<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE FOLLOWING ITEMS WERE THE
SUBJECT OF A FORM 12b-25 AND ARE
INCLUDED HEREIN; ITEM 6 AND ITEM 7.
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB/A
AMENDMENT NO. 1
(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, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ____________ to ___________.
COMMISSION FILE NO.: 0-27928
--------------------
NICOLLET PROCESS ENGINEERING, INC.
(Name of small business issuer in its charter)
MINNESOTA 41-1528120
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
420 NORTH FIFTH STREET, FORD CENTRE,
SUITE 1040, MINNEAPOLIS, MINNESOTA 55401
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (612) 339-7958
Securities registered under Section 12(b) of the Exchange Act: NONE.
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
--------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES /X/ NO / /
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this Form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. / /
State issuer's revenues for its most recent fiscal year. $1,122,579
As of November 20, 1998, 6,211,861 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 OTC Bulletin
Board), excluding outstanding shares beneficially owned by directors and
executive officers, was approximately $2,621,000.
Transitional Small Business Disclosure Format (check one): YES / / NO /X/
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS
NET SALES. Net sales decreased 51% to approximately $1.1 million in the
year ended August 31, 1998 compared to approximately $2.3 million in the year
ended August 31, 1997. Die casting sales decreased 59% to approximately
$495,000 for the year ended August 31, 1998 compared to approximately $1.2
million for the prior year period. Plastics sales decreased 47% to
approximately $112,000 for the year ended August 31, 1998 compared to
approximately $210,000 for the prior year period. The MCA product sales
decreased 42% to $278,000 compared to approximately $475,000 for the prior
year period. The decrease in sales relating to the die cast product is
primarily the result of a change in personnel in the sales manager position.
The decrease in the plastics sales is primarily due to a technical delay in
rewriting the new platform. The decrease in sales relating to the MCA
product is primarily the result of new product development of the new CCA
modular analyzer which slowed sales and reduced marketing efforts during the
second and third quarters of fiscal 1998.
GROSS MARGINS. The gross margin was 7% of revenues in the year ending
August 31, 1998 compared to approximately 28.5% of revenues for prior year.
Gross profit for year ending August 31, 1998 decreased 87% to approximately
$79,000 compared to approximately $650,000 for the prior year. The decrease
in gross margins, as percent of sales, and in absolute dollar values, is
largely due to the fixed amortization cost related to the lower overall sales
and substantial warranty costs related to the conversion of existing plastic
customers to the new SQL platform.
SALES AND MARKETING EXPENSES. Sales and marketing expenses decreased 6%
to approximately $1.3 million for the year ended August 31, 1998 from
approximately $1.4 million for the prior year. The decrease for the year
ending August 31, 1998 is the result of reduced commission expenses from
lower sales offset by additions to the sales force during the fourth quarters
of fiscal 1997 and increased advertising, marketing and travel expenses
associated with the sales additions. 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 CCA analyzer and
plastics products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
for the year ending August 31, 1998 were approximately $711,000, or 63.4% of
revenues, compared to approximately $788,000, or 34.5% of revenues for the
prior year. This increase in research and development expenses as a percent
of sales is due to lower revenues, offset by staff reductions from the prior
fiscal year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased 8% to approximately $905,000 in the year ending August 31,
1998 compared to approximately $985,000 for the prior period. The decrease
in general and administrative expense is due to a reduction in public and
investment relations expenses.
2
<PAGE>
INTEREST INCOME. There was no interest income for the year ending
August 31, 1998 compared to approximately $43,000 for the prior period. This
decrease was due to a decrease in investments in short term securities.
INTEREST EXPENSE. Interest expense increased to approximately $152,000
for the year ending August 31, 1998 compared to approximately $24,000 for the
prior year period. This increase was due to interest incurred on the bank
line of credit.
NET LOSS. The net loss was approximately $2.9 million or $0.70 per
share for the year ending August 31, 1998 compared to a loss of approximately
$2.5 million and $0.75 per share for the prior year period. This increased
loss is primarily due to reduced sales volume across all product lines.
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"). In June 1998, Norwest assigned all of its rights
and obligations under the Credit Facilities to TECHinspirations, Inc. (TECH).
The Credit Facilities are discretionary. Credit availability under these
facilities is 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 November 30, 1998 the Company borrowed approximately
$1,955,000 under the Credit Facilities. In November 1998, the Company
entered into a letter of intent with TECH, pursuant to which TECH would
arrange for additional debt financing for a total maximum amount of
$3,000,000, and $1,500,000 of the indebtedness would be converted into
1,500,000 shares of preferred stock. In connection with the financing, the
company has also agreed to pay TECH $25,000 per month for a period of one
year.
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.
On February 26, 1998, the Company sold 450,000 shares of Common Stock
for an aggregate purchase price of $250,000. On March 12, 1998, the Company
sold an additional 450,000 shares of Common Stock for aggregate proceeds of
$250,000.
Net cash used in operating activities was approximately $872,000 and
$2.2 million of the years ending August 31, 1998 and 1997, respectively. The
cash was used primarily to fund the Company's operating losses. The Company
provided cash of approximately $54,000 and approximately $648,000 relating to
investing activities for the years ending August 31, 1998 and 1997,
respectively. Net cash provided by financing activities for the years ending
August 31, 1998 and 1997 was approximately $1.2 million and $375,000,
respectively. The net cash provided by financing activities for the year
ending August 31, 1998 was primarily the result of the Company utilizing its
Credit Facilities.
3
<PAGE>
The Company anticipates capital expenditures of approximately $100,000
through fiscal 1999 related to additional equipment for sales personnel and
research and development facilities.
The report of the Company's auditors contains an explanatory paragraph
to the effect that the Company's recurring losses and negative cash flows
from operations raise substantial doubts about its ability to continue as a
going concern. If the Company's operations do not provide sufficient cash or
the Company is unable to raise additional debt or equity financing, in either
case sufficient for the Company to continue operations, the Company may be
forced to cease operations.
IMPACT OF YEAR 2000
YEAR 2000 ISSUES:
As the year 2000 approaches the various problems that may result from
the improper processing of dates and date sensitive calculations by computers
and other machinery can create breakdowns and erroneous results. Recognizing
the impact on all companies using computers, NPE is taking steps necessary to
insure that potential problems do not adversely affect its operations. The
Company also realizes the critical impact this may have in the product
provided to our customer.
THE COMPANY'S STATE OF READINESS:
The Company held initial meetings in mid 1997 to establish a task force
represented by the carious departments in the Company. The Company continues
the assessment efforts and outlined actions required for their
implementation. In October of 1998, the Year 2000 Plan was developed which
outlines six phases. These phases are as follows: Phase (I) Inventory and
Assess, Phase (II) Prioritize, Phase (III) Resolved, Phase (IV) Test, Phase
(V) Contingency Plan and Phase (VI) Control. The Company expects to complete
the plan in the fiscal third quarter of 1999. (March, April, May).
COST ASSOCIATED WITH YEAR 2000 ISSUES:
The majority of the work to date has been performed by the Company's
employees. This has limited the cost, however management does expect
requirements as the evaluations are completed. The Company anticipates
Capital Expenditures in fiscal 1999 to be approximately $150,000. Year 2000
issues included in this amount are expected to be $40,000 to $50,000. The
replacement or upgrades to the Company's telephone system has been advanced
to Year 2000 ready and included in the above capital expenditures.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES:
Until system integration testing is substantially in process and/or
complete, the Company cannot fully estimate the risks of its Year 2000 issue.
To date, the Company's expenses are in material. As a result of system
integration testing, the Company may identify business activities that are at
risk of Year 2000 disruption. The absence of any such determination at this
point represents only the status currently in the implementation phases and
should not be construed to mean that there is no business activity which is
at risk of a Year 2000 disruption. It is possible a disruption to a major
business activity could have a material adverse effect on the Company's
financial condition and results of operations. In additional, many of the
Company's business critical external providers may not appropriately address
their Year 2000 issues, the result of which could have a material adverse
effect on the Company's financial condition and results of operations.
4
<PAGE>
THE COMPANY'S CONTINGENCY PLANS:
Because the complete assessment of Year 2000 issues is incomplete, the
Company has not developed contingency plans for this issue. The Company is
aware of the possibility, however, that certain business activities may be
identified as at risk. Consistent with the plan, the Company will develop
contingency plans for such activities as and if such determinations are made.
In addition, the Company is developing contingency plans to minimize impact
of Year 2000 issues if resolutions fail and are left incomplete while
performing Phases III and VI of the plan.
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, 1998, the Company's accumulated deficit was approximately $10.0
million. Net losses for the year ended August 31, 1998 were approximately
$2.9 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. 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 and the Credit Facilities with TECHinspirations, Inc., the cash on
hand and future revenues will be sufficient to meet the Company's operating
and capital requirements through August 1999, 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. The Company will need additional financing.
EFFECTS OF DELISTING FROM NASDAQ SMALLCAP MARKET
Effective March 11, 1998, the Company's Common Stock was no longer
quoted on the Nasdaq Small Cap Market because the Company no longer met, and
currently does not meet standards for continued listing on the Nasdaq Small
Cap Market. The Company's Common Stock is currently quoted in the
"over-the-counter" market and is eligible to trade on the OTC Bulletin Board.
The public trading market for the Company's Common Stock has been, and may
continue to be, adversely effected by this development. In order for the
Company's Common Stock to be quoted on the Nasdaq Small Cap Market, the
Company will be required to meet initial listing criteria. These criteria
require the Company to have at least:
5
<PAGE>
- three market makers in the Common Stock
- total net tangible assets of $4.0 million
- a minimum bid price for the Common Stock of $4.00 per share
- 300 holders of its Common Stock
- 1 million shares of its Common Stock held by non-affiliates, having a
market value of $5 million or more
The Company does not expect to be able to achieve these criteria in the
foreseeable future. Consequently, the ability of shareholders to sell their
shares of the Company's Common Stock may be further impaired, not only in the
number of shares which may be bought and sold, but also through delays in the
timing of transactions and reductions in security analysts and the news media
coverage, if any, of the Company.
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. 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
6
<PAGE>
casting industry has been deeply affected by economic cycles and tends to
be characterized by quick declines at the very beginning of a downturn and
gradual recoveries very late in the cycle. Accordingly, the Company's sales
efforts to the die casting market are also subject to downturns in the
economy. Unlike the die casting industry, the plastic injection molding
industry historically has grown steadily in recent years, even through
downturns in the economic cycle. Since 1994, however, when the Company
entered the plastic injection molding industry, there have been no economic
downturns as reflected by industry revenues which would enable the Company to
gauge its impact on sales. The Company's operations may in the future
reflect substantial fluctuations from period to period as a consequence of
such industry patterns, general economic conditions affecting the timing of
orders from major customers, and other factors affecting capital spending.
There can be no assurance that such factors will not have a material adverse
effect upon the Company's business, operating results and financial
conditions.
TECHNOLOGICAL OBSOLESCENCE
The market for the Company's products is characterized by rapid
technological advances, evolving industry standards, changes in end-user
requirements and frequent new product introductions and enhancements. The
introduction of products embodying new technologies and the emergence of new
industry standards could render the Company's existing products and products
currently under development obsolete and unmarketable. The Company's future
success will depend upon its ability to enhance its current products and to
develop and introduce new products that keep pace with technological
developments, respond to evolving end-user requirements and achieve market
acceptance. Any failure by the Company to anticipate or respond adequately
to technological 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,
7
<PAGE>
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, the
Company's Chief Executive Officer and Interim Chief Financial Officer, Evros
Psiloyenis, the Company's President and Chief Operating Officer and Pierce A.
McNally, the Company's Chairman of the Board and Director of Corporate
Development. The loss of the services of either Mr. Pitner, Mr. Psiloyenis
or Mr. McNally 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
8
<PAGE>
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, 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. Because 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.
9
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
INDEX TO FINANCIAL STATEMENTS
The following items are included herein:
<TABLE>
<CAPTION>
Financial Statements: Pages:
--------------------- ------
<S> <C>
Report of Ernst & Young LLP.................................. F-1
Balance Sheets as of August 31, 1998 and 1997................ F-2 - F-3
Statements of Operations for the years ended
August 31, 1998 and 1997................................... F-4
Statements of Changes in Shareholders' Equity (Deficit)
for the years ended August 31, 1998 and 1997............... F-5
Statements of Cash Flows for the years ended
August 31, 1998 and 1997................................... F-6
Notes to Financial Statements................................ F-7 - F-21
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
10
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: December 14, 1998 NICOLLET PROCESS ENGINEERING, INC.
By: /s/ Robert A. Pitner
------------------------------------------
Robert A. Pitner
Chief Executive Officer and Interim Chief
Financial Officer
(principal executive officer)
11
<PAGE>
FINANCIAL STATEMENTS
NICOLLET PROCESS ENGINEERING, INC.
YEARS ENDED AUGUST 31, 1998 AND 1997
Nicollet Process Engineering, Inc.
Financial Statements
Years ended August 31, 1998 and 1997
CONTENTS
<TABLE>
<S> <C>
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................................7
</TABLE>
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, 1998 and 1997, 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the years then ended in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company's recurring
losses and negative cash flows from operations raise substantial doubts about
its ability to continue as a going concern. The 1998 financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Minneapolis, Minnesota
October 16, 1998
/s/ Ernst & Young LLP
F-1
<PAGE>
Nicollet Process Engineering, Inc.
Balance Sheets
<TABLE>
<CAPTION>
AUGUST 31
1998 1997
------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 257,910 $ -
Accounts receivable (net of allowance for doubtful
accounts of 1998--$80,199; 1997--$73,490) 124,985 815,942
Accounts receivable-related party - 19,313
Inventories 245,257 190,813
Prepaid expenses 14,670 21,103
------------------------------------
Total current assets 642,822 1,047,171
Property and equipment:
Computer equipment 497,596 486,594
Furnishings and equipment 176,647 173,022
Leasehold improvements 70,211 70,211
------------------------------------
744,454 729,827
Less accumulated depreciation (507,684) (387,423)
------------------------------------
236,770 342,404
Other assets:
Software development costs (net of accumulated amortization of
1998--$377,575; 1997--$148,556) 184,492 413,511
Other assets 11,691 63,475
------------------------------------
196,183 476,986
------------------------------------
Total assets $1,075,775 $1,866,561
====================================
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
AUGUST 31
1998 1997
------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Checks written in excess of bank balance $ - $ 128,595
Notes payable--current portion 23,564 49,655
Notes payable--line of credit - 486,538
Accounts payable 393,562 536,360
Accrued payroll liabilities 57,237 58,173
Customer deposits 114,015 10,835
Current portion of capitalized lease obligation - 7,496
Other current liabilities 74,078 66,747
------------------------------------
Total current liabilities 662,456 1,344,399
Notes payable 1,514,803 23,401
Deferred revenue - 26,000
Stockholders' equity (deficit):
Preferred stock, no par value:
Authorized shares--3,000,000
Issued and outstanding shares--none
Common stock, no par value:
Authorized shares--12,000,000
Issued and outstanding shares--6,211,861 at August 31, 1998 and
3,368,527 at August 31, 1997 8,939,949 7,653,600
Accumulated deficit (10,039,933) (7,179,339)
------------------------------------
(1,099,984) 474,261
Less stock subscription receivable (1,500) (1,500)
------------------------------------
Total stockholders' equity (deficit) (1,101,484) 472,761
------------------------------------
Total liabilities and stockholders' equity (deficit) $1,075,775 $1,866,561
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Nicollet Process Engineering, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
1998 1997
------------------------------------
<S> <C> <C>
Revenues $ 1,122,575 $ 2,285,215
Cost of revenues 1,043,569 1,634,808
------------------------------------
Gross profit 79,006 650,407
Operating expenses:
Selling 1,313,875 1,400,614
Research and development 711,720 788,120
General and administrative 905,135 985,280
------------------------------------
2,930,730 3,174,014
------------------------------------
Operating loss (2,851,724) (2,523,607)
Interest expense 152,194 24,380
Interest and other income 143,324 43,905
------------------------------------
Net loss $(2,860,594) $(2,504,082)
====================================
Net loss per share--basic and diluted $(.57) $(.75)
====================================
Weighted average number of shares outstanding 4,995,608 3,342,379
====================================
</TABLE>
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, 1996 3,277,923 $7,675,841 $ (4,675,257) $ 3,000,584
Purchase back of common stock options - (60,000) - (60,000)
Exercise of common stock options from common
stock 68,382 826 - 826
Issuance of common stock and warrants
for services 22,222 36,933 - 36,933
Net loss - - (2,504,082) (2,504,082)
-------------------------------------------------------------------------
Balance at August 31, 1997 3,368,527 7,653,600 (7,179,339) 474,261
Sale of common stock, net of offering costs of
$32,581 2,833,334 1,277,439 - 1,277,439
Issuance of common stock and warrants for
services 10,000 8,910 - 8,910
Net loss - - (2,860,594) (2,860,594)
-------------------------------------------------------------------------
Balance at August 31, 1998 6,211,861 $8,939,949 $(10,039,933) $(1,099,984)
=========================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Nicollet Process Engineering, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
1998 1997
------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,860,594) $(2,504,082)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation 120,261 97,804
Amortization 274,356 175,930
Common stock and warrants issued for services provided 8,910 36,933
Deferred revenue (26,000) 26,000
Changes in other operating assets and liabilities:
Accounts receivable 690,957 (531,745)
Accounts receivable-related party 19,313 (19,313)
Inventories (54,444) 141,261
Prepaid expenses 6,433 2,552
Accounts payable (142,798) 268,028
Checks written in excess of bank balance (128,595) 128,595
Other current liabilities 7,331 (46,271)
Accrued payroll liabilities (936) 28,881
Customer deposits 103,180 (25,718)
------------------------------------
Net cash used in operating activities (1,982,626) (2,221,145)
INVESTING ACTIVITIES
Capital expenditures (14,627) (125,590)
Software development costs - (207,596)
Maturity of marketable securities - 973,224
Other assets 6,447 7,648
------------------------------------
Net cash (used in) provided by investing activities (8,180) 647,686
FINANCING ACTIVITIES
Borrowings (payments) on line of credit (486,538) 486,538
Payments on notes payable (39,689) (49,655)
Purchase of common stock options - (60,000)
Proceeds from notes payable 1,505,000 -
Payments on capitalized lease obligation (7,496) (5,649)
Net proceeds from issuance of common stock 1,277,439 3,000
Proceeds from exercise of stock options and warrants - 826
------------------------------------
Net cash provided by financing activities 2,248,716 375,060
------------------------------------
Net increase (decrease) in cash 257,910 (1,198,399)
Cash at beginning of year - 1,198,399
------------------------------------
Cash at end of year $ 257,910 $-
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements
August 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Nicollet Process Engineering, Inc. 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.
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.
F-7
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in compliance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed."
Capitalization of computer software development costs begins upon the
establishment of technological feasibility for the product.
Amortization of capitalized computer software development costs begins when
the products are available for general release to customers, and is computed
as the greater of the ratio of current revenues for a product to the total of
current and anticipated future revenues for the product or straight-line
amortization over a period of three years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amount.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" (Statement 128). Statement 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effective of options, warrants and convertible
securities. Diluted earnings per share is very similar to fully
F-8
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
diluted earnings per share under the previous rules. All earnings per share
amounts for all periods presented have been presented, and where necessary,
restated to conform to the Statement 128 requirements. Diluted earnings per
share is not presented as the effect of outstanding options and warrants are
anti-dilutive.
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.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement 130, "Reporting Comprehensive
Income." Statement 130 is effective for financial statements for fiscal years
beginning after December 15, 1997. This standard defines comprehensive income
as the changes in equity of an entity except those resulting from shareholder
transactions. All components of comprehensive income are required to be
reported in a new financial statement. The adoption of Statement 130 is not
expected to have a material effect on the Company's financial statements.
In June 1997, the FASB also issued Statement 131, "Disclosures about Segments
of an Enterprise and Related Information." Statement 131 is effective for
financial statements for periods beginning after December 31, 1997. Statement
131 establishes standards for
F-9
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
disclosures about operating segments, products and services, geographic areas
and major customers. The adoption of Statement 131 is not expected to have a
material effect on the Company's financial statements.
In October 1997, the AICPA issued Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2"), which superseded SOP 91-1 for periods
beginning after December 15, 1997. The adoption of SOP 97-2 is not expected
to have a material effect on the timing of the Company's revenue recognition
or cause changes to its revenue recognition policies.
RECLASSIFICATION
Certain prior year items have been reclassified to conform to current year
presentation.
2. GOING CONCERN
The accompanying financial statements have been prepared on the basis that
the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The Company has incurred operating losses and has not
generated positive cash flow from operations. As a result, the Company needs
additional financing to continue as a going concern. The Company is in the
process of finalizing a proposed debt/equities financing transaction. If the
transaction is closed, the Company will be able to obtain a total of
$3,000,000 of working capital (see Note 4). The Company also continues to
explore other financing alternatives.
Because of uncertainties regarding the achievability of additional financing,
no assurance can be given as to the Company's ability to continue in
existence. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of
assets or the amount and classification of liabilities that may result from
the possible inability of the Company to continue as a going concern.
F-10
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
AUGUST 31
1998 1997
-----------------------------
<S> <C> <C>
Raw materials $ 77,230 $ 86,441
Work-in-process 31,679 8,626
Finished goods 136,348 95,746
-----------------------------
$245,257 $190,813
=============================
</TABLE>
4. 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 were due upon demand and
bore interest at 3% above the bank's reference rate. In June 1998, the
Company repaid any amounts outstanding on the line of credit and canceled the
agreement. Also, in June 1998, the Company entered into a letter of intent
with a third party to provide up to $3,000,000 of additional working capital
to the Company. The Company is negotiating the final terms of the agreement,
but as of August 31, 1998, the third party has loaned $1,505,000 to the
Company at an interest rate of 9 1/2%. The proposed terms of the agreement
call for the debt to be convertible into preferred stock. The Company will
convert $1,500,000 of the outstanding debt as of August 31, 1998 into
1,500,000 shares of preferred stock. The preferred stock carries voting
rights at 6.67 per preferred share. In addition, the third party will be
granted warrants to purchase up to 6,250,000 shares of the Company's common
stock at exercise prices ranging from $.15 to $3.00 per share.
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.
F-11
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
The carrying amount of the Company's debt instruments in the balance sheet at
August 31, 1998 approximates fair value.
F-12
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
5. COMMITMENTS
LEASES
The Company has entered into various operating leases for office, lab and
storage facilities and for various equipment. Future lease payments for all
operating leases, excluding executory costs such as management and
maintenance fees, are as follows:
<TABLE>
<S> <C>
1999 $45,424
2000 17,602
2001 400
------------------
$63,426
</TABLE>
==================
Rent expense was $122,167 and $108,013 for the years ended August 31, 1998
and 1997, 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. Total
royalty obligations were $10,800 and $32,600 for 1998 and 1997, respectively.
6. 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
F-13
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
granted at prices not less than the fair market value of the Company's common
stock at
F-14
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
6. STOCK OPTIONS AND WARRANTS (CONTINUED)
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.
On June 1, 1998, the Board of Directors approved repricing the options held
by current employees to $0.3125 per share for options previously issued at an
exercise price of $1.00 or above.
A summary of changes in outstanding options and shares available for grant
under the Company's stock option plans is as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED-
SHARES OUTSTANDING AVERAGE
AVAILABLE UNDER THE PRICE
FOR GRANT PLAN PER SHARE
--------------------------------------------------------
<S> <C> <C> <C>
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
Granted (190,000) 190,000 0.48
Canceled 164,000 (164,000) 0.48
----------------------------------
Balance at August 31, 1998 125,333 741,500 $0.50
==================================
</TABLE>
F-15
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
6. STOCK OPTIONS AND WARRANTS (CONTINUED)
As of August 31, 1998, there were 591,500 options outstanding with exercise
prices at $0.3125 and 150,000 options outstanding with exercise prices
between $0.40625 and $0.8125. At August 31, 1998, outstanding options had a
weighted-average remaining contractual life of 3.55 years.
The number of options exercisable as of August 31, 1998 and 1997 were 736,500
and 622,250, respectively, at weighted-average exercise prices of $0.37 and
$2.06 per share, respectively.
The weighted-average fair value of options granted during the years ended
August 31, 1998 and 1997 was $.41 and $.87, 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 1998 and 1997, respectively: risk-free interest rate of 6%;
no dividend yield; volatility factor of the expected market price of the
Company's common stock of 1.226% and .624%; and a weighted-average expected
life of the option of five 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-16
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
6. 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:
<TABLE>
<CAPTION>
1998 1997
------------------------------------
<S> <C> <C>
Pro forma net loss $(2,973,571) $(2,725,224)
Pro forma loss per share $(.60) $(.82)
</TABLE>
Note: The pro forma effect on the net loss for 1998 and 1997 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, 1998 and 1997, the Company has 489,440 and 597,636 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 $0.31
to $3.60. The warrants expire at various times between November 1998 and May
2001.
7. INCOME TAXES
The tax effects of significant components of the Company's deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
AUGUST 31
1998 1997
----------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $3,777,000 $2,749,000
Inventory obsolescence 38,200 37,900
Other 60,800 109,400
Deferred tax liabilities:
Software development costs 72,900 128,500
----------------------------------
Net deferred tax assets 3,803,100 2,767,800
Valuation allowance (3,803,100) (2,767,800)
</TABLE>
F-17
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
<TABLE>
<CAPTION>
<S> <C> <C>
----------------------------------
$- $-
==================================
</TABLE>
F-18
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
7. 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, 1998, the
Company had net operating loss carryforwards of approximately $9,561,700,
which are available to offset taxable income through 2013. 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, 1998 and 1997.
The effective income tax rate differed from the federal statutory rate as
follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
1998 1997
-----------------------------------
<S> <C> <C>
Taxes at statutory rate $ (972,600) $(851,000)
State taxes, net of federal benefit (162,800) (161,000)
Change in valuation allowance 1,035,300 957,000
Other 100,100 55,000
-----------------------------------
$ - $ -
===================================
</TABLE>
8. 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 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
F-19
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
months after separation if he is unable to find appropriate employment
because of the non-compete clause.
F-20
<PAGE>
Nicollet Process Engineering, Inc.
Notes to Financial Statements (continued)
8. 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 $52,500 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.
9. CONSULTING AGREEMENTS
In August 1998, the Company entered into a consulting agreement with its
"acting president" that provides for an annual base salary and a performance
bonus, payable in cash, and an option to purchase 500,000 shares of common
stock at an exercise price of $0.375 for five years. These options vest at
40% after two years and 20% per year thereafter.
In August 1998, the Company entered into an agreement with Techinspirations,
Inc. to provide expertise related to information processing technology,
marketing, and product and financial plans. For services provided, the
Company pays $25,000 per month for one year.
10. MAJOR CUSTOMERS
Sales to Customers A and B were 12% each of total sales in 1998.
Sales to Customer C were 11% of total sales in 1997.
11. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid interest of $130,100 and $24,380 for the years ended August
31, 1998 and 1997, respectively.
F-21
<PAGE>
NICOLLET PROCESS ENGINEERING, INC.
Exhibit Index to Annual Report On
Form 10-KSB
For Fiscal Year Ended August 31, 1998
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION METHOD OF FILING
- -------- ----------- ----------------
<C> <S> <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)
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION METHOD OF FILING
- -------- ----------- ----------------
<C> <S> <C>
4.14 Warrant for Purchase of Shares of Common Stock of the Company
issued to Dillon Advertising dated July 31, 1997............................... (7)
4.15 Warrant for Purchase of Shares of Common Stock of the Company
issued to Dillon Advertising dated August 31, 1997............................. (7)
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)
</TABLE>
E-2
<PAGE>
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION METHOD OF FILING
- -------- ----------- ----------------
<C> <S> <C>
10.14 Agreement for the Seventh Amendment to a Lease between
Hillcrest 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
Termination Agreement dated December 31, 1997 between the
Company and Richard A. Koontz.................................................. (8)
10.19 Credit and Security Agreement dated as of May 28, 1997 by and
between Norwest Business Credit, Inc. and the Company.......................... (4)
10.20 Credit and Security Agreement dated as of May 28, 1997 by and
between Norwest Bank Minnesota, National Association and
the Company.................................................................... (4)
10.21 Subscription Agreement dated as of November 7, 1997 among the
Company and certain Investors.................................................. (5)
10.22 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.......................... (7)
10.23 Nonrecourse Assignment dated as of June 8, 1998 by and
between Norwest Business Credit Inc. and
TECHinspirations, Inc.......................................................... (8)
10.24 Employment Proposal Agreement dated July 26, 1998 between the
Company and Evros Psiloyenis................................................... (8)
23.1 Consent of Ernst & Young LLP.................................................... Filed herewith
27.1 Financial Data Schedule......................................................... Filed herewith
</TABLE>
- ------------------------------------
(1) Incorporated by reference for the Company's Registration Statement on Form
SB-2 (File No. 333-00852C).
(2) Incorporated by reference for 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 for 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 for 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 for a Schedule 13D/A dated November 12, 1997,
filed on behalf of Pierce A. McNally and Robert A. Pitner.
(6) Incorporated by reference for 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).
(7) Incorporated by reference for the Company's Annual Report on Form 10-KSB
for the year ended August 31, 1997 (File No. 0-27928).
(8) Incorporated by reference for the Company's Annual Report on Form 10-KSB
for the year ended August 31, 1998 (File No. 0-27928).
E-4
<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 16,
1998, 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, 1998.
/s/ Ernst & Young LLP
----------------------
Ernst & Young LLP
Minneapolis, Minnesota
December 10, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF OPERATIONS AND BALANCE SHEET AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<CASH> 257,910
<SECURITIES> 0
<RECEIVABLES> 169,554
<ALLOWANCES> 44,570
<INVENTORY> 245,257
<CURRENT-ASSETS> 645,822
<PP&E> 744,454
<DEPRECIATION> 507,684
<TOTAL-ASSETS> 1,075,775
<CURRENT-LIABILITIES> 662,458
<BONDS> 0
0
0
<COMMON> 8,939,949
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,075,775
<SALES> 1,122,575
<TOTAL-REVENUES> 1,122,575
<CGS> 1,043,569
<TOTAL-COSTS> 2,930,730
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 152,194
<INCOME-PRETAX> (2,860,594)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,860,594)
<EPS-PRIMARY> (0.57)
<EPS-DILUTED> (0.57)
</TABLE>
