Exhibit 99.2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Emerson Electric Co.:
We have audited the accompanying combined balance sheets of ENI as of
September 30, 2001 and 2000, and the related combined statements of income,
divisional control and comprehensive income, and cash flows for each of the
years in the three-year period ended September 30, 2001. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined 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 combined
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of ENI as of September
30, 2001 and 2000, and the results of its operations and its cash flows for each
of the years in the three-year period ended September 30, 2001 in conformity
with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Rochester, New York
January 17, 2002
ENI
Combined Balance Sheets
September 30, 2001 and 2000
(In thousands)
ASSETS 2001 2000
--------- -------
Current assets:
Cash $ 2,452 2,702
Accounts receivable, less allowance for doubtful accounts of
$104 and $123 at September 30, 2001 and 2000, respectively 8,139 17,973
Inventories, net 22,723 28,058
Deferred income taxes and other current assets 6,232 3,522
Forward contracts 88 --
--------- -------
Total current assets 39,634 52,255
Property and equipment, net 19,737 17,631
Goodwill, less accumulated amortization of $4,623 and $3,372 at
September 30, 2001 and 2000, respectively 45,992 47,243
Other noncurrent assets, less accumulated amortization of $1,013 and
and $713 at September 30, 2001 and 2000, respectively 1,967 957
--------- -------
Total assets $ 107,330 118,086
========= =======
LIABILITIES AND DIVISIONAL CONTROL
Current liabilities:
Accounts payable - trade 4,012 10,611
Accounts payable - intercompany, net 199 13,039
Deposits received from customers for product sales 484 727
Accrued expenses 4,962 8,116
Accrued warranty expense 3,658 760
Accrued purchase obligations 1,900 --
Income taxes 6,448 9,105
Deferred income taxes 35 --
--------- -------
Total current liabilities 21,698 42,358
Long-term debt 5,000 5,000
Other long-term liabilities 390 366
Deferred income taxes 792 1,128
--------- -------
Total liabilities 27,880 48,852
--------- -------
Divisional control:
Divisional equity 80,341 69,632
Accumulated other comprehensive income (loss) (891) (398)
--------- -------
Total divisional control 79,450 69,234
--------- -------
Total liabilities and divisional control $ 107,330 118,086
========= =======
See accompanying notes to the combined financial statements.
ENI
Combined Statements of Income
Years ended September 30, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
--------- --------- --------
Sales $ 105,616 109,505 57,898
Cost of sales 68,306 56,648 32,463
--------- -------- -------
Gross profit 37,310 52,857 25,435
Operating expenses:
Research and development 13,879 11,464 7,275
Sales and marketing 7,574 8,717 6,314
General and administrative 5,942 5,315 3,087
Litigation 785 3,989 775
Amortization of goodwill 1,251 1,251 1,120
--------- -------- -------
Income from operations 7,879 22,121 6,864
Other income (expense):
Interest income 252 6 18
Interest expense (235) (193) (199)
Foreign currency gain (loss) (71) (124) 11
Other, net (685) (455) (50)
--------- -------- -------
Income before income tax provision 7,140 21,355 6,644
Income tax expense (3,074) (8,201) (2,695)
--------- -------- -------
Net income $ 4,066 13,154 3,949
========= ======== =======
See accompanying notes to the combined financial statements.
ENI
Combined Statements of Divisional Control and Comprehensive Income
Years ended September 30, 2001, 2000 and 1999
(In thousands)
ACCUMULATED
OTHER
DIVISIONAL COMPREHENSIVE COMPREHENSIVE
CONTROL INCOME (LOSS) INCOME (LOSS)
---------- ------------- -------------
Balance at September 30, 1998 $ 39,127 (369)
Comprehensive income:
Net income 3,949 -- 3,949
Currency translation adjustments 420 420
-------
Comprehensive income $ 4,369
=======
Goodwill recorded from step acquisition by Emerson 32,947 --
Distributions to Emerson (8,275) --
-------- ----
Balance at September 30, 1999 67,748 51
Comprehensive income:
Net income 13,154 -- 13,154
Currency translation adjustments (449) (449)
-------
Comprehensive income $12,705
=======
Distributions to Emerson (11,270) --
-------- ----
Balance at September 30, 2000 69,632 (398)
Comprehensive income:
Net income 4,066 -- 4,066
Currency translation adjustments (546) (546)
Translation adjustment from adoption of
SFAS No. 133 (note 3), net of tax of $64 99 99
Change in fair value of forward contracts,
net of tax of $35 53 53
Reclassification adjustment to earnings,
net of tax of $64 (99) (99)
-------
Comprehensive income $ 3,573
=======
Contributions from Emerson 6,643 --
-------- ----
Balance at September 30, 2001 $ 80,341 (891)
======== ====
See accompanying notes to the combined financial statements.
ENI
Combined Statements of Cash Flow
Years ended September 30, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
-------- -------- --------
Operating activities:
Net income $ 4,066 13,154 3,949
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,118 2,135 2,088
Amortization of goodwill 1,251 1,251 1,120
Allowance for doubtful accounts 48 213 39
Writedown of inventory to net realizable value 4,374 463 496
(Gain) loss on disposal of assets (7) 16 (20)
Deferred income taxes (3,374) (1,034) (411)
Changes in assets and liabilities:
Accounts receivable 9,786 (6,535) (3,233)
Inventories 961 (17,392) (677)
Other current assets 328 93 291
Accounts payable - trade (6,599) 6,111 2,453
Accrued expenses and warranty expense (256) 4,230 562
Accrued purchase obligations 1,900 -- --
Deposits received from customers for
product sales (243) 602 28
Other long-term liabilities 24 (74) 51
Income taxes payable (2,657) 5,738 699
Other non-current assets (1,309) (764) 29
-------- ------- ------
Net cash provided by operating activities 11,411 8,207 7,464
-------- ------- ------
Investing activities:
Capital expenditures (4,918) (6,985) (1,003)
-------- ------- ------
Net cash used in investing activities (4,918) (6,985) (1,003)
-------- ------- ------
Financing activities:
Contributions from/distributions to Emerson,
net of intercompany payables (6,197) 1,183 (9,436)
-------- ------- ------
Net cash provided by (used in) financing activities (6,197) 1,183 (9,436)
-------- ------- ------
Effect of exchange rates (546) (604) 444
-------- ------- ------
Net increase (decrease) in cash (250) 1,801 (2,531)
Cash, beginning of year 2,702 901 3,432
-------- ------- ------
Cash, end of year $ 2,452 2,702 901
======== ======= ======
Supplemental disclosures of cash flow information:
Interest paid $ 235 193 199
======== ======= ======
Income taxes paid $ 9,105 3,367 2,668
======== ======= ======
</Table>
See accompanying notes to the combined financial statements.
ENI
Notes to Combined Financial Statements
September 30, 2001, 2000 and 1999
(In thousands)
(1) BASIS OF PRESENTATION
The accompanying combined financial statements present the financial
position, results of operations and cash flows of ENI. ENI is comprised of
certain worldwide businesses of Emerson Electric Co. ("Emerson"), which are
either divisions of U.S. corporations or foreign corporations, all of which
are wholly-owned by Emerson. Emerson acquired certain of these businesses
through a series of transactions beginning in 1989 and concluding in 1999.
These purchases were accounted for as a step acquisition with the excess of
the purchase price paid over the fair value of the identifiable assets
accounted for as goodwill by ENI.
The combined financial statements include the accounts of ENI and its
Operating Group. The Operating Group includes operating divisions or
subsidiaries whose activities are managed and directed by ENI but which are
owned by other statutory entities within Emerson. These include the
following: ENI Division of Astec America, Inc. ("ENI-AAI"), ENI Technology,
Inc. ("ENI-Tech"), ENI Japan, Ltd. ("ENI-Japan"), ENI Germany Division of
Astec Germany GMbH ("ENI-Germany"), ENI Taiwan, Ltd. ("ENI-Taiwan"), ENI
Europe Division of Astec Europe, Ltd. ("ENI-Europe"), ENI Korea Division of
Emerson Korea, Ltd. ("ENI-Korea"), ENI Asia Division of Astec
International, Ltd. ("ENI-Asia"), ENI HK Manufacturing Division of Astec
Custom Power (HK), Ltd. ("ENI-HK Mfg") and ENI China Division of Astec
Power Supply (Shenzen) Co., Ltd. ("ENI-China").
It is Emerson's corporate policy to charge its divisions for all
specifically identifiable corporate related costs, plus an expense
allocation for general corporate services. The accompanying combined
financial statements reflect these expense allocations. These allocations
relate primarily to treasury, tax, legal, employee benefits, insurance,
facility usage, and other administrative services performed on behalf of
all divisions and are based upon a percentage of revenue which was
approximately 1% each of the years in the three year period ended
September 30, 2001, 2000 and 1999. This method of allocation is
consistently applied by Emerson to all its operating groups. General costs
allocated for such services have been reflected in ENI's results of
operations and amounted to $1,286, $1,172 and $566 for the years ended
September 30, 2001, 2000 and 1999 respectively. Because certain allocations
may not be the same as those that would result from transactions among
unrelated parties, the accompanying financial statements may not
necessarily be indicative of the financial position, results of operations
and cash flows if ENI were an independent entity.
(2) DESCRIPTION OF BUSINESS
ENI designs, manufactures, sells and supports high precision, high power
electrical conversion and control systems in the United States, Europe and
Asia. These systems are primarily used in thin film processing equipment in
the global semiconductor, data storage, flat panel display ("FPD") and
industrial coatings markets. The Company's products are integrated into the
manufacturing tools of these industries to produce finished goods which
include semiconductor integrated circuits ("ICs"), computer hard disks,
FPDs, compact discs ("CDs"), and digital video discs ("DVDs"). The
Company's products and systems refine, modify and control the raw
electrical power generated by a utility and convert it into reliable
solid-state power that can be readily used by production tools for advanced
thin film processing applications. The Company's website is
www.enipower.com.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING FOR DERIVATIVES
On October 1, 2000, ENI adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, which requires companies to
carry all derivatives on the balance sheet at fair value. The accounting
for changes in the fair value of a derivative instrument depends on whether
it has been designated and qualifies as part of a hedging relationship and,
if so, the reason for holding it.
ENI
Notes to Combined Financial Statements
September 30, 2001, 2000 and 1999
(In thousands)
For the year ended September 30, 2001, ENI's use of derivatives is limited
to foreign currency hedging agreements. In order to provide for foreign
currency risk protection, the Company from time to time enters into foreign
currency forward contracts to effectively exchange currency denominated in
Yen for U.S. dollars. Of the approximately $8,850 of foreign currency
forward contracts outstanding at September 30, 2001, all will mature in
fiscal year 2002.
The effective portion of the gain or loss, net of tax, on a cash flow hedge
is reported in other comprehensive income and reclassified into earnings in
the same period or periods during which the hedged transaction affects
earnings, and the ineffective portion is reported immediately in earnings.
There was no ineffectiveness in fiscal 2001.
Activity in the other comprehensive income related to derivatives held by
ENI during fiscal year 2001 is summarized below on a pre-tax basis:
Cumulative effect of adopting SFAS No. 133 $ 163
Less: reclassification adjustment (163)
Net increase in fair value of derivatives 88
-----
Accumulated derivative gain $ 88
=====
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at year end and the reported amounts of revenues and expenses
during the reporting period. Certain significant estimates are disclosed
throughout this report. Actual results could differ from these estimates.
ENI is subject to certain risks similar to other companies in its industry.
These risks include the volatility of the semiconductor and semiconductor
capital equipment industries, customer concentration within the markets
which ENI serves, manufacturing facilities risks, management of growth,
supply constraints and dependencies, rapid technological changes,
competition, international sales risks, the Asian financial markets, and
governmental regulations. A significant change in any of these risk factors
could have a material impact on ENI.
ACCRUED WARRANTY EXPENSE
ENI accrues costs related to warranty obligations incurred in connection
with the sale of its products. The reserve balance at September 30, 2001
also includes $1,800 of costs to retrofit certain parts for product sales
made to a major customer during fiscal 2001. Management believes the
warranty accrual is a reasonable estimate of future claims under warranty
obligations.
REVENUE RECOGNITION
Typically ENI recognizes revenue upon shipment. However, ENI does ship
products to certain customers on a trial basis for periods of 30 to 60
days. The corresponding revenue is recognized after the customer has agreed
to purchase the goods as evidenced by a receipt of a signed purchase order
from the customer. ENI records cash advances from customers that have not
been shipped products as of year end as liabilities under deposits received
from customers for product sales. Revenue is recognized upon subsequent
shipment to the customer location.
COMBINATION
The combined financial statements include the accounts of ENI and all
entities or divisions within the ENI group. All significant intercompany
accounts and transactions have been eliminated in combination.
ENI
Notes to Combined Financial Statements
September 30, 2001, 2000 and 1999
(In thousands)
FOREIGN CURRENCIES
The functional currency for the ENI's foreign operations is the applicable
local currency. ENI records a translation adjustment from translation of
the combined financial statements of its foreign units which is recorded in
accumulated other comprehensive income (loss). Net assets are translated at
current exchange rates as of the balance sheet date, and income and expense
items are translated at the average exchange rate for the year.
ENI recognizes gains or losses on all foreign currency transactions, other
than intercompany transactions that are of a long-term nature. ENI
recognized income (losses) on foreign currency transactions of $(71),
$(124) and $11 for the years ended September 30, 2001, 2000 and 1999,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of ENI's cash, accounts receivable, accounts payable,
accrued expenses and long-term debt approximates their respective carrying
amounts.
CASH AND CASH EQUIVALENTS
For cash flow purposes, ENI considers all cash and highly liquid
investments with original issue maturities of 90 days or less to be cash
and cash equivalents.
CONCENTRATIONS OF RISK
Financial instruments, which potentially subject ENI to concentrations of
credit risk, consist principally of cash and trade accounts receivable.
ENI's cash is placed with high credit quality financial institutions.
Concentrations of credit risk with respect to trade accounts receivable are
concentrated among a small number of customers, the majority of which are
in the semiconductor capital equipment industry. ENI's foreign subsidiaries
receivables are primarily denominated in currencies other than the U.S.
dollar. ENI performs ongoing credit evaluations of its customers, and
generally does not require collateral pledges, as many of its customers are
large, well-established companies. ENI maintains reserves for potential
credit losses but historically has not experienced any significant losses.
ENI does maintain significant concentrations of credit risk with certain
major customers (see note 14).
INVENTORIES
Inventories include costs of materials, direct labor and manufacturing
overhead. Inventories are valued at the lower of cost (first-in, first-out
basis), or market.
COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, Reporting Comprehensive Income, established rules for the
reporting of comprehensive income and its components. Comprehensive income
for the Company consists of net income and foreign currency translation
adjustments and is presented in the combined statements of divisional
control and comprehensive income.
GOODWILL AND INTANGIBLES
Prior to 1998, Emerson owned 51% of ENI through its ownership of Astec
(BSR) Plc. ("Astec"). Emerson recorded goodwill relating to the original
ownership of ENI and continued to record incremental goodwill in 1999 with
its increased ownership through a step acquisition during fiscal year 1999.
The incremental goodwill recorded through the step acquisition was pushed
down to ENI from Emerson in the amount of $32,947 in 1999. All of the
goodwill included in the accompanying combined balance sheets resulted from
Emerson's acquisition of Astec.
Goodwill is amortized on the straight-line method over 40 years, based on
the estimated economic life. The carrying value of goodwill is reviewed for
recoverability based on the undiscounted cash flows of the businesses
acquired over the remaining amortization period. Should the review indicate
that goodwill is not recoverable, the
ENI
Notes to Combined Financial Statements
September 30, 2001, 2000 and 1999
(In thousands)
company's carrying value of the goodwill would be reduced by the estimated
shortfall of the cash flows. In addition, the company assesses long-lived
assets for impairment under Financial Accounting Standards Board's (FASB)
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
the Impairment of Long-Lived Assets to be Disposed Of. Under these rules,
goodwill associated with assets acquired in a purchase business combination
is included in impairment evaluations when events or circumstances exist
that indicate the carrying amount of those assets may not be recoverable.
No reduction of goodwill for impairment was necessary in 2001, 2000 or
1999.
Certain other assets consist of unamortized patent and bond issue costs.
Patents are being amortized over a useful life of 3 years while capitalized
bond costs are being amortized over the life of the bond using the
effective interest method. Amortization expense was $300, $165 and $115 in
the years ended September 30, 2001, 2000 and 1999, respectively.
DEMONSTRATION EQUIPMENT
Demonstration equipment represents manufactured products utilized for sales
demonstration and evaluation purposes. The Company also utilizes this
equipment in its customer service function as replacement and loaner
equipment to existing customers.
The Company depreciates the equipment based on its estimated useful life in
the sales and customer service functions. The depreciation is computed
based on a 3-year life.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions, improvements, and
major renewals are capitalized. Maintenance, repairs, and minor renewals
are expensed as incurred. Depreciation is provided using the straight-line
method over 40 years for buildings and improvements, and three to ten years
for machinery and equipment. Amortization of leasehold improvements and
leased equipment covered under capitalized leases is provided using the
straight-line method over the lease term or the useful life of the assets,
whichever is shorter.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standard ("SFAS") No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, ENI continually evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful
life of long-lived assets requires revision or that all or a portion of the
remaining balance may not be recoverable.
INCOME TAXES
Substantially all of ENI's operations are included in Emerson's U.S.
federal, state or foreign income tax returns filed by Emerson legal
entities. However, for purposes of preparing the financial statements of
ENI, the tax provision has been determined as if ENI filed separate tax
returns in each tax jurisdiction in which it operates (see note 8).
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
ENI
Notes to Combined Financial Statements
September 30, 2001, 2000 and 1999
(In thousands)
ADVERTISING COSTS
ENI expenses advertising costs as incurred. Advertising expenses were $289,
$386 and $305 for the years ended September 30, 2001, 2000 and 1999,
respectively.
SEGMENT REPORTING
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, requires a business enterprise to report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance. ENI operates in principally one segment, power conversion and
control systems and believes its business units have similar economic
characteristics and meet the "aggregation criteria" of SFAS 131.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the
purchase methods of accounting, eliminates the pooling-of-interest method,
and eliminates the amortization of goodwill for business combinations
initiated after June 30, 2001. SFAS No. 142, which ENI will adopt as of
October 1, 2001, requires, among other things, the discontinuance of
goodwill amortization for business combinations initiated before July 1,
2001. SFAS No. 142 also requires ENI to complete a transitional goodwill
impairment test within six months from the date of adoption. ENI is
currently assessing but has not yet determined the impact of SFAS No. 142
on its financial statements.
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 (effective for financial statements issued for
fiscal year beginning after June 15, 2002) requires that the fair value of
a liability for an asset retirement obligation be recognized in the period
in which it is incurred if a reasonable estimate of fair value can be made.
ENI does not believe that the adoption of SFAS No. 143 will have any impact
on its financial reporting.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 establishes a single
accounting model, based on the framework established in FASB Statement No.
121, for long-lived assets to be disposed of by sale. This statement also
resolves significant implementation issues related to SFAS No. 121. The
provisions of this statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001. ENI does not believe
that the adoption of SFAS No. 144 will have a material impact on its
financial reporting.
(4) ACCOUNTS RECEIVABLE - TRADE
Accounts receivable - trade consisted of the following:
SEPTEMBER 30,
2001 2000
-------- ------------
Domestic $ 3,932 9,854
Foreign 4,311 8,242
Allowance for doubtful accounts (104) (123)
------- ------
$ 8,139 17,973
======= ======
ENI
Notes to Combined Financial Statements
September 30, 2001, 2000 and 1999
(In thousands)
(5) INVENTORIES
Inventories consisted of the following at September 30, 2001 and 2000:
SEPTEMBER 30,
2001 2000
------- ------------
Parts and raw materials $12,061 15,675
Work-in-process 5,695 8,554
Finished goods 4,967 3,829
------- ------
$22,723 28,058
======= ======
(6) PROPERTY AND EQUIPMENT, NET
Property and equipment, along with their useful lives, consists of the
following at September 30, 2001 and 2000:
AVERAGE
USEFUL LIFE
2001 2000 (YEARS)
--------- -------- -----------
Land $ 325 325 --
Buildings and improvements 12,753 11,137 40-50
Leasehold improvements 577 110 3
Machinery and equipment 5,092 4,277 4-10
Furniture and fixtures 2,849 2,163 10
Computer equipment 13,800 12,136 3
Construction in progress 826 1,416 --
-------- -------
36,222 31,564
Less accumulated depreciation and
amortization (16,485) (13,933)
-------- -------
Property and equipment, net $ 19,737 17,631
======== =======
Depreciation and amortization expense of property and equipment for the
years ended September 30, 2001, 2000 and 1999 approximated $2,818, $1,970
and $1,973, respectively.
(7) GEOGRAPHIC INFORMATION
ENI operates in a single industry segment, power conversion and control
systems, with operations in Europe, the Far East and the United States.
Financial information by geographic area is as follows:
EUROPE FAR EAST U.S. OTHER TOTAL
------ -------- ---- ----- -----
Revenue:
2001 $4,181 72,893 88,669 (60,127) 105,616
2000 3,542 66,789 88,658 (49,484) 109,505
1999 5,417 37,569 44,285 (29,373) 57,898
ENI
Notes to Combined Financial Statements
September 30, 2001, 2000 and 1999
(In thousands)
Earnings before interest
and taxes (EBIT):
2001 989 10,556 (3,764) (658) 7,123
2000 302 14,584 9,642 (2,986) 21,542
1999 754 4,565 (1,933) 3,439 6,825
Operating expenses:
2001 833 5,007 26,544 (2,953) 29,431
2000 1,000 5,226 27,193 (2,683) 30,736
1999 898 5,315 16,928 (4,570) 18,571
Assets:
2001 3,094 27,021 86,676 (9,461) 107,330
2000 2,464 26,118 95,943 (6,439) 118,086
1999 2,193 12,597 77,557 (4,144) 88,203
Intercompany sales among the Company's geographic areas are recorded on the
basis of intercompany prices established by the Company.
(8) INCOME TAXES
As described in note 2, substantially all of ENI's operations are included
in Emerson's, or its subsidiaries, U.S. federal, state or foreign income
tax returns. However, for purposes of preparing the accompanying combined
financial statements of ENI, the tax provision has been determined as if
ENI filed separate tax returns in each tax jurisdiction.
The components of the provision (benefit) for income taxes are:
2001 2000 1999
-------- -------- --------
Current income taxes:
Federal $ 1,733 4,327 1,264
Foreign 4,892 4,520 1,952
State (177) 258 151
------- ------ ------
6,448 9,105 3,367
------- ------ ------
Deferred income taxes:
Federal (2,672) (666) (448)
Foreign and state (702) (238) (224)
------- ------ ------
(3,374) (904) (672)
------- ------ ------
Total $ 3,074 8,201 2,695
======= ====== ======
The U.S. and foreign components of income before income taxes are as
follows:
2001 2000 1999
---------- ------ ------
U.S. $ (4,428) 9,387 1,312
Foreign 11,568 11,968 5,332
-------- ------ -----
$ 7,140 21,355 6,644
======== ====== =====
ENI
Notes to Combined Financial Statements
September 30, 2001, 2000 and 1999
(In thousands)
The primary components of the Company's deferred tax assets and liabilities
at September 30, 2001 and 2000 are as follows:
2001 2000
-------- -------
Gross deferred tax assets:
Deferred compensation $ 201 61
Accruals deductible for tax purposes when paid 3,614 2,158
Allowance for inventories and doubtful accounts 1,663 221
------- ------
5,478 2,440
Gross deferred tax liabilities:
Foreign currency forward exchange contracts (35) --
Accelerated depreciation (792) (1,128)
------- ------
(827) (1,128)
------- ------
Net deferred income tax asset $ 4,651 1,312
======= ======
Reconciliations between the actual provision for income taxes and that
computed by applying a U.S. statutory rate to income before taxes are as
follows:
2001 2000 1999
--------- ------- -------
Taxes computed at 35% $ 2,499 7,474 2,325
State income taxes, net of federal income tax benefit (322) 116 64
Profits taxed at other than U.S. statutory rate 459 173 (86)
Nondeductible goodwill 438 438 392
------- ----- ------
$ 3,074 8,201 2,695
======= ===== ======
At September 30, 2001, 2000 and 1999, no valuation allowance has been
recorded. Based upon the level of historical taxable income and projections
for future taxable income, management believes it is more likely than not
that the benefits of the deferred tax assets will be realized.
(9) EMPLOYEE BENEFITS
ENI has a 401(k) Plan sponsored by Emerson which covers all permanent
employees who have completed 30 days of continuous service. Prior to July
1, 1998, participation in the plan was open to all employees of ENI,
subject to the service requirements noted above except that hourly
employees were excluded from participation. Under the Plan, participants
may defer up to 15% of their gross pay up to a maximum limit as determined
by law. Participants are immediately vested in their contributions. Upon
the completion of one year of service, ENI provides a matching contribution
for participants in the Plan equal to 50% of the contributions by an
employee subject to a maximum matching contribution of 50% of the employees
contribution not to exceed 2-1/2% of gross pay. ENI's total contributions
to the plan were approximately $339, $231 and $226 for the years ended
September 30, 2001, 2000
ENI
Notes to Combined Financial Statements
September 30, 2001, 2000 and 1999
(In thousands)
and 1999, respectively. Vesting in ENI's matching contribution is based on
years of service, with a participant becoming fully vested after five years
of service.
ENI also maintains a defined-contribution Profit Sharing plan for U.S.
employees. Employees become eligible to participate in the plan on January
1 following attainment of age 21 and the completion of one year of service.
The plan is non-contributory by the employee. The Company's contributions
are discretionary. Participant vesting in the Plan is based on years of
service, with a participant becoming fully vested after five years of
service. The expenses of the plan are also paid by ENI. ENI's total
contributions to the plan were approximately $350, $625 and $555 for the
years ended September 30, 2001, 2000 and 1999, respectively.
DEFINED BENEFIT PLANS
ENI-Japan maintains a retirement plan for its President whereby upon
retirement the President receives a lump-sum benefit (subject to Emerson
approval). The retirement benefit is calculated by multiplying his monthly
salary upon termination by his years of service and by a coefficient
determined by the Board of Directors. Per the Plan document, the benefit is
to be paid six months after the vote or approval of the shareholders. At
September 30, 2001 and 2000, ENI estimated that shareholder approval is
more likely than not and accrued an estimated benefit obligation based upon
the provisions above in the amount of $333 in 2001 and $305 in 2000,
respectively.
ENI also maintains a noncontributory, defined benefit pension plan covering
substantially all employees of its Japanese division which approximates 30
people. Benefits are based on salary and years of service. The benefit
obligation is approximately $468 and $376 at September 30, 2001 and 2000,
respectively. The plan is funded through plan assets held in trust with a
fair value of $367 and $344 at September 30, 2001 and 2000, respectively.
The net periodic pension costs approximated $49, $69 and $92 for 2001, 2000
and 1999, respectively. ENI has not funded the unfunded balances at
September 30, 2001 and 2000.
(10) LONG-TERM DEBT
In 1984, ENI entered into a long-term debt agreement with the County of
Monroe Industrial Development Agency (COMIDA) for a manufacturing facility
located in Rochester, New York. The terms mirror that of the underlying
Industrial Development Revenue Bond which calls for payments of interest
only through July 1, 2014, at which time the Bond is repayable in a lump
sum of $5,000. Interest is reset annually based on bond remarketing, with
an option by ENI to elect a fixed rate, all subject to a maximum rate of
13% per annum. At September 30, 2001 the interest rate was 2.75%. The bond
is effectively secured by the building, since title does not legally
transfer to ENI until payment of the $5,000.
(11) LEASES
ENI leases certain equipment as well as office and factory space under
operating leases which expire at various dates through September 2004.
Total expense under the operating leases amounted to $940, $661 and $500
for the years ended September 30, 2001, 2000 and 1999, respectively. Future
minimum lease payments required under these lease agreements for each of
the next five years and thereafter are as follows:
OPERATING
---------
2002 $1,377
2003 1,341
2004 1,186
2005 992
2006 and thereafter 557
------
$5,453
======
ENI
Notes to Combined Financial Statements
September 30, 2001, 2000 and 1999
(In thousands)
(12) LITIGATION
The Company is involved in litigation arising in the normal course of
business. In the opinion of management, an adverse outcome to any of this
litigation would not have a material effect on the financial condition of
the Company.
In March 2001, ENI agreed to settle a patent infringement lawsuit for
$1,500. This settlement has been accrued at September 30, 2000, with the
expense classified as operating expense. Associated legal costs of $785,
$2,489 and $775 are also included in operating expenses for 2001, 2000 and
1999, respectively.
(13) RELATED PARTY TRANSACTIONS
ENI leases production and office space in China, Hong Kong, Japan, and
United Kingdom from an affiliated company. The lease relating to this space
has no fixed term with a monthly payment of approximately $19, $12 and $5
for the years ended September 30, 2001, 2000 and 1999. Approximately $225,
$145, and $63 was charged to rent expense attributable to these leases for
the years ended September 30, 2001, 2000 and 1999, respectively.
ENI participates in a number of employee benefit plans, including profit
sharing, pension, health care and life insurance, and workers compensation,
which are administered by Emerson (see note 9).
ENI has limited external borrowings and there has been no allocation of
Emerson's consolidated borrowings and related interest expense to ENI. If
ENI were an independent entity, its capital structure may have been
significantly different.
(14) MAJOR CUSTOMERS
The Division's sales to major customers (purchases in excess of 10% of
total sales) are to entities which are primarily manufacturers of
semiconductor capital equipment and disk storage equipment and, for the
years ended September 30, 2001, 2000 and 1999 are as follows (rounded to
the nearest whole percentage):
2001 2000 1999
------- ------- ------
Customer A 30% 26% 26%
Customer B 22% 24% 17%
Customer C 17% 17% 11%
------- ------- ------
69% 67% 54%
======= ======= ======
(15) SUBSEQUENT EVENT (UNAUDITED)
MKS Instruments, Inc. announced on October 31, 2001 that is has entered
into a definitive agreement to acquire the ENI division of Emerson. Under
the terms of the agreement, MKS will issue 12 million shares of common
stock to Emerson in exchange for the business and assets of ENI. The
transaction is valued at $251 million. MKS will also assume approximately
$3.5 million of net debt. The transaction was completed in the first
calendar quarter of 2002.