<PAGE> 1
================================================================================
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 DECEMBER 31, 1999
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)
MICHIGAN 38-2483796
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5840 INTERFACE DRIVE, ANN ARBOR, MICHIGAN 48103
(Address of principal executive offices) (Zip Code)
(734) 214-2000
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Exchange on Which Registered
Common Stock, no par value The American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: NONE
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. [ X ]
Issuer's revenues for its most recent fiscal year: $29,772,129
The aggregate market value of the voting stock held by non-affiliates
as of March 20, 2000, computed by reference to the closing price of such stock
on such date as quoted on The American Stock Exchange, was approximately
$26,863,000. 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
March 20, 2000 was 12,605,430.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT [ ] Yes [ X ] No
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-KSB Into
Document Which the Document is Incorporated
Portions of Definitive Proxy Statement
for the 2000 Annual Meeting of Shareholders Part III
(the "2000 Proxy Statement")
================================================================================
<PAGE> 2
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, 1997, the Company acquired Intec
Controls Corp., a Massachusetts-based software development company, and
Virtual-Time Software, Inc., a California-based software development company.
The Company's principal executive offices are located at 5840 Interface
Drive, Ann Arbor, Michigan 48103, 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 Control Computers(TM) ("ICCs") and Industrial
Workstations(TM) ("IWSs"), which are "ruggedized" computers with built-in
displays, keyboards or other forms of operator input. ICCs and IWSs 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 are
sold to industrial users for direct machine control, supervisory control,
operator interface and data acquisition.
The primary focus of ICCs and IWSs is on applications where the
extremes of temperature, shock, 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 direct machine control and
operator-machine interface applications. The Company incorporates electronic
technology and software in its ICCs and IWSs 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 five main software products, all of which were
developed by the Company or acquired in the past five years. These products,
used in the industrial and factory automation workplace, are marketed under the
trade names OpenControl(TM), Hyperkernel(R), Paragon(TM), FloPro(R) and
AutoNet(TM). Additionally, most of the Company's IWS products contain
proprietary software embedded in the products as firmware that is not sold
separately. All five 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
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. The Company's FloPro software product is a flowchart programming
and direct machine control software product. The Company's AutoNet software
2
<PAGE> 3
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.
The Company has two primary locations in the United States and one in
the United Kingdom. The Company's headquarters are in Ann Arbor, Michigan and
employees located there are responsible for computer assembly, customer service,
product development, administration, finance, accounting, personnel, corporate
purchasing, corporate quality, corporate marketing, corporate-wide sales and
international business development. The Company's software development and
software manufacturing are conducted at its Foxboro, Massachusetts office.
Software engineers and other employees located in Foxboro are responsible for
software product development, enhancement, maintenance, and reproduction of
shrink-wrapped software. The Company's sales and support operations for the
European marketplace are conducted in Waterlooville, Hampshire, The United
Kingdom, through its Nematron Limited subsidiary. Located south of London, its
principal functions are European sales, distribution management, application
engineering, technical support and customer service. Nematron Limited 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. The Company also maintains a sales office in Canada.
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 ICC and IWS products to the industrial
automation marketplace. Each product class includes a range of display options,
prices, and capabilities.
Virtually all of the Company's newer products use "flat panel" displays
that offer considerable space savings and increased reliability and clarity than
the older technology CRT displays. These products also provide immunity to
shock, vibration, and electromagnetic interference. They are particularly well
suited for applications with physical space limitations and with hazardous
environments such as chemical plants, and in the presence of high electrical
currents, such as in aluminum and steel processing applications.
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 components and assembled products. 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, Cutler-Hammer and GE Fanuc, 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 fiscal 1999 and fiscal 1998
amounted to less than 10% of consolidated revenue. The Company expects a slow
growth rate in this market segment in the next year based upon its market
research. The growth rate could accelerate if the market embraces the concept of
small footprint operating systems
3
<PAGE> 4
and languages that can communicate with Windows NT-based control software. The
Company plans to increase its efforts to develop and market new embedded
software products and enhance existing products.
INDUSTRIAL GRAPHICS TERMINALS AND PROGRAMMABLE OPERATOR INTERFACE
PRODUCTS
Industrial graphics terminals and programmable operator interface
products include both CRT displays or flat panel displays with and without
keyboards. These products utilize the Company's proprietary hardware and
software designs that 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
Cutler-Hammer.
Sales of industrial graphics terminals and programmable operator
interface products in each of fiscal 1999 and fiscal 1998 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 8000 series of Industrial Control Computers ("ICCs")
were designed and developed by the Company from 1995 through 1999. ICC-5/6/8000
products offer Pentium 133 through Pentium III 600 MHz processors. They are
shipped with display options from 10.4" to 15.0" and a choice of motherboards
featuring PCI/ISA bus architecture. The front panels of these units have
integrated keypads and are rated UL Type 4X (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 $4,500 to $13,000, varying primarily
on the choice of display, processors, features and bundled software.
The 500i and 600i series of Industrial Control Computers ("ICIs") were
designed and developed by the Company in 1998. ICI-500/600i products offer
Pentium 133 to Pentium/MMX 233 MHz processors with ISA passive backplane
architecture. They are shipped with display options from 10.4" to 12.1" and have
the same ratings as the ICC-5/6/8000 series. These units range in price from
$4,500 to $10,000, varying primarily on the choice of display, processors,
features and bundled software.
The FlexBox(TM) modular rack-mount or bench-top PC offers processors
ranging from Pentium 133 to Pentium III 600 MHz processors. These computers are
based on the same PCI/ISA motherboard technologies offered in the ICC-5/6/8000
series. These modular computers are often integrated into a system which
includes the Nematron MON-500 product, a 10.4" flat panel monitor with UL Type
4X front panel. FlexBox products range in price from $2,500 to $8,000 000
depending upon processors, hardware features and software options and the
MON-500 ranges from $3,000 to $4,000 depending upon options selected.
The MOD-D series of Digital Flat Panel Monitors (600D, 800D and 900D)
were designed and developed by the Company in 1999. Display options range from
12.1" to 18.1" and have UL, CE Mark and UL Type 4X ratings. These units range in
price from $2,500 to $8,000,000 depending upon processors and hardware features
selected.
Sales of these products in fiscal 1999 and fiscal 1998 amounted to 70%
and 33%, respectively, of consolidated revenue. The Company expects that revenue
from this product category will continue at the same rate as experienced in
fiscal 1999.
Management believes, based on market research and reports of various
research analysts, that a large segment of the existing PLC market will over
many years migrate to PC-based control and operator interface solutions that
eliminate the PLC. The resulting market for industrial PC-based products will
expand significantly. In response to this evaluation of the market, the Company
will place substantial emphasis on further enhancements to Industrial
Workstations and ICC products as cost effective replacements for existing, lower
functionality, products that complement as well as replace PLCs.
Many competitors participate in the industrial PC product market, most
notably IBM, Allen-Bradley,
4
<PAGE> 5
Siemens and smaller companies, including low-cost producers in the Far East.
Many segments in this market are highly price-sensitive, especially in
environments where desk top type 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 with unique and valued features for reliable
operation in factories and other harsh environments.
COMPUTER HARDWARE PARTS AND SERVICE
The Company maintains an inventory of spare parts and service stock and
dedicates service technicians and support personnel whose functions include
technical advice regarding product applications and service and repair of
returned hardware products. 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 an important part of the business. Revenues from the service and
repair of industrial hardware products in each of fiscal 1999 and fiscal 1998
amounted to less than 10% of consolidated revenue.
SOFTWARE PRODUCTS
The software products described below, all of which were acquired or
developed by the Company in the last five years, 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 software products described below, the continued
enhancement of existing products, the development of new hardware and software
products, the Company is positioning itself to become a leading supplier of
industrial automation solutions. These solutions include the delivery of
superior software products bundled with state-of-the-art hardware products. The
Company will attempt to use its software and proven reliable PC hardware to help
drive the factory automation industry from PLCs to PC-based control with
superior technical features compared to the older technology of PLCs.
The Company's 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 software products may be run on Nematron's
computers or on computers of most other manufacturers.
Sales of software products, including associated support, training and
maintenance agreements, amounted to 14% and 24% of the Company's consolidated
revenue in fiscal 1999 and fiscal 1998, respectively. The Company expects that
revenue from software products will represent 15-20% of revenues in 2000.
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 and Man-Machine Interface programs,
including the Company's proprietary Paragon SCADA product and MMI product.
OpenControl allows the use of standard networking products and connectivity to
the Internet or to 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, a FloPro for
Windows NT run-time control engine, and independent device network I/O servers.
FloPro for Windows NT, OpenControl's run-time engine, 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.
OpenControl 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 OpenControl is based. The OpenControl product has many
advantages over its competitors: the software is self-documenting, it allows for
more efficient programming, 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.
5
<PAGE> 6
PARAGON(TM)
The Company's SCADA and MMI software is called Paragon(TM). Paragon
was originally acquired in March 1997 and has undergone many upgrades and
enhancements since then. It is now often sold bundled with OpenControl and
Hyperkernel on ICC products as a complete machine control solution. Paragon is a
software package that 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 Dynamic Data Exchange, 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.
HYPERKERNEL(R)
Hyperkernel allows software developers to integrate highly
deterministic real-time applications into the Microsoft 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. Hyperkernel product features include high speed timers, memory
management, interrupt handlers, inter-process communication, file system
services, and task scheduling and prioritization routines. By using a
standardized development environment like Microsoft C and Visual C++, program
developers may achieve significant reductions in software development efforts.
The Hyperkernel 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.
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 automotive
component manufacturing facilities and controls thousands of machines involved
in the manufacture of engines and transmissions.
AUTONET(TM)
The Company's AutoNet(TM) software product, a test and measurement
software, 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
6
<PAGE> 7
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 at a higher performance level than competitive products.
SALES CHANNELS
The Company employs three forms of sales channels. The Company's
primary sales channel is a network of high-tech industrial distributors. The
Company also sells its products to major original equipment manufacturers
("OEMs") of industrial processing systems and machines and to other major end
users. And lastly, the Company markets certain products to private-label
accounts that remarket Nematron's products primarily through their own networks
of industrial electrical distributors. Traditionally, the split between these
three channels is 40% / 40% / 20%, respectively. However, these percentages may
vary by year depending on the success of various marketing campaigns and sales
efforts to the various channels in any one period of time. 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
2000. The Company also intends to increase its sales and marketing efforts for
bundled hardware and software products among all industries.
One distributor accounted for 30% of total fiscal 1999 revenues and
three distributors accounted for 26% of total fiscal 1998 sales. These
distributors resell products primarily to the automotive industry, OEMs and
machine tool builders. No other private label, direct customer, or distributor
accounted for more than 10% of total Company sales in 1999 or 1998. The ICC
product family, including ICC products bundled with software products, accounted
for approximately 70% and 33% of total fiscal 1999 and fiscal 1998 revenues,
respectively. No other single model or product family accounted for more than
15% of the Company's revenues during those periods.
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 varying amounts of customer training,
application engineering, and support. The Company has approximately 40 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 Alabama, Arizona, Illinois, Michigan, Ohio, Texas,
Tennessee, Virginia, Washington, Toronto, Canada 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,
keypads, displays, electronic circuit boards and other component parts into
finished products. In addition, the Company performs some limited cable
manufacturing and wave soldering, and assembles engineering prototypes for new
products. Beginning in May 1999, the Company began to subcontract the material
acquisition and assembly of certain high volume - low mix ICC products to two
subcontractors, one located in South Carolina and one in the Czech Republic.
Approximately 40% of fiscal 1999 revenues were derived from sales of products
assembled by these two subcontractors. For products assembled in-house, the
Company purchases substantially all components. It uses a number of independent
firms for these purchases and is not materially dependent upon any third party
that performs these services. Although the Company was dependent in 1999 on one
of the two subcontractors of complete ICC products, the Company may shift such
assembly in-house or find alternate subcontractors in 2000 to achieve price
reductions compared to newly quoted assembly pricing from the South Carolina
subcontractor. 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.
A network of PC-based workstations are used by personnel involved in
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.
7
<PAGE> 8
In addition, the Company employs a variety of assembly and test
equipment to reduce the cost of and ensure the quality of the designed and
assembled products and components. The Company employs its environmental
chambers and electronic instrumentation to certify that its products meet the
severe industrial environments for which they are intended.
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 has a substantial product development staff, 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 periodically employs the services of unrelated
contract engineering companies on an as-needed basis. The Company also has
assigned certain of its engineers to quality control responsible for assuring
the long term quality and reliability of the Company's products. The Company
conducts its software development activities in Foxboro, Massachusetts and its
hardware development and quality control and testing activities testing 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 1999 and
1998, the Company expended approximately $2.1 million and $4.2 million,
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 7% and 25% of total revenues in fiscal 1999 and 1998,
respectively. The decrease in the percentage results from the combination of an
increase in revenues and the consolidation of software development offices.
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. In 1997, the Company received a patent for a chassis hinged
mechanism used on its ICC and certain other products. In 1999, the Company
received a patent for a unique and effective method of logging and retrieving
computer system parameters to assist with examining environmental variables,
operating times and temperature ranges. The Company has no patents on other
hardware products or computer software 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 that meets regularly with
its patent counsel to review trademark and patent potential.
In addition to trademarks on the trade names under which the Company
does or did business, including Nematron(R), NemaSoft(R), Imagination
Systems(TM) and Universal Automation(TM), the Company also owns trademarks on
certain of its products, including Industrial Workstation(TM), OpenControl(TM),
Industrial Control Computers(TM), Hyperkernel(R), Paragon(TM), FloPro(R),
AutoNet(TM) and PowerVIEW(R), FlexBox(TM) and QuickShip(TM).
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 arrangements and
licenses. These arrangements and licenses have not been a significant source of
revenue.
EMPLOYEES
The Company employs 100 full time employees as of December 31, 1999, including
72 in Ann Arbor, Michigan, 12 in Foxboro, Massachusetts, 6 in the United
Kingdom, and 10 at other locations, primarily home offices of its sales
8
<PAGE> 9
staff. No employees are represented by a collective bargaining unit. The Company
believes its employee relations are good.
ENVIRONMENTAL COMPLIANCE
The Company's products 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 assembly facility is 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. A mortgage on the property comprises a portion of the security
for the Company's bank line of credit and a term loan from LaSalle Business
Credit.
The Company's Foxboro, Massachusetts's facility consists of
approximately 4,600 square feet of leased space in a three-story office
building. The operating lease for this facility is non-cancelable through June
2001.
The Company's Waterlooville, United Kingdom, facility consists of 2,100
square feet of leased space in a three-story office building. Prior to January
2000, the United Kingdom office was in the neighboring town of Chichester. The
operating lease is non-cancelable through December 2004.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any legal proceedings other than
routine, non-material litigation incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
9
<PAGE> 10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on The American Stock Exchange
(the "AMEX") under the symbol NMN, and began trading on that exchange on
November 23, 1999. From January 1, 1998 through April 27, 1998, the Company's
Common Stock was traded on the Nasdaq Stock Market's National Market (the
"National Market") and traded under the symbol NEMA. Trading of the Company's
Common Stock was suspended on the National Market on April 28, 1998 through
August 2, 1998. On January 21, 1999, the Company's Common Stock was delisted
from the National Market for failing to maintain the National Market's minimum
tangible net worth criteria. The Common Stock traded on the Over-The-Counter
Bulletin Board (the "OTC BB") under the symbol NEMA from January 21, 1999 until
November 23, 1999, when it became listed for trading on the AMEX. The following
table sets forth, for the periods indicated, the closing price on the AMEX and
the National Market or the bid proce on the OTC BB covering the periods during
which the Company's Common Stock was traded thereon. The quotations on the OTC
BB reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.
<TABLE>
<CAPTION>
Fiscal 1998 Period High Low
----------- ------ ---- ---
<S> <C> <C> <C>
First Quarter Oct - Dec 1997 $8.00 $4.00
Second Quarter Jan - Mar 1998 $6.50 $4.12
Third Quarter Apr - Jun 1998 $6.62 $5.50
Fourth Quarter Jul - Sep 1998 $4.00 $1.09
Transition Quarter Oct - Dec 1998 $1.93 $0.56
------------------
Fiscal 1999
-----------
First Quarter Jan - Mar 1999 $1.97 $1.00
Second Quarter Apr - Jun 1999 $3.13 $2.00
Third Quarter Jul - Sep 1999 $4.72 $2.00
Fourth Quarter Oct - Dec 1999 $4.50 $2.38
</TABLE>
There are approximately 850 holders of record of the Company's Common
Stock as of March 20, 2000.
The Company has never paid cash dividends and does not expect to pay
cash dividends in the foreseeable future. A covenant in the Company's bank
financing agreement prohibits the payment of dividends. See Note 8 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 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 its software products
into the Company's hardware 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 current 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.
10
<PAGE> 11
The discussion of operations that follows includes comparisons of the
year ended December 31, 1999 ("fiscal 1999") with the year ended September 30,
1998 ("fiscal 1998") and the three-month transition period ended December 31,
1998 to the three-month period ended December 31, 1997. As previously reported,
the Company changed its fiscal year from September 30 to December 31 and the
Company filed a Transition Report on Form 10-QSB for the three-month period
ended December 31, 1998.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998
Net revenues increased to $29,772,000 in fiscal 1999 compared to
$16,829,000 in fiscal 1998. This represents an increase of $12,943,000, or
76.9%, compared to the fiscal 1998 level. Revenues increased primarily because
of sales to original equipment manufacturers ("OEMs") under a major supply
program with an automotive company that specified Nematron's bundled products
and other hardware products to the OEMs for their program to equip several
automotive power train plants with PC-based direct machine control industrial
control computers. Revenues under this major program totaled $13,200,000
compared to $500,000 in fiscal 1998. Revenues have been recorded net of deferred
revenue which will be recognized as the Company provides the post sales support
specified in the underlying agreement. Revenues derived from all other customers
decreased approximately $1.5 million stemming from a lower order intake early in
fiscal 1999 that resulted from the Company's inability to secure component parts
and assembled products in a timely manner and the corresponding increase in
quoted delivery times. The Company solved this operating issue beginning in May
1999 by employing subcontractors to purchase and assemble products, by raising
cash in the April 1999 capital infusion and from profitable operations. Although
management believes that revenues from non-automotive customers will increase as
a result of increased marketing and sales efforts, management also expects that
overall revenues in 2000 will decrease approximately 15% because of the
completion in early 2000 of significant portions of the major automotive supply
program.
Foreign revenues increased to $11,999,000 in fiscal 1999 compared to
$5,225,000 in fiscal 1998 primarily because of sales made to foreign-based OEMs
under the major program discussed above. Domestic revenues increased in fiscal
1999 to $17,773,000 compared to $11,605,000 in fiscal 1998 also because of sales
made to domestic-based OEMs under the same program. With the decrease in
forecasted revenues under this major program in 2000, the percentage of foreign
revenues in 2000 is expected to return to historical levels of approximately 35%
of total revenues.
Cost of revenues includes 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. Cost of revenues decreased to 67.1% of revenues in fiscal
1999 compared to 83.1% in fiscal 1998. The decrease results primarily from the
increased margin on bundled hardware/software products sold in 1999 and from a
$900,000 lower provision for obsolete inventory. The cost of revenue from
bundled products is significantly lower than on hardware only products because
of the low cost of reproduction of the software that is loaded on the hardware
product. Also, improved inventory management resulted in a decrease in
provisions for possible obsolete inventory, and the Company's use of
subcontractors relieved it of significant purchasing and storage
responsibilities, in turn reducing the Company's exposure to inventory
obsolescence. Although the cost of purchasing complete units from subcontractors
was higher than the cost of assembling similar units in house, the increased
percentage of total revenue attributable to sales of higher margin software and
services offset the increased component cost. Management expects that the change
in product mix towards an increased percentage of hardware only products in
2000, resulting from the expected decrease in revenues from the major automotive
supply program discussed above, will cause the cost of revenues percentage to
increase slightly in 2000.
Product development expenses decreased to $794,000 in fiscal 1999
compared to $1,318,000 in fiscal 1998. This represents a decrease of $525,000,
or 39.8%, over the fiscal 1998 level. The decrease results a combination of
decreases in total development costs pursuant to the closing at the end of
fiscal 1998 of three software development offices and the elimination of
significant overhead costs associated with those operations, offset in part by a
decrease in the amounts of software development costs capitalized in fiscal
1999. Management expects that product development expenses will increase
moderately in 2000 from the amount expended in fiscal 1999.
Selling, general and administrative expenses in fiscal 1999 decreased
to $6,471,000 compared to $8,926,000 in fiscal 1998. This represents a decrease
of $2,455,000, or 27.5%, over the fiscal 1998 level. The decrease results from
the closing of three offices at the end of fiscal 1999, a reduction in staff,
lower discretionary spending for marketing and advertising and sales activities,
and decreases in professional fees because of the completion of all significant
litigation against the Company in early fiscal 1999. Management expects that
selling,
11
<PAGE> 12
general and administrative expenses will increase moderately in 2000 from the
amount expended in fiscal 1999 because of increases in marketing and sales staff
late in 1999 and planned increases in marketing campaigns in 2000.
Other operating expenses in fiscal 1999 decreased to $-0- compared to
$1,670,000 in fiscal 1998. Other operating expenses in fiscal 1998 included a
write down of purchased intangible assets, including goodwill recorded at the
acquisition of Intec, totaling $1,320,000 and a provision of $350,000 for
payroll and other costs related to the closing of three satellite offices at the
end of fiscal 1998. The writedown of intangible assets was required because of
personnel changes and changes in software development, operating and marketing
strategies.
Interest expense in fiscal 1999 decreased to $524,000 compared to
$735,000 in fiscal 1998. This represents a decrease of $211,000, or 28.7%, over
the fiscal 1998 level. The decrease results from significantly lower average
borrowing levels made possible by the application of cash to outstanding debt
levels which became available from the $4 million capital infusion completed in
April 1999, and from cash generated from the profitable 1999 operations.
Management expects that interest expense will continue to decrease in 2000
because of continuing lower debt levels and the lack of any significant
borrowings under the Company's $8 million revolving line of credit.
THREE-MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTH ENDED DECEMBER 31,
1997 (UNAUDITED)
Net revenues for the three months ended December 31, 1998 decreased to
$3,187,000 compared to $4,351,000 in the year earlier period. This represents a
decrease of $1,164,000, or 26.8%, over the year earlier period. The decrease is
attributable to reduced sales of Industrial Workstations and Industrial Control
Computers caused by component parts shortages resulting from the Company's
working capital deficiency during the three months ended December 31, 1998.
Gross profit for the three months ended December 31, 1998 decreased to
$1,102,000 compared to $1,314,000 in the year earlier period. This represents a
decrease of $212,000, or 16.1%, compared to the year earlier period. However,
gross profit as a percentage of revenues in the three months ended December 31,
1998 was 34.6% compared to 30.2% in the same period last year. The improvement
in gross profit percentage resulted primarily from a higher percentage of sales
of higher margin bundled hardware/software products in 1998 compared to the same
period in 1997.
Product development expenses for the three months ended December 31,
1998 decreased to $132,000 compared to $209,000 in the year earlier period. This
represents a decrease of $77,000, or 36.9%, compared to the year earlier period.
The decrease results primarily from a decrease in the number of product
development employees and reduced development efforts in the current period
compared to the same period last year.
Selling, general and administrative expenses for the three months ended
December 31, 1998 decreased to $1,324,000 compared to $2,301,000 in the year
earlier period. This represents a decrease of $977,000, or 42.5%, compared to
the year earlier period. As a percentage of net revenue, such expenses decreased
to 41.5% in the three months ended December 31, 1998 from 52.9% in the same
period last year. The decrease resulted from lower staff levels, the effects of
closing of three satellite offices as of September 30, 1998 and the effects of
cost controls initiated as of September 30, 1998.
Interest expense on borrowed funds for the three months ended December
31, 1998 increased to $159,000 compared to $143,000 in the year earlier period.
This represents an increase of $16,000, or 11.2%, compared to the year earlier
period and resulted from higher average borrowing levels.
Interest expense from the December 1998 issuance of convertible
promissory was $3,000,000, representing the charge to operations (with the
offsetting increase in shareholders' equity) to reflect the beneficial
conversion feature of the promissory notes allowing the note holders to convert
such notes into 4,000,000 shares of common stock. That amount was calculated at
the date of issuance as the difference between the conversion price ($0.25 per
share) and the quoted market price of the common stock into which the promissory
notes are convertible ($1.00 per share), multiplied by 4,000,000 shares of
common stock into which the promissory notes were convertible.
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
12
<PAGE> 13
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 was the identification of systems
and products with which the Company has exposures to Y2K issues. Only one
software product, AutoNet, was not Y2K compliant in all respects, and some
older-model hardware products required manual adjustments to achieve Y2K
compliance. Phase II encompassed the development and implementation of action
plans to be Y2K compliant in all areas. Phase III included final testing of each
major area of exposure to ensure compliance. The Company identified four major
areas determined to be critical for successful Y2K compliance: (1) financial and
information system applications; (2) software and hardware products currently
sold; (3) third-party relationships and (4) non-information technology areas
such as security, telephone systems and climate control systems.
All phases of the program were completed prior to December 31, 1999,
and the AutoNet software was enhanced to be Y2K compliant at a cost of less than
$50,000, primarily related to the salary and benefits of the Company's software
development employees. The Company experienced no Y2K compliance issues to date.
Management does not expect other incidents related to problems caused by the Y2K
issue and does not anticipate the expenditure of any additional funds related to
the Y2K issue.
LIQUIDITY AND CAPITAL RESOURCES
Primary sources of liquidity are cash generated from operations and the
Company's $8.0 million line of credit. The Company's operations generated $2.8
million in cash during 1999, primarily as a result of $2.0 million in net
income, $2.2 million in depreciation and amortization expense and an increase in
deferred revenue and accrued liabilities of $0.9 million, partially offset by an
increase in accounts receivable of $3.0 million. The increase in accounts
receivable resulted from an increase in revenues and an increase in days sales
outstanding from certain foreign customers. The Company also used $1.8 million
in cash for repayment of debt, financed in part with the $3.0 million in net
proceeds from the April 1999 stock issuance, new bank term debt (discussed
below) and cash from operations.
In November 1999 the Company repaid the amounts outstanding under the
predecessor bank agreements and mortgage loan with the proceeds of a $2.9
million three- year term loan pursuant to a Loan and Security Agreement with
LaSalle Business Credit, Inc. (the "Credit Agreement"). The Credit Agreement
also provides for a revolving line of credit up to $8.0 million, limited by a
borrowing formula that allows for advances up to 85% of eligible accounts
receivable, which bears interest at the prime rate of interest plus 1.0%. The
term loan requires monthly principal payments of $16,100 plus interest at the
prime rate of interest plus 1.5% (9.75% at inception), plus a mandatory
quarterly prepayment of "Excess Cash Flow", as defined in the Credit Agreement.
The loans are secured by substantially all of the Company's assets and
guaranteed by its domestic subsidiaries and their assets. Borrowings under the
Credit Agreement are due in full on November 12, 2002, but may be extended for
an additional one-year period unless the lender gives prior notice of
termination to the Company. The Credit Agreement includes various affirmative
and negative covenants limiting the Company's ability to take certain actions,
including the payment of cash dividends, requiring the Company to maintain
specified levels of tangible net worth, debt service coverage and interest
coverage, and limiting capital expenditures and software development
expenditures to levels higher than expended in 1999.
At December 31, 1999, the Company had letters of credit totaling $2.1
million outstanding under the Credit Agreement and was permitted to borrow an
additional $1.4 million under the borrowing formula. The letters of credit
expired or were terminated on February 15, 2000 and have not been renewed, and
these expirations increased the amounts that could be borrowed by $2.1 million.
Based upon existing working capital, the new borrowing arrangement and
forecasted revenue and expense levels, management believes that it has
sufficient liquidity to satisfy its liabilities as they become due.
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, uncertainties discussed in this section and in "Business Products,
Market and Competition" above, the decline of economic conditions in general and
conditions in the
13
<PAGE> 14
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 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.
14
<PAGE> 15
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 2000 Proxy Statement under the captions "Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Company's 2000 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 2000 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 2000 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.
(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
December 31, 1999.
15
<PAGE> 16
NEMATRON CORPORATION AND SUBSIDIARIES
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants 22
Consolidated Balance Sheets as of December 31, 1998 and 1999 23
Consolidated Statements of Operations for the years ended September 30, 1998 and
December 31, 1999 and the three months ended December 31, 1998 24
nsolidated Statements of Stockholders' Equity for the years ended September
30, 1998 and December 31, 1999 and the three months
ended December 31, 1998 25
Consolidated Statements of Cash Flows for the years ended September 30, 1998 and
December 31, 1999 and the three months ended December 31, 1998 26
Notes to Consolidated Financial Statements 27
</TABLE>
21
<PAGE> 17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
THE BOARD OF DIRECTORS
Nematron Corporation:
We have audited the accompanying consolidated balance sheets of Nematron
Corporation and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended September 30, 1998 and December 31, 1999 and the three months
ended December 31, 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 audits 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 December 31, 1998 and 1999, and the results of their
operations and their cash flows for the years ended September 30, 1998 and
December 31, 1999 and the three months ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Grant Thornton LLP
February 25, 2000
Detroit, Michigan
22
<PAGE> 18
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
December 31,
------------
1998 1999
---------- ----------
<S> <C> <C>
Assets (NOTES 5 AND 8)
Current assets:
Cash and cash equivalents $ 106,730 $ 356,668
Accounts receivable, net of allowance for doubtful accounts of $368,000
in 1998 and $122,000 in 1999 1,999,900 5,014,028
Inventories (Note 4) 1,884,335 1,671,648
Prepaid expenses and other current assets 305,310 163,895
----------- -----------
Total current assets 4,296,275 7,206,239
Property and equipment:
Land 117,000 117,000
Building and improvements 2,287,970 2,287,970
Equipment 6,624,572 6,121,875
----------- -----------
9,029,542 8,526,845
Less accumulated depreciation (5,685,402) (6,129,373)
----------- -----------
Net property and equipment 3,344,140 2,397,472
Other assets:
Software and related development costs, net of accumulated amortization of
$2,557,639 in 1998 and $1,853,660 in 1999 (Note 3) 3,880,284 3,617,553
Other intangible assets, net of accumulated amortization of
$2,225,842 in 1998 and $2,282,167 in 1999 (Note 3) 942,158 861,375
----------- -----------
Net other assets 4,822,442 4,478,928
----------- -----------
Total assets $12,462,857 $14,082,639
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Note payable to bank (Note 5) $ 2,715,457 $ -
Accounts payable 1,409,645 1,757,381
Trade notes payable (Note 6) 1,123,956 -
Deferred revenue and other accrued liabilities 1,387,403 2,281,176
Convertible promissory notes payable (Note 7 ) 1,000,000 -
Current maturities of long-term debt (Note 8) 1,576,492 232,811
----------- -----------
Total current liabilities 9,212,953 4,271,368
Long-term debt, less current maturities (Note 8) 2,182,783 2,706,668
Deferred tax liability (Note 10) 178,200 135,000
----------- -----------
Total liabilities 11,573,936 7,113,036
Commitments and contingencies (Note 14) - -
Stockholders' equity (Notes 7, 12 and 13):
Common stock, no par value; 15,000,000 shares authorized and 5,353,316
shares outstanding at December 31, 1998; 30,000,000 shares authorized
and 12,605,430 shares outstanding at December 31, 1999 24,664,809 28,727,838
Accumulated comprehensive income (loss) (7,134) 1,869
Accumulated deficit (23,768,754) (21,760,104)
----------- -----------
888,921 6,969,603
----------- -----------
Total liabilities and stockholders' equity $12,462,857 $14,082,639
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 19
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND DECEMBER 31, 1999 AND
THREE MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year Ended
September 30, December 31, December 31,
1998 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net revenues (Notes 15 and 16) $ 16,829,334 $ 3,186,910 $ 29,772,129
Cost of revenues (Note 9) 13,986,019 2,084,915 19,991,704
------------ ------------- ------------
Gross profit 2,843,315 1,101,995 9,780,425
Operating expenses:
Product development costs 1,318,894 131,987 794,207
Selling, general and administrative expenses 8,926,090 1,323,945 6,471,046
Other charges (Note 9) 1,669,698 -- --
------------ ------------- ------------
Total operating expenses 11,914,682 1,455,932 7,265,253
------------ ------------- ------------
Operating income (loss) (9,071,367) (353,937) 2,515,172
Other income (expense):
Interest expense (735,256) (158,804) (523,839)
Interest expense - issuance of convertible promissory
notes (Note 7) -- (3,000,000) --
Foreign currency gain 2,900 -- 2,929
Sundry expense, net (17,105) (1,208) (28,812)
------------ ------------- ------------
Total other expense (749,461) (3,160,012) (549,722)
------------ ------------- ------------
Income (loss) before income tax benefit (9,820,828) (3,513,949) 1,965,450
Income tax benefit (Note 10) 811,000 10,800 43,200
------------ ------------ ------------
Net income (loss) $ (9,009,828) $ (3,503,149) $ 2,008,650
============ ============ ============
Income (loss) per share (Note 11):
Basic $ (1.69) $ (0.65) $ 0.19
============ ============ ============
Diluted $ (1.69) $ (0.65) $ 0.18
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 20
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND DECEMBER 31, 1999 AND
THREE MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK COMPREHENSIVE
--------------------------- INCOME
SHARES AMOUNT ADJUSTMENT
------ ------ ----------
<S> <C> <C> <C>
Balance, October 1, 1997 5,329,938 $21,589,413 $ (7,571)
Exercise of options, net of 850
shares redeemed 11,050 27,250
Exercise of warrants 12,328 48,146
Comprehensive loss:
Net loss for the year ended
September 30, 1998
Foreign currency translation
adjustment 1,491
-------
Total comprehensive loss 1,491
---------- ----------- -------
Balance, September 30, 1998 5,353,316 21,664,809 (6,080)
Additions to equity for the beneficial
conversion feature of convertible
promissory notes issued (Note 7) 3,000,000
Comprehensive loss:
Net loss for the period ended
December 31, 1998
Foreign currency translation
adjustment (1,054)
---------- ----------- -------
Total comprehensive loss (1,054)
-------
Balance, December 31, 1998 5,353,316 24,664,809 (7,134)
Conversion of convertible promissory
notes and accrued interest thereon
to common stock (Note 7) 4,092,114 1,023,029
Private placement of common stock
(Note 7) 3,080,000 3,020,000
Exercise of options (Note 7) 80,000 20,000
Comprehensive income:
Net income for the year ended
December 31, 1999
Foreign currency translation
adjustment 9,003
-------
Total comprehensive income 9,003
-------
BALANCE, DECEMBER 31, 1999 12,605,430 $28,727,838 $ 1,869
========== =========== =======
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------- -----
<S> <C> <C>
Balance, October 1, 1997 $ (11,255,777) $10,326,065
Exercise of options, net of 850
shares redeemed 27,250
Exercise of warrants 48,146
Comprehensive loss:
Net loss for the year ended
September 30, 1998 (9,009,828) (9,009,828)
Foreign currency translation
adjustment 1,491
----------
Total comprehensive loss (9,009,828) (9,008,337)
----------- ----------
Balance, September 30, 1998 (20,265,605) 1,393,124
Additions to equity for the beneficial
conversion feature of convertible
promissory notes issued (Note 7) 3,000,000
Comprehensive loss:
Net loss for the period ended
December 31, 1998 (3,503,149) (3,503,149)
Foreign currency translation
adjustment (1,054)
------------- -----------
Total comprehensive loss (3,503,149) (3,504,203)
------------- -----------
Balance, December 31, 1998 (23,768,754) 888,921
Conversion of convertible promissory
notes and accrued interest thereon
to common stock (Note 7) 1,023,029
Private placement of common stock
(Note 7) 3,020,000
Exercise of options (Note 7) 20,000
Comprehensive income:
Net income for the year ended
December 31, 1999 2,008,650 2,008,650
Foreign currency translation
adjustment 9,003
------------- -----------
Total comprehensive income 2,008,650 2,017,653
------------- -----------
BALANCE, DECEMBER 31, 1999 $ (21,760,104) $ 6,969,603
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 21
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND
DECEMBER 31, 1999 AND THREE MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1998 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(9,009,828) $(3,503,149) $ 2,008,650
Adjustments to reconcile net income (loss) to net cash flows
provided by (used in) operating activities:
Depreciation and amortization 3,944,397 544,013 2,178,187
Loss on disposal of property and equipment 54,711 -- 61,094
Interest expense for beneficial conversion feature (Note 7) -- 3,000,000 --
Deferred income tax benefit (811,000) (10,800) (43,200)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable 1,690,456 514,841 (3,014,128)
Inventories 2,295,992 219,099 212,687
Prepaid expenses and other current assets 233,150 (9,989) 141,415
Accounts payable 1,490,242 (4,772) 347,736
Deferred revenue and other accrued liabilities 48,228 (444,468) 908,617
----------- ----------- -----------
Net cash provided by (used in) operating activities (63,652) 304,775 2,801,058
Cash flows from investing activities:
Additions to capitalized software development costs (2,017,384) (180,382) (603,688)
Additions to property and equipment (271,067) (8,723) (175,325)
Proceeds from disposals of property and equipment 60,921 12,795 19,316
----------- ----------- -----------
Net cash used in investing activities (2,227,530) (176,310) (759,697)
Cash flows from financing activities:
Proceeds from issuance of common stock and subscriptions -- -- 3,020,000
Borrowings under long-tern debt agreements -- -- 2,900,000
Proceeds from exercise of options and warrants 75,396 -- 20,000
Proceeds from issuance of convertible promissory notes -- 1,000,000 --
Repayments of long-term debt (702,164) (157,862) (3,673,544)
Net borrowings (repayments) under bank line of credit 2,373,000 (798,543) (2,715,457)
Repayments of trade notes payable (241,805) (422,000) (1,123,956)
Additions to deferred financing fees -- -- (227,469)
----------- ----------- -----------
Net cash provided by (used in) financing activities 1,504,427 (378,405) (1,800,426)
Foreign currency translation effect on cash 1,491 (1,054) 9,003
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (785,264) (250,994) 249,938
Cash and cash equivalents at beginning of period 1,142,988 357,724 106,730
----------- ----------- -----------
Cash and cash equivalents at end of period $ 357,724 $ 106,730 $ 356,668
=========== =========== ===========
Non-Cash Financing and Investing Activities:
Conversion of accounts payable to trade notes payable $ 1,787,761 $ -- $ --
Acquisition of equipment under capital leases (Notes 8 and 15) 342,692 -- --
Increase in common stock - issuance of convertible
promissory notes (Note 7) -- 3,000,000 --
Conversion of stock subscriptions to common stock -- -- 1,500,000
Conversion of promissory notes and accrued interest
to common stock (Note 7) -- -- 1,023,029
Decrease in debt and equipment for purchase price adjustment -- -- 46,252
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest 687,023 142,255 508,885
Cash paid for income taxes -- -- --
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 22
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, December 31, 1998 and 1999
(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) CHANGE IN FISCAL YEAR END
Effective December 31, 1998, the Company changed its fiscal year end from
September 30 to December 31. Accordingly, the Company is presenting its
balance sheets as of December 31, 1998 and 1999 and its statements of
operations, stockholders' equity and cash flows for the year ended
September 30, 1998, the three-month transition period ended December 31,
1998, and the year ended December 31, 1999.
(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 Limited, a
United Kingdom corporation; Nematron Canada, Inc., a Canadian corporation
formed in 1999; 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. Certain reclassifications have been made to the
September 30, 1998 financial statements to conform with the
classifications used in subsequent periods.
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 Ann Arbor, Michigan headquarters
and assembly facility. Depreciation is computed using the straight-line
method for financial reporting purposes and accelerated methods, for tax
reporting purposes.
27
<PAGE> 23
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1998, December 31, 1998 and 1999
(3) SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
Software and Related Development Costs
Certain computer software development costs, primarily salaries, wages
and other payroll 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.
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.
A summary of capitalized software and related development costs for the
periods presented are as follows:
<TABLE>
<CAPTION>
Three months
Year ended ended Year ended
September 30, December 31, December 31,
1998 1998 1999
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $2,724,819 $3,942,695 $3,880,284
Additions 1,987,803 180,382 603,688
Amortization (769,927) (242,793) (866,429)
---------- ---------- ----------
Balance at end of period $3,942,695 $3,880,284 $3,617,553
========== ========== ==========
</TABLE>
Intangible Assets
Other intangible assets, which consist primarily of acquired 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.
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.
28
<PAGE> 24
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1998, December 31, 1998 and 1999
(3) SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
Intangible Assets - continued
A summary of intangible assets for the periods presented are as follows:
<TABLE>
<CAPTION>
Three months
Year ended Ended Year ended
September 30, December 31, December 31,
1998 1998 1999
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $3,008,547 $1,002,225 $942,158
Additions 29,581 -0- 227,470
Amortization, including impairment
provision of $1,319,700 in the year
ended September 30, 1998 (Note 9)
(2,035,903) (60,067) (308,253)
---------- --------- --------
Balance at end of period $1,002,225 $942,158 $861,375
========== ======== ========
</TABLE>
Stock Option Plan
The Company adheres to the guidance of 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 for pro forma net
income (loss) and pro forma earnings (loss) 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).
Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries,
Nematron Limited and Nematron Canada, Inc., denominated in foreign
currencies, 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 periods presented. Gains or losses
resulting from translating foreign currency financial statements are
recorded as a separate component of stockholders' equity. Gains or losses
resulting from foreign currency transactions are included in net income
(loss).
Revenue Recognition
Revenues from hardware product sales are recognized upon delivery and
when collection is probable. 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.
29
<PAGE> 25
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1998, December 31, 1998 and 1999
(3) SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
Revenue Recognition - continued
Revenues from software license agreements and from bundled products
(hardware products pre-loaded with software covered by applicable license
agreements) and from systems sales (bundled products accompanied by post
sale support activities) are deferred until all conditions in Statement
of Position 97-2, Software Revenue Recognition, are met. Such conditions
include the delivery of the product, the performance of all obligations
so that remaining obligations are no longer significant, and
collectibility is probable. 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, which is
not a material amount, 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 hardware and software engineering wages, fringe benefits,
and a portion of the Company's overhead, are included in the accompanying
consolidated statements of operations as components of cost of revenues
and product development costs. Research and development costs were
approximately $1,287,000, $291,000 and $1,514,000 for the year ended
September 30, 1998 and the three months ended December 31, 1998, and the
year ended December 31, 1999, 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.
Income (Loss) Per Share
Income (loss) per share is calculated using the weighted average number
of common shares outstanding during the period, adjusted for the assumed
conversion of dilutive stock options and warrants. Since net losses were
incurred in the year ended September 30, 1998 and the three months ended
December 31, 1998, no conversion of dilutive stock options and warrants
was assumed in the loss per share calculation in either period, as the
effect would be anti-dilutive.
30
<PAGE> 26
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1998, December 31, 1998 and 1999
(3) SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
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, returns and allowances, and
deferred tax assets and liabilities.
(4) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
---- ----
<S> <C> <C>
Purchased parts and accessories $1,142,431 $1,238,980
Work in process 307,762 24,008
Finished goods, demo units and service stock 434,142 408,660
----------- ----------
Total inventories $1,884,335 $1,671,648
========== ==========
</TABLE>
(5) NOTE PAYABLE TO BANK
In November 1999, the Company entered into a Loan and Security Agreement
(the "Agreement") with a bank. The Agreement provides for an $8.0 million
line of credit and a $2.9 million term loan. The Agreement is for a
three-year term and may be extended for an additional one-year period at
the option of the Company, unless the lender gives prior notice of
termination. See Note 8 for additional information concerning the
Agreement.
The amount available under the line of credit is limited by a borrowing
formula that allows for advances up to a maximum of the sum of 85% of
eligible domestic and foreign accounts receivable, less the amount of
outstanding letters of credit issued by the Company. Based upon such
borrowing formula, approximately $3,500,000 of the available line is
eligible for advance at December 31, 1999, less $2,163,000 of outstanding
letters of credit (see Note 14). No amounts have been borrowed under the
line of credit facility since the line became available. Any amounts
borrowed will bear interest at the prime rate plus 1.0%. The line of
credit and the term loan (see Note 8) are collateralized by substantially
all assets of the Company and a mortgage on the Company's Ann Arbor
facility.
31
<PAGE> 27
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1998, December 31, 1998 and 1999
(5) NOTE PAYABLE TO BANK, CONTINUED
Prior to closing on the current Agreement, the Company had a credit
agreement with another bank providing for a term note, two equipment
notes and revolving credit notes. The revolving credit note provided for
maximum borrowing by the Company of $4,000,000. The credit facility with
the former senior lender has expired.
(6) TRADE NOTES PAYABLE
Trade notes payable consisted of short-term notes payable to certain of
the Company's creditors. The notes arose from the conversion in the year
ended September 30, 1998 of $1,787,761 of trade accounts payable. The
trade notes, which ranged in terms from six to twelve months in duration
with interest generally at 12% per annum, have been repaid in their
entirety.
(7) CONVERTIBLE PROMISSORY NOTES PAYABLE AND COMMON STOCK
In December 1998, the Company issued convertible promissory notes (the
"Notes") in the aggregate principal amount of $1 million with investors
(collectively, the "Note Holders") pursuant to a private placement as the
first stage of a capital transaction, under which the Company raised a
total of $4,023,029. The Notes bore interest at seven percent (7%) per
annum, were due and payable, with accrued interest, on the later of March
31, 1999 or 5 days following the date of shareholder approval of the
capital transaction. The Notes were not transferable without the
Company's consent. The Notes and accrued interest thereon were
convertible by the Note Holders into Common Stock at $.25 per share (the
"Conversion Price"). In February and March 1999, certain Note Holders
converted $169,863 of Notes and received 679,450 shares of Common Stock.
Following shareholder approval of the capital transaction on April 6,
1999, the remaining $830,137 of Notes and $23,029 of accrued interest
thereon were converted into 3,412,664 shares Common Stock. As a result of
the completion of the first stage of the capital transaction, the Company
issued a total of 4,092,114 shares of Common Stock.
On April 6, 1999 the Company's shareholders approved the issuance of
shares pursuant to the two stage capital transaction. Stage one included
the issuance of $1,000,000 of Notes, as described above, and stage two
included the exercise of options included in such Notes and the private
placement of additional shares of common stock. On April 7, 1999 the
Company completed the second stage of the capital transaction and issued
a total of 3,080,000 shares of Common Stock at $1.00 per share upon the
exercise of the options and the private placement. The Company recorded
the second stage of the transaction net of $60,000 of costs associated
with the private placement.
32
<PAGE> 28
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1998, December 31, 1998 and 1999
(7) CONVERTIBLE PROMISSORY NOTES PAYABLE AND COMMON STOCK, CONTINUED
The Notes were convertible by the Note Holders into Common Stock at $.25
per share (the "Conversion Price"). On the December 1, 1998, the closing
sale price of the Company's common stock on the Nasdaq National Market
was $1.00 per share. The Company was 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 had 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.
At the date the Notes were issued, the Company's common stock was traded
on the Nasdaq National Market under which rules the Company was subject.
Under such rules, the Company was precluded from issuing common stock in
excess of 20% of the outstanding shares of common stock unless the
issuance was approved by the Company's shareholders. Because of this
requirement, the Company structured the capital transaction as a sale of
convertible promissory notes rather than the sale of common stock so that
the Company could receive the Notes proceeds on December 1, 1998 and
postpone the issuance of common stock until it had received the required
shareholder approval.
Accounting for the issuance of the Notes was governed by the SEC's
Emerging Issues Task Force pronouncement D-60, Accounting for the
Issuance of Convertible Preferred Stock and Debt Securities with a
Nondetachable Conversion Feature, ("EITF D-60"). EITF D-60 requires that
a beneficial conversion feature should be recognized and measured by
allocating a portion of the proceeds equal to the intrinsic value of that
feature to additional paid - in capital. That amount is calculated at the
date of issue as the difference between the conversion price and the fair
value (determined solely by reference to the quoted per share market
price) of the common stock into which the Notes are convertible,
multiplied by the number of shares into which the Notes are convertible.
EITF D-60 further requires that if the common stock is traded in a public
market, the quoted market price is the best measure of the common stock's
fair value. Additionally, EITF D-60 requires that any discount resulting
from an allocation of the proceeds to a beneficial conversion feature
increases the effective interest rate of the Notes and is a charge to
interest expense. Pursuant to EITF D-60, the Company has recorded
interest expense of $3,000,000 on the date of issuance of the Notes to
reflect the beneficial conversion feature of $0.75 per share for each of
the 4,000,000 shares the Note Holders could have received upon conversion
of the Notes into common stock; this represents the difference between
the $0.25 per share conversion price compared to the quoted market price
of $1.00 per share on the closing date of the transaction.
On April 6, 1999, the Company's shareholders also approved an amendment
to the Company's Articles of Incorporation to increase the number of
authorized shares of Common Stock from 15,000,000 to 30,000,000.
33
<PAGE> 29
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1998, December 31, 1998 and 1999
(8) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
---- ----
<S> <C> <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 was due. The loan was repaid
in November 1999. $1,956,474 $ -
Term note payable to a bank, interest at LIBOR plus 2.5% per annum,
payable in monthly installments of $30,000 plus interest through January
31, 1999. The note was repaid in November 1999. 1,170,000 -
Term loan payable to a bank, interest at prime plus 1.5% per annum (10..%
at December 31, 1999), payable in monthly installments of $16,111 through
November 2002, at which time the remaining principal and any interest
thereon is due. The term loan is collateralized by substantially all
assets of the Company and a mortgage on the Company's Ann Arbor facility. - 2,900,000
Capitalized lease obligations and other notes 632,801 39,479
---------- -----------
Total long-term debt 3,759,275 2,939,479
Less current maturities (1,576,492) (232,811)
---------- -----------
Total long-term debt, less current maturities $2,182,783 $2,706,668
========== ==========
</TABLE>
The Loan and Security Agreement (the "Agreement"), under which the
Company has the line of credit (see Note 5) and the $2.9 million term
loan, contains several financial covenants, including specified levels of
tangible net worth, interest coverage and debt service coverage. The
terms of the Agreement also prohibit the payment of dividends, limits the
amount of annual capital expenditures and includes other restrictive
covenants. The Company was in compliance with the covenants in the
Agreement as of December 31, 1999.
The aggregate amounts of long-term debt maturities at December 31, 1999,
are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
<S> <C>
2000 $232,811
2001 193,332
2002 2,513,336
----------
Total $2,939,479
==========
</TABLE>
34
<PAGE> 30
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1998, December 31, 1998 and 1999
(9) WRITE-DOWNS AND OTHER CHARGES
Following analyses and other decisions reached by Company management in
the fourth quarter of the year ended September 30, 1998, the Company took
the following charges:
<TABLE>
<CAPTION>
Year ended
September 30,
1998
----
<S> <C>
Charged to cost of revenues - write down of obsolete inventory $1,001,742
Charged to operating expenses:
Write down of acquired intangible assets 1,319,698
Provision for losses upon closing of three U.S. offices 350,000
Total charged to operating expenses 1,669,698
---------
Total $2,671,440
==========
</TABLE>
In conjunction with the Company's 1998 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, inventories and certain acquired
intangible assets related to these products were written off. Also, 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. Additionally, in the
fourth quarter, the Company determined 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 was recorded in connection with costs expected to occur
resulting from such office closings.
(10) TAXES ON INCOME
The following reconciles the statutory federal income tax rate to the
Company's effective tax rate:
<TABLE>
<CAPTION>
Three months
Year ended ended Year ended
September 30 December 31, December 31,
1998 1998 1999
---- ---- ----
<S> <C> <C> <C>
Income tax expense (benefit) based
on the federal statutory rate (34.0)% (34.0)% 34.0%
Generation (utilization) of net
operating loss carryforwards 34.0 % 34.0 % (34.0)%
Effect of impairment and
amortization of intangible assets (8.3)% (0.3)% (8.3)%
---- ---- ----
Effective tax rate (8.3)% (0.3)% (8.3)%
===== ===== =====
</TABLE>
35
<PAGE> 31
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1998, December 31, 1998 and 1999
(10) TAXES ON INCOME, CONTINUED
The domestic and foreign components of income (loss) before taxes on income
are as follows:
<TABLE>
<CAPTION>
Three months
Year ended ended Year ended
September 30, December 31, December 31,
1998 1998 1999
---- ---- ----
<S> <C> <C> <C>
Domestic income (loss) $(9,879,752) $(3,535,904) $2,156,308
Foreign income (loss) 58,924 21,955 (190,858)
----------- ----------- -----------
Total income (loss) before tax
benefit $(9,820,828) $(3,513,949) $1,965,450
=========== =========== ==========
</TABLE>
Deferred income taxes result from temporary differences in the
recognition of income and expenses for financial and income tax reporting
purposes.
Temporary differences and net operating loss carryforwards, which give
rise to the net deferred tax position as of December 31, 1998 and 1999,
are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1999
---- ----
Deferred tax assets:
<S> <C> <C>
Inventory valuation allowance $844,000 $394,000
Accounts receivable allowance for
doubtful accounts 124,000 42,000
Property and equipment, principally depreciation 120,000 178,000
Accrued expenses deductible when paid 89,000 118,000
Net operating loss carryforward 6,678,800 6,323,000
--------- ---------
Total deferred tax assets 7,855,800 7,055,000
Less valuation allowance against deferred tax assets (6,418,000) (5,731,000)
---------- ----------
Net deferred tax assets 1,437,800 1,324,000
Deferred tax liabilities - capitalized software
development costs and other intangible assets (1,616,000) (1,459,000)
---------- ----------
Net deferred tax position $ (178,200) $ (135,000)
========== ==========
</TABLE>
The valuation allowance against deferred tax assets increased (decreased)
by $2,112,000, $134,000 and $(687,000) during the year ended September
30, 1998, the three months ended December 31, 1998 and the year ended
December 31, 1999, respectively.
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $18,000,000, which expire at various dates between 2004 and
2019. 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.
36
<PAGE> 32
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1998, December 31, 1998 and 1999
(11) EARNINGS PER SHARE
Income (loss) per share ("EPS") is as follows:
<TABLE>
<CAPTION>
Income Income
(Loss) Shares (Loss)
(Numerator) (Denominator) Per Share
----------- ------------- ---------
<S> <C> <C> <C>
Year ended September 30, 1998:
Basic EPS:
Net loss $(9,009,828) 5,345,889 $(1.69)
Effect of dilutive securities -0- -0- 0.00
----------- ----------- ------
Diluted EPS $(9,009,828) 5,345,889 $(1.69)
=========== =========== ======
Three months ended December 31, 1998:
Basic EPS:
Net loss $(3,503,149) 5,353,316 $(0.65)
Effect of dilutive securities -0- -0- 0.00
----------- ----------- ----
Diluted EPS $(3,503,149) 5,353,316 $(0.65)
=========== =========== ======
Year ended December 31, 1999:
Basic EPS:
Net income $ 2,008,650 10,753,844 $ 0.19
Effect of dilutive securities:
Options 24,946 567,668 (0.01)
----------- ----------- ------
Diluted EPS:
Income available to common
shareholders plus assumed
conversion $ 2,033,596 11,321,512 $0.18
=========== =========== =====
</TABLE>
For the year ended September 30, 1998, 913,120 options and 322,676
warrants were outstanding but were not included in the computation of
diluted loss per share because to do so would have been antidilutive. The
options expire on various dates between 2003 and 2009, and the warrants
expire between February 2000 and October 2002.
For the three months ended December 31, 1998, 1,428,894 options and
322,676 warrants were outstanding but were not included in the
computation of diluted loss per share because to do so would have been
antidilutive. The options expire on various dates between 2003 and 2009,
and the warrants expire between February 2000 and October 2002.
For the year ended December 31, 1999, 799,037 options and 322,676
warrants were outstanding but were not included in the computation of
diluted earnings per share because the exercise prices of the excluded
options and warrants were greater than the average market price of the
common shares during the period. The options expire on various dates
between 2003 and 2009, and the warrants expire between February 2000 and
October 2002.
37
<PAGE> 33
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1998, December 31, 1998 and 1999
(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 December 31, 1999, no options are available for award under the 1993
Plan.
Long-Term Incentive Plan
The Company's Long-Term Incentive Plan (the "Incentive Plan"), adopted in
April 1999, provides for the granting of awards to purchase a total of
1,250,000 shares of common stock to key employees and others. Awards may
be made by the Compensation Committee of the Board of Directors 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 exercise price for each option granted under the Incentive Plan
cannot be less than the fair market value of the common stock on the date
of the grant. The Incentive Plan gives the Committee latitude in deciding
the vesting and exercise periods. Options shall vest as the Committee
determines and will generally have a term of ten years.
The Incentive 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.
38
<PAGE> 34
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1998, December 31, 1998 and 1999
(12) EMPLOYEE BENEFIT PLANS, CONTINUED
The Committee is also authorized to grant performance share awards under
the Incentive Plan that 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 Committee will
determine the terms and conditions of restricted stock and performance
share awards, including the acceleration or lapse of any restrictions or
conditions of such awards. No options have been awarded under the
Incentive Plan as of December 31, 1999. Awards to purchase an additional
1,250,000 shares of common stock may be made.
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 an option to purchase 4,500 shares of
common stock every three years. 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 December 31, 1999, an additional 42,344
options may be issued under the Directors Option Plan.
Special Option Grants
During the three months ended December 31, 1998 and the year ended
December 31, 1999, the Board of Directors awarded special option grants
to certain key employees. The awards were made separate from the plans
described above.
39
<PAGE> 35
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1998, December 31, 1998 and 1999
(12) EMPLOYEE BENEFIT PLANS, CONTINUED
Information with respect to options under the plans and the special
awards for the year ended September 30, 1998, the three-months ended
December 31, 1998 and the year ended December 31, 1999, is as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------- ----------------------
Weighted Weighted
Average Average Number
Number Exercise Number Exercise Available
Outstanding Price Exercisable Price For Grant
----------- ----- ----------- ----- ---------
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1997 855,044 $5.48 227,994 $5.05 151,099
Granted 269,700 $3.39 (269,700)
Exercisable 251,507 $5.59
Exercised (11,900) $2.70 (11,900) $2.70
Forfeited (199,684) $5.45 (8,187) $5.45 199,684
-------- ------ -------
Balance, September 30,
1998 913,120 $4.89 459,414 $5.24 81,083
Granted 833,438 $0.75
Exercisable 674,002 $0.84
Exercised - - - -
Forfeited (317,664) $5.26 (233,498) $5.13 317,664
-------- -------- -------
Balance, December 31,
1998 1,428,894 $2.39 899,917 $2.00 225,309
Adoption of the
Long-Term Incentive Plan 1,250,000
Granted 1,143,435 $2.35 (783,435)
Exercisable 473,396
Exercised (80,000) $0.25 (80,000) $0.25
Forfeited (564,673) $3.44 (161,140) $3.44 564,673
---------- ---------- ----------
Balance, December 31,
1999 1,927,656 $2.18 1,132,173 $1.76 1,256,547
========= ========= =========
</TABLE>
Information concerning outstanding options at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- -----------------------------
Number of Weighted Number of Weighted
Options Weighted Average Average Options Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12-31-99 Contractual Life Price at 12-31-99 Price
--------------- ----------- ---------------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$0.75 to $1.00 740,000 8.8 years $0.78 740,000 $0.78
$1.01 to $2.00 108,200 8.6 $2.00 38,567 $2.00
$2.01 to $3.00 950,000 9.6 $2.69 250,000 $2.60
$4.01 to $7.00 107,406 7.4 $6.15 81,406 $6.07
$7.01 to $8.75 22,000 6.3 $8.75 22,000 $8.75
----------- -----------
Total 1,927,656 9.1 $2.18 1,132,173 $1.76
========= =========
</TABLE>
40
<PAGE> 36
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1998, December 31, 1998 and 1999
(12) EMPLOYEE BENEFIT PLANS, CONTINUED
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>
Three months
Year ended ended Year ended
September 30 December 31, December 31,
1998 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net income (loss):
As reported $(9,009,828) $(3,503,149) $2,008,650
Pro forma $(9,570,278) $(4,055,915) $1,062,196
Net income (loss) per share:
As reported $(1.69) $(0.65) $0.19
Pro forma $(1.79) $(0.76) $0.10
</TABLE>
The fair values of options granted during periods presented were
determined using the Black-Scholes option-pricing model based on the following
assumptions:
<TABLE>
<CAPTION>
Three months
Year ended ended Year ended
September 30, December 31, December 31,
1998 1998 1999
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.80% 4.96% 6.17%
Dividend yield 0.00% 0.00% 0.00%
Expected life 3 to 6 years 3 to 6 years 3 to 6 years
Expected volatility 74.10% 147.23% 111.59%
</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
matching contribution and a discretionary contribution to the 401(k) plan. The
Company matching contribution is 100% of a specified percentage of each
employee's contribution limited to the first 5% of the employee's base salary.
Company matching contributions were 5% from January 1998 to March 1998, 3% from
April 1998 to May 1998, -0-% from June 1998 to May 1999, and 2% from June 1999
to December 1999. A 401(k) plan participant becomes vested in the Company's
contribution on his or her behalf at a rate of 20 percent for each year of
service, and will be fully vested in the Company's contributions in the event of
death, disability or normal retirement. The Company's contributions to the
401(k) plan were $38,000, $-0- and $31,000 for the year ended September 30,
1998, the three months ended December 31, 1998 and the year ended December 31,
1999, respectively.
41
<PAGE> 37
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1998, December 31, 1998 and 1999
(13) WARRANTS
The Company has outstanding warrants for the purchase of its common
stock. The warrants were issued in connection with acquisitions made in
1995 and 1997 and in connection with issuing subordinated debt in 1995.
Information with respect to such warrants is as follows:
<TABLE>
<CAPTION>
ISI UAI Subordin- Intec
Acquisition Acquisition ated Debt Acquisition Total
----------- ----------- --------- ----------- -----
<S> <C> <C> <C> <C> <C>
Exercise price $2.50 $4.81 $4.00 $6.73
Expiration date 03-03-98 11-20-97 10-31-02 02-20-00
Balance,
October 1, 1997 4,928 137,000 197,678 124,998 464,604
Exercised (4,828) (7,500) -0- -0- (12,328)
Expired (100) (129,500) -0- -0- (129,600)
-------- -------- -------- -------- ---------
Balance, Sept. 30,
1998, Dec.31, 1998 and
1999 -0- -0- 197,678 124,998 322,676
======== ======== ======== ======== =========
</TABLE>
(14) COMMITMENTS AND CONTINGENCIES
The Company leases its Massachusetts and the United Kingdom facilities,
as well as certain office equipment, under operating leases. The leases
on the facilities expire at various dates through July 2001, and the
equipment operating leases expire at various dates through January 2003.
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 $39,479 at December 31, 1999 (Note 8). The net book value of
equipment leased under the capital lease is $-0- at December 31, 1999.
A summary of commitments under noncancelable leases as of December 31,
1999, is as follows:
<TABLE>
<CAPTION>
Capital Lease Operating Leases Total
------------- ---------------- -----
<S> <C> <C> <C>
Year ending December 31,
2000 $42,874 $97,095 $139,969
2001 -0- 49,474 49,474
2002 -0- 4,152 4,152
2003 -0- 346 346
------- -------- --------
Total minimum lease obligations 42,874 $151,067 $193,941
======== ========
Less amount representing interest 3,395
-------
Present value of minimum lease
payments $39,479
=======
</TABLE>
42
<PAGE> 38
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1998, December 31, 1998 and 1999
(14) COMMITMENTS AND CONTINGENCIES, CONTINUED
Total rental expense was $245,000, $8,000 and $75,000 for the year ended
September 30, 1998, the three months ended December 31, 1998 and the year
ended December 31, 1999, respectively.
As of December 31, 1999, the Company has issued letters of credit
totaling $2,163,000 to two suppliers as conditions of the supply
agreements. A $2,000,000 letter of credit expired in January 2000, and a
$163,000 letter of credit was terminated in February 2000.
(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>
Three months
Year ended ended Year ended
September 30, December 31, December 31,
1998 1998 1999
---- ---- ----
<S> <C> <C> <C>
Foreign:
France $ 1,795,275 $ 368,700 $ 1,899,142
Germany 252,864 43,022 7,892,954
Other countries 3,176,439 361,811 2,206,728
------------ ----------- -------------
Total foreign revenue 5,224,578 773,533 11,998,824
United States 11,604,756 2,413,377 17,773,305
------------ ----------- ------------
Total revenue $16,829,334 $3,186,910 $29,772,129
=========== ========== ===========
</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:
<TABLE>
<CAPTION>
December 31,
------------
1998 1999
---- ----
<S> <C> <C>
Foreign countries $ 60,908 $ 45,429
United States 8,105,674 6,830,971
---------- ----------
Total $8,166,582 $6,876,400
========== ==========
</TABLE>
43
<PAGE> 39
NEMATRON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 1998, December 31, 1998 and 1999
(16) SIGNIFICANT CUSTOMERS
The Company conducts its business through distributors, end users and
other entities under purchase orders, supply contracts and other
agreements. Information with respect to significant customers is as
follows:
<TABLE>
<CAPTION>
Revenues Accounts
From Receivable at
Customer(s) End of Period
----------- -------------
<S> <C> <C>
Year ended September 30, 1998:
One significant customer $1,795,000 $442,000
Three months ended December 31, 1998:
Two significant customers $ 876,000 $636,000
Year ended December 31, 1999:
One significant customer $8,931,000 $748,000
</TABLE>
The Company derived approximately $512,000, $771,000 and $13,200,000, of
revenues under a single supply agreement from a company in the automotive
industry for the year ended September 30, 1998, the three months ended
December 31, 1998 and the year ended December 31, 1999, respectively.
These revenues were derived from sales to certain machine tool builders
and distributors, including certain significant customers included in the
table above, that ordered Nematron products that the automotive company
had specified to those companies for its major automation programs.
44
<PAGE> 40
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: March 21, 2000
-------------------------------------- --------------
Matthew S. Galvez, President and CEO
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, CEO and a Director March 21, 2000
- ----------------------------------- (Principal Executive and Financial Officer) --------------
Matthew S. Galvez
/s/ David P. Gienapp Vice President - Finance and Administration March 21, 2000
- ----------------------------------- (Principal Accounting Officer) and Secretary --------------
David P. Gienapp
/s/ Hugo E. Braun Director March 21, 2000
- ----------------------------------- --------------
Hugo E. Braun
/s/ Joseph J. Fitzsimmons Chairman of the Board and a Director March 21, 2000
- ----------------------------------- --------------
Joseph J. Fitzsimmons
/s/ Garnel F. Graber Director March 21, 2000
- ------------------------------------ --------------
Garnel F. Graber
/s/ Michael L. Hershey Director March 21, 2000
- ------------------------------------ --------------
Michael L. Hershey
/s/ Stephen E. Globus Director March 21, 2000
- ------------------------------------ --------------
Stephen E. Globus
/s/ James A. Nichols Director March 21, 2000
- ------------------------------------ --------------
James A. Nichols
</TABLE>
45
<PAGE> 41
NEMATRON CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.01 Amended and Restated Articles of Incorporation, as amended, filed as
Exhibit 3.1 to the Registrant's Form 10-QSB for the quarterly period
ended September 30, 1999 and incorporated herein by reference.
3.02 Amended and Restated Bylaws, as amended.
3.03 Amended and Restated Articles of Incorporation, as amended, filed as
Exhibit 3.1 to the Registrant's Form 10-QSB for the quarterly period
ended September 30, 1999 and incorporated herein by reference.
4.01 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.
4.02 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.
4.03 Amended and Restated Convertible Promissory Notes dated as of January
12, 1999 filed as Exhibit 4.01 to the Registrant's Form 10-QSB for the
quarterly period ended March 31, 1999 and incorporated herein by
reference.
4.04 Loan and Security Agreement dated as of November 12, 1999 by and among
LaSalle Business Credit, Inc. and the Registrant for a $10.9 million
credit facility, filed as Exhibit 4.1 to the Registrant's Form 10-QSB
for the quarterly period ended September 30, 1999 and incorporated
herein by reference.
10.01* 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.
10.02* Nematron Corporation 1993 Directors Option Plan, as amended and
restated, filed as Exhibit 10.2 to the Registrant's Form 10-QSB
for the quarterly period ended March 31, 1997 and incorporated
herein by reference
10.03* 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
10.04* Nematron Corporation Long-Term Incentive Plan, filed as Exhibit 10.03
to the Registrant's Form 10-QSB for the quarterly period ended March
31, 1999 and incorporated herein by reference.
10.05* Employment Agreement entered into effective October 1, 1998 and dated
July 26, 1999 by and between Matthew S. Galvez and the Registrant,
filed as Exhibit 10.01 to the Registrant's Form 10-QSB for the
quarterly period ended June 30, 1999 and incorporated herein by
reference.
10.06* Nonqualified Stock Option Agreement dated October 13, 1998 between
Matthew S. Galvez and the Registrant, filed as Exhibit 10.02 to the
Registrant's Form 10-QSB for the quarterly period ended June 30, 1999
and incorporated herein by reference.
10.07* Nonqualified Stock Option Agreement dated December 3, 1998 between
Matthew S. Galvez and the Registrant, filed as Exhibit 10.02 to the
Registrant's Form 10-QSB for the quarterly period ended June 30, 1999
and incorporated herein by reference.
10.08* Nonqualified Stock Option Agreement dated December 13, 1999 between
Matthew S. Galvez and the Registrant.
10.09 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.
21.01 Subsidiaries of Nematron Corporation.
23.01 Consent of Grant Thornton LLP.
27.00 Financial Data Schedule.
- -------
* Management compensatory plan or arrangement.
- - -
<PAGE> 42
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.
46
<PAGE> 1
EXHIBIT 3.02
AMENDED AND RESTATED
BYLAWS
OF
NEMATRON CORPORATION
ARTICLE I
OFFICES
1.01 Principal Office. The principal office of the corporation shall be
at such place within or outside the State of Michigan as the Board of Directors
shall determine from time to time.
1.02 Other Offices. The corporation also may have offices at such other
places as the Board of Directors from time to time determines or the business of
the corporation requires.
ARTICLE II
SEAL
2.01 Seal. The corporation may have a seal in such form as the Board of
Directors may from time to time determine. The seal may be used by causing it or
a facsimile to be impressed, affixed, reproduced or otherwise.
ARTICLE III
CAPITAL STOCK
3.01 Issuance of Shares. The shares of capital stock of the corporation
shall be issued in such amounts, at such times, for such consideration and on
such terms and conditions as the Board shall deem advisable, subject to the
Articles of Incorporation and any requirements of the laws of the State of
Michigan.
3.02 Certificates for Shares. The shares of the corporation shall be
represented by certificates signed by the Chairman of the Board, Vice Chairman
of the Board, President or a Vice President of the corporation, and may be
sealed with the seal of the corporation or a facsimile thereof. A certificate
representing shares shall state upon its face that the corporation is formed
under the laws of the State of Michigan, the name of the person to whom it is
issued, the number and class of shares, and the designation of the series, if
any, which the certificate represents and such other provisions as may be
required by the laws of the State of Michigan.
3.03 Transfer of Shares. The shares of the capital stock of the
corporation are transferable only on the books of the corporation upon surrender
of the certificate therefor, properly endorsed for transfer, and the
presentation of such evidences of ownership and validity of the assignment as
the corporation may require.
3.04 Registered Shareholders. The corporation shall be entitled to
treat the person in whose name any share of stock is registered as the owner
thereof for purposes of dividends and other distributions in the course of
business, or in the course of recapitalization, consolidation, merger,
reorganization, sale of assets, liquidation or otherwise and for the purpose of
votes, approvals and consents by shareholders, and for the purpose of notices to
1
<PAGE> 2
shareholders, and for all other purposes whatever, and shall not be bound to
recognize any equitable or other claim to or interest in such shares on the part
of any other person, whether or not the corporation shall have notice thereof,
save as expressly required by the laws of the State of Michigan.
3.05 Lost or Destroyed Certificates. Upon the presentation to the
corporation of a proper affidavit attesting the loss, destruction or mutilation
of any certificate or certificates for shares of stock of the corporation, the
Board of Directors shall direct the issuance of a new certificate or
certificates to replace the certificates so alleged to be lost, destroyed or
mutilated. The Board of Directors may require as a condition precedent to the
issuance of new certificates a bond or agreement of indemnity, in such form and
amount and with such sureties, or without sureties, as the Board of Directors
may direct or approve.
ARTICLE IV
SHAREHOLDERS AND MEETINGS OF SHAREHOLDERS
4.01 Place of Meetings. All meetings of shareholders shall be held at
the principal office of the corporation or at such other place as shall be
determined by the Board of Directors and stated in the notice of meeting.
4.02 Annual Meeting. The annual meeting of the shareholders of the
corporation shall be held on the last Monday of the fifth calendar month after
the end of the corporation's fiscal year at 2 o'clock in the afternoon, or on
such other date and at such other time as may be determined by the Board of
Directors. Directors shall be elected at each annual meeting and such other
business transacted as may come before the meeting. The Board of Directors may
postpone and reschedule any previously scheduled annual meeting of shareholders.
Any annual meeting of shareholders may be adjourned by the Chairman of the
meeting or by the Board of Directors.
4.03 Special Meetings. Special meetings of shareholders may be called
by the Board of Directors, the Chairman of the Board (if such office is filled)
or the President. Business transacted at a special meeting of shareholders shall
be confined to the purpose or purposes of the meeting as stated in the notice of
the meeting. The Board of Directors may postpone and reschedule any previously
scheduled special meeting of shareholders. Any special meeting of shareholders
may be adjourned by the Chairman of the meeting or by the Board of Directors.
4.04 Notice of Meetings. Except as otherwise provided by statute,
written notice of the time, place and purposes of a meeting of shareholders
shall be given not less than 10 nor more than 60 days before the date of the
meeting to each shareholder of record entitled to vote at the meeting, either
personally or by mailing such notice to his last address as it appears on the
books of the corporation. No notice need be given of an adjourned meeting of the
shareholders provided the time and place to which such meeting is adjourned are
announced at the meeting at which the adjournment is taken and at the adjourned
meeting only such business is transacted as might have been transacted at the
original meeting. However, if after the adjournment a new record date is fixed
for the adjourned meeting a notice of the adjourned meeting shall be given to
each shareholder of record on the new record date entitled to notice as provided
in this Bylaw.
4.05 Record Dates. The Board of Directors may fix in advance a date as
the record date for the purpose of determining shareholders entitled to notice
of and to vote at a meeting of shareholders or an adjournment thereof, or to
express consent or to dissent from a proposal without a meeting, or for the
purpose of determining shareholders entitled to receive payment of a dividend or
allotment of a right, or for the purpose of any other action. The date fixed
shall not be more than 60 nor less than 10 days before the date of the meeting,
nor more than 60 days before any other action. In such case only such
shareholders as shall be shareholders of record on the date so fixed shall be
entitled to notice of and to vote at such meeting or adjournment thereof, or to
express consent or to dissent from such proposal, or to receive payment of such
dividend or to receive such allotment of rights, or to participate in any other
action, as the case may be, notwithstanding any transfer of any stock on the
books of the corporation, or otherwise, after any such record date. Nothing in
this Bylaw shall affect the rights of a shareholder and his transferee or
transferor as between themselves.
4.06 List of Shareholders. The Secretary of the corporation or the
agent of the corporation having charge of the stock transfer records for shares
of the corporation shall make and certify a complete list of the shareholders
2
<PAGE> 3
entitled to vote at a shareholders' meeting or any adjournment thereof. The list
shall be arranged alphabetically within each class and series, with the address
of, and the number of shares held by, each shareholder; be produced at the time
and place of the meeting; be subject to inspection by any shareholder during the
whole time of the meeting; and be prima facie evidence as to who are the
shareholders entitled to examine the list or vote at the meeting.
4.07 Quorum. Unless a greater or lesser quorum is required in the
Articles of Incorporation or by the laws of the State of Michigan, the
shareholders present at a meeting in person or by proxy who, as of the record
date for such meeting, were holders of a majority of the outstanding shares of
the corporation entitled to vote at the meeting shall constitute a quorum at the
meeting. Whether or not a quorum is present, a meeting of shareholders may be
adjourned by a vote of the shares present in person or by proxy. When the
holders of a class or series of shares are entitled to vote separately on an
item of business, this Bylaw applies in determining the presence of a quorum of
such class or series for transaction of such item of business.
4.08 Proxies. A shareholder entitled to vote at a meeting of
shareholders or to express consent or dissent without a meeting may authorize
other persons to act for the shareholder by proxy. A proxy shall be signed by
the shareholder or the shareholder's authorized agent or representative and
shall not be valid after the expiration of three years from its date unless
otherwise provided in the proxy. A proxy is revocable at the pleasure of the
shareholder executing it except as otherwise provided by the laws of the State
of Michigan.
4.09 Voting. Each outstanding share is entitled to one vote on each
matter submitted to a vote, unless otherwise provided in the Articles of
Incorporation. Votes shall be cast in writing and signed by the shareholder or
the shareholder's proxy. When an action, other than the election of directors,
is to be taken by a vote of the shareholders, it shall be authorized by a
majority of the votes cast by the holders of shares entitled to vote thereon,
unless a greater vote is required by the Articles of Incorporation or by the
laws of the State of Michigan. Except as otherwise provided by the Articles of
Incorporation, directors shall be elected by a plurality of the votes cast at
any election.
Section 4.10 Nominations and Proposals of Shareholders.
(1) Nominations of persons for election to the Board of Directors of
the corporation and the proposal of business to be considered by the
shareholders may be made at an annual meeting of shareholders (i) pursuant to
the corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) by any shareholder of the corporation who was a shareholder
of record at the time of the giving of notice provided for in this Bylaw, who is
entitled to vote at the meeting and who complied with the notice procedures set
forth in this Bylaw.
(2) For nominations or other business to be properly brought before an
annual meeting by a shareholder pursuant to clause (iii) of paragraph (a) (1) of
this Bylaw, the shareholder must have given timely notice thereof in writing to
the Secretary of the corporation. To be timely, a shareholder's notice shall be
delivered to the Secretary at the principal executive offices of the corporation
not less than 60 days nor more than 90 days prior to the first anniversary of
the preceding year's annual meeting; provided, however, that in the event that
the date of the annual meeting is advanced by more than 30 days or delayed by
more than 60 days from such anniversary date, notice by the shareholder to be
timely must be so delivered not earlier than the 90th day prior to such annual
meeting and not later than the close of business on the later of the 60th day
prior to such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made. Such shareholder's
notice shall set forth (i) as to each person whom the shareholder proposes to
nominate for election or reelection as a director, all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected); (ii) as
to any other business that the shareholder proposes to bring before the meeting,
a brief description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting and any material
interest in such business of such shareholder and the beneficial owner, if any,
on whose behalf the nomination or proposal is made; (iii) as to the shareholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (A) the name and address of such shareholder, as
they appear on the corporation's books, and of such beneficial owner and (B) the
3
<PAGE> 4
class and number of shares of the corporation which are owned beneficially and
of record by such shareholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (a)
(2) of this Bylaw to the contrary, in the event that the number of directors to
be elected to the Board of Directors of the corporation is increased and there
is no public announcement naming all of the nominees for director or specifying
the size of the increased Board of Directors made by the corporation at least 70
days prior to the first anniversary of the preceding year's annual meeting, a
shareholder's notice required by this Bylaw shall also be considered timely, but
only with respect to nominees for any new positions created by such increase, if
it shall be delivered to the Secretary at the principal executive offices of the
corporation not later than the close of business on the 10th day following the
day on which such public announcement is first made by the corporation.
(b) Special Meetings of Shareholders. Only such business shall be
conducted at a special meeting of shareholders as shall have been brought before
the meeting pursuant to the corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of shareholders at which directors are to be elected pursuant to the
corporation's notice of meeting (i) by or at the direction of the Board of
Directors or (ii) by any shareholder of the corporation who is a shareholder of
record at the time of giving of notice provided hereunder, who shall be entitled
to vote at the meeting and who complies with the notice procedures set forth in
this Bylaw. Nominations by shareholders of persons for election to the Board of
Directors may be made at such a special meeting of shareholders if the
shareholder's notice required by paragraph (a) (2) of this Bylaw shall be
delivered to the Secretary at the principal executive offices of the corporation
not earlier than the 90th day prior to such special meeting and not later than
the close of business on the later of the 60th day prior to such special meeting
or the 10th day following the day on which public announcement is first made of
the date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting.
(c) General. (1) Only such persons who are nominated in accordance with
the procedures set forth in this Bylaw shall be eligible to serve as directors
and only such business shall be conducted at a meeting of shareholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Bylaw. The Chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made in accordance with the procedures set forth in this Bylaw and,
if any proposed nomination or business is not in compliance with this Bylaw, to
declare that such defective proposal shall be disregarded.
(2) For purposes of this Bylaw, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant to Sections 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Bylaw, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights
of shareholders to request inclusion of proposals in the corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
ARTICLE V
DIRECTORS
5.01 Number. The business and affairs of the corporation shall be
managed by a Board of not less than three nor more than twelve directors, the
exact number to be fixed from time to time only by vote of a majority of the
Board of Directors. The directors need not be residents of Michigan or
shareholders of the corporation.
5.02 Election and Resignation. Directors shall be elected as set forth
in the Articles of Incorporation. A director may resign by written notice to the
corporation. The resignation is effective upon its receipt by the corporation or
a subsequent time as set forth in the notice of resignation.
4
<PAGE> 5
5.03 Vacancies. Vacancies in the Board of Directors occurring by reason
of death, resignation, removal, increase in the number of directors or otherwise
shall be filled as set forth in the Articles of Incorporation.
5.04 Annual Meeting. The Board of Directors shall meet each year
immediately after the annual meeting of the shareholders, or within three (3)
days of such time excluding Sundays and legal holidays if such later time is
deemed advisable, at the place where such meeting of the shareholders has been
held or such other place as the Board may determine, for the purpose of election
of officers and consideration of such business that may properly be brought
before the meeting; provided, that if less than a majority of the directors
appear for an annual meeting of the Board of Directors the holding of such
annual meeting shall not be required and the matters which might have been taken
up therein may be taken up at any later special or annual meeting, or by consent
resolution.
5.05 Regular and Special Meetings. Regular meetings of the Board of
Directors may be held at such times and places as the majority of the directors
may from time to time determine at a prior meeting or as shall be directed or
approved by the vote or written consent of all the directors. Special meetings
of the Board may be called by the Chairman of the Board (if such office is
filled) or the President and shall be called by the President or Secretary upon
the written request of any two directors.
5.06 Notices. No notice shall be required for annual or regular
meetings of the Board or for adjourned meetings, whether regular or special.
Twenty-four hours written notice shall be given for special meetings of the
Board, and such notice shall state the time, place and purpose or purposes of
the meeting.
5.07 Quorum. A majority of the Board of Directors then in office, or of
the members of a committee thereof, constitutes a quorum for the transaction of
business. The vote of a majority of the directors present at any meeting at
which there is a quorum shall be the acts of the Board or of the committee,
except as a larger vote may be required by the laws of the State of Michigan. A
member of the Board or of a committee designated by the Board may participate in
a meeting by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can communicate with
the other participants. Participation in a meeting in this manner constitutes
presence in person at the meeting.
5.08 Executive and Other Committees. The Board of Directors may, by
resolution passed by a majority of the whole Board, appoint three or more
members of the Board as an executive committee to exercise all powers and
authorities of the Board in management of the business and affairs of the
corporation, except that the committee shall not have power or authority to (a)
amend the Articles of Incorporation; (b) adopt an agreement of merger or
consolidation; (c) recommend to shareholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets; (d) recommend to
shareholders a dissolution of the corporation or revocation of a dissolution;
(e) amend these Bylaws; (f) fill vacancies in the Board; or (g) unless expressly
authorized by the Board, declare a dividend or authorize the issuance of stock.
The Board of Directors from time to time may, by like resolution, appoint such
other committees of one or more directors to have such authority as shall be
specified by the Board in the resolution making such appointments. The Board of
Directors may designate one or more directors as alternate members of any
committee who may replace an absent or disqualified member at any meeting
thereof.
5.09 Dissents. A director who is present at a meeting of the Board of
Directors, or a committee thereof of which the director is a member, at which
action on a corporate matter is taken is presumed to have concurred in that
action unless the director's dissent is entered in the minutes of the meeting or
unless the director files a written dissent to the action with the person acting
as secretary of the meeting before the adjournment thereof or shall forward such
dissent by registered mail to the Secretary of the corporation promptly after
the adjournment of the meeting. Such right to dissent does not apply to a
director who voted in favor of such action. A director who is absent from a
meeting of the Board, or a committee thereof of which the director is a member,
at which any such action is taken is presumed to have concurred in the action
unless the director files a written dissent with the Secretary of the
corporation within a reasonable time after the director has knowledge of the
action.
5.10 Compensation. The Board of Directors, by affirmative vote of a
majority of directors in office and irrespective of any personal interest of any
of them, may establish reasonable compensation of directors for services to the
corporation as directors or officers.
5
<PAGE> 6
ARTICLE VI
NOTICES, WAIVERS OF NOTICE AND MANNER OF ACTING
6.01 Notices. All notices of meetings required to be given to
shareholders, directors or any committee of directors may be given by mail,
telecopy, telegram, radiogram or cablegram to any shareholder, director or
committee member at his last address as it appears on the books of the
corporation. Such notice shall be deemed to be given at the time when the same
shall be mailed or otherwise dispatched.
6.02 Waiver of Notice. Notice of the time, place and purpose of any
meeting of shareholders, directors or committee of directors may be waived by
telecopy, telegram, radiogram, cablegram or other writing, either before or
after the meeting, or in such other manner as may be permitted by the laws of
the State of Michigan. Attendance of a person at any meeting of shareholders, in
person or by proxy, or at any meeting of directors or of a committee of
directors, constitutes a waiver of notice of the meeting except when the person
attends the meeting for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened.
6.03 Action Without a Meeting. Except as may be provided otherwise in
the Articles of Incorporation for action to be taken by shareholders, any action
required or permitted at any meeting of shareholders or directors or committee
of directors may be taken without a meeting, without prior notice and without a
vote, if all of the shareholders or directors or committee members entitled to
vote thereon consent thereto in writing.
ARTICLE VII
OFFICERS
7.01 Number. The Board of Directors shall elect or appoint a President,
a Secretary and a Treasurer, and may select a Chairman of the Board, and one or
more Vice Presidents, Assistant Secretaries or Assistant Treasurers. Any two or
more of the above offices, except those of President and Vice President, may be
held by the same person. No officer shall execute, acknowledge or verify an
instrument in more than one capacity if the instrument is required by law, the
Articles of Incorporation or these Bylaws to be executed, acknowledged, or
verified by one or more officers.
7.02 Term of Office, Resignation and Removal. An officer shall hold
office for the term for which he is elected or appointed and until his successor
is elected or appointed and qualified, or until his resignation or removal. An
officer may resign by written notice to the corporation. The resignation is
effective upon its receipt by the corporation or at a subsequent time specified
in the notice of resignation. An officer may be removed by the Board with or
without cause. The removal of an officer shall be without prejudice to his
contract rights, if any. The election or appointment of an officer does not of
itself create contract rights.
7.03 Vacancies. The Board of Directors may fill any vacancies in any
office occurring for whatever reason.
7.04 Authority. All officers, employees and agents of the corporation
shall have such authority and perform such duties in the conduct and management
of the business and affairs of the corporation as may be designated by the Board
of Directors and these Bylaws.
ARTICLE VIII
DUTIES OF OFFICERS
8.01 Chairman of the Board. The Chairman of the Board shall preside at
all meetings of the shareholders and of the Board of Directors at which the
Chairman is present. The Chairman shall be the Chief Executive Officer of the
corporation. The Chairman shall see that all orders and resolutions of the Board
are carried into effect and the Chairman shall have the general powers of
supervision and management usually vested in the chief executive officer
6
<PAGE> 7
of a corporation, including the authority to vote all securities of other
corporations and organizations held by the corporation.
8.02 President. The President shall be the Chief Operating Officer of
the corporation and shall have the general powers of supervision and management
over the day-to-day operations of the corporation. The President shall see that
all orders and resolutions of the Board are carried into effect and shall be ex
officio a member of all management committees. He may execute any documents in
the name of the corporation and shall have such other powers and duties as may
be prescribed by the Board.
8.03 Vice Presidents. The Vice Presidents, in order of their seniority,
shall, in the absence or disability of the President, perform the duties and
exercise the powers of the President and shall perform such other duties as the
Board of Directors or the President may from time to time prescribe.
8.04 Secretary. The Secretary shall attend all meetings of the Board of
Directors and of shareholders and shall record all votes and minutes of all
proceedings in a book to be kept for that purpose, shall give or cause to be
given notice of all meetings of the shareholders and of the Board of Directors,
and shall keep in safe custody the seal of the corporation and, when authorized
by the Board, affix the same to any instrument requiring it, and when so affixed
it shall be attested by the signature of the Secretary, or by the signature of
the Treasurer or an Assistant Secretary. The Secretary may delegate any of the
duties, powers and authorities of the Secretary to one or more Assistant
Secretaries, unless such delegation is disapproved by the Board.
8.05 Treasurer. The Treasurer shall have the custody of the corporate
funds and securities; shall keep full and accurate accounts of receipts and
disbursements in books of the corporation; and shall deposit all moneys and
other valuable effects in the name and to the credit of the corporation in such
depositories as may be designated by the Board of Directors. The Treasurer shall
render to the President and directors, whenever they may require it, an account
of his or her transactions as Treasurer and of the financial condition of the
corporation. The Treasurer may delegate any of his or her duties, powers and
authorities to one or more Assistant Treasurers unless such delegation is
disapproved by the Board of Directors.
8.06 Assistant Secretaries and Treasurers. The Assistant Secretaries,
in order of their seniority, shall perform the duties and exercise the powers
and authorities of the Secretary in case of the Secretary's absence or
disability. The Assistant Treasurers, in the order of their seniority, shall
perform the duties and exercise the powers and authorities of the Treasurer in
case of the Treasurer's absence or disability. The Assistant Secretaries and
Assistant Treasurers shall also perform such duties as may be delegated to them
by the Secretary and Treasurer, respectively, and also such duties as the Board
of Directors may prescribe.
ARTICLE IX
SPECIAL CORPORATE ACTS
9.01 Orders for Payment of Money. All checks, drafts, notes, bonds,
bills of exchange and orders for payment of money of the corporation shall be
signed by such officer or officers or such other person or persons as the Board
of Directors may from time to time designate.
9.02 Contracts and Conveyances. The Board of Directors of the
corporation may in any instance designate the officer and/or agent who shall
have authority to execute any contract, conveyance, mortgage or other instrument
on behalf of the corporation, or may ratify or confirm any execution. When the
execution of any instrument has been authorized without specification of the
executing officers or agents, the Chairman of the Board, the President or any
Vice President, and the Secretary or Assistant Secretary or Treasurer or
Assistant Treasurer, may execute the same in the name and on behalf of this
corporation and may affix the corporate seal thereto.
ARTICLE X
BOOKS AND RECORDS
7
<PAGE> 8
10.01 Maintenance of Books and Records. The proper officers and agents
of the corporation shall keep and maintain such books, records and accounts of
the corporation's business and affairs, minutes of the proceedings of its
shareholders, Board and committees, if any, and such stock ledgers and lists of
shareholders, as the Board of Directors shall deem advisable, and as shall be
required by the laws of the State of Michigan and other states or jurisdictions
empowered to impose such requirements. Books, records and minutes may be kept
within or without the State of Michigan in a place which the Board shall
determine.
10.02 Reliance on Books and Records. In discharging his or her duties,
a director or an officer of the corporation is entitled to rely on information,
opinions, reports, or statements, including financial statements and other
financial data, if prepared or presented by any of the following: (a) one or
more directors, officers, or employees of the corporation, or of a business
organization under joint control or common control whom the director or officer
reasonably believes to be reliable and competent in the matters presented, (b)
legal counsel, public accountants, engineers, or other persons as to matters the
director or officer reasonably believes are within the person's professional or
expert competence, or (c) a committee of the Board of Directors of which he or
she is not a member if the director or officer reasonably believes the Committee
merits confidence. A director or officer is not entitled to rely on such
information if he or she has knowledge concerning the matter in question that
makes such reliance unwarranted.
ARTICLE XI
INDEMNIFICATION
11.01 Non-Derivative Actions. Subject to all of the other provisions of
this Article XI, the corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal (other than an action by or in the
right of the corporation), by reason of the fact that the person is or was a
director or officer of the corporation, or is or was serving at the request of
the corporation as a director, officer, partner, trustee, employee, or agent of
another foreign or domestic corporation, partnership, joint venture, trust or
other enterprise, whether for profit or not, against expenses (including
attorneys' fees), judgments, penalties, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation or its shareholders, and with respect to any criminal action or
proceeding, if the person had no reasonable cause to believe his or her conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which the person reasonably believed to be in
or not opposed to the best interests of the corporation or its shareholders,
and, with respect to any criminal action or proceeding, had reasonable cause to
believe that his or her conduct was unlawful.
11.02 Derivative Actions. Subject to all of the provisions of this
Article XI, the corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that the person is or was a director or officer of the
corporation, or is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise,
whether for profit or not, against expenses (including attorneys' fees) and
amounts paid in settlement incurred by the person in connection with such action
or suit if the person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the corporation or its
shareholders. However, indemnification shall not be made for any claim, issue or
matter in which such person has been found liable to the corporation unless and
only to the extent that the court in which such action or suit was brought has
determined upon application that, despite the adjudication of liability but in
view of all circumstances of the case, such person is fairly and reasonably
entitled to indemnification for the expenses which the court considers proper.
11.03 Expenses of Successful Defense. To the extent that a person has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 11.01 or 11.02 of these Bylaws, or in defense
of any claim, issue or matter in the action, suit or proceeding, the person
shall be indemnified against
8
<PAGE> 9
expenses (including attorneys' fees) incurred by such person in connection with
the action, suit or proceeding and any action, suit or proceeding brought to
enforce the mandatory indemnification provided by this Section 11.03.
11.04 Definitions. For the purposes of Sections 11.01 and 11.02, "other
enterprises" shall include employee benefit plans; "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan;
"serving at the request of the corporation" shall include any service as a
director, officer, employee, or agent of the corporation which imposes duties
on, or involves services by, the director or officer with respect to an employee
benefit plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner the person reasonably believed to be in the interest of
the participants and beneficiaries of an employee benefit plan shall be
considered to have acted in a manner "not opposed to the best interests of the
corporation or its shareholders" as referred to in Sections 11.01 and 11.02.
11.05 Contract Right; Limitation on Indemnity. The right to
indemnification conferred in this Article XI shall be a contract right, and
shall apply to services of a director or officer as an employee or agent of the
corporation as well as in such person's capacity as a director or officer.
Except as provided in Section 11.03 of these Bylaws, the corporation shall have
no obligations under this Article XI to indemnify any person in connection with
any proceeding, or part thereof, initiated by such person without authorization
by the Board of Directors.
11.06 Determination That Indemnification is Proper. Any indemnification
under Section 11.01 or 11.02 of these Bylaws (unless ordered by a court) shall
be made by the corporation only as authorized in the specific case upon a
determination that indemnification of the person is proper in the circumstances
because the person has met the applicable standard of conduct set forth in
Section 11.01 or 11.02, whichever is applicable. Such determination shall be
made in any of the following ways:
(i) By a majority vote of a quorum of the Board consisting of
directors who were not parties to such action, suit or proceeding.
(ii) If the quorum described in clause (i) above is not
obtainable, then by a committee of directors who are not parties to the
action, suit or proceeding. The committee shall consist of not less
than two disinterested directors.
(iii) By independent legal counsel in a written opinion. Legal
counsel for this purpose shall be chosen by the Board or its committee
prescribed in clauses (i) or (ii), or if a quorum of the Board cannot
be obtained under clause (i) and a committee cannot be designated under
clause (ii), by the Board.
(iv) By the shareholders. Shares held by directors or officers
who are parties or threatened to be made parties to the action, suit or
proceeding may not be voted.
11.07 Proportionate Indemnity. If a person is entitled to
indemnification under Section 11.01 or 11.02 of these Bylaws for a portion of
expenses, including attorneys' fees, judgments, penalties, fines, and amounts
paid in settlement, but not for the total amount thereof, the corporation shall
indemnify the person for the portion of the expenses, judgments, penalties,
fines, or amounts paid in settlement for which the person is entitled to be
indemnified.
11.08 Expense Advance. Expenses incurred in defending a civil or
criminal action, suit or proceeding described in Section 11.01 or 11.02 of these
Bylaws shall be paid by the corporation in advance of the final disposition of
such action, suit or proceeding if the corporation receives from the person
requesting such advance the following: (i) a written affirmation of the person's
good faith belief that the person has met the applicable standard of conduct in
Section 11.01 or 11.02 and (ii) a written undertaking by or on behalf of the
person to repay the expenses if it is ultimately determined that the person is
not entitled to be indemnified by the corporation. The undertaking shall be an
unlimited general obligation of the person on whose behalf advances are made but
need not be secured.
11.09 Non-Exclusivity of Rights. The indemnification or advancement of
expenses provided under this Article XI is not exclusive of other rights to
which a person seeking indemnification or advancement of expenses may be
entitled under a contractual arrangement with the corporation. However, the
total amount of expenses
9
<PAGE> 10
advanced or indemnified from all sources combined shall not exceed the amount of
actual expenses incurred by the person seeking indemnification or advancement of
expenses.
11.10 Indemnification of Employees and Agents of the Corporation. The
corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification and to the advancement of expenses to
any employee or agent of the corporation to the fullest extent of the provisions
of this Article XI with respect to the indemnification and advancement of
expenses of directors and officers of the corporation.
11.11 Former Directors and Officers. The indemnification provided in
this Article XI continues as to a person who has ceased to be a director or
officer and shall inure to the benefit of the heirs, executors and
administrators of such person.
11.12 Insurance. The corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against the
person and incurred by him or her in any such capacity or arising out of his or
her status as such, whether or not the corporation would have power to indemnify
the person against such liability under these Bylaws or the laws of the State of
Michigan.
11.13 Changes in Michigan Law. In the event of any change of the
Michigan statutory provisions applicable to the corporation relating to the
subject matter of this Article XI, then the indemnification to which any person
shall be entitled hereunder shall be determined by such changed provisions, but
only to the extent that any such change permits the corporation to provide
broader indemnification rights than such provisions permitted the corporation to
provide prior to any such change. Subject to Section 11.14, the Board of
Directors is authorized to amend these Bylaws to conform to any such changed
statutory provisions.
11.14 Amendment or Repeal of Article XI. No amendment or repeal of this
Article XI shall apply to or have any effect on any director or officer of the
corporation for or with respect to any acts or omissions of such director or
officer occurring prior to such amendment or repeal.
ARTICLE XII
AMENDMENTS
12.01 Amendments. Subject to Section 11.14, the Bylaws of the
corporation may be amended, altered or repealed, in whole or in part, by a
majority of members of the Board of Directors then in office or by the holders
of not less than 80% of the outstanding shares of the capital stock entitled to
vote generally in the election of directors at any meeting duly held in
accordance with these Bylaws, provided that notice of the meeting includes
notice of the proposed amendment, alteration or repeal.
ARTICLE XIII
CONTROL SHARES AND
CONTROL SHARE ACQUISITIONS
13.01 Control Share Acquisitions. The corporation shall not be subject
to Chapter 7B, "Control Share Acquisitions," of the Michigan Business
Corporation Act.
10
<PAGE> 1
EXHIBIT 10.08
NONQUALIFIED STOCK OPTION AGREEMENT
NEMATRON CORPORATION
THIS AGREEMENT is entered into effective as of December 13, 1999 by and
between Nematron Corporation ("Corporation") and Matthew S. Galvez ("Optionee").
The Corporation hereby grants to the Optionee a stock option to purchase shares
of the Corporation's common stock, no par value (the "Common Stock"), subject to
the terms and conditions hereinafter provided below (the "Option"). The Option
is not an incentive stock option as defined in Section 422 of the Internal
Revenue Code of 1986.
1. Option Grant. Optionee is hereby granted an option to purchase
200,000 shares of Common Stock at $2.625 per share. The Option is awarded in
consideration of satisfactory performance as President and CEO of the
Corporation since Mr. Galvez was hired. The Option shall be exercisable upon
Optionee's execution of this Agreement.
2. Terms of Exercise.
(a) Exercise. The Option may be exercised at any time, or from time to
time, in whole or in part, from the time it first becomes exercisable as
provided in Section 1 hereof until the Expiration Date (as defined in Section
2(b) hereof) unless such Option is earlier terminated pursuant to Section 3
hereof. Upon proper exercise of the Option, the Corporation shall promptly cause
to be issued to the Optionee certificates for the Common Stock purchased upon
such exercise, subject to Section 8 of this Agreement.
(b) Expiration. Any provision of this Agreement to the contrary
notwithstanding, the Option shall expire and no longer be exercisable after the
date which is the tenth (10th) anniversary of the date of this Agreement (the
"Expiration Date").
(c) Notice. The Option shall be exercisable by delivery to the
Secretary of the Corporation of a written and duly executed notice in the form
attached hereto.
(d) Payment Terms. Payment of the full purchase price of any shares
with respect to which the Option is being exercised shall accompany the notice
of exercise of the Option. Payment shall be made (i) in cash, (ii) by certified
check, bank draft or money order, (iii) by tendering to the Corporation shares
of Common Stock then owned by Optionee, duly endorsed for transfer or with duly
executed stock power attached, which shares shall be valued at their "Fair
Market Value" ", or by directing the Corporation to withhold shares having a
"Fair Market Value" equal to the aggregate exercise price from the number of
shares which otherwise would be acquired upon exercise and deeming the Option to
have been exercised with respect to such withheld shares as well as the shares
actually acquired upon such exercise, or (iv) by delivery to the Corporation of
a properly executed exercise notice, acceptable to the Corporation, together
with irrevocable instructions to Optionee's broker to deliver to the Corporation
a sufficient amount of cash to pay the exercise price and any applicable income
and employment withholding taxes in accordance with a written agreement between
the Corporation and the brokerage firm if, at the time of exercise, the
Corporation has entered into such an agreement. "Fair Market Value" shall mean
the average of the high and low sale prices per share of the Common Stock
reported in the Wall Street Journal (or if high and low sale prices are not
reported, the last sale price reported in the Wall Street Journal or, if the
last sale price is not reported, the last reported bid price per share) for the
last preceding day on which the Common Stock was traded prior to the date with
respect to which the Fair Market Value is to be determined, as determined by the
Committee in its sole and reasonable discretion; provided that in the event the
last preceding day on which the Common Stock was traded is greater than 10
trading days prior to the date with respect to which the Fair Market Value is to
be determined, the Committee, in its good faith reasonable discretion, shall
determine the Fair Market Value of the Common Stock.
11
<PAGE> 2
3. Termination of Employment.
(a) Termination Prior to Option Becoming Exercisable. If, prior to
the date that the Option shall first become exercisable, the Optionee's
employment with the Corporation and its subsidiaries shall be terminated, with
or without cause, or by the act, death or Disability (as defined in Section
22(e) of the Internal Revenue Code of 1986, as amended) of the Optionee, the
Optionee's right to exercise the Option shall terminate and all rights hereunder
shall cease.
(b) Termination Other Than Because of Death or Disability After
Option Becomes Exercisable. If, on or after the date that the Option shall first
become exercisable, the Optionee's employment with the Corporation and its
subsidiaries shall be terminated for any reason other than death or Disability,
the Optionee shall have the right, until the Expiration Date, to exercise the
Option to the extent that it was exercisable and is unexercised on the date of
such termination of employment, subject to any other limitation on the exercise
of the Option in effect at the date of exercise. The Option shall thereafter
terminate and no longer be of any effect.
(c) Termination Because of Death or Disability After Option
Becomes Exercisable. If, on or after the date that the Option shall have become
exercisable, the Optionee shall die or become Disabled while an employee of the
Corporation or any of its subsidiaries and while the Option remains exercisable,
the Optionee or the executor or administrator of the estate of the Optionee (as
the case may be), or the person or persons to whom the Option shall have been
transferred (if such transfer was made in compliance with Section 7 of this
Agreement), shall have the right, until the Expiration Date, to exercise the
Option to the extent that it was exercisable and unexercised on the date of
death or termination, subject to any other limitation on exercise in effect at
the date of exercise. The Option shall thereafter terminate and no longer be of
any effect.
4. Authority. The Corporation represents and warrants that the person
signing this Agreement on its behalf has the requisite authority to execute this
Agreement
5. Withholding. The Optionee consents to withholding from his
compensation of all applicable payroll and income taxes with respect to the
Option. If the Optionee is no longer employed by the Corporation or its
subsidiaries at the time any applicable taxes with respect to the Option are due
and must be remitted by the Corporation, the Optionee agrees to pay applicable
taxes to the Corporation, and the Corporation may delay issuance of a
certificate until proper payment of such taxes has been made by the Optionee.
6. Rights as Shareholder. The Optionee shall have no rights as a
shareholder of the Corporation with respect to any of the shares covered by the
Option until the issuance of a stock certificate or certificates upon the
exercise of the Option, and then only with respect to the shares represented by
such certificate or certificates. No adjustment shall be made for dividends or
other rights with respect to such shares for which the record date is prior to
the date the option with respect to such shares is exercised.
7. Non-Transferability of Option. The Option shall not be transferred
in any manner other than by will or the laws of descent and distribution. During
the lifetime of the Optionee, the Option shall be exercised only by the
Optionee. No transfer of the Option shall be effective to bind the Corporation
unless the Corporation shall have been furnished with written notice thereof and
such evidence as the Corporation may deem necessary to establish the validity of
the transfer and the acceptance by the transferee of the terms and conditions of
the Option.
8. Compliance with Securities, Tax and Other Laws.
(a) Anything to the contrary herein notwithstanding, the
Corporation's obligation to sell and deliver Common Stock pursuant to the
exercise of the Option is subject to such compliance with federal and state
laws, rules and regulations applying to the authorization, issuance or sale of
securities as the Corporation reasonably deems necessary or advisable. The
Corporation shall not be required to sell and deliver Common Stock if counsel
for the Corporation reasonably determines (i) that the issuance or transfer of
such shares will violate any of the provisions of the Securities Act of 1933 or
the Securities Exchange Act of 1934, or the rules and regulations promulgated
thereunder or those of the Nasdaq Stock Market or any stock exchange on which
the Common Stock may be listed, or the provisions of any state laws governing
the sale of securities, or (ii) that there has not been
12
<PAGE> 3
compliance with the provisions of such acts, rules, regulations and laws. As a
condition to exercise of the Option, the Corporation may require the Optionee,
or any person acquiring the right to exercise the Option, to make any
representation or warranty that the Corporation reasonably deems to be necessary
under any applicable securities, tax, or other law or regulation. The
Corporation shall promptly take all actions necessary to bring itself into
compliance with such laws and regulations.
(b) The Compensation Committee of the Corporation's Board of Directors
(the "Committee") may impose such restrictions on any shares of Common Stock
acquired pursuant to the exercise of the Option as it may deem reasonably
advisable, including, without limitation, restrictions (i) under applicable
federal securities laws, (ii) under the requirements of the Nasdaq Stock Market
or any stock exchange or other recognized trading market upon which such shares
of Common Stock are then listed or traded, and (iii) under any blue sky or state
securities laws applicable to such shares. No shares shall be issued if counsel
for the Corporation determines that the Corporation has not complied with all
requirements under appropriate securities laws.
(c) The Optionee represents that, unless a registration statement
under the Securities Act of 1933 is in effect with respect to the shares of
Common Stock acquired upon exercise of the Option, all of such shares will be
acquired solely for his own account, for investment purposes and not with a view
to any further sale or distribution thereof. All certificates representing any
shares acquired upon exercise of the Option shall have endorsed thereon the
following legends:
(i) "THE SHARES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD OR
TRANSFERRED WITHOUT COMPLIANCE WITH SUCH LAWS."
(ii) Any legend required to be placed thereon under any applicable
state or federal securities law or any other agreement to which the Optionee and
the Corporation may be a party.
(d) Registration of Shares. The Corporation shall maintain an effective
registration statement on Form S-8 under the Securities Act of 1933, as amended,
with respect to the shares of Common Stock that may be purchased upon exercise
of the Option.
9. Adjustments. In the event that any dividend or other distribution
(whether in the form of cash, Common Stock, other securities, or other
property), recapitalization, stock split, reverse stock split, reorganization,
merger, consolidation, split-up, spin-off, combination, repurchase, or exchange
of Common Stock or other securities of the Corporation, issuance of warrants or
other rights to purchase Common Stock or other securities of the Corporation, or
other similar corporate transaction or event affects the Common Stock such that
an adjustment or expansion is required in order to prevent dilution or
enlargement of the benefits or potential benefits made available by the grant of
the Option, the Company shall adjust, in such manner as is equitable, the number
and type of shares of Common Stock subject to the Option and/or the exercise
prices of the Option, in order to prevent dilution or expansion of such
benefits; provided, however, that any such adjustment shall provide for the
elimination of any fractional share which might otherwise become subject to the
Option.
10. No Right to Employment. The granting of the Option does not confer upon
the Optionee any right to be retained as an employee of the Corporation.
11. Notices. Every notice relating to this Agreement shall be in writing
and if given by mail shall be given by registered or certified mail with return
receipt requested. All notices to the Corporation shall be sent or delivered to
the Secretary of the Corporation at the Corporation's headquarters. All notices
by the Corporation to the Optionee shall be delivered to the Optionee personally
or addressed to the Optionee at the Optionee's last residence address as then
contained in the records of the Corporation or such other address as the
Optionee may designate. Either party by notice to the other may designate a
different address to which notices shall be addressed. Any notice given by the
Corporation to the Optionee at the Optionee's last designated address shall be
effective to bind any other person who shall acquire rights hereunder.
13
<PAGE> 4
12. Disputes. Any dispute or disagreement which may arise under or as a
result of this Agreement shall be determined arbitration conducted pursuant to
the rules of the American Arbitration Association in Ann Arbor, Michigan and any
determination by the arbitrator shall be final and binding for all purposes and
on all persons, and shall be enforceable by any court of proper jurisdiction
over the parties.
13. Miscellaneous. The validity, construction and sufficiency of
performance under this Agreement shall be governed by the internal laws of the
State of Michigan. This is the entire agreement between the parties as to the
subject matter herein and this Agreement may not be modified except in writing
signed by both parties hereto.
IN WITNESS WHEREOF, the Corporation, by its duly authorized officer, and
the Optionee have executed this Agreement effective as of the day and year first
written above.
NEMATRON CORPORATION
By: /s/ David P. Gienapp
-------------------------
Its: Secretary
OPTIONEE
/s/ Matthew S. Galvez
----------------------------
Matthew S. Galvez
14
<PAGE> 5
NOTICE OF EXERCISE OF NONQUALIFIED STOCK OPTION
Secretary
Nematron Corporation
5840 Interface Drive
Ann Arbor, Michigan 48103
An Option was granted to me as of December 3, 1998 to purchase shares
of Common Stock to purchase 460,000 shares of Common Stock at $0.75 per share.
I hereby elect to exercise the Option with respect to shares.
Payment of the $ aggregate exercise price is being made in the form of cash,
certified check, bank draft or money order delivered with this notice.
I represent that, if a registration statement under the Securities Act
of 1933 is not in effect with respect to the shares of Common Stock I am
acquiring pursuant to this notice of exercise, such shares are being acquired
solely for my own account, for investment purposes and not with a view to any
further sale or distribution thereof.
The stock certificate for the shares acquired upon exercise should be
issued to:
(name)
(address)
(Social Security No.)
Dated: , Matthew S. Galvez
-------- -----
15
<PAGE> 1
EXHIBIT 21.01
SUBSIDIARIES OF NEMATRON CORPORATION
- - Imagination Systems, Inc.
- - NemaSoft, Inc.
- - Nematron Canada Inc.
- - Nematron, Limited
<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 February 25, 2000, relating to the consolidated balance
sheets of Nematron Corporation as of December 31, 1999 and 1998, and the
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1999 and September 30, 1998 and for the three-month
period ended December 31, 1998, which report appears in the December 31, 1999
annual report on Form 10-KSB of Nematron Corporation.
/s/ Grant Thornton LLP
Southfield, Michigan
March 17, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 356,668
<SECURITIES> 0
<RECEIVABLES> 5,014,028
<ALLOWANCES> 368,000
<INVENTORY> 1,671,648
<CURRENT-ASSETS> 7,206,239
<PP&E> 8,526,845
<DEPRECIATION> (6,129,373)
<TOTAL-ASSETS> 14,082,639
<CURRENT-LIABILITIES> 4,271,368
<BONDS> 2,706,668
0
0
<COMMON> 28,727,838
<OTHER-SE> 1,869
<TOTAL-LIABILITY-AND-EQUITY> 14,082,639
<SALES> 29,772,129
<TOTAL-REVENUES> 29,772,129
<CGS> 19,991,704
<TOTAL-COSTS> 7,265,253
<OTHER-EXPENSES> 28,812
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 523,839
<INCOME-PRETAX> 1,965,450
<INCOME-TAX> (43,200)
<INCOME-CONTINUING> 2,008,650
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,008,650
<EPS-BASIC> 0.19
<EPS-DILUTED> 0.18
</TABLE>
