<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 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)
<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)
(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: 5,353,816 SHARES AS OF AUGUST 11, 1998
Transitional Small Business Disclosure Format: [ ] YES [X] NO
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEMATRON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1998 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
(UNAUDITED) (AUDITED)
------------ -------------
(Note 1)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 743,203 $ 1,142,988
Accounts receivable, net of allowance for doubtful
accounts of $342,000 at June 30, 1998, and
$410,000 at September 30, 1997 3,299,507 4,205,196
Inventories (Note 2) 3,822,609 4,399,426
Prepaid expenses and other current assets 604,130 528,471
------------ -------------
Total Current Assets 8,469,449 10,276,081
Property and Equipment, net 3,759,949 4,264,301
Other Assets (Note 8):
Capitalized software, net of accumulated amortization
of $2,114,548 at June 30, 1998, and $1,619,919
at September 30, 1997 3,920,565 2,724,819
Other intangible assets, net of accumulated amortization
of $713,094 at June 30, 1998 and $580,954
at September 30, 1996 2,455,010 3,008,547
------------ -------------
Net Other Assets, net 6,375,575 5,733,366
------------ -------------
Total Assets $18,604,973 $20,273,748
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable to bank (Note 3) $ 3,514,000 $ 1,141,000
Accounts payable 3,062,950 1,711,936
Other accrued liabilities 1,693,786 1,818,138
Current maturities of long-term debt (Note 4) 718,296 681,231
------------ -------------
Total Current Liabilities 8,989,032 5,352,305
Long-Term Debt, less current maturities (Note 4) 3,135,112 3,595,378
Deferred Tax Liability 892,857 1,000,000
------------ -------------
Total Liabilities 13,017,001 9,947,683
Stockholders' Equity (Notes 7 and 8):
Common stock, no par value, 15,000,000 shares authorized;
5,353,816 shares issued and outstanding at June 30,
1998 and 5,329,938 shares issued and outstanding at
September 30, 1997 21,664,809 21,589,413
Foreign currency translation adjustment (8,249) (7,571)
Accumulated deficit (16,068,588) (11,255,777)
------------ -------------
Total Stockholders' Equity 5,587,972 10,326,065
------------ -------------
Total Liabilities and Stockholders' Equity $18,604,973 $20,273,748
============ =============
</TABLE>
See notes to consolidated condensed financial statements.
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
------------------------------- ----------------------------
1998 1997 1998 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
--------------- -------------- ------------- -------------
(Note 1) (Note 1)
<S> <C> <C> <C> <C>
Net Revenues $ 3,767,724 $ 5,981,613 $ 13,062,486 $ 16,167,741
Cost of Revenues 2,642,570 3,211,692 7,788,780 9,171,169
--------------- -------------- ------------- -------------
Gross Profit 1,125,154 2,769,921 5,273,706 6,996,572
Operating Expenses:
Product development costs 462,066 583,560 1,293,915 1,558,786
Selling, general and
administrative 2,883,543 2,685,084 8,452,918 6,436,038
Write off of in-process research
and development costs relating
to Intec acquisition (Note 8) -0- -0- -0- 1,655,000
Write off of in-process research
and development costs relating
to VTS acquisition (Note 8) -0- 400,000 -0- 400,000
Debt retirement -0- -0- -0- 122,340
Loss on closing of European
office (Note 6) -0- -0- -0- 149,814
--------------- -------------- ------------- -------------
Total Operating Expenses 3,345,609 3,668,644 9,746,833 10,321,978
--------------- -------------- ------------- -------------
Operating Loss (2,220,455) (898,723) (4,473,127) (3,325,406)
Other Income (Expense):
Interest expense (179,522) (110,846) (483,135) (271,249)
Interest and other income 20,829 43,205 36,307 109,585
Foreign currency loss -0- (11,084) -0- (136,503)
--------------- -------------- ------------- -------------
Total Other Income (Expense) (158,693) (78,725) (446,828) (298,167)
--------------- -------------- ------------- -------------
Loss Before Income Taxes (2,379,148) (977,448) (4,919,955) (3,623,573)
Income Tax Benefit (Note 5) 35,715 -0- 107,144 -0-
--------------- -------------- ------------- -------------
Net Loss $ (2,343,433) $ (977,448) $ (4,812,811) $ (3,623,573)
=============== ============== ============= =============
Basic Loss Per Share (Note 7) $ (0.44) $ (0.19) $ (0.90) $ (0.75)
=============== ============== ============= =============
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
----------------------------
1998 1997
(UNAUDITED) (UNAUDITED)
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss ($4,812,811) $(3,623,573)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities, net of acquisitions:
Depreciation and amortization 1,804,836 918,676
Write off of research and development costs (Note 8) 2,055,000
Deferred income taxes (Note 5) (107,143)
Debt retirement expense 122,340
Changes in assets and liabilities that provided (used) cash:
Accounts receivable 905,689 1,218,885
Inventories 576,817 (1,190,010)
Prepaid expenses and other current assets (75,659) 187,905
Accounts payable 1,351,014 508,080
Other accrued liabilities (124,352) (71,280)
----------- -----------
Net Cash Provided By (Used In) Operating Activities (481,610) 126,023
Cash Flows From Investing Activities:
Additions to capitalized software development costs (1,580,182) (1,491,927)
Additions to property and equipment (362,511) (1,071,193)
Additions to other intangible assets (114,154)
Acquisition of Intec (Note 8) 281,058
Acquisition of VTS, net of $17,766 cash acquired (Note 8) - (82,234)
----------- -----------
Net Cash Used In Investing Activities (1,942,692) (2,478,450)
Cash Flows From Financing Activities:
Increase in notes payable to bank 2,373,000 1,300,000
Proceeds from borrowings 109,613 2,337,272
Proceeds from exercise of common stock options and warrants 75,396 279,384
Repayments of long-term debt (532,814) (2,069,630)
----------- -----------
Net Cash Provided From Financing Activities 2,025,195 1,847,026
Foreign Currency Translation Effect on Cash (678) 82,065
----------- -----------
Net Decrease In Cash and Cash Equivalents (399,785) (423,336)
Cash and Cash Equivalents at Beginning of Period 1,142,988 3,942,963
----------- -----------
Cash and Cash Equivalents at End of Period $ 743,203 $ 3,519,627
=========== ===========
</TABLE>
Continues on next page
4
<PAGE> 5
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997 - CONTINUED
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
----------------------------------------------------
1998 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $489,699 $331,625
Cash paid for income taxes -0- -0-
FINANCING AND INVESTING ACTIVITIES REGARDING THE ACQUISITION OF INTEC CONTROLS CORP. (NOTE 8):
Cash acquired $281,058
Non-cash assets and liabilities acquired:
Current assets, other than cash 724,369
Property and equipment 305,309
Software development costs, including in-process R&D 2,003,092
Other intangible assets 1,407,000
Current liabilities (979,673)
Long term debt (5,950)
----------
Purchase price, including $430,000 of accrued costs $3,735,205
==========
FINANCING AND INVESTING ACTIVITIES REGARDING THE ACQUISITION OF VIRTUAL-TIME SOFTWARE, INC. (NOTE 8):
Cash acquired $17,766
Non-cash assets and liabilities acquired:
Property and equipment 15,746
Software development costs, including in-process R&D 475,000
Other intangible assets 197,562
Current liabilities (12,074)
----------
Purchase price, including $190,000 of accrued costs $ 694,000
==========
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE> 6
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 30, 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. (formerly Intec 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 and amendments thereto
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 nine-month periods ended June
30, 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 June 30, 1998 and September 30, 1997:
<TABLE>
<CAPTION>
CATEGORY JUNE 30, 1998 SEPT. 30, 1997
<S> <C> <C>
Purchased parts and accessories $2,192,264 $2,928,277
Finished goods and service stock 1,154,245 1,122,080
Work in process 476,100 349,069
------------- --------------
Total inventory $3,822,609 $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 $6,000,000. The amount available under this facility is limited
by a borrowing formula, that allows for advances up to a maximum of the sum of
a) 80% of eligible domestic and foreign accounts receivable and b) 35% of
eligible inventory. Based upon the borrowing formula, approximately $2,920,000
and $3,500,000 of the facility was eligible for advance at June 30, 1998 and
September 30, 1997, respectively. Borrowings under the line of credit were
$3,514,000 and $1,141,000 at June 30, 1998 and September 30, 1997,
respectively. The bank has acknowledged the line of credit overadvance
situation as of June 30, 1998, and, pursuant to the July 31, 1998 renewal of
the line of credit, the Company has agreed to eliminate the overadvance
position no later than August 31, 1998.
The line of credit is secured by substantially all assets of the Company and a
second mortgage on the Company's Ann Arbor facility. Advances on the line of
credit bear interest at prime plus one quarter of one percent.
6
<PAGE> 7
The credit facility had expired by its terms on May 31, 1998 and was renewed on
a month-to-month basis through July 30, 1998. On July 31, 1998, the bank
renewed the line of credit through January 15, 1999. The amount available
under the renewed facility is limited by a borrowing formula which allows for
advances up to a maximum of the sum of a) 80% of eligible domestic and foreign
accounts receivable and b) a percentage of eligible inventory, such percentage
being 35% through November 29, 1998, 34% from November 30, 1998 through
December 30, 1998, and 32% thereafter.
The Company is seeking to raise additional capital in order to pay down the
line of credit and eliminate the overadvance position by August 31, 1998, and
further, the Company plans to raise additional capital or obtain other sources
of credit in order to replace the current bank debt agreement which expires on
January 15, 1999.
NOTE 4 - LONG-TERM DEBT
Long-term debt includes the following debt instruments at June 30, 1998 and
September 30, 1997:
<TABLE>
<CAPTION>
CATEGORY JUNE 30, 1998 SEPT. 30, 1997
<S> <C> <C>
Mortgage loan payable to bank $2,039,037 $2,156,481
Term note 1,320,000 1,590,000
Equipment note 381,874 474,265
Capitalized lease obligations and other notes 112,497 55,863
----------- --------------
3,853,408 4,276,609
Less current maturities (718,296) (681,231)
----------- --------------
Long-term debt, less current maturities $3,135,112 $3,595,378
=========== ==============
</TABLE>
The term loan is governed by the same debt agreement as the line of credit
described in Note 3. The term loan is cross collateralized and cross defaulted
with the line of credit. Pursuant to the July 31, 1998 bank agreement, the
maturity of the term loan has been extended to January 15, 1999 with interest
on the principal amount at prime plus one half percent per annum. The Company
is seeking to raise additional capital or obtain other sources of credit in
order to replace the current bank debt agreement which expires on January 15,
1999.
NOTE 5 - INCOME TAXES (BENEFIT)
The current tax benefit computed for the three and nine month periods ended
June 30, 1998 reflect the tax benefit associated with the amortization of
non-deductible goodwill and other intangible assets during the same periods.
There was no current tax benefit computed for the nine month period ended June
30, 1997 because of the uncertainty that the associated deferred tax asset could
not be realized through future taxable income.
The Company has NOLs of approximately $13,700,000, which may be applied against
future taxable income. The NOLs expire beginning 2003 and run through 2013.
Utilization of these carryforwards is 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 ceased operations of
NEBV, its wholly owned Netherlands subsidiary. In connection therewith, the
Company incurred a loss of approximately $150,000.
7
<PAGE> 8
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 nine-month periods are as follows:
<TABLE>
<CAPTION>
Three months Nine months
<S> <C> <C>
June 30, 1998 5,353,267 5,343,886
June 30, 1997 5,234,779 4,802,887
</TABLE>
Diluted earnings per share is not presented because the amounts are
anti-dilutive.
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 Nine Months
Ended Ended
June 30, 1997 June 30, 1997
<S> <C> <C>
Revenues $ 5,993,000 $18,118,000
Net loss $ (722,000) $(3,734,000)
Loss per share $(0.14) $ (0.71)
</TABLE>
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED JUNE 30, 1998 COMPARED WITH
THREE AND NINE MONTH PERIODS ENDED JUNE 30, 1997
Net revenues for the three and nine-month periods ended June 30, 1998 decreased
$2,214,000 (37.0%) and $3,105,000 (19.2%), respectively, compared to the same
periods last year. The decreases in net revenues in the three month and
nine-months periods are primarily attributable to a decrease in sales of
Industrial Workstations and Industrial Control Computers ("ICCs") related to
one large contract, offset in part by an increase in revenues from software and
software services. Revenues from software and software services totaled 25% of
total revenues for the third quarter 1998 versus 24% for the third quarter of
1997, and totaled 25% of total revenues for the first nine months of 1998
versus 15% for the first nine months of 1997. In fiscal 1997, the Company
benefited from having a significant contract in place under which $1.5 million
and $3.5 million of revenues were generated in the three and nine-month periods
ended June 30, 1997, respectively. That contract was substantially completed
as of September 30, 1997. Additionally, a Nasdaq trading halt in late April
1998, resulted in a sales decline due to adverse market reaction to the
Company's situation. Management expects revenues to return to the levels
experienced in the second quarter of fiscal 1998 during the fourth quarter of
fiscal 1998, given that materials are received as needed and continued
financing is available.
Gross profit for the three and nine-month periods ended June 30, 1998 decreased
$1,645,000 and $1,723,000, respectively compared to the same period last year.
Gross profit as a percentage of revenues in the three and nine-month periods
ended June 30, 1998 was 29.9% and 40.4%, respectively, versus 46.3% and 43.3%,
respectively, in the same periods of fiscal 1997. The decreases in gross
profit margins is due primarily to provisions for obsolete materials necessary
during the third quarter ended June 30, 1998 and, to a lesser extent, to
pricing pressures during the current nine-month period.
Operating expenses for the three and nine-month period ended June 30, 1997
included a total of $400,000 and $2,327,000, respectively, related to the
write-off of in-process research and development costs related to the
acquisitions of Intec Controls Corp. ("Intec") and Virtual-Time Software, Inc.
(VTS"), 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 June 30, 1998 increased $77,000 excluding the amount attributable to the
non-recurring charges discussed above, and was due primarily to an increase in
professional fees during the three month period. Total operating expenses for
the nine-month period ended June 30, 1998 increased $1,752,000, excluding the
amount attributable to the non-recurring charges discussed above. The increase
in operating expenses for the nine-month period ended June 30, 1998 is due
primarily to the increased operating expenses associated with the former Intec
operations and increased professional fees. Management has reduced operating
expenses in the forth quarter of fiscal 1998 to better align costs with
decreased revenue levels, but professional fees are expected to offset some of
that reduction.
Interest expense for the three and nine-month periods ended June 30, 1998
increased $69,000 and $212,000, respectively, compared to the same periods last
year, as borrowing levels under the line of credit have increased during fiscal
1998.
Acquisitions
Intec Controls Corp.
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.
9
<PAGE> 10
The purchase price of the net assets of Intec, including expenses incurred in
connection with the acquisition, was approximately $3,735,000. The acquisition
of Intec has been accounted for as a purchase and approximately $3,410,000 of
intangible assets have been recorded. In connection with this acquisition, the
Company took, in the quarter ended March 31, 1997, a charge against earnings of
$1,655,000 relating to acquired in-process research and development costs.
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.
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 that
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 that 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 adverse
effect on its financial condition or results of operations. The Company does
not currently have complete information concerning the Year 2000 compliance of
its significant suppliers and customers. Accordingly, the Company can give no
assurance that the systems of other companies on which the Company's systems
rely will be converted on time, that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems would not have
a material adverse effect on the Company.
LIQUIDITY AND CAPITAL RESOURCES
Primary sources of near-term liquidity are cash from operations and the
Company's $6,000,000 bank line of credit. The Company's credit facility with
the bank provides 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% of eligible domestic and
foreign accounts receivable and 35% of eligible inventory. Based upon the
borrowing formula, approximately $2,920,000 of the facility was eligible for
advance at June 30, 1998. Borrowings under the line of credit were $3,514,000
and $1,141,000 at June 30, 1998 and 1997, respectively. The bank has
acknowledged the line of credit overadvance situation as of June 30, 1998, and
pursuant to the July 31, 1998 renewal of the line of credit, the Company has
agreed to eliminate the overadvance position no later than August 31, 1998.
Additionally, the term loan of $1,320,000 as of June 30, 1998 is governed by
the same debt agreement as the line of credit. The term loan is cross
collateralized and cross defaulted with the line of credit. Pursuant to the
July 31, 1998 bank agreement, the maturity of the term loan has been extended
to January 15, 1999 with interest on the principal amount at prime plus one
half percent per annum.
The Company is seeking to raise additional capital or obtain other sources of
credit in order to eliminate the overadvance position on the line of credit no
later than August 31, 1998, and to replace the term note which matures on
January 15, 1999. The Company has engaged an investment banking firm and a
financial consultant to assist it in raising additional capital, which may be
in the form of debt, convertible debt, or equity. This financing effort to
obtain funds to cure the overadvance position is expected to be complete by the
end of August 1998. In the event that such financing is not completed by that
date, the Company will seek further forbearance from the bank until such time
as the funds can be generated. Additionally, the Company expects to complete
the financing effort concerning the replacement of the term note by January 15,
1999. 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 and the financial
consultant 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."
10
<PAGE> 11
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 due through the end of August
1998, the time the Company's capital raising effort concerning the paydown of
the line of credit overadvance is expected to be complete. Additionally,
management expects that cash generated from sales in the fourth quarter of
fiscal 1998 and the first quarter of fiscal 1999 will allow the Company to
return to a cash positive operation by the first quarter of fiscal 1999. 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 current operations 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 and the
first quarter of fiscal 1999 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."
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 the Company's ability to generate sufficient cash, general economic
conditions and overall demand for factory automation equipment, particularly
related to automotive manufacturing, overall demand for the Company's products
and services, difficulties in raising capital, the willingness of the
Company's lenders to keep existing credit facilities in place, the ability to
secure additional capital, competitive factors (including the introduction or
enhancement of competitive products), pricing pressures, raw material price
increases, 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.
11
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 8, 1998, a complaint captioned Levine v. Nematron Corporation et. al.,
Case No. 98 CIV 3309, was filed 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 and believes that the complaint is without
merit.
ITEM 5. OTHER INFORMATION
The Nasdaq Stock Market, Inc. ("Nasdaq") suspended trading of the Company's
securities on April 28, 1998. Nasdaq subsequently held a hearing to determine
whether to de-list the Company's securities from listing on the Nasdaq National
Market System. On July 14, 1998, Nasdaq determined that the securities of the
Company would not be de-listed if a) the Company filed by July 31, 1998
amendments to its Forms 10-KSB for the years ended September 30, 1996 and 1997
and such reports included unqualified auditors' opinions, and b) the Company's
makes a public filing on or before August 31, 1998 evidencing a minimum of $7
million of tangible assets.
On July 31, 1998, the Company filed its amended Form 10-KSB/A-2 for the years
ended September 30, 1996 and 1997 and such reports included unqualified
auditors' opinions. Following the filings of the Forms 10-KSB/A-2, Nematron was
in compliance with Nasdaq regulations, and consequently, Nasdaq lifted the
trading halt. On August 3, 1998, the Company's securities resumed trading on
the National Market System. However, if the Company does not make a public
filing on or before August 31, 1998 evidencing a minimum of $7 million of
tangible assets, Nasdaq may suspend trading of the Company's securities and
de-list the Company's securities from the National Market System.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits included herewith are set forth on the Index to Exhibits.
(b) Reports on Form 8-K. The Company filed the following Current Reports on
Form 8-K:
April 28, 1998; the Company disclosed that it had issued a press release
on April 28, 1998 announcing that it had identified potential material
adjustments to the Company's financial statements for the years ended
September 30, 1996 and 1997 relating to one significant contract, and
that as a result of the potential adjustment, its independent auditors
had issued a letter notifying the Company that its auditors' reports on
the Company's financial statements as of September 30, 1996 and 1997 and
for each of the two years then ended, should no longer be relied upon.
May 4, 1998; the Company disclosed that on April 28, 1998 its auditors,
KPMG Peat Marwick LLP, informed the Audit Committee of the Company that
it had resigned as the Company's independent auditors. The Company also
disclosed that on April 28, 1998 KPMG Peat Marwick had withdrawn its
auditors report on the Company's financial statements for the years ended
September 30, 1996 and 1997.
May 21, 1998; the Company disclosed that on May 20, 1998 it had engaged
Grant Thornton LLP as its new independent auditors.
ALL OTHER ITEMS OMITTED ARE NOT APPLICABLE OR THE ANSWERS THERETO ARE NEGATIVE.
12
<PAGE> 13
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:
AUGUST 13, 1998 /S/ FRANK G. LOGAN, III
- ------------------------ -----------------------------------------------
DATE FRANK G. LOGAN, III, CEO
(DULY AUTHORIZED OFFICER)
AUGUST 13, 1998 /S/ DAVID P. GIENAPP
- ------------------------ -----------------------------------------------
DATE DAVID P. GIENAPP, EXECUTIVE VP-FINANCE
AND ADMINISTRATION (CHIEF ACCOUNTING OFFICER)
13
<PAGE> 14
INDEX TO EXHIBITS
Exhibit Number Description of Exhibit
- -------------- ----------------------
10.01 Agreement to Renew Line of Credit and Extend
Maturity of Term Loan, between KeyBank National
Association and Nematron Corporation, dated
July 31, 1998
11.00 Computation of Loss Per Share
27.00 Financial Data Schedule
14
<PAGE> 1
EXHIBIT 10.01
[KeyBank Letterhead]
July 31, 1998
Mr. David P. Gienapp
Executive Vice President-Finance and Administration
Nematron Corporation
5840 Interface Drive
Ann Arbor, MI 48103
Re: KeyBank National Association ("Bank") Commercial Loans and
Nematron Corporation ("Borrower")
Dear David:
This letter serves to formalize our agreement to renew Nematron's line of
credit, and extend the maturity of Nematron's term loan, both of which
facilities were renewed/granted in connection with a Loan Agreement between
Bank and Borrower dated September 30, 1996 (as amended from time to time, the
"Loan Agreement", and all documents executed in connection therewith being the
"Loan Documents"). As you are aware, the Notes evidencing the obligations of
Nematron under those facilities matured by their terms on May 29, 1998 and
remain unpaid.
In addition to the maturity of the Notes, Borrower has violated covenants
relating to its maintenance of a borrowing base formula, stated levels of
tangible net worth, a current ratio, debt service coverage ratio and a modified
debt to equity ratio, all as set forth in Section 1.1.3, 3.7.1, 3.7.2, 3.8, and
3.9 of the Loan Agreement. Each of these events is an Event of Default under
the Loan Agreement and certain other Loan Document.
The extension of the aforesaid credit facilities will be on the following terms
and conditions:
A. Line of Credit
i. Renewal and extension until January 15, 1999;
ii. Advances subject to strict compliance with borrowing formula,
plus overadvance through August 31, 1998;
iii. Borrowing formula limited to lesser of (a) $6,000,000 or (b)
80% of Eligible Domestic Accounts, plus 80% of Eligible
Foreign Accounts plus
<PAGE> 2
the following percentages during the following time periods, of the
aggregate sum not to exceed $2,500,000 of (x) Eligible Raw Inventory
(valued at the lower of Borrower's and NemaSoft's cost, or market) and
(y) Eligible Finished Inventory (valued at Borrower's and NemaSoft's
cost of production):
Percentage Time Period
35% Closing through November 29, 1998
34% November 30, 1998 through December 30, 1998
32% December 31, 1998 and thereafter
iv. Advances to bear interest at KeyBank Prime Rate plus one quarter
of one percent, payable monthly on the first day of each month.;
v. Overadvance on line of credit (approximately $595,000 as of June
30, 1998 to be eliminated by no later than August 31, 1998.
B. Term Loan
i) Maturity extended to January 15, 1999;
ii) Monthly payments of principal in the amount of $30,000, payable
on the first day of each month;
iii) Interest on the principal amount of the loan shall accrue at
KeyBank's Prime Rate plus one half of one percent.
C. Terms and Conditions Applicable to Both Line of Credit and Term
Loan
i) Facilities to be cross collateralized and cross defaulted;
ii) Accounts receivable to be directed to a lockbox and cash
collateral account, pursuant to terms of a Master Agreement
Cash Management Services;
iii) All patents and trademarks to be assigned for collateral
purposes to Bank, and documentation necessary or desirable to
file assignment with appropriate offices in Washington, D.C.
to be provided to Bank;
iv) All obligations of Borrower to Bank to be secured by Borrower's
real property, and appropriate mortgage amendment to be
executed to accomplish same;
v) Subordinated creditors to further subordinate their interests or
reaffirm subordinations, if so requested by Bank;
vi) Borrower to pay $30,000 extension fee at closing;
vii) Borrower to pay all out of pocket expenses, including legal
fees, incurred by Bank in connection with extending Borrower's
credit facilities, upon demand by Bank therefor;
viii) Borrower shall have obtained a loan, subordinated to Borrower's
obligations to Bank in form and substance satisfactory to Bank,
or an equity infusion, in an amount of not less than $2,000,000
by October 1, 1998;
ix) Terms and conditions stated herein shall be encompassed within a
Repayment Agreement and associated documents, as may be
requested by
2
<PAGE> 3
Bank and in form and substance acceptable to Bank (it being
understood all terms of such documents are not exhaustively
set forth herein);
x) There shall occur no further material adverse change in
Borrower's financial condition or prospects from that
heretofore disclosed in writing by Borrower to Bank between
the date hereof and the date of execution of the various
documents necessary to, or requested by Bank in connection
with, the renewal of the above-referenced credit facilities.
If the foregoing terms are acceptable, please indicate by obtaining all
signatures requested below, and returning a signed original to my attention by
no later than August 4, 1998. If the Bank has not received a fully-executed
original by that date, the offer to extend the credit facilities to Borrower
described herein will automatically terminate.
I look forward to hearing from you.
Sincerely,
/s/ Richard D. Rozenboom
Richard D. Rozenboom
Vice President
Agreed to and accepted:
Nematron Corporation
By: David P. Gienapp
------------------------------
Its: VP - Finance & Administration
-----------------------------
NemaSoft, Inc.
By: David P. Gienapp
------------------------------
Its: Secretary
-----------------------------
3
<PAGE> 1
EXHIBIT 11.00
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ --------------------------
1998 1997 1998 1997
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss $(2,343,433) $(977,448) $(4,812,811) $(3,623,573)
Weighted average shares outstanding 5,353,267 5,234,779 5,343,886 4,802,887
Basic loss per share $ (0.44) $(0.19) $(0.90) $(0.75)
</TABLE>
Diluted earnings per share are not shown because the results thereof are
anti-dilutive
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 743,203
<SECURITIES> 0
<RECEIVABLES> 3,299,507
<ALLOWANCES> (342,000)
<INVENTORY> 3,822,609
<CURRENT-ASSETS> 8,469,449
<PP&E> 3,759,949
<DEPRECIATION> (5,530,324)
<TOTAL-ASSETS> 18,604,973
<CURRENT-LIABILITIES> 8,989,032
<BONDS> 3,135,112
0
0
<COMMON> 21,664,809
<OTHER-SE> (8,249)
<TOTAL-LIABILITY-AND-EQUITY> 18,604,973
<SALES> 13,062,486
<TOTAL-REVENUES> 13,062,486
<CGS> 7,778,780
<TOTAL-COSTS> 9,746,833
<OTHER-EXPENSES> 36,307
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 483,135
<INCOME-PRETAX> (4,919,955)
<INCOME-TAX> (107,144)
<INCOME-CONTINUING> (4,812,811)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,812,811)
<EPS-PRIMARY> (0.90)
<EPS-DILUTED> (0.90)
</TABLE>
