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UTStarcom 10-Q 2005

Documents found in this filing:

  1. 10-Q/A
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

(Mark One)

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

OR

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from         to         

COMMISSION FILE NUMBER 000-29661

UTSTARCOM, INC.

(Exact name of registrant as specified in its charter)

DELAWARE

52-1782500

(State of Incorporation)

(I.R.S. Employer Identification No.)

1275 HARBOR BAY PARKWAY
ALAMEDA, CALIFORNIA

94502

(Address of principal executive offices)

(zip code)

 

Registrant’s telephone number, including area code: (510) 864-8800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x   No o

As of November 5, 2004 there were 114,274,019 shares of the registrant’s common stock outstanding, par value $0.00125.

 




EXPLANATORY NOTE

UTStarcom, Inc. (the “Company”) originally filed its quarterly report on Form 10-Q for the period ended September 30, 2004 with the Securities and Exchange Commission (the “SEC”) on November 9, 2004 (the “Original Filing”). This Amendment No. 1 on Form 10-Q/A (“Amendment No. 1”) to the Original Filing is being filed to reflect the adjustments and restatement of its condensed consolidated financial statements as of and for the three and nine months ended September 30, 2004 and September 30, 2003 for certain changes resulting from the 2003 restatement, as described below, and to reflect the adjustments to the December 31, 2003 consolidated balance sheet as presented in the Company’s amended Annual Report on Form 10-K/A for the year ended December 31, 2003 as filed with the SEC on April 13, 2005.

As part of the financial closing process for the year ended December 31, 2004, the Company identified certain prior year errors resulting in a restatement which decreased the provision for income taxes and increased net income by $20.7 million for the year ended December 31, 2003. In addition, as a result of the correction of the tax provision, retained earnings was increased by $20.7 million, additional paid-in capital was increased by $0.9 million, income taxes payable was decreased by $2.5 million, other long-term assets were increased by $21.6 million, prepaids were increased by $2.8 million and other current assets were reduced by $5.3 million, all as of December 31, 2003. There was no net effect on cash provided from operating activities as a result of this error.

The impact of the restatement on each of the respective quarters in 2003 is as follows (in thousands):

 

 

Decrease in Income
Tax Expense

 

Decrease in Income
Tax Payable

 

Increase in
Net Income

 

Increase in
Diluted EPS

 

For the three months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2003

 

 

$

3,825

 

 

 

$

3,825

 

 

 

$

3,825

 

 

 

$

0.04

 

 

June 30, 2003

 

 

$

4,038

 

 

 

$

4,038

 

 

 

$

4,038

 

 

 

$

0.03

 

 

September 30, 2003

 

 

$

6,064

 

 

 

$

6,064

 

 

 

$

6,064

 

 

 

$

0.04

 

 

 

During the evaluation of the errors related to the income tax provision, the Company determined that an additional reclassification of reported 2003 results was required. Specifically, cost of sales and other income both increased by $3.5 million for the year ended December 31, 2003 to properly classify certain incentive payments received for exports and value-added taxes in China. This adjustment related solely to the fourth quarter of 2003.

In addition to the errors in the 2003 tax provision, the Company had not correctly identified a related party that is deemed a variable interest entity and for whom the Company is considered the primary beneficiary in accordance with FASB Interpretation No. 46 (“FIN 46”). The Company has corrected its 2003 financial statements to reflect the consolidation of this variable interest entity, MDC Holding Limited (“MDC Holding”) and its affiliated entities (MDC Holding and such affiliated entities are referred to, collectively, as “MDC”). At December 31, 2003, this consolidation resulted in a $5.5 million increase in total assets and a $0.7 million increase in total liabilities. There was no effect on net income as a result of this consolidation. The consolidation occurred upon the Company’s adoption of FIN 46 at the beginning of the fourth quarter of 2003.

Furthermore, an impairment charge of $7.4 million, net of taxes of $1.3 million, was recorded to reflect an impairment of MDC equipment subject to a revenue share arrangement. Due to the uncertainties surrounding the customer’s subscriber income and ability to pay under this arrangement, the Company determined that an impairment charge should have been recorded in the fourth quarter of 2003 when these conditions should have been identified. Accordingly, an impairment charge of $7.4 million, net of tax, was recorded, which decreased both total assets and equity by $7.4 million at December 31, 2003. This adjustment was recorded in the fourth quarter of 2003.

1




The Company identified certain revisions in classification during the preparation of the 2003 restated financial statements. Therefore, for the consolidated financial statements for the quarter ended September 30, 2004, the following adjustments were made to conform to the 2003 restated financial statements:

(1)         Cost of sales for related party revenue transactions is presented separately from cost of sales for non-related party revenue transactions for all periods presented;

(2)         A related party which is 31% owned by an individual related to a member of the Company’s Board of Directors and associated transactions have been identified. See Note 19 to the Consolidated Financial Statements.

On April 13, 2005, the Company filed Amendment No. 1 to its Annual Report on Form 10-K/A for the year ended December 31, 2003 to reflect the restatement of its consolidated financial statements for the year then ended and to disclose the impact on quarters ended March 31, 2003, June 30, 2003 and September 30, 2003.

The results of operations for the year ended December 31, 2004 and the results of operations for each of the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004 have not been impacted by the restatement of 2003 financial results discussed above. However, the beginning and ending balances of certain balance sheet accounts for the quarters of 2004 were affected and therefore have been adjusted in this Amendment No. 1 to reflect the 2003 restatement.

Changes have been made to the following items in this Amendment as a result of the 2003 restatement.

Part I

·       Item 1.      Condensed Consolidated Financial Statements

·       Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

·       Item 3.      Quantitative and Qualitative Disclosures about Market Risk

·       Item 4.      Controls and Procedures

Amendment No. 1 does not reflect events that have occurred after the November 9, 2004 filing date of the Quarterly Report on Form 10-Q that the Company originally filed with the SEC, or modify or update the disclosures presented in the original Form 10-Q, except to reflect the adjustments and restatement described above. Accordingly, this Form 10-Q/A should be read in conjunction with our filings with the SEC subsequent to the filing of the original Form 10-Q.

2







PART I—FINANCIAL INFORMATION

ITEM 1—CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UTSTARCOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share data)

 

 

September 30,
2004

 

December 31,
2003

 

 

 

(As Restated)(2)

 

(As Restated)(1)

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

755,093

 

 

 

$

377,747

 

 

Short-term investments

 

 

44,883

 

 

 

48,617

 

 

Accounts receivable, net of allowances for doubtful accounts of $48,238 and $31,172 at September 30, 2004 and December 31, 2003, respectively

 

 

691,527

 

 

 

325,288

 

 

Accounts receivable, related parties

 

 

46,339

 

 

 

43,944

 

 

Notes receivable

 

 

24,877

 

 

 

11,362

 

 

Inventories

 

 

439,439

 

 

 

257,065

 

 

Deferred costs/Inventories at customer sites under contracts

 

 

151,986

 

 

 

542,060

 

 

Prepaids

 

 

82,690

 

 

 

139,103

 

 

Restricted cash and short-term investments

 

 

36,799

 

 

 

24,404

 

 

Other current assets

 

 

37,404

 

 

 

48,499

 

 

Total current assets

 

 

2,311,037

 

 

 

1,818,089

 

 

Property, plant and equipment, net

 

 

255,992

 

 

 

187,039

 

 

Long-term investments

 

 

25,428

 

 

 

24,066

 

 

Goodwill

 

 

113,544

 

 

 

100,180

 

 

Intangible assets, net

 

 

60,543

 

 

 

44,051

 

 

Other long-term assets

 

 

83,374

 

 

 

70,625

 

 

Total assets

 

 

$

2,849,918

 

 

 

$

2,244,050

 

 

LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Notes payable and short-term debt

 

 

$

176,566

 

 

 

$

 

 

Accounts payable

 

 

336,390

 

 

 

251,122

 

 

Income taxes payable

 

 

14,268

 

 

 

14,265

 

 

Customer advances

 

 

271,476

 

 

 

450,499

 

 

Deferred revenue

 

 

57,874

 

 

 

44,958

 

 

Other current liabilities

 

 

192,378

 

 

 

173,911

 

 

Total current liabilities

 

 

1,048,952

 

 

 

934,755

 

 

Convertible subordinated notes

 

 

410,655

 

 

 

410,655

 

 

Total liabilities

 

 

1,459,607

 

 

 

1,345,410

 

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

 

Minority interest in consolidated subsidiaries

 

 

5,436

 

 

 

5,309

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

Common stock: $0.00125 par value; authorized: 750,000,000 shares; issued and outstanding: 113,963,558 and 104,272,477 at September 30, 2004 and December 31, 2003, respectively

 

 

143

 

 

 

131

 

 

Additional paid-in capital

 

 

1,116,292

 

 

 

654,483

 

 

Deferred stock compensation

 

 

(7,233

)

 

 

(7,761

)

 

Retained earnings

 

 

273,652

 

 

 

243,058

 

 

Accumulated other comprehensive income

 

 

2,021

 

 

 

3,420

 

 

Total stockholders’ equity

 

 

1,384,875

 

 

 

893,331

 

 

Total liabilities, minority interest and stockholders’ equity

 

 

$

2,849,918

 

 

 

$

2,244,050

 

 


(1)             See the Company’s filing on Form 10-K/A filed with the SEC.

(2)             See Note 25 to the condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

4




UTSTARCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

          2004          

 

2003

 

         2004         

 

2003

 

 

 

 

 

(As Restated)(1)

 

 

 

(As Restated)(1)

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrelated parties

 

 

$

613,016

 

 

 

$

558,328

 

 

 

$

1,892,298

 

 

 

$

1,176,014

 

 

Related parties

 

 

32,000

 

 

 

26,054

 

 

 

64,637

 

 

 

144,722

 

 

 

 

 

645,016

 

 

 

584,382

 

 

 

1,956,935

 

 

 

1,320,736

 

 

Cost of sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrelated parties

 

 

488,363

 

 

 

390,025

 

 

 

1,435,135

 

 

 

832,554

 

 

Related parties

 

 

19,519

 

 

 

8,255

 

 

 

32,361

 

 

 

51,891

 

 

Gross profit

 

 

137,134

 

 

 

186,102

 

 

 

489,439

 

 

 

436,291

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

74,916

 

 

 

57,371

 

 

 

209,689

 

 

 

129,917

 

 

Research and development

 

 

56,026

 

 

 

44,723

 

 

 

154,276

 

 

 

107,613

 

 

In-process research and development

 

 

 

 

 

161

 

 

 

1,400

 

 

 

10,809

 

 

Amortization of intangible assets

 

 

3,639

 

 

 

3,081

 

 

 

9,946

 

 

 

5,259

 

 

Total operating expenses

 

 

134,581

 

 

 

105,336

 

 

 

375,311

 

 

 

253,598

 

 

Operating income

 

 

2,553

 

 

 

80,766

 

 

 

114,128

 

 

 

182,693

 

 

Interest income

 

 

1,339

 

 

 

530

 

 

 

4,530

 

 

 

2,172

 

 

Interest expense

 

 

(1,206

)

 

 

(1,506

)

 

 

(3,428

)

 

 

(3,463

)

 

Other income, net

 

 

1,162

 

 

 

670

 

 

 

14,211

 

 

 

4,118

 

 

Equity in loss of affiliated companies

 

 

(727

)

 

 

(1,560

)

 

 

(2,925

)

 

 

(4,280

)

 

Income before income taxes and minority interest

 

 

3,121

 

 

 

78,900

 

 

 

126,516

 

 

 

181,240

 

 

Income tax expense (benefit)

 

 

(1,906

)

 

 

13,661

 

 

 

22,773

 

 

 

31,383

 

 

Minority interest in earnings of consolidated subsidiaries

 

 

(40

)

 

 

(35

)

 

 

(127

)

 

 

(35

)

 

Net income

 

 

$

4,987

 

 

 

$

65,204

 

 

 

$

103,616

 

 

 

$

149,822

 

 

Basic earnings per share

 

 

$

0.04

 

 

 

$

0.63

 

 

 

$

0.91

 

 

 

$

1.45

 

 

Diluted earnings per share

 

 

$

0.04

 

 

 

$

0.50

 

 

 

$

0.78

 

 

 

$

1.23

 

 

Weighted average shares used in per-share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

—Basic

 

 

113,945

 

 

 

102,814

 

 

 

114,110

 

 

 

103,607

 

 

—Diluted

 

 

133,226

 

 

 

131,914

 

 

 

136,214

 

 

 

124,043

 

 


(1)          See the Company’s filing on Form 10-K/A filed with the SEC.

See accompanying notes to condensed consolidated financial statements.

5




UTSTARCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)

 

 

Nine months ended Sepember 30,

 

 

 

2004

 

2003

 

 

 

(As Restated)(2)

 

(As Restated)(1)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Net income

 

 

$

103,616

 

 

 

$

149,822

 

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

52,563

 

 

 

30,293

 

 

Non-qualified stock option exercise tax benefits

 

 

3,612

 

 

 

12,605

 

 

Net loss on sale of assets

 

 

7

 

 

 

744

 

 

Loss on sale of notes receivable

 

 

 

 

 

1,931

 

 

In-process research and development costs

 

 

1,400

 

 

 

10,809

 

 

Amortization of debt issuance costs

 

 

1,749

 

 

 

1,359

 

 

Warrants adjustment to fair value

 

 

(46

)

 

 

(64

)

 

(Gain) loss on sale of investment

 

 

(2,116

)

 

 

73

 

 

Net loss on long-term investments

 

 

1,608

 

 

 

63

 

 

Stock compensation expense

 

 

327

 

 

 

3,236

 

 

Provision for doubtful accounts

 

 

17,552

 

 

 

1,150

 

 

Inventory provision

 

 

21,190

 

 

 

9,715

 

 

Equity in loss of affiliated companies

 

 

2,925

 

 

 

4,280

 

 

Deferred income taxes

 

 

(6,865

)

 

 

(2,960

)

 

Minority interest in earnings of consolidated subsidiary

 

 

127

 

 

 

35

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(385,010

)

 

 

(92,786

)

 

Inventories

 

 

(202,171

)

 

 

(222,870

)

 

Deferred costs/Inventories at customer sites under contracts

 

 

390,074

 

 

 

(335,644

)

 

Other current and non-current assets

 

 

54,729

 

 

 

(157,134

)

 

Accounts payable

 

 

82,639

 

 

 

145,057

 

 

Income taxes payable

 

 

15

 

 

 

(2,615

)

 

Customer advances

 

 

(183,054

)

 

 

345,318

 

 

Deferred revenue

 

 

12,862

 

 

 

25,426

 

 

Other current liabilities

 

 

12,663

 

 

 

70,989

 

 

Net cash used in operating activities

 

 

(19,604

)

 

 

(1,168

)

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(105,209

)

 

 

(71,440

)

 

Additions to long-term investments

 

 

(6,000

)

 

 

(661

)

 

Purchase of businesses, net of cash acquired

 

 

(43,980

)

 

 

(112,415

)

 

Issuance of notes receivable

 

 

 

 

 

(10,071

)

 

Proceeds from disposal of property

 

 

 

 

 

21

 

 

Purchase of intellectual property licenses

 

 

(3,775

)

 

 

 

 

Change in restricted cash

 

 

(7,512

)

 

 

3,844

 

 

Purchase of short-term investments

 

 

(170,704

)

 

 

(64,643

)

 

Proceeds from sale of short-term investments

 

 

170,280

 

 

 

177,923

 

 

Net cash used in investing activities

 

 

(166,900

)

 

 

(77,442

)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Issuance of stock, net of expenses

 

 

18,402

 

 

 

51,229

 

 

Purchase of bond hedge and call option

 

 

 

 

 

(43,792

)

 

Net proceeds from borrowing

 

 

215,000

 

 

 

414,821

 

 

Repayments of Borrowings

 

 

(40,000

)

 

 

 

 

Repurchase of stock

 

 

(107,567

)

 

 

(139,609

)

 

Proceeds from stockholder notes

 

 

 

 

 

28

 

 

Proceeds from equity offering

 

 

474,554

 

 

 

 

 

Net cash provided by financing activities

 

 

560,389

 

 

 

282,677

 

 

Effect of exchange rate changes on cash

 

 

3,461

 

 

 

74

 

 

Net increase in cash and cash equivalents

 

 

377,346

 

 

 

204,141

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

377,747

 

 

 

231,944

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

 

$

755,093

 

 

 

$

436,085

 

 


(1)                See the Company’s filing on Form 10-K/A filed with the SEC.

(2)                See Note 25 to the condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

6




UTSTARCOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.   BASIS OF PRESENTATION:

The accompanying unaudited condensed consolidated financial statements include the accounts of UTStarcom, Inc. (the “Company”) and its wholly and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the preparation of the condensed consolidated financial statements. The Company also consolidates variable interest entities (“VIE”) as defined by Financial Accounting Standards Board Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” The minority interests in consolidated subsidiaries and equity in affiliated companies are shown separately in the condensed consolidated financial statements. Investments in affiliated companies are accounted for using the cost or equity method, as applicable.

The accompanying financial statements as of September 30, 2004 and for the three and nine months ended September 30, 2004 and 2003 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The December 31, 2003 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. These condensed consolidated financial statements should be read in conjunction with the Company’s audited December 31, 2003 financial statements, including the notes thereto, and the other information set forth in the Company’s Amended Annual Report on Form 10-K/A for the year ended December 31, 2003 as filed with the SEC on April 13, 2005. Certain reclassifications have been made to prior period balances in order to conform to the current year presentation.

In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company’s financial condition, the results of its operations and its cash flows for the periods indicated. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the operating results for the full year.

2.   REVENUE RECOGNITION:

Revenues from sales of telecommunications equipment are recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, customer acceptance has been obtained, the fee is fixed or determinable and collectability is reasonably assured. If the payment due from the customer is not fixed or determinable due to extended payment terms, revenue is recognized as payments become due from the customer, assuming all other criteria for revenue recognition are met. Any payments received prior to revenue recognition are recorded as customer advances. Normal payment terms differ for various reasons amongst different customer regions, depending upon common business practices for customers within a region. Shipping and handling costs are recorded as revenues and costs of revenues. Any expected losses on contracts are recognized immediately.

Sales may be generated from complex contractual arrangements that require significant revenue recognition judgments, particularly in the areas of multiple element arrangements. Where multiple elements exist in an arrangement, the arrangement fee is allocated to the different elements based upon verifiable objective evidence of the fair value of the elements, as governed under EITF 00-21, and SEC Staff Accounting Bulletin No. 104 (“SAB 104”). Multiple element arrangements primarily involve the sale of Personnel Access Systems (“PAS”), a family of wireless access handsets, wireless consumer products and

7




core infrastructure equipment or Internet Protocol-based PAS (“iPAS”) wireless access systems that employ micro cell radio technology and specialized handsets, allowing service providers to offer subscribers both mobile and fixed access to telephone services. These multiple element arrangements include the sale of PAS or iPAS equipment with handsets, installation and training and the provision of such equipment to different locations for the same customer. Revenue is recognized as each element is earned, namely upon installation and acceptance of equipment or delivery of handsets, provided that the fair value of the undelivered element(s) has been determined, the delivered elements has stand-alone value, there is no right of return on delivered element(s), and the vendor is in control of the undelivered element(s). For arrangements that include service elements, including promotional support and installation, for which verifiable objective evidence of fair value does not exist, revenue is deferred until such services are deemed complete.

Final acceptance is required for revenue recognition when installation services are not considered perfunctory. Final acceptance indicates that the customer has fully accepted delivery of equipment and the Company is entitled to the full payment. The Company will not recognize revenue before final acceptance is granted by the customer if acceptance is considered substantive to the transaction. Additionally, the Company does not recognize revenue when cash payments are received from customers for transactions that do not have the customer’s final acceptance. The Company records these cash receipts as customer advances, and defers revenue recognition until final acceptance is received.

Where multiple elements exist in an arrangement that includes software and the software is considered more than incidental to the equipment or services in the arrangement, software and software-related elements are recognized under the provisions of Statement of Position 97-2, as amended, and Emerging Issues Task Force Issue No. 03-05. The Company allocates revenues to each element of software arrangements based on vendor-specific objective evidence (“VSOE”). VSOE of each element is based on the price charged when the same element is sold separately. The Company uses the residual method to recognize revenue when an arrangement includes one or more elements to be delivered at a future date and VSOE of the fair value of all the undelivered elements exists. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of fair value of one or more undelivered elements does not exist, revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established.

The Company recognizes revenue for system integration, installation and training upon completion of performance if all other revenue recognition criteria are met. Other service revenue, such as that related to maintenance and support contracts, is recognized ratably over the contract term. Revenues from services were less than 10% of revenues for all periods.

The Company also sells products through resellers. Revenue is generally recognized when the standard price protection period, which ranges from 30 to 90 days, has lapsed. If collectability cannot be reasonably assured in a reseller arrangement, revenue is recognized upon sell-through to the end customer and receipt of cash. There may be additional obligations in reseller arrangements such as inventory rotation, or stock exchange rights on the product. As such, revenue is recognized in accordance with Statement of Financial Accounting Standards No. 48 “Revenue Recognition When Right of Return Exists” (“SFAS 48”). The Company has developed reasonable estimates for stock exchanges. Estimates are derived from historical experience with similar types of sales of similar products.

The assessment of collectability is also a factor in determining whether revenue should be recognized. The Company assesses collectability based on a number of factors, including payment history and the credit-worthiness of the customer. The Company does not request collateral from its customers. In international sales, the Company often requires letters of credit from its customers that can be drawn on demand if the customer defaults on its payment. If the Company determines that collection of a payment is

8




not reasonably assured, the Company recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash.

Because of the nature of doing business in China and other emerging markets, the Company’s billings and/or customer payments may not correlate with the contractual payment terms and the Company generally does not enforce contractual payment terms prior to final acceptance. Accordingly, accounts receivable are not booked until the Company recognizes the related customer revenue. Advances from customers are recognized when the Company has collected cash from the customer, prior to recognizing revenue. Deferred revenue is recorded if there are undelivered elements after final acceptance has been obtained.

The Company provides a warranty on its equipment and handset sales for a period generally ranging from one to three years from the time of final acceptance. The Company provides for the expected cost of product warranties at the time that revenue is recognized, based on an assessment of past warranty experience.

3.   EARNINGS PER SHARE:

Basic earnings per share is computed by dividing net income available to holders of common stock by the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted earnings per share is determined by adjusting net income as reported by the effect of dilutive securities and increasing the number of shares by potentially dilutive shares of common stock outstanding during the period. Potentially dilutive shares of common stock consist of employee stock options, a written call option, warrants, convertible subordinated notes and unvested acquisition-related stock options.

The following is a summary of the calculation of basic and diluted earnings per share (in thousands, except per share data):

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

(As Restated)(1)

 

 

 

(As Restated)(1)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (for basic EPS computation)

 

$

4,987

 

 

$

65,204

 

 

$

103,616

 

 

$

149,822

 

 

Effect of Dilutive Securities
7¤8% Convertible Subordinated Notes

 

816

 

 

1,098

 

 

2,663

 

 

2,473

 

 

Net income adjusted for dilutive
securities

 

$

5,803

 

 

$

66,302

 

 

$

106,279

 

 

$

152,295

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used to compute basic EPS

 

113,945

 

 

102,814

 

 

114,110

 

 

103,607

 

 

Dilutive common stock equivalent shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

1,994

 

 

8,352

 

 

4,442

 

 

6,407

 

 

Written call option

 

 

 

3,341

 

 

349

 

 

849

 

 

Conversion of convertible subordinated notes

 

16,919

 

 

16,919

 

 

16,919

 

 

12,581

 

 

Warrants

 

 

 

30

 

 

12

 

 

29

 

 

Unvested acquisition-related stock

 

368

 

 

458

 

 

382

 

 

570

 

 

Shares used to compute diluted EPS

 

133,226

 

 

131,914

 

 

136,214

 

 

124,043

 

 

Basic earnings per share

 

$

0.04

 

 

$

0.63

 

 

$

0.91

 

 

$

1.45

 

 

Diluted earnings per share

 

$

0.04

 

 

$

0.50

 

 

$

0.78

 

 

$

1.23

 

 


(1)    See the Company’s filing on Form 10-K/A filed with the SEC.

Certain potential shares related to employee stock options outstanding during the three and nine months ended September 30, 2004 and 2003 were excluded in the diluted per share computations, since

9




their exercise prices were greater than the average market price of the Company’s common stock during the period and, accordingly, their effect is anti-dilutive. For the three months ended September 30, 2004 and 2003, these shares totaled 12.5 million with a weighted average exercise price of $25.87 per share and 0.2 million shares with a weighted average exercise price of $43.16 per share, respectively. For the nine months ended September 30, 2004 and 2003, these shares totaled 3.5 million with a weighted average exercise price of $33.07 per share and 17.4 million shares with a weighted average exercise price of $32.19 per share, respectively.

On September 30, 2004, the Company’s 7¤8% convertible subordinated notes outstanding was eligible for conversion into shares of common stock. For each $1,000 of aggregate principal amount of notes converted, the Company will deliver approximately 42.0345 shares of common stock, if the Company’s closing stock price exceeds a specified threshold as of the last trading day of the immediately preceding fiscal quarter. At June 30, 2004, the closing price of the Company’s common stock was above the specified threshold. In September 2004, the EITF reached a consensus related to EITF No. 04-8 “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” The consensus will require contingently convertible debt instruments with a market price trigger to be treated the same as traditional convertible debt instruments for purposes of computed earnings per share using the “if converted” method. The EITF pronouncement will be effective for reporting periods ending after December 15, 2004. The Company entered into convertible bond hedge and call option transactions to reduce the potential dilution from conversion of the notes. Both the bond hedge and call option transactions may be settled at the Company’s option either in cash or net shares and expire on March 1, 2008.

During the three months ended September 30, 2004, the average price of the Company’s stock was below the specified strike prices of both the convertible bond hedge and call option transactions, that the Company entered into to reduce the potential dilution from conversion of the notes.

For the three months ended September 30, 2003, however, the average price of the Company’s stock exceeded both the specified strike prices of the convertible bond hedge and call option. Using the treasury stock method, under Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS 128”), for the three months ended September 30, 2003, this would have the effect of decreasing the denominator for diluted earnings per share by 6.8 million for the bond hedge transaction, and increasing the denominator for diluted earnings per share by 3.3 million shares for the call option transaction. However, only the dilutive effect of the 3.3 million shares with respect to the call option transaction is included in the Company’s diluted earnings per share calculation above. The convertible bond hedge, under FAS 128, is always anti-dilutive.

For the nine months ended September 30, 2004, the dilutive and anti-dilutive effects of the call option and the bond hedge were derived by taking the weighted average of the first, second, and third quarters, in accordance with SFAS 128. For the nine months ended September 30, 2004, this would have the effect of decreasing the denominator for diluted earnings per share by 2.7 million shares for the bond hedge transaction, and increasing the denominator for diluted earnings per share by 0.3 million shares for the call option transaction. For the nine months ended September 30, 2003, this would have the effect of decreasing the denominator for diluted earnings per share by 2.1 million shares for the bond hedge transaction, and increasing the denominator for diluted earnings per share by 0.8 million shares for the call option transaction. However, only the dilutive effect of the 0.3 million shares for the nine months ended September 30, 2004, and the 0.8 million shares for the nine months ended September 30, 2003, with respect to the call option transaction, were included in the Company’s diluted earnings per share calculation above. The convertible bond hedge, under SFAS 128, is always anti-dilutive.

The net income for the diluted EPS computation reflects the reduction in interest expense of $0 and $2.6 million for the three and nine months ended September 30, 2004, respectively, that would result from an assumed conversion of the 7¤8% convertible subordinated notes. The net income for the diluted “if

10




converted” EPS computation reflects the reduction in interest expense of $0.8 million for the three months ended September 30, 2004, that would result from an assumed conversion of the 7¤8% convertible subordinated notes. The net income for the diluted EPS computation reflects the reduction in interest expense of $1.1 million and $2.5 million for the three and nine months ended September 30, 2003, respectively, that would result from an assumed conversion of the 7¤8% convertible subordinated notes.

4.   STOCK-BASED COMPENSATION:

The Company accounts for employee stock option grants in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and has adopted the disclosure-only alternative of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under APB 25, compensation expense is based on the difference, if any, on the date of grant between the fair value of the common stock and the exercise price of the option.

The fair value of warrants, options or stock exchanged for services from non-employees is expensed over the period benefited. The warrants and options are valued using the Black-Scholes option pricing model.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands, except per share data):

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

(As Restated)(1)

 

 

 

(As Restated)(1)

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

4,987

 

 

$

65,204

 

 

$

103,616

 

 

$

149,822

 

 

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

 

59

 

 

115

 

 

257

 

 

2,304

 

 

Deduct: Total compensation expense determined under fair value based method for all awards, net of related tax effects

 

(8,817

)

 

(7,199

)

 

(25,471

)

 

(21,409

)

 

Pro forma net income

 

$

(3,771

)

 

$

58,120

 

 

$

78,402

 

 

$

130,717

 

 

Basic income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

0.04

 

 

$

0.63

 

 

$

0.91

 

 

$

1.45

 

 

Pro forma

 

$

(0.03

)

 

$

0.57

 

 

$

0.69

 

 

$

1.26

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

4,987

 

 

$

65,204

 

 

$

103,616

 

 

$

149,822

 

 

Effect of dilutive securities 7¤8% Convertible subordinated notes

 

 

 

1,098

 

 

2,663

 

 

2,473

 

 

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

 

59

 

 

115

 

 

257

 

 

2,304

 

 

Deduct: Total compensation expense determined under fair value method for all awards, net of
related tax effects

 

(8,817

)

 

(7,199

)

 

(25,471

)

 

(21,409

)

 

Pro forma net income

 

$

(3,771

)

 

$

59,218

 

 

$

81,065

 

 

$

133,190

 

 

Diluted income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

0.04

 

 

$

0.50

 

 

$

0.78

 

 

$

1.23

 

 

Pro forma

 

$

(0.03

)

 

$

0.46

 

 

$

0.61

 

 

$

1.11

 

 


(1)             See the Company’s filing on Form 10-K/A filed with the SEC.

11




5.   COMPREHENSIVE INCOME:

The reconciliation of net income to comprehensive income for the three and nine months ended September 30, 2004 and 2003 is as follows (in thousands):

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

(As Restated)(1)

 

 

 

(As Restated)(1)

 

Net income

 

$

4,987

 

 

$

65,204

 

 

$

103,616

 

 

$

149,822

 

 

Unrealized gains (losses) on investments

 

(1,829

)

 

(309

)

 

(1,350

)

 

874

 

 

Change in cumulative translation adjustments 

 

(550

)

 

663

 

 

(48

)

 

619

 

 

Total comprehensive income

 

$

2,608

 

 

$

65,558

 

 

$

102,218

 

 

$

151,315

 

 


(1)          See the Company’s filing on Form 10-K/A filed with the SEC.

6.   CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:

Cash and cash equivalents consist of instruments with maturities of three months or less at the date of purchase. There were no available-for-sale securities included in cash and cash equivalents at September 30, 2004 or December 31, 2003. Short-term investments, consisting entirely of available-for-sale securities, were $44.9 million and $48.6 million at September 30, 2004 and December 31, 2003, respectively. These available-for-sale securities consist of government-backed notes, commercial paper, floating rate corporate bonds and fixed income corporate bonds. These investments are recorded at fair value. Any unrealized holding gains or losses are reported as a component of comprehensive other income. Realized gains and losses are reported in earnings.

The Company accepts bank notes receivable with maturity dates between three and six months from its customers in China in the normal course of business. Bank notes receivable were $39.2 million and $11.5 million at September 30, 2004 and December 31, 2003, respectively, and have been included in either cash and cash equivalents or short-term investments. The Company may discount these notes with banking institutions in China. A sale of these notes is reflected as a reduction of cash and cash equivalents or short-term investments and the proceeds of the settlement of these notes are included in cash flows from operating activities in the consolidated statement of cash flows. There were no bank notes receivable sold during the three and nine months ended September 30, 2004; there were $65.1 million and $176.4 million of bank notes receivable sold during the three and nine months ended September 30, 2003, respectively. Any notes that have been sold are not included in the Company’s consolidated balance sheets as the criteria for sale treatment established by Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS 140”), have been met. Under SFAS 140, upon a transfer, the transferor or entity must derecognize financial assets when control has been surrendered and the transferee obtains control over the assets. In addition, the transferred assets have been isolated from the transferor, beyond the reach of its creditors, and the transferee has the right, without conditions or constraints, to pledge or exchange the assets it has received. The costs of settling or transferring these notes receivable were $0.5 million and $0.9 million for the three and nine months ended September 30, 2003, respectively.

7.   RESTRICTED CASH AND SHORT-TERM INVESTMENTS:

At September 30, 2004, the Company had restricted cash and short-term investments of $36.8 million primarily comprised of $25.3 million of restricted short-term investments held for standby letters of credit, $11.0 million of restricted cash held for standby letters of credit and $0.5 million of restricted cash. At December 31, 2003, the Company had restricted cash and short-term investments of $24.4 million

12




primarily comprised of $20.5 million of restricted short-term investments for standby letters of credit and restricted cash of a $3.7 million time deposit required for Japanese tax purposes.

The Company issues standby letters of credit primarily to support international sales activities outside of China. When the Company submits a bid for a sale, often the potential customer will require that the Company issue a bid bond or a standby letter of credit to demonstrate its commitment through the bid process. In addition, the Company may be required to issue standby letters of credit as guarantees for advance customer payments upon contract signing or performance guarantees. The standby letters of credit usually expire six to nine months from date of issuance without being drawn by the beneficiary thereof. Finally, the Company may issue commercial letters of credit in support of purchase commitments.

8.   ACCOUNTS AND NOTES RECEIVABLE:

The Company accepts commercial notes receivable with maturity dates between three and six months from its customers in China in the normal course of business. Notes receivable available for sale were $24.5 million and $11.4 million at September 30, 2004 and December 31, 2003, respectively. The Company may discount these notes with banking institutions in China. A sale of these notes is reflected as a reduction of notes receivable and the proceeds of the settlement of these notes are included in cash flows from operating activities in the consolidated statement of cash flows. There were no notes receivable sold during the three and nine months ended September 30, 2004; there were $94.0 million and $138.5 million of notes receivable sold during the three and nine months ended September 30, 2003, respectively. Any notes that have been sold are not included in the Company’s consolidated balance sheets as the criteria for sale treatment established by SFAS 140, has been met. The costs of settling or transferring these notes receivable were $0.7 million and $1.2 million for the three and nine months ended September 30, 2003, respectively.

9.   SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

Nine months ended
September 30,

 

 

 

2004

 

2003

 

 

 

(in thousands)

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

3,860

 

$

2,627

 

Income taxes

 

$

9,137

 

$

37,178

 

 

 

 

Nine months ended
September 30,

 

 

 

2004

 

2003

 

 

 

(in thousands)

 

Non-cash operating activities were as follows:

 

 

 

 

 

Accounts receivable transferred to notes receivable

 

$

64,003

 

$

256,526

 

 

13




10.   INVENTORIES AND DEFERRED COSTS/INVENTORIES AT CUSTOMER SITES UNDER CONTRACTS:

As of September 30, 2004 and December 31, 2003, total inventories and deferred costs/inventories at customer sites under contracts consist of the following:

 

 

September 30,
2004

 

December 31,
2003

 

 

 

(As Restated)(2)

 

(As Restated)(1)

 

 

 

(in thousands)

 

Inventories

 

 

 

 

 

 

 

 

 

Raw materials

 

 

$

183,468

 

 

 

$

66,753

 

 

Work-in-process

 

 

84,508

 

 

 

51,116

 

 

Finished goods

 

 

56,268

 

 

 

48,206

 

 

Finished goods on consignment at reseller

 

 

7,569

 

 

 

 

 

Inventories at customer sites without contracts

 

 

107,626

 

 

 

90,990

 

 

 

 

 

$

439,439

 

 

 

$

257,065

 

 

Deferred costs/Inventories at customer sites under contracts

 

 

 

 

 

 

 

 

 

Finished goods

 

 

$

151,986

 

 

 

$

542,060

 

 


(1)   See the Company’s filing on Form 10-K/A filed with the SEC.

(2)   See Note 25 to the condensed consolidated financial statements.

11.   ACQUISITIONS

TELOS Technology, Inc.

On May 19, 2004, the Company completed its acquisition of substantially all of the assets and certain liabilities of TELOS Technology, Inc. and its subsidiaries (“TELOS”). TELOS is a provider of mobile switching products and services for voice and data communication networks to developing rural, enterprise and emerging wireless markets. The total consideration for the acquisition, funded from cash on hand, was approximately $30.1 million. The Company paid $29.0 million in cash, in addition to $1.1 million of acquisition-related transaction costs. Within one year of the acquisition date, additional payments totaling a maximum of $19.0 million may become payable based upon revenue recognized from the sale of TELOS products. In the event these revenue milestones are met, the original purchase price will be adjusted for the amount of the contingent payment in accordance with Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations.”

The existing technology acquired included the entire TELOS product family of code division multiple access (“CDMA”) softswitch technology products, supporting servers and operations maintenance centers. CDMA technology is the common platform on which second and third-generation wireless data services and applications are built. By assigning unique codes to each communication to differentiate it from others in the same spectrum, CDMA technology allows many users to occupy the same time and frequency allocations in a given band or space. The TELOS product line will be integrated with the Company’s suite of CDMA products, strengthening the Company’s existing CDMA product portfolio. In addition to developed product technology, the Company acquired fixed assets, in-process research and development (“IPR&D”), an assembled workforce of approximately 60 employees, customer relationships and recorded goodwill.

14




Subsequent to the May 19, 2004 acquisition of TELOS, the Company completed the allocation of the purchase price based in part upon an independent valuation. The amount of the purchase price allocated to IPR&D of $1.4 million was charged to the Company’s results of operations, as no alternative future uses existed at the acquisition date. The Company initially recorded goodwill of $6.6 million in connection with the acquisition. During the third quarter of 2004, the Company reduced both the purchase price and goodwill associated with this acquisition by $0.2 million to reflect the difference between the estimated and actual professional services fees incurred related to this acquisition. In total, the Company recorded $6.4 million of goodwill related to this acquisition. The results of operations of TELOS have been included in the Company’s consolidated results of operations beginning on the acquisition date of May 19, 2004.

In assessing TELOS IPR&D projects, the Company considered key product characteristics including the product’s development stage at the acquisition date, the product’s life cycle and the product’s future prospects. The Company also considered the rate at which technology changes in the telecommunications equipment industry, the industry’s competitive environment and the economic outlook for both local and global markets.

As of the acquisition date, TELOS had two projects under development that qualified for IPR&D: the Sonata SE product family and the iCell product. The objective of both projects is to enhance the functionality of products designed to comply with the CDMA2000 technology standard. Specifically, the objective of the Sonata SE product family is to provide additional features to operation maintenance center products. The objective of the iCell product is to enhance iCell base station features.

The projects under development are enhancements to existing products that do not affect the functionality of those existing products. As such, the significant risk the Company faces is to complete these projects within the scope of the budget. As of the closing date, the Sonata SE and the iCell projects were approximately 20% and 30% complete, respectively. As of the closing, the anticipated completion dates and estimated costs to complete the Sonata SE and iCell projects were June 2005 and $1.1 million and December 2004 and $0.2 million, respectively.

The following table summarizes the allocation of the purchase price for TELOS based upon the independent valuation (in thousands):

Fair value of tangible net assets

 

 

 

Inventory

 

$

1,382

 

Property, plant and equipment

 

2,010

 

Other tangible assets

 

1,327

 

Customer relationships

 

5,000

 

Existing technology

 

15,900

 

In-process research and development

 

1,400

 

Liabilities assumed

 

(3,380

)

Excess of costs of acquiring TELOS over fair value of identified net assets acquired (goodwill)

 

6,449

 

 

 

$

30,088

 

 

The estimated useful lives of the customer relationships and existing technology intangible assets are five years.

Refer to the consolidated table below for the pro forma results of operations reflecting the combined results of the Company and TELOS for the three and nine months ended September 30, 2004 and 2003 as if the business combination occurred at the beginning of the period. These results do not purport to be indicative of what would have occurred had the acquisition been made as of that date or the results of operations which may occur in future periods.

15




Hyundai Syscomm, Inc.

On April 27, 2004, the Company completed its acquisition of the assets, substantially all of the intellectual property, certain employees and certain contracts related to Hyundai Syscomm, Inc.’s (“HSI”) CDMA infrastructure business for markets outside of Korea. Subject to the attainment of certain milestones and the transfer of certain know-how, the total consideration for this transaction was approximately $12.3 million excluding transaction costs of $2.1 million. There was $7.3 million in cash payable at the closing date and an additional $3.0 million in cash payable one year from the closing date. The remaining purchase price was comprised of $2.0 million payable upon the completion of technical training by HSI employees to Company manufacturing staff in China under the terms of a Training Services Agreement and $2.1 million of transaction costs. Not included in the purchase price was $2.0 million payable upon the completion of certain revenue milestones. In the event these revenue milestones are met, the original purchase price will be adjusted for the amount of the contingent payment in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”). In conjunction with this transaction, the Company loaned HSI $3.2 million at an effective interest rate of 12% per annum, which was used by HSI to satisfy outstanding debt obligations. The principal amount of the loan is due in April 2005. The Company may offset HSI’s payment obligations against the outstanding $3.0 million of the purchase price and any other liabilities.

Under the terms of the transaction with HSI, the Company acquired existing technologies and entered into non-compete and licensing agreements. The existing technologies acquired were the base transceiver station (“BTS”) and base station controller (“BSC”) product lines. BTS is the antenna and radio equipment that enables wireless devices to communicate with a land-based transmission network in a given range. BSC performs radio signal management functions for BTS, managing functions such as frequency assignment and handoff. As part of the asset purchase agreement, the Company and HSI entered into a training services agreement, whereby HSI employees will provide technical training to Company manufacturing staff in China for the ninth-month period subsequent to the acquisition. This technology and technological know-how will strengthen the Company’s existing CDMA product portfolio and the development of future CDMA technology.

In addition to acquiring existing technology, the Company entered non-compete and licensing agreements with HSI. The non-compete agreement prohibits HSI from competing against the Company in all countries except Korea for four years from the valuation date. The licensing agreement requires that HSI pay the Company 1% of revenue as royalty for the usage of the intellectual property that the Company acquired under the terms of the acquisition for fifteen years subsequent to the valuation date.

Subsequent to the April 27, 2004 acquisition of HSI, the Company completed the allocation of the purchase price based in part upon an independent valuation. The Company initially recorded goodwill of $6.8 million in connection with the acquisition. During the third quarter of 2004, the Company increased both the purchase price and the goodwill associated with the acquisition by $0.3 million to reflect the excess of the actual professional fees incurred compared to the estimated fees related to the acquisition. In total, the Company recorded $2.1 million of professional services fees related to the acquisition. The results of operations of HSI have been included in the Company’s consolidated results of operations beginning on the acquisition date of April 27, 2004.

16




The following table summarizes the final allocation of the purchase price for HSI based upon the final independent valuation (in thousands):

Fair value of tangible net assets

 

 

 

Property, plant and equipment

 

$

1,440

 

Other tangible assets

 

673

 

Existing technology

 

3,559

 

Non-compete intangible asset

 

760

 

IP license agreement

 

890

 

Excess of costs of acquiring HSI over fair value of identified net assets acquired (goodwill)

 

7,055

 

 

 

$

14,377

 

 

The intangible assets have estimated useful lives ranging from three to five years as follows: existing technology, five years; non-compete agreement, three years; intellectual property license agreement, three years.

Refer to the consolidated table below for pro forma results of operations reflecting the combined results of the Company and HSI for the three and nine months ended September 30, 2004 and 2003 as if the business combination occurred at the beginning of the period. These results do not purport to be indicative of what would have occurred had the acquisition been made as of that date or the results of operations which may occur in future periods.

The unaudited pro forma results of operations include historical operations of the Company, TELOS and HSI. Certain non-recurring charges were recorded by TELOS and included $2.3 million of expense for warrants issued in conjunction with an issuance of senior convertible notes in the second quarter of 2003 and $0.1 million of restructuring costs incurred in the first quarter of 2003.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro Forma

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

adjustments to reflect

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization

 

 

 

 

 

 

 

UT Starcom, Inc.

 

TELOS Technology, Inc.

 

Hyundai Syscomm, Inc.

 

of acquired assets

 

Pro Forma Results

 

 

 

 

 

 

 

For the

 

 

 

For the

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine

 

Nine

 

period

 

Nine

 

period

 

Nine

 

Nine

 

Nine

 

Nine

 

Nine

 

 

 

Months

 

Months

 

from

 

Months

 

from

 

Months

 

Months

 

Months

 

Months

 

Months

 

 

 

Ended

 

Ended

 

January 1

 

Ended

 

January 1

 

Ended

 

Ended

 

Ended

 

Ended

 

Ended

 

 

 

  September 30,  

 

  September 30,  

 

  to May 18,  

 

  September 30,  

 

  to April 27,  

 

  September 30,  

 

  September 30,  

 

  September 30,  

 

  September 30,  

 

  September 30,  

 

 

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

(As
Restated)(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(As
Restated)(1)

 

 

 

(In thousands, except per share data)

 

Proforma adjusted net revenue

 

 

$

1,956,935

 

 

 

$

1,320,736

 

 

 

$

1,689

 

 

 

$

5,837

 

 

 

$

2,872

 

 

 

$

16,327

 

 

 

$

 

 

 

$

 

 

 

$

1,961,496

 

 

 

$

1,342,900

 

 

Proforma adjusted net income(loss)

 

 

$

103,616

 

 

 

$

149,822

 

 

 

$

(3,953

)

 

 

$

(7,712

)

 

 

$

(4,548

)

 

 

$

(10,267

)

 

 

$

(2,123

)

 

 

$

(3,993

)

 

 

$

92,992

 

 

 

$

127,850

 

 

Proforma adjusted basic earnings(loss) per share

 

 

$

0.91

 

 

 

$

1.45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

0.81

 

 

 

$

1.23

 

 

Proforma adjusted diluted earnings(loss) per share

 

 

$

0.78

 

 

 

$

1.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

0.70

 

 

 

$

1.05

 

 


(1)  See the Company’s filing on Form 10-K/A filed with the SEC.

 

Audiovox Communications, Inc.

On June 14, 2004, the Company announced an agreement to acquire Audiovox Communications Corporation (“ACC”), the wireless handset division of Audiovox Corporation. On November 1, 2004, the Company completed its acquisition of ACC and acquired select assets and liabilities, including inventories, prepaids, third-party payables, accrued expenses and the right to hire approximately 250 employees for $165.1 million in cash. The Company acquired ACC’s sales, service and support infrastructure, its CDMA

17




handset brand, access to supply-chain channels, product marketing expertise and key relationships with CDMA operators in North and South America. Refer to Note 24, Subsequent Event.

12.   GOODWILL AND INTANGIBLE ASSETS:

As of September 30, 2004 and December 31, 2003, goodwill and other acquired intangible assets consisted of the following (in thousands):

 

 

September 30, 2004

 

December 31, 2003

 

 

 

(in thousands)

 

Goodwill

 

 

$

126,367

 

 

 

$

113,003

 

 

Less accumulated amortization

 

 

(12,823

)

 

 

(12,823

)

 

 

 

 

$

113,544

 

 

 

$

100,180

 

 

Identified intangible assets:

 

 

 

 

 

 

 

 

 

Existing technology

 

 

$

43,081

 

 

 

$

23,630

 

 

Less accumulated amortization

 

 

(13,098

)

 

 

(7,255

)

 

 

 

 

$

29,983

 

 

 

$

16,375

 

 

Customer relationships

 

 

$

32,820

 

 

 

$

27,820

 

 

Less accumulated amortization

 

 

(4,043

)

 

 

(1,623

)

 

 

 

 

$

28,777

 

 

 

$

26,197

 

 

Trade names

 

 

$

940

 

 

 

$

940

 

 

Less accumulated amortization

 

 

(627

)

 

 

(274

)

 

 

 

 

$

313

 

 

 

$

666