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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended SEPTEMBER 30, 1998
or
[ ] 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
(Name of small business issuer in its charter)
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MICHIGAN 38-2483796
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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5840 INTERFACE DRIVE, ANN ARBOR, MICHIGAN 48103
(Address of principal executive offices) (Zip Code)
(734) 214-2000
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. [X] Yes [ ] No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $16,829,334
The aggregate market value of the voting stock held by non-affiliates
as of December 21, 1998, computed by reference to the closing price of such
stock on such date as quoted on the Nasdaq Stock Market National Market, was
approximately $2,856,000. For purposes of this computation only, all executive
officers, directors and beneficial owners of more than 5% of the outstanding
Common Stock are assumed to be affiliates.
The number of shares outstanding of the issuer's Common Stock on December
21, 1997 was 5,353,316.
DOCUMENTS INCORPORATED BY REFERENCE
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Part of Form 10-KSB Into
Document Which the Document is Incorporated
Portions of Definitive Proxy Statement
for the 1999 Annual Meeting of Shareholders Part III
(the "1999 Proxy Statement")
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TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT [ ] Yes [X] No
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PART I
ITEM 1. BUSINESS.
This Business section contains forward looking statements that involve
uncertainties. 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 below and in "Management's Discussion and Analysis of
Operations - Uncertainties Relating to Forward Looking Statements."
CORPORATE HISTORY
Nematron Corporation ("Nematron" or the "Company") was incorporated in
Michigan in October, 1983. In 1986, the Company became a wholly-owned subsidiary
of Interface Systems, Inc. ("Interface"). On February 26, 1993, the Company
became an independent publicly-traded company as a result of a spin-off from
Interface, which was effected by the distribution of 100% of the shares of the
Company on a pro rata basis to Interface's shareholders.
During the year ended September 30, 1995, the Company completed two
acquisitions, the merger of Imagination Systems, Inc., a Virginia corporation
("Imagination"), into the Company, and the merger of Universal Automation, Inc.
("UAI"), into the Company's wholly-owned subsidiary, NemaSoft, Inc.
("NemaSoft").
During the year ended September 30, 1996, the Company formed a new
wholly-owned subsidiary, Imagination Systems, Inc., a Michigan corporation
("ISI"), which remained a shell company until 1997.
During the year ended September 30, 1997, the Company completed two
acquisitions, the merger of Intec Controls Corp. into the Company's wholly-owned
subsidiary, NemaSoft, and the merger of Virtual-Time Software, Inc. into ISI.
The Company's principal executive offices are located at 5840 Interface
Drive, Ann Arbor, Michigan, and its telephone number is (734) 214-2000.
GENERAL
Nematron designs, manufactures and markets factory automation products,
including computer hardware and software products. Its industrial computers and
terminals are called Industrial WorkstationsTM, which are "ruggedized" computers
with built-in displays, keyboards or other forms of operator input. Industrial
Workstations are used by operators in industrial processing and in factory floor
environments to monitor and control machine and cell level operations.
Nematron's software products, which have been sold under the trade names of
OpenControl(TM), Hyperkernel(TM), Paragon(TM), FloPro(R), and PowerVIEW(TM), are
sold to industrial users for operator interface, direct machine control and
supervisory control, and its AutoNet(TM) software product is used in test and
measurement environments.
The primary focus of Industrial Workstations is on applications where
the extremes of temperature, shock and vibration, high humidity, airborne
contaminants and physical abuse or hard use require the use of equipment that
has been specially designed to operate more reliably than commercial grade
equivalents. The Company's industrial computer products are used in industrial
manufacturing and process automation, specifically relating to operator-machine
interface and direct machine control applications. The Company incorporates
electronic technology and software in its Industrial Workstation products to
satisfy a broad variety of customer applications. The applications may range
from the replacement of traditional hardwired push buttons, lights and gauges
that can be used with a single machine or local process, to advanced industrial
computer-based systems that provide supervisory control, direct control and
networking capabilities over a large number of machines.
The Company has six main software products used in the industrial and
factory automation workplace, all of which were developed by the Company or
acquired. These products are marketed under the trade names OpenControl(TM),
Hyperkernel(R), Paragon(TM), FloPro(R), PowerVIEW(R) and AutoNet(TM).
Additionally, most of the Company's Industrial Workstations contain proprietary
software embedded in the products as firmware which is not
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sold separately. All six shrink-wrap products can be run on Nematron's computers
or those of most other manufacturers.
The Company's OpenControl software product allows operators to leverage
PC-based software packages, such as Windows NT and many popular Supervisory
Control and Data Acquisition ("SCADA") and Man-Machine Interface ("MMI")
programs. OpenControl allows the use of standard networking products and
connectivity to the Internet or corporate-wide Intranet systems using a modular
approach for open control architecture applications. Hyperkernel allows software
developers to integrate highly deterministic real-time applications into the
Microsoft's Windows NT operating system and enables devices such as robots,
process controllers and motion control systems to be configured as application
servers on any standard network system. The Company's Paragon software product
is a SCADA package which regulates control and management of process
information. Paragon was developed by Intec, which the Company acquired through
a merger of Intec into the Company's wholly-owned NemaSoft subsidiary in March,
1997. The Company's FloPro software product is a flowchart programming and
direct machine control software product developed by UAI, which the Company
acquired through a merger of UAI into a wholly-owned subsidiary in September,
1995. The Company's PowerVIEW product, first released by the Company in 1996, is
a powerful and comprehensive 32-bit Windows NT and Windows 95-based application
development system for factory floor operator interface applications. The
Company's AutoNet software product is a test and measurement server which allows
for data acquisition and real time processing of data and for performing
multiple functions at high speed while graphically displaying such real time
information through a wide variety of configurable graphic instruments, trends
and Cartesian plots. AutoNet was developed by Imagination, which the Company
acquired by merger in March, 1995.
The Company had six primary locations, three of which were closed
subsequent to September 30, 1998.
The Company's headquarters are in Ann Arbor, Michigan and employees
located there are responsible for product development, administration, finance,
accounting, personnel, computer manufacturing, customer service, corporate
purchasing, corporate quality, corporate marketing, corporate-wide sales and
international business development.
The Company's software development and software manufacturing for its
Nematron and NemaSoft products were conducted primarily at its Foxboro,
Massachusetts and Virginia Beach, Virginia offices, although certain development
activities were also performed at its Santa Clara, California and Hilliard, Ohio
facilities. Subsequent to September 30, 1998, the Virginia, Ohio and California
offices were closed, and all software development activities were transferred to
Foxboro, Massachusetts. Software engineers and other employees located at this
facility are responsible for software product development, enhancement,
maintenance, and reproduction of shrink-wrapped software.
The Company's sales operations for the European marketplace are
conducted in Chichester, United Kingdom, through Nematron, Ltd., which was a
wholly-owned subsidiary of Intec which the Company acquired in March, 1997.
Located south of London, its principal functions are European sales,
distribution management, application engineering and customer service. Nematron,
Ltd. is primarily operated as a cost center since allocation of gross product
margins and operating and administrative expenses cannot be reasonably allocated
to that entity or by region.
PRODUCTS, MARKET AND COMPETITION
COMPUTERS AND HARDWARE PRODUCTS
The Company designs and manufactures operator terminals for reliable
performance in harsh industrial environments. Each operator terminal provides a
display that shows the status of the process and a keyboard or a touch screen
that allows personnel to control the process. These terminals all come in a
rugged package that withstands extremes of temperature, humidity, vibration,
shock, and electrical interference.
The Company offers a variety of Industrial Workstations to the
industrial automation marketplace. Each product class includes a range of
display options, prices, and capabilities.
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Virtually all of the Company's smaller and newer products use "flat
panel" displays. Popularized by laptop personal computers, flat panels offer
considerable space savings over CRTs with increased reliability. These products
also provide immunity to shock, vibration, and electromagnetic interference.
They are particularly well suited for applications with hazardous environments
such as chemical plants, and in the presence of high electrical currents, such
as in aluminum and steel processing applications. In the near future, management
intends to convert virtually all of the Company's products to flat panel
technology.
While price and features can be important factors in a customer's
purchase decision, reliability consistently ranks the highest. As a result, the
Company expends significant effort on design verification and testing of new
products and purchased subassemblies. In addition, management believes the
Company is able to price its products competitively because of their higher
quality, and hence lower warranty and repair work is required to be performed
after the sale.
CHARACTER-BASED PLC WORKSTATIONS AND REMOTE MESSAGE UNIT PRODUCTS
Character-based programmable logic controller ("PLC") workstations and
remote message unit products economically replace as few as five
electro-mechanical push buttons, while also providing message display and alarm
annunciation functions. All products in this class include flat panel displays.
The Company internally developed the proprietary software for the products in
the lower price range of this class of product. Most of these products are used
with small PLCs for simple machine control, such as packaging equipment and
small fabricating machines. Products in this class range in price from less than
$500 to $2,000.
Most of the Company's competitors in this segment are small companies
with limited resources and market share. A few competitors, such as
Allen-Bradley and Eaton IDT, have substantially greater resources than the
Company, and offer competitive products in the upper end of the price range.
Sales of low-end products in each of 1998 and 1997 amounted to less
than 10% of consolidated revenue. The Company expects a growth rate of
approximately 5% in this market segment in the next year, largely because
industry analysts project similar growth in the small PLC market. To participate
in this growth, the Company plans to maintain a modest level of product
development effort to enhance existing products.
INDUSTRIAL GRAPHICS TERMINALS AND PROGRAMMABLE OPERATOR INTERFACE
PRODUCTS
Industrial graphics terminals and programmable operator interface
products include both CRT displays and keyboards. These products utilize the
Company's proprietary hardware and software designs, which support either remote
terminal operation with an intelligent host, or fully programmable operation to
support PLC operator interface applications.
Because several dozen large and small companies offer competing
products in this market, competition is intense. Every major PLC company
competes in this market, either with its own designs or with private-labeled
products. Significant competitors include Allen-Bradley, Siemens and Eaton IDT.
Sales of industrial graphics terminals and programmable operator
interface products in each of 1998 and 1997, amounted to less than 10% of
consolidated revenue. The Company expects a decrease of approximately 10% per
year in this market segment due to the anticipated availability of more
sophisticated technology at lower costs.
INDUSTRIAL PC PRODUCTS AND INDUSTRIAL CONTROL COMPUTER PRODUCTS
The 5000, 6000 and 7000 series of Industrial Control Computers ("ICCs")
were designed and developed by the Company in 1995 and 1996. ICC-5/6/7000
products offer a Pentium 133, Pentium/MMX 200 MHz, Pentium/MMX 233 MHz or
Pentium II 333 MHz processors. They are shipped with display options from 10.4"
to 13.8" and a choice of motherboards featuring PCI/ISA bus architecture. The
front panels of these units have integrated keypads and are rated UL Type 4
(watertight) construction. Each of these models is UL safety rated and is
certified to the CE Mark. Many of the ICC products are also "bundled" with the
Company's OpenControl and Paragon software products. These units range in price
from $4,800 to $13,000, varying primarily on the choice of display and bundled
software.
The 500i, 600i and 700i series of Industrial Control Computers ("ICIs")
were designed and developed by
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the Company in 1998. ICI-5/6/700 products offer Pentium 133, Pentium/MMX 200
MHz, or Pentium/MMX 233 MHz processors with an ISA passive backplane
architecture. They are shipped with display options from 10.4" to 13.8" and have
the same ratings as the ICC-5/6/7000 series. These units range in price from
$4,800 to $10,000, varying primarily on the choice of display and bundled
software.
The FlexBox(TM) modular rack-mount or bench-top PC provides Intel 80X86
architecture with processors ranging from Pentium 133 to Pentium II 333 MHz
processors. These computers are based on the same PCI/ISA motherboard
technologies offered in the ICC-5/6/7000 series. These modular computers are
often integrated into a system which includes the Nematron MON-500 product, a
flat panel monitor with UL Type 4 front panel. FlexBox products range in price
from $2,400 to $8,000 and the MON-500 ranges from $3400 to $4000 depending upon
hardware and software options.
Sales of these products in 1998 and 1997 amounted to 33% and 60%,
respectively, of consolidated revenue. The Company expects that revenue from
this product category will represent approximately 50% of revenues in fiscal
1999.
Management believes that while operator interface products will
eventually migrate to PC-based control and operator interface solutions that
eliminate the PLC, the migration will not be complete for many years, and the
market for industrial PC products will expand significantly. In response to this
evaluation of the market, the Company will place substantial emphasis on further
enhancements to Industrial PC and ICC products as cost effective replacements
for existing, lower functionality, industrial workstations that complement,
rather than replace, PLCs.
Many competitors participate in the industrial PC product market, most
notably IBM, Allen-Bradley, and Siemens. Many segments in this market are highly
price-sensitive, especially in environments where commercial-grade products
perform adequately. As the market expands, numerous competitive offerings will
probably appear, putting downward pressure on prices and gross profit margins.
The Company intends to continue providing industrial PC products for reliable
operation in harsh environments.
COMPUTER HARDWARE PARTS AND SERVICE
The Company maintains an inventory of spare parts and service stock and
dedicates approximately 15 service technicians and support personnel whose
functions include technical advice regarding product applications and service
and repair of returned computer and other hardware. With the increasing number
of units in service in the marketplace due to the products' wide acceptance and
long life, the shipment of spare parts and performing repair service on
out-of-warranty product continues to be a significant part of the business.
SOFTWARE PRODUCTS
The software products described below, all of which were acquired or
developed by the Company since 1995, represent the cornerstone of the Company's
shift in its strategic focus. Prior to 1995, the Company relied solely on sales
of Industrial Workstation products. Since 1995 the Company's strategy has been
to position itself as a high value-added provider of bundled industrial PC
hardware and Microsoft operating system-based software solutions. With the
acquisition of the following software products, plus the continued enhancement
of existing products and the development of new software products, the Company
is positioning itself to become a leading supplier of industrial automation
software. The Company will attempt to use its software and proven reliable PC
hardware to help drive the factory automation industry from PLC to PC based
control due to the superior technical features of PC based control over PLC
technology.
The Company's six main software products are used in the industrial and
factory automation workplace. Additionally, most of the hardware products
discussed above contain proprietary software embedded in the products as
firmware which is not sold as a separate product. All six shrink-wrap products
may be run on Nematron's computers or on computers of most other manufacturers.
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Sales of software products, including associated support, training and
maintenance agreements, amounted to 24% and 16% of the Company's consolidated
revenue in 1998 and 1997, respectively. The Company expects that revenue from
software products will represent approximately 25% of revenues in fiscal 1999.
OPENCONTROL(TM)
The Company's software product suite for open architecture, direct
control of machines is called OpenControl(TM). OpenControl allows operators to
leverage PC-based software packages, such as Windows NT and many popular
Supervisory Control and Data Acquisition ("SCADA") and Man-Machine Interface
("MMI") programs, including the Company's proprietary Paragon SCADA product and
its PowerVIEW MMI product. OpenControl allows the use of standard networking
products and connectivity to the Internet or corporate-wide Intranet systems.
OpenControl provides a modular approach for open control architecture
applications. The product is comprised of a series of Visual Programming
languages for control, the FloPro for Windows NT run-time control engine, and
independent Device Network I/O servers. FloPro for Windows NT is OpenControl's
run-time engine, and is a 32-bit version of the original field-proven FloPro
technology described below. FloPro for Windows NT is several times faster than
its DOS-based predecessor and is based on the Hyperkernel real-time Windows NT
technology. A variety of device networks and legacy PLC I/O systems are
supported.
HYPERKERNEL(R)
Hyperkernel allows software developers to integrate highly
deterministic real-time applications into the Microsoft's Windows NT operating
system and enables devices such as robots, process controllers and motion
control systems to be configured as application servers on any standard network
system. The Hyperkernel product includes features such as high speed timers;
memory management; interrupt handlers; inter-process communication; file system
services; and task scheduling and prioritization. By using a standardized
development environment like Microsoft C and Visual C++, significant reductions
in software development time may be achieved.
The technology provides true client/server capabilities for complex
software applications. The Hyperkernel RTSS for the Windows NT operating system
utilizes a sophisticated message-passing architecture for inter-process
communications, which is the key difference between Hyperkernel and similar
products developed to operate under DOS or Microsoft's Windows 3.1 operating
systems.
Traditionally, many developers have used custom or proprietary
operating systems and tools to gain high-speed determinism in their application
development work. This meant that developers were not able to leverage the
extensive collection of tools and applications available for the desktop
Windows/PC marketplace. With the Hyperkernel product, development in a
mainstream operating system architecture is now practical.
PARAGON(TM)
The Company's SCADA software is called Paragon (TM). Paragon was
developed by Intec, which the Company acquired through a merger in March 1997.
Paragon is a software package which regulates the control and management of
process information and delivers high performance and reliability in networked
applications with a scaleable database design. The open modular design and
dynamic connectivity of Paragon simplify the integration into enterprise-wide
networks. Paragon supports seamless cross-platform communication among operating
systems from Windows NT to Windows 95 and OS/2 on the same network.
Paragon competes with other software product offerings from other
companies, most notably Wonderware and Intellution. However, the flexible
feature set of Paragon and its networking capabilities provide users with
advantages over competitive products. Paragon's built-in mechanisms allow data
exchange with third-party applications through DDE, standards or programming
languages. Paragon separates application functions into servers which acquire,
generate and store information. Peer-to-peer communication between any
client/server or server/server pair occurs without a central server.
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FLOPRO(R)
The Company's soft logic software is called FloPro(R). FloPro is a
flowchart programming system which executes from personal. FloPro is based upon
the technology in Patent Number 4,852,047 "Continuous Flow Chart, Improved Data
Format and Debugging System for Programming and Operation of Machines." The
programming system is used to create, debug, document and execute control
applications in an open architecture environment. Its open system architecture
allows operators to interface it concurrently with many different input/output
systems, motion controllers, message units and RF tag/bar code systems. FloPro
simplifies machine control system development by allowing the use of multiple
flowcharts, each one handling a relatively simple task, thus allowing for the
concurrent development of applications by a team of control engineers. These
flowcharts communicate with each other in a multi-tasking environment, which
means that the control application is easy to create and understand.
Additionally, FloPro is self-documenting in that it is a programming language
based on the flowcharts; there is no need to translate the flowcharts to ladder
logic. The use of FloPro and a PC replaces the need for PLCs and ladder logic
for machine control applications. FloPro is in use at several General Motors
Corporation manufacturing facilities. FloPro systems at GM's PowerTrain Group
control several thousand machines used to manufacture engines and transmissions.
FloPro competes with several products offered by companies of similar
or smaller size than Nematron in the soft logic marketplace. The soft logic
marketplace is an emerging market that is expected to grow significantly in the
next several years as PCs and soft logic software programs replace PLCs and
ladder logic software. Several of the Company's competitors license the
technology upon which FloPro is based. The advantages of the FloPro product as
compared to competing products is that the software is self-documenting, thus
reducing programmer time; it costs less than many other products; it operates on
open PC architecture; and it reduces plant down time through diagnostic messages
and fast execution time.
POWERVIEW(R)
PowerVIEW is a 32-bit Windows-based application development and
run-time system. The application development system serves as a single point of
control for building graphical display panels and configuring hardware, I/O
connections, process variables, alarms, messages and all other events associated
with the operation of a machine. A high-speed run-time compliments the project
manager portion of the system, but operates on a 32-bit real-time preemptive
multi-tasking microkernel more naturally suited to high-speed, real-time process
control. When the application project is downloaded to the run-time system and
the workstation is plugged into a PLC or I/O network, it runs automatically and
scans the I/O network at rates higher than other commercially available
workstations, updating the screens and sending instructions to the PLC virtually
instantaneously.
PowerVIEW competes with other software product offerings from other
companies, most notably Allen Bradley and Eaton IDT. However, the product is
unique in that it runs on open architecture PC platforms and is a 32-bit
Windows-based application development system and its run time executes from
solid state memory.
AUTONET(TM)
The Company's test and measurement software is called AutoNet(TM), and
is sold to commercial and industrial companies primarily for use in a test cell
environment. AutoNet allows for data acquisition and real time processing of
high-speed data while performing multiple functions. AutoNet graphically
displays real time information through a wide variety of configurable graphic
instruments, trends and Cartesian plots. AutoNet performs real-time
mathematical, statistical and trigonometric calculations for control, test
sequencing, filtering and batch management of data. It features color coded
annunciation of alarm information, diagnostic files and automatic time stamps,
and presents stored data in report, historical graphics or ad hoc queries.
AutoNet competes with products offered by other companies, most notably
Hewlett Packard and National Instruments. The AutoNet product is unique in that
it is a real time operating system which operates in a performance region that
competitive products do not.
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SALES CHANNELS
The Company employs three forms of sales channels. A network of
high-tech industrial distributors is the Company's primary sales channel.
Private-label accounts that remarket Nematron's products primarily through their
own networks of industrial electrical distributors are a less significant sales
channel for the Company's products. In addition, the Company sells its products
to major original equipment manufacturers ("OEMs") of industrial processing
systems and machines and to other major end users.
Approximately 40% of the Company's total revenues are to distributors,
20% to private-label accounts and 40% to direct sales accounts. The Company
believes that it can increase its business as a result of increased marketing
and sales efforts for its OpenControl, Hyperkernel and Paragon software products
and its ICC hardware product lines. Additionally, with the significant
enhancements planned for its PowerVIEW and AutoNet software products, the
Company expects to introduce newer versions of these products for sale in 1999.
The Company presently markets OpenControl heavily to the automotive
manufacturing industry, and intends to expand that focus to other discrete and
process industries in fiscal 1999. The Company also intends to increase its
sales and marketing efforts for bundled hardware and software products.
Three distributors accounted for 26% of the Company's total fiscal 1998
sales and two distributors accounted for 21% of the Company's total fiscal 1997
sales. These distributors resell products primarily to the automotive industry
and machine tool builders. No other private label, direct customer, or
distributor accounted for more than 5% of total Company sales in 1998 or 1997.
The ICC product family accounted for approximately 33% of total fiscal 1998
revenues. No other single model or product family accounted for more than 15% of
the Company's sales during 1998.
The Company's distributors are typically companies with non-exclusive
written agreements that purchase inventory and resell it to their customers. In
addition, distributors typically provide customer training, application
engineering, and support. The Company has approximately 85 domestic distributor
branches and approximately 25 distributor branches in over 20 countries
internationally. The Company has regional sales managers covering major
geographic regions of the United States and Europe and several sales managers
who concentrate on key accounts nationwide. These managers are located in the
United States in Illinois, Massachusetts, Michigan, Ohio, Texas, Tennessee and
Virginia, and in major business centers in the Netherlands and the United
Kingdom. In addition, direct sales accounts and private label accounts are
handled by both key account sales managers as well as corporate executive
management.
MANUFACTURING AND SUPPLY
The Company performs final assembly and testing for almost all hardware
products. The assembly process encompasses the assembly of sheet metal parts,
keyboards, displays, and electronic circuit boards into finished goods. In
addition, the Company performs some cable manufacturing, a limited amount of
circuit board assembly and wave soldering, and the repair and engineering
prototype assembly of surface mount technology components used on various logic
boards. The Company subcontracts the insertion and soldering of components on
circuit boards, and the fabrication of sheet metal, keyboards and front panel
bezels. The Company uses a number of independent firms for these subcontracted
services and is not materially dependent upon any third party that performs
these services. Selected models are built entirely to the Company's design by
vendors and purchased as complete products.
A network of personal computer-based engineering workstations supports
accounting, purchasing, production, scheduling and inventory, as well as the
computer-aided design and development of electronic circuitry, circuit board
layout, programming of programmable logic devices, mechanical design and
software development.
In addition, the Company has purchased and designed a variety of
assembly and test equipment to reduce the cost and ensure the quality of the
design and manufacturing process. The Company has made a substantial investment
in environmental chambers and electronic instrumentation used to certify that
the Company's products meet the severe industrial environments for which they
are intended.
Some components used in the Company's products are currently purchased
from single or limited sources of supply. The Company believes that the loss of
one or more suppliers would not have a material long-term impact on its
operations but could cause some production delays. The Company experienced such
production delays in
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1998 when the Company became delinquent on certain suppliers' trade notes
payable, and as a result, the supplier refused to ship component parts to the
Company, even on a COD basis.
PRODUCT DEVELOPMENT
The Company maintains an active product development program and
continues to supplement existing research and development capabilities through
active recruiting of technical personnel and development of proprietary
technology.
The Company currently has a product development staff of approximately
20 professionals, including electrical and electronic design engineers,
mechanical design engineers, software design engineers, product managers,
application engineers and directly associated staff members involved in
technical documentation and product support. The Company also employs the
services of unrelated contract engineering companies on an as-needed basis. The
Company employs a separate group which is responsible for assuring the long term
quality and reliability of the Company's products. Within this quality assurance
group are quality, test, manufacturing and reliability engineers. Software
development activities are concentrated in the Foxboro, Massachusetts. Prior to
September 30, 1998, development was also performed in offices in Virginia Beach,
Virginia, Santa Clara, California and Hilliard, Ohio. Hardware development and
quality activities testing and control are concentrated in Ann Arbor, Michigan.
The Company emphasizes product development and quality and the
employment of highly skilled and motivated individuals in the product
development and quality assurance areas. Management believes that its product
development staff is an important factor in the Company's ability to compete in
the markets in which its products are sold. During the fiscal years 1998 and
1997, the Company expended approximately $4,200,000 and $4,600,000,
respectively, for direct hardware and software product development and product
design quality, including those costs capitalized under Statement of Financial
Accounting Standards No. 86. All of such costs were sponsored by the Company.
These amounts represented 25% and 22% of total revenues in fiscal 1998 and 1997,
respectively.
INTELLECTUAL PROPERTY
The Company's FloPro software product, which is sold as a separate
product but is also the underlying technology incorporated into the Company's
OpenControl product, is based upon the technology specified in a patent for
continuous flow chart, improved data formatting and a debugging system for
programming and operations of machines. This patent was issued in 1989 as a 17
year patent. The Company also was issued a patent in 1997 for a chassis locking
mechanism used on its Industrial Control Computer and certain other products.
The Company has no patents on other hardware products or computer designs. The
Company filed a patent application for its Hyperkernel real-time extension to
Windows NT during fiscal 1996. The Company has an active technology committee to
review trademark and patent potential on an ongoing basis.
In addition to trademarks on the trade names under which the Company
does or did business, including Nematron(R), NemaSoft(R), Imagination Systems
and Universal Automation, the Company also owns trademarks on certain of its
products, including Industrial Workstation(TM), ToolBox(R), ToolBox Plus(TM),
OpenControl(TM), Hyperkernel(R), Paragon(TM), FloPro(R), AutoNet(TM) and
PowerVIEW(R).
The Company's software products are sold under licenses to use the
products as specified in the underlying contract. Certain of the licenses for
the use of the FloPro software product are site licenses for unlimited use of
the master copy of the product in a specified building, plant or group of
plants. To date, the revenue from these site licenses has not been a significant
source of revenue to the Company. Also, the Company has licensed its soft logic
technology to several unrelated companies under royalty arrangement; these
arrangements are not currently a significant source of revenue.
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EMPLOYEES
The Company currently employs approximately 90 full time employees,
including over 60 in Ann Arbor, Michigan, 12 in Foxboro, Massachusetts, 6 in the
United Kingdom, and 10 at other locations. None of the Company's employees are
represented by a collective bargaining unit, and the Company believes its
employee relations to be good.
ENVIRONMENTAL COMPLIANCE
The Company's products must comply with federal, state and/or local
laws and regulations that have been enacted or adopted relating to the discharge
of materials into the environment, or otherwise relating to the protection of
the environment. The Company believes that continuing efforts and expenditures
incurred to maintain compliance with such laws and regulations will not have a
material effect on capital expenditures, earnings or the competitive position of
the Company.
ITEM 2. PROPERTIES.
The Company's headquarters and principal manufacturing facilities are
located in Ann Arbor, Michigan in a two-story building containing a total of
approximately 51,200 square feet of space. Of this space, approximately 6,400
square feet remain unfinished and available for future office or assembly
expansion. This facility, located on approximately five acres of land, has been
designed such that further expansion of up to 20,000 square feet may be
accommodated. The Ann Arbor facility was designed and built to the Company's
specifications and is Company owned, subject to mortgages by its bank lenders.
The mortgage loan payable to Chelsea State Bank is in the principal amount of
approximately $1,999,000 at September 30, 1998, bears interest at 9.5% per annum
and is payable in monthly installments of $29,900 through September 2001, at
which time the remaining balance of $1,491,000 is due.
The Company's Foxboro, Massachusetts's facility consists of
approximately 3,200 square feet of leased space in a three-story office
building. Leasehold improvements consist of certain changes for specific office,
service, and storage requirements according to the Company's needs. The
operating lease for this facility is non-cancelable through August, 1999.
The Company's European facilities are located in Chichester, United
Kingdom, and consist of approximately 5,000 square feet of leased space in a
20,000 square foot office complex. Leasehold improvements consist of certain
changes for specific office, service, and warehouse requirements according to
the Company's needs. The operating lease for this facility is non-cancelable
through December 1998, at which time the Company will move into a 2,000 square
foot leased facility in a multi-tenant building in Portsmouth, United Kingdom
under a non-cancelable operating lease through December 2001.
The Company believes that all of its facilities are adequate for its
present and anticipated operations.
ITEM 3. LEGAL PROCEEDINGS.
Except as described below, the Company is not involved in any legal
proceedings other than routine, non-material litigation incidental to the
business.
Following the Company's announcement of potential material adjustments
to its financial statements for the years ended September 30, 1996 and 1997
relating to the accounting treatment of one of the Company's contracts, a
complaint captioned Levine v. Nematron Corporation et. al., Case No. 98 CIV
3309, was filed on or about May 8, 1998 in the District Court for the Southern
District of New York. This lawsuit names as defendants the Company, certain of
its officers and directors, its former independent auditor and the underwriter
for the Company's June 5, 1996 public offering of Common Stock. Plaintiff seeks
to represent a class of shareholders who purchased the Company's Common Stock
from January 31, 1996 through April 28, 1998. Plaintiff filed an amended
complaint in October 1998. The amended complaint claims violations of securities
laws and common law based on allegations that defendants made untrue statements
of material facts and that they omitted material facts necessary in order to
make the statements not misleading. The complaint seeks unspecified damages and
costs. In December 1998, the case was transferred to the United States District
Court for the Eastern District of Michigan. Management believes that the outcome
of this case will not have a material adverse effect on the Company.
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On October 14, 1998, a former employee filed a complaint in the
District Court in Virginia against the Company alleging that she was terminated
illegally and in retaliation for her complaints regarding sexual harassment in
the workplace. Plaintiff seeks damages of $500,000. The same plaintiff had filed
an EEOC complaint in May 1998 alleging improper dismissal relating to sexual
harassment, and the EEOC complaint was denied in June 1998. Management believes
that the outcome of this case will not have a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq Stock Market
National Market (the "National Market") and trades under the symbol NEMA. The
following table sets forth, for the periods indicated, the closing price on the
National Market. Trading of the Company's Common Stock was suspended on April
28, 1998 following the Company's announcement that it had identified potential
material adjustments to the Company's financial statements for the years ended
September 30, 1996 and 1997 announcement that its former auditors had withdrawn
their opinions on such financial statements. Following the Company's filing of
its amended Forms 10-KSB/A-2 for the years ended September 30, 1997 and 1998,
trading was resumed on August 3, 1998. The quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent
actual transactions.
Fiscal 1997 High Low
----------- ---- ---
First Quarter $8.63 $4.88
Second Quarter $7.38 $5.13
Third Quarter $6.75 $5.00
Fourth Quarter $8.75 $6.13
Fiscal 1998 High Low
----------- ---- ---
First Quarter $8.00 $4.00
Second Quarter $6.50 $4.12
Third Quarter $6.62 $5.50
Fourth Quarter $4.00 $1.09
There are approximately 900 holders of record of the Company's Common
Stock as of December 21, 1998.
The Company has never paid cash dividends and does not expect to pay
cash dividends in the foreseeable future. Certain Company bank financing
covenants prohibit the payment of dividends. See Note 9 of Notes to Consolidated
Financial Statements.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The following discussion and analysis contains a number of "forward
looking statements" within the meaning of the Securities and Exchange Act of
1934, as amended, with respect to expectations for future periods which are
subject to various uncertainties explained herein and in "Management's
Discussion and Analysis of Operations - Uncertainties Relating to Forward
Looking Statements."
Overview
Management's operating strategy is to incorporate software products
developed internally and those software products obtained through its
acquisitions of other entities into the Company's product offerings and to
vertically integrate its product offerings to include both hardware and software
products related to industrial automation. The Company's marketing and sales
efforts to existing and new customers include stand-alone computers, software
products and bundled products. The Company intends to continue its shift of
business away from dominance by computer hardware sales, and will pursue the
development of new software products and the enhancement of existing software
products. Additionally, the Company has identified new markets for both hardware
and software products, and will pursue new business from customers which offer
the greatest likelihood of large unit volume. Management anticipates significant
growth in the industrial software marketplace and intends, through concentrated
development and aggressive marketing and sales efforts, to capture an increasing
percentage of that market.
Fiscal 1998 Compared to Fiscal 1997
Net revenues were $16,829,000 in fiscal 1998 compared to $20,875,000 in
fiscal 1997. This represents a decrease of $4,046,000, or 19.4%, compared to
fiscal 1997. Software revenues increased to 23.9% of total sales in
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fiscal 1998 versus 16.3% in fiscal 1997, reflecting a full year of Paragon sales
in 1998 compared to six months of sales of the Paragon software product after
Intec was acquired in March 1997. The decrease in sales of Industrial
Workstations and related parts and service as a percentage of total fiscal 1998
revenues resulted primarily from the expiration at the end of fiscal 1997 of
significant contracts with a major customer. Additionally, when the Company
experienced financial difficulty in the third and fourth quarters of fiscal
1998, the customer order rate decreased due to shipment uncertainty. Also, the
Company was unable to secure component parts for subsequent assembly into
finished product due to the lack of cash and available financing.
Foreign revenues decreased in fiscal 1998 by $759,000, or 12.7%, from
foreign revenues in fiscal 1997, due to a combination of higher software sales
but lower hardware sales due to the change in focus of the sales staff in
Europe. Domestic revenues decreased in fiscal 1998 by $3,287,000, or 22.1%,
compared to domestic revenues in fiscal 1997. This decrease is due primarily to
fewer sales personnel, the expiration of major a major contract in 1997 that was
not replaced in 1998, reluctance of customers to place orders in the third and
fourth quarters of fiscal 1998 and the lack of available cash or credit with
which to purchase component parts during that time.
Management expects that the working capital provided by the proceeds
from the issuance of $1 million of convertible promissory notes in December
1998, the additional private placement currently underway, borrowings under the
bank credit facility and borrowings under an additional credit facility from a
finance company entered into in December 1998 will permit the Company to
purchase the component parts needed to return the Company to more customary
production levels for the remainder of fiscal 1999. Also, assuming the Company
is able to fill the existing backlog and that the current order rate continues,
management expects that sales will increase in fiscal 1999 over 1998.
Additionally, management expects that sales will increase due to the recent
positive market response to the Company's Paragon and OpenControl software
products and to its ICC hardware products. If resources are available, the
Company intends to increase its marketing and sales efforts by hiring and
training new sales personnel in certain major metropolitan and industrial areas,
expanding its selling efforts in Europe and strengthening its sales management.
The Company's expectation of revenue growth in fiscal 1999 is also based on the
belief that the products introduced in the last several years and products
planned for release in fiscal 1999 are and will continue to be technologically
more advanced than certain comparably priced competing products, and also on the
expectation that the expansion of the Company's product line will result in the
addition of new distributors and partnership arrangements.
The Company's actual results of operations for fiscal 1999, however,
cannot be predicted with certainty and are subject to a number of risks. For
example, the Company may not close on its second traunch of a private placement,
or the amount of capital raised may not be sufficient to provide the Company
adequate working capital to sustain operations. Additionally, contracts may be
canceled or current purchase orders rescinded, the marketplace may not respond
favorably to the Company's marketing and sales efforts, the Company may be
unable to attract and retain qualified sales staff and management, latent
technological deficiencies in the new products may reduce demand for the
products, the anticipated interest of new distributors in the Company's products
may not materialize, and technological advances by competing companies and
competing products may reduce demand for the Company's products. The occurrence
of any of these events could result in the Company's net revenues growing at a
reduced rate or declining.
Cost of revenues include costs related to raw materials and component
parts, direct labor, overhead, amortization of capitalized software costs,
provisions for warranty costs on products sold and provisions for excess and
obsolete inventory. There were no material changes in costs of raw materials,
direct labor or overhead as a percentage of total revenue. However, during
fiscal 1998, the Company provided significant reserves for obsolete materials
related to certain discontinued Industrial Workstation models. As a consequence
of restricted cash resources and the price competition causing decreasing
margins on certain older products, together with the success of ICC product
models marketed to the automotive and machine tool industries, the Company
determined in the fourth quarter of fiscal 1998 to discontinue certain families
of products. Additionally, during the fourth quarter of fiscal 1998 the Company
determined to concentrate future sales efforts on current models and future
models of ICC products. Provisions for excess and obsolete inventory totaled
approximately $1.3 million, including approximately $1,000,000 recorded in the
fourth quarter of fiscal 1998. Absent the special provision for inventory
obsolescence in fiscal 1998 and the special charges to cost of revenues recorded
in fiscal 1997, the cost of sales as a percentage of total revenues was 62.5% in
fiscal 1998, compared to 61.8% in fiscal 1997.
Product development expenses increased in fiscal 1998 by 2.1%, over the
fiscal 1997 level, primarily due to the development efforts on software
products. Product development expenses, which are a function of new
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product research and development and existing product enhancement efforts, are
expected to remain relatively constant in fiscal 1999 compared to fiscal 1998.
The actual level of product development expense for fiscal 1999 is subject to
various uncertainties, including the ability of the Company to attract and/or
retain qualified persons to perform the planned activities. In addition, it is
possible that research and development efforts could proceed differently than
anticipated or the Company may be required to expense, rather than to
capitalize, the costs related to such efforts.
Selling, general and administrative expenses in fiscal 1998 increased
by $1,164,000, or 12.4%, over the fiscal 1997 level, due principally to the
effect of including the costs and expenses of the former Intec personnel and
other costs for a full year in fiscal 1998. Additionally, significant sales and
support efforts were expended to secure and support a large General Motors
contract under which ICC products will be supplied beginning in fiscal 1999. The
rate of increase in selling, general and administrative expenses in fiscal 1999
is expected to be less than in fiscal 1998 due to scheduled increases in
marketing activities and planned increases in sales staff levels and in sales
activities, offset by reductions in fixed costs, administrative personnel and
other discretionary costs which have been completed in the first quarter of
fiscal 1999. The actual rate of growth is subject to various uncertainties,
however. These include difficulties in attracting and retaining qualified
personnel as planned, the ability of management to effect operational
improvement and the potential need to curtail planned marketing and sales
efforts and other activities if cash resources are not available.
Other operating expenses in fiscal 1998 included a write down of
purchased intangible assets, including goodwill, totaling $1,320,000 and a
provision of $350,000 for payroll and other costs related to the shutting down
of three satellite offices in October and November 1998. Certain intangible
assets were acquired by the Company in the Intec merger in March 1997; in the
fourth quarter, due to personnel changes and changes in software development and
operating and marketing strategies, certain intangible assets, including
associated goodwill, were written down to net realizable value.
Sundry expense in fiscal 1998 was $17,000 compared to sundry income of
$104,000 in fiscal 1997. The decrease in sundry income (expense) is due to the
results from investing available funds in early fiscal 1997. In fiscal 1998, the
Company also recognized a loss of $55,000 on the disposal of property and
equipment.
Interest expense in fiscal 1998 increased by $373,000 due to high
average borrowing levels in fiscal 1998 than in fiscal 1997. The borrowing
levels were higher due to the capital leases entered into in fiscal 1998, as
well as the use of the bank line of credit to fund cash operating losses during
fiscal 1998.
Year 2000 Issue
The Year 2000 Issue ("Y2K") is the result of certain computer programs
being written using two digits rather than four digits to define the applicable
year. Computer systems with a Y2K problem will be unable to interpret dates
beyond the years 1999, which could cause a system failure or other computer
errors, leading to disruptions in operations. In 1997, the Company began to
assess its Y2K readiness and adopted a three-phase program for Y2K information
systems compliance. Phase I is the identification of systems and products with
which the Company has exposures to Y2K issues. Phase II encompasses the
development and implementation of action plans to be Y2K compliant in all areas
by mid-1999. Phase III includes final testing of each major area of exposure to
ensure compliance. The Company has identified four major areas determined to be
critical for successful Y2K compliance: (1) financial and information system
applications; (2) software products currently sold; (3) third-party
relationships and 4) non-information technology areas such as security,
telephone systems and climate control systems.
The Company is finishing Phase I of its program. The Company has
contacted all significant software suppliers and, due to recent implementation
of its major financial and operational software, believes that its financial and
operational software is Y2K compliant. The Company has also reviewed for Y2K
compliance its hardware and software products, including the firmware imbedded
in certain hardware products, marketed and sold to third parties. The Company
has used its employee engineers and others in its review and testing procedures.
The Company has identified one older software product, used for
monitoring and testing in a test cell environment (not related to machine
control) which needs to be modified to correct a Y2K problem. The Company
estimates that the cost to modify the product is approximately $50,000, all of
which relates to the salary and benefits
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<PAGE> 15
of software development employees of the Company, none of which has been
expended to date. The Company intends to fix this Y2K issue and notify its
customers when a solution is available. The Company intends to supply its
customers with the Y2K compliant software without charge. The Company intends to
fund the costs of this effort out of operating funds in fiscal 1999. If the
product cannot be remedied in a cost efficient manner, the Company may determine
to cease marketing and production of the product; such action, however, is not
expected to have a material adverse effect on the Company's results of
operations.
The Company has relationships with, and is to varying degrees dependent
upon, various third parties that provide funds, information, goods and services
to the Company. These include the Company's bank lender, utility providers,
stock transfer agent, and suppliers of components. The Company is attempting,
through informal contacts, to assess the compliance of these third parties.
While not all parties have informed the Company as to their status, the most
significant of these third parties have represented that their systems and
products are Y2K compliant. The Company will continue with this assessment in
fiscal 1999. The Y2K compliance of the systems of these third parties is outside
the Company's control and there can be no assurance that any of these third
parties will not experience a systems failure due to Y2K.
Because the Company expects that the systems within its control will be
Y2K compliant before the end of 1999, the Company believes that the most
reasonably likely worst case scenario is a compliance failure by one or more of
the third parties described above. Such a failure would likely have an effect on
the Company's business, financial condition and results of operations. The
magnitude of that effect, however, cannot be quantified at this time because of
variables such as the type and importance of the third party, the possible
effect on the Company's operations and the Company's ability to respond. Thus,
there can be no assurance that there will not be a material adverse effect on
the Company if such third parties do not remediate their systems in a timely
manner and in a way that is compatible with the Company's systems.
As a result, the Company will develop contingency plans that assume
some estimated level of noncompliance by, or business disruption to, these third
parties. The Company intends to have contingency plans developed by the end of
its third quarter of fiscal 1999 for third parties determined to be at high risk
of noncompliance or business disruption or whose noncompliance or disruption,
while not high risk, is considered likely to materially affect the Company. The
contingency plans will be developed on a case-by-case basis, and may include
plans for switching to Y2K compliant suppliers, Judgments regarding contingency
plans are subject to many uncertainties and there can be no assurance that the
Company will correctly anticipate the level, impact or duration of noncompliance
or that its contingency plans will be sufficient to mitigate the impact of any
noncompliance. Some material adverse effect to the Company may result despite
such contingency plans.
To date, the Company has not expended any incremental costs to
remediate Y2K problems, in that all efforts have been expended by existing
engineering and application support and other personnel These costs have been
expensed as incurred in fiscal 1998. The Company estimates total Y2K remediation
costs at $75,000 incrementally over the next four quarters. Estimates of time,
cost and risks are based on currently available information. Developments that
could affect estimates include, without limitation, the availability of trained
personnel, the ability to locate and correct all noncompliant systems,
cooperation and remediation success of third parties material to the Company,
and the ability to correctly anticipate risks and implement suitable contingency
plans in the event of system failures at the Company or third parties.
New Accounting Pronouncements
In 1997, Statement of Financial Accounting Standards No. 130 ("SFAS
130"), Reporting Comprehensive Income, was issued, and is effective for fiscal
years commencing after December 15, 1997. The Company will comply with the
requirements of SFAS 130 in fiscal year 1999.
In 1997, Statement of Financial Accounting Standards No. 131 ("SFAS
131"), Disclosures About Segments of an Enterprise and Related Information, was
issued, and is effective for fiscal years commencing after December 15, 1997.
The Company will comply with the requirements of SFAS 131 in fiscal year 1999.
On October 27, 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position 97-2 (SOP 97-2), Software Revenue Recognition. SOP
97-2 is effective for fiscal years commencing after
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<PAGE> 16
December 15, 1997, and is not expected to impact the Company's financial
position or results of operations. The Company will comply with the requirements
of SOP 97-2 in fiscal year 1999.
Liquidity and Capital Resources
In August, 1998, the Company recruited Mr. Mathew S. Galvez to assist
the Company in its efforts to stem the significant ongoing losses being suffered
by the Company. At the direction of the Board of Directors, Mr. Galvez
entertained discussions to sell the Company as well as to take on additional
investors and financing.
By the end of October, 1998, the Company was overadvanced on its
revolving credit facility, and was facing imminent foreclosure by the Company's
lenders. In early November 1998, after unsuccessful attempts to sell the
business or solicit working capital through other means, and when the Company
was faced with imminent closing of its business, the Company negotiated an
arrangement with a group of creditors that provided essential working capital to
prevent a complete closedown of the Company. The proposal was submitted to the
bank, and percipiteated a forbearance agreement from the Company's bank.
Following receipt of support from the bank, the management and Board of
Directors agreed to support the arrangement as an offer of last resort. It was
the opinion of management and the Board of Directors that keeping the Company as
an ongoing entity, even if the existing shareholder's interests were materially
diluted, was a much better result than shutting down the business and risking
losing existing business with its significant customers, new business, the loss
of its management and employees, and other detrimental effects associated with a
shut-down.
The arrangement with the new investors called for the issuance of
convertible notes expiring March 31, 1999, in the aggregate of $1 million, with
the notes being convertible into options to acquire the Company's common stock
at $.25 per share. In addition, the investors were given the option to
contribute an additional $3 million in cash in exchange for convertible notes
also excersizable for options to purchase shares at $.25 per share. The
noteholders option to contribute the $3 million in exchange for convertible
notes expires January 31, 1999.
The Company is party to a bank line of credit which permits borrowing
up to $5,000,000, subject to an availability formula based upon a percentage of
eligible accounts receivable and inventory. At September 30, 1998, approximately
$3.5 million was outstanding on the line, including a $900,000 overadvance which
the bank agreed to permit until October 31, 1998 in connection with the
extension of the expiration date of the line of credit to the same date. The
expiration date was subsequently extended to January 31, 1999. As of December
21, 1998, the amount outstanding was reduced to $2.2 million, and the amount
available under the formula was $.9 million. Amounts borrowed under the facility
bear interest at prime plus 2.0% (10.25% effective rate at December 21, 1998).
Prior to the expiration of the line of credit on January 31, 1999, the Company
plans to negotiate an extension of the expiration date of the line of credit.
Although management believes that by January 31, 1999 the receivable and
inventory levels, upon which the borrowing base is calculated, will increase,
and the amount of over-advance from the bank will decrease, there can be no
assurance that the credit line will be extended. Consequently, if negotiations
to extend the credit line fail, management will seek financing from other
financing sources, which may not materialize, or if such sources are available,
the cost of such arrangement may be significantly higher than the current bank
agreement.
As discussed above, on December 1, 1998, the Company closed on a
private placement of $1 million of convertible promissory notes. The notes bear
interest at 7% and are due on March 31, 1999. The notes are payable with and
convertible into the Company's common stock (subject to shareholder approval)
valued at $.25 per share and grant the note holders options to acquire
additional convertible promissory notes in the amount of $3 million through
January 31, 1999. Shareholder approval is also required for the conversion of
the option shares. Management believes that the options will be exercised and an
additional $3 million in funding will be received prior to the option expiration
date. The board intends to call a meeting of the shareholders prior to the
expiration of the option on March 31, 1999 and seek to obtain shareholder
approval for the issuance of the shares pursuant to the convertible promissory
notes and the option agreement. See Note 2 to the Consolidated Financial
Statements.
The Company also successfully negotiated the conversion of $1.7 million
of trade accounts payable into short-term trade notes payable. Although the
Company was delinquent on the terms of these notes at September 30, 1998, the
Company has paid or received extensions of all past due payments as of December
18, 1998.
In order for the Company to have sufficient short-term liquidity to
continue operations for the remainder of fiscal 1999, the line of credit must be
renewed or replaced, the Company must receive the proceeds from the
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additional convertible promissory notes described above and the Company must be
able to pay the principal and interest under all of its convertible notes with
Common Stock on March 31, 1999. If the Company is not successful in
accomplishing these goals, the Company would be forced to curtail its operations
and either sell the Company to a third party or seek protection under federal
bankruptcy laws.
Uncertainties Relating to Forward Looking Statements
"Item 6. Management's Discussion and Analysis of Operations" and other
parts of this Form 10-KSB contain certain "forward-looking statements" within
the meaning of the Securities Act of 1934, as amended, based on current
management expectations. Actual results could differ materially from the
forward-looking statements due to a number of uncertainties, including, but not
limited to, those discussed in this section and in "Business - Products, Market
and Competition" above.
Factors that could cause future results to differ from these
expectations include the failure of the bank renew its line of credit agreement
when borrowings thereunder become due, the inability of the Company to pay the
principal and interest of the convertible promissory notes with Common Stock at
the March 31, 1999 maturity date, the failure of the Company to receive the
proceeds of the additional $3 million of convertible promissory notes described
above, the decline of economic conditions in general and conditions in the
automotive manufacturing industry in particular, a reduction in demand for the
Company's products and services, the inability 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, reductions in product life cycles, competitive factors
(including the introduction or enhancement of competitive products), pricing
pressures which result in materially reduced selling prices for the Company's
products, raw material price increases, delays in 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, the inability to attract or retain sales and/or
engineering talent, changes in customer requirements, unexpected Y2K issues in
the Company's products or systems and evolving industry standards.
ITEM 7. FINANCIAL STATEMENTS
The financial statements filed herewith are set forth in the Index to
Consolidated Financial Statements (on page F-1) of the separate financial
section which follows this report, and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this item is incorporated by reference to
the Company's 1999 Proxy Statement under the captions "Election of Directors,"
"Board of Directors Meetings and Committees" and "Executive Officers."
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Company's 1999 Proxy Statement under the caption "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the Company's 1999 Proxy Statement under the caption "Security Ownership of
Certain Beneficial Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to
the Company's 1999 Proxy Statement under the caption "Certain Relationships and
Related Transactions."
ITEM 13. EXHIBITS REPORTS ON FORM 8-K.
(a) The exhibits filed herewith are set forth in the Index to Exhibits
(on the first page of the separate exhibit section which follows the financial
section of this report) and are incorporated herein by reference. The following
are the Company's management contracts and compensatory plans and arrangements
which are required to be filed as Exhibits to this Form 10-KSB:
Exhibit
Number Description of Exhibit
4.18 Form of Convertible Promissory Note dated as of December
1, 1998, with option to noteholder to purchase additional
convertible promissory note
4.19 Form of Convertible Promissory Note dated as of December
1, 1998, with option to noteholder to purchase additional
convertible promissory note
10.01 Nematron Corporation Restricted Stock Plan, filed as
Exhibit 10.01 to the Registrant's Form 10-Q for the
quarterly period ended June 30, 1993 and incorporated
herein by reference.
10.02 Nematron Corporation 1993 Stock Option Plan, as amended,
filed as Exhibit 10.1 to the Registrant's Form 10-Q for
the quarterly period ended March 31, 1997 and incorporated
herein by reference.
10.03 Nematron Corporation 1993 Directors Option Plan filed as
Exhibit 10.2 to the Registrant's Form 10-Q for the
quarterly period ended March 31, 1997 and incorporated
herein by reference.
10.04 Nematron 401(k) Plan filed as Exhibit 10.04 to the
Registrant's Form 10-KSB for the year ended September 30,
1997 and incorporated herein by reference
10.06 Employment and Non-Competition Agreement, dated as of
March 31, 1997, between NemaSoft, Inc. and Thomas Kraus
filed as Exhibit 10.4 to the Registrant's Form 10-QSB for
the quarterly period ended March 31, 1997 and incorporated
herein by reference.
10.07 Non-Competition Agreement dated as of March 2, 1995
between the Registrant and Frank G. Logan, III, filed as
Exhibit 99(a) to the Registrant's Form 8-K dated as of
March 3, 1995 and incorporated herein by reference.
10.08 Employment and Non-Competition Agreement, dated as of June
18, 1997, between Imagination Systems, Inc. and Michael
Shapiro filed as Exhibit 2.1 to the Registrant's Form
10-QSB for the quarterly period ended June 30, 1997 and
incorporated herein by reference.
(b) The Company was not required to and did not file any current report
on Form 8-K during the fourth quarter of the Company's fiscal year ended
September 30, 1998.
-18-
<PAGE> 19
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized
NEMATRON CORPORATION
By: /s/ Matthew S. Galvez Dated: December 22, 1997
------------------------------------ -----------------
Matthew S. Galvez, President and COO
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Matthew S. Galvez President, COO and a Director December 22, 1998
- ----------------------------------- (Principal Executive and Financial Officer) -----------------
Matthew S. Galvez
/s/ David P. Gienapp Vice President - Finance and Administration December 22, 1998
- ----------------------------------- (Principal Accounting Officer) and Secretary -----------------
David P. Gienapp
/s/ Hugo E. Braun Director December 22, 1998
- ----------------------------------- -----------------
Hugo E. Braun
/s/ Joseph J. Fitzsimmons Chairman of the Board and a Director December 22, 1998
- ----------------------------------- -----------------
Joseph J. Fitzsimmons
/s/ Garnel F. Graber Director December 22, 1998
- ----------------------------------- -----------------
Garnel F. Graber
/s/ Michael L. Hershey Director December 22, 1998
- ----------------------------------- -----------------
Michael L. Hershey
- ----------------------------------- Director December 22, 1998
Stephen E. Globus -----------------
- ----------------------------------- Director December 22, 1998
James A. Nichols -----------------
</TABLE>
-19-
<PAGE> 20
NEMATRON CORPORATION AND SUBSIDIARIES
Table of Contents
Page
Report of Independent Certified Public Accountants 2
Consolidated Balance Sheet as of September 30, 1998 3
Consolidated Statements of Operations for the years ended
September 30, 1997 and 1998 4
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1997 and 1998 5
Consolidated Statements of Cash Flows for the years ended
September 30, 1997 and 1998 6
Notes to Consolidated Financial Statements 7
F-1
<PAGE> 21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
THE BOARD OF DIRECTORS
Nematron Corporation:
We have audited the accompanying consolidated balance sheet of Nematron
Corporation and subsidiaries as of September 30, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended September 30, 1997 and 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nematron Corporation
and subsidiaries as of September 30, 1998, and the results of their operations
and their cash flows for the years ended September 30, 1997 and 1998, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has experienced cash flow difficulties and is in default of its
loan agreements with its primary lenders. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
with respect to these matters are also discussed in note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Grant Thornton LLP
December 4, 1998
Detroit, Michigan
F-2
<PAGE> 22
NEMATRON CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 1998
Assets (Notes 8 and 10)
-----------------------
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash and cash equivalents $ 357,724
Accounts receivable, net of allowance for doubtful accounts of $381,000 2,514,741
Inventories (Note 7) 2,103,434
Prepaid expenses and other current assets 295,321
-------------
Total current assets 5,271,220
Property and equipment:
Land 117,000
Building and improvements 2,287,970
Equipment 6,694,705
-------------
9,099,675
Less accumulated depreciation (5,475,815)
Net property and equipment -------------
3,623,860
Other assets:
Software and related development costs, net of accumulated 3,942,695
amortization of $2,314,845 (Notes 3, 4 and 5)
Other intangible assets, net of accumulated amortization of $2,165,775 (Notes 3, 4 and 5) 1,002,225
-------------
Net other assets 4,944,920
-------------
Total assets $13,840,000
=============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Note payable to bank (Note 8) $ 3,514,000
Accounts payable 1,414,417
Trade notes payable (Note 9) 1,545,956
Other accrued liabilities 1,866,366
Current maturities of long-term debt (Note 10) 1,832,791
-------------
Total current liabilities 10,173,530
Long-term debt, less current maturities (Note 10) 2,084,346
Deferred tax liability (Note 11) 189,000
-------------
Total liabilities 12,446,876
Commitments and contingencies (Note 14) -
Stockholders' equity:
Common stock, no par value; 15,000,000 shares authorized, 5,353,316 shares
issued and outstanding (Notes 2, 12 and 13) 21,664,809
Foreign currency translation adjustment (6,080)
Accumulated deficit (20,265,605)
-------------
Total stockholders' equity 1,393,124
-------------
Total liabilities and stockholders' equity $13,840,000
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 23
NEMATRON CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended September 30, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
-------------- -------------
<S> <C> <C>
Net revenues $ 20,875,397 $ 16,829,334
Cost of revenues (Note 5)
17,668,774 11,512,950
-------------- -------------
Gross profit 3,206,623 5,316,384
Operating expenses:
Product development costs 2,151,698 2,196,390
Selling, general, and administrative expenses 9,357,460 10,521,663
Other charges (Note 5) 727,582 1,669,698
Write-off of in-process research and development costs relating to the
Intec Controls Corp. acquisition (Note 4) 1,655,000 -
Write-off of in-process research and development costs relating to the
Virtual-Time Software, Inc., acquisition (Note 4) 400,000 -
-------------- -------------
Total operating expenses 14,291,740 14,387,751
-------------- -------------
Operating loss (11,085,117) (9,071,367)
-------------- -------------
Other income (expense):
Interest expense (361,894) (735,256)
Foreign currency gain (loss) (155,027) 2,900
Sundry income (expense), net 103,659 (17,105)
-------------- -------------
Total other expense (413,262) (749,461)
-------------- -------------
Loss before income taxes (11,498,379) (9,820,828)
Income taxes (tax benefit) (Note 11) - (811,000)
-------------- -------------
Net loss $ (11,498,379) $ (9,009,828)
============== =============
Loss per share - basic $ (2.33) $ (1.69)
============== =============
Weighted average shares outstanding - basic 4,933,939 5,345,889
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 24
NEMATRON CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the years ended September 30, 1997 and 1998
<TABLE>
<CAPTION>
Retained
Common Stock Foreign Earnings
--------------------------- Currency (Accumulated
Shares Amount Translation Deficit) Total
--------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1996 4,558,248 $17,572,814 $ (85,518) $ 242,602 $ 17,729,898
Net loss for the year ended
September 30, 1997 (11,498,379) (11,498,379)
Foreign currency translation
adjustment 77,947 77,947
Shares issued pursuant to merger
with Intec Controls Corp. 587,594 3,305,205 3,305,205
(Note 4)
Shares issued pursuant to merger
with Virtual-Time Software,
Inc. 67,301 403,806 403,806
(Note 4)
Exercise of options, net of
13,083 shares redeemed 72,148 136,667 136,667
Exercise of warrants 44,647 170,921 170,921
--------- ----------- ----------- -------------- ------------
Balance, September 30, 1997 5,329,938 21,589,413 (7,571) (11,255,777) 10,326,065
Net loss for the year ended
September 30, 1998 (9,009,828) (9,009,828)
Foreign currency translation
adjustment 1,491 1,491
Exercise of options, net of 850
shares redeemed 11,050 27,250 27,250
Exercise of warrants 12,328 48,146 48,146
--------- ----------- ----------- -------------- ------------
Balance, September 30, 1998 5,353,316 $21,664,809 $ (6,080) $ (20,265,605) $ 1,393,124
========= =========== ============ ============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 25
NEMATRON CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended September 30, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (11,498,379) $ (9,009,828)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 6,179,918 3,944,397
Write-off of in-process research and development costs (Note 4) 2,055,000 -
Loss on disposal of property and equipment - 54,711
Deferred income tax benefit - (811,000)
Debt retirement expense 122,340 -
Changes in assets and liabilities that provided (used) cash:
Accounts receivable 2,535,869 1,690,456
Inventories 143,617 2,295,992
Prepaid expenses and other current assets 248,403 233,150
Accounts payable (157,326) 1,490,242
Other accrued liabilities (224,832) 48,228
-------------- --------------
Net cash used in operating activities (595,390) (63,652)
-------------- --------------
Cash flows from investing activities:
Acquisition of Intec Controls Corp. (Note 4) 281,058 -
Acquisition of Virtual-Time Software, Inc., net of $6,327 cash acquired
(Note 4) (93,673) -
Additions to capitalized software development costs and other intangible
assets (2,512,111) (2,017,384)
Additions to property and equipment (827,861) (271,067)
Proceeds from sale of property and equipment - 60,921
-------------- --------------
Net cash used in investing activities (3,152,587) (2,227,530)
-------------- ---------------
Cash flows from financing activities:
Borrowings under long-term debt agreements 1,800,000 -
Net proceeds of note payable to bank 1,141,000 2,373,000
Proceeds from exercise of options and warrants 307,588 75,396
Repayments of long-term debt (2,264,350) (702,164)
Repayments of trade notes payable - (241,805)
Additions to deferred financing fees (39,211) -
-------------- --------------
Net cash provided by financing activities 945,027 1,504,427
-------------- --------------
Foreign currency translation effect on cash 2,975 1,491
-------------- --------------
Net decrease in cash and cash equivalents (2,799,975) (785,264)
Cash and cash equivalents at beginning of year 3,942,963 1,142,988
-------------- --------------
Cash and cash equivalents at end of year $ 1,142,988 $ 357,724
============== ==============
Supplemental disclosures of cash flow information:
Cash paid for interest, net of amounts capitalized $ 344,551 $ 687,023
Cash paid for income taxes $ - $ -
Supplemental disclosures of noncash financing and investing activities:
Conversion of trade accounts payable to trade notes payable (Note 9) $ - $ 1,787,761
Acquisition of equipment under capital lease obligations (Notes 10 and 14) $ 544,014 $ 342,692
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 26
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1998
(1) BUSINESS
Nematron Corporation (the "Company") designs, manufactures, and markets
environmentally ruggedized computers and computer displays known as
industrial workstations, and designs, develops, and markets software for
worldwide use in factory automation and control and in test and
measurement environments.
(2) GOING CONCERN MATTERS
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in
the financial statements, during the years ended September 30, 1997 and
1998, the Company incurred losses of $11,498,379 and $9,009,828,
respectively. These losses have contributed to the Company's difficulties
in generating sufficient cash flow to finance operations. These factors,
among others, raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Management's plans with respect to these matters include the following:
On December 1, 1998, the Company's primary lender extended the maturity
date of the line of credit and the term loan to January 31, 1999. The
lender also granted an adjustment to the borrowing base to allow a
permitted over-advance of $1 million. The line of credit note was
partially repaid with a portion of the proceeds from a private placement
completed on December 1, 1998. As a result of the paydown and the
operating activity subsequent to year end, the Company has returned to
compliance with the limits of its adjusted borrowing formula.
On December 1, 1998, the Company completed a $1 million private placement
of convertible promissory notes to a group of private investors. The
notes are convertible into common stock of the Company at $0.25 per
share, bear interest at 7% per annum and become due on March 31, 1999.
The notes grant the note holders an option through January 31, 1999 to
purchase additional convertible notes totaling $3 million, which are
convertible into common stock at $0.25 per share. Management believes
that the options will be exercised and an additional $3 million in
funding will be received prior to the option expiration date. Issuance of
shares in excess of 20% of the number of shares currently outstanding
will require shareholder approval, which the Board of Directors will seek
at the 1999 annual meeting of shareholders in March 1999.
A portion of the proceeds from the private placement was used to pay
delinquent vendor notes. When these notes became delinquent in the first
quarter of fiscal 1999, certain vendors ceased product delivery to the
Company. Upon the payment of the past due notes, the Company's vendors
agreed to resume the shipment, on a COD basis, of component parts for
subsequent assembly and sale to customers. Component parts have been
purchased in sufficient quantities so that management believes the
Company will be able to ship the current customer order backlog in a
timely manner and keep current with the anticipated order rate. Based
upon the actual and anticipated component purchases and subsequent
forecasted sales of finished product, management expects that current
operations and available credit facilities will be sufficient to pay its
costs and expenses as they become due.
F-7
<PAGE> 27
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1997 and 1998
(2) GOING CONCERN MATTERS, CONTINUED
Management plans to close on the private placement of the additional $3
million convertible notes by the expiration of the bank agreement, and to
use a portion of the additional proceeds to further pay down the credit
line. After this anticipated paydown, management expects borrowings to be
below the basic borrowing base (exclusive of the permitted overadvance).
Further, management intends to negotiate with its bank lender a longer
term extension of the expiration date of the financing agreement.
Management believes that an extension of the credit line is possible,
assuming that accounts receivable and inventory levels increases to
reduce or eliminate the amount of the overadvance as a result of the
anticipated sales increases, and assuming that the Company is able to
complete the additional placement of $3 million of its convertible
promissory notes prior to January 31, 1999.
Management believes successful implementation of the plans set forth
above will enable the Company to continue as a going concern. If the
Company is not successful in executing these plans, the Company maybe
forced to curtail its operations and either sell the Company or seek
protection under federal bankruptcy laws.
(3) SUMMARY OF ACCOUNTING PRINCIPLES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries - Nematron Europa BV
("NEBV"), an inactive Netherlands corporation; Nematron Ltd., a United
Kingdom corporation acquired in the Intec acquisition; NemaSoft, Inc.
("NemaSoft"); and Imagination Systems, Inc. ("ISI"), Michigan
corporations formed in 1995 and 1996, respectively. All significant
intercompany transactions and balances have been eliminated in
consolidation.
During the fiscal year ended September 30, 1997, the Company acquired two
software design and manufacturing companies. Intec Controls Corp.
("Intec"), a Massachusetts corporation, was acquired on March 31, 1997,
and Virtual-Time Software, Inc. ("VTS"), a California corporation, was
acquired on June 20, 1997. The consolidated operations of the Company for
1997 include the results of Intec and VTS since the dates of their
respective acquisitions (see note 4).
F-8
<PAGE> 28
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1997 and 1998
(3) SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less at the date of purchase to be cash
equivalents.
Inventories
Inventories are carried at the lower of cost or market. Cost is
determined by the first in, first out method. Provision is made to reduce
inventories (including demonstration units) to net realizable value for
excess and/or obsolete inventories based upon an item-by-item review of
quantities on hand compared to estimated future usage for sales and
service.
Property and Equipment
Property and equipment are stated at cost. Capital leases are recorded at
the present value of future minimum lease payments and are amortized over
their primary term. Depreciation is provided over the estimated useful
lives of the assets, ranging from 3 years for certain factory and office
equipment to 33 years for the Company's manufacturing facility.
Depreciation is computed using the straight-line method for financial
reporting purposes and accelerated methods as promulgated by the IRS for
tax reporting purposes.
Software and Related Development Costs
Certain computer software development costs and purchased software
technology have been capitalized. Capitalization of computer software
development costs begins upon establishment of technological feasibility.
The establishment of technological feasibility and the ongoing assessment
of recoverability of capitalized computer software development costs
requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
revenues, estimated economic life, and changes in software and hardware
technology. The Company continually reviews the recoverability of
capitalized software costs based on estimated cash flows. Software costs
are written off, as amortization expense, at the time a determination has
been made that the amounts are not recoverable.
F-9
<PAGE> 29
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1997 and 1998
(3) SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
Software and Related Development Costs, Continued
During the year ended September 30, 1997, capitalized software and
related development costs, net of amortization, decreased by
approximately $1,701,000. The decrease was due to the capitalization of
approximately $2,435,000 of salaries and other costs incurred during the
year, the acquisition of approximately $478,000 of costs pursuant to the
Intec and VTS acquisitions, offset by approximately $553,000 of
amortization of capital costs, and the write-off of approximately
$4,061,000 related to abandoned software projects (see notes 4 and 5).
During the year ended September 30, 1998, capitalized software and
related development costs, net of amortization, increased by
approximately $1,218,000, primarily relating to the capitalization of
approximately $1,988,000 of salaries and other costs incurred during the
year, offset by approximately $770,000 of amortization of capitalized
costs.
Amortization of capitalized computer software development costs is
provided on a product-by-product basis using the greater of the amount
computed using (a) the ratio that current gross revenues for each product
bear to the total of current and anticipated future gross revenues for
that product, or (b) the straight-line method over the remaining
estimated economic lives of the respective products, ranging from two to
five years.
Intangible Assets
Other intangible assets are carried at cost less accumulated
amortization, which is calculated on a straight-line basis over the
estimated useful lives of the assets, ranging from five to ten years. For
the year ended September 30, 1997, amortization was approximately
$636,900. For the year ended September 30, 1998, amortization was
approximately $2,035,900, including a provision for impairment of
approximately $1,319,700 relating to the write down of certain purchased
intangible assets (See Note 5).
The carrying value of intangible assets is periodically reviewed, and
impairments are recognized when the expected future cash flows derived
from such intangible assets are less than their carrying value.
Stock Option Plan
On October 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"),
which permits entities to recognize as compensation expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock
option grants as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123 (See Note 12).
F-10
<PAGE> 30
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1997 and 1998
(3) SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries, NEBV
and Nematron Ltd., denominated in foreign currency, are translated at
exchange rates in effect on the balance sheet date, and revenue and
expenses are translated using a weighted average exchange rate during the
year. Gains or losses resulting from translating foreign currency
financial statements are recorded in a separate component of
stockholders' equity. Gains or losses resulting from foreign currency
transactions are included in the net loss.
Revenue Recognition
Revenues from product sales are recognized upon shipment. Revenues from
service and repair of computers are recognized as the services are
performed. Revenues from software and engineering development are
recognized as the Company performs the services, in accordance with the
contract terms. Revenues from extended warranty agreements covering
software are recognized ratably over the terms of the agreement with the
customer. Revenues from license agreements are recognized upon delivery
of the software and performance of all obligations under the applicable
agreement. The Company has established programs which, under specified
terms and limited conditions, enable its distributors to return limited
amounts of product. The effect of these programs is estimated, and
current-period revenues and cost of revenues are reduced accordingly.
Research and Development Costs
Research and development costs are expensed when incurred. These costs,
representing engineering salaries, fringe benefits, and a portion of the
Company's overhead, are included in the accompanying consolidated
statements of operations as a component of product development costs.
Research and development costs were approximately $1,615,000 and
$1,287,000 for the years ended September 30, 1997 and 1998, respectively.
Warranty Costs
The Company provides for estimated warranty costs as products are
shipped. Estimated warranty reserves are adjusted currently based upon
projected levels of warranty repairs and estimated costs of materials,
labor, and overhead costs to be incurred in meeting warranty obligations.
Income Taxes
Income taxes are accounted for under the asset-and-liability method.
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the
future. Such deferred income tax asset-and-liability computations are
based on enacted tax laws and rates. A valuation allowance is established
when necessary to reduce deferred income tax assets to the amount
expected to be realized.
F-11
<PAGE> 31
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1997 and 1998
(3) SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
Loss Per Share
Loss per share is calculated using the weighted average number of common
shares outstanding during the year, adjusted for the assumed conversion
of dilutive stock options and warrants. Since net losses were incurred in
1997 and 1998, no conversion of dilutive stock options and warrants was
assumed in the loss per share calculation in either year, as the effect
would be anti-dilutive.
Fair Value
Financial instruments of the Company, consisting principally of cash,
accounts receivable, accounts payable, and debt, are recorded at
estimated fair value. The estimated fair value amounts have been
determined by the Company, using available market information and
available valuation methodologies.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates. Estimates are used in
the determination of the allowance for doubtful accounts, obsolete and
slow moving inventory, capitalized software and related development
costs, intangible assets, warranty costs, and deferred tax assets and
liabilities.
Other Recent Pronouncements
In 1997, Statement of Financial Accounting Standards No. 130 ("SFAS
130"), Reporting Comprehensive Income, was issued, and is effective for
fiscal years commencing after December 15, 1997. The Company will comply
with the requirements of SFAS 130 in fiscal year 1999.
In 1997, Statement of Financial Accounting Standards No. 131 ("SFAS
131"), Disclosures About Segments of an Enterprise and Related
Information, was issued, and is effective for fiscal years commencing
after December 15, 1997. The Company will comply with the requirements of
SFAS 131 in fiscal year 1999.
On October 27, 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position 97-2 (SOP 97-2), Software Revenue
Recognition. SOP 97-2 is effective for fiscal years commencing after
December 15, 1997, and is not expected to impact the Company's financial
position or results of operations. The Company will comply with the
requirements of SOP 97-2 in fiscal year 1999.
F-12
<PAGE> 32
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1997 and 1998
(4) ACQUISITIONS
Merger with Intec Controls Corp.
On March 31, 1997, the Company completed a merger of its wholly owned
subsidiary, NemaSoft, Inc., with Intec Controls Corp. ("Intec"), a
Walpole, Massachusetts-based developer of high-performance regulatory
control software solutions used primarily by process industries. The
Company recorded this transaction using the purchase method. The total
purchase price was approximately $3,735,000, including expenses of
approximately $430,000. Under terms of the merger agreement, the Company
issued 587,594 shares of its common stock to the former Intec
shareholders in exchange for 100 percent of the outstanding common stock
of Intec. The Intec stock was retired, and NemaSoft is the surviving
entity.
In addition to the common stock issued, the Company issued warrants to
the former Intec shareholders to purchase an additional 124,998 shares of
Company common stock at $6.73 per share. The warrants expire February 20,
2000.
Merger with Virtual-Time Software, Inc.
On June 20, 1997, the Company completed a merger of its wholly owned
subsidiary, Imagination Systems, Inc., with Virtual-Time Software, Inc.
("VTS"), a Santa Clara, California-based developer of real-time operating
system products which provide high-speed deterministic performance to
MicroSoft's Windows (R) operating systems. The Company recorded this
transaction using the purchase method. The total purchase price was
approximately $694,000, including expenses of approximately $190,000.
Under terms of the merger agreement, the Company issued 67,301 shares of
its common stock and $100,000 to the former VTS shareholders in exchange
for 100 percent of the outstanding common stock of VTS. The VTS stock was
retired, and ISI is the surviving entity. In connection with the merger,
ISI also entered into two-year employment and noncompetition agreements
with VTS's president, who became an employee of ISI as a result of the
merger.
The allocation of total purchase price to assets acquired and liabilities
assumed as of the respective purchase dates was as follows:
<TABLE>
<CAPTION>
Intec VTS
----------- -------------
<S> <C> <C>
Current assets $ 1,005,000 $ 6,000
Software and related development costs 2,058,000 475,000
Other intangible assets 2,352,000 216,000
Property and equipment 305,000 16,000
Deferred tax liability (1,000,000) -
Other liabilities (985,000) (19,000)
----------- -------------
$ 3,735,000 $ 694,000
=========== =============
</TABLE>
Software and related development costs include acquired in-process
research and development ("R&D"). Acquired in-process R&D includes the
value of products in the development stage and not considered to have
reached technological feasibility. In accordance with applicable
accounting rules, acquired in-process R&D is required to be expensed.
Accordingly, charges of $1,655,000 and $400,000 were recorded at the
acquisition dates related to the acquisitions of Intec and VTS,
respectively.
F-13
<PAGE> 33
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1997 and 1998
(4) ACQUISITIONS, CONTINUED
The following unaudited pro forma information presents a summary of
consolidated results of operations for fiscal 1997 of the Company, Intec,
and VTS as if the acquisitions had occurred as of the beginning of 1997,
with pro forma adjustments to give effect to amortization of software,
interest expense on additional borrowings, and certain other adjustments,
together with related income tax effects.
1997
----------------
(Unaudited)
Net revenues $ 22,825,183
Net loss $ (11,255,075)
Net loss per share $ (2.28)
(5) WRITE-DOWNS AND OTHER CHARGES
Write downs and other charges consist of the following:
<TABLE>
<CAPTION>
Year Ended September 30
1997 1998
------------ ----------
Charged to cost of revenues:
<S> <C> <C>
Write-down of software and related development $ 4,061,304 $ -
costs
Write-down of inventories 707,383 1,001,742
------------ ----------
$ 4,768,687 $1,001,742
============ ==========
Charged to operating expenses:
Write-down of other intangible assets $ 359,406 $1,319,698
Provision for loss on closing U.S. offices
- 350,000
Loss on closing of Netherlands office 245,836 -
Debt retirement expense 122,340 -
------------ ----------
$ 727,582 $1,669,698
============ ==========
</TABLE>
In the fourth quarters of fiscal 1997 and 1998, the Company wrote down
certain software and related development costs, inventories and other
intangible assets. In conjunction with the Company's strategic planning
process, analyses were prepared to determine if any asset impairment
existed as a result of changes to the Company's long-term strategic
plans. These analyses indicated impairment existed due to lower or no
planned revenues from certain products, and accordingly, assets related
to these products were written off.
In the fourth quarter of fiscal 1997 and in the third and fourth quarters
of 1998, the Company wrote down certain purchased parts and accessories
and finished goods inventories related to discontinued product models,
pursuant to results of the Company's strategic planning process.
F-14
<PAGE> 34
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1997 and 1998
(5) WRITE-DOWNS AND OTHER CHARGES, CONTINUED
During the second quarter of fiscal 1997, the Company elected to close
its Netherlands office and incurred closure costs of $245,836. Also in
the second quarter, the Company obtained bank financing in order to repay
its higher cost subordinated debt. A noncash charge of $122,340 was
recorded, which relates to the write-off of deferred financing fees on
the refinanced subordinated debt.
During the fourth quarter of fiscal 1998, the Company announced that it
had elected to close its software development offices in Virginia, Ohio
and California and to consolidate the software development activities in
its Massachusetts office. A provision for closing costs of $350,000 was
recorded in connection with costs expected to occur resulting from such
office closings.
(6) RELATED PARTY TRANSACTIONS
The Company leased its Virginia Beach, Virginia, office building from a
partnership in which the former president and CEO of the Company is a
partner. Total lease expense for the years ended September 30, 1997 and
1998, under the terms of the lease were $79,600 and $82,600,
respectively.
(7) INVENTORIES
Inventories are summarized as follows:
September 30,
1998
-----------------
Purchased parts and accessories $ 1,100,202
Finished goods 158,472
Work-in-process 370,840
Demonstration units 357,456
Service stock 116,464
-----------------
Total inventories $ 2,103,434
=================
(8) NOTE PAYABLE TO BANK
The Company had a credit facility (the "Loan Agreement") with a bank
providing for a Term Note, two Equipment Notes and a Revolving Credit
Note. The Revolving Credit Note provided for a maximum borrowing by the
Company of $6,000,000. The amount available under the line of credit was
limited by a borrowing formula which allowed for advances up to a maximum
of the sum of 80% of eligible domestic and foreign accounts, plus 35% of
inventory. Based upon the borrowing formula, approximately $2,607,000 of
the available line was eligible for advance at September 30, 1998,
resulting in an over-advance position of $907,000 at that date. The line
of credit is secured by substantially all assets of the Company and a
second mortgage on the Company's Ann Arbor facility. The borrowings bore
interest at the bank's prime interest rate (effective rate of 8.25% at
September 30, 1998).
F-15
<PAGE> 35
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1997 and 1998
(8) NOTE PAYABLE TO BANK, CONTINUED
On September 28, 1998, and December 1, 1998 the Company entered into
amendments to the loan agreements and into a Repayment Agreement with the
bank which provided, among other things, for a modification of certain
terms of the Term Note, two Equipment Notes and the Revolving Credit
Note. The Revolving Credit Note, as amended contains various affirmative
and negative covenants. The Company is in violation of these covenants.
Under the terms of the amended agreements, the amount available under the
Revolving Credit Note is $5,000,000 and is limited by a borrowing formula
which allows for advances up to a maximum of the sum of 80% of eligible
domestic and foreign accounts, plus 35% of inventory, plus a Permitted
Overadvance of $1,000,000 through January 31, 1999. The interest rate on
the credit line borrowings is at the bank's prime interest rate plus 2%
(10.25% effective rate at December 1, 1998). Amounts borrowed under the
line of credit are due in full on January 31, 1999.
(9) TRADE NOTES PAYABLE
Trade notes payable consist of short-term notes payable to certain of the
Company's creditors. The notes arose from the conversion in 1998 of
$1,787,761 of trade notes payable and the payment against the notes in
1998 of $241,805. The notes range in terms from six to twelve months in
duration and generally are interest bearing at 12% per annum. The notes
are classified as a current liability.
(10) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
1998
---------------
<S> <C>
Mortgage loan payable to a bank, interest at 9.5% per annum; payable in
monthly installments of $29,900 through September 2001, at which time
the remaining principal and any interest thereon is due. The loan is
collateralized by a first mortgage of the Company's land and building
in Ann Arbor, Michigan $ 1,998,509
Term note payable to a bank, interest at LIBOR plus 2.5% per annum
(effective rate of 8.25% at September 30, 1998) payable in monthly
installments of $30,000 plus interest through January 31, 1999. The
note is collateralized by substantially all assets, other than real
property, and a third mortgage on the Company's real estate 1,230,000
Capitalized lease obligations and other 688,628
---------------
Total long-term debt 3,917,137
Less current maturities (1,832,791)
---------------
Total long-term debt, less current maturities $ 2,084,346
===============
</TABLE>
F-16
<PAGE> 36
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1997 and 1998
(10) LONG-TERM DEBT, CONTINUED
The mortgage loan agreement contains covenants that require the Company
to maintain a minimum tangible net worth and a minimum debt-to-equity
ratio. As of September 30, 1998, the Company was not in compliance with
these covenants; however, the Company's lender has waived these defaults
through October 1, 1999.
The loan agreement with the bank regarding the term note and two
equipment notes includes various affirmative and negative covenants, the
most restrictive of which are (1) the prohibition of dividend payments,
and (2) requirements to maintain (a) a specified ratio of current assets
to current liabilities, (b) a specified ratio of liabilities to tangible
net worth, (c) a specified debt coverage ratio, and (d) a specified level
of tangible worth. The Company was in violation of certain of these
covenants at September 30, 1998 and as such these notes totaling
$1,579,781 are included in current maturities of long-term debt.
The aggregate amounts of long-term debt maturities at September 30, 1998,
are as follows:
<TABLE>
<CAPTION>
Year ended September 30:
<S> <C>
1999 $ 1,832,791
2000 279,652
2001 1,690,569
2002 49,881
2003 54,643
2004 9,601
----------------
Total long-term debt $ 3,917,137
================
</TABLE>
(11) TAXES ON INCOME
The following reconciles the statutory federal income tax rate to the
Company's effective tax rate:
<TABLE>
<CAPTION>
Year ended September 30,
-------------------------
1997 1998
------- -------
<S> <C> <C>
Income tax benefit based on the federal statutory rate (34.0)% (34.0)%
Generation of net operating loss carryforwards 34.0% 34.0%
Effect of impairment and amortization of intangible assets
0.0% 8.3%
------- -------
Effective tax rate 0.0% 8.3%
======= =======
</TABLE>
The domestic and foreign components of income (loss) before taxes on
income are as follows:
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------------
1997 1998
---------------- ----------------
<S> <C> <C>
Domestic loss $ (11,220,617) $ (9,879,752)
Foreign income (loss) (277,762) 58,924
---------------- ----------------
Total loss before tax benefit $ (11,498,379) $ (9,820,828)
================ ================
</TABLE>
F-17
<PAGE> 37
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1997 and 1998
(11) TAXES ON INCOME, CONTINUED
Deferred income taxes result from temporary differences in the
recognition of income and expenses for financial and income tax reporting
purposes. Deferred income taxes are primarily due to the use of
accelerated methods of depreciation for tax purposes versus principally
straight-line methods for financial reporting purposes, the
capitalization of software development costs for financial reporting
purposes versus the expensing of these items as incurred for tax
purposes, inventory reserves deductible for tax purposes when disposed of
versus directly expensing them for financial reporting purposes, employee
benefit accruals deductible for tax purposes when paid, and net operating
loss carryforwards.
Temporary differences and carryforwards which give rise to the net
deferred tax position are as follows:
<TABLE>
<CAPTION>
September 30,
1998
------------
Deferred tax assets:
<S> <C>
Inventories $ 814,000
Accounts receivable 129,000
Property and equipment 101,000
Other 114,000
Net operating loss carryforwards 6,588,000
------------
Total deferred tax assets 7,751,000
Less valuation allowance against deferred tax assets (6,284,000)
Net deferred tax assets ------------
1,467,000
Deferred tax liability - capitalized software development costs
and other intangible assets (1,656,000)
------------
Net deferred tax position $ (189,000)
============
</TABLE>
During the years ended September 30, 1997 and 1998, the valuation
allowance increased by $3,786,000 and $2,112,000, respectively. At
September 30, 1998, the Company has net operating loss carryforwards of
approximately $19,400,000, which expire at various dates between 2003 and
2013. Utilization of these carryforwards is subject to annual limitations
under current IRS regulations. The Company has established a valuation
allowance for the estimated amount of the total limitation on the
utilization of the net operating loss carryforwards. Realization of net
deferred tax assets associated with the net operating loss carryforwards
is dependent upon generating sufficient taxable income prior to their
expiration. Although realization is not assured for the net deferred tax
assets, management believes it is more likely than not that they will be
realized through future taxable earnings or alternative tax strategies.
However, the net deferred tax assets could be reduced in the near term if
management's estimates of future taxable income are no longer viable.
F-18
<PAGE> 38
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1997 and 1998
(12) EMPLOYEE BENEFIT PLANS
1993 Stock Option Plan
The Company's 1993 Stock Option Plan (the "1993 Plan") provides for the
granting of options to purchase a total of 950,000 shares of common stock
to key employees. The exercise price for each option granted under the
1993 Plan cannot be less than the fair market value of the common stock
on the date of the grant.
The 1993 Plan gives the Compensation Committee of the Board of Directors
latitude in deciding the vesting period. Options generally vest one third
immediately and one third on each successive anniversary date of the
award, or are exercisable at the rate of one third per year beginning on
the day after the first anniversary of the date of the award. Under
provisions of the 1993 Plan, shares subject to an option award will
become immediately exercisable upon a change in control of the Company.
Options remaining unexercised on the tenth anniversary of the date of the
grant will expire. No options may be granted after February 26, 2003.
As of September 30, 1998, an additional 56,503 options may be issued
under the 1993 Plan.
Directors Option Plan
The Company's 1993 Directors Stock Option Plan (the "Directors Option
Plan") provides for the granting of options to purchase a total of
120,000 shares of common stock. The exercise price for each option
granted beginning April 1997 under the Directors Option Plan is equal to
110 percent of the closing price of the stock on the grant date. The
exercise price for options granted prior to April 1997 was the greater of
the fair market value or book value of the Company's common stock on the
date of the grant.
The Directors Option Plan provides that beginning April 1997, each
qualified director will be granted annually an option to purchase 4,500
shares of common stock. Prior to April 1997, each qualified director was
granted annually an option to purchase 1,000 shares of common stock.
Options granted in April 1997 or thereafter will be exercisable in
one-third increments beginning on the date of the grant. Options granted
prior to April 1997 are exercisable at any time beginning six months
after the date of the grant. Options expire five years from the date of
the grant. As of September 30, 1998, an additional 24,680 options may be
issued under the Directors Option Plan.
Special Option Grants
The Board of Directors, in fiscal 1995, 1996 and 1997, awarded special
option grants to a former chairman and a former Board member. The awards
were made separate from either of the two qualified plans specified
above.
F-19
<PAGE> 39
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1997 and 1998
(12) EMPLOYEE BENEFIT PLANS, CONTINUED
Information with respect to options under the 1993 Stock Option Plan, the
1993 Directors Option Plan, and special option grants for the two years
ended September 30, 1998, is as follows:
<TABLE>
<CAPTION>
Option Price Available
Per Share Outstanding Exercisable for Grant
------------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Balance, October 1, 1996 $1.87 - $8.75 518,884 253,032 267,700
Increase in authorized shares:
1993 Plan 200,000
Directors Option plan 100,000
Special option grant $4.75 4,750
Granted $5.00 - $7.12 496,820 (496,820)
Exercisable $2.50 - $9.00 101,980
Exercised $2.12 - $5.00 (85,231) (85,231)
Forfeited $2.50 - $9.00 (80,219) (58,204) 80,219
-------- -------- -------
Balance, September 30, 1997 855,004 227,994 151,099
Granted $2.00 - $7.63 269,700 (269,700)
Exercisable $2.50 - $7.12 251,507
Exercised $2.50 - $4.89 (11,900) (11,900)
Forfeited $2.50 - $8.75 (199,684) (8,187) 199,684
-------- -------- -------
Balance, September 30, 1998 $2.00 - $8.75 913,120 459,414 81,083
======== ======== =======
</TABLE>
The Company applies APB Opinion 25 in accounting for its stock option
plans. Accordingly, no compensation cost has been recognized in the
Company's financial statements. Had compensation cost been determined
based on the fair value of such awards at the date of grant consistent
with the provisions of SFAS No. 123, the Company's total and per share
net income (loss) would have been as follows:
<TABLE>
<CAPTION>
1997 1998
---------------- ------------
<S> <C> <C>
Net loss
As reported $ (11,498,379) $ (9,009,828)
Pro forma $ (12,029,150) $ (9,570,278)
Net loss per share
As reported $ (2.33) $ (1.69)
Pro forma $ (2.44) $ (1.79)
</TABLE>
F-20
<PAGE> 40
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1997 and 1998
(12) EMPLOYEE BENEFIT PLANS, CONTINUED
The fair values of options granted during 1997 and 1998 were determined
using the Black-Scholes option-pricing model based on the following assumptions:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Risk-free interest rate 6.6% 5.8%
Dividend yield 0% 0%
Expected life 3 to 6 years 3 to 6 years
Expected volatility 61.7% 74.1%
</TABLE>
401(k) Plan and Trust
The Company has established a defined-contribution retirement plan for
all eligible employees. Participants may make basic contributions of up
to 15 percent of their compensation, pursuant to section 401(k) of the
Internal Revenue Code. Under terms of the 401(k) plan, the Company may
make a basic contribution and a discretionary contribution to the plan.
In fiscal 1997 and through March 1998, the Company contributed 100% of
each employee's contribution up to the first 5% of the employee's base
salary contributed by the employee. In April and May, the Company reduced
its contribution to 3%, and beginning in June, contributions were
discontinued. A participant becomes vested in the Company's contribution
on his or her behalf at a rate of 20 percent for each year of service
after the effective date of the 401(k) plan.
Notwithstanding the foregoing, a participating employee will be fully
vested in the Company's contributions to his or her account in the event
of death, or in the event of disability or normal retirement, as those
terms will be defined in the 401(k) plan. The Company's contributions to
the 401(k) plan were approximately $158,000 and $38,000 for the years
ended September 30, 1997 and 1998, respectively.
F-21
<PAGE> 41
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1997 and 1998
(13) WARRANTS
The Company has outstanding warrants for the purchase of its common stock
as follows:
<TABLE>
<CAPTION>
ISI UAI Subordinated Intec
Acquisition Acquisition Debt Acquisition Total
----------- ----------- ------------ ----------- -----
<S> <C> <C> <C> <C>
Exercise price $2.50 $4.81 $4.00 $6.73
Expiration date 3/03/98 11/20/97 10/31/02 2/20/00
Balance, October 1,
1996 10,039 137,000 237,214 - 384,253
Issued in connection
with the Intec 124,998 124,998
acquisition
Exercised (5,111) - (39,536) - (44,647)
-------- -------- -------- ------- --------
Balance September 30,
1997 4,928 137,000 197,678 124,998 464,604
Exercised (4,828) (7,500) - - (12,328)
Expired (100) (129,500) - - (129,600)
-------- -------- -------- ------- --------
Balance September 30,
1997 - - 197,678 124,998 322,676
======== ======== ======== ======= ========
</TABLE>
(14) COMMITMENTS AND CONTINGENCIES
The Company leases its Massachusetts, Ohio, Virginia, California and the
United Kingdom facilities, as well as certain office equipment, under
operating leases, and leases certain computer, phone, network and
production equipment under capital leases. The leases on the facilities
expire at various dates through August 1999, and the equipment operating
leases expire at various dates through June 2003.
The Company leases certain computer equipment under two capital leases
from a finance company. The leases have an initial term of four years
beginning March 1997 and collectively require monthly payments, including
interest, of $13,267 through February 2001. The unpaid balance of these
capital leases totaled $349,781 at September 30, 1998 (note 10). The net
book value of equipment leased under the two capital leases is
approximately $305,000 at September 30, 1998.
The Company leases certain computer equipment under a capital lease from
a finance company. The lease has an initial term of three years beginning
December 1997 and requires monthly payments, including interest, of
$3,898 through December 2000. The unpaid balance of this capital lease
totaled $87,085 at September 30, 1998 (note 10). The net book value of
equipment leased under the capital lease is approximately $83,000 at
September 30, 1998.
F-22
<PAGE> 42
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1997 and 1998
(14) COMMITMENTS AND CONTINGENCIES, CONTINUED
The Company leases certain telephone and network equipment under a
capital lease from a finance company. The lease has an initial term of
five years beginning November 1998 and requires monthly payments,
including interest, of $4,856 through November 2003. The unpaid balance
of this capital lease totaled $233,079 at September 30, 1998 (note 10).
The net book value of equipment leased under the capital lease is
approximately $233,000 at September 30, 1998.
A summary of commitments under noncancelable leases as of September 30,
1998, is as follows:
<TABLE>
<CAPTION>
Capital Leases Operating Leases Total
-------------- ---------------- ----------------
Year ending September 30,
<S> <C> <C> <C>
1999 $ 417,210 $ 132,116 $ 549,326
2000 82,593 85,002 167,595
2001 56,869 55,959 112,828
2002 49,881 4,152 54,033
2003 54,643 1,730 56,373
2004 9,601 9,601
-------------- ------------- ----------------
Total minimum lease obligation $ 670,797 $ 278,959 $ 949,756
============= ================
Less amounts representing interest (114,256)
Present value of minimum lease --------------
payments $ 556,541
==============
</TABLE>
Total rental expense in fiscal 1997 and 1998 was approximately $308,000
and $245,000, respectively.
On May 8, 1998, a lawsuit was filed against the Company in the District
Court for the Southern District of New York. The lawsuit names as
defendants the Company, certain of its officers and directors, its former
independent auditor and the underwriter for the Company's initial public
offering. The plaintiff seeks to represent a class of shareholder who
purchased the Company's common stock from January 31, 1996 through April
28, 1998. An amended complaint filed by the plaintiff in October 1998
claims violations of securities laws and common law based on allegations
that defendants made untrue statements of material facts and that they
omitted material facts necessary in order to make the statements not
misleading. The complaint seeks unspecified damages and costs. In
December 1998, the case was transferred to the Michigan District.
Management believes that the outcome of this case will not have a
material adverse effect on the Company.
F-23
<PAGE> 43
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1997 and 1998
(15) SEGMENT INFORMATION
The Company operates in one market segment - factory automation.
Net revenues include export sales to various countries. A summary of both
foreign and domestic revenues is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------
1997 1998
----------- -----------
<S> <C> <C>
Foreign:
France $ 1,687,171 $ 1,795,275
Other countries 4,296,205 3,429,303
----------- -----------
Total foreign revenues 5,983,376 5,224,578
United States revenues 14,892,021 11,604,756
----------- -----------
Total revenues $20,875,397 $16,829,334
=========== ===========
</TABLE>
Long-lived assets include property and equipment, capitalized software
development costs and other intangible assets. A summary of both foreign
and domestic long-lived assets at depreciated or amortized cost is as
follows:
September 30, 1998
------------------
Foreign countries $ 72,440
United States 8,496,341
------------
$ 8,598,781
============
(16) SIGNIFICANT CUSTOMER
The Company has one significant customer to which it sold $1,045,000 and
$1,795,000 in fiscal 1997 and 1998, respectively. Accounts receivable
from this customer approximated $783,000 and $442,000 at September 30,
1997 and 1998, respectively.
F-24
<PAGE> 44
NEMATRON CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description of Exhibit Page No.
------ ---------------------- ----------
<S> <C> <C>
2.01 Merger Agreement dated February 2, 1995 between the Registrant and Imagination
Systems, Inc., filed as Exhibit 2 to the Registrant's Form 8-K dated as of
March 3, 1995 and incorporated herein by reference
2.02 Merger Agreement dated August 30, 1995 between the Registrant and Universal
Automation, Inc. Ronald J. Lavallee and Thomas Peacock, the Shareholders, filed
as Exhibit 2 to the Registrant's Form 8-K dated as of September 20, 1995 and
incorporated herein by reference
2.03 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, filed as Exhibit 2.1 to the Registrant's Form 10-QSB for the
quarterly period ended June 30, 1997 and incorporated herein by reference
2.04 Agreement and Plan of Merger, dated as of February 20, 1997, by and among the
Company, NemaSoft, Inc., Thomas Kraus and Robert O. Mick, as amended March 28,
1997, filed as Exhibit 2.1 to the Registrant's Form 8-K filed April 10, 1997
and incorporated herein by reference
3.01 Amended and Restated Articles of Incorporation, filed as Exhibit 4 to the
Registrant's Form 10-QSB for the quarterly period ended June 30, 1995 and
incorporated herein by reference.
3.02 Amended and Restated Bylaws, as amended, filed as Exhibit 3.02 to the
Registrant's Form 10-KSB for the fiscal year ended September 30, 1994 and
incorporated herein by reference.
4.01 Specimen form of Stock Certificate, filed as Exhibit 4.01 to the Registrant's
Form 10-Registration Statement filed on January 27, 1993 and incorporated
herein by reference.
4.02 First Amended and Restated Loan Agreement dated October 6, 1995 between the
Registrant and Society Bank, Michigan filed as Exhibit 4.02 to the Registrant's
Form 10-KSB for the fiscal year ended September 30, 1995 and incorporated
herein by reference.
4.03 Mortgage Note dated August 8, 1995 between the Company and Chelsea State Bank,
filed as Exhibit 4.03 to the Registrant's Form 10-KSB for the fiscal year ended
September 30, 1995 and incorporated herein by reference
4.04 Mortgage Note dated September 19, 1996 between the Registrant and Chelsea State
Bank. filed as Exhibit 4.04 to the Registrant's Form 10-KSB for the fiscal year
ended September 30, 1996 and incorporated herein by reference
4.05 Term Loan and Warrant Purchase Agreement dated as of November 7, 1995 between
the Registrant and Onset BIDCO, The Capital Fund, Joseph Krinski Trust U/A
Dated 6/20/91, Emily Krinski Trust U/A Dated 6/20/91, and Urban A. MacDonald
filed as Exhibit 4.04 to the Registrant's Form S-2 Registration Statement dated
June 6, 1996 and incorporated herein by reference
4.06 Second Amended and Restated Loan Agreement dated March 29, 1996 between the
Company and KeyBank National Association (formerly Society Bank, Michigan),
together with Master Demand Business Loan Note and affirmations of guarantees,
filed as Exhibit 4.05 to the Registrant's Form S-2 Registration Statement dated
June 6, 1996 and incorporated herein by reference.
</TABLE>
<PAGE> 45
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description of Exhibit Page No.
------ ---------------------- ----------
<S> <C> <C>
4.07 Mortgage, dated November 16, 1995, between the Company and The Capital Fund,
Inc., filed as Exhibit 4.07 to the Registrant's Form S-2 Registration Statement
dated June 6, 1996 and incorporated herein by reference.
4.08 Revolving Credit Note entered into as of February 12, 1997, between the Company
and KeyBank National Association, filed as Exhibit 4.1 to the Registrant's Form
10-QSB for the quarterly period ended March 31, 1997 and incorporated herein by
reference
4.09 Term Note entered into as of February 12, 1997, between the Company and KeyBank
National Association, filed as Exhibit 4.2 to the Registrant's Form 10-QSB for
the quarterly period ended March 31, 1997 and incorporated herein by reference
4.10 Revolving Credit Note (Equipment Line of Credit) entered into as of February
12, 1997, between the Company and KeyBank National Association, filed as
Exhibit 4.3 to the Registrant's Form 10-QSB for the quarterly period ended
March 31, 1997 and incorporated herein by reference
4.11 Form of Warrant issued as of March 31, 1997 to Intec shareholders, filed as
Exhibit 4.1 to the Registrant's Form 8-K filed April 10, 1997 and incorporated
herein by reference
4.12 Repayment Agreement dated as of September 28, 1998 by and among KeyBank
National Association, Nematron Corporation and NemaSoft, Inc.
4.13 Amended and Restated Revolving Credit Note dated as of September 28, 1998 by
and among KeyBank National Association and Nematron Corporation
4.14 Amended and Restated Term Note dated as of September 28, 1998 by and among
KeyBank National Association and Nematron Corporation
4.15 First Amendment to Repayment Agreement and Fourth Amendment to Loan Agreement
dated as of December 1, 1998, by and among KeyBank National Association,
Nematron Corporation and NemaSoft, Inc.
4.16 Second Amended And Restated Revolving Credit Note dated as of September 28,
1998 by and among KeyBank National Association and Nematron Corporation
4.17 Second Amended And Restated Term Note dated as of September 28, 1998 by and
among KeyBank National Association and Nematron Corporation
4.18 Form of Convertible Promissory Note dated as of December 1, 1998, with option
to noteholder to purchase additional convertible promissory note and schedule
of noteholders and amounts
4.19 Form of Convertible Promissory Note dated as of December 1, 1998 and schedule
of noteholders and amounts
10.01 Nematron Corporation Restricted Stock Plan, filed as Exhibit 10.01 to the
Registrant's Form 10-QSB for the quarterly period ended June 30, 1993 and
incorporated herein by reference
10.02 Nematron Corporation 1993 Stock Option Plan, as amended and restated March
1997, filed as Exhibit 10.1 to the Registrant's Form 10-QSB for the quarterly
period ended March 31, 1997 and incorporated herein by reference.
10.03 Nematron Corporation 1993 Directors Option Plan, as amended and restated March
1997, filed as Exhibit 10.2 to the Registrant's Form 10-QSB for the quarterly
period ended June 30, 1993 and incorporated herein by reference
10.04 Nematron 401(k) Plan filed as Exhibit 10.04 to the Registrant's Form 10-KSB for
the year ended September 30, 1995 and incorporated herein by reference
10.05 Registration Rights Agreement, dated as of March 31, 1997, between the Company
and former stockholders of Intec Controls Corp., filed as Exhibit 10.3 to the
Registrant's Form 10-QSB for the quarterly period ended March 31, 1997 and
incorporated herein by reference
</TABLE>
<PAGE> 46
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description of Exhibit Page No.
------ ---------------------- ----------
<S> <C> <C>
10.06 Employment and Non-Competition Agreement, dated as of March 31, 1997, between
NemaSoft, Inc. and Thomas Kraus filed as Exhibit 10.4 to the Registrant's Form
10-QSB for the quarterly period ended March 31, 1997 and incorporated herein by
reference
10.07 Non-competition Agreement dated as of March 2, 1995 between the Registrant and
Frank G. Logan, III, filed as Exhibit 99(a) to the Registrant's Form 8-K dated
as of March 3, 1995 and incorporated herein by reference
11.01 Statement re Computation of Per Share Earnings
21.01 Subsidiaries of Nematron Corporation
23.01 Consent of Independent Public Accountants
27.00 Financial Data Schedule
</TABLE>
* * *
UNDERTAKING
The Company will furnish to any shareholder a copy of any of the exhibits listed
above upon written request and upon payment of a specified reasonable fee, which
fee shall be equal to the Company's reasonable expenses in furnishing the
exhibit to the shareholder. Requests for exhibits and information regarding the
applicable fee shall be direct to: Mr. David P. Gienapp, Vice President -
Finance and Administration, at the address of the principal executive offices
set forth on the cover of this Report on Form 10-KSB.
<PAGE> 1
EXHIBIT 4.12
REPAYMENT AGREEMENT
This Repayment Agreement is made as of this 28th day of September, 1998
by and among KeyBank National Association, f/k/a Society Bank, Michigan, a
national banking association located at 127 Public Square, Cleveland, Ohio 44114
("KeyBank" or "Bank"), Nematron Corporation, a Michigan corporation located at
5840 Interface Drive, Ann Arbor, Michigan 48103 ("Borrower") and NemaSoft, Inc.,
a Michigan corporation located at 5840 Interface Drive, Ann Arbor, Michigan
48103 ("Guarantor"; Borrower and Guarantor together referred to as "Interested
Parties").
RECITALS
Loan Documentation
WHEREAS, Bank has from time to time made loans to Borrower, including
pursuant to a line of credit to Borrower, originally evidenced by, among other
documents, a Loan Agreement dated January 21, 1993; and
WHEREAS, the line of credit was extended and the documentation thereof
amended and restated, including pursuant to a Loan Agreement dated September 30,
1996, which Borrower executed and delivered to Bank, as amended by a First
Amendment to Loan Agreement and related Addendum to First Amendment to Loan
Agreement ("First Amendment") both dated February 12, 1997 and a Second
Amendment to Loan Agreement, First Amendment to Revolving Credit Note and First
Amendment to Term Note ("Second Amendment") dated February 28, 1998
(collectively, the "Loan Agreement"); and
WHEREAS, pursuant to the Loan Agreement, Borrower executed and
delivered to Bank a certain Business Loan Note Floating Rate in the original
principal amount of Six Million Dollars ($6,000,000) dated September 27, 1996,
as such note was amended and restated by a Revolving Credit Note in the original
principal amount of Six Million Dollars ($6,000,000) dated February 12, 1997,
which note was further amended by the Second Amendment (the "Line Note"); and
WHEREAS, pursuant to the Loan Agreement, Borrower executed and
delivered to Bank a certain Term Note in the original principal amount of One
Million Eight Hundred Thousand Dollars ($1,800,000) dated February 12, 1997,
which note was amended and restated by the Second Amendment (the "Term Note";
the Line Note and Term Note hereafter collectively referred to as the "Original
Notes"); and
WHEREAS, Guarantor guaranteed payment of the Original Notes by
executing and delivering to Bank a certain Continuing Guaranty dated October 6,
1995, which guaranty was
1
<PAGE> 2
affirmed in Affirmations of Continuing Guaranty dated March 29, 1996, September
27, 1996 and February 12, 1997 (the "Guaranty"); and
WHEREAS, Borrower's obligation to repay the indebtedness to Bank under
the Original Notes, together with all other amounts owed by Borrower to Bank
from time to time, is secured by perfected security interests in all of
Borrower's Personal Property (as hereinafter defined) including all of
Borrower's Accounts, Accounts Receivable, Inventory, General Intangibles,
machinery, Equipment, furniture and fixtures, including Proceeds of the
foregoing, which security interest Borrower granted to Bank in various security
agreements, including (i) a Security Agreement General Assignment of Accounts
Receivable dated January 21, 1993, (ii) a Security Agreement for Lien on
Inventory dated January 21, 1993, (iii) a Security Agreement dated December 27,
1994, and (iv) a Security Agreement dated February 28, 1998, each executed by
Borrower in favor of Bank (the "Nematron Security Agreements"); and
WHEREAS, Borrower's obligation to repay the indebtedness to Bank under
the Original Notes, together with all other amounts owed by Borrower and/or
Guarantor to Bank from time to time, is secured by perfected security interests
in all of Guarantor's Personal Property (as hereinafter defined) including all
of Guarantor's Accounts, Accounts Receivable, Inventory, General Intangibles,
machinery, and Equipment, including Proceeds of the foregoing, which security
interest Guarantor granted to Bank in various security agreements, including (i)
a Security Agreement dated October 6, 1995, and (ii) a Security Agreement dated
February 28, 1998, each executed by Guarantor in favor of Bank (the "NemaSoft
Security Agreements," and together with the Nematron Security Agreements, the
"Security Agreements"); and
WHEREAS, Borrower's obligation to repay the indebtedness under the Line
Note is also secured by a mortgage lien on certain real property located at 5840
Interface Drive, Ann Arbor, Washtenaw County, Michigan (the "Mortgaged
Property"), which Borrower granted to Bank in a Mortgage and Security Agreement
dated December 27, 1994 and filed with the Washtenaw County Recorder on February
7, 1995 in Liber 3078, Pages 519-523 (the "Mortgage"); and
WHEREAS, Bank executed and delivered certain Subordination Agreements
dated August 8, 1995 and September 16, 1996, subordinating its mortgage lien on
the Mortgaged Property to a mortgage lien granted in a real estate mortgage from
Borrower to Chelsea State Bank, a Michigan Banking Corporation, in the amount of
$1,900,000, which mortgage amount was subsequently increased to $2,300,000; and
WHEREAS, Action Instruments, Inc. executed and delivered to Bank
certain Subordination Agreements dated February 14, 1994 and May 2, 1995
subordinating its right to repayment of all loans, including but not limited to
a certain $167,000 Convertible Subordinated Note dated October 29, 1993, a
$215,000 Convertible Subordinated Note dated August 29, 1994, and a $62,000
Convertible Subordinated Note dated October 1, 1994, to the rights of the Bank;
and
WHEREAS, Imagination Systems, Inc. executed and delivered to Bank a
certain Subordination Agreement dated September 13, 1994, subordinating its
right to repayment of all
2
<PAGE> 3
loans, including but not limited to a certain $295,000 Convertible Subordinated
Note dated June 30, 1994, to the rights of the Bank; and
WHEREAS, G. Paul Horst executed and delivered to Bank a certain
Subordination Agreement dated December 8, 1994, subordinating its right to
repayment of all loans, including but not limited to a certain $200,000
Convertible Subordinated Note dated December 8, 1994, to the rights of the Bank;
and
WHEREAS, the Joseph Krinsky Trust, u/a DTD 6/20/91 executed and
delivered to Bank a certain Subordination Agreement dated November 7, 1995,
subordinating its right to repayment of all loans and any security interests
granted by Borrower to the Joseph Krinsky Trust, u/a DTD 6/20/91, including but
not limited to a certain $150,000 note dated November 7, 1995, to the rights of
the Bank, though with Bank's consent, all indebtedness of Borrower to such
creditor was repaid with the proceeds of the Term Note; and
WHEREAS, Onset BIDCO executed and delivered to Bank a certain
Subordination Agreement dated November 7, 1995, subordinating its right to
repayment of all loans and any security interests granted by Borrower to Onset
BIDCO, including but not limited to a certain $1,000,000 note dated November 7,
1995, to the rights of the Bank, though with Bank's consent, all indebtedness of
Borrower to such creditor was repaid with the proceeds of the Term Note; and
WHEREAS, Urban A. MacDonald executed and delivered to Bank a certain
Subordination Agreement dated November 7, 1995, subordinating his right to
repayment of all loans and any security interests granted by Borrower to Urban
A. MacDonald, including but not limited to a certain $50,000 note dated November
7, 1995, to the rights of the Bank, though with Bank's consent, all indebtedness
of Borrower to such creditor was repaid with the proceeds of the Term Note; and
WHEREAS, the Emily Krinsky Trust, u/a DTD 6/20/91 executed and
delivered to Bank a certain Subordination Agreement dated November 7, 1995,
subordinating its right to repayment of all loans and any security interests
granted by Borrower to the Emily Krinsky Trust, u/a DTD 6/20/91, including but
not limited to a certain $100,000 note dated November 7, 1995, to the rights of
the Bank, though with Bank's consent, all indebtedness of Borrower to such
creditor was repaid with the proceeds of the Term Note; and
WHEREAS, The Capital Fund, Inc. executed and delivered to Bank a
certain Subordination Agreement dated November 7, 1995, subordinating its right
to repayment of all loans and any security interests granted by Borrower to The
Capital Fund, Inc., including but not limited to a certain $500,000 note dated
November 7, 1995, to the rights of the Bank, though with Bank's consent, all
indebtedness of Borrower to such creditor was repaid with the proceeds of the
Term Note; and
Defaults
3
<PAGE> 4
WHEREAS, pursuant to the Second Amendment, the maturity date of each of
the Original Notes was May 29, 1998, on which date all Obligations (as
hereinafter defined) were to be repaid, but to date Borrower has failed to do
so; and
WHEREAS, in addition to not repaying the Original Notes at maturity,
Borrower has incurred Obligations in excess of those permitted under the
Borrowing Formula set forth in Section 1.1.1 of the Loan Agreement, and has
violated certain other covenants set forth in the Loan Agreement; and
Desired Course of Action
WHEREAS, Borrower has requested that Bank restructure the Obligations
of Borrower to Bank under the Original Loan Documents and refrain from
exercising its various rights and remedies under applicable law in response to
the defaults, and Bank, subject to the terms and conditions of this Repayment
Agreement, has acquiesced to Borrower's request.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and of the mutual
promises, covenants and agreements herein contained, and for other valuable
considerations, the receipt and sufficiency of which are hereby acknowledged,
the Bank and the Interested Parties agree as follows:
1. Definitions. As used in this Repayment Agreement (including the
foregoing Recitals), the following terms, which are in addition to the
terms defined elsewhere in this Repayment Agreement, shall have the
indicated meanings. Any inconsistency between terms or definitions
contained in this Repayment Agreement and the Loan Documents shall be
resolved in favor of the definitions and terms contained in this
Repayment Agreement. All the terms defined in this Repayment Agreement
in the singular shall have comparable meanings when used in the plural
and vice-versa. The words "hereof," "herein" and "hereunder" and words
of similar import when used in this Repayment Agreement shall refer to
this Repayment Agreement as a whole and not to any particular provision
of this Repayment Agreement. WHENEVER ANY AGREEMENT, INSTRUMENT OR
DOCUMENT IS DEFINED IN THIS REPAYMENT AGREEMENT, SUCH DEFINITION SHALL
BE DEEMED TO MEAN AND INCLUDE ANY AMENDMENT, RESTATEMENT, OR
MODIFICATION THEREOF.
"ACCOUNT(S)", "CHATTEL PAPER", "CONSUMER GOODS",
"DEPOSIT ACCOUNT", "DOCUMENT", "FARM PRODUCTS", "GENERAL
INTANGIBLE", "GOODS" and "INSTRUMENT" shall have the meanings
set forth in Ohio Revised Code Sections 1309.01-1309.50
inclusive, including any amendments thereof and any
substitutions therefor, which definitions are hereby
incorporated by reference as though fully rewritten herein.
4
<PAGE> 5
"ACCOUNT DEBTOR" shall mean a person obligated for
payment of an Account or an Account Receivable.
"ACCOUNT(S) RECEIVABLE" shall mean:
(a) any Account, and
(b) any other indebtedness owed to or receivable
owned, acquired, or received by a Person of
whatever kind and however evidenced, and
(c) any right, title, and interest in a Person's
Goods which were sold, leased, or furnished
by that Person and gave rise to either (a)
or (b) above, or both of them. This
includes, without limitation:
(1) any rights of stoppage in transit of
a Person's sold, leased, or
furnished Goods,
(2) any rights to reclaim a Person's
sold, leased, or furnished Goods,
and
(3) any rights a Person has in such
sold, leased, or furnished Goods
that have been returned to or
repossessed by that Person.
"AFFILIATE" means
(a) an entity that directly or indirectly owns,
controls or holds with power to vote, twenty
percent (20%) or more of the outstanding
voting securities of a Person;
(b) a corporation twenty percent (20%) or more
of whose outstanding voting securities are
directly or indirectly owned, controlled or
held with power to vote, by a Person or by
an entity that directly or indirectly owns,
controls or holds with power to vote, twenty
percent (20%) or more of the outstanding
voting securities of a Person;
(c) a Person whose business is operated under a
lease or operating agreement by another
Person, or Person substantially all of whose
property is operated under an operating
agreement with another Person; or
(d) an entity that operates the business or
substantially all of the property of a
Person under a lease or operating agreement.
"AMENDED AND RESTATED LINE NOTE" shall mean the
Amended and Restated Revolving Credit Note referred to in
subsection 3(a) of this Repayment Agreement and attached
hereto as Exhibit B.
5
<PAGE> 6
"AMENDED AND RESTATED TERM NOTE" shall mean the
Amended and Restated Term Note referred to in subsection 3(c)
of this Repayment Agreement and attached hereto as Exhibit C.
"AMENDED NOTES" means the Amended and Restated Line
Note and the Amended and Restated Term Note.
"CASH COLLATERAL ACCOUNT" shall have the meaning
given to it in subsection 5(c).
"CLOSING DATE" means the date on which this
Repayment Agreement is executed by all parties hereto.
"COLLATERAL" shall mean all of the Mortgaged Property
and Personal Property.
"EQUIPMENT" means:
(a) any equipment, including without limitation,
machinery, office furniture and furnishings,
tools, dies, jigs, and molds,
(b) all Goods that are used or bought for use
primarily in a Person's business,
(c) all Goods that are not Consumer Goods, Farm
Products, or Inventory, and
(d) all substitutes or replacements for, and all
parts, accessories, additions, attachments,
or accessions to (a) to (c) above.
"GAAP" shall mean generally accepted accounting
principles consistently applied.
"INDEBTEDNESS" as applied to any Person, including
any of the Borrowers and/or Guarantors, shall mean:
(a) All items (except items of paid-in
capital or capital surplus, or of
contingency reserves, reserves or allowances
for deferred and currently payable income
tax, or reserves or allowances for pension
contributions, or reserves or allowances for
unearned revenues, trade accounts payable
and accrued expenses for goods or services
purchased in the ordinary course of business
and that are not the subject of a
conditional sales contract or capitalized
lease) which in accordance with GAAP would
be included in determining total liabilities
as shown on the liability side of a balance
sheet of any such Person as of the date on
which Indebtedness is to be determined,
regardless whether such indebtedness shall
be recourse indebtedness or otherwise; and
6
<PAGE> 7
(b) All indebtedness of others within the
meaning of (a) above which any such Person
has directly or indirectly guaranteed,
endorsed (otherwise than for collection or
deposit in the ordinary course of business),
discounted with recourse or agreed
(contingently or otherwise) to purchase or
repurchase or otherwise acquire or become
liable for, or in respect of which such
Person has entered into any agreement for
the purchase or other acquisition of any
product, materials, or supplies, or for the
making of shipments, or for the payment for
services, if in any such case payment
therefore is to be made regardless of the
nondelivery of the product, materials, or
supplies or the nonfurnishing of the
transportation or services.
"INVENTORY" means:
(a) any inventory,
(b) all Goods that are raw materials,
(c) all Goods that are work in process,
(d) all Goods that are materials used or
consumed in the ordinary course of a
Person's business,
(e) all Goods that are, in the ordinary course
of a Person's business, held for sale or
lease or furnished or to be furnished under
contracts of service, and
(f) all substitutes and replacements for, and
parts, accessories, additions, attachments,
or accessions to (a) to (e) above.
"KEYBANK PRIME RATE" shall mean, at any time, the
rate of interest, whether or not publicly announced,
determined by the Bank to be its prime or base rate (the prime
rate of the Bank is not necessarily intended to be the lowest
rate of interest charged by the Bank in connection with
extensions of credit). Changes in the Bank's prime rate shall
immediately and automatically change the KeyBank Prime Rate
applicable to the Loan.
"LAWS" shall have the meaning ascribed to it in
subsection 2(r).
"LOAN DOCUMENTS" shall have the meaning ascribed to
it in the definition of Original Loan Documents.
"LOCKBOX" shall have the meaning given to it in
subsection 5(c).
"MORTGAGE" shall have the meaning given to it in the
recitals hereto.
"MORTGAGED PROPERTY" shall mean the real property
together with any fixtures or Goods thereon which is the
subject of the Mortgage.
7
<PAGE> 8
"OBLIGATIONS" shall mean every liability now or
hereafter owing by Interested Parties to Bank whether owing by
Borrower alone or by one or more others in a several, joint or
joint and several capacity, whether owing absolutely or
contingently, whether created by loan, overdraft, guaranty of
payment or other contract or by quasi contract, tort, statute
or other operation of law, whether incurred directly to the
Bank or acquired by Bank by purchase, assignment, pledge or
otherwise and whether participated to or from Bank in whole or
in part and specifically includes all debt created or
evidenced by the Loan Documents.
"ORGANIZATION" shall mean a corporation, government
or government subdivision or agency, business trust, estate,
trust, limited liability company, partnership, association,
two or more Persons having a joint or common interest, and any
other legal or commercial entity.
"ORIGINAL LOAN DOCUMENTS" means all documents
heretofore executed in connection with the Original Notes, and
"LOAN DOCUMENTS" means this Repayment Agreement and each of
the documents required to be executed and delivered to Bank
pursuant to the provisions of this Repayment Agreement,
together with all of the Original Loan Documents.
"PERSON" shall mean an individual or an Organization.
"PERSONAL PROPERTY" shall mean all of the Interested
Parties' personal property including their respective
Accounts, Chattel Paper, Deposit Accounts, General
Intangibles, Goods, Instruments and Accounts Receivable in
which the Interested Parties have granted to Bank a security
interest pursuant to the Security Agreements or any other of
the Loan Documents.
"PROCEEDS" shall mean any proceeds as that term is
defined in Article 9 of the Uniform Commercial Code as enacted
in the state of Ohio, in any form whatsoever received and
further includes all rents received, expense recovery
receipts, proceeds of Accounts, proceeds of contract rights,
tax refunds, insurance proceeds, proceeds of the sale of any
or all of the Collateral.
"RENTS" shall mean the Proceeds, products, offspring,
rents or profits of the Mortgaged Property owned by the
mortgagor of such property.
"REPAYMENT AGREEMENT" means this Repayment Agreement
and all amendments and supplements hereto which may from time
to time become effective hereafter.
"SECURITY AGREEMENTS" shall have the meaning given to
it in the Recitals hereto.
8
<PAGE> 9
"SUBORDINATED DEBT" shall mean all debt owed by
Borrower to any Person, with respect to which a subordination
agreement has been executed in favor of Bank.
"TAXES" unless otherwise designated shall mean all
federal, state and local or foreign income, payroll,
withholding, excise, sales, use, real and personal property,
use and occupancy, business and occupation, mercantile, real
estate, capital stock and franchise or other taxes, including
interest and penalties thereon, and including estimated taxes
thereof.
2. Representations, Acknowledgments and Covenants. The Interested Parties
represent, acknowledge and covenant that each of the following is true
on the date of execution and shall remain true until the Obligations
are satisfied:
a) True and Correct Statement. The above Recitals are true and
accurate in all respects, and incorporated within this
Repayment Agreement as if fully rewritten. As a condition to
the signing of this Repayment Agreement, all parties are
relying on the truth, completeness, and correctness of the
statements and representations made herein, including the
Recitals, and all parties represent for themselves that this
Repayment Agreement contains no material misrepresentations or
omissions by any party to this Repayment Agreement.
b) Indebtedness. As of September 24, 1998, Borrower is indebted,
and the Guarantor is liable, to Bank for the following amounts
(i) under the Line Note, in the principal amount of Three
Million Five Hundred Fourteen Thousand and Dollars
($3,514,000) together with the interest as of September 24 of
$21,907.60 as reflected in the Bank's records, which interest
will continue to accrue; and (ii) under the Term Note, in the
principal amount of One Million Two Hundred Thirty Thousand
and Dollars ($1,230,000) together with the interest as of
September 24 of $6,777.81 as reflected in the Bank's records,
which interest will continue to accrue. Borrower is further
responsible for late charges and other fees in the aggregate
amount of $25,000 as of September 24, 1998.
c) Default Acknowledgment. As of the date of this Repayment
Agreement, the Interested Parties are in default under the
Original Loan Documents, and as a result of such default, Bank
is entitled to exercise its rights and remedies as provided in
the Original Loan Documents.
d) No Obligation to Restructure. Before execution and delivery of
this Repayment Agreement by all parties, the Bank had no
obligation to modify, extend, or otherwise amend the terms and
conditions of the Original Loan Documents or to negotiate with
the Interested Parties or any other person or entity
concerning any of the foregoing. The Interested Parties agree
that the Bank's execution of this Repayment Agreement does not
create any such obligations other than as expressly set forth
herein.
9
<PAGE> 10
e) Claims or Setoff. As of the date of this Repayment Agreement,
none of the Interested Parties have any claims or set-offs
against the Obligations, nor do they have any defenses to, or
counterclaims respecting, the enforcement or administration of
their respective obligations evidenced by the Original Loan
Documents and under applicable law. The Interested Parties
shall not assert or seek to assert any claim, set-off, defense
or counterclaim of any kind or nature whatsoever with respect
to the Original Loan Documents.
f) Liens and Encumbrances. No liens or encumbrances other than
Bank's attach to any of the Collateral other than those listed
on Exhibit A, and no litigation is pending against Interested
Parties other than that listed on Exhibit A hereto. Borrower
has no assets other than those pledged to Bank to secure
repayment of the Original Loan Documents. Interested Parties
will keep the Collateral and all rights with respect thereto
and proceeds of same both free from any adverse lien, except
those of Bank and those listed on Exhibit A, and in good
condition, normal wear and tear excepted, and will not waste
or destroy any of the same except in the ordinary course of
business. Interested Parties will not use the Collateral in
violation of any applicable statute or ordinance except to the
extent that such use will not have a material adverse affect
upon the Collateral or the operations of Borrower.
g) Taxes. Borrower has promptly paid when due, all taxes,
assessments, and governmental charges of every kind and nature
that have been lawfully levied, assessed or imposed upon
Borrower, or its properties (including the use thereof), or
any obligations which, if unpaid would become liens against
its assets including, without limitation, all sums due and
owing any taxing authority for income and other taxes withheld
from the wages and salaries of its employees. All federal,
state and other tax returns and reports required by law to be
filed by the Interested Parties have been duly filed (or
proper extensions for filing have been filed).
h) Business Decisions. Borrower has made its own decisions
regarding its business operations and its incurrence and
payment of third party debt.
i) Principal Place of Business. Borrower's principal place of
business is located at 5840 Interface Drive, Ann Arbor,
Michigan 48103.
j) Taxpayer Identification Number. Borrower's taxpayer
identification number is 38-2483796; Guarantor's taxpayer
identification number is 38-3255068.
k) Good faith. As of the date of this Repayment Agreement,
Bank and Bank's agents have acted at all times in a fair and
reasonable manner, and in good faith, in connection with their
administration and enforcement of the Original Loan
10
<PAGE> 11
Documents, their dealings with the Interested Parties with
respect to the Loan Documents, and their negotiations in
connection with this Repayment Agreement and any other
transactions related to the Loan Documents and/or this
Repayment Agreement. The execution and delivery of this
Repayment Agreement by the Interested Parties was and is their
free and voluntary act and deed, without any misapprehension
as to the effect thereof, and without any coercion, duress,
overreaching or any other misconduct by Bank or any agent of
Bank.
l) Legal Counsel. The Interested Parties have had the benefit of,
or the opportunity to obtain, legal counsel throughout their
dealings with the Bank and Bank's agents in connection with
the administration and enforcement of the Original Loan
Documents by Bank and Bank's agents and the execution and
delivery of this Repayment Agreement and the Loan Documents.
m) No Interference with Other Agreements or Contracts. Neither
the execution of this Repayment Agreement nor the consummation
of the transactions contemplated hereby will constitute a
violation of, be in conflict with or constitute a default
under (or with the passage of time or delivery of notice, or
both, would constitute a default under) any material term or
provision of any other agreement, contract, lease or
instrument to which any Interested Party is a party or by
which any Interested Party (or the assets of any Interested
Party) is bound, or which affects or relates to the Collateral
or any part thereof.
n) Organizational Status. Borrower is a Michigan corporation duly
formed and validly existing under the laws of the State of
Michigan and is duly qualified and authorized to do business
in any other state where Borrower is required to qualify to do
business in such state except where the failure to so qualify
would have a material adverse effect upon the Collateral or
the operations of Borrower.
o) Authority of Interested Parties to Execute Loan Documents.
(i) The execution, delivery, and performance by
Interested Parties of each of the Repayment Agreement
and the other documents referred to herein which are
required to be executed and delivered by Interested
Parties:
(1) are within each respective Interested
Party's powers and authority;
(2) do not contravene each respective Interested
Party's Articles of Incorporation, by-laws,
or any amendments thereto;
(3) do not, to the best of any Interested
Party's knowledge contravene any Laws;
(4) except as provided herein, do not result in
or require the creation of any lien,
security interest, or other charge or
encumbrance upon or with respect to any of
the assets of any Interested Party; and
(5) will not cause any money owing on any other
indebtedness of any Interested Party to be
due and payable.
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(ii) No authorization or approval or action by, and no
notice to or filing with, any governmental authority
or regulatory body is required for the due execution,
delivery, and performance by the Borrower or the
other Interested Parties of this Repayment Agreement
or any of the agreements or documents referred to
herein, except for the recording thereof, where
necessary, to evidence or perfect the liens or
security interests granted Bank or conveyances made
to Bank in connection herewith.
(iii) This Repayment Agreement and the other Loan Documents
create and constitute legal, valid, enforceable and
binding obligations of the Interested Parties, as
appropriate, in accordance with their respective
terms.
p) Sole Right to Assets. No Interested Party has (i) made a
general assignment for the benefit of creditors; (ii) filed
any voluntary petition in bankruptcy or suffered the filing of
any involuntary petition by its creditors; (iii) suffered the
appointment of a receiver to take possession of all, or
substantially all, of its assets; or (iv) suffered the
attachment or other judicial seizure of all, or substantially
all, of its assets.
q) Solvency. After giving effect to the transactions contemplated
hereby, Borrower will not have incurred, and does not intend
to incur, debts beyond its ability to pay as they become due
and has sufficient capital with which to conduct its business
affairs.
r) No Violation of Laws. The Borrower's business and the
operation thereof conform and have conformed in all material
respects with all applicable laws, ordinances, rules,
regulations and directives of governmental or
quasi-governmental agencies or authorities, including, but not
limited to, all existing zoning, land use, building, fire,
health, labor, environmental, tax and safety laws, ordinances,
rules, regulations and directives (collectively, "Laws"). No
notice, citation or special assessment for the violation of
any Laws has been received by any Interested Party nor does
any Interested Party have knowledge of any fact or condition
which may result in the issuance of any such notice, citation
or assessment.
s) Environmental Concerns. Borrower is in material compliance
with all environmental Laws and regulations and there are (i)
no gas wells or other wells, whether capped or uncapped, on or
about the Mortgaged Property; (ii) no toxic or hazardous
waste, substance or material, nor any other waste covered by
any Laws (all such waste, substances, materials, products and
compounds being collectively defined herein as "Hazardous
Materials") of any kind or nature has been stored at, disposed
of or are located in, on or about the Mortgaged Property
except as heretofore disclosed in writing to Bank; (iii) no
underground tanks of any type are
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located at the Mortgaged Property; (iv) no asbestos or
asbestos containing materials, or any polychlorinated
biphenyls, is located in, on or about the Mortgaged Property
except as heretofore disclosed in writing to Bank; (v) to the
best of Borrower's knowledge and belief there are no surface
or subsurface conditions on or about the Mortgaged Property
which constitute or with the passage of time may constitute a
public or private nuisance; (vi) no portion of the Mortgaged
Property is "wetlands" or a similarly protected area under any
Laws; (vii) no clean-up or other remediation activity has
occurred or is in process at the Mortgaged Property; (viii) no
notice, citation or other action by any local, state or
federal environmental or other agency is pending or, to the
knowledge of the Interested Parties, threatened against the
Mortgaged Property; (ix) no notice, report or corrective
action plan has been filed with any local, state or federal
environmental or other agency with respect to the Mortgaged
Property; except such plans as have been heretofore completed,
and the completion of which has been acknowledged by the
appropriate local, state or federal environmental agency; and
(x) no permit is required or has been issued from any local,
state or federal environmental agency for the use or
maintenance of any improvement or facility on or about the
Mortgaged Property.
t) Financial Information. Any financial and operating statements
of the Interested Parties furnished to Bank in connection with
or pursuant to this Repayment Agreement or otherwise are true
and correct in all material respects, accurately reflect the
financial position of the parties described therein, and do
not omit to state any material liability, contingent or
otherwise, or any facts necessary thereto, the omission of
which would be misleading.
u) Bank Accounts. All of Borrower's banking accounts are held
at Bank, and shall be at all times hereafter.
v) Closing Costs. All out-of-pocket costs, expenses and fees
(collectively, "Closing Costs") incurred by Bank in connection
with or to consummate the transactions described herein,
including, without limitation, legal fees, conveyance fees,
escrow fees, survey and title costs and fees payable to any
engineering and environmental consultants, shall be paid by
the Interested Parties to Bank within ten (10) days of a
request from Bank.
w) Capitalized terms. Capitalized terms used herein but not
defined herein shall have the meanings ascribed to them in the
Loan Documents.
x) Continuous Nature of Loan Documents. The terms of the Loan
Documents, not specifically altered herein, shall continue
unchanged.
y) Notice of Change. The Borrower agrees to give prompt
written notice to the Bank of: (a) any Event of Default; (b)
any occurrence which might mature into an Event of Default
(whether by the passage of time, giving of notice or
otherwise);
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(c) any default under any material agreement to which the
Borrower is a party or by which the Collateral is bound or the
acceleration of the maturity of any indebtedness owing by the
Borrower; (d) all litigation affecting the Borrower or the
Collateral which represents a potential liability in excess of
Twenty-Five Thousand Dollars ($25,000.00); and (e) any other
matter which might result in a material adverse change in the
financial condition of the Borrower or the value of the
Collateral. Such notice will describe the foregoing matters
with particularity and the actions which the Borrower is
taking or proposes to take with respect thereto.
3. Restructure and Amendment of Loan Documents. The Obligations evidenced
by the Original Notes shall be restructured pursuant to the terms of
the Amended and Restated Line Note and the Amended and Restated Term
Note. The Amended Notes do not constitute repayment or cancellation of
all or any portion of the Indebtedness evidenced by the Original Notes.
The Original Notes shall remain in full force and effect only for the
purpose of evidencing any amounts due in connection with the Original
Notes and any of the Loan Documents which for any reason in fact or in
law, do not become Obligations of Borrower under the Amended Notes, as
intended by the parties hereto. In connection with the restructure of
the Obligations, the following amendments are hereby made to the Loan
Agreement:
a) Subsection 1.1.1 of the Loan Agreement is deleted in its
entirety, and the following inserted in lieu thereof:
"1.1.1 Upon the request of Borrower, made at any time
or from time to time between September 28, 1998 and October
31, 1998, inclusive, and so long as no Event of Default under
this Agreement has occurred or is continuing, Bank shall make
cash advances to Borrower in an amount up to:
(a) eighty percent (80%) of the aggregate
outstanding amount of Eligible Domestic
Accounts;
PLUS
(b) at Borrower's option, eighty percent (80%)
of the aggregate outstanding amount of
Eligible Foreign Accounts;
PLUS
(c) thirty five percent (35%) of the aggregate
sum (not to exceed $2,500,000) of (i)
Eligible Raw Inventory (valued at the lower
of Borrower's and NemaSoft's cost, or
market) and (ii) Eligible Finished Inventory
(valued at Borrower's and NemaSoft's cost of
production):
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<PAGE> 15
PLUS
(d) the Permitted Overadvance;
LESS
(e) the aggregate outstanding amount of any
issued and outstanding Letters of Credit;
PROVIDED, HOWEVER, that in no event shall the
aggregate amount of outstanding cash advances made
pursuant to this Section 1.1.1 ("BORROWING FORMULA")
be, at any time, greater than the sum of Six Million
and 00/100 Dollars ($6,000,000.00). The amount
outstanding under the Line of Credit shall be
evidenced by an Amended and Restated Revolving Credit
Note dated as of September 28, 1998 ("NOTE"). The
terms of the Note, and all renewals, modifications
and amendments thereto, are hereby incorporated
herein specifically by reference. Subject to the
foregoing limitations Borrower may borrow, repay and
reborrow under the Line of Credit."
b) The Loan Agreement is amended by renumbering existing
subsection 1.2.8 as subsection 1.2.9, and adding new
subsections 1.2.8 and 1.2.10 as follows:
"1.2.8 "Permitted Overadvance" means an amount of up
to $753,345 during the period between September 28, 1998 and
October 31, 1998, and shall mean Zero Dollars ($0) thereafter.
1.2.10 "Repayment Agreement" means an agreement, so
called, among Borrower, NemaSoft and Bank dated September 28,
1998."
c) Subsection 1.7 of the Loan Agreement is deleted and the
following inserted in lieu thereof:
"1.7 Term Loan. Bank agrees to lend Borrower the sum
of One Million Two Hundred Thirty Thousand and 00/100 Dollars
($1,230,000.00) ("Term Loan"). The Term Loan shall be
evidenced by an Amended and Restated Term Note dated as of
September 28, 1998("Term Note") maturing on October 31, 1998
payable in monthly installments and bearing a variable
interest rate as set forth in the Term Note."
d) Subsection 1.8 of the Loan Agreement is deleted in its
entirety.
e) Article VI of the Loan Agreement is amended by adding a new
subsection 6.9 as follows:
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<PAGE> 16
"6.9 An Event of Default shall occur under the
Repayment Agreement."
4. Conditions Precedent to Restructure. The following conditions precedent
shall be fulfilled on or before the Closing Date, and subsection 4(c)
shall be true on the Closing Date.
a) Execution of Loan Documents. The terms and conditions of the
Restructure as set forth herein shall not become effective or
enforceable against the Bank until the Interested Parties
shall have executed and delivered to Bank each of the
documents referred to in this Repayment Agreement (including,
but not limited to those set forth in Section 5), together
with the Repayment Agreement.
b) Interest Payment/Restructure Fee. Borrowers shall pay to Bank,
in immediately available funds, on the Closing Date, the
amount of all outstanding interest due with respect to the
Original Notes, which sum is $28,685.41 as of September 24,
1998 together with all then accrued late fees. Additionally
Borrower shall pay, in immediately available funds, to Bank,
on or before execution and delivery of the Repayment Agreement
to Bank, an extension fee of Ten Thousand Dollars
($10,000.00).
c) Adverse Change. Prior to the Closing Date, there shall occur
no further material adverse change in the financial condition
or prospects of Borrower from that disclosed in writing to
Bank on or before May 31, 1998.
5. Documentation. All of the following documents shall be executed on or
before the Closing Date.
a) Amended Notes. On or before the Closing Date, Borrower shall
execute and deliver to Bank the Amended and Restated Line Note
in the form of Exhibit B attached hereto and incorporated
herein, and the Amended and Restated Term Note in the form of
Exhibit C attached hereto and incorporated herein.
b) Amendment to Mortgage. On or before the Closing Date, in order
to maintain Bank's priority, Borrower shall execute and
deliver to Bank an Amendment to Mortgage in the form of
Exhibit D attached hereto.
c) Cash Collateral Agreement and Lockbox Agreement. On or before
the Closing Date, Borrower shall execute and deliver to Bank a
Master Agreement Cash Management Services ("Cash Collateral
Agreement") in the form of Exhibit E attached hereto, and
associated Wholesale Lockbox Service Agreement ("Lockbox
Agreement") in the form of Appendix 1 thereto, providing for
the delivery of proceeds of Borrower's Accounts Receivable and
all other cash and receivables directly to a lockbox (the
"Lockbox") and/or blocked access account at Bank (the "Cash
Collateral Account") as set forth in such agreements.
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<PAGE> 17
d) Assignment of Patents and Trademarks. On or before the Closing
Date, Borrower and Guarantor shall each execute and deliver to
Bank Security Agreements relating to certain patents and
trademarks, in the forms of Exhibits F1 through F4 attached
hereto.
e) Landlord's Waiver. In order to insure Bank that its security
interests in the Personal Property will not be adversely
affected, Interested Parties will use their best efforts to
cause their respective landlords to execute a Landlord's
Waiver and Estoppel substantially in the form of Exhibit G
attached hereto.
f) Reaffirmation of Subordination Agreements. On or before the
Closing Date, Borrower shall cause to be executed and
delivered to Bank a Reaffirmation of Subordination Agreement,
substantially in the form of Exhibit H attached hereto, from
each of the Subordinated Debt holders.
g) Release of Liens on Mortgaged Property. On or before the
Closing Date, Borrower shall obtain a release of the $500,000
mortgage lien on the Mortgaged Property which Borrower granted
to The Capital Fund, Inc. in a mortgage dated November 16,
1995, and a release of a $9,260.68 lien on the Mortgaged
Property by Ajax Materials Corporation against Interface
Systems, Inc. dated June 2, 1995.
h) Corporate Resolutions. On or before the Closing Date, Borrower
and Guarantor shall each cause to be delivered to Bank a
Corporate Resolution authorizing the execution and delivery of
this Repayment Agreement, including all of the Loan Documents
required to be delivered in connection herewith.
6. Default. The occurrence of any one or more of the following events
constitutes a default by all of the Interested Parties under this
Repayment Agreement (herein called "Event of Default"):
a) Borrower fails to pay when due, any principal, interest, fees,
charges or Obligations required by the Loan Documents, or
b) Borrower fails to furnish to Bank within thirty (30) days of
each calendar month end its financial statement for the prior
calendar months and year to date, and within ninety (90) days
after the end of each calendar year complete financial
statements with all applicable notes and detail and supporting
documents certified to be true and correct by Borrower and
within thirty (30) days after filing with the government, a
copy of all of Borrower's federal, state and local tax
returns, or
c) Borrower fails to make available for inspection to duly
authorized representatives or agents of Bank any of its books,
records, or properties when requested to do so or fails to
furnish Bank any information regarding its business affairs
and financial condition within a reasonable time after written
request therefor, or
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d) Any Interested Party creates or permits the creation or
continuance of, any lien upon any of the Collateral other than
those liens referred to in subsection 2(f) and listed on
Exhibit A hereto, including, but not limited to, mortgages,
judgments, security interests, pledges, and liens for taxes,
assessments, or other governmental charges of any kind, other
than any lien for taxes, assessments, or governmental charges
which are not yet payable, or
e) Any garnishment, levy or attachment is made or attempted to
be made upon any assets of any Interested Party, or
f) Any Interested Party fails (i) to maintain insurance upon
the Collateral acceptable to Bank in its sole discretion
reasonably exercised, or (ii) to furnish to Bank, upon
request, a copy of any policy of insurance requested by Bank,
or (iii) to obtain other or additional insurance promptly upon
the reasonable request of Bank to the extent that such
insurance may be available, (iv) upon reasonable request of
Bank to assign to Bank as security for its Obligations the
proceeds of any property insurance, or (v) to cause Bank to be
named on a lender's loss payable clause in a manner acceptable
to Bank on any policy of casualty insurance maintained by
Borrower, or
g) Any representation or warranty made by any Interested Party
herein or in any written statement, certificate or other
document now or later furnished by or for any Interested Party
in connection herewith, shall prove untrue in any material
respect as of the date upon which it was made, or
h) Any Interested Party breaches any material provision,
condition, representation, warranty or covenant or any
obligation of any Interested Party to Bank including, without
limitation, any set forth or contained in or evidenced by this
Repayment Agreement, the Loan Documents, or in any other
instrument, document, or writing given as or evidencing
security for the Obligations or any other present or future
indebtedness, obligation, or liability of Interested Parties
owed to Bank, or
i) The Interested Parties or any of them become insolvent or
bankrupt, or cease, are unable, or admit in writing the
inability, to pay debts as they mature, or make a general
assignment for the benefit of, or enter into any composition
or arrangement with, creditors, or
j) Proceedings for the appointment of a receiver, trustee or
liquidator of any Interested Party or of a substantial part of
any of the Interested Parties' assets, are authorized or
instituted by or against the Interested Parties or any of
them, or
k) Proceedings under any bankruptcy, reorganization, readjustment
of debt, insolvency, dissolution, liquidation or other similar
law of any jurisdiction are authorized or any instituted by or
against Interested Parties or any of them.
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<PAGE> 19
If there shall occur any Event of Default set forth in (a) through (h)
above Bank may, without notice, declare the unpaid Indebtedness owing
upon any note or any of the Obligations of the Interested Parties to
Bank to be immediately due and payable and upon any such declaration,
such Indebtedness shall become and be forthwith due and payable without
presentment, or demand of any kind, all of which are hereby expressly
waived by the Interested Parties. If there shall occur any Event of
Default set forth in subparagraphs (i) through (k), the indebtedness
owing upon any note and all other Obligations of the Interested Parties
to Bank shall become immediately due and payable without declaration,
demand, presentment, or notice of any kind, all of which are hereby
expressly waived by the Interested Parties.
7. Bank's Remedies. Upon the occurrence of any Event of Default and
continuing thereafter, the Interested Parties hereby agree that they
will give their full cooperation and assistance to the Bank in its
exercise of all or any combination of its remedies afforded by
applicable law or described herein including, without limitation, those
remedies set forth below:
a) Appointment of a Receiver. Without notice to any Interested
Party or any party claiming under them (such notice being
hereby expressly waived) and without reference to the value of
the assets of Borrower, to the solvency or insolvency of the
person(s) liable for all or any part of the Obligations
referred to in this Repayment Agreement, Borrower and all
other Interested Parties consent to the immediate appointment,
whether by the Bank or pursuant to the order of any Court, of
a receiver for all or any of the Collateral which secures all
or part of the Obligations, and further agrees to take all
necessary steps to immediately, completely and effectively
transfer all of its right, title and interest in the
Collateral to any such receiver, including, without
limitation, transfer or assignment of all Personal Property,
subscriber lists, Accounts, General Intangibles, any licenses
or franchises and deeds for all real property. The appointment
of a receiver shall be for the benefit of Bank and such
receiver shall be vested with the power to take immediate
possession of the Collateral, to manage the assets and
business of Borrower, and to collect any and all rents,
issues, profits, accounts or Proceeds of the assets of
Borrower, and any and all such rents, issues, profits,
accounts or Proceeds when collected, may be applied toward the
payment of the Obligations, and the costs, attorneys fees,
taxes, insurance or other items necessary for the protection
and preservation of the Collateral, including the expenses of
such receivership. Such receiver shall be directed to sell the
Collateral as promptly as is commercially reasonable, subject
to court approval, and shall apply the Proceeds of sale
against the Borrower's Obligations owed to the Bank in such
order and by such division as Bank shall elect.
b) Other Remedies. The Bank may exercise all or any other
remedies to which it is entitled under the Loan Documents
and/or otherwise in law or equity.
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<PAGE> 20
8. Inspection. Any of Bank's officers, employees or agents shall have the
right, at any time or times hereafter, in Bank's name or in the name of
Interested Parties to verify the validity, amount or any other matter
relating to the Collateral by mail, telephone, telegraph or otherwise.
Bank (by any of its officers, employees and/or agents) shall have the
right, at any time or times during usual business hours, to inspect the
Collateral and all records related thereto (and to make extracts from
such records) and the premises upon which any of such Collateral is
located, to discuss Interested Parties' affairs and finances with any
attorney, accountant, Account Debtor or creditor of Interested Parties
and to verify the amount, quality, quantity, value and condition of, or
any other matter relating to the said Collateral. The Interested
Parties shall reimburse Bank upon demand for all costs, expenses and
charges incurred in connection with any of the foregoing, whether
charged by Bank's in-house auditors or outside professionals.
9. Federal Accounts. Upon Bank's request Borrower shall, if any Accounts
or Accounts Receivable arise out of contracts with the United States of
America or any department, agency or instrumentality thereof,
immediately notify Bank thereof in writing and execute any and all
instruments and take all steps required by Bank in order that all
monies due and to become due under such contracts shall be assigned to
Bank and notice thereof given to the Government under the Federal
Assignment of Claims Act, as amended.
10. Attorneys' Fees and Expenses; Bank's Out-of-Pocket Expenses. If, at any
time or times, whether prior or subsequent to the date hereof, and
regardless of the existence of an Event of Default under the Loan
Documents, Bank employs in-house or outside counsel for advice or other
representation or incurs legal and/or other costs and expenses in
connection with:
a) The preparation, negotiation and/or execution of this
Repayment Agreement and related Loan Documents or any
amendment of or modification to same; or
b) Any litigation, contest, dispute, suit, proceeding or action,
whether instituted by Bank, any Interested Party or any other
entity in any way relating to the Repayment Agreement, any
Loan Document, the administration thereof or any of Interested
Parties affairs;
c) Any attempt to enforce any rights of Bank against any
Interested Party or any other entity which may be obligated to
Bank by virtue of the Repayment Agreement or any Loan
Document, including, without limitation, the Borrower's
debtors;
d) Any attempt to inspect, verify, protect, collect, sell,
liquidate or otherwise dispose of the Collateral;
then, in any such event, the reasonable attorneys' fees (including
those of Bank's outside counsel and/or Bank's in-house counsel) arising
from such services and all reasonably
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<PAGE> 21
incurred expenses, costs, charges and other fees of such counsel or of
Bank in any way or respect arising in connection with or relating to
any of the events or actions described in this Section 10 shall be
payable, on demand, by Interested Parties, jointly and severally, to
Bank and shall be additional Obligations of the Interested Parties
secured by the Collateral. Without limiting the generality of the
foregoing, such expenses, costs, charges and fees may include
paralegals' fees, costs and expenses; accountants' fees, costs and
expenses; appraisers' and/or auditors' fees, costs and expenses; court
costs, fees and expenses; photocopying and duplicating expenses; court
reporter fees, costs and expenses; long distance telephone charges; air
express charges; telegram charges; Westlaw/Lexis charges; secretarial
over-time charges; and expenses for travel, lodging and food paid or
incurred in connection with the performance of such legal services.
11. Guarantor's Confirmation and Waiver. Guarantor, by executing this
Agreement, hereby assents to the terms and conditions of this Repayment
Agreement and ratifies and reaffirms the terms and conditions of the
Guaranty, which Guaranty shall remain in full force and effect.
Guarantor hereby waives any defense to its obligations under the
Guaranty based upon or arising out of (i) the modifications to the
Original Loan Documents as herein provided, (ii) the taking of any
additional security for repayment of the Obligations, and (iii) any act
or omission of any Bank Party (as such term is defined in Section 14
below) occurring on or before the Closing Date. Notwithstanding any
language contained in the Guaranty, Guarantor, to the extent permitted
by law, waives any claim or other right which Guarantor might now have
or hereafter may acquire against Borrower or any other obligor of the
Obligations, which arises from the existence or performance of
Guarantor's liability or other obligations under the Guaranty and any
other guaranties which the Guarantor has executed in favor of Bank,
including, without limitation, any right of subrogation, reimbursement,
exoneration, contribution, indemnification, and any right to
participate in any claim or remedy of Bank against Borrower or any of
the Collateral, whether or not such claim, remedy, or right arises in
equity, or under contract, statute, or common law.
12. Time is of the Essence. The Interested Parties further acknowledge that
TIME IS OF THE ESSENCE with respect to the time for performance of the
terms and provisions of this Repayment Agreement. None of the
Interested Parties shall be given any grace period within which to cure
any default or breach under this Repayment Agreement.
13. No Duress; Each Party Advised by Counsel; Traditional Rule of
Construction Not Applicable. The Interested Parties stipulate and agree
that the Loan Documents and this Repayment Agreement have been executed
voluntarily after due deliberation and negotiation and that neither
Bank nor any other person has exerted or attempted to exert improper or
unlawful pressure or has in any way induced or attempted to induce,
through threats or otherwise, any conduct on the part of the Interested
Parties including the execution or delivery of this Repayment Agreement
or any of the Loan documents or any other document or instrument.
Without in any way limiting the foregoing, each of the parties hereto
stipulate and agree that at all times during the course of the
negotiations resulting in the execution and delivery of this Repayment
Agreement, they have, to the
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extent deemed necessary or advisable in their sole discretion, been
advised and assisted by competent counsel of their own choosing.
Because this Repayment Agreement was negotiated at length with counsel,
the parties agree that the traditional rules calling for a document to
be construed against its draftsman shall not apply or be followed.
14. RELEASE. EFFECTIVE AS OF THE DATE OF THE EXECUTION AND DELIVERY OF
THIS REPAYMENT AGREEMENT, THE INTERESTED PARTIES JOINTLY AND SEVERALLY
AGREE TO RELEASE AND HEREBY DO RELEASE AND DISCHARGE, BANK, ITS
SHAREHOLDERS, AGENTS, SERVANTS, EMPLOYEES, DIRECTORS, OFFICERS,
ATTORNEYS, AFFILIATES, SUBSIDIARIES, PREDECESSORS, SUCCESSORS AND
ASSIGNS AND ALL PERSONS, FIRMS, CORPORATIONS, AND ORGANIZATIONS ACTING
ON THEIR BEHALF (COLLECTIVELY THE "BANK PARTIES") OF AND FROM ALL
DAMAGES, LOSSES, CLAIMS, DEMANDS, LIABILITIES, OBLIGATIONS, ACTIONS AND
CAUSES OF ACTION WHATSOEVER THAT EACH INTERESTED PARTY HAS OR CLAIMS TO
HAVE AGAINST ANY BANK PARTY AS OF THE DATE HEREOF AND WHETHER KNOWN OR
UNKNOWN AT THE TIME OF THIS RELEASE, AND OF EVERY NATURE AND EXTENT
WHATSOEVER ON ACCOUNT OF OR IN ANY WAY, DIRECTLY OR INDIRECTLY,
TOUCHING, CONCERNING, ARISING OUT OF OR FOUNDED UPON THE LOAN DOCUMENTS
OR THE LENDING RELATIONSHIP RESPECTING THE OBLIGATIONS BETWEEN ANY
INTERESTED PARTY AND ANY BANK PARTY. THIS RELEASE WILL NOT EXTEND TO
ANY CLAIM ARISING AFTER THE DATE OF THIS AGREEMENT TO THE EXTENT SUCH
CLAIM IS BASED ON ACTS OR OMISSIONS OF THE BANK OCCURRING AFTER THE
DATE OF THIS REPAYMENT AGREEMENT EXCEPT THAT SUCH RELEASE IS
SPECIFICALLY INTENDED BY THE PARTIES TO INCLUDE THE TRANSACTIONS
CONTEMPLATED BY THIS REPAYMENT AGREEMENT. Bank would not agree to enter
into this Repayment Agreement but for the provisions set forth in this
Section 14. The Interested Parties confirm that they have agreed to the
provisions of this Section 14 of their own volition, with full
knowledge of the extent and effect of the various releases and waivers
granted by this Section 14 and of the importance to Bank of these
waivers and releases and after having had the opportunity to discuss
this matter with counsel of their own choice.
15. JURY TRIAL. THE PARTIES TO THIS REPAYMENT AGREEMENT HEREBY WAIVE TRIAL
BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY ANY PARTY
AGAINST ANOTHER ON ANY MATTERS WHATSOEVER ARISING UNDER OR IN
CONNECTION WITH THIS REPAYMENT AGREEMENT OR THE LOAN DOCUMENTS OR ANY
ANCILLARY AGREEMENT AND SHALL TAKE ALL APPROPRIATE STEPS TO IMPLEMENT
THAT WAIVER, INCLUDING PROVIDING FURTHER WRITTEN CONSENT IN COURT.
16. Loan Documents. Except as herein specifically provided otherwise, the
Original Loan Documents shall remain in full force and effect and be
unaffected hereby. In the event of
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a conflict between the terms of this Repayment Agreement, the Loan
Documents and any other agreement between the Bank and the Borrower or
any other Interested Party, then this Repayment Agreement shall be
controlling. The within Repayment Agreement and all writings delivered
in connection herewith shall constitute a part of the Loan Documents.
17. Notices. Any notice, demand or communication required or permitted to
be given by any provision of this Repayment Agreement will be in
writing and will be deemed to have been given when delivered personally
or by facsimile, receipt confirmed, to the party designated to receive
such notice, or on the date following the day sent by overnight
courier, or on the third (3rd) business day after the same is sent by
certified mail, postage and charges prepaid, directed to the following
addresses or to such other or additional addresses as any party might
designate by written notice to the other party:
23
<PAGE> 24
If to Bank:
KeyBank National Association
202 S. Michigan Street
P.O. Box 6
South Bend, Indiana 46601
Cleveland, Ohio 44114-1306
Attn: Richard Rozenboom, Vice President
Mailcode IN-09-01-0402
Phone: (219) 237-5407
Fax: (219) 282-8815
With a copy to :
Robert J. Burns, Esq.
KeyBank National Association
Law Department: OH-01-27-0200
127 Public Square, 2nd Floor
Cleveland, Ohio 44114-1306
Phone: (216) 689-4970
Fax: (216) 689-5681
If to Borrower:
Nematron Corporation
5840 Interface Drive
Ann Arbor, Michigan 48103
Attn: David Gienapp, Executive Vice
President
Finance/Administration
Phone: (734) 214-2128
Fax: (734) 994-8170
With a copy to :
Aleksandra Miziolek
Dykema Gossett PLLC
400 Renaissance Center
Detroit, MI 48243
Phone: (313) 568-6762
Fax: (313) 568-6832
24
<PAGE> 25
If to Guarantor:
NemaSoft, Inc.
5840 Interface Drive
Ann Arbor, Michigan 48103
Attn: Mr. Matthew S. Galvez, President
Phone: 734-214-2000
Fax: 734-994-8170
With a copy to :
Aleksandra Miziolek
Dykema Gossett PLLC
400 Renaissance Center
Detroit, MI 48243
Phone: (313) 568-6762
Fax: (313) 568-6832
18. Waiver, Amendment, and Entirety of Agreement. No waiver of or
consent to any departure from any provision hereof shall be effective
unless in writing and signed by the authorized representative of the
party against whom such a waiver or consent is asserted and shall be
effective only in the specific instance and for the purpose for which
given and to the extent specified in such writing. No delay or omission
by any party hereto to exercise any right or remedy upon the happening
of any Event of Default hereunder shall impair such right or remedy or
be deemed to be a waiver of such Event of Default. This Repayment
Agreement embodies the entire agreement and understanding between the
parties hereto with respect to the subject matter of this Repayment
Agreement and supersedes all prior and contemporaneous negotiations,
agreements and understandings relative to such subject matter.
19. Third-Party Beneficiaries. All of the conditions and obligations
hereunder are imposed solely and exclusively for the benefit of the
parties hereto and their successors and assigns. No other person or
entities shall obtain any interest herein or require satisfaction of
such conditions in accordance with the terms hereof or be entitled to
assume that any of the parties hereto will enforce such conditions and
obligations and no other person shall, under any circumstances, be
beneficiary of such conditions.
20. No Assignment by Borrower. The Interested Parties shall not assign this
Repayment Agreement or any of their respective rights or obligations
under the Repayment Agreement without prior written consent of the
Bank, and any attempted assignment made without such consent shall be
void and of no effect.
21. Severability. In the event that any one or more of the provisions
contained in this Repayment Agreement shall for any reason be held to
be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other
25
<PAGE> 26
provision of the Repayment Agreement, and the Repayment Agreement shall
be construed as if such invalid or unenforceable provisions had never
been contained in this Repayment Agreement.
22. Further Assurances. The Interested Parties shall execute any and all
agreements, instruments, and documents, and shall take such further
actions as may be necessary to fully effectuate this Repayment
Agreement.
23. Facsimile. This Repayment Agreement together with any document
contemplated to be executed in connection herewith may be executed by
facsimile signature, and any such facsimile document shall be deemed to
be of the same force and effect as a manually signed original.
24. Counterparts, Governing Law, and Miscellaneous. This Repayment
Agreement may be executed in multiple counterparts, each of which shall
contain an original, and all of which taken together shall constitute
one and the same agreement; provided, however, that the Repayment
Agreement shall be of no force or effect until signed by all parties
hereto. This Repayment Agreement shall be construed in accordance with
and governed by the laws of the State of Ohio. Courts within the State
of Ohio shall have jurisdiction over any and all disputes arising under
or pertaining to this Repayment Agreement and venue in any such dispute
shall lie exclusively in Cuyahoga County, Ohio.
<TABLE>
<S> <C>
Address: NEMATRON CORPORATION
5840 Interface Drive By: /s/ David P. Gienapp
Ann Arbor, Michigan 48103 --------------------------------------------
Its: Vice President - Finance and Administration
-------------------------------------------
Address: NEMASOFT, INC., Guarantor
5840 Interface Drive By: s/ David P. Gienapp
Ann Arbor, Michigan 48103 --------------------------------------------
Its: Chief Financial Officer
-------------------------------------------
Address: KEYBANK NATIONAL ASSOCIATION
202 S. Michigan Street By: s/ Richard Rozenboom
P.O. Box 6 --------------------------------------------
South Bend, Indiana 46601 Its: Vice President
-------------------------------------------
</TABLE>
26
<PAGE> 27
LIST OF EXHIBITS
Exhibit A Liens and Encumbrances
Exhibit B Amended and Restated Revolving Credit Note
Exhibit C Amended and Restated Term Note
Exhibit D Amendment to Mortgage
Exhibit E Master Agreement Cash Management Services
Exhibit F-1 to F-4 Assignment of Patents and Trademarks
Exhibit G Landlord's Waiver and Estoppel
27
<PAGE> 1
EXHIBIT 4.13
AMENDED AND RESTATED REVOLVING CREDIT NOTE
$6,000,000.00 Dated as of September 28, 1998
Ann Arbor, Michigan
On October 31, 1998, for value received, the undersigned (herein called
the "Borrower") promises to pay to the order of KEYBANK NATIONAL ASSOCIATION, a
national banking association (herein called the "Bank"), at its main office, in
good and collected funds, the principal sum of Six Million and 00/100 Dollars
($6,000,000.00) with interest from the date of the Note until October 31, 1998,
at a floating rate per annum of one-quarter of one percent (.25%) in excess of
the Prime Rate of the Bank in effect from time to time, but not to exceed the
maximum rate permitted by law, payable October 1, 1998, and at maturity,
computed on the principal sum hereof remaining from time to time unpaid. In the
event of any change in the Prime Rate of Bank, the interest rate on this Amended
Note shall be immediately and correspondingly adjusted, but in no event shall
the interest rate on this Amended Note prior to maturity exceed the highest rate
permitted by law on the date of this Amended Note. The Prime Rate of Bank is
defined as that rate established from time to time by Bank as Bank's Prime Rate,
whether or not such rate is publicly announced; the Prime Rate may not be the
lowest interest rate charged by Bank for commercial or other extensions of
credit. After maturity or the occurrence of an Event of Default, the unpaid
principal and accrued interest on this Amended Note shall, until paid, bear
interest at a rate per annum equal to the greater of four percent (4%) in excess
of the Prime Rate, which rate shall be immediately and correspondingly adjusted
with each change in the Prime Rate, or sixteen percent (16%); but in no event
shall the interest rate on this Amended Note after maturity exceed the highest
rate permitted by law on the date of maturity.
Prior to maturity, if any payment of principal or interest is not paid
when due, Borrower shall pay Bank a late fee equal to the greater of ten percent
(10%) of the amount of such payment or twenty five dollars ($25).
Borrower may prepay this Amended Note, in whole or in part, without the
payment of any premium, but all such payments shall be applied to the principal
installments of this Amended Note in the inverse order of their maturity.
This Amended Note is issued pursuant to a certain Repayment Agreement
executed on even date herewith by and between Borrower and Bank, among others
(said Repayment Agreement as it may be from time to time amended, restated or
otherwise modified being herein called the "Repayment Agreement") to which
reference is hereby made for a statement of the rights of Bank and the duties
and obligations of Borrower in relation thereto, but neither this reference to
the Repayment Agreement nor any provision thereof shall affect or impair the
absolute and unconditional obligation of Borrower to pay the principal of and
interest on this Amended Note when due. This Amended Note amends and restates in
its entirety the Revolving Credit Note dated February 12, 1997 in the principal
amount of $6,000,000.00, including any
1
<PAGE> 2
amendments or modifications thereto, and referred to in the Repayment Agreement
and does not represent evidence of new indebtedness, or repayment of any
indebtedness. The notes which formerly evidenced the debt now evidenced by this
Amended Note shall remain in full force and effect only for the purpose of
evidencing any amounts due thereunder which for any reason, in fact or in law,
that do not become obligations of the Borrower under this Amended Note as
intended by the Borrower. Capitalized terms used herein and not defined shall
have the meaning given to them in the Repayment Agreement. The headings of
paragraphs of the Repayment Agreement and the titles of any and all documents
executed in conjunction therewith, including this Amended Note, are for the
convenience of reference only, and are not to be considered as limiting or
otherwise affecting any of the terms hereof or thereof.
This Amended Note and every other obligation, indebtedness, and
liability of Borrower to Bank, whether joint or several, absolute or contingent,
due or to become due, and whether heretofore or hereafter contracted or existing
and in whatsoever manner acquired by or accruing to Bank, whether before or
after maturity and whether the same may have been or shall be participated, in
whole or in part to others, and including all amendments, extensions, and
renewals thereof (all herein called "Obligations"), are secured as set forth in
the Repayment Agreement.
Borrower represents and warrants that it is a duly-organized and
existing corporation under the laws of the State of Michigan that the execution
and delivery hereof have been duly authorized by appropriate corporate action,
that there is no prohibition either in law, in its articles of incorporation,
by-laws, or regulations, or in any agreement to which it is a party which in any
way restricts or prevents the execution of this Amended Note and performance of
the Obligations herein in any respect, and that this Amended Note has been duly
executed and is a valid and binding Obligation of Borrower.
Borrower shall be in default hereunder if there shall occur an Event of
Default as set forth in the Repayment Agreement. If there shall occur any Event
of Default, Bank, by notice given to Borrower (only if and to the extent such
notice is required by the Repayment Agreement), may declare the unpaid principal
of and accrued interest owing upon this Amended Note and all other Obligations
to be immediately due and payable and upon any such declaration such principal
and interest shall become and be forthwith due and payable without any further
notice, presentment, or demand of any kind, all of which are hereby expressly
waived by Borrower. Further as provided in the Repayment Agreement for specific
Events of Default, the unpaid principal and accrued interest owing upon this
Amended Note and all other Obligations shall become and be forthwith due and
payable without declaration, notice, presentment, or demand of any kind, all of
which are hereby expressly waived by Borrower.
Wherever used in this Amended Note, the term "Bank" shall include any
holder or assignee of this Amended Note. Except for notice expressly required by
the Repayment Agreement, if any, Borrower and each endorser, guarantor, and
surety hereof waives presentment, demand for payment, protest, notice of
protest, and notice of nonpayment, and further agrees and consents that, without
notice and without affecting their liability hereon, the holder hereof at any
time or times is authorized to: (a) correct patent errors and fill blanks
herein; (b) cause or permit the signature of one or more additional makers,
co-makers, sureties, guarantors and/or endorsers to be added hereto; (c) extend
the time of payment of this Amended Note in whole or in part; (d) sell,
exchange, surrender, substitute or otherwise deal with any
2
<PAGE> 3
collateral now or hereafter securing this Amended Note; (e) add or release any
other person primarily or secondarily liable on this Amended Note; and (f)
modify, waive, supplement or otherwise change the terms of any security
agreement pertaining to this Amended Note.
Borrower understands and agrees that this Amended Note is subject to
and shall be construed according to the laws of the State of Ohio, without
regard to principles of conflict of laws. Bank's rights, remedies, and powers
that are expressly specified in this Amended Note are in addition to Bank's
rights, remedies, and powers under any other instrument or agreement or under
applicable law.
Any deposits or sums at any time credited by or due from Bank to
Borrower and any securities or other personal property of Borrower in the
possession of Bank may at all times be held and treated as additional security
for the payment of the Obligations. After the occurrence of any Event of
Default, Bank may apply or set off such deposits or other sums against the
Obligations at any time and without further notice.
Any waiver of Bank's rights hereunder must be in writing and signed by
Bank. A waiver on any one or more occasions shall not be construed as a bar to
or waiver of any such right or remedy on a future occasion, nor as the
establishment of a course of dealing with respect to such waiver(s) or any other
action or inaction of Bank referred to in this paragraph. Delay or failure by
Bank to exercise its powers, rights, or remedies, in whole or in part, shall not
be deemed a waiver of any such power, right, or remedy; no single or partial
exercise of any right, power, or remedy hereunder shall preclude the exercise of
any other right, power, or remedy. All agreements, representations, and
warranties made herein will survive the making of the loan evidenced by this
Amended Note and will bind and inure to the benefit of Borrower and its
successors and assigns and Bank and its successors and assigns.
Any notice required or authorized to be given to Borrower pursuant to
the provisions of this Amended Note shall be sufficiently given when such notice
is either delivered, sent by telegram, or mailed (deposited for delivery,
postage prepaid, by U.S. mail) to Borrower either at the address set forth below
(as modified by any change therein which Borrower has supplied in writing to
Bank) or at any other address at which Bank customarily communicates with
Borrower.
If any provision of this Amended Note, or any covenant, stipulation,
obligation, agreement, act, or action, or part thereof made, assumed, entered
into, or taken hereunder or any application thereof, is for any reason held to
be illegal or invalid, such illegality or invalidity shall not affect any other
provision or any other covenant, stipulation, obligation, agreement, act, or
action or part thereof, made, assumed, entered into, or taken, each of which
shall be construed and enforced as if such illegal or invalid portion were not
contained herein. Such illegality or invalidity of any application of any
provision hereof shall not affect any legal and valid application thereof, and
each such provision, covenant, stipulation, obligation, agreement, act, or
action, or part shall be deemed to be effective, operative, made, entered into,
or taken in the manner and to the full extent permitted by law.
The relationship between Borrower and Bank with respect to this Amended
Note and any writing executed or delivered in connection herewith is and shall
be solely that of debtor and
3
<PAGE> 4
creditor, respectively, and Bank has no fiduciary obligation toward Borrower
with respect to any such document or the transactions contemplated thereby.
This Amended Note and any agreement, document or instrument referred to
herein or executed between Bank and Borrower on or as of the date hereof
integrate all of the terms and conditions mentioned herein or incidental hereto
and supersede all oral representations and negotiations and prior writings with
respect to the subject matter hereof.
Borrower agrees to promptly reimburse Bank for all costs and expenses,
including attorney's fees of Bank's in-house or outside counsel incurred by Bank
in connection with any restructurings of this Amended Note or any documents
executed and delivered in connection herewith and in connection with any
collection proceedings as a result of nonpayment of this Amended Note, as and
when due and payable.
Borrower has received consideration which is the reasonable equivalent
value of the obligations and liabilities that Borrower has incurred to Bank.
Borrower is not insolvent as defined in any applicable state or federal statute,
nor will Borrower be rendered insolvent by the execution and delivery of this
Amended Note to Bank. Borrower is not engaged or about to engage in any business
or transaction for which the assets retained by it shall be an unreasonably
small capital, taking into consideration the obligations to Bank incurred
hereunder. Borrower does not intend to, nor does it believe that it will, incur
debts beyond its ability to pay them as they mature.
Borrower, to the extent permitted by law, waives any right to have a
jury participate in resolving any dispute, whether sounding in contract, tort,
or otherwise, between Bank and Borrower arising out of, in connection with,
related to, or incidental to the relationship established between Borrower and
Bank in connection with this Amended Note or any other agreement, instrument or
document executed or delivered in connection therewith or the transactions
related thereto. This waiver shall not in any way affect, waive, limit, amend or
modify Bank's ability to pursue remedies pursuant to any confession of judgment
or cognovit provision contained in this Amended Note, or any other agreement,
instrument or document related thereto.
Address: NEMATRON CORPORATION
5840 Interface Drive By: /s/ David P. Gienapp
Ann Arbor, Michigan 48103 -----------------------------------------------
Title: Vice President - Finance and Administration
--------------------------------------------
4
<PAGE> 1
EXHIBIT 4.14
AMENDED AND RESTATED TERM NOTE
$1,230,000.00 Dated as of September 28, 1998
Ann Arbor, Michigan
For value received, the undersigned (herein called "Borrower") promises
to pay to the order of KEYBANK NATIONAL ASSOCIATION, Cleveland, Ohio (herein
called "Bank"), in good and collected funds, at its main office, the principal
sum of One Million Two Hundred Thirty Thousand and 00/100 Dollars
($1,230,000.00) in one (1) monthly installment of Thirty Thousand and 00/100
Dollars ($30,000.00) on October 1, 1998, plus one (1) final installment on
October 31, 1998 of any remaining principal balance shall be due and payable,
together with interest upon any unpaid principal balance computed upon a 360 day
basis and payable on each date designated above for principal payments and at
maturity, at a floating rate per annum of one-half of one percent (.5%) in
excess of the Prime Rate of Bank. In the event of any change in the Prime Rate
of Bank, the interest rate on this Amended Note shall be immediately and
correspondingly adjusted, but in no event shall the interest rate on this
Amended Note prior to maturity exceed the highest rate permitted by law on the
date of this Amended Note. The Prime Rate of Bank is defined as that rate
established from time to time by Bank as Bank's Prime Rate, whether or not such
rate is publicly announced; the Prime Rate may not be the lowest interest rate
charged by Bank for commercial or other extensions of credit. After maturity or
the occurrence of an Event of Default, the unpaid principal and accrued interest
on this Amended Note shall, until paid, bear interest at a rate per annum equal
to the greater of four percent (4%) in excess of the Prime Rate, which rate
shall be immediately and correspondingly adjusted with each change in the Prime
Rate, or sixteen percent (16%); but in no event shall the interest rate on this
Amended Note after maturity exceed the highest rate permitted by law on the date
of maturity.
Prior to maturity, if any payment of principal or interest is not paid
when due, Borrower shall pay Bank a late fee equal to the greater of ten percent
(10%) of the amount of such payment or twenty five dollars ($25).
Borrower may prepay this Amended Note, in whole or in part, without the
payment of any premium, but all such payments shall be applied to the principal
installments of this Amended Note in the inverse order of their maturity.
This Amended Note is issued pursuant to a certain Repayment Agreement
executed on even date herewith by and between Borrower and Bank, among others
(said Repayment Agreement as it may be from time to time amended, restated or
otherwise modified being herein called the "Repayment Agreement") to which
reference is hereby made for a statement of the rights of Bank and the duties
and obligations of Borrower in relation thereto, but neither this reference to
the Repayment Agreement nor any provision thereof shall affect or impair the
absolute and unconditional obligation of Borrower to pay the principal of and
interest on this Amended Note when due. This Amended Note amends and restates in
its entirety the Term Note dated February 12, 1997 in the principal amount of
$1,800,000.00, including any amendments or modifications thereto, and referred
to in the Repayment Agreement and does not represent
5
<PAGE> 2
evidence of new indebtedness, or repayment of any indebtedness. The notes which
formerly evidenced the debt now evidenced by this Amended Note shall remain in
full force and effect only for the purpose of evidencing any amounts due
thereunder which for any reason, in fact or in law, that do not become
obligations of the Borrower under this Amended Note as intended by the Borrower.
Capitalized terms used herein and not defined shall have the meaning given to
them in the Repayment Agreement. The headings of paragraphs of the Repayment
Agreement and the titles of any and all documents executed in conjunction
therewith, including this Amended Note, are for the convenience of reference
only, and are not to be considered as limiting or otherwise affecting any of the
terms hereof or thereof.
This Amended Note and every other obligation, indebtedness, and
liability of Borrower to Bank, whether joint or several, absolute or contingent,
due or to become due, and whether heretofore or hereafter contracted or existing
and in whatsoever manner acquired by or accruing to Bank, whether before or
after maturity and whether the same may have been or shall be participated, in
whole or in part to others, and including all amendments, extensions, and
renewals thereof (all herein called "Obligations"), are secured as set forth in
the Repayment Agreement.
Borrower represents and warrants that it is a duly-organized and
existing corporation under the laws of the State of Michigan that the execution
and delivery hereof have been duly authorized by appropriate corporate action,
that there is no prohibition either in law, in its articles of incorporation,
by-laws, or regulations, or in any agreement to which it is a party which in any
way restricts or prevents the execution of this Amended Note and performance of
the Obligations herein in any respect, and that this Amended Note has been duly
executed and is a valid and binding Obligation of Borrower.
Borrower shall be in default hereunder if there shall occur an Event of
Default as set forth in the Repayment Agreement. If there shall occur any Event
of Default, Bank, by notice given to Borrower (only if and to the extent such
notice is required by the Repayment Agreement), may declare the unpaid principal
of and accrued interest owing upon this Amended Note and all other Obligations
to be immediately due and payable and upon any such declaration such principal
and interest shall become and be forthwith due and payable without any further
notice, presentment, or demand of any kind, all of which are hereby expressly
waived by Borrower. Further as provided in the Repayment Agreement for specific
Events of Default, the unpaid principal and accrued interest owing upon this
Amended Note and all other Obligations shall become and be forthwith due and
payable without declaration, notice, presentment, or demand of any kind, all of
which are hereby expressly waived by Borrower.
Wherever used in this Amended Note, the term "Bank" shall include any
holder or assignee of this Amended Note. Except for notice expressly required by
the Repayment Agreement, if any, Borrower and each endorser, guarantor, and
surety hereof waives presentment, demand for payment, protest, notice of
protest, and notice of nonpayment, and further agrees and consents that, without
notice and without affecting their liability hereon, the holder hereof at any
time or times is authorized to: (a) correct patent errors and fill blanks
herein; (b) cause or permit the signature of one or more additional makers,
co-makers, sureties, guarantors and/or endorsers to be added hereto; (c) extend
the time of payment of this Amended Note in whole or in part; (d) sell,
exchange, surrender, substitute or otherwise deal with any collateral now or
hereafter securing this Amended Note; (e) add or release any other person
6
<PAGE> 3
primarily or secondarily liable on this Amended Note; and (f) modify, waive,
supplement or otherwise change the terms of any security agreement pertaining to
this Amended Note.
Borrower understands and agrees that this Amended Note is subject to
and shall be construed according to the laws of the State of Ohio, without
regard to principles of conflict of laws. Bank's rights, remedies, and powers
that are expressly specified in this Amended Note are in addition to Bank's
rights, remedies, and powers under any other instrument or agreement or under
applicable law.
Any deposits or sums at any time credited by or due from Bank to
Borrower and any securities or other personal property of Borrower in the
possession of Bank may at all times be held and treated as additional security
for the payment of the Obligations. After the occurrence of any Event of
Default, Bank may apply or set off such deposits or other sums against the
Obligations at any time and without further notice.
Any waiver of Bank's rights hereunder must be in writing and signed by
Bank. A waiver on any one or more occasions shall not be construed as a bar to
or waiver of any such right or remedy on a future occasion, nor as the
establishment of a course of dealing with respect to such waiver(s) or any other
action or inaction of Bank referred to in this paragraph. Delay or failure by
Bank to exercise its powers, rights, or remedies, in whole or in part, shall not
be deemed a waiver of any such power, right, or remedy; no single or partial
exercise of any right, power, or remedy hereunder shall preclude the exercise of
any other right, power, or remedy. All agreements, representations, and
warranties made herein will survive the making of the loan evidenced by this
Amended Note and will bind and inure to the benefit of Borrower and its
successors and assigns and Bank and its successors and assigns.
Any notice required or authorized to be given to Borrower pursuant to
the provisions of this Amended Note shall be sufficiently given when such notice
is either delivered, sent by telegram, or mailed (deposited for delivery,
postage prepaid, by U.S. mail) to Borrower either at the address set forth below
(as modified by any change therein which Borrower has supplied in writing to
Bank) or at any other address at which Bank customarily communicates with
Borrower.
If any provision of this Amended Note, or any covenant, stipulation,
obligation, agreement, act, or action, or part thereof made, assumed, entered
into, or taken hereunder or any application thereof, is for any reason held to
be illegal or invalid, such illegality or invalidity shall not affect any other
provision or any other covenant, stipulation, obligation, agreement, act, or
action or part thereof, made, assumed, entered into, or taken, each of which
shall be construed and enforced as if such illegal or invalid portion were not
contained herein. Such illegality or invalidity of any application of any
provision hereof shall not affect any legal and valid application thereof, and
each such provision, covenant, stipulation, obligation, agreement, act, or
action, or part shall be deemed to be effective, operative, made, entered into,
or taken in the manner and to the full extent permitted by law.
The relationship between Borrower and Bank with respect to this Amended
Note and any writing executed or delivered in connection herewith is and shall
be solely that of debtor and creditor, respectively, and Bank has no fiduciary
obligation toward Borrower with respect to any such document or the transactions
contemplated thereby.
7
<PAGE> 4
This Amended Note and any agreement, document or instrument referred to
herein or executed between Bank and Borrower on or as of the date hereof
integrate all of the terms and conditions mentioned herein or incidental hereto
and supersede all oral representations and negotiations and prior writings with
respect to the subject matter hereof.
Borrower agrees to promptly reimburse Bank for all costs and expenses,
including attorney's fees of Bank's in-house or outside counsel incurred by Bank
in connection with any restructurings of this Amended Note or any documents
executed and delivered in connection herewith and in connection with any
collection proceedings as a result of nonpayment of this Amended Note, as and
when due and payable.
Borrower has received consideration which is the reasonable equivalent
value of the obligations and liabilities that Borrower has incurred to Bank.
Borrower is not insolvent as defined in any applicable state or federal statute,
nor will Borrower be rendered insolvent by the execution and delivery of this
Amended Note to Bank. Borrower is not engaged or about to engage in any business
or transaction for which the assets retained by it shall be an unreasonably
small capital, taking into consideration the obligations to Bank incurred
hereunder. Borrower does not intend to, nor does it believe that it will, incur
debts beyond its ability to pay them as they mature.
Borrower, to the extent permitted by law, waives any right to have a
jury participate in resolving any dispute, whether sounding in contract, tort,
or otherwise, between Bank and Borrower arising out of, in connection with,
related to, or incidental to the relationship established between Borrower and
Bank in connection with this Amended Note or any other agreement, instrument or
document executed or delivered in connection therewith or the transactions
related thereto. This waiver shall not in any way affect, waive, limit, amend or
modify Bank's ability to pursue remedies pursuant to any confession of judgment
or cognovit provision contained in this Amended Note, or any other agreement,
instrument or document related thereto.
Address: NEMATRON CORPORATION
5840 Interface Drive By: /s/ David P. Gienapp
Ann Arbor, Michigan 48103 ------------------------------------------------
Title: Vice President - Finance and Administration
8
<PAGE> 1
EXHIBIT 4.15
FIRST AMENDMENT TO REPAYMENT AGREEMENT
AND FOURTH AMENDMENT TO LOAN AGREEMENT
This First Amendment to Repayment Agreement and Fourth Amendment to
Loan Agreement ("First Amendment") is made as of the 1st day of December, 1998,
by and among KeyBank National Association, f/k/a Society Bank, Michigan, a
national banking association located at 127 Public Square, Cleveland, Ohio 44114
("KeyBank" or "Bank"), Nematron Corporation, a Michigan corporation located at
5840 Interface Drive, Ann Arbor, Michigan 48103 ("Borrower") and NemaSoft, Inc.,
a Michigan corporation located at 5840 Interface Drive, Ann Arbor, Michigan
48103 ("Guarantor"; Borrower and Guarantor together referred to as "Interested
Parties").
RECITALS
WHEREAS, Bank and the Interested Parties executed a certain Repayment
Agreement dated as of September 28, 1998 ("Repayment Agreement"); and
WHEREAS, capitalized terms not otherwise defined herein shall have the
meanings ascribed thereto in the Repayment Agreement; and
WHEREAS, the Line of Credit terminated, and the Amended Notes matured
on October 31, 1998, and have not been repaid; and
WHEREAS, the Interested Parties have asked that Bank reactivate
Borrower's Line of Credit on the terms described herein, to enable Borrower to
obtain subordinated debt or an equity infusion of not less than One Million
Dollars ($1,000,000.00), to which request Bank has acquiesced.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and the agreements
and covenants herein, the parties agree as follows:
1. Recitals. The Recitals are incorporated herein by reference.
2. Restructure and Amendment of Loan Documents. Certain of the
Loan Documents shall be amended as follows:
i) Section 1 of the Repayment Agreement is amended by
deleting the definitions of "Amended and Restated Line Note" and
"Amended and Restated Term Note" and inserting the following in lieu
thereof:
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<PAGE> 2
"Second Line Note" shall mean the Second Amended and
Restated Revolving Credit Note referred to in subsection 3(a)
of this Repayment Agreement and attached hereto as Exhibit B.
"Second Term Note" shall mean the Second Amended and
Restated Term Note referred to in subsection 3(c) of this
Repayment Agreement and attached hereto as Exhibit C.
ii) The Repayment Agreement is amended by deeming all
references to the Amended and Restated Line Note and the Amended and
Restated Term Note to be references to the Second Line Note and the
Second Term Note, respectively.
iii) The prefatory paragraph, and subsections (a), (b), (c) and
(e) of Section 3 of the Repayment Agreement are deleted, and the
following inserted in lieu thereof:
"3. Restructure and Amendment of Loan Documents. The
Obligations evidenced by the Original Notes, as same
may have been amended and/or amended and restated
from time to time, shall be restructured pursuant to
the terms of the Second Amended and Restated
Revolving Credit Note and the Second Amended and
Restated Term Note. The Amended Notes do not
constitute repayment or cancellation of all or any
portion of the Indebtedness evidenced by the Original
Notes. The Original Notes, and any amendment and/or
restatement thereof, shall remain in full force and
effect only for the purpose of evidencing any amounts
due in connection with the Original Notes and any of
the Loan Documents which for any reason in fact or in
law, do not become Obligations of Borrower under the
Amended Notes, as intended by the parties hereto. In
connection with the restructure of the Obligations,
the following amendments are hereby made to the Loan
Agreement:
a) Subsection 1.1.1 of the Loan Agreement is
deleted in its entirety, and the following inserted
in lieu thereof:
`1.1.1 Upon the request of Borrower,
made at any time or from time to time
between September 28, 1998 and October 31,
1998, inclusive, and between December 1,
1998 and January 30, 1999, inclusive, and so
long as no Event of Default under this
Agreement has occurred or is continuing,
Bank shall make cash advances to Borrower in
an amount up to:
(a) eighty percent (80%) of the
aggregate outstanding amount of
Eligible Domestic Accounts;
PLUS
(b) at Borrower's option, eighty percent
(80%) of the aggregate outstanding
amount of Eligible Foreign Accounts;
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<PAGE> 3
PLUS
(c) thirty five percent (35%) of the
aggregate sum (not to exceed
$2,500,000) of (i) Eligible Raw
Inventory (valued at the lower of
Borrower's and NemaSoft's cost, or
market) and (ii) Eligible Finished
Inventory (valued at Borrower's and
NemaSoft's cost of production):
PLUS
(d) the Permitted Overadvance;
LESS
(e) the aggregate outstanding amount of
any issued and outstanding Letters
of Credit;
PROVIDED, HOWEVER, that in no event shall
the aggregate amount of outstanding cash
advances made pursuant to this Section 1.1.1
("BORROWING FORMULA") be, at any time,
greater than the sum of Five Million and
00/100 Dollars ($5,000,000.00). The amount
outstanding under the Line of Credit shall
be evidenced by a Second Amended and
Restated Revolving Credit Note dated as of
December 1, 1998 ("Note"). The terms of the
Note, and all renewals, modifications and
amendments thereto, are hereby incorporated
herein specifically by reference. Subject to
the foregoing limitations Borrower may
borrow, repay and reborrow under the Line of
Credit. During the period between October
31, 1998 and December 1, 1998, the Line of
Credit shall be suspended, and all funds
received by Bank through the mechanism
established by the Cash Collateral Agreement
executed in connection with the Repayment
Agreement may be, at Bank's option, applied
to reduce the indebtedness evidenced by the
Note.'
b) The Loan Agreement is amended by renumbering
existing subsection 1.2.8 as subsection
1.2.9, and adding new subsections 1.2.8 and
1.2.10 as follows:
`1.2.8 "Permitted Overadvance" means
an amount of up to (i) Seven Hundred
Fifty-Three Thousand Three Hundred
Forty-Five Dollars ($753,345) during the
period between September 28, 1998 and
October 31, 1998, (ii) Zero Dollars ($0)
during the period October 31, 1998 through
November 30, 1998, and (iii) One Million One
Hundred Thousand Dollars ($1,100,000) during
the period between December 1, 1998 and
January 31, 1999.
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<PAGE> 4
1.2.10 "Repayment Agreement" means an
agreement, so called, among Borrower,
NemaSoft and Bank dated September 28, 1998,
as amended from time to time.'
c) Subsection 1.7 of the Loan Agreement is
deleted and the following inserted in lieu
thereof:
`1.7 Term Loan. Bank agrees to lend
Borrower the sum of One Million One Hundred
Seventy Thousand and 00/100 Dollars
($1,170,000.00) ("Term Loan"). The Term Loan
shall be evidenced by a Second Amended and
Restated Term Note dated as of December 1,
1998 ("Term Note") maturing on January 31,
1999, and containing other terms as set
forth therein.'
e) Article VI of the Loan Agreement is amended
by adding new subsections 6.9, 6.10, 6.11,
6.12 and 6.13 as follows:
`6.9 An Event of Default shall occur
under the Repayment Agreement, as
amended from time to time.
6.10 Borrower shall fail to obtain an
infusion of cash in the form of
convertible debt subordinated (in
form and substance acceptable to
Bank) to the repayment of all
indebtedness of Borrower to Bank, or
equity, of not less than One Million
Dollars ($1,000,000) between
November 26, 1998 and December
1, 1998.
6.11 Borrower shall fail to enter into an
arrangement for financing a
percentage of certain of Borrower's
purchase orders with a third party
on terms acceptable to Bank, and in
connection therewith, Borrower shall
have executed such amendments to the
Loan Documents as Bank shall
request, all by no later than
December 15, 1998.
6.12 Subsection 6.4 hereof
notwithstanding, Borrower shall fail
to comply in all respects with
subsections 3.5.4 and/or 3.5.10
hereof.
6.13 There shall occur a material adverse
change in Borrower's or NemaSoft's
financial condition or prospects,
from that disclosed in writing to
Bank prior to December 1, 1998, all
as determined by Bank in the
exercise of its reasonable business
judgment.'"
iv) Section 3 of the Repayment Agreement is
further amended by adding new subsections (f), (g) and (h) as follows:
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<PAGE> 5
"f) Subsection 3.5.4 of the Loan Agreement is
deleted, and the following inserted in lieu
thereof:
` 3.5.4 within fifteen (15) days
after the last day of each month between
September 30, 1996 and November 30, 1998,
and on a daily basis thereafter, a Borrowing
Base Certificate, the form of which is
acceptable in the sole and absolute
discretion of the Bank, signed by an officer
of Borrower and NemaSoft certifying to its
correctness;'
g) Subsection 3.5.10 of the Loan Agreement is
renumbered as 3.5.11, and a new subsection
3.5.10 is inserted as follows:
`3.5.10 by the second business day of each week, a
rolling twelve week projection, acceptable
to Bank in the exercise of its reasonable
business judgment, of anticipated cash
receipts and disbursements, and showing that
Borrower will at all times be in compliance
with the Borrowing Formula, as well as an
actual statement of cash receipts and
disbursements for the immediately preceding
week.'
h) The Loan Agreement is amended by deleting
the monetary reference "$6,000,000" (whether
such reference is expressed numerically or
is written out) wherever it occurs, and
inserting in lieu thereof a monetary
reference of "$5,000,000"."
v) The Repayment Agreement is hereby
amended by deleting subsection 5(b) in its entirety and inserting the
following in lieu thereof:
"b) Amendment to Mortgage. On or before December
1, 1998, Borrower shall execute and deliver
to Bank a Second Amendment to Mortgage in
the form of Exhibit D attached hereto."
vi) The Repayment Agreement is hereby
amended by adding a new subsection 5(i) as follows:
"i) Subordination Agreements. On or before 12:00
p.m. on December 2, 1998, J. Eric May, James
A. Nichols, Globus Growth Group and Gregory
J. Schwartz & Co. and shall execute and
deliver to Bank Subordination Agreements in
the form of Exhibits I-1 through I-4
attached hereto."
vii) The Repayment Agreement is amended
by deleting the prefatory paragraph of Section 17, and inserting in
lieu thereof the following:
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<PAGE> 6
Notices. Any notice, demand or communication required
or permitted to be given by any provision of
this Repayment Agreement will be in writing
and will be deemed to have been given when
delivered personally or by facsimile,
receipt confirmed, to the party designated
to receive such notice, or on the date
following the day sent by overnight courier,
or on the third (3rd) business day after the
same is sent by certified mail, postage and
charges prepaid, directed to the following
addresses or to such other or additional
addresses as any party might designate by
written notice to the other party; provided,
however, that in the event that Bank
determines to cease making advances under
Borrower's line of credit, Bank shall
undertake to promptly so notify Borrower by
both facsimile and overnight courier, though
Bank's determination to cease providing
advances shall be effective when made, and
shall not be dependent upon Borrower's
receipt of notice.
viii) The Repayment Agreement is amended by deleting
Exhibits B, C and D, and replacing them with Exhibits B, C and D
in the form of Annexes 1 through 3, respectively, attached
hereto.
ix) The Repayment Agreement is amended by adding new
Exhibits I-1 through I-4 in the form of Annex 4-A through 4-D
attached hereto.
3. Effective Date. The provisions of this First Amendment shall be
effective on December 1, 1998 ("Effective Date"), provided that (i) a fully
executed copy of this First Amendment, the Second Amended and Restated Revolving
Credit Note, the Second Amended and Restated Term Note, the Second Amendment to
Mortgage, and the four (4) Subordination Agreements are delivered to Bank on or
before 12:00 p.m. on December 2, 1998, and (ii) that all accrued interest on the
Amended and Restated Term Note dated September 28, 1998, is paid on December 1,
1998.
4. Loan Documents. Any reference in any of the Loan Documents to the
Repayment Agreement shall, from and after the Effective Date, be deemed to refer
to the Repayment Agreement as modified by this First Amendment. Any and all
references to the Amended Notes in the Repayment Agreement, the Loan Documents
and this First Amendment shall hereafter refer to the Amended Notes in the forms
of the new Exhibits C and D, copies of which are attached hereto as Annexes 1
and 2.
5. Conflicting Terms; No Other Modification. To the extent that any
of the terms and conditions of this First Amendment are inconsistent with the
terms of the Repayment Agreement, the conditions of this First Amendment shall
prevail. Otherwise, unless expressly modified or superseded herein, all of the
terms and conditions of the Repayment Agreement are ratified and confirmed and
shall remain unaffected and in full force and effect.
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<PAGE> 7
6. Course of Dealing. The parties hereto recognize that Borrower has
not fully complied with the terms of the Loan Documents. No course of dealing
between the parties is established by virtue of Borrower's non-compliance
therewith and Bank's failure exercise its legal rights responsive thereto.
Interested Parties understand that the Loan Documents will be strictly enforced
going forward, and that Bank's failure to insist on strict performance to date
shall not be interposed as a defense to Bank's exercise of its legal rights, nor
shall it constitute a waiver of any thereof.
7. Release. Effective as of the date of the delivery of a fully
executed copy or original of this First Amendment, the Interested Parties
jointly and severally agree to release and hereby do release and discharge,
Bank, its shareholders, agents, servants, employees, directors, officers,
attorneys, affiliates, subsidiaries, successors and assigns and all persons,
firms, corporations, and organizations acting on their behalf ("Bank Parties")
of and from all damages, losses, claims, demands, liabilities, obligations,
actions and causes of action whatsoever that each Interested Party has or claims
to have against any Bank Party as of the date hereof and whether known or
unknown at the time of this release, and of every nature and extent whatsoever
on account of or in any way, directly or indirectly, touching, concerning,
arising out of or founded upon the Loan Documents, or the relationship
respecting any agreement between any Interested Party and any Bank Party.
8. Third-Party Beneficiaries/Entire Agreement. All the conditions
and obligations hereunder are imposed solely and exclusively for the benefit of
the parties hereto and their successors and assigns. No other person or entity
shall obtain any interest herein or require satisfaction of such conditions in
accordance with the terms hereof or be entitled to assume that any of the
parties hereto will enforce such conditions and obligations and no other person
shall, under any circumstances, be a beneficiary of such conditions. This First
Amendment embodies the entire agreement and understanding between the parties
hereto with respect to the subject matter of this First Amendment and supersedes
all prior and contemporaneous negotiations, agreements and understandings
relative to such subject matter.
9. Binding Effect; Governing Law. This First Amendment shall bind
and inure to the benefit of the parties hereto and their respective successors
and assigns and shall be governed by and construed in accordance with the laws
of the State of Michigan without regard to principles of conflict of laws.
10. Counterparts. This First Amendment may be executed in any number
of counterparts, each of which, when so executed and delivered, shall be an
original and all of which counterparts together shall constitute one and the
same fully executed instrument.
11. Consent and Reaffirmation of Guaranty. Guarantor, being guarantor
of the Obligations of Borrower pursuant to a Continuing Guaranty dated October
6, 1995, joins in and consents to the within First Amendment and agrees that the
provisions of such guaranty are ratified and confirmed and that the guaranty
remains in full force and effect.
12. Corporate Authority. Borrower and Guarantor hereby represent and
warrant to Bank that (a) Borrower and Guarantor have the legal power and
authority to execute and deliver this First Amendment; (b) the officials
executing this First Amendment have been duly authorized to execute and deliver
the same and bind Borrower and Guarantor with respect to the
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<PAGE> 8
provisions hereof; (c) the execution and delivery hereof by Borrower and
Guarantor and the performance and observance by Borrower and Guarantor of the
provisions hereof do not violate or conflict with the organizational agreements
of Borrower or Guarantor or any law applicable to Borrower or Guarantor or
result in a breach of any provision of or constitute a default under any other
agreement, instrument or document binding upon or enforceable against Borrower
or Guarantor; (d) this First Amendment constitutes a valid and binding
obligation of Borrower and Guarantor in every respect, enforceable in accordance
with its terms.
IN WITNESS WHEREOF, Interested Parties and Bank have caused this First
Amendment to be executed by their duly authorized officers as of the date first
written above.
Address: NEMATRON CORPORATION
5840 Interface Drive By: /s/ Matthew S. Galvez
Ann Arbor, Michigan 48103 ----------------------------
Its:President
----------------------------
Address: NEMASOFT, INC., Guarantor
5840 Interface Drive By: /s/ David P. Gienapp
Ann Arbor, Michigan 48103 ----------------------------
ITS: SECRETARY
----------------------------
Address: KEYBANK NATIONAL ASSOCIATION
202 S. Michigan Street By: /s/ Nancy Terrill
P.O. Box 6 ----------------------------
South Bend, Indiana 46601 Its: Senior vice President
----------------------------
EXHIBITS
EXHIBIT B SECOND AMENDED AND RESTATED REVOLVING CREDIT NOTE
EXHIBIT C SECOND AMENDED AND RESTATED TERM NOTE
EXHIBIT D SECOND AMENDMENT TO MORTGAGE
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<PAGE> 1
EXHIBIT 4.16
SECOND AMENDED AND RESTATED REVOLVING CREDIT NOTE
$5,000,000.00 Dated as of December 1, 1998
Ann Arbor, Michigan
On January 31, 1999, for value received, the undersigned (herein called
the "Borrower") promises to pay to the order of KEYBANK NATIONAL ASSOCIATION, a
national banking association (herein called the "Bank"), at its main office, in
good and collected funds, the principal sum of Five Million and 00/100 Dollars
($5,000,000.00) with interest from the date of the Note until January 31, 1999,
at a floating rate per annum of two percent (2%) in excess of the Prime Rate of
the Bank in effect from time to time, but not to exceed the maximum rate
permitted by law, payable on the first day of each month, and at maturity,
computed on the principal sum hereof remaining from time to time unpaid. In the
event of any change in the Prime Rate of Bank, the interest rate on this Amended
Note shall be immediately and correspondingly adjusted, but in no event shall
the interest rate on this Amended Note prior to maturity exceed the highest rate
permitted by law on the date of this Amended Note. The Prime Rate of Bank is
defined as that rate established from time to time by Bank as Bank's Prime Rate,
whether or not such rate is publicly announced; the Prime Rate may not be the
lowest interest rate charged by Bank for commercial or other extensions of
credit. After maturity or the occurrence of an Event of Default, the unpaid
principal and accrued interest on this Amended Note shall, until paid, bear
interest at a rate per annum equal to the greater of four percent (4%) in excess
of the Prime Rate, which rate shall be immediately and correspondingly adjusted
with each change in the Prime Rate, or sixteen percent (16%); but in no event
shall the interest rate on this Amended Note after maturity exceed the highest
rate permitted by law on the date of maturity.
Borrower may prepay this Amended Note, in whole or in part, without the
payment of any premium, but all such payments shall be applied to the principal
installments of this Amended Note in the inverse order of their maturity.
This Amended Note is issued pursuant to a certain Repayment Agreement
executed on September 28, 1998, as amended by a First Amendment to Repayment
Agreement and Fourth Amendment to Loan Agreement of even date herewith by and
between Borrower and Bank, among others (said Repayment Agreement as it may be
from time to time amended, restated or otherwise modified being herein called
the "Repayment Agreement") to which reference is hereby made for a statement of
the rights of Bank and the duties and obligations of Borrower in relation
thereto, but neither this reference to the Repayment Agreement nor any provision
thereof shall affect or impair the absolute and unconditional obligation of
Borrower to pay the principal of and interest on this Amended Note when due.
This Amended Note amends and restates in its entirety the Amended and Restated
Revolving Credit Note dated September 28, 1998 in the principal amount of
$6,000,000.00, including any amendments or modifications thereto, and referred
to in the Repayment Agreement and does not represent evidence of new
indebtedness, or repayment of any indebtedness. The notes which formerly
evidenced the debt now evidenced by
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<PAGE> 2
this Amended Note shall remain in full force and effect only for the purpose of
evidencing any amounts due thereunder which for any reason, in fact or in law,
that do not become obligations of the Borrower under this Amended Note as
intended by the Borrower. Capitalized terms used herein and not defined shall
have the meaning given to them in the Repayment Agreement. The headings of
paragraphs of the Repayment Agreement and the titles of any and all documents
executed in conjunction therewith, including this Amended Note, are for the
convenience of reference only, and are not to be considered as limiting or
otherwise affecting any of the terms hereof or thereof.
This Amended Note and every other obligation, indebtedness, and
liability of Borrower to Bank, whether joint or several, absolute or contingent,
due or to become due, and whether heretofore or hereafter contracted or existing
and in whatsoever manner acquired by or accruing to Bank, whether before or
after maturity and whether the same may have been or shall be participated, in
whole or in part to others, and including all amendments, extensions, and
renewals thereof (all herein called "Obligations"), are secured as set forth in
the Repayment Agreement.
Borrower represents and warrants that it is a duly-organized and
existing corporation under the laws of the State of Michigan that the execution
and delivery hereof have been duly authorized by appropriate corporate action,
that there is no prohibition either in law, in its articles of incorporation,
by-laws, or regulations, or in any agreement to which it is a party which in any
way restricts or prevents the execution of this Amended Note and performance of
the Obligations herein in any respect, and that this Amended Note has been duly
executed and is a valid and binding Obligation of Borrower.
Borrower shall be in default hereunder if there shall occur an Event of
Default as set forth in the Repayment Agreement. If there shall occur any Event
of Default, Bank, by notice given to Borrower (only if and to the extent such
notice is required by the Repayment Agreement), may declare the unpaid principal
of and accrued interest owing upon this Amended Note and all other Obligations
to be immediately due and payable and upon any such declaration such principal
and interest shall become and be forthwith due and payable without any further
notice, presentment, or demand of any kind, all of which are hereby expressly
waived by Borrower. Further as provided in the Repayment Agreement for specific
Events of Default, the unpaid principal and accrued interest owing upon this
Amended Note and all other Obligations shall become and be forthwith due and
payable without declaration, notice, presentment, or demand of any kind, all of
which are hereby expressly waived by Borrower.
Wherever used in this Amended Note, the term "Bank" shall include any
holder or assignee of this Amended Note. Except for notice expressly required by
the Repayment Agreement, if any, Borrower and each endorser, guarantor, and
surety hereof waives presentment, demand for payment, protest, notice of
protest, and notice of nonpayment, and further agrees and consents that, without
notice and without affecting their liability hereon, the holder hereof at any
time or times is authorized to: (a) correct patent errors and fill blanks
herein; (b) cause or permit the signature of one or more additional makers,
co-makers, sureties, guarantors and/or endorsers to be added hereto; (c) extend
the time of payment of this Amended Note in whole or in part; (d) sell,
exchange, surrender, substitute or otherwise deal with any collateral now or
hereafter securing this Amended Note; (e) add or release any other person
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<PAGE> 3
primarily or secondarily liable on this Amended Note; and (f) modify, waive,
supplement or otherwise change the terms of any security agreement pertaining to
this Amended Note.
Borrower understands and agrees that this Amended Note is subject to
and shall be construed according to the laws of the State of Michigan, without
regard to principles of conflict of laws. Bank's rights, remedies, and powers
that are expressly specified in this Amended Note are in addition to Bank's
rights, remedies, and powers under any other instrument or agreement or under
applicable law.
Any deposits or sums at any time credited by or due from Bank to
Borrower and any securities or other personal property of Borrower in the
possession of Bank may at all times be held and treated as additional security
for the payment of the Obligations. After the occurrence of any Event of
Default, Bank may apply or set off such deposits or other sums against the
Obligations at any time and without further notice.
Any waiver of Bank's rights hereunder must be in writing and signed by
Bank. A waiver on any one or more occasions shall not be construed as a bar to
or waiver of any such right or remedy on a future occasion, nor as the
establishment of a course of dealing with respect to such waiver(s) or any other
action or inaction of Bank referred to in this paragraph. Delay or failure by
Bank to exercise its powers, rights, or remedies, in whole or in part, shall not
be deemed a waiver of any such power, right, or remedy; no single or partial
exercise of any right, power, or remedy hereunder shall preclude the exercise of
any other right, power, or remedy. All agreements, representations, and
warranties made herein will survive the making of the loan evidenced by this
Amended Note and will bind and inure to the benefit of Borrower and its
successors and assigns and Bank and its successors and assigns.
Any notice required or authorized to be given to Borrower pursuant to
the provisions of this Amended Note shall be sufficiently given when such notice
is either delivered, sent by telegram, or mailed (deposited for delivery,
postage prepaid, by U.S. mail) to Borrower either at the address set forth below
(as modified by any change therein which Borrower has supplied in writing to
Bank) or at any other address at which Bank customarily communicates with
Borrower.
If any provision of this Amended Note, or any covenant, stipulation,
obligation, agreement, act, or action, or part thereof made, assumed, entered
into, or taken hereunder or any application thereof, is for any reason held to
be illegal or invalid, such illegality or invalidity shall not affect any other
provision or any other covenant, stipulation, obligation, agreement, act, or
action or part thereof, made, assumed, entered into, or taken, each of which
shall be construed and enforced as if such illegal or invalid portion were not
contained herein. Such illegality or invalidity of any application of any
provision hereof shall not affect any legal and valid application thereof, and
each such provision, covenant, stipulation, obligation, agreement, act, or
action, or part shall be deemed to be effective, operative, made, entered into,
or taken in the manner and to the full extent permitted by law.
The relationship between Borrower and Bank with respect to this Amended
Note and any writing executed or delivered in connection herewith is and shall
be solely that of debtor and creditor, respectively, and Bank has no fiduciary
obligation toward Borrower with respect to any such document or the transactions
contemplated thereby.
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<PAGE> 4
This Amended Note and any agreement, document or instrument referred to
herein or executed between Bank and Borrower on or as of the date hereof
integrate all of the terms and conditions mentioned herein or incidental hereto
and supersede all oral representations and negotiations and prior writings with
respect to the subject matter hereof.
Borrower agrees to promptly reimburse Bank for all costs and expenses,
including attorney's fees of Bank's in-house or outside counsel incurred by Bank
in connection with any restructurings of this Amended Note or any documents
executed and delivered in connection herewith and in connection with any
collection proceedings as a result of nonpayment of this Amended Note, as and
when due and payable.
Borrower has received consideration which is the reasonable equivalent
value of the obligations and liabilities that Borrower has incurred to Bank.
Borrower is not insolvent as defined in any applicable state or federal statute,
nor will Borrower be rendered insolvent by the execution and delivery of this
Amended Note to Bank. Borrower is not engaged or about to engage in any business
or transaction for which the assets retained by it shall be an unreasonably
small capital, taking into consideration the obligations to Bank incurred
hereunder. Borrower does not intend to, nor does it believe that it will, incur
debts beyond its ability to pay them as they mature.
Borrower, to the extent permitted by law, waives any right to have a
jury participate in resolving any dispute, whether sounding in contract, tort,
or otherwise, between Bank and Borrower arising out of, in connection with,
related to, or incidental to the relationship established between Borrower and
Bank in connection with this Amended Note or any other agreement, instrument or
document executed or delivered in connection therewith or the transactions
related thereto.
Address: NEMATRON CORPORATION
5840 Interface Drive By: /s/ David P. Gienapp
Ann Arbor, Michigan 48103 -----------------------------------------------
Title: Vice President - Finance and Administration
-------------------------------------------
4
<PAGE> 1
EXHIBIT 4.17
SECOND AMENDED AND RESTATED TERM NOTE
$1,170,000.00 Dated as of December 1, 1998
Ann Arbor, Michigan
For value received, the undersigned (herein called "Borrower") promises
to pay to the order of KEYBANK NATIONAL ASSOCIATION, Cleveland, Ohio (herein
called "Bank"), in good and collected funds, at its main office, the principal
sum of One Million One Hundred Seventy Thousand and 00/100 Dollars
($1,170,000.00) in one (1) installment on January 31, 1999, when the entire
remaining principal balance shall be due and payable together with accrued and
unpaid interest upon any unpaid principal balance computed upon a 360 day basis.
Interest on the principal balance of this Amended Note shall be payable on the
first day of each calendar month hereafter, and at maturity, at a floating rate
per annum of two percent (2%) in excess of the Prime Rate of Bank. In the event
of any change in the Prime Rate of Bank, the interest rate on this Amended Note
shall be immediately and correspondingly adjusted, but in no event shall the
interest rate on this Amended Note prior to maturity exceed the highest rate
permitted by law on the date of this Amended Note. The Prime Rate of Bank is
defined as that rate established from time to time by Bank as Bank's Prime Rate,
whether or not such rate is publicly announced; the Prime Rate may not be the
lowest interest rate charged by Bank for commercial or other extensions of
credit. After maturity or the occurrence of an Event of Default, the unpaid
principal and accrued interest on this Amended Note shall, until paid, bear
interest at a rate per annum equal to the greater of four percent (4%) in excess
of the Prime Rate, which rate shall be immediately and correspondingly adjusted
with each change in the Prime Rate, or sixteen percent (16%); but in no event
shall the interest rate on this Amended Note after maturity exceed the highest
rate permitted by law on the date of maturity.
Borrower may prepay this Amended Note, in whole or in part, without the
payment of any premium, but all such payments shall be applied to the principal
installments of this Amended Note in the inverse order of their maturity.
This Amended Note is issued pursuant to a certain Repayment Agreement
executed on September 28, 1998, as amended by a First Amendment to Repayment
Agreement and Fourth Amendment to Loan Agreement of even date herewith by and
between Borrower and Bank, among others (said Repayment Agreement as it may be
from time to time amended, restated or otherwise modified being herein called
the "Repayment Agreement") to which reference is hereby made for a statement of
the rights of Bank and the duties and obligations of Borrower in relation
thereto, but neither this reference to the Repayment Agreement nor any provision
thereof shall affect or impair the absolute and unconditional obligation of
Borrower to pay the principal of and interest on this Amended Note when due.
This Amended Note amends and restates in its entirety the Amended and Restated
Term Note dated September 28, 1998 in the principal amount of $1,230,000.00,
including any amendments or modifications thereto, and referred to in the
Repayment Agreement and does not represent evidence of new indebtedness, or
repayment of any indebtedness. The notes which formerly evidenced the debt now
evidenced by this Amended Note shall remain in full force and effect only for
the purpose of evidencing any
1
<PAGE> 2
amounts due thereunder which for any reason, in fact or in law, that do not
become obligations of the Borrower under this Amended Note as intended by the
Borrower. Capitalized terms used herein and not defined shall have the meaning
given to them in the Repayment Agreement. The headings of paragraphs of the
Repayment Agreement and the titles of any and all documents executed in
conjunction therewith, including this Amended Note, are for the convenience of
reference only, and are not to be considered as limiting or otherwise affecting
any of the terms hereof or thereof.
This Amended Note and every other obligation, indebtedness, and
liability of Borrower to Bank, whether joint or several, absolute or contingent,
due or to become due, and whether heretofore or hereafter contracted or existing
and in whatsoever manner acquired by or accruing to Bank, whether before or
after maturity and whether the same may have been or shall be participated, in
whole or in part to others, and including all amendments, extensions, and
renewals thereof (all herein called "Obligations"), are secured as set forth in
the Repayment Agreement.
Borrower represents and warrants that it is a duly-organized and
existing corporation under the laws of the State of Michigan that the execution
and delivery hereof have been duly authorized by appropriate corporate action,
that there is no prohibition either in law, in its articles of incorporation,
by-laws, or regulations, or in any agreement to which it is a party which in any
way restricts or prevents the execution of this Amended Note and performance of
the Obligations herein in any respect, and that this Amended Note has been duly
executed and is a valid and binding Obligation of Borrower.
Borrower shall be in default hereunder if there shall occur an Event of
Default as set forth in the Repayment Agreement. If there shall occur any Event
of Default, Bank, by notice given to Borrower (only if and to the extent such
notice is required by the Repayment Agreement), may declare the unpaid principal
of and accrued interest owing upon this Amended Note and all other Obligations
to be immediately due and payable and upon any such declaration such principal
and interest shall become and be forthwith due and payable without any further
notice, presentment, or demand of any kind, all of which are hereby expressly
waived by Borrower. Further as provided in the Repayment Agreement for specific
Events of Default, the unpaid principal and accrued interest owing upon this
Amended Note and all other Obligations shall become and be forthwith due and
payable without declaration, notice, presentment, or demand of any kind, all of
which are hereby expressly waived by Borrower.
Wherever used in this Amended Note, the term "Bank" shall include any
holder or assignee of this Amended Note. Except for notice expressly required by
the Repayment Agreement, if any, Borrower and each endorser, guarantor, and
surety hereof waives presentment, demand for payment, protest, notice of
protest, and notice of nonpayment, and further agrees and consents that, without
notice and without affecting their liability hereon, the holder hereof at any
time or times is authorized to: (a) correct patent errors and fill blanks
herein; (b) cause or permit the signature of one or more additional makers,
co-makers, sureties, guarantors and/or endorsers to be added hereto; (c) extend
the time of payment of this Amended Note in whole or in part; (d) sell,
exchange, surrender, substitute or otherwise deal with any collateral now or
hereafter securing this Amended Note; (e) add or release any other person
primarily or secondarily liable on this Amended Note; and (f) modify, waive,
supplement or otherwise change the terms of any security agreement pertaining to
this Amended Note.
2
<PAGE> 3
Borrower understands and agrees that this Amended Note is subject to
and shall be construed according to the laws of the State of Michigan, without
regard to principles of conflict of laws. Bank's rights, remedies, and powers
that are expressly specified in this Amended Note are in addition to Bank's
rights, remedies, and powers under any other instrument or agreement or under
applicable law.
Any deposits or sums at any time credited by or due from Bank to
Borrower and any securities or other personal property of Borrower in the
possession of Bank may at all times be held and treated as additional security
for the payment of the Obligations. After the occurrence of any Event of
Default, Bank may apply or set off such deposits or other sums against the
Obligations at any time and without further notice.
Any waiver of Bank's rights hereunder must be in writing and signed by
Bank. A waiver on any one or more occasions shall not be construed as a bar to
or waiver of any such right or remedy on a future occasion, nor as the
establishment of a course of dealing with respect to such waiver(s) or any other
action or inaction of Bank referred to in this paragraph. Delay or failure by
Bank to exercise its powers, rights, or remedies, in whole or in part, shall not
be deemed a waiver of any such power, right, or remedy; no single or partial
exercise of any right, power, or remedy hereunder shall preclude the exercise of
any other right, power, or remedy. All agreements, representations, and
warranties made herein will survive the making of the loan evidenced by this
Amended Note and will bind and inure to the benefit of Borrower and its
successors and assigns and Bank and its successors and assigns.
Any notice required or authorized to be given to Borrower pursuant to
the provisions of this Amended Note shall be sufficiently given when such notice
is either delivered, sent by telegram, or mailed (deposited for delivery,
postage prepaid, by U.S. mail) to Borrower either at the address set forth below
(as modified by any change therein which Borrower has supplied in writing to
Bank) or at any other address at which Bank customarily communicates with
Borrower.
If any provision of this Amended Note, or any covenant, stipulation,
obligation, agreement, act, or action, or part thereof made, assumed, entered
into, or taken hereunder or any application thereof, is for any reason held to
be illegal or invalid, such illegality or invalidity shall not affect any other
provision or any other covenant, stipulation, obligation, agreement, act, or
action or part thereof, made, assumed, entered into, or taken, each of which
shall be construed and enforced as if such illegal or invalid portion were not
contained herein. Such illegality or invalidity of any application of any
provision hereof shall not affect any legal and valid application thereof, and
each such provision, covenant, stipulation, obligation, agreement, act, or
action, or part shall be deemed to be effective, operative, made, entered into,
or taken in the manner and to the full extent permitted by law.
The relationship between Borrower and Bank with respect to this Amended
Note and any writing executed or delivered in connection herewith is and shall
be solely that of debtor and creditor, respectively, and Bank has no fiduciary
obligation toward Borrower with respect to any such document or the transactions
contemplated thereby.
3
<PAGE> 4
This Amended Note and any agreement, document or instrument referred to
herein or executed between Bank and Borrower on or as of the date hereof
integrate all of the terms and conditions mentioned herein or incidental hereto
and supersede all oral representations and negotiations and prior writings with
respect to the subject matter hereof.
Borrower agrees to promptly reimburse Bank for all costs and expenses,
including attorney's fees of Bank's in-house or outside counsel incurred by Bank
in connection with any restructurings of this Amended Note or any documents
executed and delivered in connection herewith and in connection with any
collection proceedings as a result of nonpayment of this Amended Note, as and
when due and payable.
Borrower has received consideration which is the reasonable equivalent
value of the obligations and liabilities that Borrower has incurred to Bank.
Borrower is not insolvent as defined in any applicable state or federal statute,
nor will Borrower be rendered insolvent by the execution and delivery of this
Amended Note to Bank. Borrower is not engaged or about to engage in any business
or transaction for which the assets retained by it shall be an unreasonably
small capital, taking into consideration the obligations to Bank incurred
hereunder. Borrower does not intend to, nor does it believe that it will, incur
debts beyond its ability to pay them as they mature.
Borrower, to the extent permitted by law, waives any right to have a
jury participate in resolving any dispute, whether sounding in contract, tort,
or otherwise, between Bank and Borrower arising out of, in connection with,
related to, or incidental to the relationship established between Borrower and
Bank in connection with this Amended Note or any other agreement, instrument or
document executed or delivered in connection therewith or the transactions
related thereto.
Address: NEMATRON CORPORATION
5840 Interface Drive By: /s/ David P. Gienapp
Ann Arbor, Michigan 48103 -----------------------------------------------
Title: Vice President - Finance and Administration
-------------------------------------------
4
<PAGE> 1
EXHIBIT 4.18
The following schedule sets forth the noteholders and amounts of such notes
issued pursuant to the Convertible Promissory Notes dated December 1, 1998:
<TABLE>
<CAPTION>
Noteholder Amount
<S> <C>
J. Eric May Trustee Under Declaration of Trust
Dated 8/28/90, as amended 11/1/94 $250,000
James A. Nichols 250,000
Globus Family Capital 125,000
Richard D. Globus 62,500
Stephen E. Globus 62,500
--------
Total $750,000
========
</TABLE>
1
<PAGE> 2
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR UNDER ANY OTHER SECURITIES LAWS. IT MAY NOT BE SOLD
OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO
THIS NOTE UNDER THE SECURITIES ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE PAYOR THAT SUCH REGISTRATION IS NOT REQUIRED.
CONVERTIBLE PROMISSORY NOTE
$______________ December 1, 1998
Ann Arbor, Michigan
FOR VALUE RECEIVED, the undersigned, Nematron Corporation, a Michigan
corporation (the "Payor"), hereby promises to pay to _________________, an
individual [corporation] (the "Payee"), at ____________________________________,
or at such other place or places as the Payee may designate from time to time in
writing to the Payor, in lawful money of the United States of America and in
immediately available funds, the aggregate principal sum of
_____________________________ ($_____________), and to pay interest on the
outstanding principal balance at the rate of seven percent (7%) per annum, and
after maturity or the occurrence of an event of default hereunder, at the rate
of nine percent (9%) per annum. The payment of the principal and all accrued and
unpaid interest thereon shall be due and payable on March 31, 1999 (the
"Maturity Date"). Interest shall be charged on the basis of a year of 365 days.
This Note may be prepaid at any time and from time to time, in whole
but not in part, without penalty or premium, upon five (5) days prior written
notice from the Payor to the Payee, unless, prior to such repayment, Payee
provides notice to Payor of its intent to exercise its conversion rights
provided in the third paragraph of this note (Payee's notice of intent to
exercise its conversion rights shall be effective notwithstanding Payor's notice
of intent to repay). This Note shall be payable or prepayable, at the sole
discretion of the Payor, in cash or the Payor's common stock ("Common Stock").
For the purpose of payment or prepayment of this Note, Common Stock shall be
valued at $.25 per share (the "Payment and Conversion Price").
Subject to the terms and conditions set forth herein, the principal and
interest due and payable under this Note may be converted by Payee, in whole or
in part, into Common Stock upon fifteen (15) days prior written notice from the
Payee to the Payor and prior to the earlier of (i) the Maturity Date or (ii) the
prepayment in whole of this Note. The number of shares of Common Stock issuable
upon such conversion shall be the principal and interest then due and payable
under this Note divided by the Payment and Conversion Price, rounded down to the
nearest whole share. No fractional shares shall be issued upon conversion of
this Note. In the event any merger, reorganization, consolidation,
recapitalization, stock dividend or other change in corporate structure
affecting Common Stock occurs after the date hereof and prior to the Maturity
Date, an equivalent adjustment shall be made in the aggregate number of shares
which may be delivered upon conversion hereunder. Notwithstanding the foregoing
provisions of this paragraph, the Payor shall not be required to issue more than
_________ shares of Common Stock to the Payee pursuant to this paragraph unless
the issuance of any additional shares (if aggregated with all other issuances
and potential issuances of Common Stock pursuant to this Note and the other
notes issued by the Payor on the date hereof and upon exercise of the Options
granted pursuant to this Note and the other notes issued by the Payor on the
date hereof) has been approved by the shareholders of the Payor to the extent
required by applicable law, Payor's organizational documents or the rules of the
Nasdaq Stock Market (the "Required Approval"). Any portion of the principal or
interest under this Note which Payee attempts to convert into Common Stock but
which cannot be converted due to the limitation in the immediately preceding
sentence shall remain outstanding under this Note until otherwise paid, prepaid
or converted.
2
<PAGE> 3
The Payor agrees to file one registration statement with the Securities
and Exchange Commission to register the shares of its Common Stock issued upon
payment or conversion of this Note (if any), including the shares issued
pursuant to the Option granted in the tenth paragraph of this Note, following
the issuance of such shares, in accordance with the terms and subject to the
conditions of a registration rights agreement to be negotiated and entered into
by the Payor and the Payee in a form reasonably satisfactory to both parties.
Payor's failure to comply with the foregoing obligation to register such shares
or the obligations in such registration rights agreement shall constitute an
event of default under this Note.
THE PAYOR AND THE PAYEE, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY
TO CONSULT WITH COUNSEL, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY
RIGHT EITHER OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR
ARISING OUT OF THIS NOTE, OR ANY COURSE OF CONDUCT, DEALING, STATEMENT (WHETHER
ORAL OR WRITTEN) OR ACTIONS OF EITHER OF THEM. NEITHER THE PAYOR NOR THE PAYEE
SHALL SEEK TO CONSOLIDATE, BY COUNTERCLAIM OR OTHERWISE, ANY ACTION IN WHICH A
JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE
OR HAS NOT BEEN WAIVED.
The undersigned Payor hereby waives demand, presentment, protest,
dishonor and notice of dishonor in connection with this Note.
In the event any action is taken to collect or enforce the indebtedness
evidenced by this Note or any part thereof, the undersigned agrees to pay, in
addition to the principal and interest due and payable hereon, all reasonable
costs of collecting this Note, including reasonable attorneys' fees and
expenses.
Acceptance by the Payee of any payment in an amount less than the
amount then due and owing shall be deemed an acceptance on account only, and the
failure to pay the entire amount then due and owing shall cause the Payor to
remain in default.
This Note and the Option granted below may not be sold, assigned or
otherwise transferred without the prior written consent of Payor, which consent
shall not be unreasonably withheld. In all events, a transfer to Payee's
revocable living trust shall be allowed after written notice provided to the
Payor.
This Note is made under, and shall be governed by and construed in
accordance with, the laws of the State of Michigan as to notes made and
performed entirely within such State and without giving effect to choice of law
principles of such State.
Payor hereby grants to Payee a fully paid option to purchase a
convertible promissory note of the Payor (the "Option Note") with a principal
amount of $____________ (the "Option Principal Amount"), having substantially
the same terms as this Note (but excluding the terms relating to this option)
and convertible into a total of _____________ shares (the "Option Shares") of
Common Stock at $.25 per share (the "Option") upon the following terms and
conditions: (1) The Option may be exercised in whole, but not in part, at any
time after the date hereof until 5:00 p.m. Eastern Standard Time on January 31,
1999 (the "Expiration Time"); (2) The Option may be exercised only upon written
notice of such exercise (stating the name and address, amount of subscription
and social security number (or EIN) of such investor) accompanied by payment in
full by a wire transfer, in immediately available funds to a bank account
designated by the Payor, of an amount equal to the Option Principal Amount; (3)
If the Option is exercised, Payee shall be deemed to have represented that the
Option Note and the Option Shares have been purchased for Payee's own account,
or as the case may be, for the accounts of the Payee's designee as provided
herein, and not for the purpose of resale or distribution; (4) If the Option is
exercised, Payee shall be deemed to have acknowledged that the Option Note and
the Option Shares have not been
3
<PAGE> 4
registered under the Securities Act of 1933, as amended (the "Securities Act"),
or under any other securities laws and may not be sold or offered for sale in
the absence of an effective registration statement as to the Option Note and the
Option Shares under the Securities Act or an opinion of counsel reasonably
satisfactory to the Payor that such registration is not required. This Note was
entered into as a last resort and in good faith. Payor will not solicit from
third parties offers or solicitations of offers for purchase of shares until the
Required Approvals are received or rejected; provided that Payor shall be
permitted to solicit offers to purchase additional Option Notes as long as such
Option Notes when sold do not have an aggregate principal amount, together with
the Option Notes issued upon exercise of the Options granted pursuant to this
Note and the other notes issued by Payor on the date hereof, exceeding $3
million; and further provided, that Payor's Board of Directors, on behalf of
Payor, may furnish information and may participate in discussions and
negotiations through its representatives with persons who have sought the same
if the failure to provide such information or participate in such negotiations
or discussions would cause the directors to breach their fiduciary duties to
Payor's shareholders under applicable law.
Notwithstanding any provision in this Note to the contrary, Payor shall
not be required to issue any shares of Common Stock in excess of the number of
shares referenced in the third paragraph of this Note if any Required Approval
has not been received or if such issuance would constitute a violation of any
applicable Federal or state securities law or any other law or regulation. If
shareholder approval is required, Payor agrees to seek, as soon a practicable
following execution of this Promissory Note, the approval of its shareholders of
the issuance of any such shares to the extent required by applicable law,
Payor's organizational documents or the rules of the Nasdaq Stock Market.
NEMATRON CORPORATION
_______________________________________
By: Matthew S. Galvez, President
ACCEPTED AND AGREED:
_______________________________________ [Payee]
By: ___________________________________ [Signature]
Name: _________________________________
Its: __________________________________
4
<PAGE> 1
EXHIBIT 4.19
The following schedule sets forth the noteholders and amounts of such notes
issued pursuant to the Convertible Promissory Notes dated December 1, 1998:
<TABLE>
<CAPTION>
Noteholder Amount
<S> <C>
Rhubarb Investment Club $50,000
James A. Nichols 50,000
Gregory Schwartz, Jr. 33,000
Ralph E. Meisel Trust 25,000
Gregory J. Schwartz Revocable Trust 25,000
Lawrence and Patricia Feeny 25,000
Lisa Martin Hirs 10,000
Jeffrey and Kathleen Bell 10,000
Scott and Marilyn Schumaker 5,000
Patrick and Geraldine Carroll 5,000
Peter C. Mitchell 5,000
Craig A. Maas 5,000
Tom Van Dusen 2,000
--------
Total $250,000
========
</TABLE>
1
<PAGE> 2
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR UNDER ANY OTHER SECURITIES LAWS. IT MAY NOT BE SOLD
OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO
THIS NOTE UNDER THE SECURITIES ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE PAYOR THAT SUCH REGISTRATION IS NOT REQUIRED.
CONVERTIBLE PROMISSORY NOTE
$_________________ December 1, 1998
Ann Arbor, Michigan
FOR VALUE RECEIVED, the undersigned, Nematron Corporation, a Michigan
corporation (the "Payor"), hereby promises to pay to _________________, an
individual [corporation] (the "Payee"), at
___________________________________________, or at such other place or places as
the Payee may designate from time to time in writing to the Payor, in lawful
money of the United States of America and in immediately available funds, the
aggregate principal sum of _____________________________ ($_____________), and
to pay interest on the outstanding principal balance at the rate of seven
percent (7%) per annum, and after maturity or the occurrence of an event of
default hereunder, at the rate of nine percent (9%) per annum. The payment of
the principal and all accrued and unpaid interest thereon shall be due and
payable on March 31, 1999 (the "Maturity Date"). Interest shall be charged on
the basis of a year of 365 days.
This Note may be prepaid at any time and from time to time, in whole
but not in part, without penalty or premium, upon five (5) days prior written
notice from the Payor to the Payee, unless, prior to such repayment, Payee
provides notice to Payor of its intent to exercise its conversion rights
provided in the third paragraph of this note (Payee's notice of intent to
exercise its conversion rights shall be effective notwithstanding Payor's notice
of intent to repay). This Note shall be payable or prepayable, at the sole
discretion of the Payor, in cash or the Payor's common stock ("Common Stock").
For the purpose of payment or prepayment of this Note, Common Stock shall be
valued at $.25 per share (the "Payment and Conversion Price").
Subject to the terms and conditions set forth herein, the principal and
interest due and payable under this Note may be converted by Payee, in whole or
in part, into Common Stock upon fifteen (15) days prior written notice from the
Payee to the Payor and prior to the earlier of (i) the Maturity Date or (ii) the
prepayment in whole of this Note. The number of shares of Common Stock issuable
upon such conversion shall be the principal and interest then due and payable
under this Note divided by the Payment and Conversion Price, rounded down to the
nearest whole share. No fractional shares shall be issued upon conversion of
this Note. In the event any merger, reorganization, consolidation,
recapitalization, stock dividend or other change in corporate structure
affecting Common Stock occurs after the date hereof and prior to the Maturity
Date, an equivalent adjustment shall be made in the aggregate number of shares
which may be delivered upon conversion hereunder. Notwithstanding the foregoing
provisions of this paragraph, the Payor shall not be required to issue more than
_________ shares of Common Stock to the Payee pursuant to this paragraph unless
the issuance of any additional shares (if aggregated with all other issuances
and potential issuances of Common Stock pursuant to this Note and the other
notes issued by the Payor on the date hereof and upon exercise of the Options
granted pursuant to the other notes issued by the Payor on the date hereof) has
been approved by the shareholders of the Payor to the extent required by
applicable law, Payor's organizational documents or the rules of the Nasdaq
Stock Market (the "Required Approval"). Any portion of the principal or interest
under this Note which Payee attempts to convert into Common Stock but which
cannot be converted due to the limitation in the immediately preceding sentence
shall remain outstanding under this Note until otherwise paid, prepaid or
converted.
2
<PAGE> 3
The Payor agrees to file one registration statement with the Securities
and Exchange Commission to register the shares of its Common Stock issued upon
payment or conversion of this Note (if any following the issuance of such
shares, in accordance with the terms and subject to the conditions of a
registration rights agreement to be negotiated and entered into by the Payor and
the Payee in a form reasonably satisfactory to both parties. Payor's failure to
comply with the foregoing obligation to register such shares or the obligations
in such registration rights agreement shall constitute an event of default under
this Note.
THE PAYOR AND THE PAYEE, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY
TO CONSULT WITH COUNSEL, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY
RIGHT EITHER OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR
ARISING OUT OF THIS NOTE, OR ANY COURSE OF CONDUCT, DEALING, STATEMENT (WHETHER
ORAL OR WRITTEN) OR ACTIONS OF EITHER OF THEM. NEITHER THE PAYOR NOR THE PAYEE
SHALL SEEK TO CONSOLIDATE, BY COUNTERCLAIM OR OTHERWISE, ANY ACTION IN WHICH A
JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE
OR HAS NOT BEEN WAIVED.
The undersigned Payor hereby waives demand, presentment, protest,
dishonor and notice of dishonor in connection with this Note.
In the event any action is taken to collect or enforce the indebtedness
evidenced by this Note or any part thereof, the undersigned agrees to pay, in
addition to the principal and interest due and payable hereon, all reasonable
costs of collecting this Note, including reasonable attorneys' fees and
expenses.
Acceptance by the Payee of any payment in an amount less than the
amount then due and owing shall be deemed an acceptance on account only, and the
failure to pay the entire amount then due and owing shall cause the Payor to
remain in default.
This Note may not be sold, assigned or otherwise transferred without
the prior written consent of Payor, which consent shall not be unreasonably
withheld. In all events, a transfer to Payee's revocable living trust shall be
allowed after written notice provided to the Payor.
This Note is made under, and shall be governed by and construed in
accordance with, the laws of the State of Michigan as to notes made and
performed entirely within such State and without giving effect to choice of law
principles of such State.
This Note was entered into as a last resort and in good faith. Payor
will not solicit from third parties offers or solicitations of offers for
purchase of shares until the Required Approvals are received or rejected;
provided that Payor shall be permitted to solicit offers to purchase additional
Option Notes as long as such Option Notes when sold do not have an aggregate
principal amount, together with the other notes issued by Payor on the date
hereof, exceeding $3 million; and further provided, that Payor's Board of
Directors, on behalf of Payor, may furnish information and may participate in
discussions and negotiations through its representatives with persons who have
sought the same if the failure to provide such information or participate in
such negotiations or discussions would cause the directors to breach their
fiduciary duties to Payor's shareholders under applicable law.
3
<PAGE> 4
Notwithstanding any provision in this Note to the contrary, Payor shall
not be required to issue any shares of Common Stock in excess of the number of
shares referenced in the third paragraph of this Note if any Required Approval
has not been received or if such issuance would constitute a violation of any
applicable Federal or state securities law or any other law or regulation. If
shareholder approval is required, Payor agrees to seek, as soon a practicable
following execution of this Promissory Note, the approval of its shareholders of
the issuance of any such shares to the extent required by applicable law,
Payor's organizational documents or the rules of the Nasdaq Stock Market.
NEMATRON CORPORATION
- -----------------------------------
By: Matthew S. Galvez, President
ACCEPTED AND AGREED:
_______________________________________ [Payee]
By: ___________________________________ [Signature]
Name: _________________________________
Its: __________________________________
4
<PAGE> 1
EXHIBIT 11.01
LOSS PER SHARE
<TABLE>
<CAPTION>
Year Ended September 30
-----------------------
1997 1998
<S> <C> <C>
BASIC:
Weighted average common shares outstanding 4,933,939 5,345,889
Net loss $(11,498,379) $(9,009,828)
------------- ------------
Loss per common share $(2.33) $(1.69)
======= =======
DILUTED
Weighted average common shares outstanding 4,933,939 5,345,889
Net loss $(11,498,379) $(9,009,828)
------------- ------------
Loss per common share $(2.33) $(1.69)
======= =======
</TABLE>
1
<PAGE> 1
EXHIBIT 21.01
SUBSIDIARIES OF NEMATRON CORPORATION
- - Imagination Systems, Inc.
- - NemaSoft, Inc.
- - Nematron, Ltd.
- - Nematron Europa, B.V. (inactive)
<PAGE> 1
EXHIBIT 23.01
The Board of Directors
Nematron Corporation:
We consent to incorporation by reference in the registration statements (Numbers
333-1136, 333-1138, 333-1140 and 333-12379) on Form S-8 and in the registration
statements (Numbers 333-1314 and 333-15959) on Form S-3 of Nematron Corporation
of our report dated December 4, 1998, relating to the consolidated balance
sheet of Nematron Corporation as of September 30, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended September 30, 1997 and 1998, which report appears in the
September 30, 1998 annual report on Form 10-KSB of Nematron Corporation.
/s/ Grant Thornton LLP
Southfield, Michigan
December 4, 1998
1
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