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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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- --------
Commission File Number: 0-21142
NEMATRON CORPORATION
(Exact name of small business issuer as specified in its charter)
MICHIGAN 38-2483796
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5840 INTERFACE DRIVE, ANN ARBOR, MICHIGAN 48103
(Address of principal executive offices) (Zip Code)
(734) 214-2000
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
[X] YES [ ] No
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
No par value Common Stock: 5,346,316 SHARES AS OF MAY 11, 1998
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, 1998 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
(UNAUDITED) (UNAUDITED)
(NOTE 1)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 70,197 $ 1,142,988
Accounts receivable, net of allowance for doubtful
accounts of $433,000 at March 31, 1998, and $410,000
at September 30, 1997 4,679,891 4,205,196
Inventories (Note 2) 4,395,307 4,399,426
Prepaid expenses and other current assets 639,753 528,471
------------ ------------
Total Current Assets 9,785,148 10,276,081
Property and Equipment, net of accumulated depreciation
of $5,248,710 at March 31, 1998 and $3,865,092
at September 30, 1996 4,012,341 4,264,301
Other Assets:
Software and related development costs, net of amortization
of $1,945,640 at March 31, 1998, and $1,619,919
at September 30, 1997 3,711,370 2,724,819
Other intangible assets, net of accumulated amortization
of $799,984 at March 31, 1998 and $516,168
at September 30, 1996 2,724,176 3,008,547
------------ ------------
Net Other Assets 6,435,546 5,733,366
------------ ------------
Total Assets $ 20,233,035 $ 20,273,748
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to bank (Note 3) $ 3,670,000 $ 1,141,000
Accounts payable 2,056,303 1,711,936
Other accrued expenses 1,610,822 1,818,138
Current maturities of long-term debt (Note 4) 720,603 681,231
------------ ------------
Total Current Liabilities 8,057,728 5,352,305
Long-Term Debt, less current maturities (Note 4) 3,314,006 3,595,378
Deferred Tax Liability 928,571 1,000,000
------------ ------------
Total Liabilities 12,300,305 9,947,683
Stockholders' Equity:
Common stock, no par value, 15,000,000 shares authorized;
5,346,316 and 5,329,938 shares issued and outstanding
at March 31,1998 and September 30, 1997, respectively 21,658,559 21,589,413
Foreign currency translation adjustment (674) (7,571)
Accumulated deficit (13,725,155) (11,255,777)
------------ ------------
Total Stockholders' Equity 7,932,730 10,326,065
------------ ------------
Total Liabilities and Stockholders' Equity $ 20,233,035 $ 20,273,748
============ ============
</TABLE>
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Company and the bank includes a Parallel Purchase Commitment which can
be utilized, if necessary, to fund the contemplated transaction.
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1998 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(NOTE 1) (NOTE 1)
<S> <C> <C> <C> <C>
Net Revenues $ 4,943,454 $ 5,077,698 $ 9,294,762 $ 10,186,128
Cost of Revenues 2,745,993 3,038,000 5,146,210 5,959,477
----------- ------------ ------------ ------------
Gross Profit 2,197,461 2,039,698 4,148,552 4,226,651
Operating Expenses:
Product development costs 470,069 618,174 831,849 975,226
Selling, general and
administrative 2,784,178 1,995,058 5,569,375 3,750,954
Write off of in-process research
and development costs (Note 8) 1,655,000 1,655,000
Loss on closing of European
office (Note 6) 149,814 149,814
Debt retirement expenses 122,340 122,340
----------- ------------ ------------ ------------
Total Operating Expenses 3,254,247 4,540,386 6,401,224 6,653,334
----------- ------------ ------------ ------------
Operating Loss (1,056,786) (2,500,688) (2,252,672) (2,426,683)
Other Income (Expense):
Interest expense (160,126) (72,657) (303,613) (160,403)
Other, net 14,324 37,181 15,478 66,380
Foreign currency loss -0- (125,477) -0- (125,419)
----------- ------------ ------------ ------------
Total Other Income (Expense) (145,802) (160,953) (288,135) (219,442)
----------- ------------ ------------ ------------
Loss Before Taxes (1,202,588) (2,661,641) (2,540,807) (2,646,125)
Income Tax Benefit (Note 5) (71,429) (5,000) (71,429) -0-
----------- ------------ ------------ ------------
Net Loss $(1,131,159) $ (2,656,641) $ (2,469,378) $ (2,646,125)
=========== ============ ============ ============
Basic Loss Per Share (Note 7) $ (0.21) $ (0.58) $ (0.58) $ (0.58)
=========== ============ ============ ============
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
MARCH 31, 1998 MARCH 31, 1997
(UNAUDITED) (UNAUDITED)
(NOTE 1)
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $(2,469,378) $(2,646,125)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,208,267 547,494
Write off of research and development costs (Note 8) -0- 1,655,000
Debt retirement expense -0- 122,340
Deferred income tax benefit (71,429) -0-
Changes in assets and liabilities that provided (used) cash:
Accounts receivable (474,695) 341,472
Inventories 4,119 (92,527)
Prepaid expenses and other current assets (111,282) (76,884)
Accounts payable 344,367 92,276
Accrued expenses (207,316) (5,135)
----------- -----------
Net Cash Used In Operating Activities (1,777,347) (62,089)
Cash Flows From Investing Activities:
Acquisition of Intec Controls Corp. (Note 8) -0- 281,058
Additions to property and equipment, net of minor disposals (346,215) (744,323)
Additions to capitalized software development costs (1,312,272) (913,127)
----------- -----------
Net Cash Used In Investing Activities (1,658,487) (1,376,392)
Cash Flows From Financing Activities:
Increase in notes payable to bank 2,529,000 250,000
Proceeds from borrowings 109,613 2,172,117
Proceeds from exercise of common stock options and warrants 69,146 235,504
Payments of long-term debt (351,613) (1,881,606)
Payment of deferred financing fees -0- (63,527)
----------- -----------
Net Cash Provided From Financing Activities 2,356,146 712,488
Foreign Currency Translation Effect on Cash 6,897 85,518
----------- -----------
Net Decrease In Cash and Cash Equivalents (1,072,791) (640,475)
Cash and Cash Equivalents at Beginning of Period 1,142,988 3,942,963
----------- -----------
Cash and Cash Equivalents at End of Period $ 70,197 $ 3,302,488
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $301,241 $ 204,534
Cash paid for income taxes -0- -0-
Non-Cash Financing and Investing Activities:
Acquisition of Intec Controls Corp. (Note 8):
Cash acquired $ 281,000
Non cash assets and liabilities:
Current assets, other than cash 724,000
Property and equipment 305,000
Software development costs 2,058,000
Other intangible assets 2,352,000
Deferred tax liability (1,000,000)
Other liabilities (985,000)
-----------
Purchase price $ 3,735,000
===========
</TABLE>
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NEMATRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Nematron Corporation (the "Company") and its wholly-owned subsidiaries, Nematron
Ltd., a United Kingdom corporation acquired in the Intec acquisition (Note 8);
Nematron Europa BV, an inactive Netherlands corporation, and NemaSoft, Inc.,
("NemaSoft") and Imagination Systems, Inc., ("ISI") Michigan corporations. 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 announced by the Company on April 28, 1998, the Company has identified
potential material adjustments to its financial statements for the years ended
September 30, 1996 and 1997 relating to one significant contract. The timing and
amount of the potential adjustment has not been determined, but management
estimates that the adjustment should not exceed $1,500,000 in the aggregate over
the two year period. Adjustments to the 1997 financial information presented
herein have not been made, pending the determination of the amount of the
adjustments, if any, applicable to the 1997 periods presented herein.
As a result of the potential adjustments described above, KPMG Peat Marwick LLP
advised the Company's Audit committee on April 28, 1998 that its auditors'
reports on the Company's financial statements as of September 30, 1996 and 1997
and for each of the years then ended should no longer be relied upon. On that
date, KPMG Peat Marwick also resigned as the Company's principal accountants.
The Company is in the process of selecting new auditors.
Certain reclassifications have been made to the fiscal 1997 presentation to
conform to classifications used in fiscal 1998.
The results of operations for the three-month and six-month periods ended March
31, 1998 and 1997 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:
<TABLE>
<CAPTION>
CATEGORY MARCH 31, 1998 SEPT. 30, 1997
<S> <C> <C>
Purchased parts and accessories $ 2,853,176 $ 2,928,277
Work in process 355,608 349,069
Finished goods and service stock 1,186,523 1,122,080
----------- ----------
Total Inventory $ 4,395,307 $4,399,426
=========== ==========
</TABLE>
NOTE 3 - NOTE PAYABLE TO BANK
The Company has a credit facility with a bank providing for a maximum amount
available of up to $6,000,000. The amount available under this facility is
limited by a borrowing formula which allows for advances up to a maximum of the
sum of 80 percent of eligible domestic and foreign accounts receivable and 35%
of eligible inventory. Based upon the borrowing formula, approximately
$3,865,000 and
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$3,500,000 of the facility was eligible for advance at March 31, 1998 and
September 30, 1997, respectively, of which $3,670,000 and $1,141,000 were
outstanding on such dates. The line of credit is secured by substantially all
assets of the Company and a second mortgage on the Company's Ann Arbor facility.
The note bears interest at LIBOR plus 3% (8.7% at March 31, 1998).
The credit facility expires by its terms May 31, 1998; the Company has been
informed by the bank that the facility will be renewed on a month-to-month basis
as the Company moves forward on its plan to raise capital and meets its
operating plans as presented to the bank.
NOTE 4 - LONG-TERM DEBT
Long-term debt includes the following debt instruments at March 31, 1998 and
September 30, 1997:
<TABLE>
<CAPTION>
MARCH 31, 1998 SEPT. 30, 1997
<S> <C> <C>
Mortgage loan payable to bank $ 2,078,589 $ 2,156,481
Term note 1,410,000 1,590,000
Equipment notes 26,220 29,327
Capitalized lease obligations 519,800 500,801
------------ ------------
4,034,609 4,276,609
Less current maturities (720,603) (681,231)
------------ ------------
Long-term debt, less current maturities $ 3,314,006 $ 3,993,309
============ ============
</TABLE>
NOTE 5 - INCOME TAXES (BENEFIT)
The current tax benefit computed for the three and six month periods ended March
31, 1998 reflect the tax benefit associated with the amortization of
non-deductible goodwill during the same periods.
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 could
not be realized through future taxable income. The deferred tax benefit recorded
in the three months ended March 31, 1997 offsets the tax expense recognized in
the first fiscal quarter of fiscal 1997.
The Company has NOLs of approximately $11,570,000 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 6 - CLOSING OF EUROPEAN OFFICE
During the second quarter of fiscal 1997, the Company liquidated its
wholly-owned subsidiary, Nematron Europa, BV. In connection therewith, the
Company incurred a loss of approximately $150,000.
NOTE 7 - EARNINGS PER SHARE
Basic 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 the three
month and six month periods are as follows:
Three months Six months
March 31, 1998 5,342,842 5,339,196
March 31, 1997 4,607,802 4,586,941
Diluted earnings per share is not presented because the amounts are
anti-dilutive.
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NOTE 8 - ACQUISITIONS OF INTEC CONTROLS CORP. AND VIRTUAL-TIME SOFTWARE, INC.
Merger with Intec Controls Corp.
On March 31, 1997, the Company completed a merger of its wholly owned
subsidiary, NemaSoft, Inc., with Intec Controls Corp. ("Intec"), a Walpole,
Massachusetts-based developer of high-performance regulatory control software
solutions used primarily by process industries. The Company recorded this
transaction using the purchase method. The total purchase price was
approximately $3,735,000, including expenses of approximately $430,000. 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, which under applicable accounting
rules, is required to be expensed. Under terms of the merger agreement, the
Company issued 587,594 shares of its common stock to the former Intec
shareholders in exchange for 100% of the outstanding common stock of Intec. The
Intec stock was retired, and NemaSoft is the surviving entity.
In addition to the common stock issued, the Company issued warrants to the
former Intec shareholders to purchase an additional 124,998 shares of Company
common stock at $6.73 per share. The warrants expire February 20, 2000.
Merger with Virtual-Time Software, Inc.
On June 20, 1997, the Company completed a merger of its wholly owned subsidiary,
Imagination Systems, Inc., with Virtual-Time Software, Inc. ("VTS"), a Santa
Clara, California-based developer of real-time operating system products which
provide high-speed deterministic performance to MicroSoft's Windows (R)
operating systems. The Company recorded this transaction using the purchase
method. The total purchase price was approximately $694,000, including expenses
of approximately $190,000. Under terms of the merger agreement, the Company
issued 67,301 shares of its common stock and $100,000 to the former VTS
shareholders in exchange for 100% of the outstanding common stock of VTS. The
VTS stock was retired, and ISI is the surviving entity.
The following unaudited pro forma summary presents the consolidated results of
operations as if the acquisitions had occurred on October 1, 1996, the earliest
period presented herein, and does not purport to be indicative of what would
have occurred had the acquisitions of Intec and VTS actually been consummated at
that date or the Company's future results of operations:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
March 31, 1997 March 31, 1997
<S> <C> <C>
Revenues $ 5,953,000 $ 12,130,000
Net loss $ (1,709,000) $ (3,048,000)
Loss per share $ (0.33) $ (0.58)
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 COMPARED WITH
THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1997
Net revenues for the three and six month periods ended March 31, 1998 decreased
$134,000 (2.6%) and $891,000 (8.8%), respectively, compared to the same periods
last year. The decreases in net revenues in the three month and six months
periods are primarily attributable to a decrease in sales of Industrial
Workstations and Industrial Control Computers ("ICCs"), offset in part by an
increase in revenues from software and software services. Revenues from software
and software services totaled 24% of total revenues for the second quarter 1998
versus 15% for the second quarter of 1997, and totaled 22% of total revenues for
the first six months of 1998 versus 9% for the first six months of 1997.
Gross profit for the three month period ended March 31, 1998 increased $158,000
over the three month period ended March 31, 1997, but decreased $78,000 for the
six month period ended March 31, 1998 over the same period last year. Gross
profit as a percentage of revenues in the three and six month periods ended
March 31, 1998 was 44.5% and 44.6%, respectively, versus 40.2% and 41.5%,
respectively, in the same periods of fiscal 1997. The increase in margins is due
primarily to increased sales of software products, offset in part by pricing
pressures on hardware products.
Operating expenses for the three and six month periods ended March 31, 1997
included a total of $1,927,000 related to the write-off of in-process research
and development costs related to the acquisition of Intec Controls Corp.
("Intec"), a loss on the closing of the Company's Netherlands office, and a loss
on refinancing of debt. Total operating expenses for the three month period
ended March 31, 1998 decreased $1,286,000, including the amount attributable to
the non-recurring charges discussed above. Without these non-recurring charges,
operating expenses would have increased $641,000 for the three month period
ended March 31, 1998 compared to the year earlier period. The increase is due
primarily to the increased operating expenses associated with the former Intec
operations and costs incurred to position the Company for revenue increases in
the remainder of fiscal 1998. Total operating expenses for the six month period
ended March 31, 1998 decreased $252,000, including the amount attributable to
the non-recurring charges discussed above. Without these non-recurring charges,
operating expenses would have increased $1,675,000 for the six month period
ended March 31, 1998 compared to the year earlier period. The increase is due
primarily to the increased operating expenses associated with the former Intec
operations and costs incurred to position the Company for revenue increases in
the remainder of fiscal 1998. Additionally, sales and marketing expenses have
increased in both periods reflecting the costs involved with introductions of
new products and positioning such products in the marketplace. Operating
expenses are expected to remain constant for the remainder of fiscal 1998, as
decreases in staff levels will reduce operating costs but additional sales and
marketing efforts are expected to offset such personnel cost savings.
Interest expense for the three and six month periods ended March 31, 1998
increased $87,000 and $143,000, respectively, compared to the same periods last
year, as borrowing levels have increased during fiscal 1998.
Acquisition
Effective March 31, 1997, the Company completed its acquisition of Intec, a
Walpole, Massachusetts based 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 agreement, the Company issued 587,592
shares of Nematron common stock in exchange for 100% of the common stock of
Intec. The Intec stock was retired and Intec was merged into the Company's
NemaSoft, Inc. subsidiary, which is the surviving entity.
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,
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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.
LIQUIDITY AND CAPITAL RESOURCES
Nematron had working capital of approximately $1,700,000 at March 31, 1998.
Primary sources of near-term liquidity are cash from operations and the
Company's $6,000,000 bank line of credit. Approximately $4,100,000 is available
under the bank line of credit on the date of this report based upon the
borrowing formula specified in the underlying agreement. Amounts borrowed under
the credit facility are due on demand and bear interest at LIBOR plus 3.0%. The
credit facility expires by its terms May 31, 1998; the Company has been informed
by the bank that the facility will be renewed on a month-to-month basis as the
Company moves forward on its plan to raise capital and meets its operating plans
as presented to the bank. At that time, management intends to seek a longer term
line of credit arrangement with its existing lender. The Company has also
engaged an investment banking firm to assist it in raising additional capital,
which may be in the form of debt, convertible debt, or equity. This financing
effort is expected to be complete by the end of July 1998. The foregoing
statement is a "forward looking" statement within the meaning of the Securities
Exchange Act of 1934. The timing of the completion of the Company's financing
efforts is subject to a number of uncertainties including the time required by
the investment banking firm to locate potential investors and negotiate the
terms of an investment with them and other uncertainties described in
"Management's Discussion and Analysis of Results of Operations Uncertainties
Relating to Forward Looking Statements."
Management expects that current cash, cash generated from operations and cash
available under existing credit facilities will be sufficient to pay the
Company's costs and expenses as they become through the end of July 1998, the
time the Company's capital raising effort is expected to be complete.
Additionally, management expects that cash generated from sales in the fourth
quarter of fiscal 1998 and additional operating changes implemented in the
next six months will allow the Company to return to a cash neutral operation
by the end of the fiscal year. The foregoing statement is a "forward
looking" statement within the meaning of the Securities Exchange Act of 1934.
The extent to which such sources of liquidity will be sufficient to meet the
Company's anticipated cash requirements is subject to a number of uncertainties
including the ability of the Company's operations to generate sufficient cash to
support operations, the willingness of the Company's bank to renew the existing
credit facility and other uncertainties described in "Management's Discussion
and Analysis of Results of Operations - Uncertainties Relating to Forward
Looking Statements." The extent to which cash generated from sales in the fourth
quarter of fiscal 1998 will allow the Company to return to a cash positive
operation is subject to a number of uncertainties including general economic
conditions, demand for the Company's products and services, the introduction or
enhancement of competitive products and other uncertainties described in
"Management's Discussion and Analysis of Results of Operations - Uncertainties
Relating to Forward Looking Statements."
YEAR 2000 ISSUE
The Company has conducted a review of its internal computer systems and of
its software products offered for sale to its customers to identify systems
which could be affected by the Year 2000 issue. The Year 2000 issue is the
result of certain computer programs being written using two digits rather than
four digits to define the applicable year. The Company recently purchased and
installed a new enterprise-wide computer system which is Year 2000 compliant.
Additionally, management believes that its software products sold to third
parties do not pose operational problems for its customers. Accordingly, the
Company believes that the Year 2000 issue will not have a material effect on
its operations.
UNCERTAINTIES RELATING TO FORWARD LOOKING STATEMENTS
"Item 2. Management's Discussion and Analysis of 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, difficulties in raising capital, the willingness of the
Company's lenders to extend or renew existing credit facilities, 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Following the Company's announcement of potential material adjustments to its
financial statements for the years ended September 30, 1996 and 1997 relating to
the accounting treatment of one of the Company's contracts, a complaint
captioned Levine v. Nematron Corporation et.al., Case No. 98 CIV 3309, was filed
on or about May 8, 1998 in the District Court for the Southern District of New
York. This lawsuit names as defendants the Company, certain of its officers and
directors, its former independent auditor and the underwriter for the Company's
June 5, 1996 public offering of Common Stock. Plaintiff seeks to represent a
class of shareholders who purchased the Company's Common Stock from January 31,
1996 through April 28, 1998. The complaint claims violations of securities laws
and common law based on allegations that defendants made untrue statements of
material facts and that they omitted material facts necessary in order to make
the statements not misleading. The complaint seeks unspecified damages and
costs. The Company intends to vigorously defend this litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 13, 1998, the Company held its Annual Meeting of Shareholders. There
were two matters voted on, which were the election of directors and approval of
an amendment to the 1993 Directors Stock Option Plan to give the Board
discretionary authority to grant options to the Company's non-employee directors
from time to time upon such terms and conditions as determined by the Board. All
director nominees were elected and the amendment to the 1993 Directors Stock
Option Plan was approved. The following table sets forth the results of the
voting on the matters voted upon.
Election of Directors:
<TABLE>
<CAPTION>
Votes Votes Broker
Nominees For Against Abstained Non-Votes Total
--------- ----- ------- --------- --------- -----
<S> <C> <C> <C> <C> <C>
Garnel F. Graber 4,319,224 115,157 - - 4,434,381
Michael L. Hershey 4,291,877 142,504 - - 4,434,381
Approval of Amendment to the
1993 Directors Stock Option Plan:
3,768,047 633,670 32,664 - 4,434,381
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits included herewith are set forth on the Index to Exhibits.
(a) There were no Reports on Form 8-K filed during the quarter ended March 31,
1998
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, 1998 /s/ FRANK G. LOGAN, III
- ------------------------ -----------------------------------------
DATE FRANK G. LOGAN, III, CEO
(DULY AUTHORIZED OFFICER)
MAY 14, 1998 /s/ DAVID P. GIENAPP
- ------------------------ -----------------------------------------
DATE DAVID P. GIENAPP, CHIEF FINANCIAL OFFICER
(CHIEF ACCOUNTING OFFICER)
PAGE 11
<PAGE> 12
INDEX TO EXHIBITS
Exhibit Number Description of Exhibit
- -------------- ----------------------
10.01 Directors Stock Option Plan, as amended
10.02* Tier II Agreement, dated January 10, 1997,
by and between General Motors Powertrain
Group and the Company.
27 Financial Data Schedule
* Portions of this exhibit have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a request for confidential
treatment pursuant to Rule 24b-2.
PAGE 12
<PAGE> 1
EXHIBIT 10.01
NEMATRON CORPORATION
1993 DIRECTORS STOCK OPTION PLAN
(as amended and restated July 1997)
1. PURPOSE. The purpose of the Plan is to promote the best
interests of the Company and its shareholders by attracting and retaining the
best available personnel to serve as directors of the Company, to provide
additional incentive to non-employee directors and to encourage their continued
service on the Board of Directors.
2. ADMINISTRATION. The Board of Directors shall interpret
the Plan as it deems necessary or advisable for administration of the Plan. The
decision of the Board on any matter on which it may make a determination under
the immediately preceding sentence shall be final and binding upon all
Participants.
3. PARTICIPANTS. Participants in the Plan shall be
directors of the Company who are not Employees and who are members of the
Board of Directors on the date an option is granted under the Plan.
4. STOCK. The stock subject to options under the Plan
shall be the Common Stock. The total amount of Common Stock on which
options may be granted under the Plan shall not exceed 120,000 shares, subject
to adjustment in accordance with Section 9. Shares subject to any unexercised
portion of a terminated, canceled, forfeited or expired option granted under
the Plan may again be subjected to options under the Plan.
5. AWARD OF OPTIONS.
(a) Automatic Grants. (i) Current Directors. On the
date of the Company's 1997 annual meeting of shareholders, each Participant
serving on such date (the "Initial Participants") shall, automatically and
without discretion, be granted an option to purchase 4,664 shares of Common
Stock with an exercise price equal to 110% of the Fair Market Value per share on
the grant date. Subject to Section 12 hereof, on the date of the Company's 2000
annual meeting of shareholders, each of the Initial Participants who continue to
serve as a director of the Company following such meeting shall, automatically
and without discretion, be granted an option to purchase an additional 4,500
shares of Common Stock with an exercise price equal to 110% of the Fair Market
Value per share on the grant date.
(ii) Future Directors. Subject to Section 12
hereof, on the date any Participant becomes such, other than an Initial
Participant, such Participant shall, automatically and without discretion, be
granted an option to purchase 4,500 shares of Common Stock with an exercise
price equal to 110% of the Fair Market Value per share on the grant date.
Subject to Section 12 hereof, on the date of the Company's third succeeding
annual meeting of shareholders following the grant date described in the
preceding sentence and the sixth succeeding annual meeting of shareholders
following the grant date described in the preceding sentence, such Participant,
if he or she will continue to serve as a director of the Company following such
meeting, shall,
PAGE 13
<PAGE> 2
automatically and without discretion, be granted an option to purchase an
additional 4,500 shares of Common Stock with an exercise price equal to 110% of
the Fair Market Value per share on the grant date.
(iii) Terms. Each option granted hereunder
beginning in 1997 shall become exercisable in three equal installments on the
grant date, the first anniversary of the grant date and the second anniversary
of the grant date, shall expire at the close of business on the fifth
anniversary of the date the option is granted and shall be a Nonqualified Stock
Option. To the extent an option has become exercisable, a Participant may
exercise all or part of the exercisable portion of such option by delivering
written notice to the Company and tendering payment for the shares being
purchased. Each option shall be evidenced by a stock option agreement containing
such terms described above and incorporating the terms of the Plan. Any
Participant may hold more than one option under the Plan and any other stock
option plan of the Company.
(b) Discretionary Grants. Subject to the limitations
set forth in the Plan, the Board of Directors from time to time may grant
options to such Participants and for such number of shares of Common Stock and
upon such other terms (including, without limitation, the exercise price and the
times at which the option may be exercised) as it shall designate; provided that
all options granted under the Plan shall vest immediately upon a Change in
Control of the Company. The exercise price per share shall not be less than the
Fair Market Value per share of the Common Stock on the date of grant and the
expiration date shall be no later than the tenth anniversary of the date of
grant.
(c) General. Once an option becomes exercisable, a
Participant may exercise all or part of such option by delivering written notice
to the Company and tendering payment for the shares being purchased. Each option
shall be evidenced by a stock option agreement containing such terms described
above and incorporating the terms of the Plan. Any Participant may hold more
than one option under the Plan and any other stock option plan of the Company.
6. PAYMENT FOR SHARES. The purchase price for shares of
Common Stock to be acquired upon exercise of an option granted hereunder shall
be paid in full, at the time of exercise, in any of the following ways: (a) in
cash, (b) by certified check, bank draft or money order, (c) by tendering to the
Company shares of Common Stock then owned by the Participant, duly endorsed for
transfer or with duly executed stock power attached, which shares shall be
valued at their Fair Market Value as of the date of such exercise and payment.
7. WITHHOLDING TAXES. The Company shall have the right to
withhold from a Participant's compensation or require a Participant to remit
sufficient funds to satisfy applicable withholding tax obligations upon the
exercise of an option.
8. NON-ASSIGNABILITY. No option shall be transferable by a
Participant except by will or the laws of descent and distribution or pursuant
to a qualified domestic relations order as defined by the Code or Title I of the
Employee Retirement Income Security Act ("ERISA"), or the rules thereunder.
During the lifetime of a Participant, an option shall be exercised only by the
Participant. No transfer of an option shall be
PAGE 14
<PAGE> 3
effective to bind the Company unless the Company shall have been furnished
written notice thereof and such evidence as the Company may deem necessary to
establish the validity of the transfer and the acceptance by the transferee of
the terms and conditions of the option.
9. TERMINATION OF SERVICE. (a) If, prior to the date that
an option shall first become exercisable, the Participant shall cease to be a
director of the Company, with or without cause, or due to the act, death,
Disability, or retirement of the Participant, the Participant's right to
exercise the option shall terminate and all rights thereunder shall cease. (b)
If, on or after the date that an option shall first become exercisable, a
Participant shall cease to be a director of the Company for any reason, the
Participant, the executor or administrator of the estate of the Participant (as
the case may be) or the person or persons to whom the option shall have been
transferred by will or by the laws of descent and distribution shall have the
right, prior to the earlier of (i) the expiration of the option or (ii) the day
which is one year after the date on which the Participant ceased to be a
director of the Company, to exercise the option to the extent that it was
exercisable and is unexercised on the date the Participant ceased to be a
director of the Company, subject to any other limitation on the exercise of the
option in effect at the date of exercise.
10. ADJUSTMENTS. In the event that any dividend or other
distribution (whether in the form of cash, Common Stock, other securities, or
other property), recapitalization, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of Common Stock or other securities of the Company,
issuance of warrants or other rights to purchase Common Stock or other
securities of the Company, or other similar corporate transaction or event
affects the Common Stock such that an adjustment is determined by the Board of
Directors to be appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan,
then the Board of Directors shall, in such manner as it may deem equitable,
adjust any or all of (a) the number and type of shares of Common Stock or other
securities which thereafter may be made the subject of options, (b) the number
and type of shares of Common Stock or other securities subject to outstanding
options, and (c) the exercise price with respect to any option, or, if deemed
appropriate, make provision for a cash payment to the holder of an outstanding
option; provided, however, that the number of shares of Common Stock subject to
any option shall always be a whole number.
11. RIGHTS PRIOR TO ISSUANCE OF SHARES. No Participant
shall have any rights as a shareholder with respect to any shares covered by an
option until the issuance of a stock certificate to the Participant for such
shares. No adjustment shall be made for dividends or other rights with respect
to such shares for which the record date is prior to the date such certificate
is issued.
12. TERMINATION AND AMENDMENT. The Board of Directors may
terminate the Plan, or the granting of options under the Plan, at any time. No
Option shall be granted under the Plan after September 15, 2002. Termination of
the Plan shall not affect the rights of the holders of any options previously
granted.
The Board of Directors may amend or modify the Plan at any time
and from
PAGE 15
<PAGE> 4
time to time. No amendment, modification, or termination of the Plan
shall in any manner affect any option granted under the Plan without the consent
of the Participant holding the option.
13. APPROVAL OF PLAN. The Plan shall be subject to the
approval of the holders of at least a majority of the shares of Common Stock of
the Company present and entitled to vote at a meeting of shareholders of the
Company held within 12 months after adoption of the Plan by the Board (or acting
by consent in lieu of a meeting). The Plan shall be effective on the date the
Plan is so approved by shareholders. No option granted under the Plan may be
exercised in whole or in part until the Plan has been approved by the
shareholders as provided herein. If not approved by shareholders within such
12-month period, the Plan and any options granted hereunder shall become void
and of no effect.
14. CERTAIN DEFINITIONS.
The "Code" is the Internal Revenue Code of 1986, as amended.
The "Common Stock" is the common stock of the Company.
The "Company" is Nematron Corporation, a Michigan corporation.
"Employee" means an individual with an "employment relationship"
with the Company, or any Parent or Subsidiary, as defined in Regulation
1.421-7(h) promulgated under the Code, and shall include, without limitation,
employees who are directors of the Company, or any Parent or Subsidiary.
"Fair Market Value" shall mean the average of the high and low
sale prices per share of the Common Stock reported in the Wall Street Journal
(or if high and low sale prices are not reported, the last sale price per share
reported in the Wall Street Journal or, if the last sale prices is not reported,
the last bid price per share reported in the Wall Street Journal) for the last
preceding day on which the Common Stock was traded prior to the date with
respect to which the fair market value is to be determined, as determined by the
Board in its sole discretion.
A "Nonqualified Stock Option" is an option granted under the
Plan other than an option intended to meet the requirements of Section 422 of
the Code.
"Parent" means any "parent corporation" of the Company as
defined in Section 424(e) of the Code.
"Participant" is defined in Section 3.
The "Plan" is the 1993 Directors Stock Option Plan.
"Subsidiary" means any "subsidiary corporation" of the Company
as defined in Section 424(f) of the Code.
PAGE 16
<PAGE> 1
EXHIBIT 10.02
TIER II AGREEMENT
GENERAL MOTORS
POWERTRAIN GROUP
AND
NEMATRON CORPORATION
FOR THE
PV6 & L850 ENGINE PROGRAMS
JANUARY 10, 1997
<PAGE> 2
1. SCOPE AND CONTENT
1.1. GENERAL
The scope of this agreement is the GMPTG Premium V6 Engine
Program and the GMPTG L850 Program. This agreement may be
extended to other GMPTG programs if mutually agreeable between
GMPTG and Nematron Corporation.
1.2 HARDWARE
ICC-5000-xxx
Includes the following:
Nematron part *
* : *
* : *
* : *
* : *
* : *
* : *
* : *
*
*
* : *
* : *
* : *
* : *
* : *
Based on the hardware and software configuration specification
provided by GMPTG, Nematron agrees to assemble and test each
PC prior to shipment to any PV6 or L850 OEM. Nematron reserves
the right to substitute components of equal or greater
capability and quality as the component market dictates with
GM concurrence.
* Indicates that material has been omitted and confidential treatment has been
requested therefore. All such omitted material has been filed separately with
the SEC pursuant to Rule 24b-2.
1
<PAGE> 3
2. PV6 & L850 PROGRAMS
2.1 PRICING
The following pricing will be honored to the respective sites
for the duration of the GMPTG Premium V6 and L850 programs.
The price to GMPTG for the configuration described in section
1.2 above is * per unit.
Additional 3rd party hardware/software as needed to make up
plant specific configured units may be purchased from Nematron
at * All hardware/software will be installed, configured, and
tested by Nematron prior to shipment to GMPTG or OEM's at no
additional charge, except as specifically agreed upon between
Nematron & GMPTG.
2.2 *
*
2.3 WARRANTY
Nematron will honor a limited warranty for the PV6 & L850
programs for * from the start of regular production. All
Nematron components of the hardware selected for this project
are covered by this warranty. Nematron warrants that the
articles to be delivered under this agreement will be free
from defects in material and workmanship under normal use. All
warranties are contingent upon proper use in the application
for which the products are intended and do not cover products
which have been modified without Nematron's approval or which
have been subjected to operating and/or environmental
conditions in excess of the maximum values established
therefore in the applicable specifications, or testing,
repair, alteration, damage, assembly or processing that alters
physical or electrical properties.
Third Party Cards
Nematron will assist General Motors in selecting third party
vendors that will honor a * warranty. However, all warranties
for third party products are the responsibility of that
company. Should any of these companies offer extended
* Indicates that material has been omitted and confidential treatment has been
requested therefore. All such omitted material has been filed separately with
the SEC pursuant to Rule 24b-2.
2
<PAGE> 4
warranties at a cost, Nematron would be willing to purchase
and manage these extended warranties on behalf of General
Motors at fair market prices. Nematron will inform GMPTG on
any 3rd party products that are not covered under the Nematron
warranty.
Claims
All returns will be accompanied by an RMA number. Nematron
will work closely with GMPTG to analyze all failure data and
incorporate the findings into manufacturing processes as
determined. Nematron agrees to pick up and deliver all
Nematron provided equipment to all GMPTG plants * of Nematron
Corporation. Outside this area, GMPTG will pay freight to
Nematron and Nematron will pay return freight.
2.4 SPARE PARTS INVENTORY
Nematron will consign warranty inventory, at no charge to
GMPTG. The spare parts inventory shall consist of * quantity
of the total Nematron units purchased for each plant. These
quantities will be calculated and delivered to each plant
covered under this agreement and having a minimum of * PC's *
prior to SORP and shall be readjusted annually. After the
warranty period, these inventories shall be made available to
GMPTG at * . Nematron agrees to manage and update this
inventory with the current hardware technology that this being
used on the program during the warranty period. Nematron may
rotate warranty stock periodically at Nematron's discretion.
* Indicates that material has been omitted and confidential treatment has been
requested therefore. All such omitted material has been filed separately with
the SEC pursuant to Rule 24b-2.
3
<PAGE> 5
3. TECHNICAL SERVICE AND SUPPORT
3.1 PROGRAM MANAGEMENT
Nematron agrees to assign a program manager to handle the PV6
& L850 programs. This program manager will have the following
roles and responsibilities:
3.1.1. Work with GMPT to establish architecture, hardware
and software requirements. Develop Hardware and
Software specifications as applied to the PV6 and
L850 programs.
3.1.2. Work with Original Equipment Manufacturers during
simultaneous engineering phase to develop and
implement innovative ideas.
3.1.3. Create functional specification for Nematron product
design engineers of each project which includes;
hardware requirements, software requirements,
interfacing details, third party equipment
involvement, data flow and organization. Work with
design engineers to assess risk factors in the
specifications.
3.1.4. Provide technical data to customers to ensure proper
use of the product. Work throughout the project to
ensure product was applied correctly in accordance
with Nematron specifications. This involves the
review of technical drawings and visits to customer
sites to ensure proper practices were used.
3.1.5. Interact and assist in any technical issues that
arise both at the Original Equipment Manufacturer
site and the End User site.
3.1.6. Direct investigation of customer complaints regarding
Quality, Tolerances, Specifications and if warranted,
implement corrective action. Coordinate Nematron
product engineers to resolve problems.
3.1.7. Implement failure reporting, analysis and corrective
action program which includes describing the problem
in detail, implement and verify interim containment
actions, define and verify root cause, verify
effectiveness of permanent corrective action,
implement permanent corrective action, and prevent
recurrence on similar processes/product.
4
<PAGE> 6
3.1.8. Installation & Startup Plan. Visit Original Equipment
Manufacturers to review design prior to
implementation. Work with Original Equipment
Manufacturers during implementation to resolve any
technical issues.
3.1.9. Assist GMPT in the development of a training plan for
each project which includes; Identifying the skill
set of each customer working on an identified project
and determining the requirement for Hardware &
Software training at both the Original Equipment
Manufacturer and the End User.
3.1.10. Project timing and tracking. Identify all technical
tasks to complete project and highlight critical
tasks that affect timing. Implement method for
tracking and reporting technical issues.
3.1.11. Manage all of Nematron's resources with respect to
the PV6 & L850 project. This involves technical
people at both facilities as well as internal people
assigned to the success of these projects.
3.1.12. Provide tracking of OEM hardware orders and delivery
schedules.
3.2 HARDWARE TECHNICIAN
Nematron agrees to supply one on site hardware technician for
each GMPTG plant that is part of this agreement and having in
excess of * Nematron PC's. His/her time at the plant will
ramp up as the project progresses and machines begin to arrive
at the plant as determined by Nematron's program manager
together with GMPTG engineers. For any facility having less
than *, technical support will be covered by the same
individual within a * radius of the site he/she has been
assigned. i.e. Bay City will receive support from the
individual stationed at Livonia. The hardware technician is to
provide the following functions:
3.2.1. Track component revisions, upgrades, etc.
3.2.2. Track all warranty items
3.2.3. Provide hardware and software integration and problem
analysis.
3.2.4. Perform any system software or firmware upgrades.
* Indicates that material has been omitted and confidential treatment has been
requested therefore. All such omitted material has been filed separately with
the SEC pursuant to Rule 24b-2.
5
<PAGE> 7
4. TRAINING
4.1. COURSES
Nematron agrees to provide to GMPTG a training course that
will cover the use, installation, and maintenance of Nematron
PC's used on the program. Each site having in excess of *
Nematron PC's shall receive * free classes at their facility.
4.2. EQUIPMENT
Nematron agrees to provide * free ICC5000's (above and beyond
those covered by the * spares inventory) for every site having
in excess of * Nematron PC's, for GMPTG use on training GMPTG
personnel on their electrical controls architecture.
5. DOCUMENTATION
Nematron will provide * sets of manuals for each site and where
available, the manual will be provided in a Microsoft Word format so
that General Motors may print as many as required.
Nematron agrees to provide documentation which includes the following
topics: Product specifications & ratings, Dimensions, Serial port
definition & pinouts, Installation & set-up guides, BIOS, Memory
Expansion procedures, Installation of option cards, and Basic
Maintenance.
5.1 SOFTWARE
Nematron agrees to provide * set of master disks for each
operating system and * sets of manuals to each GMPTG site.
6. SINGLE SOURCE
As the single source supplier for industrial computers on both the PV6
&L850 global engine programs, Nematron shall be informed of any request
for deviation from the use of Nematron PC's. Nematron shall provide
input with respect to deviations and have first chance at solving these
issues.
6.1 All pre loaded software is subject to the license agreements
of the respective suppliers.
* Indicates that material has been omitted and confidential treatment has been
requested therefore. All such omitted material has been filed separately with
the SEC pursuant to Rule 24b-2.
6
<PAGE> 8
6.2 FloPro(R) and FloPro 32(R) software is provided to GMPTG
subject to the FloPro(R)/GMPT North American Site Licenses
#GMPT 96-10-01.
Bob McCurdy David W. Stanton
-------------------------- ----------------------------
Print Name Print Name
-------------------------- ----------------------------
General Motors Powertrain Nematron
-------------------------- ----------------------------
Date Date
7
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