<PAGE>
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- ------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended August 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to .
------------------ ---------------------
COMMISSION FILE NO.: 0-27928
--------------------
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,
MINNEAPOLIS, MINNESOTA 55401
(Address of principal executive offices) (Zip Code)
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. [ ]
State issuer's revenues for its most recent fiscal year. $2,285,215
As of November 20, 1997, 4,635,195 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 $5,619,625.
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
February 5, 1998 (the "1998 Proxy Statement").
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
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<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The following Financial Statements and Independent Auditors' Report are
included herein on the pages indicated:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP.................................................... F-1
Balance Sheets as of August 31, 1997 and 1996.................................. F-2 - F-3
Statements of Operations for the years ended August 31, 1997 and 1996.......... F-4
Statements of Changes in Shareholders' Equity (Deficit) for the years ended
August 31, 1997 and 1996..................................................... F-5
Statements of Cash Flows for the years ended August 31, 1997 and 1996.......... F-6 - F-7
Notes to Financial Statements.................................................. F-8 - F-19
</TABLE>
<PAGE>
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 December 12, 1997, 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)).
<PAGE>
H. Employment Agreement, dated effective August 31, 1996 between the Company
and Richard A. Koontz (incorporated by reference to Exhibit 10.18 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended August 31,
1996 (File No. 0-27928)).
(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, 1997.
<PAGE>
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: December 22, 1997 NICOLLET PROCESS ENGINEERING, INC.
By: /s/ Robert A. Pitner
-------------------------------------
Robert A. Pitner
President and Chief Executive Officer
(principal executive officer)
<PAGE>
NICOLLET PROCESS ENGINEERING, INC.
Exhibit Index to Annual Report On
Form 10-KSB
For Fiscal Year Ended August 31, 1997
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION METHOD OF FILING
- -------- ----------- ----------------
<S> <C> <C>
3.1 Articles of Incorporation, as amended ......................... (3)
3.2 Bylaws, as amended ............................................ (2)
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 Anelise Sawkins dated August 9, 1993 ...... (1)
4.3 Form of Warrant for Purchase of Shares of Common Stock
of the Company issued in connection with November 1993
private placement ........................................... (1)
4.4 Warrant for Purchase of Shares of Common Stock of the
Company issued to Charlie Phelps dated May 5, 1994 .......... (1)
4.5 Form of Warrant for Purchase of Shares of Common Stock
of the Company issued in connection with advertising
design services ............................................. (1)
4.6 Form of Warrant for Purchase of Shares of Common Stock
of the Company issued in connection with January 1995
private placement ........................................... (1)
4.7 Form of Warrant for Purchase of Shared of Common Stock
of the Company issued in connection with February 1995
private placement ........................................... (1)
4.8 Warrant for Purchase of Shares of Common Stock of the
Company issued to Tuschner & Company, Inc. dated
February 7, 1995 ............................................ (1)
4.9 Form of Warrant for Purchase of Shares of Common Stock
of the Company issued in connection with March 1995
private placement ........................................... (1)
4.10 Warrant for Purchase of Shares of Common Stock of the
Company issued to Tuschner & Company dated March 2, 1995 .... (1)
4.11 Form of Warrant for Purchase of Shares of Common Stock of
the Company issued in connection with March 1995 bridge
financing ................................................... (1)
4.12 Form of Warrant for Purchase of Shares of Common Stock of
the Company issued in connection with repayment of March
1995 bridge financing ....................................... (1)
4.13 Form of Warrant for Purchase of Shares of Common Stock of
the Company issued in connection with January 1996
bridge financing ............................................ (1)
E-1
<PAGE>
ITEM NO. DESCRIPTION METHOD OF FILING
- -------- ----------- ----------------
4.14 Warrant for Purchase of Shares of Common Stock of the
Company issued to Dillon Advertising dated July 31, 1997 .... Previously filed.
4.15 Warrant for Purchase of Shares of Common Stock of the
Company issued to Dillon Advertising dated August 31, 1997 .. Previously filed.
4.16 Registration Rights Agreement Dated as of November 7, 1997
among the Company and certain Investors ..................... (6)
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
E-2
<PAGE>
ITEM NO. DESCRIPTION METHOD OF FILING
- -------- ----------- ----------------
Development and the Company dated September 3, 1996 ......... (2)
10.15 Agreement for the Eighth Amendment to a Lease between
Hillcrest Development and the Company dated
October 18, 1996 ............................................ (2)
10.16 Software Purchase Agreement between Larry D. Glendenning,
dba LDG Software Solutions and the Company dated effective
August 1, 1995 .............................................. (1)
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 ........................... (2)
10.19 Consulting Agreement dated as of March 31, 1997 by and
between Tiger Financial Group, LLC and the Company .......... (4)
10.20 Credit and Security Agreement dated as of May 28, 1997 by
and between Norwest Business Credit, Inc. and the Company ... (4)
10.21 Credit and Security Agreement dated as of May 28, 1997 by
and between Norwest Bank Minnesota, National Association
and the Company ............................................. (4)
10.22 Subscription Agreement dated as of November 7, 1997 among
the Company and certain Investors ........................... (5)
10.23 First Amendment dated as of November 24, 1997 to Credit
and Security Agreement dated as of May 28, 1997 by and
between Norwest Business Credit, Inc. and the Company ....... Previously filed.
23.1 Consent of Ernst & Young LLP .................................. Filed herewith
27.1 Financial Data Schedule ....................................... Previously filed.
</TABLE>
____________________________________
(1) Incorporated by reference into the Company's Registration Statement on
Form SB-2 (File No. 333-00852C).
(2) Incorporated by reference into the Company's Annual Report on Form 10-KSB
for the fiscal year ended August 31, 1996 (File No. 0-27928).
(3) Incorporated by reference into the Company's Quarterly Report on Form 10-
QSB for the fiscal quarter ended February 28, 1997 (File No. 0-27928).
E-3
<PAGE>
(4) Incorporated by reference into the Company's Quarterly Report on Form 10-
QSB for the fiscal quarter ended May 31, 1997 (File No. 0-27928).
(5) Incorporated by reference into a Schedule 13D/A dated November 12, 1997,
filed on behalf of Pierce A. McNally and Robert A. Pitner.
(6) Incorporated by reference into the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on November 17, 1997
(File No. 0-27928).
E-4
<PAGE>
FINANCIAL STATEMENTS
NICOLLET PROCESS ENGINEERING, INC.
YEARS ENDED AUGUST 31, 1997 AND 1996
<PAGE>
Nicollet Process Engineering, Inc.
Financial Statements
Years ended August 31, 1997 and 1996
CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . 1
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Statement of Changes in Stockholders' Equity (Deficit) . . . . . . . . . . . . 5
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . 8
<PAGE>
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, 1997 and 1996, 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, 1997 and 1996, 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 31, 1997
F1
<PAGE>
Nicollet Process Engineering, Inc.
Balance Sheets
AUGUST 31
1997 1996
------------------------
ASSETS
Current assets:
Cash and cash equivalents $ - $1,198,399
Short-term marketable securities - 973,224
Accounts receivable (net of allowance for
doubtful accounts of 1997--$73,490;
1996--$19,490) 815,942 284,197
Accounts receivable-related party 19,313 -
Inventories 190,813 332,074
Prepaid expenses 21,103 23,655
------------------------
Total current assets 1,047,171 2,811,549
Property and equipment:
Computer equipment 486,594 412,274
Furnishings and equipment 173,022 121,752
Leasehold improvements 70,211 70,211
------------------------
729,827 604,237
Less accumulated depreciation (387,423) (289,619)
------------------------
342,404 314,618
Other assets:
License agreement (net of accumulated
amortization of 1997--$86,897;
1996--$41,559) 49,115 94,453
Software development costs (net of
accumulated amortization of 1997--$148,556;
1996--$17,964) 413,511 336,507
Other assets 14,360 22,008
------------------------
476,986 452,968
------------------------
Total assets $1,866,561 $3,579,135
------------------------
------------------------
F-2
<PAGE>
AUGUST 31
1997 1996
------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Checks written in excess of bank balance $ 128,595 $ -
Notes payable--current portion 49,655 49,655
Notes payable--line of credit 486,538 -
Accounts payable 536,360 268,332
Accrued payroll liabilities 58,173 29,292
Current portion of capitalized lease obligation 7,496 5,343
Other current liabilities 70,972 136,778
------------------------
Total current liabilities 1,337,789 489,400
Notes payable 23,401 73,056
Capitalized lease obligation - 7,802
Deferred revenue 26,000 -
Deferred rent 6,610 12,793
Stockholders' equity (deficit):
Preferred stock, no par value:
Authorized shares--3,000,000
Issued and outstanding shares--0
Common stock, no par value:
Authorized shares--12,000,000
Issued and outstanding shares--
3,368,527at August 31, 1997 and 3,277,923
at August 31, 1996 7,653,600 7,675,841
Accumulated deficit (7,179,339) (4,675,257)
------------------------
474,261 3,000,584
Less stock subscription receivable (1,500) (4,500)
------------------------
Total stockholders' equity (deficit) 472,761 2,996,084
------------------------
Total liabilities and stockholders' equity (deficit) $1,866,561 $3,579,135
------------------------
------------------------
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Nicollet Process Engineering, Inc.
Statements of Operations
YEAR ENDED AUGUST 31
1997 1996
-------------------------
Revenues $ 2,285,215 $ 2,117,097
Cost of revenues 1,634,808 1,776,898
-------------------------
Gross profit 650,407 340,199
Operating expenses:
Selling 1,400,614 792,494
Research and development 788,120 540,874
General and administrative 985,280 900,004
-------------------------
3,174,014 2,233,372
-------------------------
Operating loss (2,523,607) (1,893,173)
Interest expense 24,380 128,201
Interest and other income 43,905 64,374
-------------------------
Net loss $(2,504,082) $(1,957,000)
-------------------------
-------------------------
Net loss per share $(.75) $(.76)
-------------------------
-------------------------
Weighted average number of shares outstanding 3,342,379 2,586,104
-------------------------
-------------------------
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Nicollet Process Engineering, Inc.
Statement of Changes in Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
COMMON STOCK ISSUED
----------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
---------------------------------------------------------
<S> <C> <C> <C> <C>
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
Purchase back of common stock options - (60,000) - (60,000)
Exercise of common stock options from common stock 68,382 826 - 826
Issuance of common stock and warrants for services 22,222 36,933 - 36,933
Net loss - - (2,504,082) (2,504,082)
---------------------------------------------------------
Balance at August 31, 1997 3,368,527 $7,653,600 $(7,179,339) $ 474,261
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Nicollet Process Engineering, Inc.
Statements of Cash Flows
YEAR ENDED AUGUST 31
1997 1996
-------------------------
OPERATING ACTIVITIES
Net loss $(2,504,082) $(1,957,000)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation 97,804 68,560
Amortization 175,930 59,523
Warrants issued in connection with bridge
financing - 6,625
Common stock and warrants issued for services
provided 36,933 12,645
Deferred rent (6,183) (6,397)
Deferred revenue 26,000 -
Changes in other operating assets and
liabilities:
Accounts receivable (531,745) 169,027
Accounts receivable-related parties (19,313) -
Inventories 141,261 (24,319)
Prepaid expenses 2,552 4,858
Accounts payable 268,028 (607,805)
Checks written in excess of bank balance 128,595 -
Other current liabilities (65,806) 39,992
Accrued payroll liabilities 28,881 (28,525)
-------------------------
Net cash used in operating activities (2,221,145) (2,262,816)
INVESTING ACTIVITIES
Capital expenditures (125,590) (84,686)
Software development costs (207,596) (94,503)
License agreements - (136,012)
(Purchase) maturity of marketable securities 973,224 (973,224)
Other assets 7,648 (10,188)
-------------------------
Net cash provided by (used in) investing activities 647,686 (1,298,613)
FINANCING ACTIVITIES
Net increase in line of credit 486,538 -
Initial public offering of common stock, net of expenses - 4,321,787
Payments on notes payable (49,655) (112,295)
Payments on notes payable--related parties - (200,000)
Purchase of common stock options (60,000) -
F-6
<PAGE>
Nicollet Process Engineering, Inc.
Statements of Cash Flows (continued)
YEAR ENDED AUGUST 31
1997 1996
-------------------------
FINANCING ACTIVITIES (CONTINUED)
Payments on capitalized lease obligation $ (5,649) $ (4,676)
Net proceeds from issuance of common stock 3,000 691,238
Proceeds from exercise of stock options and warrants 826 58,500
-------------------------
Net cash provided by financing activities 375,060 4,754,554
-------------------------
Net (decrease) increase in cash (1,198,399) 1,193,125
Cash at beginning of year 1,198,399 5,274
-------------------------
Cash at end of year $ - $1,198,399
-------------------------
-------------------------
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements
August 31, 1997
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.
F-8
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
F-9
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," which is required to be adopted for periods
ending after December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements, basic earnings per share (which
excludes the dilutive effect of stock options and warrants) and diluted earnings
per share will replace primary and fully diluted earnings per share. If
Statement No. 128 had been adopted, the adoption would have had no effect on the
loss per share presented in fiscal 1997 and 1996.
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.
F-10
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," but
applies Accounting Principles Board Opinion No. 25 (APB 25) and related
interpretations in accounting for its plans. 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.
RECLASSIFICATION
Certain prior year items have been reclassified to conform to current year
presentation.
2. INVENTORIES
Inventories consist of the following:
AUGUST 31
1997 1996
----------------------
Raw materials $ 86,441 $115,550
Work-in-process 8,626 86,824
Finished goods 95,746 129,700
----------------------
$190,813 $332,074
----------------------
----------------------
3. DEBT
NOTES PAYABLE
In May 1997, the Company entered into an $800,000 line of credit agreement with
a bank. All borrowings on the line of credit are due upon demand and bear
interest at 3% above the bank's reference rate. The line of credit is secured by
accounts receivable, inventory, equipment and general intangibles. The line of
credit expires in May 1998.
F-11
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
3. DEBT (CONTINUED)
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, 1997 approximates fair value.
In January 1996, the Company borrowed $550,000 through a bridge financing
agreement. The convertible promissory notes bear interest at 10% per annum and
were 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 were due, a holder of a note may have converted 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.
F-12
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
4. 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:
1998 $ 49,433
1999 49,553
2000 16,747
---------
$ 115,733
---------
---------
Rent expense was $108,013 and $91,133 for the years ended August 31, 1997 and
1996, respectively.
LICENSE AGREEMENT
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. In April 1996 the licensor exercised
his rights under the agreement to have the Company repurchase the options at a
price of $1.00 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.
F-13
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
5. STOCK OPTIONS AND WARRANTS
OPTIONS
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.
A summary of changes in outstanding options and shares available for grant under
the Company's stock option plans is as follows:
SHARES WEIGHTED-
SHARES OUTSTANDING AVERAGE
AVAILABLE UNDER THE PRICE
FOR GRANT PLAN PER SHARE
--------------------------------------
Balance at August 31, 1995 8,083 589,250 $1.60
Additional shares authorized 400,000 - -
Granted (260,000) 260,000 2.97
Exercised - (18,000) 1.50
Canceled 132,250 (132,250) 1.83
---------------------------
Balance at August 31, 1996 280,333 699,000 2.07
Granted (171,500) 171,500 1.42
Exercised - (112,500) 1.00
Canceled 42,500 (42,500) 2.96
---------------------------
Balance at August 31, 1997 151,333 715,500 $2.01
---------------------------
---------------------------
F-14
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
5. STOCK OPTIONS AND WARRANTS (CONTINUED)
As of August 31, 1997, there were 273,750 options outstanding with exercise
prices between $.72 and $1.61, 308,500 options outstanding with exercise prices
between $2.00 and $2.63 and 133,250 options outstanding with exercise prices
between $3.00 and $4.50. At August 31, 1997 outstanding options had a weighted-
average remaining contractual life of 4 years.
The number of options exercisable as of August 31, 1997 and 1996 were 622,250
and 600,500, respectively, at weighted-average exercise prices of $2.06 and
$1.96 per share, respectively.
The weighted average fair value of options granted during the years ended August
31, 1997 and 1996 was $.87 and $1.73 per share, respectively.
PRO FORMA DISCLOSURES
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997
and 1996, respectively: risk-free interest rate of 6%; no dividend yield;
volatility factor of the expected market price of the Company's common stock of
.624%; and a weighted-average expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-15
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
5. STOCK OPTIONS AND WARRANTS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
1997 1996
---------------------------
Pro forma net loss $(3,013,014) $(2,333,120)
Pro forma loss per share $(1.13) $(.90)
Note: The pro forma effect on the net loss for 1997 and 1996 is not
representative of the pro forma effect on net income (loss) in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to 1996.
WARRANTS
At August 31, 1997 and 1996, the Company has 597,636 and 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 $0.75 to
$3.60. The warrants expire at various times between July 1997 and January 2001.
6. INCOME TAXES
The tax effects of significant components of the Company's deferred tax assets
and liabilities are as follows:
AUGUST 31
1997 1996
---------------------------
Deferred tax assets:
Net operating loss carryforwards $ 2,749,000 $ 1,825,000
Inventory obsolescence 37,900 27,500
Other 109,400 87,700
Deferred tax liabilities:
Software development costs 128,500 129,600
---------------------------
Net deferred tax assets 2,767,800 1,810,600
Valuation allowance (2,767,800) (1,810,600)
---------------------------
$ - $ -
---------------------------
---------------------------
F-16
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
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, 1997, the
Company had net operating loss carryforwards of approximately $6,959,000,
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's public offering resulted in a change in equity ownership under
Section 382. As a result, the net operating loss carryforwards, generated
prior to the change under Section 382, 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, 1997 and 1996.
The effective income tax rate differed from the federal statutory rate as
follows:
YEAR ENDED AUGUST 31
1997 1996
--------------------------
Taxes at statutory rate $(851,000) $(665,000)
State taxes, net of federal benefit (161,000) (141,000)
Change in valuation allowance 957,000 824,000
Other 55,000 (18,000)
--------------------------
$ - $ -
--------------------------
--------------------------
7. 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.
F-17
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
7. EMPLOYMENT AGREEMENTS (CONTINUED)
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.
8. MAJOR CUSTOMERS
Sales to Customer A were 11% of total sales in 1997. In addition, sales to
Customer B and C were 22% and 12% of total sales in 1996, respectively.
F-18
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
9. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid interest of $24,380 and $128,201 for the years ended August 31,
1997 and 1996, respectively.
The Company has entered into the following non-cash transactions:
AUGUST 31
1997 1996
-------------------
Conversion of debt and accrued interest to common stock $ - $211,608
10. SUBSEQUENT EVENT (UNAUDITED)
In November 1997, the Company completed a private placement of an aggregate
of 1,266,667 Shares of Common Stock. The gross proceeds to the Company from
the private placement were approximately $760,000.
F-19
<PAGE>
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 31,
1997, with respect to the financial statements of Nicollet Process
Engineering, Inc. included in the Annual Report (Form 10-KSB/A) for the year
ended August 31, 1997.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
December 22, 1997
