TIDMCTS TIDMCTSU
RNS Number : 7368U
Catalytic Solutions, Inc.
30 June 2009
+-------------------------------------+------------------------------------------+
| For Immediate Release | 30 June 2009 |
+-------------------------------------+------------------------------------------+
Catalytic Solutions, Inc.
("The Company")
Results for the year ended 31 December 2008
Catalytic Solutions, Inc. (AIM: CTS and CTSU), the Company behind Mixed Phase
Catalyst (MPC ) technology, is pleased to announce its results for the year
ended 31 December 2008.
Financial Highlights
* Revenue increased 51% to $63.0 million (2007: $41.8 million)
* Gross profit $10.4 million (2007: $6.3 million)
* Net loss $20.6 million (2007: $23.3 million)
* Cash balance as of year-end $6.7 million (2007: $17.4 million)
* U.S. financial advisor, Allen & Company LLC, appointed to advise the Company
with respect to recapitalization and financing options for the Company, the
process being supported by the Company's secured lenders
* Company in active negotiations with lenders to extend forbearance on breach of
covenants and to renegotiate repayment terms on debt until such time that the
efforts to recapitalize are successful
* Cash balance as of 31 May 2009 $3.5 million. Failure to renegotiate payment
terms for debt due will result in the Company not having sufficient cash to
operate. Detailed analysis of liquidity is addressed in the financial results
and management discussion that follow.
Operational Highlights
* Won multiple orders totalling nearly $24.0 million for energy-efficient
selective catalytic reduction (SCR) systems from various energy plants,
refineries and processing companies for use with process heater and boiler
applications
* Received verification from the State of California Air Resources Board for a
number of key heavy-duty diesel emissions control products
* Began supplying catalysts for the 2009 Honda model Acura TSX
* Shipments to Renault of three-way catalysts commenced in the second quarter of
2008
* Formed a new joint venture company, TC Catalyst Incorporated (TCC), with Tanaka
Kikinzoku Kogyo K.K. (TKK) to supply emission reduction catalysts throughout
Asia
* Intellectual property rights to part of the Company's heavy-duty diesel catalyst
technology and 40% share of the TCC joint venture sold to TKK for $7.9 million
* Light-duty vehicle business restructured in fourth quarter to realize $5 million
to $6 million in annual savings
* Recorded a fixed asset impairment charge of $4.9 million in light-duty vehicle
business
Commenting on the highlights and outlook, Charles F. Call, Chief Executive
Officer of Catalytic Solutions, Inc. said:
"2008 was a year of significant operational achievements for our Company.
Facing an unprecedented slowdown in the global economy, particularly in the
second half of 2008, we remained focused on our objectives. We transformed the
Company from a provider of unique catalysts to the automotive industry, to a
provider of both catalysts and systems in growing clean technology markets,
including heavy-duty diesel systems and energy systems.
Our energy systems group won a number of orders during 2008 including systems
which incorporate Catalytic Solutions catalysts featuring Mixed Phase Catalyst
(MPC ) technology and, with a number of U.S. Environmental Protection Agency and
California Air Resources Board product verifications, the heavy-duty diesel
systems group strengthened our leadership in the heavy-duty diesel retrofit
market. In addition, our light-duty vehicle catalyst group continued to win new
business during a severe downturn in the automotive manufacturing sector.
Under the terms of our joint venture, we accelerated the sale of part of our
heavy-duty diesel catalyst technology for $7.5 million and sold 40% of our stake
in TCC for $0.4 million to our Japanese partner, TKK. We retired a portion of
our debt and improved our short-term liquidity. However, the global economic
crisis, coupled with the distressed condition of the capital markets has made
it challenging for the Company to maintain adequate liquidity. Cash balance as
of 31 May 2009 was $3.5 million, which is insufficient to meet our debt payment
obligations. We are in active negotiations with our lenders to renegotiate
payment terms for debt due; however, failure to do so will result in the Company
not having sufficient cash to operate. We have appointed a U.S.-based
investment banking firm to provide strategic advice. This will enable management
and the Board to consider all the options available to the Company including
strengthening the longer-term liquidity position of the Company. We will keep
our shareholders informed of all progress made in this respect over the next few
months.
Despite the global economic slowdown, there continues to be product demand
driven by increasingly stringent emissions legislation, demand which we are well
positioned to address. We are committed to designing and delivering high value
emissions control products while benefiting the global environment through air
quality improvement, sustainability and energy efficiency."
About Catalytic Solutions, Inc.
Catalytic Solutions, Inc. is a global manufacturer and distributor of emissions
control systems and products, focused in the heavy-duty diesel, energy systems
and light-duty vehicle markets. The Company's emissions control systems and
products are designed to deliver high value to our customers while benefiting
the global environment through air quality improvement, sustainability and
energy efficiency. Catalytic Solutions, Inc. is listed on AIM of the London
Stock Exchange (AIM: CTS and CTSU) and currently has operations in the USA,
Canada, France, Japan and Sweden as well as an Asian joint venture.
For further details please contact:
+--------------------------------+----------------------+-------------------------+
| Catalytic Solutions, Inc. | Canaccord Adams | Buchanan Communications |
| Charlie Call, Chief Executive | Robert Finlay | Charles Ryland |
| Officer | Guy Blakeney | Ben Willey |
| Tel: +1 (805) 639-9463 | Bhavesh Patel | Christian Goodbody |
| Steve Golden, Chief Technical | Tel: 020 7050 6500 | Tel: 020 7466 5000 |
| Officer | | |
| Tel: +1 (805) 639-9464 | | |
| Nikhil Mehta, Chief Financial | | |
| Officer | | |
| Tel: +1 (805) 639-9461 | | |
+--------------------------------+----------------------+-------------------------+
This announcement was approved by the Audit Committee of the Board of Directors
on 29 June 2009. A copy of this release and the Company's annual report for the
year ended 31 December 2008 has been mailed to shareholders and is available on
the Company's website at www.catalyticsolutions.com. The annual general meeting
of shareholders of the Company will be announced at a later date.
This announcement and the information contained herein is restricted and is not
for publication, release or distribution in whole or in part in, or into, the
United States of America, Canada, Australia, The Republic of Ireland, Japan or
South Africa.
The material set forth herein is for informational purposes only and is not
intended, and should not be construed, as an offer of securities for sale into
the United States or any other jurisdiction. The securities of the Company
described herein have not been registered under the U.S. Securities Act of 1933,
as Amended (the "Securities Act"), or the laws of any state, and may not be
offered or sold within the United States, except pursuant to an exemption from,
or in a transaction not subject to, the registration requirements of the
Securities Act and applicable state laws. There is no present intention to
register the Company's securities in the United States or to conduct a public
offering of securities in the United States.
This announcement and the information contained herein include forward-looking
statements. Forward-looking statements are identified by words such as
"believe," "anticipate," "expect," "intend," "plan," "will,"
"may," "should," "could," "think," "estimate" and "predict," and
other similar expressions. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements. We based these forward-looking
statements on our current expectations and projections about future events. Our
actual results could differ materially from those discussed in, or implied by,
these forward-looking statements. Factors that could cause actual results to
differ from those implied by the forward-looking statements include a number of
risks and uncertainties, described below in the section entitled "Risks and
uncertainties", which could have a material impact on the Company's long-term
performance and prospects. Additional factors are discussed in our AIM
admission document, which was published in November 2006. The Company assumes no
responsibility to update any of the forward-looking statements contained herein.
Further, any indication in this announcement of the price at which common shares
have bought or sold in the past cannot be relied upon as a guide to future
performance.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER'S STATEMENT
Introduction
2008 was a year of progress towards the strategic goals of the Company and,
despite the unprecedented global economic crisis, we have taken significant
positive steps forward in positioning the business for the future. However, our
limited cash reserve remains a problem.
In line with our strategy, we have created a broad-based emissions control
business that is no longer solely dependent on sales to the light-duty vehicle
market. We have a profitable heavy-duty diesel systems business, a strong energy
systems business that entered 2009 with an order backlog exceeding $13 million,
and our light-duty vehicle catalyst business secured a major new customer and
was restructured to make it more efficient and ready to benefit when the
automobile industry recovers. The transaction with our Japanese partner, TKK,
provided the Company with short-term liquidity and the ability to consider
additional strategic actions to secure longer-term liquidity. Despite the
positive impact of this transaction, our ability to operate as a going concern
and to deliver on our strategic goals requires us to recapitalize our balance
sheet.
Overview of Results and Operational Performance
For the financial year ended 31 December 2008, the Company reported revenue of
$63.0 million representing an increase of $21.2 million or 51% from the $41.8
million reported for 2007, resulting from the inclusion of Engine Control
Systems (which was acquired in December 2007) partially offset by declines in
the energy systems and light-duty vehicle catalyst businesses. Sales for the
energy systems business were slightly lower than 2007 as the execution of
certain contracts were delayed, resulting in a larger than expected backlog
going into 2009. Sales in the light-duty vehicle catalyst business declined
precipitously in the fourth quarter after a strong growth in the first nine
months, resulting in a decline of 12% for the full year. Overall gross margins
increased from 15.1% to 16.5%, as a result of a shift in business mix from
light-duty vehicles to the higher-margin systems businesses. The Company
reported a net loss of $20.6 million for 2008. After adjusting for the gain
recorded on the sale of intellectual property to TKK ($5.0 million pre-tax) and
the impairment charge for the light-duty vehicle catalyst business ($4.9 million
pre-tax), the adjusted net loss for 2008 was $20.7 million. The comparable
adjusted net loss for 2007 was $14.0 million after adjusting for charges
relating to in-process research and development ($6.6 million pre-tax) and
acquisition costs associated with the unsuccessful bid for Delphi's assets ($2.7
million pre-tax).
Business Review
Energy systems business: Our energy systems business provides cost-effective,
engineered solutions for the clean and efficient utilization of fossil fuels.
The business provides emissions control and energy systems solutions for
industrial and utility boilers, process heaters, gas turbines and generation
sets used largely by major utilities, industrial process plants, original
equipment manufacturers (OEMs), refineries, food processors, product
manufacturers and universities. This business group made substantial progress
during 2008, with orders totaling nearly $24.0 million compared with bookings of
$2.4 million in 2007. These orders included the sale and installation of the
first selective catalytic reduction (SCR) system featuring the Company's
MPC technology for energy applications - validating our successful strategy to
incorporate Catalytic Solutions catalysts within our energy systems platforms.
Increasingly stringent state and federal air emissions regulations coupled with
our ongoing development efforts to create new energy system solutions have
resulted in valuable order wins from large refineries, hospital energy plants,
leading food processing companies and one of the world's largest energy
companies. The business has entered 2009 with a healthy backlog of over $13.0
million compared with an opening backlog of $0.3 million in 2007. This backlog,
coupled with a contract with PCL Industrial Services for approximately $9.0
million announced in March 2009, has positioned our energy systems business for
a successful 2009.
Heavy-duty diesel systems business: Our heavy-duty diesel systems business is a
leading environmental business specializing in the design and manufacture of
verified exhaust emissions control solutions for the OEM, aftermarket and
retrofit markets in order to reduce exhaust emissions created by on-road diesel,
off-road diesel, stationary diesel, gasoline and alternative fuel engines
including propane and natural gas. During 2008, this business group
strengthened its already well-established position in the heavy-duty diesel
retrofit market by receiving critical product verifications from the State of
California Air Resources Board (CARB) - California enforces some of the
most stringent diesel emissions regulations within the United States - and the
United States Environmental Protection Agency (EPA). These key emissions
products are fully compliant with recently implemented emissions control
regulations and in some cases were the very first approved products of their
type. This business generated $27.1 million in revenues in 2008, its first full
year as part of the Catalytic Solutions Group. We have one of the broadest CARB
and EPA verified product portfolios and are well positioned to benefit from
significantly increased EPA funding for diesel emissions control under the U.S.
economic stimulus bill approved for 2009 and 2010.
Light-duty vehicle/heavy-duty diesel catalyst business: Our catalyst business
produces catalyst formulations for gasoline, diesel and natural gas induced
emissions that offer superior performance, proven durability and cost
effectiveness for multiple markets and a wide range of applications. As
announced in the fourth quarter of 2008, a sharp slowdown in the automotive
sector has impacted our catalyst business. However, restructuring this business
group in the second half of 2008 has enabled us to focus on targeted growth
opportunities, strengthen development of next-generation technology and run more
efficiently within a challenging global economy. Despite the significant
slowdown in the automotive sector, we successfully won new business during 2008
and began supplying catalysts to European car company, Renault, and won a new
order from Honda for the Acura TSX. We believe our customers value our
innovative technology and its associated economic benefits and anticipate that
business from these customers will continue to grow as the global economy and
demand for automobiles turns around and our technology increasingly penetrates
additional vehicle models with these customers.
Research and development: Our product development activities continue to add to
our portfolio and improve our technology leadership. The Company has introduced
several next-generation products for testing and validation across all the key
markets. We believe this technology leadership has the potential to bring
significant new revenue streams to the Company.
Europe and Asia expansion: We continued to expand our operational footprint
with the establishment of the Asian joint venture with TKK in the first quarter
of 2008. We previously announced in December 2008 that we had suspended
investment in a new Czech manufacturing facility until 2010 but we have now
decided to suspend this investment indefinitely, pending a turnaround in the
demand for auto catalyst products as well as a resolution of our long-term
capital availability.
Liquidity: The primary challenge facing the Company is liquidity. At 31 December
2008, we had $6.7 million in cash. Our access to working capital is limited and
our debt service obligations and operating losses for 2009 exceed our current
cash reserves. At 31 May 2009 we had $3.5 million in cash. We are in active
discussions with our lenders to renegotiate payment terms for debt due; however,
failure to do so will result in the Company not having sufficient cash to
operate. During 2008, the Company sold its freehold premises in Ontario, Canada
to enable the planned relocation of its operations to a leasehold facility in
December 2008. This sale realized approximately $1.9 million in gross proceeds,
which were used to pay down a portion of its bank borrowings. The Company also
put in place a debt facility of $3.3 million which was drawn down in
September 2008. This is, however, only a short-term facility and is repayable
upon the sooner of the closing of any financing (other than issuances pursuant
to stock incentive plans) and 1 July 2009. In September 2008, we restructured
the light-duty vehicle catalyst group to realize annual cash savings of $5
million to $6 million in order to reduce operating cash flow needs. Lastly, in
December 2008, the Company concluded a transaction with TKK. Under the terms of
this transaction, the Company accelerated the sale of certain Asian registered
patents relating to its heavy-duty diesel catalyst technology to TKK. Under the
original joint venture agreement, TKK had the right to purchase these patents
upon the dissolution of the joint venture. Gross proceeds from the sale of these
patents and the resulting rebalancing of the Company's share of the joint
venture resulted in gross proceeds of $7.9 million to the Company, $5.0 million
of which was recognized in 2008 and the balance recognized in 2009.
In order to address the Company's ability to operate as a going concern, in the
first quarter of 2009 we retained a U.S.-based investment banking firm to act as
a financial advisor to the Company in exploring alternatives to recapitalize the
Company. Alternatives under consideration include the sale of Company stock
and/or a sale of the Company's assets, while negotiating with our lenders to
modify loan terms in order to delay repayments while alternative capital is
secured. The Company's lenders have evidenced their willingness to cooperate
with the Company as it seeks to recapitalize. At this time we cannot provide any
assurances that the Company will be successful in its continuing efforts to
recapitalize the balance sheet or in its work with lenders on loan
modifications. In the event that we are not successful in the immediate future,
there is substantial doubt that the Company will be able to continue operations
without filing a petition of bankruptcy. There can be no assurances that in that
event we would be able to reorganize through bankruptcy, and we might be forced
to effect a liquidation of our assets.
For a more detailed discussion about the liquidity of the Company, please see
page of this document.
Summary and Outlook
Throughout 2008, the Company has positively developed the energy systems and
heavy-duty diesel systems segments of the business. Consistent with our
strategy, the Company now has a diversified emissions control business and
exciting technologies that establish the building blocks for growth over the
long term. Approximately two-thirds of our revenues in 2009 are expected to
come from the two systems business segments that generate higher margins and are
not as severely affected by the economic downturn as our light-duty vehicle
catalyst business. In addition, these systems businesses provide the platform
for future profitable growth. 2008 revenues and gross profit benefited from the
December 2007 acquisition of Engine Control Systems which contributed to further
diversification of our revenue streams toward heavy-duty diesel emissions
control systems. Our energy systems segment is gaining momentum in the market
and is expected to grow sales significantly in 2009. Although we had not seen
any material softening in the revenues of the heavy-duty diesel systems business
during 2008, since the start of the year our heavy-duty diesel systems segment
has been affected negatively due to delays in government funded programs for
diesel retrofits and the global economic slow down.However, this segment is
expected to benefit from the increased funding allocated to these programs under
the 2009 U.S. economic stimulus program. The global economic crisis and the
ensuing reductions in automobile sales impacted our light-duty vehicle catalyst
business negatively in the fourth quarter of 2008 and continued to do so during
the first five months of 2009. We have aggressively cut costs in this segment in
order to offset revenue shortfalls versus expectations.
Lack of liquidity remains our greatest challenge. The Board and management are
committed to raising sufficient capital, maintaining the momentum in sales
growth in our energy systems and heavy-duty diesel systems businesses and
optimizing the cost structure of the Company to achieve our goal of sustainable
profitability.
Alexander "Hap" Ellis, III Charles F. Call
Non-Executive Director, Chairman Chief Executive Officer
BUSINESS AND FINANCIAL REVIEW
The Company reports its 2008 financial results under U.S. GAAP, consistent with
prior periods and the placing and admission to AIM.
Business Review
Catalytic Solutions, Inc. is a global manufacturer and distributor of emissions
control systems and products, focused in the heavy-duty diesel, energy systems
and light-duty vehicle markets. The Company's emissions control systems and
products are designed to deliver high value to our customers while benefiting
the global environment through air quality improvement, sustainability and
energy efficiency. We have over 28 years of experience in the heavy-duty diesel
systems market and more than 20 years in the energy systems market. Our proven
technical and manufacturing competence in the light-duty vehicle market meets
auto makers' most stringent requirements, having supplied over 8 million parts
to light-duty vehicle customers since 1996. Catalytic Solutions, Inc. is listed
on AIM of the London Stock Exchange (AIM: CTS and CTSU) and currently has
operations in the USA, Canada, France, Japan and Sweden as well as an Asian
joint venture.
Financial Review
Key Performance Indicators
The Company considers its key performance indicators to be the revenue and gross
margin of its principal automotive gasoline and diesel light-duty vehicle and
heavy-duty diesel (LDV/HDD) catalyst operations; revenue and gross margin from
growth in its energy operations; revenue, gross margin, and operating margin in
its off-road and retrofit heavy-duty diesel (HDD) operations; operating expenses
and operating cash flow measured against a predetermined budget; and development
progress toward commercialisation of its key growth opportunities in the light-
and heavy-duty diesel markets.
+-----------------+----------------------------------------------------+----+--------------------------------------------------------+----+-------------------------------------------------------------------------------+
| | Year ended | | Year ended | | Percentage |
| | 31 December | | 31 December | | change |
| | 2008 | | 2007 | | |
+-----------------+----------------------------------------------------+----+--------------------------------------------------------+----+-------------------------------------------------------------------------------+
| | $ | | $ | | |
+-----------------+----------------------------------------------------+----+--------------------------------------------------------+----+-------------------------------------------------------------------------------+
| Sales | | | | | |
+-----------------+----------------------------------------------------+----+--------------------------------------------------------+----+-------------------------------------------------------------------------------+
| LDV/HDD | 26.3M | | | | (12)% |
| catalysts | | | 29.8M | | |
+-----------------+----------------------------------------------------+----+--------------------------------------------------------+----+-------------------------------------------------------------------------------+
| Energy | 10.5M | | | | (10)% |
| | | | 11.6M | | |
+-----------------+----------------------------------------------------+----+--------------------------------------------------------+----+-------------------------------------------------------------------------------+
| HDD | 27.1M | | | | N/A |
| | | | 0.4M | | |
+-----------------+----------------------------------------------------+----+--------------------------------------------------------+----+-------------------------------------------------------------------------------+
| | (0.9M) | | - | | N/A |
| Eliminations | | | | | |
+-----------------+----------------------------------------------------+----+--------------------------------------------------------+----+-------------------------------------------------------------------------------+
| Total | 63.0M | | | | 51% |
| | | | 41.8M | | |
+-----------------+----------------------------------------------------+----+--------------------------------------------------------+----+-------------------------------------------------------------------------------+
| Gross profit | | | | | |
+-----------------+----------------------------------------------------+----+--------------------------------------------------------+----+-------------------------------------------------------------------------------+
| LDV/HDD | 0.2M | | | | (94)% |
| catalysts | | | 3.2M | | |
+-----------------+----------------------------------------------------+----+--------------------------------------------------------+----+-------------------------------------------------------------------------------+
| Energy | 2.2M | | | | (29)% |
| | | | 3.1M | | |
+-----------------+----------------------------------------------------+----+--------------------------------------------------------+----+-------------------------------------------------------------------------------+
| HDD | 8.0M | | | | N/A |
| | | | - | | |
+-----------------+----------------------------------------------------+----+--------------------------------------------------------+----+-------------------------------------------------------------------------------+
| Total | 10.4M | | | | 65% |
| | | | 6.3M | | |
+-----------------+----------------------------------------------------+----+--------------------------------------------------------+----+-------------------------------------------------------------------------------+
| Gross Margin | 16.5% | | | | +140 |
| | | | 15.1% | | basis |
| | | | | | points |
+-----------------+----------------------------------------------------+----+--------------------------------------------------------+----+-------------------------------------------------------------------------------+
| Operating | 27.8M | | | | (10)% |
| expenses | | | 31.0M | | |
+-----------------+----------------------------------------------------+----+--------------------------------------------------------+----+-------------------------------------------------------------------------------+
| Net change in | (10.7M) | | (13.9M) | | (23)% |
| cash | | | | | |
+-----------------+----------------------------------------------------+----+--------------------------------------------------------+----+-------------------------------------------------------------------------------+
Company Operating Performance
Profit and loss accounts - The Company reported revenue of $63.0 million for
fiscal year 2008, representing an increase of $21.2 million or 51% from the
$41.8 million reported for 2007. Gross profit increased to $10.4 million (gross
margin - 16.5% of revenue) for 2008, up from $6.3 million (gross margin - 15.1%
of revenue) for 2007, as a result of increased gross profit from our heavy-duty
diesel systems business, partially offset by decreased gross profit resulting
from decreases in light-duty vehicle catalyst sales and energy systems sales.
Operating expenses totaled $27.8 million for 2008 compared to $31.0 million
reported for 2007. Operating expenses in 2008 included a $4.9 million (pre-tax)
impairment charge for long-lived assets in the light-duty vehicle catalyst
business, and also a $5.0 million (pre-tax) gain on the sale of intellectual
property. In addition, operating expenses included the full year of Engine
Control Systems expenses. Operating expenses in 2007 included a $6.6 million
(pre-tax) write-down of in-process research and development expense from the
acquisition of Engine Control Systems and the Delphi bid expenses of $2.7
million (pre-tax) which were not repeated in 2008.
As a result of the increased gross profit and reduced operating expenses
described above, the Company reported a net loss of $20.6 million for 2008, down
from a loss of $23.3 million reported for 2007. Excluding the gain and the
impairment charge described above, the adjusted net loss in 2008 would have been
$20.7 million. Excluding the Delphi and in-process research and development
expenses described above, the adjusted net loss for 2007 would have been $14.0
million.
2008 revenues and gross profit benefited from the December 2007 acquisition of
Engine Control Systems which contributed to the diversification of the Company's
revenue streams toward heavy-duty diesel emissions controls. Nonetheless, our
overall financial performance was below expectations due to the significant
decline in light-duty vehicle catalyst sales in the fourth quarter and the shift
of contract revenues in our energy systems business from 2008 to 2009.
The light-duty vehicle catalyst segment reported revenue of $26.3 million for
fiscal year 2008, representing a decrease of $3.5 million or 12% from the $29.8
million reported for 2007, driven by a significant decrease in catalyst sales in
the fourth quarter of 2008. Gross profit for the segment decreased to
$0.2 million or 0.9% of revenue for 2008, down from $3.2 million or 10.7% of
revenue for 2007. This decreased gross profit was due to the lower than expected
sales noted above and the consequent reduction in manufacturing volume.
As a result of the projected cash flows not being able to support the asset
base, due to the significant slow-down in the automotive sector during 2008 and
the anticipated pace of recovery of the Company's business in the light-duty
vehicle catalyst segment, the Company conducted an assessment for the impairment
of certain property, plant and equipment within the light-duty vehicle catalyst
business segment in the year ending 31 December 2008. The assessment was done in
accordance with the provisions of SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." During this assessment, certain long-lived
assets of the light-duty vehicle catalyst business were deemed to be impaired
and a write-down to fair value was considered necessary. As a result,
impairment charges of $4.9 million were recorded during the year ending 31
December 2008.
The energy systems segment reported revenue of $10.5 million for fiscal year
2008, representing a decrease of $1.1 million or 10.5% from the $11.6 million
reported for 2007. 2007 revenue included the completion of the Flying J
emissions reduction project. In 2008, while the business recorded approximately
$24.0 million in orders, the major projects commenced in the second half of the
year, and a portion of the expected revenues were delayed into 2009. Gross
profit for the segment declined to $2.2 million or 21.1% of revenue for 2008,
down from $3.1 million or 26.7% of revenue for 2007. The decrease in gross
profit from 2007 to 2008 was due to lower revenues and higher start-up costs
associated with the initial installations of modular systems in 2008.
The heavy-duty diesel segment reported revenue of $27.1 million for fiscal year
2008 compared to revenue of $0.4 million in 2007 for the 12 days from date of
acquisition through 31 December 2007. Pro-forma full year sales were $27.6
million in 2007. Gross profit for 2008 was $8.0 million or 29.4% of revenue,
compared to gross profit of $25,000 or 7.9% of revenue for the 12-day period
from the date of acquisition to 31 December 2007. Pro-forma full year gross
profit was $7.2 million or 26.1% in 2007.
Balance sheet - As of 31 December 2008, the Company had cash and short-term
investments totaling $6.7 million compared to $17.4 million at the previous year
end. At the balance sheet date, the billings in excess of costs and estimated
earnings on uncompleted contracts were $0.8 million. This represents revenue and
earnings from energy systems contracts that were not billed at 31 December 2008.
Goodwill of $6.3 million and intangible assets of $6.9 million at 31 December
2008 principally comprise assets acquired from Engine Control Systems and
Applied Utility Systems. The Directors of Catalytic Solutions, Inc. have
reviewed the carrying value of these assets and are satisfied that they are
fairly stated.
Cash flow - Net cash used in operating activities increased to $14.9 million for
the year ended 31 December 2008 from $12.5 million used for 2007. This higher
year-over-year use of cash was driven by higher net losses after adjustments for
non-cash, non-recurring charges in both years, coupled with an increase in net
working capital in 2008, compared to a decrease in 2007. Investing activities
generated $3.4 million in net cash primarily due to the sale of intellectual
property to TKK and the sale of the freehold premises in Canada, partially
offset by capital expenditures and investment in the TCC joint venture.
Liquidity - At 31 December 2008 the Company had $6.7 million in cash. Our access
to working capital is limited and our debt service obligations and projected
operating costs for 2009 exceed our cash balance as of 31 December 2008. In
addition, the Company's current bank debt agreements contain certain covenants
in respect to which the Company was in compliance at 31 December 2008. These
covenants are almost exclusively based on the performance of the Company's
Engine Control Systems subsidiary.
As of 31 March 2009, the Company had failed to achieve two of the covenants
under the bank loan agreement with Fifth Third Bank (see page for a discussion
of the Fifth Third Bank loan agreement). The covenants that the Company failed
to achieve are those related to the annualized EBITDA and the funded debt to
EBITDA ratio for the Engine Control Systems subsidiary. The bank has agreed to
temporarily suspend its rights with respect to the breach of these two covenants
until 1 July 2009 subject to the Company, in Fifth Third Bank's opinion, making
reasonably satisfactory progress in its efforts to recapitalize the balance
sheet and the provision of an audit report on the collateral pledged by the
Company to Fifth Third Bank.As of 31 May 2009, the Company is out of compliance
with a covenant in the loan agreement with Cycad Group, LLC (see page for a
discussion of the Cycad loan agreement). The non-compliance resulted from the
Company's failure to achieve the above-described covenants under the bank loan
agreement with Fifth Third Bank. Cycad Group, LLC has agreed to suspend its
rights until 1 July 2009 subject to the Company being successful in its efforts
to recapitalize the balance sheet and Fifth Third Bank continuing to suspend its
rights.
The Company has suffered recurring losses and negative cash flows from
operations since its inception, resulting in an accumulated deficit of $143.2
million at 31 December 2008. In addition, due to non-compliance with the
above-mentioned loan covenants and per the repayment obligations under the
Company's loan agreements, the total debt of the Company has been classified as
current and due and payable in 2009. As a result of this classification, the
Company has a working capital deficit of $5.0 million. The Company had cash
balances as of 31 May 2009 of $3.5 million. Failure to renegotiate payment terms
for debt due will result in the Company not having sufficient cash to operate.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. In order to address this uncertainty, in the first quarter of
2009, the Company retained a U.S.-based investment banking firm to act as a
financial advisor to the Company in exploring alternatives to recapitalize the
Company.Alternatives under consideration include the sale of Company stock
and/or a sale of the Company's assets, while negotiating with the Company's
lenders to modify loan terms in order to delay repayments while alternative
capital is secured. The Company is actively negotiating with both lenders to
resolve the non-compliance issues and for the extension of their forbearance.
Both lenders have evidenced their willingness to cooperate with the Company as
it seeks to recapitalize. At this time the Company cannot provide any
assurances that it will be successful in its continuing efforts to recapitalize
the balance sheet or work with its lenders on loan modifications. In the event
that the Company is not successful in the immediate future, the Company will be
unable to continue operations and may be required to file bankruptcy. There can
be no assurances that the Company will be able to reorganize through bankruptcy,
and might be forced to effect a liquidation of its assets.
Interest - For the year ended 31 December 2008 the Company recorded interest
income of $266,000, primarily comprised of income from interest bearing cash
deposits, cash equivalent short-term investments and interest expense of $2.2
million.
Other income - The Company entered into an agreement in February 2008 with
Tanaka Kikinzoku Kogyo K.K. (TKK) to form a new a new joint venture company, TC
Catalyst Incorporated (TCC), a Japanese corporation.
Under the original terms of the agreement, the Company and TKK each owned 50% of
TCC. TKK provided TCC with $1.0 million in equity and capital and $5.0 million
in debt financing, while the Company provided $1.0 million of equity and
licensed specific intellectual property rights and trade secrets for
royalty-free use in the defined territory to the venture. In exchange for the
licensed technology, TCC issued the Company a promissory note for JPY
500,000,000 that accrues interest at 2.8%, due in March 2018.
In December 2008, the Company and TKK entered into agreements to alter the joint
venture agreement. The primary results of these agreements are:
* The Company sold 40% of its ownership to TKK for $441,000, reducing its
ownership share from 50% to 30%.
* The Company agreed to sell and transfer specific heavy-duty diesel catalyst
technology and intellectual property to TKK for use in the defined territory for
a total selling price of $7.5 million. TKK will provide that intellectual
property to TCC on a royalty-free basis. $5.0 million of the sale was completed
and recognized in 2008, with the balance being recognized in 2009.
* The promissory note from TCC was reduced from JPY 500,000,000 to JPY 250,000,000
and no longer accrues interest.
The Company's share of the TCC net loss for 2008 was $988,000. The Company also
recognized gain on the sale of the shares of TCC to TKK of $430,000 and $5.0
million (pre-tax) for the sale of the intellectual property.
Related Party Transactions
In June 2008, the Company put in place a debt facility with Cycad Group, LLC (a
significant shareholder of the Company) that would allow a one-time draw down of
up to $3.3 million. To avoid any conflict of interest, Mr. K. Leonard Judson,
officer of Cycad Group, LLC and then Non-Executive Director of the Company,
recused himself from all Board of Directors discussions and voting pertaining to
the debt facility. Further details regarding the debt facility are disclosed in
the Long-Term Debt discussion in the Notes to Consolidated Financial Statements
found on page of this document. Mr. Judson resigned from the Board of
Directors of the Company in January 2009.
In October 2008, the Company's Board of Directors unanimously adopted a
resolution to waive the Non-Executive Directors' right to receive, and the
Company's obligation to pay, any director fees with respect to participation in
Board and Committee meetings and other matters with effect from 1 July 2008 and
continuing thereafter until the Directors elect to adopt resolutions reinstating
such fees. On 1 May 2009, the Directors adopted a resolution to reinstate the
accrual of director fees effective 1 January 2009, with a payment schedule to be
determined at a later date.
Unrestricted Trading Line
On 10 July 2008, the Company announced completion of a second trading line (AIM:
CTSU) to enable certain eligible common shares to trade in an unrestricted
manner, including being capable of resale into the U.S. without restriction, and
to settle through the CREST electronic settlement system. As of 31 December
2008, 42,160,703 shares of the Company's 69,761,902 common shares outstanding
were trading under the unrestricted trading line with the remaining 27,601,199
trading on the restricted line (AIM: CTS).
Risks and Uncertainties
Business history and net operating losses - The Company has a relatively short
operating history as it was established in 1996, and since inception, it has
incurred recurring losses from operations. There can be no assurance that the
Company will move into profitability at any stage. There is also no assurance
that any net operating losses will be available to the Company in the future as
an offset against future profits for income tax purposes.
Liquidity - See Liquidity under Company operating performance discussion above.
Product development - Some of the Company's products for light- and heavy-duty
diesel vehicles and energy/power generation are still in the development or
testing stage with targeted customers. The Company is developing technologies in
these areas which are intended to have a commercial application. However, there
is no guarantee that such technologies will actually result in any commercial
applications. The Company's proposed operations are subject to all of the risks
inherent in a developing business enterprise, including the likelihood of
continued operating losses, although the Company has sought to mitigate these
risks by jointly developing its new products, where possible, with respected
partners. The likelihood of the Company's business success must be considered in
light of the problems, expenses, difficulties, complications, and delays
frequently encountered in connection with the growth of an existing business,
the development of products and channels of distribution, and current and future
development in several key technical fields, as well as the competitive and
regulatory environment in which the Company operates.
Market acceptance - While the Directors believe that there exists a viable
market for the Company's developing products, there can be no assurance that
such technology will succeed as an alternative to its competitors' existing and
new products. The development of a market for the products is affected by many
factors, some of which are beyond the Company's control. The adoption cycles of
the Company's key customers are lengthy and require extensive interaction
between the Company and the customer to develop an effective and reliable
catalyst for a particular application. While the Company continues to develop
and test products with key customers, there can be no guarantee that all such
products will be accepted and commercialized. The Company's relationships with
its customers are based on purchase orders rather than long-term formal supply
agreements. Generally, once a catalyst has successfully completed the testing
and certification stage for a particular application, it is generally the only
catalyst used on that application and therefore highly unlikely that, unless
there are any defects, the customer will try to replace that catalyst with a
competing product. However, our customers usually have alternate suppliers for
their products and there is no assurance that the Company will continue to win
the business.
If a market fails to develop or develops more slowly than anticipated, the
Company may be unable to recover the costs it will have incurred in the
development of its products and may never achieve profitability. In addition,
the Directors cannot guarantee that the Company will continue to develop,
manufacture or market its products or components if market conditions do not
support the continuation of the product or component.
Commercial and strategic relationships - The Company relies on its relationships
with relatively few key customers for the development of particular applications
of the Company's technology. For its light-duty vehicle segment, the Company is
not currently planning to actively pursue new business with certain U.S.
automakers, which previously accounted for a significant part of the Company's
customer base. The success of the Company will therefore depend on its ability
to maintain other existing customer relationships and also initiate, develop and
maintain beneficial commercial relationships with other parties. The successful
realization of the Company's business model requires the establishment and
maintenance of beneficial commercial and strategic relationships with other
parties in the industry. For its heavy-duty diesel systems segment, the Company
relies on emission system approvals from the U.S. Environmental Protection
Agency (EPA) and state agencies, plus relationships with numerous customers
including original equipment manufacturers (OEMs) and dealers/distributors.
Customers purchase heavy-duty diesel system products to reduce emissions for
either a retrofit or an OEM application. Retrofit applications generally
involve funded projects that use "approved systems" that are one-off in nature.
Future retrofit business therefore requires close monitoring of funding for
projects and successful bidding for these projects.For its energy systems
segment, the Company relies on its relationships with OEMs, state environmental
agencies, large engineering firms who subcontract out emissions control systems
and its distributors/sales agents. Customers are required by the U.S. EPA
and/or state agencies to meet new emissions targets when existing gas turbines,
boilers, process heaters and steam generators are upgraded or when new emissions
targets are mandated Customers purchase the energy systems segment engineering
technology to upgrade or replace out-dated systems. New installations of gas
turbines, boilers, process heaters and steam generators must meet current
regulations and customers purchase newly designed systems to meet those current
regulations.
The Company's lack of liquidity could result in current or potential customers
withholding orders.
Dependency on customer sales volumes - The Company's catalysts are often
incorporated into the products or processes of third parties. The Company is
dependent on a small number of customers for a significant portion of its
business, with one customer representing 30% of the Company's business in 2008.
If the Company were to lose the significant customer, it would have a material
adverse effect on the Company. The sale of such catalysts are therefore
dependent on the sale of the product or process of which they form part and
there can be no assurance that such third party's products or processes will
achieve commercial success.
Large project sales - The Company's energy systems business derives a large
portion of its revenues from large high-value projects that entail significant
systems design and installation with implementation timelines that range from
several weeks to several months. The Company's limited resources sometimes
inhibit its ability to accept multiple projects simultaneously. The timing of
awards and implementation of these projects can lead to significant variance in
recognized revenue from year to year.
Third party suppliers - Due to customer demands, the Company is required to
source critical materials and components such as ceramic substrates from single
suppliers. Failure of one or more of the Company's key suppliers to timely
deliver could prevent, delay or limit the Company from supplying products
because the Company would be required to qualify an alternative supplier. For
certain customers, the Company is required to purchase platinum group metal
(PGM) materials. As commodities, PGM materials are subject to daily price
fluctuations and significant volatility, based on global market conditions.
Historically, the cost of PGMs used in the manufacturing process has been passed
through to the customer. This limits the economic risk of changes in market
prices to PGM usage in excess of nominal amounts allowed by the customer.
However, going forward there can be no assurance that the Company will continue
to be successful passing PGM price risk onto its current and future customers to
minimize the risk of financial loss. Additionally, PGM material is accounted for
as inventory and therefore subject to lower of cost or market adjustments on a
regular basis at the end of accounting periods. A drop in market prices relative
to the purchase price of PGM could result in a write-down of inventory.
Due to the high value of PGM materials, special measures have been taken to
secure and insure the inventory. There is a risk that these measures may be
inadequate and expose the Company to financial loss.
Environmental concerns and possibility of litigation in the future - Customers
rely upon the Company's products to meet emissions control standards imposed
upon them by government. Failure of the catalyst to meet such standards could
expose the Company to claims from its customers. The Company's products are also
integrated into goods used by consumers and therefore a malfunction or the
inadequate design of the Company's products could result in product liability
claims. Any liability for environmental harm or damages resulting from technical
faults or failures could be substantial and could materially adversely affect
the Company's business and results of operations. In addition, a well-publicized
actual or perceived problem could adversely affect the market's perception of
the Company's products, which would materially impact upon the Company's
financial condition and operating results.
Nikhil A. Mehta
Chief Financial Officer
Independent Auditors' Report
The Board of Directors
Catalytic Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Catalytic
Solutions, Inc. and subsidiaries (the Company) as of December 31, 2008 and 2007,
and the related consolidated statements of operations, stockholders' equity and
comprehensive loss, and cash flows for the years 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 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 statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Catalytic Solutions,
Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for the years then ended in conformity with
U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 1b to
the consolidated financial statements, the Company has suffered recurring losses
from operations and has an accumulated deficit that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in note 1b. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Our audits were made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The consolidating information is
presented for purposes of additional analysis of the consolidated financial
statements rather than to present the financial position and results of
operations of the individual companies. The consolidating information has been
subjected to the auditing procedures applied in the audits of the consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the consolidated financial statements taken as a whole.
KPMG LLP
June 29, 2009
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2008 and 2007
(In thousands, except for share information)
+--------------------------------------------------------------+-----------+--+-----------+
| | December 31 |
+--------------------------------------------------------------+--------------------------+
| | 2008 | | 2007 |
+--------------------------------------------------------------+-----------+--+-----------+
| Assets | US $000 | | US $000 |
+--------------------------------------------------------------+-----------+--+-----------+
| Current assets: | | | |
+--------------------------------------------------------------+-----------+--+-----------+
| Cash and cash equivalents | 6,726 | | 17,444 |
+--------------------------------------------------------------+-----------+--+-----------+
| Trade accounts receivable, less allowance | | | |
| for doubtful accounts of $123 and $81 at December 31, | 10,667 | | 8,798 |
| 2008 and 2007 | | | |
+--------------------------------------------------------------+-----------+--+-----------+
| Inventories | 8,919 | | 10,467 |
+--------------------------------------------------------------+-----------+--+-----------+
| Prepaid expenses and other current assets | 4,494 | | 1,455 |
+--------------------------------------------------------------+-----------+--+-----------+
| | | | |
+--------------------------------------------------------------+-----------+--+-----------+
| Total current assets | 30,806 | | 38,164 |
+--------------------------------------------------------------+-----------+--+-----------+
| Property and equipment, net | 2,882 | | 10,656 |
+--------------------------------------------------------------+-----------+--+-----------+
| Intangible assets, net | 6,908 | | 8,734 |
+--------------------------------------------------------------+-----------+--+-----------+
| Goodwill | 6,319 | | 7,753 |
+--------------------------------------------------------------+-----------+--+-----------+
| Promissory note from unconsolidated affiliate | 2,767 | | - |
+--------------------------------------------------------------+-----------+--+-----------+
| Other assets | 454 | | 602 |
+--------------------------------------------------------------+-----------+--+-----------+
| Total assets | 50,136 | | 65,909 |
+--------------------------------------------------------------+-----------+--+-----------+
| | | | |
+--------------------------------------------------------------+-----------+--+-----------+
| Liabilities and stockholders equity | | | |
+--------------------------------------------------------------+-----------+--+-----------+
| Current liabilities: | | | |
+--------------------------------------------------------------+-----------+--+-----------+
| Current portion of long-term debt | 17,880 | | 408 |
+--------------------------------------------------------------+-----------+--+-----------+
| Accounts payable | 7,325 | | 7,428 |
+--------------------------------------------------------------+-----------+--+-----------+
| Deferred revenue | 2,942 | | 5 |
+--------------------------------------------------------------+-----------+--+-----------+
| Accrued salaries and benefits | 1,451 | | 2,157 |
+--------------------------------------------------------------+-----------+--+-----------+
| Accrued expenses | 6,255 | | 3,605 |
+--------------------------------------------------------------+-----------+--+-----------+
| Total current liabilities | 35,853 | | 13,603 |
+--------------------------------------------------------------+-----------+--+-----------+
| Long-term debt, excluding current portion | 33 | | 15,494 |
+--------------------------------------------------------------+-----------+--+-----------+
| Deferred tax liability | 2,415 | | 2,535 |
+--------------------------------------------------------------+-----------+--+-----------+
| | | | |
+--------------------------------------------------------------+-----------+--+-----------+
| Total liabilities | 38,301 | | 31,632 |
+--------------------------------------------------------------+-----------+--+-----------+
| | | | |
+--------------------------------------------------------------+-----------+--+-----------+
| Stockholders equity: | | | |
+--------------------------------------------------------------+-----------+--+-----------+
| Common stock, no par value. Authorized 148,500,000 shares; | | | |
| issued and outstanding 69,821,902 shares and 69,756,461 | 158,019 | | 156,562 |
| shares at December 31, 2008 and 2007, respectively | | | |
+--------------------------------------------------------------+-----------+--+-----------+
| Treasury stock at cost (60,000 shares) | (100) | | (100) |
+--------------------------------------------------------------+-----------+--+-----------+
| Accumulated other comprehensive income (loss) | (2,867) | | 427 |
+--------------------------------------------------------------+-----------+--+-----------+
| Accumulated deficit | (143,217) | | (122,612) |
+--------------------------------------------------------------+-----------+--+-----------+
| Total stockholders equity | 11,835 | | 34,277 |
+--------------------------------------------------------------+-----------+--+-----------+
| | 50,136 | | 65,909 |
+--------------------------------------------------------------+-----------+--+-----------+
See accompanying notes to consolidated financial statements
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2008 and 2007
(In thousands)
+------------------------------------------------------------+----------+--+----------+
| | December 31 |
+------------------------------------------------------------+------------------------+
| | 2008 | | 2007 |
+------------------------------------------------------------+----------+--+----------+
| | US $000 | | US $000 |
+------------------------------------------------------------+----------+--+----------+
| | | | |
+------------------------------------------------------------+----------+--+----------+
| Revenues | 63,011 | | 41,767 |
+------------------------------------------------------------+----------+--+----------+
| Cost of revenues | 52,595 | | 35,444 |
+------------------------------------------------------------+----------+--+----------+
| Gross margin | 10,416 | | 6,323 |
+------------------------------------------------------------+----------+--+----------+
| Operating expenses: | | | |
+------------------------------------------------------------+----------+--+----------+
| Sales and marketing | 6,094 | | 2,793 |
+------------------------------------------------------------+----------+--+----------+
| Research and development | 9,276 | | 8,682 |
+------------------------------------------------------------+----------+--+----------+
| General and administrative | 12,499 | | 10,241 |
+------------------------------------------------------------+----------+--+----------+
| Impairment of long-lived assets | 4,928 | | - |
+------------------------------------------------------------+----------+--+----------+
| Gain on sale of intellectual | (5,000) | | - |
| property | | | |
+------------------------------------------------------------+----------+--+----------+
| In-process research and development | - | | 6,635 |
+------------------------------------------------------------+----------+--+----------+
| Costs related to unsuccessful Delphi bid | - | | 2,668 |
+------------------------------------------------------------+----------+--+----------+
| Total operating expenses | 27,797 | | 31,019 |
+------------------------------------------------------------+----------+--+----------+
| Loss from operations | (17,381) | | (24,696) |
+------------------------------------------------------------+----------+--+----------+
| Other income (expense): | | | |
+------------------------------------------------------------+----------+--+----------+
| Interest income | 266 | | 1,352 |
+------------------------------------------------------------+----------+--+----------+
| Interest expense | (2,224) | | (246) |
+------------------------------------------------------------+----------+--+----------+
| Loss on unconsolidated affiliate | (988) | | - |
+------------------------------------------------------------+----------+--+----------+
| Other | 347 | | 270 |
+------------------------------------------------------------+----------+--+----------+
| Total other income (expense) | (2,599) | | 1,376 |
+------------------------------------------------------------+----------+--+----------+
| Loss before provision for income taxes | (19,980) | | (23,320) |
+------------------------------------------------------------+----------+--+----------+
| | | | |
+------------------------------------------------------------+----------+--+----------+
| Provision for income taxes | 625 | | 16 |
+------------------------------------------------------------+----------+--+----------+
| Net loss | (20,605) | | (23,336) |
+------------------------------------------------------------+----------+--+----------+
| | | | |
+------------------------------------------------------------+----------+--+----------+
| | | | |
+------------------------------------------------------------+----------+--+----------+
| Loss per share: | | | |
+------------------------------------------------------------+----------+--+----------+
| Basic and diluted | $(0.29) | | $(0.36) |
+------------------------------------------------------------+----------+--+----------+
| Weighted average number of common shares | | | |
| outstanding (000s): | | | |
+------------------------------------------------------------+----------+--+----------+
| Basic and diluted | 69,701 | | 64,371 |
+------------------------------------------------------------+----------+--+----------+
See accompanying notes to consolidated financial statements
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
Years ended December 31, 2008 and 2007
(In thousands, except for share information)
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| | | | | | Accum-ulated | | | | |
| | | | | | Other | | | | |
| | | | | | Comp-rehensive | | | | |
| | | | | | Income (Loss) | | | | |
| | | | | | | | Accum-ulated | | Net |
| | Common Stock | | Treasury Stock | | | | Deficit | | Stock-holders |
| | | | | | | | | | Equity |
+--------------------------+---------------------------------+----------+------------------------------------------+----------+ +----------+ +----------+ +
| | Shares | | Amount | | | Shares | | | | Amount | | | |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| | | | US | | | | US | | US $000 | | US | | US |
| | | | $000 | | | | $000 | | | | $000 | | $000 |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Balance at December 31, | 63,909,573 | | 145,064 | | (60,000) | | (100) | | 4 | | (99,276) | | 45,692 |
| 2006 | | | | | | | | | | | | | |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Net loss | - | | - | | - | | - | | - | | (23,336) | | (23,336) |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Unrealized gain on | | | | | | | | | | | | | |
| foreign currency | - | | - | | - | | - | | 423 | | - | | 423 |
| translation | | | | | | | | | | | | | |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Comprehensive | - | | - | | - | | - | | - | | - | | (22,913) |
| loss | | | | | | | | | | | | | |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Stock based compensation | - | | 921 | | - | | - | | - | | - | | 921 |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Issuance of warrants | - | | 1,880 | | - | | - | | - | | - | | 1,880 |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Issuance of common | | | | | | | | | | | | | |
| stock, secondary | 5,770,400 | | 8,663 | | - | | - | | - | | - | | 8,663 |
| placing | | | | | | | | | | | | | |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Exercise of stock | 25,200 | | 34 | | - | | - | | - | | - | | 34 |
| options | | | | | | | | | | | | | |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Cashless exercise of | 51,288 | | - | | - | | - | | - | | - | | - |
| stock options | | | | | | | | | | | | | |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Balance at December 31, | 69,756,461 | | 156,562 | | (60,000) | | (100) | | 427 | | (122,612) | | 34,277 |
| 2007 | | | | | | | | | | | | | |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Net loss | - | | - | | - | | - | | - | | (20,605) | | (20,605) |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Unrealized loss on | | | | | | | | | | | | | |
| foreign currency | - | | - | | - | | - | | (3,294) | | - | | (3,294) |
| translation | | | | | | | | | | | | | |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Comprehensive | - | | - | | - | | - | | - | | - | | (23,899) |
| loss | | | | | | | | | | | | | |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Stock based compensation | - | | 821 | | - | | - | | - | | - | | 821 |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Issuance of warrants | - | | 614 | | - | | - | | - | | - | | 614 |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Issuance of restricted | 60,000 | | 22 | | - | | - | | - | | - | | 22 |
| stock | | | | | | | | | | | | | |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Cashless exercise of | 5,441 | | - | | - | | - | | - | | - | | - |
| stock options | | | | | | | | | | | | | |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
| Balance at December 31, | 69,821,902 | | 158,019 | | (60,000) | | (100) | | (2,867) | | (143,217) | | 11,835 |
| 2008 | | | | | | | | | | | | | |
+--------------------------+------------+----------+---------+----------+----------------+----------+--------------+----------+----------------+----------+--------------+----------+----------------+
See accompanying notes to consolidated financial statements
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2008 and 2007
(In thousands)
+------------------------------------------------------------+----------+--+----------+
| | December 31 |
+------------------------------------------------------------+------------------------+
| | 2008 | | 2007 |
+------------------------------------------------------------+----------+--+----------+
| | US $000 | | US $000 |
+------------------------------------------------------------+----------+--+----------+
| Cash flows from operating activities: | | | |
+------------------------------------------------------------+----------+--+----------+
| Net loss | (20,605) | | (23,336) |
+------------------------------------------------------------+----------+--+----------+
| Adjustments to reconcile net loss to net cash used in | | | |
| operating activities: | | | |
+------------------------------------------------------------+----------+--+----------+
| Depreciation and amortization | 3,527 | | 2,798 |
+------------------------------------------------------------+----------+--+----------+
| Write-off of acquired in-process research and | - | | 6,635 |
| development | | | |
+------------------------------------------------------------+----------+--+----------+
| Provision for (recovery of) doubtful accounts, net | 50 | | (422) |
+------------------------------------------------------------+----------+--+----------+
| Amortization of deferred financing | 923 | | - |
+------------------------------------------------------------+----------+--+----------+
| Stock-based compensation | 843 | | 921 |
+------------------------------------------------------------+----------+--+----------+
| Loss on unconsolidated affiliate | 988 | | - |
+------------------------------------------------------------+----------+--+----------+
| Gain on sale of shares of unconsolidated affiliate | (428) | | - |
+------------------------------------------------------------+----------+--+----------+
| Impairment of long-lived assets | 4,928 | | - |
+------------------------------------------------------------+----------+--+----------+
| Deferred income taxes | 322 | | (11) |
+------------------------------------------------------------+----------+--+----------+
| Loss on disposal of property and equipment | 476 | | 15 |
+------------------------------------------------------------+----------+--+----------+
| Gain on sale of intellectual property | (5,000) | | - |
+------------------------------------------------------------+----------+--+----------+
| Changes in operating assets and liabilities: | | | |
+------------------------------------------------------------+----------+--+----------+
| Trade accounts receivable | (2,518) | | (1,624) |
+------------------------------------------------------------+----------+--+----------+
| Inventories | 763 | | (1,914) |
+------------------------------------------------------------+----------+--+----------+
| Prepaid expenses and other assets | (867) | | 1,411 |
+------------------------------------------------------------+----------+--+----------+
| Accounts payable | 144 | | 1,175 |
+------------------------------------------------------------+----------+--+----------+
| Deferred revenue | 2,937 | | 5 |
+------------------------------------------------------------+----------+--+----------+
| Accrued expenses | (1,415) | | 1,889 |
+------------------------------------------------------------+----------+--+----------+
| Net cash used in operating activities | (14,932) | | (12,458) |
+------------------------------------------------------------+----------+--+----------+
| Cash flows from investing activities: | | | |
+------------------------------------------------------------+----------+--+----------+
| Investment in TCC | (986) | | - |
+------------------------------------------------------------+----------+--+----------+
| Sale and maturities of available-for-sale securities | - | | 798 |
+------------------------------------------------------------+----------+--+----------+
| Purchases of property and equipment | (2,207) | | (1,439) |
+------------------------------------------------------------+----------+--+----------+
| Purchase of Engine Control Systems, net of cash | 475 | | (18,065) |
| acquired | | | |
+------------------------------------------------------------+----------+--+----------+
| Proceeds on sale of TCC shares | 441 | | - |
+------------------------------------------------------------+----------+--+----------+
| Proceeds on sale of intellectual property | 4,000 | | - |
+------------------------------------------------------------+----------+--+----------+
| Proceeds from sale of property and equipment | 1,703 | | 3 |
+------------------------------------------------------------+----------+--+----------+
| Net cash provided by (used in) investing activities | 3,426 | | (18,703) |
+------------------------------------------------------------+----------+--+----------+
| Cash flows from financing activities: | | | |
+------------------------------------------------------------+----------+--+----------+
| Borrowings under line of credit | 5,732 | | 5,408 |
+------------------------------------------------------------+----------+--+----------+
| Proceeds from issuance of debt | 3,345 | | 3,500 |
+------------------------------------------------------------+----------+--+----------+
| Net proceeds from issuance of common | - | | 8,663 |
| shares | | | |
+------------------------------------------------------------+----------+--+----------+
| Net proceeds from exercise of options | - | | 34 |
+------------------------------------------------------------+----------+--+----------+
| Repayment of short-term borrowings | (4,078) | | - |
+------------------------------------------------------------+----------+--+----------+
| Repayment of long-term debt | (2,330) | | - |
+------------------------------------------------------------+----------+--+----------+
| Payments for debt issuance costs | (713) | | (492) |
+------------------------------------------------------------+----------+--+----------+
| Net cash provided by financing activities | 1,956 | | 17,113 |
+------------------------------------------------------------+----------+--+----------+
| Effect of exchange rates on cash | (1,168) | | 115 |
+------------------------------------------------------------+----------+--+----------+
| Net change in cash and cash equivalents | (10,718) | | (13,933) |
+------------------------------------------------------------+----------+--+----------+
| | | | |
+------------------------------------------------------------+----------+--+----------+
| Cash and cash equivalents at beginning of year | 17,444 | | 31,377 |
+------------------------------------------------------------+----------+--+----------+
| Cash and cash equivalents at end of year | 6,726 | | 17,444 |
+------------------------------------------------------------+----------+--+----------+
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows - Continued
Years ended December 31, 2008 and 2007
(In thousands)
+------------------------------------------------------------+---------+--+---------+
| | December 31 |
+------------------------------------------------------------+----------------------+
| | 2008 | | 2007 |
+------------------------------------------------------------+---------+--+---------+
| | US $000 | | US $000 |
+------------------------------------------------------------+---------+--+---------+
| Supplemental disclosures of cash flow information: | | |
+------------------------------------------------------------+---------+------------+
| Cash paid during the year for | | |
+------------------------------------------------------------+---------+------------+
| Interest | 1,222 | 32 |
+------------------------------------------------------------+---------+------------+
| Income taxes | 809 | 27 |
+------------------------------------------------------------+---------+------------+
| | | |
+------------------------------------------------------------+---------+------------+
| Non cash investing and financing activities: | | |
+------------------------------------------------------------+---------+------------+
| Warrants issued | 614 | 1,880 |
+------------------------------------------------------------+---------+--+---------+
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements
1. Basis of Preparation
a. Description of Business
Catalytic Solutions, Inc. is a global manufacturer and distributor of emissions
control systems and products, focused in the heavy-duty diesel, energy systems
and light-duty vehicle markets. The Company's emissions control systems and
products are designed to deliver high value to our customers while benefiting
the global environment through air quality improvement, sustainability and
energy efficiency. Catalytic Solutions, Inc. is listed on AIM of the London
Stock Exchange (AIM: CTS and CTSU) and currently has operations in the USA,
Canada, France, Japan and Sweden as well as an Asian joint venture.
b. Liquidity
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. Therefore, the consolidated
financial statements contemplate the realization of assets and liquidation of
liabilities in the ordinary course of business. The Company has suffered
recurring losses and negative cash flows from operations since its inception,
resulting in an accumulated deficit of $143.2 million at December 31, 2008. In
addition, due to non-compliance with certain loan covenants (described below)
and per the repayment obligations under the Company's loan agreements, the total
debt of the Company has been classified as current and due and payable in 2009.
As a result of this classification, the Company has a working capital deficit of
$5.0 million. The Company has funded its operations through equity sales,
convertible debt, and bank borrowings. The Company's current bank debt
agreements contain certain covenants in respect to which the Company was in
compliance at December 31, 2008. These covenants are almost exclusively based on
the performance of the Company's Engine Control Systems subsidiary. As of March
31, 2009, the Company had failed to achieve two of the covenants under the bank
loan agreement with Fifth Third Bank (see Note 9 for a discussion of the Fifth
Third Bank loan agreement). The covenants that the Company failed to achieve are
those related to the annualized EBITDA and the funded debt to EBITDA ratio for
the Engine Control Systems subsidiary. The bank has agreed to temporarily
suspend its rights with respect to the breach of these two covenants until July
1, 2009 subject to the Company, in Fifth Third Bank's opinion, making reasonably
satisfactory progress in its efforts to recapitalize the balance sheet and the
provision of an audit report on the collateral pledged by the Company to Fifth
Third Bank.
As of May 31, 2009, the Company is out of compliance with a covenant in the loan
agreement with Cycad Group, LLC (see Note 9 for a discussion of the Cycad loan
agreement). The non-compliance resulted from the Company's failure to achieve
the above described covenants under the bank loan agreement with Fifth Third
Bank. Cycad Group, LLC has agreed to suspend its rights until 1 July 2009
subject to the Company being successful in its efforts to recapitalize the
balance sheet and Fifth Third Bank continuing to suspend its rights. The Company
is actively negotiating with both lenders to resolve the non-compliance issues
and for the extension of their forbearance.
At December 31, 2008 the Company had $6.7 million in cash. The Company's access
to working capital is limited and its debt service obligations and projected
operating costs for 2009 exceed its cash balance at December 31, 2008. Failure
to renegotiate payment terms for debt due will result in the Company not having
sufficient cash to operate.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. In order to address this uncertainty, in the first quarter of
2009, the Company retained a U.S.-based investment banking firm to act as a
financial advisor to the Company in exploring alternatives to recapitalize the
Company. Alternatives under consideration include the sale of Company stock
and/or a sale of the Company's assets, while negotiating with the Company's
lenders to modify loan terms in order to delay repayments while alternative
capital is secured. At this time the Company cannot provide any assurances that
it will be successful in its continuing efforts to recapitalize the balance
sheet or work with its lenders on loan modifications. In the event that the
Company is not successful in the immediate future, the Company will be unable to
continue operations and may be required to file bankruptcy. There can be no
assurances that the Company will be able to reorganize through bankruptcy, and
might be forced to effect a liquidation of its assets. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
c. Preparation based on U.S. Generally Accepted Accounting Principles (U.S.
GAAP)
The consolidated financial statements and accompanying notes are presented in
U.S. dollars and have been prepared in accordance with U.S. GAAP.
2. Summary of Significant Accounting Policies
a. Principles of Consolidation
The consolidated financial statements include the financial statements of
Catalytic Solutions, Inc. and its subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
b. Fiscal Year/Period
The Company uses a fiscal year ending on December 31. The Company's joint
venture, TCC, uses a fiscal year ending on March 31.
c. Concentration of Risk
During the years ended December 31, 2008 and 2007, a major automotive
manufacturer, Honda Motor Company, accounted for 30% and 44%, respectively, of
the Company's revenues. No other customer accounted for 10% or more of the
Company's revenues for the year ended December 31, 2008.
As of December 31, 2008 and 2007, an engineering services company accounted for
40% and 0%, respectively, of the Company's accounts receivable. No other
customer accounted for 10% or more of the Company's accounts receivable for the
year ended December 31, 2008.
No vendor accounted for 10% or more of the Company's raw material purchases for
the year ended December 31, 2008. During the year ending December 31, 2007, two
vendors each accounted for 30% of the Company's raw material purchases.
d. Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management of the Company 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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Areas
where significant judgments are made include, but are not limited to:
stock-based compensation, allowance for doubtful accounts, accounting for
construction-type contracts, inventory valuation, taxes, investments, valuation
of long-lived assets, and accrued liabilities. Actual results could differ from
those estimates. These estimates and assumptions are based on the Company's best
estimates and judgment. The Company evaluates its estimates and assumptions on
an ongoing basis using historical experience and other factors, including the
current economic environment, which it believes to be reasonable under the
circumstances. Estimates and assumptions are adjusted when facts and
circumstances dictate. Illiquid credit markets, volatile equity, foreign
currency, and declines in customer spending have combined to increase the
uncertainty inherent in such estimates and assumptions. As future events and
their effects cannot be determined with precision, actual results could differ
from these estimates. Changes in estimates resulting from continuing changes in
the economic environment will be reflected in the financial statements in future
periods.
e. Cash and Cash Equivalents
Cash and cash equivalents of $6,726,000 and $17,444,000 at December 31, 2008 and
2007, respectively, consist of cash balances and money market mutual funds. For
purposes of the consolidated statements of cash flows, the Company considers the
money market funds and all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
f. Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is the Company's best estimate of
the amount of probable credit losses in the Company's existing accounts
receivable. The Company determines the allowance based on historical write-off
experience and past-due balances over 60 days that are reviewed individually for
collectability. Account balances are charged off against the allowance after all
means of collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance sheet credit
exposure related to its customers.
g. Investments
The Company held no investments at December 31, 2008 and 2007. In 2008, the
Company made an investment in TCC, a Japanese corporation (see Note 14 for a
discussion of the TCC joint venture).
h. Inventories
Inventories are stated at the lower of cost (specific-identification method) or
market (net realizable value). Finished goods inventory includes materials,
labor and manufacturing overhead.
i. Property and Equipment
Property and equipment are stated at cost. Property and equipment under capital
leases are stated at the present value of the minimum lease payments.
Depreciation and amortization have been provided using the straight-line method
over the following estimated useful lives:
+-----------------------------+--------------+
| Machinery and equipment | 2 - 10 years |
+-----------------------------+--------------+
| Furniture and fixtures | 2 - 5 years |
+-----------------------------+--------------+
| Computer hardware and | 2 - 5 years |
| software | |
+-----------------------------+--------------+
| Vehicles | 2 - 5 years |
+-----------------------------+--------------+
When an asset is sold or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized. Repairs and maintenance are charged to expense as incurred and major
replacements or betterments are capitalized. Property and equipment held under
capital leases and leasehold improvements are amortized straight-line over the
shorter of the lease term or estimated useful life of the asset. Total
depreciation for the years ended December 31, 2008 and 2007 was $2,414,000 and
$2,058,000, respectively.
j. Goodwill
Goodwill is recorded when the purchase price of an acquisition exceeds the
estimated fair value of the net identified tangible and intangible assets
acquired and is recorded in the reporting that will benefit from acquired
intangible and tangible assets. Goodwill is tested for impairment on an annual
basis and written down to its implied fair value when impaired. The Company
performed the annual goodwill impairment testing as of October 31, 2008. Two of
the Company's reporting units which are also reporting segments, AUS and ECS,
have allocated goodwill. The Company's remaining reporting unit, CSI, has no
allocated goodwill. The Company performed Step I of the annual impairment test
and it was determined that the fair value of the Company's reporting units (as
determined using the expected present value of future cash flows) was greater
than the carrying amount of the respective reporting units and Step II of the
annual impairment test was not necessary; therefore there was no impairment to
the carrying amount of the reporting units.
k. Purchased Intangible Assets
Purchased intangible assets are carried at cost, less accumulated amortization.
Amortization is computed on a straight-line basis over the estimated useful
lives of the respective assets, ranging from 1 to 20 years. Intangible assets
consist of trade names, a non-competition agreement, patents and know-how, and
work-in-progress on a construction contract and customer relationships.
l. Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance against deferred tax assets is required if, based on the
weight of available evidence, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The valuation allowance
should be sufficient to reduce the deferred tax asset to the amount that is more
likely than not to be realized.
m. Revenue Recognition
The Company generally recognizes revenue when products are shipped and the
customer takes ownership and assumes risk of loss, collection of the relevant
receivable is reasonably assured, persuasive evidence of an arrangement exists,
and the sales price is fixed or determinable. There are certain customers whose
revenue recognition policy is FOB destination point. For these customers,
revenue is recognized upon receipt at the customer's warehouse. This generally
occurs within five days from shipment date.
Applied Utility Systems accounts for revenue and earnings from construction
contracts under the percentage-of-completion accounting in accordance with AICPA
Statement of Position 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts". Under this method, Applied Utility Systems
recognizes revenue measured by the percentage of cost incurred to date to
estimated total cost for each contract. This method is used because management
considers total cost to be the best available measure of progress on the
contracts. Because of inherent uncertainties in estimating costs, it is at least
reasonably possible that the estimates used may change materially.
Contract cost includes all direct labor and related fringe benefits, materials
installed in the project, and subcontractor costs. Indirect labor and related
fringe benefits and selling, general and administrative expenses are charged to
operations as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. Changes in estimated
job profitability resulting from job performance, job conditions, claims, change
orders, and settlements, are accounted for as changes in estimates in the
current period. Amounts representing contract change orders, claims or other
items are included in revenues only when they can be reliably estimated and
realization is probable.
Engine Control Systems generally recognizes revenue when the product is shipped.
For customers with FOB destination, revenue is not recognized until delivered.
For sales with associated installation, revenue is recognized upon completion of
installation.
n. Research and Development
Research and development costs are generally expensed as incurred.
o. Long-Lived Assets
In accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," assets such as property, plant, and equipment are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
or asset group to estimated undiscounted future cash flows expected to be
generated by the asset or asset group. If the carrying amount of an asset or
asset group exceeds its estimated future cash flows, an impairment charge is
recognized for the amount by which the carrying amount of the asset or asset
group exceeds the fair value of the asset or asset group. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet. The Company's analysis under SFAS 144, indicates
that certain assets are impaired. This analysis is summarized in Note 6.
p. Stock Compensation
The Company recognizes compensation expense based on the estimated grant date
fair value method using the Black-Scholes valuation model. In 2007, the Company
modified the Plan to adopt a market criteria. These options are valued using a
Monte Carlo univariate options pricing model. For the years ended December 31,
2008 and 2007, stock-based compensation expense was $843,000 and $921,000,
respectively.
q. Foreign Currency
The functional currency of Engine Control Systems is the Canadian Dollar, while
that of its subsidiaries Unikat Acquisition Co. AB and Engine Control Systems
Europe AB in Sweden is the Swedish Krona. The functional currency of the
Company's Japanese branch office is the Japanese Yen. Assets and liabilities of
the foreign locations are translated into U.S. dollars at period-end exchange
rates. The resulting adjustments are charged or credited directly to accumulated
comprehensive income (loss) within Stockholders' Equity. Revenue and expense
accounts are translated at the average exchange rates for the period. All
realized and unrealized transaction adjustments are included in other income
(loss).
On December 20, 2007 the Company issued stock on the AIM of the London Stock
Exchange and raised $9.2 million before expenses as part of the consideration
paid for Engine Control Systems. The Company hedged these proceeds and realized
a gain of $253,000 upon the surrender of the forward contract.
r. Recently Issued Accounting Standards
In December 2007, the FASB issued FASB Statement No. 141R, Business Combinations
(Statement 141R) and FASB Statement No. 160, Non-controlling Interests in
Consolidated Financial Statements - an amendment to ARB No. 51 (Statement 160).
Statements 141R and 160 require most identifiable assets, liabilities,
non-controlling interests, and goodwill acquired in a business combination to be
recorded at "full fair value" and require non-controlling interests (previously
referred to as minority interests) to be reported as a component of equity,
which changes the accounting for transactions with non-controlling interest
holders. Both Statements are effective for periods beginning on or after
December 15, 2008, and earlier adoption is prohibited. Statement 141R will be
applied to business combinations occurring after the effective date. Statement
160 will be applied prospectively to all non-controlling interests, including
any that arose before the effective date.. We expect SFAS 141(R) will have an
impact on our consolidated financial statements, but the nature and magnitude of
the specific effects will depend upon the nature, terms, and size of the
acquisitions we consummate after the effective date of January 1, 2009.
3. Trade Accounts Receivable
Trade accounts receivable at December 31, 2008 and 2007 consisted of the
following:
+---------------------------------------------------+------------+--+-----------+
| | 2008 | | 2007 |
+---------------------------------------------------+------------+--+-----------+
| | $ | | $ |
+---------------------------------------------------+------------+--+-----------+
| Non-contract trade accounts receivable, less | 4,398,000 | | 5,604,000 |
| allowance for doubtful | | | |
| accounts of $123,000 and $81,000 at December | | | |
| 31, 2008 and 2007 | | | |
+---------------------------------------------------+------------+--+-----------+
| Completed contracts | 178,000 | | 2,750,000 |
+---------------------------------------------------+------------+--+-----------+
| Contracts in progress | 6,091,000 | | 444,000 |
+---------------------------------------------------+------------+--+-----------+
| | 10,667,000 | | 8,798,000 |
+---------------------------------------------------+------------+--+-----------+
At December 31, 2008, there were no amounts included in receivables under
retainage provisions in contracts.
The Company's revolving credit facility is collateralized by inventory and
receivables. At December 31, 2008 and 2007, the collateralized receivables were
$2.8 million and $4.2 million, respectively.
In December 2005, the Company fully reserved an accounts receivable balance from
Delphi in the amount of $422,000. The $422,000 represents the amount owed to
Catalytic Solutions at the time of Delphi's filing for bankruptcy protection in
October 2005. The entire balance was reserved when the Company determined it was
unlikely that Delphi would improve the priority of the debt beyond those of
general creditors and a probable loss would be incurred by the Company. In 2007,
the Company sold its interest in the receivable at 102.5% of value. The Company
continues to reserve the amount as a contingent liability as the buyer has the
ability to demand a refund if Delphi refused the Company's claim.
4.Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts at December 31, 2008 and
2007 consisted of the following:
+---------------------------------------------------+--------------+--+-------------+
| | 2008 | | 2007 |
+---------------------------------------------------+--------------+--+-------------+
| | $ | | $ |
+---------------------------------------------------+--------------+--+-------------+
| Costs incurred on uncompleted contracts | 8,263,000 | | 934,000 |
+---------------------------------------------------+--------------+--+-------------+
| Estimated earnings | 2,448,000 | | 529,000 |
+---------------------------------------------------+--------------+--+-------------+
| | 10,711,000 | | 1,463,000 |
+---------------------------------------------------+--------------+--+-------------+
| Less: Billings to date | (11,540,000) | | (1,349,000) |
+---------------------------------------------------+--------------+--+-------------+
| | (829,000) | | 114,000 |
+---------------------------------------------------+--------------+--+-------------+
The following table details the net balance included within the accrued expense,
and prepaid expenses and other current assets at December 31, 2008 and 2007,
respectively:
+---------------------------------------------------+-----------+--+----------+
| | 2008 | | 2007 |
+---------------------------------------------------+-----------+--+----------+
| | $ | | $ |
+---------------------------------------------------+-----------+--+----------+
| Costs and estimated earnings in excess of | - | | 127,000 |
| billings on uncompleted contracts | | | |
+---------------------------------------------------+-----------+--+----------+
| Billings in excess of costs and estimated | (829,000) | | (13,000) |
| earnings on uncompleted contracts | | | |
+---------------------------------------------------+-----------+--+----------+
| | (829,000) | | 114,000 |
+---------------------------------------------------+-----------+--+----------+
5. Inventories
Inventories at December 31, 2008 and 2007 consisted of the following:
+---------------------------------------------------+-----------+--+------------+
| | 2008 | | 2007 |
+---------------------------------------------------+-----------+--+------------+
| | $ | | $ |
+---------------------------------------------------+-----------+--+------------+
| Finished goods | 4,735,000 | | 4,807,000 |
+---------------------------------------------------+-----------+--+------------+
| Work in progress | 1,127,000 | | 1,641,000 |
+---------------------------------------------------+-----------+--+------------+
| Raw materials | 3,057,000 | | 4,019,000 |
+---------------------------------------------------+-----------+--+------------+
| | 8,919,000 | | 10,467,000 |
+---------------------------------------------------+-----------+--+------------+
6. Property and Equipment
Property and equipment at December 31, 2008 and 2007 consisted of the following:
+---------------------------------------------------+--------------+--+--------------+
| | 2008 | | 2007 |
+---------------------------------------------------+--------------+--+--------------+
| | $ | | $ |
+---------------------------------------------------+--------------+--+--------------+
| Buildings and land | 511,000 | | 2,510,000 |
+---------------------------------------------------+--------------+--+--------------+
| Furniture and fixtures | 2,175,000 | | 2,753,000 |
+---------------------------------------------------+--------------+--+--------------+
| Computer hardware and software | 1,335,000 | | 2,551,000 |
+---------------------------------------------------+--------------+--+--------------+
| Machinery and equipment | 11,376,000 | | 15,000,000 |
+---------------------------------------------------+--------------+--+--------------+
| Vehicles | 73,000 | | 131,000 |
+---------------------------------------------------+--------------+--+--------------+
| | 15,470,000 | | 22,945,000 |
+---------------------------------------------------+--------------+--+--------------+
| Less accumulated depreciation | (12,588,000) | | (12,289,000) |
+---------------------------------------------------+--------------+--+--------------+
| | 2,882,000 | | 10,656,000 |
+---------------------------------------------------+--------------+--+--------------+
As a result of the significant slow-down in the automotive sector during 2008
and the anticipated pace of recovery of the Company's business in the light-duty
vehicle catalyst segment, the Company conducted an assessment for the impairment
of certain property, plant and equipment within the light-duty vehicle catalyst
business segment in the year ending December 31, 2008. The assessment was done
in accordance with the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." During this assessment, certain
long-lived assets of the light-duty vehicle catalyst business were deemed to be
impaired and a write-down to fair value was considered necessary. An impairment
charge of $4,928,000 was recorded during the year ending December 31, 2008, due
to projected cash flows not being able to support the asset base. The Company
uses a probability-weighted discounted cash flow model to determine fair market
value. The allocation of the impairment to asset groups is shown below.
+---------------------------------------------------------------+-----------+
| | 2008 |
+---------------------------------------------------------------+-----------+
| | $ |
+---------------------------------------------------------------+-----------+
| Furniture and fixtures | 278,000 |
+---------------------------------------------------------------+-----------+
| Computer hardware and software | 1,127,000 |
+---------------------------------------------------------------+-----------+
| Machinery and equipment | 3,515,000 |
+---------------------------------------------------------------+-----------+
| Vehicles | 8,000 |
+---------------------------------------------------------------+-----------+
| | 4,928,000 |
+---------------------------------------------------------------+-----------+
7. Share Based Payment
The Company has two stock option plans (the 1997 Plan and the 2006 Plan) for the
benefit of employees, officers, directors and consultants of the Company. The
1997 Plan expired on December 31, 2006 and as of December 31, 2008, there were
2,600,700 shares outstanding. Under the 2006 Plan, a total of 4,200,000 shares
of the Company's common stock are reserved for issuance. Options granted under
the plans are generally exercisable for a period between seven and ten years
from the date of grant at an exercise price that is not less than the fair
market value of the common stock on the date of grant. Options granted under the
1997 Plan generally vest over a period of four years and those granted under the
2006 Plan generally vest over a period of three years. Vested stock options may
be exercised and paid for by cash, check, net-exercise or by other means as
approved by the Remuneration Committee of the Company's Board of Directors. The
fair market value is determined by using the last reported sale price as listed
on the AIM of the London Stock Exchange as of the date of exercise or (if there
were no trades on that date) the latest preceding date upon which a sale was
reported. All common stock issued from exercises are newly issued shares that
have been reserved for under the respective Plans.
In 2007, the Company adopted a change to the 2006 Plan, adding market criteria
for vesting in addition to the existing service requirement. This criterion
applies to all options granted in 2007 and subsequent years. Under the market
criteria, the shares are earned if the Company's common stock trading price is
equal or exceeds an amount equal to 120% of the exercise price of the option for
a period of ninety days on which the stock is actually traded on the AIM of the
London Stock Exchange. The addition of the market criteria changes the method of
valuation of the stock options from Black-Scholes to a Monte Carlo univariate
pricing model.
The per share weighted average fair value of each option granted during the year
ended December 31, 2008 and December 31, 2007 was $0.44 and $0.89 on the date of
grant, respectively. The 2006 market-based Plan was valued using a Monte Carlo
univariate option pricing model with the following weighted average assumptions:
+---------------------------------------------------+----------+------------+
| | 2008 | 2007 |
+---------------------------------------------------+----------+------------+
| Expected volatility | 59.9% | 38.0% |
+---------------------------------------------------+----------+------------+
| Risk-free interest rate | 2.8% | 4.7% |
+---------------------------------------------------+----------+------------+
| Dividend yield | 0.0% | 0.0% |
+---------------------------------------------------+----------+------------+
| Expected life in years | 5.0 | 5.7 |
+---------------------------------------------------+----------+------------+
| Forfeiture rate | 6.0% | 6.0% |
+---------------------------------------------------+----------+------------+
As the stock of the Company became publicly traded in November 2006 and has
traded for a relatively short period time, it is not practicable for management
to estimate the expected volatility of share price because there is not
sufficient historical information about volatility. Therefore, the Company
utilized an estimate based upon a portfolio of peer companies. The expected life
was derived via the Monte Carlo model.
The following summarizes the stock option transactions under the Company's stock
option plans during the years presented:
+----------------------------------------------------+-----------+------------+
| | Shares | Weighted |
| | | average |
| | | exercise |
| | | price |
+----------------------------------------------------+-----------+------------+
| | | $ |
+----------------------------------------------------+-----------+------------+
| Options outstanding at December 31, 2006 | 5,602,231 | 1.98 |
+----------------------------------------------------+-----------+------------+
| Grants | 600,000 | 2.00 |
+----------------------------------------------------+-----------+------------+
| Exercised | (156,750) | 1.51 |
+----------------------------------------------------+-----------+------------+
| Forfeited | (580,730) | 2.50 |
+----------------------------------------------------+-----------+------------+
| Expired | (159,600) | 1.67 |
+----------------------------------------------------+-----------+------------+
| | | |
+----------------------------------------------------+-----------+------------+
| Options outstanding at December 31, 2007 | 5,305,151 | 1.95 |
+----------------------------------------------------+-----------+------------+
| Grants | 728,000 | 0.81 |
+----------------------------------------------------+-----------+------------+
| Exercised | (30,000) | 1.07 |
+----------------------------------------------------+-----------+------------+
| Forfeited | (129,000) | 2.44 |
+----------------------------------------------------+-----------+------------+
| Expired | (556,740) | 1.96 |
+----------------------------------------------------+-----------+------------+
| | | |
+----------------------------------------------------+-----------+------------+
| Options outstanding at December 31, 2008 | 5,317,411 | 1.78 |
+----------------------------------------------------+-----------+------------+
At December 31, 2008 the range of exercise prices and weighted average remaining
contractual life of outstanding options was $0.42 - $2.74 and 5.89 years,
respectively.
The following table details the shares outstanding:
+--------------------------------------+-------------+--------------+-----------------------+
| | Options | Options | Options |
| | outstanding | currently | vested |
| | | exercisable | or |
| | | | expected |
| | | | to vest |
+--------------------------------------+-------------+--------------+-----------------------+
| Number of shares | 5,317,411 | 3,667,186 | 5,000,133 |
+--------------------------------------+-------------+--------------+-----------------------+
| Weighted average exercise price | $1.78 | $1.87 | $1.79 |
+--------------------------------------+-------------+--------------+-----------------------+
| Aggregate | - | - | - |
| intrinsic | | | |
| value | | | |
+--------------------------------------+-------------+--------------+-----------------------+
| Weighted average remaining | 5.89 | 5.42 | 5.83 |
| contractual term | | | |
+--------------------------------------+-------------+--------------+-----------------------+
The total compensation cost of non-vested options expected to vest is $975,985,
with a weighted average period to recognize of 1.96 years.
Cash received from option exercise under all share-based payment arrangements
for the years ended December 31, 2008 and 2007, was $0 and $34,000,
respectively. The intrinsic value of options exercised for the year ended
December 31, 2008 was $7,500.
The Company's 2006 Plan allows for the issuance of stock awards to Non-Executive
Directors. As of December 31, 2008, the Company had issued two restricted stock
awards in accordance with the Plan, totaling 120,000 shares.
8. Stockholders' Equity
a. Secondary Offering on AIM of the London Stock Exchange
In connection with the acquisition of Engine Control Systems on December 20,
2007, the Company completed issuance by way of a placing ("Placing") of
5,770,400 new common shares in Catalytic Solutions for net proceeds of
$8,663,000 and issued warrants to purchase 3,117,115 shares of common shares as
part of the consideration paid the sellers of Engine Control Systems (see
warrants under section (8)(b)).
b. Warrants
In June 2008, the Company issued warrants to purchase 1,250,000 shares of common
stock as part of the consideration for a standing line of credit with Cycad
Group, LLC. The warrants are valued at $614,000 and are expensed over the term
of the loan as interest expense.
In December 2007, The Company issued warrants to purchase 3,117,115 shares of
common stock to Capital Works, LLC as part of the consideration to acquire
Engine Control Systems. The warrants are valued at $1,880,094 and are included
as part of the purchase price of Engine Control Systems.
The exercisable warrants and their associated exercise prices are shown below at
December 31, 2008 and 2007:
+------------------------------------------------+-----------+-----------+
| | 2008 | 2007 |
+------------------------------------------------+-----------+-----------+
| Warrants exercisable into common stock (issued | 37,500 | 37,500 |
| in USD) | | |
+------------------------------------------------+-----------+-----------+
| Exercise price | $1.67 | $1.67 |
+------------------------------------------------+-----------+-----------+
| Warrants exercisable into common stock (issued | 4,367,115 | 3,117,115 |
| in GBX) | | |
+------------------------------------------------+-----------+-----------+
| Exercise price | $1.51 | $1.68 |
+------------------------------------------------+-----------+-----------+
9. Long-Term Debt
In June 2008, the Company put in place a debt facility with Cycad Group, LLC
that would allow a one-time draw down of up to $3.3 million. In September 2008,
the Company borrowed $3.3 million under the debt facility. The debt is
collateralized by the accounts receivable at the energy systems business and the
machinery and equipment of the light-duty vehicle catalyst business segment. The
debt is due July 1, 2009 and interest is paid at 18%. As of May 31, 2009, the
Company has been out of compliance with a covenant in the loan agreement with
Cycad Group, LLC. The non-compliance resulted from the Company's failure to
achieve covenants under the bank loan agreement with Fifth Third Bank, as
described below. Cycad Group, LLC has agreed to suspend its rights until July 1,
2009 subject to the Company being successful in its efforts to recapitalize the
balance sheet and Fifth Third Bank continuing to suspend its rights.
In December 2007, the Company and its subsidiaries including Engine Control
Systems entered into borrowing agreements with Fifth Third Bank as part of the
cash consideration paid for the purchase of Engine Control Systems on December
20, 2007. The borrowing agreements provided for three facilities including a
revolving line of credit and two term loans. The line of credit is a two-year
revolving term operating loan up to a maximum principal amount of $8.2 million,
with availability based upon eligible accounts receivable and inventory. At
December 31, 2008, the outstanding balance was $8.1 million, in excess of the
Company's borrowing capacity by $1.6 million. Pay-down against the line in
February 2009 returned the Company to full compliance. The other facilities
include a five-year non-revolving term loan of up to $2.5 million, which was
paid off during 2008, and a non-revolving term loan of $3.5 million with a
remaining term of four years. Total borrowing on the facilities as of December
31, 2008 was $11.6 million. The loans are collateralized by the assets of the
Company. The interest rate on the line of credit is variable based upon Canadian
Prime Rate and the term loan is fixed at 13%. As of December 31, 2008, the
weighted average of the line of credit and term loan was 6.36%. The Company is
also subject to covenants on minimum levels of tangible capital funds, fixed
charge coverage, earnings before income tax, depreciation and amortization,
funded debt-to-earnings before income tax and depreciation and amortization. In
the event of default, the bank may demand payment on all amounts outstanding
immediately. The Company is also restricted from paying corporate distributions
in excess of $250,000. The loan agreement also includes a material adverse
change clause, exercisable if, in the opinion of the bank, there is a material
adverse change in the financial condition, ownership or operation of Engine
Control Systems or the Company. If the bank deems that a material adverse
change has occurred, the bank may terminate the Company's right to borrow under
the agreement and demand payment of all amounts outstanding under the agreement.
As of March 31, 2009, the Company had failed to achieve two of the covenants
under the bank loan agreement with Fifth Third Bank. The covenants that the
Company failed to achieve are those related to the annualized EBITDA and the
funded debt to EBITDA ratio for the Engine Control Systems subsidiary. The bank
has agreed to temporarily suspend its rights until 1 July 2009 subject to the
Company, in Fifth Third Bank's opinion, making reasonably satisfactory progress
in its efforts to recapitalize the balance sheet and the provision of an audit
report on the collateral pledged by the Company to Fifth Third Bank.
The Company entered into a note payable of $3.0 million with the seller as part
of the Applied Utility Systems acquisition. The note is due August 28, 2009 and
accrues interest at 5.36%. At December 31, 2008 the Company had accrued $377,000
of unpaid interest on the note.
Long-term debt at December 31, 2008 and 2007 is summarized as follows:
+---------------------------------------------------+--------------+--+------------+
| | 2008 | | 2007 |
+---------------------------------------------------+--------------+--+------------+
| | $ | | $ |
+---------------------------------------------------+--------------+--+------------+
| Line of credit | 8,068,000 | | 7,048,000 |
+---------------------------------------------------+--------------+--+------------+
| Note payable | 3,000,000 | | 3,000,000 |
+---------------------------------------------------+--------------+--+------------+
| Term loans | 3,500,000 | | 5,854,000 |
+---------------------------------------------------+--------------+--+------------+
| Cycad debt facility | 3,300,000 | | - |
+---------------------------------------------------+--------------+--+------------+
| Capital lease obligation | 45,000 | | - |
+---------------------------------------------------+--------------+--+------------+
| | 17,913,000 | | 15,902,000 |
+---------------------------------------------------+--------------+--+------------+
| Less current portion | (17,880,000) | | (408,000) |
+---------------------------------------------------+--------------+--+------------+
| | 33,000 | | 15,494,000 |
+---------------------------------------------------+--------------+--+------------+
Annual scheduled principal payments of long-term debt are: $11.1 million and
$3.5 million for the years ended December 31, 2009 and 2012, respectively. Due
to the covenant breach, Fifth Third Bank has the ability to call the $3.5
million term loan due in 2012 during 2009.
10. Commitments and Contingencies
The Company leases certain equipment and facilities under operating leases that
expire through December 2018. Minimum future payments at December 31, 2008 are
as follows:
+---------------------------------------------------------------+-----------+
| Years ending December 31: | $ |
+---------------------------------------------------------------+-----------+
| 2009 | 1,228,000 |
+---------------------------------------------------------------+-----------+
| 2010 | 1,170,000 |
+---------------------------------------------------------------+-----------+
| 2011 | 1,022,000 |
+---------------------------------------------------------------+-----------+
| 2012 | 1,034,000 |
+---------------------------------------------------------------+-----------+
| 2013 | 671,000 |
+---------------------------------------------------------------+-----------+
| Thereafter | 2,185,000 |
+---------------------------------------------------------------+-----------+
| | 7,310,000 |
+---------------------------------------------------------------+-----------+
Rent expense during 2008 and 2007 totaled $935,000 and $810,000, respectively.
11. Income Taxes
The Company applies the provision of Financial Accounting Standards
Interpretation, or FIN, No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48). FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of uncertain tax positions taken or expected to be
taken in a company's income tax return, and also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 utilizes a two-step approach for
evaluating uncertain tax positions accounted for in accordance with SFAS No.
109, "Accounting for Income Taxes" (SFAS No. 109). Step one, Recognition,
requires a company to determine if the weight of available evidence indicates
that a tax position is more likely than not to be sustained upon audit,
including resolution of related appeals or litigation processes, if any. Step
two, Measurement, is based on the largest amount of benefit, which is more
likely than not to be realized on ultimate settlement. The Company's total
amount of unrecognized tax benefits as of December 31, 2007 and December 31,
2008 was $125 million and $131 million, respectively. Also, the Company had
$268,000 of unrecognized tax benefits that, if recognized, would affect its
effective tax rate for December 31, 2008.
The following changes occurred in the amount of Unrecognized Tax Benefits
(including related interest and penalties) during the year:
+---------------------------------------------------------------+-------------+
| | $ |
+---------------------------------------------------------------+-------------+
| Balance as of January 1, 2008 | 124,946,000 |
+---------------------------------------------------------------+-------------+
| Additions for current year tax positions | 6,874,000 |
+---------------------------------------------------------------+-------------+
| Reductions for prior year tax positions | (339,000) |
+---------------------------------------------------------------+-------------+
| Balance as of December 31, 2008 | 131,481,000 |
+---------------------------------------------------------------+-------------+
The Company's policy is to include interest and penalties related to
unrecognized tax benefits within the Company's provision for income taxes. As of
December 31, 2007, the Company had $15,000 accrued for payment of interest and
penalties related to unrecognized tax benefits. For the year ended December 31,
2008 and 2007, the Company recognized $42,000 of interest and penalties related
to unrecognized tax benefits in its provision for income taxes.
The tax years 2004 to 2008 remain open to examination by California, Michigan
and U.S. taxing jurisdictions to which we are subject.
Earnings before income taxes include the following components:
+---------------------------------------------------+--------------+--+--------------+
| | 2008 | | 2007 |
+---------------------------------------------------+--------------+--+--------------+
| | $ | | $ |
+---------------------------------------------------+--------------+--+--------------+
| Pre-tax earnings: | | | |
+---------------------------------------------------+--------------+--+--------------+
| U.S.-based operations | (22,112,000) | | (16,621,000) |
+---------------------------------------------------+--------------+--+--------------+
| Non U.S.-based operations | 2,132,000 | | (6,699,000) |
+---------------------------------------------------+--------------+--+--------------+
| | (19,980,000) | | (23,320,000) |
+---------------------------------------------------+--------------+--+--------------+
Income tax expense attributable to loss from continuing operations is summarized
as follows:
+--------------------------------------+------------+--+----------+--+----------+
| | Current | | Deferred | | Total |
+--------------------------------------+------------+--+----------+--+----------+
| Year ended December 31, 2007: | $ | | $ | | $ |
+--------------------------------------+------------+--+----------+--+----------+
| U.S Federal | - | | - | | - |
+--------------------------------------+------------+--+----------+--+----------+
| State and local | 2,100 | | - | | 2,100 |
+--------------------------------------+------------+--+----------+--+----------+
| Foreign | 37,700 | | (23,800) | | 13,900 |
+--------------------------------------+------------+--+----------+--+----------+
| Total | 39,800 | | (23,800) | | 16,000 |
+--------------------------------------+------------+--+----------+--+----------+
| Year ended December 31, 2008: | | | | | |
+--------------------------------------+------------+--+----------+--+----------+
| U.S Federal | (46,800) | | - | | (46,800) |
+--------------------------------------+------------+--+----------+--+----------+
| State and local | 57,200 | | - | | 57,200 |
+--------------------------------------+------------+--+----------+--+----------+
| Foreign | 522,100 | | 92,500 | | 614,600 |
+--------------------------------------+------------+--+----------+--+----------+
| Total | 532,500 | | 92,500 | | 625,000 |
+--------------------------------------+------------+--+----------+--+----------+
Income taxes differ from the amounts computed by applying the federal
statutory rate of 34% to loss before provision for income taxes as shown below:
+---------------------------------------------------+-------------+--+-------------+
| | 2008 | | 2007 |
+---------------------------------------------------+-------------+--+-------------+
| | $ | | $ |
+---------------------------------------------------+-------------+--+-------------+
| Expected tax benefit | (6,837,000) | | (7,929,000) |
+---------------------------------------------------+-------------+--+-------------+
| Net tax effects of: | | | |
+---------------------------------------------------+-------------+--+-------------+
| State taxes, net of federal | (1,373,700) | | (1,127,000) |
| benefit | | | |
+---------------------------------------------------+-------------+--+-------------+
| Research credits | (103,000) | | (170,000) |
+---------------------------------------------------+-------------+--+-------------+
| Research credit adjustment | - | | 1,832,000 |
+---------------------------------------------------+-------------+--+-------------+
| Other | 208,700 | | 126,000 |
+---------------------------------------------------+-------------+--+-------------+
| In-process research and | - | | 2,261,000 |
| development | | | |
+---------------------------------------------------+-------------+--+-------------+
| Change in deferred tax asset | 8,730,000 | | 5,023,000 |
| valuation allowance | | | |
+---------------------------------------------------+-------------+--+-------------+
| | 625,000 | | 16,000 |
+---------------------------------------------------+-------------+--+-------------+
Deferred tax assets consist of the following:
+---------------------------------------------------+--------------+--+--------------+
| | 2008 | | 2007 |
+---------------------------------------------------+--------------+--+--------------+
| | $ | | $ |
+---------------------------------------------------+--------------+--+--------------+
| Research and development credits | 3,758,000 | | 3,774,000 |
+---------------------------------------------------+--------------+--+--------------+
| Other credits | 354,000 | | 234,000 |
+---------------------------------------------------+--------------+--+--------------+
| Operating loss carry forwards | 27,727,000 | | 26,355,000 |
+---------------------------------------------------+--------------+--+--------------+
| Warrant expense | 84,000 | | - |
+---------------------------------------------------+--------------+--+--------------+
| Other | 3,264,000 | | (15,000) |
+---------------------------------------------------+--------------+--+--------------+
| Inventories | 960,000 | | 598,000 |
+---------------------------------------------------+--------------+--+--------------+
| Allowance for doubtful accounts | 36,000 | | 14,000 |
+---------------------------------------------------+--------------+--+--------------+
| Depreciation | 1,112,000 | | (1,119,000) |
+---------------------------------------------------+--------------+--+--------------+
| Capitalized research and development expenses | 8,557,000 | | 6,597,000 |
+---------------------------------------------------+--------------+--+--------------+
| Amortization | (2,030,000) | | (1,170,000) |
+---------------------------------------------------+--------------+--+--------------+
| Non-cash compensation | 482,000 | | 279,000 |
+---------------------------------------------------+--------------+--+--------------+
| Other identifiable intangibles | (1,770,000) | | (1,727,000) |
+---------------------------------------------------+--------------+--+--------------+
| Gross deferred tax assets | 42,534,000 | | 33,820,000 |
+---------------------------------------------------+--------------+--+--------------+
| Valuation allowance | (44,949,000) | | (36,355,000) |
+---------------------------------------------------+--------------+--+--------------+
| Net deferred tax liabilities | (2,415,000) | | (2,535,000) |
+---------------------------------------------------+--------------+--+--------------+
The Company had approximately $72,600,000 of federal income tax net operating
loss carry forwards at December 31, 2008. The Company had approximately
$54,100,000 of state income tax net operating loss carry forwards at December
31, 2008. The federal and state income tax net operating loss carry forwards
expire starting in 2017 and 2012, respectively.
In assessing the potential realization of deferred tax assets, consideration is
given to whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the Company attaining future taxable income during the
periods in which those temporary differences become deductible. In addition, the
utilization of net operating loss carry forwards may be limited due to
restrictions imposed under applicable federal and state tax laws due to a change
in ownership. Based upon the level of historical operating losses and future
projections, management believes it is more likely than not that the Company
will not realize the deferred tax assets.
12. Net Earnings per Share (EPS)
Basic net loss per share is computed using the weighted average number of common
shares outstanding during the period. Diluted net loss per share is computed
using the weighted average number of common shares and excludes certain dilutive
potential common shares outstanding, as their effect is anti-dilutive on loss
from continuing operations. Dilutive potential common shares consist of employee
stock options and other warrants that are convertible into the Company's common
stock.
Because the Company incurred losses in the years ended December 31, 2008 and
2007, the effect of dilutive securities totaling 9,782,000 and 8,520,000
equivalent shares, respectively, has been excluded in net loss per share, as
their impact would be anti-dilutive. The basic and diluted EPS is shown in the
table below:
+---------------------------------------------------+--------------+--+--------------+
| | 2008 | | 2007 |
+---------------------------------------------------+--------------+--+--------------+
| | $ | | $ |
+---------------------------------------------------+--------------+--+--------------+
| Numerator: ($) | | | |
+---------------------------------------------------+--------------+--+--------------+
| Net loss | (20,605,000) | | (23,336,000) |
+---------------------------------------------------+--------------+--+--------------+
| Denominator | | | |
+---------------------------------------------------+--------------+--+--------------+
| Weighted average shares | 69,701,000 | | 64,371,000 |
+---------------------------------------------------+--------------+--+--------------+
| Net loss per share | | | |
+---------------------------------------------------+--------------+--+--------------+
| Basic and diluted | $(0.29) | | $(0.36) |
+---------------------------------------------------+--------------+--+--------------+
13. Engine Control Systems Acquisition
On December 20, 2007, the Company acquired all of the common stock and common
stock equivalents of Engine Control Systems based in Ontario, Canada. Engine
Control Systems is a manufacturer of technology-based emissions control systems
giving Catalytic Solutions access to European manufacturing, product testing and
development. This acquisition provides the Company the opportunity to grow its
business in the heavy-duty diesel off-road and retrofit markets and to extend
the use of the Company's core catalyst technology.
The tangible assets consist of inventory, property and equipment, office
furniture and fixtures, computer equipment and related software, and vehicles.
The intangible assets consist of backlog, patents and know-how, trade name,
distributor and customer relationships and in-process research and development.
The purchase price consists of the following:
+---------------------------------------------------------------+------------+
| | $ |
+---------------------------------------------------------------+------------+
| Cash payments | 18,904,000 |
+---------------------------------------------------------------+------------+
| Warrants | 1,880,000 |
+---------------------------------------------------------------+------------+
| Direct acquisition costs | 274,000 |
+---------------------------------------------------------------+------------+
| Total purchase price | 21,058,000 |
+---------------------------------------------------------------+------------+
The following table summarizes the estimated fair value of the assets and
liabilities acquired on December 20, 2007:
+--------------------------------------------+--------------------+---------------+
| | Useful life | $ |
+--------------------------------------------+--------------------+---------------+
| Working capital | | 4,453,000 |
+--------------------------------------------+--------------------+---------------+
| Long-term debt | | (2,323,000) |
+--------------------------------------------+--------------------+---------------+
| Deferred tax liability (net) | | (2,523,000) |
+--------------------------------------------+--------------------+---------------+
| Fair value of fixed assets | various | 4,046,000 |
+--------------------------------------------+--------------------+---------------+
| Patents and know-how | 10 years | 3,770,000 |
+--------------------------------------------+--------------------+---------------+
| Trade name | 20 years | 770,000 |
+--------------------------------------------+--------------------+---------------+
| In-process research and development | | 6,520,000 |
+--------------------------------------------+--------------------+---------------+
| Distributor and customer relationships | 8 years | 1,260,000 |
+--------------------------------------------+--------------------+---------------+
| Goodwill | Indefinite | 5,085,000 |
+--------------------------------------------+--------------------+---------------+
| Total purchase price | | 21,058,000 |
+--------------------------------------------+--------------------+---------------+
The Company added an additional $54,000 of goodwill to the purchase price of
Engine Control Systems during 2008. The addition was due to late arriving legal
fees associated with the acquisition. The Company expects no further
adjustments.
Approximately $6.5 million of the purchase price represents the estimated fair
value of acquired in-process research and development projects that had not yet
reached technological feasibility and had no alternative future use.
Accordingly, this amount was immediately expensed in the consolidated statement
of operations upon the acquisition date.
The value assigned to purchased in-process technology is related to particulate
filters and selective catalytic reduction (SCR) research projects. Costs
incurred to date on these projects total $596,000. The total cost to completion
for these projects is $1,591,000.
The estimated fair value of these projects was determined by use of a discounted
cash flow model. The discount rates used take into account the stage of
completion and the risks surrounding the successful development and
commercialization of each of the purchased in-process technology projects that
were valued.
The acquired intangible assets with a definite life are being amortized, and
have a weighted average useful life of approximately 10.8 years. The intangible
assets that make up that amount include backlog of $40,000 (less than 1-year
weighted average useful life), patents and know-how of $3,770,000 (10-year
weighted average useful life), trade name of $770,000 (20-year weighted average
useful life) and distributor and customer relationships of $1,260,000 (8-year
weighted average useful life).
14. TCC Joint Venture
In February 2008, the Company entered into an agreement with Tanaka Kikinzoku
Kogyo K.K. (TKK) to form a new joint venture company, TC Catalyst Incorporated
(TCC), a Japanese corporation. The joint venture is part of the light-duty
vehicle catalyst business. The Company entered the joint venture in order to
improve its presence in Japan and Asia and strengthen its business flow into the
Asian market.
Under the terms of the original agreement, the Company and TKK each owned 50% of
TCC. TKK provided TCC with $1.0 million in equity and capital and $5.0 million
in debt financing, while the Company provided $1.0 million of equity and
licensed specific intellectual property rights and trade secrets for
royalty-free use in the defined territory to the venture. In exchange for the
licensed technology, TCC issued the Company a promissory note for JPY
500,000,000 that accrues interest at 2.8%, due in March 2018.
In December 2008, the Company and TKK entered into agreements to alter the joint
venture agreement. The primary results of the agreements are:
* The Company sold 40% of its ownership to TKK for $441,000, reducing its
ownership share from 50% to 30%.
* The Company agreed to sell and transfer specific heavy-duty diesel catalyst
technology and intellectual property to TKK for use in the defined territory for
a total selling price of $7.5 million. TKK will provide that intellectual
property to TCC on a royalty-free basis. $5.0 million of the sale was completed
and recognized in 2008, with the balance being recognized in 2009.
* The promissory note from TCC was reduced from JPY 500,000,000 to JPY 250,000,000
and no longer accrues interest.
The Company also recognized a gain on the sale of the TCC shares to TKK of
$430,000 and $5.0 million (pre-tax) for the sale of the intellectual property.
The Company's investment in TCC is accounted for using the equity method. The
Company's share of the TCC net loss as of December 31, 2008 was $988,000 and
TKK's share is the balance. The amount of equity allocated to the Company as of
December 31, 2008 was $100,000. TCC operates with a March 31 fiscal year-end.
Financial information for TCC as of December 31, 2008 is as follows:
+------------------------------------------------------------+--------------+
| | 2008 |
+------------------------------------------------------------+--------------+
| | $ |
+------------------------------------------------------------+--------------+
| Assets | 13,717,000 |
+------------------------------------------------------------+--------------+
| Liabilities | 13,383,000 |
+------------------------------------------------------------+--------------+
| Equity | 334,000 |
+------------------------------------------------------------+--------------+
| | |
+------------------------------------------------------------+--------------+
| Net sales | 567,000 |
+------------------------------------------------------------+--------------+
| Gross Margin | (379,000) |
+------------------------------------------------------------+--------------+
| Net earnings | (2,000,000) |
+------------------------------------------------------------+--------------+
15. Related-party Transactions
In June 2008, the Company put in place a debt facility with Cycad Group, LLC (a
significant shareholder of the Company) that would allow a one-time draw down of
up to $3.3 million. To avoid any conflict of interest, Mr. K. Leonard Judson,
officer of Cycad Group, LLC and then Non-Executive Director of the Company,
recused himself from all Board of Directors discussions and voting pertaining to
the debt facility. Further details regarding the debt facility are disclosed in
Note 9. Mr. Judson resigned from the Board of Directors of the Company in
January 2009.
In October 2008, the Company's Board of Directors unanimously adopted a
resolution to waive the Non-Executive Directors' right to receive, and the
Company's obligation to pay, any director fees with respect to participation in
Board and Committee meetings and other matters with effect from July 1, 2008 and
continuing thereafter until the Directors elect to adopt resolutions reinstating
such fees. On May 1, 2009, the Directors adopted a resolution to reinstate the
accrual of director fees effective January 1, 2009, with a payment schedule to
be determined at a later date.
16. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the years ended December 31,
2007 and 2008 are as follows:
+---------------------------------------------------------------+-----------+
| | $ |
+---------------------------------------------------------------+-----------+
| Balance at December 31, 2006 | 2,600,000 |
+---------------------------------------------------------------+-----------+
| Acquisition of Engine Control Systems | 5,031,000 |
+---------------------------------------------------------------+-----------+
| Effect of translation adjustment | 122,000 |
+---------------------------------------------------------------+-----------+
| | |
+---------------------------------------------------------------+-----------+
| Balance at December 31, 2007 | 7,753,000 |
+---------------------------------------------------------------+-----------+
| Goodwill adjustments related to acquisition of Engine Control | 54,000 |
| Systems | |
+---------------------------------------------------------------+-----------+
| Tax valuation adjustment | (489,000) |
+---------------------------------------------------------------+-----------+
| Effect of translation adjustment | (999,000) |
+---------------------------------------------------------------+-----------+
| Balance at December 31, 2008 | 6,319,000 |
+---------------------------------------------------------------+-----------+
Intangible assets as of December 31, 2008 and 2007 are summarized as follows:
+----------------------------------+----------------+-------------+--+-------------+
| | Useful life | 2008 | | 2007 |
+----------------------------------+----------------+-------------+--+-------------+
| | | $ | | $ |
+----------------------------------+----------------+-------------+--+-------------+
| Trade name | 15-20 years | 2,151,000 | | 2,307,000 |
+----------------------------------+----------------+-------------+--+-------------+
| Non-compete agreement | 3 years | 111,000 | | 111,000 |
+----------------------------------+----------------+-------------+--+-------------+
| Patents and know-how | 5-10 years | 5,343,000 | | 5,863,000 |
+----------------------------------+----------------+-------------+--+-------------+
| Acquired contract | 1.4 years | 353,000 | | 353,000 |
| work-in-progress | | | | |
+----------------------------------+----------------+-------------+--+-------------+
| Customer relationships | 8 years | 1,094,000 | | 1,285,000 |
+----------------------------------+----------------+-------------+--+-------------+
| | | 9,052,000 | | 9,919,000 |
+----------------------------------+----------------+-------------+--+-------------+
| Less accumulated amortization | | (2,144,000) | | (1,185,000) |
+----------------------------------+----------------+-------------+--+-------------+
| | | 6,908,000 | | 8,734,000 |
+----------------------------------+----------------+-------------+--+-------------+
Aggregate amortization for amortizable intangible assets, using the
straight-line amortization method, for the years ended December 31, 2008 and
2007 was $1,112,331 and $740,000, respectively. Estimated amortization expense
for existing intangible assets for the next five years is: $979,000 in 2009,
$923,000 in 2010, $695,000 in 2011, $580,000 in 2012 and $580,000 in 2013.
17. Segment Reporting
The Company has three business segments:
Heavy-duty diesel (HDD) systems - The heavy-duty diesel systems business
represents our largest business segment. It includes retrofit of legacy diesel
fleets with emissions control systems and the emerging opportunity for new
engine emissions controls for on- and off-road vehicles. In 2007, the Company
acquired Engine Control Systems (ECS), an Ontario, Canada-based innovator
focused on a variety of heavy-duty vehicle applications. This environmental
business segment specializes in the design and manufacture of verified exhaust
emissions control solutions. Globally, the heavy-duty diesel systems business
offers a full range of products for the OEM, aftermarket and retrofit markets in
order to reduce exhaust emissions created by on-road, off-road and stationary
diesel, gasoline and alternative fuel engines including propane and natural gas.
The retrofit market in the U.S.A. is driven in particular by state and municipal
environmental regulations and incentive funding for voluntary early compliance.
The heavy-duty diesel systems business is a market leader in retrofit with a
broad portfolio of solutions verified by the California Air Resources Board and
the United States Environmental Protection Agency.
Light-duty vehicle/heavy-duty diesel (LDV/HDD) catalysts - The light-duty
vehicle/heavy-duty diesel catalyst business represents our second largest
business segment. It is the original part of the Catalytic Solutions (CSI)
business behind the Company's proprietary Mixed Phase Catalyst (MPC ) technology
enabling the Company to produce catalyst formulations for gasoline, diesel and
natural gas induced emissions that offer superior performance, proven durability
and cost effectiveness for multiple markets and a wide range of applications. A
family of unique high-performance catalysts has been developed - with
base-metals or low platinum group metal (PGM) and zero-PGM content - to provide
increased catalytic function and value for technology-driven automotive industry
customers. Typically automobile catalyst suppliers use a blend of PGM -
specifically rhodium, palladium and platinum - to achieve a desired emission
profile. This is a competitive marketplace experiencing volatile metals pricing.
This business segment has competitive catalytic coating technologies that enable
it to go head-to-head with its largest competitors at some of the world's
largest automobile manufacturers, and win significant business. The light-duty
vehicle/heavy-duty diesel catalyst business has developed world-class
technologies and customers recognize that by working collaboratively with the
Company, they can substantially reduce the amount of catalytic metals necessary
for emission controls.
Energy systems - In 2006, the Company purchased Applied Utility Systems (AUS), a
provider of cost-effective, engineered solutions for the clean and efficient
utilization of fossil fuels. The energy systems business provides emissions
control and energy systems solutions for industrial and utility boilers, process
heaters, gas turbines and generation sets used largely by major utilities,
industrial process plants, OEMs, refineries, food processors, product
manufacturers and universities. The energy systems business delivers integrated
systems, optimized for the customers' specific combustion process. The total
system approach yields energy cost savings and improved performance along with
dramatic reductions in emissions for a high return on investment.
Summarized financial information for our reportable segments as of, and for the
years ended December 31, is shown in the following table:
+---------------------------------------------------+----------+--+----------+
| | 2008 | | 2007 |
+---------------------------------------------------+----------+--+----------+
| | US $000 | | US $000 |
+---------------------------------------------------+----------+--+----------+
| Net sales | | | |
+---------------------------------------------------+----------+--+----------+
| LDV/HDD catalysts | 26,311 | | 29,792 |
+---------------------------------------------------+----------+--+----------+
| Energy systems | 10,448 | | 11,633 |
+---------------------------------------------------+----------+--+----------+
| HDD systems | 27,126 | | 342 |
+---------------------------------------------------+----------+--+----------+
| Eliminations | (874) | | - |
+---------------------------------------------------+----------+--+----------+
| Total | 63,011 | | 41,767 |
+---------------------------------------------------+----------+--+----------+
| Operating income (loss) | | | |
+---------------------------------------------------+----------+--+----------+
| LDV/HDD catalysts | (18,387) | | (18,636) |
+---------------------------------------------------+----------+--+----------+
| Energy systems | (917) | | 748 |
+---------------------------------------------------+----------+--+----------+
| HDD systems | 1,923 | | (6,808) |
+---------------------------------------------------+----------+--+----------+
| Total | (17,381) | | (24,696) |
+---------------------------------------------------+----------+--+----------+
| Depreciation and amortization | | | |
+---------------------------------------------------+----------+--+----------+
| LDV/HDD catalysts | 1,910 | | 2,697 |
+---------------------------------------------------+----------+--+----------+
| Energy systems | 556 | | 70 |
+---------------------------------------------------+----------+--+----------+
| HDD systems | 1,061 | | 31 |
+---------------------------------------------------+----------+--+----------+
| Total | 3,527 | | 2,798 |
+---------------------------------------------------+----------+--+----------+
| Total assets | | | |
+---------------------------------------------------+----------+--+----------+
| LDV/HDD catalysts | 44,057 | | 30,650 |
+---------------------------------------------------+----------+--+----------+
| Energy systems | 11,537 | | 4,748 |
+---------------------------------------------------+----------+--+----------+
| HDD systems | 26,357 | | 30,511 |
+---------------------------------------------------+----------+--+----------+
| Eliminations | (31,815) | | - |
+---------------------------------------------------+----------+--+----------+
| Total | 50,136 | | 65,909 |
+---------------------------------------------------+----------+--+----------+
| Capital expenditures | | | |
+---------------------------------------------------+----------+--+----------+
| LDV/HDD catalysts | 1,571 | | 1,388 |
+---------------------------------------------------+----------+--+----------+
| Energy systems | 110 | | 51 |
+---------------------------------------------------+----------+--+----------+
| HDD systems | 526 | | - |
+---------------------------------------------------+----------+--+----------+
| Total | 2,207 | | 1,439 |
+---------------------------------------------------+----------+--+----------+
Net sales by geographic region for the years ended December 31 is shown in the
following table:
+---------------------------------------------------+----------+--+----------+
| | 2008 | | 2007 |
+---------------------------------------------------+----------+--+----------+
| | US $000 | | US $000 |
+---------------------------------------------------+----------+--+----------+
| United States | 39,998 | | 41,524 |
+---------------------------------------------------+----------+--+----------+
| Canada | 13,654 | | 243 |
+---------------------------------------------------+----------+--+----------+
| Europe | 9,359 | | - |
+---------------------------------------------------+----------+--+----------+
| Total | 63,011 | | 41,767 |
+---------------------------------------------------+----------+--+----------+
Net fixed assets by geographic region as of December 31 are shown in the
following table:
+---------------------------------------------------+----------+--+----------+
| | 2008 | | 2007 |
+---------------------------------------------------+----------+--+----------+
| | US $000 | | US $000 |
+---------------------------------------------------+----------+--+----------+
| United States | 1,533 | | 7,254 |
+---------------------------------------------------+----------+--+----------+
| Canada | 1,043 | | 2,987 |
+---------------------------------------------------+----------+--+----------+
| Europe | 306 | | 415 |
+---------------------------------------------------+----------+--+----------+
| Total | 2,882 | | 10,656 |
+---------------------------------------------------+----------+--+----------+
18. Litigation
In connection with the Company's acquisition of the assets of Applied Utility
Systems, Inc., Applied Utility Systems entered into a Consulting Agreement with
M.N. Mansour, Inc. ("Mansour, Inc."), pursuant to which Mansour, Inc. and Dr.
M.N. Mansour ("Dr. Mansour") agreed to perform consulting services for Applied
Utility Systems. During February 2008, Applied Utility Systems terminated the
Consulting Agreement for cause and alleged that Mansour, Inc. and Dr. Mansour
had breached their obligations under the Consulting Agreement. The matter was
submitted to binding arbitration in Los Angeles, California. The arbitration was
held during February 2009. During May 2009 the Arbitrator rendered an Interim
Award (a) finding that the Consulting Agreement was properly terminated by the
Company on February 27, 2008, (b) excusing the Company from any obligation to
make any further payments under the Consulting Agreement and (c) excusing
Mansour, Inc. from any obligation to repay to the Company any of the amounts
previously paid to it under the Consulting Agreement. The Arbitrator requested
that the parties schedule a date for a hearing on the award of attorneys' fees
and the correction of any aspects of the award, without rearguing the merits of
the case. The date for such hearing has not been set. The Consulting Agreement
provides that, on termination of the Consulting Agreement by the Company,
Mansour, Inc. shall repay to the Company 75% of the amounts previously paid to
it under the Consulting Agreement. At the hearing, the Company intends to seek
the award of its attorneys' fees and the correction of the award to require such
payment by Mansour, Inc.
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Consolidating Balance Sheet
December 31, 2008
(In thousands, except for share information)
+------------------------------------------------+----+------+----+----+----+----+----+----+----+----+----+----+----+-------------------------------------------+----+----+----+------+----+
| | CSI | | AUS | | ECS | | Eliminations | | Total |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| Assets | US $000 | | US $000 | | US $000 | | US $000 | | US $000 |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| Current | | | | | | | | | |
| assets: | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | 4,316 | | 1,167 | | 1,243 | | - | | 6,726 |
| Cash | | | | | | | | | |
| and | | | | | | | | | |
| cash | | | | | | | | | |
| equivalents | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | 1,119 | | 6,269 | | 3,279 | | - | | 10,667 |
| Trade | | | | | | | | | |
| accounts | | | | | | | | | |
| receivable | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | 4,267 | | - | | 4,652 | | - | | 8,919 |
| Inventories | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | 3,614 | | 41 | | 839 | | - | | 4,494 |
| Prepaid | | | | | | | | | |
| expenses | | | | | | | | | |
| and | | | | | | | | | |
| other | | | | | | | | | |
| current | | | | | | | | | |
| assets | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | 13,316 | | 7,477 | | 10,013 | | - | | 30,806 |
| Total | | | | | | | | | |
| current | | | | | | | | | |
| assets | | | | | | | | | |
| | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| Property | 868 | | 119 | | 1,895 | | - | | 2,882 |
| and | | | | | | | | | |
| equipment, | | | | | | | | | |
| net | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| Intangible | 422 | | 2,148 | | 4,338 | | - | | 6,908 |
| assets, | | | | | | | | | |
| net | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| Goodwill | - | | 2,600 | | 3,719 | | - | | 6,319 |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| Promissory | 2,767 | | - | | - | | - | | 2,767 |
| note from | | | | | | | | | |
| unconsolidated | | | | | | | | | |
| affiliate | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| Other | 26,684 | | (807) | | 6,392 | | (31,815) | | 454 |
| assets | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | 44,057 | | 11,537 | | 26,357 | | (31,815) | | 50,136 |
| Total | | | | | | | | | |
| assets | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| Liabilities | | | | | | | | | |
| and | | | | | | | | | |
| stockholders' | | | | | | | | | |
| equity | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| Current | | | | | | | | | |
| liabilities: | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | 9,812 | | - | | 8,068 | | - | | 17,880 |
| Current | | | | | | | | | |
| portion | | | | | | | | | |
| of | | | | | | | | | |
| long-term | | | | | | | | | |
| debt | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | 1,878 | | 4,297 | | 1,150 | | - | | 7,325 |
| Accounts | | | | | | | | | |
| payable | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | 2,942 | | - | | - | | - | | 2,942 |
| Deferred | | | | | | | | | |
| revenue | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | 598 | | 218 | | 635 | | - | | 1,451 |
| Accrued | | | | | | | | | |
| salaries | | | | | | | | | |
| and | | | | | | | | | |
| benefits | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | 9,345 | | 1,274 | | 1,195 | | (5,559) | | 6,255 |
| Accrued | | | | | | | | | |
| expenses | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | 24,575 | | 5,789 | | 11,048 | | (5,559) | | 35,853 |
| Total | | | | | | | | | |
| current | | | | | | | | | |
| liabilities | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | 33 | | - | | - | | - | | 33 |
| Long-term | | | | | | | | | |
| debt, | | | | | | | | | |
| excluding | | | | | | | | | |
| current | | | | | | | | | |
| portion | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | - | | - | | 2,415 | | - | | 2,415 |
| Deferred | | | | | | | | | |
| tax | | | | | | | | | |
| liability | | | | | | | | | |
| - | | | | | | | | | |
| long-term | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | 24,608 | | 5,789 | | 13,463 | | (5,559) | | 38,301 |
| Total | | | | | | | | | |
| liabilities | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| Stockholders' | | | | | | | | | |
| equity: | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| Common | 157,825 | | 5,322 | | 21,128 | | (26,256) | | 158,019 |
| stock, | | | | | | | | | |
| no par | | | | | | | | | |
| value | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| Treasury | (100) | | - | | - | | - | | (100) |
| stock at | | | | | | | | | |
| cost | | | | | | | | | |
| (60,000 | | | | | | | | | |
| shares | | | | | | | | | |
| at | | | | | | | | | |
| December | | | | | | | | | |
| 31, 2008 | | | | | | | | | |
| and | | | | | | | | | |
| 2007, | | | | | | | | | |
| respectively) | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| Accumulated | 1 | | - | | (2,868) | | - | | (2,867) |
| other | | | | | | | | | |
| comprehensive | | | | | | | | | |
| income (loss) | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| Accumulated | (138,277) | | 426 | | (5,366) | | - | | (143,217) |
| deficit | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | 19,449 | | 5,748 | | 12,894 | | (26,256) | | 11,835 |
| Total | | | | | | | | | |
| stockholders' | | | | | | | | | |
| equity | | | | | | | | | |
+-----------------------------------------------------+-----------+---------+---------+---------+---------+---------+------------------------------------------------+---------+-----------+
| | 44,057 | | 11,537 | | 26,357 | | (31,815) | | 50,136 |
+------------------------------------------------+----+------+----+----+----+----+----+----+----+----+----+----+----+-------------------------------------------+----+----+----+------+----+
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Consolidating Statement of Operations
Year ended December 31, 2008
(In thousands)
+-----------------------------+----+-----+----+----+----+----+----+----+----+----+----+----+----+---------+----+----+----+-----+----+
| | CSI | | AUS | | ECS | | Eliminations | | Total |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| | US $000 | | US $000 | | US $000 | | US $000 | | US $000 |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| Revenues | 26,311 | | 10,448 | | 27,126 | | (874) | | 63,011 |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| Cost of | 26,071 | | 8,249 | | 19,149 | | (874) | | 52,595 |
| revenues | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| Gross | 240 | | 2,199 | | 7,977 | | - | | 10,416 |
| margin | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| Operating | | | | | | | | | |
| expenses: | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| | 2,900 | | 929 | | 2,265 | | - | | 6,094 |
| Sales | | | | | | | | | |
| and | | | | | | | | | |
| marketing | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| | 7,525 | | 533 | | 1,218 | | - | | 9,276 |
| Research | | | | | | | | | |
| and | | | | | | | | | |
| development | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| | 8,274 | | 1,654 | | 2,571 | | - | | 12,499 |
| General | | | | | | | | | |
| and | | | | | | | | | |
| administrative | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| | 4,928 | | - | | - | | - | | 4,928 |
| Impairment | | | | | | | | | |
| of | | | | | | | | | |
| long-lived | | | | | | | | | |
| assets | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| | (5,000) | | - | | - | | - | | (5,000) |
| Gain | | | | | | | | | |
| on | | | | | | | | | |
| sale | | | | | | | | | |
| of | | | | | | | | | |
| intellectual | | | | | | | | | |
| property | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| | 18,627 | | 3,116 | | 6,054 | | - | | 27,797 |
| Total | | | | | | | | | |
| operating | | | | | | | | | |
| expenses | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| | (18,387) | | (917) | | 1,923 | | - | | (17,381) |
| Loss | | | | | | | | | |
| from | | | | | | | | | |
| operations | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| Other | | | | | | | | | |
| income | | | | | | | | | |
| (expense): | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| | 225 | | - | | 485 | | (444) | | 266 |
| Interest | | | | | | | | | |
| income | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| | (2,112) | | - | | (556) | | 444 | | (2,224) |
| Interest | | | | | | | | | |
| expense | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| | (988) | | - | | - | | - | | (988) |
| Loss | | | | | | | | | |
| on | | | | | | | | | |
| unconsolidated | | | | | | | | | |
| affiliate | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| | 137 | | 2 | | 208 | | - | | 347 |
| Other | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| Total | (2,738) | | 2 | | 137 | | - | | (2,599) |
| other | | | | | | | | | |
| income | | | | | | | | | |
| (expense) | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| | (21,125) | | (915) | | 2,060 | | - | | (19,980) |
| Loss | | | | | | | | | |
| before | | | | | | | | | |
| provision | | | | | | | | | |
| for | | | | | | | | | |
| income | | | | | | | | | |
| taxes | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| Provision | (54) | | - | | 679 | | - | | 625 |
| for | | | | | | | | | |
| income | | | | | | | | | |
| taxes | | | | | | | | | |
+----------------------------------+----------+---------+---------+---------+---------+---------+--------------+---------+----------+
| Net | (21,071) | | (915) | | 1,381 | | - | | (20,605) |
| loss | | | | | | | | | |
+-----------------------------+----+-----+----+----+----+----+----+----+----+----+----+----+----+---------+----+----+----+-----+----+
This information is provided by RNS
The company news service from the London Stock Exchange
END
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