 24, 1999
-----------------------
John P. Melton
/s/ Keith B. Geeslin Director March 24, 1999
-----------------------
Keith B. Geeslin
/s/ Anthony B. Holbrook Director March 24, 1999
-----------------------
Anthony B. Holbrook
/s/ Mark B. Myers Director March 24, 1999
-----------------------
Mark B. Myers
/s/ Frederic N. Schwettmann Director March 24, 1999
-----------------------
Frederic N. Schwettmann
</TABLE>
<PAGE>
Schedule II
SDL, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Balance at Additions
Beginning Charged Balance at
of to Deduc- End of
Description Period Expenses tions(1) Period
- ----------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable
Year ended December 31, 1998..... $1,190 $401 ($586) $1,005
========== ========== ========== ==========
Year ended December 31, 1997..... $780 $442 ($32) $1,190
========== ========== ========== ==========
Year ended December 31, 1996..... $485 $355 ($60) $780
</TABLE> ========== ========== ========== ==========
- ----------
(1) Uncollectible accounts written off.
<PAGE>
EXHIBIT 3.1.1
SDL, INC.
CERTIFICATE OF DESIGNATION
OF THE
SERIES B PREFERRED STOCK
_____________________________________
Pursuant to Section 151 of the General Corporation Law of the
State of Delaware
_____________________________________
The undersigned officers of SDL, Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), in accordance with the provisions of Section 103
thereof, DO HEREBY CERTIFY:
That, pursuant to the authority conferred upon the Board of
Directors of the Corporation by its Restated Certificate of Incorporation
(the "Certificate"), the said Board of Directors, at a duly called
meeting held on November 5, 1997, at which a quorum was present and acted
throughout, adopted the following resolution, which resolution remains in
full force and effect on the date hereof creating a series of 300,000
shares of Preferred Stock having a par value of $.001 per share,
designated as Series B Preferred Stock (the "Series B Preferred Stock")
out of the class of 1,000,000 shares of preferred stock of the par value
of $.001 per share (the "Preferred Stock"):
RESOLVED, that pursuant to the authority vested in the Board of
Directors in accordance with the provisions of its Certificate, the Board
of Directors does hereby create, authorize and provide for 300,000 shares
of its authorized Preferred Stock to be designated and issued as the
Series B Preferred Stock, having the voting powers, designation,
relative, participating, optional and other special rights, preferences
and qualifications, limitations and restrictions that are set forth as
follows:
1. Dividends and Distributions. (A) Subject to the prior and
superior rights of the holders of any shares of any other series of
Preferred Stock or any other shares of stock of the Corporation ranking
prior and superior to the shares of Series B Preferred Stock with respect
to dividends, each holder of one one-hundredth (1/100) of a share (a
"Unit") of Series B Preferred Stock shall be entitled to receive, when,
as and if declared by the Board of Directors out of funds legally
available for that purpose, (i) quarterly dividends payable in cash on
the last day of February, May, August and November in each year (each
such date being a "Quarterly Dividend Payment Date"), commencing on the
first Quarterly Dividend Payment Date after the first issuance of such
Unit of Series B Preferred Stock, in an amount per Unit (rounded to the
nearest cent) equal to the greater of (a) $.01 or (b) subject to the
provision for adjustment hereinafter set forth, the aggregate per share
amount of all cash dividends declared on shares of the Common Stock since
the immediately preceding Quarterly Dividend Payment Date, or, with
respect to the first Quarterly Dividend Payment Date, since the first
issuance of a Unit of Series B Preferred Stock, and (ii) subject to the
provision for adjustment hereinafter set forth, quarterly distributions
(payable in kind) on each Quarterly Dividend Payment Date in an amount
per Unit equal to the aggregate per share amount of all non-cash
dividends or other distributions (other than a dividend payable in shares
of Common Stock or a subdivision of the outstanding shares of Common
Stock, by reclassification or otherwise) declared on shares of Common
Stock since the immediately preceding Quarterly Dividend Payment Date, or
with respect to the first Quarterly Dividend Payment Date, since the
first issuance of a Unit of Series B Preferred Stock. In the event that
the Corporation shall at any time after November 6, 1997 (the "Rights
Declaration Date") (i) declare any dividend on outstanding shares of
Common Stock payable in shares of Common Stock, (ii) subdivide
outstanding shares of Common Stock or (iii) combine outstanding shares of
Common Stock into a smaller number of shares, then in each such case the
amount to which the holder of a Unit of Series B Preferred Stock was
entitled immediately prior to such event under clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which shall be the number of shares of Common
Stock that are outstanding immediately after such event and the
denominator of which shall be the number of shares of Common Stock that
were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on
Units of Series B Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the shares of
Common Stock (other than a dividend payable in shares of Common Stock);
provided, however, that, in the event no dividend or distribution shall
have been declared on the Common Stock during the period between any
Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $.01 per Unit on the Series B
Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and shall be cumulative on each
outstanding Unit of Series B Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issuance of such Unit of Series B
Preferred Stock, unless the date of issuance of such Unit is prior to the
record date for the first Quarterly Dividend Payment Date, in which case,
dividends on such Unit shall begin to accrue from the date of issuance of
such Unit, or unless the date of issuance is a Quarterly Dividend Payment
Date or is a date after the record date for the determination of holders
of Units of Series B Preferred Stock entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment Date, in either of
which events such dividends shall begin to accrue and be cumulative from
such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on Units of Series B Preferred Stock in
an amount less than the aggregate amount of all such dividends at the
time accrued and payable on such Units shall be allocated pro rata on a
unit-by-unit basis among all Units of Series B Preferred Stock at the
time outstanding. The Board of Directors may fix a record date for the
determination of holders of Units of Series B Preferred Stock entitled to
receive payment of a dividend or distribution declared thereon, which
record date shall be no more than 30 days prior to the date fixed for the
payment thereof.
2. Voting Rights. The holders of Units of Series B Preferred Stock
shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth,
each Unit of Series B Preferred Stock shall entitle the holder thereof to
one vote on all matters submitted to a vote of the stockholders of the
Corporation. In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on outstanding shares of
Common Stock payable in shares of Common Stock, (ii) subdivide
outstanding shares of Common Stock or (iii) combine the outstanding
shares of Common Stock into a smaller number of shares, then in each such
case the number of votes per Unit to which holders of Units of Series B
Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction the numerator of which
shall be the number of shares of Common Stock outstanding immediately
after such event and the denominator of which shall be the number of
shares of Common Stock that were outstanding immediately prior to such
event; and
(B) Except as otherwise provided herein, in the Certificate or the
Bylaws of the Corporation or as required by law, the holders of Units of
Series B Preferred Stock and the holders of shares of Common Stock shall
vote together as one class on all matters submitted to a vote of
stockholders of the Corporation, and such holders shall have no special
voting rights and their consents shall not be required for taking any
corporate action.
3. Certain Restrictions. (A) Whenever quarterly dividends or
other dividends or distributions payable on Units of Series B Preferred
Stock as provided herein are in arrears, thereafter and until all accrued
and unpaid dividends and distributions, whether or not declared, on
outstanding Units of Series B Preferred Stock shall have been paid in
full, the Corporation shall not (i) declare or pay dividends on, make any
other distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of junior stock; (ii) declare or pay dividends
on or make any other distributions on any shares of parity stock, except
dividends paid ratably on Units of Series B Preferred Stock and shares of
all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of such Units and
all such shares are then entitled; (iii) redeem or purchase or otherwise
acquire for consideration shares of any parity stock, provided, however,
that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such parity stock in exchange for shares of any
junior stock; (iv) purchase or otherwise acquire for consideration any
Units of Series B Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined by the Board of
Directors) to all holders of such Units.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares
of stock of the Corporation unless the Corporation could, under paragraph
(A) of this Section 3, purchase or otherwise acquire such shares at such
time and in such manner.
4. Reacquired Shares. Any Units of Series B Preferred Stock
purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such Units shall, upon their cancellation, become authorized
but unissued shares (or fractions of shares) of Preferred Stock and may
be reissued as part of a new series of Preferred Stock to be created by
resolution or resolutions of the Board of Directors, subject to the
conditions and restrictions on issuance set forth herein.
5. Liquidation, Dissolution or Winding Up. (A) Upon any voluntary
or involuntary liquidation, dissolution or winding up of the Corporation,
no distribution shall be made (i) to the holders of shares of junior
stock unless the holders of Units of Series B Preferred Stock shall have
received, subject to adjustment as hereinafter provided in paragraph (B),
the greater of either (a) $.01 per Unit plus an amount equal to accrued
and unpaid dividends and distributions thereon, whether or not earned or
declared, to the date of such payment, or (b) the amount equal to the
aggregate per share amount to be distributed to holders of shares of
Common Stock, or (ii) to the holders of shares of parity stock, unless
simultaneously therewith distributions are made ratably on Units of
Series B Preferred Stock and all other shares of such parity stock in
proportion to the total amounts to which the holders of Units of Series B
Preferred Stock are entitled under clause (i)(a) of this sentence and to
which the holders of shares of such parity stock are entitled, in each
case upon such liquidation, dissolution or winding up.
(B) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on outstanding shares of Common
Stock payable in shares of Common Stock, (ii) subdivide outstanding
shares of Common Stock, or (iii) combine outstanding shares of Common
Stock into a smaller number of shares, then in each such case the
aggregate amount to which holders of Units of Series B Preferred Stock
were entitled immediately prior to such event pursuant to clause (i)(b)
of paragraph (A) of this Section 5 shall be adjusted by multiplying such
amount by a fraction the numerator of which shall be the number of shares
of Common Stock that are outstanding immediately after such event and the
denominator of which shall be the number of shares of Common Stock that
were outstanding immediately prior to such event.
6. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or converted into other
stock or securities, cash and/or any other property, then in any such
case Units of Series B Preferred Stock shall at the same time be
similarly exchanged for or converted into an amount per Unit (subject to
the provision for adjustment hereinafter set forth) equal to the
aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be, into which or for which each share
of Common Stock is converted or exchanged. In the event the Corporation
shall at any time after the Rights Declaration Date (i) declare any
dividend on outstanding shares of Common Stock payable in shares of
Common Stock, (ii) subdivide outstanding shares of Common Stock, or (iii)
combine outstanding Common Stock into a smaller number of shares, then in
each such case the amount set forth in the immediately preceding sentence
with respect to the exchange or conversion of Units of Series B Preferred
Stock shall be adjusted by multiplying such amount by a fraction the
numerator of which shall be the number of shares of Common Stock that are
outstanding immediately after such event and the denominator of which
shall be the number of shares of Common Stock that were outstanding
immediately prior to such event.
7. Redemption. The Units of Series B Preferred Stock and shares of
Series B Preferred Stock shall not be redeemable.
8. Ranking. The Units of Series B Preferred Stock and shares of
Series B Preferred Stock shall rank junior to all other series of the
Preferred Stock and to any other class of Preferred Stock that hereafter
may be issued by the Corporation as to the payment of dividends and the
distribution of assets, unless the terms of any such series or class
shall provide otherwise.
9. Fractional Shares. The Series B Preferred Stock may be issued
in Units or other fractions of a share, which Units or fractions shall
entitle the holder, in proportion to such holder's units or fractional
shares, to exercise voting rights, receive dividends, participate in
distributions and to have the benefit of all other rights of holders of
Series B Preferred Stock.
10. Certain Definitions. As used in this resolution with respect
to the Series B Preferred Stock, the following terms shall have the
following meanings:
(A) The term "Common Stock" shall mean the class of stock
designated as the common stock, par value $.001 per share, of the
Corporation at the date hereof or any other class of stock resulting from
successive changes or reclassification of the common stock.
(B) The term "junior stock" (i) as used in Section 3 shall mean
the Common Stock and any other class or series of capital stock of the
Corporation hereafter authorized or issued over which the Series B
Preferred Stock has preference or priority as to the payment of dividends
and (ii) as used in Section 5, shall mean the Common Stock and any other
class or series of capital stock of the Corporation over which the Series
B Preferred Stock has preference or priority in the distribution of
assets on any liquidation, dissolution or winding up of the Corporation.
(C) The term "parity stock" (i) as used in Section 3 shall mean
any class or series of stock of the Corporation hereafter authorized or
issued ranking pari passu with the Series B Preferred Stock as to
dividends and (ii) as used in Section 5, shall mean any class or series
of capital stock ranking pari passu with the Series B Preferred Stock in
the distribution of assets on any liquidation, dissolution or winding
up.
IN WITNESS WHEREOF, SDL, Inc. has caused this Certificate to be
signed by its Chairman and Chief Executive Officer and its Secretary this
14 day of November, 1997.
SDL, INC.
By: /s/ Donald R. Scifres
Name: Donald R. Scifres
Title: Chariman and Chief Executive Officer
By: /s/ John P. Melton
Name: John P. Melton
Title: Secretary
EXHIBIT 3.1.2
CERTIFICATE OF CORRECTION
OF
RESTATED CERTIFICATE OF INCORPORATION
OF SDL, INC.
SDL, Inc., a Delaware corporation (the "Corporation"),
pursuant to Section 103(f) of the General Corporation Law of the State of
Delaware, hereby certifies that:
1. the Restated Certificate of Incorporation of the Corporation
(the "Restated Certificate of Incorporation") that was filed with the
Secretary of State of Delaware on March 17, 1995 was an inaccurate record
of the corporate action therein referred to;
2. the Restated Certificate of Incorporation was inaccurate in that
paragraph E of Article XII thereof, relating to the power of the Board of
Directors to make, alter or repeal the bylaws of the Corporation, was
inadvertently omitted in its entirety; and
3. Paragraph E of Article XII of the Restated Certificate of
Incorporation in its correct form as approved by the Board of Directors
and by the stockholders of the Corporation, is as follows:
"E. The board of directors is expressly authorized to make, alter,
or repeal the bylaws of the Corporation."
IN WITNESS WHEREOF, the Corporation has caused this
Certificate of Correction to be signed by its duly authorized officer
this 8th day of December, 1997.
By: /s/ Donald R. Scifres
---------------------------
Donald R. Scifres
President
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into by and
between Gregory P. Dougherty ("Employee") and SDL, Inc. (the
"Company"), and is effective as of the 1st day of October, 1998 and
supercedes any/all previous employment agreements.
The parties hereby agree as follows:
1. Period of Employment
The Company will employ Employee to render services to the Company
in the position and with the duties and responsibilities described in
Section 2, for the compensation specified in Sections 3 and 4 and for the
period commencing on the effective date of this Agreement and ending on
termination as provided in Section 5.
2. Position and Duties
Employee accepts employment with the Company as its Chief Operating
Officer. As such, Employee shall have the responsibilities for the
management and operations of the Company established for him from time to
time by the Board of Directors.
3. Compensation
(a) Base Salary. Employee shall receive a base salary of
$209,204 per year, payable in equal installments in accordance with the
Company's current practices or as they may be amended. The foregoing
base salary shall be subject to annual reviews each year during the term
of the Agreement, as determined by the Board of Directors in its sole
discretion.
(b) Annual Bonuses. The Board of Directors shall approve an
annual operating plan for the Company. Employee shall receive cash
bonuses in connection with each audit of the Company's results of
operations conducted by the Company's independent certified public
accountants. Such audits shall be conducted at least annually.
Employee's bonuses shall be computed as provided in the matrix attached
to this agreement as Exhibit A or other such criteria as determined by
the SDL Board of Directors, provided that such bonuses shall be adjusted
pro rata to reflect any audit period less than twelve (12) months. The
Company's results of operations shall be determined by the Company's
independent certified public accountants in accordance with generally
accepted accounting principles applied consistent with the practice for
prior periods and shall be accompanied by an audit report of such
accountants, which shall be reasonably acceptable to the Company's Board
of Directors. Such bonuses shall be calculated and paid within thirty
(30) days following delivery of the audit report. Bonuses shall be
deemed earned with respect to each fiscal year (or portion thereof)
during which Employee has been employed hereunder as of the end of the
fiscal period covered by the audit; such bonuses shall thereafter be
paid on the dates set forth above, subject only to the determination of
the Company's results of operations.
(c) Option Appreciation Guarantee. Offer letter dated
February 21, 1997 states: "If at the end of your second complete year
with SDL the options that you have been granted do not yield you $200,000
appreciation, SDL will make up the difference in cash. That is, if the
options are below water SDL will pay $200,000 in cash less taxes. If the
options are above water but their value is less than $200,000 above the
exercise price, SDL will pay you the difference in cash less taxes. SDL
will calculate the appreciation on the second anniversary of your option
grant date based on a 3 day average of the last trade price as reported
in the Wall Street Journal; day before, anniversary date, and day after."
This agreement amends the above paragraph by adding the following
sentence: Any such payout will actually occur on your tenth anniversary
or termination from the Company for any reason, whichever comes first.
4. Benefits
(a) Employee will continue to receive benefits
made generally available to employees of the Company. In addition,
Employee shall receive in the future benefits generally made available to
the Company's executives at a similar reporting level. The foregoing
shall include stock option plan grants, with the number of shares, if
any, covered by such grants determined by the Board of Directors in its
sole discretion. The Company shall reimburse Employee for reasonable
travel and other business expenses incurred by him in the performance of
his duties hereunder in accordance with the Company's policies in this
regard.
(b) During the term of this Agreement and for a period of
six (6) months thereafter, the Company will maintain an insurance policy
on Employee's life in an amount equal to his then-current base salary.
The proceeds of the foregoing insurance policy shall be payable to such
beneficiaries as Employee may designate from time to time or, in the
absence of a designation, to his estate.
(c) New Loan. In the event Employee sells the Property and
purchases a new residence, the Company agrees to enter into a new housing
assistance loan (the "New Loan"), the terms of which will be the same in
all material respects to the terms of Housing Assistance Loan, including
but not limited to the terms related to the on-going loan repayment
obligations of Employee and the repayment obligations of Employee in the
event of termination by the Company, provided, however, that (i) at the
time of the close of escrow for the new residence, the Employee must be
currently employed at the Company, (ii) the amount of the New Loan will
be equal to the price of the new residence minus $228,000, but in no
event shall it exceed the amount outstanding under the Note at the time
such amount became due and payable and (iii) the New Loan will be due and
payable on the tenth anniversary of the date of the Note.
(d) See attached "Addendum, Terms of Employment Offer"
Section 1)(d)(iii) under "Relocation Package" in the
attached "Addendum, Terms of Employment Offer" dated
February 21, 1997 is amended to read as follows:
Dollar forgiveness on the anniversary of your
employment date
1999 $40,000 - 2nd Anniversary
2000 $40,000 - 3rd Anniversary
2001 $40,000 - 4th Anniversary
2002 $80,000 - 5th Anniversary
2003 $40,000 - 6th Anniversary
2004 $40,000 - 7th Anniversary
2005 $40,000 - 8th Anniversary
2006 $40,000 - 9th Anniversary
2007 $40,000 - 10th Anniversary
5. Termination
In addition to the terms of termination defined in the "Addendum, Terms
of Employment Offer" (see attached) the following will apply.
(a) Employee's employment by the Company hereunder shall be
terminable by either Employee or the Company at any time and for any
reason, with or without cause, effective upon written notice to the other
party. Upon termination of employment the employee shall be deemed to
have resigned from all offices and directorships then held with the
Company or any affiliate.
(b) In the event the Company terminates Employee's employment
pursuant to subsection (a) above other than for cause (as defined below),
or the Employee resigns following a reduction in base pay and bonus when
said reduction is not in conjunction with similar reductions in base pay
and bonus with other Senior Executives or employee is no longer in the
role of Chief Operating Officer or at least equivalent position, Employee
shall be entitled to the following benefits:
(i) An amount, payable monthly for six (6) months, commencing
on the effective date of termination of the Employee's employment equal
to his then current monthly base salary;
(ii) Accelerated vesting, for six (6) additional months from
the effective date of termination, under all outstanding stock options
then held by Employee; and
(iii) An amount, payable monthly for six (6) months commencing
on the effective date of termination of Employee's employment equal to
4.1667% of his then current annual base salary
(iv) For a period of six (6) months following the
termination of Employee's employment pursuant to this Agreement, the
Company will pay the cost to maintain medical benefits under COBRA,
provided that Employee will continue to pay the amount he paid for
medical insurance prior to such termination and provided the employee
adheres to the terms of COBRA.
(v) $200,000 of "Housing Assistance Loan"
described in the Terms of Offer dated February 21, 1997 will be forgiven
if termination occurs during the first 5 years of employment at SDL and
the balance of the loan is due upon close of escrow on the house
repurchase or within 1 year which ever comes first,
(vi) At your option, SDL can repurchase your CA
house, within 1 year of your termination date, at the higher of original
purchase price or appraised value at the time of termination or you will
need to pay the balance of the loan within 1 year.
(c) If Employee terminates his employment pursuant to this
Agreement in accordance with Section 5(a), or if the Company terminates
Employee's employment pursuant to Section 5(a) for cause (defined as
willful breach of duty in the course of employment or habitual neglect of
duty or continued inability to perform it), continued inability to
perform it shall not include performance results, unwillingness to move
(more than 100 miles)/accept transfer or unwillingness to accept
excessive travel or any reasons/circumstances resulting from illness in
family or child care, the following shall apply:
(i) No further salary shall be payable to Employee, except for
amounts accruing prior to the termination date;
(ii) No further vesting of Employee's stock options or stock
purchase, or similar rights shall occur; and
(iii) No further bonuses shall be payable pursuant to Section
3(b).
(iv) No forgiveness of the $200,000 "Housing Assistance Loan
will be provided,
(v) "Housing Assistance Loan' balance in full is payable with 1
year, or upon sale of house whichever occurs first.
(d) Subsequent to the termination of Employee's employment
hereunder, the payments and benefits provided for in Sections 4(b) and
subsections 5 (b) (i), (ii), (iii) and (iv) shall terminate at such time,
if any, as Employee commences employment.
(e) This Agreement shall terminate upon Employee's death or
permanent disability. In such event, Employee (or his estate) shall be
entitle to receive the benefits provided for under Section 5(b).
6. Miscellaneous
(a) Notices under this Agreement shall be in writing and shall
be deemed given when delivered in person or three (3) days after deposit in
the United States Mail, postage prepaid, certified or return receipt
requested, and addressed as follows:
If to Employee: NAME
STREET ADDRESS
CITY, STATE, ZIP
If to the Company: 80 Rose Orchard Way
San Jose, California 95134
Attention: Corporate Secretary
The foregoing addresses may be changed by notice in accordance with this
subsection (a).
(b) The prevailing party in any action to enforce the terms of
this Agreement shall be entitled to reimbursement from the other party
for its costs and expenses (including reasonable attorneys' fees) in
connection therewith.
(c) The terms of this Agreement are intended by the parties to be
the final expression of their agreement with respect to the employment of
Employee by the Company and may not be contradicted by evidence of any
prior or contemporaneous agreement. The parties further intend that this
Agreement shall constitute the complete and exclusive statement of its
terms and that no extrinsic evidence whatsoever may be produced in any
legal proceeding involving this Agreement. This Agreement may be
amended, and the observance of any of its terms may be waived, only by a
writing signed by the party to be charged with such amendment or waiver.
(d) If any provision of this Agreement, or the application
thereof to any person, place or circumstance, shall be held by a court of
competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other
persons, places and circumstances shall remain in full force and effect.
(e) The validity, interpretation, enforceability and performance
of this Agreement shall be governed by and construed in accordance with
the laws of the State of California, without regard to its rules
regarding conflicts of laws.
(f) Employee agrees that all disputes between him and the Company
(including all affiliates, shareholders, directors, officers, employees,
consultants, agents, successors and assigns), which arise during
Employee's employment or after, will be resolved by arbitration. The
arbitration will be conducted by a single arbitrator. The arbitrator
will be selected and the arbitration conducted pursuant to the Employment
Dispute Resolution rules of the American Arbitration Association (AAA).
The arbitration agreement covers all disputes arising from Employee's
employment, including (1) claims for wages, benefits or compensation, (2)
all tort and contract claims of any kind, including disputes concerning
this Agreement, and (3) claims based on any federal or state law,
including discrimination, harassment or retaliation laws. For example,
this arbitration agreement includes claims arising under Title VII of the
Civil Rights Act of 1964, the Age Discrimination in Employment Act, the
Americans with Disabilities Act, and the California Fair Employment and
Housing Act. The only claims not covered by this arbitration agreement
are workers' compensation and unemployment compensation claims, and the
Company may, at its option, seek injunctive relief, equitable relief and
damages in court for any breach of this Invention and Proprietary
Information Agreement, any other agreement, or any federal or state law,
concerning Proprietary Information or Inventions. Except as provided in
the previous sentence, arbitration is the exclusive remedy for all
disputes covered by this arbitration agreement, including whether a
particular dispute is covered by this agreement, and shall be final and
binding on both parties, which means that BOTH EMPLOYEE AND THE COMPANY
WAIVE ANY RIGHT TO A JURY TRIAL. Either Employee or the Company may
bring an action in court to compel arbitration and to enforce an
arbitration award. Otherwise, neither party shall initiate or prosecute
any lawsuit or administrative action in any way related to any dispute
covered by the arbitration agreement. The Federal Arbitration Act shall
govern the interpretation and enforcement of this arbitration agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first set forth above.
EMPLOYEE SDL, INC.
By /s/ Gregory P. Dougherty By /s/ Donald R. Scifres
-------------------------- --------------------------
EXHIBIT 13.1
SELECTED FINANCIAL DATA
The following selected financial data of the Company is qualified by
reference to and should be read in conjunction with the consolidated financial
statements of the Company, including the notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1998(2) 1997(1)(2)(3) 1996 1995(1) 1994
--------- ------------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of operations
data:
Revenue ................. $106,138 $91,364 $82,475 $53,894 $33,024
Cost of revenue ......... 68,419 65,154 54,956 33,390 19,991
--------- ------------- --------- --------- ---------
Gross margin ............ 37,719 26,210 27,519 20,504 13,033
Research and development. 10,690 9,794 6,681 3,994 2,781
Selling, general, and
administrative ........ 13,597 40,609 12,166 7,649 4,574
In-process research and
development ........... -- 753 -- 10,010 --
Amortization of
purchased intangibles
and goodwill........... 777 671 -- -- --
--------- ------------- --------- --------- ---------
Operating income (loss) . 12,655 (25,617) 8,672 (1,149) 5,678
Net income (loss) ....... $12,823 ($24,679) $7,121 ($2,819) $2,195
Net income (loss) per
share-basic............ $0.92 ($1.83) $0.59 ($0.31) $0.38
Net income (loss) per
share-diluted.......... $0.87 ($1.83) $0.54 ($0.31) $0.29
Weighted average
shares-basic ........... 13,887 13,497 12,012 9,228 5,738
Weighted average
shares-diluted .......... 14,709 13,497 13,199 9,228 7,461
<CAPTION>
As of December 31,
-----------------------------------------------------
1998 1997 1996 1995(1) 1994
--------- ------------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Working capital ......... $54,358 $36,012 $63,243 $22,649 $5,556
Total assets ............ 112,477 94,224 113,842 56,643 23,799
Long-term debt (less
current portion) ....... -- -- -- -- 22,519
Convertible redeemable
preferred stock ........ -- -- -- -- 10,545
Stockholders' equity
(net capital deficiency). $93,247 $76,587 $99,227 $40,500 ($18,269)
</TABLE>
- ----------------
(1) The results of operations for the years ended December 31, 1995 and
1997 include a one-time write-off of in-process research and
development of approximately $10 million and $0.8 million,
respectively, in connection with the acquisition of Seastar Optics and
Mr. Laser, Inc.
(2) In 1997, the Company changed from a calendar year end to a 52-53 week
year ending on the Friday closest to December 31. Fiscal year 1998 and
1997 ended January 1, 1999 and January 2, 1998, respectively. For ease
of discussion and presentation all fiscal year ends are referred to as
ending on December 31.
(3) The results of operations for the year ended December 31, 1997 include
a one-time charge totaling $27.5 million related to costs associated
with the litigation settlement and related legal costs of the
Spectra-Physics legal dispute.
Risk Factors
The statements contained in this annual report that are not purely
historical are forward-looking statements within the meaning of
Section 27(a) of the Securities Act of 1993 and Section 21(e) of the
Securities and Exchange Act of 1934, including statements regarding the
Company's expectations, hopes, beliefs, intentions, plans or strategies
regarding the future. Forward-looking statements include: the statement
on page 1 regarding SDL's products playing a leading role in helping to
light the way; the statements on page 9 regarding migration to DWDM,
projected compound annual growth of more than 100% for DWDM systems over
the next five years, and predicted growth of the market for DWDM
components to more than $4 billion in 2000 and $12 billion in 2005; the
statement on page 1 regarding DWDM system channels to come on the
horizon; the statements under the heading "To Our Stockholders"
regarding the Company's excellent position to take advantage of expanding
market opportunities; the forecasted five-fold expansion by the year 2000
of the primary communications market that SDL serves, SDL's primary
market to have grown to at least $8 billion by 2002, the fueling of SDL's
growth by optical amplifier and multiwave transmitter applications, SDL's
pump modules being well positioned to meet the advanced needs of the DWDM
market place, new opportunities in 1999, and the future and prospects for
SDL; statements on page 19 regarding SDL's movement up the integration
chain; statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operation" ("MD&A") under the
heading "Provision for Income Taxes" regarding generation of future
taxable income sufficient to realize the benefit of SDL's net deferred
tax assets recorded; statements in MD&A under the heading "Liquidity and
Capital Resources" regarding the Company's expected expenditures for
capital equipment purchases and leasehold improvements in 1999 and the
sufficiency of the Company's current cash balances, cash generated from
operations and cash available through equity markets for the foreseeable
future; and statements in MD&A under the heading "Impact of Year 2000"
regarding the Company's plans to have changes to critical systems
completed and tested by mid-1999, the expected burden of remediation of
the Company's tertiary business information systems, material exposure to
contingencies related to the year 2000 issue, continuance of contingency
planning activities throughout 1999, expenditures related to the year
2000 issue and capitalization and expensing thereof, the sufficiency of
operating activities to fund year 2000 costs and management's beliefs
about the impact of year 2000 matters on the Company's financial
condition and overall 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. You should
consult the risk factors listed from time to time in the Company's
Reports on Forms 10-Q and 8-K.
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. 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 1996 to 28% in 1998. 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
by a shortage in qualified manufacturing capacity, especially in the
wafer fabrication area. The Company's new wafer fabrication facility
received full qualification in June 1998, allowing a faster ramp-up in
production.
In 1997, the Company changed its year-end from a calendar year ending
December 31, to a 52-53 week year ending on the Friday closest to
December 31. The Company's fiscal 1998 and 1997 ended January 1, 1999
and January 2, 1998, respectively. For ease of discussion and
presentation, all fiscal year ends are referred to as ending on December 31.
Certain of the statements contained in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are
forward-looking statements regarding the Company's business, operations
and prospects. The Company's actual results could differ materially from
those in such forward-looking statements. See "Factors Affecting
Earnings and Stock Price."
The following table sets forth certain operating results expressed as a
percentage of total revenue for the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1998 1997(1)(2) 1996
---------- ---------- -----------
<S> <C> <C> <C>
Revenue:
Product revenue ...................... 90.8% 84.0% 84.6%
Research revenue ..................... 9.2% 16.0% 15.4%
---------- ---------- -----------
Total revenue .......................... 100.0% 100.0% 100.0%
---------- ---------- -----------
Cost of revenue:
Cost of product revenue (3)........... 63.2% 69.7% 65.0%
Cost of research revenue (3).......... 76.9% 79.6% 75.5%
---------- ---------- -----------
Total cost of revenue .................. 64.5% 71.3% 66.6%
---------- ---------- -----------
Gross margin ........................... 35.5% 28.7% 33.4%
Operating expenses:
Research and development ............. 10.1% 10.7% 8.1%
Selling, general, and administrative.. 12.7% 44.4% 14.0%
In-process research and development... -- 0.8% --
Amortization of purchased intangibles
and goodwill......................... 0.8% 0.8% 0.8%
---------- ---------- -----------
Total operating expense ................ 23.6% 56.7% 22.9%
---------- ---------- -----------
Operating income (loss) ................ 11.9% -28.0% 10.5%
Interest income and other, net ......... 1.1% 1.5% 1.8%
---------- ---------- -----------
Income (loss) before income taxes ...... 13.0% -26.5% 12.3%
Provision for income taxes ............. 1.0% 0.5% 3.7%
Net income (loss) ...................... 12.0% -27.0% 8.6%
========== ========== ===========
</TABLE>
- ----------------------
(1) The results of operations for the years ended December 31, 1997
include a one-time write-off of in-process research and development
of approximately $0.8 million in connection with the acquisition of
Mr. Laser, Inc.
(2) The results of operations for the year ended December 31, 1997
includes a one-time charge of $27.5 million related to costs
associated with the litigation settlement and related legal costs of
the Spectra Physics legal dispute.
(3) Cost of product revenue and cost of research revenue are stated as a
percentage of product revenue and research revenue, respectively.
Results of Operations
Revenue. The Company recorded a 16 percent increase in revenue to $106.1
million during 1998, following an 11 percent increase in 1997 revenue to
$91.4 million. Product revenue reported in 1998 increased 26 percent or
$19.6 million, following a 10 percent or $7.0 million increase in 1997.
The 1998 and 1997 increases in product revenue resulted primarily from
growth in dense wavelength division multiplexing (DWDM) product sales
caused by a continued strong demand for SDL's 980nm pump module. Research
revenue decreased 33 percent or $4.8 million during 1998 as a result of
the Company continuing to focus on commercial product opportunities.
Research revenue grew 15 percent during 1997 and accounted for 16 percent
and 15 percent of revenue for 1997 and 1996, respectively. There can be
no assurances that the applications markets for SDL's products will grow
in future periods at historical percentages. Further, there can be no
assurances that the Company will be able to increase or maintain its
market share in the future or to sustain historical growth rates.
The Company derived 28 percent, 38 percent, and 43 percent of its 1998,
1997 and 1996 revenue, directly or indirectly from a variety of Federal
government sources. 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 government 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, a majority of the
Company's research revenue for 1998, 1997, and 1996 was funded by Federal
programs. There can be no assurances that such programs will continue to
be funded even if government agencies have available financial resources
or that the Company will continue to be awarded contracts under such
programs.
Approximately 14 percent, 19 percent, and 21 percent of 1998, 1997 and
1996 revenue was received from Lockheed-Martin through numerous
government and commercial programs. Most of the revenue from Lockheed-
Martin during this three year period was, and during 1999 is expected to
be, derived from Federally-funded programs, which are subject to renewal
every one or two years and to termination for convenience by the
government agency. It is expected that revenue received under these
current Lockheed-Martin programs will continue to decrease as a
percentage of the Company's total revenue. However, a loss of the
Company's contracts or failure to win new contracts with Lockheed-Martin
could have an adverse effect on the Company's results of operations.
Revenues from customers outside of the United States represented 24
percent, 17 percent, and 15 percent of total revenue for 1998, 1997, and
1996, respectively. The 1998 growth was primarily within the European
region, due to the growth in the communications market business, where
revenue increased 98 percent compared to 1997.
Gross margin. Gross margin as a percentage of revenue was 36 percent in
1998, compared to 29 percent and 33 percent for 1997 and 1996,
respectively. The increase in gross margin during 1998 as compared to
1997 resulted from: (i) increased yields and volumes from the new wafer
fab and reduction of costs related to the 980nm pump module, and (ii) a
more favorable mix in the ratio of commercial product revenue as compared
to revenue derived from U.S. government sources. The decline in gross
margin during 1997 as compared to 1996 primarily resulted from: (i)
start-up costs for expansion of the Company's wafer fab and transition of
the various product lines to the new fabrication equipment, and (ii)
changes in estimable reimbursable costs in the June quarter.
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's future results depend, to a
considerable extent, on its ability to maintain a competitive advantage
in the products it provides. For this reason, SDL believes it is
critical to continue to make investments in research and development to
promote the flow of innovative, productive, and high-quality products.
Research and development increased to $10.7 million compared to $9.8
million and $6.7 million during 1998, 1997 and 1996, respectively.
Research and development as a percentage of revenue was 10 percent, 11
percent and 8 percent in 1998, 1997 and 1996, respectively. The 1998
research and development emphasis has been to bring new communication
products to market. The 1997 research and development spending was on
manufacturing process development efforts, together with the development
of new communications and laser system products.
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 (SG&A). Selling, general and
administrative (SG&A) expense of $13.6 million or 13 percent of revenue
represents a decrease of $27.0 million or 44 percent of revenue from
1997. Excluding non-recurring amounts of approximately $27.5 million for
the settlement and related legal costs incurred in 1997 for the Spectra-
Physics vs. SDL, Inc. legal dispute, SG&A increased $0.5 million and $1.6
million from 1997 and 1996, respectively. Excluding non-recurring
amounts, the increase in SG&A expense during 1998 was primarily due to
continued expansion of the Company's sales and marketing staff and the
commencement of the implementation process for the Company's new
enterprise resource planning software. The Company expects that SG&A
amounts, exclusive of the settlement and related legal costs, will
continue to increase to support the Company's current and expected future
volumes of business, including the expansion of SDL's domestic and
international sales and marketing efforts. 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.
In-process research and development. The acquisition of Mr. Laser, Inc.
during 1997 resulted in the write-off of purchased in-process research
and development of $0.8 million. In the future, additional in-process
research and development write-offs can be anticipated as the Company may
from time to time acquire companies or new product lines.
Amortization of purchased intangibles and goodwill. Amortization expense
of $777,000 represents an increase of $106,000 and $132,000 compared to
1997 and 1996, respectively. The increase in 1998 compared to 1997 and
1996 is a result of the acquisition of Mr. Laser in November 1997.
Interest income, net. Interest income decreased slightly during 1998
compared to 1997 as result of lower average cash and investment balances
during 1998. During 1997, the Company liquidated a portion of its
interest income generating investments for payment of $27.5 million in
settlement and related legal costs associated with the resolution of the
Spectra-Physics legal dispute. The early liquidation of certain of these
investment securities resulted in a realized loss of approximately $0.3
million, which is included within interest income on the statement of
operations. Excluding that loss, interest income recorded during 1997
increased slightly from that recorded during 1996.
Provision for Income Taxes. The income tax provision for the years
ending December 31, 1998 and December 31, 1997 of $1.0 million and $0.4
million, respectively, consist primarily of current foreign income taxes
for the earnings of SDL Optics and federal and state minimum taxes. The
federal and state tax provisions were reduced due to the utilization of
previously unbenefitted net operating loss carryforwards. The deferred
income tax benefit for 1998 and 1997 has been limited because realization
of the deferred tax asset is dependent upon future taxable income, the
amount and timing of which are uncertain. Accordingly, a partial
valuation allowance has been established to record a net deferred tax
asset that the Company believes is more likely than not to be realized.
The effective tax rate for the year ending December 31, 1996 was 30%.
This rate was lower than the statutory rate due primarily to the benefits
of State tax credits and tax-exempt interest income.
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.
Quarterly Results of Operations
The following tables set forth certain unaudited quarterly financial data for
the four quarters of each 1998 and 1997. The Company believes that all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts below to present fairly the selected quarterly information when
read in conjunction with the Financial Statements and the Notes thereto included
elsewhere herein. The results of operations for any quarter are not necessarily
indicative of results that may be expected for any future period or for the
entire year.
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------------------------------------
1998 1997
--------------------------------------- ---------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30(1)Sept. 30 Dec. 31(2)
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ........... $25,357 $25,810 $25,571 $29,400 $21,016 $21,570 $23,951 $24,827
Cost of revenue ... 17,150 16,895 16,342 18,032 14,018 18,333 16,325 16,478
--------- --------- --------- --------- --------- --------- --------- ---------
Gross margin ...... $8,207 $8,915 $9,229 $11,368 $6,998 $3,237 $7,626 $8,349
Operating income
(loss) .......... $2,646 $2,832 $3,015 $4,162 $104 ($29,577) $2,324 $1,532
Net income (loss).. $2,699 $2,906 $3,099 $4,119 $507 ($29,471) $2,451 $1,834
========= ========= ========= ========= ========= ========= ========= =========
Net income (loss)
per share-basic.. $0.20 $0.21 $0.22 $0.29 $0.04 ($2.19) $0.18 $0.13
========= ========= ========= ========= ========= ========= ========= =========
Net income (loss)
per share-
diluted .......... $0.19 $0.20 $0.21 $0.28 $0.04 ($2.19) $0.17 $0.13
========= ========= ========= ========= ========= ========= ========= =========
Weighted average
shares-basic .... 13,708 13,830 13,882 14,125 13,331 13,462 13,546 13,643
Weighted average
shares-diluted... 14,545 14,700 14,666 14,925 14,265 13,462 14,431 14,444
</TABLE>
- ----------------------
(1) The results of operations for the quarter ended June 30, 1997 include a
one-time charge totaling $27.5 million for the settlement and related legal
costs associated with the Spectra-Physics vs. SDL, Inc. legal dispute.
(2) The results of operations for the quarter ended December 31, 1997
include a one-time write-off of in-process research and development of
approximately $0.8 million in connection with the acquisition of Mr.
Laser, Inc.
Liquidity and Capital Resources.
The Company generated $12.6 million of cash from operating activities
during 1998 principally from net income from operations adjusted for non-
cash depreciation and amortization changes. These were offset by an
increase in accounts receivables and inventories. In addition, the
Company received $3.5 million for the issuance of stock under employee
stock plans, which was offset by investments of $13.4 million for
facilities expansion and capital equipment purchases. As a result cash,
cash equivalents, and marketable securities increased from $26.6 million
at December 31, 1997 to $29.4 million at December 31, 1998.
The payment of settlement and related legal costs of $27.5 million to
conclude the Spectra-Physics legal dispute resulted in the use of cash by
operating activities for the year ended December 31, 1997. An increase
in accounts receivable in 1997, as compared with 1996, also contributed
to a use of operating cash in 1997. In addition, the Company received
$2.1 million from the issuance of stock under employee stock plans, which
was offset by investments of $9.4 million for facilities expansion and
capital equipment purchases and a cash payment of $2.7 million which
completed the SDL Optics acquisition. As a result, cash, cash
equivalents, and marketable securities decreased from $58.3 million at
December 31 1996 to $26.6 million at December 31, 1997.
The Company currently expects to spend in the range of $18 million to $20
million for capital equipment purchases and leasehold improvements during
1999.
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 $1.9
million. The Company currently expects that the total cost of these
programs, including both incremental spending and redeployed resources,
will total approximately $2.8 million, more or less, which includes $1.8
million for the purchase of new software and hardware that will be
capitalized and $1.0 million that will be expensed as incurred. The
Company expects that operating activities will fund the year 2000 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. 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, 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 can be no assurance that there will not 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.
Interest Rate Risk
The Company's cash equivalents and short-term and long-term marketable
securities are subject to market risk and changes in interest rates. The
Company's marketable securities are managed by outside professional
managers within guidelines established by the Company. The guidelines,
which include security type, credit quality, and maturity, are intended
to limit market risk by restricting the Company's high quality debt
instruments. The Company's investments in debt securities are classified
as available-for-sale; therefore, gains and losses due to changes in
interest rates are included in other accumulated comprehensive income
unless such securities are sold prior to maturity. The Company
generally holds securities until maturity and carries the securities at
fair value.
<PAGE>
SDL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
As of December 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ....................... $13,370 $4,593
Short-term investments .......................... 12,494 10,400
Accounts receivable, net ........................ 22,070 19,960
Inventories ..................................... 19,679 13,938
Prepaid expenses and other current assets ....... 3,306 2,738
---------- ----------
Total current assets .............................. 70,919 51,629
Property and equipment, net ....................... 32,931 26,298
Long-term investments ............................. 3,552 11,613
Note due from related party ....................... 512 536
Other assets ...................................... 4,563 4,148
---------- ----------
Total assets ...................................... $112,477 $94,224
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $9,385 $8,469
Accrued payroll and related expenses ............ 2,354 2,945
Income taxes payable ............................ 1,890 828
Unearned revenue ................................ 643 393
Other accrued liabilities ....................... 2,289 2,982
---------- ----------
Total current liabilities ......................... 16,561 15,617
Long-term liabilities ............................. 2,669 2,020
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares - 1,000,000; none issued..... -- --
Common stock, $0.001 par value:
Authorized shares - 21,000,000;
issued and outstanding shares -
14,285,938 and 13,674,534 in
1998 and 1997, respectively ................. 15 14
Additional paid-in capital ...................... 120,033 116,268
Accumulated other comprehensive income........... (4) (73)
Accumulated deficit, $26.3 million relating
to the repurchase of common stock in 1992
and $5.8 million relating to a
recapitalization in 1992 ...................... (26,757) (39,580)
---------- ----------
93,287 76,629
Less common stockholders' notes receivable ...... (40) (42)
---------- ----------
Total stockholders' equity ........................ 93,247 76,587
---------- ----------
Total liabilities and stockholders' equity ........ $112,477 $94,224
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
SDL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Revenue:
Product revenue ...................... $96,358 $76,750 $69,772
Research revenue ..................... 9,780 14,614 12,703
---------- ---------- -----------
Total revenue .......................... 106,138 91,364 82,475
---------- ---------- -----------
Cost of revenue:
Cost of product revenue .............. 60,898 53,523 45,365
Cost of research revenue ............. 7,521 11,631 9,591
---------- ---------- -----------
Total cost of revenue .................. 68,419 65,154 54,956
---------- ---------- -----------
Gross margin ........................... 37,719 26,210 27,519
Operating expenses:
Research and development ............. 10,690 9,794 6,681
Selling, general, and administrative.. 13,597 40,609 11,521
In-process research and development... -- 753 --
Amortization of purchased intangibles
and goodwill......................... 777 671 645
---------- ---------- -----------
Total operating expense ................ 25,064 51,827 18,847
---------- ---------- -----------
Operating income (loss) ................ 12,655 (25,617) 8,672
Interest income and other, net ......... 1,211 1,355 1,501
---------- ---------- -----------
Income (loss) before income taxes ...... 13,866 (24,262) 10,173
Provision for income taxes ............. 1,043 417 3,052
---------- ---------- -----------
Net income (loss) ...................... $12,823 ($24,679) $7,121
========== ========== ===========
Net income (loss) per share-basic ...... $0.92 ($1.83) $0.59
========== ========== ===========
Net income (loss) per share-diluted .... $0.87 ($1.83) $0.54
========== ========== ===========
Number of weighted average
shares-basic .......................... 13,887 13,497 12,012
========== ========== ===========
Number of weighted of average
shares-diluted ........................ 14,709 13,497 13,199
========== ========== ===========
</TABLE>
See accompanying notes.
<PAGE>
SDL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Accumu-
lated Stock-
Other holder's Total
Common Stock Additional Compre- Accumu- Notes Stock-
------------------- Paid-in hensive lated Receiv- holders'
Shares Amount Capial Income Deficit able Equity
----------- ------- ---------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at, December 31, 1995. 10,628,115 $11 $62,995 ($6) ($22,022) ($478) $40,500
Net income ................. -- -- -- -- 7,121 -- 7,121
Unrealized loss on
investments............... -- -- -- (44) -- -- (44)
------------
Comprehensive income........ 7,077
------------
Issuance of stock
pursuant to
employee stock plans ..... 921,168 -- 1,509 -- -- -- 1,509
Proceeds from issuance
of common stock (less
offering expenses of
$362) .................... 1,755,000 2 44,650 -- -- -- 44,652
Issuance of treasury
stock .................... 1,827 -- 33 -- -- -- 33
Payments on
stockholders' notes
receivable ............... -- -- -- -- -- 222 222
Income tax benefit from
exercise of employee
stock options ............ -- -- 5,234 -- -- -- 5,234
----------- ------- ---------- --------- --------- --------- ------------
Balance at, December 31, 1996. 13,306,110 13 114,421 (50) (14,901) (256) 99,227
Net loss ................... -- -- -- -- (24,679) -- (24,679)
Unrealized loss on
investments............... -- -- -- (23) -- -- (23)
------------
Comprehensive loss.......... (24,702)
------------
Issuance of stock
pursuant to
employee stock plans ..... 368,424 1 1,847 -- -- -- 1,848
Payments on
stockholders' notes
receivable ............... -- -- -- -- -- 214 214
----------- ------- ---------- --------- --------- --------- ------------
Balance at, December 31, 1997. 13,674,534 14 116,268 (73) (39,580) (42) 76,587
Net income ................. -- -- -- -- 12,823 -- 12,823
Unrealized gain on
investments............... -- -- -- 69 -- -- 69
------------
Comprehensive income........ 12,892
------------
Issuance of stock
pursuant to
employee stock plans ..... 611,404 1 3,547 -- -- -- 3,548
Payments on
stockholders' notes
receivable ............... -- -- -- -- -- 2 2
Income tax benefit from
exercise of employee
stock options............. -- -- 218 -- -- -- 218
----------- ------- ---------- --------- --------- --------- ------------
Balance at, December 31, 1998. 14,285,938 $15 $120,033 ($4) ($26,757) ($40) $93,247
=========== ======= ========== ========= ========= ========= ============
</TABLE>
See accompanying notes.
<PAGE>
SDL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income (loss) ............................... $12,823 ($24,679) $7,121
--------- --------- ---------
Adjustments to reconcile net income (loss) to
net cash provided by (used in)operating
activities:
Depreciation and amortization ............... 7,583 5,800 4,948
In-process research and development ......... -- 753 --
Deferred income taxes ....................... (948) -- (223)
Changes in operating assets and liabilities:
Accounts receivable ....................... (2,110) (8,076) 1,719
Inventories ............................... (5,741) (485) (4,435)
Accounts payable .......................... 916 1,599 520
Accrued payroll and related expenses ...... (591) 730 195
Income taxes payable ...................... 1,280 2,392 --
Unearned revenue .......................... 250 (62) (517)
Other accrued liabilities ................. (693) 339 (135)
Other ..................................... (139) 435 2,879
--------- --------- ---------
Total adjustments ............................... (193) 3,425 4,951
--------- --------- ---------
Net cash provided by (used in) operating
activities ............................... 12,630 (21,254) 12,072
--------- --------- ---------
Investing activities
Acquisition of property and equipment, net ...... (13,439) (9,407) (9,909)
Purchase of marketable securities................ (75,838) (57,064) (100,620)
Sales and maturities of marketable securities.... 81,874 90,707 53,413
Acquisition of Businesses ....................... -- (3,055) (1,560)
--------- --------- ---------
Net cash provided by (used in) investing
activities ............................... (7,403) 21,181 (58,676)
--------- --------- ---------
Financing activities
Issuance of stock pursuant to employee stock
plans ......................................... 3,548 1,847 1,509
Payments on stockholders' notes receivable ...... 2 214 222
Proceeds from issuance of common stock .......... -- -- 44,652
Reissuance of treasury stock .................... -- -- 33
--------- --------- ---------
Net cash provided by financing activities ....... 3,550 2,061 46,416
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents ................................... 8,777 1,988 (188)
Cash and cash equivalents at beginning of year... 4,593 2,605 2,793
--------- --------- ---------
Cash and cash equivalents at end of year......... $13,370 $4,593 $2,605
========= ========= =========
Supplemental disclosures of cash flow information
Cash paid for income taxes .................... $803 $1 $170
Cash received from income taxes refunded ...... $214 $1,941 $773
</TABLE>
See accompanying notes.
<PAGE>
SDL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
SDL, Inc. (the Company), a Delaware corporation, designs, manufactures,
and markets semiconductor lasers, fiber optic related products, and
optoelectronic systems. The Company's revenue is derived from: (i) the
sale of standard and customized products to a diverse worldwide customer
base utilizing various market applications and, (ii) customer-funded
research programs, principally through various government agencies.
Basis of Presentation
The consolidated financial statements include the accounts of SDL, Inc.
and its wholly-owned subsidiary, SDL Optics, Inc. Intercompany accounts
and transactions have been eliminated in consolidation. The functional
currency of the Company's foreign subsidiary is the U.S. dollar.
Subsidiary financial statements are remeasured into U.S. dollars for
consolidation. Foreign currency transaction gains and losses are included
in interest income and other, net and were immaterial for all periods
presented. Beginning with 1997, the Company operates and reports
financial results on a fiscal year of 52 or 53 weeks ending on the Friday
closest to December 31. Accordingly, fiscal 1997 ended on January 2,
1998 and was a 53 week year with the fourth fiscal quarter having 14
weeks; fiscal 1998 ended on January 1, 1999 and was a 52 week year. For
ease of discussion and presentation all years are referred to as ending
on December 31.
Certain amounts in prior year financial statements and notes thereto have
been reclassified to conform to current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents. Cash equivalents are carried at cost, which approximates
fair value.
Marketable Securities
The Company has classified its entire investment portfolio as available-
for-sale. Available-for-sale securities are stated at fair market value.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is
included in interest income. Realized gains and losses are included in
interest income and other, net. The cost of securities sold is based on
the specific identification method.
Inventories
Inventories are stated at the lower of standard cost (which approximates
actual costs on a first-in, first-out basis) or market. The market value
is based upon estimated net realizable value.
Equipment and Leasehold Improvements
Property and equipment are stated at cost. Equipment and fixtures are
depreciated using the straight-line method over estimated useful lives
ranging from three to eight years. Leasehold improvements are amortized
using the straight-line method over the shorter of the estimated useful
lives or the remaining lease terms.
Goodwill and Purchased Intangibles
Goodwill and other purchased intangibles are being amortized using the
straight-line method over three to seven years.
Revenue Recognition
Revenue recognition is based on the terms of the underlying sales
agreements (purchase orders or contracts). Revenue for product sales is
recognized upon shipment. Revenue for costs incurred plus specified fee
contracts is recognized on the percentage-of-completion method. Revenue
for fixed price milestone contracts is recognized upon the completion of
the milestone. Customers entering into cost incurred and fixed price
contracts with the Company include the U.S. government, prime or
subcontractors for which the U.S. government may be the end customer, and
other domestic and international end-users.
Concentrations
Dependence Upon Government Programs and Contracts - In 1998, 1997,
and 1996, the Company derived approximately 28 percent, 38 percent,
and 43 percent, respectively, of its revenue directly and
indirectly from a variety of Federal government sources. 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 1998, 1997, and 1996 was funded by
Federal programs. There can be no assurance that such programs will
continue to be funded even if government agencies have available
financial resources or that the Company will continue to be awarded
contracts under such programs.
Dependence on Single Source and Other Third Party Suppliers - The
Company depends on a single or limited number of outside
contractors and suppliers for raw materials, packages and standard
components, and to assemble printed circuit boards. The Company
generally purchases these single or limited source products through
standard purchase orders or one-year supply agreements and has no
long-term guaranteed supply agreements with such suppliers. While
the Company seeks to maintain a sufficient safety stock of such
products and also endeavors to maintain ongoing communications with
its suppliers to guard against interruptions or cessation of
supply, the Company's business and results of operations have in
the past been and could in the future be adversely affected by a
stoppage or delay of supply, substitution of more expensive or less
reliable products, receipt of defective parts or contaminated
materials, an increase in the price of such supplies, or the
Company's inability to obtain reduced pricing from its suppliers in
response to competitive pressures.
Credit Risk - The Company performs ongoing credit evaluations of
its customers' financial condition and generally requires no
collateral from its customers. The Company maintains reserves for
potential credit losses. Although such losses have been within
management's expectations to date, there can be no assurance that
such reserves will continue to be adequate.
Principal Business and Export Sales
The Company's operations are conducted in one principal line of business,
the design, manufacture, and sale of semiconductor lasers, fiber optic
products, and optoelectronic systems. The Company has operations in the
United States and international operations in Canada. All sales are
denominated in U.S. dollars
All U.S. operations sales to international customers constitute export
sales. Export sales to Europe totaled approximately $9.3 million, $5.9
million, and $3.9 million for 1998, 1997, and 1996, respectively. Export
sales to the Pacific Rim totaled approximately $8.9 million, $6.9
million, and $6.0 million for 1998, 1997, and 1996, respectively.
Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Numerator:
Net income (loss) ...................... $12,823 ($24,679) $7,121
========== ========== ===========
Denominator:
Denominator for basic earnings per
share-weighted average shares......... 13,887 13,497 12,012
Incremental common shares attributable
to shares issuable under employee
stock plans(1)........................ 822 -- 1,187
---------- ---------- -----------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions........ 14,709 13,497 13,199
========== ========== ===========
Net income (loss) per share - basic..... $0.92 ($1.83) $0.59
========== ========== ===========
Net income (loss) per share - diluted... $0.87 ($1.83) $0.54
========== ========== ===========
</TABLE>
(1) Potential common shares relating to shares issuable under employee stock
plans are not included in the 1997 calculation due to their
anti-dilutive effect on the loss per share.
Options to purchase 62,363 shares of common stock were not included in
the computation of the 1998 diluted earnings per share because the
options' exercise price was greater than the average market price of
common shares.
Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income." SFAS 130 establishes new rules for the reporting and display
of comprehensive income and its components; however, the adoption of this
statement had no impact on the Company's net income or stockholders'
equity. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income. Comprehensive income consists of net income and other
comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
Accumulated other comprehensive income presented in the accompanying
consolidated balance sheets consists of the accumulated net unrealized
gains and losses on available-for-sale marketable securities, net of the
related tax effect for all periods presented. The tax effects for other
comprehensive income were immaterial for all periods presented.
Segments of an Enterprise
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financials Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information
(Statement 131). Statement 131 superseded FASB Statement No. 14,
Financial Reporting for Segments of a Business Enterprise. Statement 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about
operating segments in interim financial reports. Statement 131 also
establishes standards for related disclosures about products and
services, geographic areas, and major customers. The adoption of
Statement 131 did not affect results of operations or financial position,
but did affect the disclosure of segment information. See note 14.
Statement of Position 98-1
In March 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position (SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. The SOP, which
has been adopted prospectively as of September 30, 1998, requires the
capitalization of certain costs incurred in connection with developing or
obtaining internal use software. Prior to adoption of SOP 98-1, the
Company expensed all internal use software related costs as incurred.
The effect of adopting the SOP was to increase net income for the year
ended December 31, 1998 by $71,000.
Recent Financial Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities,
which is required to be adopted in years beginning after June 15, 1999.
Because the Company has never used derivatives, management does not
anticipate that the adoption of the new Statement will have a significant
effect on earnings or the financial position of the Company.
2. Marketable Securities
Available-for-sale marketable securities consist of the following (in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1998:
Medium term notes................. $10,091 $1 $25 $10,067
Commercial Paper.................. 4,959 20 -- 4,979
Tax-exempt auction rate preferred
stock........................... 5,950 -- -- 5,950
Money Market Funds................ 564 -- -- 564
---------- ---------- ---------- ----------
$21,564 $21 $25 $21,560
========== ========== ========== ==========
Included in cash and cash equivalents............................... $5,514
Included in short-term marketable securities........................ 12,494
Included in long-term marketable securities......................... 3,552
----------
$21,560
==========
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1997:
Municipal bonds................... $13,686 $1 $74 $13,613
Tax-exempt auction rate preferred
stock........................... 8,400 -- -- 8,400
Money Market Funds................ 1,017 -- -- 1,017
---------- ---------- ---------- ----------
$23,103 $1 $74 $23,030
========== ========== ========== ==========
Included in cash and cash equivalents............................... $1,017
Included in short-term marketable securities........................ 10,400
Included in long-term marketable securities......................... 11,613
----------
$23,030
==========
<CAPTION>
The following is a summary of contractual maturities of the Company's marketable
securities (in thousands):
Amortized Estimated
Cost Fair Value
---------- ----------
<S> <C> <C>
December 31, 1998:
Money Market Funds................ $564 $564
Amounts maturing within one year.. 17,436 17,444
Amounts maturing after one year... 3,564 3,552
---------- ----------
$21,564 $21,560
========== ==========
</TABLE>
Realized losses on the sale of available-for-sale securities were $0.1
million and $0.3 million in 1998 and 1997, respectively.
3. Accounts Receivable
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
As of December 31,
---------------------
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
Trade receivables.............................. $20,488 $17,334
Receivables under long-term contracts:
Billed....................................... 1,865 765
Unbilled costs and estimated earnings,
current portion............................. 722 3,051
---------- ----------
23,075 21,150
Allowance for doubtful accounts................ (1,005) (1,190)
---------- ----------
$22,070 $19,960
========== ==========
</TABLE>
The majority of unbilled costs and estimated earnings on uncompleted cost
incurred and fixed price contracts are billable in the subsequent year.
Pursuant to the retainage provisions in certain long-term contracts, a
specified portion of receivables do not become due and payable until
completion of a final audit by the Defense Contract Audit Agency. Such
retainage amounts total approximately $0.5 million in 1998 and 1997 and
are included in other assets in the accompanying balance sheets.
4. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
As of December 31,
---------------------
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
Raw materials.................................. $6,620 $6,087
Work-in-process................................ 13,059 7,851
---------- ----------
$19,679 $13,938
========== ==========
</TABLE>
No significant amounts of finished goods or work-in-process related to long-term
contracts are maintained.
5. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
As of December 31,
---------------------
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
Machinery and equipment........................ $48,636 $37,946
Leasehold improvements......................... 8,431 7,697
Furniture and fixtures......................... 898 846
Construction-in-progress....................... 3,897 1,934
---------- ----------
61,862 48,423
Less accumulated depreciation and amortization. (28,931) (22,125)
---------- ----------
$32,931 $26,298
========== ==========
</TABLE>
6. Goodwill and Purchased Intangibles
Purchased intangibles, which are included in other assets, consist of the
following:
<TABLE>
<CAPTION>
As of December 31,
---------------------
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
Goodwill....................................... $1,363 $1,363
Other purchased intangibles.................... 1,945 1,945
---------- ----------
3,308 3,308
Less accumulated amortization.................. (2,147) (1,370)
---------- ----------
$1,161 $1,938
========== ==========
</TABLE>
See Note 11, Acquisitions.
7. Note due from Related Party
On May 1, 1997 the Company loaned an officer $612,000 secured by a deed
of trust. The note is due on the tenth anniversary of the date of the
note, however; certain amounts may be forgiven. After five years
continuous employment with the Company, $200,000 will be forgiven. After
ten years continuous employment with the Company, an additional $200,000
will be forgiven. Other terms provide for mandatory prepayment if
certain events of default occur. The note shall bear interest at 8% only
in the event of a default. The amount expected to be forgiven is being
amortized to compensation expense over ten years.
8. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Current:
Federal...................................... $181 $ -- $2,617
State........................................ 26 -- 312
Foreign...................................... 1,784 417 346
---------- ---------- ----------
1,991 417 3,275
Deferred:
Federal...................................... (948) -- (371)
State........................................ -- -- 148
---------- ---------- ----------
(948) -- (223)
---------- ---------- ----------
$1,043 $417 $3,052
========== ========== ==========
</TABLE>
The tax benefits resulting from the exercise of nonqualified stock
options and the disqualifying disposition of shares acquired under the
Company's incentive stock option and employee stock purchase plans were
$0.2 million, zero and $5.2 million in 1998, 1997 and 1996, respectively.
Such benefits were credited to additional paid-in capital.
Pre-tax income from foreign operations was $4.6 million, $1.1 million and
$0.8 million in 1998, 1997 and 1996, respectively.
The difference between the provision for income taxes and the amount
computed by applying the Federal statutory income tax rate to income
before taxes is explained below:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Tax at federal statutory rate.................. $4,853 ($8,492) $3,560
State income tax, net of federal
tax benefit.................................. 17 -- 299
Non-deductible in-process, research
and development write-off.................... -- 264 --
Net operating loss not benefited (utilized).... (3,809) 9,057 --
Valuation allowance............................ (216) -- --
Tax-exempt interest income..................... (124) (453) (455)
Other.......................................... 322 41 (352)
---------- ---------- ----------
Provision for income taxes..................... $1,043 $417 $3,052
========== ========== ==========
</TABLE>
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
As of December 31,
---------------------
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............. $9,132 $9,680
Reserves and other accrued expenses
not yet deductible for tax................. 1,832 2,070
Inventory.................................... 3,088 1,584
Intangible assets............................ 4,157 3,838
Tax credit carryforward...................... 1,800 970
Other........................................ -- 52
---------- ----------
Total deferred tax assets.................... 20,009 18,194
Valuation allowance.......................... (15,128) (14,030)
---------- ----------
Net deferred tax assets...................... 4,881 4,164
---------- ----------
Deferred tax liabilities:
Depreciation................................. (743) (550)
Other........................................ (138) (562)
---------- ----------
Total deferred tax liabilities............... (881) (1,112)
---------- ----------
Net deferred tax assets........................ $4,000 $3,052
========== ==========
</TABLE>
The valuation allowance increased by approximately $1.1 million and
$12.0 million in 1998 and 1997, respectively. Approximately $7.6 million
of the valuation allowance is related to the benefits of stock option
deductions, which will be credited to paid-in capital when realized.
As of December 31, 1998, the Company had federal and state net operating
loss carryforwards of approximately $26.0 million and $4.8 million,
respectively, and federal and state tax credit carryforwards of
approximately $0.9 million and $1.3 million, respectively. The net
operating loss and credit carryforwards will expire at various dates
beginning in years 2001 through 2018, if not utilized.
Management has determined, based on the Company's history of prior
operating earnings, its expectations for the future, and the extended
period over which the benefits of certain deferred tax assets will be
realized, that a partial valuation allowance should be provided. The
realization of the Company's net deferred tax assets, which relate
primarily to temporary differences, net operating loss carryforwards and
tax credit carryforwards is dependent on generating sufficient taxable
income during the periods in which the temporary differences are expected
to reverse. Although realization is not assured, management believes it
is more likely than not that the net deferred tax assets will be
realized.
9. Stockholders' Equity
Common Stock Offerings
On June 26, 1996, the Company issued 1,500,000 shares of common stock in
a follow-on public stock offering at a per share price of $27.00. In
addition, SDL's Underwriters exercised their over-allotment option to
purchase 255,000 additional shares of the Company's common stock. Net
proceeds to the Company approximated $44.7 million.
Shareholder Rights Plan
The Company has adopted a Shareholder Rights Plan (Rights Agreement).
Pursuant to the Rights Agreement, rights were distributed at the rate of
one right for each share of Common Stock owned by the Company's
stockholders of record on November 17, 1997. The rights expire on
November 5, 2007 unless extended or earlier redeemed or exchanged by the
Company. Under the Rights Agreement, each right entitles the registered
holder to purchase one-hundredth of a Series B Preferred share of the
Company at a price of $110. The rights will become exercisable only if a
person or group acquires beneficial ownership of 15 percent or more of
the Company's common stock or commences a tender offer or exchange offer
upon consummation of which such person or group would beneficially own 15
percent or more or the Company's common stock.
Stockholders' Notes Receivable
Certain exercises of stock options occurred in conjunction with the
issuance of full-recourse stockholders' notes receivable. The notes bear
interest between 5 percent and 8 percent per annum with annual interest
payments. The principal on the notes is due beginning in 1999 through
2001.
10. Stock-Based Compensation Plans
Stock Option Plans
The 1992 Stock Option Plan provided for the granting of incentive stock
options and nonqualified options to purchase up to 4,558,125 shares of
the Company's common stock to officers, directors and key employees at
exercise prices of not less than fair value on the date of grant as
determined by a committee of the Board of Directors. Options granted were
immediately exercisable; however, unexercised options and shares
purchased upon the exercise of the options are subject to vesting over a
one- to five-year period. Shares not vested at the date of termination of
employment may be repurchased by the Company at the original exercise
price. No further options will be granted under the 1992 Stock Option
Plan.
The Company's 1995 Stock Option Plan was approved by the Board of
Directors in January 1995 and by the stockholders in February 1995. The
purposes of the 1995 Option Plan are to give the Company's employees and
others who perform substantial services to the Company incentive, through
ownership of the Company's common stock, to continue in service to the
Company, and to help the Company compete effectively with other
enterprises for the services of qualified individuals. The 1995 Stock
Option Plan permits the grant of incentive stock options to employees,
including officers and Directors who are employees, and the award of
nonqualified stock options to the Company's employees, officers,
Directors, independent contractors, and consultants. The number of shares
available for grant was initially 712,500 shares. Beginning on the first
day of each fiscal year, the number of shares reserved for grant will be
increased by 5 percent of the number of shares of common stock
outstanding as of the end of the preceding fiscal year. Options granted
under the 1995 Stock Option Plan are subject to vesting over a one to
five year period and must generally be exercised by the optionee during
the period of employment or service with the Company or within a
specified period following termination of employment or service. Options
currently expire no later than ten years from the date of grant.
The Company has reserved 3,323,738 shares of common stock for future
issuance under its Stock Option Plans as of December 31, 1998.
Information with respect to stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Outstanding Options
-----------------------
Weighted-
Available Average
for Number of Exercise
Grant Shares Price
----------- ------------ ----------
<S> <C> <C> <C>
Balance at December 31, 1995...... 130,350 2,860,863 $3.59
Options granted................. (373,642) 373,642 20.53
Options canceled................ 182,274 (182,274) 15.32
Options exercised............... -- (821,569) 0.70
Additional options authorized... 531,375 -- --
Option authorizations canceled.. (14,520) -- --
----------- ------------
Balance at December 31, 1996...... 455,837 2,230,662 6.48
Options granted................. (552,645) 552,645 16.06
Options canceled................ 140,268 (140,268) 16.79
Options exercised............... -- (249,734) 2.33
Additional options authorized... 665,305 -- --
----------- ------------
Balance at December 31, 1997...... 708,765 2,393,305 8.51
Options granted................. (646,863) 646,863 22.58
Options canceled................ 156,080 (156,080) 19.58
Options exercised............... -- (462,059) 4.06
Additional options authorized... 683,727 -- --
----------- ------------
Balance at December 31, 1998...... 901,709 2,422,029 $12.41
=========== ============
</TABLE>
The following table summarizes information about options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Oustanding Options Exercisable
------------------------------------ ----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
- ---------------- ------------ ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$0.34 - $5.10 822,109 3.7 $0.84 822,109 $0.84
5.11 - 11.00 237,409 6.1 10.02 184,471 9.87
11.01 - 16.00 336,695 8.2 13.60 107,346 14.11
16.01 - 21.00 470,679 8.4 18.60 120,169 18.44
21.01 - 25.00 492,774 9.0 24.01 40,041 22.79
25.01 - 30.00 53,313 7.5 27.64 25,925 27.74
30.01 - 39.63 9,050 10.0 39.63 -- --
------------ -----------
$0.34 - $39.63 2,422,029 6.7 $12.41 1,300,061 $6.05
============ ===========
</TABLE>
Employee Stock Purchase Plan
To provide employees with an opportunity to purchase common stock of the
Company through payroll deductions, the Company established the 1995
Employee Stock Purchase Plan (the ESPP) and initially reserved 450,000
shares of common stock for issuance to participants. In May 1998,
400,000 additional shares of common stock were reserved for issuance to
participants. Under the ESPP, the Company's employees, subject to
certain restrictions, may purchase shares of common stock at the lesser
of 85 percent of the fair market value at either the beginning of each
two-year offering period or the end of each six-month purchase period
within the two-year offering period. Under the ESPP, the Company sold
149,345, 118,690, and 110,658 shares in 1998, 1997 and 1996,
respectively.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
interpretations in accounting for its employee stock-based awards
because, as discussed below, the alternative fair value accounting
provided for under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), requires use of
option valuation models that were not developed for use in valuing stock-
based compensation plans. Under APB 25, the Company generally recognizes
no compensation expense with respect to such awards.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 as if the Company has accounted for its employee
stock options granted subsequent to December 31, 1994 under the fair
value method. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model. The Black-Scholes
option valuation model was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price
volatility. Since the Company's stock-based awards have characteristics
significantly different from those of traded options, and since changes
in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock-based
awards. The fair value of the Company's stock-based awards to employees
was estimated assuming no expected dividends and the following weighted-
average assumptions:
<TABLE>
<CAPTION>
Options ESPP
-------------------------- --------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Expected Life........... 4 years 4 years 3 years 6 months 6 months 6 months
Expected Volatility..... 0.72 0.66 0.6 0.84 0.82 0.72
Risk Free Interest Rate. 5.15% 6.17% 6.04% 5.06% 5.64% 5.45%
</TABLE>
For the purpose of pro forma disclosures, the estimated fair value of the above
stock-based awards is amortized over the awards' vesting period. The Company's
pro forma information follows (in thousands, except for per share information):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net income (loss)..... $6,789 ($27,523) $5,947
Pro forma net income (loss)
per share - basic............. $0.49 ($2.04) $0.50
Pro-forma net income (loss)
per share - diluted........... $0.46 ($2.04) $0.45
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
approximately 1999.
Weighted-average fair value of options granted during 1998, 1997 and 1996
were $13.02, $8.92 and $9.65, respectively. The weighted-average fair
value of ESPP rights granted in 1998, 1997 and 1996 were $7.53, $5.64 and
$3.97, respectively.
11. Acquisitions
In November 1997, the Company acquired all of the outstanding stock of
Mr. Laser, Inc., a company involved in the design and development of
compact laser marking systems. The acquisition was accounted for under
the purchase method of accounting. The total purchase price was
approximately $1,202,000, which includes related transaction costs of
$22,000, $187,000 for net acquired liabilities. At the time of
acquisition, the Company recorded $753,000 as in-process research and
development for development projects that had not yet reached technologic
feasibility. To determine the value of in-process research and
development, the Company considered, among other factors, the state of
development of the compact laser marking system, the costs needed to
complete development, and the expected income and risks associated with
the inherent difficulties and uncertainties in completing development.
Purchase price in excess of amounts allocated to in-process research and
development and net acquired liabilities was approximately $453,000 and
was allocated to goodwill. Goodwill is being amortized straight-line over
a three year life. Mr. Laser's operating results are included in the
accompanying consolidated financial statements beginning with November
1997. The results of Mr. Laser prior to the acquisition were not
material to the Company's consolidated results of operations.
12. Commitments
The Company leases all of its facilities and certain equipment under
operating leases. The operating facilities leases contain renewal
options. The future minimum rental payments as of December 31, 1998,
under operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Amount
- ---------------------------------- ----------
<S> <C>
1999............................ $2,218
2000............................ 2,275
2001............................ 2,246
2002............................ 640
2003............................ 167
----------
$7,546
==========
</TABLE>
Rental expense was approximately $2.2 million, $1.7 million and $1.4
million, for 1998, 1997 and 1996, respectively.
13. Contingencies
In 1985, Rockwell International Corporation (Rockwell) asserted, and in
1995 filed suit in the Northern California Federal District Court against
the Company alleging that a Company fabrication process infringed certain
Rockwell patent rights. Rockwell sought to permanently enjoin the
Company from infringing Rockwell's alleged patent rights and sought
unspecified actual and treble damages plus costs. The Company answered
Rockwell's complaint asserting, among other defenses, that Rockwell's
patent is invalid. Rockwell's suit was stayed in 1995 pending resolution
of another suit, involving the same patent, brought by Rockwell against
the Federal government, and in which SDL had intervened. The suit
between the Federal government and Rockwell was resolved in Janaury 1999,
by way of a settlement payment from the Federal government to Rockwell.
The Company did not participate in the settlement. As a result of that
settlement, the Company anticipates that the stay of Rockwell's suit
against the Company will be lifted. A status conference is scheduled in
that case for March 8, 1999. The resolution of this litigation is fact
intensive so that the outcome cannot be determined and remains uncertain.
If Rockwell prevailed in the litigation, it could be awarded monetary
damages against the Company. The Company believes, however, that it has
meritorious defenses to the Rockwell's allegations in the litigation.
Shortly after the aforementioned suit between Rockwell and the Federal
government was filed, the Federal government had notified the Company
that, if the Federal government were liable to Rockwell, then the Federal
government might seek indemnification for a portion of its liability from
the Company. The Federal government never stated the amount of the
Company's alleged indemnity obligation, nor has it ever repeated its
assertion that the Company might have some indemnity obligation to the
Federal government.
SDL is engaged in various cost-reimbursement type contracts with the
Federal government. These contracts utilize allowable costs plus
contract fee to determine revenue. 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
government has in the past and could in the future, challenge the
Company's accounting methodology for computing indirect rates and
allocating indirect costs to government contracts. The government is
currently challenging certain indirect cost allocations. While
management believes that amounts recorded on its financial statements are
adequate to cover all related risks, the government has not concluded its
investigation or agreed to a settlement with the Company. Although the
outcome of this matter cannot be determined at this time, management does
not believe that its outcome will have a material adverse affect on the
Company's financial position, results of operations or cash flows.
Nevertheless, based on future developments, the Company's estimate of the
outcome of these matters could change in the near term.
Trial of the Spectra-Physics vs. SDL, Inc. litigation began before the
Santa Clara County, California Superior Court on May 7, 1997. On May 19,
1997, before the trial was concluded, the Company, Spectra-Physics and
its subsidiary Opto Power Corporation, and Xerox Corporation made a
comprehensive settlement of their disputes.
During the second quarter of fiscal 1997, the Company included
approximately $27.5 million in general and administrative expenses for
settlement and related legal costs associated with the resolution of the
dispute with Spectra-Physics, Inc.
14. Segments of an Enterprise and Related Information
Reportable Segments
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 solely the results
generated from that business unit. Research revenue on the Consolidated
Statement of Operations included research, development, and product
customization conducted by all segments of the Company. 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>
Year ended December 31, 1998:
Revenue from external customers... $55,391 $7,354 $43,393 $106,138
Amortization...................... 645 -- 132 777
Segment Operating Income.......... $7,744 $135 $4,776 $12,655
<CAPTION>
Printing
Communica- and
tion Material
Products Research Processing Total
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Revenue from external customers... $38,354 $11,020 $41,990 $91,364
Amortization...................... 645 -- 26 671
In Process R&D.................... -- -- 753 753
Segment Operating Income (Loss)... $2,657 $138 ($912) $1,883
<CAPTION>
Printing
Communica- and
tion Material
Products Research Processing Total
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Revenue from external customers... $35,557 $11,900 $35,018 $82,475
Amortization...................... 645 -- -- 645
Segment Operating Income.......... $3,804 $518 $4,350 $8,672
</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>
Years Ended December 31,
-------------------------------
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Operating Income (Loss)
Total operating income from operating
segments............................... $12,655 $1,883 $8,672
Spectra Physics Lawsuit and related
legal costs............................ -- (27,500) --
---------- ---------- ---------
Total consolidated operating income (loss).. $12,655 ($25,617) $8,672
========== ========== =========
</TABLE>
Geographic Information
Information regarding geographic areas for the years ended December
31, 1998, 1997 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
Long-
Lived
Revenue(a) Assets
---------- ----------
<S> <C> <C>
Year ended December 31, 1998:
United States............................. $80,665 $33,624
Canada.................................... 6,503 3,016
Germany................................... 4,771 --
France.................................... 4,308 --
Japan..................................... 6,886 --
Other foreign countries................... 3,005 --
---------- ----------
Total $106,138 $36,640
========== ==========
<CAPTION>
Long-
Lived
Revenue(a) Assets
---------- ----------
<S> <C> <C>
Year ended December 31, 1997:
United States............................. $75,832 $28,249
Canada.................................... 2,175 1,366
Germany................................... 2,936 --
France.................................... 3,221 --
Japan..................................... 4,123 --
Other foreign countries................... 3,077 --
---------- ----------
Total $91,364 $29,615
========== ==========
<CAPTION>
Long-
Lived
Revenue(a) Assets
---------- ----------
<S> <C> <C>
Year ended December 31, 1996:
United States............................. $69,883 $23,777
Canada.................................... 1,144 1,075
France.................................... 3,329 --
Japan..................................... 3,740 --
Other foreign countries................... 4,379 --
---------- ----------
Total $82,475 $24,852
========== ==========
</TABLE>
(a) Revenue is attributed to countries based on the location of customers.
Major Customers
The Company received approximately 14 percent, 19 percent and 21 percent
of its 1998, 1997, and 1996, respectively, revenue from Lockheed-Martin
through several government and commercial programs. Sales to Lockheed-
Martin are reported in the communication products and printing and
material processing segments. Almost all of the Company's revenue from
this customer during 1998, 1997 and 1996 was derived from Federally-
funded programs. Most of the Company's Federally-funded programs are
subject to renewal every one or two years and to termination for
convenience by the government agency. The loss of the Company's contracts
or failure to win new contracts with Lockheed-Martin, or other major
customers, could have an adverse effect on the Company's results of
operations.
15. Employee Benefit Plan
In 1990, the Company established the SDL, Inc. Profit Sharing and Saving
Plus Plan (the Plan) that covers substantially all U.S. full-time
employees and is qualified under Sections 401(a) and 401(k) of the
Internal Revenue Code. Participants may defer up to 20 percent of their
pre-tax earnings (up to the Internal Revenue Service limit). The Company
matches 50 percent of employee contributions up to a maximum of 5 percent
of the participant's pre-tax earnings. The participants' as well as the
Company's matching contributions are fully vested. Company contributions
to the Plan were approximately $0.6 million, $0.5 million, and $0.4
million for 1998, 1997, and 1996, respectively.
16. Subsequent Events (unaudited).
In February 1999, the Company acquired the fiber laser business of
Polaroid for $5.2 million cash. 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 will be accounted for under the purchase
method of accounting and the Company anticipates it will write-off in-
process research and development up to $1.5 million in the first quarter
of 1999. The results of the fiber laser business are not material to the
Company's historical consolidated results of operations.
CORPORATE INFORMATION
Directors
Donald R. Scifres
Chairman of the Board
Chief Executive Officer
SDL, Inc.
Keith B. Geeslin (1)
Senior Vice President
The Sprout Group
Anthony B. Holbrook(1)
Vice Chairman (retired)
Advanced Micro Devices, Inc.
John P. Melton
Executive Vice President (retired)
SDL, Inc.
Mark B. Myers(2)
Senior Vice President
Xerox Corporation
Frederic N. Schwettmann(2)
President (retired)
Read-Rite Corporation
(1) Member of Audit Committee
(2) Member of Compensation Committee
SDL, Inc. Officers
Donald R. Scifres
Chief Executive Officer
Gregory P. Dougherty
Chief Operating Officer
David F. Welch
Vice President, Corporate Development and Chief Technology Officer
Michael L. Foster
Vice President, Finance, Chief Financial Officer and Secretary
Richard R. Craig
Vice President, Materials Processing and Printing
Robert J. Lang
Vice President, Research and Development
Dennis M. Samaritoni
Vice President, Manufacturing
SDL, Inc. General Information
Annual Meeting
The annual meeting of the stockholders of SDL, Inc. will be held on May
13, 1999. All stockholders are encouraged to attend.
Stockholder Report
Additional copies of this annual report and of the Company's Form 10-K as
filed with the Securities and Exchange Commission can be obtained without
charge by contacting the Investor Relations Department of SDL, Inc. at
Tel: (408) 943-4343
Fax: (408) 943-1258
http://www.sdli.com
Stockholder Communications
Communications concerning address changes, stock certificates, and
stockholder accounts should be directed to:
Chase Mellon
Shareholder Services
P.O. Box 3315
South Hackensack, NJ 07606
Tel: (800) 356-2017
Fax: (201) 329-8960
http://www.chasemellon.com
Market Price of Common Stock
The Company's common stock is traded on the Nasdaq National Market under
the symbol SDLI. The high and low sales prices are as reported by the
Nasdaq National Market.
Price Range of Common Stock
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
Q4 1998.......................................... $41.88 $9.75
Q3 1998.......................................... $29.06 $12.50
Q2 1998.......................................... $27.50 $19.63
Q1 1998.......................................... $24.00 $15.13
Q4 1997.......................................... $22.38 $13.50
Q3 1997.......................................... $25.25 $16.00
Q2 1997.......................................... $21.50 $8.00
Q1 1997.......................................... $29.00 $14.00
</TABLE>
Corporate Headquarters
80 Rose Orchard Way
San Jose, CA 95134-1365
(408) 943-9411
Manufacturing
3530 Bassett Street
Santa Clara, CA 95054
SDL Optics, Inc.
6703 Rajpur Place
Saanichton, BC V8M 1Z5
(250) 544-2244
Registrar and Transfer Agent
Chase Mellon
Shareholder Services
San Francisco, California
Counsel
Morrison & Foerster LLP
Palo Alto, California
Independent Accountants
Ernst & Young LLP
San Jose, California
EXHIBIT 21.1
SUBSIDIARIES OF SDL, INC.
The following are the material subsidiaries of the Registrant as of December 31,
1998, all of which are included in the Registrant's Consolidated Financial
Statements. The Registrant beneficially owns 100 percent of the outstanding
voting securities of these subsidiaries.
Name Jurisdiction of Incorporation
- ---- -----------------------------
SDL Optics, Inc. British Columbia, Canada
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of SDL, Inc. of our report dated January 29, 1999, included in the 1998
Annual Report to Stockholders of SDL, Inc.
Our audits also included the financial statement schedule of SDL, Inc. listed
in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 33-90848, 33-92200, 333-57683) pertaining to the
1995 Stock Option Plan, 1995 Employee Stock Purchase Plan, 1992 Stock Option
Plan and the Amended and Restated 1984 Incentive Stock Option Plan of SDL,
Inc. of our report dated January 29, 1999, with respect to the consolidated
financial statements incorporated here by reference, and our report included
in the preceding paragraph with respect to the financial statement schedule
included in this Annual Report (Form 10-K) of SDL, Inc.
ERNST & YOUNG LLP
San Jose, California
March 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Balance Sheet and Statement of Operations included in the
Company's Form 10-K for the year ended December 31, 1998 and is
qualified in its entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER>1000
<S> <C>
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<PERIOD-TYPE> 12-MOS
<CASH> 13,370
<SECURITIES> 12,494
<RECEIVABLES> 23,075
<ALLOWANCES> 1,005
<INVENTORY> 19,679
<CURRENT-ASSETS> 70,919
<PP&E> 61,862
<DEPRECIATION> 28,931
<TOTAL-ASSETS> 112,477
<CURRENT-LIABILITIES> 16,561
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 93,232
<TOTAL-LIABILITY-AND-EQUITY> 112,477
<SALES> 96,358
<TOTAL-REVENUES> 106,138
<CGS> 60,898
<TOTAL-COSTS> 68,419
<OTHER-EXPENSES> 25,064
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,866
<INCOME-TAX> 1,043
<INCOME-CONTINUING> 12,823
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,823
<EPS-PRIMARY> $0.92
<EPS-DILUTED> $0.87
</TABLE>