UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended February 28, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period From ____ to ____
Commission file number 0-27928
NICOLLET PROCESS ENGINEERING, INC.
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1528120
-------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
420 North Fifth Street, Ford Centre, Suite 1040
Minneapolis, MN 55401
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(Address of principal executive offices)
(612) 339-7958
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(Issuer's telephone number)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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. YES [X] NO [ ]
The number of shares of common stock, no par value, outstanding as of April 9,
1999 was 6,245,861.
Transitional Small Business Disclosure Format (Check One): YES [ ] NO [X]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NICOLLET PROCESS ENGINEERING, INC.
Balance Sheets
February 28, 1999 (Unaudited) and August 31, 1998
February 28, August 31,
ASSETS 1999 1998
------------ ----------
(Unaudited) (Note)
Current Assets:
Cash ................................................................. $60,141 $257,910
Short term investments...................................................... 0 0
Net receivables............................................................. 214,718 124,985
Accounts receivable -- related parties...................................... 0 0
Inventories................................................................. 135,171 245,257
Prepaid expenses and other assets........................................... 111,444 14,670
-------- -------
Total current assets................................................. 521,474 642,822
Property and equipment:
Computer equipment.......................................................... 536,346 497,596
Furnishings and equipment................................................... 176,647 176,647
Leasehold improvements...................................................... 70,211 70,211
------- -------
783,204 744,454
Less: accumulated depreciation............................................. (568,496) (507,684)
--------- ---------
214,708 236,770
Other assets:
License agreement........................................................... 0 3,778
Software development costs.................................................. 101,794 184,492
Other assets................................................................ 46,861 7,913
------ -----
Total assets ................................................................. $884,837 $1,075,775
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-------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Checks written in excess of bank balance.................................... 0 0
Customer deposits........................................................... $800 $114,015
Notes payable -- current portion............................................ 2,985 23,564
Notes payable -- line of credit............................................. 0 0
Accounts payable............................................................ 281,648 393,562
Accrued payroll liabilities................................................. 57,972 57,237
Current portion of capitalized lease obligation............................. 0 0
Accrued liabilities......................................................... 160,164 74,078
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Total current liabilities............................................... 503,569 662,456
Long term notes................................................................. 2,793,393 1,514,803
Capitalized lease obligation.................................................... 0 0
Deferred revenue................................................................ 0 0
Deferred rent ................................................................. 0 0
Shareholders' equity (deficit):
Common stock, no par value:
Authorized shares -- 12,000,000; issued and outstanding shares
6,211,861 at August 31, 1998 and 6,245,861 at February 28, 1999...... 8,956,574 8,939,949
Accumulated deficit......................................................... (11,367,199) (10,039,933)
------------ ------------
(2,410,625) (1,099,984)
Less stock subscriptions receivable......................................... (1,500) (1,500)
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Total shareholders' equity (deficit)............................................ (2,412,125) (1,101,484)
----------- -----------
Total liabilities and shareholders' equity...................................... $884,837 $1,075,775
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------- ---------
Note: The balance sheet as of August 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles.
See accompanying notes to financial statements.
2
NICOLLET PROCESS ENGINEERING, INC.
Statements of Operations
For the Three Months and Six Months Ended February 28, 1999 and
February 28, 1998
(Unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
February 28, 1999 February 28, 1998 February 28, 1999 February 28, 1998
----------------- ----------------- ----------------- -----------------
Net sales................................... $262,434 $302,453 $777,238 $704,774
Cost of sales............................... 262,116 271,166 660,188 568,999
------- ------- ------- -------
Gross margin................................ 318 31,287 117,050 135,775
Operating expenses:
Selling expenses.................... 299,960 375,694 563,695 669,043
Research and development
expenses........................... 97,924 154,223 217,795 256,044
General and administrative
expenses........................... 260,316 245,524 563,551 431,775
------- ------- ------- -------
Total operating expenses......... 658,200 775,441 1,345,041 1,356,862
------- ------- --------- ---------
Operating loss.............................. (657,882) (744,154) (1,227,991) (1,221,087)
Other income/expenses
Interest expense.................... (55,116) (21,582) (99,865) (39,268)
Total other
income/expenses................. (55,116) (21,582) (99,865) (39,268)
-------- -------- -------- --------
Net loss.................................... $(712,998) $(765,736) $(1,327,856) $(1,260,355)
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Net loss per share.......................... $(0.11) $(0.19) $(0.21) $(0.32)
------ ------- ------- -------
------ ------- ------- -------
Weighted average number of
shares outstanding ................. 6,237,384 3,992,087 6,237,384 3,992,087
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes to financial statements.
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NICOLLET PROCESS ENGINEERING, INC.
Statements of Cash Flows
For the Six Months Ended February 28, 1999 and February 28, 1998
(Unaudited)
Six Months Ended
----------------
February 28, 1999 February 28, 1998
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................................................... (1,327,856) (1,260,355)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation/amortization............................................ 150,443 161,344
Accounts receivable............................................... (89,734) 602,320
Inventories....................................................... 110,994 30,574
Prepaid expenses.................................................. (96,774) (126,125)
Accounts payable.................................................. (111,982) 212,307
Other current liabilities......................................... 1,111,206 (433,285)
Accrued liabilities............................................... 109,419 (32,729)
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Net cash used in operating activities........................................ (144,284) (845,949)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Total fixed assets........................................................... (38,750) 0
Other assets .............................................................. 0 (1,200)
Capital-in-process........................................................... (42,102) (129,898)
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Net cash used in investing activities........................................ (80,852) (131,098)
CASH FLOWS (USED IN)/FROM FINANCING ACTIVITIES
Proceeds from:
Common stock............................................................. 16,625 958,419
Stock subscription received.............................................. 0
Notes payable .......................................................... 11,167 (14,603)
Deferred lease obligation................................................ (425) (3,092)
Capitalized lease obligation............................................. 0 (2,646)
- -------
Net cash (used in)/from financing activities................................. 27,367 938,078
------ -------
Net decrease in cash......................................................... $(197,769) $(38,969)
Cash at beginning of period.................................................. 257,909 (128,595)
Cash at end of period........................................................ $60,140 $(167,564)
------ ---------
------ ---------
See accompanying notes to financial statements.
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NICOLLET PROCESS ENGINEERING, INC.
Form 10-QSB
February 28, 1999
Notes to Financial Statements
1. BASIS OF PRESENTATION
The unaudited interim financial statements have been prepared by the
Company in accordance with generally accepted accounting principles,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements have been omitted or condensed
pursuant to such rules and regulations. The information furnished
reflects, in the opinion of the management of the Company, all
adjustments (of only a normally recurring nature) necessary to present a
fair statement of the results for the interim periods presented.
Operating results for the three and six month periods ended February 28,
1999 are not necessarily indicative of the results that may be expected
for the year ended August 31, 1999. The accompanying unaudited interim
financial statements should be read in conjunction with the financial
statements and related notes included in the Company's Annual Report on
Form 10-KSB dated August 31, 1998.
2. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed by dividing the net income
(loss) for the period by the weighted average number of shares of common
stock outstanding during the period.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
THIS FORM 10-QSB CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. FOR THIS
PURPOSE, ANY STATEMENTS CONTAINED IN THIS FORM 10-QSB THAT ARE NOT STATEMENTS OF
HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING
THE FOREGOING, WORDS SUCH AS "MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR
COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES,
AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF FACTORS,
INCLUDING THOSE DESCRIBED UNDER THE CAPTION "IMPORTANT FACTORS TO CONSIDER"
CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB, AS AMENDED, FOR THE
FISCAL YEAR ENDED AUGUST 31, 1998.
OVERVIEW
Nicollet Process Engineering, Inc.'s ("NPE" or the "Company") mission is
to assist customers in turning factory floor information into revenues and
profits. NPE is focused on the information technology requirements of
manufacturers for better managing production processes and supporting management
decisions. NPE designs, manufacturers, markets and supports high speed data
acquisition systems that bring a range of solutions to solve process automation
problems, including process visualization, machine and process control and
real-time database management products. The Company currently focuses on the die
casting and plastics injection molding industries with industry specific process
monitoring and control systems, client/server software and machine diagnostic
instruments.
The Company has developed die casting industry specific, "turn-key"
manufacturing information and process control system ("Process Vision") which,
on a real-time basis, monitors, collects and displays machine performance data,
monitors process performance continuously against pre-set values, provides
feedback to the machine's controller to bring out of tolerance performance back
into conformance, and aggregates data for real-time presentation of process
reports for use by the machine operator. As part of its product offering to die
casting industry, the Company has also developed client/server software (the
"Client/Server Software" which together with Process Vision are referred to as
the "Die Casting Products"), which provides access to factory floor data stored
in file servers and distributes that data, on a real-time basis, to all levels
of an organization in either preprogrammed report formats or on a defined basis.
The Company has developed a line of products in the plastics injection
molding industry that provides process and production monitoring to all levels
of an organization. The Company's plastics monitoring product is also a "turn
key" manufacturing information system (the "Plastics Monitoring System") which
on a real-time basis, monitors, collects and displays machine performance data,
monitors process performance continuously against pre-set values and provides
the information collected and analyzed to all levels of an organization. In
February 1997, the Company introduced a second product to the plastics
industry--the PMRS. The Company's production monitoring and reporting system
(the "PMRS") collects production information, such as cycle time and number of
parts manufactured, from machines at the factory floor level and provides
specific production reports to the machine operator or, at the customer's
option, to all levels of the organization. During the first quarter of fiscal
1997, in conjunction with and at the request of several original equipment
manufacturers (OEMs), the Company developed a modified version of the Plastics
Monitoring System that offers a direct connection to the plastic injection
molding machine for process monitoring (the "Direct Connect" which together with
the Plastics Monitoring System and PMRS are referred to as the "Plastics
Products"), thereby eliminating the need for specialized computer hardware to
run process monitoring.
The Company's third product line, the Machine Capability Analyzer (the
"MCA"), is a portable, troubleshooting instrument that tests the functioning of
a manufacturing machine for inconsistencies in
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operation. Under an agreement with GE Plastics, an operating division of General
Electric Corporation, the Company developed a new software module for the MCA.
This new module was designed for GE Plastics to test specific parameters of GE
Plastic's proprietary resins. The Company believes that GE Plastics will apply
this GE-specific product throughout its polymer manufacturing plants.
During the last fiscal year, the Company focused substantially all of
the Company's research and development efforts in converting to a Structured
Query Language ("SQL") database and in modularizing the Company's Plastics
Monitoring System. The Company's Plastics Products are powered by the Windows
SQL database and are now engineered to allow customers to mix and match modules
according to a customer's specific needs, thereby permitting easy migration from
simpler starter systems, such as the PMRS, to more sophisticated process
monitoring and client/server level information gathering systems.
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO THREE MONTHS
AND SIX MONTHS ENDED FEBRUARY 28, 1998
NET SALES. Net sales decreased 13% to approximately $262,000 in the
three months ended February 28, 1999, compared to approximately $302,000 in the
three months ended February 28, 1998. Net sales increased 10% to approximately
$777,000 in the six months ended February 28, 1999 compared to $705,000 for the
six months ended February 28, 1998. The decrease in net sales for the second
fiscal quarter was due to reduced sales in die cast systems and MCA units. The
increase for the six month period ended February 28, 1999 was due to increased
plastics and die cast system sales offset by decreases in MCA units.
GROSS MARGINS. The gross margin decreased to .2% of revenues in the
three months ended February 28, 1999 compared to 10% of revenues in the prior
year period. The gross margin decreased to 15% of revenues in the six months
ended February 28, 1999 compared to 19% in the prior year period. The decrease
was due primarily to increased expenditures associated with the overseas
shipments including certification expenses, and the overall reduction of sales
in the second fiscal quarter.
SALES AND MARKETING EXPENSES. Sales and marketing expenses decreased 20%
to approximately $300,000 in the three months ended February 28, 1999 compared
to approximately $376,000 in the prior year period. These expenses decreased 16%
to approximately $564,000 in the six months ended February 28, 1999 compared to
approximately $669,000 in the prior year period. These expenses as a percentage
of revenues were 114% and 73% respectively for the three and six months ended
February 28, 1999 compared to 124% and 95% for the three and six months ended
February 28, 1999. This decrease was due to staff reductions and restructuring
during the last two quarters of fiscal 1998 and the first quarter of fiscal
1999. Although there have been staff additions during the first six months of
the fiscal year, these expenses have been offset by lower commissions due to low
sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased 37% to approximately $98,000 in the three months ended February 28,
1999, compared to approximately $154,000 in the prior year period. These
expenses decreased 15% to approximately $217,000 in the six months ended
February 28, 1999 compared to approximately $256,000 in the prior year period.
These decreases for the three and six months were primarily due to staff
reductions and reductions of outside contract services.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 6% to approximately $260,000 in the three months ended February 28,
1999, compared to approximately $246,000 in the prior year. The increase was
primarily due to financing fees associated with the TECHinspirations, Inc.
financing arrangements, and certification fees associated with overseas
shipments.
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INTEREST EXPENSES. Interest expenses increased to approximately $55,000
in the three months ended February 28, 1999, compared to approximately $22,000
in the prior year period. Interest expenses increased to approximately $100,000
in the six months ended February 28, 1999 compared to approximately $39,000 in
the prior year period. This increases in both the three and six months were due
to an increased debt with TECHispirations on the line of credit.
NET LOSS. The net loss for the three months ended February 28, 1999 was
approximately $713,000 or $0.11 per share, compared to a net loss of
approximately $766,000 or $0.19 per share for the three months ended February
28, 1998. The net loss for the six months ended February 28, 1999 was
approximately $1,328,000 or $0.21 per share, compared to a net loss of
approximately $1,260,000 or $0.32 per share for the six months ended February
28, 1998. The increase in the net loss was due primarily to increased expenses
associated with financing operations.
LIQUIDITY AND CAPITAL RESOURCES
In May 1997, the Company entered into two lines of credit with Norwest
Business Credit, Inc. and Norwest Bank Minnesota, National Association
(collectively, "Norwest") for an aggregate of up to $800,000 in borrowings (the
"Credit Facilities"). In June 1998, Norwest assigned all of its rights and
obligations under the Credit Facilities to TECHinspirations, Inc. (TECH). The
Credit Facilities are discretionary. Credit availability under these facilities
is based on accounts receivable of the Company's United States operations and
accounts receivable and inventories of the Company's international operations.
The Credit Facilities are used primarily to finance working capital. As of
February 28, 1999, the Company borrowed approximately $2,750,000 under the
Credit Facilities. In November 1998, the Company entered into a letter of intent
with TECH, pursuant to which TECH would arrange for additional debt financing
for a total maximum amount of $3,000,000, and $1,500,000 of the indebtedness
would be converted into 1,500,000 shares of preferred stock. In connection with
the financing, the Company has also agreed to pay TECH $25,000 per month for a
period of one year.
Net cash used in operating activities was approximately $144,000, and
$845,000 in the six months ended February 28, 1999 and February 28, 1998,
respectively. The cash used was primarily related to operations.
The Company anticipates capital expenditures of approximately $80,000
through fiscal 1999 for use in purchasing software and hardware to upgrade and
improve internal operations.
The report of the Company's auditors on the Company's financial
statements for the year ended August 31, 1998 contains an explanatory paragraph
to the effect that the Company's recurring losses and negative cash flows from
operations raise substantial doubts about its ability to continue as a going
concern. If the Company's operations do not provide sufficient cash or the
Company is unable to raise additional debt or equity financing, in either case
sufficient for the Company to continue operations, the Company may be forced to
cease operations.
IMPACT OF YEAR 2000
YEAR 2000 ISSUES:
As the year 2000 approaches the various problems that may result from
the improper processing of dates and date sensitive calculations by computers
and other machinery can create breakdowns and erroneous results. Recognizing the
impact on all companies using computers, the Company is taking steps necessary
to insure that potential problems do not adversely affect its operations. The
Company also realizes the critical impact this may have in the product provided
to our customer.
8
THE COMPANY'S STATE OF READINESS:
The Company held initial meetings in mid 1997 to establish a task force
represented by the carious departments in the Company. The Company continues the
assessment efforts and outlined actions required for their implementation. In
October of 1998, the Year 2000 Plan was developed which outlines six phases.
These phases are as follows: Phase (I) Inventory and Assess, Phase (II)
Prioritize, Phase (III) Resolved, Phase (IV) Test, Phase (V) Contingency Plan
and Phase (VI) Control. The Company expects to complete the plan in the fiscal
third quarter of 1999. (March, April, May).
COST ASSOCIATED WITH YEAR 2000 ISSUES:
The majority of the work to date has been performed by the Company's
employees. This has limited the cost, however management does expect
requirements as the evaluations are completed. The Company anticipates Capital
Expenditures in fiscal 1999 to be approximately $80,000. Year 2000 issues
included in this amount are expected to be $10,000 to $20,000. The replacement
or upgrades to the Company's telephone system has been advanced to Year 2000
ready and included in the above capital expenditures.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES:
Until system integration testing is substantially in process and/or
complete, the Company cannot fully estimate the risks of its Year 2000 issue. To
date, the Company's expenses are in material. As a result of system integration
testing, the Company may identify business activities that are at risk of Year
2000 disruption. The absence of any such determination at this point represents
only the status currently in the implementation phases and should not be
construed to mean that there is no business activity which is at risk of a Year
2000 disruption. It is possible a disruption to a major business activity could
have a material adverse effect on the Company's financial condition and results
of operations. In additional, many of the Company's business critical external
providers may not appropriately address their Year 2000 issues, the result of
which could have a material adverse effect on the Company's financial condition
and results of operations.
THE COMPANY'S CONTINGENCY PLANS:
Because the complete assessment of Year 2000 issues is incomplete, the
Company has not developed contingency plans for this issue. The Company is aware
of the possibility, however, that certain business activities may be identified
as at risk. Consistent with the plan, the Company will develop contingency plans
for such activities as and if such determinations are made. In addition, the
Company is developing contingency plans to minimize impact of Year 2000 issues
if resolutions fail and are left incomplete while performing Phases III and VI
of the plan.
9
PART II -- OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company is currently in default of the minimum book net worth
covenant under the Credit Facilities and has borrowed funds in excess of the
borrowing base limitations imposed by the Credit Facilities. The Company is
continuously working with TECH to resolve these defaults.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 27.1 Financial Data Schedule.
(b) No Current Reports on Form 8-K were filed during the fiscal quarter
ended February 28, 1999.
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SIGNATURES
In accordance with 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.
NICOLLET PROCESS ENGINEERING, INC.
Dated: April 12, 1999 By: /s/ Robert A. Pitner
----------------------------------------
Robert A. Pitner
Chief Executive Officer, Chief
Financial Officer (principal
executive and financial officer)
By: /s/ John Sandberg
----------------------------------------
John Sandberg
Controller
(principal accounting officer)
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NICOLLET PROCESS ENGINEERING, INC.
QUARTERLY REPORT ON FORM 10-QSB
FISCAL QUARTER ENDED FEBRUARY 28, 1999
EXHIBIT INDEX
Exhibit No. Description Location
----------- ----------- --------
27.1 Financial Data Schedule................................ Filed herewith
electronically
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