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CIMATRON LIMITED CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS Page Re p ort of Inde p endent Re g istered Public Accountin g Firm F-2 Consolidated Financial Statements: Balance Sheets as of December 31, 2006 and 2005 F-3 Statements of O p erations for the years ended December 31, 2006, 2005 and 2004 F-4 Statement of Shareholders' E q uit y and Com p rehensive Income ( Loss ) for the years ended December 31, 2006, 2005 and 2004 F-5 Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 F-6 Notes to the Consolidated Financial Statements F-8 - F-28 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders of Cimatron Limited We have audited the accompanying consolidated balance sheets of Cimatron Limited and subsidiaries (the “Company”) as of December 31, 2006 and 2005 and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and p erform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2006 and 2005 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with U.S. generally accepted accounting principles. Brightman Almagor & Co. Certified Public Accountants A member firm of Deloitte Touche Tohmatsu Tel-Aviv, Israel June 17, 2007 F - 2 CIMATRON LIMITED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, 2 0 0 6 2 0 0 5 ASSETS Current assets Cash and cash equivalents $ 5,597 $ 2,708 Shor t -term investments ( Note 3 ) -2,167 Trade accounts receivable, net of allowance for doubtful accounts of $1,625 and $1,694 as of December 31, 2006 and 2005 respectively ( Note 4 ) 4,848 4,541 Other accounts receivable and prepaid expenses (Note 5) 853 774 Inventory 127 62 Total current assets 11,425 10,252 Lon g -term investments (Note 3) 2,035 2,195 De p osits with insurance com p anies and severance p a y funds ( Note 9 ) 2,653 2,219 Pro p ert y and e q ui p ment (Note 6) Cos t 5,840 5,321 Less - accumulated depreciation 4,830 4,325 Property and equipment, ne t 1,010 996 Other assets Software development costs, net (Note 7) 156 193 Goodwill, ne t 628 587 Total other assets 784 780 Total assets $ 17,907 $ 16,442 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Shor t -term bank credi t $500$501 Related p arties 109 304 Trade payables 828 663 Other liabilities and accrued expenses (Note 8) 4,221 3,977 Deferred revenues 425 479 Total current liabilities 6,083 5,924 Lon g -term liabilities Accrued severance pay (Note 9) 3,003 2,532 Minorit y interests ( 24 ) 4 Contin g ent liabilities and commitments (Note 10) Shareholders' e q uit y Share capital (Note 11): Ordinar y shares of NIS 0.10 p ar value ( Authorized - 19,950,000 shares, issued and outstanding - 8,001,270 shares at December 31, 2006 and 2005) 264 264 Additional p ai d -in ca p ital 13,521 13,417 Accumulated other comprehensive loss: Foreign currency translation adjustments (515) (478) Unrealized loss on available fo r -sale securities ( 209 ) ( 202 ) Unrealized gain (loss) on derivative instruments 131 (158) Accumulated defici t (4,188) (4,702) 9,004 8,141 Treasury stock, at cost; 166,100 shares at December 31, 2006 and 2005 (159) (159) The accompanying notes are an integral part of the financial statements. F - 3 Total shareholders' equity 8,845 7,982 Total liabilities and shareholders' equity $ 17,907 $ 16,442 CIMATRON LIMITED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) The accompanying notes are an integral part of the financial statements. F - 4 Year ended December 31, 2 0 0 6 2 0 0 5 2 0 0 4 Revenues (Note 14a): Products $ 9,642 $ 8,968 $ 11,370 Services 11,817 11,957 11,793 Total 21,459 20,925 23,163 Cost of revenues ( Note 14b ) : Products 2,154 3,367 2,923 Services 1,469 1,568 1,678 Total 3,623 4,935 4,601 Gross profi t 17,836 15,990 18,562 Research and development expenses, ne t 4,426 4,815 5,554 Selling, general and administrative expenses ( Note 14c ) 13,362 15,650 13,962 Operating income (loss) 48 (4,475) (954) Financial income (expenses), ne t 574 (148) 445 Other income (expenses) (5) 1 144 Income (loss) before income taxes 617 (4,622) (365) Income taxes ( Note 12 ) ( 27 ) ( 2 ) ( 23 ) Income (loss) after income taxes 590 (4,624) (388) Company's equity in results of affiliated company (105) (5) - Minorit y interest in results of subsidiar y 29 36 - Net Income (loss) $ 514 $ (4,593) $ (388) N et Income (loss) per share (basic and diluted) $ 0.07 $ (0.59) $ (0.05) Wei g hted avera g e number of shares outstandin g ( basic and diluted ) 7,835 7,835 7,835 CIMATRON LIMITED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (in thousands) The accompanying notes are an integral part of the financial statements. F - 5 Share capital Additional paid-in capital Accumulated other comprehensive income (loss) Retained earnings (accumulated deficit) Treasury stock Comprehensive income (loss) Total shareholders' equity Total com p rehensive loss $ (611) Balance at January 1, 2004 264 13,417 (280) 279 (159) 13,521 Chan g es durin g the y ear ended December 31, 2004: N et loss (388) (388) (388) Unrealized loss on available-fo r -sale securities ( 222 ) ( 222 ) ( 222 ) Unrealized loss on derivative instruments (174) (174) (174) Foreign currency translation adjustmen t 111 111 111 Total com p rehensive loss $ ( 673 ) Balance at December 31, 2004 264 13,417 (565) (109) (159) 12,848 Chan g es durin g the y ear ended December 31, 2005: N et loss (4,593) (4,593) (4,593) Unrealized gain on available-fo r -sale securities 64 64 64 Unrealized loss on derivative instruments ( 158 ) ( 158 ) ( 158 ) Foreign currency translation adjustmen t (179) (179) (179) Total com p rehensive loss $ (4,866) Balance at December 31, 2005 $ 264 $ 13,417 $ ( 838 ) $ ( 4,702 ) $ ( 159 ) $7,982 Chan g es durin g the y ear ended December 31, 2006: N et Income 514 514 514 Unrealized loss on available-fo r -sale securities (7) (7) (7) Unrealized gain on derivative instruments 289 289 289 Forei g n currenc y translation ad j ustmen t ( 37 ) ( 37 ) ( 37 ) Stock option compensation 104 104 104 Total com p rehensive income $ 863 Balance at December 31, 2006 $ 264 $ 13,521 (593) (4,188) $ (159) $ 8,845 CIMATRON LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) The accompanying notes are an integral part of the financial statements. F - 6 Year ended December 31, 2 0 0 6 2 0 0 5 2004 CASH FLOWS - OPERATING ACTIVITIES Net Income (loss) $ 514 $ (4,593) $ (388) Ad j ustments to reconcile net loss to net cash p rovided b y ( used in ) o p eratin g activities: Depreciation and amortization 521 1,676 820 Increase ( decrease ) in accrued severance p a y 464 ( 736 ) ( 179 ) Gain from sale of property and equipment, ne t - (13) (71) stock options compensation 104 - - Loss (g ain ) from sale and devaluation ( revaluation ) of bonds and funds 22 284 (2) Company's equity in results of affiliated company 116 5 - Minorit y interest in results of subsidiar y ( 28 ) ( 36 ) - Chan g es in assets and liabilities: Decrease ( increase ) in accounts receivable and p re p aid ex p enses ( 266 ) 1,354 ( 416 ) Decrease (increase) in inventory 6 (11) 13 Decrease (increase) in deposits with insurance companies and severance p a y fun d ( 434 ) 727 99 Increase in debts to related parties (195) 205 2 Increase (decrease) in trade payables, accrued expenses and other liabilities 434 935 ( 797 ) Net cash p rovided b y ( used in ) o p eratin g activities 1,258 (203) (919) CASH FLOWS - INVESTING ACTIVITIES Investment in bonds - (250) (577) Proceeds from sale and redemption of bonds 2,160 2,935 334 Purchase of p ro p ert y and e q ui p ment ( 444 ) ( 429 ) ( 505 ) Proceeds from sale of property and equipmen t 7 27 221 Acquisition of affiliated companies - (891) - Ca p italization of software develo p ment costs - ( 193 ) - Acquisition of subsidiary, net of cash acquired (Appendix A) (127) 40 - Net cash p rovided b y ( used in ) investin g activities 1,596 1,239 (527) CASH FLOWS - FINANCING ACTIVITIES Shor t -term bank credi t (1) - - Net cash used in financin g activities ( 1 ) Effect of exchange rate changes on cash 36 (39) 33 N et increase ( decrease ) in cash and cash e q uivalents 2,853 1,036 ( 1,446 ) Cash and cash equivalents at beginning of year 2,708 1,711 3,124 Cash and cash e q uivalents at end of y ear 5,597 $ 2,708 $ 1,711 Su pp lemental information: Cash paid during the year for income taxes $ 47 $ 29 $ 173 CIMATRON LIMITED APPENDIX TO STATEMENTS OF CASH FLOWS (U.S. dollars in thousands) The accompanying notes are an integral part of the financial statements. F - 7 Year ended December 31, 2 0 0 6 2 0 0 5 2004 A pp endix A - Ac q uisition of subsidiar y , net of cash ac q uired Working capital - excluding cash 59 - - Goodwill 41 - - Pro p ert y and e q ui p men t 27 - - $ 127 $ - $ - A pp endix B - Non-cash transactions Purchase of property on credi t $ 60 $ 36 $ 38 CIMATRON LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) F - 8 NOTE 1 – GENERAL Cimatron Limited (“the Company”) designs, develops, manufactures, markets and supports a family of modular CAD/CAM software products which offer integrated design-through-manufacturing solutions for small to medium-sized companies. The Company’s products have been sold to end-users in numerous industries, including automotive, aviation and aerospace, household goods, mold and die making, machinery and tools, and telecommunications. The Company markets its products through distributors and throu g h its subsidiaries located in different countries. NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES The financial statements are prepared in conformity with U.S. generally accepted accounting principles. A. Use of estimates in p re p aration of financial statements The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in determining 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. B. Financial statements in U.S. dollars The reporting currency of the Company is the U.S. dollar (“dollar”). The dollar is the functional currency of the Company and its subsidiaries in the United States and Canada. Transactions and balances originally denominated in dollars are presented at their original amounts. Non-dollar transactions and balances are remeasured into dollars in accordance with the principles set forth in Statement of Financial Accounting Standards (“SFAS”) No. 52 “Foreign Currency Translation” (“SFAS No. 52”). All exchange gains and losses from remeasurement of monetary balance sheet items resulting from transactions in non-dollar currencies are recorded in the statement of operations as they arise. The financial statements of certain subsidiaries whose functional currency is other than the dollar are translated into dollars in accordance with the principles set forth in SFAS No. 52. Assets and liabilities have been translated at year-end exchange rates; results of operations have been translated at average exchange rates. The translation adjustments have been reported as a separate component of shareholders’ equity. C. Princi p les of consolidation The consolidated financial statements include the financial statements of the Company and all of its subsidiaries. All significant intercompany transactions and b alances have been eliminated in consolidation. D. Cash and cash e q uivalents Cash equivalents consist of short-term, highly liquid investments that are readily convertible into cash with original maturities of three months or less. CIMATRON LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) F - 9 NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES ( Cont. ) E. Marketable debt securities The Company accounts for its investments in marketable securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and E q uit y Securities” ( “SFAS 115” ) . Management determines the appropriate classification of the Company’s investments in marketable debt securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available-fo r -sale. As of December 31, 2006 and 2005 all marketable debt securities are designated as available-for-sale and accordingly are stated at fair value, with the unrealized gains and losses reported in shareholders’ equity under accumulated other comprehensive income (loss). Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the consolidated statement of operations. F. Fair value of financial instruments The financial instruments of the Company consist mainly of cash and cash equivalents, short-term investments, current and non-current accounts receivable, accounts payable and long-term liabilities. In view of their nature, the fair value of the financial instruments included in working capital of the Company is usually identical or close to their carrying amounts. G. Concentrations on credit risk Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents, and accounts receivable. The Company’s cash and cash equivalents are invested primarily in deposits with major banks worldwide. Management believes that the financial institutions that hold the Company’s investments are financially sound, and accordingly, minimal credit risk exists with respect to these investments. The Company’s trade receivables are derived from sales to customers located primarily in the U.S., Europe, Asia and Israel. The allowance for doubtful accounts is p rovided with res p ect to all balances deemed doubtful of collection. H. Allowance for doubtful accounts The allowance for doubtful accounts is computed on the specific identification basis for accounts, the collection of which, in management’s estimation, is doubtful. I. Inventor y Inventory is presented at the lower of cost or market. Cost is determined by the “first in, first out” method. J. Pro p ert y and e q ui p ment Property and equipment are stated at cost. Depreciation is computed using the “straight-line” method, over the estimated useful life of assets, as follows: Computers and software 3 years Office furniture and equipmen t 6.5 - 16.5 years Leasehold improvements are amortized over the shorter of the life of the respective lease or the service life of the improvements. [...].. .CIMATRON LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) NOTE 2 K – SIGNIFICANT ACCOUNTING POLICIES (Cont.) Impairment of long-lived assets The Company... acquisition cost exceeds the fair values of identifiable acquired net assets on the date of purchase Acquisition-related intangible assets are reported at cost, net of accumulated amortization F - 10 CIMATRON LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) NOTE 2 N – SIGNIFICANT ACCOUNTING POLICIES (Cont.) Stock-based compensation Effective January... were used in calculating such values during 2006, 2005, and 2004, were based on estimates at the date of grant as follows: 2006 (*) No options were granted during 2004 F - 11 2 0 0 4 (*) 5.41% 3.25 year 67% None Risk-free interest rate Expected life of options Expected volatility Expected dividend yield 2005 3.3% 4 year 96% None - . of year 2 ,70 8 1 ,71 1 3,124 Cash and cash e q uivalents at end of y ear 5,5 97 $ 2 ,70 8 $ 1 ,71 1 Su pp lemental information: Cash paid during the year for income taxes $ 47 $ 29 $ 173 CIMATRON. 9,642 $ 8,968 $ 11, 370 Services 11,8 17 11,9 57 11 ,79 3 Total 21,459 20,925 23,163 Cost of revenues ( Note 14b ) : Products 2,154 3,3 67 2,923 Services 1,469 1,568 1, 678 Total 3,623 4,935. translation adjustmen t ( 179 ) ( 179 ) ( 179 ) Total com p rehensive loss $ (4,866) Balance at December 31, 2005 $ 264 $ 13,4 17 $ ( 838 ) $ ( 4 ,70 2 ) $ ( 159 ) $7, 982 Chan g es durin g the