NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007,
2006 and 2005
(in thousands, except share and per share data, or as otherwise noted)
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Description of Business
FARO Technologies, Inc. and subsidiaries (collectively the Company or FARO) design, develop, manufacture, market and support software-based three-dimensional measurement
devices for manufacturing, industrial, building construction and forensic applications. The Companys principal products include the Faro Arm, Faro Scan Arm and Faro Gage, all articulated electromechanical measuring devices, and the Faro Laser
Tracker and the Faro Laser Scanner LS, both laser-based measuring devices. Markets for the Companys products include automobile, aerospace, heavy equipment, and law enforcement agencies. The Company sells the vast majority of its products
though a direct sales force located in many of the worlds largest industrialized countries.
Principles of
Consolidation
The consolidated financial statements of the Company include the accounts of FARO Technologies, Inc. and all its subsidiaries. All intercompany transactions and balances have been eliminated. The financial statements of
the Companys foreign subsidiaries are translated into U.S. dollars using exchange rates in effect at period-end for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting
from financial statement translations are reflected as a separate component of accumulated other comprehensive income (loss).
Revenue Recognition, Product Warranty and Extended Maintenance Contracts
Revenue related to the Companys measurement systems (integrated combinations of a measurement device, a computer and software loaded on the
computer and the measurement device) is generally recognized upon shipment as the Company considers the earnings process substantially complete as of the shipping date. The Company warrants its products against defects in design, materials and
workmanship for one year. A provision for estimated future costs relating to warranty expense is recorded when products are shipped. The Company separately sells one and three year extended warranties. Extended warranty revenues are recognized on a
straight-line basis over the term of the warranty. Costs relating to extended maintenance plans are recognized as incurred. Revenue from sales of software only is recognized when no further significant production, modification or customization of
the software is required and when the following criteria are met: persuasive evidence of a sales agreement exists, delivery has occurred, and the sales price is fixed or determinable and deemed collectible. Revenues resulting from sales of
comprehensive support, training and technology consulting services are recognized as such services are performed and are deferred when billed in advance of the performance of services. Revenue from the licensing agreements for the use of its
technology for medical applications is generally recognized as licensees use the technology. Amounts representing royalties for the current year and not received as of year-end are estimated as due based on historical data and recognized in the
current year.
Cash and Cash Equivalents
The Company considers cash on hand and amounts on deposit with financial
institutions which have maturities of three months or less when purchased to be cash and cash equivalents. The Company had deposits with foreign banks totaling $15,376 and $9,861 as of December 31, 2007 and 2006, respectively.
Accounts receivable and related allowance for doubtful accounts
Credit is extended to customers based on an evaluation of a
customers financial condition and, generally, collateral is not required. Accounts receivable are generally due within 30-90 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding
longer than the contractual payment terms are considered past due. The Company makes judgments as to the collectibility of accounts receivable based on historical trends and future expectations. Management estimates an allowance for doubtful
accounts which adjusts gross trade accounts receivable to its net realizable value. The allowance for doubtful accounts is based on an analysis of all
40
receivables for possible impairment issues and historical write-off percentages. The Company writes off accounts receivable when they become uncollectible,
and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. The Company does not generally charge interest on past due receivables.
Inventories
Inventories are stated at the lower of cost or net realizable value using the first-in first-out method. Shipping and
handling costs are classified as a component of cost of sales in the consolidated statements of income. Sales demonstration inventory is comprised of measuring devices utilized by sales representatives to present the Companys products to
customers. These products remain in sales demonstration inventory for approximately six to twelve months and are subsequently sold at prices that produce slightly reduced gross margins. Service inventory is comprised of inventory that is not
expected to be sold within twelve months, such as training and loaned equipment.
Property and Equipment
Property and
equipment purchases exceeding a thousand dollars are capitalized and recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the various classes of assets as follows:
|
|
|
Machinery and equipment
|
|
2 to 5 years
|
Furniture and fixtures
|
|
3 to 10 years
|
Leasehold improvements are amortized on the straight-line basis over the lesser of the life of the
asset or the term of the lease, not to exceed 7 years.
Depreciation expense was $3,319, $2,842 and $2,154 in 2007, 2006 and 2005,
respectively. Accelerated methods of depreciation are used for income tax purposes in contrast to book purposes, and as a result, appropriate provisions are made for the related deferred income taxes.
Goodwill and Intangibles
Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets,
indefinite-life identifiable intangible assets and goodwill are not amortized. The Company
periodically reviews its identifiable intangible assets and goodwill, considering factors such as projected cash flows and revenue and earnings multiples, to determine whether the value of the assets are impaired and the amortization periods are
appropriate. If an asset is impaired, the difference between the value of the asset reflected on the financial statements and its current fair value is recognized as an expense in the period in which the impairment occurs.
Other acquired intangibles principally include patents, existing product technology and customer relationships that arose in connection with the
acquisition of iQvolution AG (See note 2). Other acquired intangibles are recorded at fair value at the date of acquisition and are amortized over their estimated useful lives of 3 to 15 years.
Patents are recorded at cost. Amortization is computed using the straight-line method over the lives of the patents.
Research and Development
Research and development costs incurred in the discovery of new knowledge and the resulting translation of
this new knowledge into plans and designs for new products, prior to the attainment of the related products technological feasibility, are recorded as expenses in the period incurred.
The Reserve for Warranties
The Company establishes a liability for included twelve-month warranties by the creation of a warranty
reserve, which is an estimate of the repair expenses likely to be incurred for the remaining period of warranty measured in installation-months in each major product group. Warranty reserve is reflected in accrued liabilities in the accompanying
consolidated balance sheets. The warranty expense is estimated by determining the total repair expenses for each product group in the period and determining a rate of
41
repair expense per installation month. The rate is multiplied by the number of machine-months of warranty for each product group sold during the period to
determine the provision for warranty expenses for the period. The Company reevaluates its exposure to warranty costs at the end of each period using the estimated expense per installation month for each major product group, the number of machines
remaining under warranty and the remaining number of months each machine will be under warranty. While such expenses have historically been within its expectations, the Company cannot guarantee this will continue in the future.
Income Taxes
The Company reviews its deferred tax assets on a regular basis to evaluate their recoverability based upon expected
future reversals of deferred tax liabilities, projections of future taxable income, and tax planning strategies that the Company might employ to utilize such assets, including net operating loss carryforwards. Based on the positive and negative
evidence described in SFAS No. 109,
Accounting for Income Taxes
(SFAS 109), the Company establishes a valuation allowance against the net deferred assets of a taxing jurisdiction in which the Company operates
unless it is more likely than not that the Company will recover such assets through the above means. In the future, the Companys evaluation of the need for the valuation allowance will be significantly influenced by the
Companys ability to achieve profitability and the Companys ability to predict and achieve future projections of taxable income over a two year period.
The Company operates in a number of different countries around the world. In 2003, the Company began to manufacture its products in Switzerland, where it has received a permanent income tax rate commitment from the
Swiss government as an incentive to establish a manufacturing plant there. In 2005, the Company opened a regional headquarters and began to manufacture its products in Singapore, where it received in 2006 a favorable multi-year income tax rate
commitment from the Singapore Economic Development Board as an incentive to establish a manufacturing plant and regional headquarters there.
On July 13, 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48
Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109
(FIN 48) which clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attributes for financial
statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained
upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted the provisions of FIN 48 on January 1, 2007.
Significant judgment is required in determining the Companys worldwide provision for income taxes. In the ordinary course of global business, there
are many transactions for which the ultimate tax outcome is uncertain. The Company has appropriately reserved for its tax uncertainties based on the criteria established by FIN 48.
Fair Value of Financial Instruments
The Companys financial instruments include cash and cash equivalents, short-term
investments, accounts receivable and accounts payable and accruals. The carrying amounts of such financial instruments approximate their fair value due to the short-term nature of these instruments.
Earnings Per Share
Basic earnings per share (EPS) is computed by dividing earnings available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS includes the effect of all dilutive stock options and equity instruments. A reconciliation of the number of common shares used in calculation of basic and diluted EPS
is presented in Note 17. Earnings Per Share.
Concentration of Credit Risk
Financial instruments which potentially expose
the Company to concentrations of credit risk consist principally of short-term investments and operating demand deposit
42
accounts. The Companys policy is to place its operating demand deposit accounts with high credit quality financial institutions.
Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment (
SFAS
123R). SFAS 123R requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method, and eliminates the ability to account for these instruments under the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to Employers
, as allowed under the original provisions of SFAS 123,
Accounting for Stock-Based
Compensation
(SFAS 123). Under the intrinsic value based method, compensation cost is measured by the excess, if any, of the quoted market price of the stock at the grant date over the amount an employee must pay to acquire the
stock. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period, which is generally three years. The
Company adopted the provisions of SFAS 123R on January 1, 2006 using the modified prospective application transition method. The Company uses the Black-Scholes option pricing model to determine the fair value of stock option grants. In order to
determine the fair value of restricted stock awards the Company uses the closing market price of its common stock on the date of grant.
Had compensation expense for the Companys stock based compensation plans been determined consistent with SFAS 123, the Companys net income and earnings per share would have been as follows:
|
|
|
|
|
|
|
Year Ended
December 31, 2005
|
|
Net income, as reported
|
|
$
|
8,179
|
|
Deduct: Stock-based employee compensation income included in reported net income, net of related tax effects*
|
|
|
(94
|
)
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
|
|
|
(7,468
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
617
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basicas reported
|
|
$
|
0.58
|
|
|
|
|
|
|
Basicpro forma
|
|
$
|
0.04
|
|
|
|
|
|
|
Dilutedas reported
|
|
$
|
0.57
|
|
|
|
|
|
|
Dilutedpro forma
|
|
$
|
0.04
|
|
|
|
|
|
|
* The year ended 2005 assume a U.S. tax rate of 37.6%.
|
|
|
|
|
The Company used the Black-Scholes option-pricing model to determine the fair value of grants
made. The following assumptions were applied in determining the pro forma compensation cost:
|
|
|
|
|
|
Year Ended
December 31, 2005
|
|
Risk-free interest rate
|
|
3.30% to 4.47
|
%
|
Expected dividend yield
|
|
0
|
%
|
Expected option life
|
|
4 years
|
|
Stock price volatility
|
|
62.7
|
%
|
The Company incurred minimal expenses in 2006 as calculated under the Black-Scholes method of SFAS
123, related to its adoption of SFAS 123(R) for the expensing of stock options as it vested substantially all of its unvested options in the fourth quarter of 2005. The reduction in pre-tax charges estimated by the Company as a result of the
acceleration amounts to approximately $7.7 million over the course of the original vesting periods.
43
Options to purchase approximately 704,310 shares of the Companys stock or 52.5% of the Companys outstanding options were accelerated. The
weighted average exercise price of the options subject to acceleration was $21.30. The aggregate pretax expense for the shares subject to acceleration that would have been reflected in the Companys consolidated financial statements beginning
in 2006 is approximately $7.7 million, including $4.3 million in 2006, $2.7 million in 2007, and $0.7 million in 2008. The fair value for any future grants will be included in expense over the vesting periods. These expenses will be apportioned
according to the classification of the employees who have received stock options into cost of sales, selling, general and administrative or research and development costs.
Long-Lived Assets
Effective January 1, 2002, the Company adopted SFAS No. 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets
(SFAS 144). SFAS 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of
. and requires that one
accounting impairment model be used for long-lived assets to be held and used and to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal
transactions. The adoption of SFAS 144 had no financial impact on the results of operations or financial position of the Company. During the fourth quarter of 2007, 2006 and 2005, management reviewed the Companys long-lived assets and
concluded that there was no impairment of these assets for the years ended December 31, 2007, 2006 and 2005.
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.
Impact of Recently Issued Accounting Standards
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS
159). SFAS 159 permits entities to choose to measure certain financial instruments and other eligible items at fair value when the items are not otherwise currently required to be measured at fair value. Under SFAS 159, the decision to measure
items at fair value is made at specified election dates on an irrevocable instrument-by-instrument basis. Entities electing the fair value option would be required to recognize changes in fair value in earnings and to expense upfront costs and fees
associated with the item for which the fair value option is elected. Entities electing the fair value option are required to distinguish, on the face of the statement of financial position, the fair value of assets and liabilities for which the fair
value option has been elected and similar assets and liabilities measured using another measurement attribute. If elected, SFAS 159 will be effective as of the beginning of the first fiscal year that begins after November 15, 2007, with earlier
adoption permitted if all of the requirements of SFAS 159 are adopted. The impact of the adoption of SFAS 159 will be dependent on the extent to which the Company chooses to elect to measure eligible items at fair value.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies
to other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any
transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS 157 are
44
effective for fiscal years beginning after November 15, 2007 except for non-financial assets and liabilities recognized or disclosed at fair value on a
recurring basis, for which the effective date is fiscal years beginning after November 15, 2008. The Company has not determined the effect, if any, that the adoption of this statement will have on its financial condition or results of
operations.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007),
Business
Combinations
(SFAS 141 (revised)). SFAS 141 (revised) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their
fair values as of that date. The statement also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of
their fair values. The provisions of SFAS 141 (revised) are effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15,
2008. The Company has not determined the effect, if any, that the adoption of this statement will have on its financial condition or results of operations.
In December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in Consolidated Financial Statements an amendment to ARB No. 51
. This statement establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective prospectively, except for certain retrospective disclosure requirements, for fiscal years beginning after
December 15, 2008. The Company has not determined the effect, if any, that the adoption of this statement will have on its financial condition or results of operations.
Reclassification
Certain 2006 and 2005 amounts have been reclassified to conform with the 2007 presentation.
iQvolution
On
March 29, 2005, the Company acquired 100% of the outstanding stock of privately held iQvolution AG (iQvolution). iQvolution, a German company, designs, manufactures and supplies three-dimensional laser scanning products and
services. This purchase was a strategic acquisition to enable the Company to enter broader three-dimensional measurement markets. The purchase price for the transaction was approximately $13.6 million, including an initial cash payment of
approximately $3.8 million and 314,736 shares of common stock valued at approximately $7.2 million based on the average closing price for the three days immediately preceding the closing, 152,292 shares of which were payable immediately. The
remaining 162,444 shares of common stock, valued at approximately $3.7 million, were placed in escrow and may be paid over the following five years subject to achieving predetermined milestones with respect to purchased assets. Subsequent to the
purchase, approximately $1.8 million in cash was paid out for the repayment of loans and approximately $0.4 million was paid in fees associated with the purchase. Additionally, the purchase price was adjusted downward by $0.1 million, and these
funds were repaid to the Company in the third quarter relating to the settlement of a purchase price adjustment clause within the purchase agreement. In the fourth quarter of 2005, 12,183 shares were issued as a result of the successful
qualification of milestones, with a corresponding addition to goodwill of $252. In February of 2006, 43,871 shares were issued as a result of milestones met, for which $675 was accrued into goodwill and additional paid-in capital at
December 31, 2005. An additional 1,288 shares were returned to the Company in February 2006 for cancellation as a result of milestone disqualification. During 2006, 25,991 shares were released from escrow with a corresponding addition to
Goodwill of $408. During 2007, 24,773 shares were released from escrow with a corresponding addition to goodwill of $730. At December 31, 2007, there were 56,914 shares being held in escrow.
During the third quarter of 2005, approximately $3.8 million of the purchase price was allocated to intangible assets reflecting the Companys
preliminary estimate of the fair value of technology and software assets acquired. The hardware assets acquired were valued at approximately $2.3 million with an estimated life of 17 years, while the software assets were valued at approximately $1.6
million with an estimated life of 10 years. As of December 31, 2005, these estimates were in the process of being reviewed and validated by a third party. The Company completed in the first quarter of 2006 the third party valuation of the
assets acquired. The
45
Company made an adjustment to the purchase price to reflect a deferred tax liability of approximately $1.5 million. The following table represents the fair
value of the assets acquired and liabilities assumed and includes the final determination of the estimated fair values of deferred tax assets, non-compete, and intangible assets, which were preliminary as of December 31, 2005.
|
|
|
|
|
Current assets
|
|
$
|
907
|
|
Property and equipment
|
|
|
595
|
|
Deferred tax assets
|
|
|
141
|
|
Non-compete
|
|
|
348
|
|
Intangible assets
|
|
|
3,492
|
|
Goodwill
|
|
|
8,309
|
|
Current liabilities
|
|
|
(2,235
|
)
|
Long term debt
|
|
|
(167
|
)
|
Deferred tax liability
|
|
|
(1,506
|
)
|
|
|
|
|
|
|
|
$
|
9,884
|
|
|
|
|
|
|
The operating results of iQvolution have been included in the consolidated statements of income
since the date of acquisition. The following unaudited pro-forma results of operations for the year ended December 31, 2005 is presented for informational purposes only and do not purport to be indicative of the results of operations which
actually would have resulted had the acquisition occurred on the date indicated, or the results of operations which may result in the future.
|
|
|
|
|
|
Year ended
Dec 31, 2005
(unaudited)
|
Revenues
|
|
$
|
125,961
|
Net income
|
|
$
|
7,463
|
Income per share:
|
|
|
|
Basic
|
|
$
|
0.53
|
Diluted
|
|
$
|
0.52
|
3.
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
Selected cash
payments and non-cash activities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Cash paid for interest
|
|
$
|
9
|
|
$
|
16
|
|
$
|
91
|
Cash paid for income taxes
|
|
|
4,302
|
|
|
976
|
|
|
2,027
|
Cash received from income tax refund
|
|
|
|
|
|
|
|
|
1,161
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Value of shares issued for acquisition of iQvolution
|
|
|
730
|
|
|
408
|
|
|
3,756
|
4.
|
ALLOWANCE FOR DOUBTFUL ACCOUNTS
|
The allowance for
doubtful accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Balance, beginning of year
|
|
$
|
458
|
|
|
$
|
214
|
|
|
$
|
339
|
|
Provision
|
|
|
373
|
|
|
|
257
|
|
|
|
112
|
|
Amounts written off, net of recoveries
|
|
|
(92
|
)
|
|
|
(13
|
)
|
|
|
(237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
739
|
|
|
$
|
458
|
|
|
$
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
5.
|
SHORT-TERM INVESTMENTS
|
The underlying investments
of the Company are variable rate, long-term, tax-exempt municipal bonds. The interest rate on these variable rate municipal bonds resets every seven days to adjust to current market conditions. The Company can redeem these investments at cost at any
time with five business days notice. Therefore, the investments are held at cost and are classified as short-term investments on the accompanying consolidated balance sheets. The Company holds these investments as available for sale.
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Raw materials
|
|
$
|
12,614
|
|
|
$
|
9,754
|
|
Finished goods
|
|
|
4,903
|
|
|
|
2,160
|
|
Sales demonstration inventory
|
|
|
13,448
|
|
|
|
11,919
|
|
Reserve for excess and obsolete
|
|
|
(1,865
|
)
|
|
|
(404
|
)
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
29,100
|
|
|
|
23,429
|
|
Service inventory
|
|
|
10,865
|
|
|
|
7,278
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
39,965
|
|
|
$
|
30,707
|
|
|
|
|
|
|
|
|
|
|
The Companys goodwill at
December 31, 2007 and 2006 is related to its acquisition of three previous businesses. The Company tests for goodwill impairment in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets.
The Company
evaluates each reporting units fair value versus its carrying value in the fourth quarter of each year or more frequently if events or changes in circumstances indicate that the carrying value may exceed the fair value. The Company prepares a
discounted cash flow model to estimate the fair value of the reporting unit and compares this amount against the carrying value. Impairments to goodwill are charged against earnings in the period the impairment is identified. The Company has three
reporting units for which goodwill was tested on December 31, 2007, the Americas Region, the Europe/Asia Region, and the Asia Pacific Region, as shown in the table. As of December 31, 2007 and 2006, the Company did not have any goodwill
that was identified as impaired. The increase in goodwill of $1.9 million in 2007 and $2.7 million in 2006 relates primarily to the purchase of iQvolution.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
Beginning
Balance
|
|
Additions
|
|
Foreign
Currency
Translation
|
|
Ending
Balance
|
Americas Region
|
|
$
|
6,994
|
|
$
|
|
|
$
|
|
|
$
|
6,994
|
Europe/Africa region
|
|
|
10,272
|
|
|
730
|
|
|
1,121
|
|
|
12,123
|
Asia Pacific Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,266
|
|
$
|
730
|
|
$
|
1,121
|
|
$
|
19,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
Beginning
Balance
|
|
Additions
|
|
Foreign
Currency
Translation
|
|
Ending
Balance
|
Americas Region
|
|
$
|
6,994
|
|
$
|
|
|
$
|
|
|
$
|
6,994
|
Europe/Africa region
|
|
|
7,580
|
|
|
1,625
|
|
|
1,067
|
|
|
10,272
|
Asia Pacific Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,574
|
|
$
|
1,625
|
|
$
|
1,067
|
|
$
|
17,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
Intangible assets consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
|
Existing product technology
|
|
$
|
11,837
|
|
|
$
|
10,273
|
|
Patents
|
|
|
3,312
|
|
|
|
2,984
|
|
Other
|
|
|
5,871
|
|
|
|
6,791
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
21,020
|
|
|
|
20,048
|
|
Accumulated amortization
|
|
|
(15,050
|
)
|
|
|
(13,827
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assetsnet
|
|
$
|
5,970
|
|
|
$
|
6,221
|
|
|
|
|
|
|
|
|
|
|
In 2005, the Company wrote off patents with an original cost of $503 and a net book value of $334
which had been abandoned. Amortization expense was $715, $1,293 and $1,299 in 2007, 2006 and 2005, respectively. The estimated amortization expense for each of the five succeeding fiscal years is as follows:
|
|
|
|
Years ending December 31,
|
|
Amount
|
2008
|
|
$
|
551
|
2009
|
|
|
529
|
2010
|
|
|
529
|
2011
|
|
|
529
|
2012
|
|
|
527
|
Thereafter
|
|
|
3,055
|
|
|
|
|
|
|
$
|
5,720
|
|
|
|
|
Accrued liabilities consist of
the following:
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2007
|
|
2006
|
Accrued compensation and benefits
|
|
$
|
10,689
|
|
$
|
7,195
|
Accrued warranties
|
|
|
1,980
|
|
|
1,369
|
Professional and legal fees
|
|
|
1,140
|
|
|
972
|
Accrued penalties
|
|
|
2,650
|
|
|
|
Other accrued liabilities
|
|
|
1,530
|
|
|
843
|
|
|
|
|
|
|
|
|
|
$
|
17,989
|
|
$
|
10,379
|
|
|
|
|
|
|
|
Activity related to accrued warranties was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Beginning Balance
|
|
$
|
1,369
|
|
|
$
|
861
|
|
Provision for warranty expense
|
|
|
1,984
|
|
|
|
1,326
|
|
Warranty expired
|
|
|
(1,373
|
)
|
|
|
(818
|
)
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
1,980
|
|
|
$
|
1,369
|
|
|
|
|
|
|
|
|
|
|
48
On July 11, 2006, the Company
entered into a loan agreement providing for an available line of credit of $30.0 million. Loans under the loan agreement bear interest at the rate of LIBOR plus 1.75% and require the Company to maintain certain ratios with respect to a debt covenant
agreement, including current ratio, consolidated EBITDA, and senior funded debt to EBITDA. As of December 31, 2007, the Company is in compliance with all of the covenants under the loan agreement. The term of the loan agreement extends to
April 30, 2009. The Company has not drawn on this line of credit.
11.
|
CAPITAL LEASES AND LONG-TERM DEBT
|
Required future
payments of obligations under capital leases are as follows:
|
|
|
|
|
Year ending December 31,
|
|
Capital
Lease
Obligations
|
|
2008
|
|
$
|
18
|
|
2009
|
|
|
73
|
|
2010
|
|
|
25
|
|
2011
|
|
|
25
|
|
2012
|
|
|
99
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
|
240
|
|
LessCurrent maturities
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
$
|
222
|
|
|
|
|
|
|
Assets under capital leases were $409 and $559 at December 31, 2007 and 2006, respectively.
Accumulated depreciation of assets under capital leases was $150 and $366 at December 31, 2007 and 2006, respectively.
12.
|
RELATED PARTY TRANSACTIONS
|
Related party
lease
The Company leased its headquarters in Lake Mary, Florida from Xenon Research, Inc., a company owned by Simon Raab, the Company's Chairman, and Diana Raab, his spouse. On May 22, 2007, Xenon Research, Inc. sold the property and
assigned the lease agreement to Emma Investments, LLC, an unrelated third party. Rent expense under this lease was $166, $398 and $398 in 2007, 2006 and 2005, respectively.
13.
|
OTHER INCOME (EXPENSE), NET
|
Other (income)
expense, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Foreign exchange (gains) losses
|
|
$
|
(1,559
|
)
|
|
$
|
(827
|
)
|
|
$
|
794
|
|
Disposal of patents
|
|
|
|
|
|
|
|
|
|
|
334
|
|
Other
|
|
|
(339
|
)
|
|
|
37
|
|
|
|
(322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (income) expense, net
|
|
$
|
(1,898
|
)
|
|
$
|
(790
|
)
|
|
$
|
806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
The Company adopted the provisions of
FIN 48 on January 1, 2007. As a result of the implementation, the Company did not recognize an adjustment to its liability for unrecognized tax benefits. The Company has a $0.5 million liability recorded for unrecognized tax benefits as of
January 1, 2007 and December 31, 2007, which includes interest and penalties of $0.05 million.
A reconciliation of the beginning
and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
Balance at January 1, 2007
|
|
$
|
468
|
Additions based on tax positions related to the current year
|
|
|
19
|
Additions for tax positions of prior years
|
|
|
23
|
Reductions for tax positions of prior years
|
|
|
|
Settlements
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
510
|
|
|
|
|
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction,
and various state and foreign jurisdictions. The table below summarizes the open tax years and ongoing tax examinations in major jurisdictions as of December 31, 2007:
|
|
|
|
|
Jurisdiction
|
|
Open Years
|
|
Examination in Process
|
United StatesFederal Income Tax
|
|
2004 - 2007
|
|
2005
|
United Statesvarious states
|
|
2004 - 2007
|
|
2004-2007
|
Germany
|
|
1999 - 2007
|
|
1999 - 2003
|
Switzerland
|
|
2002 - 2007
|
|
N/A
|
Singapore
|
|
2001 - 2007
|
|
N/A
|
United Kingdom
|
|
2005 - 2007
|
|
N/A
|
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax
expense. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $0.5 million. The Company does not currently anticipate that the total amount of unrecognized tax benefits will result in
material changes to its financial position. The Company is subject to income taxes at the federal, state and foreign country level. The Companys tax returns are subject to examination at the U.S. federal level from 2004 forward and at the
state level subject to a three to five year statute of limitations.
The United States Internal Revenue Service (IRS) commenced
an examination of the Companys 2005 income tax return in late 2007. It is anticipated that this exam will be completed by the end of 2008. The Company also received notice from a state in early 2008 of the commencement of an examination of its
tax returns for the period 2004 through 2007. In addition, the Companys tax returns are currently under examination by the taxing authorities in Germany for the years 1999 through 2003. This audit began in 2005 and is anticipated to close by
the end of 2008. The Company does not currently anticipate that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months.
50
The effective income tax rate for 2007, 2006, and 2005, includes a reduction in the statutory corporate
tax rates for the Companys operations in Switzerland. The favorable tax rate ruling requires the Company to maintain a certain level of manufacturing operations in Switzerland.
The aggregate dollar effect of this favorable tax rate was
approximately $2.0 million, or $0.13 per share, in the year ended December 31, 2007, $1.7 million, or $0.12 per share, in the year ended December 31, 2006, and $3.0 million, or $0.21 per share, in the year ended December 31, 2005.
In 2005, the Company opened a regional headquarters and began to manufacture its products in Singapore. In the third quarter of 2006, the
Company received confirmation of a tax holiday for its operations from the Singapore Economic Development Board for a period of four years commencing January 1, 2006 and an additional six year extension at a favorable tax rate subject to
certain terms and conditions including employment, spending, and capital investment.
The aggregate dollar effect of this favorable tax rate was approximately $2.0 million, or $0.13 per share, during the year ended December 31, 2007, and
$0.9 million, or $.06 per share, during the year ended December 31, 2006.
At December 31, 2007 and 2006, the Companys
domestic entities had deferred income tax assets in the amount of $4,928 and $3,996, respectively. The Company has determined that these amounts are fully realizable and has not established any valuation allowance based on the assessment that they
are more-likely-than-not to be utilized.
At December 31, 2007 and 2006, the Companys foreign subsidiaries had deferred income
tax assets relating to net operating loss carry forwards, which do not expire, of $7,677 and $6,251, respectively. For financial reporting purposes, a valuation allowance of $6,304 and $4,417, respectively has been recognized to offset the deferred
tax assets relating to net operating losses. The Company continues to maintain a valuation allowance on net operating losses in jurisdictions for which it does not have a history of earnings over the last three years and where the Company believes
that the deferred tax assets are not more-likely-than-not to be realized based upon two-year projections of taxable income. The Company increased the overall valuation allowance in 2007 on its deferred tax assets in the amount of $1,887.
At December 31, 2006, the Company had $279 in tax credit carryforwards. These credits are related to the Companys research and development
activities and were fully utilized during 2007.
The Company has not recognized any U.S. tax expense on undistributed international
earnings since it intends to reinvest the earnings outside the U.S. for the foreseeable future. The Companys net undistributed international earnings were approximately $25.6 million and $10.8 million at December 31, 2007, and 2006,
respectively.
Significant judgment is required in determining the Companys worldwide provision for income taxes. In the ordinary
course of a global business, there are many transactions for which the ultimate tax outcome is uncertain. The Company reviews its tax contingencies on a regular basis and makes appropriate accruals as necessary.
Income before income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Domestic
|
|
$
|
7,081
|
|
$
|
932
|
|
$
|
5,304
|
Foreign
|
|
$
|
15,955
|
|
|
8,844
|
|
|
4,594
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
23,036
|
|
$
|
9,776
|
|
$
|
9,898
|
|
|
|
|
|
|
|
|
|
|
51
The components of the income tax expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,925
|
|
|
$
|
517
|
|
|
$
|
1,792
|
|
State
|
|
|
381
|
|
|
|
50
|
|
|
|
173
|
|
Foreign
|
|
|
1,235
|
|
|
|
1,028
|
|
|
|
1,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,541
|
|
|
|
1,595
|
|
|
|
3,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(721
|
)
|
|
|
(470
|
)
|
|
|
(395
|
)
|
State
|
|
|
(70
|
)
|
|
|
(46
|
)
|
|
|
(38
|
)
|
Foreign
|
|
|
193
|
|
|
|
501
|
|
|
|
(1,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(598
|
)
|
|
|
(15
|
)
|
|
|
(1,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,943
|
|
|
$
|
1,580
|
|
|
$
|
1,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense for the years ended December 31, 2007, 2006, and 2005 differ from the
amount computed by applying the federal statutory corporate rate to income before income taxes. The differences are reconciled as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Tax expense at statutory rate of 35%
|
|
$
|
8,063
|
|
|
$
|
3,422
|
|
|
$
|
3,464
|
|
State income taxes, net of federal benefit
|
|
|
234
|
|
|
|
36
|
|
|
|
84
|
|
Foreign tax rate difference
|
|
|
(6,042
|
)
|
|
|
(3,064
|
)
|
|
|
(2,771
|
)
|
Research and development credit
|
|
|
(77
|
)
|
|
|
(121
|
)
|
|
|
(274
|
)
|
Change in valuation allowance
|
|
|
1,887
|
|
|
|
1,411
|
|
|
|
1,247
|
|
Change in foreign tax rate
|
|
|
164
|
|
|
|
|
|
|
|
|
|
Penalties
|
|
|
988
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(274
|
)
|
|
|
(104
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
4,943
|
|
|
$
|
1,580
|
|
|
$
|
1,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
The components of the Companys net deferred income tax asset are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Net deferred income tax assetCurrent
|
|
|
|
|
|
|
|
|
Intercompany profit in inventory
|
|
$
|
1,676
|
|
|
$
|
1,592
|
|
Warranty costs
|
|
|
292
|
|
|
|
268
|
|
Bad debt reserve
|
|
|
130
|
|
|
|
87
|
|
Inventory reserve
|
|
|
209
|
|
|
|
(38
|
)
|
Unearned service revenue
|
|
|
1,318
|
|
|
|
1,436
|
|
Other
|
|
|
258
|
|
|
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income tax assetCurrent
|
|
|
3,883
|
|
|
|
3,243
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
|
(1,042
|
)
|
|
|
(1,398
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assetCurrent
|
|
$
|
2,841
|
|
|
$
|
1,845
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assetNon-current
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
1,256
|
|
|
$
|
1,228
|
|
Goodwill amortization
|
|
|
(842
|
)
|
|
|
(847
|
)
|
Product design costs
|
|
|
(56
|
)
|
|
|
(59
|
)
|
Employee stock options
|
|
|
8
|
|
|
|
100
|
|
Unearned service revenue
|
|
|
679
|
|
|
|
52
|
|
Tax credits
|
|
|
|
|
|
|
279
|
|
Loss carryforwards
|
|
|
7,677
|
|
|
|
6,251
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assetNon-current
|
|
|
8,722
|
|
|
|
7,004
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
|
(5,262
|
)
|
|
|
(3,019
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assetNon-current
|
|
$
|
3,460
|
|
|
$
|
3,985
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liabilityNon-current Intangible assets
|
|
$
|
(1,073
|
)
|
|
$
|
(1,200
|
)
|
|
|
|
|
|
|
|
|
|
15.
|
COMMITMENTS AND CONTINGENCIES
|
Leases
The Company leases buildings and equipment under operating leases. The following is a schedule of future minimum lease payments required under non-cancelable operating leases with initial terms in excess of one
year, in effect at December 31, 2007:
|
|
|
|
Years ending December 31,
|
|
Amount
|
2008
|
|
$
|
4,397
|
2009
|
|
|
3,583
|
2010
|
|
|
1,951
|
2011
|
|
|
1,316
|
2012
|
|
|
1,103
|
Thereafter
|
|
|
237
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
12,587
|
|
|
|
|
Rent expense for 2007, 2006 and 2005 was approximately $3,662, $3,291 and $2,306, respectively.
Purchase Commitments
The Company enters into purchase commitments for products and services in the
ordinary course of business. These purchases generally cover production requirements for 60 to 90 days. As of December 31, 2007, the Company does not have any long-term commitments for purchases.
53
Securities Litigation
On December 6, 2005, the first of four
essentially identical class action securities fraud lawsuits were filed against the Company and certain officers of the Company (the Securities Litigation) in the U.S. District Court for the Middle District of Florida. On April 19,
2006, the four lawsuits were consolidated, and Kornitzer Capital Management, Inc. (the Lead Plaintiff) was appointed as the lead plaintiff. On May 16, 2006, the Lead Plaintiff filed its Consolidated Amended Class Action Complaint
against the Company and the individual defendants (the Amended Complaint). On February 3, 2007, the Court dismissed the Amended Complaint, without prejudice. On February 22, 2007, the Lead Plaintiff filed its Consolidated
Second Amended Class Action Complaint (the Second Amended Complaint) against the Company and the individual defendants.
In the
Second Amended Complaint, as in the Amended Complaint, the Lead Plaintiff seeks to include in the class all persons who purchased or otherwise acquired the Companys common stock between April 15, 2004 and March 15, 2006 (the
Class), and seeks an unspecified amount of damages, premised on allegations that each defendant made misrepresentations and omissions of material fact during the class period in violation of the Securities Exchange Act of 1934. Among
other things, the Lead Plaintiff alleges that the Companys reported inventory, gross margins and profits were false and misleading during a portion of the class period because the Company consciously overstated the value of its inventory; that
the Company misstated during 2005 certain of the selling expenses it had accrued and had expected to incur; that certain Asian sales that the Company had reported during the class period had been the product of unlawful payments made in violation of
the Foreign Corrupt Practices Act, and that the Company failed to disclose that it was utilizing unlawful means to achieve such sales; and that certain of the Companys statements regarding the Companys systems of internal controls had
been false and misleading, in light of the above and other circumstances.
On February 26, 2008, the parties to the Securities
Litigation entered into a Memorandum of Understanding stating the principal terms of their agreement to settle the Securities Litigation. Pursuant to the Memorandum of Understanding, which is subject to certain conditions, the parties to the
Securities Litigation will prepare and file a detailed Stipulation and Agreement of Settlement with the court seeking the courts preliminary and final approval of the terms of the proposed settlement. Pursuant to those terms, the issuer of the
Companys Executive Liability and Entity Securities Liability insurance policy applicable to the Securities Litigation will pay $6.875 million into a settlement fund for the Securities Litigation. That sum is within the coverage limit of the
policy.
The proceeds of the settlement fund will be distributed to members of the Class and to the Lead Plaintiffs counsel. The
balance of the settlement fund will be used to pay various costs associated with providing notice of the terms of the proposed settlement to the Class and with administering the settlement. If the court approves the settlement, a judgment will be
entered dismissing the Securities Litigation, with prejudice, as against each defendant.
Derivative
Action
On January 10, 2008, a Verified Shareholder Derivative Complaint (the Derivative Complaint) was filed by an alleged shareholder of the Company in the U.S. District Court for the Middle District of
Florida against six of the Companys current and former directors, as defendants, and against the Company, as a nominal defendant. The Derivative Complaint alleges breach of fiduciary duty and other claims against the individual defendants
principally in connection with the alleged acts and omissions asserted in the Securities Litigation. The plaintiff alleges that the individual defendants caused the Companys stock price to be falsely inflated, and subjected the Company to
costs, fines and other damages, as well as a loss of good will. The plaintiff purports to seek an unspecified amount of damages, together with other relief, on behalf of the Company and against the individual defendants. Prior to filing the
Derivative Complaint, the plaintiff had requested that the Company assert certain of such claims against some of the individual defendants. In February 2008, the Company received another demand by another alleged shareholder that the Company assert
substantially the same claims as set forth in the Derivative Complaint against seven of the Companys current and former directors.
54
The Company has formed a committee of independent directors to review and investigate the
shareholders demand, and the allegations made in the Derivative Complaint and the other shareholder demand. The committee has not yet made a recommendation with respect to those matters. To the Companys knowledge, no defendant has been
served with the Derivative Complaint.
Voluntary Disclosure of Foreign Corrupt Practices Act Matter to the Securities and Exchange
Commission and Department of Justice.
As previously reported by the Company, the Company learned that its China subsidiary had made payments to certain customers in China that may have violated the Foreign Corrupt
Practices Act (FCPA) and other applicable laws. The Companys Audit Committee instituted an internal investigation into this matter in February 2006, and the Company voluntarily notified the Securities and Exchange Commission
(SEC) and the Department of Justice (DOJ) of this matter in March 2006. The Company's internal investigation into this matter has been completed. The Companys internal investigation identified certain improper payments
made in China and deficiencies in its controls with respect to its operations in China in possible violation of the FCPA.
Results of the
investigation revealed that referral fee payments in possible violation of the FCPA were $165,000 and $265,000 in 2004 and 2005, respectively, which were recorded in selling expenses in its statements of income. The related sales to customers to
which payment of these referral fees had been made totaled approximately $1.3 million and $3.24 million in 2004 and 2005, respectively. Additional improper referral fee payments of $122,000 were made in January and February 2006 related to sales
contracts in 2005. The Company had sales in China of $9.0 million in 2005 and $4.2 million in 2004, approximately 7% and 4% of total sales, respectively. The Company incurred expenses of $3.8 million in 2006 and $3.1 million in 2007, relating to the
FCPA matter, including $2.65 million for estimated fines and penalties to the DOJ and SEC.
The Company has provided to the SEC and the DOJ
information obtained during the course of this investigation and is cooperating with both agencies. The SEC and the DOJ have a broad range of civil and criminal remedies that they may seek to impose against corporations and individuals in
appropriate circumstances, including without limitation disgorgement, fines, penalties, and other injunctive and equitable relief, as well as additional changes to the Companys business practices and compliance programs.
The Company has engaged in settlement discussions with both the SEC and the DOJ concerning the FCPA matter. Although there is no assurance that such
discussions will result in a resolution of the FCPA matter, the Company has determined that the settlement discussions are likely to result in a resolution that will include a fine and disgorgement of associated profits. The Company recorded a
reserve of $2.65 million in anticipation of the amount that could be necessary to satisfy its financial obligations to the SEC and the DOJ in resolving this matter. Predicting at this time when the FCPA matter will be finally resolved with the SEC
and the DOJ is not possible. The monetary sanctions ultimately paid by the Company to the SEC and the DOJ in resolving this matter, whether imposed on the Company or agreed to by settlement, may exceed the amount that has been reserved by the
Company.
The Company anticipates that resolution of the matter will not result in formal criminal charges being filed against it by the
DOJ. The Company expects that as part of the final resolution of the FCPA matter with the SEC and the DOJ, in addition to monetary sanctions, the Company will have continuing obligations with the SEC and the DOJ with respect to monitoring,
compliance with the FCPA and other laws, full cooperation with the government, and the adoption of a compliance code containing specific provisions intended to prevent violations of the FCPA. The Company expects that the failure to comply with any
such continuing obligations could result in the SEC and the DOJ seeking to impose penalties against the Company in the future.
55
The Company terminated, in March 2006, certain personnel in the Asia-Pacific Region and re-assigned the
duties of other personnel in both the Asia-Pacific Region and the U.S. as a result of the internal investigation. Additionally, the Company instituted the following remedial measures:
|
|
|
Contracted with a third party forensics accounting team to conduct an in-depth audit of the operations in China and in other countries in the Asia-Pacific region
and to make recommendations for improvement to the internal control systems.
|
|
|
|
Reviewed third party distributor arrangements in an effort to assure that all contracts include adherence to the FCPA.
|
|
|
|
Performed due diligence on all third party distributors and implemented a process to assess potential new distributors.
|
|
|
|
Established an in-house internal audit function including hiring a Director of Internal Audit.
|
|
|
|
Consolidated the human resources, financial accounting and reporting functions for the Asia region into the Singapore operations.
|
|
|
|
Implemented an internal certification process to ascertain whether similar issues may exist elsewhere in the Company.
|
|
|
|
Implemented a quarterly internal certification process to confirm adherence to company policy and all applicable laws and regulations that will include all regional
leadership, country management and other sales management.
|
|
|
|
Implemented additional training on FCPA and other matters for employees and a confidential compliance reporting system.
|
Other than the litigation mentioned above, the Company is not involved in any other legal proceedings other than routine litigation arising in the normal
course of business. The Company does not believe the results of such litigation would have a material adverse effect on the Companys business, financial condition or results of operations.
16.
|
STOCK COMPENSATION PLANS
|
The Company has four
stock option plans that provide for the granting of stock options to key employees and non-employee members of the Board of Directors. The 1993 Stock Option Plan (1993 Plan) and the 1997 Employee Stock Option Plan (1997 Plan)
provide for granting incentive stock options and nonqualified stock options to officers and key employees of the Company. The 1997 Non-employee Director Plan provides for granting nonqualified stock options and formula options to non-employee
directors. The 2004 Equity Incentive Plan (2004 Plan) provides for granting options or stock appreciation rights to employees and non-employee directors.
The Company is authorized to grant options for up to 703,100 shares of common stock under the 1993 Plan, of which there are none outstanding. The Company is also authorized to grant options for up to 1,400,000 shares
of common stock under the 1997 Plan, of which 97,659 options are currently outstanding at exercise prices between $1.50 and $27.40. These options have a 10 year term and vest over a 3-year period. The Company is also authorized to grant up to
250,000 shares of common stock under the 1997 Non-employee Director Plan of which 63,000 options are currently outstanding at exercise prices between $1.61 and $21.56. Each non-employee director is granted 3,400 restricted shares of common stock
that vest ratably over three years, and then annually on the day following the Annual Meeting of Shareholders, each non-employee director is granted 2,200 restricted shares of common stock that vest ratably over three years. The Company is also
authorized to grant options for up to 1,750,000 shares of common stock under the 2004 Plan, of which 625,205 options are currently outstanding at exercise prices between $14.06 to $33.21, and 23,834 restricted stock units are outstanding at a stock
price of $19.49 to $24.36. These options and restricted stock units have a 10 year term and vest over a 3-year period.
56
The restricted stock unit grants have a performance-based annual vesting on the anniversary date over their respective terms. The Company records
compensation cost associated with its restricted stock unit grants on a straight-line basis over the vesting term.
In addition to the four
stock option plans, the Company has the 1997 Non-Employee Directors Fee Plan (1997 Fee Plan) under which the Company is authorized to issue up to 250,000 shares of Common Stock and permits non-employee directors to elect to receive directors
fees in the form of common stock rather than cash. Common stock issued in lieu of cash directors fees is issued at the end of the quarter in which the fees are earned, with the number of shares being based on the fair market value of the
common stock for the five trading days immediately preceding the last business day of the quarter. The 1997 Fee Plan also permits non-employee directors to irrevocably elect to defer receipt of all or any portion of the shares of common stock which
would otherwise be payable. As of December 31, 2005 there were 11,090 shares which were accrued but not yet issued in connection with directors elections. These shares were issued as of December 31, 2006. There were no shares issued
under this plan during 2007.
In the fourth quarter of 2005, the Company accelerated the vesting for substantially all of its outstanding
options, and recorded minimal expenses for its remaining unvested stock options during 2006. The pre-tax charge estimated by the Company to be avoided as a result of the acceleration amounts to approximately $7.7 million over the course of the
original vesting periods. The fair value for any future grants will be included in expense over the vesting periods.
Compensation (income)
costs charged to operations associated with the Companys stock option plans were $1,217, $210, and ($150) in 2007, 2006, and 2005, respectively. The changes in stock option associated compensation cost were due to the vesting of options
combined with market price fluctuations in the Companys common stock under variable accounting and the accrual of expenses relating to the issuance of restricted stock.
The Company used the Black-Scholes option-pricing model to determine the fair value of grants made using the following assumptions:
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Risk-free interest rate
|
|
3.26 - 4.5
|
%
|
|
5.00
|
%
|
Expected dividend yield
|
|
0
|
%
|
|
0
|
%
|
Expected option life
|
|
4 years
|
|
|
4 years
|
|
Expected volatility
|
|
58.0 - 62.8
|
%
|
|
63.2
|
%
|
Weighted-average expected volatility
|
|
62.6
|
%
|
|
63.2
|
%
|
Historical information was the primary basis for the selection of the expected dividend yield,
expected volatility and the expected lives of the options. The risk-free interest rate was based on yields of U.S. zero coupon issues and U.S. Treasury issues, with a term equal to the expected life of the option being valued.
A summary of stock option activity and weighted average exercise prices follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding at beginning of year
|
|
1,058,440
|
|
|
$
|
16.04
|
|
|
|
|
|
Granted
|
|
201,445
|
|
|
|
24.86
|
|
|
|
|
|
Forfeited
|
|
(33,010
|
)
|
|
|
18.19
|
|
|
|
|
|
Exercised
|
|
(441,011
|
)
|
|
|
12.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
785,864
|
|
|
$
|
20.34
|
|
7.07
|
|
$
|
9,905
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2007
|
|
592,903
|
|
|
$
|
18.92
|
|
6.38
|
|
$
|
8,313
|
|
|
|
|
|
|
|
|
|
|
|
|
57
The weighted-average grant-date fair value of the stock options granted during the years ended
December 31, 2007 and 2006 was $12.80 and $7.32, respectively. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2007, and 2006 was $8.0 million and $0.7 million, respectively. The total fair
value of stock options vested during the years ended December 31, 2007 and 2006 was $0.05 million and $0.03 million, respectively.
The following table summarizes the restricted stock activity and weighted average grant-date fair values for the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-Average
Grant Date
Fair
Value
|
Non-vested at beginning of year
|
|
40,524
|
|
|
$
|
19.95
|
Granted
|
|
27,496
|
|
|
|
26.93
|
Forfeited
|
|
(726
|
)
|
|
|
19.49
|
Vested
|
|
(19,353
|
)
|
|
|
20.60
|
|
|
|
|
|
|
|
Non-vested at December 31, 2007
|
|
47,941
|
|
|
$
|
24.03
|
|
|
|
|
|
|
|
As of December 31, 2007, there was $2.7 million in total unrecognized stock-based
compensation expense related to non-vested stock-based compensation arrangements. The expense is expected to be recognized over a weighted average period of 2.1 years.
A reconciliation of the number
of common shares used in the calculation of basic and diluted earnings per share (EPS) is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Shares
|
|
Per-Share
Amount
|
|
|
Shares
|
|
Per-Share
Amount
|
|
|
Shares
|
|
Per-Share
Amount
|
|
Basic EPS
|
|
15,443,259
|
|
$
|
1.17
|
|
|
14,397,050
|
|
$
|
0.57
|
|
|
14,169,140
|
|
$
|
0.58
|
|
Effect of dilutive securities
|
|
278,956
|
|
|
(0.02
|
)
|
|
163,281
|
|
|
(0.01
|
)
|
|
273,108
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
15,722,215
|
|
$
|
1.15
|
|
|
14,560,331
|
|
$
|
0.56
|
|
|
14,442,248
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of 10,000, 745,841 and 237,419 dilutive securities were not included for 2007, 2006 and
2005, as they were antidilutive.
18.
|
EMPLOYEE RETIREMENT BENEFIT PLAN
|
The Company
maintains a 401(k) defined contribution retirement plan for its U.S. employees, which provides benefits for all employees meeting certain age and service requirements. The Company may make a discretionary contribution each plan year, as determined
by its Board of Directors. Discretionary contributions or employer matches can be made to the participants account but cannot exceed 100% of compensation. Costs charged to operations in connection with the Plan during 2007, 2006, and 2005
aggregated $569, $247 and $201, respectively.
58
The Company has three reportable
segments based upon geographic regions: Americas, Europe/Africa and Asia Pacific. The company develops, manufactures, markets, supports and sells CAD-based quality assurance products integrated with CAD-based inspection and statistical process
control software in each of these regions. These activities represent approximately 99% of consolidated sales. The Company evaluates performance and allocates resources based upon profitable growth and assets deployed.
The following table presents information about the Companys reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Americas Region
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
79,984
|
|
|
$
|
62,967
|
|
|
$
|
55,884
|
|
Operating loss
|
|
|
(1,554
|
)
|
|
|
(6,191
|
)
|
|
|
(6,640
|
)
|
Long-lived assets
|
|
|
12,594
|
|
|
|
12,278
|
|
|
|
12,825
|
|
Capital expenditures
|
|
|
1,879
|
|
|
|
1,684
|
|
|
|
1,251
|
|
Total assets
|
|
$
|
144,865
|
|
|
$
|
69,607
|
|
|
$
|
68,304
|
|
|
|
|
|
Europe/Africa Region
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
78,299
|
|
|
$
|
60,869
|
|
|
$
|
44,940
|
|
Operating income
|
|
|
11,716
|
|
|
|
8,130
|
|
|
|
8,322
|
|
Long-lived assets
|
|
|
18,423
|
|
|
|
16,397
|
|
|
|
12,461
|
|
Capital expenditures
|
|
|
1,079
|
|
|
|
1,333
|
|
|
|
1,931
|
|
Total assets
|
|
$
|
75,279
|
|
|
$
|
55,041
|
|
|
$
|
39,112
|
|
|
|
|
|
Asia Pacific Region
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
33,334
|
|
|
$
|
28,569
|
|
|
$
|
24,766
|
|
Operating income
|
|
|
8,949
|
|
|
|
6,320
|
|
|
|
8,544
|
|
Long-lived assets
|
|
|
1,597
|
|
|
|
1,657
|
|
|
|
1,747
|
|
Capital expenditures
|
|
|
439
|
|
|
|
1,038
|
|
|
|
1,583
|
|
Total assets
|
|
$
|
23,395
|
|
|
$
|
19,628
|
|
|
$
|
15,232
|
|
|
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
191,617
|
|
|
$
|
152,405
|
|
|
$
|
125,590
|
|
Operating income
|
|
|
19,111
|
|
|
|
8,259
|
|
|
|
10,226
|
|
Long-lived assets
|
|
|
32,614
|
|
|
|
30,332
|
|
|
|
27,033
|
|
Capital expenditures
|
|
|
3,397
|
|
|
|
4,055
|
|
|
|
4,765
|
|
Total assets
|
|
$
|
243,539
|
|
|
$
|
144,276
|
|
|
$
|
122,648
|
|
The geographical sales information presented above represents sales to customers located in each
respective region whereas the long-lived assets information represents assets held in the respective regions. There were no customers that individually accounted for 10% or more of total revenue.
59
20.
|
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
March 31,
2007
|
|
June 30,
2007
|
|
September 29,
2007
|
|
December 31,
2007
|
Sales
|
|
$
|
40,289
|
|
$
|
47,579
|
|
$
|
44,521
|
|
$
|
59,228
|
Gross profit
|
|
|
23,836
|
|
|
29,224
|
|
|
26,456
|
|
|
35,527
|
Net income
|
|
|
3,198
|
|
|
5,786
|
|
|
705
|
|
|
8,404
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
$
|
0.39
|
|
$
|
0.04
|
|
$
|
0.51
|
Diluted
|
|
$
|
0.22
|
|
$
|
0.39
|
|
$
|
0.04
|
|
$
|
0.50
|
|
|
|
|
|
Quarter ended
|
|
April 1,
2006
|
|
July 1,
2006
|
|
September 30,
2006
|
|
December 31,
2006
|
Sales
|
|
$
|
32,056
|
|
$
|
38,042
|
|
$
|
38,365
|
|
$
|
43,942
|
Gross profit
|
|
|
18,835
|
|
|
22,562
|
|
|
22,244
|
|
|
25,817
|
Net income
|
|
|
496
|
|
|
853
|
|
|
3,189
|
|
|
3,658
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
$
|
0.06
|
|
$
|
0.22
|
|
$
|
0.25
|
Diluted
|
|
$
|
0.03
|
|
$
|
0.06
|
|
$
|
0.22
|
|
$
|
0.25
|
During the fourth quarter of 2006, the Company identified certain shipments to customers
containing the freight term FOB Destination as exceptions to the standard terms and conditions of sale that had been included in sales when shipped and not when delivered. Also during the fourth quarter, the Company noted that freight and duty was
not included in the cost of inventory at certain international locations but was improperly expensed as incurred.
The Company recorded an
adjustment to decrease sales and cost of sales of $1.4 million and $0.7 million, respectively, resulting in a decrease in pre-tax income of $0.7 million in the fourth quarter of fiscal 2006. The pre-tax effect of these items was not material to any
previous quarters.
60