-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FMzwFKiOzI7XUIzHu1N7Fer1yZSbK/iTLU7i3K65IaNBjCTIFRdZ3xWcsZWrdiN2 zF3ZDvzEiR4Edk3tPoDi1A== 0000950135-04-003671.txt : 20040728 0000950135-04-003671.hdr.sgml : 20040728 20040728134113 ACCESSION NUMBER: 0000950135-04-003671 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040514 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20040728 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GSI LUMONICS INC CENTRAL INDEX KEY: 0001076930 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 980110412 STATE OF INCORPORATION: A3 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-25705 FILM NUMBER: 04935445 BUSINESS ADDRESS: STREET 1: 39 MANNING ROAD STREET 2: . CITY: BILLERICA STATE: MA ZIP: 01821 BUSINESS PHONE: 978-439-5511 MAIL ADDRESS: STREET 1: 39 MANNING ROAD STREET 2: . CITY: BILLERICA STATE: MA ZIP: 01821 FORMER COMPANY: FORMER CONFORMED NAME: GSI LUMONICS DATE OF NAME CHANGE: 19990331 FORMER COMPANY: FORMER CONFORMED NAME: LUMONICS INC DATE OF NAME CHANGE: 19990115 8-K/A 1 b51314gse8vkza.txt GSI LUMONICS INC. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 8-K/A (AMENDMENT NO. 2) ---------------- CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MAY 14, 2004 ---------------- GSI LUMONICS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- NEW BRUNSWICK, CANADA 000-25705 NO. 98-0110412 (STATE OR OTHER JURISDICTION (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER OF INCORPORATION) IDENTIFICATION NO.) 39 Manning Road, Billerica, Massachusetts 01821 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (978) 439-5511 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ================================================================================ 1 Item 7 of the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission (the "SEC") on May 17, 2004, which was amended and restated in its entirety by Amendment No. 1 filed with the SEC on July 13, 2004 is hereby amended and restated as set forth herein: ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. The following documents appear as Exhibit 99.3 to this Amendment No. 2 to Current Report on Form 8-K/A and are incorporated herein by reference: (1) Consolidated Financial Statements of MicroE Systems as of and for the years ended September 28, 2003 and September 29, 2002, including the Report of Independent Registered Public Accounting Firm. (2) Notes to Consolidated Financial Statements. The following documents appear as Exhibit 99.4 to this Amendment No. 2 to Current Report on Form 8-K/A and are incorporated herein by reference: (1) Unaudited Condensed Consolidated Financial Statements of MicroE Systems as of and for the six months ended April 4, 2004 and March 30, 2003. (2) Notes to Unaudited Condensed Consolidated Financial Statements. (b) PRO FORMA FINANCIAL INFORMATION. Unaudited Pro Forma Condensed Consolidated Financial Information On May 14, 2004, GSI Lumonics Inc. ("the Company" or "GSI") completed its acquisition of MicroE Systems Corp., a Delaware corporation ("MicroE"). The acquisition was completed by means of a merger (the "Merger") of Motion Acquisition Corporation, a Delaware corporation and an indirect wholly owned subsidiary of the Company, with and into MicroE, pursuant to an Agreement and Plan of Merger dated as of April 12, 2004 (the "Merger Agreement"). As a result of the Merger, MicroE became an indirect wholly owned subsidiary of the Company. Pursuant to the terms of the Merger Agreement, upon the effective time of the Merger, the Company paid former MicroE security holders $53.8 million in cash, net of cash received as part of the merger (the "Merger Consideration") in exchange for all of MicroE's outstanding capital stock. The Merger Consideration and the terms of the Merger were determined in arms-length negotiations between the parties. The Company paid the Merger Consideration from existing cash. The total purchase price, net of cash acquired and including costs of transaction, is expected to be approximately $54.7 million. The following unaudited pro forma condensed consolidated balance sheet as of April 2, 2004, and the unaudited pro forma condensed consolidated statements of operations for the three months ended April 2, 2004 and the year ended December 31, 2003, give effect to the Company's acquisition of MicroE. The unaudited pro forma condensed consolidated balance sheet presents the financial position of the Company as if the acquisition of MicroE had occurred on April 2, 2004. The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2003 and for the three months ended April 2, 2004 have been prepared as if the acquisition occurred on January 1, 2003. MicroE's fiscal year ended on September 28, 2003. The financials for MicroE have been adjusted to reflect twelve months of activity through January 2 4, 2004 using audited twelve month information and unaudited three month information to derive the twelve months ended January 4, 2004. The use of MicroE's financial statements for the three months ended April 4, 2004 as opposed to April 2, 2004 and for the twelve months ended January 4, 2004 as opposed to December 31, 2003 had no significant impact on reported results. The acquisition has been accounted for using purchase accounting in accordance with the provisions of Statement of Financial Accounting Standards No. 141, Business Combinations. These pro forma unaudited condensed consolidated financial statements have been prepared in accordance with Article 11 of Regulation S-X. The pro forma unaudited condensed consolidated financial statements are provided for informational purposes only and do not necessarily represent what our results of operations would have been had the acquisition occurred January 1, 2003, or our financial position had the acquisition occurred April 2, 2004. Certain pro forma balances are preliminary, as the Company has allocated the estimated purchase price to the assets acquired and liabilities assumed based on a preliminary assessment made by management. The Company has not yet completed the process of conducting a valuation of the fair value of the assets acquired or liabilities assumed, including the allocation of the purchase price. This preliminary estimate of the fair value of the assets acquired, liabilities assumed and allocation of the purchase price along with the resulting pro forma amounts is subject to adjustment for any differences that might occur upon the Company's completion of the valuation process. The unaudited pro forma condensed consolidated financial statements also do not purport to project our financial position or results of operations at any future date or for any future period. This information should be read in conjunction with our previously filed Current Reports on Form 8-K, dated May 17, 2004 and Form 8-K/A Amendment No. 1, dated July 13, 2004; our Quarterly Report on Form 10-Q for the three months ended April 2, 2004; our Annual Report on Form 10-K for the year ended December 31, 2003 and the financial statements and accompanying notes of MicroE included as exhibits to this Amendment No. 2 to the Current Report on Form 8-K/A. 3 GSI LUMONICS INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET APRIL 2, 2004 (U.S. GAAP AND IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
PRO FORMA GSI MICROE ADJUSTMENTS PRO FORMA ---------- --------- ------------ --------- ASSETS Current Cash and cash equivalents............................. $ 91,997 $ 3,481 $ (57,263) a $ 38,215 Short-term investments................................ 20,577 -- 20,577 Accounts receivable, net.............................. 63,068 4,119 67,187 Income taxes receivable............................... 1,199 -- 1,199 Inventories........................................... 51,686 1,656 53,342 Deferred tax assets................................... 11,527 639 12,166 Other current assets.................................. 7,574 132 7,706 ---------- --------- ---------- ----------- Total current assets............................... 247,628 10,027 (57,263) 200,392 Property, plant and equipment, net of accumulated depreciation............................................ 52,041 390 52,431 Deferred tax assets..................................... 3,611 46 3,657 Other assets............................................ 2,324 61 2,385 Long-term investments................................... 1,644 -- 1,644 Intangible assets, net of amortization.................. 22,986 69 32,131 b, c 55,186 Goodwill................................................ -- -- 31,094 c, e 31,094 ---------- --------- ---------- ----------- $ 330,234 $ 10,593 $ 5,962 $ 346,789 ========== ========= ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Accounts payable $ 22,488 $ 811 $ 23,299 Income taxes payable -- 888 888 Accrued compensation and benefits..................... 8,312 594 8,906 Other accrued expenses................................ 22,407 354 1,991 a, b 24,752 ---------- --------- ---------- ----------- Total current liabilities.......................... 53,207 2,647 1,991 57,845 Deferred compensation................................... 2,343 -- 2,343 Other liability......................................... -- 30 30 Deferred tax liability.................................. 12,317 e 12,317 Accrued minimum pension liability....................... 1,616 -- 1,616 ---------- --------- ---------- ----------- Total liabilities.................................. 57,166 2,677 14,308 74,151 Commitments and contingencies Stockholders' equity Common stock, $0.01 par value; Authorized shares: 1,200,000; Issued and outstanding: 768,858............ 9 (9) d -- Treasury stock, at cost, 103,501 shares................. (1,157) 1,157 d -- Additional paid-in capital.............................. 794 (794) d -- Common shares, no par value; Authorized shares: unlimited; Issued and outstanding: 40,976,318......... 305,840 -- 305,840 Additional paid-in capital............................ 2,851 -- 2,851 Retained earnings (accumulated deficit)............... (34,501) 8,250 (8,680) d, f (34,931) Accumulated other comprehensive income (loss)......... (1,122) 20 (20) d (1,122) ---------- --------- ---------- ----------- Total stockholders' equity......................... 273,068 7,916 (8,346) 272,638 ---------- --------- ---------- ----------- $ 330,234 $ 10,593 $ 5,962 $ 346,789 ========== ========= ========== ===========
See the accompanying notes to unaudited pro forma condensed consolidated balance sheet. 4 GSI LUMONICS INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET APRIL 2, 2004 The following footnotes correspond to the April 2, 2004 unaudited pro forma condensed consolidated balance sheet: a) To reflect the cash payments directly attributable to the acquisition. The Company acquired all of the capital stock of MicroE in exchange for approximately $57.3 million in cash. In addition, acquisition-related costs of approximately $1.0 million are expected to be incurred by the Company. These are included in other accrued expenses. b) To adjust the values of assets and liabilities acquired to their estimated fair value as of the date of the acquisition. c) To recognize identifiable intangible assets consisting of completed technology, trademarks/tradenames and customer relationships. The Company has allocated the estimated purchase price, net of cash acquired, to the assets acquired and liabilities assumed based on a preliminary assessment made by management. The Company has not yet completed the process of conducting a valuation of the fair value of the assets acquired or liabilities assumed, including the allocation of the purchase price. This preliminary estimate of the fair value of the assets acquired, liabilities assumed and allocation of the purchase price along with the resulting pro forma amounts is subject to adjustment for any differences that might occur upon the Company's completion of the valuation process. The preliminary assessment indicates that the fair value of the assets acquired and liabilities assumed is less than the purchase price, resulting in goodwill. The following is a summary of the estimated purchase price, net of cash acquired, allocation:
in thousands $ Cash paid ................................... $ 57,263 Cash received upon acquisition .............. (3,506) Acquisition-related costs ................... 987 -------- Total purchase price ........................ $ 54,744 ======== Allocated to tangible assets acquired ....... $ 7,990 Allocated to liabilities assumed ............ (4,653) Deferred tax liability ...................... (12,317) Intangible assets ........................... 32,200 Goodwill .................................... 31,094 Purchased in process research and development 430 -------- Total ....................................... $ 54,744 ========
Preliminary allocation of intangible assets is as follows:
Estimated Fair Value Estimated in thousands $ Useful Life Customer relationships .... $ 8,500 8 Tradename ................. 3,100 15 Acquired technology ....... 20,600 10 ------- Total purchase price ...... $32,200 =======
5 d) To eliminate the stockholders' equity of MicroE at April 2, 2004. e) To recognize estimated deferred tax liability attributable to the acquisition of MicroE. The acquisition of MicroE was structured in such a manner, that the Company is not expected to receive any tax benefit from the amortization of intangibles. As such, in accordance with US GAAP a deferred tax liability based on estimated tax rates has been established with a corresponding increase to goodwill. f) To reflect an estimated in-process technology charge of approximately $0.4 million. The Company expects to record a one-time charge of approximately $0.4 million in the second quarter of 2004 for purchased in-process technology related to development projects that have not reached technological feasibility, have no alternative future use, and for which successful development is uncertain. This in-process technology charge has not been included in the pro forma condensed consolidated statements of operations for the three months ended April 2, 2004 and the year ended December 31, 2003. The final determination of the charge for in-process technology is subject to the completion of the valuation process. 6 GSI LUMONICS INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 2, 2004 (U.S. GAAP AND IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
PRO FORMA GSI MICROE ADJUSTMENTS PRO FORMA ---------- ---------- ------------ ---------- Sales.................................................. $ 74,853 $ 7,653 $ $ 82,506 Cost of goods sold..................................... 45,113 2,948 48,061 ---------- ---------- ---------- Gross profit........................................... 29,740 4,705 34,445 Operating expenses: Research and development............................. 4,759 1,168 5,927 Selling, general and administrative.................. 13,484 1,808 15,292 Amortization of purchased intangibles................ 1,549 -- 834 a 2,383 ---------- ---------- ---------- ---------- Total operating expenses.......................... 19,792 2,976 834 23,602 ---------- ---------- ---------- ---------- Income (loss) from operations 9,948 1,729 (834) 10,843 Other expense........................................ (124) (100) (224) ---------- ---------- ---------- ---------- Income (loss) before income taxes...................... 9,824 1,629 (834) 10,619 Income tax provision (benefit)......................... 885 410 (317) b 978 ---------- ---------- ---------- ---------- Net income (loss)...................................... $ 8,939 $ 1,219 $ (517) $ 9,641 ========== ========== ========== ========== Net income (loss) per common share: Basic................................................ $ 0.22 $ 0.24 Diluted.............................................. $ 0.21 $ 0.23 Weighted average common shares outstanding (000's)..... 40,951 40,951 Weighted average common shares outstanding for diluted net income (loss) per common share (000's)..... 42,114 42,114
See the accompanying notes to unaudited pro forma condensed consolidated statements of operations. 7 GSI LUMONICS INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003 (U.S. GAAP AND IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
PRO FORMA GSI MICROE ADJUSTMENTS PRO FORMA ---------- ---------- ----------- ---------- Sales............................................... $ 185,561 $ 21,053 $ $ 206,614 Cost of goods sold.................................. 117,084 8,806 125,890 ---------- ---------- ---------- Gross profit........................................ 68,477 12,247 80,724 Operating expenses: Research and development.......................... 13,895 5,082 18,977 Selling, general and administrative............... 48,952 6,143 55,095 Amortization of purchased intangibles............. 5,657 -- 3,330 a 8,987 Restructuring..................................... 3,228 -- 3,228 Other............................................. 831 -- 831 ---------- ---------- ---------- ---------- Total operating expenses....................... 72,563 11,225 3,330 87,118 ---------- ---------- ---------- ---------- Income (loss) from operations (4,086) 1,022 (3,330) (6,394) Other income (expense)............................ 2,238 (162) 2,076 ---------- ---------- ---------- ---------- Income (loss) before income taxes................... (1,848) 860 (3,330) (4,318) Income tax provision (benefit)...................... 322 140 (1,219) b (757) ---------- ---------- ---------- ---------- Net income (loss)................................... $ (2,170) $ 720 $ (2,111) $ (3,561) ========== ========== ========== ========== Net income (loss) per common share: Basic............................................. $ (0.05) $ (0.09) Diluted........................................... $ (0.05) $ (0.09) Weighted average common shares outstanding (000's).. 40,837 40,837 Weighted average common shares outstanding for diluted net income (loss) per common share (000's) 40,837 40,837
See the accompanying notes to unaudited pro forma condensed consolidated statements of operations. 8 GSI LUMONICS INC. NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 2, 2004 AND THE YEAR ENDED DECEMBER 31, 2003 The following footnotes correspond to the unaudited pro forma condensed consolidated statements of operations for the three months ended April 2, 2004 and the year ended December 31, 2003: a) To reflect the amortization of intangible assets acquired. The allocation of purchase price, net of cash acquired, to the fair value of the assets and liabilities acquired is preliminary and may change upon completion of the valuation process. The Company expects to record a one-time charge of approximately $0.4 million in the second quarter of 2004 for purchased in-process technology related to development projects that have not reached technological feasibility, have no alternative future use, and for which successful development is uncertain. This in-process technology charge has not been included in the pro forma condensed consolidated statements of operations for the three months ended April 2, 2004 and the year ended December 31, 2003. The final determination of the charge for in-process technology is subject to the completion of the valuation process. See other preliminary allocations of the purchase price in footnote (c) to the Unaudited Pro Forma Condensed Consolidated Balance Sheet at April 2, 2004. b) To reflect the income tax provision related to the pretax income of MicroE less the effect of the tax provision related to the estimated benefit of the pro forma adjustments. 9 (c) EXHIBITS. 2.1(1) Agreement and Plan of Merger dated as of April 12, 2004 by and among GSI Lumonics Inc., Motion Acquisition Corporation and MicroE Systems Corp. 23.1* Consent of Deloitte & Touche (regarding MicroE Systems) 99.1(1) Press Release dated April 12, 2004. 99.2(2) Press Release dated May 17, 2004. 99.3* Financial Statements of MicroE Systems as of and for the years ended September 28, 2003 and September 29, 2002, including the Report of Independent Registered Public Accounting Firm. 99.4* Unaudited Condensed Financial Statements of MicroE Systems as of and for the six months ended April 4, 2004 and March 30, 2003. - -------------------- (1) Incorporated herein by reference to the registrant's Current Report on Form 8-K filed on April 13, 2004. (2) Incorporated herein by reference to the registrant's Current Report on Form 8-K filed on May 17, 2004. * Attached herewith 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. GSI LUMONICS INC. By: /s/ THOMAS R. SWAIN Date: July 28, 2004 -------------------------------- Thomas R. Swain Vice President, Finance and Chief Financial Officer 11 EX-23.1 2 b51314gsexv23w1.txt CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statement Numbers 333-43080, 333-76849 and 333-73666 on Form S-8 of GSI Lumonics Inc., of our report dated December 15, 2003 on the financial statements of MicroE Systems for the years ended September 28, 2003 and September 29, 2002 appearing in this Current Report on Form 8-K/A Amendment No. 2 of GSI Lumonics Inc. dated July 28, 2004. /s/ Deloitte & Touche LLP Boston, Massachusetts July 27, 2004 EX-99.3 3 b51314gsexv99w3.txt FINANCIAL STATEMENTS OF MICROE SYSTEMS EXHIBIT 99.3 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of MicroE Systems: We have audited the accompanying consolidated balance sheets of MicroE Systems (the "Company") as of September 28, 2003 and September 29, 2002 and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 28, 2003 and September 29, 2002 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Boston, Massachusetts December 15, 2003 MICROE SYSTEMS CONSOLIDATED BALANCE SHEETS SEPTEMBER 28, 2003 AND SEPTEMBER 29, 2002
2003 2002 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 9,633,948 $ 9,009,732 Accounts receivable, net of allowances for doubtful accounts of $188,318 and $192,058 in 2003 and 2002, respectively 4,691,091 4,109,792 Inventories 1,183,132 1,015,112 Deferred taxes 639,000 562,000 Prepaid expenses and other current assets 174,220 164,540 ------------ ------------ Total current assets 16,321,391 14,861,176 PROPERTY AND EQUIPMENT--Net 456,355 543,871 DEFERRED TAXES 46,000 22,000 OTHER ASSETS--Net 53,407 60,365 ------------ ------------ TOTAL ASSETS $ 16,877,153 $ 15,487,412 ============ ============ LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 572,417 $ 837,113 Accrued income taxes 486,788 368,364 Accrued expenses 1,355,088 1,400,442 ------------ ------------ Total current liabilities 2,414,293 2,605,919 DEFERRED RENT 34,036 ------------ ------------ Total liabilities 2,448,329 2,605,919 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 4) REDEEMABLE PREFERRED STOCK Class A Redeemable Preferred Stock, at redemption value; $0.01 par value-- authorized, issued and outstanding, 44,154 shares 2,637,769 2,519,224 Class B Redeemable Preferred Stock, at redemption value; $0.01 par value-- authorized, issued and outstanding, 36,000 shares 5,142,134 4,854,134 STOCKHOLDERS' EQUITY: Common stock, $0.01 par value--authorized, 1,200,000 shares; issued and outstanding, 864,795 and 859,970 shares in 2003 and 2002, respectively 8,648 8,600 Treasury stock, at cost, 94,604 and 92,779 shares in 2003 and 2002, respectively (1,100,870) (1,037,745) Additional paid-in capital 701,292 581,605 Accumulated other comprehensive loss (22,896) (31,806) Retained earnings 7,062,747 5,987,481 ------------ ------------ Total stockholders' equity 6,648,921 5,508,135 ------------ ------------ TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY $ 16,877,153 $ 15,487,412 ============ ============
See notes to consolidated financial statements. -2- MICROE SYSTEMS CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 28, 2003 AND SEPTEMBER 29, 2002
2003 2002 REVENUE $ 21,789,824 $ 18,333,756 COST OF REVENUE 8,964,585 7,552,002 ------------ ------------ GROSS MARGIN 12,825,239 10,781,754 ------------ ------------ OPERATING EXPENSES: Research and development 4,949,643 3,814,932 Selling and marketing 4,118,448 3,647,892 General and administrative 1,937,859 1,638,487 ------------ ------------ Total operating expenses 11,005,950 9,101,311 ------------ ------------ INCOME FROM OPERATIONS 1,819,289 1,680,443 OTHER INCOME--Net 111,164 136,698 ------------ ------------ INCOME BEFORE INCOME TAX PROVISION 1,930,453 1,817,141 INCOME TAX PROVISION (BENEFIT) 448,642 (333,722) ------------ ------------ NET INCOME 1,481,811 2,150,863 ------------ ------------ PREFERRED STOCK DIVIDENDS AND ACCRETION 406,545 460,069 NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 1,075,266 $ 1,690,794 ============ ============
See notes to consolidated financial statements. -3- MICROE SYSTEMS CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 28, 2003 AND SEPTEMBER 29, 2002
COMMON STOCK TREASURY STOCK --------------------- ----------------------- NUMBER $0.01 PAR NUMBER OF OF SHARES VALUE SHARES AT COST BALANCE--September 30, 2001 858,838 $ 8,589 92,779 $(1,037,745) Net income Cumulative translation adjustments Comprehensive income Exercise of common stock options 1,132 11 Accretion of dividends on Class A and B Redeemable Preferred Stock --------- --------- --------- ----------- BALANCE--September 29, 2002 859,970 8,600 92,779 (1,037,745) Net income Cumulative translation adjustments Comprehensive income Exercise of common stock options 4,825 48 Stock-based compensation Accretion of dividends on Class A and B Redeemable Preferred Stock Repurchase of common stock--at cost 1,825 (63,125) --------- --------- --------- ----------- BALANCE--September 28, 2003 864,795 $ 8,648 94,604 $(1,100,870) ========= ========= ========= =========== ACCUMULATED ADDITIONAL OTHER TOTAL PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS' CAPITAL LOSS EARNINGS EQUITY BALANCE--September 30, 2001 $ 578,880 $ (10,542) $4,296,687 $3,835,869 Net income 2,150,863 2,150,863 Cumulative translation adjustments (21,264) (21,264) ---------- Comprehensive income 2,129,599 ---------- Exercise of common stock options 2,725 2,736 Accretion of dividends on Class A and B Redeemable Preferred Stock (460,069) (460,069) ---------- --------- ---------- ---------- BALANCE--September 29, 2002 581,605 (31,806) 5,987,481 5,508,135 ---------- Net income 1,481,811 1,481,811 Cumulative translation adjustments 8,910 8,910 ---------- Comprehensive income 1,490,721 ---------- Exercise of common stock options 32,187 32,235 Stock-based compensation 87,500 87,500 Accretion of dividends on Class A and B Redeemable Preferred Stock (406,545) (406,545) Repurchase of common stock--at cost (63,125) ---------- --------- ---------- ---------- BALANCE--September 28, 2003 $ 701,292 $ (22,896) $7,062,747 $6,648,921 ========== ========= ========== ==========
See notes to consolidated financial statements. -4- MICROE SYSTEMS CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 28, 2003 AND SEPTEMBER 29, 2002
2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,481,811 $ 2,150,863 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 298,749 400,112 Stock-based compensation 87,500 Changes in operating assets and liabilities: Accounts receivable (581,299) 179,023 Inventories (168,020) 211,998 Prepaid expenses and other assets (2,722) 86,184 Deferred taxes (101,000) 123,000 Accounts payable (264,696) 234,304 Accrued expenses and other 116,016 (1,081,201) ----------- ----------- Net cash provided by operating activities 866,339 2,304,283 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES--Purchase of property and equipment (211,233) (80,605) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of common stock options 32,235 2,736 Repurchase of common stock (63,125) ----------- ----------- Net cash (used in) provided by financing activities (30,890) 2,736 ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 624,216 2,226,414 CASH AND CASH EQUIVALENTS--Beginning of year 9,009,732 6,783,318 ----------- ----------- CASH AND CASH EQUIVALENTS--End of year $ 9,633,948 $ 9,009,732 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION-- Cash paid during the year for income taxes $ 430,719 $ 324,958 =========== =========== SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES-- Accretion of dividends on redeemable preferred stock $ 406,545 $ 460,069 =========== ===========
See notes to consolidated financial statements. -5- MICROE SYSTEMS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 28, 2003 AND SEPTEMBER 29, 2002 1. NATURE OF OPERATIONS MicroE Systems (the "Company" or "MicroE") develops, manufactures and markets high-performance, position-sensing systems called encoders for motion-controlled applications. The Company's patented technology enables the development of encoders that are smaller and more robust while delivering high resolution and accuracy. The Company targets specific motion control applications in a variety of high-tech and industrial markets. These markets include data storage, semiconductor processing and packaging, electronics assembly and other high-precision industries. The Company sells to customers located throughout the world. The accompanying consolidated financial statements reflect the application of certain accounting policies as described below and elsewhere in these notes to the consolidated financial statements. To date, the Company has raised capital principally through cash flows from operations and private placements of its preferred stock. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, MicroE International, which operates branches in Japan, Singapore and Switzerland. All intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES -- The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. Such principles require 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. FISCAL YEAR -- The Company's fiscal year is the 52 or 53 weeks ending on the Sunday closest to the last day of September. Fiscal years 2003 and 2002 were each 52-week years. FOREIGN CURRENCY TRANSLATION -- The assets and liabilities of international subsidiaries are translated into U.S. dollars at year-end currency exchange rates, as the local currency is the functional currency. Income and expense items are translated at average exchange rates during the period. Gains or losses resulting from the translation of the financial statements are reported as a component of other comprehensive income and cumulative translation gains and losses are included in accumulated other comprehensive loss in the consolidated balance sheet. Foreign exchange transaction gains or losses are recognized currently in earnings and were not material for the years ended September 28, 2003 and September 29, 2002. REVENUE RECOGNITION -- Revenue from sales are recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, delivery has occurred and collectibility is reasonably assured. The Company generally recognizes revenue for product sales upon shipment. -6- The Company generally provides for a one-year warranty for all product sales and recognizes a liability for anticipated product returns and warranty costs at the time of revenue recognition. See Note 9 for an analysis of activity in the warranty reserve. Revenue from repair services are recognized when the services have been rendered as these services represent a discrete and separate earnings event. Revenue from custom design are recognized on a time-and-materials basis. Revenue from nonrecurring engineering services are recognized as the services are performed. INVENTORIES -- Inventories are valued at the lower of cost (first-in, first-out) or market. Inventories at September 28, 2003 and September 29, 2002 consist of the following:
SEPTEMBER 28, SEPTEMBER 29, 2003 2002 Raw materials $ 745,566 $ 625,982 Work-in-process 352,562 238,353 Finished goods 85,004 150,777 ---------- ---------- $1,183,132 $1,015,112 ========== ==========
PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost, less accumulated depreciation and amortization. The Company provides for depreciation and amortization of property and equipment using the straight-line method over their estimated useful lives. Property and equipment at September 28, 2003 and September 29, 2002 consist of the following:
SEPTEMBER 28, SEPTEMBER 29, DESCRIPTION ESTIMATED USEFUL LIFE 2003 2002 Machinery and equipment 5 years $ 988,724 $ 910,330 Computer and office equipment 3-5 years 889,314 780,740 Leasehold improvements Lesser of asset 239,025 235,690 life or lease period Purchased internal-use software 3 years 227,379 206,449 Less accumulated depreciation and amortization (1,888,087) (1,589,338) ----------- -------------- $ 456,355 $ 543,871 =========== ==============
Depreciation expense was approximately $299,000 and $380,000 for the years ended September 28, 2003 and September 29, 2002, respectively. IMPAIRMENT OF LONG-LIVED ASSETS -- Long-lived assets, which consist primarily of property and equipment, are reviewed by management for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the assets. No impairment provisions have been recognized to date. RESEARCH AND DEVELOPMENT COSTS -- Research and development costs are expensed as incurred and consist primarily of payroll costs, other direct expenses and overhead. -7- CASH AND CASH EQUIVALENTS -- Cash equivalents are carried at cost plus accrued interest, which approximates fair value. The Company considers all highly liquid investments with a maturity date of three months or less at the date of purchase to be cash equivalents. PREPAID EXPENSES -- During 2002, the Company accelerated the amortization of a nonrefundable prepaid royalty related to an arrangement entered into during 1999. The arrangement provides the Company with certain technology rights, and the royalties are due based upon sales of specified products through December 2018. Due to changes in forecasted product demand, management determined that it was unlikely that the advanced royalties would be fully recovered through the related product sales. Accordingly, amortization of the prepaid royalty was accelerated and approximately $203,000 of amortization expense was recognized during 2002. As of September 28, 2003, the Company has minimum royalty commitments, which are based upon a percentage of specified product sales, subject to a $125,000 minimum over a two-year period ending in 2005. OTHER ASSETS -- Other assets consist primarily of security deposits on the Company's facility leases, which expire at various dates through May 2007. CONCENTRATIONS OF CREDIT RISK -- Financial instruments that subject the Company to significant concentrations of credit risk consist primarily of trade accounts receivable. Concentration of credit risk with respect to accounts receivable is limited to customers to whom the Company makes significant sales. To manage credit risk, the Company performs regular credit evaluations of its customers' financial condition and maintains allowances for potential credit losses. The Company generally does not obtain collateral in support of its trade accounts receivables. The following table summarizes the number of customers that individually comprise greater than 10% of total revenue and/or total accounts receivable and their aggregate percentage of the Company's revenue and accounts receivable. No single customer accounted for more than 38% and 22% of revenue for the years ended September 28, 2003 and September 29, 2002, respectively.
ACCOUNTS RECEIVABLE REVENUE ------------------------------- ------------------------- PERCENT OF PERCENT OF TOTAL NUMBER OF TOTAL NUMBER OF ACCOUNTS CUSTOMERS REVENUE CUSTOMERS RECEIVABLE YEAR ENDED: September 28, 2003 3 62% 1 45% September 29, 2002 5 85% 1 63%
The Company is dependent upon sole-source suppliers for a number of key components of its products. There can be no assurance that these suppliers will be able to meet the Company's future requirements for such components or that the components will be available at favorable terms. Any extended interruption in the supply of any such components or any significant price increase could have a material adverse effect on the Company's operating results in any given period. COMPREHENSIVE INCOME -- Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. For 2003 and 2002, the difference between comprehensive income and net income is due to changes in the Company's cumulative translation adjustment. -8- ACCOUNTING FOR STOCK-BASED COMPENSATION -- The Company accounts for compensation to employees and directors under the intrinsic-value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and its related interpretations. In accordance with this method, no compensation expense is recognized for stock awards to employees and directors provided that, as of the measurement date, (typically the grant date), all terms associated with the award are fixed and the fair value of the Company's stock, as of the grant date is not greater than the amount an employee must pay to acquire the stock. The Company accounts for grants to nonemployees or directors not in connection with their service as directors of the Company under SFAS No. 123, "Accounting for Stock-Based Compensation," as amended, and Emerging Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services." All transactions in which services are the consideration received for the issuance of equity instruments are accounted for based upon the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more readily measurable. The Company has computed the pro forma disclosures using the fair value method required under SFAS No. 123 using the Black-Scholes option-pricing model. No compensation expense for employees has been recognized in either period under the intrinsic-value method. The weighted-average assumptions used were as follows for the years ended September 28, 2003 and September 29, 2002: Risk-free interest rate 2.99% 4.63% Dividend yield 0% 0% Option life 5 years 5 years Volatility 0% 0%
Had compensation expense for the Company's stock option plans been determined in accordance with the fair-value method, net income would have been approximately as follows for the years ended September 28, 2003 and September 29, 2002:
SEPTEMBER 28, SEPTEMBER 29, 2003 2002 Net income: As reported $ 1,481,811 $ 2,150,863 Stock-based compensation recognized in the financial statements 87,500 Less employee stock-based compensation under fair value method (165,708) (69,945) ----------- ----------- Pro forma $ 1,403,603 $ 2,080,918 =========== ===========
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- In June 2002, the Financial Accounting Standard Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this statement did not have a material impact on the Company's financial position or results of operations. -9- In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which establishes standards for how an issuer of financial instruments classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on a fixed monetary amount known at inception, or something other than the fair value of the issuer's equity shares, or on variation inversely related to changes in the fair value of the issuer's equity shares. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic companies, for which it is applicable for the first fiscal period beginning after December 15, 2004. The adoption of this standard did not impact the Company's 2003 financial statements. Upon election by the preferred stockholders to redeem the outstanding preferred stock, such amount would be classified as a liability until paid. Such election was made effective September 30, 2003 (note 6). In November 2002, the FASB issued Financial Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements in this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. FIN 45 disclosure requirements are included in Note 9 to the consolidated financial statements. The adoption of FIN 45 did not have any impact on the Company's financial position or results of operations. 3. INCOME TAXES Income taxes have been provided in accordance with SFAS No. 109, "Accounting for Income Taxes," under which deferred tax assets and liabilities at the end of each period are determined based on the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates when such differences are expected to reverse. The Company establishes reserves for potential adjustments to its filed tax returns. The components of the provision for income taxes for the years ended September 28, 2003 and September 29, 2002 are as follows
SEPTEMBER 28, SEPTEMBER 29, 2003 2002 Current provision (benefit) $ 549,642 $(456,722) Deferred (101,000) 123,000 Tax credits (232,000) (320,000) Valuation allowance 232,000 320,000 --------- --------- Total provision (benefit) $ 448,642 $(333,722) ========= =========
-10- The tax provision (benefit) based on the statutory rate reconciles to the effective tax rate for the years ended September 28, 2003 and September 29, 2002 as follows:
SEPTEMBER 28, SEPTEMBER 29, 2003 2002 Taxes at statutory rate 34% 34% State income taxes 1 1 Export sales benefit (4) (19) Reversal of tax contingency reserves (19) Federal research and development credits (8) (17) Other 2 --- --- Total tax provision (benefit) 23% (18)% === ===
In finalizing the 2001 tax returns, the Company realized unanticipated tax benefits related to export sales and research and development credits. The effect of recognizing these benefits was to reduce the effective tax rate by approximately 25% in 2002. During 2002, the Company reversed tax contingency reserves, reducing the effective tax rate in 2002 by 19%. Such tax reserves were no longer required as the underlying contingencies no longer appeared probable based upon current information and experience. Deferred tax assets consist of the following components as of September 28, 2003 and September 29, 2002:
SEPTEMBER 28, SEPTEMBER 29, 2003 2002 Accounts receivable $ 66,000 $ 67,000 Inventories 374,000 293,000 Accrued expenses 216,000 209,000 Property and equipment 28,000 22,000 Tax credits 552,000 320,000 Other 1,000 (7,000) ---------- --------- Total 1,237,000 904,000 Valuation allowance (552,000) (320,000) ---------- --------- Total $ 685,000 $ 584,000 ========== =========
As of September 28, 2003, the Company had carried forward research and development and investment tax credits for state tax purposes totaling $552,000. The tax credits begin to expire in periods ranging from 2005 to having an indefinite life. Due to the uncertainty related to realization of these tax credits, a full valuation allowance has been established for these credits. 4. COMMITMENTS AND CONTINGENCIES The Company leases its facilities and certain equipment under noncancelable operating lease agreements that expire at various dates through May 2007. The Company has an option to renew certain of its facility leases for three to five years at market rates. The Company is also responsible for certain real estate taxes, utilities and maintenance costs related to the leased properties. Such contingent rent obligations are recognized as incurred. Rent expense under all operating leases was approximately $710,000 and $617,000 in fiscal 2003 and 2002, respectively. -11- Future minimum lease payments under all noncancelable operating lease agreements as of September 28, 2003 are approximately as follows:
FISCAL YEAR 2004 $ 606,902 2005 517,569 2006 361,795 2007 173,400 ------------ Total minimum lease payments $ 1,659,666 ============
The Company is currently involved in arbitration proceedings with former employees to enforce the Company's right to repurchase its stock under the stock-option agreements executed by each of the employees. No amount has been accrued for any potential additional costs in excess of repurchase amounts in the financial statements related to these cases. The Company is subject to asserted and unasserted claims that may arise in the ordinary course of business. In the opinion of management, it is remote that the ultimate resolution of any known matters will have a material adverse effect on the Company's financial condition, results of operations or cash flows. 5. LINE OF CREDIT On February 15, 2002, the Company entered into a Loan and Security Agreement (the "Credit Facility") with a bank. The amount available under the Credit Facility was the lesser of $2,000,000 or an amount based upon a percentage of eligible accounts receivable. The Company had no borrowings under the Credit Facility and was in compliance with all covenants. On February 15, 2003, the Credit Facility expired and was not renewed. 6. REDEEMABLE PREFERRED STOCK The rights and privileges of the Company's Class A and Class B Redeemable Preferred Stock are as follows: Voting -- Consent of the holders of at least a majority of each class of preferred stock, voting separately, is required for any action that adversely alters or changes the rights, preferences or privileges, or creates a new class or series of a class of any stock having preference over or parity with the preferred shares with respect to dividends or distributions. Otherwise, preferred stockholders do not have voting rights. Liquidation -- In the event of any liquidation, dissolution, or winding-up of the Company, holders of Class B Redeemable Preferred Stock ("Class B") are entitled to receive, in preference to holders of Class A Redeemable Preferred Stock ("Class A") and common stock, the amount of $100.00 per share, plus cumulative but unpaid dividends, prior to any distribution to the holders of Class A and common stock. Holders of Class A are entitled to receive, in preference to holders of common stock, the amount of $35.00 per share, plus cumulative but unpaid dividends, prior to any distribution to the holders of common stock. Such amounts will be adjusted for a stock split, stock dividends and recapitalizations. If such amounts are not available to sufficiently satisfy the full preferential amount, the entire assets of the Company will be distributed to the preferred shareholders ratably based on the total preferential amount of preferred stock held. -12- Dividends -- The holders of Class A are entitled to receive cumulative cash dividends in an amount equal to the greater of 8% of the Company's positive net income for each completed year or $2.80 per share. The holders of Class B are entitled to receive cumulative dividends in an amount equal to the greater of 8% of the Company's positive net income for each completed fiscal year or $8.00 per share. The cumulative dividends available to holders of Class A and Class B began accruing on October 1, 1998. Dividends are payable if and when declared by the Company's Board of Directors. As long as the preferred stock is outstanding, no dividends or distributions may be paid to the holders of common stock. Dividends to holders of Class A will be paid only after all cumulative dividends have been paid in full to the holders of Class B. The Company recognizes the cumulative dividends on the outstanding preferred stocks as such amounts accumulate by accretion of the preferred stock and an offsetting charge to retained earnings. As of September 28, 2003, $2,641,513 in aggregate cumulative unpaid dividends have been accreted to the Class A and B. Redemption Rights -- At the election of at least 2/3 of the holders of the Class A and Class B, as separately determined for each class, the Company shall be required to redeem the outstanding Class A and B beginning anytime on or after September 30, 2003. Such redemptions shall be at a cash purchase price equal to $35.00 and $100.00 per share for Class A and Class B, respectively, plus cumulative unpaid dividends. The Company may redeem all, or any part of, the outstanding preferred stock at any time after September 30, 2003. Election to Redeem -- On September 30, 2003, holders of greater than 2/3 of Class A and Class B shares elected to require the Company to redeem all outstanding shares and cumulative unpaid dividends of Class A and Class B. In November 2003, the Board of Directors voted to pay all cumulative dividends on the Class A and Class B accrued as of September 28, 2003. Such amounts totaled $2,641,513. The Company and the holders of the Class A and B are evaluating the form of additional redemption payments. The remaining redemption value of Class A and Class B is approximately $1,500,000 and $3,600,000, respectively. Investor Rights -- Certain investors have "piggy-back" registration rights in the event of a public stock offering. The changes in the redeemable preferred stock for the periods included in the financial statements is as follows:
CLASS A CLASS B TOTAL ----------------------- --------------------- ----------- NUMBER CARRYING NUMBER CARRYING OF SHARES VALUE OF SHARES VALUE BALANCE--September 30, 2001 44,154 $2,347,155 $ 36,000 4,566,134 $ 6,913,289 Accretion of dividends on Class A and B Redeemable Preferred Stock 172,069 288,000 460,069 --------- ---------- --------- --------- ----------- BALANCE--September 29, 2002 44,154 2,519,224 36,000 4,854,134 7,373,358 Accretion of dividends on Class A and B Redeemable Preferred Stock 118,545 288,000 406,545 --------- ---------- --------- --------- ----------- BALANCE--September 28, 2003 44,154 2,637,769 36,000 5,142,134 7,779,903 ========= ========== ========= ========= ===========
-13- 7. STOCKHOLDERS' EQUITY AND OPTION PLANS RESTRICTED STOCK -- The Company has a stock restriction agreement with the founder of the Company. The agreement provides for certain restrictions in four different circumstances as follows: (i) in the event of a proposed sale of all or a portion of his shares, the founder has granted the Company a right of first refusal to acquire the shares at the proposed sale price; (ii) if the founder ceases to be an employee of the Company, he must offer the shares to the Company at their then fair market value; (iii) in the event of a proposed sale of shares by the founder, the preferred stockholders (who also own shares of common stock) have been granted the right to participate in such sale on the same terms and conditions of the proposed sale; and (iv) while the preferred stock is outstanding, if these preferred stockholders are selling a majority of their shares in one or several related transactions, they can require the founder to sell a proportionate number of his shares in the same transaction or set of related transactions, on the same terms and conditions of the sale by such stockholders. The stock restriction agreement is in force until the first to occur of an initial public offering of stock valued at $10,000,000 or more or April 28, 2005. At September 28, 2003, the founder holds 174,073 shares of common stock. TREASURY STOCK -- During 2003, the Company exercised its right to repurchase 1,825 common shares for $63,125. These shares have been recorded at the date of repurchase at the cost of purchasing the treasury shares. STOCK OPTION PLAN -- The 1996 Stock Plan (the "1996 Plan") provides for the granting of incentive stock options, nonqualified stock options, awards of stock, and opportunities to make direct purchases of shares of the Company's common stock to key employees of the Company and to nonemployee consultants. The Board of Directors or a committee appointed by the Board of Directors administers the 1996 Plan. The exercise price of options granted equals the estimated market price of the underlying stock on the date of grant. The maximum term of the options is 10 years, or five years for options granted to employees owning greater than 10% of the total combined voting power of all classes of stock of the Company or any related corporation. At September 28, 2003, 35,575 shares of common stock were reserved for issuance under the 1996 Plan. Options granted under the 1996 Plan are either fully exercisable on the date of grant or exercisable thereafter in such instalments as the Board of Directors may specify. For options granted after February 1998, the options vest 20% one year after the grant date and 20% each of the next four years. For options granted before February 1998, the options generally vest and become exercisable 25% commencing one year after the grant date and 6.25% quarterly thereafter. In a limited number of instances, the Board of Directors has granted options that vest in full seven or eight years after the grant date, subject to accelerated vesting related to specific performance targets. Shares purchased under the 1996 Plan are subject to certain repurchase rights by the Company in the event that the employee terminates employment. The 1996 Plan expires on April 26, 2006, at which date no further options may be granted under this Plan. -14- Option activity under the 1996 Plan for the years ended September 28, 2003 and September 29, 2002 are as follows:
WEIGHTED- RANGE OF AVERAGE NUMBER EXERCISE EXERCISE OF SHARES PRICES PRICE Balance--September 30, 2001 160,754 $ 0.36 - $55.00 $ 8.29 Granted 9,550 55.00 - 55.00 55.00 Exercised (1,132) 0.79 - 10.00 2.42 Canceled (1,480) 5.00 - 55.00 32.97 ------- --------------- --------- Balance--September 29, 2002 167,692 $ 0.36 - $55.00 $ 10.78 Granted 11,900 $25.00 - $25.00 $ 25.00 Exercised (4,825) $ 0.36 - $15.00 $ 6.68 Canceled (10,311) $ 4.00 - $55.00 $ 12.85 ------- --------------- --------- Balance--September 28, 2003 164,456 $ 0.36 - $55.00 $ 11.80 ======= =============== ========= Exercisable--September 28, 2003 123,941 $ 0.36 - $55.00 $ 9.41 ======= =============== ========= Exercisable--September 29, 2002 109,817 $ 0.36 - $55.00 $ 5.43 ======= =============== =========
-15- The weighted-average fair value of stock options issued was $3.47 and $11.25 for the years ended September 28, 2003 and September 29, 2002, respectively. The following table summarizes the status of outstanding stock options as of September 28, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------- ------------------------- WEIGHTED- WEIGHTED- WEIGHTED- RANGE OF AVERAGE AVERAGE AVERAGE EXERCISE NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE $ 0.36 - $ 5.00 56,985 3.12 $ 0.76 56,985 $ 0.76 10.00 to 15.00 80,286 6.11 10.29 55,936 10.26 25.00 to 55.00 27,185 8.60 39.35 11,020 49.85 - --------------- ------- ---- ------- ------- ------- $0.36 to $55.00 164,456 5.46 $ 11.80 123,941 $ 9.41 =============== ======= ==== ======= ======= =======
On July 29, 2003, the Board of Directors reduced the exercise price for options to purchase 7,000 common shares held by two directors of the Company from $25.00 per share to $12.50 per share. The options were repriced at an exercise price less than the estimated fair value of the common stock and expire on January 29, 2004. As a result of repricing the options, the terms of the option award are no longer considered fixed and will be adjusted to fair value until such shares are execised or expire. In 2003, the Company recorded a noncash stock compensation charge of $87,500 from this option repricing. 8. EMPLOYEE BENEFIT PLAN The Company has a 401(k) retirement savings plan (the "Plan") covering all employees. Under the Plan, participants may elect to defer a portion of their compensation, subject to certain limitations. In addition, the Company, at the discretion of the Board of Directors, may make discretionary profit-sharing contributions to the Plan. Employer contributions of $48,817 and $46,415 were made to the Plan during the years ended September 28, 2003 and September 29, 2002, respectively. 9. OTHER ACCRUED EXPENSES -- Accrued expenses consist of the following as of September 28, 2003 and September 29, 2002:
SEPTEMBER 28, SEPTEMBER 29, 2003 2002 Salaries and wages $ 686,507 $ 708,952 Vacation pay and employee benefits 175,495 134,344 Other 493,086 557,146 ---------- ---------- $1,355,088 $1,400,442 ========== ==========
-16- WARRANTY -- The following table sets forth the activity in the Company's warranty accrual, included in accrued expenses:
52 WEEKS BALANCE AT BALANCE AT ENDED BEGINNING CHARGES TO COSTS ACCRUAL END OF SEPTEMBER OF YEAR AND EXPENSES REDUCTIONS YEAR 2003 $367,000 $(131,000) $178,000 $414,000 2002 514,908 (179,000) 31,092 367,000
REVENUE -- Revenue consists of the following for the years ended September 28, 2003 and September 29, 2002:
SEPTEMBER 28, SEPTEMBER 29, 2003 2002 Products $20,903,652 $17,706,547 Services 831,394 585,144 Other 54,778 42,065 ----------- ----------- $21,789,824 $18,333,756 =========== ===========
****** -17- EX-99.4 4 b51314gsexv99w4.txt UNAUDITED CONDENSED FINANCIAL STATEMENTS OF MICROE SYSTEMS . . . EXHIBIT 99.4 MICROE SYSTEMS UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS APRIL 4, 2004 AND SEPTEMBER 28, 2003 (Stated in thousands of U.S. dollars)
April 4, September 28, 2004 2003 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,481 $ 9,634 Accounts receivable, net 4,119 4,691 Inventories 1,656 1,183 Deferred taxes 639 639 Prepaid expenses and other current assets 132 174 -------- -------- Total current assets 10,027 16,321 PROPERTY AND EQUIPMENT--Net 390 456 DEFERRED TAXES 46 46 OTHER ASSETS--Net 130 54 -------- -------- TOTAL ASSETS $ 10,593 $ 16,877 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 811 $ 572 Accrued income taxes 888 487 Accrued expenses 948 1,355 -------- -------- Total current liabilities 2,647 2,414 DEFERRED RENT 30 34 -------- -------- Total liabilities 2,677 2,448 -------- -------- COMMITMENTS AND CONTINGENCIES (Note 4) REDEEMABLE PREFERRED STOCK: Class A Redeemable Preferred Stock, at liquidation value; $0.01 par value 0 2,638 Class B Redeemable Preferred Stock, at liquidation value; $0.01 par value 0 5,142 STOCKHOLDERS' EQUITY: Common stock, $0.01 par value 9 9 Treasury stock, at cost (1,157) (1,101) Additional paid-in capital 794 701 Accumulated other comprehensive gain (loss) 20 (23) Retained earnings 8,250 7,063 -------- -------- Total stockholders' equity 7,916 6,649 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,593 $ 16,877 ======== ========
-1- MICROE SYSTEMS UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED APRIL 4, 2004 AND MARCH 30, 2003 (Stated in thousands of U.S. dollars)
2004 2003 REVENUE $ 12,895 $ 11,522 COST OF REVENUE 5,207 4,691 -------- -------- GROSS MARGIN 7,688 6,831 -------- -------- OPERATING EXPENSES: Research and development 2,378 2,323 Selling and marketing 2,342 2,079 General and administrative 1,027 900 -------- -------- Total operating expenses 5,747 5,302 -------- -------- INCOME FROM OPERATIONS 1,941 1,529 OTHER INCOME/(EXPENSE)--Net (346) 57 -------- -------- INCOME BEFORE INCOME TAX PROVISION 1,595 1,586 INCOME TAX PROVISION 402 461 -------- -------- NET INCOME $ 1,193 $ 1,125 -------- -------- PREFERRED STOCK DIVIDENDS AND ACCRETION 234 -------- -------- NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 1,193 $ 891 ======== ========
-2- MICROE SYSTEMS UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED APRIL 4, 2004 AND MARCH 30, 2003 (Stated in thousands of U.S. dollars)
2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,193 $ 1,125 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 127 148 Changes in operating assets and liabilities: Accounts receivable 572 745 Inventories (473) (63) Prepaid expenses and other assets 43 101 Accounts payable 238 (186) Accrued income taxes 402 243 Accrued expenses and other (413) (260) -------- -------- Net cash provided by operating activities 1,689 1,853 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (60) (157) Decrease (increase) in other assets (76) 7 -------- -------- Net cash used in investing activities (136) (150) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemption of preferred stock (7,785) Proceeds from the exercise of common stock options 93 21 Purchase & settlement of treasury stock transactions (56) (31) -------- -------- Net cash used in financing activities (7,748) (10) -------- -------- Effects of exchange rates on cash & cash equivalents 42 (10) -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS (6,153) 1,683 CASH AND CASH EQUIVALENTS--Beginning of period 9,634 9,010 -------- -------- CASH AND CASH EQUIVALENTS--End of period $ 3,481 $ 10,693 ======== ======== SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES--Accretion of dividends on redeemable preferred stock $ 0 $ 234 ======== ========
-3- MICROE SYSTEMS NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in $000s) 1. NATURE OF OPERATIONS MicroE Systems (the "Company" or "MicroE") develops, manufactures and markets high-performance, position-sensing systems called encoders for motion-controlled applications. The Company's patented technology enables the development of encoders that are smaller and more robust while delivering high resolution and accuracy. The Company targets specific motion control applications in a variety of high-tech and industrial markets. These markets include data storage, semiconductor processing and packaging, electronics assembly and other high-precision industries. The Company sells to customers located throughout the world. 2. BASIS OF PRESENTATION INTERIM FINANCIALS -- These unaudited interim condensed consolidated financial statements have been prepared by the Company in United States (U.S.) dollars and in accordance with accounting principles generally accepted in the U.S. for interim financial statements. The condensed consolidated financial statements reflect all adjustments and accruals, consisting only of adjustments and accruals of a normal recurring nature, which management considers necessary for a fair presentation of financial position and results of operations for the periods presented. The condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes for the year ended September 28, 2003 included in Exhibit 99.3 of this Current Report on 8-K/A. The results for interim periods are not necessarily indicative of results to be expected for the year or for any future periods. PRINCIPLES OF CONSOLIDATION -- The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, MicroE International, which operates branches in Japan, Singapore and Switzerland. All intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES -- The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. Such principles require 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. INVENTORIES -- Inventories are valued at the lower of cost (first-in, first-out) or market. Inventories at April 4, 2004 and September 28, 2003 consist of the following: -4-
APRIL 4, SEPTEMBER 28, 2004 2003 Raw materials $ 998 $ 745 Work-in-process 567 353 Finished goods 91 85 ------ ------ $1,656 $1,183 ====== ======
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which establishes standards for how an issuer of financial instruments classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on a fixed monetary amount known at inception, or something other than the fair value of the issuer's equity shares, or on variation inversely related to changes in the fair value of the issuer's equity shares. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic companies, for which it is applicable for the first fiscal period beginning after December 15, 2004. The Company's outstanding preferred stock was redeemed and the Company paid the holders of the preferred stock during the six months ended April 4, 2004. The Company had no other securities outstanding impacted by SFAS 150. 3. INCOME TAXES Income taxes have been provided in accordance with SFAS No. 109, "Accounting for Income Taxes," under which deferred tax assets and liabilities at the end of each period are determined based on the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates when such differences are expected to reverse. The Company establishes reserves for potential adjustments to its filed tax returns. 4. COMMITMENTS AND CONTINGENCIES The Company is subject to asserted and unasserted claims that may arise in the ordinary course of business. In the opinion of management, it is remote that the ultimate resolution of any known matters will have a material adverse effect on the Company's financial condition, results of operations or cash flows. 5. REDEEMABLE PREFERRED STOCK Redemption of Preferred Stock -- On September 30, 2003, holders of greater than 2/3 of Class A and Class B shares elected to require the Company to redeem all outstanding shares and cumulative unpaid dividends totaling $7,780. The Board of Directors voted to pay all cumulative dividends on the Class A and Class B accrued as of September 28, 2003. Such amounts totaled $2,642 and were paid by the Company in November 2003. The Company initially settled the obligation for the remaining balance due on the preferred stock by issuing notes. In addition, the Company paid additional 16% annual rate on the balance outstanding on the redeemed preferred shares until all amounts were settled. All amounts due were paid in full on March 26, 2004 and no remaining obligations related to the redemption remained at April 4, 2004. -5-
CLASS A REDEEMABLE CLASS B REDEEMABLE CLASS A CLASS B TOTAL ---------------------- -------------------- ------- NUMBER CARRYING NUMBER CARRYING OF SHARES VALUE OF SHARES VALUE BALANCE--September 29, 2002 44,154 2,519 36,000 4,854 7,373 Accretion of dividends on Class A and B Redeemable Preferred Stock 119 288 407 ------- ------- ------- ------- ------- BALANCE--September 28, 2003 44,154 2,638 36,000 5,142 7,780 Redemption of Preferred Stock (44,154) (2,638) (36,000) (5,142) (7,780) ------- ------- ------- ------- ------- BALANCE--April 4, 2004 - $ - - $ - $ - ======= ======= ======= ======= =======
6. OTHER ACCRUED EXPENSES -- Accrued expenses consist of the following as of April 4, 2004 and September 28, 2003:
APRIL 4, SEPTEMBER 28, 2004 2003 Salaries and wages $ 301 $ 687 Vacation pay and employee benefits 293 175 Other 354 493 ------ ------ $ 948 $1,355 ====== ======
WARRANTY -- The following table sets forth the activity in the Company's warranty accrual, included in accrued expenses:
SIX MONTHS BALANCE AT BALANCE AT ENDED BEGINNING CHARGES TO COSTS ACCRUAL END OF OF PERIOD AND EXPENSES REDUCTIONS PERIOD April 4, 2004 $ 414 $ (53) $ (62) $ 299 March 30, 2003 367 (59) 104 412
REVENUE -- Revenue consists of the following for the six months ended April 4, 2004 and March 30, 2003: -6-
APRIL 4, MARCH 30, 2004 2003 Products $12,769 $11,077 Services 58 414 Other 68 31 ------- ------- $12,895 $11,522 ======= =======
7. SUBSEQUENT EVENT On April 12, 2004, the Company entered into an Agreement and Plan of Merger to be acquired by GSI Lumonics Inc. ("GSI"). The acquisition was completed on May 14, 2004 with GSI by means of a merger with the Company becoming an indirect wholly owned subsidiary of GSI. Pursuant to the terms of the Merger Agreement, GSI paid the MicroE security holders $57,300 in cash in exchange for all of the Company's outstanding capital stock. The $57,300 was net of the Company's transaction costs that were unpaid at the time of the closing of the merger. The Company incurred approximately $1,200 of transaction costs relating primarily to professional services. ****** -7- -----END PRIVACY-ENHANCED MESSAGE-----