<PAGE> 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 DECEMBER 31, 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)
<TABLE>
<S> <C>
MICHIGAN 38-2483796
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
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: 4,585,392 SHARES OUTSTANDING AS OF FEBRUARY 7,1997
Transitional Small Business Disclosure Format: [ ] YES [X] NO
================================================================================
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEMATRON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,162,125 $3,942,963
Accounts receivable, net of allowance for doubtful
accounts of $112,000 at December 31, 1996, and $115,000
at September 30, 1996 6,282,318 5,989,708
Inventories (Note 2) 4,572,939 4,520,937
Prepaid expenses and other current assets 741,443 750,995
- -----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 14,758,825 15,204,603
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
OF $3,190,991 AT DECEMBER 31, 1996 AND $3,139,560
AT SEPTEMBER 30, 1996 3,515,580 3,384,285
OTHER ASSETS:
Software and related development costs, net of amortization
of $641,036 at December 31,1996, and $611,022 at
September 30, 1996 4,780,172 4,426,257
Other intangible assets, net of amortization of $648,812 at
December 31, 1996 and $580,954 at September 30,1996 1,160,808 1,199,200
- -----------------------------------------------------------------------------------------------------------
NET OTHER ASSETS 5,940,980 5,625,457
- -----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $24,215,385 $24,214,345
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,625,295 $ 1,661,120
Other accrued expenses 675,124 671,678
Current maturities of long-term debt (Note 3) 162,885 158,340
- -----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,463,304 2,491,138
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 3) 3,947,653 3,993,309
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 6,410,957 6,484,447
STOCKHOLDERS' EQUITY:
Common stock, no par value, 15,000,000 shares authorized;
4,585,392 and 4,558,248 shares issued and outstanding
at December 31, 1996 and September 30,1996,
respectively 17,640,674 17,572,814
Foreign currency translation adjustment (89,364) (85,518)
Retained earnings 253,118 242,602
- -----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 17,804,428 17,729,898
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,215,385 $24,214,345
===========================================================================================================
</TABLE>
Page 1
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
QUARTER QUARTER
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
NET REVENUES $5,108,430 $4,914,705
COST OF REVENUES 2,921,477 2,857,238
---------------------------------------------------------------------------
GROSS PROFIT 2,186,953 2,057,467
OPERATING EXPENSES:
Product development costs 357,052 249,237
Selling, general and administrative expenses 1,755,896 1,557,595
---------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 2,112,948 1,806,832
---------------------------------------------------------------------------
OPERATING INCOME 74,005 250,635
OTHER INCOME (EXPENSE):
Other income (expense), net 29,199 (14,874)
Interest expense (87,746) (167,554)
Foreign currency gain (loss) 58 (7,152)
---------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (58,489) (189,580)
---------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME 15,516 61,055
TAXES ON INCOME (NOTE 4) 5,000 0
---------------------------------------------------------------------------
NET INCOME $10,516 $61,055
===========================================================================
EARNINGS PER SHARE (NOTE 5) $0.00 $0.02
===========================================================================
</TABLE>
Page 2
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,516 $ 61,055
Adjustments to reconcile net income to net cash flows
used in operating activities:
Depreciation and amortization 266,895 332,713
Changes in assets and liabilities that provided (used) cash:
Accounts receivable (292,610) (794,254)
Inventories (52,002) (1,153,499)
Prepaid expenses and other current assets 9,552 (129,235)
Accounts payable (35,825) 270,434
Accrued expenses 3,446 85,818
- --------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (90,028) (1,326,968)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to capitalized software development costs (389,977) (191,305)
Additions to property and equipment, net of minor disposals (293,819) (74,773)
- --------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (683,796) (266,078)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable to bank 0 400,000
Proceeds from borrowings under subordinated notes 0 1,800,000
Proceeds from exercise of options and warrants 67,860 0
Payments of long-term debt (41,111) (482,264)
Payments of deferred financing fees (29,917) (148,282)
- --------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,168) 1,569,454
FOREIGN CURRENCY TRANSLATION EFFECT ON CASH (3,846) 1,506
- --------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (780,838) (22,086)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,942,963 78,258
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,162,125 $ 56,172
==================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 117,746 $ 187,633
Cash paid for income taxes $ -0- $ -0-
</TABLE>
Page 3
<PAGE> 5
NEMATRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERS ENDED DECEMBER 31, 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, and NemaSoft, Inc., and
Imagination Systems, Inc., Michigan corporations. All significant intercompany
transactions and balances have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting principally 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;
however, the Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these condensed
consolidated financial statements 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 December 31, 1996
and 1995 are not necessarily indicative of the results to be expected for the
full year.
NOTE 2 - INVENTORIES
Inventories consist of the following at December 31, 1996, and September 30,
1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1996
<S> <C> <C>
Purchased parts and accessories $2,804,214 $2,734,974
Work in process 400,491 349,189
Finished goods and service stock 1,368,234 1,436,774
--------- ---------
Total Inventory $4,572,939 $4,520,937
========= =========
</TABLE>
NOTE 3 - LONG-TERM DEBT
Long-term debt includes the following debt instruments at December 31, 1996,
and September 30, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1996
<S> <C> <C>
Mortgage loan payable to bank $2,265,252 2,300,000
Subordinated notes payable 1,800,000 1,800,000
Capitalized lease obligations and other notes 45,286 51,649
--------- ---------
4,110,538 4,151,649
Less current maturities (162,885) (158,340)
--------- ---------
Long-term debt, less current maturities $3,947,653 $3,993,309
========= =========
</TABLE>
The mortgage loan payable to a bank bears interest at 9.5% per annum; payable
in monthly installments of $29,900 through September 2001, at which time the
remaining principal and any interest thereon is due. The loan is
collateralized by a first mortgage of the Company's land and building in Ann
Arbor, Michigan. The loan contains a covenant that requires the Company to
maintain a minimum tangible net worth and a minimum debt-to-equity ratio. The
Company was in compliance with these covenants at December 31,1996.
Page 4
<PAGE> 6
The subordinated notes bear interest at 12 percent per annum and require
monthly interest-only payments totaling $18,000 through November 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. 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. The
Company was in compliance with these covenants at December 31,1996.
NOTE 4 - TAXES ON INCOME
Current tax expense, computed at the expected tax rate of 34%, is $5,000 for
the three month period ended December 31, 1996. There was no provision for
income tax expense for the three month period ended December 31,1995 due to the
anticipated utilization of available net operating loss carryforwards.
The Company has NOLs of approximately $5,683,000 that may be applied against
future taxable income. The NOLs expire beginning 2003 through 2011.
Utilization of these carryforwards is subject to annual limitations under
current Internal Revenue Service regulations.
NOTE 5 - EARNINGS PER SHARE
Primary 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 was 4,892,693
and 3,460,062 for the three month periods ended December 31, 1996, and 1995,
respectively.
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.
Page 5
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH THREE MONTHS ENDED DECEMBER
31, 1995
Revenues for the quarter increased $194,000 (3.9%) to $5,108,000 compared to
the same period last year. The increase is attributable to increases in sales
of Industrial Workstations and related parts and service, primarily to
automotive customers. Domestic revenues increased $1,036,000 to $4,781,000, or
27.7%, over domestic revenues of a year earlier. Foreign revenues decreased
$670,000, or 77.1%, to $199,000 reflecting the decreased emphasis on
international markets. Additionally, the Company's emphasis on new hardware and
software products was limited to the domestic markets. Management expects that
revenues will continue to increase in the current fiscal year in response to
continued increases in sales and marketing efforts and given similar economic
conditions as experienced in the current period.
Gross profit increased $129,000 (6.3%) over the same quarter last year. Gross
profit as a percentage of sales in the current quarter was 42.8% versus 41.9%
in the same quarter last year. The improvement in gross profit percentage is
due primarily to sales of higher margin products and service and increased
emphasis on efficiencies and financial controls. Gross profit margins are
expected to increase slightly throughout the year as the mix of sales in the
remaining quarters of fiscal 1997 is expected to include a greater percentage
of higher margin products.
Product development expenses increased $108,000 (43.3%) compared to the same
period last year. The increase is due primarily to increased staff assigned
to hardware and software development efforts. The Company expects to release
late in its second fiscal quarter proprietary software for sale to third
parties and for use in Company products currently under development.
Additionally the Company intends to follow that release with the introduction
of other software and hardware products later in the fiscal year.
Selling, general and administrative expenses increased $198,000 (12.7%) over
the comparable period of last year and increased as a percentage of net revenue
from 31.7% in the first quarter of fiscal 1996 to 34.4% in the first quarter of
fiscal 1997. The increase was a result of adding staff and increasing
marketing and sales expenses associated with the introduction of new products
planned for the second quarter of fiscal 1997. Management expects the rate of
increase in the current quarter to continue in the remaining quarters of
fiscal 1997.
Interest expense for the current quarter decreased to $88,000 compared to
$168,000 for the comparable quarter of last year due to lower average borrowing
levels. Interest and other income increased to $29,000 from a loss of $15,000
a year ago primarily due to interest income from investments of idle cash
reserves generated from proceeds of the June 1996 secondary stock offering.
For the three month period ending December 31, 1996, net income was $11,000,
compared to income of $61,000 in the three months ended December 31, 1995. The
Company has significant net operating loss carryforwards.
The Company has provided for taxes at a 34% effective tax rate in the current
period.
CHANGES IN FINANCIAL CONDITION
Accounts receivable increased $293,000 primarily as a result of increased
revenues for the period ended December 31, 1996. Inventories increased $52,000
due primarily to increased finished goods and work in process in anticipation
of planned second quarter shipments.
Property and equipment less accumulated depreciation increased approximately
$131,000 during the period, reflecting the net acquisition of approximately
$294,000 of equipment and computer systems offset by depreciation of $155,000.
Intangible assets increased by $354,000 during the period as a result of the
capitalization of $390,000 of software development costs less the amortization
of $30,000 of previously capitalized costs during the period. This reflects the
Company's emphasis on developing software products scheduled for introduction
later in the fiscal year.
Page 6
<PAGE> 8
Total current liabilities remained relatively constant during the period,
decreasing $28,000 to $2,463,000,while the current ratio remained constant at
6.0 to 1.
Long-term debt decreased $46,000 during the period reflecting debt payments
made per the terms of the applicable debt agreements.
LIQUIDITY AND CAPITAL RESOURCES
Nematron has working capital of approximately $12,296,000. Primary sources of
liquidity are cash from operations and the Company's $6,000,000 bank line of
credit. The bank line of credit agreement has a February 28, 1998, expiration
date. The Company expects to enter into a new term loan agreement to replace
the existing $1,800,000 of subordinated debt, thereby reducing the interest
rate from 12% annually to approximately 8%. This will result in interest
savings of approximately $42,000 for the remainder of fiscal 1997 compared to
interest expense at the present 12% rate.
The Company has consistently invested cash reserves during the three months
ended December 31, 1996. Short term cash needs include amounts necessary to
sustain administrative, marketing and sales expenses at their increasing
levels, amounts necessary to purchase materials for production, and amounts
required for new product development efforts. Management expects that current
cash, cash generated from operations, and existing credit facilities will be
sufficient to pay the Company's costs and expenses as they become due and fund
the Company's planned growth.
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, changes in customer requirements and
evolving industry standards.
PART II - OTHER INFORMATION
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.
(b) The Company filed no reports on Form 8-K during the quarter ended
December 31,1996.
ALL OTHER ITEMS OMITTED ARE NOT APPLICABLE OR THE ANSWERS THERETO ARE NEGATIVE.
Page 7
<PAGE> 9
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:
<TABLE>
<S> <C>
FEBRUARY 7, 1997 /S/ FRANK G. LOGAN, III
---------------- ------------------------------------------
DATE FRANK G. LOGAN, III, PRESIDENT & CEO
(DULY AUTHORIZED OFFICER)
FEBRUARY 7, 1997 /S/ DAVID P. GIENAPP
---------------- ------------------------------------------
DATE DAVID P. GIENAPP, VICE PRESIDENT-FINANCE &
ADMINISTRATION
(CHIEF ACCOUNTING OFFICER)
</TABLE>
Page 8
<PAGE> 10
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
-------------- -----------------------------------------------------
<S> <C>
11 Statement regarding computation of earnings per share
27 Financial Data Schedule
</TABLE>
Page 9
<PAGE> 1
EXHIBIT 11
NEMATRON CORPORATION
CALCULATION OF EARNINGS PER SHARE
QUARTERS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
QUARTER ENDED
DECEMBER 31
--------------------------
1996 1995
<S> <C> <C>
ASSUMPTIONS:
Weighted average common shares outstanding during the period 4,566,079 2,869,613
Number of shares of common stock outstanding at end of the period 4,585,392 2,869,613
Number of options and warrants outstanding at end of the period 867,393 1,164,372
Number of common shares obtainable upon exercise of outstanding
options and warrants as a percentage of outstanding common
shares at end of the period 18.92% 40.58%
Weighted average exercise price of options and warrants outstanding $ 4.49 $ 3.42
Average market price of common stock during the period $ 7.21 $ 4.87
Market price of common stock at end of the period $ 5.13 $ 5.00
Shares which could be repurchased at average market price
limited to 20% of outstanding common stock 540,780 573,923
COMPUTATIONS FOR PRIMARY EARNINGS PER SHARE:
APPLICATION OF ASSUMED PROCEEDS:
Toward repurchase of outstanding common stock at average
market price, limited to 20% of outstanding shares $3,898,476 2,795,005
Toward reduction of debt in FY 1997 -
Toward reduction of debt in FY 1996 1,187,147
---------- ----------
Total proceeds from exercise of options and warrants $3,898,476 $3,982,152
========== ==========
ADJUSTMENT OF NET INCOME:
Actual net income A $ 10,516 $ 61,055
Interest reduction at 10.5% in FY 1997 -
Interest reduction at 10.5% in FY 1996 31,163
---------- ----------
Adjusted net income B $ 10,516 $ 92,218
========== ==========
ADJUSTMENT OF SHARES OUTSTANDING:
Weighted average common shares outstanding C 4,566,079 2,869,613
Additional shares assumed to be issued 867,393 1,164,372
Outstanding shares assumed to be repurchased (540,780) (573,923)
---------- ----------
Adjusted shares outstanding D 4,892,693 3,460,062
========== ==========
PRIMARY EARNINGS PER SHARE:
Before adjustment A/C $ 0.002 $ 0.021
========== ==========
After adjustment B/D $ 0.002 $ 0.027
========== ==========
FINANCIAL STATEMENT PRESENTATION $ 0.00 $ 0.02
========== ==========
</TABLE>
FULLY DILUTED EARNINGS PER SHARE ARE NOT SHOWN BECAUSE THE RESULTS THEREOF ARE
ANTI-DILUTIVE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,162,125
<SECURITIES> 0
<RECEIVABLES> 6,282,318
<ALLOWANCES> 112,000
<INVENTORY> 4,572,939
<CURRENT-ASSETS> 14,758,825
<PP&E> 6,706,571
<DEPRECIATION> 3,190,991
<TOTAL-ASSETS> 24,215,385
<CURRENT-LIABILITIES> 2,463,304
<BONDS> 3,947,653
0
0
<COMMON> 17,640,674
<OTHER-SE> 163,784
<TOTAL-LIABILITY-AND-EQUITY> 24,215,385
<SALES> 5,108,430
<TOTAL-REVENUES> 5,108,430
<CGS> 2,921,477
<TOTAL-COSTS> 2,921,477
<OTHER-EXPENSES> 2,112,948
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87,746
<INCOME-PRETAX> 15,516
<INCOME-TAX> 5,000
<INCOME-CONTINUING> 10,516
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,516
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
