-----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, UtH96D6eP0ci05jUXgA4I8vfeR8ZlRtOPU3lC2YNVQuhtLQS67JC/1f0eaVOZhno GfYlL3r20sWTq6Uig8GlCw== 0001141218-03-000121.txt : 20030721 0001141218-03-000121.hdr.sgml : 20030721 20030718210203 ACCESSION NUMBER: 0001141218-03-000121 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20030329 FILED AS OF DATE: 20030721 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVATIVE MICRO TECHNOLOGY INC CENTRAL INDEX KEY: 0000006948 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 951950506 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-06635 FILM NUMBER: 03793750 BUSINESS ADDRESS: STREET 1: 75 ROBIN HILL RD CITY: GOLETA STATE: CA ZIP: 93117 BUSINESS PHONE: 8056835353 MAIL ADDRESS: STREET 1: 75 ROBIN HILL ROAD CITY: GOLETA STATE: CA ZIP: 93117 FORMER COMPANY: FORMER CONFORMED NAME: APPLIED MAGNETICS CORP DATE OF NAME CHANGE: 19920703 10QSB/A 1 imt3290310qa.txt AMENDMENT NO. 1 TO FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-QSB/A Amendment No. 1 ---------------------- [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 29, 2003. [ ] 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. --------------------------------- (Exact name of registrant as specified in its charter) Delaware 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 Indicate by check mark whether the registrant: (1) has 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 X No __ 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 Sections 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes X No ___ APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 5,435,000 shares of $.0001 par value common stock as of July 11, 2003. PART I. 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 28, 2002. 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. The filing on Form 10-QSB/A amends a previous filing by the Company on Form 10-QSB for the quarter ended March 29, 2003. The reason for the amended filing is the completion of the independent accountants review of the interim financial statements included in this report as required under Item 310(b) of Regulation S-B for the three Months ended March 29, 2003. 2 BDO Seidman, LLP 1900 Ave of the Stars 11th Floor Accountants and Consultants Los Angeles, California 90067 Telephone: (310) 557-0300 Fax: (310) 557-1777 Report of Independent Certified Public Accountants To the Board of Directors of Innovative Micro Technology, Inc. We have reviewed the condensed consolidated balance sheet of Innovative Micro Technology, Inc. as of March 29, 2003, and the related condensed consolidated statements of operations for the three-month and six-month periods ended March 29, 2003, and cash flows for the six-month period ended March 29, 2003 included in the accompanying Securities and Exchange Commission Form 10-QSB for the period ended March 29, 2003. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. The financial statements included in this report have been prepared assuming that the Company will continue as a going concern. As discussed in Note A, the Company's recurring losses from operations and uncertainty regarding future sources of capital raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note A. The financial statements do not include adjustments that might result from the outcome of this uncertainty. /s/ BDO Seidman, LLP - -------------------- Los Angeles, California May 20, 2003 3
INNOVATIVE MICRO TECHNOLOGY, INC. Statements of Operations - Unaudited (In thousands except per share data) Successor Co. Successor Co. Successor Co. Successor Co. Predecessor Co. Three Months Three Months Six Months Four Months Two Months Ended Ended Ended Ended Ended March 29, March 30, March 29, March 30, November 24, ----------- ----------- ----------- ---------- ----------- 2003 2002 2003 2002 2001 Net sales MEMS and Other $ 530 $ 677 $ 1,963 $ 1,037 $ 606 Rental Income 128 128 255 171 86 ----------- ----------- ----------- ---------- ----------- Subtotal 658 805 2,218 1,208 692 Cost of sales MEMS and Other (including stock-based compensation of $94 and $189 for the periods ending March 29, 2003 and $95 and $142 for the periods ending March 30, 2002) 921 1,512 2,755 2,040 962 Rental income 38 32 73 45 6 ----------- ----------- ----------- ---------- ----------- Subtotal 959 1,544 2,828 2,085 968 Gross loss (301) (739) (610) (877) (276) ----------- ----------- ----------- ---------- ----------- Research and development expenses (including stock-based compensation of $79 and $158 for the periods ending March 29, 2003 and $79 and $119 for the periods ending March 30, 2002) 234 238 459 328 90 Selling, general and administrative expenses (including stock based compensation of $139 and $278 for the periods ending March 29, 2003 and $139 and $208 for the periods ending March 30, 2002) 674 563 1,372 809 245 ----------- ----------- ----------- ---------- ----------- Total operating expenses 908 801 1,831 1,137 335 ----------- ----------- ----------- ---------- ----------- Loss from operations (1,209) (1,540) (2,441) (2,014) (611) Interest income 3 6 11 9 3 Interest expense (541) (617) (1,305) (897) (329) Gain on sale of building 623 - 623 - - Other income, net 6 - 40 - 177 ----------- ----------- ----------- ---------- ----------- Other expense 91 (611) (631) (888) (149) Reorganization Costs - 164 - 237 474 ----------- ----------- ----------- ---------- ----------- Loss before income taxes (1,118) (2,315) (3,072) (3,139) (1,234) Provision for income taxes 9 - 18 - - ----------- ----------- ----------- ---------- ----------- Net loss $ (1,127) $ (2,315) $ (3,090) $ (3,139) $ (1,234) =========== =========== =========== ========== =========== Net loss per share: Loss per common share- basic and diluted $ (0.21) $ (0.51) $ (0.57) $ (0.70) $ (0.02) =========== =========== =========== ========== =========== Weighted average number of common shares outstanding: Common shares- basic and diluted 5,435 4,500 5,435 4,500 70,444 =========== =========== =========== ========== =========== The accompanying Selected Notes to Condensed Financial Statements are an integral part of these condensed statements.
4 INNOVATIVE MICRO TECHNOLOGY, INC. Balance Sheet - Unaudited (In thousands except share and par value data)
ASSETS Successor Co. Successor Co. March 29, Sept 28, ------------------- ------------------ 2003 2002 ---- ---- Current Assets: Cash $ 230 $ 2,890 Accounts receivable, net 556 655 Accounts receivable- related party 522 156 Inventories 2,564 1,362 Prepaid expenses and other 193 359 ----------------- ---------------- Total current assets 4,065 5,422 ----------------- ---------------- Property, plant and equipment, at cost 20,301 20,273 Less-accumulated depreciation (1,429) (847) ----------------- ---------------- Total property, plant and equipment 18,872 19,426 ----------------- ---------------- Other assets 471 6,161 ----------------- ---------------- Total assets $ 23,408 $ 31,009 ================= ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 4,325 $ 4,325 Accounts payable 690 668 Accrued payroll and benefits 304 286 Accrued audit and legal 75 89 Deferred revenue 802 676 Deferred revenue- related party 1,608 722 Other current liabilities 937 860 ----------------- ---------------- Total current liabilities 8,741 7,626 ----------------- ---------------- Long-term debt, net 9,394 15,645 ----------------- ---------------- Other liabilities 174 174 ----------------- ---------------- Stockholders' Equity: Preferred stock, $.0001 par value, authorized 2,500,000 shares, none issued and outstanding Common stock issuable, $.0001 par value, 25,000,000 shares authorized, 5,435,000 shares issued and issuable at March 29, 2003 and 1 1 September 28, 2002 Paid-in capital 16,714 16,714 Accumulated deficit (10,835) (7,745) ----------------- ---------------- 5,880 8,970 Unearned restricted stock compensation (781) (1,406) ----------------- ---------------- Total stockholders' equity 5,099 7,564 ----------------- ---------------- Total liabilities and stockholders' equity $ 23,408 $ 31,009 ================= ================
The accompanying Selected Notes to Condensed Financial Statements are an integral part of these condensed balance sheets. 5 INNOVATIVE MICRO TECHNOLOGY, INC. Statements of Cash Flows - Unaudited (In thousands)
Successor Co. Successor Co. Predecessor Co. Six Months Four Months Two Months Ended Ended Ended March 29, March 30, November 24, ------------ ------------ -------------- 2003 2002 2001 ---- ---- ---- Cash Flows from Operating Activities: Net loss $ (3,090) $ (3,139) $ (1,234) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 582 334 173 Gain on sale of other assets (623) - - Employee restricted stock amortization 625 469 - Amortization of loan costs 46 53 39 Non-cash interest - - 232 Changes in assets and liabilities: Accounts receivable, net (267) 240 (258) Inventories (1,202) (448) 45 Prepaid expenses and other 166 (108) (12) Other assets 144 277 59 Accounts payable 22 (598) 146 Accrued payroll and benefits 18 (3) 38 Accrued audit and legal (14) 101 378 Deferred revenue 1,158 359 (175) Other current liabilities 77 (104) 68 ---------- ---------- ------------ Net cash flows used in operating activities (2,358) (2,567) (501) ---------- ---------- ------------ Cash Flows from Investing Activities: Purchases of property, plant and equipment (28) (273) (97) Proceeds from sale of fixed assets, net 5,977 - - ---------- ---------- ------------ Net cash flows (used in) provided by investing activities 5,949 (273) (97) ---------- ---------- ------------ Cash Flows from Financing Activities: Proceeds from issuance of debt - 3,400 - Debt issuance costs - (361) - Repayment of debt (6,251) - - ---------- ---------- ------------ Net cash flows (used in) provided by financing activities (6,251) 3,039 - ---------- ---------- ------------ Net (decrease) increase in cash (2,660) 199 (598) ---------- ---------- ------------ ---------- ------------ Cash at beginning of period 2,890 1,099 1,697 ---------- ---------- ------------ Cash at end of period $ 230 $ 1,298 $ 1,099 ========== ========== ============ Supplemental Cash Flow Data: Interest paid 847 711 97 ========== ========== ============ Income taxes paid - - - ========== ========== ============
The accompanying Selected Notes to Condensed Financial Statements are an integral part of these condensed statements. 6 Selected Notes to Financial Statements Unaudited (March 29, 2003) 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 (the "Chapter 11 Reorganization") 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 $1.1 million and $3.1 million for the three and six months ended March 29, 2003. 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 has reorganized 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 (the "Plan") became effective on November 16, 2001 ("Effective Date"). The Company adopted the fresh- start reporting requirements of American Institute of Certified Public Accountants 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 common stock and warrants in the reorganized entity. The Company completed the issuance of the common stock and warrants pursuant to the Plan in its third fiscal quarter of 2003. The issuance of the stock and warrants is reflected in the accompanying Balance Sheets dated September 28, 2002 and March 29, 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 Chapter 11 Reorganization 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 the Chapter 11 Reorganization (referred to as "Successor Company") and reflect the effects of fresh-start reporting. 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 STOCKHOLDERS' 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) - - - Stockholders' 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 stockholders' equity (deficiency) (295,259) - 304,515 - - 9,256 ------------------------------------------------------------------- Total liabilities and stockholders' 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: 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 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. The value of the warrants is not reflected in the accompanying financial statements as it was recorded within common stock. The Company is a subcontractor to L-3 for a long-term government contract to produce gyroscopes and accelerometers for use in inertial navigation. The Company had inventory of $1.6 million, deferred revenue of $1.6 million and accounts receivable of $0.5 million related to L-3, as of March 29, 2003. Note D: 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 1 and May 1 of each year with an 8% annual interest rate. The final payment is due on November 1, 2006. 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 of the Professional Persons, which consist of 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 in 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 convertible notes require interest-only payments at 12% annual interest rate. The convertible notes are convertible into 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. The notes carry a 3% penalty for late payments and these additional interest costs are being accrued. The notes are classified as current debt for the fiscal quarter ended March 29, 2003 and for the year ended September 28, 2002. The notes are secured by substantially all of the assets of the Company. On February 14, 2003, the Company completed the sale of its Hollister property at a price of $6.2 million, recognizing a gain of $0.6 million. The proceeds of the sale were used to pay off the Company's first mortgage of $5.4 million. The balance of the sales proceeds were used to pay down the Company's second mortgage, which is collateralized by both of its properties, from $9.6 million to $8.8 million. The remaining $8.8 million mortgage is secured by the Company's Robin Hill property. 9 The Company's long-term debt is summarized below (in thousands): March 29, 2003 ---------------------- Property Mortgage $ 8,830 Professionals Convertible Note 4,137 Property Taxes 752 13,719 Less - Current portion (4,325) Total $ 9,394 ====================== Note E: Stock-Based Compensation - --------------------------------- The Company accounts for stock-based awards to employees under the recognition and measurement principles of APB No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company has adopted the disclosure-only provisions of FAS No. 123. Accordingly, no stock-based employee compensation cost is reflected in net (loss), as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date for awards for the three and six months ended March 29, 2003, the three and four months ended March 30, 2002 and the two months ended November 24, 2001, consistent with the provisions of FAS No. 123, the Company's net income (loss) and earnings (loss) per share would have been increased to the pro forma amounts indicated below:
(In thousands, except per share amounts) Successor Successor Successor Successor Predecessor Co. Co. Co. Co. Co. Three Months Three Months Six Months Four Months Two Months Ended Ended Ended Ended Ended March 29, March 30, March 29, March 30, November 24, ------------- ------------- ------------- ------------ --------------- 2003 2002 2003 2002 2001 ---- ---- ---- ---- ---- Net loss attributable to common stockholders - as reported $(1,127) $(2,315) $(3,090) $(3,139) $(1,234) Less fair value of stock-based employee compensation expense (278) (30) (518) (37) - Net loss attributable to common stockholders -- pro forma (1,405) (2,345) (3,608) (3,176) (1,234) Net loss per share (basic and diluted) -- as reported $ (0.21) $ (0.51) $ (0.57) $ (0.70) $ (0.02) Net loss per share (basic and diluted) -- pro forma $ (0.26) $ (0.52) $ (0.66) $ (0.71) $ (0.02)
10 The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for the grants.
Predecessor Successor Co. Successor Co. Successor Co. Successor Co. Co. Three Months Three Months Six Months Four Months Two Months Ended Ended Ended Ended Ended March 29, March 30, March 29, March 30, November 24, --------------------------------------------------------------------------- 2003 2002 2003 2002 2001 ---- ---- ---- ---- ---- Risk free interest rate 3.81% 3.97% 3.85% 3.96% - Expected life 4 years 4 years 4 years 4 years - Expected volatility 74% 74% 74% 74% -
Note F: Net Income (Loss) Per Common Share - ------------------------------------------- The Company applies SFAS No. 128, "Earnings per Share," which requires the disclosure of basic and diluted net income or loss per share for all current and prior periods. Basic net income or loss per common share is computed by dividing net income or loss available to common stockholders by the weighted average number of common shares outstanding during each year. Diluted net income or loss per common share reflects the maximum dilution, based on the average price of our common stock each period and is computed similarly to basic income or loss per share except that the denominator is increased to include the number of additional shares that would have been outstanding if potentially dilutive stock options and warrants had been exercised. Basic and diluted net (loss) per share computed in accordance with SFAS 128 for the three and six months ended March 29, 2003, the three and four months ended March 30, 2002 and the two months ended November 24, 2001 are as follows:
(In thousands, except per share amounts) Successor Successor Successor Successor Predecessor Co. Co. Co. Co. Co. Three Three Months Months Six Months Four Months Two Months Ended Ended Ended Ended Ended March 29, March 30, March 29, March 30, November 24, ----------------------------------------------------------------- 2003 2002 2003 2002 2001 ---- ---- ---- ---- ---- BASIC AND DILUTED EPS Net loss $(1,127) $(2,315) $(3,090) $(3,139) $(1,234) Denominator: weighted average common shares outstanding 5,435 4,500 5,435 4,500 70,444 Net loss per share - basic and diluted $ (0.21) $ (0.51) $ (0.57) $ (0.70) $ (0.02)
The following potential dilutive securities were outstanding at March 29, 2003 and were not included above because to do so would be anti-dilutive: 500,000 shares of restricted common stock issuable under the Plan, options to purchase 1,562,397 shares of common stock at prices ranging from $5.00 to $5.35, warrants to purchase 167,000 shares of common stock at a price of $5.35 per share with a term of eighteen months ending February 1, 2004, warrants to purchase 700,000 shares of common stock at a price of $7.29 per share with a term of thirty six months ending August 1, 2005 and approximately 504,500 common shares from the potential conversion of the Professional Persons convertible debt which is due November 16, 2003. The shares issuable on the exercise of the warrants provided to the subordinated note claimants pursuant to the Plan (the 11 "Plan Warrants") are not considered potential dilutive securities, because when the Plan Warrants are exercised the Company will exercise its rights to repurchase an equal number of shares at the same price under call options executed by certain stockholders in accordance with the Plan. The call options remain in force for as long as the Plan Warrants are exercisable, and the certificates for the shares subject to the call options bear a legend that restricts their trading specifically to ensure the Company's ability to exercise the call options. All of the following potential dilutive securities, which were outstanding for the two-month period ended November 24, 2001, were canceled or are no longer convertible in accordance with the Plan: 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 warrant agreement and approximately 58.1 million common shares from potential conversion of certain Convertible Debentures. The following potential dilutive securities were outstanding at the end of the four month period ended March 30, 2002 and were not included above because to do so would be anti-dilutive; 500,000 shares of restricted common stock issuable under 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. Note G: 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 12 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 value of the expected future cash flows and an impairment loss will be recognized. Reorganization Costs: Expenditures directly related to the Chapter 11 Reorganization and the emergence from bankruptcy are classified as reorganization costs and are expensed as incurred. These expenses primarily consist of professional fees. 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's work-in-process inventory was $2.6 million at March 29, 2003 related to capitalized costs under the completed contract method of accounting, as described below, compared to $1.4 million for the year ended September 28, 2002. Revenue Recognition and Warranty Policies: The Company uses the completed contract method of accounting for its product development projects when it is unable to accurately estimate percentage of completion during performance of the contract, and otherwise uses the percentage of completion method of accounting. Costs are capitalized during the project as inventories for the completed contract method of accounting 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 second fiscal quarters of 2003 or 2002. 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. Rental income is recorded on a straight-line basis. Fair Value of Financial Instruments: The carrying amounts of cash, customer receivables, trade accounts payable and other accrued liabilities approximate their fair value because of the short maturity of these financial instruments. The carrying amount of approximately $12.9 million of the Company's debt at March 29, 2003 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 amount of $0.8 million of the debt due on delinquent property taxes is at rates below market and its fair market value would be $0.5 million. 13 Net Loss per Common Share: Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted net 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 potential dilutive securities. However, in computing diluted net loss per share, including potential dilutive securities outstanding would have been antidilutive and accordingly they were excluded from the computation. 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 in the full amount of 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 - -------------------------------- During July 2001, Statement of Financial Accounting Standards ("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 has not had 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 has not had 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 14 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 Company adopted SFAS 145 beginning in its fiscal year 2003 and it has not had a significant impact 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 Emerging Issue Task Force ("EITF") Issue 94-3, was issued by 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 adopted SFAS 146 beginning in its second fiscal quarter of 2003 and it has not had a significant impact on its financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an Amendment to SFAS No. 123." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method on accounting for stock-based employee compensation. The Company has elected to account for stock-based employee compensation under APB 25, as permitted by SFAS No. 123, and accordingly the implementation of SFAS No. 148 has not had a material effect on the Company's consolidated financial position or results of operations. In November 2002, the FASB issued interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees. Including Indirect Guarantees of Indebtedness of Others," which disclosures are effective for financial statements for periods ending after December 15, 2002. While the Company has various guarantees included in contracts in the normal course of business, primarily in the form of indemnities, these guarantees would only result in immaterial increases in future costs, but do not represent significant commitments or contingent liabilities of the indebtedness of others. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46) which requires the consolidation of variable interest entities, as defined. FIN 46 is applicable to financial statements to be issued by the Company after 2002; however, disclosures are required currently if the Company expects to consolidate any variable interest entities. No material entities were consolidated as a result of FIN 46. In June 2003 the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires certain instruments, including mandatorily redeemable shares, to be classified as liabilities, not as part of stockholders' equity or redeemable equity. For instruments that are entered into or modified after May 31, 2003, Statement 150 is effective immediately upon entering the transaction or modifying the terms. For other instruments covered by Statement 150 that were entered into before June 1, 2003, Statement 150 is effective for the first interim period beginning after June 15, 2003. 15 Note H: 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: Microelectro 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 29, 2003, 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. 16 The following table represents net sales, gross profit (loss) and long-lived assets by segment (in thousands):
Santa Barbara Insight Rental United States MEMS Tool and Die Analytical Income Total ------------------------------------------------------------------------------------------- Successor Co. Three Months Ended: March 29, 2003 Net sales $ 284 $ 202 $ 44 $ 128 $ 658 =========================================================================================== Intercompany Sales $ 1 $ 21 $ 68 - =========================================================================================== Gross profit (loss) $ (443) $ 49 $ 3 $ 90 $ (301) =========================================================================================== Long Lived Assets $ 16,087 $ 131 $ 58 $ 2,596 $ 18,872 =========================================================================================== 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 ===========================================================================================
17
Santa Barbara Insight Rental United States MEMS Tool and Die Analytical Income Total ------------------------------------------------------------------------------------------- Successor Co. Six Months Ended: March 29, 2003 Net sales $ 1,603 $ 281 $ 79 $ 255 $ 2,218 =========================================================================================== Intercompany Sales $ 3 $ 55 $ 147 - =========================================================================================== Gross profit (loss) $ (817) $ 6 $ 19 $ 182 $ (610) =========================================================================================== Long Lived Assets $ 16,087 $ 131 $ 58 $ 2,596 $ 18,872 =========================================================================================== 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 48 $ 41 - =========================================================================================== Gross profit (loss) $ (359) $ (12) $ 15 $ 80 $ (276) =========================================================================================== Long Lived Assets $ 16,853 $ 195 $ 89 $ 2,753 $ 19,890 =========================================================================================== Successor Co. Six Months Ended: March 30, 2002 Net sales $ 1,324 $ 262 $ 57 $ 257 $ 1,900 =========================================================================================== Intercompany Sales $ 13 $ 40 $ 159 - =========================================================================================== Gross profit (loss) $ (1,394) $ (33) $ 68 $ 206 $ (1,153) =========================================================================================== Long Lived Assets $ 16,854 $ 178 $ 81 $ 2,716 $ 19,829 ===========================================================================================
18 The Company had minimal purchases of property plant and equipment in the first six months of fiscal 2003 compared to $0.4 million in the first six months of fiscal 2002. The Company's foreign sales for the first six months of 2003 were all to a customer in Japan. The foreign sales for the first six months of fiscal 2002 were to a customer in Canada. The following table displays domestic and foreign revenue (in thousands):
Successor Co. Successor Co. Successor Co. Successor Co. Predecessor Co. Three Months Three Months Six Months Four Months Two Months Ended Ended Ended Ended Ended March 29, March 30, March 29, March 30, November 24, ($000's) 2003 2002 2003 2002 2001 ------------------------------------------------------------------------------------------ Revenue Domestic $ 542 $ 727 $ 1,845 $ 1,129 $ 692 Foreign $ 116 $ 78 $ 373 $ 79 - ------------------------------------------------------------------------------------------ Total $ 658 $ 805 $ 2,218 $ 1,208 $ 692 ==========================================================================================
The Company had three customers with sales greater than 10% of its total sales for the first six months of fiscal 2003. They individually accounted for 27%, 17% and 12% of the Company's total sales for the period. 19 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 INDEPENDENT AUDITORS HAVE EXPRESSED DOUBT AS TO ITS ABILITY TO CONTINUE AS A GOING CONCERN; 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. General - ------- 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 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 American Institute of Certified Public Accountants 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 under the Plan, the Company converted approximately $12 million of its secured liabilities to debt and $304 million of unsecured liabilities to equity. 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. 20 The Company has incurred operating losses for each quarter since 1999. 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 third fiscal quarter of 2003 were predominantly related to the Company's customer development projects. These include a telecommunications optical switch and an ink-jet print head to be used in large industrial printing presses. Additional revenue was contributed by Santa Barbara Tool & Die, Insight Analytical 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 square foot 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 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 Reorganization (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 Reorganization 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 Reorganization (referred to as "Successor Company") and reflect the effects of fresh-start reporting. In order to allow comparison of the Company's results of operations, the prior year predecessor and successor periods have been combined for comparison to the current year period. Critical Accounting Policies - ---------------------------- Application of accounting policies requires 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, revenue recognition and cost of sales, 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 incurred net losses of $1.1 million and $3.1 million for the fiscal quarter and six month period ended March 29, 2003, respectively. 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. The Company has not secured additional capital for these expenses or for working 21 capital in future periods. It will also 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 financial statements included in this report have been prepared assuming that the Company will continue as a going concern. The recurring losses from operations and uncertainty regarding future sources of capital discussed above raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include adjustments that might result from the outcome of this uncertainty. Statement of Position 90-7 and Fresh-Start Accounting: The Company exited the Chapter 11 Reorganization 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 completed the issuance of the common stock and warrants pursuant to the Plan in its third fiscal quarter of 2003. The issuance of the stock and warrants is reflected in the accompanying Balance Sheets dated September 28, 2002 and March 29, 2003. Revenue Recognition and Warranty Policies: The Company uses the completed contract method of accounting for its product development projects when it is unable to accurately estimate percentage of completion during performance of the contract and otherwise uses the percentage of completion method of accounting. Costs are capitalized during the project as inventories for the completed contract method of accounting and are 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 third fiscal quarter of 2003 or 2002. 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. 22 Fair Value of Financial Instruments: The carrying amounts of cash, customer receivables, trade accounts payable and other accrued liabilities approximate their fair value because of the short maturity of these financial instruments. The carrying amount of approximately $12.9 million of the Company's debt at March 29, 2003 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 amount of $0.8 million of the debt due on delinquent property taxes is at rates below market and its fair market value would be $0.5 million. Recent Accounting Pronouncements - -------------------------------- During July 2001, Statement of Financial Accounting Standards ("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 has not had 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 has not had 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 Company adopted SFAS 145 beginning in its fiscal year 2003 and it has not had a significant impact 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 Emerging Issues Task Force ("EITF") Issue 94-3, was issued by FASB. SFAS 146 is effective for exit and disposal activities that are initiated after December 31, 2002 and requires that a 23 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 adopted SFAS 146 beginning in its second fiscal quarter of 2003 and it has not had a significant impact on its financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an Amendment to SFAS No. 123." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method on accounting for stock-based employee compensation. The Company has elected to account for stock-based employee compensation under APB 25, as permitted by SFAS No. 123, and accordingly the implementation of SFAS No. 148 has not had a material effect on the Company's consolidated financial position or results of operations. In November 2002, the FASB issued interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees. Including Indirect Guarantees of Indebtedness of Others," which disclosures are effective for financial statements for periods ending after December 15, 2002. While the Company has various guarantees included in contracts in the normal course of business, primarily in the form of indemnities, these guarantees would only result in immaterial increases in future costs, but do not represent significant commitments or contingent liabilities of the indebtedness of others. In January 2003, the FASB issued interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46) which requires the consolidation of variable interest entities, as defined. FIN 46 is applicable to financial statements to be issued by the Company after 2002; however, disclosures are required currently if the Company expects to consolidate any variable interest entities. No material entities were consolidated as a result of FIN 46. In June 2003 the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires certain instruments, including mandatorily redeemable shares, to be classified as liabilities, not as part of stockholders' equity or redeemable equity. For instruments that are entered into or modified after May 31, 2003, Statement 150 is effective immediately upon entering the transaction or modifying the terms. For other instruments covered by Statement 150 that were entered into before June 1, 2003, Statement 150 is effective for the first interim period beginning after June 15, 2003. Overview. The following discussion presents information about the financial condition, liquidity and capital resources, and results of operations of the Company and its predecessor for the six months and fiscal quarter ended March 29, 2003, interim two-month period ended November 24, 2001 and the interim four months ended March 30, 2002. In order to allow comparison of the Company's results of operations, the two months ended November 24, 2001 have been combined with the four months ended March 30, 2002 for comparison to the six months ended March 29, 2003. References in this report to results for the first six months of fiscal 2002 refer to the combined results of the two-month predecessor period and the four-month successor period. This information should be read in conjunction with the audited financial statements and the notes thereto as reported on the Company's Annual Report on Form 10-KSB for the fiscal year ended September 28, 2002. 24 Three Months Ended March 29, 2003 - --------------------------------- Net Sales. Net sales were $0.7 million for the second quarter of fiscal 2003 compared to $0.8 million for the same period of fiscal 2002. The sales for the second fiscal quarter of 2003 were made up of $0.3 million of MEMS-related business, $0.3 million from the combination of Santa Barbara Tool and Die and Insight Analytical and $0.1 million from leasing of space to tenants. The sales decrease as compared to the same quarter of fiscal 2002 was due to a reduction in the level of completed contracts in the MEMS-related portion of the business. The Company has one long-term contract with L-3 Communications, which comprises $1.4 million of the Company's $2.6 million inventory value at March 29, 2003, and this contract is expected to be completed in the third fiscal quarter of 2003. The sales for the fiscal 2002 period were made up of $0.5 million of MEMS, $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. Gross Loss. As a percentage of net sales, gross loss was a negative 45.7% or $0.3 million for the second fiscal quarter of 2003 and negative 91.8% or $0.7 million for the second fiscal quarter of 2002. The fiscal 2003 period saw the MEMS portion of the business generate a gross loss of $0.5 million and the combination of Insight Analytical and Santa Barbara Tool and Die produce a $0.1 gross profit. Leasing of space to tenants provided a $0.1 million gross profit for this same period. The MEMS portion of the business had a gross loss of $0.8 million, leasing of excess space to tenants provided a $0.1 million gross profit and the combination of Insight Analytical and Santa Barbara Tool and Die produce a minimal gross profit in the second fiscal quarter of 2002. The second fiscal quarter of both 2002 and 2003 included $0.1 million in amortization of employee stock incentives. The slight improvement in gross loss for the second fiscal quarter of 2003 as compared to the same fiscal 2002 period primarily results from the increased contract activity in the MEMS portion of the business, which allowed for absorption of more of the fixed costs associated with the Company's wafer fabrication facility. Due to the completed contract method of accounting, the MEMS portion of the business generated value through a combination of sales and an increase in inventory, aggregating $1.3 million in the second quarter of fiscal 2003 compared to $0.9 million in the same quarter of fiscal 2002. Research and Development. Research and development ("R&D") expense, as a percentage of net sales, was 35.6% for the second fiscal quarter of 2003 and 29.6% for the second quarter of fiscal 2002. R&D expense increased as a percentage of sales in the second quarter of fiscal 2003 due to the decrease in net sales; however, measured in dollars, R&D expenditures were approximately the same for the two periods. R&D expense for the second fiscal quarter of both 2003 and 2002 included $0.1 million in amortization of employee stock incentives. 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 ("SG&A") as a percentage of net sales was 102.4% for the second fiscal quarter of 2003 and 69.9% for the second quarter of fiscal 2002. SG&A expenses in dollars were $0.7 million for the second quarter of fiscal 2003 and $0.6 million for the same period of fiscal 2002. The second fiscal quarter of both 2003 and 2002 SG&A expense included $0.1 million in amortization of employee stock incentives. The Company has six employees providing the services reported as SG&A. SG&A expenses have increased primarily due to the need for greater customer interface. 25 Interest Expense. Interest expense was $0.5 million for the second fiscal quarter of 2003 compared to $0.6 million for the second fiscal quarter of 2002. The fiscal 2003 interest expense is primarily associated with the Company's property mortgage and $4.1 million in convertible notes. Both of these debts require interest-only monthly payments based upon a 12% annual interest rate. The decrease in interest expense compared to the second fiscal quarter of 2002 is primarily due to the decrease in debt balances due to the sale of the Company's Hollister property and the payoff of its associated mortgage. The Company is not making the interest payments on the $4.1 million in convertible notes, while it is negotiating the terms of the notes with the holders. The notes carry a 3% penalty for late payments and these additional interest costs are being accrued. At March 29, 2003, unpaid interest had accrued on the notes in a total amount of $0.9 million. Other income. The Company recognized $0.6 million in other income in the second fiscal quarter of 2003 associated with the sale of its Hollister property. Reorganization Costs. Reorganization costs consist primarily of professional fees directly related to the Chapter 11 filing and the emergence from bankruptcy, which occurred on November 16, 2001. There were no professional fees incurred in connection with the reorganization for the second fiscal quarter of 2003, compared to $0.2 million for the second fiscal quarter of 2002. Six Months Ended March 29, 2003 - ------------------------------- Net Sales. Net sales were $2.2 million for the first six months of fiscal 2003 compared to $1.9 million for the six months of fiscal 2002. The fiscal 2003 period sales were made up of $1.6 million of MEMS-related business, $0.3 million from Santa Barbara Tool and Die, $0.1 million from Insight Analytical and $0.2 million from leasing of space to tenants. 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. Gross Loss. As a percentage of net sales, gross loss was a negative 27.5% or $0.6 million for the first six months of fiscal 2003 as compared to 60.7% or $1.2 million for the combined six months ended March 30, 2002. The MEMS related business had a gross loss for the fiscal 2003 period of $0.8 million. The MEMS business gross loss included $0.2 million and $0.1 million in amortization of employee stock incentives for the first six months of fiscal 2003 and 2002, respectively. Santa Barbara Tool and Die and Insight Analytical combined for a minimal gross profit and leasing of space to tenants had a gross profit of $0.2 million for the first six months of fiscal 2003. The MEMS related business had a gross loss of $1.4 million for the first six months of fiscal 2002. 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 improvement in gross loss for the first six months of 2003 as compared to fiscal 2002 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 20.7% or $0.4 million for the first six months of fiscal 2003 and 22.0% or $0.4 million for the combined six months ended March 30, 2002. R&D expense included 26 $0.2 million and $0.1 million in amortization of employee stock incentives for the fiscal 2003 and 2002 periods, respectively. R&D expenditures were approximately the same for the two periods, 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 61.9% for the first six months of fiscal 2003 and 55.5% the combined six months ended March 30, 2002. Expenses in dollars were $1.4 million for the first six months of fiscal 2003 compared to $1.1 million for the same period of fiscal 2002. The fiscal 2003 period expense included $0.3 million in amortization of employee stock incentives compared to $0.2 million for the same period of 2002. The first half of both fiscal 2003 and 2002 amounts include $0.1 million of expenses related to the Hollister property, which the Company sold in the second fiscal quarter of 2003. SG&A expenses have increased primarily due to the growth in sales and the associated need for more customer service. Interest Expense. Interest expense was $1.3 million for the first six months of fiscal 2003 and $1.2 million for the combined six months ended March 30, 2002. 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 $0.7 million in other income associated with the sale of its Hollister property and other miscellaneous income for the first six months of fiscal 2003 compared to $0.2 million in other income for the same period of 2002 from the sale of a minority ownership position in Magnetic Data Technologies, LLC ("MDT"), a former subsidiary of the Company. Associated with the MDT sale, 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. There were no professional fees incurred in connection with the reorganization for the first six months of fiscal 2003 compared to $0.7 million for the combined six months ended March 30, 2002. Liquidity and Capital Resources - ------------------------------- At March 29, 2003, the Company's cash decreased to $0.2 million from $2.9 million at September 28, 2002. The decrease in cash was primarily due to the use of $2.4 million for operating activities for the first six months of fiscal 2003. The Company had minimal expenditures for capital equipment in the first six months of fiscal 2003. The Company collected $0.9 million in payments in April 2003, related to its assistance agreement from the U.S. Defense Advanced Research Project Agency for prototype development for rapid and efficient isolation of human hematopoietic stem cells for medical and defense applications. 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 2003, the Company plans to make 27 minimal capital expenditures. The Company's liquidity and ability to fund operating and capital expenditure requirements during fiscal 2003 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 its targeted revenue sources on which the fiscal 2003 liquidity depends on a timely basis, and is 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, is exercisable for up to 167,000 shares at an aggregate price of $893,450, or $5.35 per share and has a value determined to be $0.3 million using the Black-Scholes option pricing model. The second warrant has a term of thirty-six months, is exercisable for up to 700,000 shares at an aggregate price of $5,103,000, or $7.29 per share and has a value determined to be $1.4 million using the Black-Scholes option pricing model. The value of the warrants is not reflected in the accompanying financial statements, as it was recorded within common stock. Funding through the exercise of the warrants, or any part 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 29, 2003. The Company owns its premises and has no leases for which it is the lessee. The Company's liquidity depends, in part, on customers paying according to the Company's terms. The Company is also subject to market price changes. Any changes in credit terms given to major customers would have an impact on the Company's cash flow. Credit extended to the Company by suppliers' credit is another source of short-term financing and any adverse changes in their terms will have a negative impact on the Company's cash flow. The following table summarizes the Company's contractual obligations at March 29, 2003 and the effects such obligations are expected to have on liquidity and cash flow in future periods. Payments Due by Period (In thousands)
Less than 1 Contractual Obligations Total Year 1-3 Years 4-5 Years After 5 Years - ----------------------- ----- ---- --------- --------- ------------- Long-Term Debt $13,700 $4,300 $9,200 $200 $ -
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 28 AS A GOING CONCERN AND 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 $1.1 million and $3.1 million for the three and six month periods ended March 29, 2003. 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 had minimal purchases of property, plant and equipment in the second fiscal quarter of 2003. During fiscal 2003, the Company plans to make minimal purchases 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 or continuing its business. THE COMPANY HAS HIGH FIXED COSTS AND EXCESS CAPACITY DUE TO ITS CURRENT LOW PRODUCTION VOLUMES. 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 29 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. 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. 30 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 writedown the value of inventory and equipment. In addition, the Company must qualify on future programs to sell its products. The Company has an assistance agreement with an agency of the U.S. Government and is a subcontractor for a defense related Government contract. Changes in U.S. Government budget spending could have an adverse affect on the Company. 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 was underutilized, and they 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. 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 believes it cannot successfully do so until its financial condition improves. 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 31 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 EXPOSE THE COMPANY TO RISK. The Company sells its products to foreign customers and expects this to be an important part of its ongoing business. Accordingly, the Company faces risks inherent in conducting business internationally, such as: o difficulties in collecting accounts receivable and longer collection periods; o seasonal business activity in certain parts of the world; o potentially adverse tax consequences; o fluctuations in revenue expressed in dollars due to changes in currency exchange rates; o political and economic instability; and o trade barriers. Any of these factors could seriously harm the Company's international sales. 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 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. 32 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: o only one of the three classes of directors is elected each year; o stockholders have limited ability to remove directors; o stockholders cannot call a special meeting of stockholders; and o 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 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. 33 Item 3. Controls And Procedures ----------------------- Within the 90 days prior to the filing date of this report, the Chief Executive Officer and the Chief Financial Officer of the Company, with the participation of the Company's management, carried out an evaluation of the effectiveness of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer believe that, as of the date of the evaluation, the Company's disclosure controls and procedures are effective in making known to them material information relating to the Company (including its consolidated subsidiaries) required to be included in this report. Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity's disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process. There were no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls, known to the Chief Executive Officer or the Chief Financial Officer, subsequent to the date of the evaluation. 34 PART II. OTHER INFORMATION -------------------------- Item 1. Legal Proceedings ----------------- The Company is not a party, nor are its properties subject to, any material pending legal proceedings other than ordinary routine litigation incidental to the Company's business and the matters described in the Company's Annual Report on Form 10-KSB. Item 2. Changes in Securities --------------------- None. Item 3. Defaults Upon Senior Securities ------------------------------- The Company has not made twenty monthly interest payments due on the Professionals Convertible Notes due in November 2003 (the "Professionals Notes"), and as a result is in default of its obligations under the Professionals Notes. The principal of the Professionals Notes is $4.1 million and the accrued interest, including penalties, as of July 11, 2003, is approximately $1.0 million. The Company is currently negotiating amendments to the terms of the Professionals Notes with the holders. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None Item 5. Other Matters ------------- None. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3. 1 to the Company's Annual Report on Form 10-KSB for the fiscal year ended September 29, 2001). 3.2 Amended and Restated Bylaws of Innovative Micro Technology, Inc. (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-KSB for the fiscal year ended September 29, 2001). 4.1 Form of Warrant Agreement between the Company and Certain Claimants Under the Plan of Reorganization (incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-KSB for the fiscal year ended September 29, 2001). 4.2 Warrant Agreement between the Company and L-3 Communications Corporation, dated August 1, 2002 (incorporated by reference to Exhibit 4.2 to the Company's Current Report on form 8-K filed August 13, 2002). 35 99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. (i) The Company filed a Current Report on Form 8-K on April 16, 2003 reporting under Item 4 that on April 9, 2003, Deloitte & Touche LLP resigned as auditors of the Company. (ii) The Company filed a Current Report on Form 8-K on May 29, 2003 reporting under Item 4 that on May 20, 2003, the Company engaged BDO Seidman, LLP as its independent public accountant. 36 SIGNATURE --------- In accordance with the requirements of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INNOVATIVE MICRO TECHNOLOGY, INC. Dated: July 18, 2003 /s/ John S. Foster ------------------- John S. Foster On behalf of the Company and as Chairman of the Board and Chief Executive Officer Dated: July 18, 2003 /s/ Peter T. Altavilla ----------------------- Peter T. Altavilla Chief Financial Officer (Principal Accounting Officer) 37 CERTIFICATIONS I, John S. Foster, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Innovative Micro Technology, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 18, 2003 /s/ John S. Foster ------------------ John S. Foster Chairman and Chief Executive Officer 38 I, Peter T. Altavilla, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Innovative Micro Technology, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 18, 2003 /s/ Peter T. Altavilla ---------------------- Peter T. Altavilla Chairman and Chief Executive Officer 39 EX-99 3 imt3290310qaex991.txt CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to their knowledge, the Quarterly Report on Form 10-QSB for the quarterly period ended March 29, 2003 of Innovative Micro Technology, Inc. (the "Company") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such periodic report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in such report. Dated: July 18, 2003 /s/ John S. Foster ------------------ John S. Foster Chief Executive Officer /s/ Peter T. Altavilla ---------------------- Peter T. Altavilla Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 40 -----END PRIVACY-ENHANCED MESSAGE-----