<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): APRIL 3, 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 April 11, 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 financial statements of Veritech
Microwave, Inc. (Veritech) for the years ended December 31, 1998 and 1999 and
for the three months ended March 31, 2000 (unaudited) and pro forma financial
information giving effect to the merger between SDL and Veritech. SDL recently
completed the acquisition of Queensgate Instruments (Queensgate) and for periods
in which the effects of Queensgate are not included in the historical financial
statements of SDL the accompanying pro forma financial information also gives
effect to this transaction.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired (Veritech Microwave, Inc.)
i. Report of Independent Certified Public Accountants
ii. Balance Sheets as of December 31, 1998 and 1999 and March 31,
2000 (unaudited)
iii. Statements of Income for the years ended December 31, 1998 and
1999 and for the three months ended March 31, 1999 and 2000
(unaudited)
iv. Statements of Stockholders Equity for the year end 1999 and for
the three months ended March 31, 2000 (unaudited)
v. Statements of Cash Flow for the years ended December 31, 1998 and
1999 and for the three months ended March 31, 1999 and 2000
(unaudited)
vi. Notes to Financial Statements
(b) Pro Forma Financial Information
Pro Forma Combined Consolidated Financial Statements (unaudited)
i. Pro Forma Combined Consolidated Balance Sheet as of March 31, 2000
<PAGE> 2
ii. Pro Forma Combined Consolidated Statements of Operations for the year
ended December 31, 1999
iii. Pro Forma Combined Consolidated Statements of Operations for the
quarter ended March 31, 2000
iv. Notes to Pro Forma Combined Consolidated Financial Statements
(c) Exhibits
23.1 Consent of Grant Thornton LLP, Independent Certified Public
Accountants
<PAGE> 3
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
VERITECH MICROWAVE, INC.
We have audited the accompanying balance sheets of Veritech Microwave, Inc. as
of December 31, 1998 and 1999, and the related statements of income,
stockholders' equity, and cash flows for the years then ended. 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. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Veritech Microwave, Inc. as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States.
/s/ GRANT THORNTON LLP
Edison, New Jersey
January 28, 2000
<PAGE> 4
Veritech Microwave, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------- March 31,
ASSETS 1998 1999 2000
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,818,694 $ 3,249,165 $11,911,346
Short-term investment 7,066,773 11,418,050 3,572,762
Trade accounts receivable, less allowances
for doubtful accounts and sales returns
of $10,000, $10,000 and $1,133,500,
respectively 2,619,277 5,051,408 5,788,427
Inventory 969,842 1,811,413 2,329,733
Deferred income tax assets 113,000 140,000 140,000
Prepaid transaction costs 193,500
Other current assets 8,424 57,772 45,471
----------- ----------- -----------
Total current assets 12,596,010 21,727,808 23,981,239
PROPERTY AND EQUIPMENT, NET 1,746,955 2,177,699 2,632,329
OTHER ASSETS 14,250 18,000 18,000
----------- ----------- -----------
$14,357,215 $23,923,507 $26,631,568
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 272,279 $ 482,010 $ 722,028
Accrued expenses and other 982,199 1,657,981 1,775,914
Income taxes payable 504,000 609,000 1,081,766
----------- ----------- -----------
Total current liabilities 1,758,478 2,748,991 3,579,708
DEFERRED INCOME TAX LIABILITY 138,000 204,000 204,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized,
5,000,000 shares; issued and outstanding,
3,655,333 shares 36,553 36,553 36,553
Retained earnings 12,424,184 20,933,963 22,811,307
----------- ----------- -----------
12,460,737 20,970,516 22,847,860
----------- ----------- -----------
$14,357,215 $23,923,507 $26,631,568
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 5
Veritech Microwave, Inc.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended Three months ended
December 31, March 31,
----------------------------- ------------------------
1998 1999 1999 2000
------------ ------------ ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Net sales $ 15,253,977 $ 22,276,625 $5,803,655 $6,520,995
Cost of goods sold 3,953,161 5,334,544 1,818,552 1,727,604
------------ ------------ ---------- ----------
Gross profit 11,300,816 16,942,081 3,985,103 4,793,391
Operating expenses
Research and development 602,778 614,416 146,578 176,438
Selling, general and administrative 2,005,913 2,895,895 344,227 1,691,000
------------ ------------ ---------- ----------
Total operating expenses 2,608,691 3,510,311 490,805 1,867,438
------------ ------------ ---------- ----------
Operating income 8,692,125 13,431,770 3,494,298 2,925,953
------------ ------------ ---------- ----------
Other income (expense)
Investment income 325,629 583,788 105,599 203,391
Interest expense (56,164) (7,709) -- --
------------ ------------ ---------- ----------
Total other income, net 269,465 576,079 105,599 203,391
------------ ------------ ---------- ----------
Income before income tax expense 8,961,590 14,007,849 3,599,897 3,129,344
Income tax expense 3,797,420 5,498,070 1,430,000 1,252,000
------------ ------------ ---------- ----------
NET INCOME $ 5,164,170 $ 8,509,779 $2,169,897 $1,877,344
============ ============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 6
Veritech Microwave, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998 and 1999
and three months ended March 31, 2000 (unaudited)
<TABLE>
<CAPTION>
Common stock
--------------------- Retained
Shares Dollars earnings Total
--------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 (as reported) 3,655,333 $ 36,553 $ 6,894,211 $ 6,930,764
Net income 5,164,170 5,164,170
Prior period adjustment (net of income
taxes of $243,000) 365,803 365,803
--------- -------- ----------- -----------
Balance at December 31, 1998 3,655,333 36,553 12,424,184 12,460,737
Net income 8,509,779 8,509,779
--------- -------- ----------- -----------
Balance at December 31, 1999 3,655,333 36,553 20,933,963 20,970,516
Net income 1,877,344 1,877,344
--------- -------- ----------- -----------
BALANCE AT MARCH 31, 2000 (UNAUDITED) 3,655,333 $ 36,553 $22,811,307 $22,847,860
========= ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 7
Veritech Microwave, Inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Three months ended
December 31, March 31,
-------------------------- ---------------------------
1998 1999 1999 2000
----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,164,170 $ 8,509,779 $ 2,169,897 $ 1,877,344
Adjustments to reconcile net income to net cash
provided by operating activities
Prior period adjustment 365,803
Depreciation 419,877 634,197 158,000 200,779
Non-cash interest 56,164
Deferred income taxes (25,000) 39,000
Changes in operating assets and
liabilities
Trade accounts receivable, net (1,840,410) (2,432,131) (1,351,223) (737,019)
Inventory (442,578) (841,571) 355,117 (518,320)
Other current assets and other assets 9,052 (53,098) (23,472) (181,199)
Trade accounts payable 60,497 209,731 88,809 240,018
Accrued expenses and other 639,156 675,782 (638,960) 117,933
Income taxes payable 312,077 105,000 1,125,930 472,766
----------- ----------- ----------- ------------
Net cash provided by operating activities 4,718,808 6,846,689 1,884,098 1,472,302
----------- ----------- ----------- ------------
Cash flows from investing activities
Purchases of property and equipment (1,036,758) (1,064,941) (172,224) (655,409)
Sales of short-term investments -- -- -- 7,845,288
Purchases of short-term investments (7,066,773) (4,351,277) (80,316) --
----------- ----------- ----------- ------------
Net cash (used in) provided by investing
activities (8,103,531) (5,416,218) (252,540) 7,189,879
----------- ----------- ----------- ------------
Cash flows from financing activities
Principal payments under capital lease obligations (873,395) -- -- --
----------- ----------- ----------- ------------
Net cash used in financing activities (873,395) -- -- --
----------- ----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (4,258,118) 1,430,471 1,631,558 8,662,181
Cash and cash equivalents at beginning of period 6,076,812 1,818,694 1,818,694 3,249,165
----------- ----------- ----------- ------------
Cash and cash equivalents at end of period $ 1,818,694 $ 3,249,165 $ 3,450,252 $ 11,911,346
=========== =========== =========== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 56,000 $ 7,700 $ -- $ --
Income taxes 3,450,000 5,350,000 $ 300,000 $ 773,000
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 8
Veritech Microwave, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
NOTE A - DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
Veritech Microwave, Inc. (the "Company"), a Delaware corporation, was
founded in 1986. The Company designs and manufactures high technology
microwave components, multifunction components and subsystems for the
industrial and commercial microwave and fiber-optic markets.
The Company sells its products to customers in North America and Europe.
The Company has received a letter of intent from an unrelated party setting
forth the terms and conditions of a possible acquisition of the Company. The
Company is bound by confidentiality clauses from disclosing the terms of
such letter. Management believes that the proposed purchase price would
exceed the carrying value of the Company's assets. (See Note L.)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AND PRACTICES
1. Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturities of
three months or less when purchased to be cash equivalents.
2. Short-term Investment
Short-term investment consists of an investment in a money market fund
that invests primarily in corporate debt securities. Such investment is
carried at fair value and is classified as available for sale. There are
no unrealized holding gains from such investment at December 31, 1998
and 1999.
3. Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
<PAGE> 9
Veritech Microwave, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE B (CONTINUED)
4. Property and Equipment
Property and equipment are stated at cost and are being depreciated
primarily on a straight-line basis over the estimated useful lives of
the assets which generally range from 5 to 7 years. Leasehold
improvements are depreciated over their estimated useful lives
(generally 5 years) or the life of the lease, whichever is shorter.
Repairs and maintenance costs are expensed as incurred. Depreciation
expense for tax purposes is calculated using MACRS.
5. Revenue Recognition
Revenue is recognized upon product shipment.
6. Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
7. 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.
8. Stock Option Plan
The Company has elected to continue to account for its stock option plan
in accordance with the provisions of Accounting Principles Board Opinion
No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees," and
related interpretations, and pro forma disclosure provisions of SFAS No.
123, "Accounting for Stock Based Compensation." As disclosed in Note G,
since the Company did not grant any options in 1998 and 1999, the
disclosure provisions of SFAS No. 123 are currently not applicable.
<PAGE> 10
Veritech Microwave, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE B (CONTINUED)
9. Warranty Liabilities
The Company provides an accrual for estimated future warranty costs
based upon the historical relationship of warranty costs to sales
10. Other Comprehensive Income
Other comprehensive income, as defined, includes all changes in equity
during a period from non-owner sources. To date, the Company has not had
any transactions that are required to be reported as other comprehensive
income.
11. Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities," which
defines derivatives, requires that all derivatives be carried at fair
value, and provides for hedge accounting when certain conditions are
met. SFAS No. 133 is effective for the Company in 2002. The Company does
not believe that the adoption of this statement will have a material
impact on the Company's financial position or results of operations.
12. Segment Information
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131
established standards for the way companies report information about
operating segments in annual financial statements. It also established
standards for related disclosures about geographic areas and major
customers. The Company has determined that it operates as one business
segment.
13. Interim Financial Statements (Unaudited)
The accompanying balance sheet as of March 31, 2000, and the statements
of income for the three months ended March 31, 1999 and 2000,
stockholders' equity for the three months ended March 31, 2000, and cash
flows for the three months ended March 31, 1999 and 2000, are unaudited.
The unaudited interim financial statements have been prepared on the
same basis as the annual financial statements and, in the opinion of
management, reflect all adjustments, which
<PAGE> 11
Veritech Microwave, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE B (CONTINUED)
include only normal recurring adjustments, necessary to present fairly
the Company's financial position as of March 31, 2000, and results of
operations and cash flows as of and for the three months ended March 31,
1999 and 2000. The results of operations for the three months ended
March 31, 2000 are not necessarily indicative of the results to be
expected for the entire year.
NOTE C - INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------ MARCH 31,
1998 1999 2000
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials $ 442,697 $1,112,036 $1,382,136
Work-in-progress 497,407 643,229 877,409
Finished goods 29,738 56,148 70,188
---------- ---------- ----------
$ 969,842 $1,811,413 $2,329,733
========== ========== ==========
</TABLE>
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1999
---------- ----------
<S> <C> <C>
Machinery and equipment $4,049,501 $4,983,285
Furniture and fixtures 119,352 160,960
Leasehold improvements 62,051 151,600
---------- ----------
4,230,904 5,295,845
Less accumulated depreciation 2,483,949 3,118,146
---------- ----------
$1,746,955 $2,177,699
========== ==========
</TABLE>
Depreciation expense was approximately $420,000 and $634,000 for the years
ended December 31, 1998 and 1999, respectively.
<PAGE> 12
Veritech Microwave, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE E - PRIOR PERIOD ADJUSTMENT
During 1998, the Company discovered that it had made miscalculations related
to its inventory costing and warranty liabilities. These miscalculations
resulted in an understatement of the Company's prior year net income of
approximately $609,000. Such prior period adjustment is recorded as an
adjustment of retained earnings at December 31,1997 net of income taxes of
$243,000.
NOTE F - COMMITMENTS AND CONTINGENCIES
The Company was obligated under various capital leases for certain machinery
and equipment that expire on various dates through 2002. In December 1998,
the Company prepaid its balance due on its capital lease obligations. The
total prepayment was $648,948 including a prepayment penalty of
approximately $183,000, which was added to the cost of property and
equipment.
The Company also has noncancellable operating leases for building space and
two motor vehicles that expire in July 2001, November 2001, and September
2002, respectively. Rent expense for these operating leases during the years
ended December 31, 1998 and 1999 was approximately $112,000 and $176,000,
respectively.
Future minimum lease payments under noncancellable operating leases as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
2000 $183,440
2001 115,079
2002 9,256
--------
Total minimum lease payments $307,775
=======
</TABLE>
<PAGE> 13
Veritech Microwave, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE G - INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1998 1999
----------- -----------
<S> <C> <C>
Current
Federal $ 2,944,000 $ 4,272,000
State 878,420 1,187,070
----------- -----------
3,822,420 5,459,070
----------- -----------
Deferred
Federal (20,000) 42,000
State (5,000) (3,000)
----------- -----------
(25,000) 39,000
----------- -----------
Total income tax expense $ 3,797,420 $ 5,498,070
=========== ===========
</TABLE>
A reconciliation between the income tax expense computed at the United
States Federal income tax rate and the Company's effective tax rate is as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1998 1999
---------- ----------
<S> <C> <C>
Computed income tax provision based
on the Federal statutory rate $3,047,000 $4,763,000
State and local income taxes,
net of Federal benefit 748,000 732,000
Other 2,420 3,070
---------- ----------
$3,797,420 $5,498,070
========== ==========
</TABLE>
<PAGE> 14
Veritech Microwave, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE G (CONTINUED)
The tax effect of temporary differences that give rise to the Company's
deferred tax assets and liabilities is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1999
--------- ---------
<S> <C> <C>
Deferred tax assets - current
Accounts receivable, principally due to
allowance for doubtful accounts $ 4,000 $ 4,000
Unpaid vacation and bonuses, principally due to
accruals for financial reporting purposes 89,000 116,000
Warranty reserve, principally due to accrual for financial
reporting purposes 20,000 20,000
--------- ---------
Total deferred tax assets - current $ 113,000 $ 140,000
========= =========
Deferred tax liability - noncurrent
Depreciation, principally due to difference between
accelerated and straight - line methods $(138,000) $(204,000)
========= =========
</TABLE>
NOTE H - CAPITAL STOCK AND STOCK OPTIONS
Each share of the Company's outstanding capital stock as of December 31,
1998 and 1999 has equal voting privileges and rights. The Company had a
stock option plan which provided for the grant of options to purchase up to
750,000 shares of the Company's common stock at an exercise price of $.01
per share. Options granted under the plan were subject to various vesting
schedules as determined by the board of directors. Options were exercisable
commencing three months from the date of grant and expired ten years
thereafter. At December 31, 1998 and 1999, all 750,000 stock options had
been granted and exercised.
NOTE I - RETIREMENT PLAN
The Company has a 401(k) retirement plan (the "Plan") covering substantially
all full-time employees. Under the Plan, the Company is required to match
25% of the first $200 of employees' quarterly qualified contributions based
on the Company's prior quarter profits. The Company has a maximum annual
contribution of $200 per employee. Employer contributions of approximately
$5,000 and $7,000 were made during the years ended December 31, 1998 and
1999, respectively.
<PAGE> 15
Veritech Microwave, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE I (CONTINUED)
The Company plans to amend the plan in the first quarter of the 2000 plan
year whereby it will be required to match 50% of the first $300 of
employees' quarterly qualified contributions based on the Company's prior
quarter profits. The maximum annual contribution will be increased to $600
per employee.
NOTE J - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company maintains cash balances at several financial institutions
located in New Jersey. Each account is insured by the Federal Deposit
Insurance Corporation up to $100,000. Uninsured balances aggregated
approximately $1,400,000 and $3,600,000 at December 31, 1998 and 1999,
respectively. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk on cash and
cash equivalents.
At December 31, 1998 and 1999, the Company's largest customer accounts for
approximately 71% and 38% of accounts receivable, respectively, and
represented 60% and 43% of sales for the years then ended. No other customer
represented more than 10% of sales in 1998 and 1999. The Company establishes
an allowance for doubtful accounts based upon factors surrounding the credit
risk of specified customers, historical trends and other information. The
Company has historically not suffered from credit losses relating to its
accounts receivable.
NOTE K - GEOGRAPHIC AREAS
Information about the Company's revenues from domestic and foreign sources
follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1998 1999
----------- -----------
<S> <C> <C>
United States $12,803,256 $12,736,472
Europe 2,450,721 9,540,153
----------- -----------
$15,253,977 $22,276,625
=========== ===========
</TABLE>
<PAGE> 16
Veritech Microwave, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE L - SUBSEQUENT EVENTS (UNAUDITED)
1. During the quarter ended March 31, 2000, the Company became aware of an
uncertainty regarding the technological acceptance of a particular batch
of product sold to one individual customer during the fourth quarter of
1999 and the first quarter of 2000. The collectibility of the related
accounts receivable is doubtful due to the above uncertainty. Therefore,
during the three months ended March 31, 2000, the Company recorded a
provision for sales returns aggregating approximately $1,100,000
relating to these sales, which represents the Company's estimate of its
potential losses from these sales.
2. On April 3, 2000, SDL, Inc. ("SDL"), a Delaware corporation, acquired by
merger the Company pursuant to an Agreement and Plan of Merger (the
"Agreement") dated as of February 28, 2000 among SDL, VMI Acquisition
Corporation, a Delaware corporation, Veritech and certain shareholders
of Veritech. The Agreement calls for the payment by SDL of consideration
of 3,000,000 shares of common stock of SDL to the shareholders of
Veritech. The fair value of the SDL common stock has an estimated fair
value of approximately $621 million on the date of acquisition,
determined based on the quoted market price of such shares.
Additionally, fees of approximately $8.8 million were paid in connection
with such transaction.
3. In February 2000, the Company declared a special bonus aggregating
$1,000,000 to certain employees of the Company. The first half of the
bonus was paid in April 2000, with the remainder due to be paid in April
2001. The bonus is reflected in selling, general and administrative
expenses for the first quarter of 2000.
<PAGE> 17
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 financial position or results of operations for future periods or
the results of operations or financial position that actually would have been
realized had SDL, Inc., Veritech Microwave, Inc., and Queensgate Instruments
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 March 31, 2000, and SDL's Form 8-K/A filed May 22, 2000.
Unaudited pro forma combined consolidated balance sheet information as of March
31, 2000 is based on the historical financial statements of SDL, Inc. and
Veritech, after giving effect to the merger with Veritech under the purchase
method of accounting as if the acquisition occurred on March 31, 2000.
Queensgate is not separately presented in the unaudited pro-forma combined
consolidated balance sheet as the historical consolidated financial statements
as of March 31, 2000, already reflect the acquisition of Queensgate. The
unaudited pro forma combined consolidated statement of operations for the year
ended December 31, 1999, includes the historical results of SDL, 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 Veritech and Queensgate as if both occurred on the first day of
the fiscal 1999. The unaudited pro forma combined consolidated statement of
operations for the three months ended March 31, 2000, include the historical
results of SDL, Veritech, and Queensgate for the three months ended March 31,
2000, and adjustments (including the amortization of purchased intangible assets
and the elimination of non-recurring in-process research and development charges
related to the Queensgate acquisition) necessary to reflect the acquisitions of
Veritech and Queensgate as if both had occurred at the beginning of fiscal 1999.
<PAGE> 18
SDL, INC.
UNAUDITED PROFORMA COMBINED CONSOLIDATED
BALANCE SHEET
MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUST- SDL
SDL VERITECH MENTS COMBINED
-------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $238,239 $ 11,911 $ (8,800)(2A) $ 241,350
Short-term marketable securities 76,903 3,573 -- 80,476
Accounts receivable, net 49,652 5,788 -- 55,440
Inventories 36,971 2,330 555(2A) 39,856
Prepaid expenses and other current assets 3,628 379 -- 4,007
-------- -------- ----------- ----------
Total current assets: 405,393 23,981 (8,245) 421,129
Property and equipment, net 65,670 2,632 -- 68,302
Restricted cash 680 -- -- 680
Purchased intangibles, net 93,258 -- 609,155(2A) 701,858
Other assets 15,271 18 -- 15,289
-------- -------- ----------- ----------
$580,272 $ 26,631 $ 600,910 $1,207,258
======== ======== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 19,151 $ 722 $ -- $ 19,873
Accrued payroll and related expenses 4,118 -- -- 4,118
Income taxes payable 8,854 1,082 -- 9,936
Current portion of leases 874 -- -- 874
Other accrued liabilities 7,498 1,776 -- 9,274
-------- -------- ----------- ----------
Total current liabilities 40,495 3,580 -- 44,075
Long-term leases 860 -- -- 860
Other 13,667 204 -- 13,871
-------- -------- ----------- ----------
Total long-term liabilities 14,527 204 -- 14,731
-------- -------- ----------- ----------
Total Stockholders' Equity 525,250 22,847 600,910(2A) 1,148,452
-------- -------- ----------- ----------
$580,272 $ 26,631 $ 600,910 $1,207,258
======== ======== =========== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined
consolidated financial statements.
<PAGE> 19
SDL, INC.
UNAUDITED PRO FORMA COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUST- SDL
SDL VERITECH QUEENSGATE MENTS COMBINED
-------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue $187,021 $22,277 $ 8,259 $ -- $ 217,557
Cost of revenue 107,238 5,335 4,628 -- 117,201
-------- ------- -------- --------- ---------
Gross profit 79,783 16,942 3,631 -- 100,356
Operating expenses:
Research and development 19,043 614 1,606 -- 21,263
Selling, general, and administrative 26,695 2,896 5,576 -- 35,167
Merger costs 2,677 -- -- -- 2,677
In process research and development 1,495 -- -- -- 1,495
Amortization of purchased 809 -- -- 121,831(2B) 141,051
intangibles 18,411(2E)
-------- ------- -------- --------- ---------
Total operating expenses 50,719 3,510 7,182 140,242 201,653
-------- ------- -------- --------- ---------
Operating income (loss) 29,064 13,432 (3,551) (140,242) (101,297)
Interest income (expense), net 5,429 576 (163) -- 5,842
-------- ------- -------- --------- ---------
Income (loss) before income taxes 34,493 14,008 (3,714) (140,242) (95,455)
Provision (benefit) for income taxes 9,280 5,498 (538) (5,655)(2C) 6,849
(1,736)(2G)
-------- ------- -------- --------- ---------
Net income (loss) $ 25,213 $ 8,510 $ (3,176) $(132,851) $(102,304)
======== ======= ======== ========= =========
Earnings (loss) per share - basic $ 0.39 $ (1.51)
======== =========
Earnings (loss) per share - diluted $ 0.37 $ (1.51)
======== =========
Shares outstanding - basic 64,320 3,000(2D) 67,668
348(2H)
Share outstanding - diluted 68,470 3,000(2D) 67,668
348(2H)
(4,150)(2I)
</TABLE>
See accompanying notes to unaudited pro forma
combined consolidated financial statements.
<PAGE> 20
SDL, INC.
UNAUDITED PRO FORMA COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS
MARCH 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUST- SDL
SDL VERITECH QUEENSGATE MENTS COMBINED
------- ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue $72,206 $6,521 $ 2,461 $ -- $ 81,188
Cost of revenue 37,616 1,728 1,798 -- 41,142
------- ------ ------- -------- --------
Gross profit 34,590 4,793 663 -- 40,046
Operating expenses:
Research and development 5,903 176 352 -- 6,431
Selling, general, and administrative 7,298 1,691 605 -- 9,594
In process research and development 1,200 -- -- (1,200)(2F) --
Amortization of purchased 1,744 -- -- 30,458(2B) 35,270
intangibles 3,068(2E)
------- ------ ------- -------- --------
Total operating expenses 16,145 1,867 957 32,326 51,295
------- ------ ------- -------- --------
Operating income (loss) 18,445 2,926 (294) (32,326) (11,249)
Interest income (expense), net 4,485 203 (56) -- 4,632
------- ------ ------- -------- --------
Income (loss) before income taxes 22,930 3,129 (350) (32,326) (6,617)
Provision (benefit) for income taxes 8,686 1,252 -- (1,416)(2C) 8,233
(289)(2G)
------- ------ ------- -------- --------
Net income (loss) $14,244 $1,877 $ (350) $(30,621) $(14,850)
======= ====== ======= ======== ========
Earnings (loss) per share - basic $ 0.20 $ (0.20)
======= ========
Earnings (loss) per share - diluted $ 0.19 $ (0.20)
======= ========
Shares outstanding - basic 72,019 3,000(2D) 75,252
233(2H)
Share outstanding - diluted 76,507 3,000(2D) 75,252
233(2H)
(4,488)(2I)
</TABLE>
See accompanying notes to unaudited pro forma combined
consolidated financial statements.
<PAGE> 21
SDL, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
Unaudited pro forma combined consolidated balance sheet information as of March
31, 2000 is based on the historical financial statements of SDL, Inc. and
Veritech, after giving effect to the merger with Veritech under the purchase
method of accounting as if the acquisition was on March 31, 2000. Queensgate is
not separately presented in the unaudited pro forma combined consolidated
balance sheet as the historical consolidated financial statements as of March
31, 2000, already reflect the acquisition of Queensgate. The unaudited pro forma
combined consolidated statement of operations for the year ended December 31,
1999, includes the historical results of SDL, 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 Veritech
and Queensgate as if both occurred on the first day of the fiscal 1999. The
unaudited pro forma combined consolidated statement of operations for the three
months ended March 31, 2000, include the historical results of SDL, Veritech,
and Queensgate for the three months ended March 31, 2000, and adjustments
(including the amortization of purchased intangible assets and the elimination
of non-recurring in-process research and development charges related to the
Queensgate acquisition) necessary to reflect the acquisitions of Veritech and
Queensgate as if both had occurred at the beginning of fiscal 1999.
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 average market price per SDL common share of $206.843
per share 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 research and development 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. The purchase price allocation is preliminary and,
therefore, subject to change based on the Company's final analysis. Of the total
purchase price, $25.1 million has been allocated to in-process research and
development and will be charged to expense in the quarter ending June 30, 2000.
Due to their non-recurring nature, the in-process research and development
attributed to the Veritech transaction and the transaction costs incurred by
Veritech estimated at $8.8 million have been excluded in the unaudited pro forma
combined consolidated statements of operations.
<PAGE> 22
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 over 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.
The Company has a deferred tax liability that will be generated as a result of a
temporary difference between the book and tax basis of purchased intangibles
other than in-process research and development and goodwill. The deferred tax
liability will allow immediate realization of an equal amount of deferred tax
assets that have resulted from stock compensation related operating loss
carryforwards. As a result, the deferred tax asset and liability will offset and
an adjustment will be recorded in additional paid in capital for the stock
compensation related amounts.
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.
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
per share 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. 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 of the Queensgate acquisition is as follows (in
thousands):
<TABLE>
<S> <C>
Value of securities issued ................................... $77,376
Cash ......................................................... 3,000
Assumption of Queensgate options ............................. 1,502
-------
81,878
Estimated transaction costs .................................. 1,125
-------
Total purchase cost .......................................... $83,003
</TABLE>
<PAGE> 23
<TABLE>
<CAPTION>
Annual Useful
Amount Amortization Lives
-------- ------------ -------
<S> <C> <C> <C>
Purchase Price Allocation:
Tangible net deficit $ (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 research and development 1,200 n/a n/a
Workforce 1,500 300 5 years
Goodwill 70,353 14,071 5 years
Deferred tax liabilities (8,680) n/a n/a
-------- -------
Total estimated purchase price: $ 83,003 $18,411
</TABLE>
The Company has performed an allocation of the total purchase price of
Queensgate to its individual assets. The purchase price allocation is
preliminary and, therefore, subject to change based on Company's final analysis.
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 unaudited 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 unaudited 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 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 products
and technology 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 over 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.
The Company has a deferred tax liability that will be generated as a result of a
temporary difference between the book and tax basis of purchased intangibles
other than in-process research and development and goodwill. The deferred tax
liability will allow immediate realization of an equal amount of deferred tax
assets that have resulted from stock compensation related operating loss
carryforwards. As a result, the deferred tax asset and liability will offset and
an adjustment will be recorded in additional paid in capital for the stock
compensation related amounts.
2. Pro forma adjustments:
Veritech
(A) To reflect the issuance of 3,000,000 shares of SDL, Inc. common stock and
estimated transaction costs of $8.8 million.
(B) To record twelve months of amortization for purchased intangible assets for
fiscal 1999 and the three months ended March 31, 2000. Of the total purchase
price, $25.1 million has been allocated to in-process research and development
and will be charged to expense in the period the transaction closes. Due to its
non-recurring nature, the in-process research and development attributed to the
Veritech transaction has been excluded.
<PAGE> 24
(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 3,000,000 shares
of SDL common stock.
Queensgate
(E) 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 March 31, 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 March 8, 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 347,962 shares
of SDL common stock.
(I) Diluted outstanding shares excludes common equivalent shares issuable upon
conversion of stock options because such shares would be anti-dilutive.
<PAGE> 25
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.
June 15, 2000 By: /s/Michael L. Foster
-------------------------------------
Michael L. Foster
Chief Financial Officer and Secretary
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
<PAGE> 26
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<S> <C>
23.1 Consent of Grant Thornton LLP, Independent Certified
Public Accountants
</TABLE>
