Exhibit 99.1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Drexler Technology Corporation:
We have audited the accompanying consolidated balance sheet of Drexler
Technology Corporation and subsidiaries as of December 31, 2003, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the nine months then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Drexler
Technology Corporation and subsidiaries as of December 31, 2003, and the results
of their operations and their cash flows for the nine months then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
Mountain View, California
February 24, 2004
5
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Drexler Technology Corporation:
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Drexler Technology Corporation and its subsidiaries at March 31, 2003, and the
results of their operations and their cash flows for the two years then ended in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
April 28, 2003, except for
Note 4, as to which the date is January 22, 2004
6
DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2003 and December 31, 2003
(In thousands, except share and per share amounts)
March 31, December 31,
2003 2003
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 5,754 $ 17,917
Short-term investments 4,363 2,559
Accounts receivable, net of product return reserve of $90 at March 31, 2003
and $87 at December 31, 2003 1,659 1,324
Inventories 5,711 3,769
Deferred tax assets, net 2,689 --
Prepaid and other current assets 1,016 1,193
---------- ----------
Total current assets 21,192 26,762
---------- ----------
Property and equipment, at cost 23,204 25,073
Less--accumulated depreciation and amortization (15,795) (15,482)
---------- ----------
Property and equipment, net 7,409 9,591
Long-term investments 6,898 5,944
Patents and other intangibles, net 567 465
Deferred tax assets, net 4,397 --
---------- ----------
Total assets $ 40,463 $ 42,762
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,085 $ 1,441
Accrued liabilities 1,434 1,289
Advance payments from customers 1,096 4,133
Contingent settlement of common stock options at fair value -- 195
---------- ----------
Deferred revenue 5 231
---------- ----------
Total current liabilities 3,620 7,289
Long-term liabilities:
Contingent settlement of common stock warrants at fair value -- 916
---------- ----------
Total liabilities 3,620 8,205
---------- ----------
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized--2,000,000 shares
Issued--none -- --
Common stock, $.01 par value:
Authorized--30,000,000 shares
Issued and outstanding--10,443,192 shares at March 31, 2003
and 11,368,777 shares at December 31, 2003 104 114
Additional paid-in capital 42,556 52,324
Accumulated deficit (5,817) (17,881)
---------- ----------
Total stockholders' equity 36,843 34,557
---------- ----------
Total liabilities and stockholders' equity $ 40,463 $ 42,762
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
7
DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended March 31, 2002 and 2003 and Nine Months Ended December 31, 2003
(In thousands, except per share amounts)
Year Ended Year Ended Nine Months Ended
March 31, 2002 March 31, 2003 December 31, 2003
-------------- -------------- -----------------
Revenues:
Product sales $ 19,562 $ 25,221 $ 10,621
License and other revenue 1,327 1,110 --
---------- --------- ---------
Total revenues 20,889 26,331 10,621
---------- --------- ---------
Cost of product sales 10,652 13,906 8,987
---------- --------- ---------
Gross profit 10,237 12,425 1,634
---------- --------- ---------
Operating expenses:
Selling, general and administrative expenses 5,165 6,202 4,971
Research and engineering expenses 3,045 2,818 1,941
---------- --------- ---------
Total operating expenses 8,210 9,020 6,912
---------- --------- ---------
Operating income (loss) 2,027 3,405 (5,278)
---------- --------- ---------
Other income, net 386 397 300
---------- --------- ---------
Income (loss) before income taxes 2,413 3,802 (4,978)
Income tax (benefit) expense (2,786) 1,520 7,086
---------- --------- ---------
Net income (loss) $ 5,199 $ 2,282 $ (12,064)
========== ========= =========
Net income (loss) per share:
Basic $ .52 $ .22 $ (1.14)
========== ========= =========
Diluted $ .50 $ .21 $ (1.14)
========== ========= =========
Weighted-average shares used in computing net income (loss) per share:
Basic 9,961 10,356 10,554
Diluted 10,468 10,842 10,554
The accompanying notes are an integral part of these consolidated financial statements.
8
DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Fiscal Years Ended March 31, 2002 and 2003 and Nine Months Ended December 31, 2003
(In thousands)
Additional
Common Stock Paid-in Treasury Accumulated
Shares Amount Capital Stock Deficit Total
------ ------ ------- ----- ------- -----
Balance, March 31, 2001 9,951 $ 99 $ 37,852 $(1,840)$ $ (13,298) $ 22,813
Shares purchased through an
open market repurchase program -- -- -- (175) -- (175)
Shares issued under stock option
and stock purchase plans 290 3 2,079 2,015 -- 4,097
Income tax benefit arising from
stock options -- -- 307 -- -- 307
Compensation related to
stock plan activity -- -- 96 -- -- 96
Net income -- -- -- -- 5,199 5,199
-------- ------- ---------- -------- ----------- ----------
Balance, March 31, 2002 10,241 102 40,334 -- (8,099) 32,337
Shares issued under stock option
and stock purchase plans 202 2 1,774 -- -- 1,776
Income tax benefit arising from
stock options -- -- 356 -- -- 356
Compensation related to
stock plan activity -- -- 92 -- -- 92
Net income -- -- -- -- 2,282 2,282
-------- ------- ---------- -------- ----------- ----------
Balance, March 31, 2003 10,443 $ 104 $ 42,556 $ -- $ (5,817) $ 36,843
Shares sold in private placement,
net of $547 in issuance costs
and $1,229 fair value of common
stock warrants and options 791 8 8,311 -- -- 8,319
Shares issued under stock option
and stock purchase plans 135 2 1,408 -- -- 1,410
Compensation related to
stock plan activity -- -- 49 -- -- 49
Net loss -- -- -- -- (12,064) (12,064)
-------- ------- ---------- -------- ----------- ----------
Balance, December 31, 2003 11,369 $ 114 $ 52,324 -- $ (17,881) $ 34,557
======== ======= ========== ======== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
9
DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended March 31, 2002 and 2003 and Nine Months Ended December 31, 2003
(In thousands)
Year Ended Year Ended Nine Months Ended
March 31, 2002 March 31, 2003 December 31, 2003
-------------- -------------- -----------------
Cash flows from operating activities:
Net income (loss) $ 5,199 $ 2,282 $ (12,064)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,556 1,829 1,490
Provision for (recovery of) doubtful accounts receivable (14) 11 1
Provision for excess and obsolete inventory 276 425 41
Recovery of product return reserve (127) -- --
Decrease (increase) in deferred tax assets (3,484) 1,326 7,086
Stock-based compensation 96 92 83
Tax benefit relating to the exercise of stock options 307 356 --
Gain associated with decrease in fair value of
common stock warrants and options -- -- (118)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (240) (11) 334
Decrease (increase) in inventories (368) (1,163) 1,901
Decrease (increase) in other assets 116 (455) (177)
Increase (decrease) in accounts payable and accrued liabilities (45) 664 177
Increase (decrease) in deferred revenue (179) (3,965) 226
Increase (decrease) in advance payments from customers 1,276 (1,455) 3,037
--------- -------- ----------
Net cash provided by (used in) operating activities 4,369 (64) 2,017
--------- -------- ----------
Cash flows from investing activities:
Purchases of property and equipment (1,723) (2,468) (3,504)
Acquisition of patents and other intangibles (98) (307) (66)
Purchases of investments (13,964) (16,453) (7,513)
Proceeds from maturities of investments 9,466 15,077 10,271
--------- -------- ----------
Net cash used in investing activities (6,319) (4,151) (812)
--------- -------- ----------
Cash flows from financing activities:
Proceeds from sale of common stock through stock plans 4,097 1,776 1,410
Cash used to purchase common stock through an open market
repurchase program (175) -- --
Net proceeds from sale of common stock, options and
warrants through private placement -- -- 9,548
--------- -------- ----------
Net cash provided by financing activities 3,922 1,776 10,958
--------- -------- ----------
Net increase (decrease) in cash and cash equivalents 1,972 (2,439) 12,163
Cash and cash equivalents:
Beginning of period 6,221 8,193 5,754
--------- -------- ----------
End of period $ 8,193 $ 5,754 $ 17,917
========= ======== ==========
Supplemental disclosures--cash payments for:
Income taxes $ 182 $ -- $ --
========= ======== ==========
The accompanying notes are an integral part of these consolidated financial statements.
10
DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Drexler Technology Corporation and its wholly owned subsidiary, LaserCard
Systems Corporation, (the "Company") develop and manufacture optical data
storage products featuring LaserCard(R) optical memory cards and chip-ready
Smart/Optical(TM) cards used with personal computers for information recording,
storage, and retrieval. These optical data storage products include optical
memory cards, optical card read/write drives, and related systems and
peripherals. The Company's customers are mainly value-added reseller (VAR)
companies and licensees, in the United States and other countries, that develop
commercial applications for LaserCard products. Target markets for these
products include government and commercial applications for portable,
recordable, secure, identification cards and other unitary-record cards.
Applications include U.S. immigration Green Cards and Laser Visa Border Crossing
Cards, U.S. military cargo manifests, Canadian Permanent Resident Cards,
biometric IDs, access cards, and other wallet-card applications. The Company has
two additional subsidiaries that are dormant, Precision Photoglass, Inc., and
Microfab Systems Corporation.
The Company is subject to certain risks including, but not limited to,
competition from substitute products and larger companies and dependence on
certain suppliers and customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION. The consolidated
financial statements include the accounts of Drexler Technology Corporation and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
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 the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
FISCAL PERIOD. For purposes of presentation, the Company labels its annual
accounting period end as March 31 and its quarterly accounting period ends as
June 30, September 30, and December 31. The Company, in fact, operates and
reports based on quarterly periods ending on the Friday closest to month end.
Fiscal 2002 ended on March 29, 2002; fiscal 2003 ended on March 28, 2003; and
the fiscal 2004 first nine months ended on January 2, 2004.
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, AND LONG-TERM
INVESTMENTS. The Company considers all highly liquid investments, consisting
primarily of commercial paper, taxable notes, and U.S. government bonds, with
maturities of three months or less at the date of purchase, to be cash
equivalents. Cash equivalents as of March 31, 2003 and December 31, 2003 were
$4,396,000 and $9,407,000, respectively. All investments with original or
remaining maturities at date of purchase of more than three months and up to one
year are classified as short-term investments. All investments with original or
remaining maturities at date of purchase greater than one year are classified as
long-term investments. Management determines the appropriate classification of
debt and equity securities at the time of purchase and reevaluates the
classification of investments as of each balance sheet date.
11
All short-term and long-term investments are classified as held to maturity
and are stated in the balance sheet at amortized cost. As investments are
classified as held to maturity, no unrealized gains or losses are recorded. The
carrying amounts of individual held to maturity securities are reviewed at the
balance sheet date for potential impairment. As of March 31, 2003 and December
31, 2003, the Company has determined that no permanent impairment has occurred.
The carrying amounts of short-term and long-term investments at March 31, 2003
and December 31, 2003 are (in thousands):
March 31, December 31,
2003 2003
---- ----
Short-term investments:
U.S. government and agency obligations $ 401 $ --
Certificates of deposit 3,962 2,559
---------- ----------
Total short-term investments 4,363 2,559
---------- ----------
Long-term investments:
U.S. government and agency obligations 6,500 4,800
Certificates of deposit 398 1,144
---------- ----------
Total long-term investments 6,898 5,944
---------- ----------
Total investments $ 11,261 $ 8,503
========== ==========
At December 31, 2003, scheduled maturities of held-to-maturity investments
are (in thousands):
December 31,
2003
----
Up to one year $ 2,559
After one year through five years 5,944
----------
$ 8,503
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of the Company's
financial instruments including cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued liabilities,
approximate their fair values due to their short maturities. The fair value of
long-term investments was $6,910,000 at March 31, 2003 and $5,975,000 at
December 31, 2003.
INVENTORIES. Inventories are stated at the lower of cost or market, with
cost determined on a first-in, first-out basis and market based on the lower of
cost or estimated realizable value. The components of inventories as of March
31, 2003 and December 31, 2003 are (in thousands):
March 31, December 31,
2003 2003
---- ----
Raw materials $ 3,234 $ 2,276
Work-in-process 220 480
Finished goods 2,257 1,013
---------- ----------
$ 5,711 $ 3,769
========== ==========
The Company recorded charges to write down excess and obsolete inventory of
$276,000 for fiscal 2002; $425,000 for fiscal 2003; and $41,000 for the first
nine months of fiscal 2004.
12
PROPERTY AND EQUIPMENT, NET. The components of property and equipment as of
March 31, 2003 and December 31, 2003 are (in thousands):
March 31, December 31,
2003 2003
---- ----
Equipment and furniture $ 19,200 $ 19,509
Construction in progress, including
purchased equipment 1,323 2,858
Leasehold improvements 2,681 2,706
---------- ----------
$ 23,204 $ 25,073
========== ==========
Property and equipment are recorded at cost. Depreciation is provided over
the estimated useful lives (four to seven years) of equipment and furniture
using the double-declining balance and straight-line methods. Leasehold
improvements are amortized over the shorter of the life of the asset or the life
of the lease using the straight-line method. Depreciation and leasehold
amortization expense for fiscal 2002, 2003 and the first nine months of fiscal
2004 was $1,192,000; $1,477,000; and $1,322,000, respectively.
PATENT COSTS. Legal expenses incurred in connection with patents are
capitalized and amortized over the estimated remaining useful lives of the
patents of six to seventeen years. Costs incurred in connection with other
intangibles are amortized using the straight-line method over three to five
years.
Gross intangible expenditures capitalized and accumulated amortization as
of March 31, 2003 and December 31, 2003 are as follows (in thousands):
March 31, December 31,
2003 2003
---- ----
Gross patent expenditures $ 3,089 $ 3,145
Gross technology transfer expenditures 545 555
---------- ----------
Gross patent and other intangible expenditures 3,634 3,700
---------- ----------
Patent accumulated amortization (2,638) (2,784)
Technology transfer accumulated amortization (429) (451)
---------- ----------
Accumulated amortization (3,067) (3,235)
---------- ----------
Patents and other intangibles, net $ 567 $ 465
========== ==========
The weighted average remaining amortization periods are as follows:
Year Ended Nine Months Ended
March 31, 2003 December 31, 2003
-------------- -----------------
Patents 4.4 years 4.6 years
Technology transfer 2.7 years 3.5 years
Total 3.8 years 4.4 years
Amortization expense on intangible assets for fiscal 2002, 2003 and the
first nine months of fiscal 2004 was $364,000; $352,000; and $168,000,
respectively. The estimated aggregate amortization expense for the next five
years is $440,000.
ASSESSMENT OF IMPAIRMENT OF TANGIBLE AND INTANGIBLE LONG-LIVED ASSETS. The
Company periodically evaluates whether events and circumstances have occurred
which indicate that the carrying value of its long-lived assets may not be
recoverable. If the Company determines an asset has been impaired, the
impairment charge is recorded based on the excess
13
of the carrying value over the fair value of the impaired asset, with the
reduction in value charged to expense. To date, the Company has not needed to
record any impairment losses on long-lived assets.
ACCRUED LIABILITIES. The components of accrued liabilities as of March 31,
2003 and December 31, 2003 are (in thousands):
March 31, December 31,
2003 2003
---- ----
Accrued payroll and fringe benefits $ 605 $ 549
Other accrued liabilities 829 740
---------- ----------
$ 1,434 $ 1,289
========== ==========
SOFTWARE DEVELOPMENT COSTS. Development costs incurred in the research and
development of new software products are expensed as incurred until
technological feasibility in the form of a working model has been established.
To date, the Company's software development has been completed concurrent with
the establishment of technological feasibility and, accordingly, all software
development costs have been charged to research and engineering expenses in the
accompanying consolidated statements of operations.
ADVANCE PAYMENTS FROM CUSTOMERS. The Company customarily receives advance
payments on orders placed by its customers. The advance payments are recorded as
a liability on the balance sheet until the related orders are shipped.
REVENUE RECOGNITION. Product sales primarily consist of card sales and
sales of read/write drives. The Company recognizes revenue from product sales
when the following criteria are met: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the fee is fixed or determinable; and (4)
collectibility is reasonably assured. The Company recognizes revenue on product
sales at the time of shipment when shipping terms are F.O.B. shipping point,
orders are placed pursuant to a pre-existing sales arrangement, and there are no
post-shipment obligations or customer acceptance criteria. Where appropriate,
provision is made at the time of shipment for estimated warranty costs and
estimated returns. Product sales primarily consist of card sales and sales of
read/write drives.
The Company's U.S. government subcontract requires delivery into a secure,
government-funded vault located on Company premises. Shipments are made from the
vault on a shipment schedule provided by the prime contractor, which is subject
to revision, but not cancellation, at the option of the prime contractor. At the
time the cards are delivered into the vault, title to the cards is transferred
to the government and all risks of ownership are transferred as well. The prime
contractor is invoiced, with payment due within thirty days, and the contract
does not contain any return (other than for warranty) or cancellation
provisions. Pursuant to the provisions of Staff Accounting Bulletin No. 104 (SAB
104), revenue is recognized on delivery into the vault as the Company has
fulfilled its contractual obligations and the earnings process is complete. If
the Company does not receive a shipment schedule, revenue is deferred and
recognized upon shipment from the vault.
The Company applies the provisions of Statement of Position (SOP) 97-2,
"Software Revenue Recognition," as amended by Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" to all transactions involving the sale of software products.
Revenue from the license of the Company's software products is recognized when
persuasive evidence of an arrangement exists, the software product has been
delivered, the fee is fixed or determinable, and collectibility is reasonably
assured, and, if applicable, upon acceptance when acceptance criteria are
specified or upon expiration of the acceptance period.
License revenue, which may consist of up-front license fees and long-term
royalty payments, is recognized as revenue when earned. The cost of license
revenue is not material and is included in selling, general and administrative
expenses. The Company entered into a read/write drive kits assembly license with
a customer in Italy which generated license revenue of $119,000 during fiscal
2002. The arrangement was structured whereby the customer agreed to pay the
Company a contractually agreed upon fee in exchange for the transfer of
technical knowledge and know-how and training in the assembly of
read/write-drives. The training period extended over 16 months, which is the
period over which the Company recognized the fee as revenue. The Company
recorded revenue of $1,206,000 in fiscal 2002 relating to digital sound patent
14
licenses sold to Sony Corporation and Dolby Laboratories, Inc. The revenues were
net of legal costs and third party contingency (success) fees. There are no
ongoing royalty payments or continuing obligations. License revenue in the
amount of $875,000 for fiscal 2003 represents the unamortized portion of a
$1,000,000 nonrefundable distribution license fee received in 2000 from a
licensee in Asia that had committed to purchase a minimum number of optical
memory cards for a program in the licensee's country. The Company recorded this
fee as deferred revenue and had been amortizing it as revenue in proportion to
actual card purchases by the licensee. During the quarter ended December 31,
2002, the Company determined that, due to the licensee's failure to meet the
minimum contractual purchase commitment, the licensee's distribution rights had
become unenforceable and that the licensee would no longer be acting as the card
supplier for that program. Fiscal 2003 license revenue also included $235,000
relating to a payment received in January 2002 from a third party that was
considering entering into a license agreement with the Company; the Company
originally recorded this payment as deferred revenue. The third party had
subsequently foregone its rights under this agreement due to non-performance and
accordingly, the Company recognized revenue on this arrangement in the fourth
quarter of fiscal 2003. There was no license revenue for the nine months ended
December 31, 2003.
RESEARCH AND ENGINEERING EXPENSES. Costs related to research, design and
development of products are charged to research and engineering expense as
incurred.
STOCK-BASED COMPENSATION. On December 31, 2002, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure,"
which amends SFAS No. 123. SFAS No. 148 requires more prominent and frequent
disclosures about the effects of stock-based compensation, which the Company
adopted for the year ended March 31, 2003. The Company accounts for its
stock-based compensation plans using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Compensation cost for stock options, if any, is measured by the
excess of the quoted market price of the Company's stock at the date of grant
over the amount an employee must pay to acquire the stock. SFAS No. 123,
"Accounting for Stock-Based Compensation," established accounting and disclosure
requirements using a fair-value based method of accounting for stock-based
employee compensation plans. Had compensation expense for the Plans been
determined consistent with SFAS No. 123, the Company's net income (loss) and
basic and diluted net income (loss) per share would have decreased to the
following pro forma amounts (dollars, in thousands, except per share amounts):
March 31, March 31, December 31,
2002 2003 2003
---- ---- ----
Net income (loss), as reported $ 5,199 $ 2,282 $ (12,064)
Add: Stock-based employee compensation expense included in
reported net income (loss), net of related tax effects 91 55 83
Deduct: total stock-based employee compensation determined under
Fair-value based method for all awards, net of related tax effects (2,336) (1,408) (1,904)
---------- ---------- ----------
Pro forma net income (loss) $ 2,954 $ 929 $ (13,885)
========== ========== ==========
Basic net income (loss) per common share:
As reported $ .52 $ .22 $ (1.14)
========== ========== ==========
Pro forma $ .30 $ .09 $ (1.32)
========== ========== ==========
Diluted net income (loss) per common share:
As reported $ .50 $ .21 $ (1.14)
========== ========== ==========
Pro forma $ .28 $ .09 $ (1.32)
========== ========== ==========
Shares used in computing basic and diluted pro forma net income (loss) per
share:
Basic 9,961 10,356 10,554
Diluted 10,468 10,842 10,554
========== ========== ==========
15
The Company computed the fair value of each option grant on the date of
grant using the Black-Scholes option valuation model with the following
assumptions:
Year Ended Year Ended Nine Months Ended
March 31, 2002 March 31, 2003 December 31, 2003
-------------- -------------- -----------------
Risk-free interest rate 5% 2.67% to 4.99% 2.74% to 3.75%
Average expected life of option 6 to 8 years 5 to 8 years 5 to 8 years
Dividend yield 0% 0% 0%
Volatility of common stock 50% 50% 50%
Weighted average fair value of option grants $7.54 $8.59 $9.57
COMPREHENSIVE INCOME (LOSS). Under SFAS No. 130, "Reporting Comprehensive
Income," comprehensive income (loss) is defined as the changes in equity of an
enterprise except those resulting from stockholders' transactions. For the
fiscal years ended March 31, 2002 and 2003 and the nine months ended December
31, 2003, comprehensive income (loss) equaled net income (loss).
RECENT ACCOUNTING PRONOUNCEMENTS.
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus
on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" (EITF
00-21). EITF 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or rights
to use assets. The provisions of EITF 00-21 apply to revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The adoption of
this standard did not have a material impact on the Company's financial position
and results of operations.
In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46). FIN 46 addresses
consolidation by business enterprises of variable interest entities. Under that
interpretation, certain entities known as Variable Interest Entities (VIEs) must
be consolidated by the primary beneficiary of the entity. The primary
beneficiary is generally defined as having the majority of the risks and rewards
arising from the VIE. For VIEs in which a significant (but not majority)
variable interest is held, certain disclosures are required. In December 2003,
the FASB revised FIN 46, delaying the effective dates for certain entities
created before February 1, 2003, and making other amendments to clarify
application of the guidance. For potential variable interest entities other than
any Special Purpose Entities (SPEs), the revised FIN 46 (FIN 46R) is now
required to be applied no later than the end of the first fiscal year or interim
reporting period ending after March 15, 2004. The original guidance under FIN 46
is still applicable, however, at the end of the first interim or annual
reporting period ending after December 15, 2003 for all SPEs created prior to
February 1, 2003. FIN 46R may be applied prospectively with a cumulative effect
adjustment as of the date it is first applied, or by restating previously issued
financial statements with a cumulative-effect adjustment as of the beginning of
the first year restated. FIN 46R also requires certain disclosures of an
entity's relationship with variable interest entities. The Company will adopt
FIN 46R for non-SPE entities as of March 31, 2004.
In May 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003. The
adoption of SFAS No. 149 did not have an impact on the Company's financial
position and results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards for how companies classify and measure certain
financial instruments with characteristics of both liabilities and equity. It
requires companies to classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
beginning with the third quarter of fiscal 2004. The adoption of SFAS No. 150
did not have an impact on the Company's financial position and results of
operations.
16
In July 2003, the EITF reached a consensus on Issue No. 03-5,
"Applicability of AICPA Statement of Position 97-2 (SOP 97-2) to Non-Software
Deliverables" (EITF 03-5). The consensus was reached that SOP 97-2 is applicable
to non-software deliverables if they are included in an arrangement that
contains software that is essential to the non-software deliverables'
functionality. This consensus is to be applied to Company's financial year
beginning after October 1, 2003. The Company has not yet evaluated the impact
that EITF 03-5 will have on its financial position and results of operations.
In December 2003, the SEC issued SAB 104, which supercedes SAB 101,
"Revenue Recognition in Financial Statements." The primary purpose of SAB 104 is
to rescind the accounting guidance contained in SAB 101 related to multiple
element revenue arrangements, which was superceded as a result of the issuance
of EITF 00-21. The adoption of SAB 104 did not have an impact on the Company's
financial position and results of operations.
RECLASSIFICATIONS. Certain reclassifications were made to the prior year
financial data to conform with the current year presentation.
INDEMNIFICATION. The Company's major sales agreements provide remedies to
customers, such as defense, settlement, or payment of judgment for intellectual
property claims related to the use of the Company's products. The Company has
also entered into indemnification agreements with its directors and officers and
the Company's bylaws contain similar indemnification obligations. To date, there
have been no claims made under such indemnifications, and as a result the
associated estimated fair value of the liability is not material.
3. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss)
by the weighted average number of shares of common stock outstanding. Diluted
net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock and common stock equivalents
outstanding. Common stock equivalents consist of stock options and warrants
using the treasury stock method.
The reconciliation of the denominators of the basic and diluted net income
(loss) per share computation for the fiscal years ended March 31, 2002 and 2003
and the nine months ended December 31, 2003 is shown in the following table (in
thousands, except per share data):
Year Ended Year Ended Nine Months Ended
March 31, 2002 March 31, 2003 December 31, 2003
-------------- -------------- -----------------
Net income (loss) $ 5,199 $ 2,282 $ (12,064)
========= ========== ==========
Basic net income (loss) per share:
Weighted average common shares outstanding 9,961 10,356 10,554
--------- ---------- ----------
Basic net income (loss) per share $ .52 $ .22 $ (1.14)
========= ========== ==========
Diluted net income (loss) per share:
Weighted average common shares outstanding 9,961 10,356 10,554
Weighted average common shares from stock option grants 507 486 --
--------- ---------- ----------
Weighted average common shares and common stock
equivalents outstanding 10,468 10,842 10,554
--------- ---------- ----------
Diluted net income (loss) per share $ .50 $ .21 $ (1.14)
========= ========== ==========
Stock options having an exercise price greater than the average market
value for profitable periods are excluded from the calculation of diluted net
income per share, as their effect would be antidilutive. Therefore, stock
options to purchase 280,950 and 168,000 shares were excluded from the
calculation of diluted net income per share for the years ended March 31, 2002
and 2003, respectively. As the effect of common stock equivalents would be
antidilutive since the Company incurred a loss, all stock options and warrants
were excluded from the calculation of diluted net loss per share for the nine
months ended December 31, 2003.
17
4. SEGMENTS
SEGMENT REPORTING. Prior to the second fiscal quarter of 2004, the Company
reported its results as a single reportable segment. During the second fiscal
quarter of 2004, revenues increased for optical card drives and as a result, the
Company concluded that it had two reportable segments and began reporting the
results of each segment and other information pursuant to Statement of Financial
Accounting Standards No. 131, "Segment Reporting." Segment financial data for
the years ended March 31, 2002 and 2003 has been adjusted to reflect these
segments.
The Company's two reportable segments are: (1) optical memory cards and (2)
optical memory card drives, maintenance, and related accessories ("optical card
drives"). The segments were determined based on the information used by the
chief operating decision maker. The segments reported are not strategic business
units which offer unrelated products and services, rather these reportable
segments utilize compatible technology and are marketed jointly.
The accounting policies used to derive reportable segment results are the
same as those described in the "Summary of Significant Accounting Policies."
Resources are allocated to the segments in a manner that optimizes optical
memory card revenues as determined by the chief operating decision maker.
Segment revenues are comprised of sales to external customers. Segment gross
profit (loss) includes all segment revenues less the related cost of sales.
Fixed assets and inventory are not separately reported by segment to the chief
operating decision maker. Accounts receivable, cash, deferred income taxes,
prepaid expenses, certain fixed assets, and other assets are not separately
identifiable to segments. Therefore, the amount of assets by segment is not
meaningful. There are no inter-segment sales or transfers; all of the Company's
long-lived assets are attributable to the United States.
The Company's chief operating decision maker is currently the Company's
Co-Chief Executive Officers, prior to which the Company's Chairman and Chief
Executive Officer was considered to be the chief operating decision maker. The
chief operating decision maker reviews financial information presented on a
consolidated basis that is accompanied by disaggregated information about
revenues and gross profit (loss) by segment.
The table below presents information for optical memory cards and optical
card drives for the fiscal years ended March 31, 2002 and 2003 and the nine
months ended December 31, 2003 (in thousands):
Fiscal Year Ended March 31, 2002
--------------------------------
Optical Optical Card Segment
Memory Cards Drives Total
------------ ------ -----
Revenue $18,201 $ 1,279 $19,480
Cost of sales 8,717 1,918 10,635
Gross profit (loss) 9,484 (639) 8,845
Depreciation and
amortization expense 798 61 859
Fiscal Year Ended March 31, 2003
--------------------------------
Optical Optical Card Segment
Memory Cards Drives Total
------------ ------ -----
Revenue $24,247 $ 693 $24,940
Cost of sales 12,120 1,579 13,699
Gross profit (loss) 12,127 (886) 11,241
Depreciation and
amortization expense 995 81 1,076
18
Nine Months Ended December 31, 2003
-----------------------------------
Optical Optical Card Segment
Memory Cards Drives Total
------------ ------ -----
Revenue $ 7,422 $ 3,076 $10,498
Cost of sales 6,283 2,628 8,911
Gross profit 1,139 448 1,587
Depreciation and
amortization expense 870 110 980
The following is a reconciliation of segment results to amounts included in
the Company's consolidated financial statements for the fiscal years ended March
31, 2002 and 2003 and the nine months ended December 31, 2003 (in thousands):
Fiscal Year Ended March 31, 2002
--------------------------------
Segment
Total Other (a) Total
----- --------- -----
Revenue $19,480 $ 1,409 $20,889
Cost of sales 10,635 17 10,652
Gross profit 8,845 1,392 10,237
Depreciation and
amortization expense 859 697 1,556
Fiscal Year Ended March 31, 2003
--------------------------------
Segment
Total Other (a) Total
----- --------- -----
Revenue $24,940 $ 1,391 $26,331
Cost of sales 13,699 207 13,906
Gross profit 11,241 1,184 12,425
Depreciation and
amortization expense 1,076 753 1,829
Nine Months Ended December 31, 2003
-----------------------------------
Segment
Total Other (a) Total
----- --------- -----
Revenue $10,498 $ 123 $10,621
Cost of sales 8,911 76 8,987
Gross profit 1,587 47 1,634
Depreciation and
amortization expense 980 510 1,490
(a) Other revenue consists primarily of license revenue. Other cost of sales
and depreciation and amortization expense represents corporate and other
costs not directly associated with segment activities.
19
SALES BY GEOGRAPHIC REGION. Sales by geographic region are generally
determined based upon the ship-to address on the invoice. Revenues by geographic
region are as follows (in thousands):
Year Ended Year Ended Nine Months Ended
March 31, 2002 March 31, 2003 December 31, 2003
-------------- -------------- -----------------
United States $ 18,832 $ 22,205 $ 6,417
Canada 606 2,764 3,053
Europe 835 426 712
Asia 580 887 377
Rest of world 36 49 62
---------- ---------- ----------
$ 20,889 $ 26,331 $ 10,621
========== ========== ==========
Sales to customers outside the United States are denominated in U.S. dollars.
MAJOR CUSTOMERS. One customer accounted for more than 81% of revenues for
fiscal 2002, 94% of revenues for fiscal 2003, and 86% of revenues for the nine
months ended December 31, 2003. The revenue from this customer was attributable
to both the optical memory cards and the optical card drives segments. No other
customer accounted for more than 10% of revenues during the periods.
One United States customer comprised 99% of accounts receivable at March
31, 2003. Two customers comprised 88% and 12%, respectively, of accounts
receivable at December 31, 2003.
5. RELATED-PARTY TRANSACTIONS
On October 21, 2001, the Company entered into a one-year agreement with
Wexler & Walker Public Policy Associates, a unit of Hill and Knowlton, Inc.,
("Wexler") to be lobbyists on behalf of the Company. The Chairman of Wexler is
Robert S. Walker, a brother of director Walter F. Walker. In October 2002, the
agreement was extended for the period October 1, 2002 through September 2003 or
until terminated upon seven days' notice. The extended agreement provided for a
monthly retainer of $10,000, and there currently is a purchase order dated
December 11, 2003, valid through September 30, 2004 with the same terms and
conditions of the previous agreements. The Company paid $24,245 to Wexler during
the 2002 fiscal year, $82,985 during the 2003 fiscal year, and $90,482 during
the fiscal 2004 nine months ended December 31, 2003. There were no significant
amounts due to Wexler as of March 31, 2003 or December 31, 2003.
6. COMMON STOCK
STOCK OPTION PLAN. The Company has one stock option plan (the Stock Option
Plan) under which 2,153,655 shares of common stock have been reserved as of
December 31, 2003, consisting of 1,939,309 shares for stock options already
granted and 214,346 shares for stock options not yet granted.
The Company's Stock Option Plan provides that stock options may be granted
to employees, officers, directors and consultants of the Company and that option
prices may be no less than 100% of the fair market value of the shares at the
date of grant. No options were granted to consultants during fiscal 2002, 2003,
or during the nine months ended December 31, 2003. The Board of Directors
specifies the term of options and the vesting schedule for exercise of options.
The option term cannot exceed ten years (except that incentive stock options
granted to a principal shareholder cannot exceed five years).
20
The following table lists Stock Option Plan activity from March 31, 2001
through December 31, 2003:
Options Weighted
Available Outstanding Average
for Grant Options Exercise Price
--------- ------- --------------
Balance March 31, 2001 276,220 2,028,100 $ 11.49
Authorized 300,000 --
Granted (345,500) 345,500 $ 13.82
Exercised -- (416,618) $ 9.52
Expired 83,251 (83,251) $ 13.86
---------- ------------
Balance March 31, 2002 313,971 1,873,731 $ 12.25
---------- ------------
Authorized 275,000 --
Granted (394,000) 394,000 $ 16.03
Exercised -- (184,100) $ 8.67
Expired 23,833 (23,833) $ 16.11
---------- ------------
Balance March 31, 2003 218,804 2,059,798 $ 13.25
---------- ------------
Granted (35,000) 35,000 $ 18.10
Exercised -- (124,947) $ 10.53
Expired 30,542 (30,542) $ 13.90
---------- ------------
Balance December 31, 2003 214,346 1,939,309 $ 13.50
========== ============
The following table summarizes information about stock options outstanding
at December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------- ---------------------------------------
Number Weighted-Average Weighted- Number Weighted
Outstanding at Remaining Average Exercisable at Average
December 31, 2003 Contractual Life Exercise Price December 31, 2003 Exercise Price
----------------- ---------------- -------------- ----------------- --------------
$ 7.04 - $10.75 271,683 4.2 years $ 9.39 271,683 $ 9.39
$10.91 - $12.69 559,001 4.2 years $ 11.77 530,867 $ 11.76
$13.06 - $15.56 681,525 6.9 years $ 14.05 408,823 $ 13.95
$16.47 - $22.75 427,100 7.4 years $ 17.50 235,650 $ 17.13
------------ ------------
Totals 1,939,309 1,447,023
============ ============
EMPLOYEE STOCK PURCHASE PLAN. The Company has an Employee Stock Purchase
Plan (Stock Purchase Plan), under which 74,995 shares are reserved as of
December 31, 2003 for future purchases by employees. Under the Stock Purchase
Plan, eligible employees may designate from 2% to 6% of their compensation to be
withheld for the purchase of shares of common stock at 67% of a trailing average
price. The differential between fair market value and the average price of the
shares sold under the Stock Purchase Plan is charged to operations as a
compensation expense and is taxed to the employee as income. Under the Stock
Purchase Plan, employees purchased 12,942 shares for fiscal 2002; 18,405 shares
for fiscal 2003; and 9,466 shares for the nine months ended December 31, 2003.
The average purchase price per share was $10.52 for fiscal 2002; $9.74 for
fiscal 2003; and $9.96 for the nine months ended December 31, 2003. The weighted
average market price per share for shares purchased was $17.97 for fiscal 2002;
$14.76 for fiscal 2003; and $15.11 for the nine months ended December 31, 2003.
21
7. COMMITMENTS AND CONTINGENCIES
The Company occupies its buildings under various operating leases. Rent
expense relating to these buildings was approximately $1,169,000 for fiscal
2002; $1,186,000 for fiscal 2003; and approximately $863,000 for the nine months
ended December 31, 2003. As of December 31, 2003, future minimum rental payments
relating to these leases are (in thousands):
Fiscal Year
-----------
2004 $ 241
2005 616
2006 528
2007 459
2008 407
2009 424
Thereafter 2,322
--------
Total $ 4,997
========
Subsequent to December 31, 2003, on January 29, 2004, the Company entered
into a ten-year building lease for approximately 43,000 square feet with annual
lease payments beginning April 1, 2004 of $386,000 for the first five years and
$890,000 for the final five years, for a total amount of $6.4 million.
In the normal course of business, the Company is subject to various claims
and assertions. In the opinion of management, the ultimate disposition of such
claims and assertions will not have a material adverse impact on the financial
position of the Company.
8. INCOME TAXES
The provision (benefit) for income taxes for fiscal 2002, 2003, and the
nine months ended December 31, 2003 consists of the following (in thousands)
Year Ended Year Ended Nine Months Ended
March 31, 2002 March 31, 2003 December 31, 2003
-------------- -------------- -----------------
Current:
Federal $ 49 $ 261 $ --
State 213 98 3
---------- ---------- ----------
262 359 3
---------- ---------- ----------
Deferred:
Federal (3,048) 1,161 7,072
State -- -- 11
---------- ---------- ----------
(3,048) 1,161 7,083
Income tax expense
(benefit) $ (2,786) $ 1,520 $ 7,086
==========- ========== ==========
22
The Company's effective tax rate differs from the statutory rate as
follows:
Year Ended Year Ended Nine Months Ended
March 31, 2002 March 31, 2003 December 31, 2003
-------------- -------------- -----------------
Tax reconciliation:
Federal statutory rate 34% 34% (34%)
State tax, net of federal benefit 6% 6% 0%
Change in valuation allowance (159%) -- 176%
----- ----- ----
(119%) 40% 142%
===== ===== ====
The major components of the net deferred tax asset as of March 31, 2003 and
December 31, 2003 are as follows (in thousands):
March 31, 2003 December 31, 2003
-------------- -----------------
Net operating loss carryforwards:
Federal $ 10,311 $ 11,277
Tax credits 537 537
Reserves and accruals not currently deductible for tax purposes 964 1,129
Depreciation 574 757
Capitalized patent costs (153) (153)
Other 107 107
--------- ----------
Total deferred tax asset 12,340 13,654
Valuation allowance (5,254) (13,654)
--------- ----------
Net deferred tax asset $ 7,086 $ --
========= ==========
The Company analyzes its deferred tax assets with regard to potential
realization. The Company has established a valuation allowance on that portion
of its deferred tax assets with respect to which management could not conclude
that it was more likely than not that such deferred tax assets would be
realized. The Company's determination of the realizability of its deferred tax
assets involves considering all available evidence, both positive and negative,
regarding the likelihood of future income. The methodology used involves
estimates of future income relating to the Company's core business and considers
the estimated impact of future stock option deductions and the expiration dates
and amounts of net operating loss carryforwards. These estimates of future
income are projected through the life of the related deferred tax assets using
assumptions which management believes to be reasonable.
Significant management judgment is required in determining the provision
for income taxes and, in particular, any valuation allowance recorded against
the Company's deferred tax assets. During fiscal 2002, the Company recorded a
tax benefit of $2,786,000, which included a $2,999,000 reduction to the
valuation allowance on its deferred tax assets based on management's assessment
that such portion of its deferred tax assets were more likely than not to be
realized. Due primarily to the Company's recent cumulative tax loss history, its
reported financial statement losses over the past four quarters, and uncertainty
regarding the timing and amount of future revenues and profitability, the
Company determined it was necessary to increase the valuation allowance as of
December 31, 2003. As a result, the Company has recorded a valuation allowance
of $13.7 million as of December 31, 2003, including $7,086,000 recorded in the
third quarter of fiscal 2004, due to uncertainties related to its ability to
utilize its deferred tax assets before they expire.
The Company's federal net operating loss carryforwards as of December 31,
2003 of $33,167,000 will expire at various dates from 2005 through 2023, if not
utilized. The tax effect of this amount is reflected above as federal net
operating loss carryforwards totaling $11,277,000. Of this amount, $5,766,000,
representing tax benefits relating to stock-based compensation programs, will be
credited to stockholders' equity to the extent the Company concludes that it is
more likely than not that this amount will be realized. Tax credits in the
amount of $300,000 for alternative minimum taxes have no expiration. Other tax
credits in the amount of $237,000 will expire on various dates from 2013 through
2018 if not utilized.
23
9. ISSUANCE OF STOCK, OPTIONS, AND WARRANTS
In December 2003, the Company issued and sold 791,172 shares of common
stock, options to purchase 122,292 shares of common stock, and warrants to
purchase 174,057 shares of common stock for an aggregate purchase price of
$10,095,332 in a private placement. The Company received net proceeds of
$9,548,000 (net of fees and expenses). The purchase price of the common stock
was $12.76 per share, which was at a 15% discount from the five-day average
price as of December 23, 2003. The options have an exercise price of $16.51 per
share and a nine-month life. The warrants have an exercise price of $17.26 per
share and a life of five years. The options and warrants were valued at $245,000
and $984,000, respectively, based on a Black-Scholes calculation as of December
23, 2003 and pursuant to the provisions of EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock," (EITF 00-19) were recorded at those values in short-term
and long-term liabilities. The balance of the net proceeds was accounted for as
additional paid-in capital. Under EITF 00-19, the Company marks-to-market the
fair value of the options and warrants at the end of each accounting period. At
December 31, 2003, this resulted in options and warrants valued at $195,000 and
$916,000, respectively. The decrease in the valuation of the options and
warrants, between December 23, 2003 and December 31, 2003, of $118,000 was
recorded as other income in the accompanying consolidated statements of
operations and resulted from a decrease in the Company's stock price. On
February 6, 2004, the Company and the investors entered into an amendment to
their original agreement, that resulted in the reclassification of the option
and warrant to equity. The amendment clarified that the options and warrants
granted in the financing may be exercised at a time when a registration
statement covering the resale of the underlying share is not effective or
available and that in such instance the Company would deliver to the investors
shares of common stock whose resale is not currently registered. On the
effective date of the amendment, the option and warrant value was reclassified
to equity as additional paid-in capital. As a result of the increase in the
value of the options and warrants from the closing date to the amendment date
due to increases in the Company's stock price, the Company recognized an expense
of $211,000 which will be included in other expense in the consolidated
statements of operations in the fourth quarter of fiscal 2004. The Company is
subject to certain indemnity provisions included in the stock purchase agreement
entered into as part of the financing in connection with its registration of the
resale of the common stock issued and issuable in the financing. Morgan Keegan &
Company, Inc. acted as the Company's placement agent for this transaction and
was granted warrants to purchase 15,824 shares of common stock.
10. POTENTIAL ACQUISITION
On November 13, 2003, the Company announced that it had entered into a
Letter of Intent to acquire two card companies related through common ownership,
Challenge Card Design Plastikkarten GmbH of Rastede, Germany (CCD), and cards &
more GmbH of Ratingen, Germany (C&M), including their sales operations in the
USA and Korea. The Letter of Intent calls for acquisition of substantially all
of the assets of the two companies in exchange for assumption of approximately
$600,000 of debt and payment of approximately $6.1 million cash, consisting of
approximately $3.5 million payable at closing and approximately $2.6 million
payable in four equal annual installments. CCD and C&M provide advanced
contactless card solutions, primarily in the consumer, event, and access control
sectors of the European market. The final acquisition agreement is expected to
be signed and announced during the first calendar quarter of 2004, after (1) a
due diligence period is completed, including preparing financial statements for
CCD and C&M in accordance with accounting principles generally accepted in the
United States; (2) the terms and conditions of the definitive agreement are
negotiated; and (3) any required regulatory approvals are obtained.
24