1
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 JUNE 30, 1996
[ ] 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 incorporation or organization) (I.R.S. Employer Identification No.)
5840 INTERFACE DRIVE, ANN ARBOR, MICHIGAN 48103
(Address of principal executive offices) (Zip Code)
(313) 994-0591
(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: 4,244,415 SHARES AS OF AUGUST 10, 1996
Transitional Small Business Disclosure Format: [ ] YES [X] NO
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEMATRON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1996 AND SEPTEMBER 30, 1995
JUNE 30, SEPTEMBER 30,
1996 1995
(UNAUDITED) (AUDITED)
ASSETS
Current Assets:
Cash and cash equivalents (Note 2) $ 4,929,068 $ 78,258
Accounts receivable, net of allowance for doubtful
accounts of $136,000 at June 30, 1996, and $74,000
at September 30, 1995 4,863,287 3,161,626
Inventories (Note 3) 4,802,293 4,123,022
Prepaid expenses and other current assets 229,260 269,357
- ------------------------------------------------------------------------------------------
Total Current Assets 14,823,908 7,632,263
Property and Equipment, net 3,029,388 2,962,033
Other Assets:
Capitalized software, net of accumulated amortization
of $668,106 at June 30, 1996, and $569,000
at September 30, 1995 4,850,205 4,327,434
Other intangible assets, net of accumulated amortization
of $422,381 at June 30, 1996 and $297,649
at September 30, 1995 311,598 282,737
- ------------------------------------------------------------------------------------------
Net Other Assets 5,161,803 4,610,171
- ------------------------------------------------------------------------------------------
Total Assets $23,015,099 $15,204,467
==========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Demand note payable to bank (Note 4) $ -0- $2,450,000
Accounts payable 1,483,243 2,744,400
Other accrued liabilities 1,054,106 1,048,096
Current maturities of long-term debt (Note 4) 110,288 119,706
- ------------------------------------------------------------------------------------------
Total Current Liabilities 2,647,637 6,362,202
Long-Term Debt, less current maturities (Note 4) 3,639,327 2,306,107
- ------------------------------------------------------------------------------------------
Total Liabilities 6,286,964 8,668,309
Stockholders' Equity (Notes 6 and 7):
Common stock, no par value, 15,000,000 shares authorized
and 4,244,415 shares issued and outstanding at June 30,
1996; 8,000,000 shares authorized and 2,869,613 shares
issued and outstanding at September 30, 1995 16,788,232 6,796,193
Foreign currency translation adjustment (85,186) (50,947)
Retained earnings (accumulated deficit) 25,089 (209,088)
- ------------------------------------------------------------------------------------------
Total Stockholders' Equity 16,728,135 6,536,158
- ------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $23,015,099 $15,204,467
==========================================================================================
PAGE 2
3
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1996 AND 1995
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net Revenues $5,143,096 $4,526,453 $15,214,514 $13,121,167
Cost of Revenues 2,959,649 2,877,887 8,607,220 8,756,552
- -------------------------------------------------------------------------------------
Gross Profit 2,183,447 1,648,566 6,607,294 4,364,615
Operating Expenses:
Product development costs 306,400 240,386 909,486 695,890
Selling, general and
administrative 1,614,343 1,199,732 4,965,355 3,342,339
- -------------------------------------------------------------------------------------
Total Operating Expenses 1,920,743 1,440,118 5,874,841 4,038,229
- -------------------------------------------------------------------------------------
Operating Income 262,704 208,448 732,453 326,386
Other Income (Expense):
Interest and other income 17,177 1,307 13,418 2,921
Interest expense (176,446) (107,674) (497,848) (296,905)
Foreign currency gain (loss) 23 358 (13,846) 105,162
- -------------------------------------------------------------------------------------
Total Other Income (Expense) (159,246) (106,009) (498,276) (188,822)
- -------------------------------------------------------------------------------------
Income Before Income Taxes 103,458 102,439 234,177 137,564
Taxes on Income (Note 5) -0- -0- -0- -0-
- -------------------------------------------------------------------------------------
Net Income $ 103,458 $ 102,439 $ 234,177 $ 137,564
=====================================================================================
Earnings Per Share (Note 7) $ 0.03 $ 0.04 $ 0.06 $ 0.07
=====================================================================================
PAGE 3
4
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND 1995
NINE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995
(UNAUDITED) (UNAUDITED)
Cash Flows From Operating Activities:
Net income $ 234,177 $ 137,564
Adjustments to reconcile net income to net cash provided by
(used in) operating activities, net of acquisitions:
Depreciation and amortization 608,607 515,874
Non-cash compensation related to restricted stock -0- 33,258
Changes in assets and liabilities that provided (used) cash:
Accounts receivable (1,701,661) (60,295)
Inventories (679,270) 216,594
Prepaid expenses and other current assets 40,097 (282,750)
Accounts payable (1,261,157) (60,264)
Other accrued liabilities 6,010 (435,353)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Operating Activities (2,753,197) 64,628
Cash Flows From Investing Activities:
Additions to capitalized software development costs (434,938) (311,444)
Additions to property and equipment (626,878) (195,644)
- -------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (1,061,816) (507,088)
Cash Flows From Financing Activities:
Net proceeds from sale of common stock 9,551,604 -0-
Increase (decrease) in notes payable to bank (2,450,000) 615,000
Proceeds from borrowings 1,860,000 200,000
Proceeds from exercise of common stock options and warrants 440,435 -0-
Payments of long-term debt (536,199) (300,008)
Payment of deferred financing fees (165,780) -0-
- -------------------------------------------------------------------------------------------------------
Net Cash Provided From Financing Activities 8,700,060 514,992
Foreign Currency Translation Effect on Cash (34,237) (39,027)
- -------------------------------------------------------------------------------------------------------
Net Increase In Cash and Cash Equivalents 4,850,810 33,505
Cash and Cash Equivalents at Beginning of Period 78,258 61,091
- -------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 4,929,068 $ 94,596
=======================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 475,807 $ 314,089
Cash paid for income taxes -0- -0-
PAGE 4
5
NEMATRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER AND NINE MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Nematron Corporation (the "Company") and its wholly-owned subsidiaries,
Nematron Europa BV, a Netherlands corporation formed in 1990, and NemaSoft,
Inc., a Michigan corporation formed in August, 1995. All significant
intercompany transactions and balances have been eliminated in consolidation.
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 S.E.C. 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, as amended.
The results of operations for the three-month and nine-month periods ended June
30, 1996 and 1995 are not necessarily indicative of the results to be expected
for the full year.
NOTE 2 - CASH AND CASH EQUIVALENTS
The Company considers securities with a remaining maturity of three months or
less when purchased to be cash equivalents.
NOTE 3 - INVENTORIES
Segregation of inventories for the two periods is as follows:
CATEGORY JUNE 30, 1996 SEPT. 30, 1995
Purchased parts and accessories $3,141,999 $2,622,872
Finished goods and demonstration stock 1,015,445 1,066,029
Work in process 349,869 160,382
Service stock 294,980 273,739
---------- ----------
Total Inventory $4,802,293 $4,123,022
========== ==========
PAGE 5
6
NOTE 4 - SHORT-TERM AND LONG-TERM DEBT
Short-term debt includes the following debt instruments:
CATEGORY JUNE 30, 1996 SEPT. 30, 1995
Demand note payable to bank $-0- $2,450,000
During the nine months ended June 30, 1996, the Company negotiated an expansion
of its existing credit facility and entered into a Second Amended And Restated
Loan Agreement as of March 29, 1996 (the "Agreement"). The Agreement allows a
maximum available demand line of credit in the amount of $3,250,000.
Borrowings under this facility bear interest at 1.5% over the prime rate of
interest and are secured by substantially all assets and a second mortgage on
the Company's Ann Arbor facilities. The Agreement expires January 31, 1997.
Amounts borrowed under the credit facility totaled $-0- and $2,450,000 at June
30, 1996 and September 30, 1995, respectively.
Long-term debt includes the following debt instruments:
CATEGORY JUNE 30, 1996 SEPT. 30, 1995
Mortgage loan payable to bank $1,833,849 $1,893,919
Subordinated notes payable 1,800,000 -0-
Installment notes payable 57,749 -0-
Capitalized lease obligations 58,017 87,894
------------- --------------
3,749,615 2,425,813
Less current maturities 110,288 119,706
------------- --------------
Long-term debt, less current maturities $3,639,327 $2,306,107
============= ==============
On November 7, 1995, the Company obtained a total of $1,800,000 of subordinated
debt under a term loan and warrant purchase agreement (the "Subordinated Note
Agreement") with a consortium of five lenders. The subordinated notes bear
interest at 12 percent per annum and require monthly interest-only payments
totaling $18,000 through September 30, 1997, and principal payments of $50,000,
plus interest, beginning October 31, 1997. Total principal due under the
subordinated notes is $600,000 in each of the fiscal years ending September 30,
1998, 1999 and 2000. All of the notes are collateralized by substantially all
Company assets, other than real property, and the Company has granted to one
note holder, representing $500,000 of the total subordinated debt, a third
mortgage on the Company's Ann Arbor facilities. The Subordinated Note
Agreement includes various affirmative and negative covenants, the most
restrictive of which are (1) the prohibition of dividend payments and (2)
requirements to maintain (a) a specified current ratio, (b) a specified ratio
of total liabilities less subordinated debt to the sum of tangible net worth
plus subordinated debt, and (c) a specified level of tangible net worth. In
connection with the issuance of the subordinated debt, the lenders also
received a total of 237,214 warrants to purchase common stock at $4 per share.
NOTE 5 - ACCOUNTING FOR INCOME TAXES
There is no provision for income tax expense for the three months and nine
months ended June 30, 1996 and 1995 due to the anticipated utilization of
available net operating loss carryforwards. Current tax expense of $35,000 and
$80,000 for the three month and nine month periods ended June 30, 1996, and
$35,000 and $47,000 for the three month and nine month periods ended June 30,
1995, respectively, computed at the expected tax rate of 34%, have been reduced
entirely by the utilization of net operating loss carryforwards ("NOLs") of the
same amounts.
PAGE 6
7
At June 30, 1996, the Company has NOLs of approximately $4,500,000 which may be
applied against future taxable income. The NOLs expire beginning 2003 through
2010. Utilization of these carryforwards are subject to annual limitations
under current Internal Revenue Service regulations. The Company has
established a valuation allowance for its deferred tax assets, as it is
unlikely that all of the deferred tax assets will be fully realized.
NOTE 6 - CHANGE IN COMMON STOCK
The increase in common stock during the nine months ended June 30, 1996 is due
to the following:
SHARES
OUTSTANDING AMOUNT
Balance at October 1, 1995 2,869,613 $ 6,796,193
Shares issued in connection with
exercise of warrants 164,202 410,505
Shares issued in connection with
exercise of options 10,600 29,930
Shares issued in public offering 1,200,000 9,551,604
----------- -----------
Balance, June 30, 1996 4,244,415 $16,788,232
=========== ===========
NOTE 7 - EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares of common
stock and common stock equivalents outstanding for each period presented. The
weighted average number of shares outstanding for each period is as follows:
JUNE 30, JUNE 30,
1996 1995
Three months ended 4,010,551 2,563,934
Nine months ended 3,614,316 2,024,028
Fully diluted earnings per share is not presented because the computation
results in the same amounts as primary earnings per share or the amounts are
anti-dilutive. Common stock equivalents are not included in the earnings per
share calculation until the market price of the Company's common stock exceeds
the exercise price of the common stock equivalents for substantially all of the
three consecutive months ending with the last month of the period to which per
share data relate. For purposes of this calculation, the market price of the
Company's common stock was determined for the three months and nine months
ended June 30, 1996 as the closing price of the Company's stock on the NASDAQ
SmallCap Market on and prior to June 5 and on the NASDAQ National Market after
June 6, and for the three months and nine months ended June 30, 1995 as the
average of the bid and asked price per share.
PAGE 7
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED JUNE 30, 1996 COMPARED
WITH THREE AND NINE MONTH PERIODS ENDED JUNE 30, 1995
Net revenues for the three and nine month periods ended June 30, 1996 increased
$617,000 (13.6%) and $2,093,000 (16.0%) compared to the same periods last year.
The increase in net revenues in the three month period is primarily
attributable to revenues from sales of Industrial Control Computers. The
increase in net revenues in the nine month period was due equally to an
increase in software revenues resulting from the Company's acquisitions of
Imagination Systems, Inc. and Universal Automation, Inc. in March 1995 and
September 1995, respectively, and to increases in sales volumes and prices of
hardware products in response to increases in the level of marketing and sales
efforts during the current period. Domestic revenues for the three and nine
month periods ended June 30, 1996 increased $1,249,000 and $3,635,000,
respectively, while foreign revenues decreased $632,000 and $1,542,000,
respectively, compared to the same periods last year. Domestic revenues
reflect the strong demand for new hardware and software products in North
America in response to increased marketing and sales efforts. Foreign revenues
have decreased due to the timing of planned purchases by certain customers of
the Company's new products and the Company's decreased emphasis and planned
phase out of certain older products. Additionally, international marketing and
sales campaigns for the Industrial Control Computers and for certain of the
Company's software products are not planned until fiscal 1997.
Gross profit for the three and nine month periods ended June 30, 1996 increased
$535,000 and $2,243,000, respectively, over the same periods last year. Gross
profit as a percentage of revenues in the three and nine month periods ended
June 30, 1996 was 42.5% and 43.4%, respectively, versus 36.4% and 33.3%,
respectively, in the same periods last year. The improvement was due primarily
to the high gross profit margin afforded by software and applied systems
revenue, and cost controls in place during the entire current period; only a
portion of the corresponding prior period was affected.
Total operating expenses for the three and nine month periods ended June 30,
1996 increased $481,000 (33.4%) and $1,837,000 (45.5%), respectively, over the
comparable periods last year primarily as a result of higher sales and
marketing costs and increased product development efforts. The number of
employees during at June 30, 1996 has increased by approximately 10% since the
beginning of the year in response to the Company's increased emphasis on
sales, marketing and product development. The Company expects to continue to
invest a significant amount of cash to continue to its product development
efforts, especially as it pertains to the development of its real time NT
software, FloProNT and VFE software products and to revisions and enhancements
to the Company's Industrial Control Computer product line.
Interest expense for the three month period ended June 30, 1996 increased to
$176,000 compared to $108,000 for the comparable period last year and, for the
nine month period ended June 30, 1996, increased to $498,000 from $297,000 for
the comparable period last year. Such increases were due to increased average
borrowing levels and higher effective interest rates. Total average debt levels
increased due to increased borrowings on the bank line of credit through June
12, 1996, and increases in the mortgage note and subordinated debt levels.
Foreign currency losses of $-0- and $14,000, respectively, were recorded in the
three and nine month periods ended June 30, 1996 compared to foreign currency
gains $-0- and $105,000, respectively, in the comparable periods last year.
Foreign currency gains and losses are largely attributable to the impact of
translating Dutch guilder transactions of the Company's Netherlands-based
subsidiary to the Company's functional U.S. dollar currency.
PAGE 8
9
LIQUIDITY AND CAPITAL RESOURCES
Nematron had working capital of approximately $12,176,000 at June 30, 1996.
Primary sources of near-term liquidity are cash from operations and the
Company's $3,250,000 bank line of credit. Borrowings under the line of credit
are limited by a borrowing formula which allows for advances up to 80% of
eligible domestic accounts receivable plus a maximum of $1,000,000 of eligible
foreign accounts receivable plus a maximum of $1,000,000 against certain
inventory categories. The Company does not expect that the borrowing formula
will materially limit the amount of funds available to be borrowed under the
line of credit during fiscal 1996. Amounts borrowed under the credit facility
are due on demand and bear interest at prime plus 1.5%. The line of credit
facility expires on January 31, 1997.
The Company sold 1,200,000 shares of its common stock in a secondary offering
which closed on June 11, 1996. After payment of the underwriters discount and
offering expenses, net proceeds were approximately $9,552,000. Upon completion
of the offering the Company repaid outstanding borrowings of $3,250,000 under
the line of credit and added the remaining proceeds to working capital.
Common stock outstanding increased to 4,244,415 shares at June 30, 1996
compared to 2,869,613 shares outstanding at September 30, 1995. The increases
were due to the sale of 1,200,000 shares of common stock in the secondary
offering and to the exercise of 164,202 warrants and 10,600 of stock options at
an average exercise price of $2.50 per share.
Accounts receivable at June 30, 1996 increased $1,702,000 from the balance at
September 30, 1995, primarily as a result of increased revenues for the nine
months ended June 30, 1996. Inventories increased $679,000 due primarily to
forecasted sales activities.
Notes payable to the bank at June 30, 1996 decreased to $-0- from the
$2,450,000 balance at September 30, 1995 due to the repayment of the amount
borrowed under the line of credit from proceeds of the secondary offering, in
the future the Company expects to expand this facility.
Long-term debt, including current maturities, increased a total of $1,324,000
at June 30, 1996 due to the net effect of increases from borrowings of
$1,800,000 under a subordinated note agreement and $60,000 under term loans for
equipment purchases, and reductions due to repayment of a $444,000 convertible
subordinated note and other scheduled debt repayments of $92,000 under the
terms of various debt agreements. The Company intends to renegotiate or
replace the current facility.
PAGE 9
10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits included herewith are set forth on the Index to Exhibits.
ALL OTHER ITEMS OMITTED ARE NOT APPLICABLE OR THE ANSWERS THERETO ARE NEGATIVE.
PAGE 10
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEMATRON CORPORATION
BY:
AUGUST 12, 1996 /s/ FRANK G. LOGAN, III
- --------------- ------------------------------------
DATE FRANK G. LOGAN, III, PRESIDENT & CEO
(DULY AUTHORIZED OFFICER)
AUGUST 12, 1996 /s/ DAVID P. GIENAPP
- --------------- ------------------------------------
DATE DAVID P. GIENAPP,
CHIEF FINANCIAL OFFICER
(CHIEF ACCOUNTING OFFICER)
PAGE 11
12
INDEX TO EXHIBITS
Exhibit Number Description of Exhibit
-------------- ---------------------------------
3(i) Articles of Incorporation
11 Computation of Earnings Per Share
27 Financial Data Schedule
PAGE 12