UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
(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, 1999
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)
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12500 North Washington Street, 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)
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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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of December 7, 1999, was based on the closing sale price on
such date. The aggregate number of shares of common stock outstanding on
December 7, 1999 was 29,296,757.
Document Incorporated by Reference: Proxy Statement and Notice of Annual
Meeting of Shareholders to be held on January 25, 2000: Part III - Items 9, 10,
11, and 12.
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AUTO-TROL TECHNOLOGY CORPORATION
REPORT ON FORM 10-KSB
FOR THE YEAR ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PART I Page
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Item 1. Description of Business.......................................... 1
Item 2. Description of Property.......................................... 5
Item 3. Legal Proceedings................................................ 5
Item 4. Submission of Matters to a Vote of Security Holders.............. 5
PART II
Item 5. Market for Common Equity and Related Stockholder Matters......... 6
Item 6. Management's Discussion and Analysis or Plan of Operation........ 7
Item 7. Financial Statements............................................. 11
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................... 27
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act............ 28
Item 10. Executive Compensation........................................... 28
Item 11. Security Ownership of Certain Beneficial Owners and Management... 28
Item 12. Certain Relationships and Related Transactions................... 28
Item 13. Exhibits and Reports on Form 8-K................................. 30
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ITEM 1. DESCRIPTION OF BUSINESS
General
The following discussion contains forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this report. Auto-trol Technology Corporation undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements that may be necessary to reflect events or circumstances after the
date of this report or to reflect the occurrence of unanticipated events.
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 software products and the software 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 CAD/CAM
software. Both the competitive pressures and market maturity in the CAD/CAM
marketplace and reduced margins on hardware products have caused the Company to
sell less CAD/CAM software and associated hardware to its customers than in past
years. The Company has had to shift its sales and support focus from hardware
and CAD/CAM software to internally developed product data management, electronic
network management, technical illustration, and systems integration. Auto-trol
believes that by offering customers a broad spectrum of information applications
and options, from analysis through implementation and ongoing support, it 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.
Products
CENTRA 2000(R)
The CENTRA 2000 system is a product data and electronic document management
system with optional workflow systems 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 Electronic
Document Management (EDM)/Product Data Management (PDM) functions, CENTRA 2000
manages pure data environments, audio/video, and large document assemblies. The
product is designed to fit a customer's environment with a general focus on
automating 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, 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(R)
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 RDBMS. A detailed graphical representation of
the network can be automatically generated from the database and overlaid 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.
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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
"off-the-shelf" solution set that augments illustration productivity. 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.
Software
Approximately 33% and 27% of total revenue was comprised of software sales for
the years ended September 30, 1999 and 1998, respectively.
Customer Support
Consulting Services
Auto-trol offers consulting services that include software needs assessments,
system configuration, implementation of its products, and third party product
integration with Auto-trol's products. Additionally, Auto-trol may develop
custom software or modify its existing software products to solve specific
customer needs. These services are sold in conjunction with product sales and
are billed at standard rates. Approximately 16% and 15% of total revenue was
comprised of consulting service revenue for the years ended September 30, 1999
and 1998, respectively.
Educational Services
Auto-trol provides comprehensive product training programs for all of the
Company's applications, as well as training in Java programming. Approximately
4% and 10% of total revenue was comprised of educational service revenue for the
years ended September 30, 1999 and 1998, respectively.
National Customer 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 13% of Auto-trol's employees are engaged in
post-sales support functions. A technical staff offers software support services
for most problems. Approximately 48% and 49% of total revenue was comprised of
customer support revenue for the years ended September 30, 1999 and 1998
respectively.
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Research and Product Development
Approximately 42% of Auto-trol's employees are engaged in research and product
development activities. The Company has made and will continue to make
significant investment in product development and enhancement due to rapidly
changing technology, competitive pressures, and customer demands. Research and
product development expenditures as a percentage of the Company's revenues for
1999 and 1998 were as follows:
Year Ended September 30,
------------------------
1999 1998
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(in thousands)
Total research and product development expense ..... $5,259 $6,037
Percent of total revenues .......................... 46% 43%
Marketing
Auto-trol's commercial 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 and
third parties in the United States from its domestic sales offices. The Company
markets its products in Europe through wholly owned subsidiaries with offices
located in Germany 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
Sweden 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 presents the revenue comprised of foreign sales for 1999 and
1998. For additional financial information about foreign or domestic operations
and export sales, see Note 8 of "Notes to the Consolidated Financial
Statements", on page 26.
Year Ended September 30,
------------------------
1999 1998
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(in thousands)
Foreign total revenues ................... $4,253 $6,174
Percent of total revenues ................ 37% 44%
Customers may purchase software systems with related services, or they may
purchase software and services independently. The Company maintains standard
pricing structures for 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 thirty day warranty on its software products.
Auto-trol may administer and recognize vendor warranties of third-party software
products. Payment terms are generally net thirty days from the date of shipment.
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.
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 $517 thousand as of September 30, 1999,
compared to $1.4 million as of September 30, 1998.
Competition
Within the Product Data Management market, the Company's primary competitors are
Agile Corporation, Documentum Inc., Structural Dynamic Research Company (SDRC)
and Matrix One, Inc. The Itedo GMBH Company is a competitor in the technical
illustration market. Architel Systems Corporation and Visionael Corporation are
the primary competitors in the physical electronic network market. The Company
believes that its products in the design, drafting, 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.
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Auto-trol competes primarily on the basis of quality and technical expertise.
The Company believes the functionality of its application products, short
implementation time with superior technical support, and responsiveness to
customer needs enhance 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.
Customers
Auto-trol is well represented in the international manufacturing, petrochemical,
aerospace, and communications industries. Major installations at governmental
facilities in Australia, Turkey, Canada, and the United States complement
Auto-trol's presence in the commercial sector. 15% of Auto-trol's customers are
ranked in the top 100 of the "1999 Fortune Global 500."
Suppliers
Due to the nature of the software industry, Auto-trol does not rely on any major
suppliers. Suppliers are chosen for the best prices and best service.
YEAR 2000
The year 2000 has caused uncertainties throughout the industry about whether
date-sensitive hardware or software will appropriately recognize and process
dates beyond 1999. The Company has enlisted resources from its financial,
technical and management groups to review and identify those areas that could be
affected by the Year 2000 problem, including its internal computer systems,
product offerings, and the readiness of third parties with which the Company has
material relationships.
Based on extensive testing, the Company believes that the current versions of
its primary software offerings (CENTRA 2000(R), KONFIG(R), Tech Illustrator(TM)
and GEOSTATION(R)) will provide customers with the necessary date interpretation
for proper operation beyond the year 2000, as long as the underlying operating
system of the host machine provides full and correct date information to the
software.
The Company believes that, with few exceptions, the latest versions of its
legacy software products that are currently under maintenance agreements are
also Year 2000 compliant; however, there can be no assurance that the Company
has identified all Year 2000 problems in every version of software supported by
the Company, and any failure by the Company to identify any such problem could
have a material adverse effect on the Company. The Company recommends that all
users of the Company's products review the date handling logic of any
customizations and modifications that they have made to the Company's products.
The Company also has reviewed its internal business information systems, and
replaced the systems that were not Year 2000 compliant. The costs of achieving
Year 2000 compliance with respect to such internal systems did not have a
material adverse effect on the Company.
Auto-trol has also been in contact with its major customers and suppliers to
obtain assurance letters that these entities are working toward being Year 2000
compliant, and that they have backup procedures in place to prevent any major
issues, should they not be compliant on a timely basis. The Company does not
feel that there are any major Year 2000 deficiencies related to Auto-trol's
business systems, products sold to customers or its business partners, which
would cause a lapse in business.
4
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Patents and Licenses
The Company holds three patents issued in the United States for vector drawings
and polygon display. 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.
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, 1999, Auto-trol had 212 employees,
which includes 90 in research and development, 31 in customer support, 30 in
administrative support, 57 in sales and support, and 4 in marketing.
ITEM 2. DESCRIPTION OF PROPERTY
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. The Company subleases
22,500 square feet to an unrelated party on a five year lease which expires on
January 31, 2002.
The Company also leases approximately 18,000 square feet of office space
throughout the United States, approximately 25,000 square feet in Canada,
approximately 1,600 square feet in Australia, and approximately 11,000 square
feet in Europe.
ITEM 3. LEGAL PROCEEDINGS
The Company and James Fox d.b.a. James Fox, Inc. ("Fox") entered into a
License/Exchange Agreement on March 17, 1982. The Agreement provided for the
Company to license certain computer programs from Fox and then market them
worldwide. In exchange, the Company paid Fox royalties based on a percentage of
revenue from sales and maintenance for the products sold. The Agreement provided
Fox with the right to examine Auto-trol's books and records to verify payments.
In the years following execution of the Agreement, the computer programs became
obsolete. Customers stopped buying the products and discontinued maintenance.
The Company wrote a letter to Fox in January 1995 terminating the Agreement. Fox
refused to accept the termination and continued to demand that the Company pay
allegedly outstanding royalties. Auto-trol denies that any royalties are unpaid.
In February 1999, the Company filed a declaratory judgment action with the
Denver District Court, seeking determinations that the Agreement terminated and
that the Company did not owe any amounts to Fox. Fox then removed the case to
Federal District Court and asserted a counterclaim seeking $1,947,058 in actual
damages, prejudgment interest for transactions which occurred in the 1980's and
early 1990's, and punitive damages.
The Company has every intention of defending vigorously against the
counterclaim, which the Company believes has no merit. The Company has appointed
its counsel Davis, Graham and Stubbs LLP to represent it in this matter.
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.
5
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Part II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Prior to October 20, 1997, the Company's common stock was traded on the NASDAQ
National Market System under the symbol ATTC. On October 20, 1997, NASDAQ
delisted the Company's common stock from the National Market System. The common
stock is now trading on the NASDAQ Over The Counter Market System under the
Symbol ATRC. The following table sets forth the range of high and low closing
sale prices in the NASDAQ Over The Counter Market System through September 30,
1999 for the common stock for the fiscal quarters indicated, as reported by
NASDAQ.
FISCAL FISCAL
1999 1998
-----------------------------------------------------------------------
High Low High Low
---- --- ---- ---
First Quarter.............. $1 1/4 5/8 $3 $1 1/4
Second Quarter............. 1 1/8 5/8 1 1/4 1 1/4
Third Quarter.............. 1 1/8 5/8 2 5/8 1 3/8
Fourth Quarter............. 5/8 3/8 1 1/4 1
As of December 7, 1999, there were 659 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.
6
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
Except for the historical information contained herein, the following
discussions contain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. The Company undertakes no obligation to revise any
forward-looking statements in order to reflect events or circumstances that may
subsequently arise. Some additional factors, among others, that also need to be
considered are: the likelihood that actual future revenues that are realized may
differ from those inferred from existing total backlog; the ability of the
Company to attract and retain highly trained professional employees; the delay
or deferral of customer implementations; the Company's success in expanding its
direct sales force and indirect distribution channels; the timing of new product
introductions and product enhancements by the Company and its competitors; the
mix of products and services sold; levels of international sales; and the
ability of the Company to develop and market new products and control costs, and
general domestic and international economic and political conditions.
Results of Operations
Overview
During fiscal 1999, the Company focused its sales efforts primarily on
internally developed software and system integration services along with the
development of alternative distribution channels. Operating losses continued for
the year, due primarily to the lack of revenue growth from products under
development internally. The PDM and network configuration revenues were also
affected in part by the delay of customer implementations, product development
delays as well as an increased complexity of the sales cycle in these markets.
The Company continues to believe that its PDM, EPS and network configuration
products in these market areas present a unique complementary combination that
differentiates 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 1999, the Company had new software product releases
for its PDM 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.
Revenues - For the year ended September 30, 1999, total sales and service
revenue decreased $2.5 million, or 18%, from the year ended September 30, 1998.
The Company had an increase in revenues from its own proprietary software
amounting to $10 thousand or .3% as compared to fiscal 1998. European sales
revenue decreased $318,000 or 27% from fiscal 1998. The overall decrease was due
primarily to the wide swing in customer scheduling of consulting personnel, as
well as a reduction in historic maintenance as a consequence of capped legacy
products.
%
In Thousands Increase Increase
For the Year Ended (Decrease) (Decrease)
September 30, September 30,
1999 1998
---------------------- ----------------------
Sales Revenue $ 3,814 $ 3,786 $ 28 .7%
Service Revenue 7,807 10,307 (2,500) (24.2%)
---------------------- ----------------------
$ 11,621 $ 14,093 $ (2,472) (17.5%)
====================== ======================
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION-(continued)
Gross Profit Margins - For the year ended September 30, 1999, gross profit
margins on total revenue decreased 7.6% from the year ended September 30, 1998.
%
In Thousands Increase Increase
For the Year Ended (Decrease) (Decrease)
September 30, September 30,
1999 1998
-------------------- ------------------
Gross Profit Sales $3,075 $3,329 $ (254) (7.6%)
Gross Profit Services 5,708 6,176 (468) (7.6%)
-------------------- ------------------
Total $8,783 $9,505 $ (722) (7.6%)
==================== ==================
This decrease in gross profit was due to the decrease in sales and service
revenue. Gross profit as related to total revenue for the year ended September
30, 1999 was 75.6%, as compared to 67.4% for the year ended September 30, 1998.
Research and Product Development - Research and development expenses were
approximately 45% of total revenues for the year ended September 30, 1999,
compared to 43% of total revenues for the year ended September 30, 1998. The
change in research and development spending as a percentage of revenue in fiscal
1999 is due in part to a decrease of $778,000 or 13%, in spending along with a
17.5% decrease in total revenues as compared to fiscal 1998.
Marketing, General and Administrative - For the year ended September 30, 1999,
marketing, general and administrative expenses increased $171 thousand, or 2%,
from the year ended September 30, 1998.
Interest - In the year ended September 30, 1999, interest expense increased
$1,000 or 0.2% from the year ended September 30, 1998, as a result of less
borrowings. Interest income decreased $66,000, or 65% from fiscal 1998, due to a
decrease in investing activities.
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.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION-(continued)
Liquidity and Capital Resources
Financial Condition - At September 30, 1999, the Company had approximately $1.8
million in cash and cash equivalents, which was 39% more than cash balances at
September 30, 1998. Cash used in operations during the year ended September 30,
1999 was $7 million compared to $5 million for the year ended September 30,
1998. The Company's net working capital was approximately $604,000 at September
30, 1999, as compared to a negative $413,000 at September 30, 1998. Capital
expenditures were made primarily for computer equipment and software, and were
$737,000 for the year ended September 30, 1999 compared to $.9 million for the
year ended September 30, 1998. Cash used in investing activities was $735,000
for the year ended September 30, 1999 compared to $855 thousand for the year
ended September 30, 1998. Cash generated from financing activities was $7.6
million for the year ended September 30, 1999 compared to $5.9 million for the
year ended September 30, 1998. Cash generated from financing activities resulted
from the issuance of related party notes payable and was used primarily to fund
operations.
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. As of September 30,
1999, the Company had no material commitments for capital expenditures.
During fiscal 1994, the Company received a permanent waiver of certain 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,
2000. 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, 2000.
Currency Fluctuations
The Company has three wholly owned foreign subsidiaries and one foreign branch
operation. The three subsidiaries are located in Germany, 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, Switzerland 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 $103,124 of an unfavorable
exchange rate variance and a $1.1 million decrease in revenue volume resulted in
a $1.2 million decrease in non-U.S. revenue between 1999 and 1998. 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 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,
1999, and 1998, the Company had realized a loss of approximately $37,000 and
$42,000 respectively, through payments it had received from its subsidiaries.
9
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION-(continued)
New Accounting Pronouncements
In June 1997, the FASB issued SFAS 130, Reporting Comprehensive Income, which
establishes standards for reporting and displaying comprehensive income and its
components (revenue, expenses, gains, and losses) in a full set of general -
purpose financial statements. The Company adopted SFAS 130 during fiscal year
1998 and restated all presented prior periods. The adoption of this Statement
did not have a significant impact on the financial statements.
In June 1997, the FASB issued SFAS 131, Disclosure about Segments of an
Enterprise and Related Information. In February 1998, the FASB issued SFAS 132,
Employer's Disclosures about Pensions and Other Postretirement Benefits. In June
1998, the FASB issued SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 131 and 132 were adopted by the Company during fiscal
year 1999. These statements require disclosure only and therefore did not impact
the Company's financial statements. SFAS No. 133, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. Currently, the Company
does not have any derivative financial instruments and does not participate in
hedging activities; therefore, management believes that SFAS No. 133 will not
impact the Company's financial statements.
In October 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("ACSEC") issued Statement of Position
97-2 (SOP 97-2), Software Revenue Recognition. SOP 97-2 supersedes SOP 91-1. SOP
97-2 requires companies to defer revenue and profit recognition unless four
required criteria of a sale are met. In addition, SOP 97-2 requires that revenue
recognized from software arrangements be allocated to each element of the
arrangement based on the relative fair values of the elements, such as software
products, upgrades, enhancements, post-contract customer support, installation,
or training. SOP 97-2 is effective for all transactions entered into in fiscal
years beginning after December 15, 1997. The adoption of SOP 97-2 in fiscal year
1999 did not have a material effect on the Company's financial position or
results of operations.
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ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Auto-trol Technology Corporation
We have audited the accompanying consolidated balance sheet of Auto-trol
Technology Corporation and subsidiaries as of September 30, 1999, and the
related consolidated statements of operations, comprehensive loss, shareholders'
equity, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 1999 and in prior
years. The Company will continue to be economically dependent upon this
financial support until it achieves profitable operations. The shareholder has
committed, in writing, to continue providing such financial support at least
through December 31, 2000.
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, 1999 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
November 23, 1999
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Auto-trol Technology Corporation
We have audited the accompanying consolidated balance sheet of Auto-trol
Technology Corporation and subsidiaries as of September 30, 1998, and the
related consolidated statements of operations, comprehensive loss, shareholders'
equity, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 1998 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, in writing, to continue providing such financial
support at least through December 31, 1999.
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, 1998 and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
KPMG LLP
Denver, Colorado
November 24, 1998
12
<PAGE>
<TABLE>
<CAPTION>
AUTO-TROL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
----------------------
ASSETS 1999 1998
----------------------
(in thousands,
except share amounts)
Current assets:
<S> <C> <C>
Cash and cash equivalents ......................................... $ 1,836 $ 1,325
Receivables, net of allowance of $62 and $128 ..................... 2,264 1,860
Service parts and prepaid expenses ................................ 260 355
----------------------
Total current assets ......................................... 4,360 3,540
----------------------
Property, facilities and equipment:
Land .............................................................. 356 356
Building and improvements ......................................... 8,404 8,435
Machinery and equipment ........................................... 5,261 7,005
Furniture, fixtures and leasehold improvements .................... 851 920
----------------------
14,872 16,716
Less accumulated depreciation and amortization .................... (9,256) (10,948)
----------------------
5,616 5,768
----------------------
Purchased software, net of accumulated amortization of $981 and $1,428 .. 239 290
Other assets ............................................................ 55 139
----------------------
Total assets ................................................. $ 10,270 $ 9,737
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 678 $ 402
Current portion of long-term debt (Note 3) ........................ 240 240
Current portion of capital lease obligations (Note 4) ............. 40 --
Accrued interest payable, related party portion $532 and $398 ..... 548 421
Unearned service revenue and customer deposits .................... 1,056 1,410
Accrued compensation and related taxes ............................ 350 362
Other liabilities ................................................. 844 1,118
----------------------
Total current liabilities .................................... 3,756 3,953
Long-term debt, related party portion $4,050 and $4,125 (Notes 2 and 3) . 5,010 5,325
Capital lease obligations (Note 4) ...................................... 54 --
----------------------
Total liabilities ............................................ 8,820 9,278
----------------------
Commitments and contingency (Notes 2, 3, 4, 6, 7 and 11)
Shareholders' equity (Notes 2 and 6):
Common stock, $ .02 par value; authorized 40,000,000 shares; issued
29,273,172 and 14,895,093 shares (including treasury stock) .. 585 298
Additional paid-in capital ........................................ 102,905 95,674
Accumulated other comprehensive loss .............................. (315) (808)
Accumulated deficit ............................................... (101,725) (94,220)
Treasury stock - 26,020 common shares, at cost .................... -- (485)
----------------------
Total shareholders' equity ................................... 1,450 459
----------------------
$ 10,270 $ 9,737
======================
See Notes to Consolidated Financial Statements
13
</TABLE>
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
September 30,
--------------------
1999 1998
(in thousands,
except per share amounts)
Revenues:
Sales ........................................... $ 3,814 $ 3,786
Service ......................................... 7,807 10,307
--------------------
11,621 14,093
--------------------
Costs and expenses:
Cost of sales ................................... 739 457
Cost of service ................................. 2,099 4,131
Research and product development ................ 5,259 6,037
Marketing, general, and administrative .......... 10,405 10,234
--------------------
18,502 20,859
--------------------
Loss from operations .................................. (6,881) (6,766)
Interest income ....................................... 36 102
Interest expense, related party portion $532 and $448 . (660) (659)
--------------------
Net loss .............................................. $ (7,505) $ (7,323)
====================
Loss per share - basic and diluted .................... $ (.41) $ (.64)
====================
Weighted average number of common shares outstanding -
basic and diluted .................................. 18,129 11,496
====================
See Notes to Consolidated Financial Statements.
14
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Year Ended
September 30,
1999 1998
-------------------
(in thousands)
Net loss $(7,505) $(7,323)
Other comprehensive income, net of tax:
Foreign currency translation adjustments ....... 493 227
-------------------
Comprehensive loss $(7,012) $(7,096)
===================
See Notes to Consolidated Financial Statements.
15
<PAGE>
<TABLE>
<CAPTION>
AUTO-TROL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common Stock Additional Other
------------------------ Paid-in Comprehensive Accumulated Treasury
Shares Amount Capital Loss Deficit Stock Total
--------------------------------------------------------------------------------------------
(in thousands, except share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, October 1, 1997 ......... 9,314,347 $ 186 $ 88,784 $ (1,035) $ (86,897) $ (485) $ 553
Issuances under employee stock
purchase plan ............. 1,424 -- 2 2
Common stock issued through
conversion of related
party debt ................ 5,579,322 112 6,888 7,000
Change in cumulative currency
translation adjustments ... 227 227
Net loss ....................... (7,323) (7,323)
--------------------------------------------------------------------------------------------
Balances, September 30, 1998 ...... 14,895,093 298 95,674 (808) (94,220) (485) 459
Issuances under employee stock
purchase plan ............. 4,099 -- 3 3
Common stock issued through
conversion of related
party debt ................ 14,400,000 288 7,712 8,000
Change in cumulative currency
translation adjustments ... 493 493
Net loss ....................... (7,505) (7,505)
Retirement of treasury shares .. (26,020) (1) (484) 485
--------------------------------------------------------------------------------------------
Balances, September 30, 1999 ...... 29,273,172 $ 585 $ 102,905 $ (315) $ (101,725) $ -- $ 1,450
============================================================================================
See Notes to Consolidated Financial Statements.
16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AUTO-TROL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
September 30,
------------------
1999 1998
------------------
(in thousands)
Cash flows from operating activities:
<S> <C> <C>
Net loss ................................................................... $(7,505) (7,323)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ......................................... 1,011 1,173
Loss on disposal of property, facilities, and equipment ............... (2) 33
Changes in operating assets and liabilities:
(Increase) decrease in receivables ............................... 206 1,711
Decrease in service parts and prepaids ........................... 34 96
Decrease in other assets ......................................... 202 12
Increase (decrease) in accounts payable ......................... 279 (370)
Increase (decrease) in unearned service revenue and customer
deposits ..................................................... (361) 269
Decrease in other liabilities .................................... (244) (647)
------------------
Net cash used in operating activities ............................................ (6,380) (5,046)
Cash flows from investing activities:
Capital expenditures ....................................................... (737) (920)
Proceeds from sale of property, facilities and equipment ................... 2 53
------------------
Net cash provided by (used in) investing activities .............................. (735) (867)
Cash flows from financing activities:
Proceeds from issuance of notes payable, related party ..................... 7,925 8,150
Payments on notes payable, capital leases, and long-term debt, related
party portion $0 and $2,000 ............................................. (264) (2,248)
Proceeds from issuance of common stock ..................................... 3 2
------------------
Net cash provided by financing activities ....................................... 7,664 5,904
Effect of exchange rate changes on cash .......................................... (38) (87)
------------------
Net increase (decrease) in cash and cash equivalents ............................. 511 (96)
Cash and cash equivalents at the beginning of the year ........................... 1,325 1,421
------------------
Cash and cash equivalents at the end of the year ................................. $ 1,836 $1,325
==================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest, related party portion of $398 and
$406 .......................................................................... $ 514 $ 541
Supplemental schedule of non-cash investing and financing activities
Conversion of related party debt to common stock ........................... $ 8,000 $ 7,000
Capital lease obligations incurred for new equipment ....................... $ 118
Retirement of treasury stock ............................................... $ 485
See Notes to Consolidated Financial Statements.
17
</TABLE>
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 1999 and 1998
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 software products
and the software products of certain third party vendors for end-user markets
involved in the following: 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.
Use of Estimates
- ----------------
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.
Statements 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.
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 are 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 are as follows:
Building and improvements 10-35 years
Machinery and equipment 3-7 years
Furniture and fixtures 3-7 years
During the year ended September 30, 1999, the Company decided to sell the
building in which its U.S. corporate headquarters is located. The transaction,
which the Company anticipates will occur in the next fiscal year, is not
expected to result in a loss. At September 30, 1999, the net carrying amount of
the building is approximately $4,415,000.
Foreign Currency Exchange and Translation
- -----------------------------------------
The functional currency of each of the Company's foreign subsidiaries is the
local currency. For reporting purposes, the financial statements are presented
in U.S. dollars in accordance with Statement of Financial Accounting Standard
No. 52, Foreign Currency Translation. The consolidated balance sheets are
translated into U.S. dollars at the exchange rates prevailing at the balance
sheet date and the statement of operations and cash flows at the average rates
for the relevant periods. 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.
18
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
Years Ended September 30, 1999 and 1998
1. Summary of Significant Accounting Policies (continued):
Revenue Recognition
- -------------------
Revenue is comprised of software sales, software license fees, related customer
support contracts, and other support services. Revenues from the sale of
software 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 when the customer is
billed. The Company provides a warranty for its products, generally for thirty
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.
Significant Customer
- --------------------
The Company had no significant customer which contributed 10% or more of the
Company's total revenues in the year ended September 30, 1999 and 1998.
Research and Product 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 approximately $79,800 and $115,000 for the years ended September 30,
1999 and 1998, 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 $41,000 and $129,000 for the years ended
September 30, 1999 and 1998, respectively. These costs are included in cost of
sales.
Basic and Diluted Loss Per Share
- --------------------------------
The Company determines basic and diluted loss per share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share. The basic net loss per common share is computed by dividing the net loss
by the weighted average number of shares outstanding during a period. Diluted
net loss per common share is computed by dividing the net loss, adjusted on an
as if converted basis, by the weighted average number of common shares
outstanding plus potential dilutive securities. Stock options are not considered
in the calculation, as the impact of the potential common shares would be to
decrease loss per share. Therefore, diluted loss per share is equivalent to
basic loss per share.
Income Taxes
- ------------
Deferred tax assets and liabilities are recognized for the future 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
reverse. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the statement of operations in the period that includes
the enactment date.
19
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
Years Ended September 30, 1999 and 1998
1. Summary of Significant Accounting Policies (continued):
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of
an Enterprise and Related Information and in February 1998, the FASB issued SFAS
No. 132, Employer's Disclosure about Pensions and Other Postretirement Benefits.
These statements are effective for fiscal years beginning after December 15,
1997. The Company adopted SFAS No. 131 and SFAS No. 132 during the year ended
September 30, 1999. Both of these statements require disclosure only and
therefore did not impact the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement, as amended by SFAS No. 137,
is effective for fiscal years beginning after June 15, 2000. Currently, the
Company does not have any derivative financial instruments and does not
participate in hedging activities; therefore, management believes that SFAS No.
133 will not impact the Company's financial statements.
In October 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("ACSEC") issued Statement of Position
97-2 (SOP 97-2), Software Revenue Recognition. SOP 97-2 requires companies to
defer revenue and profit recognition unless four required criteria of a sale are
met. In addition, SOP 97-2 requires that revenue recognized from software
arrangements be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades,
enhancements, post-contract customer support, installation, or training. The
Company's adoption of SOP 97-2 in fiscal year 1999 did not have a material
effect on the Company's financial position or results of operations.
Reclassifications
- -----------------
Certain 1998 amounts have been reclassified to conform to the 1999 presentation.
2. Economic Dependency on Majority Shareholder:
During fiscal years 1999 and 1998, affiliates of the Company's President,
Chairman of the Board, and majority shareholder loaned the Company $7,925,000
and $8,150,000, respectively. The Company and the affiliate agreed to convert
$8,000,000 and $7,000,000 of the loans to equity in 1999 and 1998, respectively.
The share prices of the Company's stock was either the quoted market value of
the stock or an amount in excess of the stock's quoted market value at the
conversion dates. No amounts were repaid in 1999, and $2,000,000 was repaid in
1998. The loan balance at September 30, 1999 and 1998 was $4,050,000 and
$4,125,000, respectively. The notes are unsecured and are due on October 1,
2001, bearing interest at 10% per annum. 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 through affiliates controlled by the shareholder
at least through December 31, 2000.
20
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
Years Ended September 30, 1999 and 1998
3. Debt:
Long-term debt consists of the following as of September 30:
1999 1998
---- ----
(in thousands)
Related party debt ............................... $ 4,050 $ 4,125
Industrial Development Revenue Bonds ............. 1,200 1,440
----------------------
5,250 5,565
Less current portion of long-term debt ........... (240) (240)
----------------------
$ 5,010 $ 5,325
======================
Maturities of long-term debt for each of the five years subsequent to September
30, 1999, and thereafter are as follows:
2000.................................. $ 265
2001.................................. 4,265
2002.................................. 240
2003.................................. 240
2004.................................. 240
-------
$ 5,250
=======
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. The Company has received a
permanent waiver of financial ratio requirements which placed restrictions on
long-term lease agreements, debt agreements, and current ratio requirements.
4. Leases:
Operating Leases
- ----------------
The Company leases certain office facilities and equipment under non-cancelable
operating leases expiring at various dates through fiscal 2005. As of September
30, 1999, the future minimum lease payments under operating leases (with initial
or remaining lease terms in excess of one year) are as follows:
Year Ending September 30,
----------------------------------------------
(in thousands)
2000............................. $ 453
2001............................. 292
2002............................. 214
2003............................. 136
2004............................. 114
Thereafter....................... 53
------
Total minimum lease payments..... $1,262
======
Aggregate rental expense under operating leases was approximately $1,037,000 and
$1,163,000, for the years ended September 30, 1999 and 1998, respectively.
The Company has entered into lease agreements to sublet certain office
facilities which expire at various dates through 2004. The aggregate rental
income for the years ended September 30, 1999 and 1998 was approximately
$527,000 and $355,000 which the Company has charged against rental expenses.
Total future minimum rentals to be received under non-cancelable subleases as of
September 30, 1999 was approximately $793,000.
21
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
Years Ended September 30, 1999 and 1998
Capital Leases
- --------------
During the year ended September 30, 1999, the Company entered into leases for
equipment which have been classified as capital leases. These leases expire in
various years through fiscal 2004. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. At September 30, 1999, approximately
$118,000 of equipment was recorded under capital leases. The leased assets are
being amortized over the lower of their related lease terms or their estimated
productive lives. Accumulated amortization of assets under capital leases was
approximately $12,000 for the year ended September 30, 1999.
Minimum Future Lease Payments
- -----------------------------
Minimum future lease payments under capital leases as of September 30, 1999 for
each of the next five years and in the aggregate are:
Year Ending September 30,
-------------------------------------------------------------
(in thousands)
2000............................................ $ 47
2001............................................ 34
2002............................................ 11
2003............................................ 11
2004............................................ 6
----
Total minimum lease payments.................... 109
Less: Amount representing interest............. (15)
----
Present value of net minimum lease payment...... 94
Current portion................................. 40
----
Long-term capitalized lease obligations......... $ 54
====
Interest rates on capitalized leases are imputed at 10% based on the Company's
incremental borrowing rate at the inception of each lease.
22
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
Years Ended September 30, 1999 and 1998
5. Income Taxes:
The Company has no provision for income taxes for the years ended September 30,
1999 and 1998, because the Company incurred net operating losses. The expected
tax benefit arising from the net losses, for the years ended September 30, 1999
and 1998, has not been recognized due to uncertainty of the realization of the
net operating losses.
The following summarizes the amount of the Company's loss, before income taxes,
contributed by domestic and foreign operations:
Year Ended
September 30,
---------------
1999 1998
---- ----
(in thousands)
United States $(7,205) $(3,713)
Foreign (300) (3,610)
------------------
$(7,505) $(7,323)
==================
The Company's most significant temporary difference relates to net operating
loss carryforwards. At September 30, 1999 and 1998, the Company has net
operating loss carryforwards for federal income tax purposes of approximately
$71,510,000 and $63,727,000, respectively, which are available to offset future
federal taxable income, if any, through 2018. The valuation allowance for
deferred tax assets as of September 30, 1999 and 1998 was $23,517,000 and
$21,327,000, respectively. The net change in the valuation allowance for the
year ended September 30, 1999, was an increase of $2,190,000, primarily
attributable to the net operating loss incurred during the year.
At September 30, 1999, the Company's $71,510,000 of net operating loss
carryforwards will expire as follows:
Year Ended
September 30,
-------------
2003 $ 2,863,000
2004 675,000
2005-2018 67,972,000
-----------
Total $71,510,000
===========
23
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
Years Ended September 30, 1999 and 1998
6. Shareholders' Equity:
Stock Options:
- --------------
The Company has in effect two stock option plans: an Incentive Stock Option Plan
and a Special Purpose Plan, whereby 1,000,000 shares of common stock are
authorized for issuance. Under both plans, the exercise price of each option
equals the fair market value (the average of the representative highest and
lowest prices), of the Company's stock on the date of grant, and an option's
maximum term is ten years. Options are granted at the discretion of the
Compensation Committee and vest at the rate of 20% per year through the fifth
anniversary of the grant of the stock option.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1999 and 1998, respectively: no dividend yield
for all years; expected volatility of 166 percent and 100 percent based upon
historical volatility; risk-free interest rates of 5.81 percent and 5.98
percent; and expected lives of five years for 1999 and 1998. The risk-free rates
used in the calculation represent the average U.S. Government Security interest
rates on the stock option grant date with maturities equal to the expected term
of the option. The effect of actual forfeitures is included in the computation
of compensation costs for options granted during each of the respective years.
A summary of the status of the Company's two fixed stock option plans as of
September 30, 1999 and 1998, and changes during the years ended on those dates,
is presented below (shares in thousands):
Year Ended
September 30,
----------------------------------------
1999 1998
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
------------- ------ ----- ------ -----
Outstanding at beginning
of year 315,837 $ 2.42 310,807 $ 2.74
Granted 589,553 $ .375 142,689 $ 1.50
Exercised -- -- -- --
Forfeited (50,722) $ 2.44 (137,659) $ 2.29
-------- --------
Outstanding at end of year 854,668 $ 1.01 315,837 $ 2.42
======== ========
Options exercisable at
year end 91,376 $ 2.64 58,702
Weighted-average fair
value of options
granted during
the year $ .354 $ 1.20
The following table summarizes information about fixed stock options outstanding
at September 30, 1999:
Number Weighted-Avg. Number
Outstanding Remaining Exercisable
Exercise Price at 9/30/99 Contractual Life at 9/30/99
-------------- ---------- ---------------- ----------
New Grant $.375 589,553 9.9 years 0
$1.50 82,890 8.3 years 16,578
$1.56 27,900 7.7 years 11,160
$3.00 150,339 7.3 years 60,136
$3.75 2,396 3.9 years 2,396
$6.56 50 5.8 years 40
$6.88 910 6.4 years 546
$10.00 550 5.3 years 440
$20.00 80 1.2 years 80
$.375 to $20.00 854,668 6.2 years 91,376
24
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
Years Ended September 30, 1999 and 1998
The Company applies APB Opinion 25 and related Interpretations in accounting for
its stock options issued to employees. Accordingly, since the Company grants
options at fair market value at date of grant, no compensation cost has been
recognized for its Incentive Stock Option Plans and its Special Purpose Plan.
Had compensation expense for the Company's plans been determined on the fair
value at the grant dates for awards under those plans consistent with the method
of FASB Statement 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
(in thousands, except per share amounts)
1999 1998
---- ----
Net loss:
As reported $(7,505) $(7,323)
Pro forma (7,555) $(7,460)
Basic and diluted loss per share:
As reported $(.41) $(0.64)
Pro forma $(.42) $(0.65)
Employee Stock Purchase Plan - The Company has an Employee Stock Purchase Plan
(the Plan), under which 10,889 shares were available for purchase by employees
as of September 30, 1999. The Plan allows employees to elect to purchase shares
of the Company's stock at either full market price or at a 5% discounted price
of the fair market value of the stock at the beginning of the option period or
when the option is exercised, whichever is lower. The option period begins on
March 1 and ends on October 31 for each calendar year of the Plan. The maximum
number of shares that each employee can purchase during the option period is 250
shares. Employees have purchased 8,734 shares of common stock under the
Company's Employee Stock Purchase Plan through September 30, 1999. There was no
significant compensation expense recognized for stock issued under the Plan for
the years ended September 30, 1999 and 1998.
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 401(k) Plan. The Plan's
funds are invested by a third-party fund manager into various funds as selected
by the employee. The funds offered are determined by the 401(k) committee. Plan
funds may not be invested in common stock of the Company. Under the Plan,
employees may contribute 1% to 20% 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 $27,000 and $34,000 during the years ended September 30,
1999 and 1998, 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.
25
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
Years Ended September 30, 1999 and 1998
8. Foreign and Domestic Operations:
Revenues, operating results before unallocated expenses, and identifiable assets
as of and for the years ended September 30, 1999 and 1998 by geographic area are
presented in the table below. There were no significant amounts of sales or
transfers between geographic areas.
Year Ended
September 30,
---------------
1999 1998
---- ----
(in thousands)
Revenues:
North America ............ $ 8,728 $ 10,468
Europe ................... 2,514 3,053
Other (1) ................ 379 572
--------------------
Net Loss ....................... $ 11,621 $ 14,093
====================
Loss before income taxes:
North America ............ $ (7,173) $ (7,017)
Europe ................... (483) (459)
Other .................... 151 153
--------------------
Net Loss (2) ................... $ (7,505) $ (7,323)
====================
Identifiable assets at year end:
North America ............ $ 9,286 $ 8,459
Europe ................... 810 995
Other .................... 174 283
--------------------
$ 10,270 $ 9,737
====================
(1) In 1998, export sales were made to various international distributors and
to the Company's Australian branch.
(2) In 1998, 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.
In 1998, interest expense has been allocated to each geographic area based on
subsidiary assets and liabilities funded by domestic borrowings.
9. Fair Value of Financial Instruments:
The fair value of the Company's related party debt is not practicable to
estimate due to the related party nature of the underlying transaction. The fair
value of the Company's other long-term debt approximates carrying value as the
interest rate on the debt approximates current borrowing rates available to the
Company. Management believes that the carrying amounts of the Company's other
financial instruments approximates their fair values primarily because of the
short-term maturities of these instruments.
26
<PAGE>
AUTO-TROL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
Years Ended September 30, 1999 and 1998
10. Credit and other Risk Considerations:
The Company's accounts receivable subject the Company to credit risk, as
collateral is generally not required. The Company performs credit evaluations of
its customers' financial condition and maintains allowances for potential credit
losses. In the opinion of management, actual losses and allowances have been
within its expectations.
The Company is subject to risks and uncertainties common to growing
technology-based companies, including rapid technological change, growth and
commercial acceptance of its products, dependence on principal products and
third party technology, new product development, new product introductions and
other activities of competitors.
11. Litigation:
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the financial
statements of the Company.
On March 17, 1982, the Company entered into a License/Exchange Agreement ("the
Agreement") with J. Fox Inc., an independent third party which provided the
Company with a license to certain computer programs. Under the terms of the
Agreement, the Company was required to pay royalties based on a percentage of
revenues from sales and maintenance for the computer programs sold. Subsequent
to the execution of the Agreement, the computer programs became obsolete. In
February 1999, the Company filed a motion with the Denver District Court to
declare the agreement terminated. Upon filing this motion, a counter claim was
initiated against the Company for approximately $2,000,000. While it is not
possible to predict the outcome of this case, it is the opinion of the Company's
management that the counterclaim is without merit and that it will not have a
material adverse effect in the Company's consolidated financial statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
27
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The response to this Item is contained in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on January 25, 2000, under the caption
"Election of Directors" and "Executive Officers", and is incorporated herein by
reference.
ITEM 10. 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 25, 2000, under the caption
"Executive Compensation", and is incorporated herein by reference.
ITEM 11. 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 25, 2000, under the caption
"Voting Securities and Principal Shareholders", and is incorporated herein by
reference.
ITEM 12. 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 25, 2000, 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, 1999, 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.
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 20, 1999 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:
Signatures Title Date
- ---------- ----- ----
/s/ HOWARD B. HILLMAN Chairman of the Board December 22,l999
- --------------------- President (Principal
Howard B. Hillman Executive Officer)
/s/ MAJOR GENERAL WILLIAM R. USHER,USAF (RET.) Director December 22, 1999
- ---------------------------------------------
Major General William R. Usher (Ret.)*
/s/ J. RODERICK HELLER, III Director December 22, 1999
- ---------------------------
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
- -----------------------
29
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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
27, 1998
10.2 Copy of Special Purpose Stock Option Plan, as amended through
January 27, 1998
10.3 Agreement with HP/Apollo Computer, Inc., as amended October 13,
1999
10.4 Agreement with Minolta Business Systems Inc. dated April 27, 1999
10.5 Agreement with Copelco Capital Inc. dated February 24, 1999
10.6 Agreement with Copelco Capital Inc. dated November 20, 1998
10.7 Agreement with Howard B. Hillman dated October 20, 1999
21 Subsidiaries of the Registrant
24 Consent of Gelfond, Hochstadt, Pangburn, P.C.
* Incorporated by reference from Form 10-K for fiscal year ended September
30, 1996, dated December 10, 1996.
** 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.
(b) Reports on Form 8-K
None
30
EXHIBIT 10.7
Agreement with Howard B. Hillman dated October 20, 1999
October 20, 1999
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, 2000.
Sincerely,
Howard B. Hillman
President
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:
Subsidiary Jurisdiction of Incorporation
---------- -----------------------------
Auto-trol International Corporation Colorado
Centra 2000, Inc. Colorado
Auto-trol Technology (Canada) Ltd. Alberta
Auto-trol Advertising, Inc. Colorado
Auto-trol Technology GmbH Germany
Centra Technology Ltd. United Kingdom
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 23, 1999, relating to the
consolidated balance sheets of Auto-trol Technology Corporation and subsidiaries
as of September 30, 1999, and the related consolidated statements of operations,
comprehensive loss, shareholders' equity, and cash flows for the year then
ended, which appears on page 11 of this annual report on Form 10-KSB 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 1999 and 1998 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, in writing, to continue providing such financial
support at least through December 31, 2000.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
December 20, 1999
<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 22, 1999 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:
Signatures Title Date
- ---------- ----- ----
/s/HOWARD B. HILLMAN Chairman of the Board December 22, l999
- -------------------- President (Principal
Howard B. Hillman Executive Officer)
/s/MAJOR GENERAL WILLIAM R. USHER,USAF (RET.) Director December 22, 1999
- ---------------------------------------------
Major General William R. Usher (Ret.)*
/s/ J. RODERICK HELLER, III Director December 22, 1999
- ---------------------------
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
- -----------------------
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 1,836
<SECURITIES> 0
<RECEIVABLES> 2,264
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,360
<PP&E> 14,872
<DEPRECIATION> (9,256)
<TOTAL-ASSETS> 10,270
<CURRENT-LIABILITIES> 3,756
<BONDS> 0
0
0
<COMMON> 585
<OTHER-SE> 865
<TOTAL-LIABILITY-AND-EQUITY> 10,270
<SALES> 11,621
<TOTAL-REVENUES> 11,621
<CGS> 0
<TOTAL-COSTS> 2,838
<OTHER-EXPENSES> 15,664
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 660
<INCOME-PRETAX> (7,505)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,505)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (7,505)
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