We believe our existing balances of cash and cash equivalents, together with cash generated from product sales, will be sufficient to meet our cash needs for working capital, debt service and capital expenditures for at least the next twelve months. Our future capital requirements will depend on many factors that are difficult to predict, including the size, timing and structure of any future acquisitions, future capital investments the ultimate resolution of potential FCPA violations and future results of operations. Any future financing we may require may not be unavailableavailable on favorable terms, if at all. Any difficulty in obtaining additional financial resources could force us to curtail our operations or could prevent us from pursuing our growth strategy. Any future funding may dilute the ownership of our shareholders.
In our sales agreements, we typically agree to indemnify our customers for any expenses or liability resulting from claimed infringements of patents, trademarks or copyrights of third parties. The terms of these indemnification agreements are generally perpetual any time after execution of the agreement. The maximum amount of potential future indemnification is unlimited. To date, we have not paid any amounts to settle claims or defend lawsuits.
To the extent that we have international sales denominated in U.S. dollars, any fluctuation in the value of the U.S. dollar relative to foreign currencies could affect our competitive position in the international markets. Although we continue to monitor our exposure to currency fluctuations and, when appropriate, may use financial hedging techniques in the future to minimize the effect of these fluctuations, we cannot be certain that exchange rate fluctuations will not adversely affect our financial results in the future.
independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in their report which appears herein.this Annual Report.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined inRule 13a-15(f) under the Exchange Act) during our fourth quarter of fiscal 20092010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
34
ReportImpact of Independent Registered Public Accounting Firm2011 Changes to Management and Operational Involvement in RAE Fushun
ToAs of January 12, 2011, management entered into a definitive agreement to sell our 70 percent ownership of RAE Fushun to the BoardShenyang Research Institute of DirectorsChina Coal Research Institute. At that time, RAE Systems and StockholdersRAE Fushun management allowed Shenyang Research Institute to begin managing and operating the entity without the involvement of RAE Systems Inc.:
We have auditedor RAE Fushun management. As a result, from January 12, 2011, RAE Systems has had noday-to-day management or operating involvement in RAE Fushun and therefore no control oversight over the entity’s financial information. Accordingly, management believes that a material weakness in internal control over financial reporting of RAE Systems Inc. and subsidiaries (collectively the “Company”)related to this matter exists as of DecemberMarch 31, 2009, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.2011.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2009 of the Company and our report dated March 11, 2010 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
San Jose, California
March 11, 2010
35
| |
ITEM 9B. | OTHER INFORMATION |
None.
PART III
| |
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this item with respect to the Company’s executive officers is incorporated herein by reference from the information contained in Item 1 of Part I of this Report under the caption “Executive Officers of the Registrant.” The remaining information required by this item is incorporated herein by reference from the information to be contained in the Company’s 20102011 Proxy Statement to be filed with the U.S. Securities and Exchange Commission (“SEC”) in connection with the solicitation of proxies for the Company’s 20102011 Annual Meeting of Shareholders (“20102011 Proxy Statement”). The 20102011 Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal year to which this report relates.
| |
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this item is incorporated herein by reference from the information to be contained in the Company’s 20102011 Proxy Statement.
| |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this item is incorporated herein by reference from the information to be contained in the Company’s 20102011 Proxy Statement.
| |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information required by this item is incorporated herein by reference from the information to be contained in the Company’s 20102011 Proxy Statement.
| |
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this item is incorporated herein by reference from the information to be contained in the Company’s 20102011 Proxy Statement.
36
PART IV.
| |
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) (1) Financial Statements
See the index of the Consolidated Financial Statements of thisForm 10-K.
(2) Financial Statement Schedules
Schedules are not provided because of the absence of conditions under which they are required or because the required information is given in the financial statements or the notes thereto.
(3) Exhibits
See Index to Exhibits on page 3839 herein.
3637
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 12, 2010.31, 2011.
RAE SYSTEMS INC.
Robert I. Chen
President and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert I. Chen and Randall Gausman, and each of them, as such person’s true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such person and in such person’s name, place and stead, in any and all capacities, to sign any and all amendments to this report onForm 10-K, and to file same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated:
| | | | | | |
Signature | | Title | | Date |
|
| | | | |
/s/ Robert I. Chen Robert I. Chen | | President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) | | March 12, 201031, 2011 |
| | | | |
/s/ Randall Gausman Randall Gausman | | Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | | March 12, 201031, 2011 |
| | | | |
/s/ Peter C. Hsi Peter C. Hsi | | Chief Technology Officer and Director | | March 12, 201031, 2011 |
| | | | |
/s/ Lyle D. Feisel Lyle D. Feisel | | Director | | March 12, 201031, 2011 |
| | | | |
/s/ Sigrun Hjelmqvist Sigrun Hjelmqvist | | Director | | March 12, 201031, 2011 |
| | | | |
/s/ Keh ShewKeh-Shew Lu Keh Shew Lu | | Director | | March 12, 201031, 2011 |
| | | | |
/s/ James W. Power James W. Power | | Director | | March 12, 201031, 2011 |
| | | | |
/s/ Susan Wang Susan Wang | | Director | | March 12, 201031, 2011 |
3738
INDEX TO EXHIBITS
| | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Description of Document | Number | | Description of Document |
|
| 3 | .1 | | Certificate of Incorporation of Registrant(1) | 3 | .1 | | Certificate of Incorporation of Registrant(1) |
| 3 | .2 | | Amended and Restated Bylaws of Registrant(3) | 3 | .2 | | Amended and Restated Bylaws of Registrant(3) |
| 4 | .1 | | Specimen certificate representing the common stock of Registrant(1) | 4 | .1 | | Specimen certificate representing the common stock of Registrant(1) |
| 10 | .0 | | Form of Indemnity Agreement between the Registrant and the Registrant’s directors and officers(1) | 10 | .0 | | Form of Indemnity Agreement between the Registrant and the Registrant’s directors and officers(1) |
| 10 | .1 | | RAE Systems Inc. 2007 Equity Incentive Plan(2) | 10 | .1 | | RAE Systems Inc. 2007 Equity Incentive Plan(2) |
| 10 | .2 | | RAE Systems Inc. 2002 Stock Option Plan(1) | 10 | .2 | | RAE Systems Inc. 2002 Stock Option Plan(1) |
| 10 | .3 | | RAE Systems Inc. 1993 Stock Plan(1) | 10 | .3 | | RAE Systems Inc. 1993 Stock Plan(1) |
| 10 | .4 | | Form of Stock Option Agreement under the Registrant’s 2007 Equity Incentive Plan(9) | 10 | .4 | | Form of Stock Option Agreement under the Registrant’s 2007 Equity Incentive Plan(9) |
| 10 | .5 | | Lease Agreement by and between Inland American/Stephens (N First) Ventures, LLC and RAE Systems Inc., dated December 20, 2007(9) | 10 | .5 | | Lease Agreement by and between Inland American/Stephens (N First) Ventures, LLC and RAE Systems Inc., dated December 20, 2007(9) |
| 10 | .6 | | Purchase and Sale Agreement by and between D.R. Stephens & Company, LLC and RAE Systems Inc., dated November 9, 2007(9) | 10 | .6 | | Purchase and Sale Agreement by and between D.R. Stephens & Company, LLC and RAE Systems Inc., dated November 9, 2007(9) |
| 10 | .7 | | Manufacturing Building Lease Agreement by and between Shanghai China Academic Science High Tech Industrial Park Development Co., Ltd. and RAE Systems(Asia), Ltd., incorporated in Hong Kong, dated September 15, 2001(1) | 10 | .7 | | Manufacturing Building Lease Agreement by and between Shanghai China Academic Science High Tech Industrial Park Development Co., Ltd. and RAE Systems(Asia), Ltd., incorporated in Hong Kong, dated September 15, 2001(1) |
| 10 | .8 | | Lease Agreement by and between Shanghai Institute of Metallurgy Research, Chinese Academy of Sciences and WARAE Instrument(Shanghai) Incorporated, incorporated in Jiading, Shanghai, dated January 8, 1999(1) | 10 | .8 | | Lease Agreement by and between Shanghai Institute of Metallurgy Research, Chinese Academy of Sciences and WARAE Instrument(Shanghai) Incorporated, incorporated in Jiading, Shanghai, dated January 8, 1999(1) |
| 10 | .9 | | Form of Share Transfer Agreement by and between RAE-KLH shareholders and RAE Systems Asia (Hong Kong) Ltd.(4) | 10 | .9 | | Form of Share Transfer Agreement by and between RAE-KLH shareholders and RAE Systems Asia (Hong Kong) Ltd.(4) |
| 10 | .10 | | Separation Agreement and General Release of Claims by and between Donald W. Morgan and the Registrant dated August 8, 2006(5) | 10 | .10 | | Separation Agreement and General Release of Claims by and between Donald W. Morgan and the Registrant dated August 8, 2006(5) |
| 10 | .11 | | RAE System’s Inc. Management Incentive Plan(6) | 10 | .11 | | RAE System’s Inc. Management Incentive Plan(6) |
| 10 | .12 | | Employment Offer Letter by and between Randall Gausman and the Registrant dated October 17, 2006(7) | 10 | .12 | | Employment Offer Letter by and between Randall Gausman and the Registrant dated October 17, 2006(7) |
| 10 | .13 | | Loan and Security Agreement dated as of March 14, 2007 between Silicon Valley Bank and the Registrant(8) | 10 | .13 | | Loan and Security Agreement dated as of March 14, 2007 between Silicon Valley Bank and the Registrant(8) |
| 10 | .14 | | Joint Venture Agreement by and between Liaoning Coal Industry Group Co., Ltd. and RAE Systems (Asia), Ltd. dated December 10, 2006(8) | 10 | .14 | | Joint Venture Agreement by and between Liaoning Coal Industry Group Co., Ltd. and RAE Systems (Asia), Ltd. dated December 10, 2006(8) |
| 10 | .15 | | Separation Agreement and General Release of Claims by and between Rudy Mui and the Registrant dated March 4, 2008(9) | 10 | .15 | | Separation Agreement and General Release of Claims by and between Rudy Mui and the Registrant dated March 4, 2008(9) |
| 10 | .16 | | Form of Indemnity Agreement between RAE Systems Inc. and each of its directors and executive officers(10) | 10 | .16 | | Form of Indemnity Agreement between RAE Systems Inc. and each of its directors and executive officers(10) |
| 21 | .1 | | Subsidiaries of the Registrant(9) | 10 | .17 | | Equity Transfer Contract between RAE Systems (Asia) Limited and Shenyang Research Institute of China Coal Research Institute dated January 12, 2011(11) |
| 23 | .2 | | Consent of Deloitte & Touche LLP(11) | 10 | .18 | | Settlement Agreement among the Registrant, Shenyang Research Institute of China Coal Research Institute,et al.dated January 12, 2011(11) |
| 24 | .1 | | Power of Attorney(11) (included on signature page) | 10 | .19 | | Amendment No. 9 to Loan and Security Agreement between the Registrant and Silicon Valley Bank dated September 1, 2010(11) |
| 31 | .1 | | Certifications of Robert I. Chen, President and Chief Executive Officer of Registrant, pursuant toRule 13a-14 adopted under the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002(11) | 10 | .20 | | Amendment No. 10 to Loan and Security Agreement between the Registrant and Silicon Valley Bank dated January 12, 2011(11) |
| 31 | .2 | | Certifications of Randall Gausman, Vice President and Chief Financial Officer of Registrant, pursuant toRule 13a-14 adopted under the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002(11) | 10 | .21 | | Amendment No. 11 to Loan and Security Agreement between the Registrant and Silicon Valley Bank dated March 28, 2011(11) |
| 32 | .1 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(11) | 10 | .22 | | Final Judgment as to Defendant RAE Systems Inc. (vs. the Securities and Exchange Commission) dated December 14, 2010(11) |
| 32 | .2 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(11) | 10 | .23 | | Settlement Agreement between the Department of Justice and the Registrant dated December 10, 2010(11) |
39
| | | | |
Exhibit
| | |
Number | | Description of Document |
|
| 21 | .1 | | Subsidiaries of the Registrant(9) |
| 23 | .2 | | Consent of Deloitte & Touche LLP(11) |
| 24 | .1 | | Power of Attorney(11) (included on signature page) |
| 31 | .1 | | Certifications of Robert I. Chen, President and Chief Executive Officer of Registrant, pursuant to Rule 13a-14 adopted under the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002(11) |
| 31 | .2 | | Certifications of Randall Gausman, Vice President and Chief Financial Officer of Registrant, pursuant to Rule 13a-14 adopted under the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002(11) |
| 32 | .1 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(11) |
| 32 | .2 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(11) |
| | |
(1) | | Previously filed as an exhibit to the Registrant’s quarterly report onForm 10-Q, for the quarter ended March 31, 2002 and incorporated herein by reference. |
|
(2) | | Previously filed as an exhibit to the Registrant’s current report onForm 8-K on June 19, 2007 and incorporated herein by reference. |
38
| | |
(3) | | Previously filed as an exhibit to the Registrant’s current report onForm 8-K on December 21, 2007 and incorporated herein by reference. |
|
(4) | | Previously filed on August 8, 2006 as an exhibit to the Registrant’s quarterly report onForm 10-Q for the quarter ended June 30, 2006 and incorporated herein by reference. |
|
(5) | | Previously filed as an exhibit to the Registrant’s current report onForm 8-K on August 8, 2006 and incorporated herein by reference. |
|
(6) | | Previously filed as an exhibit to the Registrant’s current report onForm 8-K on August 16, 2006 and incorporated herein by reference. |
|
(7) | | Previously filed as an exhibit to the Registrant’s current report onForm 8-K on October 18, 2006 and incorporated herein by reference. |
|
(8) | | Previously filed as an exhibit to the Registrant’s annual report onForm 10-K for the year ended December 31, 2006 and incorporated herein by reference. |
|
(9) | | Previously filed as an exhibit to the Registrant’s annual report onForm 10-K for the year ended December 31, 2007 and incorporated herein by reference. |
|
(10) | | Previously filed as an exhibit to the Registrant’s quarterly report onForm 10-Q for the quarter ended June 30, 2009 and incorporated herein by reference. |
|
(11) | | Filed herewith. |
3940
RAE Systems Inc.
Consolidated Financial Statements
As of December 31, 20092010 and 20082009
| | | | |
Consolidated Financial Statements
| | | | |
| | | F-242 | |
Consolidated Financial Statements | | | 43 | |
| | | F-343 | |
| | | F-444 | |
| | | F-545 | |
| | | F-646 | |
| | | F-747 | |
F-141
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
RAE Systems Inc.
We have audited the accompanying consolidated balance sheets of RAE Systems Inc. and subsidiaries (collectively the “Company”) as of December 31, 20092010 and 2008,2009, and the related consolidated statements of operations, shareholders’ equity and comprehensive loss, and cash flows for each of the three years in the period ended December 31, 2009.2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting as of December 31, 2010. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20092010 and 2008,2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009,2010, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
San Jose, California
March 11, 201031, 2011
F-242
RAE SYSTEMS INC.
| | | | | | | | | |
| | December 31,
| | December 31,
| | | | | | | | | |
| | 2009 | | 2008 | | | December 31,
| | December 31,
| |
| | (In thousands, except share
| | | 2010 | | 2009 | |
| | and par value data) | | | (In thousands, except share and par value data) | |
|
ASSETS | ASSETS | ASSETS |
Current assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 18,528 | | | $ | 14,845 | | | $ | 16,296 | | | $ | 17,153 | |
Restricted cash | | | 2,146 | | | | — | | | | 2,000 | | | | 2,000 | |
Trade notes receivable | | | 2,039 | | | | 1,870 | | | | 2,018 | | | | 1,527 | |
Accounts receivable, net of allowances of $5,380 and $3,472, respectively | | | 19,428 | | | | 20,961 | | |
Accounts receivable, net of allowances of $3,539 and $2,675, respectively | | | | 14,286 | | | | 14,735 | |
Accounts receivable from affiliate | | | 322 | | | | 100 | | | | 200 | | | | 322 | |
Inventories | | | 12,068 | | | | 17,604 | | | | 11,546 | | | | 9,308 | |
Prepaid expenses and other current assets | | | 3,983 | | | | 4,991 | | | | 4,557 | | | | 3,339 | |
Income taxes receivable | | | 659 | | | | 895 | | | | 130 | | | | 659 | |
Current assets of discontinued operation | | | | 6,093 | | | | 10,130 | |
| | | | | | | | | | |
Total current assets | | | 59,173 | | | | 61,266 | | | | 57,126 | | | | 59,173 | |
| | | | | | | | | | |
Property and equipment, net | | | 15,590 | | | | 14,976 | | | | 10,730 | | | | 7,582 | |
Intangible assets, net | | | 2,428 | | | | 3,342 | | | | 196 | | | | 544 | |
Investments in unconsolidated affiliates | | | 358 | | | | 467 | | | | 184 | | | | 358 | |
Other assets | | | 1,325 | | | | 1,124 | | | | 393 | | | | 1,325 | |
Noncurrent assets of discontinued operation | | | | 3,478 | | | | 9,892 | |
| | | | | | | | | | |
Total assets | | $ | 78,874 | | | $ | 81,175 | | | $ | 72,107 | | | $ | 78,874 | |
| | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |
LIABILITIES AND EQUITY | | LIABILITIES AND EQUITY |
Current liabilities: | | | | | | | | | | | | | | | | |
Accounts payable | | $ | 6,454 | | | $ | 6,387 | | | $ | 5,475 | | | $ | 5,725 | |
Accounts payable to affiliate | | | 92 | | | | 382 | | | | 25 | | | | 92 | |
Payable to Fushun shareholder | | | — | | | | 64 | | |
Bank lines of credit | | | 4,026 | | | | 2,584 | | | | 1,814 | | | | 4,026 | |
Accrued liabilities | | | 15,753 | | | | 12,318 | | | | 11,957 | | | | 11,962 | |
Notes payable to related parties, current | | | 370 | | | | 1,329 | | | | 278 | | | | 370 | |
Income taxes payable | | | 199 | | | | 425 | | | | 128 | | | | — | |
Deferred revenue, current | | | 603 | | | | 631 | | | | 557 | | | | 603 | |
Current liabilities of discontinued operation | | | | 5,790 | | | | 4,719 | |
| | | | | | | | | | |
Total current liabilities | | | 27,497 | | | | 24,120 | | | | 26,024 | | | | 27,497 | |
| | | | | | | | | | |
Deferred revenue, non-current | | | 615 | | | | 685 | | | | 776 | | | | 615 | |
Deferred tax liabilities, non-current | | | 156 | | | | 83 | | | | 141 | | | | — | |
Long-term debt | | | 1,463 | | | | — | | |
Deferred gain on sale of real estate | | | 4,444 | | | | 5,079 | | | | 3,809 | | | | 4,444 | |
Other long-term liabilities | | | 781 | | | | 1,292 | | | | 1,491 | | | | 761 | |
Notes payable to related parties, non-current | | | 363 | | | | 1,219 | | | | — | | | | 363 | |
Noncurrent liabilities of discontinued operation | | | | 182 | | | | 1,639 | |
| | | | | | | | | | |
Total liabilities | | | 35,319 | | | | 32,478 | | | | 32,423 | | | | 35,319 | |
| | | | | | | | | | |
COMMITMENTS AND CONTINGENCIES (NOTE 7) | | | | | | | | | | | | | | | | |
SHAREHOLDERS’ EQUITY: | | | | | | | | | |
Common stock, $0.001 par value, 200,000,000 shares authorized; 59,438,328 and 59,443,914 shares issued and outstanding, respectively | | | 59 | | | | 59 | | |
| | |
EQUITY: | | EQUITY: |
Common stock, $0.001 par value, 200,000,000 shares authorized; 59,512,064 and 59,438,328 shares issued and outstanding as of December 31, 2010 and 2009, respectively | | | | 59 | | | | 59 | |
Additional paid-in capital | | | 63,832 | | | | 62,549 | | | | 65,041 | | | | 63,832 | |
Accumulated other comprehensive income | | | 6,844 | | | | 6,555 | | | | 7,786 | | | | 6,844 | |
Accumulated deficit | | | (31,706 | ) | | | (25,947 | ) | | | (34,311 | ) | | | (31,706 | ) |
| | | | | | | | | | |
Total RAE Systems Inc. shareholders’ equity | | | 39,029 | | | | 43,216 | | | | 38,575 | | | | 39,029 | |
Noncontrolling interest | | | 4,526 | | | | 5,481 | | | | 1,109 | | | | 4,526 | |
| | | | | | | | | | |
Total shareholders’ equity | | | 43,555 | | | | 48,697 | | |
Total equity | | | | 39,684 | | | | 43,555 | |
| | | | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 78,874 | | | $ | 81,175 | | |
Total liabilities and equity | | | $ | 72,107 | | | $ | 78,874 | |
| | | | | | | | | | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-343
RAE SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (In thousands, except per share data) | | | (In thousands, except per share data) | |
|
Net sales | | $ | 83,172 | | | $ | 95,383 | | | $ | 90,836 | | | $ | 87,053 | | | $ | 74,993 | | | $ | 83,045 | |
Cost of sales | | | 42,193 | | | | 47,168 | | | | 44,428 | | | | 34,752 | | | | 35,415 | | | | 38,898 | |
| | | | | | | | | | | | | | |
Gross profit | | | 40,979 | | | | 48,215 | | | | 46,408 | | | | 52,301 | | | | 39,578 | | | | 44,147 | |
| | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Sales and marketing | | | 18,824 | | | | 21,427 | | | | 25,434 | | | | 19,494 | | | | 16,354 | | | | 17,943 | |
Research and development | | | 6,354 | | | | 6,665 | | | | 7,973 | | | | 7,077 | | | | 5,956 | | | | 5,949 | |
General and administrative | | | 23,124 | | | | 22,864 | | | | 17,767 | | | | 19,691 | | | | 21,149 | | | | 21,160 | |
Impairment of goodwill | | | — | | | | 3,348 | | | | — | | | | — | | | | — | | | | 3,348 | |
Gain on abandonment of lease | | | — | | | | — | | | | (595 | ) | |
| | | | | | | | | | | | | | |
Total operating expenses | | | 48,302 | | | | 54,304 | | | | 50,579 | | | | 46,262 | | | | 43,459 | | | | 48,400 | |
| | | | | | | | | | | | | | |
Operating loss from continuing operations | | | (7,323 | ) | | | (6,089 | ) | | | (4,171 | ) | |
Operating income (loss) from continuing operations | | | | 6,039 | | | | (3,881 | ) | | | (4,253 | ) |
Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | | 48 | | | | 173 | | | | 162 | | | | 66 | | | | 46 | | | | 161 | |
Interest expense | | | (402 | ) | | | (397 | ) | | | (705 | ) | | | (185 | ) | | | (390 | ) | | | (397 | ) |
Other, net | | | 188 | | | | (575 | ) | | | 58 | | | | (177 | ) | | | 277 | | | | (735 | ) |
Equity in (loss) gain of unconsolidated affiliates | | | (109 | ) | | | 43 | | | | 3 | | | | (173 | ) | | | (109 | ) | | | 43 | |
| | | | | | | | | | | | | | |
Loss from continuing operations before income taxes | | | (7,598 | ) | | | (6,845 | ) | | | (4,653 | ) | |
Income tax (benefit) expense | | | (884 | ) | | | 538 | | | | 5,883 | | |
Income (loss) from continuing operations before income taxes | | | | 5,570 | | | | (4,057 | ) | | | (5,181 | ) |
Income tax (expense) benefit | | | | (297 | ) | | | 800 | | | | (538 | ) |
| | | | | | | | | | | | | | |
Loss from continuing operations | | | (6,714 | ) | | | (7,383 | ) | | | (10,536 | ) | |
Gain (loss) from discontinued operations, net of tax | | | — | | | | 11 | | | | (4,154 | ) | |
Income (loss) from continuing operations | | | | 5,273 | | | | (3,257 | ) | | | (5,719 | ) |
Loss from discontinued operations, net of tax | | | | (11,178 | ) | | | (3,457 | ) | | | (1,653 | ) |
| | | | | | | | | | | | | | |
Net loss | | | (6,714 | ) | | | (7,372 | ) | | | (14,690 | ) | | | (5,905 | ) | | | (6,714 | ) | | | (7,372 | ) |
Net loss (income) attributable to the noncontrolling interest | | | 955 | | | | 220 | | | | (6 | ) | |
Net (income) loss attributable to the noncontrolling interest, continuing operations | | | | (42 | ) | | | 3 | | | | (148 | ) |
Net loss attributable to the noncontrolling interest, discontinued operations | | | | 3,342 | | | | 952 | | | | 368 | |
| | | | | | | | |
Net loss attributable to the noncontrolling interest | | | | 3,300 | | | | 955 | | | | 220 | |
| | | | | | | | | | | | | | |
Net loss attributable to RAE Systems Inc. | | $ | (5,759 | ) | | $ | (7,152 | ) | | $ | (14,696 | ) | | $ | (2,605 | ) | | $ | (5,759 | ) | | $ | (7,152 | ) |
| | | | | | | | | | | | | | |
Net loss per share — basic and diluted | | | | | | | | | | | | | |
Earnings per common share — basic: | | | | | | | | | | | | | |
Continuing operations | | $ | (0.10 | ) | | $ | (0.12 | ) | | $ | (0.18 | ) | | $ | 0.09 | | | $ | (0.06 | ) | | $ | (0.10 | ) |
Discontinued operations | | | — | | | | — | | | | (0.07 | ) | | | (0.13 | ) | | | (0.04 | ) | | | (0.02 | ) |
| | | | | | | | | | | | | | |
Net loss per share — basic and diluted | | $ | (0.10 | ) | | $ | (0.12 | ) | | $ | (0.25 | ) | |
Net loss per common share — basic | | | $ | (0.04 | ) | | $ | (0.10 | ) | | $ | (0.12 | ) |
| | | | | | | | | | | | | | |
Weighted average common shares outstanding — Basic and Diluted | | | 59,367 | | | | 59,204 | | | | 58,852 | | |
Earnings per common share — diluted: | | | | | | | | | | | | | |
Continuing operations | | | $ | 0.09 | | | $ | (0.06 | ) | | $ | (0.10 | ) |
Discontinued operations | | | | (0.13 | ) | | | (0.04 | ) | | | (0.02 | ) |
| | | | | | | | |
Net loss per common share — diluted | | | $ | (0.04 | ) | | $ | (0.10 | ) | | $ | (0.12 | ) |
| | | | | | | | |
Weighted average common shares outstanding — basic | | | | 59,439 | | | | 59,367 | | | | 59,204 | |
Dilutive stock options | | | | 136 | | | | — | | | | — | |
| | | | | | | | |
Weighted average common shares outstanding — diluted | | | | 59,575 | | | | 59,367 | | | | 59,204 | |
| | | | | | | | |
See accompanying notes to consolidated financial statements.
F-444
RAE SYSTEMS INC.
AND COMPREHENSIVE LOSS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Accumulated
| | | | | | | | | | | | | | | Accumulated
| | | | | | | |
| | | | | | Additional
| | Other
| | | | | | | | | | | | | Additional
| | Other
| | | | | | | |
| | Common Stock | | Paid-In
| | Comprehensive
| | Accumulated
| | Noncontrolling
| | | | | Common Stock | | Paid-in
| | Comprehensive
| | Accumulated
| | Noncontrolling
| | | |
| | Shares | | Amount | | Capital | | Income | | Deficit | | Interest | | Total | | | Shares | | Amount | | Capital | | Income | | Deficit | | Interest | | Total | |
| | (In thousands, except share data) | | | (In thousands, except share data) | |
|
December 31, 2006 | | | 59,274,596 | | | $ | 59 | | | $ | 58,828 | | | $ | 1,245 | | | $ | (3,953 | ) | | $ | 4,495 | | | $ | 60,674 | | |
Cumulative effect of adopting FIN 48 — adjustment to accumulated deficit | | | — | | | | — | | | | — | | | | — | | | | (146 | ) | | | — | | | | (146 | ) | |
January 1, 2008 | | | | 59,171,980 | | | $ | 59 | | | $ | 60,957 | | | $ | 4,135 | | | $ | (18,795 | ) | | $ | 5,385 | | | $ | 51,741 | |
Components of comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | (14,696 | ) | | | 6 | | | | (14,690 | ) | | | — | | | | — | | | | — | | | | — | | | | (7,152 | ) | | | (220 | ) | | | (7,372 | ) |
Foreign currency translation adustments | | | — | | | | — | | | | — | | | | 2,889 | | | | — | | | | 884 | | | | 3,773 | | |
Unrealized loss on investment, net of tax | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | — | | | | 1 | | |
| | | | |
Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | (10,916 | ) | |
| | | | |
Exercise of stock options | | | 32,291 | | | | — | | | | 72 | | | | — | | | | — | | | | — | | | | 72 | | |
Repurchase of restricted common stock | | | (134,907 | ) | | | — | | | | (335 | ) | | | — | | | | — | | | | — | | | | (335 | ) | |
Stock-based compensation expense | | | — | | | | — | | | | 2,553 | | | | — | | | | — | | | | — | | | | 2,553 | | |
Investment in unconsolidated entity | | | — | | | | — | | | | (1 | ) | | | — | | | | — | | | | — | | | | (1 | ) | |
Tax benefit from stock options | | | — | | | | — | | | | (160 | ) | | | — | | | | — | | | | — | | | | (160 | ) | |
| | | | | | | | | | | | | | | | |
December 31, 2007 | | | 59,171,980 | | | | 59 | | | | 60,957 | | | | 4,135 | | | | (18,795 | ) | | | 5,385 | | | | 51,741 | | |
Components of comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | (7,152 | ) | | | (220 | ) | | | (7,372 | ) | |
Foreign currency translation adustments | | | — | | | | — | | | | — | | | | 2,420 | | | | — | | | | 316 | | | | 2,736 | | |
Foreign currency translation adjustments | | | | — | | | | — | | | | — | | | | 2,420 | | | | — | | | | 316 | | | | 2,736 | |
| | | | | | |
Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,636 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,636 | ) |
| | | | | | |
Exercise of stock options | | | 149,458 | | | | — | | | | 43 | | | | — | | | | — | | | | — | | | | 43 | | | | 149,458 | | | | — | | | | 43 | | | | — | | | | — | | | | — | | | | 43 | |
Repurchase of restricted common stock | | | (27,524 | ) | | | — | | | | (44 | ) | | | — | | | | — | | | | — | | | | (44 | ) | | | (27,524 | ) | | | — | | | | (44 | ) | | | — | | | | — | | | | — | | | | (44 | ) |
Stock issued for services | | | 150,000 | | | | — | | | | 210 | | | | — | | | | — | | | | — | | | | 210 | | | | 150,000 | | | | — | | | | 210 | | | | — | | | | — | | | | — | | | | 210 | |
Stock-based compensation expense | | | — | | | | — | | | | 1,383 | | | | — | | | | — | | | | — | | | | 1,383 | | | | — | | | | — | | | | 1,383 | | | | — | | | | — | | | | — | | | | 1,383 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2008 | | | 59,443,914 | | | | 59 | | | | 62,549 | | | | 6,555 | | | | (25,947 | ) | | | 5,481 | | | | 48,697 | | | | 59,443,914 | | | | 59 | | | | 62,549 | | | | 6,555 | | | | (25,947 | ) | | | 5,481 | | | | 48,697 | |
Components of comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | (5,759 | ) | | | (955 | ) | | | (6,714 | ) | | | — | | | | — | | | | — | | | | — | | | | (5,759 | ) | | | (955 | ) | | | (6,714 | ) |
Foreign currency translation adustments | | | — | | | | — | | | | — | | | | 289 | | | | — | | | | — | | | | 289 | | |
Foreign currency translation adjustments | | | | — | | | | — | | | | — | | | | 289 | | | | — | | | | | | | | 289 | |
| | | | | | |
Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | (6,425 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | (6,425 | ) |
| | | | | | |
Repurchase of restricted common stock | | | (5,586 | ) | | | — | | | | (7 | ) | | | — | | | | — | | | | — | | | | (7 | ) | | | (5,586 | ) | | | — | | | | (7 | ) | | | — | | | | — | | | | — | | | | (7 | ) |
Stock-based compensation expense | | | — | | | | — | | | | 1,290 | | | | — | | | | — | | | | — | | | | 1,290 | | | | — | | | | — | | | | 1,290 | | | | — | | | | — | | | | — | | | | 1,290 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2009 | | | 59,438,328 | | | $ | 59 | | | $ | 63,832 | | | $ | 6,844 | | | $ | (31,706 | ) | | $ | 4,526 | | | $ | 43,555 | | | | 59,438,328 | | | | 59 | | | | 63,832 | | | | 6,844 | | | | (31,706 | ) | | | 4,526 | | | | 43,555 | |
Components of comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | — | | | | — | | | | — | | | | — | | | | (2,605 | ) | | | (3,300 | ) | | | (5,905 | ) |
Foreign currency translation adjustments | | | | — | | | | — | | | | — | | | | 942 | | | | — | | | | — | | | | 942 | |
| | | | | | | | | | | | | | | | | | |
Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,963 | ) |
| | | | |
Dividend paid | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (117 | ) | | | (117 | ) |
Exercise of stock options | | | | 85,822 | | | | — | | | | 76 | | | | — | | | | — | | | | — | | | | 76 | |
Repurchase of restricted common stock | | | | (12,086 | ) | | | — | | | | (10 | ) | | | — | | | | — | | | | — | | | | (10 | ) |
Stock-based compensation expense | | | | — | | | | — | | | | 1,143 | | | | — | | | | — | | | | — | | | | 1,143 | |
| | | | | | | | | | | | | | | | |
December 31, 2010 | | | | 59,512,064 | | | $ | 59 | | | $ | 65,041 | | | $ | 7,786 | | | $ | (34,311 | ) | | $ | 1,109 | | | $ | 39,684 | |
| | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-545
RAE SYSTEMS INC.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | | |
| | (In thousands) | | | (In thousands) | |
|
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | $ | (6,714 | ) | | $ | (7,372 | ) | | $ | (14,690 | ) | | $ | (5,905 | ) | | $ | (6,714 | ) | | $ | (7,372 | ) | | | | |
Gain (loss) from discontinued operations | | | — | | | | 11 | | | | (4,154 | ) | |
Loss from discontinued operations | | | | (11,178 | ) | | | (3,457 | ) | | | (1,653 | ) | | | | |
| | | | | | | | | | | | | | |
Loss from continuing operations | | | (6,714 | ) | | | (7,383 | ) | | | (10,536 | ) | |
Income (loss) from continuing operations | | | | 5,273 | | | | (3,257 | ) | | | (5,719 | ) | | | | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 3,215 | | | | 3,344 | | | | 3,715 | | | | 1,683 | | | | 2,219 | | | | 2,381 | | | | | |
Provision for doubtful accounts | | | 1,904 | | | | 1,275 | | | | 1,948 | | | | 768 | | | | 1,145 | | | | 606 | | | | | |
Gain on disposal of property and equipment | | | (572 | ) | | | (586 | ) | | | (285 | ) | | | (624 | ) | | | (632 | ) | | | (586 | ) | | | | |
Stock-based compensation expense | | | 1,290 | | | | 1,593 | | | | 1,871 | | | | 1,143 | | | | 1,290 | | | | 1,593 | | | | | |
Equity in loss (gain) of unconsolidated affiliates | | | 109 | | | | (43 | ) | | | (3 | ) | | | 173 | | | | 109 | | | | (43 | ) | | | | |
Deferred income tax (benefit) expense | | | (380 | ) | | | (1,221 | ) | | | 3,999 | | | | (667 | ) | | | (380 | ) | | | (1,221 | ) | | | | |
Gain on abandonment of lease | | | — | | | | — | | | | (595 | ) | |
Amortization of discount on notes payable to related parties | | | 85 | | | | 52 | | | | 79 | | | | 40 | | | | 85 | | | | 52 | | | | | |
Impairment of intangible assets | | | — | | | | — | | | | 609 | | |
Impairment of goodwill | | | — | | | | 3,348 | | | | — | | | | — | | | | — | | | | 3,348 | | | | | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts receivable | | | (221 | ) | | | 1,174 | | | | (5,719 | ) | | | (239 | ) | | | 129 | | | | 1,268 | | | | | |
Accounts receivable from affiliate | | | (221 | ) | | | (77 | ) | | | 25 | | | | 127 | | | | (221 | ) | | | (77 | ) | | | | |
Trade notes receivable | | | (154 | ) | | | 1,056 | | | | (689 | ) | | | (434 | ) | | | (314 | ) | | | 1,157 | | | | | |
Inventories | | | 5,645 | | | | 661 | | | | (1,831 | ) | | | (2,048 | ) | | | 5,018 | | | | 1,050 | | | | | |
Prepaid expenses and other current assets | | | 1,389 | | | | (1,361 | ) | | | (46 | ) | | | (284 | ) | | | 95 | | | | 17 | | | | | |
Income taxes receivable | | | 237 | | | | 1,167 | | | | — | | | | 529 | | | | 237 | | | | 1,167 | | | | | |
Other assets | | | (174 | ) | | | 557 | | | | (1,004 | ) | | | 192 | | | | 3 | | | | 557 | | | | | |
Accounts payable | | | 1,053 | | | | (1,036 | ) | | | (1,473 | ) | | | (375 | ) | | | 1,385 | | | | (1,357 | ) | | | | |
Accounts payable to affiliate | | | (290 | ) | | | (52 | ) | | | 35 | | | | (69 | ) | | | (290 | ) | | | (52 | ) | | | | |
Accrued liabilities | | | 2,252 | | | | 356 | | | | 1,876 | | | | (822 | ) | | | 1,715 | | | | (1,757 | ) | | | | |
Income taxes payable | | | (240 | ) | | | (287 | ) | | | 541 | | | | 359 | | | | (439 | ) | | | (287 | ) | | | | |
Deferred revenue | | | (98 | ) | | | 314 | | | | (977 | ) | | | 114 | | | | (98 | ) | | | 314 | | | | | |
Other liabilities | | | (458 | ) | | | 320 | | | | (117 | ) | | | (6 | ) | | | (198 | ) | | | (32 | ) | | | | |
| | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities of continuing operations | | | 7,657 | | | | 3,171 | | | | (8,577 | ) | |
Net cash provided by (used in) operating activities of discontinued operations | | | — | | | | 7 | | | | (1,402 | ) | |
Net cash provided by operating activities of continuing operations | | | | 4,833 | | | | 7,601 | | | | 2,379 | | | | | |
Net cash (used in) provided by operating activities of discontinued operations | | | | (1,057 | ) | | | 56 | | | | 799 | | | | | |
| | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | 7,657 | | | | 3,178 | | | | (9,979 | ) | |
Net cash provided by operating activities | | | | 3,776 | | | | 7,657 | | | | 3,178 | | | | | |
| | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from sales and maturities of investments | | | — | | | | — | | | | 3,248 | | |
Business acquisitions, net of cash acquired | | | — | | | | — | | | | (1,618 | ) | |
Changes in restricted cash | | | (2,146 | ) | | | — | | | | — | | | | — | | | | (2,000 | ) | | | — | | | | | |
Acquisition of property and equipment | | | (2,959 | ) | | | (3,501 | ) | | | (4,014 | ) | | | (3,192 | ) | | | (1,842 | ) | | | (896 | ) | | | | |
Proceeds from sale of net assets | | | 105 | | | | 150 | | | | 12,407 | | | | 78 | | | | 73 | | | | 65 | | | | | |
| | | | | | | | | | | | | | |
Net cash (used in) provided by investing activities | | | (5,000 | ) | | | (3,351 | ) | | | 10,023 | | |
Net cash used in investing activities of continuing operations | | | | (3,114 | ) | | | (3,769 | ) | | | (831 | ) | | | | |
Net cash used in investing activities of discontinued operations | | | | (307 | ) | | | (1,231 | ) | | | (2,520 | ) | | | | |
| | | | | | | | |
Net cash used in investing activities | | | | (3,421 | ) | | | (5,000 | ) | | | (3,351 | ) | | | | |
| | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from the exercise of stock options | | | — | | | | 43 | | | | 72 | | | | 76 | | | | — | | | | 43 | | | | | |
Repurchases of common stock | | | (7 | ) | | | (44 | ) | | | (335 | ) | | | (11 | ) | | | (7 | ) | | | (44 | ) | | | | |
Dividends paid | | | | (117 | ) | | | — | | | | — | | | | | |
Borrowings from bank lines of credit | | | 5,555 | | | | 4,961 | | | | 12,156 | | | | — | | | | 4,092 | | | | 4,961 | | | | | |
Payments on bank lines of credit | | | (2,649 | ) | | | (5,195 | ) | | | (9,600 | ) | | | (2,248 | ) | | | (2,649 | ) | | | (5,195 | ) | | | | |
Payments on payables to related parties | | | (1,945 | ) | | | (1,156 | ) | | | (4,977 | ) | | | (399 | ) | | | (1,880 | ) | | | (573 | ) | | | | |
| | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 954 | | | | (1,391 | ) | | | (2,684 | ) | |
Net cash used in financing activities of continuing operations | | | | (2,699 | ) | | | (444 | ) | | | (808 | ) | | | | |
Net cash provided by (used in) financing activities of discontinued operations | | | | — | | | | 1,398 | | | | (583 | ) | | | | |
| | | | | | | | |
Net cash (used in) provided by financing activities | | | | (2,699 | ) | | | 954 | | | | (1,391 | ) | | | | |
| | | | | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | 72 | | | | 503 | | | | 427 | | | | 146 | | | | 72 | | | | 503 | | | | | |
Increase (decrease) in cash and cash equivalents | | | 3,683 | | | | (1,061 | ) | | | (2,213 | ) | |
Cash and cash equivalents at beginning of period | | | 14,845 | | | | 15,906 | | | | 18,119 | | |
(Decrease) increase in cash and cash equivalents | | | | (2,198 | ) | | | 3,683 | | | | (1,061 | ) | | | | |
Cash and cash equivalents at beginning of year | | | | 18,528 | | | | 14,845 | | | | 15,906 | | | | | |
| | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 18,528 | | | $ | 14,845 | | | $ | 15,906 | | |
Cash and cash equivalents at end of year | | | | 16,330 | | | | 18,528 | | | | 14,845 | | | | | |
Less cash and cash equivalents of discontinued operations at end of year | | | | 34 | | | | 1,375 | | | | 1,149 | | | | | |
| | | | | | | | |
Cash and cash equivalents of continuing operations at end of year | | | $ | 16,296 | | | $ | 17,153 | | | $ | 13,696 | | | | | |
| | | | | | | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash paid for taxes, net | | $ | (10 | ) | | $ | 687 | | | $ | 1,133 | | | $ | (166 | ) | | $ | (10 | ) | | $ | 687 | | | | | |
Cash paid for interest | | | 750 | | | | 333 | | | | 422 | | |
Cash paid for interest by continuing operations, net of amounts capitalized | | | | 281 | | | | 729 | | | | 325 | | | | | |
Cash paid for interest by discontinued operations, net of amounts capitalized | | | | 122 | | | | 21 | | | | 8 | | | | | |
Non-cash investing and financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unpaid property and equipment | | | 1,274 | | | | 1,100 | | | | 589 | | |
Unpaid property and equipment of continuing operations | | | | 456 | | | | 1,264 | | | | 1,082 | | | | | |
Unpaid property and equipment of discontinued operations | | | | — | | | | 10 | | | | 18 | | | | | |
See accompanying notes to consolidated financial statements.
F-646
RAE SYSTEMS INC.
| |
Note 1. | Summary of Significant Accounting Policies |
The Company
Founded in 1991, RAE Systems Inc. (the “Company” or “RAE Systems”), a Delaware company, develops and manufactures rapidly-deployable, multi-sensor chemical and radiation detection monitors and networks for oil and gas, hazardous material management, industrial safety, civil defense and environmental remediation applications. The Company’s products are based on proprietary sensor technology, and include personal, breathing zone, portable, wireless and fixed chemical detection monitors and radiation detectors.
As a result of an independent investigation conducted by the Audit Committee of the Board of Directors during fiscal year 2008, the Company made a voluntary disclosure to the United States Department of Justice (“DOJ”) and the United States Securities and Exchange Commission (“SEC”) that the companyCompany may have violated the United States Foreign Corrupt Practices Act (“FCPA”). The Company is cooperatingcooperated with the DOJ and the SEC in connection with their review of the matter and is actively engaged in settlement discussions. Although no assurances can be given as to whether the matter will settle or the amount of any settlement, the Company accrued $3.5 million in the third quarter of 2009 for the potential settlement of this matter. In December 2010, the Company settled all outstanding issues with regard to this matter in separate agreements with the DOJ and the SEC. Pursuant to these agreements, the Company agreed to pay a $1.7 million criminal penalty to the DOJ and $1.3 million in restitution and interest to the SEC. The Company also agreed to advise the DOJ and the SEC periodically until December 2013 on its ongoing efforts to ensure continued compliance with the FCPA.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and include the Company and its subsidiaries. All intercompany balances and transactions have been eliminated. The ownership of other interest holders of consolidated subsidiaries is reflected as noncontrolling interest. The presentation requirements for noncontrolling (minority) interests follows authoritative guidance promulgated by the Financial Accounting Standards Board (“FASB”) which became effective January 1, 2009, for all periods presented. Certain prior year amounts have been reclassified to conform to the current year presentation and management considers the amounts to not be material.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable based on available information. Actual results may differ materially from these estimates and assumptions.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. A provision for estimated product returns is established at the time of sale based upon historical return rates adjusted for current economic conditions. Historically, the Company has experienced an insignificant amount of sales returns. The Company generally recognizes revenue upon shipment to its distributors in accordance with standard contract terms that pass title of all goods upon delivery to a common carrier (Free on board, “FOB”) and provides for sales returns under standard product warranty provisions. For non-standard contract terms where title to goods passes upon delivery to the customer (FOB destination), revenue is recognized after the Company has established proof of delivery. Revenues related to services performed under the Company’s extended warranty program are recognized as earned based upon contract terms, generally ratably over the term of service. The Company records project installation work in
47
RAE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Asia using thepercentage-of-completion method. Net sales also include amounts billed to customers for shipping and handling. The Company’s shipping costs are included in cost of sales.
F-7
RAE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The Company introduced a software product in late 2010, ProRAE Guardian, which represents an advanced generation of real-time wireless threat detection solutions. The Company sells this product as a time-based license on a stand-alone basis and recognizes the related revenue ratably over the contractual period with the customer. Revenue recognized from the sale of this product in 2010 was not material to the Company’s financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original or remaining maturities of three months or less at time of purchase to be cash equivalents.
Allowance for Doubtful Accounts
The Company grants credit to its customers after undertaking an investigation of credit risk for all significant amounts. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, current economic conditions, and known troubled accounts. The Company generally does not require collateral for sales on credit. When the Company becomes aware that a specific customer is unable to meet its financial obligations, the Company records a specific allowance to reflect the level of credit risk in the customer’s outstanding receivable balance. In addition, the Company records allowances based on certain percentages of aged receivable balances. The Company classifies bad debt expenses as general and administrative expenses in the Consolidated Statements of Operations.
The Company is not able to predict changes in the financial stability of its customers. Any material change in the financial status of any one or a group of customers could have a material adverse effect on the Company’s results of operations and financial condition. Although such losses have been within management’s expectations to date, there can be no assurance that such allowances will continue to be adequate. The Company sells products through its direct sales force and distributors. No customer accounted for more than 10% of consolidated net sales for any period presented.
Trade Notes Receivable
Trade notes receivable are bank guaranteed promissory notes which are non-interest bearing and generally mature within six months. From time to time certain customers in China present these notes in payment of outstanding accounts receivable.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents, trade notes receivable and accounts receivable. The Company places its domestic and foreign cash and cash equivalents with large, creditworthy financial institutions, primarily in the United States and the People’s Republic of China. U.S. cash balances are insured by the Federal Deposit Insurance Company up to $250,000 per bank. As of December 31, 20092010 and 2008,2009, the Company had deposits in excess of insured limits of approximately $5.7$10.9 million and $1.0$5.7 million, respectively. The Company also had deposits at several foreign financial institutions, which are not insured, that summed to approximately $14.6$7.1 million and $13.3$13.2 million as of December 31, 20092010 and 2008,2009, respectively.
Inventories
Inventories are stated at the lower of standard cost, which approximates actual cost computed on afirst-in, first-out basis, or market. The Company establishes inventory provisions when conditions exist that suggest its
48
RAE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for its products and market conditions. When recorded, write-downs are intended to reduce the carrying value of the inventory to its net realizable value. If actual demand for specified products deteriorates, or market conditions are less favorable than those projected, additional reserveswrite-downs may be required
F-8
RAE SYSTEMS INC.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, as follows:
| | | | |
Buildings | | | 20 to 25 years | |
Equipment | | | 3 to 10 years | |
Furniture and fixtures | | | 3 to 7 years | |
Computers and software | | | 3 to 7 years | |
Automobiles | | | 3 to 5 years | |
Building improvements | | | Lesser of useful life or remaining lease term | |
Warranty Repairs
From date of shipment, the Company provides a 12 to 24 month repair or replacement warranty for the majority of its products. Based primarily on the historical relationship of actual warranty costs to sales, the Company accrues a reserve for estimated future warranty costs at the time revenue is recognized. The estimated warranty obligation is affected by product failure rates, the length of the warranty period, materials usage to repair or replace defective products, and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. If the Company’s actual experience relative to these factors is significantly different than estimated, the Company may be required to adjust its provision in future periods.
Research and Development
Research and development costs are expensed as incurred.
Advertising Costs
The Company expenses all advertising costs as incurred. For the years ended December 31, 2010, 2009 2008 and 2007,2008, advertising expense was $80,000, $190,000 $311,000 and $547,000,$300,000, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company’s consolidated financial statements or tax returns. The measurement of current and deferred taxes is based on provisions of the enacted tax law.
The Company records deferred tax assets if the realization of such assets is more likely than not to occur. Otherwise, a valuation allowance is established for the deferred tax assets which may not be realized.
The Company is subject to income tax audits by the respective tax authorities in all of the jurisdictions in which it operates. The determination of tax liabilities in each of these jurisdictions requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. The recognition and measurement of current taxes payable or refundable and deferred tax assets and liabilities requires that the Company make certain estimates and judgments. Changes to these estimates or a change in judgment may have a material impact on the Company’s tax provision in a future period.
F-949
RAE SYSTEMS INC.
Goodwill and Other Intangible Assets
Goodwill is tested for impairment on an annual basis in the fourth quarter and between annual tests if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Impairment losses, if any, are recorded in the Consolidated Statements of Operations as “Impairment of goodwill”.
Purchased intangible assets other than goodwill are amortized over their estimated useful lives unless these lives are determined to be indefinite. Purchased intangibles are carried at cost, less accumulated amortization. Amortization is generally computed using either the straight-line method or an accelerated method based on the pattern of expected usage over the estimated useful lives of the respective assets, currently 1.55 months to 62.5 years.
Long-Lived Assets
The Company evaluates the recoverability of long-lived assets with finite lives periodically and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying amount of a long-lived asset is deemed not recoverable, an impairment loss is recognized for the difference between the carrying amount of the asset and its fair value, generally the present value of estimated future cash flows.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
| | |
| • | Cash and Cash Equivalents, Accounts Receivable, Trade Notes Receivables, Accounts Receivable from Affiliate, Accounts Payable, Accrued Expenses, Inventory Purchase Obligations: |
The carrying amount reported in the consolidated balance sheets for these items approximates fair value because of the short maturity of these instruments. In addition, for inventory purchase obligations, the carrying value approximates fair value based on market rates for comparable products.
| | |
| • | Notes Payable to Related Parties: |
The carrying amount of notes payable to related parties approximates fair value as the Company has discounted these non-interest bearing notes payable at an interest rate commensurate with commercial borrowing rates available to the Company in China. As of December 31, 20092010 and 2008,2009, the fair values of the Company’s financial instruments approximate their historical carrying amount.
Translation of Foreign Currencies
Assets and liabilities ofnon-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated into U.S. dollars at exchange rates in effect at the balance sheet date; with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive income. Income and expense accounts are translated at average exchange rates during the year. Gains and losses from foreign currency transactions are recorded in Other income (expense), net on the Consolidated Statements of Operations. The functional currency is the local currency for allnon-U.S. subsidiaries.
Stock-Based Compensation Expense
The Company estimates the fair value of each option award on the date of grant using a Black-Scholes-Merton (“BSM”) valuation model and a single option award approach. Accordingly, stock-based compensation cost is measured at grant date based on the fair value of the award and recognized in expense over the requisite service period, which is generally the vesting period.
F-1050
RAE SYSTEMS INC.
Net LossEarnings Per Share
Basic lossearnings per share includes no dilution and is computed by dividing net income or loss available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution of common stock equivalents, such as options and warrants, to the extent the impact is dilutive. For 2010 the Company earned income from continuing operations, a loss from discontinued operations, and a net loss available to common shareholders. The number of anti-dilutive shares excluded from the diluted earnings per share calculations for 2010 was 5,221,584.
As the Company incurred net losses for the years ended December 31, 2009 2008 and 2007,2008, the effect of potentially dilutive securities on diluted net loss per share computations was anti-dilutive. The weighted-average number of anti-dilutive shares excluded from the diluted net loss per common share calculation for 2009 and 2008 was 5,539,961 and 2007 was 5,106,797, 3,813,874 and 3,505,491,4,402,461, respectively.
Retained Earnings
In accordance with the Company Law of the People’s Republic of China, the Company’s China subsidiaries may be required to appropriate a portion of net income as determined under accounting principles generally accepted in China (“PRC GAAP”) to non-distributable reserves which include a general reserve, an enterprise expansion reserve and a staff welfare and bonus reserve. While the reserves restrict a portion of retained earnings from distribution to shareholders, the reserves are not withdrawn from the business and remain available for use in operations.
Wholly-owned China subsidiaries are not required to make appropriations to the enterprise expansion reserve; however, the China subsidiaries are required to appropriate not less than 10% of their net income determined under PRC GAAP to the general reserve. Appropriations to the general reserve are limited to 50% of each China subsidiary’s registered capital. Appropriations to the staff welfare and bonus reserve are determined by the board of directors. The total appropriation of retained earnings to the Company’s statutory reserves totaled $2.7 million and $2.7 million at December 31, 20092010 and 2008,2009, respectively.
Variable Interest Entities
S.A.R.L. RAE France (“RAE France”) is the exclusive distributor of RAE Systems products in France. RAE Systems owns 49% of RAE France’s common stock and is the distributor’s largest shareholder. Although the operations of RAE France generally are independent of RAE Systems, through governance rights, the Company may direct RAE France’s business strategies. The Company has been identified by managementRAE France as a variable interest entity. The Company isentity with RAE Systems as the primary beneficiary through its ownershipsince inception in the fourth quarter of RAE Europe ApS. RAE France distributes and sells RAE products exclusively in France. RAE France had total sales of $2.4 million, $2.7 million and $1.8 million in 2009, 2008 and 2007, respectively, and total assets of $1.1 million as of December 31, 2009 and 2008. The2004. Accordingly, the Company has consolidated RAE France since December 2004.
51
RAE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
RAE France had total sales of $2.7 million, $2.4 million and $2.7 million in 2010, 2009 and 2008, respectively. The carrying amounts of the major classes of RAE France assets and liabilities included in the Company’s Consolidated Balance Sheets were as follows:
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2010 | | | 2009 | |
| | (In thousands) | |
|
Cash and cash equivalents | | $ | 194 | | | $ | 299 | |
Accounts receivable | | | 584 | | | | 438 | |
Inventories | | | 209 | | | | 198 | |
Prepaid expenses and other current assets | | | 119 | | | | 142 | |
| | | | | | | | |
Total current assets | | | 1,106 | | | | 1,077 | |
Other non-current assets | | | 40 | | | | 77 | |
| | | | | | | | |
Total assets | | $ | 1,146 | | | $ | 1,154 | |
Accounts payable | | $ | 25 | | | $ | 24 | |
Accrued liabilities | | | 339 | | | | 332 | |
| | | | | | | | |
Total current liabilities | | $ | 364 | | | $ | 356 | |
| | | | | | | | |
There were no restrictions or other special conditions on the assets or liabilities of RAE France.
Segment Reporting
FASB Accounting Standards Codification (“ASC”) Topic 280,“Segment Reporting,”establishes standards for public business enterprises to report information about operating segments in their annual financial statements and requires that those enterprises report selected information about operating segments in subsequent interim financial reports issued to shareholders. It also established standards for related disclosure about products and services, geographic areas, and major customers. Operating segments are components of an enterprise, which are evaluated regularly by the chief operating decision-maker in deciding how to allocate and assess resources and performance. The Company’s chief operating decision-makers are the Chief Executive Officer and the Chief Financial Officer. Although the Company’s operating segments consist of entities geographically based in the Americas, Asia and Europe, the Company operates in a single reporting segment worldwide in the sale of portable and wireless chemical and radiation detection products and related services. Accordingly, the Company operated as one reportable segment during the years ended December 31, 2010, 2009 2008 and 2007.2008.
Recent Accounting Pronouncements
In December 2007,October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to FASB issued authoritative guidance which appliesAccounting Standards Codification (“ASC”) Topic 605, Revenue Recognition) (“ASU2009-13”) and ASU2009-14, Certain Arrangements That Include Software Elements, (amendments to business combinations.FASB ASC Topic 985, Software) (“ASU2009-14”). ASU2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The new guidance changesamendments eliminate the accounting for acquisition transaction costs by requiring themresidual method of revenue allocation and require revenue to be expensedallocated using the relative selling price method. ASU2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the periodscope of the software revenue guidance. ASU2009-13 and ASU2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
F-1152
RAE SYSTEMS INC.
incurred, and also changesIn January 2010, the accounting for contingent consideration, acquired contingencies and restructuring costsFASB issued guidance to amend the disclosure requirements related to an acquisition.recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance wasrequires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for entities with a reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the Companyreporting period beginning January 1, 2009, and will change2011. The adoption of these changes had no material impact on the Company’s accounting treatment for business combinations on a prospective basis.
In June 2009, the FASB issued authoritative guidance for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. Under this guidance, an enterprise has a controlling financial interest when it has a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The guidance also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance. The guidance is effective for the Company January 1, 2010, and requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE as well as certain enhanced disclosures. The Company is currently evaluating the potential impact, if any, of the adoption of this guidance on its consolidated financial statements.
In October 2009,December 2010, the FASB issued authoritativeASU2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations (amendments to FASB ASC Topic 805, Business Combinations). The guidance onin ASU2010-29 provides amendments to clarify the acquisition date which should be used for reporting the pro forma financial information disclosures in Topic 805 when comparative financial statements are presented. The amendments also improve the usefulness of the pro forma revenue recognition that will become effective forand earnings disclosures by requiring a description of the Company beginning January 1, 2011, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essentialnature and amount of material, nonrecurring pro forma adjustments directly attributable to the functionalitybusiness combination(s). The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the tangible product will no longer be withinfirst annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally,Company’s consolidated financial statements.
In December, 2010, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scopeASU2010-28, When to Perform Step 2 of the software revenue recognition guidance. Under the new guidance, when vendor specificGoodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (amendments to FASB ASC Topic 350, Intangibles — Goodwill and Other). The objective or third party evidence for deliverablesof this ASU is to address diversity in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative fair value method. The new guidance includes new disclosure requirements on howpractice in the application of goodwill impairment testing by entities with reporting units with zero or negative carrying amounts, eliminating an entity’s ability to assert that a reporting unit is not required to perform Step 2 because the relative fair value method affects the timing andcarrying amount of revenue recognition.the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. This ASU is effective for interim periods after January 1, 2011. The Companyadoption of this ASU is currently assessingnot expected to have a material impact on the potential effect, if any, on itsCompany’s consolidated financial statements.
| |
Note 2. | Business Combinations and DispositionsDiscontinued Operation |
Aegison Corporation and Tianjin Securay Technology Ltd. Co.
In July 2006, the Company purchased the assets, including two pending patents, of Santa Clara, California based Aegison Corporation (“Aegison”), a supplier of fixed and mobile digital video surveillance systems for approximately $2.0 million in cash and direct transaction costs of $142,000. In January 2007, RAE Asia entered into an agreement to purchase the intellectual property of Tianjin Securay Technology Ltd. Co. (“Securay”) for Renminbi 12 million (approximately $1.5 million). This transaction, together with the purchase agreements entered in 2006, completed the purchase of Securay. Including transactions entered into during 2006, the total purchase price was $2.0 million in cash. The acquisition of Aegison and Securay made up the company’s mobile digital video recording (“DVR”) business
On August 24, 2007,December 22, 2010, the Board of Directors approved the discontinuationmanagement’s plan to pursue sale of the Company’s DVR business70% interest in orderRAE Coal Mine Safety Instruments (Fushun) Co., Ltd. (“RAE Fushun”), a Sino-Foreign joint venture in China. RAE Fushun had not met the Company’s revenue and earnings expectations, and the joint venture was not well positioned to reduce expenses and concentrate resourcescapitalize on the gas and radiation detection business.Company’s future strategies. On August 28, 2007January 12, 2011, the Company notifiedsigned a definitive agreement to sell its DVR customers, terminated70% interest to the Shenyang Research Institute of China Coal Research Institute (“Shenyang Institute”), a state-owned enterprise, for zero proceeds. However, under the terms of the agreement the Shenyang Institute assumes all personnel not reassigneddocumented joint venture liabilities and will pay approximately RMB 12.25 million (or approximately $1.85 million) intercompany balances owed to continuing operationsRAE Shanghai and suspendedRAE Beijing for products and services previously provided to the related production and sales activities.joint venture. As of March 15, 2011, Shenyang Institute had made scheduled payments to RAE Systems totaling RMB 6 million (or approximately $0.9 million). The Company retained the acquired intellectual property; however, because the DVR business had operated at a substantial loss, during 2007 management liquidated the tangible assets, mainly inventories of component parts,expects to receive RMB 2 million (or approximately $0.3 million) monthly until paid in full.
The purchase agreement between RAE Systems and impaired the remaining valueShenyang Institute is subject to customary closing conditions in China, which includes obtaining certain government approvals. The Company and Shenyang Institute anticipate receiving all of the intangible assetsnecessary approvals and goodwill.final transfer of shares within six months from signing the definitive agreement. Therefore, RAE Systems provided Shenyang Institute with complete operating control of RAE Fushun as of January 12, 2011, and RAE Systems is not involved in theday-to-day management or operating activities of RAE Fushun. The Company still retains its 70% ownership in the entity until such time regulatory
F-1253
RAE SYSTEMS INC.
approvals are obtained; however, the Company does not anticipate providing any financial support or management support to the entity during this time.
ASC Topic 360, “Property, Plant and Equipment,” provides that a disposal group classified as held for sale is measured at the lower of its carrying amount or fair value less cost to sell. Based on RAE Fushun’s sales price, the carrying amount of its net assets exceeded fair value as of December 31, 2010. Accordingly, the Company recorded impairment expense in the fourth quarter of 2010 totaling $4.6 million, which includes $0.2 million estimated direct transaction costs. The impairment is included in the reported loss from discontinued operations in the Company’s Consolidated Statements of Operations.
In accordance with the existing authoritative guidance,ASC Subtopic205-20, “Discontinued Operations,” the financial results of the DVR businessRAE Fushun are reported as discontinued operations for all periods presented. The financial results included in discontinued operations were as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (In thousands) | | | (In thousands) | |
|
Net sales | | $ | — | | | $ | 3 | | | $ | 319 | | | $ | 3,845 | | | $ | 8,180 | | | $ | 12,340 | |
Gain (loss) from discontinued operations before income taxes | | | — | | | | 11 | | | | (4,939 | ) | |
Loss from discontinued operations before income taxes | | | | (11,178 | ) | | | (3,541 | ) | | | (1,653 | ) |
Income tax benefit | | | — | | | | — | | | | (785 | ) | | | — | | | | 84 | | | | — | |
| | | | | | | | | | | | | | |
Gain (loss) from discontinued operations | | $ | — | | | $ | 11 | | | $ | (4,154 | ) | |
Loss from discontinued operations | | | | (11,178 | ) | | | (3,457 | ) | | | (1,653 | ) |
Net loss attributable to the noncontrolling interest | | | | 3,342 | | | | 952 | | | | 368 | |
| | | | | | | | | | | | | | |
Net loss from discontinued operations attributable to RAE Systems Inc. | | | $ | (7,836 | ) | | $ | (2,505 | ) | | $ | (1,285 | ) |
| | | | | | | | |
ThereIn the third quarter of 2010, the Company evaluated the carrying values of its customer list and other long-lived assets at RAE Fushun. Revenues had declined significantly in the quarter and for the year to date, and the Company did not expect a near-term recovery in its coal mine safety equipment business. The Company determined that the carrying value of the customer list was more than the estimated undiscounted cash flows to be generated from the use and eventual disposition of these assets. Accordingly, the Company estimated the fair value of the customer list using a discounted cash flow analysis and recorded an impairment charge of $1.5 million, the remaining carrying amount of the asset. The impairment is included in the reported loss from discontinued operations in the Company’s Consolidated Statements of Operations. The other long-lived assets consisted principally of land use rights and buildings for which the Company had current appraisals indicating a held and used fair market value in excess of the carrying amount. As a result, these long-term assets were nonot impaired at September 30, 2010.
The discounted cash flow analysis required the use of significant unobservable inputs (Level 3). These inputs included forecasted revenues to be earned from listed customers over the estimated remaining useful life of the asset, approximately 5 years, the cost of generating those revenues and the attrition rate of the customer group. Forecasted earnings, if any, would then be discounted using a risk-weighted interest rate. Based on historical experience, the Company estimated that it most likely would not be able to generate positive returns from RAE Fushun’s acquired customer list due primarily to insufficient sales volumes.
54
RAE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The carrying amounts of the major classes of assets orand liabilities related toincluded as part of the disposal group were as of December 31, 2009 and 2008.follows:
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2010 | | | 2009 | |
| | (In thousands) | |
|
Cash & cash equivalents | | $ | 34 | | | $ | 1,375 | |
Restricted cash | | | 151 | | | | 146 | |
Trade notes receivable | | | 106 | | | | 512 | |
Accounts receivable, net of allowances of $3,591 and $2,705, respectively | | | 2,533 | | | | 4,693 | |
Inventories | | | 2,551 | | | | 2,760 | |
Prepaid expenses and other current assets | | | 718 | | | | 644 | |
| | | | | | | | |
Total current assets | | | 6,093 | | | | 10,130 | |
| | | | | | | | |
Property and equipment, net | | | 3,478 | | | | 8,008 | |
Intangible assets, net | | | — | | | | 1,884 | |
| | | | | | | | |
Total assets | | $ | 9,571 | | | $ | 20,022 | |
| | | | | | | | |
Accounts payable | | $ | 1,122 | | | $ | 729 | |
Bank line of credit | | | 1,512 | | | | — | |
Accrued liabilities | | | 3,156 | | | | 3,990 | |
| | | | | | | | |
Total current liabilities | | | 5,790 | | | | 4,719 | |
| | | | | | | | |
Other long-term liabilities | | | 182 | | | | 176 | |
Long-term debt | | | — | | | | 1,463 | |
| | | | | | | | |
Total liabilities | | $ | 5,972 | | | $ | 6,358 | |
| | | | | | | | |
On November 9, 2009, RAE Fushun borrowed RMB 10.0 million, or approximately $1.5 million, to provide working capital. The loan is due on April 26, 2011 and bore interest at a fixed rate of 8.1% for the first 12 months. The interest rate was reset in November 2010 to 8.4%, 1.5 times the People’s Bank of China benchmark rate. Loan repayment is guaranteed by an unrelated third party, to whom RAE Fushun has granted a lien over its wholly owned plant and associated land rights. As a condition of the loan, the lending bank required a deposit of approximately $0.1 million from the guarantor. This deposit was funded by RAE Fushun from the loan proceeds and is included in Restricted cash in the above presentation of the disposal group’s assets and liabilities.
| |
Note 3. | Balance Sheet Details |
Allowance for Doubtful AccountsAccounts::
The components of the allowance for doubtful accounts were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (In thousands) | | | (In thousands) | |
|
Allowance for doubtful accounts at beginning of year | | $ | 3,472 | | | $ | 2,060 | | | $ | 843 | | | $ | 2,675 | | | $ | 1,532 | | | $ | 871 | |
Charges to expense | | | 2,164 | | | | 1,345 | | | | 1,948 | | | | 816 | | | | 1,405 | | | | 590 | |
Write-offs of uncollectible accounts, net of recoveries | | | (260 | ) | | | (70 | ) | | | (833 | ) | | | (48 | ) | | | (260 | ) | | | 16 | |
Foreign currency translation effects | | | 4 | | | | 137 | | | | 102 | | | | 96 | | | | (2 | ) | | | 55 | |
| | | | | | | | | | | | | | |
Allowance for doubtful accounts at end of year | | $ | 5,380 | | | $ | 3,472 | | | $ | 2,060 | | | $ | 3,539 | | | $ | 2,675 | | | $ | 1,532 | |
| | | | | | | | | | | | | | |
55
RAE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventories:
Inventories are stated at the lower of cost or market and include material, labor and manufacturing overheard costs. The components of inventories were as follows:
| | | | | | | | | | | | | | | | |
| | December 31,
| | December 31,
| | | December 31,
| | December 31,
| |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (In thousands) | | | (In thousands) | |
|
Raw materials | | $ | 5,655 | | | $ | 8,213 | | | $ | 6,770 | | | $ | 5,467 | |
Work-in-progress | | | 2,557 | | | | 2,910 | | | | 2,396 | | | | 1,920 | |
Finished goods | | | 3,856 | | | | 6,481 | | | | 2,380 | | | | 1,921 | |
| | | | | | | | | | |
Total inventories | | $ | 12,068 | | | $ | 17,604 | | | $ | 11,546 | | | $ | 9,308 | |
| | | | | | | | | | |
The Company recorded write-downs to inventory of $777,000, $580,000$1.1 million, $0.8 million and $442,000$0.6 million during 2010, 2009 2008 and 2007,2008, respectively. The inventory write-downs were predominantly the result of changes in forecasted customer demand and technological changes in the Company’s products and included primarily raw material and finished goods. The major elements of the written down raw material consists of components and items that had not entered into production. The finished goods inventory includes the cost of raw material inputs, labor, and overhead.
F-13
RAE SYSTEMS INC.
Prepaid Expenses and Other Current Assets:
The components of prepaid expenses and other current assets were as follows:
| | | | | | | | | | | | | | | | |
| | December 31,
| | December 31,
| | | December 31,
| | December 31,
| |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (In thousands) | | | (In thousands) | |
|
Supplier advances and deposits | | $ | 1,330 | | | $ | 977 | | | $ | 971 | | | $ | 1,210 | |
Amounts receivable from employees | | | 81 | | | | 661 | | | | 368 | | | | 41 | |
Prepaid insurance | | | 275 | | | | 437 | | | | 269 | | | | 275 | |
Deferred tax assets, current | | | 934 | | | | 577 | | | | 1,595 | | | | 757 | |
Other current assets | | | 1,363 | | | | 2,339 | | | | 1,354 | | | | 1,056 | |
| | | | | | | | | | |
Total prepaid expenses and other current assets | | $ | 3,983 | | | $ | 4,991 | | | $ | 4,557 | | | $ | 3,339 | |
| | | | | | | | | | |
Property and Equipment, net:
The components of property and equipment were as follows:
| | | | | | | | | | | | | | | | |
| | December 31,
| | December 31,
| | | December 31,
| | December 31,
| |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (In thousands) | | | (In thousands) | |
|
Buildings and improvements | | $ | 11,945 | | | $ | 10,327 | | | $ | 6,404 | | | $ | 6,197 | |
Equipment | | | 4,788 | | | | 5,070 | | | | 4,489 | | | | 4,346 | |
Computer equipment | | | 4,996 | | | | 4,971 | | | | 5,003 | | | | 4,780 | |
Automobiles | | | 1,385 | | | | 1,590 | | | | 488 | | | | 1,044 | |
Furniture and fixtures | | | 444 | | | | 434 | | | | 408 | | | | 411 | |
Construction in progress | | | 3,468 | | | | 2,457 | | | | 5,478 | | | | 1,601 | |
| | | | | | | | | | |
| | | 27,026 | | | | 24,849 | | | | 22,270 | | | | 18,379 | |
Less: Accumulated depreciation | | | (11,436 | ) | | | (9,873 | ) | | | (11,540 | ) | | | (10,797 | ) |
| | | | | | | | | | |
Total property and equipment, net | | $ | 15,590 | | | $ | 14,976 | | | $ | 10,730 | | | $ | 7,582 | |
| | | | | | | | | | |
56
RAE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Construction in progress in 2010 and 2009, and 2008respectively, primarily represented the cost to build offices and manufacturing facilities in Fushun, China. The new manufacturing facilities were placed into service during October 2008. RAE plans to complete the remaining office, research and development and dormitory buildings in stages over the next 12 to 24 months. Also, in December 2008, the Company invested approximately $1.2 million for land use rights in Shanghai, China to construct a new manufacturing, engineering and administrative facility.facility in Shanghai, China. The Company invested approximately $1.2 million in December 2008 for the land use rights in Shanghai. During the second quarter of 2009, the Company entered into an agreementpaid approximately $0.3 million for pre-construction land improvements of approximately $263,000. The Company began constructionimprovements. Construction of the facility began during the first quarter of 2010. As of December 31, 2010, the estimated remaining cost to complete this project is approximately $3.0 million with the work scheduled to be concluded during the first half of 2011. Upon completion of construction, the Company intends to vacate its existing leased facility in Shanghai. Based on discussions with Shanghai government officials, the landlord of the existing Company facility, the Company believes that it will be able to terminate the lease without penalty. NoHowever, no assurance can be given at this time that the Company will be able to arrange financing terms acceptable to the Company and that it would not be subject to a lease termination penalties.penalty.
In December 2007, the Company sold its headquarters building in San Jose, California for $12.7 million and leased back the facility for a period of 10 years. The Company recognized a gain on the sale of $0.4 million in 2007 which was based on the difference between the net gain on the sale of the building of $6.7 million and net present value of the future lease payments of $6.3 million. The net present value of the future lease payments is recorded as a deferred gain which will behas been recognized in income on a straight-line basis over the life of the lease beginning insince January 2008. The$0.6 million of deferred gain was recognized in income during 2010, 2009 and 2008, totaled $0.6 million and $0.6 million, respectively. The lease is classified as an operating lease. As of December 31, 20092010 and 2008,2009, the current portion of
F-14
RAE SYSTEMS INC.
the deferred gain of $0.6 million and $0.6 million, respectively, was included in Accrued liabilities on the Consolidated Balance Sheets.
Depreciation expense for the years ended December 31, 2010, 2009 and 2008 and 2007 was $2.3$1.3 million, $2.2$1.8 million and $2.3$2.0 million, respectively. Interest capitalized for the years ended December 31, 2010, 2009 and 2008 totaled $0.1 million, zero and zero, respectively.
Accrued Liabilities:
Accrued liabilities as of December 31, 20092010 and 20082009 are summarized as follows:
| | | | | | | | | | | | | | | | |
| | December 31,
| | December 31,
| | | December 31,
| | December 31,
| |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (In thousands) | | | (In thousands) | |
|
Compensation and related benefits | | $ | 3,764 | | | $ | 2,445 | | | $ | 4,249 | | | $ | 3,345 | |
Accrued commissions | | | 1,265 | | | | 2,010 | | | | 938 | | | | 484 | |
Accrued FCPA settlement (see Note 8) | | | 3,500 | | | | — | | |
Accrued FCPA settlement (see Note 7) | | | | 1,700 | | | | 3,500 | |
Customer deposits | | | 941 | | | | 1,792 | | | | 730 | | | | 572 | |
Accrued professional fees | | | 426 | | | | 755 | | | | 1,014 | | | | 422 | |
Other | | | 5,857 | | | | 5,316 | | | | 3,326 | | | | 3,639 | |
| | | | | | | | | | |
Total accrued liabilities | | $ | 15,753 | | | $ | 12,318 | | | $ | 11,957 | | | $ | 11,962 | |
| | | | | | | | | | |
The $1.7 million accrued for the FCPA settlement was paid in January 2011.
57
RAE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 4. | Goodwill and Intangible Assets |
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets. The following table presents the changeschange in goodwill during 2007 and 2008, when goodwill was impaired:
| | | | |
| | (In thousands) | |
|
Balance as of December 31, 2006 | | $ | 3,760 | |
Acquisitions: | | | | |
Securay | | | 646 | |
Purchase price adjustment — Aegison | | | (19 | ) |
Impairment charges due to discontinued operations | | | (1,443 | ) |
Currency translation adjustment | | | 199 | |
| | | | |
Balance as of December 31, 2007 | | | 3,143 | |
Currency translation adjustment | | | 205 | |
Impairment charges | | | (3,348 | ) |
| | | | |
Balance as of December 31, 2008 | | $ | — | |
| | | | |
| | | | |
| | (In thousands) | |
|
Balance as of January 1, 2008 | | $ | 3,143 | |
Currency translation adjustment | | | 205 | |
Impairment charges | | | (3,348 | ) |
| | | | |
Balance as of December 31, 2008 | | $ | — | |
| | | | |
The Company evaluates goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit, which is measured based upon, among other factors, market capitalization as well as forecasted operating results. The Company has one reporting unit. If the recorded value of the assets, including goodwill, and liabilities (“net book value”) of the reporting unit exceeds its fair value, an impairment loss may exist. Further, to the extent the net book value of the Company as a whole is greater than its market capitalization, all, or a significant portion of its goodwill may be considered impaired.
The Company experienced a significant decline in market capitalization during the fourth quarter of 2008. This decline in market capitalization was driven largely by deteriorating macroeconomic conditions that contributed to a
F-15
RAE SYSTEMS INC.
decline in the Company’s forecasted operating results and business uncertainties associated with the current FCPA investigation.
Pursuant to the authoritative guidance, the measurement of impairment of goodwill consists of two steps. In the first step, the fair value of the Company is compared to its carrying value. Management completed a valuation of the Company, which incorporated existing market-based considerations as well as operating information based on current results and projections, and concluded the estimated fair value of the Company was less than its net book value. As a result, the Company performed the second step to determine the implied fair value of the Company’s goodwill, and to compare it to the carrying value of the Company’s goodwill. This second step includes estimating the value of the tangible and intangible assets and liabilities of the Company as if it had been acquired in a business combination to determine the implied fair value of goodwill. The result of this assessment indicated that the implied fair value of goodwill was zero. As a result, the Company recognized a non-cash impairment charge of approximately $3.3 million for the three-month period and year ended December 31, 2008 to write-off the entire carrying value of its goodwill.
As a result of discontinuing the DVR business during the third quarter of 2007, the Company impaired the goodwill acquired in the purchases of Aegison and Securay. See “Note 2. Business Combinations and Dispositions” for more detail. There was no other impairment of goodwill in 2007 as a result of the required annual impairment test.
The following table presents details of the Company’s intangible assets other than goodwill:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2010 | | December 31, 2009 | |
| | December 31, 2009 | | December 31, 2008 | | | Gross
| | | | Net
| | Gross
| | | | Net
| |
| | Gross Carrying
| | Accumulated
| | Net Carrying
| | Gross Carrying
| | Accumulated
| | Net Carrying
| | | Carrying
| | Accumulated
| | Carrying
| | Carrying
| | Accumulated
| | Carrying
| |
| | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount | | | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount | |
| | (In thousands) | | | (In thousands) | |
|
Customer list | | $ | 5,456 | | | $ | (3,376 | ) | | $ | 2,080 | | | $ | 5,438 | | | $ | (2,636 | ) | | $ | 2,802 | | | $ | 1,730 | | | $ | (1,693 | ) | | $ | 37 | | | $ | 1,677 | | | $ | (1,481 | ) | | $ | 196 | |
Trade name | | | 1,356 | | | | (1,008 | ) | | | 348 | | | | 1,352 | | | | (812 | ) | | | 540 | | | | 1,402 | | | | (1,243 | ) | | | 159 | | | | 1,356 | | | | (1,008 | ) | | | 348 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total intangible assets, net | | $ | 6,812 | | | $ | (4,384 | ) | | $ | 2,428 | | | $ | 6,790 | | | $ | (3,448 | ) | | $ | 3,342 | | | $ | 3,132 | | | $ | (2,936 | ) | | $ | 196 | | | $ | 3,033 | | | $ | (2,489 | ) | | $ | 544 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
All of the Company’s purchased intangible assets other than goodwill are subject to amortization. Amortization expense for the years ended December 31, 2010, 2009 and 2008, and 2007, was $0.9$0.4 million, $1.2$0.4 million and $1.4$0.4 million, respectively.
During 2008, the Company increased the value of the customer list from the acquisition of RAE Fushun by $435,000 and recognized a corresponding deferred tax liability. During 2007, the Company recorded impairment of $609,000 for certain patents held by RAE Beijing related to the discontinuation of a related product in the fourth quarter of 2007. An impairment analysis was performed for this intangible asset which determined that the carrying value was not recoverable.
As a result of discontinuing the DVR business during the third quarter of 2007, the Company impaired the remaining balance of the intangible assets acquired in the purchases of Aegison and Securay. An impairment charge of $1.6 million was recognized during the quarter ended September 30, 2007 and is included in the net loss from discontinued operations reported in the Company’s Consolidated Statements of Operations.
F-1658
RAE SYSTEMS INC.
Based on the carrying amount of intangible assets as of December 31, 2009,2010, the estimated future amortization is as follows(in (in thousands):
| | | | | | | | |
Years Ended December 31, | | | | |
| | Years Ended
| |
2010 | | $ | 904 | | |
| | | December 31, | |
| |
2011 | | | 638 | | | $ | 142 | |
2012 | | | 372 | | | | 36 | |
2013 | | | 281 | | | | 18 | |
2014 | | | 161 | | |
Thereafter | | | 72 | | |
| | | | | | |
Total amortization | | $ | 2,428 | | | $ | 196 | |
| | | | | | |
The Company’s lossincome (loss) from continuing operations before income taxes consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (In thousands) | | | (In thousands) | |
|
United States | | $ | (4,526 | ) | | $ | (4,934 | ) | | $ | (5,973 | ) | | $ | 1,689 | | | $ | (4,526 | ) | | $ | (4,934 | ) |
Foreign | | | (3,072 | ) | | | (1,911 | ) | | | 1,320 | | | | 3,881 | | | | 469 | | | | (247 | ) |
| | | | | | | | | | | | | | |
Loss from continuing operations before income taxes | | $ | (7,598 | ) | | $ | (6,845 | ) | | $ | (4,653 | ) | |
Income (loss) from continuing operations before income taxes | | | $ | 5,570 | | | $ | (4,057 | ) | | $ | (5,181 | ) |
| | | | | | | | | | | | | | |
The Company’s income tax expense (benefit) expense consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (In thousands) | | | (In thousands) | |
|
Current: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | $ | (1,072 | ) | | $ | (91 | ) | | $ | 819 | | | $ | 829 | | | $ | (1,072 | ) | | $ | (91 | ) |
State | | | 23 | | | | 18 | | | | 53 | | | | (25 | ) | | | 23 | | | | 18 | |
Foreign | | | 545 | | | | 1,832 | | | | 1,012 | | | | 91 | | | | 545 | | | | 1,832 | |
| | | | | | | | | | | | | | |
| | | (504 | ) | | | 1,759 | | | | 1,884 | | | | 895 | | | | (504 | ) | | | 1,759 | |
| | | | | | | | | | | | | | |
Deferred: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | | — | | | | — | | | | 2,917 | | | | — | | | | — | | | | — | |
State | | | — | | | | (48 | ) | | | 862 | | | | — | | | | — | | | | (48 | ) |
Foreign | | | (380 | ) | | | (1,173 | ) | | | 220 | | | | (598 | ) | | | (380 | ) | | | (1,173 | ) |
| | | | | | | | | | | | | | |
| | | (380 | ) | | | (1,221 | ) | | | 3,999 | | | | (598 | ) | | | (380 | ) | | | (1,221 | ) |
| | | | | | | | | | | | | | |
Total income tax (benefit) expense | | $ | (884 | ) | | $ | 538 | | | $ | 5,883 | | |
Total income tax expense (benefit) | | | $ | 297 | | | $ | (884 | ) | | $ | 538 | |
| | | | | | | | | | | | | | |
Continuing operations | | | $ | 297 | | | $ | (800 | ) | | $ | 538 | |
Discontinued operations | | | | — | | | | (84 | ) | | | — | |
| | | | | | | | |
Total income tax expense (benefit) | | | $ | 297 | | | $ | (884 | ) | | $ | 538 | |
| | | | | | | | |
The Company recorded a tax benefit of approximately $0.6 million during the fourth quarter of 2010 related to the expiration of its high-tech status for its Shanghai and Beijing entities. This expiration resulted in an increase in the tax rate used to establish our deferred tax assets from 15% to 25%. The Company has applied for the renewal of the high-tech status in the respective jurisdictions to obtain the 15% tax rate, however, there can be no certainty that the renewal will be granted. If the high-tech status is granted the Company will calculate the deferred tax assets at the lower rate, which would result in a tax expense in the period the new status was granted.
F-1759
RAE SYSTEMS INC.
A reconciliation of the Company’s income tax expense (benefit) expense at the federal statutory rate to the income tax expense (benefit) expense at the effective tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | | |
| | (In thousands) | | | (In thousands) | |
|
Federal income tax benefit at statutory rate | | $ | (2,584 | ) | | $ | (2,327 | ) | | $ | (1,582 | ) | |
State income tax expense (benefit), net of federal benefit | | | 13 | | | | 18 | | | | (486 | ) | |
Federal income tax expense (benefit) at statutory rate | | | $ | 1,894 | | | $ | (1,380 | ) | | $ | (1,762 | ) | | | | |
State income tax expense, net of federal benefit | | | | 13 | | | | 13 | | | | 18 | | | | | |
Foreign tax expense (benefit) | | | 326 | | | | 1,116 | | | | (53 | ) | | | (1,828 | ) | | | (794 | ) | | | 551 | | | | | |
Nondeductible expenses | | | 1,281 | | | | 90 | | | | 132 | | | | 60 | | | | 1,281 | | | | 90 | | | | | |
Subpart F | | | — | | | | 320 | | | | — | | | | — | | | | — | | | | 320 | | | | | |
Contingencies released | | | (799 | ) | | | — | | | | — | | | | (186 | ) | | | (799 | ) | | | — | | | | | |
Net operating loss carryback | | | 65 | | | | — | | | | — | | | | — | | | | 65 | | | | — | | | | | |
Other | | | 870 | | | | 363 | | | | 561 | | | | 374 | | | | 870 | | | | 363 | | | | | |
Change in valuation allowance | | | (56 | ) | | | 958 | | | | 7,311 | | | | (30 | ) | | | (56 | ) | | | 958 | | | | | |
| | | | | | | | | | | | | | |
Total income tax (benefit) expense | | $ | (884 | ) | | $ | 538 | | | $ | 5,883 | | |
Total income tax expense (benefit) | | | $ | 297 | | | $ | (800 | ) | | $ | 538 | | | | | |
| | | | | | | | | | | | | | |
The components of the Company’s net deferred taxes consisted of the following:
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | |
| | (In thousands) | |
|
Deferred tax assets: | | | | | | | | |
Fixed assets | | $ | 90 | | | $ | 30 | |
Other temporary differences | | | 477 | | | | 547 | |
Other accruals | | | 3,380 | | | | 4,468 | |
Capitalized research and development | | | 76 | | | | 233 | |
Unrealized foreign losses & temporary differences | | | 3,789 | | | | 2,722 | |
Federal and state tax credits | | | 611 | | | | 423 | |
Stock-based compensation | | | 2,208 | | | | 2,034 | |
Valuation allowance | | | (9,332 | ) | | | (9,389 | ) |
| | | | | | | | |
Total deferred tax assets | | | 1,299 | | | | 1,068 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Intangibles | | | (376 | ) | | | (574 | ) |
| | | | | | | | |
Total deferred tax liabilities | | | (376 | ) | | | (574 | ) |
| | | | | | | | |
Net deferred tax assets | | $ | 923 | | | $ | 494 | |
| | | | | | | | |
The above amounts are recorded on the Consolidated Balance Sheet per following:
| | | | | | | | |
| | December 31
| | | Dec. 31
| |
| | 2009 | | | 2008 | |
|
Prepaid expenses and other current assets | | $ | 934 | | | $ | 577 | |
Other assets | | $ | 145 | | | $ | — | |
Deferred tax liabilities, non-current | | $ | (156 | ) | | $ | (83 | ) |
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2010 | | | 2009 | |
| | (In thousands) | |
|
Deferred tax assets: | | | | | | | | |
Fixed assets | | $ | — | | | $ | 90 | |
Other temporary differences | | | 517 | | | | 477 | |
Other accruals | | | 2,975 | | | | 3,380 | |
Capitalized research and development | | | 11 | | | | 76 | |
Unrealized foreign losses & temporary differences | | | 3,037 | | | | 2,721 | |
Federal and state tax credits | | | 553 | | | | 611 | |
Stock-based compensation | | | 2,557 | | | | 2,208 | |
Valuation allowance | | | (8,064 | ) | | | (8,552 | ) |
| | | | | | | | |
Total deferred tax assets | | | 1,586 | | | | 1,011 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Fixed assets | | | (19 | ) | | | — | |
Intangibles | | | (47 | ) | | | (88 | ) |
| | | | | | | | |
Total deferred tax liabilities | | | (66 | ) | | | (88 | ) |
| | | | | | | | |
Net deferred tax assets | | $ | 1,520 | | | $ | 923 | |
| | | | | | | | |
In assessing the recoverability of its deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax
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RAE SYSTEMS INC.
assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, historical and projected future taxable income, and tax planning strategies in making this assessment.
U.S. income taxes were provided for certain earnings ofnon-U.S. subsidiaries. The Company does not plan to repatriate the remaining undistributed earnings ofnon-U.S. subsidiaries as of December 31, 2009.2010.
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RAE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Under the Tax Reform Act of 1986, the amount of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating loss and credit carryforwards that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. The Company has no federal and approximately $2.5 million and $3 million of federal and California net operating losses which are scheduled to expire in 2027 and 2029, respectively.2028.
In November 2009, the Worker, Homeownership, and Business Assistance Act of 2009 was enacted. Under this law, companies may elect to increase the carryback period for the net operating loss of a tax year ending after December 31, 2007 and beginning before January 1, 2010 to 3, 4 or 5 years. Accordingly, the Company has elected to carry its 2008 net operating loss back to 2003, which will result in a refund of approximately $659,000.
In July 2008, the Housing and Economic Recovery Act of 2008 was enacted. Under this law, companies can elect to accelerate a portion of their unused alternative minimum tax credit and credit for increased research activities in lieu of the 50-percent “bonus” depreciation enacted in February 2008. The Company has determined it would not receive any significant benefit from this election. As of December 31, 2009, the Company hashad federal research and development credit carryforwards of approximately $200,000,$148,000, which are scheduled to expire in 2022 if not utilized.
The California2008-20092010-2011 Budget Bill, enacted on September 30, 2008, resulted in two temporary changes toOctober 19, 2010, extended the Company’s California income tax. First, the bill suspends the usesuspension of net operating loss carryovers for another two years, 20082010 and 2009. Second, the bill limits the use of research and development credit carryovers to no more than 50% of the tax liability before credits.2011. As of December 31, 2009,2010, the Company had research and development credit carryforwards of approximately $0.2$0.1 million for California income tax purposes. The California credits are not subject to expiration under current California tax law.
The Company has been granted a tax holiday for its subsidiary in Fushun, China whereby the Company is entitled to a full exemption from China income tax in the first year of positive accumulated earnings and a 50% reduction from the statutory rate for the following three years. The statutory rate in China is 25%. For tax purposes, RAE Fushun reached cumulative profitability as of December 31, 2008 and declared its first year of exemption from corporate income tax in China. The tax savings to the Company was approximately $511,000. Taxable income will be subject to tax at 12.5% for 2009 through 2011. The Company does not anticipate any tax liability for 2009.
In 2006, the Internal Revenue Service completed its examination of the Company’s federal income tax returns for the years ended December 31, 2003 and 2004. Based on the results of the examination, the Company paid $391,000 to the IRS in April 2006. In 2006, the tax authority in Denmark, Skat, completed the audit of the Company’s subsidiary in Denmark for the year ended December 31, 2004 without any adjustment. Subsequent periods remain subject to examination; however, no audits are currently in process.
The Company’s valuation allowance was determined in accordance with the authoritative accounting guidance, which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable, with such assessment being required on a jurisdiction by jurisdiction basis. Management believes that sufficient uncertainty exists with regard to the realizability of its tax assets with the exception of $0.9$1.5 million of foreign deferred tax assets, such that a valuation allowance is necessary. Factors considered in providing a valuation allowance include the lack of a significant history of consistent profits, the current weakness in the overall market, and the uncertainty of when economic fundamentals will stabilize,
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RAE SYSTEMS INC.
thereby potentially impacting the Company’s ability to sustain or grow revenues and earnings, and the length of carryback and carryforward periods.
Based on the absence of sufficient positive objective verifiable evidence at December 31, 2009,2010, the Company concluded that it was appropriate to establish a full valuation allowance for its net federal and state deferred tax assets. Throughout fiscal year 2009,2010, the Company had a valuation allowance for future tax benefits related to certain foreign net operating losses. As a result, the valuation allowance for deferred tax assets decreased by $0.1$0.5 million from $9.4$8.6 million at January 1, 2009,2010, to approximately $9.3$8.1 million at December 31, 2009.2010. The Company expects to provide a full valuation allowance on future tax benefits until it can sustain a level of profitability that demonstrates its ability to utilize these assets. The amount of the deferred tax asset valuation allowance, however, could be reduced in future periods to the extent that future taxable income is realized.
Prior to 2009, exposures were settled primarily through the settlement of audits within each individual tax jurisdiction or the closing of a statute of limitation. Exposures can also be affected by changes in applicable tax law or other factors, which may cause management to believe a revision of past estimates is appropriate. Management believes that an appropriate liability has been established for income tax exposure; however, actual amounts may differ materially from these estimates.
The impact of an uncertain tax position that is more likely than not of being sustained upon audit by the relevant taxing authority must be recognized at the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Also, interest expense is recognized on the full amount of deferred benefits for uncertain tax positions. As of December 31, 20092010 and 2008,2009, the Company has recorded tax contingency reserves of approximately $1.5$1.4 million and $1.4$1.5 million, respectively. These balances include accrued interest and penalties of $0.3$0.4 million and $0.3 million, respectively, at December 31, 20092010 and 2008.2009. The tax contingency reserves are included as a component of Income taxes payable on the Consolidated Balance Sheets.
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RAE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On December 31, 2009,2010, the Company had $1.5$1.4 million of unrecognized tax benefits, $0.5$1.2 million of which would affect its effective tax rate if recognized. The Company does not anticipate any material changes to its uncertain tax positions in the next 12 months.
A reconciliation of the beginning and ending balance of unrecognized tax benefits (“UTB”) is as follows:
| | | | | | | | |
| | (In thousands) | | | (In thousands) | |
|
Balance at January 1, 2008 | | $ | 1,193 | | | $ | 1,193 | |
Positions taken related to prior years | | | — | | | | — | |
Positions taken during the current year | | | (64 | ) | | | (64 | ) |
Reduction to UTB due to settlement with tax authories | | | (12 | ) | | | (12 | ) |
| | | | | | |
Balance at January 1, 2009 | | | 1,117 | | |
Balance at December 31, 2008 | | | | 1,117 | |
Positions taken related to prior years | | | — | | | | — | |
Positions taken during the current year | | | (6 | ) | | | (6 | ) |
Reduction to UTB due to settlement with tax authories | | | 102 | | | | 102 | |
| | | | | | |
Balance at December 31, 2009 | | $ | 1,213 | | | | 1,213 | |
Positions taken related to prior years | | | | — | |
Positions taken during the current year | | | | 26 | |
Reduction to UTB due to settlement with tax authories | | | | (200 | ) |
| | | | | | |
Balance at December 31, 2010 | | | $ | 1,039 | |
| | | | |
The Company recognizes interest and penalties associated with uncertain tax positions in its income tax expense. AtFor the years ended December 31, 20082010, 2009 and 2009,2008, the provision for interest and penalties was $0.3 million, $0.3 million and $0.3 million, respectively. The ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty.
We conduct business globally and, as a result, one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject
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RAE SYSTEMS INC.
to examination by taxing authorities throughout the world, including such major jurisdictions as China, Hong Kong, Denmark, UK, France, and the United States. We are no longer subject to U.S. federal, ornon-U.S. income tax examinations for years before 2003.
In many cases the Company’s uncertain tax positions are related to tax years that remain subject to examination by tax authorities. The following describes the open tax years, by major tax jurisdiction, as of December 31, 2009:2010:
| | | | | | | | |
United States — Federal | | | | | | | 2003 - present | |
United States — State | | | | | | | 20042005 - present | |
China | | | | | | | 20052006 - present | |
Hong Kong | | | | | | | 20042005 - present | |
Denmark | | | | | | | 20072008 - present | |
The Company maintains credit facilities to support its operations in the United States and China.
In the United States, the Company has a $10.0 million revolving credit agreement as of December 31, 2009.2010. The credit facility is renewed annually and currently expiresas of December 31, 2010, the line was scheduled to mature on May 15, 2010.14, 2011. Available credit is based on a percentage of specific qualifying assets and the total facility is collateralized by a blanket security interest in the Company’s assets in the United States. The Company is required to comply with certain reporting requirements in addition to the ongoing requirement to submit quarterly financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest accrues at the floating prime bank lending rate plus 100 basis points subject to a minimum total rate of 5%. In addition, the Company pays 30 basis points annually of the average unused portion of the facilityfacility. As of December 31, 2010 and is2009, the Company was required to maintain a compensating balance of at least $2.0 million at all times. The compensating balance is included in Restricted cash on the Consolidated Balance Sheets. The compensating balance requirement was released in January 2011. As of December 31, 20092010 and December 31, 2008,2009, $1.8 million was outstanding against the revolving credit agreement. There is no assurance that the Company will be successful in securing a renewed agreement on this line of credit for any period after May 15, 2010.and interest was accruing at 5% per annum.
During the fourth quarter of 2009, the Company obtained an amendment to the financial covenants of its revolving credit agreement, as a result of non-compliance. The amended financialFinancial covenants under the revolving credit agreement 1) require the Company to maintain specified trailing two-quarter minimum earnings before interest, depreciation, amortization and non-cash stock compensation expenses and 2) limits the size of potential monetary penalties under the FCPA to $3.5 million. TheAs a result of the impairment expense incurred to discontinue operations in Fushun, China, the Company was in compliance with these covenants asdefault of the trailing two-quarter minimum earnings requirement for the period ended December 31, 2009.2010. However, the lender issued a waiver for the non compliance.
In March 2011, the Company amended the credit facility to extend the maturity date to the earlier of June 15, 2011 or consummation of a merger with Vector Capital and exclude the assets and liabilities held for sale of RAE Fushun from the financial covenants. (Refer to “Note 13. Subsequent Event” for details of the Merger Agreement). The amendment also allows borrowings of up to $2 million on a non-formula basis and increases the interest rate on such borrowings to the floating prime bank lending rate plus 400 basis points.
In China, the Company from time to time maintains one or more unsecured revolving lines of credit to provide working capital. Borrowings under these lines of credit are generally at the current market rate for fixed rate loans of the amount and duration requested, up to one year. The linesAs of December 31, 2010, the Company had no line of credit are renewed annually in May and September, respectively. The
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RAE SYSTEMS INC.
following table presents the Company’s total lines of creditall bank debt in China for working capital and balances drawn against each ashad been repaid. As of December 31, 2009, and December 31, 2008 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Chinese Renminbi | | U.S. Dollars | | |
| | | | Amount
| | Total
| | | | Amount
| | Total
| | |
| | Amount
| | Available
| | Line
| | Amount
| | Available
| | Line
| | Interest
|
| | Oustanding | | for Use | | of Credit | | Oustanding | | for Use | | of Credit | | Rate |
|
December 31, 2009: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Due October 12, 2010 | | | 15.0 | | | | 5.0 | | | | 20.0 | | | | 2.2 | | | | 0.7 | | | | 2.9 | | | | 5.04 | % |
No balance outstanding | | | — | | | | 20.0 | | | | 20.0 | | | | — | | | | 2.9 | | | | 2.9 | | | | n/a | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 15.0 | | | | 25.0 | | | | 40.0 | | | | 2.2 | | | | 3.6 | | | | 5.8 | | | | | |
December 31, 2008: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Due April 30, 2009 | | | 5.0 | | | | 15.0 | | | | 20.0 | | | | 0.7 | | | | 2.2 | | | | 2.9 | | | | 6.33 | % |
No balance outstanding | | | — | | | | 20.0 | | | | 20.0 | | | | — | | | | 2.9 | | | | 2.9 | | | | n/a | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 5.0 | | | | 35.0 | | | | 40.0 | | | | 0.7 | | | | 5.1 | | | | 5.8 | | | | | |
Term Loan
On November 9, 2009, the Company borrowedhad an unsecured revolving line of credit in the amount of RMB 10.020 million, or approximately $1.5$2.9 million, to provide working capital for its 70% owned subsidiary in Fushun, China (“RAE Fushun”). The loan is due on April 26, 2011 and bearsan outstanding balance of RMB 15 million, or approximately $2.2 million, accruing interest at a fixed rate of 8.1% for 12 months. The interest rate will be reset once5.04%. This loan was repaid at maturity in November 2010 at 1.5 times the People’s Bank of China benchmark rate. Loan repayment is guaranteed by an unrelated third party, to whom RAE Fushun has granted a lien over its wholly owned plant and associated land rights. As a condition of the loan, the lending bank required a deposit of approximately $0.1 million from the guarantor. This deposit was funded by RAE Fushun from the loan proceeds and is included in Restricted cash on the Consolidated Balance Sheets.October 2010.
| |
Note 7. | Commitments and Contingencies |
Legal Proceedings
Regulatory Compliance
During fiscal year 2008, the Company’sour internal audit department identified certain payments and gifts made by certain personnel in the Company’sour China operations that may have violated the FCPA. Following this discovery, the Audit Committee of theour Board of Directors initiated an independent investigation. The Company hasWe made a voluntary disclosure to the DOJ and the SEC regarding the results of itsour investigation. The Company hasWe also implemented additional policies and controls with respect to compliance with the FCPA. The FCPA and related statutes and regulations provide for potential monetary penalties, criminal sanctions and in some cases debarment from doing business with the U.S. federal government in connection with FCPA violations. The Company is cooperatingWe cooperated with the DOJ and the SEC in connection with their review of the matter, and is actively engaged in settlement discussions. Although no assurances can be given as to whether the matter will settle or the amount of any settlement, the Companywe recorded an accrual of $3.5 million in the third quarter of 2009 relating to the potential settlement of this matter. We subsequently settled all outstanding issues with regard to his matter, in December 2010, pursuant to separate agreements with the DOJ and the SEC, under which we agreed to pay a $1.7 million criminal penalty to the DOJ and about $1.15 million in restitution plus $0.1 million in interest to the SEC. The timingCompany also agreed to advise the DOJ and final outcome of this or any future government investigation cannot be predictedthe SEC periodically until December 2013 as to its ongoing efforts to ensure continued compliance with certainty and any indictment, conviction or material fine, debarment or settlement arising out of these investigations could have a material adverse affect on the Company’s business, financial condition, results of operation and future prospects.
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Legal proceedingsProceedings
Polimaster Ltd. et al. v. RAE Systems Inc., United States District Court for the Northern District of California, CaseNo. 05-CV-01887-JF, United States Court of Appeals for the Ninth Circuit, Nos.08-15708 and09-15369
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Polimaster Ltd. and Na&Se Trading Company, Ltd. (“Polimaster”) filed a complaint against the Company on May 9, 2005, in the United States District Court for the Northern District of California in a case titled Polimaster Ltd., et al. v. RAE Systems Inc. (CaseNo. 05-CV-01887-JF). The complaint alleges, among other things, that the Company breached its contract with Polimaster and infringed upon Polimaster’s intellectual property rights. The dispute is subject to a contractual arbitration agreement, although the federal court has retained jurisdiction over the matter pending completion of the arbitration. The arbitration was conducted in the spring of 2007.
In September 2007, a Final Award was issued in the arbitration. The arbitrator ruled that Polimaster failed to prove its claims and was not entitled to any relief; that the Company had proven its counterclaims and was awarded damages of approximately $2.4 million; and that as the prevailing party, the Company was entitled to recover costs in the amount of $46,000. On October 5, 2007, RAE Systems filed a motion to confirm the Final Award. On October 17, 2007, Polimaster filed an opposition to RAE Systems’ motion to confirm the Final Award and filed its own motion to vacate the Final Award. Both motions were heard on December 7, 2007, and the district court confirmed the Final Award by an order dated February 25, 2008. Polimaster appealed from the district court’s order confirming the arbitration award in Polimaster Ltd. et al. v. RAE Systems Inc.,No. 08-15708. The appeal is currently pending in the United States Court of Appeals for the Ninth Circuit. Briefing on the appeal has been completed by both sides and the appeal was argued and submitted to the Ninth Circuit for decision on January 15, 2010.
When the district court confirmed the Final Award in favor of RAE Systems it did not enter judgment, an omission the district court described as a non-substantive clerical error. On September 9, 2008, the court of appeal granted leave for the district court to correct this clerical error. On January 23, 2009, the district court entered judgment in favor of RAE Systems and against Polimaster, and included in the judgment post-arbitration/pre-judgment interest and post-judgment interest. Polimaster has appealed the inclusion of these two interest components in the judgment, in Polimaster Ltd. et al. v. RAE Systems Inc.,No. 09-15369, and briefing on the appeal has been completed by both sides and the appeal was argued and submitted to the Ninth Circuit for decision on January 15, 2010.
On May 14, 2009, Polimaster and RAE Systems entered a First Amended And Restated Stipulation And Order Re Stay Of Execution Of Judgment In Favor Of RAE Systems Inc. (the “stipulation”), pursuant to which Polimaster wire transferred $1.4 million to the client trust account of RAE Systems’ counsel, McLeod, Witham & Flynn LLP, and agreed to wire transfer an additional $116,224.25 per month until the entire amount deposited equalsequaled the amount of the judgment (approximately $2.8 million) plus accrued interest at the judgment rate of 0.43 percent per annum. Pursuant to the stipulation, the amounts transferred by Polimaster are beingwere maintained in the client trust account of RAE Systems’ counsel, McLeod, Witham & Flynn LLP, and shall not be distributed to RAE Systems or Polimaster,were held until the Ninth Circuit hashad ruled on Polimaster’s appeal (Nos.08-15708 and09-15369). McLeod, Witham & Flynn LLP shall releaseThe appeals were argued before a three-judge panel and submitted to the fundsNinth Circuit for decision on January 15, 2010. On September 28, 2010, the Ninth Circuit issued a divided panel opinion finding that Polimaster has established a defense to the enforcement of the arbitration award in favor of RAE Systems under Article V (1)(d) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) on the ground that the arbitrator’s decision permitting RAE Systems to assert its counterclaims in the account to RAE Systemsand/or Polimaster within seven days of the Ninth Circuit’s final ruling on the appeal,arbitration was not in accordance with the agreement of the parties. On October 12, 2010, RAE Systems petitioned the Ninth Circuit’s decision. PolimasterCircuit for rehearing en banc,i.e., a reconsideration of the appeal before a larger panel of 11 judges. On November 12, 2010, the Ninth Circuit denied RAE Systems’ petition, so the judgment of the Ninth Circuit is currently in compliance withnow final, and the payment schedule providedescrowed funds have been returned to Polimaster.
Shareholder Lawsuits
The California State Court Actions:
On September 20, 2010, a putative class action suit, entitledFoley v. RAE Systems Inc., et al., No. 110CV182985, was filed in the stipulation. If RAE Systems is successful on appeal, it is expected thatSuperior Court of California, County of Santa Clara, against the Company, would receive approximately $1.6 million, netmembers of attorneys’ feesits Board of Directors, the Company’s Chief Financial Officer, and expenses. The timing of a final ruling on the appeal is not currently determinable.
Notwithstanding the Polimaster proceeding described above, from time to time, the Company is engaged in various legal proceedings incidental to its normal business activities. Although the results of litigation and claims cannot be predictedentities affiliated with certainty, the Company believes the final outcome of such matters will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.Battery
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RAE SYSTEMS INC.
Ventures. The suit alleges in summary that, in connection with a proposed acquisition of the Company by an affiliate of Battery Ventures, the individual defendants breached their fiduciary duties by conducting an unfair sale process and agreeing to an unfair price, would purportedly receive improper personal benefits in connection with the proposed acquisition, and were aided and abetted by the other defendants. Plaintiff seeks, among other things, a declaration that the suit can be maintained as a class action, an injunction against the proposed merger, rescission of the Merger Agreement, a directive that the defendants exercise their fiduciary duties to implement a process to secure the best possible consideration for stockholders, imposition of a constructive trust on allegedly improper benefits, and fees and costs. Four other lawsuits making similar allegations have also been filed in the Superior Court of the State of California, County of Santa Clara against the Company, its Board of Directors and Battery Ventures or its affiliates:Angles v. RAE Systems Inc., et al., No. 110CV183606;Greenbaum v. Chen , et al., No. 110CV183814;AC Photonics, Inc. v. RAE Systems Inc., et al., No. 110CV183942; andMann v. RAE Systems Inc., et al., No. 110CV183960. On October 28, 2010 the California court consolidated all five California actions under the captionIn re RAE Systems, Inc. Shareholder Litigation, Lead Case No. 110CV182985. On December 15, 2010, plaintiffs Mann and Angles filed an amended complaint continuing to set forth the claims set forth above and including additional disclosure claims based on allegations that the Company’s proxy filings contain materially false statements and fail to disclose material facts regarding, among other things, the Special Committee, the holders of the Rollover Shares, the process and events leading up to the proposed acquisition, the FCPA investigation, communications with Battery Ventures and other potential bidders, and the work performed by UBS and data underlying its analyses. On December 17, 2010, the California court issued an order staying all proceedings in California state court in favor of litigation pending in Delaware.
The Delaware Chancery Court Actions:
In addition, four putative class action suits with similar allegations have been filed in Delaware Chancery Court:Nelson v. RAE Systems Inc., et al., C.A.No. 5848-VCS;Venton v. RAE Systems Inc., et al., C.A.No. 5854-VCS;Quintanilla v. RAE Systems Inc., et al., C.A. No. 5872;Villeneuve v. RAE Systems Inc., et al., C.A. No. 5877. The Delaware actions have been consolidated under the captionIn re RAE Systems, Inc. Shareholder Litigation, Consolidated C.A.No. 5848-VCS, and plaintiffs filed a Verified Consolidated Amended Class Action Complaint on or about October 28, 2010. In this pleading, plaintiffs continued to assert the claims set forth above, and in addition they alleged that the Company’s Preliminary Proxy Statement, filed with the SEC on October 21, 2010, contained materially false statements or failed to disclose material facts regarding, among other things, the Special Committee, the holders of the Rollover Shares, the process and events leading up to the proposed acquisition, the FCPA investigation, communications with Battery Ventures and other potential bidders, and the work performed by UBS and data underlying its analyses. Plaintiffs requested various forms of injunctive relief, as well as money damages allegedly suffered or to be suffered by the putative class. On December 17, 2010, two of the plaintiffs from the stayed California action (Mann and Angles) also filed a complaint in Delaware Chancery Court making essentially the same allegations as in their amended California complaint described above. Plaintiffs Mann and Angles subsequently voluntarily dismissed their Delaware complaint.
On February 24, 2011, the remaining Delaware plaintiffs filed a motion requesting leave to file a Supplemental and Amended Verified Class Action Complaint. The Delaware Chancery Court granted plaintiffs’ leave to amend their complaint on March 2, 2011. The Supplemental Amended Verified Class Action Complaint asserts claims against the Company, members of its Board of Directors, and entities affiliated with Vector Capital, and alleges in summary that, in connection with the proposed acquisition of the Company by an affiliate of Vector Capital, the individual defendants breached their fiduciary duties by conducting an unfair sale process and agreeing to an unfair price, are purportedly receiving improper personal benefits, and were aided and abetted by the other defendants. The complaint also alleges that the Company’s Preliminary Proxy Statement, filed with the SEC on February 22, 2011, contains materially false statements or fails to disclose material facts regarding, among other things, the Special Committee, the holders of the Rollover Shares, the process and events leading up to the proposed acquisition, the work performed by UBS and data underlying its analyses, and communications with Battery
65
RAE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Ventures, Vector Capital, and other potential bidders. Plaintiffs request various forms of injunctive relief, as well as money damages allegedly suffered or to be suffered by the putative class.
The Federal Court Actions:
Two other actions have been filed in the United States District Court for the Northern District of California against the Company, members of its Board of Directors, the Company’s Chief Financial Officer,and/or Battery Ventures, Rudy Merger Sub Corp. and Rudy Acquisition Corp. Those actions are entitledLaPlante v. RAE Systems Inc., et al., No. CV104944 andMabry v. Chen, et al., No. CV10-5328. They make allegations similar to the other lawsuits, and add claims for alleged violation of the federal securities laws in connection with the preparation of the proxy statement filed by the Company in connection with a proposed acquisition by affiliates of Battery Ventures. On January 10, 2011, the federal court issued an order pursuant to a stipulation of the parties staying proceedings in theLaPlanteaction in favor of litigation pending in Delaware. A similar order was entered by the federal court in theMabryaction on January 21, 2011, pursuant to stipulation of the parties.
The Company believes that the claims in the above shareholder lawsuits are without merit and intends to vigorously defend against them. However, there can be no assurances as to the outcome of the litigation. The Company is in the process of assessing these matters and is consulting with its external legal counsel and technical experts. The amount of loss related to these matters is not estimable at this time. Accordingly, the Company has not accrued an amount of the loss related to these matters.
Leases
The Company and its subsidiaries lease certain manufacturing, warehousing and other facilities under operating leases. The leases generally provide for the lessee to pay taxes, maintenance, insurance and certain other operating costs of the leased property. Total rent expense for the years ended December 31, 2010, 2009 and 2008 was $1.3 million, $1.4 million and 2007 was $1,480,000, $1,760,000 and $1,109,000,$1.5 million, respectively. Future minimum annual payments under non-cancellable leases were as follows as of December 31, 20092010(in thousands):
| | | | | | | | |
Years Ended December 31, | | | | | | |
|
2010 | | $ | 1,733 | | |
2011 | | | 1,477 | | | $ | 1,598 | |
2012 | | | 1,339 | | | | 1,395 | |
2013 | | | 1,337 | | | | 1,375 | |
2014 | | | 1,307 | | | | 1,296 | |
2015 | | | | 1,139 | |
Thereafter | | | 3,490 | | | | 2,350 | |
| | | | | | |
Total minimum lease payments | | $ | 10,683 | | | $ | 9,153 | |
| | | | | | |
In December 2004, the Company moved into its current corporate headquarters in San Jose, California and abandoned a leased facility in Sunnyvale, California. During the second quarter of 2005, the Company accrued a restructuring reserve of approximately $2.0 million for the remaining lease term of the former headquarters in Sunnyvale. The discount rate used was 4.85% and the liability was not reduced for any anticipated future sublease income. In March 2007, due to improved conditions for office rentals, the Company revised the estimated loss on abandonment of the lease and reduced operating expense by $595,000. During the second quarter of 2007, a sublease was executed with rents commencing in June 2007. Both the master lease and the sublease expired in October 2009. Rent payments for 2009 2008 and 20072008 were $439,000 $490,000 and $396,000,$490,000, respectively, for the Sunnyvale building with sublease income of $136,000 $176,000 and $97,000$176,000 in 2009 and 2008, and 2007, respectively.
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RAE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Purchase obligations
Although open purchase orders are considered enforceable and legally binding, the terms generally allow the Company the option to cancel, reschedule and adjust requirements based on business needs prior to the delivery of goods or performance of services. Obligations to purchase inventory and other commitments are generally expected to be fulfilled within one year and were estimated at $4.5$7.2 million at December 31, 2009.
During 2007 the Company began to construct RAE Fushun’s new manufacturing and administrative facility in China. The Company occupied the factory buildings in October 2008. The estimated cost to complete this project in 2010 and beyond is $0.4 million and is not deemed to be a contractual obligation as the underlying contract does not specify a financial commitment.2010.
During the first quarter of 2010, the Company began to construct a new manufacturing and engineering facility in Shanghai, China. The estimated cost to complete this project is approximately $5.3$3.0 million with the work scheduled to be completed as soon as year end.in the second quarter of 2011. This project is not deemed to be a contractual obligation as the underlying contract does not specify a financial commitment. Upon completion of construction, the Company would vacate its existing leased facility in Shanghai. Based on discussions with Shanghai government officials, the landlord of the existing Company facility, the Company believes that it will be able to terminate the lease without penalty. However, no assurance can be given at this time that the Company will not be subject to a lease termination penalty.
F-24
RAE SYSTEMS INC.
Guarantees
The Company is permitted under Delaware law and required under our Certificate of Incorporation and Bylaws to indemnify its officers and directors for certain events or occurrences, subject to certain limits, while the officer is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a Director and Officer Insurance Policy that limits its exposure and enables it to recover a portion of any future amounts paid. To date the Company has not incurred any losses under these agreements.
The Company typically agrees to indemnify its customers for any expenses or liability resulting from claimed infringements of patents, trademarks or copyrights of third parties. The terms of these indemnification agreements are generally perpetual any time after execution of the agreement. The maximum amount of potential future indemnification is unlimited. To date, the Company has not paid any amounts to settle claims or defend lawsuits.
Product Warranties
The Company sells the majority of its products with a 12 to 24 month repair or replacement warranty from the date of shipment. The Company provides an accrual for estimated future warranty costs based upon the historical relationship of warranty costs to sales. The estimated future warranty obligations related to product sales are recorded in the period in which the related revenue is recognized under accrued liabilities on the Consolidated Balance Sheets. The following table presents changes in the Company’s warranty reserve during 20092010 and 2008:2009:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, |
| | 2009 | | 2008 | | | 2010 | | 2009 | | 2008 |
| | (In thousands) | | | (In thousands) |
|
Balance at beginning of year | | $ | 707 | | | $ | 884 | | | $ | 695 | | | $ | 599 | | | $ | 653 | |
Provision for warranty | | | 1,429 | | | | 844 | | | | 1,039 | | | | 951 | | | | 795 | |
Utilization of reserve | | | (1,212 | ) | | | (1,041 | ) | | | (757 | ) | | | (857 | ) | | | (855 | ) |
Foreign currency translation effects | | | 2 | | | | 20 | | | | (1 | ) | | | 2 | | | | 6 | |
| | | | | | |
Balance at end of year | | $ | 926 | | | $ | 707 | | | $ | 976 | | | $ | 695 | | | $ | 599 | |
| | | | | | |
| |
Note 8. | Employee Benefit Plan |
The Company sponsors the RAE Systems 401(k) Plan (the “Plan”), a defined contribution plan which provides retirement benefits for its eligible employees through tax deferred salary deductions. The Plan allows employees to contribute up to 60% of their annual compensation subject to statutory maximum levels. The Plan is available to all employees in the United States who have reached the age of 21. The Plan provides for employer matching
67
RAE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
contributions of 25% on each employee’s elective contributions for the first 6.0% of eligible compensation contributed. Company contributions vest at the rate of 25% per annum over the first 4 years of service. Employer matching contributions to the Plan totaled $136,000, $122,000 $113,000 and $129,000$113,000 for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively.
| |
Note 9. | Stock-Based Compensation |
Stock Option Plans
In June 2007, the Company’s shareholders approved the 2007 Equity Incentive Plan (the “2007 Plan”) to replace the Company’s 2002 Stock Option Plan (the “2002 Plan”). The 2007 Plan authorizes the grant of options to employees, directors and consultants to purchase shares of the Company’s common stock.
Four million shares of the Company’s common stock are authorized for issuance under the 2007 Plan. The maximum number of shares that may be issued under the 2007 Plan will be increased from time to time by shares
F-25
RAE SYSTEMS INC.
subject to options granted under the 2002 Plan that expire or are terminated and by shares acquired under the 2002 Plan that are forfeited or repurchased by the Company for the option holder’s purchase price. However, no more than 1.5 million additional shares may be authorized for issuance under the 2007 Plan as a result of these adjustments. Through December 31, 2009, 1,250,3762010, 1,264,541 shares have been added to the 2007 Plan due to qualifying adjustments from the 2002 Plan.
Incentive options may be granted at not less than 100% of the fair market value per share and non-statutory options may be granted at not less than 85% of the fair market value per share of the underlying stock at the date of grant as determined by the Board of Directors or committee thereof, except for options granted to a person owning greater than 10% of the outstanding stock, for which the exercise price must not be less than 110% of the fair market value. Options granted under the Plans generally vest 25% after one year with the remainder vesting pro-rata monthly over the following three years. If not exercised, options generally expire ten years after the date of grant.
The total intrinsic value of options exercised during 2010, 2009 and 2008 was $62,000, zero and $179,000, respectively. In connection with these exercises, no tax benefit was realized as the Company has a full valuation allowance on its deferred tax assets. As of December 31, 2009,2010, the unrecognized future estimated compensation expense related to stock options and net of expected forfeitures was $1.8$1.0 million. That cost is expected to be recorded over an estimated amortization period of 2.82.1 years.
The following is a summary of stock option activity (in thousands, except weighted-average amounts):
| | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Outstanding | |
| | Number
| | Weighted-Average
| | Number
| | Weighted-Average
| |
| | of Shares | | Exercise Price | | of Shares | | Exercise Price | |
|
Balance as of December 31, 2006 | | | 3,139 | | | $ | 3.22 | | |
Granted | | | 855 | | | | 2.73 | | |
Exercised | | | (32 | ) | | | 2.25 | | |
Canceled | | | (239 | ) | | | 4.18 | | |
| | | | |
Balance as of December 31, 2007 | | | 3,723 | | | | 3.05 | | |
Balance as of January 1, 2008 | | | | 3,723 | | | $ | 3.05 | |
Granted | | | 1,299 | | | | 1.51 | | | | 1,299 | | | | 1.51 | |
Exercised | | | (149 | ) | | | 0.29 | | | | (149 | ) | | | 0.29 | |
Canceled | | | (680 | ) | | | 3.83 | | | | (680 | ) | | | 3.83 | |
| | | | | | |
Balance as of December 31, 2008 | | | 4,193 | | | | 2.55 | | | | 4,193 | | | | 2.55 | |
Granted | | | 1,870 | | | | 1.03 | | | | 1,870 | | | | 1.03 | |
Exercised | | | — | | | | — | | | | — | | | | — | |
Canceled | | | (670 | ) | | | 2.96 | | | | (670 | ) | | | 2.96 | |
| | | | | | |
Balance as of December 31, 2009 | | | 5,393 | | | | 1.97 | | | | 5,393 | | | | 1.97 | |
Granted | | | | 135 | | | | 0.78 | |
Exercised | | | | (92 | ) | | | 0.90 | |
Canceled | | | | (170 | ) | | | 1.21 | |
| | | | | | |
Balance as of December 31, 2010 | | | | 5,266 | | | | 1.99 | |
| | | | |
F-2668
RAE SYSTEMS INC.
The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2009:2010:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable | | | Options Outstanding | | Options Exercisable | |
| | | | Weighted
| | | | | | | | Weighted
| | | | | | | | | Weighted
| | | | | | | | Weighted
| | | | | |
| | | | Average
| | | | | | | | Average
| | | | | | | | | Average
| | | | | | | | Average
| | | | | |
| | | | Remaining
| | Weighted
| | Aggregate
| | | | Remaining
| | Weighted
| | Aggregate
| | | Number
| | Remaining
| | Weighted
| | Aggregate
| | Number
| | Remaining
| | Weighted
| | Aggregate
| |
| | Number
| | Contractual
| | Average
| | Intrinsic
| | Number
| | Contractual
| | Average
| | Intrinsic
| | | of
| | Contractual Life
| | Average
| | Intrinsic
| | of
| | Contractual Life
| | Average
| | Intrinsic
| |
Range of
| | of
| | Life
| | Exercise
| | Value
| | of
| | Life
| | Exercise
| | Value
| | |
Exercise Prices | | Shares | | (In Years) | | Price | | (’000) | | Shares | | (In Years) | | Price | | (’000) | | |
Range of Exercise Prices | | | Shares | | (in years) | | Exercise Price | | Value (‘000) | | Shares | | (in years) | | Exercise Price | | Value (‘000) | |
|
$0.00 - 0.50 | | | 120,877 | | | | 1.51 | | | $ | 0.08 | | | $ | 123 | | | | 120,877 | | | | | | | $ | 0.08 | | | $ | 123 | | | | 90,666 | | | | 0.77 | | | $ | 0.08 | | | $ | 139 | | | | 90,666 | | | | | | | $ | 0.08 | | | $ | 139 | |
0.51 - 1.00 | | | 1,197,936 | | | | 8.86 | | | | 0.95 | | | | 180 | | | | 251,466 | | | | | | | | 0.84 | | | $ | 65 | | | | 1,278,771 | | | | 8.17 | | | | 0.94 | | | | 857 | | | | 506,467 | | | | | | | | 0.93 | | | | 344 | |
1.01 - 1.50 | | | 2,018,282 | | | | 6.98 | | | | 1.26 | | | | 23 | | | | 863,270 | | | | | | | | 1.22 | | | $ | 19 | | | | 1,865,593 | | | | 5.27 | | | | 1.27 | | | | 621 | | | | 1,194,540 | | | | | | | | 1.26 | | | | 416 | |
1.51 - 2.00 | | | 200,000 | | | | 8.28 | | | | 1.87 | | | | — | | | | 83,333 | | | | | | | | 1.87 | | | | — | | | | 200,000 | | | | 7.28 | | | | 1.87 | | | | — | | | | 133,333 | | | | | | | | 1.87 | | | | — | |
2.01 - 2.50 | | | 259,167 | | | | 7.65 | | | | 2.26 | | | | — | | | | 147,760 | | | | | | | | 2.26 | | | | — | | | | 259,167 | | | | 6.65 | | | | 2.26 | | | | — | | | | 212,552 | | | | | | | | 2.26 | | | | — | |
2.51 - 3.00 | | | 445,000 | | | | 7.25 | | | | 2.88 | | | | — | | | | 301,558 | | | | | | | | 2.87 | | | | — | | | | 430,000 | | | | 6.23 | | | | 2.88 | | | | — | | | | 397,081 | | | | | | | | 2.88 | | | | — | |
3.01 - 4.00 | | | 804,324 | | | | 6.03 | | | | 3.62 | | | | — | | | | 723,488 | | | | | | | | 3.60 | | | | — | | |
3.01 - 3.50 | | | | 220,824 | | | | 3.71 | | | | 3.18 | | | | — | | | | 220,824 | | | | | | | | 3.18 | | | | — | |
3.51 - 4.00 | | | | 573,500 | | | | 5.54 | | | | 3.79 | | | | — | | | | 573,500 | | | | | | | | 3.79 | | | | | |
4.01 - 5.00 | | | 152,500 | | | | 4.38 | | | | 4.81 | | | | — | | | | 152,500 | | | | | | | | 4.81 | | | | | | | | 152,500 | | | | 3.38 | | | | 4.81 | | | | — | | | | 152,500 | | | | | | | | 4.81 | | | | | |
5.01 - 6.00 | | | 170,000 | | | | 4.24 | | | | 5.30 | | | | — | | | | 170,000 | | | | | | | | 5.30 | | | | | | |
6.01 - 7.00 | | | 25,000 | | | | 4.87 | | | | 6.43 | | | | — | | | | 25,000 | | | | | | | | 6.43 | | | | — | | |
5.01 - 6.50 | | | | 195,000 | | | | 3.32 | | | | 5.44 | | | | — | | | | 195,000 | | | | | | | | 5.44 | | | | — | |
| | | | | | | | | | | | | | | | | | |
| | | 5,393,086 | | | | 7.07 | | | | 1.97 | | | $ | 326 | | | | 2,839,252 | | | | 5.78 | | | | 2.48 | | | $ | 207 | | | | 5,266,021 | | | | 5.96 | | | | 1.99 | | | $ | 1,617 | | | | 3,676,463 | | | | 5.42 | | | | 2.32 | | | $ | 899 | |
| | | | | | | | | | | | | | | | | | |
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the excess of the Company’s closing stock price of $1.10$1.61 as of December 31, 20092010 over the options holders’ exercise price, which would have been received by the option holders had all option holders exercised their options as of that date. The total number ofin-the-money options exercisable as of December 31, 2009,2010, was 800,000.1,791,673. As of December 31, 2009,2010, the stock options outstanding included 4,953,1775,072,060 options which were either vested or are expected to vest, with a weighted-average exercise price of $2.04,$2.02, an aggregate intrinsic value of $302,000$1,518,000 and a remaining contractual term of 6.935.91 years.
In May 2008, the Company granted an aggregate of 150,000 shares of common stock to non-employee directors under the 2007 Plan. The weighted-average grant date fair value of these awards is $1.40. The shares are not subject to vesting and compensation expenses of $210,000 was recognized on date of grant. As of December 31, 2009,2010, no unvested grants of restricted stock were outstanding under the 2007 Plan.
Non-Plan Stock Options
In 2002, the Company granted certain of its Directors non-plan options to purchase 400,000 shares of restricted stock at a weighted average exercise price of $0.99 per share. The options vested 25% after one year with the remainder vesting pro-rata monthly over the following three years. From 2002 to 2006, the Company issued 300,000 shares of common stock due to the exercise of such options. There have been no further grants, exercises or cancellations through December 31, 2009.2010. As such, total outstanding non-plan stock options at December 31, 20092010 were 100,000 at a weighted average exercise price of $1.06. The vested options are exercisable over ten years from date of grant. During 2009,2010, no stock-based compensation expense related to non-plan stock options remained to be recorded.
F-2769
RAE SYSTEMS INC.
The following table summarizes the outstanding and exercisable non-plan stock options as of December 31, 2009:2010:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable | | | Options Outstanding | | Options Exercisable |
| | | | Weighted
| | | | | | | | Weighted
| | | | | | | | | | | | | | | | | Weighted
| | | | |
| | | | Average
| | | | | | | | Average
| | | | | | | | | Weighted Average
| | | | | | | | Average
| | | | |
| | | | Remaining
| | Weighted
| | Aggregate
| | | | Remaining
| | Weighted
| | Aggregate
| | | | | Remaining
| | Weighted
| | Aggregate
| | | | Remaining
| | Weighted
| | Aggregate
|
| | Number
| | Contractual
| | Average
| | Intrinsic
| | Number
| | Contractual
| | Average
| | Intrinsic
| | | | | Contractual
| | Average
| | Intrinsic
| | Number
| | Contractual
| | Average
| | Intrinsic
|
Range of
| | of
| | Life
| | Exercise
| | Value
| | of
| | Life
| | Exercise
| | Value
| Range of
| | Number
| | Life
| | Exercise
| | Value
| | of
| | Life
| | Exercise
| | Value
|
Exercise Prices | | Shares | | (In Years) | | Price | | (’000) | | Shares | | (In Years) | | Price | | (’000) | Exercise Prices | | of Shares | | (in years) | | Price | | (‘000) | | Shares | | (in years) | | Price | | (‘000) |
|
$1.06 | | | 100,000 | | | | 2.41 | | | $ | 1.06 | | | $ | 5 | | | | 100,000 | | | | 2.41 | | | $ | 1.06 | | | $ | 5 | | |
$ | | 1.06 | | | | 100,000 | | | | 1.41 | | | $ | 1.06 | | | $ | 55 | | | | 100,000 | | | | 1.41 | | | $ | 1.06 | | | $ | 55 | |
Non-Plan Restricted Stock
In 2006, the Company granted 536,000 shares of restricted stock to four individuals as an inducement to join the Company. Twenty five percent of this restricted stock or 134,000 shares vested in July 2007 with the remainder vesting pro-rata quarterly over the following three years. In August 2007, concurrent with discontinuing the Company’s DVR business, the Company terminated two of these individuals. As a result, the remainder of their restricted stock awards or 203,571 shares vested immediately and a charge of $596,000 was included in the loss from discontinued operations. See “Note 3. Discontinued Operations” for more detail.operations in 2007.
The fair market value of the Company’s common shares on the dates the awards were granted represents unrecognized deferred stock compensation which is beingwas amortized on a straight-line basis over the vesting period of the underlying stock awards. As of December 31, 2009, $50,000 of estimated2010, no stock-based compensation expense related to restricted stock awards remainsremained to be recorded. That cost is expected to be recorded over an amortization period of 0.5 years.
The following is a summary of activity for the non-plan awards (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | |
| | Restricted Stock Awards | | Restricted Stock Awards | |
| | | | Weighted-Average
| | | | Weighted-Average
| |
| | Number
| | Grant-Dated
| | Number
| | Grant-Date
| |
| | of Shares | | Fair Value | | of Shares | | Fair Value | |
|
Balance as of December 31, 2006 | | | 536 | | | $ | 2.81 | | |
Granted | | | — | | | | — | | |
Vested | | | (354 | ) | | | 2.81 | | |
Forfeited | | | — | | | | — | | |
| | | | |
Balance as of December 31, 2007 | | | 182 | | | | 2.81 | | |
Balance as of January 1, 2008 | | | | 182 | | | $ | 2.81 | |
Granted | | | — | | | | — | | | | — | | | | — | |
Vested | | | (73 | ) | | | 2.81 | | | | (73 | ) | | | 2.81 | |
Forfeited | | | — | | | | — | | | | — | | | | — | |
| | | | | | |
Balance as of December 31, 2008 | | | 109 | | | | 2.81 | | | | 109 | | | | 2.81 | |
Granted | | | — | | | | — | | | | — | | | | — | |
Vested | | | (62 | ) | | | 2.81 | | | | (62 | ) | | | 2.81 | |
Forfeited | | | — | | | | — | | | | — | | | | — | |
| | | | | | |
Balance as of December 31, 2009 | | | 47 | | | | 2.81 | | | | 47 | | | | 2.81 | |
Granted | | | | — | | | | — | |
Vested | | | | (47 | ) | | | 2.81 | |
Forfeited | | | | — | | | | — | |
| | | | | | |
Balance as of December 31, 2010 | | | | — | | | | — | |
| | | | |
Stock-Based Compensation Expense
The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton valuation method. Accordingly, stock-based compensation cost is measured at grant date based on the fair value of the award and recognized in expense over the requisite service, which is generally the vesting period. The impact on the
F-2870
RAE SYSTEMS INC.
Company’s results from continuing operations of recording stock-based compensation by function for the years ended December 31, 2010, 2009 2008 and 20072008 was as follows:
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
| | (In thousands) | |
|
Cost of sales | | $ | 80 | | | $ | 66 | | | $ | 50 | |
Sales and marketing | | | (43 | ) | | | 61 | | | | 114 | |
Research and development | | | 143 | | | | 348 | | | | 453 | |
General and administrative | | | 1,110 | | | | 1,118 | | | | 1,254 | |
| | | | | | | | | | | | |
Total | | $ | 1,290 | | | $ | 1,593 | | | $ | 1,871 | |
| | | | | | | | | | | | |
In addition, the Company recorded the following stock-based compensation expenses from discontinued operations for the year ended December 31, 2007:
| | | | | | | | | | | | | | | | |
| | Year Ended
| | | Year Ended December 31, | |
| | December 31,
| | | 2010 | | 2009 | | 2008 | |
| | 2007 | | | (In thousands) | |
| | (In thousands) | |
| |
Cost of sales | | | $ | 92 | | | $ | 80 | | | $ | 66 | |
Sales and marketing | | $ | 628 | | | | 132 | | | | (43 | ) | | | 61 | |
Research and development | | | 53 | | | | 126 | | | | 143 | | | | 348 | |
General and administrative | | | | 793 | | | | 1,110 | | | | 1,118 | |
| | | | | | | | | | |
Total | | $ | 681 | | | $ | 1,143 | | | $ | 1,290 | | | $ | 1,593 | |
| | | | | | | | | | |
No stock-based compensation expense from discontinued operations was recorded during fiscal 20082010, 2009 or 2009.2008.
Valuation Assumptions
The Company estimates the fair value of each stock option on the date of grant using a Black-Scholes-Merton valuation model and a single option award approach. The fair value of each option grant is amortized on a straight-line basis over the requisite service period of the award, which is generally the vesting period. The weighted-average assumptions applied are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2009 | | 2008 | | 2007 | | 2010 | | 2009 | | 2008 |
|
Expected volatility | | | 85 | % | | | 60-65 | % | | | 65 | % | | | 110 | % | | | 85 | % | | | 60-65 | % |
Expected dividend yield | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
Risk-free interest rate | | | 2.0-3.0 | % | | | 2.7-3.6 | % | | | 4.8 | % | | | 1.9-2.8 | % | | | 2.0-3.0 | % | | | 2.7-3.6 | % |
Expected term in years | | | 6.0 | | | | 5.5-6.0 | | | | 5.5 | | | | 6.0 | | | | 6.0 | | | | 5.5-6.0 | |
Weighted-average grant date fair value | | $ | 0.73 | | | $ | 0.89 | | | $ | 1.66 | | | $ | 0.65 | | | $ | 0.73 | | | $ | 0.89 | |
Expected Volatility — The Company’s expected volatilities are based on historical volatility of the Company’s stock, adjusted by management for unusual and non-representative stock price activity not expected to recur. Management determined the historical stock price volatility for period from April 11, 2002, the commencement of public trading of the common stock, through December 31, 2002, was not likely to be representative of the future and excluded this period. Management also applies mean reversion techniques to the historical stock prices, which results in an emphasis on recent activity over the distant past, when determining the expected volatility rate to be included in the Black-Scholes-MertonBlack-Sholes-Merton valuation model.
Expected Dividend — The BSM valuation model calls for a single expected dividend yield as an input. The Company has not paid a dividend in the past and does not anticipate paying a dividend in the near future.
F-29
RAE SYSTEMS INC.
Risk-Free Interest Rate — The Company bases the risk-free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term. When the expected term of the Company’s stock-based award does not correspond with the terms for which interest rates are quoted, the Company performs a straight-line interpolation between available maturities.
Expected Term — The Company’s expected term represents the weighted-average period that the Company’s stock-based awards are expected to be outstanding. The Company uses the historical exercise patterns of previously granted options in relation to the Company’s stock price to estimate expected exercise patterns.
Estimated Forfeitures — To estimate forfeitures, the Company applies its historical rate of option forfeitures. Estimated forfeiture rates aretrued-up to actual forfeiture results as the stock-based awards vest.
71
RAE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 10. | Related Party Transactions |
The Company accounts for its 40% ownership in Renex Technologies Ltd. (“Renex”), a Hong Kong company, following the equity method. The Company’s total investment in Renex at December 31, 2010 and 2009 was $166,000 and 2008 was $339,000, and $448,000, respectively. The Company recorded a losslosses of $173,000 $109,000 on its equity interest in Renex for the years ended December 31, 2010 and 2009, respectively, and income of $43,000 for the year ended December 31, 2009 and gains of $43,000 and $3,000 for the years ended December 31, 2008 and 2007, respectively.2008.
The Company payshas a 7.5% royalty toagreement with Renex for modems which can be incorporated into certain RAE Systems products. InHowever, in each of 2010, 2009 2008 and 2007,2008, the Company madeincurred no expenses under this royalty payments amounting to zero, zero and $84,000, respectively.agreement. The Company also paid $31,000, $95,000 $181,000 and $149,000$181,000 to Renex for research projects in 2010, 2009 2008 and 2007,2008, respectively.
In conjunction with the original and subsequent additionalCompany’s investment in RAE Beijing, unsecured notes payable were established for the previous RAE Beijing shareholders as part of the purchase price agreement in May 2004 and July 2006. Although these notes bear a stated interest rate of 3% per annum, the notes were discounted using a market interest rate of 6.48%. As of December 31, 20092010 and December 31, 2008,2009, $278,000 and $370,000, and $1,329,000, respectively, was included in current notes payable to related parties and $363,000zero and $1,219,000,$363,000, respectively, was included in long term notes payable to related parties.
The notes issued in conjunction with the original RAE Beijing purchase in May 2004 were non-interest bearing and were recorded at net present value using a discount rate of 5.5%. In conjunction with the additional investment in RAE Beijing in July 2006, 11.0 million shares of preferred stock were issued to four shareholders of RAE Beijing. In accordance with the authoritative accounting guidance, these preferred shares were classified as liabilities and were recorded as long-term notes payable to related parties. Although, these preferred shares bear a dividend yield rate of 3% per annum, the notes payable were discounted using a market interest rate of 6.48%.
Scheduled paymentsfinal scheduled payment of principal and accrued interest under the notes from 2010 throughis due at maturity in 2011 are $370,000 and $363,000, respectively.July 2011.
In addition to its 40% ownership in Renex, the Company has investments in three distributors of RAE Systems products, RAE Australia, RAE Benelux and RAE Spain. The Company owns 19%, 10% and 19% of RAE Australia, RAE Benelux and RAE Spain, respectively. These investments are accounted for under the cost method.
The Liaoning Coal Industry Group, Ltd. (“Liaoning Group”) owns a 30% interest in RAE Fushun and has also been a supplier to RAE Fushun.
F-30
RAE SYSTEMS INC.
Transactions and balances with the Company’s related parties were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | December 31,
| | December 31,
| | | Year Ended December 31, | | | | December 31,
| | December 31,
| |
| | 2009 | | 2008 | | 2007 | | | | 2009 | | 2008 | | | 2010 | | 2009 | | 2008 | | | | 2010 | | 2009 | |
| | (In thousands) | | | (In thousands) | |
|
Sales: | | | | | | | | | | | | | | Accounts receivable: | | | | | | | | | | | | | | | | | | | | | | Accounts receivable: | | | | | | | | |
Renex | | $ | 509 | | | $ | 282 | | | $ | 228 | | | Renex | | $ | 322 | | | $ | 100 | | | $ | 345 | | | $ | 509 | | | $ | 282 | | | Renex | | $ | 200 | | | $ | 322 | |
RAE Australia | | | 714 | | | | — | | | | — | | | RAE Australia | | | 59 | | | | — | | | | 1,116 | | | | 714 | | | | — | | | RAE Australia | | | 131 | | | | 59 | |
RAE Benelux | | | 2,698 | | | | 2,287 | | | | 1,596 | | | RAE Benelux | | | 253 | | | | 411 | | | | 2,730 | | | | 2,698 | | | | 2,287 | | | RAE Benelux | | | 268 | | | | 253 | |
RAE Spain | | | 429 | | | | 604 | | | | 442 | | | RAE Spain | | | 119 | | | | 192 | | | | 361 | | | | 429 | | | | 604 | | | RAE Spain | | | 123 | | | | 119 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | $ | 4,350 | | | $ | 3,173 | | | $ | 2,266 | | | | | $ | 753 | | | $ | 703 | | | $ | 4,552 | | | $ | 4,350 | | | $ | 3,173 | | | | | $ | 722 | | | $ | 753 | |
| | | | | | | | | | | | | | | | | | | | | | |
Purchases: | | | | | | | | | | | | | | Accounts payable: | | | | | | | | | | | | | | | | | | | | | | Accounts payable: | | | | | | | | |
Liaoning Group | | $ | — | | | $ | 20 | | | $ | 4,448 | | | Liaoning Group | | $ | 14 | | | $ | 72 | | |
Renex | | | 256 | | | | 677 | | | | 675 | | | Renex | | | 92 | | | | 382 | | | $ | 314 | | | $ | 256 | | | $ | 677 | | | Renex | | $ | 25 | | | $ | 92 | |
| | | | | | | | | | | | |
| | $ | 256 | | | $ | 697 | | | $ | 5,123 | | | | | $ | 106 | | | $ | 454 | | |
| | | | | | | | | | | | |
The Company’s Director of Information Systems, Lien Chen, is the wife of our Chief Executive Officer, Robert Chen. Ms. Chen was paid a salary and bonus of $127,000, $128,000 and $111,000 for 2010, 2009 and $96,000 for 2009, 2008, and 2007, respectively. Ms. Chen also receives standard employee benefits offered to all other full-time U.S. employees. Ms. Chen does not report to Robert Chen and compensation decisions regarding Ms. Chen are performed in the same manner as other U.S. employees, with Robert Chen the final approval signatory on compensation recommendations.
72
RAE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 11. | Fair Value Measurements |
The Company uses the following methods and assumptions in estimating the fair value of financial assets and liabilities:
Cash and cash equivalents and bank line of credit: The carrying amounts reported in the consolidated balance sheets approximate fair value due to the short-term maturity of these instruments.
Notes payable to related parties: The fair value was determined by discounting these non-interest bearing notes payable at an interest rate commensurate with commercial borrowing rates available to the Company in China.
Intangible assets, net: The fair value is evaluated whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.
The existing authoritative guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
F-31
RAE SYSTEMS INC.
The carrying amounts and fair values of the Company’s financial assets and liabilities were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | December 31, 2009 | | December 31, 2008 |
| | | | Carrying
| | | | Carrying
| | |
| | Catergory | | Amounts | | Fair Value | | Amounts | | Fair Value |
| | (In thousands) |
|
Cash and cash equivalents | | Level 1 | | $ | 18,528 | | | $ | 18,528 | | | $ | 14,845 | | | $ | 14,845 | |
Bank lines of credit | | Level 1 | | | 4,026 | | | | 4,026 | | | | 2,584 | | | | 2,584 | |
Notes payable to related parties | | Level 2 | | | 733 | | | | 733 | | | | 2,548 | | | | 2,548 | |
| |
Note 12. | Geographic Information |
The Company operates primarily in three geographic regions: Americas, Asia and Europe. The following tables present net sales and identifiable long-lived assets by geographic region:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | % | | 2008 | | % | | 2007 | | % | | | 2010 | | % | | 2009 | | % | | 2008 | | % | |
| | (In thousands) | | | (In thousands) | |
|
Net sales: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Americas | | $ | 34,935 | | | | 42 | | | $ | 38,467 | | | | 40 | | | $ | 37,011 | | | | 41 | | | $ | 47,351 | | | | 54 | | | $ | 34,935 | | | | 47 | | | $ | 38,467 | | | | 46 | |
Asia | | | 33,749 | | | | 41 | | | | 41,422 | | | | 44 | | | | 42,107 | | | | 46 | | | | 24,279 | | | | 28 | | | | 25,570 | | | | 34 | | | | 29,084 | | | | 35 | |
Europe | | | 14,488 | | | | 17 | | | | 15,494 | | | | 16 | | | | 11,718 | | | | 13 | | | | 15,423 | | | | 18 | | | | 14,488 | | | | 19 | | | | 15,494 | | | | 19 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total net sales | | $ | 83,172 | | | | 100 | | | $ | 95,383 | | | | 100 | | | $ | 90,836 | | | | 100 | | | $ | 87,053 | | | | 100 | | | $ | 74,993 | | | | 100 | | | $ | 83,045 | | | | 100 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31,
| | | | December 31,
| | | | | December 31, | |
| | 2009 | | % | | 2008 | | % | | | 2010 | | % | | 2009 | | % | | 2008 | | % | |
| | (In thousands) | | | (In thousands) | |
|
Property and equipment, net | | | | | | | | | | | | | | | | | |
Property and equipment, net: | | | | | | | | | | | | | | | | | | | | | | | | | |
Americas | | $ | 317 | | | | 2 | | | $ | 533 | | | | 4 | | | $ | 333 | | | | 3 | | | $ | 317 | | | | 4 | | | $ | 533 | | | | 6 | |
Asia | | | 15,103 | | | | 97 | | | | 14,228 | | | | 95 | | | | 10,298 | | | | 96 | | | | 7,095 | | | | 94 | | | | 8,072 | | | | 92 | |
Europe | | | 170 | | | | 1 | | | | 215 | | | | 1 | | | | 99 | | | | 1 | | | | 170 | | | | 2 | | | | 214 | | | | 2 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total property and equipment, net | | $ | 15,590 | | | | 100 | | | $ | 14,976 | | | | 100 | | | $ | 10,730 | | | | 100 | | | $ | 7,582 | | | | 100 | | | $ | 8,819 | | | | 100 | |
| | | | | | | | | | | | |
Net sales in China were $28.0$17.7 million or 34%20%, $38.1$19.9 million or 40%26% and $39.1$25.7 million or 43%31% of total net sales in 2010, 2009 2008 and 20072008 respectively. China held $15.1$10.3 million or 97% and $14.296%, $7.0 million or 95%94% and $8.0 million or 91% of total net property and equipment as of December 31, 2010, 2009 and 2008, respectively.
The Company’s intangible assets are located in China and consist of purchased customer lists and trade names. The net carrying amount of these long-lived assets was $0.2 million, $0.5 million and $0.9 million as of December 31, 2010, 2009 and 2008, respectively.
73
RAE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The majority of the Company’s net sales in Americas and Asia are to customers domiciled in the United States and the People’s Republic of China, respectively. The Company performs credit evaluations of its customers’ financial condition when considered necessary and generally does not require cash collateral from its customers. These evaluations require significant judgment and are based on a variety of factors including, but not limited to, current economic trends, historical payments, bad debt write-off experience, and financial review of the customer.
F-32
| |
Note 13. | Subsequent Event |
On September 19, 2010, the Company signed a definitive agreement to be acquired by Battery Ventures for $1.60 in cash per share (other than certain shares held by our founders, Robert Chen, Peter Hsi and affiliated entities). The transaction was subject to customary closing conditions, including the approval of RAE SYSTEMS INC.
Systems’ shareholders. Subsequently, on January 12, 2011, the Company received a letter from Vector Capital setting forth an offer to acquire the outstanding shares of our common stock for $1.75 per share in cash (other than certain shares held by Robert Chen, Peter Hsi and affiliated entities). After extensive consideration by the Special Committee of the Board of Directors of the Company, the Company terminated the Battery Merger Agreement on January 18, 2011, paid a termination fee of $3.39 million to Battery Ventures in accordance with the terms of the Battery Merger Agreement, and signed a Merger Agreement with Vector Capital on the terms described above. This transaction is also subject to customary closing conditions, including the approval of RAE Systems’ shareholders.
| |
Note 13.14. | Quarterly Information (Unaudited) |
The summarized quarterly financial data presented below reflect all adjustments, which, in the opinion of management, are of a normal and recurring nature necessary to present fairly the results of operations for the periods presented.
| | | | | | | | | | | | | | | | | | | | |
| | First
| | | Second
| | | Third
| | | Fourth
| | | | |
| | Quarter | | | Quarter | | | Quarter | | | Quarter | | | 2009 | |
| | (In thousands, except per share data) | |
|
Net sales | | $ | 19,113 | | | $ | 19,907 | | | $ | 19,909 | | | $ | 24,243 | | | $ | 83,172 | |
Gross profit | | | 9,330 | | | | 9,868 | | | | 10,273 | | | | 11,508 | | | | 40,979 | |
Operating loss from continuing operations | | | (1,060 | ) | | | (2,057 | ) | | | (3,914 | ) | | | (292 | ) | | | (7,323 | ) |
Income (loss) from continuing operations | | | (1,283 | ) | | | (2,553 | ) | | | (3,664 | ) | | | 786 | | | | (6,714 | ) |
Income (loss) from discontinued operations, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | |
Net income (loss) attributable to RAE Systems Inc. | | | (988 | ) | | | (2,250 | ) | | | (3,489 | ) | | | 968 | | | | (5,759 | ) |
Basic net income (loss) per common share: | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | $ | (0.02 | ) | | $ | (0.03 | ) | | $ | (0.06 | ) | | $ | 0.01 | | | $ | (0.10 | ) |
Discontinued operations | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
Basic net income (loss) per common share | | $ | (0.02 | ) | | $ | (0.03 | ) | | $ | (0.06 | ) | | $ | 0.01 | | | $ | (0.10 | ) |
| | | | | | | | | | | | | | | | | | | | |
Diluted net income (loss) per common share: | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | $ | (0.02 | ) | | $ | (0.03 | ) | | $ | (0.06 | ) | | $ | 0.01 | | | $ | (0.10 | ) |
Discontinued operations | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Diluted net income (loss) per common share | | $ | (0.02 | ) | | $ | (0.03 | ) | | $ | (0.06 | ) | | $ | 0.01 | | | $ | (0.10 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | First
| | | Second
| | | Third
| | | Fourth
| | | | |
| | Quarter | | | Quarter | | | Quarter | | | Quarter | | | 2010 | |
| | (In thousands, except per share data) | |
|
Net sales | | $ | 16,855 | | | $ | 22,459 | | | $ | 24,398 | | | $ | 23,341 | | | $ | 87,053 | |
Gross profit | | | 9,496 | | | | 13,698 | | | | 14,903 | | | | 14,204 | | | | 52,301 | |
Operating (loss) income from continuing Operations | | | (81 | ) | | | 2,717 | | | | 2,463 | | | | 940 | | | | 6,039 | |
(Loss) income from continuing Operations | | | (213 | ) | | | 2,517 | | | | 1,054 | | | | 1,915 | | | | 5,273 | |
Loss from discontinued Operations, net of tax | | | (194 | ) | | | (735 | ) | | | (2,918 | ) | | | (7,331 | ) | | | (11,178 | ) |
Net (loss) income attributable to RAE Systems Inc. | | | (364 | ) | | | 1,973 | | | | (1,477 | ) | | | (2,737 | ) | | | (2,605 | ) |
Basic net income (loss) per common share: | | | | | | | | | | | | | | | | | | | | |
Continuing Operations | | $ | (0.01 | ) | | $ | 0.05 | | | $ | 0.01 | | | $ | 0.04 | | | $ | 0.09 | |
Discontinued Operations | | | — | | | | (0.01 | ) | | | (0.04 | ) | | $ | (0.08 | ) | | $ | (0.13 | ) |
| | | | | | | | | | | | | | | | | | | | |
Basic net income (loss) per common share | | $ | (0.01 | ) | | $ | 0.04 | | | $ | (0.03 | ) | | $ | (0.04 | ) | | $ | (0.04 | ) |
| | | | | | | | | | | | | | | | | | | | |
Diluted net income (loss) per common share: | | | | | | | | | | | | | | | | | | | | |
Continuing Operations | | $ | (0.01 | ) | | $ | 0.05 | | | $ | 0.01 | | | $ | 0.04 | | | $ | 0.09 | |
Discontinued Operations | | | — | | | | (0.01 | ) | | | (0.04 | ) | | | (0.08 | ) | | | (0.13 | ) |
| | | | | | | | | | | | | | | | | | | | |
Diluted net income (loss) per common share | | $ | (0.01 | ) | | $ | 0.04 | | | $ | (0.03 | ) | | $ | (0.04 | ) | | $ | (0.04 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | First
| | | Second
| | | Third
| | | Fourth
| | | | |
| | Quarter | | | Quarter | | | Quarter | | | Quarter | | | 2008 | |
|
Net sales | | $ | 17,869 | | | $ | 24,647 | | | $ | 28,845 | | | $ | 24,022 | | | $ | 95,383 | |
Gross profit | | | 8,855 | | | | 13,091 | | | | 15,775 | | | | 10,494 | | | | 48,215 | |
Operating income (loss) from continuing operations | | | (2,557 | ) | | | 498 | | | | 1,379 | | | | (5,409 | ) | | | (6,089 | ) |
Income (loss) from continuing operations | | | (2,346 | ) | | | (472 | ) | | | 558 | | | | (5,123 | ) | | | (7,383 | ) |
Loss from discontinued operations, net of tax | | | 10 | | | | 5 | | | | (4 | ) | | | — | | | | 11 | |
Net income (loss) attributable to RAE Systems Inc. | | | (2,336 | ) | | | (467 | ) | | | 554 | | | | (4,903 | ) | | | (7,152 | ) |
Basic net income (loss) per common share: | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | $ | (0.04 | ) | | $ | (0.01 | ) | | $ | 0.01 | | | $ | (0.08 | ) | | $ | (0.12 | ) |
Discontinued operations | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Basic net loss per common share | | $ | (0.04 | ) | | $ | (0.01 | ) | | $ | 0.01 | | | $ | (0.08 | ) | | $ | (0.12 | ) |
| | | | | | | | | | | | | | | | | | | | |
Diluted net income (loss) per common share: | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | $ | (0.04 | ) | | $ | (0.01 | ) | | $ | 0.01 | | | $ | (0.08 | ) | | $ | (0.12 | ) |
Discontinued operations | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Diluted net loss per common share | | $ | (0.04 | ) | | $ | (0.01 | ) | | $ | 0.01 | | | $ | (0.08 | ) | | $ | (0.12 | ) |
| | | | | | | | | | | | | | | | | | | | |
74
RAE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | |
| | First
| | | Second
| | | Third
| | | Fourth
| | | | |
| | Quarter | | | Quarter | | | Quarter | | | Quarter | | | 2009 | |
|
Net sales | | $ | 17,345 | | | $ | 18,329 | | | $ | 18,181 | | | $ | 21,138 | | | $ | 74,993 | |
Gross profit | | | 9,213 | | | | 9,310 | | | | 9,917 | | | | 11,138 | | | | 39,578 | |
Operating (loss) income from continuing Operations | | | (16 | ) | | | (1,107 | ) | | | (3,196 | ) | | | 438 | | | | (3,881 | ) |
(Loss) income from continuing Operations | | | (201 | ) | | | (1,517 | ) | | | (3,008 | ) | | | 1,469 | | | | (3,257 | ) |
Loss from discontinued Operations, net of tax | | | (1,082 | ) | | | (1,036 | ) | | | (656 | ) | | | (683 | ) | | | (3,457 | ) |
Net (loss) income attributable to RAE Systems Inc. | | | (988 | ) | | | (2,250 | ) | | | (3,489 | ) | | | 968 | | | | (5,759 | ) |
Basic net income (loss) per common share: | | | | | | | | | | | | | | | | | | | | |
Continuing Operations | | $ | (0.01 | ) | | $ | (0.02 | ) | | $ | (0.05 | ) | | $ | 0.02 | | | $ | (0.06 | ) |
Discontinued Operations | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) | | | (0.04 | ) |
| | | | | | | | | | | | | | | | | | | | |
Basic net loss per common share | | $ | (0.02 | ) | | $ | (0.03 | ) | | $ | (0.06 | ) | | $ | 0.01 | | | $ | (0.10 | ) |
| | | | | | | | | | | | | | | | | | | | |
Diluted net income (loss) per common share: | | | | | | | | | | | | | | | | | | | | |
Continuing Operations | | $ | (0.01 | ) | | $ | (0.02 | ) | | $ | (0.05 | ) | | $ | 0.02 | | | $ | (0.06 | ) |
Discontinued Operations | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) | | | (0.04 | ) |
| | | | | | | | | | | | | | | | | | | | |
Diluted net loss per common share | | $ | (0.02 | ) | | $ | (0.03 | ) | | $ | (0.06 | ) | | $ | 0.01 | | | $ | (0.10 | ) |
| | | | | | | | | | | | | | | | | | | | |
F-3375