<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 0-21142
NEMATRON CORPORATION
(Exact name of small business issuer as specified in its charter)
MICHIGAN 38-2483796
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5840 INTERFACE DRIVE, ANN ARBOR, MICHIGAN 48103
(Address of principal executive offices) (Zip Code)
(313) 994-0591
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities 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.
[X] YES [ ] No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
No par value Common Stock: 5,318,656 SHARES AS OF AUGUST 11, 1997
Transitional Small Business Disclosure Format: [ ] YES [X] NO
================================================================================
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEMATRON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1997 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1996
(UNAUDITED) (AUDITED)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $3,519,627 $3,942,963
Accounts receivable, net of allowance for doubtful
accounts of $258,000 at June 30, 1997, and
$115,000 at September 30, 1996 5,447,208 5,989,708
Inventories (Note 2) 5,733,053 4,520,937
Prepaid expenses and other current assets 588,969 750,995
- -------------------------------------------------------------------------------------------
Total Current Assets 15,288,857 15,204,603
Property and Equipment, net 4,227,729 3,384,285
Other Assets (Note 7):
Capitalized software, net of accumulated amortization
of $751,000 at June 30, 1997, and $611,022
at September 30, 1996 6,257,243 4,426,257
Other intangible assets, net of accumulated amortization
of $766,000 at June 30, 1997 and $580,954
at September 30, 1996 2,509,736 1,199,200
- ------------------------------------------------------------------------------------------
Net Other Assets, net 8,766,979 5,625,457
- ------------------------------------------------------------------------------------------
Total Assets $28,283,565 $24,214,345
==========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable to bank (Note 3) $ 1,300,000 $ -0-
Accounts payable 2,375,696 1,661,120
Other accrued liabilities 1,966,498 671,678
Current maturities of long-term debt (Note 3) 701,931 158,340
- ------------------------------------------------------------------------------------------
Total Current Liabilities 6,344,125 2,491,138
Long-Term Debt, less current maturities (Note 3) 3,762,655 3,993,309
- ------------------------------------------------------------------------------------------
Total Liabilities 10,106,780 6,484,447
Stockholders' Equity (Notes 5 and 8):
Common stock, no par value, 15,000,000 shares authorized
and 5,318,656 shares issued and outstanding at June 30,
1997; 8,000,000 shares authorized and 4,558,248 shares
issued and outstanding at September 30, 1996 21,561,209 17,572,814
Foreign currency translation adjustment (3,453) (85,518)
Retained earnings (accumulated deficit) (3,380,971) 242,602
- ------------------------------------------------------------------------------------------
Total Stockholders' Equity 18,176,785 17,729,898
- ------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $28,283,565 $24,214,345
==========================================================================================
</TABLE>
PAGE 2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net Revenues $5,981,613 $5,143,096 $16,167,741 $15,214,514
Cost of Revenues 3,211,692 2,959,649 9,171,169 8,607,220
- -------------------------------------------------------------------------------------------
Gross Profit 2,769,921 2,183,447 6,996,572 6,607,294
Operating Expenses:
Product development costs 583,560 306,400 1,558,786 909,486
Selling, general and
administrative 2,685,084 1,614,343 6,436,038 4,965,355
- -------------------------------------------------------------------------------------------
Total Operating Expenses 3,268,644 1,920,743 7,994,824 5,874,841
- -------------------------------------------------------------------------------------------
Operating Income (Loss) (498,723) 262,704 (998,252) 732,453
Other Income (Expense):
Write off of in-process research
and development costs relating
to Intec acquisition (Note 7) -0- -0- (1,655,000) -0-
Write off of in-process research
and development costs relating
to VTS acquisition (Note 7) (400,000) -0- (400,000) -0-
Loss on closing of European
office (Note 6) -0- -0- (149,814) -0-
Interest expense (110,846) (176,446) (271,249) (497,848)
Debt retirement (Note 3) -0- -0- (122,340) -0-
Interest and other income 43,205 17,177 109,585 13,418
Foreign currency gain (loss) (11,084) 23 (136,503) (13,846)
- -------------------------------------------------------------------------------------------
Total Other Income (Expense) (478,725) (159,246) (2,625,321) (498,276)
- -------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes (977,448) 103,458 (3,623,573) 234,177
Taxes on Income (Note 4) -0- -0- -0- -0-
- -------------------------------------------------------------------------------------------
Net Income (Loss) $(977,448) $103,458 $(3,623,573) $ 234,177
===========================================================================================
Earnings Per Share (Note 8) $ (0.19) $ 0.03 $ (0.75) $ 0.06
===========================================================================================
</TABLE>
PAGE 3
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTH ENDED
JUNE 30, 1997 JUNE 30, 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (3,623,573) $ 234,177
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities, net of acquisitions:
Depreciation and amortization 918,676 608,607
Write off of research and development costs (Note 7) 2,055,000
Debt retirement expense 122,340
Changes in assets and liabilities that provided (used) cash:
Accounts receivable 1,218,885 (1,701,661)
Inventories (1,190,010) (679,270)
Prepaid expenses and other current assets 187,905 40,097
Accounts payable 508,080 (1,261,157)
Other accrued liabilities (71,280) 6,010
- -------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Operating Activities 126,023 (2,753,197)
Cash Flows From Investing Activities:
Acquisition of Intec Controls Corp. (Note 7) 281,058
Acquisition of Virtual-Time Software, Inc., net of
$17,766 cash acquired (Note 7) (82,234)
Additions to capitalized software development costs (1,491,927) (434,938)
Additions to property and equipment (1,071,193) (626,878)
Additions to other intangible assets (114,154)
- -------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (2,478,450) (1,061,816)
Cash Flows From Financing Activities:
Proceeds from borrowings 2,337,272 1,860,000
Increase (decrease) in notes payable to bank 1,300,000 (2,450,000)
Proceeds from exercise of common stock options and warrants 279,384 440,435
Net proceeds from sale of common stock 9,551,604
Payments of long-term debt (2,069,630) (536,199)
Payment of deferred financing fees (165,780)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided From Financing Activities 1,847,026 8,700,060
Foreign Currency Translation Effect on Cash 82,065 (34,237)
- -------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash and Cash Equivalents (423,336) 4,850,810
Cash and Cash Equivalents at Beginning of Period 3,942,963 78,258
- -------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 3,519,627 $ 4,929,068
=======================================================================================================
</TABLE>
Continues on next page
PAGE 4
<PAGE> 5
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996 - CONTINUED
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTH ENDED
JUNE 30, 1997 JUNE 30, 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 331,625 $475,807
Cash paid for income taxes -0- -0-
FINANCING AND INVESTING ACTIVITIES REGARDING THE ACQUISITION OF INTEC CONTROLS CORP. (NOTE 7):
Cash acquired $ 281,058
Non-cash assets and liabilities acquired:
Current assets, other than cash 724,369
Property and equipment 305,309
Software development costs, including in-process R&D 2,003,092
Other intangible assets 1,407,000
Current liabilities (979,673)
Long term debt (5,950)
----------
Purchase price, including $430,000 of accrued costs $3,735,205
==========
FINANCING AND INVESTING ACTIVITIES REGARDING THE ACQUISITION OF VIRTUAL-TIME SOFTWARE, INC. (NOTE 7):
Cash acquired $ 17,766
Non-cash assets and liabilities acquired:
Property and equipment 15,746
Software development costs, including in-process R&D 475,000
Other intangible assets 197,562
Current liabilities (12,074)
----------
Purchase price, including $190,000 of accrued costs $ 694,000
==========
</TABLE>
PAGE 5
<PAGE> 6
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 30, 1997 AND 1996
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Nematron Corporation (the "Company") and its wholly-owned subsidiaries,
Nematron Europa BV, a Netherlands corporation ("NEBV"), and NemaSoft, Inc. and
Imagination Systems, Inc., Michigan corporations. During the second quarter of
fiscal 1997, the Company ceased operations of NEBV. As explained more fully in
Note 7, on March 31, 1997, the Company acquired Intec Controls Corp. ("Intec")
and on June 18, 1997, the Company acquired Virtual-Time Software, Inc. ("VTS")
by merging each of those corporations into a wholly-owned subsidiary of the
Company. Operations of Intec and VTS are included in the accompanying
financial statements since the dates of their acquisitions. All significant
intercompany transactions and balances have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair presentation of the
consolidated financial statements for the interim periods have been included.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to S.E.C. rules and regulations,
although the Company believes that the disclosures are adequate to make the
information presented not misleading. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's latest annual report on
Form 10-KSB, as amended.
The results of operations for the three-month and nine-month periods ended June
30, 1997 are not necessarily indicative of the results to be expected for the
full year.
NOTE 2 - INVENTORIES
Inventories consist of the following at June 30, 1997 and September 30, 1996:
<TABLE>
<CAPTION>
CATEGORY JUNE 30, 1997 SEPT. 30, 1996
<S> <C> <C>
Purchased parts and accessories $3,489,352 $2,734,974
Finished goods and service stock 1,428,066 1,436,774
Work in process 815,635 349,189
---------- ----------
Total inventory $5,733,053 $4,520,937
========== ==========
</TABLE>
NOTE 3 - SHORT-TERM AND LONG-TERM DEBT
The Company negotiated an expansion of its existing credit facility and entered
into a new Loan Agreement as of February 12, 1997 (the "Agreement"). The
Agreement allows borrowings under the line of credit of up to $6,000,000.
Borrowings under this facility bear interest at 2.5% over LIBOR and are secured
by substantially all assets and a second mortgage on the Company's Ann Arbor
facilities. The Agreement expires February 28, 1998. Amounts borrowed under
the credit facility totaled $1,300,000 at June 30, 1997.
PAGE 6
<PAGE> 7
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
Long-term debt includes the following debt instruments:
<TABLE>
<CAPTION>
CATEGORY JUNE 30, 1997 SEPT. 30, 1996
<S> <C> <C>
Mortgage loan payable to bank $2,193,246 $2,300,000
Subordinated notes payable -0- 1,800,000
Term note 1,680,000 -0-
Equipment note 508,404 -0-
Capitalized lease obligations and other notes 82,936 51,649
---------- ----------
4,464,586 4,151,649
Less current maturities (701,931) (158,340)
---------- ----------
Long-term debt, less current maturities $3,762,655 $3,993,309
========== ==========
</TABLE>
On February 12, 1997, the Company entered into a term note agreement in the
amount of $1,800,000 with its primary bank. The purpose of the loan was to pay
off the 12% subordinated debt, on which there was $122,340 of remaining debt
financing costs that were being amortized over the term of the subordinated
debt. The note issued under the new agreement bears interest at LIBOR plus
2.50%, which at June 30, 1997 was approximately 8.2%. The note is payable in
monthly installments of $30,000 plus interest, with the final payment due
February 1, 2002.
On March 31, 1997, the Company entered into an arrangement with its primary
bank for an equipment line of credit to finance the purchase of certain
computer equipment. The total amount advanced under this line was $537,272.
The note is payable in monthly installments of $13,300, including interest at
the prime rate, currently 8.5%, through April 30, 2002.
NOTE 4 - ACCOUNTING FOR INCOME TAXES
There was no current tax benefit for the three and nine month periods ended
June 30, 1997 because of the uncertainty that the associated deferred tax asset
would not be realized.
At September 30, 1996, the Company had NOLs of approximately $5,700,000 that
may be applied against future taxable income. The NOLs expire beginning 2003
through 2011. Utilization of these carryforwards is subject to annual
limitations under current Internal Revenue Service regulations.
NOTE 5 - CHANGE IN COMMON STOCK
The increase in common stock during the nine months ended June 30, 1997 is due
to the following:
<TABLE>
<CAPTION>
SHARES
OUTSTANDING AMOUNT
<S> <C> <C>
Balance at October 1, 1996 4,558,248 $17,572,814
Shares issued in connection with
exercise of warrants 44,647 170,922
Shares issued in connection with
exercise of options 73,949 190,713
Shares retired in connection with
exercise of options (13,083) (82,251)
Shares issued in connection with
acquisition of Intec Controls Corp. 587,594 3,305,205
Shares issued in connection with
acquisition of Virtual-Time Software, Inc. 67,301 403,806
---------- -----------
Balance, June 30, 1997 5,318,656 $21,561,209
========== ===========
</TABLE>
PAGE 7
<PAGE> 8
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NOTE 6 - CLOSING OF EUROPEAN OFFICE
During the second quarter of fiscal 1997, the Company ceased operations of
NEBV, its wholly-owned subsidiary. In connection therewith, the Company
incurred a loss of approximately $150,000. As a result of the liquidation of
the NEBV operations, the Company also recognized a foreign currency loss of
approximately $92,000 that had previously been recorded as a component of
stockholders' equity. The United Kingdom operations of the former Intec
operations will serve as a base for the Company's operations in Europe. See
Note 7.
NOTE 7 - ACQUISITIONS
Virtual-Time Software, Inc.
Effective June 18, 1997, the Company completed its acquisition of Virtual-Time
Software, Inc. of Santa Clara, California. VTS is a software developer and
seller of real-time operating system products which provide high speed
deterministic performance to Microsoft's Windows operating systems. Under the
terms of the related agreement, VTS was merged into the Company's Imagination
Systems, Inc. subsidiary and the VTS stock was retired. In connection with the
acquisition and a related non-competition agreement with VTS's president, the
Company paid cash totaling $100,000 and issued 67,301 shares of Nematron stock
to VTS's shareholders. Such shares represent 1.3% of the total shares
outstanding immediately after the acquisition.
The purchase price of the net assets of VTS, including expenses incurred in
connection with the acquisition, was approximately $694,000. The acquisition
of VTS has been accounted for as a purchase and approximately $668,000 of
intangible assets have been recorded. In connection with the acquisition, the
Company took, in the quarter ended June 30, 1997, a charge against earnings of
$400,000 relating to acquired in-process research and development costs.
The allocation of the purchase price of VTS to assets and liabilities acquired
was made on a preliminary basis by Company management. The final allocation of
the purchase price is subject to adjustments as certain estimates are
finalized. The final allocation will be determined based upon a valuation
report prepared by an independent valuation firm, and such report is expected
prior to the end of the fiscal year.
Intec Controls Corp.
Effective March 31, 1997, the Company completed its acquisition of Intec
Controls Corp. ("Intec") of Walpole, Massachusetts, a supplier of high
performance regulatory control software solutions used primarily by process
industries located in the United States and Europe. Under the terms of the
agreement, Intec was merged into the Company's NemaSoft subsidiary and the
Intec stock was retired. The Company issued 587,594 shares of Nematron common
stock to Intec's shareholders, and such shares represent 11.3% of the total
shares outstanding immediately after the acquisition. In addition to the
issuance of common stock to former Intec shareholders, the Company issued
warrants to Intec's shareholders to purchase an additional 124,998 shares of
Nematron common stock at $6.73 per share. The warrants expire February 20,
2000.
The purchase price of the net assets of Intec, including expenses incurred in
connection with the acquisition, was approximately $3,735,000. The acquisition
of Intec has been accounted for as a purchase and approximately $3,410,000 of
intangible assets have been recorded. In connection with the acquisition, the
Company took, in the quarter ended March 31, 1997, a charge against earnings of
$1,655,000 relating to acquired in-process research and development costs.
PAGE 8
<PAGE> 9
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
The following unaudited pro forma summary presents the consolidated results of
operations as if the acquisitions of VTS and Intec had occurred on October 1,
1995, the earliest period presented herein, and does not purport to be
indicative of what would have occurred had the acquisitions actually been
consummated at that date or the Company's future results of operations.
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues $5,986,000 $6,313,000 $18,139,000 $18,619,000
Net income (loss) $ (623,000) $ 224,000 $(1,126,000) $(1,954,000)
Primary income (loss) per share $ (0.12) $ 0.06 $ (0.22) $ (0.54)
</TABLE>
NOTE 8 - EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares of common
stock and common stock equivalents outstanding for each period presented. The
weighted average number of shares outstanding for each period is as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
<S> <C> <C>
Three months ended 5,234,779 3,372,683
Nine months ended 4,802,887 3,051,788
</TABLE>
Fully diluted earnings per share is not presented because the computation
results in the same amounts as primary earnings per share or the amounts are
anti-dilutive. Common stock equivalents are not included in the earnings per
share calculation until the market price of the Company's common stock exceeds
the exercise price of the common stock equivalents for substantially all of the
three consecutive months ending with the last month of the period to which per
share data relate. For purposes of this calculation, the market price of the
Company's common stock was determined for the three months and nine months
ended June 30, 1997 as the last reported sale price of the Company's stock on
the Nasdaq National Market, and for the three months and nine months ended June
30, 1996 as the last reported sale price of the Company's stock on the Nasdaq
SmallCap Market.
PAGE 9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED JUNE 30, 1997 COMPARED WITH
THREE AND NINE MONTH PERIODS ENDED JUNE 30, 1996
Net revenues for the three and nine month periods ended June 30, 1997 increased
$838,500 (16.3%) and $953,200 (6.3%), respectively, compared to the same
periods last year. The increase in net revenues in both of the three-month and
nine-month periods is primarily attributable to the net revenues from the
operations of the former Intec Controls Corp. ("Intec") and Virtual-Time
Software, Inc. ("VTS"), (collectively, the "Acquired Companies"), which were
acquired by the Company on March 31, 1997 and June 18, 1997, respectively. The
increase in revenues from the Acquired Companies was partially offset by a
decrease in revenues due to the closing of the Company's operations in The
Netherlands. Over 60% of the Company's existing product line consists of
products developed in the last 24 months. At June 30, 1997, the Company's
backlog was $3.4 million, compared to a $2.6 million backlog at September 30,
1996. New product introductions announced during the most recent quarter have
generated a heightened interest in the Company's hardware and software
products, and management expects that sales from such products, including the
OpenControl and Hyperkernel software products, will lead to increased software
sales over the next several quarters compared to the comparable quarters of the
previous year.
Gross profit for the three and nine month periods ended June 30, 1997 increased
$586,500 and $389,300, respectively, over the same periods last year. Gross
profits as a percentage of revenues in the three and nine month periods ended
June 30, 1997 were 46.3% and 43.3%, respectively, versus 42.5% and 43.4%,
respectively, in the same periods last year. The increase in margin in the
current period was due primarily to the increased revenues from high margin
software products, and the slight erosion in margins for the nine month period
ended June 30, 1997 was due primarily to pricing pressure on hardware products
which more than offset the improvements resulting from the more favorable
revenue mix. Overall, the mix of net revenues continues to reflect the
Company's strategy to increase the amount of higher margin software sales as a
percentage of total revenues. This shift in revenue mix is supported by
changes in the Company's marketing and sales efforts, its heavy emphasis on new
product development and its acquisition of the Acquired Companies. Management
expects that margins on stand-alone hardware products will continue to erode at
or greater than the current rate, but when such hardware is bundled with the
Company's proprietary software and as sales of software products increase,
total gross margins will improve.
Total operating expenses for the three and nine month periods ended June 30,
1997 increased $1,347,900 (70.2%) and $2,120,000 (36.1%), respectively, over
the comparable periods last year primarily as a result of operations of the
Acquired Companies for the periods presented, higher salaries, increased sales
and marketing costs, and increased product development efforts. Operations of
the Acquired Companies contributed $780,100 of the increased operating expenses
in the three and nine month periods ended June 30, 1997. During the three and
nine month periods ended June 30, 1997, the Company made significant marketing
efforts and incurred significant sales costs in anticipation of its new
software product roll out efforts. The Company intends to continue to invest
heavily in product development efforts and in marketing and sales activities at
no less than the current rate of increase, and expects to continue to release
upgrades and enhancements to existing product offerings when appropriate.
Interest expense for the three month period ended June 30, 1997 decreased to
$110,800 compared to $176,400 for the comparable period last year. Likewise,
for the nine month period ended June 30, 1997, interest expense decreased to
$271,200 from $497,800. Such decreases were due to reduced average borrowing
levels and lower effective interest rates. A total of $1,800,000 of
subordinated debt carrying an interest rate of 12% was replaced with a 5-year
term loan, which carries an adjustable interest rate that approximated 8% at
June 30, 1997. Costs to acquire the subordinated debt were written off in the
second quarter and totaled $122,000.
The Company incurred charges of $400,000 in the third quarter and $1,655,000 in
the second quarter of fiscal 1997 to write off in-process research and
development costs acquired in the VTS and Intec acquisitions, respectively, and
during the nine months ended June 30, 1997 incurred a loss of $242,000,
including the effect on foreign currency, related to the closing of the
Company's Netherlands-based subsidiary and liquidation of its assets .
PAGE 10
<PAGE> 11
ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED
Interest and other income, net of expenses, of $43,200 and $109,600,
respectively, was earned in the three and nine month periods ended June 30,
1997. This compares to interest and other income of $17,000 and $13,000,
respectively, in the comparable periods last year. The income is largely
attributable to the investment of available cash in interest-bearing cash
equivalent securities.
ACQUISITIONS
Virtual-Time Software, Inc.
Effective June 18, 1997, the Company completed its acquisition of Virtual-Time
Software, Inc. of Santa Clara, California. VTS is a software developer and
seller of real-time operating system products which provide high speed
deterministic performance to Microsoft's Windows operating systems. Under the
terms of the related agreement, VTS was merged into the Company's Imagination
Systems, Inc. ("ISI") subsidiary. In connection with the acquisition and the
related non-competition agreement with VTS's president, the Company paid cash
of $100,000 and issued 67,301 shares of Nematron common stock at $6.00 per
share to the former VTS shareholders.
The purchase price of the net assets of VTS, including expenses incurred in
connection with the acquisition, was approximately $694,000. The acquisition
of VTS has been accounted for as a purchase and approximately $668,000 of
intangible assets have been recorded. In connection with the acquisition, the
Company took, in the quarter ended June 30, 1997, a charge against earnings of
$400,000 relating to acquired in-process research and development costs.
VTS's products and technology are being integrated into the current ISI product
line of real-time deterministic software products for Windows operating
systems. The RT-WIN product line allows other commercially available real-time
kernels to run concurrently with Microsoft's Windows 95 operating system. The
addition of the VTS technology and the capability of the acquired staff broaden
ISI's current product offerings and enhance its future capability to cover a
wider range of Microsoft operating systems and to develop other real-time
factory and consumer automation solutions.
Intec Controls Corporation
Effective March 31, 1997, the Company completed its acquisition of Intec
Controls Corp. of Walpole, Massachusetts, a supplier of high performance
regulatory control software solutions used primarily by process industries
located in the United States and Europe. Under the terms of the agreement,
Intec was merged into the Company's NemaSoft, Inc. subsidiary and the Company
issued 587,594 shares of Nematron common stock and warrants to purchase an
additional 124,998 shares of Nematron common stock at $6.73 per share to the
former Intec stockholders. The warrants expire February 20, 2000.
The purchase price of the net assets of Intec, including expenses incurred in
connection with the acquisition, was approximately $3,735,000. The acquisition
of Intec has been accounted for as a purchase and approximately $3,410,000 of
intangible assets have been recorded. In connection with this acquisition, the
Company took, in the quarter ended March 31,1997, a charge against earnings of
$1,655,000 relating to acquired in-process research and development costs.
Intec's products are being integrated into the current NemaSoft product line of
open architecture control and automation software products. The addition of
Intec's product line significantly extends the scope of the Company's software
offerings by extending the Company's reach into the process industries. It is
anticipated that eventually all of NemaSoft's operations will be headquartered
in Massachusetts. The costs to consolidate the operations on NemaSoft in
Massachusetts are not expected to be significant.
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ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED
In addition to the synergism anticipated in the United States, the acquisition
of Intec provides the Company with the opportunity to continue improvement of
its European strategy. The former Intec facility in the United Kingdom will
become the new European headquarters for the Company and NemaSoft. The
Company's Netherlands-based office, which operated at a loss for a number of
years, has ceased operations, and its business will be carried on by personnel
located in the United States and the United Kingdom.
LIQUIDITY AND CAPITAL RESOURCES
Nematron has working capital of approximately $8,900,000 at June 30, 1997
compared to $12,700,000 at September 30, 1996. The decrease in working capital
is due primarily to the Company's investment in its software development
efforts and in information technology resources. Primary sources of near-term
liquidity are cash from operations and the Company's $6,000,000 bank line of
credit, of which $4,700,000 was unused at June 30,1997. Amounts borrowed under
the credit facility bear interest at LIBOR plus 2.5% (8.2% at June 30, 1997).
The line of credit facility expires on February 28, 1998. The Company believes
it will be able to renew the facility at that date on terms and conditions that
are no less favorable than the current facility.
Accounts receivable at June 30, 1997 decreased $542,500 from the $5,989,700
balance at September 30, 1996 primarily due to cash collection efforts,
partially offset by the increase of $807,800 in accounts receivable balances as
a result of the acquisition of the Acquired Companies. Inventories increased
$1,212,100 in anticipation of the Company's needs next quarter and the increase
in the Company's backlog.
Current liabilities at June 30, 1997 increased $3,853,000 from the $2,491,100
balance at September 30, 1996. Approximately $1,240,500 of this increase is
associated with the acquisition of the Acquired Companies. Current maturities
of long term debt increased $543,600, due to the new term note agreement and
the new equipment line of credit. In addition, borrowings on the line of
credit totaled $1,300,000 at June 30,1997.
Long-term debt, less current maturities, decreased a total of $230,700 at June
30, 1997 due to the net effect of reductions caused by the refinancing of the
subordinate debt with term notes that contain a current maturity of $360,000,
and scheduled debt repayments and new term notes to finance equipment
purchases.
The Company expects to continue to invest a significant amount of cash to
continue its product development efforts, especially in connection with the
development and enhancements of its Hyperkernel, OpenControl and Paragon
software products. Also, the Company intends to continue its investment begun
in the current year in internal information technology products, including
state of the art computer and other communication systems.
Uncertainties Relating to Forward Looking Statements
"Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains "forward-looking statements" within the meaning
of the Securities Exchange Act of 1934, as amended, based on current management
expectations. Actual results could differ materially from those in the forward
looking statements due to a number of uncertainties, including, but not limited
to, those discussed in this section and in the Company's Annual Report on Form
10-KSB for the year ended September 30, 1996.
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ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS - CONTINUED
Factors that could cause future results to differ from these expectations
include general economic conditions, particularly related to automotive
manufacturing, demand for the Company's products and services, the ability of
the Company to successfully implement its strategy to lead the industrial
automation market migration from closed architecture PLCs to open architecture
PC-based solutions, changes in Company strategy, product life cycles,
competitive factors (including the introduction or enhancement of competitive
products), pricing pressures, raw material price increases, delays in the
introduction of planned hardware and software products, software defects and
latent technological deficiencies in new products, changes in operating
expenses, fluctuations in foreign exchange rates, inability to attract or
retain sales and/or engineering talent, successful integration of the Acquired
Companies' products with Nematron products, changes in customer requirements
and evolving industry standards.
PAGE 13
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
The Company issued 67,301 shares of its common stock to the former stockholders
of Virtual-Time Software, Inc. ("VTS") in connection with the merger of VTS
into a wholly owned subsidiary of the Company on June 18, 1997. The Company
issued the common stock to VTS's stockholders without registration under the
Securities Act of 1933, as amended (the "Act"), in reliance upon Section 4(2)
of the Act. The Company relied upon this exemption based upon the limited
number of VTS stockholders, the provision of financial and other information
concerning the Company to the VTS stockholders, investment representations made
by the stockholders, the lack of general solicitation, and actions taken by the
Company to restrict resale of the securities without registration, including
the placement of restrictive legends on the share certificates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on April 17, 1997. The
results of the meeting were disclosed in the Company's Form 10-QSB for the
period ended March 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits included herewith are set forth on the Index to Exhibits.
(b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K on
April 11, 1997 disclosing information under Item 2 regarding the
acquisition of Intec Controls Corp. No financial statements were
included therein.
ALL OTHER ITEMS OMITTED ARE NOT APPLICABLE OR THE ANSWERS THERETO ARE NEGATIVE.
SIGNATURES
Pursuant to the requirements 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:
AUGUST 13, 1997 /s/ FRANK G. LOGAN, III
- ------------------------- -------------------------------------------
DATE FRANK G. LOGAN, III, PRESIDENT & CEO
(DULY AUTHORIZED OFFICER)
AUGUST 13, 1997 /s/ DAVID P. GIENAPP
- ------------------------- --------------------------------------------
DATE DAVID P. GIENAPP, EXECUTIVE VP-FINANCE
AND ADMINISTRATION (CHIEF ACCOUNTING OFFICER)
PAGE 14
<PAGE> 15
INDEX TO EXHIBITS
Exhibit Number Description of Exhibit
- -------------- ----------------------
2.1 Agreement and Plan of Merger, dated as of June 13, 1997,
by and among the Company, Imagination Systems, Inc.,
Virtual-Time Software, Inc. and certain VTS Shareholders
11 Computation of Earnings Per Share
27 Financial Data Schedule
PAGE 15
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the "Agreement") is made as of
June 13, 1997, by and among Nematron Corporation, a Michigan corporation
("Nematron"), Imagination Systems, Inc., a Michigan corporation ("ISI"),
Virtual-Time Software, Inc., a California corporation ("VTS"), and Michael
Shapiro, Milton Liebhaber, Leonard Shustek, J. Glen Stancil and Lawrence
Blackwell (collectively, the "Shareholders"). Nematron, ISI, VTS and the
Shareholders may be referred to individually as a "Party" or collectively as the
"Parties".
WITNESSETH
WHEREAS, ISI, a wholly owned subsidiary of Nematron, VTS and Nematron
desire that VTS merge with and into ISI (the "Merger"), with ISI being the
surviving corporation of the Merger;
WHEREAS, the Shareholders own approximately 67% of the outstanding
shares of VTS Common Stock; and
WHEREAS, the Merger is intended to constitute a tax-free reorganization
as described in Section 368(a) of the Code.
NOW, THEREFORE, subject to the terms and conditions of this Agreement
and the Certificate of Merger to be filed in the States of Michigan and
California in order to effectuate the Merger, and in consideration of the
premises and the mutual covenants and agreements hereinafter set forth, the
Parties agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the following capitalized
terms will have the following meanings:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Exchange Act.
"Balance Sheet" has the meaning set forth in Section 4.1(h).
"CGCL" means the California General Corporation Law.
"Certificate" has the meaning set forth in Section 3.1(a).
"Certificate of Merger" means the Certificate of Merger to be filed with
the Michigan Department of Consumer and Industry Services and the California
Secretary of State setting forth the terms of the Merger.
"Closing" has the meaning set forth in Section 8.1.
"Closing Date" has the meaning set forth in Section 8.1.
<PAGE> 2
"Code" means the Internal Revenue Code of 1986, as amended.
"Constituent Corporations" has the meaning set forth in Section 2.1(b).
"Dissenters' Shares" has the meaning set forth in Section 3.1(f).
"Effective Time" has the meaning set forth in Section 2.2(a).
"Employee Benefit Plan" means any (a) nonqualified deferred
compensation or retirement plan or arrangement which is an Employee Pension
Benefit Plan, (b) qualified defined contribution retirement plan or
arrangement which is an Employee Pension Benefit Plan, (c) qualified defined
benefit retirement plan or arrangement which is an Employee Pension Benefit
Plan (including any Multiemployer Plan), (d) Employee Welfare Benefit Plan,
including medical, dental, disability and other welfare benefits plan, and
material fringe benefit plan or program, (e) employee, severance and
termination agreements and arrangements, and (f) all plans, programs and
arrangements with respect to stock options, restricted stock, phantom stock
and other stock-based or stock-related compensation.
"Employee Pension Benefit Plan" has the meaning set forth in Section
3(2) of ERISA.
"Employee Welfare Benefit Plan" has the meaning set forth in Section
3(1) of ERISA.
"Employment and Noncompetition Agreement" means the employment and
noncompetition agreement between ISI and Michael Shapiro in the form
attached hereto as Exhibit 8.2(a)(iv).
"Environmental, Health, and Safety Laws" means the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Resource
Conservation and Recovery Act of 1976, and the Occupational Safety and
Health Act of 1970, each as amended, together with all other laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder) of federal, state, local, and foreign
governments (and all agencies thereof) concerning pollution or protection of
the environment, public health and safety, or employee health and safety,
including laws relating to emissions, discharges, releases, or threatened
releases of pollutants, contaminants, or chemical, industrial, hazardous, or
toxic materials or wastes into ambient air, surface water, ground water, or
lands or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic materials or
wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974
(including any amendments thereof, and the regulations and published
interpretations thereunder).
"Escrow Agreement" means an agreement in the form attached as Exhibit
8.2(b)(ix) to this Agreement.
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<PAGE> 3
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Financial Statements" has the meaning set forth in Section 4.1(f).
"GAAP" means United States generally accepted accounting principles, as
in effect from time to time.
"Intellectual Property Rights" means all of the right, title and
interest of VTS in and to (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks,
service marks, trade dress, logos, trade names, and corporate names,
together with all translations, adaptations, derivations, and combinations
thereof and including all goodwill associated therewith, and all
applications, registrations, and renewals in connection therewith, (c) all
copyrightable works, all copyrights, and all applications, registrations,
and renewals in connection therewith, (d) all mask works and all
applications, registrations, and renewals in connection therewith, (e) all
trade secrets and confidential business information (including ideas,
research and development, know-how, formulas, compositions, manufacturing
and production processes and techniques, technical data, designs, drawings,
specifications, customer and supplier lists, pricing and cost information,
and business and marketing plans and proposals), (f) all computer software
(including data and related documentation), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever
form or medium).
"Investment Representation Letter" means a letter in the form attached
as Exhibit 8.2(b)(viii).
"ISI" has the meaning set forth in the preamble to this Agreement.
"ISI Common Stock" means the common stock, no par value, of ISI.
"ISI Shares" means any shares of ISI Common Stock.
"Knowledge" means present actual knowledge, without independent
investigation.
"Liability" means any liability (whether asserted or unasserted,
whether absolute or contingent, whether accrued or unaccrued, whether
liquidated or unliquidated, and whether due or to become due), including any
liability for Taxes.
"MBCA" means the Michigan Business Corporation Act.
"Merger" has the meaning set forth in the first recital to this
Agreement.
"Merger Consideration" has the meaning set forth in Section 3.1(a).
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<PAGE> 4
"Most Recent Financial Statements" has the meaning set forth in Section
4.1(f).
"Multiemployer Plan" has the meaning set forth in Section 3(37) of
ERISA.
"Nematron" has the meaning set forth in the preamble to this Agreement.
"Nematron Common Stock" means the common stock, no par value, of
Nematron.
"Nematron Share" means any share of Nematron Common Stock.
"Ordinary Course of Business" means the ordinary course of business
consistent with current and past custom and practice (including with respect
to quantity and frequency).
"Party" and "Parties" have the meaning set forth in the preamble of
this Agreement.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an
unincorporated organization or association, or a governmental entity (or any
department, agency, or political subdivision thereof).
"Related Agreements" means any agreements being delivered in connection
with or ancillary to this Agreement.
"SEC" means the U.S. Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's, materialmen's
and similar liens, (b) liens for Taxes not yet due and payable or for Taxes
that the taxpayer is contesting in good faith through appropriate
proceedings, (c) purchase money liens and liens securing rental payments
under capital lease arrangements, and (d) other liens arising in the
Ordinary Course of Business and not incurred in connection with the
borrowing of money.
"Shareholders" has the meaning set forth in the preamble to this
Agreement.
"Surviving Corporation" has the meaning set forth in Section 2.1(a).
"Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes under
Code Section 59A), customs duties, capital stock, franchise, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, use, transfer, registration, value
added, alternative or add-on minimum, estimated, or other tax of any kind
whatsoever, including any interest, penalty, or addition thereto, whether
disputed or not.
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<PAGE> 5
"VTS" has the meaning set forth in the Preamble to this Agreement.
"VTS Common Stock" means the common stock, no par value, of VTS.
"VTS Share" means any share of VTS Common Stock.
2. MERGER.
2.1 The Merger.
(a) Subject to the terms and conditions of this Agreement, the
Certificate of Merger, the MBCA and the CGCL, at the Effective Time (as
defined in Section 2.2(a) below) (i) VTS will be merged with and into ISI
and (ii) the separate existence of VTS will cease and ISI will continue as
the "Surviving Corporation".
(b) At the Effective Time (i) the Surviving Corporation will
continue its corporate existence under the laws of the State of Michigan and
will possess all of the rights, privileges, immunities, powers, franchises
and purposes of VTS and ISI immediately prior to the Merger (VTS and ISI will
be referred to in this Agreement as the "Constituent Corporations"), (ii) all
property of the Constituent Corporations will be the property of the
Surviving Corporation and (iii) the Surviving Corporation will, by operation
of law, Assume all of the liabilities and obligations of the
Constituent Corporations.
(c) The Articles of Incorporation of ISI in effect at and as of the
Effective Time will remain the Articles of Incorporation of the Surviving
Corporation without any modification or amendment in the Merger. The Bylaws
of ISI will remain the Bylaws of the Surviving Corporation.
(d) The existing directors and officers of ISI in office immediately
prior to the Effective Time will remain the directors and officers of the
Surviving Corporation until their successors shall have been duly elected or
appointed and qualified.
2.2 Effectiveness of the Merger.
(a) The Certificate of Merger will be filed with the Michigan
Department of Consumer and Industry Services and the Secretary of State of
the State of California on the day of the Closing or as soon thereafter as
is practicable. The Merger will become effective at the time at which the
Certificate of Merger is filed with the Michigan Department of Consumer and
Industry Services (the "Effective Time").
(b) If, at any time after the Effective Time, the Surviving
Corporation will consider or be advised that any further deeds, assignments
or other things are necessary or desirable to vest, perfect or confirm, of
record or otherwise, in the Surviving Corporation, the title to any property
or rights of the Constituent Corporations acquired or to be acquired by
5
<PAGE> 6
reason or as a result of, the Merger, the Constituent Corporations and the
officers and directors, on behalf of the Constituent Corporations, to the
extent permitted by law, will execute and deliver all such deeds and
assignments and do all things necessary or desirable to vest, perfect or
confirm title to such property or rights in the Surviving Corporation and
otherwise to carry out the purpose of this Agreement, and the officers and
directors of the Surviving Corporation are fully authorized in the name of
the Constituent Corporations or otherwise to take any and all such actions.
3. MERGER CONSIDERATION.
3.1 Merger Consideration and Conversion of Shares. At the Effective
Time, by virtue of the Merger and without any action on the part of any
holder thereof:
(a) Each VTS Share issued and outstanding at the Effective Time,
other than Dissenters' Shares (as defined in Section 3.1(f)), shall be
converted into the right to receive Nematron Shares and cash in accordance
with Section 3.1(d) (the "Merger Consideration"), determined as follows: the
number of Nematron Shares into which each VTS Share shall be converted shall
be determined by dividing 67,300 by the total number of VTS Shares
outstanding at the Effective Time and the amount of cash into which each VTS
Share shall be converted shall be determined by dividing $50,000 by the total
number of VTS Shares outstanding at the Effective Time. At the Effective
Time, each VTS Share shall cease to be outstanding, shall automatically be
canceled and retired and shall cease to exist. Each holder of a stock
certificate (a "Certificate") formerly representing VTS Shares shall cease to
have any rights with respect thereto except the right to receive, without
interest, the Merger Consideration upon the surrender of such Certificate in
accordance with Section 3.1(d).
(b) Each VTS Share issued and held by VTS immediately prior to the
Effective Time, if any, shall cease to be outstanding, shall automatically
be canceled and retired without payment of any consideration therefor and
shall cease to exist.
(c) The shares of ISI Common Stock issued and outstanding
immediately prior to the Effective Time shall remain outstanding, shall be
unaffected by the Merger and shall thereafter constitute all of the issued
and outstanding shares of the capital stock of the Surviving Corporation.
Outstanding certificates representing ISI Shares will continue to represent
the number of shares of common stock of the Surviving Corporation following
the Effective Time and need not be exchanged for new certificates of the
Surviving Corporation by any holders thereof.
(d) Following the Effective Time, each holder of a Certificate or
Certificates surrendering such Certificate or Certificates to Nematron shall
be entitled to receive in exchange therefor the Merger Consideration.
Nematron shall mark all Certificates delivered by holders pursuant to this
Section as canceled. If a Certificate is lost or destroyed, the registered
owner thereof shall be entitled to receive the Merger Consideration to which
such registered owner would otherwise be entitled on the surrender of such
Certificate by presenting an affidavit to
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<PAGE> 7
Nematron attesting to the loss or destruction of such Certificate. Nematron
may require such registered owner, as a condition precedent to receiving the
Merger Consideration, to furnish Nematron with a bond or agreement of
indemnity, in such form and amount and with such sureties, or without
sureties, as Nematron may direct or approve. No certificates or scrip
representing a fraction of a Nematron Share shall be issued upon the
surrender of Certificates for exchange pursuant to this Section. In lieu of
any such fractional shares, the number of Nematron Shares to be received by a
holder of VTS Shares (computed based upon the aggregate number of VTS Shares
owned by such holder) shall be rounded to the nearest full Nematron Share.
(e) Certificates representing Nematron Shares issued in the
Merger will bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR
TRANSFERRED UNLESS THE SAME ARE REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND
APPLICABLE STATE SECURITIES LAWS OR THE COMPANY RECEIVES
AN OPINION OF COUNSEL THAT REGISTRATION UNDER THE ACT AND
SUCH LAWS IS NOT REQUIRED FOR SALE OR TRANSFER. TRANSFER
OF THESE SECURITIES IS ALSO SUBJECT TO A LETTER AGREEMENT
DATED JUNE __, 1997, A COPY OF WHICH IS ON FILE AT THE
REGISTERED OFFICE OF NEMATRON CORPORATION.
(f) Notwithstanding anything in this Agreement to the contrary,
the VTS Shares which are issued and outstanding immediately prior to the
Effective Time and which are held by shareholders who do not vote in favor of
the approval and adoption of this Agreement and who comply with all of the
relevant provisions of Sections 1300 through 1312 of the CGCL (the
"Dissenters' Shares") shall not be converted into or be exchangeable for the
right to receive the Merger Consideration. Dissenters' Shares shall, from
and after the Effective Time, no longer be outstanding and shall be canceled
and retired and shall cease to exist, and each holder of Dissenters' Shares
shall thereafter cease to have any rights with respect to such Shares except
the right, if any, to receive payment pursuant to the relevant provisions of
Sections 1300 through 1312 of the CGCL. If any holder of VTS Shares shall
fail to perfect or shall have effectively withdrawn or lost the right to
dissent, the VTS Shares held thereby shall thereupon be treated as though
converted into the Merger Consideration pursuant to Section 3.1(a), such
shares shall be deemed not to be Dissenters' Shares and the holder of such
shares shall execute and deliver an Investment Representation Letter to
Nematron. Any Merger Consideration otherwise to have been paid to holders of
Dissenters' Shares shall be retained by Nematron.
(g) No transfers of the VTS Shares shall be made on the stock
transfer books of VTS at or after the Effective Time.
4. REPRESENTATIONS AND WARRANTIES.
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<PAGE> 8
4.1 Representations and Warranties of VTS and the Shareholders. VTS
and the Shareholders, jointly and severally, represent and warrant to
Nematron and ISI as follows:
(a) Authorization of Transaction. VTS has full corporate power and
authority to execute and deliver this Agreement and each Related Agreement
being executed and delivered by VTS and, subject to obtaining the necessary
approval of its shareholders, to consummate the transactions contemplated
hereby and thereby and perform its obligations hereunder and thereunder.
This Agreement and each Related Agreement to which VTS is a party
constitutes the valid and legally binding obligation of VTS enforceable in
accordance with its terms and conditions (subject as to the enforcement of
remedies, to applicable bankruptcy, reorganization, insolvency, moratorium
and similar laws affecting creditors rights, and, with respect to the remedy
of specific performance, equitable doctrines applicable thereto). This
Agreement and each Related Agreement to which any Shareholder is a party
constitutes the valid and legally binding obligation of such Shareholder
enforceable in accordance with its terms and conditions (subject as to the
enforcement of remedies, to applicable bankruptcy, reorganization,
insolvency, moratorium and similar laws affecting creditors rights, and,
with respect to the remedy of specific performance, equitable doctrines
applicable thereto). Except for the filing of the Certificate of Merger with
the Michigan Department of Consumer and Industry Services and the Secretary
of State of California and as set forth on Schedule 4.1(a), VTS is not
required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency
in order to consummate the transactions contemplated by this Agreement.
(b) Organization, Qualification, and Corporate Power. (i) VTS is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of California. VTS is duly authorized to conduct business
and is in good standing as a foreign corporation under the laws of each
jurisdiction where the failure to be so authorized and in good standing, in
the aggregate for all such failures, could reasonably be expected to have a
material adverse effect on VTS. Such jurisdictions are listed on Schedule
4.1(b)(i). VTS has all licenses, permits, and authorizations necessary to
carry on the business in which it is engaged and to own and use the
properties owned and used by it. Schedule 4.1(b)(i) lists the directors and
officers of VTS. VTS has delivered to Nematron correct and complete copies
of the Articles of Incorporation and Bylaws of VTS (as amended to the date
hereof). VTS is not in violation of any provision of its Articles of
Incorporation or Bylaws.
(ii) VTS does not own and has never owned, directly or
indirectly, a 50% or greater interest in the outstanding voting securities
of any corporation or other entity.
(c) Noncontravention. Neither the execution and the delivery of
this Agreement, nor the consummation of the transactions contemplated hereby,
will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which VTS is subject or any
provision of the Articles of Incorporation or Bylaws of VTS, or (ii) except
as set forth in Schedule 4.1(c), conflict with, result in a breach of,
constitute a default under, result in the
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acceleration of, create in any party the right to accelerate, terminate,
modify, or cancel, or require any notice under any agreement, contract,
lease, license, instrument, or other arrangement to which VTS is a party or
by which it is bound or to which any of its assets is subject or (iii) result
in the imposition of any Security Interest upon any of VTS's assets.
(d) Capitalization. The entire authorized capital stock of VTS consists
of 10,000,000 shares of VTS Common Stock of which 6,188,000 shares are
issued and outstanding. Each of the holders of VTS Shares owns the VTS
Shares free and clear of any restrictions on transfer (other than any
restrictions under the Securities Act and state securities laws). All of
the issued and outstanding VTS Shares have been duly authorized, are validly
issued, fully paid, and nonassessable, and are held of record by the
shareholders and in the amounts listed in Schedule 4.1(d) to this Agreement.
VTS has no outstanding subscriptions, warrants, options or other agreements
or commitments obligating it to issue any additional shares. VTS holds in
treasury none of its own authorized shares.
(e) Equity Interests. VTS does not control, directly or indirectly, or
have any direct or indirect equity participation in any corporation,
partnership, trust, or other business association.
(f) Financial Statements. VTS has previously delivered to Nematron the
following financial statements (collectively the "Financial Statements"):
(i) an unaudited balance sheet and related statements of operations and
retained earnings, and schedules of general and administrative expenses as
of and for the fiscal year ended December 31, 1996 for VTS, and (ii) an
unaudited balance sheet and statements of operations as of March 31, 1997
and for the three months then ended (such unaudited balance sheet and
statements of operations are the "Most Recent Financial Statements") for VTS
prepared on a basis consistent with the preparation of such December 31,
1996 statements. The Financial Statements have been prepared in accordance
with GAAP (except for the lack of footnotes and other presentation items)
and present fairly the financial condition of VTS as of such dates and the
results of operations of VTS for such periods. The Financial Statements are
correct and complete, to the extent required by GAAP, and are consistent
with the books and records of VTS (which books and records are correct and
complete); provided, however, that the Most Recent Financial Statements are
subject to normal year-end adjustments (which will not be material
individually or in the aggregate) and lack footnotes and other presentation
items.
(g) Subsequent Events. Except as set forth in Schedule 4.1(g), since
March 31, 1997, VTS has not:
(i) issued, sold, purchased or redeemed any shares of its capital
stock; granted any stock options or made any other commitment to issue or
sell shares of its capital stock; otherwise amended its Articles of
Incorporation or Bylaws; or declared, set aside or made any payment or
distribution upon its capital stock;
(ii) incurred any liability or obligation under agreements or
otherwise, except current liabilities entered into or incurred in the
Ordinary Course of Business or in
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connection with the execution and performance of this Agreement; issued any
notes or other corporate debt securities; or, to its Knowledge, waived any of
its rights;
(iii) mortgaged, pledged or subjected to any lien any asset or,
except in the Ordinary Course of Business, entered into any lease of real
property, machinery, equipment or buildings, or sold or transferred any
intangible asset;
(iv) effected any increases in salary, wage or other compensation
of any kind, whether current or deferred, to any officer, employee, agent,
broker or consultant, other than routine increases in the Ordinary Course of
Business; entered into any salary, wage or other compensation agreement with
a term of one year or longer with any employee or made any contribution to
any trust or plan for the benefit of employees except as required by the
terms thereof as now in effect;
(v) entered into any material transaction other than in the Ordinary
Course of Business, except in connection with the execution and performance
of this Agreement, the Related Agreements and the transactions contemplated
hereby and thereby;
(vi) suffered any damage, destruction or loss to any of its
properties or assets (whether or not covered by insurance); or
(vii) suffered any adverse changes which in the aggregate have had
or are reasonably likely to have a material adverse effect on the business,
financial condition or prospects of VTS.
(h) Undisclosed Liabilities. VTS does not have any Liability, except
for (i) Liabilities set forth on the balance sheet of VTS as of March 31,
1997 (the "Balance Sheet") and (ii) Liabilities which have arisen after
March 31, 1997 in the Ordinary Course of Business (none of which liabilities
resulted from, arose out of, relate to, is in the nature of, or was caused
by any breach of contract, breach of warranty, tort, infringement, violation
of law or provisions in the Articles of Incorporation or bylaws of VTS
providing for indemnification of directors, officers or employees).
(i) Legal Compliance; Licenses and Authorizations.
(i) VTS has complied in all material respects with all applicable
laws, statutes, rules, regulations and orders of federal, state, local, and
foreign governments (and all agencies thereof), including, without
limitation, all Environmental, Health and Safety Laws, and, to the Knowledge
of VTS, no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced against it
alleging any failure so to comply.
(ii) VTS holds all licenses and other permits and authorizations
necessary for the operation of the business of VTS as presently conducted
and such licenses, permits and authorizations will be in full force and
effect for the entire duration of their respective unexpired
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license terms, unimpaired by any acts or omissions of VTS, except for such
licenses, permits and authorizations with respect to which the failure of VTS
to hold such licenses, permits and authorizations would not have a material
adverse effect on VTS. There is not now pending or, to the Knowledge of VTS
and the Shareholders, threatened any action by the grantor of any such
license, permit or authorization to revoke, cancel or refuse to renew any
such license, permit or authorization.
(j) Tax Returns and Taxes. Except as set forth on Schedule 4.1(j), (i)
VTS has filed all federal, state, local and other Tax returns and reports
which are required to be filed; (ii) VTS has paid all Taxes, interest,
penalties, assessments and deficiencies due or assessed pursuant to such
returns; (iii) VTS has not received any notice of assessment of additional
Taxes or has executed or filed with any taxing authority any agreement
extending the period of assessment of any Taxes; (iv) there are no claims,
examinations, proceedings or proposed deficiencies for Taxes pending or, to
the Knowledge of VTS, threatened against VTS; (v) VTS is current in the
payment of all withholding and other employee taxes which are due and
payable; (vi) there are no Tax liens on any of the assets or properties of
VTS; (vii) the accruals for Taxes contained in the Balance Sheet are
adequate to cover all liabilities for Taxes of VTS for all periods ending on
or before the date of such statement; (viii) all Taxes for periods beginning
after the date of such statement up to the Closing have been paid or are
adequately reserved against on the books of VTS; (ix) VTS has not been
audited by the Internal Revenue Service, has not received any notice of an
audit and has not been threatened with an audit.
(k) Real Property. VTS does not own, or have the obligation to
purchase, any real property. VTS is not a party to any lease of real
property other than as set forth on Schedule 4.1(k). VTS is not under any
obligation to become a party to any lease of real property.
(l) Intellectual Property. VTS does not hold, own or use any domestic
or foreign (A) patents and registered trademarks, tradenames and service
marks, or (B) patent, trademark, tradename and service mark applications
filed in connection with the business of VTS ((A) and (B) collectively
referred to herein as the "Issued Rights and Applications"). Set forth on
Schedule 4.1(l) is a correct and complete list of all license and other
agreements allowing VTS to use intellectual property rights of third parties
in the United States or foreign countries entered into by VTS or affecting
the business of VTS (the "License Agreements") and a complete list of the
products of VTS currently existing or under development. Except as set
forth on Schedule 4.1(l), (y) VTS has and owns all right, title and interest
in and to all of the Intellectual Property Rights (including the exclusive
right to use, sell, license or dispose of such rights and to bring actions
for infringement thereof) which are required or necessary for VTS to conduct
its business in the normal course in accordance with past practice, free
and clear of any claims, liens, licenses or encumbrances and (z) no person
or entity has a right to receive a royalty or similar payment in respect of
any of the Intellectual Property Rights. VTS has no Knowledge of and has
not received any notice of any infringements of, or claims or assertions of
infringement of, any of the Intellectual Property Rights, and VTS has not
taken or omitted to take any action which would have the effect of waiving
any of its rights relating to any of the Intellectual Property Rights.
There have been no claims and, to the Knowledge of VTS and the Shareholders,
there is no basis for any claim challenging the scope, validity or
enforceability of any of the Intellectual
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Property Rights which are material to the conduct of VTS's business. The
manufacture, sale or use of any products now or heretofore manufactured or
sold by VTS did not and does not infringe (nor has any claim been made that
any such action infringes) the intellectual property rights of others. Each
of the License Agreements is in full force and effect and there has occurred
no default which is continuing in respect of any License Agreement. VTS'
RT-Win software is a tool designed to allow VxWorks and Windows (3.1x or 95)
to run concurrently on a single properly configured personal computer,
providing a way to develop real-time applications that look and feel like
Windows. The RT-Win software includes components for both the Windows and
VxWorks environments. VTS' RT-Win software performs substantially the tasks
for which it has been designed and has no more defects or bugs than would be
reasonably expected by the industry for software at a similar stage of
development. Such software continues to be developed and enhanced by VTS and
no representation is hereby made that such software, in its present state, is
suitable for all markets intended to be targeted by Nematron.
(m) Tangible Assets. VTS owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted, free and clear of all liens and encumbrances except as
set forth on Schedule 4.1(m). Each such tangible asset is in good operating
condition and repair (subject to normal wear and tear) and is suitable for
the purposes for which it presently is used.
(n) Contracts. Except as set forth on Schedule 4.1(n), VTS is not a
party to any outstanding:
(i) written contract (or collective bargaining agreement) with any
labor union or representative of employees;
(ii) written or oral commitment, contract, or agreement involving an
obligation or liability on the part of VTS of more than $10,000 (excluding
orders for the purchase of standard products from VTS accepted in the
Ordinary Course of Business and providing for prevailing prices and
customary conditions of sale);
(iii) written or oral lease of real property or personal property;
(iv) written or oral agreement, contract or commitment containing
any covenant limiting the freedom of VTS to engage in any line of business or
compete with any person or entity;
(v) written or oral employment, consulting, sales representative,
agency or distributor agreement that is not cancelable by VTS pursuant to
its stated terms on notice of not longer than three months and without
liability, penalty or premium;
(vi) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance or other plan or arrangement
for the benefit of its current or former directors, officers and employees;
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(vii) written or oral agreement or contract relating to any
indebtedness or the mortgaging, pledging or the placing of a lien on any of the
properties or assets of VTS which is not reflected in the Financial Statements;
(viii) guaranty of any obligation;
(ix) loans to or from officers, directors or affiliates;
(x) any agreement with any shareholder of VTS or any of its
affiliates; or
(xi) any other written or oral agreement which is material to
the operations or business prospects of VTS.
VTS has delivered to Nematron a correct and complete copy of each written
agreement listed in Schedule 4.1(n) (as amended to date) and a written summary
setting forth the terms and conditions of each oral agreement referred to in
Schedule 4.1(n). With respect to each such agreement: (A) the agreement is
legal, valid, binding, enforceable, and in full force and effect, (B) the
agreement will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated by this Agreement and the Related Agreements; (C) no
party is in breach or default, and no event has occurred which with notice or
lapse of time could constitute a breach or default, or permit termination,
modification, or acceleration, under the agreement and (D) no party has
repudiated any provision of the agreement. Except as set forth in Schedule
4.1(n), no contract or agreement described in Schedule 4.1(n) requires the
consent of any party to the execution of this Agreement or the consummation of
the transactions contemplated by this Agreement.
(o) Notes and Accounts Receivable. All notes and accounts receivable
of VTS are reflected properly on its books and records, are subject to no known
setoffs or counterclaims, are current and collectible, subject only to the
reserve for bad debts set forth on the face of the Balance Sheet (rather than in
any notes thereto) as adjusted for the passage of time through the Closing Date
in accordance with the past custom and practice of VTS.
(p) Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of VTS.
(q) Insurance. Set forth on Schedule 4.1(q) is a complete and correct
list of all policies of insurance of VTS, indicating for each policy the
carrier, risks insured against, coverage limits, deductible amounts, premium
rate, expiration date, all outstanding claims thereunder and whether the terms
of such policy provide for retrospective premium adjustments. All such policies
are outstanding and in full force and effect.
(r) Litigation. None of VTS or, to the Knowledge of VTS, any
director, officer, employee or agent of VTS, is (i) subject to any outstanding
injunction, judgment, order, decree, ruling, or charge or (ii) a party or, to
the Knowledge of VTS, threatened to be made a
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party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. No director,
officer, or employee of VTS has any reason to believe that any such action,
suit, proceeding, hearing, or investigation may be brought or threatened against
VTS.
(s) Employees. No employee has notified VTS of any plans to terminate
employment with VTS. VTS neither is nor has been a party to or bound by any
labor or collective bargaining agreement.
(t) Employee Benefits.
(i) Schedule 4.1(t) to this Agreement lists each Employee Benefit
Plan that VTS maintains or to which it contributes.
(A) Each such Employee Benefit Plan (and each related trust,
insurance contract, or fund) complies in form and in operation in all material
respects with its underlying documents, the applicable requirements of ERISA,
the Code, and other applicable laws.
(B) All applicable disclosure and filing requirements have
been timely satisfied in all material respects with respect to each such
Employee Benefit Plan. The requirements of Part 6 of Subtitle B of Title I of
ERISA and of Code Section 4980B have been met with respect to each such Employee
Benefit Plan which is an Employee Welfare Benefit Plan.
(C) All premiums or other payments for all periods ending on
or before the Closing Date have been paid with respect to each such Employee
Benefit Plan which is an Employee Welfare Benefit Plan.
(D) With respect to each such Employee Benefit Plan, VTS has
delivered to Nematron correct and complete copies of the plan documents and
summary plan descriptions, the most recent Form 5500 Annual Report, if
applicable, and all related insurance contracts, or trust or other funding
agreements which, if applicable, implement each such Employee Benefit Plan.
(ii) VTS does not contribute to, has never contributed to, nor
has ever been required to contribute to any Multiemployer Plan, and has no
Liability (including withdrawal Liability) under any Multiemployer Plan.
(iii) VTS does not maintain, has never maintained, does not
contribute, has never contributed, nor has ever been required to contribute to
any Employee Welfare Benefit Plan providing medical, health, or life insurance
or other welfare-type benefits for current or future retired or terminated
employees, their spouses, or their dependents (other than in accordance with
Code Section 4980B).
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(iv) There is no litigation, disputed claim (other than routine
claims for benefits), governmental proceeding, audit, inquiry or investigation
pending or, to the Knowledge of VTS, threatened with respect to any such
Employee Benefit Plan, its related assets or trusts, or any fiduciary,
administrator or sponsor of such Employee Benefit Plan.
(v) Except as disclosed in Schedule 4.1(t), with respect to each
Employee Pension Benefit Plan:
(A) each such plan which is intended to qualify as a
tax-qualified retirement plan under Code Section 401(a) has received a favorable
determination letter(s) from the Internal Revenue Service (copies of which have
been delivered to Nematron) as to qualification of such plan covering the period
from its adoption through the Closing Date; all amendments required to maintain
such qualification have been timely adopted; nothing has occurred, whether by
action or failure to act, which has resulted in or could cause the loss of such
qualification (whether or not eligible for review under the Internal Revenue
Service's Closing Agreement Program, Voluntary Compliance Resolution program or
any similar governmental agency program); and each trust thereunder is exempt
from tax pursuant to Code Section 501(a);
(B) no event has occurred and no condition exists relating
to any such plan that would subject VTS, Nematron or ISI to any tax under Code
Sections 4972 or 4979, or to any Liability under ERISA Section 502; and
(C) neither any such plan nor any other person or entity has
engaged in a "prohibited transaction" (as defined in ERISA Section 406 or Code
Section 4975) with respect to such Plan, for which no individual or class
exemption exists.
(u) Inventories.
(i) All inventory of VTS, including, without limitation, raw
materials, work in process, finished goods, returned products, goods in transit
and all other materials used or consumed in their business and reflected on the
Balance Sheet: (A) was acquired and has been maintained in the Ordinary Course
of Business; (B) is of good and merchantable quality; (C) consists substantially
of a quality, quantity and condition usable, leasable or saleable in the
Ordinary Course of Business; (D) is valued at reasonable amounts based on the
Ordinary Course of Business during the past six months; and (E) is not subject
to any write-down or write-off. (ii) VTS is not under any Liability or
obligation with respect to the return of inventory in the possession of
wholesalers, retailers or other customers. (iii) All inventory has been valued
on the Balance Sheet and on VTS's records and books of account at the lower of
cost (determined on a first in, first out basis) or market value on a basis
consistent with that reflected in the Financial Statements. (iv) Obsolete
inventory and inventory of below-standard quality has been written down to
amounts not in excess of realizable market value. (v) All of the
work-in-process, raw materials and supplies inventory can be used or consumed in
the Ordinary Course of Business and are not in amounts in excess of normal
requirements. (vi) Since the date of the Balance Sheet, there has been no
change in the amount of inventory except changes as a result of the purchase and
sale of, or adjustment to, inventory in the Ordinary Course of Business,
including,
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but not limited to, established seasonal patterns.
(v) Insider Interests. Except as set forth on Schedule 4.1(v), (i) no
officer or director of VTS, nor any shareholder of VTS, has any interest in any
property, real or personal, tangible or intangible, used in or pertaining to the
business of VTS, and (ii) no such person has any business relationship with VTS,
except as an officer, employee, director or shareholder thereof.
(w) Payments. VTS has not directly or indirectly, nor has any agent,
representative or employee of any of them, directly or indirectly, paid or
delivered any fee, commission or other sum of money or item or property, however
characterized, to any finder, agent, government official or other party, in the
United States or any other country, which is in any manner related to the
operations of VTS and which is, or may be with the passage of time or discovery,
illegal under any federal, state or local law (including, without limitation,
the U.S. Foreign Corrupt Practices Act) or any other country having
jurisdiction. VTS has not participated, directly or indirectly, in any boycotts
or other similar practices affecting any of its actual or potential customers
and VTS has at all times done business in an open and ethical manner.
(x) Brokers' Fees. VTS has no Liability or obligation to pay any fees
or commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement.
(y) Disclosure. The representations and warranties contained in this
Section 4.1 do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Section 4.1 not misleading in light of the
circumstances under which they were made.
4.2 Representations and Warranties of Nematron and ISI. Nematron
represents on behalf of itself and ISI as follows:
(a) Authorization of Transaction. Nematron and ISI each has full
corporate power and authority to execute and deliver this Agreement and each
Related Agreement being executed and delivered by Nematron or ISI, and to
consummate the transactions contemplated hereby and thereby and perform their
respective obligations hereunder and thereunder. This Agreement constitutes the
valid and legally binding obligation of Nematron and ISI each enforceable in
accordance with its terms and conditions (subject as to the enforcement of
remedies, to applicable bankruptcy, reorganization, insolvency, moratorium and
similar laws affecting creditors rights, and, with respect to the remedy of
specific performance, equitable doctrines applicable thereto).
(b) Organization and Qualification. Nematron and ISI each is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Michigan. Each of Nematron and ISI is duly authorized to
conduct its business and is in good standing in each jurisdiction where the
failure to so qualify would have a material adverse effect on the
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business of Nematron or ISI.
(c) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Nematron or ISI is subject or any
provision of its articles of incorporation or bylaws or (ii) result in a breach
of, constitute a default under, result in the acceleration of, create in any
party the right to accelerate, terminate, modify, or cancel, or require any
notice under any agreement, contract, lease, license, instrument, or other
arrangement to which Nematron or ISI is a party or by which either is bound or
to which any of their assets is subject.
(d) Nematron SEC Documents. Nematron has delivered to VTS true and
complete copies of its Form 10-KSB, as amended, for the year ended September 30,
1996 and all other documents that Nematron has filed with the SEC since
September 30, 1996 pursuant to the Exchange Act (the "Nematron SEC Documents").
Such reports are complete and correct in all material respects.
(e) Merger Consideration. The shares of Nematron Common Stock to be
issued and delivered pursuant to this Agreement and the Merger are duly
authorized and, when issued and delivered as contemplated herein, will be duly
and validly issued, fully paid and non-assessable.
(f) Brokers' Fees. Nematron has no Liability or obligation to pay any
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement.
(g) Events Subsequent to March 31, 1997. Except as set forth in
the Nematron SEC Documents, or as otherwise contemplated by this Agreement,
since March 31, 1997, Nematron has not:
(i) incurred any liability or obligation under agreements or
otherwise, except current liabilities entered into or incurred in the ordinary
course of business or in connection with the execution and performance of this
Agreement;
(ii) entered into any material transaction other than in the
ordinary course of its business, except in connection with the execution and
performance of this Agreement;
(iii) entered into any agreement or arrangement that will
need to be filed as an exhibit to a report to be filed pursuant to the Exchange
Act in accordance with the requirements of Regulation S-B promulgated under the
Securities Act or amended its Articles of Incorporation or Bylaws;
(iv) become (A) subject to any outstanding injunction,
judgment, order,
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decree, ruling or charge or (B) a party or, to the Knowledge of Nematron, is
threatened to be made a party, to any action, suit, proceeding, hearing, or
investigation of, in or before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction of before any
arbitrator, which, with respect to (A) or (B), would be required to be disclosed
in a report filed by Nematron under the Exchange Act;
(v) suffered any damage, destruction or loss to any of the
properties or assets (whether or not covered by insurance) which in the
aggregate are reasonably likely to have a material adverse effect on Nematron's
business or financial condition; or
(vi) suffered any adverse changes which in the aggregate have had
or are reasonably likely to have a material adverse effect on Nematron's
business or financial condition.
(h) Representations Relating to Tax-Free Reorganization.
(i) Prior to the Merger, all of the shares of capital stock of
ISI are owned beneficially and of record by Nematron.
(ii) Nematron has no current plan or intention to (A) reacquire
any of the Nematron Shares issued as part of the Merger Consideration; (B)
liquidate ISI; (C) merge ISI with or into another corporation; (D) sell or
otherwise dispose of the stock of ISI currently owned by Nematron; (E) cause ISI
to sell or otherwise dispose of any of ISI's assets following the Merger except
in the ordinary course of business; or (F) cause ISI to issue any additional
stock or securities.
(iii) Nematron has never owned any of the capital stock of VTS.
(iv) Neither Nematron nor ISI is an investment company subject to
regulation under the Investment Company Act of 1940.
(i) Disclosure. The representations and warranties contained in this
Section 4.2 do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Section 4.2 not misleading.
5. PRE-CLOSING COVENANTS. The Parties agree as follows with respect to the
period between the execution of this Agreement and the Closing.
5.1 General. Each of the Parties will use its best efforts to take all
action and to do all things necessary, proper, or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Section 7 below).
5.2 Shareholders' Approval. As soon as practicable following the date
hereof (and in
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no event more than 10 days after the date hereof), VTS, acting through its Board
of Directors, shall in accordance with its Articles of Incorporation and Bylaws
and applicable law duly call, give notice of, convene and hold a special meeting
of its shareholders for the purpose of approving and adopting this Agreement and
the transactions contemplated hereby, or obtain the consent of its shareholders
in lieu of such a meeting, and, subject to its board of directors' fiduciary
duties under applicable law (as determined following consultation with counsel),
include in any materials distributed to holders of VTS Shares entitled to vote
at such meeting or to give such consent the recommendation of its board of
directors that shareholders of VTS vote in favor of, or give their consent to,
and adopting this Agreement and the transactions contemplated hereby and use its
best efforts to solicit votes or consents in favor of the approval and adoption
of this Agreement and the transactions contemplated hereby. The Shareholders
shall vote, or give consent with respect to, all of the shares owned by them in
favor of the approval and adoption of this Agreement and the transactions
contemplated hereby.
5.3 Notices and Consents. Nematron, ISI and VTS will give any notices to
third parties, and use their best efforts to obtain any third-party
authorizations, consents, or approvals required in order to consummate the
transactions contemplated by this Agreement.
5.4 Operation of Business. From the date of this Agreement until the
Effective Time, VTS will operate its business in the Ordinary Course of
Business. VTS will use its best efforts to preserve intact the present business
organization of VTS, maintain in effect all material licenses, permits and
approvals of governmental authorities necessary for the conduct of its present
business and maintain its present operations, physical facilities, working
conditions and relationships with lessors, suppliers, customers, clients and
employees. VTS will not engage in any practice, take any action, or enter into
any transaction outside the Ordinary Course of Business without the prior
written consent of Nematron and ISI. Without limiting the generality of the
foregoing, from the date of this Agreement until the Effective Time, VTS will
not, without the prior written consent of Nematron:
(a) amend its Articles of Incorporation or Bylaws;
(b) pay or declare any cash dividend, or other dividend or
distribution with respect to its capital stock;
(c) issue, transfer, sell or deliver, or commit to issue, transfer,
sell or deliver, any shares of its capital stock (or any options, warrants or
any rights thereto including, without limitation, any securities convertible
into or exchangeable, with or without additional consideration, for such capital
stock);
(d) increase or reduce the number of shares of its capital stock by
split-up, reverse split, reclassification or distribution of stock dividends;
(e) purchase or otherwise acquire for any consideration any
outstanding shares of its capital stock or securities carrying the right to
acquire, or convertible into or exchangeable for such stock, with or without
additional consideration;
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(f) acquire by merger or consolidation with, or merge or consolidate
with, or purchase substantially all of the assets of, or otherwise acquire any
business of any corporation, partnership, association or other business
organization or division thereof, or make any investment of a capital nature
either by purchase of stock or securities, contributions to capital, property
transfer or otherwise, or by the purchase of any property or assets of any other
individual, partnership, firm or corporation;
(g) incur additional indebtedness for borrowed money in excess of
$10,000 in the aggregate;
(h) adopt or materially modify any bonus, pension, profit-sharing or
other compensation plan or enter into any contract of employment with any
employee which is not terminable at will without cost or other liability;
(i) adopt, enter into or amend in any material respect any collective
bargaining, employment, severance or termination agreement or arrangement with
any person or make any change in its key management structure, including, but
not limited to, the hiring of additional employees or the termination of
existing employees;
(j) discharge or satisfy any lien or encumbrance or pay any obligation
or liability (whether accrued, absolute, contingent or otherwise), except
current liabilities incurred in the Ordinary Course of Business;
(k) mortgage, pledge or subject to lien, charge, security interest or
any other encumbrance any of its assets or property;
(l) transfer or lease any of its assets or property except in the
Ordinary Course of Business;
(m) cancel or compromise any debt or claim other than in the Ordinary
Course of Business in an aggregate amount in excess of $10,000;
(n) waive or release any rights, or settle any claim, in an aggregate
amount which is in excess of $10,000;
(o) transfer or grant any rights under any leases, licenses or other
agreements, other than in the Ordinary Course of Business;
(p) make or grant any general or individual wage or salary increase;
(q) fail to pay or discharge its accounts payable, debts or
liabilities when due;
(r) suffer any material adverse change in its financial condition,
properties or business;
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(s) make or enter into any contract, commitment or transaction which
involves an expenditure in excess of $10,000, or renew, extend, amend or modify
any contract, commitment or transaction involving in excess of $10,000;
(t) enter into or amend any contract, agreement or other transaction
with any officer, director or shareholder of VTS, or any affiliate of such an
officer, director or shareholder, on terms that are less favorable than could be
obtained from an unrelated third party on an arm's length basis.
5.5 Full Access to and Provision of Information. VTS will permit Nematron
and ISI and their designees to have full and complete access upon reasonable
notice and during normal business hours, to all premises, properties, personnel,
books, records (including Tax records), contracts, and documents of or
pertaining to VTS. VTS will deliver to Nematron or ISI such other documentation
and information which is reasonably requested. All information so obtained
shall be subject to that certain Non-Disclosure Agreement, dated as of May 1,
1997, between Nematron and VTS.
5.6 Notice of Developments. Upon becoming aware of such facts or
circumstances, each Party will give prompt written notice to the other Parties
of (a) the occurrence or failure to occur of any event the effect of which is
that any representation and warranty made by such Party herein is untrue and (b)
the receipt of any notice or other communication from any third party alleging
that the consent of such third party is or may be required in connection with
the transactions contemplated by this Agreement. To the extent such facts or
circumstances would cause a Schedule to this Agreement to become incorrect or
incomplete, such Schedule shall be amended and delivered promptly to the other
Parties (and, in any event, prior to the Closing). No disclosure by any Party
pursuant to this Section 5.6, however, will be deemed to amend or supplement
this Agreement or the Schedules, or to prevent or cure any misrepresentation,
breach of warranty, or breach of covenant, unless such misrepresentation or
breach is waived in accordance with Section 11.10; provided, however, that if
the Effective Time occurs notwithstanding such disclosure, the representations
and warranties contained in this Agreement shall be deemed amended to include
such disclosure and such misrepresentation or breach shall be deemed waived.
5.7 Exclusivity. VTS and the Shareholders agree not to, and VTS shall use
its best efforts to cause its officers, directors, employees, agents and
shareholders not to, solicit, encourage or participate, directly or indirectly,
in any manner in any discussion with, or furnish or caused to be furnished any
information to, any person other than Nematron or ISI in connection with, or
negotiate for or otherwise pursue, the sale of VTS Shares or any rights thereto,
the sale of all or substantially all of the assets of VTS or any portion of its
business, or any business combination or merger of VTS with any other party
prior to the termination of this Agreement pursuant to Section 9.1. VTS shall
promptly inform Nematron and ISI of any inquiries or proposals with respect to
any of the foregoing. In the event that the agreements in this paragraph are
violated by VTS, the Shareholders or VTS's officers, directors, employees,
agents or shareholders, and VTS does not consummate the Merger, then, in
addition to other
21
<PAGE> 22
remedies available to Nematron, Nematron shall be entitled to receive from VTS
all costs and out-of-pocket expenses (including reasonable attorneys' fees and
expenses related to the Merger and any related financing) which Nematron and ISI
may have incurred.
5.8 WARN Act. VTS agrees that, if requested by Nematron, it shall, on
behalf of Nematron and ISI, issue such notices as are required under the Worker
Adjustment and Retraining Notification Act of 1988 ("WARN Act") or any similarly
applicable state or local law. No such notices shall be given without the prior
approval of Nematron.
5.9 Press Releases and Public Announcements. Neither VTS nor the
Shareholders will issue any press release or make any public announcement
relating to the subject matter of this Agreement or any Related Agreement
without the prior written approval of Nematron. Prior to the Effective Time,
Nematron shall not issue any press release relating to the subject matter of
this Agreement or any Related Agreement without prior consultation with and
approval of VTS, which approval shall not be unreasonably withheld.
6. POST-CLOSING COVENANTS. The Parties agree as follows with respect to the
period following the Closing:
6.1 General. In case at any time after the Closing any further action is
necessary or desirable to carry out the purposes of this Agreement or any
Related Agreement, each of the Parties will, to the extent permitted by law,
take such further action (including the execution and delivery of such further
instruments and documents and obtaining such further consents) as any other
Party may request, all at the sole cost and expense of the requesting Party.
VTS acknowledges and agrees that from and after the Closing, Nematron will be
entitled to possession of all documents, books, records (including Tax records),
agreements and financial data in VTS's possession of any sort relating to VTS.
6.2 Deposit Nematron Shares in Escrow. Immediately following the
Effective Time, each of the Shareholders shall deposit, with the escrow agent
named in the Escrow Agreement, Nematron Shares received by him in the Merger in
the amount set forth in Schedule 6.2.
7. CONDITIONS TO OBLIGATIONS TO CLOSE THE MERGER.
7.1 Conditions to Obligation of Nematron and ISI to Close the Merger. The
obligation of Nematron and ISI to consummate the transactions to be performed by
them in connection with the Closing is subject to satisfaction or waiver of the
following conditions:
(a) The representations and warranties set forth in Section 4.1 shall
be true and correct at and as of the Closing Date.
(b) VTS and the Shareholders shall have performed and complied with
all of their covenants under this Agreement in all material respects through the
Closing.
22
<PAGE> 23
(c) This Agreement and the transactions contemplated hereby
(including, without limitation, the Merger) shall have been duly approved by the
holders of the requisite number of the VTS Shares in accordance with applicable
law and VTS's Articles of Incorporation and Bylaws.
(d) There shall be no more than 310,000 Dissenters' Shares for which
written demand for payment has been made in accordance with Sections 1300
through 1312 of the CGCL.
(e) VTS shall have delivered to Nematron or ISI an unaudited balance
sheet and related statements of operations for the months subsequent to March
31, 1997 to the Closing Date.
(f) VTS shall have procured all of the third party consents required
in order for it to consummate the transactions contemplated by this Agreement
and the Related Agreements.
(g) All required governmental and regulatory approvals for the Merger,
including any approvals required under federal or state securities laws, shall
have been received.
(h) No action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would (i)
prevent consummation of any of the transactions contemplated by this Agreement
or any Related Agreement, (ii) cause any of the transactions as set forth in
this Agreement or any Related Agreement to be rescinded following consummation,
(iii) affect adversely the right of VTS to own its assets and to operate its
business as it currently operates, or (iv) if determined adversely to VTS or any
director, officer, employee or agent of VTS, have a material adverse effect on
the business, financial condition or prospects of VTS and no such injunction,
judgment, order, decree, ruling, or charge described in (i), (ii), (iii) or (iv)
shall be in effect.
(i) All actions to be taken by VTS and the Shareholders in connection
with the consummation of the Merger and all certificates, opinions, instruments,
and other documents delivered at the Closing or required to effect the Merger
shall be satisfactory in form and substance to Nematron and its counsel.
(j) VTS and the Shareholders shall have made, or caused to be made,
all of the deliveries required by Section 8.2(b).
(k) There shall not have occurred since the date hereof any event
which has had or with the passage of time, is reasonably likely to have a
material adverse effect on the condition (financial or otherwise), assets,
liabilities, results of operations or prospects of VTS.
(l) Shareholders shall own and shall have owned, beneficially and of
record, at least 67% of the issued and outstanding VTS Shares at all times from
the record date for determining the VTS Shares entitled to vote or consent to
the approval and adoption of this
23
<PAGE> 24
Agreement and the Merger or the date of this Agreement, whichever is earlier,
through the Effective Time.
7.2 Conditions to Obligation of VTS to Close the Merger. The obligation of
VTS to consummate the transactions to be performed by it in connection with the
Closing is subject to satisfaction or waiver of the following conditions:
(a) The representations and warranties set forth in Section 4.2 shall
be true and correct at and as of the Closing Date.
(b) Nematron and ISI shall have performed and complied with all of
their covenants under this Agreement in all material respects through the
Closing.
(c) No action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would (i)
prevent consummation of any of the transactions contemplated by this Agreement
or any Related Agreement, or (ii) cause any of the transactions contemplated by
this Agreement or any Related Agreement to be rescinded following consummation,
and no such injunction, judgment, order, decree, ruling, or charge described in
(i) and (ii) shall be in effect.
(d) Nematron and ISI shall have made all of the deliveries required by
Section 8.2(a).
(e) The last reported sale price of Nematron Common Stock reported by
the Nasdaq National Market on the day prior to the Closing Date shall be $5.00
or more.
(f) This Agreement and the transactions contemplated hereby
(including, without limitation, the Merger) shall have been duly approved by the
holders of the requisite number of the VTS Shares in accordance with applicable
law and VTS's Articles of Incorporation and Bylaws.
(g) All required governmental and regulatory approvals for the Merger,
including any approvals required under federal or state securities laws, shall
have been received.
(h) All actions to be taken by Nematron and ISI in connection with the
consummation of the Merger and all certificates, opinions, instruments, and
other documents delivered at the Closing or required to effect the Merger shall
be satisfactory in form and substance to VTS and its counsel.
(i) There shall not have occurred since the date hereof any event
which has had or with the passage of time, is reasonably likely to have a
material adverse effect on the condition (financial or otherwise), assets,
liabilities, results of operations or prospects of Nematron or its subsidiaries,
taken as a whole.
24
<PAGE> 25
8. CLOSING.
8.1 Time and Place. Subject to the terms and conditions of this Agreement,
the closing of the transactions contemplated by this Agreement (the "Closing")
will take place at such location, on such date and at such time as the Parties
mutually agree at the earliest practicable time after the satisfaction or waiver
of all conditions to the Merger set forth in Article 7 herein (the "Closing
Date").
8.2 Deliveries at the Closing.
(a) At the Closing, Nematron or ISI will deliver or cause to be
delivered to VTS and the Shareholders the following:
(i) Certified resolutions of Nematron's Board of Directors and
ISI's Board of Directors authorizing the execution and delivery of this
Agreement, the Related Agreements to which Nematron or ISI is a party and the
consummation of the Merger; (ii) A certificate of Nematron, dated the Closing
Date, signed by the President of Nematron, to the effect that the conditions of
Section 7.2 have been fulfilled;
(iii) The written opinion of Dykema Gossett PLLC, counsel to
Nematron and ISI, dated the Closing Date, in the form attached as Exhibit
8.2(a)(iii);
(iv) The Employment and Noncompetition Agreement executed by
Nematron or ISI; and
(v) The Certificate of Merger executed by ISI.
(b) At the Closing, VTS and the Shareholders will deliver or cause to
be delivered to Nematron and ISI the following:
(i) A certificate as to the (A) resolutions of VTS's Board of
Directors and shareholders authorizing the execution and delivery of this
Agreement, the Related Agreements to which VTS or the Shareholders are parties
and the consummation of the Merger, (B) the authenticity of the bylaws of VTS,
and (C) the incumbency of certain VTS officers;
(ii) A certificate of VTS, dated the Closing Date, signed by the
President of VTS and by the Shareholders, to the effect that the conditions of
Section 7.1 have been fulfilled;
(iii) The opinion of General Counsel Associates LLP, dated the
Closing Date, in the form attached as Exhibit 8.2(b)(iii);
(iv) A copy of the Articles of Incorporation of VTS (certified by
the California Secretary of State) and certificates of good standing from the
appropriate
25
<PAGE> 26
governmental officials stating that VTS is in good standing in California and
that VTS is in good standing as a foreign corporation in each jurisdiction
listed in Schedule 4.1(b)(i);
(v) The Employment and Noncompetition Agreement executed by
Michael Shapiro;
(vi) The Certificate of Merger executed by VTS;
(vii) The minute books of VTS;
(viii) An Investment Representation Letter from each holder of
VTS Shares (other than holders of VTS Shares not voted in favor of the Merger
and this Agreement and as to which notice has been given by the holders thereof
as provided in Section 1301 of the CGCL);
(ix) the Escrow Agreement executed by the Shareholders; and
(x) Such other information, documents or instruments from VTS or
the Shareholders as Nematron or ISI may reasonably request for the purpose of
effectuating the transactions contemplated by the Agreement and the Related
Agreements.
9. TERMINATION.
9.1 Termination. Notwithstanding the adoption of this Agreement by the
Board of Directors of Nematron, ISI and VTS and the shareholders of VTS, this
Agreement may be terminated, and the Merger abandoned, at any time before the
Effective Time in any of the following ways:
(a) by the mutual written agreement of the Parties;
(b) by Nematron or ISI if any of the conditions set forth in Section
7.1 have not been satisfied at Closing and have not been waived by Nematron or
ISI;
(c) by VTS if any of the conditions set forth in Section 7.2 have not
been satisfied at Closing and have not been waived by VTS; or
(d) by VTS or Nematron if the Closing Date does not occur on or before
June 30, 1997; provided, that the right to terminate this Agreement under this
paragraph (d) shall not be available to any party whose failure to fulfill any
obligations under this Agreement has been the cause of or resulted in the
failure of the consummation of the Merger to occur on or before such date.
A Party desiring to terminate this Agreement must give written notice of such
termination to the other Parties, specifying the paragraph of this Section 9.1
pursuant to which such termination is
26
<PAGE> 27
made and the reason(s) therefor.
9.2 Effect of Termination. Upon termination of this Agreement (and the
Merger) pursuant to Section 9.1 above, this Agreement will become void, each
Party will be responsible for its out-of-pocket expenses (including professional
fees and expenses) and the right to terminate shall be the sole remedy for any
failure of any condition of this Agreement except for a breach of Sections 5.7
or 5.9.
10. SURVIVAL OF REPRESENTATIONS; REMEDIES.
10.1 Survival of Representations and Warranties. The representations and
warranties contained in this Agreement and in any certificate furnished or to be
furnished pursuant hereto shall survive the Closing Date for a period of six
months following the Closing Date; provided, however, that the representations
and warranties contained in Section 4.1(l) shall survive the Closing Date for a
period of two years following the Closing Date.
10.2 Remedies. Following the Closing Date, the remedies provided by the
Escrow Agreement shall be the exclusive remedy of Nematron and ISI for any
breach of any representation or warranty made by VTS or any Shareholder in this
Agreement.
11. MISCELLANEOUS.
11.1 Complete Agreement; Amendment. This Agreement and the Related
Agreements, including the Exhibits, the Schedules and other writings referred to
in or delivered pursuant to or simultaneously with this Agreement, contain the
entire understanding of the Parties with respect to the transactions
contemplated by this Agreement. No representation, inducement, agreement,
promise or understanding altering, modifying, taking from or adding to the terms
and conditions hereof will have any force and effect unless the same is in
writing and validly executed by the Parties hereto.
11.2 Notices. All notices or other communications required or permitted
hereunder will be in writing and will be deemed to have been duly given if sent
by registered or certified mail, postage prepaid and return receipt requested,
addressed as follows:
(a) if to Nematron or ISI, to:
Mr. Frank G. Logan, III, President
Nematron Corporation
5840 Interface Drive
Ann Arbor, Michigan 48103
with a copy to:
Mark A. Metz, Esq.
27
<PAGE> 28
Dykema Gossett PLLC
400 Renaissance Center
Detroit, Michigan 48243
(b) If to VTS or Shareholders, to:
Michael Shapiro, President
Virtual-Time Software, Inc.
650 Saratoga Avenue
Santa Clara, California 95129
with a copy to:
Riaz A. Karamali, Esq.
General Counsel Associates LLP
1891 Landings Drive
Mountain View, CA 94043
or to such other address as will be furnished in writing by any Party, and any
such notice or communication will be deemed to have been given as of the date so
mailed. Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth above
using any other means (including personal delivery, expedited courier, messenger
service, telecopy, telex, ordinary mail, or electronic mail), but no such
notice, request, demand, claim, or other communication will be deemed to have
been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Party notice in the manner herein set forth.
11.3 Expenses. Each Party will be responsible for the payment of the fees
and expenses which he or it incurs for counsel, accountants, brokers and
otherwise in connection with this Agreement.
11.4 Assignment. This Agreement will be binding upon and inure to the
benefit of, and be enforceable by, the Parties hereto and their respective
successors and assigns, provided that neither this Agreement nor any of the
rights, interests or obligations under this Agreement will be assigned by VTS or
the Shareholders without the prior written consent of Nematron; and further
provided, that Nematron and/or ISI may assign, in their sole discretion, any or
all of their rights, interests and obligations under this Agreement to each
other or to any direct or indirect wholly owned subsidiary of Nematron.
11.5 Counterparts. This Agreement may be executed in counterparts, all of
which together will be deemed an original of this Agreement.
11.6 Governing Law. This Agreement will be governed by the laws of the
State of Michigan without regard to its rules regarding choice of law.
28
<PAGE> 29
11.7 Interpretation. The titles of the Sections have been inserted as a
matter of convenience and reference only and will not control or affect the
meaning or construction of this Agreement. References to Sections refer to
Sections of this Agreement unless otherwise stated. Words such as "herein",
"hereof", "hereby" and "hereunder", and words of similar import, unless the
context requires otherwise, refer to this Agreement. As used in this Agreement,
the masculine, feminine and neuter genders shall be deemed to include the others
if the context requires.
11.8 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof. References to this Agreement herein shall be construed as
references to the Agreement with all Exhibits and Schedules.
11.9 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement will be construed as
if drafted jointly by the Parties and no presumption or burden of proof will
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement.
11.10 Waivers. No waiver by any Party of any default, misrepresentation,
or breach of warranty or covenant hereunder, whether intentional or not, will be
deemed to extend to any prior or subsequent default, misrepresentation, or
breach of warranty or covenant hereunder or affect in any way any rights arising
by virtue of any prior or subsequent such occurrence. Any waiver of any
obligation contained in this Agreement is freely, knowingly and voluntarily
given by each Party, without any duress or coercion, after each Party has had
opportunity to consult with its counsel and has carefully and completely read
all of the terms and provisions of this Agreement. No Party will be deemed to
have made any waiver unless it has been made in writing and signed by the Party
to be charged with having made such waiver.
29
<PAGE> 30
IN WITNESS WHEREOF, the Shareholders and the duly authorized officers of
Nematron, ISI and VTS have hereunto set their hands and delivered this Agreement
as of the date and year first above written.
NEMATRON CORPORATION IMAGINATION SYSTEMS, INC.
By: /s/ Frank G. Logan, III By: /s/ Frank G. Logan, III
------------------------ ------------------------
Frank G. Logan, III Frank G. Logan, III
Its: President Its: President
VIRTUAL-TIME SOFTWARE, INC.
By: /s/ Michael Shapiro
------------------------
Michael Shapiro
Its: President
30
<PAGE> 31
/s/ Michael Shapiro
- ----------------------------
MICHAEL SHAPIRO
STATE OF CALIFORNIA)
COUNTY OF Santa Clara)ss.
The foregoing was executed and acknowledged before me this 13th day of
June, 1997 by Michael Shapiro.
Lizabeth L. Johnson
Notary Public, Santa Clara County, California
My commission expires: July 28, 2000.
/s/ Milton Liebhaber
- ----------------------------
MILTON LIEBHABER
STATE OF CALIFORNIA)
COUNTY OF Santa Clara)ss.
The foregoing was executed and acknowledged before me this 13th day of
June, 1997 by Milton Liebhaber.
Lizabeth L. Johnson
Notary Public, Santa Clara County, California
My commission expires: July 28, 2000.
/s/ Leonard Shustek
- -----------------------------
LEONARD SHUSTEK
STATE OF CALIFORNIA)
COUNTY OF Santa Clara)ss.
The foregoing was executed and acknowledged before me this 13th day of
June, 1997 by Leonard Shustek.
Lizabeth L. Johnson
Notary Public, Santa Clara County, California
My commission expires: July 28, 2000.
31
<PAGE> 32
/s/ Lawrence Blackwell
- --------------------------------
LAWRENCE BLACKWELL
STATE OF CALIFORNIA)
COUNTY OF Santa Clara)ss.
The foregoing was executed and acknowledged before me this 13th day of
June, 1997 by Lawrence Blackwell.
Lizabeth L. Johnson
- -------------------
Notary Public, Santa Clara County, California
My commission expires: July 28, 2000.
/s/ J. Glen Stancil
- --------------------------------
J. GLEN STANCIL
STATE OF CALIFORNIA)
COUNTY OF Santa Clara)ss.
The foregoing was executed and acknowledged before me this 13th day of
June, 1997 by J. Glen Stancil.
Lizabeth L. Johnson
- -------------------
Notary Public, Santa Clara County, California
My commission expires: July 28, 2000.
32
<PAGE> 33
Schedules to the Agreement:
4.1(a)Governmental notices, consents, approvals
4.1(b)(i) List of jurisdictions in which qualified as a
foreign corporation and list of officers and
directors
4.1(c)Noncontravention
4.1(d)Shareholders and holdings
4.1(g)Subsequent Events
4.1(j) Taxes
4.1(k) Leases
4.1(l) Intellectual property
4.1(m) Exceptions to tangible assets owned
4.1(n)Contracts
4.1(q)Insurance
4.1(t) Employee benefits
4.1(v)Insider interests
6.2 Number of Nematron Shares to be Deposited in
Escrow
Exhibits to the Agreement:
8.2(a)(iii) Form of Opinion of Dykema Gossett PLLC
8.2(a)(iv) Form of Employment and Noncompetition Agreement
8.2(b)(iii) Form of Opinion of General Counsel Associates LLP
8.2(b)(viii) Form of Investment Representation Letter
8.2(b)(ix) Form of Escrow Agreement
33
<PAGE> 1
EXHIBIT 11
NEMATRON CORPORATION
CALCULATION OF EARNINGS (LOSS) PER SHARE
THREE AND NINE MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
---------------------- -----------------------
1997 1996 1997 1996
---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
ASSUMPTIONS:
Shares outstanding at the end of the period 5,318,656 4,244,415 5,318,656 4,244,415
Weighted average common shares outstanding 5,234,779 3,372,683 4,802,887 3,051,788
Weighted average options and warrants outstanding A 1,092,891 1,054,738 946,862 1,094,465
Number of options and warrants outstanding at end of period B 1,288,192 1,062,375 1,288,192 1,062,375
20% of common shares outstanding C 1,063,731 848,883 1,063,731 848,883
Number of options and warrants outstanding in excess of 20%
common shares outstanding B-C 224,461 213,492 224,461 213,492
Number of common shares obtainable upon exercise of outstanding
weighted average options and warrants as a percentage of
outstanding common shares 24.22% 31.27% 24.22% 35.86%
Average exercise price of options and warrants outstanding D $ 5.16 3.49 $ 5.26 $ 3.35
Average market price of common stock during the period E $ 5.72 8.90 $ 6.41 $ 6.97
Number of common shares obtainable upon exercise of outstanding
options and warrants, limited to 20% of outstanding shares F 959,496 332,877 873,086 408,000
(C*D)/E
COMPUTATIONS:
APPLICATION OF ASSUMED PROCEEDS:
Toward repurchase of outstanding common stock at average
market price and using options and warrants
outstanding, limited to 20% of outstanding shares C*D $5,488,996 $2,962,602 $5,596,534 $2,843,758
Toward reduction of debt for shares in excess of 20% (B-C)*D 1,158,248 745,087 1,180,940 715,198
---------- ---------- ----------- ----------
Total proceeds from exercise of options and warrants B*D $6,647,244 $3,707,689 $ 6,777,474 $3,558,956
========== ========== =========== ==========
ADJUSTMENT OF NET INCOME (LOSS):
Actual net income (loss) G $ (977,448) $ 103,458 $(3,623,573) $ 234,177
Interest reduction at 9.50% in FY 1997 27,508 28,047
Interest reduction of 10.75% in FY 1996 60,073 57,663
---------- ---------- ----------- ----------
Adjusted net income (loss) H $ (949,940) $ 163,531 $(3,595,526) $ 291,840
========== ========== =========== ==========
ADJUSTMENT OF SHARES OUTSTANDING:
Weighted average common shares outstanding I 5,234,779 3,372,683 4,802,887 3,051,788
Net additional shares outstanding B-F 328,696 729,498 415,106 654,375
---------- ---------- ----------- ----------
Adjusted shares outstanding J 5,563,475 4,102,181 5,217,993 3,706,163
========== ========== =========== ==========
EARNINGS (LOSS) PER SHARE:
Before adjustment G/I $ (0.187) $ 0.031 $ (0.754) $ 0.057
========== ========== =========== ==========
After adjustment H/J $ (0.171) $ 0.040 $ (0.689) $ 0.059
========== ========== =========== ==========
USE FOR PRIMARY EARNINGS (LOSS) PER SHARE FOR FINANCIAL STATE $ (0.19) $ 0.03 $ (0.75) $ 0.06
========== ========== =========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,519,627
<SECURITIES> 0
<RECEIVABLES> 5,447,208
<ALLOWANCES> 258,000
<INVENTORY> 5,733,053
<CURRENT-ASSETS> 15,288,857
<PP&E> 4,227,729
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,283,565
<CURRENT-LIABILITIES> 6,344,125
<BONDS> 3,762,655
21,561,209
0
<COMMON> 0
<OTHER-SE> (3,453)
<TOTAL-LIABILITY-AND-EQUITY> 28,283,565
<SALES> 16,167,741
<TOTAL-REVENUES> 16,167,741
<CGS> 9,171,169
<TOTAL-COSTS> 9,171,169
<OTHER-EXPENSES> 7,994,824
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 271,249
<INCOME-PRETAX> (3,623,573)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,623,573)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,623,573)
<EPS-PRIMARY> (0.75)
<EPS-DILUTED> (0.75)
</TABLE>
