The following tables set forth, for the years 2009 and 2010, the reported high and low sales prices of the ADSs on NASDAQ for each full financial quarter:
Pursuant to Article 2 of the articles of association, the purposes of the Company are:
The Board of Directors is currently composed of four members who were appointed by the shareholders for a period of six years expiring upon the date of the annual general shareholders’ meeting approving the financial results for fiscal year 2013. See Item 6, ‘‘Directors, Senior Management and Employees’’. The tenure of a Director terminates at the end of the ordinary general shareholders' meeting convened to vote upon the accounts of the then-preceding fiscal year and is held in the year during which the term of such Director comes to an end. Directors may always be re-elected; a Director may also be dismissed at any time at the shareholders’ meeting.
The mandate for each member of the current Board of Directors expires on the date of the ordinary general shareholders' meeting approving the financial results for the 2013 fiscal year.
Each Director must own at least one share during his/her term of office. If, at the time of his/her appointment, a Director does not own the required number of shares or if during his/her term, he/she no longer owns the required number of shares, he/she is considered to have automatically resigned if he/she fails to comply with the shareholding requirement within three months.
In case of the death or resignation of one or more Director, the Board of Directors may make provisional appointments to fill vacancies before the next general shareholders meetings. These provisional appointments must be ratified by the next following ordinary shareholders meeting. Even if a provisional appointment is not ratified, resolutions and acts previously approved by the Board of Directors nonetheless remain valid.
When the number of Directors falls below the compulsory legal minimum, the remaining Directors must convene an ordinary general shareholders’ meeting to reach the full complement of the Board of Directors.
Any Director appointed in replacement of another Director whose tenure has not expired remains in office only for the remaining duration of the tenure of his predecessor.
One of our employees may be appointed to serve as a Director. His/her contract of employment must however entail actual work obligations. In this case, he/she does not lose the benefit of his/her employment contract.
The number of Directors who are also linked to the Company by an employment contract cannot exceed one third of the Directors then in office and in any case five members.
The Board of Directors determines the direction of our business and supervises our operations. Within the limits set out by the corporate purposes and the powers expressly granted by law to the general shareholders’ meeting, the Board of Directors may deliberate upon our operations and make any decisions in accordance with our business. However, a Director must abstain from voting on matters in which the Director has an interest. The resolutions passed in a meeting of the Board of Directors are valid only if a quorum of half of the Directors is reached. A Director cannot borrow money from the Company.
The Board of Directors must elect one of its members as Chairman of the Board of Directors, who must be an individual person. The Board of Directors determines the duration of the tenure of the Chairman, which cannot exceed that of his/her tenure as a Director. The Board of Directors may dismiss the Chairman at any time. The remuneration of the Chairman is decided by the Board of Directors, upon recommendation of the Compensation Committee.
The Chairman represents the Board of Directors and organizes its work. The general shareholders’ meeting must be informed of this work by the Chairman. The Chairman is responsible for the good functioning of our organization and for supervising the ability of the Board members to perform their mission.
Pursuant to Section 706-43 of the French Criminal Proceedings Code, the Chairman may validly delegate to any person he/she chooses the power to represent us in any criminal proceedings that we may face.
As with any other Director, the Chairman may not be over eigthy years old. In case the Chairman reaches this limit during his/her tenure, he/she will automatically be considered to have resigned. However, his/her tenure is extended until the next Board of Directors meeting, during which his/her successor will be appointed. Subject to the age limit provision, the Chairman of the Board may also be re-elected.
We are managed by the Chairman of the Board of Directors or an individual elected by the Board of Directors bearing the title of Chief Executive Officer. The choice between these two methods of management belongs to the Board of Directors and must be made as provided for by our articles of association. On March 31, 2008, the Board of Directors appointed Mr. Marc Oczachowski as Chief Executive Officer.
The Chief Executive Officer is vested with the powers to act under all circumstances on behalf of the Company, within the limits set out by the Company’s corporate purposes, and subject to the powers expressly granted by law to the Board of Directors and the general shareholders’ meeting.
The Chief Executive Officer represents us with respect to third parties. We are bound by any acts of the Chief Executive Officer even if they are contrary to corporate purposes, unless it is proven that the third party knew such act exceeded the Company’s corporate purposes or could not ignore it in light of the circumstances. Publication of the articles of association alone is not sufficient evidence of such knowledge.
The remuneration of the Chief Executive Officer is set by the Board of Directors, upon recommendation of the Compensation Committee. The Chief Executive Officer can be terminated at any time by the Board of Directors. If such termination is found to be unjustified, damages may be allocated to the Chief Executive Officer, except when the Chief Executive Officer is also the Chairman of the Board.
Net income in each fiscal year, as increased or reduced, as the case may be, by any profit or loss of the Company carried forward from prior years, less any contributions to legal reserves, is available for distribution to our shareholders as dividends, subject to the requirements of French law and our articles of association.
Our shareholders may, upon recommendation of the Board of Directors, decide to allocate all or a part of distributable profits, if any, among special or general reserves, to carry them forward to the next fiscal year as retained earnings, or to allocate them to the shareholders as dividends.
If we have made distributable profits since the end of the preceding fiscal year (as shown on an interim income statement certified by our statutory auditors), the Board of Directors has the authority under French law, without the approval of shareholders, to distribute interim dividends to the extent of such distributable profits. We have never paid interim dividends.
Under French law, dividends are distributed to shareholders pro rata according to their respective shareholdings. Dividends are payable to holders of shares outstanding on the date of the annual shareholders' meeting deciding the distribution of dividends, or in the case of interim dividends, on the date of the Board of Directors meeting approving the distribution of interim dividends. However, holders of newly issued shares may have their rights to dividends limited with respect to certain fiscal years. The actual dividend payment date is decided by the shareholders in an ordinary general meeting or by the Board of Directors in the absence of such a decision by the shareholders. The payment of the dividends must occur within nine months from the end of our fiscal year. Under French law, dividends not claimed within five years of the date of payment revert to the French State.
If the Company is liquidated, our assets remaining after payment of our debts, liquidation expenses and all of our remaining obligations will be distributed first to repay in full the nominal value of the shares, then the surplus, if any, will be distributed pro rata among the shareholders based on the nominal value of their shareholdings and subject to any special rights granted to holders of priority shares, if any.
Our share capital may be increased only with the approval of two third majority of f the shareholders entitled to vote present or represented at an extraordinary general meeting, following a recommendation of the Board of Directors. Increases in the share capital may be effected either by the issuance of additional shares (including the creation of a new class of shares) or by an increase in the nominal value of existing shares. Additional Shares may be issued for cash or for assets contributed in kind, upon the conversion of debt securities previously issued by the Company, by capitalization of reserves, or, subject to certain conditions, in satisfaction of indebtedness incurred by the Company. Dividends paid in the form of Shares may be distributed in lieu of payment of cash dividends, as described above under ‘‘—Dividend and Liquidation Rights (French law).’’ French law permits different classes of shares to have liquidation, voting and dividend rights different from those of the outstanding ordinary shares, although we only have one class of shares.
Our share capital may be decreased only with the approval a two third majority of of the shareholders entitled to vote present or represented at an extraordinary general meeting. The share capital may be reduced either by decreasing the nominal value of the shares or by reducing the number of outstanding shares. The conditions under which the registered capital may be reduced will vary depending upon whether or not the reduction is attributable to losses incurred by the Company. The number of outstanding shares may be reduced either by an exchange of shares or by the repurchase and cancellation by us of our shares. Under French law, all the shareholders in each class of shares must be treated equally unless the inequality in treatment is accepted by the affected shareholder. If the reduction is not attributable to losses incurred by us, each shareholder will be offered an opportunity to participate in such capital reduction and may decide whether or not to participate therein.
Pursuant to French law, the Company may not acquire its own shares except (a) to reduce its share capital under certain circumstances with the approval of the shareholders at an extraordinary general meeting, (b) to provide shares for distribution to employees under a profit sharing or stock option plan and (c) after obtaining approval from the shareholders at an ordinary general meeting, to make purchases for stabilization of quotations on a regulated stock exchange. In either case, the amounts to be repurchased under (b) and (c) may not result in the Company holding more than 10% of its shares then-issued. A subsidiary of the Company is prohibited by French law from holding shares of the Company and, in the event it becomes a shareholder of the Company, such shareholder must transfer all the shares of the Company that it holds.
In accordance with French law, there are two types of general shareholders’ meetings, ordinary and extraordinary. Ordinary general meetings are required for matters such as the election of directors, the appointment of statutory auditors, the approval of the report prepared by the Board of Directors and the annual accounts, the declaration of dividends and the issuance of (non-convertible) bonds.
Extraordinary general meetings are required for approval of matters such as amendments to the Company’s articles of association, modification of shareholders’ rights, approval of mergers, increases or decreases in share capital (including a waiver of preferential subscription rights), the creation of a new class of shares, the authorization of the issuance of investment certificates or securities convertible or exchangeable into shares and for the sale or transfer of substantially all of the Company’s assets.
Attendance and exercise of voting rights at ordinary and extraordinary general meetings are subject to certain conditions. Shareholders deciding to exercise their voting rights must have their shares registered in their names in the shareholder registry maintained by or on behalf of the Company before the meeting. An ADS holder must timely and properly return its voting instruction card to the Depositary to exercise the voting rights relating to the shares represented by its ADSs. The Depositary will use its reasonable efforts to vote the underlying shares in the manner indicated by the ADS holder. In addition, if an ADS holder does not timely return a voting instruction card or the voting instruction card received is improperly completed or blank, that holder will be deemed to have given the Depositary a proxy to vote, and the Depositary will vote in favor of all proposals recommended by the Board of Directors and against all proposals that are not recommended by the Board of Directors.
All shareholders who have properly registered their shares have the right to participate in general meetings, either in person, by proxy, or by mail, and to vote according to the number of shares they hold. Each share confers on the shareholder the right to one vote. Under French law, an entity we control directly or indirectly is prohibited from holding shares in the Company and, in the event it becomes a shareholder, shares held by such entity would be deprived of voting rights. A proxy may be granted by a shareholder whose name is registered on our share registry to his or her spouse, to another shareholder or to a legal representative, in the case of a legal entity, or by sending a proxy in blank to the Company without nominating any representatives. In the latter case, the Chairman of the shareholders’ meeting will vote such blank proxy in favor of all resolutions proposed by the Board of Directors and against all others.
The presence in person or by proxy of shareholders having not less than 20% (in the case of an ordinary general meeting or an extraordinary general meeting deciding upon any capital increase by capitalization of reserves) or 25% (in the case of an extraordinary general meeting) of the Shares entitled to vote is necessary to reach a quorum. If a quorum is not reached at any meeting, the meeting is adjourned. Upon reconvening of an adjourned meeting, there is no quorum requirement in the case of an ordinary general meeting or an extraordinary general meeting deciding upon any capital increase by capitalization of reserves. The presence in person or by proxy of shareholders having not less than 20% of the Shares is necessary to reach a quorum in the case of any other type of extraordinary general meeting.
At an ordinary general meeting or an extraordinary general meeting deciding upon any capital increase by capitalization of reserves, a simple majority of the votes of the shareholders present or represented by proxy is required to approve a resolution. At any other extraordinary general meeting, a two-thirds majority of the votes cast is required. However, a unanimous vote is required to increase liabilities of shareholders. Abstention from voting by those present or represented by proxy is viewed as a vote against the resolution submitted to a vote.
In addition to his/her rights to certain information regarding the Company, any shareholder may, during the two-week period preceding a shareholders’ meeting, submit to the Board of Directors written questions relating to the agenda for the meeting. The Board of Directors is required to respond to such questions during the meeting.
As set forth in our articles of association, shareholders’ meetings are held at our registered office of the Company or at any other locations specified in the written notice. We do not have staggered or cumulative voting arrangements for the election of Directors.
Shareholders have preferential rights to subscribe for additional shares issued by the Company for cash on a pro rata basis (or any equity securities of the Company or other securities giving a right, directly or indirectly, to equity securities issued by the Company). Shareholders may waive their preferential rights, either individually or at an extraordinary general meeting under certain circumstances. Preferential subscription rights, if not previously waived, are transferable during the subscription period relating to a particular offering of shares. U.S. holders of ADSs may not be able to exercise preferential rights for Shares underlying their ADSs unless a registration statement under the Securities Act is effective with respect to such rights or an exemption from the registration requirement thereunder is available.
Our articles of association provide that shares can only be held in registered form.
The shares are registered in the name of the respective owners thereof in the registry maintained by or on behalf of the Company.
Stock certificates evidencing shares, in a manner comparable to that in the United States, are not issued by French companies, but we may issue or cause to be issued confirmations of shareholdings registered in such registry to the persons in whose names the shares are registered. Pursuant to French law, such confirmations do not constitute documents of title and are not negotiable instruments.
Under the U.S. securities laws, as a foreign private issuer, we are exempt from certain rules that apply to domestic U.S. issuers with equity securities registered under the U.S. Securities Exchange Act of 1934, including the proxy solicitation rules and the rules requiring disclosure of share ownership by directors, officers and certain shareholders. We are also exempt from certain of the current NASDAQ corporate governance requirements. For more information on these exemptions, see Item 16 G – ‘‘Corporate Governance —Exemptions from Certain NASDAQ Corporate Governance Rules.’’
On October 31, 2007, we completed the private placement of $20 million principal amount of 9% Senior Convertible Debentures due 2012. In addition, the purchasers of the Convertible Debentures and the Placement Agent received warrants to purchase our ordinary shares, which expire in 2013. The October 2007 private placement resulted in net proceeds of approximately $17.4 million. The Securities Purchase Agreement, dated as of October 29, 2007, among EDAP TMS S.A. and each purchaser is provided on Exhibit 4.3. of this annual report. The terms for registering the underlying ADSs with the SEC are included in the Registration Rights Agreement, dated as of October 29, 2007, among EDAP TMS S.A. and the investors signatory thereto, provided on Exhibit 4.4. of this annual report.
On August 24, 2009, one holder of Convertible Debentures elected to convert 2,892 Convertible Debentures, out of a total of 20,000 representing a total value of $2.892 million. Under the terms of the Convertible Debentures, the 2,892 Convertible Debentures were converted into 440,182 new shares, using the conversion price of $6.57. Following this conversion, our convertible debt was reduced to $17.1 million.
On October 30, 2009, our shareholders adopted several resolutions allowing the Board of Directors to renegotiate our indebtedness with the maximum flexibility while staying within the limit of the dilution already authorized by shareholders on October 30, 2007 and February 26, 2009. On November 16, 2009, pursuant to these resolutions, the Board of Directors issued a Supplement to the current Convertible Debentures allowing bondholders to convert their Convertible Debentures earlier, with a lower exercise price and including the payment of an accelerated interest premium, payable in shares, within the already authorized dilution limits. This Supplement was unanimously approved by the debenture holders on December 3, 2009, convened in a General Meeting (Masse). For more information on the terms of the Supplement, see Exhibit 4.6 of this annual report.
On March 10, April 23 and November 16, 2010, one holder of Convertible Debentures elected to convert a total of 2,050 Convertible Debentures, representing a total value of $2.1 million. Under the terms of the Convertible Debentures and the above Supplement, 440,206 new shares were issued. Following this conversion, our total aggregate amount of our outstanding convertible debenture was reduced to $15.1 million.
On June 24, 2010, our shareholders adopted several new resolutions and extended the validity of existing ones, allowing the Board of Directors to renegotiate our indebtedness while remaining within the limit of the dilution already authorized by shareholders.
On October 6, 2010, based on the above mentioned resolutions and in view of debt restructuring and new projects financing, we filed a Form-F3 registration statement with the SEC to register ordinary shares and warrants for a maximum amount of $9 million. Such registration statement was declared effective by the SEC on October 20, 2010.
On December 29, 2010, we entered into an amendment to the Securities Purchase Agreement dated as of October 29, 2007, relating to the issuance and sales of the Company’s Convertible Debentures and Warrants in order to exempt exchanges of our ordinary shares for outstanding Convertible Debentures or Warrants from the anti-dilution provisions of those instruments.
On December 29, 30 and 31, 2010, pursuant to the above mentioned shareholders’ authorizations, the Management, upon the Board of Directors delegation, extended an offer to all senior debenture and warrant holders to exchange all of their Convertible Debentures and warrants against ADRs in order to redeem part of our outstanding convertible debt and entered into the exchange agreements with some of the debenture and warrant holders. Pursuant to the Exchange Agreements, we issued 1,441,743 new ordinary shares in the form of ADRs in exchange for 4,558 Convertible Debentures and 986,965 warrants, reducing the nominal amout of our outstanding convertible debt to $10.5 million.
Under current French foreign exchange control regulations, there are no limitations on the amount of cash payments that we may remit to residents of foreign countries. Laws and regulations concerning foreign exchange controls do require, however, that all payments or transfers of funds made by a French resident to a non-resident be handled by an accredited intermediary. All registered banks and credit institutions in France are accredited intermediaries.
The following generally summarizes the material French tax consequences of purchasing, owning and disposing of Shares or ADSs. The statements relating to French tax laws set forth below are based on the laws in force as of the date hereof, and are subject to any future changes in applicable laws and tax treaties.
This discussion is intended only as a descriptive summary and does not purport to be a complete analysis or listing of all potential tax effects of the purchase, ownership or disposition of Shares or ADSs. It does not constitute legal or tax advice. The following summary does not address the treatment of Shares or ADSs that are held by a resident of France (except for purposes of describing related tax consequences for other holders) or in connection with a permanent establishment or fixed base through which a holder carries on business or performs personal services in France, or by a person that owns, directly or indirectly, 5% or more of the stock of the Company. Moreover, the following discussion of the tax treatment of dividends only deals with distributions made on or after January 1, 2006.
There are currently no procedures available for holders that are not U.S. residents to claim tax treaty benefits in respect of dividends received on ADSs or Shares registered in the name of a nominee. Such holders should consult their own tax advisor about the consequences of owning and disposing of ADSs or Shares.
Investors should consult their own tax advisors regarding the tax consequences of the purchase, ownership and disposition of shares in light of their particular circumstances.
Dividends received by French resident individuals are either included in their total income and subject to the progressive income tax plus social contributions, or they can alternatively be subject to an 18% levy source plus social contributions (i.e. a global rate of 30.1%) at the option of the beneficiary.
As a result of the French Finance Act for 2008, French resident individuals can elect to have all or part of the dividends received subject to an 18% levy at source at the irrevocable option of the shareholder exercised no later than at the time of the payment if it occurs in France. If the option is exercised only for a portion of the dividends received during the year (whether they are distributed by EDAP or any other company), the remaining dividends subject to the progressive income tax lose the benefit of the aforementioned allowances and the Tax Credit. Holders of Shares are invited to contact their financial or tax advisor to be informed of the consequences of such option on their tax situation and the terms and conditions of exercising the option and the payment of the levy at source as well as the reporting obligations related to such option when the paying agent is not located in France.
France imposes estate and gift tax on shares or ADSs of a French corporation that are acquired by inheritance or gift. The tax applies without regard to the tax residence of the transferor. However, France has entered into estate and gift tax treaties with a number of countries pursuant to which, assuming certain conditions are met, residents of the treaty country may be exempted from such tax or obtain a tax credit.
Taxation of U.S. Investors
In particular, the United States and France signed a protocol on January 13, 2009, that entered into force on December 23, 2009 and make several significant changes to the Treaty, including changes to the “Limitation of Benefits” provision. U.S. holders are advised to consult their own tax advisors regarding the effect the protocol may have on their eligibility for Treaty benefits in light of their own particular circumstances.
A holder generally will be entitled to Treaty benefits in respect of Shares or ADSs if he is concurrently:
Special rules apply to pension funds and certain other tax-exempt investors.
If a partnership holds Shares of ADSs, the tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. If a U.S. Holder is a partner in a partnership that holds Shares or ADSs, the holder is urged to consult its own tax advisor regarding the specific tax consequences of owning and disposing of its Shares and ADSs.
For U.S. federal income tax purposes, a U.S. holder’s ownership of the Company’s ADSs will be treated as ownership of the Company’s underlying shares.
This summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to any particular investor, and does not discuss tax considerations that arise from rules of general application or that are generally assumed to be known by investors. In particular, the summary does not deal with Shares or ADSs that are not held as capital assets, and does not address the tax treatment of holders that are subject to special rules, such as banks, insurance companies, dealers in securities or currencies, regulated investment companies, persons that elect mark-to-market treatment, persons holding Shares or ADSs as a position in a synthetic security, straddle or conversion transaction, persons that own, directly or indirectly, 5% or more of the Company’s voting stock or 5% or more of the Company’s outstanding capital and persons whose functional currency is not the U.S. dollar.
This summary does not discuss the treatment of shares or ADSs that are held in connection with a permanent establishment or fixed base through which a holder carries on business or performs personal services in France. The summary is based on laws, treaties, regulatory interpretations and judicial decisions in effect on the date hereof, all of which are subject to change. Such changes could apply retroactively and could affect the consequences described below.
Holders should consult their own tax advisors regarding the tax consequences of the purchase, ownership and disposition of Shares or ADSs in the light of their particular circumstances, including the effect of any state, local, or other national laws.
Generally, dividend distributions to non-residents of France are subject to French withholding tax at a 25% rate (reduced to 18% since January 1, 2008 when non-residents are individuals resident from one of the countries of the European Economic Area, except Liechtenstein) or to 50% as from March 1, 2010 if paid towards non-cooperative States or territories, as defined in Article 238-0 A of the French General Tax Code, irrespective of the tax residence of the beneficiary of the dividends if the dividends are received in such States or territories.
Under the Treaty, the rate of French withholding tax on dividends paid to an eligible U.S. holder whose ownership of the ordinary shares or ADSs is not effectively connected with a permanent establishment or fixed base that such U.S. holder has in France is reduced to 15% and a U.S. holder may claim a refund from the French tax authorities of the amount withheld in excess of the Treaty rate of 15%, if any. For U.S. holders that are not individuals, the requirements for eligibility for Treaty benefits, including the reduced 15% withholding tax rate, contained in the “Limitation on Benefits” provision of the Treaty are complicated, and certain technical changes were made to these requirements by the new protocol. U.S. holders are advised to consult their own tax advisers regarding their eligibility for Treaty benefits in light of their own particular circumstances.
French withholding tax will be withheld at the 15% Treaty rate if a U.S. holder has established before the date of payment that the holder is a resident of the United States under the Treaty by following the simplified procedure described below.
The gross amount of dividends that a U.S. holder receives (before the deduction of French withholding tax) generally will be subject to U.S. federal income taxation as ordinary dividend income to the extent paid or deemed paid out of the current or accumulated earnings and profits of the Company (as determined under U.S. federal income tax principles). Such dividends will not be eligible for the dividends received deduction generally allowed to U.S. corporations. To the extent that an amount received by a U.S. holder exceeds the allocable share of current and accumulated earnings and profits of the Company, such excess will be applied first to reduce such U.S. holder’s tax basis in its Shares or ADSs and then, to the extent it exceeds the U.S. holder’s tax basis, it will constitute capital gain from a deemed sale or exchange of such Shares or ADSs. As the Company does not maintain “earnings and profits” computations, holders should assume that all distributions constitute dividends.
Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual before January 1, 2011 with respect to the Shares or ADSs will be subject to taxation at a maximum rate of 15% if the dividends are “qualified dividends.” Dividends paid on the Shares or ADSs will be treated as qualified dividends if (i) the issuer is eligible for the benefits of a comprehensive income tax treaty with the United States that the IRS has approved for the purposes of the qualified dividend rules and (ii) the Company was not, in the year prior to the year in which the dividend was paid, and is not, in the year in which the dividend is paid, a passive foreign investment company (“PFIC”). The Treaty has been approved for the purposes of the qualified dividend rules. Based on the Company’s audited financial statements and relevant market and shareholder data, we believe that the Company was not treated as a PFIC for U.S. federal income tax purposes with respect to its 2009 taxable year. In addition, based on the Company’s audited financial statements and our current expectations regarding the value and nature of its assets, the sources and nature of its income, and relevant market and shareholder data, we do not anticipate it becoming a PFIC for the 2010 taxable year (as described under “—Passive Foreign Investment Company Rules” below). Accordingly, dividends paid by us in 2010 to a U.S. holder should constitute “qualified dividends”.
Holders of ADSs and Shares should consult their own tax advisers regarding the availability of the reduced dividend tax rate in light of their own particular circumstances.
Dividends distributed with respect to the Shares or ADSs generally will be treated as dividend income from sources outside of the United States, and generally will be treated as “passive category” (or, in the case of certain U.S. holders, “general category”) income for U.S. foreign tax credit purposes. Subject to certain limitations, French income tax withheld in connection with any distribution with respect to the Shares or ADSs may be claimed as a credit against the U.S. federal income tax liability of a U.S. holder if such U.S. holder elects for that year to credit all foreign income taxes. Alternatively, such French withholding tax may be taken as a deduction against taxable income. Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions in securities and may not be allowed in respect of certain arrangements in which a U.S. holder’s expected economic profit is insubstantial. U.S. holders should consult their own tax advisors concerning the implications of these rules in light of their particular circumstances.
Dividends paid in euro will be included in the income of a U.S. holder in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of receipt by the holder (or, in the case of the ADSs, by the Depositary), regardless of whether the payment is in fact converted into U.S. dollars. If such a dividend is converted into U.S. dollars on the date of receipt, a U.S. holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend income.
The French tax authorities issued guidelines in Instruction n° 4-J-1-05, dated February 25, 2005 that significantly changed the formalities to be complied with by non-resident shareholders, including U.S. holders, in order to obtain the reduced withholding tax rate on distributions made on or after January 1, 2005.
Pursuant to these guidelines, U.S. holders can either claim Treaty benefits under a simplified procedure or under the normal procedure. The procedure to be followed depends on whether the application for Treaty benefits is filed before or after the dividend payment.
Under the simplified procedure, in order to benefit from the lower rate of withholding tax applicable under the Treaty before the payment of the dividend, a U.S. holder must complete and deliver to the paying agent (through its account holder) a treaty form (Form 5000), to certify in particular that:
For partnerships or trusts, claims for Treaty benefits and related attestations are made by the partners, beneficiaries or grantors who also have to supply certain additional documentation.
In order to be eligible for Treaty benefits, pension funds and certain other tax-exempt U.S. holders must comply with the simplified procedure described above, though they may be required to supply additional documentation evidencing their entitlement to those benefits.
If Form 5000 is not filed prior to the dividend payment, a withholding tax will be levied at the 25% rate, and a holder would have to claim a refund for the excess under the normal procedure by filing both Form 5000 and Form 5001 no later than December 31 of the second calendar year following the year in which the dividend is paid.
Pension funds and certain other tax-exempt entities are subject to the same general filing requirements as other U.S. holders except that they may have to supply additional documentation evidencing their entitlement to these benefits.
Under the Treaty, a U.S. holder will not be subject to French tax on any gain derived from the sale or exchange of Shares or ADSs, unless the gain is effectively connected with a permanent establishment or fixed base maintained by the holder in France.
For U.S. federal income tax purposes, gain or loss realized by a U.S. holder on the sale or other disposition of Shares or ADSs will be capital gain or loss, and will be long-term capital gain or loss if the Shares or ADSs were held for more than one year. The net amount of long-term capital gain recognized by an individual U.S. holder before January 1, 2011 generally is subject to taxation at a maximum rate of 15%. U.S. holders’ ability to offset capital losses against ordinary income is limited.
Unfavorable U.S. tax rules (the “PFIC rules”) apply to companies that are considered passive foreign investment companies (“PFICs”). The Company will be classified as a PFIC in a particular taxable year if either (a) 75% or more of its gross income is treated as passive income for purposes of the PFIC rules; or (b) the average percentage of the value of its assets that produce or are held for the production of passive income is at least 50%.
Under the estate and gift tax convention between the United States and France, a transfer of Shares or ADSs by gift or by reason of the death of a U.S. holder entitled to benefits under that convention will not be subject to French gift or inheritance tax, so long as the donor or decedent was not domiciled in France at the time of the transfer, and Shares or ADSs were not used or held for use in the conduct of a business or profession through a permanent establishment or fixed base in France.
The French wealth tax does not generally apply to Shares or ADSs of a U.S. holder if the holder is a resident of the United States for purposes of the Treaty.
U.S. Information Reporting and Backup Withholding Rules
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and may be subject to backup withholding unless the holder (i) is a corporation or other exempt recipient or (ii) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Holders that are not U.S. persons generally are not subject to information reporting or backup withholding. However, such a holder may be required to provide a certification of its non- U.S. status in connection with payments received within the United States or through a U.S.-related financial intermediary.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in both foreign currency exchange rates and interest rates. We do not hold or issue derivative or other financial instruments. As of December 31, 2010, we had no outstanding foreign exchange sale or purchase contracts.
We are exposed to foreign currency exchange rate risk because a significant portion of our costs are denominated in currencies other than those in which we earn revenues. In 2010, approximately 66% of our total operating expenses were denominated in euro. During the same period, approximately 59% of our sales were denominated in euro, the rest being denominated primarily in U.S. dollars and Japanese yen.
A uniform 10% strengthening in the value of the euro as of December 31, 2010 relative to the U.S. dollar and the Japanese yen would have resulted in an increase in income before taxes and minority interests of approximately €309,000 for the year ended December 31, 2010, compared to a increase of approximately €223,000 for the year ended December 31, 2009. This calculation assumes that the U.S. dollar and Japanese yen exchange rates would have changed in the same direction relative to the euro. In addition to the direct effect of changes in exchange rates quantified above, changes in exchange rates also affect the volume of sales.
We regularly assess the exposure of our receivables to fluctuations in the exchange rates of the principal foreign currencies in which our sales are denominated (in particular, the U.S. dollar and the Japanese yen) and, from time to time, hedge such exposure by entering into forward sale contracts for the amounts denominated in such currencies that we expect to receive from our local subsidiaries. As of December 31, 2010 we had no outstanding hedging instruments.
Over the past three years, we also had exchange rate exposures with respect to indebtedness and assets denominated in Japanese yen and U.S. dollars. Approximately €0.675 million, €0.568 million and €0.231 million of our outstanding indebtedness at December 31, 2010, 2009 and 2008, respectively, were denominated in Japanese yen. Approximately €9.4 million, €9.7 million and €9.3 million of our outstanding indebtedness at December 31, 2010, 2009 and 2008, respectively, were denominated in U.S. dollars. See “Risk Factors—Risks relating to the October 2007 Private Placement.”
In addition, we had approximately €4.9 million, €7.9 million and €9.6 million of cash denominated in U.S. dollars at December 31, 2010, 2009 and 2008, respectively, and €0.7 million, €1.0 million and €0.5 million of cash denominated in Japanese yen at December 31, 2010, 2009 and 2008, respectively.
Item 12. Description of Securities Other than Equity Securities
The Bank of New York Mellon, as the Company’s Depositary, currently collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. With respect to our Senior Convertible Debenture contract, fees for delivery of ADS directly linked to a debenture conversion, a warrant exercise or the payment of quarterly interest shares are supported by the Company.
The Depositary may collect fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable properly to pay the fees. The Depositary may collect its annual fee for Depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The Depositary may generally refuse to provide fee-attracting services until fees for those services are paid.
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of December 31, 2010. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of such date. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely discussions regarding required disclosure.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed 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.
Because of inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This annual report does not include the attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.
No change in the Company’s internal control over financial reporting occurred as of the end of the period covered by this report that has materially affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Our Board of Directors has determined that the chair of the Board’s Audit Committee, Mr. Pierre Beysson, an independent Director, qualifies as an audit committee financial expert.
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
The ‘‘Audit and Non-Audit Services Pre-Approval Policy’’ was approved by our Audit Committee on December 22, 2003 (the “2003 Rules”) and reviewed on July 22, 2005. This requires all services which are to be performed by our external auditors to be pre-approved. Pre-approval may be in the form of a general pre-approval or as pre-approval on a case-by-case basis. All services to be performed by the external auditors were subjected to the above policy and approved in advance. The Audit Committee has been regularly informed of the services and the fees to be paid. Our external auditors Ernst & Young Audit (“E&Y”) billed the following services related to our 2010 financial year:
The following services were billed under the category ‘‘audit services’’: audit of financial statements and services performed in relation to legal obligations, including the formulation of audit opinions and reports, domestic and international legal audits and support in the preparation and auditing of the documents to be filed. Audit services also included the auditing of information systems and processes and tests, which serve to promote understanding and reliability of the systems and internal corporate controls, as well as advice on issues of billing, accounting and reporting.
Audit-related services mainly consisted of services that are normally performed by the external auditor in connection with the auditing of the annual financial statements. Audit-related services also included advice on issues of accounting and reporting which were not classified as audit services, support with the interpretation and implementation of new accounting and reporting standards, auditing of employee benefit plans and support with the implementation of corporate control requirements for reporting.
Tax services consisted of services relating to issues of domestic and international taxation (adherence to tax law, tax planning and tax consulting). Furthermore, services were commissioned for the review of tax returns, assistance with tax audits, as well as assistance relating to tax law.
Other services mainly consisted of routine and administrative follow-up of patents and brand names. All these services were unrelated to the audits of our financial statements.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In 2010, one Director acquired 17,500 shares of EDAP TMS. There was no other purchase of equity securities of the Company registered pursuant to Section 12 of the Exchange Act by the Company or by affiliated purchasers.
Not applicable.
NASDAQ rules provide for exemptions from the NASDAQ corporate governance standards to a foreign issuer when those standards are contrary to a law, rule or regulation of any public authority exercising jurisdiction over such issuer or contrary to generally accepted business practices in the issuer’s country of domicile. We received from NASDAQ an exemption from compliance with one corporate governance standard that is contrary to the French corporate law. The exemption, and the practices followed by the Company, are described below.
Item 17. Financial Statements.
Item 18. Financial Statements
The financial statements listed in the Index to Financial Statements are filed as a part of this annual report.
Item 19. Exhibits
The exhibits listed in the Index to Exhibits are filed or incorporated by reference as a part of this annual report.
Pursuant to the rules and regulations of the Securities and Exchange Commission, the Company has filed certain agreements as exhibits to this annual report on Form 20-F. These agreements may contain representations and warranties by the parties. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may be intended not as statements of fact, but rather as a way of allocating the risk to one of the parties to such agreements if those statements turn out to be inaccurate; (ii) may have been qualified by disclosures that were made to such other party or parties and that either have been reflected in the Company’s filings or are not required to be disclosed in those filings; (iii) may apply materiality standards different from what may be viewed as material to investors; and (iv) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments. Accordingly, these representations and warranties may not describe the Company’s actual state of affairs at the date hereof.
8.1 List of subsidiaries of EDAP TMS S.A. as of March 31, 2011.
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
INDEX TO FINANCIAL STATEMENTS
Audited Consolidated Financial Statements for EDAP TMS S.A. and Subsidiaries for the Years Ended December 31, 2010, 2009 and 2008
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders of EDAP TMS S.A.,
We have audited the accompanying consolidated balance sheets of EDAP TMS S.A. and subsidiaries as of December 31, 2009 and 2010, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the three years ended December 31, 2010. These consolidated financial statements are the responsibility of EDAP TMS's management. Our responsibility is to express an opinion on these consolidated 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EDAP TMS S.A. and subsidiaries at December 31, 2009 and 2010, and the consolidated results of its operations and its cash flows for the three years ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
ERNST & YOUNG Audit
/s/ JACQUES FOURNIER
Represented by
Jacques Fournier
March 31, 2011
Lyon, France
EDAP TMS S.A. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
As of December 31, 2010 and 2009
(in thousands of euros unless otherwise noted)
| ASSETS | | Notes | | | 2010 | | | 2009 | |
| Current assets | | | | | | | | | |
Cash and cash equivalents | | | 2 | | | | 7,369 | | | | 11,590 | |
Net Trade accounts and notes receivable | | | 3 | | | | 15,441 | | | | 14,802 | |
Other receivables | | | 4 | | | | 650 | | | | 723 | |
Inventories | | | 5 | | | | 3,917 | | | | 3,794 | |
Deferred tax assets | | | 21-3 | | | | 282 | | | | 355 | |
Other assets, current portion | | | 6 | | | | 687 | | | | 870 | |
Short-term investment | | | 2 | | | | 1,519 | | | | 1,113 | |
Total current assets | | | | | | | 29,865 | | | | 33,248 | |
Other assets, non-current | | | 6 | | | | 187 | | | | 861 | |
Property and equipment, net | | | 7 | | | | 2,877 | | | | 3,288 | |
Intangible assets, net | | | 8 | | | | 82 | | | | 103 | |
Goodwill | | | 8 | | | | 2,412 | | | | 2,412 | |
Deposits and other non-current assets | | | | | | | 515 | | | | 466 | |
Total assets | | | | | | | 35,938 | | | | 40,378 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | |
| Current liabilities | | | | | | | | | | | | |
Trade accounts and notes payable | | | 9 | | | | 5,899 | | | | 5,734 | |
Deferred revenues, current portion | | | 10 | | | | 578 | | | | 558 | |
Social security and other payroll withholdings taxes | | | | | | | 837 | | | | 823 | |
Employee absences compensation | | | | | | | 488 | | | | 466 | |
Income taxes payable | | | | | | | 48 | | | | 124 | |
Other accrued liabilities | | | 11 | | | | 3,768 | | | | 3,784 | |
Short-term borrowings | | | 13 | | | | 2,031 | | | | 2,675 | |
Current portion of capital lease obligations | | | 12 | | | | 688 | | | | 837 | |
Current portion of long-term debt | | | 14 | | | | 322 | | | | 173 | |
Total current liabilities | | | | | | | 14,658 | | | | 15,175 | |
Deferred revenues, non current | | | 10 | | | | 297 | | | | 330 | |
Capital lease obligations, non current | | | 12 | | | | 961 | | | | 1,372 | |
Convertible debentures carried at fair value | | | 14 | | | | 8,121 | | | | 8,934 | |
Financial instruments carried at fair value | | | 14 | | | | 1,287 | | | | 808 | |
Long-term debt, non current | | | 14 | | | | 668 | | | | 396 | |
Other long-term liabilities | | | 15 | | | | 1,047 | | | | 784 | |
Total liabilities | | | | | | | 27,038 | | | | 27,799 | |
| Shareholders’ equity | | | | | | | | | | | | |
| Common stock, €0.13 par value; 13,389,929 shares issued and 13,008,401 shares outstanding; 10,909,833 shares issued and 10,510,305 shares outstanding; | | | | | | | | | | | | |
at December 31, 2010 and 2009, respectively | | | | | | | 1,741 | | | | 1,418 | |
Additional paid-in capital | | | | | | | 38,870 | | | | 29,961 | |
Retained earnings | | | | | | | (27,151 | ) | | | (14,436 | ) |
Cumulative other comprehensive loss | | | | | | | (3,386 | ) | | | (3,131 | ) |
| Treasury stock, at cost; 381,528 and 399,528 at December 31, 2010 and 2009, respectively | | | | | | | (1,172 | ) | | | (1,233 | ) |
Total shareholders’ equity | | | 16 | | | | 8,900 | | | | 12,579 | |
Total liabilities and shareholders’ equity | | | | | | | 35,938 | | | | 40,378 | |
EDAP TMS S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2010, 2009 and 2008
(in thousands of euros unless otherwise noted)
| | | Notes | | | 2010 | | | 2009 | | | 2008(2) | |
Sales of goods | | | | | | 13,135 | | | | 13,775 | | | | 12,547 | |
Sales of RPPs & leases | | | | | | 4,689 | | | | 5,444 | | | | 4,664 | |
Sales of spare parts and services | | | | | | 5,378 | | | | 5,620 | | | | 5,645 | |
Total sales | | | | | | 23,202 | | | | 24,839 | | | | 22,856 | |
Total net sales | | | | | | 23,202 | | | | 24,839 | | | | 22,856 | |
Other revenues | | | 17 | | | | 506 | | | | 46 | | | | 197 | |
Total revenues | | | | | | | 23,708 | | | | 24,885 | | | | 23,053 | |
| | | | | | | | | | | | | | | | | |
Cost of goods | | | | | | | (7,656 | ) | | | (7,847 | ) | | | (8,395 | ) |
Cost of RPPs & leases | | | | | | | (2,641 | ) | | | (2,768 | ) | | | (2,546 | ) |
Cost of spare parts and services | | | | | | | (3,956 | ) | | | (3,598 | ) | | | (3,014 | ) |
Total cost of sales | | | | | | | (14,253 | ) | | | (14,213 | ) | | | (13,955 | ) |
| | | | | | | | | | | | | | | | | |
Gross profit | | | | | | | 9,455 | | | | 10,672 | | | | 9,099 | |
| | | | | | | | | | | | | | | | | |
Research and development expenses | | | 18 | | | | (3,268 | ) | | | (3,651 | ) | | | (3,712 | ) |
Selling and marketing expenses | | | | | | | (6,684 | ) | | | (6,401 | ) | | | (5,684 | ) |
General and administrative expenses | | | | | | | (3,320 | ) | | | (3,822 | ) | | | (3,862 | ) |
| | | | | | | | | | | | | | | | | |
Non-recurring operating expenses | | | 19 | | | | | | | | | | | | | |
Loss from operations | | | | | | | (3,818 | ) | | | (3,202 | ) | | | (4,159 | ) |
Financial (expense) income, net | | | 20 | | | | (8,844 | ) | | | (4,390 | ) | | | 5,232 | |
Foreign currency exchange gain (loss), net | | | | | | | 884 | | | | (101 | ) | | | 577 | |
Other income (expense), net | | | | | | | - | | | | - | | | | (1 | ) |
Income (loss) before taxes | | | | | | | (11,778 | ) | | | (7,694 | ) | | | 1,648 | |
Income tax (expense) benefit | | | 21 | | | | (939 | ) | | | (72 | ) | | | (51 | ) |
Net income (loss) | | | | | | | (12,717 | ) | | | (7,766 | ) | | | 1,597 | |
Basic income (loss) per share | | | 22 | | | | (0.98 | ) | | | (0.74 | ) | | | 0.17 | |
Diluted income (loss) per share(1) | | | 22 | | | | (0.98 | ) | | | (0.74 | ) | | | 0.17 | |
Basic Weighted average shares outstanding | | | 22 | | | | 13,008,401 | | | | 10,510,305 | | | | 9,582,593 | |
Diluted Weighted average shares outstanding | | | 22 | | | | 13,094,235 | | | | 10,567,563 | | | | 9,658,295 | |
| (1) | Due to the net losses in 2010 and 2009, the assumed net exercise of stock options/warrants and stock relating to the convertible bonds in those years was excluded, as the effect would have been anti-dilutive. |
| (2) | Certain prior years amounts have been reclassified to conform to the current year’s presentation (see Note 1-15 Research and development costs) |
The accompanying notes are an integral part of the consolidated financial statements.
EDAP TMS S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 2010, 2009 and 2008
(in thousands of euros unless otherwise noted)
| | | 2010 | | | 2009 | | | 2008 | |
| Net income (loss) | | | (12,717 | ) | | | (7,766 | ) | | | 1,597 | |
| Other comprehensive loss: | | | | | | | | | | | | |
| Foreign currency translation adjustments | | | (93 | ) | | | 123 | | | | (168 | ) |
| Provision for retirement indemnities | | | (162 | ) | | | 32 | | | | (34 | ) |
| Comprehensive income (loss), net of tax | | | (12,972 | ) | | | (7,611 | ) | | | 1,395 | |
The accompanying notes are an integral part of the consolidated financial statements.
EDAP TMS S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended December 31, 2010, 2009 and 2008
(in thousands of euros unless otherwise noted)
| | | Number of Shares | | | Common Stock | | | Additional paid-in Capital | | | Retained Earnings | | | Cumulative Other Comprehensive Income (loss) | | | Treasury Stock | | | Total | |
| Balance as of January 1, 2008 | | | 9,200,757 | | | | 1,251 | | | | 25,896 | | | | (8,265 | ) | | | (3,082 | ) | | | (1,301 | ) | | | 14,499 | |
Net income | | | | | | | | | | | | | | | 1,597 | | | | | | | | | | | | 1,597 | |
Translation adjustment | | | | | | | | | | | | | | | | | | | (168 | ) | | | | | | | (168 | ) |
| Warrants and stock options granted | | | | | | | | | | | 699 | | | | | | | | | | | | | | | | 699 | |
Capital increase | | | 381,836 | | | | 50 | | | | 550 | | | | | | | | | | | | | | | | 599 | |
| Provision for retirement indemnities | | | | | | | | | | | | | | | | | | | (34 | ) | | | | | | | (34 | ) |
| Balance as of December 31, 2008 | | | 9,582,593 | | | | 1,301 | | | | 27,145 | | | | (6,668 | ) | | | (3,285 | ) | | | (1,301 | ) | | | 17,191 | |
Net income | | | | | | | | | | | | | | | (7,766 | ) | | | | | | | | | | | (7,766 | ) |
Translation adjustment | | | | | | | | | | | | | | | | | | | 123 | | | | | | | | 123 | |
| Warrants and stock options granted | | | 24,212 | | | | | | | | 312 | | | | | | | | | | | | 68 | | | | 380 | |
Capital increase | | | 903,500 | | | | 117 | | | | 2,504 | | | | (2 | ) | | | | | | | | | | | 2,620 | |
| Provision for retirement indemnities | | | | | | | | | | | | | | | | | | | 32 | | | | | | | | 32 | |
| Balance as of December 31, 2009 | | | 10,510,305 | | | | 1,418 | | | | 29,961 | | | | (14,436 | ) | | | (3,131 | ) | | | (1,233 | ) | | | 12,579 | |
Net loss | | | | | | | | | | | | | | | (12,717 | ) | | | | | | | | | | | (12,717 | ) |
Translation adjustment | | | | | | | | | | | | | | | | | | | (93 | ) | | | | | | | (93 | ) |
| Warrants and stock options granted | | | 18,000 | | | | | | | | 265 | | | | | | | | | | | | 62 | | | | 327 | |
Capital increase | | | 2,480,096 | | | | 322 | | | | 8,644 | | | | | | | | | | | | | | | | 8,966 | |
| Provision for retirement indemnities | | | | | | | | | | | | | | | | | | | (162 | ) | | | | | | | (162 | ) |
| Balance as of December 31, 2010 | | | 13,008,401 | | | | 1,740 | | | | 38,870 | | | | (27,154 | ) | | | (3,386 | ) | | | (1,172 | ) | | | 8,900 | |
The accompanying notes are an integral part of the consolidated financial statements.
EDAP TMS S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2010, 2009 and 2008
(in thousands of euros unless otherwise noted).
| | | 2010 | | | 2009 | | | 2008 | |
| Cash flows from operating activities | | | | | | | | | |
Net income (loss) | | | (12,717 | ) | | | (7,766 | ) | | | 1,597 | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 1,233 | | | | 1,801 | | | | 1,785 | |
Change in fair value on Convertible Debentures | | | 3,434 | | | | 2,342 | | | | (3,465 | ) |
| Change in fair value on Investors Warrants and Placement Agent Warrants | | | 2,619 | | | | 376 | | | | (3,238 | ) |
Other Non-cash compensation | | | 489 | | | | 528 | | | | 684 | |
| Change in allowances for doubtful accounts & slow-moving inventories | | | 186 | | | | (330 | ) | | | 394 | |
Change in long-term provisions | | | (21 | ) | | | 294 | | | | 325 | |
Net capital loss on disposals of assets | | | 78 | | | | 119 | | | | 255 | |
Deferred tax expense (benefit) | | | 180 | | | | (57 | ) | | | (77 | ) |
Operating cash flow | | | (4,519 | ) | | | (2,693 | ) | | | (1,740 | ) |
| Increase/Decrease in operating assets and liabilities: | | | | | | | | | | | | |
| Decrease (Increase) in trade accounts and notes and other receivables | | | 146 | | | | (903 | ) | | | (3,467 | ) |
Decrease (Increase) in inventories | | | (355 | ) | | | (319 | ) | | | (126 | ) |
Decrease (Increase) in other assets | | | 940 | | | | 504 | | | | 26 | |
(Decrease) Increase in trade accounts and notes payable | | | 192 | | | | (307 | ) | | | 561 | |
| (Decrease) Increase in accrued expenses, other current liabilities | | | (223 | ) | | | 54 | | | | 152 | |
Net increase (decrease) in operating assets and liabilities | | | 700 | | | | (971 | ) | | | (2,854 | ) |
Net cash used in operating activities | | | (3,818 | ) | | | (3,664 | ) | | | (4,593 | ) |
| Cash flows from investing activities: | | | | | | | | | | | | |
Additions to capitalized assets produced by the Company | | | (244 | ) | | | (383 | ) | | | (687 | ) |
Net proceeds from sale of leased back assets | | | 283 | | | | 1,079 | | | | 1,108 | |
Acquisitions of property and equipment | | | (352 | ) | | | (320 | ) | | | (373 | ) |
Acquisitions of intangible assets | | | (13 | ) | | | (35 | ) | | | (57 | ) |
Acquisitions of short term investments, net | | | (406 | ) | | | (8 | ) | | | (691 | ) |
Net proceeds from sale of assets | | | 39 | | | | 71 | | | | | |
Increase (decrease) in deposits and guarantees, net | | | 8 | | | | (2 | ) | | | (11 | ) |
Net cash generated by (used in) investing activities | | | (685 | ) | | | 402 | | | | (712 | ) |
| Cash flow from financing activities: | | | | | | | | | | | | |
| Proceeds from capital increase | | | 8,966 | | | | 2,620 | | | | 600 | |
Proceeds from long term borrowings, net of financing costs | | | 598 | | | | 499 | | | | 238 | |
Repayment of long term borrowings | | | (7,424 | ) | | | (2,161 | ) | | | (65 | ) |
Repayment of obligations under capital leases | | | (843 | ) | | | (888 | ) | | | (636 | ) |
| Increase (decrease) in bank overdrafts and short-term borrowings | | | (644 | ) | | | 922 | | | | 159 | |
Net cash generated by financing activities | | | 652 | | | | 992 | | | | 296 | |
| Net effect of exchange rate changes on cash and cash equivalents | | | (369 | ) | | | 33 | | | | 1,313 | |
Net decrease in cash and cash equivalents | | | (4,221 | ) | | | (2,237 | ) | | | (3,696 | ) |
Cash and cash equivalents at beginning of year | | | 11,590 | | | | 13,827 | | | | 17,523 | |
Cash and cash equivalents at end of year | | | 7,369 | | | | 11,590 | | | | 13,827 | |
The accompanying notes are an integral part of the consolidated financial statements.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1-1 Nature of operations
EDAP TMS S.A. and its subsidiaries (‘‘the Company’’) are engaged in the development, production, marketing, distribution and maintenance of a portfolio of minimally-invasive medical devices for the treatment of urological diseases. The Company currently produces devices for treating stones of the urinary tract and localized prostate cancer. Net sales consist primarily of direct sales to hospitals and clinics in France and Europe, export sales to third-party distributors and agents, and export sales through subsidiaries based in Germany, Italy and Asia.
The Company purchases the majority of the components used in its products from a number of suppliers but for some components, relies on a single source. Delay would be caused if the supply of these components or other components was interrupted and these delays could be extended in certain situations where a component substitution may require regulatory approval. Failure to obtain adequate supplies of these components in a timely manner could have a material adverse effect on the Company’s business, financial position and results of operation.
1-2 Management estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (‘‘U.S. GAAP’’) requires management to make estimates and assumptions, such as business plans, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
1-3 Consolidation
The accompanying consolidated financial statements include the accounts of EDAP TMS S.A. and all its domestic and foreign owned subsidiaries, which include EDAP TMS France SAS, EDAP Technomed Inc., Edap Technomed Sdn Bhd, Edap Technomed Italia S.R.L, EDAP Technomed Co. Ltd. and EDAP TMS Gmbh. Edap Technomed Sdn Bhd was incorporated in early 1997. Edap Technomed Co. Ltd. was created in late 1996. EDAP TMS Gmbh was created in July 2006. EDAP SA, a subsidiary incorporating HIFU activities merged all of its activity into EDAP TMS France SAS in 2008. All intercompany transactions and balances are eliminated in consolidation
1-4 Revenue recognition
Sales of goods:
For medical device sales with no significant remaining vendor obligation, payments contingent upon customer financing, acceptance criteria that can be subjectively interpreted by the customer, or tied to the use of the device, revenue is recognized when evidence of an arrangement exists, title to the device passes (depending on terms, either upon shipment or delivery), and the customer has the intent and ability to pay in accordance with contract payment terms that are fixed or determinable. For sales in which payment is contingent upon customer financing, acceptance criteria can be subjectively interpreted by the customer, or payment depends on use of the device, revenue is recognized when the contingency is resolved. The Company provides training and provides a minimum of one-year warranty upon installation. The Company accrues for the estimated training and warranty costs at the time of sale. Revenues related to disposables are recognized when goods are delivered.
Sales of RPPs and leases:
Revenues related to the sale of Ablatherm treatments invoiced on a ‘‘Revenue-Per-Procedure’’ (‘‘RPP’’) basis are recognized when the treatment procedure has been completed. Revenues from devices leased to customers under operating leases are recognized on a straight-line basis.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
Sales of spare parts and services:
Revenues related to spare parts are recognized when goods are delivered. Maintenance contracts rarely exceed one year and are recognized on a linear basis. Billings or cash receipts in advance of services due under maintenance contracts are recorded as deferred revenue.
1-5 Shipping and handling costs
The Company recognizes revenue from the shipping and handling of its products as a component of revenue. Shipping and handling costs are recorded as a component of cost of sales.
1-6 Cash equivalents and short term investments
Cash equivalents are cash investments which are highly liquid and have initial maturities of 90 days or less.
Cash investments with a maturity higher than 90 days are considered as short-term investments.
1-7 Accounts Receivables
Accounts receivables are stated at cost net of allowances for doubtful accounts. The Company makes judgments as to its ability to collect outstanding receivables and provides allowances for the portion of receivables when collection becomes doubtful. Provision is made based upon a specific review of all significant outstanding invoices. These estimates are based on our bad debt write-off experience, analysis of credit information, specific identification of probable bad debt based on our collection efforts, aging of accounts receivables and other known factors.
1-8 Inventories
Inventories are valued at the lower of manufacturing cost, which is principally comprised of components and labor costs, or market (net realizable value). Cost is determined on a first-in, first-out basis for components and spare parts and by specific identification for finished goods (medical devices). The Company establishes reserves for inventory estimated to be obsolete, unmarketable or slow moving, first based on a detailed comparison between quantity in inventory and historical consumption and then based on case-by-case analysis of the difference between the cost of inventory and the related estimated market value.
1-9 Property and equipment
Property and equipment is stated at historical cost. Depreciation and amortization of property and equipment are calculated using the straight-line method over the estimated useful life of the related assets, as follows:
Leasehold improvements...................................... 10 years or lease term if shorter
Equipment.............................................................. 3-10 years
Furniture, fixtures, fittings and other ................. 2-10 years
Equipment includes industrial equipment and research equipment that has alternative future uses. Equipment also includes devices that are manufactured by the Company and leased to customers through operating leases related to Revenue-Per-Procedure transactions and devices subject to sale and leaseback transactions. This equipment is depreciated over a period of seven years.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
1-10 Long-lived assets
The Company reviews the carrying value of its long-lived assets, including fixed assets and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Recoverability of long-lived assets is assessed by a comparison of the carrying amount of the assets (or the Group of assets, including the asset in question, that represents the lowest level of separately-identifiable cash flows) to the total estimated undiscounted cash flows expected to be generated by the asset or group of assets. If the future net undiscounted cash flows is less than the carrying amount of the asset or group of assets, the asset or group of assets is considered impaired and an expense is recognized equal to the amount required to reduce the carrying amount of the asset or group of assets to its then fair value. Fair value is determined by discounting the cash flows expected to be generated by the assets, when the quoted market prices are not available for the long-lived assets. Estimated future cash flows are based on assumptions and are subject to risk and uncertainty.
1-11 Goodwill and intangible assets
Goodwill represents the excess of purchase price over the fair value of identifiable net assets of businesses acquired. Goodwill is not amortized but instead tested annually for impairment or more frequently when events or change in circumstances indicate that the assets might be impaired by comparing the carrying value to the fair value of the reporting units to which it is assigned. Under ASC 350, “Goodwill and other intangible assets”, the impairment test is performed in two steps. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying amount, a second step is performed to measure the amount of impairment loss. The second step allocates the fair value of the reporting unit to the Company’s tangible and intangible assets and liabilities. This derives an implied fair value for the reporting unit’s goodwill. If the carrying amount of the reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized equal to that excess. For the purpose of any impairment test, the Company relies upon projections of future undiscounted cash flows and takes into account assumptions regarding the evolution of the market and its ability to successfully develop and commercialize its products.
Changes in market conditions could have a major impact on the valuation of these assets and could result in additional impairment losses.
Intangible assets consist primarily of purchased patents relating to lithotripters, purchased licenses, a purchased trade name and a purchased trademark. The basis for valuation of these assets is their historical acquisition cost. Amortization of intangible assets is calculated by the straight-line method over the shorter of the contractual or estimated useful life of the assets, as follows:
Patents.................................................................... 5 years
Licenses................................................................. 5 years
Trade name and trademark ................................. 7 years
Treasury stock purchases are accounted for at cost. The sale of treasury stocks is accounted for using the first in first out method. Gains on the sale or retirement of treasury stocks are accounted for as additional paid-in capital whereas losses on the sale or retirement of treasury stock are recorded as additional paid-in capital to the extent that previous net gains from sale or retirement of treasury stocks are included therein; otherwise the losses shall be recorded to accumulated benefit (deficit) account. Gains or losses from the sale or retirement of treasury stock do not affect reported results of operations.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
1-13 Warranty expenses
The Company generally provides customers with a warranty for each product sold and accrues warranty expense at time of sale based upon historical claims experience. Actual warranty costs incurred are charged against the accrual when paid and are classified in cost of sales in the statement of income. Warranty expense amounted to €555 thousand, €738 thousand and €768 thousand for the years ended December 31 2010, 2009 and 2008 respectively.
1-14 Income taxes
The Company accounts for income taxes in accordance with ASC 740, ‘‘Accounting for Income Taxes’’ Under ASC 740, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured by applying enacted tax rates and laws to taxable years in which such differences are expected to reverse. A valuation allowance is established if, based on the weight of available evidence, it is more likely than not that some portion, or all of the deferred tax assets, will not be realized. In accordance with ASC740, no provision has been made for income or withholding taxes on undistributed earnings of foreign subsidiaries, such undistributed earnings being permanently reinvested.
As of January 1, 2007, the Company adopted FIN48 (now ASC 740) "Accounting for uncertainty in income tax". Under ASC740, the measurement of a tax position that meets the more-likely-that-not recognition threshold must take into consideration the amounts and probabilities of the outcomes that could be realized upon ultimate settlement using the facts, circumstances and information available at the reporting date.
1-15 Research and development costs
Research and development costs are recorded as an expense in the period in which they are incurred.
The French government provides tax credits to companies for innovative research and development. This tax credit is calculated based on a percentage of eligible research and development costs and it can be refundable in cash.
In 2009, the Company reviewed the presentation of its research tax credit and elected to change for the preferred classification as permitted under ASC 250-10.
The research tax credit amounted to €327 thousand, €452 thousand and €544 thousand for the years ended December 31 2010, 2009 and 2008 respectively.
1-16 Advertising costs
Advertising costs are recorded as an expense in the period in which they are incurred. Advertising costs amounted to €920 thousand, €1,090 thousand and €1,408 thousand for the years ended December 31 2010, 2009 and 2008 respectively.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
1-17 Foreign currency translation and transactions
Translation of the financial statements of consolidated companies
The reporting currency of EDAP TMS S.A. for all years presented is the euro (€). The functional currency of each subsidiary is its local currency. In accordance with ASC 830, all accounts in the financial statements are translated into euro from the functional currency at exchange rate as follows:
| · | assets and liabilities are translated at year-end exchange rates; |
| · | shareholders’ equity is translated at historical exchange rates (as of the date of contribution); |
| · | statement of income items are translated at average exchange rates for the year; and |
| · | translation gains and losses are recorded in a separate component of shareholders’ equity. |
Foreign currencies transactions
Transactions involving foreign currencies are translated into the functional currency using the exchange rate prevailing at the time of the transactions. Receivables and payables denominated in foreign currencies are translated at year-end exchange rates. The resulting unrealized exchange gains and losses are carried to the statement of income.
1-18 Earnings per share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share reflects potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The dilutive effects of the Company’s common stock options and warrants is determined using the treasury stock method to measure the number of shares that are assumed to have been repurchased using the average market price during the period, which is converted from U.S. dollars at the average exchange rate for the period.
1-19 Derivative instruments
ASC 815 requires the Company to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, the Company must classify the hedging instrument, based upon the exposure being hedged, as fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.
Gains and losses from derivative instruments are recorded in the income statement.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
1-20 Employee stock option plans
At December 31, 2010, the Company had four stock-based employee compensation plans. The Company adopted ASC 718, “Share-Based Payment”, effective January 1, 2006. ASC 718 requires the recognition of fair value of stock compensation as an expense in the calculation of net income (loss).
The fair value of each stock option granted during the year is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
| | | Year Ended December 31, | |
| | | 2010 | | | 2009(1) | | | 2008(1) | |
Weighted-average expected life (years) | | | 6.25 | | | | — | | | | — | |
Expected volatility rates | | | 87 | % | | | — | | | | — | |
Expected dividend yield | | | — | | | | — | | | | — | |
Risk-free interest rate | | | 2.32 | % | | | — | | | | — | |
Weighted-average exercise price (€) | | | 2.23 | | | | — | | | | — | |
| Weighted-average fair value of options granted during the year (€) | | | 1.45 | | | | — | | | | — | |
(1) The Company did not make any grants during the years ended December 31, 2008 and 2009.
1-21 Convertible debentures and detachable warrants
Convertible Debentures
On October 29, 2007, the Company issued $20 million in aggregate principal amount of non-secured, convertible debentures (the “Convertible Debentures”) with detachable warrants (the “Investors Warrants” as defined below). See Note 14 for further discussion. At the inception date, the Company elected to measure the instrument and the embedded derivatives in their entirety at fair value, with changes in fair value reported in the income statement under financial income, in accordance with ASC 815. Thus, the Convertible Debentures together with their embedded derivatives are recorded as a liability, with subsequent changes in fair value recorded in financial income and expenses. The Company used a binomial valuation model to measure the fair value of the Investor Warrants and a binomial valuation model with a Company specific credit spread to measure the fair value of the Convertible Debentures.
Warrants:
As part of the October 2007 $20 million issuance of the 9% Convertible Debentures, the Company issued Warrants (as defined below) to both the investors in the Convertible Debentures and to the bank that assisted us as the Placement Agent. See Note 14 for further discussion.
In accordance with ASC 815, the warrants issued to the investors in the Convertible Debentures (“Investor Warrants”) and the Placement Agent (“Placement Agent Warrants” and together with the Investor Warrants, the “Warrants”) are classified as a liability because the Company may be required to net-cash and settle them upon the occurrence of certain events outside the control of the Company. The Company accounted for the Warrants based on their fair value at inception date, with subsequent changes in fair value recorded as financial earnings (or loss) as each balance sheet date. The Company used a Black & Scholes pricing model to determine the fair value of the Warrants. The application of the model to the Warrants therefore requires the use of subjective assumptions, including historical share price volatility, the expected life of the Warrants and our risk-free interest rate, and the liquidity discount factor. A change in one or more of these assumptions could result in a material change to the estimated fair value of the vested Warrants.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
1-22 Leases and Sales and leaseback transactions
In accordance with ASC 840, Accounting for Leases, the Company classifies all leases at the inception date as either a capital lease or an operating lease. A lease is a capital lease if it meets any one of the following criteria; otherwise, it is an operating lease:
| - | Ownership is transferred to the lessee by the end of the lease term; |
| - | The lease contains a bargain purchase option; |
| - | The lease term is at least 75% of the property's estimated remaining economic life; |
| - | The present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. |
The Company enters into sale and leaseback transactions from time to time. In accordance with ASC 840, any profit or loss on the sale is deferred and amortized prospectively over the term of the lease, in proportion to the leased asset if a capital lease, or in proportion to the related gross rental charged to expense over the lease term, if an operating lease.
1-23 New accounting pronouncements
In October 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance that requires entities to allocate revenue in multiple-element arrangements using estimated selling prices of the delivered goods and services based on a selling price hierarchy. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. This new approach is effective prospectively for multiple-element revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company does not expect adoption to have a material impact on the Company’s financial position or results of operations.
2—CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
Cash and cash equivalents are comprised of the following:
| | | December 31, | |
| | | 2010 | | | 2009 | |
| Total cash and cash equivalents | | | 7,369 | | | | 11,590 | |
| Short term investments | | | 1,519 | | | | 1,113 | |
| Total cash and cash equivalents, and short term investments | | | 8,888 | | | | 12,703 | |
Short term investments are comprised of money market funds. The aggregate fair value of the short term investments is consistent with their book value.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
3—TRADE ACCOUNTS AND NOTES RECEIVABLE, NET
Trade accounts and notes receivable consist of the following:
| | | December 31, | |
| | | 2010 | | | 2009 | |
| Trade accounts receivable | | | 16,234 | | | | 15,390 | |
| Notes receivable | | | 286 | | | | 274 | |
| Less: allowance for doubtful accounts | | | (1,079 | ) | | | (862 | ) |
| Total | | | 15,441 | | | | 14,802 | |
Notes receivable usually represent commercial bills of exchange (drafts) with initial maturities of 90 days or less.
Bad debt expenses amount to €200 thousand, €332 thousand and €149 thousand, for the years ended December 31, 2010, 2009, and 2008.
4—OTHER RECEIVABLES
Other receivables consist of the following:
| | | December 31, | |
| | | 2010 | | | 2009 | |
| Value-added taxes receivable | | | 221 | | | | 90 | |
| Research and development tax credit receivable from the French State | | | 327 | | | | 452 | |
| Personnel advances | | | 47 | | | | 39 | |
| Other receivables from the French State | | | - | | | | 62 | |
| Others | | | 55 | | | | 80 | |
| Total | | | 650 | | | | 723 | |
5—INVENTORIES
Inventories consist of the following:
| | | December 31, | |
| | | 2010 | | | 2009 | |
| Components, spare parts | | | 3,754 | | | | 3,656 | |
| Work-in-progress | | | 329 | | | | 317 | |
| Finished goods | | | 705 | | | | 627 | |
| Total gross inventories | | | 4,789 | | | | 4,600 | |
| Less: provision for slow-moving inventory | | | (871 | ) | | | (805 | ) |
| Total | | | 3,917 | | | | 3,794 | |
The provision for slow moving inventory relates to components and spare parts. The allowance for slow moving inventory, the changes in which are classified within cost of sales, amounted to €184 thousand, €196 thousand and €390 thousand for the years ended December 31, 2010, 2009 and 2008, respectively.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
6—OTHER ASSETS
Other assets consist of the following:
| | | December 31, | |
| | | 2010 | | | 2009 | |
| Deferred financing costs , current portion | | | 224 | | | | 469 | |
| Other prepaid expenses, current portion | | | 463 | | | | 401 | |
| Total | | | 687 | | | | 870 | |
| | | December 31, | |
| | | 2010 | | | 2009 | |
| Deferred financing costs , non-current | | | 187 | | | | 861 | |
Deferred financing costs related to the debentures issued in the October 2007 private placement are being amortized over 5 years, the duration of the debt. In case of debt reimbursement through earlier conversion, the amortization is then accelerated. The amortization of deferred financing costs, which is classified as financial expense, net, amounted to €920 thousand, €470 thousand and €470 thousand, for the years ended December 31, 2010, 2009 and 2008, respectively.
7—PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
| | | December 31, | |
| | | 2010 | | | 2009 | |
| Equipment | | | 8,369 | | | | 8,270 | |
| Furniture, fixture, and fittings and other | | | 2,727 | | | | 2,718 | |
| Total gross value | | | 11,096 | | | | 10,988 | |
| Less: accumulated depreciation and amortization | | | (8,219 | ) | | | (7,701 | ) |
| Total | | | 2,877 | | | | 3,288 | |
Depreciation and amortization expense related to property and equipment amounted to €950 thousand, to €1,097 thousand and €1,273 thousand for the years ended December 31, 2010, 2009 and 2008, respectively.
Capitalized costs on equipment held under capital leases of €3,326 thousand and €3,251 thousand and are included in property and equipment at December 31, 2010 and 2009, respectively. Accumulated amortization of these assets leased to third parties was €2,086 thousand and €1,786 thousand, at December 31, 2010 and 2009, respectively. Amortization expense on assets held under capital leases is included in total amortization expense and amounted to €333 thousand, €350 thousand and €372 thousand for the years ended December 31, 2010, 2009 and 2008, respectively.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
8—GOODWILL AND INTANGIBLE ASSETS
As discussed in Note 1-11, the Company adopted ASC 350, ‘‘Goodwill and Other Intangible Assets’’, on January 1, 2002. ASC 350 requires that goodwill and other intangible assets that have indefinite lives not be amortized but instead be tested at least annually for impairment, or more frequently when events or change in circumstances indicate that the asset might be impaired, by comparing the carrying value to the fair value of the reporting unit to which they are assigned. The Company considers its ASC 280 operating segment — High Intensity Focused Ultrasound (HIFU) and Urology Devices and Services (UDS) — to be its reporting units for purposes of testing for impairment, as the components within each operating segment have similar economic characteristics and thus do not represent separate reporting units. Goodwill amounts to €1,767 thousand for the UDS division and to €645 thousand for the HIFU division, at December 31, 2009.
The Company completed the required annual impairment test in the fourth quarter of 2010. To determine the fair value of the Company’s reporting units, the Company used the discounted cash flow approach for each of the two reportable units. The main assumptions used are the following: (i) a five-year business plan approved by management in late 2010, (ii) a discount rate of 15% for HIFU, 10% for UDS, (iii) a residual value specific to each segment. In both cases, the fair value of the reporting unit was in excess of the reporting unit's book value, which resulted in no goodwill impairment.
A one percentage point increase in the HIFU discount rate assumed in the impairment testing would not lead the Company to record an impairment charge. Similarly, a one percentage point increase in the UDS discount rate assumed in the impairment testing would not lead the Company to record an impairment charge. A zero growth rate in the Company’s business plan would not lead the Company to record any impairment charge.
Intangible assets consist of the following:
| | | December 31, | |
| | | 2010 | | | 2009 | |
| Licenses | | | 401 | | | | 389 | |
| Trade name and trademark | | | 682 | | | | 591 | |
| Patents | | | 412 | | | | 412 | |
| Organization costs | | | 363 | | | | 363 | |
| Total gross value | | | 1,858 | | | | 1,755 | |
| Less: accumulated amortization | | | (1,776 | ) | | | (1,652 | ) |
| Total | | | 82 | | | | 103 | |
Amortization expenses related to intangible assets amounted to €36 thousand, €32 thousand and €37 thousand, for the years ended December 31, 2010, 2009 and 2008, respectively.
For the two coming years, the annual estimated amortization expense for intangible assets will be approximately €35 thousand.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
9—TRADE ACCOUNTS AND NOTES PAYABLE
Trade accounts and notes payable consist of the following:
| | | December 31, | |
| | | 2010 | | | 2009 | |
| Trade accounts payable | | | 4,309 | | | | 4,061 | |
| Notes payable | | | 1,589 | | | | 1,673 | |
| Total | | | 5,899 | | | | 5,734 | |
Trade accounts payable usually represent invoices with a due date of 90 days or less.
Notes payable represent commercial bills of exchange (drafts) with initial maturities of 90 days or less.
10—DEFERRED REVENUES
Deferred revenues consist of the following:
| | | December 31, | |
| | | 2010 | | | 2009 | |
| Deferred revenues on maintenance contracts | | | 338 | | | | 311 | |
| Deferred revenue on RPP | | | 41 | | | | 27 | |
| Deferred revenue on sale of devices | | | 437 | | | | 428 | |
| Deferral of the gain on sale-lease-back transactions | | | 58 | | | | 122 | |
| Total | | | 875 | | | | 888 | |
| Less long term portion | | | 297 | | | | 330 | |
| Current portion | | | 578 | | | | 558 | |
11—OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
| | | December 31, | |
| | | 2010 | | | 2009 | |
| Provision for warranty costs | | | 1,402 | | | | 1,295 | |
| Value added tax payable | | | 531 | | | | 511 | |
| Accruals for social expenses | | | 624 | | | | 559 | |
Conditional government subsidies(1) | | | 621 | | | | 814 | |
| Retirement indemnities | | | 78 | | | | 93 | |
| Accrued interests | | | 254 | | | | 267 | |
| Others | | | 259 | | | | 246 | |
| Total | | | 3,768 | | | | 3,784 | |
(1) The maturity of conditional government subsidies depends on the nature of the project.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
Changes in the provision for warranty costs are as follows:
| | | December 31, | |
| | | 2010 | | | 2009 | |
| Beginning of year | | | 1,295 | | | | 1,114 | |
| Amount used during the year (payments) | | | (448 | ) | | | (557 | ) |
| New warranty expenses | | | 555 | | | | 738 | |
| End of year | | | 1,402 | | | | 1,295 | |
12—LEASE OBLIGATIONS
12-1 Capital leases
The Company leases certain of its equipment under capital leases. At December 31, 2010, this equipment consists of medical devices for an amount of €1,534 thousand and vehicles for an amount of €115 thousand. Future minimum lease payments under capital leases for the years ending December 31, 2010 are as follows:
| | | December 31, 2010 | |
| 2011 | | | 764 | |
| 2012 | | | 527 | |
| 2013 | | | 342 | |
| 2014 | | | 80 | |
| Thereafter | | | 84 | |
| Total minimum lease payments | | | 1,797 | |
| Less: amount representing interest | | | (148 | ) |
| Present value of minimum lease payments | | | 1,649 | |
| Less: current portion | | | 688 | |
| Long-term portion | | | 961 | |
Interest paid under capital lease obligations was €115 thousand, €150 thousand, and €110 thousand for the years ended December 31, 2010, 2009, and 2008, respectively.
12-2 Operating leases
As of December 31, 2010, operating leases having initial or remaining non-cancelable lease terms greater than one year consist of one lease for the facilities of TMS S.A. in Vaulx-en-Velin, France and several leases for facilities in Japan. The French lease contract has a lease term of nine years expiring at the option of the lessee at the end of a first four-year period, then a two-year and finally a three-year period, through 2011 (i.e. in 2006, 2008 or 2011).
Future minimum lease payments for these operating leases consist of the following amounts, unless leases are otherwise cancelled by the lessees:
| | | France | | | Japan | |
| | | | | | | |
| 2011 | | | 294 | | | | 284 | |
| 2012 | | | | | | | 161 | |
| Total | | | 294 | | | | 445 | |
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
Total rent expenses under operating leases amounted to €790 thousand, €822 thousand and €753 thousand for the years ended December 31, 2010, 2009 and 2008, respectively. These total rent expenses include the above-mentioned operating leases, but also lease expenses related to subsidiaries office rentals, office equipment and car rentals.
13—SHORT-TERM BORROWINGS
As of December 31, 2010, short-term borrowings consist of €1,031 thousand of account receivables factored and for which the Company is supporting the collection risk and a loan in euro amounting to €1,000 thousand with the following conditions:
| | Amount | Maturation | Interest rate |
EDAP-TMS France SAS | 1,000 | January 20, 2011 | Euribor + 0,5% |
As of December 31, 2009, short-term borrowings consist of €1,675 thousand of account receivables factored and for which the Company is supporting the collection risk and a loan in euro amounting to €1,000 thousand with the following conditions:
| | Amount | Maturation | Interest rate |
EDAP-TMS France SAS | 1,000 | January 13, 2010 | Euribor + 0,5% |
14—LONG-TERM DEBT
Long-term debt consists of the following:
| | | December 31, | |
| | | 2010 | | | 2009 | |
| Japanese yen term loan | | | 675 | | | | 568 | |
| Italy term loan | | | 315 | | | | - | |
| Convertible debentures carried at fair value | | | 8,121 | | | | 8,934 | |
| | | | | | | | | |
| Investor Warrants | | | 1,287 | | | | 702 | |
| Placement Agent Warrants | | | - | | | | 106 | |
| Financial instruments carried at fair value | | | 1,287 | | | | 808 | |
| Total | | | 10,397 | | | | 10,310 | |
| Less current portion | | | (322 | ) | | | (173 | ) |
| Total long-term portion | | | 10,075 | | | | 10,137 | |
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
Long-term debt at December 31, 2010 matures as follows:
2011 | | | 322 | |
2012 | | | 8,351 | |
2013 | | | 1,520 | |
2014 | | | 130 | |
2015 | | | 74 | |
Total | | | 10,397 | |
As of December 31, 2010, long-term debt in Japan consists of 4 loans in Yen with the following conditions:
| | Amount | Maturation | Interest rate |
| EDAP Technomed Co. Ltd | 30,000,000 | November 17, 2011 | 2.87% |
| | 10,000,000 | July 17, 2014 | 2.00% |
| | 10,000,000 | March 31, 2015 | 0.10% |
| | 50,000,000 | September 30, 2015 | 1.60% |
As of December 31, 2009, long-term debt in Japan consists of 4 loans in Yen with the following conditions:
| | Amount | Maturation | Interest rate |
| EDAP Technomed Co. Ltd | 30,000,000 | November 17, 2011 | 2.87% |
| | 50,000,000 | February 27, 2014 | 2.00% |
| | 10,000,000 | July 17, 2014 | 2.00% |
| | 5,000,000 | September 30, 2014 | 1.60% |
As of December 31, 2010, long-term debt in Italy consists of a loan in euro amounting to €404 thousand with an interest rate at Euribor + 1.9% due to mature on February 28, 2014.
As of December 31, 2010, and 2009, long-term in USD consists of a $20 million convertible debt with Warrants, raised on October 29, 2007 through a Private Investment in Public Equity deal with selected investors – see Note 1-21 on the accounting treatment of the convertible debentures and the detachable Investors Warrants.
At inception date, the fair value of the convertible debentures and detachable warrants was $20 million. The Company has allocated the proceeds to the fair value of the debt host and the Investors Warrants.
The $20 million convertible debt is in the form of 20,000 debentures with a face value of $1,000 and each bond is convertible into 152 shares of common stock at any time at the election of the holder, using a conversion price of $6.57, subject to standard anti-dilution adjustments.
The debentures mature in five years (October 28, 2012) and bear an annual interest rate of 9% payable on a quarterly basis in cash or in common stock, at the option of the Company (decision made every quarter) with a 10% discount price over the average market price of common stock.
Investors in the convertible debentures also received an aggregate number of 1,680,000 detachable Investors Warrants to purchase one share of common stock for each warrant. The Investors Warrants have a six-year term and an exercise price of $6.87, subject to standard anti-dilutive adjustments.
The Company also granted to the bank acting as placement agent in the transaction Placement Agent Warrants to purchase 188,965 shares of common stock, with a five-year term and the following exercise prices: 121,765 shares at $6.57 and 67,200 shares at $6.87.
On August 24, 2009, one holder of Convertible Debentures elected to convert 2,892 debentures representing a total value of $2.892 million. Under the terms of the Convertible Debentures, the 2,892 Convertible Debentures have been converted into 440,182 new shares, using the conversion price of $6.57
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
On October 30, 2009, our shareholders adopted several resolutions allowing the Board of Directors to renegotiate our indebtedness with the maximum flexibility while staying within the limit of the dilution already authorized by shareholders on October 30, 2007 and February 26, 2009. On November 16, 2009, pursuant to these resolutions, the Board of Directors issued a Supplement to the current debentures offering a 12-month option to the bondholders to convert their debentures earlier out-of-the-money and be compensated by the payment of an accelerated interest premium, payable in shares, within the already authorized dilution limits. This Supplement was unanimously approved by the debenture holders on December 3, 2009, convened in a General Meeting (Masse).
During the year 2010, 2,050 debentures have been converted under this Supplement for a total value of $2.050 million. The 2,050 debentures have been converted into 312,023 new shares, using the conversion price of $6.57. The accelerated interest premium represented a total amount of $0.487 million and triggered the issuance of 128,181 new shares.
On June 24, 2010, our shareholders adopted several new resolutions and extended the validity of existing ones, allowing the Board of Directors to renegociate our indebtedness with the maximum flexibility while remaining within the limit of the dilution already approved by shareholders, hence authorizing the issuance of a maximum of 6,512,370 new shares.
On December 29, 2010, the Company entered into an amendment to the Securities Purchase Agreement dated as of October 29, 2007, relating to the issuance and sales of the Company’s Convertible Debentures and Warrants in order to exempt exchanges of the Company’s ordinary shares for outstanding Convertible Debentures or Warrants from the anti-dilution provisions of those instruments.
Pursuant to shareholders’ authorization and upon the Board of Directors delegation, the management extended an offer to all senior debenture and warrant holders to exchange all of their Convertible Debentures and Warrants against ADRs in order to redeem part of our outstanding convertible debt. On December 29, 30 and 31, 2010, the Company entered into specific exchange agreements (the “Exchange Agreements”) with some of the debenture and warrant holders. Pursuant to these Exchange Agreements, the Company issued 1,441,743 new ordinary shares in the form of ADRs in exchange for 4,558 senior debentures and 986,965 Warrants, reducing the nominal amount of our outstanding convertible debt to $10.5 million.
Observable and unobservable inputs for fair value measurements: Given the classification established by ASC 820, the following table indicates each input or assumption and the level it belongs to:
| Input | ASC 820 level | Comment |
Share price | Level 1 | Quoted price directly linked to the instrument |
Risk free rate | Level 2 | Observable input |
Volatility | Level 3 | Unobservable input |
Credit Spread | Level 3 | Unobservable input |
Liquidity discount | Level 3 | Unobservable input |
Fair Value of Investor Warrants:
The valuation model of Investor Warrants used a binomial valuation model at inception to capture the complexity of the instruments, and notably the possibility to exercise the call option at any time from the inception date. For subsequent years, the Company used a Black & Scholes valuation model.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
As of October 29, 2007, the binomial model uses the following main assumptions and parameters:
| - | Share price at inception date: $5.95 |
| - | Strike price of Investor Warrants: $6.87 |
| - | Risk free interest rate at 6 years: 4.11% |
| - | Share price volatility: 45% |
| - | Liquidity discount factor: 26.91% |
As of December 31, 2009, the Black & Scholes model used the following main assumptions and parameters:
| - | Share price at closing date: $2.75 |
| - | Strike price of Investor Warrants: $6.87 |
| - | Risk free interest rate at 6 years: 2.11% |
| - | Share price volatility: 80% |
| - | Liquidity discount factor: 42.66% |
As of December 31, 2010, the Black & Scholes model uses the following main assumptions and parameters:
| - | Share price at closing date: $5.64 |
| - | Strike price of Investor Warrants: $6.87 |
| - | Risk free interest rate at 6 years: 0.95% |
| - | Share price volatility: 107% |
| - | Liquidity discount factor: 42.66% |
At inception, the Company used a 30-day volatility to fit the monthly arbitration step of its binomial valuation model. At December 31, 2008, given the peculiar market conditions and the erratic changes in stock volatility, the Company, in agreement with third-party experts, determined that a share price volatility based on the residual lifetime of the convertible instruments would be more relevant and should then be used for assessing the fair value of the instruments. Share price volatility was determined using the historical volatility methodology.
On that basis, the unit fair value of Investor Warrants was $2.32 per warrant at inception date, $0.60 per warrant as of December 31, 2009, and $1.95 per warrant as of December 31, 2010. The total fair value for the 1,680,000 issued Investor Warrants was $3.890 million at inception date and $1.011 million at December 31, 2009.
As of December 31, 2010, the total fair value for the 882,000 remaining Investor Warrants was $1.719 million
Fair Value of the Convertible Debt:
The total fair value of the convertible debt is the aggregate of the fair value of the underlying debt host instrument and the fair value of the embedded derivative.
The estimate of the fair value of the underlying debt component is obtained by using the actual interest spread the Company would have had to pay if a straight, unsecured, debt had been raised, with no additional remuneration to lenders in the form of conversion options or warrants. Before and at inception date, the Company conducted an analysis of the terms on a non-convertible, unsecured, conventional debt. Based on this analysis, a rate of 30% has been used to assess the fair value of the debt host, which represents an interest spread of 26% over the risk-free interest rate at inception date. The present value of the debt host using an effective interest rate of 30% was $10.330 million.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
At December 31, 2009 the fair value has been measured considering any changes required in underlying assumptions, and mostly the risk free interest rate and the credit spread. With the support of third-party experts, the Company determined that the spread to be used over the risk-free rate was 28.51%, in line with the increase in risk-aversion on financial markets. The present value of the debt host at December 31, 2009 was $11.217 million taking into account the conversion of 2,892 Convertible Debentures in August 2009.
At December 31, 2010 the fair value has been measured considering any changes required in underlying assumptions, and mostly the risk free interest rate and the credit spread. With the support of third-party experts, the Company determined that the spread to be used over the risk-free rate was 29.96%, in line with the increase in risk-aversion on financial markets. The present value of the debt host at December 31, 2010 was $7.863 million taking into account the remaining 10,500 debentures.
The valuation model of the conversion option uses a binomial valuation model to capture the complexity of the instrument, and notably the continuous possibility of an arbitrage between holding common shares versus interest bearing bonds.
As of October 29, 2007, the binomial model used the following main assumptions and parameters:
| - | Share price at inception date: $5.95 |
| - | Strike price of Convertible Debentures: $6.87 |
| - | Risk free interest rate at 5 years: 4.04% |
| - | Share price volatility: 45% |
| - | Liquidity discount factor: 26.91% |
As of December 31, 2009, the binomial model used the following main assumptions and parameters:
| - | Share price at closing date: $2.75 |
| - | Strike price of warrants: $6.57 |
| - | Risk free interest rate at 5 years: 1.56% |
| - | Share price volatility: 80% |
| - | Liquidity discount factor: 42.66% |
As of December 31, 2010, the binomial model uses the following main assumptions and parameters:
| - | Share price at closing date: $5.64 |
| - | Strike price of warrants: $6.57 |
| - | Risk free interest rate at 5 years: 0.56% |
| - | Share price volatility: 107% |
| - | Liquidity discount factor: 42.66% |
At inception, the Company used a 30-day volatility to fit the monthly arbitration step of its binomial valuation model. At December 31, 2008, given the peculiar market conditions and the erratic changes in stock volatility, the Company, in agreement with third-party experts, determined that a share price volatility based on the residual lifetime of the convertible instruments would be more relevant and should then be used for assessing the fair value of the instruments. Share price volatility was determined using the historical volatility methodology.
On that basis, the fair value of the conversion option was $5.780 million ($7.909 million before liquidity discount) at inception date, $1.653 million ($2.883 million before liquidity discount) as of December 31, 2009, and $2.988 million ($5.211 million before liquidity discount) as of December 31, 2010.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
Placement Agent Warrants:
As part of the transaction costs, the Company granted to the bank acting as placement agent in the transaction Placement Agent Warrants to purchase 188,965 shares of common stock, with a five year term and the following exercise prices: 121,765 shares at $6.57 per share and 67,200 shares at $6.87 per share. The fair value of the Placement Agent Warrants has been valued using the Black-Scholes option valuation method, using a 4.04% risk free interest rate and a 75% volatility at inception date, and a 1.56% risk free interest rate and a 80% stock volatility at December 31, 2009.
At December 31, 2010, all the Placement Agent Warrants had been exchanged against ADRs
The following table summarizes the fair value of the entire indebtedness related to the Convertible Debentures, Investor Warrants and Placement Agent Warrants:
In ‘000 US Dollars | | Total Fair Value At inception date | | | Total Fair Value At December 31, 2009 | | | Total Fair Value At December 31, 2010 | | | Conversion | | | Change in Fair Value in USD 2010 vs 2009 | |
Convertible debt | | | 16,110 | | | | 12,870 | | | | 10,851 | | | | (6,608 | ) | | | 4,589 | |
Investor Warrants | | | 3,890 | | | | 1,011 | | | | 1,719 | | | | (2,380 | ) | | | 3,089 | |
Total | | | 20,000 | | | | 13,881 | | | | 12,570 | | | | (8,988 | ) | | | 7,678 | |
| Placement Agent Warrants at $6.57 | | | 448 | | | | 100 | | | | - | | | | (363 | ) | | | 263 | |
| Placement Agent Warrants at $6.87 | | | 244 | | | | 53 | | | | - | | | | (200 | ) | | | 147 | |
Total | | | 20,692 | | | | 14,034 | | | | 12,570 | | | | (9,552 | ) | | | 8,088 | |
The following table reflects the impact after translation in euros:
| In ‘000 Euros | | Total Fair Value At inception date | | | Total Fair Value At December 31, 2009 | | | Total Fair Value At December 31, 2010 | | | Conversion and exchange | | | Change in Fair Value in EUR (reflected in Financial income – See Note 20) | | | Exchange rate impact | |
Exchange Rate (USD/EUR) | | | 1.4548 | | | | 1.4405 | | | | 1.3362 | | | | | | | 1.3362 | | | | |
Convertible debt | | | 11,074 | | | | 8,934 | | | | 8,121 | | | | (4,918 | ) | | | 3,434 | | | | 670 | |
Investor Warrants | | | 2,674 | | | | 702 | | | | 1,287 | | | | (1,782 | ) | | | 2,311 | | | | 55 | |
Total | | | 13,748 | | | | 9,636 | | | | 9,407 | | | | (6,700 | ) | | | 5,745 | | | | 725 | |
Placement Agent Warrants | | | 476 | | | | 106 | | | | - | | | | (422 | ) | | | 307 | | | | 8 | |
Total | | | 14,224 | | | | 9,743 | | | | 9,407 | | | | (7,121 | ) | | | 6,053 | | | | 733 | |
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
15—OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
| | | December 31, | |
| | | 2010 | | | 2009 | |
| Provision for retirement indemnities | | | 1,047 | | | | 771 | |
| Other | | | - | | | | 13 | |
| Total | | | 1,047 | | | | 784 | |
Pension, post-retirement, and post-employment benefits for most of the Company’s employees are sponsored by European governments. The Company’s liability with respect to these plans is mostly limited to specific payroll deductions.
In addition to government-sponsored plans, certain subsidiaries in Japan and France have defined benefit retirement indemnity plans in place. The provision for retirement indemnities at December 31, 2010 represents an accrual for lump-sum retirement indemnity payments to be paid at the time an employee retires. The largest part of this liability relates to employees in France. This provision has been calculated taking into account the estimated payment at retirement (discounted to the current date), turnover and salary increases. Calculations have been performed by an actuary consultant.
The actuarial assumptions as of year-end are as follows:
| | | Pension Benefits – France | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Discount rate | | | 4.60 | % | | | 5.00 | % | | | 5.50 | % |
| Salary increase | | | 2.50 | % | | | 2.50 | % | | | 2.50 | % |
| Retirement age | | | 65 | | | | 65 | | | | 65 | |
| Average retirement remaining service period | | | 25 | | | | 26 | | | | 26 | |
| | | Pension Benefits – Japan | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Discount rate | | | 1.00 | % | | | 1.25 | % | | | 1.25 | % |
| Salary increase | | | 2.30 | % | | | 1.80 | % | | | 1.80 | % |
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
The reconciliation between projected benefit obligations and the accumulated benefit obligations is as follows as of December 31, 2010 (in thousands of euros):
| | | France | | | Japan | |
| | | | | | | |
| Projected benefit obligation | | | 371 | | | | 562 | |
| Normal cost | | | 21 | | | | 50 | |
| Accumulated benefit obligation | | | 247 | | | | 458 | |
Provision presentation according to ASC 715 in euro:
| | | France | | | Japan | |
| Non current liabilities | | | 370,913 | | | | 484,221 | |
| Current liabilities | | | − | | | | 77,901 | |
| Non current asset | | | − | | | | − | |
| Accumulated other comprehensive income | | | (7,929 | ) | | | (235,703 | ) |
| Total | | | 362,984 | | | | 326,420 | |
Detailed reconciliation of pension cost components (in thousands of euros) during fiscal year ending December 31, 2010:
| France | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Change in benefit obligations | | | | | | | | | |
| Benefit obligations at beginning of year | | | 262 | | | | 256 | | | | 240 | |
| Service cost | | | 21 | | | | 23 | | | | 23 | |
| Interest cost | | | 13 | | | | 14 | | | | 13 | |
| Plan amendments | | | 31 | | | | - | | | | - | |
| (gain) / loss | | | 43 | | | | (24 | ) | | | (20 | ) |
| Benefits paid | | | - | | | | (7 | ) | | | - | |
| Benefit obligations at end of year | | | 371 | | | | 262 | | | | 256 | |
| | | | | | | | | | | | | |
| Change in plan assets | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | | | - | | | | - | | | | - | |
| Employer contribution | | | - | | | | 7 | | | | - | |
| Return on plan assets | | | - | | | | - | | | | - | |
| Benefits paid | | | - | | | | (7 | ) | | | - | |
| Fair value of plan assets at end of year | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | |
| Unrecognized actuarial (gain) loss | | | (23 | ) | | | (68 | ) | | | (45 | ) |
| Unrecognized prior service cost | | | 31 | | | | - | | | | - | |
| Accrued pension cost | | | 363 | | | | 330 | | | | 300 | |
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
| Japan | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Change in benefit obligations | | | | | | | | | |
| Benefit obligations at beginning of year | | | 435 | | | | 392 | | | | 278 | |
| Service cost | | | 50 | | | | 45 | | | | 44 | |
| Interest cost | | | 6 | | | | 5 | | | | 5 | |
| Plan amendments | | | - | | | | - | | | | - | |
| Termination benefits | | | - | | | | - | | | | - | |
| (gain) / loss | | | 68 | | | | 14 | | | | 35 | |
| Benefits paid | | | (95 | ) | | | - | | | | (57 | ) |
| Exchange rate impact | | | 98 | | | | (21 | ) | | | 87 | |
| Benefit obligations at end of year | | | 562 | | | | 435 | | | | 392 | |
| | | | | | | | | | | | | |
| Change in plan assets | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | | | - | | | | - | | | | - | |
| Employer contribution | | | - | | | | - | | | | - | |
| Return on plan assets | | | - | | | | - | | | | - | |
| Benefits paid | | | - | | | | - | | | | - | |
| Fair value of plan assets at end of year | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | |
| Unrecognized actuarial (gain) loss | | | 236 | | | | 149 | | | | 158 | |
| Unrecognized prior service cost | | | - | | | | - | | | | - | |
| Accrued pension cost | | | 326 | | | | 285 | | | | 233 | |
16—SHAREHOLDERS’ EQUITY
16-1 Common stock
As of December 31, 2010, EDAP TMS S.A.’s common stock consisted of 13,389,929 issued shares, fully paid, and with a par value of €0.13 each. 13,008,401 of the shares were outstanding.
16-2 Pre-emptive subscription rights
Shareholders have preemptive rights to subscribe on a pro rata basis for additional shares issued by the Company for cash. Shareholders may waive such preemptive subscription rights at an extraordinary general meeting of shareholders under certain circumstances. Preemptive subscription rights, if not previously waived, are transferable during the subscription period relating to a particular offer of shares.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
16-3 Dividend rights
Dividends may be distributed from the statutory retained earnings, subject to the requirements of French law and the Company’s by-laws. The Company has not distributed any dividends since its inception. Distributable statutory retained earnings amounted to €19,465 thousand and €19,581 thousand at December 31, 2010 and 2009, respectively. Dividend distributions, if any, will be made in euros. The Company has no plans to distribute dividends in the foreseeable future.
16-4 Treasury stock
As of December 31, 2010, the 381,528 shares of treasury stock consisted of (i) 331,988 shares acquired between August and December 1998 for €956 thousand, and (ii) 49,540 shares acquired in June and July 2001 for €150 thousand. All 381,528 shares of treasury stock have been acquired to cover outstanding stock options (see Note 16-5).
16-5 Stock-option plans
As of December 31, 2010, EDAP TMS S.A. sponsored four stock purchase and subscription option plans:
On June 12, 2001, the shareholders of EDAP TMS S.A. authorized the Board of Directors to grant up to 300,000 options to purchase pre-existing Shares, at a fixed exercise price to be set by the Supervisory Board. Under this plan, 28,425 options are still in force on December 31, 2010.
On January 29, 2004, the shareholders of EDAP TMS S.A. authorized the Board of Directors to grant up to 240,000 options to purchase pre-existing Shares at a fixed price to be set by the Board of Directors. All of the Shares that may be purchased through the exercise of stock options are currently held as treasury stock. Under this plan, 124,000 options are still in force on December 31, 2010.
On May 22, 2007, the shareholders of EDAP TMS S.A. authorized the Board of Directors to grant up to 600,000 options to subscribe to 600,000 new Shares and up to 105,328 options to purchase pre-existing Shares at a fixed price to be set by the Board of Directors. All of the 105,328 Shares that may be purchased through the exercise of stock options are currently held as treasury stock.
Conforming to this stock option plan, on October 29, 2007, the Board of Directors granted 504,088 options to subscribe to new Shares to certain employees of EDAP TMS. The exercise price was fixed at €3.99 per share. Options were to begin vesting one year after the date of grant and will be fully vested as of October 29, 2011 (i.e., four years after the date of grant). Shares acquired pursuant to the options cannot be sold prior to four years from the date of grant. The options expire on October 29, 2017 (i.e., ten years after the date of grant) or when employment with the Company ceases, whichever occurs earlier. At December 31, 2007 the total fair value of the options granted under this plan was €1,731 thousand. This non-cash financial charge will be recognized in the Company’s operating expenses over a period of 48 months; the impact on 2008 Operating Income was €661 thousand. The impact on 2009 operating income, in accordance with ASC 718 was €333 thousand. The impact on 2010 operating income was €167 thousand.
Conforming to this stock option plan, on June 25, 2010, the Board of Directors granted the remaining 95,912 options to subscribe to new Shares to certain employees of EDAP TMS. The exercise price was fixed at €1.88 per share. Options were to begin vesting one year after the date of grant and will be fully vested as of June 25, 2014 (i.e., four years after the date of grant). Shares acquired pursuant to the options cannot be sold prior to four years from the date of grant. The options expire on June 25, 2020 (i.e., ten years after the date of grant) or when employment with the Company ceases, whichever occurs earlier. At June 25, 2010 the total fair value of the options granted under this plan was €143 thousand. This non-cash financial charge will be recognized in the Company’s operating expenses over a period of 48 months; the impact on 2010 Operating Income was €39 thousand.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
On June 24, 2010, the shareholders authorized the Board of Directors to grant up to 229,100 options to purchase pre-existing Shares at a fixed price to be set by the Board of Directors. All of the Shares that may be purchased through the exercise of stock options are currently held as treasury stock. Conforming to this stock option plan, on June 25, 2010, the Board of Directors granted 229,100 options to purchase existing Shares to certain employees of EDAP TMS. The exercise price was fixed at €2.38 per share. Options were to begin vesting one year after the date of grant and will be fully vested as of June 25, 2014 (i.e., four years after the date of grant). Shares acquired pursuant to the options cannot be sold prior to four years from the date of grant. The options expire on June 25, 2020 (i.e., ten years after the date of grant) or when employment with the Company ceases, whichever occurs earlier. At June 24, 2010 the total fair value of the options granted under this plan was €328 thousand. This non-cash financial charge will be recognized in the Company’s operating expenses over a period of 48 months; the impact on 2010 Operating Income was €82 thousand.
On February 17, 2005, the shareholders of EDAP TMS S.A. authorized the Board of Directors to grant up to 625,000 free shares to be issued to certain employees of the Company, subject to compliance with the conditions and performance criteria fixed by the Board of Directors. On July 3, 2009, only 11,775 free shares out of the 625,000 right allocated, have been issued to certain employees of the Company upon reaching one performance milestone. All remaining rights to subscribe to free shares were cancelled as corresponding performance milestones were not met. As of December 31, 2010, no more right to subscribe to new shares was valid.
As of December 31, 2010, a summary of stock option activity to purchase or to subscribe to Shares under these plans is as follows:
| | | 2010 | | | 2009 | | | 2008 | |
| | | Options | | | Weighted average exercise price (€) | | | Options | | | Weighted average exercise price (€) | | | Options | | | Weighted average exercise price (€) | |
| Outstanding on January 1, | | | 656,013 | | | | 3.57 | | | | 706,725 | | | | 3.51 | | | | 781,625 | | | | 3.51 | |
| Granted | | | 325,012 | | | | 2.23 | | | | | | | | | | | | | | | | | |
| Exercised | | | (18,000 | ) | | | 2.15 | | | | (24,212 | ) | | | 2.07 | | | | | | | | | |
| Forfeited | | | (56,250 | ) | | | 2.45 | | | | (26,500 | ) | | | 3.36 | | | | (34,000 | ) | | | 3.59 | |
| Expired | | | | | | | | | | | | | | | | | | | (40,900 | ) | | | 3.37 | |
| Outstanding on December 31, | | | 906,775 | | | | 3.19 | | | | 656,013 | | | | 3.57 | | | | 706,725 | | | | 3.51 | |
| Exercisable on December 31, | | | 486,446 | | | | 3.52 | | | | 420,719 | | | | 3.33 | | | | 342,929 | | | | 3.00 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Share purchase options available for grant on December 31 | | | 16,003 | | | | | | | | 105,328 | | | | | | | | 105,328 | | | | | |
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
The following table summarizes information about options to purchase existing Shares held by the Company, or to subscribe to new Shares, at December 31, 2010:
| | | Outstanding options | | | Exercisable options | |
| Exercise price (€) | | Options | | | Weighted average remaining contractual life | | | Weighted average exercise price (€) | | | Options | | | Weighted average exercise price (€) | |
| 3.99 | | | 445,338 | | | | 6,8 | | | | 3.99 | | | | 334,021 | | | | 3.99 | |
| 2.60 | | | 124,000 | | | | 2.2 | | | | 2.60 | | | | 124,000 | | | | 2.60 | |
| 2.38 | | | 213,100 | | | | 8.5 | | | | 2.38 | | | | | | | | | |
2.08(1) | | | 25,000 | | | | 0.8 | | | | 2.08 | | | | 25,000 | | | | 2.08 | |
2.02(2) | | | 3,425 | | | | 1.5 | | | | 2.02 | | | | 3,425 | | | | 2.02 | |
1.88) | | | 95,912 | | | | 8.5 | | | | 1.88 | | | | | | | | | |
| 1.88 to 3.99 | | | 906,775 | | | | 5.8 | | | | 3.14 | | | | 486,446 | | | | 3.52 | |
| (1) | All the 25,000 options were granted on September 25, 2001 with an exercise price expressed in U.S. dollars ($1.92) and converted here to euros based on the noon buying rate on September 25, 2001 ($1 = €1.085). |
| (2) | All the 3,425 options were granted on June 18, 2002 with an exercise price expressed in U.S. dollars ($1.92) and converted here to euros based on the noon buying rate on June 18, 2002 ($1 = €1.0545). |
A summary of the status of the non-vested shares as of December 31, 2010, and changes during the year ended December, 2010, is presented below:
| | | Options | | | Weighted average Grant-Date Fair Value (€) | |
Non-vested at January 1, 2010 | | | 235,086 | | | | 2.97 | |
Granted | | | 325,012 | | | | 1.45 | |
Vested | | | (117,043 | ) | | | 2.97 | |
Forfeited | | | (22,812 | ) | | | 1.89 | |
| Non-vested at December 31, 2010 | | | 420,243 | | | | 1.85 | |
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
17—OTHER REVENUES
Other revenues consist of the following:
| | | 2010 | | | 2009 | | | 2008 | |
| Royalties | | | - | | | | - | | | | - | |
| Grants and others | | | 506 | | | | 46 | | | | 197 | |
| Total | | | 506 | | | | 46 | | | | 197 | |
In 2010, other revenues consist mainly of €500 thousand of French Government grant as part of a small businesses aid program
In 2009, other revenues were mainly comprised of training and consulting services.
In 2008, EDAP TMS France invoiced €58 thousand to China Medical Technologies for consulting services and received grants of €59 thousand from ANVAR a French government agency
18—RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist of the following:
| | | 2010 | | | 2009 | | | 2008 | |
| Gross research and development expenses | | | (3,958 | ) | | | (4,103 | ) | | | (4,255 | ) |
| Research Tax Credit and grants | | | 690 | | | | 452 | | | | 544 | |
| Net Research and development expenses | | | (3,268 | ) | | | (3,651 | ) | | | (3,712 | ) |
19—NON-RECURRING OPERATING EXPENSES
In 2010, 2009 and 2008, there were no non-recurring expenses.
20—FINANCIAL INCOME, NET
Interest (expense) income, net consists of the following:
| | | 2010 | | | 2009 | | | 2008 | |
| Interest income | | | 265 | | | | 252 | | | | 412 | |
| Interest expense | | | (2,136 | ) | | | (1,454 | ) | | | (1,413 | ) |
| Depreciation of prepaid expenses on debt grant | | | (920 | ) | | | (469 | ) | | | (469 | ) |
| Changes in fair value of the Convertible Debentures | | | (3,434 | ) | | | (2,342 | ) | | | 3,465 | |
| Changes in fair value of the Investor Warrants | | | (2,311 | ) | | | (323 | ) | | | 2,931 | |
| Changes in fair value of the Placement Agent Warrants | | | (307 | ) | | | (53 | ) | | | 307 | |
| Total | | | (8,844 | ) | | | (4,390 | ) | | | 5,232 | |
The interest expense related to the payment of the 9% interest coupon on the Convertible Debentures amounted to €1,058 thousand, €1,214 thousand and €1,223 thousand for the years ended December 31, 2010, 2009 and 2008, respectively.
For the year ended December 31, 2010, the interest expense related to earlier conversion or exchange of the convertible debenture amounted to €919 thousand.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
21—INCOME TAXES
21-1 Loss before income taxes
| Loss before income taxes is comprised of the following: | | 2010 | | | 2009 | | | 2008 | |
| France | | | (8,972 | ) | | | (6,153 | ) | | | 3,727 | |
| EDAP Inc | | | (2,143 | ) | | | (1,848 | ) | | | (1,896 | ) |
| Other countries | | | (663 | ) | | | 307 | | | | (181 | ) |
| Total | | | (11,778 | ) | | | (7,694 | ) | | | 1,648 | |
Certain prior years amounts have been reclassified to conform to the current year’s presentation
21-2 Income tax (expense)/ benefit
| Income tax (expense)/benefit consists of the following: | | 2010 | | | 2009 | | | 2008 | |
| Current income tax expense: | | | | | | | | | |
| France | | | (818 | ) | | | - | | | | (1 | ) |
| Other countries | | | (49 | ) | | | (79 | ) | | | (35 | ) |
| Sub-total current income tax expense | | | (866 | ) | | | (79 | ) | | | (36 | ) |
| Deferred income tax (expense) benefit: | | | | | | | | | | | | |
| France | | | (13 | ) | | | (50 | ) | | | (81 | ) |
| Other countries | | | (60 | ) | | | 57 | | | | 65 | |
| Sub-total deferred income tax (expense) benefit | | | (73 | ) | | | 7 | | | | (15 | ) |
| Total | | | (939 | ) | | | (72 | ) | | | (51 | ) |
Certain prior years amounts have been reclassified to conform to the current year’s presentation
The current income tax expense in France consists for €773 thousand of the reimbursement of a state aid received by EDAP-TMS France in 1994 for the acquisition of the activities of Technomed International. This aid was finally considered as an illegal State Aid by European Court of Justice (C-214/07 "Commission of the European Communities us French Republic").
21-3 Deferred income taxes:
Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities reported for financial reporting purposes and such amounts as measured in accordance with tax laws. The tax effects of temporary differences which give rise to significant deferred tax assets (liabilities) are as follows:
| | | December 31, | |
| | | 2010 | | | 2009 | |
| Elimination of intercompany profit in inventory | | | 128 | | | | 104 | |
| Elimination of intercompany profit in fixed assets | | | 267 | | | | 350 | |
| Other items | | | 827 | | | | 821 | |
| Net operating loss carryforwards | | | 15,496 | | | | 11,946 | |
| Total deferred tax assets | | | 16,718 | | | | 13,221 | |
| Capital leases treated as operating leases for tax | | | (164 | ) | | | (91 | ) |
| Other items | | | (11 | ) | | | (72 | ) |
| Total deferred tax liabilities | | | (175 | ) | | | (163 | ) |
| Net deferred tax assets | | | 16,543 | | | | 13,058 | |
| Valuation allowance for deferred tax assets | | | (16,261 | ) | | | (10,050 | ) |
| Deferred tax assets (liabilities), net of allowance | | | 282 | | | | 322 | |
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
Net operating loss carryforwards of €8,107 thousand, €2,644 thousand, €1,301 thousand, €392 thousand, €225 thousand and €32,714 thousand as of December 31, 2010 are available at EDAP Technomed Inc., EDAP-TMS France S.A.S., Edap Technomed Co Ltd Japan, Edap Technomed Sdn Bhd Malaysia, EDAP TMS GmbH and EDAP TMS S.A., respectively. These net operating losses generate deferred tax assets of €15,496 thousand. Realization of these assets is contingent on future taxable earnings in the applicable tax jurisdictions. As of December 31, 2010, €12,126 thousand out of these €15,496 thousand net operating loss carry-forwards have no expiration date. The remaining tax loss carry-forwards expire in years 2013 through 2030. In accordance with ASC 740, a valuation allowance is recorded as realization of those amounts is not considered probable.
Deferred taxes have not been provided on the undistributed earnings of domestic subsidiaries as these earnings, with the exception of the earnings of EDAP-TMS France SAS, which benefited from the tax exemption, can be distributed tax-free to EDAP TMS S.A. The tax-exempted earnings of EDAP-TMS France SAS would normally be taxable if distributed to EDAP TMS S.A. via dividends. However, no taxes will be due if the Company first incorporates these earnings into statutory capital and then makes a distribution via a statutory capital reduction (redemption). As the Company intends on implementing this tax planning opportunity in the event a distribution were to be made, no deferred taxes have been provided on these earnings.
21-4 Effective tax rate
A reconciliation of differences between the statutory French income tax rate and the Company’s effective tax rate is as follows:
| | | 2010 | | | 2009 | | | 2008 | |
| French statutory rate | | | 33.8 | % | | | 33.8 | % | | | 33.8 | % |
| Income of foreign subsidiaries taxed at different tax rates | | | 0.6 | % | | | 0.4 | % | | | (2.6 | %) |
| Effect of net operating loss carry-forwards and valuation allowances | | | (28.3 | %) | | | (35.1 | %) | | | 80.0 | % |
| Non taxable debt fair value variation | | | (17.4 | %) | | | (11.9 | %) | | | (137.5 | %) |
| Non deductible entertainment expenses | | | 0.4 | % | | | 0.7 | % | | | 2.1 | % |
| Other | | | 2.9 | % | | | 11.3 | % | | | 27.3 | % |
| Effective tax rate | | | (8.0 | %) | | | (0.9 | %) | | | 3.1 | % |
Certain prior years amounts have been reclassified to conform to the current year’s presentation
21-5 Uncertainty in Income Taxes
According to ASC 740, the Company reviewed the tax positions of each subsidiary. On December 31, 2010 there is no uncertainty in the Company’s tax positions.
In July 2010, the Company was requested by the French Tax Authorities to pay the amount of €772,822 to comply with the European Court of Justice ruling on fair competition and illegal state aids (C-214/07 "Commission of the European Communities vs. French Republic"). The amount was related to a state aid received by EDAP-TMS France in 1994 for the acquisition of the activities of Technomed International and included €374,156 of late interest. The Company reversed consequently the €50 thousand reserve that had been taken as of December 31, 2009.
In March 2011, the Company engaged in a contentious procedure against the French Tax Authorities to contest this position and ask for the recuperation of the paid amounts.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
As a result, the effect on the retained earnings is the following:
| | | Unrecognized tax benefits | |
| | | 2010 | | | 2009 | | | 2008 | |
Balance as of January 1st, | | | (50 | ) | | | - | | | | - | |
| Impact of tax positions taken during a prior period | | | - | | | | - | | | | - | |
| Impact of tax positions taken during the current period | | | - | | | | (50 | ) | | | - | |
Impact of settlements with taxing authorities | | | 50 | | | | - | | | | - | |
| Impact of a lapse of the applicable statute of limitations | | | - | | | | - | | | | - | |
Balance as of December 31st, | | | - | | | | (50 | ) | | | - | |
As the state aid received in 1994 was an income tax credit, the payment of €773 thousand has been recognized as an income tax in 2010 .The tax years that remain subject to examination by major tax jurisdictions are 2008, 2009 and 2010.
22—EARNINGS (LOSS) PER SHARE
A reconciliation of the numerators and denominators of the basic and diluted EPS calculations for the years ended December 31, 2010, 2009 and 2008 is as follows:
| | | For the year ended Dec. 31, 2010 | | | For the year ended Dec. 31, 2009 | | | For the year ended Dec. 31, 2008 | |
| | | Income in euro (Numerator) | | | Shares (Denomin-ator) | | | Per-Share Amount | | | Loss in euro (Numerator) | | | Shares (Denomin-ator) | | | Per-Share Amount | | | Loss in euro (Numerator) | | | Shares (Denomin-ator) | | | Per-Share Amount | |
| Basic EPS | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) available to common Shareholders | | | (12,717,105 | ) | | | 13,008,401 | | | | (0.98 | ) | | | (7,765,901 | ) | | | 10,510,305 | | | | (0.74 | ) | | | 1,597,189 | | | | 9,582,593 | | | | 0.17 | |
| Effect of dilutive securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock options only in the money | | | | | | | 85,834 | | | | | | | | | | | | 57,258 | | | | | | | | | | | | 75,702 | | | | | |
| Diluted EPS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (Loss) available to | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| common shareholders, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| including assumed | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Conversions | | | (12,717,105 | ) | | | 13,094,235 | | | | (0.98 | ) | | | (7,765,901 | ) | | | 10,567,563 | | | | (0.74 | ) | | | 1,597,189 | | | | 9,658,295 | | | | 0.17 | |
23—COMMITMENTS AND CONTINGENCIES
23-1 Commitments
The Company currently has commitments regarding its operating leases as described in Note 12-2.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
The Company also has commitments regarding its Convertible Debentures and Warrants. Under the terms of the registration rights agreement the Company entered into in connection with the October 2007 private placement, the Company agreed to secure the registration of a portion of the securities deliverable upon conversion of the Convertible Debentures and in payment of interest under the Convertible Debentures by certain dates, and the Company agreed to secure the registration of the remaining securities deliverable on conversion of the Convertible Debentures and all of the securities deliverable upon exercise of the Warrants by certain dates, with penalties, including payment of liquidated damages in case of a default of these commitments. Also, the Company committed to a certain number of covenants regarding its convertible debentures and Warrants, and any event of default on these covenants could require the early repayment of the Convertible Debentures at the mandatory default amount, including all other amounts of interest, costs, expenses and liquidated damages due in respect of the defaulted Convertible Debentures.
23-2 Litigation
As of the date of these financial statements, the Company is not involved in any material legal proceedings.
23-3 Contingencies
The Company currently has contingencies relating to warranties provided to customers for products as described in Note 1-13 and Note 11.
24—FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments was made in accordance with the requirements of ASC 825 ‘‘Disclosure about fair value of financial instruments.’’ The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The estimates of fair values of the Company’s financial instruments are compared below to the recorded amounts at December 31, 2010 and 2009.
| | | December 31, | | | December 31, | |
| | | 2010 Recorded Value | | | 2010 Estimated Fair Value | | | 2009 Recorded Value | | | 2009 Estimated Fair Value | |
| Assets: | | | | | | | | | | | | |
| Cash and cash equivalents | | | 7,369 | | | | 7,369 | | | | 11,590 | | | | 11,590 | |
| Trade accounts and notes receivable, net | | | 15,441 | | | | 15,441 | | | | 14,802 | | | | 14,802 | |
| Short term investment | | | 1,519 | | | | 1,519 | | | | 1,113 | | | | 1,113 | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Short-term borrowings | | | 2,031 | | | | 2,031 | | | | 2,675 | | | | 2,675 | |
| Trade accounts payable | | | 4,309 | | | | 4,309 | | | | 4,061 | | | | 4,061 | |
| Notes payable | | | 1,589 | | | | 1,589 | | | | 1,673 | | | | 1,673 | |
| Convertible Debentures and other Long Term Debt | | | 8,121 | | | | 8,121 | | | | 9,330 | | | | 9,330 | |
| Investor Warrants | | | 1,287 | | | | 1,287 | | | | 702 | | | | 702 | |
| Placement Agent Warrants | | | - | | | | - | | | | 106 | | | | 106 | |
The recorded amount of cash and cash equivalents, restricted short term investment, investments available for sale, trade accounts and notes receivable (drafts), short-term borrowings, and trade accounts and notes payable (drafts) are a reasonable estimate of their fair value due to the short-term maturities of these instruments.
The long-term debt is recorded at fair value.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
25—CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and trade accounts and notes receivable from customers, primarily located in France, Japan and the United States. The Company maintains cash deposits with major banks. Management periodically assesses the financial condition of these institutions and believes that any possible credit risk is limited.
The Company has procedures in effect to monitor the creditworthiness of its customers. The Company obtains bank guarantees for first-time or infrequent customers, and in certain cases obtains insurance against the risk of a payment default by the customer. The Company reviewed individual customer balances considering current and historical loss experience and general economic conditions in determining the allowance for doubtful accounts receivable of €1.1 million and €0.9 million, for the years ended December 31, 2010, and 2009, respectively.
Ultimate losses may vary from the current estimates, and any adjustments are reported in earnings in the periods in which they become known.
In 2010, 2009 and 2008, the Company did not generate significant revenue with a single customer.
26—FOREIGN CURRENCY TRANSACTIONS
The Company generates a significant percentage of its revenues, and of its operating expenses, in currencies other than euro. The Company’s operating profitability could be materially adversely affected by large fluctuations in the rate of exchange between the euro and such other currencies. The Company engages in foreign exchange hedging activities when it deems necessary, but there can be no assurance that hedging activities will be offset by the impact of movements in exchange rates on the Company’s results of operations. As of December 31, 2010, there were no outstanding hedging instruments.
27—SEGMENT INFORMATION
In July 2002, the Company announced an organizational realignment that created two operating divisions within the Company. For reporting purposes, this organizational realignment created three reporting segments: the holding Company, EDAP TMS S.A., the High Intensity Focused Ultrasound division and the Urological Devices and Services division. Then, in 2007, the Company created a new reporting segment dedicated to the FDA approval for Ablatherm-HIFU activity. The following tables set forth the key income statement figures, by segment for fiscal years 2010, 2009 and 2008 and the key balance sheet figures, by segment, for fiscal years 2010, 2009 and 2008.
The business in which the Company operates is the development and production of minimally invasive medical devices, primarily for the treatment of urological diseases. Substantially all revenues result from the sale of medical devices and their related license and royalty payments from third parties. The segments derive their revenues from this activity.
Segment operating profit or loss and segment assets are determined in accordance with the same policies as those described in the summary of significant accounting policies except that interest income and expense, current and deferred income taxes, and goodwill are not allocated to individual segments. A reconciliation of segment operating profit or loss to consolidated net loss is as follows:
| | | 2010 | | | 2009 | | | 2008 (1) | |
| Segment operating loss | | | (3,818 | ) | | | (3,202 | ) | | | (4,159 | ) |
| Financial income, net | | | (8,844 | ) | | | (4,390 | ) | | | 5,232 | |
| Foreign Currency exchange (losses) gains, net | | | 884 | | | | (101 | ) | | | 577 | |
| Other income, net | | | - | | | | - | | | | (1 | ) |
| Income tax (expense) credit | | | (939 | ) | | | (72 | ) | | | (51 | ) |
| Consolidated net loss | | | (12,717 | ) | | | (7,766 | ) | | | 1,597 | |
(1) Certain prior years amounts have been reclassified to conform to the current year’s presentation. See Note 1-15 of the consolidated financial statements – Research & Development costs.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
A summary of the Company’s operations by business unit is presented below for years ending December 31, 2010, 2009 and 2008:
| | | HIFU Division | | | UDS Division | | | EDAP TMS (Corporate) | | | FDA | | | Total consolidated | |
| 2010 | | | | | | | | | | | | | | | |
Sales of goods | | | 1,939 | | | | 11,196 | | | | - | | | | - | | | | 13,135 | |
Sales of RPPs & leases | | | 3,505 | | | | 1,184 | | | | - | | | | - | | | | 4,689 | |
| Sales of spare parts and services | | | 1,438 | | | | 3,940 | | | | - | | | | - | | | | 5,378 | |
Total sales | | | 6,882 | | | | 16,319 | | | | - | | | | - | | | | 23,202 | |
Total net sales | | | 6,882 | | | | 16,319 | | | | - | | | | - | | | | 23,202 | |
External other revenues | | | 6 | | | | 500 | | | | - | | | | - | | | | 506 | |
Total revenues | | | 6,888 | | | | 16,820 | | | | - | | | | - | | | | 23,708 | |
Total COS | | | (3,285 | ) | | | (10,969 | ) | | | - | | | | - | | | | (14,253 | ) |
Gross margin | | | 3,604 | | | | 5,851 | | | | - | | | | - | | | | 9,455 | |
R&D | | | (741 | ) | | | (793 | ) | | | - | | | | (1,734 | ) | | | (3,268 | ) |
Selling expenses | | | (2,741 | ) | | | (3,943 | ) | | | - | | | | - | | | | (6,684 | ) |
G&A | | | (766 | ) | | | (1,024 | ) | | | (1,338 | ) | | | (193 | ) | | | (3,320 | ) |
Total expenses | | | (4,247 | ) | | | (5,760 | ) | | | (1,338 | ) | | | (1,927 | ) | | | (13,272 | ) |
Operating income (loss) | | | (644 | ) | | | 91 | | | | (1,338 | ) | | | (1,927 | ) | | | (3,818 | ) |
Total Assets | | | 9,344 | | | | 20,803 | | | | 5,474 | | | | 317 | | | | 35,938 | |
Capital expenditures | | | 116 | | | | 411 | | | | 73 | | | | - | | | | 600 | |
Long-lived assets | | | 2,341 | | | | 3,310 | | | | 175 | | | | 59 | | | | 5,886 | |
Goodwill | | | 645 | | | | 1,767 | | | | - | | | | - | | | | 2,412 | |
| | | HIFU Division | | | UDS Division | | | EDAP TMS (Corporate) | | | FDA | | | Total consolidated | |
| 2009 | | | | | | | | | | | | | | | |
Sales of goods | | | 3,663 | | | | 10,113 | | | | - | | | | - | | | | 13,775 | |
Sales of RPPs & leases | | | 4,267 | | | | 1,177 | | | | - | | | | - | | | | 5,444 | |
| Sales of spare parts and services | | | 1,690 | | | | 3,930 | | | | - | | | | - | | | | 5,620 | |
Total sales | | | 9,620 | | | | 15,219 | | | | - | | | | - | | | | 24,839 | |
Total net sales | | | 9,620 | | | | 15,219 | | | | - | | | | - | | | | 24,839 | |
External other revenues | | | 7 | | | | 39 | | | | - | | | | - | | | | 46 | |
Total revenues | | | 9,627 | | | | 15,258 | | | | - | | | | - | | | | 24,885 | |
Total COS | | | (4,173 | ) | | | (10,040 | ) | | | - | | | | - | | | | (14,213 | ) |
Gross margin | | | 5,454 | | | | 5,218 | | | | - | | | | - | | | | 10,672 | |
R&D | | | (974 | ) | | | (868 | ) | | | - | | | | (1,810 | ) | | | (3,652 | ) |
Selling expenses | | | (3,284 | ) | | | (3,117 | ) | | | - | | | | - | | | | (6,401 | ) |
G&A | | | (973 | ) | | | (1,017 | ) | | | (1,431 | ) | | | (400 | ) | | | (3,821 | ) |
Total expenses | | | (5,231 | ) | | | (5,002 | ) | | | (1,431 | ) | | | (2,210 | ) | | | (13,874 | ) |
Operating income (loss) | | | 223 | | | | 216 | | | | (1,431 | ) | | | (2,210 | ) | | | (3,202 | ) |
Total Assets | | | 10,604 | | | | 20, 322 | | | | 9,065 | | | | 387 | | | | 40,378 | |
Capital expenditures | | | 309 | | | | 410 | | | | 19 | | | | 2 | | | | 740 | |
Long-lived assets | | | 2,685 | | | | 3,327 | | | | 158 | | | | 99 | | | | 6,269 | |
Goodwill | | | 645 | | | | 1,767 | | | | - | | | | - | | | | 2,412 | |
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
| | | HIFU Division | | | UDS Division | | | EDAP TMS (Corporate) | | | FDA | | | Total consolidated | |
2008 (1) | | | | | | | | | | | | | | | |
Sales of goods | | | 3,658 | | | | 8,888 | | | | - | | | | - | | | | 12,547 | |
Sales of RPPs & leases | | | 3,698 | | | | 966 | | | | - | | | | - | | | | 4,664 | |
| Sales of spare parts and services | | | 1,705 | | | | 3,941 | | | | - | | | | - | | | | 5,645 | |
Total sales | | | 9,060 | | | | 13,796 | | | | - | | | | - | | | | 22,856 | |
Total net sales | | | 9,060 | | | | 13,796 | | | | - | | | | - | | | | 22,856 | |
External other revenues | | | 138 | | | | 59 | | | | - | | | | - | | | | 197 | |
Total revenues | | | 9,198 | | | | 13,855 | | | | - | | | | - | | | | 23,053 | |
Total COS | | | (3,794 | ) | | | (10,161 | ) | | | - | | | | - | | | | (13,955 | ) |
Gross margin | | | 5,405 | | | | 3,694 | | | | - | | | | - | | | | 9,099 | |
R&D | | | (816 | ) | | | (838 | ) | | | - | | | | (2,058 | ) | | | (3,712 | ) |
Selling expenses | | | (2,960 | ) | | | (2,724 | ) | | | - | | | | - | | | | (5,684 | ) |
G&A | | | (887 | ) | | | (841 | ) | | | (2,036 | ) | | | (97 | ) | | | (3,862 | ) |
Total expenses | | | (4,663 | ) | | | (4,403 | ) | | | (2,036 | ) | | | (2,156 | ) | | | (13,258 | ) |
Operating income (loss) | | | 742 | | | | (709 | ) | | | (2,036 | ) | | | (2,156 | ) | | | (4,159 | ) |
Total Assets | | | 10,690 | | | | 20,000 | | | | 1,746 | | | | 11,429 | | | | 43,863 | |
Capital expenditures | | | 673 | | | | 327 | | | | 128 | | | | - | | | | 1,128 | |
Long-lived assets | | | 3,048 | | | | 3,371 | | | | 171 | | | | 157 | | | | 6,747 | |
Goodwill | | | 645 | | | | 1,767 | | | | - | | | | - | | | | 2,412 | |
(1) Certain amounts have been reclassified to conform to the current year’s presentation. See Note 1-15 of the consolidated financial statements – Research & Development costs.
28—VALUATION ACCOUNTS
| | | Allowance for doubtful accounts | | | Slow- moving inventory | |
| Restated balance as of January 1, 2008 | | | 735 | | | | 1,021 | |
| Charges to costs and expenses | | | 72 | | | | 391 | |
| Deductions: write-off provided in prior periods | | | (15 | ) | | | - | |
| Restated balance as of December 31, 2008 | | | 792 | | | | 1,412 | |
| Charges to costs and expenses | | | 290 | | | | 196 | |
| Deductions: write-off provided in prior periods | | | (220 | ) | | | (803 | ) |
| Restated balance as of December 31, 2009 | | | 862 | | | | 805 | |
| Charges to costs and expenses | | | 217 | | | | 252 | |
| Deductions: write-off provided in prior periods | | | - | | | | (186 | ) |
| Restated balance as of December 31, 2010 | | | 1,079 | | | | 871 | |
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
29—SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest and income taxes paid are as follows:
| | | 2010 | | | 2009 | | | 2008 | |
| Income taxes paid (refunds received) | | | 942 | | | | (13 | ) | | | 74 | |
| Interest paid | | | 66 | | | | 759 | | | | 382 | |
| Interest received | | | 43 | | | | 44 | | | | 273 | |
| | | | | | | | | | | | | |
| Non-cash transactions: | | | 2010 | | | | 2009 | | | | 2008 | |
| Capital lease obligations incurred | | | 1,649 | | | | 2,209 | | | | 2,019 | |
30—RELATED PARTY TRANSACTIONS
The General Manager of the Company's Korean branch "EDAP-TMS Korea" is also Chairman of a Korean company named Dae You. EDAP-TMS Korea subcontracts to Dae You the service contract maintenance of our medical devices installed in Korea. The amounts payable (‘Trade accounts and notes payable’) under this contract were €59 thousand, €52 thousand and €61 thousand for 2010, 2009 and 2008 respectively.
Dae You also acts as an agent to promote our medical devices in South Korea, and receives commissions on sales. Dae You has purchased medical devices from us, which it operates in partnership with hospitals or clinics. These purchases (‘Sales of goods’) amounted to €315 thousand, €234 thousand and €539 thousand in 2010, 2009 and 2008 respectively. As of December 31, 2010, receivables (‘Net trade accounts and notes receivable’) amounted to €33 thousand and payables to €21 thousand. As of December 31, 2009, receivables from Dae You amounted to €67 thousand and our payables to them amounted to €14 thousand.
The Company purchases certain technological elements from Siemens AG, an affiliate of its shareholder, Siemens France Holding. Total purchases amounted to €20 thousand in 2010, €216 thousand in 2009 and €212 thousand in 2008. As of December 31, 2010, payables due to Siemens AG amounted to €0 thousand and as of December 31, 2009, payables due to Siemens AG amounted to €2 thousand.
As of December 31, 2010, Siemens France Holding is no more a shareholder of EDAP-TMS.
31—SUBSEQUENT SIGNIFICANT EVENTS AS OF MARCH 31, 2011
Following the March 2011 earthquake and tsunami in Japan, we are closely monitoring the situation of our subsidiary in Japan which accounts for approximately 33% of our lithotripsy sales. We do not have any manufacturing facility in Japan nor do we procure significant supplies from Japan. As of March 31, 2011, it is too early to determine whether the current Japanese situation will have any significant impact on our business in this territory.
EXHIBIT 1.1
BY-LAWS
EDAP TMS
A stock company (société anonyme)
with a capital of Euros 1,750,229.78
Head office: Parc d’activité- La Poudrette Lamartine
4 rue du Dauphiné
69120 Vaulx en Velin - France
MEMORANDUM AND ARTICLES OF ASSOCIATION
- BYLAWS -
Including modifications approved on January 3rd, 2011
TITLE I
FORMATION - PURPOSE - CORPORATE NAME
REGISTERED OFFICES - DURATION
ARTICLE 1 - FORMATION OF THE COMPANY
A stock company exists between the owners of the shares created hereinafter and those which could be created at a later stage; it is organized and exists under the laws in force and under the following bylaws.
ARTICLE 2 – CORPORATE PURPOSES
The purpose of the Company is:
| | - | the taking of financial interests under whatever form in all French or foreign groups, companies or businesses which currently exist or which may be created in the future, mainly through contribution, subscription or purchasing of shares, obligations or other securities, mergers, holding companies, groups, alliances or partnerships ; |
| | - | the management of such financial interests ; |
| | - | the direction, management, supervision and coordination of its subsidiaries and interests ; |
| | - | the provision of all administrative, financial, technical or other services ; |
| | - | and generally, all operations of whatever nature, financial, commercial, industrial, civil, relating to property and real estate which may be connected directly or indirectly, in whole or in part, to the company's purposes or to any similar or related purposes which may favor the extension or development of said purpose. |
ARTICLE 3 - CORPORATE NAME
The corporate name of the Company is:
EDAP TMS
ARTICLE 4 - REGISTERED OFFICE
The registered office is fixed at: Parc d'activité La Poudrette Lamartine
4 rue du Dauphiné- (F) 69120 Vaulx en Velin - France.
It may be transferred to any other location within the department or a nearby department further to a simple resolution from the Board, subject to ratification by the earliest Ordinary General Meeting, and every other location by virtue of a resolution from the Extraordinary Shareholders' General Meeting. The Board may set up administrative seats, subsidiaries, offices and branches in all places without any derogation related to the choice of jurisdiction as provided in these bylaws.
ARTICLE 5 - DURATION
The duration of the Company is sixty (60) years as of the date of incorporation of the Company recorded in the Trade and Corporate Registry unless an anticipated dissolution or a prorogation is decide as provided for in these bylaws.
TITLE II
REGISTERED CAPITAL
ARTICLE 6 - REGISTERED CAPITAL
The registered capital is fixed at the amount of one million seven hundred fifty thousand two hundred twenty nine Euros and seventy eight cents (Euros 1,750,229.78) divided into thirteen million four hundred and sixty-three thousand three hundred and six (13,463,306) shares with a nominal value of thirteen cents (Euros 0.13) each, fully paid up.
ARTICLE 7 - INCREASE OF THE REGISTERED CAPITAL
The registered capital may be increased once or several times through the creation of new shares, representing contributions in kind or contributions in cash, the transformation of available corporate reserves into shares or through any other mean by virtue of a resolution from the Extraordinary Shareholders' General Meeting. Such meeting shall fix the conditions for the issuing of new shares within the framework of the legal provisions in force, or delegate its powers for such purpose to the Board. As a representation of capital increases may be created, either shares similar to the existing ones, or shares of a totally different type which may, within the conditions provided by law, grant a preferential right or whatever privilege on the other shares. The Board has all powers to negotiate, if any, with any bank or financial syndicate to facilitate or guarantee the issuance of shares as mentioned here above complying with any legal provision, in particular as far as preferential rights of subscription for the benefit of the older shareholders are concerned. No capital increase in shares paid up in cash may however be implemented if the existing capital has not been priorly fully paid up. Capital increases must be implemented within five years as of the date on which the Shareholders' General Meeting has taken or authorized such resolution.
Capital increases may occur through the issue of shares with a premium. That premium of which the total amount shall have to be paid at the time of the subscription of the shares shall not be regarded as a profit to be distributed under operating profit; it shall represent an additional payment to the capital in shares and shall belong exclusively to all shareholders, except otherwise provided for by the Ordinary or Extraordinary Shareholders' Meeting.
In case of an increase through the issue of shares payable in cash, and unless otherwise provided further to a resolution from the Extraordinary Shareholders' General Meeting, the owners of existing shares who have duly contributed as they were called up shall receive in proportion to the amount of these shares, a preferential right to subscribe to the new shares. The Board shall determine the manner in which that right shall be exercised and its validity period in compliance with (French) law; it shall be negotiable under the same conditions as the shares during the subscription.
Those shareholders who, due to the number of shares they hold, may not obtain a new share or a full number of new shares, shall be entitled to group to exercise their right but however no joint subscription may result from such a grouping.
ARTICLE 8 - CAPITAL REDUCTION
The Extraordinary Shareholders' General Meeting may also decide a reduction of the registered capital for whatever reason and in whatever manner, in particular through the reimbursement to the shareholders of a repurchasing of the corporate shares or the exchange of old shares by new shares, for the same or a lower number of shares, with or without the same nominal amount and, if any, the obligation of selling or buying old shares to enable the exchange or also through the payment of a balance in cash.
The General Meeting may also delegate to the Board all powers to implement the capital reduction.
The Auditors shall be informed on the project of capital reduction at least forty five days prior to the Meeting. The General Meeting shall decide on the report from the Auditors who shall provide their appreciation on the causes and the conditions of the operation.
When losses do not motivate the capital reduction, creditors may within a period of thirty days as of the date of the filing with the Clerk of the Trade Court of the minutes of the resolution from the General Meeting who decided or authorized the reduction, oppose to the reduction. The opposition is brought before the Trade Court.
TITLE III
SHARES
ARTICLE 9 – PAYMENT OF THE SHARES
At the time of capital increase, the shares to be subscribed in cash must be paid up of at least one fourth at the time of the subscription. The balance of payments shall be paid within a maximum of five years, as of the day on which the capital increase shall have become effective, in one or several times, at the times and in the proportions determined by the Board. The calling up of capital contributions shall be communicated to the shareholders by registered letter at least fifteen days prior to the date fixed for each payment.
The shares contributed in cash as part of the capital increases may be paid up partly or totally through the compensation of a debt which is fixed, liquid and due to the company.
The Board may authorize at any time the shareholders to prepay the amount of their shares which are not yet called up.
Should the shareholders not proceed with the payments on the set dates, the interest of the amount of these payments shall run by law for each day of delay at a rate of 12% per annum as of the date of payment fixed in the registered letter above mentioned and without a claim or formal notice being necessary.
If within the period fixed at the time of calling up the capital, some shares have not been paid up from the required payments, the Company may, one month after a special formal individual notice notified to the defaulting shareholder - by registered letter or extra judicial writ – offer, to the other shareholders, the shares to be paid up by registered letter sent to each of them.
To implement this preemptive right, the Board shall have, upon the expiration of the fixed time limit, at the time of the calling up of capital, to offer to the shareholders the shares to be paid up by registered letter sent to each of them.
If several shareholders are purchasers, the shares shall be distributed among them in proportion to their rights in the Company.
If such a proportional distribution is not possible, the remaining shares shall be distributed through draw lots.
If within a time limit of one month further to the shareholders having been warned, some shares are still not paid up, the Company may sale them within the terms and conditions stipulated under Section L.228-27 of the French Commercial Code through the decree of March 23, 1967 referred to for its application.
The sale of the shares shall be carried in public auctions by a stock broker or a public notary. For such purpose, the Company shall publish in a legal gazette within the department of the registered offices, at least thirty days further to the notice scheduled in the previous paragraph, a notice concerning the sale of the shares. It shall inform the debtor and, if any, its co-debtors, of the sale by a registered letter containing indications on the date and the issue number of the gazette in which the publication has been made. The sale of the shares may not take place less than fifteen day as from the sending of the registered letter.
The Company shall be entitled to the net proceeds of the sale up to the due amount and shall be deducted from the principal amount and interests due by the defaulting shareholder before the reimbursement of the costs incurred by the company to realize the sale. The defaulting shareholder remains debtor or benefits from the difference.
Upon the expiration of the time limit as scheduled in the fifth paragraph above, the shares not paid up from the required payments shall stop permitting the admission and the voting rights in shareholders meetings and shall be deducted for the counting of the quorum. The right to the dividends and the preferential right of subscription shall be suspended. If the shareholder pays up the principal sum and its interests, he/she may ask for the payment of non prescribed dividends but he/she may not exercise an action under a preferential right of subscription to a capital increase after the expiration of the time limit fixed for the exercise of that right.
ARTICLE 10 – LEGAL FORM AND CONDITIONS OF VALIDITY OF SHARES
The shares are compulsorily issued by the Company as registered shares and are materialized through a registration into the accounts of the Company.
The share accounts are kept under the conditions and terms provided by law, by the Company or any other authorized Agent the name or denomination and address of which shall be published in the "Bulletin des Annonces Légales Obligatoires" (Bulletin for compulsory legal announcements).
The share accounts mention:
| | - | the identification data of natural persons or legal entities in the name of whom they have been opened and, if any, the legal nature of their rights or incapacities ; |
| | - | the name, the category, the number and, if any, the nominal value of the registered shares; |
| | - | the restrictions which may concern these shares (pledge, escrow account, etc...). |
Whenever the shares are not fully paid upon subscription, the payments on these shares are put in and witnessed as such by a certificate.
Each share gives right to a part of the ownership of the Company's assets, in proportion with the number of issued shares. Besides, it gives right to a part of profits as stipulated under Article 27 hereinafter.
Shareholders are only responsible up to the amount of shares they possess and above that amount, any calling up of capital is forbidden. They cannot be subject to any restitution of interests or dividends which were regularly distributed.
ARTICLE 11 - SHARE TRANSFERS
Shares may be freely traded under the conditions defined by law. In the event of a capital increase, the shares may be traded from the completion thereof.
Shares shall remain negotiable following the Company’s dissolution, and until the closing of its liquidation.
ARTICLE 12 - INDIVISIUM OF SHARES - SEALS
In respect of the Company the shares are indivisible. Joint owners of a share shall be represented before the Company by a single person they shall have appointed further to a common agreement.
Whenever the ownership of several existing shares shall be necessary to exercise any right whatsoever and in particular to exercise the preferential right as here above provided for, or still, in the case of exchange or attribution of the shares further to an operation such as: capital reduction, capital increase by incorporation of reserves, merger, entitling to a new share against providing existing shares, isolated shares or shares in a number lower than the one required shall grant no right to the holder against the Company ; shareholders shall be personally responsible for the regrouping of the necessary number of shares.
The heirs, representatives or creditors of a shareholder shall under no circumstances whatsoever neither call for the seals on the Company's assets and documents requesting the partition or the sale by auction of a lot held by indivisium, nor interfere in whatever manner in its management ; they must - for the exercise of their rights - refer to the corporate inventories/ books and the decisions from the General Meeting.
All shares which form or shall form the registered capital shall always be assimilated to one another as regards tax costs. Consequently, all duties and taxes which for whatever reason could - with respect to any reimbursement of capital of these shares, or more generally, any distribution of their profit become claimable for only some of them, either during the existence of the Company or during its winding-up, shall be distributed among all shares representing the capital at the time of that or those reimbursements or distributions in such a way that all current or future shares shall confer on their owners - whilst taking into account the nominal amount of shares and rights not amortized of different categories, the same effective privileges giving them the right of receiving the same net amount.
TITLE IV
MANAGEMENT OF THE COMPANY
ARTICLE 13 – BOARD OF DIRECTORS
The Company is managed by a Board of Directors made up of individuals or legal persons whose number is determined by the Ordinary Shareholders Meeting within the limits provided for by the law.
A legal entity must, at the time of its appointment, designate an individual who will be its permanent representative at the Board of Directors. The duration of the office of this permanent representative is the same as that of the Director legal body he/she represents. In the event the legal body revokes its permanent representative, it must replace said representative immediately. The same rules apply in case of death or resignation of the permanent representative.
Each Director must own at least one share during his term of office. However there is no minimal obligation if the Director is, at the same time, a shareholder linked to the Company with an employment contract.
If - at the time of his/her appointment - the Director does not own the requested number of shares or if during his/her term, he/she no longer owns the requested number of shares, he/she is considered to have automatically resigned, if he/she has failed to regularize his/her situation within three months.
The Directors’ term of office is for six years; one year being calculated as the period in between two consecutive annual Ordinary General Shareholders Meetings. The tenure of a Director terminates at the end of the Ordinary General Shareholders Meeting which meets to vote upon the accounts of the then preceding fiscal year and is held in the year during which the office of said Director comes to an end.
The Directors may always be re-elected, they may also be revoked at any time by the Shareholders' General Meeting.
An individual person cannot to hold more than five positions as a member of a Board of Directors or a member of a Supervisory Board in companies registered in France; the directorship held in controlled companies (as defined by Section L.233-16 of the French Commercial Code) by the Company, are not taken into account.
In case of death or resignation of one or several Director(s), the Board of Directors may make (a) provisional appointment(s), even between two General Shareholders Meetings.
Any such provisional appointment(s) made pursuant to the previous paragraph need to be ratified by the next following Ordinary Shareholders' General Meeting.
Failing ratification, the resolutions and acts approved beforehand by the Board remain nonetheless valid.
When the number of Directors falls below the compulsory legal minimum, the remaining directors must summon immediately the Ordinary General Shareholders Meeting, in order to reach the full complement of the Board.
Any Director appointed in replacement of another Director whose tenure has not expired remains in office only for the remaining duration of the tenure of his predecessor.
An employee of the Company may be appointed as a Director. His/her contract of employment must however correspond to an effective work. In this case, he/she does not loose the benefit of his/her employment contract.
The number of Directors who are also linked to the Company by an employment contract can not exceed one third of the Directors in office or five members.
Directors cannot be more than eighty years old. In case one of the Directors reaches this limit during his/her office, the older Director is automatically considered as having resigned at the next General Shareholders Meeting.
ARTICLE 14 - MEETINGS OF THE BOARD
14.1. The Board of Directors meets as often as the interests of the Company require.
14.2. The Chairman summons the Directors to the Meetings of the Board. The notification of the Meetings may be made by all means, whether oral or written.
Furthermore, if there has not been a Board Meeting for two months, members of the Board representing at least one third of the members of the Board, or the Chief Executive Officer, may validly require the President to summon the Board. In such a case, they must indicate the agenda for the meeting.
In case a Labor Committee exists, the representatives of this committee - appointed pursuant to the Labor Code - must be invited to every meeting of the Board.
The meeting takes place either at the registered office or at any other place in France or abroad.
14.3. For the resolutions of the Board of Directors to be valid, at least one half of its members must be present.
Within the limits set out by Section L.225-37, paragraph 3 of the French Commercial Code and subject to the setting up of internal rules, the Board will be entitled to take into account for its quorum and majority rules, the participation of Directors by means of videoconference, still in respect of the legal provisions.
Any decision granting options to purchase new or existing shares of the Company to a Director who is also an employee, to the President or to the Chief Executive Officer of the Company (when he/she is also a Director), within the framework of an authorization given by the Extraordinary Shareholders' General Meeting, pursuant to Sections L.225-177 et seq. of the French Commercial Code, shall be taken by a majority vote among the Directors who are present or represented. The concerned Director as well as any other Director who is likely to be granted similar options cannot take part in the vote.
The resolutions of the Board shall be taken at a majority vote ; in case of a split decision, the President has casting vote.
14.4. Any Director may grant a proxy – even by letter, telegram, telex or fax – to any other Director to represent him/her at a Board Meeting; however, each Director is not allowed to have more than one proxy per meeting.
14.5. The copies or abstracts of the minutes of the Board of directors are certified by the Chairman of the Board, the Chief Executive Officer, the Director temporarily delegated in the duties of President or by a representative duly authorized for that purpose.
ARTICLE 15 - POWERS OF THE BOARD
The Board of Directors defines the orientations of the Company's activity and supervises their implementation. Within the limits set out by the corporate purposes, and the powers expressly granted by law to the General Shareholders Meeting, the Board may deliberate upon the business of the Company and take any decisions thereof.
ARTICLE 16 - CHAIRMAN
The Board elects one of its members as Chairman of the Board, who must be an individual. The Board determines the duration of the office of the Chairman: it cannot exceed that of his/her office as a Director. The Board may revoke the Chairman at any time. The remuneration of the Chairman is decided by the Board of Directors.
The Chairman represents the Board and organizes its work. The General Shareholders' Meeting must be informed of this work, by the Chairman. The Chairman is responsible for the good functioning of the Company's organization and, in particular, has to check the ability of the Board members to perform their mission.
Pursuant to Section 706-43 of the French criminal proceedings Code, the Chairman may validly delegate to any person he/she chooses the powers to represent the Company within the framework of criminal proceedings which might be taken against the Company.
The Chairman of the Board of Directors cannot be over eighty years old. In case the Chairman reaches this limit during his/her tenure, he/she will automatically be considered as having resigned. However, his/her tenure is extended until the next Board of Directors Meeting, during which his/her successor shall be appointed. Subject to this provision, the Chairman of the Board may always be re-elected.
ARTICLE 16 bis - CHIEF EXECUTIVE OFFICER
The general management of the Company is performed, under his responsibility, either by the Chairman of the Board or by another individual, elected by the Board and bearing the title of Chief Executive Officer.
The choice between these two methods of management belongs to the Board and must be made as provided for by these bylaws.
Shareholders and third parties will be informed of this choice in the conditions set out by the decree n° 2002-803 of May, 3rd, 2002.
The Chief Executive Officer is vested with the most extensive powers to act under all circumstances on behalf of the Company, within the limits set out by the corporate purposes, and subject to the powers expressly granted by law to the Board of Directors and the General Shareholders Meeting.
The Chief Executive Officer represents the Company with third parties. The Company is bound by the acts of the Chief Executive Officer overcoming the corporate purposes, unless proven that the third party knew such act overcame the corporate purposes or could not ignore so in light of the circumstances; yet, the sole publication of the bylaws is not enough to constitute a sufficient evidence thereof.
The remuneration of the Chief Executive Officer is decided by the Board of Directors. The Chief Executive Officer can be revoked at any time by the Board of Directors. If this revocation is not justified, damages may be allocated to the Chief Executive Officer, except when the Chief Executive Officer is also the Chairman of the Board.
The Chief Executive Officer may not hold another position as Chief Executive Officer or member of a Supervisory Board in a company registered in France except when (i) such company is controlled (as referred to in Section L.233-16 of the French Commercial Code) by the Company and (ii) when this controlled company’s shares are not quoted on a regulated market.
The Chief Executive Officer cannot be over seventy years old. In case the Chief Executive Officer reaches this limit during his/her tenure, he/she will automatically be considered as having resigned. However, his/her tenure is extended until the next Board of Directors meeting, during which his/her successor shall be appointed.
ARTICLE 17 - DEPUTY CHIEF EXECUTIVE
Upon the Chief Executive Officer’s proposal, the Board of Directors may appoint one or several individual(s) as Deputy Chief Executive(s) with the aim of assisting the Chief Executive Officer.
The Deputy Chief Executive may be revoked at any time by the Board, upon proposal of the Chief Executive Officer.
In agreement with the Chief Executive Officer, the Board of Directors shall determine the scope and duration of the powers delegated to the Deputy Chief Executive. The remuneration of the Deputy Chief Executive is decided by the Board of Directors.
Towards third parties, the Deputy Chief Executive has the same powers as the Chief Executive Officer, among which the ability to represent the Company in court.
The Deputy Chief Executive Officer cannot be over seventy years old. In case a Deputy Chief Executive Officer would reach this limit during his/her office, he/she would automatically be considered as having resigned. However, his/her office is extended until the soonest Board of Directors meeting, during which his/her successor shall be appointed.
In any case, the maximum number of Deputy Chief Executive(s) cannot exceed five.
ARTICLE 18 - AGREEMENTS SUBJECT TO AUTHORIZATION
18.1. Securities, endorsement of drafts and guarantees provided for by the Company shall be authorized by the Board of Directors in compliance with the conditions provided for by the law.
18.2. Any agreement to be entered into - either directly or indirectly or through an intermediary - between the Company and one of its Directors, its Chief Executive Officer or Deputy Chief Executive, one of its shareholders holding more than 5% of the voting rights or, if it is a company, the company controlling it (as referred to in the Section L.233-3 of the French Commercial Code) is subject to a prior authorization of the Board of Directors. The same authorization applies to the agreements in which these persons are indirectly interested.
Such prior authorization is not required for agreements which, even though they are entered into by the above mentioned persons, concern usual operations which have been entered into on standard conditions. Nevertheless, such agreements have to be reported to the Chairman by the concerned person. Furthermore, the lists and purposes of these agreements shall be communicated by the Chairman to the Board of Directors and to the Statutory Auditors.
The same shall apply for agreements between the Company and another company, whenever one of the Directors, Chief Executive Officer(s) or Deputy Chief Executive(s) of the Company is the owner, a partner with unlimited liability, a manager, Director, Chief Executive Officer, member of the Executive Board or Supervisory Board of said company.
The prior authorization of the Board of Directors is required pursuant to the conditions provided for by law. It being specified that said director shall not be taken into account for the quorum calculation and that his/her vote shall not be taken into consideration for the calculation of the majority.
ARTICLE 19 - PROHIBITED AGREEMENTS
Directors who are not legal bodies are prohibited from taking out loans from the Company, under any form whatsoever, from getting an overdraft on a current account or otherwise, and benefiting from a guarantee from the Company for the agreements they have entered into with third parties.
The same prohibition applies to Chief Executive Officers, Deputy Chief Executives and to permanent representatives of the Directors legal bodies. It also applies to spouses, ascendants and descendants of the persons referred to in the previous paragraph, as well as to any interposed person.
TITLE V
AUDITORS
ARTICLE 20 - AUDITORS
The Ordinary Shareholders' General Meeting shall appoint one or two Auditors and substitute Auditors for a duration under the conditions and for the task complying with (French) Law.
The Auditors are appointed for six fiscal years. Their mandate ends at the time of the General Meeting deciding upon the statements of the sixth fiscal year.
The Auditor appointed to replace another shall only remain in service until the expiration of the mandate of his predecessor.
Auditors are indefinitely re-eligible.
One or several shareholders representing at least one twentieth of the registered capital may ask in court the objection to one or several Auditors appointed by the meeting and the designation of one or several other Auditors who shall provide their services replacing the objected Auditors. Under penalty of unacceptability of the request, the latter shall have to be made before the President of the Commercial Court who shall rule in chambers within a period of thirty days as from the rejected nomination.
The Auditors must be called at the Board meeting during which the accounts of the ended financial year shall be closed and at all shareholders meetings.
ARTICLE 21 - EXPERTISE
One or several shareholders representing at least one twentieth of the registered capital may ask to the President of the Commercial Court to rule in chambers to designate an expert in charge of presenting a report on one or several management operations.
The report from the expert possibly appointed must be sent to the petitioners, to the Board, to the Ministère Public ("Attorney General"), to the Labor Committee and to the COB (French SEC) ; it shall also be attached to the report from the Auditor(s) prepared for the forthcoming General Meeting and should be granted the same advertising.
TITLE VI
GENERAL MEETINGS
ARTICLE 22 - GENERAL RULES
| 1) | The annual Ordinary General Meeting shall have to meet every six month, following the end of each financial year subject to an extension of that period further to a court decision. |
| 2) | Extraordinary Shareholders' General Meetings or Ordinary Shareholders' General Meetings called up extraordinarily may also be called up further to a notice from either the Board or the Auditors or the Agent designated by the court upon the petition of the Labor Committee or any interested person in case of an urgent matter or one or several shareholders representing at least one twentieth of the registered capital. |
| 3) | The General Meetings are held at the head office or in any other place indicated in the notice which may even be out of the department of the head office. |
In case of an urgent matter, the Labor Committee may go to court and ask for the appointment of an Agent who will be in charge of convening the Shareholders' General Meeting.
The Labor Committee may also require the registration of resolution proposals on the agenda.
Two members of the Labor Committee, one from the "cadres techniciens et Agents de maîtrise" category, and one from the "employés et ouvriers" category, may be appointed by the Labor Committee in order to assist to the Shareholders' General Meetings. Upon their demand, they must be listened to during for all deliberations requiring an unanimous vote from the shareholders.
| 4) | The notices for General Meetings are sent to each shareholder at least fifteen days prior to these meetings either by simple mail or registered mail. |
Should the General Meeting not have been able to decide validly due to the failing of the required quorum, a second meeting is called up the same way as the first one and the calling up notice shall remind its date. However the time limit for such a notice is reduced to six days.
| 5) | The calling up notice shall indicate the corporate name possibly followed by its acronym, the corporate form, the amount of registered capital, the address of its registered offices, the corporate identification numbers with the French Trade Registry and the National Institute of Statistics and Economic Surveys (Institut National de la Statistique et des Etudes Economiques INSEE), the dates, hour and place of the meeting and its nature, extraordinary, ordinary or special together with its agenda. |
Subject to miscellaneous questions which should be of no major importance, questions indicated on the agenda are mentioned in such a manner that their content and scope appear clearly without having to refer to other documents.
One or several shareholders may under the conditions provided in Sections 128 to 131 of the decree n° 67-236 dated March 23rd, 1967 require the recording on the agenda of resolution projects which do not concern the presentation of candidates to the Board.
The Meeting cannot deliberate on a question which is not listed on the agenda; however, it may in all circumstances revoke one or several members from the Board and proceed with their replacement.
The Meeting agenda cannot be modified on the second calling up.
| 6) | All shareholders attend the General Meeting whatever the number of their shares as long as they have been paid up for required payments. |
| 7) | A shareholder can only be represented by another shareholder or his/her spouse who may not be a shareholder. |
The mandate is granted for a single meeting ; however it can be granted for two meetings, an ordinary meeting and an extraordinary meeting held on the same day or within a period of seven days.
The mandate granted for a meeting is valid for successive meetings called up covering the same agenda.
The following documents must be attached to any proxy form sent to the shareholders :
| | - | the text of the projects of resolutions presented by the Board and if need be by the shareholders or the Labor Committee. |
| | - | a summary on the corporate situation during the ended financial year with a chart on the corporate results during the past five financial years or each of the financial years since the incorporation of the Company if their number is inferior to five. |
| | - | a form for the sending of the documents and information listed under article 135 of the decree mentioned here above, informing the shareholder that he/she may obtain by simple request the automatic sending of the documents and information mentioned above for each forthcoming Shareholders' Meetings. |
The proxy form must inform the shareholder in a very clear manner that failing any indication of Agent, a favorable vote shall be issued in his/her name to adopt the resolution projects presented or consented by the Board. To issue any other vote, the shareholder must chose an Agent who accepts to vote in line with his/her mandate.
The proxy must be signed by the represented shareholder and indicate his/her name, usual first name and domicile, the number of shares he/she holds and the number of votes related to his/her shares.
The Agent namely designated on the proxy may not a substitute another person to him/herself.
| 8) | The Meeting is presided over by the Chairman of the Board of Directors or, if he/she is absent, by a director duly delegated for that purpose by the Board. Otherwise, the Meeting elects its own president. |
The two members of the meeting with most votes shall, if they accept that position, fulfill the tasks of scrutinizers
The Meeting Committee designates the secretary who may be selected among persons who are not shareholders.
| 9) | An attendance sheet is kept and contains: |
| | - | the name, usual first name and domicile of each shareholder, attending or represented, the number of shares he/she holds and the number of votes related to these shares. |
| | - | the name, usual first name and domicile of each Agent, the number of shares represented by his/her mandates and the number of votes related to his/her shares. |
Comments on the represented shareholders may not be mentioned on the attendance sheet provided the powers are attached thereto and their number is indicated.
The Meeting Committee shall certify as true the attendance sheet duly signed by the present or represented shareholders.
| 10) | Secret ballot vote shall be adopted whenever claimed by the Meeting Committee or members of the meeting representing more than half of the registered capital represented at that Meeting. |
| 11) | For all meetings, the quorum is counted on the total amount of shares forming the registered capital deducting those which are not entitled to the voting right by virtue of the legislative or regulatory provisions. |
| 12) | Each member of the meeting has as much votes as he/she possesses and represents shares, both under his/her personal name and as Agent, without limitations. However, in meetings held for the checking the shares invested in kind or specific advantages, each shareholder may not dispose of more than ten votes. |
In the case of beneficial ownership, the right to vote related to the share belongs to the beneficial owner in Ordinary General Meetings and to the bare owner in Extraordinary or Special General Meetings.
The joint owners of shares must be represented by only one among them or by a sole Agent.
Finally, the owner of the securities pledged again shall have the right to vote.
| 13) | Minutes shall witness resolutions voted in General Meetings and shall contain the required comments on a special register kept in the registered office under the conditions provided here above and signed by the members of the Board Committee. |
Copies or extracts of the minutes of the General Meeting are validly certified by the Chairman of the Board, a Director duly empowered to act as a Chief Executive Officer, or by the secretary of the meeting.
| 14) | Shareholders exercise their rights related to communications and copies under the conditions provided by law. |
| 15 ) | The votes of the Shareholder attending to the meeting by means of videoconference or telecommunications, according to regulatory provisions, shall be taken into account for the calculation of the quorum and the majority of the said meeting. |
ARTICLE 23 - EXTRAORDINARY GENERAL MEETINGS
The Extraordinary Shareholders' General Meeting is alone entitled to modify bylaws as far as all their provisions : any contrary clause shall be declared void. However, it may not increase shareholders' commitments subject to operations resulting from a regrouping of shares regularly carried out.
The Extraordinary Shareholders Meeting may only deliberate under the quorum criteria provided by the relevant provisions of the French Commercial Code.
Resolutions shall be adopted by the majority of two third of the voting rights of the attending or represented shareholders, including the shareholders voting by mail.
ARTICLE 24 - ORDINARY GENERAL MEETINGS
The Ordinary Shareholders' General Meeting takes all decisions except those which are of the competence of the Extraordinary Shareholders' General Meeting.
The Ordinary Shareholders Meeting may only deliberate under the quorum criteria provided by the relevant provisions of the French Commercial Code.
It shall act by a majority of votes owned by the attending or represented shareholders, including the shareholders voting by mail.
TITLE VII
INVENTORIES - PROFITS - RESERVES
ARTICLE 25 - COMPANY’S FISCAL YEAR
Each fiscal year shall cover a period of twelve months starting on January 1st and ending on next December 31st.
ARTICLE 26 - INVENTORY – ACCOUNTS
Regularly accounting of corporate operations is held in compliance with Law.
At the end of the each fiscal year, the Board draws up an inventory and the financial statements.
A management report is prepared on the situation of the Company over the last fiscal year, its expected evolution, the major events which occurred between the date of the end of the last fiscal year and the date on which the management report is prepared and on its activities in research and development.
All these documents are made available to the Auditors disposal according the provisions set forth by the law.
ARTICLE 27 - FIXING, ALLOCATION AND DISTRIBUTION OF PROFITS
On the profit of each fiscal year subject to reduction of the amount of the previous law, an amount equal to 5 % of it shall be allocated in order to constitute the legal funds ; such allocation is no longer compulsory when the said funds amount to 10 % of the registered capital ; should the amount of the legal funds become inferior of the registered capital, such allocation should have to be implemented.
The General Meeting may allocate any amount to the appropriation of all optional, ordinary or extraordinary funds or carrying it forward.
The profit of the fiscal year reduced by the amount of previous losses and by the amount to be allocated to the reserves according any legal provisions or bylaws and increased by the amount of the carried forward profit constitutes the distributable profit.
Further to the approval on the financial statement and the determination of the distributable amounts, the General Meeting decides the amount of the dividends to be distributed to the shareholders. The General Meeting may also decide on the distribution of amounts appropriated from the reserves it has available either to provide or complete dividends or as extraordinary distribution ; in such a case, the decision shall expressly indicate the reserve items from which the distributions are made. However, the dividends have to be priorly distributed from the distributable profit of the current fiscal year.
ARTICLE 28 - PAYMENT OF DIVIDENDS
The terms and conditions of payment of dividends voted by the General Meeting are decided by the relevant meeting or, failing such decision, by the Board. However, the payment must occur within a period which can not exceed nine months from the end of the fiscal year unless a court decision authorizes an extension of such time limit for payment.
Dividends which are not claimed within five years from their maturity date shall be bared.
TITLE VIII
EXTENSION - DISSOLUTION - WINDING UP
ARTICLE 29 - EXTENSION
At least one year prior to the expiration date of the Company, the Board must convene a Extraordinary Shareholders' General Meeting to decide the prorogation of the Company; such prorogation may not exceed 99 years.
Failing such Extraordinary Shareholders' General Meeting, any shareholder may fifteen days further to a formal notice sent to the Chairman of the Board, by registered letter remaining unsuccessful, request from the courts the appointment of a Agent in charge of convening the meeting here above.
ARTICLE 30 - DISSOLUTION
The Extraordinary Shareholders' Meeting may, at any time, decide the accelerated dissolution of the Company.
If - as a consequence of the losses showed by the Company's accounts, the net assets of the Company are reduced below one half of the registered capital of the Company, the Board of Directors must, within four months from the approval of the accounts showing this loss, convene an Extraordinary Shareholders' General Meeting in order to decide whether the Company should be dissolved before its statutory term.
If the dissolution is not declared, the registered capital must - at the latest at the closing of the second fiscal year following that which has showed the losses and subject to the legal provisions concerning the minimum capital of sociétés anonymes be reduced by an amount at least equal to the losses which could not be charged on reserves, if during that period the net assets have not been restored up to an amount at least equal to one half of the capital.
Failing such meeting of the Extraordinary Shareholders' General Meeting as well as when the meeting has not been able validly to take its resolutions, any person with an interest to do so may file a claim before a court for the dissolution of the Company.
The Company is in liquidation at the time of its dissolution, whatever the reason. Its legal personality remains for the needs of the liquidation until it is closed.
During the liquidation, the General Meeting keeps the same powers as when the Company existed.
The shares remain negotiable until the liquidation is closed.
The dissolution of the Company is opposable to third parties only as from the date when the dissolution is published at the Trade and Corporate Registry.
ARTICLE 31 - WINDING UP
The winding up of the Company shall be carried out under the conditions provided for sectuions L.237-1 to L.237-31 of the French Commercial Code and under the provisions of the decree of March 23rd, 1967 referred to for their application.
Further to the extinction of the liabilities, the reimbursement of the shares nominal (registered) capital shall be carried out. The liquidation bonus shall be distributed to the shareholders in a due proportion of their respective rights.
TITLE IX
DISPUTES - ELECTION OF DOMICILE
ARTICLE 32 - DISPUTES
Any disputes arising during the existence or the winding up of the Company either between the shareholders and the company or between the shareholders themselves and related to corporate matters shall be submitted to the Courts of the location of the registered office.
EXHIBIT 8.1.
LIST OF EDAP TMS S.A. SUBSIDIARIES
(as of March 31, 2011)
| Name of Subsidiary | | Juridiction of Incorporation |
| | | |
| EDAP TMS France S.A.S. | | France |
| EDAP Technomed S.r.l. | | Italy |
| EDAP Technomed, Inc. | | United States |
| EDAP Technomed Co. Ltd. | | Japan |
| EDAP Technomed Sdn Bhd | | Malaysia |
| EDAP TMS GmbH | | Germany |
| | | |
| | | |
EXHIBIT 13.1
Annual Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of EDAP TMS S.A. (the “Company”), does hereby certify, to such officer's knowledge, that:
The Annual Report on Form 20-F for the year ended December 31, 2010 of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 20-F fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: March 31, 2011 | /s/ MARC OCZACHOWSKI |
| | Marc Oczachowski |
| | Chief Executive Officer |
| Dated: March 31, 2011 | /s/ ERIC SOYER |
| | Eric Soyer |
| | Chief Financial Officer |
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act has been provided to EDAP TMS S.A. and will be retained by EDAP TMS S.A. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 12.1
Annual Certification
Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
I, Marc Oczachowski, Chief Executive Officer of EDAP TMS S.A., certify that:
| 1. | I have reviewed this annual report on Form 20-F of EDAP TMS S.A.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
| 4. | The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and we have: |
| | a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| | b) | Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| | c) | Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and |
| 5. | The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): |
| | a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and |
| | b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
| Dated: March 31, 2011 | /s/ MARC OCZACHOWSKI |
| | Title: Chief Executive Officer |
EXHIBIT 12.2
Annual Certification
Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
I, Eric Soyer, Chief Financial Officer of EDAP TMS S.A., certify that:
| 1. | I have reviewed this annual report on Form 20-F of EDAP TMS S.A.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
| 4. | The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and we have: |
| | a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| | b) | Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| | c) | Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and |
| 5. | The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): |
| | a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and |
| | b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
Dated: March 31, 2011 | /s/ ERIC SOYER |
| | Title: Chief Financial Officer |
EXHIBIT 15.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference into the Registration Statements (Form F-3, No. 333-136811, Form F-3, No. 333-147762, Form F-3, No. 333-152738 and Form F-3, N°333-169793) of EDAP TMS S.A. (the “Company”) of our report dated March 31, 2011, with respect to the consolidated financial statements of the Company and its subsidiaries included in the Annual Report (Form 20-F) for the year ended December 31, 2010.
ERNST & YOUNG Audit
/s/ JACQUES FOURNIER
Represented by
Jacques Fournier
March 31, 2011
Lyon, France
