<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JUNE 2, 2000
Commission File Number: 0-25688
SDL, INC.
--------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 77-0331449
------------------------------- ------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
80 Rose Orchard Way, San Jose, California 95134
----------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (408) 943-9411
This form 8-K/A amends Form 8-K filed with the Securities and Exchange
Commission on June 14, 2000 (the "Original Form 8-K") by including the financial
statements and pro forma financial information referred to below.
ITEM 5. OTHER EVENTS
SDL, Inc. (SDL) has included herein the consolidated financial statements of
Photonic Integration Research, Inc. (PIRI) for the years ended March 31, 2000
and 1999 and pro forma financial information giving effect to the acquisition of
PIRI by SDL effective June 2, 2000. SDL recently completed the acquisitions of
Queensgate Instruments (Queensgate) and Veritech Microwave (Veritech) and for
periods in which the effects of Queensgate and Veritech are not included in the
historical operating results of SDL the accompanying pro forma financial
information also gives effect to these transactions.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired
i. Report of Deloitte & Touche LLP, Independent Auditors
ii. Balance sheets as of March 31, 2000 and 1999
iii. Statements of income for the years ended March 31, 2000, 1999 and 1998
iv. Statements of shareholders' equity for the years ended March 31, 2000,
1999 and 1998
v. Statements of cash flow for the years ended March 31, 2000, 1999 and
1998
vi. Notes to Financial Statements for the years ended March 31, 2000 and
1999
(b) Pro Forma Financial Information
<PAGE> 2
Pro Forma Combined Consolidated Financial Statements (unaudited)
i. Pro Forma Combined Consolidated Statements of Operations for the
year ended December 31, 1999
ii. Pro Forma Combined Consolidated Statements of Operations for the
six months ended June 30, 2000
iii. Notes to Pro Forma Combined Consolidated Financial Statements
(c) Exhibits
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of
Photonic Integration Research, Inc.:
We have audited the accompanying balance sheets of Photonic Integration
Research, Inc. as of March 31, 2000 and 1999, and the related statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended March 31, 2000. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at March 31, 2000 and 1999, and
the results of its operations and its cash flows for each of the three years in
the period ended March 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
/S/ Deloitte & Touche LLP
Columbus, Ohio
May 10, 2000
(June 2, 2000 as to Note 10)
<PAGE> 4
PHOTONIC INTEGRATION RESEARCH, INC.
BALANCE SHEETS, MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 16,286,567 $ 4,223,220
Trade receivables:
Shareholders 84,571 93,520
Other 7,283,847 9,716,658
------------ ------------
Total receivables 7,368,418 9,810,178
Inventory 3,166,949 1,610,286
Prepaid expenses 71,750 15,938
Income tax refundable 200,972
Deferred income taxes 176,000 40,000
------------ ------------
Total current assets 27,270,656 15,699,622
------------ ------------
PROPERTY - At cost:
Land 522,684 305,852
Building and improvements 3,524,556 3,272,769
Research and manufacturing equipment 16,026,058 12,471,494
Office equipment 873,168 734,969
Construction in progress 129,322
------------ ------------
Total 21,075,788 16,785,084
Less accumulated depreciation and amortization (9,491,595) (7,216,214)
------------ ------------
Total property - net 11,584,193 9,568,870
------------ ------------
OTHER ASSETS:
Deposits 216,827
Deferred income taxes 130,000
License agreement (net of accumulated amortization of $78,000) 572,000
------------
Total other assets 918,827
------------ ------------
TOTAL $ 39,773,676 $ 25,268,492
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 2,147,041 $ 3,316,263
Advance from customers 702,021
Accrued liabilities:
Vacation 167,459 93,666
Profit sharing 1,109,523 619,634
Commissions 8,410 1,515,667
Taxes 706,156 660,264
Royalties 1,399,182 598,220
Other 99,000 205,680
------------ ------------
Total accrued liabilities 3,489,730 3,693,131
------------ ------------
Total current liabilities 6,338,792 7,009,394
DEFERRED INCOME TAXES 208,000
DEFERRED COMPENSATION LIABILITY 869,368 191,892
------------ ------------
Total liabilities 7,208,160 7,409,286
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock - $1,000 par value; authorized - 10,000 shares;
issued and outstanding - 8,100 shares 8,100,000 8,100,000
Retained earnings 24,465,516 9,759,206
------------ ------------
Total shareholders' equity 32,565,516 17,859,206
------------ ------------
TOTAL $ 39,773,676 $ 25,268,492
============ ============
</TABLE>
See notes to financial statements.
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<PAGE> 5
PHOTONIC INTEGRATION RESEARCH, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $62,552,297 $36,862,033 $10,252,354
COST OF GOODS SOLD 29,633,060 17,949,505 5,106,369
----------- ----------- -----------
GROSS MARGIN 32,919,237 18,912,528 5,145,985
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Including research and development expense of
$385,275 in 2000 and $0 in 1999 and 1998) 7,987,260 5,855,959 2,443,084
----------- ----------- -----------
INCOME FROM OPERATIONS 24,931,977 13,056,569 2,702,901
INTEREST INCOME 541,229 165,448 119,592
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 25,473,206 13,222,017 2,822,493
INCOME TAX EXPENSE 9,146,896 4,857,757 1,050,052
----------- ----------- -----------
NET INCOME $16,326,310 $ 8,364,260 $ 1,772,441
=========== =========== ===========
</TABLE>
See notes to financial statements.
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<PAGE> 6
PHOTONIC INTEGRATION RESEARCH, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS TOTAL
---------------------------------- (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT) EQUITY
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 1997 8,100 $ 8,100,000 $ (377,495) $ 7,722,505
NET INCOME FOR THE YEAR
ENDED MARCH 31, 1998 1,772,441 1,772,441
----------- ------------ ------------ -----------
BALANCE, MARCH 31, 1998 8,100 8,100,000 1,394,946 9,494,946
NET INCOME FOR THE YEAR
ENDED MARCH 31, 1999 8,364,260 8,364,260
----------- ------------ ------------ -----------
BALANCE, MARCH 31, 1999 8,100 8,100,000 9,759,206 17,859,206
NET INCOME FOR THE YEAR
ENDED MARCH 31, 2000 16,326,310 16,326,310
DIVIDENDS PAID (1,620,000) (1,620,000)
----------- ------------ ------------ -----------
BALANCE, MARCH 31, 2000 8,100 $ 8,100,000 $ 24,465,516 $32,565,516
=========== ============ ============ ===========
</TABLE>
See notes to financial statements.
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<PAGE> 7
PHOTONIC INTEGRATION RESEARCH, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,326,310 $ 8,364,260 $ 1,772,441
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,353,381 1,398,592 719,669
Deferred income taxes (474,000) 220,990 524,495
Deferred compensation expense 677,476 141,820 50,072
Changes in assets and liabilities:
Receivables 2,441,760 (7,252,085) (1,750,024)
Inventory (1,556,663) (1,115,565) (122,270)
Prepaid expenses and other (256,784) (9,710) 7,067
Accounts payable (1,169,222) 2,881,432 406,030
Accrued liabilities 498,620 2,754,621 668,063
------------ ----------- -----------
Net cash provided by operating activities 18,840,878 7,384,355 2,275,543
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (3,692,763) (5,415,775) (1,577,798)
Building improvements (381,109) (295,024) (469,502)
Land (216,832) (114,119)
Deposit for equipment purchase (216,827)
Purchase of license agreement (650,000)
------------ ----------- -----------
Net cash used in investing activities (5,157,531) (5,824,918) (2,047,300)
------------ ----------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES -
Payment of dividends (1,620,000)
------------ ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 12,063,347 1,559,437 228,243
CASH AND CASH EQUIVALENTS - Beginning of year 4,223,220 2,663,783 2,435,540
------------ ----------- -----------
CASH AND CASH EQUIVALENTS - End of year $ 16,286,567 $ 4,223,220 $ 2,663,783
============ =========== ===========
SUPPLEMENTAL CASH FLOWS INFORMATION -
Cash paid during the year for income taxes $ 9,898,127 $ 4,306,165 $ 244,582
============ =========== ===========
</TABLE>
See notes to financial statements.
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<PAGE> 8
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - Photonic Integration Research, Inc. was incorporated on June
16, 1987 under the laws of the State of Ohio to engage in the
development, manufacture and marketing of high performance, high
value-added optical waveguide components. The Company operates one
facility in Columbus, Ohio and sells its products world-wide. The
Company operates as a single segment.
BASIS OF ACCOUNTING - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America 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. Estimates also affect 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 cash, highly
liquid debt instruments, treasury bills, and certificates of deposit
with a maturity of approximately three months or less at the date of
purchase to be cash equivalents. At March 31, 2000 and 1999,
substantially all cash and cash equivalents were held at a single
financial institution.
INVENTORY - Inventory is valued at the lower of cost or market using the
first-in, first-out (FIFO) method.
DEPRECIATION AND AMORTIZATION - Equipment is depreciated using the
straight-line method over an estimated useful life of five years.
Building and improvements are depreciated using the straight-line method
over an estimated useful life of thirty years. The license agreement is
amortized over its life of eight years three months.
LONG-LIVED ASSETS - Property, license agreements and other long-lived
assets are evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets or
intangibles may not be recoverable. Recoverability is measured by a
comparison of the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.
INCOME TAXES - Deferred income taxes are provided for all temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
REVENUE RECOGNITION - Revenue and related cost of goods sold are
recognized at the time products are shipped to the customer and are
recorded net of estimated sales discounts and returns based on
historical trends. All sales are considered final upon shipment.
ADVERTISING - The Company expenses advertising costs as incurred. During
fiscal 2000, 1999 and 1998 such expenses were $130,706, $64,897 and
$115,463, respectively.
RESEARCH AND DEVELOPMENT - The Company expenses research and development
costs as incurred. During fiscal 2000 such expense was $385,275. The
Company did not incur any research and development costs in fiscal 1999
or 1998.
FOREIGN CURRENCY TRANSACTIONS - The Company has significant sales
transactions involving Japanese currency. Revenues and related accounts
receivable were translated at the rates of exchange when the sales were
recognized. Accounts receivable are adjusted at year-end to reflect any
aggregate unrealized loss. Gains and
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<PAGE> 9
losses resulting from foreign currency transactions (net gains of
$15,657 and $39,194 for 2000 and 1999, respectively, and net losses of
$86,657 for 1998) are included in miscellaneous operating expense.
RECENTLY ISSUED FINANCIAL STANDARDS - In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which, as amended, will require adoption by the Company no
later than April 1, 2001. This new statement establishes accounting and
reporting standards for derivative instruments and for hedging
activities, and requires companies to recognize all derivatives as
either assets or liabilities in the balance sheet and measure such
instruments at fair value. Adoption of this statement is not anticipated
to materially impact the Company's financial position, results of
operations or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under
certain circumstances. The Company has not completed the process of
evaluating the impact that will result from adopting SAB 101 and is,
therefore, unable to disclose the impact that adoption will have on its
financial position and results of operations. SAB 101 will be effective
no later than the fourth quarter of the fiscal year ended March 31,
2001.
RECLASSIFICATIONS - For purposes of comparability, certain prior year
amounts have been reclassified to conform with the current year's
presentation.
2. RELATED PARTY TRANSACTIONS
In addition to the transactions described in Notes 3 and 4 to the
financial statements, the following transactions with related parties
occurred:
MARKETING AGREEMENT - In December 1999, the Company entered into a new
marketing agreement with Mitsubishi Corporation (MC, a shareholder)
whereby MC would provide for certain marketing and sales support, and
brokerage activities for a percentage of the sales price on certain
contracts. For the years ended March 31, 1999 and 1998, $50,000 and
$100,000, respectively, was incurred for such services under a previous
agreement. No amount was incurred for the year ended March 31, 2000.
Sales through MC to the ultimate customer under the marketing agreement
were $846,193, $1,930,422 and $3,144,419 during the years ended March
31, 2000, 1999 and 1998, respectively, which includes sales to Nippon
Telegraph and Telephone Corporation (NTT, a shareholder) of $47,920,
$404,767 and $1,128,879 during the years ended March 31, 2000, 1999 and
1998, respectively. MC assigned its North America and Europe Rights and
Obligations (as defined) to Mitsubishi International Corporation (MIC),
a wholly-owned subsidiary of MC. Under a sales commission agreement with
MIC, $1,365,071, $1,393,794 and $272,302 of commissions were incurred
for the years ended March 31, 2000, 1999 and 1998, respectively.
RESEARCH AND DEVELOPMENT AGREEMENT - The Company has contracted with
Battelle Memorial Institute (BMI, a shareholder) for research and
development services in connection with the development of its
technology and products. Costs incurred under the contract totaled
$25,390, $26,298 and $4,095 in the years ended March 31, 2000, 1999 and
1998, respectively. In addition to amounts paid under the contract, the
Company has purchased certain other items/services typically related to
Exhibits and Industry Trade Shows through Battelle. For the years ended
March 31, 2000, 1999 and 1998 the amounts for these purchases are
$9,816, $23,125 and $12,283, respectively.
MATERIAL SUPPLY AGREEMENTS - In November 1999, the Company entered into
material supply agreements with NTT Advanced Technology Corporation
(NTT-AT) whereby the Company agreed to purchase minimum quantities of
certain inventory products through December 31, 2002 and 2004 from
NTT-AT. At March 31, 2000 the Company has met the required minimum
purchases. During the year ended March 31, 2000 the Company purchased
$975,000 of inventory under these agreements.
-7-
<PAGE> 10
3. LICENSE AGREEMENTS
The Company has licensed certain technologies from NTT under various
agreements. The agreements provide for one-year renewals until
terminated by mutual agreement of the parties. Royalties range from .8
to 3.0 percent of sales, depending on the licensed articles. For the
years ended March 31, 2000, 1999 and 1998, respectively, total royalty
fees of $1,834,586, $949,217 and $151,239 for these licenses were
incurred. See also Note 10.
On April 1, 1999 the Company entered into an agreement with Polaroid
Corporation whereby Polaroid grants to the Company and its affiliates an
irrevocable, royalty bearing, nontransferable, nonexclusive, worldwide
license, without the right to sublicense, under Polaroid Licensed
Patents to make, have made, import export, operate, use, lease, offer to
sell, sell or otherwise transfer PIRI Licensed Products. The Company
must pay Polaroid royalties of 1.75-5% of the net selling price of PIRI
Licensed Products sold. In fiscal 2000, royalty fees of $1,792,654 were
incurred. Under the terms of the agreement, the Company paid an initial
license fee of $650,000 to Polaroid. This payment is being amortized
over the eight years three months life of the agreement.
4. REVENUES
Approximately 95%, 80% and 80% of the Company's operating revenues came
from sales to two companies, in 2000, 1999 and 1998, respectively. At
March 31, 2000 and 1999 other trade receivables include $6,914,212 and
$8,500,607, respectively, related to these two companies.
5. INVENTORY
At March 31, 2000 and 1999, inventory consisted of the following:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Raw materials $2,820,652 $ 718,090
Work-in-process and finished goods 346,297 892,196
---------- ----------
Total $3,166,949 $1,610,286
========== ==========
</TABLE>
6. LINE OF CREDIT
At March 31, 2000, the Company has available a $3,000,000 line of credit
under an unsecured commercial revolving note, which expires November 1,
2001. The applicable interest rate, as defined, is determined at the
time of borrowing. At March 31, 2000 and 1999 there are no borrowings
outstanding on the line.
7. INCOME TAXES
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ---------- ----------
<S> <C> <C> <C>
Federal:
Current $ 8,511,425 $4,374,045 $ 470,381
Deferred 43,500 203,355 482,639
State and local:
Current 1,119,471 262,722 55,176
Deferred (credit) (527,500) 17,635 41,856
----------- ---------- ----------
Total income tax expense $ 9,146,896 $4,857,757 $1,050,052
=========== ========== ==========
</TABLE>
A reconciliation of recorded federal income tax expenses to the expected
expense computed by applying the federal statutory rate of 35% for all
periods to income before income taxes is as follows:
-8-
<PAGE> 11
<TABLE>
<CAPTION>
2000 1999 1998
----------- ---------- -----------
<S> <C> <C> <C>
Expected expense at statutory rate $ 8,915,622 $4,627,706 $ 987,873
Increase (decrease) in income
taxes resulting from:
State and local income taxes 727,656 182,232 63,071
State of Ohio manufacturing tax credit (535,000)
Other - net 38,618 47,819 (892)
----------- ---------- -----------
Total $ 9,146,896 $4,857,757 $ 1,050,052
=========== ========== ===========
</TABLE>
The state of Ohio manufacturing tax credit of $535,000 (net of Federal
expense) is utilized over 7 years with no expiration date.
The Company's deferred tax assets and liabilities at March 31, 2000 and
1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
-------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued vacation $ 68,500 $ 38,000
Inventory basis differences 2,500 2,000
State taxes (principally investment tax credit) 535,000
Deferred compensation liability 356,000 78,500
-------- ---------
Total deferred tax assets 962,000 118,500
Deferred tax liability - basis differences in property 646,000 286,500
-------- ---------
Net deferred tax asset (liability) $316,000 $(168,000)
======== =========
</TABLE>
8. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) retirement plan covering
substantially all of its employees. Eligible employees may contribute a
portion of their salaries subject to certain limitations. The Company
may match a portion of an employee's contribution up to 8% of annual
compensation. Total expense was $82,220, $47,996 and $30,181 in fiscal
2000, 1999 and 1998, respectively.
Effective April 1, 1998, the Company adopted a cash profit sharing plan
which provides substantially all employees the opportunity to receive a
quarterly cash distribution. The amount of the distribution is 10% of
the Company's quarterly profit before tax and is allocated to all
individuals employed by the Company as of the last day of the quarter,
based upon salary and position. Total expense under this plan was
$2,830,394 and $1,469,113 in fiscal 2000 and 1999, respectively.
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<PAGE> 12
The Company has a performance share plan which gives certain key
employees an economic interest similar to that of a shareholder of the
Company. Up to 1,000 shares may be issued under this plan. As of March
31, 2000 and 1999, 504 and 467 performance shares have been issued under
this plan. Grants under the plan vest at the rate of 20% per year.
Payments under the plan may be made in a lump sum or in equal
installments over ten years (including interest at the prime rate) upon
the employees' termination of employment except for certain specified
reasons. Payments are also made to employees under a change of control
of ownership (as defined). Compensation expense of $731,636, $141,820
and $50,072 was recorded during fiscal 2000, 1999 and 1998,
respectively. The related liability, $869,368 and $191,892 at March 1,
2000 and 1999, respectively, is recorded on the balance sheet as
deferred compensation liability.
9. PLANT EXPANSION
As of March 31, 2000, the Company has entered into a construction
contract to expand its Columbus manufacturing facility. Total cost for
the expansion, excluding any required equipment, is estimated at
$1,800,000, which will be financed from operations.
10. SALE OF COMPANY
On May 10, 2000, the shareholders signed an agreement to sell the
Company to an unrelated party. The transaction closed June 2, 2000. In
connection with the sale, the Company entered into a revised license
agreement with NTT which will replace all previous license agreements
(see Note 3). Under the new agreement, effective upon the closing of the
sale, the buyer made a capital contribution to the Company which in turn
was paid to NTT as an initial license fee payment and no future royalty
payments will be made.
* * * * * *
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<PAGE> 13
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS
(CONTINUED)
(b) Pro Forma Financial Information
The following unaudited pro forma combined consolidated financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the combined results of operations for future periods or the results of
operations that actually would have been realized had SDL, Inc., Photonic
Integration Research, Inc. ("PIRI"), Veritech Microwave, Inc. ("Veritech"), and
Queensgate Instruments ("Queensgate") been a combined company during the
specified periods, and do not purport to represent the future results of
operations of the Company. The unaudited pro forma combined consolidated
financial statements should be read in conjunction with SDL's Annual Report on
Form 10-K for the year ended 1999, SDL's Form 10-Q for the quarter ended June
30, 2000, and SDL's Forms 8-K/A filed May 22, 2000, and June 16, 2000.
On July 10, 2000, the Company announced the signing of a Merger Agreement with
JDS Uniphase Corporation. Upon completion of this transaction, the Company's
stockholders would receive 3.8 shares of JDS Uniphase common stock for each
share of SDL common stock they own, and the Company would become a wholly-owned
subsidiary of JDS Uniphase. Completion of the transaction is subject to the
approval of our stockholders, as well as customary closing conditions and
regulatory approvals. Accordingly there can be no assurance that the transaction
will be completed. On July 11, 2000, the Company filed a press release
announcing the transaction and the merger agreement as exhibits to Form 8-K.
Those documents contain the specific terms and conditions of the transaction.
These pro forma financial statements do not include any adjustments relating to
the proposed Merger Agreement between SDL and JDS Uniphase.
Pro forma combined consolidated balance sheet information for SDL, Inc. is not
presented because the historical consolidated financial statements included in
the Company's Form 10-Q for the quarter ended June 30, 2000, already reflect the
acquisitions of PIRI, Veritech, and Queensgate.
The unaudited pro forma combined consolidated statement of operations for the
year ended December 31, 1999, includes the historical results of SDL, PIRI,
Veritech and Queensgate for the 12 months ended December 31, 1999, and
adjustments (including the amortization of purchased intangible assets)
necessary to reflect the acquisitions of PIRI, Veritech and Queensgate as if
they had occurred on the first day of fiscal 1999. The unaudited pro forma
combined consolidated statement of operations for the six months ended June 30,
2000, include the historical results of SDL for the six months ended June 30,
2000, the historical results of PIRI, Veritech, and Queensgate for the period
prior to their acquisition by SDL, and adjustments (including the amortization
of purchased intangible assets and the elimination of non-recurring in-process
research and development charges related to the PIRI, Veritech, and Queensgate
acquisition) necessary to reflect the acquisitions of PIRI, Veritech and
Queensgate as if they had occurred at the beginning of fiscal 1999.
<PAGE> 14
SDL, INC.
UNAUDITED PRO FORMA COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS - YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUST SDL
SDL PIRI VERITECH QUEENSGATE MENTS COMBINED
-------- -------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue $187,021 $ 57,166 $22,277 $ 8,259 $ -- $ 274,723
4,628
Cost of revenue 107,238 28,906 5,335 4,628 -- 146,107
-------- -------- ------- --------- --------- ---------
Gross profit 79,783 28,260 16,942 3,631 -- 128,616
Operating expenses:
Research and development 19,043 253 614 1,606 -- 21,516
Selling, general, and administrative 26,695 7,819 2,896 5,576 -- 42,986
Merger costs 2,677 -- -- -- -- 2,677
In process research and development 1,495 -- -- -- -- 1,495
Amortization of purchased intangibles 809 -- -- -- 436,293 (2A) 603,422
-- -- -- -- 121,831 (2E)
-- -- -- -- 44,489 (2I)
-------- -------- ------- --------- --------- ---------
Total operating expenses 50,719 8,072 3,510 7,182 602,613 672,096
-------- -------- ------- --------- --------- ---------
Operating income (loss) 29,064 20,188 13,432 (3,551) (602,613) (543,480)
Interest income (expense), net 5,429 404 576 (163) -- 6,246
-------- -------- ------- --------- --------- ---------
Income (loss) before income taxes 34,493 20,592 14,008 (3,714) (602,613) (537,234)
Provision (benefit) for income taxes 9,280 7,476 5,498 (538) (18,955)(2C) (4,630)
-- -- -- -- (5,655)(2G)
-- -- -- -- (1,736)(2K)
-------- -------- ------- --------- --------- ---------
Net income (loss) $ 25,213 $ 13,116 $ 8,510 $ (3,176) $(576,267) $(532,604)
======== ======== ======= ========= ========= =========
Earnings (loss) per share - basic $ 0.39 ($6.95)
======== =========
Earnings (loss) per share - diluted $ 0.37 ($6.95)
======== =========
Shares outstanding - basic 64,320 3,000 (2H) 76,595
813 (2L)
8,462 (2D)
Shares outstanding - diluted 68,470 3,000 (2H) 76,595
813 (2L)
8,462 (2D)
(4,150)(2M)
</TABLE>
See accompanying notes to unaudited pro forma combined consolidated
financial statements.
<PAGE> 15
SDL, INC.
UNAUDITED PRO FORMA COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUST SDL
SDL PIRI VERITECH QUEENSGATE MENTS COMBINED
--------- ------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 182,718 $37,957 $ 6,521 $ 2,461 $ -- $ 229,657
Cost of revenue 92,830 13,696 1,728 1,798 -- 110,052
--------- ------- -------- ------- --------- ---------
Gross profit 89,888 24,261 4,793 663 -- 119,605
Operating expenses:
Research and development 14,472 216 176 352 -- 15,216
Selling, general, and administrative 20,802 3,800 1,691 605 -- 26,898
In process research and development 27,400 -- -- -- (1,100)(2B) --
-- -- -- (25,100)(2F)
-- -- -- (1,200)(2J)
Amortization of purchased 73,371 -- -- -- 181,789 (2A) 301,730
intangibles -- -- -- -- 30,458 (2E)
-- -- -- -- 16,112 (2I)
--------- ------- -------- ------- --------- ---------
Total operating expenses 136,045 4,016 1,867 957 200,959 343,844
--------- ------- -------- ------- --------- ---------
Operating income (loss) (46,157) 20,245 2,926 (294) (200,959) (224,239)
Interest income (expense), net 9,514 352 204 (56) -- 10,014
--------- ------- -------- ------- --------- ---------
Income (loss) before income taxes (36,643) 20,597 3,130 (350) (200,959) (214,225)
Provision (benefit) for income taxes 19,844 7,179 1,252 -- (7,898)(2C) 18,672
-- -- -- -- (1,416)(2G)
-- -- -- -- (289)(2K)
--------- ------- -------- ------- --------- ---------
Net income (loss) ($ 56,487) $13,418 $ 1,878 $ (350) $(191,356) $(232,897)
========= ======= ======== ======= ========= =========
Loss per share - basic ($0.75) ($2.74)
========= =========
Loss per share - diluted ($0.75) ($2.74)
========= =========
Shares outstanding - basic 75,633 1,500 (2H) 84,883
698 (2L)
7,052 (2D)
Shares outstanding - diluted 75,633 1,500 (2H) 84,883
698 (2L)
7,052 (2D)
</TABLE>
See accompanying notes to unaudited pro forma combined consolidated
financial statements.
<PAGE> 16
SDL, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
The following unaudited pro forma combined consolidated financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the results of operations for future periods or the results of operations that
actually would have been realized had SDL, Inc. ("SDL"), Photonic Integration
Research, Inc. ("PIRI"), Veritech Microwave, Inc. ("Veritech"), and Queensgate
Instruments ("Queensgate") been a combined company during the specified periods.
Pro forma combined consolidated balance sheet information for SDL is not
presented because the historical consolidated financial statements included in
the Company's Form 10-Q for the quarter ended June 30, 2000, already reflect the
acquisition of PIRI, Veritech, and Queensgate. The unaudited pro forma combined
consolidated statement of operations for the year ended December 31, 1999,
includes the historical results of SDL, PIRI, Veritech and Queensgate for the 12
months ended December 31, 1999, and adjustments (including the amortization of
purchased intangible assets) necessary to reflect the acquisitions of PIRI,
Veritech and Queensgate as if they had occurred on the first day of fiscal 1999.
The unaudited pro forma combined consolidated statement of operations for the
six months ended June 30, 2000, include the historical results of SDL for the
six months ended June 30, 2000, the historical results of PIRI, Veritech, and
Queensgate for the period prior to their acquisition by SDL, and adjustments
(including the amortization of purchased intangible assets and the elimination
of non-recurring in-process research and development charges related to the
PIRI, Veritech, and Queensgate acquisition) necessary to reflect the
acquisitions of PIRI, Veritech and Queensgate as if they had occurred at the
beginning of fiscal 1999.
PIRI
The unaudited pro forma combined consolidated financial statements reflect the
issuance of 8,461,663 SDL common shares and a cash payment of $31.7 million for
all of PIRI's shares outstanding as of June 2, 2000, the date of the closing.
The average market price per SDL common share of $246.22 was used to determine
the consideration paid to PIRI shareholders. The average market price per share
of SDL common share is based on the average closing price for a range of trading
days (May 30 through June 7, 2000) around the announcement date (June 2, 2000)
of the acquisition. The estimated direct transaction expenses of $12.4 million
have been included as a part of the total estimated purchase cost.
The total purchase cost and purchase price allocation of the PIRI merger is as
follows (in thousands):
<TABLE>
<S> <C>
Value of securities issued.................. $2,083,430
Cash........................................ 31,732
----------
2,115,162
Estimated transaction costs................. 12,443
----------
Total purchase cost......................... $2,127,605
==========
</TABLE>
<TABLE>
<CAPTION>
Annual Useful
Amount Amortization Lives
---------- ------------ -------
<S> <C> <C> <C>
Purchase Price Allocation:
Tangible net assets $39,816 n/a n/a
Existing technology 226,400 45,280 5 years
In process technology 1,100 n/a n/a
Workforce 3,900 780 5 years
Tradename 6,640 1,328 5 years
Goodwill 1,944,525 388,905 5 years
Deferred tax liabilities (94,776) n/a n/a
---------- -------- -------
Total estimated purchase price: $2,127,605 $436,293
========== ========
</TABLE>
The Company has performed an allocation of the total purchase price of PIRI to
its individual assets. The purchase price allocation is preliminary and,
therefore, subject to change based on the Company's final analysis. Of the total
purchase price,
<PAGE> 17
$1.1 million was allocated to in-process research and development and was
charged to expense in the quarter ending June 30, 2000. Due to the non-recurring
nature of in-process research and development, the $1.1 million charge has been
excluded from the pro forma combined consolidated statements of operations.
In addition to allocating value to the in-process research and development
projects and PIRI's tangible assets, specific intangible assets were also
identified and valued. The related amortization of the identifiable intangible
assets is reflected as a pro forma adjustment to the unaudited pro forma
combined consolidated statement of operations for the 12 months ended December
31, 1999 and the six months ended June 30, 2000. The identifiable intangible
assets include existing technology, assembled workforce, and tradename.
The acquired existing technology is comprised of products in PIRI's portfolio
that are technologically feasible. This technology represent PIRI's trade
secrets and patents developed through years of experience designing and
manufacturing arrayed waveguide gratings (AWGs). This know-how enables PIRI to
develop new and improved AWGs, processes, and manufacturing equipment, thereby
providing PIRI with a distinct advantage over its competitors and providing the
Company with a reputation for technological superiority in the industry. The
Company expects to amortize the acquired existing technology of approximately
$226.4 million on a straight-line basis over an estimated remaining useful life
of 5 years.
The acquired assembled workforce is comprised of over 156 skilled employees
across PIRI's Senior Management, Sales, General and Administration, Research and
Development, and Manufacturing and Engineering groups. The Company expects to
amortize the assembled workforce of approximately $3.9 million on a
straight-line basis over an estimated remaining useful life of 5 years.
The trade names include the PIRI trademark and trade name as well as all branded
PIRI products. The Company expects to amortize the trade names of approximately
$6.6 million on a straight-line basis over an estimated remaining useful life of
5 years.
Goodwill, which represents the excess of the purchase price of PIRI over the
fair value of the underlying net identifiable assets, will be amortized on a
straight-line basis over an estimated useful life of 5 years.
Veritech
The unaudited pro forma combined consolidated financial statements reflect the
issuance of 3,000,000 SDL common shares for all of Veritech's shares outstanding
as of April 3, 2000, the closing date. The average market price per SDL common
share of $206.843 was used to determine the consideration paid to Veritech
shareholders. The average market price per share of SDL common share is based on
the average closing price for a range of trading days (February 24 through March
3, 2000) around the announcement date (February 29, 2000) of the acquisition.
The estimated direct transaction expenses of $8.8 million have been included as
a part of the total estimated purchase cost.
The total purchase cost of the Veritech acquisition is as follows (in
thousands):
<TABLE>
<S> <C>
Value of securities issued................ $620,529
Estimated transaction costs............... 8,800
--------
Total purchase cost....................... $629,329
</TABLE>
<TABLE>
<CAPTION>
Annual Useful
Amount Amortization Lives
-------- ------------ -------
<S> <C> <C> <C>
Purchase Price Allocation:
Tangible net assets $23,402 n/a n/a
Core \ existing technology 67,800 13,560 5 years
In process technology 25,100 n/a n/a
Workforce 2,500 500 5 years
Design tools and device library 521 104 5 years
Goodwill 538,334 107,667 5 years
Deferred tax liabilities (28,328) n/a n/a
-------- -------- -------
Total estimated purchase price: $629,329 $121,831
</TABLE>
The Company has performed an allocation of the total purchase price of Veritech
to its individual assets. Of the total purchase price, $25.1 million has been
allocated to in-process research and development and was charged to expense in
the
<PAGE> 18
quarter ending June 30, 2000. Due to the non-recurring nature of in-process
research and development, the $25.1 million charge has been excluded from the
pro forma combined consolidated statements of operations.
In addition to allocating value to the in-process research and development
projects and Veritech's tangible assets, specific intangible assets were also
identified and valued. The related amortization of the identifiable intangible
assets is reflected as a pro forma adjustment to the unaudited pro forma
combined consolidated statement of operations for the 12 months ended December
31, 1999 and the three months ended March 31, 2000. The identifiable intangible
assets include existing /core technology, assembled workforce, and design tools
and device library.
The acquired existing/core technology is comprised of products in Veritech's
portfolio that are technologically feasible. These products represent Veritech's
trade secrets and patents developed through years of experience designing and
manufacturing high speed optoelectronic modules. This know-how enables the
Company to develop new and improve existing high speed optoelectronic modules,
processes, and manufacturing equipment, thereby providing Veritech with a
distinct advantage over its competitors and providing the Company with a
reputation for technological superiority in the industry. The Company expects to
amortize the acquired existing / core technology of approximately $67.8 million
on a straight-line basis over an estimated remaining useful life of 5 years.
The acquired assembled workforce is comprised of 100 skilled employees across
Veritech's General and Administration, Research and Development, Sales and
Marketing, and Manufacturing groups. The Company expects to amortize the
assembled workforce of approximately $2.5 million on a straight-line basis over
an estimated remaining useful life of 5 years.
The acquired design tools and device library is comprised of the software code
for customization of various products. The Company expects to amortize the
acquired design tools and device library of approximately $0.5 million on a
straight-line basis over an estimated remaining useful life of 5 years.
Goodwill, which represents the excess of the purchase price of Veritech over the
fair value of the underlying net identifiable assets, will be amortized on a
straight-line basis over an estimated useful life of 5 years.
Queensgate
The acquisition agreement between SDL and Queensgate provided for initial
consideration of $3 million of cash and 347,962 shares of SDL's common stock
with a fair value of approximately $77 million, and contingent payments of up to
an additional $150 million in common stock based on Queensgate's pretax profits
for the 10 months ended December 31, 2000 and the twelve months ended December
31, 2001. In addition, SDL issued options in exchange for outstanding Queensgate
options with the number of shares and the exercise price appropriately adjusted
by the exchange ratio. On June 26, 2000, SDL signed a supplementary agreement
with the prior shareholders and option-holders of Queensgate extinguishing all
rights to future contingent payments in exchange for 465,102 shares of SDL
common stock with a fair value of $130.4 million in order to minimize potential
conflicts in management priorities. This additional payment was recorded as
goodwill in the quarter ended June 30, 2000.
The unaudited pro forma combined consolidated financial statements reflect the
issuance of 347,962 SDL common shares for all of Queensgate's shares outstanding
as of March 8, 2000. The average market price per SDL common share of $222.37
was used to determine the consideration paid to Queensgate shareholders. The
average market price per share of SDL common share is based on the average
closing price for a range of trading days (March 3 through March 13, 2000)
around the announcement date (March 8, 2000) of the acquisition. In addition,
the unaudited pro forma combined consolidated financial statements reflect the
issuance 465,102 SDL common shares with a fair value of $130.4 million issued on
June 26, 2000 to extinguish the contingent payments. The average market price
per SDL common share of $280.35 was used to estimate the fair value of the
consideration. The average market price per share of SDL common share is based
on the average closing price for a range of trading days (June 21 through June
29, 2000) around the signing of the agreement (June 26, 2000). The estimated
fair value of the options, as well as estimated direct transaction expenses of
$1.1 million, have been included as a part of the total estimated purchase cost.
The total purchase cost and purchase price allocation of the Queensgate merger
is as follows (in thousands):
<TABLE>
<S> <C>
Value of securities issued............... $207,767
Cash..................................... 3,000
Assumption of Queensgate options......... 1,502
--------
212,269
Estimated transaction costs.............. 1,125
--------
Total purchase cost...................... $213,394
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
Annual Useful
Amount Amortization Lives
-------- ------------ -------
<S> <C> <C> <C>
Purchase Price Allocation:
Tangible net liabilities $ (1,570) n/a n/a
Tradename 2,000 $400 5 years
Core technology 12,000 2,400 5 years
Existing technology 6,200 1,240 5 years
In process technology 1,200 n/a n/a
Workforce 1,500 300 5 years
Goodwill 200,744 40,149 5 years
Deferred tax liabilities (8,680) n/a n/a
-------- -------
Total estimated purchase price: $213,394 $44,489
</TABLE>
The Company has performed an allocation of the total purchase price of
Queensgate to its individual assets. Of the total purchase price, $1.2 million
has been allocated to in-process research and development and was charged to
expense in the quarter ending March 31, 2000. Due to the non-recurring nature of
in-process research and development, the $1.2 million charge has been excluded
in the pro forma combined consolidated statements of operations.
In addition to allocating value to the in-process research and development
projects and Queensgate's tangible assets, specific intangible assets were also
identified and valued. The related amortization of the identifiable intangible
assets is reflected as a pro forma adjustment to the pro forma combined
consolidated statement of operations. The identifiable intangible assets include
existing technology, core technology, trade name, and assembled workforce.
The acquired existing technology is comprised of products in the Queensgate
portfolio that are already technologically feasible. The Company expects to
amortize the acquired existing technology of approximately $6.2 million on a
straight-line basis over an estimated remaining useful life of 5 years.
The core technology represents Queensgate trade secrets and patents developed
through years of experience designing and manufacturing optical network
monitoring modules. This know-how enables the Company to develop new and improve
existing optical network monitoring modules, processes, and manufacturing
equipment, thereby providing Queensgate with a distinct advantage over its
competitors and providing the Company with a reputation for technological
superiority in the industry. The Company expects to amortize the core technology
of approximately $12.0 million on a straight-line basis over an average
estimated remaining useful life of 5 years.
The trade names include the Queensgate trademark and trade name as well as all
branded Queensgate products. The Company expects to amortize the trade names of
approximately $2.0 million on a straight-line basis over an estimated remaining
useful life of 5 years.
The acquired assembled workforce is comprised of 100 skilled employees across
Queensgate's General and Administration, Research and Development, Sales and
Marketing, and Manufacturing groups. The Company expects to amortize the
assembled workforce of approximately $1.5 million on a straight-line basis over
an estimated remaining useful life of 5 years.
Goodwill, which represents the excess of the purchase price of Queensgate over
the fair value of the underlying net identifiable assets, will be amortized on a
straight-line basis over an estimated useful life of 5 years.
2. Pro forma adjustments:
PIRI
(A) To record twelve months of amortization for purchased intangible assets for
fiscal 1999 and to record additional amortization for the period January 1, 2000
through June 2, 2000 (date of acquisition). Amortization expense for the period
subsequent to the acquisition from June 3, 2000 to June 30, 2000 is already
included in the historical financial results of the Company.
(B) To eliminate non-recurring charges related to in-process research and
development written off at the date of acquisition on June 2, 2000.
<PAGE> 20
(C) To record tax benefits relating to amortization of purchased intangibles.
(D) The pro forma basic and diluted loss per share are based on the historical
weighted average number of SDL common shares outstanding during each period and
are adjusted to reflect the issuance, as of January 1, 1999, of 8,461,663 shares
of SDL common stock made for the purchase of PIRI.
Veritech
(E) To record twelve months of amortization for purchased intangible assets for
fiscal 1999 and to record additional amortization for the period January 1, 2000
through April 3, 2000 (date of acquisition). Amortization expense for the period
subsequent to the acquisition from April 4, 2000 to June 30, 2000 is already
included in the historical financial results of the Company.
(F) To eliminate non-recurring charges related to in-process research and
development written off at the date of acquisition on April 3, 2000.
(G) To record tax benefits relating to amortization of purchased intangibles.
(H) The pro forma basic and diluted loss per share are based on the historical
weighted average number of SDL common shares outstanding during each period and
are adjusted to reflect the issuance, as of January 1, 1999, of 3,000,000 shares
of SDL common stock made for the purchase of Veritech.
Queensgate
(I) To record twelve months of amortization for purchased intangible assets for
fiscal 1999 and to record additional amortization expense for purchased
intangibles assets for the period from January 1, 2000 to March 8, 2000 (date of
acquisition). Amortization expense for the period subsequent to the acquisition
from March 9, 2000 to June 30, 2000 is already included in the historical
financial results of the Company.
(J) To eliminate non-recurring charges related to in-process research and
development written off at the date of acquisition on March 8, 2000.
(K) To record tax benefits relating to amortization of purchased intangibles.
(L) The pro forma basic and diluted loss per share are based on the historical
weighted average number of SDL common shares outstanding during each period and
are adjusted to reflect the issuance of 813,064 shares of SDL common stock as if
the original purchase of Queensgate, including the extinguishments of the
contingent purchase price, was made on January 1, 1999.
(M) Diluted outstanding shares excludes common equivalent shares issuable upon
conversion of SDL stock options because such shares would be anti-dilutive.
<PAGE> 21
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.
August 14, 2000 By: /s/Michael L. Foster
-------------------------------------
Michael L. Foster
Chief Financial Officer and Secretary
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- ----------------------------------------------------
<S> <C>
23.1 Consent of Deloitte Touche LLP, Independent Auditors
</TABLE>
