<PAGE> 1
SCHEDULE 14A - INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT 1934
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Filed by a Party other than the Registrant [ ]
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[ X ] Definitive Proxy Statement
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[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.
14a-12
NEMATRON CORPORATION
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(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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(1) Title of each class of securities to which transaction applies:
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[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act
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(Amended by Sec Act Rel No. 7331; Exch Act Rel No. 37692, eff. 10/7/96.)
<PAGE> 2
NEMATRON CORPORATION
5840 INTERFACE DRIVE
ANN ARBOR, MICHIGAN 48103
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Our Shareholders:
Notice is hereby given that the Annual Meeting of Shareholders of
Nematron Corporation (the "Company") will be held at the Company's main offices,
5840 Interface Drive, Ann Arbor, Michigan 48103 on Tuesday, April 6, 1999 at
1:00 p.m. for the following purposes:
1. To elect two directors,
2. To approve the potential issuance of approximately 7,313,333
shares of Common Stock pursuant to a capital raising transaction,
3. To approve a proposal to amend the Articles of Incorporation to
increase the number of authorized shares of Common Stock to
30,000,000,
4. To approve a proposal to amend the Articles of Incorporation to
declassify the Board of Directors and reduce the terms of the
directors from three years to one year,
5. To approve the Nematron Corporation Long-Term Incentive Plan, and
6. To vote upon such other matters as may properly come before the
meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on February 25,
1999 are entitled to notice of and to vote at the meeting and any adjournments
or postponements thereof.
You are invited to attend the Annual Meeting. Whether or not you expect
to attend the Annual Meeting, please complete, date and sign the enclosed proxy
and return it promptly in the enclosed postage-paid envelope. The proxy is
revocable and will not affect your right to vote in person if you attend the
Annual Meeting.
By Order of the Board of Directors,
David P. Gienapp
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David P. Gienapp
Secretary
Ann Arbor, Michigan
March 5, 1999
<PAGE> 3
NEMATRON CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 6, 1999
PROXY STATEMENT
The accompanying proxy is solicited on behalf of the Board of Directors
of Nematron Corporation, a Michigan corporation (the "Company"), for use at the
Annual Meeting of Shareholders of the Company to be held at the Company's main
offices, 5840 Interface Drive, Ann Arbor, Michigan 48103 on Tuesday, April 6,
1999 at 1:00 p.m. (the "Annual Meeting") or at any adjournment thereof. This
Proxy Statement and the accompanying form of proxy will be first given or sent
to shareholders on or about March 5, 1999.
Only holders of record of Common Stock of the Company at the close of
business on February 25, 1999 (the "Record Date") are entitled to vote at the
meeting or any adjournment thereof. On the Record Date, 6,022,066 shares of
Common Stock were issued and outstanding and are entitled to vote at the Annual
Meeting. Shareholders of record on the Record Date are entitled to one vote for
each share of Common Stock held of record on any matter that may properly come
before the Annual Meeting. Shares cannot be voted at the Annual Meeting unless
the holder is present in person or represented by proxy. The presence, either in
person or by properly executed proxy, of the holders of a majority of the
outstanding shares of Common Stock on the Record Date is necessary to constitute
a quorum at the Annual Meeting.
Shares represented by a proxy in the accompanying form, unless
previously revoked, will be voted at the Annual Meeting in accordance with the
specifications made if the proxy, properly executed, is received by the Company
before the close of business on April 5, 1999. Shares represented by a proxy
received after that time will be voted if the proxy is received by the Company
in sufficient time to permit the necessary examination and tabulation of the
proxy before a vote is taken. IF NO SPECIFICATIONS ARE MADE IN ANY PROXY, THE
SHARES REPRESENTED THEREBY WILL BE VOTED FOR THE ELECTION OF DIRECTORS AND FOR
EACH OF THE PROPOSALS DESCRIBED IN THIS PROXY Statement. The Board of Directors
does not intend to present any other matters at the Annual Meeting. However,
should any other matters properly come before the Annual Meeting, it is the
intention of the persons named in the accompanying form of proxy to vote the
proxy in accordance with their best judgment. Shareholders who execute a proxy
in the accompanying form may revoke the proxy at any time before it is exercised
by giving written notice to the Secretary of the Company bearing a later date
than the proxy, by submitting a later-dated proxy, or by voting the shares
represented by such proxy in person at the Annual Meeting.
For purposes of determining the number of votes cast with respect to
the election of directors, only those cast "for" are included. The number of
votes cast on the other proposals is determined by counting the votes cast "for"
and "against". Abstentions are counted only for purposes of determining whether
a quorum is present at the Annual Meeting. Broker non-votes are not counted for
any purpose.
The cost of soliciting proxies will be borne by the Company. In
addition to the solicitation by mail, proxies may be solicited in person or by
telephone or facsimile by officers, directors and employees of the Company. Such
officers, directors and employees will not be additionally compensated, but may
be reimbursed for out-of-pocket expenses in connection with such solicitation.
The Company will reimburse brokerage houses, custodians, nominees and
fiduciaries for their expenses in mailing proxy material to principals.
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MATTERS TO COME BEFORE THE MEETING
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Articles of Incorporation divide the directors into three
classes, the terms of which expire as set forth below. At each annual meeting,
the shareholders of the Company elect to three-year terms directors to replace
those directors whose terms expire at that annual meeting. The term of office of
each director elected at this year's Annual Meeting will continue until the 2002
Annual Meeting and until his successor has been elected and qualified, or until
his earlier resignation or removal. If Proposal 4 is approved by shareholders,
however, the terms of all of the Company's directors, including the directors
elected at the Annual Meeting, will expire at the 2000 Annual Meeting. See
"Proposal 4 - Amendment to the Company's Articles of Incorporation to Declassify
the Board of Directors". The election of directors requires a plurality of the
votes cast. The Board of Directors recommends a vote FOR each of the nominees
for election. Proxies will be voted FOR the election of the nominees unless the
specification is marked on the proxy indicating that authority to do so is
withheld.
The following sets forth information as to each nominee for election at
the Annual Meeting and each director continuing in office, including his age,
present principal occupation, other business experience during the last five
years, directorships in other publicly-held companies and period of service as a
director of the Company. If, as a result of circumstances not known or foreseen,
any of the nominees shall be unavailable to serve as a director, the proxies may
be voted for any such substitute nominees as the Board of Directors may select.
NOMINEES FOR ELECTION FOR A TERM EXPIRING IN 2002
Hugo E. Braun, 40, became a director in March 1996. Mr. Braun is a
partner with Access Ventures, an investment fund manager, where he has been
employed since 1989.
Matthew S. Galvez, 43, became a director in August 1998 upon his
joining the Company as its Chief Operating Officer. On October 1, 1998, Mr.
Galvez was appointed to the office of the President of the Company. Mr. Galvez
served as Chief Executive Officer of ISDA & Co., a privately held apparel
company, from June 1994 until June 1998. From 1990 until June 1994, Mr. Galvez
was a director and Chief Financial Officer of Manufacturers Products
Corporation, a supplier of plastic products to the automotive industry. In 1994
he became Chief Executive Officer of that company as well. Prior to 1990, Mr.
Galvez was Executive Vice President - Corporate Operations and General Counsel
to General CAD/CAM, Inc. ("GCI") in Schenectady, New York. GCI is a developer
and supplier of graphics translation software for the industrial marketplace.
DIRECTORS WHOSE TERMS EXPIRE 2001
Garnel F. Graber, 67, became a director in February 1993 at the time
of the Company's spin-off from Interface Systems, Inc. and served as Chairman
of the Board of Nematron until March 1996. Mr. Graber is a retired executive
of, and is the current Chairman of the Board of Directors of, Applied Dynamics
International, a computer firm specializing in high speed simulation. Mr. Graber
served as Chief Executive Officer of Applied Dynamics for more than five years
prior to his retirement in 1994. Mr. Graber also serves as Chairman of the
Board of Interface Systems, Inc.
Michael L. Hershey, 60, became a director in March 1995 at the time the
Company merged with Imagination Systems, Inc. Mr. Hershey had served as a
member of the Board of Directors and Secretary of Imagination Systems, Inc.
Mr. Hershey has been the President and Chairman of the Board of Directors of
Landis Associates, Inc., an investment management company, since its formation
in 1986.
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DIRECTORS WHOSE TERMS EXPIRE IN 2000
Joseph J. Fitzsimmons, 64, became a director in March 1997. Mr.
Fitzsimmons is a retired executive of Bell & Howell Company and University
Microfilms International ("UMI"), a subsidiary of Bell & Howell. From January
1994 through June 1995 when he retired, Mr. Fitzsimmons was Corporate Vice
President of Bell & Howell and Chairman of UMI. From March 1987 through December
1993, Mr. Fitzsimmons was Corporate Vice President of Bell & Howell and
President and Chief Executive Officer of UMI, a leading provider of technology
services to libraries and other organizations regarding acquiring, preserving
and distributing literature. Mr. Fitzsimmons is a member of the Board of
Directors of First of America Bank Corporation, a Midwest bank holding company
owned by National CityBank. Mr. Fitzsimmons is a past Chairman of the
Information Industry Association and was the Vice-Chairman of the White House
Conference on Libraries and Information Services in 1991.
James A. Nichols, 53, a former executive of Ford Motor Company, became
a director in December 1998. From 1981 to 1991, Mr. Nichols was a Senior
Attorney in the Corporate Transactions Department of Ford's Office of the
General Counsel. From 1991 to the present, Mr. Nichols has been the founder and
the Chairman of the Board of Surgical Instrument Repair Service, Inc., a
partnership with Allegiance Healthcare Corporation, a public company, that
engages in the repair and management of surgical instruments and equipment at
health care providers in North America. From 1993 to 1998, Mr. Nichols served as
corporate secretary and a director of Liberty BIDCO Investment Corporation, a
Michigan-based mezzanine finance company. Mr. Nichols was president and sole
owner of Sterilization Management Group, LLC, a provider of reusable sterile
products to hospitals, from 1997 to 1998 when the company was sold to Teleflex
Corporation, a public company. From 1991 to the present, Mr. Nichols has been
president and sole owner of Nichols & Associates, P.C., attorneys practicing in
the area of international commercial law.
Stephen E. Globus, 52, became a director in December 1998. He has been
Chairman of the Board of Globus Growth Group, Inc., a Manhattan - based venture
capital company specializing in providing startup and seed capital, since 1984.
He is also a director of Plasmaco, Inc., a flat computer screen manufacturer
owned by Matsushita (Panasonic). Mr. Globus is the founder of several privately
held biotechnology companies, including Kimeragen, Inc., NuGene Technologies,
Inc., Thermaphore Sciences, Inc. and Genitope, Inc.
Messrs. Nichols and Globus were appointed to the Board in connection
with their purchase of certain convertible promissory notes from the Company.
See "Proposal 2 - Approval of the Issuance of Shares of Common Stock - Change
in Board of Directors."
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
The Board met thirty-two times during the year ended September 30,
1998. Each current director who served during fiscal 1998 attended at least 75%
of the total number of meetings of the Board and committees of the Board on
which he served during fiscal 1998. The Board has a standing Audit Committee,
Nominating Committee and Organization and Compensation Committee.
The Audit Committee met once in fiscal 1998. The Audit Committee meets
with the Company's independent accountants to review the adequacy of the
Company's internal control systems and financial reporting procedures; reviews
the general scope of the Company's annual audit and the fees charged by the
independent accountants; and reviews and monitors the performance of non-audit
services by the Company's auditors. The members of the Audit Committee are
Messrs. Braun (Chairman), Fitzsimmons, Hershey and Nichols.
The Nominating Committee met once during fiscal 1998. The Nominating
Committee identifies and reviews potential members of the Board and nominates
persons to the Board to serve as Board members. The Nominating Committee
presently consists solely of Mr. Hershey (Chairman).
The Organization and Compensation Committee met twice during fiscal
1998. The Organization and Compensation Committee administers the Company's
Restricted Stock Plan and the 1993 Stock Option Plan, determines compensation
issues for officers, and determines compensation issues for non-employee
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directors that do not involve the Company's equity securities. The current
members of the Organization and Compensation Committee are Messrs.
Graber (Chairman), Globus, and Nichols.
EXECUTIVE OFFICERS
The executive officers of the Company as of the date of this Proxy
Statement are listed and described below. Executive officers of the Company
serve at the pleasure of the Board of Directors.
Name Offices Age
- ----- ------- ---
Matthew S. Galvez President and Chief Operating Officer 43
David P. Gienapp Vice President - Finance and Administration,
Secretary and Treasurer 50
See "Nominees for Election For A Term Expiring in 2002" for further
information concerning Mr. Galvez.
David P. Gienapp has been the Vice President - Finance and
Administration and Treasurer of the Company since joining the Company in
September 1994 and has served as Secretary since March 1996. Mr. Gienapp served
as a director of the Company from March 1995 until August 1998. Prior to joining
the Company, Mr. Gienapp spent over 20 years with Deloitte & Touche LLP, a
certified public accounting firm.
PROPOSAL 2
APPROVAL OF THE ISSUANCE OF SHARES OF COMMON STOCK
The Board of Directors of the Company has approved, and is proposing
that shareholders approve, the issuance of approximately 7,313,333 shares of
Common Stock pursuant to a private placement capital raising transaction, the
first stage of which occurred in December 1998 and the second stage of which
will be consummated promptly following approval of this Proposal 2 (the "Capital
Transaction"). The Company entered into the Capital Transaction to alleviate a
severe cash shortage and permit the Company to continue operations.
Proposal 2 is the Board's proposal that the shareholders approve the
issuance of shares of Common Stock pursuant to the Capital Transaction. Approval
of Proposal 2 could result in the issuance of approximately 7.3 million shares
of Common Stock, including shares issued pursuant to the Notes, upon exercise of
Options and the Schwartz Option (capitalized terms are hereinafter defined), and
pursuant to subscription agreements received pending approval by the
shareholders of this Proposal 2. The Board of Directors recommends a vote FOR
this Proposal 2.
BACKGROUND
In early 1998, the Company began seeking additional capital due to the
losses reported for fiscal 1997 and the first quarter of fiscal 1998. In April
1998, the Company hired an investment banking firm to assist it in raising
needed capital and in evaluating strategic business partners.
Following the Company's April 28, 1998 announcement of potential
reporting adjustments to its financial statements and the withdrawal of its
independent auditors and their report on the audit of the 1996 and 1997
financial statements, Nasdaq suspended trading of the Common Stock. Potential
partners and investors showed no interest in investing in the Company at a price
reflective of the Company's intrinsic value, given the uncertainties surrounding
the trading halt, the market value of the Common Stock, the shareholder suit
filed soon after the April 28th announcement and the Company's financial
position. Moreover, the Company's customers began questioning the financial
viability of the Company and became reluctant to place new orders with the
Company as its competitors used this news and rumors of the Company's financial
demise to the Company's detriment.
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Faced with these attacks from its competitors and questions from its
traditional customer base, sales slowed considerably, reducing receivables and
inventory and, consequently, the borrowing base under the Company's bank credit
line. The Company soon had fully utilized its existing credit line. Cash
collections from the reduced sales and receivables were lower than necessary to
sustain operations at previous levels. In an effort to preserve its dwindling
cash resources, the Company was forced to delay paying its trade payables and to
attempt to obtain extended terms from its vendors. Certain key vendors instead
required the Company to pay cash upon delivery of components, which negatively
affected the Company's production capability and worsened its cash shortage.
After further negotiations during July and August 1998, the Company
successfully arranged trade notes with approximately twenty vendors. The terms
of those notes included fixed payments of the past due trade balance with
interest over six to twelve months in return for the vendors' promises to
continue their "cash on delivery" shipments. Due to the continuing cash shortage
and despite the efforts of the Company's management and outside consultants, the
Company was not able to keep current on the payments on these trade notes.
Consequently, the Company was unable to secure all of the parts needed to fill
customer orders, thereby further depressing sales, cash flow and its borrowing
capacity.
Because the Company's line of credit borrowings exceeded the applicable
borrowing base limitation, the Company was forced to negotiate a temporary
forbearance agreement with its principal bank lender through October 1998. The
lender also informally agreed to work with the Company for a short time beyond
the expiration of its forbearance agreement if the Company could demonstrate its
ability to raise additional capital to repay the out-of-covenant borrowings and
increase production.
During the fourth quarter of fiscal 1998, the Company appointed a new
chief operating officer who has extensive experience helping financially
troubled businesses. After further analysis of the Company's cash needs and
expected sales and costs, management determined early in the first quarter of
fiscal 1999 that the Company needed to raise $1 million immediately and an
additional $3 million in the second quarter of fiscal 1999 in order to continue
operations. Management intensified its efforts to raise the needed capital, but
was unable to find investors who were interested in investing in Common Stock at
the current market price due to the Company's cash shortage, potential investor
concerns regarding the Company's operating prospects and pending litigation and
the low trading volume of the Common Stock.
Despite the Company's financial difficulties, certain major customers
and various other customers remained loyal to the Company, allowing the Company
to generate a significant backlog of new orders. The Company also had secured a
major contract from a large manufacturer which the Company expected to generate
a significant amount of sales over the next 18 months. Due to the cash shortage
and difficulties in raising additional capital, however, the Company was unable
to purchase the components needed to fill the backlog in a timely manner. In
addition, vendors who had agreed to finance outstanding accounts payable refused
to ship components to the Company until overdue payments had been made, further
hampering the Company's efforts to fill existing orders. These delays
jeopardized not only the current backlog but also the Company's future business
prospects.
In mid-November 1998, the Company's bank lender began "sweeping" the
cash in the Company's deposit account to reduce amounts outstanding under the
bank credit line in excess of the borrowing base. The bank also insisted that
the Company reduce the remaining excess borrowing immediately or it would no
longer be willing to continue its forbearance. The bank indicated that it would
be willing to extend its forbearance until January 31, 1999 if the Company
raised $1 million of working capital immediately. However, the depletion of the
cash reserves in the Company's deposit account severely threatened the Company's
ability to pay its employees and continue operating.
After months of intensive effort and negotiation, management identified
several investors willing to invest in the Company on the terms set forth in the
Notes (defined and described below), subject to the willingness of the Company's
Board to appoint certain of the investors to the Board of Directors and subject
to the Company's commitment to raise an additional $3 million during the second
quarter of fiscal 1999.
Through frequent meetings and informal contacts with management during
the preceding eight months, the Board of Directors had been kept fully informed
of the Company's financial position and
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strategic and capital raising efforts. With this extensive background
information in mind, the Board met on December 1, 1998 to consider the proposed
transactions. Following a detailed explanation of (i) the current status of the
Company's financial position and lack of working capital, (ii) the negotiations
with potential investors and others who had been approached by management but
who had responded negatively to a proposed investment in the Company and (iii)
the Company's relationship with its bank lender and other creditors, the Board
proceeded to consider the terms of the proposed issuance of Notes and potential
alternatives available to the Company. The Board discussed, among other
alternatives, (i) a potential merger with a privately-owned company in its
industry, (ii) the liquidation of the Company's assets, (iii) a reorganization
under the Federal Bankruptcy Code and (iv) the postponement of the proposed
transaction to allow the Company more time to locate an investment transaction
with terms more favorable to the Company and its shareholders. In view of, among
other factors, (i) the Company's pending backlog of orders which could provide
immediate cash flow if filled, (ii) the urgency with which the Company needed to
obtain capital in order to pay its employees and to pay its vendors to induce
them to recommence shipments of components, (iii) the likely loss of vendor
support and customer base if the Company were to seek bankruptcy protection and
(iv) the likely depreciation in value of the Company's assets if they were to be
liquidated or if the Company were to cease operating for even a short time, the
Board determined that the proposed issuance of the Notes and the Options
(defined and described below) was the best available alternative to maximize
the Company's value to its shareholders. Therefore, the Board unanimously
approved (with Mr. Hershey abstaining) the terms of the Notes and the Options
and the related transactions. Messrs. Globus and Nichols were not directors at
the time of such approval and did not participate in the Board's discussions
or deliberations.
On January 12, 1999, following a detailed analysis of the Company's
current financial position, the status of negotiations with the Company's bank
lender and potential investors, and the improvement of the market value of the
Common Stock, the Board of Directors approved the terms of the second stage of
the Capital Transaction as well as an amendment to certain of the Notes
containing Options (defined and described below) which amendment extended the
expiration date of the Options and these Notes to expire on the earlier of April
30, 1999 and the fifth business day after receipt of shareholder approval of
Proposal 2, and increased the exercise price per share from $.25 per share to
$1.00 per share. The new price was determined by calculating the average closing
price of the Company's Common Stock on the Nasdaq National Market for the 30
trading days prior to January 12, 1999, rounded to the nearest $0.25. The
amendment was approved by the Board following conversations with shareholders
and potential investors to determine their support for the proposed change.
DESCRIPTION OF CAPITAL TRANSACTION TERMS
As of December 1, 1998, the Company executed and delivered convertible
promissory notes (the "Notes") in the aggregate principal amount of $1 million
to 18 investors in a private placement (collectively, the "Note Holders") as the
first stage of the Capital Transaction. The Notes bear interest at the rate of
seven percent (7%) per annum, are due and payable, with accrued interest, on
March 31, 1999 (except as described below) and are not transferable without the
Company's consent. The Notes may be paid by the Company, subject to the
limitation described in the next sentence, with Common Stock valued at $.25 per
share and are convertible by the Note Holders into Common Stock at $.25 per
share (the "Conversion Price"). To date, approximately $167,000 of the initial
promissory notes have been converted to 668,750 shares of Common Stock, or
approximately 11.1% of the shares outstanding after the conversion. The Company
is not required to issue more than 1,070,000 shares in connection with the
payment and/or conversion of the Notes unless the issuance of any additional
shares has been approved by the Company's shareholders to the extent required by
applicable law, the Company's organizational documents or the rules of the
Nasdaq Stock Market (the "Required Approval"). The Company is not aware of any
Required Approval, but as stated above, intends to seek shareholder approval of
this Proposal 2. If the entire principal and accrued interest amount of the
Notes is converted into or paid with Common Stock, the Company would be required
to issue approximately 4.1 million shares of Common Stock. Amounts due under the
Notes which are not paid with or converted into Common Stock must be paid in
cash on or before their due date. The Company intends to pay all of its
obligations under the Notes with Common Stock if this Proposal 2 is approved by
shareholders.
The Company has agreed to file one registration statement under the
Securities Act of 1933 with respect to the shares issued pursuant to the Notes.
In addition, the Company has agreed not to solicit from
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third parties offers or solicitations of offers for the purchase of shares of
Common Stock until the Required Approvals are received or rejected, but the
Board of Directors 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 the Company's shareholders under applicable law.
In contemplation of the second stage of the Capital Transaction in
which the Company was to raise an additional $3 million, five of the Note
Holders, including Mr. Nichols, Mr. Globus and two of his affiliates and Mr.
Hershey (on behalf of J. Eric May), required, as a condition of their
willingness to accept the Notes, the Company to grant options to acquire
additional Notes with an aggregate principal amount of $1,250,000 on or before
January 31, 1999 (the "Options"). See "Certain Considerations" below. As of
January 12, 1999, the terms of the Options were amended by the Note holders and
the Board of Directors to provide that (i) the Options expire on the earlier of
April 30, 1999 and the fifth business day after receipt of shareholder approval
of Proposal 2, (ii) the Option holders together have the right to purchase a
total of 1,250,000 shares of Common Stock, rather than Notes convertible into
Common Stock, and (iii) the exercise price of the Options is $1.00 per share,
rather than $.25. The Notes held by these five investors were also amended to
extend the maturity of the Notes from March 31, 1999 to coincide with the
termination of the Options - the earlier of April 30, 1999 and the fifth
business day after receipt of shareholder approval of Proposal 2. Additionally,
under the terms of the Notes and with the Company's consent, the five Note
Holders may assign a portion of their Options to other parties. The Company
expects all of the Options to be exercised if Proposal 2 is approved.
The Company has also received subscription agreements from accredited
investors to purchase 1,500,000 shares as part of the second portion of the
Capital Transaction at $1.00 per share. The proceeds from these subscription
agreements are being held in escrow pending approval of this Proposal 2.
As consideration for its efforts as placement agent in connection with
the sale of such shares and the sale of $250,000 principal amount of the Notes,
the Company will issue to Gregory J. Schwartz & Co. ("Schwartz") upon the sale
of the shares in the second stage of the Capital Transaction an option to
purchase 80,000 shares at $.25 per share and 140,000 shares at $1.00 per share
(the "Schwartz Option"). The Schwartz Option expires on April 30, 2009. The
Company will reserve a total of 220,000 shares of Common Stock for the Schwartz
Option if Proposal 2 is approved by the shareholders.
NASDAQ AND LEGAL REQUIREMENTS; SHAREHOLDER APPROVAL NOT REQUIRED
When the Capital Transaction was structured and approved by the Board,
the Company's Common Stock was listed on the Nasdaq Stock Market's National
Market, the market rules of which (the "Nasdaq Rules") require approval by the
Company's shareholders to the extent the Company issues Common Stock (or
securities convertible into Common Stock) equal to 20% or more of the voting
power outstanding prior to such issuance. If the entire principal amount under
the Notes is converted into or paid with Common Stock and shares are issued
pursuant to the Schwartz Option and all of the subscription agreements received
by the Company as part of the second stage of the Capital Transaction, the
Company would issue a total of approximately 7.3 million shares of Common Stock,
or approximately 135% of the shares of Common Stock currently outstanding, and
the Nasdaq Rules would have required shareholder approval. The Company's Common
Stock was delisted from the Nasdaq National Market effective January 21, 1999
and began trading on the OTC Bulletin Board on that date. Consequently the
Nasdaq Rules no longer require the Company to obtain shareholder approval of the
issuance of shares pursuant to the Capital Transaction. The Board has
determined, however, to continue to seek shareholder approval of Proposal 2 in
light of the large number of shares proposed to be issued. Because shareholder
approval is no longer required under Nasdaq Rules or applicable law, the Company
is contractually obligated to issue the shares pursuant to the Capital
Transaction, even if Proposal 2 is not approved by shareholders, unless the
terms of the Notes, the Schwartz Option and the second stage subscription
agreements are renegotiated. If the Company does not issue shares pursuant to
the Capital Transaction, the Company is likely to be unable to pay when due the
principal amount of the Notes and the Company would be in default thereunder. In
addition, the Company would not be able to acquire the working capital necessary
to continue its operations or to repay the bank
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the amount required to reduce its line of credit borrowings as required by the
January 31, 1999 agreement with the bank. In such event, the Company is not
likely to have sufficient capital to continue operating on a long-term basis and
could be forced to curtail or completely cease operations. The Company could
also determine to sell the Company to a third party, liquidate its assets or
seek protection under federal bankruptcy laws.
Neither the laws of the State of Michigan nor the Company's articles of
incorporation or bylaws require approval by the Company's shareholders to issue
shares pursuant to the Capital Transaction. In addition, under Michigan law,
objecting shareholders will have no appraisal, dissenters' or similar rights
(i.e., the right to seek a judicial determination of the "fair value" of the
Common Stock and to compel the Company to purchase their Common Stock for cash
in that amount) with respect to matters presented at the Annual Meeting or
otherwise with respect to Proposal 2, nor will the Company voluntarily accord
such rights to shareholders. Therefore, approval by the requisite number of
shares of the matters presented at the Annual Meeting will bind all shareholders
and objecting shareholders will be able to liquidate their Common Stock only by
selling it in the market.
USE OF PROCEEDS
The proceeds from the issuance of the Notes were used as follows:
Payment of past due vendor notes $350,000
Purchase of inventory 400,000
Payment of other past due trade payables 100,000
Additions to working capital 150,000
-----------
Total proceeds from Notes $1,000,000
-----------
The proceeds from the issuance of shares of Common Stock in the second
stage of the Capital Transaction are expected to be used by the Company as
follows:
Repayment of bank debt 900,000
Addition to working capital 2,100,000
-----------
Total proceeds from second stage 3,000,000
-----------
Total from Capital Transaction $4,000,000
===========
CHANGE IN BOARD OF DIRECTORS
Simultaneous with the Company's execution and delivery of the Notes,
the Board appointed Stephen E. Globus and James A. Nichols to the Board of
Directors to fill the vacancies created by the resignations of Frank Logan and
Douglas Juanarena in November 1998. Messrs. Globus and Nichols each purchased
Notes with Options. See "Certain Considerations" below.
CERTAIN CONSIDERATIONS
The Conversion Price of the Notes is $.25 and the option exercise price
and the sale price pursuant to the subscription agreements received as part of
the second stage of the Capital Transaction is $1.00. The closing price of the
Common Stock reported on the Nasdaq OTC Bulletin Board as of February 25, 1999
was $1.19. If the issuance of the shares expected to be issued in the Capital
Transaction occurs, such issuance is likely to have a dilutive effect on the
shareholders of the Company.
Messrs. Globus (including his affiliates), Nichols (including his
affiliates) and Mr. Hershey (for the account of J. Eric May, Trustee Under
Declaration of Trust) have purchased Notes and Options to purchase shares of
Common Stock as follows:
-8-
<PAGE> 11
<TABLE>
<CAPTION>
GLOBUS NICHOLS HERSHEY/MAY
------ -------- -----------
<S> <C> <C> <C>
Principal Amount of Notes $250,000 $350,000 $250,000
Total shares which may be
acquired upon conversion of
Notes (including interest) 1,023,333 1,432,667 1,023,333
Shares converted to date -0- 374,500 267,500
Options to purchase shares at
$1.00 per shares 250,000 750,000 250,000
Total shares which may be
acquired in Capital Transaction
1,273,333 2,182,667 1,273,333
</TABLE>
Amounts reflected in the table above for Mr. Globus include transactions with
Mr. Globus, Mr. Globus' brother and a partnership controlled by Mr. Globus and
his brother. Amounts reflected in the table above for Mr. Nichols include the
transactions with Mr. Nichols and with an investment club of which Mr. Nichols
is a member. Amounts reflected in the table above for Mr. Hershey are all for
the account of a trust controlled by Mr. J. Eric May, over which Mr. Hershey
may exercise voting and investment power.
If the shares subject to approval pursuant to this Proposal 2 are
issued, the beneficial ownership of the outstanding shares of Common Stock
(excluding options and warrants) will change as illustrated in the following
table.
<TABLE>
<CAPTION>
Before Issuance of Shares After Issuance of Shares
------------------------- ------------------------
Number % Number %
-------- -------- --------- ----------
<S> <C> <C> <C> <C>
Hugo E. Braun -0- 0.00% -0- 0.00%
Joseph J. Fitzsimmons 4,000 0.07% 4,000 0.03%
Matthew S. Galvez -0- 0.00% -0- 0.00%
David P. Gienapp 34,460 0.57% 34,460 0.27%
Stephen E. Globus 216,379 3.59% 1,489,712 11.77%
Garnel F. Graber 16,002 0.27% 16,002 0.13%
Michael L. Hershey (including
shares of J. Eric May) 764,043 12.69% 1,769,876 13.99%
James A. Nichols 391,500 6.50% 2,199,667 17.37%
--------- -------- --------- --------
All Directors and Current
Executive Officers as a Group 1,426,384 23.69% 5,513,717 43.58%
All other shareholders 4,595,682 76.31% 7,138,932 56.42%
--------- -------- --------- ---------
Total 6,022,066 100.00% 12,652,649 100.00%
========= ======== ========== =======
</TABLE>
If all of the shares subject to approval pursuant to this Proposal are
issued, the 6,030,626 shares of Common Stock currently outstanding will
represent approximately 47.66% of the 12,652,649 then outstanding shares and
Messrs. Nichols, Globus and Hershey together will beneficially own approximately
43.15% of the outstanding Common Stock.
BOARD OF DIRECTORS' RECOMMENDATIONS
The Board of Directors has reviewed and considered the terms and
conditions of the Capital Transaction and believes that approval of Proposal 2
is advisable and in the best interests of the Company and its shareholders. The
Board of Directors has approved the issuance of the Capital Transaction and the
terms thereof and recommends that the shareholders vote FOR approval of Proposal
2. The Company's
-9-
<PAGE> 12
directors and executive officers (who hold approximately 23.69% of the
outstanding Common Stock as of the Record Date) have indicated that they intend
to vote all shares of Common Stock over which they exercise voting power in
favor of approval of Proposal 2.
VOTE REQUIRED
The affirmative vote of a majority of the votes cast at the Annual
Meeting, in person or by proxy, on Proposal 2 is required to approve Proposal 2.
Consequently, abstentions and broker non-votes will not affect the vote on
Proposal 2.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF PROPOSAL 2.
PROPOSAL 3
APPROVAL OF AMENDMENT TO THE ARTICLES OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES
The Board of Directors of the Company has approved an amendment to the
Company's Articles of Incorporation to increase the number of shares of Common
Stock authorized for issuance from 15,000,000 shares to 30,000,000 shares (the
"Authorized Shares Amendment"). Proposal 3 is the Board's proposal that the
shareholders approve the Authorized Shares Amendment. The Board of Directors
recommends a vote FOR Proposal 3.
The Authorized Shares Amendment would amend and restate the first
sentence of Article III of the Company's Articles of Incorporation to read as
follows:
The total authorized capital stock is:
1. Common Stock: 30,000,000 shares.
The remainder of Article III would remain unchanged.
On February 25, 1999, of the 15 million shares authorized, there were
6,022,066 shares issued and outstanding and a total of 8,041,462 reserved for
issuance as follows: (i) 6,724,583 shares reserved for issuance pursuant to the
Capital Transaction, including the Schwartz Option, and (ii) 1,316,879 shares
reserved for issuance pursuant to the Company's current stock option plans and
other outstanding warrants and rights to acquire Common Stock from the Company.
If the Capital Transaction shares are issued but this Proposal 3 is not
approved, the remaining unissued and unreserved shares which are currently
authorized, would not be sufficient in number, in the Board's view, to provide
the flexibility necessary for the Company to be able to take advantage of market
or acquisition opportunities or to address capital needs without the delay and
expense involved in calling a special shareholders meeting to approve an
issuance. As a result, the Company's ability to raise additional capital would
be severely restricted. Moreover, if Proposal 5 is approved by the shareholders
but this Proposal 3 is not approved, the Company would not have a sufficient
number of shares to fully implement the new Long-Term Incentive Plan, severely
restricting its ability to attract and retain qualified employees.
The number of shares authorized in excess of the shares outstanding and
the shares reserved for issuance would be available to the Company to be used
for general corporate purposes, which include, without limitation, raising
additional funds, attracting and retaining qualified personnel and effecting
stock splits and acquisitions. Other than the issuance of shares submitted for
approval by the shareholders under Proposal 2 and the Long-Term Incentive Plan
submitted for approval by the shareholders under Proposal 5, there are no
transactions under present review by the Board of Directors which would result
in the issuance of the additional authorized shares, although the Company does
consider from time to time proposals or transactions involving the issuance of
additional shares of Common Stock or instruments convertible into or exercisable
for Common Stock. Whether any specific proposed transaction involving the
issuance of shares of Common Stock will be submitted for shareholder approval
will be determined by applicable law and by the regulations of any securities
market or exchange on which the Company's Common Stock is then listed.
-10-
<PAGE> 13
Although the Board of Directors would authorize the issuance of
additional shares of Common Stock based on its judgment as to the best interests
of the Company and its shareholders, the issuance of additional authorized
shares could have the effect of diluting the voting power per share and diluting
the book value per share of the outstanding shares of Common Stock. In addition,
increasing the authorized shares of Common Stock could, in certain instances,
render more difficult or discourage a merger, tender offer, or proxy contest and
thus potentially have an "anti-takeover" effect, especially if additional shares
of Common Stock were issued in response to a potential takeover. Such an effect
could deter certain types of transactions that might be proposed, whether or not
such transactions were favored by the majority of the shareholders, and could
enhance the ability of officers and directors to retain their positions.
The additional Common Stock to be authorized by adoption of the
Authorized Shares Amendment would have rights identical to the currently
outstanding Common Stock of the Company. Holders of Common Stock have no
preemptive rights with respect to any shares which may be issued in the future.
If Proposal 3 is approved, the Company intends to file an amendment to
its Articles of Incorporation with the Michigan Department of Consumer and
Industry Services, upon which filing the Authorized Shares Amendment will become
effective.
The Company's directors and executive officers (who hold approximately
23.69% of the outstanding shares of Common Stock as of the Record Date) have
indicated that they intend to vote all shares of Common Stock over which they
exercise voting power in favor of approval of Proposal 3.
The affirmative vote of a majority of the shares of Common Stock
entitled to vote at the Annual Meeting is required to approve Proposal 3.
Consequently, abstentions and broker non-votes will have the same effect as a
vote against Proposal 3.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF PROPOSAL 3.
PROPOSAL 4
APPROVAL OF AMENDMENT TO THE COMPANY'S
ARTICLES OF INCORPORATION
TO DECLASSIFY THE BOARD OF DIRECTORS
The Board of Directors of the Company has approved, and is proposing
that shareholders approve, an amendment to the Company's Articles of
Incorporation to eliminate the classification of the Company's Board of
Directors and cause each director to stand for election annually (the
"Declassification Amendment"). The Board of Directors recommends a vote FOR
Proposal 4.
Article VII of the Restated Articles of Incorporation currently
provides that the Board of Directors be divided into three classes as nearly
equal in number as possible. Directors of each class serve staggered three-year
terms, with the term of office of one class expiring each year, and can be
removed only for cause. Article VII may be amended only with the approval of
holders of 80% of the shares of Common Stock outstanding and entitled to vote on
the election of directors generally. If the Declassification Amendment is
approved, the classes and staggered three-year terms of directors would be
eliminated, the current term of office of each director will end at the 2000
Annual Meeting (which will be held after the end of the Company's fiscal year
ending September 30, 1999) and all directors will thereafter be elected for
one-year terms at each annual meeting of shareholders. The Declassification
Amendment will also eliminate the restriction on removal of directors and the
80% vote requirement, which are adjuncts to a classified board.
Proponents of classified boards of directors believe that a classified
board helps a board of directors maintain a greater continuity of experience
because the majority of directors at any given time will have at least one year
of experience with the business affairs and operations of a company. This
continuity may assist a company in long-term strategic planning. Additionally,
proponents argue that a classified board reduces the possibility of a sudden
change in majority control of a board of directors. In the event of a hostile
takeover attempt, a classified board may encourage a person seeking control of
the Company to
-11-
<PAGE> 14
initiate arm's length discussions with the Board, which is in a position to
negotiate a more favorable transaction for shareholders.
However, the Board of Directors believes that a classified board of
directors limits the ability of shareholders to elect directors and exercise
influence over the Company. The election of directors is the primary means for
shareholders to influence corporate governance policies and to hold management
accountable for its implementation of those policies. In keeping with its goal
of ensuring that the Company's corporate governance policies maximize management
accountability to shareholders, the Board of Directors has determined that
declassifying the Board, so that shareholders have the opportunity each year to
register their views on the performance of the Board and management, would
better serve the interests of the Company and its shareholders.
The Declassification Amendment would amend and restate Article VII of
the Company's Articles of Incorporation to read as follows:
"A. The number of directors constituting the entire Board of
Directors shall not be less than three nor more than twelve, the exact
number of directors to be fixed from time to time only by a vote of a
majority of the Board of Directors.
B. During the intervals between annual meetings of
shareholders, any vacancy occurring in the Board of Directors caused by
resignation, removal, death or other incapacity, and any newly created
directorships resulting from an increase in the number of directorships
shall be filled by a majority vote of the directors then in office,
whether or not a quorum, or, if there are no directors in office, by
the shareholders. If the Board of Directors accepts the resignation of
any director or officer to take effect at a future time, it shall have
the power to elect a successor who shall take office when the
resignation becomes effective. Each director chosen to fill a vacancy
or chosen to fill a newly created directorship shall take office until
the next election and until the election and qualification of his
successor, or until his earlier death, resignation or removal."
Section 506 of the Michigan Business Corporation Act, as amended,
requires that a corporation desiring to classify its board of directors must
expressly provide for such classification in either its articles of
incorporation or its bylaws. The deletion of the provisions of Article VII
relating to the classification of the Board is intended to remove any express
provision for the classification of the Board, thereby removing the
classification of the Board. The Company's bylaws do not expressly provide for
classification of the Board.
If Proposal 4 is approved, the Company intends to file an amendment to
its Articles of Incorporation with the Michigan Department of Consumer and
Industry Services, upon which filing the Declassification Amendment will become
effective.
The Company's directors and executive officers (who currently hold
Common Stock representing approximately 23.69% of the Common Stock) have
indicated that they intend to vote all shares of Common Stock over which they
exercise voting power as of the close of business on the Record Date in favor of
approval of Proposal 4.
The Articles of Incorporation provide that the affirmative vote of the
holders of at least 80% of the outstanding shares of Common Stock entitled to
vote at the Annual Meeting is required to approve Proposal 4. Consequently,
abstentions and broker non-votes will have the same effect as a vote against
Proposal 4.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF PROPOSAL 4.
-12-
<PAGE> 15
PROPOSAL 5
APPROVAL OF THE NEMATRON CORPORATION
LONG-TERM INCENTIVE PLAN
The Board of Directors of the Company has approved, and is proposing
that shareholders approve, the Nematron Corporation Long-Term Incentive Plan
(the "Plan") and the issuance of shares of Common Stock thereunder. In
accordance with the terms of the Plan, approval of Proposal 5 could result in
the issuance of up to 1,250,000 shares of Common Stock (subject to adjustment by
the Committee to prevent dilution or enlargement of benefits resulting from
stock dividends, recapitalizations, mergers and other changes in the Common
Stock).
The Plan is intended to attract, retain and motivate highly qualified
individuals to serve as employees of the Company, to align the interests of
employees of the Company with the interests of the Company's shareholders and to
encourage employees to acquire an ownership interest in the Company. As the
Company realizes future business success, the Plan may provide compensation
incentives which it cannot presently provide through salary or bonus.
The Board of Directors recommends a vote FOR Proposal 5.
GENERAL DESCRIPTION OF THE PLAN
The Plan will be administered by the Organization and Compensation
Committee of the Company's Board of Directors (the "Committee"), which is
comprised of no fewer than two non-employee members of the Company's Board of
Directors. The Committee is authorized to administer and interpret the Plan and
to adopt such rules and regulations as it determines are appropriate.
Awards may be made by the Committee to employees of the Company and its
subsidiaries and others as the Committee may select and may be in the form of
incentive stock options, non-qualified stock options, restricted stock or
performance shares, provided that the Committee may not grant options to any
salaried employee during any three year period to purchase more than 500,000
shares. The Company currently has 90 employees. A total of 1,250,000 shares of
Common Stock are reserved for issuance under the Plan (subject to adjustment by
the Committee to prevent dilution or enlargement of benefits resulting from
stock dividends, recapitalizations, mergers and other changes in the Common
Stock). There have been no grants or awards under the Plan to date. Shares
subject to any unexercised portion of a terminated, forfeited, canceled or
expired option granted under the Plan, and shares subject to any terminated,
forfeited, canceled or expired portion of a restricted stock grant or
performance share award under the Plan may again be used for subsequent grants
and awards under the Plan. No award under the Plan may be transferred except by
will or the laws of descent and distribution.
STOCK OPTION GRANTS
Options granted under the Plan may be either incentive stock options
under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
or nonqualified stock options. The exercise price of any option granted under
the Plan may be no less than the fair market value per share of the Common Stock
on the date of grant. The closing price of the Common Stock on February 25, 1999
was $1.19 per share. Options granted under the Plan become exercisable at such
times as the Committee may determine and will generally have a term of ten years
unless the Committee determines a shorter term. No incentive stock options may
be exercisable after ten years from the date of grant. The aggregate fair market
value, determined on the grant date, of the Common Stock with respect to which
incentive stock options may first become exercisable for an optionee during any
calendar year may not exceed $100,000.
Payment for shares to be acquired upon exercise of options granted
under the Plan may be made in cash, by check, by tendering shares of Common
Stock, or, at the discretion of the Committee, an optionee may exercise an
option through a cashless exercise procedure whereby the optionee provides an
option exercise notice to the Company and simultaneously irrevocably instructs a
broker to sell a sufficient number of the shares from the option exercise to pay
the option exercise price and accompanying taxes. At the
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<PAGE> 16
Committee's discretion, shares may be tendered to the Company or the cashless
exercise procedure may be used to satisfy tax obligations.
RESTRICTED STOCK GRANTS AND PERFORMANCE SHARE AWARDS
The Plan authorizes the Committee to grant restricted stock awards
pursuant to which shares of Common Stock will be awarded, subject to
restrictions on transfer that lapse over a period of time or upon achievement of
performance goals, as determined by the Committee. Participants who receive
restricted stock grants are entitled to dividend and voting rights on the
awarded shares prior to the lapse of restrictions on such awards. The Committee
is also authorized to grant performance share awards under the Plan, which are
payable at the discretion of the Committee in cash, shares of Common Stock, or a
combination of each, upon achievement of performance goals established by the
Committee. The terms and conditions of restricted stock and performance share
awards, including the acceleration or lapse of any restrictions or conditions of
such awards, will be determined by the Committee.
TERMINATION; CHANGE IN CONTROL
Options which are not yet exercisable, restricted stock which is not
yet transferable and performance share awards with respect to which performance
goals have not yet been achieved will generally be forfeited if the holder's
employment is terminated. The Committee, however, is granted discretion under
the Plan to accelerate the exercisability of options and waive the restrictions
or conditions applicable to restricted stock or performance share awards and
such acceleration and waiver will occur automatically upon a change in control
of the Company (as defined in the Plan).
An option (or portion thereof) which is exercisable at the time of the
holder's termination may be exercised after such time to the extent it was
exercisable at the time of the holder's termination until such option
terminates. Unless the Committee otherwise provides, an exercisable option will
terminate at various times after the holder's employment terminates, based upon
the reason for the holder's termination. If employment is terminated for any
reason other than death, disability or retirement, such option generally will
terminate on the earlier of the expiration date of the option or three months
after the option holder's termination. If employment terminates because the
holder has died or becomes disabled, such option generally will terminate on the
earlier of the expiration of the option or one year following the date of the
option holder's termination. If employment terminates due to retirement, the
option generally will terminate on the earlier of the expiration date of the
option or the second anniversary of the option holder's termination.
AMENDMENT AND TERMINATION OF THE PLAN
The Plan may be terminated or amended at any time by the Board of
Directors. No amendment, modification or termination of the Plan may adversely
affect any option, restricted stock award or performance share award previously
granted under the Plan without the consent of the participant. Unless the Plan
is terminated sooner by the Board, no new awards or grants may be authorized
under the Plan after January 12, 2009.
FEDERAL INCOME TAX CONSEQUENCES
Under the Code as now in effect, at the time an incentive stock option
("ISO") is granted or exercised, the optionee will not be deemed to receive any
income and the Company will not be entitled to any deduction. However, the
difference between the exercise price and the fair market value of the shares of
Common Stock on the date of exercise is a tax preference item, which may subject
the optionee to the alternative minimum tax in the year of exercise. The holder
of an ISO generally will be accorded capital gain or loss treatment on the
disposition of Common Stock acquired by exercise of an ISO, provided the
disposition occurs more than two years after the date of grant and more than one
year after exercise. An optionee who disposes of shares acquired upon exercise
of an ISO prior to the expiration of the foregoing holding periods recognizes
ordinary income upon the disposition equal to the difference between the
exercise price and the lesser of the fair market value of the shares on the date
of exercise or the disposition price. Any appreciation above the fair market
value of the shares on the exercise date is taxed at capital gains rates. To the
extent ordinary income is recognized by the optionee, the Company may deduct a
-14-
<PAGE> 17
corresponding amount as compensation expense. Payment of the exercise price by
surrendering shares of Common Stock generally will not result in the recognition
of a capital gain or loss on the shares surrendered.
Upon the exercise of a nonqualified stock option, an optionee will
recognize ordinary income equal to the difference between the exercise price and
the fair market value of the Common Stock acquired at the time of exercise and
the Company will receive a corresponding deduction. Payment of the exercise
price by surrendering shares of Common Stock generally will not result in the
recognition of a capital gain or loss on the shares surrendered. When the
optionee disposes of the shares acquired by the exercise of the option, any
difference from the fair market value of the shares on the date of exercise will
be treated as capital gain or loss.
A participant who receives a restricted stock or performance share
award recognizes ordinary income equal to the fair market value of the Common
Stock on the date the restrictions lapse or the date of receipt, respectively,
and, upon withholding for income and employment taxes, the Company will receive
a compensation tax deduction equal to the ordinary income recognized by the
participant.
BOARD OF DIRECTORS' RECOMMENDATIONS
The Board of Directors has reviewed and considered the terms and
conditions of the Plan and believes that approval of Proposal 5 is advisable and
in the best interests of the Company and its shareholders. The Board of
Directors has approved the Plan and the terms thereof and recommends that the
shareholders vote FOR approval of Proposal 5. The Company's directors and
executive officers (who hold approximately 23.69% of the outstanding Common
Stock as of the Record Date) have indicated that they intend to vote all shares
of Common Stock over which they exercise voting power in favor of approval of
Proposal 5.
VOTE REQUIRED
The affirmative vote of a majority of the shares of Common Stock voted,
in person or by proxy, on Proposal 5 at the Annual Meeting is required to
approve Proposal 5. Consequently, abstentions and broker non-votes will have no
effect on Proposal 5.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF PROPOSAL 5.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information as of February 25, 1999 with
respect to the beneficial ownership of Common Stock by each nominee, each
current director, each executive officer named in the Summary Compensation Table
under "Executive Compensation", all current directors and executive officers as
a group and all other persons known by the Company to beneficially own more than
5% of its outstanding Common Stock (each, a "5% Owner"). Except as noted below,
each shareholder exercises sole voting and investment power with respect to the
shares beneficially owned.
-15-
<PAGE> 18
<TABLE>
<CAPTION>
Name Number of Shares Percent of Class(11)
- ---- ---------------- -------------------
<S> <C> <C>
James A. Nichols 2,199,667 (1) 28.08%
Michael L. Hershey 1,787,540 (2) 25.37%
J. Eric May, Trustee Under
Declaration of Trust 1,744,505 (3) 24.82%
Stephen E. Globus 1,489,712 (4) 20.40%
Frank G. Logan, III 234,552 (5) 3.89%
Hugo E. Braun 46,893 (6) 2.38%
David P. Gienapp 108,460 (7) 1.78%
Garnel F. Graber 64,110 (8) 1.06%
Joseph J. Fitzsimmons 20,664 (9) 0.34%
Matthew S. Galvez 0 0.00%
All Current Directors and Executive
Officers as Group (9 persons) 5,817,046 (10) 55.86%
</TABLE>
(1) Mr. Nichols. The shares represented in the table include (i) 338,000
shares owned outright, including 321,000 obtained upon conversion of Notes; (ii)
53,500 shares owned by an investment club of which Mr. Nichols is a member,
which were acquired upon conversion of the Notes; (iii) 907,000 shares which may
be acquired upon conversion of Notes owned by Mr. Nichols; (iii) 151,167 shares
which may be acquired upon conversion of Notes owned by an investment club of
which Mr. Nichols is a member; and (iv) 750,000 shares which he has the right to
acquire upon exercise of the Option granted to him in connection with his
acquisition of the Notes. Mr. Nichols business address is 3707 West Maple Road,
Bloomfield Hills, MI 48301.
(2) Mr. Hershey. The shares represented in the table include (i) the
738,672 shares owned by J. Eric May, Trustee Under Declaration of Trust (over
which Mr. Hershey may exercise voting and investment power), including 267,500
obtained upon conversion of Notes; (ii) 755,833 shares which may be acquired by
Mr. May as Trustee upon conversion of Notes; (iii) 250,000 shares which may be
acquired by Mr. May as Trustee upon exercise of the Option granted to him in
connection with his acquisition of the Notes; (iv) 25,371 shares owned outright
by Mr. Hershey; and (v) options to purchase 17,664 shares of Common Stock under
the Directors Option Plan which are currently exercisable or are exercisable
within sixty days. Mr. Hershey's address is c/o Landis Associates, Inc., 400
West Ninth Street, Suite 100, Wilmington, DE 19801.
(3) Mr. May. The shares represented in the table include (i) 738,672
shares owned by Mr. J. Eric May, Trustee Under Declaration of Trust, over which
Mr. Hershey may exercise voting and investment power, including 267,500 obtained
upon conversion of Notes; (ii) 755,833 shares which may be acquired by Mr. May
as Trustee upon conversion of Notes; and (iii) 250,000 shares which may be
acquired by Mr. May as Trustee upon exercise of the Option granted to him in
connection with his acquisition of the Notes. Mr. May's address is c/o
Wilmington Trust Company, 1100 North Market Street, Wilmington, DE 19890.
(4) Mr. Globus. The shares represented in the table include (i) 8,973
shares owned outright by Mr. Globus; (ii) 120,180 shares owned by partnerships
over which Mr. Globus exercises voting and investment power; (iii) 87,226 shares
owned by certain relatives of Mr. Globus over which Mr. Globus exercises
beneficial ownership; (iv) 255,833 shares which may be acquired by Mr. Globus
upon conversion of Notes and 62,500 shares which he has the right to acquire
upon exercise of the Option granted to him in connection with his acquisition of
the Notes; (v) 511,667 shares which may be acquired by a partnership upon
conversion of Notes and 125,000 shares which it has the right to acquire upon
exercise of the Option granted to it in connection with its acquisition of the
Notes, with respect to which shares Mr. Globus will have voting and investment
power; and (vi) 255,833 shares which may be acquired by Mr. Globus' brother upon
conversion of Notes and 62,500 shares which he has the right to acquire upon
exercise of the Option granted to him in connection with his acquisition of the
Notes, with respect to which shares Mr. Globus will have beneficial ownership.
Mr. Globus' address is 44 West 24th Street, New York, New York 10010.
(5) Mr. Logan. The shares represented in the table include (i) 208,588
shares owned outright; and (ii) 25,964 shares owned by Mr. Logan as custodian
of certain trusts for his children. Mr. Logan has resigned as a director and
officer of the Company.
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<PAGE> 19
(6) Mr. Braun. The shares represented in the table include (i) options
to purchase 15,108 shares under the Directors Stock Option Plan which are
currently exercisable or are exercisable within sixty days; and (ii) currently
exercisable warrants to purchase 131,785 shares of Common Stock pursuant to a
Term Loan and Warrant Purchase Agreement dated November 7, 1995 between the
Company and Onset BIDCO, Inc., of which Mr. Braun is an officer, and others.
If such warrants were exercised, Mr. Braun would have sole voting rights and
shared investment power with respect to the underlying shares.
(7) Mr. Gienapp. The shares represented in the table include (i) 34,460
shares owned outright; and (ii) options to purchase 74,000 shares under the 1993
Stock Option Plan which are currently exercisable or are exercisable within
sixty days.
(8) Mr. Graber. The shares represented in the table include (i) 16,002
shares owned outright; and (ii) options to purchase 48,108 shares of Common
Stock under the Directors Stock Option Plan and special option awards which are
currently exercisable or are exercisable within sixty days.
(9) Mr. Fitzsimmons. The shares in the table include (i) 4,000 shares of
Common Stock owned outright; and (ii) options to purchase 16,664 shares of
Common Stock under the Directors Stock Option Plan which are currently
exercisable or are exercisable within sixty days.
(10) All Current Directors and Executive Officers as a Group. The shares
represented in the table include the shares described in footnotes (1), (2), (4)
and (6) through (9).
(11) For purposes of calculating the percentage of Common Stock beneficially
owned by each person, the shares issuable upon exercise of options and warrants
held by such person and upon conversion of Notes held by such person are
considered outstanding and added to the shares of Common Stock actually
outstanding.
EXECUTIVE COMPENSATION
SUMMARY
The following table sets forth information concerning the aggregate
compensation paid by the Company and its subsidiaries to the Company's former
President and Chief Executive Officer, its current President and Chief Operating
Officer and to its Executive Vice President - Finance and Administration, the
Company's only other executive officer whose salary and bonus exceeded $100,000
in fiscal 1998 (the "Named Executives"), for the periods indicated.
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
AWARDS ALL OTHER
NAME AND PRINCIPAL FISCAL SECURITIES UNDERLYING COMPEN-
POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) SATION ($) (2)
- ------------------ ------- ---------- --------- --------------------- -------------
<S> <C> <C> <C> <C> <C>
Matthew S. Galvez, 1998 $ 13,538 $-0- -0- $ -0-
President and Chief
Operating Officer (3)
Frank G. Logan, III, 1998 $165,467 $-0- -0- $49,226
President and Chief 1997 $168,043 $200,000 120,000 $ 5,113
Executive Officer(4) 1996 $154,531 $ 25,000 50,000 $ 4,305
David P. Gienapp, 1998 $110,552 $-0- -0- $ 3,268
VP - Finance and 1997 $103,005 $ 50,000 36,000 $ 5,746
Administration 1996 $95,384 $ 15,000 20,000 $ 2,286
</TABLE>
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<PAGE> 20
(1) The amounts reflected in the table do not include other compensation or
personal benefits which did not exceed in the aggregate the lesser of
either $50,000 or 10% of the total of annual salary and bonus for the
Named Executives.
(2) All Other Compensation shown for Mr. Logan represents (i) amounts paid
by the Company for life insurance for Mr. Logan of $1,560, $1,560, and
$956 for 1998, 1997 and 1996, respectively, (ii) 401(k) Plan
contributions by the Company of $2,666, $3,553, and $3,349 for 1998,
1997 and 1996, respectively and (iii) $45,000 of consulting fees
accrued by the Company for the three month period following Mr. Logan's
termination as an employee. All Other Compensation shown for Mr.
Gienapp represents 401(k) Plan contributions by the Company.
(3) Mr. Galvez was appointed Chief Operating Officer on August 15, 1998 and
President on October 1, 1998.
(4) Mr. Logan resigned as President and CEO of the Company effective
September 30, 1998.
OPTIONS
The Named Executives were not granted and did not exercise any options
in the year ended September 30, 1998. The following table provides information
with respect to unexercised options held by the Named Executives as of September
30, 1998.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END (#) OPTIONS AT FY-END ($)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
---------------------- ----------------------- ---------------------------------
<S> <C> <C>
Matthew S. Galvez -0- / -0- $-0- / $-0-
Frank G. Logan, III 140,000 / 80,000 $-0- / $-0-
David P. Gienapp 74,000 / 12,000 $-0- / $-0-
</TABLE>
COMPENSATION OF DIRECTORS
Each director who is not an officer or employee of the Company is
eligible to receive for his services as such a fee of $1,000 per meeting
attended, $500 for each committee meeting attended, and an additional $250 for
each committee meeting attended by the chairman of the committee. Director fees
were suspended in April 1998 for the remaining meetings held in fiscal 1998, and
will not resume until after the Company returns to profitability. Directors who
are officers or employees of the Company receive no additional compensation for
their service as a director, although they are reimbursed for their reasonable
travel expenses when meetings are held in a location other than the metropolitan
area in which they reside.
In addition, the Company has a 1993 Directors Stock Option Plan (the
"Directors Plan"). No grants were made under the Directors Plan in the year
ended September 30, 1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leased its two-story office building in Virginia Beach,
Virginia, which the Company used for its software development and applied
systems businesses, from LPS Management, a partnership of which Mr. Logan is a
partner. Mr. Logan is a former director, President and Chief Executive Officer
of the
-18-
<PAGE> 21
Company. Lease payments were $6,994 per month. The lease term extends to
February 1999, but the building was vacated by the Company on October 1, 1999
and is now occupied by a company formed by Mr. Logan after his resignation from
the Company. Total lease expense for the office building was approximately
$82,600 and $79,600 for fiscal 1998 and fiscal 1997, respectively.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Act of 1934 requires all Company
executive officers and directors and persons who own more than ten percent of a
registered class of the Company's equity securities to file reports of their
ownership with the Securities and Exchange Commission. Executive officers,
directors and greater than ten percent shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) reports they
file. Specific due dates for these reports have been established and the Company
is required to report any delinquent filings and failures to file such reports.
Based solely on its review of the copies of such reports received by it
and written representations of its executive officers and incumbent directors,
the Company believes that during the year ended September 30, 1998, all filing
requirements under Section 16(a) applicable to its executive officers, directors
and greater than ten percent beneficial owners were complied with except that
Messrs. Galvez, Globus and Nichols did not file a Form 3 within the prescribed
time period.
ACCOUNTANTS
The accounting firm of Grant Thornton LLP acted as independent
accountants to audit the financial statements of the Company and its
consolidated subsidiaries as of September 30, 1998 and for the two fiscal years
ended September 30, 1998. The Company's Board of Directors, upon the
recommendation of the Audit Committee, has selected Grant Thornton LLP as the
Company's independent auditors for the fiscal year ending September 30, 1999.
Representatives from Grant Thornton LLP will be present at the Annual Meeting,
will have an opportunity to make a statement if they wish and will be available
to respond to appropriate questions. Grant Thornton LLP was appointed in May
1998 and also audited the financial statements of the Company and its
consolidated subsidiaries as of September 30, 1997 and for the two fiscal years
ended September 30, 1997.
On April 28, 1998, KPMG Peat Marwick LLP ("KPMG") informed the Audit
Committee of the Company that it had resigned as the Company's independent
auditors. The Company then began the process of selecting new auditors. The
Company placed no limitations on KPMG responding fully to inquiries of the
successor accountant. The reports of KPMG on the Company's financial statements
for fiscal 1996 and 1997 were withdrawn as of April 28, 1998. Prior to such
withdrawal, such reports contained no adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principle.
In connection with its audits for fiscal 1996 and 1997 and through
April 28, 1998, (i) there were no disagreements between the Company and KPMG on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not properly
resolved to the satisfaction of KPMG would have caused them to make reference
thereto in their report on the financial statements for such fiscal years; and
(ii) there were no reportable events as defined in Regulation S-K Item
304(a)(1)(v), except as follows: As announced on April 28, 1998, the Company
identified potential material adjustments to its financial statements for the
years ended September 30, 1996 and 1997 relating to one significant contract,
and, as a result of the potential adjustments, KPMG advised the Company that its
auditors' reports on the Company's consolidated financial statements as of
September 30, 1997 and 1996 and for each of the years in the two-year period
ended September 30, 1997 should no longer be relied upon. In KPMG's April 28,
1998 letter of resignation, it advised the Audit Committee of the Company that
it had concluded that it could no longer rely on management's representations,
and that it was unwilling to be associated with the financial statements
prepared by management.
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<PAGE> 22
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Shareholder proposals intended to be presented at the 2000 Annual
Meeting of Shareholders which are eligible for inclusion in the Company's Proxy
Statement for that meeting under the applicable rules of the Securities and
Exchange Commission must be received by the Company not later than November 4,
1999 if they are to be included in the Company's Proxy Statement relating to
that meeting. Such proposals should be addressed to the Secretary at the
Company's principal executive offices and should satisfy the requirements
applicable to shareholder proposals contained in the Company's bylaws.
In addition to applicable Securities and Exchange Commission rules for
submission of shareholder proposals, the Company's bylaws provide that
shareholder proposals or nominations must be received by the Company not less
than 60 days nor more than 90 days prior to the first anniversary of the
preceding year's Annual Meeting. If the meeting date has been advanced by more
than 30 days or delayed by more than 60 days, then such proposal must be
received by the Company not less than 60 days nor more than 90 days before the
upcoming Annual Meeting or not later than 10 days after the day of the public
announcement of the date of such meeting, in accordance with the procedures set
forth in the Company's Bylaws, in order to be brought properly before the Annual
Meeting.
By Order of the Board of Directors,
David P. Gienapp
- ---------------------------------------
David P. Gienapp
Secretary
March 3, 1999
Ann Arbor, Michigan
ALL SHAREHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING
PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
THANK YOU FOR YOUR PROMPT ATTENTION TO THIS MATTER.
-20-
<PAGE> 23
PROXY
NEMATRON CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF NEMATRON CORPORATION
The undersigned hereby constitutes and appoints Matthew S. Galvez and
Joseph J. Fitzsimmons, and each of them, attorneys, agents and proxies with
power of substitution to vote as designated below all of the shares of Common
Stock of Nematron Corporation (the "Company") that the undersigned is entitled
to vote at the Annual Meeting of Shareholders of the Company, to be held at
Nematron Corporation, 5840 Interface Drive, Ann Arbor, Michigan on April 6, 1999
at 1:00 p.m., local time, and at any adjournments thereof, upon the matters set
forth below, all of which are proposed by the Company.
This Proxy, when properly executed, will be voted in the manner
directed; IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR ALL NOMINEES FOR
ELECTION AS DIRECTORS AND FOR EACH PROPOSAL INCLUDED IN THE PROXY STATEMENT
DATED MARCH 3, 1999. In their discretion, the persons named herein as proxies
are also hereby authorized to vote upon such other matters as may properly come
before the meeting, including the election of any person to the Board of
Directors where a nominee named in the Proxy Statement dated March 3, 1999 is
unable to serve or, for good cause, will not serve.
(TO BE SIGNED ON REVERSE SIDE)
<PAGE> 24
1. Election of Directors:
| | FOR | | WITHHOLD | | FOR ALL EXCEPT
Hugo E. Braun
Matthew S. Galvez
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ONE OR MORE OF THE INDIVIDUAL
NOMINEES, MARK "FOR ALL EXCEPT" AND WRITE THE NAME OF EACH SUCH NOMINEE ON THE
LINE BELOW.)
- -----------------------------------------------------------------------
2. Approve the potential issuance of approximately 7,313,333 shares of Common
Stock pursuant to a capital raising transaction:
| | FOR | | AGAINST | | ABSTAIN
3. Approve a proposal to amend the Articles of Incorporation to increase the
number of authorized shares of Common Stock to 30,000,000:
| | FOR | | AGAINST | | ABSTAIN
4. Approve a proposal to amend the Articles of Incorporation to declassify the
Board of Directors and reduce the terms of the directors from three years
to one year:
| | FOR | | AGAINST | | ABSTAIN
5. Approve the Nematron Corporation Long-Term Incentive Plan:
| | FOR | | AGAINST | | ABSTAIN
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Shareholders and the Proxy Statement dated March 3, 1999 and the 1998 Annual
Report to Shareholders and ratifies all that the proxies or either of them or
their substitutes may lawfully do or cause to be done by virtue hereof and
revokes all former proxies.
Please sign this Proxy exactly as your name(s) appear(s) on this Proxy.
If the stock is registered in the names of two or more persons, each must sign.
Executors, administrators, trustees, guardians, attorneys and corporate officers
should add their titles.
PLEASE BE SURE TO SIGN AND DATE THIS PROXY IN THE SPACE BELOW.
SIGNATURE(S) DATE
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SIGNATURE(S) DATE
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