Exhibit 99.1
Orthodyne Electronics Corporation and Subsidiaries
Consolidated Financial Report
December 31, 2007
McGladrey & Pullen LLP is a member firm of RSM International,
an affiliation of separate and independent legal entities.
Contents
Independent Auditor’s Report
To the Board of Directors
Orthodyne Electronics Corporation
Irvine, California
We have audited the accompanying consolidated balance sheets of Orthodyne Electronics Corporation and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orthodyne Electronics Corporation and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
Irvine, California
September 15, 2008
McGladrey & Pullen, LLP is a member firm of RSM International,
an affiliation of separate and independent legal entities.
1
Orthodyne Electronics Corporation and Subsidiaries
Consolidated Balance Sheets
| | | | | | | | | |
Assets | | June 30,
2008
(Unaudited) | | December 31, |
| | | 2007 | | 2006 |
Current Assets | | | | | | | | | |
Cash and cash equivalents | | $ | 19,010,000 | | $ | 9,005,000 | | $ | 11,995,000 |
Securities available for sale | | | 3,943,000 | | | 4,474,000 | | | 4,344,000 |
Securities held to maturity | | | 3,652,000 | | | 9,588,000 | | | 7,820,000 |
Accounts receivable, net of allowance for doubtful accounts 2008 $192,000; 2007 $193,000; 2006 $ 202,000 | | | 24,848,000 | | | 28,630,000 | | | 20,912,000 |
Note receivable, stockholder | | | 2,375,000 | | | 1,000,000 | | | 2,000,000 |
Inventories, net | | | 24,227,000 | | | 22,374,000 | | | 15,352,000 |
Prepaid expenses and other current assets | | | 1,146,000 | | | 1,534,000 | | | 1,191,000 |
| | | | | | | | | |
Total current assets | | | 79,201,000 | | | 76,605,000 | | | 63,614,000 |
| | | | | | | | | |
Property and Equipment, net | | | 21,050,000 | | | 21,172,000 | | | 20,818,000 |
| | | | | | | | | |
Other Assets | | | | | | | | | |
Cash value of life insurance | | | 6,468,000 | | | 7,027,000 | | | 6,335,000 |
Securities held to maturity | | | 4,117,000 | | | 8,151,000 | | | 9,091,000 |
Amortizable intangible assets | | | 736,000 | | | 856,000 | | | 1,102,000 |
Other | | | 557,000 | | | 285,000 | | | 373,000 |
| | | | | | | | | |
| | | 11,878,000 | | | 16,319,000 | | | 16,901,000 |
| | | | | | | | | |
| | $ | 112,129,000 | | $ | 114,096,000 | | $ | 101,333,000 |
| | | | | | | | | |
| | | |
Liabilities and Stockholders’ Equity | | | | | | |
Current Liabilities | | | | | | | | | |
Current maturities of long-term debt | | $ | — | | $ | — | | $ | 150,000 |
Accounts payable | | | 1,791,000 | | | 3,023,000 | | | 1,845,000 |
Commissions payable | | | 2,030,000 | | | 1,905,000 | | | 2,280,000 |
Other current liabilities | | | 3,176,000 | | | 3,950,000 | | | 5,301,000 |
| | | | | | | | | |
Total current liabilities | | | 6,997,000 | | | 8,878,000 | | | 9,576,000 |
| | | | | | | | | |
Long-term Debt, less current maturities | | | — | | | — | | | 152,000 |
| | | | | | | | | |
Commitments and Contingencies | | | | | | | | | |
| | | |
Stockholders’ Equity | | | | | | | | | |
Preferred stock, par value $.001 per share; 10,000,000 shares authorized: no shares issued and outstanding | | | — | | | — | | | — |
Common stock, par value $.001 per share; 40,000,000 shares authorized: issued and outstanding shares 5,178,963 in 2008; 5,178,963 in 2007; 5,494,652 in 2006 | | | 5,000 | | | 5,000 | | | 5,000 |
Additional paid-in capital | | | 9,197,000 | | | 9,197,000 | | | 7,988,000 |
Accumulated other comprehensive income | | | 41,000 | | | 423,000 | | | 387,000 |
Retained earnings | | | 95,889,000 | | | 95,593,000 | | | 83,225,000 |
| | | | | | | | | |
| | | 105,132,000 | | | 105,218,000 | | | 91,605,000 |
| | | | | | | | | |
| | $ | 112,129,000 | | $ | 114,096,000 | | $ | 101,333,000 |
| | | | | | | | | |
See Notes to Consolidated Financial Statements.
2
Orthodyne Electronics Corporation and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
| | | | | | | | | | | | | | | | | | | | |
Income | | Six Months Ended June 30, | | | Year Ended December 31, | |
| | 2008
(Unaudited) | | | 2007
(Unaudited) | | |
| | | | 2007 | | | 2006 | | | 2005 | |
Revenue: | | | | | | | | | | | | | | | | | | | | |
Net sales | | $ | 45,890,000 | | | $ | 52,807,000 | | | $ | 110,423,000 | | | $ | 88,471,000 | | | $ | 56,598,000 | |
Interest and dividend income | | | 630,000 | | | | 1,088,000 | | | | 1,733,000 | | | | 1,352,000 | | | | 915,000 | |
Rental income | | | 11,000 | | | | 82,000 | | | | 185,000 | | | | 255,000 | | | | 280,000 | |
Gain on sale of assets | | | 26,000 | | | | 157,000 | | | | 346,000 | | | | 103,000 | | | | 6,000 | |
Gain on foreign currency transaction | | | 221,000 | | | | 74,000 | | | | 217,000 | | | | 164,000 | | | | — | |
Gain (loss) on sale of securities available for sale | | | 4,000 | | | | 191,000 | | | | 155,000 | | | | (81,000 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total revenue | | | 46,782,000 | | | | 54,399,000 | | | | 113,059,000 | | | | 90,264,000 | | | | 57,799,000 | |
| | | | | | | | | | | | | | | | | | | | |
Costs and operating expenses: | | | | | | | | | | | | | | | | | | | | |
Cost of sales | | | 20,186,000 | | | | 21,473,000 | | | | 45,150,000 | | | | 35,879,000 | | | | 23,164,000 | |
Selling | | | 10,332,000 | | | | 10,154,000 | | | | 21,507,000 | | | | 17,900,000 | | | | 13,291,000 | |
Research and development and engineering | | | 5,488,000 | | | | 5,630,000 | | | | 12,323,000 | | | | 10,548,000 | | | | 9,624,000 | |
General and administrative | | | 4,964,000 | | | | 4,062,000 | | | | 8,042,000 | | | | 7,902,000 | | | | 6,255,000 | |
ESOP compensation | | | — | | | | — | | | | — | | | | 3,725,000 | | | | 2,219,000 | |
Interest expense | | | — | | | | — | | | | 26,000 | | | | 91,000 | | | | 93,000 | |
| | | | | | | | | | | | | | | | | | | | |
Total costs and operating expenses | | | 40,970,000 | | | | 41,319,000 | | | | 87,048,000 | | | | 76,045,000 | | | | 54,646,000 | |
| | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | 5,812,000 | | | | 13,080,000 | | | | 26,011,000 | | | | 14,219,000 | | | | 3,153,000 | |
Provision (benefit) for income taxes | | | 294,000 | | | | 376,000 | | | | 461,000 | | | | (95,000 | ) | | | 2,876,000 | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 5,518,000 | | | $ | 12,704,000 | | | $ | 25,550,000 | | | $ | 14,314,000 | | | $ | 277,000 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Comprehensive Income | | | | | | | | | | | | | | | |
Net income | | $ | 5,518,000 | | | $ | 12,704,000 | | | $ | 25,550,000 | | | $ | 14,314,000 | | | $ | 277,000 | |
Other comprehensive income, before tax: | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation gain (loss) | | | 52,000 | | | | (45,000 | ) | | | 69,000 | | | | 87,000 | | | | (13,000 | ) |
Unrealized gain (loss) on securities available for sale, net: | | | | | | | | | | | | | | | | | | | | |
Unrealized holding gains (losses) arising during period | | | (430,000 | ) | | | 367,000 | | | | 122,000 | | | | 232,000 | | | | — | |
Less: reclassification adjustment for gains included in net income | | | (4,000 | ) | | | (191,000 | ) | | | (155,000 | ) | | | 81,000 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | (434,000 | ) | | | 176,000 | | | | (33,000 | ) | | | 313,000 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | $ | 5,136,000 | | | $ | 12,835,000 | | | $ | 25,586,000 | | | $ | 14,714,000 | | | $ | 264,000 | |
| | | | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements.
3
Orthodyne Electronics Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | | | | | Other | | | | |
| | | | | | | | | | | | | | Compre- | | | | |
| | | Common Stock | | | Additional
Paid-in
Capital | | Retained
Earnings | | | Unearned
ESOP
Shares | | | hensive
Income
(Loss) | | | Total | |
| | | Shares | | | Amount | | | | | | |
Balance, December 31, 2004 | | 5,697,739 | | | $ | 6,000 | | | $ | 4,244,000 | | $ | 72,423,000 | | | $ | (3,234,000 | ) | | $ | — | | | $ | 73,439,000 | |
Committed and allocated ESOP shares | | — | | | | — | | | | 1,219,000 | | | — | | | | 1,200,000 | | | | — | | | | 2,419,000 | |
Repurchase of common stock from former ESOP participants | | (89,312 | ) | | | — | | | | — | | | (1,327,000 | ) | | | — | | | | — | | | | (1,327,000 | ) |
Accumulated other comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | — | | | | — | | | | — | | | — | | | | — | | | | (13,000 | ) | | | (13,000 | ) |
Net income | | — | | | | — | | | | — | | | 277,000 | | | | — | | | | — | | | | 277,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2005 | | 5,608,427 | | | | 6,000 | | | | 5,463,000 | | | 71,373,000 | | | | (2,034,000 | ) | | | (13,000 | ) | | | 74,795,000 | |
Committed and allocated ESOP shares | | — | | | | — | | | | 2,525,000 | | | — | | | | 1,200,000 | | | | — | | | | 3,725,000 | |
Repurchase of common stock from former ESOP participants | | (67,659 | ) | | | (1,000 | ) | | | — | | | (1,000,000 | ) | | | — | | | | — | | | | (1,001,000 | ) |
Shares surrendered as payment of ESOP note | | (46,116 | ) | | | — | | | | — | | | (834,000 | ) | | | 834,000 | | | | — | | | | — | |
Accumulated other comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | — | | | | — | | | | — | | | — | | | | — | | | | 87,000 | | | | 87,000 | |
Unrealized gain on securities available for sale, net | | — | | | | — | | | | — | | | — | | | | — | | | | 313,000 | | | | 313,000 | |
Dividends | | — | | | | — | | | | — | | | (628,000 | ) | | | — | | | | — | | | | (628,000 | ) |
Net income | | — | | | | — | | | | — | | | 14,314,000 | | | | — | | | | — | | | | 14,314,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2006 | | 5,494,652 | | | | 5,000 | | | | 7,988,000 | | | 83,225,000 | | | | — | | | | 387,000 | | | | 91,605,000 | |
Repurchase of common stock from former ESOP participants | | (151,640 | ) | | | — | | | | — | | | (2,742,000 | ) | | | — | | | | — | | | | (2,742,000 | ) |
Repurchase of common stock | | (276,549 | ) | | | — | | | | — | | | (5,000,000 | ) | | | — | | | | — | | | | (5,000,000 | ) |
Exercise of stock options | | 112,500 | | | | — | | | | 1,209,000 | | | — | | | | — | | | | — | | | | 1,209,000 | |
Accumulated other comprehensive gain: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | — | | | | — | | | | — | | | — | | | | — | | | | 69,000 | | | | 69,000 | |
Unrealized loss on securities available for sale, net | | — | | | | — | | | | — | | | — | | | | — | | | | (33,000 | ) | | | (33,000 | ) |
Dividends | | — | | | | — | | | | — | | | (5,440,000 | ) | | | — | | | | — | | | | (5,440,000 | ) |
Net income | | — | | | | — | | | | — | | | 25,550,000 | | | | — | | | | — | | | | 25,550,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2007 | | 5,178,963 | | | | 5,000 | | | | 9,197,000 | | | 95,593,000 | | | | — | | | | 423,000 | | | | 105,218,000 | |
Accumulated other comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment (unaudited) | | — | | | | — | | | | — | | | — | | | | — | | | | 52,000 | | | | 52,000 | |
Unrealized loss on securities available for sale, net (unaudited) | | — | | | | — | | | | — | | | — | | | | — | | | | (434,000 | ) | | | (434,000 | ) |
Dividends (unaudited) | | — | | | | — | | | | — | | | (5,222,000 | ) | | | — | | | | — | | | | (5,222,000 | ) |
Net income (unaudited) | | — | | | | — | | | | — | | | 5,518,000 | | | | — | | | | — | | | | 5,518,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2008 (unaudited) | | 5,178,963 | | | $ | 5,000 | | | $ | 9,197,000 | | $ | 95,889,000 | | | $ | — | | | $ | 41,000 | | | $ | 105,132,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements.
4
Orthodyne Electronics Corporation and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, | | | Year Ended December 31, | |
| | 2008
(Unaudited) | | | 2007
(Unaudited) | | |
| | | | 2007 | | | 2006 | | | 2005 | |
Cash Flows from Operating Activities | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 5,518,000 | | | $ | 12,704,000 | | | $ | 25,550,000 | | | $ | 14,314,000 | | | $ | 277,000 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | |
Increase in fair value of allocated and committed ESOP shares | | | — | | | | — | | | | — | | | | 2,525,000 | | | | 1,219,000 | |
Gain on disposal of property and equipment | | | (27,000 | ) | | | (199,000 | ) | | | (374,000 | ) | | | (103,000 | ) | | | (6,000 | ) |
Depreciation and amortization | | | 1,070,000 | | | | 1,059,000 | | | | 2,178,000 | | | | 2,148,000 | | | | 2,180,000 | |
Provision for bad debts | | | — | | | | — | | | | — | | | | 322,000 | | | | — | |
Gain on foreign currency transactions | | | (161,000 | ) | | | (73,000 | ) | | | (199,000 | ) | | | (121,000 | ) | | | — | |
Net amortization (accretion) of premiums and discounts on held-to-maturity securities | | | (13,000 | ) | | | (41,000 | ) | | | (81,000 | ) | | | 6,000 | | | | — | |
Deferred taxes | | | — | | | | — | | | | (3,000 | ) | | | (19,000 | ) | | | 2,617,000 | |
Net change in working capital components | | | 491,000 | | | | (7,559,000 | ) | | | (15,587,000 | ) | | | (8,414,000 | ) | | | 13,300,000 | |
Other long-term liabilities | | | — | | | | — | | | | — | | | | (298,000 | ) | | | (5,164,000 | ) |
Other | | | — | | | | — | | | | — | | | | — | | | | (218,000 | ) |
(Increase) decrease in cash value of life insurance | | | 559,000 | | | | (300,000 | ) | | | (688,000 | ) | | | (918,000 | ) | | | (1,425,000 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 7,437,000 | | | | 5,591,000 | | | | 10,796,000 | | | | 9,442,000 | | | | 12,780,000 | |
| | | | | | | | | | | | | | | | | | | | |
Cash Flows from Investing Activities | | | | | | | | | | | | | | | | | | | | |
Purchase of property and equipment | | | (798,000 | ) | | | (908,000 | ) | | | (2,412,000 | ) | | | (1,958,000 | ) | | | (1,661,000 | ) |
Proceeds from sale of property and equipment | | | 48,000 | | | | 312,000 | | | | 541,000 | | | | 167,000 | | | | 184,000 | |
Cash acquired in SW Mikroelektronik, GmbH purchase | | | — | | | | — | | | | — | | | | — | | | | 911,000 | |
Purchase of intangible assets | | | — | | | | — | | | | — | | | | — | | | | (1,588,000 | ) |
Purchase of held-to-maturity securities | | | (1,832,000 | ) | | | (5,868,000 | ) | | | (15,276,000 | ) | | | (31,092,000 | ) | | | (44,494,000 | ) |
Maturities of held-to-maturity securities | | | 11,816,000 | | | | 3,836,000 | | | | 14,530,000 | | | | 39,185,000 | | | | 19,484,000 | |
Purchase of available-for-sale securities | | | (1,624,000 | ) | | | (3,732,000 | ) | | | (5,298,000 | ) | | | (6,443,000 | ) | | | — | |
Sale of available-for-sale securities | | | 1,720,000 | | | | 2,607,000 | | | | 5,135,000 | | | | 2,412,000 | | | | — | |
Receipts (advances) on note receivable, stockholder | | | (1,375,000 | ) | | | 1,000,000 | | | | 1,000,000 | | | | (2,000,000 | ) | | | — | |
(Increase) decrease in other assets | | | (252,000 | ) | | | 60,000 | | | | 119,000 | | | | (261,000 | ) | | | 565,000 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 7,703,000 | | | | (2,693,000 | ) | | | (1,661,000 | ) | | | 10,000 | | | | (26,599,000 | ) |
| | | | | | | | | | | | | | | | | | | | |
Cash Flows from Financing Activities | | | | | | | | | | | | | | | | | | | | |
Principal payments on long-term debt | | | — | | | | — | | | | (302,000 | ) | | | (150,000 | ) | | | (5,574,000 | ) |
Decrease in unearned ESOP shares | | | — | | | | — | | | | — | | | | 1,200,000 | | | | 1,200,000 | |
Exercise of stock options | | | — | | | | 1,209,000 | | | | 1,209,000 | | | | — | | | | — | |
Dividends | | | (5,222,000 | ) | | | (2,911,000 | ) | | | (5,440,000 | ) | | | (628,000 | ) | | | — | |
Repurchase of common stock | | | — | | | | (5,000,000 | ) | | | (7,742,000 | ) | | | (1,001,000 | ) | | | (875,000 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash (used in) financing activities | | | (5,222,000 | ) | | | (6,702,000 | ) | | | (12,275,000 | ) | | | (579,000 | ) | | | (5,249,000 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 9,918,000 | | | | (3,804,000 | ) | | | (3,140,000 | ) | | | 8,873,000 | | | | (19,068,000 | ) |
Effect of Foreign Currency Exchange Rate Changes on Cash and Cash Equivalents | | | 87,000 | | | | 6,000 | | | | 150,000 | | | | 279,000 | | | | (35,000 | ) |
Cash and Cash Equivalents | | | | | | | | | | | | | | | | | | | | |
Beginning | | | 9,005,000 | | | | 11,995,000 | | | | 11,995,000 | | | | 2,843,000 | | | | 21,946,000 | |
| | | | | | | | | | | | | | | | | | | | |
Ending | | $ | 19,010,000 | | | $ | 8,197,000 | | | $ | 9,005,000 | | | $ | 11,995,000 | | | $ | 2,843,000 | |
| | | | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements.
5
Orthodyne Electronics Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Orthodyne Electronics Corporation (OEC) and its wholly owned subsidiaries (collectively the Company or the Companies) design, manufacture and distribute wire bonding equipment and related supplies. This equipment is used to connect wires within semiconductors and other microelectronic devices. The Company’s main product is a sophisticated robot that can bond devices requiring large wires. These devices are used in a variety of computer, industrial, consumer and telecommunications solid state switches, industrial controls, motor controls, lighting, power supplies and other control devices. The Company’s ability to purchase raw materials, sell products and collect amounts due from customers is affected by economic fluctuations in the electronics industry, both domestically and internationally.
A summary of the Company’s significant accounting policies is as follows:
Principles of consolidation:The consolidated financial statements include the accounts of OEC and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates:The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Estimates are used for, but not limited to, the allowance for doubtful accounts, the recoverability of the carrying value and estimated useful lives of long-lived assets, warranty reserves, inventory reserves and fair value of equity instruments and financial instruments. Actual results could differ from those estimates.
Foreign currency translation and transactions:Assets and liabilities recorded in functional currencies other than U.S. dollars (primarily euros for the Company’s subsidiaries) are translated into U.S. dollars at the period-end rate of exchange. Revenue and expenses are translated at the weighted-average exchange rates for the period. The resulting translation adjustments are charged or credited directly to accumulated other comprehensive income or loss. Gains or losses from foreign currency transactions are included in the determination of net income or loss.
Cash and cash equivalents:The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Substantially all cash is on deposit at one financial institution and may, at times, exceed federally insured limits. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant risk of loss on cash and cash equivalents.
Investments in marketable securities:Management determines the appropriate classification of marketable securities at the date individual investment securities are acquired and the appropriateness of such classification at each balance sheet date. The Company’s investments have been classified as either available for sale or held to maturity.
Available-for-sale securities consist solely of equity securities. Since the Company does not buy equity securities in anticipation of short-term fluctuations in market prices and since equity securities have no maturity date, they have been classified as available for sale. These securities are stated at fair value and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders’ equity. Realized gains and losses are determined on the basis of specific identification of the cost of the securities sold.
Held-to-maturity securities consist solely of debt securities which the Company has the positive intent and ability to hold to maturity and are stated at fair market value.
6
Orthodyne Electronics Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies, Continued
Premiums and discounts on investments in debt securities are amortized over the contractual lives of those securities. The method of amortization results in a constant effective yield on those securities (the interest method). Interest on debt securities is recognized in income as earned. Realized gains and losses, including losses from declines in value of specific securities determined by management to be other-than-temporary, are included in income. Realized gains and losses are determined on the basis of specific identification of the securities sold.
Accounts receivable:Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables, based on a review of all outstanding amounts on a regular basis. Credit is extended to customers on an unsecured basis based on credit analysis performed by the Company. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.
Inventories: Inventories are carried at the lower of cost (determined on the first-in first-out method) or market. The Company evaluates its inventory and, if necessary, the Company records an allowance for all slow-moving or obsolete inventory items.
Property and equipment:Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the assets using the straight-line method. The estimated useful lives for machinery, equipment and office equipment are three to seven years. The building is being depreciated over 39 years, and certain building improvements are being depreciated over 15 years.
Long-lived assets:Long-lived assets include property and equipment and intangibles consisting of licenses to use patents, a noncompete agreement and a customer list, all of which are evaluated for impairment whenever events or changes in circumstances have indicated that an asset may not be recoverable. The intangibles are amortized on a straight-line basis over their estimated useful lives, which are generally two to 13 years. Long-lived assets evaluated for impairment are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows (excluding interest charges) is less than the carrying value of the assets, the assets will be written down to the estimated fair value, and such loss is recognized in income from continuing operations in the period in which the determination is made. Management has determined that no impairment of long-lived assets currently exists.
Income taxes:Effective January 1, 2005, the Company elected to be taxed under sections of federal and California tax law which provide that, in lieu of federal corporation income taxes and the normal California corporation income taxes, the stockholders separately account for their pro rata shares of the Company’s items of income, deductions, losses and credits. Therefore, these statements do not include a provision for U.S. federal corporation income taxes and, as the section of the California tax law requires, the state income taxes are at a reduced rate. Foreign taxes are provided for the German subsidiary. The Company distributes funds to the stockholders to provide for personal income tax liabilities as they arise related to the S corporation income. As a result of the Tax Reform Act of 1986, the Company may be subject to income taxes at the maximum corporate rate if certain assets are sold at a gain for a 10-year period following the election.
Deferred taxes are provided on a liability method whereby tax assets are recognized for deductible temporary differences and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
7
Orthodyne Electronics Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies, Continued
Revenue recognition: The Company recognizes revenue as products are shipped and/or title passes. The Company’s standard terms are FCA (the Company’s factory), with title transferring to its customer at the Company’s loading dock. The Company provides for warranty costs at the time of shipment based upon its historical experience.
Advertising:The Company expenses the cost of advertising the first time the advertising takes place. No amounts are included in the Company’s balance sheets for deferred advertising costs.
Financial instruments:The Company’s financial instruments consist of cash and cash equivalents, securities, accounts receivable, notes receivable, surrender value of life insurance contracts, accounts payable and notes payable. The carrying value of these instruments is considered representative of their fair value.
Stock-based compensation: At December 31, 2007, the Company has one stock-based employee compensation plan. Beginning January 1, 2006, the Company accounts for equity-based compensation under the provisions of Statement of Financial Accounting Standards (SFAS) No. 123R,Share-Based Payment(SFAS No. 123R). SFAS No. 123R requires the recognition of the fair value of equity-based compensation in net income. The fair value of equity-based awards is amortized over the vesting period of the award. Prior to the adoption of SFAS No. 123R, the Company accounted for the plan under the recognition and measurement principles or Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations. There is no effect on income for the six months ended June 30, 2008 and 2007 and fiscal years 2007 and 2006 as a result of the adoption of SFAS No. 123R, as the options were fully vested as of January 1, 2006.
Product warranties: The Company provides a limited one-year warranty for its products. The Company’s standard warranties require the Company to repair or replace defective products during such warranty period at no cost to the customer. The Company will periodically charge back its suppliers for failures of the materials or construction of the product purchased. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Changes in the Company’s warranty liability are as follows:
| | | | | | | | | | | | |
| | | December 31, | |
| | 2007 | | | 2006 | | | 2005 | |
Balance, beginning | | $ | 150,000 | | | $ | 150,000 | | | $ | 150,000 | |
Provision for warranty claims | | | 365,000 | | | | 306,000 | | | | 64,000 | |
Warranty claims paid | | | (365,000 | ) | | | (306,000 | ) | | | (64,000 | ) |
| | | | | | | | | | | | |
Balance, ending | | $ | 150,000 | | | $ | 150,000 | | | $ | 150,000 | |
| | | | | | | | | | | | |
8
Orthodyne Electronics Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies, Continued
Recent accounting pronouncements: In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48),Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS Statement No. 109,Accounting for Income Taxes. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return. If there are changes in net assets as a result of application of FIN 48, these will be accounted for as an adjustment to the opening balance of retained earnings. Additional disclosures about the amounts of such liabilities will be required also. In February 2008, the FASB delayed the effective date of FIN 48 for certain nonpublic enterprises to annual financial statements for fiscal years beginning after December 15, 2007. The Company will be required to adopt FIN 48 in its 2008 annual financial statement. Management is currently assessing the impact of FIN 48 on its financial position, results of operations and cash flows and has not determined if the adoption of FIN 48 will have a material effect on its financial statements.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurement. SFAS No. 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under SFAS No. 157, the fair value measurements are disclosed by level within that hierarchy. The requirements of SFAS No. 157 are first effective for its fiscal year beginning January 1, 2008. However, in February 2008, the FASB decided that an entity need not apply this standard to nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until the subsequent year. Accordingly, its adoption of this standard on January 1, 2008 is limited to financial assets and liabilities, and any nonfinancial assets and liabilities recognized or disclosed at fair value on a recurring basis. The Company does not believe the initial adoption of SFAS No. 157 will have a material effect on its financial condition or results of operations. However, the Company is still in the process of evaluating this standard with respect to its effect on nonfinancial assets and liabilities recognized or disclosed in the financial statements on a nonrecurring basis and therefore have not yet determined the impact that it will have on its financial statements upon the effective date of the complete standard.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. SFAS No. 159 permits companies to elect to follow fair value accounting for certain financial assets and liabilities in an effort to mitigate volatility in earnings without having to apply complex hedge accounting provisions. The standard also establishes presentation and disclosure requirements designed to facilitate comparison between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the adoption requirements of SFAS No. 159.
9
Orthodyne Electronics Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 2. Available-for-sale and Held-to-maturity Securities
The following is a summary of the Company’s investment in available-for-sale and held-to-maturity securities as of December 31:
| | | | | | | | | | | | | |
| | | Available-for-sale |
| | Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | | Fair Value |
| | 2007 |
Equity securities | | $ | 4,193,000 | | $ | 341,000 | | $ | (60,000 | ) | | $ | 4,474,000 |
| | | | | | | | | | | | | |
| |
| | | 2006 |
Equity securities | | $ | 4,030,000 | | $ | 315,000 | | $ | (1,000 | ) | | $ | 4,344,000 |
| | | | | | | | | | | | | |
| |
| | | Held-to-maturity |
| | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | | Fair Value |
| | | 2007 |
Certificates of deposit | | $ | 5,261,000 | | $ | 2,000 | | $ | (3,000 | ) | | $ | 5,260,000 |
U.S. government securities | | | 3,731,000 | | | 38,000 | | | — | | | | 3,769,000 |
Corporate debt securities | | | 8,733,000 | | | 4,000 | | | (27,000 | ) | | | 8,710,000 |
| | | | | | | | | | | | | |
| | $ | 17,725,000 | | $ | 44,000 | | $ | (30,000 | ) | | $ | 17,739,000 |
| | | | | | | | | | | | | |
| |
| | | 2006 |
Certificates of deposit | | $ | 6,094,000 | | $ | — | | $ | (16,000 | ) | | $ | 6,078,000 |
Commercial paper | | | 250,000 | | | — | | | — | | | | 250,000 |
U.S. government securities | | | 3,774,000 | | | 9,000 | | | — | | | | 3,783,000 |
Corporate debt securities | | | 6,819,000 | | | — | | | (19,000 | ) | | | 6,800,000 |
| | | | | | | | | | | | | |
| | $ | 16,937,000 | | $ | 9,000 | | $ | (35,000 | ) | | $ | 16,911,000 |
| | | | | | | | | | | | | |
The Company’s investment in equity securities is concentrated in issuers in the manufacturing industry, and the investment in corporate debt securities is concentrated in issuers in the financial services industry.
10
Orthodyne Electronics Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 2. Available-for-sale and Held-to-maturity Securities, Continued
All available-for-sale securities are expected to be sold during the next year and have been classified as a current asset on the accompanying balance sheet. The amortized cost and fair value of debt securities classified as held-to-maturity, by contractual maturity, as of December 31, 2007 is as follows:
| | | | | | |
| | | Amortized
Cost | | Fair Value |
Due within one year | | $ | 9,614,000 | | $ | 9,588,000 |
Due after one year through three years | | | 5,279,000 | | | 5,308,000 |
Due after three years through five years | | | 2,832,000 | | | 2,843,000 |
| | | | | | |
| | $ | 17,725,000 | | $ | 17,739,000 |
| | | | | | |
Expected maturities will differ from contractual maturities because the issues of certain debt securities do have the right to call or prepay their obligations without any penalties. The amount classified as current assets on the accompanying balance sheets represent the amount of debt securities maturing during the next year.
A summary of investment earnings recognized in other income (expense) follows:
| | | | | | | | | | | |
| | | December 31, |
| | 2007 | | | 2006 | | | 2005 |
Securities available for sale: | | | | | | | | | | | |
Realized gain (loss), net | | $ | 155,000 | | | $ | (81,000 | ) | | $ | — |
Change in unrealized, net | | | (33,000 | ) | | | 313,000 | | | | — |
| | | | | | | | | | | |
| | $ | 122,000 | | | $ | 232,000 | | | $ | — |
| | | | | | | | | | | |
Note 3. Inventories
| | | | | | | | | | | | |
| | | June 30,
2008
(Unaudited) | | | December 31, | |
| | | 2007 | | | 2006 | |
Raw materials | | $ | 18,961,000 | | | $ | 15,307,000 | | | $ | 10,992,000 | |
Work in progress | | | 6,766,000 | | | | 7,342,000 | | | | 4,600,000 | |
Finished goods | | | — | | | | — | | | | 35,000 | |
| | | | | | | | | | | | |
| | | 25,727,000 | | | | 22,649,000 | | | | 15,627,000 | |
Inventory reserve | | | (1,500,000 | ) | | | (275,000 | ) | | | (275,000 | ) |
| | | | | | | | | | | | |
| | $ | 24,227,000 | | | $ | 22,374,000 | | | $ | 15,352,000 | |
| | | | | | | | | | | | |
11
Orthodyne Electronics Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Property and Equipment
| | | | | | | | |
| | | December 31, | |
| | 2007 | | | 2006 | |
Machinery and equipment | | $ | 9,759,000 | | | $ | 8,363,000 | |
Office equipment | | | 3,776,000 | | | | 3,838,000 | |
Building and improvements | | | 11,864,000 | | | | 11,512,000 | |
| | | | | | | | |
| | | 25,399,000 | | | | 23,713,000 | |
Less accumulated depreciation | | | (12,976,000 | ) | | | (11,644,000 | ) |
| | | | | | | | |
| | | 12,423,000 | | | | 12,069,000 | |
Land, including $2,619,000 of raw land | | | 8,749,000 | | | | 8,749,000 | |
| | | | | | | | |
| | $ | 21,172,000 | | | $ | 20,818,000 | |
| | | | | | | | |
Note 5. Intangible Assets
| | | | | | | | | | | | |
| | | December 31, |
| | 2007 | | 2006 |
| | Gross
Carrying
Amount | | Accumulated
Amortization | | Gross
Carrying
Amount | | Accumulated
Amortization |
Intangible assets subject to amortization: | | | | | | | | | | | | |
Licenses to use patents | | $ | 635,000 | | $ | 192,000 | | $ | 635,000 | | $ | 136,000 |
Noncompete agreement | | | 635,000 | | | 360,000 | | | 635,000 | | | 233,000 |
Customer list | | | 318,000 | | | 180,000 | | | 318,000 | | | 117,000 |
| | | | | | | | | | | | |
| | $ | 1,588,000 | | $ | 732,000 | | $ | 1,588,000 | | $ | 486,000 |
| | | | | | | | | | | | |
Amortization expense recognized on all amortizable intangibles totaled $120,000, $123,000, $246,000, $265,000 and $221,000 for the six months ended June 30, 2008 and 2007 (unaudited) and the years ended December 31, 2007, 2006 and 2005, respectively.
Estimated aggregate amortization expense for each of the next five years and thereafter is as follows: 2008 $240,000; 2009 $240,000; 2010 $81,000; 2011 $49,000; 2012 $49,000; thereafter $197,000; total $856,000.
Note 6. Note Payable and Line of Credit
In 2006 the Company had an unsecured term note to a former employee stock ownership plan (ESOP) participant, due in annual installments of $150,000, including a final payment of $152,000 plus interest at a rate of 6.5 percent. The note was fully paid in 2007.
The Company has a line of credit agreement with a bank for an amount that fluctuates with the value of certain securities held by the Company with the bank’s affiliated investment house. The line is secured by said investments and carries an interest rate equal to the one-month LIBOR plus 1 percent (4.63 percent at December 31, 2007). The amount available at December 31, 2007 was $8,530,000. There are no amounts outstanding at June 30, 2008, December 31, 2007 or 2006.
12
Orthodyne Electronics Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 7. Employee Stock Ownership Plan and Retirement Savings Plan
On December 31, 2006, the Company made an election to freeze the ESOP effective January 1, 2007 and to discontinue its annual contributions to the Plan. The freezing restricts any new employees from entering the Plan. It also resulted in all of the participant account balances becoming fully vested as of this date.
Contributions to the ESOP that were allocated to the participants’ accounts for 2006 totaled approximately $1,343,000. There were no contributions in 2007. The Company incurred administrative expenses of approximately $10,000 in both 2007 and 2006.
Distributions to terminated plan participants are made in cash or stock (based on the fair market value of the assets held at the time of termination) and are required to be completed within 10 years of termination. If the ESOP is unable to repurchase the shares, the Company may be required to repurchase these shares from the participants at the fair market value. During 2007, 2006 and 2005, the Company repurchased 151,640 shares, 67,659 shares and 89,312 shares, respectively, of common stock held by former ESOP participants. No shares were repurchased during the six months ended June 30, 2008.
In 2006 the ESOP sold and the Company repurchased 46,116 shares of Company stock with a fair value of approximately $834,000, which was equal to the remaining amount owed on the note payable to the Company. Because the note was fully paid, 57,515 remaining unallocated shares were then allocated to participants resulting in compensation expense of approximately $1,040,000.
The number of committed and allocated shares, along with their respective approximate fair value, is as follows:
| | | | | | | | | | | | | | | | | |
| | | June 30, 2008
(Unaudited) | | December 31, | |
| | | 2007 | | | 2006 | |
| | Number of
Shares | | Approximate
Fair Value | | Number of
Shares | | Approximate
Fair Value | | | Number of
Shares | | Approximate
Fair Value | |
Committed-to-be-released shares | | — | | $ | — | | — | | $ | — | | | 206,675 | | $ | 3,737,000 | |
| | | | | | | | | | | | | | | | | |
Allocated shares | | 1,687,112 | | $ | 41,267,000 | | 1,687,112 | | $ | 30,503,000 | (A) | | 1,632,077 | | $ | 29,508,000 | (A) |
| | | | | | | | | | | | | | | | | |
(A) | The latest valuation of the Company’s common stock was $24.46 per share based on a valuation performed by an independent appraiser as of December 31, 2007. As of December 31, 2007 and 2006, 94 percent and 99 percent, respectively, of the ESOP’s investments were in the Company. |
The Company also has a defined-contribution 401(k) savings plan. The plan covers all employees meeting minimum age and service requirements. The plan allows the employer to make a discretionary matching contribution, as defined in the plan document. Employer contributions to the plan totaled approximately $316,000, $0, $677,000, $0 and $0 for the six months ended June 30, 2008 and 2007 (unaudited) and for fiscal years 2007, 2006 and 2005, respectively.
13
Orthodyne Electronics Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 8. Stock Purchase Agreement
An agreement with all stockholders (other than the ESOP) places restrictions on the sale or transfer of common stock. Generally, shares cannot be sold or transferred without first offering them to the nontransferring stockholders and then to the Company, at a per-share price equal to that tendered by a prospective third-party purchaser. If neither the nontransferring stockholders nor the Company exercise right of first refusal, the transferee must agree to become party to this agreement.
In the event of any termination of employment of certain stockholders, or other certain events as defined in the agreement, the Company is required to repurchase a certain number of shares at fair value equal to the greater of $3 million or the proceeds of any insurance policy maintained by the Company in the event of death or disability of the stockholder, divided by the per-share value at the time of repurchase (increased to $5 million in January 2006 for one stockholder). The per-share value will be $10 per share if repurchased within three years of the date of the agreement. Otherwise, it will be the greater of $10 per share or the most recent per-share value determined by an independent appraiser for the ESOP. If the date of the qualifying event is more than six months after the last annual appraisal, then the per-share value will be that of the next annual appraisal.
In the event of the passing of certain stockholders, the Company is required to repurchase all outstanding shares of the deceased stockholder and his estate at a per-share price determined in the same fashion as in the paragraph above.
The Company also has a stock redemption and purchase agreement with three of the stockholders and certain former stockholders. This agreement states that, if any of the stockholders do not make timely payment on their notes to the former stockholders, the Company is obligated to declare and pay a dividend in an amount sufficient to cover the note payment. These dividends will then be paid directly to the noteholders on the payer’s behalf. As of June 30, 2008 and December 31, 2007 and 2006, the shareholders’ promissory notes totaled $21,002,000, $21,965,000 and $23,296,000, respectively, with quarterly installments ranging from $60,000 to $90,000, at a rate of 3.51 percent.
Note 9. Stock Incentive Plan
On January 31, 2000, the Company adopted the 2000 Stock Incentive Plan and reserved 1,600,000 shares for issuance. Option prices for the incentive stock options will be 100 percent of the fair market value of the stock on the date the option is granted with an exercise period of not more than 10 years. For incentive options granted to 10 percent or more stockholders, the option price is 110 percent of the fair market value of the stock on the date the option is granted, with an exercise period of not more than five years. Option prices for the nonqualified stock options shall not be less than 85 percent of the fair market value of the stock on the date the options are granted, with an exercise period of not more than 10 years. Vesting terms are determined by the Company at the date of grant.
During the year ended November 30, 2000, 450,000 options were granted and outstanding with an exercise price of $10.75 per share. One quarter of the options were vested at the date of grant. The remaining options vested in equal annual installments over three years on the grant anniversary. During 2007, 112,500 options were exercised. No options were exercised during the six months ended June 30, 2008 or fiscal year 2006. The total intrinsic value of the options exercised during the year ended December 31, 2007 was approximately $825,000. Fair value of options exercised was based on the latest valuation of the Company’s common stock performed by an independent appraiser as of December 31, 2006. New shares were issued upon exercise. The remaining life of these options is approximately three years and four years at December 31, 2007 and 2006, respectively. As of June 30, 2008 and December 31, 2007, 2006 and 2005, 337,500, 337,500, 450,000 and 450,000 options were outstanding and vested, respectively.
14
Orthodyne Electronics Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 10. Major Customers
Percentages of accounts receivable and revenue of major customers are as follows:
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | 2007 | | 2006 | | 2005 |
| | Percentage
of Net Sales | | Percentage
of Accounts
Receivable | | Percentage
of Net Sales | | Percentage
of Accounts
Receivable | | Percentage
of Net Sales | | Percentage
of Accounts
Receivable |
Customer A | | 28 | | 35 | | * | | * | | * | | * |
Customer B | | 11 | | 9 | | 13 | | 3 | | 14 | | 4 |
Customer C | | * | | * | | 11 | | 8 | | 23 | | 44 |
| * | Did not represent more than 10% of total revenue. |
Note 11. Income Taxes
The provision for federal, state and foreign income taxes consists of the following:
| | | | | | | | | | | |
| | | December 31, |
| | 2007 | | | 2006 | | | 2005 |
Current: | | | | | | | | | | | |
Federal | | $ | 71,000 | | | $ | (31,000 | ) | | $ | 207,000 |
State | | | 16,000 | | | | 12,000 | | | | 6,000 |
Foreign | | | 377,000 | | | | (57,000 | ) | | | 25,000 |
| | | | | | | | | | | |
| | | 464,000 | | | | (76,000 | ) | | | 238,000 |
| | | | | | | | | | | |
Deferred: | | | | | | | | | | | |
Federal | | | — | | | | — | | | | 1,806,000 |
State | | | (3,000 | ) | | | (19,000 | ) | | | 832,000 |
| | | | | | | | | | | |
| | | (3,000 | ) | | | (19,000 | ) | | | 2,638,000 |
| | | | | | | | | | | |
| | $ | 461,000 | | | $ | (95,000 | ) | | $ | 2,876,000 |
| | | | | | | | | | | |
15
Orthodyne Electronics Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 11. Income Taxes, Continued
The income tax provision differs from the amount of income tax determined by applying the California S corporation income tax rate to pretax income due to the following:
| | | | | | | | | | | | |
| | | December 31, | |
| | 2007 | | | 2006 | | | 2005 | |
Computed “expected” tax expense | | $ | 767,000 | | | $ | 213,000 | | | $ | 47,000 | |
Increase (decrease) in income taxes resulting from: | | | | | | | | | | | | |
(Deductible) nondeductible expenses | | | (14,000 | ) | | | 30,000 | | | | 21,000 | |
Tax credits | | | (183,000 | ) | | | (205,000 | ) | | | (20,000 | ) |
Foreign sales income exclusion | | | (224,000 | ) | | | (112,000 | ) | | | (25,000 | ) |
NOL usage as a result of the foreign subsidiary merger | | | — | | | | (57,000 | ) | | | — | |
Change in deferred tax due to S corporation election | | | — | | | | — | | | | 2,323,000 | |
Change in deferred tax valuation allowance | | | 11,000 | | | | 59,000 | | | | 300,000 | |
Built-in gains tax | | | 107,000 | | | | — | | | | 207,000 | |
Other | | | (3,000 | ) | | | (23,000 | ) | | | 23,000 | |
| | | | | | | | | | | | |
| | $ | 461,000 | | | $ | (95,000 | ) | | $ | 2,876,000 | |
| | | | | | | | | | | | |
Significant components of the Company’s deferred tax assets are as follows:
| | | | | | | | |
| | | December 31, | |
| | 2007 | | | 2006 | |
Tax credits | | $ | 473,000 | | | $ | 439,000 | |
Accrued compensation | | | 21,000 | | | | 46,000 | |
Other | | | 16,000 | | | | 14,000 | |
| | | | | | | | |
Total deferred taxes | | | 510,000 | | | | 499,000 | |
Valuation allowance | | | (382,000 | ) | | | (374,000 | ) |
| | | | | | | | |
Net deferred tax asset | | $ | 128,000 | | | $ | 125,000 | |
| | | | | | | | |
Deferred tax assets have been included in prepaid expenses and other current assets on the balance sheet. The tax credit carryforwards of $473,000 are available to offset certain state taxes and have an indefinite life.
Management believes that it is more likely than not that the Company will not realize the benefit of certain net deferred tax assets existing at the balance sheet dates pertaining to research and development (R&D) credits. The Company has provided a valuation allowance on the related deferred tax asset balance since it is not likely the Company will realize the benefit of these credits against California income tax.
16
Orthodyne Electronics Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 12. Geographic Segment Data
The Company has export sales to international customers. Net sales, summarized by geographic area, are as follows:
| | | | | | | | | |
| | | Year Ended December 31, |
| | 2007 | | 2006 | | 2005 |
China | | $ | 49,478,000 | | $ | 18,098,000 | | $ | 15,983,000 |
Japan | | | 11,308,000 | | | 11,530,000 | | | 7,676,000 |
Germany | | | 8,731,000 | | | 7,227,000 | | | 5,292,000 |
Malaysia | | | 8,507,000 | | | 10,923,000 | | | 1,493,000 |
Philippines | | | 8,023,000 | | | 5,304,000 | | | 2,342,000 |
Taiwan | | | 5,562,000 | | | 7,215,000 | | | 3,089,000 |
Other European countries | | | 5,471,000 | | | 5,170,000 | | | 2,843,000 |
South Korea | | | 4,569,000 | | | 5,459,000 | | | 4,474,000 |
Singapore | | | 3,816,000 | | | 7,907,000 | | | 5,655,000 |
Domestic | | | 2,805,000 | | | 3,267,000 | | | 2,229,000 |
Mexico | | | 1,561,000 | | | 6,231,000 | | | 5,389,000 |
Other international | | | 592,000 | | | 140,000 | | | 133,000 |
| | | | | | | | | |
| | $ | 110,423,000 | | $ | 88,471,000 | | $ | 56,598,000 |
| | | | | | | | | |
The Company has approximately $2.8 million, $2.6 million and $2.3 million in assets held outside the United States at June 30, 2008 and December 31, 2007 and 2006, respectively.
Note 13. Cash Flow Disclosures
Changes in working capital components as shown in the consolidated statement of cash flows are comprised of the following:
| | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, | | | Year Ended December 31, | |
| | 2008
(Unaudited) | | | 2007
(Unaudited) | | |
| | | | 2007 | | | 2006 | | | 2005 | |
(Increase) decrease in: | | | | | | | | | | | | | | | | | | | | |
Accounts receivable | | $ | 3,806,000 | | | $ | (1,611,000 | ) | | $ | (7,691,000 | ) | | $ | (6,308,000 | ) | | $ | 15,365,000 | |
Income taxes receivable | | | (45,000 | ) | | | 59,000 | | | | (224,000 | ) | | | (26,000 | ) | | | 2,531,000 | |
Inventories, net | | | (1,818,000 | ) | | | (6,078,000 | ) | | | (6,957,000 | ) | | | (903,000 | ) | | | (924,000 | ) |
Prepaid expenses and other current assets | | | 448,000 | | | | 297,000 | | | | (113,000 | ) | | | (12,000 | ) | | | — | |
Increase (decrease) in: | | | | | | | | | | | | | | | | | | | | |
Accounts payable | | | (1,236,000 | ) | | | (51,000 | ) | | | 1,171,000 | | | | 806,000 | | | | (64,000 | ) |
Commissions payable | | | 125,000 | | | | (683,000 | ) | | | (375,000 | ) | | | 1,329,000 | | | | (899,000 | ) |
Income taxes payable | | | (17,000 | ) | | | 315,000 | | | | (212,000 | ) | | | (782,000 | ) | | | 658,000 | |
Other current liabilities | | | (772,000 | ) | | | 193,000 | | | | (1,186,000 | ) | | | (2,518,000 | ) | | | (3,367,000 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 491,000 | | | $ | (7,559,000 | ) | | $ | (15,587,000 | ) | | $ | (8,414,000 | ) | | $ | 13,300,000 | |
| | | | | | | | | | | | | | | | | | | | |
17
Orthodyne Electronics Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 13. Cash Flow Disclosures, Continued
| | | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, | | Year Ended December 31, | |
| | 2008
(Unaudited) | | | 2007
(Unaudited) | |
| | | | 2007 | | | 2006 | | 2005 | |
Supplemental Disclosures of Cash Paid during the Year: | | | | | | | | | | | | | | | | | | |
Income taxes | | $ | 352,000 | | | $ | — | | $ | 889,000 | | | $ | 698,000 | | $ | (2,985,000 | ) |
| | | | | | | | | | | | | | | | | | |
Interest | | $ | — | | | $ | — | | $ | 29,000 | | | $ | 84,000 | | $ | 115,000 | |
| | | | | | | | | | | | | | | | | | |
Supplemental Disclosures of Noncash Investing and Financing Transactions: | | | | | | | | | | | | | | | | | | |
Capitalized equipment built in-house | | $ | — | | | $ | — | | $ | — | | | $ | — | | $ | 227,000 | |
| | | | | | | | | | | | | | | | | | |
Net changes in unrealized gain (loss) on available-for-sale securities | | $ | (434,000 | ) | | $ | 176,000 | | $ | (33,000 | ) | | $ | 313,000 | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Repurchase of common stock with note receivable from ESOP | | $ | — | | | $ | — | | $ | — | | | $ | 834,000 | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Repurchase of common stock under note payable | | $ | — | | | $ | — | | $ | — | | | $ | — | | $ | 452,000 | |
| | | | | | | | | | | | | | | | | | |
Note 14. Other Current Liabilities
Other current liabilities consist of the following:
| | | | | | | | | |
| | | June 30,
2008
(Unaudited) | | December 31, |
| | | 2007 | | 2006 |
Accrued compensated absences | | $ | 1,256,000 | | $ | 1,198,000 | | $ | 1,088,000 |
Accrued compensation | | | 793,000 | | | 1,756,000 | | | 3,335,000 |
Accrued payroll | | | 425,000 | | | 320,000 | | | 307,000 |
Customer deposits | | | 293,000 | | | 169,000 | | | — |
Income taxes payable | | | 62,000 | | | 74,000 | | | 256,000 |
Other | | | 347,000 | | | 433,000 | | | 315,000 |
| | | | | | | | | |
| | $ | 3,176,000 | | $ | 3,950,000 | | $ | 5,301,000 |
| | | | | | | | | |
18
Orthodyne Electronics Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 15. Costs and Operating Expenses
Costs and operating expenses include the following:
| | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, | | |
| | | 2008 | | 2007 | | Year Ended December 31, |
| | | (Unaudited) | | (Unaudited) | | 2007 | | 2006 | | 2005 |
Research and development expense | | $ | 3,141,000 | | $ | 3,608,000 | | $ | 7,977,000 | | $ | 8,310,000 | | $ | 7,496,000 |
| | | | | | | | | | | | | | | |
Advertising expense | | $ | 118,000 | | $ | 96,000 | | $ | 221,000 | | $ | 115,000 | | $ | 95,000 |
| | | | | | | | | | | | | | | |
Rent expense | | $ | 68,000 | | $ | 45,000 | | $ | 14,000 | | $ | 91,000 | | $ | 12,000 |
| | | | | | | | | | | | | | | |
Note 16. Notes Receivable
The Company has a note receivable from a stockholder, which is payable on July 31, 2008, with interest accruing monthly at 4.49 percent per annum, that is secured by a deed of trust. Principal amounts outstanding at December 31, 2007 and 2006 are $1,000,000 and $2,000,000, respectively. Subsequently, the note receivable was amended, extending the maturity date to July 31, 2009.
On June 30, 2008, the Company entered into a second note receivable totaling $1,375,000 from the stockholder, which is payable on July 1, 2009, with interest accruing monthly at 2.40 percent, that is secured by a deed of trust.
19
