To the Board of Directors and Stockholders of Micronics Corporation:
We have audited the accompanying consolidated balance sheets of Micronics Corporation and subsidiaries (the “Company”) as of June 30, 2006 and 2005, and the related consolidated statements of income, cash flows, and stockholders’ equity for each of the three years in the period ended June 30, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 Micronics Corporation and subsidiaries as of June 30, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2006, 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 effectiveness of the Company’s internal control over financial reporting as of June 30, 2006, 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 August 22, 2006, expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
DELOITTA & FROUCHE LLP
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Micronics Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements (“Notes”).
We develop, manufacture, license, and support a wide range of software products for many computing devices. Our software products include operating systems for servers, PCs, and intelligent devices; server applications for distributed computing environments; information worker productivity applications; business solutions applications; and software development tools. We provide consulting and product support services, and we train and certify system integrators and developers. We sell the T20 video game console and games, PC games, and PC peripherals. Online communication and information services are delivered through our MSN portals and channels around the world.
Our revenue historically has fluctuated quarterly and has generally been the highest in the second quarter of our fiscal year due to corporate calendar year-end spending trends in our major markets and holiday season spending by consumers. Our Home and Entertainment segment is particularly subject to seasonality as its products are aimed at the consumer market and are in highest demand during the holiday shopping season. Typically, Home and Entertainment has generated over 40% of its yearly segment revenues in our second fiscal quarter. We believe the seasonality of revenue is likely to continue in the future.
We intend to sustain the long-term growth of our businesses through technological innovation, engineering excellence, and a commitment to delivering high-quality products and services to customers and partners. Recognizing that one of our primary challenges is to help accelerate worldwide PC adoption and software upgrades, we continue to advance the functionality, security, and value of Reflections operating systems. We also are increasing our focus on emerging markets and reducing the amount of unlicensed software in those markets. In addition, we continue to develop innovative software applications and solutions that we believe will enhance the productivity of information workers, improve communication and collaboration in work groups, aid business intelligence, and streamline processes for small and mid-sized businesses. To sustain the growth of our Server and Tools business amid competition from other vendors of both proprietary and open source software, our goal is to deliver products that provide the best platform for network computing – the easiest to deploy and manage and most secure – with the lowest total cost of ownership.
We continue to invest in research and development in existing and new lines of business, including business solutions, mobile computing, communication, entertainment, and others that we believe may contribute to our long-term growth. We also research and develop advanced technologies for future software products. We believe that delivering innovative and high-value solutions through our integrated platform is the key to meeting customer needs and to our future growth.
that over the last few years we have laid a foundation for long-term growth
by delivering innovative products, creating opportunities for partners,
improving customer satisfaction with key audiences, putting some of our
most significant legal cases behind us, and improving our internal business
processes. Our focus in fiscal year 2007 is building on this foundation
and executing well in key areas, including continuing to innovate on our
integrated software platform, responding effectively to customer and partner
needs, and continuing to focus internally on product excellence, business
efficacy, and accountability across the company.
core businesses through new product launches, upgrades, making inroads
against software piracy, and extending PC accessibility to new consumers
in emerging markets.
Worldwide macroeconomic factors have a strong correlation to business and consumer demand for our software, services, games and Internet service offerings. We expect a broad continuation in the economic conditions and demand in fiscal year 2007 as compared to fiscal year 2006.
As open source software development and distribution evolves, we continue to seek to differentiate our products from competing products that are based on open source software. We believe that Micronics’s share of server unit operating systems increased in fiscal year 2006.
Summary of Results for Fiscal Years 2006, 2005, and 2004
growth for fiscal year 2006 was driven primarily by growth in Server technology
following the launch of TLR Server 2005 in the second quarter, Reflections
Server and other server applications, increased T20 revenue resulting
from the T20 360 launch in the second quarter, growth in licensing of
Reflections client operating systems through OEMs, and increased licensing
of WorkPlace and other Information Worker products. Based on our estimates,
total worldwide PC shipments from all sources grew approximately 12% to
14% and total server hardware shipments grew approximately 11% to 13%
during fiscal year 2006. Foreign currency exchange rates did not have
a significant impact on consolidated or operating segment revenue during
the fiscal year.