Sale of Product Lines-Discontinued Operations
 9 Months Ended
Sep. 30, 2014
Discontinued Operations and Disposal Groups [Abstract]  
Sale of Product Lines - Discontinued Operations

4. SALE OF PRODUCT LINES - DISCONTINUED OPERATIONS

 

Test Handler Product Line

 

On April 22, 2014, we entered into an Agreement (the “BSA Agreement”) with Boston Semi Equipment LLC (“BSE”) and Boston Semi Automation LLC (“BSA”), a wholly owned subsidiary of BSE, pursuant to which we transferred our assets related to our business of designing, manufacturing, marketing and servicing equipment used in the handling of integrated circuits (“test handler product line”) to BSA.

 

The BSA Agreement provided for the following:

 

  ● BSA will pay to ATRM a royalty on all revenue related to the test handler product line over approximately five years (April 22, 2014 through December 31, 2018) that will start at 15% and decline over time to 3%, subject to certain qualifications and adjustments. The first royalty payment covering the period April 22, 2014 through December 31, 2014 amounted to approximately $0.8 million and was received in January 2015. Subsequent payments are due 60 days after the end of each calendar quarter.
     
  ● ATRM transferred all inventories, certain equipment, intellectual property, and certain other assets associated with the test handler product line to BSA.
     
  ● BSA assumed certain liabilities related to the test handler product line, including certain accounts payable, accrued expenses and product support and warranty obligations.
     
  ● BSA and ATRM executed a sublease and transition services agreement providing for BSA to continue to operate the test handler product line in approximately 15,000 square feet within ATRM’s leased facility in North St. Paul, MN and for each party to provide certain administrative services to the other. The sublease provides for initial monthly rental payments of $19,930 and the term extends through August 31, 2015.
     
  ● 16 of ATRM’s employees that were associated with the test handler product line were hired by BSA.

 

We recorded a pre-tax gain of approximately $1.1 million on the sale of the test handler product line in the quarter ended June 30, 2014 as follows (in thousands):

 

Proceeds:        
Fair value of contingent earn-out (royalty stream)   $ 2,200  
         
Carrying value of net assets transferred:        
Inventories     1,197  
Equipment     73  
Accounts payable     (116 )
Accrued liabilities     (82 )
Total net assets transferred     1,072  
         
Gain on sale   $ 1,128  

 

Assets and liabilities included in our condensed consolidated balance sheets and results of operations included in our condensed consolidated statements of operations related to the test handler product line have been reclassified and presented as discontinued operations for all periods presented.

 

Assets and liabilities related to the test handler product line presented as discontinued operations in our consolidated balance sheet as of December 31, 2013 are summarized below (in thousands):

 

Accounts receivable   $ 296  
Inventories     2,075  
Prepaid expenses     15  
Current assets – discontinued operations   $ 2,386  
Property and equipment   $ 1,360  
Less, accumulated depreciation     (1,279 )
Property and equipment, net – discontinued operations   $ 81  
Capitalized lease obligation   $ 35  
Accounts payable     256  
Accrued compensation     109  
Accrued warranty     16  
Other accrued liabilities     109  
Current liabilities – discontinued operations   $ 525  

 

Reliability Test (RTP) Product Line

 

In July 2013, we sold the assets related to our RTP line of products to Cascade Microtech, Inc. (“Cascade”). The RTP product line includes test equipment that provides semiconductor manufacturers with structural performance data to aid in the evaluation and improvement of IC designs and manufacturing processes to increase IC yield and reliability.

 

The purchase price included $1.9 million received at closing plus the following:

 

  ● $0.5 million holdback amount to secure ATRM’s obligations related to representations, warranties and covenants, $0.3 million of which was payable on July 31, 2014 and $0.2 million of which was payable on January 15, 2015, subject to deduction of any indemnification payments to Cascade; and
     
  ● A contingent earn-out payment of up to $1.0 million based on RTP net revenues generated during the nine months ended April 30, 2014.

 

In May 2014, we received approximately $0.4 million in final settlement of the contingent earn-out. There are no additional amounts to be received for the contingent earn-out. On July 30, 2014, Cascade informed us that it would continue to hold back the $0.3 million of holdback amount that was due on July 31, 2014, pending resolution of certain indemnification claims made by Cascade. In October 2014, we reached a settlement agreement with Cascade whereby Cascade and ATRM released all claims against each other and Cascade agreed to pay $0.4 million of the total $0.5 million holdback amount, including the payment due in January 2015. We received the settlement payment of $0.4 million on October 10, 2014. Therefore, no further payments will be received from Cascade.

 

Facility Expense Accrual

 

After the sale of our RTP product line to Cascade in 2013 and the transfer of our test handler product line to BSA on April 22, 2014, ATRM has no manufacturing operations remaining in North St. Paul, Minnesota. The lease for our North St. Paul facility, which consists of approximately 45,000 square feet, expires on August 31, 2015. Approximately one-half of the space in this facility has been subleased to Cascade and BSA through the end of our lease. We have also entered into administrative services agreements with Cascade and BSA that provide for copier and computer network services among other things. The remaining half of the facility is unutilized.

 

As a result of the divestitures of our businesses in Minnesota, we determined that ATRM will not receive economic benefit from its facility, copier and IT equipment leases at the North St. Paul location over their remaining terms, and liabilities related to these contracts should be recorded at net settlement value at April 22, 2014 (the “cease-use date”). Based on an analysis of future projected net cash flows, including costs for the facility, copiers and computer network contracts that will continue to be incurred without economic benefit to ATRM and income we expect to receive from the sublease agreements with Cascade and BSA, we determined the net settlement value of the liability related to these contracts to be $264,000 at April 22, 2014. Therefore, we recorded a charge for this amount in the quarter ended June 30, 2014. This charge is included in income (loss) from discontinued operations in our condensed consolidated statement of operations. As of September 30, 2014, the accrued facility expense amounted to $226,000, which amount is in “Other accrued liabilities” in our condensed consolidated balance sheet.

 

Condensed operating results for the test handler and RTP product lines are presented as discontinued operations in our consolidated statements of operations and are summarized below (in thousands):

 

    Three months ended
September 30,		     Nine months ended
September 30,		  
    2014     2013     2014     2013  
                         
Net sales   $ —     $ 751     $ 2,376     $ 3,142  
Costs and expenses:                                
Cost of sales     —       792       1,400       2,719  
Operating expenses     —       413       779       2,092  
Total costs and expenses     —       1,205       2,179       4,811  
Income (loss) from discontinued operations     —       (454 )     197       (1,669 )
Gain on sale of discontinued operations     —       1,021       1,128       1,021  
Income (loss) before income taxes     —       567       1,325       (648 )
Income tax expense     —       —       (464 )     —  
Income (loss) from discontinued operations   $ —     $ 567     $ 861     $ (648 )