SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
[ ] 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: 0-23081
FARO TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Florida 59-3157093
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 Technology Park Drive, Lake Mary, Florida 32746
- --------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: 407-333-9911
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 Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class: Voting Common Stock, $.001 Par Value Outstanding at November 10, 1998: 11,341,470
FARO Technologies Inc.
Index to Form 10-Q/A
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and
September 30, 1998 (restated) 3
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 1997 and 1998 (restated) 4
Consolidated Statement of Shareholders' Equity (restated) 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1998 (restated) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
This Amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1998, as filed by the Registrant on
November 10, 1998, and is being filed to reflect the restatement of the
Registrant's condensed consolidated financial statements (the "Restatement").
The Restatement reflects the revaluation of acquired in-process research and
development in connection with the acquisition of CATS on May 15, 1998.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(AS RESTATED
SEE NOTE C)
CURRENT ASSETS:
Cash and cash equivalents $ 28,815,069 $ 20,492,804
Accounts receivable, net of allowance 6,159,173 8,082,129
Inventories 4,275,376 5,843,376
Deferred taxes 126,572 126,572
Prepaid expenses 109,649 264,887
------------ ------------
Total current assets 39,485,839 34,809,768
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Machinery and equipment 1,014,309 1,745,944
Furniture and fixtures 605,913 897,091
------------ ------------
Total 1,620,222 2,643,035
Less accumulated depreciation (792,442) (1,134,065)
------------ ------------
Property and equipment, net 827,780 1,508,970
------------ ------------
INTANGIBLE ASSETS, net of accumulated amortization
of $321,261 and $1,843,616, respectively 747,979 12,910,680
DEFERRED INCOME TAXES 130,735 69,910
------------ ------------
TOTAL ASSETS $ 41,192,333 $ 49,299,328
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,196,967 $ 2,580,950
Income taxes payable 413,167 --
Customer deposits 121,358 161,001
Current portion unearned service revenues 476,802 216,600
------------ ------------
Total current liabilities 2,208,294 2,958,551
UNEARNED SERVICE REVENUES, less current portion 44,628 135,773
------------ ------------
TOTAL LIABILITIES 2,252,922 3,094,324
------------ ------------
SHAREHOLDERS' EQUITY:
Class A preferred stock - par value $.001, 10,000,000 shares
authorized, no shares issued and outstanding
Common stock - par value $.001, 50,000,000 shares
authorized, 9,919,000 and 11,005,138 issued and
outstanding, respectively 9,919 11,045
Additional paid-in-capital 36,502,004 47,523,064
Treasury stock -- (150,625)
Retained earnings (deficit) 3,018,265 (408,884)
Unearned compensation (464,480) (335,357)
Accumulated other comprehensive income:
Cumulative translation adjustments (126,297) (434,239)
------------ ------------
Total shareholders' equity 38,939,411 46,205,004
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 41,192,333 $ 49,299,328
============ ============
See accompanying notes to consolidated financial statements.
3
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
(AS RESTATED (AS RESTATED
SEE NOTE C) SEE NOTE C)
Sales $ 5,909,306 $ 4,972,182 $ 16,227,841 $ 19,376,191
Cost of sales 2,379,114 2,460,143 6,567,395 7,921,748
------------ ------------ ------------ ------------
Gross profit 3,530,192 2,512,039 9,660,446 11,454,443
Operating expenses:
Selling 1,432,265 2,870,373 3,955,236 6,665,432
General and administrative 310,082 851,532 916,517 1,967,250
Depreciation and amortization 79,023 1,038,391 204,998 1,718,729
Research and development 326,918 737,732 721,757 1,559,710
Employee stock options 813 43,041 364,959 129,123
Purchased in-process research and development -- -- -- 3,210,000
------------ ------------ ------------ ------------
Total operating expenses 2,149,101 5,541,069 6,163,467 15,250,244
------------ ------------ ------------ ------------
Income (loss) from operations 1,381,091 (3,029,030) 3,496,979 (3,795,801)
Interest income 33,010 215,766 38,841 838,545
Other income 31,941 19,391 68,754 22,145
Interest expense (43,809) (3,234) (109,660) (11,099)
------------ ------------ ------------ ------------
Income (loss) before income taxes 1,402,233 (2,797,107) 3,494,914 (2,946,210)
Income tax expense (benefit) 573,118 (56,298) 1,410,191 480,939
------------ ------------ ------------ ------------
Net income (loss) 829,115 (2,740,809) 2,084,723 (3,427,149)
Other comprehensive expense
Foreign currency translation adjustments (59,970) (103,488) (103,955) (307,942)
------------ ------------ ------------ ------------
Other comprehensive expense (59,970) (103,488) (103,955) (307,942)
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 769,145 $ (2,844,297) $ 1,980,768 $ (3,735,091)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ 0.11 $ (0.25) $ 0.29 $ (0.33)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ 0.11 $ (0.25) $ 0.28 $ (0.33)
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
COMMON STOCK ADDITIONAL CUMULATIVE
------------ PAID-IN UNEARNED TRANSLATION
SHARES AMOUNTS CAPITAL COMPENSATION ADJUSTMENT
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31,
1997 9,919,000 $ 9,919 $ 36,502,004 $ (464,480) $ (126,297)
Common stock issued in connection
with acquisition of business 916,668 917 10,394,083
Registration costs in connection with
acquisition of business (133,391)
Exercise of stock options 209,470 209 77,094
Acquisition of treasury stock (40,000)
Amortization of unearned
compensation 129,123
Tax benefit from exercise
of stock options 683,274
Currency translation
adjustment (307,942)
Net loss for period
(As restated, See Note C)
------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1998
(As restated, See Note C) 11,005,138 $ 11,045 $ 47,523,064 $ (335,357) $ (434,239)
============ ============ ============ ============ ============
RETAINED
TREASURY EARNINGS
STOCK (DEFICIT) TOTAL
------------ ------------ ------------
BALANCE, DECEMBER 31,
1997 $ -- $ 3,018,265 $ 38,939,411
Common stock issued in connection
with acquisition of business 10,623,608
Registration costs in connection with
acquisition of business (133,391)
Exercise of stock options 77,304
Acquisition of treasury stock (150,625) (150,625)
Amortization of unearned
compensation 129,123
Tax benefit from exercise
of stock options 683,274
Currency translation
adjustment (307,942)
Net loss for period
(As restated, See Note C) (3,427,149) (3,427,149)
------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1998
(As restated, See Note C) $ (150,625) $ (408,884) $ 46,205,004
============ ============ ============
See accompanying notes to consolidated financial statements.
5
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1997 1998
------------ ------------
(As restated
See Note C)
OPERATING ACTIVITIES:
Net income (loss) $ 2,084,723 $ (3,427,149)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation, amortization and other 204,998 1,829,314
In-process research and development 3,210,000
Employee stock options 364,959 129,123
Deferred income taxes (276,302) 208,578
Change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable (2,354,051) (575,203)
Inventories (448,739) (1,537,663)
Prepaid expenses (31,652) (42,878)
Increase (decrease) in:
Accounts payable and accrued liabilities (639,054) (992,933)
Income taxes payable (68,294) (196,983)
Customer deposits (70,345) 39,643
Unearned service revenues 486,239 (169,056)
------------ ------------
Net cash used in operating activities (747,518) (1,525,207)
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (350,849) (852,906)
Payments of patent costs (157,728) (65,587)
Payments of product design costs -- (485,120)
Acquisition of business, net of cash acquired ($5,618) -- (5,306,057)
------------ ------------
Net cash used in investing activities (508,577) (6,709,670)
------------ ------------
FINANCING ACTIVITIES:
Payments on debt (604,806) --
Proceeds from issuance of common stock, net 32,265,217 96,105
Acquisition of treasury stock (150,625)
------------ ------------
Net cash provided by (used in) financing activities 31,660,411 (54,520)
------------ ------------
EFFECT OF FOREIGN CURRENCY FLUCTUATIONS (103,955) (32,868)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 30,300,361 (8,322,265)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 263,342 28,815,069
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30,563,703 $ 20,492,804
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 27,181 $ 11,099
============ ============
Cash paid for income taxes $ -- $ 492,749
============ ============
Noncash financing activities:
Payables recorded in connection with initial public offering $ 419,811
Acquisition of business:
Fair value of assets acquired $ 17,677,382
Common stock issued 10,395,000
Liabilities assumed (1,614,000)
Net decrease in deferred tax assets and current tax
liability due to exercise of employee stock options $ -- $ 683,274
============ ============
See accompanying notes to consolidated financial statements.
6
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended September 30, 1997 and 1998 (restated)
NOTE A - DESCRIPTION OF ORGANIZATION AND BUSINESS
FARO Technologies, Inc. and subsidiaries (the "Company") develops,
manufactures, markets and supports Computer Aided Design (CAD)-based quality
assurance products and CAD-based inspection and statistical process control
software.
NOTE B - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all the
information and footnote disclosure required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the consolidated financial position and
operating results for the interim periods have been included. The consolidated
results of operations for the three and nine months ended September 30, 1998 are
not necessarily indicative of results that may be expected for the year ending
December 31, 1998. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the Company as
of December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997 included in the Company's Annual Report to Stockholders
included by reference within the Company's Annual Report of Form 10-K and in
conjunction with the Form S-1, as amended, dated August 7, 1998.
NOTE C - RESTATEMENT
Subsequent to the issuance of the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998, the Company's management
revised the amount of the purchase price which was allocated to in-process
research and development ("IPR&D") in accounting for the acquisition of CATS
Computer Aided Technologies, Computeranwendungen in der Fertigungssteurung, GmbH
("CATS") in May 1998 (See Note D). The revised allocation is based upon methods
prescribed in a letter from the Securities and Exchange Commission ("SEC") sent
to the American Institute of Certified Public Accountants in September 1998. The
letter sets forth the SEC's views regarding the valuation methodology to be used
in allocating a portion of the purchase price to IPR&D at the date of
acquisition.
The Company's initial calculations to value the acquired IPR&D were
based upon a methodology that focused on the after-tax cash flows attributable
to the technology on an overall basis, without regard for stage of completion of
individual projects, and the selection of an appropriate rate of return to
reflect the risk associated with the stage of completion of the technology.
The revised valuation is based on management's estimates of the net
cash flows associated with expected operations of CATS and gives explicit
consideration to the SEC's views on acquired IPR&D as set forth in its September
1998 letter to the American Institute of Certified Public Accountants. As a
result of the revised valuation, the Company's financial statements for the
quarterly period ended September 30, 1998, have been restated to reduce the
amount of acquired IPR&D by approximately $11.2 million, and to increase the
amount ascribed to other intangible assets by approximately $11.2 million.
Amortization expense has also increased by $638 thousand for the three and nine
months ended September 30, 1998.
7
A summary of the significant effects of the restatement is as follows:
AS OF
SEPTEMBER 30, 1998
----------------------------
AS
PREVIOUSLY
REPORTED AS RESTATED
------------ -----------
BALANCE SHEET DATA:
Deferred tax asset $ 526,572 $ 126,572
Intangible assets 2,330,595 12,910,680
Deferred taxes 1,269,910 69,910
Total assets 40,319,243 49,299,328
Accounts payable and accrued liabilities 2,002,764 2,580,950
Total shareholders' equity 37,803,104 46,205,004
3 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
------------ ------------- ------------- ------------
STATEMENT OF OPERATIONS DATA:
Loss from operations $ (2,390,574) $ (3,029,030) $(14,013,886) $ (3,795,801)
Income tax expense (benefit) (882,347) (56,298) (1,335,245) 480,939
Net Loss (1,276,304) (2,740,809) (11,829,050) (3,427,149)
Net Loss per common share - Basic $ (0.12) $ (0.25) $ (1.13) $ (0.33)
Net Loss per common share - Diluted $ (0.11) $ (0.25) $ (1.10) $ (0.33)
NOTE D - ACQUISITION OF CATS
On May 15, 1998, the Company acquired CATS for a total purchase price
of $16,069,000 consisting of $5.7 million in cash, 916,668 shares of common
stock and the assumption of certain outstanding liabilities of CATS. In
addition, 333,332 shares of common stock will be issued provided CATS meets
certain performance goals. The purchase price includes direct costs of the
acquisition in the amount of $674,000.
The acquisition was recorded under the purchase method of accounting and
the final allocation among tangible and intangible assets and liabilities is as
follows:
8
Tangible assets $ 1,522,000
Intangible assets:
Developed and core technology 8,940,000
Workforce in place 550,000
Customer relations 590,000
Goodwill 2,871,000
In process technology 3,210,000
Liabilities (1,614,000)
------------
$ 16,069,000
============
The valuation of development and core technology and in-process
technology was based on management's estimates of after tax net cash flows and
gives explicit consideration to the Security and Exchange Commission's ("SEC")
recent views on in-process research and development in purchase transactions. In
making the allocation of purchase price, the Company considered the present
value of cash flows and income, the status of projects, completion costs and
project risk. Specifically, the Company considered (1) the value of core
technology and ensured that the relative allocations to core technology and in
process technology were consistent with the relative contributions of each of
the final products and (2) the stage of completion of the individual projects
and ensured that the value considered only the efforts completed as of the
transaction date.
The amount allocated to in-process research and development of $3.2
million was expensed upon acquisition, as it was determined that the underlying
projects had not reached technological feasibility, had no alternative future
use and successful future development was uncertain. The operating results of
CATS have been included in the consolidated statements since the date of
acquisition.
The operating results of CATS have been included in the consolidated statements
since the date of acquisition. The following unaudited pro forma results of
operations are presented for informational purposes assuming that the Company
has acquired CATS as of January, 1 1998. The $3.2 million charge for in process
research and development has been excluded from the pro forma results as it
represents a material non recurring charge.
NINE MONTHS
ENDED
SEPTEMBER 30, 1998
------------------
Revenues $ 20,201,000
Net income (664,000)
Income per share:
Basic $ (0.06)
Diluted $ (0.06)
The pro forma results of operations have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
actually would have resulted had the acquisition occurred on the date indicated,
or which may result in the future.
Pro forma information has not been provided for comparable periods in 1997, as
the historical operations of CATS are not material to the Company's operating
results. Audited financial statements of CATS for the year ended December 31,
1997 are included as an exhibit to this Form 10-Q/A.
NOTE E - INVENTORY
Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
Raw materials $2,432,194 $2,827,648
Finished goods 804,827 983,352
Sales demonstration 1,038,355 1,438,930
---------- ----------
$4,275,376 $5,249,930
========== ==========
NOTE F - INTANGIBLE ASSETS
Goodwill represents the excess of purchase price over the fair value of
businesses acquired and is amortized on a straight line basis over 5 years.
Other acquired intangibles principally include core technology, existing product
technology, workforce in place and customer relationships that arose in
9
connection with the acquisition of CATS. Other acquired intangibles are recorded
at fair value at the date of acquisition and are amortized over their estimated
useful lives of primarily 3 to 5 years.
Product design costs incurred in the development of products after
technological feasibility is attained are capitalized and amortized using the
straight-line method over the estimated economic lives of the related products,
not to exceed 3 years. The Company considers technological feasibility to be
established when the Company has completed all planning, designing, coding and
testing activities that are necessary to establish design specifications
including function, features and technical performance requirements.
Capitalization of product design costs ceases and amortization of such costs
begins when the product is available for general release to customers.
Patents are recorded at cost. Amortization is computed using the
straight-line method over the lives of the patents, which is 17 years. Other
intangibles are amortized over periods ranging from 2 to 5 years.
NOTE G - Earnings Per Share
A reconciliation of the number of common shares used in the calculation
of basic and diluted earnings per share ("EPS") is presented below:
THREE MONTHS ENDED SEPTEMBER 30, 1997 1998
- -------------------------------------------------------------------------------------------------
PER-SHARE PER-SHARE
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------
Basic EPS
Weighted-Average Shares 7,384,923 $ .11 11,028,890 ($ .25)
Effect of Dilutive Securities
Stock Options 365,139
Diluted EPS
Weighted-Average Shares and
Assumed Conversions 7,750,062 $ .11 11,028,890 ($ .25)
NINE MONTHS ENDED SEPTEMBER 30, 1997 1998
- -------------------------------------------------------------------------------------------------
PER-SHARE PER-SHARE
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------
Basic EPS
Weighted-Average Shares 7,129,733 $ .29 10,506,189 ($ .33)
Effect of Dilutive Securities
Stock Options 350,529
Diluted EPS
Weighted-Average Shares and
Assumed Conversions 7,480,262 $ .28 10,506,189 ($ .33)
10
Note H - RECENT ACCOUNTING STANDARDS
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130).
SFAS No. 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Prior year financial statements have been restated for
comparative purposes to conform with this new standard.
11
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY, INCLUDING THE NOTES THERETO,
INCLUDED ELSEWHERE IN THIS FORM 10-Q/A, AND THE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCLUDED IN THE
COMPANY'S AMENDED QUARTERLY REPORT ON FORM 10-Q/A DATED APRIL 1, 1999.
On May 15, 1998, the Company acquired CATS Computer Aided Technologies GmbH
("CATS") for total consideration of $15,395,000, consisting of $5 million in
cash and 916,668 shares of common stock, and the assumption of certain
outstanding liabilities of CATS. In addition, 333,332 shares of common stock
will be issued provided CATS meets certain performance goals. The purchase price
includes direct costs of the acquisition in the amount of $674,000. CATS,
headquartered in Karlsruhe, Germany, develops, markets and supports 3-D
measurement retrofit and statistical process control software used in both main
frame and PC based CAD environments. The Company assumed current liabilities
totaling $1.6 million and received tangible assets of $1.5 million and
intangible assets of $16.2 million.
Subsequent to the issuance of the Company's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1998, the Company's management revised
the amount of the purchase price which was allocated to in-process research and
development ("IPR&D") in accounting for the acquisition of CATS Computer Aided
Technologies, Computeranwendungen in der Fertigungssteurung, GmbH ("CATS") in
May 1998 (See Note D). The revised allocation is based upon methods prescribed
in a letter from the Securities and Exchange Commission ("SEC") sent to the
American Institute of Certified Public Accountants in September 1998. The letter
sets forth the SEC's views regarding the valuation methodology to be used in
allocating a portion of the purchase price to IPR&D at the date of acquisition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
SALES. Sales decreased $0.9 million, or 15.3% from $5.9 million for the
three months ended September 30, 1997 to $5.0 million for three months ended
September 30, 1998. The decrease was primarily due to a 35.5% reduction in
average sale price of the Company's traditional products from $46,000 in the
third quarter of 1997 to $30,000 in the third quarter of 1998, which offset a
15.8% increase in unit sales of these products, from 114 units in the third
quarter of 1997 to 132 units in the third quarter of 1998, and the addition of
sales from CATS GmbH, which the company acquired on May 15,1998. The Company's
price reduction was related to disposal of inventory of its traditional product
line as part of a transition to a new generation product line.
GROSS PROFIT. Gross profit decreased $1.0 million, or 28.8% from $3.5
million for the three months ended September 30, 1997 to $2.5 million for the
three months ended September 30, 1998. Gross margin decreased to 50.5% for the
three months ended September 30, 1998, from 59.7% for the three months ended
September 30, 1997. The decrease in gross profit percentage was primarily
related to the unit price reduction on the Company's traditional product line as
it began transition to its new generation products.
SELLING EXPENSES. Selling expenses increased $1.4 million, or 100.4%,
from $1.4 million for the three months ended September 30, 1997 to $2.9 million
for the three months ended September 30, 1998. This increase was a result of the
Company's expansion of sales and marketing staff in the United States and
Europe, the addition of the selling expenses ($428,000) from CATS, and increased
promotion related to the Company's introduction of its new generation of
products. Excluding CATS, the number of sales and marketing employees increased
from 40 at September 30, 1997 to 60 at September 30, 1998.
12
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $541,000, or 174.6%, from $310,000 for the three months ended
September 30, 1997 to $852,000 for the three months ended September 30, 1998.
This increase was due to salaries for additional administration and accounting
employees to support the increased sales effort, the addition of general and
administrative expenses ($81,000) from CATS, and increased professional and
legal expenses related to investor relations and public company reporting
requirements. Excluding CATS, the number of administrative and accounting
employees has increased from 13 at September 30, 1997 to 25 at September 30,
1998. Five of these new employees are in network systems, and two new employees
were added to each of the accounting, total quality, and human resources
departments.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased $959,000, or 1213.9% from $79,000 for the three months ended
September 30, 1997 to $1,038,000 for the three months ended September 30, 1998.
This increase was due primarily to the amortization of the values assigned to
intangible assets in connection with the Company's acquisition of CATS on May
15, 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $411,000, or 125.7%, from $327,000 for the three months ended
September 30, 1997 to $738,000 for the three months ended September 30, 1998.
This increase was a result of the Company's continued activities associated with
the development of technologies related to new products, and research and
development costs ($260,000) from CATS.
INTEREST INCOME. Interest income is attributable to interest on the
remaining cash proceeds (approximately $20 million at September 30) from the
Company's initial public offering in 1997.
INTEREST EXPENSE. Interest expense decreased $41,000, or 92.6% from
$44,000 for the three months ended September 30, 1997 to $3,000 for the three
months ended September 30, 1998. This reduction was attributable to the
repayment of the Company's debt in September 1997 from use of proceeds from the
Company's initial public offering, and the addition of interest expense ($3,000)
from CATS.
INCOME TAX EXPENSE. Income tax expense decreased $629,000 from an
expense of $573,000 for the three months ended September 30, 1997 to a benefit
of $56,000 for the three months ended September 30, 1998 as a result of the net
loss from operations. After the Company's revision of the charge for in-process
research and development the Company prorated the incremental income tax expense
from the first quarter to the year end, and assigned it to the second and third
quarters based on relative net income before taxes, as adjusted for a valuation
allowance, the in-process research and development charge, and the resulting
changes in amortization expense.
NET INCOME. Net income decreased $3,570,000 from $829,000 for the three
months ended September 30, 1997 to a loss of $2,741,000 for the three months
ended September 30, 1998. The decrease was primarily due to a loss from
operations in the three months ended September 30, 1998 of $3.0 million. The
loss from operations is due to lower sales and lower gross margin resulting from
a decrease in average sales price of the Company's traditional products, higher
operating expenses related to the acquisition of CATS, and the expansion of the
Company's sales force.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
SALES. Sales increased $3.1 million, or 19.4% from $16.2 million for
the first nine months of 1997 to $19.4 million for the first nine months of
1998. The increase was the result of increased product sales due to an expanded
sales effort that included the addition of sales personnel at existing offices,
the opening of sales offices, and the acquisition of CATS.
GROSS PROFIT. Gross profit increased $1.8 million, or 18.6%, from $9.7
million for the first nine months of 1997 to $11.5 million for the first nine
months of 1998. Gross margin decreased from 59.5% for the first nine months of
1997 to 59.1% for the first nine months of 1998. Gross margin decreased as a
result of sales of traditional Faro products at reduced selling prices in the
third quarter, offset by higher margin software sales in the second and third
quarters.
13
SELLING EXPENSES. Selling expenses increased $2.7 million, or 68.5%,
from $4.0 million for the first nine months of 1997 to $6.7 million for the
first nine months of 1998. This increase was a result of the Company's increased
sales and promotion activities related to its expansion of sales and marketing
staff in the United States and in Europe, including CATS. Selling expenses as a
percentage of sales increased from 24.4% for the first nine months of 1997 to
34.4% for the first nine months of 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $1.1 million or 114.6% from $917,000 for the first nine
months of 1997 to $1,967,000 for the first nine months of 1998. This increase
resulted primarily from the hiring of additional administrative personnel to
support staff increases in sales and marketing and increased transactional
volume resulting from increased sales and increases in professional and legal
expenses associated with investor relations and public reporting requirements.
General and administrative expenses as a percentage of sales increased from 5.6%
for the first nine months of 1997 to 10.2% for the first nine months of 1998.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased $1,514,000, or 738.4% from $205,000 for the nine months ended
September 30, 1997 to $1,719,000 for the nine months ended September 30, 1998.
This increase was due primarily to amortization of intangible assets in
connection with the Company's acquisition of CATS on May 15, 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $838,000, or 116.1%, from $722,000 for the first nine months of 1997
to $1,560,000 for the first nine months of 1998. This increase was a result of
the Company's continued activities associated with the development of
technologies related to new products, and the addition of CATS research and
development expenses ($371,000). Research and development expenses as a
percentage of sales increased from 4.4% for the first nine months of 1997 to
8.0% for the first nine months of 1998.
IN-PROCESS RESEARCH AND DEVELOPMENT RESULTING FROM ACQUISITION.
In-process research and development resulting from the acquisition of CATS
represents the allocation of purchase price to products under development by
CATS which had not achieved technological feasibility.
EMPLOYEE STOCK OPTIONS EXPENSES. Employee stock options expenses
decreased $236,000 or 64.6% from $365,000 for the first nine months of 1997 to
$129,000 for the first nine months of 1998. The higher expense in 1997 was
primarily attributable to the grant of 52,733 options in May 1997, which was
made at an exercise price below the fair market value of the Common Stock on the
date of the grant.
INTEREST INCOME. Interest income increased $800,000 to $839,000 for the
nine months ended September 30 1998, compared to $39,000 in the nine months
ended September 30 1997. The increase was attributable to interest on the
remaining cash proceeds (approximately $20 million at September 30, 1998) from
the Company's initial public offering in 1997.
INTEREST EXPENSE. Interest expense decreased $99,000, or 89.9%, from
$110,000 for the first nine months of 1997 to $11,000 for the first nine months
of 1998. This reduction was primarily attributable to the elimination of the
Company's debt in September, 1997 from use of proceeds from the Company's
initial public offering, offset by $11,000 in interest expense paid by CATS in
the period since the acquisition.
INCOME TAX EXPENSE. Income tax expense decreased $929,000, or 65.9%,
from $1,410,000 for the first nine months of 1997 to $481,000 for the first nine
months of 1998. The income tax expense resulted from an expense of $572,000 for
the first three months of 1998, offset by tax benefits of $35,000 for the three
months ended June 30, 1998, and $56,000 for the three months ended September 30,
1998..
NET INCOME. Net income decreased $5.5 million, from $2.1 million for
the first nine months of 1997 to a loss of $3.4 million for the first nine
months of 1998. The decrease was primarily due to the $3,210,000 charge for
in-process research and development, and the increase in amortization expense
associated with the Company's acquisition of CATS on May 15, 1998.
14
LIQUIDITY AND CAPITAL RESOURCES
In September 1997, the Company completed an initial public offering of
stock which provided net cash after offering expenses, of $31.8 million.
For the nine months ended September 30, 1998, net cash used in
operating activities was $1,525,000 compared to $851,000 for the same period of
1997. Net cash used in this period increased as a result of increases in
accounts receivable ($575,000) and inventories ($1.5 million), a decrease in
accounts payable ($993,000), and a net loss of $3.4 million offset by
depreciation and amortization ($1.8 million) and in-process research and
development ($3.2 million) adjustments.
Net cash used in investing activities was $7,072,000 for the nine
months ended September 30, 1998 compared to $509,000 for the nine months ended
September 30, 1997. Net cash used in investing activities increased for the
first nine months of 1998 primarily due to the acquisition of CATS for
$5,668,000.
Net cash provided by financing activities for the nine months ended
September 30, 1998 was $307,000 compared to net cash provided by financing
activities of $31.7 million for the nine months ended September 30, 1997, as a
result of the initial public offering.
The Company has a loan agreement (the "Agreement") in the form of a
term note and a line of credit. The Agreement combines the equivalent of three
successive one-year term loans, each equal to that portion of the loan that will
be fully amortized in the ensuing year, with a line of credit equal to that
portion of the loan that will not be fully amortized in the ensuing year. The
Company had available borrowings under the Agreement totaling approximately $2
million as of September 30, 1998. Interest accrues at the 30-day commercial
paper rate plus 2.7% and is paid monthly. Borrowings under the Agreement are
collateralized by the Company's accounts and notes receivable, inventory,
property and equipment, intangible assets, and deposits. The Agreement contains
restrictive covenants, including the maintenance of certain amounts of working
capital and tangible net worth and limits on loans to related parties, and
prohibits the Company from declaring dividends. There were no outstanding
borrowings under this loan agreement at September 30, 1998.
In April 1997, the Company obtained a one-year secured $1.0 million
line of credit which bears interest at the 30-day commercial paper rate plus
2.65% per annum. The line of credit was extended in 1998 and expires on March
31, 1999. There were no outstanding borrowings under this line of credit
agreement at September 30, 1998.
The Company's principal commitments at September 30, 1998 were leases on its
headquarters and regional offices, and there were no material commitments for
capital expenditures at that date. The Company believes that its cash,
investments, cash flows from operations and funds available from its credit
facilities will be sufficient to satisfy its working capital and capital
expenditure needs at least through 1998.
NEW PRODUCT LINES
On September 1, 1998 the Company announced plans to introduce a new,
completely redesigned generation of its FAROArm products featuring higher
accuracy and reliability at lower cost than the previous generation. The Company
expected to replace the previous Bronze and Silver Series product lines with two
new product lines: the Sterling Series and the Gold Series. Based on customer
demand since the new product announcement, the Company has elected to retain the
Silver Series product line, and position it between the lower priced Sterling
Series and higher priced Gold Series lines.
To clear the way for the new product lines, the Company has sold for the
quarter ended September 30, and will continue to sell for the fourth quarter its
Bronze Series products at discount to reduce inventory. The Company will also
continue to sell the Silver Series product line at discount to traditional price
levels, to fit between the new Sterling and Gold Product lines. The Company
plans to offset Silver Series product
15
gross margin reductions from lower selling price by applying cost saving
features of the new product lines to the Silver Series. This is expected to be
complete for Silver Series products shipped in the second quarter of 1999.
The Company expects certain delays in shipments of Sterling and Gold Series
products to customers, as a result of converting its production to the new
product lines, and until it has completely supplied models of these new products
to its sales force for demonstration. This is expected to be complete by
December 31, 1998.
The Company expects the transition from the previous product lines to the
new product lines to have material negative impact on the Company's results of
operations until the third quarter of 1999.
FOREIGN EXCHANGE EXPOSURE
Sales outside the United States represent a significant portion of the
Company's total revenues. Currently, the majority of the Company's revenues and
expenses are invoiced and paid in U.S. dollars. In the future, the Company
expects a greater portion of its revenues to be denominated in foreign
currencies. Fluctuations in exchange rates between the U.S. dollar and such
foreign currencies may have a material adverse effect on the Company's business,
results of operation and financial condition, particularly its operating
margins, and could also result in exchange losses. The impact of future exchange
rate fluctuations on the results of the Company's operations cannot be
accurately predicted. Historically, the Company has not managed the risks
associated with fluctuations in exchange rates but intends to undertake
transactions to manage such risks in the future. To the extent that the
percentage of the Company's non-U.S. dollar revenues derived from international
sales increases in the future, the risks associated with fluctuations in foreign
exchange rates will increase. The Company may use forward foreign exchange
contracts with foreign currency options to hedge these risks.
IMPACT OF YEAR 2000
The Company has invested significant resources in the latest
information technologies over the past five years and therefore has minimized
the effect of Year 2000 issues. Management initiated a program to evaluate all
internal computer systems and applications, and products with computer systems
and determined the adjustments necessary to become Year 2000 compliant.
Management is confident that existing internal resources are sufficient to
correct any internal systems deficiencies that have or may be determined. The
Company has set a target date of September 30, 1999 for complete compliance of
internal computer systems, applications, and products. The Company has also made
inquiries of its major suppliers, customers and other third-party entities with
which it has business relations to obtain assurances of their Year 2000
compliance. However, there can be no assurance that the systems of other
companies on which the Company relies will be timely corrected, or that any
failure by another company to correct such systems would not have a material
adverse effect on the Company. Contingency plans are currently being developed
to be implemented in the event any information technology system,
non-information technology system, third party or supplier is not Year 2000
compliant in a timely manner.
The total cost to the Company of these Year 2000 Compliance activities
has not been and is not anticipated to be material to its financial position or
results of operations in a given year. The Company has a provision of $12,500
per quarter in 1999 to cover the cost of any unexpected corrections to any
internal systems or product deficiencies. These costs are based on Management's
best estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third party
modification plans, and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ from those
plans.
16
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of the Company's registration statement filed under
the Securities Act in connection with its initial public offering was September
17, 1997.
From the effective date of such registration statement to September 30, 1998
none of the net proceeds from the Company's initial public offering were used
for construction of plant, building and facilities; purchase and installation of
machinery and equipment or the purchase of real estate. The Company used $5
million of such net proceeds to acquire CATS and $3 million as working capital.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
27.1.1 Financial Data Schedule (for SEC use only)
99.1 Financial Statements of CATS GmbH for the
two years in the period ended December 31,
1997.
b) Reports on Form 8-K
None
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March__, 1999 FARO TECHNOLOGIES, INC.
(Registrant)
By: /s/ Gregory A. Fraser
---------------------
Gregory A. Fraser
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial
Officer)
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of CATS computer
aided technologies, Computeranwendungen in der Fertigungssteuerung GmbH,
Karlsruhe, as of December 31, 1997 and 1996, and the related statements of
income and cash flows for each of the two years in the period ended December 31,
1997. 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 generally accepted
auditing standards in the United States of America and Germany. 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 financial statements present fairly, in all
material respects, the financial position of CATS computer aided technologies,
Computeranwendungen in der Fertigungssteuerung GmbH, Karlsruhe, as of December
31, 1997 and 1996, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles in the United States of America.
Deloitte & Touche GmbH
Wirtschaftsprufungsgesellschaft
/s/ Dr. KAMM /s/ KOMPENHANS
(Dr. Kamm) (Kompenhans)
Wirtschafsprufer Wirtschaftsprufer
Mannheim, May 26, 1998
Kom/Pf
CATS COMPUTER AIDED TECHNOLOGIES,
COMPUTERANWENDUNGEN IN DER FERTIGUNGSSTEUERUNG GMBH
BALANCE SHEETS
DECEMBER 31,
1997 1996
----- -----
(in thousands of DM)
ASSETS
Current Assets
Cash and cash equivalents ......................... 5 6
Accounts receivable ............................... 2,154 569
(net of allowance for doubtful accounts of
DM 21 in 1997 and DM 6 in 1996)
Inventories ....................................... 54 32
Other current assets and prepaid expenses .........
Deferred tax assets ............................... 154 34
----- -----
2,367 641
EDP equipment and office furniture (net) ............. 360 96
Long-term receivables from related parties ........... 328 143
----- -----
3,055 880
===== =====
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities
Liabilities to banks .............................. 1,092 121
Accounts payable .................................. 1,227 260
Other liabilities and other accruals .............. 534 433
Deferred tax liabilities .......................... 56 8
----- -----
2,909 822
Stockholders' Equity
Registered capital ................................ 50 50
Retained earnings ................................. 96 8
----- -----
146 58
----- -----
3,055 880
===== =====
See Notes to the Financial Statements.
CATS COMPUTER AIDED TECHNOLOGIES,
COMPUTERANWENDUNGEN IN DER FERTIGUNGSSTEUERUNG GMBH
STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DM)
YEARS ENDED
DECEMBER 31,
----------------
1997 1996
----- -----
Net sales ....................... 5,711 3,116
Cost of sales ................... 1,718 928
----- -----
Gross profit .................... 3,993 2,188
Selling and administrative ...... 2,069 1,439
Research and development ........ 1,669 712
----- -----
Income from operations .......... 255 37
Net interest ............ 40 21
----- -----
Income before income taxes ...... 215 16
Income taxe expense ............. 127 13
----- -----
Net income .............. 88 3
===== =====
See Notes to the Financial Statements.
CATS COMPUTER AIDED TECHNOLOGIES,
COMPUTERANWENDUNGEN IN DER FERTIGUNGSSTEUERUNG GMBH
STATEMENTS OF CASH FLOW
YEARS ENDED
DECEMBER 31,
------------------
1997 1996
------ ------
Operating activities
Net income ............................................ 68 3
Adjustments to reconcile net income to
cash (used by) provided by
operating activities
Deferred income taxes ............................... 48 (7)
Depreciation ........................................ 92 62
Changes in assets and liabilities that
provided (used) cash
Inventories ......................................... (22) (31)
Accounts payable and accrued charges ................ 1,068 274
Accounts receivable and other assets ................ (1,890) (257)
------ ------
Cash (used) provided by operating activities ........... (616) 44
------ ------
Investing activities
Purchase of EDP-equipment and office furniture ...... (356) (84)
------ ------
Cash provided by (used in) investing activities ........ (356) (84)
Financing activities
Increase of bank liabilities, net ...................... 971 44
------ ------
Cash provided by financing activities .................. 971 44
------ ------
Net change in cash and cash equivalents ................ (1) 4
Cash and cash equivalents, beginning of year ........... 6 2
------ ------
Cash and cash equivalents, end of year ................. 5 6
====== ======
See Notes to the Financial Statements.
CATS
COMPUTER AIDED TECHNOLOGIES, COMPUTERANWENDUNGEN
IN DER FERTIGUNGSSTEUERUNG GMBH
NOTES TO THE FINANCIAL STATEMENTS
(DEUTSCHE MARK IN THOUSANDS)
1. DESCRIPTION OF BUSINESS
CATS computer aided technologies, Computeranwendungen in der
Fertigungssteuerung GmbH ("CATS") is engaged in the production and marketing of
software and computer applications used in managing and controlling computer
integrated manufacturing applications as well as in the related training.
Offered are modules for CAD/CAM-technologies (computer aided design, computer
aided manufacturing), CAQ-technologies (computer aided quality control) and
manufacturing, planning and control systems. Workstations can be delivered ready
for operation including hardware, software and other services.
The company operates in one segment providing customer oriented
development of overall concepts relating to computer aided manufacturing in
Germany. The main customers are large German car manufacturers and component
suppliers for the car industry.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The company's accounting policies are in accordance with accounting
policies generally accepted in the United States of America. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
the revenue and expenses during the reporting period. Actual results could
differ from those estimates. The following policies are considered to be
significant.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and amounts on
deposit with financial institutions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The company's financial instruments include cash and cash
equivalents, accounts receivable, accounts payable and liabilities to banks. The
carrying amounts of the financial instruments approximate their fair value
because of their short term maturities.
INVENTORIES
NOTES TO THE FINANCIAL STATEMENTS --(CONTINUED)
Inventories include raw materials and are stated at the lower of
average cost or market.
EDP-EQUIPMENT AND OFFICE FURNITURE
Property, plant and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the various classes of assets as follows:
Office furniture .........................5 - 10 years
EDP-equipment ............................3 - 4 years
CATS COMPUTER AIDED TECHNOLOGIES, COMPUTERANWENDUNGEN
IN DER FERTIGUNGSSTEUERUNG GMBH
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs incurred in the discovery of new
knowledge and the resulting translation of this knowledge into plans and new
products, prior to the attainment of the related products' feasibility, are
recorded as expenses in the period incurred.
Costs incurred in the development of products, after technological
feasibility is attained, are principally to be capitalized and amortized over
the estimated economic lives of the related products. According to the
assessment of the management the company's products have an economic life of
less than one year, due to the fast rate of technological development. As a
result, all product design costs are charged to income.
REVENUE RECOGNITION
The company recognizes revenue at the date of shipment.
INCOME TAXES
Income taxes have been provided for in accordance with the asset and
liability methodology of Statement for Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). Under SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
EARNINGS PER SHARE
Earnings per share are not calculated because the company has two
shareholders with ownership of 50% each.
3. OTHER CURRENT ASSETS AND PREPAID EXPENSES
The balances were as follows:
1997 1996
---- ----
(DM) (DM)
Tax receivables......................................... 108 0
Receivables from employees.............................. 33 18
Prepaid expenses........................................ 2 10
Other .................................................. 11 6
--- ---
154 34
=== ===
CATS
COMPUTER AIDED TECHNOLOGIES, COMPUTERANWENDUNGEN
IN DER FERTIGUNGSSTEUERUNG GMBH
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
4. EDP-EQUIPMENT AND OFFICE FURNITURE
Cost and accumulated depreciation were as follows:
1997 1996
---- ----
(DM) (DM)
EDP -equipment and office furniture......................... 613 257
Less accumulated depreciation............................... 253 161
--- ---
360 96
=== ===
5. LONG-TERM RECEIVABLES FROM RELATED PARTIES
1997 1996
---- ----
(DM) (DM)
Argus Q GmbH, Germany (former AC-Tech GmbH)................. 215 143
Antares Ltd., Portugal...................................... 113 0
--- ----
328 143
=== ===
- -------------------------
The receivables from Argus Q GmbH and Antares Ltd. have a residual term in
excess of one year. They are bearing interest with a rate of 4.5%.
6. LIABILITIES TO BANKS
The average interest rate of the short-term borrowings outstanding at
year-end was approx. 10.0%.
Cash payment for interest amounted to DM 37 in 1997 and DM 25 in 1996.
The bank loans are secured by guarantees given by the company's shareholders.
Furthermore, accounts receivable and the company's telephone system serve as
collateral.
There are no significant credit lines available in addition to the drawings on
short-term credit lines shown on the balance sheet.
7. OTHER LIABILITIES AND OTHER ACCRUALS
The balances were as follows:
1997 1996
---- ----
(DM) (DM)
Accrued warranty expenses................................... 57 31
Accrued vacation expenses................................... 112 89
Other accruals.............................................. 143 14
Payables to related parties................................. 52 43
Withholding tax liability................................... 126 199
Other liabilities........................................... 44 57
--- ---
534 433
8. LEASE COMMITMENTS
The Company has operating lease agreements for the rental of cars
and office space. Expenses for operating leases were DM 289 in 1997 and DM 124
in 1996 respectively.
CATS
COMPUTER AIDED TECHNOLOGIES, COMPUTERANWENDUNGEN
IN DER FERTIGUNGSSTEUERUNG GMBH
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments, which have initial or remaining non
cancelable terms in excess of one year at December 31, 1997, were as follows:
(DM)
1998.................................................................... 337
1999.................................................................... 327
2000.................................................................... 256
2001.................................................................... 70
2002.................................................................... 35
------
1,025
9. SHAREHOLDERS' EQUITY
The registered capital of the Company is DM 50, which has been paid
in by the company's two shareholders. Such ownership shares are not negotiable.
The following table presents the changes in retained earnings for
the period from January 1, 1996, to December 31, 1997:
(DM)
Balance - January 1, 1996............................................... 5
Net Income 1996....................................................... 3
-
Balance - December 31, 1996............................................. 8
Net Income 1997....................................................... 88
--
Balance - December 31, 1997............................................. 96
--
10. INCOME TAXES
The components of income taxes are as follows:
1997 1996
---- ----
(DM) (DM)
Current Taxes............................................... 79 20
Deferred Taxes.............................................. 48 (7)
--- ---
127 13
=== ==
The provision for income taxes differed from the statutory rate
(45%) for the following reasons:
1997 1996
---- ----
(DM) (DM)
Corporate income tax at statutory rate...................... 99 8
Municipal trade tax, net of corporation income tax effect... 18 1
Corporate income tax surcharge.............................. 7 0
Non-deductible expenses..................................... 5 3
Other ...................................................... (2) 1
--- --
127 13
Corporate income taxes and municipal trade taxes paid amounted to DM
206 in 1997 and DM 0 in 1996.
The components of the recorded deferred tax liabilities are:
1997 1996
---- ----
(DM) (DM)
Accounts receivable and other current assets................ 10 (28)
Accounts payable and accrued changes........................ 46 36
-- --
56 8
11. RELATED PARTY TRANSACTIONS
The company's operations include transactions with companies that
are owned by the stockholders of CATS GmbH. The material transactions are as
follows:
1997 1996
---- ----
(DM) (DM)
Argus Q GmbH, Germany
Net sales................................................. 320 0
Antares Ltd., Portugal
Net sales................................................. 533 0
Purchased Services......................................... 537 0
Antares Ltd. is developing software for the company. The business
of Argus Q GmbH is the quality control for the automotive and aircraft
industry.
Amounts due from these companies are included in trade accounts
receivable.
The balances outstanding were:
1997 1996
---- ----
(DM) (DM)
Argus Q GmbH, Germany ...................................... 368 0
Antares Ltd., Portugal...................................... 533 0
Long-term receivables from related parties:
1997 1996
---- ----
(DM) (DM)
Argus Q GmbH, Germany 215 143
Antares Ltd., Portugal 113 0
--- ---
328 143
=== ===
The accounts payable include liabilities to related parties.
1997 1996
---- ----
(DM) (DM)
Argus Q GmbH, Germany 280 0
Antares Ltd., Portugal 537 0
The short term payables to related parties include the advance accounts of the
stockholders.