03/17/97 12:37 PM
Consolidated Financial Statements
Tylan General, Inc.
Years ended October 31, 1994, 1995
and 1996
with Report of Independent Auditors
Tylan General, Inc.
Consolidated Financial Statements
Years ended October 31, 1994, 1995 and 1996
Contents
Report of Independent Auditors 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
1. Description of Business and Significant Accounting
Policies
Basis of Presentation
On July 3, 1996, Tylan General, Inc. completed a merger with
Span Instruments, Inc. ("Span"), and the combined entity
retained the name Tylan General, Inc. (the "Company").
Pursuant to the "Agreement and Plan of Reorganization",
Tylan General, Inc. issued 1,300,000 shares of its common
stock for all of the outstanding common stock of Span.
The accompanying consolidated financial statements of the
Company have been restated and reflect the merger, which has
been accounted for as a pooling of interest. Prior to the
combination, Span's fiscal year ended August, 31. In
restating the financial statements, Span's operating
activity for the year ended October 31, 1996 was combined
with that of Tylan General's for the same period. For the
fiscal 1994 and 1995 financial statements, Span's operating
activity for the year ended August 31 was combined with that
of Tylan General's for the year ended October 31. The two-
month period ended October 31, 1995 relating to Span's
operating activity, during which Span had net sales of
$4,900,000 and a net loss of $826,000, is not included in
the accompanying consolidated financial statements as it is
presented as an adjustment to retained earnings due to the
differing year ends of Span and Tylan General. The balance
sheets of Tylan General and Span have been combined as of
October 31, 1996 and 1995.
All significant transactions between Tylan General and Span
prior to the combination were eliminated. No adjustments
were required to conform accounting policies of Tylan
General and Span. However, certain reclassifications were
made to the 1994 and 1995 financial statements to conform to
the 1996 presentation.
The Company
The Company designs, manufactures and markets precision mass
flow controllers, gas panels, pressure measurement,
monitoring and control instrumentation. The Company's
products are used primarily in integrated circuit
fabrication and also in other manufacturing processes, such
as flat panel display and fiber optic cable fabrication.
The Company's customer base includes semiconductor capital
equipment suppliers, integrated circuit manufacturers,
emergency vehicle manufacturers and other industrial users
located primarily in North America, with additional sales
generated in Europe and Asia. Integrated manufacturers
purchase the Company's products either as part of processing
systems purchased from equipment suppliers or directly from
the Company for retrofit or replacement applications. Such
manufacturers often specify to equipment suppliers which
vendors' process instrumentation should be supplied on a
particular process tool.
A significant portion of the Company's revenues are derived
from semiconductor capital equipment suppliers. The amount
and timing of future revenue from these semiconductor
capital equipment suppliers is contingent upon continued
construction and/or expansion of semiconductor wafer
fabrication facilities. During fiscal 1996, the Company's
five largest customers were Lam Research Corporation,
Applied Materials, Inc., Semi Gas, Tokyo Electron Limited,
and Valin Corporation, Inc., all of which are equipment
suppliers. These customers accounted in the aggregate for
36.6% of net sales in fiscal 1996. One customer individually
accounted for 12.1%, 12.8% and 16.6% of sales for fiscal
1994, 1995 and 1996, respectively. International sales
accounted for 29.3%, 26.8% and 27.1% of sales for fiscal
1994, 1995 and 1996, respectively.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of the Company and its wholly-owned
subsidiaries and its 75% owned subsidiary Ocala, Inc.
(d.b.a. Class 1), after elimination of all significant
intercompany accounts and transactions.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results
could differ from those estimates.
Fiscal Year
For ease of presentation, the Company has indicated its
fiscal year as ending on October 31. Whereas, in fact, the
Company reports on a 52-53 week fiscal year ending on the
Sunday closest to October 31. Fiscal 1994, 1995 and 1996
each included 52 weeks.
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, demand
deposits, and highly liquid short-term investments with
insignificant interest rate risk and original maturities of
three months or less. The Company has not experienced any
losses on its cash accounts.
Concentration of Credit Risk
The Company sells its product to customers primarily in the
United States, Europe and Asia. The Company maintains a
reserve for potential credit losses and such losses have
been minimal.
Foreign Currency Translation
All assets and liabilities of foreign subsidiaries are
translated into U.S. dollars at the rates of exchange in
effect at the close of the period. The aggregate effect of
translating the balance sheets is included as a separate
component of stockholders' equity entitled "Cumulative
translation adjustment." Revenues and expenses are
translated into U.S. dollars at the average rates of
exchange during the period. Gains and losses resulting from
foreign currency transactions are included in net income.
Financial Instruments
The Company periodically enters into foreign currency
futures contracts for the purpose of hedging foreign
exchange risk on certain transactions, primarily
intercompany receivables and payables with its foreign
subsidiaries. The primary exposures for the Company are
denominated in European currencies and the Japanese yen.
The Company does not engage in financial instrument
transactions for trading purposes. The counterparty to the
Company's contracts is a substantial and creditworthy
financial institution. The risk of counterparty default
associated with these contracts is not considered by the
Company to be material.
1. Description of Business and Significant Accounting
Policies (continued)
At October 31, 1995, the Company had foreign exchange
forward contracts to buy $1,200,000 of Japanese yen, that
matured in December 1995. As of October 31, 1995 these
contracts had a carrying value of $100,000 which
approximated their fair value. At October 31, 1996, the
Company had no foreign exchange forward contracts
outstanding.
Inventories
Inventories are stated at cost, which is less than market
value at October 31, 1995 and 1996, determined by the first-
in, first-out method.
Property
Property is stated at cost less accumulated depreciation and
amortization, which is computed using the straight-line
method. Machinery and equipment and furniture and fixtures
are depreciated generally over five years while equipment
under capital leases and leasehold improvements are
amortized over the shorter of the estimated life or related
lease term. Expenditures for replacements and betterments
are capitalized, while expenditures for repairs and
maintenance are charged to expense as incurred.
Evaluation of Intangible Assets
The Company's policy is to evaluate, at each balance sheet
date, the appropriateness of the carrying values of the
unamortized balances of intangible assets on the basis of
estimated future cash flows (undiscounted) and other
factors. If such evaluation were to indicate a material
impairment of these intangible assets, such impairment would
be recognized by a write-down of the applicable asset.
Capitalized Software
In accordance with Statement of Financial Accounting
Standards No. 86 "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", costs
incurred in the research and development of new software
products and significant enhancements to existing software
products are charged against operations as incurred until
the technological feasibility of the product has been
established. After technological feasibility has been
established, direct production costs, including programming
and testing, are capitalized. Amortization of these costs
begin when the product becomes available for sale.
Amortization expense of capitalized software costs for the
years ended October 31, 1994, 1995 and 1996 was $275,000,
$307,000 and $228,000, respectively. Unamortized
capitalized software costs totaled $1,366,000 and $563,000
at October 31, 1995 and 1996, respectively.
1. Description of Business and Significant Accounting
Policies (continued)
Capitalized software costs are amortized using the greater
of the amount computed using the ratio of current product
revenues to estimated total product revenues or the straight-
line method over the estimated economic lives of the
products. It is possible that estimated total product
revenues, the estimated economic life of the product, or
both will be reduced in the future. As a result, the
carrying amount of capitalized software costs may be reduced
in the future, which could result in material charges to the
results of operations in future periods.
Revenue Recognition
Revenue from product sales is recognized upon shipment.
Research and Development
Research and development costs are expensed in the period
incurred.
Advertising Expenses
Advertising costs are expensed when incurred. Advertising
expenses incurred for the years ended October 31, 1994, 1995
and 1996 were $498,000, $926,000, and $976,000,
respectively.
Income Per Share
Income per share is computed based on the weighted average
number of common and common equivalent shares outstanding
during each period using the treasury stock method and it
assumes conversion of all outstanding convertible preferred
stock and the exercise of all outstanding warrants. Stock
options, convertible preferred stock and warrants are
considered to be common stock equivalents. All shares of
common stock and common stock equivalents issued within
twelve months of an initial public offering at a price per
share less than the offering price ($7.00) are considered to
be outstanding for all periods presented prior to the
initial public offering.
Accounting for Stock-based Compensation
In October, 1995, the Financial Accounting Standards Board
issued "Accounting for Stock-Based Compensation" ("Statement
No. 123"). The statement is effective for fiscal years
beginning after December 15, 1995. Under Statement No. 123,
stock-based
1. Description of Business and Significant Accounting
Policies (continued)
Accounting for Stock-based Compensation
compensation expense is measured using either the intrinsic-
value method as prescribed by Accounting Principle Board
Opinion No. 25 or the fair-value method described in
Statement No. 123. Should the Company not be acquired as
disclosed in Note 13, the Company intends to implement
Statement No. 123 in fiscal 1997 using the intrinsic-value
method. Accordingly, upon adopting Statement No. 123 there
will be no effect on the Company's financial position or
results or operations.
Accounting for Asset Impairment
The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, effective November 1, 1996. SFAS No. 121 required
impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying amount.
SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. There was no
effect on the financial statements from the adoption of SFAS
No. 121.
2. Merger and Acquisitions
Merger with Span Instruments, Inc.
As stated in Note 1 "Basis of Presentation," Span was merged
into the Company in July, 1996. Span, with principal
facilities in Texas and Florida, designs, manufacturers, and
markets a complete line of pressure monitoring instruments
and equipment.
Total revenues and net income (loss) of Tylan General and
Span for the periods preceding the acquisition were (in
thousands):
Tylan
General Span Combined
Year ended October 31, 1994:
Total revenues $ 48,079 $ 27,294 $ 75,373
Net income $ 2,449 $ 501 $ 2,950
Year ended October 31, 1995:
Total revenues $ 75,825 $ 42,443 $118,268
Net income $ 4,693 $ 540 $ 5,233
Period from November 1, 1995
to July 3, 1996 (Unaudited):
Total revenues $ 71,991 $ 31,819 $103,810
Net income $ 5,977 $ (2,288) $ 3,689
Included in the consolidated statements of operations for
the year ended October 31, 1996 were costs of $3,740,000
related to the combination and integration of Span into
Tylan General. These costs include professional fees of
$1,180,000 and integration costs of $2,560,000. Included in
the integration costs are accrued compensation relating to
employees which were terminated subsequent to the merger and
a $2,000,000 write down of certain assets, primarily
capitalized software costs and fixed assets, to the
estimated net realizable value, which management determined
would be sold after the merger. The net book value of the
division to be sold is $200,000 which is included in prepaid
expenses and other assets in the accompanying consolidated
balance sheet. The consolidated statements of operations
for the year ended October 31, 1996 also include costs
associated with the pre-payment of Span indebtedness which
are presented as an extraordinary loss (net of income tax
benefit) of $224,000.
Investment in Korean Joint Venture
In October, 1995, the Company purchased the remaining 50% of
the outstanding shares of stock of Hanyang General Co., LTD.
Prior to October, 1995, the Company was a 50% owner of
Hanyang General Co., LTD., a corporate joint venture with
Hanyang Engineering Co., LTD. Beginning in October 1995,
Hanyang General Co., LTD's financial statements were
consolidated with the Company's financial statements. Prior
to October 1995, the Company's investment in the corporate
joint venture was accounted for on the equity method.
Acquisition of Class 1, Inc.
On December 29, 1994, the Company acquired the assets,
liabilities, and business of Class 1, Inc. (Class 1), in
exchange for 25% of the stock of a previously wholly-owned
subsidiary of the Company. Class 1 specializes in the
manufacturing of pressure gauges for emergency vehicles.
The acquisition has been accounted for by the purchase
method of accounting and, accordingly, the purchase price
has been allocated to the assets acquired and the
liabilities assumed based on the estimated fair values at
the date of acquisition. The excess of purchase price over
the estimated fair values of the net assets acquired has
been recorded as goodwill. The operating results of this
acquisition are included in the Company's consolidated
statements of operations from the date of acquisition. In
connection with the acquisition, the Company and the
minority shareholders entered into a Shareholders' Agreement
under which the minority shareholders of Class 1 have the
option to acquire the Company's 75% interest in Class 1 if a
change in controlling interest of the Company occurs. The
revenues and net income of Class 1 were not material
compared to those of the Company prior to its acquisition.
3. Goodwill
In October, 1989, Tylan General, Inc., (formerly Vacuum
General, Inc.) purchased all of the outstanding shares of
common stock of Tylan. The purchase price exceeded the net
assets acquired by $6,592,000. This excess was recorded as
goodwill and is being amortized on a straight-line basis
over 15 years. Goodwill has been reduced for certain tax
benefits utilized in 1992 of $63,000 and deferred tax assets
recognized in 1993 of $1,469,000 (Note 8).
In October, 1995, the Company purchased the remaining 50% of
the outstanding shares of stock of Hanyang General Co.,
LTD., the Company's Korean joint venture. The purchase
price exceeded the net assets acquired by $140,000. This
excess was recorded as goodwill and is being amortized on a
straight-line basis over five years (Note 2).
In the Class 1, Inc. acquisition (Note 2), the purchase
price exceeded the net assets by $101,000. This excess was
recorded as goodwill and is being amortized over 10 years.
4. Balance Sheet Details
October 31,
1995 1996
(in thousands)
ACCOUNTS RECEIVABLE:
Accounts receivabletrade $21,699 $22,128
Less allowance for doubtful (329) (486)
accounts
Total $21,370 $21,642
INVENTORIES:
Raw materials $11,242 $15,746
Work in process 4,525 7,451
Finished goods 4,108 5,702
Total $19,875 $28,899
PROPERTY:
Machinery and equipment $18,036 $22,470
Furniture and fixtures 8,961 11,371
Leasehold improvements 7,290 10,601
34,287 44,442
Less accumulated depreciation (13,100) (17,257)
and amortization
Total $21,187 $27,185
GOODWILL:
Goodwill $5,447 $5,416
Less accumulated amortization (2,347) (2,632)
Total $3,100 $2,784
ACCRUED EXPENSES:
Compensation $3,183 $2,297
Other 3,718 4,173
Total $6,901 $6,470
5. Debt
At October 31, 1996, Tylan General, Inc. had $5,627,000
outstanding under an $11,000,000 revolving line of credit
with a bank (the "Tylan Credit Facility"). The Tylan Credit
Facility originated June 5, 1996 and matures on March 31,
1997. Interest is payable monthly at either prime or LIBOR
plus 1.75% at the election of the borrower. The Tylan
Credit Facility also provides for the issuance of standby
letters of credit denominated in Japanese yen and Korean won
in amounts of up to the yen and won equivalents of
$4,000,000 and $5,000,000, respectively. These standby
letters of credit are used to support borrowings by Tylan
General, K.K. and Tylan General Korea Ltd.. At October 31,
1996, standby letters of credit in the amounts of the yen
and won equivalents of approximately $4,000,000 and
$500,000, respectively were outstanding. These outstanding
standby letters of credit are in addition to the borrowings
set forth above. As collateral for the Tylan Credit
Facility, the Company has granted the bank a security
interest in all accounts receivable, inventories, machinery
and equipment and general intangibles. The Tylan Credit
Facility contains financial covenants relating to minimum
levels of net worth and profitability, minimum current,
quick and debt coverage ratios and maximum levels of balance
sheet leverage and capital expenditures. The Company was
not in compliance with certain of the financial covenants at
October 31, 1996; however, the Tylan Credit Facility has
been repaid and replaced with the new agreement effective
December 13, 1996 as described below.
At October 31, 1996, Span Instruments, Inc. and Ocala, Inc.
as Co-Borrowers had $9,997,000 outstanding under a
$12,000,000 revolving credit facility and had $1,708,000
outstanding under a term loan with a bank (together the
"Span Credit Facility") that originated on March 14, 1996.
Maximum borrowings under the revolving portion of the
facility are limited to the lesser of $12,000,000 or a
defined percentage of accounts receivable and inventories.
Both the revolving credit facility and the term loan bear
interest at prime plus 1.5% ( 9.75% at October 31, 1996) and
are collateralized by the Co-Borrowers' accounts receivable,
inventories and machinery and equipment not otherwise
pledged under capital lease obligations and by the partial
guarantee of Span's Chief Executive Officer. The revolving
credit facility requires payment of interest payments
monthly with principal due at maturity on January 1, 1998.
The term loan is due in equal monthly principal payments
plus interest over a four year period commencing April 1,
1996. Both the revolving credit facility and the term loan
require the Company to meet certain financial covenants on a
consolidated basis with Ocala, Inc. relating to minimum
levels of net worth, working capital, and interest and debt
coverage, and maximum levels of leverage and capital
expenditures. The Span Credit Facility also restricts the
incurrence of debt and prohibits the payment of dividends or
distribution of assets. The Span Credit Facility was repaid
and replaced with the new loan facility agreement entered
into on December 13, 1996 as described below.
Effective March 14, 1996, Span issued a $5,000,000 Senior
Subordinated Note (the "Note") at par with a detachable
Common Stock Purchase Warrant (the "Warrant"). The Note was
unsecured and accrued interest at 12.5% payable quarterly.
The agreement with the holder of the Warrant also contained
a provision that if the merger with Tylan General was
complete prior to the first anniversary of the issuance of
the Warrant, and the Senior Subordinated Note was paid in
full, the shares purchasable by the Warrant would be reduced
to zero. Following the consummation of the merger between
Tylan General and Span Instruments, the Note was repaid in
full and the shares purchasable by the Warrant were reduced
to zero.
Effective December 13, 1996, the Company entered into a new
loan facility agreement (the "Agreement") under which all of
the outstanding borrowings under the Tylan Credit Facility
and the Span Credit Facility were refinanced and the partial
guarantee of Span's Chief Executive Officer was released.
The Agreement provides for a $30,000,000 revolving credit
facility (the "Revolver"), a $1,666,664 term loan (the "Term
Loan") and a $4,000,000 equipment line of credit (the
"Equipment Line"). Outstanding borrowings under the
Revolver are limited to the lesser of $30,000,000 or a
percentage of accounts receivable and inventory, as defined
in the Agreement. The Revolver also provides for the
issuance of standby letters of credit denominated in
Japanese yen and Korean won in amounts of up to the yen and
won equivalents of $4,000,000 and $500,000 respectively
(combined not to exceed $4,000,000). These standby letters
of credit are used to support borrowings by Tylan General
K.K. and Tylan General Korea Ltd. The Revolver, Term Loan
and Equipment Line all bear interest at prime or LIBOR plus
2.25% at the election of the borrower. All three facilities
are collateralized by the Company's accounts receivable,
inventories, machinery, equipment and intangible assets. To
provide additional collateral, Tylan General has pledged 65%
of the shares owned by it in the following subsidiaries:
Tylan General UK Ltd., Tylan General TCA GmbH, Tylan General
SARL, Tylan General K.K., Tylan General Korea Ltd., and Span
has pledged 65% of the shares owned by it in Span
Instruments (Singapore) Pte. Ltd. Interest on the Revolver
is due monthly with principal due at maturity on March 1,
1999. The Term Loan is due in equal monthly principal
payments plus interest through maturity on March 1, 2000.
Advances under the Equipment Line are limited to 80% of the
purchase price of new equipment. Each draw amortizes over
48 months and draws must be made prior to March 1, 1999.
The Agreement requires the Company to meet certain financial
covenants relating to minimum levels of net worth, working
capital, debt coverage, profitability and maximum levels of
leverage and capital expenditures. The Agreement also
prohibits acquisitions where consideration exceeds
$5,000,000 and prohibits the payment of dividends or
distribution of assets. The Agreement has a $100,000
prepayment penalty in the event it is repaid or refinanced
for any reason prior to September 1, 1998.
Long-Term Debt Summary
Long-term debt is summarized as follows (in thousands):
October 31,
1995 1996
Bank revolving credit due January 1998, $ -
with interest payable monthly $9,997
Bank revolving credit which was repaid
in April 1996 9,790
Bank term loan (Tylan General K.K.)
payable in quarterly principal
installments of $18 plus interest at
3.75% per year through November, 1999 334 229
Bank term loan (Tylan General K.K.)
payable in monthly principal
installments of $26 plus interest at
2.7% per year with the balance due
June, 1997 865 459
Bank term loan (Tylan General K.K.)
payable in monthly principal
installments of $26 plus interest at
1.25% per year through October, 1997 - 317
Bank term loan (Tylan General K.K.)
payable at maturity for $300
plus interest at 1.54% per year
through October, 1997 principal
installments of $29 plus interest at
2.6% per year through June, 1997 - 300
Capital lease obligations with weighted
average yearly interest rates of
10.9% and 11.6% respectively (Note 9) 3,086 2,533
Notes payable to the CIT Group
collateralized by specific assets,
bearing interest at 9.25% to 10.625%,
with maturities ranging from
November, 1998 to November, 2001 921 1,080
Term notes to Fleet Credit Corporation
payable in monthly installments of
$52 plus interest at prime plus 2% 1,999 -
Term note to Comerica Bank, Texas - 1,708
Note payable to Sun Trust Bank -
Ocala, Florida 237
Subordinated notes payable to employees
bearing interest at 6.5% to 12%, with
maturities ranging from March, 1996
to September, 1999 514 -
Unsecured promissory notes bearing
interest at 6% to 9% maturing from
May, 1998 to February, 2000 154 117
Total 17,663 16,977
Less current portion (2,393) (2,784)
Long-term debt $15,270 $14,193
Long-term debt payments (excluding capital leases) as of
October 31, 1996 are summarized as follows (in thousands):
Year Ending October 31,
1997 $ 2,040
1998 10,998
1999 913
2000 451
2001 42
$14,444
6. Research and Development Agreements
In August 1996, the Company signed a five-year research and
development agreement with Innovative Lasers Corporation
("ILC"). Under terms of the agreement, ILC will undertake
research and development of certain products which may be
sold to the Company or incorporated into the Company's
products and the Company will make equal quarterly payments
of $400,000 to ILC through January 2001. Following the
first contract year the Company may terminate the agreement
prior to the expiration date, by providing advance notice of
six quarters. Work and quarterly payments would continue
during the six quarter period.
In April 1996, the Company signed a five-year research and
development agreement with Integrated Sensing Systems, Inc.
("ISSYS"). Under terms of the agreement, ISSYS will
undertake research and development of certain products which
may be sold to the Company or incorporated into the
Company's products and the Company will make equal quarterly
payments of $250,000 to ISSYS through January 2001. The
Company may terminate the agreement prior to the expiration
date, at which time the Company will be obligated to make
quarterly payment through the end of the current contract
year plus the next full contract year.
7. Extraordinary Items
During fiscal 1996, the Company prepaid $5,000,000 in Span
debt. With this prepayment, the Company paid and expensed
$150,000 in prepayment penalty and wrote-off unamortized
prepaid financing costs of $189,000. The total amount of
$339,000 was recorded, net of income tax benefit, as an
extraordinary item of $224,000.
During fiscal 1995, the Company repaid $5,400,000 in debt
and revolving credit with the proceeds from the Company's
Initial Public Offering. In connection with the repayment
of debt of $5,000,000, the Company wrote-off the unamortized
deferred issue costs of $949,000 and incurred a prepayment
penalty of $250,000. The total amount of $1,199,000 was
recorded, net of income tax benefit, as an extraordinary
item of $695,000.
8. Income Taxes
Effective November 1, 1992, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes" under which deferred tax assets and
liabilities are determined using presently enacted tax
rates, and net deferred tax assets are recognized to the
extent their realization is more likely than not.
The components of the provision for income taxes are
summarized as follows (in thousands):
Year Ended October 31,
1994 1995 1996
Current income taxes
Federal $ 648 $ 823 $ 571
Foreign 463 2,166 1,359
State 177 346 241
Total 1,288 3,335 2,171
Deferred income taxes
Federal 225 257 (1,316)
Foreign - (285) (114)
State 1 (57) (373)
Total 226 (85) (1,803)
Reduction in valuation
allowance (591) - -
Tax benefit of
extraordinary item - 504 115
Provision for income taxes $ 923 $3,754 $ 483
The provision for income taxes is different from that which
would be obtained by applying the statutory federal income
tax rate (34%) to income before income taxes. The items
causing this difference are as follows:
Year Ending October 31,
1994 1995 1996
Provision at statutory 34.0% 34.0% 34.0%
rate
Goodwill amortization 2.5 1.0 7.9
Foreign provision in excess
of (less than) federal
statutory rate (3.3) 4.8 13.4
State income taxes, net of
federal benefit 3.3 2.2 (8.5)
Nondeductible merger fees 17.3
Reduction in valuation
allowance, net of write- (15.3)
offs
Other 2.6 .2 1.7
Tax credits (3.4) (28.0)
23.8% 38.8% 37.8%
Deferred income taxes reflect the net effect of temporary
differences between the carrying amounts of assets and
liabilities for reporting and the amounts used for income
tax purposes. The tax effects of items comprising the
Company's net deferred tax assets are as follows at October
31, 1995 and 1996 (in thousands):
October 31,
1995 1996
Deferred Tax Assets:
Net operating loss carryforwards $ 589 $1,120
Tax credit carryforwards 270 127
Reserves currently not deductible 226 1,091
Accrued expenses 239 433
Differences between book and tax 1,067 1,732
basis of inventory
Differences between book and tax 37 26
basis of fixed assets
Other, net 83 86
Total deferred tax assets 2,511 4,615
Deferred Tax Liability:
Software development costs (282) (583)
Net deferred tax assets $2,229 $4,032
At October 31, 1996, the Company had available federal,
state and foreign net operating loss carryforwards of
approximately $1,921,000, $5,565,000, and $643,000,
respectively. The difference between federal and state tax
loss carryforwards is primarily attributable to a portion of
the federal losses being carried back to reduce taxable
income in prior years. The state losses are not allowed to
be carried back. The federal, state, and foreign tax loss
carryforwards will begin to expire in 2002, 2001 and 2001,
respectively, unless previously utilized. The tax credit
carryforwards will begin to expire in 2000, unless
previously utilized. Approximately $1,130,000 and
$4,190,000 of the federal and state tax loss carryforwards,
respectively, were generated by Span before the merger with
the Company. Accordingly, these losses will only be
available to offset the separate future taxable income of
Span.
Pursuant to Internal Revenue Code Sections 382 and 383,
annual use of the Company's federal and state net operating
loss and credit carryforwards are limited because of certain
greater than 50% cumulative changes in ownership. The tax
loss carryforwards that may be utilized to offset taxable
income for the year ended October 31, 1997 are approximately
$1,750,000. In subsequent years, approximately $950,000 of
taxable income per annum may be offset by the tax loss
carryforwards.
Undistributed earnings of the Company's foreign subsidiaries
(except earnings of the Company's German subsidiary which
are deemed distributed) amounted to approximately $4.5
million at October 31, 1996. Those earnings are considered
to be indefinitely reinvested and, accordingly, no provision
for U.S. federal income taxes has been provided thereon.
Upon distribution of those earnings in the form of dividends
or otherwise, the Company would be subject to both U.S.
income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to the various
foreign countries, if applicable.
Income tax benefits resulting from the exercise of non-
qualified stock options are recorded directly to paid-in-
capital. Such benefits totaled $143,000 for the year ended
October 31, 1996.
9. Leases
The Company leases its facilities and certain equipment
under capital and operating leases that expire at various
dates through 2009. Certain facility leases include
provisions for inflation escalation adjustments,
requirements for the payment of property taxes, insurance
and maintenance expenses as well as 5-year renewal options.
Rent expense under operating leases for fiscal 1994, 1995
and 1996 was approximately $2,309,000, $2,459,000 and
$3,130,000, respectively.
The net book value of assets under capital leases at October
31, 1995 and 1996 was approximately $2,910,000 and
$2,425,000 net of accumulated amortization of approximately
$1,942,000 and $3,041,000, respectively. Future minimum
lease payments under capital and operating leases as of
October 31, 1996 are summarized as follows (in thousands):
Year Ending October 31, Capital Operating
1997 $ 973 $ 2,870
1998 865 2,613
1999 779 2,399
2000 306 2,194
2001 22 1,948
Thereafter 11,265
Total $ 2,945 $ 23,289
Less amount representing interest (412)
Present value of minimum lease
payments (Note 5) 2,533
Less current portion (744)
Long-term obligations under
capital leases $ 1,789
Recapitalization
In January 1995, the Company effected a recapitalization
whereby it reincorporated in the State of Delaware and the
number of common and preferred shares authorized was
increased to 50,000,000 and 10,000,000, respectively, at
$.001 par value per share. Immediately prior to such
recapitalization, a warrant to purchase 887,845 shares of
common stock was exercised.
On February 2, 1995, all outstanding preferred stock was
converted into an aggregate of 1,550,002 common shares and
the proceeds to the Company from the sale of 1,300,000 newly
issued shares, net of underwriting commissions and expenses,
of $7,400,000 were received.
The initial public offering consisted of 2,300,000 shares
(including the underwriters' over-allotment option of
300,000 shares which was exercised in March 1995) of common
stock which was sold at $7 per share. Of the 2,300,000
shares, 1,000,000 shares were sold by existing stockholders
and 1,300,000 shares were sold by the Company.
In October 1995, the Company received proceeds of
$18,500,000, net of underwriting commissions and expenses,
from a secondary offering consisting of 1,725,000 shares
(including the underwriters' over-allotment option of
225,000 shares) of common stock which was sold at $16 per
share. Of the 1,725,000 shares, 475,000 shares were sold by
existing stockholders and 1,250,000 shares were sold by the
Company.
Series B and D Convertible Preferred Stock
At October 31, 1994 there were 1,208,201 shares of Series B
and D preferred stock outstanding. Each share of Series B
and D preferred stock (i) was voting, (ii) was convertible
at the option of the holder into common stock, (iii) was
entitled to preference in liquidation equal to $5.04 per
share plus declared and unpaid dividends and then
participated equally with common stock, up to a maximum of
$20.16 per share for Series B preferred stock, (iv) would
automatically convert into common stock immediately upon
effectiveness of a registration statement under the
Securities Act of 1933 of common stock with a minimum per
share price of $10.08 and net proceeds of $22,400,000 and
(v) had certain anti-dilutive protections as defined. In
February 1994 immediately following the close of the
Company's initial public offering, all outstanding preferred
stock was converted into an aggregate of 1,550,002 common
shares.
Stockholders' Rights Plan
On July 2, 1996, the Board of Directors of the Company
declared a dividend distribution of one preferred share
purchase right for each outstanding share of common stock.
Each right, with certain exceptions, when it becomes
exercisable, entitles the registered holder to purchase one
one-hundredth of a share of Series A Junior Participating
Preferred Stock, without par value, at a price of $70.00 per
share. The rights become exercisable (except pursuant to a
"Permitted Offer") upon the earliest to occur of (i) a
person or group of affiliated or associated persons having
acquired a beneficial ownership of 15% or more of the
outstanding common shares or (ii) 10 days following the
commencement of or announcement of an intention to make a
tender offer. Until a right is exercised, the holder will
have no rights as a stockholder of the Company including the
right to vote or receive dividends
Stock Option Plans
The Company's 1989 Stock Option plan provided that non-
qualified options to purchase up to 380,500 shares of common
stock could be granted to employees and others purchase
common stock at a price per share determined by the Board of
Directors, which approximated market value. In June 1994,
the Company terminated the 1989 plan as to new issuances and
adopted the 1994 Stock Option Plan. Such plan, which was
amended on February 11, 1996, provides that incentive and
non-qualified options to purchase up to 639,000 shares of
common stock may be granted to certain employees, directors,
and consultants. Incentive stock options are to be granted
at prices not less than the fair market value at the date of
grant. Non-qualified stock options and options granted to
individuals possessing 10% or more of the total combined
voting power of all classes of stock are to be granted at
prices not less than 85% and 110%, respectively, of the fair
market value.
On July 11, 1996, the Company adopted the 1996 Stock Option
Plan which provides that incentive and non-qualified options
to purchase up to 295,000 shares of common stock may be
granted to employees and consultants other than officers and
directors. Options granted under this plan are to be
granted at prices not less than eighty five percent (85%) of
the fair market value of the stock at the date of grant.
Options issued under the 1994 and 1996 plans generally vest
over a period of five (5) years from date of grant and
expire ten (10) years from date of grant.
In December 1994, the 1994 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") was adopted by the Board
of Directors and approved by the stockholders. The
Directors' Plan provides for the automatic grant of options
to purchase shares of common stock to non-employee directors
of the Company. The maximum number of shares of common
stock that may be issued pursuant to options granted under
the Directors' Plan is 75,000.
The following is a summary of all stock options activity for
fiscal 1994, 1995 and 1996:
Number Price
of Per Share
Shares
October 31, 1993 310,321 $.90
Canceled or expired (600) $.90
Exercised (2,400) $.90
Granted 149,324 $3.50 - $5.04
October 31, 1994 456,645 $.90 - $5.04
Exercised (117,300) $.90 - $5.04
Granted 346,950 $5.04 - $15.75
October 31, 1995 686,295 $.90 - $15.75
Canceled or expired (74,022) $3.50 - $15.75
Exercised (47,134) $.90 - $10.25
Granted 532,734 $9.63 - $14.00
October 31, 1996 1,097,873 $.90 - $15.75
At October 31, 1996, 4,650 shares remained available for
grant under the 1994 Stock Option Plan, 41,888 shares
remained available under the 1994 Non-Employee Directors'
Stock Option Plan, and 21,000 shares remained available
under the 1996 Stock Option Plan. The total number of
shares exercisable under all stock option plans is 281,709.
11. Geographic Information
Sales and operating income (loss) for the years ended
October 31, 1994, 1995 and 1996, and identifiable assets at
October 31, 1995 and 1996, classified by geographic area,
were as follows (in thousands):
Year Ended October 31,
1994 1995 1996
Net sales:
United States $59,310 $ 93,742 $ 108,955
Europe 9,358 11,578 18,178
Asia 6,705 12,948 21,206
Total $75,373 $118,268 $ 148,339
Income from operations
United States $ 4,682 $ 7,705 $ 791
Europe 1,284 1,816 3,372
Asia (61) 2,280 (81)
Total $ 5,905 $ 11,801 $ 4,082
As of October 31,
Identifiable assets: 1995 1996
United States $ 70,605 $ 70,568
Europe 8,187 10,382
Asia 8,259 10,395
Total $ 87,051 $ 91,345
Intercompany sales between geographic areas totaled
$8,393,000, $11,794,000 and $22,388,000 for the years ended
October 31, 1994, 1995 and 1996, respectively. These sales
represent primarily export sales of U.S. produced goods and
are accounted for based on established sales prices between
the related companies.
12. Employee Retirement and Gain Sharing Plans
401(k)
The Company has adopted 401(k) plans for the benefit of all
qualifying employees, generally all US employees with more
than three months of service (one year of service for Span
employees). The plans allow participants to contribute up
to 15% of annual salary (20% for Span employees) (not to
exceed approximately $9,500 in 1996) which is
entirely tax deferred. The employee contributions are 100%
vested. The Company matches $.25 for each dollar of
qualifying employee contributions, up to 6% of such
employee's gross compensation with immediate 100% vesting
($1.00 for each dollar, up to 3% with vesting at 20% a year
for Span employees). During the years ended October 31,
1994, 1995 and 1996, the Company made contributions to the
plan of $113,000, $262,000 and $296,000, respectively.
Gain-sharing plan
In April 1995, the Company adopted a gain-sharing plan (the
"Gain-Sharing Plan") which allows eligible employees to earn
incentive compensation of up to 10% of their annual salary
based on the Company's performance against certain goals and
objectives. Eligible employees under the Gain-Sharing Plan
are regular or temporary employees who have been employed
for a full quarter in the United States and who are not
participants in any other Company bonus plan. The executive
officers of the Company are not currently eligible to
participate in the Gain-Sharing Plan. The Company is
considering including Span employees in this Plan. Payouts
under the Gain-Sharing Plan are made on a quarterly basis.
For the years ended October 31, 1995 and 1996, total
payments made under the Gain-Sharing Plan were $604,000 and
$362,000, respectively.
13. Subsequent Event (Unaudited)
On December 16, 1996, the Company and Millipore Corporation
announced that Millipore had entered into a definitive
agreement to acquire the Company for $16.00 per share, or
approximately $133 million. This transaction will result in
a greater than 50% ownership change for purposes of Internal
Revenue Code Sections 382 and 383. However, the Company
does not believe that this change will have a material
impact on the utilization of its tax loss and credit
carryforwards.