Exhibit 99.1
LK Products Oy
(A business of Filtronic PLC)
Combined Financial Statements
December 31, 2004 and 2003
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Index
Page
Independent Auditors' Report 3
Combined Statements of Income 4
Combined Balance Sheets 5
Combined Statements of Cash Flows 6
Notes to the Combined Financial Statements 7-26
Independent Auditors' Report
To the Board of Directors of LK Products Oy
We have audited the accompanying combined balance sheets of LK Products Oy (a
business of Filtronic PLC) as of December 31, 2003 and 2004, and the related
combined statements of income and cash flows for the years then ended. 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
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of LK Products Oy as of
December 31, 2003 and 2004 and the results of their operations and their cash
flows for the years then ended in conformity with accounting principles
generally accepted in Finland.
Accounting principles generally accepted in Finland vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating the nature and effect of such differences is
presented in Note 17 to the combined financial statements.
Helsinki, Finland
25 November, 2005
KPMG Oy Ab
Pekka Pajamo
Authorized Public Accountant
3
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Combined Statements of Income
---------------------------------
Years Ended
December 31
---------------------------------
2004 2003
-------------- --------------
Notes (In thousands)
Net turnover 16 (euro) 74,018 (euro) 87,448
Cost of Sales 51,296 51,568
-------------- --------------
Gross margin 22,722 35,880
Operating expenses (income):
Research and development expenses 7,113 5,961
Administrative expenses 5,042 4,718
Sales and marketing expenses 1,138 1,130
Other operating expenses 128 --
Other operating income (475) (1,844)
-------------- --------------
Total operating expenses 12,946 9,965
-------------- --------------
Operating income 9,776 25,915
Financial income (expenses), net 6 (40) 220
-------------- --------------
Income before income taxes 9,736 26,135
Income tax expense 7 600 2,539
-------------- --------------
Net income (euro) 9,136 (euro) 23,596
============== ==============
The accompanying notes are an integral part of the combined
financial statements.
4
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Combined Balance Sheets
------------------------------
December 31
------------------------------
2004 2003
------------- -------------
Notes (In thousands)
ASSETS
Non-Current Assets:
Intangible assets 8 (euro) 1,629 (euro) 1,739
Tangible fixed assets 9 10,214 8,998
Investments 4 4
------------- -------------
Total Non-Current Assets 11,847 10,741
Current Assets:
Inventory, net 10 4,685 4,461
Deferred tax 7 626 424
Accounts receivable, net 10,563 15,781
Other receivables 504 683
Prepaid expenses and accrued income 11 2,110 2,852
Cash and cash equivalents 8 --
------------- -------------
Total Current Assets 18,496 24,201
TOTAL ASSETS (euro) 30,343 (euro) 34,942
============= =============
DIVISIONAL EQUITY AND LIABILITIES
Divisional equity 12 (euro) 17,367 (euro) 22,550
LIABILITIES
Accounts payable (euro) 10,249 (euro) 9,140
Other payables -- 574
Accrued expenses 13 2,727 2,678
------------- -------------
Total Liabilities (euro) 12,976 (euro) 12,392
TOTAL DIVISIONAL EQUITY AND LIABILITIES (euro) 30,343 (euro) 34,942
============= =============
The accompanying notes are an integral part of the combined
financial statements.
5
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Combined Statements of Cash Flows
---------------------------------
Years Ended
December 31
---------------------------------
2004 2003
-------------- --------------
(In thousands)
Cash flows from operating activities:
Net income (euro) 9,136 (euro) 23,596
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortisation expense 4,854 8,602
Gain on sale of tangible fixed asset disposals -- (216)
Deferred taxes (202) (147)
Changes in working capital:
Accounts receivable 4,952 (7,161)
Inventory (387) (2,155)
Accounts payable 831 4,004
-------------- --------------
Total changes in working capital 5,396 (5,312)
-------------- --------------
Net cash provided by operations (euro) 19,184 (euro) 26,523
Cash flows from investing activities:
Capital expenditures (6,301) (7,681)
Proceeds from sale of tangible fixed assets -- 306
-------------- --------------
Net cash used in investing activities (euro) (6,301) (euro) (7,375)
Cash flows from financing activities:
Transfers to Filtronic, net (12,875) (19,148)
-------------- --------------
Net cash used in financing activities (euro) (12,875) (euro) (19,148)
Increase in cash and cash equivalents 8 --
-------------- --------------
Cash and cash equivalents:
At beginning of year -- --
-------------- --------------
At end of year (euro) 8 (euro) -
============== ==============
Supplemental disclosure of cash flow information
Cash paid during the year for taxes (euro) 237 (euro) 4,120
The accompanying notes are an integral part of the combined
financial statements.
6
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements
1 BUSINESS
LK Products Oy ("LK Products" or the "Company"), a business of Filtronic
PLC ("Filtronic"), is a producer of antennas and modules for mobile
communications and information devices. LK Products designs and
manufactures internal antennas and integrated antenna modules, as well as
external cellular antennas and ceramic chip antennas for narrow band
communication applications such as GPS, WiFi and Bluetooth.
LK Products is based in Kempele, Finland and has additional production
operations in Finland and China. The Company conducts business in Europe
(primarily in Finland, Hungary, Germany and Estonia), North and South
America (primarily the United States of America) and Asia (primarily
China).
2 BASIS OF PRESENTATION
These combined financial statements reflect the business activities of LK
Products as managed by Filtronic. These combined financial statements
include the business activities of LK Products Oy, Finland, and LK
Products (Suzhou) Telecommunication Components Co., Ltd., China.
These combined financial statements reflect the historical basis of the
assets and liabilities and the historical results of the net turnover and
expenses that were directly related to the Company as they were operated
within Filtronic. Additionally, these combined financial statements
include allocations for various expenses, including corporate
administrative expenses historically maintained by Filtronic and not
recorded in the accounts of LK Products. Significant allocations are
discussed in Note 5 to the combined financial statements. The Company's
management considers such allocations to have been made on a reasonable
basis.
The combined financial statements included herein may not necessarily be
indicative of LK Products' financial position, results of operations or
cash flows, had the Company operated as a separate entity during the
periods presented or for future periods.
The fiscal year end of the Company has been changed from May 31st to a
calendar year-end, for the purpose of these combined financial statements.
All amounts included in these combined financial statements are presented
in accordance with accounting principles generally accepted in Finland
("Finnish GAAP"), which differ in certain significant respects from
accounting principles generally accepted in the United States of America
("U.S. GAAP"). See Note 17 for a description of the differences between
Finnish GAAP and U.S. GAAP affecting LK Products' Net income and
Divisional equity.
All amounts are reflected in thousands of euros ("EURs") with the
exception of headcount data.
3 SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies used in the preparation
of the accompanying combined financial statements is as follows:
Principles of combination
The combined financial statements of LK Products include the accounts of
LK Products Oy, Finland, and LK Products (Suzhou) Telecommunication
Components Co., Ltd., China. All intercompany transactions among these
businesses have been eliminated. Transactions with Filtronic and its
subsidiaries have not been eliminated and are reflected as transaction
with related parties.
7
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
Revenue recognition
The Company recognizes revenue when persuasive evidence of a sale
arrangement exists, delivery has occurred, the sales price is fixed and
determinable, and collectibility is reasonably assured. These criteria are
generally met when finished products are shipped to the customers and both
title and the risks and rewards of ownership are transferred.
For products for which a general right of return exists during a defined
period, revenue recognition is determined based on the historical pattern
of actual returns for that product and customer.
Pre-production tooling costs
The amounts received from customers related to the reimbursement for
certain client specific tooling products has been netted against the
related costs incurred for producing those products and are reflected in
the Combined Balance Sheets as prepaid expenses within the prepaid
expenses and accrued income line item. The Company recognizes the net gain
or loss from the tooling activities upon approval of the tools by the
customers. These amounts are recognized either as other operating income
or other operating expense in the Combined Statements of Income.
Government grants
Government grants, which are principally received for research and
development purposes, are recognized when there is reasonable assurance
that the Company will comply with the relevant conditions.
Research and development expenditure
Research and development costs are expensed as incurred.
Intangible fixed assets and amortisation
Acquired intangible fixed assets are capitalised at cost and are amortized
on a straight line basis over their estimated useful lives. The Company's
intangible fixed assets primarily consist of patents and software
developed for internal use, which are amortized over a period of 10 and 5
years, respectively.
Tangible fixed assets and depreciation
Tangible fixed assets are recorded at cost, less accumulated depreciation.
Additions, replacements, renewals and improvements that extend the lives
of depreciable assets are capitalized. Maintenance and repair expenditures
are charged to expense in the period incurred. Upon the sale or other
retirement of depreciable property, the cost and accumulated depreciation
are removed from the related accounts and any gain or loss is reflected in
the Combined Statements of Income as either other operating income or
expense.
Depreciation is calculated using a straight-line method depending on the
useful life of the acquisition as follows:
Computers and office equipment 4 years
Computer software 5 years
Cars and vehicles 5 years
Machinery and equipment 3-10 years
Furniture and Fixtures 5-10 years
Warehouse 10 years
Building 20-50 years
8
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
The Company does not capitalize interest costs associated with the
construction of its assets. However, had the Company capitalized interest
costs, the amounts would not have been material.
Asset impairment
Intangible assets, tangible fixed assets, and other long lived assets are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of an asset is measured by a comparison of the carrying
amount of the asset with the discounted value of the future net cash flows
expected to be generated by the asset. If the carrying amount of the asset
exceeds this discounted cash flow value, an impairment charge for this
excess is recognized.
Leases
Rental expenses for operating leases are charged to the profit and loss
accounts on a straight-line basis over the period of the lease.
Inventory
Inventory is stated at the lower of cost and net realisable value. Cost is
determined based upon the weighted average purchase price for raw
materials and production costs for work in progress and finished goods.
The Company does not include production overhead costs as a component of
inventory, but rather expenses these costs as incurred.
Accounts receivable
Accounts receivable are stated at face value less a provision for doubtful
receivables, if deemed necessary.
Cash and cash equivalents
Cash and cash equivalents include all highly liquid investments purchased
with original maturity dates of three months or less. During the periods
covered by these combined financial statements, treasury activities at LK
Products were centralized at Filtronic. Accordingly, the cash and cash
equivalents contained within these financial statements are for those bank
accounts which belong to the legal entity of LK Products.
Pensions and other post retirement benefits
Statutory pension obligations in Finland are covered through a compulsory
pension insurance policy. Payments to the pension insurance company are
recorded in amounts determined by the pension insurance company according
to certain prescribed actuarial assumptions and other rulings pursuant to
the Finnish Employee's Pension Act. In Finland, the companies are liable
on certain obligations related to disability pensions based on the number
of disability pension cases. The companies contribute in such cases to the
pension company when the decision of payment is made. Therefore,
proportional share of annual pension costs compared to wages and salaries
may vary depending on the number of disability pension cases.
In China, the pension obligations are covered through a statutory pension
plan. Contributions to a statutory pension plan are charged to the
Combined Statements of Income when incurred.
Provisions
The Company accrues for provisions, including among others, bonus and
employee termination costs, in the period when it becomes probable that a
liability has been incurred and the amount is reasonably estimable.
9
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
Contingencies
The Company accrues for contingencies, including contingencies related to
legal proceedings and claims arising out of its businesses that cover a
wide range of matters, including, among others, environmental matters,
contract and employment claims, and product liability, in the period when
it becomes probable that a liability has been incurred and the amount is
reasonably estimable. Amounts are updated and accrued based on specific
circumstances as applicable.
Foreign currencies
The Company's combined net turnover is generated mainly in euros.
Additionally, a substantial portion of the Company's combined costs are
incurred in euros. The Company's management believes that the euro is the
primary currency of the economic environment in which the Company and its
subsidiaries operate. Thus, the euro is the functional and reporting
currency of the Company.
Financial statements of international subsidiaries are translated into
euros using the exchange rate at each balance sheet date for assets and
liabilities and an average exchange rate for each period for net turnover,
expenses, gains and losses. Translation adjustments are recorded as a
component of Divisional equity.
Transactions in foreign currencies are translated into euros using the
exchange rates prevailing at the dates of the transactions. Receivables
and liabilities in foreign currencies are translated into euros at the
exchange rates ruling on the balance sheet dates. Foreign exchange gains
and losses resulting from the settlement of such transactions and from the
translation of monetary assets and liabilities denominated in foreign
currencies are recognized in the Combined Statements of Income.
Taxation
Filtonic and its subsidiaries file an income tax return, which includes LK
Products, in each applicable tax jurisdiction. The income tax provision
included in these financial statements was calculated using a method
consistent with a separate return basis, as if LK Products was a separate
taxpayer and the resulting current tax liability is recorded as an accrued
expense on the Combined Balance Sheets. Deferred income taxes were
provided for temporary differences between amounts of assets and
liabilities for financial reporting purposes and such amounts as measured
by the respective jurisdictional tax laws.
Fair value disclosure
The carrying value of receivables, prepayments, and current liabilities
approximates fair value given the short maturity of these instruments.
Concentration of business risk
The Company's primary customer accounted for 90% and 92% of Net turnover
and 32% and 25% of Accounts receivables as of December 31, 2004 and 2003,
respectively. Historically, the Company has relied on this customer for a
substantial portion of its total net turnover. The Company expects that a
significant portion of its future net turnover will continue to be
generated by this customer and any substantial reductions in orders by
this customer could have a material adverse effect on the Company's
operating results.
10
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
Use of estimates
The combined financial information of LK Products has been prepared in
conformity with Finnish GAAP. The preparation of combined financial
information in conformity with Finnish GAAP requires the Company's
management to make a number of estimates and assumptions that affect
reported amounts and related disclosures. Actual results could differ from
those estimates.
4 EMPLOYEES
The average number of persons employed by the Company (including
directors) during the period, analysed by category, was as follows:
--------------------------------
Years Ended
December 31
--------------------------------
2004 2003
-------------- --------------
(Number of employees)
Operations 791 589
Research & Development 91 73
Sales & Marketing 12 10
Administrative 52 51
-------------- --------------
946 723
============== ==============
The aggregate payroll costs of these persons were as follows:
--------------------------------
Years Ended
December 31
--------------------------------
2004 2003
-------------- --------------
(In thousands)
Wages and salaries (euro) 10,125 (euro) 9,239
Social security costs 1,289 1,189
Pension costs 1,427 1,319
-------------- --------------
(euro) 12,841 (euro) 11,747
============== ==============
5 RELATED PARTY TRANSACTIONS
Since inception of LK Products, the operations of the business were
primarily self contained. For instance, the Company has its own management
team, accounting, information technology, and sales and marketing groups.
Additionally, the Company retains external legal counsel to address its
legal affairs. However, the Company does not have its own treasury
department nor does it have its own Board members, therefore, as discussed
below, an allocation of such costs have been made in these combined
financial statements.
11
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
As mentioned above, Filtonic uses a centralized approach to cash
management and financing its operations. During the periods covered by
these combined financial statements, cash deposits were remitted to
Filtronic on a regular basis and are reflected within Divisional equity on
the Combined Balance Sheets. Similarly, LK Products' cash disbursements
were funded through Filtronic's cash accounts. As a result, none of
Filtronic's cash, cash equivalents or liabilities pertaining to book
overdrafts have been allocated to LK Products in the combined financial
statements.
LK Products administrative expenses included allocated corporate costs
from Filtronic totalling (euro)243 and (euro)236 for the years ended
December 31, 2004 and 2003, respectively. These costs are primarily
related to Filtronic Board member fees and the costs incurred as a result
of Filtronic providing treasury functions on behalf of the Company. These
costs are generally allocated based on costs incurred, including salaries
and benefits, by the employee providing these services on LK Products'
behalf. Management considers such allocations to have been made on a
reasonable basis and believes that the associated costs of these services
are reflective of what the Company would have incurred assuming it was a
stand alone business.
Additionally, certain LK Products employees participate in Filtronic
Executive Share Option Scheme, whereby Filtronic share options are
conditionally granted to the employees, subject to a vesting period based
upon financial performance of Filtronic. The Company does not recognize
any stock compensation costs related to its stock options.
The Company has an interest bearing loan due to Filtronic in the amount of
(euro)0 and (euro)1,500 at December 31, 2004 and 2003. Both the loan and
the interest are settled through divisional equity; however, the interest
expense associated with this loan has been reflected in these combined
financial statements.
6 FINANCIAL INCOME AND EXPENSE
----------------------------
Years Ended
December 31
----------------------------
2004 2003
----------- -----------
(In thousands)
Foreign exchange gains, net (euro) 228 (euro) 596
Interest expense and other financial expense
To related parties (259) (349)
To third parties (9) (27)
----------- -----------
Total (268) (376)
----------- -----------
Total financial income (expense), net (euro) (40) (euro) 220
=========== ===========
12
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
7 TAXATION
The Company has historically been a part of Filtronic's global tax
reporting structures and has not filed separate income tax returns solely
for the LK Products business. The Company's income tax provisions have
been calculated for each period on a method consistent with a separate
return basis, as if LK Products were a separate taxpayer and the resulting
current tax liability was recorded as an accrued expense on the Combined
Balance Sheets.
Income tax expenses in Finland and from foreign operations were as
follows:
------------------------------
Years Ended
December 31
------------------------------
2004 2003
------------- -------------
(In thousands)
Pre-tax income (loss)
Finland (euro) (953) (euro) 3,403
Foreign 10,689 22,732
------------- -------------
Total (euro) 9,736 (euro) 26,135
============= =============
Total income tax expense (benefit)
Finland (17) 1,094
Foreign 617 1,445
------------- -------------
Total (euro) 600 (euro) 2,539
============= =============
Current income tax expense (benefit)
Finland -- 1,094
Foreign 802 1,592
------------- -------------
Total (euro) 802 (euro) 2,686
============= =============
Deferred income tax expense (benefit)
Finland (17) --
Foreign (185) (147)
------------- -------------
Total (euro) (202) (euro) (147)
============= =============
Total income tax expense (euro) 600 (euro) 2,539
============= =============
The difference between income tax expenses computed at statutory rates in
Finland (29% in 2004 and 2003), and income tax expense provided on
earnings is primarily the result of the effect of jurisdictional tax rate
differences in China, which had a statutory rate of 15% in 2004 and 2003.
Pursuant to the income tax law of the Peoples Republic of China for
enterprises with foreign investment, commencing from the year in which a
profit is made after the offset of losses incurred in prior years, the
Company is entitled to a preferential tax treatment of exemption from
income tax for the first two profit making years (years 2002 and 2001) and
50% of the applicable tax rate for the following three years. As the 2001
fiscal year was the first profitable year in China, income with respect to
operations in China has an effective statutory tax rate of 7.5% for the
years ended December 31, 2004 and 2003. Effective January 1, 2005, the
statutory rate for Finland has been reduced to 26%.
13
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2004
and 2003 are as follows:
-------------------------
December 31
-------------------------
2004 2003
---------- ----------
(In thousands)
Deferred tax asset:
Tangible fixed asset (euro) 626 (euro) 424
---------- ----------
Total deferred tax asset 626 424
========== ==========
Deferred tax liability -- --
========== ==========
Net deferred tax asset (euro) 626 (euro) 424
========== ==========
Movements in deferred tax assets are specified as follows:
--------------
Deferred Tax
Asset
--------------
(In thousands)
Balance at December 31, 2002 (euro) 277
Additions 156
Change in exchange rates (9)
----------
Balance at December 31, 2003 (euro) 424
==========
Additions 219
Change in exchange rates (17)
----------
Balance at December 31, 2004 (euro) 626
==========
14
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
8 INTANGIBLE ASSETS
--------------------------------------------------------------
Patents Software Other Total
------------ ------------ ------------ ------------
(In thousands)
Balance at December 31 2002
Cost of acquisitions (euro) 1,164 (euro) 1,816 (euro) -- (euro) 2,980
Accumulated amortization (247) (779) -- (1,026)
------------ ------------ ------------ ------------
Book value at December 31, 2002 (euro) 917 (euro) 1,037 (euro) -- (euro) 1,954
------------ ------------ ------------ ------------
Changes in book value:
Acquisitions 59 148 3 210
Amortization (91) (334) -- (425)
------------ ------------ ------------ ------------
Total changes during 2003 (32) (186) 3 (215)
------------ ------------ ------------ ------------
Balance at December 31 2003:
Cost of acquisitions 1,223 1,964 3 3,190
Accumulated amortization (338) (1,113) -- (1,451)
------------ ------------ ------------ ------------
Book value at December 31, 2003 (euro) 885 (euro) 851 (euro) 3 (euro) 1,739
------------ ------------ ------------ ------------
Changes in book value:
Acquisitions 94 313 148 555
Amortization (99) (566) -- (665)
------------ ------------ ------------ ------------
Total changes during 2004 (5) (253) 148 (110)
------------ ------------ ------------ ------------
Balance at December 31 2004:
Cost of acquisitions 1,317 2,277 151 3,745
Accumulated amortization (437) (1,679) -- (2,116)
------------ ------------ ------------ ------------
Book value at December 31, 2004 (euro) 880 (euro) 598 (euro) 151 (euro) 1,629
============ ============ ============ ============
15
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
9 TANGIBLE FIXED ASSETS
-------------------------------------------------------------------------------------
Advanced
payments &
Other construction
Machinery & tangible in progress
Buildings equipment assets (CIP) Total
-------------------------------------------------------------------------------------
(In thousands)
Balance at December 31 2002
Cost of acquisitions (euro) 859 (euro) 32,673 (euro) 445 (euro) 106 (euro) 34,083
Accumulated depreciation (430) (23,106) (137) -- (23,673)
------------- ------------- ------------- ------------- -------------
Book value at December 31, 2002 (euro) 429 (euro) 9,567 (euro) 308 (euro) 106 (euro) 10,410
------------- ------------- ------------- ------------- -------------
Changes in book value:
Capital expenditures 116 3,935 139 3,281 7,471
Depreciation (180) (7,913) (84) -- (8,177)
Depreciation on disposals -- 2,848 -- -- 2,848
Disposals -- (2,963) -- -- (2,963)
Transfers -- 503 -- (503) --
Changes in exchange rates (56) (495) (40) -- (591)
------------- ------------- ------------- ------------- -------------
Total changes during 2003 (120) (4,085) 15 2,778 (1,412)
------------- ------------- ------------- ------------- -------------
Balance at December 31 2003:
Cost of acquisitions 832 33,230 514 2,884 37,460
Accumulated depreciation (523) (27,748) (191) -- (28,462)
------------- ------------- ------------- ------------- -------------
Book value at December 31, 2003 (euro) 309 (euro) 5,482 (euro) 323 (euro) 2,884 (euro) 8,998
------------- ------------- ------------- ------------- -------------
Changes in book value:
Capital expenditures 3 4,997 226 520 5,746
Depreciation (136) (3,946) (107) -- (4,189)
Transfers -- 2,642 -- (2,642) --
Changes in exchange rates (12) (175) (16) (138) (341)
------------- ------------- ------------- ------------- -------------
Total changes during 2004 (145) 3,518 103 (2,260) 1,216
------------- ------------- ------------- ------------- -------------
Balance at December 31 2004:
Cost of acquisitions 768 40,207 700 624 42,299
Accumulated depreciation (604) (31,207) (274) -- (32,085)
------------- ------------- ------------- ------------- -------------
Book value at December 31, 2004 (euro) 164 (euro) 9,000 (euro) 426 (euro) 624 (euro) 10,214
============= ============= ============= ============= =============
16
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
10 INVENTORY, NET
Inventories consisted of the following:
----------------------------
December 31
----------------------------
2004 2003
------------ ------------
(In thousands)
Raw materials (euro) 1,743 (euro) 2,773
Work in progress 857 202
Finished goods 2,085 1,486
------------ ------------
Total inventory, net (euro) 4,685 (euro) 4,461
============ ============
The total inventory amounts are netted against a provision for obsolete
inventory of (euro)1,147 and (euro)1,112 at December 31, 2004 and 2003,
respectively.
11 PREPAID EXPENSES AND ACCRUED INCOME
----------------------------
December 31
----------------------------
2004 2003
------------ ------------
(In thousands)
Prepaid expenses (euro) 832 (euro) 1,033
Government grants 95 280
Prepaid taxes 1,183 1,539
------------ ------------
(euro) 2,110 (euro) 2,852
============ ============
17
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
12 DIVISIONAL EQUITY
Total Divisional equity of LK Products represents Filtronic historical
equity in the LK Products business and includes the Company's cumulative
operating results, accumulated translation differences on net assets,
allocations from Filtronic and settlement of intercompany transactions
with Filtronic.
Activity in Divisional equity for the years ended December 31, 2004 and
2003 is as follows:
--------------
Divisional
Equity
--------------
(In thousands)
Balance at December 31, 2002 (euro) 20,154
Net income 23,596
Transfer to Filtronic, net (19,148)
Exchange adjustments (2,052)
--------------
Balance at December 31, 2003 (euro) 22,550
==============
Net income 9,136
Transfer to Filtronic, net (12,875)
Exchange adjustments (1,444)
--------------
Balance at December 31, 2004 (euro) 17,367
==============
13 ACCRUED EXPENSES
----------------------------
December 31
----------------------------
2004 2003
------------ ------------
(In thousands)
Accrued salaries and holiday pay (euro) 1,682 (euro) 1,555
Accrued expenses 836 1,123
Other 209 --
------------ ------------
(euro) 2,727 (euro) 2,678
============ ============
18
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
14 PENSIONS
Employees in Finland participate in the Finnish TEL pension system, which
provides for a retirement benefit based on years of service and earnings
according to the prescribed statutory system. The Finnish TEL pension
scheme provides for early retirement benefits at age 60 and full
retirement benefits at age 65. The current TEL provisions cap the total
pension benefit at 60% of the pensionable earnings amount. Under Finnish
GAAP, the Company's TEL liability is settled as the TEL insurance premiums
are paid. For the years ended December 31, 2004 and 2003, the Company
expensed (euro)1,797 and (euro)1,630 pertaining to contributions to the
TEL pension system, which is reflected in the Combined Statements of
Income.
All Chinese employees of the Company participate in statutory pension
plans organized and administered by the governmental authorities. The
Company has no other substantial commitments to employees. According to
the relevant regulations, the premiums and welfare benefit contributions
that should be borne by the Company are calculated based on percentages of
the total salary of employees, subject to a certain ceiling, and are paid
to the labor and social welfare authorities. Contributions to the plans
are expensed as incurred. The Company incurred expenses of approximately
(euro)226 (RMB 2,300) and (euro)170 (RMB 1,600) in 2004 and 2003,
respectively.
15 COMMITMENTS AND CONTINGENCIES
Commitments
The Company enters into operating leases primarily for its vehicles,
office equipment, and machinery and equipment under varying terms and
conditions.
At December 31, 2004, future minimum rental payments under operating
leases were as follows (in thousands):
2005 (euro) 491
2006 361
2007 145
2008 26
2009 --
Thereafter --
------------
Total minimum payments required (euro) 1,023
============
For the years ended December 31, 2004 and 2003, the Company recorded
rental expense of (euro)829 and (euro)1,046, respectively.
Contingencies
LK Products is subject to to various claims and litigation arising from
the normal course of business, including product liability and
environmental claims. The Company accrues for contingencies in the period
when it becomes probable that a liability has been incurred and the
amounts are reasonably estimable. Currently, there are no such claims or
litigations in which the Company is a party to, which would likely have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
19
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
16 GEOGRAPHICAL SALES INFORMATION
The Company designs and manufactures antennas and modules for mobile
communications and information devices. For management purposes, the
Company is organized on a worldwide basis and operates in one segment.
Although the Company is managed on a worldwide basis, it operates in three
principal geographical areas of the world. The following shows the
distribution of the Company's combined Net turnover by geographical
market, regardless of where the product was produced:
------------------------------
Years ended
December 31
------------------------------
2004 2003
------------- -------------
(In thousands)
Europe (euro) 35,282 (euro) 43,928
Asia and Pacific Ocean Area 31,610 38,672
North and South America 7,126 4,848
------------- -------------
(euro) 74,018 (euro) 87,448
============= =============
20
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
17 APPLICATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED
STATES OF AMERICA
The Company's combined financial statements have been prepared in
accordance with Finnish GAAP, which differs in certain significant
respects from accounting principles generally accepted in the United
States of America ("U.S. GAAP"). The effect of the application of U.S.
GAAP on Net income and Divisional equity, as reported under Finnish GAAP,
is set out below.
Reconciliation of Net Income
-------------------------------
Years Ended
December 31
-------------------------------
2004 2003
------------- -------------
Notes (In thousands)
Net income reported under Finnish GAAP (euro) 9,136 (euro) 23,596
U.S. GAAP adjustments:
Pension expense a (113) (108)
Inventory b 59 (364)
Leases c (5) 11
Tooling arrangements d (558) (710)
Business combinations, net of tax e (1,220) (1,748)
Stock compensation f -- --
Tax effect of U.S. GAAP adjustments 180 332
------------- -------------
Net income under U.S. GAAP (euro) 7,479 (euro) 21,009
============= =============
Reconciliation of Divisional Equity
-------------------------------
December 31
-------------------------------
2004 2003
------------- -------------
Notes ((euro) In thousands)
Divisional equity reported under Finnish GAAP (euro) 17,367 (euro) 22,550
U.S. GAAP adjustments:
Pension expense a (705) (592)
Inventory b 458 399
Leases c (10) (5)
Tooling arrangements d 594 1,152
Business combinations, net of tax e 46,549 47,769
Stock compensation f -- --
Tax effect of U.S. GAAP adjustments (89) (269)
------------- -------------
Divisional equity under U.S. GAAP (euro) 64,164 (euro) 71,004
============= =============
21
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
The following statements summarize adjustments that reconcile Net income
and Divisional equity from that reported under Finnish GAAP to that which
would have been reported had U.S. GAAP been applied.
(a) Pension expense - Under Finnish GAAP pension premiums are computed
actuarially and determined as a percentage of wages, salaries and
similar remuneration paid. Under U.S. GAAP, the determination of
pension expense for defined benefit pension plans, such as the
Company's, is made pursuant to Statement of Financial Accounting
Standard No. 87, "Employers' Accounting for Pensions SFAS No. 87."
SFAS 87 is more prescriptive than Finnish GAAP in that it requires
the use of specific actuarial method (the projected unit credit
method). Such pension expense is recorded on a full accrual basis
and reflected in the combined statement of income over the working
lives of the employees provided with such benefits. For the years
ended December 31, 2004 and 2003, the Company recorded an additional
(euro)113 and (euro)108 of net periodic benefit cost in accordance
with U.S. GAAP, respectively. The additional accrued benefit
obligation under U.S. GAAP as of December 31, 2004 and 2003
aggregates (euro)705 and (euro)592, respectively.
(b) Inventory - Under Finnish GAAP, the Company has chosen not to
allocate the fixed production overhead costs to the cost of the
inventory.
In accordance with U.S. GAAP, the cost of inventory includes the
cost of materials, direct labor, and an appropriate proportion of
production overheads related to bringing the inventory to its
present location and condition. The inventory overheads that are
attributable to the inventory under U.S. GAAP at December 31, 2004
and 2003 are (euro)458 and (euro)399, respectively.
(c) Leases - The Company leases measuring equipment, which is utilized
in their manufacturing process, and accounts for these leases as
operating leases in accordance with Finnish GAAP.
In accordance with U.S. GAAP, leases need to be evaluated under
Statement of Financial Accounting Standards ("SFAS") 13, "Accounting
for Leases," to determine whether a lease should to be accounted for
as a capital lease or operating lease. The Company has evaluated
these lease contracts in accordance with SFAS No. 13 and determined
that the lease arrangement is a capital lease. Under U.S. GAAP, the
Company has reflected the value of the measuring equipment as a
tangible fixed asset and has recorded a related obligation for the
net present value of the amounts due to the lessor upon the maturity
of the contractual arrangement. At December 31, 2004 and 2003, the
Company has recorded tangible fixed assets of (euro)309 and
(euro)288, respectively, and a related obligation for (euro)319 and
(euro)293, respectively. The Company has also recorded additional
expense of (euro)5 and a benefit of (euro)11 for the years ended
December 31, 2004 and 2003, respectively. The Company reclassed
rental expense of (euro)103 and (euro)349 to depreciation expense
and (euro)20 and (euro)29 to interest expense for the years ended
December 31, 2004 and 2003, respectively.
(d) Tooling - Under Finnish GAAP, the amounts received from customers
related to certain client specific tooling products has been netted
against the related costs and is reflected in the Combined Balance
Sheets as prepaid expenses and accrued income. At December 31, 2004
and 2003 the Company has recorded a net receivable of (euro)255 and
(euro)159, respectively, pertaining to tooling costs which have been
reversed through equity for purposes of the U.S. GAAP differences
discussed below. The Company recognized the net gain or loss from
the tooling activities upon approval of the tools by the customers.
These amounts are recognized as other operating income in the
Combined Statements of Income.
22
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
Under U.S. GAAP, EITF 99-5, "Accounting for Pre-Production Costs
Related to Long-Term Supply Arrangements," design and development
costs for tools that a supplier will not own and that will be used
in producing the products under the long-term supply arrangement
should be capitalized, subject to an impairment if the supply
arrangement provides the supplier the noncancelable right to use the
tools during the supply arrangement. As such, under U.S. GAAP, the
Company has capitalized pre-production costs and recorded
unamortized pre-production costs of (euro)5,077 and (euro)5,827 at
December 31, 2004 and 2003, respectively. The pre-production costs
are amortized on a straight line basis over the estimated useful
life of the tools utilized in the production line, which
approximates 12 - 18 months. The Company has recorded depreciation
expense associated with these capitalized costs in the amount of
(euro)5,203 and (euro)7,099 for the years ended December 31, 2004
and 2003, respectively. Additionally, as a result of capitalizing
such costs, the Company has reversed the pre-production costs
originally recorded under Finnish GAAP in the amount of (euro)743 of
other operating income and (euro)1,697 of other operating expense
for the years ended December 31, 2004 and 2003, respectively.
In connection with the tooling arrangements, the Company has a
contractual guarantee for reimbursement of certain costs from its
customers. In accordance with U.S. GAAP, EITF 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent," the Company
should report Net turnover based on the gross amount billed to its
customer because it has earned revenue from the sales. The Net
turnover associated with this reimbursement is deferred and
recognized on a straight line basis, in accordance with Staff
Accounting Bulletin 104, "Revenue Recognition," over the estimated
useful life of the tools utilized in the production line, which
approximates 12 - 18 months. The above results in the Company
recording an additional (euro)5,379 and (euro)8,080 of Net turnover
and lowering its cost of sales by (euro)5,203 and (euro)7,099 for
the years ended December 31, 2004 and 2003, respectively. As a
result of these adjustments partially relating to the business
activities in China, the Company recorded financial income for the
foreign currency translation effect of (euro)10 and (euro)6 for the
years ended December 31, 2004 and 2003, respectively. Additionally,
under U.S. GAAP, the Company has recorded (euro)4,228 and
(euro)4,516 deferred income at December 31, 2004 and 2003,
respectively.
(e) Business Combinations - Filtronic acquired LK Products in July of
1998. Under Finnish GAAP, even though Filtronic wholly owns LK
Products as a result of the acquisition, Filtronic is not required
to push down the accounting arising from Filtronic's acquisition of
LK Products.
In accordance with U.S. GAAP, Staff Accounting Bulletin No. 54,
"Push Down Basis of Accounting Required in Certain Limited
Circumstances," the U.S. GAAP reconciliation reflects the new basis
of accounting arising from Filtronic's acquisition of LK Products.
Under U.S. GAAP, the acquisition of LK Products was accounted for
under the U.S. GAAP guidance, APB 16, "Business Combinations." Under
APB 16, Filtronic applied the purchase accounting guidance for the
acquisition of LK Products. Under this methodology, Filtronic
recorded the assets acquired, including identifiable intangible
assets, and liabilities assumed at fair value; and recorded the
excess of the purchase price above the net assets acquired as
goodwill.
23
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
The following represents the purchase accounting at the date of
acquisition:
--------------
(In thousands)
--------------
Purchase Price (euro) 85,084
Fair value of net assets acquired:
Customer relationships 22,890
Trademarks 4,928
Technology 807
Tangible assets 328
Pensions (484)
Deferred tax liability on purchase
accounting adjustments (8,107)
Remaining net assets acquired as
recognized under Finnish GAAP 25,823
--------------
Total fair value of net assets acquired 46,185
Purchase price adjustment for stock
options 883
--------------
Goodwill (euro) 39,782
==============
These combined financial statements reflect the new basis of
accounting arising from Filtronic's acquisition of LK Products and
as such, the impact for the step-up of the various assets and the
identifiable intangible assets and goodwill balances have been
reflected in the U.S. GAAP reconciliations.
Prior to 2001, U.S. GAAP, APB 17, "Intangible Assets", required that
intangible assets, including goodwill, with finite lives are
amortized over their estimated useful lives on a straight-line
basis, not to exceed forty years. On adoption of SFAS 142, "Goodwill
and Other Intangible Assets" as of January 1, 2002, intangible
assets, excluding goodwill, with finite lives are required to be
amortized over the estimated useful life in a manner in which the
economic benefits are consumed. LK Products identified finite lived
intangible assets of customer relationships and technology and are
amortized on a straight-line basis over 10 and 5 years,
respectively. At December 31, 2004 and 2003, under U.S. GAAP, as a
result of this transaction, the Company has recorded intangible
fixed assets, net in the amount of (euro)13,512 and (euro)15,801,
respectively. Additionally, the Company has recorded a deferred tax
liability in the amount of (euro)3,513 and (euro)4,582 at December
31, 2004 and 2003, respectively.
Under U.S. GAAP, SFAS 142 specifies that goodwill and other
intangibles with an indefinite life are no longer amortized but
rather tested for impairment on an annual basis and whenever certain
triggering events are identified. SFAS 142 requires a two-step
impairment test to analyse whether or not goodwill has been
impaired. The first step tests for potential impairment and requires
that the fair value of each identified reporting unit be compared to
its carrying value. LK Products estimates the fair value of each
reporting unit using a discounted cash flow valuation technique. If
the fair value of the reporting unit is higher than the book value
of the reporting unit, including goodwill, no impairment is
recognized. If the fair value of the reporting unit is lower than
the book value, the second step is to measure the amount of the
impairment loss through preparation of a hypothetical purchase price
allocation to determine the implied fair value of goodwill. The
implied fair value of goodwill is
24
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
then compared to the carrying value of goodwill. If the implied fair
value of goodwill is lower than the carrying value of goodwill,
impairment must be recorded for the difference. At both December 31,
2004 and 2003, the Company has recorded goodwill in the amount of
(euro)36,550. The Company has performed an impairment analysis on
its goodwill balance and indefinite lived trademarks as of December
31, 2004, 2003, and 2002 and noted no impairments.
As a result of this acquisition, under U.S. GAAP, the Company
recorded the following adjustments to net income.
--------------
U.S. GAAP
adjustment to
net income
--------------
(In thousands)
Intangible asset amortization (euro) 2,410
Tangible asset amortization 49
Release of deferred tax (711)
--------------
Year ended December 31, 2003 (euro) 1,748
==============
Intangible asset amortization (euro) 2,289
Release of deferred tax (595)
Change in tax rate (474)
--------------
Year ended December 31, 2004 (euro) 1,220
==============
(f) Stock compensation - Certain LK Products employees participate in
Filtronic's Executive Share Option Scheme, whereby Filtronic share
options are conditionally granted to the employees, subject to a
vesting period based upon financial performance of Filtronic. Under
Finnish GAAP, the Company does not recognize any stock compensation
costs related to its stock options.
As permitted by SFAS 123, "Accounting for Stock Based Compensation,"
under U.S. GAAP the Company has elected to apply APB 25 and related
interpretations in accounting for its stock based compensation
plans. In accordance with APB 25, "Accounting for Stock Issued to
Employees," compensation costs, including the change in the
liability for the difference between the exercise and market price
at date of grant, should be recognized as an expense. Additionally,
in accordance with APB 25, when variable plan awards are granted,
compensation expense is recorded for the amount by which the market
value of the shares of the stock exceeds the option price at date of
grant; and these options are remeasured each reporting period up
until the measurement date, with changes in the fair market value
recognized as compensation expense.
The stock options that were granted to LK Products' employees are
performance related options; therefore, the Company recognized
compensation expense for the intrinsic value when it is probable
that the award (or portion thereof) will be exercised in the future.
Additionally, these options are mark-to-market each reporting
period. The Company had approximately 19,000 stock options that were
granted, vested, and exercised prior to 2003, in which the Company
recognized approximately (euro)160 of compensation expense. At the
time of the recognition of these costs, a corresponding amount has
been reflected in divisional equity. Additionally, upon the
exercising of the
25
LK Products Oy (a business of Filtronic PLC)
December 31, 2004 and 2003
Notes to the Combined Financial Statements (continued)
options, the Company would have recorded approximately (euro)139 as
additional paid in capital, a component of Divisional equity.
However, as the Company would not have received cash from the
employee for the exercise price, but rather this amount would have
been settled with Filtronic, a corresponding amount for the exercise
of the 19,000 options has been reflected in equity. As such, the net
impact on divisional equity for these transactions was zero. As of
December 31, 2004 and 2003, all outstanding options exercise price
exceeded the market value of the shares, therefore, no compensation
costs has been recognized during these periods.
Additionally, as discussed above in the Business Combination note,
in conjunction with the acquisition of LK Products, Filtronic
exchanged unvested options in the former owner of LK Products for
unvested options in Filtronic. As a result of this transaction, as
the employees were required to continue to perform services prior to
vesting in Filtronic shares, the Company was required to record
unearned compensation, a component of Divisional equity, in the
amount of (euro)443, which was charged to expense over the remaining
vesting period. All of these options vested prior to the year end
December 31, 2003 and as such, there was no impact on Divisional
equity for the periods presented.
Additionally, under Finnish GAAP, during 2003, the Company recorded an
impairment charge pertaining to its ceramic business line in the amount of
(euro)949 and has classified this charge as Cost of Sales within the
Combined Statements of Income.
18 SUBSEQUENT EVENTS
On September 8, 2005, Technitrol, Inc. completed the acquisition of LK
Products from Filtronic. The purchase price was (euro)67,000.
26