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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NO. 0-9247
AUTO-TROL TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COLORADO 84-0515221
(STATE OF INCORPORATION) (IRS EMPLOYER
IDENTIFICATION NUMBER)
------------------------
12500 NORTH WASHINGTON, DENVER, COLORADO 80241-2400
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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AREA CODE (303) 452-4919
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.02 PAR VALUE
(TITLE OF CLASS)
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 ninety days.
Yes [X] No [_]
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 registrant's 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. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 10, 1996, was $23,197,335 based on the closing sale
price on such date. The aggregate number of shares of common stock outstanding
on December 10, 1996, was 7,732,445.
Document Incorporated by Reference: Proxy Statement and Notice of Annual
Meeting of Shareholders to be held on January 28, 1997: Part III - Items 10, 11,
12, and 13.
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AUTO-TROL TECHNOLOGY CORPORATION
REPORT ON FORM 10-K
FOR THE YEAR ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
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PART I Page
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Item 1. Business....................................... 1
Item 2. Properties..................................... 4
Item 3. Legal Proceedings.............................. 5
Item 4. Submission of Matters to a Vote of Security
Holders........................................ 5
PART II
Item 5. Market for the Registrant's Common Equity
and Related Shareholder Matters................ 6
Item 6. Selected Financial Data......................... 6
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 7
Item 8. Financial Statements and Supplementary Data..... 12
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure..................................... 24
PART III
Item 10. Directors and Executive Officers of the
Registrant..................................... 24
Item 11. Executive Compensation.......................... 24
Item 12. Security Ownership of Certain Beneficial
Owners and Management.......................... 24
Item 13. Certain Relationships and Related
Transactions................................... 24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................ 25
Signatures.................................................. 29
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ITEM 1. BUSINESS
GENERAL
Auto-trol Technology Corporation and its wholly-owned subsidiaries (referred to
hereafter as "Auto-trol" or the "Company") develop, integrate, market, sell, and
support its products and the products of certain third-party vendors for end
user markets involved in: product data management, physical network management,
mapping, technical illustration, and engineering. Historically, the Company
sold proprietary hardware products and Manufacturing Computer Aided Design
(MCAD) Software. Both the competitive pressures and market maturity in the MCAD
marketplace and reduced margins on hardware products have caused the Company to
sell less MCAD software and hardware to its customers than in past years. The
Company continues to shift the sales and support focus from hardware to
internally developed software and systems integration. The Company will
continue to sell hardware primarily as part of a total systems solution. Auto-
trol believes that by offering customers a broad spectrum of applications and
options from analysis through implementation and ongoing support, the Company is
able to develop long-term relationships with its customers and expand into new
markets. The Company's business is not seasonal in nature nor is the Company
dependent on any single individual customer. On June 30, 1995, AT Development,
Inc., a wholly owned subsidiary of Auto-trol Technology Corporation, acquired a
100% interest in Metaware, Inc. doing business as Centra 2000, Inc. During
September 1996, the Company announced that it had ceased development work on its
Mozaic suite of applications.
PRODUCTS
CENTRA 2000(TM)
The CENTRA 2000 system is a product data management, document management and
workflow system specifically designed to solve the complex problems facing
engineering, manufacturing, technical publishing, petrochemical and other
operations. The product is intended for scaleable implementation from the work
group to the entire enterprise. In addition to traditional Product Data
Management (PDM) functions, the CENTRA 2000 product manages pure data
environments, audio/video and large document assemblies. The product is
designed to fit a customer's environment with a general focus to automate
configuration management and project management, as well as processes integrated
with a customer's hardware and business systems, rules and procedures. The core
CENTRA 2000 technology was used to develop the NASA Electronic Library System
(NELS), which serves as a solution for configuration management of technical
documentation and programming source code. CENTRA 2000 technology was also used
to map and track the parts list for the space station.
KONFIG(TM)
The KONFIG product is advanced software for physical network, cable/wire, and
asset management of data, voice or video networks. The KONFIG software stores
and models the entire network infrastructure in ORACLE(R)'s relational database
management system (RDBMS), including both active elements such as workstations,
hubs, routers, and switches, along with passive elements such as cables,
connectors, distribution frames, and patch panels. The spatial location,
topological information, connectivity, and non-graphic attributes of each
network object are stored in the ORACLE RDBMS. A detailed graphical
representation of the network can be automatically generated from the database
and overlayed on a facility drawing. Auto-trol's powerful Series 5000(TM)
graphic engine is used to generate graphic views of the network as well as
create and modify the facility drawings. The KONFIG Network Manager product
provides integration with industry-leading network management tools.
SERIES 5000(TM)
The series 5000 product is a graphics design platform consisting of graphics
tools, macro languages and a relational database query language that allows
engineers and designers to create, visualize and document their designs. As
Auto-trol's flagship product for more than a dozen years, the Series 5000
product is used primarily in the architectural, engineering and construction
fields. The Series 5000 product has a set of accompanying products such as data
converters, plotter drivers and application specific tools.
SERIES 7000(TM)
The Series 7000 system is a suite of graphics products used to design and
document mechanical parts and assemblies. Manufacturing companies are
traditionally the largest users of the Series 7000 system. Applications such as
three-dimensional (3D) part design, the creation of numerical control machining
programs, and the engineering analysis of mechanical parts and assemblies are
examples of how Auto-trol customers use the series 7000 system.
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TECH ILLUSTRATOR(TM)
Auto-trol's Electronic Publishing Solutions (EPS) product line, comprised of a
suite of application and converter products, embodies a standards-based solution
set that augments illustration productivity "off-the-shelf". The EPS product
line enables compliance with important military and commercial standards that
affect contemporary publishing operations. Auto-trol's solution provides access
to a wide variety of reference material ranging from legacy hard copy and
electronic archives to current digital 3D design data, for direct use in
creating illustration views. The EPS product line provides the added advantage
of being easily and extensively customized to adhere to end user requirements.
GEOSTATION(R) GIS
The Geostation product is an integrated exploration data management and mapping
solution that allows for visualization of complex data. This product is used as
a subsurface exploration tool in oil and gas exploration and for assessment of
mineral rights associated with land. Geostation software is also used in the
mapping and cartography industry.
Approximately 26%, 23% and 25% of total revenue was comprised of software sales
for the years ended September 30, 1996, 1995 and 1994 respectively.
HARDWARE
Auto-trol helps its customers configure hardware to be integrated with Auto-trol
proprietary and third-party software. The Company integrates hardware from
suppliers including hewlett packard company (HP) and Sun Microsystems, inc.
(Sun). For further information see subheading "Sources of Supply" under Item 1.
The company, in fiscal year 1994, had limited development of hardware products
to ancillary products that complement third-party vendor hardware.
Approximately 17%, 19% and 21% of total revenue was comprised of hardware sales
for the years ended September 30, 1996, 1995 and 1994 respectively.
CUSTOMER SUPPORT
CONSULTING SERVICES
Auto-trol offers consulting services that include software and hardware needs
assessments, system configuration and implementation of its products, third
party product integration and system customization. Additionally, Auto-trol can
develop custom software or modify its existing software products to solve
specific customer needs. These services are sold in conjunction with product
sales and have standard rates. Occasionally, Auto-trol will develop custom
software or modify existing software products. Approximately 10%, 8%, and 9% of
total revenue was comprised of consulting service revenue for the years ended
September 30, 1996, 1995 and 1994, respectively.
EDUCATIONAL SERVICES
Auto-trol provides comprehensive product training programs for all of the
Company's applications. Additionally, Auto-trol provides certified HP and Sun
training and offers a wide range of courses both domestically and
internationally. Approximately 8%, 7%, and 5% of total revenue was comprised of
educational service revenue for the years ended September 30, 1996, 1995 and
1994, respectively.
NATIONAL TECHNICAL SUPPORT
Auto-trol believes that the quality of customer support is an important factor
in helping the customer to attain and maintain productivity levels and its
related return on investment in Auto-trol products. Post-sale customer support
services are provided on a time and materials basis or under warranties and
service contracts. Approximately 15% of Auto-trol's employees are engaged in
post-sales support functions. A technical staff offers software support
services for most problems. Field and applications engineers provide customer
support for repair service and preventative maintenance for hardware, and in
some cases, support for software applications. Approximately 39%, 43% and 41%
of total revenue was comprised of customer support revenue for the years ended
September 30, 1996, 1995 and 1994, respectively.
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RESEARCH AND PRODUCT DEVELOPMENT
Approximately 36% of Auto-trol's employees are engaged in research and product
development activities. The Company has and will continue significant
investment in product development and enhancement due to rapidly changing
technology, competitive pressures, and customer demands. During September 1996,
the Company announced that it had ceased development work on its Mozaic suite of
applications. The decision was prompted by competitive pressures and to focus
the Company's development and marketing efforts on its other products. The
expenditures from 1994 through 1996 were as follows:
YEAR ENDED SEPTEMBER 30,
--------------------------------
1996 1995 1994
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(in thousands)
Mozaic research and product development
expense................................ $3,274 $3,762 $2,984
Mozaic percent of total revenues........ 15% 15% 9%
Research and product development expense $9,176 $8,834 $7,908
Percent of total revenues............... 43% 35% 23%
MARKETING
Auto-trol's customers are chiefly from the petroleum, pharmaceutical, chemical,
manufacturing, engineering, and public utility industries. Governmental
customers include federal, state and municipal agencies. The Company markets
and sells its products and services directly to end users in the United States
from its eleven Domestic sales offices. The Company markets its products in
Europe through wholly owned subsidiaries with offices located in Germany,
Sweden, and the United Kingdom. Additionally, the Company markets its products
in Canada through Auto-trol Technology (Canada) Ltd., a wholly owned subsidiary,
and in Australia through a Company sales office. Export sales to South America
and the Pacific Rim countries are handled by independent distributors. The
Company ships product to its distributors after the sale has been negotiated
with the end customer. The Company does not grant rights to the distributor to
return products for other merchandise, credit, or refund.
The following table states the revenue comprised of foreign sales for the last
three fiscal years. For additional financial information about foreign or
domestic operations and export sales, see Note 8 of "Notes to the Consolidated
Financial Statements."
YEAR ENDED SEPTEMBER 30,
--------------------------------
1996 1995 1994
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(in thousands)
Foreign total revenues.................. $11,034 $14,287 $16,245
Percent of total revenues............... 53% 56% 46%
Customers may purchase hardware and software systems with related services, or
they may purchase software and services independently. The Company maintains
standard pricing structures for hardware and software products. Pricing of
customer service contracts is determined based on customer needs. As is
customary in the industry, the Company licenses its software and sublicenses
third-party software to protect the ownership of such software. The Company's
Software License Agreement provides for a transfer of the product, but limits
disclosure of the software to third parties. Auto-trol offers a 90 day warranty
on its software products. Auto-trol will administer and recognize vendor
warranties of third-party software products. Payment terms are generally net 30
upon receipt of invoice.
Due to the competitive pressures in the software industry, the Company strives
to minimize the time that elapses from the approval of purchase orders to the
date of shipment of the product. Therefore, the Company routinely ships
software products to its customers within twenty-four hours after approval of
the order. Shipment of hardware products is dependent on vendor supply as the
Company does not maintain a large inventory.
The Company's backlog at the end of a quarter only represents a portion of
future sales and should not be used solely to predict future results. Orders in
backlog may be canceled but are subject to a cancellation fee. The Company's
recorded backlog was approximately $1.7 million as of September 30, 1996,
compared to $1.2 million as of September 30, 1995.
COMPETITION
Within the Product Data Management market, the Company's primary competitors are
Sherpa Corporation, Documentum, Structural Dynamic Research Company (SDRC) and
Adra. Intergraph Inc. is a competitor in the process industry and technical
illustration market. Cambio Networks, Inc. and Accugraph Corporation are the
primary competitors in the physical electronic network market. The Company
believes that its products in the design, drafting,
3
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and product and network management markets, uniquely leverage the Company's core
competencies in the engineering graphics and documentation areas to provide a
total solution to the customer.
Auto-trol competes primarily on the basis of quality and technical expertise.
The Company believes the functionality of its applications products, technical
support, and responsiveness to customer needs enhances its competitive position.
The Company believes that, although price is a competitive factor, customers
consider product functionality, ease of implementation, and user friendliness to
be of greater importance when selecting a vendor's product.
SOURCES OF SUPPLY
Many of the parts and components used by the Company are available from several
sources, although the Company currently purchases certain key components from
single suppliers. The Company has agreements with Sun and HP for their hardware
platforms. The Company believes relations with its suppliers are good and does
not anticipate difficulty in receiving equipment as scheduled. The Company's
operations would be adversely affected if it experienced significant delays in
delivery from suppliers. Additionally, if production of one or more vendor's
computer products was wholly discontinued, operations would be negatively
impacted as this would require software modifications in the Company's graphics
systems.
The agreement in place with HP is dated July, 1994. This agreement renews
annually and is currently effective through September 1997. Pursuant to that
agreement, HP provides certain hardware equipment at various discounts. This
equipment must be used with systems developed by Auto-trol, in the country where
the equipment is purchased. This agreement is international in scope.
The agreement in place with Sun is dated April 30, 1993. This agreement renews
annually and is currently effective until September 1997. Pursuant to that
agreement, Sun provides certain hardware equipment to Auto-trol at discounts
based upon volume with special discounts for certain equipment. This equipment
is to be used with systems developed by Auto-trol, in the country where the
equipment is purchased. This agreement is international in scope, and provides
for marketing cooperation.
Auto-trol also buys other components and devices such as magnetic disk and tape
drives, keyboards and printers from single sources. Alternate sources for these
items are generally available and loss of a particular supplier would not have a
material effect on the Company's operations.
PATENTS AND LICENSES
The Company holds five patents, issued in the United States, and one patent in
each of Canada, Australia and Taiwan for license management methods. Generally,
the Company seeks to protect aspects of its systems through trade secret
protection. The Company's standard Software License Agreement prohibits the
customer from disclosing any confidential or proprietary information. Included
in the Company's purchase of vendor equipment is the right to resell and
sublicense systems software licenses under Auto-trol's standard Software License
Agreement.
The Company is also licensed to use and sublicense a limited number of graphics
and applications programs developed by others. The Company does not believe
that the manufacture and sales of its products require additional licenses from
others. If such licenses were required, the Company believes that it would not
have a materially adverse financial impact on operations.
EMPLOYEES
The Company has no collective bargaining agreements and there have been no work
stoppages due to labor difficulties. The Company believes that relations with
its employees are good. As of September 30, 1996, Auto-trol had 325 employees
which includes 117 in research and development, 48 in customer support, 59 in
administrative support, 84 in sales and support, and 17 in marketing.
ITEM 2. PROPERTIES
The Company's 127,000 square foot corporate headquarters facility is located on
a 20-acre site about 15 miles North of downtown Denver, Colorado, in the city of
Thornton. Financing for this facility was obtained primarily through the
issuance of $6 million of Industrial Development Revenue Bonds, Series 1979, by
the City of Thornton, Colorado, which mature through 2004.
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The Company also leases approximately 27,000 square feet of office space
throughout the United States, approximately 25,000 square feet in Canada, and
approximately 21,000 square feet in Europe.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings before any
court, administrative agency or other tribunal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's common stock is traded on the NASDAQ SmallCap Market System under
the symbol ATTC. The following table sets forth the range of high and low
closing sale prices in the NASDAQ National Market System and the National
SmallCap Market System for the common stock for the fiscal quarters indicated,
as reported by NASDAQ. (Restated to reflect the one-for-ten reverse stock split
effective January 30,1996.)
FISCAL FISCAL
1996 1995
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HIGH LOW HIGH LOW
--------- --------- --------- ---------
First Quarter..... $11-/2/3/ $5 $15 $7-/1/2/
Second Quarter.... 6-/7/8/ 3-/1/2/ 15 7-/1/2/
Third Quarter..... 8 1 12-/1/2/ 6-/1/4/
Fourth Quarter.... 6-/1/4/ 3 12-/1/2/ 6-/1/4/
As of December 10, 1996, there were 7,732,445 holders of record of the Company's
common stock. The Company has never paid or declared any dividends on its
common stock. The indenture to the Industrial Development Revenue Bonds
restricts the payment of dividends to the amount of $2,000,000 minus 100% of the
accumulated deficit subsequent to December 31, 1978.
ITEM 6. SELECTED FINANCIAL DATA
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AS OF AND FOR THE YEAR ENDED SEPTEMBER 30,
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1996 1995 1994/1/ 1993 1992
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(in thousands, except per share data)
SUMMARY OF OPERATIONS:
Revenues................................ $ 21,231 $ 25,591 $35,046 $ 38,335 $58,900
Net loss................................ (11,787) (10,777) (6,723) (10,544) (9,129)
Loss per share /2/...................... (2.32) (3.53) (3.51) (10.48) (13.64)
Weighted average number of common shares
outstanding /2/.................... 5,086 3,052 1,916 1,006 670
BALANCE SHEET DATA, END OF YEAR:
Working capital (deficit)............... $ 268 $ 1,377 $ 1,712 $ 1,893 $ (597)
Total assets............................ 12,850 14,388 16,079 18,826 24,433
Current portion of long term-debt and
capital lease obligations.............. 368 494 240 869 7,197
Long-term debt and capital lease 3,588 4,993 8,148 7,488 2,640
obligations............................
Shareholders' equity.................... 3,685 3,533 1,410 3,245 7,770
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/1/ Restated to reflect the acquisition of a 100% interest in Metaware, Inc.
on June 30, 1995. See Note 9 to the Consolidated Financial Statements.
/2/ Restated to reflect the one-for-ten reverse stock split effective January
30, 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
During 1996, the Company continued to shift its sales efforts from hardware
sales to internally developed software and system integration services. Sales
of products based on the Company's Series 5000 and Series 7000 platforms
continued to decline as cheaper alternative products on the personal computer
platform continue to erode the Company's installed base of UNIX(R) design and
drafting products. As a result the Company discontinued development of the
Mozaic suite of products in September 1996. Operating losses continued for the
eighth consecutive year due primarily to the lack of revenue growth from
products under development in the MCAD, EPS, PDM and network configuration
markets. These sales did not materialize due in part to product development
delays as well as an increased complexity of the sales cycle in these markets
and the deteriorating price point erosion for MCAD software products. The
Company continues to believe that its PDM, EPS and network configuration
products in these market areas, when complete, will present a unique
complementary combination that will differentiate the Company from its
competitors.
Due to the nature of the software industry, the future operating results of the
Company depend largely on its ability to rapidly and continuously develop and
deliver new software products that are competitively priced and offer enhanced
performance. During fiscal 1996, the Company had new software product releases
for its product data management and network configuration products. The Company
believes that these products are competitive both functionally and from a
pricing perspective. However, the Company is unable to predict the impact of
new products or the effect that industry economic conditions will have on future
results of operations.
BUSINESS COMBINATION WITH RELATED PARTY - On June 30, 1995, AT Development
Inc., a wholly owned subsidiary of Auto-trol Technology Corporation, acquired a
100% interest in Metaware, Inc. doing business as Centra 2000, Inc. Financial
results for the years ended September 30, 1995 and 1994 were previously restated
to reflect the combination of the Company with Centra 2000, Inc. from
commencement of Centra 2000, Inc.'s operations on October 1, 1994. The Company
and Centra 2000, Inc. were under common control at the date of acquisition.
REVENUES - For the year ended September 30, 1996, total sales and service
revenue decreased $4.4 million, or 17%, from the year ended September 30, 1995.
total sales revenue for fiscal 1996 decreased $1.7 million, or 16%, from the
year ended September 30, 1995. Hardware revenue for fiscal 1996 declined $1.3
million or 27%, as compared to fiscal 1995. The Company continues to shift the
sales and support focus from hardware to internally developed software and
systems integration. The Company will continue to sell hardware primarily as
part of a total systems solution. Total software revenue declined $367,000, or
6%, as compared to fiscal 1995. This decrease can be attributed primarily to a
revenue reduction of $923,000 for sales of third party software products. The
Company had an increase in revenues from its own proprietary software amounting
to $556,000 or 12% as compared to fiscal 1995. North America hardware sales
revenue decreased $1.2 million, or 41%, while North America software sales
revenue increased $234,000, or 6% during fiscal 1996. European sales revenue
decreased $1.0 million or 25% from fiscal 1995. The European revenue reduction
was due to a decrease of $434,000 in hardware revenue, or 21%, and a software
revenue decrease of $582,000, or 28%, as compared to fiscal 1995. Approximately
43% of this decrease was due to unfavorable exchange rates and the remainder was
due to decreased sales volume.
For the year ended September 30, 1995, total sales and service revenue decreased
$9.5 million, or 27%, from the year ended September 30, 1994. Total sales
revenue for fiscal 1995 decreased $5.6 million, or 34%, from the year ended
September 30, 1994. Hardware revenue for fiscal 1995 declined $2.7 million or
36%, as compared to fiscal 1994 as the Company focused its selling efforts on
proprietary software sales. Total software revenue declined $3.0 million, or
33%, as compared to fiscal 1994. The decline can be attributed to reduced sales
of the products based on the Company's Series 5000 and 7000 platforms. In
addition, the growth in revenue from the MCAD and PDM, and network management
products were below the Company's expectations. Delays in product development
contributed to the reduced growth in software from these newer products. In
fiscal 1994, the Company received as consideration, $702,000 from Italcad, a
former software joint venture partner, in exchange for allowing Italcad to
transfer its rights to certain technology to a newly formed company. The
Company booked this settlement as Domestic software sales. Domestic hardware
sales revenue decreased $1.5 million, or 57%, while Domestic software sales
revenue decreased
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-(CONTINUED)
$2.3 million, or 46% during fiscal 1995, excluding the Italcad settlement.
International sales revenue decreased $1.8 million, or 20% from fiscal 1994.
This decrease consisted of a favorable exchange rate variance of 4% and a 24%
decrease in sales volume. The decrease in revenue was entirely due to a
decrease of $1.9 million in hardware revenue, as compared to fiscal 1994.
International software revenue increased $82,000, or 3%, as compared to fiscal
1994. Canadian sales revenue for fiscal 1995 decreased $2.0 million, or 43% as
compared to fiscal 1994. European sales revenue grew $108,000, or 3% in fiscal
1995 as compared to fiscal 1994. Increased sales of the Company's process
software in Germany accounted for the majority of the year-to-year improvement
in software sales in Europe.
Total service revenue for the year ended September 30, 1996, decreased $2.7
million, or 18%, from the year ended September 30, 1995. Service revenue is
comprised of hardware and software maintenance, training and billable service
revenue. Hardware maintenance revenue decreased $1.3 million, or 46%, while
software maintenance revenue decreased $1.4 million, or 17% for fiscal 1996 as
compared to fiscal 1995. The Company experienced an overall decline in service
revenue for all geographic locations during fiscal 1996. As the Company shifts
from being a hardware and software solution provider to a software, systems
integration, and service provider, revenue from hardware and hardware
maintenance will continue to decline. The Company's management expects this
trend to continue into the future. The declines in software maintenance revenue
can be attributed to a decline in older products and reduced third party
software maintenance revenues. Billable services revenue increased $144,000, or
7% from fiscal 1995. This increase is directly related to the increased
revenues resulting from the Company's proprietary software products. Training
revenue decreased $45,000, or 3%, as compared to fiscal 1995. North America
service revenue, which comprised 76% of the total worldwide service revenue,
declined $2.2 million, or 19%, as compared to fiscal 1995. European service
revenue declined $448,000, or 15%, as compared to fiscal 1996.
Total service revenue for the year ended September 30, 1995, decreased $3.8
million, or 21%, from the year ended September 30, 1994. Hardware maintenance
revenue was down $1.5 million, or 34%, while software maintenance revenue was
down $1.6 million, or 16% for fiscal 1995 as compared to fiscal 1994. The
worldwide decline in software maintenance revenue can be attributed to a lack of
new software products sales combined with a decline in older products
maintenance revenue. Billable services revenue declined $902,000, or 31% from
fiscal 1994. This decline is consistent with the decline in sales revenue, as
these services are performed after the initial sale. Training revenue increased
$117,000, or 7%, as compared to fiscal 1994. This increase can be attributed to
an increased demand for Sun and HP training given in the Company's training
centers in Denver and Calgary. Domestic service revenue, which comprised 54% of
the total worldwide service revenue, declined $3.2 million, or 29%, as compared
to fiscal 1994. Canadian service revenue declined $166,000 or 5%, as compared
to fiscal 1994. European service revenue declined $473,000, or 13%, as compared
to fiscal 1994.
COST OF SALES AND SERVICE - The result of operations for the year ended
September 30, 1996, continued to reflect shifts in product mix from hardware to
software and services. For the year ended September 30, 1996, gross profit
margins on total revenue decreased slightly to 57% from 58% for the year ended
September 30, 1995. Gross profit margins on sales revenue for the year ending
September 30, 1996, increased to 64% from 63% for the year ended September 30,
1995. In fiscal 1996, gross profit margins on hardware declined $554,000,
yielding a gross margin of 23%, as compared to a gross margin of 28% in fiscal
1995. This decline reflects the continued pressure on hardware pricing
throughout the computer industry. In fiscal 1996, gross profit margins on
software sales declined $696,000 yielding a gross margin of 91%, as compared to
a gross margin of 97% in fiscal 1995.
For the year ended September 30, 1995, gross profit margins on total revenue
increased to 58% from 54% for the year ended September 30, 1994. Gross profit
margins on sales revenue for the year ending September 30, 1995, increased to
63% from 61% for the year ended September 30, 1994. In fiscal 1995 gross profit
margins on hardware declined $871,000, yielding a gross margin of 28%, as
compared to a gross margin of 30% in fiscal 1994. In fiscal 1995 gross profit
margins on software sales declined $2.4 million, yielding a gross margin of 97%,
as compared to a gross margin of 88% in fiscal 1994. This increase in gross
profit margin can be attributed in part to the reduction in sales of third party
software sold by the Company which has a range in costs from a few percent to
50% of the total revenue sold.
Gross profit margins for total service revenue in fiscal 1996 decreased $1.8
million, yielding a gross margin of 52%, as compared to a gross margin of 55% in
fiscal 1995. Gross margins on billable services and training in fiscal 1996
8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-(CONTINUED)
decreased to 37% from 50% in fiscal 1995 due to increased costs to provide
billable services and fixed training expenses. Gross profit margins on hardware
maintenance declined $554,000 yielding gross margins of 19% in fiscal 1996 as
compared to gross margins of 29% in fiscal 1995. This reduction is attributed
to the Company's growing utilization of outside third parties for hardware
maintenance services. Software maintenance gross margins improved to 68% from
67% in fiscal 1996 due to increased sales of the Company's proprietary support
and cost containment efforts.
Gross profit margins for total service revenue in fiscal 1995 decreased
$726,000, yielding a gross margin of 55%, as compared to a gross margin of 47%
in fiscal 1994. This improvement reflects Management's efforts to reduce costs
while still providing high quality support and services to customers. Gross
margins on billable services in fiscal 1995 improved to 51% from 35% in fiscal
1994. Gross margins on training were flat year-to-year at 48%. Gross profit
margins on hardware maintenance declined $1.9 million yielding gross margins of
29% in fiscal 1995 as compared to gross margins of 62% in fiscal 1994. The
decline in hardware maintenance revenue was not matched with commensurate cost
reductions in reducing hardware maintenance support costs. The Company will
continue its efforts at cost reduction measures in the coming fiscal year, to
reduce field support costs on hardware. Software maintenance gross margins
improved to 66% from 44% in fiscal 1994, reflecting the Company's efforts to
control costs in its delivery of support.
RESEARCH AND PRODUCT DEVELOPMENT - Research and development expenses were
approximately 43% of total revenues for the year ended September 30, 1996,
compared to 35% of total revenues for the year ended September 30, 1995. The
change in research and development spending as a percentage of revenue in fiscal
1996 is due in part to an increase of $342,000, or 4%, in spending along with a
17% decrease in total revenues as compared to fiscal 1995. In September 1996,
the Company ceased development of is Mozaic product due to competitive pressures
and the Company's focus on developing its other proprietary software products.
approximately $3.2 million in research and development expenditures were
expended during fiscal 1996 for the Mozaic product development. As a
consequence of discontinuing this product development a workforce reduction of
35 employees occurred in September 1996.
Research and development expenses were approximately 35% of revenue for the year
ended September 30, 1995, and 23% for the years ended September 30, 1994. The
change in research and development spending as a percentage of revenue in fiscal
1995 is due in part to an increase of $925,000, or 12%, in spending coupled with
the overall 27% decrease in total revenue as compared to fiscal 1994. The
increase in spending is a result of the Company's acquisition of Centra 2000.
The fiscal 1995 research and product development expenditures were restated by
an additional $1,232,000 to reflect the acquisition of Centra 2000, Inc., which
occurred on June 30, 1995.
MARKETING, GENERAL AND ADMINISTRATIVE - For the year ended September 30, 1996,
marketing, general and administrative expenses decreased $2.0 million, or 12%,
from the year ended September 30, 1995. north american marketing, general and
administrative spending declined $1.1 million due to the closure of field
offices and the Company's cost containment measures. During fiscal 1996,
European marketing, general and administrative spending declined $841,000, as
compared to fiscal 1995 as occupancy and personnel costs were reduced.
During fiscal 1996, the Company implemented cost containment measures to
streamline operations worldwide. Implementation of these measures resulted in a
workforce reduction of 28 employees. The Company will continue to identify and
implement cost containment measures and implement them as appropriate.
In the year ended September 30, 1995, marketing, general and administrative
expenses decreased $1.2 million, or 7%, from the year ended September 30, 1994.
In fiscal 1995, North American marketing, general and administrative spending
declined $202,000, as compared to fiscal 1994. European marketing, general and
administrative spending declined $1.0 million due to the closure of some
European offices in fiscal 1994.
INTEREST - In the year ended September 30, 1996, interest expense decreased
$110,000 or 13% from the year ended September 30, 1995, as a result of
converting $11.5 million of related party debt to common stock. Interest income
decreased $63,000, or 24% from fiscal 1995.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-(CONTINUED)
In the year ended September 30, 1995, interest expense decreased 3% compared to
the year ended September 30, 1994, as a result of converting $12.4 million of
related party debt to common stock in three transactions. Interest income
increased 42% from fiscal 1994 due to an increase in cash investments.
INFLATION - The Company is affected by inflation principally through increases
in salaries and wages and by increases in prices of services, at rates
comparable to those experienced by other businesses. Historically, the impact
of inflation has been partially mitigated by general price declines in
electronic components resulting from improved technology.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION - AT September 30, 1996, the Company had approximately $2.2
million in cash and cash equivalents, which was 9% less than cash balances at
September 30, 1995. The Company's net working capital was approximately
$268,000 at September 30, 1996, as compared to $1.4 million at September 30,
1995. Other than the uncertainty of future profitability, there are no known
demands, commitments, events, or uncertainties that will result in the Company's
liquidity increasing or decreasing in any material way. However, during October
and December 1996, the Company borrowed a total of $2,000,000, with the notes
bearing interest at 10% per annum, from an affiliate of Howard B. Hillman, the
Company's President, Chairman of the Board and majority shareholder. In
December 1995, the Company paid $391,000 of accrued interest on the outstanding
related party debt of $2,900,000. As of September 30, 1996, the Company had no
material commitments for capital expenditures.
During fiscal 1994, the Company received a permanent waiver of financial
covenants of its outstanding Industrial Development Revenue Bonds. The Company
received a permanent wavier of financial ratio requirements which placed
restrictions on long-term lease agreements, debt agreements, and current ratio
requirements.
The Company will require additional funds from its majority shareholder to
continue to fund future operating losses. The shareholder has committed, in
writing, to continue providing financial support at least through December 31,
1997. If the Company does not achieve profitability in the near future, it will
continue to be dependent on its majority shareholder for additional funding and
to continue as a going concern. The Company's long term viability will be in
jeopardy if it is not able to achieve financial independence through improved
results, or should support from its majority shareholder not continue after
December 31, 1997.
CURRENCY FLUCTUATIONS
The Company has four wholly owned subsidiaries and one branch operation. The
four subsidiaries are located in Germany, Sweden, Canada and the United Kingdom;
the branch is located in Australia. The Company does business in the local
currencies of these countries, in addition to other countries where the
subsidiaries may have customers, such as Norway, Finland and Italy. These local
currency revenues and expenses are translated into dollars for U.S. reporting
purposes. A stronger U.S. dollar will decrease the level of reported U.S.
dollar revenues and expenses. Approximately $561,000 of an unfavorable exchange
rate variance and a $2,269,000 decrease in revenue volume resulted in a
$2,830,000 decrease in non-U.S. revenue between 1996 and 1995. These effects on
the Company's results of operations could become significant if the percentage
of revenues and expenses attributed to International operations increases and/or
if the dollar fluctuates significantly against international currencies. The
Company's international operations are also subject to certain risks inherent in
doing business abroad and may be adversely affected by government policies,
restrictions, or other factors.
The Company does not use foreign exchange contracts, interest rate swaps, or
option contracts. Foreign currency risk for the Company is limited to
outstanding debt owed to the Company by the subsidiaries. The Company invoices
its
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-(CONTINUED)
subsidiaries in their local currencies for products that are sold to the
subsidiaries' end customers. Upon receipt of payment from the subsidiaries, a
foreign currency gain or loss can occur. For the years then ended September 30,
1996, and 1995, the Company had realized a loss of approximately $27,000 and
$47,000 respectively, through payments it had received from its subsidiaries.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of (SFAS 121) was issued in
March, 1995, by the Financial Accounting Standards Board. It requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. SFAS 121
is required to be adopted for fiscal years beginning after December 15, 1995.
Adoption of this statement by the Company as of October 1, 1996 will not have a
significant effect on the consolidated financial statements.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), was issued by the Financial Accounting Standards Board
in October, 1995. SFAS 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans as well as transactions in
which an entity issues its equity instruments to acquire goods or services from
non-employees. This statement defines a fair value based method of accounting
for employee stock option or similar equity instrument, and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees. Entities electing to remain with the accounting in Opinion 25 must
make proforma disclosures of net income and, if presented, earnings per share,
as if the fair value based method of accounting defined by SFAS 123 had been
applied. SFAS 123 is applicable to fiscal years beginning after December 15,
1995. The Company currently accounts for its equity instruments using the
accounting prescribed by Opinion 25. The Company does not currently expect to
adopt the accounting prescribed by SFAS 123; however, the Company will include
the disclosures required by SFAS 123 in future annual consolidated financial
statements.
11
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Auto-trol Technology Corporation:
We have audited the accompanying consolidated balance sheets of Auto-trol
Technology Corporation and subsidiaries as of September 30, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended September 30,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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.
As discussed in Note 2 to the consolidated financial statements, affiliates of
the Company's President, Chairman of the Board, and majority shareholder have
provided significant financial support to the Company during 1996, 1995, 1994
and in prior years. The Company will continue to be economically dependent upon
financial support from the shareholder until it achieves profitable operations.
The shareholder has committed to continue providing such financial support at
least through December 31, 1997.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Auto-trol Technology
Corporation and subsidiaries as of September 30, 1996 and 1995 and the results
of their operations and their cash flows for each of the years in the three-year
period ended September 30, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Denver, Colorado
November 4, 1996
12
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------
ASSETS 1996 1995
----------------------------------------
(in thousands, except share amounts)
Current assets:
<S> <C> <C>
Cash and cash equivalents............. $ 2,173 $ 2,388
Receivables, net of allowance of
$173 and $132....................... 2,846 4,325
Inventories.......................... 304 196
Service parts and prepaid expenses... 522 330
--------------------------------------
Total current assets.............. 5,845 7,239
--------------------------------------
Property, facilities and equipment
(Note 1):
Land................................. 356 355
Building and improvements............ 8,204 8,098
Machinery and equipment.............. 9,560 8,574
Furniture, fixtures and leasehold
improvements........................ 906 898
--------------------------------------
19,026 17,925
Less accumulated depreciation and
amortization........................ (12,572) (11,421)
--------------------------------------
6,454 6,504
--------------------------------------
Purchased software, net of accumulated
amortization of $1,123 and $991........ 461 548
Other assets........................... 90 97
--------------------------------------
Total assets...................... $ 12,850 $ 14,388
======================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable..................... $ 1,195 $ 1,309
Current portion of long-term debt
(Note 3)............................ 240 240
Current portion of capital lease
obligations (Note 4)................ 128 254
Accrued interest payable, related
party portion $490 and $370......... 516 407
Income taxes payable (Note 5)........ 37 98
Unearned service revenue and
customer deposits................... 1,590 1,188
Accrued compensation and related
taxes............................... 673 554
Other liabilities.................... 1,198 1,812
--------------------------------------
Total current liabilities......... 5,577 5,862
Long-term debt, related party portion
$1,900 and $2,900 (Note 3)............. 3,580 4,820
Capital lease obligations (Note 4)...... 8 173
--------------------------------------
Total liabilities................. 9,165 10,855
--------------------------------------
Shareholders' equity (Note 6):
Common stock, $ .02 par value;
authorized 40,000,000 shares;
issued (including treasury stock)
7,745,929 and 3,935,181 shares...... 155 79
Additional paid-in capital........... 84,106 71,674
Cumulative currency translation
adjustments......................... (980) (411)
Accumulated deficit.................. (79,111) (67,324)
Treasury stock - 26,140 common
shares at cost...................... (485) (485)
--------------------------------------
Total shareholders' equity........ 3,685 3,533
Commitments and contingency (Notes 2
and 4 )
--------------------------------------
$ 12,850 $ 14,388
======================================
</TABLE>
See Notes to Consolidated Financial Statements.
13
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------------------------------
1996 1995 1994
--------------------------------------------
(in thousands, except per share amounts)
Revenues:
<S> <C> <C> <C>
Sales................................ $ 9,139 $ 10,824 $16,434
Service.............................. 12,092 14,767 18,612
--------------------------------------------
21,231 25,591 35,046
--------------------------------------------
Costs and expenses:
Cost of sales........................ 3,248 4,006 6,355
Cost of service...................... 5,842 6,686 9,806
Research and product development..... 9,176 8,834 7,908
Marketing, general, and
administrative...................... 14,271 16,242 17,443
--------------------------------------------
32,537 35,768 41,512
--------------------------------------------
Loss from operations.................... (11,306) (10,177) (6,466)
Interest income......................... 204 267 188
Interest expense, related party portion
$490, $390 and $559.................... (725) (835) (863)
Loss before income taxes................ (11,827) (10,745) (7,141)
Income tax benefit (expense) (Note 5)... 40 (32) 418
--------------------------------------------
Net loss................................ $(11,787) $(10,777) $(6,723)
============================================
Loss per share.......................... $ (2.32) $ (3.53) $ (3.51)
============================================
Weighted average number of common
shares outstanding..................... 5,086 3,052 1,916
============================================
</TABLE>
See Notes to Consolidated Financial Statements.
14
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
COMMON STOCK ADDITIONAL CURRENCY
------------------- PAID-IN TRANSLATION ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL ADJUSTMENTS DEFICIT STOCK TOTAL
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands, except number of shares)
Balance, October 1, 1994................ 1,619,732 $ 33 $53,871 $(351) $(49,824) $(484) $ 3,245
Issuances under stock option and
compensation plans.................... 554 4 4
Common stock issued through conversion
of related party debt................. 533,333 11 3,989 4,000
Acquisition of 1,200 common shares for
treasury.............................. (1) (1)
Change in cumulative currency
translation adjustments............... (6) (6)
Capital contribution to sub-sidiary
acquired in business combination...... 891 891
Net loss............................... (6,723) (6,723)
---------------------------------------------------------------------------------
Balance, September 30, 1994 2,153,619 44 58,755 (357) (56,547) (485) 1,410
Issuances under stock option and
compensation plans.................... 1,961 13 13
Common stock issued through conversion
of related party debt................. 1,658,400 33 12,405 12,438
Capital contribution to sub- sidiary
acquired in business combination...... 503 503
Issuance of common stock in business
combination
(Note 9).......................... 121,201 2 (2) 0
Change in cumulative currency
translation adjustments............... (54) (54)
Net loss............................... (10,777) (10,777)
---------------------------------------------------------------------------------
Balance, September 30, 1995 3,935,181 79 71,674 (411) (67,324) (485) 3,533
Issuances under stock option and
compensation plans.................... 1,224 8 8
Common stock issued through conversion
of related party debt................. 3,809,524 76 12,424 12,500
Change in cumulative currency
translation adjustments............... (569) (569)
Net loss............................... (11,787) (11,787)
---------------------------------------------------------------------------------
Balance, September 30, 1996 7,745,929 $155 $84,106 $(980) $(79,111) $(485) $ 3,685
=================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
----------------------------------
1996 1995 1994
----------------------------------
<S> <C> <C> <C>
(in thousands)
Cash flows from operating activities:
Net loss............................... $(11,787) $(10,777) $(6,723)
Adjustments to reconcile net loss to
net cash used by operating
activities:
Depreciation and amortization..... 1,570 1,830 2,168
Loss (gain) on disposal of
property, facilities, and
equipment........................ 41 180 (82)
Provision for inventory
obsolescence and shrinkage....... -- 4 14
Changes in operating
assets and liabilities:
Decrease in receivables...... 1,225 543 987
(Increase) decrease in
inventories................. (132) 90 235
(Increase) decrease in
service parts and prepaids.. (210) 466 135
Decrease in accounts
payable..................... (206) (917) (333)
Increase (decrease) in
accrued interest payable.... 109 (171) (27)
Increase (decrease) in
income taxes payable........ (61) 66 (410)
Increase (decrease) in
unearned service revenue
and customer deposits....... 402 (168) (103)
Increase (decrease) in
other liabilities........... (722) 196 138
Increase (decrease) in
accrued compensation and
related taxes............... 106 61 (103)
Settlement of Italcad note... -- -- (702)
---------------------------------
Net cash used by operating activities..... (9,665) (8,597) (4,806)
Cash flows from investing activities:
Capital expenditures................... (1,573) (1,136) (1,154)
Proceeds from sale of property,
facilities and equipment.............. 92 277 217
Decrease (increase) in other assets.... 6 (19) 61
Net cash used by investing activities..... (1,475) (878) (876)
Cash flows from financing activities:
Proceeds from issuance of notes
payable, related party................ 11,500 10,350 5,100
Payments on notes payable, capital
leases, and long term debt,
related party portion $0, $1,000
and $200.............................. (531) (1,240) (440)
Proceeds from issuance of common
stock................................. 8 13 4
Payments to acquire treasury stock..... -- -- (1)
Capital contributions to
subsidiary....................... -- 503 891
----------------------------------
Net cash provided by financing
activities............................... 10,977 9,626 5,554
Effect of exchange rate changes on cash... (52) (8) (105)
----------------------------------
Net increase (decrease) in cash and
cash equivalents......................... (215) 143 (233)
Cash and cash equivalents at the
beginning of the year.................... 2,388 2,245 2,478
----------------------------------
Cash and cash equivalents at the end of
the year................................. $ 2,173 $ 2,388 $ 2,245
==================================
Supplemental disclosures of cash flow
information:
Cash paid during the year for interest,
related party portion of $391, $579
and $572........................ $ 563 $ 1006 $ 962
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995, AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
- - ---------------------
The consolidated financial statements include the accounts of Auto-trol
Technology Corporation and its subsidiaries, each of which is wholly owned. All
significant intercompany transactions and balances have been eliminated in
consolidation. The Company develops, integrates and supports its products and
the products of certain third party vendors for end user markets involved in:
product data management, physical network management, mapping, technical
illustration, design, engineering, drafting and manufacturing processes. These
products are designed to facilitate the creation, distribution, analysis and
management of technical information.
The preparation of the 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Statement of Cash Flows
- - -----------------------
Cash and cash equivalents include currency on hand, demand deposits with banks
or other financial institutions, and other highly liquid securities purchased
with an original maturity of three months or less.
Inventories
- - -----------
Inventories consist of completed computer hardware units and completed
components used for resale. Inventories are stated at the lower of cost (first-
in, first-out method) or market. Service parts are recorded at cost and
amortized on the straight line method over three years or the estimated useful
lives, whichever is shorter.
Property, Facilities and Equipment
- - ----------------------------------
Property, facilities, and equipment, including leasehold improvements, are
recorded at cost and depreciated or amortized on the straight line method over
the estimated useful lives of the respective assets or the lease period,
whichever is shorter. Gains and losses from retirement or replacement of
property, facilities, and equipment is included in operations. Betterments and
renewals are capitalized. Maintenance and repairs are charged to operations.
The estimated useful lives of facilities and equipment used in determining
depreciation and amortization is as follows:
Building and improvements component lives of 10-35 years
Leasehold improvements lease period
Machinery and equipment 3-7 years
Furniture and fixtures 3-7 years
Foreign Currency Exchange and Translation
- - -----------------------------------------
The functional currency of the Company's foreign subsidiaries is its local
currency and such assets and liabilities are translated to U.S. dollars at year
end exchange rates. The Company does not use foreign exchange contracts,
interest rate swaps, or option contracts. Translation gains and losses are not
included in operations but are accumulated in a separate component of
shareholders' equity. Foreign currency transaction gains and losses, which were
not significant, have been included in the results of operations.
Revenue Recognition
- - -------------------
Revenue is comprised of equipment sales, software license fees, related customer
support contracts, and other support services. Revenues from the sale of
equipment and software licenses are generally recorded at the time of delivery
to the customer. Revenues are deferred if significant future obligations are to
be fulfilled or if collection is not probable. Post-sales customer support
revenues are recognized ratably over the contract period. Included in post-
contract support costs are direct costs paid to third-party vendors, which are
expensed as incurred. In addition, labor and overhead expenses relating to
support personnel are included in cost of service and are expensed as incurred.
The Company provides a warranty for its products, generally for ninety days from
the date of installation, and establishes an allowance to cover warranty costs
during this period. Service contract revenues are recognized as the services
are performed.
17
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Research and Development
- - ------------------------
The Company charges research and product development costs to operations as
incurred.
Amortization of Software
- - ------------------------
Purchased software acquired for use in the business includes the cost of
software acquired through acquisitions and from third-party vendors.
Amortization of these costs is included in research and product development or
marketing, general, and administrative expenses depending on the application of
the software. Such costs are amortized using the straight-line method over the
estimated useful lives ranging from three to five years. Software amortization
expense was $132,000, $365,000, and $351,000 for the years ended September 30,
1996, 1995, and 1994, respectively.
Software Royalties
- - ------------------
The Company pays royalties for software licensed from third-party vendors for
sublicense to the Company's customers. Total royalty expense incurred for
third-party software was approximately $170,000, $112,000, and $340,000 for
fiscal years ended September 30, 1996, 1995, and 1994, respectively. These
costs are included in cost of sales.
Loss Per Share
- - --------------
Loss per share is computed on the basis of the weighted average number of common
shares outstanding and is adjusted, if applicable, for common stock equivalent
shares. For the years ended September 30, 1996, 1995, and 1994, the weighted
average number of shares outstanding includes no weighted common stock
equivalent shares because their effect would be antidilutive.
2. ECONOMIC DEPENDENCY ON MAJORITY SHAREHOLDER:
During fiscal years 1996, 1995 and 1994, affiliates of the Company's President,
Chairman of the Board, and majority shareholder loaned the Company $11,500,000,
$10,350,000 and $5,100,000 respectively. The Company converted $12,500,000,
$12,438,000 and $4,000,000 of shareholder loans to equity in 1996, 1995 and 1994
respectively, and repaid $1,000,000 in 1995. The shareholder loan balance at
September 30, 1996, was $1,900,000. The notes are unsecured and are due on
October 1, 1998, bearing interest at 10% per annum. The Company borrowed a
total of $2,000,000 in October and December 1996. The Company will continue to
be economically dependent upon such financial support until it achieves
profitable operations. The shareholder has committed, in writing, to continue
providing the Company such financial support at least through December 31, 1997.
3. DEBT:
<TABLE>
<CAPTION>
Long-term debt consists of the 1996 1995
following as of September 30, ------ ------
(in thousands)
<S> <C> <C>
Related party debt (see note 2)......... $1,900 $2,900
Industrial Development Revenue Bonds(a). 1,920 2,160
-----------------
3,820 5,060
Less current portion of long-term debt.. (240) (240)
-----------------
$3,580 $4,820
=================
</TABLE>
Maturities of long-term debt for each of the five years subsequent to September
30, 1996, and thereafter are as follows:
<TABLE>
<S> <C>
1997............................ $ 240
1998............................ 2,140
1999............................ 240
2000............................ 240
2001............................ 240
Thereafter...................... 720
------
$3,820
======
</TABLE>
18
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(a) The Industrial Development Revenue Bonds were issued by the City of
Thornton, Colorado, to finance the cost of the Company's corporate headquarters.
The bonds bear interest at 8%, are payable in annual installments of $240,000
through August, 2004, and are collateralized by a mortgage indenture on the
facilities. The indenture has debt covenants which place certain limitations on
the Company, including restrictions on the sale of assets, and certain common
stock transactions including payment of dividends. During fiscal 1994, the
Company received a permanent waiver of financial ratio requirements which placed
restrictions on long-term lease agreements, debt agreements, and current ratio
requirements.
4. LEASES:
The Company leases certain office facilities and equipment under operating
leases expiring at various dates through fiscal 2006. The Company also leases
computer equipment under capital leases which expire through fiscal 1998.
As of September 30, 1996, the future minimum lease payments under capital and
noncancellable operating leases (with initial or remaining lease terms in excess
of one year) are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, CAPITAL LEASES OPERATING LEASES
--------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
1997............................................. $ 132 $1,408
1998............................................. 8 679
1999............................................. -- 402
2000............................................. -- 204
2001............................................. -- 95
Thereafter....................................... -- 211
------------------------
Total minimum lease payments..................... 140 $2,999
==============
Less amount representing interest................ (4)
--------
Present value of net minimum lease payments...... 136
Less current portion of capital lease
obligations.................................... (128)
--------
$ 8
========
</TABLE>
There are no material subleases or contingent rentals related to the leases, and
the lease payments include no executory costs. Aggregate rental expense under
operating leases was $1,660,000, $1,964,000, and $2,035,000 for the years ended
September 30, 1996, 1995, and 1994, respectively.
5. INCOME TAXES:
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109),
which requires the use of the asset and liability method of accounting for
income taxes. Under the asset and liability method required by 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
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109 the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Based on the uncertainty of future realization, a valuation allowance equal to
the deferred tax asset relating to the Company's net operating loss carry
forwards for income tax purposes of approximately $49.4 million has been
provided.
19
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
As of September 30, 1993, the Company had an accrued tax liability of $232,000
relating to a dispute with the German tax authorities concerning the
subsidiary's loss carry forward for its German subsidiary. As a conservative
measure the Company had accrued the liability in the event the German tax
authorities would not accept the Company's loss carry forward calculation.
During the second quarter of 1994, the Company reached an agreement with the
German tax authorities whereby the Company's loss carry forward was accepted as
correct. As a result, the Company realized a tax benefit of $232,000 during the
second quarter of 1994.
The components of the current provisions for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------
1996 1995 1994
-------------------
(in thousands)
<S> <C> <C> <C>
Foreign income tax expense (benefit) $(40) $32 $(232)
United States tax expense (benefit) -- -- (186)
-------------------
Total income tax expense (benefit) $(40) $32 $(418)
===================
</TABLE>
The following summarizes the amount of the Company's loss, before income taxes,
contributed by domestic and foreign operations:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------------------------
1996 1995 1994
---------------------------------
(in thousands)
<S> <C> <C> <C>
United States $ (9,997) $ (8,650) $(4,878)
Foreign (1,830) (2,095) (2,263)
---------------------------------
$(11,827) $(10,745) $(7,141)
=================================
</TABLE>
The Company's effective tax rate varies from the statutory federal income tax
rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------------------
1996 1995 1994
--------------------------------
<S> <C> <C> <C>
Expected federal income tax benefit (34.0)% (34.0)% (34.0)%
Net operating loss carryforwards for
which no benefit has been recorded 34.0 34.0 31.1
Foreign income tax benefit -- -- (3.9)
--------------------------------
Actual tax rate -- -- (6.8)%
================================
</TABLE>
6. SHAREHOLDERS' EQUITY:
STOCK REPURCHASE PROGRAM - On May 2, 1989, the Company established a program to
repurchase its common stock in the marketplace from time to time depending on
market prices and other market conditions. the maximum cost of shares to be
repurchased under the program is limited to $2,000,000. as of september 30,
1996, 26,140 shares have been repurchased under this program.
20
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK OPTIONS - The Company has in effect two stock option plans: an Incentive
Stock Option Plan and a Special Purpose Plan, whereby, 1,350,000 shares of
common stock are authorized for issuance. Information with respect to activity
under the stock option plans is set forth below:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------------------
1996 1995 1994
------------- -------- -------
<S> <C> <C> <C>
Options outstanding, beginning of year.. 61,128 42,149 43,395
Granted................................. 175,773 33,908 7,390
Canceled................................ (42,666) (14,064) (8,522)
Exercised............................... (254) (865) (114)
---------------------------------
Options outstanding, end of year (1) 193,981 61,128 42,149
=================================
Options exercisable, end of year........ 19,426 11,864 7,883
=================================
</TABLE>
(1) Options outstanding as of September 30, 1996, have exercise prices ranging
from $3.00 to $20.00 per share with expiration through the year 2005. The
exercise price of the shares at date of grant is established as the market price
as of that date.
EMPLOYEE STOCK PURCHASE PLAN - The Company's Retirement Savings Plan, under
which 22,798 shares are available for purchase by employees as of September 30,
1996. Employees have purchased 1,711 shares of common stock under the Company's
Employee Stock Purchase Plan through September 30, 1996.
7. EMPLOYEE RETIREMENT PLAN:
The Retirement Savings Plan (Plan) is a cash or deferred profit-sharing plan
designed to comply with the requirements of Section 401(a) and 401(k) of the
Internal Revenue Code of 1986. Substantially all employees of the Company with
six months of service are eligible to participate in the Plan; however, certain
employee groups may be made ineligible at the discretion of the Company. The
Plan's funds are invested by an independent broker into various funds as
selected by the 401(k) Committee. Plan funds may not be invested in common
stock of the Company. Under the Plan, employees may contribute ten dollars,
plus from 1% to 15% of their compensation per pay period, to a tax deferral
account subject to statutory maximums. The Company will contribute to the
account of a participant an amount equal to the employee's contribution up to
ten dollars per pay period. The Company recognized expense related to the Plan
of approximately $44,000, $46,000, and $53,000 in the years ended September 30,
1996, 1995, and 1994, respectively. The Board of Directors may, at its
discretion, terminate the Plan at any time in whole or in part. Upon such
termination, the Plan provides for the distribution of the assets of the fund
for the benefit of its participants.
21
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
8. FOREIGN AND DOMESTIC OPERATIONS:
Revenues, operating results before unallocated expenses, and identifiable assets
as of and for the three years ended September 30, 1996 by geographic area are
presented in the table below. There were no significant amounts of sales or
transfers between geographic areas.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
(in thousands)
Revenues:
North America........................ $ 14,731 $ 17,344 $26,935
Europe............................... 5,729 7,192 7,557
Other (1)............................ 771 1,055 554
--------------------------------
$ 21,231 $ 25,591 $35,046
--------------------------------
Loss before income taxes:
North America........................ $(10,530) $ (6,625) $(1,509)
Europe............................... (1,440) (3,870) (4,653)
Other................................ 143 (250) (979)
--------------------------------
Consolidated loss before income taxes
(2).................................... $(11,827) $(10,745) $(7,141)
================================
Identifiable assets at year end:
North America........................ $ 10,618 $ 12,069 $12,705
Europe............................... 1,716 1,978 2,865
Other................................ 516 341 509
--------------------------------
$ 12,850 $ 14,388 $16,079
================================
</TABLE>
(1) Export sales were made to various international distributors and through
the Company's sales office in Australia. No one customer accounted for 10%
or more of total sales for the years ended September 30, 1996, 1995 and
1994.
(2) Research and development expenses have been allocated to each geographic
area based on the revenues generated by each area from internally-developed
software products. Management believes this to be a reasonable method for
allocating research and development expenses.
Interest expense has been allocated to each geographic area based on subsidiary
assets and liabilities funded by domestic operations.
9. BUSINESS COMBINATION WITH RELATED PARTY:
On June 30, 1995, AT Development Inc., a wholly owned subsidiary of Auto-trol
Technology Corporation, acquired a 100% interest in Metaware, Inc., doing
business as Centra 2000, Inc. The consideration for the purchase was four
shares of Auto-trol Technology Corporation common stock for each share of Centra
2000, Inc. common stock outstanding. The 1,212,008 shares of Auto-trol
Technology Corporation common stock exchanged were not registered under Federal
or State securities laws and are subject to restrictions on resale. Additional
consideration for existing Centra 2000, Inc. shareholders consists of a cash
bonus and stock in Auto-trol Technology Corporation in each of the next four
years, which is contingent upon meeting a development schedule and market
acceptance of the Centra 2000 product.
22
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Auto-trol Technology Corporation's President and Chairman of the Board, Howard
B. Hillman, controls, through various affiliates, the majority of the
outstanding shares of capital stock of both Auto-trol Technology Corporation and
Centra 2000, Inc. (Centra).
The effect of applying the purchase method of accounting to the acquisition of
the common stock of Centra owned by the other shareholders was not significant.
Accordingly, the acquisition was accounted for in a manner similar to a pooling
of interests of entities under common control and the accompanying consolidated
financial statements were previously restated for all periods prior to the
merger to include the accounts and operations of Centra with those of the
Company from the commencement of Centra's operations on October 1, 1994. For
income tax purposes, the merger was a nontaxable transaction.
23
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this Item is contained in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on January 28, 1997, under the caption
"Election of Directors" and "Executive Officers", and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item is contained in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on January 28, 1997, under the caption
"Executive Compensation", and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The response to this Item is contained in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on January 28, 1997, under the caption
"Voting Securities and Principal Shareholders", and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item is contained in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on January 28, 1997, under the caption
"Certain Relationships and Related Transactions", and is incorporated herein by
reference.
The Company intends to file definitive copies of the Proxy Statement with the
Securities and Exchange Commission within 120 days after September 30, 1996, the
close of its last fiscal period, and pursuant to General Instruction G to Form
10-K. Information called for by these items is incorporated herein by reference
from such definitive Proxy Statement.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
PAGE
-----
(A) 1. FINANCIAL STATEMENTS
The following Consolidated Financial Statements of Auto-trol
Technology Corporation are included in Part II, Item 8:
Independent Auditors' Report.................................. 12
Consolidated Balance Sheets - September 30,
1996 and 1995................................................ 13
Consolidated Statements of Operations - years ended September
30, 1996, 1995, and 1994..................................... 14
Consolidated Statements of Shareholders' Equity - years ended
September 30, 1996, 1995, and 1994........................... 15
Consolidated Statements of Cash Flows -years ended September
30, 1996, 1995, and 1994..................................... 16
Notes to Consolidated Financial Statements.................... 17-24
2. FINANCIAL STATEMENT SCHEDULE
Independent Auditors' Report.................................. 26
Schedule II - Valuation and qualifying accounts and reserves
- years ended September 30, 1996, 1995, and 1994............. 27
All other schedules are omitted because they are inapplicable, not required
under the instructions, or the information is included in the Consolidated
Financial Statements or notes thereto.
3. EXHIBITS
Exhibit
number Description of Exhibit
------ -----------------------
3.3 Restated Articles of Incorporation
3.4 Bylaws*
3.5 Amendment to Bylaws**
4.1 Specimen Certificate*
4.2 Copies of Industrial Development Revenue Bond documents*
4.3 Specimen Debentures, Warrants, Royalty Agreement, and Royalty
Certificate issued to purchase Research and Development Limited
Partnership Interests+
10.1 Copy of Incentive Stock Option Plan, as amended through
January 28, 1992++
10.2 Copy of Special Purpose Stock Option Plan, as amended through
January 28, 1992++
10.3 Agreement with Sun Microsystems, Inc. dated April 30, 1993+++
10.4 Agreement with HP/Apollo Computer, Inc. dated July 4, 1994+++
10.5 Agreement with Howard B. Hillman dated November 7, 1996
21 Subsidiaries of the Registrant
24 Consent of KPMG Peat Marwick LLP
* Incorporated by reference from Registration Statement No. 2-63253, filed
January 24, 1979.
** Incorporated by reference from Registration Statement No. 2-73702, filed
August 14, 1981.
+ Incorporated by reference from Form 10-K for fiscal year ended September 30,
1988, dated December 14, 1988.
++ Incorporated by reference from Form 10-K for fiscal year ended September 30,
1993, dated December 18, 1992.
+++ Incorporated by reference from Form 10-K for fiscal year ended September
30, 1994, dated December 14, 1994.
(B) REPORTS ON FORM 8-K
A Form 8-K was filed September 25, 1996 reporting the change in Vice President,
Treasurer and a debt to equity conversion.
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Auto-trol Technology Corporation:
Under date of November 4, 1996, we reported on the consolidated balance
sheets of Auto-trol Technology Corporation and subsidiaries as of September 30,
1996 and 1995, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 1996, as contained in the Company's Annual Report on
Form 10-K for the year 1996. In connection with our audits of the
aforementioned consolidated financial statements, we have also audited the
related financial statement schedule listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
As discussed in Note 2 to the consolidated financial statements, affiliates
of the Company's President, Chairman of the Board, and majority shareholder have
provided significant financial support to the Company during 1996, 1995, 1994
and in prior years. The Company will continue to be economically dependent upon
financial support from the shareholder until it achieves profitable operations.
The shareholder has committed to continue providing such financial support at
least through December 31, 1997.
In our opinion, this financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth herein.
KPMG PEAT MARWICK LLP
Denver, Colorado
November 4, 1996
26
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - -------- ---------- ---------- ---------- ---------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands)
YEAR ENDED SEPTEMBER 30, 1996:
Allowance for doubtful accounts...... $ 132 $170 $ 129 $ 173
Reserve for inventory obsolescence
and shrinkage....................... 58 8 11 55
Accumulated amortization of service
parts............................... 981 42 27 996
Valuation reserve for machinery and
equipment........................... 306 - - 306
Reserve for warranty and unearned
discounts........................... 55 - - 55
-----------------------------------------
$1,532 $220 $ 167 $1,585
=========================================
YEAR ENDED SEPTEMBER 30, 1995:
Allowance for doubtful accounts...... $ 134 $ 61 $ 63 $ 132
Reserve for inventory obsolescence
and shrinkage....................... 22 60 24 58
Accumulated amortization of service
parts............................... 996 18 33 981
Valuation reserve for machinery and
equipment........................... 306 - - 306
Reserve for warranty and unearned
discounts........................... 100 3 48 55
-----------------------------------------
$1,558 $142 $ 168 $1,532
=========================================
YEAR ENDED SEPTEMBER 30, 1994:
Allowance for doubtful accounts...... $ 661 $ 31 $ 558 $ 134
Reserve for inventory obsolescence
and shrinkage....................... 32 17 27 22
Accumulated amortization of service
parts............................... 1,482 39 525 996
Valuation reserve for machinery and
equipment........................... 306 - - 306
Reserve for warranty and unearned
discounts........................... 54 50 4 100
-----------------------------------------
$2,535 $137 $1,114 $1,558
=========================================
</TABLE>
See accompanying independent auditors' report
27
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Auto-trol Technology Corporation
We consent to the incorporation by reference in the registration statements
Nos. 2-66611, 2-73702, 2-80142, 33-637, and 33-15533 on Form S-8 of Auto-trol
Technology Corporation of our reports dated November 4, 1996, relating to the
consolidated balance sheets of Auto-trol Technology Corporation and subsidiaries
as of September 30, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended September 30, 1996, and the related financial statement
schedule, which reports appear in the September 30, 1996, annual report on Form
10-K of Auto-trol Technology Corporation.
As discussed in Note 2 to the consolidated financial statements, affiliates of
the Company's President, Chairman of the Board, and majority shareholder have
provided significant financial support to the Company during 1996, 1995, 1994
and in prior years. The Company will continue to be economically dependent upon
financial support from the shareholder until it achieves profitable operations.
The shareholder has committed to continue providing such financial support at
least through December 31, 1997.
KPMG PEAT MARWICK LLP
Denver, Colorado
December 18, 1996
28
<PAGE>
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.
AUTO-TROL TECHNOLOGY CORPORATION
Date: DECEMBER 10, 1996 BY: /S/HOWARD B. HILLMAN
--------------------
Howard B. Hillman,
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- - ---------- ----- ----
<S> <C> <C>
/s/HOWARD B. HILLMAN Chairman of the Board President December 10, 1996
- - -----------------------
Howard B. Hillman
/s/Mary L. Schwab Vice President, Treasurer December 10, 1996
- - --------------------------- (Principal Financial Officer
Mary L. Schwab and Principal Accounting
Officer)
/s/MAJOR GENERAL WILLIAM R. USHER,USAF (RET.) Director December 10, 1996
- - ---------------------------------------------
Major General William R. Usher (Ret.)*
/s/J. RODERICK HELLER, III Director December 10, 1996
- - ---------------------------
J. Roderick Heller, III*
*Howard B. Hillman is the Attorney in fact for:
MAJOR GENERAL WILLIAM R. USHER, USAF (RET.) and
- - -----------------------------------------------
J. RODERICK HELLER, III
- - -----------------------
</TABLE>
29
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
number Description of Exhibit Page
------ ---------------------- ----
<C> <S> <C>
3.3 Restated Articles of Incorporation 33
3.4 Bylaws*
3.5 Amendment to Bylaws**
4.1 Specimen Certificate*
4.2 Copies of Industrial Development Revenue Bond documents*
4.3 Specimen Debentures, Warrants, Royalty Agreement, and Royalty Certificate issued to purchase
Research and Development Limited Partnership Interests+
10.1 Copy of Incentive Stock Option Plan, as amended through January 28, 1992++
10.2 Copy of Special Purpose Stock Option Plan, as amended through January 28, 1992++
10.3 Agreement with Sun Microsystems, Inc. dated April 30, 1993+++
10.4 Agreement with HP/Apollo Computer, Inc. dated July 4, 1994+++
10.5 Agreement with Howard B. Hillman dated November 7, 1996 31
21 Subsidiaries of the Registrant 32
24 Consent of KPMG Peat Marwick LLP 28
</TABLE>
* Incorporated by reference from Registration Statement No. 2-63253, filed
January 24, 1979.
** Incorporated by reference from Registration Statement No. 2-73702, filed
August 14, 1981.
+ Incorporated by reference from Form 10-K for fiscal year ended September 30,
1988, dated December 14, 1988.
++ Incorporated by reference from Form 10-K for fiscal year ended September 30,
1993, dated December 18, 1992.
+++ Incorporated by reference from Form 10-K for fiscal year ended September
30, 1994, dated December 14, 1994.
30
<PAGE>
EXHIBIT 3.3
AUTO-TROL TECHNOLOGY CORPORATION
RESTATED ARTICLES OF INCORPORATION
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following Restated Articles of Incorporation:
Auto-trol Technology Corporation, a Colorado corporation, having its
principal office at 12500 N. Washington Street, Denver Colorado 80241-2400
(hereinafter referred to as the "Corporation") hereby certifies to the Secretary
of State of Colorado that:
FIRST: The Corporation desires to restate its Articles of Incorporation as
- - ------
hereinafter provided.
SECOND: The provisions set forth in these Restated Articles of Incorporation
- - -------
without Amendments supersede the original Articles of Incorporation and all
amendments thereto. These Restated Articles of Incorporation with Amendments
correctly set forth the provisions of the Articles of Incorporation, as amended,
of the Corporation.
THIRD: The Articles of Incorporation of the Corporation are hereby restated by
- - ------
striking, in their entirety, Articles 1 through 13, inclusive, and by
substituting in lieu thereof the following:
ARTICLE 1: The name of the corporation is Auto-trol Technology
Corporation.
ARTICLE 2: The purpose for which the corporation is organized is:
1. To design, produce, manufacturer, buy, sell, job, barter, exchange,
distribute, promote and deal generally in all classes of services,
goods, wares, merchandise and articles of trade at retail or wholesale
throughout the world.
2. To conduct its business and to have one or more offices in any of the
states or territories of the United States, and in any foreign country,
subject always to the laws of such state, territory or country.
3. In general, to carry on any lawful business whatsoever which may appear
to the corporation capable of being carried on in connection with the
foregoing, or calculated, directly or indirectly, to promote the
interests of the corporation or to enhance the value of its properties;
and to have, enjoy and exercise all of the rights, powers and privileges
now or hereafter conferred upon the corporation organized under the laws
of the State of Colorado as amended from time to time.
ARTICLE 3: SHARES
A. AUTHORIZED SHARES. The total number of shares of stock is 40,000,000,
------------------
consisting of 40,000,000 shares of Class A Common Stock, par value
$0.02, hereinafter called Common Stock.
B. CLASS A COMMON STOCK. The rights, preferences and limitations of Common
---------------------
Stock shall be as follows:
1. DIVIDENDS. Dividends in cash, property or shares of the Corporation
----------
may be paid upon the Common Stock, as and when declared by the Board
of Directors, out of the funds of the Corporation to the extent and
in the manner permitted by law.
2. VOTING RIGHTS. The holders of Common Stock shall be entitled to one
--------------
vote for each share owned of record by them, on any matters presented
to the shareholders, and shall be entitled to vote their shares as
provided by law.
ARTICLE 4: Cumulative voting of shares of stock is not authorized.
ARTICLE 5: No holder of Common Stock of the Corporation shall be entitled,
as of right, to subscribe for, purchase or receive any new or additional
shares of stock of any class, whether now or hereafter authorized, or
33
<PAGE>
any notes, bonds, debentures, or other securities convertible into, or
carrying options or warrants to purchase, stock of any class; but all such
new or additional shares of stock of any class, or notes, bonds,
debentures, or other securities convertible into, or carrying options or
warrants to purchase, stock of any class may be issued or disposed of by
the Board of Directors to such persons and on such terms as it, in its
absolute discretion, may deem advisable.
ARTICLE 6: REGISTERED OFFICE/AGENT
The address of the registered office of the Corporation is 12500 North
Washington Street, Denver, Colorado 80241-2400 and the name of its
registered agent at such address is Allyson S. Kissell. Said registered
agent is an individual who resides in Colorado and has previously consented
to serve as registered agent in writing.
ARTICLE 7: PRINCIPAL OFFICE
The address of the principle office is: 12500 North Washington Street,
Denver, Colorado 80241-2400.
ARTICLE 8: INCORPORATORS
The names and addresses of each incorporator:
William M. Barnes Tamsin G. Barnes Stewart R. Couper
Jamestown Star Route Jamestown Star Route 2933 West 23rd Avenue
Boulder, Colorado Boulder, Colorado Denver, Colorado
ARTICLE 9: INDEMNIFICATION
A. To the fullest extent specifically permitted or provided by the Colorado
Business Corporation Act, as amended from time to time, the Corporation
shall indemnify any person against all liability and expense incurred by
reason of the fact that he is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, partner, or trustee of, or in any similar managerial
position of, another corporation, partnership, joint venture, trust or
other entity. In addition to the foregoing obligations of
indemnification, and with a view to giving the person covered by these
provisions the broadest possible indemnity, the Corporation shall also
indemnify any person as provided in the following sections of this
Article.
B. The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the
Corporation), by reason of the fact that he is or was a director or
officer of the corporation or is or was serving at the request of the
corporation as a director, officer, partner, or trustee of, or in any
similar managerial position of, another corporation, partnership, joint
venture, trust or other entity, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and
reasonable incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonable
believed to be in or not opposed to the best interests of the
Corporation and, with respect to any criminal action or proceeding, had
reasonable cause to believe his conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement or
conviction or upon a plea of nolo contendere or its equivalent shall not
---------------
of itself create a presumption that the person did not act in good faith
and in a manner which he reasonable believed to be in or not opposed to
the best interest of the Corporation and, with respect to any criminal
action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
C. The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was director,
officer, partner, or trustee of, or in any similar managerial position
of, another corporation, partnership, joint venture, trust or other
entity, against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement
of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation; but no indemnification shall be made in respect of any
claim, issue or matter as to which such person has been adjudged to be
liable for negligence or misconduct in the performance of his duty to
the Corporation unless, and then only to the extent that, the court in
which such action or suit was brought determines upon application that,
despite the adjudication of
34
<PAGE>
liability, but in view of all circumstances of the case, such person is
fairly and reasonably entitled to indemnification for such expenses
which such court deems proper.
D. To the extent that a person entitled to indemnity under Section B or C
of this Article has been successful on the merits in defense of any
action, suit, or proceeding referred to in said Section B or C or in
defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
E. Any indemnification under Section B or C of this Article (unless ordered
by a Court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the person
seeking indemnification is proper in the circumstances because he has
met the applicable standard of conduct set forth in said Section B or C.
Such determination shall be made by the Board of Directors by a majority
vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or, if such a quorum of disinterested
directors so directs, by independent legal counsel in written opinion,
or by the shareholders.
F. Expenses (including attorneys' fees) incurred in defending a civil or
criminal action, suit or proceeding may be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding as
authorized in Section E of this Article upon receipt of an undertaking
by or on behalf of the person seeking the advance to repay such amount
unless it is ultimately determined that he is entitled to be indemnified
by the Corporation against such expenses pursuant to the article.
G. The indemnification provided by this Article shall not be deemed
exclusive of any other rights to which those indemnified may be entitled
under these Articles of Incorporation, any bylaw, agreement, vote of
shareholders or disinterested directors, or otherwise, and any procedure
provided for by any of the foregoing, both as to action in his official
capacity and as to action in another capacity while holding such office,
and shall continue as to a person who has ceased to be in the position
which entitled him to such indemnification and shall inure to the
benefit of heirs, executors and administrators of such a person. The
provisions of this Article shall not be deemed to preclude the
Corporation from indemnifying other person from similar or other
expenses and liabilities as the Board of Directors may determine in a
specific instance or by resolution of general application.
H. The Corporation may purchase and maintain insurance on behalf of any
person who is or was director, officer, employee or agent of the
Corporation or who is or was serving at the request of the Corporation
as a director, officer, partner, trustee, or agent, or in any similar
managerial position, or as an employee or agent, of another corporation,
partnership, joint venture, trust or other enterprise, or any other
person against any liability asserted against him and incurred by him in
any such capacity or arising out of his status as such, whether or not
he would be indemnified under the provisions of the Article.
ARTICLE 10: DIRECTOR LIMITED LIABILITY
A. A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director, except as to liability specified in 7-108-
402 of the Colorado Business Corporation Act.
B. Any repeal or modification of the foregoing paragraph by the
shareholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such
repeal or modification.
FOURTH: By a meeting of the Board of Directors of the Corporation, pursuant to
- - ------
and in accordance with the Colorado Business Corporation Act, the Board of
Directors of the Corporation duly approve the foregoing Restatement of Articles.
The effective date of the directors' approval is February 22, 1996.
FIFTH: The manner in which any exchange, reclassification, or cancellation of
- - -----
issued shares provided for in the restatement shall be effected is as follows:
No exchange, reclassification, or cancellation of issued shares shall be
effected by the restatement.
IN WITNESS WHEREOF, AUTO-TROL TECHNOLOGY CORPORATION, has caused these
presents to be signed in its name and on behalf by its President and attested by
its Secretary on this 22nd day of February, 1996, and its President
35
<PAGE>
acknowledges that these Articles of Restatement are the act and deed of Auto-
trol Technology Corporation, and, under the penalties of perjury, that the
matters and facts set forth herein with respect to authorization and approval
are true in all material respects to the best of his knowledge, information, and
belief.
ATTEST: AUTO-TROL TECHNOLOGY CORPORATION
By: /s/Allyson S. Kissell By: /s/HOWARD B. HILLMAN
-------------------------- -------------------------
Allyson S. Kissell, Secretary Howard B. Hillman, President
36
<PAGE>
EXHIBIT 10.5
AGREEMENT WITH HOWARD B. HILLMAN DATED NOVEMBER 7, 1996
November 7, 1996
To Whom It May Concern:
The purpose of this letter is to document my commitment of ongoing financial
support to Auto-trol Technology Corporation and its subsidiaries (the
"Company"), which support will be sufficient to enable the Company to continue
as a going concern through December 31, 1997.
Sincerely,
Howard B. Hillman
President
31
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Auto-trol Technology Corporation, a Colorado corporation, has the following
subsidiaries, incorporated in the jurisdictions noted and doing business under
the names indicated.
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION OF INCORPORATION
- - ---------- -----------------------------
<S> <C>
Auto-trol International Corporation Colorado
Centra 2000, Inc. Colorado
Auto-trol Technology (Canada) Ltd. Alberta
Auto-trol Advertising, Inc. Colorado
Auto-trol Technology A.B. Sweden
Auto-trol Technology GmbH Germany
Centra Technology Ltd. United Kingdom
</TABLE>
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 2,173
<SECURITIES> 0
<RECEIVABLES> 3,019
<ALLOWANCES> 173
<INVENTORY> 304
<CURRENT-ASSETS> 5,845
<PP&E> 19,026
<DEPRECIATION> 12,572
<TOTAL-ASSETS> 12,850
<CURRENT-LIABILITIES> 5,577
<BONDS> 3,580
0
0
<COMMON> 155
<OTHER-SE> 3,530
<TOTAL-LIABILITY-AND-EQUITY> 12,850
<SALES> 9,139
<TOTAL-REVENUES> 21,231
<CGS> 3,248
<TOTAL-COSTS> 9,090
<OTHER-EXPENSES> 23,447
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 725
<INCOME-PRETAX> (11,827)
<INCOME-TAX> (40)
<INCOME-CONTINUING> (11,787)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,787)
<EPS-PRIMARY> (2.32)
<EPS-DILUTED> (2.32)
</TABLE>
