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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(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 .
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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,
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
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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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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) BUSINESS DEVELOPMENT
Nicollet Process Engineering, Inc.'s ("NPE" or the "Company") mission is
to assist customers in turning factory floor information into revenues and
profits for its customers. NPE is focused on the information technology
requirements of manufacturers for better managing production processes and
supporting management decision support systems. NPE designs, manufactures,
markets and supports high speed data acquisition systems that bring a range of
solutions to solve process automation problems, including process
visualization, machine and process control and real-time database management
products. The Company currently focuses on the die casting and plastics
injection molding industries with industry specific process monitoring and
control systems, client/server software and machine diagnostic instruments.
The Company has developed a die casting industry-specific, "turn-key"
manufacturing information and process control system ("Process Vision") which,
on a real-time basis, monitors, collects and displays machine performance data,
monitors process performance continuously against pre-set values, provides
feedback to the machine's controller to bring out-of-tolerance performance back
into conformance, and aggregates data for real-time presentation of process
reports for use by the machine operator. As part of its product offering to
the die casting industry, the Company has also developed client/server software
(the "Client/Server Software" which together with Process Vision are referred
to as the "Die Casting Products"), 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.
The Company has developed a line of products in the plastics injection
molding industry that provides process and production monitoring to all levels
of an organization. The Company's plastics monitoring product is also a "turn-
key" manufacturing information system (the "Plastics Monitoring System") which,
on a real-time basis, monitors, collects and displays machine performance data,
monitors process performance continuously against pre-set values and provides
the information collected and analyzed to all levels of an organization. In
February 1997, the Company introduced a second product to the plastics
industry--the PMRS. The Company's production monitoring and reporting system
(the "PMRS") collects production information, such as cycle time and number of
parts manufactured, from machines at the factory floor level and provides
specific production reports to the machine operator or, at the customer's
option, to all levels of the organization. During the first quarter of fiscal
1997, in conjunction with and at the request of several original equipment
manufacturers ("OEMs"), the Company developed a modified version of the Plastics
Monitoring System that offers a direct connection to the plastic injection
molding machine for process monitoring (the "Direct Connect" which together
with the Plastics Monitoring System and PMRS are referred to as the "Plastics
Products"), thereby eliminating the need for specialized computer hardware to
run process monitoring.
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. During the fourth
quarter of fiscal 1997, the Company, under an agreement with GE Plastics, an
operating division of General Electric Corporation, began development of a new
module for the MCA. This new module is being custom designed for GE Plastics
to test specific parameters of GE Plastic's proprietary resins. The Company
believes that GE Plastics will apply this GE-specific product throughout its
polymer manufacturing plants.
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During the last fiscal year, the Company has focused substantially all of
the Company's research and development efforts in modularizing the Company's
Plastics Monitoring System. The Company's Plastics Products are now engineered
to allow customers to mix and match modules according to a customer's specific
needs, thereby permitting easy migration from simpler starter systems, such as
PMRS, to more sophisticated process monitoring and client/server level
information gathering systems.
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 for the die casting industry with add-on capabilities for
client/server level information dissemination, a production and process
monitoring and reporting system for the plastic injection molding industry with
add-on capabilities for client/server level information reports and a portable,
machine diagnostic instrument called the Machine Capability Analyzer.
DIE CASTING PRODUCTS. NPE offers two major products for use in the die
casting industry: a "turn-key" manufacturing information and process control
system ("Process Vision") and client/server or workstation software (the
"Client/Server Software").
PROCESS VISION. NPE's Process Vision 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 machines. The sensors measure critical elements of
the die casting 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. Process Vision is used exclusively in the
die casting industry.
Using the data collected from the sensors and the PLC, the Process
Monitoring Software computes numerous die casting 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.
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In addition to Process Vision's ability to collect and analyze data and
correct irregularities in the production process, the Process Monitoring
Software provides, in addition to other reports, 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.
CLIENT/SERVER SOFTWARE. NPE also offers the Client/Server Software, which
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 Client/Server Software receives data that has
been collected at the machine level on the factory floor through Process
Vision. That data, through a high speed network, is stored on the client/server
and updated on a real-time basis, providing desk top computer 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
Client/Server Software also provides a set of standard, die-casting reports
that support decision making used by manufacturers. Specifically, the
Client/Server Software provides the following reports that can be accessed by
desk top computers:
- Machine maintenance 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.
PLASTIC INJECTION MOLDING PRODUCTS. NPE offers three major products for
use in the plastic injection molding industry: a process monitoring system (the
"Plastics Monitoring System"), a production monitoring and reporting system
with add-on capabilities for client/server level information reporting ("PMRS")
and the direct connect (the "Direct Connect").
PLASTICS MONITORING SYSTEM. Like Process Vision for the die casting
industry, the Plastics Monitoring System is a Windows-TM- developed, PC based
system consisting of standard personal computer hardware, monitoring and
client/server level software ("R3V1") and various sensors for data acquisition
from plastic injection molding machines. Like Process Vision, the sensors
measure critical elements of the plastic injection molding production process,
E.G. temperature, various pressures and velocities.
Using the data collected from the sensors, R3V1 computes numerous plastic
injection molding parameters that describe and profile the performance of each
manufacturing shot, and instantaneously
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detects structurally inferior parts. Upon detection of an out-of-tolerance
part, R3V1 sets off alarms to inform factory personnel of the
out-of-tolerance event. Information relating to each production cycle, or
shot, is used for real-time parameter calculations. Information is then
displayed and run through SPC and the results are immediately charted and
aggregated for real-time generation of data. All information is stored at the
machine level for traceability and verification and, at the customers option,
at the client/server level. As part of the core engine of R3V1, NPE offers a
client/server product similar to the Client/Server Software for the die
casting industry that provides information collected at the machine level to
personnel throughout the enterprise. NPE offers core client/server
information capabilities with R3V1 and also offers, as an add-on, additional
reporting features if requested, which include SPC, scheduling, maintenance
and profiling. R3V1 generally provides the same reports as the Process Vision
product and also offers real-time finite machine, tool and material
scheduling.
THE PMRS. In February 1997, the Company introduced a new production
monitoring system for the plastic injection molding industry, the PMRS. PMRS
is a Windows-TM- developed, PC based system consisting of standard personal
computer hardware, NPE's proprietary production software (the "Production
Software") and one sensor for data acquisition from plastic injection molding
machines. The sensor measures critical elements of the production cycle of a
machine, E.G. the number of seconds elapsed per cycle of production on the
machine, the number of parts the machine has produced over a defined period of
time, and the number of cycles the machine has reciprocated over a defined
period of time. The information acquired by the system during each cycle is
used for production status calculations and real-time report generations. PMRS
provides, in addition to other reports, the following reports for use by
management and factory floor personnel:
- Production reports;
- Shift and run reports;
- Cycle time reports; and
- Down time reports.
PMRS is designed to be a starter system for customers in the plastic
injection molding industry, permitting easy migration for a customer to full
process monitoring or client/server level formation processing.
DIRECT CONNECT. During the first quarter of fiscal 1997, in conjunction
with and at the request of several OEMs, the Company developed the Direct
Connect, a modified version of the Plastics Monitoring System that offers a
direct connection to the plastic injection molding machine through the
machine's controller to access data in a special protocol format for process
monitoring. The Direct Connect consists of a cable that is wired directly into
selected OEM machines and the customer's PC containing the Company's R3V1. The
cable collects information directly from the machine's controller in Society of
Plastics Industry, Inc. ("SPI") protocol and provides that information, through
a modified version of the R3V1 software, to the customer's reporting and
monitoring system. The Direct Connect gathers information when provided by the
machine, typically every 10 or 15 seconds rather than on a real-time basis.
Other than purchasing the cable and the R3V1, the Direct Connect does not
require additional expenditures for hardware, such as a separate PC. The
Company intends to sell the Direct Connect both directly to customers who
purchase new generation plastic injection molding machines and through private
label arrangements with these OEMs.
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 Process Vision and the Plastics Monitoring System,
the MCA monitors machine performance parameters and is not limited to the die
casting and plastic injection molding industries. The MCA incorporates the
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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 that permits 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.
During the fourth quarter of fiscal 1997, the Company, under an agreement
with GE Plastics, an operating division of General Electric Corporation, began
development of a new module for the MCA. This new module is being custom
designed for GE Plastics to test specific parameters of GE Plastic's
proprietary resins. The Company believes that GE Plastics will apply this GE-
specific product throughout its polymer manufacturing plants.
MARKETING STRATEGY
HDRP APPROACH. In June 1997, the Company developed a new marketing
strategy for its plastics market to seed its technology in a broader base of
the plastics market and vertically and horizontally integrate the Company's
products throughout an organization. Under the High Density Revenue
Propagation ("HDRP") approach, the Company first identifies potential customers
whose needs are significant in terms of both overall revenue potential and
duration of the relationship. After identifying customers offering the
potential for high revenue over a period of multiple years, the Company then
approaches each customer with a proposal designed to place a "starter" PMRS
system in their factory to meet their most immediate, basic needs of production
monitoring. After meeting the initial expectations of the customer, the
Company's strategy is to vertically and horizontally integrate its full range
of products throughout a customer's organization. This integration may include
upgrading from PMRS to full process monitoring, increasing the number of
machines being monitored, installing client/server level reporting for a
factory or implementing the entire NPE solution to an organization across
multiple plants throughout the world. To implement the HDRP approach, the
Company has engaged a marketing agency that has developed a plan to assist the
Company in increasing recognition of the NPE name, establishing a distinctive
positioning and a brand image and generating leads within the plastics industry
for seeding its technology.
SALES CYCLE. The Company's products, 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 PMRS and then, several months or years later,
purchasing the Plastics Monitoring System, a
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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 to four 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 DIE CASTING AND PLASTICS PRODUCTS. The Company
sells its products using a direct sales force and through a network of industry
specific manufacturers' representatives. For die casting sales, the Company
has two direct sales representatives and two domestic manufacturing
representatives. For plastic injection molding sales, the Company has five
direct sales representatives and seven domestic manufacturing representatives.
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's distributor in the United Kingdom, formerly
known as Six Sigma, Ltd., has changed its name to Nicollet Process Engineering,
Ltd. ("NPE, Ltd."). NPE, Ltd. employs three full-time direct sales personnel
devoted exclusively to developing markets for and selling the Company's
products in the United Kingdom and Ireland.
The Company also routinely retains other professionals to assist with
sales and marketing efforts, including telemarketers.
SALES METHODOLOGY FOR THE MCA. The Company currently sells its MCA
through telemarketing programs and advertising in trade journals. The Company
has introduced the MCA at various quality control trade shows, including the
show sponsored by the SPI. The Company 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.
CUSTOMERS. Sales to one customer of the Company represented 11% of
total sales in 1997. In addition, sales to two customers represented 22% and
12% of total sales in 1996, respectively.
RESEARCH AND DEVELOPMENT
The Company's research and development staff is dedicated to the research,
design and development of the technology used in the Company's products. The
Company's research and development expenses for the fiscal years ended
August 31, 1996 and 1997 were approximately $541,000 and $788,000, respectively.
From April 1996 through May 1997, the Company significantly increased its
personnel and expenditures devoted to research and development efforts. The
Company took these measures, primarily, to respond to its plastic injection
molding customers' demand for more flexibility and modularity. As a result of
these efforts, the Company has redesigned its technology platform for the
plastics industry. The Company's technology platform now consists of a core
engine, which performs high speed data acquisition, surrounded by customer
specific modules, which vary in number and characteristics so that a customer
can "mix and match" options to meet a particular need.
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The Company's research and development efforts during the last fiscal year
have culminated with the formal introduction of R3V1, the 3.0 version of the
Company's Plastics Monitoring System, which has been installed and is currently
operating at several customer sites. Having achieved the formal introduction
of R3V1, the Company reduced, during the fourth quarter of fiscal 1997, its
personnel and expenditures devoted to research and development efforts. The
Company anticipates, however, that it will continue to spend funds on research
and development activities for the foreseeable future.
The Company does not anticipate developing a new generation product for
approximately two fiscal years. Instead, the Company's future research and
development efforts will focus on improving and adding to the Company's module
products, refining and improving the Company's core engine products, improving
the options for and ease with which customers can upgrade or migrate to other
Company-provided technology, enhancing the degree to which the Company's
products can be integrated with the software systems of third-party providers
and modifying current products for additional industry applications.
COMPETITION
GENERAL. 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 Company's products
utilize open architecture software, which usually can be easily ported to a
wide variety of software systems and hardware platforms. The Company also
believes that although these competitors' products have Windows-TM-
capabilities; to the Company's knowledge, these competitors' products apply the
Windows-TM- operating system only at the client/server level and not at the
machine level.
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 although they generally have
Windows-TM- capabilities, to the Company's knowledge, these competitors'
product apply the Windows-TM- operating system only at the client/server 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 Company's products, the Company believes these competing products
are not "turn key" and typically are not industry specific. Nonetheless, 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 Company's products 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
Company's products 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.
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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, but has applications in various industries. The MCA 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. No assurances can be given that the
Company will obtain any issued patents, 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. Third parties may receive
patents which contain claims encompassing products, or product functions,
developed by the Company.
The Company has a non-exclusive worldwide license to make, use and sell
process monitoring software covered by two patents owned by John R. Mickowski
(the "Licensed Patents"). In consideration of such license, the Company pays
Mickowski royalty payments of $1,800 per unit of process monitoring equipment
sold by the Company to or on behalf of an original equipment manufacturer
("OEM"). Sales to end users are royalty free. 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 to the Licensed Patents.
The Company acquired the core technology for Process Vision 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. As of October 31, 1997, the outstanding balance due on this obligation
was approximately $65,000. This obligation is secured by the acquired
software.
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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
As of August 31, 1997, the Company had no part-time employees and 26 full-
time employees, including five in manufacturing, five in research and
development, five in sales and marketing, four in customer service and seven in
general administration and customer service. As of August 31, 1997, the
Company had four contract individuals, including two in research and
development, one in sales and marketing and one 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 $9,850 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 1998. 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, 1997.
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ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The executive officers of the Company, their ages and the offices held, as
of November 20, 1997, are as follows:
NAME AGE POSITION
------------------ --- ---------------------------------------
Robert A. Pitner 54 President, Chief Executive Officer and
Chief Financial Officer
Richard W. Koontz 48 Chief Technology Officer
ROBERT A. PITNER has served as President, Chief Executive Officer and
director of the Company since April 1991 and as Chief Financial Officer since
May 1997. 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.
RICHARD W. KOONTZ has served as the Company's Chief Technology Officer
since August 31, 1996 and has been a director of the Company since January
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.
11
<PAGE>
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 bid
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.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ---- ----
<S> <C> <C>
1997
First Quarter (September 1, 1996 through November 30, 1996).... 3 1-3/8
Second Quarter (December 1, 1996 through February 28, 1997).... 2-3/4 1-11/64
Third Quarter (March 1, 1997 through May 31, 1997)............. 1-7/16 3/4
Fourth Quarter (June 1, 1997 through August 31, 1997).......... 1-7/16 9/16
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
</TABLE>
As of August 31, 1997, the Company's Common Stock was held of record by
approximately 620 persons. No cash dividends were declared or paid by the
Company during the fiscal years ending August 31, 1996 or 1997.
The following details all securities sold by the Company during the fourth
quarter of the fiscal year ended August 31, 1997, which were not registered
under the Securities Act of 1933, as amended (the "Securities Act"):
1. On July 31, 1997, the Company issued a warrant to purchase 16,820
shares of Common Stock to Dillon Advertising in exchange for advertising
services rendered to the Company. The warrant has an exercise price of $0.75
per share and is exercisable until July 31, 2000.
2. On August 31, 1997, the Company issued a warrant to purchase 17,274
shares of Common Stock to Dillon Advertising in exchange for advertising
services rendered to the Company. The warrant has an exercise price of
$0.765625 per share and is exercisable until August 31, 2000.
All of the above sales were made in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering.
In all such transactions, the recipients of securities represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the securities issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Company.
12
<PAGE>
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 increased 8% to approximately $2.3 million in the
year ended August 31, 1997 compared to approximately $2.1 million in the year
ended August 31, 1996. Die casting sales increased 13% to approximately $1.2
million for the year ended August 31, 1997 compared to approximately $1.1
million for the prior year period. Plastics sales decreased 63% to
approximately $210,000 for the year ended August 31, 1997 compared to
approximately $582,000 for the prior year period. The MCA product sales
increased 38% to $475,000 compared to approximately $346,000 for the prior year
period. The increase in sales relating to the die cast product is primarily
the result of steady growth and acceptance of the Process Vision product. The
decrease in the plastics sales is primarily due to a technical delay in the
release of the new R3V1 product. The increase in sales relating to the MCA
product is primarily the result of increased marketing efforts during fiscal
1997.
GROSS MARGINS. The gross margin was 28.5% of revenues in the year ending
August 31, 1997 compared to approximately 16.1% of revenues for prior year.
Gross profit for year ending August 31, 1997 increased 91% to approximately
$650,000 compared to approximately $340,000 for the prior year. The increase
in gross margins, as percent of sales, and in absolute dollar values, is
largely due to reduced costs of the standard product and improved technical
support and installation methods, partially offset by increased warranty costs
in connection with plastics sales.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 77%
to approximately $1.4 million for the year ending August 31, 1997 from
approximately $792,000 for the prior year. The increase for the year ending
August 31, 1997 is the result of additions to the sales force during the third
and fourth quarters of fiscal 1996 and increased trade show expenses,
advertising and travel associated with the June National Plastics Expo.
Commission expense increased approximately $30,000 due to increased sales
volume. The Company expects that sales and marketing expenses will increase
significantly over the next year as the Company 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, 1997 were approximately $788,000, or 34.5% of
revenues, compared to approximately $541,000, or 25.6% of revenues for the
prior year. This increase in research and development expenses due to
additions to the technical staff during the second quarter of fiscal 1997 and
development activities associated with the completion of the R3V1 and the PMRS
products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 9% to approximately $985,000 in the year ending August 31, 1997
compared to approximately $900,000 for the prior period. The increase in
general and administrative expense is due to public and investment relations
expenses and legal and accounting fees relating to the Company's public company
obligations.
13
<PAGE>
INTEREST INCOME. Interest income decreased to approximately $43,000 in
the year ending August 31, 1997 compared to approximately $64,000 for the prior
year period. This decrease was due to a decrease in investments in short term
securities.
INTEREST EXPENSE. Interest expense decreased to approximately $24,000 for
the year ending August 31, 1997 compared to approximately $128,000 for the
prior year period. This decrease was due to a reduction in outstanding debt as
a result of the payoff of all outstanding loans and obligations from the
proceeds of the initial public offering.
NET LOSS. The net loss was approximately $2.5 million or $0.75 per share
for the year ending August 31, 1997 compared to a loss of approximately $2.0
million and $0.76 per share for the prior year period. This increased loss is
primarily due to increased sales and marketing expenses and research and
development costs.
LIQUIDITY AND CAPITAL RESOURCES
In March 1996, the Company completed an initial public offering 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 initial public offering was
approximately $4.3 million. The Company's Common Stock is quoted on the Nasdaq
SmallCap Market under the symbol "NPET."
In May 1997, the Company entered into two lines of credit with Norwest
Business Credit, Inc. and Norwest Bank Minnesota, National Association
(collectively, "Norwest") for an aggregate of up to $800,000 in borrowings (the
"Credit Facilities"). The Credit Facilities are discretionary and have a term
of one year. Credit availability under these facilities are based on accounts
receivable of the Company's United States operations and accounts receivable
and inventories of the Company's international operations. The Credit
Facilities are used primarily to finance working capital. As of August 31,
1997, the Company borrowed approximately $487,000 under the Credit Facilities.
In November 1997, the Company and Norwest amended the Credit Facilities to
reset certain financial covenants.
On November 7, 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.
Net cash used in operating activities was approximately $2.2 million and
$2.3 million for the years ending August 31, 1997 and 1996, respectively.
The cash was used primarily to fund the Company's operating losses. The
Company provided cash of approximately $648,000 and used cash of
approximately $1.3 million relating to investing activities for the years
ending August 31, 1997 and 1996, respectively. Net cash provided by
financing activities for the years ending August 31, 1997 and 1996 was
approximately $375,000 and $4.8 million, respectively. The net cash provided
by financing activities for the year ending August 31, 1997 was primarily the
result of the Company utilizing its Credit Facilities.
The Company anticipates capital expenditures of approximately $75,000
through fiscal 1998 related to additional testing equipment for research &
development facilities.
With the proceeds of the private placement in November 1997, the Company
believes that sufficient liquidity is available to satisfy its working capital
needs at least through August 1998.
14
<PAGE>
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. As of
August 31, 1997, the Company's accumulated deficit was approximately $7.2
million. Net losses for the year ended August 31, 1997 were approximately $2.5
million. Historically, the Company has financed its operations through public
and private placements of Common Stock and short-term borrowings. The Company
is dependent on increasing its revenue base to achieve profitability. Expenses
will continue to increase as the Company begins to increase its sales and
marketing activities. While the Company expects to achieve profitability in
the near future, there can be no assurance that the Company will ever generate
substantial revenues or achieve profitability. The Company's results of
operations will depend upon numerous factors, including market acceptance of
the Company's products, the timing of customer orders, the level of pricing and
product competition and the Company's ability to manufacture and market its
products efficiently and competitively.
NEED FOR ADDITIONAL CAPITAL
The Company plans to continue to expand its sales and marketing
activities. Although the Company believes that the proceeds from the private
placements in November 1997, cash on hand and future revenues will be
sufficient to meet the Company's operating and capital requirements through
August 1998, there can be no assurance that the Company will not require
additional financing earlier. Any additional required financing may not be
available on terms satisfactory to the Company, if at all.
EFFECTS OF DELISTING FROM NASDAQ SMALLCAP MARKET
On July 21, 1997, the Company received a letter from the Nasdaq Stock
Market, Inc. regarding the Company's noncompliance with the qualification
standards for continued listing of the Common Stock on the Nasdaq SmallCap
Market. Continued inclusion on the Nasdaq SmallCap Market requires the Company
to have at least two active market makers in the Common Stock, total net
tangible assets of $2.0 million, a minimum bid price for the Common Stock of
$1.00 per share, 300 holders of its Common Stock and 500,000 shares of its
Common Stock held by non-affiliates, having a market value of $1,000,000 or
more. The Company responded to the July 21, 1997 letter from the Nasdaq Stock
Market, Inc. and submitted a proposal for achieving compliance with the
qualification standards. As of November 20, 1997, the Company is in compliance
with the minimum bid price standard but is not in compliance with the total net
tangible assets qualification standard. There can be no assurance that the
Company will be able to achieve the total net tangible assets qualification
standard and, if achieved, maintain it, or maintain the minimum bid price
qualification standard. In such event, trading, if any, in the Common Stock
would thereafter be conduct in the over-the-counter market in what are commonly
referred to as the "pink sheets" or the National Association of Securities
Dealers' "Electronic Bulletin Board." Consequently, the liquidity of the
Company's Common Stock would likely be impaired, not only in the number of
shares which could be bought and sold, but also through delays in the timing of
the transactions, and reduction in security analysts and the news media's
coverage, if any, of the Company. As a result, prices for the Company's shares
of Common Stock may be lower than might otherwise prevail.
15
<PAGE>
LENGTHY SALES CYCLES
The Company's products, in particular the Process Vision and the Plastics
Monitoring System, are subject to a long sales cycle, lasting from
approximately eight to twelve months or longer. This cycle may result in
delays in realizing revenues from the sale of the Company's products.
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 the Company's products, in particular
the Process Vision and the Plastics Monitoring 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.
LIMITED MARKETING EXPERIENCE
A key element of the Company's business strategy is to promote the sale of
its products by continuing to expand 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. The Company 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 and maintain an effective
sales force.
DEPENDENCE UPON PLASTIC INJECTION MOLDING AND DIE CASTING INDUSTRIES
Currently, the Die Casting Products and the Plastics 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.
16
<PAGE>
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 developments 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 the Company'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.
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
Company's ability to develop products for different industries and the
Company's ability to gain market acceptance for the Company's 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 begun limited expansion
into industries other than die casting and plastic injection molding, including
the machine tool and plastic extrusion industries. 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.
DEPENDENCE ON KEY EMPLOYEES
The Company's success depends on the performance of its executive officers
and other key personnel, and in particular Robert A. Pitner, President, Chief
Executive Officer and Chief Financial Officer, and Pierce A. McNally, Chairman
of the Board and Director of Corporate Development. The loss of the services
of either Mr. Pitner or Mr. McNally or any of the Company's other executive
officers
17
<PAGE>
could have a material adverse effect on the Company. The Company's future
success will also depend in part upon its ability to attract and retain
highly qualified personnel. Competition in the recruiting of highly
qualified personnel in the Company's industry is intense. While the Company
has not experienced any difficulty in attracting and retaining talented and
qualified employees to date, there can be no assurance that the Company can
retain its key employees or that it can attract, assimilate and retain other
qualified personnel in the future.
PROTECTION OF INTELLECTUAL PROPERTY
The Company primarily relies upon unpatented trade secrets to protect is
proprietary technology. The Company's success will depend on its ability to
preserve these trade secrets and no assurance can be given that others will not
independently develop or acquire substantially equivalent techniques, gain
access to the Company's proprietary technology or disclose such technology to
third parties. Furthermore, there can be no assurance that the Company will
ultimately protect meaningful rights to such unpatented proprietary technology.
The Company generally requires its employees to execute nondisclosure
agreements to preserve these trade secrets. The Company's success may also
depend on its ability to obtain patent protection for its products and to
operate without infringing the proprietary rights of third parties. The
Company has not undertaken any independent investigation to determine whether
it is infringing any intellectual property rights of others. No assurances can
be given that any future patent applications will be issued or that the scope
of any patent protection will exclude competitors or provide competitive
advantages to the Company. Furthermore, there can be no assurance that others
will not claim rights in or ownership of proprietary rights held by the
Company, or that the Company's products and processes will not infringe, or be
alleged to infringe, the proprietary rights of others. Moreover, there can be
no assurance that others have not developed or will not develop similar
products, duplicate any of the Company's products or design around the
Company's patents, if issued. In addition, whether or not any patents are
issued to the Company, others may hold or receive patents which contain claims
having a scope that covers products subsequently developed by the Company.
INTERNATIONAL SALES
The Company intends to expand its operations outside of the United States,
in part by the addition of international sales representatives, and to enter
additional international markets, which will require significant management
attention and financial resources. International sales are subject to inherent
risks, including unexpected changes, in regulatory requirements, currency
exchange rates, tariffs and taxes, difficulties in staffing and managing
foreign operations, longer payment cycles, greater difficulty in accounts
receivable collection and political and economic instability. If, for any
reason, exchange or price controls or other restrictions on foreign currencies
were imposed, the Company's business could be adversely affected. In addition,
the laws of certain countries do not protect the Company's products and
intellectual property rights to the same extent as do the laws of the United
States. There can be no assurance that these factors will not have a material
adverse effect on the Company's future international sales and, consequently,
on the Company's business, operating results and financial condition.
PRODUCT LIABILITY
The Company may be exposed to product liability claims with respect to
defective parts produced by machines served by Process Vision. While the
Company believes it would have adequate defenses to any such claim, any such
claims could have an adverse effect on the Company. The Company currently
maintains product liability insurance in the face amount of $2,000,000;
however,
18
<PAGE>
there can be no assurance that any insurance coverage would be adequate to
cover product liability claims.
APPLICABILITY OF "PENNY STOCK RULES"
Federal regulations under the Exchange Act, regulate the trading of so-
called "penny stocks" (the "Penny Stock Rules"), which are generally defined as
any security not listed on a national securities exchange or Nasdaq, priced at
less than $5.00 per share and offered by an issuer with limited net tangible
assets and revenues. In addition, equity securities listed on Nasdaq which are
priced at less than $5.00 are deemed "penny stocks" for the limited purpose of
Section 15(b)(6) of the Exchange Act, which makes it unlawful for any broker-
dealer to participate in a distribution of any "penny stock" without the
consent of the Commission if, in the exercise of reasonable care, the broker-
dealer is aware of or should have been aware of the participation of a
previously sanctioned person. The Company's Common Stock is currently trading
below $5.00 per share. Accordingly, it may be more difficult for broker-
dealers to sell the Company's Common Stock and shareholders of the Company may
therefore have difficulty in selling their shares in the future in the
secondary trading market. Additionally, during the time that the Company's
Common Stock trades below $5.00 per share and is not listed on Nasdaq or any
national securities exchange, trading, if any, of the Company's Common Stock
will be subject to the full range of the Penny Stock Rules. Under these rules,
broker-dealers must take certain steps prior to selling a "penny stock," which
steps include: (i) obtaining financial and investment information from the
investor; (ii) obtaining a written suitability questionnaire and purchase
agreement signed by the investor; and (iii) providing the investor a written
identification of the shares being offered and the quantity of the shares. If
the Penny Stock Rules are not followed by the broker-dealer, the investor has
no obligation to purchase the shares. The application of the comprehensive
Penny Stock Rules make it more difficult for broker-dealers to sell the
Company's Common Stock and shareholders of the Company may have difficulty in
selling their shares in the future in the secondary trading market.
POSSIBLE VOLATILITY OF STOCK PRICE
The stock market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In addition, the market price of
the Company's Common Stock may be highly volatile. Factors such as a small
market float, fluctuations in the Company's operating results, announcements of
technological innovations or new products by the Company or its competitors,
developments with respect to patents or proprietary rights, changes in stock
market analyst recommendations regarding the Company, other technology
companies or the Company's industry generally and general market conditions may
have a significant effect on the market price of the Common Stock.
19
<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>
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 1998 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 1998 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 1998 Proxy Statement is incorporated herein by
reference.
20
<PAGE>
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 1998 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 1998 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 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)).
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<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.
22
<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: November 28, 1997 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 28, 1997 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,
Interim Chief Financial Officer
and Director
(principal executive and 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
/s/ Andrew K. Boszhardt, Jr.
----------------------------------------
Andrew K. Boszhardt, Jr.
Director
23
<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 .... Filed herewith
4.15 Warrant for Purchase of Shares of Common Stock of the
Company issued to Dillon Advertising dated August 31, 1997 .. Filed herewith
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 ....... Filed herewith
23.1 Consent of Ernst & Young LLP .................................. Filed herewith
27.1 Financial Data Schedule ....................................... Filed herewith
</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 for services 22,222 25,000 - 25,000
Net loss - - (2,492,149) (2,492,149)
---------------------------------------------------------
Balance at August 31, 1997 3,368,527 $7,641,667 $(7,167,406) $ 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 $(2,492,149) $(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 issued for services provided 25,000 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 4.14
WARRANT FOR PURCHASE OF
COMMON STOCK
OF
NICOLLET PROCESS ENGINEERING, INC.
JULY 31, 1997
For value received, DILLON ADVERTISING, a MINNESOTA corporation, or its
registered assigns (the "Holder"), is entitled to purchase from Nicollet Process
Engineering, Inc., a Minnesota corporation (the "Company"), on or before JULY
31, 2000, SIXTEEN THOUSAND EIGHT HUNDRED TWENTY (16,820) fully paid and
nonassessable shares of the Company's Common Stock (such class of stock being
hereinafter referred to as the "Securities" and such Securities as may be
acquired upon exercise hereof being hereinafter referred to as the "Warrant
Securities"), at a price equal to $.75 per share.
This Warrant is subject to the following provisions, terms and conditions:
1. The rights represented by this Warrant may be exercised by the Holder,
in whole or in part (but not as to a fractional share of the Securities), by
written notice of exercise delivered to the Company accompanied by the surrender
of this Warrant (properly endorsed if required) at the principal office of the
Company and upon payment to it, by cash, certified check or bank draft, of the
warrant exercise price for such shares.
The Company agrees that the Warrant Securities so purchased shall be and
are deemed to be issued as of the close of business on the date on which this
Warrant shall have been surrendered and payment made for such Warrant Securities
as aforesaid. Certificates for the shares of the Warrant Securities so
purchased shall be delivered to the Holder within 15 days after the rights
represented by this Warrant shall have been so exercised, and, unless this
Warrant has expired, a new Warrant representing the number of shares of the
Securities, if any, with respect to which this Warrant has not been exercised
shall also be delivered to the Holder within such time. Notwithstanding the
foregoing, however, the Company shall not be required to deliver any
certificates for shares of the Warrant Securities except in accordance with the
provisions and subject to the limitations of Paragraph 4 below.
The Company covenants and agrees that all shares of the Warrant Securities
that may be issued upon the exercise of this Warrant will upon issuance, be duly
authorized and issued, fully paid and non assessable and free from all taxes,
liens and charges with respect to the issuance thereof. The Company further
covenants and agrees that until expiration of this warrant, the Company will at
all times have authorized, and reserved for the purpose of issuance or transfer
upon exercise of this Warrant, a sufficient number of shares of the Securities
to provide for the exercise of this Warrant.
2. The foregoing provisions are, however, subject to the following:
(a) The Warrant exercise price shall be subject to adjustment from
time to time as hereinafter provided. Upon each adjustment of the Warrant
exercise price, the holder of
1
<PAGE>
this Warrant shall thereafter be entitled to purchase, at the Warrant
exercise price resulting from such adjustment, the number of shares
obtained by multiplying the Warrant exercise price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant
hereto immediately prior to such adjustment and dividing the product
thereof by the Warrant exercise price resulting from such adjustment.
(b) In case the Company shall at any time subdivide the outstanding
Securities into a greater number of shares or declare a dividend payable in
the Securities, the Warrant exercise price in effect immediately prior to
such subdivision shall be proportionately reduced, and conversely, in case
the outstanding Securities shall be combined into a smaller number of
shares, the Warrant exercise price in effect immediately prior to such
combination shall be proportionately increased.
(c) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of its assets
to another corporation shall be effected in such a way that holders of the
Securities shall be entitled to receive stock, securities or assets
("Substituted Property") with respect to or in exchange for such
Securities, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, the Holder shall have the right to purchase
and receive upon the basis and upon the terms and conditions specified in
this Warrant an din lieu of the Securities immediately theretofore
purchasable and receivable upon the exercise of the rights represented
hereby, such Substituted Property as would have been issued or delivered to
the Holder if it had exercised this Warrant and had received upon exercise
of this warrant the Securities prior to such reorganization,
reclassification, consolidation, merger or sale. The Company shall not
effect any such consolidation, merger or sale, unless prior to the
consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation purchasing
such assets shall assume by written instrument executed and mailed to the
Holder at the last address of the Holder appearing on the books of the
Company, the obligation to deliver to the Holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, the
Holder may be entitled to purchase.
(d) If the Company takes any other action, or if any other event
occurs which does not come within the scope of the provisions of Paragraphs
2(b) or 2(c), but which should result in an adjustment in the Warrant
exercise price and/or the number of shares subject to the Warrant in order
to fairly protect the purchase rights of the Holder, an appropriate
adjustment in such purchase rights shall be made by the Company.
(e) Upon any adjustment of the Warrant exercise price, the Company
shall give written notice thereof, by first-class mail, postage prepaid,
addressed to the Holder at the address of the Holder as shown on the books
of the Company, which notice shall state the Warrant exercise price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon the exercise of this
Warrant, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based.
2
<PAGE>
3. This Warrant shall not entitle the Holder to any voting rights or
other rights as a shareholder of the Company.
4. The Holder, by acceptance hereof, represents and warrants that (a) it
is acquiring this Warrant for its own account for investment purposes only and
not with a view to its resale or distribution and (b) it has no present
intention to resell or otherwise dispose of all or any part of this Warrant.
Other than pursuant to registration under federal and state securities laws or
an exemption from such registration, the availability of which the Company shall
determine in its sole discretion (y) the Company will not accept the exercise of
this Warrant or issue certificates for shares of the Warrant Securities and (z)
neither this Warrant nor any shares of the Warrant Securities may be sold,
pledged, assigned or otherwise disposed of (whether voluntarily or
involuntarily). The Company may condition such issuance or sale, pledge,
assignment or other disposition on the receipt from the party to whom this
Warrant is to be so transferred or to whom any Warrant Securities are to be
issued or so transferred of any representations and agreements requested by the
Company in order to permit such issuance or transfer to be made pursuant to
exemptions from registration under federal and applicable state securities laws.
Each certificate representing the Warrant (or any part thereof) and any shares
of Warrant Securities shall be stamped with appropriate legends setting forth
these restrictions on transferability. The Holder, by acceptance hereof, agrees
to give written notice to the Company before exercising or transferring this
Warrant or transferring any shares of the Warrant Securities of the Holder's
intention to do so, describing briefly the manner of any proposed exercise or
transfer.
5. The Company will not, by amendment of its articles of incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of this warrant,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such action as may be necessary or appropriate in order
to protect the rights of the Holder against dilution or other impairment.
Without limiting the generality of the foregoing, the Company (a) will not
increase the par value of any shares of stock receivable on the exercise of this
Warrant above the amount payable therefor on such exercise, and (b) will take
all such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of stock on the
exercise of this Warrant.
6. In the event of:
(a) any taking by the Company of a record of the holders of the
Securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right,
or
(b) any capital reorganization of the Company, any reclassification
or recapitalization of the capital stock of the Company or any transfer of
all or substantially all of the assets of the Company to or consolidation
or merger of the Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
3
<PAGE>
then and in each such event the Company will give notice to each Holder
specifying (i) the date on which any such record is to be taken for the purpose
of such dividend, distribution or right, and stating the amount and character of
such dividend, distribution or right, and (ii) the date on which any such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up is to take place, and the time,
if any is to be fixed, as of which the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable on such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up. Such notice shall be given in
writing to the Holder at least twenty (20) days in advance of such action.
7. This Warrant shall be transferable only on the books of the Company by
the Holder in person, or by duly authorized attorney, on surrender of the
Warrant, properly assigned.
8. Neither this Warrant or any term hereof may be changed, waived,
discharged or terminated orally but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer and to be dated as of the date set forth above.
NICOLLET PROCESS ENGINEERING, INC.
By: /s/ Robert A. Pitner
-------------------------
Robert A. Pitner
Its: President and Chief Executive
Officer
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED
OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES WILL BE MADE BY THE
COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
4
<PAGE>
EXHIBIT 4.15
WARRANT FOR PURCHASE OF
COMMON STOCK
OF
NICOLLET PROCESS ENGINEERING, INC.
AUGUST 31, 1997
For value received, DILLON ADVERTISING, a MINNESOTA corporation, or its
registered assigns (the "Holder"), is entitled to purchase from Nicollet Process
Engineering, Inc., a Minnesota corporation (the "Company"), on or before AUGUST
31, 2000, SEVENTEEN THOUSAND TWO HUNDRED SEVENTY FOUR (17,274) fully paid and
nonassessable shares of the Company's Common Stock (such class of stock being
hereinafter referred to as the "Securities" and such Securities as may be
acquired upon exercise hereof being hereinafter referred to as the "Warrant
Securities"), at a price equal to $.765625 per share.
This Warrant is subject to the following provisions, terms and conditions:
1. The rights represented by this Warrant may be exercised by the Holder,
in whole or in part (but not as to a fractional share of the Securities), by
written notice of exercise delivered to the Company accompanied by the surrender
of this Warrant (properly endorsed if required) at the principal office of the
Company and upon payment to it, by cash, certified check or bank draft, of the
warrant exercise price for such shares.
The Company agrees that the Warrant Securities so purchased shall be and
are deemed to be issued as of the close of business on the date on which this
Warrant shall have been surrendered and payment made for such Warrant Securities
as aforesaid. Certificates for the shares of the Warrant Securities so
purchased shall be delivered to the Holder within 15 days after the rights
represented by this Warrant shall have been so exercised, and, unless this
Warrant has expired, a new Warrant representing the number of shares of the
Securities, if any, with respect to which this Warrant has not been exercised
shall also be delivered to the Holder within such time. Notwithstanding the
foregoing, however, the Company shall not be required to deliver any
certificates for shares of the Warrant Securities except in accordance with the
provisions and subject to the limitations of Paragraph 4 below.
The Company covenants and agrees that all shares of the Warrant Securities
that may be issued upon the exercise of this Warrant will upon issuance, be duly
authorized and issued, fully paid and non assessable and free from all taxes,
liens and charges with respect to the issuance thereof. The Company further
covenants and agrees that until expiration of this warrant, the Company will at
all times have authorized, and reserved for the purpose of issuance or transfer
upon exercise of this Warrant, a sufficient number of shares of the Securities
to provide for the exercise of this Warrant.
2. The foregoing provisions are, however, subject to the following:
(a) The Warrant exercise price shall be subject to adjustment from
time to time as hereinafter provided. Upon each adjustment of the Warrant
exercise price, the holder of
1
<PAGE>
this Warrant shall thereafter be entitled to purchase, at the Warrant
exercise price resulting from such adjustment, the number of shares
obtained by multiplying the Warrant exercise price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant
hereto immediately prior to such adjustment and dividing the product
thereof by the Warrant exercise price resulting from such adjustment.
(b) In case the Company shall at any time subdivide the outstanding
Securities into a greater number of shares or declare a dividend payable in
the Securities, the Warrant exercise price in effect immediately prior to
such subdivision shall be proportionately reduced, and conversely, in case
the outstanding Securities shall be combined into a smaller number of
shares, the Warrant exercise price in effect immediately prior to such
combination shall be proportionately increased.
(c) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of its assets
to another corporation shall be effected in such a way that holders of the
Securities shall be entitled to receive stock, securities or assets
("Substituted Property") with respect to or in exchange for such
Securities, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, the Holder shall have the right to purchase
and receive upon the basis and upon the terms and conditions specified in
this Warrant and in lieu of the Securities immediately theretofore
purchasable and receivable upon the exercise of the rights represented
hereby, such Substituted Property as would have been issued or delivered to
the Holder if it had exercised this Warrant and had received upon exercise
of this warrant the Securities prior to such reorganization,
reclassification, consolidation, merger or sale. The Company shall not
effect any such consolidation, merger or sale, unless prior to the
consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation purchasing
such assets shall assume by written instrument executed and mailed to the
Holder at the last address of the Holder appearing on the books of the
Company, the obligation to deliver to the Holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, the
Holder may be entitled to purchase.
(d) If the Company takes any other action, or if any other event
occurs which does not come within the scope of the provisions of Paragraphs
2(b) or 2(c), but which should result in an adjustment in the Warrant
exercise price and/or the number of shares subject to the Warrant in order
to fairly protect the purchase rights of the Holder, an appropriate
adjustment in such purchase rights shall be made by the Company.
(e) Upon any adjustment of the Warrant exercise price, the Company
shall give written notice thereof, by first-class mail, postage prepaid,
addressed to the Holder at the address of the Holder as shown on the books
of the Company, which notice shall state the Warrant exercise price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon the exercise of this
Warrant, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based.
2
<PAGE>
3. This Warrant shall not entitle the Holder to any voting rights or
other rights as a shareholder of the Company.
4. The Holder, by acceptance hereof, represents and warrants that (a) it
is acquiring this Warrant for its own account for investment purposes only and
not with a view to its resale or distribution and (b) it has no present
intention to resell or otherwise dispose of all or any part of this Warrant.
Other than pursuant to registration under federal and state securities laws or
an exemption from such registration, the availability of which the Company shall
determine in its sole discretion (y) the Company will not accept the exercise of
this Warrant or issue certificates for shares of the Warrant Securities and (z)
neither this Warrant nor any shares of the Warrant Securities may be sold,
pledged, assigned or otherwise disposed of (whether voluntarily or
involuntarily). The Company may condition such issuance or sale, pledge,
assignment or other disposition on the receipt from the party to whom this
Warrant is to be so transferred or to whom any Warrant Securities are to be
issued or so transferred of any representations and agreements requested by the
Company in order to permit such issuance or transfer to be made pursuant to
exemptions from registration under federal and applicable state securities laws.
Each certificate representing the Warrant (or any part thereof) and any shares
of Warrant Securities shall be stamped with appropriate legends setting forth
these restrictions on transferability. The Holder, by acceptance hereof, agrees
to give written notice to the Company before exercising or transferring this
Warrant or transferring any shares of the Warrant Securities of the Holder's
intention to do so, describing briefly the manner of any proposed exercise or
transfer.
5. The Company will not, by amendment of its articles of incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of this warrant,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such action as may be necessary or appropriate in order
to protect the rights of the Holder against dilution or other impairment.
Without limiting the generality of the foregoing, the Company (a) will not
increase the par value of any shares of stock receivable on the exercise of this
Warrant above the amount payable therefor on such exercise, and (b) will take
all such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of stock on the
exercise of this Warrant.
6. In the event of:
(a) any taking by the Company of a record of the holders of the
Securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right,
or
(b) any capital reorganization of the Company, any reclassification
or recapitalization of the capital stock of the Company or any transfer of
all or substantially all of the assets of the Company to or consolidation
or merger of the Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or winding-
up of the Company,
3
<PAGE>
then and in each such event the Company will give notice to each Holder
specifying (i) the date on which any such record is to be taken for the purpose
of such dividend, distribution or right, and stating the amount and character of
such dividend, distribution or right, and (ii) the date on which any such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up is to take place, and the time,
if any is to be fixed, as of which the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable on such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up. Such notice shall be given in
writing to the Holder at least twenty (20) days in advance of such action.
7. This Warrant shall be transferable only on the books of the Company by
the Holder in person, or by duly authorized attorney, on surrender of the
Warrant, properly assigned.
8. Neither this Warrant or any term hereof may be changed, waived,
discharged or terminated orally but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer and to be dated as of the date set forth above.
NICOLLET PROCESS ENGINEERING, INC.
By: /s/ Robert A. Pitner
---------------------------------------------
Robert A. Pitner
Its: President and Chief Executive Officer
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED
OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES WILL BE MADE BY THE
COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
4
<PAGE>
EXHIBIT 10.23
FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT
This Amendment, dated as of November 24, 1997, is made by and between
NICOLLET PROCESS ENGINEERING INC., a Minnesota corporation (the "Borrower"), and
NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender").
RECITALS
The Borrower and the Lender have entered into a Credit and Security
Agreement dated as of May 28, 1997 (as the same may be amended or supplemented
from time to time, the "Credit Agreement"). Capitalized terms used in these
recitals have the meanings given to them in the Credit Agreement unless
otherwise specified.
The Borrower has requested that the Lender waive certain Defaults and reset
certain financial covenants to the Credit Agreement which the Lender is willing
to do pursuant to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. FINANCIAL COVENANTS. Section 6.7 of the Credit Agreement is hereby
amended in its entirety and replaced with the following new section:
"Section 6.7 MINIMUM BOOK NET WORTH. The Borrower will maintain its
Book Net Worth, determined as at the end of each month listed below, at an
amount not less than the amount set forth opposite such period:
----------------------------------------------------------
MONTH MINIMUM BOOK NET WORTH
----------------------------------------------------------
November 30, 1997 $580,000
December 31, 1997 $480,000
January 31, 1998 $480,000
February 28, 1998 $480,000
March 31, 1998 $480,000
April 30, 1998 $480,000
May 31, 1998 $680,000
----------------------------------------------------------
"Provided however, that if upon the Lender's receipt of the Borrower's
audited fiscal year-end financial reports for the fiscal year ending August
31,1997, such audited reports show that the Borrower's fiscal year-end Book
Net Worth varied from $472,000 by more than $10,000, then
<PAGE>
"(i) if the variance is $10,000 or more greater than $472,000, then
each of the financial covenants above shall be increased by the amount
that the Borrower's fiscal year-end Book Net Worth varies from
$472,000; and
"(ii) if the variance is $10,000 or more less than $472,000, then the
Lender, in its sole discretion, may consider amending the covenant
levels.
"If both parties agree to extend the Maturity Date beyond May 28,
1998, then on or before June 30, 1998, the Lender shall establish
acceptable covenant levels for this Section based upon the Borrower's
projections for such periods."
2. NO OTHER CHANGES. Except as explicitly amended by this Amendment, all
of the terms and conditions of the Credit Agreement shall remain in full force
and effect and shall apply to any advance or letter of credit thereunder.
3. WAIVER OF DEFAULTS. The Borrower is in default of the following
provisions of the Credit Agreement (collectively, the "Defaults"):
- --------------------------------------------------------------------------------
SECTION/COVENANT PERIOD REQUIRED ACTUAL
- --------------------------------------------------------------------------------
6.7 Minimum Book Net Work 6/97 not less than $1,310,000 $1,303,000
7/97 not less than $1,310,000 $1,094,000
FYE not less than $1,310,000 $ 472,000
8/97
- --------------------------------------------------------------------------------
Upon the terms and subject to the conditions set forth in this Amendment, the
Lender hereby waives the Defaults. This waiver shall be effective only in this
specific instance and for the specific purpose for which it is given, and this
waiver shall not entitle the Borrower to any other or further waiver in any
similar or other circumstances.
4. AMENDMENT FEE. The Borrower shall pay the Lender as of the date
hereof a fully earned, non-refundable fee in the amount of $2,000 in
consideration of the Lender's execution of this Amendment.
5. CONDITIONS PRECEDENT. This Amendment, and the waiver set forth in
Paragraph 3 hereof, shall be effective when the Lender shall have received an
executed original hereof, together with each of the following, each in substance
and form acceptable to the Lender in its sole discretion:
(a) payment of the fee described in Paragraph 4; and
(b) such other matters as the Lender may require in its sole discretion.
2
<PAGE>
6. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and
warrants to the Lender as follows:
(a) The Borrower has all requisite power and authority to execute
this Amendment and to perform all of its obligations hereunder, and this
Amendment has been duly executed and delivered by the Borrower and
constitutes the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrower of this
Amendment have been duty authorized by all necessary corporate action and
do not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree
presently in effect, having applicability to the Borrower, or the articles
of incorporation or bylaws of the Borrower, or (iii) result in a breach of
or constitute a default under any indenture or loan or credit agreement or
any other agreement, lease or instrument to which the Borrower is a party
or by which it or its properties may be bound or affected.
(c) All of the representations and warranties contained in Article V
of the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such representations
and warranties relate solely to an earlier date.
7. REFERENCES. All references in the Credit Agreement to "this
Agreement" shall be deemed to refer to the Credit Agreement as amended hereby;
and any and all references in the Security Documents to the Credit Agreement
shall be deemed to refer to the Credit Agreement as amended hereby.
8. NO OTHER WAIVER. Except as set forth in Paragraph 3 hereof, the
execution of this Amendment and acceptance of any documents related hereto shall
not be deemed to be a waiver of any Default or Event of Default under the Credit
Agreement or breach, default or event of default under any Security Document or
other document held by the Lender, whether or not known to the Lender and
whether or not existing on the date of this Amendment.
9. RELEASE. The Borrower hereby absolutely and unconditionally releases
and forever discharges the Lender, and any and all participants, parent
corporations, subsidiary corporations, affiliated corporations, insurers,
indemnitors, successors and assigns thereof, together with all of the present
and former directors, officers, agents and employees of any of the foregoing,
from any and all claims, demands or causes of action of any kind, nature or
description, whether arising in law or equity or upon contract or tort or under
any state or federal law or otherwise which the Borrower has had, now has or has
made claim to have against any such person for or by reason of any act,
omission, matter, cause or thing whatsoever arising from the beginning of time
to and including the date of this Amendment, whether such claims, demands and
causes of action are matured or unmatured or known or unknown.
3
<PAGE>
10. COSTS AND EXPENSES. The Borrower hereby reaffirms its agreement under
the Credit Agreement to pay or reimburse the Lender on demand for all costs and
expenses incurred by the Lender in connection with the Credit Agreement, the
Security Documents and all other documents contemplated thereby, including
without limitation all reasonable fees and disbursements of legal counsel.
Without limiting the generality of the foregoing, the Borrower specifically
agrees to pay all fees and disbursements of counsel to the Lender for the
services performed by such counsel in connection with the preparation of this
Amendment and the documents and instruments incidental hereto. The Borrower
hereby agrees that the Lender may, at any time or from time to time in its sole
discretion and without further authorization by the Borrower, make a loan to the
Borrower under the Credit Agreement or apply the proceeds of any loan, for the
purpose of paying any such fees, disbursements, costs and expenses.
11. MISCELLANEOUS. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original and all of which counterparts, taken together, shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed as of the date first written above.
NORWEST BUSINESS CREDIT, INC. NICOLLET PROCESS ENGINEERING,
INC.
By /s/ Warren G. Lindman By /s/ John Sandberg
---------------------------- ------------------------------------
Warren G. Lindman John Sandberg
Its Assistant Vice President Its Controller
4
<PAGE>
Exhibit B to Credit and Security
Agreement
COMPLIANCE CERTIFICATE
To: Warren Lindman
Norwest Business Credit, Inc.
Date: __________,199__
Subject: Nicollet Process Engineering, Inc.
Financial Statements
In accordance with our Credit and Security Agreement dated as of May 28,
1997 (the "Credit Agreement"), attached are the financial statements of Nicollet
Process Engineering, Inc. (the "Borrower") as of and for ____________________,
19____ (the "Reporting Date") and the year-to-date period then ended (the
"Current Financials"). All terms used in this certificate have the meanings
given in the Credit Agreement.
I certify that the Current Financials have been prepared in accordance with
GAAP, subject to year-end audit adjustments, and fairly present the Borrower's
financial condition as of the date thereof.
Events of Default (Check one):
/ / The undersigned does not have knowledge of the occurrence of a Default
or Event of Default under the Credit Agreement.
/ / The undersigned has knowledge of the occurrence of a Default or Event
of Default under the Credit Agreement and attached hereto is a
statement of the facts with respect to thereto.
FINANCIAL COVENANTS. I further hereby certify as follows:
1. MINIMUM BOOK NET Worth. Pursuant to Section 6.7 of to Credit
Agreement, as of the Reporting Date, the Borrower's Book Net Worth was $______
which / / satisfies / / does not satisfy the requirement that such amount be not
less than $_____________ during such period as set forth in table below:
<PAGE>
MONTH MINIMUM BOOK NET WORTH
----- ----------------------
November 30, 1997 $580,000
December 31, 1997 $480,000
January 31, 1998 $480,000
February 28, 1998 $480,000
March 31, 1998 $480,000
April 30, 1998 $480,000
May 31, 1998 $680,000
Attached hereto are all relevant acts in reasonable detail to evidence, and
the computations of the financial covenants referred to above. These
computations were made in accordance with GAAP.
NICOLLET PROCESS ENGINEERING, INC.
By___________________________________
Its Chief Financial Officer
2
<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) for the year ended August 31, 1997.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
November 28, 1997
<TABLE> <S> <C>
<PAGE>
<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> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 889,432
<ALLOWANCES> 73,490
<INVENTORY> 190,813
<CURRENT-ASSETS> 1,047,171
<PP&E> 729,827
<DEPRECIATION> 387,423
<TOTAL-ASSETS> 1,866,561
<CURRENT-LIABILITIES> 1,337,789
<BONDS> 0
0
0
<COMMON> 7,653,600
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,866,561
<SALES> 2,285,215
<TOTAL-REVENUES> 2,285,215
<CGS> 1,634,808
<TOTAL-COSTS> 3,174,014
<OTHER-EXPENSES> (43,905)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,380
<INCOME-PRETAX> (2,504,082)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,504,082)
<EPS-PRIMARY> (0.75)
<EPS-DILUTED> (0.75)
</TABLE>
