10QSB 1 imt2002qtr210q.txt QUARTERLY REPORT Form 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------------------- (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 30, 2002. ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______to_______ Commission File No.1-6635 INNOVATIVE MICRO TECHNOLOGY, INC. --------------------------------- (Name of small business issuer) A Delaware Corporation 95-1950506 ---------------------- ---------- (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 75 Robin Hill Road, Goleta, California 93117 -------------------------------------------- (Address of principal executive offices) Registrant's telephone number: (805) 681-2800 Formerly Known as APPLIED MAGNETICS CORPORATION --------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /__/ No /X/ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes /__/ No /X*/ Indicate the number of shares outstanding of each of the issuer's classes of common stock: 4,500,000 shares of $.0001 par value common stock as of March 30, 2002. * Securities to be distributed under the Company's Plan of Reorganization have not been distributed as of the filing date. PART 1. FINANCIAL INFORMATION ----------------------------- Item 1. Financial Statements -------------------- The unaudited financial statements included in this report have been prepared by Innovative Micro Technology, Inc. (the "Company" or "IMT") pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The unaudited condensed financial statements and selected notes included therein should be read in conjunction with the audited financial statements and the notes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended September 29, 2001. The following unaudited financial statements reflect all adjustments, consisting only of normal and recurring adjustments, which, in the opinion of management, are necessary to present fairly the financial position and results of operations for the periods presented. 2 INNOVATIVE MICRO TECHNOLOGY, INC. Statements of Operations - Unaudited (In thousands except per share data)
Successor Co. Predecessor Co. Successor Co. Predecessor Co. Predecessor Co. Three Months Three Months Four Months Two Months Six Months Ended Ended Ended Ended Ended March 30, March 31, March 30, November 24, March 31, ------------ ------------- ------------ -------------- -------------- 2002 2001 2002 2001 2001 ---- ---- ---- ---- ---- Net sales MEMS and other $ 677 $ 719 $ 1,037 $ 606 $ 1,159 Rental Income 128 11 171 86 17 ------------ ------------- ------------ -------------- -------------- Subtotal 805 730 1,208 692 1,176 Cost of sales MEMS and Other (including stock-based compensation of $95 and $142 for the periods ending March 30, 2002) 1,512 1,513 2,040 962 2,870 Rental income 32 53 45 6 117 ------------ ------------- ------------ -------------- -------------- Subtotal 1,544 1,566 2,085 968 2,987 Gross loss (739) (836) (877) (276) (1,811) ------------ ------------- ------------ -------------- -------------- Research and development expenses (including stock-based compensation of $79 and $119 for the periods ending March 30, 2002) 238 102 328 90 222 Selling, general and administrative expenses (including stock-based compensation of $139 and $208 for the periods ending March 30, 2002) 563 424 809 245 732 Total operating expenses 801 526 1,137 335 954 ------------ ------------- ------------ -------------- -------------- Loss from operations (1,540) (1,362) (2,014) (611) (2,765) Interest income 6 12 9 3 17 Interest expense (617) (372) (897) (329) (716) Other income - - - 177 - ------------ ------------- ------------ -------------- -------------- Other income (expense) (611) (360) (888) (149) (699) Reorganization Costs 164 565 237 474 991 ------------ ------------- ------------ -------------- -------------- Net loss $ (2,315) $ (2,287) $ (3,139) $ (1,234) $ (4,455) ============ ============ ============ =========== ============== Net loss per share: Loss per common share - basic and diluted $ (0.51) $ (0.03) $ (0.70) $ (0.02) $ (0.06) ============ ============ ============ =========== ============== Weighted average number of common shares outstanding: Common shares - basic and diluted 4,500 70,444 4,500 70,444 70,444 ============ ============ ============ =========== ==============
The accompanying Selected Notes to Condensed Financial Statements are an integral part of these condensed statements. 3 INNOVATIVE MICRO TECHNOLOGY, INC. Balance Sheet - Unaudited (In thousands except share and par value data)
ASSETS Successor Co. Predecessor Co. March 30, Sept 29, ------------- ---------------- 2002 2001 ---- ---- Current Assets: Cash $ 1,298 $ 1,697 Accounts receivable, net 574 733 Other receivables 177 - Inventories 857 454 Prepaid expenses and other 295 299 ------------- -------------- Total current assets 3,201 3,183 ------------- -------------- Property, plant and equipment, at cost 20,164 21,181 Less-accumulated depreciation (335) (1,215) ------------- -------------- Total property, plant and equipment 19,829 19,966 ------------- -------------- Other assets 6,263 6,206 ------------- -------------- Total assets $ 29,293 $ 29,355 ============= ============== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) Current Liabilities: Current portion of long-term debt $ 4,325 $ 2,000 Accounts payable 458 518 Accrued payroll and benefits 242 207 Accrued audit and legal 111 3,897 Deferred revenue 968 784 Other current liabilities 545 91 ------------- -------------- Total current liabilities 6,649 7,497 ------------- -------------- Long-term debt, net 15,884 - ------------- -------------- Other liabilities 174 174 ------------- -------------- Liabilities subject to compromise under reorganization proceedings - 315,709 Shareholders' Equity (Deficiency): Predecessor preferred stock, $.10 par value, authorized 5,000,000 shares, none issued at September 29, 2001 Predecessor common stock, $.10 par value, authorized 120,000,000 shares, issued 70,574,306 at September 29, 2001 7,057 Successor preferred stock, $.0001 par value, authorized 2,500,000 shares, none issued at March 30, 2002 Successor common stock, $.0001 par value, authorized 25,000,000 shares, none issued at March 30, 2002 - Paid-in capital 11,756 345,100 Accumulated deficit (3,139) (644,601) ------------- -------------- 8,617 (292,444) Treasury stock, at cost (130,552 shares as of September 29, 2001 and none at March 30, 2002) - (1,581) Unearned restricted stock compensation (2,031) - ------------- -------------- Total shareholder's equity (deficiency) 6,586 (294,025) ------------- -------------- Total liabilities and shareholder's equity (deficiency) $ 29,293 $ 29,355 ============= ==============
The accompanying Selected Notes to Condensed Financial Statements are an integral part of these condensed balance sheets. 4 INNOVATIVE MICRO TECHNOLOGY, INC. Statements of Cash Flows - Unaudited (In thousands)
Successor Co. Predecessor Co. Predecessor Co. Four Months Two Months Six Months Ended Ended Ended March 30, November 24, March 31, ----------- -------------- -------------- 2002 2001 2001 ---- ---- ---- Cash Flows from Operating Activities: Net loss $ (3,139) $ (1,234) $ (4,455) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 334 173 900 Employee restricted stock amortization 469 - - Amortization of loan costs 53 39 - Gain on sale of assets - - (29) Non-cash interest - 232 712 Non-cash property taxes - - 220 Changes in assets and liabilities: Accounts receivable, net 240 (258) (265) Inventories (448) 45 (65) Prepaid expenses and other (108) (12) (70) Other assets 277 59 (2) Accounts payable (598) 146 52 Accrued expenses (3) 38 31 Accrued audit and legal 101 378 961 Deferred revenue 359 (175) (121) Other current liability (104) 68 114 Other liabilities - - 174 ----------- ----------- ----------- Net cash flows used in operating activities (2,567) (501) (1,843) ----------- ----------- ----------- Cash Flows from Investing Activities: Purchases of property, plant and equipment (273) (97) (80) Proceeds from sale of fixed assets, net - - 1,539 ----------- ----------- ----------- Net cash flows (used in) provided by investing activities (273) (97) 1,459 ----------- ----------- ----------- Cash Flows from Financing Activities: Repayment of note payable (100) Proceeds from issuance of debt 3,400 - - Debt issuance costs (361) - - ----------- ----------- ----------- Net cash flows provided by (used in) financing activities 3,039 - (100) ----------- ----------- ----------- Net increase (decrease) in cash 199 (598) (484) ----------- ----------- ----------- Cash at beginning of period 1,099 1,697 1,060 ----------- ----------- ----------- Cash at end of period $ 1,298 $ 1,099 $ 576 =========== =========== ===========
The accompanying Selected Notes to Condensed Financial Statements are an integral part of these condensed statements. 5 Selected Notes to Financial Statements Unaudited (March 30, 2002) Note A: Basis of Presentation ----------------------------- The Company has incurred net losses and losses from operations for each quarter since 1999. The Company filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in January, 2000 and, on emergence from bankruptcy, all of the previously issued and outstanding common stock was canceled without consideration to the holders. The Company incurred net losses of $2.3 million for the quarter ended March 30, 2002. It expects to continue to incur substantial operating losses for the foreseeable future, and it cannot predict the extent of the future losses or when it may become profitable. Even if the Company does achieve profitability, it may not be able to sustain or increase profitability in the future. The Company expects to incur increasing sales and marketing, research and development and general and administrative expenses. As a result, it will need to significantly increase its revenues to achieve profitability. Although the Company's revenues have increased, the growth may not continue at the current rate or at all. The above items raise substantial doubt about the Company's ability to continue as a going concern. Note B: Chapter 11 Reorganization --------------------------------- The Company filed a petition for Chapter 11 Reorganization with the U.S Bankruptcy Court on January 7, 2000. The Company has re-organized itself from a manufacturer of magnetic recording heads for the disk drive industry to a manufacturer of micro-electro-mechanical systems ("MEMS") operating in a number of industry segments. The Company's Reorganization Plan became effective on November 16, 2001 ("Effective Date"). The Company adopted the fresh start reporting requirements of Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" during the first quarter of fiscal 2002. In accordance with the fresh start reporting requirements, the reorganization value of the Company was allocated to the Company's assets in conformity with the procedures specified by SFAS No. 142, "Goodwill and Other Intangible Assets". As provided for under the Company's reorganization plan (the "Plan"), the Company converted approximately $12 million of its secured liabilities to debt and $304 million of unsecured liabilities to common stock and warrants in the reorganized entity. The Company has initiated the process for issuance of the common stock and warrants pursuant to the Plan, however it will not perform the actual distribution until the Company is current with all of its Securities and Exchange Commission filings. The Company anticipates that the filings will be current by the end of January 2003. The results of operations and cash flows for the two months ended November 24, 2001 include operations prior to the Company's emergence from Chapter 11 proceedings (referred to as "Predecessor Company") and the effects of Fresh-Start Reporting. The Company's monthly fiscal calendar ended with November 24, 2001. There were no significant accounting transactions between the Company's exit from the Chapter 11 on November 16, 2001 and November 24, 2001 and therefore it believes this reporting to be appropriate. The results of operations and cash flows for the four months ended March 30, 2002 include 6 operations subsequent to the Company's emergence from Chapter 11 proceedings (referred to as "Successor Company") and reflect the effects of Fresh-Start Reporting. As a result, the net loss for the four months ended March 30, 2002 is not comparable with prior periods. In addition, certain line items of the liabilities and shareholders' equity portion of the balance sheet as of March 30, 2002 are not comparable to prior periods for the reasons discussed above. 7 Innovative Micro Technology, Inc. Fresh-start Balance Sheet (In Thousands) The adoption of the Fresh-start reporting requirements had the following effect on the Company's unaudited balance sheet dated November 24, 2001: Balance Sheet (In thousands, except share and par value data)
Pre Exchange Debt Exchange Confirmation to Debt Discharge of Stock Fresh-Start Adjusted ------------------------------------------------------------------ ASSETS Current assets: Cash $ 1,099 - - - - $ 1,099 Accounts receivable, net of allowance for doubtful accounts of $11 814 - - - - 814 Other receivable 177 - - - - 177 Inventories 409 - - - - 409 Prepaid expenses and other 311 - - - - 311 ------------------------------------------------------------------ Total current assets 2,810 - - - - 2,810 ------------------------------------------------------------------ Property, plant and equipment, at cost: Land 8,750 - - - - 8,750 Buildings 10,725 - - - $ (1,316) 9,409 Manufacturing equipment 1,683 - - - (72) 1,611 Construction in progress 120 - - - - 120 ------------------------------------------------------------------ Total property, plant and equipment, at cost 21,278 - - - (1,388) 19,890 Less-accumulated depreciation and amortization (1,388) - - - 1,388 - ------------------------------------------------------------------ Total property, plant and equipment 19,890 - - - - 19,890 ------------------------------------------------------------------ Other assets 6,108 - - - - 6,108 ------------------------------------------------------------------ Total assets $ 28,808 - - - - $28,808 ================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Current portion of long-term debt (1) $ 2,000 $ 188 - - - $ 2,188 Accounts payable (2) 664 4,529 - - - 5,193 Accrued payroll and benefits 245 - - - - 245 Accrued audit and legal (3) 4,274 (4,137)$ (127) - - 10 Accrued property taxes (4) 63 635 - - - 698 Deferred revenue 609 - - - - 609 Other current liabilities (5) 97 (146) - - - (49) ------------------------------------------------------------------ Total current liabilities 7,952 1,069 (127) - - 8,894 ------------------------------------------------------------------ Long Term Debt (6) - 10,484 - - - 10,484 ------------------------------------------------------------------ Other long-term liabilities 174 - - - - 174 ------------------------------------------------------------------ Liabilities subject to compromise under reorganization proceedings (7) 315,941 (11,553) (304,388) - - - ================================================================== Shareholders' Deficiency: Preferred stock, $.10 par value, authorized 5,000,000 shares, none issued and outstanding at November 24, 2001, no par value, 2,500,000 shares authorized, none issued and outstanding "as adjusted for fresh start accounting." Common stock, $.10 par value, 120,000,000 shares authorized, 70,574,306 shares issued and outstanding at November 24, 2001, $.0001 par value, 25,000,000 shares authorized, 4,500,000 to be issued "as adjusted for fresh start accounting" 7,057 - - $ (7,057) - - Paid-in capital 345,100 - 304,515 (637,859) - 11,756 Accumulated deficit (645,835) - - 645,835 - - ------------------------------------------------------------------ (293,678) - 304,515 919 - 11,756 Unearned restricted stock (8) - - - (2,500) - (2,500) Treasury stock, at cost (130,552 shares at November 24, 2001 (1,581) - - 1,581 - - ------------------------------------------------------------------ Total shareholder's equity (deficiency) (295,259) - 304,515 - - 9,256 ------------------------------------------------------------------ Total liabilities and shareholder's equity (deficiency) $ 28,808 $ - $ - $ - $ - $ 28,808 ==================================================================
Notes: (1) Current portion of delinquent property taxes to be paid over a five year term. (2) Bankruptcy claims that require cash payments and Professional fees (see 3 below). (3) Professional fees associated with the Reorganization that were converted to a two year interest bearing convertible note in the second fiscal quarter of 2002. (4) Secured county property taxes required to be paid in cash. (5) Record the settlement of a bankruptcy claim with a mortgage holder allowing use of property insurance proceeds to pay down the mortgage principal. (6) Settlement resulting in the reduction of a secured property mortgage required to be paid in cash pursuant to the terms of the original agreement and delinquent property taxes to be paid over a five year term. (7) Unsecured liabilities that were converted to equity and warrants in the reorganized Company. (8) Restricted stock granted to the employees as part of the Plan of Reorganization. 8 Note C: Subsequent Event - Related Party Transaction ----------------------------------------------------- The Company completed an equity financing transaction with L-3 Communications, Inc. ("L-3"), a strategic investor, on August 2, 2002 for $5 million in cash. The Company issued L3 935,000 shares of common stock along with two warrants. The first warrant has a term of eighteen months and is for 167,000 shares of common stock at a price of $5.35 per share. The second warrant has a term of thirty-six months and is for 700,000 shares of common stock at a price of $7.29 per share. The Company had deferred revenue of $0.3 million, inventory of $0.2 million and accounts receivable of $0.2 million from L-3, as of March 30, 2002. Note D: Debt ------------- On September 5, 2001, the Company completed a mortgage of $2.0 million secured by one of its California properties. The loan had a three-month term with the ability to extend it for an additional nine months. The loan required interest-only monthly payments at 12% annual interest rate. The loan also provided an option for the Company to borrow an additional $3.4 million at 12% annual interest rate with a three-year loan term for the entire $5.4 million. The Company exercised this option in December of 2001 and the additional proceeds were received on January 5, 2002. The Chapter 11 Reorganization provided for the treatment of the unpaid professional persons involved in the reorganization process. The total amount owed to these professional persons as of the Effective Date was $4.1 million. The Bankruptcy Code provides that each Professional Person, defined as the law firms and investment bankers employed by the Company during the Chapter 11 reorganization, is entitled to be paid cash, in full, at the Effective Date an amount equal to their Professional Person's Allowed Administrative Claim. In consideration for each Professional Person waiving this right and agreeing to accept a convertible note, the Plan provided for each Professional Person to have an Allowed Administrative Claim as of the Effective Date. The convertible notes are due on November 15, 2003. The notes require interest-only payments at 12% annual interest rate. The notes are convertible to common stock of the Company at a conversion price of $8.20 per share. The Company has not made any of the monthly interest payments to the Professional Persons and is currently negotiating the terms of these notes with the holders. Consequently, the notes are considered to be current debt. The Company settled two claims during the Chapter 11 Reorganization that were secured by its owned properties. One of these claims is a property mortgage of $9.6 million due on November 24, 2005. The mortgage requires interest-only payments at 12% annual interest rate. The other claim was for delinquent property taxes of $0.9 million. The settlement requires semi-annual principal and interest payments on November 1st and May 1st of each year with an 8% annual interest rate. The final payment is due on November 1, 2006. 9 The Company's long-term debt is summarized below: MARCH 30, 2002 ---------------------- Property Mortgages $ 15,132 Property Taxes 940 Convertible Notes with Bankruptcy Professionals 4,137 ---------------------- 20,209 Current portion 4,325 ---------------------- Total $ 15,884 ====================== Note E: Significant Accounting Policies and New Accounting Pronouncements -------------------------------------------------------------------------- USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Management believes that these estimates and assumptions provide a reasonable basis for the fair presentation of the financial statements. DEPRECIATION AND AMORTIZATION POLICIES: Plant, property and equipment are accounted for on a historical cost basis and are depreciated or amortized over their estimated useful lives using the straight-line method except for leasehold improvements, which are amortized over the shorter of the estimated useful life or the life of the lease. Estimated useful lives are as follows: AVERAGE USEFUL LIFE Buildings 25 Years Manufacturing equipment 3 - 5 Years Other equipment 1 - 5 Years Building improvements 10 Years The Company follows the policy of capitalizing expenditures that materially increase asset lives. Maintenance and minor replacements are charged to operations when incurred. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is included in results of operations. LONG-LIVED ASSETS: The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that an asset's carrying value may exceed the undiscounted expected future cash flows to be derived from that asset. Whenever undiscounted expected future cash flows are less than the carrying value, the asset will be reduced to an amount equal to the net present 10 value of the expected future cash flows and an impairment loss will be recognized. The Company adjusted its machinery and equipment to market value in the fourth fiscal quarter of 2001. An orderly liquidation value appraisal was performed by a third party at the request of the Company, and the valuation indicated that the equipment, similar to that used by semiconductor manufacturers, required a reduction in value of approximately $2.5 million. REORGANIZATION COSTS: Expenditures directly related to the Chapter 11 filing are classified as reorganization costs and are expensed as incurred. These expenses primarily consist of professional fees and the emergence from bankruptcy. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out method) or market. Market for purchased parts and manufacturing supplies is based on replacement costs and for other inventory classifications on net realizable value. The Company had work-in-process inventory of $0.9 million at the end of the second fiscal quarter of 2002 related to capitalized costs under completed contract method of accounting, as described below, compared to $0.5 million at the beginning of the fiscal year. REVENUE RECOGNITION AND WARRANTY POLICIES: The Company uses the completed contract method of accounting for its product development projects due to the inability to accurately estimate percentage of completion during performance of the contract. Costs are capitalized during the project as inventories and expensed at its completion along with the recognition of revenue. Santa Barbara Tool and Die delivers a finished product to the customer and revenue is recognized at the time the product is shipped and title passes. Insight Analytical has service related revenue and this revenue is recognized upon completion of the service for the customer. The Company's MEMS development contracts do not have any rights of return. Santa Barbara Tool and Die and Insight Analytical did not have any sales returns in the first six months of 2002 or 2001. The Company's warranty policy provides for the replacement of defective parts when the customer's return request is approved within thirty days of the original shipment date. To date, warranty costs have not been significant. A portion of the Company's facilities are leased to tenants under long-term contracts. The terms of the leases expire within the next five years with renewal options. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash and cash equivalents, customer receivables, trade accounts payable and other accrued liabilities approximate their fair value because of the short maturity of these financial instruments. As a result of the Company's Chapter 11 filing, instruments included as liabilities subject to compromise were recorded at their historical value, however, the liabilities were settled at this amount. The liabilities not under compromise approximate fair value due to their short-term nature or market rate of interest. The carrying amounts of approximately $19.3 million of the Company's debt at March 30, 2002 approximates fair market value as the debt is with multiple lenders and it had been negotiated at the same rate which appears to represent a market rate of interest. The carrying amounts of $0.9 million of the debt due on delinquent property taxes is at rates below market and its fair market value would be $0.6 million. NET LOSS PER COMMON SHARE: Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted 11 loss per share is computed by dividing net loss by the sum of the weighted average number of common shares outstanding for the period plus the assumed exercise of all dilutive securities. However, in the case of a loss per share, dilutive securities outstanding would be antidilutive and would, therefore, be excluded from the computation of diluted loss per share. All of the following dilutive securities, which were outstanding for the two month period ending November 24, 2001 and the fiscal year ending 2001, were canceled or are no longer convertible due to the bankruptcy which occurred on January 7, 2000; options to purchase 3.8 million shares of common stock at prices ranging from $1.90 to $43.13, warrants to purchase 1.5 million shares of common stock at the lower of (i) the current market price on the vesting date, as defined or (ii) $7.00, subject to adjustments defined in the agreement and approximately 58.1 million common shares from potential conversion of certain Convertible Debentures. The following dilutive securities were outstanding at the end of the four month period ended March 30, 2002; 500,000 shares of restricted common stock pursuant to the Plan, options to purchase 1,239,800 shares of common stock at a price of $5.00 and approximately 504,500 common shares from the potential conversion of the Professional Persons convertible debt which is due November 16, 2003. The warrants issuable to the subordinated note claimants pursuant to the Plan, which are convertible into 1,880,564 common shares, are not considered dilutive as the Company will issue the same number of new common shares upon payment from the Warrant holders as it retires upon processing the associated Call on the parties that hold the shares containing the legend that restricts their trading specifically for this purpose RESEARCH AND DEVELOPMENT EXPENSES: The Company is actively engaged in basic technology and applied research and development programs which are designed to develop new products and product applications and related manufacturing processes. The costs of these programs are classified as research and development expenses and are charged to operations as incurred. INCOME TAXES: Income taxes are computed using the liability method. The provision for income taxes includes income taxes payable for the current period and the deferred income tax consequences of transactions that have been recognized in the Company's financial statements or income tax returns. The carrying value of deferred income tax assets is determined based on an evaluation of whether the realization of such assets is more likely than not. Temporary differences result primarily from accrued liabilities, valuation allowances, depreciation and amortization, and state franchise taxes. The valuation allowance is reviewed periodically to determine the amount of deferred tax asset considered realizable. A valuation allowance has been recorded for all deferred tax assets, because the Company does not have a basis to conclude that it is more likely than not that it will realize the deferred tax assets. Recent Accounting Pronouncements -------------------------------- Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Company adopted SFAS 133 12 effective October 1, 2000. The adoption of SFAS 133 did not have a significant impact on the financial position, results of operations, or cash flows of the Company. During July 2001, SFAS No. 142, "Goodwill and Other Intangible Assets," was issued by the Financial Accounting Standards Board ("FASB"). SFAS 142 applies to all acquired intangible assets whether acquired singly, as part of a group, or in a business combination. SFAS 142 specifies that goodwill and indefinite lived intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. Intangible assets with a determinable useful life will continue to be amortized over their expected lives. The Company early adopted SFAS 142 beginning in its fiscal year 2002 and it did not have a significant impact on its financial position or results of operations. In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was issued by the FASB. SFAS 144 addresses the financial accounting and reporting issues for the impairment or disposal of long-lived assets. This statement supersedes SFAS 121 but retains the fundamental provisions for (a) recognition/measurement of impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sales. It is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company early adopted SFAS 144 beginning in its fiscal year 2002 and it did not have a significant impact on its financial position or results of operations as the Company had consistently applied the impairment provisions of SFAS 121. In May of 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," was issued by the FASB. The statement rescinds FASB No. 4, "Reporting Gains and Losses from extinguishment of Debt," and an amendment of that statement, FASB No. 64, "Extinguishments of Debt Made to Satisfy Sinking Fund Requirements." As a result, gains and losses from extinguishment of debt will no longer be aggregated and classified as an extraordinary item, net of related income tax effect, in the statement of operations. Instead, such gains and losses will be classified as extraordinary items only if they meet the criteria of unusual or infrequently occurring items. SFAS No. 145 also requires that gains and losses from debt extinguishments, which were classified as extraordinary items in prior periods, be reclassified to continuing operations if they do not meet the criteria for extraordinary items. The provisions related to this portion of the statement are required to be applied in fiscal years beginning after May 15, 2002, with earlier application encouraged. The Company is currently evaluating the provisions of SFAS 145 and it has not determined the impact, if any, that this statement will have on its financial position or results of operations. In June of 2002, SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," which nullifies EITF issue 94-3, was issued by the FASB. SFAS 146 is effective for exit and disposal activities that are initiated after December 31, 2002 and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, in contrast to the date of an entity's commitment to an exit plan, as required by EITF issue 94-3. The Company is currently evaluating the provisions of SFAS 146, but does not expect a material impact on its financials position or results of operations. 13 Note F: Liabilities subject to compromise under reorganization proceedings: -------------------------------------------------------------------------- Certain obligations of the Company, which were in existence as of the bankruptcy petition filing date, were stayed under the federal bankruptcy laws and were not paid while the Company operated as a debtor in possession. These claims are reflected in the accompanying balance sheet as of September 29, 2001. The unsecured liabilities subject to compromise were satisfied through the confirmation of the Reorganization Plan and were converted to equity through the approved issuance of the Company's common stock. The Company has initiated the process for issuance of the common stock and warrants pursuant to the Plan, however it will not perform the actual distribution until the Company is current with all of its Securities and Exchange Commission filings. The Company anticipates that the filings will be current by the end of January 2003. Liabilities subject to compromise under reorganization proceedings consist of: As of --------------- September 29, 2001 Secured Liabilities: Property Mortgage $ 10,375 Property taxes 1,575 ------------- 11,950 Unsecured Liabilities: Accounts payable trade 10,661 Borrowings outstanding under: Offshore guaranteed bank loans 59,961 Accounts payable offshore subsidiary 45,582 7% convertible subordinated debentures 87,891 14% convertible debenture 24,711 2% convertible debenture 12,262 Operating leases 55,217 Other accrued expenses 7,474 ------------- 303,759 $ 315,709 ============= 14 Note G: Segments of Business: ---------------------------- Indicated below is the information required to comply with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Under SFAS No. 131, "operating segments" are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Company has four reportable operating segments: Micro-electro-mechanical systems ("MEMS"), Santa Barbara Tool & Die, Insight Analytical and Rental Income. MEMS devices are made using modern wafer-processing technology, similar to that used in making silicon electronic devices. The factor that distinguishes MEMS devices is that they are designed to include moving parts, hence the "mechanical" part of the name. Common uses for MEMS devices are automotive air-bag sensors (accelerometers), pressure and airflow sensors, and inkjet printer heads. Santa Barbara Tool and Die's technology permits high precision manufacturing of tooling for its customers. Insight Analytical's laboratory equipment provides services that identify information as to dimension, material makeup, and material crystal properties of a customer's sample. The Company has approximately 51,000 square feet of building space available to lease. As of March 30, 2002, approximately 34,000 square feet were under long-term lease arrangements and reported as Rental Income. The Company's management evaluates performance of each segment primarily on the net sales and gross profit (loss). The information in the following table is derived directly from the segments' internal financial reporting used for corporate management purposes. Research and development and general and administrative expenses are not allocated to and/or among the segments. 15 The following table represents net sales, gross profit (loss) and long lived assets by segment (in thousands):
($000's) Santa Barbara Insight Rental United States MEMS Tool and Die Analytical Income Total -------------------------------------------------------------------------------- Successor Co. Three Months Ended: March 30, 2002 Net sales $ 505 $ 145 $ 27 $ 128 $ 805 ================================================================================- Intercompany Sales $ 7 $ 18 $ 100 $ - ================================================================================- Gross profit (loss) $ (857) $ (25) $ 47 $ 96 $ (739) ================================================================================- Long Lived Assets $ 16,854 $ 178 $ 81 $ 2,716 $ 19,829 ================================================================================- Predecessor Co. Three Months Ended: March 31, 2001 Net sales $ 454 $ 209 $ 56 $ 11 $ 730 ================================================================================- Intercompany Sales $ 6 $ 20 $ 81 $ - ================================================================================- Gross profit (loss) $ (874) $ 38 $ 42 $ (42) $ (836) ================================================================================- Long Lived Assets $ 20,060 $ 185 $ 244 $ 2,834 $ 23,323 ================================================================================-
16
($000's) Santa Barbara Insight Rental United States MEMS Tool and Die Analytical Income Total -------------------------------------------------------------------------------- Successor Co. Four Months Ended: March 30, 2002 Net sales $ 810 $ 186 $ 41 $ 171 $ 1,208 ================================================================================- Intercompany Sales $ 9 $ 32 $ 118 $ - ================================================================================- Gross profit (loss) $ (1,035) $ (21) $ 53 $ 126 $ (877) ================================================================================- Long Lived Assets $ 16,854 $ 178 $ 81 $ 2,716 $ 19,829 ================================================================================- Predecessor Co. Two Months Ended: November 24, 2001 Net sales $ 514 $ 76 $ 16 $ 86 $ 692 ================================================================================- Intercompany Sales $ 4 $ 8 $ 41 $ - ================================================================================- Gross profit (loss) $ (359) $ (12) $ 15 $ 80 $ (276) ================================================================================- Long Lived Assets $ 16,853 $ 195 $ 89 $ 2,753 $ 19,890 ================================================================================- Predecessor Co. Six Months Ended: March 31, 2001 Net sales $ 656 $ 365 $ 138 $ 17 $ 1,176 ================================================================================- Intercompany Sales $ 12 $ 31 $ 156 $ - ================================================================================- Gross profit (loss) $ (1,867) $ 36 $ 120 $ (100) $ (1,811) ================================================================================- Long Lived Assets $ 20,060 $ 185 $ 244 $ 2,834 $ 23,323 ================================================================================-
The Company made $0.4 million in purchases of property plant and equipment in the first six months of fiscal 2002. The Company sells its products to customers in both Europe and Canada. The following table displays domestic and international revenue:
Successor Co. Predecessor Co. Successor Co. Predecessor Co. Predecessor Co. Three Months Three Months Four Months Two Months Six Months Ended Ended Ended Ended Ended March 30, March 31, March 30, November 24, March 31, ($000's) 2002 2001 2002 2001 2001 ------------------- ------------------ -------------------- ---------------- ----------------- Revenue Domestic $ 727 $ 730 $ 1,129 $ 692 $ 1,176 Foreign $ 78 $ - $ 79 $ - $ - Total $ 805 $ 730 $ 1,208 $ 692 $ 1,176 =================== ================== ==================== ================ =================
17 Item 2: Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations ----------------------- STATEMENTS IN THIS DISCUSSION THAT ARE NOT HISTORICAL ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE HEREOF. ALL OF THE FORWARD-LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE COMPANY, WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN AND DIFFICULT TO PREDICT. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH ESTIMATES. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW UNDER THE HEADING "RISK FACTORS AFFECTING OUR BUSINESS" AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-QSB, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE COMPANY'S MANAGEMENT. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO THE FOLLOWING: THE COMPANY'S ABILITY TO MAKE THE TRANSITION TO VOLUME PRODUCTION OF MEMS PRODUCTS; THE COMPANY'S HISTORY OF LOSSES AND BANKRUPTCY; THE COMPANY'S NEED FOR ADDITIONAL CAPITAL; CHANGING TECHNOLOGY; COMPETITION; THE COMPANY'S ABILITY TO PROTECT INTELLECTUAL PROPERTY, FLUCTUATIONS IN THE COMPANY'S QUARTERLY AND ANNUAL OPERATING RESULTS; LACK OF AN ACTIVE TRADING MARKET; RISKS RELATED TO INTERNATIONAL TRANSACTIONS; ENVIRONMENTAL LAWS AND REGULATIONS, SUPPLIES OF RAW MATERIALS; ANTI-TAKEOVER PROVISIONS OF THE COMPANY'S CHARTER AND DELAWARE LAW; AND GENERAL ECONOMIC AND POLITICAL UNCERTAINTY. The Company's Reorganization Plan under Chapter 11 of the U.S. Bankruptcy code (the "Plan"), became effective on November 16, 2001. During the reorganization period the Company re-organized its operations from manufacturing magnetic recording heads solely for the disk drive industry to a manufacturing MEMS operating in a number of industry segments. The Company is developing products for the personal security, telecommunications, inertial navigation, bio-technical, microfluidics and biomedical industries and seeks to broaden into the wireless communication industry. The Company adopted the fresh start reporting requirements of Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" during the first quarter of fiscal 2002. In accordance with the fresh start reporting requirements, the reorganization value of the Company was allocated to the Company's assets in conformity with the procedures specified by SFAS No. 142, "Goodwill and Other Intangible Assets." As provided for under the Plan, the Company converted approximately $12 million of its secured liabilities to debt and $304 million of unsecured liabilities to equity in the reorganized entity. The Company has three additional lines of business, which are: Santa Barbara Tool and Die, a machine, model and die shop, Insight Analytical, an analytical lab, and leasing of excess space in its owned facility under long-term lease contracts. Santa Barbara Tool and Die and Insight Analytical are strategic parts of the core company, in that their services are used to make the core business more competitive, and both use their capacity that exceeds Company needs to provide services to outside customers. The Company incurred operating losses in the second fiscal quarter of 2002. These losses are a result of the level of the current MEMS-related sales, which are predominantly orders for delivery of prototypes and new product development. The sales for the second fiscal quarter of 2002 were predominantly from development of a gyroscope for inertial navigation, continued development 18 of the personal security device, a development project for an add/drop optical telecommunications switch, Santa Barbara Tool & Die and leasing of excess space in our owned facility under long-term lease contracts. The current level of sales cannot absorb the fixed costs of operating the Company's 30,000 sq. ft. wafer fabrication facility. The Company plans to shift from prototype and product development orders to the product qualification phase and ultimately to high-volume production orders with its customers. This process depends in part on the general development and acceptance of MEMS technology industry-wide. While the Company is devoting significant engineering resources to these efforts, there can be no assurances that the Company will succeed in securing production orders. To the extent that the Company is unable to do so, there would be a material adverse effect on the Company's operating results and liquidity. The personal security device customer cancelled the development project with us during our second fiscal quarter of 2002. They are transferring the product to a different fabrication process for cost purposes. This product was our customer's proprietary design. The results of operations and cash flows for the two months ended November 24, 2001 include operations prior to the Company's emergence from Chapter 11 proceedings (referred to as "Predecessor Company") and the effects of Fresh-Start Reporting. The Company's monthly fiscal calendar ended with November 24, 2001. There were no significant accounting transactions between the Company's exit from the Chapter 11 on November 16, 2001 and November 24, 2001 and therefore it believes this reporting to be appropriate. The results of operations and cash flows for the four months ended March 30, 2002 include operations subsequent to the Company's emergence from Chapter 11 proceedings (referred to as "Successor Company") and reflect the effects of Fresh-Start Reporting. As a result, the net loss for the four months ended March 30, 2002 is not comparable with prior periods. In addition, the balance sheet as of March 30, 2002 is not comparable to prior periods for the reasons discussed above. In order to allow comparison of the Company's results of operations, the current year predecessor and successor periods have been combined for comparison to the prior year periods. Critical Accounting Policies ---------------------------- Application of our accounting policies require management to make judgments and estimates about the amounts reflected in the financial statements. Management uses historical experience and all available information to make these estimates and judgments, although differing amounts would be reported if the assumptions and estimates changed. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, inventory allowances, impairment costs and other special charges, depreciation and amortization, sales returns, warranty costs, taxes, and contingencies. Management has identified the following accounting policies as critical to an understanding of our financial statements and as areas most dependent on management's judgment and estimates. GOING CONCERN ASSUMPTION: The Company has incurred net losses and losses from operations for each quarter since 1999. The Company filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in January, 2000 and, on emergence from bankruptcy, all of the previously issued and outstanding common stock was canceled without consideration to the holders. The Company incurred net losses of $2.3 million for the quarter ended March 30, 2002. It 19 expects to continue to incur substantial operating losses for the foreseeable future, and it cannot predict the extent of the future losses or when it may become profitable. Even if the Company does achieve profitability, it may not be able to sustain or increase profitability in the future. The Company expects to incur increasing sales and marketing, research and development and general and administrative expenses. As a result, it will need to significantly increase its revenues to achieve profitability. Although the Company's revenues have increased, the growth may not continue at the current rate or at all. The above items raise substantial doubt about the Company's ability to continue as a going concern. STATEMENT OF POSITION 90-7 AND FRESH START ACCOUNTING: The Company exited its Chapter 11 Reorganization process on November 16, 2001 ("Effective Date"). The Company adopted the fresh start reporting requirements of Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" during the first quarter of fiscal 2002. In accordance with the fresh start reporting requirements, the reorganization value of the Company was allocated to the Company's assets in conformity with the procedures specified by SFAS No. 142, "Goodwill and Other Intangible Assets". As provided for under the Company's reorganization plan (the "Plan"), the Company converted approximately $12 million of its secured liabilities to debt and $304 million of unsecured liabilities to common stock and warrants in the reorganized entity. The Company has initiated the process for issuance of the common stock and warrants pursuant to the Plan, however it will not perform the actual distribution until the Company is current with all of its Securities and Exchange Commission filings. The Company anticipates that the filings will be current by the end of January 2003. REVENUE RECOGNITION AND WARRANTY POLICIES: The Company uses the completed contract method of accounting for its product development projects due to the inability to accurately estimate percentage of completion during performance of the contract. Costs are capitalized during the project as inventories and expensed at its completion along with the recognition of revenue. Santa Barbara Tool and Die delivers a finished product to the customer and revenue is recognized at the time the product is shipped and title passes. Insight Analytical has service related revenue and this revenue is recognized upon completion of the service for the customer. The Company's MEMS development contracts do not have any rights of return. Santa Barbara Tool and Die and Insight Analytical did not have any sales returns in the first fiscal quarter of 2002 or 2001. The Company's warranty policy provides for the replacement of defective parts when the customer's return request is approved within thirty days of the original shipment date. To date, warranty costs have not been significant. A portion of the Company's facilities are leased to tenants under long-term contracts. The terms of the leases expire within the next five years with renewal options. LONG-LIVED ASSETS: The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that an asset's carrying value may exceed the undiscounted expected future cash flows to be derived from that asset. Whenever undiscounted expected future cash flows are less than the carrying value, the asset will be reduced to an amount equal to the net present value of the expected future cash flows and an impairment loss will be recognized. The Company adjusted its machinery and equipment to market value in the fourth fiscal quarter of 2001. An orderly liquidation value appraisal was 20 performed by a third party at the request of the Company, and the valuation indicated that the equipment, similar to that used by semiconductor manufacturers, required a reduction in value of approximately $2.5 million. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash and cash equivalents, customer receivables, trade accounts payable and other accrued liabilities approximate their fair value because of the short maturity of these financial instruments. As a result of the Company's Chapter 11 filing, instruments included as liabilities subject to compromise were recorded at their historical value, however, the liabilities were not settled at this amount. The liabilities not under compromise approximate fair value due to their short-term nature or market rate of interest. The carrying amounts of approximately $19.3 million of the Company's debt at March 30, 2002 approximates fair market value as the debt is with multiple lenders and it had been negotiated at the same rate which appears to represent a market rate of interest. The carrying amounts of $0.9 million of the debt due on delinquent property taxes is at rates below market and its fair market value would be $0.6 million. Recent Accounting Pronouncements -------------------------------- SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Company adopted SFAS 133 effective October 1, 2000. The adoption of SFAS 133 did not have a significant impact on the financial position, results of operations, or cash flows of the Company. During July 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued by the Financial Accounting Standards Board ("FASB"). SFAS 142 applies to all acquired intangible assets whether acquired singly, as part of a group, or in a business combination. SFAS 142 specifies that goodwill and indefinite lived intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. Intangible assets with a determinable useful life will continue to be amortized over their expected lives. The Company early adopted SFAS 142 beginning in its fiscal year 2002 and it did not have a significant impact on its financial position or results of operations. In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was issued by the FASB. SFAS 144 addresses the financial accounting and reporting issues for the impairment or disposal of long-lived assets. This statement supersedes SFAS 121 but retains the fundamental provisions for (a) recognition/measurement of impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sales. It is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company early adopted SFAS 144 beginning in its fiscal year 2002 and it did not have a significant impact on its financial position or results of operations as the Company had consistently applied the impairment provisions of SFAS 121. In May of 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," was issued by the FASB. The statement rescinds FASB No. 4, "Reporting Gains and Losses from extinguishment of Debt," and an amendment of that statement, FASB 21 No. 64, "Extinguishments of Debt Made to Satisfy Sinking Fund Requirements." As a result, gains and losses from extinguishment of debt will no longer be aggregated and classified as an extraordinary item, net of related income tax effect, in the statement of operations. Instead, such gains and losses will be classified as extraordinary items only if they meet the criteria of unusual or infrequently occurring items. SFAS No. 145 also requires that gains and losses from debt extinguishments, which were classified as extraordinary items in prior periods, be reclassified to continuing operations if they do not meet the criteria for extraordinary items. The provisions related to this portion of the statement are required to be applied in fiscal years beginning after May 15, 2002, with earlier application encouraged. The Company is currently evaluating the provisions of SFAS 145 and it has not determined the impact, if any, that this statement will have on its financial position or results of operations. In June of 2002, SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," which nullifies EITF issue 94-3 was issued by the FASB. SFAS 146 is effective for exit and disposal activities that are initiated after December 31, 2002 and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, in contrast to the date of an entity's commitment to an exit plan, as required by EITF issue 94-3. The Company is currently evaluating the provisions of SFAS 146, but does not expect a material impact on its financials position or results of operations. OVERVIEW. The following discussion presents information about the financial condition, liquidity and capital resources, and results of operations of the Company and its predecessor as of and for the interim two month period ended November 24, 2001, the interim four months ended March 30, 2002 and the six months and fiscal quarter ended March 31, 2001. This information should be read in conjunction with the audited financial statements and the notes thereto as reported on Innovative Micro Technology, Inc. Annual Report on Form 10-KSB for the fiscal year ended September 29, 2001. Three Months Ended March 30, 2002 --------------------------------- NET SALES. Net sales were $0.8 million and $0.7 million in the second quarter of fiscal 2002 and 2001, respectively. Sales for the fiscal 2002 period were made up of $0.5 million of MEMS-related business, $0.2 million from the combination of Santa Barbara Tool and Die and Insight Analytical and $0.1 million from leasing of space to tenants. The fiscal 2001 period sales were made up of $0.4 million of MEMS-related business, $0.2 million from Santa Barbara Tool and Die and $0.1 million from Insight Analytical. GROSS LOSS. As a percentage of net sales, gross loss was a negative 91.8% and 114.5% for the second quarter of fiscal 2002 and 2001, respectively. The gross loss was $0.7 million and $0.8 million for the second quarter of fiscal 2002 and 2001, respectively. The gross loss during fiscal 2002 was composed of a gross loss of $0.8 million from the MEMS-related business and from the combination of Santa Barbara Tool and Die and Insight Analytical a breakeven gross profit. Leasing of space to tenants provided a $0.1 million gross profit for this same period. The MEMS business gross loss included $0.1 million in amortization of employee stock incentives for the fiscal 2002 period. The MEMS-related business had a gross loss for the fiscal 2001 period of $0.9 million. Santa Barbara Tool 22 and Die and Insight Analytical combined for a gross profit of $0.1 million in the second quarter of fiscal 2001. The gross loss for the second fiscal quarter of 2002 was primarily due to the under-absorbed fixed costs associated with the Company's wafer fabrication facility. RESEARCH AND DEVELOPMENT. Research and development ("R&D") expense, as a percentage of net sales, was 29.6% and 14.0% or $0.2 million and $0.1 million for the second quarter of fiscal 2002 and 2001, respectively. R&D expense included $0.1 million in amortization of employee stock incentives for the fiscal 2002 period. The Company is focused on projects allowing entry to the wireless communications and biomedical industries. The Company has four employees focused on the development of new products and manufacturing processes. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expense as a percentage of net sales was 69.9% and 58.1% for the second quarter of fiscal 2002 and 2001, respectively. Expenses in dollars were $0.6 million for the second quarter of fiscal 2002 and $0.4 million for the same period of fiscal 2001. The second fiscal quarter of 2002 expense included $0.1 million in amortization of employee stock incentives. The second quarter of fiscal 2001 amount includes $0.1 million of expenses related to the Hollister property, which the Company is planning to sell. The Company has six employees providing the services reported as SG&A. SG&A expenses have increased primarily due to the growth in sales and the associated customer interface. INTEREST EXPENSE. Interest expense was $0.6 million and $0.4 million for the second quarter of fiscal 2002 and 2001, respectively. The increase principally results from the interest expense associated with the $5.4 million mortgage that the Company secured at the beginning of the second fiscal quarter of 2002 and the $4.1 million in convertible notes issued to the unpaid professional persons involved in the reorganization process as of the Effective Date. Both of these instruments require interest-only monthly payments based upon a 12% annual interest rate. REORGANIZATION COSTS. Reorganization costs consist primarily of professional fees directly related to the Chapter 11 filing and the emergence from bankruptcy. These costs were $0.2 million and $0.6 million for the second fiscal quarter of 2002 and 2001, respectively. The reorganization costs are expected to continue through the fourth fiscal quarter of 2002, but at reduced rates. Six Months Ended March 30, 2002 ------------------------------- NET SALES. Net sales were $1.9 million for the six months ended March 30, 2002 and $1.2 million for the first six months of fiscal 2001. The MEMS-related business generated sales of $1.3 million, the combination of Santa Barbara Tool and Die and Insight Analytical generated sales of $0.3 million and $0.3 million came from leasing of space to tenants for the first six months of fiscal 2002. The fiscal 2001 period sales were made up of $0.7 million of MEMS-related business, $0.4 million from Santa Barbara Tool and Die and $0.1 million from Insight Analytical. GROSS LOSS. As a percentage of net sales, gross loss was a negative 60.7% for the combined six months ended March 30, 2002 or $1.2 million and 154.0% or $1.8 23 million for the first six months of fiscal 2001. The MEMS-related business had a gross loss of $1.4 million for the first six months of fiscal 2002. The MEMS business gross loss included $0.1 million in amortization of employee stock incentives for the fiscal 2002 period. The combination of Santa Barbara Tool and Die and Insight Analytical had a breakeven gross profit for the fiscal 2002 period. Leasing of space to tenants provided a $0.2 million gross profit for this same period. The MEMS-related business had a gross loss for the fiscal 2001 period of $1.9 million. Santa Barbara Tool and Die and Insight Analytical combined for a gross profit of $0.2 million and leasing of space to tenants had a gross loss of $0.1 million for the first six months of fiscal 2001. The improvement in gross loss for the first six months of 2002 as compared to fiscal 2001 is primarily due to the increase in revenue allowing absorption of the fixed costs associated with the Company's wafer fabrication facility. RESEARCH AND DEVELOPMENT. R&D expense, as a percentage of net sales, was 22.0% or $0.4 million for the combined six months ended March 30, 2002 and 18.9% or $0.2 million for the first six months of fiscal 2001. R&D expense included $0.1 million in amortization of employee stock incentives for the fiscal 2002 period. R&D expense increased, as the Company focused on projects allowing entry to the wireless communications and biomedical industries SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expense as a percentage of net sales was 55.5% the combined six months ended March 30, 2002 and 62.2% for the first six months of fiscal 2001. Expenses in dollars were $1.1 million for the first six months of fiscal 2002 compared to $0.7 million for the same period of fiscal 2001. The fiscal 2002 period expense included $0.2 million in amortization of employee stock incentives. The first half of both fiscal 2002 and 2001 amounts include $0.1 million of expenses related to the Hollister property, which the Company is planning to sell. SG&A expenses have increased primarily due to the growth in sales and the associated customer interface. INTEREST EXPENSE. Interest expense was $1.2 million for the combined six months ended March 30, 2002 and $0.7 million for the first six months of fiscal 2001. The increase principally results from the interest expense associated with the $5.4 million mortgage that the Company secured at the beginning of the second fiscal quarter of 2002 and the $4.1 million in convertible notes issued to the unpaid professional persons involved in the reorganization process as of the Effective Date. Both of these instruments require interest-only monthly payments based upon a 12% annual interest rate. OTHER INCOME. The Company recognized $0.2 million in other income for the first fiscal quarter of 2002 from the sale of a minority ownership position in Magnetic Data Technologies, LLC, a former subsidiary of the Company. An additional $0.2 million is being held in escrow for potential indemnity claims and will be released over the next two years, so long as no claims have been successfully brought against the escrow. REORGANIZATION COSTS. Reorganization costs consist primarily of professional fees directly related to the Chapter 11 filing. The professional fees were $0.7 million for the combined six months ended March 30, 2002 and $1.0 million for the first six months of fiscal 2001. 24 Liquidity and Capital Resources ------------------------------- At March 30, 2002, the Company's cash decreased to $1.3 million from $1.7 million at September 29, 2001. The Company raised an additional $2.1 million in cash, after expenses, in its fiscal second quarter of 2002 by completing a mortgage secured by its Hollister property. The decrease in cash was primarily due to its use for operating activities of $3.8 million, which included the payment of a bankruptcy court approved claim for delinquent property taxes of $0.9 million. The Company settled an additional claim for delinquent property taxes of $.9 million and was able to negotiate a five-year payment plan at an 8% interest rate requiring semi-annual principal and interest payments. The Company acquired $0.4 million of new equipment to increase its capability during this period. The MEMS industry is capital intensive and requires expenditures for research and development in order to develop and take advantage of technological improvements and new technologies. In fiscal 2002, the Company plans approximately $0.5 million in capital expenditures primarily to continue development and production of new MEMS technologies and products and to increase overall production capacity. The Company's liquidity and ability to fund operating and capital expenditure requirements during fiscal 2002 are heavily dependent on its ability to transition from development to volume production of its MEMS products on a timely basis. Although the Company is devoting substantial engineering and manufacturing resources to these efforts, there can be no assurances that the Company will achieve this transition on a timely basis. If the Company is unable to achieve any of the factors on which the fiscal 2002 liquidity depends on a timely basis and are unable to obtain adequate alternative financing, there will be a material adverse effect on the Company's financial condition and competitive position. Because of the Company's recurring losses from operations and negative cash flow the Company's accountants have expressed substantial doubt about its ability to continue as a going concern. The Company completed an equity financing transaction with L-3, a strategic investor, on August 2, 2002 for $5 million in cash. The Company issued to L-3 935,000 shares of common stock along with two warrants. The first warrant has a term of eighteen months and is for 167,000 shares of common stock at a price of $5.35 per share. The second warrant has a term of thirty-six months and is for 700,000 shares of common stock at a price of $7.29 per share. Funding through the exercise of the warrants is at the exclusive discretion of L-3. The Company cannot give assurance that any additional financing will be available or, if available, that its terms will be favorable to the Company. Purchase commitments associated with capital expenditures were minimal at March 30, 2002. The Company has no leases for which it is the lessee. The aggregate principal payments of long term debt for the fiscal periods subsequent to March 30, 2002 are: 2003 - $4.4 million, 2004 - $0.2 million, 2005 - $5.6 million, 2006 - $9.9 million and 2007 - $0.1 million. These amounts relate to convertible notes owed to the professionals used in the bankruptcy, property taxes and two property mortgages, which are all secured by the two California properties owned by the Company. 25 RISK FACTORS AFFECTING OUR BUSINESS IN ADDITION TO THE FACTORS DISCUSSED ELSEWHERE IN THIS REPORT, THE FOLLOWING ARE IMPORTANT FACTORS THAT COULD CAUSE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S FINANCIAL CONDITION, COMPETITIVE POSITION AND ABILITY TO CONTINUE AS A GOING CONCERN AND TO CAUSE ACTUAL RESULTS OR EVENTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD LOOKING STATEMENTS MADE BY OR ON BEHALF OF THE COMPANY. THE COMPANY HAS INCURRED LOSSES SINCE 1999; IT RECENTLY EMERGED FROM BANKRUPTCY, AND EXPECTS TO INCUR LOSSES FOR THE FORESEEABLE FUTURE. The Company has incurred net losses and losses from operations for each quarter since 1999. The Company filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in January, 2000 and, on emergence from bankruptcy, all of the previously issued and outstanding common stock was canceled without consideration to the holders. The Company incurred net losses of $2.3 million for the quarter ended March 30, 2002. It expects to continue to incur substantial operating losses for the foreseeable future, and it cannot predict the extent of the future losses or when it may become profitable. If the Company does achieve profitability, it may not be able to sustain or increase profitability in the future. The Company expects to incur increasing sales and marketing, research and development and general and administrative expenses. As a result, it will need to significantly increase its revenues to achieve profitability. Although the Company's revenues have increased, the growth may not continue at the current rate or at all. The above factors raise substantial doubt about the Company's ability to continue as a going concern. CAPITAL NEEDS. The MEMS industry is capital intensive and requires expenditures for facilities, equipment and research and development to develop and keep pace with technological improvements. The Company believes that to achieve its objectives, it will need additional resources over the next several years for capital expenditures, working capital and research and development. The Company purchased property, plant and equipment in the first six months of fiscal 2001 totaling $0.1 million. During fiscal 2002, the Company plans to purchase or enter into lease financing for approximately $0.5 million of property, plant and equipment. The Company believes that it will be able to fund future expenditures from a combination of new capital infusion, existing cash balances and cash flow from operations. The Company may need additional sources of capital to meet requirements in future years. There is no assurance that additional funds will be available to the Company or, if available, that the terms and conditions will be acceptable to the Company. If the Company cannot obtain sufficient capital, it would need to curtail its operating and capital expenditures, which would adversely affect the Company's future operating results and could prevent the Company from competing successfully in the MEMS industry. THE COMPANY HAS HIGH FIXED COSTS AND EXCESS CAPACITY DUE TO ITS CURRENT LOW PRODUCTION VOLUMES. 26 The fixed costs of operating and maintaining the Company's wafer fabrication facility and other elements of its production capacity are high. Most of its current production consists of prototypes and new product development. These are low-volume projects, which leave the Company's facilities underutilized and cannot absorb the fixed costs. As a result the Company experiences operating losses. The company plans to shift from low-volume prototype and development orders to high-volume production for its customers as their development programs mature into production contracts, which will make fuller use of its excess capacity. However, making this shift depends on the success of the Company's engineers in developing efficient high-volume production technology, the success of its customers in developing marketable uses for its MEMS technology, and the general growth and acceptance of MEMS technology. If the Company cannot successfully make the transition to high-volume production, it will continue to experience losses and suffer material harm to its operating results and liquidity. TECHNOLOGICAL CHANGES. The MEMS business has been characterized by rapidly changing technology. The demand for greater capability will cause competitors to continue to build greater performance into their respective products. There can be no assurance that the Company's products will achieve such performance. There can be no assurance that the Company will not experience manufacturing and product quality problems in the future. The Company's future success depends in large part on its ability to develop and qualify new products on a timely basis and to manufacture them in sufficient quantities to compete effectively on the basis of price and performance. COMPETITION. The Company competes with other independent MEMS manufacturers, with large integrated circuit manufacturers, and with captive wafer fabs owned by vertically integrated MEMS users. Many of these competitors are larger than the Company and have greater financial resources. If the Company is unable to equal or surpass its competitors in the area of price, performance, quality or customer responsiveness, then the business will be unsuccessful. THE COMPANY'S SUCCESS DEPENDS IN PART UPON THE ABILITY TO PROTECT ITS INTELLECTUAL PROPERTY. The Company's success depends in large part upon its proprietary technology. The Company relies on a combination of patents, trade secret protection, confidentiality and nondisclosure agreements and licensing arrangements to establish and protect its intellectual property rights. The Company's patents may be successfully challenged or may not provide it with the intended competitive advantages. Important technology developed by the Company may not be patentable. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of its products or to obtain and use information that is regarded as proprietary. Policing unauthorized use of the Company's proprietary technology is difficult. In addition, the laws of some foreign countries do not protect these proprietary rights to as great an extent as do the laws of the United States. The Company's means of protecting its proprietary rights may not be adequate and its competitors may independently develop similar technology, duplicate its products, or design around its proprietary intellectual property. 27 The Company may face costly damages or litigation costs if a third party claims that the Company infringed on its intellectual property. Advanced technology products such as the Company's are increasingly subject to third-party infringement claims. In addition, former employers of the Company's current and future employees may assert that its employees have disclosed confidential or proprietary information to the Company. Any of these claims even if they are without merit, could be expensive and time consuming to defend. In addition, intellectual property claims against the Company, with or without merit, could require it to enter into royalty or licensing agreements. These royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could seriously harm its business. A successful claim of infringement against the Company or its failure or inability to license the infringed or similar technology could adversely affect its business because the Company would not be able to sell the affected product without redeveloping the product or its manufacturing process, incurring significant additional expenses. FLUCTUATIONS IN QUARTERLY AND ANNUAL OPERATING RESULTS MAY ADVERSELY AFFECT THE COMPANY'S BUSINESS. The Company's operating results have fluctuated and may continue to fluctuate from quarter to quarter and year to year. The Company's sales are generally made pursuant to individual purchase orders and production is scheduled on the basis of such purchase orders. Because the market for MEMS products is new, and the Company is constantly introducing new designs ordered by customers, the sales cycles are long and unpredictable. The sales cycle for the Company's products typically ranges from three to six months. Moreover, as customer programs mature, the Company may have to write-down inventory and equipment. In addition, the Company must qualify on future programs to sell its products. Cancellation, rescheduling and reductions of orders in the future could result in inventory losses, under-utilization of production capacity and write-downs of tooling and equipment which would have a material adverse effect on the Company's future operating results. In particular, in the past the Company's operating results have been adversely affected when production capacity is underutilized, and will likely be so affected in the future. PLANT EXCESS CAPACITY. The Company has a 6-inch wafer fabrication facility that has 30,000 square feet of fully facilitized manufacturing space. At the current level of customer orders this facility is underutilized and the associated depreciation and utilities expenses are underabsorbed. The Company is working with customers on development programs that are expected to mature into production contracts, which will more fully utilize its plant capacity. However, these contracts may never materialize and the plant underutilization could continue to cause an adverse affect on the Company's operating results. THE COMPANY'S COMMON STOCK MAY BE ILLIQUID AND SUFFER FROM PRICE VOLATILITY BECAUSE IT HAS NOT BEEN PUBLICLY TRADED. 28 There has not been a public market for the Company's common stock since January, 2000. The Company's outstanding common stock, which was issued after the emergence of the Company from bankruptcy, is not listed for trading on any stock market or quotation on the Nasdaq. The company intends to apply for listing of its common stock, but there can be no assurance it will be successful. Even if listed, it is likely that the stock will initially be thinly traded and the Company cannot predict when or if investor interest in the Company will lead to the development of an active, liquid trading market. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders for investors. A thin trading market in the Company's stock will likely depress the trading price, make it more difficult for investors to buy or sell its common stock, and result in price volatility. INTERNATIONAL SALES COULD EXPOSE THE COMPANY TO RISK. The Company sells its products to foreign customers and expect this to be an important part of its ongoing business. Accordingly, the Company will face risks inherent in conducting business internationally, such as: . difficulties in collecting accounts receivable and longer collection periods; . seasonal business activity in certain parts of the world; . potentially adverse tax consequences; . fluctuations in currency exchange rates; . political and economic instability; and . trade barriers. Any of these factors could seriously harm the Company's international operations and, consequently, business. ENVIRONMENTAL LAWS AND REGULATIONS. The Company's manufacturing processes employ hazardous substances and are subject to regulation pursuant to various federal and state laws governing the environment. In the past, the Company has been subject to claims by government agencies and individuals related to disposal of hazardous materials. These matters have largely been resolved and the Company believes it conducts its business in a manner that complies with environmental laws and regulations. Nevertheless, material environmental claims could arise in the future, which could have a material adverse effect on the Company. INTERRUPTIONS IN THE COMPANY'S SUPPLY OF RAW MATERIALS COULD ADVERSELY AFFECT ITS BUSINESS. The Company's operations require raw materials that meet exacting standards. The Company generally has multiple sources of supply for its raw materials; however, only a limited number of suppliers are capable of delivering certain raw materials that meet its standards. Various factors could reduce the 29 availability of raw materials such as silicon wafers, photomasks, chemicals, and gases. In addition, any transportation problems could delay the Company's receipt of raw materials. Although raw materials shortages or transportation problems have not interrupted its operations in the past, shortages may occur from time to time in the future. Also, lead times for the supply of raw materials have been extended in the past. If the Company's supply of raw materials is interrupted or its lead times extended, then its cash flow would be reduced, orders may be cancelled or diverted to competitors, and its business would suffer significant harm. THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS COULD DELAY OR PREVENT AN ACQUISITION OR SALE OF THE COMPANY. The Company's Certificate of Incorporation empowers the Board of Directors to establish and issue a class of preferred stock, and to determine the rights, preferences and privileges of the preferred stock. This gives the Board of Directors the ability to deter, discourage or make more difficult a change in control of the Company, even if such a change in control would be in the interest of a significant number of our stockholders or if such a change in control would provide its stockholders with a substantial premium for their shares over the then-prevailing market price for the common stock. The Company's Amended and Restated Bylaws contain other provisions that could have an anti-takeover effect, including the following: . only one of the three classes of directors is elected each year; . stockholders have limited ability to remove directors; . stockholders cannot call a special meeting of stockholders; and . stockholders must give advance notice to nominate directors or submit proposals for consideration at stockholder meetings. ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW COULD DELAY OR PREVENT AN ACQUISITION OF THE COMPANY. The Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for the Company's common stock or preventing changes in its management. CURRENT ECONOMIC AND POLITICAL UNCERTAINTIES MAY HARM THE COMPANY'S BUSINESS. Deteriorating global economic conditions and the effects of ongoing military actions against terrorists may cause significant disruptions to commerce throughout the world. To the extent that such disruptions result in delays or cancellations of customer orders, a general decrease in corporate spending on advanced technology, or the Company's inability to effectively market, manufacture or ship its products, its business, results of operations and financial conditions could suffer harm. In addition, the Company's ability 30 to raise capital for purposes of research and development, capital expenditures and ongoing operations depends on access to financing. During times of adverse global economic and political conditions, general investor confidence could decrease and make it more difficult for the Company to find potential investors. If the Company does not have access to financing, it could be unable to fund operations, invest in capital expenditures and fully carry out its research and development efforts, which could adversely affect the business, results of operations and financial conditions. 31 PART II. OTHER INFORMATION -------------------------- Item 6. Exhibits and Reports on Form 8-K ---------------------------------------- (a) Exhibits None. (b) Reports on Form 8-K. None 32 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INNOVATIVE MICRO TECHNOLOGY, INC. Dated: January 10, 2003 /s/ John S. Foster ------------------ John S. Foster Chairman of the Board and Chief Executive Officer Dated: January 10, 2003 /s/ Peter T. Altavilla ---------------------- Peter T. Altavilla Chief Financial Officer (Principal Accounting Officer) 33