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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, 1997
[ ] 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)
(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: 5,221,770 SHARES AS OF MAY 12, 1997
Transitional Small Business Disclosure Format: [ ] YES [X] NO
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEMATRON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1997 AND SEPTEMBER 30, 1996
MARCH 31, SEPTEMBER 30,
1997 1996
(UNAUDITED) (AUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,302,488 $ 3,942,963
Accounts receivable, net of allowance for doubtful
accounts of $126,000 at March 31, 1997, and $115,000
at September 30, 1996 6,324,620 5,989,708
Inventories (Note 2) 4,635,570 4,520,937
Prepaid expenses and other current assets 853,758 750,995
- ------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 15,116,436 15,204,603
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $3,273,888 at March 31, 1997 and $3,139,560
at September 30, 1996 4,089,120 3,384,285
OTHER ASSETS:
Software and related development costs, net of amortization
of $670,908 at March 31, 1997, and $611,022
at September 30, 1996 (Note 8) 5,643,541 4,426,257
Other intangible assets, net of accumulated amortization
of $667,467 at March 31, 1997 and $580,954
at September 30, 1996 (Note 8) 2,388,623 1,199,200
- ------------------------------------------------------------------------------------------
NET OTHER ASSETS 8,032,164 5,625,457
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $27,237,720 $24,214,345
==========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to bank (Note 3) $ 289,345 $ -0-
Accounts payable 1,947,465 1,661,120
Other accrued expenses 1,842,802 671,678
Current maturities of long-term debt (Note 3) 627,735 158,340
- ------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,707,347 2,491,138
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 3) 3,820,374 3,993,309
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES 8,527,721 6,484,447
STOCKHOLDERS' EQUITY (NOTES 5, 7 AND 8):
Common stock, no par value, 15,000,000 shares authorized;
5,216,320 and 4,558,248 shares issued and outstanding
at March 31,1997 and September 30, 1996, respectively 21,113,523 17,572,814
Foreign currency translation adjustment -0- (85,518)
Retained Earnings (Accumulated deficit) (2,403,524) 242,602
- ------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 18,709,999 17,729,898
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $27,237,720 $24,214,345
==========================================================================================
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ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1997 1996 1997 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
NET REVENUES $ 5,077,698 $5,156,713 $10,186,128 $10,071,418
COST OF REVENUES 3,038,000 2,790,333 5,959,477 5,647,571
- --------------------------------------------------------------------------------------------------
GROSS PROFIT 2,039,698 2,366,380 4,226,651 4,423,847
OPERATING EXPENSES:
Product development costs 618,174 353,849 975,226 603,086
Selling, general and
administrative 1,995,058 1,793,417 3,750,954 3,351,012
- --------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES $ 2,613,232 2,147,266 4,726,180 3,954,098
- --------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (573,534) 219,114 (499,529) 469,749
OTHER INCOME (EXPENSE):
Write off of in-process research
and development costs (Note 8) (1,655,000) -0- (1,655,000) -0-
Loss on closing of European
office (Note 6) (149,814) -0- (149,814) -0-
Interest expense (72,657) (153,848) (160,403) (321,402)
Debt retirement (Note 3) (122,340) -0- (122,340) -0-
Foreign currency loss (125,477) (6,717) (125,419) (13,869)
Other income (expense), net 37,181 11,115 66,380 (3,759)
- --------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (2,088,107) (149,450) (2,146,596) (339,030)
- --------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE TAXES (2,661,641) 69,664 (2,646,125) 130,719
INCOME TAXES (BENEFIT) (NOTE 4) (5,000) -0- -0- -0-
- --------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(2,656,641) $ 69,664 $(2,646,125) $ 130,719
==================================================================================================
EARNINGS (LOSS) PER SHARE (NOTE 7) $ (0.58) $ 0.02 $ (0.58) $ 0.04
==================================================================================================
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ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(2,646,125) $130,719
Adjustments to reconcile net income (loss) to net cash flows
used in operating activities: Depreciation and amortization 547,494 490,773
Write off of research and development costs (Note 8) 1,655,000 -0-
Debt retirement expense 122,340 -0-
Changes in assets and liabilities that provided (used) cash,
net of assets acquired:
Accounts receivable 341,472 (208,026)
Inventories (92,527) (701,786)
Prepaid expenses and other current assets (76,884) (179,096)
Accounts payable 92,276 (666,091)
Accrued expenses (5,135) (90,760)
- --------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (62,089) (1,224,267)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Intec Controls Corp. (Note 8) 281,058 -0-
Additions to capitalized software development costs (913,127) (371,088)
Additions to property and equipment, net of minor disposals (744,323) (179,857)
- --------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,376,392) (550,945)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable to bank 250,000 410,000
Proceeds from borrowings 2,172,117 1,817,952
Proceeds from exercise of common stock options and warrants 235,504 419,613
Payments of long-term debt (1,881,606) (507,754)
Payment of deferred financing fees (63,527) (165,781)
- --------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 712,488 1,974,030
FOREIGN CURRENCY TRANSLATION EFFECT ON CASH 85,518 (12,672)
- --------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (640,475) 186,146
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,942,963 78,258
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,302,488 $264,404
==================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $204,534 $299,966
Cash paid for income taxes -0- -0-
FINANCING AND INVESTING ACTIVITIES REGARDING THE ACQUISITION OF INTEC CONTROLS CORP. (NOTE 8):
Cash acquired $281,058
Non-cash assets and liabilities acquired:
Current assets, other than cash 724,369
Property and equipment 305,309
Software development costs, including in-process R&D 2,003,092
Other intangible assets 1,407,000
Current liabilities (979,673)
Long term debt (5,950)
----------
Purchase price, including $430,000 of accrued costs $3,735,205
==========
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NEMATRON CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1997AND 1996
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 B.V., a Netherlands corporation, and NemaSoft, Inc., and
Imagination Systems, Inc., Michigan corporations. During the second quarter
of fiscal 1997, the Company ceased operations of Nematron Europa, B.V. See
Note 6. 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 condensed 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.
The results of operations for the three-month and six-month periods are not
necessarily indicative of the results to be expected for the full year.
NOTE 2 - INVENTORIES
Inventories consist of the following at March 31, 1997 and September 30, 1996:
CATEGORY MARCH 31, 1997 SEPT. 30, 1996
Purchased parts and accessories $3,006,522 $2,734,974
Work in process 385,769 349,189
Finished goods and service stock 1,243,279 1,436,774
---------- -----------
Total Inventory $4,635,570 $4,520,937
========== ===========
NOTE 3 - SHORT-TERM AND LONG-TERM DEBT
Short-term debt includes the following debt instruments:
CATEGORY MARCH 31, 1997 SEPT. 30, 1996
Demand note payable to bank $250,000 $-0-
Other 39,344 -0-
----------- -----------
Total short-term debt $289,344 $-0-
=========== ===========
During the three months ended March 31, 1997, the Company negotiated an
expansion of its existing credit facility and entered into a Loan Agreement as
of February 12, 1997 (the "Agreement"). The Agreement allows a maximum
available demand line of credit in the amount of $6,000,000. Borrowings under
this facility bear interest at 2.5% over LIBOR (London Interbank Offered Rate)
and are secured by substantially all of the Company's assets and a second
mortgage on the Company's Ann Arbor facilities. The Agreement expires February
28, 1998. Amounts borrowed under the credit facility totaled $250,000 at March
31, 1997.
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Long-term debt includes the following debt instruments:
CATEGORY MARCH 31, 1997 SEPT. 30, 1996
Mortgage loan payable to bank $2,229,111 $2,300,000
Subordinated notes payable -0- 1,800,000
Term note 1,770,000 -0-
Equipment note 402,117 -0-
Capitalized lease obligations and other notes 46,881 51,649
----------- -----------
4,448,109 4,151,649
Less current maturities (627,735) (158,340)
----------- -----------
Long-term debt, less current maturities $3,820,374 $3,993,309
=========== ===========
On February 12, 1997, the Company entered into a term note agreement with a
bank for $1,800,000. The purpose of the loan was to pay off the subordinated
debt that carried an interest cost of 12% per annum. The note issued under
this agreement bears interest at LIBOR plus 2 1/2%, which at March 31, 1997
was approximately 8.05%. The note is payable in monthly installments of
$30,000 plus interest with the final payment due on February 1, 2002.
On March 31, 1997, the Company entered into an arrangement under an equipment
line of credit with a bank to finance the purchase of certain computer
equipment. Principal outstanding under this arrangement at March 31, 1997 was
$402,117. Payments of approximately $10,500 per month, over the forty-eight
month term of this arrangement, are determined using the prime interest rate,
which at March 31, 1997 was 8.5%.
NOTE 4 - INCOME TAXES (BENEFIT)
There was no current tax benefit computed for the six month period ended March
31,1997 because of the uncertainty that the associated deferred tax asset would
not be realized. The deferred tax benefit recognized in the three months ended
March 31, 1997 offset the tax expense recognized in the first quarter of fiscal
1997.
The Company has NOLs of approximately $7,100,000 which may be applied against
future taxable income. The NOLs expire beginning 2003 and run through 2012.
Utilization of these carryforwards are subject to annual limitations under
current Internal Revenue Service regulations.
NOTE 5 - CHANGE IN COMMON STOCK
The increase in common stock during the six months ended March 31, 1997 is due
to the issuance of 587,594 shares of common stock in connection with the
acquisition of Intec Controls Corp. (Note 8) and to the issuance of 70,480
shares of common stock in connection with the exercise of 47,647 warrants and
25,833 stock options.
NOTE 6 - CLOSING OF EUROPEAN OFFICE
During the second quarter of fiscal 1997, the Company ceased operations of its
wholly-owned subsidiary, Nematron Europa, B.V. In connection therewith, the
Company incurred a loss of approximately $150,000. The UK operations of the
former Intec Controls will serve as the base for re-launching the Company's
hardware platforms throughout Europe, as well as building on Intec's base of
software customers to roll out the Company's software products. See Note 8.
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NOTE 7 - EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares
outstanding for each period presented because common stock equivalents are
anti-dilutive. The weighted average number of shares outstanding for each
period is as follows:
Three months ended:
March 31, 1997 4,607,802
March 31, 1996 3,575,647
Six months ended:
March 31, 1997 4,586,941
March 31, 1996 3,404,182
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 six months ended
March 31, 1997 as the closing price of the Company's stock on the NASDAQ
National Market and for the three months and six months ended March 31, 1996 as
the closing price of the Company's stock on the NASDAQ SmallCap Market.
NOTE 8 - ACQUISITION OF INTEC CONTROLS CORP.
Effective March 31, 1997, the Company completed its acquisition of Intec
Controls Corp. ("Intec") of Walpole, Massachusetts, a supplier of high
performance regulatory control software solutions used primarily by process
industries located in the United States and Europe. Under the terms of the
related agreement, Intec was merged into the Company's NemaSoft, Inc.
subsidiary and the Intec stock was retired. The Company issued 587,594 shares
of Nematron common stock to Intec's shareholders, and such amount represents
11.3% of the total shares outstanding immediately after the acquisition.
In addition to the issuance of common stock as described in the previous
paragraph, the Company issued warrants to Intec's shareholders to purchase an
additional 124,998 shares of Nematron common stock at $6.73 per share. The
warrants expire February 20, 2000.
The purchase price of the net assets of Intec, including expenses incurred in
connection with the acquisition, was approximately $3,735,000. The acquisition
of Intec has been accounted for as a purchase and approximately $3,410,000 of
intangible assets have been allocated on a preliminary basis in the
accompanying consolidated condensed balance sheet. In connection with the
acquisition, the Company took, in the quarter ended March 31, 1997, a charge
against earnings of $1,655,000 relating to acquired in-process research and
development costs.
The following unaudited pro forma summary presents the consolidated results of
operations as if the acquisition had occurred on October 1, 1995, the earliest
period presented herein, and does not purport to be indicative of what would
have occurred had the acquisition of Intec actually been consummated at that
date or the Company's future results of operations:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1997 1996 1997 1996
Revenues $5,947,749 $6,260,509 $12,075,891 $12,246,379
Net loss (981,048) (524,803) (958,531) (2,134,518)
Loss per share $(0.34) $(0.15) $(0.33) $(0.61)
PAGE 7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1997 COMPARED WITH THREE AND SIX
MONTH PERIODS ENDED MARCH 31, 1996
Net revenues for the three and six month periods ended March 31, 1997 decreased
$79,000 (1.5%) and increased $115,000 (1.1%), respectively, compared to the
same periods last year. The decrease in net revenues in the three month period
is primarily attributable to the closing of the operations in The Netherlands,
partially offset by an increase in revenues from software and software services
in the United States. The increase in net revenues in the six month period was
due primarily to an increase in software and software services. Revenues from
domestic customers for the three and six month periods ended March 31, 1997
decreased $95,000 and $513,000, respectively, while revenues from foreign
customers increased $16,000 and $628,000, respectively, compared to the same
periods last year. Overall, revenues continue to reflect the strong demand
for new hardware and software products in response to increased marketing and
sales efforts. Based upon the increased backlog at March 31, 1997 compared to
the backlog at March 31, 1996, management expects that revenues will increase
in the remainder of the current fiscal year over the revenue amount in the
comparable period a year ago.
Gross profit for the three and six month periods ended March 31, 1996 decreased
$327,000 and $197,000, respectively, over the same periods last year. Gross
profit as a percentage of revenues in the three and six month periods ended
March 31, 1997 was 40.2% and 41.5%, respectively, versus 45.9% and 43.9%,
respectively, in the same periods last year. The erosion in margins was due
primarily to pricing pressure on hardware products. As the percentage of
software revenue increases, management expects that gross margins will improve.
Additionally, with the sale of increasing amounts of software products,
related amortization of capitalized software costs will also increase.
Total operating expenses for the three and six month periods ended March 31,
1997 increased $466,000 (21.7%) and $772,000 (11.9%), respectively, over the
comparable periods last year primarily as a result of higher salaries and other
operating costs and increased product development efforts. The average number
of employees during the six months ended March 31, 1997 increased by
approximately 10% over the comparable period last year as emphasis continued to
be placed on sales, marketing and product development. Over 60% of the
Company's existing revenues are derived from sales of products developed in the
last 24 months. The Company intends to continue to invest in product
development efforts at no less than the current rate of increase, and expects
to continue to release upgrades and enhancements to existing product offerings
when appropriate.
Interest expense for the three month period ended March 31, 1997 decreased to
$73,000 compared to $154,000 for the comparable period last year. Likewise,
for the six month period ended March 31, 1997, interest expense decreased to
$160,000 from $321,000. Such decreases were due to reduced average borrowing
levels and lower effective interest rates. A total of $1,800,000 of
subordinate debt with an interest rate of 12% was replaced with a five year
term loan, which carries an adjustable interest rate which was 8.05% at March
31, 1997. Unamortized costs to acquire the subordinate debt of $122,000 were
written off in the current quarter. In addition, the Company incurred charges
of $1,655,000 during the quarter to write off in-process research and
development costs acquired in the Intec Controls Corp. acquisition and $150,000
related to the closing of the Company's Netherlands-based subsidiary.
Other income/(expense) was $37,000 and $66,000 in the three and six month
periods ended March 31, 1997, respectively. compared to other income/(expense)
of $11,000 and $(4,000), respectively, in the comparable periods of fiscal
1996. The income in fiscal 1997 is primarily attributable to the investment of
excess cash in interest-bearing cash equivalent securities.
Net loss for the three and six month periods ended March 31, 1997 was
$2,662,000 and $2,646,000, respectively, compared to net income of $70,000 and
$131,000 for the three and six month periods ended March 31, 1996,
respectively. Non-recurring charges in the current quarter relating to the
acquisition of Intec Controls Corp., the closing of the Company's Netherlands
office and the refinancing of debt contributed a total of $2,052,000 to the
reported operating results.
PAGE 8
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ACQUISITION OF INTEC CONTROLS CORP.
Effective March 31, 1997, the Company completed its acquisition of Intec
Controls Corp. ("Intec") of Walpole, Massachusetts, a supplier of high
performance regulatory control software solutions used primarily by process
industries located in the United States and Europe. Under the terms of the
related agreement, Intec was merged into the Company's NemaSoft, Inc.
subsidiary and the Company issued 587,594 shares of Nematron common stock to
Intec's shareholders. The 587,594 shares of the Company's common stock which
were issued in this transaction represent 11.3% of the total shares outstanding
immediately after the acquisition.
In addition to the issuance of common stock, the Company issued warrants to
Intec's shareholders to purchase an additional 124,998 shares of Nematron
common stock at $6.73 per share. The warrants expire February 20, 2000.
The purchase price of the net assets of Intec, including expenses incurred in
connection with the acquisition, was approximately $3,735,000. The acquisition
of Intec has been accounted for as a purchase and approximately $3,410,000 of
intangible assets have been recorded. In connection with this acquisition, the
Company took, in the quarter ended March 31, 1997, a charge against earnings of
$1,655,000 relating to the write off of acquired in-process research and
development costs.
Intec's products are being integrated into the current NemaSoft product line of
open architecture control and automation software products. The addition of
Intec's product line significantly extends the scope of the Company's software
offerings by extending the Company's reach into the process industries. It is
anticipated that eventually all of NemaSoft's operations will be headquartered
in Massachusetts. It is anticipated that the costs to consolidate the
operations of NemaSoft in Massachusetts will not be significant.
In addition to the synergism anticipated in the United States, the acquisition
of Intec provides the Company with the opportunity to continue improvement of
its European strategy. The former Intec facility in the United Kingdom will
become the new European headquarters for the Company and NemaSoft. The
Company's Netherlands-based office , which operated at a loss for a number of
years, has ceased operations, and its operations will be carried on by
personnel located in the United States and the United Kingdom.
LIQUIDITY AND CAPITAL RESOURCES
Nematron had working capital of approximately $10,400,000 at March 31, 1997.
Primary sources of near-term liquidity are cash from operations and the
Company's $6,000,000 bank line of credit, of which $5,750,000 was unused at
March 31,1997. Amounts borrowed under the credit facility are due on demand
and bear interest at LIBOR (London Interbank Offered Rate) plus 2.5% (8.05% at
March 31, 1997). The line of credit facility expires on February 28, 1998, but
it is anticipated that the line will be renewed at that date on substantially
the same terms and conditions as the current facility.
Accounts receivable at March 31, 1997 increased $335,000 from the balance at
September 30, 1996 primarily due to increases of $676,000 in accounts
receivable balances as a result of the acquisition of Intec offset by
reductions achieved due to increased collection efforts. Inventories increased
$115,000 in anticipation of a stronger third quarter and in line with the
increase in the Company's backlog.
Current liabilities at March 31, 1997 increased $2,216,000 from the $2,491,000
balance at September 30, 1996. Approximately $1,400,000 of this increase is
associated with the acquisition of Intec. Current maturities of long term debt
increased $360,000 and $100,500, respectively, due to the new term note
agreement and the new equipment line of credit. In addition, a $250,000 note
payable to a bank was outstanding at March 31,1997.
Long-term debt, less current maturities, decreased $173,000 at March 31, 1997
due to the net effect of reductions caused by the refinancing of the
subordinate debt with term notes that contain a current maturity of $360,000
and debt repayments of $120,000 under terms of the notes. Offsetting these
decreases are increases in the long-term portion of the new equipment financing
of $301,500 and $6,000 of debt assumed in the Intec acquisition.
PAGE 9
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Common stock outstanding increased to 5,216,320 shares at March 31, 1997
compared to 4,558,248 shares outstanding at September 30, 1996, and the total
recorded amount of common stock increased by $3,541,000 during the six months
ended March 31, 1997. The increase was due to the issuance of 587,594 shares
of common stock at $5.625 per share in connection with the acquisition of
Intec, and the exercise of 47,647 warrants and 25,833 of stock options at an
average exercise price of $3.35 per share.
The Company expects to continue to invest a significant amount of cash to
continue its product development efforts, especially as it pertains to the
development of its Hyperkernel, OpenControl and Paragon software products, and
also for scheduled enhancements and extensions of the Company's Industrial
Control Computer product line.
UNCERTAINTIES RELATING TO FORWARD LOOKING STATEMENTS
"Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains "forward-looking statements" within the meaning
of the Securities Exchange Act of 1934, as amended, based on current management
expectations. Actual results could differ materially from those in the forward
looking statements due to a number of uncertainties, including, but not limited
to, those discussed in this section.
Factors that could cause future results to differ from these expectations
include general economic conditions, particularly related to automotive
manufacturing, demand for the Company's products and services, the ability 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, product life cycles,
competitive factors (including the introduction or enhancement of competitive
products), pricing pressures, raw material price increases, delays in the
introduction of planned hardware and software products, software defects and
latent technological deficiencies in new products, changes in operating
expenses, fluctuations in foreign exchange rates, inability to attract or
retain sales and/or engineering talent, successful integration of the former
Intec products with Nematron's products, changes in customer requirements and
evolving industry standards.
PAGE 10
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As disclosed in the Company's Annual Report on Form 10-KSB for the year
ended September 30, 1996, Xycom, Inc. had filed suit against the Company and
Universal Automation, Inc. ("UAI") in the Circuit Court for the County of
Washtenaw, State of Michigan. The suit alleged, among other things, that the
Company disclosed confidential information of Xycom and failed to notify Xycom
of the transfer of certain intellectual property, including the FloPro patent,
in connection with the Company's acquisition of UAI. The suit was settled on
March 14, 1997, with each party bearing its own legal expenses. The Company's
costs of settlement were immaterial. In addition, Nematron's NemaSoft
subsidiary agreed to grant a non-exclusive technology license for its patented
flowchart programming technology to a Xycom unit. No other rights related to
copyrights were granted.
ITEM 2: CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
The Company issued 587,594 shares of Company common stock and 124,998
warrants to the former stockholders of Intec Controls Corp. in connection with
the acquisition of Intec. See Note 8 of Notes to consolidated Financial
Statements. The warrants expire on February 20, 2000, and have an exercise
price of $6.73 per share. The Company issued the common stock and warrants to
Intec's stockholders without registration under the Securities Act of 1933 (the
"Act), in reliance upon Section 4(2) of the Act and Section 506 of Regulation D.
The Company relied, upon these exemptions based upon the limited number of Intec
stockholders, the provision of financial and other information concerning the
Company to the stockholders, investment representations made by the
stockholders, 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 securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On April 17, 1997, the Company held its Annual Meeting of Shareholders.
(b) The following persons were nominated and elected as directors at the
Annual Meeting. Also presented is a tabulation of the results of the
voting on the nominees:
Nominee Votes For Votes Withheld Total
Frank G. Logan, III 3,842,841 120,289 3,963,130
Douglas B. Juanarena 3,842,735 120,395 3,963,130
Joseph J. Fitzsimmons 3,842,506 120,624 3,963,130
(c) Two proposals were voted upon at the annual meeting. Brief
descriptions of the two proposals and the results of the voting thereon
are as follows:
PROPOSAL TO AMEND THE 1993 STOCK OPTION PLAN TO INCREASE THE NUMBER OF
SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UNDER THE 1993 PLAN FROM
750,000 SHARES TO 950,000 SHARES, AND IMPOSE A LIMIT ON THE NUMBER
OF OPTIONS THAT MAY BE GRANTED TO SALARIED EMPLOYEES.
The results of shareholder voting on the above proposal were as follows:
Votes
For the proposal 1,831,146
Against the proposal 261,290
Non-votes 1,842,505
Abstentions 28,189
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PROPOSAL TO AMEND THE 1993 DIRECTORS STOCK OPTION PLAN TO INCREASE THE
NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UNDER THE 1993
PLAN FROM 20,000 SHARES TO 120,000 SHARES.
The results of shareholder voting on the above proposal were as follows:
Votes
For the proposal 1,852,608
Against the proposal 317,740
Non-votes 1,760,089
Abstentions 32,693
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits included herewith are set forth on the Index to Exhibits,
which index is incorporated by reference.
(b) Reports on Form 8-K.
February 26, 1997 Current report under Item 5 reflecting the
February 21, 1997 press release reporting
that Nematron Corporation signed a definitive
agreement to acquire Intec Controls Corp.
ALL OTHER ITEMS OMITTED ARE NOT APPLICABLE OR THE ANSWERS THERETO ARE NEGATIVE.
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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:
MAY 14, 1997 /S/ FRANK G. LOGAN, III
- ------------ -----------------------------------------
DATE FRANK G. LOGAN, III, PRESIDENT & CEO
(DULY AUTHORIZED OFFICER)
MAY 14, 1997 /S/ DAVID P. GIENAPP
- ------------ -----------------------------------------
DATE DAVID P. GIENAPP, CHIEF FINANCIAL OFFICER
(CHIEF ACCOUNTING OFFICER)
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INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
2.1 Agreement and Plan of Merger, dated as of February 20, 1997,
by and among the Company, NemaSoft, Intec, Thomas W.
Kraus and Robert O Mick, as amended March 28, 1997,
incorporated by reference to Exhibit to Form 8-K filed
April 10, 1997
4.1 Revolving Credit Note entered into as of February 12, 1997,
between Nematron Corporation and KeyBank National
Association
4.2 Term Note entered into as of February 12, 1997, between
Nematron Corporation and KeyBank National Association
4.3 Revolving Credit Note (Equipment Line of Credit) entered
into as of February 12, 1997, between Nematron Corporation
and KeyBank National Association
4.4 Form of Warrant issued as of March 31, 1997 to Intec
shareholders, incorporated by reference to Exhibit to
Form 8-K filed April 10, 1997
10.1 Nematron Corporation 1993 Stock Option Plan, as amended and
restated March 1997.
10.2 Nematron Corporation 1993 Directors Stock Option Plan, as
amended and restated March 1997.
10.3 Registration Rights Agreement, dated as of March 31, 1997,
between Nematron Corporation and former stockholders of
Intec Controls Corp.
10.4 Employment and Noncompetition Agreement, dated as of March
31, 1997, between NemaSoft, Inc., and Thomas Kraus.
11 Computation of Earnings Per Share
27 Financial Data Schedule
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