<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission File Number 0-25688
SDL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 77-0331449
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
80 Rose Orchard Way, San Jose, CA 95134-1365
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code (408) 943-9411
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
The number of shares outstanding of the issuer's common stock as of October 31,
2000 was 87,423,110.
<PAGE> 2
SDL, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations for
the three and nine months ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 2. Changes in Securities and Use of Proceeds 36
Item 3. Defaults upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 36
SIGNATURES 37
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SDL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999 (1)
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................................... $ 266,560 $ 153,016
Short-term marketable securities ................................................... 117,669 161,120
Accounts receivable, net ........................................................... 82,787 41,445
Inventories ........................................................................ 55,761 32,070
Prepaid expenses and other current assets .......................................... 7,693 3,659
----------- -----------
Total current assets ................................................................. 530,470 391,310
Property and equipment, net .......................................................... 104,051 59,772
Goodwill and other intangibles, net .................................................. 2,791,297 2,948
Other assets ......................................................................... 8,071 6,923
----------- -----------
Total assets ......................................................................... $ 3,433,889 $ 460,953
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................... $ 28,629 $ 18,277
Accrued payroll and related expenses ............................................... 10,066 10,717
Income taxes payable ............................................................... 6,402 1,093
Other accrued liabilities .......................................................... 30,284 5,961
----------- -----------
Total current liabilities ............................................................ 75,381 36,048
Long-term liabilities ................................................................ 5,012 4,757
Commitments and contingencies
Stockholders' equity:
Common stock ....................................................................... 87 72
Additional paid-in capital ......................................................... 3,533,990 425,993
Accumulated other comprehensive income (loss) ...................................... (787) 1,557
Accumulated deficit, $26.3 million relating to the repurchase of
common stock in 1992 and $5.8 million relating to a recapitalization in 1992 ..... (179,794) (7,474)
----------- -----------
Total stockholders' equity ........................................................... 3,353,496 420,148
----------- -----------
Total liabilities and stockholders' equity ........................................... $ 3,433,889 $ 460,953
=========== ===========
</TABLE>
See accompanying notes
(1) Derived from the Company's audited financial statements as of December 31,
1999.
3
<PAGE> 4
SDL, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data - unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September, 30 September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues $ 146,516 $ 47,507 $ 329,234 $ 128,344
Cost of revenues 70,058 26,656 162,888 74,662
--------- --------- --------- ---------
Gross profit 76,458 20,851 166,346 53,682
Operating expenses:
Research and development 12,214 5,237 26,686 13,310
Selling, general and administrative 18,127 6,527 38,929 18,650
Merger costs 3,168 -- 3,168 2,677
In-process research and development -- -- 27,400 1,495
Amortization of purchased intangibles 151,327 210 224,698 599
--------- --------- --------- ---------
Total operating expenses 184,836 11,974 320,881 36,731
--------- --------- --------- ---------
Operating income (loss) (108,378) 8,877 (154,535) 16,951
Interest income, net 5,949 589 15,463 1,172
--------- --------- --------- ---------
Income (loss) before income taxes (102,429) 9,466 (139,072) 18,123
Provision for income taxes 13,404 2,082 33,248 4,905
--------- --------- --------- ---------
Net income (loss) ($115,833) $ 7,384 ($172,320) $ 13,218
========= ========= ========= =========
Net income (loss) per share - basic ($ 1.34) $ 0.12 ($ 2.17) $ 0.21
========= ========= ========= =========
Net income (loss) per share - diluted ($ 1.34) $ 0.11 ($ 2.17) $ 0.20
========= ========= ========= =========
Number of weighted average shares - basic 86,608 64,186 79,292 62,086
Number of weighted average shares - diluted 86,608 68,292 79,292 66,170
</TABLE>
See accompanying notes.
4
<PAGE> 5
SDL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(172,320) $ 13,218
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 13,569 8,388
Amortization of intangibles 224,698 599
Stock based compensation 14,328 --
Tax benefit from employee stock options 30,494 --
In-process research and development 27,400 1,495
Changes in operating assets and liabilities:
Accounts receivable (23,359) (19,524)
Inventories (14,588) (7,580)
Accounts payable 4,971 2,020
Accrued payroll and related expenses (890) 4,061
Income taxes payable (146) 2,267
Other accrued liabilities 15,340 3,603
Long-term liabilities (2,108) 1,581
Other (5,377) (2,028)
--------- ---------
Total adjustments 284,332 (5,118)
--------- ---------
Net cash provided by operating activities 112,012 8,100
INVESTING ACTIVITIES
Acquisition of property and equipment, net (40,515) (21,356)
Acquisitions, net of cash acquired (22,265) (5,055)
Sale (purchase) of investments, net 47,045 (65,797)
--------- ---------
Net cash used in investing activities (15,735) (92,208)
FINANCING ACTIVITIES
Issuance of stock pursuant to employee stock plans 18,174 9,751
Proceeds from issuance of common stock -- 266,301
Payments on capital leases (907) (850)
Payments on notes payable -- (898)
--------- ---------
Net cash provided by financing activities 17,267 274,304
--------- ---------
Net increase (decrease) in cash and cash equivalents 113,544 190,196
Net cash activity of IOC for the three months ended December
31, 1998 -- (1,163)
Cash and cash equivalents at beginning of period 153,016 17,023
--------- ---------
Cash and cash equivalents at end of period $ 266,560 $ 206,056
========= =========
</TABLE>
See accompanying notes.
5
<PAGE> 6
SDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2000
1. Basis of Presentation and Business Activities
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended
September 30, 2000 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2000. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1999.
The condensed consolidated financial statements include the accounts of
SDL, Inc. and its wholly owned subsidiaries, SDL Optics, SDL Integrated
Optics, SDL Queensgate, SDL Veritech and SDL PIRI. Intercompany accounts
and transactions have been eliminated in consolidation.
The functional currency of the Company's Canadian subsidiary (SDL
Optics) is the U.S. dollar. The financial statements of the Canadian
subsidiary are remeasured into U.S. dollars for the purposes of
consolidation using the historical exchange rates in effect at the date
of the transactions. Remeasurement gains and losses are recorded in the
income statement and have not been material to date. The functional
currency of the Company's United Kingdom subsidiaries is the British
Pound Sterling. All assets and liabilities of the Company's United
Kingdom subsidiaries (SDL Integrated Optics and SDL Queensgate) are
translated at the exchange rate on the balance sheet date. Revenues and
costs and expenses are translated at weighted average rates of exchange
prevailing during the period. Translation adjustments are recorded in
accumulated other comprehensive income as a separate component of
stockholders' equity. Foreign currency transaction gains and losses are
included in interest income and other, net and were immaterial for all
periods presented.
The Company operates and reports financial results on a fiscal year of
52 or 53 weeks ending on the Friday closest to December 31. The third
fiscal quarter of 2000 and 1999 ended on September 29, 2000 and October
1, 1999, respectively. For ease of discussion and presentation, all
accompanying financial statements have been shown as ending on the last
day of the calendar quarter.
On March 8, 2000, Queensgate Instruments Limited ("Queensgate") was
acquired by SDL in a transaction accounted for as a purchase. Queensgate
was a privately held company and is located in Bracknell, United
Kingdom. Queensgate designs, develops, manufactures and markets optical
network monitoring modules for long haul terrestrial fiber optic
transmission systems. The acquisition agreement provided for initial
consideration of $3 million of cash and 347,962 shares of the Company'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 ending December
31, 2000 and the twelve months ending 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 stock with a fair value of approximately $130.4
million which increased goodwill. See Note 6, "Acquisitions."
On April 3, 2000, the Company acquired Veritech Microwave, Inc.
("Veritech") for 3,000,000 shares of the Company's common stock with a
fair value of approximately $621 million. Veritech was a privately held
company located in South Plainfield, New Jersey. Veritech designs,
develops, manufactures and markets optoelectronic
6
<PAGE> 7
modules for long haul undersea and terrestrial fiber optic transmission
systems. The acquisition was accounted for under the purchase method of
accounting. See Note 6, "Acquisitions."
On June 2, 2000, the Company acquired Photonic Integration Research,
Inc. (PIRI) for 8,461,663 shares of the Company's common stock with a
fair value of approximately $2.1 billion and a $31.7 million cash
payment. PIRI, a privately held company located in Columbus, Ohio, is a
manufacturer of arrayed waveguide gratings (AWGs) that enable the
routing of individual wavelength channels in fiber optic systems. These
products are used in optical multiplexing (mux) and demultiplexing
(demux) applications for dense wavelength division multiplexed (DWDM)
fiber optic systems. The acquisition was accounted for under the
purchase method of accounting. See Note 6, "Acquisitions."
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. See the section entitled "Risk Factors" in Item 2,
specifically the risk factor captioned, "If the merger with JDS Uniphase
is not completed or is delayed, our stock price and future business and
operations could be materially harmed."
As a result of the substantial increase in the market price of the
Company's Common Stock beginning in the fourth quarter of 1998, and the
resulting increased levels of employee participation in the Company's
Employee Stock Purchase Plan ("ESPP"), the number of shares issuable
pursuant to the Company's ESPP in fiscal 2000 exceeded the number of
shares that were available under the Plan at the beginning of the
October 1998 employee purchase period. As a result, the Company incurred
$4.7 million and $8.9 million non-cash charges to operating results in
the second and third quarters of 2000. The non-cash charges to operating
results are based on the difference between the purchase price and the
fair value of the common stock for the last share authorization in May
1999.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). The SAB summarizes certain of the
Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. SAB 101 provides that if
registrants have not applied the accounting therein they should
implement the SAB and report a change in accounting principle. SAB 101,
as subsequently amended, will be effective for the Company no later than
the fourth quarter of 2000. The Company does not believe that adoption
of SAB 101 will have a material impact on its financial condition or
results of operations.
In June 1998, the Financial Accounting Standards Board, or the FASB,
issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 133 establishes methods of accounting for derivative
financial instruments and hedging activities related to those
instruments, as well as other hedging activities. The Company will be
subject to SFAS 133 commencing in 2001. The Company believes that the
implementation of SFAS 133 will not have a significant effect on its
financial position or results of operations.
In March 2000, the FASB issued Interpretation, or FIN, No. 44,
Accounting for Certain Transactions Involving Stock Compensation an
Interpretation of APB Opinion No. 25. FIN 44 clarifies the definition of
an employee for purposes of applying APB 25, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the
accounting consequences of various modifications to the terms of a
previously fixed stock option or award and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44
was effective July 1, 2000. The Company believes that the implementation
of FIN 44 will not have a significant effect on its financial position
or results of operations.
7
<PAGE> 8
2. Net income (loss) per share
The following table sets forth the computation of basic and diluted net
(loss) income per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) ($115,833) $ 7,384 ($172,320) $13,218
========= ======= ========= =======
Denominator:
Denominator for basic net income per
share - weighted average shares 86,608 64,186 79,292 62,086
Incremental common shares attributable to
shares issuable under employee stock plans (1) -- 4,106 -- 4,084
--------- ------- --------- -------
Denominator for diluted net income per share
adjusted weighted average shares and assumed conversions 86,608 68,292 79,292 66,170
========= ======= ========= =======
Net income (loss) per share - basic $ (1.34) $ 0.12 $ (2.17) $ 0.21
========= ======= ========= =======
Net income (loss) per share - diluted $ (1.34) $ 0.11 $ (2.17) $ 0.20
========= ======= ========= =======
</TABLE>
(1) Potential common shares relating to shares issuable under employee stock
plans of 4,217 shares and 4,311 shares, respectively, are not included in the
three months and nine months ended September 30, 2000 calculation due to their
anti-dilutive effect on the loss per share.
3. Inventories
The components of inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
--------------------------
2000 1999
--------- ---------
<S> <C> <C>
Raw materials $32,217 $15,115
Work in process 17,918 14,615
Finished Goods 5,626 2,340
------- -------
$55,761 $32,070
======= =======
</TABLE>
4. Comprehensive income (loss)
Accumulated other comprehensive income (loss) presented in the
accompanying condensed consolidated balance sheet consists of the
accumulated net unrealized gains and losses on available-for-sale
marketable securities and foreign currency translation adjustments, net
of the related tax effects. The tax effects for other comprehensive
income (loss) were immaterial for all periods presented.
Total comprehensive loss amounted to approximately $116.5 million for
the third quarter of 2000 compared to a comprehensive income of $7.7
million for the third quarter of 1999. For first nine months of 2000,
comprehensive loss amounted to $174.7 million compared to comprehensive
income of $13.0 million for the corresponding 1999 period.
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5. Segment reporting
SDL has two reportable segments: communications and industrial laser.
The communications business unit develops, designs, manufactures and
distributes lasers, modulators, drivers, receiver circuits, network
monitors, amplifiers, multiplexers, demultiplexers, modules and
subsystems for applications in the telecom, datacom, cable television,
and dense wavelength division multiplexing markets. The recent
acquisitions, PIRI, Veritech, Queensgate, are included in the
communication segment. The industrial laser business unit develops,
designs, manufacturers and distributes lasers and subsystems for
applications in the surface heat treating, product marking, digital
imaging, digital proofing, and thermal printing solutions markets.
The operating segments reported below are the segments of the Company
for which separate financial information is available and for which
operating income/loss amounts are evaluated regularly by executive
management in deciding how to allocate resources and in assessing
performance. The accounting policies of the operating segments are the
same as those described in the summary of accounting policies.
The Company's reportable segments are business units that offer
different products. The reportable segments are each managed separately
because they manufacture and distribute distinct products with different
applications. The Company does not allocate assets to its individual
operating segments.
Information about reported segment income or loss is as follows (in
thousands):
<TABLE>
<CAPTION>
Communication Industrial
Quarter ended September 30, 2000: Products Laser Total
------------- ---------- --------
<S> <C> <C> <C>
Revenue from external customers $131,604 $ 14,912 $146,516
Segment Operating Income $ 54,139 $ 3,599 $ 57,738
-------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Communication Industrial
Quarter ended September 30, 1999: Products Laser Total
------------- ---------- --------
<S> <C> <C> <C>
Revenue from external customers $ 32,109 $ 15,398 $ 47,507
Segment Operating Income (loss) $ 9,989 $ (902) $ 9,087
-------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Communication Industrial
Nine Months ended September 30, 2000: Products Laser Total
------------- ---------- --------
<S> <C> <C> <C>
Revenue from external customers $288,288 $ 40,946 $329,234
Segment Operating Income $115,467 $ 1,648 $117,115
-------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Communication Industrial
Nine Months ended September 30, 1999: Products Laser Total
------------- ---------- --------
<S> <C> <C> <C>
Revenue from external customers $ 90,751 $ 37,593 $128,344
Segment Operating Income (loss) $ 24,564 $ (2,142) $ 22,422
-------- -------- --------
</TABLE>
9
<PAGE> 10
Reconciliations of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements are as
follows (in thousands):
<TABLE>
<CAPTION>
For the quarter ended
September 30,
Operating Income: 2000 1999
--------- ---------
<S> <C> <C>
Total operating income from operating segments $ 57,738 $ 9,087
Stock compensation charges and payroll taxes --
on stock options (11,621)
Amortization of intangibles (151,327) (210)
Merger costs (3,168) --
========= =========
Total consolidated operating income $(108,378) $ 8,877
========= =========
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended
September 30,
Operating Income: 2000 1999
--------- ---------
<S> <C> <C>
Total operating income from operating segments $ 117,115 $ 22,422
Stock compensation charges and payroll taxes on --
stock options (16,384)
In process research and development and related (27,400) (2,195)
Amortization of intangibles (224,698) (599)
Merger costs (3,168) (2,677)
========= =========
Total consolidated operating income $(154,535) $ 16,951
========= =========
</TABLE>
Major Customers
During the first nine months of 2000, five communication product
customers and their affiliates accounted for 16 percent, 12 percent, 11
percent, 11 percent and 10 percent of revenues, respectively. During
fiscal 1999, three communication product customers and their affiliates
accounted for 15 percent, 11 percent and 11 percent of revenues,
respectively.
6. Acquisitions
Queensgate
Overview
On March 8, 2000 Queensgate merged with SDL in a transaction accounted
for as a purchase. Queensgate was a privately held company and is
located in Bracknell, United Kingdom. Queensgate designs, develops,
manufactures and markets optical network monitoring modules for long
haul terrestrial fiber optic transmission systems. The merger agreement
provided for initial consideration of $3 million of cash and 347,962
shares of the Company's common stock with a fair value of $77.4 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 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.
Valuation Methodology
In accordance with the provisions of Accounting Principle Board Opinion
No. 16 (APB No. 16), Business Combinations, all identifiable assets,
including identifiable intangible assets, were assigned a portion of the
cost of the acquired business (purchase price) on the basis of their
respective fair values. This included the portion of the purchase
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<PAGE> 11
price properly attributable to incomplete research and development
projects that should be expensed according to the requirements of
Interpretation 4 of Statement of Financial Accounting Standards No. 2.
Intangible assets were identified through: (i) analysis of the
acquisition agreement, (ii) consideration of the Company's intentions
for future use of the acquired assets; and (iii) analysis of data
available concerning the business products, technologies, markets,
historical financial performance, estimates of future performance and
the assumptions underlying those estimates.
The economic and competitive environment in which the Company and
Queensgate operate was also considered in the valuation.
Specifically, in-process research and development, core technology and
existing technology was identified and valued through extensive
interviews and discussion with the Company and Queensgate's management.
The valuation of in-process research and development included an
analysis of data provided by Queensgate concerning the products in
development, their respective stage of development, the time and
resources needed to complete them, their expected income generating
ability, target markets and associated risks. The Income Approach, which
included an analysis of the markets, cash flows, and risks associated
with achieving such cash flows, was the primary technique utilized in
valuing the in-process research and development, core technology and
existing technology. Tradename was valued using the Brand Savings
approach and workforce was valued using the estimated cost of recruiting
and training replacement workers.
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>
<TABLE>
<CAPTION>
Annual Useful
Amount Amortization Lives
---------------------------------------
Purchase Price Allocation:
<S> <C> <C> <C>
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 purchase price: $ 213,394 $ 44,489
=========================
</TABLE>
Assumptions
The Income Approach used by the Company to value in-process research and
development, core technology and existing technology included
assumptions relating to revenue estimates, operating expenses, income
taxes and discount rates.
Revenue
Revenue estimates were developed based on: (i) aggregate revenue growth
rates for the business as a whole, (ii) individual product revenues,
(iii) growth rates for the telecommunications industry, (iv) the
aggregate size of
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<PAGE> 12
the telecommunication industry, (v) anticipated product development and
introduction schedules, (vi) product sales cycles, and (vii) the
estimated life of a product's underlying technology.
Operating Expenses
Operating expenses used in the valuation analysis of Queensgate
included: cost of goods sold, selling, general and administrative
expenses, and research and development expenses.
In developing future expense estimates, an evaluation of both the
Company and Queensgate's overall business model, specific product
results, including both historical and expected direct expense levels,
as appropriate, and an assessment of general industry metrics was
conducted.
Cost of goods sold
Costs of goods sold, expressed as a percentage of revenue, for the core,
existing and in-process technologies ranged from 61 percent for the
twelve months ending March 31, 2001 to 53 percent in fiscal 2002 and
beyond.
Selling, general and administrative expenses
Selling, general and administrative expenses, expressed as a percentage
of revenue, for the core, existing, and in-process technologies ranged
from 17 percent for the twelve months ending March 31, 2001 to 11
percent in fiscal 2002 and beyond.
Research and development expense
Research and development expense consists of the costs associated with
activities undertaken to correct errors or keep products updated with
current information, also referred to as "maintenance" research and
development. Maintenance research and development includes all
activities undertaken after a product is available for general release
to customers to keep the product updated with current customer
specifications. These activities include routine changes and additions.
The maintenance research and development expense was estimated to be 1
percent of revenue for the core, existing, and in-process technologies
throughout the estimation period.
Effective tax rate
The effective tax rate was determined based on federal and state
statutory tax rates and was determined to be 41 percent.
Discount rate
The discount rate for Queensgate's core, existing, and in-process
technologies were 18 percent, 14 percent and 20 percent, respectively.
In the selection of the appropriate discount rates, consideration was
given to (i) the weighted average cost of capital and (ii) the weighted
average return on assets. The discount rate utilized for the in-process
technology was determined to be higher than the Company's weighted
average cost of capital because the technology had not yet reached
technological feasibility as of the date of valuation. In utilizing a
discount rate greater than the Company's weighted average cost of
capital, management has reflected the risk premium associated with
achieving the forecasted cash flows associated with these projects.
The in-process research and development was comprised of one project
related to the next generation channel monitoring products and amounted
to $1.2 million of the total purchase price and was charged to expense
during the quarter ended March 31, 2000. The estimated cost of
completion of the in-process research and development project is $0.2
million and is expected to be completed in December 2000. 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.
12
<PAGE> 13
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. 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 Executives, Direct Production, Indirect Production,
Overhead, Engineers, and Central. 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 an
investment in an acquired business 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
Overview
On April 3, 2000, Veritech was acquired by the Company in a transaction
accounted for as a purchase. The Company issued 3,000,000 shares of the
Company's common stock with a fair value of approximately $621 million
in the purchase. Veritech was a privately held company and is located in
South Plainfield, New Jersey. Veritech designs, develops, manufactures
and markets optoelectronic modules for long haul undersea and
terrestrial fiber optic transmission systems.
Valuation Methodology
In accordance with the provisions of Accounting Principle Board Opinion
No. 16 (APB No. 16), Business Combinations, all identifiable assets,
including identifiable intangible assets, were assigned a portion of the
cost of the acquired business (purchase price) on the basis of their
respective fair values. This included the portion of the purchase price
properly attributable to incomplete research and development projects
that should be expensed according to the requirements of Interpretation
4 of Statement of Financial Accounting Standards No. 2.
Intangible assets were identified through: (i) analysis of the
acquisition agreement, (ii) consideration of the Company's intentions
for future use of the acquired assets; and (iii) analysis of data
available concerning the business products, technologies, markets,
historical financial performance, estimates of future performance and
the assumptions underlying those estimates.
The economic and competitive environment in which the Company and
Veritech operate was also considered in the valuation.
Specifically, in-process research and development, core technology and
existing technology was identified and valued through extensive
interviews and discussion with the Company and Veritech management. The
valuation of in-process research and development included an analysis of
data provided by Veritech concerning the products in development, their
respective stage of development, the time and resources needed to
complete them, their expected income generating ability, target markets
and associated risks. The Income Approach, which included an analysis of
the markets, cash flows, and risks associated with achieving such cash
flows, was the primary technique utilized in valuing the in-process
research and development and core/existing technology. The design tools
and device library was valued using the replacement cost approach. The
workforce was valued using the estimated cost of recruiting and training
replacement workers.
13
<PAGE> 14
The total purchase cost and purchase price allocation of the Veritech
merger is as follows (in thousands):
<TABLE>
<S> <C>
Value of securities issued ........ $620,529
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 $ 23,802 n/a n/a
Core \ existing technology 67,800 13,560 5years
In process technology 25,100 n/a n/a
Workforce 2,500 500 5years
Design tools and device library 521 104 5years
Goodwill 537,934 107,586 5years
Deferred tax liabilities (28,328) n/a n/a
------------------------
Total purchase price: $ 629,329 $121,750
========================
</TABLE>
Assumptions
The Income Approach used by the Company to value in-process research and
development and core\existing technology included assumptions relating
to revenue estimates, operating expenses, income taxes and discount
rates.
Revenue
Revenue estimates were developed based on: (i) aggregate revenue growth
rates for the business as a whole, (ii) individual product revenues,
(iii) growth rates for the telecommunications industry, (iv) the
aggregate size of the telecommunication industry, (v) anticipated
product development and introduction schedules, (vi) product sales
cycles, and (vii) the estimated life of a product's underlying
technology.
Operating Expenses
Operating expenses used in the valuation analysis of Veritech included:
cost of goods sold, selling, general and administrative expenses, and
research and development expenses.
In developing future expense estimates, an evaluation of both the
Company and Veritech's overall business model, specific product results,
including both historical and expected direct expense levels, as
appropriate, and an assessment of general industry metrics was
conducted.
Cost of goods sold
Costs of goods sold, expressed as a percentage of revenue, for the
core/existing and in-process technologies was 28 percent throughout the
estimation period.
Selling, general and administrative expenses
Selling, general and administrative expenses, expressed as a percentage
of revenue, for the core/existing, and in-process technologies was 6.6
percent throughout the estimation period.
Research and development expense
Research and development expense consists of the costs associated with
activities undertaken to correct errors or keep products updated with
current information, also referred to as "maintenance" research and
development. Maintenance research and development includes all
activities undertaken after a product is available for general release
to customers to keep the product updated with current customer
specifications. These activities include routine changes and
14
<PAGE> 15
additions. The maintenance research and development expense was
estimated to be 1 percent of revenue for the core/ existing and
in-process technologies throughout the estimation period.
Effective tax rate
The effective tax rate was determined based on federal and state
statutory tax rates and was determined to be 41 percent.
Discount rate
The discount rate for Veritech's core/existing and in-process
technologies were 14 percent and 20 percent, respectively. In the
selection of the appropriate discount rates, consideration was given to
(i) the weighted average cost of capital and (ii) the weighted average
return on assets. The discount rate utilized for the in-process
technology was determined to be higher than the Company's weighted
average cost of capital because the technology had not yet reached
technological feasibility as of the date of valuation. In utilizing a
discount rate greater than the Company's weighted average cost of
capital, management has reflected the risk premium associated with
achieving the forecasted cash flows associated with these projects.
The in-process research and development was comprised of one project
related to the next generation data receiver products and amounted to
$25.1 million of the total purchase price and was charged to expense
during the quarter ended June 30, 2000. The estimated cost of completion
of the in-process research and development project is $37,000 and is
expected to be completed in September 2000.
The acquired core/existing 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 competence 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 104 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.
PIRI
Overview
On June 2 2000, the Company acquired Photonic Integration Research, Inc.
(PIRI) for 8,461,663 shares of the Company's common stock with a fair
value of approximately $2.1 billion and a $31.7 million cash payment.
PIRI, a privately held company located in Columbus, Ohio, is a
manufacturer of arrayed waveguide gratings (AWGs) that enable the
routing of individual wavelength channels in fiber optic systems. These
products are used in optical multiplexing (mux) and demultiplexing
(demux) applications for dense wavelength division multiplexed (DWDM)
fiber optic systems. The acquisition was accounted for under the
purchase method of accounting.
15
<PAGE> 16
Valuation Methodology
In accordance with the provisions of Accounting Principle Board Opinion
No. 16 (APB No. 16), Business Combinations, all identifiable assets,
including identifiable intangible assets, were assigned a portion of the
cost of the acquired business (purchase price) on the basis of their
respective fair values. This included the portion of the purchase price
properly attributable to incomplete research and development projects
that should be expensed according to the requirements of Interpretation
4 of Statement of Financial Accounting Standards No. 2.
Intangible assets were identified through: (i) analysis of the
acquisition agreement, (ii) consideration of the Company's intentions
for future use of the acquired assets; and (iii) analysis of data
available concerning the business products, technologies, markets,
historical financial performance, estimates of future performance and
the assumptions underlying those estimates.
The economic and competitive environment in which the Company and PIRI
operate was also considered in the valuation.
Specifically, in-process research and development and existing
technology was identified and valued through extensive interviews and
discussion with the Company and PIRI management. The valuation of
in-process research and development included an analysis of data
provided by PIRI concerning the products in development, their
respective stage of development, the time and resources needed to
complete them, their expected income generating ability, target markets
and associated risks. The Income Approach, which included an analysis of
the markets, cash flows, and risks associated with achieving such cash
flows, was the primary technique utilized in valuing the in-process
research and development and existing technology. Tradename was valued
using the Brand Savings approach and workforce was valued using the
estimated cost of recruiting and training replacement workers.
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
-----------------------------------------
Purchase Price Allocation:
<S> <C> <C> <C>
Tangible net assets $ 39,816 n/a n/a
Existing technology 226,400 45,280 5years
In process technology 1,100 n/a n/a
Workforce 3,900 780 5years
Tradename 6,640 1,328 5years
Goodwill 1,944,525 388,905 5years
Deferred tax liabilities (94,776) n/a n/a
-----------------------------
Total estimated purchase price: $ 2,127,605 $ 436,293
=============================
</TABLE>
The purchase price allocation is preliminary and, therefore, subject to
change based on the Company's final analysis and receipt of a final
report by a valuation specialist used by the Company to assist in the
purchase price allocation.
Assumptions
The Income Approach used by the Company to value in-process research and
development and existing technology included assumptions relating to
revenue estimates, operating expenses, income taxes and discount rates.
16
<PAGE> 17
Revenue
Revenue estimates were developed based on: (i) aggregate revenue growth
rates for the business as a whole, (ii) individual product revenues,
(iii) growth rates for the telecommunications industry, (iv) the
aggregate size of the telecommunication industry, (v) anticipated
product development and introduction schedules, (vi) product sales
cycles, and (vii) the estimated life of a product's underlying
technology.
Operating Expenses
Operating expenses used in the valuation analysis of PIRI: included:
cost of goods sold, selling, general and administrative expenses, and
research and development expenses.
In developing future expense estimates, an evaluation of both the
Company and PIRI's overall business model, specific product results,
including both historical and expected direct expense levels, as
appropriate, and an assessment of general industry metrics was
conducted.
Cost of goods sold
Costs of goods sold, expressed as a percentage of revenue, for the
existing and in-process technologies was 40 percent throughout the
estimation period.
Selling, general and administrative expenses
Selling, general and administrative expenses, expressed as a percentage
of revenue, for the existing and in-process technologies 12 percent
throughout the estimation period.
Research and development expense
Research and development expense consists of the costs associated with
activities undertaken to correct errors or keep products updated with
current information, also referred to as "maintenance" research and
development. Maintenance research and development includes all
activities undertaken after a product is available for general release
to customers to keep the product updated with current customer
specifications. These activities include routine changes and additions.
The maintenance research and development expense was estimated to be 1
percent of revenue for the existing and in-process technologies
throughout the estimation period.
Effective tax rate
The effective tax rate was determined based on federal and state
statutory tax rates and was determined to be 41 percent.
Discount rate
The discount rate for PIRI existing and in-process technologies were 12
percent and 18 percent, respectively. In the selection of the
appropriate discount rates, consideration was given to (i) the weighted
average cost of capital and (ii) the weighted average return on assets.
The discount rate utilized for the in-process technology was determined
to be higher than the Company's weighted average cost of capital because
the technology had not yet reached technological feasibility as of the
date of valuation. In utilizing a discount rate greater than the
Company's weighted average cost of capital, management has reflected the
risk premium associated with achieving the forecasted cash flows
associated with these projects.
The in-process research and development was comprised of two projects
related to future AWG products and amounted to $1.1 million of the total
purchase price and was charged to expense during the quarter ended June
30, 2000. The estimated cost of completion of the in-process research
and development projects is $69,000 and they are expected to be
completed by December 2000.
17
<PAGE> 18
The acquired existing technology is comprised of products in PIRI's
portfolio that are technologically feasible. These products 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 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.
The following unaudited proforma information presents the results of
operations of the Company as if the acquisitions had taken place on
January 1, 1999 and excludes the write-off of purchased in process
research and development of $27.4 million:
<TABLE>
<CAPTION>
(In thousands, For the nine months
except per share amounts) ended September 30,
----------------------
2000 1999
----------------------
<S> <C> <C>
Revenues 376,172 196,424
Net loss (348,732) (403,254)
Loss per share - basic ($4.08) ($5.42)
Loss per share - diluted ($4.08) ($5.42)
</TABLE>
These pro-forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition
occurred on the date indicated, or which may result in the future.
Polaroid Corporation's fiber laser business
In February 1999, the Company acquired the fiber laser business of
Polaroid Corporation for $5.3 million in cash, which includes related
transaction costs of $0.1 million. The business acquired included all
the physical assets, intellectual property, including the assignment of
38 patents and the licensing of 22 patents in the fiber laser and fiber
amplifier area, and the ongoing operation of the fiber manufacturing
facilities and fiber laser subsystem.
The acquisition was accounted for under the purchase method of
accounting. The Company recorded $1.5 million as in-process research and
development for development projects that had not yet reached
technological feasibility. Intangible assets are being amortized
straight-line over a seven year life. In-process research and
development was identified and valued through analysis of data provided
by Polaroid concerning developmental products, their stage of
development, the time and resources needed to complete them, their
expected income generating ability, target markets and associated risks.
The Income Approach, which includes an analysis of the markets, cash
flows, and risks associated with achieving such cash flows, was the
primary technique utilized in valuing purchased research and development
project. The Company considered, among other factors, the importance of
each project to the overall development plan, and the projected
incremental cash flows from the projects when completed and any
associated risks. The projected incremental cash flows were discounted
back to their present value using a discount rate determined after
consideration of the Company's weighted average cost of capital and the
weighted average return on assets. Associated risks include the inherent
difficulties and uncertainties in completing each project and thereby
achieving technological
18
<PAGE> 19
feasibility, anticipated levels of market acceptance and penetration,
market growth rates and risks related to the impact of potential changes
in future target markets.
In addition, the Company recorded $0.7 million to accrue for certain
pre-existing obligations to integrate the fiber laser business. The
results of the fiber laser business are not material to the Company's
historical consolidated results of operations.
The purchase price allocation for the fiber laser business acquisition
was recorded as follows (in thousands):
<TABLE>
<S> <C>
Inventory .............................. $ 979
Property and equipment ................. 229
Intangibles ............................ 2,596
In-process research and development .... 1,495
------
Total assets acquired .................. $5,299
======
Liabilities assumed .................... $ 94
Cash paid, including transaction costs . 5,205
------
Total purchase price ................... $5,299
======
</TABLE>
7. CONTINGENCIES
In 1985, Rockwell International Corporation (Rockwell) asserted, and in 1995
filed suit in the Northern California Federal District Court against the Company
alleging, that a Company fabrication process infringed certain patent rights set
forth in a patent owned by Rockwell. Rockwell sought to permanently enjoin the
Company from infringing Rockwell's alleged patent rights and sought unspecified
actual and treble damages for willful infringement plus costs. The Company
answered Rockwell's complaint asserting, among other defenses, that Rockwell's
patent is invalid. Rockwell's suit was stayed in 1995 pending resolution of
another suit, involving the same patent, brought by Rockwell against the Federal
government, and in which SDL had intervened. The suit between the Federal
government and Rockwell was resolved in January 1999, by way of a settlement
payment of $16.9 million from the Federal government to Rockwell. The Company
did not participate in the settlement. As a result of that settlement, the suit
was dismissed and the stay of Rockwell's suit against the Company was lifted and
the California suit was reactivated. Thereafter, Rockwell filed motions for
partial summary judgment alleging that the Company has infringed certain claims
of the Rockwell patent and that certain invalidity evidence presented by the
Company is not applicable, which motions the Company vigorously opposed in
court. A decision on the motions was rendered in the beginning of February 2000.
The District Court ruled that the Company infringed the specified claims of
Rockwell's patent. The District Court also ruled that the Company could not make
the invalidity argument specified by Rockwell's motion. Additional motions were
considered by the Court in June, 2000. The Court granted another motion brought
by Rockwell, further limiting the grounds on which the Company can argue that
Rockwell's patent is invalid. The Court also denied a motion brought by the
Company for a ruling that Rockwell's damages were limited by the doctrine of
laches. The Court held that there were factual issues raised by the issue of
laches that would require trial. The District Court's ruling prevents the
Company from defending against Rockwell's lawsuit on the ground that the Company
does not infringe Rockwell's patent. The District Court's ruling will also
prevent the Company from making some (but not all) of its invalidity arguments.
A trial date has been set in April 2001. Discovery on several matters is
currently ongoing. Despite the District Court's decisions on Rockwell's motions,
the Company believes that Rockwell is not entitled to any damages because the
patent is invalid and unenforceable, and because Rockwell is guilty of laches
and equitable estoppel. Rockwell's patent expired in January 2000, so that it is
no longer possible for Rockwell to obtain an injunction stopping the Company
from using the fabrication process allegedly covered by Rockwell's patent. While
the Company believes that it has meritorious defenses to Rockwell's lawsuit,
there can be no assurance that Rockwell will not ultimately prevail in this
dispute. The resolution of this litigation is fact intensive so that the outcome
cannot be determined and remains uncertain. If Rockwell prevailed in the
litigation, Rockwell could be awarded substantial monetary damages. The award of
monetary damages against the Company, including past damages, could have a
material adverse effect on the Company's results of its operations. Litigation
and trial of Rockwell's claim against the Company is also expected to involve
significant expense to the Company and could divert the attention of the
Company's technical and management personnel. However, because the patent
expired in January 2000, the Company will not need a license regardless of the
outcome of the litigation.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SDL, Inc. is a leader in providing products for optical communications and
related markets worldwide. We design, manufacture and market semiconductor
lasers, fiber optic related products and optoelectronic modules and systems. Our
products enable the transmission of data, voice, and Internet information over
fiber optic networks to meet the needs of telecommunication, cable television
and metro communications applications primarily using technologies relating to
dense wavelength division multiplexing, or DWDM. Our products allow customers to
meet the growing need for bandwidth by expanding their fiber optic communication
networks more quickly and efficiently than by using conventional electronic and
optical technologies.
The demand for DWDM products has accelerated significantly in recent years due
to the technology's unique ability to expand network bandwidth and allows for
faster transmission of data, voice and video signals. With the qualification of
our new wafer fabrication facility in the first half of 1998, and improved
yields and expanded assembly and test capacity in 1999 and the first nine months
of 2000, we were able to successfully increase capacity and achieve significant
revenue growth. Revenue from fiber optic communications products increased by
179 percent in 1999 compared to 1998 and continued in 2000 with fiber optic
communication product revenue increasing by 253 percent for the first nine
months of 2000 compared to the comparable 1999 period. Our optical products also
serve a wide variety of non-communications applications, including materials
processing and high resolution printing. In addition to internal growth, we have
recently sought to expand our technologies and product offerings through
selected strategic acquisitions, such as our acquisitions of Photonic
Integration Research, Inc., or PIRI, in June 2000; Veritech Microwave, Inc., or
Veritech, in April 2000; and Queensgate Instruments, Limited, or Queensgate, in
March 2000.
The Company operates and reports financial results on a fiscal year of 52 or 53
weeks ending on the Friday closest to December 31. The third fiscal quarter of
2000 and 1999 ended on September 29, 2000 and October 1, 1999, respectively. For
ease of discussion and presentation, all accompanying financial statements have
been shown as ending on the last day of the calendar quarter.
RESULTS OF OPERATIONS
Revenue. Total revenue for the quarter ended September 30, 2000 increased 208
percent to $146.5 million compared to $47.5 million in the corresponding 1999
quarter. For the first nine months of 2000, total revenue increased 156 percent
to $329.2 million from $128.3 million reported for the comparable period. The
increase in revenue for the third quarter and first nine months of 2000 was
driven by demand for the Company's dense wavelength division multiplexing (DWDM)
products. Revenue generated from SDL's DWDM products, including 980nm undersea
and terrestrial pump lasers and terrestrial pump modules, lithium niobate light
modulators and drivers, light amplifiers, fiber gratings, receiver circuits,
optical network monitoring products and arrayed waveguide gratings, increased
332 percent from the prior year quarter. Results of the third quarter include
three full months of results from the Queensgate, Veritech, and PIRI
acquisitions. Excluding these three acquired businesses, total revenue increased
by 22 percent sequentially and by 138 percent over the prior year quarter.
Revenues for the three and nine months ended September 30, 2000, are not
considered indicative of the results to be expected for any future period. In
addition, there can be no assurance that the market for our products will grow
in future periods at its historical percentage rate or that certain market
segments will not decline. Further, there can be no assurance that we will be
able to increase or maintain our market share in the future or to achieve
historical growth rates.
Gross Margin. Gross margin increased to 52 percent and 51 percent for the three
and nine months ended September 30, 2000 from 44 percent and 42 percent in
comparable 1999 periods. The increase in gross margin was primarily due to the
following: (i) a more favorable mix of higher margin DWDM revenue as compared to
revenue derived from lower margin industrial laser and satellite communication
revenue, (ii) reduction of costs due to increased yields and factory volume, and
(iii) strong gross margins from our newly acquired businesses, Veritech and
PIRI. These favorable factors were partially offset by higher employee benefit
costs and non-cash stock compensation charges.
The Company's gross margin can be affected by a number of factors, including
product mix, customer mix, applications mix, pricing pressures and product
yield. Generally, the cost of newer products has tended to be higher as a
percentage of
20
<PAGE> 21
revenue than that of more mature, higher volume products. Considering these
factors, gross margin fluctuations are difficult to predict and there can be no
assurance that the Company will achieve or maintain gross margin percentages at
historical levels in future periods.
Research and Development. Research and development expense was $12.2 million, or
8 percent of revenue for the quarter ended September 30, 2000 as compared to
$5.2 million, or 11 percent of revenue for the quarter ended September 30, 1999.
For the first nine months of 2000, research and development was $26.7 million,
or 8 percent of revenue as compared to $13.3 million, or 10 percent of revenue
for the corresponding 1999 period. The increase in research and development
spending is primarily due to the continued development and enhancement of the
Company's fiber optic communication products and non-cash stock compensation
charges of $2.2 million and $3.2 million for the three and nine months ended
September 30, 2000, respectively. The decline in research and development
expenses as a percent of revenues was due to revenue growing rapidly making it
difficult to scale research and development programs at the same ratio as our
revenue growth. The Company expects to commit substantial resources to product
development in future periods. As a result, the Company expects research and
development expenses to continue to increase in absolute dollars in future
periods, although research and development expenses may vary as a percentage of
revenue.
Selling, General and Administrative. Selling, general and administrative (SG&A)
expense was $18.1 million, or 12 percent of revenue for the quarter ended
September 30, 2000 as compared to $6.5 million, or 14 percent of revenue for the
quarter ended September 30, 1999. For the first nine months of 2000, SG&A
expense was $38.9 million, or 12 percent of revenue compared to $18.7 million,
or 15 percent of revenue for the nine months ended September 30, 1999. The
increase in SG&A spending was primarily due to the following: (i) higher
personnel-related costs to support the growth in revenues and operations; (ii)
higher internal and external sales commissions; (iii) increased professional
service expenses; (iv) significantly higher payroll taxes on stock options, (v)
and non-cash stock compensation charges. These factors were partially offset by
charges incurred related to the implementation of the Company's enterprise
resource planning software during the first half of 1999. There can be no
assurances that current SG&A levels as a percentage of total revenue are
indicative of future SG&A expenses as a percentage of total revenue.
Merger Costs. During the third quarter of 2000, the Company recorded merger
related costs of $3.2 million in connection with the proposed merger with JDS
Uniphase. In 1999, the Company recorded merger related costs of $2.7 million in
connection with the acquisition of IOC in a transaction accounted for as a
pooling of interests. The costs incurred related primarily to printing,
financial advisory, filing fees and professional fees for legal and accounting
services.
In-process research and development. During March 2000, the Company acquired
Queensgate Instruments, Limited which resulted in the write-off of purchased
in-process research and development (IPR&D) of $1.2 million. During April 2000,
the Company acquired Veritech Microwave which resulted in the write-off of IPR&D
of $25.1 million. During June 2000, the Company acquired Photonic Integration
Research, Inc. which resulted in the write-off of IPR&D of $1.1 million. The
Company's acquisition of the fiber laser business from Polaroid during the first
quarter 1999 resulted in the write-off of IPR&D of $1.5 million.
The fair value of the IPR&D for each of the acquisitions was determined using
the income approach, which discounts expected future cash flows from projects
under development to their net present value. Each project was analyzed to
determine the technological innovations included; the utilization of core
technology; the complexity, cost and time to complete the remaining development
efforts; any alternative future use or current technological feasibility; and
the stage of completion. Future cash flows were estimated based on forecasted
revenues and costs, taking into account the expected life cycles of the products
and the underlying technology, relevant market sizes and industry trends.
Discount rates were derived from a weighted average cost of capital analysis,
adjusted to reflect the relative risks inherent in each entity's development
process, including the probability of achieving technological success and market
acceptance. The IPR&D charge includes the fair value of IPR&D completed. The
fair value assigned to developed technology is included in identifiable
intangible assets, and no value is assigned to IPR&D to be completed or to
future development. The Company believes the amounts determined for IPR&D, as
well as developed technology, are representative of fair value and do not exceed
the amounts an independent party would pay for these projects. Failure to
deliver new products to the market on a timely basis, or to achieve expected
market acceptance or revenue and expense forecasts, could have a significant
impact on the financial results and operations of the acquired businesses.
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Amortization of Purchased Intangibles We have acquired three companies during
fiscal 2000 that generated approximately $3.0 billion in identified intangibles
and goodwill. Amortization of purchased intangibles during the three and nine
months ended September 30, 2000 was $151.3 million and $224.7 million,
respectively, compared to $0.2 million and $0.6 million for the corresponding
1999 periods. The increase in amortization of purchased intangibles is due to
the intangible assets generated from the acquisitions of PIRI, Veritech, and
Queensgate during the nine months ended September 30, 2000.
Interest Income, net. Net interest income for the three and nine months ended
September 30, 2000 was $5.9 million and $15.5 million, respectively, compared to
$0.6 million and $1.2 million for the corresponding 1999 periods. The increase
in interest income was primarily due to the interest earned on interest bearing
securities purchased with proceeds from the Company's September 1999 stock
offering and cash flow from operations during fiscal 2000.
Provision for Income Taxes. The Company recorded a provision for income taxes of
$13.4 million and $33.2 million for the three and nine months ending September
30, 2000, respectively. Excluding the impact of non-deductible in-process
research and development charges and goodwill amortization and merger expenses,
the effective tax rate for the first nine months of 2000 is 36.5 percent,
compared to 22 percent for the first nine months of fiscal year 1999. The
increase in the 2000 tax rate is primarily attributable to the Company's
utilization of the remainder of federal and state tax loss carryforwards in
1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company's combined balance of cash, cash
equivalents and marketable securities was $384.2 million. Operating activities
generated $112.0 million during the nine months ended September 30, 2000
primarily the result of the following: (i) strong earnings before non-cash
accounting charges for depreciation, IPR&D, stock based compensation, and
amortization of intangibles, (ii) tax benefit from employee stock options, and
(iii) increase in accrued liabilities. These cash inflows were partially offset
by increases in accounts receivable and inventory.
Cash used in investing activities was $15.7 million in the nine months ended
September 30, 2000. The Company incurred capital expenditures of $40.5 million
for facilities expansion and capital equipment purchases to expand its
manufacturing capacities for its fiber optic communication products. The Company
currently expects to spend approximately $30 million for capital equipment
purchases and leasehold improvements during the remainder of 2000. In addition,
the Company acquired Queensgate, Veritech, and PIRI during the first nine months
of 2000 resulting in net cash payments of $22.3 million.
The Company generated $18.2 million from financing activities during the first
nine months of 2000 from the issuance of stock under employee stock plans,
offset by capital lease payments.
The Company believes that current cash balances, cash generated from operations,
and cash available through the bank and equity markets will be sufficient to
fund capital equipment purchases, acquisitions of complementary businesses, and
working capital requirements for the foreseeable future. However, there can be
no assurances that events in the future will not require the Company to seek
additional capital sooner or, if so required, that adequate capital will be
available on terms acceptable to the Company.
BUSINESS ACQUISITIONS
Queensgate
The Income Approach used by the Company to value in-process research and
development, core technology and existing technology included assumptions
relating to revenue estimates, operating expenses, income taxes and discount
rates.
Revenue estimates were developed based on: (i) aggregate revenue growth rates
for the business as a whole, (ii) individual product revenues, (iii) growth
rates for the telecommunications industry, (iv) the aggregate size of the
telecommunication industry, (v) anticipated product development and introduction
schedules, (vi) product sales cycles, and (vii) the estimated life of a
product's underlying technology.
The estimated product development cycle for the new product was 12 months.
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Operating expenses used in the valuation analysis of Queensgate included: cost
of goods sold, selling, general and administrative expenses, and research and
development expenses.
In developing future expense estimates, an evaluation of both the Company and
Queensgate's overall business model, specific product results, including both
historical and expected direct expense levels, as appropriate, and an assessment
of general industry metrics was conducted.
The effective tax rate was determined based on federal and state statutory tax
rates and was determined to be 41 percent.
The discount rate for Queensgate's core, existing, and in-process technologies
were 18 percent, 14 percent and 20 percent, respectively. In the selection of
the appropriate discount rates, consideration was given to (i) the weighted
average cost of capital and (ii) the weighted average return on assets. The
discount rate utilized for the in-process technology was determined to be higher
than the Company's weighted average cost of capital because the technology had
not yet reached technological feasibility as of the date of valuation. In
utilizing a discount rate greater than the Company's weighted average cost of
capital, management has reflected the risk premium associated with achieving the
forecasted cash flows associated with these projects.
The in-process research and development was comprised of one project and
amounted to $1.2 million of the total purchase price and was charged to expense
during the quarter ended March 31, 2000. The estimated cost of completion of the
in-process research and development project is $0.2 million.
Veritech
The Income Approach used by the Company to value in-process research and
development and core\existing technology included assumptions relating to
revenue estimates, operating expenses, income taxes and discount rates.
Revenue estimates were developed based on: (i) aggregate revenue growth rates
for the business as a whole, (ii) individual product revenues, (iii) growth
rates for the telecommunications industry, (iv) the aggregate size of the
telecommunication industry, (v) anticipated product development and introduction
schedules, (vi) product sales cycles, and (vii) the estimated life of a
product's underlying technology.
The estimated product development cycle for the new product was 17 months.
Operating expenses used in the valuation analysis of Veritech included: cost of
goods sold, selling, general and administrative expenses, and research and
development expenses.
In developing future expense estimates, an evaluation of both the Company and
Veritech's overall business model, specific product results, including both
historical and expected direct expense levels, as appropriate, and an assessment
of general industry metrics was conducted.
The effective tax rate was determined based on federal and state statutory tax
rates and was determined to be 41 percent.
The discount rate for Veritech's core/existing, and in-process technologies were
14 percent and 20 percent, respectively. In the selection of the appropriate
discount rates, consideration was given to (i) the weighted average cost of
capital and (ii) the weighted average return on assets. The discount rate
utilized for the in-process technology was determined to be higher than the
Company's weighted average cost of capital because the technology had not yet
reached technological feasibility as of the date of valuation. In utilizing a
discount rate greater than the Company's weighted average cost of capital,
management has reflected the risk premium associated with achieving the
forecasted cash flows associated with these projects.
The in-process research and development was comprised of one project and
amounted to $25.1 million of the total purchase price and was charged to expense
during the quarter ended June 30, 2000. The estimated cost of completion of the
in-process research and development project is $37,000. The acquired
core/existing technology is comprised of products in
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Veritech's portfolio that are already technologically feasible. The Company
expects to amortize the acquired existing technology of approximately $67.8
million on a straight-line basis over an estimated remaining useful life of 5
years.
PIRI
The Income Approach used by the Company to value in-process research and
development and existing technology included assumptions relating to revenue
estimates, operating expenses, income taxes and discount rates.
Revenue estimates were developed based on: (i) aggregate revenue growth rates
for the business as a whole, (ii) individual product revenues, (iii) growth
rates for the telecommunications industry, (iv) the aggregate size of the
telecommunication industry, (v) anticipated product development and introduction
schedules, (vi) product sales cycles, and (vii) the estimated life of a
product's underlying technology.
Operating expenses used in the valuation analysis of PIRI: included: cost of
goods sold, selling, general and administrative expenses, and research and
development expenses.
In developing future expense estimates, an evaluation of both the Company and
PIRI's overall business model, specific product results, including both
historical and expected direct expense levels, as appropriate, and an assessment
of general industry metrics was conducted.
The effective tax rate was determined based on federal and state statutory tax
rates and was determined to be 41 percent.
The discount rate for PIRI existing and in-process technologies were 12 percent
and 18 percent, respectively. In the selection of the appropriate discount
rates, consideration was given to (i) the weighted average cost of capital and
(ii) the weighted average return on assets. The discount rate utilized for the
in-process technology was determined to be higher than the Company's weighted
average cost of capital because the technology had not yet reached technological
feasibility as of the date of valuation. In utilizing a discount rate greater
than the Company's weighted average cost of capital, management has reflected
the risk premium associated with achieving the forecasted cash flows associated
with these projects.
The in-process research and development was comprised of two projects and
amounted to $1.1 million of the total purchase price and was charged to expense
during the quarter ended June 30, 2000. The estimated cost of completion of the
in-process research and development project is $0.1 million.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to
become year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $1.6 million in connection with remediating its systems.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
RISK FACTORS
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, plans,
intentions, beliefs or strategies regarding the future. Forward-looking
statements include statements regarding research and development expenditures,
capital equipment purchases and leasehold improvement expenditures, sufficiency
of cash and the Company's liquidity and anticipated cash needs and availability
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations (MD&A)." All forward-looking statements included in
this document are based on information available to the Company on the date
hereof, and SDL assumes no obligation to update any such forward looking
statement. It is important to note that the Company's actual results could
differ materially from those in such forward-looking statements. Among the
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factors that could cause actual results to differ materially are the risks
discussed above in the MD&A and the factors detailed below. You should also
consult the risk factors listed in the Company's annual report on Form 10-K
filed for the year ended December 31, 1999 and in the Company's Quarterly
Reports on Forms 10-Q for the quarter ended March 31, and June 30, 2000.
WE HAVE EXPERIENCED AND COULD AGAIN EXPERIENCE MANUFACTURING PROBLEMS, WHICH
COULD INCREASE OUR COSTS, REDUCE OUR YIELDS AND DELAY OUR PRODUCT SHIPMENTS.
The manufacture of semiconductor lasers and related products and systems
that we sell is highly complex and precise, requiring production in a highly
controlled and clean environment. Changes in the manufacturing processes or the
inadvertent use of defective or contaminated materials by us or our suppliers
have in the past and could in the future significantly impair our ability to
achieve acceptable manufacturing yields and product reliability. If we do not
achieve acceptable yields or product reliability, our operating results and
customer relationships will be adversely affected. We rely almost exclusively on
our own production capability in:
- computer-aided chip and package design,
- wafer fabrication,
- wafer processing,
- device packaging,
- fiber production and grating fabrication,
- hybrid microelectronic packaging,
- module assembly,
- printed circuit board testing, and
- final assembly and testing of products.
Because we manufacture, package and test these components, products and
systems at our own facility, and because these components, products and systems
are not readily available from other sources, our business and results of
operations will be significantly impaired if our manufacturing is interrupted by
any of the following:
- shortages of parts or equipment,
- equipment or power failures,
- poor yields,
- fire or natural disaster,
- delays in bringing new facilities on line,
- labor or equipment shortages, or
- otherwise.
A significant portion of our production relies or occurs on equipment
for which we do not have a backup. To alleviate, at least in part, this
situation, we remodeled our front-end wafer fabrication facility and our
packaging and test facility. We cannot assure you that we will not experience
further start-up costs and yield problems in fully utilizing our increased wafer
capacity targeted by these remodeling efforts. In addition, we are deploying a
new manufacturing execution software system designed to further automate and
streamline our manufacturing processes, and there may be unforeseen deficiencies
in this system which could adversely affect our manufacturing processes. In the
event of any disruption in production by one of these machines or systems, our
business and results of operations could be materially adversely affected.
Furthermore, we have a limited number of employees dedicated to the operation
and maintenance of our equipment, loss of whom could affect our ability to
effectively operate and service our equipment. We experienced lower than
expected production yields on some of our products, including certain key
product lines over the past three years. This reduction in yields:
- adversely affected gross margins,
- delayed component, product and system shipments, and
- to a certain extent, delayed new orders booked.
Although more recently, our yields have improved, we cannot assure you
that yields will continue to improve or not decline in the future, nor that in
the future our manufacturing yields will be acceptable to ship products on time.
To the extent that we experience lower than expected manufacturing yields or
experience any shipment delays, gross margins will
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likely be significantly reduced and we could lose customers and experience
reduced or delayed customer orders and cancellation of existing backlog. We
presently are ramping production of some of our product lines by:
- changing our shift schedules and equipment coverage,
- hiring and training new personnel,
- acquiring new equipment, and
- expanding our facilities and capabilities.
Difficulties in starting production to meet expected demand and
schedules have occurred in the past and may occur in the future including the
following:
- quality problems could arise, yields could fall, and gross
margins could be reduced during such a ramp,
- overall product line revenue may decline as resources are
diverted from mature products in full production to new
generation products under initial volume production, or
- cost reductions in manufacturing are required to avoid a drop in
gross margins for certain products sold to customers receiving
volume pricing.
We have announced a program to increase our manufacturing capacity by a
factor of five over the next twelve to eighteen months. This is a very ambitious
program and there is substantial risk to achieving the objective. If
manufacturing capacity is not expanded to meet customer delivery requirements or
if customer demand fails to grow at anticipated rates, our business and results
of operation would be materially adversely affected.
Cost reductions may not occur rapidly enough to avoid a decrease in
gross margins on products sold under volume pricing terms. In that event, our
business and results of operations would be materially adversely affected.
WE DEPEND ON LIMITED- OR SINGLE-SOURCE SUPPLIERS FOR NECESSARY MATERIALS, WITH
WHOM WE DO NOT HAVE LONG-TERM GUARANTEED SUPPLY AGREEMENTS. ANY INABILITY OR
UNWILLINGNESS OF OUR SUPPLIERS TO MEET OUR MANUFACTURING REQUIREMENTS WOULD
DELAY OUR PRODUCTION AND PRODUCT SHIPMENTS AND HARM OUR BUSINESS.
We depend on a single or limited number of outside contractors and
suppliers for raw materials, packages and standard components, and to assemble
printed circuit boards. We generally purchase these products through standard
purchase orders or one-year supply agreements. We do not have long-term
guaranteed supply agreements with these suppliers. We seek to maintain a
sufficient safety stock to overcome short-term shipping delays or supply
interruptions by our suppliers. We also endeavor to maintain ongoing
communications with our suppliers to guard against interruptions in supply. To
date, we have generally been able to obtain sufficient supplies in a timely
manner. However, our business and results of operations have in the past been
and could be impaired by:
- a stoppage or delay of supply,
- substitution of more expensive or less reliable parts,
- receipt of defective parts or contaminated materials, or
- an increase in the price of such supplies or our inability to
obtain reduced pricing from our suppliers in response to
competitive pressures.
OUR GROWTH AND EXPANSION ARE STRAINING OUR RESOURCES AND NECESSITATING THE
IMPLEMENTATION OF EXPANDED SYSTEMS, PROCEDURES AND CONTROLS, AND HIRING OF
ADDITIONAL EMPLOYEES. ANY FAILURE TO DO SO SUCCESSFULLY COULD HARM OUR BUSINESS.
The expansion in the scope of our operations through internal growth and
acquisitions has placed a considerable strain on our management, financial,
manufacturing and other resources and has required us to implement and improve a
variety of operating, financial and other systems, procedures and controls. We
have on occasion been unable to manufacture products in quantities sufficient to
meet the demands of our existing customer base and new customers. We have
recently deployed a new enterprise resource planning system and manufacturing
execution system. We cannot assure you that any existing or new systems,
procedures or controls will adequately support our operations or that our
systems, procedures and controls will be designed, implemented or improved in a
cost-effective and timely manner. Any failure to
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implement, improve and expand such systems, procedures and controls in an
efficient manner at a pace consistent with our business could harm our business
and results of operations.
We will continue to need a substantial number of additional personnel,
including those with research development, manufacturing, sales, marketing and
management expertise, to commercialize and develop our products and expand all
areas of our business in order to continue to grow. We may not be able to
attract, assimilate and retain additional personnel, including key personnel.
Competition for such personnel is intense, and we expect demand for such
personnel to exceed supply for the foreseeable future.
INTENSE COMPETITION IN THE MARKETS IN WHICH WE OPERATE MAY REDUCE DEMAND FOR OUR
PRODUCTS OR THE PRICES OF OUR PRODUCTS, WHICH COULD HARM OUR OPERATING RESULTS.
Our various markets are highly competitive. We face current or potential
competition from four primary sources:
- direct competitors,
- potential entrants,
- suppliers of potential new technologies, and
- suppliers of existing alternative technologies.
We offer a range of components, products and systems and have numerous
competitors worldwide in various segments of our markets. As the markets for our
products grow, new competitors have recently emerged and are likely to continue
to do so in the future. We also sell products and services to companies with
which we presently compete or in the future may compete and some of our
customers have been or could be acquired by, or enter into strategic relations
with our competitors. In most of our product lines, our competitors are working
to develop new technologies, or improvements and modifications to existing
technologies, which will make our present products obsolete. Many of our
competitors have significantly greater financial, technical, manufacturing,
marketing, sales and other resources than we do.
In addition, many of these competitors may be able to respond more
quickly to new or emerging technologies, evolving industry trends and changes in
customer requirements and to devote greater resources to the development,
promotion and sale of their products than we can. We cannot assure you that:
- our current or potential competitors including our customers
have not already or will not in the future develop or acquire
products or technologies comparable or superior to those that we
developed, combine or merge with each other or our customers to
form significant competitors, expand production capacity to more
quickly meet customer supply requirements, or
- adapt more quickly than we do to new technologies, evolving
industry trends and changing customer requirements.
Increased competition has resulted and could, in the future, result in
price reductions, reduced margins or loss of market share, any of which could
materially and adversely affect our business and results of operations. We
cannot assure you that we will be able to compete successfully against current
and future competitors or that competitive pressures we face will not have a
material adverse effect on our business and results of operations. We expect
that both direct and indirect competition will increase in the future.
Additional competition could have an adverse material effect on our results of
operations through price reductions and loss of market share.
WE WILL REPORT OPERATING LOSSES FOR THE FORESEEABLE FUTURE AS A RESULT OF
ACCOUNTING CHARGES RELATED TO ACQUISITIONS.
We will report operating losses for the foreseeable future as a result
of accounting charges for amortization of intangible assets and for in-process
research and development related to acquisitions.
In March 2000, we acquired Queensgate for initial consideration of $3.0
million in cash and 347,962 shares of our 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 ten months
ended December 31, 2000 and the twelve months ended December 31, 2001. On June
26, 2000, we 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 stock with a value of $130.4
million. In April 2000, we acquired Veritech for 3,000,000 shares of our common
stock with a
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fair value of approximately $621 million. In June 2000, we acquired PIRI for
8,461,663 shares of our common stock with a fair value of approximately $2.1
billion and $31.7 million in cash. The acquisitions will be accounted for under
the purchase method of accounting. Under purchase accounting, we will record the
market value of our common stock issued in connection with the purchases and the
amount of direct transaction costs as the cost of acquiring the companies. That
cost will be allocated to the individual assets acquired and liabilities
assumed, including various identifiable intangible assets such as in-process
research and development, acquired technology, acquired trademarks and trade
names and acquired workforce, based on their respective fair values. We will
allocate the excess of the purchase cost over the fair value of the net assets
to goodwill. Approximately $831 million is expected to be amortized and expensed
through April 2005, related to the acquisitions of Veritech and Queensgate, and
approximately $2.2 billion is expected to be amortized and expensed through June
2005, related to the acquisition of PIRI. The amortization of goodwill and other
intangible assets and the write-off of in-process research and development
relating to these and potential future acquisitions will result in significant
non-cash expenses that will result in a net loss for the foreseeable future,
which could adversely affect the market value of our stock.
WE WILL INCUR SIGNIFICANT EXPENSES RELATED TO THE ISSUANCE OF STOCK UNDER OUR
EMPLOYEE STOCK PLANS, WHICH WILL CONTRIBUTE TO OUR EXPECTED OPERATING LOSSES.
Stock options exercised by employees of our United Kingdom subsidiary
may result in significant expenses. Under United Kingdom law, we are required to
pay national insurance tax on the gain on stock options exercised by employees
in the United Kingdom. Based on the stock price at September 30, 2000, we have a
$8.5 million contingent liability that will be charged to operations in the
period that the options are exercised. The options were granted to United
Kingdom employees beginning in May 1999, and have a 10-year option exercise
period and vest 25% per year of employment. The expenses including significant
tax related expenses related to issuance of stock pursuant to our employee stock
plans could have a material adverse effect on the market value of our stock.
OUR ACQUISITIONS MAY NOT BE SUCCESSFUL DUE TO THE COMPLEXITIES OF IDENTIFYING,
MANAGING AND INTEGRATING OTHER BUSINESSES.
Our strategy involves the acquisition and integration of additional
companies' products, technologies and personnel. We have limited experience in
acquiring other businesses. Acquisitions or investments could result in a number
of financial consequences, including:
- potentially dilutive issuances of equity securities;
- large one-time write-offs;
- reduced cash balances and related interest income;
- higher fixed expenses which require a higher level of revenues
to maintain gross margins;
- the effect of local laws and taxes in foreign subsidiaries;
- the incurrence of debt and contingent liabilities; and
- amortization expenses related to goodwill and other intangible
assets.
Furthermore, acquisitions involve numerous operational risks, including:
- difficulties in the integration of operations, personnel,
technologies, products and the information systems of the
acquired companies;
- diversion of management's attention from other business
concerns;
- diversion of resources from our existing businesses, products or
technologies;
- risks of entering geographic and business markets in which we
have no or limited prior experience; and
- potential loss of key employees of acquired organizations.
Specifically, in connection with our most recent acquisitions, we are
currently engaged in expansion of certain facilities in order to integrate and
rationalize the operations at the acquired companies.
If we are unable to successfully address any of these risks or fail to
complete the facility expansions successfully and on schedule, our business
could be materially and adversely affected.
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IF THE MERGER WITH JDS UNIPHASE IS NOT COMPLETED OR IS DELAYED, OUR STOCK PRICE
AND FUTURE BUSINESS AND OPERATIONS COULD BE MATERIALLY HARMED.
Completion of the merger with JDS Uniphase is subject to several
conditions, including approval by our stockholders and the stockholders of JDS
Uniphase and the receipt of all required regulatory approvals and the expiration
of all applicable waiting periods. We cannot assure you that the merger with JDS
Uniphase will be completed or that it will be completed in the expected time
period. If the merger with JDS Uniphase is not completed or its completion is
substantially delayed, we may be subject to the following material risks, among
others:
- we will be required to pay JDS Uniphase a termination fee of $1
billion if:
(1) an acquisition proposal has been made to us or our
stockholders or any person has publicly announced an intention to make
an acquisition proposal with respect to us; and
(2) JDS Uniphase terminates the merger agreement because our
board of directors amends or modifies or takes certain other actions
with respect to its recommendation to our SDL stockholders or we take or
fail to take certain actions with respect to a competing transaction;
and
(3) an acquiring party has acquired, directly or indirectly,
within 12 months of such termination, a majority of the voting power of
our outstanding securities or all or substantially all of our assets or
there has been consummated a merger, consolidation or similar business
combination between us and an acquiring person;
- we will also be required to pay JDS Uniphase a termination fee
of $1 billion if:
(1) the merger agreement has been terminated by us in order to
enter into a binding written agreement concerning a transaction that
constitutes a superior proposal; and
(2) an acquiring party has acquired, directly or indirectly,
within 12 months of such termination, a majority of the voting power of
our outstanding securities or all or substantially all of our assets or
there has been consummated a merger, consolidation or similar business
combination between us and an acquiring person;
- if the merger agreement with JDS Uniphase is terminated under
specified circumstances, we may be required to pay JDS Uniphase
$10,000,000 as a reasonable estimate of JDS Uniphase's
out-of-pocket expenses with respect to the merger;
- the price of our common stock may decline to the extent that the
current market price of our common stock reflects an assumption
that the merger with JDS Uniphase will be completed;
- our costs related to the merger, including, without limitation,
certain legal, accounting and financial advisors fees, which are
substantial will still have to be paid even if the merger is not
completed;
- if the merger is terminated and our board of directors
determines to seek another merger or business combination, it is
not certain that we will be able to find a partner willing to
pay an equivalent or more attractive price than that which would
be paid in the proposed merger with JDS Uniphase. In addition,
while the merger agreement with JDS Uniphase is in effect, we
are generally prohibited from soliciting, initiating,
encouraging or otherwise facilitating or entering into competing
transactions, such as a merger, sale of assets or other business
combination, with any party other than JDS Uniphase, which
limits our strategic options;
- we will not experience the benefits of the merger, including,
among other things, expected synergies and cost savings,
expanded product offerings, increased research and development
efforts and faster time to market for new products; and
- our industry is undergoing increased consolidation and we will
be faced with competition from organizations some of which will
have greater financial, marketing and technical resources than
we do.
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A DECREASE OR SLOWING IN DEMAND FOR DWDM PRODUCTS GENERALLY, OR ANY FAILURE TO
SUCCESSFULLY DEVELOP PRODUCTS IN RESPONSE TO EVOLVING OR NEW TECHNOLOGIES, WOULD
SIGNIFICANTLY DECREASE OUR REVENUES.
A majority of our revenues are derived from sales of products which rely
on DWDM technology. As the market for DWDM products grew last year, our revenues
from the sale of our DWDM products increased significantly and we expect that
the percentage of our overall revenues attributable to the sale of our DWDM
products will continue to increase for the foreseeable future. If the markets
for optoelectronic products move away from DWDM technology and begin using new
technologies, we may not be able to successfully design and manufacture new
products that use these new technologies. There is also the risk that new
products we develop in response to new technologies may not be accepted in the
market. In addition, DWDM technology is continuously evolving, and we may not be
able to modify our products to address new DWDM specifications. A slowing in the
growth rate for DWDM products could also occur, as customers build out certain
systems or new deployments are delayed. Any of these events would have a
material adverse effect on our business.
OUR LENGTHY QUALIFICATION AND SALES CYCLE RESULTS IN DELAYS BETWEEN THE
INCURRENCE OF EXPENSES AND THE GENERATION OF RELATED REVENUES, DURING WHICH TIME
OUR CUSTOMERS MAY CANCEL OR REDUCE THEIR ORDERS FOR OUR PRODUCTS. CONSEQUENTLY,
WE MAY INCUR EXPENSES THAT ARE NOT FULLY OR TIMELY RECOUPED THROUGH PRODUCT
SALES, WHICH WOULD HARM OUR RESULTS OF OPERATIONS.
Our customers typically perform numerous tests and extensively evaluate
our products before incorporating them into their systems. The time required for
the process of designing, testing, evaluating, qualifying and integrating our
products into customers' equipment can take up to twelve months. It can take an
additional six months or more before a customer commences volume shipments of
equipment that incorporates our products. Because of this lengthy qualification
and sales cycle, we may experience a delay between the time when we incur
expenses for research and development and sales and marketing efforts and the
time when we generate revenues, if any, from these expenditures.
In addition, the delays inherent in our lengthy qualification and sales
cycle raise additional risk that customers may decide to cancel or change
product plans. After a customer selects our technology, there can be no
assurance that the customer will ultimately ship products incorporating our
products. Our business could be materially adversely affected if during our
lengthy qualification and sales cycle a significant customer reduces or delays
orders or chooses not to release products incorporating our products.
IF WE ARE NOT ABLE TO SUCCESSFULLY MANAGE OUR PRODUCT MIX AND PRODUCTION CYCLES,
OUR OPERATING RESULTS WOULD BE HARMED.
We sell a variety of products, with differing margins, and we introduce
new products to the markets from time to time. The proportional mix of the
products that we sell changes from quarter to quarter. This change in product
mix may adversely affect our operating results if, for example, we sell more
products with lower margins in a particular quarter. Further, our ability to
address changes in the market demand for our specific products depends on our
ability to ramp up production for products with increased demand and to ramp
down production for products with decreased demand. If we are not able to
successfully manage the production cycles for our products, our operating
results would be harmed.
CUSTOMER ORDER FLUCTUATIONS AND CANCELLATIONS COULD HARM OUR BUSINESS AND
RESULTS OF OPERATIONS.
Our product revenue is subject to fluctuations in customer orders.
Occasionally, some of our customers have ordered more products than they need in
a given period, thereby building up inventory and delaying placement of
subsequent orders until such inventory has been reduced. We may also build
inventory in anticipation of receiving new orders in the future. Also, customers
have occasionally placed large orders that they have subsequently cancelled. In
addition, due to the fact that our sales of 980 nm pump lasers products comprise
a significant portion of our total revenues, our revenues are particularly
susceptible to customer order fluctuations for these products. These
fluctuations, cancellations and the failure to receive new orders can have
adverse effects on our business and results of operations. We may also have
incurred significant inventory or other expenses in preparing to fill such
orders prior to their cancellation. Almost all of our backlog is subject to
cancellation. Cancellation of significant portions of our backlog, or delays in
scheduled delivery dates, could materially harm our business and results of
operations.
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A LARGE PORTION OF OUR REVENUES IS DERIVED FROM SALES TO A FEW CUSTOMERS, WHO
COULD CEASE PURCHASING FROM US AT ANY TIME.
A relatively limited number of OEM customers has accounted for a
substantial portion of revenue. In 1999, three communication product customers
and their affiliates respectively accounted for 15 percent, 11 percent and 11
percent of revenues. During the first nine months of 2000, five communication
product customers and their affiliates accounted for 16 percent, 12 percent, 11
percent, 11 percent and 10 percent of revenues, respectively. Our recent
acquisition of PIRI will increase our customer concentration, as the substantial
majority of PIRI's sales in 1999 were made to Lucent which is one of our top ten
customers. Revenue to any single customer is also subject to significant
variability from quarter to quarter. Loss or reduction in orders from our key
customers could decrease our revenues and harm our operating results. We expect
that revenue to a limited number of customers will continue to account for a
high percentage of the net sales for the foreseeable future. Our current
customers may not continue to place orders or we may not obtain new orders from
new communication customers.
IF WE DO NOT DEVELOP AND QUALIFY NEW PRODUCTS IN A TIMELY MANNER THAT OUR
CUSTOMERS USE IN THEIR PRODUCTS, OR IF OUR CUSTOMERS DO NOT SUCCESSFULLY DEVELOP
NEW PRODUCTS, OUR BUSINESS AND OPERATING RESULTS WOULD BE HARMED.
We believe that rapid customer acceptance and qualification of our new
products is key to our financial results. Substantial portions of our products
address markets that are not now, and may never become, substantial commercial
markets. We have experienced, and are expected to continue to experience, delays
in qualification, fluctuation in customer orders and competitive, technological
and pricing constraints that may preclude development of markets for our
products and our customers' products.
We may be unable to develop or qualify new products on a timely
schedule. Even if we are successful in the timely development of new products
that are accepted in the market, we often experience lower margins on these
products. The lower margins are due to lower yields and other factors, and thus
we may be unable to manufacture and sell new products at an acceptable cost so
as to achieve anticipated gross margins.
Our current products serve many applications in the communications
market. In many cases, our products are substantially completed, but the
customer's product incorporating our products is not yet completed or the
applications or markets for the customer's product are new or emerging. In
addition, some of our customers are currently in the process of developing new
products that are in various stages of development, testing and qualification,
and sometimes are in emerging applications or new markets, which may require us
to develop products for use in our customers' products.
Our customers and we are often required to test and qualify pump lasers
and modules, modulators, amplifiers, network monitors, receivers and
transmitters among other new products for potential volume applications. In the
communications market qualification is an especially costly, time consuming and
difficult process. We cannot assure you that:
- we or our customers will continue their existing product
development efforts, or if continued that such efforts will be
successful,
- markets will develop for any of our technology or that pricing
will enable such markets to develop, other technology or
products will not supersede our products or our customer's
products, or
- we or our customers will be able to qualify products for certain
customers or markets.
ANY LOSS OF, OR INABILITY TO ATTRACT, KEY PERSONNEL WOULD HARM US.
Our future performance depends in significant part upon the continued
service of our key technical and senior management personnel. The loss of the
services of one or more of our officers or other key employees could
significantly impair our business, operating results and financial condition.
While many of our current employees have many years of service with us, there
can be no assurance that we will be able to retain our existing personnel. If we
are unable to retain or replace our key personnel, our business and results of
operations could be materially and adversely affected.
WE HAVE BEEN AND CONTINUE TO BE SUBJECT TO TIME-CONSUMING AND COSTLY PATENT
INFRINGEMENT CLAIMS AND JUDGMENTS, WHICH COULD HARM OUR BUSINESS AND RESULTS OF
OPERATIONS.
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The semiconductor, optoelectronics, communications, information and
laser industries are characterized by frequent litigation regarding patent and
other intellectual property rights. From time to time we have received and may
receive in the future, notice of claims of infringement of other parties'
proprietary rights and licensing offers to commercialize third party patent
rights. In addition:
- additional infringement claims (or claims for indemnification
resulting from infringement claims) may be asserted against us,
- existing claims may significantly impair our business and
results of operations, and
- other assertions may result in an injunction against the sale of
infringing products or otherwise significantly impair our
business and results of operations.
In 1985, Rockwell International Corporation alleged that we used a
fabrication process that infringes Rockwell's patent rights. Those allegations
led to two related lawsuits, one of which is still pending. The first lawsuit
was filed in August 1993 in the U.S. Court of Federal Claims by Rockwell against
the Federal government, alleging infringement of these patent rights with
respect to the contracts the Federal government had with SDL and other
companies. Although we were not originally named as a party to this lawsuit, the
Federal government asserted that we might be liable to indemnify the Federal
government for a portion of any liability it might have to Rockwell, and we were
permitted to intervene in the lawsuit in August 1995.
Rockwell filed the second lawsuit against us in May 1995 in Federal
District Court in California, alleging that we used a fabrication process in
connection with our manufacture and sale of products to customers other than the
Federal government that infringes the Rockwell patent. Rockwell sought to:
- permanently enjoin us from using fabrication processes allegedly
covered by Rockwell's patent, and
- require us to pay damages in an unspecified amount for our
alleged past infringement of the patent, treble damages for
willful infringement and attorneys' fees.
Our answers to Rockwell's complaints in both lawsuits asserted several
defenses, including that:
- Rockwell's patent was invalid,
- we did not infringe Rockwell's patent,
- Rockwell's patent was unenforceable under the doctrine of
inequitable conduct, and
- Rockwell's action is barred, in whole or in part, by the
doctrines of laches and equitable estoppel.
After extensive discovery in the first lawsuit, we and the Federal
government moved for summary judgment on the ground that Rockwell's patent was
invalid. In February 1997, the court decided in our favor and in favor of the
Federal government. However, Rockwell appealed the decision, and in May 1998 the
U.S. Court of Appeals for the Federal Circuit vacated the lower court's judgment
and remanded the case back to the lower court for further proceedings.
The Federal government subsequently agreed to pay Rockwell $16.9 million
in settlement of the first lawsuit, which as a result was then dismissed by the
lower court in January 1999. We did not participate in the settlement. The
government thus far has not made any further assertions that we must indemnify
it for amounts paid to Rockwell.
As a consequence of the May 1998 decision by the Court of Appeals in the
first lawsuit, the issue of validity in the second lawsuit must be decided in a
trial by jury, which is currently scheduled to commence in April 2001.
Following a court-ordered settlement conference in June 1999 between
Rockwell and us, at which we were unable to settle this lawsuit, Rockwell moved
for summary judgment, seeking to have the court summarily find us to have
infringed those claims. In February 2000, the court ruled that we had infringed
Rockwell's patent. This ruling prevents us from defending against Rockwell's
lawsuit on the ground that we do not infringe Rockwell's patent. The court has
granted other summary judgment motions brought by Rockwell which also limit the
defenses we may assert at trial. However, we intend to pursue our remaining
defenses mentioned above. A trial date has been set in April 2001. Discovery on
several matters is currently ongoing.
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Rockwell's patent expired in January 2000 so Rockwell can no longer
prevent us from using the fabrication process allegedly covered by Rockwell's
patent.
The resolution of this litigation will depend on the resolution of
various factual disputes, so the outcome cannot be determined and remains
uncertain. Rockwell may ultimately prevail in this dispute. If Rockwell were to
prevail, Rockwell could be awarded substantial monetary damages, including past
damages, against us for the sale of infringing products, which could harm our
business and results of operations. Litigation and trial of Rockwell's claim
against us is expected to involve significant expense to us and could divert the
attention of our technical and management personnel and could harm our business
and results of operations.
In addition, we are involved in various other legal proceedings and
controversies arising in the ordinary course of our business.
ANY INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS COULD
HARM OUR COMPETITIVE POSITION.
Our future success and competitive position is dependent in part upon
our proprietary technology, and we rely in part on patent, trade secret,
trademark and copyright law to protect our intellectual property. However,
- any of the over 200 patents, domestic and foreign, owned or
approximately 95 patents licensed by us could be invalidated,
circumvented, challenged or licensed to others,
- the rights granted under the patents may not provide a
competitive advantage to us,
- our approximately 170 pending or future patent applications may
not be issued with the scope of the claims sought by us, if at
all, or
- others may develop technologies that are similar or superior to
our technology, duplicate our technology or design around the
patents we own, or obtain a license to the patents we own or
license, or patent or assert patents on technology that we might
use or intend to use.
In addition, effective copyright and trade secret protection may be
unavailable, limited or not applied for in certain foreign countries. We expect
that a significant portion of our revenues will be derived from technology
licensed on a non-exclusive basis from NTT, Xerox and other third parties that
may license such technology to others, including our competitors. There can be
no assurance that steps we take to protect our technology rights will prevent
misappropriation of such technology. In addition, litigation has been necessary
and may be necessary in the future:
- to enforce our patents and other intellectual property rights,
- to protect our trade secrets,
- to determine the validity and scope of the proprietary rights of
others, or
- to defend against claims of infringement or invalidity of
intellectual property rights developed internally or acquired
from third parties.
Litigation of this type has resulted in substantial costs and diversion
of resources and could have a material adverse effect on our business and
results of operations. Moreover, we may be required to participate in
interference proceedings to determine the propriety of inventions. These
proceedings could result in substantial cost to us.
BECAUSE WE SELL OUR PRODUCTS TO CUSTOMERS OUTSIDE THE UNITED STATES, WE FACE
FOREIGN BUSINESS AND ECONOMIC RISKS THAT COULD HARM US.
We derived approximately 54 percent of our revenue from customers
outside the United States in the first nine months of 2000, 41 percent in 1999,
27 percent in 1998, and 25 percent in 1997. International revenue carries a
number of inherent risks, including:
- reduced protection for intellectual property rights in some
countries,
- the impact of unstable environments or currency fluctuations in
economies outside the United States,
- generally longer receivable collection periods,
- changes in regulatory environments,
- tariffs, and
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- other potential trade barriers.
In addition, some of our international revenue is subject to export
licensing and approvals by the Department of Commerce or other Federal
governmental agencies. Any failure to obtain these licenses or approvals or
comply with such regulations in the future could have a material adverse effect
on our business and results of operations.
We currently use local distributors in key industrialized countries and
local representatives in smaller markets. Although we have formal distribution
contracts with some of our distributors and representatives, some of our
relationships are currently on an informal basis. Most of our international
distributors and representatives offer only our products; however, certain
distributors offer competing products and we cannot assure you that additional
distributors and representatives will not also offer products that are
competitive with our products. Certain of our acquisitions have contracts with
distributors or representatives that may have conflicts with our existing
distributors and representatives. In any event we or our distributors or
representatives may desire to terminate certain distributor or representative
relationships. Such a termination may result in monetary expenses or a loss of
revenue. We cannot assure you that our international distributors and
representatives will enter into formal distribution agreements at all or on
acceptable terms, will not terminate informal or contractual relationships, will
continue to sell our products or that we will provide the distributors and
resellers with adequate levels of support. Our business and results of
operations will be affected adversely if we lose a significant number of our
international distributors and representatives or experience a decrease in
revenue from these distributors and representatives.
WE ARE REQUIRED TO COMPLY WITH EXTENSIVE ENVIRONMENTAL REGULATIONS, WHICH COULD
BE COSTLY AND COULD RESTRICT OUR ABILITY TO EXPAND OUR OPERATIONS.
We, as well as the companies we acquire, are subject to a variety of
federal, state and local laws and regulations concerning the storage, use,
discharge and disposal of toxic, volatile, or otherwise hazardous or regulated
chemicals or materials used in our manufacturing processes. Further, we are
subject to other safety, labeling and training regulations as required by local,
state and federal law. We have established an environmental and safety
compliance program to meet the objectives of applicable federal, state and local
laws. Our environmental and safety department administers this compliance
program which includes monitoring, measuring and reporting compliance,
establishing safety programs and training our personnel in environmental and
safety matters. Changes in these regulations and laws could harm us. In
addition, these regulations could restrict our ability to expand our operations.
If we do not:
- obtain required permits for,
- operate within regulations for,
- control the use of, and
- adequately restrict the discharge of
hazardous or regulated substances and materials under present or future
regulations, we may be required to pay substantial penalties, to make costly
changes in our manufacturing processes or facilities or to suspend our
operations.
If we are unable to successfully address any of these risks, our
business could be materially and adversely affected.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE EXTREMELY VOLATILE DUE TO
FACTORS BEYOND OUR CONTROL.
The market price of our common stock may fluctuate significantly because
of:
- announcements of technological innovations,
- large customer orders,
- customer order delays or cancellations,
- customer qualification delays,
- new products by us, our competitors or third parties,
- possible acquisition of us or our customers or our competitors
by a third party,
- merger or acquisition announcements, by us or others,
- production problems,
- stock compensation charges due to stock option plans or stock
purchase plans,
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- delays in ordering by our customers' customer,
- quarterly variations in our actual or anticipated results of
operations, and
- developments in litigation in which we are or may become
involved.
Furthermore, the stock market has experienced extreme price and volume
volatility, which has particularly affected the market prices of many high
technology companies. This volatility has often been unrelated to the operating
performance of such companies. This broad market volatility may adversely affect
the market price of our common stock. Many companies in the optical
communications industry have in the past year experienced historical highs in
the market prices of their stock. The market price of our common stock may
experience significant volatility in the future, including volatility that is
unrelated to our performance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's market risk disclosures set forth in Item 7A of its Annual Report
on Form 10-K for the year ended December 31, 1999 have not changed
significantly.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Not Applicable
Item 2. Changes in Securities and Use of Proceeds. Not Applicable
Item 3. Defaults upon Senior Securities. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable
Item 5. Other Information. Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits
Number Exhibit Description
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
We filed a report on Form 8-K on July 11, 2000,
reporting the Agreement and Plan of Reorganization and
Merger among JDS Uniphase Corporation and SDL, Inc.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SDL, INC.
---------
Registrant
November 1, 2000
/s/ Michael Foster
------------------
Michael L. Foster
Vice President, Finance
Chief Financial Officer
(duly authorized officer, and principal
financial and accounting officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
