<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A-2
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended SEPTEMBER 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission File Number: 0-21142
NEMATRON CORPORATION
(Name of small business issuer 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) 994-0501
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $20,923,613
The aggregate market value of the voting stock held by non-affiliates
as of December 20, 1996, computed by reference to the closing price of such
stock on such date as quoted on the Nasdaq Stock Market National Market, was
approximately $23,965,000.
The number of shares outstanding of the issuer's Common Stock on December 20,
1996 was 4,564,692
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT [ ] Yes [ X ] No
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<PAGE> 2
The Registrant hereby amends its Form 10-KSB for the fiscal year ended September
30, 1996 to change Item 7 as set forth below:
ITEM 7 FINANCIAL STATEMENTS.
NEMATRON CORPORATION AND SUBSIDIARIES
Table of Contents
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Independent Auditors' Report on the Consolidated Financial Statements as of and
for the year ended September 30, 1996 3
Independent Auditors' Report on the Consolidated Financial Statements as of and
for the year ended September 30, 1995 4
Consolidated Balance Sheet as of September 30, 1996 5
Consolidated Statements of Income for the years ended September 30,
1995 and 1996 6
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1995 and 1996 7
Consolidated Statements of Cash Flows for the years ended September 30,
1995 and 1996 8
Notes to Consolidated Financial Statements 9-25
</TABLE>
2
<PAGE> 3
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Nematron Corporation
We have audited the accompanying consolidated balance sheet of Nematron
Corporation and subsidiaries as of September 30, 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nematron Corporation
and subsidiaries as of September 30, 1996, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/s/ Grant Thornton LLP
July 13, 1998
(except for Note 13, as to
which the date is July 31, 1998)
Detroit, Michigan
3
<PAGE> 4
Independent Auditors' Report
The Board of Directors
Nematron Corporation:
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows of Nematron Corporation and subsidiaries
for the year ended September 30, 1995. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Nematron Corporation and subsidiaries for the year ended September 30, 1995 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Detroit, Michigan
December 15, 1995
<PAGE> 5
NEMATRON CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 1996
<TABLE>
<S> <C>
Assets (Notes 6 and 7)
Current assets:
Cash and cash equivalents $ 3,942,963
Accounts receivable, net of allowance for doubtful accounts of $115,000 5,989,708
Inventories (note 5) 4,520,937
Prepaid expenses and other current assets 750,995
-------------
Total current assets 15,204,603
Property and equipment:
Land 117,000
Building and improvements 2,264,906
Equipment 4,141,939
-------------
6,523,845
Less accumulated depreciation (3,139,560)
-------------
Net property and equipment 3,384,285
Other assets:
Software and related development costs, net of accumulated amortization of $611,022 4,426,257
Other intangible assets, net of accumulated amortization of $580,954 1,199,200
-------------
Net other assets 5,625,457
-------------
Total assets $ 24,214,345
=============
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt (note 7) $ 158,340
Accounts payable 1,661,120
Other accrued liabilities 671,678
-------------
Total current liabilities 2,491,138
Long-term debt, less current maturities (note 7) 3,993,309
-------------
Total liabilities 6,484,447
Stockholders' equity:
Common stock, no par value; 15,000,000 shares authorized, 4,558,248 shares issued
and outstanding (note 10) 17,572,814
Foreign currency translation adjustment (85,518)
Retained earnings 242,602
-------------
Total stockholders' equity 17,729,898
-------------
Commitments and contingencies (note 11)
Total liabilities and stockholders' equity $ 24,214,345
=============
</TABLE>
5
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NEMATRON CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the years ended September 30, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net revenues $ 17,576,305 $ 20,923,613
Cost of revenues 11,382,064 12,190,759
------------- -------------
Gross profit 6,194,241 8,732,854
Operating expenses:
Product development costs 893,926 1,448,540
Selling, general, and administrative expenses 4,692,918 6,379,718
------------- -------------
Total operating expenses 5,586,844 7,828,258
------------- -------------
Operating income 607,397 904,596
Other income (expense):
Interest and other income, net 2,704 70,189
Interest expense (380,738) (512,896)
Foreign currency gain (loss) 73,706 (10,199)
------------- -------------
Total other expense (304,328) (452,906)
------------- -------------
Income before taxes on income 303,069 451,690
Taxes on income (note 8) 0 0
------------- -------------
Net income $ 303,069 $ 451,690
============= =============
Earnings per share:
Primary $ 0.14 $ 0.13
====== ======
Fully Diluted $ 0.12
======
Weighted average shares outstanding - primary 2,179,939 3,580,057
========= =========
Weighted average shares outstanding - fully diluted 3,797,490
=========
</TABLE>
6
<PAGE> 7
NEMATRON CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the years ended September 30, 1995 and 1996
<TABLE>
<CAPTION>
Retained
Common Stock Foreign Earnings
------------------------- Currency (Accumulated
Shares Amount Translation Deficit) Total
------ ------ ----------- ------------- -----
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1994 1,612,773 $ 3,643,223 $ (33,022) $ (512,157) $ 3,098,044
Shares issued pursuant to merger with
Imagination Systems, Inc. (note 3) 970,526 1,699,078 1,699,078
Shares issued pursuant to merger with
Universal Automation, Inc. (note
3) 200,000 1,112,000 1,112,000
Grant of stock in connection with
separation agreement 9,000 16,313 16,313
Shares issued in connection with
conversion of convertible
subordinated note to common stock
(note 4) 102,564 200,000 200,000
Forfeiture of restricted stock upon
termination of employment (25,250) 0 0
Compensation related to Restricted
Stock Plan (note 9) 125,579 125,579
Net income for the year ended
September 30, 1995 303,069 303,069
Foreign currency translation (17,925) (17,925)
--------- ------------- ---------- ----------- --------------
Balance, September 30, 1995 2,869,613 6,796,193 (50,947) (209,088) 6,536,158
Net income for the year ended
September 30, 1996 451,690 451,690
Foreign currency translation effect (34,571) (34,571)
Shares issued pursuant to secondary
stock offering, net of expenses 1,200,000 9,551,604 9,551,604
Exercise of options 13,416 36,968 36,968
Exercise of warrants 475,219 1,188,049 1,188,049
--------- ------------- ---------- ----------- --------------
Balance, September 30, 1996 4,558,248 $ 17,572,814 $ (85,518) $ 242,602 $ 17,729,898
========= ============= ========== =========== ==============
</TABLE>
7
<PAGE> 8
NEMATRON CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended September 30, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 303,069 $ 451,690
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 730,717 837,666
Noncash compensation related to restricted stock 125,579 0
Changes in assets and liabilities that provided (used) cash:
Accounts receivable (676,457) (2,828,082)
Inventories (597,345) (397,915)
Prepaid expenses and other current assets (265,206) (481,638)
Accounts payable 592,625 (1,083,280)
Other accrued liabilities (487,363) (376,418)
-------------- -------------
Net cash used in operating activities (274,381) (3,877,977)
-------------- -------------
Cash flows from investing activities:
Additions to capitalized software development costs and other intangible assets (469,672) (1,171,827)
Additions to property and equipment (244,690) (929,730)
Acquisitions, net of cash acquired (104,709) 0
-------------- -------------
Net cash used in investing activities (819,071) (2,101,557)
-------------- -------------
Cash flows from financing activities:
Borrowings under long-term debt 2,100,000 2,266,081
Net proceeds (repayments) of notes payable to bank 730,000 (2,450,000)
Payments of long-term debt (1,695,953) (540,245)
Proceeds from sale of common stock 0 10,776,621
Additions to deferred financing fees (22,896) (173,647)
-------------- -------------
Net cash provided by financing activities 1,111,151 9,878,810
-------------- -------------
Foreign currency translation effect on cash (532) (34,571)
-------------- -------------
Net increase in cash and cash equivalents 17,167 3,864,705
Cash and cash equivalents at beginning of year 61,091 78,258
-------------- -------------
Cash and cash equivalents at end of year $ 78,258 $ 3,942,963
============== =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 456,984 $ 519,456
Cash paid for income taxes 0 0
Supplemental disclosures of noncash financing and investing activities:
Additions to various assets and liabilities in connection with the acquisition
of Imagination Systems, Inc., for common stock (note 3) 1,497,891
Additions to various assets and liabilities in connection with the acquisition
of Universal Automation, Inc., for common stock (note 3) 1,112,000
Issuance of common stock in exchange for noncompete agreement (note 3) 217,500
Issuance of common stock in connection with conversion of a subordinated note
(note 4) 200,000
Acquisition of equipment under capital lease obligations 78,579
</TABLE>
8
<PAGE> 9
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
(1) BUSINESS
--------
Nematron Corporation (the "Company") designs, manufactures, and markets
environmentally ruggedized computers and computer displays known as
industrial workstations, and designs, develops, and markets software for
worldwide use in factory automation and control and in test and
measurement environments.
(2) SUMMARY OF ACCOUNTING PRINCIPLES
--------------------------------
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries -- Nematron Europa BV
(NEBV), a Netherlands corporation formed in 1990, and NemaSoft, Inc.
(NemaSoft), and Imagination Systems, Inc., Michigan corporations formed
in 1995 and 1996, respectively. All significant intercompany transactions
and balances have been eliminated in consolidation.
During the fiscal year ended September 30, 1995, the Company acquired two
software design and manufacturing companies. Imagination Systems, Inc.
("ISI"), a Virginia corporation, was acquired on March 3, 1995, and
Universal Automation, Inc. ("UAI"), was acquired on September 20, 1995.
The consolidated operations of Nematron for 1995 include the results of
ISI and UAI since the dates of their respective acquisitions (see note
3).
Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less at the date of purchase to be cash
equivalents.
Inventories
Inventories are carried at the lower of cost or market. Cost is
determined by the first in, first out method. Provision is made to reduce
inventories to net realizable value for excess and/or obsolete
inventories based upon an item-by-item review of quantities on hand
compared to estimated usage for sales and service.
9
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NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
-------------------------------------------
Property and Equipment
Property and equipment are stated at cost. Capital leases are recorded at
the present value of future minimum lease payments and are amortized over
their primary term. Depreciation is provided over the estimated useful
lives of the assets, ranging from 3 years for certain factory and office
equipment to 33 years for the Company's manufacturing facility.
Depreciation is computed using the straight-line method for financial
reporting purposes and accelerated methods as promulgated by the IRS for
tax reporting purposes.
Software and Related Development Costs
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software To Be Sold, Leased or
Otherwise Marketed, certain computer software development costs and
purchased software technology have been capitalized. Capitalization of
computer software development costs begins upon establishment of
technological feasibility. The establishment of technological feasibility
and the ongoing assessment of recoverability of capitalized computer
software development costs requires considerable judgment by management
with respect to certain external factors, including, but not limited to,
anticipated future gross revenues, estimated economic life, and changes
in software and hardware technology.
During the year ended September 30, 1996, capitalized software and
related development costs, net of amortization, increased by
approximately $1,125,000, primarily relating to salaries and other costs
incurred during the year, offset by approximately $47,000 of amortization
of capital costs.
Amortization of capitalized computer software development costs is
provided on a product-by-product basis using the greater of the amount
computed using (a) the ratio that current gross revenues for each product
bear to the total of current and anticipated future gross revenues for
that product, or (b) the straight-line method over the remaining
estimated economic lives of the respective products, ranging from two to
five years. Amortization amounted to approximately $166,000 and $47,000
for the years ended September 30, 1995 and 1996, respectively, and is
included in cost of revenues in the accompanying consolidated statements
of operations.
10
<PAGE> 11
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
-------------------------------------------
Intangible Assets
Other intangible assets are carried at cost less accumulated
amortization, which is calculated on a straight-line basis over the
estimated useful lives of the assets, ranging from five to ten years.
Amortization was $100,500 for the year ended September 30, 1996.
Foreign Currency Translation
In accordance with Statement of Financial Accounting Standards No. 52,
Foreign Currency Translation, the assets and liabilities of the Company's
foreign subsidiary, Nematron Europa BV, denominated in foreign currency,
are translated at exchange rates in effect on the balance sheet date, and
revenue and expenses are translated using a weighted average exchange
rate during the year. Gains or losses resulting from translating foreign
currency financial statements are recorded in a separate component of
stockholders' equity. Gains or losses resulting from foreign currency
transactions are included in net income.
Revenue Recognition
Revenues from product sales are recognized upon shipment. Revenues from
service and repair of computers are recognized as the services are
performed. Revenues from software and engineering development are
recognized as the Company performs the services, in accordance with the
contract terms. Revenues from extended warranty agreements covering
software are recognized ratably over the terms of the agreement with the
customer. Revenues from license agreements are recognized upon delivery
of the software and performance of all obligations under the applicable
agreement. The Company has established programs which, under specified
terms and limited conditions, enable its distributors to return limited
amounts of product. The effect of these programs is estimated, and
current-period revenues and cost of revenues are reduced accordingly.
11
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NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
-------------------------------------------
Research and Development Costs
Research and development costs are expensed when incurred. These costs,
representing engineering salaries, fringe benefits, and a portion of the
Company's overhead, are included in the accompanying consolidated
statements of income as a component of product development costs.
Research and development costs expensed were approximately $705,000 and
$1,087,000 for the years ended September 30, 1995 and 1996, respectively.
Reserve for Self-Insurance
Through September 30, 1996, the Company had elected to retain a
significant portion of expected medical claims for Ann Arbor-based
personnel expenses through the use of deductibles which total $30,000 per
employee and $1,000,000 aggregate. Provisions for losses under the
employee medical benefit program are recorded based upon the Company's
estimates of claims incurred but not reported, as provided by its
third-party administrator. The total estimated liability for medical
claim expenses, both reported as well as for incurred but not reported,
at September 30, 1996, was approximately $26,000 and is included in other
accrued liabilities. Effective October 1, 1996, the Company has purchased
commercial medical insurance in order to provide this employee benefit.
Warranty Costs
The Company provides for estimated warranty costs as products are
shipped. Estimated warranty reserves are adjusted currently based upon
projected levels of warranty repairs and estimated costs of materials,
labor, and overhead costs to be incurred in meeting warranty obligations.
Income Taxes
Income taxes are accounted for under the asset-and-liability method.
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the
future. Such deferred income tax asset-and-liability computations are
based on enacted tax laws and rates. A valuation allowance is established
when necessary to reduce deferred income tax assets to the amount
expected to be realized.
12
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NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
-------------------------------------------
Earnings Per Share
Earnings per share are calculated using the weighted average number of
common shares outstanding during the year, adjusted for the assumed
conversion of dilutive stock options and warrants. In computing the per
share effect of assumed conversion, funds which would have been received
from the exercise of options and warrants are considered to have been
used to purchase common shares at an average market price for primary
earnings per share and at the year end market price for fully diluted
earnings per share. The resulting net additional common shares are
included in the calculation of average shares outstanding. During fiscal
year 1995 the average conversion price of options and warrants exceeded
the average market price and, therefore, the options and warrants are not
dilutive and are not reflected in the calculation of average shares
outstanding.
Fair Value
Financial instruments of the Company, consisting principally of cash,
accounts receivable, accounts payable, and debt, are recorded at
estimated fair value. The estimated fair value amounts have been
determined by the Company, using available market information and
available valuation methodologies.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. The
Company intends to adopt this standard during the first quarter of fiscal
1997. The adoption of this standard is not expected to have a material
effect on the Company's financial position or results of operations.
13
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NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
-------------------------------------------
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation. The Company intends to adopt this standard in
fiscal 1997 by making the required note disclosures only. Therefore, the
adoption of this standard is not expected to have an effect on the
Company's financial position or results of operations.
(3) ACQUISITIONS
------------
Merger with Imagination Systems, Inc.
On March 3, 1995, the Company purchased all of the outstanding shares of
Imagination Systems, Inc., a Virginia Beach, Virginia-based developer of
industrial data acquisition, networking, and other software, and recorded
this transaction using the purchase method. The total purchase price was
approximately $1,886,000, including expenses of approximately $300,000.
Under terms of the merger agreement, the Company issued 825,526 shares of
its common stock to the former ISI shareholders in exchange for
100 percent of the outstanding common stock of ISI. The ISI stock was
retired, and the Company is the surviving entity. In connection with the
merger, the Company also issued 120,000 shares of its common stock in
return for a noncompetition agreement with ISI's president, who became
the Company's president, and 25,000 shares of its common stock to certain
employees of ISI who became employees of the Company as a result of the
merger. A total of 970,526 shares of Company common stock were issued in
this transaction.
In addition to the common stock issued, the Company issued warrants to
purchase Company common stock at $2.50 per share for every two shares
issued in the merger. The warrants expire three years from the date of
the merger (see note 10).
Merger with Universal Automation, Inc.
On September 20, 1995, the Company completed its merger of its wholly
owned subsidiary, NemaSoft, with Universal Automation, Inc., a Hudson,
New Hampshire-based developer of industrial software for machine control
that executes on Intel-based personal computers, and recorded this
transaction using the purchase method. UAI is the holder of a patent for
a continuous flow chart, improved data format, and debugging system for
the programming and operation of machines. The total purchase price was
approximately $1,530,000, including expenses of approximately $400,000.
14
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NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) ACQUISITIONS, CONTINUED
-----------------------
Under terms of the merger agreement, the Company issued 200,000 shares of
its common stock and $100,000 to the former UAI shareholders in exchange
for 100 percent of the outstanding common stock of UAI. The UAI stock was
retired, and NemaSoft is the surviving entity. In connection with the
merger, NemaSoft also entered into two-year employment and noncompetition
agreements with UAI's president and vice president, who became employees
of NemaSoft as a result of the merger.
In addition to the common stock issued, the Company also issued 137,000
warrants to purchase Nematron common stock at $4.81 per share. The
warrants expire November 20, 1997 (see note 10).
Merger with Universal Automation, Inc.
The allocation of total purchase price to assets acquired and liabilities
assumed as of the respective purchase dates was as follows:
<TABLE>
<CAPTION>
ISI UAI
--- ---
<S> <C> <C>
Current assets $ 268,000 $ 0
Software and related development costs 2,196,000 617,000
Other intangible assets 218,000 1,005,000
Property and equipment 81,000 5,000
Liabilities (877,000) (97,000)
--------------- --------------
Total purchase price $ 1,886,000 $ 1,530,000
=============== ==============
</TABLE>
As of September 30, 1995, the total purchase price and the allocation
among the fair value of the acquired assets and liabilities was subject
to adjustment until estimates were finalized.
Finalization of such estimates resulted in an increase of approximately
$56,000 in the software and related development costs and the total
purchase price of ISI. Finalization of estimates related to the UAI
merger resulted in a re-allocation of approximately $1,005,000 from
software and related development costs to other intangible assets.
15
<PAGE> 16
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) ACQUISITIONS, CONTINUED
-----------------------
The following unaudited pro forma information presents a summary of
consolidated results of operations for fiscal 1995 of the Company, ISI,
and UAI as if the acquisitions had occurred as of the beginning of 1995,
with pro forma adjustments to give effect to amortization of software,
interest expense on additional borrowings, and certain other adjustments,
together with related income tax effects.
<TABLE>
<CAPTION>
Year Ended
September 30, 1995
(Unaudited)
--------------------
<S> <C>
Net revenues $18,578,000
Net income $37,000
Net earnings per share $0.01
</TABLE>
(4) RELATED PARTY TRANSACTIONS
--------------------------
The Company leases its Virginia Beach, Virginia, office building from a
partnership in which the president and CEO of the Company is a partner.
Total lease payments made for the lease period from March 3, 1995,
through September 30, 1995, and for the year ended September 30, 1996,
under the terms of the lease, which commenced on March 3, 1995, were
$45,262 and $77,592, respectively.
(5) INVENTORIES
-----------
Inventories are summarized as follows:
<TABLE>
<CAPTION>
September 30,
1996
-------------------
<S> <C>
Purchased parts and accessories $ 2,734,974
Finished goods 467,631
Work-in-process 349,189
Demo units 627,316
Service stock 341,827
---------------
Total inventories $ 4,520,937
===============
</TABLE>
16
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NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) NOTES PAYABLE TO BANK
---------------------
The Company has a credit facility with a bank with a maximum amount
available of $6,000,000. No amounts are outstanding on this facility at
September 30, 1996. 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 accounts receivable plus a maximum
of $1,000,000 of eligible foreign receivables, plus a maximum of
$1,000,000 against certain inventory categories. Based upon the borrowing
formula, the entire amount of the available line was eligible for
advance. 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 the bank's prime interest rate (8.25 percent at
September 30, 1996). The line of credit includes various affirmative and
negative covenants. The Company was in compliance with all covenants as
of September 30, 1996.
(7) LONG-TERM DEBT
--------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
1996
---------------
<S> <C>
Mortgage loan payable to a bank, 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 $ 2,300,000
Subordinated debt under a term loan and warrant purchase agreement (the "Subordinated
Note Agreement"), interest at 12% per annum. Interest-only payments are required
through September 1997. Beginning in October 1997, payable in monthly installments
of $50,000 plus interest. The notes are collateralized by substantially all
assets, other than real property, of the Company and a third mortgage on the
Company's land and building in Ann Arbor, Michigan 1,800,000
Capitalized lease obligations (note 11) 51,649
-----------
Total long-term debt 4,151,649
Less current maturities (158,340)
-----------
Total long-term debt, less current maturities $ 3,993,309
===========
</TABLE>
17
<PAGE> 18
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) LONG-TERM DEBT, CONTINUED
-------------------------
The mortgage loan payable to a bank contains a covenant that requires the
Company to maintain a minimum tangible net worth and a minimum
debt-to-equity ratio. 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 ratio of current assets to current liabilities, (b) a
specified ratio of cash flow, and (c) a specified level of tangible
worth. The Company was in compliance with these covenants at September
30, 1996. A total of 237,214 warrants were issued under the Subordinated
Note Agreement to purchase stock at $4 a share which expire October 31,
2002 (see note 10).
The aggregate amounts of long-term debt maturities at September 30, 1996,
are as follows:
<TABLE>
<CAPTION>
Year ended September 30:
<S> <C>
1997 $ 158,340
1998 772,195
1999 760,324
2000 775,971
2001 1,684,819
----------
Total long-term debt $4,151,649
==========
</TABLE>
(8) TAXES ON INCOME
---------------
The provisions for taxes on income in fiscal 1995 and 1996, including
both the current and deferred portions, are zero. The following
reconciles the statutory federal income tax rate to the Company's
effective tax rate:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------
1995 1996
---- ----
<S> <C> <C>
Income tax expense based on the federal statutory rate 34.0% 34.0%
Utilization of net operating loss carryforwards (34.0)% (34.0)%
---- ----
Effective tax rate 0.0% 0.0%
=== ===
</TABLE>
18
<PAGE> 19
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) TAXES ON INCOME, CONTINUED
--------------------------
The domestic and foreign components of income before taxes on income are
as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1995 1996
---- ----
<S> <C> <C>
Domestic $ 368,057 $ (9,100)
Foreign (64,988) 460,790
------------- ------------
Total income before taxes on income $ 303,069 $ 451,690
============= ============
</TABLE>
Deferred income taxes result from temporary differences in the
recognition of income and expenses for financial and income tax reporting
purposes. Deferred income taxes are primarily due to the use of
accelerated methods of depreciation for tax purposes versus principally
straight-line methods for financial reporting purposes, the
capitalization of software development costs for financial reporting
purposes versus the expensing of these items as incurred for tax
purposes, the required capitalization of certain inventory items for tax
purposes, inventory reserves deductible for tax purposes when disposed of
versus directly expensing them for financial reporting purposes, employee
benefit accruals deductible for tax purposes when paid, and net operating
loss carryforwards.
Temporary differences and carryforwards which give rise to the net
deferred tax position at September 30, 1996, are as follows:
<TABLE>
Deferred tax assets:
<S> <C>
Inventories $ 152,000
Property and equipment 90,000
Other 174,000
Net operating loss carryforwards 1,930,000
-------------
Total deferred tax assets 2,346,000
Less: Valuation allowance (386,000)
-------------
Net deferred tax assets 1,960,000
Deferred tax liability - capitalized software development costs and other intangible
assets (1,960,000)
-------------
Net deferred tax position $ 0
=============
</TABLE>
19
<PAGE> 20
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) TAXES ON INCOME, CONTINUED
--------------------------
During the year ended September 30, 1996, the valuation allowance
decreased by $18,000. At September 30, 1996, the Company has net
operating loss carryforwards of approximately $5,683,000, which expire at
various dates between 2003 and 2011. Utilization of these carryforwards
is subject to annual limitation under current IRS regulations. The
Company has established a valuation allowance for the estimated amount of
the total limitation on the utilization of the net operating loss
carryforwards. Realization of net deferred tax assets associated with the
net operating loss carryforwards is dependent upon generating sufficient
taxable income prior to their expiration. Although realization is not
assured for the deferred tax assets, management believes it is more
likely than not that they will be realized through future taxable
earnings or alternative tax strategies. However, the net deferred tax
assets could be reduced in the near term if management's estimates of
future taxable income are no longer viable.
(9) EMPLOYEE BENEFIT PLANS
----------------------
Restricted Stock Plan
The Company has a Restricted Stock Plan which provides for the granting
of up to 75,000 shares of the Company's common stock to key employees. In
July 1993, all 75,000 shares were granted by action of the Compensation
Committee of the Board of Directors, and no further grants will be made
under this plan. Under terms of the plan, upon change in control, all
shares subject to an award shall automatically vest. The merger of the
Company with ISI constituted a change in control. By action of the board
of directors, the restricted stock not previously vested as of August 16,
1995, was 100 percent vested as of that date.
During 1995, 42,750 shares of restricted stock became vested, and 25,250
shares were forfeited due to terminations. Compensation expense in 1995
related to the Restricted Stock Plan was $125,579.
1993 Stock Option Plan
The Company's 1993 Stock Option Plan (the "1993 Plan") provides for the
granting of options to purchase a total of 750,000 shares of common stock
to key employees. The exercise price for each option granted under the
1993 Plan cannot be less than the fair market value of the common stock
on the date of the grant.
20
<PAGE> 21
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) EMPLOYEE BENEFIT PLANS, CONTINUED
---------------------------------
The plan gives the Compensation Committee of the Board of Directors
latitude in deciding the vesting period. Options generally vest one third
immediately and one third on each successive anniversary date of the
award, or are exercisable at the rate of one third per year beginning on
the day after the first anniversary of the date of the award. Under
provisions of the 1993 Plan, shares subject to an option award will
become immediately exercisable upon a change in control of the Company. A
"change in control" has the same definition in the 1993 Stock Option Plan
as in the Restricted Stock Plan. Accordingly, 67,150 options became
immediately exercisable in 1995. Options remaining unexercised on the
tenth anniversary of the date of the grant will expire. No options may be
granted after February 26, 2003.
During fiscal 1995, the Company granted 239,250 options at exercise
prices of $2.50 to $3.87 per share, 73,400 options became exercisable,
and 32,850 options were forfeited. During fiscal 1996, 225,500 options
were granted at option prices of $4.50 to $9.00 per share, 151,448
options became exercisable, and 18,300 options were forfeited. As of
September 30, 1996, an additional 267,700 options may be issued under the
1993 Plan.
Directors Option Plan
The Company's 1993 Directors Stock Option Plan (the "Directors Option
Plan") provides for the granting of options to purchase a total of 20,000
shares of common stock. The exercise price for each option granted under
the Directors Option Plan is equal to the greater of the fair market
value or book value of the Company's common stock on the date of the
grant.
The Directors Option Plan provides that each qualified director will be
granted annually an option to purchase 1,000 shares of common stock.
Options will be exercisable at any time beginning six months after the
date of the grant; options expire five years from the date of the grant.
During fiscal 1995, the Company granted options to purchase 4,000 shares
of common stock at exercise prices of $1.87 to $2.12 per share, and in
fiscal 1996, the Company granted options to purchase 3,000 shares of
common stock at an exercise price of $8.75 per share and no options were
forfeited. As of September 30, 1996, an additional 8,000 options may be
issued under the Directors Option Plan.
21
<PAGE> 22
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) EMPLOYEE BENEFIT PLANS, CONTINUED
---------------------------------
Special Option Grants
The board of directors has awarded special option awards to its former
chairman. These awards total 30,000 options to purchase common stock at
$2.50 per share and $8.75 per share, and the awards were a grant made
separate from either of the two qualified plans specified above.
Information with respect to options under the 1993 Stock Option Plan, the
1993 Directors Stock Option Plan, and special option grants for the two
years ended September 30, 1996, is as follows:
<TABLE>
<CAPTION>
Option Price Available
Per Share Outstanding Exercisable for Grant
------------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
Balance, October 1, 1994 $2.50 - $4.89 84,700 22,900 40,300
Increase in authorized shares
under the 1993 Plan 350,000
Special option grant 10,000
Granted $1.87 - $3.87 243,250 (243,250)
Exercisable $1.87 - $2.50 74,400
Forfeited $2.50 (32,850) 32,850
---------- ---------- ----------
Balance, September 30, 1995 $1.87 - $4.89 305,100 97,300 179,900
Increase in authorized shares
under the 1993 Plan 295,000
Special option grant $8.75 20,000
Granted $4.50 - $9.00 225,500 (225,500)
Exercisable $2.50 - $8.75 187,448
Exercised $1.87 - $2.50 (13,416) (13,416)
Forfeited $2.50 (18,300) (18,300) 18,300
---------- ---------- ----------
Balance, September 30, 1996 $1.87 - $8.75 518,884 253,032 267,700
========== ========== ==========
</TABLE>
22
<PAGE> 23
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) EMPLOYEE BENEFIT PLANS, CONTINUED
---------------------------------
401(k) Plan and Trust
The Company has established a defined-contribution retirement plan for
all eligible employees. Participants may make basic contributions of up
to 15 percent of their compensation, pursuant to section 401(k) of the
Internal Revenue Code. Under terms of the 401(k) plan, the Company makes
a basic contribution of 50 percent of each employee's contribution up to
the first 4 percent contributed by the employee, and it may make
additional contributions as approved by the board of directors. A
participant becomes vested in the Company's contribution on his or her
behalf at a rate of 20 percent for each year of service after the
effective date of the 401(k) plan. Notwithstanding the foregoing, a
participating employee will be fully vested in the Company's
contributions to his or her account in the event of death, or in the
event of disability or normal retirement, as those terms will be defined
in the 401(k) plan.
The Company's contributions to the 401(k) plan were approximately $38,000
and $68,000 for the years ended September 30, 1995 and 1996,
respectively.
(10) WARRANTS
--------
The Company has outstanding warrants for the purchase of its common stock
as follows:
<TABLE>
<CAPTION>
ISI UAI Subordinated
Acquisition Acquisition Debt Total
----------- ----------- ------------ -----
<S> <C> <C> <C> <C>
Exercise price $2.50 $4.81 $4.00
Expiration date 3/03/98 11/20/97 10/31/02
Issued in connection with the ISI
acquisition 485,258 485,258
Issued in connection with the UAI
acquisition 137,000 137,000
---------- ---------- ---------- ----------
Balance, September 30, 1995 485,258 137,000 622,258
Issued in connection with
subordinated debt 237,214 237,214
Exercised (475,219) 0 0 (475,219)
---------- ---------- ---------- ----------
Balance, September 30, 1996 10,039 137,000 237,214 384,253
========== ========== ========== ==========
</TABLE>
23
<PAGE> 24
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) LEASE COMMITMENTS
-----------------
The Company leases its Virginia Beach office, its Netherlands facility,
other facilities, and certain vehicles and office equipment under
operating leases, and leases certain office and production equipment
under capital leases. Terms of the Virginia Beach office lease with a
partnership which includes the Company's president as a partner include
monthly rent of $6,466 for a 24-month period ending February 1997. The
lease for the Netherlands facility requires quarterly payments of
approximately $48,000; the other facilities' lease requires monthly
payments of $1,150 through March 1997; the vehicle leases collectively
require lease payments totaling approximately $2,000 through various
dates between April 1997 and March 1998; and the office equipment
operating lease requires monthly payments of $147 through April 1998.
The Company leases certain computer and test equipment under two capital
leases which had an initial term of three years and which collectively
require monthly payments, including interest, of $2,642 through August
1998. The net book value of equipment leased under the two capital leases
is approximately $52,000 at September 30, 1996.
A summary of commitments under noncancelable leases as of September 30,
1996, is as follows:
<TABLE>
<CAPTION>
Capital Leases Operating Leases Total
-------------- ---------------- -----
<S> <C> <C> <C>
1997 $ 31,700 $ 128,200 $ 159,900
1998 28,200 69,100 97,300
1999 0 58,700 58,700
2000 0 26,800 26,800
2001 0 5,400 5,400
----------- ------------- ------------
Total minimum obligation $ 59,900 $ 288,200 $ 348,100
============= ============
Less amounts representing interest (8,300)
-----------
Present value of minimum lease payments $ 51,600
===========
</TABLE>
Total rental expense in fiscal 1995 and 1996 was $161,300 and $172,500,
respectively.
24
<PAGE> 25
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) FOREIGN REVENUES AND MAJOR CUSTOMER
-----------------------------------
Net revenues include export sales to various countries. A summary of both
foreign and domestic revenues is as follows:
<TABLE>
<CAPTION>
Year Ended September 30
------------------------
1995 1996
---- ----
<S> <C> <C>
Foreign:
France $ 2,330,183 $ 2,019,177
Other Europe 2,399,158 1,307,856
Canada 837,543 670,832
South America 539,209 285,892
Asia and South Pacific 346,244 471,539
Africa 59,949 22,061
----------- -----------
Total foreign revenues 6,512,286 4,777,357
Domestic revenues 11,064,019 16,146,256
----------- -----------
Total $17,576,305 $20,923,613
=========== ===========
</TABLE>
During the years ended September 30, 1995 and 1996, revenues from one
unaffiliated customer totaled 15 percent and 10 percent of total
revenues, respectively. Revenues from a different unaffiliated customer
totaled 2 percent and 13 percent during the same respective periods.
25
<PAGE> 26
NOTE 13 - SUBSEQUENT EVENTS
CONTRACTS
During April and May 1998, management and representatives of one of its
significant customers finalized certain of the provisions of an existing supply
agreement under which the Company provided certain bundled hardware/software
products. The result of the finalization of the agreement did not have a
material impact on the estimates utilized by the Company in the preparation of
the accompanying consolidated financial statements.
LEGAL PROCEEDING
On May 8, 1998, the Company, certain of its officers and others were named as
defendants in a lawsuit filed by a shareholder in the United States District
Court for the Southern District of New York. The plaintiff seeks to represent
a class of shareholders, which purchased the Company's common stock in the open
market during the period from January 31, 1996 through April 28, 1998 and seeks
to recover unspecified damages purportedly caused by defendants' alleged
violations of federal securities laws and common law. The Company denies any
liability in this action and intends to vigorously defend this litigation.
LINE OF CREDIT AGREEMENT
The Company's line of credit facility with a bank, providing for a maximum
available line of credit of $6 million but limited by a borrowing formula,
expired on February 28, 1998. The facility was initially renewed through
May 29, 1998 and subsequently renewed through January 15, 1999. As of June 30,
1998, the Company was in an out-of-formula position under the borrowing
arrangement and expects to be in a similar position until August 31, 1998. The
bank has agreed not to require that the Company comply with limits set by the
borrowing formula until August 31, 1998. The bank has also adjusted the
borrowing formula for the period from November 30, 1998 to January 15, 1999.
Under the adjusted borrowing formula, the amount of credit available to the
Company is expected to be reduced by $40,000 on November 30, 1998 and by an
additional $80,000 on December 31, 1998.
SECURITIES TRADING HALT
Following the Company's announcement that its previous auditors resigned and
withdrew their opinions on the Company's 1996 and 1997 financial statements and
that it had discovered potential adjustments to such financial statements, The
Nasdaq Stock Market ("Nasdaq") halted trading of the Company's common stock on
the Nasdaq National Market System effective April 28, 1998. The trading has
been halted since that date pending Nasdaq's receipt and review of additional
information, including the issuance of audited statements for the fiscal years
ended September 30, 1996 and 1997. The Company is in the process of responding
to Nasdaq's informational requests.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
NEMATRON CORPORATION
By: /S/ DAVID P. GIENAPP Dated: JULY 31, 1998
------------------------------------------ -------------
David P. Gienapp,
Vice President - Finance and Administration
and Chief Financial Officer
27
