Odd. 10Q files today. I'm in at 3 3/8. Jack
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
SALES. Sales increased $2.1 million, or 41.3%, from $5.0 million for
the three months ended September 30, 1998 to $7.0 million for three months ended
September 30, 1999. The increase was due to increases in product sales in the
United States ($1.3 million) and in the three European countries where the
Company has sales offices ($757,000).
GROSS PROFIT. Gross profit increased $1.1 million, or 44.7%, from $2.5
million for the three months ended September 30, 1998 to $3.6 million for the
three months ended September 30, 1999. Gross margin increased to 51.7% for the
three months ended September 30, 1999 from 50.5% for the three months ended
September 30, 1998. The increase in gross margin was primarily a result of
smaller price discounts in the three months ended September 30, 1999, partially
offset by fewer sales of higher margin software.
SELLING EXPENSES. Selling expenses decreased $45,000, or 1.6%, from
$2.9 million for the three months ended September 30, 1998 to $2.8 million for
the three months ended September 30, 1999. This decrease was primarily a result
of lower selling expenses in the United States ($373,000), partially offset by
an increase in selling expenses in Europe ($327,000).
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $660,000, or 77.5%, from $852,000 for the three months ended
September 30, 1998 to $1.5 million for the three months ended September 30,
1999. The increase was due to increases across many categories related to the
company's expansion in the United States and Europe. The Company's United States
operations accounted for $492,000 of the increase, including increases in
professional and legal ($158,000), salaries ($111,000), subcontractor expenses
($60,000), telecommunications ($47,000) and hiring and training costs ($43,000).
Expenses in Europe increased primarily as a result of staffing additions
($160,000).
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses decreased $159,000, or 15.3%, from $1.0 million for the three months
ended September 30, 1998 to $880,000 for the three months ended September 30,
1999. This decrease was primarily due to the completion of the amortization of
existing product technology in 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $157,000, or 21.3%, from $738,000 for the three months ended September
30, 1998 to $895,000 for the three months ended September 30, 1999.
The increase was primarily due to increases in salaries ($106,000) in the
United States, and expenses in Europe ($85,000).
INTEREST INCOME. Interest income decreased $50,000, or 23.3%, from
$216,000 for the three months ended September 30, 1998, to $165,000 for the
three months ended September 30, 1999. The decrease was primarily attributable
to a decrease in the amount of interest-earning cash, cash equivalents, and
investments.
INCOME TAX BENEFIT. Income tax benefit increased $406,000 from $56,000
for the three months ended September 30, 1998, to $462,000 for the three months
ended September 30, 1999. The tax
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benefit in the three months ended September 30, 1999 resulted from tax benefits
in the United States ($416,000) and Europe ($46,000).
NET LOSS. Net loss decreased $1.1 million from $2.7 million for the
three months ended September 30, 1998 to $1.7 million for the three months ended
September 30, 1999 due to the factors stated above.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
SALES. Sales increased $3.2 million, or 16.3%, from $19.4 million for
the nine months ended September 30, 1998 to $22.5 million for the nine months
ended September 30, 1999. The increase was primarily a result of an increase in
product sales in Germany ($2.5 million), primarily as a result of the Company's
acquisition of CATS in May 1998.
GROSS PROFIT. Gross profit increased $1.5 million, or 13.2%, from $11.5
million for the nine months ended September 30, 1998 to $13.0 million for the
nine months ended September 30, 1999. Gross margin decreased to 57.5% for the
nine months ended September 30, 1999 from 59.1% for the nine months ended
September 30, 1998. The decrease in gross margin was primarily a result of a
decrease in the average selling price of the Company's FAROArm products,
beginning in September 1998.
SELLING EXPENSES. Selling expenses increased $1.5 million, or 21.8%,
from $6.7 million for the nine months ended September 30, 1998 to $8.1 million
for the nine months ended September 30, 1999. This increase was a result of the
Company's expansion of sales and marketing staff and activities, including those
resulting from the Company's acquisition of CATS in May 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $2.1 million, or 104.2%, from $2.0 million for the nine
months ended September 30, 1998 to $4.0 million for the nine months ended
September 30, 1999. The increase from the Company's United States operations was
$1.2 million, including increases in salaries ($530,000), professional and legal
expenses ($408,000) and subcontractor expenses ($190,000). The increase in the
Company's European operations was $811,000, primarily from the addition of CATS
in May 1998.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased $889,000, or 51.7%, from $1.7 million for the nine months
ended September 30, 1998 to $2.6 million for the first nine months of 1999. This
increase was primarily due to the amortization expenses related to the
intangible assets associated with the Company's acquisition of CATS.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $1.0 million or 65.6%, from $1.6 million for the nine months ended
September 30, 1998 to $2.6 million for the nine months ended September 30, 1999.
The increase was primarily due to increases in salaries in the United States of
$555,000, and an increase in expenses in Europe of $644,000, resulting from the
Company's acquisition of CATS, offset in part by a reduction in other research
and development expenses in the United States of $176,000.
IN-PROCESS RESEARCH AND DEVELOPMENT RESULTING FROM ACQUISITION.
In-process research and development expenses of $3.2 million were recorded in
the second quarter of 1998 related to the acquisition of CATS.
INTEREST INCOME. Interest income decreased $316,000, or 37.7%, from
$839,000 for the nine months ended September 30, 1998, to $522,000 for the nine
months ended September 30, 1999. The decrease was primarily attributable to a
decrease in the amount of interest-earning cash, cash equivalents, and
investments.
INCOME TAX EXPENSE (BENEFIT). Income tax expense decreased $1.1
million, or 229.1%, from expense of $481,000 for the nine months ended September
30, 1998, to a benefit of $621,000 for the nine months ended September 30, 1999.
The Company had income tax expense for the nine months ended September 30, 1998
due to U. S. taxable income and the writeoff of the deferred tax asset relating
to
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German net operating loss carryforwards. The Company had a net tax benefit for
the nine months ended September 30, 1999, primarily due to the generation of U.
S. taxable losses.
NET LOSS. Net loss decreased $458,000 from $3.4 million for the nine
months ended September 30, 1998 to $3.0 million for the nine months ended
September 30, 1999, due to the factors stated above.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, net cash provided by
operating activities was $82,000 compared to cash used in operating activities
of $1.7 million for the nine months ended September 30, 1998. The increase was
due to decreases in accounts receivable and increases in accounts payable and
accrued liabilities. Net cash provided by investing activities was $813,000 for
the nine months ended September 30, 1999, compared to net cash provided by
investing activities of $751,000 for the nine months ended September 30, 1998.
Net cash used in financing activities for the nine months ended September 30,
1999 was $183,000 compared to net cash provided of $75,000 for the nine months
ended September 30, 1998. This increase was due to payments on debt during the
nine months ended September 30, 1999.
In April 1997, the Company obtained a one-year unsecured $1.0 million
line of credit which bears interest at the 30-day commercial paper rate plus
2.65% per annum. There were no outstanding borrowings under this loan agreement
at September 30, 1999.
The Company's principal commitments at September 30, 1999 were leases
on its headquarters and regional offices and a loan commitment to the two former
shareholders of CATS (see Part II, Item 5, Other Information). There were no
material commitments for capital expenditures at that date. The Company believes
that its cash, investments, cash flows from operations and funds available from
its credit facilities will be sufficient to satisfy its working capital, loan
commitment and capital expenditure needs at least through 1999.
FOREIGN EXCHANGE EXPOSURE
Sales outside the United States represent a significant portion of the
Company's total revenues. Fluctuations in exchange rates between the U.S. dollar
and the currencies where the Company conducts such business may have a material
adverse effect on the Company's business, results of operation and financial
condition, particularly its operating margins, and could also result in exchange
losses. The impact of future exchange rate fluctuations on the results of the
Company's operations cannot be accurately predicted. To the extent that the
percentage of the Company's non-U.S. dollar revenues derived from international
sales increases in the future, the risks associated with fluctuations in foreign
exchange rates will increase. Historically, the Company has not managed the
risks associated with fluctuations in exchange rates but may undertake
transactions to manage such risks in the future using forward foreign exchange
contracts, foreign currency options or other instruments to hedge these risks.
YEAR 2000
The Company has invested significant resources in the latest
information technologies over the past five years and therefore has minimized
the effect of Year 2000 issues. Management initiated a program to evaluate all
internal computer systems and applications, and products with computer systems
and determined the adjustments necessary to become Year 2000 compliant.
Management believes that existing internal resources are sufficient to correct
any internal systems deficiencies that have or may be determined. The Company
has completed compliance of internal computer systems, applications, and
products. A final roll-over test of the Company's headquarters' internal
computer systems will be held by November 30, 1999. The Company has received
positive responses from its major customers and substantially all of its
suppliers regarding their Year 2000 readiness. However, there can be no
assurance that the systems of other companies on which the Company relies will
be timely corrected, or that any failure by another company to correct such
systems would not have a material adverse effect on the Company. Contingency
plans have been developed to be implemented in the event any information
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technology system, non-information technology system, third party or supplier is
not Year 2000 compliant in a timely manner.
The total cost to the Company of these Year 2000 Compliance activities
has not been and is not anticipated to be material to its financial position or
results of operations in a given year. This is based on Management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans, and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ from those
plans. The Company does not separately track the internal costs incurred on Year
2000 Compliance activities, and such costs are principally the payroll costs of
employees participating in these activities.
EFFECTS OF INFLATION
Inflation generally affects the Company by increasing the cost of
labor, equipment and raw materials. The Company does not believe that inflation
has had any material effect on the Company's business over the last three years.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference
herein from the section of this report in Part I, Item 2, under the caption
"Foreign Exchange Exposure." |
