NEMATRON CORP, 10KSB/A, 1997-01-28

NEMATRON CORP
10KSB/A, 1997-01-28
ELECTRONIC COMPUTERS

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<PAGE> 1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended SEPTEMBER 30, 1996
or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
------- ------

Commission File Number: 0-21142

NEMATRON CORPORATION
(Name of small business issuer in its charter)

<TABLE>

<S> <C>
MICHIGAN 38-2483796
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>

5840 INTERFACE DRIVE, ANN ARBOR, MICHIGAN 48103
(Address of principal executive offices) (Zip Code)

(313) 994-0501
(Issuer's telephone number)

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
(Title of class)

Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No

Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not 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. [ ]

Issuer's revenues for its most recent fiscal year: $20,923,613

The aggregate market value of the voting stock held by non-affiliates as
of December 20, 1996, computed by reference to the closing price of such stock
on such date as quoted on the Nasdaq Stock Market National Market, was
approximately $23,965,000.

The number of shares outstanding of the issuer's Common Stock on December 20,
1996 was 4,564,692

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT [ ] Yes [ X ] No

<PAGE> 2

The Registrant hereby amends its Form 10-KSB for the fiscal year ended
September 30, 1996 to add Items 9, 10, 11 and 12 as set forth below:

ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT.

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Certain information relating to the persons who are the directors and executive
officers of the Company is set forth below.

<TABLE>
<CAPTION>
Director Term
Name Age Principal Occupation Since Expires
- -------------------- --- ------------------------------------------------- ----- -------
<S> <C> <C> <C> <C>

Frank G. Logan, III 40 Chairman of the Board of Directors, President 1995 1997
and CEO of the Company, and a Director

Douglas B. Juanarena 43 President and Chief Executive Officer of Pressure 1996 1997
Systems, Inc., an electronics manufacturer, and
a Director

Harry A. Sundblad 51 Vice President - Finance and Administration of 1994 1997
Watkins Manufacturing Corporation, a manufacturer
of portable hot spas, and a Director

Gregory J. Chandler 42 Vice President - Design Engineering of the 1983 1998
Company, and a Director

Garnel F. Graber 65 Chairman of the Board of Directors of Applied 1993 1998
Dynamics International, a computer manufacturing
Company, and of Interface Systems, Inc., a
manufacture of printers and computer interfaces,
and a Director

Michael L. Hershey 58 President and Chairman of the Board of Directors 1995 1998
of Landis Associates, Inc., an investment
management company, and a Director

David P. Gienapp 47 Secretary, Treasurer and Vice President - Finance 1995 1999
and Administration of the Company, and a Director

Hugo E, Braun 38 Vice President and a director of Onset BIDCO, 1995 1999
Inc., an investment fund, and a Director
</TABLE>

Frank G. Logan III, 40, became a director in March 1995 at the time of the
Company's merger with Imagination Systems, Inc. Mr. Logan is the Chairman of
the Board, President and Chief Executive Officer of the Company. Prior to
joining the Company on March 3, 1995, Mr. Logan was the President and Chief
Executive Officer of Imagination Systems, Inc., which was a privately held
Virginia-based software development company which he founded in 1983.

Douglas B. Juanarena, 43, became a director on December 16, 1996, as a
result of his election by the other members of the Board of Directors, to fill
the Board seat vacated when Mr. Albert W. Lowery resigned from the Board on
August 12, 1996. Mr. Juanarena is the President and Chief Executive Officer of
Pressure Systems, Inc., an electronics manufacturer specializing in designing
and producing advanced pressure measurement instrumentation for aeronautical
design and research. Prior to forming Pressure Systems, Inc. in 1978, Mr.
Juanarena worked in the Instrument Research Division of the NASA Langley
Research Center.

<PAGE> 3

Harry A. Sundblad, 51, became a director in 1994 pursuant to an Asset
Purchase Agreement between the Company and Action Instruments, Inc. The
Company acquired certain assets relating to Action's industrial computer
products in October 1993. Since June, 1996, Mr. Sundblad is the Vice President
of Finance and Administration for Watkins Manufacturing Corporation, a large
manufacturer of portable hot spas, located in Vista, California. Prior to
joining Watkins, Mr. Sundblad was self-employed as a financial consultant from
August, 1995 to May, 1996. Prior to August, 1995, Mr. Sundblad was the
Executive Vice President and a director of Action Instruments, a manufacturer
of high-technology electronic measurement and control instrumentation, where he
was employed since 1976.

Gregory J. Chandler, 41, is a founder of the Company and has been a
director of the Company since its formation in 1983. Mr. Chandler is the Vice
President - Design Engineering of the Company. Since 1983, Mr. Chandler has
been principally involved in computer and component design and development, as
well as the development of major vendor relationships regarding critical
components and assemblies such as displays, processors, and mechanical
packaging.

Garnel F. Graber, 64, became a director in February 1993 at the time of
the Company's spin-off from Interface Systems, Inc. and served as Chairman of
the Board of Nematron through March 8, 1996. Mr. Graber is a retired executive
of, and the current Chairman of the Board of Directors of, Applied Dynamics
International, a computer firm specializing in high speed simulation
applications required in applications such as aviation, and is a director of
FAAC, Inc. and The Ann Arbor Convention and Visitors Bureau, both privately
held corporations. Mr. Graber also serves as Chairman of the Board of
Interface Systems, Inc.

Michael L. Hershey, 57, became a director in March 1995 at the time of the
Company's merger with Imagination Systems, Inc. Mr. Hershey had served as a
member of the Board of Directors and Secretary of Imagination Systems, Inc., a
Virginia-based corporation merged into the Company in March, 1995. Mr. Hershey
has been the President and Chairman of the Board of Directors of Landis
Associates, Inc., an investment management company, since its formation in
1986, and is a member of the Board of Directors of Atlantic Aviation Corp., a
privately-owned aviation services company.

David P. Gienapp, 48, became a director in March 1995 at the time of the
Company's merger with Imagination Systems, Inc. Mr. Gienapp is the Vice
President - Finance and Administration, Secretary and Treasurer of the Company.
Prior to joining the Company in September, 1994, Mr. Gienapp spent over 20
years with Deloitte & Touche LLP, a certified public accounting firm.

Hugo Braun, 38, was elected to the Board by the shareholders in March,
1996. Mr. Braun is Vice President and a director of Onset BIDCO, Inc., an
investment fund, where he has been employed since 1989. Mr. Braun is a member
of the Boards of Directors of ArborText, Inc., a privately-owned electronic
publishing software company, Open Networks Engineering, Inc., a privately-owned
networking software company, Personal Bibliographics Software, Inc., a
privately-owned bibliographics software company, and Morley Candy Makers, Inc.,
a privately-owned manufacturer and distributor of chocolate products.

The executive officers of the Company serve at the pleasure of the Board
of Directors.

<PAGE> 4

BOARD OF DIRECTORS MEETINGS AND COMMITTEES

The Board met six times during the year ended September 30, 1996. No
director attended fewer than 75% of the aggregate of the total number of
meetings of the Board and of the committees of the Board on which he served,
except that former directors Robert Buckler and G. Paul Horst attended none of
the three meetings of the Board held prior to the expiration of their terms as
directors in March, 1996.

Standing committees of the Board include an Audit Committee, a
Compensation Committee, an Organization and Compensation Committee, an
Executive Committee, and a Nominating Committee.

The Audit Committee met four times in fiscal 1996. The Audit Committee
meets with the Company's independent accountants to review the adequacy of the
Company's internal control systems and financial reporting procedures; reviews
the general scope of the Company's annual audit and the fees charged by the
independent accountants; and reviews and monitors the performance of non-audit
services by the Company's auditors. The members of the Audit Committee are
Messrs. Sundblad (Chairman), Braun, Graber, Hershey.

The Compensation Committee met once during fiscal 1996. The Compensation
Committee administers the Company's Restricted Stock Plan and 1993 Stock Option
Plan and determines all compensation issues involving the grant or award of the
Company's equity securities. The members of the Compensation Committee are
Messrs. Hershey and Sundblad.

The Organization and Compensation Committee met two times during fiscal
1996. The Organization and Compensation Committee determines compensation
issues for officers and directors that do not involve the Company's equity
securities. The members of the Organization and Compensation Committee are
Messrs. Graber (Chairman), Braun, Hershey and Sundblad.

The Executive Committee met ten times during the of fiscal 1996. The
Executive Committee discusses current operating and strategic matters that
arise between scheduled or special Board meetings. The members of the
Executive Committee are Messrs. Logan (Chairman), Gienapp and Graber.

The Nominating Committee met two times during fiscal 1996. The Nominating
Committee identifies and reviews potential members of the Board and nominates
persons to the Board to serve as Board members. The members of the Nominating
Committee are Messrs. Graber (Chairman), Logan and Hershey.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Act of 1934 requires all Company executive
officers and directors and persons who own more than ten percent of a
registered class of the Company's equity securities to file reports of their
ownership with the Securities and Exchange Commission. Executive Officers,
directors and greater than ten percent shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) reports they
file. Specific due dates for these reports have been established and the
Company is required to report any delinquent filings and failures to file such
reports.

Based solely on its review of the copies of such reports received by it
and written representations of its executive officers and incumbent directors,
the Company believes that during the year ended September 30, 1996, all filing
reports applicable to its executive officers, directors and greater than ten
percent beneficial owners were complied with, except that Mr. Graber did not
timely file a Form 4 report disclosing one transaction and Mr. May, a principal
shareholder, did not timely file a Form 4 report disclosing one transaction.

<PAGE> 5

ITEM 10 EXECUTIVE COMPENSATION

SUMMARY

The following table sets forth information concerning the aggregate
compensation paid by the Company and its subsidiaries to the Company's
President and Chief Executive Officer and to its Vice President - Finance and
Administration, the Company's only other executive officer whose salary and
bonus exceeded $100,000 in fiscal 1996 (the "Named Executives") for the periods
indicated.

SUMMARY COMPENSATION TABLE (1)

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
COMPENSATION
---------------------- -------------------------
AWARDS PAYOUTS
------------------------- ALL OTHER
NAME AND PRINCIPAL FISCAL OPTIONS LTIP COMPEN-
POSITION YEAR SALARY ($) BONUS ($) (#) PAYOUTS SATION ($) (2)
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Frank G. Logan, III, 1996 $154,531 $25,000 50,000 $-0- $4,305
President, CEO (3) ------------------------------------------------------------------------------
1995 $ 70,088 $-0- 50,000 $-0- $1,588
- ----------------------------------------------------------------------------------------------------
David P. Gienapp, 1996 $ 95,384 $15,000 20,000 $-0- $2,286
VP - Finance and ------------------------------------------------------------------------------
Administration 1995 $ 77,035 $-0- 25,000 $-0- $ 395
------------------------------------------------------------------------------
1994 $ 6,250 $-0- 5,000 $-0-
- ----------------------------------------------------------------------------------------------------
</TABLE>

(1) The amounts reflected in the table do not include other compensation or
personal benefits which did not exceed in the aggregate the lesser of
either $50,000 or 10% of the total of annual salary and bonus for the
Named Executives. No "Other Annual Cash Compensation" or "Long Term
Incentive Plan Payouts" were paid in any of the fiscal years shown.

(2) All Other Compensation shown for Mr. Logan represents amounts paid by
the Company for life insurance for Mr. Logan of $956 each year and 401(k)
Plan contributions by the Company of $3,349 for 1996 and $632 for 1995.
All Other Compensation shown for Mr. Gienapp represents 401(k) Plan
contributions by the Company.

(3) Mr. Logan assumed the office of President on March 3, 1995 and was
named Chief Executive Officer on March 27, 1995.

Management compensation is established on an annual basis by the
Organization and Compensation Committee and the Compensation Committee of the
Board of Directors.

<PAGE> 6

OPTIONS

The following table sets forth information concerning options granted to
the Named Executives in the year ended September 30, 1996.

OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS

<TABLE>
PERCENT OF TOTAL
OPTIONS OPTIONS GRANTED TO EXERCISE
GRANTED EMPLOYEES IN FISCAL PRICE EXPIRATION
NAME (#) (1) YEAR ($/SHARE) DATE
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
Frank G. Logan, III 50,000 22.5% $6.75/Share August 9, 2006
- ------------------------------------------------------------------------------------------
David P. Gienapp 20,000 9.0% $6.75/Share August 9, 2006
- ------------------------------------------------------------------------------------------
</TABLE>

(1) All of these options, which were granted pursuant to the Company's 1993
Stock Option Plan, were granted at market value on the date of the grant
and have a term of ten years. The Compensation Committee of the Board of
Directors determines the exercise provisions of each option award. The
options granted to each of the Named Executives in fiscal 1996 become
exercisable annually in increments of 33 1/3% beginning on the date of
the grant. The exercisability of these options may be accelerated in the
event of a change in control of the Company. See "Change in Control
Arrangements."

The Named Executives did not exercise any options in the year ended
September 30, 1996. The following table provides information with respect to
unexercised options held by the Named Executives as of September 30, 1996.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FY-END (#) AT FY-END ($)
ACQUIRED
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
Frank G. Logan, III None N/A 66,666 / 33,334 $269,332 / $62,668
- ---------------------------------------------------------------------------------------
David P. Gienapp None N/A 36,666 / 13,334 $196,432 / $25,068
- ---------------------------------------------------------------------------------------
</TABLE>

COMPENSATION OF DIRECTORS

Each director who is not an officer or employee of the Company receives
for his services as such a fee of $1,000 per meeting attended, subject to a
maximum annual fee of $4,000. Directors who are officers or employees of the
Company receive no additional compensation for their service as a director,
although they are reimbursed for their reasonable travel expenses when meetings
are held in a location other than the metropolitan area in which they reside.

As additional consideration for their services to the Company, the Company
has established a Directors Stock Option Plan which provides for the grant of
non-qualified stock options to non-employee directors of the Company. Each
such director is granted an option to purchase 1,000 shares of Common Stock on:
(a) the date on which such person first becomes a director and (b) the date of
each Annual Meeting of Shareholders occurring thereafter during the term of the
plan if the participant shall have been a director for the six months
immediately preceding such Annual Meeting. The exercise price of options
granted under the Directors Stock Option Plan is the greater of book value per
share or fair market value of the Company's Common Stock on the date the option
is granted. Each option under the Directors Stock

<PAGE> 7

Option Plan becomes exercisable beginning six months after the option is
granted and remains exercisable until the fifth anniversary of the date of the
grant unless earlier terminated in accordance with the terms of the plan. In
the fiscal year ended September 30, 1995, Messrs. Graber, Hershey and Sundblad
each received an option to purchase 1,000 shares of Common Stock under the plan
at an exercise price of $8.75 per share.

In March, 1996, the Compensation Committee of the Board of Directors
awarded Mr. Graber a special option to purchase 20,000 shares of the Company's
Common Stock at an exercise price of $8.75 per share for his efforts as
Chairman of the Board during the period from beginning with the spin-off of the
Company as a separate entity in February, 1993 through March 8, 1996 when a new
chairman of the Board of Directors was elected. Mr. Graber's option is
currently exercisable and expires in March, 2006.

The Company does not have employment agreements with the Named Executives.

CHANGE IN CONTROL ARRANGEMENTS

The Company granted the options disclosed in the tables above pursuant to
the 1993 Stock Option Plan. The Compensation Committee of the Board of
Directors determines the exercise provisions of each option award. All shares
subject to an option grant become immediately exercisable upon a change in
control of the Company. A "change in control" is defined as the acquisition of
20% or more of the voting power of the Company or sale of all or substantially
all of the Company's assets, or a merger, consolidation or similar transaction
in which the Company is a constituent corporation, or a change in the identity
of a majority of the members of the Company's Board of Directors in any
twelve-month period, which change or changes were not recommended by the
incumbent directors immediately prior to such change or changes.

ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PRINCIPAL SHAREHOLDERS

The Common Stock is the only voting security of the Company. The
following table sets forth information as of January 27, 1997, for all
shareholders known by the Company to be the beneficial owners of more than 5%
of its outstanding Common Stock. Except as noted below, each shareholder
exercises sole voting and investment power with respect to the shares
beneficially owned.

<PAGE> 8

(1) The shares represented in the table include (i) the 471,172 shares
owned by J. Eric May, Trustee Under Declaration of Trust, over which Mr.
Hershey may exercise voting and investment power; (ii) 25,371 shares of
Common Stock owned outright; (iii) options to purchase 1,000 shares of
Common Stock under the Directors Option Plan which are currently
exercisable or are exercisable within sixty days of January 27, 1997.

(2) The shares represented in the table include (i) 298,361 shares of
Common Stock owned outright; (ii) 2,000 shares owned by Mr. Logan's wife;
(iii) 25,964 shares of Common Stock owned by Mr. Logan as custodian of
certain trusts for his children; and (iv) options to purchase 66,666
shares of Common Stock under the 1993 Stock Option Plan which are
currently exercisable or are exercisable within sixty days of January 27,
1997.

(3) The shares represented in the table include shares owned by the
following individuals and entities: Stephen E. Globus; Richard D.
Globus; Ronald P. Globus; Jane Globus; SRG Capital Partnership, a
partnership consisting of Stephen E. Globus and Richard D. Globus; Globus
Growth Group, Inc., a business development corporation, as defined in the
Investment Company Act of 1940, controlled by Stephen E. Globus, Richard
D. Globus and Ronald P. Globus; Globus Studios, Inc., a corporation
controlled by Stephen E. Globus, Richard D. Globus, Ronald P. Globus and
Jane Globus. These individuals and entities filed an Amendment No. 1 to
Schedule 13D with the Securities and Exchange Commission on May 1, 1996
in which the individuals expressly disclaimed beneficial ownership of
shares owned by the other individuals and expressly disclaimed that they
constituted a group.

<PAGE> 9

STOCK OWNERSHIP OF MANAGEMENT

The following table sets forth information concerning the beneficial
ownership of the Company's Common Stock by each of the Company's directors and
Named Executives and by all executive officers and directors of the Company as
a group as of January 27, 1997. Except as noted below, each shareholder
exercises sole voting and investment power with respect to the shares
beneficially owned.

<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
NAME AND ADDRESS OF BENEFICIAL OWNERS OWNERSHIP PERCENT OF CLASS
- -------------------------------------------------------------------------------------
<S> <C> <C>
Michael L. Hershey, Director
Landis Associates, Inc.
400 West Ninth Street, Suite 100
Wilmington, DE 19801 497,543 (1) 10.85%
- -------------------------------------------------------------------------------------
Frank G. Logan, III, Director and Officer
5840 Interface Drive
Ann Arbor, MI 48103 392,991 (2) 8.45%
- -------------------------------------------------------------------------------------
Hugo E. Braun, Director
313 North First Street
Ann Arbor, MI 48103 131,785 (3) 2.79%
- -------------------------------------------------------------------------------------
Gregory J. Chandler, Director and Officer
5840 Interface Drive
Ann Arbor, MI 48103 120,570 (4) 2.62%
- -------------------------------------------------------------------------------------
David P. Gienapp, Director and Officer
5840 Interface Drive
Ann Arbor, MI 48103 59,916 (5) 1.30%
- -------------------------------------------------------------------------------------
Garnel F. Graber, Director
600 Adrian
Manchester, MI 48158 48,152 (6) 1.04%
- -------------------------------------------------------------------------------------
Harry A. Sundblad, Director
1280 Park Center Drive
Vista, CA 92083 3,000 (7) 0.07%
- -------------------------------------------------------------------------------------
Douglas B. Juanarena
34 Research Drive
Hampton, VA 23666 1,000 (8) 0.02%
- -------------------------------------------------------------------------------------
All Directors and Executive Officers as Group 1,254,957 (9) 26.34%
- -------------------------------------------------------------------------------------
</TABLE>

(1) See footnote 1 to Principal Shareholder table.

(2) See footnote 2 to Principal Shareholder table.

(3) The shares represented in the table include currently exercisable
warrants to purchase 131,785 shares of Common Stock pursuant to a Term
Loan and Warrant Purchase Agreement dated November 7, 1995 between the
Company and Onset BIDCO, Inc., of which Mr. Braun is an officer, The
Capital Fund, Inc., and others in connection with a private placement of
subordinated notes in the amount of $1,800,000. If such warrants were
exercised, Mr. Braun would have sole voting rights and shared investment
power with respect to the underlying shares.

(4) The shares represented in the table include (i) 102,337 shares of
Common Stock owned outright; and (ii) options to purchase 18,233 shares
of Common Stock under the 1993 Stock Option Plan which are currently
exercisable or are exercisable within sixty days of January 27, 1997.

(5) The shares represented in the table include (i) 23,250 shares of Common
Stock owned outright; and (ii) options to purchase 36,666 shares of
Common Stock under the 1993 Stock Option Plan which are currently
exercisable or are exercisable within sixty days of January 27, 1997.

<PAGE> 10

(6) The shares represented in the table include (i) 14,152 shares of Common
Stock owned outright; (ii) options to purchase 4,000 shares of Common
Stock under the Directors Stock Option Plan which are currently
exercisable or are exercisable within sixty days of January 27, 1997; and
(iii) options to purchase 30,000 shares of Common Stock under special
option awards which are currently exercisable or are exercisable within
sixty days of January 27, 1997.

(7) The shares in the table represent options to purchase 3,000 shares of
Common Stock under the Directors Stock Option Plan which are currently
exercisable or are exercisable within sixty days of January 27, 1997.

(8) The shares represented in the table include currently exercisable
options to purchase 1,000 shares of Common Stock under the Directors
Stock Option Plan.

(9) The shares represented in the table include (i) 491,435 shares of
Common Stock owned outright; (ii) 471,172 shares of Common Stock
beneficially owned by J. Eric May, Trustee Under Declaration of Trust but
also reported as beneficially owned by Mr. Hershey and over which Mr.
Hershey may exercise voting and investment; (iii) options to purchase
121,565 shares of Common Stock under the 1993 Stock Option Plan which are
currently exercisable or are exercisable within sixty days of January 27,
1997: (iv) options to purchase 9,000 shares of Common Stock under the
Directors Stock Option Plan which are currently exercisable or are
exercisable within sixty days of January 27, 1997; (v) options to
purchase 30,000 shares of Common Stock under special option awards which
are currently exercisable or are exercisable within sixty days of January
27, 1997; and (vi) warrants to purchase 131,785 shares of Common Stock.

ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Messrs. J. Eric May, Frank G. Logan, III and Michael L. Hershey

Effective March 3, 1995, the Company completed its merger with Imagination
Systems, Inc. ("ISI). Under terms of the merger agreement, the Company issued
825,526 shares of its Common Stock to the former ISI shareholders (including
Messrs. May (a principal shareholder), Logan (the Chairman of the Board,
President and Chief Executive Officer) and a principal shareholder and Hershey
(a director), who received 314,155 shares, 74,217 shares and 12,914 shares of
Company common stock, respectively, in exchange for 100% of the outstanding
stock of ISI. The ISI stock was retired, and the Company is the surviving
entity. In connection with the merger, the Company also issued 120,000 shares
of its Common Stock to Mr. Logan in return for a non-competition agreement.
The value of the shares issued to Mr. Logan for the non-competition agreement
was $217,500 on the date of the merger. In addition, the Company issued one
warrant to purchase the Company's Common Stock at $2.50 per share for every two
shares of

10
<PAGE> 11

Common Stock issued in the ISI merger. Messrs. May, Logan and
Hershey received 157,057 warrants, 97,108 warrants and 6,457 warrants,
respectively, all of which have been exercised.

Frank G. Logan, III

In March, 1995, the Company entered into a lease for the use of a
two-story office building in Virginia Beach, Virginia, which the Company uses
for its software development and applied systems businesses, with LPS
Management, a partnership of which Mr. Logan is a partner. The lease term
extends to February, 1997 and requires lease payments of $6,466 per month.
Total lease expense for the office building was approximately $77,600 and
$45,300 for fiscal 1996 and fiscal 1995, respectively. The lease is expected
to be renewed in March, 1996 on substantially the same terms and conditions as
the current lease.

The Organization and Compensation Committee of the Board of Directors
authorized a loan to Mr. Logan in the principal amount of $94,900 as of April,
1996 to pay federal and state taxes with respect to the 120,000 shares of
Company common stock issued to Mr. Logan in consideration for a Non-Competition
Agreement dated March 3, 1995. Mr. Logan delivered to the Company a promissory
note which is payable in full on the earlier of April 15, 1997 or 90 days after
Mr. Logan terminates employment with the Company. The note bears interest at
8.25% per annum; accrued interest is payable at the maturity date of the note.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

NEMATRON CORPORATION

By: /s/ David P. Gienapp Dated: January 28, 1997
-------------------------------------------
David P. Gienapp,
Vice President - Finance and Administration
and Chief Financial Officer