<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 9, 2000
--------------
inTEST Corporation
- -----------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-22529 22-2370659
- ---------------------------------------------------------------
(State or Other (Commission File Number) (I.R.S. Employer
Jurisdiction of Identification No.)
Incorporation)
2 Pin Oak Lane, Cherry Hill, New Jersey 08003
- -----------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (856)424-6886
-------------
<PAGE>
The Current Report on Form 8-K filed by inTEST Corporation on March 20, 2000
is hereby amended to include the financial information required in Item 7.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired:
(i) The consolidated financial statements of Temptronic Corporation
at June 30, 1998 and 1999 and for each of the three years in the period ended
June 30, 1999 are:
PAGE
-----
Report of Independent Auditors F - 1
Consolidated Balance Sheets as of June 30, 1999 and 1998 F - 2
Consolidated Statements of Operations for the years ended
June 30, 1999, 1998 and 1997 F - 3
Consolidated Statements of Comprehensive Income (Loss) for the
years ended June 30, 1999, 1998 and 1997 F - 4
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 1999, 1998 and 1997 F - 5
Consolidated Statements of Cash Flows for the years ended
June 30, 1999, 1998 and 1997 F - 7
Notes to Consolidated Financial Statements F - 8
(ii) The consolidated financial statements of Temptronic Corporation
as of December 31, 1999 and for the six months ended December 31, 1999 and
1998 are:
Condensed Consolidated Balance Sheet as of December 31, 1999
(Unaudited) F - 22
Condensed Consolidated Statements of Operations for the six months
ended December 31, 1999 and 1998 (Unaudited) F - 23
Condensed Consolidated Statements of Comprehensive Income (Loss)
for the six months ended December 31, 1999 and 1998 (Unaudited) F - 24
Condensed Consolidated Statement of Stockholders' Equity for the
six months ended December 31, 1999 (Unaudited) F - 25
Condensed Consolidated Statements of Cash Flows for the six months
ended December 31, 1999 and 1998 (Unaudited) F - 26
Notes to Condensed Consolidated Financial Statements (Unaudited) F - 27
(b) Restated Financial Information:
inTEST CORPORATION
INDEX TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
Restated Consolidated Financial Statements:
Independent Auditors' Report F - 30
Restated Consolidated Balance Sheets as of December 31,
1999 and 1998 F - 31
Restated Consolidated Statements of Earnings for the years
ended December 31, 1999, 1998 and 1997 F - 32
Restated Consolidated Statements of Comprehensive Earnings
for the years ended December 31, 1999, 1998 and 1997 F - 33
Restated Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997 F - 34
Restated Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997 F - 35
Notes to Restated Consolidated Financial Statements F - 36
<PAGE>
Report of Independent Auditors
To the Stockholders and Board of Directors of
Temptronic Corporation
We have audited the accompanying consolidated balance sheets of Temptronic
Corporation and subsidiaries (the Company) as of June 30, 1999 and 1998, and
the related consolidated statements of operations, comprehensive income
(loss), stockholders' equity, and cash flows for each of the three years in
the period ended June 30, 1999. 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 in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance as to 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
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Temptronic
Corporation and subsidiaries at June 30, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended June 30, 1999, in conformity with accounting principles
generally accepted in the United States.
/S/ ERNST & YOUNG LLP
---------------------
Boston, Massachusetts
August 6, 1999
F - 1
<PAGE>
Temptronic Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
--------------------------
1999 1998
---------- -----------
<S> <C> <C>
Assets
Current assets:
Cash $ 2,543 $ 422,050
Accounts receivable, net of allowance for doubtful
accounts of $53,000 in 1999 and $52,000 in 1998 2,677,026 2,663,213
Due from related party 192,799 274,266
Inventories 3,507,380 3,994,955
Income tax receivable - 250,510
Prepaid expenses and other current assets 176,360 288,646
---------- -----------
Total current assets 6,556,108 7,893,640
Property and equipment, net 1,098,820 1,626,061
Cash surrender value of life insurance 1,031,320 960,688
Other assets 194,990 130,480
---------- -----------
Total assets $8,881,238 $10,610,869
========== ===========
Liabilities and stockholders' equity
Current liabilities:
Notes payable to bank $2,311,922 $ 3,508,426
Accounts payable and accrued expenses 2,170,567 2,551,693
Current portion of long-term debt 100,000 100,000
Current portion of obligation under capital lease 49,211 51,937
---------- -----------
Total current liabilities 4,631,700 6,212,056
Long-term debt, net of current portion 183,334 283,334
Obligation under capital lease, net of current portion - 53,424
Stockholders' equity:
Common stock, $0.01 par value; authorized 3,000,000 shares,
issued and outstanding 2,228,982 shares in 1999 and
2,224,482 shares in 1998 22,290 22,245
Additional paid-in capital 5,248,426 5,290,846
Retained earnings 2,513,377 2,716,615
Accumulated other comprehensive income (loss) (3,434) 18,341
---------- -----------
7,780,659 8,048,047
Less deferred compensation 191,347 331,038
Less note receivable from Equity Participation Plan 3,299,013 3,430,859
Less treasury stock, at cost; 60,062 shares in 1999 and in
1998 224,095 224,095
---------- -----------
Total stockholders' equity 4,066,204 4,062,055
---------- -----------
Total liabilities and stockholders' equity $8,881,238 $10,610,869
========== ===========
</TABLE>
See accompanying notes.
F - 2
<PAGE>
Temptronic Corporation and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended June 30
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues:
Product $13,520,257 $17,774,731 $16,380,889
Service 1,702,907 1,555,439 1,664,353
----------- ----------- -----------
15,223,164 19,330,170 18,045,242
Cost of revenues 8,695,988 10,831,097 9,629,769
----------- ----------- -----------
Gross profit 6,527,176 8,499,073 8,415,473
Operating expenses:
Selling 3,075,523 4,040,107 3,996,661
Research and engineering 1,816,047 2,900,411 2,798,897
General and administrative 1,600,222 1,906,410 1,835,187
----------- ----------- -----------
Total operating expenses 6,491,792 8,846,928 8,630,745
----------- ----------- -----------
Operating income (loss) 35,384 (347,855) (215,272)
Other (income) expense:
Interest expense 283,996 348,943 273,536
Other income (45,374) (19,149) (103,449)
----------- ----------- -----------
238,622 329,794 170,087
----------- ----------- -----------
Loss before income taxes (203,238) (677,649) (385,359)
Income tax benefit - (98,779) (470,000)
----------- ----------- -----------
Net income (loss) $ (203,238) $ (578,870) $ 84,641
=========== =========== ===========
Earnings (loss) per share:
Basic $ (0.12) $ (0.36) $ 0.06
======= ======= ======
Diluted $ (0.12) $ (0.36) $ 0.05
======= ======= ======
Weighted-average common shares outstanding:
Basic 1,628,049 1,586,266 1,501,730
========= ========= =========
Diluted 1,628,049 1,586,266 1,666,199
========= ========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
Temptronic Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
<TABLE>
<CAPTION>
Year ended June 30
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) $(203,238) $(578,870) $ 84,641
Unrealized gains (losses) on foreign currency
translation adjustments, net of tax (21,775) 1,094 4,568
--------- --------- ---------
Comprehensive income (loss) $(225,013) $(577,776) $ 89,209
========= ========= =========
</TABLE>
See accompanying notes.
F - 4
<PAGE>
Temptronic Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-in Retained
Class A Class B Class C Capital Earnings
------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $10,000 $ 1,563 $ 4,306 $ 845,881 $3,210,844
Net income 84,641
Other comprehensive income, net of tax
Conversion of Class B and Class C common stock
to Class A common stock 5,869 (1,563) (4,306)
Conversion of note payable to common stock 287,560
Stock options exercised 1,876 685,589
Sale of common stock, net of offering costs
of $230,739 4,500 2,914,761
Deferred compensation related to stock options
granted 447,705
Amortization of deferred compensation
Note receivable from Equity Participation Plan
Principal payments made by Equity Participation
Plan
------- ------- ------- ---------- ----------
Balance at June 30, 1997 22,245 - - 5,181,496 3,295,485
Net loss (578,870)
Other comprehensive income, net of tax
Deferred compensation related to stock options
granted 145,290
Amortization of deferred compensation
Elimination of deferred compensation related to
stock options forfeited (35,940)
Principal payments made by Equity Participation
Plan
Acquisition of treasury stock
------- ------- ------- ---------- ----------
Balance at June 30, 1998 22,245 - - 5,290,846 2,716,615
Net loss (203,238)
Other comprehensive expense, net of tax
Deferred compensation related to stock options
granted 46,935
Amortization of deferred compensation
Elimination of deferred compensation related to
stock options forfeited (89,355)
Stock options exercised 45
Principal payments made by Equity Participation
Plan
------- ------- ------- ---------- ----------
Balance at June 30, 1999 $22,290 $ - $ - $5,248,426 $2,513,377
======= ======= ======= ========== ==========
</TABLE>
See accompanying notes.
F - 5
<PAGE>
Temptronic Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity (Continued)
<TABLE>
<CAPTION>
Accum.
Other Total
Comp. Note Stock-
Income Deferred Receivable Treasury holders'
(Loss) Comp. From EPP Stock Equity
------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $12,679 $(905,035) $3,180,238
Net income 84,641
Other comprehensive income, net of tax 4,568 4,568
Conversion of Class B and Class C common stock
to Class A common stock -
Conversion of note payable to common stock 712,440 1,000,000
Stock options exercised 687,465
Sale of common stock, net of offering costs
of $230,739 2,919,261
Deferred compensation related to stock options
granted $(447,705) -
Amortization of deferred compensation 137,845 137,845
Note receivable from Equity Participation Plan $(3,667,998) (3,667,998)
Principal payments made by Equity Participation
Plan 117,693 117,693
------- --------- ----------- --------- ----------
Balance at June 30, 1997 17,247 (309,860) (3,550,305) (192,595) 4,463,713
Net loss (578,870)
Other comprehensive income, net of tax 1,094 1,094
Deferred compensation related to stock options
granted (145,290) -
Amortization of deferred compensation 88,172 88,172
Elimination of deferred compensation related to
stock options forfeited 35,940 -
Principal payments made by Equity Participation
Plan 119,446 119,446
Acquisition of treasury stock (31,500) (31,500)
------- --------- ----------- --------- ----------
Balance at June 30, 1998 18,341 (331,038) (3,430,859) (224,095) 4,062,055
Net loss (203,238)
Other comprehensive expense, net of tax (21,775) (21,775)
Deferred compensation related to stock options
granted (46,935) -
Amortization of deferred compensation 97,271 97,271
Elimination of deferred compensation related to
stock options forfeited 89,355 -
Stock options exercised 45
Principal payments made by Equity Participation
Plan 131,846 131,846
------- --------- ----------- --------- ----------
Balance at June 30, 1999 $(3,434)$(191,347) $(3,299,013) $(224,095) $4,066,204
======= ========= =========== ========= ==========
</TABLE>
See accompanying notes.
F - 6
<PAGE>
Temptronic Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30
---------------------------------------
1999 1998 1997
----------- --------- -----------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (203,238) $(578,870) $ 84,641
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Compensation relating to stock options 97,271 94,633 74,733
Provision for (recovery of) allowance for doubtful
accounts 1,000 (8,000) 15,000
Depreciation and amortization 576,673 585,708 556,622
Gain on sale of equipment (220,247) (165,824) (111,613)
Deferred taxes - 330,000 (330,000)
Changes in operating assets and liabilities:
Accounts receivable and due from related party 51,543 361,112 (641,099)
Inventories 484,498 (883,864) (89,303)
Prepaid expenses and other 47,776 (126,714) 16,981
Accounts payable and accrued expenses (377,655) (53,645) (165,749)
Income taxes receivable / payable 250,510 (49,586) (287,001)
---------- --------- ----------
Net cash provided (used) by operating activities 708,131 (495,050) (876,788)
Investing activities
Acquisition of equipment (165,984) (902,287) (790,359)
Net proceeds from sale of equipment 336,579 391,540 204,047
(Increase) decrease in cash surrender value of life
insurance (70,632) 417,856 (106,828)
---------- --------- ----------
Net cash provided (used) by investing activities 99,963 (92,891) (693,140)
Financing activities
Net (repayments of) proceeds from notes payable to bank (1,196,504) 786,668 1,931,891
Proceeds from long-term debt - - 500,000
Repayments of long-term debt (100,000) (100,839) (29,227)
Acquisition of treasury stock - (31,500) -
Net proceeds from sale of Class A common stock - - 2,919,261
Net proceeds from stock options exercised 45 - 527,465
Note receivable (issuance to) repayments from EPP 131,846 119,446 (3,550,305)
Payments related to loans on life insurance policies - - (500,040)
Payments under capital leases (56,150) (57,050) (63,432)
---------- --------- ----------
Net cash (used) provided by financing activities (1,220,763) 716,725 1,735,613
Effect of exchange rate changes on cash (6,838) (12,677) (7,941)
---------- --------- ----------
Net (decrease) increase in cash (419,507) 116,107 157,744
Cash balance at beginning of year 422,050 305,943 148,199
---------- --------- ----------
Cash balance at end of year $ 2,543 $ 422,050 $ 305,943
========== ========= ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 284,021 $ 350,228 $ 264,151
========== ========= ==========
Supplemental disclosure of financing activities:
Conversion of note payable from related party into
200,000 shares of Class A common stock $ - $ - $1,000,000
========== ========= ==========
</TABLE>
See accompanying notes.
F - 7
<PAGE>
Temptronic Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999
1. ORGANIZATION
Temptronic Corporation (the Company) is engaged in the manufacture, sale
and service of temperature control instruments used in the electronics
industry. The Company's principal customers are large electronics
manufacturers throughout the world.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the
application of certain significant accounting policies described below
and elsewhere in the accompanying consolidated financial statements
and notes.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
and disclosure of contingent assets and liabilities, at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts
of Temptronic Corporation, its wholly-owned subsidiary and its 95%-owned
foreign subsidiary. All material intercompany accounts and transactions
have been eliminated. Minority interest in the Company's 95%-owned
foreign subsidiary is not material.
Concentration of Credit Risk
----------------------------
The Company provides credit in the normal course of business and,
accordingly, performs ongoing credit evaluations of its customers and
maintains allowances for potential credit losses. These allowances, when
realized, have been within the range of management's expectations. Credit
risk on trade receivables is minimized as a result of the large and
diverse nature of the Company's worldwide customer base. Credit losses
have consistently been within management's estimates.
Inventories
-----------
Inventories are stated at the lower of cost or market as determined under
the first-in, first-out (FIFO) method.
F - 8
<PAGE>
Temptronic Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
----------------------
Property and equipment are stated at cost. Provisions for depreciation
and amortization on property and equipment are calculated by the
straight-line method over the expected useful lives of the assets as
follows:
<TABLE>
<CAPTION>
Estimated Useful Life
--------------------------------------
<S> <C>
Machinery and equipment 5 years
Equipment under capital lease Lesser of useful life or life of lease
Demonstration equipment 3-4 years
Furniture and fixtures 3-7 years
Leasehold improvements Lesser of useful life or life of lease
</TABLE>
Foreign Currency Translation
----------------------------
The Company translates the financial statement items of its foreign
subsidiary in accordance with Statement of Financial Accounting Standards
No. 52, Foreign Currency Translation (SFAS No. 52). In translating the
accounts of the foreign subsidiary into U.S. dollars, assets and
liabilities are translated at the rate of exchange in effect at year end,
while stockholders' equity is translated at historical rates. Income
statement items are translated at average currency exchange rates for the
year. The resulting translation adjustment is included as part of
accumulated other comprehensive income (loss) in the accompanying
consolidated balance sheets. Transaction gains and losses included in
income were not significant.
Stock-Based Compensation
------------------------
The Company grants stock options for a fixed number of shares to
employees and nonemployee directors with an exercise price equal to or
less than the fair value of the shares at the date of grant. The Company
has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations in accounting for its stock-based compensation plans.
Under APB No. 25, when the exercise price of options granted to employees
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Stock options granted to nonemployees
are accounted for under SFAS No. 123, Stock-Based Compensation, based
upon the fair value of the options on the date of grant.
F - 9
<PAGE>
Temptronic Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
------------
The Company provides for income taxes under SFAS No. 109, Accounting for
Income Taxes. Under SFAS No. 109, the liability method is used in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities, and are measured using
the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Financial Instruments
---------------------
The estimated fair values of the Company's consolidated financial
instruments, which include cash, accounts receivable, accounts payable
and accrued expenses, approximate their carrying value due to the short
maturity of these instruments as of June 30, 1999 and 1998. The estimated
fair values of the Company's note payable, capital lease obligations and
long-term debt approximates their carrying value based upon the current
rates offered to the Company for similar type arrangements.
Revenue Recognition
-------------------
Revenues from equipment sales are recognized at the time the equipment is
shipped. Service revenues are recognized as the services are performed.
Research and Engineering
------------------------
Expenditures for research and engineering are expensed as incurred.
Included in these expenses are research and development expenditures of
approximately $1,800,000 in 1999, $2,900,000 in 1998 and $2,800,000 in
1997.
Warranty Costs
--------------
The Company warrants its products against defects in design, materials
and workmanship for a maximum period of one year. A provision for
estimated future costs related to warranty expense is recognized at the
time of sale and periodically adjusted to reflect actual experience.
Comprehensive Income (Loss)
---------------------------
The Company adopted SFAS No. 130, Reporting Comprehensive Income, in
1999. SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income (loss) and its components; however, the adoption of
SFAS No. 130 had no impact on the Company's results of operations or
financial position. SFAS No. 130 requires the Company's foreign currency
translation adjustments, which prior to adoption were reported as a
separate component in stockholders' equity, to be included in accumulated
other comprehensive income (loss). Prior year financial statements have
been presented to conform with the requirements of SFAS No. 130.
F - 10
<PAGE>
Temptronic Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Segment and Related Information
-------------------------------
Effective July 1, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS No. 131
superseded SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas and major customers. The
adoption of SFAS No.131 did not affect operations or financial position,
but did affect the disclosure of segment and related information.
New Accounting Pronouncement
----------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
is required to be adopted in fiscal years beginning after June 15, 2000.
Management does not anticipate that the adoption of SFAS No. 133 will
have a significant effect on earnings or the financial position of the
Company.
3. EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share. SFAS No. 128 replaces the calculation of primary and
fully diluted earnings per share with basic and diluted earning per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is similar to fully diluted
earnings per share.
The following table sets forth the computation of earnings (loss) per
share for the years ended June 30:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Basic Earnings (Loss) Per Share
-------------------------------
Numerator:
Net income (loss) $ (203,238) $ (578,870) $ 84,641
Denominator:
Weighted-average common shares outstanding 1,628,049 1,586,266 1,501,730
---------- ---------- ----------
Basic earnings (loss) per share $ (0.12) $ (0.36) $ 0.06
========== ========== ==========
</TABLE>
F - 11
<PAGE>
Temptronic Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999
3. EARNINGS (LOSS) PER SHARE (Continued)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Diluted Earnings (Loss) Per Share
---------------------------------
Numerator:
Net income (loss) $ (203,238) $ (578,870) $ 84,641
Denominator:
Weighted-average common shares outstanding 1,628,049 1,586,266 1,501,730
Dilutive effect of stock options - - 164,469
---------- ---------- ----------
Shares used in computing diluted earnings
(loss) per share 1,628,049 1,586,266 1,666,199
---------- ---------- ----------
Diluted earnings (loss) per share $ (0.12) $ (0.36) $ 0.05
========== ========== ==========
</TABLE>
Weighted-average common shares exclude unallocated shares of common stock
held by the Company's Equity Participation Plan (see Note 12). Options to
purchase shares of common stock during the years ended June 30, 1999 and
1998, and convertible notes payable for the year ended June 30, 1997,
were excluded from the calculation of diluted net loss per share as the
effect of their inclusion would have been antidilutive.
4. INVENTORIES
Inventories consist of the following at June 30:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Purchased parts and components $2,943,024 $3,563,624
Work-in-process 279,456 352,850
Finished goods 284,900 78,481
---------- ----------
$3,507,380 $3,994,955
========== ==========
</TABLE>
F - 12
<PAGE>
Temptronic Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Machinery and equipment $3,657,361 $3,627,207
Leasehold improvements 996,324 987,441
Demonstration equipment 513,275 643,368
Furniture and fixtures 275,756 275,756
---------- ----------
5,442,716 5,533,772
Less accumulated depreciation and amortization 4,343,896 3,907,711
---------- ----------
$1,098,820 $1,626,061
========== ==========
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at June
30:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Trade accounts payable $1,509,636 $1,673,188
Accrued compensation and related items 256,091 297,922
Accrued warranty costs 100,561 100,000
Other 304,279 480,583
---------- ----------
$2,170,567 $2,551,693
========== ==========
</TABLE>
F - 13
<PAGE>
Temptronic Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999
7. DEBT
Notes Payable to Bank
---------------------
The Company had a maximum borrowing capacity of $5.0 million under two
lines of credit with a bank, subject to a borrowing limitation based on a
maximum percentage of qualified inventories and accounts receivable. At
June 30, 1999, the Company had approximately $3,567,000 of borrowing
capacity available under those lines, of which the Company had $2,311,922
of borrowings outstanding at the bank's prime interest rate (7.75% at
June 30, 1999). The weighted-average interest rate on outstanding
borrowings under the lines of credit in 1999 and 1998 was 7.99% and
8.75%, respectively. In July 1999, the lines of credit were renewed and
reduced by the Company to a maximum borrowing capacity of $4.0 million.
The lines of credit are collateralized by a security interest in the
Company's inventories, accounts receivable and equipment. The line of
credit agreements contain certain covenants with which the Company must
comply, including the maintenance of certain financial ratios. The
Company was in compliance with these covenants at June 30, 1999.
Term Note
---------
In May 1997, the Company entered into a note agreement for $500,000 with
a bank in which interest is based on the bank's prime rate plus 0.75%
(8.50% at June 30, 1999) and is collateralized by a security interest in
the Company's inventories, accounts receivable and equipment. The note
matures on May 2, 2002. The note agreement contains certain covenants
with which the Company must comply, including the maintenance of certain
financial ratios.
Principal maturities of the term note subsequent to 1999 amount to
$100,000 in 2000, $100,000 in 2001 and $83,334 in 2002.
8. NOTE RECEIVABLE FROM EQUITY PARTICIPATION PLAN
On November 6, 1996, the Company entered into an agreement with the
Temptronic Corporation Equity Participation Plan (EPP) to provide the EPP
with cash of $3,667,998 in exchange for a note receivable. The note bears
interest at 10% and matures on September 30, 2011. The note allowed the
EPP to purchase approximately 611,333 shares of Class A common stock at
$6.00 from certain shareholders of the Company for a total cost of
$3,667,998. In connection with this agreement, the Company has agreed to
make an annual contribution to the EPP in the amount of principal plus
interest due on the EPP's note (see Note 12).
9. STOCK REDEMPTION AGREEMENT
In 1982, the Company entered into a stock redemption agreement with
certain individuals who were then officer-stockholders. Under the terms
of the agreement, in the event of death of such stockholders, the Company
is required to purchase their shares at a price equal to the appraised
value as of the date of death.
F-14
<PAGE>
Temptronic Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999
9. STOCK REDEMPTION AGREEMENT (Continued)
As of June 30, 1999 and 1998, the appraised value of the stockholders'
shares (based on the most recent stock appraisals obtained by the
Company) amounted to $1,677,893 and $2,349,050, respectively. The
commitment is funded by life insurance policies with a face value of
$2,796,232 as of June 30, 1999 and 1998.
10. LEASE OBLIGATIONS
The Company leases its present facility under an operating lease expiring
in August 2001. Rent expense charged to income for the years ended June
30, 1999, 1998 and 1997 was approximately $519,000, $581,000 and
$518,000, respectively, net of sublease income of approximately $29,000
in 1998 and $130,000 in 1997. There was no sublease income during 1999.
The Company also leases certain machinery and equipment, which is
capitalized in accordance with generally accepted accounting principles.
Minimum lease payments through the expiration of the leases are
approximately as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- -----------
<S> <C> <C>
Year ending June 30, 2000 $52,195 $ 519,103
2001 - 519,679
2002 - 96,709
------- ----------
Total minimum lease payments 52,195 $1,135,491
==========
Less amounts representing interest 2,984
-------
Present value of remaining lease payments 49,211
Less amounts due within one year 49,211
-------
Amounts due after one year $ -
=======
</TABLE>
Assets under capital lease are capitalized using interest rates
appropriate at the inception of each lease. The net book value of assets
under capital lease amounted to $47,208 and $93,591 at June 30, 1999 and
1998, respectively. Assets under capital lease are net of accumulated
amortization of $170,671 and $149,498 at June 30, 1999 and 1998,
respectively. Amortization of assets under capital lease obligations is
included in depreciation expense.
F - 15
<PAGE>
Temptronic Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999
11. STOCK OPTIONS
Pro forma net income (loss) information is required by SFAS No. 123 and
has been determined as if the Company had accounted for its employee
stock options under the fair value method of SFAS No. 123. The fair
values for these options were estimated at the date of grant using a
binomial pricing model. The following weighted-average assumptions were
made for grants in 1999, 1998 and 1997, respectively:
1999 1998 1997
---- ---- ----
Dividend yield - - -
Expected life of options (in years) 5.0 5.0 6.2
Expected volatility - - -
Risk-free interest rate 5.8% 6.5% 6.1%
For purposes of pro forma net income (loss), the estimated fair value of
the options is amortized to expense over the options' vesting period. For
the years ended June 30, 1999, 1998 and 1997, pro forma net income (loss)
would have been as follows:
<TABLE>
<CAPTION>
1999
-------------------------
As Reported Pro Forma
----------- ---------
<S> <C> <C>
Net income (loss) .............. $(203,238) $(233,442)
========= =========
Basic earnings (loss) per share ....... $ (0.12) $ (0.14)
========= =========
Diluted earnings (loss) per share ..... $ (0.12) $ (0.14)
========= =========
<CAPTION>
1998 1997
----------------------- -----------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net income (loss) .............. $(578,870) $(586,913) $ 84,641 $ 75,926
========= ========= ======== ========
Basic earnings (loss) per share ....... $ (0.36) $ (0.37) $ 0.06 $ 0.05
========= ========= ======== ========
Diluted earnings (loss) per share ..... $ (0.36) $ (0.37) $ 0.05 $ 0.05
========= ========= ======== ========
</TABLE>
F - 16
<PAGE>
Temptronic Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999
11. STOCK OPTIONS (Continued)
The effects on pro forma net income (loss) and earnings (loss) per share
of expensing the estimated fair market value of stock options are not
necessarily representative of the effects on reported net income for
future years due to such factors as the vesting period of the stock
options and the potential for issuance of additional stock options in
future years. Because SFAS No. 123 is applicable only to options granted
subsequent to June 1995, its pro forma effect is not fully reflected
until fiscal year 1999.
Both qualified and nonqualified options are granted by the Board of
Directors. Option activity is summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 282,005 $ 2.25 285,371 $ 2.41 430,531 $ 2.82
Granted 55,000 3.75 17,000 0.01 42,500 0.01
Expired or canceled (85,026) 3.09 (20,366) 2.59 - -
Exercised (4,500) 0.01 - - (187,660) 2.82
------- ------- --------
Outstanding at end of year 247,479 2.34 282,005 2.25 285,371 2.41
======= ====== ======= ====== ======== ======
Exercisable at end of year 155,810 $ 2.27 207,688 $ 2.89 198,841 $ 3.17
======= ====== ======= ====== ======== ======
Weighted-average fair value of
options granted during the year $ 0.94 $ 6.24 $ 6.24
======= ======= ========
</TABLE>
The following table presents weighted-average price and life information
about significant option groups outstanding at June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ -----------------------------
Weighted-
Average Weighted Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.01 92,591 6.2 $ 0.01 60,282 $ 0.01
$ 3.50-$4.10 154,888 6.5 3.73 95,528 3.70
------- -------
247,479 155,810
======= =======
</TABLE>
F - 17
<PAGE>
Temptronic Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999
12. RETIREMENT AND PROFIT-SHARING PLANS
During fiscal year 1982, the Company established an Equity Participation
Plan (EPP) covering substantially all employees. The Company contributed
approximately $25,000 to the EPP in 1996. On November 6, 1996, the
Company provided the EPP $3,667,998 in exchange for a note receivable to
purchase 611,333 shares of stock from certain shareholders of the
Company. The amount of the note to the EPP was recorded as a reduction of
shareholders' equity. As the Company makes tax-deductible contributions
to the EPP, shares acquired with the note proceeds are allocated to EPP
participants and the amount in shareholders' equity is reduced. Shares
acquired are allocated to participant accounts on September 30 of each
plan year. In 1999, 1998 and 1997, the Company contributed approximately
$470,000, $470,000 and $352,000, respectively, to the EPP and recorded
interest income of $338,000, $350,000 and $235,000, respectively, on the
EPP note. At June 30, 1999, the EPP owned 719,089 shares of stock with a
fair market value of $2,696,584 of which 189,267 shares were allocated to
participants. The remaining shares will be allocated to participants in
the future under EPP guidelines.
The Company adopted a 401(k) plan (the Plan) in 1988. The Plan covers all
U.S. employees, subject to minimum age and experience requirements. The
Company made matching contributions to the 401(k) plan during 1999, 1998
and 1997 of approximately $76,000, $97,000 and $92,000, respectively.
13. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Year ended June 30
-----------------------------------
1999 1998 1997
------ ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ - $ (428,779) $ (140,000)
State - - -
----- ---------- ----------
- (428,779) (140,000)
Deferred:
Federal - 330,000 (330,000)
State - - -
----- ---------- ----------
- 330,000 (330,000)
----- ---------- ----------
Income tax $ - $ (98,779) $ (470,000)
===== ========== ==========
</TABLE>
F - 18
<PAGE>
Temptronic Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999
13. INCOME TAXES (Continued)
No income tax payments were made in fiscal 1999, 1998 and 1997.
The provision for income taxes differs from the amount computed by
applying the statutory federal and state income tax rates to loss before
income taxes as follows:
<TABLE>
<CAPTION>
Year ended June 30
------------------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Tax provision at statutory rates (40.3)% (40.3)% (40.3)%
Permanent differences (34.4) (0.5) (3.1)
Other 74.7 26.2 (78.6)
----- ----- -----
0.0% (14.6)% (122.0)%
===== ===== =====
</TABLE>
Other includes the effect of increases in the Company's valuation
allowance of $349,000 in 1999, $369,000 in 1998 and $110,000 in 1997.
Deferred income taxes consist of the following at June 30:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss and tax credit
carryforwards $ 769,000 $ 375,000 $ 310,000
Book over tax depreciation 146,000 177,000 204,000
Inventory valuation 152,000 167,000 148,000
Vacation accrual 92,000 49,000 97,000
Other 149,000 170,000 119,000
---------- --------- ---------
1,308,000 938,000 878,000
Less valuation allowance for
deferred tax assets (1,256,000) (907,000) (538,000)
---------- --------- ---------
52,000 31,000 340,000
Deferred tax liabilities:
Capitalized patent costs (52,000) (31,000) (10,000)
---------- --------- ---------
Net deferred tax assets $ - $ - $ 330,000
========== ========= =========
</TABLE>
F - 19
<PAGE>
Temptronic Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999
13. INCOME TAXES (Continued)
A valuation allowance has been established to reflect the uncertainty of
sufficient future taxable income to utilize available deferred tax assets
beyond the amount the Company has available for net operating loss
carrybacks.
The Company has research and development credit carryforwards
of approximately $406,000, investment tax credit carryforwards of
approximately $14,000, alternative minimum tax credit carryforwards of
approximately $62,000, and federal and state net operating loss
carryforwards of approximately $429,000 and $1,843,000, respectively,
available at June 30, 1999 to offset future taxable income. The above
credits and net operating loss carryforwards expire through fiscal year
2014 and 2019, respectively. Net operating loss carryforwards and tax
credits are subject to review and possible adjustment by the Internal
Revenue Service. In addition, the occurrence of certain events, including
significant changes in ownership interests, may limit the amount of
the net operating loss carryforwards available to be used in any given
year.
14. RELATED PARTY
The Company has transactions in the normal course of business with Hakuto
Corporation. As of June 30, 1999, Hakuto Corporation owned 700,000 shares
of the Company's outstanding stock. During fiscal 1999, 1998 and 1997,
the Company sold product at market prices totaling approximately $1.3
million, $3.3 million and $2.3 million, respectively, to Hakuto
Corporation. At June 30, 1999 and 1998, accounts receivable from Hakuto
Corporation amounted to approximately $193,000 and $274,000,
respectively.
15. SEGMENT REPORTING AND RELATED INFORMATION
Segment and Geographical Areas
------------------------------
To date, the Company has viewed its operations and manages its business
as principally one operating segment. As a result, the financial
statement disclosed herein represents all of the material financial
information related to the Company's principal operating segment. The
following table provides information relating to the Company's
consolidated net revenues from unaffiliated customers in particular
geographical areas for the years ended June 30:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
United States $ 8,274,089 $ 9,536,084 $ 8,820,118
Asia-Pacific Rim 3,506,058 7,399,645 6,220,499
Europe 2,763,206 1,900,344 2,520,220
Other 679,811 494,097 484,405
----------- ----------- -----------
$15,223,164 $19,330,170 $18,045,242
=========== =========== ===========
</TABLE>
F - 20
<PAGE>
Temptronic Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999
15. SEGMENT REPORTING AND RELATED INFORMATION (Continued)
For the years ended June 30, 1999, 1998 and 1997, the Company's
facilities located in the United States manufactured, serviced and
distributed all products to customers worldwide. During the years ended
June 30, 1999, 1998 and 1997, the Company had sales to Japan of
approximately $1,978,000, $4,679,000 and $3,198,000, respectively.
Transfers between geographical areas were not material for the years
ended June 30, 1999, 1998 and 1997.
Significant Customers
---------------------
Net revenues from two customers as a percent of total net revenues of the
Company amounted to 20.9% and 8.7% in 1999, 17.4% and 17.1% in 1998, and
14.1% and 13.0% in 1997. Accounts receivable from these two customers as
a percent of total accounts receivable of the Company amounted to 21.4%
and 6.7% as of June 30, 1999, and 17.7% and 9.3% as of June 30, 1998.
F - 21
<PAGE>
TEMPTRONIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 29,369
Accounts receivable, net of allowance for doubtful
accounts of $54,129 3,347,194
Due from related party 200,175
Inventories 4,146,036
Deferred tax asset 912,000
Prepaid expenses and other current assets 362,140
-----------
Total current assets 8,996,914
Property and equipment, net 912,258
Cash surrender value of life insurance 1,066,558
Deferred tax asset 350,000
Other assets 69,905
-----------
Total assets $11,395,635
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 1,241,255
Accounts payable and accrued expenses 3,780,097
Income taxes payable 46,317
Current portion of long-term debt 100,000
Current portion of obligation under capital lease 22,659
-----------
Total current liabilities 5,190,328
Long-term debt, net of current portion 133,333
Stockholders' equity:
Common stock, $0.01 par value; authorized 3,000,000
shares, issued and outstanding 2,264,182 shares 22,642
Additional paid-in capital 5,222,946
Retained earnings 4,412,994
Accumulated other comprehensive income 4,149
-----------
9,662,731
Less deferred compensation 138,619
Less note receivable from Equity Participation Plan 3,228,043
Less treasury stock, at cost; 60,062 shares 224,095
-----------
Total stockholders' equity 6,071,974
-----------
Total liabilities and stockholders' equity $11,395,635
===========
</TABLE>
See accompanying notes.
F - 22
<PAGE>
TEMPTRONIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended December 31,
-----------------------------
1999 1998
----------- ----------
<S> <C> <C>
Net revenues:
Product $10,125,183 $6,653,253
Service 1,220,998 788,027
----------- ----------
11,346,181 7,441,280
Cost of revenues 6,470,704 4,410,885
----------- ----------
Gross profit 4,875,477 3,030,395
Operating expenses:
Selling 1,723,191 1,634,349
Research and engineering 847,551 828,746
General and administrative 1,520,482 643,521
----------- ----------
Total operating expenses 4,091,224 3,106,616
----------- ----------
Operating income (loss) 784,253 (76,221)
Other (income) expense:
Interest expense 94,172 165,784
Other income (6,536) (14,745)
----------- ----------
87,636 151,039
----------- ----------
Income (loss) before income taxes 696,617 (227,260)
Income tax expense (benefit) (1,203,000) -
----------- ----------
Net income (loss) $ 1,899,617 $ (227,260)
=========== ==========
Earnings (loss) per share:
Basic $1.14 $(0.14)
Diluted $1.08 $(0.14)
Weighted-average common shares outstanding:
Basic 1,663,661 1,618,853
Diluted 1,762,099 1,618,853
</TABLE>
See accompanying notes.
F - 23
<PAGE>
TEMPTRONIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended December 31,
-----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net income (loss) $1,899,617 $ (227,260)
Unrealized gains on foreign currency translation
adjustments 7,583 2,704
---------- ----------
Comprehensive income (loss) $1,907,200 $ (224,556)
========== ==========
</TABLE>
See accompanying notes.
F - 24
<PAGE>
TEMPTRONIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive Note Total
Common Paid-in Retained Income Deferred Receivable Treasury Stockholders'
Stock Capital Earnings (Loss) Compensation from EPP Stock Equity
------ ---------- -------- ------------- ------------ ---------- --------- -------------
<C> <S> <S> <S> <S> <S> <S> <S> <S>
Balance at June 30, 1999 $22,290 $5,248,426 $2,513,377 $(3,434) $(191,347) $(3,299,013) $(224,095) $4,066,204
Net income 1,899,617 1,899,617
Other comprehensive income 7,583 7,583
Amortization of deferred
compensation 27,248 27,248
Elimination of deferred
compensation related to
stock options forfeited (25,480) 25,480 -
Stock options exercised 352 352
Principal payments made by
Equity Participation Plan 70,970 70,970
------- ---------- ---------- ------- --------- ----------- --------- ----------
Balance at December 31, 1999 $22,642 $5,222,946 $4,412,994 $ 4,149 $(138,619) $(3,228,043) $(224,095) $6,071,974
======= ========== ========== ======= ========= =========== ========= ==========
</TABLE>
See accompanying notes.
F - 25
<PAGE>
TEMPTRONIC CORPORATION AND SUBSIDIAIRES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-------------------------
1999 1998
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $1,899,617 $(227,260)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization 267,793 296,259
Allowance for bad debts 1,129 1,458
Deferred taxes (1,262,000) (318,958)
Deferred compensation relating to stock options 27,248 48,635
Changes in assets and liabilities:
Accounts receivable and due from related party (678,673) 431,602
Inventories (638,656) 620,660
Proceeds from sale of demonstration equipment,
net of gain 57,255 92,444
Prepaid expenses and other current assets (185,780) 8,125
Accounts payable and accrued expenses 1,611,304 (910,970)
Taxes payable 44,543 319,324
---------- ---------
Net cash provided by operations 1,143,780 361,319
INVESTING ACTIVITIES
Purchase of property and equipment (138,486) (64,094)
Other long-term assets 89,847 (57,204)
---------- ---------
Net cash used in investing activities (48,639) (121,298)
FINANCING ACTIVITIES
Proceeds from stock options exercised 352 45
Net repayments of line of credit (1,070,667) (482,838)
Repayment of long-term debt (76,553) (76,890)
Note receivable repayments from EPP 70,970 64,295
---------- ---------
Net cash used in financing activities (1,075,898) (495,388)
Effects of exchange rates on cash 7,583 2,704
Net cash provided by (used in) all activities 26,826 (252,663)
Cash at beginning of period 2,543 422,050
---------- ---------
Cash at end of period $ 29,369 $ 169,387
========== =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 101,840 $ 171,749
========== =========
Cash paid for taxes $ 14,000 $ -
========== =========
</TABLE>
See accompanying notes.
F - 26
<PAGE>
TEMPTRONIC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Unaudited)
1. ORGANIZATION
Temptronic Corporation (the "Company") is engaged in the manufacture,
sale and service of temperature control instruments used in the
electronics industry. The Company's principal customers are large
electronics manufacturers throughout the world. To date, the Company has
viewed and manages its business as one operating segment.
2. INTERIM FINANCIAL REPORTING
The accompanying interim unaudited condensed consolidated financial
statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission and in accordance
with generally accepted accounting principles. Accordingly, certain
information and footnote disclosures normally included in annual
consolidated financial statements have been omitted or condensed.
Therefore, these condensed consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial
statements and accompanying footnotes for the year ended June 30, 1999.
In the opinion of management, all necessary adjustments (consisting of
only normal recurring accruals) have been made to provide a fair
presentation.
3. RECLASSIFICATIONS
Certain amounts have been reclassified to conform to the presentation
used by inTEST Corporation (see note 7).
4. INVENTORIES
Inventories consist of the following at December 31, 1999:
<TABLE>
<S> <C>
Raw materials $4,077,312
Work-in-process 164,881
Finished goods 326,708
Reserve for obsolete inventory (422,865)
----------
$4,146,036
==========
</TABLE>
F - 27
<PAGE>
TEMPTRONIC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Unaudited)
5. INCOME TAXES
The Company has various tax credits and state net operating loss
carryforwards available at December 31, 1999 to offset future taxable
income. Net operating loss carryforwards and tax credits are subject to
review and possible adjustment by the Internal Revenue Service. In
addition, the occurrence of certain events, including significant changes
in ownership interests, may limit the amount of the net operating loss
carryforwards available to be used in any given year.
During the six months ended December 31, 1999, the Company reduced the
valuation allowance by $1,256,000. This reduction was based upon
management's assessment of the Company's projected future taxable income.
However, the amount of the deferred tax asset considered realizable
could be reduced in the near term if estimates of future taxable income
are reduced.
6. EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share (SFAS No. 128).
SFAS No. 128 replaces the calculation of primary and fully diluted
earnings per share with basic and diluted earning per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings
per share is similar to fully diluted earnings per share. The following
table sets forth the computation of earnings (loss) per share for the six
months ended December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Basic Earnings (Loss) Per Share
-------------------------------
Numerator:
Net income (loss) $1,899,617 $ (227,260)
Denominator:
Weighted-average common shares outstanding 1,663,661 1,618,853
---------- ----------
Basic earnings (loss) per share $1.14 $(0.14)
========== ==========
Diluted Earnings (Loss) Per Share
---------------------------------
Numerator:
Net income (loss) $1,899,617 $ (227,260)
Denominator:
Weighted-average common shares outstanding 1,663,661 1,618,853
Dilutive effect of stock options 98,438 -
---------- ----------
Shares used in computing diluted earnings
(loss) per share 1,762,099 1,618,853
---------- ----------
Diluted earnings (loss) per share $1.08 $(0.14)
========== ==========
</TABLE>
F - 28
<PAGE>
TEMPTRONIC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Unaudited)
6. EARNINGS (LOSS) PER SHARE (Continued)
Weighted-average common shares exclude unallocated shares of common stock
held by the Company's Equity Participation Plan. Options to purchase
shares of common stock during the six months ended December 31, 1998 were
excluded from the calculation of diluted net loss per share as the effect
of their inclusion would have been antidilutive.
7. SUBSEQUENT EVENT
The Company completed its merger with inTEST Corporation (inTEST) of
Cherry Hill, New Jersey on March 9, 2000. As a result of this
transaction, the Company was merged into a wholly-owned subsidiary of
inTEST. Each share of the Company's common stock outstanding as of the
date of the merger was exchanged for 0.925 shares of inTEST's common
stock. In addition, the Company's outstanding stock options were
converted at the same exchange ratio into options to acquire inTEST's
common stock.
F - 29
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
inTEST Corporation
We have audited the accompanying restated consolidated balance sheets of
inTEST Corporation and subsidiaries as of December 31, 1999 and 1998, and the
related restated consolidated statements of earnings, comprehensive earnings,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999. These restated consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these restated consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the restated consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
inTEST Corporation and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
---------------------------
Philadelphia, Pennsylvania
May 5, 2000
F - 30
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
RESTATED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
ASSETS ------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $12,047 $ 8,637
Trade accounts and notes receivable, net of allowance for
doubtful accounts of $239 and $221, respectively 10,020 5,779
Inventories 7,972 5,895
Deferred tax asset 1,271 245
Refundable domestic and foreign income taxes - 970
Other current assets 898 419
------- -------
Total current assets 32,208 21,945
Machinery and equipment:
Machinery and equipment 7,279 6,117
Leasehold improvements 1,420 1,210
------- -------
8,699 7,327
Less: accumulated depreciation (6,002) (5,191)
------- -------
Net machinery and equipment 2,697 2,136
------- -------
Cash surrender value of life insurance 1,067 990
Deferred tax asset 350 -
Other assets 288 246
Goodwill, net of accumulated amortization of $780 and $301,
respectively 6,405 6,884
------- -------
Total assets $43,015 $32,201
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 1,241 $ 3,026
Accounts payable 5,195 2,185
Accrued expenses 3,011 1,447
Current portion of long-term debt 123 150
Domestic and foreign income taxes payable 1,854 69
------- -------
Total current liabilities 11,424 6,877
Long-term debt, net of current potion 133 262
------- -------
Total liabilities 11,557 7,139
------- -------
Commitments
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized,
no shares issued or outstanding - -
Common stock, $0.01 par value; 20,000,000 shares authorized;
8,630,980 and 8,597,842 shares issued, respectively 86 86
Additional paid-in capital 21,872 21,913
Retained earnings 13,077 6,944
Accumulated other comprehensive earnings (expense) 14 (35)
Deferred compensation (139) (255)
Note receivable from Equity Participation Plan (3,228) (3,367)
Treasury stock, at cost; 55,557 shares in 1999 and 1998 (224) (224)
------- -------
Total stockholders' equity 31,458 25,062
------- -------
Total liabilities and stockholders' equity $43,015 $32,201
======= =======
</TABLE>
See accompanying Notes to Restated Consolidated Financial Statements.
F - 31
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
RESTATED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net revenues $53,585 $36,058 $40,014
Cost of revenues 26,875 18,870 19,100
------- ------- -------
Gross margin 26,710 17,188 20,914
------- ------- -------
Operating expenses:
Selling expense 8,418 6,976 6,951
Engineering and product development expense 4,864 4,062 4,543
General and administrative expense 6,101 4,074 3,580
------- ------- -------
Total operating expenses 19,383 15,112 15,074
------- ------- -------
Operating income 7,327 2,076 5,840
------- ------- -------
Other income (expense):
Interest income 348 455 349
Interest expense (229) (356) (310)
Other 112 64 (15)
------- ------- -------
Total other income 231 163 24
------- ------- -------
Earnings before income taxes and minority interest 7,558 2,239 5,864
Income tax expense 1,425 1,181 1,616
------- ------- -------
Earnings before minority interest 6,133 1,058 4,248
Minority interest - - (25)
------- ------- -------
Net earnings $ 6,133 $ 1,058 $ 4,223
======= ======= =======
Pro forma information (unaudited) (Note 3)
Pro forma earnings before income taxes $ 5,824
Pro forma income taxes 2,224
Pro forma net earnings 3,600
Earnings per share (1997 information is pro forma):
Basic $0.76 $0.14 $0.55
Diluted 0.74 0.14 0.54
Weighted average shares outstanding (1997 information
is pro forma):
Basic 8,084,398 7,668,911 6,531,478
Diluted 8,265,537 7,822,088 6,696,892
</TABLE>
See accompanying Notes to Restated Consolidated Financial Statements.
F - 32
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
RESTATED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands, except share data)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net earnings $6,133 $1,058 $4,223
Foreign currency translation adjustments 49 77 (161)
------ ------ ------
Comprehensive earnings $6,182 $1,135 $4,062
====== ====== ======
</TABLE>
See accompanying Notes to Restated Consolidated Financial Statements.
F - 33
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
RESTATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Accum.
Other
Common Stock Addt'l Comp. Equity Total
Paid-In Retained Earnings Deferred Part. Treasury Stockholders'
Shares Amount Capital Earnings (Expense) Comp. Plan Note Stock Equity
------ ------ ------- -------- --------- -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997, as reported 3,790,591 $38 $ 689 $ 3,833 $ 27 $ - $ - $ - $ 4,587
Pooling of interests with Temptronic 2,057,646 21 4,918 3,352 22 (86) (3,668) (193) 4,366
--------- --- ------- ------- ----- ----- ------- ----- -------
Balance, January 1, 1997, as restated 5,848,237 59 5,607 7,185 49 (86) (3,668) (193) 8,953
Net earnings - - - 4,223 - - - - 4,223
Other comprehensive expense - - - - (161) - - - (161)
Deferred compensation - - 411 - - (411) - - -
Amortization of deferred compensation - - - - - 86 - - 86
Principal payments by Equity
Participation Plan - - - - - - 176 - 176
Dividends - - - (5,522) - - - - (5,522)
Acquisition of minority interest 300,443 3 1,655 - - - - - 1,658
Issuance of common stock in connection
with Offering, net 1,820,000 18 11,637 - - - - - 11,655
Acquisition of treasury stock - - - - - - - (31) (31)
--------- --- ------- ------- ----- ----- ------- ----- -------
Balance, December 31, 1997 7,968,680 80 19,310 5,886 (112) (411) (3,492) (224) 21,037
Net earnings - - - 1,058 - - - - 1,058
Other comprehensive earnings - - - - 77 - - - 77
Deferred compensation - - 47 - - (47) - - -
Amortization of deferred compensation - - - - - 93 - - 93
Elimination of deferred compensation
related to stock options forfeited - - (110) - - 110 - - -
Principal payments by Equity
Participation Plan - - - - - - 125 - 125
Stock options exercised 4,162 - - - - - - - -
Issuance of common stock in
connection with Acquisition 625,000 6 2,666 - - - - - 2,672
--------- --- ------- ------- ----- ----- ------- ----- -------
Balance, December 31, 1998 8,597,842 86 21,913 6,944 (35) (255) (3,367) (224) 25,062
Net earnings - - - 6,133 - - - - 6,133
Other comprehensive earnings - - - - 49 - - - 49
Amortization of deferred compensation - - - - - 75 - - 75
Elimination of deferred compensation
related to stock options forfeited - - (41) - - 41 - - -
Principal payments by Equity
Participation Plan - - - - - - 139 - 139
Stock options exercised 33,138 - - - - - - - -
--------- --- ------- ------- ----- ----- ------- ----- -------
Balance, December 31, 1999 8,630,980 $86 $21,872 $13,077 $ 14 $(139) $(3,228) $(224) $31,458
========= === ======= ======= ===== ===== ======= ===== =======
</TABLE>
See accompanying Notes to Restated Consolidated Financial Statements.
F - 34
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
RESTATED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 6,133 $ 1,058 $ 4,223
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 950 822 755
Amortization of goodwill 479 252 49
Deferred taxes (1,377) 259 (503)
Foreign exchange (gain) loss (36) 52 84
Allowance for doubtful accounts, net 17 (32) 54
Deferred compensation relating to stock options 75 93 86
Minority interest - - 25
Changes in assets and liabilities, net of effects
of Acquisition:
Trade accounts and notes receivable (4,206) 2,863 (3,358)
Inventories (2,080) 605 (993)
Proceeds from sale of demonstration equipment, net of gain 85 251 105
Refundable domestic and state income taxes 977 (750) (51)
Other current assets (481) 111 (28)
Accounts payable 3,045 (1,284) 1,387
Domestic and foreign income taxes payable 1,785 (1,262) 904
Dividends payable - - (973)
Accrued expenses 1,561 (724) 347
------- ------- -------
Net cash provided by operating activities 6,927 2,314 2,113
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business, net of cash acquired - (4,629) -
Purchase of machinery and equipment (1,596) (972) (609)
Other long-term assets (100) 229 45
------- ------- -------
Net cash used in investing activities (1,696) (5,372) (564)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid - - (5,541)
Net borrowings (repayments) on revolving debt (1,784) (221) 528
Proceeds from long-term debt - 21 500
Repayment of long-term debt (156) (391) (351)
Note receivable repayments from Equity Participation Plan 139 125 176
Purchase of treasury stock - - (31)
Net proceeds from Offering - - 11,655
------- ------- -------
Net cash provided by (used in) financing activities (1,801) (466) 6,936
------- ------- -------
Effects of exchange rate on cash (20) 23 (93)
------- ------- -------
Net cash provided by (used in) all activities 3,410 (3,501) 8,392
Cash and cash equivalents at beginning of period 8,637 12,138 3,746
------- ------- -------
Cash and cash equivalents at end of period $12,047 $ 8,637 $12,138
======= ======= =======
SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Details of Acquisition:
Fair value of assets acquired, net of cash acquired $ 2,003
Liabilities assumed (549)
Common stock issued (2,672)
Goodwill resulting from Acquisition 5,847
-------
Net cash paid for Acquisition $ 4,629
=======
Cash payments made for:
Domestic and foreign income taxes $ 59 $ 2,975 $ 1,233
Interest 240 358 302
</TABLE>
See accompanying Notes to Restated Consolidated Financial Statements.
F - 35
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(1) NATURE OF OPERATIONS
inTEST Corporation (the "Company") is a leading independent designer,
manufacturer and marketer of interface solutions and temperature
management products that semiconductor manufacturers use in conjunction
with automatic test equipment, or ATE, in the testing of integrated
circuits, or ICs. The Company's interface solutions products include
manipulator, docking hardware, and tester interface products.
The consolidated entity is comprised of inTEST Corporation (parent) and
its eight 100% owned subsidiaries: inTEST Limited (Thame, UK), inTEST
Kabushiki Kaisha (Kichijoji, Japan), inTEST PTE, Limited (Singapore),
inTEST Sunnyvale Corp. (Delaware) (see Note 4), Temptronic Corporation
(Delaware) (see Note 17), inTEST Investments, Inc. (a Delaware holding
company), inTEST IP Corp. (a Delaware holding company) and inTEST
Licensing Corp. (a Delaware holding company).
The Company manufactures its products in the U.S., the U.K. and
Singapore (where the Company commenced manufacturing during September
1999). Marketing and support activities are conducted worldwide from
the Company's facilities in the U.S., U.K., Japan and Singapore.
On June 20, 1997, the Company completed an initial public offering of
2.275 million common shares including 1.82 million shares of common
stock sold by the Company (the "Offering"). Simultaneous with
the closing of the Offering, the Company acquired the 21% minority
interests in each of its three foreign subsidiaries in exchange for an
aggregate of 300,443 shares of the Company's common stock (the
"Exchange").
On March 9, 2000, the Company completed a merger with Temptronic
Corporation ("Temptronic") whereby Temptronic was merged into a
wholly-owned subsidiary of the Company. The Company exchanged 2,046,793
shares of its common stock for all of the Temptronic common stock. Each
share of Temptronic common stock was exchanged for 0.925 shares of the
Company's common stock. In addition, outstanding Temptronic stock
options were converted at the same exchange ratio into options to
acquire 175,686 shares of the Company's common stock. The merger was
accounted for under the pooling-of-interests method of accounting and,
accordingly, the accompanying restated consolidated financial
statements have been retroactively restated to give effect to the
merger. Temptronic also has a 95% owned foreign subsidiary which is
consolidated with Temptronic for reporting purposes. Minority interest
in this foreign subsidiary is not material.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The accompanying restated consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated upon consolidation. The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F - 36
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassification
----------------
Certain previously reported amounts for Temptronic have been restated to
conform to the accounting methods applied by the Company.
Cash and Cash Equivalents
-------------------------
Short-term investments, which have maturities of three months or less
when purchased, are considered to be cash equivalents and are carried at
cost, which approximates market value.
Trade Notes Receivable
----------------------
Trade notes receivable are due from trade customers in Japan, and have
original maturities of less than four months. The notes are non-
interest bearing. Trade notes receivable were $141 and $524 at December
31, 1999 and 1998, respectively.
Note Receivable from Equity Participation Plan
----------------------------------------------
As a result of the merger with Temptronic, the Company has a note
receivable from the Temptronic Corporation Equity Participation Plan
("EPP"). The note was issued on November 6, 1996 with a principal
amount of $3.7 million. The note bears interest at 10% and matures on
September 30, 2011. The proceeds of the note were used by the EPP
to purchase approximately 565,483 shares of common stock at $6.49
per share from certain former shareholders of Temptronic. The
Company has agreed to make an annual contribution to the EPP in the
amount of the principal plus interest due on the EPP's note (see
Note 12).
Credit Risks
------------
The Company grants credit to customers and generally requires no
collateral. To minimize its risk, the Company performs ongoing credit
evaluations of its customers' financial condition. Bad debt expense
(recoveries) were $16, $(4) and $68 for the years ended December 31,
1999, 1998 and 1997, respectively.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is
determined under the first-in first-out (FIFO) method.
Machinery and Equipment
-----------------------
Machinery and equipment are stated at cost. Depreciation is based upon
the estimated useful life of the assets using the straight-line method.
The estimated useful lives range from three to seven years. Leasehold
improvements are recorded at cost and amortized over the shorter of the
lease term or the estimated useful life of the asset. Total
depreciation expense was $950, $822 and $755 for the years ended
December 31, 1999, 1998 and 1997, respectively. Expenditures for
maintenance and repairs are charged to operations as incurred.
F - 37
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangibles
-----------
Goodwill resulting from the acquisition of the minority interest in the
Company's three foreign subsidiaries and the acquisition of TestDesign
(as described in Note 4) is amortized on a straight-line basis over 15
years. Total amortization expense for the years ended December 31,
1999, 1998 and 1997 was $479, $252 and $49, respectively. When events
or circumstances so indicate, the Company assesses the potential
impairment of its intangible assets and other long-lived assets based on
anticipated undiscounted cash flows from operations. Such events and
circumstances include a sale of all or a significant part of the
operations associated with the long-lived asset, or a significant
decline in the operating performance of the asset. If an impairment is
indicated, the amount of impairment charge would be calculated by
comparing the anticipated discounted future cash flows to the carrying
value of the long-lived asset. At December 31, 1999, no impairment was
indicated.
Income Taxes
------------
Just prior to the closing of the Offering (as described in Note 1), the
Company terminated its status as an S corporation for Federal tax
purposes and in the state of New Jersey. As an S corporation, any
Federal and certain New Jersey state income tax liabilities were those
of the former S corporation stockholders, not of the Company. All tax
liabilities on income earned subsequent to the revocation of the S
corporation elections are liabilities of the Company. The Company is
taxed in foreign countries and for activity in certain states. The
Company accounts for income taxes in accordance with the Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes.
Net Earnings Per Common Share
-----------------------------
Net earnings per common share is computed in accordance with SFAS No.
128, Earnings Per Share. Basic earnings per share is computed by
dividing net earnings by the weighted average number of common shares
outstanding during each year. Diluted earnings per share is computed by
dividing net earnings by the weighted average number of common shares
and common share equivalents outstanding during each year. Common share
equivalents represent stock options using the treasury stock method.
A reconciliation of weighted average shares outstanding - basic to
weighted average shares outstanding - diluted appears below:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares outstanding-basic 8,084,398 7,668,911 6,531,478
Potentially dilutive securities:
Employee stock options 181,139 153,177 165,414
--------- --------- ---------
Weighted average shares outstanding-diluted 8,265,537 7,822,088 6,696,892
========= ========= =========
</TABLE>
F - 38
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Earnings Per Common Share (Continued)
-----------------------------
Weighted average common shares outstanding exclude unallocated shares of
common stock held by the Company's EPP (see Note 12).
As discussed in Note 3, pro forma earnings per share information for the
year ended December 31, 1997 includes certain adjustments to reflect
results as if (i) the Company had been taxed as a C corporation for all
of 1997, and (ii) the acquisition of the minority interests in the
Company's three foreign subsidiaries had occurred on January 1, 1997.
Revenue Recognition
-------------------
Revenue from sales of products are recognized upon shipment to
customers. Service revenues are recognized as the services are
performed.
Engineering and Product Development
-----------------------------------
Engineering and product development costs, which consist primarily of
the salary and related benefits costs of the Company's technical staff,
as well as product development costs, are expensed as incurred.
Product Warranties
------------------
The Company generally provides product warranties and records estimated
warranty expense at the time of sale based upon historical claims
experience. Warranty expense for the years ended December 31, 1999,
1998 and 1997 was $790, $601 and $568, respectively.
Stock-Based Compensation
------------------------
During 1997, the Company adopted SFAS No. 123, Accounting for Stock-
Based Compensation. As permitted by SFAS No. 123, the Company has
elected to continue to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") in accounting
for its stock option plans. Under APB 25, the Company does not
recognize compensation expense on the issuance of its stock options to
employees and non-employee directors when the option terms are fixed and
the exercise price equals the fair value of the underlying stock on the
grant date. Compensation expense for stock options granted to non-
employees is accounted for based upon the fair value of the options on
the date of grant, in accordance with the provisions of SFAS No. 123.
Foreign Currency
----------------
The accounts of the foreign subsidiaries are translated in accordance
with SFAS No. 52, Foreign Currency Translation, which requires that
assets and liabilities of international operations be translated using
the exchange rate in effect at the balance sheet date. The results of
operations are translated using an average exchange rate for the period.
The effects of rate fluctuations in translating assets and liabilities
of international operations into U.S. dollars are accumulated and
reflected as other comprehensive earnings or expense in the restated
consolidated statements of stockholders' equity. Transaction gains
or losses are included in net earnings.
F - 39
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial Instruments
---------------------
The Company's financial instruments, principally accounts and notes
receivable and accounts payable, are carried at cost which approximates
fair value, due to the short maturities of the accounts. The estimated
fair values of the Company's notes payable and long-term debt
approximates their carrying value based upon the current rates offered
to the Company for similar type arrangements.
New Accounting Pronouncements
-----------------------------
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This Statement
requires that certain costs related to the development or purchase of
internal software be capitalized and amortized over the estimated useful
life of the software. This Statement also requires that costs related
to the preliminary project stage and the post implementation/operation
stage of an internal use computer software development project be
expensed as incurred. The Company adopted this Statement in the first
quarter of 1999, as required. The adoption of this Statement did not
have a material effect on the results of operations, financial condition
or long-term liquidity of the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company plans to adopt this
Statement in the first quarter of 2001, as required. The adoption of
this Statement is not expected to have a material effect on the results
of operations, financial condition or long-term liquidity of the
Company.
(3) PRO FORMA STATEMENT OF EARNINGS INFORMATION (Unaudited)
The Company terminated its status as an S corporation just prior to the
closing of the Offering, described in Note 1, and is subject to Federal
and additional state income taxes for periods after such termination.
Accordingly, for informational purposes, the following pro forma
information for the year ended December 31, 1997 is presented to show
pro forma earnings on an after-tax basis, assuming the Company had been
taxed as a C corporation since January 1, 1997. The difference between
the Federal statutory income tax rate and the pro forma income tax rate
is as follows:
F - 40
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(3) PRO FORMA STATEMENT OF EARNINGS INFORMATION (Unaudited) (Continued)
<TABLE>
<S> <C>
Federal statutory tax rate 34%
State income taxes, net of Federal benefit 2
Foreign income taxes 4
Non-deductible goodwill amortization 1
Research credits (3)
--
Pro forma income tax rate 38%
==
</TABLE>
Set forth below are pro forma results of the Company's operations for
the year ended December 31, 1997. These pro forma results reflect
adjustments for:
(i) the aforementioned change in method of computing taxes; and
(ii) the amortization of goodwill resulting from the acquisition of
minority interests in the Company's three foreign subsidiaries, net
of the elimination of the minority interests charge reflected in
the restated consolidated financial statements, as if
the Exchange (as described in Note 1) had occurred on January 1,
1997. The goodwill resulting from the Exchange, which totaled $1.3
million, is being amortized over 15 years.
<TABLE>
<S> <C>
Pro forma earnings before income taxes $5,824
Pro forma income taxes 2,224
Pro forma net earnings 3,600
Pro forma net earnings per common share - basic $ 0.55
Pro forma weighted average common shares outstanding -
basic 6,531,478
Pro forma net earnings per common share - diluted $ 0.54
Pro forma weighted average common shares and common
share equivalents outstanding - diluted 6,696,892
</TABLE>
Pro forma net earnings per common share - basic was calculated by
dividing pro forma net earnings by the pro forma weighted average number
of common shares outstanding during the period, calculated as if the
Exchange had occurred on January 1, 1997.
Pro forma net earnings per common share - diluted was calculated by
dividing pro forma net earnings by the pro forma weighted average number
of common shares and common share equivalents outstanding during the
period, calculated as if the Exchange had occurred on January 1, 1997.
F - 41
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(4) ACQUISITION
On August 3, 1998, the Company acquired all of the outstanding capital
stock of TestDesign Corporation ("TestDesign"), a privately held
California corporation (the "Acquisition"). Subsequent to the
Acquisition, the Company changed the name of TestDesign to inTEST
Sunnyvale Corp. TestDesign is engaged in the design and manufacture of
tester interfaces used by the semiconductor industry. The purchase
price was $4.4 million in cash and 625,000 shares of the Company's
common stock (subject to certain adjustments).
An escrow (held by a third party escrow agent) of $1.0 million of the
cash portion of the purchase price was established at closing.
This amount will remain in escrow until July 31, 2000, unless
any indemnity claims are then pending, in which case an amount
equal to the amount of such pending claims will be retained in
escrow until resolution of the claims. Although the Company's common
stock had a market price of $4.75 per share on the closing date of the
transaction, all of the 625,000 shares issued in connection with the
Acquisition are subject to legal restrictions on transfer and were
valued at a 10% discount to the market price of the shares. In
addition, the Company incurred transaction costs of approximately $425
in completing the Acquisition. The following is an allocation of the
purchase price:
<TABLE>
<S> <C>
Cash payment $4,400
Transaction costs 425
625,000 common shares at $4.28 2,672
------
7,497
Estimated fair value of identifiable assets
acquired net of liabilities assumed 1,650
------
Goodwill to be amortized over 15 years $5,847
======
</TABLE>
The Acquisition has been accounted for as a purchase and the results of
operations of the acquired business have been included in the Company's
restated consolidated financial statements since the date
of the Acquisition. The following unaudited pro forma information
presents a summary of consolidated results of operations for the Company
and TestDesign as if the Acquisition had occurred on January 1, 1997
(the 1997 amounts also reflect the pro forma adjustments described in
Note 3):
F - 42
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(4) ACQUISITION (Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
------- --------
<S> <C> <C>
Pro forma net revenues $40,318 $48,957
Pro forma earnings before income taxes 2,105 6,154
Pro forma income taxes 1,162 2,574
Pro forma net earnings 943 3,580
Pro forma net earnings per common share - basic $0.12 $0.50
Pro forma weighted average common shares outstanding -
basic 8,035,349 7,156,478
Pro forma net earnings per common share - diluted $0.12 $0.49
Pro forma weighted average common shares and common share
equivalents outstanding - diluted 8,188,527 7,321,892
</TABLE>
(5) SEGMENT INFORMATION
The various products the Company designs, manufactures and markets,
which include manipulator, docking hardware, tester interface and
temperature management products, are considered by management to be a
single product segment. Included in this segment are products the
Company designs and markets that are manufactured by third
parties, which include high performance test sockets and interface
boards. The Company operates its business worldwide and divides the
world into three geographic segments: North America, Asia-Pacific and
Europe. The North America segment includes the Company's manufacturing,
design and service facilities in New Jersey, California and
Massachusetts; the Asia-Pacific segment includes the Company's
manufacturing, design and service facilities in Singapore and the
Company's design and service facilities in Japan; and the Europe segment
includes the Company's manufacturing, design and service facility in the
U.K. Each segment sells Company designed and manufactured products,
while products produced by third party manufacturers are primarily
distributed by the Company's Asia-Pacific segment. All three segments
sell to semiconductor manufacturers and automatic test equipment
manufacturers.
Intercompany pricing between segments is either a multiple of cost for
component parts used in manufacturing or a percentage discount from list
price for finished goods sold to non-manufacturing segments.
F - 43
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(5) SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998 1997
-------- ------- --------
<S> <C> <C> <C>
Net revenues from unaffiliated customers:
North America $45,064 $28,984 $32,262
Asia-Pacific 5,465 4,727 5,743
Europe 3,056 2,347 2,009
------- ------- -------
$53,585 $36,058 $40,014
======= ======= =======
Affiliate sales or transfer from:
North America $ 2,106 $ 1,402 $ 1,181
Asia-Pacific - - -
Europe 951 378 500
------- ------- -------
$ 3,057 $ 1,780 $ 1,681
======= ======= =======
Depreciation/amortization:
North America $ 1,371 $ 994 $ 704
Asia-Pacific 19 53 69
Europe 39 27 31
------- ------- -------
$ 1,429 $ 1,074 $ 804
======= ======= =======
Operating income:
North America $ 5,838 $ 1,283 $ 4,855
Asia-Pacific 333 299 651
Europe 1,156 494 334
------- ------- -------
$ 7,327 $ 2,076 $ 5,840
======= ======= =======
Earnings before income taxes and minority interest:
North America $ 5,949 $ 1,333 $ 4,927
Asia-Pacific 442 379 606
Europe 1,167 527 331
------- ------- -------
$ 7,558 $ 2,239 $ 5,864
======= ======= =======
Income tax expense:
North America $ 790 $ 829 $ 1,054
Asia-Pacific 339 263 463
Europe 296 89 99
------- ------- -------
$ 1,425 $ 1,181 $ 1,616
======= ======= =======
Net earnings:
North America $ 5,159 $ 504 $ 3,873
Asia-Pacific 103 116 131
Europe 871 438 219
------- ------- -------
$ 6,133 $ 1,058 $ 4,223
======= ======= =======
Identifiable assets:
North America $37,983 $28,769 $27,000
Asia-Pacific 2,595 1,706 2,679
Europe 2,437 1,726 1,611
------- ------- -------
$43,015 $32,201 $31,290
======= ======= =======
</TABLE>
F - 44
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(5) SEGMENT INFORMATION (Continued)
Substantially all interest income is generated by the North America
segment. Export sales from the Company's domestic manufacturing
facilities (New Jersey, California and Massachusetts) totaled $15.9
million, $12.3 million and $11.1 million during the years ended December
31, 1999, 1998 and 1997, respectively. During the years ended December
31, 1999, 1998 and 1997, the Company had sales to Japan of $5.7 million,
$6.8 million and $8.0 million, respectively.
(6) MAJOR CUSTOMERS
No customer accounted for more than 10% of the Company's consolidated
net revenues in 1999, 1998 or 1997.
(7) INVENTORIES
Inventories held at December 31, were comprised of the following:
1999 1998
------ ------
Raw materials $6,091 $4,367
Work in process 1,954 1,538
Finished goods 704 617
Reserve for obsolete inventory (777) (627)
------ ------
$7,972 $5,895
====== ======
(8) DEBT
Lines of Credit
---------------
The Company has a $1.5 million line of credit. Borrowings under this
line of credit are principally used for working capital purposes.
Borrowings on the line of credit bear interest at the prime rate, which
is payable monthly on any outstanding balance. The Company is required
to maintain a $50 compensating balance at the bank which granted the
line of credit. The credit line expires on June 28, 2000. At December
31, 1999, there were no borrowings outstanding.
As a result of the merger with Temptronic, the Company has two
additional lines of credit with a maximum borrowing capacity of $4.0
million, subject to a borrowing limitation based on a maximum percentage
of qualified inventories and accounts receivable. At December 31, 1999,
the Company had approximately $2.3 million of borrowing capacity
available under these lines at the bank's prime interest rate (8.50%).
The weighted average interest rate on outstanding borrowings under the
lines of credit in 1999 and 1998 was 7.99% and 8.36%, respectively. The
lines of credit are collateralized by a security interest in
Temptronic's inventories, accounts receivable and equipment. The line
of credit agreements contain certain covenants with which the Company
must comply, including the maintenance of certain financial ratios. The
Company was in compliance with these covenants at December 31, 1999.
There was approximately $1.2 million outstanding under one of these
lines of credit as of December 31, 1999. The Company paid off the
outstanding balance under these lines shortly after completion of the
merger. The Company does not plan to renew these lines of credit when
they expire in June 2000.
F - 45
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(8) DEBT (Continued)
Term Note
---------
As a result of the merger with Temptronic, the Company has a note
agreement with a bank for $500. The agreement was originally entered
into in May 1997. Interest is based on the bank's prime rate plus 0.75%
(9.25% at December 31, 1999). The note is collateralized by a security
interest in Temptronic's inventories, accounts receivable and equipment.
The note matures on May 2, 2002. The note agreement contains certain
covenants with which the Company must comply, including the maintenance
of certain financial ratios. The Company was in compliance with these
covenants at December 31, 1999.
Principal maturities of the term note subsequent to 1999 amount to $100
in 2000, $100 in 2001, and $33 in 2002. The Company paid off the
remaining balance due under the term note shortly after completion of
the merger.
Capital Lease Obligations
-------------------------
As a result of the merger with Temptronic, the Company assumed capital
lease obligations. The balance outstanding at December 31, 1999 was
$23, which is due in 2000.
(9) STOCK OPTION PLAN
The 1997 Stock Plan (the "Plan") provides for the granting of either
incentive stock options or non-qualified stock options to purchase
shares of the Company's common stock and for other stock-based awards to
key employees and directors responsible for the direction and management
of the Company and to non-employee consultants. The Plan consists of
two parts: the Non-Qualified Plan (administered by the Board of
Directors of the Company) and the Key Employee Plan (administered by the
Compensation Committee of the Board of Directors of the Company). The
Company has reserved 500,000 shares of common stock for issuance upon
exercise of options or stock awards under the Plan.
No option may be granted with an exercise period in excess of ten years
from the date of grant. Generally, incentive stock options will be
granted with an exercise price equal to the fair market value on the
date of grant; the exercise price of non-qualified stock options will be
determined by either the Board of Directors or the Compensation
Committee of the Board of Directors.
The options which have been issued under this plan generally vest 20%
one year from date of grant and 20% in each of the succeeding four
years.
In connection with the merger with Temptronic, outstanding incentive and
non-qualified stock options to acquire Temptronic common stock were
converted into stock options to acquire the Company's stock at a
conversion ratio of 0.925, with appropriate adjustment to the exercise
price. These stock options also generally vest over four to five years
and, in most cases, expire on the earlier of the date of termination of
employment or ten years from the date of grant.
F - 46
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(9) STOCK OPTION PLAN (Continued)
Prior to the merger, shares issued upon exercise were restricted and, in
most cases, subject to repurchase by Temptronic at the then current
fair market value of the common stock (to be determined by an
independent appraiser) upon termination of the optionee's employment
with Temptronic. In addition, in most cases, Temptronic had a right of
first refusal if any optionee received a bona fide offer to purchase the
common stock issued through exercise of their options where Temptronic
could offer, at its election, to repurchase the common stock from the
employee at the lower of the then current fair value or the amount of
the bona fide offer. As a result of the merger described in Note 1,
Temptronic's purchase rights terminated.
As discussed in Note 2, the Company has elected to continue to follow
APB 25 in accounting for its stock option plans. Under APB 25, the
Company does not recognize compensation expense on the issuance of its
stock options to employees and non-employee directors when the option
terms are fixed and the exercise price equals the fair value of the
underlying stock on the grant date. Prior to the merger, Temptronic had
granted certain non-qualified stock options to employees which had an
exercise price below the estimated fair value of Temptronic's common
stock at the date of grant. For these options, compensation cost,
equaling the difference between the fair market value of the options and
the cost to exercise them, was recorded as a reduction to stockholders'
equity at the date of grant. This cost is amortized to expense as the
options vest. Total compensation cost recognized for 1999, 1998 and
1997 was $75, $93 and $86, respectively.
Had compensation costs for the Company's stock-based compensation plans
been determined consistent with SFAS No. 123, the Company's net earnings
and net earnings per share for the years ended December 31, 1999, 1998
and 1997 would have been reduced to the unaudited pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net earnings:
As reported (pro forma for 1997) $6,133 $1,058 $3,600
Pro forma $5,988 $ 915 $3,512
Net earnings per share - basic:
As reported (pro forma for 1997) $ 0.76 $ 0.14 $ 0.55
Pro forma $ 0.74 $ 0.12 $ 0.54
Net earnings per share - diluted:
As reported (pro forma for 1997) $ 0.74 $ 0.14 $ 0.54
Pro forma $ 0.72 $ 0.12 $ 0.52
</TABLE>
F - 47
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(9) STOCK OPTION PLAN (Continued)
The fair value for stock options granted in 1998 and 1997 was estimated
at the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions for 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------ -----
<S> <C> <C>
Risk-free interest rate 5.65% 5.67%
Dividend yield 0.00% 0.00%
Expected common stock market price
volatility factor 0.61 0.65
Weighted average expected life of stock options 5 years 5 years
</TABLE>
The per share weighted average fair value of stock options issued by the
Company in 1998 and 1997 was $3.71 and $4.61, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. As the Company's stock options have
characteristics significantly different from those of traded options,
and as changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of
its stock options.
The following table summarizes the stock option activity for the three
years ended December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise
of Shares Price
--------- ---------
<S> <C> <C>
Options outstanding, January 1, 1997 224,657 $3.06
Granted 215,037 5.75
Exercised - -
Canceled (27,839) 4.32
------- -----
Options outstanding, December 31, 1997 (177,067 exercisable) 411,855 $4.38
------- =====
Granted 200,875 $4.20
Exercised (4,162) 0.02
Canceled (22,877) 4.22
------- -----
Options outstanding, December 31, 1998 (215,637 exercisable) 585,691 $3.91
------- =====
Granted - $ -
Exercised (33,138) 0.10
Canceled (79,598) 3.40
------- -----
Options outstanding, December 31, 1999 (202,464 exercisable) 472,955 $4.26
======= =====
</TABLE>
F - 48
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(9) STOCK OPTION PLAN (Continued)
The total options granted in 1997 include 55,037 options which were
granted by Temptronic with an exercise price of $0.02. The weighted
average fair value of these options at the date of grant was $6.74.
There were no other options issued with exercise prices below market
value during the three years ended December 31, 1999.
On June 30, 1998, the Company modified 141,000 options originally
exercisable at $7.50 per share and 10,000 options originally exercisable
at $11.00 per share to reduce the exercise price of such options to
$6.00 per share.
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Weighted Exercise Exercise
Range of Number Average Price of Number Price of
Exercise Outstanding Maximum Remaining Outstanding Exercisable Exercisable
Prices at 12/31/99 Life Life Options at 12/31/99 Options
----------- ------------ ------- --------- ----------- ----------- -----------
<C> <C> <C> <C> <C> <C> <C>
$ 0.02 49,200 10 4.92 $0.02 25,613 $0.02
$3.79-$4.60 285,755 10 7.43 $4.15 121,651 $4.08
$ 6.00 138,000 10 7.54 $6.00 55,200 $6.00
</TABLE>
(10) COMMITMENTS
The Company leases its offices, warehouse facilities, automobiles and
certain equipment under noncancellable operating leases which expire at
various dates through 2005. Total rental expense for the years ended
December 31, 1999, 1998 and 1997 was $1.2 million, $1.1 million, and
$1.1 million, respectively.
The aggregate minimum rental commitments under the noncancellable
operating leases in effect at December 31, 1999, are as follows:
2000 $1,312
2001 1,100
2002 662
2003 510
2004 375
Thereafter 35
(11) INCOME TAXES
As discussed in Notes 2 and 3, prior to the Offering the Company had
elected S corporation status for Federal and State of New Jersey tax
purposes, and therefore, was not directly subject to Federal and certain
New Jersey income taxes. Immediately prior to the Offering, the Company
terminated its status as an S corporation and is now subject to Federal
and additional state income taxes. In addition, the Company is taxed in
foreign countries and for activity in certain states. The cumulative
F - 49
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(11) INCOME TAXES (Continued)
amount of undistributed earnings of foreign subsidiaries for which U.S.
income taxes have not been provided was approximately $3.0 million at
December 31, 1999. During 1999, the Company repatriated a portion of
the earnings of its foreign subsidiaries. The estimated tax effect of
distributing such earnings is expected to be offset by available foreign
tax credits.
Earnings before income taxes were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Domestic $ 5,949 $ 1,333 $ 4,927
Foreign 1,609 906 937
------- ------- -------
$ 7,558 $ 2,239 $ 5,864
======= ======= =======
</TABLE>
Income tax expense was as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Domestic - Federal $ 1,934 $ 516 $ 1,243
Domestic - state 215 54 303
Foreign 652 352 573
------- ------- -------
2,801 922 2,119
------- ------- -------
Deferred:
Domestic - Federal (946) 284 (485)
Domestic - state (430) (25) (18)
------- ------- -------
(1,376) 259 (503)
------- ------- -------
Income tax expense $ 1,425 $ 1,181 $ 1,616
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effect of net operating loss
and credit carryforwards and temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The following is a summary of
the significant components of the Company's deferred tax assets and
liabilities as of December 31, 1999 and 1998:
F - 50
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(11) INCOME TAXES (Continued)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Accrued vacation pay $ 195 $ 157
Allowance for doubtful accounts 88 80
Inventories 392 277
Accrued warranty 87 38
Accrued bonuses 84 -
Net operating loss and credit carryforward 686 966
Stock compensation 88 69
Machinery and equipment 101 154
Other 55 37
------- -------
1,776 1,778
Valuation allowance (90) (1,508)
------- -------
Deferred tax assets 1,686 270
------- -------
Deferred tax liabilities:
Accrued royalty income (65) (25)
------- -------
Deferred tax liabilities (65) (25)
------- -------
Net deferred tax asset $ 1,621 $ 245
======= =======
</TABLE>
The valuation allowance for deferred tax assets as of the beginning of
the year was $1.5 million and $898 in 1999 and 1998, respectively. The
net change in the valuation allowance for the years ended December 31,
1999 and 1998 was a decrease of $1.4 million and an increase of $610,
respectively. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. In order to
fully realize the total deferred tax assets, the Company will need to
generate future taxable income prior to the expiration of net operating
loss and credit carryforwards which expire at various years through
2019. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not
the Company will realize the benefit of the deferred tax asset, net
of the valuation allowance at December 31, 1999. The amount of the
deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income during the carry-
forward period are reduced.
F - 51
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(11) INCOME TAXES (Continued)
An analysis of the effective tax rate on earnings and a reconciliation
from the expected statutory rate are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Expected income tax provision at U.S. Statutory rate $ 2,570 $ 761 $ 1,994
State taxes, net of Federal benefit 157 (65) 79
Increase (decrease) in tax from:
Non-deductible goodwill and other permanent
differences 28 (83) (36)
Foreign income tax rate differences 58 12 219
S corporation earnings not subject to Federal taxation - - (549)
Federal credits (51) (41) (112)
Change in valuation allowance (1,418) 610 48
Other 81 (13) (27)
------- ------- -------
Income tax expense $ 1,425 $ 1,181 $ 1,616
======= ======= =======
</TABLE>
(12) EMPLOYEE BENEFIT PLANS
In 1996, the Company instituted a defined contribution 401(k) plan for
its employees who work in the U.S. All permanent employees of inTEST
Corporation and inTEST Sunnyvale Corp. who are at least 18 years of age
and have completed six months of service with the Company are eligible
to participate in the plan. Under the plan, the Company matches
employee contributions dollar for dollar up to 10% of the employee's
annual compensation up to $5. In addition, the Company may, at its
discretion, match employee contributions dollar for dollar for amounts
exceeding 10% up to 15% of the employee's annual compensation to a
maximum of $5. Employer contributions vest over a six-year period. The
Company contributed $221, $157 and $129 to the plan for the years ended
December 31, 1999, 1998 and 1997, respectively.
inTEST Sunnyvale (formerly TestDesign) adopted a defined contribution
401(k) plan for its employees in July 1994. All permanent employees who
were at least 18 years of age and had completed six months of service
with inTEST Sunnyvale were eligible to participate in the plan. Under
the plan, inTEST Sunnyvale matched employee contributions equal to 25%
of an employee's contributions up to 5% of gross salary. Matching
contributions for the plan were $6 from the date of the Acquisition
through December 31, 1998. In addition, the plan allowed inTEST
Sunnyvale to make discretionary matching contributions up to 6.5% of an
employee's gross salary for the year based upon inTEST Sunnyvale's
profitability. There were no discretionary matching contributions made
from the date of the Acquisition through December 31, 1998.
F - 52
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(12) EMPLOYEE BENEFIT PLANS (Continued)
Effective October 1, 1998, all inTEST Sunnyvale permanent employees who
were at least 18 years of age and had completed six months of service
were offered enrollment in the Company's 401(k) plan, and employee
contributions and employer matching contributions into the inTEST
Sunnyvale plan ceased. The Company is currently in the process of
terminating the inTEST Sunnyvale plan. Upon termination, the former
participants will have the option of rolling their assets into the
Company's plan.
Temptronic adopted a defined contribution 401(k) plan for its domestic
employees in 1988. All permanent employees who are at least 21 years of
age and have completed six months of service with Temptronic are
eligible to participate in the plan. Under the plan, Temptronic may
make discretionary matching contributions to be determined annually by
Temptronic up to 6% of the employees' annual compensation. Employer
contributions vest over a seven-year period. Temptronic contributed
$56, $88 and $93 to the plan for the years ended December 31, 1999, 1998
and 1997, respectively.
Temptronic established the EPP covering substantially all employees in
1982. On November 6, 1996, in exchange for a note receivable,
Temptronic loaned the EPP $3.7 million to purchase 565,483 shares of
stock from certain former shareholders of Temptronic. The amount of the
note from the EPP was recorded as a reduction of stockholders' equity.
The amount in stockholders' equity is reduced when the tax deductible
contributions are made. Shares acquired are allocated to participant
accounts on September 30 of each plan year. Temptronic contributed
approximately $470 to the EPP during each of 1999, 1998 and 1997 and
recorded interest income of $331, $345, and $294, respectively, on the
EPP note. At December 31, 1999, the EPP owned 665,157 shares of stock
with a fair market value of approximately $12 million of which 212,798
shares were allocated to participants. The remaining shares will be
allocated to participants in the future under the EPP guidelines.
F - 53
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(13) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
------ ------
<S> <C> <C>
Accrued compensation $1,237 $ 503
Accrued commissions 776 312
Accrued professional fees 340 106
Accrued warranty costs 228 100
Customer deposits 138 100
Accrued directors fees 105 109
Accrued other 187 217
------ ------
$3,011 $1,447
====== ======
</TABLE>
(14) RELATED PARTY TRANSACTIONS
The Company paid consulting fees to one individual who is a member of
the Board of Directors of the parent company which totaled $67, $56 and
$17 during the years ended December 31, 1999, 1998 and 1997,
respectively.
During 1998, in connection with the acquisition of TestDesign, the
Company repaid $215 on a note due to a firm ("PRIM") controlled by
Douglas W. Smith, Executive Vice President and Chief Operating Officer
of the Company. This note, which did not bear interest or have a
maturity date, evidenced borrowings that TestDesign had made from PRIM
prior to the acquisition. In addition, subject to the terms of a
consulting agreement between TestDesign and Gregory W. Slayton, a
current board member of the Company, the Company paid directly to Mr.
Slayton, on behalf of TestDesign, $170 in cash and 31,250 shares of the
Company's common stock. These payments are included in the merger
consideration and are accounted for as described in Note 4.
Some of the Company's foreign subsidiaries paid directors' fees to
several individuals who are members of management of the parent company
which totaled $119, $104 and $177 during the years ended December 31,
1999, 1998 and 1997, respectively.
At December 31, 1999 and 1998 there were $48 and $49 of foreign
directors' fees payable to members of management of the parent company.
F - 54
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(14) RELATED PARTY TRANSACTIONS (Continued)
Temptronic has transactions in the normal course of business with Hakuto
Corporation. As of December 31, 1999, a wholly-owned subsidiary of
Hakuto Corporation, Hakuto American Holdings, Inc., owned 647,500 shares
of the Company's outstanding stock. During 1999, 1998 and 1997,
Temptronic sold product at market prices totaling approximately $1.5
million, $2.5 million and $2.8 million, respectively, to Hakuto
Corporation. At December 31, 1999 and 1998, accounts receivable from
Hakuto Corporation amounted to approximately $200 and $137,
respectively.
(15) LEGAL PROCEEDINGS
As previously reported, on April 16, 1999, the Company and its
subsidiary, inTEST IP Corp. (which holds title to the Company's
intellectual property) filed suit against a competitor for infringement
of a United States patent held by the Company (the "815 Patent"). The
invention disclosed and claimed in the 815 Patent is directed to a
system for positioning and docking a test head to a device handler and
is used in the testing of integrated circuits. The Company sells
docking hardware products covered by the 815 Patent worldwide.
As alleged in the complaint, the competitor began manufacturing, offering
to sell, and selling products as early as 1991 that, without license,
infringed upon the claims of the 815 Patent. The complaint asked the
court to enjoin the competitor from further acts of infringement and
award the Company damages, including lost profits, from the infringing
product sales.
On March 31, 2000, the Company entered into a settlement agreement with
the competitor under which the Company agreed to dismiss the suit. The
settlement agreement provides, among other things, that the competitor
acknowledged the validity of the 815 Patent with regard to its existing
docking hardware products, agreed to pay the Company $300 over two
years, became a licensee under the 815 Patent and agreed to pay
royalties to the Company for future sales of its current design of
docking hardware products.
All legal fees incurred in connection with this matter have been
expensed. The amounts to be received for settlement of the suit will
be offset against the same expense category to which these legal fees
were charged.
(16) QUARTERLY RESTATED CONSOLIDATED FINANCIAL DATA (Unaudited)
The following tables present certain unaudited restated
consolidated quarterly financial information for each of the eight
quarters ended December 31, 1999. In the opinion of the Company's
management, this quarterly information has been prepared on the same
basis as the Restated Consolidated Financial Statements and
includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information for the period
presented. The results of operations for any quarter are not
necessarily indicative of results for the full year or for any future
period.
F - 55
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(16) QUARTERLY RESTATED CONSOLIDATED FINANCIAL DATA (Unaudited) (Continued)
The Company's business is not seasonal; therefore year-over-year
quarterly comparisons of the Company's results of operations may not be
as meaningful as the sequential quarterly comparisons set forth below
which tend to reflect the cyclical activity of the semiconductor
industry as a whole. Quarterly fluctuations in expenses are related
directly to sales activity and volume and may also reflect personnel
costs and the timing of expenses incurred throughout the year.
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------
3/31/99 6/30/99 9/30/99 12/31/99 Total
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Net revenues $8,223 $10,816 $15,237 $19,309 $53,585
Gross margin 3,752 5,314 7,615 10,029 26,710
Earnings before income taxes 64 1,051 2,669 3,774 7,558
Income taxes 125 357 901 42 1,425
Net earnings (loss) (61) 694 1,768 3,732 6,133
Net earnings (loss) per common share-basic $(0.01) $0.09 $0.22 $0.46 $0.76
Weighted average common shares
outstanding-basic 8,061,730 8,071,154 8,081,482 8,122,588 8,084,398
Net earnings (loss) per common share-diluted $(0.01) $0.08 $0.21 $0.45 $0.74
Weighted average common shares and
common share equivalents
outstanding-diluted 8,061,730 8,217,571 8,260,359 8,358,355 8,265,537
<CAPTION>
Quarters Ended
-------------------------------------
3/31/98 6/30/98 9/30/98 12/31/98 Total
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Net revenues $10,634 $9,697 $8,407 $7,320 $36,058
Gross margin 5,419 4,649 3,867 3,253 17,188
Earnings before income taxes 1,908 849 269 (787) 2,239
Income taxes 689 571 153 (232) 1,181
Net earnings (loss) 1,219 278 116 (555) 1,058
Net earnings (loss) per common share-basic $0.16 $0.04 $0.01 $(0.07) $0.14
Weighted average common shares
outstanding-basic 7,394,868 7,404,292 7,815,345 8,052,303 7,668,911
Net earnings (loss) per common share-diluted $0.16 $0.04 $0.01 $(0.07) $0.14
Weighted average common shares and
common share equivalents
outstanding-diluted 7,557,841 7,561,125 7,967,515 8,052,303 7,822,088
</TABLE>
F - 56
<PAGE>
(c) Exhibits:
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG LLP
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
inTEST CORPORATION
By: /s/ Hugh T. Regan, Jr.
----------------------------------
Hugh T. Regan, Jr.
Treasurer, Chief Financial Officer
and Secretary
Date: May 15, 2000
--------------
<PAGE>
EXHIBIT INDEX
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8) of inTEST Corporation (Nos. 333-44059 and 333-33722) pertaining to
the 1997 Stock Plan, the 1998 Incentive and Non-statutory Stock Option Plan
and various written compensation contracts, of our report dated August 6,
1999, with respect to the consolidated financial statements of Temptronic
Corporation included in the Current Report (Form 8-K/A) of inTEST Corporation
filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
May 11, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
inTEST Corporation
We consent to incorporation by reference in the registration statements
(Nos. 333-44059 and 333-33722) on Form S-8 of inTEST Corporation of our
report dated May 5, 2000, relating to the restated consolidated balance
sheets of inTEST Corporation and subsidiaries as of December 31, 1999
and 1998, and the related restated consolidated statements of earnings,
comprehensive earnings, stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1999, which report
appears in the Form 8-K/A of inTEST Corporation dated March 9, 2000.
/s/ KPMG LLP
Philadelphia, Pennsylvania
May 15, 2000
