<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MARCH 8, 2000
Commission File Number: 0-25688
SDL, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 77-0331449
- -------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
80 Rose Orchard Way, San Jose, California 95134
- --------------------------------------------- -------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (408) 943-9411
This form 8-K/A amends Form 8-K filed with the Securities and Exchange
Commission on March 21, 2000 (the "Original Form 8-K") by including the
financial statements and pro forma financial information referred to below.
ITEM 5. OTHER EVENTS
SDL, Inc. (SDL) has included herein the consolidated financial statements of
Queensgate Instruments, Limited (Queensgate) for the years ended March 31, 1999
and 1998 and pro forma financial information giving effect to the proposed
merger between SDL and Queensgate.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired
i. Report of Arthur Andersen, Independent Auditors
ii. Consolidated profit and loss account for the years ended March 31,
1999 and 1998
iii. Consolidated balance sheets as of March 31, 1999 and 1998
iv. Consolidated cash flow statement for the years ended March 31, 1999 and
1998
v. Notes to Financial Statements for the years ended March 31, 1999 and
1998
Queensgate Instruments, Limited Condensed Financial Statements (unaudited)
i. Balance Sheet as of December 31, 1999 and March 31, 1999
<PAGE> 2
ii. Statements of Operations for the nine months ended December 31, 1999
and 1998
iii. Statements of Cash Flows for the nine months ended December 31, 1999
and 1998
iv. Notes to Financial Statements for the nine months ended December 31,
1999 and 1998
(b) Pro Forma Financial Information
Pro Forma Combined Consolidated Financial Statements (unaudited)
i. Pro Forma Combined Consolidated Statements of Operations for the year
ended December 31, 1999
ii. Pro Forma Combined Consolidated Statement of Operations for the three
months ended March 31, 2000
iii. Notes to Pro Forma Combined Consolidated Financial Statements
(c) Exhibits
23.1 Consent of Arthur Andersen, Independent Auditors
<PAGE> 3
AUDITORS' REPORT
TO THE SHAREHOLDERS OF SDL QUEENSGATE LIMITED:
We have audited the accounts on pages 5 to 29 which have been prepared under the
historical cost convention, as modified for the revaluation of certain fixed
assets, and the accounting policies set out on pages 9 to 11.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
Directors' responsibilities
Company law requires the directors to prepare accounts for each financial year
which give a true and fair view of the state of affairs of the company and group
and of the profit or loss of the group for that period. In preparing those
accounts, the directors are required to:
- - select suitable accounting policies and then apply them consistently;
- - make judgements and estimates that are reasonable and prudent;
- - state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the accounts; and
- - prepare the accounts on the going concern basis unless it is inappropriate
to presume that the group will continue in business.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
company and group and enable them to ensure that the accounts comply with the
Companies Act 1985. They are also responsible for safeguarding the assets of the
company and group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
Auditors' responsibilities
It is our responsibility to form an independent opinion, based on our audit, on
the accounts 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 in the United Kingdom which are substantially
consistent with U.S. generally accepted auditing standards. An audit includes
examination, on a test basis, of evidence relevant to the amounts and
disclosures in the accounts. It also includes an assessment of the significant
estimates and judgements made by the directors in the preparation of the
accounts and of whether the accounting policies are appropriate to the group's
circumstances, 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 accounts 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 accounts.
<PAGE> 4
OPINION
In our opinion the accounts give a true and fair view of the state of affairs of
the company and the group at 31 March 1999 and 31 March 1998 and of its results
and cash flows for the years then ended and have been properly prepared in
accordance with the Companies Act 1985.
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 complete reconciliation
of the consolidated net loss or profit after taxation and shareholders' funds to
U.S. generally accepted accounting principles is set forth in Note 27.
ARTHUR ANDERSEN
CHARTERED ACCOUNTANTS AND REGISTERED AUDITORS
Abbots House
Abbey Street
Reading
Berkshire
RG1 3BD
6 April 2000
<PAGE> 5
Consolidated profit and loss account
For the year ended 31 March 1999
<TABLE>
<CAPTION>
Notes 1999 1998
GBP GBP
<S> <C> <C> <C>
TURNOVER
Existing operations 3,301,859 4,480,433
Acquisitions -- 469,964
---------- ----------
Continuing operations 2 3,301,859 4,950,397
Cost of sales (2,026,174) (1,652,095)
---------- ----------
GROSS PROFIT 1,275,685 3,298,302
Distribution costs (102,489) (93,919)
Administration expenses (3,868,502) (2,921,328)
Other operating income 3 -- 308,933
---------- ----------
OPERATING (LOSS) PROFIT
Existing operations (2,695,306) 498,408
Acquisitions -- 93,580
---------- ----------
(LOSS) PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST (2,695,306) 591,988
Interest payable and similar charges 4 (50,193) (15,992)
Interest receivable and similar income 3,596 1,757
Dividend income -- 10,000
---------- ----------
(LOSS) PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION 5 (2,741,903) 587,753
Tax credit (charge) on (loss) profit on ordinary activities 7 330,858 (191,087)
---------- ----------
(LOSS) PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION 17 (2,411,045) 396,666
Dividends paid and proposed on equity and non-equity shares 8, 18 (9,167) (90,096)
---------- ----------
RETAINED (LOSS) PROFIT FOR THE YEAR (2,420,212) 306,570
========== ==========
</TABLE>
The accompanying notes are an integral part of this consolidated profit and loss
account.
All operations relate to continuing activities and no operations were acquired
or discontinued in the current period.
<PAGE> 6
Consolidated balance sheet
31 March 1999
<TABLE>
<CAPTION>
Notes 1999 1998
GBP GBP
<S> <C> <C> <C>
FIXED ASSETS
Tangible assets 9 1,679,776 780,895
Investments 10 250 200,000
---------- ----------
1,680,026 980,895
---------- ----------
CURRENT ASSETS
Stocks 11 790,416 701,621
Debtors 12 1,273,090 1,747,066
Cash at bank and in hand 358,514 99,229
---------- ----------
2,422,020 2,547,916
CREDITORS: Amounts falling due within one year 13 (1,379,483) (1,096,611)
---------- ----------
NET CURRENT ASSETS 1,042,537 1,451,305
---------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 2,722,563 2,432,200
CREDITORS: Amounts falling due after more than one year 14 (748,070) (13,754)
PROVISIONS FOR LIABILITIES & CHARGES 15 (346,615) (149,759)
---------- ----------
NET ASSETS 1,627,878 2,268,687
========== ==========
CAPITAL AND RESERVES
Called-up share capital 16 3,703 3,498
Other reserves 17 1,624,175 2,265,189
---------- ----------
SHAREHOLDERS' FUNDS 18 1,627,878 2,268,687
---------- ----------
SHAREHOLDERS' FUNDS MAY BE ANALYSED AS:
Equity interests 1,544,545 2,185,354
Non equity interests 83,333 83,333
---------- ----------
1,627,878 2,268,687
========== ==========
</TABLE>
SIGNED ON BEHALF OF THE BOARD
N K Reay
Director 6 April 2000
The accompanying notes are an integral part of this consolidated balance sheet.
<PAGE> 7
Company balance sheet
31 March 1999
<TABLE>
<CAPTION>
Notes 1999 1998
GBP GBP
<S> <C> <C> <C>
FIXED ASSETS
Tangible assets 9 1,474,736 562,010
Investments 10 173,610 374,010
---------- ----------
1,648,346 936,020
---------- ----------
CURRENT ASSETS
Stocks 11 670,340 588,469
Debtors: Amounts falling due within one year 12 1,592,486 1,352,119
Cash at bank and in hand 169,126 16,172
---------- ----------
2,431,952 1,956,760
CREDITORS: Amounts falling due within one year 13 (1,244,138) (940,326)
---------- ----------
NET CURRENT ASSETS 1,187,814 1,016,434
---------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 2,836,160 1,952,454
CREDITORS: Amounts falling due after more than one year 14 (748,070) (13,754)
PROVISIONS FOR LIABILITIES & CHARGES 15 (346,615) (149,759)
---------- ----------
NET ASSETS 1,741,475 1,788,941
========== ==========
CAPITAL AND RESERVES
Called-up share capital 16 3,703 3,498
Other reserves 17 1,737,772 1,785,443
---------- ----------
SHAREHOLDERS' FUNDS 18 1,741,475 1,788,941
========== ==========
SHAREHOLDERS' FUNDS MAY BE ANALYSED AS:
Equity interests 1,685,142 1,705,608
Non equity interests 83,333 83,333
---------- ----------
1,741,475 1,788,941
========== ==========
</TABLE>
SIGNED ON BEHALF OF THE BOARD
N K Reay
Director 6 April 2000
The accompanying notes are an integral part of this balance sheet
<PAGE> 8
Consolidated Cash Flow Statement
For the year ended 31 March 1999
<TABLE>
<CAPTION>
Notes 1999 1998
GBP GBP
<S> <C> <C> <C>
NET CASH OUTFLOW FROM OPERATING ACTIVITIES 19 (799,733) (89,766)
Returns on investments and servicing of finance 20 (75,983) (29,169)
Taxation 20 (159,167) (260,495)
Capital expenditure and financial investment 20 (628,545) (114,840)
Acquisition and disposals -- (90,126)
Equity dividends paid (60,708) (53,057)
---------- ----------
CASH OUTFLOW BEFORE FINANCING (1,724,136) (637,453)
Financing 20 2,193,440 (252,953)
---------- ----------
INCREASE (DECREASE) IN CASH IN THE YEAR 21 469,304 (890,406)
========== ==========
</TABLE>
The accompanying notes are an integral part of this consolidated cash flow
statement.
Consolidated statement of total recognised gains and losses
For the year ended 31 March 1999
<TABLE>
<CAPTION>
1999 1998
GBP GBP
<S> <C> <C> <C>
Retained (loss) profit for the financial year (2,420,212) 306,570
Foreign exchange movement 18 53,953 13,638
---------- ----------
TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR (2,366,259) 320,208
========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 9
Notes to accounts
31 March 1999
1 ACCOUNTING POLICIES
Basis of accounting
A summary of the principal accounting policies is set out below. Other than the
change in the basis for calculating depreciation on tangible fixed assets all
accounting policies have been applied consistently throughout the year and the
preceding year.
The accounts have been prepared under the historical cost convention as modified
for the revaluation of certain fixed assets and in accordance with applicable
accounting standards.
Basis of consolidation
The group accounts consolidate the accounts of SDL Queensgate Limited and its
subsidiary undertakings drawn up to 31 March each year. The results of
subsidiaries acquired are consolidated from the date when control passed.
Acquisitions are accounted for under the acquisition method.
For the purposes of consolidation the closing rate method is used, under which
translation gains or losses are shown as movements on reserves. Profit and loss
accounts and cash flows of overseas branches and subsidiary are translated at
the average rate for the year.
The loss for the financial year after tax of Queensgate Instruments Limited was
GBP1,797,261 (1998: Profit of GBP494,977). As provided by Section 230 of the
Companies Act 1985, no profit and loss account is presented in respect of SDL
Queensgate Limited.
Goodwill
Goodwill arising on the acquisition of subsidiary undertakings and businesses,
representing any excess of the fair value of the consideration given over the
fair value of the identifiable assets and liabilities acquired, is capitalised
and written off on a straight line basis over its useful economic life.
Provision is made for any impairment.
On acquisitions prior to 31 March 1998, where the fair value of the
consideration given was less than the fair value of the identifiable assets, the
resulting negative goodwill was credited immediately to reserves.
Investments
Investments in subsidiary undertakings in the company only balance sheet are
stated at cost less provision for impairment where appropriate.
Other investments at valuation or cost less any provision for impairment where
appropriate.
Tangible fixed assets
Tangible fixed assets are shown at historic cost less accumulated depreciation.
For 1999 depreciation has been calculated on the straight-line basis and aims to
write down the cost or valuation of all tangible fixed assets over their
expected useful lives. The previous depreciation policy was based on the
reducing balance method. The effect of changing the basis of calculation of
depreciation is an increase of GBP24,924 in the depreciation charge for the
year.
<PAGE> 10
ACCOUNTING POLICIES (CONTINUED)
Tangible fixed assets (continued)
The rates applied are:
Freehold property 25 years
Leasehold improvements the remaining period of the lease
Furniture and equipment 3 - 15 years
Motor vehicles 5 years
Foreign currency
Transactions denominated in foreign currencies are recorded in sterling at
actual exchange rates as of the date of the transaction or at the appropriate
forward contract rate. 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.
Monetary assets and liabilities denominated in foreign currencies are reported
at the rates of exchange prevailing at the year-end or at the appropriate
forward contract rate.
Stocks
Stocks and work in progress are stated at the lower of cost and net realisable
value.
Long-term contract balances included in stock are stated at cost, after
provision has been made for any foreseeable losses and the deduction of
applicable payments on account. The amount by which recorded turnover is in
excess of amounts invoiced is classified as amounts recoverable on contracts.
Turnover is ascertained in a manner appropriate to the state of completion of
the contract and attributable profit is recognised when the outcome of the
contract can be assessed with reasonable certainty.
Full provision is made for losses on all contracts in the year in which the loss
is first foreseen.
Provision is made for obsolete, slow moving or defective items where
appropriate.
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 terms 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 lives.
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.
<PAGE> 11
ACCOUNTING POLICIES (CONTINUED)
Taxation
Corporation tax payable is provided on taxable profits at the current rate.
Deferred taxation has been calculated using 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 tax is
not provided on timing differences which, in the opinion of the directors, will
probably not reverse.
Pension costs
The group operates a defined contribution scheme. The amount charged to the
profit and loss account in respect of the scheme is the contributions payable in
the year. Differences between contributions payable in the year and
contributions actually paid are shown as either accruals or prepayments in the
balance sheet.
Research and development
All research and development costs are charged immediately to the profit and
loss account.
Government grants
Government grants of a revenue nature are credited to the profit and loss
account in the same period as the related expenditure.
Turnover
Turnover arises entirely from the group's principal activity and comprises the
value of sales (excluding VAT and similar taxes, trade discounts and intra-group
transactions) of goods and services in the normal course of business.
2 TURNOVER ANALYSIS
In the opinion of the directors, disclosure of the information required by
paragraph 55 of Schedule 4 to the Companies Act 1985 concerning particulars of
turnover would be seriously prejudicial to the interests of the group.
Accordingly this information has not been presented.
3 OTHER OPERATING INCOME
Other operating income for 1998 relates to an insurance claim in respect of
business interruption.
4 INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
1999 1998
GBP GBP
<S> <C> <C>
On bank loans and overdrafts 29,728 5,723
On finance leases and hire purchase contracts 20,465 10,269
-------- --------
50,193 15,992
======== ========
</TABLE>
<PAGE> 12
5 (LOSS) PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
The (loss) profit on ordinary activities before taxation is stated after
charging (crediting):
<TABLE>
<CAPTION>
1999 1998
GBP GBP
<S> <C> <C>
Depreciation and amounts written off tangible fixed assets
- - owned 256,455 76,984
- - held under finance leases and hire purchase contracts 65,542 61,354
Business relocation costs 354,083 --
Government grants (16,888) (94,559)
Operating lease rentals - plant and machinery 6,656 12,824
- other 149,082 140,368
Auditors' remuneration for audit services 32,783 21,960
Auditor's remuneration for non-audit services 4,750 3,000
Research and development 862,430 656,632
========== =========
</TABLE>
The depreciation charge for the year includes GBP80,478 in relation to
accelerated depreciation for assets no longer fully utilised following the
relocation of the business to new premises.
6 STAFF COSTS
The average monthly number of employees (including executive directors) was:
<TABLE>
<CAPTION>
1999 1998
Number Number
<S> <C> <C>
Production 29 26
Research and development 23 21
Sales 10 9
Administration 18 17
---------- ----------
80 73
========== =========
Their aggregate remuneration comprised:
1999 1998
GBP GBP
<S> <C> <C>
Wages and salaries 2,307,573 1,654,828
Social security costs 206,171 140,656
Pension costs 97,071 70,507
---------- ----------
2,610,815 1,865,991
========== =========
</TABLE>
<PAGE> 13
6 STAFF COSTS (CONTINUED)
Directors' remuneration
The remuneration of the directors was as follows:
<TABLE>
<CAPTION>
1999 1998
GBP GBP
<S> <C> <C>
Emoluments 450,095 347,659
Company contributions to money purchase pension schemes 28,602 28,806
---------- ----------
478,697 376,465
========== =========
Pensions
The number of directors who were members of pension schemes was as follows:
1999 1998
Number Number
<S> <C> <C>
Money purchase schemes 4 4
========== =========
Highest-paid director
The above amounts for remuneration include the following in respect of the
highest paid director:
1999 1998
GBP GBP
<S> <C> <C>
Emoluments 114,516 101,316
Company contributions to money purchase schemes 10,200 10,200
---------- ---------
124,716 111,516
========== =========
</TABLE>
Share options
Options over ordinary shares in the company issued to and held during the year
by the directors were:
<TABLE>
<CAPTION>
As at date of Number of options
appointment* ------------------------- As at
or Granted Exercised 31 March
1 April 1998 during the year 1998
<S> <C> <C> <C> <C>
I E Thomas* -- 12 -- 12
C M Shannon -- 15 -- 15
------------ ----------
-- 27
============ ==========
</TABLE>
The options are exercisable on the successful flotation or sale of the company.
<PAGE> 14
7 TAX ON (LOSS) PROFIT ON ORDINARY ACTIVITIES
The tax credit (charge) comprises:
<TABLE>
<CAPTION>
1999 1998
GBP GBP
<S> <C> <C>
Corporation tax at 31% (1998: 31%) 158,774 (153,744)
Deferred taxation 149,759 11,103
Overseas taxation 22,325 (48,446)
-------- --------
330,858 (191,087)
======== ========
</TABLE>
8 DIVIDENDS PAID AND PROPOSED ON EQUITY AND NON-EQUITY SHARES
<TABLE>
<CAPTION>
1999 1998
GBP GBP
<S> <C> <C>
NON-EQUITY DIVIDENDS
`A' ordinary at GBP10.49 per share (1998:GBP10.49) 9,167 9,167
`A' ordinary participating at GBPnil per share (1998: GBP23.14) -- 20,221
-------- --------
9,167 29,388
EQUITY DIVIDENDS
Ordinary shares at GBPnil per share (1998: GBP20.22) -- 60,708
-------- --------
9,167 90,096
======== ========
</TABLE>
<PAGE> 15
9 TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
GROUP Freehold Motor Furniture & Leasehold
property vehicles equipment improvements Total
COST GBP GBP GBP GBP GBP
<S> <C> <C> <C> <C> <C>
At the beginning of the year 188,416 21,527 830,860 164,495 1,205,298
Additions -- -- 904,107 333,896 1,238,003
Disposals -- (21,527) (41,207) (169,019) (231,753)
Foreign exchange differences -- -- 3,336 -- 3,336
---------- ---------- ---------- ---------- ----------
At the end of the year 188,416 -- 1,697,096 329,372 2,214,884
---------- ---------- ---------- ---------- ----------
DEPRECIATION
At the beginning of the year 8,000 12,636 331,810 71,957 424,403
Charge for the year 8,000 -- 212,069 101,928 321,997
Disposals -- (12,636) (30,542) (169,019) (212,197)
Foreign exchange differences -- -- 905 -- 905
---------- ---------- ---------- ---------- ----------
At the end of the year 16,000 -- 514,242 4,866 535,108
---------- ---------- ---------- ---------- ----------
NET BOOK VALUE
At the end of the year 172,416 -- 1,182,854 324,506 1,679,776
========== ========== ========== ========== ==========
At the beginning of the year 180,416 8,891 499,050 92,538 780,895
========== ========== ========== ========== ==========
</TABLE>
The figures stated above include the net book value of assets held under finance
leases of GBP649,156 (1998: GBP209,059).
<PAGE> 16
9 TANGIBLE FIXED ASSETS (CONTINUED)
<TABLE>
<CAPTION>
COMPANY Motor Furniture & Leasehold
vehicles equipment improvements Total
COST GBP GBP GBP GBP
<S> <C> <C> <C> <C>
At the beginning of the year 21,527 775,175 164,495 961,197
Additions -- 899,136 333,896 1,233,032
Disposals (21,527) (39,925) (169,019) (230,471)
Foreign e change differences -- 1,420 -- 1,420
------------ ------------ ------------ ------------
At the end of the year -- 1,635,806 329,372 1,965,178
------------ ------------ ------------ ------------
DEPRECIATION
At the beginning of the year 12,636 314,594 71,957 399,187
Charge for the year -- 201,150 101,928 303,078
Disposals (12,636) (30,435) (169,019) (212,090)
Foreign e change differences -- 267 -- 267
------------ ------------ ------------ ------------
At the end of the year -- 485,576 4,866 490,442
------------ ------------ ------------ ------------
NET BOOK VALUE
At the end of the year -- 1,150,230 324,506 1,474,736
============ ============ ============ ============
At the beginning of the year 8,891 460,581 92,538 562,010
============ ============ ============ ============
</TABLE>
The figures stated above include the net book value of assets held under finance
leases of GBP649,156 (1998: GBP209,059).
10 FIXED ASSET INVESTMENTS
<TABLE>
<CAPTION>
Group Company
---------------------- ----------------------
1999 1998 1999 1998
GBP GBP GBP GBP
<S> <C> <C> <C> <C>
Subsidiary undertakings at cost -- -- 173,360 174,010
Other investments 250 200,000 250 200,000
-------- -------- -------- --------
250 200,000 173,610 374,010
======== ======== ======== ========
</TABLE>
The movement in the carrying value of subsidiary undertakings represents the
write off of amounts relating to dormant subsidiaries.
<PAGE> 17
10 FIXED ASSET INVESTMENTS (CONTINUED)
Principal group investments
The parent company has investments in the following subsidiary undertakings and
other investments:
Wholly owned subsidiary undertakings Country of Principal activity
incorporation
Queensgate Instruments Incorporated USA Sale of electro-
optical instruments
IC Optical Systems Limited England & Wales Manufacturer of
specialised optical
components
The other investment represents a 25% holding in LOT-Oriel Limited, a company
incorporated in England and Wales. Its principal activity is the sale of
electro-optical instruments. The remaining 75% holding in LOT-Oriel Limited is
owned by a single party. Due to the nature of the group's holding and the
control exercised by the other shareholder, the directors do not believe they
have a significant influence over LOT-Oriel Limited and therefore do not
consider the company an associated company and have therefore not applied equity
accounting principles to the investment.
In the opinion of the directors the value of these investments is not less than
their carrying value. A provision for impairment in the investment in LOT-Oriel
Limited was recorded in the year, which reduces the investment carrying value to
its original level. The provisions for impairment have been set off against the
revaluation reserve.
Acquisition of subsidiary undertaking
On 8 April 1997 the company acquired 100% of the issued share capital of IC
Optical Systems Limited for consideration of GBP160,000.
<PAGE> 18
10 FIXED ASSET INVESTMENTS (CONTINUED)
Acquisition of subsidiary undertaking (continued)
The following table sets out the fair values of the identifiable assets and
liabilities acquired.
<TABLE>
<CAPTION>
Fair value
to group
GBP
<S> <C>
Tangible fixed assets 188,855
Stocks 106,277
Debtors 67,059
Cash 69,874
----------
TOTAL ASSETS 432,065
==========
Creditors
Bank loans (144,523)
Other creditors (55,633)
----------
TOTAL LIABILITIES (200,156)
----------
NET ASSETS 231,909
----------
Negative goodwill (71,909)
----------
Cash consideration 160,000
==========
</TABLE>
The negative goodwill arising has been credited to reserves.
In relation to the acquisition of IC Optical Systems Limited, continuing
operations in 1998 include cost of sales of GBP216,118, gross profit of
GBP253,846, and administrative expenses of GBP151,750.
Net cash outflows in respect of the acquisition comprised:
<TABLE>
<CAPTION>
GBP
<S> <C>
Cash consideration (160,000)
Cash at bank and in hand acquired 69,874
----------
(90,126)
==========
</TABLE>
<PAGE> 19
11 STOCKS
<TABLE>
<CAPTION>
Group Company
---------------------- ----------------------
1999 1998 1999 1998
GBP GBP GBP GBP
<S> <C> <C> <C> <C>
Raw materials and consumables 360,198 342,619 354,344 338,749
Work-in-progress 418,065 304,371 303,843 195,090
Finished goods and goods for resale 12,153 54,631 12,153 54,630
-------- -------- -------- --------
790,416 701,621 670,340 588,469
======== ======== ======== ========
</TABLE>
12 DEBTORS
Amounts falling due within one year:
<TABLE>
<CAPTION>
Group Company
------------------------ -------------------------
1999 1998 1999 1998
GBP GBP GBP GBP
<S> <C> <C> <C> <C>
Trade debtors 828,914 1,078,015 314,970 225,012
Amounts recoverable on contracts 12,000 115,237 12,000 115,237
Amounts owed by group undertakings -- -- 909,321 496,412
VAT 143,357 51,950 143,357 51,950
Tax and ACT recoverable 160,729 22,524 160,729 22,524
Overseas corporation tax recoverable 59,858 30,938 -- --
Other debtors 25,807 274,878 21,207 270,442
Prepayments and accrued income 42,425 173,524 30,902 170,542
--------- --------- --------- ---------
1,273,090 1,747,066 1,592,486 1,352,119
========= ========= ========= =========
</TABLE>
13 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
Group Company
------------------------ -------------------------
1999 1998 1999 1998
GBP GBP GBP GBP
<S> <C> <C> <C> <C>
Obligations under finance leases and hire purchase 168,998 45,172 168,998 45,172
contracts
Bank overdrafts 19,431 280,970 19,431 280,970
Trade creditors 408,243 221,094 349,878 133,773
UK taxation payable -- 150,617 -- 130,456
Social Security and other taxes 72,546 57,192 65,032 44,208
ACT on proposed dividends -- 22,524 -- 22,524
Other creditors 835 66,844 835 43,770
Accruals and deferred income 700,263 162,102 630,797 149,357
Proposed dividends 9,167 90,096 9,167 90,096
--------- --------- --------- ---------
1,379,483 1,096,611 1,244,138 940,326
========= ========= ========= =========
</TABLE>
<PAGE> 20
14 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
Group Company
------------------------ -------------------------
1999 1998 1999 1998
GBP GBP GBP GBP
<S> <C> <C> <C> <C>
Obligations under finance leases and hire purchase
Contracts 261,537 13,754 261,537 13,754
Bank loan (net of issue costs) 486,533 -- 486,533 --
-------- -------- -------- --------
748,070 13,754 748,070 13,754
======== ======== ======== ========
</TABLE>
On 21 August 1998 the Company entered into a 5 year multi-line facility of
GBP2.5m with National Westminster Bank PLC at an interest rate of 1.5% over
base. This facility was fully repaid and cancelled on 8 March 2000 consequent
upon the acquisition of the Company by SDL Inc.
Finance leases
<TABLE>
<CAPTION>
Group Company
---------------------- ----------------------
1999 1998 1999 1998
GBP GBP GBP GBP
<S> <C> <C> <C> <C>
Between one and two years 187,379 8,807 187,379 8,807
Between two and five years 74,158 4,947 74,158 4,947
-------- -------- -------- --------
261,537 13,754 261,537 13,754
On demand or within one year 168,998 45,172 168,998 45,172
-------- -------- -------- --------
430,535 58,926 430,535 58,926
======== ======== ======== ========
</TABLE>
<PAGE> 21
15 PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
Business
GROUP AND COMPANY relocation Warranty
Deferred tax costs provisions Total
GBP GBP GBP GBP
<S> <C> <C> <C> <C>
At the beginning of the year 149,759 -- -- 149,759
Charged (credited) to profit and loss account (149,759) 292,615 54,000 196,856
--------- --------- --------- ---------
At the end of the year -- 292,615 54,000 346,615
========= ========= ========= =========
</TABLE>
The business relocation costs represent the costs associated with leasehold
premises vacated prior to the year end when the company moved to larger
premises.
Deferred taxation provided and deferred taxation not provided are as follows:
<TABLE>
<CAPTION>
Provided Not provided
--------------------------- ---------------------------
1999 1998 1999 1998
GBP GBP GBP GBP
<S> <C> <C> <C> <C>
GROUP AND COMPANY
Accelerated capital allowances 476,781 149,759 -- --
Losses carried forward (476,781) -- (228,836) --
Taxation on revaluation surpluses -- -- -- 61,925
---------- ---------- ---------- ----------
-- 149,759 (228,836) 61,925
========== ========== ========== ==========
</TABLE>
<PAGE> 22
16 SHARE CAPITAL
<TABLE>
<CAPTION>
1999 1998
GBP GBP
<S> <C> <C>
Authorised
`A' ordinary shares of GBP1 each 1,124 1,124
Ordinary shares of GBP1 each 3,023 2,624
11% cumulative redeemable preference shares of GBP1 each -- 240,000
-------- --------
4,147 243,748
======== ========
Allotted, called up and fully paid
`A' ordinary shares of GBP1 each 874 874
Ordinary shares of GBP1 each 2,829 2,624
-------- --------
3,703 3,498
======== ========
</TABLE>
During the year 205 ordinary shares were issued for a cash consideration of
GBP1,925,200 (net of costs).
`A' ordinary shares
The `A' ordinary shares are non-equity shares which carry an entitlement to a
fixed cumulative dividend of a sum equal to 11% of the total subscription price
for the `A' ordinary shares in issue in each year.
They are entitled to a participating cumulative dividend of a sum equal to 5% of
the net profit of the group based on the published financial statements for each
financial year after deduction of the fixed cumulative dividend paid in the
year. They are further entitled to a dividend per share equal to the dividend
per share paid to the Ordinary shareholds less the participating dividend per
share.
The holders of `A' ordinary shares have one vote for every GBP1 share held. `A'
ordinary shareholders have the right on winding up to receive, in priority to
the ordinary shareholders, an amount equal to the subscription price per share
together with a sum equal to any assets or accruals of dividends calculated to
the date of winding up.
Subsequent events
On 2 July 1999 the Company passed a resolution to sub-divide each `A' ordinary
share of GBP1 into 1,000 `A' ordinary shares of 0.1p and each ordinary share of
GBP1 into 1,000 ordinary shares of 0.1p.
Change to Articles of Association
On 8 March 2000 the Company changed its Articles of Association. The `A'
ordinary shares are no longer entitled to a fixed cumulative dividend or to
receive priority on a winding up. The `A' ordinary shares and the Ordinary
shares now have identical rights.
<PAGE> 23
17 RESERVES
<TABLE>
<CAPTION>
Share Capital
GROUP Profit and loss premium redemption Revaluation Other
account account reserve reserve reserves Total
GBP GBP GBP GBP GBP GBP
<S> <C> <C> <C> <C> <C> <C>
At 1 April 1997 1,399,463 83,859 190,000 199,750 -- 1,873,072
Profit for the financial 396,666 -- -- -- -- 396,666
year
Dividends (90,096) -- -- -- -- (90,096)
Foreign exchange movement 13,638 -- -- -- -- 13,638
Negative goodwill arising
in the year -- -- -- -- 71,909 71,909
Transfer between reserves 7,191 -- -- -- (7,191) --
---------- ---------- ---------- ---------- ---------- ----------
At 31 March 1998 1,726,862 83,859 190,000 199,750 64,718 2,265,189
Loss for the financial year (2,411,045) -- -- -- -- (2,411,045)
Share issue during the year -- 1,924,995 -- -- -- 1,924,995
Dividends (9,167) -- -- -- -- (9,167)
Reduction (Note 10) -- -- -- (199,750) -- (199,750)
Foreign exchange movement 53,953 -- -- -- -- 53,953
Transfer between reserves 7,191 -- -- -- (7,191) --
---------- ---------- ---------- ---------- ---------- ----------
At 31 March 1999 (632,206) 2,008,854 190,000 -- 57,527 1,624,175
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
COMPANY Share Capital
Profit and premium redemption Revaluation
loss account account reserve reserve Total
GBP GBP GBP GBP GBP
<S> <C> <C> <C> <C> <C>
At 1 April 1997 882,008 83,859 190,000 199,750 1,355,617
Profit for the financial 494,977 -- -- -- 494,977
year
Dividends (90,096) -- -- -- (90,096)
Foreign exchange movement 24,945 -- -- -- 24,945
---------- ---------- ---------- ---------- ----------
At 31 March 1998 1,311,834 83,859 190,000 199,750 1,785,443
Loss for the financial year (1,797,261) -- -- -- (1,797,261)
Share issue during the year -- 1,924,995 -- -- 1,924,995
Dividends (9,167) -- -- -- (9,167)
Reduction -- -- -- (199,750) (199,750)
Foreign exchange movement 33,512 -- -- -- 33,512
---------- ---------- ---------- ---------- ----------
At 31 March 1999 (461,082) 2,008,854 190,000 -- 1,737,772
========== ========== ========== ========== ==========
</TABLE>
<PAGE> 24
18 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
1999 1998
GROUP GBP GBP
<S> <C> <C>
(Loss) profit for the financial year (2,411,045) 396,666
Dividends paid and proposed on equity and non-equity shares (9,167) (90,096)
Share issue during the year 1,925,200 --
Reduction in revaluation reserve (199,750) --
Foreign exchange movement 53,953 13,638
Negative goodwill arising in the year -- 71,909
------------ ------------
Net (reduction) addition to shareholders' funds (640,809) 392,117
Opening shareholders' funds 2,268,687 1,876,570
------------ ------------
Closing shareholders' funds 1,627,878 2,268,687
============ ============
1999 1998
COMPANY GBP GBP
<S> <C> <C>
(Loss) profit for the financial year (1,797,261) 494,977
Dividends paid and proposed on equity and non-equity shares (9,167) (90,096)
Share issue during the year 1,925,200 --
Reduction in revaluation reserve (199,750) --
Foreign exchange movement 33,512 24,945
------------ ------------
Net (reduction) addition to shareholders' funds (47,466) 429,826
Opening shareholders' funds 1,788,941 1,359,115
------------ ------------
Closing shareholders' funds 1,741,475 1,788,941
============ ============
19 RECONCILIATION OF OPERATING PROFIT TO OPERATING CASH FLOWS
1999 1998
GBP GBP
<S> <C> <C>
Operating (loss) profit (2,695,306) 591,988
Depreciation charge 321,997 138,338
Loss on sale of tangible fixed assets -- 18,185
Increase in stocks (88,795) (128,896)
Decrease (increase) in debtors 641,101 (342,554)
Increase (decrease) in creditors and provisions for liabilities and charges 1,021,270 (366,827)
------------ ------------
NET CASH (OUTFLOW) INFLOW FROM OPERATING ACTIVITIES (799,733) (89,766)
============ ============
</TABLE>
<PAGE> 25
20 ANALYSIS OF CASH FLOW
<TABLE>
<CAPTION>
1999 1998
GBP GBP
<S> <C> <C>
Returns on investments and servicing of finance
Interest received 3,596 1,757
Interest paid (29,728) (5,723)
Interest element of finance lease and hire purchase rental payments (20,465) (10,269)
Non equity dividends paid (29,386) (19,934)
Dividends received -- 5,000
------------ ------------
NET CASH OUTFLOW (75,983) (29,169)
============ ============
1999 1998
Taxation GBP GBP
<S> <C> <C>
UK corporation tax paid (152,572) (149,705)
Overseas tax paid (6,595) (110,790)
------------ ------------
NET CASH OUTFLOW (159,167) (260,495)
============ ============
1999 1998
Capital expenditure and financial investment GBP GBP
<S> <C> <C>
Purchase of tangible fixed assets (648,101) (182,456)
Sale of tangible fixed asset 19,556 67,616
------------ ------------
NET CASH OUTFLOW (628,545) (114,840)
============ ============
1999 1998
Financing GBP GBP
<S> <C> <C>
Shares issued less expenses 1,925,200 --
Loans obtained (repaid) 486,533 (144,523)
Capital element of finance lease and hire purchase payments (218,293) (108,430)
------------ ------------
NET CASH INFLOW (OUTFLOW) 2,193,440 (252,953)
============ ============
</TABLE>
<PAGE> 26
21 ANALYSIS AND RECONCILIATION OF NET DEBT
<TABLE>
<CAPTION>
New
1 April finance Exchange 31 March
1998 Cash flow leases Movement 1999
GBP GBP GBP GBP GBP
<S> <C> <C> <C> <C> <C>
Cash in hand and at bank 99,229 207,765 -- 51,520 358,514
Overdrafts (280,970) 261,539 -- -- (19,431)
---------- ---------- ---------- ---------- ----------
(181,741) 469,304 -- 51,520 339,083
Finance leases (58,926) 218,293 (589,902) -- (430,535)
Bank loans -- (486,533) -- -- (486,533)
---------- ---------- ---------- ---------- ----------
Net debt (240,667) 201,064 (589,902) 51,520 (577,985)
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1999 1998
GBP GBP
<S> <C> <C>
Increase (decrease) in cash in the year 469,304 (890,406)
Cash outflow from decrease in lease financing 218,293 108,430
Bank loan (obtained) repaid (486,533) 144,523
---------- ----------
Change in net debt resulting from cash flows 201,064 (637,453)
Loans acquired with subsidiary -- (144,523)
New finance leases (589,902) (31,315)
Translation difference 51,520 15,824
---------- ----------
Movement in net debt in year (337,318) (797,467)
Net debt at beginning of year (240,667) 556,800
---------- ----------
Net debt at end of year (577,985) (240,667)
========== ==========
</TABLE>
22 FINANCIAL COMMITMENTS
On 21 August 1998 the Company and its subsidiary undertakings entered into a
composite cross guarantee with National Westminster Bank PLC and granted a fixed
and floating charge over the assets of the group to secure its banking
facilities. Consequent upon the acquisition of the Company by SDL Inc. on 8
March 2000 the bank loans have been repaid and the facility with National
Westminster Bank PLC fully discharged. The group no longer has any assets
charged to secure its borrowings.
Neither the group nor the company had any capital commitments at 31 March 1999
or 31 March 1998.
<PAGE> 27
22 FINANCIAL COMMITMENTS (CONTINUED)
Annual commitments under non-cancellable operating leases are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- -----------------------
Land and Land and
buildings Other buildings Other
GBP GBP GBP GBP
<S> <C> <C> <C> <C>
GROUP
Expiry date
- - within one year 125,798 24,263 -- 10,488
- - between two and five years 44,858 36,193 31,745 23,614
- - after five years 320,400 -- 100,000 --
-------- -------- -------- --------
491,056 60,456 131,745 34,102
======== ======== ======== ========
COMPANY
Expiry date
- - within one year 91,833 24,263 -- 10,488
- - between two and five years 9,819 33,770 -- 20,767
- - after five years 320,400 -- 100,000 --
-------- -------- -------- --------
422,052 58,033 100,000 31,255
======== ======== ======== ========
</TABLE>
23 PENSION ARRANGEMENTS
The group operates a number of defined contribution schemes for which the
pension cost charge for the year amounted to GBP97,071 (1998: GBP70,507).
24 CONTINGENT LIABILITIES
The company had forward foreign exchange contracts of GBP3.1m at 31 March 1999
(1998: GBP1.5m).
25 RELATED PARTY TRANSACTIONS
The group has taken advantage of the exemptions set out in Financial Reporting
Standard No. 8, "Related Party Transactions" and not disclosed related party
transactions between members of the SDL Queensgate Limited group.
During the year the Company received management fees of GBP15,202 (1998
GBP22,952) from GBPOT-Oriel Ltd. At the end of the year the Company was owed
GBP5,000 (1998 GBP5,000) by LOT-Oriel Ltd.
During the year two directors purchased cars at market value from the Company.
26 SUBSEQUENT EVENTS
On 8 March 2000 the whole of the issued share capital of the Company was
acquired by SDL Inc., a Top-100 NASDAQ listed US multi-national, and the Company
changed its name to SDL Queensgate Ltd. As part of the take-over SDL Inc.
entered into a loan agreement to provide funding of up to $15.0m for the future
development of the Company in the period to 31 December 2001. Part of this
funding was used to pay off bank borrowing which stood at GBP1.7m at 8 March
2000.
<PAGE> 28
27 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("UK GAAP") AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("US GAAP")
The SDL Queensgate Limited'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 (loss)/profit on ordinary activities after tax and
shareholders' funds between UK GAAP and US GAAP.
<TABLE>
<CAPTION>
Year ending Year ending
31 March 31 March
1999 1998
GBP GBP
<S> <C> <C>
Consolidated (loss) profit on ordinary activities after taxation under UK GAAP (2,411,045) 396,666
Amortisation of negative goodwill. (note i) below) 14,382 14,382
---------- ----------
(LOSS) PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION UNDER US GAAP (2,396,663) 411,048
========== ==========
31 March 31 March
1999 1998
GBP GBP
<S> <C> <C>
Consolidated shareholders' funds under UK GAAP 1,627,878 2,268,687
Capitalisation of negative goodwill net of amortisation (note i) below) (43,145) (57,527)
Non cumulative dividends payable (note ii) below) -- 60,708
Restatement of the carrying value of other investments to cost. (note iii) below) -- (199,750)
--------- ----------
CONSOLIDATED SHAREHOLDERS' FUNDS UNDER US GAAP 1,584,733 2,072,118
========= ==========
</TABLE>
i) Negative goodwill
During the year ended 31 March 1998 the company purchased the entire share
capital of IC Optical Systems Limited. Negative goodwill of GBP71,909 arose on
this acquisition.
Under UK GAAP for the year ended 31 March 1998 the negative goodwill was
credited immediately to reserves. Under US GAAP the negative goodwill should be
capitalised and amortised to the profit and loss account over its expected
useful life. For the purposes of this UK GAAP to US GAAP reconciliation the
directors have adopted a useful life of 5 years.
ii) Dividends
Under UK GAAP non- cumulative dividends proposed but not paid are recorded as
liabilities at the balance sheet date. Under US GAAP they are not recorded.
iii) Other investments
Under UK GAAP at 31 March 1998 the directors recorded their investment in
LOT-Oriel Limited at a valuation in excess of its historic cost.
<PAGE> 29
Under US GAAP investments must be carried at their historic cost, less any
provisions for permanent diminution.
b) 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 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. Under US GAAP overdrafts are not included in the definition of cash and
cash equivalents, movements on the overdraft are treated as a financing cash
flow.
Summary statements of cash flows presented under US GAAP are given below:
<TABLE>
<CAPTION>
31 March 31 March
1999 1998
GBP GBP
<S> <C> <C>
Cash outflow from operating activities (1,034,883) (379,430)
Cash outflow on investing activities (628,545) (204,966)
Cash inflow (outflow) from financing activities 1,871,193 (25,040)
---------- ----------
Increase (decrease) in cash and cash equivalents 207,765 (609,436)
Effect of exchange rate changes on cash and cash equivalents 51,520 15,824
Opening cash and cash equivalents 99,229 692,841
---------- ----------
Closing cash and cash equivalents 358,514 99,229
========== ==========
</TABLE>
<PAGE> 30
QUEENSGATE INSTRUMENTS, LIMITED
BALANCE SHEET (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
------------- -------------
<S> <C> <C>
ASSETS GBP GBP
Current assets
Cash and cash equivalents GBP 36 GBP 359
Accounts receivable, net 1,064 1,273
Inventories 1,136 790
Prepaid Expenses and other current assets 129 --
------------- -------------
2,365 2,422
Property and equipment, net 1,525 1,681
------------- -------------
GBP 3,890 GBP 4,103
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable GBP 302 GBP 408
Current Portion of Leases 177 169
Other Accrued Liabilities 763 803
------------- -------------
Total Current Liabilities 1,242 1,380
Long-term Leases 127 262
Bank loan 1,636 487
Other 376 347
------------- -------------
Total Long-Term Liabilities 2,139 1,096
------------- -------------
------------- -------------
Total Stockholders' equity 509 1,627
------------- -------------
GBP 3,890 GBP 4,103
============= =============
</TABLE>
See accompanying notes.
<PAGE> 31
QUEENSGATE INSTRUMENTS, LIMITED
STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
1999 1998
--------- ---------
GBP GBP
<S> <C> <C>
Revenue GBP 4,099 GBP 2,493
Cost of revenue 1,985 1,172
--------- ---------
Gross profit 2,114 1,321
Operating expenses:
Research and development 664 552
Selling, general, and administrative 2,431 1,941
--------- ---------
Total operating expenses 3,095 2,493
--------- ---------
Operating loss (981) (1,172)
Interest expense and other, net (69) (16)
--------- ---------
Loss before income taxes (1,050) (1,188)
Provision (benefit) for income taxes -- (143)
--------- ---------
Net loss GBP(1,050) GBP(1,045)
--------- ---------
Less: Dividend on "A" ordinary shares (7) (7)
--------- ---------
Net loss applicable to ordinary shares GBP(1,057) GBP(1,052)
========= =========
</TABLE>
See accompanying notes.
<PAGE> 32
QUEENSGATE INSTRUMENTS, LIMITED
STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
9 MONTHS ENDED
1999 1998
-------- --------
GBP GBP
<S> <C> <C>
Operating activities
Net loss GBP(1,050) GBP(1,045)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 340 214
Changes in operating assets and liabilities:
Trade receivable 209 972
Inventories (346) (191)
Accounts payable (106) (121)
Other accrued liabilities (40) (220)
Long-term liabilities 30 (149)
Other (166) (115)
-------- --------
Total adjustments (79) 390
-------- --------
Net cash used by operating activities (1,129) (655)
Investing activities
Acquisition of property and equipment (184) (588)
-------- --------
Net cash used in investing activities (184) (588)
Financing activities
Payments on capital lease (152) (145)
Dividends payment (6) --
Proceeds from debt, net 1,148 1,446
-------- --------
Net cash provided in financing activities 990 1,301
Net increase (decrease) in cash and cash equivalents (323) 58
Cash and cash equivalents at beginning of period 359 99
-------- --------
Cash and cash equivalents at end of period GBP 36 GBP 157
======== ========
</TABLE>
See accompanying notes.
<PAGE> 33
QUEENSGATE INSTRUMENTS
NOTES TO INTERIM FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED DECEMBER 31, 1999 AND 1998
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed financial statements have been prepared in
accordance with United States generally accepted accounting principles for
interim financial information and with the instructions to Form 8-K and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine month period ended December
31, 1999 are not necessarily indicative of the results that may be expected for
future periods. For further information, refer to the financial statements for
the year ended March 31, 1999 and 1998 and notes thereto included herein.
The accompanying financial statements are prepared in British Pounds.
In July 1999, the Company passed a resolution and subdivided each 'A' ordinary
share of GBP1 into 1,000 'A' of ordinary shares of 0.1p and each ordinary shares
of GBP1 was subdivided into 1,000 shares of 0.1p.
2. LONG-TERM DEBT
The Company's long-debt facility was subject to satisfaction of certain
financial covenants, including tangible net worth. The Company was in default
of the financial covenants as of December 31, 1999. As a result of the sale of
the Company to SDL, Inc. in March 2000 (see Note 4), the long-term debt was
fully repaid.
3. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into foreign currency forward exchange contracts to manage
exposure related to anticipated foreign currency denominated intercompany sales
transactions denominated primarily in US dollars. The Company does not enter
into derivative financial instruments for trading purposes. All foreign currency
forward exchange contracts are marked-to-market and unrealized gains and losses
are included in current period net income as a component of other income
(expense) if material.
At December 31, 1999, the Company had outstanding foreign currency forward
exchange contracts with notional amounts totaling approximately GDP 2,612,000
maturing at various dates through August 2000. Unrealized gains and losses were
not material at December 31, 1999.
While the contract or notional amounts of the Company's forward exchange
contracts provide one measure of the volume of these transactions, they do not
represent the amount of the Company's exposure to credit risk. The amounts
potentially subject to credit risk (arising from the possible inability of
counterparties to meet the terms of their contracts) are generally limited to
the amounts, if any, by which the counterparties' obligations exceed the
obligations of the Company. The Company controls credit risk through credit
approvals, limits and monitoring procedures. At December 31, 1999, the Company
had all of its foreign exchange contracts with National Westminster Bank PLC.
4. SUBSEQUENT EVENT
In March 2000, SDL, Inc. acquired the Company for initial consideration of $3
million of cash, 347,962 shares of the SDL's common stock with a fair value of
approximately $77 million, and the assumption of 12,246 stock options of the
Company by SDL. The purchase price also included contingent payments of up to an
additional $150 million in common stock based on Queensgate's pretax profits for
the 10 months ending December 31, 2000 and the twelve months ending December 31,
2001. SDL, Inc. is a publicly traded Company on the NASDAQ in the United States.
SDL designs, manufactures and markets semiconductor lasers, fiber optic related
products and optoelectronic modules and systems.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS
(CONTINUED)
(b) Pro Forma Financial Information
The following unaudited pro forma financial statements consist of the unaudited
pro forma combined consolidated statements of operations for SDL, Inc. Pro forma
combined consolidated balance sheet information for SDL, Inc. is not presented
because the historical consolidated financial statements included in the
Company's Form 10-Q for the quarter ending March 31, 2000, already reflect the
acquisition of Queensgate. The unaudited pro forma combined consolidated
statement of operations for the year ended December 31, 1999, includes the
historical results of SDL and Queensgate for the 12 months ended December 31,
1999, and adjustments (including the amortization of purchased intangible
assets) necessary to reflect the acquisition of Queensgate as if it occurred on
the first day of fiscal 1999. The unaudited pro forma combined consolidated
statement of operations for the three months ended March 31, 2000, include the
historical results of SDL for the three months ended March 31, 2000, the
historical results of Queensgate for the period from January 1, 2000 through the
date of acquisition by SDL on March 8, 2000, and adjustments (including the
amortization of purchased intangible assets and the elimination of non-recurring
in-process research and development charges related to the acquisition)
necessary to reflect the acquisition of Queensgate as if it had occurred at the
beginning of fiscal 1999. The historical results of operations of the Company
for the three months ending March 31, 2000, already include the results of
operations of Queensgate and amortization of purchased intangible assets
relating to Queensgate for the period from the acquisition date March 8, 2000
through March 31, 2000.
The unaudited pro forma combined consolidated statements of operations are not
necessarily indicative of what the actual financial results would have been had
the acquisition of Queensgate actually occurred at the beginning of fiscal 1999,
and do not purport to represent the future results of operations of the Company.
The unaudited pro forma consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
1999 and the Company's Form 10-Q for the quarter ended March 31, 2000.
<PAGE> 34
SDL, INC
UNAUDITED PRO FORMA COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUST SDL
SDL QUEENSGATE MENTS COMBINED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 187,021 $ 8,259 $ -- $ 195,280
Cost of revenue 107,238 4,628 -- 111,866
---------- ---------- ---------- ----------
Gross profit 79,783 3,631 -- 83,414
Operating expenses:
Research and development 19,043 1,606 -- 20,649
Selling, general, and administrative 26,695 5,576 -- 32,271
Merger costs 2,677 -- -- 2,677
In process research and development 1,495 -- -- 1,495
Amortization of purchased intangibles 809 -- 18,411(2A) 19,220
---------- ---------- ---------- ----------
Total operating expenses 50,719 7,182 18,411 76,312
---------- ---------- ---------- ----------
Operating income (loss) 29,064 (3,551) (18,411) 7,102
Interest income (expense), net 5,429 (163) -- 5,266
---------- ---------- ---------- ----------
Income (loss) before income taxes 34,493 (3,714) (18,411) 12,368
Provision (benefit) for income taxes 9,280 (538) (1,736)(2C) 7,006
---------- ---------- ---------- ----------
Net income (loss) $ 25,213 $ (3,176) $ (16,675) $ 5,362
========== ========== ========== ==========
Earnings per share - basic $ 0.39 $ 0.08
========== ==========
Earnings per share - diluted $ 0.37 $ 0.08
========== ==========
Shares outstanding - basic 64,320 348(2D) 64,668
Share outstanding - diluted 68,470 360(2D) 68,830
</TABLE>
See accompanying notes to unaudited pro forma condensed combined consolidated
financial statements.
<PAGE> 35
SDL, INC.
UNAUDITED PRO FORMA COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUST SDL
SDL QUEENSGATE MENTS COMBINED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 72,206 $ 2,461 $ -- $ 74,667
Cost of revenue 37,616 1,798 -- 39,414
---------- ---------- ---------- ----------
Gross profit 34,590 663 -- 35,253
Operating expenses:
Research and development 5,903 352 -- 6,255
Selling, general, and administrative 7,298 605 -- 7,903
In process research and development 1,200 -- (1,200)(2B) --
Amortization of purchased intangibles 1,744 -- 3,068(2A) 4,812
---------- ---------- ---------- ----------
Total operating expenses 16,145 957 1,868 18,970
---------- ---------- ---------- ----------
Operating income (loss) 18,445 (294) (1,868) 16,283
Interest income (expense), net 4,485 (56) -- 4,429
---------- ---------- ---------- ----------
Income (loss) before income taxes 22,930 (350) (1,868) 20,712
Provision (benefit) for income taxes 8,686 -- (289)(2C) 8,397
---------- ---------- ---------- ----------
Net income (loss) $ 14,244 $ (350) $ (1,579) $ 12,315
========== ========== ========== ==========
Earnings per share - basic $ 0.20 $ 0.17
========== ==========
Earnings per share - diluted $ 0.19 $ 0.16
========== ==========
Shares outstanding - basic 72,019 233(2D) 72,252
Share outstanding - diluted 76,507 246(2D) 76,753
</TABLE>
See accompanying notes to unaudited pro forma condensed combined consolidated
financial statements.
<PAGE> 36
SDL, Inc.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation
The unaudited pro forma financial statements consist of the unaudited pro forma
combined consolidated statements of operations for SDL, Inc. Pro forma combined
consolidated balance sheet information for SDL, Inc. is not presented because
the historical consolidated financial statements included in the Company's Form
10-Q for the quarter ending March 31, 2000, already reflect the acquisition of
Queensgate. The unaudited pro forma combined consolidated statement of
operations for the year ended December 31, 1999, includes the historical results
of SDL and Queensgate for the 12 months ended December 31, 1999, and adjustments
(including the amortization of purchased intangible assets) necessary to reflect
the acquisition of Queensgate as if it occurred on the first day of fiscal 1999.
The unaudited pro forma combined consolidated statement of operations for the
three months ended March 31, 2000, include the historical results of SDL for the
three months ended March 31, 2000, the historical results of Queensgate for the
period from January 1, 2000 through the date of acquisition by SDL on March 8,
2000, and adjustments (including the amortization of purchased intangible assets
and the elimination of non-recurring in-process research and development charges
related to the acquisition) necessary to reflect the acquisition of Queensgate
as if it had occurred at the beginning of fiscal 1999. The historical results of
operations of the Company for the three months ending March 31, 2000, already
include the results of operations for Queensgate and amortization of purchased
intangible assets relating to Queensgate for the period from the acquisition
date March 8, 2000 through March 31, 2000.
The acquisition agreement between the Company and Queensgate provided for
initial consideration of $3 million of cash and 347,962 shares of the SDL's
common stock with a fair value of approximately $77 million, and contingent
payments of up to an additional $150 million in common stock based on
Queensgate's pretax profits for the 10 months ended December 31, 2000 and the
twelve months ended December 31, 2001. In addition, SDL issued options in
exchange for outstanding Queensgate options with the number of shares and the
exercise price appropriately adjusted by the exchange ratio.
The unaudited pro forma financial statements reflect the issuance of 347,962 SDL
common shares for all of Queensgate's shares outstanding as of March 8, 2000.
The average market price per SDL common share of $222.37 per share was used to
determine the consideration given to Queensgate shareholders. The average market
price per share of SDL common share is based on the average closing price for a
range of trading days (March 3 through March 13, 2000) around the announcement
date (March 8, 2000) of the acquisition. The estimated fair value of the
options, as well as estimated direct transaction expenses of $1.1 million, have
been included as a part of the total estimated purchase cost.
The total purchase cost of the Queensgate acquisition is as follows (in
thousands):
<TABLE>
<S> <C>
Value of securities issued ............. $77,376
Cash ................................... 3,000
Assumption of Queensgate options ....... 1,502
-------
81,878
Estimated transaction costs ............ 1,125
-------
Total purchase cost .................... $83,003
</TABLE>
<TABLE>
<CAPTION>
Annual Useful
Amount Amortization Lives
------ ------------ -----
<S> <C> <C> <C>
Purchase Price Allocation:
Tangible net deficit $ (1,570) n/a n/a
Tradename 2,000 $ 400 5 years
Core technology 12,000 2,400 5 years
Existing technology 6,200 1,240 5 years
In process technology 1,200 n/a n/a
Workforce 1,500 300 5 years
Goodwill 70,353 14,071 5 years
Deferred tax liabilities (8,680) n/a n/a
-------- --------
Total estimated purchase price
allocation: $ 83,003 $ 18,411
</TABLE>
The Company has performed an allocation of the total purchase price of
Queensgate to its individual assets. The purchase price allocation is
preliminary and, therefore, subject to change based on Company's final analysis.
Of the total purchase price, $1.2 million has been allocated to in-process
research and development and was charged to expense in the quarter ending March
31, 2000. Due to their non-recurring nature, the in-process research and
development attributed to the Queensgate transaction and the transaction costs
incurred by Queensgate estimated at $1.2 million have been excluded in the pro
forma statements of operations.
After allocating value to the in-process research and development projects and
Queensgate's tangible assets, specific intangible assets were then identified
and valued. The related amortization of the identifiable intangible assets is
reflected as a pro forma adjustment to the Pro Forma Combined Statement of
Operations. The identifiable intangible assets include existing technology, core
technology, trade name, and assembled workforce.
The acquired existing technology is comprised of products in Queensgate
portfolio that are already technologically feasible. The Company expects to
amortize the acquired existing technology of approximately $6.2 million on a
straight-line basis over an estimated remaining useful life of 5 years.
The core technology represents Queensgate trade secrets and patents developed
through years of experience designing and manufacturing optical network
monitoring modules. This know-how enables the Company to develop new and improve
existing optical network monitoring modules, processes, and manufacturing
equipment, thereby providing Queensgate with a distinct advantage over its
competitors and providing the Company with a reputation for technological
superiority in the industry. The Company expects to amortize the core technology
of approximately $12.0 million on a straight-line basis over an average
estimated remaining useful life of 5 years.
The trade names include the Queensgate trademark and trade name as well as all
branded Queensgate products. The Company expects to amortize the trade names of
approximately $2.0 million on a straight-line basis over an estimated remaining
useful life of 5 years.
The acquired assembled workforce is comprised of over 100 skilled employees
across Queensgate's General and Administration, Research and Development, Sales
and Marketing, and Manufacturing groups. The Company expects to amortize the
assembled workforce of approximately $1.5 million on a straight-line basis over
an estimated remaining useful life of 5 years.
Goodwill, which represents the excess of the purchase price of an investment in
an acquired business over the fair value of the underlying net identifiable
assets, is amortized on a straight-line basis over an estimated useful life of 5
years.
2. Pro forma adjustments
(A) To record twelve months of amortization for purchased intangible assets
for fiscal 1999 and to record additional amortization expense for
purchased intangibles assets for the period from January 1, 2000 to
March 8, 2000 (date of acquisition). Amortization expense for the period
subsequent to the acquisition from March 9, 2000 to March 31, 2000 is
already included in the historical financial results of the Company.
(B) To eliminate non-recurring charges related to in-process research and
development written off at the date of acquisition on March 8, 2000.
(C) To record tax benefits relating to amortization of purchased
intangibles. The pro forma combined provisions for income taxes do not
represent the amounts that would have resulted had SDL and Queensgate
filed consolidated income tax returns during the periods presented.
(D) The pro forma basic and dilutive earnings per share are based on the
historical weighted average number of SDL common shares outstanding
during each period and adjusted to reflect the issuance, as of January
1, 1999, of 347,962 shares of SDL common stock. Dilutive securities
including the replacement Queensgate options are included in the
computation of pro forma diluted earnings per share.
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SDL, INC.
May 19, 2000 By: /s/ Michael L. Foster
-------------------------------
Michael L. Foster
Chief Financial Officer and
Secretary
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
<PAGE> 38
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
23.1 Consent of Arthur Andersen, Independent Auditors
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ARTHUR ANDERSEN, INDEPENDENT AUDITORS
As independent public accountants we hereby consent to the incorporation by
reference in the Registration Statements (Form S-8 Nos. 333-84921, 33-90848,
33-92200, 333-57683 and Form S-3 No. 333-32068) pertaining to the 1995 Stock
Option Plan, 1995 Employee Stock Purchase Plan, 1992 Stock Option Plan, and the
Amended and Restated 1984 Incentive Stock Option Plan of SDL, Inc. and to the
registration of shares of common stock of SDL, Inc. issued or to be issued in
connection with its acquisition of Queensgate Instruments Limited, of our report
dated April 6, 2000 with respect to the financial statements of Queensgate
Instruments Limited included in this Current Report (Form 8-K) of SDL, Inc.
filed May 22, 2000.
/s/ Arthur Andersen
Chartered Accountants
Reading, England
May 22, 2000
