UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
December 31,
2009
|
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:
001-31783
RAE Systems Inc.
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
|
|
77-0280662
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
3775 North First Street San Jose, California
|
|
95134
|
(Address of principal executive
offices)
|
|
(Zip Code)
|
408-952-8200
(Registrants telephone number, including area
code)
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
|
Common Stock, $0.001 par value per share
|
|
NYSE Alternext US
|
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated
filer o
|
|
Accelerated
filer þ
|
|
Non-accelerated
filer o
|
|
Smaller reporting
company o
|
|
|
(Do not check if a smaller
reporting company)
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 30, 2009, the aggregate market value of the
voting and non-voting common equity held by non-affiliates of
the registrant was approximately $82,032,601, based upon the
closing sale price of $1.38 on the NYSE Alternext US (formerly
the American Stock Exchange) on June 30, 2009, the last
business day of the registrants most recently completed
second fiscal quarter. As of the close of business on
February 26, 2010, the number of shares of
registrants Common Stock outstanding was 59,438,328.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants proxy statement for its 2010
Annual Meeting of Stockholders are incorporated by reference
into Part III of this Annual Report on
Form 10-K.
RAE
SYSTEMS INC.
INDEX TO
ANNUAL REPORT ON
FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2009
TABLE OF CONTENTS
1
PART I
In addition to historical information, this Annual Report on
Form 10-K
contains forward-looking statements. These statements typically
are preceded or accompanied by words like believe,
anticipate, expect, may,
will, should, intend,
plan, estimate, potential,
or continue, and other words of similar meaning.
These forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking
statements. Readers are cautioned not to place undue reliance on
those forward-looking statements, which reflect
managements opinions only as of the date hereof. We
undertake no obligation to revise or update or publicly release
the results of any revisions or update to these forward-looking
statements. Readers should carefully review the risk factors
described herein and in other documents that we file from time
to time with the Securities and Exchange Commission, including
the Quarterly Reports on
Form 10-Q
that we file for the fiscal year 2010.
Overview
RAE Systems Inc. (referred to herein as the Company,
we, or our) is a leading developer and
manufacturer of rapidly-deployable, multi-sensor chemical and
radiation detection monitors and wireless networks for
application in five key markets: oil and gas, hazardous material
management, industrial safety, civil defense and environmental
remediation. We provide personal, portable and wireless sensor
networks that enable our customers in more than 95 countries to
identify safety and security threats in real-time. The Company
was founded in 1991 and originally developed technologies for
the detection of hazardous materials in environmental
remediation and chemical spill
clean-ups.
We have a broad patent portfolio consisting of 14 issued
U.S. patents, one patent issued in Japan, one issued and
five pending EU patents, and five issued and 14 pending
technology patents in China. These patents in gas and radiation
detection technology are the basis for many of our products.
We offer a comprehensive portfolio of fixed and portable
breathing zone single and multi-sensor chemical and radiation
detection products, many with wireless integrated systems
capability. Industrial applications include the detection of
toxic industrial chemicals, volatile organic compounds and
petrochemicals. Our products are deployed in oil and gas
facilities, petrochemical and plastics plants, steel mills and
in other types of manufacturing facilities. Our products enable
the military and first responders such as firefighters, law
enforcement and other emergency management personnel to detect
and provide early warning of hazardous materials.
We have significant operations in the Peoples Republic of
China (China), including research and development
and manufacturing operations in Shanghai. We own 96% of RAE-KLH
(Beijing) Co., Limited, or RAE Beijing, a manufacturer and
distributor of safety, environmental and personal protection
monitors and equipment. We own a 70% interest in RAE Coal Mine
Safety Instruments (Fushun) Co., Ltd., hereinafter referred to
as RAE Fushun. RAE Fushun offers a range of portable and fixed
use safety products, primarily to the China coal mining industry.
Additional information about the Company is available on our web
site at www.raesystems.com. Information contained on or
accessible through our web site is not part of this Annual
Report or our other filings with the Securities and Exchange
Commission (SEC). We make available, free of charge
on our web site, access to our Annual Report on
Form 10-K,
our Quarterly Reports on
Form 10-Q,
our Current Reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after we
file them electronically with or furnish them to the SEC.
The public may also read and copy any materials we file with the
SEC at the SECs Public Reference Room at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. The public may obtain information
on the operation of the Public Reference Rooms by calling the
SEC at
1-800-SEC-0330.
The SEC also maintains an internet web site that contains
reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. The
SECs internet web site is located at
http://www.sec.gov.
2
Industry
Background
The market for our products has evolved from being strictly
focused on environmental and industrial monitoring to
encompassing energy exploration and production, mining and
public safety. Demand for our products has grown in the fields
of petrochemical production, environmental remediation, confined
space entry, and OSHA industrial safety compliance monitoring.
The application of our products in these established markets
stems from the dependence of numerous key industries on sensors
that provide vital information that can affect worker safety,
products, processes and systems.
Sophisticated monitoring is important for emergency response
personnel to detect harmful agents that could create a
potentially lethal situation. We believe first responders need a
suite of products that provide a practical, comprehensive
solution to protect them from this danger. Many of the same
equipment capabilities that are necessary to support first
responders are also necessary to address other areas where there
are increasing demands for chemical and radiation detection. For
example, wireless detection systems have been deployed at many
of the worlds major spectator events for public venue
protection.
RAE Systems now offers a full suite of gas detection solutions
for the oil, gas, petrochemical, adhesives and polymers markets.
All of these markets require the constant monitoring of both
flammable and toxic hydrocarbons. In 2009, RAE Systems began
offering a full suite of personal, portable, fixed and wireless
gas detection monitors for these markets.
Products
We manufacture and sell sensors and measurement products, which
may also be integrated with wireless technology. As an
instrument manufacturer, we have differentiated ourselves from
our competition by developing a broad array of specific chemical
sensors, including an array of electrochemical, solid polymer,
infrared and catalytic-bead gas sensors as well as
photoionization detectors.
Sensor
and Measurement Products
Our products are based on proprietary and patented gas, chemical
and radiation sensors. We design and manufacture the following
sensors:
|
|
|
|
|
photoionization detectors for the measurement of volatile
organic compounds, highly toxic chemical warfare agents and
toxic industrial chemicals;
|
|
|
|
catalytic bead pellistors for the detection and measurement of
combustible gas;
|
|
|
|
non-dispersive infrared sensors for the measurement of carbon
dioxide and hydrocarbons;
|
|
|
|
electro-chemical sensors for the measurement of oxygen and toxic
gases such as ammonia, carbon monoxide, chlorine and hydrogen
sulfide;
|
|
|
|
solid polymer electrode sensors for the measurement of
oxygen; and
|
|
|
|
solid-state scintillation detectors for both neutron and gamma
radiation.
|
Photoionization detectors use ultraviolet light to ionize gas
molecules into charged particles. This produces a flow of
electrical current proportional to the concentration of the
charge. Our patented photoionization detector technology enables
dependable, linear,
part-per-billion
range readings for many toxic gases and vapors. Photoionization
detection is particularly suited to the detection of the highly
toxic, long-chain, low vapor pressure volatile organic compounds
associated with many toxic industrial chemicals. Our products
that use this technology include: the MultiRAE Plus, AreaRAE,
AreaRAE Inert, AreaRAE Steel, MiniRAE 3000, MiniRAE Lite, ppbRAE
3000 and UltraRAE 3000.
Integrated
Wireless Products
We have developed wireless capabilities for many of our gas
monitoring instruments that enable detection from remote
locations. Our AreaRAE and MeshGuard products offer
wireless-enabled gas detectors, which provide
3
real-time transmission of monitoring information to a base
station located up to two miles away from the detectors. The
AreaRAE incorporates technologies such as global positioning
system (GPS) receivers and geographic information system (GIS)
capabilities to create awareness of hazardous conditions for
decision makers located remotely in a central command and
control location. In addition, both the AreaRAE and MeshGuard
can interface with the Internet, making measurements available
from virtually any location with Internet access.
Our AreaRAE Gamma combines a multi-gas and radiation detector
equipped with a wireless radio frequency modem that allows the
unit to communicate and transmit sensor and location information
on a real-time basis to a remotely located base controller.
AreaRAE Steel is a stainless steel version of the AreaRAE that
meets the intrinsic safety requirements of the United States,
Canada and the European Union (ATEX). All of the AreaRAE models
are available in Rapid Deployment kits to enable swift
deployment in the field.
Meshguard, introduced in October 2008, is a new family of
wireless products designed to replace the fixed
sensor systems that are deployed for oil and gas exploration.
This family of products uses mesh-radio to create a
self healing network where each sensor has both a radio receiver
and transmitter. This architecture gives the MeshGuard sensor
the ability to transmit radio data in and around metal
structures that are generally difficult for clear radio
transmission.
RAELink 3 provides the wireless network bridge to connect
MultiRAE Plus, MiniRAE 3000, ppbRAE 3000 and UltraRAE 3000 to
either the AreaRAE or MeshGuard networks.
Our wireless products include the AreaRAE, AreaRAE Steel,
AreaRAE Gamma, MeshGuard and RAELink3.
Radiation
Products
We have developed technology for gamma and neutron radiation
detection. These technologies are incorporated into highly
sensitive handheld instruments capable of detecting low levels
of radiation on a real-time basis and dosimeters which are used
in nuclear power plants to protect personnel from long-term
radiation exposure. Our radiation products include
GammaRAE II R, NeutronRAE II, AreaRAE Gamma, AreaRAE
Steel Gama and DoseRAE. Our markets include nuclear power plants
and first responders.
Sales,
Marketing and Distribution
We sell our products in more than 95 countries and through an
international network of direct sales personnel, representatives
and distributors managed from our San Jose, California
headquarters, our Beijing and Fushun, China operations, Hong
Kong and our Copenhagen, Denmark European headquarters.
Currently, our predominant distribution channel is value added
business-to-business or business-to-government distribution
services companies that focus on the health, safety and security
product markets. Many of our distributors are international
companies with distribution rights in specific territories. We
seek those distributors that have the greatest reach and
broadest array of end-user customers. We monitor our
distributors performance according to volume, payment
schedule, training, services and other support programs.
Our wireless detection products, specifically the AreaRAE and
MeshGuard suite of products and their peripherals, are largely
sold through a direct sales channel in the United States and
Europe. This channel was established because of the technical
expertise required to advise and sell these complex monitoring
systems.
Our marketing efforts are focused on increasing brand awareness
and creating product preference through print advertising,
direct mail, email marketing, web sites, trade shows and focused
sales strategies. The primary responsibilities of our product
managers is to create products and develop marketing programs
targeted towards specific audiences in the areas of wireless
systems, portable products, consumable products and government
requirements.
Customers
We have significant numbers of instruments currently in service
in more than 95 countries, with various government agencies and
many of the worlds leading corporations. Our products are
used in civilian and government atmospheric monitoring programs.
Our end-user customers include many industrial companies that
4
use hazardous chemicals as part of their manufacturing
processes. We serve customers in five key markets: oil and gas,
hazardous material management, industrial safety, civil defense
and environmental remediation. Our products are used in confined
space entry monitoring programs, public venue protection, first
responders, law enforcement, all branches of the armed forces
and numerous local, state and federal agencies and departments.
Research,
Development and Engineering
As a stand-alone toxic gas and radiation instruments
manufacturer, we continue to invest in sensor technology. We
were among the first companies in our industry to deploy
Reduction of Hazardous Substances (RoHS) compliant oxygen
sensors. These oxygen sensors meet the RoHS requirements of
China, the European Union and the State of California. The
Company maintains research, development and engineering
facilities in San Jose, CA, and in Shanghai and Beijing,
China. Our primary R&D facility is located in Shanghai,
where we also have a radiation calibration lab. This lab is an
important facility for the Company to expand its future
radiation detection product offerings.
We use modular product design processes and flexible rapid
manufacturing. These investments have resulted in improved
system performance as well as advanced scalability, thereby
allowing rapid development and regional certification of new
products.
The Company currently holds a total of 21 patents granted with
19 patents pending. Theses patents include:
|
|
|
|
|
14 United States patents granted;
|
|
|
|
5 China patents granted with 14 pending;
|
|
|
|
1 Europe patent granted with 5 pending; and
|
|
|
|
1 Japan patent granted.
|
Manufacturing
We lease a modern 61,000 square foot manufacturing facility
with laboratory space in Shanghai, China, where the majority of
our components and products are manufactured. We lease a
67,000 square foot office, manufacturing, integration and
test site in San Jose, California, where we manufacture
some of our more complex and sensitive sensors. Our
manufacturing operations in Shanghai and California are ISO 9001
certified. We have limited manufacturing capabilities in our RAE
Beijing operations, consisting of 106,000 square feet, of
which 41,000 square feet are dedicated to manufacturing and
the balance to sales, marketing and administrative functions. We
own a 239,000 square foot facility in Fushun, China, of
which 179,000 square feet are dedicated to manufacturing
and the balance to sales, marketing and administrative functions.
Competition
The markets for gas detection monitoring devices and wireless
gas monitoring systems are highly competitive. Our global gas
detection competitors include Industrial Scientific Corporation,
Mine Safety Appliances Company, Honeywell, Ion Science, Draeger
Safety Inc., Gastec Corporation and Sperian Protection. In
addition, China specific gas detection competitors include
Ex-Saf, Cosmos, and local China companies with established
distribution networks.
Competitors in the gas monitoring industry differentiate
themselves on the basis of their sensor technology, product
quality, language support, service offerings, sales
capabilities, cost and time to market. An emerging
differentiator is the ability to manage data for long term
exposure records and incident management. We believe we compete
strongly in each of these areas and consider ourselves an
industry leader in the design, development, marketing and
manufacture of toxic gas monitoring devices. In particular, we
believe our ability to develop products that integrate different
chemical detection techniques, such as photoionization
detectors, electrochemical sensors for specific toxic chemicals
and combustible gas detectors, along with communication
technologies that allow wireless data transfer, provide us with
a competitive advantage. In addition, we believe our single user
interface, training and support materials are a valuable
resource for our distributors and end-users, which make our
products more attractive to customers.
5
Many of our gas detection competitors have longer operating
histories, larger customer bases, greater brand recognition and
significantly greater financial and marketing resources. In
addition, some of our competitors may be able to devote greater
resources to marketing and promotional campaigns, adopt more
aggressive pricing policies
and/or
devote more resources to technology and systems development.
We differentiate our radiation detection products on their
intrinsic safety certifications and the dual nature of our
products. Our GammaRAE II R combines both a detector and
dosimeter. Our NeutronRAE combines both gamma radiation and
neutron detectors. Our AreaRAE Gamma combines wireless gas
detection and gamma radiation monitoring. Competitors in the
radiation detection market include Canberra, Exporanium, ICx,
MGP Polimaster Ltd., Santa Barbara Systems, Smiths
Detection, ThermoFisher and TSA Limited.
Employees
As of December 31, 2009, we employed 1,259 people. Our
employees are not covered by a collective bargaining agreement.
We have never experienced an employee-related work stoppage and
consider our employee relations to be good.
Executive
Officers of the Registrant
The following table sets forth the names, ages and positions
held by our executive officers.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Robert I. Chen
|
|
|
62
|
|
|
President, Chief Executive Officer and Chairman of the Board
|
Randall Gausman
|
|
|
60
|
|
|
Vice President and Chief Financial Officer
|
Peter C. Hsi
|
|
|
59
|
|
|
Chief Technology Officer
|
Ming-Ching Tang
|
|
|
59
|
|
|
Executive Vice President Operations
|
Christopher Hameister
|
|
|
55
|
|
|
Vice President Asia-Pacific, Europe and Middle East Business
Operations
|
William Jackson
|
|
|
50
|
|
|
Vice President Global Marketing
|
Bin Lu
|
|
|
37
|
|
|
Vice President and General Manager Beijing Business Operations
|
Fei-Zhou Shen
|
|
|
47
|
|
|
Vice President Corporate Development and Fushun Business
Operations
|
Ryan Watson
|
|
|
37
|
|
|
Vice President Americas Sales
|
Robert I. Chen co-founded RAE Systems in 1991 and has
served as President, Chief Executive Officer and a director
since our inception. From 1981 to 1990, Mr. Chen served as
President and Chief Executive Officer of Applied Optoelectronic
Technology Corporation, a manufacturer of computer-aided test
systems, a company he founded and subsequently sold to
Hewlett-Packard. Mr. Chen currently serves on the board of
directors of Shanghai Ericsson Simtek Electronics Company,
Limited, a telecommunications and electronics company.
Mr. Chen received a BS in electrical engineering from
Taiwan National Cheng Kung University, an MS in electrical
engineering from South Dakota School of Mines and Technology, an
advanced engineering degree from Syracuse University and
graduated from the Harvard Owner/President program.
Randall Gausman joined RAE Systems in October 2006 as
Chief Financial Officer. From May 2006 until joining the
Company, Mr. Gausman worked as an independent financial
consultant. From April 2002 to May 2006, Mr. Gausman served
as Chief Financial Officer of Tut Systems, Inc., which delivered
industry leading content processing and distribution products
for deploying next-generation video and IP services over
broadband networks. Previously he served as co-founder and CFO
of Zantaz, Inc. and a senior finance executive at American
President Companies. Mr. Gausman holds both a BS and MBA
from the University of Southern California, as well as a
certificate in corporate finance from the University of Michigan
School of Business Administration.
Dr. Peter C. Hsi co-founded RAE Systems in 1991 and
has served as Chief Technology Officer and a director since our
inception. Prior to co-founding RAE Systems, Dr. Hsi was
the chief architect for semiconductor test
6
systems at Applied Optoelectronic Technology Corporation. He was
also the general manager for Shanghai Simax Technology Co. Ltd.
Dr. Hsi has filed 21 patent applications, of which 16 have
been granted and 5 are pending. Dr. Hsi received a BS in
electrical engineering from the National Chiao-Tung University,
and a MS and PhD in electrical engineering from Syracuse
University.
Dr. Ming-Ching Tang joined RAE Systems in June 2007
as Vice President Manufacturing and was promoted to Executive
Vice President Operations in August 2009. Prior to joining the
Company, Dr. Tang was Senior Vice President of TDK China
from 2004 to 2007, and was President of Trace Storage
Technology, a thin film magnetic recording media company in
Taiwan from 2001 to 2004. Prior to 2001, Dr. Tang held
senior executive positions in hard drive technology development
with Western Digital, Seagate Technology and IBM. Dr. Tang
received a BS in mechanical engineering from National Taiwan
University, an MS in mechanical engineering from Massachusetts
Institute of Technology and a PhD in mechanical engineering from
University of California, Berkeley.
Christopher Hameister has served as Vice President of
Asia-Pacific, Europe, and Middle East Business Operations since
January 2007. Previously, Mr. Hameister served as Vice
President of Worldwide Sales with RAE Systems from July 2006 to
January 2007. In the last 25 years,
Mr. Hameisters experiences have all been with
instrumentation companies, including seven years, prior to
rejoining the company in July 2005, as Director of Marketing and
Sales with RAE Systems and six years with Thermo Instruments as
Business Operation Manager. Mr. Hameister holds a BS from
the University of Adelaide, South Australia and a certificate in
marketing from University of New South Wales.
William Jackson joined RAE Systems in July 2009 and
serves as our Vice President Global Marketing. Before joining
RAE Systems, Mr. Jackson was Vice President of Product
Marketing at ARC International, a leading supplier of
semiconductor intellectual property. Prior to ARC,
Mr. Jackson held management, marketing and business
development positions at Eastman Kodak, MIPS Technologies,
Toshiba, Digital Equipment Corporation and RCA. Mr. Jackson
holds a MBA from Boston University and a BS in electrical
engineering from the University of Pittsburgh.
Bin Lu joined RAE Systems in July 2006 as Director of the
Companys security business in China. He was promoted to
Vice President and General Manager of RAE Beijing in September
2009. Prior to joining RAE Systems, Mr. Lu held management
and engineering positions with several international technology
companies. Mr. Lu holds both a BS and MS in computer
science from Nankai University.
Fei-Zhou Shen joined RAE Systems in May 2001 and has
served in various key roles including Vice President of
Worldwide Manufacturing. Mr. Shen is currently Vice
President Corporate Development and Fushun Business Operations.
Mr. Shen has over 20 years of business experience
serving in key business and strategic management roles.
Mr. Shen has a BS in mechanical engineering from Shanghai
Jiao-Tong University and a MS in mechanical engineering from the
University of Idaho.
Ryan Watson joined RAE Systems in May 1999 as the
Midwestern Regional Sales Manager. He has also served as Sales
Director for the Eastern US and Canada and Central US Regional
Sales Manager. He was promoted to Vice President of Americas
Sales in March 2008. Mr. Watson has over 14 years of
field experience selling into multiple market segments including
industrial, first responder, government/military, oil-gas and
petrochemical as well as environmental applications.
Mr. Watson has a BS in human environmental sciences from
the University of Missouri.
You should carefully consider the risks described below
before making a decision regarding an investment in our common
stock. If any of the following risks actually occur, our
business could be harmed, the trading price of our common stock
could decline and you may lose all or part of your investment.
You should also refer to the other information contained in this
report, including our financial statements and the related
notes.
7
We
have discovered potential violations of the Foreign Corrupt
Practices Act, the resolution of which could have a material
adverse impact on our financial condition and results of
operations.
During fiscal year 2008, our internal audit department
identified certain payments and gifts made by certain personnel
in our China operations that may have violated the Foreign
Corrupt Practices Act (FCPA). Following this
discovery, the Audit Committee of our Board of Directors
initiated an independent investigation. We have made a voluntary
disclosure to the United States Department of Justice
(DOJ) and the SEC regarding the results of our
investigation. We have also implemented additional policies and
controls with respect to compliance with the FCPA. The FCPA and
related statutes and regulations provide for potential monetary
penalties, criminal sanctions and in some cases debarment from
doing business with the U.S. federal government in
connection with FCPA violations. We are cooperating with the DOJ
and the SEC in connection with their review of the matter and
are actively engaged in settlement discussions. Although no
assurances can be given as to whether the matter will settle or
the amount of any settlement, the Company recorded an accrual of
$3.5 million in the third quarter of 2009 relating to the
potential settlement of this matter. The timing and final
outcome of this or any future government investigation cannot be
predicted with certainty and any indictment, conviction or
material fine, debarment or settlement arising out of these
investigations could have a material adverse affect on our
business, financial condition, results of operation and future
prospects.
Economic
conditions could materially adversely affect our
business.
The financial turmoil that first arose in the fall of 2008 has
resulted in a tightening of the credit markets and a low level
of liquidity in many financial markets. There could be a number
of follow-on effects from the credit crisis on our business,
including the insolvency of key suppliers or their inability to
obtain credit to finance manufacturing of their products,
resulting in product delays; inability of customers, including
channel partners, to obtain credit to finance purchases of our
products;
and/or
customer, including channel partner, insolvencies. Our
operations and performance depend significantly on worldwide
economic conditions. Uncertainty about current global economic
conditions poses a risk as businesses and governments may
postpone spending in response to tighter credit
and/or
negative financial news, which could have a material negative
effect on demand for our products. Our operating results could
also be adversely affected if the U.S. dollar strengthens
against various foreign currencies.
Political
events, war, terrorism, natural disasters, and other
circumstances could materially adversely affect
us.
War, terrorism, geopolitical uncertainties, and other business
interruptions have caused and could cause damage or disruption
to international commerce and the global economy, and thus could
have a strong negative effect on us and our suppliers, logistics
providers, manufacturing vendors, and customers, including
channel partners. Our business operations are potentially
subject to interruption by natural disasters, fire, power
shortages, terrorist attacks and other hostile acts, and other
events beyond our control. Such events could decrease demand for
our products, make it difficult or impossible for us to make and
deliver products to our customers, including channel partners,
or to receive components from our suppliers, and create delays
and inefficiencies in our supply chain.
Our
future revenues are unpredictable, our operating results are
likely to fluctuate from quarter-to-quarter, and if we fail to
meet the expectations of securities analysts or investors, our
stock price could decline significantly.
Our quarterly and annual operating results have fluctuated in
the past and are likely to fluctuate significantly in the future
due to a variety of factors, some of which are outside of our
control. Accordingly, we believe that period-to-period
comparisons of our results of operations are not meaningful and
should not be relied upon as indications of future performance.
Some of the factors that could cause our quarterly or annual
operating results to fluctuate include significant shortfalls in
revenue relative to our planned expenditures, changes in budget
allocations by the federal government for homeland security
purposes, changes in world-wide energy production and refining,
market acceptance of our products, ongoing product development
and production, competitive pressures and customer retention. It
is likely that in some future quarters our operating results may
fall below the expectations of investors. In this event, the
trading price of our common stock could significantly decline.
8
We may
have difficulty achieving and sustaining profitability and may
experience additional losses in the future. If we continue to
report losses or are marginally profitable, the financial impact
of future events may be magnified and may lead to a
disproportionate impact on the trading price of our
stock.
We recorded net losses of $5.8 million, $7.2 million
and $14.7 million for 2009, 2008 and 2007, respectively. In
order to improve our profitability, we will need to continue to
generate new sales while controlling our costs. As we plan on
continuing the growth of our business while implementing cost
control measures, we may not be able to successfully generate
enough revenues to return to profitability. Any failure to
increase our revenues and control costs as we pursue our planned
growth would harm our profitability and would likely result in a
negative effect on the market price of our stock. In addition,
our financial results have historically bordered at or near
profitability, and if we continue to perform at this level, the
financial impact may be magnified and we may experience a
disproportionate impact on our trading price as a result. If we
continue to incur losses, any particular financial event could
result in a relatively large change in our financial results or
could be the difference between us having a profit or a loss for
the particular quarter in which it occurs.
We may
require additional capital in the future, which may not be
available or may only be available on unfavorable
terms.
Our future capital requirements depend on many factors,
including potential future acquisitions and our ability to
generate revenue and control costs. Should we have the need to
raise additional capital, we might not be able to do so at all
or on favorable terms. In the case of any future equity
financings, dilution to our shareholders could result and, in
any case, such securities may have rights, preferences and
privileges that are senior to those of our common stock. If we
are unable to obtain needed capital on favorable terms, or at
all, our business and results of operations could be harmed and
our liquidity could be adversely effected.
The
market for gas and radiation detection monitoring devices is
highly competitive, and if we cannot compete effectively, our
business may be harmed.
The market for gas and radiation detection monitoring devices is
highly competitive. Competitors in the gas and radiation
monitoring industry differentiate themselves on the basis of
their technology, quality of product and service offerings, cost
and time to market. Our primary competitors in the gas detection
market include Industrial Scientific Corporation, Mine Safety
Appliances Company, Honeywell, Ion Science, Draeger Safety Inc.,
Gastec Corporation and Sperian Protection. Our competitors in
the radiation market include Canberra, Exporanium, ICx, MGP
Polimaster Ltd., Santa Barbara Systems, Smiths Detection,
ThermoFisher and TSA Limited. Several of our competitors such as
Mine Safety Appliances Company, Draeger Safety Inc. and Smiths
have longer operating histories, larger customer bases, greater
brand recognition and significantly greater financial and
marketing resources than we do. In addition, some of our
competitors may be able to:
|
|
|
|
|
devote greater resources to marketing and promotional campaigns;
|
|
|
|
adopt more aggressive pricing policies; or
|
|
|
|
devote more resources to technology and systems development.
|
In light of these factors, we may be unable to compete
successfully.
We may
not be successful in the development or introduction of new
products and services in a timely and effective manner and,
consequently, we may not be able to remain competitive and the
results of operations may suffer.
Our revenue growth is dependent on the timely introduction of
new products to market. We may be unsuccessful in identifying
new product and service opportunities or in developing or
marketing new products and services in a timely or
cost-effective manner. In developing new products, we may be
required to make significant investments before we can determine
the commercial viability of the new product. If we fail to
accurately foresee our customers needs and future
activities, we may invest heavily in the research and
development of products that do not lead to significant sales.
9
We have expanded our current business of providing gas detection
instruments to include radiation detection and wireless systems
for local and remote security monitoring. While we perceive a
large market for such products, the radiation detection and
wireless systems markets are still evolving, and we have little
basis to assess the demand for these products and services or to
evaluate whether our products and services will be accepted by
the market. If our radiation detection products and wireless
products and services do not gain broad market acceptance or if
we do not continue to maintain the necessary technology, our
business and results of operations will be harmed.
In addition, compliance with safety regulations, specifically
the need to obtain regulatory approvals in certain
jurisdictions, could delay the introduction of new products by
us. As a result, we may experience delays in realizing revenues
from our new products.
The
securities laws and regulations have and are likely to continue
to have a significant effect on our costs.
The Sarbanes-Oxley Act of 2002 (the Act) and the
rules promulgated by the SEC and the New York Stock Exchange in
relation thereto require significant legal, financial and
accounting compliance costs, and we expect these costs to
continue indefinitely.
In the
event we are unable to satisfy regulatory requirements relating
to internal control over financial reporting or, if these
controls are not effective, our business and financial results
may suffer.
In designing and evaluating our internal control over financial
reporting, we recognize that any internal control or procedure,
no matter how well designed and operated, can provide only
reasonable assurance of achieving desired control objectives.
For example, a companys operations may change over time as
the result of new or discontinued lines of business and
management must periodically modify a companys internal
controls and procedures to timely match these changes in its
business. In addition, management is required to apply its
judgment in evaluating the cost-benefit relationship of possible
controls and procedures and company personnel are required to
use judgment in their application. While we continue to improve
upon our internal control over financial reporting so that it
can provide reasonable assurance of achieving its control
objectives, no system of internal controls can be designed to
provide absolute assurance of effectiveness.
Material weaknesses in internal control over financial reporting
may materially impact our reported financial results and the
market price of our stock could significantly decline.
Additionally, adverse publicity related to a material failure of
internal control over financial reporting could have a negative
impact on our reputation and business.
We are
subject to risks and uncertainties of the government
marketplace, including the risk that the government may not fund
projects that our products are designed to address and that
certain terms of our contracts with government agencies may
subject us to adverse government actions or
penalties.
Our business is dependent in part upon government funded
projects. Decisions on what types of projects are to be funded
by local, state and federal government agencies may have a
material impact on our business. The Federal budget for the
Department of Homeland Security, which we refer to as
Homeland Security herein, is a source for funding
for many of our customers either directly or through grants to
state and local agencies. However, if the government does not
fund projects that our products are designed to address, or
funds such projects at levels lower than we expect, our business
and results of operations will be harmed.
From time to time we enter into government contracts that
contain provisions which subject us to laws and regulations that
provide government clients with rights and remedies not
typically found in commercial contracts. For example, a portion
of our federal contracting has been done through our
distributors who are on the Federal Supply Schedules from the
United States General Services Administration (GSA). GSA
Schedule contracts which we may enter into often include a
clause known as the Price Reductions clause. The
terms of that clause are similar but not identical to a
most favored customer clause in commercial
contracts. Under that clause, we may agree that the prices to
the government under the GSA Schedules contract will maintain a
constant relationship to the prices charged to certain
commercial customers, i.e., when prices to those benchmark
customers drop, our prices on our GSA Schedules contract must be
adjusted accordingly. Although when we are party to these
contracts we
10
undertake extensive efforts to comply with the Price Reductions
clause, it is possible that we may have an unreported discount
offered to a Basis of Award customer and may have
failed to honor the obligations of the Price Reductions clause.
If that occurs, we could, under certain circumstances, be
subject to an audit, an action in fraud, or other adverse
government actions or penalties.
We may
not be successful in promoting and developing our brand, which
could prevent us from remaining competitive.
We believe that our future success will depend on our ability to
maintain and strengthen the RAE brand, which will depend, in
turn, largely on the success of our marketing efforts and
ability to provide our customers with high-quality products. If
we fail to successfully promote and maintain our brand, or incur
excessive expenses in attempting to promote and maintain our
brand, our business will be harmed.
We may
face risks from our substantial international operations and
sales.
We have significant operations in foreign countries, including
manufacturing facilities, sales personnel and customer support
operations. For the years ended December 31, 2009 and 2008,
approximately 41% and 43% of our revenues, respectively, were
from sales to customers located in Asia and approximately 17%
and 16% of our revenues, respectively, were from sales to
customers located in Europe. We have manufacturing facilities in
China and in the United States. A significant portion of our
products and components are manufactured at our facility in
Shanghai, China.
Our international operations are subject to economic and other
risks inherent in doing business in foreign countries, including
the following:
|
|
|
|
|
difficulties with staffing and managing international operations;
|
|
|
|
transportation and supply chain disruptions and increased
transportation expense as a result of epidemics, terrorist
activity, acts of war or hostility, increased security and less
developed infrastructure;
|
|
|
|
economic slowdown
and/or
downturn in foreign markets;
|
|
|
|
international currency fluctuations;
|
|
|
|
political and economic uncertainty caused by epidemics,
terrorism or acts of war or hostility;
|
|
|
|
legislative and regulatory responses to terrorist activity such
as increased restrictions on cross-border movement of products
and technology;
|
|
|
|
legislative, regulatory, police, or civil responses to epidemics
or other outbreaks of infectious diseases such as quarantines,
factory closures, or increased restrictions on transportation or
travel;
|
|
|
|
increased costs and complexities associated with complying with
Section 404 of the Sarbanes-Oxley Act of 2002;
|
|
|
|
general strikes or other disruptions in working conditions;
|
|
|
|
labor shortages;
|
|
|
|
political instability;
|
|
|
|
changes in tariffs;
|
|
|
|
generally longer periods to collect receivables;
|
|
|
|
unexpected legislative or regulatory requirements;
|
|
|
|
reduced protection for intellectual property rights in some
countries;
|
|
|
|
significant unexpected duties or taxes or other adverse tax
consequences;
|
|
|
|
difficulty in obtaining export licenses and other trade
barriers; and
|
11
|
|
|
|
|
ability to obtain credit and access to capital issues faced by
our international customers.
|
The specific economic conditions in each country will impact our
future international sales. For example, approximately half of
our recognized revenue has been denominated in
U.S. dollars. Significant downward fluctuations in currency
exchange rates against the U.S. dollar could result in
higher product prices
and/or
declining margins and increased manufacturing costs. If we do
not effectively manage the risks associated with international
operations and sales, our business, financial condition and
operating results could suffer.
Like other companies operating or selling internationally, we
are subject to the FCPA and other laws which prohibit improper
payments or offers of payments to foreign governments and their
officials and political parties by U.S. and other business
entities for the purpose of obtaining or retaining business. We
make sales in countries known to experience corruption. Our
sales activities in such countries create the risk of
unauthorized payments or offers of payments by one of our
employees, consultants, sales agents or distributors which could
be in violation of various laws including the FCPA, even though
such parties are not always subject to our control. We have
implemented new policies and procedures to prevent losses from
such practices and to discourage such practices by our
employees, consultants, sales agents and distributors and are
continuing our efforts to improve such policies and procedures.
Among other things, we have established ongoing training
programs for our employees to ensure that they are aware of
their responsibilities under the FCPA and similar laws. However,
our existing safeguards and any improvements may prove to be
less than effective and our employees, consultants, sales agents
or distributors may engage in conduct for which we might be held
responsible. Violations of the FCPA may result in severe
criminal or civil sanctions, and we may be subject to other
liabilities, which could negatively affect our business,
financial condition and results of operations.
The
loss of Normal Trade Relations status for China,
changes in current tariff structures or adoption of other trade
policies adverse to China could have an adverse effect on our
business.
Our ability to import products from China at current tariff
levels could be materially and adversely affected if the
normal trade relations (NTR, formerly
most favored nation) status the United States
government has granted to China for trade and tariff purposes is
terminated. As a result of its NTR status, China receives the
same favorable tariff treatment that the United States extends
to its other normal trading partners. Chinas
NTR status, coupled with its membership in the World Trade
Organization, could eventually reduce barriers to manufacturing
products in and exporting products from China. However, we
cannot provide any assurance that Chinas membership in the
World Trade Organization or NTR status will not change. As a
result of opposition to certain policies of the Chinese
government and Chinas growing trade surpluses with the
United States, there has been, and in the future may be,
opposition to NTR status for China. Also, the imposition of
trade sanctions by the United States or the European Union
against a class of products imported by us from, or the loss of
NTR status with, China, could significantly increase our cost of
products imported into the United States or Europe and harm our
business. For example, in September 2009, the
U.S. government imposed new tariffs on tires imported from
China. Retaliatory actions by China could be harmful to our
business. Because of the importance of our international sales
and international sourcing of manufacturing to our business, our
financial condition and results of operations could be
significantly and adversely affected if any of the risks
described above were to occur.
The
government of China may change or even reverse its policies of
promoting private industry and foreign investment, in which case
our assets and operations may be at risk.
We currently manufacture and sell a significant portion of our
components and products in China. Our existing and planned
operations in China are subject to the general risks of doing
business internationally and the specific risks related to the
business, economic and political conditions in China, which
include the possibility that the central government of China
will change or even reverse its policies of promoting private
industry and foreign investment in China. Many of the current
reforms which support private business in China are
unprecedented or experimental. Other political, economic and
social factors, such as political changes, changes in the rates
of economic growth, unemployment or inflation, or in the
disparities of per capita wealth among citizens of China and
between regions within China, could also lead to further
readjustment of the governments reform measures. It is not
possible to predict whether the Chinese government will continue
to be as supportive of private business in China, nor is it
possible to predict how future reforms will affect our business.
12
Any
failure to adequately protect and enforce our intellectual
property rights could harm our business.
We regard our intellectual property as critical to our success.
We rely on a combination of patent, trademark, copyright, trade
secret laws and non-disclosure agreements and confidentiality
procedures to protect our proprietary rights. Notwithstanding
these laws, we may be unsuccessful in protecting our
intellectual property rights or in obtaining patents or
registered trademarks for which we apply. Although processes are
in place to protect our intellectual property rights, we cannot
guarantee that these procedures are adequate to prevent
misappropriation of our current technology or that our
competitors will not develop technology that is similar to our
own.
While there is no single patent or license to technology of
material significance to the Company, our ability to compete is
affected by our ability to protect our intellectual property
rights in general. For example, we have a collection of patents
related to our photoionization detector technology, the first of
which expires in 2012, and our ability to compete may be
affected by any competing similar or new technology. In
addition, if we lose the licensing rights to a patented or other
proprietary technology, we may need to stop selling products
incorporating that technology and possibly other products,
redesign our products or lose a competitive advantage. We cannot
ensure that our future patent applications will be approved or
that our current patents will not be challenged by third
parties. Furthermore, we cannot ensure that, if challenged, our
patents will be found to be valid and enforceable. Any
litigation relating to our intellectual property rights could,
regardless of the outcome, have a material adverse impact on our
business and results of operations.
We may
face intellectual property infringement claims that might be
costly to resolve and affect our results of
operations.
In connection with the enforcement of our own intellectual
property rights, the acquisition of third-party intellectual
property rights or disputes relating to the validity or alleged
infringement of third-party rights, including patent rights, we
have been, are currently and may in the future be subject to
claims, negotiations or complex, protracted litigation.
Intellectual property disputes and litigation are typically very
costly and can be disruptive to our business operations by
diverting the attention and energies of management and key
technical personnel. Although we have successfully defended or
resolved past litigation and disputes, we may not prevail in any
ongoing or future litigation and disputes. We may incur
significant costs in acquiring the necessary third party
intellectual property rights for use in our products. Third
party intellectual property disputes could subject us to
significant liabilities, require us to enter into royalty and
licensing arrangements on less favorable terms, prevent us from
manufacturing or licensing certain of our products, cause severe
disruptions to our operations or the markets in which we
compete, or require us to satisfy indemnification commitments
with our customers including contractual provisions under
various license arrangements, any one of which could seriously
harm our business. For example, for the last several years we
have been involved in a dispute with Polimaster Ltd. which
required us to incur substantial professional fees. Although we
ultimately prevailed, it is uncertain whether we will be able to
recover any of the amounts awarded to us.
Claims of this type, regardless of merit, can be time-consuming
to defend, result in costly litigation, divert managements
attention and resources or require us to enter into royalty or
license agreements. The terms of any such license agreements may
not be available on reasonable terms, if at all, and the
assertion or prosecution of any infringement claims could
significantly harm our business.
Some
of our products may be subject to product liability claims which
could be costly to resolve and affect our results of
operations.
There can be no assurance that we will not be subject to third
party claims in connection with our products or that any
indemnification or insurance available to us will be adequate to
protect us from liability. A product liability claim, product
recall or other claim, as well as any claims for uninsured
liabilities or in excess of insured liabilities, could have a
material adverse effect on our business and results of
operations.
13
We
sell a majority of our products through distributors, and if our
distributors stop selling our products, our revenues would
suffer.
We distribute our products in the Americas, Europe, Asia Pacific
and the Middle East primarily through distributors. We are
dependent upon these distributors to sell our products and to
assist us in promoting and creating a demand for our products.
Distributors are an important sales channel for our future
growth. If one or more of our distributors were to experience
financial difficulties or become unwilling to promote and sell
our products for any reason, including any refusal to renew
their commitment as our distributor, we might not be able to
replace such lost revenue, and our business and results of
operations could be materially harmed.
Because
we purchase a significant portion of our component parts from a
limited number of third party suppliers, we are subject to the
risk that we may be unable to acquire quality components in a
timely manner, which could result in delays of product shipments
and damage our business and operating results.
We currently purchase component parts used in the manufacture of
our products from a limited number of third party suppliers. We
depend on these suppliers to meet our needs for various sensors,
microprocessors and other material components. Moreover, we
depend on the quality of the products supplied to us over which
we have limited control. Should we encounter shortages and
delays in obtaining components, we might not be able to supply
products in a timely manner due to a lack of components, and our
business could be adversely affected.
Future
acquisitions that we undertake could be difficult to integrate,
disrupt our business, dilute shareholder value or harm our
results of operations.
In the last several years, we increased our ownership of RAE
Beijing to 96%, acquired Aegison Corporation and Tianjin Securay
Technology Co., Ltd. and formed RAE Fushun, of which we retain
70% ownership. In August 2007, we determined to discontinue the
Aegison and Securay businesses. We may acquire or make
additional investments in complementary businesses,
technologies, services or products if appropriate opportunities
arise. The process of integrating any acquired business,
technology, service or product into our business and operations
may result in unforeseen operating difficulties and
expenditures. Integration of an acquired company also may
consume much of our managements time and attention that
would otherwise be available for ongoing development of our
business. Moreover, the anticipated benefits of any acquisition
may not be realized. Future acquisitions could result in
dilutive issuances of equity securities or the incurrence of
debt, contingent liabilities or expenses related to goodwill
recognition and other intangible assets, any of which could harm
our business.
Our
ownership interest in Renex will cause us to incur losses that
we would not otherwise incur.
We currently own approximately 40% of Renex Technology Ltd.
(Renex), a wireless systems company. We are required
to incorporate our share of its expenses as losses in our
Consolidated Statements of Operations. If Renex does not begin
to generate revenues at the level we anticipate or otherwise
incurs greater losses, we could incur greater losses than we
anticipate and our results of operations will suffer.
Our
business could suffer if we lose the services of any of our
executive officers.
Our future success depends to a significant extent on the
continued service of our executive officers. We have no formal
employment agreements with any of our executives other than the
initial offer letter, if applicable. The loss of the services of
any of our executive officers could harm our business. We do not
have key person life insurance on any of our personnel.
Our
officers and directors beneficially own approximately 32% of our
common stock and, accordingly, may exert substantial influence
over the Company.
Our executive officers and directors, in the aggregate,
beneficially own approximately 32% of our common stock as of
December 31, 2009. These stockholders acting together have
the ability to substantially influence all matters requiring
approval by our stockholders. These matters include the election
and removal of the directors, amendment of our certificate of
incorporation, and any merger, consolidation or sale of all or
substantially all of our
14
assets. In addition, they may dictate the management of our
business and affairs. Furthermore, this concentration of
ownership could have the effect of delaying, deferring or
preventing a change in control, or impeding a merger or
consolidation, takeover or other business combination and may
substantially reduce the marketability of our common stock.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
Our corporate headquarters and principal offices are located in
a facility we lease in San Jose, California. The
San Jose facility consists of approximately
67,000 square feet, which we have occupied since May 2005,
and which includes research and development, sales and
marketing, general and administrative and manufacturing
operations. The lease expires in December 2017.
We lease manufacturing and research and development facilities
in Shanghai, China. The lease on the manufacturing facility
(44,000 square feet) expires in September 2011. The lease
on the research and development/sensor laboratory
(17,000 square feet) expires in October 2012.
In December 2008, we purchased the land use rights for
50 years to 5 acres of land in Shanghai. We plan to
use this site to construct a new manufacturing and research and
development facility, which would replace our current Shanghai
facility.
In addition, RAE Beijing owns a manufacturing facility
consisting of approximately 106,000 square feet, of which
41,000 square feet is dedicated to the manufacturing of RAE
Beijings products and the storage of the inventory.
In October 2008, we relocated our operations to a new owner
occupied 239,000 square foot manufacturing facility in
Fushun, China. Related offices, a research and development
facility and living quarters totaling 152,000 square feet
have not been completed at this time.
We maintain a sales office in Shatin, Hong Kong, from which we
sell our products throughout Asia, excluding the Peoples
Republic of China. The lease expires in April 2011. We also
maintain sales and service centers in Copenhagen, Denmark, the
United Kingdom, France and United Arab Emirates, from which we
sell our products to Europe, Australia, New Zealand, the Middle
East and Africa. The lease of the Copenhagen facility expires in
September 2014.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
Regulatory
Compliance
During fiscal year 2008, our internal audit department
identified certain payments and gifts made by certain personnel
in our China operations that may have violated the FCPA.
Following this discovery, the Audit Committee of our Board of
Directors initiated an independent investigation. We have made a
voluntary disclosure to the DOJ and the SEC regarding the
results of our investigation. We have also implemented
additional policies and controls with respect to compliance with
the FCPA. The FCPA and related statutes and regulations provide
for potential monetary penalties, criminal sanctions and in some
cases debarment from doing business with the U.S. federal
government in connection with FCPA violations. We are
cooperating with the DOJ and the SEC in connection with their
review of the matter and are actively engaged in settlement
discussions. Although no assurances can be given as to whether
the matter will settle or the amount of any settlement, the
Company recorded an accrual of $3.5 million in the third
quarter 2009 relating to the potential settlement of this
matter. The timing and final outcome of this or any future
government investigation cannot be predicted with certainty and
any indictment, conviction or material fine, debarment or
settlement arising out of these investigations could have a
material adverse affect on our business, financial condition,
results of operation and future prospects.
15
Polimaster
Ltd., et al. v. RAE Systems Inc., United States District
Court for the Northern District of California, Case
No. 05-CV-01887-JF,
United States Court of Appeals for the Ninth Circuit, Nos.
08-15708 and
09-15369.
Polimaster Ltd. and Na&Se Trading Company, Ltd.
(Polimaster) filed a complaint against the Company
on May 9, 2005, in the United States District Court for the
Northern District of California in a case titled Polimaster
Ltd., et al. v. RAE Systems Inc. (Case
No. 05-CV-01887-JF).
The complaint alleges, among other things, that the Company
breached its contract with Polimaster and infringed upon
Polimasters intellectual property rights. The dispute was
subject to a contractual arbitration agreement, although the
federal court retained jurisdiction over the matter pending
completion of the arbitration. The arbitration was conducted in
the spring of 2007.
In September 2007, a Final Award was issued in the arbitration.
The arbitrator ruled that Polimaster failed to prove its claims
and was not entitled to any relief; that the Company had proven
its counterclaims and was awarded damages of approximately
$2.4 million; and that as the prevailing party, the Company
was entitled to recover costs in the amount of $46,000. On
October 5, 2007, RAE Systems filed a motion to confirm the
Final Award. On October 17, 2007, Polimaster filed an
opposition to RAE Systems motion to confirm the Final
Award and filed its own motion to vacate the Final Award. Both
motions were heard on December 7, 2007, and the district
court confirmed the Final Award in an order dated
February 25, 2008. Polimaster appealed from the district
courts order confirming the arbitration award in
Polimaster Ltd. et al. v. RAE Systems Inc.,
No. 08-15708.
The appeal is currently pending in the United States Court of
Appeals for the Ninth Circuit. Briefing on the appeal has been
completed by both sides and the appeal was argued and submitted
to the Ninth Circuit for decision on January 15, 2010.
When district court confirmed the Final Award in favor of RAE
Systems, it did not enter judgment, an omission the district
court described as a non-substantive clerical error. On
September 9, 2008, the court of appeal granted leave for
the district court to correct this clerical error. On
January 23, 2009, the district court entered judgment in
favor of RAE Systems and against Polimaster, and included in the
judgment post-arbitration/pre-judgment interest and
post-judgment interest. Polimaster has appealed the inclusion of
these two interest components in the judgment, in Polimaster
Ltd. et al. v. RAE Systems Inc.,
No. 09-15369,
and briefing on the appeal has been completed by both sides and
the appeal was argued and submitted to the Ninth Circuit for
decision on January 15, 2010.
On May 14, 2009, Polimaster and RAE Systems entered a First
Amended And Restated Stipulation And Order Re Stay Of Execution
Of Judgment In Favor Of RAE Systems Inc. (the
stipulation), pursuant to which Polimaster wire
transferred $1.4 million to the client trust account of RAE
Systems counsel McLeod, Witham & Flynn LLP, and
agreed to wire transfer an additional $116,224.25 per month
until the entire amount deposited equals the amount of the
judgment (approximately $2.8 million) plus accrued interest
at the judgment rate of 0.43 percent per annum. Pursuant to
the stipulation, the amounts transferred by Polimaster are being
maintained in the client trust account of McLeod,
Witham & Flynn LLP, and shall not be distributed to
RAE Systems or Polimaster, until the Ninth Circuit has ruled on
Polimasters appeal (Nos.
08-15708 and
09-15369).
McLeod, Witham & Flynn LLP shall release the funds in
the account to RAE Systems
and/or
Polimaster within seven days of the Ninth Circuits final
ruling on the appeal, in accordance with the Ninth
Circuits decision. Polimaster is currently in compliance
with the payment schedule provided in the stipulation. If RAE
Systems is successful on appeal, it is expected that the Company
would receive approximately $1.6 million, net of
attorneys fees and expenses.
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock traded on the American Stock Exchange
(AMEX) under the trading symbol RAE
beginning on August 29, 2003. Effective October 1,
2008, the AMEX was acquired by NYSE Euronext, the holding
company created by the combination of NYSE Group, Inc. and
Euronext N.V. in April 2007. Since October 1, 2008, our
common stock has traded on the NYSE Alternext US
(NYSE-Alt). The following table sets forth, for the
16
periods indicated, the high and low sales prices for our common
stock as derived from publicly reported AMEX and NYSE-Alt daily
trading data. The quotations do not reflect adjustments for
retail
mark-ups,
mark-downs, or commissions and may not necessarily represent
actual transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First Quarter
|
|
$
|
1.00
|
|
|
$
|
0.28
|
|
|
$
|
2.81
|
|
|
$
|
1.07
|
|
Second Quarter
|
|
$
|
1.70
|
|
|
$
|
0.42
|
|
|
$
|
1.92
|
|
|
$
|
1.30
|
|
Third Quarter
|
|
$
|
2.23
|
|
|
$
|
1.00
|
|
|
$
|
2.18
|
|
|
$
|
1.03
|
|
Fourth Quarter
|
|
$
|
1.48
|
|
|
$
|
0.65
|
|
|
$
|
1.72
|
|
|
$
|
0.38
|
|
As of December 31, 2009, there were 272 shareholders
of record who held shares of our common stock.
We have never declared or paid dividends on our common stock. We
do not have any plans to pay dividends in the foreseeable future
so that we may reinvest our earnings in the development of our
business. The payment of dividends in the future will be at the
discretion of the Board of Directors.
PERFORMANCE
GRAPH
The following chart presents a comparative analysis of the
performance of our common stock relative to the NYSE AMEX
Composite Index and NYSE AMEX stock index for SIC codes
3800-3899,
Measuring Instruments. This analysis assumes a $100 investment
in our underlying common stock and these indices on
December 31, 2004 through December 31, 2009. This
analysis does not purport to be a representation of the actual
market performance of our stock or these indices. This chart has
been provided for informational purposes to assist the reader in
evaluating the market performance of our common stock compared
to other market participants.
Notwithstanding anything to the contrary set forth in our
previous filings under the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended, which might
incorporate future filings made by us under those statutes, the
following Stock Performance Graph will not be deemed
incorporated by reference into any future filings made by us
under those statutes.
17
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among RAE Systems Inc., the NYSE AMEX Composite Index, the NYSE
Amex Stock Market (U.S. Companies), and a Peer Group of
NYSE AMEX stocks for SIC codes 3800 3899 Measuring
Instruments (photo, med & optical goods)
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2009
|
|
|
* |
|
$100 invested on 12/31/04 in stock or index-including
reinvestment of dividends. |
Fiscal year ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
RAE Systems, Inc.
|
|
|
|
100.00
|
|
|
|
|
48.09
|
|
|
|
|
43.84
|
|
|
|
|
36.99
|
|
|
|
|
7.40
|
|
|
|
|
15.07
|
|
NYSE AMEX Composite Index
|
|
|
|
100.00
|
|
|
|
|
126.17
|
|
|
|
|
151.23
|
|
|
|
|
181.81
|
|
|
|
|
108.34
|
|
|
|
|
146.73
|
|
NYSE AMEX Stock Market (US Companies)
|
|
|
|
100.00
|
|
|
|
|
108.14
|
|
|
|
|
125.58
|
|
|
|
|
130.13
|
|
|
|
|
82.95
|
|
|
|
|
101.45
|
|
Peer Group
|
|
|
|
100.00
|
|
|
|
|
96.08
|
|
|
|
|
129.00
|
|
|
|
|
119.31
|
|
|
|
|
66.01
|
|
|
|
|
177.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective October, 2008, the AMEX was acquired by NYSE Euronext,
the holding company created by the combination of NYSE Group,
Inc. and Euronext N.V. in April 2007. Since October 1,
2008, our common stock has traded on the NYSE Alternext US
(NYSE-Alt).
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The selected consolidated financial data set forth below should
be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of
Operations, the Consolidated Financial Statements of RAE
Systems Inc. and Notes thereto, and other financial information
included elsewhere in this
Form 10-K.
Historical results are not necessarily indicative of results
that may be expected for future periods.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
2009
|
|
2008
|
|
(1)(2)(3)
|
|
(4)(5)(6)(7)
|
|
(8)
|
|
|
(In thousands, except share and per share data)
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
83,172
|
|
|
$
|
95,383
|
|
|
$
|
90,836
|
|
|
$
|
67,721
|
|
|
$
|
60,293
|
|
Gross profit
|
|
$
|
40,979
|
|
|
$
|
48,215
|
|
|
$
|
46,408
|
|
|
$
|
35,523
|
|
|
$
|
35,603
|
|
Operating loss from continuing operations
|
|
$
|
(7,323
|
)
|
|
$
|
(6,089
|
)
|
|
$
|
(4,171
|
)
|
|
$
|
(2,871
|
)
|
|
$
|
(1,588
|
)
|
Loss from continuing operations
|
|
$
|
(6,714
|
)
|
|
$
|
(7,383
|
)
|
|
$
|
(10,536
|
)
|
|
$
|
(1,418
|
)
|
|
$
|
(821
|
)
|
Basic loss per share from continuing operations
|
|
$
|
(0.10
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
Diluted loss per share from continuing operations
|
|
$
|
(0.10
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
Weighted-average common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic outstanding shares
|
|
|
59,366,850
|
|
|
|
59,204,262
|
|
|
|
58,852,172
|
|
|
|
58,424,970
|
|
|
|
57,687,714
|
|
Diluted outstanding shares
|
|
|
59,366,850
|
|
|
|
59,204,262
|
|
|
|
58,852,172
|
|
|
|
58,424,970
|
|
|
|
57,687,714
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
31,676
|
|
|
$
|
37,146
|
|
|
$
|
40,850
|
|
|
$
|
36,641
|
|
|
$
|
41,366
|
|
Total assets
|
|
$
|
78,874
|
|
|
$
|
81,175
|
|
|
$
|
85,343
|
|
|
$
|
89,753
|
|
|
$
|
76,264
|
|
Long-term liabilities
|
|
$
|
7,822
|
|
|
$
|
8,358
|
|
|
$
|
10,442
|
|
|
$
|
5,441
|
|
|
$
|
2,962
|
|
Total RAE Systems Inc. shareholders equity
|
|
$
|
39,029
|
|
|
$
|
43,216
|
|
|
$
|
46,356
|
|
|
$
|
56,179
|
|
|
$
|
54,573
|
|
The following information summarizes events that affect
comparability of the information reflected in selected financial
data:
|
|
|
(1) |
|
In January 2007, the Company entered into an agreement to
purchase the intellectual properties of Tianjin Securay
Technology Ltd. Co. for approximately $1.5 million.
Including transactions entered into during fiscal 2006, the
total purchase price was $2.0 million in cash. |
|
(2) |
|
In August 2007, the Board of Directors approved the
discontinuation of the Companys DVR business. Impairment
expenses recognized in fiscal 2007 totaled $4.2 million. |
|
(3) |
|
In December 2007, the Company sold its headquarters building in
San Jose, California for $12.7 million and leased back
the facility for a period of 10 years. The Company
recognized a gain on sale of $0.4 million in 2007 and
recorded a deferred gain of $6.3 million. The deferred gain
will be recognized in income straight-line over the life of the
leaseback beginning in January 2008. |
|
(4) |
|
RAE Fushun joint venture was formed in December 2006. The fair
value of assets acquired and liabilities assumed were included
in the consolidated balance sheet as of December 31, 2006.
There were no operating activities recorded in 2006. |
|
(5) |
|
The Company purchased an additional 32% ownership in RAE Beijing
in July 2006. The Company has consolidated RAE Beijing since
2004. With the purchase in July 2006, minority
shareholders interest was reduced to 4%. |
|
(6) |
|
In July 2006, the Company purchased Aegison Corporation. The
fair value of assets acquired and liabilities assumed were
included in the consolidated balance sheet as of
December 31, 2006. |
|
(7) |
|
As of December 31, 2006, the Company was in the process of
acquiring Securay. The Company recorded $820,000 of acquisition
in progress as of December 31, 2006. |
|
(8) |
|
During the second quarter of 2005, the Company abandoned its
leased facility in Sunnyvale California and moved to a new
headquarters and U.S. manufacturing facility. As a result, the
Company took a before-tax charge of approximately
$2.0 million for abandonment of its lease in the second
quarter of 2005. |
19
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following Managements Discussion and Analysis of
Financial Condition and Results of Operations contains
forward-looking statements. In some cases, readers can identify
forward-looking statements by terminology such as
may, will, should,
could, expects, plans,
anticipates, believes,
estimates, predicts,
potential, or continue. These statements
involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements
to be materially different from those stated herein. Factors
that might cause or contribute to such differences include, but
are not limited to, those discussed in Item 1A, Risk
Factors as well as in Item 1, Business
and Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations in this
Annual Report on
Form 10-K.
You should carefully review these risks and also review the
risks described in other documents we file from time- to- time
with the Securities and Exchange Commission, including the
Quarterly Reports on
Form 10-Q
that we will file in fiscal year 2010. You are cautioned not to
place undue reliance on these forward-looking statements, and we
expressly assume no obligations to update the forward-looking
statements in this report that occur after the date hereof.
Overview
We are a leader in delivering innovative sensor solutions to
serve industrial, energy, environmental and government safety
markets worldwide. In addition, we offer a full line of portable
single and multi-sensor chemical and radiation detection
products. The market for our products has evolved from being
strictly focused on environmental and industrial monitoring to
now encompassing the public safety and energy markets. We have
expanded our presence to include the broader global energy
exploration and refining safety equipment market. With the
formation of RAE Fushun, we are serving the coal mine safety
equipment market in China.
In 2006, we made two significant business investments in China.
First in July 2006, we increased our ownership in RAE Beijing to
96%. RAE Beijing produces, sells and distributes safety and
security solutions for the chemical, oil and gas, metals and
energy sectors in China. Second, in December 2006, we formed RAE
Fushun, a joint venture with Fushun Anyi, a former state owned
company serving the coal mine safety market. This joint venture
was formed to capitalize on Chinas growing reliance on
coal based energy. RAE Fushun manufactures and sells coal mine
safety equipment. RAE Systems owns 70% of the joint venture.
In China, our focus is on growing the environmental protection
market and the industrial sector, including oil and gas,
petro-chemicals, steel, telecommunications and coal mining. A
major priority will be to introduce new products for the coal
mine safety market through RAE Fushun. We believe this market
will provide us a number of new business opportunities, as China
continues to modernize its coal mining industry.
We offer a complete line of products to meet the requirements of
the various markets we serve. Products range from breathing zone
single sensor products for specific toxic chemicals (ToxiRAE
3) to belt worn multi-gas monitors (QRAE 2) to
handheld instruments (MiniRAE 3000, ppbRAE 3000 and UltraRAE) to
measure total and specific volatile organic compounds, to
wireless monitors for industrial and public safety applications
(AreaRAE Steel).
We have expanded our wireless product offering with the
introduction of MeshGuard, a single-gas, mesh radio-based
monitor designed to replace single-gas fixed monitors in
industrial environments that include steel mills, oil and gas
exploration and chemical processing. We continue to improve our
product offerings through advances in sensors and wireless
networking technologies, including the RAELink 3 a wireless
modem with integrated GPS and Bluetooth radio technology that
provides a data bridge for our products and complementary
products such as chemical warfare agents and particle counters.
We updated several of our fixed gas monitors to meet the needs
of the China market. We received an additional sensor patent for
a new gamma radiation detector/dosimeter, and this was deployed
in our GammaRAE II R product.
In all of our markets we will continue to explore and develop
strategic value added partnerships, to leverage our product and
market expertise.
20
Critical
Accounting Policies
The preparation of financial statements in conformity with
United States generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses
during the reporting period. On an on-going basis, we evaluate
the estimates, including those related to our allowance for
doubtful accounts, valuation of long-lived assets, goodwill and
intangible assets, valuation of deferred tax assets,
contingencies, inventory valuation, warranty accrual and
stock-based compensation expense. In conjunction with
acquisitions, we allocate investment costs based on the fair
value of the assets acquired and liabilities assumed. We base
our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ significantly from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our
more significant judgments or estimates used in the preparation
of our consolidated financial statements.
Revenue
Recognition
We recognize revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable,
and collectability is reasonably assured. A provision for
estimated product returns is established at the time of sale
based upon historical return rates adjusted for current economic
conditions. Historically, we have experienced an insignificant
amount of sales returns. We generally recognize revenue when
goods are shipped to our distributors in accordance with
standard contract terms that pass title of all goods upon
delivery to a common carrier (FOB factory) and provide for sales
returns under standard product warranty provisions. For
non-standard contract terms where title to goods passes at time
of delivery (FOB destination), revenue is recognized after we
have established proof of delivery. Revenues relating to
services performed under our extended warranty program represent
less than 5% of net revenues in each of 2009, 2008 and 2007 and
are recognized as earned based upon contract terms, generally
ratable over the term of service. We record project installation
work in Asia using the percentage-of-completion method.
Installation revenue represents less than 7% of net revenue in
2009, 2008 and 2007. Net revenues include amounts billed to
customers in sales transactions for shipping and handling.
Shipping fees represent less than 1% of net revenues in each of
2009, 2008 and 2007. Shipping costs are included in cost of
goods sold.
Accounts
Receivable, Trade Notes Receivable and Allowance for Doubtful
Accounts
We grant credit to our customers after undertaking an
investigation of credit risk for all significant amounts. An
allowance for doubtful accounts is provided for estimated credit
losses at a level deemed appropriate to adequately provide for
known and inherent risks related to such amounts. The allowance
is based on reviews of loss, adjustments history, current
economic conditions and other factors that deserve recognition
in estimating potential losses. We generally do not require
collateral for sales on credit. While management uses the best
information available in making our determination, the ultimate
recovery of recorded accounts receivable is also dependent upon
future economic and other conditions that may be beyond
managements control. If there was a deterioration of a
major customers credit-worthiness or if actual defaults
were higher than what have been experienced historically,
additional allowances would be required.
We are not able to predict changes in the financial stability of
our customers. Any material change in the financial status of
any one or a group of customers could have a material adverse
effect on our results of operations and financial condition.
Trade notes receivables are presented to us from some of our
customers in China as a payment against the outstanding trade
receivables. These notes receivables are bank guarantee
promissory notes which are non-interest bearing and generally
mature within 6 months.
21
Inventories
Inventories are stated at the lower of cost, using the
first-in,
first-out method, or market. We are exposed to a number of
economic and industry factors that could result in portions of
our inventory becoming either obsolete or in excess of
anticipated usage, or saleable only for amounts that are less
than their carrying amounts. These factors include, but are not
limited to, technological changes in the market, competitive
pressures in products and prices, and the availability of key
components from our suppliers. We have established inventory
reserves when conditions exist that suggest that our inventory
may be in excess of anticipated demand or is obsolete based upon
assumptions about future demand for our products and market
conditions. When recorded, reserves are intended to reduce the
carrying value of the inventory to its net realizable value. If
actual demand for specified products deteriorates, or market
conditions are less favorable than those projected, additional
reserves may be required.
Goodwill
and Other Intangible Assets
We test goodwill and other intangible assets for possible
impairment on an annual basis and at any other time if events
occur or circumstances indicate that the carrying amount may not
be recoverable. The recoverability is measured at the reporting
unit level by comparing the reporting units carrying
amount, including goodwill, to the fair value of the reporting
unit, which is measured based upon, among other factors, market
capitalization as well as forecasted operating results. We have
one reporting unit. If the recorded value of the assets,
including goodwill and other intangible assets, and liabilities
(net book value) of the reporting unit exceeds its
fair value, an impairment loss may exist. Further, to the extent
our consolidated net book value is greater than our market
capitalization, all, or a significant portion of any goodwill
may be impaired.
We experienced a significant decline in market capitalization
during the fourth quarter of 2008. This decline in market
capitalization was driven largely by deteriorating macroeconomic
conditions that contributed to a decline in our forecasted
operating results and business. As a result, we recognized a
non-cash impairment charge of approximately $3.3 million
for the three-month period and year ended December 31, 2008
to write-off the entire carrying value of goodwill.
Long-lived
Assets
We test long-lived asset groups for recoverability when events
occur or circumstances indicate that their carrying amounts may
not be recoverable. Recoverability is assessed based on the
carrying amounts of the asset and its fair value which is
generally determined based on the sum of the undiscounted cash
flows expected to result from the use and the eventual disposal
of the asset, as well as specific appraisals in certain
instances. An impairment loss is recognized when the carrying
amount is not recoverable and exceeds fair value.
Stock-Based
Compensation Expense
We estimate the fair value of each option award on the date of
grant using a Black-Scholes-Merton (BSM) valuation
model and a single option award approach. Accordingly,
stock-based compensation cost is measured at grant date based on
the fair value of the award and recognized in expense over the
requisite service period, which is generally the vesting period.
We make the following estimates and assumptions in determining
fair value:
Expected Term Our expected term represents
the weighted-average period that our stock-based awards are
expected to be outstanding. We have used the historical exercise
patterns of previously granted options in relation to the
Companys stock price to estimate expected exercise
patterns.
Expected Volatility The Companys
expected volatilities are based on historical volatility of the
Companys stock, adjusted where determined by management
for unusual and non-representative stock price activity not
expected to recur. Management determined the historical stock
price volatility for period from April 11, 2002, the
commencement of public trading of the common stock, through
December 31, 2002, was not likely to be representative of
the future and excluded this period. Management also applies
mean reversion techniques to the historical stock prices, which
results in an emphasis on recent activity over the distant past,
when determining the expected volatility rate to be included in
the Black-Scholes-Merton valuation model.
22
Expected Dividend The Black-Scholes-Merton
valuation model calls for a single expected dividend yield as an
input. The Company currently pays no dividends and does not
expect to pay dividends in the foreseeable future.
Risk-Free Interest Rate The Company bases the
risk-free interest rate on the implied yield currently available
on United States Treasury zero-coupon issues with an equivalent
remaining term.
Estimated Forfeitures To estimate
forfeitures, we apply our historical rate of option forfeitures.
Estimated forfeiture rates are
trued-up to
actual forfeiture results as the stock-based awards vest.
Business
Combinations
In accordance with the authoritative accounting guidance, we
allocate the purchase price of acquired companies to the
tangible and intangible assets acquired and liabilities assumed
based on their estimated fair values. We engage third-party
appraisal firms to assist management in determining the fair
values of certain assets acquired and liabilities assumed. Such
a valuation requires management to make significant estimates
and assumptions, especially with respect to intangible assets.
Management makes estimates of fair value based upon assumptions
believed to be reasonable. These estimates are based on
historical experience and information obtained from the
management of the acquired companies and is inherently
uncertain. Critical estimates in valuing certain of the
intangible assets include but are not limited to: future
expected cash flows from customer contracts, acquired developed
technologies and pending patents; expected costs to develop the
in-process research and development into commercially viable
products and estimating cash flows from the projects when
completed; the acquired companys brand awareness and
market position, as well as assumptions about the period of time
the acquired brand will continue to be used in the combined
companys product portfolio; and discount rates.
Unanticipated events and circumstances may occur which may
affect the accuracy or validity of such assumptions, estimates
or actual results.
Income
Taxes
We are subject to income taxes in the United States and numerous
foreign jurisdictions. Significant judgment is required in
evaluating our tax positions and determining our provision for
income taxes.
Our effective tax rates differ from the statutory rate primarily
due to foreign earnings taxed at lower rates, foreign losses not
benefited, stock compensation expenses, under ASC 718,
Stock Compensation, which are not deductible for tax
purposes and changes in our valuation allowances. Our future
effective tax rates could be adversely affected by earnings
being lower than anticipated in countries where we have lower
statutory rates and higher than anticipated in countries where
we have higher statutory rates, by changes in the valuation of
our deferred tax assets or liabilities, or by changes in tax
laws, regulations, accounting principles, or interpretations
thereof. We regularly assess the likelihood of adverse outcomes
resulting from tax examinations to determine the adequacy of our
provision for income taxes.
Significant judgment is also required in determining any
valuation allowance recorded against deferred tax assets. In
assessing the need for a valuation allowance, we consider all
available evidence including past operating results, estimates
of future taxable income, and the feasibility of tax planning
strategies. In the event that we change our determination as to
the amount of deferred tax assets that can be realized, we will
adjust our valuation allowance with a corresponding impact to
the provision for income taxes in the period in which such
determination is made.
RESULTS
OF OPERATIONS
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Percentage
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
(In thousands)
|
|
Net sales
|
|
$
|
83,172
|
|
|
$
|
95,383
|
|
|
$
|
(12,211
|
)
|
|
|
(13
|
)%
|
|
$
|
95,383
|
|
|
$
|
90,836
|
|
|
$
|
4,547
|
|
|
|
5
|
%
|
Net sales during 2009 decreased $12.2 million, or 13%, from
$95.4 million in 2008. The decease was primarily the result
of a decrease in net sales of $3.5 million, or 9%, in
Americas, $7.7 million, or 19%, in Asia and
23
$1.0 million, or 6%, in Europe. The decrease is primarily
attributable to the negative impact of the worldwide economic
downturn during the first half of 2009 and disruption of our
sales activity in China due to management changes at our Fushun
and Beijing operations. We believe these two factors negatively
impacted our sales by approximately $6.2 million in the
first nine months of 2009. Additionally, the decrease in 2009
resulted from the impact of two significant non-recurring orders
in 2008 totaling approximately $5.6 million: one from the
United States National Guard and another from the Beijing
International Airport. Approximately $0.5 million of the
decrease was due to unfavorable exchange rate fluctuations.
Net sales during 2008 increased $4.5 million, or 5%, from
$90.8 million in 2007. The increase was primarily the
result of an increase in net sales of $1.4 million and
$3.8 million in the Americas and Europe, respectively,
offset by a decrease of net sales in Asia by $0.7 million.
The increase from 2007 to 2008 consisted primarily of two large
non-recurring orders in 2008 totaling approximately
$5.6 million: one from the United States National Guard and
another from the Beijing International Airport. Additional
increases in net sales of approximately $4.2 million were
due to the appreciation of the Renminbi (RMB) and
Euro against the U.S. dollar from 2007 to 2008. The
increase was partially offset by an economic slow down in China
following the Beijing Olympics, in the second half of 2008.
Cost
of Sales and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Percentage
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
(In thousands)
|
|
Cost of sales
|
|
$
|
42,193
|
|
|
$
|
47,168
|
|
|
$
|
(4,975
|
)
|
|
|
(11
|
)%
|
|
$
|
47,168
|
|
|
$
|
44,428
|
|
|
$
|
2,740
|
|
|
|
6
|
%
|
Gross profit
|
|
$
|
40,979
|
|
|
$
|
48,215
|
|
|
$
|
(7,236
|
)
|
|
|
(15
|
)%
|
|
$
|
48,215
|
|
|
$
|
46,408
|
|
|
$
|
1,807
|
|
|
|
4
|
%
|
Gross margin
|
|
|
49
|
%
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
|
|
51
|
%
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
Cost of sales consists of direct material, labor and overhead.
Cost of sales in 2009 decreased $5.0 million or 11% from
$47.2 million in 2008. The decrease in cost of sales was
primarily the result of a decrease in net sales from
$95.4 million in 2008 to $83.2 million in 2009. The
gross margin change to 49% in 2009 from 51% in 2008 was
primarily the result of the year-over-year decline in revenue,
particularly in the Americas and Europe, regions where we
generally sell higher margin products.
Cost of sales in 2008 increased $2.7 million or 6% from
$44.4 million in 2007. The increase in cost of sales was
primarily the result of an increase in net sales from
$90.8 million in 2007 to $95.4 million in 2008. Gross
margin in 2008 remained consistent with 2007 at 51%.
Sales
and Marketing Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Sales and marketing
|
|
$
|
18,824
|
|
|
$
|
21,427
|
|
|
$
|
(2,603
|
)
|
|
|
(12
|
)%
|
|
$
|
21,427
|
|
|
$
|
25,434
|
|
|
$
|
(4,007
|
)
|
|
|
(16
|
)%
|
|
|
|
|
Percentage of net sales
|
|
|
23
|
%
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
22
|
%
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses in 2009 decreased
$2.6 million, or 12%, from $21.4 million in 2008. The
decrease was primarily due to reduced headcount, travel by
employees and participation at trade shows.
Sales and marketing expenses in 2008 decreased $4.0 million
or 16% from $25.4 million in 2007. The decrease was
primarily due to company-wide cost-control initiatives and a ten
percent workforce reduction in the Americas, at the end of the
first quarter of 2008. Additional savings were realized by
decreases in office expenses, advertising and trade show
expenses, travel and entertainment expenses, consultant expenses
and project expenses.
24
Research
and Development Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Percentage
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
(In thousands)
|
|
Research and development
|
|
$
|
6,354
|
|
|
$
|
6,665
|
|
|
$
|
(311
|
)
|
|
|
(5
|
)%
|
|
$
|
6,665
|
|
|
$
|
7,973
|
|
|
$
|
(1,308
|
)
|
|
|
(16
|
)%
|
Percentage of net sales
|
|
|
8
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
7
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
Research and development expenses in 2009 decreased
$0.3 million, or 5%, from $6.7 million in 2008. The
decrease was primarily the result of a business tax exemption
from the PRC granted to RAE Shanghai for engineering services
provided by RAE Shanghai to RAE Asia and lower project related
expenses, partially offset by an increase in payroll expenses
due to an increase in headcount.
Research and development expenses in 2008 decreased
$1.3 million or 16% from $8.0 million in 2007. The
decrease was primarily due to a $0.7 million decrease in
amortization expense as certain intangible assets were fully
amortized and a $0.7 million decrease in project expenses
due to completion of certain R&D projects in 2008.
General
and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Percentage
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
(In thousands)
|
|
General and administrative
|
|
$
|
23,124
|
|
|
$
|
22,864
|
|
|
$
|
260
|
|
|
|
1
|
%
|
|
$
|
22,864
|
|
|
$
|
17,767
|
|
|
$
|
5,097
|
|
|
|
29
|
%
|
Percentage of net sales
|
|
|
28
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
24
|
%
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
General and administrative expenses in 2009 increased
$0.3 million from $22.9 million in 2008. While general
and administrative expenses were relatively constant during 2009
and 2008, management accrued $3.5 million as its estimate
to settle the outstanding joint investigation into the
Companys alleged violations of the FCPA and increased bad
debt expense associated with doubtful accounts receivable of
$0.8 million, which was offset by lower professional fees
of $4.5 million, consisting primarily of legal fees.
General and administrative expenses in 2008 increased
$5.1 million or 29% from $17.8 in 2007. The increase was
primarily due to a net increase of $2.5 million in
professional service expenses. The charge was comprised of a
$4.0 million increase related to the previously disclosed
FCPA investigation and related remediation plans conducted under
the supervision of the Audit Committee of the Board of
Directors, offset by a decrease in legal costs associated with
the conclusion of the Polimaster arbitration in 2007. Bad debt
expenses increased by $1.4 million due to an increase in
accounts receivable reserves at RAE Fushun and RAE Beijing.
Impairment
of Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Percentage
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
(In thousands)
|
|
Impairment of goodwill
|
|
$
|
|
|
|
$
|
3,348
|
|
|
$
|
(3,348
|
)
|
|
|
100
|
%
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
0
|
%
|
Percentage of net sales
|
|
|
0
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
We experienced a significant decline in market capitalization
during the fourth quarter of 2008. This decline in market
capitalization was driven largely by deteriorating macroeconomic
conditions that contributed to a decline in our forecasted
operating results and business. As a result, we recognized a
non-cash impairment charge of approximately $3.3 million
for the three-month period and year ended December 31, 2008
to write-off the entire carrying value of goodwill.
25
Gain/loss
on Abandonment of Lease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Percentage
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
(In thousands)
|
|
(Gain) loss on abandonment of lease
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
(595
|
)
|
|
$
|
595
|
|
|
|
100
|
%
|
Percentage of net sales
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Change
|
|
|
|
(In thousands)
|
|
|
Interest income
|
|
$
|
48
|
|
|
$
|
173
|
|
|
$
|
(125
|
)
|
|
|
(72
|
)%
|
|
$
|
173
|
|
|
$
|
162
|
|
|
$
|
11
|
|
|
|
7
|
%
|
Interest expense
|
|
|
(402
|
)
|
|
|
(397
|
)
|
|
|
(5
|
)
|
|
|
1
|
%
|
|
|
(397
|
)
|
|
|
(705
|
)
|
|
|
308
|
|
|
|
-44
|
%
|
Other, net
|
|
|
188
|
|
|
|
(575
|
)
|
|
|
763
|
|
|
|
(133
|
)%
|
|
|
(575
|
)
|
|
|
58
|
|
|
|
(633
|
)
|
|
|
-1091
|
%
|
Equity in loss of unconsolidated affiliate
|
|
|
(109
|
)
|
|
|
43
|
|
|
|
(152
|
)
|
|
|
(353
|
)%
|
|
|
43
|
|
|
|
3
|
|
|
|
40
|
|
|
|
1333
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
$
|
(275
|
)
|
|
$
|
(756
|
)
|
|
$
|
481
|
|
|
|
(64
|
)%
|
|
$
|
(756
|
)
|
|
$
|
(482
|
)
|
|
$
|
(274
|
)
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For 2009, Total other expenses decreased by $0.5 million,
or 64%, from $0.8 million in 2008. The decrease in interest
income was primarily due to lower interest rates and decreased
cash in interest earning accounts. The change of
$0.8 million income in net other during 2009 was primarily
from foreign exchange gains in Asia and Europe. The expense
increase of $0.2 million in Equity in loss of
unconsolidated affiliates represents the Companys share in
the unconsolidated losses of its investments in various
businesses.
For 2008, total other expenses increased $0.3 million or
57% from $0.5 million in 2007. The increase was primarily
due to increases in foreign exchange losses from balances and
payments in Euro and RMB, offset by decreases in interest
expenses as we repaid our outstanding loan balance using funds
from sale of the San Jose building.
Income
Tax (Benefit) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Percentage
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
(In thousands)
|
|
Income tax (benefit) expense
|
|
$
|
(884
|
)
|
|
$
|
538
|
|
|
$
|
(1,422
|
)
|
|
|
(264
|
)%
|
|
$
|
538
|
|
|
$
|
5,883
|
|
|
$
|
(5,345
|
)
|
|
|
(91
|
)%
|
Effective tax rate
|
|
|
12
|
%
|
|
|
(8
|
)%
|
|
|
|
|
|
|
|
|
|
|
(8
|
)%
|
|
|
(126
|
)%
|
|
|
|
|
|
|
|
|
Income tax expense decreased $1.4 million from an income
tax expense of $0.5 million in 2008. Our effective tax rate
was 12% in 2009 and (8)% in 2008. The tax rate for years 2009
and 2008 differed from United States statutory rate due to the
realization of certain deferred tax assets (DTAs), foreign
earnings taxed at lower rates, foreign losses not benefited and
non-deductible stock compensation deductions.
In November 2009, the Worker, Homeownership, and Business
Assistance Act of 2009 was enacted. Under this law, companies
may elect to increase the carryback period for the net operating
loss of a tax year ending after December 31, 2007 and
beginning before January 1, 2010 to 3, 4 or 5 years.
Accordingly, we have elected to carry our 2008 net
operating loss back to 2003, which will result in a refund of
approximately $659,000.
We currently have significant deferred tax assets resulting from
anticipated net operating losses and other deductible temporary
differences, which will reduce taxable income in future periods.
We continue to maintain a full valuation allowance for all
deferred assets except for $0.9 million related to certain
of our foreign entities. Based on our current projections, we
believe it is more likely than not we will not be
able realize our deferred tax assets with the exception of the
$0.9 million foreign deferred tax assets. ASC 740,
Income Taxes, requires a valuation allowance be
established when it is more likely than not that all
or a portion of deferred tax assets will not be realized and
that it is difficult to conclude that a valuation allowance is
not needed when there is negative
26
evidence such as cumulative losses in recent years. Therefore,
cumulative losses weighed heavily in the overall assessment. We
believe that sufficient uncertainty exists with regard to the
realizability of these tax assets such that a valuation
allowance is necessary. Factors considered in providing a
valuation allowance include the lack of a significant history of
consistent profits, the current and believed to be continued
weakness in the overall market thereby potentially impacting our
ability to sustain or grow revenues and earnings, and the length
of carryback and carryforward periods. We considered
expectations and risks associated with estimates of future
taxable income and ongoing prudent and feasible tax planning
strategies. Based on the absence of sufficient positive
objective verifiable evidence at December 31, 2009, we have
placed a valuation on our deferred tax assets except for
$0.9 million of foreign deferred tax assets. We expect to
record a valuation allowance on future tax benefits until we can
sustain an appropriate level of profitability and until such
time, we would not expect to recognize any significant tax
benefits in our future results of operations.
Our effective tax rate was a (8)% tax expense in 2008 and (126)%
tax in 2007. The tax rate for 2008 and 2007 differed from the
United States statutory rate due to the change in the
realization of our deferred tax assets, foreign earnings taxed
at lower rates, foreign losses not benefited, and non-deductible
stock compensation deductions.
Net
Loss Attributable to the Noncontrolling Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Percentage
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
(In thousands)
|
|
Net loss (income) attributable to the noncontrolling interest
|
|
$
|
955
|
|
|
$
|
220
|
|
|
$
|
735
|
|
|
|
334
|
%
|
|
$
|
220
|
|
|
$
|
(6
|
)
|
|
$
|
226
|
|
|
|
(3767
|
)%
|
The noncontrolling interest in the losses of consolidated
subsidiaries for 2009 increased $735,000 from a loss of $220,000
in 2008. The increase in the loss attributable to the
noncontrolling interest was mainly due to the increased loss
generated by RAE Fushun and RAE Beijing.
Net loss attributable to the noncontrolling interest for 2008
increased $226,000 from income of $6,000 in 2007. The increase
in loss attributable to the noncontrolling interest was mainly
due to the increased loss generated by RAE Fushun, offset by
increased profitability at RAE France in 2008.
Gain
(loss) From Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Change
|
|
|
|
(In thousands)
|
|
|
Gain (loss) from discontinued operations before income taxes
|
|
$
|
|
|
|
$
|
11
|
|
|
$
|
(11
|
)
|
|
|
(100
|
)%
|
|
$
|
11
|
|
|
$
|
(4,939
|
)
|
|
$
|
4,950
|
|
|
|
(100
|
)%
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
(785
|
)
|
|
|
785
|
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations
|
|
$
|
|
|
|
$
|
11
|
|
|
$
|
(11
|
)
|
|
|
(100
|
)%
|
|
$
|
11
|
|
|
$
|
(4,154
|
)
|
|
$
|
4,165
|
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On August 24, 2007, the Board of Directors approved the
discontinuation of our mobile DVR business in order to reduce
expenses and concentrate resources on our gas and radiation
detection business. Our mobile DVR business was acquired through
the purchases of Aegison and Securay. See Note 2.
Business Combinations and Dispositions of the Notes to
Consolidated Financial Statements for details. On
August 28, 2007, we notified our DVR customers, terminated
all personnel not reassigned to continuing operations and
suspended the related production and sales activities. Because
the DVR business operates at a substantial loss, management
intended to liquidate the tangible assets, mainly inventories of
component parts. Accordingly, the value of these assets had been
adjusted to reflect the anticipated disposals.
As a result of discontinuing the DVR business, management
impaired the remaining value of the intangible assets and
goodwill acquired in the purchases of Aegison in July 2006 and
Securay in January 2007. Impairment expense recognized in fiscal
2007 totaled $4.2 million.
27
In accordance with the authoritative accounting guidance, the
financial results of the DVR business are reported as
discontinued operations for all periods presented. The financial
results included in discontinued operations were as follows:
Liquidity
and Capital Resources
To date, we have financed our operations primarily through
operating revenues, proceeds from the issuance of equity
securities and short-term bank borrowings. In 2007, we also sold
and leased back our corporate headquarters in San Jose,
California. As of December 31, 2009, we had
$18.5 million in cash and cash equivalents compared with
$14.8 million on December 31, 2008. The
$3.7 million year-over-year increase in company cash was
due in part to our global initiatives to reduce worldwide
inventory levels.
On December 31, 2009, we had $31.7 million in working
capital (current assets less current liabilities) and a current
ratio (ratio of current assets to current liabilities) of 2.2 to
1.0 compared to working capital of $37.1 million and a
current ratio of 2.5 to 1.0 on December 31, 2008. Of the
$5.4 million reduction in working capital,
$3.5 million is attributable to the proposed FCPA
settlement discussed in Note 7 to the Consolidated
Financial Statements.
In the United States, we had a $10.0 million revolving
credit agreement as of December 31, 2009, and a
$15.0 million revolving credit agreement as of
December 31, 2008. This credit facility is renewed annually
and currently expires on May 15, 2010. Available credit is
based on a percentage of specific qualifying assets and the
total facility is collateralized by a blanket security interest
over the Companys assets in the United States. We are
required to comply with certain reporting and financial
requirements in addition to the ongoing requirement to submit
monthly financial information. We must also maintain a
compensating balance with the lending bank of at least
$2.0 million at all times, which is included in Restricted
cash on the Consolidated Balance Sheets. While we intend to
pursue renewal, there is no assurance we will be successful in
securing a renewed agreement on this line of credit for any time
period after May 15, 2010. As of December 31, 2009 and
December 31, 2008, $1.8 million was outstanding
against the revolving credit agreements in the United States.
During the fourth quarter of 2009, the Company obtained an
amendment to the financial covenants of its revolving credit
agreement, as a result of non-compliance. The amended financial
covenants under the revolving credit agreement 1) require
us to maintain specified trailing two-quarter minimum earnings
before interest, depreciation, amortization and non-cash stock
compensation expenses and 2) limits the size of potential
monetary penalties under the FCPA to $3.5 million. We were
in compliance with these covenants as of December 31, 2009.
In China, we had two unsecured revolving lines of credit as of
December 31, 2009 and December 31, 2008, each in the
amount of RMB 20 million or approximately
$2.9 million. Borrowings under these lines of credit are
available to provide working capital and are generally at the
current market rate for fixed rate loans of the amount and
duration requested, up to one year. The continuing credit
facilities are renewed annually. As of December 31, 2009
and December 31, 2008, RMB 15 million, or
approximately $2.2 million, and RMB 5 million, or
approximately $0.7 million, respectively, was outstanding
against loan agreements in China.
In November 2009, we borrowed RMB 10.0 million, or
approximately $1.5 million, for a term of 18 months to
provide working capital for our 70% owned subsidiary in Fushun,
China (RAE Fushun). Loan repayment is guaranteed by
an unrelated third party, to whom RAE Fushun granted a lien over
its wholly owned plant and associated land rights. As a
condition of the loan, the lending bank required a deposit of
approximately $0.1 million from the guarantor. This deposit
was funded by RAE Fushun from the loan proceeds and is included
in Restricted Cash on the Consolidated Balance Sheets.
We believe our existing balances of cash and cash equivalents,
together with cash generated from product sales, will be
sufficient to meet our cash needs for working capital, debt
service and capital expenditures for at least the next twelve
months. Our future capital requirements will depend on many
factors that are difficult to predict, including the size,
timing and structure of any future acquisitions, future capital
investments, the ultimate resolution of potential FCPA
violations and future results of operations. Any future
financing we may require may be unavailable on favorable terms,
if at all. Any difficulty in obtaining additional financial
resources could force us to curtail our operations or could
prevent us from pursuing our growth strategy. Any future funding
may dilute the ownership of our shareholders.
28
Our Consolidated Statements of Cash Flows for 2009, 2008 and
2007 may be summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
7,657
|
|
|
$
|
3,178
|
|
|
$
|
(9,979
|
)
|
Investing activities
|
|
|
(5,000
|
)
|
|
|
(3,351
|
)
|
|
|
10,023
|
|
Financing activities
|
|
|
954
|
|
|
|
(1,391
|
)
|
|
|
(2,684
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
72
|
|
|
|
503
|
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
3,683
|
|
|
$
|
(1,061
|
)
|
|
$
|
(2,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
For the year ended December 31, 2009, net cash provided by
operating activities of $7.6 million was due to the
following:
|
|
|
|
|
Non-cash charges included in our net loss of $6.7 million
totaled $5.6 million. Our principal non-cash expenses were
as follows: $3.2 million depreciation and amortization;
$1.9 million provision for doubtful accounts; and
$1.3 million stock-based compensation. These non-cash
expenses were partially offset by $0.6 million in gains on
disposal of property and equipment; $0.4 million in
deferred income tax benefits; and other net losses of
$0.2 million.
|
|
|
|
The net change in operating assets and liabilities which
generated cash flow of $8.7 million. Cash was primarily
provided by the managed reduction of $5.6 million in
inventories. Additional cash flow was contributed by increases
to accounts payable and accrued liabilities and a reduction in
prepaid expenses of $1.1 million, $2.2 million and
$1.4 million, respectively. Cash was applied to reduce
accounts payable to affiliate by $0.3 million. The net
change in other operating assets and liabilities used cash
totaling $1.3 million.
|
For the year ended December 31 2008, net cash provided by
operating activities of $3.2 million was due to the
following:
|
|
|
|
|
Non-cash charges included in our net loss of $7.4 million
totaled $7.8 million. Our principal non-cash expenses were
as follows: $3.3 million reduction in goodwill;
$3.3 million depreciation and amortization;
$1.6 million stock-based compensation; and
$1.3 million provision for doubtful accounts. These
non-cash expenses were partially offset by $0.6 million in
gains on disposal of property and equipment; $1.2 million
in deferred income tax benefits; and other net gains of
$0.1 million.
|
|
|
|
The net reduction in working capital of $2.8 million
attributable to changes in operating assets and liabilities. The
decrease in working capital resulted primarily from a
$1.2 million decline in accounts receivable and a
$1.1 million decline in trade notes receivable. Other
operating accounts provided net cash of $0.5 million.
|
For the year ended December 31, 2007, net cash used by
operating activities was $10.0 million which was due to the
following:
|
|
|
|
|
Cash was used mainly to support an increase of $9.5 million
in working capital primarily consisting of an increase of
$5.7 million in accounts receivable and $1.8 million
in inventories primarily related to increased sales. The
remaining $2.0 million was primarily comprised of changes
in deferred revenue, deposits and other current operating
accounts.
|
|
|
|
The positive effect of the non-cash adjustments was due to
depreciation and amortization of long lived assets of
$3.7 million, deferred taxes of $4.0 million, stock
based compensation expense of $1.9 million and provision
for doubtful accounts of $1.9 million.
|
29
Investing
Activities
As disclosed above in the discussion of banking relationships,
during 2009 we agreed to maintain restricted cash arrangements
of $2.1 million. Other 2009 investing activities primarily
consisted of ongoing construction and outfitting activities at
our new facility in Fushun, China and payment for land use
rights and pre-construction site improvements in Shanghai. In
December 2008, we purchased the land use rights for
50 years to 5 acres of land in Shanghai. We plan to
use this site to construct a new manufacturing and research and
development facility, which will replace our current Shanghai
facility. Construction began during the first quarter of 2010.
Upon completion, we intend to vacate our existing leased
facility. Based on discussions with Shanghai government
officials, our landlord, we believe we will be able to terminate
the lease without penalty. Negotiations for project and
long-term financing arrangements are ongoing. However, no
assurance can be given that we will be able to arrange financing
terms acceptable to us or that we will not be subject to lease
termination penalties.
During 2008, cash used in investing activities was primarily
used to complete and occupy the manufacturing facility in
Fushun, China. The total project in Fushun also includes
administrative offices, a research and development facility and
living quarters. The estimated cost to complete the project is
approximately $2.3 million. However, we have not committed
to a timeline for the remaining construction.
During 2007, the increase in cash due to investing activities of
$10.0 million was primarily due to the net proceeds from
the sale and leaseback of our San Jose headquarters
building for approximately $12.4 million and the sale of
investments in securities for $3.2 million, partially
offset by approximately $4.0 million used for the
acquisition of property and equipment and $1.6 million used
for business acquisitions. During 2007, we began to construct
RAE Fushuns new manufacturing and administrative facility
in China.
Financing
Activities
The cash provided by financing activities of $1.0 million
in 2009 was primarily from bank borrowings (net of payments
made) of $2.9 million. As disclosed above in the discussion
of banking relationships, $1.5 million was borrowed by RAE
Fushun for working capital. In addition, we borrowed
$1.4 million to fund the purchase of land use rights in
Shanghai for the construction of a new manufacturing facility as
discussed in investing activities above.
We also made principal payments totaling $1.9 million to
reduce the notes payable to related parties for the acquisition
of RAE Beijing. These payments were made from general working
capital. The next scheduled principal payment is in July 2010.
Cash used in financing activities of $1.4 million in 2008
was primarily applied to payments on related party notes
totaling $1.2 million and payments on bank lines of credit
of $0.2 million, net of amounts borrowed. The bank lines of
credit provide working capital for our operations in the United
States and China.
The cash provided by financing activities was $2.7 million
in 2007 and was primarily from bank borrowings (net of
repayment) of $2.6 million, which was used to repay a
related party note of $5.0 million and the repurchase of
restricted stock awards of $0.3 million.
30
Commitments
and Contingencies
Summary
of Obligations
The following table quantifies our known contractual obligations
in tabular form as of December 31, 2009. These obligations
impact our short and long-term liquidity and capital resource
needs. Certain of these contractual obligations are reflected in
the Consolidated Balance Sheets, while others are disclosed as
future obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
After
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reflected in Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt(1)
|
|
$
|
1,463
|
|
|
$
|
|
|
|
$
|
1,463
|
|
|
$
|
|
|
|
$
|
|
|
Notes payable to related parties(2)
|
|
|
733
|
|
|
|
370
|
|
|
|
363
|
|
|
|
|
|
|
|
|
|
Deferred gain on sale of real estate(3)
|
|
|
5,079
|
|
|
|
635
|
|
|
|
1,270
|
|
|
|
1,270
|
|
|
|
1,904
|
|
Deferred revenue
|
|
|
1,218
|
|
|
|
603
|
|
|
|
542
|
|
|
|
73
|
|
|
|
|
|
Deferred tax liabilities, non-current
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156
|
|
Other long-term liabilities
|
|
|
781
|
|
|
|
|
|
|
|
542
|
|
|
|
55
|
|
|
|
184
|
|
Other cash obligations not reflected in Consolidated Balance
Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations(4)
|
|
|
10,683
|
|
|
|
1,733
|
|
|
|
2,816
|
|
|
|
2,644
|
|
|
|
3,490
|
|
Open purchase orders(4)(5)
|
|
|
4,484
|
|
|
|
4,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,597
|
|
|
$
|
7,825
|
|
|
$
|
6,996
|
|
|
$
|
4,042
|
|
|
$
|
5,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For further discussion surrounding long-term debt, refer to
Note 6. Bank Debt to the Consolidated Financial
Statements. |
|
(2) |
|
For further discussion surrounding notes payable-related
parties, refer to Note 10. Related Party
Transactions to the Consolidated Financial Statements. |
|
(3) |
|
For further discussion surrounding deferred gain on sale of real
estate, refer to Note 3. Balance Sheet Details
to the Consolidated Financial Statements. |
|
(4) |
|
For further discussion surrounding purchase and lease
obligations, refer to Note 7. Commitments and
Contingencies to the Consolidated Financial statements. |
|
(5) |
|
Represents estimated cancelable open purchase orders to purchase
inventory and other goods and services in the normal course of
business to meet operational requirements. |
Guarantees
We are permitted under Delaware law and required under our
Certificate of Incorporation and Bylaws to indemnify our
officers and directors for certain events or occurrences,
subject to certain limits, while the director or officer is or
was serving at our request in such capacity. The term of the
indemnification period is for the officers or
directors lifetime. The maximum amount of potential future
indemnification is unlimited; however, we have a Director and
Officer Insurance Policy that reduces exposure and enables us to
recover a portion of any future amounts paid. To date we have
not incurred any losses under these agreements.
In our sales agreements, we typically agree to indemnify our
customers for any expenses or liability resulting from claimed
infringements of patents, trademarks or copyrights of third
parties. The terms of these indemnification agreements are
generally perpetual any time after execution of the agreement.
The maximum amount of potential future indemnification is
unlimited. To date, we have not paid any amounts to settle
claims or defend lawsuits.
31
Product
Warranties
We sell the majority of our products with a 12 to 24 month
repair or replacement warranty from the date of shipment. We
provide an accrual for estimated future warranty costs based
upon the historical relationship of warranty costs to sales. The
estimated future warranty obligations related to product sales
are recorded in the period in which the related revenue is
recognized.
Uncertain
Tax Positions
As of December 31, 2009, the liability for uncertain tax
positions, including associated interest and penalties, was
approximately $1.5 million. This liability represents an
estimate of tax positions that the Company has taken in its tax
returns which may ultimately not be sustained upon examination
by the tax authorities. Since the ultimate amount and timing of
any future cash settlements cannot be predicted with reasonable
certainty, this estimated liability has been excluded from the
contractual obligations table.
Recent
Accounting Pronouncements
In December 2007, the FASB issued authoritative guidance which
applies to business combinations. The new guidance changes the
accounting for acquisition transaction costs by requiring them
to be expensed in the period incurred, and also changes the
accounting for contingent consideration, acquired contingencies
and restructuring costs related to an acquisition. The new
guidance was effective for the Company beginning January 1,
2009, and will change the Companys accounting treatment
for business combinations on a prospective basis.
In June 2009, the FASB issued authoritative guidance for
determining whether an entity is a variable interest entity
(VIE) and requires an enterprise to perform an
analysis to determine whether the enterprises variable
interest or interests give it a controlling financial interest
in a VIE. Under this guidance, an enterprise has a controlling
financial interest when it has a) the power to direct the
activities of a VIE that most significantly impact the
entitys economic performance and b) the obligation to
absorb losses of the entity or the right to receive benefits
from the entity that could potentially be significant to the
VIE. The guidance also requires an enterprise to assess whether
it has an implicit financial responsibility to ensure that a VIE
operates as designed when determining whether it has power to
direct the activities of the VIE that most significantly impact
the entitys economic performance. The guidance is
effective for the Company January 1, 2010, and requires
ongoing assessments of whether an enterprise is the primary
beneficiary of a VIE as well as certain enhanced disclosures.
The Company is currently evaluating the potential impact, if
any, of the adoption of this guidance on its consolidated
financial statements.
In October 2009, the FASB issued authoritative guidance on
revenue recognition that will become effective for the Company
beginning January 1, 2011, with earlier adoption permitted.
Under the new guidance on arrangements that include software
elements, tangible products that have software components that
are essential to the functionality of the tangible product will
no longer be within the scope of the software revenue
recognition guidance, and software-enabled products will now be
subject to other relevant revenue recognition guidance.
Additionally, the FASB issued authoritative guidance on revenue
arrangements with multiple deliverables that are outside the
scope of the software revenue recognition guidance. Under the
new guidance, when vendor specific objective or third party
evidence for deliverables in an arrangement cannot be
determined, a best estimate of the selling price is required to
separate deliverables and allocate arrangement consideration
using the relative selling price method. The new guidance
includes new disclosure requirements on how the application of
the relative selling price method affects the timing and amount
of revenue recognition. The Company is currently assessing the
potential effect, if any, on its financial statements.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Concentration
of Credit Risk
Currently, we have cash and cash equivalents deposited with
major financial institutions in the countries where we conduct
business. Our deposits may exceed the amount of insurance
available to cover such deposits. To date, we
32
have not experienced any losses of deposits of cash and cash
equivalents. Management regularly reviews our deposit balances
and the credit worthiness of the financial institutions which
hold our deposits.
Interest
Rate Risk
As of December 31, 2009, we had cash and cash equivalents
of $18.5 million and restricted cash of $2.1 million.
The Company had no other significant interest bearing assets.
Over time changes to interest rates may reduce or increase our
interest income, but the impact on our net income (loss) or the
fair value of our interest bearing assets is not expected to be
significant.
Our borrowings in China are at fixed interest rates or at rates
fixed for 12 months. The outstanding balance under our line
of credit in the United States bears interest at the floating
prime bank lending rate plus 100 basis points subject to a
minimum total rate of 5%. As the prime rate as of
December 31, 2009 was 3.25%, our cost of funds in the
United States will not increase until the prime rate rises by
more than 75 basis points. On an outstanding balance of
$1.8 million, the loan balance in the United States on
December 31, 2009, annual interest expense would increase
by $1,800 for each basis point thereafter.
Foreign
Currency Exchange Rate Risk
For the year ended December 31, 2009, a substantial portion
of our recognized revenue was denominated in U.S. dollars
generated primarily from customers in the Americas (42%).
Revenue generated from our European operations (17%) was
primarily in Euros; revenue generated by our Asia operations
(41%) was primarily in RMB. We manufacture a majority of our
component parts at our manufacturing facility in Shanghai,
China. Since January 2009, our operations in China have been
affected by currency fluctuations due to an approximate 0.3%
appreciation of the RMB relative to the U.S. dollar.
Our strategy has been and will continue to be to increase our
overseas manufacturing and research and development activities
to capitalize on lower cost capacity and efficiencies in
supply-chain management. In 2004 and 2006, we made a strategic
investment with the acquisition of a 96% interest in RAE
Beijing, a Beijing-based manufacturer and distributor of
environmental safety and security equipment, and the formation
of RAE Fushun in late 2006 to capitalize on increases in demand
for safety equipment in the mining and energy sectors in China.
There has been continued speculation in the financial press that
Chinas currency, the RMB, will be subject to a further
market adjustment relative to the U.S. dollar and other
currencies. If, for example, there was a hypothetical 10% change
in the RMB relative to the U.S. dollar, the effect on our
loss would have been approximately $1.1 million for fiscal
2009. If the currencies in all other countries in Europe and
Asia where we have operations were to change in unison with the
RMB by a hypothetical 10% relative to the U.S. dollar, the
effect on our loss would have been approximately
$0.7 million for fiscal 2009. The difference of
$0.4 million is attributable to the impact of foreign
currencies outside of China.
To the extent that we have international sales denominated in
U.S. dollars, any fluctuation in the value of the
U.S. dollar relative to foreign currencies could affect our
competitive position in the international markets. Although we
continue to monitor our exposure to currency fluctuations and,
when appropriate, may use financial hedging techniques in the
future to minimize the effect of these fluctuations, we cannot
be certain that exchange rate fluctuations will not adversely
affect our financial results in the future.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Our consolidated financial statements included in this report
beginning on page F-1 are incorporated herein by reference.
33
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
RAE Systems, Inc. (the Company) maintains disclosure
controls and procedures that are designed to ensure that
information required to be disclosed in the reports the Company
files or submits under the Securities Exchange Act of 1934, as
amended (the Exchange Act), is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms, and
that such information is accumulated and communicated to the
Companys management, including its Chief Executive Officer
(CEO) and Chief Financial Officer (CFO),
as appropriate, to allow timely decisions regarding required
financial disclosure.
In connection with the preparation of this Annual Report on
Form 10-K,
the Company carried out an evaluation under the supervision and
with the participation of the Companys management,
including the CEO and CFO, as of December 31, 2009 of the
effectiveness of the design and operation of the Companys
disclosure controls and procedures, as such term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act. Based upon this evaluation, the CEO and
CFO concluded that as of December 31, 2009 the
Companys disclosure controls and procedures were effective.
Managements
Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the
Company, as such term is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act. The Companys internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external reporting
purposes in accordance with generally accepted accounting
principles in the United States.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management has conducted an assessment, including testing, of
the effectiveness of the Companys internal control over
financial reporting as of December 31, 2009. In making its
assessment of internal control over financial reporting,
management used the criteria in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on our assessment, which was conducted according to the
COSO criteria, we have concluded that our internal control over
financial reporting was effective as of December 31, 2009.
The effectiveness of the Companys internal control over
financial reporting as of December 31, 2009 has been
audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report
which appears herein.
Changes
in Internal Control Over Financial Reporting
There was no change in our internal control over financial
reporting (as defined in
Rule 13a-15(f)
under the Exchange Act) during our fourth quarter of fiscal 2009
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
34
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of RAE Systems Inc.:
We have audited the internal control over financial reporting of
RAE Systems Inc. and subsidiaries (collectively the
Company) as of December 31, 2009, based on the
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
December 31, 2009 of the Company and our report dated
March 11, 2010 expressed an unqualified opinion on those
financial statements.
/s/ Deloitte &
Touche LLP
San Jose, California
March 11, 2010
35
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by this item with respect to the
Companys executive officers is incorporated herein by
reference from the information contained in Item 1 of
Part I of this Report under the caption Executive
Officers of the Registrant. The remaining information
required by this item is incorporated herein by reference from
the information to be contained in the Companys 2010 Proxy
Statement to be filed with the U.S. Securities and Exchange
Commission (SEC) in connection with the solicitation
of proxies for the Companys 2010 Annual Meeting of
Shareholders (2010 Proxy Statement). The 2010 Proxy
Statement will be filed with the SEC within 120 days after
the end of the fiscal year to which this report relates.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this item is incorporated herein by
reference from the information to be contained in the
Companys 2010 Proxy Statement.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by this item is incorporated herein by
reference from the information to be contained in the
Companys 2010 Proxy Statement.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
The information required by this item is incorporated herein by
reference from the information to be contained in the
Companys 2010 Proxy Statement.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information required by this item is incorporated herein by
reference from the information to be contained in the
Companys 2010 Proxy Statement.
PART IV.
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a) (1) Financial Statements
See the index of the Consolidated Financial Statements of this
Form 10-K.
(2) Financial Statement Schedules
Schedules are not provided because of the absence of conditions
under which they are required or because the required
information is given in the financial statements or the notes
thereto.
(3) Exhibits
See Index to Exhibits on page 38 herein.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized on March 12, 2010.
RAE SYSTEMS INC.
Robert I. Chen
President and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person
whose signature appears below constitutes and appoints Robert I.
Chen and Randall Gausman, and each of them, as such
persons true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for such person
and in such persons name, place and stead, in any and all
capacities, to sign any and all amendments to this report on
Form 10-K,
and to file same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as
such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of
them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in
the capacities and on the dates indicated:
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Robert
I. Chen
Robert
I. Chen
|
|
President, Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
|
|
March 12, 2010
|
|
|
|
|
|
/s/ Randall
Gausman
Randall
Gausman
|
|
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
|
|
March 12, 2010
|
|
|
|
|
|
/s/ Peter
C. Hsi
Peter
C. Hsi
|
|
Chief Technology Officer and Director
|
|
March 12, 2010
|
|
|
|
|
|
/s/ Lyle
D. Feisel
Lyle
D. Feisel
|
|
Director
|
|
March 12, 2010
|
|
|
|
|
|
/s/ Sigrun
Hjelmqvist
Sigrun
Hjelmqvist
|
|
Director
|
|
March 12, 2010
|
|
|
|
|
|
/s/ Keh
Shew Lu
Keh
Shew Lu
|
|
Director
|
|
March 12, 2010
|
|
|
|
|
|
/s/ James
W. Power
James
W. Power
|
|
Director
|
|
March 12, 2010
|
|
|
|
|
|
/s/ Susan
Wang
Susan
Wang
|
|
Director
|
|
March 12, 2010
|
37
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
3
|
.1
|
|
Certificate of Incorporation of Registrant(1)
|
|
3
|
.2
|
|
Amended and Restated Bylaws of Registrant(3)
|
|
4
|
.1
|
|
Specimen certificate representing the common stock of
Registrant(1)
|
|
10
|
.0
|
|
Form of Indemnity Agreement between the Registrant and the
Registrants directors and officers(1)
|
|
10
|
.1
|
|
RAE Systems Inc. 2007 Equity Incentive Plan(2)
|
|
10
|
.2
|
|
RAE Systems Inc. 2002 Stock Option Plan(1)
|
|
10
|
.3
|
|
RAE Systems Inc. 1993 Stock Plan(1)
|
|
10
|
.4
|
|
Form of Stock Option Agreement under the Registrants 2007
Equity Incentive Plan(9)
|
|
10
|
.5
|
|
Lease Agreement by and between Inland American/Stephens (N
First) Ventures, LLC and RAE Systems Inc., dated
December 20, 2007(9)
|
|
10
|
.6
|
|
Purchase and Sale Agreement by and between D.R.
Stephens & Company, LLC and RAE Systems Inc., dated
November 9, 2007(9)
|
|
10
|
.7
|
|
Manufacturing Building Lease Agreement by and between Shanghai
China Academic Science High Tech Industrial Park Development
Co., Ltd. and RAE Systems(Asia), Ltd., incorporated in Hong
Kong, dated September 15, 2001(1)
|
|
10
|
.8
|
|
Lease Agreement by and between Shanghai Institute of Metallurgy
Research, Chinese Academy of Sciences and WARAE
Instrument(Shanghai) Incorporated, incorporated in Jiading,
Shanghai, dated January 8, 1999(1)
|
|
10
|
.9
|
|
Form of Share Transfer Agreement by and between RAE-KLH
shareholders and RAE Systems Asia (Hong Kong) Ltd.(4)
|
|
10
|
.10
|
|
Separation Agreement and General Release of Claims by and
between Donald W. Morgan and the Registrant dated August 8,
2006(5)
|
|
10
|
.11
|
|
RAE Systems Inc. Management Incentive Plan(6)
|
|
10
|
.12
|
|
Employment Offer Letter by and between Randall Gausman and the
Registrant dated October 17, 2006(7)
|
|
10
|
.13
|
|
Loan and Security Agreement dated as of March 14, 2007
between Silicon Valley Bank and the Registrant(8)
|
|
10
|
.14
|
|
Joint Venture Agreement by and between Liaoning Coal Industry
Group Co., Ltd. and RAE Systems (Asia), Ltd. dated
December 10, 2006(8)
|
|
10
|
.15
|
|
Separation Agreement and General Release of Claims by and
between Rudy Mui and the Registrant dated March 4, 2008(9)
|
|
10
|
.16
|
|
Form of Indemnity Agreement between RAE Systems Inc. and each of
its directors and executive officers(10)
|
|
21
|
.1
|
|
Subsidiaries of the Registrant(9)
|
|
23
|
.2
|
|
Consent of Deloitte & Touche LLP(11)
|
|
24
|
.1
|
|
Power of Attorney(11) (included on signature page)
|
|
31
|
.1
|
|
Certifications of Robert I. Chen, President and Chief Executive
Officer of Registrant, pursuant to
Rule 13a-14
adopted under the Securities Exchange Act of 1934, as amended,
and Section 302 of the Sarbanes-Oxley Act of 2002(11)
|
|
31
|
.2
|
|
Certifications of Randall Gausman, Vice President and Chief
Financial Officer of Registrant, pursuant to
Rule 13a-14
adopted under the Securities Exchange Act of 1934, as amended,
and Section 302 of the Sarbanes-Oxley Act of 2002(11)
|
|
32
|
.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002(11)
|
|
32
|
.2
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002(11)
|
|
|
|
(1) |
|
Previously filed as an exhibit to the Registrants
quarterly report on
Form 10-Q,
for the quarter ended March 31, 2002 and incorporated
herein by reference. |
|
(2) |
|
Previously filed as an exhibit to the Registrants current
report on
Form 8-K
on June 19, 2007 and incorporated herein by reference. |
38
|
|
|
(3) |
|
Previously filed as an exhibit to the Registrants current
report on
Form 8-K
on December 21, 2007 and incorporated herein by reference. |
|
(4) |
|
Previously filed on August 8, 2006 as an exhibit to the
Registrants quarterly report on
Form 10-Q
for the quarter ended June 30, 2006 and incorporated herein
by reference. |
|
(5) |
|
Previously filed as an exhibit to the Registrants current
report on
Form 8-K
on August 8, 2006 and incorporated herein by reference. |
|
(6) |
|
Previously filed as an exhibit to the Registrants current
report on
Form 8-K
on August 16, 2006 and incorporated herein by reference. |
|
(7) |
|
Previously filed as an exhibit to the Registrants current
report on
Form 8-K
on October 18, 2006 and incorporated herein by reference. |
|
(8) |
|
Previously filed as an exhibit to the Registrants annual
report on
Form 10-K
for the year ended December 31, 2006 and incorporated
herein by reference. |
|
(9) |
|
Previously filed as an exhibit to the Registrants annual
report on
Form 10-K
for the year ended December 31, 2007 and incorporated
herein by reference. |
|
(10) |
|
Previously filed as an exhibit to the Registrants
quarterly report on
Form 10-Q
for the quarter ended June 30, 2009 and incorporated herein
by reference. |
|
(11) |
|
Filed herewith. |
39
RAE
Systems Inc.
Consolidated
Financial Statements
As of December 31, 2009 and 2008
|
|
|
|
|
Consolidated Financial Statements
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
F-1
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of RAE Systems Inc.
We have audited the accompanying consolidated balance sheets of
RAE Systems Inc. and subsidiaries (collectively the
Company) as of December 31, 2009 and 2008, and
the related consolidated statements of operations,
shareholders equity and comprehensive loss, and cash flows
for each of the three years in the period ended
December 31, 2009. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2009 and 2008, and the results
of its operations and its cash flows for each of the three years
in the period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2009, based on the criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 11, 2010 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
/s/ Deloitte &
Touche LLP
San Jose, California
March 11, 2010
F-2
RAE
SYSTEMS INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share
|
|
|
|
and par value data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,528
|
|
|
$
|
14,845
|
|
Restricted cash
|
|
|
2,146
|
|
|
|
|
|
Trade notes receivable
|
|
|
2,039
|
|
|
|
1,870
|
|
Accounts receivable, net of allowances of $5,380 and $3,472,
respectively
|
|
|
19,428
|
|
|
|
20,961
|
|
Accounts receivable from affiliate
|
|
|
322
|
|
|
|
100
|
|
Inventories
|
|
|
12,068
|
|
|
|
17,604
|
|
Prepaid expenses and other current assets
|
|
|
3,983
|
|
|
|
4,991
|
|
Income taxes receivable
|
|
|
659
|
|
|
|
895
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
59,173
|
|
|
|
61,266
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
15,590
|
|
|
|
14,976
|
|
Intangible assets, net
|
|
|
2,428
|
|
|
|
3,342
|
|
Investments in unconsolidated affiliates
|
|
|
358
|
|
|
|
467
|
|
Other assets
|
|
|
1,325
|
|
|
|
1,124
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
78,874
|
|
|
$
|
81,175
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,454
|
|
|
$
|
6,387
|
|
Accounts payable to affiliate
|
|
|
92
|
|
|
|
382
|
|
Payable to Fushun shareholder
|
|
|
|
|
|
|
64
|
|
Bank lines of credit
|
|
|
4,026
|
|
|
|
2,584
|
|
Accrued liabilities
|
|
|
15,753
|
|
|
|
12,318
|
|
Notes payable to related parties, current
|
|
|
370
|
|
|
|
1,329
|
|
Income taxes payable
|
|
|
199
|
|
|
|
425
|
|
Deferred revenue, current
|
|
|
603
|
|
|
|
631
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
27,497
|
|
|
|
24,120
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, non-current
|
|
|
615
|
|
|
|
685
|
|
Deferred tax liabilities, non-current
|
|
|
156
|
|
|
|
83
|
|
Long-term debt
|
|
|
1,463
|
|
|
|
|
|
Deferred gain on sale of real estate
|
|
|
4,444
|
|
|
|
5,079
|
|
Other long-term liabilities
|
|
|
781
|
|
|
|
1,292
|
|
Notes payable to related parties, non-current
|
|
|
363
|
|
|
|
1,219
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
35,319
|
|
|
|
32,478
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (NOTE 7)
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 200,000,000 shares
authorized; 59,438,328 and 59,443,914 shares issued and
outstanding, respectively
|
|
|
59
|
|
|
|
59
|
|
Additional paid-in capital
|
|
|
63,832
|
|
|
|
62,549
|
|
Accumulated other comprehensive income
|
|
|
6,844
|
|
|
|
6,555
|
|
Accumulated deficit
|
|
|
(31,706
|
)
|
|
|
(25,947
|
)
|
|
|
|
|
|
|
|
|
|
Total RAE Systems Inc. shareholders equity
|
|
|
39,029
|
|
|
|
43,216
|
|
Noncontrolling interest
|
|
|
4,526
|
|
|
|
5,481
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
43,555
|
|
|
|
48,697
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
78,874
|
|
|
$
|
81,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
RAE
SYSTEMS INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Net sales
|
|
$
|
83,172
|
|
|
$
|
95,383
|
|
|
$
|
90,836
|
|
Cost of sales
|
|
|
42,193
|
|
|
|
47,168
|
|
|
|
44,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
40,979
|
|
|
|
48,215
|
|
|
|
46,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
18,824
|
|
|
|
21,427
|
|
|
|
25,434
|
|
Research and development
|
|
|
6,354
|
|
|
|
6,665
|
|
|
|
7,973
|
|
General and administrative
|
|
|
23,124
|
|
|
|
22,864
|
|
|
|
17,767
|
|
Impairment of goodwill
|
|
|
|
|
|
|
3,348
|
|
|
|
|
|
Gain on abandonment of lease
|
|
|
|
|
|
|
|
|
|
|
(595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
48,302
|
|
|
|
54,304
|
|
|
|
50,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss from continuing operations
|
|
|
(7,323
|
)
|
|
|
(6,089
|
)
|
|
|
(4,171
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
48
|
|
|
|
173
|
|
|
|
162
|
|
Interest expense
|
|
|
(402
|
)
|
|
|
(397
|
)
|
|
|
(705
|
)
|
Other, net
|
|
|
188
|
|
|
|
(575
|
)
|
|
|
58
|
|
Equity in (loss) gain of unconsolidated affiliates
|
|
|
(109
|
)
|
|
|
43
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(7,598
|
)
|
|
|
(6,845
|
)
|
|
|
(4,653
|
)
|
Income tax (benefit) expense
|
|
|
(884
|
)
|
|
|
538
|
|
|
|
5,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(6,714
|
)
|
|
|
(7,383
|
)
|
|
|
(10,536
|
)
|
Gain (loss) from discontinued operations, net of tax
|
|
|
|
|
|
|
11
|
|
|
|
(4,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(6,714
|
)
|
|
|
(7,372
|
)
|
|
|
(14,690
|
)
|
Net loss (income) attributable to the noncontrolling interest
|
|
|
955
|
|
|
|
220
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to RAE Systems Inc.
|
|
$
|
(5,759
|
)
|
|
$
|
(7,152
|
)
|
|
$
|
(14,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.10
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.18
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(0.10
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding Basic and
Diluted
|
|
|
59,367
|
|
|
|
59,204
|
|
|
|
58,852
|
|
See accompanying notes to consolidated financial statements.
F-4
RAE
SYSTEMS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Interest
|
|
|
Total
|
|
|
|
(In thousands, except share data)
|
|
|
December 31, 2006
|
|
|
59,274,596
|
|
|
$
|
59
|
|
|
$
|
58,828
|
|
|
$
|
1,245
|
|
|
$
|
(3,953
|
)
|
|
$
|
4,495
|
|
|
$
|
60,674
|
|
Cumulative effect of adopting FIN 48 adjustment to
accumulated deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(146
|
)
|
|
|
|
|
|
|
(146
|
)
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,696
|
)
|
|
|
6
|
|
|
|
(14,690
|
)
|
Foreign currency translation adustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,889
|
|
|
|
|
|
|
|
884
|
|
|
|
3,773
|
|
Unrealized loss on investment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
32,291
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
Repurchase of restricted common stock
|
|
|
(134,907
|
)
|
|
|
|
|
|
|
(335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(335
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
2,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,553
|
|
Investment in unconsolidated entity
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Tax benefit from stock options
|
|
|
|
|
|
|
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
59,171,980
|
|
|
|
59
|
|
|
|
60,957
|
|
|
|
4,135
|
|
|
|
(18,795
|
)
|
|
|
5,385
|
|
|
|
51,741
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,152
|
)
|
|
|
(220
|
)
|
|
|
(7,372
|
)
|
Foreign currency translation adustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,420
|
|
|
|
|
|
|
|
316
|
|
|
|
2,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
149,458
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
Repurchase of restricted common stock
|
|
|
(27,524
|
)
|
|
|
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44
|
)
|
Stock issued for services
|
|
|
150,000
|
|
|
|
|
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
59,443,914
|
|
|
|
59
|
|
|
|
62,549
|
|
|
|
6,555
|
|
|
|
(25,947
|
)
|
|
|
5,481
|
|
|
|
48,697
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,759
|
)
|
|
|
(955
|
)
|
|
|
(6,714
|
)
|
Foreign currency translation adustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of restricted common stock
|
|
|
(5,586
|
)
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
59,438,328
|
|
|
$
|
59
|
|
|
$
|
63,832
|
|
|
$
|
6,844
|
|
|
$
|
(31,706
|
)
|
|
$
|
4,526
|
|
|
$
|
43,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
RAE
SYSTEMS INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,714
|
)
|
|
$
|
(7,372
|
)
|
|
$
|
(14,690
|
)
|
Gain (loss) from discontinued operations
|
|
|
|
|
|
|
11
|
|
|
|
(4,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(6,714
|
)
|
|
|
(7,383
|
)
|
|
|
(10,536
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,215
|
|
|
|
3,344
|
|
|
|
3,715
|
|
Provision for doubtful accounts
|
|
|
1,904
|
|
|
|
1,275
|
|
|
|
1,948
|
|
Gain on disposal of property and equipment
|
|
|
(572
|
)
|
|
|
(586
|
)
|
|
|
(285
|
)
|
Stock-based compensation expense
|
|
|
1,290
|
|
|
|
1,593
|
|
|
|
1,871
|
|
Equity in loss (gain) of unconsolidated affiliates
|
|
|
109
|
|
|
|
(43
|
)
|
|
|
(3
|
)
|
Deferred income tax (benefit) expense
|
|
|
(380
|
)
|
|
|
(1,221
|
)
|
|
|
3,999
|
|
Gain on abandonment of lease
|
|
|
|
|
|
|
|
|
|
|
(595
|
)
|
Amortization of discount on notes payable to related parties
|
|
|
85
|
|
|
|
52
|
|
|
|
79
|
|
Impairment of intangible assets
|
|
|
|
|
|
|
|
|
|
|
609
|
|
Impairment of goodwill
|
|
|
|
|
|
|
3,348
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(221
|
)
|
|
|
1,174
|
|
|
|
(5,719
|
)
|
Accounts receivable from affiliate
|
|
|
(221
|
)
|
|
|
(77
|
)
|
|
|
25
|
|
Trade notes receivable
|
|
|
(154
|
)
|
|
|
1,056
|
|
|
|
(689
|
)
|
Inventories
|
|
|
5,645
|
|
|
|
661
|
|
|
|
(1,831
|
)
|
Prepaid expenses and other current assets
|
|
|
1,389
|
|
|
|
(1,361
|
)
|
|
|
(46
|
)
|
Income taxes receivable
|
|
|
237
|
|
|
|
1,167
|
|
|
|
|
|
Other assets
|
|
|
(174
|
)
|
|
|
557
|
|
|
|
(1,004
|
)
|
Accounts payable
|
|
|
1,053
|
|
|
|
(1,036
|
)
|
|
|
(1,473
|
)
|
Accounts payable to affiliate
|
|
|
(290
|
)
|
|
|
(52
|
)
|
|
|
35
|
|
Accrued liabilities
|
|
|
2,252
|
|
|
|
356
|
|
|
|
1,876
|
|
Income taxes payable
|
|
|
(240
|
)
|
|
|
(287
|
)
|
|
|
541
|
|
Deferred revenue
|
|
|
(98
|
)
|
|
|
314
|
|
|
|
(977
|
)
|
Other liabilities
|
|
|
(458
|
)
|
|
|
320
|
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities of
continuing operations
|
|
|
7,657
|
|
|
|
3,171
|
|
|
|
(8,577
|
)
|
Net cash provided by (used in) operating activities of
discontinued operations
|
|
|
|
|
|
|
7
|
|
|
|
(1,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
7,657
|
|
|
|
3,178
|
|
|
|
(9,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities of investments
|
|
|
|
|
|
|
|
|
|
|
3,248
|
|
Business acquisitions, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(1,618
|
)
|
Changes in restricted cash
|
|
|
(2,146
|
)
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(2,959
|
)
|
|
|
(3,501
|
)
|
|
|
(4,014
|
)
|
Proceeds from sale of net assets
|
|
|
105
|
|
|
|
150
|
|
|
|
12,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(5,000
|
)
|
|
|
(3,351
|
)
|
|
|
10,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options
|
|
|
|
|
|
|
43
|
|
|
|
72
|
|
Repurchases of common stock
|
|
|
(7
|
)
|
|
|
(44
|
)
|
|
|
(335
|
)
|
Borrowings from bank lines of credit
|
|
|
5,555
|
|
|
|
4,961
|
|
|
|
12,156
|
|
Payments on bank lines of credit
|
|
|
(2,649
|
)
|
|
|
(5,195
|
)
|
|
|
(9,600
|
)
|
Payments on payables to related parties
|
|
|
(1,945
|
)
|
|
|
(1,156
|
)
|
|
|
(4,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
954
|
|
|
|
(1,391
|
)
|
|
|
(2,684
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
72
|
|
|
|
503
|
|
|
|
427
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
3,683
|
|
|
|
(1,061
|
)
|
|
|
(2,213
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
14,845
|
|
|
|
15,906
|
|
|
|
18,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
18,528
|
|
|
$
|
14,845
|
|
|
$
|
15,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes, net
|
|
$
|
(10
|
)
|
|
$
|
687
|
|
|
$
|
1,133
|
|
Cash paid for interest
|
|
|
750
|
|
|
|
333
|
|
|
|
422
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid property and equipment
|
|
|
1,274
|
|
|
|
1,100
|
|
|
|
589
|
|
See accompanying notes to consolidated financial statements.
F-6
RAE
SYSTEMS INC.
|
|
Note 1.
|
Summary
of Significant Accounting Policies
|
The
Company
Founded in 1991, RAE Systems Inc. (the Company or
RAE Systems), a Delaware company, develops and
manufactures rapidly-deployable, multi-sensor chemical and
radiation detection monitors and networks for oil and gas,
hazardous material management, industrial safety, civil defense
and environmental remediation applications. The Companys
products are based on proprietary sensor technology, and include
personal, breathing zone, portable, wireless and fixed chemical
detection monitors and radiation detectors.
As a result of an independent investigation conducted by the
Audit Committee of the Board of Directors during fiscal year
2008, the Company made a voluntary disclosure to the United
States Department of Justice (DOJ) and the
United States Securities and Exchange Commission
(SEC) that the company may have violated United
States Foreign Corrupt Practices Act (FCPA). The
Company is cooperating with the DOJ and the SEC in connection
with their review of the matter and is actively engaged in
settlement discussions. Although no assurances can be given as
to whether the matter will settle or the amount of any
settlement, the Company accrued $3.5 million in the third
quarter of 2009 for the potential settlement of this matter.
Principles
of Consolidation
The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States (US GAAP) and include the Company and
its subsidiaries. All intercompany balances and transactions
have been eliminated. The ownership of other interest holders of
consolidated subsidiaries is reflected as noncontrolling
interest. The presentation requirements for noncontrolling
(minority) interests follows authoritative guidance promulgated
by the Financial Accounting Standards Board (FASB)
which became effective January 1, 2009, for all periods
presented. Certain prior year amounts have been reclassified to
conform to the current year presentation and management
considers the amounts to not be material.
Use of
Estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. The Company bases its
estimates on historical experience and on various other
assumptions that are believed to be reasonable based on
available information. Actual results may differ materially from
these estimates and assumptions.
Revenue
Recognition
The Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collectability is reasonably assured. A
provision for estimated product returns is established at the
time of sale based upon historical return rates adjusted for
current economic conditions. Historically, the Company has
experienced an insignificant amount of sales returns. The
Company generally recognizes revenue upon shipment to its
distributors in accordance with standard contract terms that
pass title of all goods upon delivery to a common carrier (Free
on board, FOB) and provides for sales returns under
standard product warranty provisions. For non-standard contract
terms where title to goods passes upon delivery to the customer
(FOB destination), revenue is recognized after the Company has
established proof of delivery. Revenues related to services
performed under the Companys extended warranty program are
recognized as earned based upon contract terms, generally
ratably over the term of service. The Company records project
installation work in Asia using the
percentage-of-completion
method. Net sales also include amounts billed to customers for
shipping and handling. The Companys shipping costs are
included in cost of sales.
F-7
RAE
SYSTEMS INC.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with
original or remaining maturities of three months or less at time
of purchase to be cash equivalents.
Allowance
for Doubtful Accounts
The Company grants credit to its customers after undertaking an
investigation of credit risk for all significant amounts. The
allowance for doubtful accounts is based on the Companys
assessment of the collectability of customer accounts. The
Company regularly reviews the allowance by considering factors
such as historical experience, credit quality, the age of the
accounts receivable balances, current economic conditions, and
known troubled accounts. The Company generally does not require
collateral for sales on credit. When the Company becomes aware
that a specific customer is unable to meet its financial
obligations, the Company records a specific allowance to reflect
the level of credit risk in the customers outstanding
receivable balance. In addition, the Company records allowances
based on certain percentages of aged receivable balances. The
Company classifies bad debt expenses as general and
administrative expenses in the Consolidated Statements of
Operations.
The Company is not able to predict changes in the financial
stability of its customers. Any material change in the financial
status of any one or a group of customers could have a material
adverse effect on the Companys results of operations and
financial condition. Although such losses have been within
managements expectations to date, there can be no
assurance that such allowances will continue to be adequate. The
Company sells products through its direct sales force and
distributors. No customer accounted for more than 10% of
consolidated net sales for any period presented.
Trade
Notes Receivable
Trade notes receivable are bank guaranteed promissory notes
which are non-interest bearing and generally mature within six
months. From time to time certain customers in China present
these notes in payment of outstanding accounts receivable.
Concentration
of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash and
cash equivalents, trade notes receivable and accounts
receivable. The Company places its domestic and foreign cash and
cash equivalents with large, creditworthy financial
institutions, primarily in the United States and the
Peoples Republic of China. U.S. cash balances are
insured by the Federal Deposit Insurance Company up to $250,000
per bank. As of December 31, 2009 and 2008, the Company had
deposits in excess of insured limits of approximately
$5.7 million and $1.0 million, respectively. The
Company also had deposits at several foreign financial
institutions, which are not insured, that summed to
approximately $14.6 million and $13.3 million as of
December 31, 2009 and 2008, respectively.
Inventories
Inventories are stated at the lower of standard cost, which
approximates actual cost computed on a
first-in,
first-out basis, or market. The Company establishes inventory
provisions when conditions exist that suggest its inventory may
be in excess of anticipated demand or is obsolete based upon
assumptions about future demand for its products and market
conditions. When recorded, write-downs are intended to reduce
the carrying value of the inventory to its net realizable value.
If actual demand for specified products deteriorates, or market
conditions are less favorable than those projected, additional
reserves may be required
F-8
RAE
SYSTEMS INC.
Property
and Equipment
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, as follows:
|
|
|
Buildings
|
|
20 to 25 years
|
Equipment
|
|
3 to 10 years
|
Furniture and fixtures
|
|
3 to 7 years
|
Computers and software
|
|
3 to 7 years
|
Automobiles
|
|
3 to 5 years
|
Building improvements
|
|
Lesser of useful life or remaining lease term
|
Warranty
Repairs
From date of shipment, the Company provides a 12 to
24 month repair or replacement warranty for the majority of
its products. Based primarily on the historical relationship of
actual warranty costs to sales, the Company accrues a reserve
for estimated future warranty costs at the time revenue is
recognized. The estimated warranty obligation is affected by
product failure rates, the length of the warranty period,
materials usage to repair or replace defective products, and
service delivery costs incurred in correcting product failures.
In addition, from time to time, specific warranty accruals may
be made if unforeseen technical problems arise. If the
Companys actual experience relative to these factors is
significantly different than estimated, the Company may be
required to adjust its provision in future periods.
Research
and Development
Research and development costs are expensed as incurred.
Advertising
Costs
The Company expenses all advertising costs as incurred. For the
years ended December 31, 2009, 2008 and 2007, advertising
expense was $190,000, $311,000 and $547,000, respectively.
Income
Taxes
The Company accounts for income taxes under the asset and
liability method, which requires the recognition of taxes
payable or refundable for the current year and deferred tax
assets and liabilities for the expected future tax consequences
of events that have been included in the Companys
consolidated financial statements or tax returns. The
measurement of current and deferred taxes is based on provisions
of the enacted tax law.
The Company records deferred tax assets if the realization of
such assets is more likely than not to occur. Otherwise, a
valuation allowance is established for the deferred tax assets
which may not be realized.
The Company is subject to income tax audits by the respective
tax authorities in all of the jurisdictions in which it
operates. The determination of tax liabilities in each of these
jurisdictions requires the interpretation and application of
complex and sometimes uncertain tax laws and regulations. The
recognition and measurement of current taxes payable or
refundable and deferred tax assets and liabilities requires that
the Company make certain estimates and judgments. Changes to
these estimates or a change in judgment may have a material
impact on the Companys tax provision in a future period.
F-9
RAE
SYSTEMS INC.
Goodwill
and Other Intangible Assets
Goodwill is tested for impairment on an annual basis in the
fourth quarter and between annual tests if events occur or
circumstances indicate that the carrying amount of goodwill may
not be recoverable. Impairment losses, if any, are recorded in
the Consolidated Statements of Operations as Impairment of
goodwill.
Purchased intangible assets other than goodwill are amortized
over their estimated useful lives unless these lives are
determined to be indefinite. Purchased intangibles are carried
at cost, less accumulated amortization. Amortization is
generally computed using either the straight-line method or an
accelerated method based on the pattern of expected usage over
the estimated useful lives of the respective assets, currently
1.5 to 6 years.
Long-Lived
Assets
The Company evaluates the recoverability of long-lived assets
with finite lives periodically and whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. The carrying amount of a long-lived asset is
not recoverable if it exceeds the sum of the undiscounted cash
flows expected to result from the use and eventual disposition
of the asset. If the carrying amount of a long-lived asset is
deemed not recoverable, an impairment loss is recognized for the
difference between the carrying amount of the asset and its fair
value, generally the present value of estimated future cash
flows.
Fair
Values of Financial Instruments
The following methods and assumptions were used by the Company
in estimating its fair value disclosures for financial
instruments:
|
|
|
|
|
Cash and Cash Equivalents, Accounts Receivable, Trade Notes
Receivables, Accounts Receivable from Affiliate, Accounts
Payable, Accrued Expenses, Inventory Purchase Obligations:
|
The carrying amount reported in the consolidated balance sheets
for these items approximates fair value because of the short
maturity of these instruments. In addition, for inventory
purchase obligations, the carrying value approximates fair value
based on market rates for comparable products.
|
|
|
|
|
Notes Payable to Related Parties:
|
The carrying amount of notes payable to related parties
approximates fair value as the Company has discounted these
non-interest bearing notes payable at an interest rate
commensurate with commercial borrowing rates available to the
Company in China. As of December 31, 2009 and 2008, the
fair values of the Companys financial instruments
approximate their historical carrying amount.
Translation
of Foreign Currencies
Assets and liabilities of
non-U.S. subsidiaries
that operate in a local currency environment, where that local
currency is the functional currency, are translated into
U.S. dollars at exchange rates in effect at the balance
sheet date; with the resulting translation adjustments directly
recorded to a separate component of accumulated other
comprehensive income. Income and expense accounts are translated
at average exchange rates during the year. Gains and losses from
foreign currency transactions are recorded in Other income
(expense), net on the Consolidated Statements of Operations. The
functional currency is the local currency for all
non-U.S. subsidiaries.
Stock-Based
Compensation Expense
The Company estimates the fair value of each option award on the
date of grant using a Black-Scholes-Merton (BSM)
valuation model and a single option award approach. Accordingly,
stock-based compensation cost is measured at grant date based on
the fair value of the award and recognized in expense over the
requisite service period, which is generally the vesting period.
F-10
RAE
SYSTEMS INC.
Net
Loss Per Share
Basic loss per share includes no dilution and is computed by
dividing loss available to common shareholders by the
weighted-average number of common shares outstanding for the
period. Diluted earnings per common share reflects the potential
dilution of common stock equivalents, such as options and
warrants, to the extent the impact is dilutive. As the Company
incurred net losses for the years ended December 31, 2009,
2008 and 2007, the effect of potentially dilutive securities on
diluted net loss per share computations was anti-dilutive. The
weighted-average number of anti-dilutive shares excluded from
the diluted net loss per common share calculation for 2009, 2008
and 2007 was 5,106,797, 3,813,874 and 3,505,491, respectively.
Retained
Earnings
In accordance with the Company Law of the Peoples Republic
of China, the Companys China subsidiaries may be required
to appropriate a portion of net income as determined under
accounting principles generally accepted in China (PRC
GAAP) to non-distributable reserves which include a
general reserve, an enterprise expansion reserve and a staff
welfare and bonus reserve. While the reserves restrict a portion
of retained earnings from distribution to shareholders, the
reserves are not withdrawn from the business and remain
available for use in operations.
Wholly-owned China subsidiaries are not required to make
appropriations to the enterprise expansion reserve; however, the
China subsidiaries are required to appropriate not less than 10%
of their net income determined under PRC GAAP to the general
reserve. Appropriations to the general reserve are limited to
50% of each China subsidiarys registered capital.
Appropriations to the staff welfare and bonus reserve are
determined by the board of directors. The total appropriation of
retained earnings to the Companys statutory reserves
totaled $2.7 million and $2.7 million at
December 31, 2009 and 2008, respectively.
Variable
Interest Entities
S.A.R.L. RAE France (RAE France) has been identified
by management as a variable interest entity. The Company is the
primary beneficiary through its ownership of RAE Europe ApS. RAE
France distributes and sells RAE products exclusively in France.
RAE France had total sales of $2.4 million,
$2.7 million and $1.8 million in 2009, 2008 and 2007,
respectively, and total assets of $1.1 million as of
December 31, 2009 and 2008. The Company has consolidated
RAE France since December 2004.
Segment
Reporting
FASB Accounting Standards Codification (ASC) Topic
280, Segment Reporting, establishes standards
for public business enterprises to report information about
operating segments in their annual financial statements and
requires that those enterprises report selected information
about operating segments in subsequent interim financial reports
issued to shareholders. It also established standards for
related disclosure about products and services, geographic
areas, and major customers. Operating segments are components of
an enterprise, which are evaluated regularly by the chief
operating decision-maker in deciding how to allocate and assess
resources and performance. The Companys chief operating
decision-makers are the Chief Executive Officer and the Chief
Financial Officer. Although the Companys operating
segments consist of entities geographically based in the
Americas, Asia and Europe, the Company operates in a single
reporting segment worldwide in the sale of portable and wireless
chemical and radiation detection products and related services.
Accordingly, the Company operated as one reportable segment
during the years ended December 31, 2009, 2008 and 2007.
Recent
Accounting Pronouncements
In December 2007, the FASB issued authoritative guidance which
applies to business combinations. The new guidance changes the
accounting for acquisition transaction costs by requiring them
to be expensed in the period
F-11
RAE
SYSTEMS INC.
incurred, and also changes the accounting for contingent
consideration, acquired contingencies and restructuring costs
related to an acquisition. The new guidance was effective for
the Company beginning January 1, 2009, and will change the
Companys accounting treatment for business combinations on
a prospective basis.
In June 2009, the FASB issued authoritative guidance for
determining whether an entity is a variable interest entity
(VIE) and requires an enterprise to perform an
analysis to determine whether the enterprises variable
interest or interests give it a controlling financial interest
in a VIE. Under this guidance, an enterprise has a controlling
financial interest when it has a) the power to direct the
activities of a VIE that most significantly impact the
entitys economic performance and b) the obligation to
absorb losses of the entity or the right to receive benefits
from the entity that could potentially be significant to the
VIE. The guidance also requires an enterprise to assess whether
it has an implicit financial responsibility to ensure that a VIE
operates as designed when determining whether it has power to
direct the activities of the VIE that most significantly impact
the entitys economic performance. The guidance is
effective for the Company January 1, 2010, and requires
ongoing assessments of whether an enterprise is the primary
beneficiary of a VIE as well as certain enhanced disclosures.
The Company is currently evaluating the potential impact, if
any, of the adoption of this guidance on its consolidated
financial statements.
In October 2009, the FASB issued authoritative guidance on
revenue recognition that will become effective for the Company
beginning January 1, 2011, with earlier adoption permitted.
Under the new guidance on arrangements that include software
elements, tangible products that have software components that
are essential to the functionality of the tangible product will
no longer be within the scope of the software revenue
recognition guidance, and software-enabled products will now be
subject to other relevant revenue recognition guidance.
Additionally, the FASB issued authoritative guidance on revenue
arrangements with multiple deliverables that are outside the
scope of the software revenue recognition guidance. Under the
new guidance, when vendor specific objective or third party
evidence for deliverables in an arrangement cannot be
determined, a best estimate of the selling price is required to
separate deliverables and allocate arrangement consideration
using the relative fair value method. The new guidance includes
new disclosure requirements on how the application of the
relative fair value method affects the timing and amount of
revenue recognition. The Company is currently assessing the
potential effect, if any, on its financial statements.
|
|
Note 2.
|
Business
Combinations and Dispositions
|
Aegison
Corporation and Tianjin Securay Technology Ltd.
Co.
In July 2006, the Company purchased the assets, including two
pending patents, of Santa Clara, California based Aegison
Corporation (Aegison), a supplier of fixed and
mobile digital video surveillance systems for approximately
$2.0 million in cash and direct transaction costs of
$142,000. In January 2007, RAE Asia entered into an agreement to
purchase the intellectual property of Tianjin Securay Technology
Ltd. Co. (Securay) for Renminbi 12 million
(approximately $1.5 million). This transaction, together
with the purchase agreements entered in 2006, completed the
purchase of Securay. Including transactions entered into during
2006, the total purchase price was $2.0 million in cash.
The acquisition of Aegison and Securay made up the
companys mobile digital video recording (DVR)
business
On August 24, 2007, the Board of Directors approved the
discontinuation of the Companys DVR business in order to
reduce expenses and concentrate resources on the gas and
radiation detection business. On August 28, 2007 the
Company notified its DVR customers, terminated all personnel not
reassigned to continuing operations and suspended the related
production and sales activities. The Company retained the
acquired intellectual property; however, because the DVR
business had operated at a substantial loss, during 2007
management liquidated the tangible assets, mainly inventories of
component parts, and impaired the remaining value of the
intangible assets and goodwill.
F-12
RAE
SYSTEMS INC.
In accordance with the existing authoritative guidance, the
financial results of the DVR business are reported as
discontinued operations for all periods presented. The financial
results included in discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
319
|
|
Gain (loss) from discontinued operations before income taxes
|
|
|
|
|
|
|
11
|
|
|
|
(4,939
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
(785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations
|
|
$
|
|
|
|
$
|
11
|
|
|
$
|
(4,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no assets or liabilities related to the disposal
group as of December 31, 2009 and 2008.
|
|
Note 3.
|
Balance
Sheet Details
|
Allowance
for Doubtful
Accounts:
The components of the allowance for doubtful accounts were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Allowance for doubtful accounts at beginning of year
|
|
$
|
3,472
|
|
|
$
|
2,060
|
|
|
$
|
843
|
|
Charges to expense
|
|
|
2,164
|
|
|
|
1,345
|
|
|
|
1,948
|
|
Write-offs of uncollectible accounts, net of recoveries
|
|
|
(260
|
)
|
|
|
(70
|
)
|
|
|
(833
|
)
|
Foreign currency translation effects
|
|
|
4
|
|
|
|
137
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts at end of year
|
|
$
|
5,380
|
|
|
$
|
3,472
|
|
|
$
|
2,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories:
Inventories are stated at the lower of cost or market and
include material, labor and manufacturing overheard costs. The
components of inventories were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
5,655
|
|
|
$
|
8,213
|
|
Work-in-progress
|
|
|
2,557
|
|
|
|
2,910
|
|
Finished goods
|
|
|
3,856
|
|
|
|
6,481
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
12,068
|
|
|
$
|
17,604
|
|
|
|
|
|
|
|
|
|
|
The Company recorded write-downs to inventory of $777,000,
$580,000 and $442,000 during 2009, 2008 and 2007, respectively.
The inventory write-downs were predominantly the result of
changes in forecasted customer demand and technological changes
in the Companys products and included primarily raw
material and finished goods. The major elements of the written
down raw material consists of components and items that had not
entered into production. The finished goods inventory includes
the cost of raw material inputs, labor, and overhead.
F-13
RAE
SYSTEMS INC.
Prepaid
Expenses and Other Current Assets:
The components of prepaid expenses and other current assets were
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Supplier advances and deposits
|
|
$
|
1,330
|
|
|
$
|
977
|
|
Amounts receivable from employees
|
|
|
81
|
|
|
|
661
|
|
Prepaid insurance
|
|
|
275
|
|
|
|
437
|
|
Deferred tax assets, current
|
|
|
934
|
|
|
|
577
|
|
Other current assets
|
|
|
1,363
|
|
|
|
2,339
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets
|
|
$
|
3,983
|
|
|
$
|
4,991
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, net:
The components of property and equipment were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Buildings and improvements
|
|
$
|
11,945
|
|
|
$
|
10,327
|
|
Equipment
|
|
|
4,788
|
|
|
|
5,070
|
|
Computer equipment
|
|
|
4,996
|
|
|
|
4,971
|
|
Automobiles
|
|
|
1,385
|
|
|
|
1,590
|
|
Furniture and fixtures
|
|
|
444
|
|
|
|
434
|
|
Construction in progress
|
|
|
3,468
|
|
|
|
2,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,026
|
|
|
|
24,849
|
|
Less: Accumulated depreciation
|
|
|
(11,436
|
)
|
|
|
(9,873
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
15,590
|
|
|
$
|
14,976
|
|
|
|
|
|
|
|
|
|
|
Construction in progress in 2009 and 2008 primarily represented
the cost to build offices and manufacturing facilities in
Fushun, China. The new manufacturing facilities were placed into
service during October 2008. RAE plans to complete the remaining
office, research and development and dormitory buildings in
stages over the next 12 to 24 months. Also, in December
2008, the Company invested approximately $1.2 million for
land use rights in Shanghai, China to construct a new
manufacturing, engineering and administrative facility. During
the second quarter of 2009, the Company entered into an
agreement for pre-construction land improvements of
approximately $263,000. The Company began construction of the
facility during the first quarter of 2010. Upon completion, the
Company intends to vacate its existing leased facility in
Shanghai. Based on discussions with Shanghai government
officials, the landlord of the existing Company facility, the
Company believes that it will be able to terminate the lease
without penalty. No assurance can be given that the Company will
be able to arrange financing terms acceptable to the Company and
that it would not be subject to lease termination penalties.
In December 2007, the Company sold its headquarters building in
San Jose, California for $12.7 million and leased back
the facility for a period of 10 years. The Company
recognized a gain on the sale of $0.4 million in 2007 which
was based on the difference between the net gain on the sale of
the building of $6.7 million and net present value of the
future lease payments of $6.3 million. The net present
value of the future lease payments is recorded as a deferred
gain which will be recognized in income on a straight-line basis
over the life of the lease beginning in January 2008. The
deferred gain recognized in income during 2009 and 2008 totaled
$0.6 million and $0.6 million, respectively. The lease
is classified as an operating lease. As of December 31,
2009 and 2008, the current portion of
F-14
RAE
SYSTEMS INC.
the deferred gain of $0.6 million and $0.6 million,
respectively, was included in Accrued liabilities on the
Consolidated Balance Sheets.
Depreciation expense for the years ended December 31, 2009,
2008 and 2007 was $2.3 million, $2.2 million and
$2.3 million, respectively.
Accrued
Liabilities:
Accrued liabilities as of December 31, 2009 and 2008 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Compensation and related benefits
|
|
$
|
3,764
|
|
|
$
|
2,445
|
|
Accrued commissions
|
|
|
1,265
|
|
|
|
2,010
|
|
Accrued FCPA settlement (see Note 8)
|
|
|
3,500
|
|
|
|
|
|
Customer deposits
|
|
|
941
|
|
|
|
1,792
|
|
Accrued professional fees
|
|
|
426
|
|
|
|
755
|
|
Other
|
|
|
5,857
|
|
|
|
5,316
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
15,753
|
|
|
$
|
12,318
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4.
|
Goodwill
and Intangible Assets
|
Goodwill represents the excess of purchase price and related
costs over the value assigned to the net tangible and
identifiable intangible assets. The following table presents the
changes in goodwill during 2007 and 2008, when goodwill was
impaired:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance as of December 31, 2006
|
|
$
|
3,760
|
|
Acquisitions:
|
|
|
|
|
Securay
|
|
|
646
|
|
Purchase price adjustment Aegison
|
|
|
(19
|
)
|
Impairment charges due to discontinued operations
|
|
|
(1,443
|
)
|
Currency translation adjustment
|
|
|
199
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
3,143
|
|
Currency translation adjustment
|
|
|
205
|
|
Impairment charges
|
|
|
(3,348
|
)
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
|
|
|
|
|
|
|
The Company evaluates goodwill for impairment whenever events or
changes in circumstances indicate that the carrying amount may
not be recoverable. The recoverability of goodwill is measured
at the reporting unit level by comparing the reporting
units carrying amount, including goodwill, to the fair
value of the reporting unit, which is measured based upon, among
other factors, market capitalization as well as forecasted
operating results. The Company has one reporting unit. If the
recorded value of the assets, including goodwill, and
liabilities (net book value) of the reporting unit
exceeds its fair value, an impairment loss may exist. Further,
to the extent the net book value of the Company as a whole is
greater than its market capitalization, all, or a significant
portion of its goodwill may be considered impaired.
The Company experienced a significant decline in market
capitalization during the fourth quarter of 2008. This decline
in market capitalization was driven largely by deteriorating
macroeconomic conditions that contributed to a
F-15
RAE
SYSTEMS INC.
decline in the Companys forecasted operating results and
business uncertainties associated with the current FCPA
investigation.
Pursuant to the authoritative guidance, the measurement of
impairment of goodwill consists of two steps. In the first step,
the fair value of the Company is compared to its carrying value.
Management completed a valuation of the Company, which
incorporated existing market-based considerations as well as
operating information based on current results and projections,
and concluded the estimated fair value of the Company was less
than its net book value. As a result, the Company performed the
second step to determine the implied fair value of the
Companys goodwill, and to compare it to the carrying value
of the Companys goodwill. This second step includes
estimating the value of the tangible and intangible assets and
liabilities of the Company as if it had been acquired in a
business combination to determine the implied fair value of
goodwill. The result of this assessment indicated that the
implied fair value of goodwill was zero. As a result, the
Company recognized a non-cash impairment charge of approximately
$3.3 million for the three-month period and year ended
December 31, 2008 to write-off the entire carrying value of
its goodwill.
As a result of discontinuing the DVR business during the third
quarter of 2007, the Company impaired the goodwill acquired in
the purchases of Aegison and Securay. See Note 2.
Business Combinations and Dispositions for more detail.
There was no other impairment of goodwill in 2007 as a result of
the required annual impairment test.
The following table presents details of the Companys
intangible assets other than goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Customer list
|
|
$
|
5,456
|
|
|
$
|
(3,376
|
)
|
|
$
|
2,080
|
|
|
$
|
5,438
|
|
|
$
|
(2,636
|
)
|
|
$
|
2,802
|
|
Trade name
|
|
|
1,356
|
|
|
|
(1,008
|
)
|
|
|
348
|
|
|
|
1,352
|
|
|
|
(812
|
)
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net
|
|
$
|
6,812
|
|
|
$
|
(4,384
|
)
|
|
$
|
2,428
|
|
|
$
|
6,790
|
|
|
$
|
(3,448
|
)
|
|
$
|
3,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of the Companys purchased intangible assets other than
goodwill are subject to amortization. Amortization expense for
the years ended December 31, 2009, 2008 and 2007, was
$0.9 million, $1.2 million and $1.4 million,
respectively.
During 2008, the Company increased the value of the customer
list from the acquisition of RAE Fushun by $435,000 and
recognized a corresponding deferred tax liability. During 2007,
the Company recorded impairment of $609,000 for certain patents
held by RAE Beijing related to the discontinuation of a related
product in the fourth quarter of 2007. An impairment analysis
was performed for this intangible asset which determined that
the carrying value was not recoverable.
As a result of discontinuing the DVR business during the third
quarter of 2007, the Company impaired the remaining balance of
the intangible assets acquired in the purchases of Aegison and
Securay. An impairment charge of $1.6 million was
recognized during the quarter ended September 30, 2007 and
is included in the net loss from discontinued operations
reported in the Companys Consolidated Statements of
Operations.
F-16
RAE
SYSTEMS INC.
Based on the carrying amount of intangible assets as of
December 31, 2009, the estimated future amortization is as
follows (in thousands):
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2010
|
|
$
|
904
|
|
2011
|
|
|
638
|
|
2012
|
|
|
372
|
|
2013
|
|
|
281
|
|
2014
|
|
|
161
|
|
Thereafter
|
|
|
72
|
|
|
|
|
|
|
Total amortization
|
|
$
|
2,428
|
|
|
|
|
|
|
The Companys loss from continuing operations before income
taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
(4,526
|
)
|
|
$
|
(4,934
|
)
|
|
$
|
(5,973
|
)
|
Foreign
|
|
|
(3,072
|
)
|
|
|
(1,911
|
)
|
|
|
1,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
$
|
(7,598
|
)
|
|
$
|
(6,845
|
)
|
|
$
|
(4,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys income tax (benefit) expense consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,072
|
)
|
|
$
|
(91
|
)
|
|
$
|
819
|
|
State
|
|
|
23
|
|
|
|
18
|
|
|
|
53
|
|
Foreign
|
|
|
545
|
|
|
|
1,832
|
|
|
|
1,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(504
|
)
|
|
|
1,759
|
|
|
|
1,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
2,917
|
|
State
|
|
|
|
|
|
|
(48
|
)
|
|
|
862
|
|
Foreign
|
|
|
(380
|
)
|
|
|
(1,173
|
)
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(380
|
)
|
|
|
(1,221
|
)
|
|
|
3,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
$
|
(884
|
)
|
|
$
|
538
|
|
|
$
|
5,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
RAE
SYSTEMS INC.
A reconciliation of the Companys income tax (benefit)
expense at the federal statutory rate to the income tax
(benefit) expense at the effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Federal income tax benefit at statutory rate
|
|
$
|
(2,584
|
)
|
|
$
|
(2,327
|
)
|
|
$
|
(1,582
|
)
|
State income tax expense (benefit), net of federal benefit
|
|
|
13
|
|
|
|
18
|
|
|
|
(486
|
)
|
Foreign tax expense (benefit)
|
|
|
326
|
|
|
|
1,116
|
|
|
|
(53
|
)
|
Nondeductible expenses
|
|
|
1,281
|
|
|
|
90
|
|
|
|
132
|
|
Subpart F
|
|
|
|
|
|
|
320
|
|
|
|
|
|
Contingencies released
|
|
|
(799
|
)
|
|
|
|
|
|
|
|
|
Net operating loss carryback
|
|
|
65
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
870
|
|
|
|
363
|
|
|
|
561
|
|
Change in valuation allowance
|
|
|
(56
|
)
|
|
|
958
|
|
|
|
7,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
$
|
(884
|
)
|
|
$
|
538
|
|
|
$
|
5,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the Companys net deferred taxes
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
$
|
90
|
|
|
$
|
30
|
|
Other temporary differences
|
|
|
477
|
|
|
|
547
|
|
Other accruals
|
|
|
3,380
|
|
|
|
4,468
|
|
Capitalized research and development
|
|
|
76
|
|
|
|
233
|
|
Unrealized foreign losses & temporary differences
|
|
|
3,789
|
|
|
|
2,722
|
|
Federal and state tax credits
|
|
|
611
|
|
|
|
423
|
|
Stock-based compensation
|
|
|
2,208
|
|
|
|
2,034
|
|
Valuation allowance
|
|
|
(9,332
|
)
|
|
|
(9,389
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
1,299
|
|
|
|
1,068
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(376
|
)
|
|
|
(574
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(376
|
)
|
|
|
(574
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
923
|
|
|
$
|
494
|
|
|
|
|
|
|
|
|
|
|
The above amounts are recorded on the Consolidated Balance Sheet
per following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
Dec. 31
|
|
|
|
2009
|
|
|
2008
|
|
|
Prepaid expenses and other current assets
|
|
$
|
934
|
|
|
$
|
577
|
|
Other assets
|
|
$
|
145
|
|
|
$
|
|
|
Deferred tax liabilities, non-current
|
|
$
|
(156
|
)
|
|
$
|
(83
|
)
|
In assessing the recoverability of its 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 the deferred tax
F-18
RAE
SYSTEMS INC.
assets is dependent on the generation of future taxable income
during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of
deferred tax liabilities, historical and projected future
taxable income, and tax planning strategies in making this
assessment.
U.S. income taxes were provided for certain earnings of
non-U.S. subsidiaries.
The Company does not plan to repatriate the remaining
undistributed earnings of
non-U.S. subsidiaries
as of December 31, 2009.
Under the Tax Reform Act of 1986, the amount of and benefits
from net operating loss carryforwards may be impaired or limited
in certain circumstances. Events which cause limitations in the
amount of net operating loss and credit carryforwards that the
Company may utilize in any one year include, but are not limited
to, a cumulative ownership change of more than 50%, as defined,
over a three year period. The Company has approximately
$2.5 million and $3 million of federal and California
net operating losses which are scheduled to expire in 2027 and
2029, respectively.
In November 2009, the Worker, Homeownership, and Business
Assistance Act of 2009 was enacted. Under this law, companies
may elect to increase the carryback period for the net operating
loss of a tax year ending after December 31, 2007 and
beginning before January 1, 2010 to 3, 4 or 5 years.
Accordingly, the Company has elected to carry its 2008 net
operating loss back to 2003, which will result in a refund of
approximately $659,000.
In July 2008, the Housing and Economic Recovery Act of 2008 was
enacted. Under this law, companies can elect to accelerate a
portion of their unused alternative minimum tax credit and
credit for increased research activities in lieu of the
50-percent bonus depreciation enacted in February
2008. The Company has determined it would not receive any
significant benefit from this election. As of December 31,
2009, the Company has federal research and development credit
carryforwards of approximately $200,000, which are scheduled to
expire in 2022 if not utilized.
The California
2008-2009
Budget Bill, enacted on September 30, 2008, resulted in two
temporary changes to the Companys California income tax.
First, the bill suspends the use of net operating loss
carryovers for two years, 2008 and 2009. Second, the bill limits
the use of research and development credit carryovers to no more
than 50% of the tax liability before credits. As of
December 31, 2009, the Company had research and development
credit carryforwards of approximately $0.2 million for
California income tax purposes. The California credits are not
subject to expiration under current California tax law.
The Company has been granted a tax holiday for its subsidiary in
Fushun, China whereby the Company is entitled to a full
exemption from China income tax in the first year of positive
accumulated earnings and a 50% reduction from the statutory rate
for the following three years. The statutory rate in China is
25%. For tax purposes, RAE Fushun reached cumulative
profitability as of December 31, 2008 and declared its
first year of exemption from corporate income tax in China. The
tax savings to the Company was approximately $511,000. Taxable
income will be subject to tax at 12.5% for 2009 through 2011.
The Company does not anticipate any tax liability for 2009.
In 2006, the Internal Revenue Service completed its examination
of the Companys federal income tax returns for the years
ended December 31, 2003 and 2004. Based on the results of
the examination, the Company paid $391,000 to the IRS in April
2006. In 2006, the tax authority in Denmark, Skat, completed the
audit of the Companys subsidiary in Denmark for the year
ended December 31, 2004 without any adjustment. Subsequent
periods remain subject to examination; however, no audits are
currently in process.
The Companys valuation allowance was determined in
accordance with the authoritative accounting guidance, which
requires an assessment of both positive and negative evidence
when determining whether it is more likely than not that
deferred tax assets are recoverable, with such assessment being
required on a jurisdiction by jurisdiction basis. Management
believes that sufficient uncertainty exists with regard to the
realizability of its tax assets with the exception of
$0.9 million of foreign deferred tax assets, such that a
valuation allowance is necessary. Factors considered in
providing a valuation allowance include the lack of a
significant history of consistent profits, the current weakness
in the overall market, and the uncertainty of when economic
fundamentals will stabilize,
F-19
RAE
SYSTEMS INC.
thereby potentially impacting the Companys ability to
sustain or grow revenues and earnings, and the length of
carryback and carryforward periods.
Based on the absence of sufficient positive objective verifiable
evidence at December 31, 2009, the Company concluded that
it was appropriate to establish a full valuation allowance for
its net federal and state deferred tax assets. Throughout fiscal
year 2009, the Company had a valuation allowance for future tax
benefits related to certain foreign net operating losses. As a
result, the valuation allowance for deferred tax assets
decreased by $0.1 million from $9.4 million at
January 1, 2009, to approximately $9.3 million at
December 31, 2009. The Company expects to provide a full
valuation allowance on future tax benefits until it can sustain
a level of profitability that demonstrates its ability to
utilize these assets. The amount of the deferred tax asset
valuation allowance, however, could be reduced in future periods
to the extent that future taxable income is realized.
Prior to 2009, exposures were settled primarily through the
settlement of audits within each individual tax jurisdiction or
the closing of a statute of limitation. Exposures can also be
affected by changes in applicable tax law or other factors,
which may cause management to believe a revision of past
estimates is appropriate. Management believes that an
appropriate liability has been established for income tax
exposure; however, actual amounts may differ materially from
these estimates.
The impact of an uncertain tax position that is more likely than
not of being sustained upon audit by the relevant taxing
authority must be recognized at the largest amount that is more
likely than not to be sustained. No portion of an uncertain tax
position will be recognized if the position has less than a 50%
likelihood of being sustained. Also, interest expense is
recognized on the full amount of deferred benefits for uncertain
tax positions. As of December 31, 2009 and 2008, the
Company has recorded tax contingency reserves of approximately
$1.5 million and $1.4 million, respectively. These
balances include accrued interest and penalties of
$0.3 million and $0.3 million, respectively, at
December 31, 2009 and 2008. The tax contingency reserves
are included as a component of Income taxes payable on the
Consolidated Balance Sheets.
On December 31, 2009, the Company had $1.5 million of
unrecognized tax benefits, $0.5 million of which would
affect its effective tax rate if recognized. The Company does
not anticipate any material changes to its uncertain tax
positions in the next 12 months.
A reconciliation of the beginning and ending balance of
unrecognized tax benefits (UTB) is as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance at January 1, 2008
|
|
$
|
1,193
|
|
Positions taken related to prior years
|
|
|
|
|
Positions taken during the current year
|
|
|
(64
|
)
|
Reduction to UTB due to settlement with tax authories
|
|
|
(12
|
)
|
|
|
|
|
|
Balance at January 1, 2009
|
|
|
1,117
|
|
Positions taken related to prior years
|
|
|
|
|
Positions taken during the current year
|
|
|
(6
|
)
|
Reduction to UTB due to settlement with tax authories
|
|
|
102
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
1,213
|
|
|
|
|
|
|
The Company recognizes interest and penalties associated with
uncertain tax positions in its income tax expense. At
December 31, 2008 and 2009, the provision for interest and
penalties was $0.3 million and $0.3 million,
respectively. The ultimate amount and timing of any future cash
settlements cannot be predicted with reasonable certainty.
We conduct business globally and, as a result, one or more of
our subsidiaries file income tax returns in the
U.S. federal jurisdiction and various state and foreign
jurisdictions. In the normal course of business, we are subject
F-20
RAE
SYSTEMS INC.
to examination by taxing authorities throughout the world,
including such major jurisdictions as China, Hong Kong, Denmark,
UK, France, and the United States. We are no longer subject to
U.S. federal, or
non-U.S. income
tax examinations for years before 2003.
In many cases the Companys uncertain tax positions are
related to tax years that remain subject to examination by tax
authorities. The following describes the open tax years, by
major tax jurisdiction, as of December 31, 2009:
|
|
|
|
|
|
|
|
|
United States Federal
|
|
|
|
|
|
|
2003 - present
|
|
United States State
|
|
|
|
|
|
|
2004 - present
|
|
China
|
|
|
|
|
|
|
2005 - present
|
|
Hong Kong
|
|
|
|
|
|
|
2004 - present
|
|
Denmark
|
|
|
|
|
|
|
2007 - present
|
|
The Company maintains credit facilities to support its
operations in the United States and China.
In the United States, the Company has a $10.0 million
revolving credit agreement as of December 31, 2009. The
credit facility is renewed annually and currently expires on
May 15, 2010. Available credit is based on a percentage of
specific qualifying assets and the total facility is
collateralized by a blanket security interest in the
Companys assets in the United States. The Company is
required to comply with certain reporting requirements in
addition to the ongoing requirement to submit quarterly
financial statements. Interest accrues at the floating prime
bank lending rate plus 100 basis points subject to a
minimum total rate of 5%. In addition, the Company pays
30 basis points annually of the average unused portion of
the facility and is required to maintain a compensating balance
of at least $2.0 million at all times. The compensating
balance is included in Restricted cash on the Consolidated
Balance Sheets. As of December 31, 2009 and
December 31, 2008, $1.8 million was outstanding
against the revolving credit agreement. There is no assurance
that the Company will be successful in securing a renewed
agreement on this line of credit for any period after
May 15, 2010.
During the fourth quarter of 2009, the Company obtained an
amendment to the financial covenants of its revolving credit
agreement, as a result of non-compliance. The amended financial
covenants under the revolving credit agreement 1) require
the Company to maintain specified trailing two-quarter minimum
earnings before interest, depreciation, amortization and
non-cash stock compensation expenses and 2) limits the size
of potential monetary penalties under the FCPA to
$3.5 million. The Company was in compliance with these
covenants as of December 31, 2009.
In China, the Company maintains unsecured revolving lines of
credit to provide working capital. Borrowings under these lines
of credit are generally at the current market rate for fixed
rate loans of the amount and duration requested, up to one year.
The lines of credit are renewed annually in May and September,
respectively. The
F-21
RAE
SYSTEMS INC.
following table presents the Companys total lines of
credit in China for working capital and balances drawn against
each as of December 31, 2009 and December 31, 2008
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chinese Renminbi
|
|
U.S. Dollars
|
|
|
|
|
|
|
Amount
|
|
Total
|
|
|
|
Amount
|
|
Total
|
|
|
|
|
Amount
|
|
Available
|
|
Line
|
|
Amount
|
|
Available
|
|
Line
|
|
Interest
|
|
|
Oustanding
|
|
for Use
|
|
of Credit
|
|
Oustanding
|
|
for Use
|
|
of Credit
|
|
Rate
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due October 12, 2010
|
|
|
15.0
|
|
|
|
5.0
|
|
|
|
20.0
|
|
|
|
2.2
|
|
|
|
0.7
|
|
|
|
2.9
|
|
|
|
5.04
|
%
|
No balance outstanding
|
|
|
|
|
|
|
20.0
|
|
|
|
20.0
|
|
|
|
|
|
|
|
2.9
|
|
|
|
2.9
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.0
|
|
|
|
25.0
|
|
|
|
40.0
|
|
|
|
2.2
|
|
|
|
3.6
|
|
|
|
5.8
|
|
|
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due April 30, 2009
|
|
|
5.0
|
|
|
|
15.0
|
|
|
|
20.0
|
|
|
|
0.7
|
|
|
|
2.2
|
|
|
|
2.9
|
|
|
|
6.33
|
%
|
No balance outstanding
|
|
|
|
|
|
|
20.0
|
|
|
|
20.0
|
|
|
|
|
|
|
|
2.9
|
|
|
|
2.9
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.0
|
|
|
|
35.0
|
|
|
|
40.0
|
|
|
|
0.7
|
|
|
|
5.1
|
|
|
|
5.8
|
|
|
|
|
|
Term
Loan
On November 9, 2009, the Company borrowed RMB
10.0 million or approximately $1.5 million to provide
working capital for its 70% owned subsidiary in Fushun, China
(RAE Fushun). The loan is due on April 26, 2011
and bears interest at a fixed rate of 8.1% for 12 months.
The interest rate will be reset once in November 2010 at 1.5
times the Peoples Bank of China benchmark rate. Loan
repayment is guaranteed by an unrelated third party, to whom RAE
Fushun has granted a lien over its wholly owned plant and
associated land rights. As a condition of the loan, the lending
bank required a deposit of approximately $0.1 million from
the guarantor. This deposit was funded by RAE Fushun from the
loan proceeds and is included in Restricted cash on the
Consolidated Balance Sheets.
|
|
Note 7.
|
Commitments
and Contingencies
|
Legal
Proceedings
Regulatory
Compliance
During fiscal year 2008, the Companys internal audit
department identified certain payments and gifts made by certain
personnel in the Companys China operations that may have
violated the FCPA. Following this discovery, the Audit Committee
of the Board of Directors initiated an independent
investigation. The Company has made a voluntary disclosure to
the DOJ and the SEC regarding the results of its investigation.
The Company has also implemented additional policies and
controls with respect to compliance with the FCPA. The FCPA and
related statutes and regulations provide for potential monetary
penalties, criminal sanctions and in some cases debarment from
doing business with the U.S. federal government in
connection with violations. The Company is cooperating with the
DOJ and the SEC in connection with their review of the matter
and is actively engaged in settlement discussions. Although no
assurances can be given as to whether the matter will settle or
the amount of any settlement, the Company recorded an accrual of
$3.5 million in the third quarter 2009 relating to the
potential settlement of this matter. The timing and final
outcome of this or any future government investigation cannot be
predicted with certainty and any indictment, conviction or
material fine, debarment or settlement arising out of these
investigations could have a material adverse affect on the
Companys business, financial condition, results of
operation and future prospects.
F-22
RAE
SYSTEMS INC.
Legal
proceedings
Polimaster Ltd. et al. v. RAE Systems Inc.,
United States District Court for the Northern District of
California, Case
No. 05-CV-01887-JF,
United States Court of Appeals for the Ninth Circuit, Nos.
08-15708 and
09-15369
Polimaster Ltd. and Na&Se Trading Company, Ltd.
(Polimaster) filed a complaint against the Company
on May 9, 2005, in the United States District Court for the
Northern District of California in a case titled Polimaster
Ltd., et al. v. RAE Systems Inc. (Case
No. 05-CV-01887-JF).
The complaint alleges, among other things, that the Company
breached its contract with Polimaster and infringed upon
Polimasters intellectual property rights. The dispute is
subject to a contractual arbitration agreement, although the
federal court has retained jurisdiction over the matter pending
completion of the arbitration. The arbitration was conducted in
the spring of 2007.
In September 2007, a Final Award was issued in the arbitration.
The arbitrator ruled that Polimaster failed to prove its claims
and was not entitled to any relief; that the Company had proven
its counterclaims and was awarded damages of approximately
$2.4 million; and that as the prevailing party, the Company
was entitled to recover costs in the amount of $46,000. On
October 5, 2007, RAE Systems filed a motion to confirm the
Final Award. On October 17, 2007, Polimaster filed an
opposition to RAE Systems motion to confirm the Final
Award and filed its own motion to vacate the Final Award. Both
motions were heard on December 7, 2007, and the district
court confirmed the Final Award by an order dated
February 25, 2008. Polimaster appealed from the district
courts order confirming the arbitration award in
Polimaster Ltd. et al. v. RAE Systems Inc.,
No. 08-15708.
The appeal is currently pending in the United States Court of
Appeals for the Ninth Circuit. Briefing on the appeal has been
completed by both sides and the appeal was argued and submitted
to the Ninth Circuit for decision on January 15, 2010.
When the district court confirmed the Final Award in favor of
RAE Systems it did not enter judgment, an omission the district
court described as a non-substantive clerical error. On
September 9, 2008, the court of appeal granted leave for
the district court to correct this clerical error. On
January 23, 2009, the district court entered judgment in
favor of RAE Systems and against Polimaster, and included in the
judgment post-arbitration/pre-judgment interest and
post-judgment interest. Polimaster has appealed the inclusion of
these two interest components in the judgment, in Polimaster
Ltd. et al. v. RAE Systems Inc.,
No. 09-15369,
and briefing on the appeal has been completed by both sides and
the appeal was argued and submitted to the Ninth Circuit for
decision on January 15, 2010.
On May 14, 2009, Polimaster and RAE Systems entered a First
Amended And Restated Stipulation And Order Re Stay Of Execution
Of Judgment In Favor Of RAE Systems Inc. (the
stipulation), pursuant to which Polimaster wire
transferred $1.4 million to the client trust account of RAE
Systems counsel McLeod, Witham & Flynn LLP, and
agreed to wire transfer an additional $116,224.25 per month
until the entire amount deposited equals the amount of the
judgment (approximately $2.8 million) plus accrued interest
at the judgment rate of 0.43 percent per annum. Pursuant to
the stipulation, the amounts transferred by Polimaster are being
maintained in the client trust account of McLeod,
Witham & Flynn LLP, and shall not be distributed to
RAE Systems or Polimaster, until the Ninth Circuit has ruled on
Polimasters appeal (Nos.
08-15708 and
09-15369).
McLeod, Witham & Flynn LLP shall release the funds in
the account to RAE Systems
and/or
Polimaster within seven days of the Ninth Circuits final
ruling on the appeal, in accordance with the Ninth
Circuits decision. Polimaster is currently in compliance
with the payment schedule provided in the stipulation. If RAE
Systems is successful on appeal, it is expected that the Company
would receive approximately $1.6 million, net of
attorneys fees and expenses. The timing of a final ruling
on the appeal is not currently determinable.
Notwithstanding the Polimaster proceeding described above, from
time to time, the Company is engaged in various legal
proceedings incidental to its normal business activities.
Although the results of litigation and claims cannot be
predicted with certainty, the Company believes the final outcome
of such matters will not have a material adverse effect on its
consolidated financial position, results of operations or cash
flows.
F-23
RAE
SYSTEMS INC.
Leases
The Company and its subsidiaries lease certain manufacturing,
warehousing and other facilities under operating leases. The
leases generally provide for the lessee to pay taxes,
maintenance, insurance and certain other operating costs of the
leased property. Total rent expense for the years ended
December 31, 2009, 2008 and 2007 was $1,480,000, $1,760,000
and $1,109,000, respectively. Future minimum annual payments
under non-cancellable leases were as follows as of
December 31, 2009 (in thousands):
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2010
|
|
$
|
1,733
|
|
2011
|
|
|
1,477
|
|
2012
|
|
|
1,339
|
|
2013
|
|
|
1,337
|
|
2014
|
|
|
1,307
|
|
Thereafter
|
|
|
3,490
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
10,683
|
|
|
|
|
|
|
In December 2004, the Company moved into its current corporate
headquarters in San Jose, California and abandoned a leased
facility in Sunnyvale, California. During the second quarter of
2005, the Company accrued a restructuring reserve of
approximately $2.0 million for the remaining lease term of
the former headquarters in Sunnyvale. The discount rate used was
4.85% and the liability was not reduced for any anticipated
future sublease income. In March 2007, due to improved
conditions for office rentals, the Company revised the estimated
loss on abandonment of the lease and reduced operating expense
by $595,000. During the second quarter of 2007, a sublease was
executed with rents commencing in June 2007. Both the master
lease and the sublease expired in October 2009. Rent payments
for 2009, 2008 and 2007 were $439,000, $490,000 and $396,000,
respectively, for the Sunnyvale building with sublease income of
$136,000 $176,000 and $97,000 in 2009, 2008 and 2007,
respectively.
Purchase
obligations
Although open purchase orders are considered enforceable and
legally binding, the terms generally allow the Company the
option to cancel, reschedule and adjust requirements based on
business needs prior to the delivery of goods or performance of
services. Obligations to purchase inventory and other
commitments are generally expected to be fulfilled within one
year and were estimated at $4.5 million at
December 31, 2009.
During 2007 the Company began to construct RAE Fushuns new
manufacturing and administrative facility in China. The Company
occupied the factory buildings in October 2008. The estimated
cost to complete this project in 2010 and beyond is
$0.4 million and is not deemed to be a contractual
obligation as the underlying contract does not specify a
financial commitment.
During the first quarter of 2010, the Company began to construct
a new manufacturing and engineering facility in Shanghai, China.
The estimated cost to complete this project is approximately
$5.3 million with the work scheduled to be completed as
soon as year end. This project is not deemed to be a contractual
obligation as the underlying contract does not specify a
financial commitment. Upon completion of construction, the
Company would vacate its existing leased facility in Shanghai.
Based on discussions with Shanghai government officials, the
landlord of the existing Company facility, the Company believes
that it will be able to terminate the lease without penalty.
However, no assurance can be given at this time that the Company
will not be subject to a lease termination penalty.
F-24
RAE
SYSTEMS INC.
Guarantees
The Company is permitted under Delaware law and required under
our Certificate of Incorporation and Bylaws to indemnify its
officers and directors for certain events or occurrences,
subject to certain limits, while the officer is or was serving
at the Companys request in such capacity. The term of the
indemnification period is for the officers or
directors lifetime. The maximum amount of potential future
indemnification is unlimited; however, the Company has a
Director and Officer Insurance Policy that limits its exposure
and enables it to recover a portion of any future amounts paid.
To date the Company has not incurred any losses under these
agreements.
The Company typically agrees to indemnify its customers for any
expenses or liability resulting from claimed infringements of
patents, trademarks or copyrights of third parties. The terms of
these indemnification agreements are generally perpetual any
time after execution of the agreement. The maximum amount of
potential future indemnification is unlimited. To date, the
Company has not paid any amounts to settle claims or defend
lawsuits.
Product
Warranties
The Company sells the majority of its products with a 12 to
24 month repair or replacement warranty from the date of
shipment. The Company provides an accrual for estimated future
warranty costs based upon the historical relationship of
warranty costs to sales. The estimated future warranty
obligations related to product sales are recorded in the period
in which the related revenue is recognized under accrued
liabilities on the Consolidated Balance Sheets. The following
table presents changes in the Companys warranty reserve
during 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
707
|
|
|
$
|
884
|
|
Provision for warranty
|
|
|
1,429
|
|
|
|
844
|
|
Utilization of reserve
|
|
|
(1,212
|
)
|
|
|
(1,041
|
)
|
Foreign currency translation effects
|
|
|
2
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
926
|
|
|
$
|
707
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8.
|
Employee
Benefit Plan
|
The Company sponsors the RAE Systems 401(k) Plan (the
Plan), a defined contribution plan which provides
retirement benefits for its eligible employees through tax
deferred salary deductions. The Plan allows employees to
contribute up to 60% of their annual compensation subject to
statutory maximum levels. The Plan is available to all employees
in the United States who have reached the age of 21. The Plan
provides for employer matching contributions of 25% on each
employees elective contributions for the first 6.0% of
eligible compensation contributed. Company contributions vest at
the rate of 25% per annum over the first 4 years of
service. Employer matching contributions to the Plan totaled
$122,000, $113,000 and $129,000 for the years ended
December 31, 2009, 2008 and 2007, respectively.
|
|
Note 9.
|
Stock-Based
Compensation
|
Stock
Option Plans
In June 2007, the Companys shareholders approved the 2007
Equity Incentive Plan (the 2007 Plan) to replace the
Companys 2002 Stock Option Plan (the 2002
Plan). The 2007 Plan authorizes the grant of options to
employees, directors and consultants to purchase shares of the
Companys common stock.
Four million shares of the Companys common stock are
authorized for issuance under the 2007 Plan. The maximum number
of shares that may be issued under the 2007 Plan will be
increased from time to time by shares
F-25
RAE
SYSTEMS INC.
subject to options granted under the 2002 Plan that expire or
are terminated and by shares acquired under the 2002 Plan that
are forfeited or repurchased by the Company for the option
holders purchase price. However, no more than
1.5 million additional shares may be authorized for
issuance under the 2007 Plan as a result of these adjustments.
Through December 31, 2009, 1,250,376 shares have been
added to the 2007 Plan due to qualifying adjustments from the
2002 Plan.
Incentive options may be granted at not less than 100% of the
fair market value per share and non-statutory options may be
granted at not less than 85% of the fair market value per share
of the underlying stock at the date of grant as determined by
the Board of Directors or committee thereof, except for options
granted to a person owning greater than 10% of the outstanding
stock, for which the exercise price must not be less than 110%
of the fair market value. Options granted under the Plans
generally vest 25% after one year with the remainder vesting
pro-rata monthly over the following three years. If not
exercised, options generally expire ten years after the date of
grant.
The total intrinsic value of options exercised during 2009 and
2008 was zero and $179,000, respectively. In connection with
these exercises, no tax benefit was realized as the Company has
a full valuation allowance on its deferred tax assets. As of
December 31, 2009, the unrecognized future estimated
compensation expense related to stock options and net of
expected forfeitures was $1.8 million. That cost is
expected to be recorded over an estimated amortization period of
2.8 years.
The following is a summary of stock option activity (in
thousands, except weighted-average amounts):
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Number
|
|
Weighted-Average
|
|
|
of Shares
|
|
Exercise Price
|
|
Balance as of December 31, 2006
|
|
|
3,139
|
|
|
$
|
3.22
|
|
Granted
|
|
|
855
|
|
|
|
2.73
|
|
Exercised
|
|
|
(32
|
)
|
|
|
2.25
|
|
Canceled
|
|
|
(239
|
)
|
|
|
4.18
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
3,723
|
|
|
|
3.05
|
|
Granted
|
|
|
1,299
|
|
|
|
1.51
|
|
Exercised
|
|
|
(149
|
)
|
|
|
0.29
|
|
Canceled
|
|
|
(680
|
)
|
|
|
3.83
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
4,193
|
|
|
|
2.55
|
|
Granted
|
|
|
1,870
|
|
|
|
1.03
|
|
Exercised
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(670
|
)
|
|
|
2.96
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
5,393
|
|
|
|
1.97
|
|
|
|
|
|
|
|
|
|
|
F-26
RAE
SYSTEMS INC.
The following table summarizes significant ranges of outstanding
and exercisable options as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Average
|
|
|
Intrinsic
|
|
|
Number
|
|
|
Contractual
|
|
|
Average
|
|
|
Intrinsic
|
|
Range of
|
|
of
|
|
|
Life
|
|
|
Exercise
|
|
|
Value
|
|
|
of
|
|
|
Life
|
|
|
Exercise
|
|
|
Value
|
|
Exercise Prices
|
|
Shares
|
|
|
(In Years)
|
|
|
Price
|
|
|
(000)
|
|
|
Shares
|
|
|
(In Years)
|
|
|
Price
|
|
|
(000)
|
|
|
$0.00 - 0.50
|
|
|
120,877
|
|
|
|
1.51
|
|
|
$
|
0.08
|
|
|
$
|
123
|
|
|
|
120,877
|
|
|
|
|
|
|
$
|
0.08
|
|
|
$
|
123
|
|
0.51 - 1.00
|
|
|
1,197,936
|
|
|
|
8.86
|
|
|
|
0.95
|
|
|
|
180
|
|
|
|
251,466
|
|
|
|
|
|
|
|
0.84
|
|
|
$
|
65
|
|
1.01 - 1.50
|
|
|
2,018,282
|
|
|
|
6.98
|
|
|
|
1.26
|
|
|
|
23
|
|
|
|
863,270
|
|
|
|
|
|
|
|
1.22
|
|
|
$
|
19
|
|
1.51 - 2.00
|
|
|
200,000
|
|
|
|
8.28
|
|
|
|
1.87
|
|
|
|
|
|
|
|
83,333
|
|
|
|
|
|
|
|
1.87
|
|
|
|
|
|
2.01 - 2.50
|
|
|
259,167
|
|
|
|
7.65
|
|
|
|
2.26
|
|
|
|
|
|
|
|
147,760
|
|
|
|
|
|
|
|
2.26
|
|
|
|
|
|
2.51 - 3.00
|
|
|
445,000
|
|
|
|
7.25
|
|
|
|
2.88
|
|
|
|
|
|
|
|
301,558
|
|
|
|
|
|
|
|
2.87
|
|
|
|
|
|
3.01 - 4.00
|
|
|
804,324
|
|
|
|
6.03
|
|
|
|
3.62
|
|
|
|
|
|
|
|
723,488
|
|
|
|
|
|
|
|
3.60
|
|
|
|
|
|
4.01 - 5.00
|
|
|
152,500
|
|
|
|
4.38
|
|
|
|
4.81
|
|
|
|
|
|
|
|
152,500
|
|
|
|
|
|
|
|
4.81
|
|
|
|
|
|
5.01 - 6.00
|
|
|
170,000
|
|
|
|
4.24
|
|
|
|
5.30
|
|
|
|
|
|
|
|
170,000
|
|
|
|
|
|
|
|
5.30
|
|
|
|
|
|
6.01 - 7.00
|
|
|
25,000
|
|
|
|
4.87
|
|
|
|
6.43
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
6.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,393,086
|
|
|
|
7.07
|
|
|
|
1.97
|
|
|
$
|
326
|
|
|
|
2,839,252
|
|
|
|
5.78
|
|
|
|
2.48
|
|
|
$
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the
total pretax intrinsic value, based on the excess of the
Companys closing stock price of $1.10 as of
December 31, 2009 over the options holders exercise
price, which would have been received by the option holders had
all option holders exercised their options as of that date. The
total number of
in-the-money
options exercisable as of December 31, 2009, was 800,000.
As of December 31, 2009, the stock options outstanding
included 4,953,177 options which were either vested or are
expected to vest, with a weighted-average exercise price of
$2.04, an aggregate intrinsic value of $302,000 and a remaining
contractual term of 6.93 years.
In May 2008, the Company granted an aggregate of
150,000 shares of common stock to non-employee directors
under the 2007 Plan. The weighted-average grant date fair value
of these awards is $1.40. The shares are not subject to vesting
and compensation expenses of $210,000 was recognized on date of
grant. As of December 31, 2009, no unvested grants of
restricted stock were outstanding under the 2007 Plan.
Non-Plan
Stock Options
In 2002, the Company granted certain of its Directors non-plan
options to purchase 400,000 shares of restricted stock at a
weighted average exercise price of $0.99 per share. The options
vested 25% after one year with the remainder vesting pro-rata
monthly over the following three years. From 2002 to 2006, the
Company issued 300,000 shares of common stock due to the
exercise of such options. There have been no further grants,
exercises or cancellations through December 31, 2009. As
such, total outstanding non-plan stock options at
December 31, 2009 were 100,000 at a weighted average
exercise price of $1.06. The vested options are exercisable over
ten years from date of grant. During 2009, no stock-based
compensation expense related to non-plan stock options remained
to be recorded.
F-27
RAE
SYSTEMS INC.
The following table summarizes the outstanding and exercisable
non-plan stock options as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Remaining
|
|
Weighted
|
|
Aggregate
|
|
|
|
Remaining
|
|
Weighted
|
|
Aggregate
|
|
|
Number
|
|
Contractual
|
|
Average
|
|
Intrinsic
|
|
Number
|
|
Contractual
|
|
Average
|
|
Intrinsic
|
Range of
|
|
of
|
|
Life
|
|
Exercise
|
|
Value
|
|
of
|
|
Life
|
|
Exercise
|
|
Value
|
Exercise Prices
|
|
Shares
|
|
(In Years)
|
|
Price
|
|
(000)
|
|
Shares
|
|
(In Years)
|
|
Price
|
|
(000)
|
|
$1.06
|
|
|
100,000
|
|
|
|
2.41
|
|
|
$
|
1.06
|
|
|
$
|
5
|
|
|
|
100,000
|
|
|
|
2.41
|
|
|
$
|
1.06
|
|
|
$
|
5
|
|
Non-Plan
Restricted Stock
In 2006, the Company granted 536,000 shares of restricted
stock to four individuals as an inducement to join the Company.
Twenty five percent of this restricted stock or
134,000 shares vested in July 2007 with the remainder
vesting pro-rata quarterly over the following three years. In
August 2007, concurrent with discontinuing the Companys
DVR business, the Company terminated two of these individuals.
As a result, the remainder of their restricted stock awards or
203,571 shares vested immediately and a charge of $596,000
was included in the loss from discontinued operations. See
Note 3. Discontinued Operations for more detail.
The fair market value of the Companys common shares on the
dates the awards were granted represents unrecognized deferred
stock compensation which is being amortized on a straight-line
basis over the vesting period of the underlying stock awards. As
of December 31, 2009, $50,000 of estimated stock-based
compensation expense related to restricted stock awards remains
to be recorded. That cost is expected to be recorded over an
amortization period of 0.5 years.
The following is a summary of activity for the non-plan awards
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
|
|
|
|
|
Weighted-Average
|
|
|
Number
|
|
Grant-Dated
|
|
|
of Shares
|
|
Fair Value
|
|
Balance as of December 31, 2006
|
|
|
536
|
|
|
$
|
2.81
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(354
|
)
|
|
|
2.81
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
182
|
|
|
|
2.81
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(73
|
)
|
|
|
2.81
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
109
|
|
|
|
2.81
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(62
|
)
|
|
|
2.81
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
47
|
|
|
|
2.81
|
|
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation Expense
The fair value of each option award is estimated on the date of
grant using the Black-Scholes-Merton valuation method.
Accordingly, stock-based compensation cost is measured at grant
date based on the fair value of the award and recognized in
expense over the requisite service, which is generally the
vesting period. The impact on the
F-28
RAE
SYSTEMS INC.
Companys results from continuing operations of recording
stock-based compensation by function for the years ended
December 31, 2009, 2008 and 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cost of sales
|
|
$
|
80
|
|
|
$
|
66
|
|
|
$
|
50
|
|
Sales and marketing
|
|
|
(43
|
)
|
|
|
61
|
|
|
|
114
|
|
Research and development
|
|
|
143
|
|
|
|
348
|
|
|
|
453
|
|
General and administrative
|
|
|
1,110
|
|
|
|
1,118
|
|
|
|
1,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,290
|
|
|
$
|
1,593
|
|
|
$
|
1,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, the Company recorded the following stock-based
compensation expenses from discontinued operations for the year
ended December 31, 2007:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Sales and marketing
|
|
$
|
628
|
|
Research and development
|
|
|
53
|
|
|
|
|
|
|
Total
|
|
$
|
681
|
|
|
|
|
|
|
No stock-based compensation expense from discontinued operations
was recorded during fiscal 2008 or 2009.
Valuation
Assumptions
The Company estimates the fair value of each stock option on the
date of grant using a Black-Scholes-Merton valuation model and a
single option award approach. The fair value of each option
grant is amortized on a straight-line basis over the requisite
service period of the award, which is generally the vesting
period. The weighted-average assumptions applied are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Expected volatility
|
|
|
85
|
%
|
|
|
60-65
|
%
|
|
|
65
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free interest rate
|
|
|
2.0-3.0
|
%
|
|
|
2.7-3.6
|
%
|
|
|
4.8
|
%
|
Expected term in years
|
|
|
6.0
|
|
|
|
5.5-6.0
|
|
|
|
5.5
|
|
Weighted-average grant date fair value
|
|
$
|
0.73
|
|
|
$
|
0.89
|
|
|
$
|
1.66
|
|
Expected Volatility The Companys
expected volatilities are based on historical volatility of the
Companys stock, adjusted by management for unusual and
non-representative stock price activity not expected to recur.
Management determined the historical stock price volatility for
period from April 11, 2002, the commencement of public
trading of the common stock, through December 31, 2002, was
not likely to be representative of the future and excluded this
period. Management also applies mean reversion techniques to the
historical stock prices, which results in an emphasis on recent
activity over the distant past, when determining the expected
volatility rate to be included in the Black-Scholes-Merton
valuation model.
Expected Dividend The BSM valuation model
calls for a single expected dividend yield as an input. The
Company has not paid a dividend in the past and does not
anticipate paying a dividend in the near future.
F-29
RAE
SYSTEMS INC.
Risk-Free Interest Rate The Company bases the
risk-free interest rate on the implied yield currently available
on U.S. Treasury zero-coupon issues with an equivalent
remaining term. When the expected term of the Companys
stock-based award does not correspond with the terms for which
interest rates are quoted, the Company performs a straight-line
interpolation between available maturities.
Expected Term The Companys expected
term represents the weighted-average period that the
Companys stock-based awards are expected to be
outstanding. The Company uses the historical exercise patterns
of previously granted options in relation to the Companys
stock price to estimate expected exercise patterns.
Estimated Forfeitures To estimate
forfeitures, the Company applies its historical rate of option
forfeitures. Estimated forfeiture rates are
trued-up to
actual forfeiture results as the stock-based awards vest.
|
|
Note 10.
|
Related
Party Transactions
|
The Company accounts for its 40% ownership in Renex Technologies
Ltd. (Renex), a Hong Kong company, following the
equity method. The Companys total investment in Renex at
December 31, 2009 and 2008 was $339,000 and $448,000,
respectively. The Company recorded a loss of $109,000 on its
equity interest in Renex for the year ended December 31,
2009 and gains of $43,000 and $3,000 for the years ended
December 31, 2008 and 2007, respectively.
The Company pays a 7.5% royalty to Renex for modems incorporated
into certain RAE Systems products. In 2009, 2008 and 2007, the
Company made royalty payments amounting to zero, zero and
$84,000, respectively. The Company also paid $95,000, $181,000
and $149,000 to Renex for research projects in 2009, 2008 and
2007, respectively.
In conjunction with the original and subsequent additional
investment in RAE Beijing, unsecured notes payable were
established for the previous RAE Beijing shareholders as part of
the purchase price agreement in May 2004 and July 2006. As of
December 31, 2009 and December 31, 2008, $370,000 and
$1,329,000, respectively, was included in current notes payable
to related parties and $363,000 and $1,219,000, respectively,
was included in long term notes payable to related parties.
The notes issued in conjunction with the original RAE Beijing
purchase in May 2004 were non-interest bearing and were recorded
at net present value using a discount rate of 5.5%. In
conjunction with the additional investment in RAE Beijing in
July 2006, 11.0 million shares of preferred stock were
issued to four shareholders of RAE Beijing. In accordance with
the authoritative accounting guidance, these preferred shares
were classified as liabilities and were recorded as long-term
notes payable to related parties. Although, these preferred
shares bear a dividend yield rate of 3% per annum, the notes
payable were discounted using a market interest rate of 6.48%.
Scheduled payments of principal and accrued interest under the
notes from 2010 through maturity in 2011 are $370,000 and
$363,000, respectively.
In addition to its 40% ownership in Renex, the Company has
investments in three distributors of RAE Systems products, RAE
Australia, RAE Benelux and RAE Spain. The Company owns 19%, 10%
and 19% of RAE Australia, RAE Benelux and RAE Spain,
respectively. These investments are accounted for under the cost
method.
The Liaoning Coal Industry Group, Ltd. (Liaoning
Group) owns a 30% interest in RAE Fushun and has also been
a supplier to RAE Fushun.
F-30
RAE
SYSTEMS INC.
Transactions and balances with the Companys related
parties were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Renex
|
|
$
|
509
|
|
|
$
|
282
|
|
|
$
|
228
|
|
|
Renex
|
|
$
|
322
|
|
|
$
|
100
|
|
RAE Australia
|
|
|
714
|
|
|
|
|
|
|
|
|
|
|
RAE Australia
|
|
|
59
|
|
|
|
|
|
RAE Benelux
|
|
|
2,698
|
|
|
|
2,287
|
|
|
|
1,596
|
|
|
RAE Benelux
|
|
|
253
|
|
|
|
411
|
|
RAE Spain
|
|
|
429
|
|
|
|
604
|
|
|
|
442
|
|
|
RAE Spain
|
|
|
119
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,350
|
|
|
$
|
3,173
|
|
|
$
|
2,266
|
|
|
|
|
$
|
753
|
|
|
$
|
703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable:
|
|
|
|
|
|
|
|
|
Liaoning Group
|
|
$
|
|
|
|
$
|
20
|
|
|
$
|
4,448
|
|
|
Liaoning Group
|
|
$
|
14
|
|
|
$
|
72
|
|
Renex
|
|
|
256
|
|
|
|
677
|
|
|
|
675
|
|
|
Renex
|
|
|
92
|
|
|
|
382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
256
|
|
|
$
|
697
|
|
|
$
|
5,123
|
|
|
|
|
$
|
106
|
|
|
$
|
454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys Director of Information Systems, Lien Chen,
is the wife of our Chief Executive Officer, Robert Chen.
Ms. Chen was paid a salary and bonus of $128,000, $111,000
and $96,000 for 2009, 2008 and 2007, respectively. Ms. Chen
also receives standard employee benefits offered to all other
full-time U.S. employees. Ms. Chen does not report to
Robert Chen and compensation decisions regarding Ms. Chen
are performed in the same manner as other U.S. employees,
with Robert Chen the final approval signatory on compensation
recommendations.
|
|
Note 11.
|
Fair
Value Measurements
|
The Company uses the following methods and assumptions in
estimating the fair value of financial assets and liabilities:
Cash and cash equivalents and bank line of
credit: The carrying amounts reported in the
consolidated balance sheets approximate fair value due to the
short-term maturity of these instruments.
Notes payable to related parties: The fair
value was determined by discounting these non-interest bearing
notes payable at an interest rate commensurate with commercial
borrowing rates available to the Company in China.
Intangible assets, net: The fair value is
evaluated whenever events or changes in circumstances indicate
that the carrying value of the asset may not be recoverable.
The existing authoritative guidance requires that assets and
liabilities carried at fair value be classified and disclosed in
one of the following three categories:
Level 1: Quoted market prices in active markets for
identical assets or liabilities.
Level 2: Observable market based inputs or unobservable
inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by
market data.
F-31
RAE
SYSTEMS INC.
The carrying amounts and fair values of the Companys
financial assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
December 31, 2008
|
|
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
|
|
Catergory
|
|
Amounts
|
|
Fair Value
|
|
Amounts
|
|
Fair Value
|
|
|
(In thousands)
|
|
Cash and cash equivalents
|
|
Level 1
|
|
$
|
18,528
|
|
|
$
|
18,528
|
|
|
$
|
14,845
|
|
|
$
|
14,845
|
|
Bank lines of credit
|
|
Level 1
|
|
|
4,026
|
|
|
|
4,026
|
|
|
|
2,584
|
|
|
|
2,584
|
|
Notes payable to related parties
|
|
Level 2
|
|
|
733
|
|
|
|
733
|
|
|
|
2,548
|
|
|
|
2,548
|
|
|
|
Note 12.
|
Geographic
Information
|
The Company operates primarily in three geographic regions:
Americas, Asia and Europe. The following tables present net
sales and identifiable long-lived assets by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
34,935
|
|
|
|
42
|
|
|
$
|
38,467
|
|
|
|
40
|
|
|
$
|
37,011
|
|
|
|
41
|
|
Asia
|
|
|
33,749
|
|
|
|
41
|
|
|
|
41,422
|
|
|
|
44
|
|
|
|
42,107
|
|
|
|
46
|
|
Europe
|
|
|
14,488
|
|
|
|
17
|
|
|
|
15,494
|
|
|
|
16
|
|
|
|
11,718
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
83,172
|
|
|
|
100
|
|
|
$
|
95,383
|
|
|
|
100
|
|
|
$
|
90,836
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
317
|
|
|
|
2
|
|
|
$
|
533
|
|
|
|
4
|
|
Asia
|
|
|
15,103
|
|
|
|
97
|
|
|
|
14,228
|
|
|
|
95
|
|
Europe
|
|
|
170
|
|
|
|
1
|
|
|
|
215
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
15,590
|
|
|
|
100
|
|
|
$
|
14,976
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales in China were $28.0 million or 34%,
$38.1 million or 40% and $39.1 million or 43% of total
net sales in 2009, 2008 and 2007 respectively. China held
$15.1 million or 97% and $14.2 million or 95% of total
net property and equipment as of December 31, 2009 and
2008, respectively.
The majority of the Companys net sales in Americas and
Asia are to customers domiciled in the United States and the
Peoples Republic of China, respectively. The Company
performs credit evaluations of its customers financial
condition when considered necessary and generally does not
require cash collateral from its customers. These evaluations
require significant judgment and are based on a variety of
factors including, but not limited to, current economic trends,
historical payments, bad debt write-off experience, and
financial review of the customer.
F-32
RAE
SYSTEMS INC.
|
|
Note 13.
|
Quarterly
Information (Unaudited)
|
The summarized quarterly financial data presented below reflect
all adjustments, which, in the opinion of management, are of a
normal and recurring nature necessary to present fairly the
results of operations for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Net sales
|
|
$
|
19,113
|
|
|
$
|
19,907
|
|
|
$
|
19,909
|
|
|
$
|
24,243
|
|
|
$
|
83,172
|
|
Gross profit
|
|
|
9,330
|
|
|
|
9,868
|
|
|
|
10,273
|
|
|
|
11,508
|
|
|
|
40,979
|
|
Operating loss from continuing operations
|
|
|
(1,060
|
)
|
|
|
(2,057
|
)
|
|
|
(3,914
|
)
|
|
|
(292
|
)
|
|
|
(7,323
|
)
|
Income (loss) from continuing operations
|
|
|
(1,283
|
)
|
|
|
(2,553
|
)
|
|
|
(3,664
|
)
|
|
|
786
|
|
|
|
(6,714
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to RAE Systems Inc.
|
|
|
(988
|
)
|
|
|
(2,250
|
)
|
|
|
(3,489
|
)
|
|
|
968
|
|
|
|
(5,759
|
)
|
Basic net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.10
|
)
|
Discontinued operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.10
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
2008
|
|
|
Net sales
|
|
$
|
17,869
|
|
|
$
|
24,647
|
|
|
$
|
28,845
|
|
|
$
|
24,022
|
|
|
$
|
95,383
|
|
Gross profit
|
|
|
8,855
|
|
|
|
13,091
|
|
|
|
15,775
|
|
|
|
10,494
|
|
|
|
48,215
|
|
Operating income (loss) from continuing operations
|
|
|
(2,557
|
)
|
|
|
498
|
|
|
|
1,379
|
|
|
|
(5,409
|
)
|
|
|
(6,089
|
)
|
Income (loss) from continuing operations
|
|
|
(2,346
|
)
|
|
|
(472
|
)
|
|
|
558
|
|
|
|
(5,123
|
)
|
|
|
(7,383
|
)
|
Loss from discontinued operations, net of tax
|
|
|
10
|
|
|
|
5
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
11
|
|
Net income (loss) attributable to RAE Systems Inc.
|
|
|
(2,336
|
)
|
|
|
(467
|
)
|
|
|
554
|
|
|
|
(4,903
|
)
|
|
|
(7,152
|
)
|
Basic net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.12
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per common share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.12
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per common share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33