<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[X] Preliminary proxy statement. [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2)).
[ ] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12.
NEMATRON CORPORATION
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
N/A
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, no par value ("Common Stock") of Nematron Corporation
--------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
3,112,500 shares of Common Stock
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
$2,345,641, which is the book value of securities to be received by
Registrant in the merger described in the proxy statement, computed
as of September 30, 2000
--------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$2,345,641
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(5) Total fee paid:
$469.13
--------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
--------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
--------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
--------------------------------------------------------------------------------
(3) Filing Party:
--------------------------------------------------------------------------------
(4) Date Filed:
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<PAGE> 2
[PRELIMINARY COPY]
NEMATRON CORPORATION
5840 INTERFACE DRIVE
ANN ARBOR, MICHIGAN 48103
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To the Shareholders of Nematron Corporation:
A Special Meeting of the Shareholders of Nematron Corporation
("Nematron" or the "Company") will be held on December 22, 2000 at 10:00 a.m.,
Eastern Standard Time, at the offices of Nematron, 5840 Interface Drive, Ann
Arbor, Michigan, to act upon a proposal to approve the issuance of shares of
common stock, no par value, of Nematron ("Nematron Common Stock") in connection
with the Agreement and Plan of Merger, dated as of November 14, 2000, among
Nematron, Nematron Acquisition Corp., a wholly owned subsidiary of Nematron
("Merger Sub"), Optimation Technology, Inc. ("Optimation"), William K. Pollock,
Timothy A. Lasch, and Pollock and Lasch as Trustees of the Optimation
Technology, Inc. Employee Stock Ownership Trust, pursuant to which Merger Sub
will be merged with and into Optimation, with Optimation surviving as a wholly
owned subsidiary of Nematron (the "Merger"), as more fully described in the
attached Proxy Statement.
As a result of the Merger, each share of common stock, no par value, of
Optimation issued and outstanding immediately prior to the effective time of the
Merger will be converted into the right to receive 249 shares of Nematron Common
Stock. A total of 3,112,500 shares of Nematron Common Stock will be issued to
the shareholders of Optimation, which will represent approximately 19.07% of the
outstanding shares of Nematron Common Stock immediately after the Merger.
In connection with the Merger, William K. Pollock, the majority
shareholder of Optimation and also its president and a member of its board of
directors, will become a director of Nematron.
Only shareholders of record at the close of business on November 29,
2000 are entitled to notice of and to vote at the meeting and any adjournments
thereof.
A Proxy Statement containing a detailed description of the matters to
be considered at the meeting accompanies this notice.
You are invited to attend the meeting in person. Whether or not you
plan to attend the meeting personally, please complete, sign and date the
enclosed proxy, and return it as soon as possible in the enclosed postage paid
envelope. You may revoke your proxy at any time prior to its exercise, and you
may attend the meeting and vote in person, even if you have returned your proxy.
By order of the Board of Directors,
David P. Gienapp
Corporate Secretary
Ann Arbor, Michigan
December 4, 2000
<PAGE> 3
NEMATRON CORPORATION
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS OF NEMATRON CORPORATION
TO BE HELD DECEMBER 22, 2000
This Proxy Statement is being furnished to you by the Board of
Directors of Nematron Corporation, a Michigan corporation ("Nematron" or the
"Company"), for use at a Special Meeting of Shareholders of Nematron to be held
at Nematron's offices, 5840 Interface Drive, Ann Arbor, Michigan 48103 on
December 22, 2000 at 10:00 a.m., Eastern Standard Time, or at any adjournment
thereof (the "Special Meeting"). This Proxy Statement and the accompanying form
of proxy were first mailed to shareholders on or about December 4, 2000.
This Proxy Statement relates to an Agreement and Plan of Merger, dated
as of November 14, 2000, among Nematron, Nematron Acquisition Corp., a wholly
owned subsidiary of Nematron ("Merger Sub"), Optimation Technology, Inc.
("Optimation"), William K. Pollock, Timothy A. Lasch and Pollock and Lasch as
Trustees of the Optimation Technology, Inc. Employee Stock Ownership Trust which
has been established in connection with the Optimation Technology, Inc. Employee
Stock Ownership Plan (the "Agreement and Plan of Merger"), pursuant to which
Merger Sub will be merged with and into Optimation, with Optimation surviving as
a wholly owned subsidiary of Nematron (the "Merger"). As a result of the Merger,
each share of common stock, no par value, of Optimation issued and outstanding
immediately prior to the effective time of the Merger will be converted into the
right to receive 249 shares of Nematron Common Stock. A total of 3,112,500
shares of Nematron Common Stock will be issued to the shareholders of
Optimation, which would represent 19.07% of the outstanding shares of Nematron
Common Stock immediately after the Merger.
Only holders of record of Nematron Common Stock at the close of
business on November 29, 2000 (the "Record Date") are entitled to vote at the
meeting or any adjournment thereof. On and as of the Record Date, 13,209,616
shares of Nematron Common Stock were issued and outstanding and entitled to vote
at the Special Meeting. Shareholders of record on the Record Date are entitled
to one vote for each share of Nematron Common Stock held of record on any matter
that may properly come before the Special Meeting. Shares cannot be voted at the
Special Meeting unless the holder is present in person or represented by proxy.
The presence, either in person or by properly executed proxy, of the holders of
a majority of the outstanding shares of Common Stock on the Record Date is
necessary to constitute a quorum at the Special Meeting.
Shares represented by a proxy in the accompanying form, unless
previously revoked, will be voted at the Special Meeting in accordance with the
specifications made if the proxy is properly executed and received by Nematron
before the Special Meeting. You may revoke your proxy at any time prior to its
exercise, and you may attend the meeting and vote in person, even if you have
returned your proxy.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE MERGER, PASSED UPON THE MERITS OR
FAIRNESS OF THE MERGER OR PASSED ON THE ACCURACY OR COMPLETENESS OF THIS PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement is December 4, 2000.
<PAGE> 4
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROXY STATEMENT DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY
IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE
SUCH SOLICITATION. THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF NEMATRON SINCE THE DATE HEREOF.
2
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
SUMMARY..................................................................................................................5
The Companies.........................................................................................................5
Nematron...........................................................................................................5
Merger Sub.........................................................................................................5
Optimation.........................................................................................................5
The Special Meeting of Shareholders...................................................................................5
Meeting of Nematron Shareholders..................................................................................5
Matter to be Considered............................................................................................5
Vote Required......................................................................................................5
Record Date; Shares Entitled to Vote...............................................................................6
Security Ownership of Management...................................................................................6
Effect of the Merger...............................................................................................6
Treatment of Optimation Common Stock...............................................................................6
Recommendation of the Board of Directors...........................................................................6
Nematron Board of Directors After the Merger.......................................................................6
Reasons for the Merger.............................................................................................6
Risks of the Merger................................................................................................7
Effective Time of the Merger.......................................................................................7
Conditions to the Merger...........................................................................................7
Amendment and Waiver...............................................................................................7
Termination........................................................................................................7
Dissenters Rights..................................................................................................7
Certain Federal Income Tax Consequences............................................................................7
Accounting Treatment...............................................................................................8
Interests of Certain Persons in the Merger.........................................................................8
FORWARD-LOOKING STATEMENTS AND RISKS INVOLVED............................................................................9
THE SPECIAL MEETING OF SHAREHOLDERS.....................................................................................10
General..............................................................................................................10
Matter to be Considered..............................................................................................10
Record Date; Shares Entitled to Vote; Quorum.........................................................................10
Vote Required; Effect of Abstentions and Non-Votes...................................................................10
Voting and Revocation of Proxies.....................................................................................11
Solicitation of Proxies; Expenses....................................................................................11
THE MERGER..............................................................................................................12
General..............................................................................................................12
The Merger...........................................................................................................12
Nematron Board of Directors After the Merger.........................................................................12
Procedures for Exchange of Certificates..............................................................................12
Legend on Certificates...............................................................................................12
Reasons for the Merger...............................................................................................13
Certain Federal Income Tax Consequences..............................................................................14
Regulatory Approvals.................................................................................................14
Accounting Treatment.................................................................................................14
INTERESTS OF CERTAIN PERSONS IN THE MERGER..............................................................................15
Employee Matters.....................................................................................................15
Registration Rights Agreement........................................................................................15
CERTAIN PROVISIONS OF THE AGREEMENT AND PLAN OF MERGER..................................................................16
Representations and Warranties.......................................................................................16
Certain Covenants -- Conduct Of Business Of Optimation...............................................................17
Additional Agreements................................................................................................17
Conditions to the Merger.............................................................................................18
Amendment And Waiver.................................................................................................18
Termination..........................................................................................................19
Expenses.............................................................................................................19
No Solicitation Of Alternative Transaction...........................................................................19
Indemnification......................................................................................................19
</TABLE>
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<TABLE>
<S> <C>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................................................20
FUTURE SHAREHOLDER PROPOSALS............................................................................................21
HOW TO OBTAIN ADDITIONAL INFORMATION....................................................................................21
PRO FORMA FINANCIAL INFORMATION.........................................................................................22
FINANCIAL INFORMATION FOR OPTIMATION....................................................................................27
Management's Discussion and Analysis.................................................................................27
Financial Statements.................................................................................................30
FINANCIAL INFORMATION FOR NEMATRON......................................................................................42
Management's Discussion and Analysis.................................................................................42
Financial Statements.................................................................................................46
</TABLE>
4
<PAGE> 7
SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement and does not purport to be complete. This Summary is
qualified in its entirety by the more detailed information contained elsewhere
or incorporated by reference in this Proxy Statement. Shareholders are urged to
read this Proxy Statement and the Appendix hereto in their entirety.
THE COMPANIES
NEMATRON 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. Through its wholly owned subsidiary A-OK
Controls Engineering, Inc., Nematron provides
automation control system design, consulting and
integration services, primarily to the automotive
manufacturing industry. Through its wholly owned
subsidiaries in the United Kingdom, it provides sales
and support services in the European marketplace.
Through its wholly owned Canadian subsidiary, it
provides sales solicitation services in Canada.
MERGER SUB Merger Sub is a wholly owned subsidiary of Nematron
incorporated in New York on November 3, 2000 for
the purpose of effectuating the Merger. The principal
executive offices of Nematron and Merger Sub are
located at 5840 Interface Drive, Ann Arbor, Michigan
48103, and the telephone number of both Nematron and
Merger Sub is (734) 214-2000.
OPTIMATION Optimation is a privately held company incorporated
in New York which provides process and mechanical
design, control system design, instrumentation and
electrical design, system integration, software
programming, computer aided drafting and consulting
to its customers in various industry segments.
Optimation operates out of seven offices in the
states of New York and North Carolina. The principal
executive offices of Optimation are located at 50
High Tech Drive, Rush, New York 14543, and its phone
number is (716) 359-0700.
THE SPECIAL MEETING OF SHAREHOLDERS
MEETING OF NEMATRON
SHAREHOLDERS The Special Meeting of Nematron Shareholders will be
held on December 22, 2000 at 10:00 a.m., Eastern
Standard Time, at the offices of Nematron at 5840
Interface Drive, Ann Arbor, Michigan 48103.
MATTER TO BE
CONSIDERED At the Special Meeting, shareholders will be asked
to approve the issuance of a total of 3,112,500
shares of Nematron Common Stock pursuant to the
Agreement and Plan of Merger, dated as of November
14, 2000, among Nematron, Merger Sub, Optimation,
William K. Pollock, Timothy A. Lasch, and Pollock and
Lasch as Trustees of the Optimation Technology, Inc.
Employee Stock Ownership Trust (the "Trustees") which
has been established in connection with the
Optimation Technology, Inc. Employee Stock Ownership
Plan, pursuant to which Merger Sub will be merged
with and into Optimation, with Optimation surviving
as a wholly owned subsidiary of Nematron. The
American Stock Exchange rules require shareholder
approval to issue the shares of Nematron Common Stock
pursuant to the Merger.
VOTE REQUIRED Assuming a quorum is present at the Special Meeting,
the affirmative vote of the holders of a majority of
the shares of Nematron Common Stock present in person
or represented by proxy and voting on the matter is
required for approval of the issuance of shares of
Nematron Common Stock pursuant to the Agreement and
Plan of Merger.
5
<PAGE> 8
RECORD DATE;
SHARES ENTITLED
TO VOTE Only shareholders of record of Nematron Common Stock
at the close of business on November 29, 2000 (the
"Record Date") are entitled to notice of and to vote
at the Special Meeting. On that date, there were
13,209,616 shares of Nematron Common Stock
outstanding. Holders of Nematron Common Stock are
entitled to one vote for each share held.
SECURITY OWNERSHIP
OF MANAGEMENT Directors and executive officers of Nematron and
their affiliates, who as of the Record Date
beneficially owned 38.95% of Nematron Common Stock,
have indicated that they intend to vote in favor of
the proposal to approve the issuance of shares of
Nematron Common Stock pursuant to the Agreement and
Plan of Merger.
THE MERGER
EFFECT OF THE MERGER In the Merger, Merger Sub will merge with and into
Optimation. Optimation will be the surviving
corporation and will become a wholly owned subsidiary
of Nematron.
TREATMENT OF OPTIMA-
TION COMMON STOCK In the Merger, each share of Optimation will be
converted into the right to receive 249 shares of
Nematron Common Stock. A total of 3,112,500 shares of
Nematron Common Stock will be issued to the
shareholders of Optimation, which would represent
19.07% of the outstanding shares of Nematron Common
Stock immediately after the Merger.
RECOMMENDATION OF THE
BOARD OF DIRECTORS The Board of Directors of Nematron has unanimously
determined that the Merger is in the best interest of
Nematron and its shareholders and has unanimously
approved the Agreement and Plan of Merger. THE BOARD
OF DIRECTORS OF NEMATRON UNANIMOUSLY RECOMMENDS THAT
ALL NEMATRON SHAREHOLDERS APPROVE THE ISSUANCE OF
SHARES OF NEMATRON COMMON STOCK PURSUANT TO THE
AGREEMENT AND PLAN OF MERGER.
NEMATRON BOARD OF
DIRECTORS AFTER THE
MERGER As of the effective date of the Merger, the Board of
Directors of Nematron will be expanded from eight to
nine members, and Mr. William K. Pollock, the
majority shareholder of Optimation and also its
president and a member of its Board of Directors,
will become a director of Nematron.
REASONS FOR THE
MERGER The combination of Nematron and Optimation is
expected to result in the following advantages:
- The ability of Nematron to better support existing
customers with controls consulting, design and
integration services.
- Increased opportunities to win large, competitively
bid programs that require significant post-sale
support activities.
- The ability of Nematron to identify additional
customers and additional markets for its existing
industrial automation hardware and software
products.
- The ability to market a broader range of services
to customers.
- The opportunity to better identify products and
services demanded by the marketplace through
in-field consultants and application engineers, and
thereby generate better marketing data for use in
product planning and development.
- The ability of Nematron to expand to the East Coast
marketplace and to expand into non-automotive
industries and thus create additional revenues.
- The opportunities for revenue synergies and, to a
lesser extent, cost savings.
- The opportunity to develop an operating structure
that will allow the creation of additional product
lines and a more predictable revenue stream.
RISKS OF THE MERGER There are certain risks involved in the Merger. See
Section entitled "Forward-Looking Statements and
Risks Involved."
6
<PAGE> 9
EFFECTIVE TIME OF
THE MERGER The effective time of the Merger will occur within
five business days after the last of the conditions
to the Merger contained in the Agreement and Plan of
Merger has been satisfied or waived, pursuant to the
filing of a certificate of merger with the New York
Department of State.
CONDITIONS TO THE
MERGER The obligations of Nematron and Optimation to
consummate the Merger are subject to certain
conditions, including:
- The approval of the requisite shareholders of
Nematron.
- Consent to the Merger by LaSalle Business Credit,
Nematron's lender.
- Other conditions customary for transactions of this
nature.
AMENDMENT AND WAIVER The parties may amend the Agreement and Plan of
Merger at any time before or after shareholder
approval. However, following Nematron shareholder
approval, no amendment may be made which by law
requires the further approval of shareholders without
such required approval.
Any party to the Agreement and Plan of Merger may, to
the extent legally allowed, extend the time for
performance of any of the obligations of the other
parties, waive any inaccuracies in any representation
and warranties of the other parties, or waive
compliance with any of the agreements or conditions
contained in the Agreement and Plan of Merger for the
benefit of such party.
TERMINATION The Agreement and Plan of Merger may be terminated
at any time prior to the Merger for the following
reasons:
- By mutual written consent of the Board of Directors
of Nematron, Optimation, Merger Sub, and the
shareholders and trustees of Optimation.
- By Nematron or Optimation if the other party shall
have failed to comply in any material respect with
any of the covenants or agreements contained in the
Agreement and Plan of Merger and such failure shall
not have been cured within 15 business days
following written notice of the failure.
- By Nematron or Optimation if the shareholders of
Nematron shall have failed to approve the issuance
of the shares of Nematron Common Stock.
- By Nematron if litigation is filed that seeks to
prevent or prohibit the Merger.
- By Nematron or Optimation if the Merger is not
consummated within 60 business days from the date
of the Agreement and Plan of Merger; however, if
Nematron is unable to satisfy any of the conditions
precedent enumerated in the Agreement and Plan of
Merger, Nematron shall have the right to extend
such date for two thirty-business day periods in
order to give Nematron additional time to satisfy
such conditions.
DISSENTERS RIGHTS Nematron shareholders will not be entitled to any
appraisal or dissenters' rights in connection with
the Merger.
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES It is expected that the Merger will be treated for
federal income tax purposes as a tax free
reorganization within the meaning of Section
368(a)(1)(A) and Section 368(a)(2)(E) of the Internal
Revenue Code of 1986, as amended.
If the Merger qualifies as a reorganization, no gain
or loss will be recognized for federal income tax
purposes by Nematron, Merger Sub or Optimation on the
transaction contemplated by the Agreement and Plan of
Merger.
ACCOUNTING TREATMENT Nematron will account for the Merger as a purchase in
accordance with Accounting Principles Board No. 16,
"Business Combinations."
INTERESTS OF CERTAIN
PERSONS IN THE MERGER Two executive officers of Optimation, William K.
Pollock and Timothy A. Lasch, have interests in the
Merger that are in addition to the interests of
Optimation shareholders generally. Pursuant to the
Agreement and Plan of Merger, Optimation will enter
into employment agreements with
7
<PAGE> 10
Messrs. Pollock and Lasch pursuant to which current
salaries and fringe benefits will continue for a
period of three years after the Merger for Mr.
Pollock and four years after the Merger for Mr.
Lasch. Mr. Pollock and Mr. Lasch are also Trustees of
the Optimation Technology, Inc. Employee Stock
Ownership Trust, which has been established in
connection with the Optimation Technology, Inc.
Employee Stock Ownership Plan.
8
<PAGE> 11
FORWARD-LOOKING STATEMENTS AND RISKS INVOLVED
THE STATEMENTS IN THIS PROXY STATEMENT RELATING TO MATTERS THAT ARE NOT
HISTORICAL FACTS ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. THESE STATEMENTS
INCLUDE, WITHOUT LIMITATION, STATEMENTS CONCERNING THE FUTURE COMPETITIVE
POSITION, TAX TREATMENT, STRATEGIC ADVANTAGES, BROADER SERVICE OFFERINGS,
SYNERGIES, REVENUES AND REVENUE GROWTH, FINANCIAL POSITION, RESULTS OF
OPERATIONS, CASH FLOWS, GENERAL BUSINESS AND FINANCING STRATEGIES, OPERATING AND
INDUSTRY TRENDS, ACQUISITION AND COMBINATION ACTIVITIES, AND OPERATIONS OF
NEMATRON, OPTIMATION AND THE COMBINED COMPANY AFTER THE MERGER IN THE FUTURE.
WHEN USED IN THIS PROXY STATEMENT, WORDS SUCH AS "ANTICIPATE," "BELIEVE,"
"EXPECT," "PLAN," "INTEND," "ESTIMATE," "PROJECT," "WILL," "COULD," "MAY,"
"PREDICT" AND SIMILAR EXPRESSIONS, AS THEY RELATE TO NEMATRON, OPTIMATION OR THE
COMBINED COMPANY AFTER THE MERGER, IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE AND ARE DEPENDENT UPON CERTAIN RISKS AND
UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, THE FOLLOWING, WHICH ARE BEYOND
THE CONTROL OF NEMATRON, OPTIMATION OR THE COMBINED COMPANY AFTER THE MERGER:
- THE DECLINE OF ECONOMIC CONDITIONS IN GENERAL AND
CONDITIONS IN THE AUTOMOTIVE MANUFACTURING INDUSTRY IN
PARTICULAR;
- A REDUCTION IN DEMAND FOR NEMATRON'S OR OPTIMATION'S
PRODUCTS AND SERVICES, CANCELLATION OF PURCHASE ORDERS OR
CONTRACTS FOR SERVICES PROVIDED BY NEMATRON OR OPTIMATION;
- THE INABILITY OF NEMATRON TO SUCCESSFULLY IMPLEMENT ITS
STRATEGY TO LEAD THE INDUSTRIAL AUTOMATION MARKET MIGRATION
FROM CLOSED ARCHITECTURE PCS TO OPEN ARCHITECTURE PC-BASED
SOLUTIONS;
- CHANGES IN NEMATRON'S 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 NEMATRON'S OR OPTIMATION'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 EXPENSE;
- FLUCTUATIONS IN FOREIGN EXCHANGE RATES;
- THE INABILITY TO ATTRACT OR RETAIN SALES AND/OR ENGINEERING
TALENT; AND
- CHANGES IN CUSTOMER REQUIREMENTS AND EVOLVING INDUSTRY
STANDARDS.
9
<PAGE> 12
THE SPECIAL MEETING OF SHAREHOLDERS
GENERAL
This Proxy Statement is being furnished to Nematron shareholders in
connection with the solicitation of proxies on behalf of the Board of Directors
of Nematron (the "Nematron Board") for use at the Special Meeting to be held on
December 22, 2000 at the time and place specified under "Summary - The Special
Meeting of Shareholders", and at any adjournment thereof.
MATTER TO BE CONSIDERED
At the Special Meeting, shareholders of Nematron will be asked to
consider and vote upon a proposal to approve the issuance of 3,112,500 shares of
Nematron Common Stock pursuant to the Agreement and Plan of Merger (the
"Nematron Proposal").
THE NEMATRON BOARD HAS UNANIMOUSLY APPROVED THE AGREEMENT AND PLAN OF
MERGER AND UNANIMOUSLY RECOMMENDS THAT NEMATRON SHAREHOLDERS VOTE "FOR" APPROVAL
OF THE NEMATRON PROPOSAL.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
The Nematron Board has fixed the close of business on November 29, 2000
as the Record Date for determination of the Nematron shareholders entitled to
receive notice of and to vote at the Special Meeting. On and as of the Record
Date, 13,209,616 shares of Nematron Common Stock, held by approximately 840
holders of record, were issued and outstanding and entitled to vote at the
Special Meeting. Each outstanding share of Nematron Common Stock is entitled to
one vote on all matters coming before the Special Meeting. The presence, either
in person or represented by proxy, of the holders of a majority of the issued
and outstanding shares of Nematron Common Stock is necessary to constitute a
quorum for the transaction of business at the Special Meeting.
VOTE REQUIRED; EFFECT OF ABSTENTIONS AND NON-VOTES
Approval of a majority of the votes cast by holders of Nematron Common
Stock is required to approve the Nematron Proposal. Under the rules of the AMEX,
such approval is required because the number of shares of Nematron Common Stock
to be issued in the Merger pursuant to the Agreement and Plan of Merger will
result in an increase in Nematron Common Stock outstanding of 20% or more.
The inspector of elections will treat shares of Nematron Common Stock
represented by proxies that reflect abstentions as shares that are present,
entitled to vote and voting for purposes of determining the presence of a quorum
at the Special Meeting and for purposes of determining the outcome of any
question submitted to the shareholders for a vote. The inspector of elections
will treat "broker non-votes" (i.e., shares held by brokers that are represented
at the meeting but with respect to which the broker does not have discretionary
authority to vote) as shares that are present and entitled to vote for purposes
of establishing a quorum. For purposes of determining the outcome of any
question as to which the broker has physically indicated on the proxy that it
does not have discretionary authority to vote, these shares will be treated as
not present and not entitled to vote with respect to that question, even though
those shares are considered entitled to vote for quorum purposes and may be
entitled to vote on other questions. Accordingly, abstentions will have the same
effect as votes against the Nematron Proposal and broker non-votes will have the
effect of reducing the number of affirmative votes required to achieve the
majority vote for approval.
As of the Record Date, directors and executive officers of Nematron and
their affiliates beneficially owned 38.95% of the outstanding shares of Nematron
Common Stock. The directors and executive officers of Nematron have indicated
that they intend to vote all such shares of Nematron Common Stock for approval
of the Nematron Proposal.
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<PAGE> 13
VOTING AND REVOCATION OF PROXIES
Shares of Nematron Common Stock represented by properly executed
proxies received at or prior to the Special Meeting, and which have not been
revoked, will be voted at the Special Meeting, or any adjournment thereof, in
accordance with the instructions on such proxies. If a proxy is properly
executed and returned by a shareholder of Nematron without indicating any voting
instructions, the shares of Nematron Common Stock represented by such proxy will
be voted at the Special Meeting FOR approval of the Nematron Proposal.
A shareholder executing and returning a proxy has the power to revoke
it at any time before it is exercised either by executing and delivering a
later-dated proxy to the Secretary of Nematron or by delivering a duly executed
written revocation of such proxy to the Secretary of Nematron. A shareholder may
attend the Special Meeting and vote in person, even if such shareholder has
returned his or her proxy.
SOLICITATION OF PROXIES; EXPENSES
In connection with the Special Meeting, proxies are being solicited by,
and on behalf of, the Nematron Board. Nematron will bear the cost of this
solicitation of proxies from its shareholders. In addition to the solicitation
of proxies by use of mail, directors, officers and employees of Nematron may
solicit proxies from shareholders personally or by telephone, telegraph or
facsimile transmission. Such directors, officers and employees will not be
additionally compensated for such solicitation but may be reimbursed for
out-of-pocket expenses incurred in connection therewith. Arrangements will also
be made with brokerage houses, banks, fiduciaries and other custodians for the
forwarding of solicitation material to the beneficial owners of Nematron Common
Stock held of record by such persons, and Nematron will reimburse such persons
for their reasonable out-of-pocket expenses incurred in connection therewith.
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<PAGE> 14
THE MERGER
GENERAL
Nematron, Optimation, Merger Sub, William Pollock, Timothy Lasch, and
Pollock and Lasch as Trustees of the Optimation Technology, Inc. Employee Stock
Ownership Trust which has been established in connection with the Optimation
Technology, Inc. Employee Stock Ownership Plan have entered into the Agreement
and Plan of Merger, which provides that, subject to the satisfaction of the
conditions thereof (see "Certain Provisions of the Agreement and Plan of Merger
- Conditions to the Merger"), the Merger will be effected. THE DESCRIPTION OF
THE MERGER IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE AGREEMENT AND PLAN
OF MERGER, A COPY OF WHICH IS INCLUDED AS APPENDIX A TO THIS PROXY STATEMENT AND
IS INCORPORATED IN ITS ENTIRETY HEREIN BY REFERENCE.
THE MERGER
The Agreement and Plan of Merger provides for the merger of Merger Sub
with and into Optimation. Optimation will be the surviving corporation and will
become a wholly owned subsidiary of Nematron at the effective time of the
Merger. In the Merger, each share of Optimation Common Stock outstanding
immediately prior to the effective time will be converted automatically into the
right to receive 249 shares of Nematron Common Stock (the "Merger
Consideration"). A total of 3,112,500 shares of Nematron Common Stock will be
issued to the shareholders of Optimation, which would represent 19.07% of the
outstanding shares of Nematron Common Stock immediately after the Merger. The
shareholders of Optimation will not receive any special voting, dividend or
preemptive rights in connection with the 3,112,500 shares of Nematron Common
Stock issued in connection with the Merger.
The closing of the Merger will occur simultaneously with the filing of
a certificate of merger with the New York Department of State, which will occur
within five (5) business days after the last of the conditions to the Merger
contained in the Agreement and Plan of Merger has been satisfied or waived.
Pursuant to the Agreement and Plan of Merger, the Certificate of
Incorporation and the Bylaws of Optimation will be the Certificate of
Incorporation and the Bylaws, respectively, of the surviving corporation of the
Merger (the "Surviving Corporation"). At the closing, William K. Pollock,
Timothy A. Lasch, Diane Trentini, Anthony Sovenitti and Paul Kelly (the
"Optimation Designated Directors"), and Matthew Galvez and James R. Thomas (the
"Nematron Designated Directors"), shall be appointed to the Board of Directors
of the Surviving Corporation. For a period of three years following the closing,
in the event there is a vacancy among the Optimation Designated Directors,
whether due to the expiration of a term or otherwise, it shall be filled by
designation of the remaining Optimation Designated Directors.
NEMATRON BOARD OF DIRECTORS AFTER THE MERGER
At the effective date of the Merger, the Nematron Board will be
expanded from eight to nine members, and William K. Pollock, who is currently
the President and a member of the Board of the Directors of Optimation, will
become a member of the Nematron Board.
PROCEDURES FOR EXCHANGE OF CERTIFICATES
At the closing of the Merger, the three shareholders of Optimation will
deliver to the Surviving Corporation certificates evidencing all of the
Optimation common stock owned by them, endorsed in blank or accompanied by
executed stock powers. Upon surrender of such certificates, each holder of the
Optimation common stock evidenced by such certificates will be entitled to
receive 249 shares of Nematron Common Stock for each share of Optimation common
stock. The certificates evidencing Optimation common stock will then be
cancelled.
After the effective date of the Merger, the stock transfer books of
Optimation will be closed and thereafter there will be no further registration
of transfers of Optimation common stock on the records of Optimation. From and
after the effective date of the Merger, the holders of Optimation common stock
outstanding immediately before the effective date of the Merger will cease to
have any rights with respect to such Optimation common stock except as otherwise
provided by law.
LEGEND ON CERTIFICATES
The shares of Nematron Common Stock to be issued pursuant to the Merger
have not been registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities laws in reliance on exemptions
therefrom.
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<PAGE> 15
Consequently, the Optimation shareholders will bear the economic risk of
investment in the Nematron Common Stock received indefinitely, unless a
subsequent disposition thereof is registered under the Securities Act or is
exempt from registration. The certificates representing the Nematron Common
Stock issued in the Merger will bear the following legend:
"The shares represented by this certificate are 'Restricted
Securities'. As such they may not be transferred unless (i) such transfer is
effected pursuant to a registration statement which has been filed under the
Securities Act of 1933 (the "1933 Act") and declared effective by the Securities
and Exchange Commission, or (ii) in the written opinion of counsel, which
opinion and counsel are acceptable to the issuer of these shares, such transfer
may be effected under and is in compliance with Rule 144 under the 1933 Act, as
in effect on the date of such transfer, or is otherwise exempt from the
registration requirements of the 1933 Act."
REASONS FOR THE MERGER
The Nematron Board believes that the terms of the Merger are fair to,
and in the best interests of, Nematron and its shareholders, has unanimously
approved the Agreement and Plan of Merger and unanimously recommends that
Nematron shareholders vote FOR approval of the Nematron Proposal.
In reaching its conclusions, the Nematron Board considered, among other
factors:
- The combined company will be strategically positioned to provide
design and integration services and field support to existing
Nematron customers. Nematron customers traditionally require field
support concerning the adoption of and operation of PC-based direct
machine control products. The addition of Optimation's application
engineers and other trained personnel will increase the capability
of the combined companies to provide such support.
- The combined company will have a better opportunity to win programs
and contracts that are competitively bid, especially when such bids
require in-field service and support activities. Nematron has noted
with increasing frequency that manufacturers are requiring turnkey
solutions to their factory automation contract awards. Nematron has
been at a disadvantage with its current staff to effectively and
realistically bid on large products requiring project management,
field service and ongoing support activities. When such projects
were won in the past, Nematron was often required to subcontract a
portion of these activities to third parties. The combined company
will be better positioned to secure turnkey projects than Nematron
on a stand-alone basis.
- The combined company will be better able to identify additional
customers and additional markets for PC-based direct machine
control products. With its staff of control engineers, application
engineers and other support personnel that are knowledgeable of its
customers' automation requirements, Optimation is in a position to
identify additional customers and markets for Nematron's existing
PC-based direct machine control products.
- The combined company will be able to offer a broad range of
services and products, and there is no significant overlap between
the current businesses of the two companies.
- The combined company will be better positioned to identify products
and technologies demanded by the marketplace. With its staff of
in-the-field engineers who consult with, design and develop
automation controls systems, Optimation is in a unique position to
understand market demands for control products. Nematron believes
that this will translate into a better understanding of the
controls marketplace and an ability to bring new and better
products to market.
- The combined company will increase its geographic presence on the
East Coast and amount of non-automotive-based customers.
Optimation's existing customer base is diverse and includes
significant customers in the food, packaging and other process
industries, whereas Nematron's customer base includes a heavy
concentration of automotive industry customers.
- The combined company's capital structure, management abilities,
product and service offerings, and customer revenue bases will be
able to interest other companies in vertical integration
activities. The combined company will have consulting, design and
integration capabilities and operations, in addition to Nematron's
traditional activities of designing and manufacturing industrial
automation control hardware and software products. Nematron
believes that the capabilities of the combined entity will appeal
to other entities in the automation marketplace so that joint
ventures and other affiliations, including possible mergers, may
result.
- The combined company may be able to achieve benefits of revenue
synergies and, to a lesser extent, cost savings that will, if
realized, create additional value to Nematron shareholders.
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<PAGE> 16
- The combined company will allow the creation of additional product
lines and alternative product structuring, including the creation
of an automation service provider product line that could generate
monthly service and maintenance fees greater than either of the
separate companies could generate on its own.
- The combined company will include seasoned and experienced managers
in addition to those which Nematron has on a stand-alone basis.
- The combined company should realize a more predictable and steady
revenue stream than Nematron has experienced in recent years, as
Nematron's revenues have fluctuated with the success of obtaining
major program business. The combined company should experience
fewer fluctuations in quarterly revenues and operating results than
Nematron has experienced on a stand-alone basis. This should
increase its ability to budget for activities such as software
development, hardware research and development efforts.
- The combined company presents opportunities for improved financial
performance, an improved financial position, and increased revenue
prospects.
- The combined company should experience improved cash flow as
compared to Nematron on a stand-alone basis.
- Nematron and Optimation are believed to have compatible corporate
cultures and compatible employee groups.
In determining that the Merger was fair to, and in the bests interest
of, Nematron shareholders, the Nematron Board considered the factors above as a
whole and did not assign specific or relative weights to those factors. The
Nematron Board believes that the Merger is an opportunity for Nematron's
shareholders to participate in a combined enterprise that has significantly
greater business and financial resources than Nematron would have absent the
Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a description of the material federal income tax
consequences of the Merger to Nematron, Merger Sub and Optimation.
Neither Nematron nor Optimation has requested a ruling from the
Internal Revenue Service (the "IRS") with regard to any of the federal income
tax consequences of the Merger.
It is the intention of the parties to the Merger that, under present
United States federal income tax law, and based upon the assumptions that the
Merger and related transactions will take place as described in the Agreement
and Plan of Merger, the Merger will be treated for federal income tax purposes
as a reorganization within the meaning of Section 368(a)(1)(A) and Section
368(a)(2)(E) of the Code.
As a tax-free reorganization, neither Nematron, Merger Sub nor
Optimation will recognize any gain or loss on the transactions contemplated by
the Agreement and Plan of Merger.
THE DISCUSSION SET FORTH ABOVE IS BASED ON CURRENTLY EXISTING
PROVISIONS OF THE CODE, EXISTING AND PROPOSED TREASURY REGULATIONS THEREUNDER
AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING ARE
SUBJECT TO CHANGE, AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF
THIS DISCUSSION. NO INFORMATION IS PROVIDED HEREIN WITH RESPECT TO THE TAX
CONSEQUENCES, IF ANY, OF THE MERGER UNDER APPLICABLE FOREIGN, STATE AND LOCAL
LAWS.
REGULATORY APPROVALS
There are no U.S. federal or state regulatory approvals, including
antitrust clearance, required to consummate the Merger.
ACCOUNTING TREATMENT
Nematron will account for the Merger as a purchase in accordance with
the accounting standards promulgated under Accounting Principles Board No. 16,
"Business Combinations" ("APB-16") and relevant AICPA Interpretations,
Accounting Research Bulletins, FASB Statements, Interpretations and Technical
Bulletins which serve as amendments to APB-16.
Representatives of Grant Thornton LLP are expected to be present at the
Special Meeting to be available to respond to appropriate questions and will
have an opportunity to make a statement if they desire to do so.
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<PAGE> 17
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The two individual shareholders of Optimation have interests in the
Merger that are in addition to the interests of Optimation shareholders
generally. Messrs. Pollock and Lasch are executive officers and directors of
Optimation and will continue on the Board of the Surviving Corporation after the
Merger. Mr. Pollock will also be appointed to the Nematron Board.
EMPLOYEE MATTERS
William K. Pollock currently serves as President and a member of the
Board of Optimation. Upon completion of the Merger, he will enter into an
employment agreement with Optimation to continue as President of Optimation. The
employment agreement will provide for (i) a three year term; (ii) the payment of
a specified base salary computed on an hourly rate; (iii) a prohibition against
Mr. Pollock's disclosure of confidential information both during the term of the
employment agreement and thereafter; (iv) a noncompetition agreement during the
term of the employment agreement and for a period of three years thereafter; and
(v) payment of an amount equal to 100% of Mr. Pollock's base salary under the
employment agreement for the remainder of the three year term or twelve months,
whichever is longer, if Mr. Pollock is terminated by Optimation without cause.
Timothy A. Lasch currently serves as Vice President of Optimation. Upon
completion of the Merger, he will enter into an employment agreement with
Optimation to continue as Vice President of Optimation. The employment agreement
will provide for (i) a four year term; (ii) the payment of a specified base
salary computed on an hourly rate; (iii) a prohibition against Mr. Lasch's
disclosure of confidential information both during the term of the employment
agreement and thereafter; (iv) a noncompetition agreement during the term of the
employment agreement and for a period of three years thereafter; and (v) payment
of an amount equal to 100% of Mr. Lasch's base salary under the employment
agreement for the remainder of the four year term or twelve months, whichever is
longer, if Mr. Lasch is terminated by Optimation without cause.
Mr. Pollock and Mr. Lasch also serve as Trustees of the Optimation
Technology, Inc. Employee Stock Ownership Trust, which is a shareholder of
Optimation.
REGISTRATION RIGHTS AGREEMENT
The shares of Nematron Common Stock to be issued pursuant to the Merger
have not been registered under the Securities Act or any state securities laws.
Consequently, the Optimation shareholders will bear indefinitely the economic
risk of investment in Nematron Common Stock received in the Merger, unless a
subsequent disposition thereof is registered under the Securities Act or is
exempt from registration. The certificates representing the Nematron Common
Stock will bear a legend described under "Legend on Certificates" above.
Upon completion of the Merger, Nematron will enter into a Registration
Rights Agreement with the Optimation shareholders, which will provide the
Optimation shareholders the right to register the shares of Nematron Common
Stock received by such shareholders in the Merger at any time Nematron
undertakes to register any of its common stock, subject to certain limitations
set forth in the Registration Rights Agreement.
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<PAGE> 18
CERTAIN PROVISIONS OF THE AGREEMENT AND PLAN OF MERGER
The detailed terms of and conditions of the Merger are contained in the
Agreement and Plan of Merger, which is included in full as Appendix A to this
Proxy Statement and incorporated herein by reference. The following summary
description of certain provisions of the Agreement and Plan of Merger is subject
to the more complete information set forth in the Agreement and Plan of Merger.
REPRESENTATIONS AND WARRANTIES
The Agreement and Plan of Merger contains various representations,
warranties and agreements by Optimation, the shareholders of Optimation and the
Trustees of the Optimation Technology, Inc. Employee Stock Ownership Trust
relating to, among other things:
- the organization, good standing and foreign qualification of
Optimation;
- Optimation's capital structure and share ownership;
- authorization, execution, delivery and enforceability of the
Agreement and Plan of Merger;
- the absence of conflicts with, violations of or defaults under the
certificate of incorporation or bylaws of Optimation, or any material
agreement or applicable law;
- required consents;
- compliance with laws and material agreements
- Optimation's financial statements and the accuracy of the information
contained therein;
- the absence of certain changes or events;
- the absence of litigation against Optimation;
- contracts;
- retirement and other employee plans and matters relating to the
Employee Retirement Income Security Act of 1974, as amended;
- labor matters;
- tangible property, real property and leases;
- intellectual property matters;
- tax matters;
- environmental matters;
- brokerage and similar fees;
- transactions with management;
- books and records;
- full disclosure;
- investment representations;
- trustee authorization concerning the employee stock ownership trust
and plan;
- employees;
- vehicles;
- customers;
- bank accounts; and
- accounts receivable.
The Agreement and Plan of Merger contains various representations,
warranties and agreements by Nematron relating to, among other things:
- the organization, good standing and foreign qualification of
Nematron;
- authorization, execution, delivery and enforceability of the
Agreement and Plan of Merger;
- the absence of conflicts with, violations of or defaults under the
articles of incorporation or bylaws of Nematron, or any material
agreement or applicable law;
- required consents; and
- full disclosure.
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CERTAIN COVENANTS -- CONDUCT OF BUSINESS OF OPTIMATION
Optimation has agreed (except as contemplated by the Agreement and Plan
of Merger or to the extent that Nematron has otherwise consented in writing)
that, prior to the effective time of the Merger, it will, among other things:
- conduct its business in the ordinary course in substantially the same
manner as previously conducted;
- use its reasonable efforts to preserve its business organizations,
keep available the services of its officers and employees and
maintain satisfactory business relationships;
- not amend its certificate of incorporation or by-laws;
- not issue, sell, pledge, dispose of, grant, encumber or authorize any
shares of its capital stock;
- not grant any new options, warrants convertible securities or other
rights not existing on the date of the Agreement and Plan of Merger
to acquire shares of its capital stock;
- not declare, set aside or pay any dividends on or make other
distributions in respect of any of its capital stock, or redeem,
purchase or otherwise acquire any shares of its capital stock;
- not acquire any corporation, partnership, other business organization
or any division thereof or substantially all the assets of a
business,
- not incur any indebtedness for borrowed money nor issue any debt
securities nor assume or guaranty any obligations of any person
except in the ordinary course of business;
- not enter into any contracts or agreements except in the ordinary
course of business;
- not terminate, cancel or request a material change in any of its
material contract except in the ordinary course of business;
- not authorize capital expenditures which are in the aggregate in
excess of $5,000;
- not enter into or amend any contract, agreement, commitment or
arrangement except in the ordinary course of business;
- not increase the compensation or benefits payable to, or enter into
or amend any employment agreement with, any officer, director or
employee, except as consistent with past practice;
- not adopt any new employee benefit plan or materially amend any
existing employee benefit plan;
- not change any material accounting principle or procedures or
practice except as required by a change in law or generally accepted
accounting principles;
- not make or rescind any material tax election, settle or compromise
any material tax liability or materially change its methods of
reporting income or deductions for federal income tax purposes except
as may be required by applicable law;
- not pay, discharge or satisfy any claim, liability or obligation
other than in the ordinary course of business;
- not form any subsidiary; and
- not announce an intention, enter into any formal agreement or
otherwise make a commitment to do any of the foregoing prohibited
actions.
ADDITIONAL AGREEMENTS
Pursuant to the Agreement and Plan of Merger, Nematron and Optimation
have agreed, among other things, to:
- consult with the other parties and mutually agree upon any press
releases and other announcements regarding the Merger;
- promptly notify the other party of (A) any situation that would cause
any representation in the Agreement and Plan of Merger to be untrue
or inaccurate and (B) the failure to comply with any covenant,
condition or agreement to be complied with or satisfied; and
- take all reasonable efforts to consummate and make effective the
Merger.
Pursuant to the Agreement and Plan of Merger, Nematron has agreed,
among other things, to call the Special Meeting to consider and vote upon the
issuance of shares of Nematron Common Stock pursuant to the Merger.
Pursuant to the Agreement and Plan of Merger, Optimation has agreed,
among other things, to:
- afford Nematron access to its officers, properties, records, files
and other information as Nematron may reasonably request; and
- not solicit or encourage an offer from any person relating to any
acquisition or purchase of any material portion of Optimation's
assets or any equity interest in Optimation.
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<PAGE> 20
Immediately after the Closing, Optimation shall permanently discontinue
its contributions to the Optimation Employee Stock Ownership Plan (the "OTI
ESOP") and freeze participation in the OTI ESOP so that no additional employees
shall be eligible to participate in the OTI ESOP and all present participants in
the OTI ESOP will be fully vested in their accounts.
CONDITIONS TO THE MERGER
Conditions of Each Party's Obligation to Effect The Merger
The respective obligations of Nematron, Merger Sub, Optimation and the
Optimation shareholders to complete the Merger are subject to satisfaction of
the following conditions:
- the issuance of the shares of Nematron Common Stock pursuant to the
Merger must have been approved by the Nematron shareholders;
- all consents, permits and authorizations required to be obtained must
have been obtained;
- each party must have performed in all material respects its covenants
and agreements required under the Agreement and Plan of Merger and
all representations and warranties of the other party contained in
the Agreement and Plan of Merger must have been true and correct in
all material respects on the date of the Agreement and Plan of Merger
and on the closing date; and
- each party shall have received an opinion as to certain legal matters
from the other party's legal counsel.
Additional Condition to Obligations of Optimation Shareholders to
Effect the Merger
The obligations of Optimation shareholders to complete the Merger are
subject to satisfaction or waiver of the additional condition that, as of the
effective time of the Merger, Mr. William K. Pollock must have been elected to
the Nematron Board of Directors.
Additional Conditions to Obligations of Nematron and Merger Sub to
Effect the Merger
The obligations of Nematron and Merger Sub to complete the Merger are
subject to satisfaction of the following additional conditions:
- No litigation must be pending which seeks to prevent or prohibit
consummation of the Merger;
- Nematron must be satisfied with the results of its due diligence
investigation of Optimation;
- Nematron must have obtained the consent to the Merger of LaSalle
Business Credit, its lender, and must have executed amendments to its
existing financing agreements;
- Mr. Pollock and Mr. Lasch must have entered into noncompetition
agreements with Nematron and Optimation; and
- Mr. Pollock and Mr. Lasch must have entered into employment
agreements with Optimation.
AMENDMENT AND WAIVER
The Agreement and Plan of Merger may be amended by Nematron, Merger Sub
and Optimation, by action taken or authorized by their respective Boards of
Directors, and by the Optimation shareholders, at any time before or after
approval of the matters presented in connection with the Merger by the Nematron
shareholders, but after any such approval, no amendment may be made which by law
requires further approval by the Nematron shareholders without obtaining such
further approval.
At any time prior to the effective time of the Merger, each party may,
to the extent legally allowed: (i) extend the time for the performance of any of
the obligations or other acts of the other parties; (ii) waive any inaccuracies
in the representations and warranties made to such party contained in the
Agreement and Plan of Merger or in any document delivered pursuant thereto; and
(iii) waive compliance with any of the agreements or conditions for the benefit
of such party contained in the Agreement and Plan of Merger.
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TERMINATION
The Agreement and Plan of Merger may be terminated at any time before
the Merger:
- by the mutual written consent of Nematron, Optimation and Merger Sub,
and by the shareholders of Optimation;
- by either Nematron or Optimation if the other party fails to comply
in any material respect with its covenants or agreements contained in
the Agreement and Plan of Merger which has not been cured within
fifteen days after notice of noncompliance;
- by either Nematron or Optimation if the shareholders of Nematron have
not approved issuance of the shares of Nematron Common Stock in the
Merger by the requisite vote at the Special Meeting;
- by Nematron if any litigation is pending which seeks to prohibit or
prevent the Merger;
- by either Nematron or Optimation if the Merger does not become
effective within 60 business days after November 14, 2000, but if
Nematron is unable to satisfy any of the conditions to the
effectiveness of the Merger by such date, Nematron has the right to
extend the date for two thirty-business-day periods in order to give
Nematron additional time to satisfy the conditions.
EXPENSES
Optimation has agreed that it will not incur legal fees in connection
with the Merger in excess of $25,000 without the consent of Nematron.
If Optimation enters into an agreement for a merger or consolidation of
Optimation, a sale of all or a substantial part of its assets, or any other
business combination to any person other than Nematron or Merger Sub, then
Optimation must, within two days after the first such event, pay Nematron an
amount equal to Nematron's out-of-pocket expenses incurred in connection with
the Agreement and Plan of Merger.
NO SOLICITATION OF ALTERNATIVE TRANSACTION
Optimation has agreed that neither it nor any of its officers,
directors, nor its shareholders shall solicit, initiate or knowingly encourage
any inquiry, proposal or offer with respect to a purchase of its capital stock,
or any merger, asset sale or similar transaction involving, Optimation (any such
proposal, offer or transaction being referred to as an "Alternative
Transaction") or participate or engage in any discussions or negotiations
concerning an Alternative Transaction; except as may be required by law,
Optimation shall not disclose information relating to it or provide access to
its property or records in connection with any proposed Alternative Transaction.
Optimation is required to disclose to Nematron the existence or
occurrence of any proposal, contract or contact which Optimation may receive
with respect to any proposed Alternative Transaction.
INDEMNIFICATION
The shareholders of Optimation and the Trustees indemnify Nematron and
its affiliates, directors, officers and employees from any claim or liability
relating to (a) any misrepresentation or breach of warranty by any of the
shareholders in the Agreement and Plan of Merger, (b) any failure of the
shareholders or the Trustees to perform or observe any covenant in the Agreement
or Plan of Merger, (c) any guaranty to which Optimation is a party which
guarantees amounts payable by or obligations of the shareholders, the Trustees
or their affiliates, (d) any liability of Optimation under any agreement and
other dealings by the shareholders or the Trustees with any third party
regarding a sale of capital stock or business of Optimation, (e) any liability
for taxes of Optimation, the shareholders or the Trustees that is based upon the
income of Optimation, the shareholders or the Trustees for any period up to and
including the effective time, (f) any liability for taxes of the shareholders or
the Trustees based on income for any post-closing period, (g) any liability of
Optimation, the shareholders or the Trustees for taxes resulting from
transactions contemplated by the Agreement and Plan of Merger.
Nematron indemnifies the shareholders and the Trustees from any damages
relating to any misrepresentation or breach of warranty by Nematron or failure
of Nematron to perform or observe any covenant under the Agreement and Plan of
Merger. The amount of damages for which indemnification is provided will be
computed net of any insurance proceeds received by the indemnified party in
connection with such damages, reduced by all related costs and expenses and any
premium increase or decrease resulting therefrom. The amount of damages for
which indemnification is provided by the shareholders and the Trustees will be
reduced to the extent such damages relate to and do not exceed any applicable
reserve or accrual with respect to such damages provided for in Optimation's
1999 balance sheet.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of November 17, 2000 and
after giving effect to the Merger with respect to the beneficial ownership of
Nematron Common Stock by each director and each executive officer of Nematron,
all current directors and executive officers as a group and all other persons
known by Nematron to beneficially own more than 5% of its outstanding Common
Stock. Except as noted below, each shareholder exercises sole voting and
investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
------------------------------------ ------------------------------------ --------------------------------------
PRIOR TO MERGER AFTER MERGER
------------------------------------ ------------------------------------ --------------------------------------
NAME NUMBER OF SHARES PERCENTAGE NUMBER OF SHARES PERCENTAGE
------------------------------------ --------------------- -------------- --------------------- ----------------
------------------------------------ --------------------- -------------- --------------------- ----------------
<S> <C> <C> <C> <C>
James A. Nichols 1,823,155 (1) 13.80% 1,823,155 (1) 11.17%
------------------------------------ --------------------- -------------- --------------------- ----------------
Michael L. Hershey 1,536,460 (2) 11.62 1,536,460 (2) 9.40
------------------------------------ --------------------- -------------- --------------------- ----------------
J. Eric May, 1,493,425 (3) 11.31 1,493,425 (3) 9.15
Under Declaration of Trust
------------------------------------ --------------------- -------------- --------------------- ----------------
Stephen E. Globus 1,240,735 (4) 9.39 1,240,735 (4) 7.60
------------------------------------ --------------------- -------------- --------------------- ----------------
Matthew S. Galvez 860,100 (5) 6.11 860,100 (5) 5.01
------------------------------------ --------------------- -------------- --------------------- ----------------
Hugo E. Braun 648,449 (6) 4.85 648,449 (6) 3.94
------------------------------------ --------------------- -------------- --------------------- ----------------
David P. Gienapp 97,793 (7) .74 97,793 (7) .60
------------------------------------ --------------------- -------------- --------------------- ----------------
Garnel F. Graber 63,966 (8) .48 63,966 (8) .39
------------------------------------ --------------------- -------------- --------------------- ----------------
Joseph J. Fitzsimmons 19,108 (9) .14 19,108 (9) .12
------------------------------------ --------------------- -------------- --------------------- ----------------
William K. Pollock 1,563,471 (11) 9.58
------------------------------------ --------------------- -------------- --------------------- ----------------
Timothy A. Lasch 614,283 (11) 3.76
------------------------------------ --------------------- -------------- --------------------- ----------------
OTI ESOP Plan 934,746 (11) 5.73
------------------------------------ --------------------- -------------- --------------------- ----------------
All directors and executive 6,289,766 (10) 43.82
officers as group (9 persons)
------------------------------------ --------------------- -------------- --------------------- ----------------
All directors and executive
Officers as a group (11 persons) 9,402,266 53.83
------------------------------------ --------------------- -------------- --------------------- ----------------
------------------------------------ --------------------- -------------- --------------------- ----------------
</TABLE>
(1) The shares shown in the table for Mr. Nichols include (i) 1,618,704 shares
owned outright, and (ii) 204,451 shares owned by an investment club of which Mr.
Nichols is a member. Mr. Nichols' address is 3707 West Maple Road, Bloomfield
Hills, MI 48301.
(2) The shares shown in the table for Mr. Hershey include (i) the 1,493,425
shares owned by J. Eric May, Trustee Under Declaration of Trust (over which Mr.
Hershey may exercise voting and investment power), (ii) 25,371 shares owned
outright by Mr. Hershey; and (v) options to purchase 17,664 shares of Common
Stock under the Directors Option Plan which are currently exercisable or are
exercisable within sixty days. Mr. Hershey's address is c/o Landis Associates,
Inc., 400 West Ninth Street, Suite 100, Wilmington, DE 19801.
(3) The shares shown in the table for Mr. May include (i) 1,493,425 shares owned
by J. Eric May, Trustee Under Declaration of Trust, over which Mr. Hershey may
exercise voting and investment power. Mr. May's address is c/o Wilmington Trust
Company, 1100 North Market Street, Wilmington, DE 19890.
(4) The shares shown in the table for Mr. Globus include (i) 265,062 shares
owned outright by Mr. Globus; (ii) 622,358 shares owned by companies and
partnerships over which Mr. Globus exercises voting and investment power; (iii)
343,315 shares owned by certain relatives of Mr. Globus over which Mr. Globus
exercises beneficial ownership. Mr. Globus' address is 44 West 24th Street, New
York, NY 10010.
(5) The shares shown in the table for Mr. Galvez include (i) 100 shares owned
outright; and (ii) non-qualified options to purchase 860,000 shares which are
currently exercisable or are exercisable within sixty days. Mr. Galvez's address
is 5840 Interface Drive, Ann Arbor, MI 48103.
(6) The shares shown in the table for Mr. Braun include (i) 500,000 shares owned
by Access Ventures, of which Mr. Braun is a partner; (ii) options to purchase
16,664 shares under the Directors Stock Option Plan which are currently
exercisable or are exercisable within sixty days; and (iii) currently
exercisable warrants to purchase 131,785 shares of Common Stock
20
<PAGE> 23
pursuant to a Term Loan and Warrant Purchase Agreement dated November 7, 1995
between Nematron and Onset BIDCO, Inc., of which Mr. Braun is an officer. If
such warrants were exercised, Mr. Braun would have sole voting rights and shared
investment power with respect to the underlying shares. Mr. Braun's address is
206 South Fifth Avenue, Suite 550, Ann Arbor, MI 48104.
(7) The shares shown in the table for Mr. Gienapp include (i) 44,460 shares
owned outright; and (ii) options to purchase 53,333 shares under the 1993 Stock
Option Plan which are currently exercisable or are exercisable within sixty
days.
(8) The shares shown in the table for Mr. Graber include (i) 14,302 shares owned
outright; and (ii) options to purchase 49,664 shares of Common Stock under the
Directors Stock Option Plan and non-qualified option awards which are currently
exercisable or are exercisable within sixty days.
(9) The shares shown in the table for Mr. Fitzsimmons include (i) 4,000 shares
of Common Stock owned outright; and (ii) options to purchase 16,664 shares of
Common Stock under the Directors Stock Option Plan which are currently
exercisable or are exercisable within sixty days.
(10) The shares shown in the table for all current directors and executive
officers as a group include the shares described in footnotes (1) through (9).
(11) The address for Mr. Pollock, Mr. Lasch and the OTI ESOP Plan is 50 High
Tech Drive, Rush, New York 14543.
For purposes of calculating the percentage of Common Stock beneficially
owned by each person, the shares issuable upon exercise of options and warrants
held by such person are considered outstanding and added to the shares of Common
Stock actually outstanding.
FUTURE SHAREHOLDER PROPOSALS
The 2001 annual meeting of the shareholders of Nematron is scheduled to
occur on or about May 18, 2001. Shareholder proposals intended to be presented
at the 2001 Annual Meeting of Shareholders which are eligible for inclusion in
Nematron's Proxy Statement for that meeting under the applicable rules of the
Securities and Exchange Commission must be received by Nematron not later than
December 20, 2000 if they are to be included in Nematron's Proxy Statement
relating to that meeting. Such proposals should be addressed to the Secretary at
Nematron's principal executive offices and should satisfy the requirements
applicable to shareholder proposals contained in Nematron's bylaws.
HOW TO OBTAIN ADDITIONAL INFORMATION
Nematron is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission ("SEC"). Such reports and other information
may be inspected and copied at the public reference facilities that the SEC
maintains at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following Regional Offices of the SEC: Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and Seven
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can also be obtained from the Public Reference Section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The public
may obtain information on the operation of the Public Reference Section by
calling the SEC at 1-800-732-0330. The SEC maintains a web site that contains
reports, proxy and information statements and other information filed
electronically by Nematron with the SEC that can be accessed over the Internet
at http://www.sec.gov.
21
<PAGE> 24
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited proforma financial statements were prepared to
give effect to the Merger. The accompanying pro forma balance sheet as of
September 30, 2000 and the pro forma statements of operations for the year ended
December 31, 1999 and for the nine months ended September 30, 2000 present the
financial position and the results of operations of Nematron Corporation and
Consolidated Subsidiaries ("Nematron" or the "Company") giving effect to the
acquisition of Optimation Technology, Inc. The purchase price is estimated to be
$4,020,000 based on the closing price of Nematron's common stock as traded on
the American Stock Exchange on the day immediately prior to the date of the
proxy statement. The pro forma consolidated financial statements are presented
for informational purposes only, and are not necessarily indicative of the
financial position or results of operations that would have occurred if the
Merger had been consummated as of the date indicated. In addition, the pro forma
consolidated financial statements are not necessarily indicative of future
financial condition or operating results.
22
<PAGE> 25
NEMATRON CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Pro Forma Adjustments
Optimation --------------------- Pro Forma
Nematron Technology Amount Note Amount
-------- ---------- ------ ---- ------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 129,443 $ 322,040 $ 451,483
Accounts receivable, net of allowance
for doubtful accounts:
Billed 4,683,386 1,815,537 (406,000) (1) 6,092,923
Unbilled 1,146,533 1,332,788 2,479,321
Inventories 2,314,230 - 2,314,230
Prepaid expenses and other current assets 248,556 72,896 321,452
----------- ----------- ------------
Total Current Assets 8,522,148 3,543,261 11,659,409
Property and Equipment, net of accumulated
depreciation 2,709,658 781,757 3,491,415
Other Assets:
Capitalized software development costs,
net of accumulated amortization 3,457,847 - 3,457,847
Goodwill and other intangible assets,
net of accumulated amortization 3,070,789 - 2,080,359 (2) 5,151,148
----------- ----------- ------------
Net Other Assets 6,528,636 - 8,608,995
----------- ----------- ------------
Total Assets $17,760,442 $ 4,325,018 $ 23,759,819
=========== =========== ============
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable to bank $ 2,813,163 $ - $ 2,813,163
Accounts payable 1,580,136 124,071 1,704,207
Deferred revenue and accrued liabilities 1,922,000 431,203 2,353,203
Income taxes payable - 294,103 294,103
Deferred income taxes - 1,076,000 1,076,000
Current maturities of long-term debt 4,228,374 36,000 4,264,374
----------- ----------- ------------
Total Current Liabilities 10,543,673 1,961,377 12,505,050
Long-Term Debt, less current maturities 18,000 18,000
Deferred Tax Liability 102,600 - 102,600
----------- ----------- ------------
Total Liabilities 10,646,273 1,979,377 12,625,650
Stockholders' Equity:
Common Stock 29,977,838 184,076 (184,076) (2) 33,997,838
4,020,000 (2)
Foreign Currency Translation Adjustment (26,979) - (26,979)
Retained Earnings (Accumulated Deficit) 2,174,175 (2,174,175) (2)
(22,836,690) (22,836,690)
Less Treasury Stock, at cost (12,610) 12,610 (2) -
----------- ----------- ------------
Total Stockholders' Equity 7,114,169 2,345,641 11,134,169
----------- ----------- ------------
Total Liabilities and Stockholders'
Equity $17,760,442 $ 4,325,018 $ 23,759,819
=========== =========== ============
</TABLE>
23
<PAGE> 26
NEMATRON CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Pro Forma Adjustments
Optimation --------------------- Pro Forma
Nematron Technology Amount Note Amount
-------- ---------- ------ ---- ------
<S> <C> <C> <C> <C> <C>
Net revenue $ 29,772,129 $ 10,393,979 $ 40,166,108
Cost of revenues 19,991,704 6,651,224 (3) 26,642,928
------------ ------------
Gross profit 9,780,425 13,523,180
Operating expenses:
Product development costs 794,207 794,207
Cost of equipment sold and
reimbursable expenses 820,806 (820,806) (3) -
Salaries and wages 5,495,172 (5,495,172) (3) -
Payroll taxes 415,488 (415,488) (3) -
Subcontract engineering and
fabrication 468,550 (468,550) (3) -
Selling, general and
administrative expenses 6,471,046 2,022,625 946,212 (3) 9,543,901
104,018 (4)
Depreciation 397,420 (397,420) (3) -
------------
Total operating expenses 7,265,253 9,620,061 10,338,108
------------ ------------ ------------
Operating income 2,515,172 773,918 3,185,072
Interest expense (523,839) (47,288) (571,127)
Sundry income (expense) (25,883) 36,312 10,429
------------ ------------ ------------
Income before taxes 1,965,450 762,942 2,624,374
Income tax benefit (expense) 43,200 (324,412) 324,412 (5) 43,200
------------ ------------ ------------
Net income $ 2,008,650 $ 438,530 $ 2,667,574
============ ============ ============
Net earnings per share:
Basic $ 0.19 $ 0.19
Diluted $ 0.18 $ 0.18
Weighted average number of
common shares outstanding:
Basic 10,753,844 3,112,500 (6) 13,866,344
Diluted 11,321,512 3,112,500 (6) 14,434,012
</TABLE>
See notes to pro forma consolidated condensed statements.
24
<PAGE> 27
NEMATRON CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Pro Forma Adjustments
Optimation --------------------- Pro Forma
Nematron Technology Amount Note Amount
-------- ---------- ------ ---- ------
<S> <C> <C> <C> <C> <C>
Net revenue $ 15,345,568 $ 8,080,883 $ 23,426,451
Cost of revenues 11,193,431 $ 5,224,774 (3) 16,418,205
------------ ------------
Gross profit 4,152,137 7,008,246
Operating expenses:
Product development costs 486,957 486,957
Cost of equipment sold and
reimbursable expenses 961,762 (961,762) (3) -
Salaries and wages 4,029,781 (4,029,781) (3) -
Payroll taxes 331,664 (331,664) (3) -
Subcontract engineering and
fabrication 362,621 (362,621) (3) -
Selling, general and
administrative expenses 4,810,485 1,497,328 688,304 (3) 7,074,131
78,013 (4)
Depreciation and amortization 227,250 (227,250) (3) -
------------ ----------- ------------
Total operating expenses 5,297,442 7,410,406 7,561,088
------------ ----------- ------------
Operating income (loss) (1,145,305) 670,477 (552,841)
Interest expense (352,712) (7,957) (360,669)
Sundry income (expense) 404,212 63,517 467,729
------------ ----------- ------------
Income (loss) before taxes (1,093,805) 726,037 (445,781)
Income tax benefit (expense) 17,217 (317,000) 317,000 (5) 17,217
------------ ----------- ------------
Net income (loss) $ (1,076,588) $ 409,037 $ (428,564)
============ =========== ============
Net loss per share:
Basic $ (0.08) $ (0.03)
Diluted $ (0.08) $ (0.03)
Weighted average number of
common shares outstanding:
Basic 12,857,425 3,112,500 (6) 15,969,925
Diluted 12,857,425 3,112,500 (6) 15,969,925
</TABLE>
See notes to pro forma consolidated condensed statements.
25
<PAGE> 28
NEMATRON CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL INFORMATION
The accompanying pro forma balance sheet as of September 30, 2000 and the pro
forma statements of operations for the year ended December 31, 1999 and for the
nine months ended September 30, 2000 present the financial position and the
results of operations of Nematron Corporation and Consolidated Subsidiaries
("Nematron" or the "Company") giving effect to the acquisition of Optimation
Technology, Inc. The purchase price is estimated to be $4,020,000 based on the
closing price of the Company's common stock as traded on the American Stock
Exchange on the day immediate prior to the date of the proxy statement.
Pro forma adjustments to the Pro Forma Unaudited Consolidated Condensed Balance
Sheet as of September 30, 2000, giving effect to the transaction as if it
occurred on September 30, 2000, are as follows:
(1) Adjust for the agreed-upon distribution of two accounts receivable
totaling $406,000 to former Optimation Technology shareholders prior to
the effective date of the acquisition.
(2) Adjust for the acquisition of Optimation Technology equal to the
estimated purchase price of $4,020,000 and for the recording of
goodwill equal to the excess of the purchase price over the fair value
of the net assets acquired.
Pro forma adjustments to the Pro Forma Unaudited Consolidated Condensed
Statements of Operations for the year ended December 31, 1999 and the nine
months ended September 30, 2000, assuming the transaction occurred as of the
earliest date presented, are as follows:
(3) Reclassify costs and expenses into classifications utilized by
Nematron.
(4) Adjust for goodwill amortization based on the cost of the business
acquired, using an amortization period of twenty years.
(5) Adjust for the utilization of Nematron's available net operating loss
carryforward to eliminate the income tax expense of Optimation
Technology.
(6) Adjust for the number of shares exchanged in the acquisition of
Optimation Technology.
26
<PAGE> 29
FINANCIAL INFORMATION FOR OPTIMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Nine-Month Period Ended September 30, 2000 Compared with the Nine-Month Period
Ended September 30, 1999
Net revenues for the nine-month periods ended September 30, 2000
increased $306,000 (3.9%) to $8,081,000 compared to the same period last year.
The revenue increase is primarily attributable to a more efficient utilization
of staff in providing engineering services to customers, as well as an increase
in equipment sold and reimbursable expenses incurred on the engineering services
provided during the period. In addition, there were fewer write-offs as a result
of project overruns during the period. Management expects that net revenues for
the fourth quarter of 2000 will also increase compared to the year earlier
period, based on existing scheduled work under the current backlog.
Cost of equipment sold and reimbursable expenses for the nine-month
period ended September 30, 2000 increased $296,000 (44.5%) to $962,000 compared
to the same period last year. The amount of equipment sold varies depending upon
the nature of the engineering services provided and the equipment specified by
the customer.
Salaries and wages for the nine-month period ended September 30, 2000
decreased $36,000 (0.9%) to $4,030,000 compared to the same period last year.
The slight decrease is primarily attributable to a change in compensation
methods to salaried employees, effective January 1, 2000, and also an increase
in subcontract engineering and fabrication services.
Payroll taxes for the nine-month period ended September 30, 2000
increased $18,000 (5.9%) to $332,000 compared to the same period last year.
Payroll taxes as a percentage of salaries and wages increased to 8.2% for the
nine-month period ended September 30, 2000 from 7.7% for the same period last
year. The increase is primarily attributable to the effect of additional
employees not reaching the statutory limits where tax rates are reduced.
Subcontract engineering and fabrication expenses for the nine-month
period ended September 30, 2000 increased $83,000 (29.5%) to $363,000 compared
to the same period last year. The increase is primarily attributable to the
varying nature of work performed for customers during the current period
compared to the year earlier period.
Selling, general and administrative expenses for the nine-month period
ended September 30, 2000 decreased $178,000 (10.6%) to $1,497,000 compared to
the comparable period last year. The decrease in selling, general and
administrative expenses in the current period resulted from less business
expansion and practice development activities during the current period compared
to the year earlier period. Management expects that selling, general and
administrative expenses will increase moderately in the fourth quarter of 2000
compared to the current quarter because of costs associated with its proposed
merger with Nematron Corporation and because of business expansion activities
currently under way.
Interest and other income for the nine-month period ended September 30,
2000 increased $41,000 (183.8%) to $64,000 compared to $22,000 for the
comparable period last year. The increase in the current period is primarily
attributable to changes in revenues from non-operating activities such as
Optimation's in-house day care center, as well as income from sundry and
miscellaneous transactions and activities.
Interest expense for the nine-month period ended September 30, 2000
decreased $30,000 (79.1%) to $8,000 compared to $38,000 for the comparable
period last year. The decrease in the current period results primarily from
decreased utilization of Optimation's line of credit as its cash flow has been
sufficient to fund current period expenses as such expenses became due and
payable.
Income tax expense for the nine-month period ended September 30, 2000
increased $127,000 (66.8%) to $317,000 compared to $190,000 for the comparable
period last year. The effective income tax rate for the nine month period ended
September 30, 2000 increased to 43.7% from 42.4% for the nine-month period ended
September 30, 1999 primarily because of higher non-deductible expenses as a
percentage of pre-tax income in the current period compared to the year earlier
period. Income taxes include both federal and state income tax provisions.
27
<PAGE> 30
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
Net revenues for the year ended December 31, 1999 increased $2,743,000
(35.9%) to $10,394,000 compared to year ended December 31, 1998. The revenue
increase was primarily attributable to the success of Optimation's marketing and
business development efforts in late 1998 and early 1999, primarily with several
larger long-time customers that had reduced their outsourcing of engineering
projects in the prior year. Additionally, Optimation opened satellite offices in
New York and North Carolina and offered a closer presence to certain new
customers.
Cost of equipment sold and reimbursable expenses for the year ended
December 31, 1999 increased $109,000 (15.4%) to $821,000 compared to year ended
December 31, 1998. The amount of equipment sold varies depending upon the nature
of the engineering services provided and the equipment specified by the
customer.
Salaries and wages for the year ended December 31, 1999 increased
$842,000 (18.1%) to $5,495,000 compared to year ended December 31, 1998. The
increase was primarily attributable to increasing the size of the professional
staff in order to complete expanded contracted services in the year ended
December 31, 1999.
Payroll taxes for the year ended December 31, 1999 increased $58,000
(16.3%) to $415,000 compared to year ended December 31, 1998. Payroll taxes,
which closely parallel labor changes, decreased to 7.6% of salaries and wages
for the year ended December 31, 1999 from 7.7% for the year ended December 31,
1998. The increase was primarily attributable to the effect of additional
employees not reaching the statutory limits where tax rates are reduced.
Subcontract engineering and fabrication expenses for the year ended
December 31, 1999 increased $98,000 (26.3%) to $469,000 compared to year ended
December 31, 1998. The increase was primarily attributable to the varying nature
of work performed for customers during the current year compared to last year.
Selling, general and administrative expenses for the year ended
December 31, 1999 decreased $121,000 (5.6%) to $2,023,000 compared to year ended
December 31, 1998. The decrease in selling, general and administrative expenses
in the current year resulted from less business expansion and practice
development activities during the current year compared to the year earlier
period.
Interest and other income for the year ended December 31, 1999
increased $32,000 to $36,000 compared to year ended December 31, 1998. The
increase in the current period was primarily attributable to changes in revenues
from non-operating activities such as Optimation's in-house day care center, as
well as income from sundry and miscellaneous transactions and activities.
Interest expense for the year ended December 31, 1999 increased $27,000
(137.8%) to $47,000 compared to year ended December 31, 1998. The increase in
the current period resulted primarily from a higher average utilization of
Optimation's line of credit during the current year compared to the year earlier
period.
Income tax expense for the year ended December 31, 1999 increased
$738,000 (178.4%) to $324,000 compared to year ended December 31, 1998. The
effective income tax rate for the year ended December 31, 1999 increased to
42.5% from 39.5% for the year ended December 31, 1998 primarily because of
higher non-deductible expenses as a percentage of pre-tax income in the current
period compared to the year earlier period. Income taxes include both federal
and state income tax provisions.
LIQUIDITY AND CAPITAL RESOURCES
Optimation's primary sources of liquidity are cash generated from
operations and Optimation's line of credit. Optimation's operations generated
$1,067,000 of cash in the nine-month period ended September 30, 2000, including
the effect of changes in working capital items.
Optimation has available a $1.3 million bank line of credit secured by
equipment with interest at prime plus .75%. In addition, Optimation has an
available $100,000 lease line of credit which can be used to lease certain
equipment. No amounts are outstanding under either line of credit at September
30, 2000.
28
<PAGE> 31
Based upon existing cash balances, available lines of credit and
anticipated cash generated from current operations, management believes that it
has sufficient liquidity to satisfy Optimation's liabilities as they become due.
Uncertainties Relating to Forward Looking Statements
Optimation's Management's Discussion and Analysis contains certain
"forward-looking statements" within the meaning of the Securities Exchange Act
of 1934, as amended, which are 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 the decline of economic
conditions in general and conditions in manufacturing industries in particular,
a reduction in demand for Optimation's services, the inability of Optimation to
attract and retain new and existing customers, changes in Optimation's strategy,
competitive factors, pricing pressures which result in materially reduced
contract prices for Optimation's services, changes in operating expenses, the
inability to attract or retain executive and/or engineering talent, changes in
customer requirements, the ability to consummate the merger of Optimation with
Nematron Corporation, and the ability to successfully integrate Optimation's
operations into the operations of Nematron subsequent to the contemplated
merger. See generally the section entitled "Forward-Looking Statements and Risks
Involved".
29
<PAGE> 32
FINANCIAL STATEMENTS
THE FOLLOWING FINANCIAL INFORMATION IS PROVIDED BELOW FOR OPTIMATION: (1)
AUDITED BALANCE SHEET FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 AND UNAUDITED
INTERIM BALANCE SHEET FOR THE PERIOD ENDED SEPTEMBER 30, 2000; AND (2) AUDITED
STATEMENTS OF INCOME, CASH FLOWS AND CHANGES IN SHAREHOLDERS' EQUITY FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1999 AND UNAUDITED INTERIM STATEMENTS OF INCOME
AND CASH FLOWS FOR THE PERIOD ENDED SEPTEMBER 30, 2000 AND THE COMPARABLE PERIOD
IN THE PRECEDING FISCAL YEAR.
OPTIMATION TECHNOLOGY, INC.
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
DECEMBER 31, 1999 and SEPTEMBER 30, 2000 (UNAUDITED)
INDEPENDENT AUDITORS' REPORT
President and Board of Directors
Optimation Technology, Inc.
We have audited the accompanying balance sheet of Optimation Technology, Inc. as
of December 31, 1999, and the related statements of income, shareholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Optimation Technology, Inc. as
of December 31, 1999, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ Mengel, Metzger, Barr & Co. LLP
--------------------------------------
Rochester, New York
September 1, 2000
30
<PAGE> 33
OPTIMATION TECHNOLOGY, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
December 31, September 30,
1999 2000
------------ -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 361 $ 322,040
Accounts receivable, net of allowance for doubtful
accounts of $25,000:
Billed 2,336,873 1,815,537
Unbilled 759,825 1,332,788
Refundable income taxes 123,537 -
Prepaid expenses 121,960 49,364
Deposits 46,371 23,532
---------- -----------
TOTAL CURRENT ASSETS 3,388,927 3,543,261
FIXED ASSETS
Office equipment 1,523,417 1,647,609
Leasehold improvements 180,000 183,000
Furniture, fixtures and computer equipment 905,610 910,422
---------- -----------
2,609,027 2,741,031
Less accumulated depreciation and amortization 1,739,284 1,959,274
---------- -----------
869,743 781,757
---------- -----------
$4,258,670 $ 4,325,018
========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
31
<PAGE> 34
LIABILITIES AND SHAREHOLDERS EQUITY
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
-------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Line of Credit $ 582,500 $ -
Current portion of long-term debt 36,000 36,000
Cash overdraft 192,905 -
Accounts payable 26,757 124,071
Accrued payroll and employee benefits 376,904 431,203
Income taxes payable 1,065,000 294,103
Deferred income taxes 1,065,000 1,076,000
----------- ----------
TOTAL CURRENT ASSETS 2,280,066 1,961,377
LONG-TERM DEBT 42,000 18,000
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized, 27,500 shares
Issued, 12,597 shares 184,076 184,076
Retained earnings 1,765,138 2,174,175
----------- ----------
1,949,214 2,358,251
Less:
Treasury stock, 97 shares, at cost 12,610 12,610
----------- ----------
1,936,604 2,345,641
----------- ----------
$ 4,258,670 $4,325,018
=========== ==========
</TABLE>
32
<PAGE> 35
OPTIMATION TECHNOLOGY, INC.
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1999 AND
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30, September 30,
1999 2000 1999
------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues:
Net sales $10,393,979 $ 8,080,883 $ 7,775,173
Costs and expenses:
Cost of equipment sold and reimbursable expenses 820,806 961,762 665,655
Salaries and wages 5,495,172 4,029,781 4,065,355
Payroll taxes 415,488 331,664 313,315
Subcontract engineering and fabrication 468,550 362,621 279,941
Selling, general and administrative 2,022,625 1,497,328 1,675,601
Depreciation and amortization 397,420 227,250 311,850
----------- ----------- -----------
9,620,061 7,410,406 7,311,717
----------- ----------- -----------
INCOME FROM OPERATIONS 773,918 670,477 463,456
Other income (expense):
Interest and other income 36,312 63,517 22,380
Interest expense (47,288) (7,957) (38,129)
------------ ------------ ------------
(10,976) 55,560 (15,749)
------------ ----------- ------------
INCOME BEFORE INCOME TAXES 762,942 726,037 447,707
Income tax expense 324,412 317,000 190,000
----------- ----------- -----------
NET INCOME $ 438,530 $ 409,037 $ 257,707
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
33
<PAGE> 36
OPTIMATION TECHNOLOGY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999
NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Common Retained ESOP Treasury
Stock Earnings Shares Stock Total
------ -------- ------ -------- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $ 184,076 $ 1,330,182 $ (95,385) $ (12,610) $ 1,406,263
Net income - 438,530 - - 438,530
Release of stock in employee
stock ownership plan - (3,574) 95,385 - 91,811
---------- ----------- ---------- --------- -----------
BALANCE,
DECEMBER 31, 1999 184,076 1,765,138 - (12,610) 1,936,604
---------- -----------
Net income (Unaudited) - 409,037 - - 409,307
---------- ----------- ---------- --------- -----------
BALANCE,
SEPTEMBER 30, 2000
(Unaudited) $ 184,076 $ 2,174,175 - $ (12,610) $ 2,345,641
========== =========== ---------- ========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE> 37
OPTIMATION TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999 AND
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30, September 30,
1999 2000 1999
------------ ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Net income $ 438,530 $ 409,037 $ 257,707
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 397,420 227,250 311,850
Bad debts 10,000 - -
Deferred income taxes 375,000 11,000 (393,976)
ESOP compensation expense 91,811 - 95,385
Changes in operating assets and liabilities:
Accounts receivable (1,121,847) (51,627) (192,442)
Refundable income taxes (50,310) 123,537 73,227
Prepaid expenses (401) 72,596 29,676
Deposits (3,455) 22,839 25,080
Cash overdraft 120,388 (192,905) (29,450)
Accounts payable (170,181) 97,314 (157,433)
Accrued payroll and employee benefits 152,318 54,299 225,003
Income taxes payable 294,103 -
Deferred revenue (3,466) - -
------------ ---------- ----------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 235,807 1,067,443 274,627
CASH FLOW - INVESTING ACTIVITIES
Purchases of fixed assets (184,186) (139,264) (141,921)
------------ ---------- ----------
NET CASH USED FOR INVESTING ACTIVITIES (184,186) (139,264) (141,921)
CASH FLOWS - FINANCING ACTIVITIES
Net borrowing under line of credit agreement 68,000 (582,500) (21,400)
Principal payments on long-term debt (131,385) (24,000) (122,385)
------------ ---------- ----------
NET CASH USED FOR FINANCING ACTIVITIES (63,385) (606,500) (143,785)
------------ ---------- ----------
NET DECREASE IN CASH (11,764) 321,679 (11,079)
Cash at beginning of period 12,125 361 12,125
------------ ---------- ----------
CASH AT END OF PERIOD $ 361 $ 322,040 $ 1,046
============ ========= ==========
</TABLE>
35
<PAGE> 38
OPTIMATION TECHNOLOGY, INC.
STATEMENT OF CASH FLOWS, Cont'd
YEAR ENDED DECEMBER 31, 1999 AND
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30, September 30,
1999 2000 1999
----- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (received) during the period for:
Interest $ 42,288 $ 7,957 $ 38,129
======== ========== ========
Income taxes $ (278) $ (111,640) $ (278)
======== ========== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
36
<PAGE> 39
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements
In the opinion of management, the accompanying unaudited financial
statements include all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the Company's financial
position at September 30, 2000 and results of operations and cash flows for
the nine month period ended September 30, 2000. The financial statements as
of September 30, 2000 and for the nine months then ended are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
The Company
The Company provides consulting services in engineering for the design of
industrial manufacturing systems. In addition, the Company provides turn
key products engineering which includes the purchase of equipment. The
client base is made up primarily of Fortune 500 companies located
throughout the world.
Revenue recognition
Revenues are recognized when services are performed under cost plus
contracts. Customers are billed on a bi-weekly basis or at project
completion. Unbilled accounts receivable represent revenues earned and
billable in the following bi-weekly period as well as revenues earned but
billable at completion. When billed, these amounts are included in billed
accounts receivable.
Concentration of credit risk
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash and trade
receivables. The Company maintains its cash account in one commercial bank
located in New York State. Accounts are guaranteed by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000.
Concentration of credit risk with respect to trade accounts receivable are
limited due to the large number of customers and their dispersion across
many geographic areas. Credit is extended on an evaluation of the
customer's financial condition and generally collateral is not required.
Credit losses consistently have been within management's expectations.
Fixed assets
Fixed assets are stated at cost, less accumulated depreciation and
amortization. Property is depreciated or amortized using straight-line and
accelerated methods over the estimated useful lives of the assets, which
range from 5 to 15 years.
Expenditures for renewals and betterments are capitalized while repairs and
maintenance are charged to operations as incurred. Upon sale or retirement,
the related cost and accumulated depreciation or amortization are removed
from the accounts and the related gain or loss is reflected in operations.
Income taxes
Deferred income tax assets and liabilities arise from temporary differences
associated with differences between the financial statement and tax basis
of assets and liabilities, as measured by the enacted tax rates which are
expected to be in effect when these differences reverse. Deferred tax
assets and liabilities are classified as current or noncurrent, depending
on the classification of the assets and liabilities to which they relate.
Deferred tax assets and liabilities not related to an asset or liability
are classified as current or noncurrent depending on the periods in which
the temporary differences are expected to reverse. The principal types of
temporary differences between assets and liabilities for financial
statement and tax return purposes are detailed in Note D.
Advertising
Advertising costs are expensed as costs are incurred and approximated
$29,000 and $15,000 for the year ended December 31, 1999 and the nine
months ended September 30, 2000, respectively.
37
<PAGE> 40
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE B: LINE OF CREDIT
The Company has available an $1,300,000 bank line of credit secured by
equipment with interest at prime plus .75% (9.25% at December 31, 1999).
The balance outstanding at December 31, 1999 and September 30, 2000 was
$582,500 and $-0-, respectively. In addition, the Company has an available
$100,000 lease line of credit which can be used to lease certain equipment.
No amount was outstanding relating to this line at December 31, 1999 or
September 30, 2000.
NOTE C: LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
----- ----
(Unaudited)
<S> <C> <C>
Note payable to bank, unsecured, in monthly installments
of $3,000 plus interest at prime plus .75% (9.25% at
December 31, 1999) due February, 2002 $ 78,000 $ 54,000
Less current maturities 36,000 36,000
--------- ---------
$ 42,000 $ 18,000
========= =========
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
--------
<S> <C>
2000 $ 36,000
2001 36,000
2002 6,000
--------
$ 78,000
========
</TABLE>
38
<PAGE> 41
NOTE D: INCOME TAXES
The provision for income taxes includes the following:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
Dec. 31, 1999 Sept. 30, 2000
-------------- ---------------
(Unaudited)
<S> <C> <C>
Currently (refundable) payable:
Federal $ (51,918) $ 248,000
State 1,330 58,000
---------- ----------
(50,588) 306,000
Deferred tax expense:
Federal 300,000 1,000
State 75,000 10,000
---------- ----------
375,000 11,000
---------- ----------
$ 324,412 $ 317,000
========== ==========
</TABLE>
A reconciliation between income taxes at the Company's Federal statutory
rate of 35% and the amount provided is as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
Dec. 31, 1999 Sept. 30, 2000
-------------- ---------------
(Unaudited)
<S> <C> <C>
Computed at Federal rate $ 267,030 $ 254,113
State taxes, net of Federal income tax effect 49,615 44,200
Non-deductible expenses 10,516 10,460
Other (2,749) 8,227
---------- ----------
$ 324,412 $ 317,000
========== ==========
</TABLE>
Deferred taxes result from the effect of transactions which are recognized
in different periods for financial and tax reporting purposes and are due
primarily to the Company using the cash basis of accounting for income tax
reporting and the accrual basis for financial statement purposes and as of
December 31, 1999, $175,000 federal and $290,000 state net operating loss
carryforwards which expire in 2019. The net operating loss carry forwards
were utilized in the current tax provision in the nine months ended
September 30, 2000. The tax effects of temporary differences that give rise
to deferred tax assets and liabilities are as follows:
39
<PAGE> 42
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
Dec. 31, 1999 Sept. 30, 2000
-------------- --------------
(Unaudited)
<S> <C> <C>
Deferred tax liabilities:
Accrual versus cash reporting $ 1,154,000 $ 1,076,000
Net operating loss carryforwards (89,000) -
------------ -------------
$ 1,065,000 $ 1,076,000
============ =============
</TABLE>
NOTE E: LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company has entered into two lease agreements with related parties for
office space. The first lease provides for base annual rent of $160,200
plus expenses through August 31, 2012. The second lease currently requires
annual base rent of $160,200 plus expenses through January 31, 2002.
The Company also leases office space in seven other locations currently
requiring annual payments of approximately $16,100 to $108,000 through May
2004.
Total minimum lease payments required at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year Ending Amount
----------- ------
<S> <C>
December 31, 2000 $ 571,217
December 31, 2001 541,927
December 31, 2002 398,903
December 31, 2003 338,098
December 31, 2004 219,571
Thereafter 1,228,200
----------
$3,297,916
==========
</TABLE>
The rent expense was $571,410 and $444,736 for the year ended December 31,
1999 and the nine months ended September 30, 2000, respectively.
The Company has guaranteed the debt of a related party. The outstanding
balance of the guaranteed debt was approximately $700,000 and $677,000 at
December 31, 1999 and September 30, 2000, respectively.
NOTE F: RETIREMENT PLAN
The Company maintains a 401(k) retirement plan covering substantially all
employees. The plan provides for matching contributions by the Company up
to 3% of each covered employee's salary. The retirement plan expense was
$97,265 and $81,315 for the year ended December 31, 1999 and the nine
months ended September 30, 2000, respectively.
NOTE G: EMPLOYEE STOCK OWNERSHIP PLAN
Effective January 1, 1994 the Company's Board of Directors approved an
employee stock ownership plan (ESOP) that covers all eligible employees.
The Company transferred 2,103 shares at fair market value of $97.50 per
share, which were held in treasury, to the ESOP in exchange for the ESOP's
assumption of a note payable to an individual. In addition on December 18,
1996, the Company sold 1,651 shares of common stock valued at $53.81 per
share to the ESOP in exchange for a one year promissory note. In 1998 the
ESOP purchased 250.849 shares at fair market value from former employees at
$507 per share in exchange for a note payable to a bank. The Company makes
annual contributions to the ESOP equal to the ESOP's debt service. The ESOP
shares are pledged as collateral
40
<PAGE> 43
for its debt. As the debt is repaid, shares are released from collateral
based on the proportion of debt service paid in the year and allocated to
participating employees. The Company accounts for its ESOP in accordance
with Statement of Position 93-6. Accordingly, the debt of the ESOP was
recorded as a liability of the Company and the shares pledged as collateral
were reported as unearned ESOP shares in the shareholders' equity section
of the balance sheet. As shares are released from collateral, the Company
reports compensation expense equal to the current fair market value of the
shares. ESOP compensation expense for the year ended December 31, 1999 was
$91,811 (188.137 shares at $488 per share).
The ESOP shares as of December 31, 1999 were as follows:
<TABLE>
<S> <C>
Allocated shares - beginning of year
3,566
Shares released for allocation
188
------
3,754
======
Unreleased shares
-
Carrying value of unearned shares at end of year $ -
======
</TABLE>
NOTE H: MAJOR CUSTOMERS
The Company had two customers that accounted for more than 10% of revenues.
Sales to these customers amounted to $3,875,565 and $3,840,142 for the year
ended December 31, 1999 and the nine months ended September 30, 2000,
respectively. In addition, accounts receivable from these customers were
approximately $859,000 and $718,000 as of December 31, 1999 and September
30, 2000, respectively.
NOTE I: SUBSEQUENT EVENT
On June 20, 2000 the Company's shareholders signed a letter of intent
whereby 100% of the shares of the Company's outstanding stock will be
acquired by Nematron Corporation, a publicly traded company, and the
Company would become a wholly-owned subsidiary of Nematron. Management
expects the transaction to be completed by December 31, 2000.
41
<PAGE> 44
FINANCIAL INFORMATION FOR NEMATRON
MANAGEMENT'S DISCUSSION AND ANALYSIS
Nematron Acquisition Corp. ("Merger Sub") is a wholly owned subsidiary
of Nematron incorporated in New York on November 3, 2000 for the purpose of
effectuating the Merger. Merger Sub does not have any operations. Therefore no
financial information is provided for Merger Sub and it is not included in the
discussion below about Nematron.
Nematron acquired 100% of the outstanding equity of A-OK Engineering
Controls, Inc. ("A-OK Controls") effective at the close of business on June 30,
2000. The results of operations of A-OK Controls are consolidated with Nematron
beginning July 1, 2000.
Three-And Nine-Month Periods Ended September 30, 2000 Compared With The Three-
And Nine-Month Periods Ended September 30, 1999
Net revenues for the three- and nine-month periods ended September 30,
2000 decreased $4,231,000 (40.4%) and $6,889,000 (31.0%), respectively, to
$6,249,000 and $15,346,000, respectively, compared to the same periods last
year. The revenue decreases are primarily attributable to decreases in sales of
bundled Industrial Control Computers under a significant automation controls
supply program with a major automotive company (the "major controls program"),
and to a lesser extent, to decreases in sales of hardware and software through
the Nematron's non-automotive sales and distribution channel. These decreases
were partially offset by higher sales of repair and integration services,
including $2,374,000 of service revenue from A-OK Controls for the three- and
nine-month periods ended September 30, 2000. Management expects that net
revenues for the fourth quarter of 2000 will also decrease compared to the year
earlier period, based on existing scheduled production releases, expected
shipments under the major supply contract and the current backlog.
Gross profit for the three- and nine-month periods ended September 30,
2000 decreased $1,665,000 (51.6%) and $2,790,000 (40.2%), respectively, to
$1,564,000 and $4,152,000, respectively, compared to the same periods last year.
Gross profit as a percentage of net revenues for the three- and nine-month
periods ended September 30, 2000 was 25.0% and 27.1%, respectively, compared to
30.8% and 31.2% in the same periods last year. The decreases in gross profit
percentage resulted from the effect of fixed cost on lower revenues in the
current periods and from a lower percentage of sales of higher margin bundled
hardware/software products under the major controls program in the current
periods compared to the same periods last year. Management expects that gross
profit margins will remain relatively constant throughout the year as the mix of
sales in the fourth quarter of 2000 is expected to be similar to the sales mix
experienced in the third quarter of 2000, based on the current backlog and
forecasts.
Product development expenses for the three- and nine-month periods
ended September 30, 2000 decreased $11,000 (4.5%) and $136,000 (21.8%),
respectively, to $229,000 and $487,000, respectively, compared to the same
periods last year. The decrease is attributable to a smaller development staff
and a shift in staff's efforts in the current periods compared to a year ago.
Management expects that product development expenses will increase slightly in
the fourth quarter of 2000 as staff and development efforts are planned to
increase above current levels to develop and release new products in the near
term.
Selling, general and administrative expenses for the three- and
nine-month periods ended September 30, 2000 decreased $324,000 (17.2%) and
increased $407,000 (9.2%) to $1,563,000 and $4,810,000, respectively, compared
to the comparable periods last year. The decrease in selling, general and
administrative expenses in the current three-month period resulted from lower
commissions and other sales costs, increased cost controls and staff reductions
in response to lower revenues in the current period. The increase in selling,
general and administrative expenses in the current nine-month period resulted
primarily from increases in sales and marketing efforts during the first half of
the year, offset in part by slightly reduced staff levels and sales commissions
on lower revenue levels. Management expects that selling, general and
administrative expenses will increase moderately in the fourth quarter of 2000
compared to the current quarter because of an anticipated increase in marketing
and sales activities.
42
<PAGE> 45
Interest expense for the three- and nine-month periods ended September
30, 2000 increased $120,000 (140.7%) and decreased $81,000 (18.7%),
respectively, to $205,000 and $353,000, respectively, compared to $85,000 and
$434,000, respectively, for the comparable periods last year. The increase in
the current three-month period results primarily from increased interest rates
and new borrowings during the current period, arising primarily from funds
borrowed to acquire A-OK Controls. The decrease in the current nine-month period
resulted from lower average borrowing levels.
Sundry income (expense) for the three- and nine-month periods ended
September 30, 2000 was $26,000 and $404,000 that resulted primarily from the
sale of idle assets during the periods. Sundry expenses for the three- and
nine-month periods ended September 30, 1999 were not significant.
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 the major controls
program that specified Nematron's bundled products and other hardware products
to the OEMs. Revenues under this major controls 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 Nematron 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 Nematron's inability to secure component parts
and assembled products in a timely manner and the corresponding increase in
quoted delivery times. Nematron 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. 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.
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 resulted 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 Nematron's use of subcontractors
relieved it of significant purchasing and storage responsibilities, in turn
reducing Nematron'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.
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 resulted 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.
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 resulted 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 Nematron in early fiscal 1999.
43
<PAGE> 46
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 Controls Corp. 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 write-down 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 resulted 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.
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 Nematron'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 resulted 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.
44
<PAGE> 47
Liquidity And Capital Resources
Nematron's primary sources of liquidity are cash generated from
operations and its lines of credit. Nematron's operations generated $894,000 of
cash in the nine-month period ended September 30, 2000, including the effect of
changes in working capital items.
Nematron is a party to two loan and security agreements (the
"Agreements") with a bank. The Agreements provide for two lines of credit
totaling $9.0 million, a $2.9 million term loan and a $1.5 million special
accommodation note used for Nematron's acquisition of A-OK Controls. The
Agreements are for a term through November 12, 2002, and may be extended for an
additional one-year period at the option of Nematron, unless the lender gives
prior notice of termination.
The amounts available under the lines of credit are limited by
borrowing formulas that allow for advances up to an amount equal to 85% of
eligible accounts receivable, less any amount of outstanding letters of credit
issued by Nematron. Amounts borrowed under the lines of credit facilities by
Nematron totaled $2,813,163 at September 30, 2000. Based upon the specified
borrowing formulas, approximately $500,000 was eligible for additional advances
under the lines of credit at September 30, 2000. Although Nematron was not in
compliance with the tangible net worth covenant contained in one of the
Agreements as of September 30, 2000, the bank has issued a forebearance letter
to Nematron concerning this covenant violation. However, in such letter, the
bank has specifically reserved it right to take any action permitted under the
Agreements in the future without any notice to Nematron. The bank and management
are in the process of revising the Agreements which, among other things, change
the tangible net worth covenant contained therein. As a condition of the bank
making this change, Nematron will be required by the bank to raise additional
equity, and Nematron has agreed to do so.
Amounts borrowed under the lines of credit bear interest at the prime
rate plus 1.5% (11.0% at September 30, 2000). The lines of credit and the term
loan are collateralized by substantially all assets of Nematron and a mortgage
on Nematron's Ann Arbor facility. Nematron financed the cash portion of the
purchase price for A-OK Controls on June 30, 2000 through borrowings under the
lines of credit and refinanced A-OK Controls' existing long-term debt with a
term loan from the line of credit bank. Nematron has determined, however, that
it is in the best interests of Nematron to decrease its credit line borrowings
by raising additional equity capital. Accordingly, Nematron has entered into
agreements with three investors to purchase approximately 800,000 newly issued
shares of Nematron's common stock at a price of $1.25 per share. Management
expects that these shares will be sold by November 29, 2000. Based upon
Nematron's existing working capital of approximately $1,165,000, the proceeds
from the anticipated private placement, currently forecasted revenue and expense
levels and the funds available under Nematron's lines of credit, management
believes that it will have sufficient cash resources to satisfy its liquidity
needs in both the short and long term.
Uncertainties Relating to Forward Looking Statements
Nematron's Management's Discussion and Analysis contains certain
"forward-looking statements" within the meaning of the Securities Exchange Act
of 1934, as amended, which are 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 the decline of economic
conditions in general and conditions in the automotive manufacturing industry in
particular, a reduction in demand for Nematron's products and services, the
inability of Nematron to successfully implement its strategy to lead the
industrial automation market migration from closed architecture PLCs to open
architecture PC-based solutions, changes in Nematron 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 Nematron'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, the ability of Nematron to effectively integrate the
operations of acquired companies, fluctuations in foreign exchange rates, the
inability to attract or retain sales and/or engineering talent, changes in
customer requirements, evolving industry standards and the ability to consummate
the merger with Optimation Technology, Inc., and the ability to successfully
integrate Optimation's operations into the operations of
45
<PAGE> 48
Nematron subsequent to the contemplated merger. See generally the section
entitled "Forward-Looking Statements and Risks Involved".
FINANCIAL STATEMENTS
THE FOLLOWING FINANCIAL INFORMATION IS INCLUDED FOR NEMATRON: (1) AUDITED
BALANCE SHEETS AT DECEMBER 31, 1999 AND DECEMBER 31, 1998, AND UNAUDITED INTERIM
BALANCE SHEET FOR THE FISCAL PERIOD ENDED SEPTEMBER 30, 2000; AND (2) AUDITED
STATEMENTS OF INCOME, CASH FLOWS AND CHANGES IN SHAREHOLDERS' EQUITY FOR THE
YEARS ENDED SEPTEMBER 30, 1998 AND DECEMBER 31, 1999 AND THE THREE MONTHS ENDED
DECEMBER 31, 1998, AND UNAUDITED INTERIM STATEMENTS OF INCOME AND CASH FLOWS FOR
THE PERIOD ENDED SEPTEMBER 30, 2000 AND THE COMPARABLE PERIOD IN THE PRECEDING
FISCAL YEAR.
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
46
<PAGE> 49
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
Assets (NOTES 5 AND 8) December 31
1998 1999
---- ----
<S> <C> <C>
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
----------- -----------
Less accumulated depreciation 9,029,542 8,526,845
(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 and equipment $12,462,857 $14,082,639
=========== ===========
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) -- --
Shareholders' 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
Accumulated comprehensive income (loss) 24,664,809 28,727,838
Accumulated deficit (7,134) 1,869
(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.
47
<PAGE> 50
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
Year Ended Months Ended Year Ended
September 30, 1998 December 31, 1998 December 31, 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 operating expenses (749,461) (3,160,120) (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.
48
<PAGE> 51
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>
Common Stock
------------
Accumulated
Comprehensive
Income Accumulated
Shares Amount Adjustment Deficit Total
------ ------ ---------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1997 5,329,938 $21,589,413 $ (7,571) $(11,255,777) $10,326,065
Exercise of options, net of 850
shares redeemed 11,050 27,250 27,250
Exercise of warrants 12,328 48,146 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 (1,491)
----------- -------------- ------------
Total comprehensive loss 1,491 (9,009,828) (9,008,337)
--------- ----------- ----------- -------------- ------------
Balance, September 30, 1998 5,353,316 21,664,809 (6,080) $(20,265,605) $ 1,393,124
Additions to equity for the beneficial conversion
feature of convertible promissory notes issued
(Note 7) 3,000,000 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) (1,054)
---------- ------------- -----------
Total comprehensive loss (1,054) (3,503,149) (3,504,203)
--------- ----------- ----------- -------------- ------------
Balance, December 31, 1998 5,353,316 24,664,809 (7,134) (23,768,754) 888,921
Conversion of convertible promissory notes and
accrued interest thereon to common stock (Note 7) 4,092,114 1,023,029 1,023,029
Private placement of common stock (Note 7) 3,080,000 3,020,000 3,020,000
Exercise of options (Note 7) 80,000 20,000 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 9,003
---------- ------------- -----------
Total comprehensive income 9,003 2,008,650 2,017,653
---------- ------------- -----------
BALANCE, DECEMBER 31, 1999 12,605,430 $28,727,838 $ 1,869 $(21, 760,104) $ 6,969,603
========== =========== ========== ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE> 52
[This Page Intentionally Left Blank)
50
<PAGE> 53
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>
Year Ended Three Month Ended Year Ended
September 30, 1998 December 31, 1988 December 31, 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-term 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 notes payable $1,787,761 $ ---- $ ----
Acquisition of equipment under capital leases
(Notes 8 and 15) 342,692 ---- ----
Increase in common stock - issuance of convertible ---- 3,000,000 ----
Promissory notes (Note 7)
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.
51
<PAGE> 54
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.
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
52
<PAGE> 55
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>
Year ended Three Months Ended Year ended
September 30, 1998 December 31, 1998 December 31, 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.
A summary of intangible assets for the periods presented are as follows:
<TABLE>
<CAPTION>
Year ended Three Months Ended Year ended
September 30, 1998 December 31, 1998 December 31, 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.
53
<PAGE> 56
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.
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.
54
<PAGE> 57
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.
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.
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
55
<PAGE> 58
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.
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
56
<PAGE> 59
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.
(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 (10.0% 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.
57
<PAGE> 60
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>
(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 ending
September 30, 1998
------------------
<S> <C>
Charged to cost 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, 1998 December 31, 1998 December 31, 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 carry forwards 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>
58
<PAGE> 61
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
---- ----
<S> <C> <C>
Deferred tax assets:
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.
59
<PAGE> 62
(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
------------ ------------- -----------
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.
(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
60
<PAGE> 63
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.
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.
61
<PAGE> 64
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,
Sept. 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,
Dec. 31, 1998 1,428,894 $2.39 899,917 $2.00 225,309
Adoption of 1,250,000
The Long Term
Incentive Plan
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,
Dec. 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 Weighted Number of Weighted
Options 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>
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
62
<PAGE> 65
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>
Year ended Three months ended Year ended
September 30, 1998 December 31, 1998 December 31, 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 Three months
Year ended Ended Ended
September 30, 1998 December 31, 1998 December 31, 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.
63
<PAGE> 66
(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 Subordinated Intec
Acquisition Acquisition 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>
Operating
Capital Lease 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>
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.
64
<PAGE> 67
(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
Year ended ended 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
---------- ----------
$8,166,582 $6,876,400
========== ==========
</TABLE>
(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.
65
<PAGE> 68
THE FOLLOWING CONDENSED COMPARATIVE BALANCE SHEETS INCLUDE FINANCIAL INFORMATION
FROM THE AUDITED BALANCE SHEET AS OF DECEMBER 31, 1999 INCLUDED ELSEWHERE
HEREIN.
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED) (AUDITED)
----------- ---------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 129,443 $ 356,668
Accounts receivable, net of allowance for doubtful
accounts of $50,000 at September 30, 2000, and
$122,000 at December 31, 1999 5,829,919 5,014,028
Inventories (Note 3) 2,314,230 1,671,648
Prepaid expenses and other current assets 248,556 163,895
------------ -------------
Total Current Assets 8,522,148 7,206,239
Property and Equipment, net of accumulated depreciation
of $6,566,241 at September 30, 2000 and $6,129,373
at December 31, 1999 2,709,658 2,397,472
Other Assets:
Software and related development costs, net of amortization
of $2,567,611 at September 30,2000, and $1,853,660
at December 31, 1999 3,457,847 3,617,553
Goodwill and other intangible assets, net of amortization
of $2,485,467 at September 30, 2000 and $2,282,167
at December 31,1999 3,070,789 861,375
------------ -------------
Net Other Assets 6,528,636 4,478,928
------------ -------------
Total Assets $ 17,760,442 $ 14,082,639
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to bank (Note 4) $ 2,813,163 $ -0-
Accounts payable 1,580,136 1,757,381
Deferred revenue and other accrued expenses 1,922,000 2,281,176
Current maturities of long-term debt (Note 4) 4,228,374 232,811
----------- -------------
Total Current Liabilities 10,543,673 4,271,368
Long-Term Debt, less current maturities (Note 4) -0- 2,706,668
Deferred Tax Liability 102,600 135,000
------------ -------------
Total Liabilities 10,646,273 7,113,036
Stockholders' Equity:
Common Stock, no par value, 30,000,000 shares authorized;
shares issued and outstanding: 13,209,616 at September 30,
2000 and 12,605,430 and at December 31, 1999 29,977,838 28,727,838
Foreign currency translation adjustment (26,979) 1,869
Accumulated deficit (22,836,690) (21,760,104)
------------ -------------
Total Stockholders' Equity 7,114,169 6,969,603
------------ -------------
Total Liabilities and Stockholders' Equity $ 17,760,442 $ 14,082,639
============ =============
</TABLE>
66
<PAGE> 69
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE-AND NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net Revenues $ 6,249,149 $10,479,734 $ 15,345,568 $22,234,769
Cost of Revenues 4,685,406 7,250,587 11,193,431 15,292,275
----------- ----------- ------------ -----------
Gross Profit 1,563,743 3,229,147 4,152,137 6,942,494
Operating Expenses:
Product development costs 228,613 239,471 486,957 622,916
Selling, general and
administrative expenses 1,562,866 1,886,933 4,810,485 4,403,326
----------- ----------- ------------ -----------
Total Operating Expenses 1,791,479 2,126,404 5,297,442 5,026,242
----------- ----------- ------------ -----------
Operating Income (Loss) (227,736) 1,102,743 (1,145,305) 1,916,252
Other Income (Expense):
Interest expense (205,087) (85,202) (352,712) (433,690)
Sundry income (expense) 26,043 (16,813) 404,212 (14,291)
----------- ----------- ------------ -----------
Total Other Income (Expense) (179,044) (102,015) 51,500 (447,982)
----------- ----------- ------------ -----------
Income (Loss) Before Taxes (406,780) 1,000,728 (1,093,805) 1,468,270
Income Tax Benefit
(Expense) (Note 5) (4,383) 10,800 17,217 32,400
----------- ----------- ------------ -----------
Net Income (Loss) $ (411,163) $ 1,011,528 $(1,076,588) $ 1,500,670
=========== =========== =========== ===========
Per Share Amounts (Note 6):
Basic $ (0.03) $ 0.08 $ (0.08) $ 0.15
=========== =========== =========== ===========
Diluted $ ( 0.03) $ 0.08 $ (0.08) $ 0.14
=========== =========== =========== ===========
Weighted Average Shares
Outstanding (Note 6):
Basic 13,209,616 12,547,169 12,857,425 10,111,991
=========== ========== ========== ===========
Diluted 13,209,616 13,240,687 12,857,425 10,624,599
=========== ========== ========== ===========
</TABLE>
67
<PAGE> 70
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE-AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) $(411,163) $1,011,528 $(1,076,588) $1,500,670
Other comprehensive income -
equity adjustment from
foreign translation (9,591) 8,148 (28,848) 8,803
--------- ---------- ----------- ----------
Comprehensive income (loss) $(420,754) $1,019,676 $(1,105,436) $1,509,473
========= ========== =========== ==========
</TABLE>
68
<PAGE> 71
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $(1,076,588) $1,500,670
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
Depreciation and amortization 1,394,828 1,782,729
Deferred income tax benefit (32,400) (32,400)
Loss (gain) on disposal of property (3,681) 53,200
Changes in assets and liabilities that provided (used) cash, net
of effects of acquisition:
Accounts receivable 2,246,715 (3,516,155)
Inventories (642,581) 451,709
Prepaid expenses and other current assets 56,068 98,114
Accounts payable (245,372) 2,115,655
Deferred revenue and other accrued expenses (803,284) 1,161,406
---------- ----------
Net Cash Provided By Operating Activities 893,705 3,614,928
---------- ----------
Cash Flows From Investing Activities:
Acquisition of A-OK Controls, net of cash acquired (Note 2) (2,851,722) -0-
Additions to capitalized software development costs (554,244) (347,081)
Additions to property and equipment, net of minor disposals (160,347) (101,958)
Proceeds from disposals of property and equipment 2,749 19,317
---------- ----------
Net Cash Used In Investing Activities (3,563,564) (429,722)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from long-term debt agreement 1,500,000 -0-
Net proceeds from sale of Common Stock and subscriptions -0- 3,020,000
Increase (decrease) in note payable to bank 1,393,048 (2,715,457)
Payment of trade notes payable -0- (1,123,956)
Payments of long-term debt (336,247) (689,041)
Payment of deferred financing fees (85,319) (102,000)
Proceeds from exercise of stock options -0- 20,000
---------- -----------
Net Cash Provided By (Used In) Financing Activities 2,471,482 (1,590,454)
---------- -----------
Foreign Currency Translation Effect on Cash (28,848) 8,803
---------- -----------
Net Decrease (Increase) In Cash and Cash Equivalents (227,225) 1,603,555
Cash and Cash Equivalents at Beginning of Period 356,668 106,730
--------- -----------
Cash and Cash Equivalents at End of Period $ 129,443 $1,710,285
========= ===========
Non-Cash Financing and Investing Activities:
Fair value of assets acquired from A-OK Controls, including goodwill $6,072,722
Less liabilities assumed (1,977,000)
Less Common Stock issued (1,250,000)
----------
Net cash paid for A-OK Controls (Note 2) $2,851,722
==========
Conversion of stock subscriptions to Common Stock $1,500,000
Conversion of promissory notes to Common Stock 1,023,029
Long-term debt and property decrease from purchase price adjustment 55,534
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes $15,183
Cash paid for interest 69,280 441,755
</TABLE>
69
<PAGE> 72
NEMATRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE-AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
NOTE 1 -- BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Nematron Corporation (the "Company") and its wholly-owned subsidiaries, Nematron
Ltd., a United Kingdom corporation, Nematron Canada, Inc., a Canadian
corporation, and NemaSoft, Inc., Imagination Systems, Inc. and A-OK Controls
Engineering, Inc. ("A-OK Controls"), each of which is a Michigan corporation.
All significant intercompany transactions and balances have been eliminated in
consolidation. The Company acquired 100% of the outstanding equity of A-OK
Controls effective at the close of business on June 30, 2000, and the results of
operations of A-OK Controls are consolidated with Nematron beginning July 1,
2000 through the date of this report.
In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair presentation of the
consolidated financial statements for the interim periods have been included.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31, 1999.
The results of operations for the three- and nine-month periods ended September
30, 2000 and 1999 are not necessarily indicative of the results to be expected
for the full year.
NOTE 2 -- ACQUISITION OF A-OK CONTROLS
On June 30, 2000, the Company completed its acquisition of A-OK Controls, a
control systems design and integration company located in Auburn Hills,
Michigan. Under the terms of the Stock Purchase Agreement, the Company acquired
100% of the outstanding shares of A-OK Controls in exchange for cash plus
604,186 shares of Nematron Common Stock issued to A-OK Controls' shareholder.
These shares represent 4.6% of the total shares of Nematron Common Stock
outstanding immediately after the acquisition.
The purchase price for A-OK Controls, including expenses incurred in connection
with the acquisition, was approximately $4,165,000. The acquisition of A-OK
Controls has been accounted for as a purchase and approximately $2,328,000 of
goodwill, on a preliminary basis, has been recorded. A-OK Controls' former
president and sole shareholder has entered into a three-year employment
agreement to continue as president of A-OK Controls, and he has entered into an
agreement not to compete with Nematron for the subsequent two-year period.
In addition to the cash required for a portion of the total purchase price, the
Company also agreed to repay, on the acquisition date, A-OK Controls' long-term
debt and accrued interest thereon as of the acquisition date. Accordingly, the
Company advanced funds to A-OK Controls in the amount of approximately
$2,436,000, and A-OK Controls extinguished its outstanding long-term debt and
accrued interest thereon. The Company funded the cash requirements by borrowing
under its lines of credit and a new long-term agreement, and by utilizing its
existing cash reserves.
70
<PAGE> 73
The allocation of the total purchase price to assets acquired and liabilities
assumed as of the June 30, 2000 acquisition date were, on a preliminary basis,
as follows:
<TABLE>
<S> <C>
Cash $ 64,000
Other current assets 3,139,000
Equipment 611,000
Intangible assets, including goodwill 2,328,000
Current notes payable (1,420,000)
Other current liabilities (448,000)
Long-term debt (109,000)
-----------
Total purchase price $ 4,165,000
===========
</TABLE>
The following unaudited pro forma summary presents the Company's consolidated
results of operations as if the acquisition of A-OK Controls had occurred on
January 1, 1999. The following summary does not purport to be indicative of
either what would have occurred had the acquisition of A-OK Controls actually
been consummated at that date nor the Company's future results of operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $6,249,000 $13,231,000 $20,344,000 $30,392,000
Net income (loss) (411,000) 916,000 (979,000) 1,988,000
Income (loss) per share, diluted (0.03) 0.07 (0.07) 0.18
</TABLE>
NOTE 3 -- INVENTORIES
Inventories consist of the following at September 30, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Purchased parts and accessories $1,860,880 $1,238,980
Work in process 72,482 24,008
Finished goods, demonstration units
and service stock 380,868 408,660
---------- ----------
Total Inventory $2,314,230 $1,671,648
========== ==========
</TABLE>
NOTE 4 -- SHORT-TERM AND LONG-TERM DEBT
The Company and its subsidiaries, are parties to two loan and security
agreements (the "Agreements") with a bank. The Agreements provide for two lines
of credit totaling $9.0 million, a $2.9 million term loan and a $1.5 million
special accommodation note used for the Company's acquisition of A-OK Controls.
The Agreements are 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.
The amounts available under the lines of credit are limited by borrowing
formulas that allow for advances up to a maximum of the sum of 85% of eligible
accounts receivable, less any amount of outstanding letters of credit issued by
the Company. Amounts borrowed under the lines of credit facilities by the
Company and its subsidiaries total $2,813,163 at September 30, 2000. Based upon
the specified borrowing formulas, approximately $500,000 of the available lines
is eligible for additional advances at September 30, 2000.
71
<PAGE> 74
Amounts borrowed under the lines of credit bear interest at the prime rate plus
1.5% (11.0% at September 30, 2000). The lines of credit and the term loan are
collateralized by substantially all assets of the Company and a mortgage on the
Company's Ann Arbor facility.
The Agreements contain several financial covenants, including specified levels
of tangible net worth, interest coverage and debt service coverage. The terms of
the Agreements also prohibit the payment of dividends, limit the amount of
annual capital expenditures and include other restrictive covenants. Although
the Company was not in compliance with the tangible net worth covenant contained
in one of the Agreements as of September 30, 2000, the bank has issued a
forbearance letter to the Company concerning this covenant violation. However,
in such letter, the bank has specifically reserved it right to take any action
permitted under the Agreements in the future without any notice to the Company.
The bank and management are in the process of revising the Agreements which,
among other things, change the tangible net worth covenant contained therein. As
a condition of the bank making this change, the Company will be required by the
bank to raise additional equity, and the Company has agreed to do so.
Long-term debt includes the following debt instruments at September 30, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Term note payable to a bank, interest rate at prime plus
1.50%, payable in monthly installments of $16,111 $2,755,000 $ 2,900,000
Special accommodation advance to a bank, interest at prime
plus 3.00%, payable in monthly installments of $62,500 1,375,000 -0-
Capitalized lease obligations and other notes 98,374 39,479
------------- ------------
Total long-term debt 4,228,374 2,939,479
Less current maturities -0- (232,811)
------------- ------------
Long-term debt, less current maturities $4,228,374 $2,706,668
============= ============
</TABLE>
NOTE 5 -- TAXES ON INCOME
The current tax benefit (expense) for the three- and nine-month periods ended
September 30, 2000 and 1999 reflects the tax benefit associated with the
amortization of non-deductible goodwill and other intangible assets during the
periods, offset in the three-month period ended September 30, 2000 by a
provision for income taxes related to the alternative minimum tax.
The Company has net operating loss carryforwards ("NOLs") of approximately
$18,000,000, which expire at various dates between 2004 and 2019. Utilization of
these NOLs 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 NOLs. Realization of net deferred tax
assets associated with the NOLs is dependent upon generating sufficient taxable
income prior to their expiration.
72
<PAGE> 75
NOTE 6 -- EARNINGS PER SHARE
Earnings per share ("EPS") for the three- and nine-month periods ended September
30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
For the Three-Month Period Ended September 30,
----------------------------------------------
2000 1999
------------------------------------ ------------------------------------
Income Per Income Per
(Loss) Shares Share (Loss) Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
Net income (loss) $(411,163) 13,209,616 $(0.03) $1,011,528 12,547,169 $0.08
EFFECT OF DILUTIVE
SECURITIES:
Options -0- -0- 0.00 -0- 693,518 0.00
---------- ---------- ------- ---------- ---------- -------
DILUTED EPS:
Net income (loss) available
to common shareholders $(411,163) 13,209,616 $(0.03) $1,011,528 13,240,687 $0.08
========== ========== ======= ========== ========== =======
</TABLE>
<TABLE>
<CAPTION>
For the Nine-Month Period Ended September 30,
---------------------------------------------
2000 1999
----------------------------------- -------------------------------------
Income Per Income Per
(Loss) Shares Share (Loss) Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
Net income (loss) $(1,076,588) 12,857,425 $(0.08) $1,500,670 10,111,991 $ 0.15
EFFECT OF DILUTIVE
SECURITIES:
Convertible promissory
notes 24,946 (0.00)
Options -0- -0- 0.00 -0- 512,607 (0.01)
----------- ------------- --------- ----------- ---------- ------
DILUTED EPS:
Net income (loss) available
to common shareholders $(1,076,588) 12,857,425 $(0.08) $ 1,500,670 10,624,599 $ 0.14
=========== ============ ======== =========== ========== ======
</TABLE>
For the three-month period ended September 30, 2000, 2,234,156 options and
197,678 warrants were outstanding but were not included in the computation of
diluted EPS because the inclusion of these securities would have an antidilutive
effect on loss per share during the period. These options expire on various
dates between 2003 and 2010, and the warrants expire on October 2002. For the
three-month period ended September 30, 1999, 204,370 options and 322,676
warrants were outstanding but were not included in the computation of diluted
EPS because the exercise prices of the excluded options and warrants were
greater than the average market price of the common shares during the period.
These options expire on various dates between 2003 and 2009, and the warrants
expire between February 2000 and October 2002.
For the nine- month period ended September 30, 2000, 2,234,156 options and
197,678 warrants were outstanding but were not included in the computation of
diluted EPS because the inclusion of these securities would have an antidilutive
effect on loss per share during the period. These options expire on various
dates between 2003 and 2010, and these warrants expire in October 2002. For the
nine-month period ended September 30, 1999, 803,346 options and 322,676 warrants
were outstanding but were not included in the computation of diluted EPS because
the exercise prices of the excluded options and warrants were greater than the
average market price of the common shares during the period. These options
expire on various dates between 2003 and 2009, and the warrants expire between
February 2000 and October 2002.
73
<PAGE> 76
Appendix A Agreement and Plan of Merger
74
<PAGE> 77
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of November 14,
2000, (this "Agreement"), among Nematron Corporation., a company organized under
the laws of Michigan ("Parent"), Nematron Acquisition Corp., a New York
corporation and a wholly owned subsidiary of Parent ("Sub"), Optimation
Technology, Inc., a New York corporation (the "Company"), William Pollock
("Pollock"), Timothy Lasch ("Lasch") (individually, Pollock and Lasch are each
referred to as a "Shareholder" and collectively as "Shareholders") and Pollock
and Lasch as Trustees of the Optimation Technology, Inc. Employee Stock
Ownership Trust, which has been established in connection with the Optimation
Technology, Inc. Employee Stock Ownership Plan ("OTI ESOP") (collectively, the
"Trustees").
RECITALS
Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of New York. As of the date hereof,
the authorized capital stock of Sub consists of 200 shares of Common Stock of
which 100 shares are issued and outstanding and owned by Parent.
The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of New York. As of the date
hereof, the authorized capital stock of the Company consists of 27,500 shares of
Common Stock (the "Shares"); and as of the date hereof 12,500 Shares were issued
and outstanding.
Shareholders are officers and directors of the Company and the
Shareholders and the OTI ESOP are the sole shareholders of the Company.
The respective Boards of Directors of the Company, Parent and
Sub deem it advisable and in the best interests of the Company and Sub and in
the best interests of the respective shareholders of said corporations that Sub
be merged with and into the Company (the "Merger") on the terms and conditions
hereinafter set forth in accordance with the provisions of the New York Business
Corporation Law (the "New York Law").
The Company, the Parent and the Sub intend that the Merger shall
qualify as a reorganization within the meaning of ss. ss. 368(a)(1)(A) and
368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code"), and
the rules and regulations promulgated thereunder, and this Agreement is intended
to be and is adopted as a "plan of reorganization" within the meaning of ss. 368
of the Code.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, the parties hereto agree as follows:
<PAGE> 78
ARTICLE I
THE MERGER
SECTION 1.01 The Merger. Upon the terms and subject to the
conditions set forth in Article VI, and in accordance with the New York Law, at
the Effective Time (as hereinafter defined), Sub shall be merged with and into
the Company. As a result of the Merger, the separate corporate existence of Sub
shall cease and the Company shall continue as the surviving corporation of the
Merger (the "Surviving Corporation"), and shall continue to be governed by the
laws of the State of New York.
SECTION 1.02 Effective Time; Closing. As promptly as
practicable, but within five (5) business days after the satisfaction or, if
permissible, waiver of the last of the conditions set forth in Article VI, the
parties hereto shall cause the Merger to be consummated by filing a certificate
of merger (the "Certificate of Merger") with the New York Department of State,
in such form as is required by, and executed in accordance with the relevant
provisions of, the New York Law (the date and time of such filing being the
"Effective Time"). Simultaneous with such filing, a closing (the "Closing")
shall be held at the offices of Dickinson Wright PLLC, 101 N. Main, Suite 430,
Ann Arbor, MI 48104, or such other place as the parties shall agree, for the
purpose of confirming the satisfaction or waiver, as the case may be, of the
conditions set forth in Article VI and the delivery of all documents provided
herein.
SECTION 1.03 Effect of the Merger. At the Effective Time, the
effect of the Merger shall be as provided in the applicable provisions of the
New York Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, all the property, rights, privileges, powers and
franchises of the Company and Sub shall vest in the Surviving Corporation, and
all debts, liabilities, obligations, restrictions, disabilities and duties of
the Company and Sub shall become the debts, liabilities, obligations,
restrictions, disabilities and duties of the Surviving Corporation.
SECTION 1.04 Certificate of Incorporation; Bylaws. (a) From and
after the Effective Time, the Certificate of Incorporation of the Company shall
be the Certificate of Incorporation of the Surviving Corporation.
(b) The Bylaws of the Surviving Corporation shall be the same as
the Bylaws of the Company, as in effect immediately prior to the Effective Time.
SECTION 1.05 Directors and Officers. At the Closing, Pollock,
Lasch, Diane Trentini, Anthony Jovenitti and Paul Kelly (the "Company-Designated
Directors") and Matthew S. Galvez and James R. Thomas (the "Nematron-Designated
Directors") shall be appointed to the Board of Directors of the Company. For a
period of three (3) years following the Closing, (a) in the event there is a
vacancy among the Company-Designated Directors, whether due to the expiration of
a term or otherwise, it shall be filled by designation of the remaining
Company-Designated Directors, (b) the Parent, as sole shareholder of the
Surviving Corporation, shall cause such designated person to be elected to the
Company's Board of Directors, and (c) Parent, as the sole shareholder of the
Surviving Corporation, will not, without the consent of the Company-Designated
Directors, increase the number of directors on the Board of Directors of the
Company to more than seven (7).
SECTION 1.06 Conversion of Securities. At the Effective Time, by
virtue of the Merger and without any action on the part of Parent, Sub, the
Company or the holders of any of the Shares:
2
<PAGE> 79
(a) Each share of Common Stock of Sub issued and
outstanding immediately prior to the Effective Time shall be converted
into and exchanged for one validly issued, fully paid and
non-assessable share of Common Stock of the Surviving Corporation.
(b) Each Share, if any, owned by Sub, Parent or any
direct or indirect wholly owned subsidiary of Parent or by the Company
immediately prior to the Effective Time shall be cancelled and retired
without any conversion thereof and no payment or distribution shall be
made with respect thereto.
(c) Each Share issued and outstanding immediately prior
to the Effective Time (other than any Shares to be cancelled pursuant
to Section 1.06(b)) shall be cancelled and shall be converted
automatically into and exchanged for 249 validly issued, fully paid and
non-assessable unregistered shares of voting Common Stock of Parent
(the "Merger Consideration"), upon surrender, in the manner provided in
Section 1.07, of the certificate that formerly evidenced such Share.
SECTION 1.07 Surrender of Shares; Stock Transfer Books. (a) At
the Closing the Shareholders and the Trustees will deliver to the Surviving
Corporation duly executed certificates in valid form evidencing all of the
Shares of such Shareholders and the OTI ESOP, duly endorsed in blank or
accompanied by duly executed stock powers. Upon surrender to the Surviving
Corporation of a certificate, duly completed and validly executed, the holder of
such certificate shall be entitled to receive in exchange therefor the Merger
Consideration for each Share formerly evidenced by such certificate, and such
certificate shall then be cancelled.
(b) At the close of business on the day of the Effective Time,
the stock transfer books of the Company shall be closed and, thereafter, there
shall be no further registration of transfers of Shares on the records of the
Company. From and after the Effective Time, the holders of Shares outstanding
immediately prior to the Effective Time shall cease to have any rights with
respect to such Shares except as otherwise provided herein or by applicable law.
SECTION 1.08 Legend on Certificates Evidencing the Merger
Consideration. The Company, the Shareholders and the Trustees understand that
the Merger Consideration has not been registered under the Securities Act or any
state securities laws, and that each of them must therefore bear the economic
risk of such investment indefinitely, unless a subsequent disposition thereof is
registered under the Securities Act or is exempt from registration, and that the
certificates representing the Merger Consideration will bear the following
legend:
"The shares represented by this certificate are 'Restricted
Securities'. As such they may not be transferred unless (i) such
transfer is effected pursuant to a registration statement which has been
filed under the Securities Act of 1933 (the "1933 Act") and declared
effective by the Securities and Exchange Commission, or (ii) in the
written opinion of counsel, which opinion and counsel are acceptable to
the issuer of these shares, such transfer may be effected under and is
in compliance with Rule 144 under the 1933 Act, as in effect on the date
of such transfer, or is otherwise exempt from the registration
requirements of the 1933 Act."
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY, THE SHAREHOLDERS AND
THE TRUSTEES
The Company, the Shareholders and the Trustees hereby represent
and warrant to Parent and Sub that:
SECTION 2.01 Organization and Qualification: Subsidiaries. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of New York and has the requisite corporate power
and authority and all necessary governmental approvals to own, lease and operate
its properties and to carry on its business as it is now being conducted, except
where the failure to be so organized, existing or in good standing or to have
such power, authority and governmental approvals would not, individually or in
the aggregate, have a Material Adverse Effect (as defined below). The Company is
duly qualified or licensed as a foreign corporation to do business, and is in
good standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its business makes such qualification
or licensing necessary. For purposes of this Agreement, (a) the term "Material
Adverse Effect" means when used with respect to the Company any event or
condition that is or is reasonably likely to be materially adverse to the
business, operations, prospects, properties, condition (financial or otherwise),
assets or liabilities (including, without limitation, contingent liabilities) of
the Company, and (b) "Subsidiary" means any corporation, partnership, joint
venture or other business association or legal entity of which the Company
(either alone or through or together with any other Subsidiary), owns, directly
or indirectly, 50% or more of the stock or other equity interests the holders of
which are generally entitled to vote for the election of the Board of Directors
or other governing body of such corporation or other legal entity. The Company
does not have any Subsidiaries. Except as disclosed in Section 2.01 of the
Company Disclosure Schedule, which has been delivered prior to the date of this
Agreement by the Company to Parent (the "Company Disclosure Schedule"), the
Company does not directly or indirectly own any equity or similar interest in,
or any interest convertible into or exchangeable or exercisable for any equity
or similar interest in, any corporation, partnership, joint venture or other
business association or other legal entity.
SECTION 2.02 Certificate of Incorporation and Bylaws. The
Company has heretofore furnished to Parent a complete and correct copy of its
Certificate of Incorporation and Bylaws, each as amended to date. Such
Certificate of Incorporation and Bylaws are in full force and effect. The
Company is not in violation of any provision of its Certificate of Incorporation
or Bylaws.
SECTION 2.03 Capitalization. The authorized and outstanding
capital stock of the Company is as set forth in the Recitals to this Agreement.
Except as set forth in Section 2.03 of the Company Disclosure Schedule, there
are no options, warrants or other rights, agreements, arrangements or
commitments of any character relating to the issued or unissued capital stock of
the Company or obligating the Company to issue or sell any shares of capital
stock of, or other equity interests in, the Company. Except as set forth in
Section 2.03 of the Company Disclosure Schedule, there are no outstanding
contractual obligations of the Company to repurchase, redeem or otherwise
acquire any Shares or to provide funds to, or make any investment (in the form
of a loan, capital contribution or otherwise) in any person.
SECTION 2.04 Share Ownership and Authority. Each of the
Shareholders and the Trustees is the lawful owner of the Shares, free and clear
of all liens, encumbrances, restrictions and claims of every kind, which Shares
constitute all of the issued and outstanding shares of capital stock of
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the Company. Each of the Shareholders and the Trustees has full legal right,
power and authority to sell, assign, transfer and convey the Shares in
accordance with the terms and subject to the conditions of this Agreement. The
delivery to the Parent of the Shares pursuant to the provisions of this
Agreement will transfer to the Parent valid title thereto, free and clear of any
claim, lien, encumbrance or agreement with respect thereto. Each of the
Shareholders and the Trustees has the full and unrestricted power to effect the
Merger, free and clear of any liens, security interests, encumbrances, pledges,
charges, claims, voting trusts and restrictions on transfer of any nature
whatsoever and without the consent of any third parties, except for restrictions
on transfer imposed by or pursuant to the securities laws of the United States.
Each of the Shareholders and the Trustees has all necessary power and authority
to execute and deliver this Agreement and to consummate the transactions
contemplated hereby. This Agreement has been duly executed by each of the
Shareholders and the Trustees. This Agreement constitutes the valid and binding
obligation of the each of the Shareholders and the Trustees, enforceable against
each of the Shareholders and the Trustees in accordance with its terms.
SECTION 2.05 Authority Relative to this Agreement. Except as
set forth in Section 2.05 of the Company Disclosure Schedule, the Company has
all necessary corporate power and authority to execute and deliver this
Agreement, to perform its obligations hereunder and subject to approval by the
Company's shareholders of the Merger and satisfaction of the other conditions
set forth herein, to consummate the Merger contemplated hereby. The execution
and delivery of this Agreement by the Company and the consummation by the
Company of the Merger have been duly and validly authorized by all necessary
corporate action and no other corporate proceedings on the part of the Company
are necessary to authorize this Agreement or to consummate the Merger (other
than the approval and adoption of this Agreement by the affirmative vote of the
shareholders of the Company, and the filing and recordation of appropriate
merger documents as required by the New York Law). This Agreement has been duly
and validly executed and delivered by the Company and, subject to the foregoing
and assuming the due authorization, execution and delivery by Parent and Sub,
constitutes a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, subject as to enforceability
to bankruptcy, insolvency, reorganization, fraudulent conveyance and similar
laws relating to creditors' rights and to general principles of equity.
SECTION 2.06 No Conflict; Required Filings and Consents.
Except as set forth in Section 2.06 of the Company Disclosure Schedule, (a) the
execution and delivery of this Agreement by the Company do not, and the
performance of this Agreement by the Company will not, (i) conflict with or
violate the Certificate of Incorporation or Bylaws of the Company, (ii) conflict
with or violate any law, rule, regulation, written order, judgment or decree
applicable to the Company or by which any property or asset of the Company is
bound or subject, or (iii) result in any breach of or constitute a default (or
an event which with notice or lapse of time or both would become a default)
under, or give to others any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or other encumbrance of any
nature on any property or asset of the Company pursuant to, any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which the Company is a party or by which the
Company or any property or asset of the Company is bound or subject, except for
any such conflicts, violations, breaches, defaults or other occurrences which
would not, individually or in the aggregate, have a Material Adverse Effect.
(b) The execution and delivery of this Agreement by
the Company do not, and the performance of this Agreement by the Company will
not, require any consent, approval, authorization or permit of, or filing with,
or notification to, any governmental or regulatory authority, domestic or
foreign, except (i) for filing and recordation of appropriate merger documents
as required by the New York Law, and (ii) where failure to obtain such consents,
approvals, authorizations or permits, or to
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make such filings or notifications, would not prevent or delay consummation of
the Merger, or otherwise prevent the Company from performing its obligations
under this Agreement, and would not, individually or in the aggregate, have a
Material Adverse Effect.
SECTION 2.07 Compliance. Except as set forth in Section 2.07
of the Company Disclosure Schedule, the Company is not in default or violation
of, (i) any law, rule, regulation, written order, judgment or decree applicable
to the Company or by which any property or asset of the Company is bound or
subject or (ii) any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which the
Company is a party or by which the Company or any property or asset of the
Company is bound or subject.
SECTION 2.08 Financial Statements. The Company has delivered
or will deliver to Parent copies of the following financial statements:
(i) The balance sheet of the Company as at December
31, 1999 and the statements of income, changes in capital accounts and cash
flows for the fiscal years ended December 31, 1999, as audited by Mengel,
Metzger, Barr & Co., LLP, independent auditors ("MMB") and the balance sheets as
of December 31, 1998 and 1997 and the statements of income, changes in capital
accounts and cash flows for the three fiscal years prior thereto as reviewed by
MMB; and
(ii) Each of its monthly financial statements prepared
from January 1, 2000, until the Effective Time.
Each of the financial statements (including, in each
case, any notes thereto) was prepared in accordance with generally accepted
accounting principles applied on a consistent basis ("GAAP") throughout the
periods indicated (except as may be indicated in the notes thereto and except
that the unaudited financial statements do not contain notes and are subject to
normal year-end adjustments) and each fairly presents the financial position,
results of operations and changes in shareholders' equity and cash flows of the
Company as at the respective dates thereof and for the respective periods
indicated therein (subject, in the case of unaudited financial statements, to
normal year-end adjustments).
Except as and to the extent set forth on the balance
sheet of the Company dated as of December 31, 1999 (the "1999 Company Balance
Sheet"), or in Section 2.08 of the Company Disclosure Schedule, the Company has
no liability or obligation of any nature (whether accrued, absolute, contingent
or otherwise) which would be required to be reflected on a balance sheet, or in
the notes thereto, prepared in accordance with GAAP, except for liabilities and
obligations incurred in the ordinary course of business since December 31, 1999.
SECTION 2.09 Absence of Certain Changes or Events. Since
December 31, 1999, except as set forth in Section 2.09 of the Company Disclosure
Schedule or as contemplated by this Agreement, the Company has conducted its
business only in the ordinary course and, since December 31, 1999, there has not
been (i) any change in the business, operations, properties, condition, assets
or liabilities (including, without limitation, contingent liabilities) of the
Company having, individually or in the aggregate, a Material Adverse Effect,
(ii) any damage, destruction or loss (whether or not covered by insurance) with
respect to any property or asset of the Company, (iii) any change by the Company
in its accounting methods, principles or practices, (iv) any revaluation by the
Company of any asset (including, without limitation, any writing down of the
value of inventory or writing off of notes or accounts receivable), other than
in the ordinary course of business consistent with past practice, (v) any
failure by
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the Company to revalue any asset in accordance with GAAP consistent with past
practice, (vi) any declaration, setting aside or payment of any dividend or
distribution in respect of any capital stock of the Company or any redemption,
purchase or other acquisition of any of its securities, (vii) other than
pursuant to the contracts referred to in Section 2.11, any increase in or
establishment of any bonus, insurance, severance, deferred compensation,
pension, retirement, profit sharing, stock option (including, without
limitation, the granting of stock options, stock appreciation rights,
performance awards or restricted stock awards), stock purchase or other employee
benefit plan, or any other increase in the compensation payable or to become
payable to any officers or key employees of the Company, except in the ordinary
course of business consistent with past practice, or (viii) any entering into,
renewal, modification or extension of, any contract, arrangement or agreement
with any other party except for contracts, arrangements or agreements in the
ordinary course of business.
SECTION 2.10 Absence of Litigation. Except as set forth in
Section 2.10 of the Company Disclosure Schedule, as of the date hereof, there is
no claim, action, proceeding or investigation pending or, to the knowledge of
the Company, threatened against the Company or any officer or director of the
Company, or any property or asset of the Company, before any court, arbitrator
or administrative, governmental or regulatory authority or body, domestic or
foreign. Except as set forth in Section 2.10 of the Company Disclosure Schedule,
neither the Company nor any property or asset of the Company is subject to any
order, writ, judgment, injunction, decree, determination or award.
SECTION 2.11 Contracts. Except as set forth in Section 2.11 of
the Company Disclosure Schedule, the Company is not a party to any written or
oral (i) contract with any labor union or similar entity, (ii) bonus, deferred
compensation, stock purchase, stock option or other plan or agreement providing
benefits for officers, directors of employees, (iii) employment, agency,
consulting or similar contract, (iv) license agreement, (v) lease or other
contract extending for more than one year beyond the Effective Time and
involving more than $10,000 on an annual basis, whether as lessor or lessee,
(vi) contract or agreement with any vendor or supplier of the Company extending
for more than one year beyond the Effective Time and involving more than $15,000
on an annual basis, (vii) contract with any shareholder, director, officer or
employee of the Company or (viii) other material contract not described in
(i)-(vii) above. The Company has made available to Parent a correct and complete
copy of each contract, agreement, and other written arrangement listed in the
Company Disclosure Schedule.
SECTION 2.12 Employee Benefit Plans. (a) Section 2.12 of the
Company Disclosure Schedule contains a true and complete list (i) of all
employee benefit plans (within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) and all bonus,
stock option, stock purchase, restricted stock, incentive, deferred
compensation, retiree medical or life insurance, supplemental retirement,
severance or other benefit plans, programs or arrangements, and all employment,
termination, severance or other contracts or agreements to which the Company is
a party, with respect to which the Company has any obligation or which are
maintained, contributed to or sponsored by the Company for the benefit of any
current or former employee, officer or director of the Company, and (ii) each
employee benefit plan for which the Company could incur liability under Section
4069 of ERISA, in the event such plan were terminated, or under Section 4212(c)
of ERISA, or in respect of which the Company remains secondarily liable under
Section 4204 of ERISA (collectively, the "Plans"). No plan is a "defined benefit
plan" within the meaning of Section 3(35) of ERISA and no Plan is subject to
Part IV of ERISA. Each Plan that is required to be in writing under ERISA is in
writing. For each Plan that is in writing, the Company has previously furnished
Parent with a true and complete copy of each Plan and for each Plan that is not
in writing, the Company has previously furnished Parent with a complete
description of such Plan, and the Company has furnished to Parent a true and
complete copy of each material document prepared in connection with each such
Plan,
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including, where applicable, a copy of (i) each trust or other funding
arrangement, (ii) each summary plan description and summary of material
modifications, (iii) the three most recently filed Internal Revenue Service
("IRS") Forms 5500, (iv) the most recently received IRS determination letter for
each such Plan, (v) the most recently prepared actuarial report and financial
statement in connection with each such Plan and (vi) any written communication
to employees. Except as set forth in Section 2.12 of the Company Disclosure
Schedule, the Company has no express or implied commitment (i) to create, incur
liability with respect to or cause to exist any other employee benefit plan,
program or arrangement, (ii) to enter into any contract or agreement to provide
compensation or benefits to any individual or (iii) to modify, change or
terminate any Plan, other than with respect to a modification, change or
termination required by ERISA or the Code.
(b) Except as set forth in Section 2.12 of the Company
Disclosure Schedule, none of the Plans is a multiemployer plan, within the
meaning of Section 3(37) or 4001(a)(3) of ERISA (a "Multiemployer Plan"), or a
single employer pension plan, within the meaning of Section 4001(a)(15) of
ERISA, for which the Company could incur liability under Section 4063 or 4064 of
ERISA (a "Multiple Employer Plan"). Except as disclosed in Section 2.12 of the
Company Disclosure Schedule, none of the Plans (i) provides for the payment of
separation, severance, termination or similar-type benefits to any person (ii)
obligates the Company to pay separation, severance, termination or other
benefits as a result of the Merger or (iii) obligates the Company to make any
payment or provide any benefit that could be subject to a tax under Section 4999
of the Code. Except as disclosed in Section 2.12 of the Company Disclosure
Schedule, none of the Plans provides for or promises retiree medical, disability
or life insurance benefits to any current or former employee, officer or
director of the Company.
(c) Except as set forth in Section 2.12 of the Company
Disclosure Schedule, each Plan which is intended to be qualified under Section
401(a) or 401(k) of the Code has received or has applied for a favorable
determination letter from the IRS that such Plan is so qualified, and each trust
established in connection with any Plan which is intended to be exempt from
federal income taxation under Section 501(a) of the Code has received a
determination letter from the IRS that such trust is so exempt. To the knowledge
of the Company no material fact or event has occurred since the date of any such
determination letter from the IRS that could adversely affect the qualified
status of any such Plan or the exempt status of any such trust. Each trust
maintained or contributed to by the Company which is intended to be qualified as
a voluntary employees' beneficiary association exempt from federal income
taxation under Sections 501(a) and 501(c)(9) of the Code has received a
favorable determination letter from the IRS that it is so qualified and so
exempt, and to the knowledge of the Company no fact or event has occurred since
the date of such determination by the IRS that could adversely affect such
qualified or exempt status.
(d) To the knowledge of the Company, there has been no
prohibited transaction (within the meaning of Section 406 of ERISA or Section
4975 of the Code) with respect to any Plan. The Company is not currently liable
and has not previously incurred any liability for any tax or penalty arising
under Section 4971, 4972, 4979, 4980 of the Code or Section 502(c) of ERISA or
any material tax or penalty under Section 4980B of the Code, and to the
knowledge of the Company, no fact or event exists which could give rise to any
such liability. The Company has not incurred any liability under, arising out of
or by operation of Title IV of ERISA, including, without limitation, any
liability in connection with (i) the termination or reorganization of any
employee pension benefit plan subject to Title IV of ERISA or (ii) the
withdrawal from any Multiemployer Plan or Multiple Employer Plan, and to the
knowledge of the Company no fact or event exists which could give rise to any
such liability. No complete or partial termination has occurred within the five
years preceding the date hereof with respect
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to any Plan. No reportable event (within the meaning of Section 40943 of ERISA)
has occurred or is expected to occur with respect to any Plan subject to Title
IV of ERISA. No asset of the Company is the subject of any lien arising under
Section 302(f) of ERISA or Section 412(N) of the Code; the Company has not been
required to post any security under Section 307 of ERISA or Section 401(a)(29)
of the Code; and to the knowledge of the Company no fact or event exists which
could give rise to any such lien or requirement to post any such security.
(e) Each Plan is now and has been operated in all
material respects in accordance with the requirements of all applicable laws,
including, without limitation, ERISA, the Code and applicable state and federal
law, and the Company has performed all material obligations required to be
performed by it under, is not in any respect in material default under or in
material violation of, and has no knowledge of any default or violation by any
party to, any Plan. To the knowledge of the Company, all contributions, premiums
or payments required to be made with respect to any Plan are fully deductible
for income tax purposes and no such deduction previously claimed has been
challenged by any government entity. The 1999 Company Balance Sheet reflects an
accrual of all amounts of employer contributions and premiums accrued but unpaid
with respect to the Plans. All contributions required to have been paid under
any Plan to the date hereof have been timely made.
(f) The Company has not incurred any material liability
under, and has complied in all material respects with, the Worker Adjustment
Retraining Notification Act and the regulations promulgated thereunder and does
not reasonably expect to incur any such liability as a result of actions taken
or not taken prior to the Effective Time. No litigation or legal or
administrative proceeding has been asserted or commenced or, to the Company's
knowledge, threatened, against any Plan, the assets of any such plan or the
Company with respect to any Plan, or the plan administrator or fiduciary of any
Plan with respect to the operation of any such plan (other than routine,
uncontested benefit claims), and to the knowledge of the Company there are no
facts or circumstances which would reasonably be expected to form the basis for
any such legal proceeding except to the extent that any such litigation or
proceeding would not reasonably be expected to result in a material liability to
the Company.
(g) The Company has no obligations under any of the
Plans to provide health or life insurance benefits to its current or prior
employees (or their beneficiaries or dependents) for periods after termination
of employment, except as specifically required by Section 4980B of the Code or
subtitle B, part 6, of Title I of ERISA or similar state continuation coverage
law. Each Plan which is a "welfare benefit plan" under ERISA ss. 3(1) is
terminable in accordance with its terms by the Company at any time without any
further obligation thereunder other than to make payments and/or contributions
in respect of benefits theretofore accrued in accordance with its terms.
SECTION 2.13 Labor Matters. Except as set forth in Section
2.13 of the Company Disclosure Schedule, (i) there are no controversies pending
or, to the knowledge of the Company, threatened between the Company and any of
its employees; (ii) the Company is not a party to any collective bargaining
agreement or other labor union contract applicable to persons employed by the
Company, nor, to the knowledge of the Company, are there any activities or
proceedings of any labor union to organize any such employees; (iii) the Company
has not breached or otherwise failed to comply with any provision of any such
agreement or contract and there are no grievances outstanding against the
Company under any such agreement or contract; (iv) there are no unfair labor
practice complaints pending against the Company before the National Labor
Relations Board or any current union representation questions involving
employees of the Company which could have a Material Adverse
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Effect; and (v) there is no strike, slowdown, work stoppage or lockout, or, to
the knowledge of the Company, threat thereof, by or with respect to any
employees of the Company.
SECTION 2.14 Tangible Property; Real Property and Leases. (a)
The Company has sufficient title to all its tangible properties and assets to
conduct its business currently conducted or as contemplated to be conducted.
(b) Each parcel of real property owned or leased by the
Company (i) is owned or leased free and clear of all mortgages, pledges, liens,
security interests, conditional and installment sale agreements, encumbrances,
charges or other claims of third parties of any kind (collectively, "Liens"),
other than (A) Liens for current taxes and assessments not yet past due, (B)
inchoate mechanics' and materialmen's Liens for construction in progress, (C)
workmen's, repairmen's, warehousemen's and carriers' Liens arising in the
ordinary course of business of the Company consistent with past practice, and
(D) all matters of record, Liens and other imperfections of title and
encumbrances which, individually or in the aggregate, would not have a Material
Adverse Effect (collectively, "Permitted Liens"), and (ii) is neither subject to
any governmental decree or order to be sold nor is being condemned, expropriated
or otherwise taken by any public authority with or without payment of
compensation therefor, nor, to the knowledge of the Company, has any such
condemnation, expropriation or taking been proposed.
(c) Section 2.14 of the Company Disclosure Schedule
lists all leases of real or personal property to which the Company is a party.
All such leases and all amendments and modifications thereto are in full force
and effect and have not been modified or amended, and there exists no default
under any such lease by the Company, nor any event which with notice or lapse of
time or both would constitute a default thereunder by the Company. Except as set
forth in Section 2.14 of the Company Disclosure Schedule, none of such leases
contain a prohibition against assignment by the Company or any other provision
which would preclude the Surviving Corporation from occupying and using the
leased premises for the same purposes and upon the same rental and other terms
as are applicable to the occupation and use by the Company.
SECTION 2.15 Intellectual Property. Set forth on Section 2.15
of the Company Disclosure Schedule is a list of the domestic and foreign
patents, patent applications, patent licenses, software licenses, trade names,
trademarks, domain names, service marks, trademark registrations and
applications, service mark registrations and applications and copyright
registrations and applications owned by the Company and which are used in the
operation of the business of Company (collectively, the "Intellectual
Property"). Unless otherwise indicated on Section 2.15 of the Company Disclosure
Schedule, the Company owns the entire right, title and interest in and to the
Intellectual Property (including, without limitation, the exclusive right to use
and license the same) and each item constituting part of the Intellectual
Property has been, to the extent indicated on Section 2.15 of the Company
Disclosure Schedule, duly registered with, filed in or issued by, as the case
may be, the United States Patent and Trademark Office or such other government
entity, domestic or foreign, as is indicated on Section 2.15 of the Company
Disclosure Schedule and, to the knowledge of the Shareholders and the Trustees,
such registrations, filings and issuances remain in full force and effect. To
the knowledge of the Shareholders and the Trustees, except as stated in Section
2.15 of the Company Disclosure Schedule, there are no pending proceedings or
litigation or other adverse claims made in writing affecting or with respect to
the Intellectual Property. To the knowledge of the Shareholders and the
Trustees, the Company has not received any notice that it is infringing any
Intellectual Property of any other person in connection with the conduct of the
business of the Company and to the knowledge of the Shareholders and the
Trustees, no claim is pending or has been made to such effect that has not been
resolved and, to
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the knowledge of the Shareholders and the Trustees the Company is not infringing
any Intellectual Property of any other Person. The Company has not granted to
any Person any licenses, sublicenses or other rights under any Intellectual
Property owned by it.
SECTION 2.16 Tax Matters. Except as set forth in Section 2.16 of the
Company Disclosure Schedule:
(a) Returns, Payments, and Reserves. The Company has duly and
timely filed (taking into account all available extensions) all Tax Returns
concerning Taxes applicable to the Company (or such Tax Returns have been filed
on behalf of the Company) required to be filed by applicable law and has paid
(or set up reserves in accordance with GAAP), all amounts due in respect of
Taxes (whether or not actually shown on such Tax Returns); all such Tax Returns
are true, correct and complete in all material respects and accurately set forth
all items to the extent required to be reflected or included in such Tax Returns
by applicable federal, state, local or foreign Tax laws.
The Company is not delinquent in the payment of any Taxes
claimed to be due by any federal, state or local or foreign taxing authority.
The Company has established a tax reserve or account payable in an amount
sufficient for all accrued and unpaid federal, state, county and local and
foreign taxes of the Company, whether or not disputed, including any penalties,
interest and related charges and fees in connection therewith, for all complete
fiscal periods of the Company which reserve is set forth in the Company's 1999
Balance Sheet and constitutes an adequate reserve under GAAP and F.A.S.B. No.
15. There is no proposed liability for any Tax to be imposed upon the Company
for the current or any prior year not foreclosed by the statute of limitations
for which there is not an adequate reserve.
(b) Extensions; Certain Tax Adjustments. With respect to any
Tax to which it is subject the Company (i) has not requested any extension of
time within which to file any Tax Return, which Tax Return has not since been
filed; (ii) is not a party to any agreement providing for the allocation or
sharing of, or indemnification for Taxes; (iii) is not required to include in
income any adjustment pursuant to Code ss. 481(a) (nor does the Company have any
knowledge that the Internal Revenue Service has proposed or is likely to propose
any such adjustment or change of accounting method); or (iv) has not filed a
consent pursuant to Code ss. 341(f) or agreed to have Code ss. 341(f)(2) apply.
The Company does not have an application pending with any taxing authority
requesting permission for any change in accounting method.
(c) Federal Income Tax Returns and Examinations. The Company
has disclosed on its United States federal income Tax Returns all positions
taken therein that could give rise to a substantial understatement of United
States federal income Tax within the meaning of Code ss. 6662. No examination or
audit by the Internal Revenue Service is in progress, and no issue has been
raised in any such examination or audit that, by application of similar
principles, could reasonably be expected to result in the assertion of a
deficiency for any other year not so examined or audited.
(d) State Income Tax Returns and Examinations. The Company
files state income Tax Returns in the states of New York and North Carolina. No
examination or audit by the State of New York is in progress, and no issue has
been raised in any such examination or audit that, by application of similar
principles, could reasonably be expected to result in the assertion of a
deficiency for any other year not so examined or audited. No other state income
Tax Returns have been examined.
(e) Other Proceedings. There are no audits or other
administrative or court proceedings or any dispute or claim concerning any Tax
for which the Company may be liable either (i)
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claimed by any governmental entity in writing sent to the Company or (ii) as to
which the Company has knowledge. No such audit or examination is in progress.
There is no refund claim proposed or pending with respect to any Tax Returns
filed by or on behalf of the Company. The Company has received no notice of any
pending or threatened audit by the Internal Revenue Service, the state of New
York or any other state, local or foreign taxing authority related to the
Company's Tax Returns or Tax liability for any period and no claim for
assessment or collection of Taxes has been asserted against the Company.
(f) Claims by Certain Jurisdictions. No claim has ever been
made by any authority in a jurisdiction where the Company does not file Tax
Returns that it is or may be subject to taxation by that jurisdiction.
(g) Waivers. As of the date hereof, the Company has not
executed any outstanding waivers or comparable consents regarding the
application of the statute of limitations with respect to any Taxes or Tax
Returns which waivers or consents could result in the assessment of any
additional taxes against or for the account of the Company and which waivers or
consents remain outstanding as of the date hereof.
(h) Tax Liens. There are no Tax liens outstanding against any
of the assets, properties or business of the Company other than for Taxes not
yet due and payable (including without limitation, liens arising under property
and similar Taxes), the date of payment of which has not yet accrued.
(i) Tax Status of Company Property. No property of the Company
(i) is "tax-exempt use property" within the meaning of Section 168(h) of the
Code, (ii) directly or indirectly secures any debt the interest on which is
exempt under Code ss. 103(a) or (iii) is property that is required to be treated
as being owned by any person (other than the Company) pursuant to the provisions
of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended, and as in
effect immediately before the enactment of the Tax Reform Act of 1986.
Section 2.16 of the Company Disclosure Schedule sets forth the
following information with respect to the Company as of the Company's 1999
Balance Sheet and as shown on the Company's 1999 tax return: (i) the tax basis
of the Company in its respective assets and (ii) the amount of any net operating
loss, net capital loss, unused investment or other credit, unused foreign tax
credit, or excess charitable contribution available to the Company.
(j) Certain Tax Accruals. The Company will not be required to
include in a taxable period ending after the Effective Time taxable income
attributable to income that economically accrued in a taxable period ending on
or before the Effective Time as a result of the installment method of
accounting, the completed contract method of accounting, any method of reporting
revenue from contracts which are required to be reported on the percentage of
completion method (as defined in Code ss. 460(b)) but that were reported using
another method of accounting, or any other method of accounting.
(k) Certain Tax Agreements. Neither the Company nor any other
person has entered into any agreement with any taxing authority that will bind
Parent or the Company for any taxable period ending after the Effective Time.
(l) Certain Compensation Agreements. There is no contact,
agreement, plan or arrangement covering any current or former director, officer,
or employee of the Company that, individually or collectively, could give rise
to the payment of any amount that would not be deductible by reason of Code
ss.ss. 162(a)(1), 162(m) or 280G.
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(m) Tax Records. The Company has maintained the books and
records required to be maintained pursuant to Code ss. 6001 and the Regulations
thereunder, and comparable laws of the state of New York, other states, cities,
counties, localities and other countries and political divisions wherein it is
required to file Tax Returns or any other reports relating to Taxes.
(n) Tax Definitions. For purposes of this agreement the
following terms shall have the meaning set forth below:
"Tax or Taxes" shall mean all taxes, charges, fees, levies, or
other assessments, domestic or foreign, including, without limitation, all net
income, gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, withholding, payroll, employment (including
withholding, payroll and employment taxes required to be withheld with respect
to income paid to employees), excise, estimated, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code ss. 59A),
capital stock, social security (or similar), unemployment, disability,
registration, value added, alternative or add-on minimum, real property,
personal property or other taxes, customs, duties, fees, assessments or charges
of any kind whatsoever, together with any interest and any penalties, additions
to tax or additional amounts imposed by any taxing authority (domestic or
foreign).
"Tax Returns" shall mean all returns, declarations, reports,
claims for refund, statements and other documents required or permitted to be
filed with any governmental entity or authority with power to impose any tax in
respect of any Tax and "Tax Return" shall mean one of the foregoing Tax Returns
SECTION 2.17 Environmental Matters. Except as set forth in
Section 2.17 of the Company Disclosure Schedule, to the knowledge of the
Company, there are no present or past conditions relating to the Company's or
any of its former direct or indirect Subsidiaries' owned or leased properties,
involving or resulting from a past or present storage, spill, discharge, leak,
emission, injection, escape, dumping or release by the Company of any kind
whatsoever of any Hazardous Materials (as defined below) or exposure of any type
to any workplace or to any medium, including, but not limited to, air, land,
surface waters or underground waters, or from any generation, transportation,
treatment, storage, disposal, use or handling by the Company of any Hazardous
Materials.
The Company is in compliance in all material respects with all
applicable federal, state or municipal statutes, laws, regulations or permits
relating to the environment or occupational health and safety. Except as set
forth in Section 2.17 of the Company Disclosure Schedule, the Company has not
received notice of, nor are there outstanding, any claims, citations, penalties,
unsatisfied abatement obligations or written notices or written orders of
noncompliance by any federal, state or local agency relating to the environment
or occupational health and safety, nor to the knowledge of the Company are any
such matters pending or threatened. None of the Company's facilities whether
owned or leased are currently undergoing hazardous waste remediation, removal or
clean-up activities.
No material expenditures, other than expenses incurred in the
ordinary course of business, are required in order for the Company to comply
with any such existing statute, law or regulation in connection with the
operation of the business after the Merger, including, without limitation,
expenditures relating to the clean-up or removal of any Hazardous Materials
which may have been discharged or released prior to the Effective Time.
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The Company has all governmental permits, licenses,
certificates of inspection and other authorizations relating to the environment
or occupational health and safety necessary to conduct its present business.
"Hazardous Materials" means any material or substance: (i)
which is defined as a "hazardous substance", "pollutant" or "contaminant"
pursuant to the Comprehensive Environmental Response Compensation and Liability
Act (42 U.S.C. Section 9601 et seq) and amendments thereto and regulations
promulgated thereunder; (ii) containing gasoline, oil, diesel fuel or other
petroleum products; (iii) which is defined as a "hazardous waste" pursuant to
the Federal Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et
seq) and amendments thereto and regulations promulgated thereunder; (iv)
containing polychlorinated byphenyls (PCBs); (v) containing asbestos; (vi) which
is radioactive; (vii) the presence of which requires investigation or
remediation under any federal, state or local statute, regulation, ordinance or
policy; or (viii) which is defined as a "hazardous waste", "hazardous
substance", "pollutant" or "contaminant" or other such term used to define a
substance having an adverse effect on the environment under any federal, state
or local statute, regulation or ordinance applicable to the Company.
SECTION 2.18 Brokers. No broker, finder or investment banker
is entitled to any brokerage, finder's or other fee or commission in connection
with the Merger based upon arrangements made by or on behalf of the Company.
SECTION 2.19 Transactions with Management. Except as set forth
in Section 2.19 of the Company Disclosure Schedule, no officer, director or
Shareholder has, since December 31, 1999, engaged in any material business with
the Company. To the knowledge of the Company, no officer or director of the
Company (except in his or her capacity as such) has any direct or indirect
material interest in (i) any property or assets of the Company (except as a
shareholder), (ii) any competitor, customer, supplier or agent of the Company,
or (iii) any person which is a party to any material contract or agreement with
the Company.
SECTION 2.20 Books and Records. The books and records of the
Company are in all material respects complete and correct. All proceedings of
the Board of Directors and shareholders of the Company to date have been
recorded in its corporate minute books. All documents and copies thereof of the
Company (whether or not specifically referred to in this Agreement) delivered to
Parent, its attorneys or accountants, in connection with Parent's examination of
the financial condition, books and records of the Company are and will be true,
complete and correct in all material respects.
SECTION 2.21 Disclosure. No representation, warranty or
statement made by the Company in this Agreement (including the Company
Disclosure Schedule), when taken together with this Agreement, contains any
untrue statement of a material fact or omits to state any material fact
necessary to make the statements or facts contained herein not misleading in
light of the circumstances under which they were made.
SECTION 2.22 Investment Representations. Each of the
Shareholders and the Trustees is acquiring the Merger Consideration for its own
account and not with a view to distribution or resale thereof in any transaction
which would be in violation of the Securities Act of 1933, as amended (the
"Securities Act") and rules promulgated thereunder, or any state securities
statute, and agrees not to sell, hypothecate or otherwise dispose of all or any
part of the Merger Consideration unless such Merger Consideration has been
registered under the Securities Act and applicable state or other securities
laws or in the opinion of counsel for the Shareholders and the Trustees, which
counsel and which opinion are
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reasonably satisfactory to the Parent, an exemption from the registration
requirements of the Securities Act and such state or other laws is available.
Each of the Shareholders and the Trustees is an "accredited investor" as defined
in Rule 501 under Regulation D promulgated under the Securities Act. Each of the
Shareholders and the Trustees can bear the economic risk of losing its
investment in the Merger Consideration and is presently able to afford the
complete loss of such investment. Each of the Shareholders and the Trustees has
such knowledge and experience in financial and business matters so as to be
capable of evaluating the merits and risks of an investment in the Merger
Consideration. Each of the Shareholders and the Trustees has been furnished with
the Parent's Form 10KSB for the year ended December 31, 1999, Form 10QSB for the
quarter ended March 31, 2000, Form 10QSB for the quarter ended June 30, 2000,
Form 10QSB for the quarter ended September 30, 2000 and the proxy statement for
the Parent's annual meeting of shareholders held on May 23, 3000 (collectively,
the "SEC Reports") and acknowledges that it has been afforded the opportunity
(i) to ask such questions as it has deemed necessary of, and to receive answers
from, representatives of the Parent concerning the merits and risks of investing
in the Merger Consideration and (ii) to obtain such additional information which
the Parent possesses or can acquire without unreasonable effort or expense that
is necessary to verify the accuracy and completeness of the information
contained in the SEC Reports. Each of the Shareholders and the Trustees
acknowledges that the Parent has answered all questions and responded to all
inquiries and requests for information to each of the Shareholder's and the
Trustee's satisfaction. Each of the Shareholders and the Trustees acknowledges
that it has made, independently and without reliance upon the Parent (other than
the representations and warranties of the Parent set forth in Article III
hereof) or any agent or representative of the Parent and based on its own
independent analysis of the Parent and such other documents and information as
it has deemed appropriate, its own investment analysis and its own business
decision to enter into and consummate this Agreement and the transactions
contemplated hereby.
SECTION 2.23 Trustees' Authorization. The Trustees have
followed the provisions of the OTI ESOP and the Trust Agreement with respect to
obtaining voting direction from the OTI ESOP participants including, but not
limited to, providing to all OTI ESOP participants all relevant information with
respect to the Merger. The Trustees have full authority to execute and deliver
this Agreement and have determined that the consummation of the Merger is in
accordance with the Trustees' fiduciary obligations.
SECTION 2.24 Employees. Section 2.24 of the Company Disclosure
Schedule sets forth the following information for each of the officers and
employees of the Company: name and job title; current annualized rate of
compensation as of the date of this Agreement (identifying any guaranteed
bonuses separately); and the number of vacation days such person is entitled to
take in each calendar year.
SECTION 2.25 Vehicles. Section 2.25 of the Company Disclosure
Schedule contains a list of all motor vehicles owned or leased by the Company.
SECTION 2.26 Customers. None of the customers which accounted
for one percent or more of the dollar volume of purchases from the Company for
the fiscal year ended December 31, 1999 and for the eight (8) months ended
August 31, 2000 has discontinued its relationship with the Company or notified
it in writing that it intends to discontinue its relationship with the Company.
SECTION 2.27 Bank Accounts. Section 2.27 of the Company
Disclosure Schedule contains the names and locations of all banks or other
financial institutions which are depositories of funds of the Company, the names
of all persons authorized to draw or sign checks or drafts upon such
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accounts and the names and locations of any institutions in which the Company
has safe deposit boxes and the names of the persons having access thereto.
SECTION 2.28 Accounts Receivable. All of the accounts
receivable of the Company on the 1999 Company Balance Sheet and created since
the date of the 1999 Company Balance Sheet and prior to the Effective Date are
the result of a bona fide sales or other transactions.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub hereby represent and warrant to the Company
that:
SECTION 3.01 Organization and Qualification. Each of Parent
and Sub is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation and has the requisite
corporate power and authority and all necessary governmental approvals to own,
lease and operate its properties and to carry on its business as it is now being
conducted.
SECTION 3.02 Authority Relative to this Agreement. Except for
the approval of the Parent's shareholders to be obtained following the Closing
pursuant to Section 5.01 hereof, each of Parent and Sub have all necessary
corporate power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the Merger. Except for the approval
of the Parent's shareholders to be obtained following the Closing pursuant to
Section 5.01 hereof, the execution and delivery of this Agreement by Parent and
Sub and the consummation by Parent and Sub of the Merger have been duly and
validly authorized by all necessary corporate action and no other corporate
proceedings on the part of Parent or Sub are necessary to authorize this
Agreement or to consummate the Merger (other than the filing and recordation of
appropriate merger documents as required by the New York Law). This Agreement
has been duly and validly executed and delivered by Parent and Sub and assuming
the due authorization, execution and delivery by the Company, constitutes a
legal, valid and binding obligation of Parent and Sub enforceable against Parent
and Sub in accordance with its terms, subject as to enforceability to
bankruptcy, insolvency, reorganization, fraudulent conveyance and similar laws
relating to creditors' rights and to general principles of equity.
SECTION 3.03 No Conflict; Required Filings and Consents. (a)
The execution and delivery of this Agreement by Parent and Sub do not, and the
performance of this Agreement by Parent and Sub will not, (i) conflict with or
violate the articles or certificate of incorporation and by-laws of Parent or
Sub, (ii) conflict with or violate any law, rule, regulation, written order,
judgment or decree applicable to Parent or Sub or by which any property or asset
of Parent or Sub is bound or subject or (iii) result in any breach of or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any right of termination,
amendment, acceleration or cancellation of, or result in the creation of a lien
or other encumbrance of any nature on any property or asset of Parent or Sub
pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which Parent or
Sub is a party or by which Parent or Sub or any property or asset of Parent or
Sub is bound or subject, except for any such conflicts, violations, breaches,
defaults or other occurrences which would not, individually or in the aggregate,
have a Material Adverse Effect.
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(b) Except as set forth in Schedule 3.03, the execution
and delivery of this Agreement by Parent and Sub do not, and the performance of
this Agreement by Parent and Sub will not, require any consent, approval,
authorization or permit of, or filing with, or notification to, any governmental
or regulatory authority, domestic or foreign, except (i) for filing and
recordation of appropriate merger documents as required by the New York Law, and
(ii) where failure to obtain such consents, approvals, authorizations or
permits, or to make such filings or notifications, would not prevent or delay
consummation of the Merger, or otherwise prevent Parent or Sub from performing
their obligations under this Agreement, and would not, individually or in the
aggregate, have a Material Adverse Effect.
SECTION 3.04 Disclosure. No representation, warranty or
statement by Parent or Sub in this Agreement when taken together with this
Agreement, contains any untrue statement of a material fact or omits to state
any material fact necessary to make the statements or facts contained herein not
misleading in light of the circumstances under which they were made.
ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 4.01 Conduct of Business by the Company Pending the
Merger. The Company covenants and agrees that, between the date of this
Agreement and the Effective Time, unless Parent shall otherwise agree in
writing, the business of the Company shall be conducted only in, and the Company
shall not take any action except in, the ordinary course of business; and the
Company shall use its reasonable efforts to preserve substantially intact the
business organization of the Company, to keep available the services of the
current officers, employees and consultants of the Company and to preserve the
current relationships of the Company with customers, suppliers and other persons
with which the Company has significant business relations. By way of
amplification and not limitation, except as contemplated by this Agreement or by
Section 4.01 of the Company Disclosure Schedule, the Company shall not, between
the date of this Agreement and the Effective Time, directly or indirectly do,
any of the following without the prior written consent of Parent:
(a) amend or otherwise change its Certificate of
Incorporation or Bylaws;
(b) issue, sell, pledge, dispose of, grant, encumber,
or authorize the issuance, sale, pledge, disposition, grant or
encumbrance of (i) any shares of capital stock of any class of the
Company, or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of such capital stock, or any
other ownership interest (including, without limitation, any phantom
interest), of the Company or (ii) any assets of the Company, except for
sales in the ordinary course of business;
(c) declare, set aside, make or pay any dividend or
other distribution, payable in cash, stock, property or otherwise, with
respect to any of its capital stock other than a dividend to the
shareholders of the Company of the receivables from Honeywell in the
aggregate amount of $47,034.88 and the receivables from American Axle
in the aggregate amount of $359,357.28 (the "Transferred Receivables")
to be paid prior to the Effective Time, which dividend will be made by
an assignment of the Transferred Receivables without recourse;
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(d) reclassify, combine, split, subdivide or redeem,
purchase or otherwise acquire, directly or indirectly, any of its
capital stock;
(e) acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets or any other business
combination) any corporation, partnership, other business organization
or any division thereof or substantially all of the assets of a
business; (ii) incur any indebtedness for borrowed money or issue any
debt securities or assume, guarantee or endorse, pledge in respect of
or otherwise as an accommodation become responsible for the obligations
of any person, or make any loans or advances, except in the ordinary
course of business; (iii) enter into any contract or agreement which
require aggregate payments by the Company in an aggregate amount in
excess of $5,000 other than contracts or agreements entered into in the
ordinary course of business; and (iv) terminate, cancel or request any
material change in, or agree to any material change in, any contract
which is material to the business of the Company, except in the
ordinary course of business, other than contemplated amendments of real
estate leases for the real property leased by the Company for its
operations, which amendments shall be approved by the Parent prior to
execution thereof; (v) authorize any single capital expenditure which
is in excess of $1,000 or capital expenditures which are, in the
aggregate, in excess of $5,000; or (vi) enter into or amend any
contract, agreement, commitment or arrangement with respect to any
matter set forth in this Section 4.01(e);
(f) increase the compensation payable or to become
payable to its officers or employees, or grant any severance or
termination pay to, or enter into any employment or severance agreement
with, any director, officer or other employee of the Company, or
establish, adopt, enter into or amend (except as may be required by
law) any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement,
deferred compensation, employment, termination, severance or other
plan, agreement, trust, fund, policy or arrangement for the benefit of
any director, officer or employee; or reimburse any officer of the
Company for aggregate expenses in excess of $1,000;
(g) take any action, other than reasonable and usual
actions in the ordinary course of business and consistent with past
practice, with respect to accounting policies or procedures (including,
without limitation, procedures with respect to the payment of accounts
payable and collection of accounts receivable);
(h) make any tax election; settle or compromise any
material federal, state, local or foreign tax liability or change any
of its methods of reporting income, deductions or other items for
federal state, local or foreign Tax purposes from those employed in the
preparation of its most recently filed returns with respect to the
applicable Tax, except only as such changes may be required by
intervening changes in applicable law or regulations;
(i) pay, discharge or satisfy any claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business, of liabilities
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reflected or reserved against in the 1999 Company Balance Sheet or
subsequently incurred in the ordinary course of business;
(j) form any subsidiary; or
(k) announce an intention, enter into any formal or
informal agreement, or otherwise make a commitment, to do any of the
foregoing.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01 Parent's Shareholders' Meeting. The Parent,
acting through its Board of Directors, shall, in accordance with applicable law
and the Parent's Amended and Restated Articles of Incorporation and Bylaws, (i)
duly call, give notice of, convene and hold a Special Meeting of Shareholders
(the "Parent's Shareholders' Meeting") as soon as practicable and (A) include in
the Proxy Statement mailed to shareholders ("Proxy Statement") the
recommendation of the Board of Directors that the shareholders of the Parent
approve the issuance of the Merger Consideration for the consummation of the
transactions contemplated by this Agreement and (B) take all lawful action to
solicit and use its reasonable efforts to obtain such approval.
SECTION 5.02 Reserved.
SECTION 5.03 Proxy Statement. Parent, Sub and the Company
shall cooperate with each other in the preparation of the Proxy Statement. If at
any time after the mailing of the Proxy Statement and prior to the Parent's
Shareholders' Meeting, any event with respect to any party, its officers,
directors or principal shareholders or any event with respect to the Merger
shall occur which is required to be described in the Proxy Statement, such party
shall immediately inform the other party of such event and all parties shall
cooperate in the preparation of a mutually satisfactory amendment or supplement
describing such event and such amendment or supplement shall be promptly
disseminated to the shareholders of the Parent.
SECTION 5.04 Access to Information; Confidentiality. (a) From
the date hereof to the Effective Time, the Company shall, and shall cause the
officers, directors, employees, accountants and agents of the Company to, afford
the officers, employees and agents of Parent and Sub complete access at all
reasonable times and upon reasonable request, and so long as it does not
interfere with the normal operations of the business of the Company, to the
officers, employees, agents, properties, offices, plants and other facilities,
books and records of the Company, and shall furnish Parent and Sub with all
financial, operating and other data and information as Parent or Sub, through
its officers, employees or agents, may reasonably request.
(b) All proprietary and confidential information
obtained by Parent or Sub pursuant to this Section 5.04 shall be kept
confidential except such information as may be appropriate to be divulged in
order to satisfy any of the conditions precedent set forth in Section 6.02
hereof.
(c) All proprietary and confidential information
obtained by Parent or Sub pursuant to this Section 5.04 shall be promptly
returned to the Company in the event of the termination of this Agreement.
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SECTION 5.05 No Solicitation. The Company shall not, directly
or indirectly, through any officer, director, agent or otherwise, solicit,
initiate or encourage the submission of any proposal or offer from any person
relating to any acquisition or purchase of all or any material portion of the
assets of, or any equity interest in, the Company or any business combination
with the Company.
SECTION 5.06 Notification of Certain Matters. The Company
shall give prompt notice to Parent, and Parent shall give prompt notice to the
Company, of (i) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would be likely to cause any representation or warranty
contained in this Agreement to be untrue or inaccurate in any material respect
and (ii) any failure of the Company, Parent or Sub, as the case may be, to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it hereunder; provided, however, that the delivery of any notice
pursuant to this Section 5.06 shall not limit or otherwise affect the remedies
available hereunder to the party receiving such notice.
SECTION 5.07 Further Action; Reasonable Efforts. Upon the
terms and subject to the conditions hereof (including, without limitation,
Section 5.04) each of the parties hereto shall use its reasonable efforts to
take, or cause to be taken, all appropriate action, and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the Merger, including, without
limitation, using its reasonable efforts to obtain all licenses, permits
(including, without limitation, environmental permits), consents, approvals,
authorizations, qualifications and orders of governmental authorities and
parties to contracts with the Company as are necessary for the consummation of
the Merger and to fulfill the conditions to the Merger. In case at any time
after the Effective Time any further action is necessary or desirable to carry
out the purposes of this Agreement, the proper officers and directors of each
party to this Agreement shall use their reasonable efforts to take all such
action.
SECTION 5.08 Public Announcements. Parent and the Company
shall consult with each other before issuing any press release or otherwise
making any public statements with respect to this Agreement and shall not issue
any such press release or make any such public statement prior to such
consultation.
SECTION 5.09 No-Shop. Neither the Company or any of its
officers, employees, directors, nor the Shareholders or the Trustees or any of
their representatives (including investment bankers, accountants, attorneys,
agents or consultants) will take any action to, directly or indirectly, (i)
encourage, initiate or solicit discussions or negotiations with any person,
other than Parent (and its affiliates and representatives), concerning any
purchase of any capital stock of the Company or any merger, asset sale or
similar transaction involving the Company (other than sales of assets in the
ordinary course of business consistent with past practice), or enter into any
negotiations or agreement with any third party with respect to the foregoing (an
"Alternative Transaction"), or (ii) except as may be required by law or legal
process, disclose non-public information relating to the Company or provide
access to property, books or records of the Company to any person, other than
Parent (and its affiliates and representatives), in connection with any
solicitation, offer or proposal of an Alternative Transaction. The Company, the
Shareholders and the Trustees will promptly disclose to Parent the existence or
occurrence of any proposal, contract or contact which they, the Company or any
of their representatives described above may receive after the date hereof in
respect of any Alternative Transaction. Each of the Shareholders and the
Trustees agree that they will, and will cause the Company and its officers,
employees, directors, agents and representatives to, immediately cease any
activities, discussions or negotiations existing as of the date of this
Agreement with any parties conducted heretofore with respect to any Alternative
Transaction.
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SECTION 5.10 Employee Benefits. (a) Immediately after the
Closing, the Company shall take all action necessary to permanently discontinue
employer contributions to the OTI ESOP and freeze participation in the OTI ESOP
so that no additional employees of the Company or any employees of the Parent
will be eligible to participate in the OTI ESOP. Therefore, immediately after
the Closing, all participants in the OTI ESOP will be fully vested in their
accounts.
(b) The Company and the Parent recognize that after the
completion of this transaction they will be members of a controlled group of
corporations as defined in Code Section 414(b). Both the Company and the Parent
agree that immediately after the Closing, an employee of one entity shall not be
allowed to participate in the other entity's Plans solely due to the controlled
group status, and further agree to take any action necessary to incorporate
these eligibility rules into the Plans. Nothing in this paragraph shall prohibit
the Parent or the Company from later agreeing to amend, merge, or terminate any
Plans.
SECTION 5.11 Tax Consequences. It is intended by the parties
hereto that the Merger shall constitute a reorganization within the meaning of
ss. ss. 368(a)(1)(A) and 368(a)(2)(E) of the Code. The parties hereto hereby
adopt this Agreement as a "plan of reorganization" within the meaning of
Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations.
SECTION 5.12 Transferred Receivables. As of the date of this
Agreement, the Company will assign new job numbers to the existing projects with
Honeywell and American Axle. All work done and all expenses incurred on such
contracts after the date of this Agreement will be charged to such new job
number. The Shareholders and the Trustees agree to reimburse the Company in
cash, within thirty (30) days after the date of any invoice from the Company,
for all costs and expenses incurred with respect to the projects after the date
of this Agreement. The agreement set forth in this Section 5.12 shall survive
the Effective Time.
ARTICLE VI
CONDITIONS TO THE MERGER
SECTION 6.01 Conditions Precedent to Obligations of the
Shareholders and the Trustees. The obligations of the Shareholders and the
Trustees to effect the Merger shall be subject to the satisfaction at or prior
to the Effective Time, of each of the following conditions unless waived by the
Shareholders and the Trustees:
(a) Shareholder Approval. The issuance of the Merger
Consideration in connection therewith shall have been approved and
adopted by the affirmative vote of at least a majority of the
shareholders of the Parent voting on such issuance.
(b) Accuracy of Representations and Warranties. All
representations and warranties of Parent and Sub contained herein shall
be true and correct in all material respects as of the date hereof and
at and as of the Effective Time, with the same force and effect as
though made on and as of the Effective Time.
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<PAGE> 98
(c) Performance. Parent and Sub shall have performed in
all material respects all obligations and agreements, and complied in
all material respects with all covenants and conditions, contained in
this Agreement to be performed or complied with by each of them prior
to the Effective Time.
(d) Approvals. All consents, approvals, permits and
authorizations required to be obtained prior to the Effective Time by
Parent and Sub, shall have been made or obtained.
(e) Employment Agreements. At the Effective Time,
each of the Shareholders shall have entered into an Employment
Agreement with the Surviving Corporation in the form attached to this
Agreement as Exhibit A.
(f) Reserved.
(g) Board of Directors of Parent. At the
Effective Time, William K. Pollock shall have been elected to the
Board of Directors of the Parent.
(h) Opinion of Counsel. The Company shall have been
provided an opinion of counsel for the Parent, in form and substance
reasonably acceptable to the Company and its counsel.
(i) Merger Consideration. At Closing, the Shareholders
and the OTI ESOP shall have received the Merger Consideration in the
form and manner specified in Sections 1.06 and 1.07 of this Agreement.
(j) Incumbency Certificate. At Closing, the Company
shall have received an incumbency certificate, executed by the
Secretary or Assistant Secretary of the Parent, which shall identify by
name and title and bear the signatures of the officers of the Parent
authorized to sign this Agreement and the documents executed in
connection therewith, upon which certificate the Company shall be
entitled to rely until informed of any change in writing by the Parent.
The Parent shall attach to such incumbency certificate (i) copies of
its Amended and Restated Articles of Incorporation, together with all
amendments and (ii) a certificate of good standing, each certified by
the Michigan Department of Consumer and Industry Services, (iii) copies
of its Bylaws and (iv) copies of its Board of Directors' resolutions
and resolutions or actions of any other body authorizing the execution
of this Agreement and any documents executed in connection therewith,
each certified by the Secretary or Assistant Secretary of the Parent.
(k) Closing Certificate. At Closing, the Company shall
have received a certificate signed by the Parent and dated the date of
the Closing to the effect that the conditions precedent provided in
Section 6.01(a) through (j) hereof have been satisfied. The delivery of
such certificate shall in no way diminish, supercede or enlarge the
representations and warranties of the Parent made in this Agreement or
its liability in respect thereof pursuant to Article VII hereof.
(l) Registration Rights Agreement. At closing, Parent
shall have entered into a Registration Rights Agreement in the form
attached hereto as Exhibit B.
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<PAGE> 99
SECTION 6.02 Conditions Precedent to Obligations of Parent and
Sub. The obligations of Parent and Sub to effect the Merger shall be subject to
the satisfaction, at or prior to the Effective Time, of each of the following
conditions unless waived by Parent and Sub:
(a) Shareholder Approval. The Merger and the issuance
of the Merger Consideration in connection therewith shall have been
approved and adopted by the affirmative vote of at least a majority of
the shareholders of the Parent voting on the Merger.
(b) Accuracy of Representations and Warranties. All
representations and warranties of the Company contained herein shall be
true and correct in all material respects as of the date hereof and at
and as of the Effective Time, with the same force and effect as though
made on and as of the Effective Time, and at Closing the Shareholders
and Trustees shall have delivered a "bring down" certificate with
respect to such representations and warranties.
(c) Performance. The Company shall have performed in
all material respects all obligations and agreements, and complied in
all material respects with all covenants and conditions, contained in
this Agreement to be performed or complied with by it prior to the
Effective Time.
(d) Approvals. All consents, approvals, permits and
authorizations required to be obtained prior to the Effective Time by
the Parent, shall have been made or obtained, including without
limitation the consent of La Salle Business Credit to the Merger.
(e) No Litigation. No litigation shall be pending which
seeks to prevent or prohibit consummation of the Merger.
(f) Employment Agreements. At the Effective Time, each
of the Shareholders shall have entered into an Employment Agreement
with the Surviving Corporation in the form attached to this Agreement
as Exhibit A.
(g) Due Diligence. Parent shall be satisfied with the
results of its due diligence investigation of the Company.
(h) Company Financing Arrangements. Parent shall have
obtained amendments to the Company's existing financing arrangements or
obtained substitute financing acceptable to Parent.
(i) Consents. Parent shall have obtained all consents
from the Company's employee stock ownership plan, customers, suppliers,
landlords, and others, and shall have made all modifications to
existing agreements with any of them, as it deems necessary or
appropriate.
(j) Reserved.
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<PAGE> 100
(k) Compliance with Securities Laws. At the Effective
Time, the Company, the Sub, the Parent, the Shareholders and the
Trustees shall have complied with all applicable state and federal
securities laws and exchange requirements.
(l) Delivery of Certificates. At the Closing, the
Shareholders and the Trustees shall deliver to the Parent certificates
representing all of the Shares, endorsed in blank or with accompanying
stock powers duly signed. The Shareholders and the Trustees shall also
deliver such other instruments or documents as shall, in the opinion of
the Parent's counsel, be reasonably required to vest good and
marketable title in the Parent to the Shares.
(m) Opinion of Counsel. The Parent shall have been
provided an opinion of counsel for the Company, the Shareholders and
the Trustees, in form and substance reasonably acceptable to the Parent
and its counsel.
(n) Noncompetition Agreement. Pollock and Lasch shall
each have entered into an agreement not to compete with the Company and
the Parent in the form attached hereto as Exhibit C.
(o) Tax Representation and Continuity Certificates. At
Closing, the Parent shall have received in support of the intended
federal income Tax treatment of the transaction: (i) the Tax
Representation Certificate duly executed by the Company in the Form
attached hereto as Exhibit D , and (ii) a Continuity of Interest
Certificate from each Shareholder duly executed by such Shareholder.
(p) Incumbency Certificate. At Closing, the Parent
shall have received an incumbency certificate, executed by the
Secretary of the Company, which shall identify by name and title and
bear the signatures of the officers of the Company authorized to sign
this Agreement and the documents executed in connection therewith, upon
which certificate the Parent shall be entitled to rely until informed
of any change in writing by the Company. The Company shall attach to
such incumbency certificate (i) copies of its Certificate of
Incorporation, together with all amendments and (ii) a certificate of
good standing, each certified by the New York Department of State,
(iii) copies of its Bylaws and (iv) copies of its Board of Directors'
resolutions and resolutions or actions of any other body authorizing
the execution of this Agreement and any documents executed in
connection therewith, each certified by the Secretary of the Company.
(q) Closing Certificate. At Closing, the Parent shall
have received a certificate signed by the Company and dated the date of
the Closing to the effect that the conditions precedent provided in
Section 6.02(a) through (p) hereof have been satisfied. The delivery of
such certificate shall in no way diminish, supercede or enlarge the
representations and warranties of the Company made in this Agreement or
its liability in respect thereof pursuant to Article VII hereof.
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<PAGE> 101
ARTICLE VII
TERMINATION. AMENDMENT, WAIVER AND EXPENSES
SECTION 7.01 Termination. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time,
notwithstanding the requisite approval and adoption of this Agreement and the
Merger contemplated hereby by the shareholders of each of the Parent and the
Company:
(a) By mutual written consent duly authorized by the
Boards of Directors of Parent, Sub, the Company and by the Shareholders
and the Trustees;
(b) By Parent if (i) the Company shall have failed to
comply in any material respect with any of its covenants or agreements
contained in this Agreement required to be compiled with by the Company
prior to the date of such termination and such failure shall not have
been cured within fifteen (15) business days following receipt by the
Company from Parent of written notice of such failure and demand for
cure, or (ii) if shareholders of the Parent shall have failed to
approve the issuance of the Merger Consideration by the requisite vote
at the Parent's Shareholders' Meeting;
(c) By the Company if Parent or Sub shall have failed
to comply in any material respect with any of its covenants or
agreements contained in this Agreement required to be complied with by
Parent or Sub prior to the date of such termination, and such failure
to comply shall not have been cured within fifteen (15) business days
following receipt by Parent from the Company of written notice of such
failure and demand for cure, or (ii) if shareholders of the Parent
shall have failed to approve the issuance of the Merger Consideration
by the requisite vote at the Parent's Shareholders' Meeting;
(d) By Parent if (i) an action as set forth in Section
6.02(e) is instituted, or (ii) it is unable to satisfy any of the
conditions precedent set forth in Section 6.02(g) through 6.02(q)
hereof; and
(e) By the Company or Parent if the Merger is not
consummated within sixty (60) business days from the date of this
Agreement; provided that if Parent is unable to satisfy any of the
conditions set forth in Section 6.02 hereof by such date, it shall have
the right to extend such date for two (2) thirty (30) business day
periods each in order to give Parent additional time to satisfy such
conditions.
SECTION 7.02 Effect of Termination. In the event of the
termination of this Agreement pursuant to Section 7.01 hereof by Parent or Sub,
on the one hand, or the Company, on the other hand, written notice thereof shall
forthwith be given to the other party or parties specifying the provision
pursuant to which such termination is made, and this Agreement shall become void
and have no effect, and there shall be no liability hereunder on the part of
Parent, Sub or the Company, except that Section 7.06 hereof shall survive any
termination of this Agreement. Nothing in this Section 7.02 shall relieve any
party to this Agreement of liability for breach of this Agreement.
SECTION 7.03 Legal Fees. Without the written consent of Parent,
the Company will not incur Company legal fees in connection with the Merger in
excess of $25,000.
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<PAGE> 102
SECTION 7.04 Amendment. This Agreement may be amended by the
parties hereto by action taken by or on behalf of their respective Boards of
Directors (as applicable) at any time prior to the Effective Time; provided,
however, that, after the approval and adoption of this Agreement and the Merger
by the shareholders of the Parent, no amendment may be made which would as a
matter of law require further shareholder approval of such amendment. This
Agreement may not be amended except by an instrument in writing signed by the
parties hereto.
SECTION 7.05 Waiver. At any time prior to the Effective Time any
party hereto may (i) extend the time for the performance of any obligation or
other act of any other party hereto, (ii) waive any inaccuracy in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any agreement or condition
contained herein. Any such extension or waiver shall be valid if set forth in an
instrument in writing signed by the party or parties to be bound thereby.
SECTION 7.06 Fee. If at any time while this Agreement is in
effect the Company shall have consummated, or entered into an agreement
providing for, a merger or consolidation of the Company with, sale of all or a
substantial part of the assets of the Company to, or any other business
combination involving the Company with, any person (other than Parent or Sub),
then, Company shall, within two days after the first of such events has
occurred, pay Parent an amount equal to all out of pocket expenses incurred by
Parent in connection with this Agreement. This provision shall be in addition to
any other rights and remedies Parent and Sub may have under this Agreement.
ARTICLE VIII
INDEMNIFICATION
SECTION 8.01 Indemnification by the Shareholders and the
Trustees. The Shareholders and the Trustees shall jointly and severally
indemnify, defend and hold harmless the Parent, its affiliates, and their
respective officers, directors, employees, members, partners and shareholders in
their capacities as such (including the successors of any of the foregoing)
from, against and with respect to any claim, liability, obligation, loss,
damage, assessment, judgment, cost or expense (including, without limitation,
reasonable attorneys', environmental consultants' and accountants' fees and
costs) of any kind or character ("Damages"), (subject to Section 8.05), arising
out of or in any manner incident, relating or attributable to (a) any
misrepresentation or breach of warranty by any of the Shareholders or the
Trustees contained in this Agreement (subject to Section 9.01), (b) any failure
by the Shareholders or the Trustees to perform, cause to be performed or observe
any covenant to be performed or observed by the Company, the Shareholders or the
Trustees under this Agreement, (c) any guaranty to which the Company is a party
and which guarantees amounts payable by, or obligations of, the Shareholders,
the Trustees or any of their affiliates or related parties, (d) any liability of
the Company under any agreements, contracts, negotiations and other dealings by
the Shareholders or the Trustees with any third party concerning the sale of the
capital stock or business of the Company, (e) any liability for federal income
or state or local income or franchise taxes of the Company, the Shareholders or
the Trustees that is based upon or measured with respect to the income of the
Company, the Shareholders or the Trustees for any period up through and
including the Effective Time, (f) any liability for federal income or state or
local income or franchise taxes of the Shareholders or the Trustees based on
income for any post-Closing period, (g) any liability of the Company, the
Shareholders or the Trustees for taxes resulting from the transactions
contemplated by this Agreement, including, without limitation, any taxes
resulting from the disposition, deemed or actual, of assets or stock
contemplated by this Agreement.
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SECTION 8.02 Limitations. Notwithstanding the provisions of
Section 8.01:
(a) The right of indemnification provided in Section 8.01 is solely for
the benefit of the parties referred to therein, and such right will not be
extended, either directly or indirectly, to any other person except as consented
to by the Shareholders and the Trustees. Except as provided in Article VII
hereof and Exhibit C, the right of indemnification in Section 8.01 is the sole
remedy which the Parent has against the Shareholders and the Trustees for any
breach of a representation or warranty hereunder or for any other claim with
respect to, or arising in any matter from, the transactions contemplated
hereunder.
(b) If a condition precedent stated in Section 6.02(b) is not
satisfied, the Company's Closing Certificate specifies the representation or
warranty which is not correct in all material respects and identifies the reason
and underlying facts therefor in reasonable details (such facts, the "Down-Date
Facts"), and the Parent at any time thereafter proceeds with the Closing
notwithstanding such unsatisfied condition or incorrectness, then the
Shareholders and the Trustees shall have no liability to the Parent or any other
party indemnified pursuant to Section 8.01 with respect to the Down-Date Facts
to the extent so described.
SECTION 8.03 Procedure. The party requesting indemnification
under this Article VIII (the "indemnified party") shall give the party from whom
indemnification is requested (the "indemnifying party") prompt notice of, and
shall reasonably cooperate with the indemnifying party (including, without
limitation, by making relevant personnel and records available to the
indemnifying party at all reasonable times free of charge) in connection with
any claim for which the indemnified party may seek indemnification from the
indemnifying party under Article VIII, but the failure to give such notice will
not affect the indemnifying party's liability hereunder, except and to the
extent it is actually prejudiced thereby. The indemnifying party shall at its
own expense and with counsel of its choice assume the defense of all third party
claims for which it is obligated to indemnify the indemnified party. The
indemnified party may also at its own expense employ its own counsel to
participate in the defense of any such third party claim. The indemnifying party
shall have the absolute right to settle at its expense any such third party
claim; provided, however, that such settlement shall also require the prior
written consent of the indemnified party where criminal liability is admitted or
where any action other than the payment of money is required or which does not
include an unconditional release of all indemnified parties.
SECTION 8.04 Parent's Indemnification. (a) Subject to clause (b)
below, the Parent agrees to indemnify, defend, and hold harmless the
Shareholders and the Trustees from, against, and with respect to any Damages
(subject to Section 8.05) arising out of or in any manner incident, relating, or
attributable to (1) any misrepresentation or breach of warranty by the Parent
contained in this Agreement, and (2) any failure by the Parent to perform or
observe any covenant to be performed or observed by the Parent under this
Agreement.
(b) The right of indemnification provided in Section 8.04 is solely for
the benefit of the parties referred to therein, and such right will not be
extended, either directly or indirectly, to any other person. The right of
indemnification in Section 8.04 is the sole remedy which the Shareholders and
the Trustees have against the Parent for any breach of a representation or
warranty hereunder or for any other claim with respect to, or arising in any
manner from, the transactions contemplated hereunder.
SECTION 8.05 Amount. The amount of Damages for which
indemnification is provided (i) under this Article VIII will be computed net of
any insurance proceeds received by the indemnified
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<PAGE> 104
party in connection with such Damages, reduced by all costs and expenses
related thereto and any premium increase or expense resulting therefrom and (ii)
by the Shareholders and the Trustees under Section 8.01(a) will be reduced to
the extent such Damages relate to and do not exceed any applicable reserve or
accrual with respect to such Damages provided for or reflected in the 1999
Company Balance Sheet.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01 Survival of Representations. Warranties and
Agreements. The representations, warranties and agreements in this Agreement
shall survive for three years after the Effective Time or upon the termination
of this Agreement pursuant to Section 7.01, except that the agreement set forth
in Section 7.06 shall survive termination of this Agreement.
SECTION 9.02 Notices. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be given (and shall
be deemed to have been duly given upon receipt) by delivery in person, by cable,
telecopy, telegram or telex or by registered or certified mail (postage prepaid,
return receipt requested) to the respective parties at the following addresses
(or at such other address for a party as shall be specified in a notice given in
accordance with this Section 9.02):
if to Parent or Sub:
Nematron Corporation
5840 Interface Drive
Ann Arbor, Michigan 48103
Telephone No.: (734) 214-2000
Facsimile No.: (734) 994-8074
Attention: Matthew S. Galvez
with a copy to:
Dickinson Wright PLLC
500 Woodward Avenue
Suite 4000
Detroit, MI 48226
Telephone No.: (313) 223-3500
Facsimile No.: (313) 223-3598
Attention: Bernadette M. Dennehy
if to the Company or Shareholder:
Optimation Technology, Inc.
50 High Tech Drive
Rush, NY 14543
Telephone No.: (716) 359-0700
Fax No.: (716) 359-0701
Attention: William Pollock
with a copy to:
Saperston & Day, P.C.
800 First Federal Plaza
Rochester, NY 14614
Telephone No.: (716) 325-7570
Fax No.: (716) 325-5458
Attention: George G. MacKey
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<PAGE> 105
SECTION 9.03 Shareholder Agreements. In consideration of Parent
and Sub entering into this Agreement, each Shareholder agrees (i) to vote all
Shares owned directly or indirectly by him in favor of the Merger, and (ii) to
not, without Parent's prior written consent, sell or otherwise dispose of the
Shares owned directly or indirectly by him until the Merger is consummated or
the Agreement is terminated.
SECTION 9.04 Trustee Agreements. In consideration of Parent and
Sub entering into this Agreement, each Trustee acknowledges and agrees (i) that
it has voted all Shares owned directly or indirectly by the OTI ESOP in favor of
the Merger, and (ii) that it will not, without Parent's prior written consent,
sell or otherwise dispose of the Shares owned directly or indirectly by the OTI
ESOP until the Merger is consummated or the Agreement is terminated.
SECTION 9.05 Severability. If any term or other provision of
this Agreement is invalid, illegal or incapable of being enforced by any rule of
law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the Merger is not affected in any manner materially adverse
to any party. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the Merger be consummated as originally contemplated to the fullest
extent possible.
SECTION 9.06 Entire Agreement; Assignment. This Agreement,
together with the Exhibits and Schedules hereto and the Company Disclosure
Schedule constitutes the entire agreement among the parties with respect to the
subject matter hereof and supersedes all prior agreements and undertakings, both
written and oral, among the parties, their officers and representatives, or any
of them, with respect to the subject matter hereof. This Agreement shall not be
assigned by operation of law or otherwise.
SECTION 9.07 Parties in Interest. This Agreement shall be
binding upon and inure solely to the benefit of each party hereto, and nothing
in this Agreement, express or implied, is intended to or shall confer upon any
other person any right, benefit or remedy of any nature whatsoever under or by
reason of this Agreement.
SECTION 9.08 Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Michigan, regardless
of the laws that might otherwise govern under applicable principles of conflicts
of laws.
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<PAGE> 106
SECTION 9.09 Headings. The descriptive headings contained in
this Agreement are included for convenience of reference only and shall not
affect in any way the meaning or interpretation of this Agreement.
SECTION 9.10 Counterparts. This Agreement may be executed in one
or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement.
[the balance of this page intentionally left blank]
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<PAGE> 107
IN WITNESS WHEREOF, Parent, Sub, the Company, the Shareholders
and the Trustees have caused this Agreement to be executed as of the date first
written above by their respective officers thereunto duly authorized.
NEMATRON CORPORATION
By: /s/ David P. Gienapp
-----------------------------
Its: Corporate Secretary
NEMATRON ACQUISITION CORP.
By: /s/ David P. Gienapp
-----------------------------
Its: Vice President
OPTIMATION TECHNOLOGY, INC.
By: /s/ William K. Pollock
-----------------------------
Its: President
/s/ William K. Pollock
--------------------------------
WILLIAM K. POLLOCK
/s/ Timothy Lasch
--------------------------------
TIMOTHY LASCH
/s/ William K. Pollock
---------------------------------------
WILLIAM K. POLLOCK, TRUSTEE OF THE
OPTIMATION TECHNOLOGY, INC.
EMPLOYEE STOCK OWNERSHIP TRUST
and
/s/ Timothy Lasch
-----------------------------------------
TIMOTHY LASCH, TRUSTEE OF THE OPTIMATION
TECHNOLOGY, INC. EMPLOYEE
STOCK OWNERSHIP TRUST
31
<PAGE> 108
EXHIBIT A
<PAGE> 109
EMPLOYMENT AGREEMENT
OF WILLIAM K. POLLOCK
THIS EMPLOYMENT AGREEMENT (this "Agreement"), is made this day of
, 2000, by and between William K. Pollock ("Employee") and OPTIMATION
TECHNOLOGY, INC., a New York corporation (the "Company").
WHEREAS, pursuant to that certain Agreement and Plan of Merger (the
"Merger Agreement") dated as of November , 2000 by and among Nematron
Corporation ("Nematron"), Nematron Acquisition Corp. ("Sub"), the Employee and
the other shareholders of the Company, Nematron acquired, through a merger with
Sub in which the Company was the surviving corporation (the "Acquisition") all
of the issued and outstanding stock of the Company;
WHEREAS, as a condition precedent to the consummation of the
Acquisition, Nematron has required Employee and the Company to enter into this
Agreement to ensure the continued employment of Employee by the Company;
WHEREAS, the consummation of the transactions contemplated by the
Purchase Agreement is also a condition precedent to the effectiveness of this
Agreement;
WHEREAS, the Company is engaged in the business of providing process
and mechanical design, instrumentation and electrical design, system
integration, software programming and computer aided drafting to its customers
in various industry segments (the "Business"); and
WHEREAS, the Company desires to employ Employee, and Employee desires
to be employed by the Company upon the terms and conditions set forth in this
Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
obligations contained herein, and intending to be legally bound, the parties,
subject to the terms and conditions set forth herein, agree as follows:
1. Employment and Term. The Company hereby employs Employee, and
Employee hereby accepts employment with the Company as its President (the
"Position") for a period commencing on the date hereof and continuing for a
period of three (3) years, subject to earlier termination pursuant to the
provisions of Section 10 hereof (the "Term").
2. Duties. During the Term, Employee shall serve the Company faithfully
and to the best of his ability and shall devote his full attention, skill and
efforts to the performance of the duties required by or appropriate for his
Position, shall use his best skill and abilities to promote the interest of the
Company, and shall work with other officers and employees of the Company in a
competent and professional manner. Employee agrees to assume such duties and
responsibilities as are commensurate with his Position. Employee shall report
directly to the Board of Directors of the Company. Employee shall be based in
the Company's offices in the Rochester, New York area.
3. Other Business Activities. During the Term, Employee will not,
without the prior approval of the Board of Directors, directly or indirectly
engage in any other business activities or pursuits which may interfere with the
performance of his responsibilities and obligations pursuant to this Agreement.
<PAGE> 110
4. Compensation. The Company shall pay Employee, and Employee hereby
agrees to accept, as compensation for all services rendered hereunder and for
Employee's covenant not to compete provided for in Section 9 hereof, an initial
base salary of $51.40 per hour for not less than 2,080 hours per calendar year,
less applicable withholdings, commencing upon closing of the Acquisition (the
"Base Salary"), and $77.10 per hour for each hour in excess of 2,080 hours per
calendar year, payable in a manner and at such times as is consistent with the
payroll practices of the Company or Nematron. The Employee shall also be
entitled to participate in such incentive bonus or long-term incentive programs
as may be established from time to time by the compensation committee appointed
by the Board of Directors or, if none, the Board, upon terms established by the
compensation committee or the Board of Directors, and, to the extent and upon
the terms determined by Nematron's board of directors in its sole discretion, in
Nematron's Gainsharing Program and Long-Term Incentive Plan.
5. Other Benefits. Employee shall be entitled to those employee
benefits which the Company, as determined by the compensation committee or Board
of Directors, may from time to time generally makes available to its senior
executives ("Benefits"). The Benefits shall initially include, without
limitation, health insurance, life insurance, and disability income insurance
substantially similar to the disability income insurance policy in effect for
Employee's benefit as of November 1, 2000, and such other benefits as the
compensation committee or Board of Directors may determine from time to time.
6. Reimbursement of Expenses. Subject to such conditions as the Company
may from time to time determine, Employee shall be reimbursed for ordinary and
reasonable documented business expenses incurred by him in the performance of
his duties under this Agreement.
7. Confidentiality. Employee recognizes and acknowledges that the
Proprietary Information (as hereinafter defined) is a valuable, special and
unique asset of the Business of the Company. As a result, both during the Term
and thereafter, Employee shall not, without the prior written consent of the
Company, for any reason, either directly or indirectly divulge to any
third-party or use for his own benefit or for any purpose other than the
exclusive benefit of the Company any confidential, proprietary, business or
technical information or trade secrets of the Company or of any subsidiary or
affiliate of the Company ("Proprietary Information") revealed, obtained or
developed in the course of his employment with the Company. Such Proprietary
Information shall include, but shall not be limited to, the intangible personal
property described in Section 8(b) hereof, any information relating to methods
of production, manufacture, service, research, computer codes or instructions
(including source and object code listings, program logic algorithms,
subroutines, modules or other subparts of computer programs and related
documentation, including program notation), computer processing systems and
techniques, concepts, layouts, flowcharts, specifications, know-how any
associated user or service manuals or other like textual materials (including
any other data and materials used in performing the Employee's duties), all
computer inputs and outputs (regardless of the media on which stored or
located), hardware and software configurations, designs, architecture,
interfaces, plans, sketches, blueprints, any other materials prepared by
Employee in the course of, relating to or arising out of his employment by the
Company or prepared by any other Company employee or contractor for the Company
or its customers, costs, business studies, business procedures, finances,
marketing data, methods, plans and efforts, the identities of customers,
contractors and suppliers and prospective customers, contractors and suppliers,
the terms of contracts and agreements with customers, contractors and suppliers,
the Company's relationship with actual and prospective customers, contractors
and suppliers and the needs and requirements of, and the Company's course of
dealing with, any such actual or prospective customers, contractors and
suppliers, personnel information, customer and vendor credit information and any
other materials that have not been made available to the general public;
provided, that nothing herein contained shall restrict
<PAGE> 111
Employee's ability to make such disclosures during the course of his employment
as may be necessary or appropriate to the effective and efficient discharge of
the duties required by or appropriate for his Position or as such disclosures
may be required by law; and further provided, that nothing herein contained
shall restrict Employee from divulging or using for his own benefit or for any
other purpose any Proprietary Information that is readily available to the
general public so long as such information did not become available to the
general public as a direct or indirect result of Employee's breach of this
Section 7. Failure by the Company to mark any of the Proprietary Information as
confidential or proprietary shall not affect its status as Proprietary
Information under the terms of this Agreement.
8. Inventions and Property.
(a) All right, title and interest in and to Proprietary
Information shall be and remain the sole and exclusive property of the Company.
During the Term, Employee shall not remove from the Company's offices or
premises any documents, records, notebooks, files, correspondence, reports,
memoranda or similar materials of, or containing, Proprietary Information or
other materials or property of any kind belonging to the Company, unless
necessary or appropriate in accordance with the duties and responsibilities
required by or appropriate for his Position, and, in the event that such
materials or property are removed, all of the foregoing shall be returned to
their proper files or places of safekeeping as promptly as possible after the
removal shall serve its specific purpose. Employee shall not make, retain,
remove and/or distribute any copies of any of the foregoing for any reason
whatsoever, except as may be necessary in the discharge of his assigned duties,
and shall not divulge to any third person the nature of and/or contents of any
of the foregoing or of any other oral or written information to which he may
have access or with which for any reason he may become familiar, except as
disclosure shall be necessary in the performance of his duties. Upon the
termination of Employee's employment with the Company, he shall leave with or
return to the Company all originals and copies of the foregoing then in his
possession, whether prepared by Employee or by others.
(b) (i) Employee agrees that all right, title and interest in
and to any innovations, designs, systems, analyses, ideas for marketing
programs, customer contacts, and all copyrights, patents, trademarks and trade
names, or similar intangible personal property which have been or are developed
or created in whole or in part by Employee (A) at any time and at any place
during the Employee's employment with the Company and which, in the case of any
or all of the foregoing, are related to and used in connection with the Business
of the Company, (B) as a result of tasks assigned to Employee by the Company or
(C) from the use of premises or personal property (whether tangible or
intangible) owned, leased or contracted for by the Company (collectively, the
"Intellectual Property"), shall be and remain forever the sole and exclusive
property of the Company. The Employee shall promptly disclose to the Company all
Intellectual Property and the Employee shall have no claim for additional
compensation for the Intellectual Property.
(ii) The Employee acknowledges that all the Intellectual
Property that is copyrightable shall be considered a work made for hire under
United States Copyright Law. To the extent that any copyrightable Intellectual
Property may not be considered a work made for hire under the applicable
provisions of the United States Copyright Law, or to the extent that,
notwithstanding the foregoing provisions, the Employee may retain an interest in
any Intellectual Property that is not copyrightable, the Employee hereby
irrevocably assigns and transfers to the Company any and all right, title, or
interest that the Employee may have in the Intellectual Property under
copyright, patent, trade secret and trademark law, in perpetuity or for the
longest period otherwise permitted by law, without the necessity of further
consideration. The Company shall be entitled to obtain and hold in its own name
all copyrights, patents, trade secrets, and trademarks with respect thereto.
<PAGE> 112
(iii) Employee further agrees to reveal promptly all
information relating to the same to an appropriate officer of the Company and to
cooperate with the Company and execute such documents as may be necessary or
appropriate (A) in the event that the Company desires to seek copyright, patent
or trademark protection, or other analogous protection, thereafter relating to
the Intellectual Property, and when such protection is obtained, to renew and
restore the same, and (B) to defend any opposition proceedings in respect of
obtaining and maintaining such copyright, patent or trademark protection, or
other analogous protection.
(iv) In the event the Company is unable after reasonable
effort to secure Employee's signature on any of the documents referenced in
Section 8(b)(iii) hereof, whether because of Employee's physical or mental
incapacity or for any other reason whatsoever, Employee hereby irrevocably
designates and appoints the Company and its duly authorized officers and agents
as Employee's agent and attorney-in-fact, to act for and in his behalf and stead
to execute and file any such documents and to do all other lawfully permitted
acts to further the prosecution and issuance of any such copyright, patent or
trademark protection, or other analogous protection, with the same legal force
and effect as if executed by Employee.
9. Covenant Not to Compete. The Employee shall not, during the Term and
for a period of three (3) years thereafter (such period, the "Restricted
Period"), do any of the following directly or indirectly, within the continental
United States, without the prior written consent of the Company:
(a) engage or participate in any business activity competitive
with the Business of the Company;
(b) become interested in (as owner, stockholder, lender,
partner, co-venturer, director, officer, employee, agent, consultant or
otherwise) any person, firm, corporation, association or other entity engaged in
any business that is competitive with the Business of the Company.
Notwithstanding the foregoing, Employee may hold not more than one percent (1%)
of the outstanding securities of any class of any publicly-traded securities of
a company that is engaged in activities referenced in Section 9(a) hereof;
(c) solicit or call on, either directly or indirectly, in
connection with any business which is competitive with the Business of the
Company, any (i) customer with whom the Company shall have dealt at any time or
(ii) any distributor, supplier or other contracting party with whom the Company
shall have dealt;
(d) influence or attempt to influence any supplier,
distributor, customer or potential customer of the Company to terminate or
modify any written or oral agreement or course of dealing with the Company; or
(e) except in his capacity as an employee of the Company,
influence or attempt to influence any person to either (i) terminate or modify
his employment, consulting, agency, distributorship or other arrangement with
the Company or (ii) employ or retain, or arrange to have any other person or
entity employ or retain, any person who has been employed or retained by the
Company as an employee, consultant, agent or distributor of the Company at any
time during the two year period immediately preceding the termination of
Employee's employment hereunder.
<PAGE> 113
10. Termination. Employee's employment hereunder may be terminated
during the Term upon the occurrence of any one of the events described in this
Section 10. Upon termination, Employee shall be entitled only to such
compensation and benefits as described in this Section 10.
10.1. Termination by Death or Permanent Disability.
(a) In the event of Employee's death or Permanent Disability
(as defined below) during the Term, Employee's employment hereunder shall be
terminated thereby and the Company shall pay to Employee or Employee's
executors, legal representatives or administrators an amount equal to the vested
or accrued and unpaid portion of his Base Salary, Benefits and other forms of
compensation and benefits payable or provided in accordance with the terms of
any then existing compensation or benefit plan or arrangement ("Other
Compensation").
(b) Except as specifically set forth in this Section 10.1, the
Company shall have no liability or obligation hereunder to Employee's executors,
legal representatives, administrators, heirs or assigns or any other person
claiming under or through him by reason of Employee's death or Permanent
Disability, except that Employee's executors, legal representatives or
administrators will be entitled to receive the payment prescribed under any
death or disability benefits plan in which he is a participant as an employee of
the Company and to exercise any rights afforded under any compensation or
benefit plan then in effect. For the purposes of this Agreement, "Permanent
Disability" shall have the same meaning as such phrase is given under the long
term disability plan sponsored by the Company or, in the absence of such policy,
as determined by a physician selected by the Company and reasonably satisfactory
to Employee or his personal representative.
10.2. Termination for Cause.
(a) The Company may terminate Employee's employment
hereunder at any time for "cause" upon written notice to Employee. For purposes
of this Agreement, "cause" shall mean, in each case as determined by a majority
of the Board of Directors: (i) any breach by Employee of any of his material
obligations under this Agreement (other than as a result of incapacity due to
physical or mental illness), in each case if such breach is not cured within
thirty (30) calendar days after written notice thereof to Employee by Company,
(ii) commission of a felony or a crime involving moral turpitude or other
commission of any act or omission of Employee involving dishonesty, fraud,
embezzlement, theft, substance abuse or sexual misconduct with respect to the
Company or any of its affiliates or subsidiaries or any of their employees,
vendors, suppliers, distributors or customers, (iii) Employee's substantial
neglect of duties or failure to follow a directive of the Board of Directors,
after written notice from the Board of Directors of such neglect or failure has
not been cured within thirty (30) days after the Employee receives such notice,
(iv) the Employee's misappropriation of funds or assets of the Company or one of
its affiliates or subsidiaries for personal use, or (v) the Employee's gross
negligence or willful misconduct in the performance of his duties.
(b) In the event of a termination of Employee's
employment hereunder pursuant to Section 10.2(a), Employee shall be entitled to
receive all vested or accrued but unpaid (as of the effective date of such
termination) Base Salary, Benefits and Other Compensation. All Base Salary,
Benefits and Other Compensation shall cease at the time of such termination,
subject to the terms of any benefit or compensation plan then in force and
applicable to Employee. Except as specifically set forth in this Section 10.2,
the Company shall have no liability or obligation hereunder by reason of
Employee's termination pursuant to this Section 10.2.
<PAGE> 114
10.3. Termination Without Cause.
In the event of termination by the Company of
Employee's employment hereunder without Cause, Employee shall be entitled to
receive all accrued, but unpaid (as of the effective date of such termination)
Base Salary, Benefits and Other Compensation, plus an amount equal to One
hundred percent (100%) of the Employee's annual Base Salary (as of the date of
termination) for the remainder of the term of this Agreement or twelve months,
whichever is longer.
10.4. Termination by Employee.
(a) Employee may terminate his employment for any
reason upon ninety (90) days' written notice to Company.
(b) In the event of termination of Employee's
employment hereunder pursuant to Section 10.4(a), Employee shall be entitled to
receive all accrued but unpaid (as of the effective date of such termination)
Base Salary, Benefits and Other Compensation. All Base Salary, Benefits and
Other Compensation shall cease at the time of such termination, subject to the
terms of any benefit or compensation plan then in force and applicable to
Employee.
11. Indemnification. The Company shall indemnify Employee and shall
save and hold Employee harmless from, against, for, and in respect of, any and
all damages, losses, obligations, deficiencies, costs and expenses, including,
without limitation, reasonable attorneys' fees and other costs and expenses,
incident to, or arising out of, any threatened, pending or completed suit,
action, claim or proceeding, whether civil, criminal, administrative or
investigative, suffered, incurred or required to be paid by Employee by reason
of being a director, officer, employee or agent of the Company or by reason of
service, at the request of the Company, as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise (whether or not Employee continues to be a director, officer,
employee or agent of the Company or such corporation, partnership, joint
venture, trust or other enterprise at the time such action, suit or proceeding
is brought or threatened) if the Board of Directors determines that Employee's
act or omission was taken or made in good faith and in a manner reasonably
believed to be in, or not inconsistent with, the best interests of the Company;
provided, that such act or omission did not constitute gross negligence, willful
misconduct or fraud. The foregoing right of indemnification shall be in addition
to any rights to which Employee may otherwise be entitled and shall inure to the
benefit of Employee's heirs, executors or administrators. If authorized under
the circumstances by the Board of Directors of the Company, the Company may pay
the expenses incurred by Employee (including without limitation reasonable
attorneys' fees) in defending any action, suit or proceeding upon receipt of an
undertaking by Employee to repay such payment if there shall be a final
adjudication or determination that it is not entitled to indemnification as
provided herein.
12. Other Agreements. Employee represents and warrants to the Company
that:
(a) There are no restrictions, agreements or
understandings whatsoever to which Employee is a party which would prevent or
make unlawful Employee's execution of this Agreement or Employee's employment
hereunder, or which is or would be inconsistent or in conflict with this
Agreement or Employee's employment hereunder, or would prevent, limit or impair
in any way the performance by Employee of his obligations hereunder;
<PAGE> 115
(b) That Employee's execution of this Agreement and Employee's
employment hereunder shall not constitute a breach of any contract, agreement or
understanding, oral or written, to which Employee is a party or by which
Employee is bound;
(c) That Employee is free to execute this Agreement and to
enter into the employ of the Company pursuant to the provisions set forth
herein; and
(d) That Employee shall disclose the existence and terms of
the restrictive covenants set forth in this Agreement to any employer that the
Employee may work for during the term of this Agreement (which employment is not
hereby authorized) or after the termination of the Employee's employment at the
Company.
13. Survival of Provisions. The provisions of this Agreement set forth
in Sections 7, 8, 9 and 22 hereof shall survive the termination of Employee's
employment hereunder.
14. Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the Company and Employee and their respective successors,
executors, administrators, heirs and/or permitted assigns; provided, however,
that neither Employee nor the Company may make any assignment of this Agreement
or any interest herein, by operation of law or otherwise, without the prior
written consent of the other party hereto, except that, without such consent,
the Company may assign this Agreement to any successor to all or substantially
all of its assets and business by means of liquidation, dissolution, merger,
consolidation, transfer of assets, or otherwise, provided that such successor
entity assumes in writing all of the obligations of the Company under this
Agreement. Except as provided in this Section 14, this Agreement is not intended
to, and shall not, confer any rights upon any third parties.
15. Notice. Any notice or communication required or permitted under
this Agreement shall be made in writing and sent by certified or registered
mail, return receipt requested, addressed as follows:
If to Employee:
William K. Pollock
---------------------
---------------------
---------------------
If to the Company:
Optimation Technology, Inc.
c/o Nematron Corporation
5840 Interface Drive
Ann Arbor, MI 48103
Attn: Matthew S. Galvez
Fax: (734) 994-8074
or to such other address as either party may from time to time duly specify by
notice given to the other party in the manner specified above.
<PAGE> 116
16. Entire Agreement; Amendments. This Agreement, contains the entire
agreement and understanding of the parties hereto relating to the subject matter
hereof, and merge and supersede all prior and contemporaneous discussions,
agreements and understandings of every nature between the parties hereto
relating to the employment of Employee with the Company. This Agreement may not
be changed or modified, except by an Agreement in writing signed by each of the
parties hereto.
17. Waiver. The waiver of the breach of any term or provision of this
Agreement shall not operate as or be construed to be a waiver of any other or
subsequent breach of this Agreement.
18. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Michigan.
19. Waiver of Jury Trial. Each of the parties hereto hereby irrevocably
waives any and all right to trial by jury of any claim or cause of action in any
legal proceeding arising out of or related to this Agreement or the transactions
or events contemplated hereby or any course of conduct, course of dealing,
statements (whether verbal or written) or actions of any party hereto. The
parties hereto each agree that any and all such claims and causes of action
shall be tried by a court trial without a jury. Each of the parties hereto
further waives any right to seek to consolidate any such legal proceeding in
which a jury trial has been waived with any other legal proceeding in which a
jury trial cannot or has not been waived.
20. Invalidity. In case any one or more of the provisions contained in
this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect the validity of any other provision of this Agreement, and such
provision(s) shall be deemed modified to the extent necessary to make it
enforceable.
21. Section Headings. The section headings in this Agreement are for
convenience only, and form no part of this Agreement and shall not affect its
interpretation.
22. Specific Enforcement: Extension of Period.
(a) Employee acknowledges that the restrictions contained in
Sections 7, 8, and 9 hereof are reasonable and necessary to protect the
legitimate interests of the Company and its affiliates and that the Company
would not have entered into this Agreement in the absence of such restrictions.
Employee also acknowledges that any breach by him of Sections 7, 8, and 9 hereof
will cause continuing and irreparable injury to the Company for which monetary
damages would not be an adequate remedy. The Employee shall not, in any action
or proceeding to enforce any of the provisions of this Agreement, assert the
claim or defense that an adequate remedy at law exists. In the event of such
breach by Employee, the Company shall have the right to enforce the provisions
of Sections 7, 8 or 9 of this Agreement by seeking injunctive or other relief in
any court, and this Agreement shall not in any way limit remedies of law or in
equity otherwise available to the Company. If an action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to recover, in addition to any other relief, reasonable
attorneys' fees, costs and disbursements. In the event that the provisions of
Sections 7, 8 or 9 hereof should ever be adjudicated to exceed the time,
geographic, or other limitations permitted by applicable law in any applicable
jurisdiction, then such provisions shall be deemed reformed in such jurisdiction
to the maximum time, geographic, or other limitations permitted by applicable
law.
<PAGE> 117
(b) In the event that Employee shall be in breach of any of
the restrictions contained in Section 9 hereof, then the Restricted Period shall
be extended for a period of time equal to the period of time that Employee is in
breach of such restriction.
22. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which
together shall be deemed to be one and the same instrument.
<PAGE> 118
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed the day and year first written above.
OPTIMATION TECHNOLOGY, INC.
By:
-----------------------------------------------
Name:
Title:
EMPLOYEE
-----------------------------------------------
William K. Pollock
<PAGE> 119
EMPLOYMENT AGREEMENT
OF TIMOTHY A. LASCH
THIS EMPLOYMENT AGREEMENT (this "Agreement"), is made this day of
, 2000, by and between Timothy A. Lasch ("Employee") and OPTIMATION
TECHNOLOGY, INC., a New York corporation (the "Company").
WHEREAS, pursuant to that certain Agreement and Plan of Merger (the
"Merger Agreement") dated as of November , 2000 by and among Nematron
Corporation ("Nematron"), Nematron Acquisition Corp. ("Sub"), the Employee and
the other shareholders of the Company, Nematron acquired, through a merger with
Sub in which the Company was the surviving corporation (the "Acquisition") all
of the issued and outstanding stock of the Company;
WHEREAS, as a condition precedent to the consummation of the
Acquisition, Nematron has required Employee and the Company to enter into this
Agreement to ensure the continued employment of Employee by the Company;
WHEREAS, the consummation of the transactions contemplated by the
Purchase Agreement is also a condition precedent to the effectiveness of this
Agreement;
WHEREAS, the Company is engaged in the business of providing process
and mechanical design, instrumentation and electrical design, system
integration, software programming and computer aided drafting to its customers
in various industry segments (the "Business"); and
WHEREAS, the Company desires to employ Employee, and Employee desires
to be employed by the Company upon the terms and conditions set forth in this
Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
obligations contained herein, and intending to be legally bound, the parties,
subject to the terms and conditions set forth herein, agree as follows:
1. Employment and Term. The Company hereby employs Employee, and
Employee hereby accepts employment with the Company as its Vice President (the
"Position") for a period commencing on the date hereof and continuing for a
period of four (4) years, subject to earlier termination pursuant to the
provisions of Section 10 hereof (the "Term").
2. Duties. During the Term, Employee shall serve the Company faithfully
and to the best of his ability and shall devote his full attention, skill and
efforts to the performance of the duties required by or appropriate for his
Position, shall use his best skill and abilities to promote the interest of the
Company, and shall work with other officers and employees of the Company in a
competent and professional manner. Employee agrees to assume such duties and
responsibilities as are commensurate with his Position. Employee shall report
directly to the President of the Company. Employee shall be based in the
Company's offices in the Rochester, New York area.
3. Other Business Activities. During the Term, Employee will not,
without the prior approval of the Board of Directors, directly or indirectly
engage in any other business activities or pursuits which may interfere with the
performance of his responsibilities and obligations pursuant to this Agreement.
<PAGE> 120
4. Compensation. The Company shall pay Employee, and Employee hereby
agrees to accept, as compensation for all services rendered hereunder and for
Employee's covenant not to compete provided for in Section 9 hereof, an initial
base salary of ($48.30) per hour for not less than 2,080 hours per calendar
year, less applicable withholdings, commencing upon closing of the Acquisition
(the "Base Salary"), and ($72.45) per hour for each hour in excess of 2,080
hours per calendar year, payable in a manner and at such times as is consistent
with the payroll practices of the Company or Nematron. The Employee shall also
be entitled to participate in such incentive bonus or long-term incentive
programs as may be established from time to time by the compensation committee
appointed by the Board of Directors or, if none, the Board of Directors, upon
terms established by the compensation committee or the Board of Directors, and,
to the extent and upon the terms determined by Nematron's board of directors in
its sole discretion, in Nematron's Gainsharing Program and Nematron's Long-Term
Incentive Plan.
5. Other Benefits. Employee shall be entitled to those employee
benefits which the Company, as determined by the compensation committee or Board
of Directors, may from time to time generally makes available to its senior
executives ("Benefits"). The Benefits shall initially include, without
limitation, health insurance, life insurance, and disability income insurance
substantially similar to the disability income insurance policy in effect for
Employee's benefit as of November 1, 2000, and such other benefits as the
compensation committee or Board of Directors may determine from time to time.
6. Reimbursement of Expenses. Subject to such conditions as the Company
may from time to time determine, Employee shall be reimbursed for ordinary and
reasonable documented business expenses incurred by him in the performance of
his duties under this Agreement.
7. Confidentiality. Employee recognizes and acknowledges that the
Proprietary Information (as hereinafter defined) is a valuable, special and
unique asset of the Business of the Company. As a result, both during the Term
and thereafter, Employee shall not, without the prior written consent of the
Company, for any reason, either directly or indirectly divulge to any
third-party or use for his own benefit or for any purpose other than the
exclusive benefit of the Company any confidential, proprietary, business or
technical information or trade secrets of the Company or of any subsidiary or
affiliate of the Company ("Proprietary Information") revealed, obtained or
developed in the course of his employment with the Company. Such Proprietary
Information shall include, but shall not be limited to, the intangible personal
property described in Section 8(b) hereof, any information relating to methods
of production, manufacture, service, research, computer codes or instructions
(including source and object code listings, program logic algorithms,
subroutines, modules or other subparts of computer programs and related
documentation, including program notation), computer processing systems and
techniques, concepts, layouts, flowcharts, specifications, know-how any
associated user or service manuals or other like textual materials (including
any other data and materials used in performing the Employee's duties), all
computer inputs and outputs (regardless of the media on which stored or
located), hardware and software configurations, designs, architecture,
interfaces, plans, sketches, blueprints, any other materials prepared by
Employee in the course of, relating to or arising out of his employment by the
Company or prepared by any other Company employee or contractor for the Company
or its customers, costs, business studies, business procedures, finances,
marketing data, methods, plans and efforts, the identities of customers,
contractors and suppliers and prospective customers, contractors and suppliers,
the terms of contracts and agreements with customers, contractors and suppliers,
the Company's relationship with actual and prospective customers, contractors
and suppliers and the needs and requirements of, and the Company's course of
dealing with, any such actual or prospective customers, contractors and
suppliers, personnel information, customer and vendor credit information and any
other materials that have not
<PAGE> 121
been made available to the general public; provided, that nothing herein
contained shall restrict Employee's ability to make such disclosures during the
course of his employment as may be necessary or appropriate to the effective and
efficient discharge of the duties required by or appropriate for his Position or
as such disclosures may be required by law; and further provided, that nothing
herein contained shall restrict Employee from divulging or using for his own
benefit or for any other purpose any Proprietary Information that is readily
available to the general public so long as such information did not become
available to the general public as a direct or indirect result of Employee's
breach of this Section 7. Failure by the Company to mark any of the Proprietary
Information as confidential or proprietary shall not affect its status as
Proprietary Information under the terms of this Agreement.
8. Inventions and Property.
(a) All right, title and interest in and to Proprietary
Information shall be and remain the sole and exclusive property of the Company.
During the Term, Employee shall not remove from the Company's offices or
premises any documents, records, notebooks, files, correspondence, reports,
memoranda or similar materials of, or containing, Proprietary Information or
other materials or property of any kind belonging to the Company, unless
necessary or appropriate in accordance with the duties and responsibilities
required by or appropriate for his Position, and, in the event that such
materials or property are removed, all of the foregoing shall be returned to
their proper files or places of safekeeping as promptly as possible after the
removal shall serve its specific purpose. Employee shall not make, retain,
remove and/or distribute any copies of any of the foregoing for any reason
whatsoever, except as may be necessary in the discharge of his assigned duties,
and shall not divulge to any third person the nature of and/or contents of any
of the foregoing or of any other oral or written information to which he may
have access or with which for any reason he may become familiar, except as
disclosure shall be necessary in the performance of his duties. Upon the
termination of Employee's employment with the Company, he shall leave with or
return to the Company all originals and copies of the foregoing then in his
possession, whether prepared by Employee or by others.
(b) (i) Employee agrees that all right, title and interest
in and to any innovations, designs, systems, analyses, ideas for marketing
programs, customer contacts, and all copyrights, patents, trademarks and trade
names, or similar intangible personal property which have been or are developed
or created in whole or in part by Employee (A) at any time and at any place
during the Employee's employment with the Company and which, in the case of any
or all of the foregoing, are related to and used in connection with the Business
of the Company, (B) as a result of tasks assigned to Employee by the Company or
(C) from the use of premises or personal property (whether tangible or
intangible) owned, leased or contracted for by the Company (collectively, the
"Intellectual Property"), shall be and remain forever the sole and exclusive
property of the Company. The Employee shall promptly disclose to the Company all
Intellectual Property and the Employee shall have no claim for additional
compensation for the Intellectual Property.
(ii) The Employee acknowledges that all the
Intellectual Property that is copyrightable shall be considered a work made
for hire under United States Copyright Law. To the extent that any copyrightable
Intellectual Property may not be considered a work made for hire under the
applicable provisions of the United States Copyright Law, or to the extent that,
notwithstanding the foregoing provisions, the Employee may retain an interest in
any Intellectual Property that is not copyrightable, the Employee hereby
irrevocably assigns and transfers to the Company any and all right, title, or
interest that the Employee may have in the Intellectual Property under
copyright, patent, trade secret and trademark law, in perpetuity or for the
longest period otherwise permitted by law, without the
<PAGE> 122
necessity of further consideration. The Company shall be entitled to obtain and
hold in its own name all copyrights, patents, trade secrets, and trademarks with
respect thereto.
(iii) Employee further agrees to reveal promptly
all information relating to the same to an appropriate officer of the Company
and to cooperate with the Company and execute such documents as may be necessary
or appropriate (A) in the event that the Company desires to seek copyright,
patent or trademark protection, or other analogous protection, thereafter
relating to the Intellectual Property, and when such protection is obtained, to
renew and restore the same, and (B) to defend any opposition proceedings in
respect of obtaining and maintaining such copyright, patent or trademark
protection, or other analogous protection.
(iv) In the event the Company is unable after
reasonable effort to secure Employee's signature on any of the documents
referenced in Section 8(b)(iii) hereof, whether because of Employee's physical
or mental incapacity or for any other reason whatsoever, Employee hereby
irrevocably designates and appoints the Company and its duly authorized officers
and agents as Employee's agent and attorney-in-fact, to act for and in his
behalf and stead to execute and file any such documents and to do all other
lawfully permitted acts to further the prosecution and issuance of any such
copyright, patent or trademark protection, or other analogous protection, with
the same legal force and effect as if executed by Employee.
9. Covenant Not to Compete. The Employee shall not, during the
Term and for a period of three (3) years thereafter (such period, the
"Restricted Period"), do any of the following directly or indirectly, within the
continental United States, without the prior written consent of the Company:
(a) engage or participate in any business activity
competitive with the Business of the Company;
(b) become interested in (as owner, stockholder, lender,
partner, co-venturer, director, officer, employee, agent, consultant or
otherwise) any person, firm, corporation, association or other entity engaged in
any business that is competitive with the Business of the Company.
Notwithstanding the foregoing, Employee may hold not more than one percent (1%)
of the outstanding securities of any class of any publicly-traded securities of
a company that is engaged in activities referenced in Section 9(a) hereof;
(c) solicit or call on, either directly or indirectly, in
connection with any business which is competitive with the Business of the
Company, any (i) customer with whom the Company shall have dealt at any time or
(ii) any distributor, supplier or other contracting party with whom the Company
shall have dealt;
(d) influence or attempt to influence any supplier,
distributor, customer or potential customer of the Company to terminate or
modify any written or oral agreement or course of dealing with the Company; or
(e) except in his capacity as an employee of the Company,
influence or attempt to influence any person to either (i) terminate or modify
his employment, consulting, agency, distributorship or other arrangement with
the Company or (ii) employ or retain, or arrange to have any other person or
entity employ or retain, any person who has been employed or retained by the
Company as an employee, consultant, agent or distributor of the Company at any
time during the two year period immediately preceding the termination of
Employee's employment hereunder.
<PAGE> 123
10. Termination. Employee's employment hereunder may be
terminated during the Term upon the occurrence of any one of the events
described in this Section 10. Upon termination, Employee shall be entitled only
to such compensation and benefits as described in this Section 10.
10.1. Termination by Death or Permanent Disability.
(a) In the event of Employee's death or Permanent
Disability (as defined below) during the Term, Employee's employment hereunder
shall be terminated thereby and the Company shall pay to Employee or Employee's
executors, legal representatives or administrators an amount equal to the vested
or accrued and unpaid portion of his Base Salary, Benefits and other forms of
compensation and benefits payable or provided in accordance with the terms of
any then existing compensation or benefit plan or arrangement ("Other
Compensation").
(b) Except as specifically set forth in this Section
10.1, the Company shall have no liability or obligation hereunder to Employee's
executors, legal representatives, administrators, heirs or assigns or any other
person claiming under or through him by reason of Employee's death or Permanent
Disability, except that Employee's executors, legal representatives or
administrators will be entitled to receive the payment prescribed under any
death or disability benefits plan in which he is a participant as an employee of
the Company and to exercise any rights afforded under any compensation or
benefit plan then in effect. For the purposes of this Agreement, "Permanent
Disability" shall have the same meaning as such phrase is given under the long
term disability plan sponsored by the Company or, in the absence of such policy,
as determined by a physician selected by the Company and reasonably satisfactory
to Employee or his personal representative.
10.2. Termination for Cause.
(a) The Company may terminate Employee's
employment hereunder at any time for "cause" upon written notice to Employee.
For purposes of this Agreement, "cause" shall mean, in each case as determined
by a majority of the Board of Directors: (i) any breach by Employee of any of
his material obligations under this Agreement (other than as a result of
incapacity due to physical or mental illness), in each case if such breach is
not cured within thirty (30) calendar days after written notice thereof to
Employee by Company, (ii) commission of a felony or a crime involving moral
turpitude or other commission of any act or omission of Employee involving
dishonesty, fraud, embezzlement, theft, substance abuse or sexual misconduct
with respect to the Company or any of its affiliates or subsidiaries or any of
their employees, vendors, suppliers, distributors or customers, (iii) Employee's
substantial neglect of duties or failure to follow a directive of the Board of
Directors, after written notice from the Board of Directors of such neglect or
failure has not been cured within thirty (30) days after the Employee receives
such notice, (iv) the Employee's misappropriation of funds or assets of the
Company or one of its affiliates or subsidiaries for personal use, or (v) the
Employee's gross negligence or willful misconduct in the performance of his
duties.
(b) In the event of a termination of Employee's
employment hereunder pursuant to Section 10.2(a), Employee shall be entitled
to receive all vested or accrued but unpaid (as of the effective date of such
termination) Base Salary, Benefits and Other Compensation. All Base Salary,
Benefits and Other Compensation shall cease at the time of such termination,
subject to the terms of any benefit or compensation plan then in force and
applicable to Employee. Except as specifically set forth in this Section 10.2,
the Company shall have no liability or obligation hereunder by reason of
Employee's termination pursuant to this Section 10.2.
<PAGE> 124
10.3. Termination Without Cause.
In the event of termination by the Company of
Employee's employment hereunder without Cause, Employee shall be entitled to
receive all accrued, but unpaid (as of the effective date of such termination)
Base Salary, Benefits and Other Compensation, plus an amount equal to One
hundred percent (100%) of the Employee's annual Base Salary (as of the date of
termination) for the remainder of the term of this Agreement or twelve months,
whichever is longer.
10.4. Termination by Employee.
(a) Employee may terminate his employment
for any reason upon ninety (90) days' written notice to Company.
(b) In the event of termination of Employee's
employment hereunder pursuant to Section 10.4(a), Employee shall be entitled
to receive all accrued but unpaid (as of the effective date of such termination)
Base Salary, Benefits and Other Compensation. All Base Salary, Benefits and
Other Compensation shall cease at the time of such termination, subject to the
terms of any benefit or compensation plan then in force and applicable to
Employee.
11. Indemnification. The Company shall indemnify Employee and shall
save and hold Employee harmless from, against, for, and in respect of, any and
all damages, losses, obligations, deficiencies, costs and expenses, including,
without limitation, reasonable attorneys' fees and other costs and expenses,
incident to, or arising out of, any threatened, pending or completed suit,
action, claim or proceeding, whether civil, criminal, administrative or
investigative, suffered, incurred or required to be paid by Employee by reason
of being a director, officer, employee or agent of the Company or by reason of
service, at the request of the Company, as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise (whether or not Employee continues to be a director, officer,
employee or agent of the Company or such corporation, partnership, joint
venture, trust or other enterprise at the time such action, suit or proceeding
is brought or threatened) if the Board of Directors determines that Employee's
act or omission was taken or made in good faith and in a manner reasonably
believed to be in, or not inconsistent with, the best interests of the Company;
provided, that such act or omission did not constitute gross negligence, willful
misconduct or fraud. The foregoing right of indemnification shall be in addition
to any rights to which Employee may otherwise be entitled and shall inure to the
benefit of Employee's heirs, executors or administrators. If authorized under
the circumstances by the Board of Directors of the Company, the Company may pay
the expenses incurred by Employee (including without limitation reasonable
attorneys' fees) in defending any action, suit or proceeding upon receipt of an
undertaking by Employee to repay such payment if there shall be a final
adjudication or determination that it is not entitled to indemnification as
provided herein.
12. Other Agreements. Employee represents and warrants to the
Company that:
(a) There are no restrictions, agreements or understandings
whatsoever to which Employee is a party which would prevent or make unlawful
Employee's execution of this Agreement or Employee's employment hereunder, or
which is or would be inconsistent or in conflict with this Agreement or
Employee's employment hereunder, or would prevent, limit or impair in any way
the performance by Employee of his obligations hereunder;
<PAGE> 125
(b) That Employee's execution of this Agreement and
Employee's employment hereunder shall not constitute a breach of any contract,
agreement or understanding, oral or written, to which Employee is a party or by
which Employee is bound;
(c) That Employee is free to execute this Agreement
and to enter into the employ of the Company pursuant to the provisions set forth
herein; and
(d) That Employee shall disclose the existence and terms of
the restrictive covenants set forth in this Agreement to any employer that the
Employee may work for during the term of this Agreement (which employment is not
hereby authorized) or after the termination of the Employee's employment at the
Company.
13. Survival of Provisions. The provisions of this Agreement
set forth in Sections 7, 8, 9 and 22 hereof shall survive the termination of
Employee's employment hereunder.
14. Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the Company and Employee and their respective
successors, executors, administrators, heirs and/or permitted assigns; provided,
however, that neither Employee nor the Company may make any assignment of this
Agreement or any interest herein, by operation of law or otherwise, without the
prior written consent of the other party hereto, except that, without such
consent, the Company may assign this Agreement to any successor to all or
substantially all of its assets and business by means of liquidation,
dissolution, merger, consolidation, transfer of assets, or otherwise, provided
that such successor entity assumes in writing all of the obligations of the
Company under this Agreement. Except as provided in this Section 14, this
Agreement is not intended to, and shall not, confer any rights upon any third
parties.
15. Notice. Any notice or communication required or permitted
under this Agreement shall be made in writing and sent by certified or
registered mail, return receipt requested, addressed as follows:
If to Employee:
Timothy Lasch
---------------------
---------------------
---------------------
If to the Company:
Optimation Technology, Inc.
c/o Nematron Corporation
5840 Interface Drive
Ann Arbor, MI 48103
Attn: Matthew S. Galvez
Fax: (734) 994-8074
or to such other address as either party may from time to time duly specify by
notice given to the other party in the manner specified above.
<PAGE> 126
16. Entire Agreement; Amendments. This Agreement, contains the
entire agreement and understanding of the parties hereto relating to the subject
matter hereof, and merge and supersede all prior and contemporaneous
discussions, agreements and understandings of every nature between the parties
hereto relating to the employment of Employee with the Company. This Agreement
may not be changed or modified, except by an Agreement in writing signed by each
of the parties hereto.
17. Waiver. The waiver of the breach of any term or provision of
this Agreement shall not operate as or be construed to be a waiver of any
other or subsequent breach of this Agreement.
18. Governing Law. This Agreement shall be construed and
enforced in accordance with the laws of the State of Michigan.
19. Waiver of Jury Trial. Each of the parties hereto hereby
irrevocably waives any and all right to trial by jury of any claim or cause of
action in any legal proceeding arising out of or related to this Agreement or
the transactions or events contemplated hereby or any course of conduct, course
of dealing, statements (whether verbal or written) or actions of any party
hereto. The parties hereto each agree that any and all such claims and causes of
action shall be tried by a court trial without a jury. Each of the parties
hereto further waives any right to seek to consolidate any such legal proceeding
in which a jury trial has been waived with any other legal proceeding in which a
jury trial cannot or has not been waived.
20. Invalidity. In case any one or more of the provisions
contained in this Agreement shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect the validity of any other provision of this
Agreement, and such provision(s) shall be deemed modified to the extent
necessary to make it enforceable.
21. Section Headings. The section headings in this Agreement
are for convenience only, and form no part of this Agreement and shall not
affect its interpretation.
22. Specific Enforcement: Extension of Period.
(a) Employee acknowledges that the restrictions
contained in Sections 7, 8, and 9 hereof are reasonable and necessary to protect
the legitimate interests of the Company and its affiliates and that the Company
would not have entered into this Agreement in the absence of such restrictions.
Employee also acknowledges that any breach by him of Sections 7, 8, and 9 hereof
will cause continuing and irreparable injury to the Company for which monetary
damages would not be an adequate remedy. The Employee shall not, in any action
or proceeding to enforce any of the provisions of this Agreement, assert the
claim or defense that an adequate remedy at law exists. In the event of such
breach by Employee, the Company shall have the right to enforce the provisions
of Sections 7, 8 or 9 of this Agreement by seeking injunctive or other relief in
any court, and this Agreement shall not in any way limit remedies of law or in
equity otherwise available to the Company. If an action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to recover, in addition to any other relief, reasonable
attorneys' fees, costs and disbursements. In the event that the provisions of
Sections 7, 8 or 9 hereof should ever be adjudicated to exceed the time,
geographic, or other limitations permitted by applicable law in any applicable
jurisdiction, then such provisions shall be deemed reformed in such jurisdiction
to the maximum time, geographic, or other limitations permitted by applicable
law.
<PAGE> 127
(b) In the event that Employee shall be in breach of any
of the restrictions contained in Section 9 hereof, then the Restricted Period
shall be extended for a period of time equal to the period of time that Employee
is in breach of such restriction.
22. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which
together shall be deemed to be one and the same instrument.
<PAGE> 128
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed the day and year first written above.
OPTIMATION TECHNOLOGY, INC.
By:
------------------------------------
Name:
Title:
EMPLOYEE
---------------------------------------
Timothy A. Lasch
<PAGE> 129
EXHIBIT B
<PAGE> 130
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is made this day
of , 2000, by and between William K. Pollock, Timothy A. Lasch, and
Pollock and Lasch, as Trustees of the Optimation Technology, Inc. Employee Stock
Ownership Trust (collectively, the "Holders"), and NEMATRON CORPORATION, a
Michigan corporation, with offices at 5840 Interface Drive, Ann Arbor, Michigan
48103 ("Company").
Nematron, Nematron Acquisition Sub, Optimation Technology, Inc. and the
Holders are parties to an Agreement and Plan of Merger dated November , 2000
herewith pursuant to which the Holders, in connection with the acquisition by
Nematron of Optimation Technology, Inc. ("OTI") through a merger of its
subsidiary with and into OTI, are receiving 3,112,500 shares of Nematron's
Common Stock, no par value per share ("Common Stock"). In connection with the
issuance of the Common Stock, Nematron has agreed to provide the Holders with
the certain registration rights.
1. CERTAIN DEFINITIONS. As used in this Agreement, the
following capitalized terms shall have the following respective meanings:
"COMMISSION" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
"REGISTRABLE SECURITIES" shall mean the 3,112,500 shares of
Nematron's Common Stock issued to the Holders, and any securities issued in
respect of such shares upon any conversion, stock split, stock dividend,
recapitalization or similar event, which have not been sold to the public
pursuant to a Registration.
The terms "REGISTER, "REGISTERED" AND "REGISTRATION" shall
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable rules and
regulations promulgated thereunder, and the declaration or ordering of the
effectiveness of such registration statement.
"REGISTRATION EXPENSES" shall mean all expenses incurred by
Nematron in compliance with Section 2 hereof, including, without limitation, all
Registration and filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for Nematron, blue sky fees and expenses, and the
expenses of any special audits incident to or required by any such Registration
but shall not include Selling Expenses, fees and disbursements of counsel for
the Holders.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"SELLING EXPENSES" shall mean all underwriting discounts,
selling commissions and stock transfer fees applicable to the sale of
Registrable Securities and all fees and disbursements of counsel for the
Holders.
<PAGE> 131
2. COMPANY REGISTRATION.
2.1 NOTICE OF REGISTRATION. If at any time or from time to
time Nematron shall determine to Register any of its capital stock or other
issued securities, either for its own account or the account of a security
holder or holders (other than the Holders), other than (x) a Registration
relating solely to employee benefit plans, or (y) a Registration relating solely
to a Commission Rule 145 transaction, or (z) a Registration on any Registration
form which does not permit secondary sales or does not include substantially the
same information as would be required to be included in a Registration statement
covering the sale of Registrable Securities, Nematron shall:
2.1.1. promptly give to the Holders written notice thereof;
and
2.1.2. use its best efforts to include in such Registration
(and any related qualification under blue sky laws or other compliance) and in
any underwriting involved therein, all the Registrable Securities specified in a
written request or requests made by a Holder within ten (10) days after the
Holder's receipt of the written notice from Nematron described in Section 2.1.1
above, except as set forth in Section 2.2 below.
2.2 UNDERWRITING. If the Registration of which Nematron
gives notice is for a Registered public offering involving an underwriting,
Nematron shall so advise the Holders as a part of the written notice given
pursuant to Section 2.1.1. In such event the right of the Holders to
Registration pursuant to this Section 2 shall be conditioned upon the Holders'
participation in such underwriting and the inclusion of the Holders' Registrable
Securities in the underwriting to the extent provided herein. A Holder, if
proposing to distribute its securities through such underwriting, shall
(together with Nematron and the other holders of securities of Nematron with
registration rights to participate therein, distributing their securities
through such underwriting), enter into an underwriting agreement in customary
form with the managing underwriter selected for underwriting by Nematron.
Notwithstanding any other provision of this Section 2, if the managing
underwriter advises Nematron in writing that marketing factors require a
limitation on the number of shares to be underwritten, the underwriter may
(subject to the allocation priority set forth below), exclude all Registrable
Securities from or limit the number of Registrable Securities to be included in
the Registration and underwriting. If a limitation on the number of Registrable
Securities is required as a result of these limits, the number of Registrable
Securities that may be included in the Registration and underwriting shall be
allocated among all such holders requesting to participate in such Registration
in proportion, as nearly as practicable, to the respective amounts of
registrable securities which they had requested to be included in such
Registration at the time of filing the Registration statement. No Registrable
Securities excluded from the underwriting by reason of the managing
underwriter's marketing limitation shall be included in such Registration.
3. EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with any Registration, qualification or compliance pursuant to this
Agreement shall be borne by Nematron, and all Selling Expenses shall be borne by
the holders of the securities so Registered pro rata on the basis of the number
of their shares so Registered.
4. REGISTRATION PROCEDURES. In the case of each Registration,
qualification or compliance effected by Nematron pursuant to this Agreement,
Nematron will keep the Holders, if participating therein, advised in writing as
to the initiation of each Registration, qualification or compliance and as to
the completion thereof. At its expense, Nematron will use its best efforts to:
4.1. Except for offerings pursuant to Rule 145 or successors
thereto under the Securities Act, Nematron will keep such Registration,
qualification or compliance effective and current
<PAGE> 132
for a period of one hundred twenty (120) days or until the Holders have
completed the distribution described in Registration statement relating thereto,
whichever first occurs.
4.2 Nematron will furnish such number of prospectuses and
other documents incident thereto as each Holder from time to time may reasonably
request.
4.3 Nematron will notify the Holders, if Registrable
Securities are covered by a Registration statement, at any time when a
prospectus relating thereto covered by such Registration statement is required
to be delivered under the Securities Act, of the happening of any event as a
result of which the prospectus included in such Registration statement includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of circumstances then existing.
5. INDEMNIFICATION.
5.1 Nematron will indemnify the Holders, and the Holders'
legal counsel and independent accountants, with respect to which Registration,
qualification or compliance has been effected pursuant to this Agreement,
against all expenses, claims, losses, damages and liabilities (or actions in
respect thereof) including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
prospectus, offering circular or other document (including any related
registration statement, notification or the like) incident to any such
Registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by
Nematron of the Securities Act or any rule or regulation thereunder or any state
securities law applicable to Nematron and relating to action or inaction
required of Nematron in connection with any such Registration, qualification or
compliance, and will reimburse the Holders for any legal and any other expenses
reasonably incurred in connection with investigating, defending any such claim,
loss, damage, liability, or action, provided that Nematron will not be liable in
any case to the extent that any such claim, loss, damage liability or expense
arises out of or is based on any untrue statement or omission based upon written
information furnished to Nematron by such Holder and stated to be specifically
for use therein. It is agreed that the indemnity agreement contain in this
Section 5.1 shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if settlement is effected without the consent
of Nematron (which consent has not been unreasonably withheld).
5.2. Each Holder, if Registrable Securities held by him are
included in the securities as to which such Registration, qualification or
compliance is being effected, will indemnify Nematron and each of its directors
and officers, each person who controls Nematron within the meaning of the
Securities Act and the rules and regulations thereunder, each other such Holder
or holder participating in such Registration, and each of their officers,
directors and partners, and each person controlling such Holder and the legal
counsel and independent accountants of the foregoing persons against all claims,
losses, damages and liabilities (or actions in respect thereof) arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering circular
or other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse Nematron and such holders, directors,
officers, partners, persons or control persons for any legal or any other
expenses reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such
<PAGE> 133
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to Nematron
and stated to be specifically for use therein; provided, however, that the
liability and obligations of each Holder hereunder shall be limited to any
amount equal to the gross proceeds received by such Holder of Registrable
Securities sold as contemplated therein.
5.3 Each party entitled to indemnification under this Section
5 ("Indemnified Party") shall give notice to the party required to provide
indemnification ("Indemnifying Party") promptly after such Indemnified Party has
actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld). The Indemnified Party may participate in such defense
at such party's expense; provided, however, the Indemnifying Party shall bear
the expenses of such defense of the Indemnified Party (including the fees and
disbursements of one additional counsel to all Indemnified Parties which shall
be selected by the Indemnified Parties) if representation of both parties by the
same counsel would be inappropriate due to actual or potential conflicts of
interest. The omission by any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 5 except to the extent the omission results in a failure of actual
notice to the Indemnified Party and such Indemnified Party is damaged solely as
a result of the failure to give notice. No Indemnifying Party, in the defense of
any such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. Each Indemnified Party shall furnish such
information regarding itself or the claim in question as an Indemnifying Party
may reasonably request in writing and as shall be reasonably required in
connection with defense of such claim and litigation resulting therefrom.
If the indemnification provided for in this Section 5 is held by a
court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability, claim, damage, or expense referred to therein,
then the Indemnifying Party, in lieu of indemnifying such Indemnified Party
hereunder, shall contribute to the amount paid or payable by such Indemnified
Party as a result of such loss, liability, claim, damage or expense in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party on the one hand and of the Indemnified Party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage, or expense as well as any other relevant equitable considerations. The
relative fault of the Indemnifying Party and of the Indemnified Party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of material fact or the omission to state a material fact
relates to information supplied by the Indemnifying Party or by the Indemnified
Party and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in the underwriting agreement entered
into in connection with the underwritten public offering are in conflict with
the foregoing provisions, the provisions in the underwriting agreement shall
control.
6. INFORMATION BY HOLDER. Each Holder, if any of the Registrable
Securities are included in any Registration, shall furnish to Nematron such
information regarding such Holder and the distribution proposed by such Holder
as Nematron may reasonably request in writing and as shall be reasonably
required in connection with any Registration, qualification or compliance
referred to in this
<PAGE> 134
Agreement. Such information shall be furnished to Nematron by an instrument duly
executed by such Holder and stated to be specifically for use therein.
7. TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The rights to
cause Nematron to Register securities granted under Section 2 may be transferred
or assigned by a Holder to one or more permitted transferees or assignees of at
least one-third of the total number of Registrable Securities, provided that (i)
such transfer may otherwise be effected in accordance with applicable securities
laws, (ii) Nematron is given written notice by such Holder thirty (30) days
prior to said transfer or assignment, stating the name and address of each
transferee or assignee and identifying the securities with respect to which such
Registration rights are being transferred or assigned and Nematron consents to
the transfer or assignment (which consent will not be unreasonably withheld),
and (iii) that the transferee or assignee of such rights assumes the obligations
of such Holder under this Agreement and executes and delivers an assumption
agreement reasonably satisfactory to Nematron to that effect.
8. "MARKET STAND-OFF" AGREEMENT. Each Holder agrees, if requested
by Nematron and an underwriter of Common Stock (or other securities) of
Nematron, not to sell or otherwise transfer or dispose of any Common Stock (or
other securities) of Nematron held by such Holder during the one hundred fifty
(150) day period following the effective date of a Registration statement of
Nematron filed under the Securities Act, provided that all officers and
directors of Nematron enter into similar agreements. Nematron may impose
stop-transfer instructions with respect to the securities subject to the
foregoing restriction until the end of such one hundred fifty (150) day period.
9. SUSPENSION OF REGISTRATION RIGHTS. The registration rights
granted pursuant to Sections 2 hereof shall not be exercisable by any Holder
during the period in which such Holder has the ability to sell all of the
Registrable Securities held by the Holder under Rule 144 or Rule 144A during a
single ninety (90) day period.
10. DELAY OF REGISTRATION. The Holders shall not have any right to
take any actions to restrain, enjoin or otherwise delay any registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Agreement.
11. GENERAL.
11.1 GOVERNING LAW. This agreement shall be governed in all
respects by the laws of the State of Michigan without giving effect to any
conflicts of laws principles.
11.2. REMEDIES. Any person having rights under any provisions
of this Agreement will be entitled to enforce such rights specifically, to
recover damages caused by reason of any breach of any provision of this
Agreement and to exercise all other rights granted by law.
11.3. ENTIRE AGREEMENT, AMENDMENTS AND WAIVERS. This Agreement
constitutes the entire agreement of the parties hereto with respect to the
subject matter hereof and supersedes all previous agreements with respect to
such subject matter. Except as otherwise provided herein, the provisions of this
Agreement may be amended in a writing signed by Nematron and the Holders.
11.4. SUCCESSORS AND ASSIGNS. All covenants and agreements
in this Agreement by or on behalf of any of the parties hereto will bind and
inure to the benefit of the respective successors and assigns of the parties
hereto.
<PAGE> 135
11.5. NOTICES AND OTHER COMMUNICATIONS. All notices and other
communications required or permitted hereunder shall be in writing and shall be
mailed by first-class mail, postage pre paid, or delivered by hand, addressed
(i) if to the Holders, at their respective addresses set forth in the preamble
of this Agreement or at such other address as a Holder shall have furnished to
Nematron in writing, and (ii) if to Nematron, at its address set forth at the
beginning of this Agreement, or at such other address as Nematron shall have
furnished to the Holders in writing.
11.6. TITLE AND SUBTITLES. The titles of the sections and.
paragraphs of this Agreement are for convenience of reference only and are not
to, be considered in construing this Agreement.
11.7. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
<PAGE> 136
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused this Agreement to be executed by their respective officers, thereunto
duly authorized, as of the day and year first above written.
------------------------------------
William K. Pollock
Address for Notices:
------------------------------------
------------------------------------
------------------------------------
------------------------------------
Timothy A. Lasch
Address for Notices:
------------------------------------
------------------------------------
------------------------------------
OPTIMATION TECHNOLOGY, INC.
EMPLOYEE STOCK OWNERSHIP TRUST
By:
---------------------------------
William K. Pollock, Trustee
By:
---------------------------------
Timothy A. Lasch, Trustee
Address for Notices:
------------------------------------
------------------------------------
------------------------------------
NEMATRON CORPORATION
By:
---------------------------------
David P. Gienapp
Its: Vice President, Finance and
Administration
<PAGE> 137
EXHIBIT C
<PAGE> 138
AGREEMENT NOT TO COMPETE
AGREEMENT NOT TO COMPETE (the "Agreement"), dated as of ,
2000 between Timothy A. Lasch ("Lasch") having an address at
and Optimation Technology, Inc. (the "Company") having an address at
and Nematron Corporation ("Nematron") having an address at 5840
Interface Drive, Ann Arbor, Michigan 48103.
WHEREAS, Lasch, a shareholder, officer and key employee of the Company
entered into an agreement dated as of November , 2000 (the "Merger
Agreement") pursuant to which Nematron will, through a merger of its subsidiary
with and into the Company, acquire all of the issued and outstanding stock of
the Company;
WHEREAS, Lasch has acquired significant expertise in the business and
operations of the Company and in the business of providing process and
mechanical design, instrumentation and electrical design, system integration,
software programming and computer aided drafting to its customers in various
industry segments (the "Business");
WHEREAS, the Company and Nematron desire that Lasch not engage in
competition or use his expertise to compete or assist others in competition with
the Company;
NOW THEREFORE, in consideration of the execution of the Merger
Agreement, the mutual agreements contained herein and therein and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
Lasch agrees for the benefit of the Company and Nematron that, during
the period commencing on the effective time of the Merger under the Merger
Agreement (the "Closing Date") and ending on the third (3rd) anniversary of the
Closing Date, he will not:
(a) engage or participate in any business activity competitive
with the Business of the Company;
(b) become interested in (as owner, stockholder, lender, partner,
co-venturer, director, officer, employee, agent, consultant or otherwise) any
person, firm, corporation, association or other entity engaged in any business
that is competitive with the Business of the Company. Notwithstanding the
foregoing, Lasch may hold not more than one percent (1%) of the outstanding
securities of any class of any publicly-traded securities of a company that is
engaged in activities competitive with the Business of the Company;
(c) solicit or call on, either directly or indirectly, in
connection with any business which is competitive with the Business of the
Company, any (i) customer with whom the Company shall have dealt at any time or
(ii) any distributor, supplier or other contracting party with whom the Company
shall have dealt;
(d) influence or attempt to influence any supplier, distributor,
customer or potential customer of the Company to terminate or modify any written
or oral agreement or course of dealing with the Company; or
(e) except in his capacity as an employee of the Company,
influence or attempt to influence any person to either (i) terminate or modify
his employment, consulting, agency,
<PAGE> 139
distributorship or other arrangement with the Company or (ii) employ or retain,
or arrange to have any other person or entity employ or retain, any person who
has been employed or retained by the Company as an employee, consultant, agent
or distributor of the Company at any time during the two year period immediately
preceding the termination of Employee's employment hereunder.
The foregoing shall not apply to Lasch's activities as an employee of
the Company after the Closing Date or his ownership of shares of common stock of
Nematron.
Lasch agrees that a monetary remedy for a breach of the agreements set
forth in this Agreement will be inadequate and impracticable and further agrees
that such a breach would cause the Company irreparable harm, and that the
Company will be entitled to temporary and permanent injunctive relief without
the necessity of proving actual damages. In the event of such a breach, Lasch
agrees that the Company will be entitled to such injunctive relief, including
temporary restraining orders, preliminary injunctions and permanent injunctions,
as a court of competent jurisdiction may determine.
If any provision of this Agreement is held invalid in part, it will be
curtailed, both as to time and location, to the minimum extent required for its
validity and will be binding and enforceable with respect to Lasch as so
curtailed.
This Agreement shall be construed an interpreted, and the rights of the
parties shall be determined in accordance with the laws of the State of Michigan
without giving effect to the principles of conflict of laws of such state.
Terms used herein but not defined shall be defined by reference to the
Merger Agreement.
<PAGE> 140
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date and year first above written.
-----------------------------
Timothy A. Lasch
OPTIMATION TECHNOLOGY, INC.
By:
-------------------------
Its: Vice President -- Finance and
Administration
NEMATRON CORPORATION
By:
-------------------------
Its: Vice President -- Finance and
Administration
<PAGE> 141
AGREEMENT NOT TO COMPETE
AGREEMENT NOT TO COMPETE (the "Agreement"), dated as of ,
2000 between William K. Pollock ("Pollock") having an address at
and Optimation Technology, Inc. (the "Company") having an address at
and Nematron Corporation ("Nematron") having an address at
5840 Interface Drive, Ann Arbor, Michigan 48103.
WHEREAS, Pollock, a shareholder, officer and key employee of the
Company entered into an agreement dated as of November , 2000 (the "Merger
Agreement") pursuant to which Nematron will, through a merger of its subsidiary
with and into the Company, acquire all of the issued and outstanding stock of
the Company;
WHEREAS, Pollock has acquired significant expertise in the business and
operations of the Company and in the business of providing process and
mechanical design, instrumentation and electrical design, system integration,
software programming and computer aided drafting to its customers in various
industry segments (the "Business");
WHEREAS, the Company and Nematron desire that Pollock not engage in
competition or use his expertise to compete or assist others in competition with
the Company;
NOW THEREFORE, in consideration of the execution of the Merger
Agreement, the mutual agreements contained herein and therein and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
Pollock agrees for the benefit of the Company and Nematron that, during
the period commencing on the effective time of the Merger under the Merger
Agreement (the "Closing Date") and ending on the third (3rd) anniversary of the
Closing Date, he will not:
(a) engage or participate in any business activity competitive
with the Business of the Company;
(b) become interested in (as owner, stockholder, lender, partner,
co-venturer, director, officer, employee, agent, consultant or otherwise) any
person, firm, corporation, association or other entity engaged in any business
that is competitive with the Business of the Company. Notwithstanding the
foregoing, Pollock may hold not more than one percent (1%) of the outstanding
securities of any class of any publicly-traded securities of a company that is
engaged in activities competitive with the Business of the Company;
(c) solicit or call on, either directly or indirectly, in
connection with any business which is competitive with the Business of the
Company, any (i) customer with whom the Company shall have dealt at any time or
(ii) any distributor, supplier or other contracting party with whom the Company
shall have dealt;
(d) influence or attempt to influence any supplier, distributor,
customer or potential customer of the Company to terminate or modify any written
or oral agreement or course of dealing with the Company; or
<PAGE> 142
(e) except in his capacity as an employee of the Company,
influence or attempt to influence any person to either (i) terminate or modify
his employment, consulting, agency, distributorship or other arrangement with
the Company or (ii) employ or retain, or arrange to have any other person or
entity employ or retain, any person who has been employed or retained by the
Company as an employee, consultant, agent or distributor of the Company at any
time during the two year period immediately preceding the termination of
Employee's employment hereunder.
The foregoing shall not apply to Pollock's activities as an employee of
the Company after the Closing Date or his ownership of shares of common stock of
Nematron.
Pollock agrees that a monetary remedy for a breach of the agreements
set forth in this Agreement will be inadequate and impracticable and further
agrees that such a breach would cause the Company irreparable harm, and that the
Company will be entitled to temporary and permanent injunctive relief without
the necessity of proving actual damages. In the event of such a breach, Pollock
agrees that the Company will be entitled to such injunctive relief, including
temporary restraining orders, preliminary injunctions and permanent injunctions,
as a court of competent jurisdiction may determine.
If any provision of this Agreement is held invalid in part, it will be
curtailed, both as to time and location, to the minimum extent required for its
validity and will be binding and enforceable with respect to Pollock as so
curtailed.
This Agreement shall be construed an interpreted, and the rights of the
parties shall be determined in accordance with the laws of the State of Michigan
without giving effect to the principles of conflict of laws of such state.
Terms used herein but not defined shall be defined by reference to the
Merger Agreement.
<PAGE> 143
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date and year first above written.
-------------------------------------
William K. Pollock
OPTIMATION TECHNOLOGY, INC.
By:
----------------------------
Its: Vice President -- Finance and
Administration
NEMATRON CORPORATION
By:
----------------------------
Its: Vice President -- Finance and
Administration
<PAGE> 144
EXHIBIT D
<PAGE> 145
TAX REPRESENTATION CERTIFICATE
OPTIMATION TECHNOLOGY, INC.
, 2000
---------------
Nematron Corporation Dickinson Wright PLLC
5840 Interface Drive 500 Woodward Avenue, Suite 4000
Ann Arbor, MI 48103 Detroit, Michigan 48226-3425
RE: MERGER PURSUANT TO THE AGREEMENT AND PLAN OF MERGER DATED AS OF NOVEMBER ,
2000, AMONG NEMATRON CORPORATION, A MICHIGAN CORPORATION ("PARENT"),
NEMATRON ACQUISITION CORP., A NEW YORK CORPORATION AND A WHOLLY OWNED
SUBSIDIARY OF PARENT ("MERGER SUB"), OPTIMATION TECHNOLOGY, INC. A NEW YORK
CORPORATION (THE "COMPANY") AND THE SHAREHOLDERS OF THE COMPANY, (THE
"MERGER AGREEMENT").
Ladies and Gentlemen:
This letter is supplied to you in connection with the above referenced
merger transaction ("Merger"). Unless otherwise indicated, capitalized terms not
defined herein have the meanings set forth in the Merger Agreement.
After consulting with its counsel and auditors regarding the meaning of
and factual support for the following representations, the undersigned hereby
certifies and represents that the following statements are accurate now and will
be accurate as of the Effective Time:
1. Pursuant to the terms of the Merger Agreement and the Certificate of
Merger to be filed by Merger Sub and the Company with the New York Department of
State at the Effective Time, Merger Sub will merge into the Company, and the
Company will acquire (by operation of law) all of the assets and liabilities of
Merger Sub. Specifically. at least ninety percent (90%) of the fair market value
of the net assets and at least seventy percent (70%) of the fair market value of
the gross assets held by the Company immediately prior to the Merger will
continue to be held by the Company immediately after the Merger. For the purpose
of determining the percentage of the Company's net and gross assets held by the
Company immediately after the Merger, the following assets will be treated as
property held by the Company immediately prior but not subsequent to the Merger:
(a) assets disposed of by the Company prior to or subsequent to the Merger and
in contemplation thereof (including, without limitation, any asset disposed of
by the Company, other than in the ordinary course of business, pursuant to a
plan or intent existing during the period beginning with the commencement of
negotiations (whether formal or informal) with Parent regarding the Merger and
ending at the Effective Time (the "Pre-Merger Period"); (b) assets used by the
Company to pay the shareholders of the Company in connection with the exercise
of dissenters' rights or to pay other expenses or liabilities incurred in
connection with the Merger; and (c) assets used to make distribution, redemption
or other payments in respect of shares of Company capital stock or rights to
acquire such stock (including payments treated as such for tax purposes) that
are made in contemplation of the Merger or that are related thereto.
<PAGE> 146
2. Other than in the ordinary course of business or pursuant to its
obligations under the Merger Agreement, the Company has made not transfer of any
of its assets (including any distribution of assets with respect to, or in
redemption of, stock) (a) in contemplation of the Merger or (b) during the
Pre-Merger Period.
3. The Company's principal reasons for participating in the Merger are
bona fide business purposes not related to taxes, and are more specifically as
part of a strategic business plan to build a global service organization focused
on plant floor-to-enterprise needs in a variety of targeted industries.
4. At the Effective Time, the Company will have no outstanding equity
interests other than the Company's common stock, no par value. At the Effective
Time, the Company will have no outstanding warrants, options, or convertible
securities or any other type of right outstanding pursuant to which any person
could acquire shares of the Company capital stock or any other equity interest
in the Company other than those disclosed in Section 2.03 of the Merger
Agreement or the Company Disclosure Schedule with respect thereto.
5. Upon consummation of the Merger, shares of Company capital stock
representing "Control" of the Company will be exchanged solely for shares of
Parent Common Stock. At the Effective Time, there will exist no rights to
acquire Company capital stock or to vote (or restrict or otherwise control the
vote of) shares of Company capital stock which, if exercised, would affect
Parent's acquisition and retention of Control of the Company. (For purposes of
the preceding sentence, shares of Company capital stock exchanged in the Merger
for cash and other property (including, without limitation, cash paid to
shareholders of the Company in connection with the exercise of dissenters'
rights or in lieu of fractional shares of Parent Common Stock) will be treated
as shares of Company capital stock outstanding at the Effective Time but not
exchanged for shares of Parent Common Stock.) As used in this letter, "Control"
of a corporation shall consist of direct ownership of shares of stock possessing
at least eighty percent (80%) of the total combined voting power of shares of
all classes of stock of such corporation entitled to vote and at least eighty
percent (80%) of the total number of shares of all other classes of stock of
such corporation. For purposes of determining Control, a person shall not be
considered to own shares of voting stock if rights to vote such shares (or
rights to restrict or otherwise control the voting of such shares) are held by a
third party (including a voting trust) other than an agent of such person.
6. The total fair market value of all consideration other than shares
of Parent Common Stock to be received by shareholders of the Company in the
Merger (including, without limitation, cash paid to shareholders of the Company
in connection with the exercise of dissenters' rights or in lieu of fractional
shares of Parent Common Stock) will be less than ten percent (10%) of the
aggregate fair market value of all Company capital stock outstanding immediately
prior to the Merger.
7. The Company has no plan or intention to issue additional shares of
capital stock after the Merger, or take any other action that would result in
Parent not being in Control of the Company.
8. Except for transfers described in both Section 368(a)(2)(C) of the
Code and Treasury Regulation ss. 1.368-2(j)(4), the Company has no plan or
intention to sell or otherwise dispose of any of its assets or of any of the
assets acquired from Merger Sub in the Merger except for dispositions made in
the ordinary course of business.
9. The Company intends to continue its historic business or use a
significant portion of its historic business assets in a business following the
Merger.
<PAGE> 147
10. The liabilities of the Company have been incurred by the Company in
the ordinary course of its business.
11. The fair market value of the Company's assets will, at the
Effective Time, exceed the aggregate liabilities of the Company plus the amount
of liabilities, if any, to which such assets are subject.
12. The Company is not, and will not be at the Effective Time, an
"investment company" within the meaning of Section 368(a)(2)(F)(iii) and (iv) of
the Code.
13. The Company is not, and will not be at the Effective Time, under
the jurisdiction of a court in a Title II or similar case within the meaning of
Section 368(a)(3)(A) of the Code.
14. After due inquiry with its officers, directors and principal
shareholders, the Company has no knowledge of, and believes that there does not
exist, any plan or intention on the part of the shareholders (or any
shareholder) of the Company to engage in a sale, exchange, transfer,
distribution, pledge, disposition or any other transaction which would result in
a reduction in ft risk of ownership or a direct or indirect disposition (a
"Sale") of shares of Parent Common Stock to be received in the Merger that would
reduce the Company shareholders' ownership of such Parent Common Stock to a
number of shares having an aggregate fair market value, as of the Effective
Time, of less than fifty percent (50%) of the aggregate fair market value, of
the Company capital stock outstanding immediately prior to the consummation of
the Merger. (For purposes of the preceding sentence, shares of Company capital
stock (a) with respect to which a shareholder of the Company receives
consideration in the Merger other than shares of Parent Common Stock (including,
without limitation, cash received in connection with the exercise of dissenters'
rights or in lieu of fractional shares of Parent Common Stock) and/or (b) with
respect to which a Sale occurs prior to and in contemplation of the Merger,
shall be considered outstanding shares of Company capital stock exchanged for
shares of Parent Common Stock in the Merger and then disposed of pursuant to a
plan.)
15. There will be no payments of cash to shareholders of the Company in
connection with the exercise of dissenters' rights, and one hundred percent
(100%) of the Company capital stock outstanding immediately prior to the Merger
will be exchanged solely for shares of Parent Common Stock. Thus, the Company
intends that no consideration be paid or received (directly or indirectly,
actually or constructively) for shares of Company capital stock other than
shares of Parent Common Stock.
16. The fair market value of the shares of Parent Common Stock received
by each shareholder of the Company will be approximately equal to the fair
market value of the shares of Company capital stock surrendered in exchange
therefor and the aggregate consideration received by shareholders of the Company
in exchange for their shares of Company capital stock will be approximately
equal to the fair market value of all of the outstanding shares of Company
capital stock immediately prior to the Merger.
17. Each of Merger Sub, Parent, the Company and each shareholder of the
Company will pay separately his or its own expenses relating to the Merger.
18. There is no intercorporate indebtedness existing between Parent and
the Company or between Merger Sub and the Company that was issued, acquired or
will be settled at a discount as a
<PAGE> 148
result of the Merger; Parent will assume no liabilities of the Company or any
shareholder of the Company in connection with the Merger.
19. The terms of the Merger Agreement and of the other agreements
relating thereto are the product of arm's length negotiations.
20. None of the compensation received or to be received by any
shareholder-employee of the Company will be separate consideration for, or
allocable to, any of such shareholder-employee's shares of Company capital
stock; none of the shares of Parent Common Stock to be received by any
shareholder-employee of the Company in the Merger will be separate consideration
for, or allocable to, any employment agreement or any covenant not to compete;
and the compensation paid or to be paid to any shareholder-employee of the
Company will be for services actually rendered and will be commensurate with
amounts paid to third parties bargaining at arm's length for similar services.
21. With respect to each instance, if any, in which shares of Company
capital stock have been purchased by a stockholder of Parent (a "Stockholder")
during the Pre-Merger Period (a "Stock Purchase"): (a) to the best knowledge of
the Company, (i) the Stock Purchase was made by such Stockholder on its own
behalf, rather than as a representative, or for the benefit, of Parent, (ii) the
Stock Purchase was entered into solely to satisfy the separate interests of such
Stockholder and the seller, and (iii) the purchase price paid by such
Stockholder pursuant to the Stock Purchase was the product of arm's length
negotiations; and (b) the Stock Purchase was not a formal or informal condition
to the consummation of the Merger.
<PAGE> 149
22. The Company is authorized to make all of the representations set
forth herein.
Notwithstanding anything herein to the contrary, the undersigned makes
no representations regarding any actions or conduct of the Company pursuant to
Parent's exercise of control over the Company after the Merger.
Very truly yours,
OPTIMATION TECHNOLOGY, INC.
By:
----------------------------------------
Title:
-------------------------------------
<PAGE> 150
SCHEDULES (OMITTED)
Company Disclosure Schedule
Schedule 3.03 No Conflict, Required Filings and Consents
Omitted Schedules will be furnished upon request.
<PAGE> 151
FORM OF PROXY CARD
SOLICITED ON BEHALF OF NEMATRON CORPORATION'S
BOARD OF DIRECTORS
DATED AS OF DECEMBER 4, 2000
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF NEMATRON CORPORATION
The undersigned hereby constitutes and appoints Matthew S. Galvez and
David P. Gienapp, and each of them, attorneys, agents and proxies with power of
substitution to vote as designated below all of the shares of Common Stock of
Nematron Corporation (the "Company") that the undersigned is entitled to vote at
the Special Meeting of Shareholders of Nematron, to be held at Nematron
Corporation, 5840 Interface Drive, Ann Arbor, Michigan on December 22, 2000 at
10:00 a.m., Eastern Standard Time, and at any adjournments thereof, upon the
matter set forth below, which is proposed by Nematron.
This Proxy, when properly executed, will be voted in the manner
directed; IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR APPROVAL OF THE
ISSUANCE OF SHARES PURSUANT TO THE MERGER.
Nematron Corporation's Board of Directors proposes to issue a total of
3,112,500 shares of Nematron Common Stock pursuant to the Agreement and Plan of
Merger, dated as of November 14, 2000, among Nematron, Merger Sub, Optimation,
William K. Pollock, Timothy A. Lasch, and Pollock and Lasch as Trustees of the
Optimation Technology, Inc. Employee Stock Ownership Trust (the "Trustees"),
pursuant to which Merger Sub (a New York corporation organized by Nematron
Corporation in connection with the Merger, as hereinafter defined) will be
merged with and into Optimation, with Optimation surviving as a wholly owned
subsidiary of Nematron (the "Merger"). The American Stock Exchange rules require
shareholder approval to issue the shares pursuant to the Merger.
By checking the appropriate box below, I choose to vote my shares of
Nematron Common Stock:
[ ] FOR APPROVAL OF THE ISSUANCE OF 3,112,500 SHARES OF NEMATRON COMMON STOCK
PURSUANT TO THE AGREEMENT AND PLAN OF MERGER
[ ] AGAINST APPROVAL OF THE ISSUANCE OF 3,112,500 SHARES OF NEMATRON COMMON
STOCK PURSUANT TO THE AGREEMENT AND PLAN OF MERGER
[ ] ABSTENTION WITH RESPECT TO THE APPROVAL OF THE ISSUANCE OF 3,112,500 SHARES
OF NEMATRON COMMON STOCK PURSUANT TO THE AGREEMENT AND PLAN OF MERGER
________________________________________________________________________________
The undersigned acknowledges receipt of the Notice of Special Meeting
of Shareholders and the Proxy Statement dated December 4, 2000 and ratifies all
that the proxies or either of them or their substitutes may lawfully do or cause
to be done by virtue hereof and revokes all former proxies.
Please sign this Proxy exactly as your name(s) appear(s) on this Proxy.
If the stock is registered in the names of two or more persons, each must sign.
Executors, administrators, trustees, guardians, attorneys and corporate officers
should add their titles.
PLEASE BE SURE TO SIGN AND DATE THIS PROXY IN THE SPACE BELOW.
SIGNATURE(S) ___________________________________ DATE _________________
SIGNATURE(S) ___________________________________ DATE _________________
75
