<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-75639
THIS OFFER DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION.
If you are in doubt about this Offer, you should consult an independent
financial adviser duly authorised under the Financial Services Act of 1986.
You should read this Offer Document in conjunction with the accompanying Form
of Acceptance.
If you have sold or transferred all your holding of IOC Shares, please
forward this Offer Document, the accompanying Form of Acceptance and reply-paid
envelope to the purchaser or transferee or to the stockbroker, bank or other
agent through whom the sale or transfer was effected for transmission to the
purchaser or transferee. However, such documents should not be forwarded or
transmitted in or into Canada, Australia or Japan.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RECOMMENDED OFFER
by
REA BROTHERS LIMITED
on behalf of
SDL, INC.
for
IOC INTERNATIONAL PLC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Offer is not being made, directly or indirectly, in or into, nor is it
capable of acceptance from, Canada, Australia or Japan and this document and
the Form of Acceptance are not being, and must not be, mailed or transmitted in
or into Canada, Australia or Japan.
A letter from the Chairman of IOC recommending the Offer is set out on pages
7 to 9 of this Offer Document.
The procedure for acceptance is set out on pages 23 to 26 of this Offer
Document and in the accompanying Form of Acceptance. To accept the Offer, the
Form of Acceptance must be completed and returned as soon as possible and, in
any event, so as to be received no later than 3.00 p.m. (UK time) on 12 May
1999.
See Appendix IX of this Offer Document for definitions of terms used in this
Offer Document.
The Shareholders of IOC are strongly urged to read and consider carefully
this Offer Document in its entirety, including the matters referred to under
"Information regarding SDL -- Risk factors", beginning on page 28 of this Offer
Document.
Neither the Securities and Exchange Commission nor any United States state
securities commission has approved or disapproved these securities, or
determined if this Offer Document is truthful or complete. Any representation
to the contrary is a criminal offence.
<PAGE>
Rea Brothers Limited, which is regulated by The Securities and Futures
Authority Limited, is acting exclusively for SDL and no-one else in connection
with the Offer and will not be responsible to anyone other than SDL for
providing the protections afforded to customers of Rea Brothers Limited nor for
providing advice in relation to the Offer.
Henry Cooke Corporate Finance Ltd, which is regulated by The Securities and
Futures Authority Limited, is acting exclusively for IOC and no-one else in
connection with the Offer and will not be responsible to anyone other than IOC
for providing the protections afforded to customers of Henry Cooke Corporate
Finance Ltd nor for providing advice in relation to the Offer.
Certain market makers on the Alternative Investment Market ("AIM") may engage
in "market making" transactions on AIM in IOC Shares during the period from the
announcement of the Offer until the end of the Offer period.
SDL has applied to the SEC for an exemption from Rule 10b-13 under the
Exchange Act which permits SDL to purchase IOC Shares, subject to certain
conditions, in any period during which the Offer remains open, but after SDL
shall have become entitled to apply the provisions of sections 428-430F of the
Companies Act 1985 to acquire compulsorily any outstanding IOC Shares. SDL
intends to acquire outstanding IOC Shares under sections 428-430F of the
Companies Act 1985 while the Offer remains open and after SDL shall have become
entitled to apply the provisions of those sections.
2
<PAGE>
SUMMARY
. The boards of SDL and IOC announced on 31 March 1999 that agreement had
been reached on the terms of a recommended share for share offer to be made
by Rea Brothers Limited on behalf of SDL for the whole of the share capital
of IOC.
. The Offer is being made on, and subject to, the conditions and principal
further terms set out in Appendix I of this Offer Document, and on the
following basis:
for every 100 IOC Shares 1.815 shares of New SDL Common Stock
. Based on the closing SDL Common Stock price on the NASDAQ National Market
on 19 April 1999 of $87.0313 per share and an exchange rate of $1.6075 to
(Pounds)1.00 (being the Noon Buying Rate on 19 April 1999), the Offer
values each IOC Share at approximately 98.3p ($1.58).
. An Offer value of 98.3p per IOC Share represents a premium of 77 per cent.
over the closing price of 55.5p per IOC Share on 30 March 1999, the last
dealing day before the announcement of the Offer.
. The Offer values the share capital of IOC at approximately (Pounds)33.0
million ($53.1 million) on a fully diluted basis after adjusting for the
exercise of all outstanding IOC options and deducting the aggregate
exercise price of such options.
. The New SDL Common Stock issued pursuant to the Offer will be credited as
fully paid and will rank equally in all respects with the existing SDL
Common Stock.
. The Directors of IOC unanimously recommend IOC Shareholders to accept the
Offer.
. IOC, operating through its subsidiary Integrated Optical Components
Limited, is a UK-based manufacturer of lithium niobate components for long
haul fiber optic transmission systems.
. SDL designs, manufactures and markets fiber optic related products, lasers
and optoelectronic-based systems. Its products are used in various markets
such as telecommunications, cable television, dense wave division
multiplexing, satellite communications, printing, medical and materials
processing.
. The IOC board believes that becoming part of the SDL Group will provide the
IOC Group with greater resources to further develop its products,
particularly the ability to create integrated component modules which are
of increasing interest to dense wave division multiplexing customers.
. The full conditions and further terms of the Offer are set out in Appendix
I to this Offer Document. Terms used in this Offer Document have the
meanings set out in Appendix IX, unless the context requires otherwise.
This summary highlights some of the information contained in this Offer
Document. IOC Shareholders are strongly encouraged to read the full text of
the Offer Document and the attached appendices.
3
<PAGE>
Where You Can Find More Information About SDL
SDL files annual, quarterly and special reports, proxy statements and other
information with the SEC. SDL's SEC filings are available to the public over
the Internet at the SEC's Web site at http://www.sec.gov. You may also read and
copy any document SDL files with the SEC at its Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. You can also obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of its Public Reference
Room.
The SEC allows SDL to "incorporate by reference" into this Offer Document the
information SDL has filed with it. The information incorporated by reference is
an important part of this Offer Document and the information that SDL files
subsequently with the SEC will automatically update this Offer Document. SDL
incorporates by reference the documents listed below and any filings SDL makes
with the SEC under sections 13(a), 13(c), 14, or 15(d) of the Securities
Exchange Act of 1934 after the initial filing of the Registration Statement
that contains this Offer Document and prior to the time that the Offer becomes
or is declared unconditional in all respects:
. SDL's Annual Reports on Form 10-K and 10-K/A for the fiscal year ended
January 1, 1999;
. SDL's Definitive Proxy Statement dated April 9, 1999, filed in connection
with SDL's 1999 Annual Meeting of Stockholders to be held on May 13,
1999; and
. the description of SDL's Common Stock contained in SDL's Registration
Statement on Form 8-A filed on November 7, 1997 under section 12 of the
Exchange Act, including SDL's Registration Statement on Form 8-A/A filed
on March 19, 1999 updating such description.
You may, during normal business hours on any weekday, inspect the
Registration Statement of which this Offer Document is a part and you may
request a copy of the Registration Statement or a copy of these filings, at no
cost, by writing or telephoning the following at the following addresses:
<TABLE>
<S> <C>
Bird & Bird SDL, Inc.
Attention: Chris Barrett Attention: Investor Relations
90 Fetter Lane 80 Rose Orchard Way
London EC4A 1JP San Jose, California 95134
United Kingdom 001 (408) 943-4364
+44 171 415 6000
</TABLE>
4
<PAGE>
Rule 8 Notices
Any person who, alone or acting together with any other person(s) pursuant to
any agreement (formal or informal), owns or controls, or becomes the owner or
controller of, directly or indirectly, one per cent. (1 per cent.) or more of
any relevant securities (as such term is defined on page VI-9 of this Offer
Document) is required, under the provisions of Rule 8 of the City Code, to
notify, in typed format, the Company Announcements Office of the London Stock
Exchange, which will notify the Panel by no later than 12.00 noon on the
business day following the date of the relevant transaction of every dealing
in any relevant securities until the Initial Closing Date of the Offer or (if
later) such time as the Offer becomes or is declared unconditional in all
respects or lapses, in accordance with Rule 8. Dealings by "associates"
(within the meaning of the City Code) of SDL or IOC in SDL Common Stock or IOC
Shares until such time must also be disclosed. Please consult your legal
counsel immediately if you believe Rule 8 may be applicable to you.
Financial Information
The extracts from the consolidated financial statements of, and other
information about, SDL appearing in this Offer Document are presented in US
dollars ($) and have been prepared in accordance with US generally accepted
accounting principles ("US GAAP"). The extracts from the consolidated
financial statements of, and other information about, IOC appearing in this
Offer Document are presented in pounds sterling ((Pounds)) and have been
prepared in accordance with UK GAAP. US GAAP and UK GAAP differ in certain
significant respects. As a result, and for the convenience of the reader, the
financial information of IOC used in the preparation of the pro forma
information appearing in this Offer Document has been adjusted to comply with
US GAAP and contains translations of pounds sterling amounts into US dollars
at rates specified in "Information regarding IOC -- Selected financial
information." Such translations should not be construed as representations
that the pounds sterling amounts represent, or have been, or could be
converted into US dollars at that or any other rate. On 30 March 1999, the
last dealing day before the announcement of the Offer, the conversion rate of
pounds sterling to US dollars was $1.6115 per (Pounds)1.00, as set by the Noon
Buying Rate in New York City for cable transfers in pounds sterling as
certified for customs purposes by the Federal Reserve Bank of New York. This
information is provided for the convenience of the reader and may differ from
the actual rates in effect during the periods covered by the IOC financial
information discussed herein.
5
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY................................................................... 3
WHERE YOU CAN FIND MORE INFORMATION ABOUT SDL............................. 4
LETTER FROM THE CHAIRMAN OF IOC TO IOC SHAREHOLDERS....................... 7
OFFER LETTER FROM REA BROTHERS TO IOC SHAREHOLDERS........................ 10
1.Introduction.......................................................... 10
2.The Offer............................................................. 10
3.Dealing facility...................................................... 11
4.Irrevocable undertakings.............................................. 11
5.IOC Share Option Schemes.............................................. 12
6.Accounting treatment.................................................. 12
7.Information on SDL.................................................... 13
8.Information on IOC.................................................... 13
9.Background to and reasons for the Offer............................... 14
10.Management and employees............................................. 16
11.Financial effects of acceptance...................................... 16
12.Illustrative comparative per share data.............................. 17
13.Taxation............................................................. 18
14.Procedure for acceptance............................................. 23
15.Settlement........................................................... 26
16.Further information.................................................. 27
INFORMATION REGARDING SDL................................................. 28
1.Risk factors.......................................................... 28
2.Selected historical financial information of SDL...................... 40
INFORMATION REGARDING IOC................................................. 41
1.Business.............................................................. 41
2.Selected financial information........................................ 42
3.IOC management's discussion and analysis of financial condition and
results of operations............................................ 43
4.Nature of trading market.............................................. 45
5.Market risk........................................................... 45
</TABLE>
<TABLE>
<C> <S> <C>
APPENDICES
APPENDIX I Conditions and further terms of the Offer.............. I-1
APPENDIX II SDL financial statements............................... II-1
APPENDIX III IOC financial statements............................... III-1
Unaudited pro forma combined condensed financial
APPENDIX IV statements............................................. IV-1
APPENDIX V Certain market and dividend information................ V-1
APPENDIX VI Additional information................................. VI-1
APPENDIX VII Description of SDL Capital Stock and changes in certain
rights of IOC Shareholders............................ VII-1
APPENDIX VIII Certain provisions of the Companies Act 1985........... VIII-1
APPENDIX IX Definitions............................................ IX-1
</TABLE>
6
<PAGE>
[LOGO APPEARS HERE]
(Registered in England and Wales No. 3131731)
<TABLE>
<CAPTION>
Directors: Registered Office:
<C> <S> <C>
D. P. Taylor (Non-executive Chairman) 3 Waterside Business Park
M. A. Powell (Managing Director) Eastways
T. G. Collins (Production Director) Witham
M. K. Burwood (Finance Director) Essex CM8 3YQ
A. P. Appleyard (Technical Director)
C. A. Bradley (Non-executive Director)
D. Cheesman (Non-executive Director)
N. S. Kapany (Non-executive Director)
</TABLE>
21 April 1999
To IOC Shareholders and, for information only, to participants in the IOC
Share Option Schemes
Dear Shareholder
Recommended Offer by SDL for IOC
The boards of IOC and SDL announced on 31 March 1999 that agreement had been
reached on the terms of a recommended share for share offer to be made by Rea
Brothers on behalf of SDL for the whole of the share capital of IOC. I am
writing to explain the background to the Offer and the reasons why your
directors consider that the terms of the Offer are fair and reasonable and,
accordingly, why they unanimously recommend that you accept the Offer.
Background to and reasons for the recommendation
Since its flotation on the Alternative Investment Market of the London Stock
Exchange in March 1996, IOC has established a strong reputation for innovation
in the design, development and manufacture of lithium niobate opto-electronic
devices.
As part of IOC's product development initiatives, its executive management
regularly visits customers and other telecommunications equipment component
suppliers around the world and, as a result, has developed a close
relationship with the management of SDL.
IOC's board has for some time recognised the value of international
collaboration to maximise the growth potential of IOC's business. During
recent discussions between the management of IOC and SDL it has become
apparent that the two companies are likely to benefit significantly from a
combination of their operations. The combination of IOC and SDL will represent
a major step in the pursuit of both groups' international ambitions. The board
considers that SDL represents a partner which has the resources to enable IOC
to take full advantage of the opportunities developing in the opto-electronic
components market.
The IOC board believes that becoming part of the SDL Group will provide the
IOC Group with greater resources to further develop its products, particularly
the ability to create integrated component modules which are of increasing
interest to dense wave division multiplexing customers. It is expected that
the Enlarged Group will have the credibility and critical mass to gain
improved acceptance with key customers, which is of growing importance in a
competitive
7
<PAGE>
market already subject to rapid change and consolidation. Additionally, the
combination of SDL's and IOC's sales teams is expected to provide better
coverage of, and service to, the international telecommunications markets.
Discussions with SDL have led to agreement on the terms of this Offer which
your board believes, having been so advised by Henry Cooke and having taken
into account the prospects for IOC as an independent company, is in the best
interests of IOC and its shareholders.
Terms of the offer
The formal Offer, which is set out in the letter from Rea Brothers beginning
on page 10 of this Offer Document, is on the following basis:
for every 100 IOC Shares 1.815 shares of New SDL Common Stock
and so in proportion for any other number of IOC Shares held. This basis is
calculated before taking account of SDL's recently announced intention to
declare a 2 for 1 stock split by way of a stock dividend.
Based on the closing SDL Common Stock price on the NASDAQ National Market
System on 19 April 1999 of $87.0313 per share and an exchange rate of $1.6075
to (Pounds)1 (being the Noon Buying Rate on 19 April 1999), full acceptance of
the Offer would value each IOC Share at approximately 98.3p ($1.58) and IOC's
current issued share capital at approximately (Pounds)30.6 million ($49.2
million).
An Offer value of 98.3p per IOC Share represents a premium of 77 per cent.
over the IOC Closing Price of 55.5p on 30 March 1999, the last dealing day
before the announcement of the Offer.
Full acceptance of the Offer will involve the issue of up to 632,088 shares of
New SDL Common Stock, representing approximately four per cent. of SDL's
current outstanding Common Stock and, based on the closing SDL Common Stock
price on the NASDAQ National Market System on 19 April 1999, values IOC's
share capital at approximately (Pounds)33.0 million ($53.1 million) on a fully
diluted basis after adjusting for the exercise of all outstanding IOC options
and deducting the aggregate exercise price of such options.
Dealing facility
The New SDL Common Stock will be traded on the NASDAQ National Market System,
but will not be listed on the London Stock Exchange or traded on AIM. Since
IOC Shareholders may not be able to deal easily or economically in the US
market, IOC Shareholders will shortly receive information regarding a dealing
facility established by IRG Trustees Limited using the services of Donaldson,
Lufkin & Jenrette International. This arrangement will enable those IOC
Shareholders who wish to sell any of their New SDL Common Stock to do so at a
competitive rate of commission. The facility will be available to IOC
Shareholders who accept the Offer for a limited period following the Offer
becoming or being declared unconditional in all respects.
Undertakings to accept the Offer
The UK directors of IOC and certain other IOC Shareholders have given
irrevocable undertakings to accept the Offer in respect of holdings amounting
in total to 19,766,175 IOC Shares, representing 63.49 per cent. of IOC's
issued share capital as at 30 March 1999. Of these undertakings, those
relating to 5,084,830 IOC Shares (16.33 per cent.) will be binding even if a
higher competing offer is made and those relating to 14,681,345 IOC Shares
(47.16 per cent.) will cease to be binding in certain circumstances.
Further details of the irrevocable undertakings are set out in Appendix VI of
this Offer Document.
8
<PAGE>
IOC Share Option Schemes
The Offer extends to any IOC Shares which are unconditionally allotted or
issued whilst the Offer remains open for acceptance pursuant to the exercise
of options under the IOC Share Option Schemes.
As part of the Offer, appropriate proposals reflecting the terms of the Offer
will be made in due course to participants in the IOC Share Option Schemes
which will provide holders of options under the IOC Share Option Schemes with
the ability to exchange their options for options over SDL Common Stock. These
proposals will be made subsequent to, or conditional upon, the Offer becoming
or being declared unconditional in all respects. IOC has agreed with SDL to
refrain from taking any voluntary action and not to make any changes to the
IOC Share Option Schemes which would cause options over IOC Shares to be
exercised at a date earlier than the date on which they would otherwise become
exercisable.
Action to be taken to accept the Offer
The procedure for acceptance of the Offer is set out in paragraph 14 of the
letter from Rea Brothers included in this Offer Document. In order to accept
the Offer, you should return your completed Form of Acceptance in accordance
with the instructions thereon as soon as possible and, in any event, so as to
be received not later than 3.00 p.m. (UK time) on 12 May 1999.
Taxation
Your attention is drawn to paragraph 13 of the letter from Rea Brothers
included in this Offer Document. If you are in any doubt as to your tax
position, you should consult your independent professional adviser.
Recommendation
Your directors, who have been so advised by Henry Cooke, consider the terms of
the Offer to be fair and reasonable. In providing advice to the directors of
IOC, Henry Cooke has taken into account the commercial assessments of the
directors of IOC.
Your directors therefore unanimously recommend you to accept the Offer, as
they have irrevocably undertaken to do in respect of holdings amounting to
1,027,500 IOC Shares, representing 3.30 per cent. of the issued share capital
of IOC as at 30 March 1999.
As with any investment in shares of a high technology company, including IOC,
an investment in SDL Common Stock involves a high degree of risk. IOC
Shareholders should have regard to the factors referred to under "Information
regarding SDL--Risk factors" beginning on page 28 of this Offer Document when
making investment decisions with respect to SDL Common Stock.
Yours faithfully
Dennis Taylor
Chairman
9
<PAGE>
[LOGO]
Rea Brothers
Rea Brothers Limited
Alderman's House, Alderman's Walk, London EC2M 3XR
Bankers Established 1919
21 April 1999
To IOC Shareholders and, for information only, to participants in the IOC
Share Option Schemes
Dear Shareholder
Recommended Offer by SDL for IOC
1.Introduction
It was announced on 31 March 1999 that the boards of SDL and IOC had reached
agreement on the terms of a recommended share for share Offer to be made by
Rea Brothers on behalf of SDL for the whole of the share capital of IOC. This
letter sets out the formal Offer. A Form of Acceptance and a reply-paid
envelope to be used for the purpose of accepting the Offer are also enclosed.
On the basis set out in paragraph 11 below, the Offer represents a premium of
77 per cent. over the IOC Closing Price on 30 March 1999, the last dealing
date before the announcement of the Offer.
Your attention is drawn to the letter from your Chairman, Dennis Taylor,
beginning on page 7 of this Offer Document, from which you will see that the
board of IOC considers the terms of the Offer to be fair and reasonable and
unanimously recommends IOC Shareholders to accept the Offer.
2.The Offer
The Offer is being made on, and subject to, the conditions and principal
further terms set out in Appendix I of this Offer Document, and on the
following basis:
for every 100 IOC Shares 1.815 shares of New SDL Common
Stock
and so in proportion for any other number of IOC Shares held. This is
calculated before taking account of SDL's recently announced intention to
declare a 2 for 1 stock split by way of a stock dividend.
Based on the closing SDL Common Stock price on the NASDAQ National Market
System on 19 April 1999 of $87.0313 per share and an exchange rate of $1.6075
to (Pounds)1 (being the Noon Buying Rate on 19 April 1999), the Offer values
each IOC Share at approximately 98.3p ($1.58) and values IOC's current issued
share capital at approximately (Pounds)30.6 million ($49.2 million).
Regulated by SFA
Registered in England No. 161783
10
<PAGE>
Full acceptance of the Offer will involve the issue of up to 632,088 shares of
New SDL Common Stock, representing approximately four per cent. of SDL's
current outstanding Common Stock and values IOC's share capital at
approximately (Pounds)33.0 million ($53.1 million) on a fully diluted basis
after adjusting for the exercise of all outstanding IOC options and deducting
the aggregate exercise price of such options).
The New SDL Common Stock issued pursuant to the Offer will be credited as
fully paid and will rank pari passu in all respects with the existing SDL
Common Stock, including the right to receive the benefit of all dividends and
other distributions declared, made or paid after 31 March 1999 (the date of
the announcement of the Offer) including the right to receive the stock
dividend referred to above relating to the intended stock split to be effected
by SDL.
If the Offer becomes or is declared unconditional in all respects, fractions
of a share of SDL Common Stock will not be issued to accepting IOC
Shareholders, who will instead receive from SDL an amount in cash (calculated
in sterling by reference to the Noon Buying Rate and the closing SDL Common
Stock price on the NASDAQ National Market System on the date the Offer becomes
or is declared unconditional in all respects) in lieu of any entitlements to a
fraction of a share of SDL Common Stock. Individual entitlements of less than
(Pounds)3.00, however, will not be paid to IOC Shareholders but will be
retained for the benefit of the Enlarged Group.
Application will be made to the National Market System of NASDAQ for the New
SDL Common Stock issued pursuant to the Offer to be admitted to the National
Market System of NASDAQ for quotation. The New SDL Common Stock will not be
listed on the London Stock Exchange or traded on AIM. Further details of
settlement are set out in paragraph 15 below.
The IOC Shares which are the subject of the Offer will be acquired fully paid
and free from all liens, charges, equitable interests, encumbrances, rights of
pre-emption and other third party rights or interests of any nature whatsoever
and together with all rights now or hereafter attached to them, including the
right to receive and retain the benefit of all dividends and other
distributions declared, made or paid hereafter.
Acceptances of the Offer should be dispatched as soon as possible and in any
event so as to be received by 3.00 p.m. (UK time) on 12 May 1999. Instructions
on how to accept the Offer are set out in paragraph 14 below and in the Form
of Acceptance.
3.Dealing facility
The New SDL Common Stock will be traded on the NASDAQ National Market System,
but will not be listed on the London Stock Exchange or traded on AIM. Since
IOC Shareholders may not be able to deal easily or economically in the US
market, IOC Shareholders will shortly receive information regarding a dealing
facility established by IRG Trustees Limited using the services of Donaldson,
Lufkin & Jenrette International. This arrangement will enable those IOC
Shareholders who wish to sell any of their New SDL Common Stock to do so at a
competitive rate of commission. The facility will be available to IOC
Shareholders who accept the Offer for a limited period following the Offer
becoming or being declared unconditional in all respects.
4.Irrevocable undertakings
The UK directors of IOC and certain other IOC Shareholders have given
irrevocable undertakings to accept the Offer in respect of holdings amounting
in total to 19,766,175 IOC Shares, representing 63.49 per cent. of IOC's
issued share capital as at 30 March 1999. Of these
11
<PAGE>
undertakings, those relating to 5,084,830 IOC Shares (16.33 per cent.) will be
binding even if a higher competing offer is made for IOC and those relating to
14,681,345 IOC Shares (47.16 per cent.) will cease to be binding under certain
circumstances.
Further details of the irrevocable undertakings are set out in paragraph 3(f)
of Appendix VI of this Offer Document.
As part of its overall plan to acquire the entire issued share capital of IOC,
SDL purchased 10,550 IOC Shares on 29 March 1999. Immediately following the
acquisition of IOC, SDL will transfer all of the IOC Shares owned by it to SDL
International Holdings, Inc. an indirect subsidiary of SDL. Save for this
holding and the irrevocable undertakings referred to above, no member of the
SDL Group nor, so far as SDL is aware, any party acting in concert (as defined
in the City Code) with SDL owns or controls any IOC Shares or holds any
options to purchase IOC Shares or has received any irrevocable commitments to
accept the Offer or has entered into any derivative contracts referenced to
IOC Shares which remain outstanding.
5.IOC Share Option Schemes
The Offer will extend to any IOC Shares which are unconditionally allotted or
issued whilst the Offer remains open for acceptance pursuant to the exercise
of options under the IOC Share Option Schemes.
As part of the Offer, appropriate proposals reflecting the terms of the Offer
will be made in due course to participants in the IOC Share Option Schemes
which will provide holders of options under the IOC Share Option Schemes with
the ability to exchange their options for options over SDL Common Stock. These
proposals will be made subsequent to, or conditional upon, the Offer becoming
or being declared unconditional in all respects. IOC has agreed with SDL to
refrain from taking any voluntary action and not to make any changes to the
IOC Share Option Schemes which would cause options over IOC Shares to be
exercised at a date earlier than the date on which they would otherwise become
exercisable.
6.Accounting treatment
Pooling of interests
The acquisition of IOC Shares under the Offer is intended to qualify as a
pooling of interests transaction, which means the recorded assets and
liabilities of IOC will be carried forward to the combined business at their
recorded amounts. The historical revenues and expenses of IOC, for all
periods, will be combined with those of SDL, whose financial statements will
then be restated.
SDL expects, on the date that the Offer becomes or is declared unconditional
in all respects, that it will have received a letter from Ernst & Young LLP,
dated as of the date on which the Offer becomes or is declared unconditional
in all respects, to the effect that it concurs no conditions exist in relation
to IOC (other than any arising as a result of anything done by any member of
the IOC Group pursuant to a request evidenced in writing by or on behalf of
SDL) that would preclude SDL accounting for the Offer as a pooling of
interests under Accounting Principles Board Opinion No. 16.
Affiliate Agreements
In order that the acquisition of IOC may be treated as a pooling of interests
under US GAAP, the directors of IOC have agreed with SDL in respect of a total
of 1,227,500 IOC Shares
12
<PAGE>
(representing approximately 3.94 per cent. of IOC's issued share capital as at
30 March 1999), unless certain conditions set out in those agreements are
satisfied, not to deal in their IOC Shares (other than to accept the Offer) or
their New SDL Common Stock until SDL has published financial statements
incorporating at least 30 days of post acquisition combined operations of SDL
and IOC. Financial statements reflecting the combined operations of SDL and
IOC are required to be included in SDL's quarterly report on Form 10-Q, filed
with the SEC, for the quarter in which the Offer becomes or is declared
unconditional in all respects.
7.Information on SDL
SDL designs, manufactures and markets fiber optic related products, lasers and
optoelectronic based systems. Its products are used in various markets such as
telecommunications, cable television, dense wavelength division multiplexing
("DWDM"), satellite communications, printing, medical and materials
processing.
SDL was established in 1983 as a joint venture between Xerox and Spectra-
Physics to develop and commercialise semiconductor laser technology. The
management of SDL led a group to buy-out the joint venture partners in 1992
and the Company was admitted to NASDAQ in 1995. SDL's technical staff,
including over fifty PhDs, represents one of the largest investments in core
technology in the photonics industry. From the original products introduced in
1984, SDL has expanded its product offering to over 200 standard products in
addition to providing custom design and packaging for original equipment
manufacturer ("OEM") customers. SDL's revenue also includes revenue from
customer-funded research programs.
By 1995, the management of SDL recognised that its core technical strengths of
high reliability and high power were particularly well-suited to the growing
market opportunity in fiber optic communications. Since the acquisition of
Seastar Optics in 1995, SDL's strategy has increasingly focused on providing
solutions for optical communications. SDL's optical communications products
power the transmission of data, voice and Internet information over fiber
optic networks to meet the needs of telecommunications, DWDM, cable television
and satellite communications applications. Led by growth in shipments of its
flagship 980 nm semiconductor laser pump module, revenue in 1998 from fiber
optic products for terrestrial, undersea and cable television communications
increased by more than 100 per cent. compared with 1997. Overall,
communications-related revenue increased to 66 per cent. of total revenue in
the fourth quarter of 1998.
For the year ended 31 December 1998, SDL generated income before taxes of
$13.866 million on revenues of $106.138 million. As at 31 December 1998, SDL
had total stockholders' equity of $93.247 million.
SDL Common Stock is traded on the NASDAQ National Market System under the
symbol "SDLI". SDL had a current market capitalisation of approximately $1.2
billion as at 30 March 1999, the last dealing day before the Offer
announcement, based on the closing SDL Common Stock price on the NASDAQ
National Market System of $82.25.
Further information on SDL may be found beginning on page 28 of this Offer
Document.
8.Information on IOC
IOC, which is based in Witham, Essex, was formed in 1995 and was floated on
AIM in 1996. IOC is the parent company of Integrated Optical Components
Limited, which was founded in 1991 with venture capital funding.
13
<PAGE>
The IOC Group's products include 2.5 Gbit/s and 10 Gbit/s modulators and other
lithium niobate components which are designed for use in long haul fiber optic
transmission systems. The IOC Group manufactures hermetically sealed lithium
niobate modulators, developed for high reliability applications for both 2.5
Gbit/s and 10 Gbit/s transmission. The worldwide lithium niobate modulator
market is expected to grow significantly as transmission systems continue to
move to 10 Gbit/s and 40 Gbit/s data rates per wavelength division
multiplexing ("WDM") channel.
The IOC Group has also designed and developed a prototype integrated laser
modulator and a prototype integrated driver modulator. These products are
currently being market tested.
Since the admission of its shares to AIM, IOC has invested heavily in its
manufacturing capacity and technologies. As a result, the IOC Group now
provides high yield manufacturing of high performance products. IOC tests and
qualifies all its products to industry quality standards.
For the year ended 30 September 1998, IOC reported a loss on ordinary
activities before taxation of (Pounds)2.952 million on turnover of
(Pounds)4.025 million. As at 30 September 1998, IOC had equity shareholders'
funds of (Pounds)8.802 million.
Further information on IOC may be found beginning on page 41 of this Offer
Document.
9.Background to and reasons for the Offer
Background
As part of SDL's efforts to encourage growth through strategic acquisitions of
complementary businesses, SDL regularly examines a variety of potential
acquisitions which may assist SDL's growth and enable SDL to market a wider
range of products to a broader customer base.
On 25 February 1998, Gregory P. Dougherty, the chief operating officer of SDL,
and Mike Powell, the managing director of IOC, met informally while attending
the 1998 Optical Fiber Conference in San Diego, California. Mr. Dougherty and
Mr. Powell discussed the possibility of entering into an agreement to
integrate SDL's indium phosphide products into IOC products. After the date of
the 1998 Optical Fiber Conference and continuing through August 1998, Mr.
Dougherty and Jo Major, SDL's director of communications business unit,
continued occasional discussions with Tom Collins, the production director of
IOC, regarding product sales.
On 28 July 1998, David Welch, SDL's chief technical officer, met with Mike
Powell of IOC at IOC's facility in the United Kingdom to learn more about
IOC's products and the potential for integration of SDL products into IOC
products.
On 21 October 1998, a non-disclosure agreement was executed for the purpose of
entering into more detailed discussions regarding mutual product development
and integration.
After evaluating product integration possibilities, SDL began to consider a
possible acquisition strategy for IOC. At the 12 December 1998 board meeting
of SDL, the board discussed a number of potential acquisition opportunities,
including IOC.
On 6 January 1999, Don Scifres, chairman and chief executive officer of SDL,
Mr. Welch and Mr. Dougherty visited the UK office of IOC to introduce IOC to
the SDL management. The SDL representatives met with Dennis Taylor, the
chairman of IOC, Mr. Powell, Mr. Collins and Andrew Appleyard, IOC's technical
director. The participants discussed IOC's product lines, market
opportunities, manufacturing capacity and reviewed IOC's historical financial
results. In addition, SDL and IOC informally discussed a potential acquisition
of IOC by SDL.
14
<PAGE>
On 27 January 1999, Mr. Taylor, Mr. Powell and Mike Burwood, finance director
of IOC, along with David Cheesman, a non-executive director of IOC, visited
SDL's facility in San Jose, California. Senior management of SDL made
presentations to the IOC representatives overviewing SDL's business. The IOC
representatives then met with the senior management of SDL to discuss SDL's
existing products and financial results and visited SDL's manufacturing
facilities. The participants in these meetings continued informal discussions
concerning the potential acquisition of IOC by SDL. These discussions included
valuation ranges for the IOC shares and a hypothetical schedule of a proposed
acquisition by SDL.
On 8 February 1999 and 9 February 1999, Michael Foster, the chief financial
officer of SDL, visited IOC to conduct financial due diligence. Mr. Foster met
with Mr. Powell and Mr. Burwood, and reviewed IOC's financial information.
On 11 February 1999, Mr. Foster and Mr. Welch recommended to the board of SDL
that they approve the entering into further discussions with IOC leading
towards an agreement to acquire the shares of IOC. At this meeting, SDL's
board authorised SDL's management to continue discussions with IOC and to
prepare and deliver to IOC a letter of intent ("LOI") from SDL. On 12 February
1999, Mr. Welch delivered the first draft LOI to IOC. On 17 February 1999, Mr.
Welch met with Mr. Powell in London to begin negotiating the terms of the LOI.
On 17 and 19 February 1999, Mr. Collins and Mr. Appleyard visited SDL's
facilities in Victoria, British Columbia and San Jose, California to assess
SDL's manufacturing and technical capabilities.
On 21 February 1999, at the 1999 Optical Fiber Conference being held in San
Diego, Mr. Welch and Mr. Powell met to continue negotiating the terms of the
LOI. These negotiations continued as time permitted during the conference and
the LOI was executed by SDL and IOC on 23 February 1999. On 25 and 26 February
1999, Douglas Carothers, SDL's director of legal affairs and intellectual
property, Della Bynum, vice president of human resources for SDL, together
with Christopher Barrett of Bird & Bird, SDL's UK legal advisers, visited IOC
and conducted legal due diligence on IOC. Further due diligence visits were
made on 2 March 1999 by Dennis Samaritoni, vice president of manufacturing,
and Paul Gaffney, facilities manager of SDL, specifically to assess
manufacturing key performance indices, health and safety and environmental
matters.
On 4 March 1999, SDL engaged Rea Brothers as its financial adviser in
connection with the Offer. Between 4 March 1999 and 31 March 1999, a series of
conference calls and meetings took place between Mr. Welch of SDL, Mr. Powell
of IOC, Rea Brothers, Henry Cooke, the firms of Bird & Bird and Morrison &
Foerster LLP, legal advisers to SDL, and Barlow Lyde & Gilbert and Latham &
Watkins, legal advisers to IOC. The purpose of these calls and meetings was to
discuss matters relating primarily to the terms and structure of the offer for
IOC, regulatory requirements relating to any such offer, the due diligence
investigation to be performed by SDL in order to assess the perceived benefits
of a combination with IOC, and to review the required documentation necessary
for a formal offer to be made by SDL for IOC.
On 24 March 1999, the board of SDL approved the terms of the Offer, subject to
agreement of the detailed terms, the form of the Offer Document and related
documents and the filing of the Registration Statement with the SEC. On 25
March 1999, the board of IOC approved the terms of the Offer, the draft form
of the Offer Document, the portions of the draft Registration Statement
relating to IOC and other related documents.
On 31 March 1999, SDL and IOC issued a press release announcing the terms of
the Offer and on 2 April 1999 filed the Registration Statement with the SEC
which was declared effective on 16 April 1999.
On 20 April 1999, SDL and IOC agreed that at and conditional upon the closing
of the Offer, SDL shall pay to IOC the sum of (Pounds)375,000 in partial
payment of the fees of the accounting and legal advisers to IOC.
15
<PAGE>
Reasons
The acquisition of IOC is intended to expand SDL's range of optical products
to its DWDM system customers and is a key part of SDL's strategy to offer a
full line of critical components to fiber optic systems manufacturers.
SDL is a leading supplier of 980 nm pump modules for use in fiber amplifiers
in both terrestrial and undersea communications business. SDL also offers a
line of other products for use in the telecommunications business, including
fiber Bragg gratings, WDM combined 980 nm pump lasers and modules, high power
1480 nm laser pump modules, fiber amplifiers and tunable 1550 nm sources for
telecommunications diagnostic equipment.
The IOC Group's operations, including manufacturing, design, development and
sales and marketing, are based in the United Kingdom. The combination of SDL
and IOC is expected to enhance SDL's presence in Europe and to enable greater
penetration of the US market by IOC. The IOC Group will also bring
technological expertise to SDL in the design of high frequency packaging.
The IOC board believes that becoming part of the SDL Group will provide the
IOC Group with greater resources to further develop its products, particularly
the ability to create integrated component modules which are of increasing
interest to DWDM customers. It is expected that the Enlarged Group will have
the credibility and critical mass to gain improved acceptance with key
customers, which is of growing importance in a competitive market already
subject to rapid change and consolidation.
The IOC board believes, having been so advised by Henry Cooke and having taken
into account the prospects for IOC as an independent company, that the Offer
is in the best interests of IOC and its shareholders.
10.Management and employees
Existing employment rights, including pension rights, of the management and
employees of the members of the IOC Group will be fully safeguarded.
Following the acquisition, the IOC executive management team is expected to
remain, including Mike Powell, who will continue as managing director of IOC.
The IOC operating unit will report to Gregory P. Dougherty, the chief
operating officer of SDL. SDL expects to integrate the sales organisations
into a common structure.
11.Financial effects of acceptance
The information set out hereunder shows, for illustrative purposes only and on
the bases and assumptions set out in the notes below, the financial effects of
acceptance on capital value and income for a holder of 100 IOC Shares
accepting the terms of the Offer, if the Offer becomes or is declared
unconditional in all respects:
(a) Capital value
<TABLE>
<CAPTION>
Based on SDL
Common Stock
price on:
---------------------------
Notes 30 March 1999 19 April 1999
<S> <C> <C> <C>
Sterling equivalent value of 1.815 shares of
New SDL Common Stock issued in exchange for
100 IOC Shares.............................. (i) (Pounds)92.64 (Pounds)98.27
Market value of 100 IOC Shares............... (ii) (Pounds)55.50 (Pounds)55.50
------------- -------------
Increase in value............................ (iii) (Pounds)37.14 (Pounds)42.77
============= =============
This represents an increase of............... (iii) 67 per cent. 77 per cent.
</TABLE>
16
<PAGE>
Notes:
(i) The sterling equivalents of SDL Common Stock are based on the NASDAQ
National Market System closing prices of $82.25 per share of SDL Common
Stock on 30 March 1999, the last dealing day before the announcement of
the Offer, and $87.0313 on 19 April 1999 (the latest practicable date
prior to the posting of this Offer Document) and exchange rates of $1.6115
to (Pounds)1 and $1.6075 to (Pounds)1, being the Noon Buying Rates on 30
March 1999 and 19 April 1999, respectively.
(ii) The market value attributed to 100 IOC Shares is based on the IOC Closing
Price of 55.5p on 30 March 1999, the last dealing day before the
announcement of the Offer.
(iii) No account has been taken of any liability to taxation or of the
treatment of any fractional entitlements to New SDL Common Stock.
(b) Income
SDL did not declare or pay a dividend in respect of the year ended 31 December
1998. SDL intends to continue its policy of retaining earnings for use in its
operations and in the expansion of its business and therefore does not
anticipate paying any cash dividends or making any other form of distribution
of income for the foreseeable future.
IOC did not declare or pay a dividend in respect of the year ended 30
September 1998.
12.Illustrative comparative per share data
The following tables set forth certain historical per share data of SDL and
IOC and combined per share data on an unaudited pro forma basis after giving
effect to the Offer on a pooling of interests basis assuming the issue of
1.815 shares of New SDL Common Stock in exchange for 100 IOC Shares and the
issuance of an option to purchase 1.815 of a share of SDL Common Stock for
every 100 outstanding options under the IOC Share Option Schemes. The data
below should be read in conjunction with the selected financial data and
separate historical financial statements of SDL and IOC included in this Offer
Document and the unaudited pro forma combined condensed financial statements
also included in this Offer Document. The unaudited pro forma combined
financial data are not necessarily indicative of the operating results that
would have been achieved had the Offer been consummated in an earlier period
and should not be construed as being representative of future operations.
Historical figures for IOC are based on pounds sterling amounts prepared on a
US GAAP basis.
Pounds sterling amounts have been translated into US dollars at either the
exchange rate at the end of the period presented or the weighted average
exchange rate for the period, as appropriate. A table setting forth the
sterling-dollar exchange rate at the end of certain financial periods, the
average rate for each period and the range of high and low rates for each
period can be found on page 42 of this Offer Document.
The historical book value per share is computed by dividing total
stockholders' equity by the number of shares of SDL Common Stock plus IOC
Shares outstanding at the end of the period. The pro forma book value per
share is computed by dividing pro forma stockholders' equity by the pro forma
number of shares of SDL Common Stock plus IOC Shares as of the end of the
period presented.
IOC per share equivalents are calculated by multiplying the SDL combined pro
forma per share amounts by 0.01815, the fraction of a share of SDL that will
be exchanged for each IOC Share. Net income/(loss) data were calculated based
on the weighted average number of IOC Shares and common equivalent shares
outstanding during the period. SDL and IOC have not paid cash dividends to
date.
17
<PAGE>
<TABLE>
<CAPTION>
Fiscal year ended December 31,
-----------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
HISTORICAL--SDL:
Net income/(loss) per share:
Basic................................. $0.92 $(1.83) $0.59
Diluted............................... $0.87 $(1.83) $0.54
Book value per share.................... $6.53
<CAPTION>
Fiscal year ended September 30,
-----------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
HISTORICAL--IOC: (U.S. GAAP)
Net (loss)/income per share:
Basic................................. $(0.19) $0.01 $0.05
Diluted............................... $(0.19) $0.01 $0.04
Book value per share.................... $ 0.48
<CAPTION>
Fiscal year ended December 31,
-----------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
UNAUDITED PRO FORMA COMBINED--PER SHARE
OF SDL COMMON STOCK:
Net income/(loss) per share:
Basic................................. $0.55 $(1.75) $0.66
Diluted............................... $0.52 $(1.75) $0.60
Book value per share.................... $7.29
<CAPTION>
Fiscal year ended December 31,
-----------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
UNAUDITED PRO FORMA COMBINED--PER IOC
SHARE:
Net income/(loss) per share:
Basic................................. $0.01 $(0.03) $0.01
Diluted............................... $0.01 $(0.03) $0.01
Book value per share.................... $0.13
</TABLE>
13.Taxation
The following discussion of taxation is included for general information and
only relates to the position of a person who is a UK resident or a United
States person, as defined below, and who is the absolute beneficial owner of
IOC Shares. In particular, the following does not discuss all of the tax
consequences that may be relevant to an IOC Shareholder in light of such
shareholder's particular circumstances or to holders subject to special rules,
such as insurance companies, dealers in securities, banks, tax-exempt
organizations, or holders of IOC Shares acquired upon the exercise of stock
options or through other compensatory transactions. The explanation of US and
UK tax laws set out below is based on laws and, in the case of the UK,
practice, at present in effect, including the Treaty, and, in the case of both
the US and the UK, judicial and administrative precedent as of the date
hereof. This explanation is subject to any changes in those laws, or in the
interpretation thereof by the relevant taxation authorities, which changes may
be made with prospective or retroactive effect, practice (in the case of the
UK) and precedent occurring after the date hereof. No information is provided
herein with respect to taxation under the laws of any jurisdiction other than
the UK and the US. IOC Shareholders who are in any doubt as to their taxation
position or are subject to taxation in any jurisdiction other than the UK or
the US are urged to consult their professional advisers as to the specific tax
consequences to them of the Offer.
18
<PAGE>
Taxation of UK residents
UK taxation
The following discussion summarises in general terms for an IOC Shareholder
who is a UK resident and who holds IOC Shares as an investment the principal
UK tax consequences associated with the exchange of securities pursuant to the
Offer. This summary assumes that SDL is resident for tax purposes only in the
US.
Taxation of capital gains. The exchange of IOC Shares by an IOC Shareholder in
return for New SDL Common Stock will not be treated as a disposal of IOC
Shares for the purposes of UK taxation of capital gains. The New SDL Common
Stock will instead be treated as the same asset as the IOC Shares, acquired as
and when the IOC Shares were acquired.
Any IOC Shareholder who, together with persons connected with him, owns more
than 5 per cent. of, or any class of, the shares in or debentures of IOC
should note that SDL has obtained a tax clearance from the UK Inland Revenue
under section 138 of the Taxation of Chargeable Gains Act 1992 which confirms
that the Inland Revenue is satisfied that the exchange of shares pursuant to
the Offer is being effected for bona fide commercial reasons and not for tax
avoidance purposes.
An IOC Shareholder will, to the extent that he receives cash in lieu of a
fraction of a share of New SDL Common Stock, be treated as making a part
disposal of his IOC Shares which may, depending upon his individual
circumstances, give rise to a liability to UK taxation of capital gains. If
the cash amount is (Pounds)3,000 or less, the shareholder may be treated as
having his allowable expenditure on SDL Common Stock as reduced by the amount
of cash received instead of treating this as a part disposal.
A subsequent disposal of New SDL Common Stock by a UK resident may give rise
to a liability to UK taxation of capital gains.
Stamp duty and stamp duty reserve tax. No UK stamp duty or stamp duty reserve
tax will be payable by an IOC Shareholder on the transfer of IOC Shares to
SDL. Any liability to UK stamp duty or stamp duty reserve tax on the transfer
of such IOC Shares to SDL will be borne by SDL. No UK stamp duty or stamp duty
reserve tax will be payable on the issue of New SDL Common Stock.
Dividends. SDL has never paid, and does not anticipate that it will pay, cash
dividends on its Common Stock. A UK resident will generally be liable to
income tax or corporation tax in the UK on the aggregate of any dividend
received from SDL and any tax withheld at source in the US (see below under
"US taxation"). In computing that liability to taxation, credit will be given
for any tax withheld in the US. In the case of a corporate UK resident which
controls 10 per cent. or more of the voting stock of SDL, credit will also be
available for underlying tax against UK taxes in respect of the dividend.
Special rules apply to UK residents who are not domiciled in the UK.
US taxation
The following is a general summary of certain US federal income and estate tax
consequences of the acquisition, ownership and disposition of New SDL Common
Stock by a UK resident who is not a "United States person" for the purposes of
US federal income tax. For the purposes of this summary, the term "United
States person" means: (i) a citizen or resident of the United
19
<PAGE>
States; (ii) a corporation, partnership, or association or legal entity
taxable as a corporation created or organised in the United States or under
the laws of the United States or of any political subdivision thereof; (iii)
an estate whose income is included in gross income for United States federal
income tax purposes regardless of its source; or (iv) a trust whose
administration is subject to the primary supervision of a United States court
and which has one or more United States persons who have the authority to
control all substantial decisions of the trust. This summary does not address
foreign, state or local tax consequences. IOC Shareholders are urged to
consult their own tax advisers regarding the US federal, state and local
income and other tax consequences of ownership and disposition of New SDL
Common Stock, as well as any tax consequences that may arise under the laws of
any foreign taxing jurisdiction.
Acquisition of SDL Common Stock. In general, if a UK resident realises a gain
or loss on the exchange of IOC Shares for New SDL Common Stock, such gain or
loss will be subject to US federal income tax only if: (i) such gain or loss
is effectively connected with such UK resident's conduct of a trade or
business in the United States, but if the UK resident is eligible for the
benefits of the Treaty, only if the gain or loss is attributable to a
permanent establishment of such UK resident in the United States; (ii) the UK
resident is an individual who is present in the United States for 183 or more
days during the taxable year and who meets certain other requirements; or
(iii) the UK resident is subject to tax pursuant to the provisions of US tax
law applicable to certain US expatriates. A UK resident who is subject to US
tax on the exchange of IOC Shares should consult his, her, or its own tax
adviser concerning the amount of the resulting tax liability, which will
depend on the UK resident's individual circumstances.
Dividends. SDL has never paid, and does not anticipate that it will pay, cash
dividends on its Common Stock. Should SDL ever pay a cash dividend on its
Common Stock, UK residents who hold New SDL Common Stock would generally be
subject to US withholding tax at the then-effective US withholding tax rate
(currently 30 per cent.), subject to reduction, in the case of a UK resident
eligible to claim the benefits of the Treaty, pursuant to the terms of the
Treaty as then in effect. Dividends that are effectively connected with a
United States trade or business conducted by a UK resident would not be
subject to withholding tax but would generally be taxed at the same graduated
rates that apply to United States persons. Dividends may be subject to backup
withholding at the rate of 31 per cent. unless the UK resident certifies to
certain required information in accordance with US Treasury Regulations.
Sales or other dispositions of SDL Common Stock. A UK resident generally will
not be subject to US income tax on gain realised upon a sale or other
disposition of New SDL Common Stock unless: (i) the gain is effectively
connected with the conduct of a trade or business in the United States, but if
the UK resident is eligible for the benefits of the Treaty, only if the gain
or loss is attributable to a permanent establishment of the UK resident in the
United States; (ii) the UK resident is an individual who is present in the US
for 183 days or more during the taxable year and certain other requirements
are met; or (iii) the UK resident is subject to tax pursuant to provisions of
US tax law applicable to US expatriates, including former citizens or
residents of the United States. A UK resident who is subject to US tax on a
sale or other disposition of New SDL Common Stock should consult with his,
her, or its own tax adviser concerning the amount of the resulting tax
liability, which will depend on the UK resident's individual circumstances.
The payment of the proceeds of a sale of SDL Common Stock to or through a US
office of a broker is currently subject to both information reporting and US
backup withholding at the rate of 31 per cent. unless the UK resident
certifies its non-US status under penalties of perjury or otherwise
establishes an exemption. Generally, US information reporting and backup
withholding requirements will not apply to the receipt by a UK resident of
proceeds of a sale of New SDL Common Stock through an office outside the
United States of a non-US broker. However, US information reporting, but not
backup withholding, generally will apply to a
20
<PAGE>
payment made outside the United States of the proceeds of a sale of New SDL
Common Stock through an office outside the United States of a broker if the
broker (i) is a United States person for US federal income tax purposes; (ii)
derives 50 per cent. or more of its gross income for certain periods from the
conduct of a trade or business in the United States; (iii) is a "controlled
foreign corporation" for US tax purposes; or (iv) with respect to payments
made after 31 December 1999, is a foreign partnership, if at any time during
its taxable year, one or more of its partners are US persons, as defined in US
Treasury Regulations, who in the aggregate hold more than 50 per cent. of the
income or capital interest in the partnership or if, at any time during its
taxable year, such foreign partnership is engaged in a US trade or business.
The US Treasury Department has recently finalized regulations regarding
withholding and information reporting ("the Final Regulations") which will
generally be effective for payments made after 31 December 1999. The Final
Regulations do not significantly alter the substantive withholding and
information reporting requirements but would alter the procedures for claiming
the benefits of an income tax treaty and change the certification procedures
relating to the receipt by intermediaries of payments on behalf of the
beneficial owner of shares of New SDL Common Stock. UK residents should
consult their own tax advisers regarding the effect, if any, of the Final
Regulations.
Backup withholding, if applied, is not an additional tax. Rather, the tax
liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained, provided that the required information is furnished to
the IRS.
Federal estate tax. New SDL Common Stock owned or treated as owned at the time
of death by an individual who is not a citizen or resident of the United
States for federal estate tax purposes will be included in such individual's
estate for US federal estate tax purposes unless an estate tax treaty applies
other rules. Under the US-UK Estate and Gift Tax Treaty, a UK domiciliary who
dies holding New SDL Common Stock will not include such shares in his estate
for purposes of determining liability for US estate tax.
Federal Gift Tax. A gratuitous transfer of New SDL Common Stock owned or
treated as owned at the time of transfer by an individual who is not a citizen
or resident of the United States for federal gift tax purposes generally will
not be subject to the federal gift tax.
Taxation of United States persons
UK taxation
The following is a summary of the principal UK tax consequences associated
with the exchange of securities pursuant to the Offer for an IOC Shareholder
who is a United States person (as defined above) and not a UK resident.
Taxation of chargeable gains. The exchange of IOC Shares by an IOC Shareholder
in return for New SDL Common Stock will not be subject to UK capital gains tax
unless, at the time of disposal, the IOC Shareholder carries on a business in
the UK through a branch or agency, in which event the comments contained in
"Taxation of UK residents -- Taxation of capital gains" will apply in the same
way as they apply to UK residents.
Stamp duty and stamp duty reserve tax. No UK stamp duty or stamp duty reserve
tax will be payable by an IOC Shareholder on the transfer of the IOC Shares to
SDL. Any liability to UK stamp duty or stamp duty reserve tax on the transfer
of such IOC Shares to SDL will be borne
21
<PAGE>
by SDL. No UK stamp duty or stamp duty reserve tax will be payable on the
issue of New SDL Common Stock.
Dividends. SDL has never paid, and does not anticipate that it will pay, cash
dividends on its Common Stock. Dividends, if any, paid on New SDL Common Stock
to a person who is not a UK resident will not be subject to UK tax unless that
person carries on a business in the UK through a branch or agency and the SDL
Common Stock is effectively connected with that branch or agency, in which
event the comments contained in "Taxation of UK residents--Dividends" will
apply in the same way as they apply to UK residents.
US taxation
The following is a general summary of certain US federal income tax
consequences of the acquisition, ownership and disposition of New SDL Common
Stock by a person who is a United States person (as defined above) for the
purposes of US federal income tax. This summary does not address foreign,
state or local tax consequences. IOC Shareholders who are United States
persons are urged to consult their own tax advisers regarding the US federal,
state and local income and other tax consequences of the exchange of IOC
Common Stock for New SDL Common Stock, as well as any tax consequences that
may arise under the laws of any foreign taxing jurisdiction.
The exchange of IOC Shares for New SDL Common Stock pursuant to the Offer
should constitute a taxable transaction for United States federal income tax
purposes. Accordingly, an IOC Shareholder who is a United States person should
realise and recognise gain or loss for US federal income tax purposes equal to
the excess of the fair market value of the New SDL Common Stock received in
the exchange, plus any cash received in lieu of a fractional share, over such
person's adjusted tax basis for the IOC Shares surrendered in the exchange.
Such gain or loss will constitute capital gain or loss if the IOC Shareholder
holds his IOC Shares as capital assets, and such capital gain or loss will be
long-term capital gain or loss if the IOC Shareholder's holding period for the
IOC Shares exchanged exceeds one year. A United States person who is subject
to US tax on the exchange of IOC Shares should consult his own tax adviser
concerning the amount of the resulting tax liability, which will depend on the
IOC Shareholder's individual circumstances. An IOC Shareholder who receives
New SDL Common Stock in exchange for his IOC Shares will take a tax basis in
such New SDL Common Stock equal to the fair market value of the New SDL Common
Stock, and will begin a new holding period for the New SDL Common Stock.
As noted above, SDL does not anticipate that it will pay cash dividends on its
Common Stock. Distributions, if any, paid on New SDL Common Stock will be
subject to tax as ordinary dividend income to the extent of SDL's current or
accumulated earnings and profits, then as a return of capital to the extent of
the shareholder's tax basis in the shares of New SDL Common Stock received,
and then as gain from the sale of such stock.
Upon the sale or exchange of SDL Common Stock, a former IOC Shareholder will
recognise taxable capital gain or loss equal to the difference between the
amount realised from the sale or exchange and such holder's tax basis in the
shares, assuming that the shares of SDL Common Stock are held as a capital
asset on the day of the sale or exchange.
"Backup" withholding and information reporting requirements apply to certain
payments of dividends and of proceeds from the sale of stock by certain non-
corporate United States persons. SDL, its agent, a broker or any paying agent,
as the case may be, will be required to withhold from any payment that is
subject to backup withholding a tax equal to 31 per cent. of such payment if
the affected shareholder fails to furnish his taxpayer identification number
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(social security number or employer identification number), to certify that
such holder is not subject to backup withholding or to comply otherwise with
the applicable requirements of the backup withholding rules. Any amounts
withheld under the backup withholding rules from a payment to a United States
person would be allowed as a credit or refund against such person's US federal
income tax liability if the required information is furnished to the Internal
Revenue Service.
14.Procedure for acceptance
This section should be read together with the notes on the Form of Acceptance
You should note that, if you hold IOC Shares in both certificated form and
uncertificated form (that is, in CREST), you should complete a separate Form
of Acceptance for each holding. If you hold IOC Shares in uncertificated form,
but under different member account IDs, you should complete a separate Form of
Acceptance in respect of each member account ID.
Similarly, if you hold IOC Shares in certificated form but under different
designations, you should complete a separate Form of Acceptance in respect of
each designation.
To accept the Offer
To accept the Offer, the Form of Acceptance must be completed and returned,
whether or not your IOC Shares are in CREST. You should complete Boxes 1 and 3
and (if your IOC Shares are in CREST) Box 4, and in all cases sign Box 2 of
the Form of Acceptance in the presence of a witness, who should also sign in
accordance with the instructions printed in the Form of Acceptance.
Return of Form of Acceptance
The completed Form of Acceptance, together, if your IOC Shares are in
certificated form, with your share certificate(s) for such IOC Shares and/or
other document(s) of title, should be returned by post or by hand to New
Issues Department, IRG plc, PO Box 166, Bourne House, 34 Beckenham Road,
Beckenham, Kent BR3 4TH or by hand only (during normal business hours) to IRG
plc, 23 Ironmonger Lane, London, EC2 as soon as possible but, in any event, so
as to be received not later than 3.00 p.m. (UK time) on 12 May 1999. A reply-
paid envelope is enclosed for your convenience and may be used by IOC
Shareholders for returning the Form of Acceptance within the UK. No
acknowledgment of receipt of documents will be given. The instructions printed
on the Form of Acceptance shall be deemed to form part of the terms of the
Offer.
Shares in uncertificated form (that is, in CREST)
If your IOC Shares are in uncertificated form, you should insert, in Box 4 of
the enclosed Form of Acceptance, the participant ID and member account ID
under which such shares are held by you in CREST and otherwise complete and
return the Form of Acceptance as described above. In addition, you should take
(or procure to be taken) the action set out below to transfer the IOC Shares
in respect of which you wish to accept the Offer to an escrow balance,
specifying IRG plc (in its capacity as a CREST participant under its
participant ID referred to below) as the escrow agent, as soon as possible and
in any event so that the transfer to escrow settles not later than 3.00 p.m.
(UK time) on 12 May 1999.
If you are a CREST sponsored member, you should refer to your CREST sponsor
before taking any action. Your CREST sponsor will be able to confirm details
of your participant ID and the
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member account ID under which your IOC Shares are held. In addition, only your
CREST sponsor will be able to send the TTE instruction to CRESTCo in relation
to your IOC Shares.
You should send (or, if you are a CREST sponsored member, ensure that your
CREST sponsor sends) a TTE instruction to CRESTCo which must be properly
authenticated in accordance with CRESTCo's specifications and which must
contain, in addition to the other information that is required for a TTE
instruction to settle in CREST, the following details:
. the number of IOC Shares to be transferred to an escrow balance;
. your member account ID. This must be the same member account ID as the
member account ID that is inserted in Box 4 of the Form of Acceptance;
. your participant ID. This must be the same participant ID as the
participant ID that is inserted in Box 4 of the Form of Acceptance;
. the participant ID of the escrow agent, IRG plc, in its capacity as a
CREST Receiving Agent. This is RA10;
. the member account ID of IRG plc. This is "IOC";
. the Form of Acceptance Reference Number. This is the Reference Number
that appears next to Box 4 on page 3 of the Form of Acceptance. This
Reference Number should be inserted in the first eight characters of
the shared note field on the TTE instruction. Such insertion will
enable IRG plc to match the transfer to escrow to your Form of
Acceptance. You should keep a separate record of this Reference Number
for future reference;
. the intended settlement date. This should be as soon as possible and
in any event not later than 3.00 p.m. (UK time) on 12 May 1999;
. the Corporate Action ISIN. This is GB0004755459;
. the Corporate Action Number for the Offer. This is allocated by
CRESTCo and can be found by viewing the relevant Corporate Action
details in CREST; and
. input with a Standard Delivery Instruction priority of 80.
After settlement of the TTE instruction, you will not be able to access the
IOC Shares concerned in CREST for any transaction or charging purposes. If the
Offer becomes or is declared unconditional in all respects, IRG plc will
transfer the IOC Shares concerned to itself in accordance with paragraph (e)
of Part C of Appendix I--"Conditions and further terms of the Offer."
You are recommended to refer to the CREST Manual published by CRESTCo for
further information on the CREST procedure outlined above. For ease of
processing, you are requested wherever possible, to ensure that a Form of
Acceptance relates to only one transfer to escrow.
If no Form of Acceptance Reference Number, or an incorrect Form of Acceptance
Reference Number, is included on the TTE instruction, SDL may treat any amount
of IOC Shares transferred to an escrow balance in favour of IRG plc specified
above from the participant ID and member account ID identified in the TTE
instruction as relating to any Form of Acceptance which relates to the same
member account ID and participant ID (up to the amount of IOC Shares inserted
or deemed to be inserted on the Form of Acceptance concerned).
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You should note that CRESTCo does not make available special procedures, in
CREST, for any particular corporate action. Normal system timings and
limitations will therefore apply in connection with a TTE instruction and its
settlement. You should therefore ensure that all necessary action is taken by
you (or by your CREST sponsor) to enable a TTE instruction relating to IOC
Shares to settle prior to 3.00 p.m. (UK time) on 12 May 1999. In this
connection, you are referred in particular to those sections of the CREST
Manual concerning practical limitations of the CREST system and timings.
SDL will make an appropriate announcement if any of the details contained
under "Procedure for acceptance--Shares in Uncertificated Form (that is, in
CREST)" of this paragraph 14 alter for any reason.
Share certificates not readily available or lost
If your IOC Shares are in certificated form but your share certificate(s)
and/or other document(s) of title is/are not readily available or is/are lost,
the relevant Form of Acceptance should nevertheless be completed, signed and
returned so as to arrive not later than 3.00 p.m. (UK time) on 12 May 1999 at
New Issues Department, IRG plc, PO Box 166, Bourne House, 34 Beckenham Road,
Beckenham, Kent BR3 4TH or by hand only (during normal business hours) to IRG
plc, 23 Ironmonger Lane, London EC2, together with any share certificate(s)
and/or document(s) of title that you have available, accompanied by a letter
stating that the balance will follow or that you have lost one or more share
certificate(s) and/or document(s) of title. You should then arrange for the
relevant share certificate(s) and/or other document(s) of title to be
forwarded as soon as possible thereafter. No acknowledgment of receipt of
documents will be given. In the case of loss, you should write as soon as
possible to IOC's registrars, IRG plc, Balfour House, 390-398 High Road,
Ilford, Essex IG1 INQ, for a letter of indemnity for lost share certificate(s)
and/or other document(s) of title, which, when completed in accordance with
the instructions given, should be returned to New Issues Department, IRG plc,
PO Box 166, Bourne House, 34 Beckenham Road, Beckenham, Kent BR3 4TH or by
hand only (during normal business hours) to IRG plc, 23 Ironmonger Lane,
London EC2.
Deposits of IOC Shares into, and withdrawals of IOC Shares from, CREST
Normal CREST procedures (including timings) will be applied in relation to any
IOC Shares that are, or are to be, converted from uncertificated to
certificated form, or from certificated to uncertificated form, during the
course of the Offer (whether any such conversion arises as a result of a
transfer of IOC Shares or otherwise). IOC Shareholders who are proposing so to
convert any such shares are recommended to ensure that the conversion
procedure is implemented in sufficient time to enable the person holding or
acquiring the shares as a result of the conversion to take all necessary steps
in connection with an acceptance of the Offer (in particular, as regards
delivery of share certificate(s) and/or other document(s) of title or
transfers to an escrow balance as described above) prior to 3.00 p.m. (UK
time) on 12 May 1999.
Validity of acceptance
Subject to the provisions of the City Code and without prejudice to paragraph
5 of Part B of Appendix I --"Conditions and further terms of the Offer", SDL
reserves the right to treat as valid any acceptance of the Offer which is not
entirely in order or which is not accompanied by the relevant transfer to
escrow or (as applicable) the relevant share certificate(s) and/or other
document(s) of title. In that event, no shares of SDL Common Stock will be
issued under the Offer, until after the relevant transfer to escrow has
settled or (as applicable) the relevant share certificate(s) and/or other
document(s) of title or indemnities satisfactory to SDL have been received.
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Overseas Shareholders
The attention of shareholders who are citizens or residents of jurisdictions
outside the United Kingdom is drawn to paragraph 7 of Part B and Part C of
Appendix I -- "Conditions and further terms of the Offer" and to the relevant
provisions of the Form of Acceptance, including Box 5.
Forms of Acceptance should be returned as soon as possible and in any event so
as to be received by no later than 3.00 p.m. (UK time) on 12 May 1999.
If you are in any doubt as to the procedure for acceptance, please contact IRG
plc by telephone on 0181 639 2188 or at New Issues Department, IRG plc, PO Box
166, Bourne House, 34 Beckenham Road, Beckenham, Kent BR3 4TH. You are
reminded that, if you are a CREST member, you should contact your CREST
sponsor before taking any action.
15.Settlement
Subject to the Offer becoming or being declared unconditional in all respects
and, in the case of IOC Shareholders who are citizens, nationals or residents
of jurisdictions outside the UK or who are in Canada, Japan or Australia,
except as provided in paragraph 7 of Part B of Appendix I -- "Conditions and
further terms of the Offer", settlement of the consideration to which any IOC
Shareholder is entitled under the Offer will be effected: (i) in the case of
acceptances received, complete in all respects, by the date on which the Offer
becomes or is declared unconditional in all respects, within 14 days of such
date; or (ii) in the case of acceptances of the Offer received, complete in
all respects, after the date on which the Offer becomes or is declared
unconditional in all respects but whilst it remains open for acceptance,
within 14 days of such receipt. Certificates for New SDL Common Stock and,
where applicable, cheques representing fractional entitlements will be
despatched to IOC Shareholders. In the case of joint holders of IOC Shares,
these will be despatched to the joint holder whose name appears first in the
register of members. All documents will be sent by pre-paid post at the risk
of the person entitled thereto. Accepting IOC Shareholders will receive their
New SDL Common Stock certificates without having to take any further action.
Dealings in New SDL Common Stock are expected to commence on NASDAQ shortly
after the Offer becomes or is declared unconditional in all respects. Pending
despatch of certificates, transfers of New SDL Common Stock will be certified
against the register of stockholders of SDL.
If the Offer does not become or is not declared unconditional in all respects:
(i) share certificate(s) and/or other document(s) of title will be returned by
post (or such other method as may be approved by the Panel) within 14 days of
the Offer lapsing to the person or agent whose name and address outside
Canada, Japan and Australia is set out in Box 6 of the Form of Acceptance or,
if none is set out, to the first named holder at his registered address
outside Canada, Japan and Australia; and (ii) IRG plc will, immediately after
the lapsing of the Offer (or within such longer period, not exceeding 14 days
after the Offer lapsing, as the Panel may approve), give TFE instructions to
CRESTCo to transfer all IOC Shares held in escrow balances to the original
available balances of the IOC Shareholders concerned.
Except with the consent of the Panel, settlement of the consideration to which
any IOC Shareholder is entitled under the Offer will be implemented in
accordance with the terms of the Offer without regard to any lien, right of
set-off, counterclaim or other analagous right to which SDL may otherwise be,
or claim to be, entitled against such shareholders.
All documents and remittances sent by, to or from IOC Shareholders or their
appointed agents will be sent at their own risk.
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16.Further information
Your attention is drawn to the other sections and Appendices contained in this
Offer Document which contain certain additional relevant information.
Yours faithfully
for and on behalf of
Rea Brothers Limited
Jennifer A. Pantling
Director
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INFORMATION REGARDING SDL
1. RISK FACTORS
This offer Document contains forward-looking statements that involve risks
and uncertainties. SDL's and IOC's actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
risks and uncertainties, including risks relating to:
. the integration of SDL and IOC,
. the integration by SDL of other acquisitions,
. the respective businesses of SDL and IOC, including risks relating to
the timing and magnitude of sales, the timing and scope of technological
advances and the overall condition of the optoelectronic industry, and
. other matters set forth in this section and elsewhere in this Offer
Document and in the documents incorporated herein by reference.
In addition to the other information in this Offer Document, the following
risk factors should be considered carefully by IOC Shareholders in determining
whether or not to accept the Offer.
Risks relating to the Offer
We may experience difficulty integrating IOC
The Offer involves integrating two companies that have previously operated
independently. This integration will require significant effort from each
company, including the co-ordination of their research and development and
sales and marketing efforts. We cannot assure you that SDL will be able to
integrate the operations of IOC without encountering difficulties or
experiencing the loss of IOC or SDL personnel or that the benefits expected
from integrating the two companies will be realised. This integration will
require the dedication of management resources that may distract management's
attention from the day-to-day business of the combined companies. Any
difficulties encountered in the integration process (including the
interruption of, or a loss of momentum in, IOC's activities, problems
associated with integration of management information and reporting systems
and delays in implementation of consolidation plans) could adversely impact
SDL's ability to realise the anticipated benefits of the Offer.
Our stock price has been and may continue to be volatile
In the Offer, each IOC Share will be exchanged for a fraction of a share of
New SDL Common Stock. The market prices of SDL Common Stock and IOC Shares are
set out in Appendix V--"Certain market and dividend information." IOC
Shareholders should obtain recent market quotations for SDL Common Stock and
IOC Shares. SDL Common Stock and IOC Shares historically have experienced
price volatility. We cannot guarantee you the market prices of SDL Common
Stock or IOC Shares at any time.
IOC's customers may react adversely to the combination with us
Any number of IOC's existing customers or strategic partners may, following
a change of control of IOC, choose to review their contractual or business
relationships with IOC. This review could result in delayed or lost sales to
either SDL or IOC.
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Our stockholders have different rights under US law
After the Offer, IOC Shareholders will hold shares of New SDL Common Stock.
The rights of IOC Shareholders under IOC's Articles of Association are
different from the rights of our Stockholders under our Restated Certificate of
Incorporation and our Amended and Restated Bylaws. See Appendix VII--
"Description of SDL Capital Stock and changes in certain rights of IOC
Shareholders."
Purchase accounting could adversely affect our operating results
The Offer is intended to qualify for pooling of interests accounting
treatment under US GAAP. Under pooling of interests treatment, our accounts
will be combined with those of IOC at their historical carrying amounts and our
financial statements for all prior periods will be restated, if material, to
reflect our accounts as if the two companies had been combined for all periods.
We anticipate that the requirements necessary for the transaction to be
treated as a pooling of interests will be met at the date that the Offer
becomes or is declared unconditional in all respects. These requirements will
continue after this date, including the requirement that no Affiliate of either
company may reduce its risk relative to its shareholdings within the period
beginning 30 days prior to the date that the Offer is declared unconditional in
all respects and ending when financial results covering at least 30 days of
post-combination operations have been published. We have entered or will enter
into agreements with our and IOC's Executive Officers and Directors to restrict
their disposition of shares to the extent necessary to preserve pooling of
interests treatment. We cannot assure you, however, that the acquisition of
IOC, if consummated, will qualify for pooling of interests treatment.
If the transaction becomes or is declared unconditional in all respects and
does not qualify for pooling of interest treatment, the purchase method of
accounting will be applied. Under that method, the fair value of the New SDL
Common stock and options to purchase SDL Common Stock issued by us in the
transaction would be recorded as the cost of acquiring IOC's business. That
cost would be allocated to the individual tangible and intangible assets
acquired and liabilities assumed according to their respective estimated fair
values. Intangible assets acquired may include amounts for:
. assembled workforce,
. developed technology,
. trademarks,
. in-process research and development, and
. other intangibles.
Cost in excess of the fair value of the identified tangible and intangible
assets acquired and liabilities assumed, if any, would be allocated to
goodwill. Amounts allocated to in-process research and development will be
expensed in the period the transaction is consummated. Amounts allocated to
intangible assets acquired, including goodwill but excluding in-process
research and development, will be amortised to expense over their estimated
useful lives. Purchase accounting treatment could materially adversely impact
the reported operating results of the combined companies during those periods
as compared to that under the pooling of interests treatment.
Sales of New SDL Common Stock could decrease SDL stock price
Assuming the Offer is successfully completed, up to 632,088 shares of SDL
Common Stock will be issued, of which up to 580,172 shares will be immediately
freely tradable under the
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Securities Act. The remaining shares, which will be issued to the directors of
IOC, will become freely tradable after we have published financial results for
the period covering at least 30 days of combined operations commencing on the
offer being declared unconditional in all respects. Sales of a substantial
number of such shares of SDL Common Stock could decrease the per share market
price of SDL Common Stock.
Risks relating to SDL's business
SDL has experienced and could again experience manufacturing difficulties
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,
. hybrid microelectronic packaging,
. 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 of equipment,
. equipment failures,
. poor yields,
. fire or natural disaster, 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
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production yields on some of our products, including certain key product lines
during 1997 and the first half of 1998. This reduction in yields:
. adversely affected gross margins,
. delayed component, product and system shipments, and
. to a certain extent, delayed new orders booked.
Although more recently, our yields have improved, we cannot assure you that
yields will continue to improve or not decline in the future, nor that in the
future our manufacturing yields will be acceptable to ship products on time.
To the extent that we experience lower than expected manufacturing yields or
experience any shipment delays, gross margins will likely be significantly
reduced and we could lose customers and experience reduced or delayed customer
orders and cancellation of existing backlog. We presently are ramping
production of some of our product lines by:
. hiring and training new personnel,
. acquiring new equipment, and
. expanding our packaging facilities and capabilities.
Difficulties in starting production to meet expected demand and schedules
have occurred in the past and may occur in the future including the following:
. quality problems could arise, yields could fall, and gross margins could
be reduced during such a ramp.
. aggressive volume pricing for large long-term orders has been provided
to certain customers.
. cost reductions in manufacturing are required to avoid a drop in gross
margins for certain products sold to customers receiving volume pricing.
These cost reductions may not occur rapidly enough to avoid a decrease in
gross margins on products sold under volume pricing terms. In that event, our
business and results of operations would be materially adversely affected.
Our business depends on developing new products and applications
Our current products serve many applications in the communications and
materials processing and printing markets. In many cases, our products are
substantially completed, but the customer's product incorporating our products
is not yet completed or the applications or markets for the customer's product
are new or emerging. In addition, some of our customers are currently in the
process of developing new products that are in various stages of development,
testing and qualification, and sometimes are in emerging applications or new
markets.
We believe that rapid customer acceptance of our new products is key to our
financial results. A substantial portion of our products address markets that
are not now, and may never become, substantial commercial markets. We have
experienced, and are expected to continue to experience, fluctuation in
customer orders and competitive, technological and pricing constraints that
may preclude development of markets for our products and our customers'
products.
Our customers are often required to test and qualify laser pump modules,
transmitters, and marking systems among other new products for potential
volume applications. We cannot assure you that:
. we or our customers will continue their existing product development
efforts, or if continued that such efforts will be successful,
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. markets will develop for any of our technology or that pricing will
enable such markets to develop, or
. other technology or products will not supersede our products or our
customer's products.
We may also be unable to develop new products on a timely schedule. Moreover,
even if we are successful in the timely development of new products that are
accepted in the market, we often experience lower margins on these products.
The lower margins are due to lower yields and other factors, and thus we may be
unable to manufacture and sell new products at an acceptable cost so as to
achieve acceptable gross margins.
Our growth and expansion may strain our resources
We have on occasion been unable to manufacture products in quantities
sufficient to meet demand of our existing customer base and new customers. The
expansion in the scope of our operations has placed a considerable strain on
our management, financial, manufacturing and other resources and has required
us to implement and improve a variety of operating, financial and other
systems, procedures and controls. In addition, we are currently deploying a new
enterprise resource planning system.
We cannot assure you that any existing or new systems, procedures or controls
will be adequate to support our operations or that our systems, procedures and
controls will be designed, implemented or improved in a cost-effective and
timely manner. Any failure to implement, improve and expand such systems,
procedures and controls in an efficient manner at a pace consistent with our
business could have a material adverse effect on our business and results of
operations.
Our future success is dependent, in part, on our ability to attract,
assimilate and retain additional employees, including certain key personnel. We
will continue to need a substantial number of additional personnel, including
those with specialized skills, to commercialize our products and expand all
areas of our business in order to continue to grow. Competition for such
personnel is intense, and we cannot assure you that we will be able to attract,
assimilate or retain additional highly qualified personnel.
Our acquisition strategy poses several risks
Our strategy involves the acquisition and integration of additional
companies' products, technologies and personnel. We have limited experience in
acquiring outside businesses. Acquisition of businesses requires substantial
time and attention of management personnel and may require additional equity or
debt financings. Furthermore, integration of newly established or acquired
businesses is often disruptive. Since we have acquired or in the future may
acquire one or more businesses, we cannot assure you that we will:
. identify appropriate targets,
. acquire such businesses on favorable terms, or
. be able to successfully integrate such organizations into our business.
Failure to do so could significantly impair our business, financial condition
and results of operations.
We have depended on government programs and contracts
We derived approximately 28 per cent., 38 per cent., and 43 per cent. of our
revenue during fiscal 1998, 1997, and 1996, respectively, directly and
indirectly from a variety of
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Federal government sources. We received approximately 14 per cent., 19 per
cent. and 21 per cent. of our revenue for fiscal 1998, 1997 and 1996,
respectively, from Lockheed Martin through several US government and commercial
programs. We derived almost all of our revenue from Lockheed Martin during
these periods from Federally-funded programs.
The demand for certain of our services and products is directly related to
the level of funding of government programs. We believe that the success and
further development of our business is dependent, in significant part, upon the
continued existence and funding of such programs and upon our ability to
participate in such programs. For example, Federal programs funded
substantially all of our research revenue for 1998, 1997 and 1996. Most of our
Federally-funded programs are subject to renewal every one or two years, so
that continued work by us under these programs in future periods is not
assured. Federally-funded programs are subject to termination for convenience
of the government agency, at which point we would be reimbursed for related
allowable costs incurred to the termination date.
Federally-funded contracts are subject to audit of pricing and actual costs
incurred, which have resulted, and could result in the future, in price
adjustments. The Federal government has in the past, and could in the future,
challenge our accounting methodology for computing indirect rates and
allocating indirect costs to government contracts. The government is currently
challenging certain indirect cost allocations. While we believe that amounts
recorded on our financial statements are adequate to cover all related risks,
the government has not concluded its investigation or agreed to a settlement
with us. Although the outcome of this matter cannot be determined at this time,
we do not believe that its outcome will have a material adverse effect on our
financial position, results of operations and cash flows. However, based on
future developments, our estimate of the outcome of these matters could change
in the near term. In addition, a change in our accounting practices in this
area could result in reduced profit margins on government contracts.
We depend upon key personnel and may be unable to hire qualified personnel
Our future performance also depends in significant part upon the continued
service of our key technical and senior management personnel. The loss of the
services of one or more of our officers or other key employees could
significantly impair our business, operating results and financial condition.
While many of our current employees have many years of service with us, there
can be no assurance that we will be able to retain our existing personnel. If
we are unable to retain and hire additional personnel, our business and results
of operations could be materially and adversely affected. See also "Our
acquisition strategy poses several risks" above.
We have been subject to patent infringement claims
The semiconductor, optoelectronics, communications, information and laser
industries are characterized by frequent litigation regarding patent and other
intellectual property rights. From time to time we have received and may
receive in the future, notice of claims of infringement of other parties'
proprietary rights and licensing offers to commercialize third party patent
rights. In addition, we cannot assure you that:
. additional infringement claims (or claims for indemnification resulting
from infringement claims) will not be asserted against us, or
. that existing claims or any other assertions will not result in an
injunction against the sale of infringing products or otherwise
significantly impair our business and results of operations.
In 1985, we first received correspondence from Rockwell International
Corporation alleging that we used a fabrication process that infringes
Rockwell's patent rights. Those allegations
33
<PAGE>
led to two related lawsuits, one of which is still pending. The first lawsuit
was filed in August 1993, when Rockwell sued the Federal government in the
United States Court of Federal Claims, alleging infringement of these patent
rights with respect to the contracts the Federal government has had with at
least 15 companies, including us (Rockwell International Corporation v. The
United States of America, No. 93-542C (US Ct. Fed. Cl.)). We were not
originally named as a party to this lawsuit. However, the Federal government
has asserted that, if we were held liable to Rockwell for infringement of
Rockwell's patent rights in connection with some of its contracts with us, then
we would be liable to indemnify the Federal government for a portion of its
liability on certain contracts.
In June 1995, after Rockwell filed a second lawsuit, we filed a motion to
intervene in the lawsuit filed in August 1993. That motion was granted on
August 17, 1995. Upon intervening in the Federal government's lawsuit, we filed
an answer to Rockwell's complaint, alleging that:
. Rockwell's patent was invalid and that we did not infringe Rockwell's
patent,
. Rockwell's patent was unenforceable under the doctrine of inequitable
conduct, and
. Rockwell's action is barred by the doctrines of laches and equitable
estoppel.
After extensive discovery, we moved, as did the Federal government, for
summary judgment on the ground that Rockwell's patent was invalid. By order
dated February 5, 1997, the Court of Federal Claims granted those motions and
entered judgment in our favor and in favor of the Federal government. However,
Rockwell appealed the Court of Federal Claims' decision, and on June 15, 1998,
the United States Court of Appeals for the Federal Circuit issued an opinion
vacating the judgment that had been entered in our favor and in favor of the
Federal government. The US Circuit Court for the Federal Circuit held that the
Court of Federal Claims had erred in finding that there were no genuine
disputes of material fact concerning the obviousness of the Rockwell patent,
and that the resolution of these disputes requires a trial. The Federal
Circuit:
. remanded the case back to the trial court for further proceedings, and
. affirmed the Court of Federal Claims' denial of our motion for summary
judgment of invalidity based on anticipation, as well as the Court of
Federal Claims' claim construction.
Subsequent to the Federal Circuit's action, Rockwell and the United States
reached a settlement in the lawsuit filed on August 1993. Pursuant to the
settlement ending this lawsuit, a judgment was entered in Rockwell's favor
against the Federal government in the amount of $16,900,000. We did not
participate in the settlement. The Federal government has not again raised the
issue of our potential indemnity obligation.
As noted above, we made our decision to intervene in the lawsuit filed on
August 1993 after Rockwell filed suit against us in the Northern District of
California in May 1995, alleging that we had infringed the Rockwell patent in
connection with our manufacture and sale of products to customers other than
the United States. Again, the complaint alleges that we used a fabrication
process that infringes the Rockwell patent (Rockwell International Corporation
v. SDL, Inc., No. C95-01729 MHP (US Dist.Ct., N.D. Cal.)). By its complaint,
Rockwell seeks a permanent injunction against us to:
. enjoin us from infringement of the Rockwell patent,
. require us to pay damages in an unspecified amount for our alleged past
infringement of the patent, treble damages and attorneys' fees.
34
<PAGE>
The complaint was served on us on June 30, 1995, and we filed an answer to the
complaint on August 18, 1995, alleging that:
. Rockwell's patent is invalid,
. we did not infringe Rockwell's patent,
. Rockwell's patent is unenforceable under the doctrine of inequitable
conduct, and
. Rockwell's action is barred by the doctrines of laches and equitable
estoppel.
On August 11, 1995, prior to filing our answer, we filed a motion to stay
this action based upon the pendency of the lawsuit brought by the federal
government. The District Court granted our motion to stay on September 15,
1995. Subsequent to the settlement of this lawsuit, the District Court lifted
this stay, and discovery has re-commenced for the lawsuit filed on May 1995.
Although the Court of Federal Claims ruled in our favor, finding the patent
invalid on motion for summary judgment, the Court of Appeals for the Federal
Circuit reversed the summary judgment ruling, meaning that the issue of
validity needed to go to trial. Such a trial would now occur before a jury in
California. We believe that we have meritorious defenses to Rockwell's
allegations. It should be noted that the resolution of intellectual property
disputes is often fact intensive and, therefore, the results are inherently
uncertain. There can be no assurance that Rockwell will not ultimately prevail
in this dispute. If Rockwell were to prevail, Rockwell could be awarded
substantial monetary damages and/or an injunction against us for the sale of
infringing products. If this injunction were entered, we may seek to obtain a
license to use Rockwell's patent.
We cannot assure you, however, that a license would be available on
reasonable terms or at all. The award of monetary damages against us, or the
grant of an injunction and failure to obtain a license to use Rockwell's
patent on commercially reasonable terms could have a material adverse effect
on our business and results of operations. Litigation of Rockwell's claim
against us is expected to involve significant expense to us and could divert
the attention of our technical and management personnel and could have a
material adverse effect on our business and results of operations.
In addition, we are involved in various legal proceedings arising in the
ordinary course of our business.
Orders from our customers fluctuate
Our product revenue is subject to fluctuations in customer orders.
Occasionally, some of our customers have ordered more products than they need
in a given period, thereby building up inventory and delaying placement of
subsequent orders until such inventory has been reduced. We may also build
inventory in anticipation of receiving new orders in the future. Also,
customers have occasionally placed large orders that they have subsequently
cancelled. In addition, due to the fact that our sales of our 980 nm pump
module products comprise a significant portion of our total revenues, our
revenues are particularly susceptible to customer order fluctuations for this
product. These fluctuations, cancellations and the failure to receive new
orders can have adverse effects on our business and results of operations. We
may also have incurred significant inventory or other expenses in preparing to
fill such orders prior to their cancellation. Virtually our entire backlog is
subject to cancellation. Cancellation of significant portions of our backlog,
or delays in scheduled delivery dates, could have a material adverse effect on
our business and results of operations.
35
<PAGE>
We depend on ownership of our technology and our technical expertise
Our future success and competitive position is dependent in part upon our
proprietary technology, and we rely in part on patent, trade secret, trademark
and copyright law to protect our intellectual property. There can be no
assurance that:
. any of the 127 patents owned or approximately 134 patents licensed by us
will not be invalidated, circumvented, challenged or licensed to others,
. the rights granted under the patents will provide competitive advantages
to us,
. any of our approximately 90 pending or future patent applications will
be issued with the scope of the claims sought by us, if at all, or
. that others will not develop technologies that are similar or superior
to our technology, duplicate our technology or design around the patents
we own, or patent or assert patents on technology which we might use or
intend to use.
In addition, effective copyright and trade secret protection may be
unavailable, limited or not applied for in certain foreign countries. Our
technology is licensed on a non-exclusive basis from Xerox and other third
parties that may license such technology to others, including our competitors.
There can be no assurance that steps we take to protect our technology will
prevent misappropriation of such technology. In addition, litigation has been
necessary and may be necessary in the future:
. 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.
Our markets are extremely competitive
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
certain of our customers have been or could be acquired by, or enter into
strategic relations with our competitors. In most of our product lines, our
competitors and we are working to develop new technologies, or improvements
and modifications to existing technologies, which will obsolete present
products. Many of our competitors have significantly greater financial,
technical, manufacturing, marketing, sales and other resources than we do.
36
<PAGE>
In addition, many of these competitors may be able to respond more quickly to
new or emerging technologies, evolving industry trends and changes in customer
requirements and to devote greater resources to the development, promotion and
sale of their products than we. We cannot assure you that:
. our current or potential competitors have not already or will not in the
future develop or acquire products or technologies comparable or
superior to those that we developed,
. 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 have risks of doing business internationally
Revenues from customers outside of the United States accounted for
approximately 24 per cent., 17 per cent. and 15 per cent., of our total revenue
in 1998, 1997 and 1996, respectively. International revenue carries a number of
inherent risks, including:
. reduced protection for intellectual property rights in some countries,
. the impact of unstable environments in economies outside the United
States,
. generally longer receivable collection periods,
. changes in regulatory environments,
. tariffs, and
. other potential trade barriers.
In addition, some of our international revenue is subject to export licensing
and approvals by the Department of Commerce or other Federal governmental
agencies. Although to date, we have experienced little difficulty in obtaining
such licenses or approvals, the failure to obtain these licenses or approvals
or comply with such regulations in the future could have a material adverse
effect on our business and results of operations.
We currently use local distributors in key industrialized countries and local
representatives in smaller markets. Although we have formal distribution
contracts with some of our distributors and representatives, some of our
relationships are currently on an informal basis. Most of our international
distributors and representatives offer only our products; however, certain
distributors offer competing products and we cannot assure you that additional
distributors and representatives will not also offer products that are
competitive with our products. We cannot assure you that our international
distributors and representatives will enter into formal distribution agreements
at all or on acceptable terms, will not terminate informal or contractual
relationships, will continue to sell our products or that we will provide the
distributors and resellers with adequate levels of support. Our business and
results of
37
<PAGE>
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 subject to extensive environmental regulation
We are subject to a variety of federal, state and local laws and regulations
concerning the storage, use, discharge and disposal of toxic, volatile, or
otherwise hazardous or regulated chemicals or materials used in our
manufacturing processes. Further, we are subject to other safety, labeling and
training regulations as required by local, state and federal law. We have
established an environmental and safety compliance program to meet the
objectives of applicable federal, state and local laws. Our environmental and
safety department administers this compliance program which includes
monitoring, measuring and reporting compliance, establishing safety programs
and training our personnel in environmental and safety matters. We cannot
assure you that changes in these regulations and laws will not have an adverse
economic effect on us. Further, these local, state, and federal regulations
could restrict our ability to expand our operations. If we do not:
. obtain required permits for,
. operate within regulations for,
. control the use of, or
. adequately restrict
the discharge of hazardous or regulated substances or materials under present
or future regulations, we may be required to pay substantial penalties, to make
costly changes in our manufacturing processes or facilities or to suspend our
operations.
We have limited or sole source suppliers for necessary materials
We depend on a single or limited number of outside contractors and suppliers
for raw materials, packages and standard components, and to assemble printed
circuitboards. We generally purchase these products through standard purchase
orders or one-year supply agreements. We do not have long-term guaranteed
supply agreements with these suppliers. We seek to maintain a sufficient safety
stock to overcome short-term shipping delays or supply interruptions by our
suppliers. We also endeavor to maintain ongoing communications with our
suppliers to guard against interruptions in supply. To date, we have generally
been able to obtain sufficient supplies in a timely manner. However, our
business and results of operations have in the past been and could be impaired
by:
. a stoppage or delay of supply,
. substitution of more expensive or less reliable parts,
. receipt of defective parts or contaminated materials, and
. an increase in the price of such supplies or our inability to obtain
reduced pricing from our suppliers in response to competitive pressures.
Our stock price has been and may continue to be volatile
The market price of our Common Stock may fluctuate significantly because of:
. announcements of technological innovations,
. large customer orders,
. customer order delays or cancellations,
38
<PAGE>
. customer qualification delays,
. new products by us, our competitors or third parties,
. possible acquisition of us by a third party,
. merger or acquisition announcements,
. production problems,
. quarterly variations in our actual or anticipated results of operations,
and
. developments in litigation in which we are involved.
Furthermore, the stock market has experienced extreme price and volume
volatility, which has particularly affected the market prices of many high
technology companies. This volatility has often been unrelated to the operating
performance of such companies. This broad market volatility may adversely
affect the market price of our Common Stock. Many companies in the optical
communications industry have in the past year experienced historical highs in
the market prices of their stock. We cannot assure you that the market price of
our Common Stock will not experience significant volatility in the future,
including volatility that is unrelated to our performance.
39
<PAGE>
2. SELECTED HISTORICAL FINANCIAL INFORMATION OF SDL
The following selected financial data of SDL is qualified by reference to and
should be read in conjunction with the consolidated financial statements of
SDL, including the notes thereto, and management's discussion and analysis of
financial condition and results of operations in SDL's Annual Reports on Form
10-K and 10-K/A for the 1998 fiscal year which are incorporated by reference
in this Offer Document.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1998(/2/) 1997(/1/)(/2/)(/3/) 1996 1995(/1/) 1994
--------- ------------------- -------- --------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenue................. $106,138 $ 91,364 $ 82,475 $ 53,894 $ 33,024
Cost of revenue......... 68,419 65,154 54,956 33,390 19,991
-------- -------- -------- -------- --------
Gross profit............ 37,719 26,210 27,519 20,504 13,033
Research and
development............ 10,690 9,794 6,681 3,994 2,781
Selling, general, and
administrative......... 13,597 40,609 11,521 7,595 4,574
In-process research and
development............ -- 753 -- 10,010 --
Amortization of
purchased intangibles
and goodwill........... 777 671 645 54 --
-------- -------- -------- -------- --------
Operating
income/(loss).......... 12,655 (25,617) 8,672 (1,149) 5,678
-------- -------- -------- -------- --------
Net income/(loss)....... $ 12,823 $(24,679) $ 7,121 $ (2,819) $ 2,195
======== ======== ======== ======== ========
Net income/(loss) per
share-basic............ $ 0.92 $ (1.83) $ 0.59 $ (0.31) $ 0.38
Net income/(loss) per
share-diluted.......... $ 0.87 $ (1.83) $ 0.54 $ (0.31) $ 0.29
Weighted average shares-
basic.................. 13,887 13,497 12,012 9,228 5,738
Weighted average shares-
diluted................ 14,709 13,497 13,199 9,228 7,461
<CAPTION>
As of December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
--------- ------------------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Working capital........ $ 54,358 $ 36,012 $ 63,243 $ 22,649 $ 5,556
Total assets........... 112,477 94,224 113,842 56,643 23,799
Long-term debt (less
current portion)...... -- -- -- -- 22,519
Convertible redeemable
preferred stock....... -- -- -- -- 10,545
Stockholders' equity
(net capital
deficiency)........... $ 93,247 $ 76,587 $ 99,227 $ 40,500 $(18,269)
</TABLE>
- --------
(1) The results of operations for the years ended December 31,1995 and 1997
include a one-time write-off of in-process research and development of
approximately $10 million and $0.8 million, respectively, in connection
with the acquisition of Seastar Optics and Mr. Laser, Inc.
(2) In 1997, the Company changed from a calendar year end to a 52-53 week year
ending on the Friday closest to December 31. Fiscal years 1998 and 1997
ended January 1, 1999 and January 2, 1998, respectively. For ease of
discussion and presentation all fiscal year ends are referred to as ending
on December 31.
(3) The results of operations for the year ended December 31, 1997 include a
one-time charge totaling $27.5 million related to costs associated with
the litigation settlement and related legal costs of the Spectra-Physics
legal dispute.
40
<PAGE>
INFORMATION REGARDING IOC
1.BUSINESS
The IOC Group designs, develops and manufactures opto-electronic components
and ancillary devices based on lithium niobate for the telecommunications
industry. Its key technologies are the manufacture of lithium niobate chips
and the assembly of components into small hermetically sealed packages. IOC
has established a strong reputation for innovation in the development of
lithium niobate opto-electronic devices.
IOC's wholly owned subsidiary, IOC Limited, was founded in 1991 with venture
capital funding. This enabled the commencement of the development of IOC
Limited's lithium niobate chip manufacturing plant located at the site of its
now expanded facilities in Witham, Essex.
In the early part of IOC Limited's development, turnover was generated by the
sale of development components. In late 1992, IOC Limited completed the
development of its first standard product, a 622Mbit/s external amplitude
modulator. The following year, IOC Limited commenced the shipment of
components to customers for use in products. In that same year, IOC Limited
launched its 2.5 Gbit/s external amplitude modulator and increased its
marketing campaign, which was directed at original equipment manufacturers
internationally.
In May 1995, in order to increase production capacity further, (Pounds)1.5
million of equity capital was raised by way of a private placing.
In March 1996, IOC shares were admitted to trading on AIM and (Pounds)6.5
million was raised for the IOC Group by way of a placing. Since admission to
AIM, IOC has invested heavily in manufacturing capacity and technologies.
In 1996, the IOC Group strengthened its management team in a number of key
positions and commenced the expansion of its manufacturing and research and
development facilities.
In 1997, the IOC Group commenced the sale of hermetically sealed lithium
niobate modulators and also received its first orders for 10 Gbit/s lithium
niobate modulators.
During the autumn of 1997, an approach was made to IOC which may have led to
an offer being made for the IOC Group. The discussions were terminated in
December 1997.
The financial results for the year ended 30 September 1998 were significantly
affected by the cancellation of a large order by a major customer and also by
the subsequent under-utilisation of the additional production capacity put in
place in 1997. Turnover for the year ended 30 September 1998 fell from record
levels for the year ended 30 September 1997 of (Pounds)6.59 million to
(Pounds)4.03 million.
In July 1998, IOC completed an institutional placing of shares which raised
just under (Pounds)4 million for IOC and enabled the financing of additional
design-in projects for major customers.
41
<PAGE>
2.SELECTED FINANCIAL INFORMATION
The selected financial data presented below has been derived from IOC's
financial statements as at and for the years ended 30 September 1998, 1997 and
1996. Such financial statements are denominated in pounds sterling and were
prepared in accordance with UK GAAP and are included in Appendix III of this
Offer Document. The selected financial data set out below should be read in
conjunction with those financial statements.
<TABLE>
<CAPTION>
As of and for the year ended 30 September
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ---- -------- --------
Amounts in accordance with
the UK GAAP (in (Pounds)000, except per share data)
<S> <C> <C> <C> <C> <C>
Profit and loss account da-
ta:
Turnover.................... 4,025 6,590 3,728 1,600 1,032
Operating profit/(loss) .... (2,996) 45 536 168 (6)
Profit/(loss) on ordinary
activities before
taxation................... (2,952) 200 660 85 (100)
Profit/(loss) for the
financial year............. (2,976) 200 660 85 (100)
Earnings/(loss) per share--
basic...................... (11.4)p 0.8p 3.2p 1.0p (2.7)p
Dividends per share......... -- -- -- -- --
Balance sheet data:
Total assets................ 11,523 11,297 9,958 2,486 885
Long-term obligations and
redeemable preferred
stock...................... 1,193 1,492 879 966 869
Net assets/liabilities...... 8,802 7,877 7,662 1,052 (415)
</TABLE>
There are no significant differences between the figures above as presented
under UK GAAP and as they would be presented under US GAAP. Earnings per share
as calculated under US GAAP are as follows:
<TABLE>
<CAPTION>
For the year
ended 30 September
------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Earnings/(loss) per share--basic...................... (11.4)p 0.8p 3.2p
Earnings/(loss) per share--diluted.................... (11.4)p 0.7p 2.8p
</TABLE>
The following table shows a five year summary of net dividends per share paid
in full and stated in both pounds and dollars based on the exchange rate at
each payment date:
<TABLE>
<CAPTION>
Paid in respect of the
year ended 30 September
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Dividend (pence)....................................... nil nil nil nil nil
Dividend (cents)....................................... nil nil nil nil nil
</TABLE>
The following table shows the pound-dollar exchange rate at the end of certain
financial periods, the average rate for each period and the range of high and
low rates for each period. The pounds sterling to US dollar exchange rate used
in the table is the Noon Buying Rate used in New York City for cable transfers
in pounds sterling as certified for customs purposes by the Federal Reserve
Bank of New York.
<TABLE>
<CAPTION>
As of and for the year ended 30
September
----------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
End of financial period...................... 1.6995 1.6117 1.5653 1.5795 1.5770
Average for period........................... 1.6531 1.6320 1.5421 1.5843 1.5091
High......................................... 1.7068 1.7123 1.5909 1.6440 1.5840
Low.......................................... 1.6114 1.5623 1.4948 1.5345 1.4615
</TABLE>
42
<PAGE>
3. IOC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of operations
Turnover
IOC derives its turnover from the sale of opto-electronic devices and
ancillary components which are predominantly based on chips which use a
lithium niobate substrate. Turnover increased by 77 per cent. from
(Pounds)3.73 million in the year ended 30 September 1996 to (Pounds)6.59
million in the year ended 30 September 1997. In the year ended 30 September
1998, turnover fell by 39 per cent. to (Pounds)4.03 million. This fall was
caused primarily by the cancellation of an order for modulators by one major
customer.
Design and development costs
In the year ended 30 September 1998, design and development costs amounted to
(Pounds)1.19 million. This represented an increase of 27 per cent. over the
design and development costs for the year ended 30 September 1997 of
(Pounds)938,000 which itself was an increase of 63 per cent. on such costs for
the year ended 30 September 1996, of (Pounds)574,000.
Operating expenditure
Operating expenditure consists of costs related to sales, marketing, general
administrative activities and premises.
Total operating expenses increased by 51 per cent. from (Pounds)1.24 million
in the year ended 30 September 1996 to (Pounds)1.88 million in the year ended
30 September 1997 and then by a further 29 per cent. to (Pounds)2.42 million
in the year ended 30 September 1998. However, total operating expenses in the
year ended 30 September 1998 included (Pounds)498,000 exceptional costs such
that non-exceptional operating expenses remained almost constant at
(Pounds)1.93 million for the year ended 30 September 1997 and (Pounds)1.92
million for the year ended 30 September 1998.
Exceptional operating costs in the year ended 30 September 1998 comprised
(Pounds)319,000 relating to a bad debt provision in respect of sales to one
major customer and (Pounds)179,000 in respect of professional fees incurred in
relation to an aborted merger strategy.
Profit or loss on ordinary activities before taxation
Profit or loss before taxation can be analysed in the context of the changes
in turnover, design and development expenditure, operating expenditure and net
interest receivable. The profit or loss on ordinary activities before taxation
for the period under review was: year ended 30 September 1996; (Pounds)660,000
profit; year ended 30 September 1997, (Pounds)200,000 profit; and year ended
30 September 1998, (Pounds)2.95 million loss.
Taxation on profits from ordinary activities
During the period under review the only taxation charge incurred by IOC was
(Pounds)24,000 in the year ended 30 September 1998 in respect of an adjustment
related to previous years. At 30 September 1998, the IOC Group had taxation
losses of approximately (Pounds)3 million available to carry forward to offset
against future profits, subject to agreement with the Inland Revenue.
Impact of inflation
During the period under review, the business of IOC was not materially
affected by inflation.
43
<PAGE>
Liquidity and capital resources
The IOC Group has historically satisfied its cash requirements principally
through a combination of venture capital funding, a private placing,
flotation, borrowings from banks and other third parties and cash flow from
operations.
In March 1996, IOC obtained a trading facility for its shares on AIM and
completed an initial public offering raising net proceeds of approximately
(Pounds)6.5 million. Those funds were used to repay the then issued preference
share capital of IOC, to invest in capital equipment to meet anticipated
increases in demand for IOC products and to finance an increase of working
capital as sales volumes were expected to increase.
In July 1998, IOC completed an institutional placing of shares raising net
proceeds of approximately (Pounds)4 million. These funds are being used to
undertake further product design-in programmes with customers and for
investment in new product development.
Operating activities absorbed (Pounds)1.36 million of cash for the year ended
30 September 1998 and (Pounds)938,000 for the year ended 30 September 1997.
For the year ended 30 September 1996, IOC generated (Pounds)454,000 positive
cashflow from operating activities. Cash flows from operations can vary
significantly from period to period, depending upon the timing of operating
cash receipts and payments and the level of design and development
expenditure. In addition, payments to acquire tangible fixed assets increased
from (Pounds)1.07 million for the year ended 30 September 1996 to (Pounds)1.38
million for the year ended 30 September 1997. For the year ended 30 September
1998, such payments reduced to (Pounds)363,000.
As at 30 September 1998, the end of IOC's last financial year, IOC had cash at
bank and in hand of (Pounds)5.6 million which, in the context of expected cash
flows from operating activities, was believed to be sufficient to meet its
then anticipated working capital and capital expenditure requirements over the
next year. Subsequent to this period IOC may need additional funding in order
to further develop its product range, to fund working capital or to finance
capital expenditure. Management believes that such funds may be sought from
traditional financing sources.
Year 2000
The directors of IOC recognise the significance of Year 2000 issues to IOC's
business. Responsibility for Year 2000 issues rests with a director of IOC and
regular progress reports are provided to the board of IOC by a working group
set up in March 1998. The directors of IOC are of the opinion that the costs
of Year 2000 compliance will not exceed (Pounds)130,000. Three activities are
currently being undertaken in respect of IOC's Year 2000 compliance programme:
. Seeking assurance that all business systems will correctly process
future dates and taking action where the IOC board believe there is a
risk or potential weakness.
. Reviewing the operation of all embedded logic units within IOC's plant
and equipment to verify that they will operate correctly into the next
century.
. Discussing millennium compliance with suppliers to ensure that supply
chains on which IOC is dependent will continue without disruption.
The directors of IOC believe that all material Year 2000 risks to IOC's
business have been identified and that actions in progress should resolve
them. IOC is currently in the process of developing contingency plans in
respect of Year 2000 issues.
Reconciliation of UK GAAP to US GAAP
There are no significant differences between the results of operations or the
financial position as presented under UK GAAP and that presented under US
GAAP.
44
<PAGE>
4. NATURE OF TRADING MARKET
IOC Shares have been traded on AIM since March 1996. There is no trading
market for IOC Shares in the United States.
According to IOC's share register as at 3 March 1999, there were only two
holders of IOC Shares with registered addresses in the United States, holding
an aggregate of 201,000 IOC Shares (approximately 0.6 per cent. of IOC's then
issued share capital). Certain United States holdings may be held in nominee
accounts with registered addresses outside the United States.
The following table sets out, for the periods indicated, the reported highest
and lowest middle market quotations for IOC Shares (in pence), as derived from
the AIM section of the London Stock Exchange Daily Official List:
<TABLE>
<CAPTION>
Pence per
IOC Share
------------
Period High Low
- ------ ---- ----
<S> <C> <C>
1 April 1999 to 19 April 1999 100 1/2 77 1/2
1 January 1999 to 31 March 1999 72 45 1/2
1 October 1998 to 31 December 1998 52 29 1/2
1 July 1998 to 30 September 1998 85 44 1/2
1 April 1998 to 30 June 1998 138 1/2 65 1/2
1 January 1998 to 31 March 1998 166 1/2 137 1/2
1 October 1997 to 31 December 1997 179 1/2 97 1/2
1 July 1997 to 30 September 1997 95 1/2 59 1/2
1 April 1997 to 30 June 1997 160 1/2 127 1/2
</TABLE>
5.MARKET RISK
IOC invests surplus funds in low risk sterling treasury deposits. At 30
September 1998, the amount held on deposit was (Pounds)5,375,000. In addition,
IOC has variable rate long term debt. At 30 September 1998, the outstanding
balance was (Pounds)540,000. This amount falls due for payment in three equal
instalments of (Pounds)180,000 in the years ended 30 September 1999, 2000 and
2001. The interest rate is the higher of 10 per cent. or 3 per cent. over
LIBOR. At 30 September 1998, the interest rate applicable to the debt was
10.75 per cent. and the fair value of the debt was (Pounds)540,000.
45
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APPENDIX I
CONDITIONS AND FURTHER TERMS OF THE OFFER
PART A
Conditions of the Offer
The Offer complies with the Securities Act and the applicable rules and
regulations of the NASDAQ and AIM markets and any other relevant regulatory
bodies and the City Code (except to the extent of any dispensation, waiver or
exemption granted by the appropriate body or (as the case may be) the Panel).
The Offer is governed by English law and is subject to the jurisdiction of the
courts of England and to the following terms and conditions:
(a) valid acceptances being received (and not, where permitted, withdrawn) not
later than 3.00 p.m. (UK time) on the Initial Closing Date (or such later
time(s) and/or date(s) as SDL may, subject to the Rules of the City Code,
decide) in respect of not less than 90 per cent. of the IOC Shares to
which the Offer relates (or such lesser percentage as SDL may decide),
provided that this condition will not be satisfied unless SDL and any of
its wholly-owned subsidiaries shall have acquired or agreed to acquire
(either pursuant to the Offer or otherwise) IOC Shares carrying in
aggregate more than 50 per cent. of the voting rights then normally
exercisable at general meetings of IOC (including for the purpose of this
condition, to the extent, if any, required by the Panel, any voting rights
attaching to any shares in IOC which may be unconditionally allotted or
issued before the Offer becomes or is declared unconditional as to
acceptances pursuant to the exercise of any outstanding conversion or
subscription rights or otherwise). For the purpose of this condition the
expression "IOC Shares to which the Offer relates" shall mean the
aggregate of:
(i) the IOC Shares allotted on or before the date the Offer is made; and
(ii) the IOC Shares unconditionally allotted after that date but on or
before the first closing date of the Offer (or such later date(s) as
SDL may decide), but excluding any IOC Shares which, on the date the
Offer is made, are held by SDL or its associates (within the meaning
of section 430E of the Companies Act 1985), or which, at that date,
SDL or its associates have contracted to acquire;
(b) the New SDL Common Stock to be issued pursuant to the Offer having been
approved for listing on the NASDAQ National Market System, subject to
official notice of the issue of such New SDL Common Stock;
(c) no stop order suspending the effectiveness of the Registration Statement
with respect to the New SDL Common Stock having been issued and no
proceedings for that purpose having been initiated or threatened by the
SEC;
(d) SDL having received a letter from Ernst & Young LLP, dated as of the date
on which the Offer becomes or is declared unconditional in all respects,
to the effect that it concurs no conditions exist in relation to IOC
(other than any arising as a result of anything done by any member of the
IOC Group pursuant to a request evidenced in writing by or on behalf of
SDL) that would preclude SDL accounting for the Offer as a pooling of
interests under Accounting Principles Board Opinion No. 16;
(e) it having been established, in terms satisfactory to SDL, that the
proposed acquisition of IOC by SDL or any matter arising from that
acquisition will not be referred to the Monopolies and Mergers Commission;
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(f) no government or governmental, quasi-governmental, supranational,
statutory or regulatory body, trade agency, professional association,
institution, court or any other person or body in any jurisdiction having
instituted, implemented or threatened any action, proceedings, suit,
investigation or enquiry or enacted or made, or having proposed to enact
or make, any statute, regulation, order or decision that might:
(i) make the Offer or the acquisition or the proposed acquisition of any or
all IOC Shares by SDL void, illegal or unenforceable or directly or
indirectly restrict, prohibit, delay or otherwise interfere with the
implementation of, or impose additional conditions or obligations with
respect to, the Offer or any acquisition of shares in IOC by SDL which
in any such case interfere with the Offer or any such acquisition to a
materially adverse extent;
(ii) result, directly or indirectly, in a material delay in the ability of
SDL to acquire all or any of the IOC Shares;
(iii) require the divestiture by any member of IOC Group or any member of
SDL or the SDL Group of all or any material part of their respective
businesses, assets or properties or impose any material limitation on
the ability of any of them to conduct their respective businesses or
own their respective assets or properties;
(iv) impose any limitation on the ability of any member of the SDL Group to
acquire or hold, or to exercise effectively, directly or indirectly,
all or any rights of ownership of shares in any member of the IOC
Group or on the ability of any member of the IOC Group to acquire or
hold, or to exercise effectively, directly or indirectly, all or any
rights of ownership of shares in any other member of the IOC Group or
to exercise management control over IOC or any member of the IOC
Group;
(v) otherwise materially and adversely affect the business, profits or
prospects of the IOC Group or of the SDL Group;
(vi) result in any member of the IOC Group ceasing to be able to carry on
business under the name under which it presently does so; or
(vii) result in any member of the SDL Group having to dispose of any shares
or other securities in any member of the IOC Group or the SDL Group;
and all applicable waiting periods during which any such government, body,
agency, association, institution, court or person could institute,
implement or threaten any such action, proceedings, suit, investigation or
enquiry having expired, lapsed or been terminated;
(g) all authorisations, orders, recognitions, grants, consents, confirmations,
permissions and approvals necessary or appropriate for or in respect of
the Offer and the proposed acquisition of IOC by SDL being obtained in
terms and form satisfactory to SDL from the appropriate governments,
governmental, quasi-governmental, supranational, statutory and regulatory
bodies, trade agencies, professional associations, institutions, courts
and persons and bodies and with whom any member of the IOC Group or the
SDL Group has entered into contractual arrangements and such
authorisations, orders, recognitions, grants, consents, confirmations,
permissions and approvals remaining in full force and effect and there
being no intimation of any intention to revoke any of them and all
necessary filings having been made and all applicable waiting periods
under any applicable legislation or regulation in any jurisdiction having
expired or been terminated and all necessary statutory and regulatory
obligations in any jurisdiction having been complied with;
(h) except as disclosed in writing to SDL on or before 8.00 a.m. (UK time) on
31 March 1999, there being no provision of any arrangement, agreement or
other instrument to which any member of the IOC Group or any partnership,
joint venture or company in which any
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member of the IOC Group has a substantial interest ("associated person") is
a party or by or to which any such member or associated person or any of
its assets may be bound or be subject which, in consequence of the Offer or
the proposed acquisition of IOC Shares by SDL, would or may result, to an
extent which is material in the context of the IOC Group taken as a whole,
in:
(i) any indebtedness of any such member or associated person being or
becoming capable of being repayable prior to its stated maturity date
or the ability of such member or associated person to incur any
indebtedness being withdrawn or inhibited;
(ii) the creation of any mortgage, charge or other security interest over
the whole or any material part of the business property or assets of
any member of the IOC Group or any such security (whenever arising or
having arisen) becoming enforceable;
(iii) any such arrangement, agreement, licence, permit or franchise or
instrument being terminated or materially and adversely modified or
any material action being taken or onerous obligation arising
thereunder;
(iv) any assets of any such member or associated person being disposed of
otherwise than in the ordinary course of business;
(v) the respective financial or trading position or prospects of any such
member or associated person being materially and adversely affected;
(vi) the interest or business of any such member or associated person in or
with any venture, firm or company (or any arrangements relating to
such interest or business) being terminated or materially and
adversely affected; or
(vii) the creation of any mortgage, charge or other security over the whole
or any part of the business, property or assets of any such member or
associated person;
(i) save as disclosed in the annual report and accounts of IOC for the
financial year ended 30 September 1998 or announced on or before 8.00 a.m.
(UK time) on 31 March 1999 through the London Stock Exchange or as
disclosed to SDL in writing on or before 8.00 a.m. (UK time) on 31 March
1999, no member of the IOC Group having since 30 September 1998:
(i) issued or authorised or proposed the issue of additional shares of any
class which were outstanding or securities convertible into, or rights,
warrants or options to subscribe for or acquire, any such shares or
convertible securities (save for the issue of shares pursuant to the
exercise of options granted on or before 30 September 1998 under the
IOC Share Option Schemes);
(ii) recommended, declared, paid or made or proposed to declare, pay or
make any bonus, dividend or other distribution whether payable in cash
or otherwise, other than any distribution by any wholly owned
subsidiary within the IOC Group;
(iii) authorised or proposed or announced its intention to propose any
merger or acquisition, demerger, disposal or transfer of assets
(other than in the ordinary course of trading) or shares or change in
its share or loan capital;
(iv) issued any debentures or incurred any indebtedness or contingent
liability which is material in the context of the IOC Group taken as a
whole;
(v) purchased, repaid or announced any proposal to purchase, redeem or
repay any of its own shares or other securities or redeemed or reduced
any part of its share capital;
(vi) disposed of or transferred, mortgaged or encumbered any asset or any
right, title or interest in any asset which is material in the context
of the IOC Group taken as a whole;
(vii) been unable, or admitted in writing that it is unable, to pay its
debts or having stopped or suspended (or threatened to stop, or
suspend) payment of its debts generally or ceased or threatened to
cease carrying on all or a substantial part of its business;
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(viii) entered into or varied, any arrangement, agreement or commitment
(whether in respect of capital expenditure or otherwise) which is of
a long term or unusual nature or which involves or could involve an
obligation of a nature or magnitude which is material in the context
of the IOC Group taken as a whole;
(ix) entered into any arrangement, agreement or commitment otherwise than
in the ordinary course of its business which is material in the
context of the IOC Group taken as a whole;
(x) entered into or varied the terms of any service agreement with any
director or senior executive or any connected person of any such person
(within the meaning of section 346 of the Companies Act 1985) of IOC;
(xi) waived or compromised any claim which is material in the context of
the relevant member of the IOC Group;
(xii) in the case of IOC, proposed any voluntary winding-up;
(xiii) made any alteration to its memorandum and articles of association or
other incorporation documents; or
(xiv) entered into any arrangement, agreement or commitment or passed any
resolution in general meeting with respect to any of the transactions
or events referred to in this paragraph;
(j) except as disclosed in writing to SDL on or before 8.00 a.m. (UK time) on
31 March 1999, prior to the date when the Offer would otherwise become
unconditional:
(i) there having been no receiver, administrative receiver or other
encumbrance appointed over any material portion of the assets of any
member of the IOC Group or any other analogous proceedings or steps
having taken place under the laws of any relevant jurisdiction and
there having been no petition presented for the administration of any
member of the IOC Group or any equivalent proceedings or steps taken
under the laws of any other jurisdictions;
(ii) there having been no material adverse change in the business, assets,
financial or trading position or prospects of the IOC Group taken as a
whole;
(iii) there having been no material litigation, arbitration proceedings,
prosecution or other legal proceedings to which any member of the IOC
Group is a party (whether as plaintiff, defendant or otherwise) and
no such proceedings having been threatened against any member of the
IOC Group; and
(iv) no contingent liability having arisen which might be likely materially
and adversely to affect the IOC Group taken as a whole;
(k) except as disclosed in writing to SDL on or before 8.00 a.m. (UK time) on
31 March 1999, SDL not having discovered prior to the date when the Offer
would otherwise become unconditional that:
(i) the financial or business information concerning the IOC as contained
in the information publicly disclosed at any time by any member of the
IOC Group contains a material misrepresentation of fact or omits to
state a fact necessary to make the information contained therein not
materially misleading;
(ii) any past or present member of the IOC Group has not complied with any
applicable legislation or regulations of any jurisdiction with regard
to the disposal, spillage or leak of waste or disposal or emission of
hazardous substances with which non-compliance would be likely to give
rise to any material liability (whether actual or contingent) on the
part of any member of the IOC Group;
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(iii) there has been a disposal, spillage or leak of waste or hazardous
substances on or there has been an emission of waste or hazardous
substances from any property now or previously owned, occupied or
made use of by any past or present member of the IOC Group which
would be likely to give rise to any material liability, (whether
actual or contingent), on the part of any member of the IOC Group;
(iv) there is any material liability (whether actual or contingent) to make
good, repair, re-instate or clean-up any property now or previously
owned, occupied or made use of by any past or present member of the
IOC Group under any environmental legislation, regulation or order of
any government, quasi-government, state or local government,
supranational, statutory or regulatory body, agency, association,
institution, court or any other person or body in any jurisdiction; or
(v) circumstances exist (whether as a result of the making of the Offer or
otherwise):
(A) which would be likely to lead to any government, quasi-government,
state or local government, supranational, statutory or regulatory
body, agency, association, institution, court or any other person
or body in any jurisdiction instituting; or
(B) whereby any member of the SDL Group or any present or past member
of the IOC Group would be likely to be required to institute
an environmental audit or take any other steps which would in any case
be likely to result in any actual or contingent material liability to
make good, repair, re-instate, or clean up any property now or
previously owned, occupied or made use of by any member of the IOC
Group.
SDL reserves the right to waive all or any of conditions (c) to (k) inclusive
in whole or in part. If SDL is required by the Panel to make an offer or
offers for IOC Shares under the provisions of Rule 9 of the City Code, SDL may
make such alterations to the conditions, including that in paragraph (a)
above, as are necessary to comply with the provisions of that Rule.
SDL also reserves the right, subject to the consent of the Panel, to extend
the time allowed under the City Code for satisfaction of condition (a) until
such time as conditions (c) to (k) inclusive have been satisfied or, to the
extent permitted, waived. SDL shall be under no obligation to waive or treat
as satisfied any of conditions (c) to (k) (inclusive) by a date earlier than
the latest date specified below for the satisfaction thereof notwithstanding
that the other conditions of the Offer may at such earlier date have been
waived or fulfilled or satisfied and that there are at such earlier date no
circumstances indicating that any of such conditions may not be capable of
fulfilment or satisfaction.
The Offer will lapse if the proposed acquisition of IOC by SDL, or any matter
arising therefrom, is referred to the Monopolies and Mergers Commission before
the Initial Closing Date.
PART B
Further terms of the Offer
The following further terms apply in this Part B and Part C of this Appendix I
and in the Form of Acceptance, unless the context otherwise requires, and
references to:
(a) the "Offer" shall mean the Offer and any revision thereof or extension
thereto;
(b) "the Offer becoming unconditional" shall include references to the Offer
being declared unconditional;
(c) "the Offer becoming or being declared unconditional" shall be construed
as the Offer becoming or being declared unconditional as to acceptances,
whether or not any other condition of the Offer remains to be fulfilled;
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(d) the "acceptance condition" shall mean the condition as to acceptances set
out in paragraph (a) of Part A of this Appendix I;
(e) "acceptances of the Offer" shall include deemed acceptances of the Offer;
and
(f) any reference to any hour of the day shall refer to such time in the UK.
1.Acceptance period
(a) The Offer will initially be open for acceptance until 3.00 p.m. (UK
time) on 12 May 1999. Although no revision is envisaged, if the Offer
is revised it will remain open for acceptance for a period of at least
14 days from the date on which written notification of the revision is
posted to IOC Shareholders (or such other period as may be permitted
by the Panel). Except with the consent of the Panel, no such written
notification may be posted after 6 June 1999 or if later, the date
falling 14 days prior to the last date on which the Offer is capable
of becoming unconditional.
(b) The Offer, whether revised or not, shall not be capable of becoming
unconditional after midnight (UK time) on 20 June 1999 (or any earlier
time and/or date beyond which SDL has stated, and has not withdrawn
such statement, that the Offer will not be extended) nor of being kept
open after that time unless it has previously become unconditional,
provided that SDL reserves the right, with the permission of the
Panel, to extend the Offer to a later time(s) and/or date(s). Except
with the permission of the Panel, SDL may not, for the purpose of
determining whether the acceptance condition has been satisfied, take
into account acceptances received or purchases of shares made unless
all relevant documentation is received by IRG plc no later than 1.00
p.m. (UK time) on 20 June 1999 (or any earlier time and/or date beyond
which SDL has stated that the Offer will not be extended and in
respect of which it has not withdrawn that statement) or such later
time(s) and/or date(s) as SDL, with the permission of the Panel, may
determine.
(c) If the Offer becomes unconditional, it will remain open for acceptance
for not less than 14 days from the date on which it would otherwise
have expired. If the Offer has become unconditional and it is stated
that the Offer will remain open until further notice, then not less
than 14 days written notice will be given prior to the closing of the
Offer. If a competitive situation arises after SDL has made a "no
increase" and/or "no extension" statement in relation to the Offer,
SDL may, if it specifically reserves the right to do so at the time
such statement is made, withdraw such statement if it announces such
withdrawal within four business days after the announcement of the
competing offer and notifies IOC Shareholders in writing thereof (or,
in the case of IOC Shareholders with registered addresses outside the
UK, or whom SDL knows to be a nominee, trustee or custodian holding
IOC Shares for such persons, by an announcement in the UK) at the
earliest opportunity. SDL may choose not to be bound by the terms of a
"no increase" or "no extension" statement if, having reserved the
right to do so, it posts an increased or improved offer which is
recommended for acceptance by the IOC Board or in other circumstances
permitted by the Panel.
(d) Unless otherwise determined by the Panel, SDL shall be entitled at any
particular time to decide that the acceptance condition is then
satisfied taking account only of those IOC Shares which have been
unconditionally allotted or issued before that time and written notice
of the allotment or issue of which, containing all relevant details,
has been received before that time by IRG plc on behalf of SDL from
IOC or its agents at the address specified in sub-paragraph 3(b) of
this Part B. Telex, e-mail or facsimile transmission will not be
sufficient.
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2. Announcements
(a) Without prejudice to sub-paragraph 3(b) of this Part B ("Rights of
withdrawal"), by 8.30 a.m. (UK time) on the business day (the
"Relevant Day") following the day on which the Offer is due to expire
or become unconditional or is revised or extended, as the case may be,
(or such later time(s) or date(s) as the Panel may agree), SDL will
make an appropriate announcement and simultaneously inform the London
Stock Exchange of the position. Such announcement will (unless
otherwise permitted by the Panel) state (as nearly as practicable) the
total number of IOC Shares and rights over IOC Shares:
(i) for which acceptances of the Offer have been received (and to what
extent such acceptances have been received from persons acting in
concert with SDL for the purposes of the Offer);
(ii) acquired or agreed to be acquired by or on behalf of SDL (or by
persons acting in concert with SDL for the purposes of the Offer)
during the Offer Period; and
(iii) held by or on behalf of SDL (or by persons acting in concert
with SDL for the purposes of the Offer) prior to the Offer
Period,
and will specify the percentage of IOC's ordinary share capital
represented by each of these figures.
(b) Any decision to extend the date by which the acceptance condition has
to be fulfilled may be made at any time up to, and will be announced
not later than, 8.30 a.m. (UK time) on the Relevant Day (or such later
time(s) and/or date(s) as the Panel may agree). The announcement will
state the next expiry date (unless the Offer is unconditional, in
which case a statement may instead be made that the Offer will remain
open until further notice). In computing the number of IOC Shares
represented by acceptances and purchases there may be included or
excluded for announcement purposes, subject to sub-paragraph 5(a) of
this Part B, acceptances and purchases not in all respects in order or
subject to verification.
(c) In this Appendix I, references to the making of an announcement by or
the giving of notice by or on behalf of SDL include the release of an
announcement to the press by public relations consultants or by Rea
Brothers and the delivery by hand or telephone, facsimile, telex or
other electronic transmission of an announcement to the London Stock
Exchange. An announcement made otherwise than to the London Stock
Exchange shall be notified simultaneously to the London Stock
Exchange.
3.Rights of withdrawal
(a) Except as otherwise provided in this paragraph 3, acceptances of the
Offer by holders of IOC Shares are irrevocable.
(b) If SDL, having announced the Offer to be unconditional, fails to
comply by 3.30 p.m. (UK time) on the Relevant Day (or such later
time(s) and/or date(s) as the Panel may agree) with any of the other
relevant requirements specified in sub-paragraph 2(a) of this Part B,
an accepting IOC Shareholder may (unless the Panel otherwise agrees)
immediately thereafter withdraw his acceptance(s) of the Offer by
written notice signed by such IOC Shareholder given by post or by hand
to New Issues Department, IRG plc, PO Box 166, Bourne House, 34
Beckenham Road, Beckenham, Kent BR3 4TH or by hand only (during normal
business hours) to IRG plc, 23 Ironmonger Lane, London EC2. Subject to
sub-paragraph 1(b) of this Part B, this right of withdrawal may be
terminated not less than eight days after the Relevant Day by SDL
confirming, if such be the case, that the Offer is still unconditional
and complying with the other requirements specified in sub-paragraph
2(a) of this Part B. If any such confirmation is given, the first
period of 14 days referred to in sub-paragraph 1(c) of this Part B
will run from the date of such confirmation and compliance.
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(c) If by 3.00 p.m. (UK time) on 2 June 1999 (or such later time(s) and/or
date(s) as the Panel may agree) the Offer has not become
unconditional, an accepting IOC Shareholder may withdraw his
acceptance(s) at any time thereafter by written notice received by IRG
plc on behalf of SDL at the address and in the manner referred to in
sub-paragraph 3(b) of this Part B, until the earlier of: (i) the time
when the Offer becomes unconditional; and (ii) the final time for
lodgement of acceptances of the Offer which can be taken into account
in accordance with sub-paragraph 1(b) of this Part B.
(d) If a "no increase" and or "no extension" statement has been withdrawn
in accordance with sub-paragraph 1(c) of this Part B, any IOC
Shareholder who accepts the Offer after such statement is made may
withdraw that acceptance thereafter in the manner referred to in sub-
paragraph 3(b) of this Part B not later than the eighth day after the
posting of written notice of such withdrawal to IOC Shareholders.
(e) To be effective, a written notice of withdrawal must be mailed in good
time to IRG plc and must specify the name of the person who accepted
the Offer, the number of IOC Shares to be withdrawn and (if
certificates have been submitted) the name of the registered holder of
the relevant IOC Shares.
(f) In this paragraph 3, "written notice" (including any letter of
appointment, direction or authority) means notice in writing bearing
the original signature(s) of the relevant accepting IOC
Shareholder(s), or his/their agent(s) duly appointed in writing
(evidence of whose appointment is produced with the notice in a form
reasonably satisfactory to SDL). Telex, e-mail or facsimile
transmission or copies will not be sufficient to constitute written
notice. No notice which is postmarked in, or otherwise appears to SDL
or its agents to have been sent from, Canada, Australia or Japan will
be treated as valid.
(g) All questions as to the validity (including time of receipt) of any
notice of withdrawal will be determined by SDL, whose determination
(except as required by the Panel) will be final and binding. None of
SDL, IOC, Henry Cooke or IRG plc or any other person will be under any
duty to give any notification of any defects or irregularities in any
notice of withdrawal or bear any liability for failure to give such
notification.
4.Revised Offer
(a) Although no such revision is envisaged, if the Offer (in its original
or any previously revised form) is revised and such revision
represents, on the date on which such revision is announced, (on such
basis as Rea Brothers may consider appropriate) an improvement (or no
diminution) in the value of the Offer as so revised compared with the
value of the overall consideration or terms previously offered, the
benefit of the revised Offer will, subject as provided in sub-
paragraphs 4(b) and 4(c) and paragraph 7 of this Part B, be made
available to IOC Shareholders who have accepted the Offer in its
original or any previously revised form(s) (each a "Previous
Acceptor"). The acceptance by or on behalf of a Previous Acceptor of
the Offer in its original or any previously revised form(s) shall,
subject as provided in sub-paragraphs 4(b), (c), (d) and (e) of this
Part B and subject to any election for alternative forms of
consideration made as provided in the remainder of this paragraph
4(a), be treated as an acceptance of the Offer so revised and shall
also constitute the separate appointment of SDL and/or any director of
SDL and/or Rea Brothers and/or any director of Rea Brothers as his
attorney and agent with authority to accept any such revised Offer on
behalf of the Previous Acceptor and, if such revised Offer includes
alternative forms of consideration, to make an election as to the form
of consideration and/or the proportion thereof on behalf of a Previous
Acceptor as such attorney and agent in his absolute discretion thinks
fit and to execute on behalf of and in the name of such Previous
Acceptor all such further
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documents (if any) as may be required to give effect to such acceptances
and/or elections. In making any such election, such attorney and agent
shall take into account the nature of any previous acceptances and/or
elections made by the Previous Acceptor and such other facts or matters
as he may reasonably consider relevant.
(b) The deemed acceptance referred to and authorities conferred by sub-
paragraph 4(a) of this Part B shall not apply or (as the case may be)
be exercised if as a result thereof the Previous Acceptor would (on
such basis as Rea Brothers may consider appropriate) thereby receive
less in aggregate in consideration under the revised Offer than he
would have received in aggregate in consideration as a result of
acceptance of the Offer in the form in which it was originally
accepted by him having regard to any election or previous acceptance
originally made by him, unless the Previous Acceptor has previously
agreed in writing to receive less aggregate consideration.
(c) The deemed acceptance referred to and exercise of the powers of
attorney and agency so conferred by this paragraph 4 shall be
ineffective to the extent that a Previous Acceptor shall lodge, within
14 days of the posting of the document pursuant to which the revision
of the Offer is made available to IOC Shareholders (or such later date
as SDL may determine), a form in which he validly elects (to the
extent possible) to receive the consideration receivable by him under
the revised Offer in some other manner.
(d) Subject to sub-paragraph 4(c) of this Part B, the authorities referred
to in this paragraph 4 and any acceptance of a revised Offer and any
election pursuant thereto shall be irrevocable unless and until the
Previous Acceptor becomes entitled to withdraw his acceptance under
paragraph 3 of this Part B and duly does so.
(e) SDL reserves the right to treat an executed Form of Acceptance
relating to the Offer (in its original or any previously revised
form(s)) which is received after the announcement or issue of the
Offer in any revised form as a valid acceptance of the revised Offer
and/or, where applicable, a valid election for or acceptance of any of
the alternative forms of consideration and such acceptance shall
constitute an authority and request in the terms of paragraph 4(a) of
this Part B, mutatis mutandis, on behalf of the relevant IOC
Shareholder.
5.Acceptances and purchases
Except as otherwise agreed by the Panel:
(a) an acceptance of the Offer shall not be treated as valid for the
purposes of the acceptance condition unless the requirements of Note 4
and, if applicable, Note 6 of Rule 10 of the City Code are satisfied
in respect of it;
(b) a purchase of IOC Shares by SDL or its nominee(s) or any person acting
in concert with it or its or their nominees will only be treated as
valid for the purposes of the acceptance condition if the requirements
of Note 5 and, if applicable, Note 6 of Rule 10 of the City Code are
satisfied in respect of it; and
(c) before the Offer may become unconditional, IRG plc must have issued a
certificate to SDL and/or to Rea Brothers which states the number of
IOC Shares in respect of which acceptances have been received and
which comply with paragraph 5(a) of this Part B, and the number of IOC
Shares otherwise acquired, whether before or during the Offer Period,
which comply with paragraph 5(b) of this Part B. Copies of such
certificate will be sent to the Panel and to the financial advisers of
IOC as soon as possible after issue.
6.General
(a) Save with the consent of the Panel, the Offer will lapse unless all
the conditions have been satisfied or (if capable of waiver) waived
or, where appropriate, have been
I-9
<PAGE>
determined by SDL in its reasonable opinion to be or remain satisfied
by, or where appropriate at, midnight (UK time) on 2 June 1999 or on the
date which is 21 days after the date on which the Offer becomes
unconditional, whichever is the later, or such later date as SDL may,
with the consent of the Panel, decide. In such a case the Offer shall
cease to be capable of further acceptance and SDL and Rea Brothers and
IOC Shareholders shall thereupon cease to be bound by prior acceptances.
If the Offer lapses pursuant to the City Code, neither SDL nor any
person acting in concert with SDL (for the purposes of the City Code)
may make an offer for IOC for a period of one year following such lapse,
except with the consent of the Panel.
(b) The expression "Offer Period" when used in this Offer Document means,
in relation to the Offer, the period commencing on 31 March 1999 and
ending on whichever of the following times shall be the latest:
(i) 3.00 p.m. (UK time) on 12 May 1999; and
(ii) the earlier of:
(A) the time at which the Offer lapses; and
(B) the time at which the Offer becomes unconditional.
(c) The Offer will lapse if the proposed acquisition of IOC is referred to
the Monopolies and Mergers Commission before 3.00 p.m. (UK time) on 12
May 1999 or the date when the Offer becomes or is declared
unconditional as to acceptances, whichever is the later. If the Offer
so lapses, the Offer will cease to be capable of further acceptance
and accepting IOC Shareholders and SDL will thereupon cease to be
bound by any acceptance submitted before the time when the Offer
lapses.
(d) Except with the consent of the Panel, settlement of the consideration
to which any IOC Shareholder is entitled under the Offer will be
implemented in full in accordance with the terms of the Offer without
regard to any lien, right of set-off, counterclaim or other analogous
right to which SDL may otherwise be, or claim to be, entitled as
against any such shareholder.
(e) The Offer is made on 21 April 1999 and is capable of acceptance
thereafter. The Offer is being made by means of this Offer Document
and by means of an advertisement to be placed in the UK Financial
Times on 21 April 1999 to all persons to whom this document or Form of
Acceptance may not be despatched (or by whom such documents may not be
received) who hold or are entitled to have allotted or issued to them
IOC Shares. Copies of this Offer Document, the Form of Acceptance and
any related documents are available from IRG plc from that time at
either of the addresses set out in paragraph 3(b) of this Part B.
(f) The terms, provisions, instructions and authorities contained in or
deemed to be incorporated in the Form of Acceptance constitute part of
the terms of the Offer. Words and expressions defined in this Offer
Document have the same meanings when used in the Form of Acceptance
unless the context otherwise requires.
(g) The Offer and the Form of Acceptance and all acceptances of the Offer
and elections in respect thereof and all contracts made pursuant to
the Offer and action taken or deemed to be taken under any of the
foregoing shall be governed by and construed in accordance with
English law. Execution by or on behalf of an IOC Shareholder of a Form
of Acceptance will constitute his submission, in relation to all
matters arising out of the Offer and the Form of Acceptance, to the
jurisdiction of the courts of England and the relevant shareholder's
agreement that nothing shall limit the right of SDL or Rea Brothers to
bring any action, suit or proceeding arising out of or in connection
with the Offer and the Form of Acceptance in any other manner
permitted by law or in any court of competent jurisdiction.
I-10
<PAGE>
(h) All references in this Offer Document and in the Form of Acceptance to
12 May 1999 shall (except in sub-paragraphs 6(b) and 6(c) of this Part
B and except where the context otherwise requires) be deemed, if the
expiry date of the Offer be extended, to refer to the expiry date of
the Offer as so extended.
(i) Any omission to despatch the Offer Document and/or the Form of
Acceptance or any notice required to be despatched under the terms of
the Offer to, or any failure to receive the same by, any person to
whom the Offer is made, or should be made, shall not invalidate the
Offer in any way or create any implication that the Offer has not been
made to any such person. The Offer extends to any such person to whom
the Offer Document, the Form of Acceptance and any related documents
may not be despatched or who may not receive such documents, and such
persons may collect copies of such documents from IRG plc at either of
the addresses set out in paragraph 3(b) of this Part B.
(j) SDL and Rea Brothers reserve the right to notify IOC Shareholders
regarding any matter, including the making of the Offer, to all or any
IOC Shareholders with a registered address outside the UK or whom IOC
knows to be a nominee holding IOC Shares for such persons, by
announcement or paid advertisement in a daily newspaper published and
circulated in the UK, or any part thereof, in which event such notice
shall be deemed to have been sufficiently given, notwithstanding any
failure by any such shareholder(s) to receive or see such notice, and
all references in the Offer Document to notice or the provision of
information in writing by or on behalf of SDL and/or Rea Brothers
and/or their respective agents shall be construed accordingly.
(k) Due completion of a Form of Acceptance will constitute an instruction
to SDL, on the Offer becoming unconditional in all respects, to cancel
all mandates and other instructions entered in the records of IOC in
force relating to holdings of IOC Shares. Such mandates and other
instructions will not continue in force in relation to New SDL Common
Stock issued to such shareholders.
(l) Without prejudice to any other provisions of this Part B, SDL and Rea
Brothers reserve the right to treat acceptances as valid if received
by or on behalf of either of them at any place or places or in any
manner which may be otherwise than as set out herein or in the Form of
Acceptance.
(m) If sufficient acceptances are received and/or sufficient IOC Shares
are otherwise acquired, SDL intends to apply the provisions of
sections 428-430F of the Companies Act 1985 to acquire compulsorily
any outstanding IOC Shares and to apply for the cancellation of IOC's
listing of IOC Shares on AIM.
(n) All powers of attorney, appointment of agents and authorities on the
terms conferred by or referred to in this Appendix I or in the Form of
Acceptance are given by way of security for the performance of the
obligations of the IOC Shareholder concerned and are irrevocable in
accordance with section 4 of the Powers of Attorney Act 1971 except in
the circumstances where the grantor of such power of attorney,
appointment or authority is entitled to withdraw his acceptance in
accordance with paragraph 3 of this Part B and duly does so.
(o) No acknowledgement of receipt of any Form of Acceptance, transfer by
means of CREST, share certificate(s) and other document(s) will be
given by or on behalf of SDL. All communications, notices,
certificates, documents of title and remittances to be delivered by or
sent to or from IOC Shareholders (or their designated agent(s)) will
be delivered by or sent to or from them (or their designated agent(s))
at their own risk.
(p) If the Offer does not become unconditional in all respects or lapses:
(i) the Form of Acceptance, share certificate(s) and other document(s)
of title will be returned by post (or by such other method as may
be approved by the Panel)
I-11
<PAGE>
within 14 days of the Offer lapsing, at the risk of the person
entitled thereto, to the person or agent whose name and address is
set out in Box 6 on the Form of Acceptance or, if none is set out, to
the first-named holder at his registered address; and
(ii) IRG plc will, immediately after the lapsing of the Offer (or
within such longer period as the Panel may permit, not exceeding
14 days of the lapsing of the Offer), give instructions to CRESTCo
to transfer all IOC Shares held in escrow balances and in relation
to which it is the escrow agent for the purposes of the Offer to
the original available balances of IOC Shareholders concerned.
(q) The IOC Shares which are the subject of the Offer will be acquired
free from all liens, charges, restrictions (including restrictions
imposed by law), third party rights, and encumbrances and together
with all rights now or hereafter attaching thereto, including voting
rights and the right to all dividends and other distributions
declared, paid or made after the date of the announcement of the
Offer.
(r) Save, in the case of any New SDL Common Stock to be issued to any
Affiliate, as agreed under the terms of the Affiliate Agreements:
(i) the New SDL Common Stock will be issued free from all liens,
charges and other encumbrances or other equitable interests and
will be freely tradeable by the recipients thereof; and
(ii) the New SDL Common Stock will rank pari passu in all respects with
existing SDL Common Stock, including the right to receive in full
all dividends (which are payable in US dollars), if any, and other
distributions declared, paid or made on such shares after 31 March
1999 (including the right to receive the benefit of the stock
dividend relating to the intended stock split announced by SDL on
25 March 1999).
(s) In relation to any acceptance of the Offer in respect of a holding of
IOC Shares which are in uncertificated form, SDL reserves the right to
make such alterations, additions or modifications as may be necessary
or desirable to give effect to any purported acceptance of the Offer,
whether in order to comply with the facilities or requirements of
CREST or otherwise, provided such alterations, additions or
modifications are consistent with the requirements of the City Code or
are otherwise made with the consent of the Panel.
(t) All references in this Appendix I to statutory provisions shall
include a statute or statutory provision which corrects, consolidates
or replaces the same (whether before or after the date hereof).
7.Overseas Shareholders
(a) The making of the Offer in, or to persons resident in or nationals of
or citizens of jurisdictions outside the UK or the US or who are
nominees of, or custodians or trustees for, citizens or nationals of
other countries ("Overseas Shareholders") may be affected by the laws
of the relevant jurisdictions. Such Overseas Shareholders should
inform themselves about and observe any applicable legal requirements.
It is the responsibility of any Overseas Shareholder wishing to accept
the Offer to satisfy himself/herself as to the full observance of the
laws and regulatory requirements of the relevant jurisdiction in
connection therewith, including the obtaining of any governmental,
exchange control or other consents which may be required, or the
compliance with other necessary formalities needing to be observed and
the payment of any issue, transfer or other taxes or duties due in
such jurisdiction. Any such Overseas Shareholder will be responsible
for any such issue, transfer or other taxes or other payments by
whomsoever payable and SDL and Rea Brothers (and any person acting on
behalf of either of them) shall be fully indemnified and held harmless
by such
I-12
<PAGE>
Overseas Shareholder for any such issue, transfer of other taxes or
duties as SDL or Rea Brothers (and any person acting on behalf of either
of them) may be required to pay.
(b) In particular, the Offer is not being made, directly or indirectly, in
or into Canada, Australia or Japan. Furthermore, no steps have been
taken to qualify the New SDL Common Stock for distribution in Japan or
any province or territory of Canada and no prospectus in relation to
the New SDL Common Stock has been, or will be, lodged with or
registered by the Australian Securities Commission. SDL will not
(unless otherwise determined by SDL in its sole discretion and save as
provided for in paragraph 7(c) below) mail or deliver, or authorise
the mailing or delivery of, this Offer Document, the Form of
Acceptance or any related offering document in or into Canada,
Australia or Japan including to IOC Shareholders with registered
addresses in Canada, Australia or Japan or to persons whom SDL knows
to be trustees, nominees or custodians holding IOC Shares for such
persons ("Restricted Overseas Person"). Persons receiving such
documents (including, without limitation, trustees, nominees or
custodians) should not distribute or send them in or into Canada,
Australia or Japan or use such mails or any such means or
instrumentality for any purpose directly or indirectly in connection
with the Offer and so doing may invalidate any purported acceptance.
Persons wishing to accept the Offer should not use such mails or any
such means or instrumentality for any purpose directly or indirectly
related to acceptance of the Offer. Envelopes containing the Form of
Acceptance should not be postmarked in Canada, Australia or Japan or
otherwise despatched from Canada, Australia or Japan and all acceptors
must provide addresses outside Canada, Australia or Japan for the
receipt of the consideration available under the Offer or for the
return of the Form of Acceptance, certificate(s) for IOC Shares and/or
other document(s) of title. Unless an exemption under the relevant
securities laws is available as aforesaid, SDL will not issue New SDL
Common Stock or authorise the delivery of any document(s) of title in
respect of New SDL Common Stock to: (i) any person who is, or who SDL
has reason to believe is, a Restricted Overseas Person; or (ii) to any
person who is unable or fails to give the warranty set out in
paragraph (b) of Part C below; or (iii) to any person with a
registered address in Canada, Australia or Japan.
(c) These provisions and any other terms of the Offer relating to Overseas
Shareholders may be waived, varied or modified as regards specific IOC
Shareholders or on a general basis by SDL in its absolute discretion.
Subject thereto, the provisions of this paragraph 7 supersede any
terms of the Offer inconsistent therewith. References in this
paragraph 7 to a IOC Shareholder include references to the person or
persons executing a Form of Acceptance and, in the event of more than
one person executing the Form of Acceptance, the provisions of this
paragraph 7 shall apply to them jointly and severally.
PART C
Form of Acceptance
Each IOC Shareholder by whom, or on whose behalf, a Form of Acceptance is
executed irrevocably undertakes, represents, warrants and agrees to and with
SDL, Rea Brothers and IRG plc, so as to bind such shareholder, such
shareholder's personal representatives, heirs, successors and assigns, to the
following effect:
(a) that the execution of a Form of Acceptance (whether or not any boxes
therein are completed) shall constitute:
(i) an acceptance of the Offer in respect of the number of IOC Shares
inserted or deemed to be inserted in Box 1 of the Form of
Acceptance; and
I-13
<PAGE>
(ii) an undertaking to execute any further documents and give any
further assurances which may be required to enable SDL to obtain
the full benefit of this Part C and for SDL and/or any of its
directors and/or Rea Brothers and/or any of its directors and/or
IRG plc to perfect any of the authorities to be given hereunder,
in each case on and subject to the terms and conditions set out in this
Offer Document and the Form of Acceptance and, subject only to the
rights of withdrawal set out in paragraph 3 of Part B of this Appendix
I, each such acceptance shall be irrevocable;
(b) unless "YES" is put in Box 5 of the Form of Acceptance, such IOC
Shareholder has not received or sent copies of this Offer Document,
the Form of Acceptance or any related offering documents in, into or
from Canada, Australia or Japan;
(c) that the IOC Shares in respect of which the Offer is accepted or
deemed to be accepted are fully paid up and are sold free from all
liens, equitable interests, charges, restrictions (including
restrictions imposed by law), third party rights and encumbrances and
together with all rights now or attaching thereto after the
announcement of the Offer, including voting rights and the right to
all dividends and other distributions hereafter declared, paid or
made;
(d) that the execution of the Form of Acceptance constitutes, subject to
the Offer becoming unconditional in all respects in accordance with
its terms and to the accepting IOC Shareholder not having validly
withdrawn his acceptance, the irrevocable separate appointments of SDL
and/or any of its directors and/or Rea Brothers and/or any of its
directors as such IOC Shareholder's attorney and/or agent and an
irrevocable instruction to the attorney and/or agent:
(i) to complete and execute all or any form(s) of transfer and/or other
document(s) at the attorney's and/or agent's discretion in relation
to the IOC Shares referred to in sub-paragraph (a)(i) of this Part
C held in (or subsequently converted into) certificated form in
favour of SDL or such other person or persons as SDL may direct;
and
(ii) to deliver such form(s) of transfer and/or other document(s) at
the attorney's and/or agent's discretion together with the share
certificate(s) and/or other document(s) relating to such IOC
Shares for registration within six months of the Offer becoming or
being declared unconditional in all respects and to do all such
other acts and things as may in the opinion of such attorney
and/or agent be necessary or expedient for the purposes of or in
connection with the acceptance of the Offer and to vest the IOC
Shares in SDL or any subsidiary or nominee(s) of such company;
(e) that the execution of the Form of Acceptance constitutes the
irrevocable appointment of IRG plc as such shareholder's attorney
and/or agent and an irrevocable instruction and authority to the
attorney and/or agent:
(i) subject to the Offer becoming unconditional in all respects in
accordance with its terms and to the accepting IOC Shareholder not
having validly withdrawn his acceptance, to transfer to itself (or
to such other person or persons as SDL or its agents may direct)
by means of CREST all or any of the Relevant IOC Shares (as
defined in sub-paragraph (ii) below) (but not exceeding the number
of IOC Shares in respect of which the Offer is accepted or deemed
to be accepted); and
(ii) if the Offer does not become unconditional in all respects, to
give instructions to CRESTCo, immediately after the lapsing of
the Offer (or within such longer period as the Panel may permit,
not exceeding 14 days of the lapsing of the Offer), to transfer
all Relevant IOC Shares to the original available balance of the
accepting IOC Shareholder. "Relevant IOC Shares" means IOC Shares
in uncertificated form
I-14
<PAGE>
and in respect of which a transfer or transfers to escrow has or have
been effected pursuant to the procedures described in the letter from
Rea Brothers contained in this Offer Document and where the
transfer(s) to escrow was or were made in respect of IOC Shares held
under the same member account ID and participant ID as the member
account ID and participant ID relating to the Form of Acceptance
concerned (but irrespective of whether or not any Form of Acceptance
Reference Number, or a Form of Acceptance Reference Number
corresponding to that appearing on the Form of Acceptance concerned,
was included in the TTE instruction concerned);
(f) that the execution of the Form of Acceptance constitutes, subject to
the Offer becoming or being declared unconditional in all respects in
accordance with its terms and to the accepting IOC Shareholder not
having validly withdrawn his acceptance, an irrevocable authority and
request:
(i) to IOC or its agents to procure the registration of the transfer of
the IOC Shares pursuant to the Offer and, if applicable, the
delivery of the share certificate(s) and/or other document(s) of
title in respect thereof to SDL or as it may direct;
(ii) to SDL or its agents to procure that such IOC Shareholder's name
is entered on the share register of SDL in respect of New SDL
Common Stock to which such shareholder becomes entitled under the
Offer (subject to the provisions of SDL's certificate of
incorporation and bylaws); and
(iii) to SDL or its agents to procure the despatch by post (or by such
other method as may be approved by the Panel) of the document(s)
of title for any New SDL Common Stock to which an accepting IOC
Shareholder becomes entitled pursuant to such IOC Shareholder's
acceptance of the Offer, at the risk of such IOC Shareholder, to
the person whose name and address is set out in Box 6 of the Form
of Acceptance or, if none is set out, to the first-named holder
at such holder's registered address provided that this is outside
Canada, Australia and Japan;
(g) that the execution of the Form of Acceptance constitutes separate
authority to SDL and/or its directors and/or Rea Brothers and/or its
directors and/or their respective agents and the irrevocable
appointment of SDL and/or its directors and/or Rea Brothers and/or its
directors as such shareholder's attorney and agent within the terms of
paragraph 4 of Part B of this Appendix I in respect of those IOC
Shares in respect of which the Offer has been accepted and such
acceptance has not been validly withdrawn;
(h) that, subject to the Offer becoming unconditional in all respects (or
if the Offer would become or be declared unconditional in all respects
or lapse immediately upon the outcome of the resolution in question or
if the Panel otherwise gives its consent) and pending registration:
(i) SDL shall be entitled to direct the exercise of any votes and any or
all other rights and privileges (including the right to requisition
the convening of a general meeting of IOC or of any class of its
shareholders) attaching to any IOC Shares in respect of which the
Offer has been accepted and such acceptance has not been validly
withdrawn;
(ii) with regard to any such IOC Shares, the execution of the Form of
Acceptance will constitute:
(A) an authority to IOC from such IOC Shareholder to send any
notice, warrant or other document or communication (including
any share certificate(s) and/or other document(s) of title
issued as a result of conversion of such IOC Shares into
certificated form) which may be required to be sent to him (as a
member of IOC) to SDL at its registered office or such other
address nominated by SDL;
I-15
<PAGE>
(B) an authority to SDL or any person appointed by SDL to sign any
consent to short notice of a general or separate class meeting
on his behalf and/or execute a form of proxy in respect of such
IOC Shares appointing and/or to appoint any person determined by
SDL to attend general meetings and separate class meetings of
IOC or its members or any of them (and any adjournment thereof)
and to exercise the votes attaching to such IOC Shares on his
behalf, where relevant, such votes to be cast so far as possible
to satisfy any outstanding condition of the Offer; and
(C) (subject as aforesaid) the agreement of such IOC Shareholder not
to exercise any of such rights without the consent of SDL and
the irrevocable undertaking of such shareholder not to appoint a
proxy for or to attend any such general meetings or separate
class meetings;
(i) that he will deliver to IRG plc at either of the addresses given in
paragraph 3(b) of Part B of this Appendix I his share certificate(s)
and or other document(s) of title in respect of the IOC Shares
referred to in sub-paragraph (a)(i) of this Part C held by him in (or
subsequently converted into) certificated form or an indemnity
acceptable to SDL in lieu thereof, as soon as possible and in any
event within six months of the Offer becoming or being declared
unconditional in all respects;
(j) that he will take (or procure to be taken) the action set out in
paragraph 14 of the letter from Rea Brothers contained in this Offer
Document to transfer all IOC Shares in respect of which the Offer has
been accepted or is deemed to have been accepted and not validly
withdrawn held by him in (or subsequently converted into)
uncertificated form to an escrow balance as soon as possible and in
any event so that the transfer to escrow settles within six months of
the Offer becoming unconditional in all respects;
(k) that if, for any reason, any IOC Shares in respect of which a transfer
to an escrow balance has been effected in accordance with paragraph 14
of the letter from Rea Brothers contained in this Offer Document are
converted to certificated form, he will (without prejudice to
paragraph (f) of this Part C) immediately deliver or procure the
immediate delivery of the share certificate(s) or other document(s) of
title in respect of all such IOC Shares as so converted to IRG plc at
either of the addresses referred to in paragraph 3(b) of Part B of
this Appendix I or to SDL at its registered office or as SDL or its
agents may direct;
(l) that the execution of the Form of Acceptance constitutes his
submission, in relation to all matters arising out of the Offer and
the Form of Acceptance, to the jurisdiction of the courts of England
and Wales;
(m) that on execution the Form of Acceptance shall take effect as a deed;
(n) that the terms of this Part C and the Offer generally shall be
incorporated in and form part of the Form of Acceptance, which shall
be read and construed accordingly;
(o) that, if he accepts the Offer, he shall do all such acts and things as
shall be necessary or expedient to vest in SDL or its subsidiaries or
nominees or such other persons as it may decide the IOC Shares
aforesaid and all such acts and things as may be necessary or
expedient to enable IRG plc to perform its functions as escrow agent
for the purposes of the Offer;
(p) that he agrees to ratify each and every act or thing which may be done
or effected by SDL and/or any of its directors and/or Rea Brothers
and/or any of its directors or their respective agents or IOC or its
agents, as the case may be, in the proper exercise of any of his or
its powers and/or authorities hereunder; and
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<PAGE>
(q) that he undertakes, if any provisions of Part B of this Appendix I or
this Part C shall in any way be unenforceable, invalid or not operate
so as to afford SDL and/or Rea Brothers and/or their respective agents
the full benefit of the authorities expressed be given herein, with
all practicable speed to do all such acts and things and execute all
such documents as may be required or desirable to enable SDL and/or
any of its directors and/or Rea Brothers and/or any of its directors
and/or IRG plc to secure the full benefit of the authorities and
powers of attorney conferred by or referred to in Part B of this
Appendix I or this Part C.
References in this Part C to an IOC Shareholder shall include references to
the person or persons executing a Form of Acceptance and in the event of more
than one person executing a Form of Acceptance the provisions of this Part C
shall apply to them jointly and to each of them.
I-17
<PAGE>
APPENDIX II
SDL FINANCIAL STATEMENTS
INDEX TO SDL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Report of Ernst & Young LLP, Independent Auditors....................... II-2
2. SDL audited annual financial statements................................. II-3
</TABLE>
II-1
<PAGE>
1. REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To The Board of Directors and Stockholders of SDL, Inc.
We have audited the accompanying consolidated balance sheets of SDL, Inc. as
of December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of SDL's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of SDL, Inc. as of December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
San Jose, California
January 29, 1999
II-2
<PAGE>
2. SDL AUDITED ANNUAL FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
As of December 31,
1998 1997
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 13,370 $ 4,593
Short-term marketable securities........................ 12,494 10,400
Accounts receivable, net................................ 22,070 19,960
Inventories............................................. 19,679 13,938
Prepaid expenses and other current assets............... 3,306 2,738
--------- --------
Total current assets................................ 70,919 51,629
Property and equipment, net............................... 32,931 26,298
Long-term marketable securities........................... 3,552 11,613
Note due from related party............................... 512 536
Other assets.............................................. 4,563 4,148
--------- --------
Total assets........................................ $ 112,477 $ 94,224
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 9,385 $ 8,469
Accrued payroll and related expenses.................... 2,354 2,945
Income taxes payable.................................... 1,890 828
Unearned revenue........................................ 643 393
Other accrued liabilities............................... 2,289 2,982
--------- --------
Total current liabilities................................. 16,561 15,617
--------- --------
Long-term liabilities..................................... 2,669 2,020
--------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares -- 1,000,000; none issued........... -- --
Common stock, $0.001 par value:
Authorized shares -- 21,000,000; issued and
outstanding shares -- 14,285,938 and 13,674,534 in
1998 and 1997, respectively.......................... 15 14
Additional paid-in capital.............................. 120,033 116,268
Accumulated other comprehensive income.................. (4) (73)
Accumulated deficit, $26.3 million relating to the
repurchase of common stock in 1992 and $5.8 million
relating to a recapitalization in 1992................. (26,757) (39,580)
--------- --------
93,287 76,629
Less common stockholders' notes receivable.............. (40) (42)
--------- --------
Total stockholders' equity.......................... 93,247 76,587
--------- --------
Total liabilities and stockholders' equity.......... $ 112,477 $ 94,224
========= ========
</TABLE>
See accompanying notes
II-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Revenue:
Product revenue................................... $ 96,358 $ 76,750 $69,772
Research revenue.................................. 9,780 14,614 12,703
-------- -------- -------
Total revenue................................... 106,138 91,364 82,475
Cost of revenue:
Cost of product revenue........................... 60,898 53,523 45,365
Cost of research revenue.......................... 7,521 11,631 9,591
-------- -------- -------
Total cost of revenue........................... 68,419 65,154 54,956
-------- -------- -------
Gross margin........................................ 37,719 26,210 27,519
Operating expenses:
Research and development.......................... 10,690 9,794 6,681
Selling, general, and administrative.............. 13,597 40,609 11,521
In-process research and development............... -- 753 --
Amortization of purchased intangibles and
goodwill......................................... 777 671 645
-------- -------- -------
Total operating expense......................... 25,064 51,827 18,847
-------- -------- -------
Operating income/(loss)............................. 12,655 (25,617) 8,672
Interest income and other, net...................... 1,211 1,355 1,501
-------- -------- -------
Income/(loss) before income taxes................... 13,866 (24,262) 10,173
Provision for income taxes.......................... 1,043 417 3,052
-------- -------- -------
Net income/(loss)................................... $ 12,823 $(24,679) $ 7,121
======== ======== =======
Net income/(loss) per share-basic................... $ 0.92 $ (1.83) $ 0.59
======== ======== =======
Net income/(loss) per share-diluted................. $ 0.87 $ (1.83) $ 0.54
======== ======== =======
Number of weighted average shares-basic............. 13,887 13,497 12,012
======== ======== =======
Number of weighted average shares-diluted........... 14,709 13,497 13,199
======== ======== =======
</TABLE>
See accompanying notes
II-4
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional other Stockholders' Total
----------------- paid-in comprehensive Accumulated notes stockholders'
Shares Amount capital income deficit receivable equity
---------- ------ ---------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 10,628,115 $11 $ 62,995 $(6) $(22,022) $(478) $40,500
Net income............. -- -- -- -- 7,121 -- 7,121
Unrealized loss on
investments........... -- -- -- (44) -- -- (44)
-------
Comprehensive income... 7,077
-------
Issuance of stock
pursuant to employee
stock plans........... 921,168 -- 1,509 -- -- -- 1,509
Proceeds from issuance
of common stock (less
offering expenses of
$362)................. 1,755,000 2 44,650 -- -- -- 44,652
Issuance of treasury
stock................. 1,827 -- 33 -- -- -- 33
Payments on
stockholders' notes
receivable............ -- -- -- -- -- 222 222
Income tax benefit from
exercise of employee
stock options......... -- -- 5,234 -- -- -- 5,234
---------- --- -------- --- -------- ----- -------
Balance at December 31,
1996................... 13,306,110 13 114,421 (50) (14,901) (256) 99,227
Net loss............... -- -- -- (24,679) -- (24,679)
Unrealized loss on
investments........... -- -- -- (23) -- -- (23)
-------
Comprehensive loss..... (24,702)
-------
Issuance of stock
pursuant to employee
stock plans........... 368,424 1 1,847 -- -- -- 1,848
Payments on
stockholders' notes
receivable............ -- -- -- -- -- 214 214
---------- --- -------- --- -------- ----- -------
Balance at December 31,
1997................... 13,674,534 14 116,268 (73) (39,580) (42) 76,587
Net Income............. -- -- -- -- 12,823 -- 12,823
Unrealized gain on
investments........... -- -- -- 69 -- -- 69
-------
Comprehensive income... 12,892
-------
Issuance of stock
pursuant to employee
stock plans........... 611,404 1 3,547 -- -- -- 3,548
Payments on
stockholders' notes
receivable............ -- -- -- -- -- 2 2
Income tax benefit from
exercise of employee
stock options......... -- -- 218 -- -- -- 218
---------- --- -------- --- -------- ----- -------
Balance at December 31,
1998................... 14,285,938 $15 $120,033 $(4) $(26,757) $ (40) $93,247
========== === ======== === ======== ===== =======
</TABLE>
See accompanying notes
II-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Operating activities
Net income (loss)................................ $12,823 $(24,679) $ 7,121
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization................... 7,583 5,800 4,948
In-process research and development............. -- 753 --
Deferred income taxes........................... (948) -- (223)
Changes in operating assets and liabilities:
Accounts receivable............................. (2,110) (8,076) 1,719
Inventories..................................... (5,741) (485) (4,435)
Accounts payable................................ 916 1,599 520
Accrued payroll and related expenses............ (591) 730 195
Income taxes payable............................ 1,280 2,392 --
Unearned revenue................................ 250 (62) (517)
Other accrued liabilities....................... (693) 339 (135)
Other........................................... (139) 435 2,879
------- -------- --------
Total adjustments............................. (193) 3,425 4,951
------- -------- --------
Net cash provided by (used in) operating
activities...................................... 12,630 (21,254) 12,072
Investing activities
Acquisition of property and equipment, net....... (13,439) (9,407) (9,909)
Purchase of marketable securities................ (75,838) (57,064) (100,620)
Sales and maturities of marketable securities.... 81,874 90,707 53,413
Acquisition of Businesses........................ -- (3,055) (1,560)
------- -------- --------
Net cash provided by (used in) investing
activities...................................... (7,403) 21,181 (58,676)
Financing activities
Issuance of stock pursuant to employee stock
plans........................................... 3,548 1,847 1,509
Payments on stockholders' notes receivable....... 2 214 222
Proceeds from issuance of common stock........... -- -- 44,652
Reissuance of treasury stock..................... -- -- 33
------- -------- --------
Net cash provided by financing activities........ 3,550 2,061 46,416
------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 8,777 1,988 (188)
Cash and cash equivalents at beginning of year... 4,593 2,605 2,793
------- -------- --------
Cash and cash equivalents at end of year......... $13,370 $ 4,593 $ 2,605
======= ======== ========
Supplemental disclosures of cash flow information
Cash paid for income taxes...................... $ 803 $ 1 $ 170
Cash received from income taxes refunded........ $ 214 $ 1,941 $ 773
</TABLE>
See accompanying notes
II-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Organization and summary of significant accounting policies
Organization
SDL, Inc., a Delaware corporation, designs, manufactures, and markets
semiconductor lasers, fiber optic related products, and optoelectronic
systems. SDL's revenue is derived from: (i) the sale of standard and
customized products to a diverse worldwide customer base utilizing various
market applications; and (ii) customer-funded research programs, principally
through various government agencies.
Basis of presentation
The consolidated financial statements are prepared under generally accepted
accounting principles in the United States and include the accounts of SDL,
Inc. and its wholly-owned subsidiary, SDL Optics, Inc. Intercompany accounts
and transactions have been eliminated in consolidation. The functional
currency of SDL's foreign subsidiary is the US dollar. Subsidiary financial
statements are remeasured into US dollars for consolidation. Foreign currency
transaction gains and losses are included in interest income and other, net
and were immaterial for all periods presented. Beginning with 1997, SDL
operates and reports financial results on a fiscal year of 52 or 53 weeks
ending on the Friday closest to December 31. Accordingly, fiscal 1997 ended on
January 2, 1998 and was a 53 week year with the fourth fiscal quarter having
14 weeks; fiscal 1998 ended on January 1, 1999 and was a 52 week year. For
ease of discussion and presentation all years are referred to as ending on
December 31.
Certain amounts in prior year financial statements and notes thereto have been
reclassified to conform to current year presentation.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
SDL considers all highly liquid investments with original maturities of three
months or less at the time of purchase to be cash equivalents. Cash
equivalents are carried at cost, which approximates fair value.
Marketable securities
SDL has classified its entire investment portfolio as available-for-sale.
Available-for-sale securities are stated at fair market value. The amortized
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity. Such amortization is included in interest income.
Realized gains and losses are included in interest income and other, net. The
cost of securities sold is based on the specific identification method.
Inventories
Inventories are stated at the lower of standard cost (which approximates
actual costs on a first-in, first-out basis) or market. The market value is
based upon estimated net realizable value.
II-7
<PAGE>
Equipment and leasehold improvements
Property and equipment are stated at cost. Equipment and fixtures are
depreciated using the straight-line method over estimated useful lives ranging
from three to eight years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives or the
remaining lease terms.
Goodwill and purchased intangibles
Goodwill and other purchased intangibles are being amortized using the
straight-line method over three to seven years.
Revenue recognition
Revenue recognition is based on the terms of the underlying sales agreements
(purchase orders or contracts). Revenue for product sales is recognized upon
shipment. Revenue for costs incurred plus specified fee contracts is
recognized on the percentage-of-completion method. Revenue for fixed price
milestone contracts is recognized upon the completion of the milestone.
Customers entering into cost incurred and fixed price contracts with SDL
include the US government, prime or subcontractors for which the US government
may be the end customer, and other domestic and international end-users.
Concentrations
Dependence upon Government programs and contracts -- In 1998, 1997, and 1996,
SDL derived approximately 28 percent, 38 percent, and 43 percent,
respectively, of its revenue directly and indirectly from a variety of Federal
government sources. The demand for certain of SDL's services and products is
directly related to the level of funding of government programs. SDL believes
that the success and further development of its business is dependent, in
significant part, upon the continued existence and funding of such programs
and upon SDL's ability to participate in such programs. For example,
substantially all of SDL's research revenue for 1998, 1997, and 1996 was
funded by Federal programs. There can be no assurance that such programs will
continue to be funded even if government agencies have available financial
resources or that SDL will continue to be awarded contracts under such
programs.
Dependence on single source and other third party suppliers -- SDL depends on
a single or limited number of outside contractors and suppliers for raw
materials, packages and standard components, and to assemble printed circuit
boards. SDL generally purchases these single or limited source products
through standard purchase orders or one-year supply agreements and has no
long-term guaranteed supply agreements with such suppliers. While SDL seeks to
maintain a sufficient safety stock of such products and also endeavors to
maintain ongoing communications with its suppliers to guard against
interruptions or cessation of supply, SDL's business and results of operations
have in the past been and could in the future be adversely affected by a
stoppage or delay of supply, substitution of more expensive or less reliable
products, receipt of defective parts or contaminated materials, an increase in
the price of such supplies, or SDL's inability to obtain reduced pricing from
its suppliers in response to competitive pressures.
Credit risk -- SDL performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral from its customers.
SDL maintains reserves for potential credit losses. Although such losses have
been within management's expectations to date, there can be no assurance that
such reserves will continue to be adequate.
II-8
<PAGE>
Principal business and export sales
SDL's operations are conducted in one principal line of business, the design,
manufacture, and sale of semiconductor lasers, fiber optic products, and
optoelectronic systems. SDL has operations in the United States and
international operations in Canada. All sales are denominated in US dollars
All US operations sales to international customers constitute export sales.
Export sales to Europe totaled approximately $9.3 million, $5.9 million, and
$3.9 million for 1998, 1997, and 1996, respectively. Export sales to the
Pacific Rim totaled approximately $8.9 million, $6.9 million, and $6.0 million
for 1998, 1997, and 1996, respectively.
Net income/(loss) per share
The following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Numerator:
Net income (loss).................................... $12,823 $(24,679) $ 7,121
------- -------- -------
Denominator:
Denominator for basic earnings per share -- weighted
average shares...................................... 13,887 13,497 12,012
Incremental common shares attributable to shares
issuable under employee stock plans (1)............. 822 -- 1,187
------- -------- -------
Denominator for diluted earnings per share --
adjusted weighted average shares and assumed
conversions......................................... 14,709 13,497 13,199
======= ======== =======
Net income/(loss) per share -- basic................. $ 0.92 $ (1.83) $ 0.59
Net income/(loss) per share -- diluted............... $ 0.87 $ (1.83) $ 0.54
</TABLE>
- --------
(1) Potential common shares relating to shares issuable under employee stock
plans are not included in the 1997 calculation due to their anti-dilutive
effect on the loss per share.
Options to purchase 62,363 shares of common stock were not included in the
computation of the 1998 diluted earnings per share because the options'
exercise price was greater than the average market price of common shares.
Comprehensive Income
As of January 1, 1998, SDL adopted Statement of Financial Accounting Standards
No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 establishes new
rules for the reporting and display of comprehensive income and its
components; however, the adoption of this statement had no impact on SDL's net
income or stockholders' equity. SFAS 130 requires unrealized gains or losses
on SDL's available-for-sale securities, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income. Comprehensive income consists of net income and other comprehensive
income. Prior year financial statements have been reclassified to conform to
the requirements of SFAS 130.
Accumulated other comprehensive income presented in the accompanying
consolidated balance sheets consists of the accumulated net unrealized gains
and losses on available-for-sale marketable securities, net of the related tax
effect for all periods presented. The tax effects for other comprehensive
income were immaterial for all periods presented.
II-9
<PAGE>
Segments of an enterprise
Effective January 1, 1998, SDL adopted the Financial Accounting Standards
Board's Statement of Financials Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information (Statement 131).
Statement 131 superseded FASB Statement No. 14, Financial Reporting for
Segments of a Business Enterprise. Statement 131 establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. Statement 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
adoption of Statement 131 did not affect results of operations or financial
position, but did affect the disclosure of segment information. See note 14.
Statement of position 98-1
In March 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. The SOP, which has been
adopted prospectively as of September 30, 1998, requires the capitalization of
certain costs incurred in connection with developing or obtaining internal use
software. Prior to adoption of SOP 98-1, SDL expensed all internal use
software related costs as incurred. The effect of adopting the SOP was to
increase net income for the year ended December 31, 1998 by $71,000.
Recent financial accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. Because SDL has
never used derivatives, management does not anticipate that the adoption of
the new Statement will have a significant effect on earnings or the financial
position of SDL.
2. Marketable securities
Available-for-sale marketable securities consist of the following (in
thousands):
December 31, 1998:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Medium term notes.................. $10,091 $ 1 $25 $10,067
Commercial paper................... 4,959 20 -- 4,979
Tax-exempt auction rate preferred
stock............................. 5,950 -- -- 5,950
Money market funds................. 564 -- -- 564
------- --- --- -------
$21,564 $21 $25 $21,560
======= === === =======
Included in cash and cash
equivalents....................... $ 5,514
Included in short-term marketable
securities........................ 12,494
Included in long-term marketable
securities........................ 3,552
-------
$21,560
=======
</TABLE>
II-10
<PAGE>
December 31, 1997:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Municipal bonds $13,686 $ 1 $74 $13,613
Tax-exempt auction rate preferred
stock 8,400 -- -- 8,400
Money market funds 1,017 -- -- 1,017
------- --- --- -------
$23,103 $ 1 $74 $23,030
======= === === =======
Included in cash and cash
equivalents $ 1,017
Included in short-term marketable
securities 10,400
Included in long-term marketable
securities 11,613
-------
$23,030
=======
</TABLE>
The following is a summary of contractual maturities of SDL's marketable
securities as of December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Amortized Estimated
cost fair value
--------- ----------
<S> <C> <C>
Money market funds $ 564 $ 564
Amounts maturing within one year 17,436 17,444
Amounts maturing after one year 3,564 3,552
------- -------
$21,564 $21,560
======= =======
</TABLE>
Realized losses on the sale of available-for-sale securities were $0.1 million
and $0.3 million in 1998 and 1997, respectively.
3.Accounts receivable
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
As of 31
December 31,
----------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Trade receivables $20,488 $17,334
Receivables under long-term contracts:
Billed 1,865 765
Unbilled costs and estimated earnings, current portion 722 3,051
------- -------
23,075 21,150
Allowance for doubtful accounts (1,005) (1,190)
------- -------
$22,070 $19,960
======= =======
</TABLE>
The majority of unbilled costs and estimated earnings on uncompleted cost
incurred and fixed price contracts are billable in the subsequent year.
Pursuant to the retainage provisions in certain long-term contracts, a
specified portion of receivables do not become due and payable until
completion of a final audit by the Defense Contract Audit Agency. Such
retainage amounts total approximately $0.5 million in 1998 and 1997 and are
included in other assets in the accompanying balance sheets.
II-11
<PAGE>
4.Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
As of December
31,
---------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Raw materials................................................. $ 6,620 $ 6,087
Work-in-process............................................... 13,059 7,851
------- -------
$19,679 $13,938
======= =======
</TABLE>
No significant amounts of finished goods or work-in-process related to long-
term contracts are maintained.
5.Property and equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
As of December
31,
----------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Machinery and equipment....................................... $48,636 $37,946
Leasehold improvements........................................ 8,431 7,697
Furniture and fixtures........................................ 898 846
Construction-in-progress...................................... 3,897 1,934
------- -------
61,862 48,423
Less accumulated depreciation and amortization................ (28,931) (22,125)
------- -------
$32,931 $26,298
======= =======
</TABLE>
6.Goodwill and purchased intangibles
Purchased intangibles, which are included in other assets, consist of the
following:
<TABLE>
<CAPTION>
As of December
31,
----------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Goodwill...................................................... $ 1,363 $ 1,363
Other purchased intangibles................................... 1,945 1,945
------- -------
3,308 3,308
Less accumulated amortization................................. (2,147) (1,370)
------- -------
$ 1,161 $ 1,938
======= =======
</TABLE>
See Note 11, Acquisitions.
7.Note due from related party
On May 1, 1997 SDL loaned an officer $612,000 secured by a deed of trust. The
note is due on the tenth anniversary of the date of the note, however; certain
amounts may be forgiven. After five years continuous employment with SDL,
$200,000 will be forgiven. After ten years continuous employment with SDL, an
additional $200,000 will be forgiven. Other terms provide for mandatory
prepayment if certain events of default occur. The note shall bear interest at
8 percent only in the event of a default. The amount expected to be forgiven
is being amortized to compensation expense over ten years.
II-12
<PAGE>
8. Income taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years ended December
31,
----------------------
1998 1997 1996
------- -------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal............................................... $ 181 $ -- $ 2,617
State................................................. 26 -- 312
Foreign............................................... 1,784 417 346
------- ----- -------
1,991 417 3,275
Deferred:
Federal............................................... (948) -- (371)
State................................................. -- -- 148
------- ----- -------
(948) -- (223)
------- ----- -------
$ 1,043 $ 417 $ 3,052
======= ===== =======
</TABLE>
The tax benefits resulting from the exercise of nonqualified stock options and
the disqualifying disposition of shares acquired under SDL's incentive stock
option and employee stock purchase plans were $0.2 million, zero and $5.2
million in 1998, 1997 and 1996, respectively. Such benefits were credited to
additional paid-in capital.
Pre-tax income from foreign operations was $4.6 million, $1.1 million and $0.8
million in 1998, 1997 and 1996, respectively.
The difference between the provision for income taxes and the amount computed
by applying the Federal statutory income tax rate to income before taxes is
explained below:
<TABLE>
<CAPTION>
Years ended December
31,
-----------------------
1998 1997 1996
------ ------- ------
(In thousands)
<S> <C> <C> <C>
Tax at federal statutory rate........................ $4,853 $(8,492) $3,560
State income tax, net of federal tax benefit......... 17 -- 299
Non-deductible in-process, research and development
write-off........................................... -- 264 --
Net operating loss not benefited (utilized).......... (3,809) 9,057 --
Valuation allowance.................................. (216) -- --
Tax-exempt interest income........................... (124) (453) (455)
Other................................................ 322 41 (352)
------ ------- ------
Provision for income taxes........................... $1,043 $ 417 $3,052
====== ======= ======
</TABLE>
II-13
<PAGE>
Significant components of SDL's deferred tax assets are as follows:
<TABLE>
<CAPTION>
As of December
31,
------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward.......................... $ 9,132 $ 9,680
Reserves and other accrued expenses not yet deductible
for tax................................................. 1,832 2,070
Inventory................................................ 3,088 1,584
Intangible assets........................................ 4,157 3,838
Tax credit carryforward.................................. 1,800 970
Other.................................................... -- 52
-------- --------
Total deferred tax assets................................ 20,009 18,194
Valuation allowance...................................... (15,128) (14,030)
-------- --------
Net deferred tax assets.................................. 4,881 4,164
Deferred tax liabilities:..................................
Depreciation............................................. (743) (550)
Other.................................................... (138) (562)
-------- --------
Total deferred tax liabilities........................... (881) (1,112)
-------- --------
Net deferred tax assets.................................... $ 4,000 $ 3,052
======== ========
</TABLE>
The valuation allowance increased by approximately $1.1 million and $12.0
million in 1998 and 1997, respectively. Approximately $7.6 million of the
valuation allowance is related to the benefits of stock option deductions,
which will be credited to paid-in capital when realized.
As of December 31, 1998, SDL had federal and state net operating loss
carryforwards of approximately $26.0 million and $4.8 million, respectively,
and federal and state tax credit carryforwards of approximately $0.9 million
and $1.3 million, respectively. The net operating loss and credit
carryforwards will expire at various dates beginning in years 2001 through
2018, if not utilized.
Management has determined, based on SDL's history of prior operating earnings,
its expectations for the future, and the extended period over which the
benefits of certain deferred tax assets will be realized, that a partial
valuation allowance should be provided. The realization of SDL's net deferred
tax assets, which relate primarily to temporary differences, net operating
loss carryforwards and tax credit carryforwards is dependent on generating
sufficient taxable income during the periods in which the temporary
differences are expected to reverse. Although realization is not assured,
management believes it is more likely than not that the net deferred tax
assets will be realized.
9.Stockholders' equity
Common Stock offerings
On 26 June 1996, SDL issued 1,500,000 shares of common stock in a follow-on
public stock offering at a per share price of $27.00. In addition, SDL's
underwriters exercised their over-allotment option to purchase 255,000
additional shares of SDL's common stock. Net proceeds to SDL approximated
$44.7 million.
II-14
<PAGE>
Shareholder Rights Plan
SDL has adopted a Shareholder Rights Plan (Rights Agreement). Pursuant to the
Rights Agreement, rights were distributed at the rate of one right for each
share of Common Stock owned by SDL's stockholders of record on November 17,
1997. The rights expire on November 5, 2007 unless extended or earlier
redeemed or exchanged by SDL. Under the Rights Agreement, each right entitles
the registered holder to purchase one-hundredth of a Series B Preferred share
of SDL at a price of $110. The rights will become exercisable only if a person
or group acquires beneficial ownership of 15 percent or more of SDL's common
stock or commences a tender offer or exchange offer upon consummation of which
such person or group would beneficially own 15 percent or more of SDL's common
stock.
Stockholders' notes receivable
Certain exercises of stock options occurred in conjunction with the issuance
of full-recourse stockholders' notes receivable. The notes bear interest
between 5 percent and 8 percent per annum with annual interest payments. The
principal on the notes is due beginning in 1999 through 2001.
10.Stock-based compensation plans
Stock Option Plans
The 1992 Stock Option Plan provided for the granting of incentive stock
options and nonqualified options to purchase up to 4,558,125 shares of SDL's
common stock to officers, directors and key employees at exercise prices of
not less than fair value on the date of grant as determined by a committee of
the Board of Directors. Options granted were immediately exercisable; however,
unexercised options and shares purchased upon the exercise of the options are
subject to vesting over a one- to five-year period. Shares not vested at the
date of termination of employment may be repurchased by SDL at the original
exercise price. No further options will be granted under the 1992 Stock Option
Plan.
SDL's 1995 Stock Option Plan was approved by the Board of Directors in January
1995 and by the stockholders in February 1995. The purposes of the 1995 Option
Plan are to give SDL's employees and others who perform substantial services
to SDL incentive, through ownership of SDL's common stock, to continue in
service to SDL, and to help SDL compete effectively with other enterprises for
the services of qualified individuals. The 1995 Stock Option Plan permits the
grant of incentive stock options to employees, including officers and
Directors who are employees, and the award of nonqualified stock options to
SDL's employees, officers, Directors, independent contractors, and
consultants. The number of shares available for grant was initially 712,500
shares. Beginning on the first day of each fiscal year, the number of shares
reserved for grant will be increased by 5 percent of the number of shares of
common stock outstanding as of the end of the preceding fiscal year. Options
granted under the 1995 Stock Option Plan are subject to vesting over a one to
five year period and must generally be exercised by the optionee during the
period of employment or service with SDL or within a specified period
following termination of employment or service. Options currently expire no
later than ten years from the date of grant.
SDL has reserved 3,323,738 shares of common stock for future issuance under
its Stock Option Plans as of December 31, 1998.
II-15
<PAGE>
Information with respect to stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Outstanding options
-------------------------
Weighted-
Available Number average
for grant of shares exercise price
--------- --------- --------------
<S> <C> <C> <C>
Balance at December 31, 1995............... 130,350 2,860,863 $ 3.59
Options granted.......................... (373,642) 373,642 20.53
Options canceled......................... 182,274 (182,274) 15.32
Options exercised........................ -- (821,569) 0.70
Additional options authorized............ 531,375 -- --
Option authorizations canceled........... (14,520) -- --
-------- --------- ------
Balance at December 31, 1996............... 455,837 2,230,662 6.48
Options granted.......................... (552,645) 552,645 16.06
Options canceled......................... 140,268 (140,268) 16.79
Options exercised........................ -- (249,734) 2.33
Additional options authorized............ 665,305 -- --
-------- --------- ------
Balance at December 31, 1997............... 708,765 2,393,305 8.51
Options granted.......................... (646,863) 646,863 22.58
Options canceled......................... 156,080 (156,080) 19.58
Options exercised........................ -- (462,059) 4.06
Additional options authorized............ 683,727 -- --
-------- --------- ------
Balance at December 31, 1998............... 901,709 2,422,029 $12.41
======== ========= ======
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------- ---------------------
Weighted-
average Weighted- Weighted-
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.34 -- $5.10 822,109 3.7 years $ 0.84 822,109 $0.84
5.11 -- 11.00 237,409 6.1 10.02 184,471 9.87
11.01 -- 16.00 336,695 8.2 13.60 107,346 14.11
16.01 -- 21.00 470,679 8.4 18.60 120,169 18.44
21.01 -- 25.00 492,774 9.0 24.01 40,041 22.79
25.01 -- 30.00 53,313 7.5 27.64 25,925 27.74
30.01 -- 39.63 9,050 10.0 39.63 -- --
--------- ---------
$0.34 -- $39.63 2,422,029 6.7 $12.41 1,300,061 $6.05
========= =========
</TABLE>
Employee stock purchase plan
To provide employees with an opportunity to purchase common stock of SDL
through payroll deductions, SDL established the 1995 Employee Stock Purchase
Plan (the ESPP) and initially reserved 450,000 shares of common stock for
issuance to participants. In May 1998, 400,000 additional shares of common
stock were reserved for issuance to participants. Under the ESPP, SDL's
employees, subject to certain restrictions, may purchase shares of common
stock at the lesser of 85 percent of the fair market value at either the
beginning of each two-year offering period or the end of each six-month
purchase period within the two-year offering period. Under the ESPP, SDL sold
149,345, 118,690, and 110,658 shares in 1998, 1997 and 1996, respectively.
II-16
<PAGE>
Stock-based compensation
SDL has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related
interpretations in accounting for its employee stock-based awards because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS 123), requires use of option valuation models that
were not developed for use in valuing stock-based compensation plans. Under
APB 25, SDL generally recognizes no compensation expense with respect to such
awards.
Pro forma information regarding net income and earnings per share is required
by SFAS 123 as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method. The fair
value for these options was estimated at the date of grant using a Black-
Scholes option pricing model. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Since SDL's stock-based awards have
characteristics significantly different from those of traded options, and
since changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock-
based awards. The fair value of SDL's stock-based awards to employees was
estimated assuming no expected dividends and the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Options ESPP
------------------------- ----------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Expected life........... 4 years 4 years 3 years 6 months 6 months 6 months
Expected volatility..... 0.72 0.66 0.60 0.84 0.82 0.72
Risk free interest
rate................... 5.15% 6.17% 6.04% 5.06% 5.64% 5.45%
</TABLE>
For the purpose of pro forma disclosures, the estimated fair value of the
above stock-based awards is amortized over the awards' vesting period. SDL's
pro forma information follows (in thousands, except for per share
information):
<TABLE>
<CAPTION>
Years ended December
31,
-----------------------
1998 1997 1996
------ -------- ------
<S> <C> <C> <C>
Pro forma net income/(loss)............................ $6,789 $(27,523) $5,947
Pro forma net income/(loss) per share--basic........... $ 0.49 $ (2.04) $ 0.50
Pro forma net income/(loss) per share--diluted......... $ 0.46 $ (2.04) $ 0.45
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until approximately
1999.
Weighted-average fair value of options granted during 1998, 1997 and 1996 were
$13.02, $8.92 and $9.65, respectively. The weighted-average fair value of ESPP
rights granted in 1998, 1997 and 1996 were $7.53, $5.64 and $3.97,
respectively.
11.Acquisitions
In November 1997, SDL acquired all of the outstanding stock of Mr. Laser,
Inc., a company involved in the design and development of compact laser
marking systems. The acquisition was accounted for under the purchase method
of accounting. The total purchase price was approximately $1,202,000, which
includes related transaction costs of $22,000, $187,000 for net acquired
liabilities. At the time of acquisition, SDL recorded $753,000 as in-process
research and development for development projects that had not yet reached
technologic feasibility. To
II-17
<PAGE>
determine the value of in-process research and development, SDL considered,
among other factors, the state of development of the compact laser marking
system, the costs needed to complete development, and the expected income and
risks associated with the inherent difficulties and uncertainties in
completing development. Purchase price in excess of amounts allocated to in-
process research and development and net acquired liabilities was
approximately $453,000 and was allocated to goodwill. Goodwill is being
amortized straight-line over a three year life. Mr. Laser's operating results
are included in the accompanying consolidated financial statements beginning
with November 1997. The results of Mr. Laser prior to the acquisition were not
material to SDL's consolidated results of operations.
12.Commitments
SDL leases all of its facilities and certain equipment under operating leases.
The operating facilities leases contain renewal options. The future minimum
rental payments as of December 31, 1998, under operating leases are as follows
(in thousands):
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------
<S> <C>
1999............................................................. $2,218
2000............................................................. 2,275
2001............................................................. 2,246
2002............................................................. 640
2003............................................................. 167
------
Total............................................................ $7,546
======
</TABLE>
Rental expense was approximately $2.2 million, $1.7 million and $1.4 million,
for 1998, 1997 and 1996, respectively.
13.Contingencies
In 1985, Rockwell International Corporation (Rockwell) asserted, and in 1995
filed suit in the Northern California Federal District Court against SDL
alleging that a SDL fabrication process infringed certain Rockwell patent
rights. Rockwell sought to permanently enjoin SDL from infringing Rockwell's
alleged patent rights and sought unspecified actual and treble damages plus
costs. SDL 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 from the Federal government to Rockwell. SDL did
not participate in the settlement. On March 8, 1999 the Court lifted the stay
of action in the Rockwell suit and allowed the parties to engage in limited
discovery primarily regarding Rockwell's allegation that SDL infringed the
Rockwell patent. No trial date has been set. A further case management
conference was scheduled for July 19, 1999. The resolution of this litigation
is fact intensive so that the outcome cannot be determined and remains
uncertain. If Rockwell prevailed in the litigation, it could be awarded
monetary damages against SDL. SDL believes, however, that it has meritorious
defenses to the Rockwell's allegations in the litigation.
Shortly after the aforementioned suit between Rockwell and the Federal
government was filed, the Federal government had notified SDL that, if the
Federal government were liable to Rockwell, then the Federal government might
seek indemnification for a portion of its liability from SDL. The Federal
government never stated the amount of SDL's alleged indemnity obligation, nor
has it ever repeated its assertion that SDL might have some indemnity
obligation to the Federal government.
II-18
<PAGE>
SDL is engaged in various cost-reimbursement type contracts with the Federal
government. These contracts utilize allowable costs plus contract fee to
determine revenue. Federally-funded contracts are subject to audit of pricing
and actual costs incurred, which have resulted and could result in the future,
in price adjustments. The government has in the past and could in the future,
challenge SDL's accounting methodology for computing indirect rates and
allocating indirect costs to government contracts. The government is currently
challenging certain indirect cost allocations. While management believes that
amounts recorded on its financial statements are adequate to cover all related
risks, the government has not concluded its investigation or agreed to a
settlement with SDL. Although the outcome of this matter cannot be determined
at this time, management does not believe that its outcome will have a
material adverse affect on SDL's financial position, results of operations or
cash flows. Nevertheless, based on future developments, SDL's estimate of the
outcome of these matters could change in the near term.
Trial of the Spectra-Physics vs. SDL, Inc. litigation began before the Santa
Clara County, California Superior Court on May 7, 1997. On May 19, 1997,
before the trial was concluded, SDL, Spectra-Physics and its subsidiary Opto
Power Corporation, and Xerox Corporation made a comprehensive settlement of
their disputes.
During the second quarter of fiscal 1997, SDL included approximately $27.5
million in general and administrative expenses for settlement and related
legal costs associated with the resolution of the dispute with Spectra-
Physics, Inc.
14.Segments of an enterprise and related information
Reportable segments
SDL has three reportable segments: communications, research, and printing and
materials processing. The communications business unit develops, designs,
manufactures and distributes lasers for applications in the telecom, cable
television, satellite and dense wavelength division multiplexing markets. The
research business unit conducts research, development or product
customization, involving both communications and printing and material
processing applications, for Fortune 500 companies, major international
customers, smaller domestic and international companies, and multiple Federal
government agencies. The operating results of the research business unit
include solely the results generated from that business unit. Research revenue
on the Consolidated Statement of Operations included research, development,
and product customization conducted by all segments of SDL. The printing and
materials processing business unit develops, designs, manufacturers and
distributes lasers for applications in the surface heat treating, product
labeling, digital imaging, digital proofing, and thermal printing solutions
markets.
The operating segments reported below are the segments of SDL 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.
SDL'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. SDL does not
allocate assets to its individual operating segments.
II-19
<PAGE>
Information about reported segment income or loss is as follows (in
thousands):
Year ended December 31, 1998:
<TABLE>
<CAPTION>
Communication Printing and
products Research material processing Total
------------- -------- ------------------- --------
<S> <C> <C> <C> <C>
Revenue from external
customers................ $55,391 $7,354 $43,393 $106,138
Amortization.............. 645 -- 132 777
Segment operating income.. $ 7,744 $ 135 $ 4,776 $ 12,655
</TABLE>
Year Ended December 31, 1997:
<TABLE>
<CAPTION>
Communication Printing and
products Research material processing Total
------------- -------- ------------------- -------
<S> <C> <C> <C> <C>
Revenue from external
customers................. $38,354 $11,020 $41,990 $91,364
Amortization............... 645 -- 26 671
In process R&D............. -- -- 753 753
Segment operating
income/(loss)............. $ 2,657 $ 138 $ (912) $ 1,883
</TABLE>
Year Ended December 31, 1996:
<TABLE>
<CAPTION>
Communication Printing and
products Research material processing Total
------------- -------- ------------------- -------
<S> <C> <C> <C> <C>
Revenue from external
customers................. $35,557 $11,900 $35,018 $82,475
Amortization............... 645 -- -- 645
Segment operating income... $ 3,804 $ 518 $ 4,350 $ 8,672
</TABLE>
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as follows
(in thousands):
<TABLE>
<CAPTION>
Years ended December
31,
------------------------
Operating income/(loss) 1998 1997 1996
- ----------------------- ------- -------- ------
<S> <C> <C> <C>
Total operating income from operating segments:....... $12,655 $ 1,883 $8,672
Spectra Physics lawsuit and related legal costs....... -- (27,500) --
------- -------- ------
Total consolidated operating income/(loss):.......... $12,655 $(25,617) $8,672
======= ======== ======
</TABLE>
Geographic information
Information regarding geographic areas for the years ended December 31, 1998,
1997 and 1996 is as follows (in thousands):
Year ended December 31, 1998:
<TABLE>
<CAPTION>
Long-
lived
Revenue (a) assets
----------- -------
<S> <C> <C>
United States............................................... $ 80,665 $33,624
Canada...................................................... 6,503 3,016
Germany..................................................... 4,771 --
France...................................................... 4,308 --
Japan....................................................... 6,886 --
Other foreign countries..................................... 3,005 --
-------- -------
Total..................................................... $106,138 $36,640
======== =======
</TABLE>
II-20
<PAGE>
Year ended December 31, 1997:
<TABLE>
<CAPTION>
Long-
lived
Revenue (a) assets
----------- -------
<S> <C> <C>
United States............................................... $75,832 $28,249
Canada...................................................... 2,175 1,366
Germany..................................................... 2,936 --
France...................................................... 3,221 --
Japan....................................................... 4,123 --
Other foreign countries..................................... 3,077 --
------- -------
Total..................................................... $91,364 $29,615
======= =======
</TABLE>
Year ended December 31, 1996:
<TABLE>
<CAPTION>
Long-
lived
Revenue (a) assets
----------- -------
<S> <C> <C>
United States............................................... $69,883 $23,777
Canada...................................................... 1,144 1,075
France...................................................... 3,329 --
Japan....................................................... 3,740 --
Other foreign countries..................................... 4,379 --
------- -------
Total..................................................... $82,475 $24,852
======= =======
</TABLE>
(a) Revenue is attributed to countries based on the location of customers.
Major customers
SDL received approximately 14 percent, 19 percent and 21 percent of its 1998,
1997, and 1996, respectively, revenue from Lockheed-Martin through several
government and commercial programs. Sales to Lockheed-Martin are reported in
the communication products and printing and material processing segments.
Almost all of SDL's revenue from this customer during 1998, 1997 and 1996 was
derived from Federally-funded programs. Most of SDL's Federally-funded
programs are subject to renewal every one or two years and to termination for
convenience by the government agency. The loss of SDL's contracts or failure
to win new contracts with Lockheed-Martin, or other major customers, could
have an adverse effect on SDL's results of operations.
15.Employee benefit plan
In 1990, SDL established the SDL, Inc. Profit Sharing and Saving Plus Plan
(the Plan) that covers substantially all US full-time employees and is
qualified under sections 401(a) and 401(k) of the Internal Revenue Code.
Participants may defer up to 20 percent of their pre-tax earnings (up to the
Internal Revenue Service limit). SDL matches 50 percent of employee
contributions up to a maximum of 5 percent of the participant's pre-tax
earnings. The participants' as well as SDL's matching contributions are fully
vested. SDL's contributions to the Plan were approximately $0.6 million, $0.5
million, and $0.4 million for 1998, 1997, and 1996, respectively.
16.Subsequent events (unaudited)
In February 1999, SDL acquired the fiber laser business of Polaroid for $5.2
million cash. The business acquired includes all the physical assets,
intellectual property, including the assignment of 38 patents and the
licensing of 22 patents in the fiber laser area, and the ongoing operation of
the fiber manufacturing facilities and fiber laser subsystem. The acquisition
will be accounted for under the purchase method of accounting and SDL
anticipates it will write-off in-
II-21
<PAGE>
process research and development up to $1.5 million in the first quarter of
1999. The results of the fiber laser business are not material to SDL's
historical consolidated results of operations.
On March 24, 1999, SDL's board of directors approved a two-for-one stock split
to be effected in the form of a stock dividend. In addition, SDL's board of
directors approved an increase in the number of authorized shares of capital
stock to 71,000,000 consisting of 70,000,000 common shares. In order to effect
the stock split, the increase in the number of authorized common shares must
receive stockholder approval.
II-22
<PAGE>
APPENDIX III
IOC FINANCIAL STATEMENTS
INDEX TO IOC FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
1.Report of independent auditors.......................................... III-2
2.IOC consolidated financial statements................................... III-3
(a)consolidated profit and loss accounts............................... III-3
(b)consolidated balance sheets......................................... III-4
(c)consolidated cash flow statements................................... III-5
(d)notes to the financial statements................................... III-6
</TABLE>
III-1
<PAGE>
1. REPORT OF INDEPENDENT AUDITORS
To IOC International plc
We have audited the Financial Statements on pages III-3 to III-18, which have
been prepared under the historical cost convention and the accounting policies
set out on pages III-6 to III-8.
Respective responsibilities of directors and auditors
The company's directors are responsible for the preparation of the financial
statements. It is our responsibility to form an independent opinion, based on
our audit, on those financial statements and to report our opinion to you.
Basis of opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board, which do not differ in any significant respect from
United States Generally Accepted Auditing Standards. An audit includes
examination, on a test basis, of evidence relevant to the amounts and
disclosures in the financial statements. It also includes an assessment of the
significant estimates and judgments made by the directors in the preparation
of the financial statements and of whether the accounting policies are
appropriate to the circumstances of the group, consistently applied and
adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion the financial statements give a true and fair view of the state
of affairs of the group as at 30 September 1998 and 30 September 1997, of the
group's loss or profit and cash flows for each of the years ended 30 September
1998, 1997 and 1996, in accordance with Generally Accepted Accounting
Principles in the United Kingdom.
Reconciliation to US GAAP
Accounting practices used by the group in preparing the accompanying financial
statements conform with Generally Accepted Accounting Principles in the United
Kingdom, but do not conform with accounting principles generally accepted in
the United States. A description of these differences and a reconciliation of
net loss or profit and shareholders' equity to United States Generally
Accepted Accounting principles is set out in note 24.
/s/
- -----------------------------
Arthur Andersen
Chartered Accountants
Cambridge, England
15 December 1998
III-2
<PAGE>
2. IOC CONSOLIDATED FINANCIAL STATEMENTS
(a) CONSOLIDATED PROFIT AND LOSS ACCOUNTS
for the years ended 30 September
<TABLE>
<CAPTION>
1998 1997 1996
Notes (Pounds)'000 (Pounds)'000 (Pounds)'000
----- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Turnover.......................... 2 4,025 6,590 3,728
Cost of sales..................... (3,413) (3,732) (1,374)
------ ------ ------
Gross profit...................... 612 2,858 2,354
Design and development costs...... (1,191) (938) (574)
Other operating costs--
exceptional...................... 3 (498) 52 (67)
- --non-exceptional................. 4 (1,919) (1,927) (1,177)
------ ------ ------
Operating (loss)/profit........... (2,996) 45 536
Investment income................. 5 310 307 251
Interest payable and similar
charges.......................... 6 (266) (152) (127)
------ ------ ------
(Loss)/profit on ordinary
activities before taxation....... 7 (2,952) 200 660
Taxation.......................... 9 (24) -- --
------ ------ ------
(Loss)/profit on ordinary
activities after taxation being
(loss)/profit for the year....... (2,976) 200 660
Release of dividends accrued, not
proposed......................... -- -- 265
Accumulated deficit, beginning of
year............................. (222) (422) (1,347)
------ ------ ------
Accumulated deficit, end of year.. (3,198) (222) (422)
------ ------ ------
(Loss)/earnings per share
(pence).......................... 10
--basic......................... (11.4)p 0.8p 3.2p
--fully diluted................. n/a n/a 2.8p
------ ------ ------
</TABLE>
The group has no gains or losses for any year other than the retained
(loss)/profit for each year and therefore no statement of total recognised
gains and losses has been included in these financial statements. All
operations continued throughout the years presented and no operations were
acquired or discontinued.
The accompanying notes are an integral part of these consolidated profit and
loss accounts.
III-3
<PAGE>
(b) CONSOLIDATED BALANCE SHEETS
as at 30 September
<TABLE>
<CAPTION>
1998 1997
Notes (Pounds)'000 (Pounds)'000
----- ------------ ------------
<S> <C> <C> <C>
Fixed assets
Tangible assets............................... 11 4,070 3,756
Current assets
Stocks........................................ 12 947 773
Debtors....................................... 13 907 2,415
Cash at bank and in hand and term deposits.... 5,599 4,353
------ ------
7,453 7,541
Creditors: Amounts falling due within one
year......................................... 14 (1,528) (1,928)
------ ------
Net current assets............................ 5,925 5,613
------ ------
Total assets less current liabilities......... 9,995 9,369
Creditors: Amounts falling due after more than
one year..................................... 15 (1,193) (1,492)
------ ------
Net assets.................................... 8,802 7,877
====== ======
Capital and reserves
Called-up share capital....................... 16 3,103 2,489
Share premium account......................... 17 7,832 4,545
Difference arising on merger.................. 17 1,065 1,065
Profit and loss account....................... 17 (3,198) (222)
------ ------
Equity shareholders' funds.................... 18 8,802 7,877
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
III-4
<PAGE>
(c) CONSOLIDATED CASH FLOW STATEMENTS
for the years ended 30 September
<TABLE>
<CAPTION>
1998 1997 1996
Notes (Pounds)'000 (Pounds)'000 (Pounds)'000
----- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net cash (outflow)/inflow from
operating activities............ 19 (1,359) (938) 454
====== ====== ======
Returns on investments and
servicing of finance
Interest received................ 355 339 163
Interest paid.................... (105) (65) (79)
Interest element of finance lease
rentals......................... (175) (60) (31)
------ ------ ------
Net cash inflow from returns on
investments and servicing of
finance......................... 75 214 53
====== ====== ======
Capital expenditure and financial
investment
Payments to acquire tangible
fixed assets.................... (363) (1,376) (1,068)
Proceeds from the disposal of
tangible fixed assets........... -- 8 7
------ ------ ------
Net cash outflow from investing
activities...................... (363) (1,368) (1,061)
====== ====== ======
Taxation paid.................... (24) -- --
====== ====== ======
Net cash outflow before
management of liquid resources
and financing................... (1,671) (2,092) (554)
------ ------ ------
Management of liquid resources
Cash (placed on)/withdrawn from
term deposits................... (1,625) 2,350 (4,900)
====== ====== ======
Financing
Proceeds from issue of ordinary
shares (net).................... 3,901 15 6,618
Redemption of preference shares.. -- -- (668)
Movement in net debt for the
period.......................... 20 (984) (130) (197)
------ ------ ------
Net cash inflow/(outflow) from
financing....................... 2,917 (115) 5,753
====== ====== ======
(Decrease)/increase in cash...... (379) 143 299
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated cash flow
statements.
III-5
<PAGE>
(d)NOTES TO THE FINANCIAL STATEMENTS
1.Accounting policies
A summary of the principal group accounting policies, all of which have been
applied consistently throughout the year and the preceding years, is set out
below.
(a)Basis of accounting
The consolidated financial statements are prepared under the historical cost
convention and in accordance with applicable accounting standards.
(b)Basis of consolidation
The group financial statements consolidate the financial statements of IOC
International plc and its subsidiary undertaking, Integrated Optical
Components Limited, under merger accounting principles as if the company had
always owned its subsidiary. Comparative information has been prepared on the
same basis. The excess over the nominal value of the shares issued by the
company to acquire Integrated Optical Components Limited and the nominal value
of the shares acquired including any share premium is included as a difference
arising on merger.
(c)Tangible fixed assets
Tangible fixed assets are shown at cost, net of depreciation and permanent
diminution in value.
Depreciation is provided on all tangible fixed assets other than assets in the
course of construction, from the date at which the asset is brought into use,
at rates calculated to write off the cost, less estimated residual value, of
each asset on a straight-line basis over its expected life as follows:
Motor vehicles:33 per cent. per annum
Computer equipment and software:25 per cent. per annum
Leasehold improvements and lease premia: over period of property lease
Cleanroom and related services:over period of property lease
Plant and equipment:20 per cent. per annum
Fixtures and fittings:25 per cent. per annum
During the year ended 30 September 1997, with the addition of a further
premises, the directors amended the depreciation bases of the cleanroom and
related services to the period of the lease in order that the bases more
accurately reflect the usage. Previously the rate had been 15 per cent. per
annum on a straight-line basis. This change has resulted in an exceptional
credit of (Pounds)52,000, reversing earlier years' depreciation charged.
Residual value is calculated at the date of acquisition.
(d)Stocks
Stocks are stated at the lower of cost and net realisable value.
III-6
<PAGE>
Costs include materials, direct labour and an attributable proportion of
manufacturing overhead based on normal levels of activity.
Net realisable value is based on estimated normal selling price, less further
costs expected to be incurred to completion and disposal.
Provision is made for obsolete, slow moving and defective items where
appropriate.
(e)Taxation
Corporation tax payable is provided on taxable profits at the current rate.
Advance corporation tax payable on dividends paid or proposed in the year is
written off, except when recoverability against corporation tax payable is
considered to be reasonably assured. Credit is taken for advance corporation
tax written off in previous years when it is recovered against corporation tax
liabilities.
Deferred taxation (which arises from differences in the timing of the
recognition of items, principally depreciation, in the financial statements
and by tax legislation) has been calculated on the liability method. Deferred
taxation is provided on timing differences which will probably reverse, at the
rates of tax likely to be in force at the time of the reversal. Deferred
taxation is not provided on timing differences which, in the opinion of the
directors, will probably not reverse.
(f)Foreign currency
Transactions denominated in foreign currencies are recorded in sterling at
actual exchange rates as of the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies at the year end are reported at
the rates of exchange prevailing at the year end. Any gain or loss arising
from a change in exchange rates subsequent to the date of the transaction is
included as an exchange gain or loss in the profit and loss account.
(g)Turnover
Group turnover comprises the value of sales (excluding VAT) of goods and
services supplied in the normal course of business.
(g)Leases
The group enters into operating and finance leases.
Assets held under finance leases, which confer rights and obligations similar
to those attached to owned assets, are capitalised as tangible fixed assets
and are depreciated over the shorter of the lease term and their useful lives.
The capital elements of future lease obligations are recorded as liabilities,
while the interest elements are charged to the profit and loss account over
the period of the leases to produce a constant rate of charge on the balance
of capital repayments outstanding. Hire purchase transactions are dealt with
similarly, except that assets are depreciated over their useful economic
lives.
The group enters into operating leases as described in note 23. Rentals under
operating leases are charged on a straight-line basis over the lease term,
even if the payments are not made on such a basis.
III-7
<PAGE>
(i)Design and development costs
Design and development expenditure is written off in the period in which it is
incurred.
(j)Pension costs
The group makes contributions to personal pension plans operated by the
individual employees of the company which are charged to the profit and loss
account in the periods to which they relate.
2.Segmental information
Turnover by destination by geographical area:
<TABLE>
<CAPTION>
1998 1997 1996
(Pounds)'000 (Pounds)"000 (Pounds)'000
------------ ------------ ------------
<S> <C> <C> <C>
United Kingdom......................... 2,348 6,210 3,654
Europe................................. 297 116 --
United States of America............... 1,341 208 62
Rest of World.......................... 39 56 12
----- ----- -----
4,025 6,590 3,728
===== ===== =====
All turnover of the group originates in the United Kingdom and all net assets
are located in the United Kingdom. All turnover and profit arises from the
sale of optoelectronic devices and ancillary components.
3.Other operating expenses--exceptional
<CAPTION>
1998 1997 1996
(Pounds)'000 (Pounds)'000 (Pounds)'000
------------ ------------ ------------
<S> <C> <C> <C>
Bad debt (see note 22)................. 319 -- --
Professional fees on aborted merger
strategy.............................. 179 -- --
Write back of depreciation............. -- (52) --
Employee bonus......................... -- -- 67
----- ----- -----
498 (52) 67
===== ===== =====
4.Other operating expenses--non exceptional
<CAPTION>
1998 1997 1996
(Pounds)'000 (Pounds)'000 (Pounds)'000
------------ ------------ ------------
<S> <C> <C> <C>
Distribution costs..................... 34 52 44
Administrative expenses................ 1,885 1,875 1,133
----- ----- -----
1,919 1,927 1,177
===== ===== =====
5.Investment income
<CAPTION>
1998 1997 1996
(Pounds)'000 (Pounds)'000 (Pounds)'000
------------ ------------ ------------
<S> <C> <C> <C>
Bank interest receivable............... 310 307 251
===== ===== =====
</TABLE>
III-8
<PAGE>
6.Interest payable and similar charges
<TABLE>
<CAPTION>
1998 1997 1996
(Pounds)'000 (Pounds)'000 (Pounds)'000
------------ ------------ ------------
<S> <C> <C> <C>
Hire purchase and finance lease
interest............................... 175 60 31
Interest on related party loans......... 88 89 90
Other interest.......................... 3 3 6
----- ----- ---
266 152 127
===== ===== ===
7.(Loss)/profit on ordinary activities before taxation
<CAPTION>
1998 1997 1996
(Pounds)'000 (Pounds)'000 (Pounds)'000
------------ ------------ ------------
(Loss)/profit on ordinary activities before taxation is stated after charging:
<S> <C> <C> <C>
Depreciation of tangible fixed assets
--owned............................... 515 305 248
--held under finance leases and hire
purchase contracts.................. 269 76 44
Auditors' remuneration
--audit fee........................... 30 24 20
--other............................... 47 8 15
The auditors received fees of (Pounds)47,000 (1997: (Pounds)nil; 1996:
(Pounds)99,000) for work relating to share offerings that have been charged to
the share premium account
Staff costs (note 8).................... 2,110 2,012 941
Operating lease rentals
--property............................ 117 105 52
--plant and machinery................. 29 177 25
--other............................... 16 14 7
===== ===== ===
8.Staff costs
Particulars of employees (including executive directors) are as shown below.
Employee costs during the year amounted to:
<CAPTION>
1998 1997 1996
(Pounds)'000 (Pounds)'000 (Pounds)'000
------------ ------------ ------------
<S> <C> <C> <C>
Wages and salaries...................... 1,866 1,793 830
Social security costs................... 175 153 84
Other pension costs..................... 69 66 27
----- ----- ---
2,110 2,012 941
===== ===== ===
The average monthly number of persons employed by the group during each year
was as follows:
<CAPTION>
1998 1997 1996
Number Number Number
------------ ------------ ------------
<S> <C> <C> <C>
Production.............................. 42 40 14
Design and development.................. 10 8 10
Administration.......................... 16 14 5
Sales................................... 7 6 4
----- ----- ---
75 68 33
===== ===== ===
</TABLE>
III-9
<PAGE>
Directors' remuneration:
The total amounts of directors' remuneration and other benefits were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
(Pounds)'000 (Pounds)'000 (Pounds)'000
------------ ------------ ------------
<S> <C> <C> <C>
Emoluments............................. 327 379 321
Contributions to money purchase pension
schemes............................... 11 13 9
Gains on exercise of share options..... -- 605 13
--- --- ---
Aggregate emoluments................... 338 997 343
=== === ===
Compensation for loss of office........ 56 -- --
=== === ===
</TABLE>
Compensation for loss of office is comprised of (Pounds)29,600 paid to S.J.
Meyrick and (Pounds)26,000 paid to A.C. O'Donnell upon their resignations. All
other benefits received are included in the aggregate emoluments.
Directors' emoluments
<TABLE>
<CAPTION>
Salary Benefits Total Total Total
-------- -------- -------- -------- --------
1998 1998 1998 1997 1996
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Executive
M.A. Powell........................ 61,600 5,524 67,124 63,876 68,872
T.G. Collins....................... 72,533 5,183 77,716 76,278 10,238
C.A. Bradley....................... 27,049 365 27,414 -- --
A.P. Appleyard..................... 11,856 -- 11,856 -- --
S.J. Meyrick....................... 24,000 283 24,283 57,862 61,818
A.C. O'Donnell..................... 29,924 4,219 34,143 54,372 58,946
J.D. Dodson........................ -- -- -- 50,404 59,777
Non-executive
D.P. Taylor........................ 54,000 -- 54,000 54,000 47,800
D. Cheesman........................ 15,000 -- 15,000 15,000 13,500
N.S. Kapany........................ 15,000 -- 15,000 7,500 --
------- ------ ------- ------- -------
310,962 15,574 326,536 379,292 320,951
======= ====== ======= ======= =======
</TABLE>
Fees to non-executive directors represent amounts paid to Burlington
Associates Limited under an agreement to provide the services of D.P. Taylor
and Tritech Investment Managers Limited under an agreement to provide the
services of D. Cheesman.
Directors' pension entitlements
Directors are members of money purchase pension schemes as shown below.
Contributions paid by the company in respect of such directors were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
(Pounds) (Pounds) (Pounds)
-------- -------- --------
<S> <C> <C> <C>
M.A. Powell.......................................... 3,380 2,929 2,250
T.G. Collins......................................... 3,467 3,126 568
C.A. Bradley......................................... 1,008 -- --
A.P. Appleyard....................................... 250 -- --
S.J. Meyrick......................................... -- 2,545 2,000
A.C. O'Donnell....................................... 3,033 2,440 2,000
J.D. Dodson.......................................... -- 2,427 2,000
------ ------ -----
11,138 13,467 8,818
====== ====== =====
</TABLE>
III-10
<PAGE>
Directors' share options
Details of directors' holdings of options to acquire ordinary shares in the
company are as follows:
<TABLE>
<CAPTION>
At At Gains on Gains on Gains on
1 October 30 September Exercise exercise exercise exercise
1997 Granted Exercised 1998 price 1998 1997 1996
Number Number Number Number (pence) (Pounds) (Pounds) (Pounds)
--------- ------- --------- ------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
M.A. Powell............. 702,800 -- -- 702,800 5.714* -- -- --
60,000 -- -- 60,000 80 -- -- --
T.G. Collins............ 60,000 -- -- 60,000 120 -- -- --
-- 250,000 -- 250,000 70 -- -- --
C.A. Bradley............ -- 250,000 -- 250,000 70 -- -- --
A.P. Appleyard.......... -- 250,000 -- 250,000 79 -- -- --
S. J. Meyrick........... -- -- -- -- -- -- -- 13,000
D.P. Taylor............. 302,785 -- -- 302,785 5.714* -- 605,166 --
--------- ------- ---- --------- ----- ------- ------
1,125,585 750,000 -- 1,875,585 -- 605,166 13,000
========= ======= ==== ========= ===== ======= ======
</TABLE>
- --------
* Certain options as marked are exercisable in the wholly owned subsidiary
undertaking, Integrated Optical Components Limited. The shares in the
subsidiary are then exchanged on a one ordinary share for thirty five
ordinary share basis in IOC International plc. The exercise price above is
the effective price in IOC International plc.
The dates the options are exercisable and any performance criteria are
disclosed in note 16.
9.Tax on ordinary activities
<TABLE>
<CAPTION>
1998 1997 1996
(Pounds)'000 (Pounds)'000 (Pounds)'000
------------ ------------ ------------
<S> <C> <C> <C>
The tax charge for each year
represented:
Adjustments in respect of previous
years................................. 24 -- --
=== === ===
</TABLE>
At 30 September 1998, the group had tax losses of approximately
(Pounds)3,000,000 (1997 and 1996: (Pounds)630,000) available to carry forward
to offset against future profits, subject to agreement with the Inland
Revenue.
10.(Loss)/earnings per share
Earnings per share has been calculated on the (loss)/profit for the year after
taxation, divided by the weighted average number of equity shares ranking for
dividend.
<TABLE>
<CAPTION>
1998 1997 1996
------------------ --------------- ---------------
<S> <C> <C> <C>
Profits available to
equity shareholders...... (Pounds)(2,976,000) (Pounds)200,000 (Pounds)660,000
Weighted average number of
shares in issue in year.. 26,206,598 24,814,720 20,348,108
================== =============== ===============
</TABLE>
Fully diluted earnings per share has not been disclosed for the year ended 30
September 1998 and the year ended 30 September 1997 in accordance with
Statement of Standard Accounting Practice No. 3. For the year ended 30
September 1998, the basic earnings per share was negative and for the year
ended 30 September 1997, the dilution was not material. Fully diluted earnings
per share for the year ended 30 September 1996 is based on 24,332,843 ordinary
shares, allowing for the exercise of outstanding share purchase options and an
adjusted profit
III-11
<PAGE>
of (Pounds)689,000 after adding interest deemed to be earned from investing
the proceeds of such share options in 2.5 per cent. Consolidated Stock.
11.Tangible fixed assets
The movement in the year for the group was as follows:
<TABLE>
<CAPTION>
Assets in Fixtures Plant Premises Computer
course of and and and equipment Motor
construction fittings equipment cleanroom and software vehicles Total
(Pounds)'000 (Pounds)'000 (Pounds)'000 (Pounds)'000 (Pounds)'000 (Pounds)'000 (Pounds)'000
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cost
Beginning of year....... 310 155 2,822 1,258 290 35 4,870
Additions............... -- 46 1,162 71 80 -- 1,359
Disposals............... (261) -- (187) -- -- -- (448)
---- --- ----- ----- --- --- -----
End of year............. 49 201 3,797 1,329 370 35 5,781
==== === ===== ===== === === =====
Depreciation
Beginning of year....... -- 49 847 84 123 11 1,114
Charge.................. -- 37 572 95 69 11 784
Disposals............... -- -- (187) -- -- -- (187)
---- --- ----- ----- --- --- -----
End of year............. -- 86 1,232 179 192 22 1,711
==== === ===== ===== === === =====
Net book value
Beginning of year....... 310 106 1,975 1,174 167 24 3,756
==== === ===== ===== === === =====
End of year............. 49 115 2,565 1,150 178 13 4,070
==== === ===== ===== === === =====
</TABLE>
The net book value of tangible fixed assets includes an amount of
(Pounds)1,946,000 (1997: (Pounds)1,480,000) in respect of assets held under
hire purchase of finance lease contracts.
12.Stocks
<TABLE>
<CAPTION>
1998 1997
(Pounds)'000 (Pounds)'000
------------ ------------
<S> <C> <C>
Raw materials......................................... 723 585
Work in progress...................................... 193 151
Finished goods and goods for resale................... 31 37
--- ---
947 773
=== ===
</TABLE>
There is no material difference between the balance sheet value of stocks and
their replacement value.
13.Debtors
<TABLE>
<CAPTION>
1998 1997
(Pounds)'000 (Pounds)'000
------------ ------------
<S> <C> <C>
Trade debtors......................................... 572 999
Amounts owed by subsidiary undertaking................ -- --
Other debtors......................................... 154 1,210
Prepayments and accrued income........................ 181 206
--- -----
907 2,415
=== =====
</TABLE>
All amounts are recoverable within one year.
III-12
<PAGE>
14.Creditors: amounts falling due within one year
<TABLE>
<CAPTION>
1998 1997
(Pounds)'000 (Pounds)'000
------------ ------------
<S> <C> <C>
Obligations under finance leases and hire purchase
contracts.......................................... 646 415
Amounts due to related parties...................... 180 361
Trade creditors..................................... 370 738
Social security and other taxes..................... 136 223
Accruals and deferred income........................ 196 191
----- -----
1,528 1,928
===== =====
</TABLE>
The amounts due to related parties include amounts owing to certain
shareholders of the company; 3i Group plc, British Technology Group Ltd and
Innolion SA, as described in note 15.
15.Creditors: amounts falling due after more than one year
<TABLE>
<CAPTION>
1998 1997
(Pounds)'000 (Pounds)'000
------------ ------------
<S> <C> <C>
Obligations under finance leases and hire purchase
contracts.......................................... 833 951
Amounts due to related parties...................... 360 541
----- -----
1,193 1,492
===== =====
</TABLE>
Obligations disclosed under finance leases and hire purchase contracts are
secured on the appropriate assets together with a charge over cash at bank
totalling (Pounds)425,000 (1997: (Pounds)550,000) and book debts.
Liabilities disclosed under "Amounts due to related parties" relate to long
term loans secured by a fixed and floating charge from certain shareholders of
the company; 3i Group plc, British Technology Group Limited and Innolion SA.
These loans are repayable in equal annual instalments ceasing on 30 September
2001. The interest rate is the higher of 3 per cent. above LIBOR or 10 per
cent.
Obligations under finance leases and hire purchase contracts:
<TABLE>
<CAPTION>
1998 1997
(Pounds)'000 (Pounds)'000
------------ ------------
<S> <C> <C>
Amounts payable:
- --within one year..................................... 646 415
- --within two to five years............................ 833 951
----- -----
1,479 1,366
===== =====
</TABLE>
16.Called-up share capital
<TABLE>
<CAPTION>
1998 1997
(Pounds)'000 (Pounds)'000
------------ ------------
<S> <C> <C>
Authorised
50,000,000 (1997: 37,500,000) ordinary shares of 10p
each............................................... 5,000 3,750
----- -----
Allotted, issued and fully paid
31,027,155 (1997: 24,891,440) ordinary shares of 10p
each............................................... 3,103 2,489
===== =====
</TABLE>
On 9 April 1998, 140,000 ordinary shares of 10p each were issued pursuant to
share options being exercised.
On 16 July 1998, the authorised share capital of the company was increased
from (Pounds)3,750,000 to (Pounds)5,000,000 by the creation of 12,500,000
ordinary shares of 10p each. At the same time, 5,995,715 ordinary shares of
10p each were allotted at a price of 70p per share to certain existing
shareholders.
III-13
<PAGE>
On 12 October 1998, 105,000 ordinary shares of 10p each were issued pursuant
to share options being exercised.
Share options
Options have been granted to subscribe for ordinary shares as follows:
<TABLE>
<CAPTION>
At At Exercise Period
1 October Exercised/ 30 September price exerciseable/
1997 Granted Lapsed 1998 per share last date
Number Number Number Number (pence) exerciseable
--------- ------- ---------- ------------ --------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
1991 options............ 105,000 Nil Nil 105,000 2.857* 13 October 1998
1992 options............ 140,000 Nil 140,000 Nil 2.857* 13 October 1998
1994 options............ 2,382,485 Nil Nil 2,382,485 5.714* 30 July 2000
1996 options............ 300,000 Nil Nil 300,000 80 (i) One third of options
from 3 March 1996 to
23 February 2003
(ii) One third of options
from 3 March 1997 to
23 February 2003
(iii) One third of options
from 3 March 1998 to
23 February 2003
1996 options............ 60,000 Nil Nil 60,000 120 (i) One third of options
from 5 August 1997 to
5 August 2003
(ii) One third of options
from 5 August 1998 to
5 August 2003
(iii) One third of options
from 5 August 1999
to
5 August 2003
1996 options............ 250,000 Nil Nil 250,000 80 5 September 1998 to
5 March 2001
1997 options............ 30,000 Nil Nil 30,000 140 (i) One third of options
from 1 May 1998 to
1 May 2004
(ii) One third of options
from 1 May 1999 to
1 May 2004
(iii) One third of options
from 1 May 2000 to
1 May 2004
1997 options**.......... 238,000 Nil 44,102 193,898 80.5 3 September 2000 to
3 September 2004
1998 options**.......... Nil 500,000 Nil 500,000 70 16 July 2001 to
16 July 2005
1998 options**.......... Nil 250,000 Nil 250,000 79 20 July 2001 to
20 July 2005
</TABLE>
- -------
* Certain options as marked are exercisable in the wholly owned subsidiary
undertaking Integrated Optical Components Limited. The shares in the
subsidiary are then exchanged on a one ordinary share for thirty five
ordinary shares basis in IOC International plc. The exercise price above is
the effective price in IOC International plc.
** Options as marked are subject to performance criteria based on a specified
level of increase in the earnings per share over a three year period.
III-14
<PAGE>
The 500,000 and 250,000 1998 executive share options were granted on 16 July
1998 and 20 July 1998 respectively.
44,102 options in the 1997 employee share scheme lapsed during the year owing
to staff leaving the company.
17.Reserves
Of total reserves shown in the balance sheet, the following amounts are
regarded as distributable or otherwise:
<TABLE>
<CAPTION>
1998 1997
(Pounds)'000 (Pounds)'000
------------ ------------
<S> <C> <C>
Distributable:
- --profit and loss account............................. (3,198) (222)
------ -----
(3,198) (222)
Non-distributable:
- --share premium....................................... 7,832 4,545
- --difference arising on merger........................ 1,065 1,065
------ -----
5,699 5,388
====== =====
</TABLE>
The movement on reserves during 1998 was as follows:
<TABLE>
<CAPTION>
Difference Share Profit and
arising on premium loss
merger account account Total
(Pounds)'000 (Pounds)'000 (Pounds)'000 (Pounds)'000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Beginning of year......... 1,065 4,545 (222) 5,388
Adjustment on issue of
share options............ -- (10) -- (10)
Issue of shares on
placement................ -- 3,597 -- 3,597
Costs of share issue...... -- (300) -- (300)
Loss for the financial
year..................... -- -- (2,976) (2,976)
----- ----- ------ ------
1,065 7,832 (3,198) 5,699
===== ===== ====== ======
</TABLE>
18.Reconciliation of movements in shareholders' funds
<TABLE>
<CAPTION>
1998 1997
(Pounds)'000 (Pounds)'000
------------ ------------
<S> <C> <C>
(Loss)/profit for the financial year.................. (2,976) 200
New share capital subscribed--net..................... 3,901 15
------ -----
Net addition to shareholders' funds................... 925 215
Opening shareholders' funds........................... 7,877 7,662
------ -----
Closing shareholders' funds........................... 8,802 7,877
====== =====
</TABLE>
III-15
<PAGE>
19.Reconciliation of operating (loss)/profit to net cash (outflow)/inflow from
operating activities
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(Pounds)'000 (Pounds)'000 (Pounds)'000
------------ ------------ ------------
<S> <C> <C> <C>
Operating (loss)/profit................ (2,996) 45 536
Depreciation charges................... 784 381 292
(Profit)/loss on disposal of fixed
assets................................ -- (5) 4
Increase in stocks..................... (174) (207) (380)
Decrease/(increase) in debtors......... 1,463 (1,110) (761)
(Decrease)/increase in creditors....... (436) (42) 763
------ ------ ----
Net cash (outflow)/inflow from
operating activities.................. (1,359) (938) 454
====== ====== ====
</TABLE>
20.Analysis of net funds
<TABLE>
<CAPTION>
As at As at
1 October Other non- 30 September
1997 Cash flow cash changes 1998
(Pounds)'000 (Pounds)'000 (Pounds)'000 (Pounds)'000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash at bank and in hand... 603 (379) -- 224
===== ====== ===== =====
Debt due within one year:
--finance leases and hire
purchase................ 415 (622) 853 646
--loans from related
parties................. 361 (362) 181 180
Debt due after one year:
--finance leases and hire
purchase................ 951 -- (118) 833
--loans from related
parties................. 541 -- (181) 360
----- ------ ----- -----
2,268 (984) 735 2,019
===== ====== ===== =====
Term deposits.............. 3,750 1,625 -- 5,375
===== ====== ===== =====
Net funds.................. 2,085 3,580
===== =====
<CAPTION>
As at As at
1 October Other non- 30 September
1996 Cash flow cash changes 1997
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash at bank and in hand... 460 143 -- 603
===== ====== ===== =====
Debt due within one year:
--finance leases and hire
purchase................ 47 (47) 415 415
--loans from related par-
ties.................... 192 (11) 180 361
--bank loans............. 36 (36) -- --
Debt due after one year:
--finance leases and hire
purchase................ 158 (36) 829 951
--loans from related par-
ties.................... 721 -- (180) 541
----- ------ ----- -----
1,154 (130) 1,244 2,268
===== ====== ===== =====
Term deposits.............. 6,100 (2,350) -- 3,750
===== ====== ===== =====
Net funds.................. 5,406 2,085
===== =====
</TABLE>
During the year ended 30 September 1998, the group entered into finance lease
arrangements in respect of assets with a total capital value at the inception
of the leases of (Pounds)735,000 (1997: (Pounds)1,244,000).
III-16
<PAGE>
21.Reconciliation of net cash flow to movement in net funds
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------- -------------------------
(Pounds)'000 (Pounds)'000 (Pounds)'000 (Pounds)'000 (Pounds)'000 (Pounds)'000
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(Decrease)/increase in
cash in the year....... (379) 143 299
Cash outflow from
decrease in debt and
lease financing........ 984 130 197
Cash inflow/(outflow)
from decrease in liquid
resources.............. 1,625 (2,350) 4,900
----- ------ -----
Change in net funds
resulting from cash
flows.................. 2,230 (2,077) 5,396
Net finance leases...... (735) (1,244) (279)
----- ------ -----
Movement in net funds in
the year............... 1,495 (3,321) 5,117
Net funds at beginning
of year................ 2,085 5,406 289
----- ------ -----
Net funds at end of
year................... 3,580 2,085 5,406
===== ====== =====
</TABLE>
22.Contingent liabilities
In the first half of 1998, supplies of modulators to a major customer were
withdrawn due to an apparent design problem. It was expected that the
replacement modulators would be shipped during the second half of the year.
The order has now been cancelled by the customer. Whilst there has been no
formal legal claim against the company, the customer has requested the return
of monies paid to IOC for earlier deliveries ((Pounds)761,000). The board of
directors has rejected this request and is confident that if a formal legal
claim is received it can be successfully defended. The directors have provided
as a bad debt the remaining monies outstanding from this customer. (See note
3).
23.Guarantees and other financial commitments
(a) Capital commitments
Capital commitments are as follows:
<TABLE>
<CAPTION>
1998 1997
(Pounds)'000 (Pounds)'000
------------ ------------
<S> <C> <C>
Contracted but not provided for....................... 143 313
=== ===
</TABLE>
(b) Lease commitments
The group has entered into non-cancellable operating leases in respect of
plant and equipment, the payments for which extend over a period of up to
three years. In addition, the group leases certain land and buildings on
short-term leases. The rents payable under these leases are subject to
renegotiation at various intervals as specified in the lease.
The minimum annual rentals under the foregoing leases are as follows:
<TABLE>
<CAPTION>
1998 1998 1997 1997
Land and Plant and Land and Plant and
buildings equipment buildings equipment
(Pounds)'000 (Pounds)'000 (Pounds)'000 (Pounds)'000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating leases which
expire:
- --within one year......... -- 22 -- 4
- --within two to five
years.................... -- 1 -- 49
- --over five years......... 117 -- 117 --
=== === === ===
</TABLE>
III-17
<PAGE>
24. Summary of principal differences between United Kingdom Generally
Accepted Accounting Principles ("UK GAAP") and United States Generally
Accepted Accounting Principles ("US GAAP")
The IOC Group's consolidated financial statements have been prepared under UK
GAAP, which differs in certain significant respects from US GAAP. The
principal differences between the Group's accounting policies under UK GAAP
and US GAAP are set out below.
(a) Reconciliation of net (loss)/profit and net assets between UK GAAP and US
GAAP.
There are no significant differences between the net (loss)/profit and
shareholders' equity as reported under UK GAAP and as reported under US GAAP.
(b) (Loss)/earnings per share
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net (loss)/profit, US
GAAP, (Pounds)'000....... (2,976) 200 660
Stock and common stock
equivalents, number
--basic................. 26,206,598 24,814,720 20,348,108
--diluted............... 26,206,598 27,968,298 23,330,240
(Loss)/earnings per share,
pence
--basic................. (11.4)p 0.8p 3.2p
--diluted............... (11.4)p 0.7p 2.8p
</TABLE>
(c) Consolidated statement of cash flows
The consolidated statement of cash flows prepared under UK GAAP presents
substantially the same information as that required under US GAAP by SFAS 95--
"Statements of Cash Flows". These standards differ, however, with regard to
classification of items within the statements and as regards the definition of
cash and cash equivalents.
Under UK GAAP, cash and cash equivalents would not include bank overdrafts and
borrowings with initial maturities of less than three months which cannot be
withdrawn without notice and without incurring a penalty. Under UK GAAP, cash
flows are presented separately for operating activities, returns on
investments and servicing of finance, taxation, equity dividends paid, capital
expenditure and financial investment, management of liquid resources and
financing activities. US GAAP, however, requires only three categories of cash
flow activity to be reported: operating, investing and financing. Cash flows
from taxation and returns on investments and servicing of finance shown under
UK GAAP would be included as operating activities under US GAAP. The payment
of dividends would be included as a financing activity under US GAAP.
Management of liquid resources would be included as cash and cash equivalents
as the medium term deposits involved have a maturity of less than three months
and are convertible into known amounts of cash.
Summary statements of cash flow presented under US GAAP are given below:
<TABLE>
<CAPTION>
1998 1997 1996
(Pounds),000 (Pounds),000 (Pounds),000
------------ ------------ ------------
<S> <C> <C> <C>
Cash (outflow)/inflow from operating
activities............................ (1,308) (724) 507
Cash outflow on investing activities... (363) (1,368) (1,061)
Cash inflow from financing activities.. 2,717 60 2,753
------ ------ ------
Increase/(decrease) in cash and cash
equivalents........................... 1,046 (2,032) 2,199
Opening cash and cash equivalents...... 1,528 3,560 1,361
------ ------ ------
Closing cash and cash equivalents...... 2,574 1,528 3,560
====== ====== ======
</TABLE>
III-18
<PAGE>
APPENDIX IV
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
assume a business combination between SDL and IOC accounted for on a pooling
of interests basis (the "SDL/IOC Merger") and are based on the respective
historical financial statements and the notes thereto, which are included in
and incorporated by reference in this Offer Document. The pro forma combined
condensed balance sheet combines SDL's December 31, 1998 consolidated balance
sheet with IOC's 30 September 1998 consolidated balance sheet. The pro forma
statements of operations combine SDL's historical results for each of the
three years ended December 31, 1998, 1997 and 1996, with the corresponding
results for IOC for the twelve months ended 30 September 1998, 1997 and 1996,
respectively. Amounts included for IOC are based on US GAAP pounds sterling
information translated at the average exchange rates for the year of
operations and at the 30 September rate for balance sheet amounts.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the SDL/IOC Merger had been consummated in an earlier
period, nor is it necessarily indicative of the future operating results or
financial position.
These pro forma financial statements are based on, and should be read in
conjunction with, the historical consolidated financial statements and the
related notes thereto of SDL and IOC included and incorporated by reference in
this Offer Document.
IV-1
<PAGE>
Unaudited pro forma combined condensed statements of operations
for the year ended December 31, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro
forma
SDL IOC combined
-------- ------- --------
<S> <C> <C> <C>
Revenue............................................. $106,138 $ 6,654 $112,792
Cost of revenues.................................... 68,419 5,642 74,061
-------- ------- --------
Gross margin........................................ 37,719 1,012 38,731
Operating expenses:
Research and development.......................... 10,690 1,969 12,659
Selling, general and administrative............... 13,597 3,996 17,593
Amortization of purchased intangibles............. 777 -- 777
-------- ------- --------
Total operating expense............................. 25,064 5,965 31,029
Operating income/(loss)............................. 12,655 (4,953) 7,702
Interest income and other, net...................... 1,211 73 1,284
-------- ------- --------
Income/(loss) before income taxes................... 13,866 (4,880) 8,986
Provision for income taxes.......................... 1,043 40 1,083
-------- ------- --------
Net income/(loss)................................... $ 12,823 $(4,920) $ 7,903
======== ======= ========
Net income/(loss) per share:
Basic............................................. $ 0.92 $(10.42) $ 0.55
Diluted........................................... $ 0.87 $(10.42) $ 0.52
Weighted average shares outstanding:
Basic............................................. 13,887 472 14,359
Diluted........................................... 14,709 472 15,181
</TABLE>
See accompanying notes
IV-2
<PAGE>
Unaudited pro forma combined condensed statements of operations
for the year ended December 31, 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro forma
SDL IOC combined
-------- ------- ---------
<S> <C> <C> <C>
Revenue............................................ $ 91,364 $10,755 $102,119
Cost of revenues................................... 65,154 6,091 71,245
-------- ------- --------
Gross margin....................................... 26,210 4,664 30,874
Operating expenses:
Research and development......................... 9,794 1,531 11,325
Selling, general and administrative.............. 40,609 3,060 43,669
In process research and development.............. 753 -- 753
Amortization of purchased intangibles............ 671 -- 671
-------- ------- --------
Total operating expense............................ 51,827 4,591 56,418
Operating income/(loss)............................ (25,617) 73 (25,544)
Interest income and other, net..................... 1,355 253 1,608
-------- ------- --------
Income/(loss) before income taxes.................. (24,262) 326 (23,936)
Provision for income taxes......................... 417 -- 417
-------- ------- --------
Net income/(loss).................................. $(24,679) $ 326 $(24,353)
======== ======= ========
Net income/(loss) per share:
Basic............................................ $ (1.83) $ 0.73 $ (1.75)
Diluted.......................................... $ (1.83) $ 0.65 $ (1.75)
Weighted average shares outstanding:
Basic............................................ 13,497 447 13,944
Diluted.......................................... 13,497 503 13,944
</TABLE>
See accompanying notes
IV-3
<PAGE>
Unaudited pro forma combined condensed statements of operations
for the year ended December 31, 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro forma
SDL IOC combined
------- ------ ---------
<S> <C> <C> <C>
Revenue................................................ $82,475 $5,749 $88,224
Cost of revenues....................................... 54,956 2,119 57,075
------- ------ -------
Gross margin........................................... 27,519 3,630 31,149
Operating expenses:
Research and development............................. 6,681 885 7,566
Selling, general and administrative.................. 11,521 1,918 13,439
Amortization of purchased intangibles................ 645 -- 645
------- ------ -------
Total operating expense................................ 18,847 2,803 21,650
Operating income....................................... 8,672 827 9,499
Interest income and other, net......................... 1,501 191 1,692
------- ------ -------
Income/(loss) before income taxes...................... 10,173 1,018 11,191
Provision for income taxes............................. 3,052 -- 3,052
------- ------ -------
Net income............................................. $ 7,121 $1,018 $ 8,139
======= ====== =======
Net income per share:
Basic................................................ $ 0.59 $ 2.78 $ 0.66
Diluted.............................................. $ 0.54 $ 2.42 $ 0.60
Weighted average shares outstanding:
Basic................................................ 12,012 366 12,378
Diluted.............................................. 13,199 420 13,619
</TABLE>
See accompanying notes
IV-4
<PAGE>
Unaudited pro forma combined condensed balance sheet
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Pro forma Pro forma
SDL IOC adjustments combined
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents........... $ 13,370 $ 4,375 $ 17,745
Short-term investments.............. 12,494 5,141 17,635
Accounts receivable, net............ 22,070 972 23,042
Inventories......................... 19,679 1,609 21,288
Prepaid expenses and other current
assets............................. 3,306 569 3,875
-------- ------- ------ --------
Total current assets.............. 70,919 12,666 -- 83,585
Property and equipment, net........... 32,931 6,917 39,848
Long-term investments................. 3,552 -- 3,552
Note due from related party........... 512 -- 512
Other assets.......................... 4,563 -- 4,563
-------- ------- ------ --------
Total assets...................... $112,477 $19,583 -- $132,060
======== ======= ====== ========
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable.................... $ 9,385 $ 629 $ 10,014
Accrued payroll and related
expenses........................... 2,354 -- 2,354
Income taxes payable................ 1,890 -- 1,890
Accrued liabilities and other....... 2,932 1,968 4,900
-------- ------- ------ --------
Total current liabilities......... 16,561 2,597 -- 19,158
Other long-term liabilities........... 2,669 2,027 4,696
Stockholder's equity:
Common stock........................ 15 5,274 (5,274) 15
Additional paid-in capital.......... 120,033 15,120 5,274 140,427
Accumulated other comprehensive
income............................. (4) -- (4)
Accumulated deficit................. (26,757) (5,435) (32,192)
-------- ------- ------ --------
93,287 14,959 -- 108,246
Less common stockholder's note
receivable......................... (40) -- (40)
-------- ------- ------ --------
Total stockholder's equity........ 93,247 14,959 -- 108,206
-------- ------- ------ --------
Total liabilities and
shareholder's equity............. $112,477 $19,583 -- $132,060
======== ======= ====== ========
</TABLE>
See accompanying notes
IV-5
<PAGE>
Notes to unaudited pro forma combined condensed financial statements
1. The accompanying unaudited pro forma combined condensed financial
statements do not include any transaction costs and expenses which are
expected to be incurred in connection with consummating the combination and
integrating the operations of SDL and IOC. These costs and expenses relate
directly to completing the transaction, such as professional, legal and
financial advisers' fees and registration costs. It is anticipated that
these costs and expenses will result in charges to the earnings of the
Enlarged Group in the period the transaction becomes unconditional in all
respects. SDL currently anticipates these costs, including amounts relating
to IOC, will approximate $1.75 million.
2. The pro forma combined condensed financial statements reflect the issuance
of up to 632,088 shares and options to purchase New SDL Common Stock for
all of the outstanding shares and options of IOC in connection with the
Offer based on the exchange ratio of 0.01815 shares or options to purchase
New SDL Common Stock for each outstanding IOC Share or option to purchase
IOC Shares. It is anticipated that all outstanding options over IOC Shares
will be exchanged for stock options of SDL with substantially equivalent
terms and conditions.
3. There were no material transactions between SDL and IOC during any period
presented. Adjustments to conform the accounting policies of the two
companies are not material for any period presented. The pro forma balance
sheet at December 31, 1998 includes a reclassification adjustment to
conform the presentation of IOC Shares to the presentation used by SDL to
reflect par value per share of $0.001.
4. Amounts included for IOC in the pro forma combined condensed statements of
operations are based on pounds sterling amounts prepared on a US GAAP
basis, translated at the average exchange rate for the year of operations.
The pro forma combined condensed balance sheet of IOC included in the pro
forma balance sheet was translated at the 30 September 1998 exchange rate.
The amount of any translation adjustments were not material. Net
income/(loss) per share and number of IOC Shares reflect SDL equivalent
amounts of 0.01815 share of SDL Common Stock for each IOC Share.
IV-6
<PAGE>
APPENDIX V
CERTAIN MARKET AND DIVIDEND INFORMATION
1. Market and price data
The following table sets out the closing middle market quotations for an IOC
Share (as derived from the AIM section of the London Stock Exchange Daily
Official List) and the last sale price for a share of SDL Common Stock on the
NASDAQ National Market System, in each case for the first dealing day that
both AIM and NASDAQ were open for business in each month from November 1998 to
April 1999, for 30 March 1999 (the last dealing day before the announcement of
the Offer) and for 19 April 1999 (the latest practicable date prior to the
posting of this Offer Document):
<TABLE>
<CAPTION>
IOC SDL
Share price Share price
Date (in pence) (in dollars)
- --------------- ----------- ------------
<S> <C> <C>
2 November 1998 44 1/2 $24.00
1 December 1998 35 23.50
4 January 1999 45 1/2 39.75
1 February 1999 50 1/2 49.27
1 March 1999 50 1/2 54.94
30 March 1999 55 1/2 82.25
1 April 1999 86 1/2 85.25
19 April 1999 100 1/2 87.03
</TABLE>
2. Dividend policy
No cash dividends have ever been paid on SDL's Common Stock. SDL's current
policy is to retain earnings for use in its business. Any payment of cash
dividends in the future will depend upon the financial condition, capital
requirements and earnings of SDL, as well as other factors as the Board of
Directors of SDL may deem relevant.
V-1
<PAGE>
APPENDIX VI
ADDITIONAL INFORMATION
1. Responsibility
(a) The directors of SDL (whose names are set out in paragraph 2(a) below)
accept responsibility for the information contained in this Offer
Document, except for the information in this Offer Document concerning
IOC, its subsidiary and their respective businesses, the directors of IOC
and their connected persons and persons acting in concert with, and
associates of, IOC. Subject as aforesaid, to the best of the knowledge
and belief of the Directors of SDL (who have taken all reasonable care to
ensure that such is the case), the information contained in this Offer
Document for which they are responsible is in accordance with the facts
and does not omit anything likely to affect the import of such
information.
(b) The directors of IOC (whose names are set out in paragraph 2(b) below)
accept responsibility for the information contained in this Offer
Document concerning IOC, IOC Limited and their respective businesses,
themselves and their connected persons and persons acting in concert
with, and associates of, IOC. To the best of the knowledge and belief of
the directors of IOC (who have taken all reasonable care to ensure that
such is the case), the information contained in this Offer Document for
which they are responsible is in accordance with the facts and does not
omit anything likely to affect the import of such information.
(c) The statements set out in paragraphs (a) and (b) above are included
solely to comply with the requirements of Rule 19.2 of the City Code and
shall not be deemed to establish or expand any liability under the
Securities Act or any state securities legislation in the United States.
2. Directors
(a) The directors of SDL are as follows:
<TABLE>
<C> <S>
Donald R. Scifres........ (Chairman of the Board and Chief Executive Officer)
Keith B. Geeslin......... (Director)
Anthony B. Holbrook...... (Director)
John P. Melton........... (Director)
Mark B. Myers............ (Director)
Frederic N. Schwettmann.. (Director)
</TABLE>
The executive offices of SDL are located at 80 Rose Orchard Way, San Jose, CA
95134, USA.
(b) The directors of IOC are as follows:
<TABLE>
<C> <S>
D.P. Taylor............... (Non-executive Chairman)
M.A. Powell............... (Managing Director)
T.G. Collins.............. (Production Director)
M.K. Burwood.............. (Finance Director)
A.P. Appleyard............ (Technical Director)
C.A. Bradley.............. (Non-executive Director)
D. Cheesman............... (Non-executive Director)
N.S. Kapany............... (Non-executive Director)
</TABLE>
The registered office of IOC, which is also the business address of its
directors, is 3 Waterside Business Park, Eastways, Witham, Essex CM8 3YQ,
United Kingdom .
VI-1
<PAGE>
3. Disclosures of interests and dealings
(a) At the close of business on 19 April 1999 (the latest practicable date
prior to the posting of this Offer Document), the interests of the
directors of IOC and their connected persons (within the meaning of
section 346 of the Companies Act 1985), all of which (save as noted
below) are beneficial, in IOC Shares which have been notified to IOC
pursuant to sections 324 or 328 of the Companies Act 1985, or are
required to be entered in the register of IOC directors' interests
maintained under the provisions of section 325 of the Companies Act 1985,
were as follows:
<TABLE>
<CAPTION>
Number of
Name IOC Shares
---- ----------
<S> <C>
D.P. Taylor....................................................... 7,500
M.A. Powell....................................................... 990,000
T.G. Collins...................................................... 30,000
A.P. Appleyard.................................................... NIL
M.K. Burwood...................................................... NIL
C.A. Bradley...................................................... NIL
D. Cheesman....................................................... NIL
N.S. Kapany....................................................... 200,000
</TABLE>
Affiliate Agreements
In order that the acquisition of IOC may be treated as a pooling of
interests under US GAAP, the directors of IOC have agreed with SDL in
respect of a total of 1,227,500 IOC Shares (representing approximately 3.94
per cent. of IOC's issued share capital as at 30 March 1999), unless
certain conditions set out in those agreements are satisfied, not to deal
in their IOC Shares (other than to accept the Offer) or their New SDL
Common Stock until SDL has published financial results incorporating at
least 30 days of post acquisition combined operations of SDL and IOC.
Financial statements reflecting the combined operations of SDL and IOC are
required to be included in SDL's quarterly report on Form 10-Q, filed with
the SEC, for the quarter in which the Offer becomes or is declared
unconditional in all respects.
(b) As of the close of business on 19 April 1999 (the latest practicable date
prior to the posting of this Offer Document), the following options and
awards over IOC Shares had been granted under the IOC Share Option Schemes
to certain current directors of IOC and remain outstanding:
<TABLE>
<CAPTION>
Date of Exercise
Name grant Number price Period exercisable
---- ---------- ------- -------- ------------------------
<S> <C> <C> <C> <C>
D.P. Taylor............. 28.03.1994 302,785 5.714p* Until 30.07.2000
=======
M.A. Powell............. 28.03.1994 702,800 5.714p* Until 30.07.2000
27.02.1996 60,000 80p 20,000 from
27.02.1996 to 27.02.2003
20,000 from
27.02.1997 to 27.02.2003
20,000 from
27.02.1998 to 27.02.2003
-------
762,800
=======
T.G. Collins............ 05.08.1996 60,000 120p 20,000 from
05.08.1997 to 05.08.2003
20,000 from
05.08.1998 to 05.08.2003
20,000 from
05.08.1999 to 05.08.2003
16.07.1998 250,000 70p 16.07.2001 to 16.07.2005
-------
310,000
=======
</TABLE>
VI-2
<PAGE>
<TABLE>
<CAPTION>
Date of Exercise
Name grant Number price Period exercisable
---- ---------- ------- -------- ------------------------
<S> <C> <C> <C> <C>
A.P. Appleyard.......... 20.07.1998 250,000 79p 20.07.2001 to 20.07.2005
=======
M.K. Burwood............ 03.09.1997 7,298 81.5p 09.09.2000 to 03.09.2004
=======
</TABLE>
--------
* This shows the effective price in IOC Shares. By an agreement dated 21
February 1996 between M.A. Powell and others (1) and IOC (2), IOC agreed
to exchange shares in IOC Limited issued pursuant to certain options
granted between 1991 and 1994 for IOC Shares on the basis of 35 IOC Shares
for each share in IOC Limited.
On 30 March 1999, M.K. Burwood unconditionally and irrevocably waived his
options over 120,000 IOC Shares granted to him under the IOC 1998 Executive
Share Option Scheme.
C.A. Bradley's 250,000 share options, granted to her under the IOC 1998
Executive Share Option Scheme, lapsed on the cessation of her employment
with IOC on 31 December 1998.
By letters dated 29 March 1999, as amended by letters dated 2 April 1999,
SDL has undertaken that, after completion of the acquisition of IOC and
upon approval by the SDL board of directors, the following options over SDL
Common Stock will be granted to directors of IOC under the 1995 SDL Stock
Option Plan:
<TABLE>
<CAPTION>
Name Number
---- ------
<S> <C>
D.P. Taylor........................................................... 4,000
M.A. Powell........................................................... 10,000
T.G. Collins.......................................................... 7,500
A.P. Appleyard........................................................ 7,500
M.K. Burwood.......................................................... 7,500
</TABLE>
The exercise price of the above options will be not less than the fair
market value of the SDL Common Stock on the date on which the options are
granted. All options will have a four year vesting schedule, save for D.P.
Taylor's option which will have a two year vesting schedule.
At the close of business on 19 April 1999 (the latest practicable date
prior to the posting of this Offer Document), the following options over
IOC Shares had been granted and remain outstanding to Henry Cooke,
financial advisers to IOC.
<TABLE>
<CAPTION>
Date of Exercise
Name grant Number price Period exercisable
---- --------- ------- -------- ------------------------
<S> <C> <C> <C> <C>
Henry Cooke............. 27.02.1996 250,000 80p 05.09.1998 to 05.03.2001
</TABLE>
(c) There have been no dealings by directors of IOC or their connected persons
in IOC Shares during the disclosure period, save as follows:
<TABLE>
<CAPTION>
Number
Nature of of IOC
Name Date transaction Shares Price
---- -------- ------------------- ------- -----
<S> <C> <C> <C> <C>
N.S. Kapany....................... 28.09.98 Off market purchase 200,000 $0.50
</TABLE>
(d) Henry Cooke is a company under the same control as Henry Cooke, Lumsden
plc. As at 19 April 1999 (the latest practicable date prior to the posting
of this Offer Document), discretionary clients of Henry Cooke, Lumsden plc
were interested in 728,873 IOC Shares.
VI-3
<PAGE>
Henry Cooke, Lumsden plc has dealt for value in IOC Shares (all of which
were managed by Henry Cooke, Lumsden plc on a discretionary basis) during
the disclosure period as follows:
<TABLE>
<CAPTION>
Number of Type of
Period Shares Price range Transaction
------ --------- ---------------- -----------
<S> <C> <C> <C>
01.04.1998 to 30.04.1998.............. 50,000 100 1/2p -- 116p Purchase
01.04.1998 to 30.04.1998.............. 1,500 93p Sale
01.05.1998 to 31.05.1998.............. 19,500 75 -- 80p Sale
01.06.1998 to 30.06.1998.............. 20,000 68p Purchase
01.06.1998 to 30.06.1998.............. 8,000 63p -- 69p Sale
01.10.1998 to 31.10.1998.............. 37,753 27p -- 35p Sale
01.11.1998 to 30.11.1998.............. 16,000 42p -- 47p Sale
01.12.1998 to 31.12.1998.............. 11,800 28p -- 33p Sale
01.01.1999 to 31.01.1999.............. 27,100 38p -- 70p Sale
01.02.1999 to 28.02.1999.............. 36,500 47p -- 55p Sale
01.03.1999 to 31.03.1999.............. 43,143 43p -- 55p Sale
01.04.1999 to 19.04.1999 ............. nil n/a n/a
</TABLE>
(e) Rea Brothers Investment Management (Guernsey) Limited, a company under the
same control as Rea Brothers, has dealt for value in shares of SDL Common
Stock on a discretionary basis during the disclosure period as follows:
<TABLE>
<CAPTION>
Number of Price Type of
Date of transaction shares (dollars) transactions
------------------- --------- --------- ------------
<S> <C> <C> <C>
10.11.98.................................... 2,000 $23.75 Sale
</TABLE>
(f) The UK directors of IOC and certain other IOC Shareholders have given
irrevocable undertakings to accept the Offer in respect of holdings
amounting in total to 19,766,175 IOC Shares, representing approximately
63.49 per cent. of IOC's issued share capital as at 30 March 1999.
<TABLE>
<CAPTION>
Percentage
Number of of issued
Name IOC Shares IOC Shares
---- ---------- ----------
<S> <C> <C>
D.P. Taylor........................................... 7,500 0.02
M.A. Powell........................................... 990,000 3.18
T.G. Collins.......................................... 30,000 0.10
Funds managed by Mercury Asset Management Ltd......... 2,732,500 8.78
Funds managed by Invesco Asset Management Ltd......... 4,177,000 13.42
3i Group plc.......................................... 4,275,845 13.73
The Fleming Mercantile Investment Trust plc........... 3,496,000 11.23
Funds managed by Newton Investment Management Ltd..... 4,057,330 13.03
---------- -----
19,766,175 63.49
========== =====
</TABLE>
Irrevocable undertakings to accept the Offer given by the UK directors of
IOC extend to any IOC Shares arising from the exercise of options held
under the IOC Share Option Schemes. All of the irrevocable undertakings
will continue to be binding even if a higher competing offer is made for
IOC, except as follows: the irrevocable undertakings from Mercury Asset
Management Ltd and Invesco Asset Management Ltd cease to be binding if a
competing offer is made for IOC on improved terms; the irrevocable
undertaking from 3i Group plc applies to a recommended offer and lapses on
30 June 1999 and will cease to be binding if a competing offer is made for
IOC on improved terms, and the irrevocable undertaking from
VI-4
<PAGE>
The Fleming Mercantile Investment Trust plc ceases to be binding in the
event that a competing offer is made at a price exceeding (Pounds)1.00 per
IOC Share. In addition, Newton Investment Management Ltd has indicated to
SDL its intention to exchange the IOC Shares under its management for
shares of New SDL Common Stock on the same terms as the Offer,
notwithstanding that a competing offer may be made or that the Offer may be
varied, lapsed or withdrawn.
Those directors of IOC who hold options under the IOC Share Option Schemes
have also irrevocably undertaken, in respect of their options, to either:
(i) exercise their options (if possible under the terms of the applicable
IOC Share Option Scheme) within seven days of the Offer becoming or being
declared unconditional in all respects and then to accept the Offer in
respect of the IOC Shares acquired on exercise of the options; or (ii)
accept a proposal to be made by SDL pursuant to the Offer to exchange their
options for options to acquire SDL Common Stock on substantially identical
terms to the terms of their existing options.
In addition to the above, the following former directors of IOC have
entered into irrevocable undertakings to exercise options held under IOC
Share Option Schemes and to accept the Offer in respect of the IOC Shares
allotted to them pursuant to such exercise:
<TABLE>
<CAPTION>
No. of Exercise
Name shares price
---- ------- --------
<S> <C> <C>
A. C. O'Donnell............................................ 632,800 5.714p*
60,000 80p
S.J. Meyrick............................................... 321,300 5.714p*
60,000 80p
J.D. Dodson................................................ 422,800 5.714p*
60,000 80p
</TABLE>
--------
* This shows the effective price in IOC Shares. See explanatory note at
foot of the first table (showing current directors' outstanding options)
in sub-paragraph 3(b) above.
Henry Cooke has irrevocably undertaken as follows as regards its option to
subscribe for IOC Shares referred to in paragraph 3(b) of this Appendix VI:
(i) if it exercises such option, to accept the Offer in respect of the IOC
Shares acquired pursuant to the exercise of such option by not later
than the seventh day after the Offer is declared or becomes
unconditional in all respects;
(ii) to the extent that it has not previously exercised the option, to
accept a proposal to be made by SDL pursuant to the Offer to exchange
its options for options to acquire SDL Common Stock on substantially
identical terms to the terms of its existing options.
(g) The following dealings for value in IOC Shares by persons who have given
the irrevocable undertakings referred to in sub-paragraph 3(f) above have
taken place during the disclosure period.
<TABLE>
<CAPTION>
Date of Number of Type of
Name transaction shares Price transaction
---- ----------- --------- ----- -----------
<S> <C> <C> <C> <C>
Funds managed by Mercury Asset
Management Ltd................... 17.07.98 1,400,000 70p Purchase
The Fleming Mercantile Investment
Trust plc........................ 30.03.98 25,000 140p Purchase
20.04.98 45,000 130p Purchase
22.04.98 50,000 118p Purchase
27.04.98 320,000 80p Purchase
01.06.98 50,000 72p Purchase
17.07.98 669,000 70p Purchase
</TABLE>
VI-5
<PAGE>
<TABLE>
<CAPTION>
Number
Date of of Type of
Name transaction shares Price transaction
---- ----------- ------- ------ ---------------
<S> <C> <C> <C> <C>
Funds managed by Invesco Asset
Management Ltd.................. 23.06.98 700,000 70p Purchase
23.06.98 125,000 70p Purchase
23.06.98 250,000 70p Purchase
23.06.98 25,000 70p Purchase
23.06.98 35,000 70p Purchase
23.06.98 265,000 70p Purchase
19.10.98 55,000 26p Purchase
19.10.98 52,000 26p Purchase
19.10.98 200,000 26p Purchase
29.10.98 25,000 26p Purchase
S.J. Meyrick..................... 09.04.98 140,000 2.857p* Option exercise
15.05.98 20,000 75p Sale
25.06.98 40,000 77p Sale
19.10.98 80,000 26p Sale
J.D. Dodson...................... 12.10.98 105,000 2.857p* Option exercise
04.01.99 50,000 43p Sale
A.C. O'Donnell................... 28.09.98 200,000 $ 0.50 Off market sale
23.10.98 68,810 30p Sale
08.12.98 316,000 28p Sale
</TABLE>
- --------
* This shows the effective price in IOC Shares. See explanatory note at foot
of the first table (showing current directors' outstanding options) in sub-
paragraph 3(b) above.
The dealings by Henry Cooke and the directors of IOC are set out in
paragraphs 3(c) and 3(d) above.
(h) As at 19 April 1999 (the latest practicable date prior to the posting of
this Offer Document), SDL had a beneficial interest in 10,550 IOC Shares.
These shares were purchased on 29 March 1999 at a price of 57p per share as
part of SDL's overall plan to acquire the entire issued share capital of
IOC. Immediately following the acquisition of IOC, SDL will transfer all of
the IOC shares owned by it to an indirect subsidiary.
(i) As at 19 April 1999 (the latest practicable date prior to the posting of
this Offer Document), the beneficial interests of the directors of SDL and
their connected persons in SDL Common Stock were as follows:
<TABLE>
<CAPTION>
No. of shares
-------------
<S> <C>
D.R. Scifres................................................... 649,663
K.B. Geeslin................................................... 4,711
A.B. Holbrook.................................................. Nil
J.P. Melton.................................................... 110,982
M.B. Myers..................................................... Nil
F.N. Schwettmann............................................... Nil
</TABLE>
VI-6
<PAGE>
(j) As at the close of business on 19 April 1999 (the latest practicable date
prior to the posting of this Offer Document), the following options and
awards over shares of SDL Common Stock had been granted to directors of
SDL and remain outstanding:
<TABLE>
<CAPTION>
Date of Exercise
Name grant Number price Period exercisable
---- ---------- ------- -------- ------------------------
<S> <C> <C> <C> <C>
D.R. Scifres............ 17.07.1992 264,448 $ 0.3431 Until 17.07.2002
17.07.1992 70,431 $ 0.3431 Until 17.07.2002
15.03.1995 54,825 $10.6667 Until 15.03.2005
30.04.1997 6,250 $13.0000 Until 30.04.2007
30.04.1997 6,250 $13.0000 30.04.1999 to 30.04.2007
30.04.1997 6,250 $13.0000 30.04.2000 to 30.04.2007
30.04.1997 6,250 $13.0000 30.04.2001 to 30.04.2007
-------
414,704
=======
K.B. Geeslin............ 13.05.1995 500 $30.0000 13.05.1999 to 13.05.2006
12.05.1997 500 $15.7500 12.05.1999 to 12.05.2007
12.05.1997 500 $15.7500 12.05.2000 to 12.05.2007
14.05.1998 500 $20.7800 14.05.1999 to 14.05.2008
14.05.1998 500 $20.7800 14.05.2000 to 14.05.2008
14.05.1998 500 $20.7800 14.05.2001 to 14.05.2008
-------
3,000
=======
A.B. Holbrook........... 22.12.1995 9,000 $15.0000 Until 22.12.2005
13.05.1996 1,000 $30.0000 Until 13.05.2006
13.05.1996 500 $30.0000 13.05.1999 to 13.05.2006
12.05.1997 500 $15.7500 Until 12.05.2007
12.05.1997 500 $15.7500 12.05.1999 to 12.05.2007
12.05.1997 500 $15.7500 12.05.2000 to 12.05.2007
14.05.1998 500 $20.7500 14.05.1999 to 14.05.2008
14.05.1998 500 $20.7500 14.05.2000 to 14.05.2008
14.05.1998 500 $20.7500 14.05.2001 to 14.05.2008
-------
13,500
=======
J.P. Melton............. 15.03.1995 5,100 $10.6667 Until 15.03.2005
08.02.1996 1,875 $18.8333 08.02.2000 to 08.02.2006
30.04.1997 3,750 $13.0000 30.04.1999 to 30.04.2007
30.04.1997 3,750 $13.0000 30.04.2000 to 30.04.2007
30.04.1997 3,750 $13.0000 30.04.2001 to 30.04.2007
20.04.1998 100 $24.7500 30.04.1999 to 20.04.2008
-------
18,325
=======
M.B. Myers.............. 19.02.1993 10,200 $ 1.4706 Until 19.02.2003
16.06.1995 1,500 $19.3333 Until 16.06.2005
13.05.1996 1,000 $30.0000 Until 13.05.2006
13.05.1996 500 $30.0000 13.05.1999 to 13.05.2006
12.05.1997 500 $15.7500 Until 12.05.2007
12.05.1997 500 $15.7500 12.05.1999 to 12.05.2007
12.05.1997 500 $15.7500 12.05.2000 to 12.05.2007
14.05.1998 500 $20.7500 14.05.1999 to 14.05.2008
14.05.1998 500 $20.7500 14.05.2000 to 14.05.2008
14.05.1998 500 $20.7500 14.05.2001 to 14.05.2008
-------
16,200
=======
</TABLE>
VI-7
<PAGE>
<TABLE>
<CAPTION>
Date of Exercise
Name grant Number price Period exercisable
---- ---------- ------ -------- ------------------------
<S> <C> <C> <C> <C>
F.N. Schwettmann......... 27.10.1994 10,200 $ 5.0981 Until 27.10.2004
16.06.1995 1,500 $19.3333 Until 16.06.2005
13.05.1996 1,000 $30.0000 Until 13.05.2006
13.05.1996 500 $30.0000 13.05.1999 to 13.05.2006
12.05.1997 500 $15.7500 Until 12.05.2007
12.05.1997 500 $15.7500 12.05.1999 to 12.05.2007
12.05.1997 500 $15.7500 12.05.2000 to 12.05.2007
14.05.1998 500 $20.7500 14.05.1999 to 14.05.2008
14.05.1998 500 $20.7500 14.05.2000 to 14.05.2008
14.05.1998 500 $20.7500 14.05.2001 to 14.05.2008
------
16,200
======
</TABLE>
(k) There have been no dealings for value by the directors of SDL or their
connected persons in SDL Common Stock during the disclosure period, save as
follows:
<TABLE>
<CAPTION>
Date of Number Type of
Name transaction of shares Price transaction
---- ----------- --------- ------ ---------------
<S> <C> <C> <C> <C>
D.R. Scifres.................... 12.11.98 37,000 $ 0.34 Option exercise
12.11.98 37,000 $25.42 Sale
16.02.99 20,000 $ 0.34 Option exercise
16.02.99 20,000 $57.00 Sale
23.02.99 8,000 $ 0.34 Option exercise
23.02.99 8,000 $59.08 Sale
24.02.99 32,000 $ 0.34 Option exercise
24.02.99 32,000 $57.00 Sale
K.B. Geeslin.................... 16.02.99 1,000 $57.36 Sale
17.02.99 1,000 $ 6.08 Option exercise
17.02.99 1,000 $54.95 Sale
18.02.99 2,000 $ 6.08 Option exercise
18.02.99 2,000 $54.95 Sale
19.02.99 7,200 $ 6.08 Option exercise
19.02.99 7,200 $53.95 Sale
19.02.99 1,500 $19.33 Option exercise
19.02.99 1,500 $53.95 Sale
19.02.99 1,000 $30.00 Option exercise
19.02.99 500 $53.95 Sale
19.02.99 500 $15.75 Option exercise
19.02.99 500 $53.95 Sale
10.03.99 1,000 $ 0.00 Gift (disposal)
J.P. Melton..................... 10.04.98 675 $12.89 ESPP
30.04.98 3,908 $ 0.34 Option exercise
30.04.98 3,908 $25.13 Sale
01.05.98 5,000 $ 0.34 Option exercise
01.05.98 5,000 $25.00 Sale
16.11.98 2,000 $ 0.00 Gift (disposal)
16.11.98 10,000 $ 0.34 Option exercise
16.11.98 10,000 $25.13 Sale
09.02.99 15,300 $10.67 Option exercise
09.02.99 5,625 $18.83 Option exercise
09.02.99 3,750 $13.00 Option exercise
09.02.99 24,675 $59.25 Purchase
24.02.99 24,675 $58.93 Sale
</TABLE>
VI-8
<PAGE>
(l) At the close of business on 19 April 1999 (the latest practicable date
prior to the posting of this Offer Document), Rea Brothers Investment
Management Limited ("RBIML"), a company under the same control as Rea
Brothers, managed 33,000 IOC Shares on a discretionary basis.
The following dealing for value in IOC Shares by RBIML have taken place, on
a discretionary basis, during the disclosure period:
<TABLE>
<CAPTION>
Number
of Type of
Date of transaction shares Price transaction
------------------- ------ ----- -----------
<S> <C> <C> <C>
13.01.99............................................ 25,000 44p Purchase
</TABLE>
(m) There have been no dealings for value in SDL Common Stock by persons who
have given the irrevocable undertakings referred to in sub-paragraph 3(f)
above during the disclosure period.
(n) Save as disclosed above:
(i) neither SDL nor any subsidiary of SDL owns any IOC Shares;
(ii) no director of SDL or IOC is interested (as defined in Parts VI and X
of the Companies Act 1985), directly or indirectly, in relevant
securities (as defined below);
(iii) no person acting in concert with SDL owns or controls any relevant
securities;
(iv) no person who has irrevocably committed himself to accept the Offer
owns or controls any relevant securities;
(v) IOC owns no relevant securities;
(vi) no subsidiary of IOC, nor any pension fund of IOC or of any of its
subsidiaries, nor any bank, stockbroker, financial or other
professional adviser (excluding exempt market-makers) to IOC or to any
subsidiary of IOC or to any associated company of IOC or any persons
controlling, controlled by, or under the same control as any such
bank, stockbroker, financial or other professional adviser, owns or
controls or is interested, directly or indirectly in any relevant
securities;
(vii) no person mentioned in sub-paragraphs 3(g), (h), (k) and (l) above
has dealt for value in relevant securities during the disclosure
period.
(o) For purposes of the above:
(i) "relevant securities" include:
(A) IOC Shares;
(B) securities convertible into (A), rights to subscribe for (A) and
options (including traded options) in respect of, or derivatives
referenced to, (A);
(C) SDL Common Stock;
(D) securities of SDL which carry substantially the same rights as
those to be issued under the Offer; and
(E) securities convertible into (C) or (D), rights to subscribe for (C)
or (D) and options (including traded options) in respect of, or
derivatives referenced to, (C) or (D);
(ii) "bank" means any bank whose relationship to any relevant party is not
solely the provision of normal commercial banking services; and
VI-9
<PAGE>
(iii) "disclosure period" means the period commencing on 30 March 1998 and
ending on 19 April 1999, being respectively the date 12 months
preceding the announcement of the Offer and the latest practicable
date prior to the posting of this Offer Document.
4.Service contracts of IOC directors
Save as disclosed below, there are no contracts of service between any
director of IOC and IOC or any of its subsidiaries having more than twelve
months to run and no such contract has been entered into or amended or
replaced within the six months preceding the date of this Offer Document.
(a) By a letter dated 30 December 1998 from IOC to Burlington Associates
Limited and D.P. Taylor, the consultancy agreement between IOC, Burlington
Associates Limited and D.P. Taylor dated 23 February 1996 was varied with
effect from 1 January 1999 by the insertion of an entitlement to a fee of
0.5 per cent. of the value of certain special projects undertaken in
relation to IOC and by increasing the annual aggregate fees payable to
Burlington Associates Limited from (Pounds)15,000 to (Pounds)18,000 per
annum plus VAT. On 31 March 1999, Burlington Associates Limited
unconditionally and irrevocably waived its right to receive the 0.5 per
cent. special project fee that it would otherwise be entitled to on
completion of the acquisition of IOC by SDL pursuant to the Offer. In
addition, upon the Offer becoming or being declared unconditional in all
respects, the consultancy agreement continues for a fixed period of two
years thereafter until termination by either party giving to the other not
less than six months previous written notice.
(b) T.G. Collins entered into a service agreement with IOC on 6 July 1998. His
employment is for a fixed term of two years from the date of the agreement
and is capable of being terminated by either party on six months' notice
thereafter. On 29 March 1999, T.G. Collins released IOC from the terms of
a letter dated 3 September 1998, under which T.G. Collins was entitled to
take a training sabbatical.
5.Material contracts
(a) SDL has not entered into any material contracts outside the ordinary
course of business since 31 March 1997.
(b) IOC has not entered into any material contracts outside the ordinary
course of business since 31 March 1997, except for the letter referred to
in paragraph 9(b) below and for the agreement under which SDL will pay to
IOC the sum of (Pounds)375,000 in partial payment of the accounting and
legal advisers to IOC referred to in paragraph 9 of the letter from Rea
Brothers contained in this Offer Document.
6.Compulsory acquisition
If, on or before the expiration of four months from the date of posting of
this Offer Document, SDL has as a result of acceptances of the Offer, or,
subject to certain conditions, acquired or contracted to acquire, at least 90
per cent. in value of the IOC Shares to which the Offer relates then: (i) SDL
will be entitled, and intends, to acquire compulsorily the remainder of the
outstanding IOC Shares in accordance with sections 428-430F of the Companies
Act 1985; and (ii) in such circumstances a holder of IOC Shares may require
SDL to purchase his IOC Shares in accordance with the procedures and time
limits described in section 430A of the Companies Act 1985. A copy of sections
428-430F of the Companies Act 1985 is set out in Appendix VIII to this Offer
Document.
7. Legal matters
Certain legal matters with respect to the validity of the SDL Common Stock
registered hereby are being passed upon by Morrison & Foerster LLP, Palo Alto,
California.
VI-10
<PAGE>
8. Experts
The consolidated financial statements of SDL, Inc. at December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998,
appearing in this Offer Document have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The consolidated financial statements of IOC as of 30 September 1997 and 1998
and for the years ended 30 September 1996, 1997 and 1998 included in this
Offer Document have been audited by Arthur Andersen, Chartered Accountants, as
indicated in their reports with respect thereto and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
9. General
(a) Rea Brothers and Henry Cooke have given and not withdrawn their written
consent to the issue of this Offer Document with the reference to their
name, and Ernst & Young LLP, Independent Auditors, and Arthur Andersen,
Chartered Accountants, have given and have not withdrawn their consent to
the inclusion of their opinions, each in the form and context in which
they are included.
(b) On 23 February 1999, SDL, IOC and certain directors of IOC entered into a
letter of understanding concerning the Offer under which, inter alia, IOC
gave certain covenants to SDL in relation to the Offer. Subject to such
agreement and save as disclosed in this Offer Document, no agreement,
arrangement or understanding (including any compensation arrangement)
exists between SDL or any party acting in concert with SDL for the
purposes of the Offer and any of the directors or recent directors,
shareholders or recent shareholders of IOC having any connection with or
dependence on the Offer.
(c) There is no agreement, arrangement or understanding whereby the
beneficial ownership of any of the IOC Shares to be acquired by SDL
pursuant to the Offer will be transferred to any other person, except
that SDL reserves the right to transfer any IOC Shares to any of its
subsidiaries.
(d) Save as disclosed in paragraph 3(o) of this Appendix VI above, neither
SDL nor any person acting in concert with SDL nor IOC nor any associate
of IOC has any arrangement (including any indemnity or option
arrangement), agreement or understanding (formal or informal) of whatever
nature relating to relevant securities (as defined in sub-paragraph 3(o)
of this Appendix VI), which may be an inducement to deal or refrain from
dealing.
In this sub-paragraph (d):
(i) references to an "associate" are to:
(A) subsidiaries and associated companies of SDL and IOC respectively
and companies of which any such subsidiaries or associated
companies are associated companies;
(B) banks, financial and other professional advisers (including
stockbrokers) to SDL and IOC respectively or a company covered in
(A) above, including persons controlling, controlled by or under
the same control as such banks, financial or other professional
advisers;
(C) the directors (together with their close relatives and related
trusts) of SDL and IOC respectively or a company covered in (A)
above; and
(D) the pension funds of SDL and IOC respectively or a company covered
in (A) above;
VI-11
<PAGE>
(ii) references to a "bank" do not apply to a bank whose sole relationship
with SDL and IOC respectively or a company covered in (A) above is
the provision of normal commercial banking services or such
activities in connection with the Offer as handling acceptances and
other registration work; and
(iii) ownership or control of 20 per cent. or more of the equity share
capital of a company is regarded as the test of associated status
and "control" means a holding, or aggregate holdings, of shares
carrying 30 per cent. or more of the voting rights attributable to
the share capital of a company which are currently exercisable at a
general meeting, irrespective of whether the holding or aggregate
holding gives de facto control.
(e) No proposal exists in connection with the Offer that any payment or other
benefit shall be made or given to any director of IOC as compensation for
loss of office or as consideration for or in connection with his
retirement from office.
(f) The total emoluments receivable by the Directors of SDL will not be
varied as a result of the proposed acquisition of IOC or by any other
associated transactions.
(g) So far as the Directors of SDL are aware, and save as disclosed in this
Offer Document, there have been no material changes in the financial
position of SDL since December 31, 1998 (the date to which its last
published audited accounts were prepared).
(h) So far as the directors of IOC are aware, and save as disclosed in this
Offer Document, there have been no material changes in the financial or
trading position of IOC since 30 September 1998 (the date to which its
last published audited accounts were prepared).
(i) The financial information on IOC contained within this Offer Document does
not constitute statutory accounts within the meaning of section 240 of the
Companies Act 1985 ("the Act"). Statutory accounts for each of the years
ended September 30, 1998, 1997 and 1996 have been delivered to the
Registrar of Companies for England and Wales. The companies auditors have
made reports under section 235 the Act on each of these statutory accounts
that were not qualified within the meaning of section 262 and did not
contain any statements made under section 237(2) or (3) of the Act.
10.Documents available for inspection
Copies of the following documents will be available for inspection during
normal business hours on any weekday (English public holidays excepted) at the
offices of Bird & Bird, 90 Fetter Lane, London EC4A 1JP while the Offer
remains open for acceptance:
(a) the Restated Certificate of Incorporation and Amended and Restated Bylaws
of SDL;
(b) the Memorandum and Articles of Association of IOC;
(c) the published audited consolidated accounts of IOC for the two financial
years ended 30 September 1998;
(d) the Forms 10-K and 10-K/A of SDL for the year ended January 1, 1999;
(e) the undertakings to accept the Offer referred to sub-paragraph (3)(f) of
this Appendix VI of this Offer Document;
(f) the service contracts referred to in paragraph 4 of this Appendix VI of
this Offer Document;
VI-12
<PAGE>
(g) the material contracts, relating to IOC referred to in paragraph 5 of
this Appendix VI of this Offer Document;
(h) the letters of consent referred to in sub-paragraph 9(a) of this Appendix
VI of this Offer Document;
(i) the Affiliate Agreements referred to in sub-paragraph 3(a) of this
Appendix VI of this Offer Document;
(j) this Offer Document and the Form of Acceptance; and
(k) the rules of, or agreements relating to, the IOC Share Option Schemes.
VI-13
<PAGE>
APPENDIX VII
DESCRIPTION OF SDL CAPITAL STOCK AND CHANGES IN CERTAIN RIGHTS OF
IOC SHAREHOLDERS
SDL is authorised to issue up to 21,000,000 shares of SDL Common Stock, $0.001
par value per share, and 1,000,000 shares of Preferred Stock, $0.001 par value
per share. On 25 March 1999, SDL announced its intention to declare a two-for-
one stock split to be effected in the form of a stock dividend following
stockholder approval of an increase in the authorised number of shares of SDL
capital stock from 21,000,000 shares of Common Stock to 70,000,000 shares of
Common Stock, which approval is being sought at the SDL annual meeting of
stockholders to be held on 13 May 1999.
SDL Common Stock
The holders of SDL Common Stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders. Holders of
SDL Common Stock have cumulative voting rights in the election of directors.
Subject to preferences that may be granted to any then outstanding Preferred
Stock, holders of SDL Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up
of SDL, holders of SDL Common Stock are entitled to share ratably in all
assets of SDL remaining after payment of liabilities and the liquidation of
any then outstanding Preferred Stock. Holders of SDL Common Stock have no
preemptive or other subscription or conversion rights. There are no redemption
or sinking fund provisions applicable to the SDL Common Stock. All outstanding
shares of SDL Common Stock are, and all shares of SDL Common Stock to be
outstanding upon completion of the offering will be validly issued, fully paid
and non-assessable. See "Information regarding SDL--Risk factors--Our stock
price has been and may continue to be volatile."
Preferred Stock
The board of directors has the authority, without further action by the
stockholders, to issue up to 1,000,000 shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of such series, without any
further vote or action by stockholders. No shares of Preferred Stock of SDL
are outstanding. Of the 1,000,000 shares of Preferred Stock authorised, SDL
has denominated 261,628 shares of the Preferred Stock as Series A Preferred
Stock, par value $.001 per share. SDL has authorised the issuance of shares of
Series B Preferred Stock and 300,000 shares of the Preferred Stock as Series B
Preferred Stock, par value $0.001 per share ("Series B Preferred Stock") upon
exercise of certain preferred stock purchase rights associated with each share
of SDL Common Stock outstanding. See "Stockholder rights agreement" below. The
issuance of Preferred Stock could adversely affect the voting power of holders
of SDL Common Stock and the likelihood that such holders will receive dividend
payments and payments upon liquidation and could have the effect of delaying,
deferring or preventing a change in control of SDL. SDL has no present plan to
issue any shares of Preferred Stock.
Delaware Law and certain charter provisions
Certain provisions of Delaware law and SDL's Restated Certificate of
Incorporation (the Certificate) could make more difficult the acquisition of
SDL by means of a tender offer, a proxy
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contest or otherwise and the removal of incumbent officers and directors.
These provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of SDL to negotiate first with SDL.
Delaware Statute
SDL is subject to the provisions of Delaware General Corporation Law section
203 (the Delaware Statute). In general, the Delaware Statute prohibits certain
business combinations between a publicly-held Delaware corporation, such as
SDL, and any "interested stockholder" for a period of three years after the
date on which the latter became an interested stockholder unless the business
combination is approved in a prescribed manner. A "business combination"
includes a merger, asset sale or other transaction resulting in financial
benefit to the interested stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years
prior, did own) 15 per cent. or more of the corporation's outstanding voting
stock.
Classified board of directors
The Certificate provides that, so long as the board of directors consists of
more than two directors, the board of directors will be divided into three
classes of directors serving staggered three-year terms. As a result,
approximately one-third of SDL's board of directors will be elected each year.
In addition, the Certificate provides for cumulative voting in the election of
directors, allowing the election of a director at each election by holders
representing a large minority of shares.
Advance notice for raising business or making nominations at meetings
The Certificate establishes an advance notice procedure for bringing business
before an annual meeting of stockholders and for nominating (other than by or
at the direction of the Board of Directors) candidates for election as
directors at an annual meeting or a special meeting called for the purpose of
electing directors. To be timely, notice of nominations or other business to
be brought before an annual meeting must be received by the Secretary of SDL
not earlier than 90 nor later than 60 days prior to the first anniversary of
the preceding year's annual meeting or, if the date of the annual meeting is
advanced by more than 30 days or delayed by more than 60 days from such
anniversary, such notice must be received not earlier than 90 days prior to
such annual meeting and not later than the later of: (i) the 60th day prior to
the annual meeting; or (ii) the 10th day following the date on which notice of
the date of the annual meeting was mailed or public disclosure thereof was
made, whichever occurs first.
Other charter provisions
The Certificate provides that in determining whether to take or refrain from
taking corporate action on any matter, the Board of Directors may take into
account the interests of customers, employees and other constituencies of SDL
and its subsidiaries, including the effect upon communities in which SDL and
its subsidiaries do business, and may consider long-term as well as short-term
interests of SDL and its stockholders, in addition to any other considerations
which the Board of Directors may lawfully take into account.
Stockholder rights agreement
On November 6, 1997, the Board of Directors adopted and approved a stockholder
rights agreement, as amended on February 11, 1999 (the "SDL Rights Agreement")
and declared a dividend of one right (each a "Right") for each share of SDL
Common Stock outstanding on November 17, 1997. The Rights have certain anti-
takeover effects and are intended to
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discourage coercive or unfair takeover tactics and to encourage any potential
acquirer to negotiate a price fair to all SDL stockholders. The Rights may
cause substantial dilution to an acquiring party that attempts to acquire SDL
on terms not approved by the Board of Directors, but they will not interfere
with any negotiated merger or other business combination. In the event that
any person or group (except for a certain existing stockholder of SDL so long
as such stockholder is not required to report its ownership on Schedule 13(D))
acquires beneficial ownership of fifteen (15) per cent. or more of the
outstanding shares of SDL Common Stock as defined in the SDL Rights Agreement,
each holder of a Right, other than a Right beneficially owned by the acquiring
person, will thereafter have the right to receive upon exercise that number of
shares of SDL Common Stock having a market value of two times the exercise
price of the Right. In addition, if at any time following such acquisition of
fifteen (15) per cent. or more of the outstanding SDL Common Stock, SDL is
acquired in a merger or other business combination or transaction, or fifty
(50) per cent. or more of its consolidated assets or earning power are sold,
each holder of a Right will receive, upon exercise of that Right, that number
of shares of common stock of the acquiring company which, at the time of such
transaction, will have a market value of two times the exercise price of the
Right.
Differences between SDL Common Stock and IOC Shares
There are a number of differences between the rights attaching to SDL Common
Stock and those attaching to IOC Shares. Certain rights attaching to IOC
Shares are identified below. Differences may arise from the differences
between the legislation governing IOC and SDL as well as between the
constitutional documents of the two companies. The following is not a complete
description of the differences between the rights associated with IOC Shares
compared to SDL Common Stock.
Further, it does not address the differing rights of holders of SDL Preferred
Stock should any be issued.
For a complete understanding of such differences, shareholders are referred to
the laws and applicable regulations of England and the State of Delaware,
United States, the rules of AIM, the NASDAQ, and the constitutional documents
of both IOC and SDL.
IOC Share rights
IOC is incorporated in England and operated in accordance with the Companies
Act 1985. Rules and regulations governing trading of IOC Shares differ from
those relating to SDL.
Pursuant to IOC's Articles of Association, and subject to the restrictions of
English law, dividends may be declared by the board of IOC or by IOC, on the
recommendation of the IOC board, by ordinary resolution in an amount not to
exceed that recommended by the IOC board.
The holders of not less than one tenth of the paid up voting capital of IOC
have the right to requisition general meetings of shareholders.
The IOC Articles of Association allow the IOC board, in its absolute
discretion, and without giving any reason for so doing, to refuse to register
certain transfers of IOC Shares, being shares which are not fully paid up, or
being shares, whether fully paid up or not, which are in favour of more than
four joint transferees.
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APPENDIX VIII
CERTAIN PROVISIONS OF THE COMPANIES ACT 1985
Set out below is an extract from the Companies Act:
"PART XIIIA
TAKEOVER OFFERS
428.Takeover offers
(1) In this Part of this Act "takeover offer" means an offer to acquire all
the shares, or all the shares of any class or classes, in a company (other
than shares which at the date of the offer are already held by the
offeror), being an offer on terms which are the same in relation to all
the shares to which the offer relates or, where those shares include
shares of different classes, in relation to all the shares of each class.
(2) In subsection (1) "shares" means shares which have been allotted on the
date of the offer but a takeover offer may include among the shares to
which it relates all or any shares that are subsequently allotted before a
date specified in or determined in accordance with the terms of the offer.
(3) The terms offered in relation to any shares shall for the purposes of this
section be treated as being the same in relation to all the shares or, as
the case may be, all the shares of a class to which the offer relates
notwithstanding any variation permitted by subsection (4).
(4) A variation is permitted by this subsection where:
a. the law of a country or territory outside the United Kingdom precludes
an offer of consideration in the form or any of the forms specified in
the terms in question or precludes it except after compliance by the
offeror with conditions with which he is unable to comply or which he
regards as unduly onerous; and
b. the variation is such that the persons to whom an offer of consideration
in that form is precluded are able to receive consideration otherwise
than in that form but of substantially equivalent value.
(5) The reference in subsection (1) to shares already held by the offeror
includes a reference to shares which he has contracted to acquire but that
shall not be construed as including shares which are the subject of a
contract binding the holder to accept the offer when it is made, being a
contract entered into by the holder either for no consideration and under
seal or for no consideration other than a promise by the offeror to make
the offer.
(6) In the application of subsection (5) to Scotland, the words "and under
seal" shall be omitted.
(7) Where the terms of an offer make provision for their revision and for
acceptances on the previous terms to be treated as acceptances on the
revised terms, the revision shall not be regarded for the purposes of this
Part of this Act as the making of a fresh offer and references in this
Part of this Act to the date of the offer shall accordingly be construed
as references to the date on which the original offer was made.
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(8) In this Part of this Act "the offeror" means, subject to section 430D, the
person making a takeover offer and "the company" means the company whose
shares are the subject of the offer.
429.Right of offeror to buy out minority shareholders
(1) If, in a case in which a takeover offer does not relate to shares of
different classes, the offeror has by virtue of acceptance of the offer
acquired or contracted to acquire not less than nine-tenths in value of
the shares to which the offer relates he may give notice to the holder of
any shares to which the offer relates which the offeror has not acquired
or contracted to acquire that he desires to acquire those shares.
(2) If, in a case in which a takeover offer relates to shares of different
classes, the offeror has by virtue of acceptances of the offer acquired
or contracted to acquire not less than nine-tenths in value of the shares
of any class to which the offer relates, he may give notice to the holder
of any shares of that class which the offeror has not acquired or
contracted to acquire that he desires to acquire those shares.
(3) No notice shall be given under subsection (1) or (2) unless the offeror
has acquired or contracted to acquire the shares necessary to satisfy the
minimum specified in that subsection before the end of the period of four
months beginning with the date of the offer; and no such notice shall be
given after the end of the period of two months beginning with the date
on which he has acquired or contracted to acquire shares which satisfy
that minimum.
(4) Any notice under this section shall be given in the prescribed manner;
and when the offeror gives the first notice in relation to an offer he
shall send a copy of it to the company together with a statutory
declaration by him in the prescribed form stating that the conditions for
the giving of the notice are satisfied.
(5) Where the offeror is a company (whether or not a company within the
meaning of this Act) the statutory declaration shall be signed by a
director.
(6) Any person who fails to send a copy of a notice or statutory declaration
as required by subsection (4) or makes such a declaration for the
purposes of that subsection knowing it to be false or without having
reasonable grounds for believing it to be true shall be liable to
imprisonment or a fine, or both, and for continued failure to send the
copy or declaration, to a daily default fine.
(7) If any person is charged with an offence for failing to send a copy of a
notice as required by subsection (4) it is a defense for him to prove
that he took reasonable steps for securing compliance with that
subsection.
(8) When during the period within which a takeover offer can be accepted the
offeror acquires or contracts to acquire any of the shares to which the
offer relates but otherwise than by virtue of acceptances of the offer,
then, if:
(a) The value of the consideration for which they are acquired or
contracted to be acquired ("the acquisition consideration") does not
at that time exceed the value of the consideration specified in the
terms of the offer; or
(b) those terms are subsequently revised so that when the revision is
announced the value of the acquisition consideration, at the time
mentioned in paragraph (a) above, no longer exceeds the value of the
consideration specified in those terms.
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the offeror shall be treated for the purposes of this section as having
acquired or contracted to acquire those shares by virtue of acceptances of
the offer; but in any other case those shares shall be treated as excluded
from those to which the offer relates.
430. Effect of notice under section 429
(1) The following provisions shall, subject to section 430C, have effect
where a notice is given in respect of any shares under section 429.
(2) The offeror shall be entitled and bound to acquire those shares on the
terms of the offer.
(3) Where the terms of an offer are such as to give the holder of any shares
a choice of consideration the notice shall give particulars of the choice
and state:
(a) that the holder of the shares may within six weeks from the date of
the notice indicate his choice by a written communication sent to the
offeror at an address specified in the notice; and
(b) which consideration specified in the offer is to be taken as applying
in default of his indicating a choice as aforesaid;
and the terms of the offer mentioned in subsection (2) shall be determined
accordingly.
(4) Subsection (3) applies whether or not any time-limit or the other
conditions applicable to the choice under the terms of the offer can still
be complied with; and if the consideration chosen by the holders of the
shares:
(a) is not cash and the offeror is no longer able to provide it; or
(b) was to have been provided by a third party who is no longer bound or
able to provide it,
the consideration shall be taken to consist of an amount of cash payable
by the offeror which at the date of the notice is equivalent to the chosen
consideration.
(5) At the end of six weeks from the date of the notice the offeror shall
forthwith:
(a) send a copy of the notice to the company; and
(b) pay or transfer to the company the consideration for the shares to
which the notice relates.
(6) If the shares to which the notice relates are registered, the copy of the
notice sent to the company under subsection (5)(a) shall be accompanied by
an instrument of transfer executed on behalf of the shareholder by a
person appointed by the offeror; and on receipt of that instrument the
company shall register the offeror as the holder of those shares.
(7) If the shares to which the notice relates are transferable by the delivery
of warrants or other instruments, the copy of the notice sent to the
company under subsection (5)(a) shall be accompanied by a statement to
that effect; and the company shall on receipt of the statement issue the
offeror with warrants or other instruments in respect of the shares and
those already in issue in respect of the shares shall become void.
(8) Where the consideration referred to in paragraph (b) of subsection (5)
consists of shares or securities to be allotted by the offeror the
reference in that paragraph to the transfer of the consideration shall be
construed as a reference to the allotment of the shares or securities to
the company.
(9) Any sum received by a company under paragraph (b) of subsection (5), and
any other consideration received under that paragraph shall be held by the
company on trust for the
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person entitled to the shares in respect of which the sum or other
consideration was received.
(10) Any sum received by a company under paragraph (b) of subsection (5), and
any dividend or other sum accruing from any other consideration received
by a company under that paragraph, shall be paid into a separate bank
account, being an account the balance on which bears interest at an
appropriate rate and can be withdrawn by such notice (if any) as is
appropriate.
(11) Where after reasonable enquiry made at such intervals as are reasonable
the person entitled to any consideration held on trust by virtue of
subsection (9) cannot be found and twelve years have elapsed since the
consideration was received or the company is wound up the consideration
(together with any interest, dividend or other benefit that has accrued
from it) shall be paid into court.
(12) In relation to a company registered in Scotland, subsections (13) and
(14) shall apply in place of subsection (11).
(13) Where after reasonable enquiry made at such intervals as are reasonable
the person entitled to any consideration held on trust by virtue of
subsection (9) cannot be found and
twelve years have elapsed since the consideration was received or the
company is wound up:
(a) the trust shall terminate;
(b) the company or, as the case may be, the liquidator shall sell any
consideration other than cash and any benefit other than cash that has
accrued from the consideration; and
a sum representing:
(i) the consideration so far as it is cash;
(ii) the proceeds of any sale under paragraph (b) above; and
(iii) any interest, dividend or other benefit that has accrued from the
consideration,
shall be deposited in the name of the Accountant of Court in a bank
account such as is referred to in subsection (10) and the receipt for the
deposit shall be transmitted to the Accountant of Court.
(14) Section 58 of the Bankruptcy (Scotland) Act 1985 (so far as consistent
with this Act) shall apply with any necessary modifications to sums
deposited under subsection (13) as that section applies to sums deposited
under section 57(1) of that Act.
(15) The expenses of any such enquiry as is mentioned in subsection (11) or
(13) may be defrayed out of the money or other property held on trust for
the person or persons to whom the enquiry relates.
430A.Right of minority shareholder to be bought out by offeror
(1) If a takeover offer relates to all the shares in a company and at any time
before the end of the period within which the offer can be accepted:
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(a) the offeror has by virtue of acceptances of the offer acquired or
contracted to acquire some (but not all) of the shares to which the
offer relates; and
(b) those shares, with or without any other shares in the company which he
has acquired or contracted to acquire, amount to not less than nine-
tenths in value of all the shares in the company, the holder of any
shares to which the offer relates who has not accepted the offer may by
a written communication addressed to the offeror require him to acquire
those shares.
(2) If a takeover offer relates to shares of any class or classes and at any
time before the end of the period within which the offer can be accepted:
(a) the offeror has by virtue of acceptances of the offer acquired or
contracted to acquire some (but not all) of the shares of any class to
which the offer relates; and
(b) those shares, with or without any other shares of that class which he
has acquired or contracted to acquire, amount to not less than nine-
tenths in value of all the shares of that class,
the holder of any shares of that class who has not accepted the offer may
by a written communication addressed to the offeror require him to acquire
those shares.
(3) Within one month of the time specified in subsection (1) or, as the case
may be, subsection (2) the offeror shall give any shareholder who has not
accepted the offer notice in the prescribed manner of the rights that are
exercisable by him under that subsection; and if the notice is given
before the end of the period mentioned in that subsection it shall state
that the offer is still open for acceptance.
(4) A notice under subsection (3) may specify a period for the exercise of the
rights conferred by this section and in that event the rights shall not be
exercisable after the end of that period; but no such period shall end
less than three months after the end of the period within which the offer
can be accepted.
(5) Subsection (3) does not apply if the offeror has given the shareholder a
notice in respect of the shares in question under section 429.
(6) If the offeror fails to comply with subsection (3) he and, if the offeror
is a company, every officer of the company who is in default or to whose
neglect the failure is attributable, shall be liable to a fine and for
continued contravention, to a daily default fine.
(7) If an offeror other than a company is charged with an offence for failing
to comply with subsection (3) it is a defense for him to prove that he
took all reasonable steps for securing compliance with that subsection.
430B. Effect of requirement under section 430A
(1) The following provision shall, subject to section 430C, have effect where
a shareholder exercises his rights in respect of any shares under section
430A.
(2) The offeror shall be entitled and bound to acquire those shares on the
terms of the offer or on such other terms as may be agreed.
(3) Where the terms of an offer are such as to give the holder of shares a
choice of consideration the holder of the shares may indicate his choice
when requiring the offeror to acquire them and the notice given to the
holder under section 430A(3):
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(a) shall give particulars of the choice and of the rights conferred by
this subsection; and
(b) may state which consideration specified in the offer is to be taken as
applying in default of his indicating a choice;
and the terms of the offer mentioned in subsection (2) shall be determined
accordingly.
(4) Subsection (3) applies whether or not any time-limit or other conditions
applicable to the choice under the terms of the offer can still be
complied with; and if the consideration chosen by the holder of the
shares:
(a) is not cash and the offeror is no longer able to provide it; or
(b) was to have been provided by a third party who is no longer bound or
able to provide it,
the consideration shall be taken to consist of an amount of cash payable by
the offeror which at the date when the holder of the shares requires the
offeror to acquire them is equivalent to the chosen consideration.
430C. Applications to the court
(1) Where a notice is given under section 429 to the holder of any shares the
court may, on an application made by him within six weeks from the date on
which the notice was given:
(a) order that the offeror shall not be entitled and bound to acquire the
shares; or
(b) specify terms of acquisition different from those of the offer.
(2) If an application to the court under subsection (1) is pending at the end
of the period mentioned in subsection (5) of section 430 that subsection
shall not have effect until the application has been disposed of.
(3) Where the holder of any shares exercises his rights under section 430A the
court may, on an application made by him or the offeror, order that the
terms on which the offeror is entitled and bound to acquire the shares
shall be such as the court thinks fit.
(4) No order for costs or expenses shall be made against a shareholder making
an application under subsection (1) or (3) unless the court considers:
(a) that the application was unnecessary, improper or vexatious; or
(b) that there has been unreasonable delay in making the application or
unreasonable conduct on his part in conducting the proceedings on the
application.
(5) Where a takeover offer has not been accepted to the extent necessary for
entitling the offeror to give notices under subsection (1) or (2) of
section 429 the court may, on the application of the offeror, make an
order authorizing him to give notices under that subsection if satisfied:
(a) that the offeror has after reasonable enquiry been unable to trace one
or more of the persons holding shares to which the offer relates;
(b) that the shares which the offeror has acquired or contracted to acquire
by virtue of acceptances of the offer, together with the shares held by
the person or persons
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mentioned in paragraph (a), amount to not less than the minimum
specified in that subsection; and
(c) that the consideration offered is fair and reasonable;
but the court shall not make an order under this subsection unless it
considers that it is just and equitable to do so having regard, in
particular, to the number of shareholders who have been traced but who have
not accepted the offer.
430D.Joint offers
(1) A takeover offer may be made by two or more persons jointly and in that
event this Part of this Act has effect with the following modifications.
(2) The conditions for the exercise of the rights conferred by sections 429
and 430A shall be satisfied by the joint offerors acquiring or contracting
to acquire the necessary shares jointly (as respects acquisitions by
virtue of acceptances of the offer) and either jointly or separately (in
other cases); and, subject to the following provisions, the rights and
obligations of the offeror under those sections and sections 430 and 430B
shall be respectively joint rights and joint and several obligations of
the joint offerors.
(3) It shall be a sufficient compliance with any provision of those sections
requiring or authorizing a notice or other document to be given or sent by
or to the joint offerors that it is given or sent by or to any of them;
but the statutory declaration required by section 429(4) shall be made by
all of them and, in the case of a joint offeror being a company, signed by
a director of that company.
(4) In sections 428, 430(8) and 430E references to the offeror shall be
construed as references to the joint offerors or any of them.
(5) In section 430(6) and (7) references to the offeror shall be construed as
references to the joint offerors or such of them as they may determine.
(6) In sections 430(4)(a) and 430B(4)(a) references to the offeror being no
longer able to provide the relevant consideration shall be construed as
references to none of the joint offerors being able to do so.
(7) In section 430C references to the offeror shall be construed as references
to the joint offerors except that any application under subsection (3) or
(5) may be made by any of them and the reference in subsection (5)(a) to
the offeror having been unable to trace one or more of the persons holding
shares shall be construed as a reference to none of the offerors having
been able to do so.
430E.Associates
(1) The requirement in section 428(1) that a takeover offer must extend to all
the shares, or all the shares of any class or classes, in a company shall
be regarded as satisfied notwithstanding that the offer does not extend to
shares which associates of the offeror hold or have contracted to acquire;
but, subject to subsection (2), shares which any such associate holds or
has contracted to acquire, whether at the time when the offer is made or
subsequently, shall be disregarded for the purposes of any reference in
this Part of this Act to the shares to which a takeover offer relates.
(2) Where during the period within which a takeover offer can be accepted any
associate of the offeror acquires or contracts to acquire any of the
shares to which the offer relates, then, if the condition specified in
subsection (8)(a) or (b) of section 429 is satisfied as respects those
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shares they shall be treated for the purposes of that section as shares to
which the offer relates.
(3) In section 430A(1)(b) and (2)(b) the reference to shares which the offeror
has acquired or contracted to acquire shall include a reference to shares
which any associate of his has acquired or contracted to acquire.
(4) In this section "associate", in relation to an offeror, means:
(a) a nominee of the offeror;
(b) a holding company, subsidiary or fellow subsidiary of the offeror or a
nominee of such a holding company, subsidiary or fellow subsidiary;
(c) a body corporate in which the offeror is substantially interested; or
(d) any person who is, or is a nominee of, a party to an agreement with the
offeror for the acquisition of, or of an interest in, the shares which
are the subject of the takeover offer, being an agreement which
includes provisions imposing obligations or restrictions such as are
mentioned in section 204(2)(a).
(5) For the purposes of subsection (4)(b) a company is a fellow subsidiary of
another body corporate if both are subsidiaries of the same body corporate
but neither is a subsidiary of the other.
(6) For the purposes of subsection (4)(c) an offeror has a substantial
interest in a body corporate if:
(a) that body or its directors are accustomed to act in accordance with his
directions or instructions; or
(b) he is entitled to exercise or control the exercise of one-third or more
of the voting power at general meetings of that body.
(7) Subsections (5) and (6) of section 204 shall apply to subsection (4)(d)
above as they apply to that section and subsections (3) and (4) of section
203 shall apply for the purposes of subsection (6) above as they apply for
the purposes of subsection (2)(b) of that section.
(8) Where the offeror is an individual his associates shall also include his
spouse and any minor child or step-child of his.
430F.Convertible securities
(1) For the purposes of this Part of this Act securities of a company shall be
treated as shares in the company if they are convertible into or entitle
the holder to subscribe for such shares; and references to the holder of
shares or a shareholder shall be construed accordingly.
(2)Subsection (1) shall not be construed as requiring any securities to be
treated:
(a) as shares of the same class as those into which they are convertible or
for which the holder is entitled to subscribe; or
(b) as shares of the same class as other securities by reason only that the
shares into which they are convertible or for which the holder is
entitled to subscribe are of the same class."
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APPENDIX IX
Definitions
The following definitions apply throughout this document, unless the context
requires otherwise:
"Affiliate Agreements" the agreements between SDL and the directors of
IOC to, inter alia, restrict the ability of the
directors of IOC to deal in IOC Shares or SDL
Common Stock described in paragraph 3(a) of
Appendix VI of this Offer Document
"AIM" the Alternative Investment Market of the London
Stock Exchange
"Australia" the Commonwealth of Australia, its territories
and its possessions
"City Code" The City Code on Takeovers and Mergers
"CREST" the system operated by CRESTCo in accordance with
the Uncertificated Securities Regulations 1995
(SI 1995 No. 95/3272)
"CRESTCo" CRESTCo Limited
"Enlarged Group" or the SDL Group following the acquisition of IOC
"Enlarged SDL Group" pursuant to the Offer
"Exchange Act" the Securities Exchange Act of 1934, as amended,
and the rules thereunder
"Form of Acceptance" the form of acceptance relating to the Offer
"Henry Cooke" Henry Cooke Corporate Finance Ltd
"Initial Closing Date" 3.00 p.m. (UK time) on 12 May 1999, being the
21st day after the date of the posting of this
Offer Document, unless SDL, in its discretion and
subject to the Rules of the City Code, shall have
extended the Offer, in which case the term
"Initial Closing Date" shall mean the latest time
and date at which the Offer, as so extended by
SDL, will expire or, if earlier, the time at
which the conditions of the Offer set out in Part
A of Appendix I of this Offer Document are
satisfied or, to the extent permitted, waived
"Initial Offer Period" the period from the date of this Offer Document
to and including the Initial Closing Date
"IOC" IOC International plc
"IOC Closing Price" the middle market closing price for an IOC Share
as derived from the AIM section of the London
Stock Exchange Daily Official List
"IOC Group"
IOC and its subsidiary undertaking (as such term
is defined in the Companies Act 1985)
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"IOC Limited" Integrated Optical Components Limited, the
wholly-owned subsidiary of IOC
"IOC Shares" the existing issued and fully paid ordinary
shares of 10p each in the capital of IOC and any
further such shares which are unconditionally
allotted or issued while the Offer remains open
for acceptance (or prior to such earlier date,
not being earlier than the Initial Closing Date,
as SDL may, subject to the approval of the Panel,
decide)
"IOC Shareholders" holders of IOC Shares
"IOC Share Option Schemes" the 1997 IOC Employee Share Scheme, the 1998 IOC
Executive Share Option Scheme, the share option
agreement between IOC Limited and M.A. Powell and
others dated 28 March 1994 (as amended), the
individual agreements between IOC and each of
M.A. Powell, A.C. O'Donnell, S.J. Meyrick, J.D.
Dodson and R.P. Harley dated 27 February 1996,
the agreement between IOC and Henry Cooke dated
27 February 1996 (as amended), the agreement
between IOC and T.G. Collins dated 5 August 1996
and the agreement between IOC and N. Healey dated
1 May 1997
"London Stock Exchange" London Stock Exchange Limited
"NASDAQ" the computerised quotation system sponsored by
the National Association of Securities Dealers
"New SDL Common Stock" SDL Common Stock to be issued pursuant to the
Offer
"Noon Buying Rate" the noon buying rate of US dollars for cable
transfer in New York City relative to pounds
sterling as certified by the New York Federal
Reserve Bank for customs purposes
"Offer" the proposed offer to be made by Rea Brothers, on
behalf of SDL, on the terms and subject to the
conditions to be set out in this Offer Document
to acquire the IOC Shares and, where the context
admits, any subsequent revision, variation,
extension or renewal thereof
"Offer Period" this term is defined in Appendix I, section 6(b)
"Offer Document" this document
"Overseas Shareholders" holders of IOC Shares resident in or nationals or
citizens of, jurisdictions outside the United
Kingdom and the United States or who are nominees
of, or custodians, trustees or guardians for,
citizens or nationals of other countries
"Panel" the Panel on Takeovers and Mergers
"Rea Brothers" Rea Brothers Limited
"Registration Statement"
the registration statement on Form S--4 relating
to the Offer filed by SDL under the Securities
Act
IX-2
<PAGE>
"SDL" or "the Company" SDL, Inc.
"SDL Group" SDL and its subsidiaries
"SDL Stockholders" holders of SDL Common Stock
"SDL Common Stock" $.001 par value Common Stock of SDL
"SEC" the US Securities and Exchange Commission
"Securities Act" US Securities Act of 1933, as amended, and the
rules thereunder
"Treaty" US-UK double tax convention relating to income
and capital gains
"UK GAAP" generally accepted accounting principles as
applied in the UK
"UK" or "United Kingdom" the United Kingdom of Great Britain and Northern
Ireland
"US GAAP" generally accepted accounting principles as
applied in the US
"US Business Day" any day other than Saturday, Sunday or a Federal
holiday in the US, and consists of the time
period from 12.01 a.m. to 12.00 midnight, New
York City time
"US Person" a US person as defined in Regulation S of the
Securities Act
"US Securities Law" the Securities Act, the Exchange Act and the
rules and regulations promulgated thereunder
"United States" or "US" the United States of America, its territories and
possessions, any state of the United States of
America and the District of Columbia
"$" United States dollars
"(Pounds)" or "GBP" United Kingdom pounds sterling
IX-3
