UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [Fee Required]
For the fiscal year ended August 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [No Fee Required]
For the transition period from __________________ to
_____________________.
COMMISSION FILE NO.: 0-27928
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NICOLLET PROCESS ENGINEERING, INC.
(Name of small business issuer in its charter)
MINNESOTA 41-1528120
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
420 North Fifth Street, Ford Centre, Suite 1040, 55401
Minneapolis, Minnesota (Zip Code)
(Address of principal executive offices)
Issuer's telephone number: (612) 339-7958
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
--------------------
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the 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.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B 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. [X]
State issuer's revenues for its most recent fiscal year. $2,117,000
As of November 5, 1996, 3,295,108 shares of Common Stock of the
Registrant were deemed outstanding, and the aggregate market value of the Common
Stock of the Registrant (based upon the average of the closing bid and asked
prices of the Common Stock at that date as reported by the Nasdaq SmallCap
Market), excluding outstanding shares beneficially owned by directors and
executive officers, was approximately $6,061,228.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-KSB incorporates by
reference information (to the extent specific sections are referred to herein)
from the Company's Proxy Statement for its Annual Meeting of Shareholders to be
held January 21, 1997 (the "1997 Proxy Statement").
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) BUSINESS DEVELOPMENT
Nicollet Process Engineering, Inc. ("NPE" or the "Company") designs,
manufactures, markets and supports process monitoring and control systems,
client/server software at the host level and machine diagnostic tools for the
die casting and plastic injection molding industries. The Company has developed
industry-specific, "turn-key" manufacturing information and process control
systems (the "NPE Monitoring and Control System") which, on a real-time basis,
monitor, collect and display machine performance data, monitor process
performance continuously against pre-set values, provide feedback to the
machine's controller to bring out-of-tolerance performance back into
conformance, and aggregate data for real-time presentation of process reports
for use by the machine operator. The Company has also developed client/server
software at the host level (the "NPE Host Level Software") which provides access
to factory floor data stored in file servers and distributes that data, on a
real-time basis, to all levels of an organization in either preprogrammed report
formats or on a user defined basis. These products (together the "NPE System")
allow manufacturers of discrete parts to (i) analyze and control their
production processes to ensure repeatable production of high quality parts; (ii)
reduce scrap and machine downtime; (iii) increase product quality; (iv) reduce
production costs; and (v) provide management on-line, real-time access to
production and process data for decision making. The Company's third product
line, the Machine Capability Analyzer (the "MCA"), is a portable,
troubleshooting instrument that tests the functioning of a manufacturing machine
for inconsistencies in operation.
Since inception, NPE's strategy has been to develop industry-specific
monitoring and control systems to better control the production process and to
provide information access to all levels of management throughout an enterprise.
In 1985, the Company began developing its first product, a process monitoring
and control system for the die casting industry, and ultimately generated its
first sale in 1987. In 1988, the Company introduced an early version of its
networking and host level software product. This product, made for the die
casting industry, connected various machines on the factory floor and provided
information from those machines to the host system. After introduction of the
Company's hardware and software products into the die casting industry, the
Company began exploring expansion into other industries and began development
work for products in the plastic injection molding industry. In 1994, the
Company introduced Windows(TM) based versions of its products for the plastic
injection molding industry. These products have both on-machine process and
control capabilities and plant-wide data acquisition and dissemination
capabilities. During 1995, the Company introduced Windows(TM) based versions of
its products into the die casting industry. In 1995, the Company also developed
its client/server software product for the plastic injection molding industry.
The first sale of the host-level product occurred in late 1995. The emphasis of
existing sales efforts of the Company's products are the Windows(TM) based
version, although the Company continues to offer DOS based applications.
The MCA was developed in 1994 with the assistance of Minnesota Mining
& Mfg. Co. ("3M") of Saint Paul, Minnesota. NPE developed the specifications of
the MCA and utilized 3M for refinement of the product. 3M also provided
laboratory and testing equipment for refinement and testing of the MCA. The
Company owns all of the rights to the MCA and is under no obligation to pay
royalties or other monies to 3M in connection with the development of the MCA.
Other than its relationship as a customer, 3M has no relationship with the
Company.
The Company was incorporated in Minnesota on February 22, 1985. The
Company's principal executive offices are located at 420 North Fifth Street,
Ford Centre, Suite 1040, Minneapolis, MN 55401, and its telephone number is
(612) 339-7958.
(b) BUSINESS OF ISSUER
PRODUCTS
The Company's technology is designed to improve discrete
manufacturing processes at the machine and plant floor level and to enhance
management decision making enterprise-wide with real-time manufacturing analysis
and reporting. The Company has three product lines: a machine-level monitoring
and control system, a client/server software product at the host level and a
portable, machine diagnostic instrument called the Machine Capability Analyzer.
THE NPE MONITORING AND CONTROL SYSTEM. The NPE Monitoring and Control
System is a Windows(TM) developed, PC based system consisting of standard
personal computer hardware, NPE's proprietary monitoring software (the "Process
Monitoring Software") and various sensors and programmable logic controller
("PLC") interface hardware for data acquisition connection to die casting or
plastic injection molding machines. The sensors measure critical elements of the
production process, E.G. temperature, various pressures and velocities. This
information, together with data provided by the PLC, is acquired by the system
during each cycle, through interface hardware, for data analysis, presentation
and alarming.
Using the data collected from the sensors and the PLC, the Process
Monitoring Software computes numerous industry-specific parameters that describe
and profile the performance of each manufacturing production cycle, or "shot",
and instantaneously detects structurally inferior parts. Upon detection of an
out-of-tolerance part, the Process Monitoring Software sets off alarms to inform
factory personnel of the out-of-tolerance event, directs the PLC to divert the
part as defective and provides information to the PLC for automatic adjustment
of the machine's performance. This PLC interface capability is designed to
integrate with and communicate to many different types of PLCs.
Information relating to each production cycle, or shot, is used for
real-time parameter calculations. Information is then displayed and run through
a technique called statistical process control ("SPC"). SPC is a commonly used
technique that identifies trends in a manufacturing process. These SPC results
are immediately charted and aggregated for real-time generation of data.
Competing products generally aggregate data for a period of time and perform SPC
only periodically. All information is stored at the machine level for
traceability and verification.
In addition to the NPE Monitoring and Control System's ability to
collect and analyze data and correct irregularities in the production process,
the Process Monitoring Software provides the following reports for use by
management and factory floor personnel:
* Production and process reports;
* SPC reports;
* Efficiency and productivity reports;
* Shift and run reports;
* Cycle time reports; Machine maintenance reports; and
* Downtime and scrap reports.
The NPE Monitoring and Control System is sold in various
configurations ranging from starter systems, which provide plant managers with
machine specific, real-time production information such as cycle counting, part
counts and productivity and efficiency reports (the "NPE Starter System") to
full process monitoring, focusing primarily on SPC quality control. The NPE
Monitoring and Control System, available under Windows `95 or NT, allows for
relatively easy migration from "starter" systems to full process monitoring
systems.
THE NPE HOST LEVEL SOFTWARE. In addition to the NPE Monitoring and
Control System, the Company has developed a host level, client/server software
product that is designed for use on various major hardware platforms and
operating systems and is compatible with many relational database management
systems ("RDBMS"), such as Sybase and Oracle. The NPE Host Level Software
receives data that has been collected at the machine level on the factory floor,
either through the NPE Monitoring and Control System or directly from the PLC.
That data, through a high speed network, is stored on the client/server and
updated on a real-time basis, providing information access to plant supervisors,
quality control and financial personnel, and other supervisory or management
personnel.
The process and production information is stored in a networked
database server allowing data to be accessed and queried by users. This
information can be accessed and arrayed by the user to create custom reports and
can even be exported to other software applications, such as Excel or Lotus. The
NPE Host Level Software also provides a set of standard, industry-specific
reports that support decision making used by manufacturers.
Specifically, the NPE Host Level Software provides the following reports:
* Real time finite machine, toll and material scheduling;
* Machine maintenance reports;
* Bar code data reports;
* Gauging statistical quality and process control ("SQC" and
"SPC") reports;
* Machine efficiency and productivity reports;
* Scrap and downtime reports;
* Material usage reports;
* Operator efficiency reports; and
* Machine, run and shift profit and loss reports.
THE MCA. The MCA is a portable, Windows(TM) based diagnostic
instrument that detects and displays machine inconsistencies and variances while
verifying machine performance. Unlike the NPE Monitoring and Control System, the
MCA does not monitor process parameters. The MCA incorporates the functions of
an oscilloscope, chart recorder, logic analyzer and voltmeter into one seamless,
easy to use instrument. It has 16 analog channels and 16 digital channels along
with a scan rate of up to 2,000 data samples per second permitting very precise,
high resolution presentation of a machine's performance characteristics.
Machine diagnostics have traditionally been performed using trial and
error techniques. When a machine malfunctions, an operator generally knows that
it has malfunctioned but often does not know the cause of the problem. An
operator begins a trial and error process to determine the cause of the
malfunction by utilizing separate instruments (such as an oscilloscope, chart
recorder, logic analyzer, and voltmeter) one at a time to determine the cause of
the malfunction. The MCA, in contrast, combines all of these functions into one
instrument thereby eliminating this trial and error methodology and decreasing
the time required to diagnose the problem.
The MCA provides precise visual presentation of the most minute
defects, pinpointing the precise corrective action necessary to bring the
machine into conformance with original specifications. The MCA contains certain
preprogrammed math functions and provides SPC capabilities that permit the MCA
to perform instantaneous calculations. The user can easily design and run
unlimited experiments and can configure, calibrate and set-up the analyzer for
analysis on a broad range of machines where data can be collected.
MARKETING STRATEGY
SALES CYCLE. The NPE Monitoring and Control System and the NPE Host
Level Software, because of the cost of the systems and their functions, have a
typical sales cycle of eight to twelve months. The customer's acquisition
decisions often occur at senior management levels in the information systems,
plant management and quality control areas. Since most customers purchase
process monitoring and control systems in several phases, such as first
purchasing the NPE Starter System and then, several months or years later,
purchasing the NPE Monitoring and Control System with the NPE Host Level
Software, a high level of customer support is critical to the successful
marketing and sales of the Company's products and to future revenue generation
for the Company.
The sales cycle for the MCA product can be as short as two weeks. The
MCA is a smaller capital expenditure for the Company's customers and, in
addition, does not control the manufacturing process.
Accordingly, decisions are typically made by lower level management.
SALES METHODOLOGY FOR THE NPE SYSTEM. The Company sells its NPE
System using a direct sales force and through a network of industry specific
manufacturers' representatives. For die casting sales, the Company has one
direct sales representative and two domestic manufacturing representatives. For
plastic injection molding sales, the Company has four direct sales
representative and nine domestic independent representative organizations. The
Company also has one distributor organization in the United Kingdom serving both
the die casting and plastics industries.
The Company has entered into sales agreements with all of its
domestic manufacturers' representatives for both die casting and plastic
injection molding sales. These agreements generally impose limited geographic
exclusivity and confidentiality restrictions. Each manufacturers' representative
is paid a commission based on the net selling price. These arrangements are
typically terminable at any time by either party, upon thirty days written
notice. The Company has entered into a distribution agreement with its
distributor organization in the United Kingdom. This agreement imposes no
minimum purchase obligations on the distributor organization and is terminable
by either party upon written notice at least 120 days prior to the agreement's
expiration date.
Since the NPE System is industry-specific, the Company believes it is
critical to have sales and marketing personnel with knowledge of the plastics
and die casting industries. All of the Company's current direct sales personnel
have technical engineering backgrounds. All of the Company's manufacturing
representatives have industry expertise in either the die casting or plastic
injection molding industries. The United Kingdom distributor organization has
personnel that have been trained by the Company to provide sales, service and
support functions for all of the Company's United Kingdom customers. Most of the
personnel employed by the United Kingdom distributor organization have
engineering backgrounds.
SALES METHODOLOGY FOR THE MCA. The Company currently sells its MCA
using its NPE System direct sales force and manufacturers representatives. Since
the MCA is a lower priced product and purchasing decisions are typically made at
lower management levels, the Company believes that achieving larger volume sales
will not require the same lengthy sales cycles as the NPE System. The Company
plans to utilize catalogs, direct mail and telephone solicitation as its primary
means for selling the MCA in the future. In addition, the Company intends to
introduce the MCA at various quality control trade shows. The Company also
intends to increase its consulting staff primarily to assist in diagnosing
machine performance problems and rendering solutions to the Company's customers,
either with the existing MCA or through the development of new products. To
implement this change in sales philosophy for the MCA, the Company has organized
a separate special product and services division focusing on MCA sales. This new
division may also include a fee based consulting service.
CUSTOMERS. The Company is not dependent on one or a few major
customers.
RESEARCH AND DEVELOPMENT
The Company's research and development staff is dedicated to the
research, design and development of the technology used in NPE's products. The
Company's principal research and development activities consist of design and
development of additional applications of its core technology, including
increasing the speed of data acquisition and the development of man/machine
interfaces for the factory floor. The Company currently is developing a new
version of its NPE Monitoring and Control System for the plastic industry that
incorporates new features and functionality that will, if successfully
developed, increase the volume of data processed and stored and provide more
user configurability and real-time reporting capabilities. The architecture of
the core data acquisition engine for this new version is being designed to be
"open," which should allow NPE, if successfully developed, to easily develop
applications for other industries.
The Company is also exploring entry into the blow molding and
extrusion segments of the plastics industry, the permanent mold and minicast
segments of the die casting industry and the metal stamping and plating and
foundry industries during the next year. Currently, the Company has sold two
MCAs to companies in the extrusion segment of the plastics industry and has
developed the specifications to build a product for data acquisition for the
minicast segment of the die casting industry. Other than the foregoing, the
Company has not yet formulated a detailed plan surrounding these expansion
efforts except to assign a team for those efforts in the minicast and foundry
segments of the metal industry. To enter these markets further, the Company will
need to modify its existing products to make the products' applications specific
to these industries.
The Company's research and development expenses for the fiscal years
ended August 31, 1995 and 1996 were approximately $571,000 and $541,000,
respectively. The Company anticipates that it will continue to spend funds on
research and development activities for the foreseeable future.
COMPETITION
THE NPE SYSTEM. The Company provides industry-specific
software/hardware "turn key" systems that compete directly with several
companies in the die casting and plastic injection molding industries that also
offer similar solutions. The Company knows of at least three other privately
held organizations providing process monitoring and control systems in the die
casting industry. The Company believes that these competitors do not offer an
open architecture product, but rather rely on proprietary software systems that
typically are not compatible with other software operating systems. The NPE
System utilizes open architecture software, which usually can be easily ported
to a wide variety of software systems and hardware platforms. The Company also
believes that its competitors do not offer a Windows(TM) based product, but
rather rely on DOS based systems.
The Company believes it has several direct competitors in the market
for plastic injection molding monitoring and process control. The Company
believes all of these competitors' products generally run on closed or
proprietary systems often requiring specific hardware and generally do not have
Windows(TM) capabilities. The Company knows of only one competitor with
Windows(TM) capabilities; however, to the Company's knowledge, its competitor's
product applies the Windows(TM) operating system only at the host level and not
at the machine level.
The Company also has several indirect competitors, including large
business software companies which offer lower cost, generic application
development tools, requiring additional software programming by the customer.
Unlike the NPE System, the Company believes these competing products are not
"turn key" and typically are not industry specific. These companies may sell
their programming software as an alternative to the Company's products into the
die casting and plastic injection molding industries.
Generally, the methods of competition in this industry include the
quality and level of technology of the product offered, the level of product
service and support, and price. The Company believes that its current and
planned levels of product support compare favorably with its competitors.
Although the price of the NPE System is generally higher than the price of
competitors' products, the Company is able to justify higher prices based on the
value provided to customers by the high level of technology offered by the NPE
System that may not be offered by competitors' products. Because of these
features, the Company does not believe that higher prices for its products will
have a negative impact on its results of operations and financial condition.
Some of the Company's competitors and potential competitors have
significantly greater financial, technical, research, marketing, sales,
distribution and other resources than the Company. There can be no assurance
that the Company's competitors will not succeed in developing or marketing
technologies and products that are more effective or less expensive than those
developed or marketed by the Company or that would render the Company's
technology and products obsolete or noncompetitive.
THE MCA. The MCA was developed specifically for the plastic injection
molding industry and competes with a wide variety of instruments from many
competitors. Competing companies offer products that perform separate diagnostic
functions such as an oscilloscope, a logic analyzer, chart recorder and
voltmeter. Management is not aware of any instrument, other than the MCA, which
combines all of these features in one instrument.
PATENTS AND PROPRIETARY RIGHTS/TRADE SECRETS
The Company relies primarily on trade secrets and other unpatented
proprietary technology. There can be no assurance that the Company can
meaningfully protect its rights in such unpatented proprietary technology or
that others will not independently develop substantially equivalent proprietary
products. Furthermore, there can be no assurance that third parties or
competitors would not otherwise gain access to the Company's proprietary
technology. The Company seeks to protect its trade secrets and proprietary
know-how, in part, with confidentiality agreements with employees and
consultants. There can be no assurance that the agreements will not be breached,
that the Company will have adequate remedies for any breach or that the
Company's trade secrets will not otherwise become known to or independently
developed by competitors.
The Company's success will also depend, in part, on its ability to
obtain patent protection for its products and to operate without infringing the
proprietary rights of third parties. While the Company filed one US patent
application covering its MCA product on May 30, 1995, which application is still
pending, and has acquired a license to two other patents, no assurances can be
given that the patent application filed will issue, that any additional patents
will be issued, that the scope of any patent protection will exclude competitors
or that any of the Company's rights under such patents will be held valid if
subsequently challenged. The validity and breadth of claims covered in software
technology involve complex legal and factual questions and therefore may be
highly uncertain. Whether or not the Company's patent application is granted,
others may receive patents which contain claims encompassing products, or
product functions, developed by the Company.
On August 24, 1994, John R. Mickowski filed suit against the Company
and one other non-related party in he United States District Court for the
Southern District of New York alleging, in relevant part, that certain of the
Company's products infringed two patents issued to Mr. Mickowski. On October 1,
1995, the Company entered into a Settlement Agreement with Mr. Mickowski (the
"Settlement Agreement"), relating to the Company's alleged infringement of the
two patents (the "Licensed Patents"). Pursuant to the Settlement Agreement, the
Company received a non-exclusive worldwide license to make, use and sell process
monitoring software covered by the Licensed Patents in exchange for a total lump
sum payment of $125,000, a grant of an option to purchase 60,000 shares of
Common Stock at an exercise price of $3.00, and royalty payments of $1,800 per
unit of process monitoring equipment sold by the Company to or on behalf of an
OEM. Sales to end users are royalty free. The royalties payable by the Company
are subject to an initial $50,000 credit. If the Licensed Patents are held
invalid in the future, no further royalties will be due after the date that the
judgment of invalidity becomes final and nonappealable. The license expires upon
expiration of both Licensed Patents, the years 2002 and 2009. The Company has
limited sublicensing rights under the Settlement Agreement. Although the Company
maintains that its activities were not infringing upon the Licensed Patents, the
Company believes that the Settlement Agreement and resulting license was an
efficient and cost-effective way of handling the litigation.
The Company acquired the core technology for its Windows(TM) based
software for the die casting related NPE System from a third party in August
1995. The total purchase price for the acquisition of this software was
$300,000, payable in varying monthly installments through May 1999. This
obligation is secured by the acquired software.
MANUFACTURING
NPE's operational strategy increasingly emphasizes outsourcing of
manufacturing to manage margins and to provide flexibility in meeting customer
schedules. NPE's manufacturing operations consist primarily of material
procurement, light assembly, systems integration and testing and quality
assurance. The Company purchases all of the hardware components and
subassemblies for its products. The Company purchases sensors, cables and other
peripheral equipment from third party suppliers. The Company contracts most
circuit board assembly to companies that specialize in those services. All
software and hardware is assembled and configured by the Company and is tested
by the Company's quality control team prior to installation at the customer's
site. All of the materials necessary for the assembly of its products are
available from multiple third party sources.
EMPLOYEES
The Company currently has 26 full-time employees, including 5 in
manufacturing, 6 in research and development, 6 in sales and marketing and 9 in
general administration and customer service. None of the Company's employees are
represented by a labor union, and the Company considers its employee relations
to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's facilities are located at 420 North Fifth Street, Ford
Centre, Suite 1040, Minneapolis, Minnesota, and consists of approximately 11,705
square feet, 10,505 square feet of manufacturing and administration space and
1,200 square feet of storage space. The Company leases these facilities pursuant
to a lease which expires on December 31, 1999. The Company has the option to
extend the term of the lease for an additional five-year term. Monthly rent is
currently approximately $9,200 plus the Company's pro rate share of operating
expenses and real estate taxes. These facilities are in satisfactory condition
and the Company expects that these facilities will be sufficient for its
operations through fiscal 1997. The Company believes that additional or
alternative space is readily available at acceptable rates.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal, governmental, administrative or
other proceedings to which the Company is a party or of which any of its
property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the
fourth quarter ending August 31, 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The executive officers of the Company, their ages and the offices held,
as of October 31, 1996, are as follows:
Name Age Position
- -------------------------- ------ ---------------------------------------
Robert A. Pitner 53 President and Chief Executive Officer
Lanny I. Kurysh 50 Chief Operating Officer and Chief
Financial Officer
Richard W. Koontz 47 Chief Technology Officer
ROBERT A. PITNER has served as President, Chief Executive Officer and
director of the Company since April 1991. From April 1991 to May 1995, Mr.
Pitner also served as the Company's Chief Financial Officer. From June 1989 to
April 1991, Mr. Pitner was a Vice President at Wiken Advertising and Promotion,
a consulting firm specializing in "high tech" industries. From 1988 to 1989, he
was President and Chief Operating Officer of Springboard Software, Inc., a
software company. Prior to 1988, Mr. Pitner spent twenty years in the banking
industry in various executive positions, most recently as a senior executive at
First Bank System.
LANNY I. KURYSH has served as the Company's Chief Operating Officer
and Chief Financial Officer since October 1995. From June 1991 through October
1995, Mr. Kurysh served as the President of Nystrom Incorporated, a manufacturer
of metal fabricated products for the commercial construction industry. From
August 1987 through November 1990, Mr. Kurysh served as Chief Operating Officer
for Durkee-Atwood Incorporated, a manufacturer of power transmission products.
In November 1990, Durkee-Atwood Incorporated was sold to Pirrelli Power
Transmission ("Pirrelli"). Mr. Kurysh continued at Pirrelli until June 1991.
Prior to his employment with Durkee-Atwood Incorporated, Mr. Kurysh served in
various capacities for Straus Mills, Incorporated, B.W. Harris Manufacturing
Company and Kurysh Manufacturing, Inc.
RICHARD W. KOONTZ has served as the Company's Chief Technology
Officer since August 31, 1996 and was a director of the Company from January
1996 through August 1996. Since May 1994, Mr. Koontz has also been the President
of Object Technologies Group, Inc., a software engineering services company.
From October 1993 through April 1994, he served as the General Manager of Poliac
Research Corporation. Mr. Koontz was also a real estate developer and investor
from 1989 through 1993. Prior to his employment with Poliac Research
Corporation, Mr. Koontz served as President of Reldom Nevada, Inc., a computer
software company of on-line casino management and player tracking systems and
President of W.R. Casey, Inc., a computer software company for the health
insurance industry. Mr. Koontz has also served as a Controller and Vice
President of Reldom Corporation, a light manufacturing company.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been traded on the National
Association of Securities Dealers Automated Quotation System ("Nasdaq") SmallCap
Market under the symbol "NPET" since March 19, 1996, the date of the Company's
initial public offering. Prior to March 19, 1996, the Company's Common Stock was
not publicly traded. The following table sets forth the quarterly high and low
closing sales prices for the Company's Common Stock for the periods represented.
These prices do not include adjustments for retail mark-ups, mark-downs or
commissions.
PERIOD HIGH LOW
1996
Third Quarter (March 19, 1996 through May 31, 1996)......... 5-1/4 4-1/2
Fourth Quarter (June 1, 1996 through August 31, 1996)....... 4-3/4 2-5/8
As of November 5, 1996, there were approximately 146 record holders
of the Company's Common Stock. No cash dividends were declared or paid by the
Company during the years ending August 31, 1995 or 1996.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
THIS FORM 10-KSB CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. FOR
THIS PURPOSE, ANY STATEMENTS CONTAINED IN THIS FORM 10-KSB THAT ARE NOT
STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS.
WITHOUT LIMITING THE FOREGOING, WORDS SUCH AS "MAY," "WILL," "EXPECT,"
"BELIEVE," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER
VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL
RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED UNDER THE CAPTION "IMPORTANT
FACTORS TO CONSIDER".
RESULTS OF OPERATIONS
NET SALES. Net sales decreased 23.5% to approximately $2.1 million in
the year ended August 31, 1996 compared to approximately $2.8 million in the
year ended August 31, 1995. Die casting sales decreased 49.0 % to approximately
$1.1 million for the year ended August 31, 1996 compared to approximately $2.1
million for the prior year period. Plastics sales increased 61.5% to
approximately $1.0 million for the year ended August 31, 1996 compared to
approximately $639,000 for the prior year period. The decrease in sales,
relating to the die cast product, is primarily the result of a technical delay
the Company experienced in releasing its Windows(TM) based die casting product.
The technical problems related to board development are resolved, and the
Company expects that the new product will be available first quarter 1997. The
increase in plastics sales for the year ending August 31, 1996 is due to the
final shipment and installation of several large orders occurring in late 1996.
GROSS MARGINS. The gross margin was 16.1% of revenues in the year
ending August 31, 1996 compared to approximately 30.0% of revenues for prior
year. Gross profit for year ending August 31, 1996 decreased 59.5% to
approximately $340,000 compared to approximately $841,000 for the prior year.
The decrease in gross margins, as percent of sales, and in absolute dollar
values, is largely due to decreased sales volume, partially offset by greater
than anticipated costs for plastic product installation, service and training.
SALES AND MARKETING EXPENSES. Sales and marketing expenses decreased
4.9% to approximately $792,000 for the year ending August 31, 1996 from
approximately $833,000 for the prior year. The decrease for the year ending
August 31, 1996 is the result of decreased commission expense related to the
lower sales volume partially offset by additions to the sales force and
increased expenses for advertising, trade shows and travel. The Company expects
that sales and marketing expenses will increase significantly over the next year
as it increases its selling efforts associated with its die casting and plastics
products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
for the year ending August 31, 1996 were approximately $541,000, or 25.6% of
revenues, compared to approximately $571,000, or 20.6% of revenues for the prior
year. This increase in research and development expenses as a percentage of
revenue is largely due to the decrease in revenues for the period. The absolute
dollar decrease in research and development expenses was primarily due to
capitalization of approximately $63,000 in costs involved in the final phases of
the Windows(TM) based die casting product.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 43.6% to approximately $900,000 in the year ending August 31,
1996 compared to approximately $627,000 for the prior period. The increase in
general and administrative expense is due to increased costs associated with
hiring personnel and increasing administrative support, costs associated with
the development of international markets and the related establishment of a
direct sales force in international markets.
INTEREST INCOME. Interest income increased to $64,000 in the year
ending August 31, 1996 compared to approximately $3,000 for the prior year. This
increase was due to short term investment of funds from the initial public
offering ("IPO") completed March 19, 1996.
INTEREST EXPENSE. Interest expense increased to approximately
$128,000 for the year ending August 31, 1996 compared to approximately $46,000
for the prior year period. This increase was due to increased financing
activities related to the line of credit with Republic Acceptance Corporation,
bridge financing associated with the IPO, and loans to related parties. All of
these loans were paid off by proceeds from the IPO.
NET LOSS. The net loss was approximately $2.0 million or $0.76 per
share for the year ending August 31, 1996 compared to a loss of approximately
$1.2 million and $0.66 per share for the prior year period. This increased loss
is primarily due to low sales volume as a result of the problems associated with
the Company's new Windows(TM) die casting product and increased selling and
general & administrative expenses associated with the Company's increased
selling activities.
LIQUIDITY AND CAPITAL RESOURCES
In March 1996, the Company completed an IPO of 1,000,000 shares of
common stock. In May 1996, the underwriter exercised its overallotment option to
purchase an additional 171,215 shares of common stock. The net proceeds to the
Company from the IPO was approximately $4.3 million. The Company's Common Stock
is quoted on the Nasdaq SmallCap Market under the symbol "NPET."
Net cash used in operating activities was approximately $2.3 million
and $831,000 for the years ending August 31, 1996 and 1995, respectively. The
cash was used primarily to reduce accounts payable by approximately $608,000 and
to fund the Company's operating losses. Net cash used in investing activities
was approximately $1.3 million and $182,000 for the years ending August 31, 1996
and 1995, respectively. Net cash provided by financing activities was
approximately $4.8 million and $823,000 for the years ending August 31, 1996 and
1995, respectively.
The Company anticipates capital expenditures of approximately $60,000
through fiscal 1997 related to additional space for research & development
facilities.
With the proceeds of the IPO, the Company believes that sufficient
liquidity is available to satisfy its working capital needs at least through
August 1997.
IMPORTANT FACTORS TO CONSIDER
The following factors are important and should be considered
carefully in connection with any evaluation of the Company's business, financial
condition, results of operations and prospects.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE RESULTS. To date, the
Company has incurred continuing operating losses. The Company is dependent on
increasing its revenue base to achieve profitability. Expenses will also
increase as the Company begins to increase its sales and marketing activities.
The Company's results of operations will depend upon numerous factors, including
market acceptance of the Company's products, the level of pricing and product
competition and the Company's ability to manufacture and market its products
efficiently and competitively.
DEPENDENCE UPON PLASTIC INJECTION MOLDING AND DIE CASTING INDUSTRIES.
Currently, the Company's products are designed only for the die casting and
plastic injection molding industries. Each of these industries is characterized
by fluctuations in manufacturing capacity and pricing and gross margin
pressures. Segments of these industries have from time to time experienced
significant economic downturns characterized by decreased product demand,
production over-capacity, price erosion, work slowdowns and layoffs.
Historically, the die casting industry has been deeply affected by economic
cycles and tends to be characterized by quick declines at the very beginning of
a downturn and gradual recoveries very late in the cycle. Accordingly, the
Company's sales efforts to the die casting market are also subject to downturns
in the economy. Unlike the die casting industry, the plastic injection molding
industry historically has grown steadily in recent years, even through downturns
in the economic cycle. Since 1994, however, when the Company entered the plastic
injection molding industry, there have been no economic downturns as reflected
by industry revenues which would enable the Company to gauge its impact on
sales. The Company's operations may in the future reflect substantial
fluctuations from period to period as a consequence of such industry patterns,
general economic conditions affecting the timing of orders from major customers,
and other factors affecting capital spending. There can be no assurance that
such factors will not have a material adverse effect upon the Company's
business, operating results and financial conditions.
TECHNOLOGICAL OBSOLESCENCE. The market for the Company's products is
characterized by rapid technological advances, evolving industry standards,
changes in end-user requirements and frequent new product introductions and
enhancements. The introduction of products embodying new technologies and the
emergence of new industry standards could render the Company's existing products
and products currently under development obsolete and unmarketable. The
Company's future success will depend upon its ability to enhance its current
products and to develop and introduce new products that keep pace with
technological developments, respond to evolving end-user requirements and
achieve market acceptance. Any failure by the Company to anticipate or respond
adequately to technological development or end-user requirements, or any
significant delays in product development or introduction, could result in a
loss of competitiveness or revenues. Furthermore, the Company may not have
sufficient financial resources to maintain research and development capabilities
and, consequently, to maintain its technology position. Even though NPE's
products have been designed to incorporate the latest technology, some of the
Company's competitors have greater financial resources and larger research and
development staffs than the Company and accordingly may have greater
capabilities to adapt their products to technological changes.
LIMITED MARKETING EXPERIENCE. A key element of the Company's business
strategy is to promote the sale of its products by significantly expanding its
sales and marketing efforts. To date, the Company has had limited resources for
sales and marketing activities and has primarily sold its products through its
independent representative organizations and a limited direct sales force. NPE
has not had sufficient resources to develop marketing materials and programs or
to adequately train its independent representative organizations, which
currently provide most of the Company's sales efforts in the plastic injection
molding industry. There can be no assurance that the Company will increase its
sales activity, or that the Company will be able to develop an effective sales
force.
LENGTHY SALES CYCLES. The Company's NPE System is subject to a long
sales cycle, lasting from approximately eight to twelve months or longer.
Accordingly, this cycle may result in delays in realizing increased revenues for
the sale of the NPE System.
GROWTH REQUIREMENTS. In addition to the Company's efforts to grow its
existing core business, future growth of the Company will also depend on, among
other things, the successful development of the NPE System's interface
capabilities with a customer's computer based information management systems,
the Company's ability to develop products for different industries and the
Company's ability to gain market acceptance for its products in new geographic
areas. In order to expand into additional industries, the Company must obtain
necessary industry-specific knowledge and successfully design new products
specific to the new industries. In order to enter new geographical markets, the
Company must successfully develop effective distribution channels, product
recognition and product and customer support capabilities. All of these
requirements present significant risks, and may require additional investment by
the Company. To date, the Company has not begun any expansion into industries
other than die casting and plastic injection molding. No assurance can be given
that the Company will be able to successfully manage or generate necessary
funding for these aspects of its business or adequately monitor and control the
additional costs and expenses associated with growth.
COMPETITION. The markets for the Company's products are highly
competitive. Several companies offer lower cost products that compete with the
Company's products. Many of the Company's competitors and potential competitors
include a number of established companies that have significantly greater
financial, technical and marketing resources than the Company. There can be no
assurance that such competitors will not develop products that are superior to
the Company's products or that achieve greater market acceptance. There is no
assurance that the Company will be able to compete successfully against current
and future sources of competition or that the competitive pressures faced by the
Company will not adversely affect its financial performance.
VARIABILITY OF QUARTERLY OPERATING RESULTS. The Company's operating
results can vary substantially from quarter to quarter due to various factors
including among others: the size and timing of customer orders; lengthy sales
cycles for its NPE System; the buying patterns of manufacturers in the Company's
target markets; delays in the introduction of products or product upgrades by
the Company or by other providers of hardware and software components; customer
order deferrals in anticipation of new products; market acceptance of new
products; reduction in demand for existing products; changes in operating
expenses; and general economic conditions. There can be no assurance that future
product upgrades and resulting customer order deferrals will not impact its
quarterly operating results.
ITEM 7. FINANCIAL STATEMENTS.
The following Financial Statements and Independent Auditors' Report
are included herein on the pages indicated:
PAGE
Report of Ernst & Young LLP....................................F-1
Balance Sheets as of August 31, 1996 and 1995..................F-2
Statements of Operations for the years ended
August 31, 1996 and 1995.................................F-4
Statements of Shareholders' Equity (Deficit) for the years
ended August 31, 1996 and 1995.........................F-5
Statements of Cash Flows for the years ended
August 31, 1996 and 1995................................F-6
Notes to Financial Statements..................................F-7
Report of Independent Auditors
Board of Directors and Stockholders
Nicollet Process Engineering, Inc.
We have audited the accompanying balance sheets of Nicollet Process Engineering,
Inc. as of August 31, 1996 and 1995, and the related statements of operations,
changes in stockholders' equity (deficit), and cash flows for each of the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nicollet Process Engineering,
Inc. at August 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
October 7, 1996
F-1
<TABLE>
<CAPTION>
Nicollet Process Engineering, Inc.
Balance Sheets
AUGUST 31
1996 1995
------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,198,399 $ 5,274
Short-term marketable securities 973,224 -
Accounts receivable (net of allowance for doubtful
accounts of 1996--$19,490; 1995--none) 284,197 453,224
Inventories 332,074 307,755
Prepaid expenses 23,655 28,513
------------------------------------
Total current assets 2,811,549 794,766
Property and equipment:
Computer equipment 412,274 345,228
Furnishings and equipment 121,752 104,112
Leasehold improvements 70,211 70,211
------------------------------------
604,237 519,551
Less accumulated depreciation (289,619) (221,059)
------------------------------------
314,618 298,492
Other assets:
License agreement (net of accumulated amortization
of 1996--$41,559; 1995--none) 94,453 -
Software development costs (net of accumulated amortization of
1996--$17,964; 1995--none) 305,384 259,968
Other assets 53,131 11,820
------------------------------------
452,968 271,788
------------------------------------
Total assets $3,579,135 $1,365,046
====================================
</TABLE>
F-2
<TABLE>
<CAPTION>
AUGUST 31
1996 1995
------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable--current portion $ 49,655 $ 321,187
Notes payable--related parties - 200,000
Accounts payable 268,332 854,382
Accounts payable--related parties - 21,755
Accrued payroll liabilities 29,292 57,817
Current portion of capitalized lease obligation 5,343 4,676
Other current liabilities 136,778 96,786
------------------------------------
Total current liabilities 489,400 1,556,603
Notes payable 73,056 125,427
Capitalized lease obligation 7,802 13,145
Deferred rent 12,793 19,190
Stockholders' equity (deficit):
Common stock, no par value:
Authorized shares--5,000,000
Issued and outstanding shares--
3,277,923 at August 31, 1996 and 1,796,830
at August 31, 1995 7,675,841 2,368,938
Accumulated deficit (4,675,257) (2,718,257)
------------------------------------
3,000,584 (349,319)
Less stock subscription receivable (4,500) -
------------------------------------
Total stockholders' equity (deficit) 2,996,084 (349,319)
------------------------------------
Total liabilities and stockholders' equity (deficit) $ 3,579,135 $ 1,365,046
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<TABLE>
<CAPTION>
Nicollet Process Engineering, Inc.
Statements of Operations
YEAR ENDED AUGUST 31
1996 1995
------------------------------------
<S> <C> <C>
Revenues $ 2,117,097 $ 2,766,139
Cost of revenues 1,776,898 1,925,236
------------------------------------
Gross profit 340,199 840,903
Operating expenses:
Selling 792,494 832,636
Research and development 540,874 571,232
General and administrative 900,004 626,857
------------------------------------
2,233,372 2,030,725
------------------------------------
Operating loss (1,893,173) (1,189,822)
Interest expense 128,201 46,334
Interest and other income 64,374 2,609
------------------------------------
Net loss $(1,957,000) $(1,233,547)
====================================
Net loss per share $ (.76) $ (.66)
====================================
Weighted average number of shares outstanding 2,586,104 1,877,800
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<TABLE>
<CAPTION>
Nicollet Process Engineering, Inc.
Statement of Changes in Stockholders' Equity (Deficit)
COMMON STOCK ISSUED
------------------------------------ ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at August 31, 1994 1,523,993 $1,604,721 $(1,484,710) $ 120,011
Issuance of warrants for services - 17,708 - 17,708
Exercise of common stock warrants 6,667 6,667 - 6,667
Exercise of common stock options 2,667 2,667 - 2,667
Sale of common stock, net of offering costs of
$79,331 263,503 711,175 - 711,175
Value of warrants granted to holders of notes
payable - 1,000 - 1,000
Value of common stock options granted - 25,000 - 25,000
Net loss - - (1,233,547) (1,233,547)
----------------------------------------------------------------------
Balance at August 31, 1995 1,796,830 2,368,938 (2,718,257) (349,319)
Exercise of common stock warrants 6,000 21,000 - 21,000
Exercise of common stock options 28,000 42,000 - 42,000
Sale of common stock, net of offering costs of
$10,000 212,500 691,238 - 691,238
Initial public offering of common stock,
net of expenses 1,171,215 4,321,787 - 4,321,787
Bridge financing conversion 58,780 211,608 - 211,608
Issuance of common stock for services 4,598 12,645 - 12,645
Value of warrants granted in connection
with bridge financing - 2,500 - 2,500
Value of warrants granted in consideration
for the guarantee of a loan agreement - 4,125 - 4,125
Net loss - - (1,957,000) (1,957,000)
----------------------------------------------------------------------
Balance at August 31, 1996 3,277,923 $7,675,841 $(4,675,257) $ 3,000,584
======================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<TABLE>
<CAPTION>
Nicollet Process Engineering, Inc.
Statements of Cash Flows
YEAR ENDED AUGUST 31
1996 1995
------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,957,000) $(1,233,547)
Adjustments to reconcile net loss to net cash flows from operating
activities:
Depreciation 68,560 48,712
Amortization 59,523 -
Warrants issued in connection with bridge financing 6,625 2,410
Common stock issued for services provided 12,645 25,000
Deferred rent (6,397) (6,397)
Changes in other operating assets and liabilities:
Accounts receivable 169,027 85,434
Inventories (24,319) (30,907)
Prepaid expenses 4,858 (22,651)
Accounts payable (607,805) 259,249
Other current liabilities 39,992 54,348
Accrued payroll liabilities (28,525) (12,420)
------------------------------------
Net cash used in operating activities (2,262,816) (830,769)
INVESTING ACTIVITIES
Capital expenditures (84,686) (155,412)
Software development costs (63,380) (70,075)
License agreements (136,012) -
Purchase of marketable securities (973,224) -
Other assets (41,311) 43,829
------------------------------------
Net cash used in investing activities (1,298,613) (181,658)
FINANCING ACTIVITIES
Net increase in short-term borrowings - 106,721
Initial public offering of common stock, net of expenses 4,321,787 -
Payments on notes payable (112,295) -
Payments on convertible notes - (200,000)
Proceeds from issuance of notes payable--related parties - 200,000
Payments on notes payable--related parties (200,000) -
Payments on capitalized lease obligation (4,676) (4,270)
Net proceeds from issuance of common stock 691,238 711,175
Proceeds from exercise of stock options and warrants 58,500 9,334
------------------------------------
Net cash provided by financing activities 4,754,554 822,960
------------------------------------
Net increase (decrease) in cash 1,193,125 (189,467)
Cash at beginning of year 5,274 194,741
====================================
Cash at end of year $1,198,399 $ 5,274
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
Nicollet Process Engineering, Inc.
Notes to Financial Statements
August 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Nicollet Process Engineering, Inc. was incorporated in 1985. The Company
designs, manufactures, markets and supports process monitoring and control
systems, host level client/server software, and machine diagnostic tools for the
die casting and plastic injection molding industries. The Company currently
sells its products principally in domestic markets using a direct sales force
and through a network of manufacturers' representatives. The Company also has a
distributor in the United Kingdom serving both the high pressure die casting and
plastics industries.
REVENUE RECOGNITION
Product revenues are generally recognized as products are shipped, but may be
recognized when installed or accepted, depending upon the particular product and
contract terms. Training and installation revenues are recognized as the
services are performed, generally within a few days of delivery. The Company
defers revenue related to any future obligations it could have under maintenance
or warranty agreements. The Company recognizes revenue related to these
agreements ratably over the life of the agreements or as the obligations are
fulfilled.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
MARKETABLE SECURITIES
At the time of purchase, management determines the appropriate classification of
marketable securities. Marketable securities, consisting of commercial paper,
are classified as available-for-sale. Marketable securities are stated at fair
value, which approximates cost. Interest on securities is included in interest
income.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided on a
straight-line basis over the estimated useful life of three to ten years.
Leasehold improvements are amortized using the straight-line method over the
shorter of their estimated useful lives or the underlying lease term, including
option periods.
LICENSE AGREEMENT
The Company amortizes license agreements over the shorter of the life of the
agreement or five years.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in compliance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed." Capitalization of computer
software development costs begins upon the establishment of technological
feasibility for the product.
Amortization of capitalized computer software development costs begins when the
products are available for general release to customers, and is computed as the
greater of the ratio of current revenues for a product to the total of current
and anticipated future revenues for the product or straight-line amortization
over a period of three years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares of
common stock outstanding during the periods presented. Pursuant to Securities
and Exchange Commission Staff Accounting Bulletin No. 83 ("SAB No. 83"), shares
of common stock issued by the Company at prices less than the initial offering
price during the twelve months immediately preceding the initial public
offering, plus stock options granted at an exercise price less than the initial
public offering price during the same period, have been included in the
determination of shares used in the calculation of net loss per share, using the
treasury method, as if they were outstanding for all periods presented.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between the financial
reporting and tax basis of assets and liabilities.
ACCOUNTING FOR STOCK OPTIONS
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," (APB 25) and related interpretations in accounting
for its employee stock options. Under APB 25, when the exercise price of
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company has not determined the impact of the new statement on
its financial statements.
2. INVENTORIES
Inventories consist of the following:
AUGUST 31
1996 1995
-----------------------------
Raw materials $115,550 $211,914
Work-in-process 86,824 31,609
Finished goods 129,700 64,232
-----------------------------
$332,074 $307,755
=============================
3. DEBT
NOTES PAYABLE
In November 1993, the Company entered into a $150,000 line of credit with a
bank. The line of credit was renewed in May 1994. Borrowings under the line of
credit bore interest at 2% above the bank's reference rate. The line of credit
expired in December 1994.
In July 1995, the Company entered into a $750,000 line of credit agreement with
a bank. All borrowings on the line of credit are due upon demand and bear
interest at 4% above the bank's reference rate. The line of credit is secured by
accounts receivable, inventory, equipment and general intangibles. The line of
credit expired in April 1996.
In August 1995, the Company acquired its existing Windows(TM) based die casting
software from a third party. The total purchase price for the software was
$300,000 payable in varying monthly installments through May 1999. Because the
agreement was non-interest bearing, the Company estimated a discount on the debt
of approximately $40,000, which is being amortized to interest expense ratably
over the period of the agreement. The obligation is secured by the die casting
software.
In December 1995, the Company entered into a loan agreement with a bank. The
$200,000 note bears interest at 2% above the prime rate. The note was personally
guaranteed by a member of the Company's board of directors. In consideration for
the guarantee, the board member was granted options to purchase 6,000 shares of
common stock at a price of $3.30 per share. The options vest ratably over the
initial six-month term of the loan, provided the loan is still outstanding. The
options remain outstanding until May 2000. The loan was repaid in March 1996.
The carrying amount of the Company's debt instruments in the balance sheet at
August 31, 1996 approximates fair value.
CONVERTIBLE NOTES PAYABLE
In August 1994, the Company issued notes payable in the amount of $200,000, due
90 days after issuance. The notes incurred interest at the rate of 11% per year.
The notes were convertible into common stock at $1.50 per share if not repaid
within 120 days. The notes were repaid in November 1994.
Warrants to purchase 20,000 shares of common stock were issued in consideration
of the notes. The warrants are exercisable at $2.50 per share and expire five
years after issuance.
NOTES PAYABLE--RELATED PARTIES
In March 1995, the Company borrowed $200,000 through bridge loan agreements with
two shareholders. The bridge loans bear interest at 12% per year. In connection
with the bridge loans, the Company issued warrants to purchase 2,000 shares of
common stock for each $10,000 of principal borrowed. The warrants are
exercisable at $3.00 per share and remain outstanding for three years after the
date the bridge loans are repaid. The bridge loans were repaid in November 1995.
In January 1996, the Company borrowed $550,000 through a bridge financing
agreement. The convertible promissory notes bear interest at 10% per annum and
are due at the earlier of six months from the issuance of the notes or
completion of an initial public offering by the Company. At any time prior to
the time the notes are due, a holder of a note may convert one-half of the
outstanding balance under the note into common stock of the Company at the
conversion ratio of one share of common stock for each $3.60 of principal
outstanding. In April 1996, the holders of the notes elected to convert $211,608
of the outstanding principal balances into 58,780 shares of the Company's common
stock. The remaining balance plus accrued interest was repaid by the Company
during 1996. In connection with the notes, the Company issued warrants to the
noteholders for the purchase of 110,000 shares of common stock. The warrants are
exercisable at $3.60 and remain outstanding for ten years after the date of
issuance.
4. CAPITALIZED LEASE OBLIGATION
During fiscal 1994, the Company entered into an agreement to lease phone
equipment over a 48-month period.
Future minimum lease payments required on the lease are as follows:
1997 $ 6,786
1998 8,481
---------------
Total minimum lease payments 15,267
Less amount representing interest 2,123
---------------
Present value of future minimum lease payments 13,144
Less current maturities 5,343
---------------
Long-term portion of capitalized lease obligation $ 7,801
===============
5. COMMITMENTS
LEASES
The Company has entered into various operating leases for office, lab and
storage facilities and for various equipment. Future lease payments for all
operating leases, excluding executory costs such as management and maintenance
fees, are as follows:
1997 $ 48,227
1998 49,433
1999 48,454
2000 16,446
-------------------
$ 162,560
===================
Rent expense was $91,133 and $72,064 for the years ended August 31, 1996 and
1995, respectively.
LICENSE AGREEMENT
In October 1995, the Company obtained a non-exclusive worldwide license
agreement to utilize certain process monitoring equipment. The Company is
required to make certain lump sum payments and royalty payments under this
arrangement.
In October 1995, the Company paid $125,000 to obtain a non-exclusive worldwide
license to utilize certain process monitoring software. Additionally, the
Company issued the licensor an option to purchase 60,000 shares of common stock
at an exercise price of $3.00 per share. The license runs for the length of the
two underlying patents, which expire in 2002 and 2009. The Company has
continuing royalty obligations of $1,800 per unit of process monitoring
equipment sold by the Company to or on behalf of an OEM, subject to an initial
$50,000 credit.
6. COMMON STOCK
From January 1995 to March 1995, the Company sold 263,503 shares of common
stock, which resulted in net proceeds to the Company of $711,175. In connection
with the sale of the common stock, the Company issued warrants for the purchase
of 263,503 shares of common stock at an exercise price of $3.50. The warrants
expire between February 1998 and January 2000.
In November 1995, the Company sold 203,500 shares of common stock, which
resulted in net proceeds to the Company of $661,550. $141,900 of the net
proceeds were received in December 1995.
7. INITIAL PUBLIC OFFERING
In March 1996, the Company sold 1,171,215 shares of Common Stock in an initial
public offering from which the Company received net proceeds of $4,321,787.
8. STOCK OPTIONS AND WARRANTS
The Board of Directors approved the Nicollet Process Engineering 1990 Stock
Option Plan (the "1990 Plan"). Under the 1990 Plan, the Company reserved 600,000
shares for issuance to employees and directors as either incentive stock
options, non-qualified options or stock appreciation rights. Under the 1990
Plan, incentive stock options may be granted at prices not less than the fair
market value of the Company's common stock at the grant date. The grant price of
non-qualified options is determined by the Compensation Committee, but the
exercise price must be at least 85% of the fair market value of the common stock
as of the grant date. Options are exercisable based on terms set by the
Compensation Committee, but the option term may not exceed ten years from the
date of grant.
On December 20, 1995, the Board of Directors adopted the 1995 Amended and
Restated Stock Incentive Plan (the "1995 Plan") which was approved by the
Company's shareholders on January 16, 1996. The 1995 Plan reserved an additional
400,000 shares of common stock. The 1995 Plan has provisions similar to the 1990
Plan regarding incentive stock options, non-qualified options and stock
appreciation rights and also provides for the granting of performance units,
stock bonuses, and restricted stock awards.
<TABLE>
<CAPTION>
A summary of changes in outstanding options and shares available for grant under
the Company's stock option plans is as follows:
SHARES
SHARES OUTSTANDING
AVAILABLE UNDER THE PRICE
FOR GRANT PLAN PER SHARE
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at August 31, 1994 (44,417) 544,417 $1.00 - $2.50
Additional shares authorized 100,000 - -
Granted (58,750) 58,750 1.50 - 3.00
Exercised - (2,667) 1.00
Canceled 11,250 (11,250) 1.00 - 3.00
-------------------------------------
Balance at August 31, 1995 8,083 589,250 1.00 - 3.00
Additional shares authorized 400,000 - -
Granted (260,000) 260,000 2.75 - 4.50
Exercised - (18,000) 1.50
Canceled 132,250 (132,250) 1.00 - 3.00
-------------------------------------
Balance at August 31, 1996 280,333 699,000 $1.00 - $4.50
=====================================
</TABLE>
Options to purchase 600,500 and 558,250 shares were exercisable at August 31,
1996 and 1995, respectively.
At August 31, 1996, the Company has 563,542 shares of common stock reserved for
the exercise of warrants that have been granted in connection with debt and
equity offerings and in lieu of cash payment for services provided. The warrants
are exercisable at prices ranging from $1.00 to $3.60. The warrants expire at
various times between July 1997 and January 2001.
9. INCOME TAXES
The tax effects of significant components of the Company's deferred tax assets
and liabilities are as follows:
AUGUST 31
1996 1995
------------------------------------
Deferred tax assets:
Net operating loss carryforwards $1,825,000 $943,600
Inventory obsolescence 27,500 31,600
Other 87,700 39,500
Deferred tax liabilities:
Software development costs 129,600 27,700
Other - -
------------------------------------
Net deferred tax assets 1,810,600 987,000
Valuation allowance (1,810,600) (987,000)
------------------------------------
$ - $ -
====================================
For financial reporting purposes, a valuation allowance has been provided to
offset the deferred tax assets related to the net operating loss carryforwards
and other temporary differences. At August 31, 1996, the Company had net
operating loss carryforwards of approximately $4,620,000, which are available to
offset taxable income through 2011. The Company's ability to utilize these
carryforwards to offset future taxable income is subject to certain restrictions
under Section 382 of the Internal Revenue Code in the event of certain changes
in the equity ownership of the Company. The Company anticipates that its public
offering will result in a change in equity ownership under Section 382. As a
result, the net operating loss carryforwards will be limited to offset a maximum
of approximately $535,000 of taxable income in any one tax year. No income taxes
have been paid in the years ended August 31, 1996 and 1995.
The effective income tax rate differed from the federal statutory rate as
follows:
YEAR ENDED AUGUST 31
1996 1995
----------------------------------
Taxes at statutory rate $(665,000) $(419,000)
State taxes, net of federal benefit (141,000) (75,000)
Change in valuation allowance 824,000 464,000
Other (18,000) 30,000
----------------------------------
$ - $ -
==================================
10. EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement (the "Agreement") with its
President and Chief Executive Officer in 1991. The Agreement was amended in July
1994 and October 1995. The Agreement provides for an annual base salary and a
discretionary bonus. The agreement contains a two year non-compete clause in the
event of termination of employment. The Agreement may be terminated by either
party upon twelve months' notice by either party and immediately in the event
the President and Chief Executive Officer defaults or does not perform. Upon
termination, the Company is obligated to pay the President and Chief Executive
Officer 100% of his current base salary for twelve months after separation if he
is unable to find appropriate employment because of the non-compete clause.
In May 1995, the Company entered into an agreement with the Chairman of the
Board (the "Chairman") for the Chairman to provide services to the Company. The
Chairman receives compensation of $50,000 per year and a bonus payable at the
discretion of the Board of Directors. In connection with the agreement, on
September 1, 1995, the Chairman received options to purchase 10,000 shares of
common stock at a price of $3.00 per share. The options vested immediately and
remain outstanding for a period of five years. In October 1995, the Company
amended the agreement to provide for the future grant of additional options to
purchase 15,000 shares of common stock at the discretion of the Board of
Directors.
In January 1996, the Company entered into an Employment Agreement with its Chief
Operating Officer and Chief Financial Officer that provides for an annual base
salary and a performance bonus, payable in cash, stock options or any other
manner with the amount and terms to be determined by the Board of Directors. As
a part of the agreement, on February 1, 1996, the employee was granted options
to purchase 40,000 shares of common stock at an exercise price of $3.30 for five
years. These options vested immediately and remain exercisable until February 1,
2001. The agreement contains provisions providing for the assignment of
inventions, the maintenance of confidentiality of proprietary information of the
Company and a one-year non-competition clause in the event of termination of
employment. The agreement may be terminated by either party for any reason at
any time. If, however, the employee is terminated by the Company without cause,
the Company must pay salary and benefits to the employee for six months.
In August 1996, the Company entered into an employment agreement with its Chief
Technology Officer that provides for an annual base salary and an annual bonus
of one-third of one percent of the Company's net sales that exceed certain
thresholds ($2.0 million for fiscal 1997). In future years, the amount will be
established by the Company's Chief Executive Officer. In addition, the employee
is entitled to an additional bonus of fifty percent of his salary if net sales
exceed $12 million dollars in any consecutive twelve month period during the
employment agreement. As a part of the agreement, the employee was granted
options to purchase 75,000 shares of common stock at an exercise price of $2.75.
The options vest at a rate of one-third on each anniversary of the employment
agreement. The agreement contains provisions providing for the assignment of
inventions, the maintenance of confidentiality of proprietary information of the
Company and a one-year non-competition clause in the event of termination of
employment. The agreement may be terminated by either party upon thirty days
notice for whatever reason or immediately for cause. If, however, the employee
is terminated by the Company without cause, the Company must pay six months of
salary and non-contingent compensation earned through the termination date.
11. MAJOR CUSTOMERS
Sales to Customer A were 12% and 10% of total sales in 1996 and 1995,
respectively. In addition, sales to Customer B were 22% of total sales in 1996
and sales to Customer C were 11% of total sales in 1995.
12. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid interest of $128,201 and $14,700 for the years ended August 31,
1996 and 1995, respectively.
The Company has entered into the following non-cash transactions:
AUGUST 31
1996 1995
--------------------
Conversion of debt and accrued interest to common stock $211,608 $ -
Warrants issued as payment for services provided - 17,708
Software acquired for debt - 189,893
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT.
(a) DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS OF THE COMPANY
The information under the caption "Election of Directors --
Information About Nominees" in the Company's 1997 Proxy Statement is
incorporated herein by reference. Information concerning executive officers of
the Company is included in this Report under Item 4A, "Executive Officers of the
Company."
(b) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information under the caption "Compliance with Section 16(a) of
the Exchange Act" in the 1997 Proxy Statement is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information under the caption "Election of Directors --
Director Compensation" in the Company's 1997 Proxy Statement is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the caption "Principal Shareholders and
Beneficial Ownership of Management" in the Company's 1997 Proxy Statement is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the captions "Election of Directors --
Information About Nominees" and "Certain Transactions" in the Company's 1997
Proxy Statement is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K .
(a) Exhibits
The exhibits to this Report are listed on the Exhibit Index on pages
E-1 to E-3 below. A copy of any of the exhibits listed or referred to above will
be furnished at a reasonable cost to any person who was a shareholder of the
Company as of November 29, 1996, upon receipt from any such person of a written
request for any such exhibit. Such request should be sent to Nicollet Process
Engineering, Inc., 420 North Fifth Street, Suite 1040, Ford Centre, Minneapolis
Minnesota, 55401; Attn.: Shareholder Information.
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Annual Report on
Form 10-KSB pursuant to Item 14(c):
A. 1990 Stock Option Plan (incorporated by reference to Exhibit 10.1 to
the Company's Registration Statement on Forms SB-2 (File
No.333-00852C)).
B. 1995 Amended and Restated Stock Indenture Plan (incorporated by
reference to Exhibit 10.2 to the Company's Registration Statement on
Form SB-2 (File No. 333-00852C)).
C. Employment Agreement between the Company and Robert A. Pitner, dated
July 31, 1994 (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form SB-2 (File No. 333-00852C)).
D. Amendment No. 1, dated effective October 26, 1995 to Employment
Agreement between the Company and Robert A. Pitner, dated July 31,
1994 (incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form SB-2 (File No. 333-00852C)).
E. Agreement between the Company and Pierce A. McNally, dated June 1,
1995 (incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form SB-2 (File No. 333-00852C)).
F. Amendment No. 1, dated effective October 26, 1995 to Agreement
between the Company and Pierce A. McNally, dated June 1, 1995
(incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form SB-2 (File No. 333-00852C)).
G. Form of Indemnification Agreement by and between the Company and the
Officers and Directors of the Company (incorporated by reference to
Exhibit 10.15 to the Company's Registration Statement on Form SB-2
(File No. 333-00852C)).
H. Employment Agreement, dated effective August 31, 1996 between the
Company and Richard A. Koontz (filed herewith).
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended August 31, 1996.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: November 21, 1996 NICOLLET PROCESS ENGINEERING, INC.
By: /s/ Robert A. Pitner
Robert A. Pitner
President and Chief Executive Officer
(principal executive officer)
In accordance with the Exchange Act, this report has been signed
below on November 21, 1996 by the following persons on behalf of the Company and
in the capacities indicated.
Signature and Title
/s/ Pierce A. McNally
-----------------------------------------------
Pierce A. McNally
Chairman of the Board and Director of
Corporate Development
/s/ Robert A. Pitner
-----------------------------------------------
Robert A. Pitner
President, Chief Executive Officer and Director
(principal executive officer)
/s/ Lanny I. Kuysh
-----------------------------------------------
Lanny I. Kurysh
Chief Operating Officer and Financial Officer
(principal financial officer)
/s/ John Sandberg
-----------------------------------------------
John Sandberg
Controller
(principal accounting officer)
/s/ Thomas W. Bugbee
-----------------------------------------------
Thomas W. Bugbee
Director
/s/ Benton J. Case Jr.
-----------------------------------------------
Benton J. Case Jr.
Director
/s/ Richard W. Koontz
-----------------------------------------------
Richard W. Koontz
Chief Technology Officer and Director
NICOLLET PROCESS ENGINEERING, INC.
Exhibit Index to Annual Report On
Form 10-KSB
For Fiscal Year Ended August 31, 1996
ITEM NO. DESCRIPTION METHOD OF FILING
- -------- ----------- ----------------
3.1 Articles of Incorporation............................... (1)
3.2 Bylaws, as amended...................................... Filed herewith
4.1 Specimen Form of the Company's Common Stock Certificate. (1)
4.2 Warrant for Purchase of Shares of Common Stock of
the Company issued to RTF Consultants dated August
31, 1991............................................... (1)
4.3 Warrant for Purchase of Shares of Common Stock of the
Company issued to Anelise Sawkins dated August 9, 1993. (1)
4.4 Form of Warrant for Purchase of Shares of Common Stock
of the Company issued in connection with November 1993
private placement...................................... (1)
4.5 Warrant for Purchase of Shares of Common Stock of the
Company issued to Charlie Phelps dated May 5, 1994..... (1)
4.6 Form of Warrant for Purchase of Shares of Common Stock
of the Company issued in connection with advertising
design services........................................ (1)
4.7 Form of Warrant for Purchase of Shares of Common Stock
of the Company issued in connection with January 1995
private placement...................................... (1)
4.8 Form of Warrant for Purchase of Shared of Common Stock
of the Company issued in connection with February 1995
private placement...................................... (1)
4.9 Warrant for Purchase of Shares of Common Stock of the
Company issued to Tuschner & Company, Inc. dated
February 7, 1995....................................... (1)
4.10 Form of Warrant for Purchase of Shares of Common Stock
of the Company issued in connection with March 1995
private placement...................................... (1)
4.11 Warrant for Purchase of Shares of Common Stock of the
Company issued to Tuschner & Company dated March 2,
1995................................................... (1)
4.12 Form of Warrant for Purchase of Shares of Common Stock
of the Company issued in connection with March 1995
bridge financing....................................... (1)
4.13 Form of Warrant for Purchase of Shares of Common Stock
of the Company issued in connection with repayment of
March 1995 bridge financing............................ (1)
E-1
4.14 Form of Warrant for Purchase of Shares of Common Stock
of the Company issued in connection with January 1996
bridge financing....................................... (1)
10.1 1990 Stock Option Plan.................................. (1)
10.2 1995 Amended and Restated Stock Incentive Plan.......... (1)
10.3 Employment Agreement between the Company and Robert A.
Pitner, dated July 31, 1994............................ (1)
10.4 Amendment No. 1, dated effective October 26, 1995 to
Employment Agreement between the Company and Robert
A. Pitner, dated July 31, 1994......................... (1)
10.5 Agreement between the Company and Pierce A. McNally,
dated June 1, 1995..................................... (1)
10.6 Amendment No. 1, dated effective October 26, 1995
to Agreement between the Company and Pierce A. McNally,
dated June 1, 1995..................................... (1)
10.7 Settlement Agreement between the Company and John W.
Mickowski, dated October 1, 1995....................... (1)
10.8 Form of Indemnification Agreement by and between the
Company and the Officers and Directors of the Company.. (1)
10.9 Lease Agreement by and between Hillcrest Development and
the Company, dated January 11, 1993.................... (1)
10.10 Agreement for the First Amendment to a Lease between
Hillcrest Development and the Company, dated June 8,
1993................................................... (1)
10.11 Agreement for the Second Amendment to a Lease between
Hillcrest Development and the Company, dated
July 20, 1993.......................................... (1)
10.12 Agreement for the Third Amendment to a Lease between
Hillcrest Development and the Company, dated
November 12, 1993...................................... (1)
10.13 Agreement for the Sixth Amendment to a Lease between
Hillcrest Development and the Company, dated
October 7, 1994........................................ (1)
10.14 Agreement for the Seventh Amendment to a Lease between
Hillcrest Development and the Company dated
September 3, 1996...................................... Filed herewith
10.15 Agreement for the Eighth Amendment to a Lease between
Hillcrest Development and the Company dated
October 18, 1996....................................... Filed herewith
10.16 Software Purchase Agreement between Larry D.
Glendenning, dba LDG Software Solutions and the Company
dated effective August 1, 1995......................... (1)
E-2
10.17 Promissory Note and Security Agreement in favor of Larry
D. Glendenning, dba LDG Software Solutions dated
effective August 1, 1995............................... (1)
10.18 Employment Agreement dated effective August 31, 1996
between the Company and Richard A. Koontz.............. Filed herewith
11.1 Computation of Income Per Common Share.................. Filed herewith
23.1 Consent of Ernst & Young LLP............................ Filed herewith
27.1 Financial Data Schedule................................. Filed herewith
(1) Incorporated by reference into the Company's Registration Statement on Form
SB-2 (File No. 333-00852C).
E-3
BYLAWS
OF
NICOLLET PROCESS ENGINEERING, INC.
ARTICLE I
OFFICES AND CORPORATE SEAL
Section 1.01. Registered and Other Offices. The registered office of
the corporation in Minnesota shall be that set forth in the Articles of
Incorporation or in the most recent amendment of the Articles of Incorporation
or statement of the Board of Directors filed with the Secretary of State of
Minnesota changing the registered office in the manner prescribed by law. The
corporation may have such other offices, within or without the State of
Minnesota, as the Board of Directors shall, from time to time, determine.
Section 1.02. Corporate Seal. The corporation shall have no corporate
seal.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 2.01. Time and Place of Meetings. Regular or special meetings
of the shareholders, if any, shall be held on the date and at the time and place
fixed by the Chairman of the Board of Directors in the absence of Board action,
or the Board, except that a special meeting called by, or at the demand of a
shareholder or shareholders, shall be held in the county where the principal
executive office is located.
Section 2.02. Regular Meetings. At any regular meeting of the
shareholders there shall be an election of qualified successors for directors
who serve for an indefinite term and whose terms have expired or are due to
expire within six months after the date of the meeting. Any business appropriate
for action by the shareholders may be transacted at a regular meeting. No
meeting shall be considered a regular meeting unless specifically designated as
such in the notice of meeting or unless all the shareholders are present in
person or by proxy and none of them objects to such designation.
Section 2.03. Demand by Shareholders. Regular or special meetings may
be demanded by a shareholder or shareholders, pursuant to the provisions of
Minnesota Statutes, Sections 302A.431, Subd. 2, and 302A.433, Subd. 2,
respectively.
Section 2.04. Quorum; Adjourned Meetings. The holders of fifty percent
(50%) of the voting power of the shares entitled to vote at a meeting constitute
a quorum for the transaction of business; said holders may be present at the
meeting either in person or by proxy. If a quorum is present when a duly called
or held meeting is convened, the shareholders present may continue to transact
business until adjournment, even though withdrawal of shareholders originally
present leaves less than the proportion or number otherwise required for a
quorum.
Section 2.05. Voting. At each meeting of the shareholders, every
shareholder having the right to vote shall be entitled to vote either in person
or by proxy. Unless otherwise provided by the Articles of Incorporation or a
resolution of the Board of Directors filed with the Secretary of State, each
shareholder shall have one vote for each share held. Upon demand of any
shareholder, the vote upon any question before the meeting shall be by ballot.
Section 2.06. Notice of Meetings. Notice of all meetings of
shareholders shall be given to every holder of voting shares, except where the
meeting is an adjourned meeting and the date, time and place of the meeting were
announced at the time of adjournment. The notice shall be given at least five
(5), but not more than sixty (60) days before the date of the meeting, except
that written notice of a meeting at which an agreement of merger is to be
considered shall be given to all shareholders, whether entitled to vote or not,
at least fourteen (14) days prior thereto. Every notice of any special meeting
shall state the purpose or purposes for which the meeting has been called, and
the business transacted at all special meetings shall be confined to the purpose
stated in the call, unless all of the shareholders are present in person or by
proxy and none of them objects to consideration of a particular item of
business.
Section 2.07. Waiver of Notice. A shareholder may waive notice of any
meeting of shareholders. A waiver of notice by a shareholder entitled to notice
is effective whether given before, at or after the meeting and whether given in
writing, orally or by attendance.
Section 2.08. Authorization Without a Meeting. Any action required or
permitted to be taken at a meeting of the shareholders may be taken without a
meeting as authorized by law.
ARTICLE III
DIRECTORS
Section 3.01. General Purposes. Except as authorized by the
shareholders by unanimous affirmative vote, the business and affairs of the
corporation shall be managed by and shall be under the direction of the Board of
Directors.
Section 3.02. Number and Term of Office. The number of directors which
constitutes the whole board will be at least one (1), or such other number as
may be determined by the Board of Directors or by the Shareholders at a regular
or special meeting. Except as otherwise permitted by statute, the directors will
be elected at each regular or special meeting. Except as otherwise permitted by
statute, the directors will be elected at each regular meeting of the
Corporation's shareholders (or at any special meeting of the shareholders called
for that purpose) by a majority of the voting power of the shares represented
and voting, and each director will be elected to serve until the next regular
meeting of the shareholders and thereafter until a successor is duly elected and
qualified, unless a prior vacancy occurs by reason of death, resignation, or
removal from office. Directors must be natural persons, but need not be
shareholders. [Amended October 1, 1996].
Section 3.03. Board Meetings; Place and Notice. Meetings of the Board
of Directors may be held from time to time at any place within or without the
State of Minnesota that the Board of Directors may designate. In the absence of
designation by the Board of Directors, Board meetings shall be held at the
principal executive office of the corporation, except as may be otherwise
unanimously agreed orally or in writing or by attendance. The Chairman of the
Board, the President, or directors comprising at least one third of the number
of directors then in office may call a Board meeting by giving 5 days notice if
by mail or two days notice if by telephone, telex, telegram or in person, to all
directors of the day or date and time of the meeting. The notice need not state
the purpose of the meeting. If a meeting schedule is adopted by the Board, or if
the date and time of a Board meeting has been announced at a previous meeting,
no notice is required.
Section 3.04. (a) Advance Written Consent or Opposition. Any member of
the Board or a committee thereof, as the case may be, may give advance written
consent or opposition to a proposal to be acted on at a Board or committee
meeting. If a director or committee member is not present at the meeting,
advance written consent or opposition to a proposal does not constitute presence
for the purpose of determining whether a quorum exists, but such advance written
consent or opposition shall be a vote in favor of or against the proposal or
resolution if the proposal or resolution acted upon at the meeting is
substantially the same or has substantially the same effect as the proposal or
resolution to which the member of the Board or committee has consented or
objected.
(b) Action Without Meeting. Any action, other than an
action requiring shareholder approval, may be taken by written action signed by
the number of directors that would be required to take the same action at a
meeting of the board at which all directors were present. An action requiring
shareholder approval required or permitted to be taken at a board meeting may be
taken by written action signed by all of the directors. Any such written action
is effective when signed by the required number of directors, unless a different
effective time is provided in the written action. When written action is taken
by less than all directors, all directors shall be notified immediately of its
text and effective date. Failure to provide the notice does not invalidate the
written notice. A director who does not sign or consent to the written action
has no liability for the action or actions taken thereby.
Section 3.05. Waiver of Notice. A director may waive notice of a
meeting of the Board. A waiver of notice by a director is effective, whether
given before, at or after the meeting and whether given in writing, orally or by
attendance.
Section 3.06. Quorum. A majority of the directors currently holding
office is a quorum for the transaction of business. If a quorum is present when
a duly called or held meeting is convened, the directors present may continue to
transact business until adjournment, even though withdrawal of directors
originally present leaves less than the proportion or number otherwise required
for a quorum.
Section 3.07. Vacancies. Vacancies on the Board resulting from the
death, resignation or removal of a director may be filled by the affirmative
vote of a majority of the remaining directors, even though less than a quorum.
Each director elected under this Section to fill a vacancy shall hold office
until a qualified successor is elected by the shareholders at the next regular
or special meeting of the shareholders.
ARTICLE IV
OFFICERS
Section 4.01. Numbers. The officers of the corporation shall be a
President, one or more Vice Presidents, a Secretary, and a Treasurer, and such
other officers as the Board of Directors, in its discretion, may deem necessary.
The Board of Directors, in its discretion, may elect a Chairman of the Board of
Directors, who, when present, shall preside at all meetings of the Board of
Directors, and who shall have such other powers as the Board shall prescribe.
Section 4.02. Term. Officers shall hold office at the will of the Board
for an indefinite term until their successors are elected and qualified. Any
officer elected or appointed by the Board of Directors may be removed by the
Board at any time with or without cause.
Section 4.03. President. The President shall have such powers and
duties as are designated by the Board of Directors. The President and the
Secretary, unless some other person is specifically authorized by vote of the
Board of Directors, shall sign all certificates of stock, bonds, deeds,
mortgages, agreements, modification of mortgage agreements, leases, and
contracts of the corporation.
Section 4.04. Vice President. If a Vice President or Vice Presidents
have been elected, they shall have such powers and perform such duties as may be
prescribed by the Board of Directors or by the President. In the event of
absence or disability of the President, Vice Presidents shall succeed to the
President's power and duties in the order designated by the Board of Directors.
Section 4.05. Secretary. The Secretary shall keep accurate minutes of
all meetings of the shareholders and the Board of Directors, shall give proper
notice of meetings of shareholders and directors, and shall perform such other
duties and have such other powers as the Board of Directors or the President may
from time to time prescribe. In his absence at any meeting, an Assistant
Secretary or a Secretary Pro Tempore shall perform his duties.
Section 4.06. Treasurer. The Treasurer, subject to order of the Board
of Directors, shall have the care and custody of the money, funds, valuable
papers, and documents of the corporation (other than his own bond, if any, which
shall be in the custody of the President), and shall have and exercise, under
the supervision of the Board of Directors, all the powers and duties commonly
incident to his office, and shall give bond in such form and amount and with
such sureties as shall be required by the Board of Directors. The Treasurer
shall keep accurate accounts of all monies of the corporation received or
disbursed. He shall deposit all monies, drafts and checks in the name of, and to
the credit of, the corporation in such banks and depositories as a majority of
the whole Board of Directors shall from time to time designate. He shall have
power to endorse for deposit all notes, checks and drafts received by the
corporation. He shall disburse the funds of the corporation in the manner
prescribed by the Board of Directors, making proper vouchers therefor. He shall
render to the directors, whenever required, an account of all his transactions
as Treasurer and of the financial condition of the corporation and shall perform
such other duties as may be prescribed from time to time by the Board of
Directors.
Section 4.07. Additional Officers and Agents. The Board of Directors,
at its discretion, may appoint Vice Presidents, one or more assistant
treasurers, one or more assistant secretaries, and such other officers or agents
as it may deem advisable, and may prescribe the duties of any such officer or
agent.
Section 4.08. Compensation. The officers of the corporation shall
receive such compensation for their services as may be determined from time to
time by resolution of the Board of Directors.
ARTICLE V
SHARES AND THEIR TRANSFER
Section 5.01. Certificates for Shares. Every shareholder of this
corporation shall be entitled to a certificate, to be in such form as prescribed
by law and adopted by the Board of Directors, certifying the number of shares of
the corporation owned by him. The certificates shall be numbered in the order in
which they are issued and shall be signed by the President and Secretary.
Section 5.02. Transfer of Shares. Transfer of shares on the books of
the corporation may be authorized only by the shareholder named in the
certificate or the shareholder's legal representative, or the shareholder's duly
authorized attorney in fact, and upon surrender of the certificate or the
certificates for such shares. The corporation may treat, as the absolute owner
of shares of the corporation, the person or persons in whose name or names the
shares are registered on the books of the corporation.
ARTICLE VI
AMENDMENTS
Section 6.01. Subject to the power of shareholders to adopt, amend, or
repeal these Bylaws as provided in Minnesota Statutes Section 302A.l81,
subdivision 3, any Bylaw may be amended or repealed by the Board of Directors at
any meeting, provided that, after adoption of the initial Bylaws, the Board
shall not adopt, amend, or repeal a Bylaw fixing a quorum for meetings for
shareholders, prescribing procedures for removing directors or filling vacancies
in the Board, or fixing the number of directors or their classifications,
qualifications, or terms of office. The Board may adopt or amend a Bylaw to
increase the number of directors.
ARTICLE VII
INDEMNIFICATION
Section 7.01. The corporation shall indemnify persons for such expenses
and liabilities in such manner, under such circumstances, and to the extent
required by Minnesota Statutes Section 302A.52l.
AGREEMENT FOR THE
SEVENTH AMENDMENT TO A LEASE
On this 26th day of August 1996, it is hereby agreed by and between HILLCREST
DEVELOPMENT, a limited partnership, as Lessor, and NICOLLET PROCESS ENGINEERING
INC., a Minnesota corporation, as Tenant, that the Lease Agreement dated January
1, 1993 and the first six (6) Amendments to that same Lease, the last of which
is dated October 7, 1994, shall be amended as follows:
1. Lessor and Tenant agree that, as per Paragraph #5 of the Sixth
Amendment to a Lease dated October 7, 1994, the rental rate for the
recently renovated portion of Suite 1075, consisting of 1384 rentable
square feet, shall be as follows:
September 1, 1996-August 31, 1997 $463.64 per month NET.
September 1, 1997-December 31, 1999 $474.02 per month NET.
Operating Expenses and Real Estate Taxes shall be escrowed and paid to
Lessor at their then current levels.
2. The remaining balance of Suite 1075 is 2200 rentable square feet of
which Tenant shall continue to lease 1200 rentable square feet as
storage space. Tenant shall retain its First Right of Refusal on the
remaining 1000 rentable square feet, as per Paragraph #4 of the Sixth
Amendment to a Lease dated October 7, 1994. Accordingly, the net rental
rates for said 1200 square feet shall remain at the following:
September 1, 1996-December 31, 1996 $200.00 per month NET.
January 1, 1997-December 31, 1998 $260.00 per month NET.
January 1, 1999-December 31, 1999 $275.00 per month NET.
Operating Expenses and Real Estate Taxes shall be escrowed and paid to
Lessor at their then current levels.
3. Lessor and Tenant agree that the construction for Suite 1075 totaling
$29,768.00 (as per Invoice #42-1199) shall be amortized at 10.25%
interest over forty (40) months, beginning September 1, 1996 and
continuing through December 31, 1999, and shall be payable by Tenant to
Lessor as Additional Rent in monthly installments of $881.11.
Except as herein stated, all terms and conditions of the aforementioned Lease
shall remain in full force and effect.
Tenant: Lessor:
NICOLLET PROCESS ENGINEERING INC. HILLCREST DEVELOPMENT
a Minnesota corporation
By: /s/ Robert A. Pitner By: /s/ Scott M. Tankenoff
----------------------------- ------------------------------
Robert A. Pitner Scott M. Tankenoff
Its: President & CEO Its: General Partner
Date: 8/29/96 Date: 9/3/96
----------------------------- -----------------------------
AGREEMENT FOR THE
EIGHTH AMENDMENT TO A LEASE
On this 16th day of October 1996, it is hereby agreed by and between HILLCREST
DEVELOPMENT, a limited partnership, as Lessor, and NICOLLET PROCESS ENGINEERING
INC., a Minnesota corporation, as Tenant, that the Lease Agreement dated January
1, 1993 and the first seven (7) Amendments to that same Lease, the last of which
is dated August 26, 1996, shall be amended as follows:
1. Lessor and Tenant agree that Tenant shall lease an additional 1,000
rentable square feet designated as a "storage" usage, in Suite 1075 for
a term of thirty-eight (38) months, beginning November 1, 1996 and
continuing through December 31, 1999. The net rental rates for Tenant's
combined total of 2,200 rentable square feet of storage space in Suite
1075 shall be as follows:
November 1, 1996-December 31, 1996 $366.67 per month NET.
January 1, 1997-December 31, 1998 $476.67 per month NET.
January 1, 1999-December 31, 1999 $504.17 per month NET.
Operating expenses and Real Estate Taxes shall be escrowed and paid to
Lessor by Tenant at their then current levels.
2. Tenant's "office" space in Suite #1075 shall remain at its current
square footage.
Except as herein stated, all terms and conditions of the aforementioned Lease
shall remain in full force and effect.
Tenant: Lessor:
NICOLLET PROCESS ENGINEERING INC. HILLCREST DEVELOPMENT
a Minnesota corporation
By: /s/ Robert A. Pitner By: /s/ Scott M. Tankenoff
------------------------------- -----------------------------
Robert A. Pitner Scott M. Tankenoff
Its: President & CEO Its: General Partner
Date: 10/17/96 Date: 10/8/96
---------------------------- --------------------------
EMPLOYMENT AGREEMENT
This Employment Agreement dated effective as of August 31, 1996, is by
and among Nicollet Process Engineering, Inc., a Minnesota corporation located at
420 North Fifth Street, Suite 1040 Ford Centre, Minneapolis, MN 55401 (the
"Company") and Richard Koontz (the "Employee"), residing at 260 Cimarron Road,
Apple Valley, MN 55124.
A. The Employee is familiar with the Company's business and products.
B. The parties wish to provide for the employment of the Employee by
the Company.
C. The Employee wishes to receive compensation from the Company for the
Employee's services, and the Company desires reasonable protection of its
confidential business and technical information that has been acquired and is
being developed by the Company at substantial expense.
The Company and the Employee each intending to be legally bound, agree
as follows:
ARTICLE
1.
EMPLOYMENT
1.1 EMPLOYMENT. Subject to all of the terms and conditions of this
Agreement, the Company agrees to employ the Employee as its Chief
Technology Officer, and the Employee accepts such employment.
1.2 DUTIES. The Employee will devote a minimum of forty (40) hours per week
to, and, during such time, make the best use of his energy, knowledge
and training in advancing the Company's interests. The Employee will
diligently and conscientiously perform the duties of the Employee's
position within the general guidelines to be determined by the
Company's Chief Executive Officer. While the Employee is employed by
the Company, the Employee will keep the Company informed of any other
business activities or outside employment, and will promptly stop any
activity or employment that might conflict with the Company's interests
or adversely affect the performance of the Employee's duties for the
Company.
ARTICLE
2.
COMPENSATION
2.1 SALARY. The Company agrees to pay Employee a salary at a rate of
$100,000 per year, increased from time to time as the Chief Executive
Officer and the Board of Directors (the "Board"), in their sole
discretion, determine (the "Salary"). Such Salary shall be paid no less
often than semi-monthly in accordance with the standard payroll
practices of the Company.
2.2 ANNUAL BONUS.
(a) As additional compensation to the Employee, the Employee is
entitled to an annual bonus of one-third of one percent of the
amount of Net Sales that exceed the following thresholds
during the indicated fiscal year (the "Annual Bonus"):
Fiscal Year Ending Net Sales
------------------ ---------
August 31, 1997 $2,000,000
August 31, 1998 To be determined
August 31, 1999 To be determined
The Chief Executive Officer, in his sole discretion, will determine the
Net Sales goals or other threshold by which to measure the Annual Bonus for
fiscal years ending August 31, 1998 and August 31, 1999, such determination to
occur prior to the beginning of such fiscal year. The Annual Bonus is payable to
the Employee within sixty (60) days following the end of each fiscal year.
(b) For purposes of this Agreement, Net Sales means all gross
revenues received by the Company from the sales of its
products including license, royalty, consulting, maintenance
and installation fees less returns and discounts.
2.3 ADDITIONAL BONUS. If, during any Bonus Period (hereinafter defined),
the Company has Net Sales of at least $12 million, then, as additional
compensation to the Employee, the Employee is entitled to a bonus (the
"Additional Bonus") of 50% of the Employee's Salary in effect on the
last day of the Bonus Period (the "Measurement Date"). The Additional
Bonus is payable within sixty (60) days following the Measurement Date.
For purposes of this Agreement, the term "Bonus Period" means any
consecutive twelve (12) month period beginning on the first day of the
first month following the Measurement Date (or September 1, 1996 if no
Additional Bonus has been paid under this Section 2.3) and before the
Termination Date (hereinafter defined). The Annual Bonus and the
Additional Bonus are collectively referred to herein as the "Bonus."
2.4 OPTION GRANT. The Company hereby grants to the Employee non-qualified
options to purchase 75,000 shares (the "Options") of Company Common
Stock, at an exercise price equal to $2.75 per share on the terms and
subject to the conditions of the option agreement, in substantially the
form attached hereto as Exhibit A. The Options will become exercisable,
on a cumulative basis, with respect to 25,000 shares on each
anniversary of this agreement, beginning on August 31, 1997.
2.5 REIMBURSEMENT OF BUSINESS EXPENSES. The Company agrees to reimburse the
Employee for all reasonable out-of-pocket business expenses incurred by
the Employee on behalf of the Company, provided that the Employee
properly accounts to the Company for all such expenses in accordance
with the rules and regulations of the Internal Revenue Service under
the Internal Revenue Code of 1986, as amended and in accordance with
the standard policies of the Company relating to reimbursement of
business expenses.
2.6 BENEFITS AND VACATION. The Employee is entitled to participate in all
benefit plans adopted by the Company to the extent that the terms of
such benefit plans permit the Employee to participate. The Employee is
entitled to three weeks paid vacation and all legal holidays observed
by the Company, in each case, in accordance with the Company's policies
as in effect from time-to-time.
2.7 ADDITIONAL COMPENSATION. The Company and the Employee agree that the
Employee is entitled to additional compensation, whether in the form of
stock grants, options or cash, or a combination of both, as the Board
of Directors or the Chief Executive Officer in its or his sole
discretion, determine, provided however, that the Company is under no
obligation to provide any additional compensation to the Employee.
ARTICLE
3.
TERM AND TERMINATION
3.1 TERM. Subject to earlier termination in accordance with Section 2.2
below, this Agreement shall become effective on the date set forth
above and will have an initial term of three (3) years.
3.2 TERMINATION. Subject to the respective continuing obligations of the
Company and the Employee under Articles 4, 5 and 6 below:
(a) The Company may terminate this Agreement immediately on
written notice to the Employee for cause, including (without
limitation) fraud, misrepresentation, theft, embezzlement of
assets of the Company or breach of any provision of this
Agreement;
(b) This Agreement will terminate upon Employee's death or upon
written notice from the Company in the event of Employee's
"permanent disability" (the term "permanent disability" means
the occurrence of an event which constitutes permanent and
total disability within the meaning of Section 22(e)(3) of the
Internal Revenue Code of 1986, as amended);
(c) This Agreement may be terminated by either the Company or the
Employee without cause upon thirty (30) days prior written
notice to the other party; and
(d) This Agreement will terminate upon mutual written consent of
the Company and the Employee such termination being effective
on the date agreed to between the Company and the Employee.
The date this Agreement is terminated is hereinafter referred to as the
Termination Date.
3.3 COMPENSATION UPON TERMINATION. If the Company terminates this Agreement
pursuant to paragraph (a) of Section 2.3, the Company shall be
obligated to pay the Employee only the Salary as may be due and owing
through the Termination Date and all other non-contingent compensation
earned and accrued up through the Termination Date which shall
specifically not include any Bonus payments. Such Salary will be paid
in one lump sum within ten business days of the Termination Date. If
this Agreement terminates pursuant to paragraphs (b), (c) or (d) of
Section 3.2, the Company will be obligated to pay the Employee (i)
Salary for six (6) months at the rate in effect on the Termination
Date; and (ii) all other non-contingent compensation earned and accrued
up through the Termination Date, including any Bonus payments. Such
Salary and non-contingent compensation shall be paid in one lump sum
within ten business days of the date of termination.
ARTICLE
4.
INVENTIONS
4.1 DEFINITION. "Inventions" as used in this Article 4, means any
inventions, discoveries, improvements and ideas (whether or not they
are in writing or reduced to practice) or works of authorship (whether
or not they can be patented or copyrighted) that the Employee makes,
authors, or conceives (either alone or with others) and that concern
directly affects the Company's business or the Company's present or
demonstrably anticipated future research or development and result from
any work the Employee performs for the Company.
4.2 OWNERSHIPOF INVENTIONS. The Employee agrees that all Inventions made by
the Employee during the term of this Agreement will be the Company's
sole and exclusive property. The Employee will, with respect to any
Invention:
(a) keep current, accurate, and complete records, which will
belong to the Company and be kept and stored on the Company's
premises;
(b) promptly and fully disclose the existence and describe the
nature of the Invention to the Company in writing (and without
request);
(c) assign (and the Employee does hereby assign) to the Company
all of the Employee's rights to the Invention, any
applications the Employee makes for patents or copyrights in
any country, and any patents or copyrights granted to the
Employee in any country; and
(d) acknowledge and deliver promptly to the Company any written
instruments, and perform any other acts necessary in the
Company's opinion to preserve property rights in the Invention
against forfeiture, abandonment or loss and to obtain and
maintain patents and/or copyrights on the Invention and to
vest the entire right and title to the Invention in the
Company.
The requirements of this Section 4.2 do not apply to an Invention for
which no equipment, software, supplies, facility or trade secret information of
the Company was used and which was developed entirely on Employee's own time,
and (i) which does not relate directly to the Company's business or to the
Company's actual or demonstrably anticipated research or development, or (ii)
which does not result from any work the Employee performed for the Company. The
Employee represents that, except as indicated on the attached Exhibit B, as of
the date of this Agreement, Employee has no rights under, and will make no
claims against the Company with respect to, any inventions, discoveries,
improvements, ideas or works of authorship which would be Inventions if made,
conceived, authored or acquired by the Employee during the term of this
Agreement. With respect to any obligations performed by the Employee under this
Section 4.2 following termination of this Agreement, the Company will pay or
reimburse all reasonable out-of-pocket expenses.
4.3 SURVIVABILITY. The obligations of this Article 4 will survive the
expiration or termination of this Agreement.
ARTICLE
5.
CONFIDENTIALITY
5.1 DEFINITION. "Confidential Information," as used in this Article 5,
means information that is not generally known and that is proprietary
to the Company or that the Company is obligated to treat as
proprietary. Any information that the Employee reasonably considers
Confidential Information, or that the Company treats as Confidential
Information, will be presumed to be Confidential Information (whether
the Employee or others originated it and regardless of how the Employee
obtained it).
5.2 PROHIBITION ON USE OF CONFIDENTIAL INFORMATION. Except as specifically
authorized by an authorized officer of the Company or by written
Company policies, the Employee will not, either during or after
employment by the Company, use or disclose Confidential Information to
any person who is not an employee of the Company. Upon termination of
this Agreement, the Employee will promptly deliver to the Company all
records and any compositions, articles, devices, apparatus and other
items that disclose, describe or embody Confidential Information or any
Invention, including all copies, reproductions and specimens of the
Confidential Information in Employee's possession, regardless of who
prepared them and will promptly deliver any other property of the
Company in Employee's possession, whether or not Confidential
Information.
ARTICLE
6.
NON-COMPETITION AGREEMENT
6.1 NON-COMPETE. During the period of this Agreement and for a further
period of one (1) year after termination of employment with the Company
for any reason, Employee will not, directly or indirectly, within the
United States, either for his own benefit or for the benefit of any
other person, firm or corporation whatsoever, other than the Company,
(i) directly engage in any commercial activity that competes with the
Company's business, as the Company has conducted it during the three
years before the Employee's employment with the Company ends, (ii)
serve any of the then-existing clients or customers of the Company, any
clients or customers that have had a relationship with the Company
during the preceding twelve (12) months, or any potential clients or
customers that were solicited by the Company during the preceding
twelve (12) months, or (iii) in any way interfere or attempt to
interfere with the Company's relationships with any of its current or
potential customers, or (iv) employ or attempt to employ any of the
Company's then employees on behalf of any other entity competing with
the Company. Notwithstanding the foregoing, it is understood that the
restrictions contained in this Article 6 will cease to be applicable to
any activity of the Employee from and after such time as the Company
(a) shall have ceased all business activities for a period of sixty
(60) days or (b) shall have made a decision through the Board not to
continue, or shall have ceased for a period of sixty (60) days, the
business activities with which such activity of Employee would be
competitive.
6.2 REMEDIES.Employee acknowledges that if he breaches this covenant, the
Company will be irreparably and immeasurably injured. Therefore,
Employee agrees that in addition to any other remedies available to the
Company, the Company may apply to a court of competent jurisdiction for
a temporary and/or permanent injunction and that such court may grant
such injunction to restrain and prohibit such breach by Employee.
6.3 NO ADDITIONAL COMPENSATION. In the event Employee's employment
terminates for any reason, no additional compensation shall be paid for
this non-competition obligation.
6.4 SURVIVAL. The obligations of this Article 6 survive the expiration or
termination of this Agreement.
ARTICLE
7.
MISCELLANEOUS
7.1 NO ADEQUATE REMEDY. The Employee understands that if the Employee fails
to fulfill his obligations under Articles 4, 5 or 6 of this Agreement,
the damages to the Company would be very difficult to determine.
Therefore, in addition to any rights or remedies available to the
Company at law, in equity, or by statute, the Employee hereby consents
to the specific enforcement of Articles 4, 5 and 6 of this Agreement by
the Company through an injunction or restraining order issued by an
appropriate court.
7.2 CONSENT TO USE OF NAME. The Employee consents to the use of his name in
appropriate Company materials such as, but not limited to, offering
memoranda related to financing activities of the Company.
7.3 NO CONFLICTS. The Employee represents and warrants to the Company that
neither the entering into of this Agreement nor the performance of any
obligations hereunder will conflict with or constitute a breach under
any obligation of the Employee, as the case may be, under any agreement
or contract to which the Employee is a party or any other obligation by
which the Employee is bound. Without limiting the foregoing, the
Employee agrees that at no time will the Employee use any trade secrets
or other intellectual property of any third party while performing
services hereunder.
7.4 SUCCESSORS AND ASSIGNS. This Agreement is binding on and inures to the
benefit of the Company's successors and assigns; provided however, that
the Company may assign the Agreement only in connection with a merger,
consolidation, assignment, sale or other disposition or substantially
all of its assets or business. This Agreement is also binding on the
Employee's heirs, successors, assigns and legal representatives.
7.5 MODIFICATION. This Agreement may be modified or amended only by a
writing signed by the Company and the Employee.
7.6 GOVERNING LAW. The laws of Minnesota will govern the validity,
construction, and performance of this Agreement. Any legal proceeding
related to this Agreement will be brought in an appropriate Minnesota
court, and the Company and the Employee hereby consent to the exclusive
jurisdiction of that court for this purpose.
7.7 CONSTRUCTION. Whenever possible, each provision of this Agreement will
be interpreted so that it is valid under the applicable law. If any
provision of this Agreement is to any extent declared invalid by a
court of competent jurisdiction under the applicable law, that
provision will remain effective to the extent not declared invalid. The
remainder of this Agreement also will continue to be valid, and the
entire Agreement will continue to be valid in other jurisdictions.
7.8 WAIVERS. No failure or delay by the Company or the Employee in
exercising any right or remedy under this Agreement will waive any
provision of the Agreement. Nor will any single or partial exercise by
either the Company or the Employee of any right or remedy under this
Agreement preclude either of them from otherwise or further exercising
these rights or remedies, or any other rights or remedies granted by
any law or any related document.
7.9 ENTIRE AGREEMENT. This Agreement supersedes all previous and
contemporaneous oral negotiations, commitments, writings and
understandings between the parties concerning the matters in this
Agreement, including without limitation any policy or personnel manuals
of the Company.
7.10 NOTICES. All notices and other communications required or permitted
under this Agreement shall be in writing and sent by registered
first-class mail, postage prepaid, and shall be effective five days
after mailing to the addresses stated at the beginning of this
Agreement. These addresses may be changed at any time by like notice.
IN WITNESS WHEREOF, the Company and the Employee have executed this Agreement as
of the date first above written.
NICOLLET PROCESS ENGINEERING, INC.
By: /s/ Robert A. Pitner
-------------------------------------------
Robert A. Pitner
Its: President and Chief Executive Officer
EMPLOYEE
/s/ Richard Koontz
- -----------------------------------------------
Richard Koontz
EXHIBIT A
NON-STATUTORY STOCK OPTION AGREEMENT
THIS AGREEMENT is entered into and effective as of August 31, 1996 (the
"Date of Grant"), by and between Nicollet Process Engineering, Inc. (the
"Company") and Richard Koontz (the "Optionee").
A. The Company has adopted the 1995 Amended and Restated Stock
Incentive Plan (the "1995 Plan") authorizing the Board of Directors of the
Company, or a committee as provided for in the 1995 Plan (the Board or such a
committee to be referred to as the "Committee"), to grant non-statutory stock
options to employees and nonemployee directors, consultants and independent
contractors of the Company.
B. The Company desires to give the Optionee an inducement to acquire a
proprietary interest in the Company and an added incentive to advance the
interests of the Company by granting to the Optionee an option to purchase
shares of common stock of the Company pursuant to the 1995 Plan.
Accordingly, the parties hereby agree as follows:
ARTICLE 1. GRANT OF OPTION.
The Company hereby grants to the Optionee the right, privilege, and
option (the "Option") to purchase Seventy-Five Thousand (75,000) shares (the
"Option Shares") of the Company's common stock, no par value (the "Common
Stock"), according to the terms and subject to the conditions set forth in this
Agreement and the 1995 Plan. The Option is not intended to be an "incentive
stock option," as that term is used in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").
ARTICLE 2. OPTION EXERCISE PRICE.
The per share price to be paid by Optionee in the event of an exercise
of the Option shall be $__________________.
ARTICLE 3. DURATION OF OPTION AND TIME OF EXERCISE.
3.1 Initial Period of Exercisability. The Option shall become
exercisable, on a cumulative basis, with respect to one-third (1/3) of the
Option Shares on each of the first three anniversary dates of the Date of Grant.
The foregoing rights to exercise this Option shall be cumulative with respect to
the Option Shares becoming exercisable on each such date but in no event shall
this Option be exercisable after, and this Option shall become void and expire
as to all unexercised Option Shares at, 5:00 p.m. (Minneapolis, Minnesota time)
on August 30, 2006 (the "Time of Termination").
3.2 Termination of Employment or Other Service.
(a) In the event that the Optionee's employment or other service with
the Company and all Subsidiaries (as defined in the 1995 Plan) is terminated by
reason of the Optionee's death, Disability or Retirement (as such terms are
defined in the 1995 Plan), this Option shall remain exercisable to the extent
exercisable as of such termination for a period of one year after such
termination in the case of death or Disability and three months in the case of
Retirement (but in no event after the Time of Termination).
(b) In the event the Optionee dies within three months following
termination of employment or other service with the Company for any reason other
than "cause" (as defined in the 1995 Plan), then this Option shall remain
exercisable to the extent exercisable as of such termination for a period of one
year after such termination (but in no event after the Time of Termination).
(c) In the event the Optionee's employment or other service with the
Company and all Subsidiaries is terminated for any reason other than death,
Disability or Retirement, all rights of the Optionee under the 1995 Plan and
this Agreement shall immediately terminate without notice of any kind, and this
Option shall no longer be exercisable; provided, however, that if such
termination is due to any reason other than termination by the Company or any
Subsidiary for "cause" (as defined in the 1995 Plan), this Option shall remain
exercisable to the extent exercisable as of such termination for a period of
three months after such termination (but in no event after the Time of
Termination).
(d) Notwithstanding anything in this Agreement or the 1995 Plan to the
contrary, in the event that an Optionee materially breaches the terms of any
confidentiality or non-compete agreement entered into with the Company or any
Subsidiary, whether such breach occurs before or after termination of such
Optionee's employment or other service with the Company or any Subsidiary, the
Committee in its sole discretion may immediately terminate all rights of the
Optionee under this Agreement and the 1995 Plan without notice of any kind.
ARTICLE 4. MANNER OF OPTION EXERCISE.
4.1 Notice. This Option may be exercised by the Optionee in whole or in
part from time to time, subject to the conditions contained in the 1995 Plan and
herein, by delivery, in person or by registered mail, to the Company at its
principal executive office in Minneapolis, Minnesota (Attention: Chief Financial
Officer), of a written notice of exercise. Such notice shall be in a form
satisfactory to the Committee, shall identify the Option, shall specify the
number of Option Shares with respect to which the Option is being exercised, and
shall be signed by the person or persons so exercising the Option. Such notice
shall be accompanied by payment in full of the total purchase price of the
Option Shares purchased. In the event that the Option is being exercised, as
provided by the 1995 Plan and Section 3.2 above, by any person or persons other
than the Optionee, the notice shall be accompanied by appropriate proof of right
of such person or persons to exercise the Option. As soon as practicable after
the effective exercise of the Option, the Optionee shall be recorded on the
stock transfer books of the Company as the owner of the Option Shares purchased,
and the Company shall deliver to the Optionee one or more duly issued stock
certificates evidencing such ownership.
4.2 Investment Purpose. The Company shall not be required to issue or
deliver any shares of Common Stock under this Option unless (1)(a) such shares
are covered by an effective and current registration statement under the
Securities Act of 1933 and applicable state securities laws or (b) if the
Committee has determined not to so register such shares, exemptions from
registration under the Securities Act of 1933 and applicable state securities
laws are available for such issuance (as determined by counsel to the Company)
and the Company has received from the Optionee (or, in the event of death or
disability, the Optionee's heir(s) or legal representative(s)) any
representations or agreements requested by the Company in order to permit such
issuance to be made pursuant to such exemptions, and (2) the Company has
obtained any other consent, approval or permit from any state or federal
governmental agency which the Committee shall, in its sole discretion upon the
advice of counsel, deem necessary or advisable. In the event that, at the time
of the attempted exercise of this Option, any of these conditions to the
issuance of a certificate for shares of Common Stock have not been satisfied,
such exercise shall be deemed withdrawn and the Company shall return any
payments made with respect thereto unless the Optionee, within 15 days after
being informed of the nonsatisfaction of such conditions, gives the Company
written notice that he or she wants such exercise to remain suspended (in which
event such exercise shall be deemed to be effective on the earliest date upon
which such conditions have been satisfied). Unless a registration statement
under the Securities Act of 1933 is in effect with respect to the issuance or
transfer of Option Shares, each certificate representing any such shares shall
be restricted by the Company as to transfer unless the Company receives an
opinion of counsel satisfactory to the Company to the effect that registration
under the Securities Act of 1933 and applicable state securities laws is not
required with respect to such transfer.
ARTICLE 5. NONTRANSFERABILITY.
Neither this Option nor the Option Shares acquired upon exercise may be
transferred by the Optionee, either voluntarily or involuntarily, or subjected
to any lien, directly or indirectly, by operation of law or otherwise, except as
provided in the 1995 Plan. Any attempt to transfer or encumber this Option or
the Option Shares other than in accordance with this Agreement and the 1995 Plan
shall be null and void and shall void this Option.
ARTICLE 6. LIMITATION OF LIABILITY.
Nothing in this Agreement shall be construed to (a) limit in any way
the right of the Company to terminate the employment or service of the Optionee
at any time, or (b) be evidence of any agreement or understanding, express or
implied, that the Company will retain the Optionee in any particular position,
at any particular rate of compensation or for any particular period of time.
ARTICLE 7. WITHHOLDING TAXES.
The Company is entitled to (a) withhold and deduct from future wages of
the Optionee (or from other amounts which may be due and owing to the Optionee
from the Company), or make other arrangements for the collection of, all legally
required amounts necessary to satisfy any federal, state or local withholding
and employment-related tax requirements attributable to the grant or exercise of
this Option or otherwise incurred with respect to this Option, or (b) require
the Optionee promptly to remit the amount of such withholding to the Company
before acting on the Optionee's notice of exercise of this Option. In the event
that the Company is unable to withhold such amounts, for whatever reason, the
Optionee hereby agrees to pay to the Company an amount equal to the amount the
Company would otherwise be required to withhold under federal, state or local
law.
ARTICLE 8. ADJUSTMENTS.
In the event of any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering, extraordinary dividend or divestiture
(including a spin-off) or any other change in the corporate structure or shares
of the Company, the Committee (or, if the Company is not the surviving
corporation in any such transaction, the board of directors of the surviving
corporation), in order to prevent dilution or enlargement of the rights of the
Optionee, shall make appropriate adjustment (which determination shall be
conclusive) as to the number, kind and exercise price of securities subject to
this Option.
ARTICLE 9. SUBJECT TO 1995 PLAN.
The Option and the Option Shares granted and issued pursuant to this
Agreement have been granted and issued under, and are subject to the terms of,
the 1995 Plan. The terms of the 1995 Plan are incorporated by reference herein
in their entirety, and the Optionee, by execution hereof, acknowledges having
received a copy of the 1995 Plan. The provisions of this Agreement shall be
interpreted as to be consistent with the 1995 Plan, and any ambiguities herein
shall be interpreted by reference to the 1995 Plan. In the event that any
provision hereof is inconsistent with the terms of the 1995 Plan, the terms of
the 1995 Plan shall prevail.
ARTICLE 10. MISCELLANEOUS.
10.1 Binding Effect. This Agreement shall be binding upon the heirs,
executors, administrators and successors of the parties hereto.
10.2 Governing Law. This Agreement and all rights and obligations
hereunder shall be construed in accordance with the 1995 Plan and governed by
the laws of the State of Minnesota.
10.3 Entire Agreement. This Agreement and the 1995 Plan set forth the
entire agreement and understanding of the parties hereto with respect to the
grant and exercise of this Option and the administration of the 1995 Plan and
supersede all prior agreements, arrangements, plans and understandings relating
to the grant and exercise of this Option and the administration of the 1995
Plan.
10.4 Amendment and Waiver. Other than as provided in the 1995 Plan,
this Agreement may be amended, waived, modified or canceled only by a written
instrument executed by the parties hereto or, in the case of a waiver, by the
party waiving compliance.
The parties hereto have executed this Agreement effective the day and
year first above written.
NICOLLET PROCESS ENGINEERING, INC.
By:__________________________________
Its__________________________________
[By execution hereof, the OPTIONEE
Optionee acknowledges having
received a copy of the 1995
Plan.] _____________________________________
EXHIBIT "B"
TO EMPLOYMENT AGREEMENT
Programs, algorithms, concepts and techniques, developed by Richard Koontz and
his companies, portions of which may be licensed to NPE, but still retained
by Koontz.
"Auditor in a Briefcase (TM)" Hospital Billing Audit System
* Guided auditing system;
* Automated letter writing;
* Automated summary report generator.
"BoardReport" Report System for Bank Board of Directors
* Highly flexible report formatting and presentation systems.
"Business Object Engineering" Design Methodology
"Data HyperCube Engine" High-Performance Data System (work in progress since
1984)
* data compression and expansion
* data compaction and reconstruction
* data presentation which includes many features that would be useful
for NPE.
"HealthPack(TM)" Health Insurance Claims Administration System
Level I: for first-time, small TPA's using single PCs
Level II: for medium TPA's using networked PCs
Level III: for medium TPA's using IBM host computers
* Table-driven claims adjudication system;
* Accounting system;
* Reporting system;
* Dialable speed and options panel;
"Quality Pays(TM)" Activity Tracking System (work in progress since 1990)
* a drag-and-drop many-to-many relationship manager which enables a
user to selectively rearrange lists of equipment, people, tasks,
etc., freely assigning equipment to multiple people, people to
multiple task lists, and so forth, without extensive knowledge of
the workings of the data base manager;
* a semi-automatic "paperwork filler-outer";
* an automatic telephone call-maker;
"Quality Pays(TM)" Predictive Maintenance System (work in progress since 1990)
* "status-at-a-glance" plant floor summary
* a "learning" equipment usage estimating or recording system;
* a predictive maintenance system;
* a repair order generator;
* a repair order tracker;
* an information manager;
* a time accounting system;
* a time manager;
* an activity simulation and forecasting system.
"Quality Pays(TM)" Process Problem Tracking System (work in progress)
(built on work done 1980-1988)
* "status-at-a-glance" problem summary;
* an information and "hot tips" manager;
* a time accounting and billing system;
* a problem resolution and solution retrieval system;
* a problem tracking system.
"RealProp(TM)" Real Estate Brokerage Listing Management System,
* A property listing management system.
"SlotGuard(TM)"Real-Time Equipment Monitoring System,
* A real-time graphic depiction of a casino floor;
* "Status-at-a-glance" showing equipment performance over time;
* Real-time monitoring of equipment events;
* Digital signal monitoring and pattern recognition;
* Automated relay of key event data to remote monitors;
* A floor activity simulator; * Reconfigurable on-line by a customer
as the need arises;
* "Intelligent" report pre-preparation to slash delays An accounting
package;
* A marketing package;
* Equipment maintenance capabilities;
* N-tier Client/Server implementation;
* 1-second machine-to-network-to-machine performance;
"Smart" Nurse Staffing and Retention Systems
* A resource management and tracing system;
* A resource forecasting system;
* A resource scheduling system;
* A rules-and-time-schedule conflict identification system.
Many discrete process activity simulators, using various forms of information
presentation.
In the Course of his ongoing investigation into improving these systems, Mr.
Koontz has developed proprietary techniques and algorithms necessary for
continual high-speed use of computer networks in monitoring discrete activities.
These include data encryption algorithms; data compaction and compression
algorithms and techniques; data staging; and data presentation methods. Some of
these are part of the "Data HyperCube Engine" noted above.
In developing high-speed presentation, review and retrieval capabilities, Mr.
Koontz has evolved an approach which takes into account real-world human
perceptual limitations and characteristics. This has allowed his systems to
regularly exceed the perceived performance of competing systems.
SOFTWARE LICENSE AGREEMENT
This Agreement is made effective as of __________________________ and is
by and between Richard Koontz, an individual residing at 260 Cimarron Road,
Apple Valley, MN 55124 ("Licensor") and Nicollet Process Engineering, Inc., a
Minnesota corporation, with its principal place of business at 420 North Fifth
Street, Suite 1040 Ford Centre, Minneapolis, MN 55401 (the "Company"). For
purposes of this Agreement, the term "Software" means the computer program,
algorithms, method or concepts described in the attached Exhibit A, all software
incorporated into the Software that is licensed from third parties and all
operator and user manuals, training materials and other materials provided to
the Company in connection with this Agreement.
1. SOFTWARE LICENSE. Licensor grants to the Company a non-terminable,
non-exclusive, transferable, fully-paid up license to use the source and object
code version of the Software according to the terms and conditions of this
Agreement, in any fashion the Company so chooses, including without limitation,
the right to use, make and distribute derivatives of the Software in any media.
Title to the Software, all copies thereof and all rights therein, including all
patents, copyrights and trade secrets, will remain vested in Licensor.
2. MAINTENANCE. No maintenance is to be provided under the terms and
conditions of this agreement.
3. DISCLAIMER OF WARRANTY FOR SOFTWARE. THE SOFTWARE IS LICENSED ON AN
"AS IS" BASIS. LICENSOR DISCLAIMS ALL WARRANTIES, WHETHER IMPLIED OR EXPRESS,
ARISING BY OPERATION OF LAW OR OTHERWISE, INCLUDING WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. LICENSOR MAKES NO
REPRESENTATIONS CONCERNING THE QUALITY OR PERFORMANCE OF THE SOFTWARE AND DOES
NOT WARRANT THAT THE SOFTWARE WILL BE ERROR FREE OR WILL OPERATE WITHOUT
INTERRUPTION.
4. PROTECTION OF SOFTWARE. The Company will keep in confidence and
protect the Software from disclosure to third parties and will restrict its use
as provided in this Agreement. The Company acknowledges that unauthorized
disclosure of the Software may cause substantial economic loss to the Licensor.
The Company will inform its employees, consultants and other agents of their
obligations under this Section and instruct them in a manner to ensure that such
obligations are met.
5. EXCLUSIVE AGREEMENT, GOVERNING LAW, JURISDICTION. This agreement,
together with that certain Employment Agreement dated effective as of August 31,
1996 between the Licensor and the Company, is the complete and exclusive
statement of agreement between the parties and supersedes all proposals,
communications, purchase orders and prior agreements, verbal or written between
the parties. This agreement is governed by the laws of the United States and the
State of Minnesota, without regard to the conflicts of laws provisions of any
jurisdictions. Any disputes arising under this Agreement will be subject to the
exclusive jurisdiction of the courts of the State of Minnesota, and each of the
parties consents to the exclusive jurisdiction of such courts for this purpose.
If any provision or portion of this agreement is invalid or unenforceable under
any applicable statute or rule of law, it is deemed to be omitted.
NICOLLET PROCESS ENGINEERING, INC. _________________________________
Richard Koontz
By: _________________________________
Robert A. Pitner
Its: Chief Executive Officer
Year ended August 31,
1996 1995
-------------------------
PRIMARY LOSS PER SHARE:
Average shares outstanding 2,535,900 1,676,900
SAB No. 83 - for stock options granted at
exercise price less than the initial public
offering price during the 12 months
preceding the initial public offering
using the treasury method 50,200 200,900
----------- -----------
Total 2,586,100 1,877,800
=========== ===========
Net loss $(1,957,900) $(1,233,547)
=========== ===========
Net loss per share $ (.76) $ (.66)
=========== ===========
FULLY DILUTED LOSS PER SHARE:
Average shares outstanding 2,535,900 1,676,900
SAB No. 83 - for stock options granted at
exercise price less than the initial public
offering price during the 12 months
preceding the initial public offering
using the treasury method 50,200 200,900
----------- -----------
Total 2,586,100 1,877,800
=========== ===========
Net loss $(1,957,900) $(1,233,547)
=========== ===========
Net loss per share $ (.76) $ (.66)
=========== ===========
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-09505) pertaining to the Nicollet Process Engineering, Inc. 1990
Stock Option Plan and the Nicollet Process Engineering, Inc. 1995 Amended and
Restated Stock Incentive Plan of our report dated October 7, 1996, with respect
to the financial statements of Nicollet Process Engineering, Inc. included in
the Annual Report (Form 10-KSB) for the year ended August 31, 1996.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
November 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
statements of operations and the balance sheet and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<CASH> 1,198,399
<SECURITIES> 973,224
<RECEIVABLES> 303,687
<ALLOWANCES> (19,490)
<INVENTORY> 332,074
<CURRENT-ASSETS> 2,811,549
<PP&E> 604,237
<DEPRECIATION> 289,619
<TOTAL-ASSETS> 3,579,135
<CURRENT-LIABILITIES> 489,400
<BONDS> 0
0
0
<COMMON> 7,675,891
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,579,135
<SALES> 2,117,097
<TOTAL-REVENUES> 2,117,097
<CGS> 1,776,898
<TOTAL-COSTS> 1,776,898
<OTHER-EXPENSES> 2,233,372
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128,201
<INCOME-PRETAX> (1,957,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,957,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,957,000)
<EPS-PRIMARY> (.76)
<EPS-DILUTED> (.76)
</TABLE>
