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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ____
Commission File Number: 0-21142
NEMATRON CORPORATION
(Exact name of small business issuer as specified in its charter)
MICHIGAN 38-2483796
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5840 INTERFACE DRIVE, ANN ARBOR, MICHIGAN 48103
(Address of principal executive offices) (Zip Code)
(734) 214-2000
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
[X] YES [ ] No
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
No par value Common Stock: 14,453,296 OUTSTANDING AS OF MAY 4, 2001
Transitional Small Business Disclosure Format: [ ] YES [X] NO
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 2001 AND DECEMBER 31, 2000
MARCH 31, DECEMBER 31,
2001 2000
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 65,061 $ 74,712
Accounts receivable, net of allowance for doubtful
accounts of $86,000 at March 31, 2001, and $ 78,000
at December 31, 2000 5,376,703 5,407,593
Inventories (Note 3) 2,932,435 1,956,255
Prepaid expenses and other current assets 331,108 315,556
------------ ------------
Total current assets 8,705,307 7,754,116
Property and equipment, net of accumulated depreciation
of $6,802,035 at March 31, 2001 and $6,703,078 at
December 31, 2000 2,464,047 2,544,041
Other assets:
Software and related development costs, net of amortization
of $3,076,216 at March 31, 2001, and $2,805,592 at
December 31, 2000 3,282,389 3,369,660
Other intangible assets, net of amortization of $2,693,667 at
March 31, 2001 and $2,589,652 at December 31, 2000 3,943,449 3,212,345
------------ ------------
Net other assets 7,225,838 6,582,005
------------ ------------
Total assets $ 18,395,192 $ 16,880,162
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank (Note 4) $ 2,295,791 $ 2,059,318
Accounts payable 1,672,310 1,642,039
Deferred revenue and other accrued expenses 2,378,847 2,011,825
Convertible subordinated debt (Note 5) 788,000 -
Current maturities of long-term debt (Note 6) 1,042,321 3,953,908
------------ ------------
Total current liabilities 8,177,269 9,667,090
Long-term debt, less current maturities (Note 6) 2,715,001 -
------------ ------------
Total liabilities 10,892,270 7,113,036
Shareholders' equity:
Common stock, no par value, 30,000,000 shares authorized;
shares issued and outstanding: 15,453,296 at March 31, 2001
and 13,969,616 at December 31, 2000 32,204,089 30,892,089
Accumulated comprehensive loss (5,995) (1,606)
Accumulated deficit (24,695,172) (23,677,411)
------------ ------------
Total shareholders' equity 7,502,922 7,213,072
------------ ------------
Total liabilities and shareholders' equity $ 18,395,192 $ 16,880,162
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ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED MARCH 31, 2001 AND 2000
QUARTER ENDED MARCH 31,
----------------------------
2001 2000
(UNAUDITED) (UNAUDITED)
Net revenues $ 4,785,350 $ 5,238,888
Cost of revenues 3,962,713 3,621,234
------------ ------------
Gross profit 822,637 1,617,654
Operating expenses:
Product development costs 114,356 125,326
Selling, general and administrative expenses 1,556,442 1,713,342
------------ ------------
Total operating expenses 1,670,798 1,838,668
------------ ------------
Operating loss (848,161) (221,014)
Other income (expense):
Interest expense (170,126) (75,612)
Sundry income (expense), net 524 374,884
------------ ------------
Total other income (expense) (169,603) 299,273
------------ ------------
Income (loss) before income tax benefit (1,017,763) 78,259
Income tax benefit (Note 7) - 10,800
------------ ------------
Net income (loss) $ (1,017,763) $ 89,059
============ ============
Earnings (loss) per share (Note 8):
Basic $ (0.07) $ 0.01
============ ============
Diluted $ (0.07) $ 0.01
============ ============
Weighted average shares outstanding:
Basic 14,002,587 12,605,430
============ ============
Diluted 14,002,587 13,292,279
============ ============
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE QUARTERS ENDED MARCH 31, 2001 AND 2000
QUARTER ENDED MARCH 31,
--------------------------
2001 2000
(UNAUDITED) (UNAUDITED)
Net income (loss) $(1,017,763) $ 89,059
Other comprehensive loss - foreign
currency translation adjustment (4,387) (6,653)
----------- -----------
Comprehensive income (loss) $(1,022,150) $ 82,406
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ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 2001 AND 2000
QUARTER ENDED MARCH 31,
--------------------------
2001 2000
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income (loss) $(1,017,761) $ 89,059
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization 509,344 452,136
Deferred income tax benefit - (10,800)
Loss on disposal of property 2,291 3,131
Gain on sale of domain name - (375,000)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable 212,983 1,755,587
Inventories 442,139 (78,071)
Prepaid expenses and other current assets (10,660) 2,525
Accounts payable (66,914) (788,964)
Deferred revenue and accrued expenses (33,312) (357,580)
----------- -----------
Net cash provided by operating activities 38,110 692,023
----------- -----------
Cash flows from investing activities:
Acquisition of Optimation, Inc., net of cash acquired (278,877) -
Additions to capitalized software development costs (183,353) (190,946)
Additions to property and equipment (16,591) (82,994)
Proceeds from sale of domain name - 375,000
Proceeds from disposals of property and equipment 50 2,751
----------- -----------
Net cash provided by (used in) investing activities (478,771) 103,811
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of convertible subordinated notes
and warrants (Note 5) 1,100,000 -
Payments of long-term debt (261,076) (61,811)
Payments of deferred financing fees - (7,536)
Decrease in notes payable to bank (403,527) -
----------- -----------
Net cash provided by (used in) financing activities 435,397 (69,347)
----------- -----------
Foreign currency translation effect (4,387) (6,653)
----------- -----------
Net increase (decrease) in cash and cash equivalents (9,651) 719,834
Cash and cash equivalents at beginning of period 74,712 356,668
----------- -----------
Cash and cash equivalents at end of period $ 65,061 $ 1,076,502
=========== ===========
Continued on next page.
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ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE QUARTERS ENDED MARCH 31, 2001 AND 2000
QUARTER ENDED MARCH 31,
-------------------------
2001 2000
(UNAUDITED) (UNAUDITED)
Non-cash financing and investing activities:
Fair value of assets acquired from Optimation, Inc.,
including goodwill $ 2,459,727
Less liabilities assumed (1,180,850)
Less common stock issued (1,000,000)
-----------
Net cash paid for Optimation, Inc. (Note 2) $ 278,877
===========
Increase in property and debt resulting from capitalized
lease obligation $ - $ 13,212
Supplemental disclosures of cash flow information:
Cash paid for interest 180,159 86,720
Cash paid for income taxes - -
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ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Nematron Corporation (the "Company") and its wholly-owned subsidiaries, Nematron
Limited, a United Kingdom corporation, Nematron Canada Inc., a Canadian
corporation, A-OK Controls Engineering, Inc. ("A-OK Controls"), a Michigan
corporation, and Optimation, Inc. ("Optimation"), an Alabama corporation. All
significant intercompany transactions and balances have been eliminated in
consolidation. The Company acquired 100% of the equity of A-OK Controls
effective at the close of business on June 30, 2000, and acquired 100% of the
equity of Optimation effective at the close of business on March 30, 2001.
Accordingly, the consolidated balance sheet at March 31, 2001 includes the
balance sheets of both A-OK Controls and Optimation, while the consolidated
statements of operations for the three months ended March 31, 2000 exclude the
operations of both A-OK Controls and Optimation and the consolidated statements
of operations for the three months ended March 31, 2001 exclude the operations
of Optimation.
In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair presentation of the
consolidated financial statements for the interim periods have been included.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10-KSB.
The results of operations for the three-month periods ended March 31, 2001 and
2000 are not necessarily indicative of the results to be expected for the full
year.
NOTE 2 - ACQUISITIONS
Acquisition of A-OK Controls
On June 30, 2000, the Company completed its acquisition of A-OK Controls, an
Auburn Hills, Michigan-based provider of automation control engineering and
system integration services. The Company recorded this transaction using the
purchase method of accounting.
The purchase price was approximately $4,538,000, including expenses of
approximately $186,000. Under the terms of the related Stock Purchase Agreement,
the Company issued 604,186 shares of its Common Stock to the former A-OK
Controls shareholder in exchanges for 100% of the outstanding equity of A-OK
Controls. Additionally, the Company paid the former shareholder of A-OK Controls
$2,750,000 cash and agreed to pay the remaining amount of $352,000 after
December 31, 2000. In connection with the Stock Purchase Agreement, the Company
also entered into a three-year employment agreement and a five-year agreement
not to compete with A-OK Controls' former shareholder.
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The allocation of the total purchase price to assets acquired and liabilities
assumed as of the June 30, 2000 acquisition date are as follows:
Cash $ 42,000
Other current assets 3,490,000
Equipment 611,000
Intangible assets, including goodwill 2,559,000
Current notes payable (1,420,000)
Other current liabilities (675,000)
Long-term debt (109,000)
------------
Total purchase price - A-OK Controls $ 4,538,000
============
Acquisition of Optimation
On March 30, 2001, the Company completed its acquisition of Optimation, a
Huntsville, Alabama-based company that develops, produces and markets industrial
communications and display products for industrial automation. The Company
recorded this transaction using the purchase method of accounting.
The purchase price was approximately $1,660,000, including expenses of
approximately $60,000. Under the terms of the related Stock Purchase Agreement,
the Company issued 1,483,680 shares of its Common Stock to the former Optimation
shareholders in exchanges for 100% of the outstanding equity of Optimation.
Additionally, the Company paid the former Optimation shareholders $300,000 and
agreed to pay the former Optimation shareholders $300,000 ninety days after the
acquisition. In connection with the Stock Purchase Agreement, the Company also
entered into three-year employment agreements and three-year agreements not to
compete with Optimation's president and vice-president, both of whom were
Optimation shareholders.
The allocation of the total purchase price to assets acquired and liabilities
assumed as of the March 30, 2001 acquisition date are as follows:
Cash $ 21,000
Other current assets 1,605,000
Equipment 19,000
Intangible assets, including goodwill 835,000
Current notes payable (640,000)
Other current liabilities (137,000)
Long-term debt (43,000)
------------
Total purchase price - Optimation $ 1,660,000
============
The following unaudited pro forma summary presents the consolidated results of
operations as if the acquisition of A-OK Controls and Optimation had occurred on
January 1, 2000, the earliest period presented in this Form 10-QSB, and does not
purport to be indicative of either what would have occurred had the acquisition
of A-OK Controls and Optimation actually been consummated at that date or the
Company's future results of operations:
Three Months Ended March 31,
--------------------------------
2001 2000
---- ----
Revenues $ 5,196,000 $8,242,000
Net income (loss) (1,019,000) 371,000
Income (loss) per share, diluted $ (0.07) $ 0.02
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NOTE 3 - INVENTORIES
Inventories consist of the following at March 31, 2001 and December 31, 2000:
MARCH 31, DECEMBER 31,
2001 2000
Purchased parts and accessories $2,355,743 $1,544,890
Work in process 131,833 105,742
Finished goods, demo units and service stock 444,859 305,623
---------- ----------
Total Inventory $2,932,435 $1,956,255
========== ==========
NOTE 4 - NOTES PAYABLE TO BANK
The Company and its subsidiary, A-OK Controls, are parties to two loan and
security agreements (the "Agreements") with a Wisconsin-based bank. The
Agreements have been amended through April 12, 2001. The Agreements provide for
a total of $6.0 million in two lines of credit, a $2.9 million term loan and a
$1.5 million special accommodation advance for the purpose of the Company's
acquisition of A-OK Controls. The Agreements provide for credit facilities
through November 2003, and may be extended for an additional one-year period at
the option of the Company, unless the lender gives prior notice of termination.
The amount available under the lines of credit are limited by a borrowing
formula that allows for advances up to a maximum of the sum of specified
percentages of eligible accounts receivable, less the amount, if any, of
outstanding letters of credit issued by the Company. Based upon such borrowing
formula, approximately $937,000 of the available lines are eligible for advance
at March 31, 2001. Amounts borrowed under the lines of credit facility total
$1,655,791 at March 31, 2001, and such borrowings bear interest at the prime
rate plus 2.5% (10.5% effective rate at March 31, 2001). The lines of credit and
the term loans (see Note 6) are collateralized by substantially all assets of
the Company and a mortgage on the Company's Ann Arbor facility.
The Company's wholly-owned subsidiary, Optimation, is party to a loan and
security agreement with an Alabama-based bank. The agreement provides for a
total line of credit of $640,000. Amounts borrowed under the line of credit
facility total $640,000 at March 31, 2001, and such borrowings bear interest at
the prime rate plus .25% (8.75% effective rate at March 31, 2001). The agreement
provides for line of credit facility through June 30, 2001. The line of credit
is collateralized by substantially all assets of Optimation.
NOTE 5 - CONVERTIBLE SUBORDINATED DEBT
In March 2001, the Company sold $1,100,000 of principal amount of convertible
subordinated promissory notes, bearing interest at 10% per annum ("Subordinated
Notes") and warrants to purchase a total of 733,333 shares of Common Stock
("Warrants"). In April 2001, the Company sold $100,000 of Subordinated Notes and
Warrants for 66,667 shares of Common Stock. The Subordinated Notes are due
August 31, 2001 and may be prepaid at any time prior to maturity. The Company
intends to complete a private offering of equity securities by August 31, 2001.
If such offering is completed, the Noteholders may convert the principal amount
of the Subordinated Notes and accrued interest thereon into the same class of
shares that the Company issues in such offering at a conversion price per share
equal to the offering price per share of the shares sold in such offering. The
Subordinated Notes become due and payable immediately if the issuance of the
shares into which the Subordinated Notes may be converted is not approved by
shareholders of the Company by May 31, 2001. If the Company does not complete an
equity financing pursuant to which it receives gross proceeds of at least $5
million by August 31, 2001 (the "Proposed Equity Offering"), the noteholders may
convert the principal amount of the Subordinated Notes and accrued interest
thereon into shares of Common Stock at $0.30 per share. However, if the daily
closing price of the Common Stock, as traded on the American Stock Exchange,
falls below $0.30 per share for five
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consecutive days, the conversion price will be adjusted downward to the lowest
price during such five trading day period.
The Warrants, which are non-assignable, allow the holders to purchase Common
Stock at $0.30 per share (the "Per Share Warrant Price") at any time until March
31, 2006. If at any time prior to the exercise of the Warrant the daily closing
price of the Common Stock, as traded on the American Stock Exchange, falls
below the Per Share Warrant Price for five consecutive days, the Per Share
Warrant Price will be adjusted downward to the lowest price during such five
trading day period. In the event that the Company completes the Proposed Equity
Offering at less than the Per Share Warrant Price, the holders have the option
to exchange the Warrant for a warrant to purchase a greater number of shares
based on the difference between the Per Share Warrant Price and the Proposed
Equity Offering price per share. Because the Per Share Warrant Price was less
than the closing price of the Common Stock, as traded on the American Stock
Exchange, on the dates the notes were sold, the Warrants were ascribed a value
of $312,000 and such amount was credited to shareholders equity, and the
subordinated notes were ascribed a value of $788,000. The value of the
beneficial conversion will be charged to interest over the life of the note,
resulting in a total charge to interest expense of $312,000 between April 1,
2001 and August 31, 2001.
NOTE 6 - LONG-TERM DEBT
The bank agreements governing the lines of credit (see Note 4) and the term
loans, contain several financial covenants, including specified levels of
tangible net worth, interest coverage and debt service coverage. The terms of
the Agreements also prohibit the payment of dividends, limit the amount of
annual capital expenditures and include other restrictive covenants. On March 1,
2001, the bank agreements were amended to reduce the available lines of credit
from $8.0 million to $6.0 million. On April 12, 2001, the Agreements were
further amended and the covenant violations that existed at December 31, 2001
and at the date of the amendment were waived effective December 31, 2000, new
covenants were established and the credit facility was extended for an
additional one-year period.
The Company's wholly-owned subsidiary, Optimation, has a debt obligation due to
an individual totaling $43,333. The promissory note bears interest at 15% per
annum and is due in two remaining installments of $21,667 on April 30 and May
30, 2001.
Long-term debt includes the following debt instruments at March 31, 2001 and
December 31, 2000:
MARCH 31, DECEMBER 31,
2001 2000
Term note payable to a bank, interest at prime plus 2.5% (10.5%
effective rate as of March 31, 2001), payable in monthly
installments of $16,111 through November 2002 at which
time any remaining principal and interest thereon is due $ 2,658,333 $ 2,706,667
Term note payable to a bank, interest at prime plus 3.0%, (11.0%
effective rate as of March 31, 2001), payable in monthly
installments of $62,500 through August 2002 at which time
the remaining principal and interest thereon is due 1,000,000 1,187,500
Capitalized lease obligations and other notes 98,989 59,741
----------- -----------
Total long-term debt 3,757,322 3,953,908
Less current maturities (1,042,321) (3,953,908)
----------- ----------
Long-term debt, less current maturities $ 2,715,001 $ -0-
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NOTE 7 - TAXES ON INCOME
The current tax benefits computed for the three-month period ended March 31,
2000 reflects the tax benefit associated with the amortization of non-deductible
acquired intangible assets during the same period.
The Company has net operating loss carryforwards ("NOLs") of approximately $20.2
million that may be applied against future taxable income. The NOLs expire in
varying amounts from 2004 and through 2020. Utilization of these NOLs is subject
to annual limitations under current Internal Revenue Service regulations. The
Company has established a valuation allowance for the estimated amount of the
total limitation on the utilization of the NOLs. Realization of net deferred tax
assets associated with the NOLs is dependent upon generating sufficient taxable
income prior to their expiration.
NOTE 8 - EARNINGS PER SHARE
Earnings per share ("EPS") is as follows:
Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- ---------
Three Months Ended March 31, 2001:
Basic EPS:
Net loss $(1,017,763) 14,002,587 $ (0.07)
Effect of Dilutive Securities:
Options - - (0.00)
----------- ----------- --------
Diluted EPS:
Net loss available to common
shareholders plus assumed conversion $(1,017,763) 14,002,587 $ (0.07)
=========== =========== ========
Three Months Ended March 31, 2000:
Basic EPS:
Net income $ 89,059 12,605,430 $ 0.01
Effect of Dilutive Securities:
Options - 686,849 (0.00)
----------- ----------- --------
Diluted EPS:
Net income available to common
shareholders plus assumed conversion $ 89,059 13,292,279 $ 0.01
=========== =========== ========
For the three months ended March 31, 2001, 2,318,492 options and 931,011
warrants were outstanding but were not included in the computation of diluted
EPS because the inclusion of these securities would have an antidilutive effect
on loss per share during the three-month period ended March 31, 2001. The
options expire on various dates between 2003 and 2010, and the warrants expire
between October 2002 and March 2006.
For the three months ended March 31, 2000, 129,406 options and 197,678 warrants
were outstanding but were not included in the computation of diluted EPS because
the exercise prices of the excluded options and warrants were greater than the
average market price of the Common Stock during the period. The options expire
on various dates between 2003 and 2009, and the warrants expire in October 2002.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 2000
Net revenues for the first quarter of 2001 decreased $454,000 (8.7%) to
$4,785,000 compared to $5,239,000 for the comparable period last year. The
decrease is attributable to a decrease in sales of bundled Industrial Control
Computers ("ICCs"), unbundled ICCs and software, partially offset by increased
revenues from services and system integration, including $1,900,000 attributable
to the revenues of A-OK Controls which the Company acquired on June 30, 2000.
Deliveries of bundled ICC products under the Company's major supply program with
an automotive company (the "major supply program") were $1,200,000 less in the
current period compared to the same period last year because of the major supply
program terminated at the end of 2000. Management expects that net revenues for
the last nine months of 2001 will be comparable to the year earlier period based
on the current order rate and scheduled deliveries.
Gross profit for the first quarter of 2001 decreased $795,000 (49.1%)
to $822,000 compared to $1,618,000 for the comparable period last year. Gross
profit as a percentage of sales in the first quarter of 2001 was 17.2% compared
to 30.9% in the comparable period last year. The decrease in the gross profit
percentage results from a higher percentage of sales of lower margin products in
the current period compared to the comparable period last year, including the
effect of the significant decrease in sales of bundled ICC products under the
major supply program. Management expects that gross profit margins will remain
relatively constant throughout the year as the mix of sales in the remaining
quarters of 2001 is expected to be similar to the sales mix experienced in the
first quarter of the year based on the current backlog and scheduled releases.
Product development expenses for the first quarter of 2001 decreased
$11,000 (8.8%) to $114,000 compared to $125,000 for the comparable period last
year. The decrease is attributable to a more efficient and effective development
staff in the current period compared to the year earlier period. Management
expects that product development expenses will increase slightly in the
remaining quarters of 2001 as staff and development efforts are planned to
increase above current levels.
Selling, general and administrative expenses for the first quarter of
2001 decreased $157,000 (9.2%) to $1,556,000 compared to $1,713,000 for the
comparable period last year and decreased as a percentage of net revenue to
32.5% in the first quarter of 2001 from 32.7% in the comparable period of 2000.
The decrease results primarily from more efficient marketing and sales
initiatives during the current quarter compared to the comparable period last
year. Management expects that selling, general and administrative expenses will
increase slightly in the remaining quarters of 2001 because of an expansion of
its marketing and sales initiatives compared to current activities.
Interest expense for the first quarter of 2001 increased $95,000
(125.0%) to $170,000 compared to $76,000 for the comparable period last year.
The increase results primarily from higher average borrowing levels due to cash
needs in light of current operating results.
Sundry income for the first quarter of 2001 decreased by $374,000 to
$1,000 compared to $375,000 in the comparable period last year during which
period the Company sold a domain name during the first quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Primary sources of liquidity are cash generated from operations, short
term subordinated debt and the Company's two secured lines of credit that total
$6.0 million. As of March 31, 2001, the Company had $1,655,791 outstanding under
the lines of credit and approximately $937,000 of additional borrowing capacity
available under such credit lines. As of April 30, 2001, the Company had
borrowed $1,417,000 under the lines of credit and had $761,000 of additional
borrowing capacity under those lines of credit. On March 1, 2001, the principal
bank agreements governing the lines of credit were amended to reduce the
available lines of credit from $8.0 million to $6.0 million. On April 12, 2001,
the bank agreements were further amended and the covenant violations that
existed at December 31, 2001 and at the date of the amendment were waived, new
covenants were established and the credit facility due date was extended until
November 2003. The Company also has a secured line of credit through its
wholly-owned subsidiary, Optimation, with an Alabama-based bank. The agreement
provides for a total line of credit of $640,000.
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Amounts borrowed under the line of credit facility total $640,000 at March 31,
2001, and such borrowings bear interest at the prime rate plus .25% (8.75%
effective rate at March 31, 2001). The agreement provides for a line of credit
facility through June 30, 2001. The Company intends, prior to its June annual
maturity date, to renew the Optimation credit line for an additional year.
The Company's operations generated $38,000 of cash in the first quarter
of 2001, including a $544,000 positive effect from changes in working capital
items.
In the short term, the Company will be required to repay its $1.2
million principal amount of Subordinated Notes unless such notes are converted
by the holders. The Company also has commitments to make payments approximating
$900,000 on term debt prior to year end. Management intends to complete an
equity offering to accredited investors prior to August 31, 2001 whereby the
Company would raise a minimum of $5 million, a portion of the proceeds of which
would be applied to the repayment of the Subordinated Notes. If such offering is
not completed, the Company expects the Subordinated Notes to be converted into
Common Stock.
Based upon the Company's existing working capital of $216,000,
forecasted revenue and expense levels and forecasted line of credit
availability, and assuming the conversion of the Subordinated to Common Stock,
the Company believes it has sufficient liquidity to satisfy its liabilities as
they become due. The Company believes that its long-term liquidity needs will be
accomplished through the proceeds of the private equity offering it expects to
complete on or prior to August 31, 2001.
UNCERTAINTIES RELATING TO FORWARD LOOKING STATEMENTS
"Item 2. Management's Discussion and Analysis or Plan of Operation" and other
parts of this Form 10-QSB contain certain "forward-looking statements" within
the meaning of the Securities Act of 1934, as amended. While the Company
believes any forward-looking statements it has made are reasonable, actual
results could differ materially since the statements are based on current
management expectations and are subject to risks and uncertainties. These risks
and uncertainties include, but are not limited to the following:
- Uncertainties discussed elsewhere in "Management's Discussion and
Analysis or Plan of Operation" and in "Description of Business"
above;
- The potential inability to raise additional equity or debt
financing in a sufficient amount to sustain operations and allow
management to execute its strategies;
- The potential inability to modify bank covenants as it may be
necessary from time to time;
- The decline of economic conditions in general and conditions in
the automotive manufacturing industry in particular;
- A reduction in demand for the Company's products and services;
- The inability of the Company to successfully implement its
strategy to lead the industrial automation market migration from
closed architecture PLCs to open architecture PC-based solutions;
- Changes in Company strategy;
- The potential inability of the Company to utilize the new
manufacturers representative sales channel to increase sales over
prior year levels;
- The ability of the Company to effectively and efficiently
integrate the operations of acquired companies;
- Reductions in product life cycles;
- Competitive factors (including the introduction or enhancement of
competitive products);
- Pricing pressures that may result in materially reduced selling
prices for the Company's products;
- Component price increases;
- Component availabilities and the availability of replacement or
substitute components;
- Delays in introduction of planned hardware and software products;
- Software defects and latent technological deficiencies in new
products;
- Unforeseen increases in operating expenses;
- Adverse fluctuations in foreign exchange rates;
- The inability to attract or retain sales and/or engineering
talent;
- Changes in customer requirements; and
- Evolving industry standards.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 30, 2001, the Company sold $1,100,000 principal amount of
convertible subordinated promissory notes, bearing interest at 10% per annum
("Subordinated Notes") and warrants to purchase a total of 733,333 shares of
Common Stock ("Warrants"). On April 7, 2001, the Company sold $100,000 of
Subordinated Notes and Warrants to purchase 66,667 shares of Common Stock. The
Subordinated Notes are due August 31, 2001 and may be prepaid at any time prior
to maturity. The Company intends to complete a private offering of equity
securities by August 31, 2001. If such offering is completed, the noteholders
may convert the principal amount of the Subordinated Notes and accrued interest
thereon into the same class of shares that the Company issues in such offering
at a conversion price per share equal to the offering price per share of the
shares sold in such offering. The Subordinated Notes become due and payable
immediately if the issuance of the shares into which the Subordinated Notes may
be converted is not approved by shareholders of the Company by May 31, 2001. If
the Company does not complete an equity financing pursuant to which it receives
gross proceeds of at least $5 million by August 31, 2001 (the "Proposed Equity
Offering"), the noteholders may convert the principal amount of the Subordinated
Notes and accrued interest thereon into shares of Common Stock at $0.30 per
share. However, if the daily closing price of the Common Stock, as traded on the
American Stock Exchange, falls below $0.30 per share for five consecutive days,
the conversion price will be adjusted downward to the lowest price during such
five trading day period. The Warrants, which are non-assignable, allow the
holders to purchase Common Stock at $0.30 per share (the "Per Share Warrant
Price") at any time until March 31, 2006. If at any time prior to the exercise
of the Warrant the daily closing price of the Common Stock, as traded on the
American Stock Exchange, falls below the Per Share Warrant Price for five
consecutive days, the Per Share Warrant Price will be adjusted downward to the
lowest price during such five trading day period. In the event that the Company
completes the Proposed Equity Offering at less than the Per Share Warrant Price,
the holders have the option to exchange the Warrant for a warrant to purchase a
greater number of shares based on the difference between the Per Share Warrant
Price and the Proposed Equity Offering price per share. The Company issued the
securities to accredited investors, without registration under the Securities
Act of 1933, as amended (the "Act"), in reliance upon Section 4(2) of the Act
and Regulation D promulgated thereunder. The Company relied upon this exemption
based upon the limited number of purchasers, the provision of financial and
other information concerning the Company to the purchasers, investment
representations made by the purchasers, the lack of general solicitation, and
actions taken by the Company to restrict resale of the securities without
registration, including the placement of restrictive legends on the share
certificate.
On March 30, 2001, in connection with the acquisition of 100% of the
outstanding stock of Optimation, Inc., the Company issued 1,483,680 shares of
its Common Stock in a private placement transaction with Optimation's
shareholders, paid Optimation's shareholders $300,000 and agreed to pay
Optimation's shareholders $300,000 within ninety days of the acquisition date.
The Company issued the Common Stock to accredited investors, without
registration under the Act, in reliance upon Section 4(2) of the Act [and
Regulation D promulgated thereunder]. The Company relied upon this exemption
based upon the limited number of purchasers, the provision of financial and
other information concerning the Company to the purchasers, investment
representations made by the purchasers, the lack of general solicitation, and
actions taken by the Company to restrict resale of the securities without
registration, including the placement of restrictive legends on the share
certificate.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On April 12, 2001, effective as of December 31, 2000, the Company
received a waiver of various covenant violations under the agreements governing
its lines of credit and term loans with its principal bank lender, which default
had existed for more than 30 days. The bank and the Company also amended the
provisions of the agreements as to which the Company was in violation.
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14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits included herewith are set forth on the Index to Exhibits,
which is incorporated herein by reference.
(b) During the quarter ended March 31, 2001, the Company filed a report on
Form 8-K dated as of January 5, 2001 reporting information under Item
5. There were no financial statements filed with the report.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NEMATRON CORPORATION
BY:
MAY 7, 2001 /S/ MATTHEW S. GALVEZ
- ----------------------------- --------------------------------------------
DATE MATTHEW S. GALVEZ, PRESIDENT & CEO
(DULY AUTHORIZED OFFICER)
MAY 7, 2001 /S/ DAVID P. GIENAPP
- ----------------------------- --------------------------------------------
DATE DAVID P. GIENAPP, EXECUTIVE VICE PRESIDENT -
FINANCE & ADMINISTRATION
(CHIEF ACCOUNTING OFFICER)
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INDEX TO EXHIBITS
Exhibit Number Description of Exhibit
2.1 Stock Purchase Agreement dated as of March 30, 2001
by and among Nematron Corporation, Optimation, Inc.,
Dennis A. Sierk, Sheila D. Sierk, Charles Garrett
and Kerry Garrett.
4.1 First Amendment to Amended and Restated Loan and
Security Agreement dated as of March 1, 2001, by and
between Nematron Corporation and LaSalle Business
Credit, Inc., as Lender.
4.2 First Amendment to Loan and Security Agreement dated
as of March 1, 2001, by and between Nematron
Corporation and A-OK Controls Engineering, Inc. and
LaSalle Business Credit, Inc., as Lender.
4.3 Second Amendment and Waiver to Amended and Restated
Loan and Security Agreement dated as of April 12,
2001, by and between Nematron Corporation and
LaSalle Business Credit, Inc., as Lender.
4.4 Second Amendment and Waiver to Loan and Security
Agreement dated as of April 12, 2001, by and between
Nematron Corporation and A-OK Controls Engineering,
Inc. and LaSalle Business Credit, Inc., as Lender.
4.5 Security Agreement dated as of April 12, 2001, by
Optimation, Inc. in favor of LaSalle Business
Credit, Inc.
4.6 Form of Convertible Subordinated Promissory Note
dated between March 21 and April 6 2001, by and
between Nematron Corporation and Noteholders, and
schedule of Noteholders and amounts.
4.7 Form of Warrant Agreement dated between March 21 and
April 6 2001, by and between Convertible
Subordinated Noteholders and Nematron Corporation,
and schedule of amounts of Warrants by Warrant
holder.
4.8 Revolving Credit and Security Agreement dated July
9, 1999, by and between Optimation, Inc. and Compass
Bank.
4.9 Modification Agreement and Amendment to Loan
Documents dated July 19, 2000, by and between
Optimation, Inc. and Compass Bank.
10.1 Employment Agreement between Dennis A. Sierk and
Nematron Corporation dated as of March 30, 2001.