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SCHEDULE 14A
-(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [ X ]registrant [X]
Filed by a Partyparty other than the Registrantregistrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statementproxy statement. [ ] Confidential, for use of the
Commission Onlyonly (as permitted by
Rule 14a-6(e)(2)).
[ ] Definitive Proxy Statementproxy statement.
[ ] Definitive Additional Materialsadditional materials.
[ ] Soliciting Material Pursuantmaterial pursuant to Section 240.14a-11(c) or Section
240.14a-12Rule 14a-12
NEMATRON CORPORATION
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(Name of Registrant as Specified in itsIts Charter)
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(Name of Person(s) Filing Proxy Statement if other thanOther Than the Registrant)
Payment of Filing Fee (Checkfiling fee (check the appropriate box):
[X] No fee requiredrequired.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-110-11.
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(2) Aggregate number of securities to which transaction applies:
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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):
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(4) Proposed maximum aggregate value of transaction
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[ ] Fee paid previously with preliminary materialsmaterials.
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[ ] 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 Formform or Scheduleschedule and the date of its filing.
(1) Amount Previously Paid:
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(3) Filing Party:
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(4) Date Filed:
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(Amended by Sec Act Rel No. 7331; Exch Act Rel No. 37692, eff. 10/7/96.)- --------------------------------------------------------------------------------
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NEMATRON CORPORATION
5840 INTERFACE DRIVE
ANN ARBOR, MICHIGAN 48103
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Our Shareholders:
Notice is hereby given that the Annual Meeting of Shareholders of
Nematron Corporation (the "Company") will be held at the Company's main offices,
5840 Interface Drive, Ann Arbor, Michigan 48103 on Tuesday, March 30, 1999May 22, 2001 at
10:00 a.m. for the following purposes:
1. To elect two directors 2. To approveof the potential issuance of approximately 7,313,333
shares of Common Stock pursuant to a capital raising transaction
in accordance with Nasdaq rules,
3.Company;
2. To approve a proposal to amend the Articles of Incorporation to
increase the number of authorized shares of Common Stock to
30,000,000,
4.provide for "blank check" preferred stock,
3. To approve a proposal to amend the Articles of Incorporation to
declassify the Board of Directors and reduce the terms of the
directors from three years to one year,
5.4. To approve the Nematron Corporation Long-Term Incentive Plan,potential issuance of Common Stock upon conversion
of certain convertible notes recently issued pursuant to a capital
raising transaction, and
6.5. To vote upon such other matters as may properly come before the
meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on February 18,
1999April 12, 2001
are entitled to notice of and to vote at the meeting and any adjournments or
postponements thereof.
You are invited to attend the Annual Meeting. Whether or not you expect
to attend the Annual Meeting, please complete, date and sign the enclosed proxy
and return it promptly in the enclosed postage-paid envelope. The proxy is
revocable and will not affect your right to vote in person if you attend the
Annual Meeting.
By Order of the Board of Directors,
/S/ DAVID P. GIENAPP
- -----------------------------------
David P. Gienapp
Corporate Secretary
Ann Arbor, Michigan
February 24, 1999April 20, 2001
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NEMATRON CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 30, 1999MAY 22, 2001
PROXY STATEMENT
The accompanying proxy is solicited on behalf of the Board of Directors
of Nematron Corporation, a Michigan corporation (the "Company"), for use at the
Annual Meeting of Shareholders of the Company to be held at the Company's main
offices, 5840 Interface Drive, Ann Arbor, Michigan 48103 on Tuesday, March 30,
1999May 22,
2001 at 10:00 a.m. (the "Annual Meeting") or at any adjournment thereof. This
Proxy Statement and the accompanying form of proxy will be first given or sent
to shareholders on or about February 26, 1999.April 20, 2001.
Only holders of record of Common Stockcommon stock of the Company (the "Common
Stock") at the close of business on February 18, 1999April 12, 2001 (the "Record Date") are
entitled to vote at the meetingAnnual Meeting or any adjournment thereof. On the Record
Date, 5,353,31613,696,616 shares of Common Stock were issued and outstanding and are
entitled to vote at the Annual Meeting. Shareholders of record on the Record
Date are entitled to one vote for each share of Common Stock held of record on
any matter that may properly come before the Annual Meeting. Shares cannot be
voted at the Annual Meeting unless the holder is present in person or
represented by proxy. The presence, either in person or by properly executed
proxy, of the holders of a majority of the outstanding shares of Common Stock on
the Record Date is necessary to constitute a quorum at the Annual Meeting.
Shares represented by a proxy in the accompanying form, unless
previously revoked, will be voted at the Annual Meeting in accordance with the
specifications made if the proxy, properly executed, is received by the Company
before the close of business on March 29, 1999.May 21, 2001. Shares represented by a proxy
received after that time will be voted if the proxy is received by the Company
in sufficient time to permit the necessary examination and tabulation of the
proxy before a vote is taken. IF NO SPECIFICATIONS ARE MADE, IN ANY PROXY, THE SHARES
REPRESENTED THEREBY WILL BE VOTED FOR THE ELECTION OF DIRECTORSTHE NOMINEES FOR DIRECTOR
NAMED IN THIS PROXY STATEMENT AND FOR EACH OF THE OTHER PROPOSALS DESCRIBEDLISTED IN THIS PROXY
STATEMENT. The Board of Directors does not intend to present any other matters
at the Annual Meeting. However, should any other matters properly come before
the Annual Meeting, it is the intention of the persons named in the accompanying
form of proxy to vote the proxy in accordance with their best judgment.
Shareholders who execute a proxy in the accompanying form may revoke the proxy
at any time before it is exercised by giving written notice to the Secretary of
the Company bearing a later date than the proxy, by submitting a later-dated
proxy, or by voting the shares represented by such proxy in person at the Annual
Meeting.
For purposes of determining the number of votes cast with respect to
the election of directors, only those cast "for" are included. The number of
votes cast on the other proposals is determined by counting the votes cast "for"
and "against". Abstentions are counted only for purposes of determining whether
a quorum is present at the Annual Meeting. Broker non-votes are not counted for
any purpose.
The cost of soliciting proxies will be borne by the Company. In
addition to the solicitation by mail, proxies may be solicited in person or by
telephone or facsimile by officers, directors and employees of the Company. Such
officers, directors and employees will not be additionally compensated, but may
be reimbursed for out-of-pocket expenses in connection with such solicitation.
The Company will reimburse brokerage houses, custodians, nominees and
fiduciaries for their expenses in mailing proxy material to principals.
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MATTERS TO COME BEFORE THE ANNUAL MEETING
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Articles of Incorporation divide the directors into three
classes, the terms of which expire as set forth below. At each annual meeting,
the shareholders of the Company elect to three-year terms directors to replace
those directors whose terms expire at that annual meeting. The term of office of
each director elected at this year's Annual Meeting will continue until the 2002
Annual Meeting2004
annual meeting and until his successor has been elected and qualified, or until
his earlier resignation or removal. If Proposal 4 is approved by shareholders,
the terms of all of the Company's directors, including the directors elected at
the Annual Meeting, will expire at the 2000 Annual Meeting. See "Proposal 4 -
Amendment to the Company's Articles of Incorporation to Declassify the Board of
Directors". The election of directors requires a plurality of the votes cast. The Board of Directors recommends a vote FOR
each of the nominees for election. Proxies will be voted FOR the election of the
nomineesnominee unless the specification is marked on the proxy indicating that
authority to do so is withheld. For purposes of determining the number of votes
cast with respect to the election of directors, only those votes cast "for" are
included. The election of directors requires a plurality of the votes cast.
The following sets forth information as to each nominee for election at
the Annual Meeting and each director continuing in office, including his age,
present principal occupation, other business experience during the last five
years, directorships in other publicly-heldpublicly held companies and period of service as a
director of the Company. If, as a result of circumstances not known or foreseen,
any of the nominees shall be unavailable to serve as a director, the proxies may
be voted for any such substitute nomineesnominee as the Board of Directors may select.
NOMINEES FOR ELECTION FOR A TERM EXPIRING IN 2002
Hugo E. Braun, 40, became a director in March 1996. Mr. Braun is a
partner with Access Ventures, an investment fund manager, where he has been
employed since 1989.2004
Matthew S. Galvez, 43,45, became a director in August 1998 upon his
joining the Company as its Chief Operating Officer. On October 1, 1998, Mr.
Galvez was appointed to the office of the President and Chief Executive Officer of the Company. Mr.
Galvez served as Chief Executive Officer of ISDA & Co., a privately held apparel
company, from June 1994 until June 1998. From 1990 until June 1994, Mr. Galvez
was a director and Chief Financial Officer of Manufacturers Products
Corporation, a supplier of plastic products to the automotive industry. In 1994
he became Chief Executive Officer of that company as well. Prior to 1990, Mr.
Galvez was Executive Vice President-CorporatePresident - Corporate Operations and General Counsel
to General CAD/CAM, Inc. ("GCI") in Schenectady, New York. GCI is a developer and
supplier ofan industrial graphics translation software for the industrial marketplace.
DIRECTORS WHOSE TERMS EXPIRE 2001developer and served as an
officer of two acquisition funds. Mr. Galvez serves as Chairman and a Director
of Waltec Plastics Co. in Midland, Ontario, Canada, and IMC Plastics in Los
Angeles, California.
Garnel F. Graber, 67,69, became a director in February 1993 at the time of
the Company's spin-off from Interface Systems, Inc. and served as
Chairman of the Board of Nematron until March 1996. Mr. Graber is a retired
executive of, and is the current Chairman of the Board of Directors of, Applied
Dynamics International, a computer firm specializing in high speedhigh-speed simulation.
Mr. Graber served as Chief Executive Officer of Applied Dynamics for more than
five years prior to his retirement in 1994.
Mr. Graber also serves as Chairman of the Board
of Interface Systems, Inc.
Michael L. Hershey, 60,DIRECTORS WHOSE TERMS EXPIRE IN 2003
Joseph J. Fitzsimmons, 66, became a director in March 1995 at the time the
Company merged with Imagination Systems, Inc.1997. Mr.
Hershey had served as a member
of the Board of Directors and Secretary of Imagination Systems, Inc. Mr. Hershey
has beenFitzsimmons is the President and ChairmanChief Executive Officer of the Board of Directors of Landis
Associates, Inc., an investmentNonprofit Enterprise
at Work, a management company, since its formation in 1986.
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DIRECTORS WHOSE TERMS EXPIRE IN 2000
Joseph J. Fitzsimmons, 64, became a director in March 1997.support organization dedicated to assisting non-profit
organizations. Mr. Fitzsimmons is a retired executive of Bell & Howell Company
and University Microfilms International ("UMI"), a subsidiary of Bell & Howell. From January
1994 through June 1995 when he retired, Mr. Fitzsimmons was Corporate Vice
President of Bell & Howell and Chairman of UMI. From March 1987 through December
1993, Mr. Fitzsimmons was Corporate Vice President of Bell & Howell and
President and Chief Executive Officer of UMI, a leading provider of
technology services to libraries and other organizations regarding acquiring,
preserving and distributing literature.literature and a subsidiary of Bell & Howell. Mr.
Fitzsimmons is a memberserved as Corporate Vice President of the BoardBell & Howell and as Chairman
or President and Chief Executive Officer of Directors of First of America Bank Corporation, a Midwest bank holding company
owned by National CityBank. Mr. Fitzsimmons is a past Chairman of the
Information Industry Association and was the Vice-Chairman of the White House
Conference on Libraries and Information ServicesUMI from March 1987 until he retired
in 1991.June 1995.
James A. Nichols, 53, a retired executive of Ford Motor Company,55, became a director in December 1998. From 1991 to
the present, Mr. Nichols has been president and sole owner of Nichols &
Associates, P.C., attorneys practicing in the area of international commercial
law. From 1981 to 1991, Mr. Nichols was a Senior Attorney in the Corporate
Transactions Department of Ford's Office of the General Counsel. From 1991 to
the present,April 1999, Mr. Nichols has been the founder andwas the Chairman of the Board of Surgical Instrument
Repair Service, Inc., a partnership with Allegiance
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Healthcare Corporation, a public company that engages in the repair and
management of surgical instruments and equipment at health care providers in
North America. From 1993 to 1998, Mr. Nichols served as corporate secretary and
a director of Liberty BIDCO Investment Corporation, a Michigan-based mezzanine
finance company. Mr. Nichols was president and sole owner of Sterilization
Management Group, LLC, a provider of reusable sterile products to hospitals,
from 1997 to 1998 when the company was sold to Teleflex Corporation, a public
company.
From 1991 to the present, Mr. Nichols has been
president and sole owner of Nichols & Associates, P.C., attorneys practicing in
the area of international commercial law.
Stephen E. Globus, 52,54, became a director in December 1998. He has been
Chairman of the Board of Globus Growth Group, Inc., a Manhattan - based venture
capital company specializing in providing startup and seed capital, since 1984.
He is also a director of Plasmaco, Inc., a flat computer screen manufacturer
owned by Matsushita (Panasonic). Mr. Globus is the founder of several privately
held biotechnology companies, including Kimeragen, Inc., NuGene Technologies,
Inc., Thermaphore Sciences, Inc. and Genitope, Inc.
Messrs. NicholsDIRECTORS WHOSE TERMS EXPIRE IN 2002
Hugo E. Braun, 43, became a director in March 1996. Since 1999, Mr.
Braun has been a partner with North Coast Technology Investors L.P., a $100
million venture capital fund. Before founding North Coast Technology Investors
L.P., Mr. Braun was a partner from 1989 to 1999 in Access Venture Fund, L.P., a
Michigan-based investment firm with over $30 million under management. Prior to
joining Access Venture Fund, L.P., Mr. Braun co-managed California-based
BankAmerica Venture Capital's $100 million venture portfolio. Mr. Braun is
currently a director of six private companies.
James H. Wicker, 61, is a partner in the firm of Technology 2 Market, a
consulting firm concentrating on the factory automation marketplace. Prior to
forming the consulting firm, Mr. Wicker was employed from 1995 to 1999 as
president of Ci Technologies, Inc. in North and Globus were appointedSouth America. Mr. Wicker
continues to the Boardserve as a director of this company. Ci Technology develops and
markets factory automation software. From 1990 to 1994, Mr. Wicker was employed
by a manufacturer's representative and distribution company for a line of
factory automation and process control products. From 1984 to 1990, Mr. Wicker
was executive vice president - sales and marketing of Xycom, Inc., a
manufacturer of VME cards and plant floor MMI and industrial PC products. From
1962 to 1984, Mr. Wicker was employed by Taylor Instruments (later ABB) in
connection
with their purchasevarious technical support and sales management positions, and finished his
career at ABB as vice president of certain convertible promissory notes from the Company.
See "Proposal 2 - Approval of the Issuance of Shares of Common Stock - Change in
Board of Directors."sales.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
The Board of Directors met thirty-twoeight times during the year ended September 30,
1998.2000. Each current
director who served during that period attended at least 75% of the total number
of meetings of the Board and committees of the Board on which he served during
fiscal 1998.that period. The Board has a standing AuditOrganization and Compensation Committee,
Nominating Committee and Audit Committee.
The Organization and Compensation Committee.
The Audit Committee met once in fiscal 1998.twice during 2000. The
AuditOrganization and Compensation Committee meets
withadministers the Company's independent accountants to reviewLong Term
Incentive Plan and the adequacy of1993 Stock Option Plan, determines compensation issues
for officers, and determines compensation issues for non-employee directors that
do not involve the Company's internal control systems and financial reporting procedures; reviews
the general scope of the Company's annual audit and the fees charged by the
independent accountants; and reviews and monitors the performance of non-audit
services by the Company's auditors.equity securities. The current members of the
AuditOrganization and Compensation Committee are Messrs. BraunNichols (Chairman), Fitzsimmons, HersheyGlobus,
and Nichols.Graber.
The Nominating Committee met once during fiscal 1998.2000. The Nominating Committee
identifies and reviews potential members of the Board and nominates persons to
the Board to serve as Board members. The Nominating Committee
presently consists solely of Mr. Hershey (Chairman).
The Organization and Compensation Committee met twice during fiscal
1998. The Organization and Compensation Committee administers the Company's
Restricted Stock Plan and the 1993 Stock Option Plan, determines compensation
issues for officers, and determines compensation issues for non-employee
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directors that do not involve the Company's equity securities. The current
members of the OrganizationNominating Committee are
Mr. Globus (Chairman) and CompensationMr. Fitzsimmons. The procedures for nomination of
directors by shareholders are described in the Company's bylaws and are briefly
described in this Proxy Statement under "Shareholder Proposals for 2002 Annual
Meeting."
The Audit Committee met six times during 2000. The members of the Audit
Committee are Messrs. GraberBraun (Chairman), Globus,Nichols and Nichols.Fitzsimmons. The Audit
Committee is organized and conducts its business pursuant to a written charter
adopted by the Board of Directors. A complete copy of the Committee's charter is
included as Appendix A to this Proxy Statement. The Audit Committee's primary
function is to assist the Board of Directors in fulfilling its oversight
responsibilities with respect to (i) the
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annual financial information to be provided to shareholders and the Securities
and Exchange Commission; (ii) the system of internal controls that management
has established; and (iii) the internal and external audit process. In addition,
the Audit Committee provides an avenue for communication between internal audit,
the independent accountants, financial management and the Board.
REPORT OF THE AUDIT COMMITTEE
In accordance with its charter, the Audit Committee provides assistance
to the Board in fulfilling its responsibility to the shareholders, potential
shareholders and investment community relating to corporate accounting,
reporting practices and the quality and integrity of the financial reports of
the Company. Each Audit Committee member is "independent," as defined in Rule
121(A) of the American Stock Exchange.
The Audit Committee received from the independent auditors and reviewed
a formal written statement describing all relationships between the auditors and
the Company that might bear on the auditors' independence consistent with
Independence Standards Board Standard No. 1, "Independence Discussions with
Audit Committees," discussed with the auditors any relationships that may impact
their objectivity and independence and satisfied itself as to the auditors'
independence.
The Audit Committee discussed with the independent auditors the matters
required to be discussed by Statement on Auditing Standards No. 61, as amended,
"Communication with Audit Committees," and, with and without management present,
discussed and reviewed the results of the independent auditors' examination of
the financial statements. The Audit Committee also discussed the results of the
internal audit examinations.
The Audit Committee reviewed and discussed with management and the
independent auditors the audited financial statements of the Company as of and
for the year ended December 31, 2000.
Based on the above-mentioned reviews and discussions with management
and the independent auditors, the Audit Committee recommended to the Board of
Directors that the Company's audited financial statements be included in its
Annual Report on Form 10-KSB as of and for the year ended December 31, 2000 for
filing with the Securities and Exchange Commission.
AUDIT COMMITTEE: HUGO E. BRAUN
JAMES A. NICHOLS
JOSEPH J. FITZSIMMONS
EXECUTIVE OFFICERS
The executive officers of the Company as of the date of this Proxy
Statement are listed and described below. Executive officers of the Company
serve at the pleasure of the Board of Directors.
Name Offices Age
- ---- ------- ---
Matthew S. Galvez President and Chief Operating Officer 43
David P. Gienapp Vice President - Finance and Administration,
Secretary and Treasurer 50
Name Offices Age
- ---- ------- ---
Matthew S. Galvez President and Chief Operating Officer 45
David P. Gienapp Vice President - Finance and Administration,
Secretary and Treasurer 52
See "Nominees for Election For Afor a Term Expiring in 2002"2004" for further information
concerning Mr. Galvez.
David P.Mr. Gienapp has been the Vice President - Finance and Administration
and Treasurer of the Company since joining the Company in September 1994 and has
served as its Secretary since March 1996. Mr. Gienapp served as a director of
the Company from March 1995 until August 1998. Prior to joining the Company, Mr.
Gienapp spent over 20 years with Deloitte & Touche LLP, a certified public
accounting firm.
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PROPOSAL 2
APPROVAL OF AMENDMENT TO THE ARTICLES OF INCORPORATION
TO AUTHORIZE THE FUTURE ISSUANCE OF SHARES OF COMMON"BLANK CHECK"
PREFERRED STOCK
The Board of Directors of the Company has approved, and is proposing
that shareholders approve, the issuance of approximately 7,313,333 shares of
Common Stock pursuant to a private placement capital raising transaction, the
first stage of which occurred in December 1998 and the second stage of which
will be consummated promptly following approval of this Proposal 2 (the "Capital
Transaction"). The Company entered into the Capital Transaction to alleviate a
severe cash shortage and permit the Company to continue operations. The rules of
the Nasdaq Stock Market require the Company to obtain shareholder approval of
the issuance of the shares which may be issued pursuant to the Capital
Transaction (in excess of the first 1,070,000 shares, for which no approval is
required) prior to the issuance of such shares.
Proposal 2 is the Board's proposalrecommending that the
shareholders approve at the Annual Meeting, an amendment to the Articles of
Incorporation authorizing the future issuance by the Board, without further
shareholder approval, of 30,000,000 shares of preferred stock, without par value
(the "Preferred Stock"), as described below (the "Preferred Stock Amendment").
The Company's Articles of Incorporation presently does not authorize any class
of equity securities other than the Common Stock pursuant to the Capital Transaction to the
extent required by the rules of the Nasdaq Stock Market. Approval of Proposal 2
could result in the issuance of approximately 7.3 million shares of Common
Stock, including shares issued pursuant to the Notes, upon exercise of Options
and the Schwartz Option (capitalized terms are hereinafter defined), and
pursuant to subscription agreements which are contingent on approval by the
shareholders of this Proposal 2.Stock. The Board of Directors
recommends a vote FOR this Proposal 2.
BACKGROUND
In early 1998, the Company began seeking additional capital due to the
losses reported for fiscal 1997 and the first quarter of fiscal 1998. In April
1998, the Company hired an investment banking firm to assist it in raising
needed capital and in evaluating strategic business partners.
Following the Company's April 28, 1998 announcement of potential
reporting adjustments to its financial statements and the withdrawal of its
independent auditors and their report on the audit of the 1996 and 1997
financial statements, Nasdaq suspended trading of the Common Stock. Potential
partners and investors showed no interest in investing in the Company at a price
reflective of the Company's intrinsic value, given the uncertainties surrounding
the trading halt, the market value of the Common Stock, the shareholder suit
filed soon after the April 28th announcement and the Company's financial
position. Moreover, the Company's customers began questioning the financial
viability of the Company and became reluctant to place new orders with the
Company as its competitors used this news and rumors of the Company's financial
demise to the Company's detriment.
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Faced with these attacks from its competitors and questions from its
traditional customer base, sales slowed considerably, reducing receivables and
inventory and, consequently, the borrowing base under the Company's bank credit
line. The Company soon had fully utilized its existing credit line. Cash
collections from the reduced sales and receivables were lower than necessary to
sustain operations at previous levels. In an effort to preserve its dwindling
cash resources, the Company was forced to delay paying its trade payables and to
attempt to obtain extended terms from its vendors. Certain key vendors instead
required the Company to pay cash upon delivery of components, which negatively
affected the Company's production capability and worsened its cash shortage.
After further negotiations during July and August 1998, the Company
successfully arranged trade notes with approximately twenty vendors. The terms
of those notes included fixed payments of the past due trade balance with
interest over six to twelve months in return2 for the vendors' promises to
continue their "cash on delivery" shipments. Due toreasons described below.
PRINCIPAL REASONS FOR AUTHORIZATION
If the continuing cash shortage
and despite the efforts of the Company's management and outside consultants, the
Company was not able to keep current on the payments on these trade notes.
Consequently, the Company was unable to secure all of the parts needed to fill
customer orders, thereby further depressing sales, cash flow and its borrowing
capacity.
Because the Company's line of credit borrowings exceeded the applicable
borrowing base limitation, the Company was forced to negotiate a temporary
forbearance agreement with its principal bank lender through October 1998. The
lender also informally agreed to work with the Company for a short time beyond
the expiration of its forbearance agreement if the Company could demonstrate its
ability to raise additional capital to repay the out-of-covenant borrowings and
increase production.
During the fourth quarter of fiscal 1998, the Company appointed a new
chief operating officer who has extensive experience helping financially
troubled businesses. After further analysis of the Company's cash needs and
expected sales and costs, management determined early in the first quarter of
fiscal 1999 that the Company needed to raise $1 million immediately and an
additional $3 million in the second quarter of fiscal 1999 in order to continue
operations. Management intensified its efforts to raise the needed capital, but
was unable to find investors who were interested in investing in CommonPreferred Stock at
the current market price due to the Company's cash shortage, potential investor
concerns regarding the Company's operating prospects and pending litigation and
the low trading volume of the Common Stock.
Despite the Company's financial difficulties, certain major customers
and various other customers remained loyal to the Company, allowing the Company
to generate a significant backlog of new orders. The Company also had secured a
major contract from a large manufacturer which the Company expected to generate
a significant amount of sales over the next 18 months. Due to the cash shortage
and difficulties in raising additional capital, however, the Company was unable
to purchase the components needed to fill the backlog in a timely manner. In
addition, vendors who had agreed to finance outstanding accounts payable refused
to ship components to the Company until overdue payments had been made, further
hampering the Company's efforts to fill existing orders. These delays
jeopardized not only the current backlog but also the Company's future business
prospects.
In mid-November 1998, the Company's bank lender began "sweeping" the
cash in the Company's deposit account to reduce amounts outstanding under the
bank credit line in excess of the borrowing base. The bank also insisted that
the Company reduce the remaining excess borrowing immediately or it would no
longer be willing to continue its forbearance. The bank indicated that it would
be willing to extend its forbearance until January 31, 1999 if the Company
raised $1 million of working capital immediately. However, the depletion of the
cash reserves in the Company's deposit account severely threatened the Company's
ability to pay its employees and continue operating.
After months of intensive effort and negotiation, management identified
several investors willing to invest in the Company on the terms set forth in the
Notes (defined and described below), subject to the willingness of the Company's
Board to appoint certain of the investors toAmendment is approved, the Board of Directors
and subjectwould be entitled to authorize the Company's commitmentissuance of up to raise an additional $3 million during the second
quarter30,000,000 shares of
fiscal 1999.
Through frequent meetings and informal contacts with management during
the preceding eight months,Preferred Stock. The Preferred Stock is considered "blank check preferred stock"
because the Board of Directors had been kept fully informed
of the Company's financial position and strategic and capital raising efforts.
With this extensive background information in mind, the Board met on
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December 1, 1998will be permitted to consider the proposed transactions. Following a detailed
explanation of (i) the current status of the Company's financial position and
lack of working capital, (ii) the negotiations with potential investors and
others who had been approached by management but who had responded negatively to
a proposed investment in the Company and (iii) the Company's relationship with
its bank lender and other creditors, the Board proceeded to consider the terms
of the proposed issuance of Notes and potential alternatives available to the
Company. The Board discussed, among other alternatives, (i) a potential merger
with a privately-owned company in its industry, (ii) the liquidation of the
Company's assets, (iii) a reorganization under the Federal Bankruptcy Code and
(iv) the postponement of the proposed transaction to allow the Company moreissue it at any time or from time to locate an investment transactiontime
in one or more series, each with terms more favorablesuch designations, preferences, conversion
prices and rights, dividend rates, cumulative, relative, participating,
optional, voting, redemption or other rights, qualifications, limitations or
restrictions as may be determined from time to the Company and
its shareholders. In view of, among other factors, (i) the Company's pending
backlog of orders which could provide immediate cash flow if filled, (ii) the
urgency with which the Company needed to obtain capital in order to pay its
employees and to pay its vendors to induce them to recommence shipments of
components, (iii) the likely loss of vendor support and customer base if the
Company were to seek bankruptcy protection and (iv) the likely depreciation in
value of the Company's assets if they were to be liquidated or if the Company
were to cease operating for even a short time the Board determined that the
proposed issuance of the Notes and the Options (defined and described below) the
best available alternative to maximize the Company's value to its shareholders.
Therefore, the Board unanimously approved (with Mr. Hershey abstaining) the
terms of the Notes and the Options and the related transactions. Messrs. Globus
and Nichols were not directors at the time of such approval and did not
participate in the Board's discussions or deliberations.
On January 12, 1999, following a detailed analysis of the Company's
current financial position, the status of negotiations with the Company's bank
lender and potential investors, and the improvement of the market value of the
Common Stock, the Board of Directors approved the terms of the second stage of
the Capital Transaction as well as an amendment to certain of the Notes
containing Options (defined and described below) which amendment extended the
expiration date of the Options and these Notes to expire on the earlier of April
30, 1999 and the fifth business day after receipt of shareholder approval of
Proposal 2, and increased the exercise price per share from $.25 per share to
$1.00 per share. The new price was determined by calculating the average closing
price of the Company's Common Stock on the Nasdaq National Market for the 30
trading days prior to January 12, 1999, rounded to the nearest $0.25. The
amendment was approved by the Board following conversations with shareholders
and potential investors to determine their support for the proposed change.
DESCRIPTION OF CAPITAL TRANSACTION TERMS
As of December 1, 1998, the Company executed and delivered convertible
promissory notes (the "Notes") in the aggregate principal amount of $1 million
to 18 investors in a private placement (collectively, the "Note Holders") as the
first stage of the Capital Transaction. The Notes bear interest at the rate of
seven percent (7%) per annum, are due and payable, with accrued interest, on
March 31, 1999 (except as described below) and are not transferablesole
discretion, without the
Company's consent. The Notes may be paid by the Company, subject to the
limitation described in the next sentence, with Common Stock valued at $.25 per
share and are convertible by the Note Holders into Common Stock at $.25 per
share (the "Conversion Price"). The Company is not required to issue more than
1,070,000 shares in connection with the payment and/or conversion of the Notes
unless the issuance of any additional shares has been approvedfurther action by the Company's shareholders to the extentexcept as may
otherwise be required by applicable law the Company's
organizational documents or the rules of the Nasdaq Stock Market (the "Required
Approval"). The Company is not aware of any Required Approval other than the
approval of this Proposal 2. If the entire principal and accrued interest amount
of the Notes is converted into or paid with Common Stock, the Company would be
required to issue 4,093,333 million shares of Common Stock. Amounts due under
the Notes which are not paid with or converted into Common Stock must be paid in
cash on or before their due date. The Company intends to pay all of its
obligations under the Notes with Common Stock if this Proposal 2 is approved by
shareholders.
The Company has agreed to file one registration statement under the
Securities Act of 1933 with respect to the shares issued pursuant to the Notes.
In addition, the Company has agreed not to solicit from third parties offers or
solicitations of offers for the purchase of shares of Common Stock until the
Required Approvals are received or rejected, but the Board of Directors may
furnish information and may participate in discussions and negotiations through
its representatives with persons who have sought the same if the
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failure to provide such information or participate in such negotiations or
discussions would cause the directors to breach their fiduciary duties to the
Company's shareholders under applicable law.
In contemplation of the second stage of the Capital Transaction in
which the Company was to raise an additional $3 million, five of the Note
Holders, including Mr. Nichols, Mr. Globus and two of his affiliates and Mr.
Hershey (on behalf of J. Eric May), expressed a willingness to invest additional
funds in the Company's Common Stock and were granted, in connection with their
purchase of Notes as of December 1, 1999, options to acquire additional Notes
with an aggregate principal amount of $1,250,000 on or before January 31, 1999
(the "Options"). See "Certain Considerations" below. As of January 12, 1999, the
terms of the Options were amended to provide that (i) the Options expire on the
earlier of April 30, 1999 and the fifth business day after receipt of
shareholder approval of Proposal 2, (ii) the Option holders together have the
right to purchase a total of 1,250,000 shares of Common Stock, rather than Notes
convertible into Common Stock (subject to receipt of the Required Approval) and
(iii) the exercise price of the Options is $1.00 per share, rather than $.25.
The Notes held by these five investors were also amended to extend the maturity
of the Notes from March 31, 1999 to coincide with the termination of the Options
- -- the earlier of April 30, 1999 and the fifth business day after receipt of
shareholder approval of Proposal 2. The Option holders have indicated that they
intend to exercise the Options in full if Proposal 2 is approved by
shareholders.
The Company has also received subscription agreements from other
accredited investors to purchase an additional 1,750,000 shares as part of the
second stage of the Capital Transaction at $1.00 per share, subject to receipt
of shareholder approval of this Proposal 2. As consideration for its efforts as
placement agent in connection with the sale of such shares and the sale of
$250,000 principal amount of the Notes, the Company will issue to Gregory J.
Schwartz & Co. ("Schwartz") upon the sale of the shares in the second stage of
the Capital Transaction an option to purchase 80,000 shares at $.25 per share
and 140,000 shares at $1.00 per share (the "Schwartz Option"). The Schwartz
Option expires on June 30, 1999.
NASDAQ VOTING REQUIREMENTS
The Company's Common Stock is listed on the Nasdaq Stock Market's
National Market, the market rules of which (the "Nasdaq Rules") require approval
by the Company's shareholders if the Company issues Common Stock (or securities
convertible into Common Stock) equal to 20% or more of the voting power
outstanding prior to such issuance. If the entire principal amount under the
Notes is converted into or paid with Common Stock and shares are issued pursuant
to the Schwartz Option and all of the subscription agreements received by the
Company as part of the second stage of the Capital Transaction, the Company
would issue a total of approximately 7.3 million shares of Common Stock, or
approximately 135% of the shares of Common Stock currently outstanding.
Accordingly, a vote in favor of Proposal 2 will allow the amounts owed by the
Company under the Notes to be satisfied (through payment by the Company or
conversion by the holders) with Common Stock, and the Company to issue the
shares pursuant to the subscription agreements and the Schwartz Option, without
violating Nasdaq Rules. There can be no assurance, however, that the Common
Stock will continue to be listed on the Nasdaq National Market and it is
possible that the Company may be delisted for failure to comply with other
Nasdaq Rules requiring, among other things, a minimum market price, a minimum
tangible net worth and a minimum market capitalization.
The laws of the State of Michigan do not require approval by the
Company's shareholders to issue shares pursuant to the Capital Transaction. In
addition, under Michigan law, objecting shareholders will have no appraisal,
dissenters' or similar rights (i.e., the right to seek a judicial determination
of the "fair value" of the Common Stock and to compel the Company to purchase
their Common Stock for cash in that amount) with respect to matters presented at
the Annual Meeting or otherwise with respect to Proposal 2, nor will the Company
voluntarily accord such rights to shareholders. Therefore, approval by the
requisite number of shares of the matters presented at the Annual Meeting will
bind all shareholders and objecting shareholders will be able to liquidate their
Common Stock only by selling it in the market.
-7-
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USE OF PROCEEDS
The proceeds from the issuance of the Notes were used as follows:
Payment of past due vendor notes $350,000
Purchase of inventory 400,000
Payment of other past due trade payables 100,000
Additions to working capital 150,000
----------
Total proceeds from Notes $1,000,000
----------
The proceeds from the issuance of shares of Common Stock in the second
stage of the Capital Transaction are expected to be used by the Company as
follows:
Repayment of bank debt 600,000
Additions to working capital 2,400,000
----------
Total proceeds from second stage 3,000,000
----------
Total from Capital Transaction $4,000,000
==========
CHANGE IN BOARD OF DIRECTORS
Simultaneous with the Company's execution and delivery of the Notes,
the Board appointed Stephen E. Globus and James A. Nichols to the Board of
Directors to fill the vacancies created by the resignations of Frank Logan and
Douglas Juanarena in November 1998. Messrs. Globus and Nichols each purchased
Notes with Options and intend to exercise the Options in full if this Proposal 2
is approved by shareholders. See "Certain Considerations" below.
CERTAIN CONSIDERATIONS
The Conversion Price of the Notes is $.25 and the option exercise price
and the sale price pursuant to the subscription agreements received as part of
the second stage of the Capital Transaction is $1.00. The closing price of the
Common Stock on the Nasdaq Stock Market as of February 18, 1999 was $ . If
the issuance of the shares expected to be issued in the Capital Transaction
occurs, such issuance is likely to have a dilutive effect on the shareholders of
the Company.
Messrs. Globus (including his affiliates), Nichols (including his
affiliates) and Mr. Hershey (for the account of J. Eric May, Trustee Under
Declaration of Trust) have purchased Notes and Options to purchase shares of
Common Stock as follows:
GLOBUS NICHOLS HERSHEY/MAY
------ ------- -----------
Principal Amount of Notes $ 250,000 $ 350,000 $ 250,000
Shares which may be acquired
upon conversion of Notes
(including interest) 1,023,333 1,432,667 1,023,333
Options to purchase shares at
$1.00 per shares 250,000 750,000 250,000
Total shares which may be
acquired in Capital Transaction
1,273,333 2,182,667 1,273,333
Amounts reflected in the table above for Mr. Globus include transactions with
Mr. Globus, Mr. Globus' brother and a partnership controlled by Mr. Globus and
his brother. Amounts reflected in the table above
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for Mr. Nichols include the transactions with Mr. Nichols and with an investment
club of which Mr. Nichols is a member. Amounts reflected in the table above for
Mr. Hershey are all for the account of a trust controlled by Mr. J. Eric May,
over which Mr. Hershey may exercise voting and investment power.
If the shares subject to approval pursuant to this Proposal 2 are
issued, the beneficial ownership of the outstanding shares of Common Stock
(excluding options and warrants) will change as illustrated in the following
table.
Before Issuance of Shares After Issuance of Shares
------------------------- ------------------------
Number % Number %
------ - ------ -
Hugo E. Braun -0- 0.00% -0- 0.00%
Joseph J. Fitzsimmons 4,000 0.07% 4,000 0.03%
Matthew S. Galvez -0- 0.00% -0- 0.00%
David P. Gienapp 34,460 0.64% 34,460 0.27%
Stephen E. Globus 216,379 4.04% 1,466,379 11.76%
Garnel F. Graber 16,002 0.30% 16,002 0.13%
Michael L. Hershey (including
shares of J. Eric May) 496,543 9.28% 1,769,876 13.79%
James A. Nichols 17,000 0.32% 2,199,667 17.37%
--------- ------ ---------- ------
All Directors and Current
Executive Officers as a Group 784,384 14.65% 5,513,717 43.53%
All other shareholders 4,568,832 85.35% 7,152,932 56.47%
--------- ------ ---------- ------
Total 5,353,316 100.00% 12,666,649 100.00%
========= ====== ========== ======
If all of the shares subject to approval pursuant to this Proposal are
issued, the 5,353,316 shares of Common Stock currently outstanding will
represent approximately 42.3% of the 12,666,649 then outstanding shares and
Messrs. Nichols, Globus and Hershey together will beneficially own approximately
42.9% of the outstanding Common Stock.
CONSEQUENCES IF PROPOSAL 2 IS NOT APPROVED
If the shareholders do not approve Proposal 2, the Company is likely to
be unable to pay when due the $1 million aggregate principal amount of the Notes
and the Company would be in default thereunder. In addition, it would not be
able to complete the second stage of the Capital Transaction and acquire the
working capital necessary to continue its operations. In such event, the Company
is not likely to have sufficient capital to continue operating on a long-term
basis and could be forced to curtail or completely cease its operations. The
Company could also determine to sell the Company to a third party, liquidate its
assets or seek protection under federal bankruptcy laws.
BOARD OF DIRECTORS' RECOMMENDATIONSstock exchange rule.
The Board of Directors has reviewed and consideredbelieves that the terms and
conditionsauthorization of the Capital Transaction and believes that approval of Proposal 2Preferred
Stock is advisable and in the best interests of the Company and its shareholders.shareholders and believes
that it is advisable to have such shares available for use in connection with
possible future transactions, such as financings, strategic alliances,
acquisitions and other uses not presently determinable. The Board of Directors
believes that it is desirable that the Company have the flexibility to issue
shares of Preferred Stock without the delay and expense associated with further
shareholder action. Such delay and expense may make such a transaction
impracticable, may cause the Company to miss an opportunity or may require the
Company to structure a transaction in a less advantageous manner.
During the past four years, the Company has approvedbeen unable to access the
public markets to raise cash. It has also had a difficult time attracting
institutional investors because of their reluctance to invest in Common Stock
that is unsupported in the capital markets. Approval of the proposal to create
the Preferred Stock would provide the Company with additional financing
alternatives that are necessary for the Company's long-term financial stability.
The Company intends to sell additional equity securities during the
third quarter of 2001 to refinance certain convertible subordinated notes (which
bear interest at 10% per annum and are due August 31, 2001) and to increase its
working capital. While the Company has not begun that offering or determined the
terms and conditions of the equity securities to be sold, it intends to attempt
to issue an undetermined number of shares of Preferred Stock in such offering
rather than Common Stock to minimize the additional dilution of earnings per
share and voting rights of existing common shareholders that would result from
an issuance of Common Stock. See "Proposal 4 Approval of the Capital Transaction andIssuance of Shares
of Common Stock." The Company does not intend to seek further approval from
shareholders of the terms thereof and recommendsconditions of such equity securities.
POSSIBLE DISADVANTAGES
It is not possible to determine the actual effect of the Preferred
Stock on the rights of the shareholders of the Company until the Board of
Directors determines the rights of the holders of a series of the Preferred
Stock. However, such effects might include (i) restrictions on the payments of
dividends to holders of the Common Stock; (ii) dilution of voting power to the
extent that the shareholders vote FOR approvalholders of Proposal
2. The Company's directors and executive officers (who hold approximately 14.65%shares of Preferred Stock are given voting rights;
(iii) dilution of the outstandingequity interests and voting power if the Preferred Stock
is convertible into Common Stock; and (iv) restrictions upon any distribution of
assets to
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8
the holders of the Common Stock asupon liquidation or dissolution and until the
satisfaction of any liquidation preference granted to the holders of Preferred
Stock. An issuance of Preferred Stock could also have the effect of diluting the
earnings per share and book value per share of the Record Date)Common Stock. Shareholders
will not have indicated that they
intendpreemptive rights to vote allsubscribe for shares of Common Stock over which they exercise voting power
in favor of approval of Proposal 2.
VOTE REQUIRED
The affirmative vote of a majority of the votes cast at the Annual
Meeting, in person or by proxy, on Proposal 2 is required to approve Proposal 2.
Consequently, abstentions and broker non-votes will not affect the vote on
Proposal 2.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF PROPOSAL 2.
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PROPOSAL 3
APPROVAL OF AMENDMENT TO THE ARTICLES OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARESPreferred Stock.
The Board of Directors is required by Michigan law to make any
determination to issue shares of Preferred Stock based upon its judgment as
advisable and in the best interests of the Company has approved an amendment toshareholders and the Company's Articles of Incorporation to increase the number of shares of Common
Stock authorized for issuance from 15,000,000 shares to 30,000,000 shares (the
"Authorized Shares Amendment"). Proposal 3 is the Board's proposal that the
shareholders approve the Authorized Shares Amendment.Company. The
Board of Directors recommendscould issue shares of Preferred Stock (within the limits
imposed by applicable law) that make more difficult or discourage an attempt to
obtain control of the Company when, in the judgment of the Board of Directors,
such action would not be in the best interests of the shareholders and the
Company. For example, Preferred Stock could be sold to purchasers favorable to
the Board of Directors, or the Board of Directors could authorize holders of a
series of Preferred Stock to vote FOR Proposal 3.either separately as a class or with the
holders of the Common Stock on any merger or other extraordinary corporate
transaction involving the Company. The Authorized Sharesexistence of the additional authorized
shares could have the effect of discouraging unsolicited takeover attempts.
THE AMENDMENT
The Preferred Stock Amendment would amend and restate the first
sentence of Article III of
the Company's Articles of Incorporation in its entirety to read as follows:
1. The total authorized capital stock is:
1. Common Stock: 30,000,000 shares.
The remaindershares
Preferred Stock: 30,000,000 shares
2. A statement of Article III would remain unchanged.
On February 18, 1999,all or any of the 15 million shares authorized, there were
5,353,316 shares issuedrelative rights, preferences and
outstanding and a total of 8,630,212 reserved for
issuance as follows: (i) 7,313,333 shares reserved for issuance pursuant to the
Capital Transaction, including the Schwartz Option, and (ii) 1,316,879 shares
reserved for issuance pursuant to the Company's current stock option plans and
other outstanding warrants and rights to acquire Common Stock from the Company.
If Proposal 2 is approved by the shareholders but this Proposal 3 is not
approved, the remaining unissued and unreserved shares which are currently
authorized, while sufficient to permit the Company to issue shares as
contemplated by the Capital Transaction, would not be sufficient in number, in
the Board's view, to provide the flexibility necessary for the Company to be
able to take advantage of market or acquisition opportunities or to address
capital needs without the delay and expense involved in calling a special
shareholders meeting to approve an issuance. As a result, the Company's ability
to raise additional capital would be severely restricted. Moreover, if Proposals
2 and 5 are approved by the shareholders but this Proposal 3 is not approved,
the Company would not have a sufficient number of shares to fully implement the
new Long-Term Incentive Plan, severely restricting its ability to attract and
retain qualified employees.
The number of shares authorized in excesslimitations of the shares outstanding and
the shares reserved for issuance would be availableof each class is as follows:
A. Subject to the Companypreferences accorded the holders of any other
class of stock pursuant to these Articles of Incorporation or
action of the Board of Directors taken with respect to such
preferences, holders of Common Stock are entitled to receive such
dividends as may be used
for general corporate purposes, which include, without limitation, raising
additional funds, attracting and retaining qualified personnel and effecting
stock splits and acquisitions. Other than the issuance of shares submitted for
approval by the shareholders under Proposal 2 and the Long-Term Incentive Plan
submitted for approval by the shareholders under Proposal 5, there are no
transactions under present reviewdeclared by the Board of Directors which would result
in the issuance of the
additional authorized shares, although the Company does
considercorporation from time to time proposalsand, in the event of any
liquidation, dissolution or transactions involvingwinding up of the issuance of
additional shares of Common Stock or instruments convertible into or exercisable
for Common Stock. Whether any specific proposed transaction involvingcorporation, the
issuance of sharesholders of Common Stock will be submittedentitled to receive pro rata all
of the remaining assets of the corporation available for
shareholder approval
willdistribution. Each issued and outstanding share of Common Stock is
entitled to one vote.
B. The board of directors is empowered and authorized from time to
time, for such consideration as the board of directors may
determine, to issue Preferred Stock in one or more series, each
series to bear a distinctive designation and to have such relative
rights, powers, preferences, limitations, restrictions and other
terms as shall be determinedstated in the resolution or resolutions of the
board of directors providing for the issuance thereof. Such
resolutions, when filed with the Michigan Department of Commerce,
shall constitute amendments to these Articles of Incorporation.
Except as may otherwise be provided in these Articles of
Incorporation or required by applicable law, anddifferent series of preferred
stock shall not be construed to constitute different classes of
shares for the purpose of voting by the regulationsclasses.
C. No holder of any shares of any class of stock of this
corporation shall have any preemptive or preferential right to
subscribe for, or to purchase, any part of a new or additional
issue of stock or any other reacquired shares of stock of any
class whatsoever or of any securities marketconvertible into stock of
any class whatsoever, whether now or exchange on which the Company's Common Stock is then listed.
Although the Board of Directors would authorize the issuance of
additional shares of Common Stock based on its judgment as to the best interests
of the Companyhereafter authorized and
its shareholders, the issuance of additional authorized
shares could have the effect of diluting the voting power per share and diluting
the book value per share of the outstanding shares of Common Stock. In addition,
increasing the authorized shares of Common Stock could, in certain instances,
render more difficultwhether issued for cash or discourage a merger, tender offer, or proxy contest and
thus potentially have an "anti-takeover" effect, especially if additional shares
of Common Stock were issued in response to a potential takeover. Such an effect
could deter certain types of transactions that might be proposed, whether or not
such transactions were favored by the majority of the shareholders, and could
enhance the ability of officers and directors to retain their positions.
The additional Common Stock to be authorized by adoption of the
Authorized Shares Amendment would have rights identical to the currently
outstanding Common Stock of the Company. Holders of Common Stock have no
preemptive rights with respect to any shares which may be issued in the future.
-10-other consideration.
6
139
If Proposal 32 is approved, the Company intends to file an amendment to
its Articles of Incorporation with the Michigan Department of Consumer and
Industry Services,Commerce, upon
which filing the Authorized SharesPreferred Stock Amendment will become effective.
VOTE REQUIRED
If a majority of the outstanding shares of Common Stock entitled to
vote at the Annual Meeting are voted for the amendment, the amendment will be
approved. Abstentions and broker nonvotes will not be counted and will have the
same effect as a vote against Proposal 2.
The Company's directors and executive officers (who currently hold
Common Stock representing approximately 14.65%37.5 % of the outstanding shares of Common Stock as of the Record Date)Stock) have
indicated that they intend to vote all shares of Common Stock over which they
exercise voting power as of the close of business on the Record Date in favor of
approval of Proposal 3.
The affirmative vote of a majority of the shares of Common Stock
entitled to vote at the Annual Meeting is required to approve Proposal 3.
Consequently, abstentions and broker non-votes will have the same effect as a
vote against Proposal 3.2.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF PROPOSAL 3.2.
PROPOSAL 43
APPROVAL OF AMENDMENT TO THE COMPANY'S ARTICLES OF
INCORPORATION TO DECLASSIFY THE BOARD OF DIRECTORS
The Board of Directors of the Company has approved, and is proposing
that shareholders approve, an amendment to the Company's Articles of
Incorporation to eliminate the classification of the Company's Board of
Directors and cause each director to stand for election annually (the
"Declassification Amendment"). The Board of Directors recommends a vote FOR
Proposal 4.3.
ISSUES FOR CONSIDERATION
Article VII of the Restated Articles of Incorporation currently
provides that the Board of Directors be divided into three classes as nearly
equal in number as possible. Directors of each class serve staggered three-year
terms, with the term of office of one class expiring each year, and can be
removed only for cause. Article VII may be amended only with the approval of
holders of 80% of the shares of Common Stock outstanding and entitled to vote on
the election of directors generally. If the Declassification Amendment is
approved, the classes and staggered three-year terms of directors would be
eliminated, the current term of office of each director will end at the 2000
Annual Meeting2002
annual meeting (which will be held after the end of the Company's fiscal year
ending September 30, 1999)December 31, 2001) and all directors will thereafter be elected for
one-year terms at each annual meeting of shareholders. The Declassification
Amendment will also eliminate the restriction on removal of directors and the
80% vote requirement, which are adjuncts to a classified board.
Proponents of classified boards of directors believe that a classified
board helps a board of directors maintain a greater continuity of experience
because the majority of directors at any given time will have at least one year
of experience with the business affairs and operations of a company. This
continuity may assist a company in long-term strategic planning. Additionally,
proponents argue that a classified board reduces the possibility of a sudden
change in majority control of a board of directors. In the event of a hostile
takeover attempt, a classified board may encourage a person seeking control of
the Company to initiate arm's length discussions with the Board, which is in a
position to negotiate a more favorable transaction for shareholders.
However, the Board of Directors believes that a classified board of
directors limits the ability of shareholders to elect directors and exercise
influence over the Company. The election of directors is the primary means for
shareholders to influence corporate governance policies and to hold management
accountable for its implementation of those policies. In keeping with its goal
of ensuring that the Company's corporate governance policies maximize management
accountability to shareholders, the Board of Directors has determined that
declassifying the Board, so that shareholders have the opportunity each
7
10
year to register their views on the performance of the Board and management,
would better serve the interests of the Company and its shareholders.
THE AMENDMENT
The Declassification Amendment would amend and restate Article VII of
the Company's Articles of Incorporation to read as follows:
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"A.A. The number of directors constituting the entire Board of
Directors shall not be less than three nor more than twelve, the exact
number of directors to be fixed from time to time only by a vote of a
majority of the Board of Directors.
B. During the intervals between annual meetings of
shareholders, any vacancy occurring in the Board of Directors caused by
resignation, removal, death or other incapacity, and any newly created
directorships resulting from an increase in the number of directorships
shall be filled by a majority vote of the directors then in office,
whether or not a quorum, or, if there are no directors in office, by
the shareholders. If the Board of Directors accepts the resignation of
any director or officer to take effect at a future time, it shall have
the power to elect a successor who shall take office when the
resignation becomes effective. Each director chosen to fill a vacancy
or chosen to fill a newly created directorship shall take office until
the next election and until the election and qualification of his
successor, or until his earlier death, resignation or removal."
Section 506 of the Michigan Business Corporation Act, as amended,
requires that a corporation desiring to classify its board of directors must
expressly provide for such classification in either its articles of
incorporation or its bylaws. The deletion of the provisions of Article VII
relating to the classification of the Board is intended to remove any express
provision for the classification of the Board, thereby removing the
classification of the Board. The Company's bylaws do not expressly provide for
classification of the Board.
If Proposal 43 is approved, the Company intends to file an amendment to
its Articles of Incorporation with the Michigan Department of Consumer and
Industry Services,Commerce, upon
which filing the Declassification Amendment will become effective.
VOTE REQUIRED
The Articles of Incorporation provide that the affirmative vote of the
holders of at least 80% of the outstanding shares of Common Stock entitled to
vote at the Annual Meeting is required to approve Proposal 3. Consequently,
abstentions and broker non-votes will not be counted and will have the same
effect as a vote against Proposal 3.
The Company's directors and executive officers (who currently hold
Common Stock representing approximately 14.65%37.5 % of the Common Stock) have
indicated that they intend to vote all shares of Common Stock over which they
exercise voting power as of the close of business on the Record Date in favor of
approval of Proposal 3.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF PROPOSAL 3.
PROPOSAL 4
APPROVAL OF THE ISSUANCE OF SHARES OF COMMON STOCK
The Board of Directors has approved, and is proposing that shareholders
approve, the potential issuance of shares of Common Stock pursuant to a private
placement capital raising transaction (the "Capital Transaction"). The Company
entered into the Capital Transaction to alleviate a severe cash shortage and
permit the Company to continue operations.
Approval of Proposal 4 could result in the issuance of approximately
4,172,000 shares of
8
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Common Stock (subject to adjustment) upon the conversion of convertible
subordinated promissory notes issued in March 2001. The Board of Directors
recommends a vote FOR this Proposal 4.
BACKGROUND
The Company experienced a loss from operations in 2000 of $2.2 million
and incurred additional losses in the first quarter of 2001. Because of these
losses and the cash used to acquire A-OK Controls in June 2000, the Company's
financial position had deteriorated and it was in violation of several bank loan
covenants. Although the bank has indicated its willingness to forbear from
exercising its remedies and to continue to lend money to the Company up to the
limits of the borrowing base formula in the Company's loan agreement, management
projected that the limits imposed by the borrowing base formula would not be
sufficient to fund near-term operations unless the limits under the borrowing
base formula were relaxed. The bank was unwilling to adjust the formula, leaving
the Company unable to fund operations until it could return to profitability
and/or improve the dollar limits of its borrowing availability through increased
sales and resulting receivables. The Company's only alternative was to raise
additional debt or equity capital. In December 2000, the Company issued
additional shares of Common Stock in an offering to several of its directors and
their affiliates. After additional months of intensive effort and negotiation,
management identified several investors willing to invest in the Company and
issued $1.2 million principal amount of its convertible subordinated promissory
notes (the "Notes") and warrants to purchase a total of 800,000 shares of Common
Stock to four accredited investors in a private placement in March 2001.
Through frequent meetings and informal contacts with management during
the preceding months, the Board of Directors was kept fully informed of the
Company's declining financial position and management's strategic and capital
raising efforts. With this extensive background information in mind, the Board
met on March 20, 2001 to consider the issuance of the Notes and related
warrants. Following a detailed explanation of the current status of the
Company's financial position and lack of working capital, the negotiations with
potential investors and others who had been approached by management but who had
responded negatively to a proposed investment in the Company and the Company's
relationship with its bank lender and other creditors, the Board proceeded to
consider the terms of the proposed issuance of Notes and potential alternatives
available to the Company. The Board considered postponing the proposed
transaction to allow the Company more time to locate an investment transaction
with terms more favorable to the Company and its shareholders. However, in view
of, among other factors, (i) the Company's pending acquisition of Optimation,
which required $300,000 of cash at closing, (ii) the urgency with which the
Company needed to obtain capital in order to pay its employees and to pay its
vendors to induce them to continue shipments of components, (iii) the likely
loss of vendor support and customer base if the Company were to seek bankruptcy
protection and (iv) the likely depreciation in value of the Company's assets if
they were to be liquidated or if the Company were to cease operating for even a
short time, the Board determined that the proposed issuance of the Notes was the
best available alternative to maximize the Company's value to its shareholders.
The Board concluded, in light of these factors and others, that the issuance of
the Notes and related warrants was in the best interests of the Company and its
shareholders and unanimously approved (with Mr. Braun and Mr. Nichols
abstaining) such issuance, the terms of the Notes and warrants and related
matters.
$300,000 of the proceeds from the sale of the Notes was used to acquire
the stock of Optimation, Inc. on March 29, 2001 and the remaining $900,000 was
added to working capital and was used in part to pay down outstanding accounts
payable and for general operations. The Notes, which are secured by a second
lien on the Company's assets and are subordinated in right of payment to the
Company's bank lender, bear interest at 10% and are due on August 31, 2001. The
Notes will become immediately due and payable in full if this Proposal 4 is not
approved on or before May 31, 2001. The Notes are prepayable at any time without
penalty upon prior written notice as provided in the Notes. The holders of the
Notes are not permitted to transfer them without the Company's prior written
consent.
If the Company does not complete an equity financing pursuant to which
it receives gross proceeds of at least $5 million (the "Equity Financing
Transaction") on or before August 31, 2001, the principal and interest due on
the Notes become convertible by the holders into Common Stock at an initial
conversion price of $0.30 per share. The conversion price will adjust downward
to the extent the closing price for five consecutive days on which the Common
Stock is traded is less than $0.30. Based upon the initial conversion price, the
Notes would be convertible into a total of 4,172,000 shares of Common Stock,
9
12
assuming the Company has not previously paid any of the principal or interest
due on the Notes. If the Equity Financing Transaction occurs on or before August
31, 2001, the unpaid principal and interest due on the Notes will be convertible
by the holders into the capital stock sold in the Equity Financing Transaction
at the price per share paid by the purchasers in such transaction.
AMERICAN STOCK EXCHANGE REQUIREMENTS
The Company's Common Stock is listed on the American Stock Exchange,
the rules of which (the "Amex Rules") require approval by the Company's
shareholders if the Company issues Common Stock (or securities convertible into
Common Stock) equal to 20% or more of the voting power outstanding prior to such
issuance. If the entire principal and interest under the Notes are converted
into Common Stock, the Company would issue a total of approximately 4,172,000
million shares of Common Stock, or approximately 27.0% of the shares of Common
Stock currently outstanding. Accordingly, a vote in favor of Proposal 4 will
allow the holders of the Notes to convert the Notes into Common Stock if the
Equity Financing Transaction involves Common Stock or if the Equity Financing
Transaction does not occur without violating Amex Rules. There can be no
assurance, however, that the Common Stock will continue to be listed on the
American Stock Exchange and it is possible that the Company may be delisted for
failure to comply with other Amex Rules requiring, among other things, a minimum
market price, a minimum tangible net worth and a minimum market capitalization.
The laws of the State of Michigan do not require approval of Proposal 4
by the Company's shareholders. In addition, under Michigan law, objecting
shareholders will have no appraisal, dissenters' or similar rights with respect
to any of the matters presented at the Annual Meeting, including Proposal 4, nor
will the Company voluntarily accord such rights to shareholders.
CERTAIN CONSIDERATIONS
The conversion price of the Notes is $0.30 per share (subject to
adjustment, as described above) and the closing price of the Common Stock
reported on the American Stock Exchange as of March 29, 2001 was $0.75. If the
Notes become convertible as a result of the Equity Financing Transaction not
occurring on or before August 31, 2001 and the Notes are thereafter converted
into Common Stock, such issuance is likely to have a dilutive effect on the
shareholders of the Company.
If Proposal 4 is not approved on or before May 31, 2001, the Notes will
become immediately due and payable in cash. The Company intends to repay the
Notes with the proceeds of the Equity Financing Transaction, which may not occur
until August 2001, if at all, and does not currently have available cash to
repay the Notes. The Company's bank lender, which is currently forbearing from
exercising its remedies against the Company, and the Note holders would be
entitled to exercise their remedies against the Company to collect the Notes,
including enforcing their security interest in the Company's assets. In
addition, the Company would not be able to acquire the working capital necessary
to continue its operations or to repay the bank lender the amount required to
reduce its line of credit borrowings. In such event, the Company is not likely
to have sufficient capital to continue operating on a long-term basis and could
be forced to curtail or completely cease operations. The Company could also
determine to sell the Company to a third party, liquidate its assets or seek
protection under federal bankruptcy laws.
James A. Nichols, a director of the Company, purchased $100,000
principal amount of the Notes and a partnership, in which Mr. Nichols is a
partner, purchased $50,000 principal amount of the Notes. North Coast Technology
Investors L.P., of which Hugo E. Braun, a director of the Company, is a partner,
purchased $750,000 principal amount of the Notes. If their Notes become
convertible at $0.30 per share due to the Company's failure to timely complete
the Equity Financing Transaction, the Notes held by Mr. Nichols, directly and
through such partnership, and by North Coast Technology Investors L. P. would be
convertible into approximately 521,000 shares and 2,607,000 shares,
respectively, at September 1, 2001, assuming none of the principal and interest
due on the Notes has been paid by the Company in cash.
VOTE REQUIRED
The affirmative vote of the holders of at least a majority of the votes
cast at the Annual Meeting is required to approve Proposal 4. Consequently,
abstentions and broker non-votes will not be counted and will not affect the
vote on Proposal 4.
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13
The Company's directors and executive officers (who currently hold
Common Stock representing approximately 37.5% of the Common Stock) have
indicated that they intend to vote all shares of Common Stock over which they
exercise voting power as of the close of business on the Record Date in favor of
approval of Proposal 4.
The Articles of Incorporation provide that the affirmative vote of the
holders of at least 80% of the outstanding shares of Common Stock entitled to
vote at the Annual Meeting is required to approve Proposal 4. Consequently,
abstentions and broker non-votes will have the same effect as a vote against
Proposal 4.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF PROPOSAL 4.
PROPOSAL 5
APPROVAL OF THE NEMATRON CORPORATION
LONG-TERM INCENTIVE PLAN
The Board of Directors of the Company has approved, and is proposing
that shareholders approve, the Nematron Corporation Long-Term Incentive Plan
(the "Plan") and the issuance of shares of Common Stock thereunder. In
accordance with the terms of the Plan, approval of Proposal 5 could result in
the issuance of up to 1,250,000 shares of Common Stock (subject to adjustment by
the Committee to prevent dilution or enlargement of benefits resulting from
stock dividends, recapitalizations, mergers and other changes in the Common
Stock).
The Plan is intended to attract and motivate highly qualified
individuals to serve as employees of the Company, to align the interests of
employees of the Company with the interests of the Company's shareholders and to
encourage employees to acquire an ownership interest in the Company. As the
Company realizes future business success, the Plan may provide compensation
incentives which it cannot presently provide through salary or bonus.
The Board of Directors recommends a vote FOR Proposal 5.
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GENERAL DESCRIPTION OF THE PLAN
The Plan will be administered by the Organization and Compensation
Committee of the Company's Board of Directors (the "Committee"), which is
comprised of no fewer than two non-employee members of the Company's Board of
Directors. The Committee is authorized to administer and interpret the Plan and
to adopt such rules and regulations as it determines are appropriate.
Awards may be made by the Committee to employees of the Company and its
subsidiaries as the Committee may select and may be in the form of incentive
stock options, non-qualified stock options, restricted stock or performance
shares, provided that the Committee may not grant options to any salaried
employee during any three year period to purchase more than 500,000 shares. The
Company currently has 90 employees. A total of 1,250,000 shares of Common Stock
are reserved for issuance under the Plan (subject to adjustment by the Committee
to prevent dilution or enlargement of benefits resulting from stock dividends,
recapitalizations, mergers and other changes in the Common Stock). There have
been no grants or awards under the Plan to date. Shares subject to any
unexercised portion of a terminated, forfeited, canceled or expired option
granted under the Plan, and shares subject to any terminated, forfeited,
canceled or expired portion of a restricted stock grant or performance share
award under the Plan may again be used for subsequent grants and awards under
the Plan. No award under the Plan may be transferred except by will or the laws
of descent and distribution.
STOCK OPTION GRANTS
Options granted under the Plan may be either incentive stock options
under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
or nonqualified stock options. The exercise price of any option granted under
the Plan may be no less than the fair market value per share of the Common Stock
on the date of grant. The last reported sale price of the Common Stock on
February 18, 1999 was $___ per share. Options granted under the Plan become
exercisable at such times as the Committee may determine and will generally have
a term of ten years unless the Committee determines a shorter term. No incentive
stock options may be exercisable after ten years from the date of grant. The
aggregate fair market value, determined on the grant date, of the Common Stock
with respect to which incentive stock options may first become exercisable for
an optionee during any calendar year may not exceed $100,000.
Payment for shares to be acquired upon exercise of options granted
under the Plan may be made in cash, by check, by tendering shares of Common
Stock, or, at the discretion of the Committee, an optionee may exercise an
option through a cashless exercise procedure whereby the optionee provides an
option exercise notice to the Company and simultaneously irrevocably instructs a
broker to sell a sufficient number of the shares from the option exercise to pay
the option exercise price and accompanying taxes. At the Committee's discretion,
shares may be tendered to the Company or the cashless exercise procedure may be
used to satisfy tax obligations.
RESTRICTED STOCK GRANTS AND PERFORMANCE SHARE AWARDS
The Plan authorizes the Committee to grant restricted stock awards
pursuant to which shares of Common Stock will be awarded, subject to
restrictions on transfer that lapse over a period of time or upon achievement of
performance goals, as determined by the Committee. Participants who receive
restricted stock grants are entitled to dividend and voting rights on the
awarded shares prior to the lapse of restrictions on such awards. The Committee
is also authorized to grant performance share awards under the Plan, which are
payable at the discretion of the Committee in cash, shares of Common Stock, or a
combination of each, upon achievement of performance goals established by the
Committee. The terms and conditions of restricted stock and performance share
awards, including the acceleration or lapse of any restrictions or conditions of
such awards, will be determined by the Committee.
TERMINATION; CHANGE IN CONTROL
Options which are not yet exercisable, restricted stock which is not
yet transferable and performance share awards with respect to which performance
goals have not yet been achieved will generally be forfeited if the holder's
employment is terminated. The Committee, however, is granted discretion under
the Plan to accelerate the exercisability of options and waive the restrictions
or conditions
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16
applicable to restricted stock or performance share awards and such acceleration
and waiver will occur automatically upon a change in control of the Company (as
defined in the Plan).
An option (or portion thereof) which is exercisable at the time of the
holder's termination may be exercised after such time to the extent it was
exercisable at the time of the holder's termination until such option
terminates. Unless the Committee otherwise provides, an exercisable option will
terminate at various times after the holder's employment terminates, based upon
the reason for the holder's termination. If employment is terminated for any
reason other than death, disability or retirement, such option generally will
terminate on the earlier of the expiration date of the option or three months
after the option holder's termination. If employment terminates because the
holder has died or becomes disabled, such option generally will terminate on the
earlier of the expiration of the option or one year following the date of the
option holder's termination. If employment terminates due to retirement, the
option generally will terminate on the earlier of the expiration date of the
option or the second anniversary of the option holder's termination.
AMENDMENT AND TERMINATION OF THE PLAN
The Plan may be terminated or amended at any time by the Board of
Directors. No amendment, modification or termination of the Plan may adversely
affect any option, restricted stock award or performance share award previously
granted under the Plan without the consent of the participant. Unless the Plan
is terminated sooner by the Board, no new awards or grants may be authorized
under the Plan after January 12, 2009.
FEDERAL INCOME TAX CONSEQUENCES
Under the Code as now in effect, at the time an incentive stock option
("ISO") is granted or exercised, the optionee will not be deemed to receive any
income and the Company will not be entitled to any deduction. However, the
difference between the exercise price and the fair market value of the shares of
Common Stock on the date of exercise is a tax preference item, which may subject
the optionee to the alternative minimum tax in the year of exercise. The holder
of an ISO generally will be accorded capital gain or loss treatment on the
disposition of Common Stock acquired by exercise of an ISO, provided the
disposition occurs more than two years after the date of grant and more than one
year after exercise. An optionee who disposes of shares acquired upon exercise
of an ISO prior to the expiration of the foregoing holding periods recognizes
ordinary income upon the disposition equal to the difference between the
exercise price and the lesser of the fair market value of the shares on the date
of exercise or the disposition price. Any appreciation above the fair market
value of the shares on the exercise date is taxed at capital gains rates. To the
extent ordinary income is recognized by the optionee, the Company may deduct a
corresponding amount as compensation expense. Payment of the exercise price by
surrendering shares of Common Stock generally will not result in the recognition
of a capital gain or loss on the shares surrendered.
Upon the exercise of a nonqualified stock option, an optionee will
recognize ordinary income equal to the difference between the exercise price and
the fair market value of the Common Stock acquired at the time of exercise and
the Company will receive a corresponding deduction. Payment of the exercise
price by surrendering shares of Common Stock generally will not result in the
recognition of a capital gain or loss on the shares surrendered. When the
optionee disposes of the shares acquired by the exercise of the option, any
difference from the fair market value of the shares on the date of exercise will
be treated as capital gain or loss.
A participant who receives a restricted stock or performance share
award recognizes ordinary income equal to the fair market value of the Common
Stock on the date the restrictions lapse or the date of receipt, respectively,
and, upon withholding for income and employment taxes, the Company will receive
a compensation tax deduction equal to the ordinary income recognized by the
participant.
BOARD OF DIRECTORS' RECOMMENDATIONS
The Board of Directors has reviewed and considered the terms and
conditions of the Plan and believes that approval of Proposal 5 is advisable and
in the best interests of the Company and its shareholders. The Board of
Directors has approved the Plan and the terms thereof and recommends that the
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shareholders vote FOR approval of Proposal 5. The Company's directors and
executive officers (who hold approximately 14.65% of the outstanding Common
Stock as of the Record Date) have indicated that they intend to vote all shares
of Common Stock over which they exercise voting power in favor of approval of
Proposal 5.
VOTE REQUIRED
The affirmative vote of a majority of the shares of Common Stock voted,
in person or by proxy, on Proposal 5 at the Annual Meeting is required to
approve Proposal 5. Consequently, abstentions and broker non-votes will have no
effect on Proposal 5.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF PROPOSAL 5.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information as of February 18, 1999March 31, 2001 with
respect to the beneficial ownership of Common Stock by each board nominee, each
other current director, each executive officer named in the Summary Compensation
Table under "Executive Compensation", all current directors and executive
officers as a group and all other persons known by the Company to beneficially
own more than 5% of its outstanding Common Stock (each, a "5% Owner"). Except as
noted below, each shareholder exercises sole voting and investment power with
respect to the shares beneficially owned.
Name Number of Shares Percent of Class(11)Class (13)
- ---- ---------------- -----------------------------------------
Directors and Management:
James A. Nichols 2,199,6672,081,155 (1) 29.19%13.4%
Stephen E. Globus 1,283,735 (2) 8.3%
Hugo E. Braun 1,701,449 (3) 10.6%
Matthew S. Galvez 860,100 (4) 5.3%
David P. Gienapp 95,193 (5) *
Garnel F. Graber 66,966 (6) *
Joseph J. Fitzsimmons 25,108 (7) *
James H. Wicker 4,000 (8) *
All directors and executive
officers as group (8 persons) 5,517,706 (9) 36.5%
5% Owners:
Michael L. Hershey 1,787,540 (2) 26.90%1,518,796 (10) 9.8%
J. Eric May, Trustee Under
Declaration of Trust 1,744,505 (3) 26.33%
Stephen E. Globus 1,489,712 (4) 22.48%
Frank G. Logan, III 234,552 (5) 4.38%
Hugo E. Braun 146,893 (6) 2.67%
David P. Gienapp 108,460 (7) 2.00%
Garnel F. Graber 64,110 (8) 1.19%
Joseph J. Fitzsimmons 20,664 (9) 0.38%
Matthew S. Galvez 0 0.00%
All Current Directors and Executive
Officers as Group (9 persons) 5,817,046 (10) 56.01%1,493,425 (11) 9.6%
Dennis A. Sierk 1,415,620 (12) 9.2%
- ----------------
* Less than one percent.
(1) Mr. Nichols. The shares representedshown in the table for Mr. Nichols include (i) 17,0001,737,704 shares
owned outright;outright, and (ii) 1,228,000244,451 shares which may be acquired upon
conversion of Notes owned by Mr. Nichols; (iii) 204,667 shares which may be
acquired upon conversion of Notes owned by an investment club of which Mr.
Nichols is a member;member, (iii) currently exercisable warrants to purchase 100,000
shares pursuant to the Notes described in Proposal 4 above, and (iv) 750,000options to
purchase 3,000 shares which he has the right to acquire
upon exercise of the Option granted to him in connection with his acquisition
of the Notes.are currently exercisable or are exercisable within
sixty days. Mr. Nichols businessNichols' address is 3707 West Maple Road, Bloomfield Hills, MI
48301.
(2) Mr. Hershey. The shares representedshown in the table for Mr. Globus include (i) the
471,172 shares owned by J. Eric May, Trustee Under Declaration of Trust, over
which Mr. Hershey may exercise voting and investment power; (ii) 1,023,333
shares which may be acquired by Mr. May as Trustee upon conversion of Notes;
(iii) 250,000 shares which may be acquired by Mr. May as Trustee upon exercise
of the Option granted to him in connection with his acquisition of the Notes;
(iv) 25,371255,062 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.
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(3) Mr. May. The shares represented in the table include (i)
471,172Globus, (ii) 672,358 shares owned by Mr. J. Eric May, Trustee Under Declaration of Trust,
over which Mr. Hershey may exercise votingcompanies and investment power; (ii) 1,023,333
shares which may be acquired by Mr. May as Trustee upon conversion of Notes; and
(iii) 250,000 shares which may be acquired by Mr. May as Trustee upon exercise
of the Option granted to him in connection with his acquisition of the Notes.
Mr. May's address is c/o Wilmington Trust Company, 1100 North Market Street,
Wilmington, DE 19890.
(4) Mr. Globus. The shares represented in the table include (i) 8,973
shares owned outright by Mr. Globus; (ii) 120,180 shares owned by
partnerships over which Mr. Globus exercises voting and investment power;power, (iii)
87,226343,315 shares owned by certain relatives of Mr. Globus over which Mr. Globus
exercises beneficial ownership;ownership, and (iv) 255,833options to purchase 3,000 shares which
may be acquired by Mr. Globus
upon conversion of Notes and 62,500 shares which he has the right to acquire
upon exercise of the Option granted to him in connection with his acquisition of
the Notes; (v) 511,667 shares which may be acquired by a partnership upon
conversion of Notes and 125,000 shares which it has the right to acquire upon
exercise of the Option granted to it in connection with its acquisition of the
Notes, with respect to which shares Mr. Globus will have voting and investment
power; and (vi) 255,833 shares which may be acquired by Mr. Globus' brother upon
conversion of Notes and 62,500 shares which he has the right to acquire upon
exercise of the Option granted to him in connection with his acquisition of the
Notes, with respect to which shares Mr. Globus will have beneficial ownership.are currently exercisable or are exercisable within sixty days. Mr. Globus'
address is 44 West 24th Street, New York, New YorkNY 10010.
(5) Mr. Logan.(3) The shares representedshown in the table for Mr. Braun include (i) 208,588 shares owned outright; (ii) 2,0001,050,000 shares
owned by North Coast Technology Investors L.P. and Access Venture Fund L.P., of
which Mr. Logan's wife; and
(iii) 25,964 shares owned by Mr. Logan as custodian of certain trusts for his
children. Mr. Logan has resigned asBraun is a director and officer of the Company.
(6) Mr. Braun. The shares represented in the table include (i)partner, (ii) options to
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purchase 15,10819,664 shares under the Directors Stock Option Plan which are currently exercisable or are exercisable within
sixty days;days, (iii) currently exercisable warrants to purchase 500,000 shares
pursuant to the Notes described in Proposal 4 above, and (ii)(iv) currently
exercisable warrants to purchase 131,785 shares of Common Stock pursuant to a Term Loan and
Warrant Purchase Agreement dated November 7, 1995 between the Company and Onset
BIDCO, Inc., of which Mr. Braun is an officer, and
others.officer. If such warrants were exercised,
Mr. Braun would have sole voting rights and shared investment power with respect
to the underlying shares. (7)The address for Mr. Gienapp.Braun and North Coast Technology
Investors L.P. is 206 South Fifth Avenue, Suite 550, Ann Arbor, MI 48104.
(4) The shares representedshown in the table for Mr. Galvez include (i) 34,460100 shares owned
outright;outright, and (ii) options to purchase 74,000860,000 shares underwhich are currently
exercisable or are exercisable within sixty days. Mr. Galvez's address is 5840
Interface Drive, Ann Arbor, MI 48103.
(5) The shares shown in the 1993table for Mr. Gienapp include (i) 41,860 shares
owned outright, (ii) options to purchase 53,333 shares which are currently
exercisable or are exercisable within sixty days.
(6) The shares shown in the table for Mr. Graber include (i) 14,302 shares owned
outright, and (ii) options to purchase 52,664 shares which are currently
exercisable or are exercisable within sixty days.
(7) The shares shown in the table for Mr. Fitzsimmons include (i) 10,000 shares
of Common Stock Option Planowned outright, and (ii) options to purchase 15,108 shares which
are currently exercisable or are exercisable within sixty days.
(8) Mr. Graber. The shares representedshown in the table for Mr. Wicker include (i) 16,0021,000 shares of
Common Stock owned outright;outright, and (ii) options to purchase 48,1083,000 shares of Common
Stock under the Directors Stock Option Plan and special option awards which are
currently exercisable or are exercisable within sixty days.
(9) Mr. Fitzsimmons. The shares shown in the table include (i) 4,000 shares of
Common Stock owned outright;for all current directors and (ii) options to purchase 16,664 shares of
Common Stock under the Directors Stock Option Plan which are currently
exercisable or are exercisable within sixty days.
(10) All Current Directors and Executive Officersexecutive
officers as a Group. The shares
represented in the tablegroup include the shares described in footnotes (1) through (8).
(10) 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), (2)and (ii) 25,371 shares owned
outright by Mr. Hershey. Mr. Hershey's address is c/o Landis Associates, Inc.,
(4)400 West Ninth Street, Suite 100, Wilmington, DE 19801.
(11) The shares shown in the table for Mr. May include 1,493,425 shares owned by
J. Eric May, Trustee Under Declaration of Trust, over which Mr. Hershey may
exercise voting and (6) through (9).
(11)investment power. Mr. May's address is c/o Wilmington Trust
Company, 1100 North Market Street, Wilmington, DE 19890.
(12) The shares shown in the table for Mr. Sierk include 1,145,620 shares owned
by Mr. Sierk and his wife, such shares being acquired as a portion of the
purchase price of Optimation, Inc. by the Company on March 29, 2001. Mr. Sierk's
address is 2800 Bob Wallace Avenue, Suite L3, Huntsville, AL 35805.
(13) For purposes of calculating the percentage of Common Stock beneficially
owned by each person, the shares issuable upon exercise of options and warrants
held by such person and upon conversion of Notes held by such person are considered outstanding and added to the shares of Common
Stock actually outstanding.
EXECUTIVE COMPENSATION
SUMMARY
The following table sets forth information for the periods indicated
concerning the aggregate compensation paid by the Company and its subsidiaries
to the Company's former
President and Chief Executive Officer, its current
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President and Chief Operating Officer and to its Executive Vice
President - Finance and Administration, the Company's only other executive
officer whose salary and bonus exceeded $100,000 in fiscal 1998the year ended December 31,
2000 (the "Named Executives"), for
the periods indicated.
.
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SUMMARY COMPENSATION TABLE
(1)
- ---------------------------------------------------------------------------------------------------------
LONG-TERM
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION COMPENSATION
-------------------------
AWARDS
--------------------------------
--------------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL FISCAL SECURITIESBONUS UNDERLYING COMPEN-OPTIONS COMPENSATION
POSITION YEARPERIOD SALARY ($) BONUS ($) OPTIONS (#) SATION ($) (2)(A)
- ----------------------------------------------------------------------------------------------------------------------------------- --------------- --------------- ----------- ---------------------- --------------
Matthew S. Galvez, 1998Y/E 12-31-00 $200,000 $ -0- -0- $18,071
President and Chief --------------- --------------- ----------- ---------------------- --------------
Executive Officer (b) Y/E 12-31-99 $181,042 $63,092 200,000 $11,175
--------------- --------------- ----------- ---------------------- --------------
3 Months
12-31-98 $ 35,538 $ -0- 660,000 $ 2,115
--------------- --------------- ----------- ---------------------- --------------
Y/E 9-30-98 $ 13,538 $ -0- -0- $ -0-
President--------------- --------------- ----------- ---------------------- --------------
David P. Gienapp, Y/E 12-31-00 $120,000 $ -0- 25,000 $ 3,461
VP-Finance and Chief
Operating Officer (3)
- ---------------------------------------------------------------------------------------------------------
Frank G. Logan, III, 1998 $165,467--------------- --------------- ----------- ---------------------- --------------
Administration Y/E 12-31-99 $111,642 $ 8,477 70,000 $ 1,664
--------------- --------------- ----------- ---------------------- --------------
3 Months
12-31-98 $ 29,724 $ -0- -0- $49,226
-----------------------------------------------------------------------------
President and Chief 1997 $168,043 $200,000 120,000 $ 5,113
-----------------------------------------------------------------------------
Executive Officer(4) 1996 $154,531 $ 25,000 50,000 $ 4,305
- ---------------------------------------------------------------------------------------------------------
David P. Gienapp, 1998-0-
--------------- --------------- ----------- ---------------------- --------------
Y/E 9-30-98 $110,552 $ -0- -0- $ 3,268
-----------------------------------------------------------------------------
VP - Finance and 1997 $103,005 $ 50,000 36,000 $ 5,746
-----------------------------------------------------------------------------
Administration 1996 $ 95,384 $ 15,000 20,000 $ 2,286
- ------------------------------------------------------------------------------------------------------------------------ --------------- ----------- ---------------------- --------------
(1) The amounts reflected in the table do not include other compensation or
personal benefits which did not exceed in the aggregate the lesser of
either $50,000 or 10% of the total of annual salary and bonus for the
Named Executives.
(2)(a) All Other Compensation shownfor the year ended December 31, 2000 includes,
for Mr. Logan represents (i) amounts paid
by the Company for life insurance for Mr. LoganGalvez, $7,715 of $1,560, $1,560,housing allowance, $4,800 of automobile
allowance and $956 for 1998, 1997 and 1996, respectively, (ii)$5,566 of 401(k) Plan matching contributions, by the Company of $2,666, $3,553, and $3,349 for 1998,
1997 and 1996, respectively and (iii) $45,000 of consulting fees
accrued by the Company for the three month period following Mr. Logan's
termination as an employee. All Other Compensation shown for Mr.
Gienapp, represents 401(k) Plan contributions by the Company.
(3)matching contributions.
(b) Mr. Galvez was appointed Chief Operating Officer on August 15, 1998 and
became President and Chief Executive Officer on October 1, 1998.
(4) Mr. Logan resigned as President and CEOOPTIONS
The following table sets forth information concerning options granted
to the Named Executives in the year ended December 31, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
- ----------------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR (A) ($/SHARE) DATE
- ------------------------ ---------------- ------------------- ------------------- ------------------------
Matthew S. Galvez -0- -0- --- ---
David P. Gienapp 25,000 (a) 5.53% $1.50 08-30-10
- ------------------------ ---------------- ------------------- ------------------- ------------------------
(a) These options, which were granted pursuant to the Company's Long-Term
Incentive Plan, become exercisable annually in increments of 33 1/3%
beginning on the day after the first anniversary of the date of the grant.
The ability to exercise these options may be accelerated in the event of a
change in control of the Company effective
September 30, 1998.
OPTIONS(as defined in the option plan).
The Named Executives were not granted and did not exercise any options in the year ended
September 30, 1998.December 31, 2000. The following table provides information with respect to
unexercised options held by the Named Executives as of September
30, 1998.December 31, 2000.
13
16
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
--------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT FY-ENDYEAR-END (#) OPTIONS AT FY-END ($) EXERCISABLE/ EXERCISABLE/(A)
---------------------------- ---------------------------------------- -----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------------------------------------------------------------------------------------------------------------------ ------------------- -------------------- ---------------- ------------------
Matthew S. Galvez -0- /860,000 -0- $-0- / $-0-
--------------------------------------------------------------------------------------------------------
Frank G. Logan, III 140,000 / 80,000 $-0- / $-0-
------------------------------------------------------------------------------------------------------------------------------------ ------------------- -------------------- ---------------- ------------------
David P. Gienapp 74,000 / 12,00053,333 71,667 $-0- / $-0-
------------------------------------------------------------------------------------------------------------------------------------ ------------------- -------------------- ---------------- ------------------
-17-
20(a) Value of unexercised in-the-money options is determined by multiplying
the number of shares subject to the option by the difference between
the closing price of the Common Stock on the American Stock Exchange at
the end of 2000 and the option exercise price.
EMPLOYMENT AGREEMENT
Mr. Galvez is a party to an employment agreement with the Company that
provides for Mr. Galvez to serve as the President and Chief Executive Officer of
the Company for an annual base salary from October 1, 1998 through April 15,
1999 of $135,000, and from April 16, 1999 through December 31, 2001 of $200,000.
In addition to bonuses that may be awarded from time to time by the Board, Mr.
Galvez was also entitled to a one-time performance bonus of $50,000 under the
agreement at such time as the Company shall have first achieved any three
consecutive months of positive net income before taxes. Other benefits to which
he is currently entitled under the agreement include a term life insurance
policy, an automobile allowance and the right to participate in the Company's
employee benefit plans and stock compensation plans along with the Company's
other officers or employees. The agreement may be terminated at any time by the
Company if (i) Mr. Galvez commits fraud, embezzles from the Company, willfully
disregards the business and affairs of the Company after notice and time to cure
or is convicted of any felony or any crime involving moral turpitude or fraud
and (ii) the holders of 80% of the outstanding shares of Common Stock other than
shares owned by Mr. Galvez are voted in favor of terminating his employment for
cause. The agreement may also be terminated by the Company without cause upon 60
days notice or if Mr. Galvez becomes disabled, may be terminated by Mr. Galvez
upon 90 days notice, and automatically terminates in the event of Mr. Galvez's
death. If employment is terminated without cause, Mr. Galvez is entitled to
continue receiving his base salary and coverage under Company benefit plans for
the longer of one year or the remaining term of the agreement and to receive a
bonus equal to the average of the last two quarterly performance bonuses paid to
him. Mr. Galvez has agreed not to compete with the Company for two years after
termination unless his employment is terminated without cause or a change in
control of the Company has occurred.
COMPENSATION OF DIRECTORS
Each director who is not an officer or employee of the Company is
eligible to receive for his services as such a fee of $1,000 per meeting
attended and $500 for each committee meeting attended, andattended. Committee chairmen
receive an additional $250 for each committee meeting attended bymeeting. The directors waived the
chairman of the committee. Directordirector fees were suspended in April 1998 for the remaining meetings held in fiscal 1998, and
will not resume until afterduring quarterly periods during which the
Company returns to profitability.reported a loss from operations, which, for 2000, were all quarters.
Directors who are officers or employees of the Company receive no additional
compensation for their service as a director, although they are reimbursed for
their reasonable travel expenses when meetings are held in a location other than
the metropolitan area in which they reside.
In addition, the Company has a 1993 Directors Stock Option Plan (the
"Directors Plan"). No grants were madePursuant to the provisions of the Directors Plan, each
director is automatically and without discretion awarded options to purchase
4,500 shares of Common Stock, with an exercise price equal to 110% of the fair
market value per share on the grant date, beginning on the date of the Company's
2000 annual meeting of shareholders and every three years thereafter. The
options are exercisable annually in increments of 33 1/3% beginning on the grant
date, the first anniversary of the date of the grant and the second anniversary
of the grant. All options granted under the Directors Plan expire on the fifth
anniversary of the date the
14
17
option was granted. The ability to exercise these options may be accelerated in
the year
ended September 30, 1998.event of a change in control of the Company (as defined in the Directors
Plan). Options to purchase a total of 31,500 were granted under the Directors
Plan to the Company's seven non-employee directors on May 23, 2000.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leased its two-story office buildingAs approved by shareholders at the 1999 annual meeting, in Virginia Beach,
Virginia, whichconnection
with the Company's private placement of Common Stock, the Company usedsold
promissory notes convertible into Common Stock at $.25 per share as of December
1, 1998 and shares of Common Stock at $1.00 per share on April 7, 1999 to Steven
Globus and his affiliates, James Nichols and his affiliates and Michael Hershey
(for the account of J. Eric May, Trustee under Declaration of Trust) in the
following amounts:
Stephen E. James A. Michael L. Hershey/
Globus Nichols J. Eric May, Trustee
------ ------- --------------------
Principal amount of Notes $250,000 $350,000 $250,000
Accrued interest on Notes $6,089 $7,789 $5,563
Shares received upon conversion 1,024,356 1,431,155 1,022,253
Shares purchased -0- 375,000 -0-
Both the principal amount of the notes and accrued interest were
converted into Common Stock. Amounts reflected in the table for its software developmentMr. Globus
include transactions with Mr. Globus, his brother and applied
systems businesses, from LPS Management,a partnership controlled
by Mr. Globus and his brother. Amounts reflected in the table for Mr. Nichols
include the transactions with Mr. Nichols and with an investment club in which
he is a member. Amounts reflected in the table for Mr. Hershey are all for the
account of a trust controlled by J. Eric May, over which trust Mr. Hershey may
exercise voting and investment power. Messrs. Globus and Nichols are directors
of the Company and Mr. Hershey is a former director.
In December 2000, the Company completed a private placement of 760,000
shares of Common Stock at $1.25 per share to certain accredited investors,
including (i) North Coast Technology Investors L.P., a limited partnership of
which Hugo E. Braun, a director of the Company, is a partner, (ii) James A.
Nichols, a director of the Company, and an investment club of which Mr. Nichols
is a member, and (iii) a partnership in which Stephen E. Globus, a director of
the Company, is a partner. The $1.25 price per share exceeded the $0.65 fair
market value of the Common Stock at the time of the sale. The amount of Common
Stock purchased and the total purchase price are as follows:
Hugo E. James A. Stephen E.
Braun Nichols Globus
----- ------- ------
Shares purchased 550,000 140,000 50,000
Total purchase price $687,500 $175,000 $62,500
In March 2001, the Company completed a sale of $1.2 million principal
amount of convertible subordinated promissory notes and warrants to purchase a
total of 800,000 shares of Common Stock to certain accredited investors,
including (i) North Coast Technology Investors L.P., a limited partnership of
which Hugo E. Braun, a director of the Company, is a partner, and (ii) James A.
Nichols, a director of the Company, and a partnership of which Mr. LoganNichols is a
partner. Mr. LoganThe Notes, which are secured by a second lien on the Company's assets
and are subordinated in right of payment to the Company's bank lender, bear
interest at 10% and are due on August 31, 2001. The Notes will become
immediately due and payable in full if Proposal 4 discussed above is a former director, President and Chief Executive Officernot
approved on or before May 31, 2001. The Notes are prepayable at any time without
penalty upon prior written notice as provided in the Notes. The holders of the
Company. Lease payments were $6,994 per month.Notes are not permitted to transfer them without the Company's prior written
consent. The lease term extendsamount of convertible subordinated promissory notes and warrants
purchased to February 1999, but the building was vacated by the Company on October 1, 1999
and is now occupied by a company formed by Mr. Logan after his resignation from
the Company. Total lease expense for the office building was approximately
$82,600 and $79,600 for fiscal 1998 and fiscal 1997, respectively.related parties are as follows:
Hugo E. James A.
Braun Nichols
----- -------
Convertible Subordinated Promissory Notes purchased $750,000 $150,000
Warrants purchased 500,000 100,000
15
18
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Act of 1934 requires all Company
executive officers and directors and persons who own more than ten percent of a
registered class of the Company's equity securities to file reports of their
ownership with the Securities and Exchange Commission. Executive officers,
directors and greater than ten percent shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) reports they
file. Specific due dates for these reports have been established and the Company
is required to report any delinquent filings and failures to file such reports.
Based solely on its review of the copies of such reports received by it
and written representations of its executive officers and incumbent directors,
the Company believes that during the year ended September 30, 1998, all filing
requirements under Section 16(a) applicable to2000, its executive officers, directors and
greater than ten percent beneficial owners were complied with all applicable filing
requirements under Section 16(a), except that Messrs. Galvez, Globus and NicholsMr. Fitzsimmons, a director, did
not timely file aone Form 3 within the prescribed
time period.4 report disclosing one transaction.
INDEPENDENT PUBLIC ACCOUNTANTS
The accounting firm ofGENERAL
Grant Thornton LLP, acted asindependent public accountants, has audited the
consolidated financial statements of the Company and its subsidiaries since the
year ended September 30, 1998. The Audit Committee has not yet completed its
evaluation of the 2000 audit process. As a result, the selection of the
independent accountants to audit the financial statements of the Company and its
consolidated subsidiaries as of September 30, 1998 and for
the two fiscal years
ended September 30, 1998. The Company's Board of Directors, upon the
recommendation of the Audit Committee, has selected Grant Thornton LLP as the
Company's independent auditors for the fiscal year ending September 30, 1999.2001 will be made at a later date. Representatives from Grant Thornton LLP will
be present at the Annual Meeting, will have an opportunity to make a statement
if they wish and will be available to respond to appropriate questions.
AUDIT FEES
Audit fees billed to the Company by Grant Thornton LLP was appointed in May
1998for the 2000
audit and also auditedreviews of three quarterly reports on Form 10-QSB were $53,000.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
These fees for 2000 were nil.
ALL OTHER FEES
All other fees for 2000 totaled $32,000, including $28,000 related to
Grant Thornton's audit of the financial statements of the Company and its
consolidated subsidiariesA-OK Controls Engineering,
Inc. as of September 30, 1997 and for the two fiscal yearsyear ended SeptemberNovember 30, 1997.
On April 28, 1998, KPMG Peat Marwick LLP ("KPMG") informed the Audit
Committee of the Company that it had resigned as1999, which were included in the
Company's independent
auditors. The Company then began the process of selecting new auditors. The
Company placed no limitations on KPMG responding fully to inquiries of the
successor accountant. The reports of KPMG on the Company's financial statements
for fiscal 1996 and 1997 were withdrawn as of April 28, 1998. Prior to such
withdrawal, such reports contained no adverse
-18-
21
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principle.
In connection with its audits for fiscal 1996 and 1997 and through
April 28, 1998, (i) there were no disagreements between the Company and KPMG on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not properly
resolved to the satisfaction of KPMG would have caused them to make reference
thereto in their report on the financial statements for such fiscal years; and
(ii) there were no reportable events as defined in Regulation S-K Item
304(a)(1)(v), except as follows: As announced on April 28, 1998, the Company
identified potential material adjustments to its financial statements for the
years ended September 30, 1996 and 1997 relating to one significant contract,
and, as a result of the potential adjustments, KPMG advised the Company that its
auditors' reports on the Company's consolidated financial statements as of
September 30, 1997 and 1996 and for each of the years in the two-year period
ended September 30, 1997 should no longer be relied upon. In KPMG's April 28,
1998 letter of resignation, it advised the Audit Committee of the Company that
it had concluded that it could no longer rely on management's representations,
and that it was unwilling to be associatedForm 8-K field with the financial statements
prepared by management.SEC, and $4,000 for sundry consulting services
during 2000.
SHAREHOLDER PROPOSALS FOR 20002002 ANNUAL MEETING
Shareholder proposals intended to be presented at the 2000 Annual
Meeting2002 annual
meeting of Shareholdersshareholders which are eligible for inclusion in the Company's Proxy
Statement for that meeting under the applicable rules of the Securities and
Exchange Commission must be received by the Company not later than October 31,
1999December 21,
2001 if they are to be included in the Company's Proxy Statement relating to
that meeting. Such proposals should be addressed to the Secretary at the
Company's principal executive offices and should satisfy the requirements
applicable to shareholder proposals contained in the Company's bylaws.
In addition to applicable Securities and Exchange Commission rules for
submissioninclusion of shareholder proposals in the Company's Proxy Statement, the
Company's bylaws provide that, in order for a shareholder proposalsproposal or nominationsnomination
to be properly brought before the Annual Meeting, written notice of
16
19
such proposal or nomination must be received by the Company not less than 60
days nor more than 90 days prior to the first anniversary of the preceding
year's Annual Meeting.annual meeting. If the meeting date has been advanced by more than 30
days or delayed by more than 60 days from such anniversary date, then such
proposal must be received by the Company not less than 60 days nor more than 90
days before the upcoming Annual Meetingannual meeting or not later than 10 days after the day
of the public announcement of the date of such meeting, in accordance with the
procedures set forth in the Company's Bylaws, in order to be brought properly
before the Annual Meeting. The Company also expects the persons named as proxies
for the 2002 annual meeting of shareholders to use their discretionary voting
authority, to the extent permitted by applicable law, with respect to any
proposal presented at that meeting by a shareholder who does not provide the
Company with written notice of such proposal during the period provided for in
the Company's Bylaws.
By Order of the Board of Directors,
/S/ DAVID P. GIENAPP
- -----------------------------------
David P. Gienapp, Secretary
February 24, 1999
Ann Arbor, MichiganApril 20, 2001
ALL SHAREHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE
ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
THANK YOU FOR YOUR PROMPT ATTENTION TO THIS MATTER.
-19-17
2220
APPENDIX A
NEMATRON CORPORATION
LONG-TERM INCENTIVE PLAN
I. GENERAL PROVISIONS
------------------
1.1 PURPOSE.AUDIT COMMITTEE CHARTER
THE AUDIT COMMITTEE ("THE COMMITTEE"), OF THE BOARD OF DIRECTORS ("THE BOARD")
OF NEMATRON CORPORATION ("THE COMPANY") WILL HAVE THE OVERSIGHT RESPONSIBILITY,
AUTHORITY AND SPECIFIC DUTIES AS DESCRIBED BELOW.
COMPOSITION
The purposeCommittee will be comprised of three or more directors as determined by the
Board. The members of the Plan is to promoteCommittee will meet the best
interestsindependence and experience
requirements of the CorporationAmerican Stock Exchange (AMEX) or such other stock exchange
on which the Company's equity securities are traded from time to time. The
members of the Committee will be appointed annually at the organizational
meeting of the full Board held immediately following the annual shareholders'
meeting and its shareholders by attracting and motivating
highly qualified individuals to serve as Employees and to encourage Employees to
acquire an ownership interestwill be listed in the Corporation, thus identifying their
interests with those of shareholders and encouraging Employeesnext annual report to make greater
efforts on behalf of the Corporation to achieve the Corporation's long-term
business plans and objectives.
1.2 DEFINITIONS. As used in this Plan, the following terms have
the meaning described below:
(a) "AGREEMENT" means the written agreement that sets forth
the terms of a Participant's Option, Restricted Stock grant or Performance Share
Award.
(b) "BOARD" means the Board of Directors of the Corporation.
(c) "CHANGE IN CONTROL" means a change in control of the
Company of a nature that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act,
whether or not the Company is then subject to such reporting requirement;
provided that, without limitation, a Change in Control shall be deemed to have
occurred if (i) any individual, partnership, firm, corporation, association,
trust, unincorporated organization or other entity (other than a Subsidiary or
an employee benefit plan or employee benefit plan trust maintained by the
Company or a Subsidiary), or any syndicate or group deemed to be a person under
Section 14(d)(2) of the Exchange Act, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company representing 20% or more of the
combined voting power of the Company's then outstanding securities entitled to
vote in the election of directors of the Company, provided that a person shall
not be deemed to beneficially own shares solely because such person has the
right to vote such shares pursuant to a revocable proxy or proxies given in
response to a public solicitation made in accordance with the applicable rules
promulgated under the Exchange Act; (ii) consummation of any merger or
consolidation with respect to which the Company or any Parent is a constituent
corporation (other than a transaction for the purpose of changing the Company's
corporate domicile), any liquidation or dissolution of the Company or any sale
of all or substantially all of the Company's assets; and (iii) a change in the
identity of a majorityshareholders. One of the
members of the Company's Board of Directors within
any twelve-month period, which change or changes are not recommendedCommittee will be appointed the Committee Chair by the incumbent directors immediatelyBoard.
RESPONSIBILITY
THE COMMITTEE IS A PART OF THE BOARD. IT'S PRIMARY FUNCTION IS TO ASSIST THE
BOARD IN FULFILLING ITS OVERSIGHT RESPONSIBILITIES WITH RESPECT TO (I) THE
ANNUAL FINANCIAL INFORMATION TO BE PROVIDED TO SHAREHOLDERS AND THE SECURITIES
AND EXCHANGE COMMISSION (SEC); (II) THE SYSTEM OF INTERNAL CONTROLS THAT
MANAGEMENT HAS ESTABLISHED; AND (III) THE INTERNAL AND EXTERNAL AUDIT PROCESS.
IN ADDITION, THE COMMITTEE PROVIDES AN AVENUE FOR COMMUNICATION BETWEEN INTERNAL
AUDIT, THE INDEPENDENT ACCOUNTANTS, FINANCIAL MANAGEMENT AND THE BOARD. THE
COMMITTEE SHOULD HAVE A CLEAR UNDERSTANDING WITH THE INDEPENDENT ACCOUNTANTS
THAT THEY MUST MAINTAIN AN OPEN AND TRANSPARENT RELATIONSHIP WITH THE COMMITTEE,
AND THAT THE ULTIMATE ACCOUNTABILITY OF THE INDEPENDENT ACCOUNTANTS IS TO THE
BOARD AND THE COMMITTEE. THE COMMITTEE WILL MAKE REGULAR REPORTS TO THE BOARD
CONCERNING ITS ACTIVITIES.
While the Audit Committee has the responsibilities and powers set forth in this
Charter, it is not the duty of the Audit Committee to plan or conduct audits or
to determine that the Company's financial statements are complete and accurate
and are in accordance with generally accepted accounting principles. This is the
responsibility of management and the independent auditor. Nor is it the duty of
the Audit Committee to conduct investigations, to resolve disagreements, if any,
between management and the independent auditor or to assure compliance with laws
and regulations and the Company's business conduct guidelines.
AUTHORITY
Subject to the prior approval of the Board, the Committee is granted the
authority to investigate any matter or activity involving financial accounting
and financial reporting, as well as the internal controls of the Company. In
that regard, the Committee will have the authority to approve the retention of
external professionals to render advice and counsel in such changematters. All
employees will be directed to cooperate with respect thereto as requested by
members of the Committee.
18
21
MEETINGS
The Committee is to meet at least four times annually and as many additional
times as the Committee deems necessary. Content of the agenda for each meeting
should be cleared by the Committee Chair. The Committee is to meet in separate
executive sessions with the chief financial officer, independent accountants and
internal audit at least once each year and at other times when considered
appropriate.
ATTENDANCE
Committee members will strive to be present at all meetings. As necessary or
changes.desirable, the Committee Chair may request that members of management and
representatives of the independent accountants and internal audit be present at
Committee meetings.
SPECIFIC DUTIES
In carrying out its oversight responsibilities, the Committee will:
1. Review and reassess the adequacy of this charter annually and recommend
any proposed changes to the Board for approval. This should be done in
compliance with applicable AMEX Audit Committee Requirements.
2. Review with the Company's management, the chief financial officer and
independent accountants the Company's accounting and financial
reporting controls. Obtain annually in writing from the independent
accountants their letter as to the adequacy of such controls.
3. Review with the Company's management, the chief financial officer and
independent accountants significant accounting and reporting
principles, practices and procedures applied by the Company in
preparing its financial statements. Discuss with the independent
accountants their judgments about the quality, not just the
acceptability, of the Company's accounting principles used in financial
reporting.
4. Review the scope and general extent of the independent accountants'
annual audit. The Committee's review should include an explanation from
the independent accountants of the factors considered by the
accountants in determining the audit scope, including the major risk
factors. The independent accountants should confirm to the Committee
that no limitations have been placed on the scope or nature of their
audit procedures. The Committee will review annually with management
the fee arrangement with the independent accountants.
5. Inquire as to the independence of the independent accountants and
obtain from the independent accountants, at least annually, a formal
written statement delineating all relationships between the independent
accountants and the Company as contemplated by Independence Standards
Board Standard No. 1, 23
(d) "CODE" meansIndependence Discussions with Audit Committees.
6. Have a predetermined arrangement with the Internal Revenue Code of 1986, as
amended from time to time.
(e) "COMMITTEE" means a committee of two or more directorsindependent accountants that
they will advise the Committee through its Chair and management of the
Company each of whomany matters identified through procedures followed for
interim quarterly financial statements, and that such notification as
required under standards for communication with Audit Committees is a "non-employee director" as defined in Rule
16b-3 of the Exchange Act.
(f) "COMMON STOCK" means shares of the Corporation's
authorized common stock, no par value.
(g) "CORPORATION" means Nematron Corporation, a Michigan
corporation.
(h) "DIRECTOR" means a member of the Corporation's Board of
Directors.
(i) "DISABILITY" means total and permanent disability, as
defined in Code Section 22(e).
(j) "EFFECTIVE DATE" means January 12, 1999.
(k) "EMPLOYEE" means a full-time salaried employee of the
Corporation or its Subsidiaries, who has an "employment relationship" with the
Corporation or its Subsidiaries, as defined in Treasury Regulation 1.421-7(h),
and the term "employment" means employment with the Corporation or its
subsidiaries.
(l) "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended from time to
time and any successor thereto.
(m) "EXPIRATION DATE" means the date set forth in the
Agreement relating to an Option on which the right to exercise shall expire
absent a termination of the Participant's employment. Unless otherwise provided
in the Agreement, the Expiration Date for an Option shall be the tenth
anniversary of its Grant Date.
(n) "FAIR MARKET VALUE" means the average of the high and
low sale prices per share of the Common Stock reported in the Wall Street
Journal (or if high and low sale prices are not reported, the last sale price
reported in the Wall Street Journal or, if the last sale price is not reported,
the last bid price per share reported in the Wall Street Journal) for the last
preceding day on which the Common Stock was tradedmade prior to the daterelated press release or, if not practicable,
prior to filing Forms
19
22
10-Q. Also receive a written confirmation provided by the independent
accountants at the end of each of the first three quarters of the year
that they have nothing to report to the Committee, if that is the case,
or the written enumeration of required reporting issues.
7. At the completion of the annual audit, review with respectmanagement, the
chief financial officer and the independent accountants the following:
a) The annual financial statements and related footnotes and
financial information to be included in the Company's annual
report to shareholders and on Form 10-K.
b) Results of the audit of the financial statements and the related
report thereon and, if applicable, a report on changes during the
year in accounting principles and their application.
c) Significant changes to the audit plan, if any, and any serious
disputes or difficulties with management encountered during the
audit. Inquire about the cooperation received by the independent
accountants during their audit, including access to all requested
records, data and information. Inquire of the independent
accountants whether there have been any disagreements with
management which, if not satisfactorily resolved, would have
caused them to issue a nonstandard report on the fair market valueCompany's
financial statements.
d) Other communications as required to be communicated by the
independent accountants by Statement of Auditing Standards (SAS)
61 as amended by SAS 90 relating to the conduct of the audit.
Further, receive a written communication provided by the
independent accountants concerning their judgment about the
quality of the Company's accounting principles, as outlined in SAS
61 as amended by SAS 90, and that they concur with management's
representation concerning audit adjustments.
If deemed appropriate after such review and discussion, recommend to
the Board that the financial statements be included in the company's
Annual Report on Form 10-K.
8. After preparation by management and review by the chief financial
officer and independent accountants, approve the report required under
SEC rules to be included in the Company's annual proxy statement. The
charter is to be determined,published as determinedan appendix to the proxy statement every
three years.
9. Discuss with the independent accountants the quality of the Company's
financial and accounting personnel. Also, elicit the comments of
management regarding the responsiveness of the independent accountants
to the Company's needs.
10. Meet with management, the chief financial officer and the independent
accountants to discuss any relevant significant recommendations that
the independent accountants may have, particularly those characterized
as `material' or `serious'. Typically, such recommendations will be
presented by the Committeeindependent accountants in its sole discretion.
2
24
(o) "GRANT DATE" means the date on which the Committee
authorizes an individual Option, Restricted Stock grant or Performance Share
Award, or such later date as shall be designated by the Committee.
(p) "INCENTIVE STOCK OPTION" means an Option that is
intendedform of a Letter of
Comments and Recommendations to meet the requirements of Section 422 of the Code.
(q) [reserved]
(r) "NONQUALIFIED STOCK OPTION" means an Option that is not
intended to constitute an Incentive Stock Option.
(s) "OPTION" means either an Incentive Stock Option or a
Nonqualified Stock Option to purchase Common Stock.
(t) "PARTICIPANT" shall have the meaning ascribed in Section
1.4 of the Plan.
(u) "PERFORMANCE SHARE AWARD" means an award granted in
accordance with Article IV of the Plan.
(v) "PLAN" means the Nematron Corporation Long-Term
Incentive Plan, the terms of which are set forth herein, and amendments thereto.
(w) "RESTRICTION PERIOD" means the period or periods of time
during which a Participant's Restricted Stock grant is subject to restrictions
on transferability.
(x) "RESTRICTED STOCK" means Common Stock that is subject to
restrictions on transferability.
(y) "RETIREMENT" means retirement at age 65 or older.
(z) "RULE 16B-3" means Rule 16b-3 under the Exchange Act, as
in effect from time to time.
(aa) "SUBSIDIARY" means a corporation defined in Code
Section 424(f).
1.3 ADMINISTRATION. The Plan shall be administered by the Committee. The Committee shall interpret the Plan, prescribe, amend, and rescind
rules and regulations relatingshould
review responses of management to the Plan,Letter of Comments and
make all other determinations
necessary or advisable for its administration. The decision ofRecommendations from the Committeeindependent accountants and receive follow-up
reports on any questionaction taken concerning the interpretation of the Plan or its administration
with respect to any Option, Restricted Stock grant or Performance Share Award
granted under the Plan shall be final and binding upon all Participants.
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1.4 PARTICIPANTS. Participants in the Plan shall be such
Employees (including Employees who are Directors) as the Committee may select
from time to time. The Committee may grant Options, Restricted Stock and
Performance Share Awards to an individual upon the condition that the individual
become an Employee, provided that the Option, Restricted Stock grant or
Performance Share Award shall be deemed to be granted only on the date that the
individual becomes an Employee.
1.5 STOCK. The total number of shares of Common Stock available
for grants and awards under the Plan shall not, in the aggregate, exceed
1,250,000 shares of Common Stock, as adjusted from time to time in accordance
with Article VI. Shares subject to any unexercised portion of a terminated,
forfeited, canceled or expired Option granted hereunder, and shares subject to
any terminated, forfeited, canceled or expired portion of a Performance Share
Award or Restricted Stock grant made hereunder shall be available for subsequent
grants and awards under the Plan.
1.6 AGREEMENT. No person shall have any rights under any grant
or award made pursuantaforementioned recommendations.
11. Recommend to the Plan unless and untilBoard the Corporation and the
recipient of the grant or award have executed and delivered an agreement
expressly granting or awarding benefits to such person pursuant to the Plan and
containing the provisions required under the Plan to be set forth in the
Agreement. The terms of the Plan shall govern in the event any provision of any
Agreement conflicts with any term in this Plan as constituted on the Grant Date.
II. STOCK OPTIONS FOR EMPLOYEES
2.1 GRANT OF OPTIONS. The Committee, at any time and from time
to time, subject to Section 7.7, may grant Options to such Employees and for
such number of shares of Common Stock as it shall designate. Any Participant may
hold more than one Option under the Plan and any other Plan of the Corporation.
The Committee shall determine, in its discretion, subject to the limitations set
forth in the Plan, the general terms and conditions of the Option, including,
without limitation, the number of shares which the Option entitles the holder to
purchase, the exercise price, the time or times during which the Option shall be
exercisable and the Expiration Date of the Option, which terms shall be set
forth in a Participant's Agreement; provided that, during any three year period,
no salaried Employee shall receive Options to purchase more than 500,000 shares
of Common Stock. The Committee may designate any Option granted as either an
Incentive Stock Option or a Nonqualified Stock Option, or the Committee may
designate a portion of an Option as an Incentive Stock Option or a Nonqualified
Stock Option.
2.2 INCENTIVE STOCK OPTIONS. Any Option intended to constitute
an Incentive Stock Option shall comply with the requirements of this Section 2.2
in addition to the other requirements of this Article II. No Incentive Stock
Option shall be granted with an exercise price below its Fair Market Value on
the Grant Date or with an exercise term that extends
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beyond 10 years from the Grant Date. An Incentive Stock Option shall not be
granted to any Participant who owns (within the meaning of Code Section 424(d))
stock of the Corporation possessing more than 10% of the total combined voting
power of all classes of stock of the Corporation unless, at the Grant Date, the
exercise price for the Option is at least 110% of the Fair Market Value of the
shares subject to the Option and the Option, by its terms, is not exercisable
more than five years after the Grant Date. The aggregate Fair Market Value of
the underlying Common Stock (determined at the Grant Date) as to which Incentive
Stock Options granted under the Plan may first be exercised by a Participant in
any one calendar year shall not exceed $100,000. To the extent that an Option
intended to constitute an Incentive Stock Option shall violate the foregoing
$100,000 limitation, the portion of the Option that exceeds the $100,000
limitation shall be deemed to constitute a Nonqualified Stock Option.
2.3 OPTION PRICE. The Committee shall determine the per share
exercise price for each Option granted under the Plan; provided, that the
exercise price shall not be less than the Fair Market Value on the Grant Date.
2.4 PAYMENT FOR OPTION SHARES. The purchase price for shares of
Common Stock to be acquired upon exercise of an option granted hereunder shall
be paid in full, at the time of exercise, in any of the following ways: (a) in
cash, (b) by certified check, bank draft or money order, (c) by tendering to the
Company shares of Common Stock then owned by the Participant, duly endorsed for
transfer or with duly executed stock power attached, which shares shall be
valued at their Fair Market Value as of the date of such exercise and payment or
(d) by delivery to the Company of a properly executed exercise notice,
acceptable to the Company, together with irrevocable instructions to the
Participant's broker to deliver to the Company a sufficient amount of cash to
pay the exercise price and any applicable income and employment withholding
taxes, in accordance with a written agreement between the Company and the
brokerage firm ("Cashless Exercise") if, at the time of exercise, the Company
has entered into such an agreement.
III. RESTRICTED STOCK
3.1 GRANT OF RESTRICTED STOCK. Subject to the terms and
conditions of the Plan, the Committee, at any time and from time to time, may
grant shares of Restricted Stock under this Plan to such Employees in such
amounts as it shall determine.
3.2 RESTRICTED STOCK AGREEMENT. Each grant of Restricted Stock
shall be evidenced by an Agreement that shall specify the terms of the
restrictions, including the Restriction Period, the number of shares subject to
the grant, and such other provisions, including performance goals, if any, as
the Committee may determine.
3.3 TRANSFERABILITY. Except as provided in this Article III of
the Plan, the shares of Restricted Stock granted hereunder may not be sold,
transferred, pledged, assigned, or otherwise alienated, hypothecated or
encumbered until the termination of the applicable Restriction Period
established by the Committee and specified in the Agreement, or upon the
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earlier satisfaction of other conditions as specified by the Committee in its
sole discretion and set forth in such Agreement. The Committee may, but is not
required to, specify more than one set of restrictions applicable to a
Restriction Period with respect to a Restricted Stock grant. All rights with
respect to the Restricted Stock granted to a Participant shall be exercised
during a Participant's lifetime only by the Participant or the Participant's
legal representative.
3.4 OTHER RESTRICTIONS. The Committee may impose such other
restrictions on any shares of Restricted Stock granted under the Plan as it may
deem advisable including, without limitation, restrictions under applicable
Federal or State securities laws, and may legend the certificates representing
Restricted Stock to give appropriate notice of such restrictions.
3.5 CERTIFICATE LEGEND. In addition to any legends placed on
certificates pursuant to Sections 3.3 and 3.4, each certificate representing
shares of Restricted Stock shall bear the following legend:
The sale or other transfer of the shares of stock represented by
this certificate, whether voluntary, involuntary or by operation
of law, is subject to certain restrictions on transfer set forth
in the Nematron Corporation Long-Term Incentive Plan ("Plan"),
rules and administrative guidelines adopted pursuant to such
Plan and a Restricted Stock Agreement dated , . A copy of
the Plan, such rules and such Restricted Stock Agreement may be
obtained from Nematron Corporation.
3.6 REMOVAL OF RESTRICTIONS. Except as otherwise provided in
this Article III of the Plan, and subject to applicable federal and state
securities laws, shares covered by each Restricted Stock grant made under the
Plan shall become freely transferable by the Participant after the last day of
the Restriction Period. Once the shares are released from the restrictions, the
Participant shall be entitled to have the legend required by Section 3.6 of the
Plan removed from the certificate representing such shares. The Committee shall
have discretion to waive the applicable Restriction Period with respect to all
or any part of a Restricted Stock grant.
3.7 VOTING RIGHTS. During the Restriction Period, Participants
holding shares of Restricted Stock granted hereunder may exercise full voting
rights with respect to the Restricted Stock.
3.8 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Restriction
Period, a Participant shall be entitled to receive all dividends and other
distributions paid with respect to shares of Restricted Stock. If any dividends
or distributions are paid in shares of Common Stock during the Restriction
Period, the dividend or other distribution shares shall be subject to the same
restrictions on transferability as the shares of Restricted Stock with respect
to which they were paid.
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IV. PERFORMANCE SHARE AWARDS
4.1 GRANT OF PERFORMANCE SHARE AWARDS. The Committee, at its
discretion, may grant Performance Share Awards (including, but not limited to,
stock appreciation rights and phantom shares) to Employees and may determine, on
an individual or group basis, the performance goals to be attained pursuant to
each Performance Share Award.
4.2 TERMS OF PERFORMANCE SHARE AWARDS. In general, Performance
Share Awards shall consist of rights to receive cash, Common Stock or a
combination of each, if designated performance goals are achieved. The terms of
a Participant's Performance Share Award shall be set forth in the Agreement
relating to such Award. Each Agreement shall specify the performance goals
applicable to the Participant, the period over which the goals are to be
attained, the payment schedule if the goals are attained, and any other terms,
conditions and restrictions applicable to an individual Performance Share Award
and not inconsistent with the provisions of the Plan. The Committee, at its
discretion, may waive all or part of the conditions, goals and restrictions
applicable to the receipt of full or partial payment of a Performance Share
Award.
V. TERMINATION
5.1. OPTIONS.
The time or times at which an Option shall terminate prior to
its Expiration Date shall be determined by the Committee in its discretion and
set forth in the Agreement relating to such Option. If a Participant's Agreement
does not specify such time or times, the following shall apply:
(A) If a Participant's employment is terminated for
any reason prior to the date that an Option or a portion thereof first becomes
exercisable, such Option or portion thereof shall terminate and all rights
thereunder shall cease.
(B) To the extent an Option is exercisable and
unexercised on the date a Participant's employment is terminated
(i) for any reason other than death, Disability
or Retirement, the Option shall terminate on the earlier of (A) the Expiration
Date of the Option, and (B) three months after the Participant's termination.
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(ii) because the Participant has died or become
subject to a Disability, the Option shall terminate on the earlier of (A) the
Expiration Date of the Option and (B) the first anniversary of the date of such
Participant's termination.
(iii) due to Retirement, the Option shall
terminate on the earlier of (A) the Expiration Date of the Option, and (B) the
second anniversary of such Participant's termination.
(c) During the period from the Participant's
termination until the termination of the Option, the Participant, or the person
or persons to whom the Option shall have been transferred by will or by the laws
of descent and distribution, may exercise the Option only to the extent that
such Option was exercisable on the date of the Participant's termination.
(d) The Committee may, at any time, accelerate the
right of a Participant to exercise an Option or extend the exercise period of
such an Option; provided, that no Option exercise period may be extended beyond
the Option's Expiration Date.
5.2 RESTRICTED STOCK. If a Participant's employment is
terminated for any reason, any shares of Common Stock owned by a Participant
which were the subject of a Restricted Stock grant under the Plan and at the
time of such termination are subject to a Restriction Period shall be forfeited
by the Participant to the Corporation upon such termination; provided, that the
Committee, in its sole discretion, may waive the restrictions remaining on any
or all shares of Restricted Stock as it deems appropriate.
5.3 PERFORMANCE SHARES. Performance Share Awards shall expire
and be forfeited by a Participant upon termination of the Participant's
employment for any reason; provided, that the Committee, in its discretion, may
waive all or part of the conditions, goals and restrictions applicable to the
receipt of full or partial payment of a Performance Share Award.
5.4 OTHER PROVISIONS. The transfer of an Employee from one
corporation to another among the Corporation and any of its Subsidiaries, or a
leave of absence under the Corporation's leave policy, shall not be a
termination of employment for purposes of the Plan.
VI. ADJUSTMENTS AND CHANGE IN CONTROL
6.1 ADJUSTMENTS. In the event that the Committee shall determine
that any dividend or other distribution (whether in the form of cash, Common
Stock, other securities, or other property), recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, or exchange of Common Stock or other securities of the
Corporation, issuance of warrants or other rights to purchase Common Stock or
other securities of the Corporation, or other similar corporate transaction or
event affects the Common Stock such that an adjustment is determined by the
Committee to be appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits
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intended to be made available under the Plan, then the Committee shall, in such
manner as it may deem equitable, adjust any or all of (a) the number and type of
shares of Common Stock which thereafter may be made the subject of grants and
awards under the Plan, (b) the number and type of shares of Common Stock subject
to outstanding grants and awards, (c) the exercise price with respect to any
Option, or, if deemed appropriate, make provision for a cash payment to the
holder of an outstanding Option and (d) any performance-related conditions of
any outstanding grants and awards based upon the price of Common Stock;
provided, in each case, that with respect to Incentive Stock Options no such
adjustment shall be authorized to the extent that such authority would cause the
Plan to violate Section 422 of the Code or any successor provision thereto; and
provided further, that any such adjustment shall provide for the elimination of
any fractional share which might otherwise become subject to an Option,
Restricted Stock grant or Performance Share Award.
6.2 CHANGE IN CONTROL. Notwithstanding anything contained herein
to the contrary, upon a Change in Control, (i) any outstanding Option granted
hereunder immediately shall become exercisable in full, regardless of any
installment provision applicable to such Option, (ii) the remaining Restriction
Period on any Restricted Stock granted hereunder immediately shall lapse and the
shares shall become fully transferable, subject to any applicable federal or
state securities laws, and (iii) all performance goals and conditions shall be
deemed to have been satisfied and all restrictions shall lapse on any
outstanding Performance Share Awards, which immediately shall become payable in
full.
VII. MISCELLANEOUS
7.1 PARTIAL EXERCISE/FRACTIONAL SHARES. The Committee shall
permit, and shall establish procedures for, the partial exercise of Options
under the Plan. No fractional shares shall be issued in connection with the
exercise of a Performance Share Award; instead, the Fair Market Value of the
fractional shares shall be paid in cash, or at the discretion of the Committee,
the number of shares shall be rounded down to the nearest whole number of shares
and any fractional shares shall be disregarded.
7.2 RULE 16B-3 REQUIREMENTS. Notwithstanding any other provision
of the Plan, the Committee may impose such conditions on the exercise of an
Option, or the grant of Restricted Stock or a Performance Share Award
(including, without limitation, the right of the Committee to limit the time of
exercise to specified periods) as may be required to satisfy the requirements of
Rule 16b-3.
7.3 RIGHTS PRIOR TO ISSUANCE OF SHARES. No Participant shall
have any rights as a shareholder with respect to shares covered by an Option,
Restricted Stock grant or Performance Share Award until, in the case of an
Option, the Option is exercised or, in the case of a Restricted Stock grant or a
Performance Share Award, the issuance of a stock certificate for such shares.
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7.4 NON-ASSIGNABILITY. No Option, Restricted Stock grant or
Performance Share Award shall be transferable by a Participant except by will or
the laws of descent and distribution. During the lifetime of a Participant, an
Option shall be exercised only by the Participant. No transfer of an Option,
Restricted Stock grant or Performance Share Award by will or the laws of descent
and distribution shall be effective to bind the Corporation unless the
Corporation shall have been furnished with written notice thereof and a copy of
the will or such evidence as the Corporation may deem necessary to establish the
validity of the transfer and the acceptance by the transferee of the terms and
conditions of the Option, Restricted Stock grant or Performance Share Award.
7.5. SECURITIES LAWS.
(A) Anything to the contrary herein notwithstanding,
the Corporation's obligation to sell and deliver Common Stock pursuant to the
exercise of an Option or deliver Common Stock pursuant to a Restricted Stock
grant or Performance Share Award is subject to such compliance with federal and
state laws, rules and regulations applying to the authorization, issuance or
sale of securities as the Corporation deems necessary or advisable. The
Corporation shall not be required to sell and deliver Common Stock unless and
until it receives satisfactory assurance that the issuance or transfer of such
shares shall not violate any of the provisions of the Securities Act of 1933 or
the Exchange Act, or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder or those of the National Association of
Securities Dealers, Inc. or any stock exchange on which the Common Stock may be
listed, the provisions of any state laws governing the sale of securities, or
that there has been compliance with the provisions of such acts, rules,
regulations and laws.
(B) The Committee may impose such restrictions on any
shares of Common Stock acquired pursuant to the exercise of an Option or the
grant of Restricted Stock or a Performance Share Award under the Plan as it may
deem advisable, including, without limitation, restrictions (i) under applicable
federal securities laws, (ii) required by the Nasdaq Stock Market (including,
without limitation, with respect to securities traded on the Nasdaq National
Market or the Nasdaq SmallCap Market) or any stock exchange or other recognized
trading market upon which such shares of Common Stock are then listed or traded,
and (iii) under any blue sky or state securities laws applicable to such shares.
No shares shall be issued until counsel for the Corporation has determined that
the Corporation has complied with all requirements under appropriate securities
laws.
7.6 WITHHOLDING TAXES. The Corporation shall have the right to
withhold from a Participant's compensation or require a Participant to remit
sufficient funds to satisfy applicable withholding for income and employment
taxes upon the exercise of an Option or the lapse of the Restriction Period on a
Restricted Stock grant or the payment of a Performance Share Award. The cashless
exercise procedure described in Section 2.4 may be utilized to satisfy the
withholding requirements related to the exercise of an Option.
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7.7 TERMINATION AND AMENDMENT.
(A) The Board may terminate the Plan, or the granting
of Options, Restricted Stock or Performance Share Awards under the Plan, at any
time. No new grants or awards shall be made under the Plan after the tenth
anniversary date of the Effective Date.
(B) The Board may amend or modify the Plan at any
time and from time to time.
(C) No amendment, modification,selection, retention or termination of the
Plan shall adversely affect any Option, Restricted Stock grant or Performance
Share Award granted underCompany's independent accountants.
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12. Review the Plan without the consentappointment and replacement of the Participant
holdingsenior internal audit
executive.
13. Review with management, the Option, Restricted Stock grantchief financial officer and the independent
accountants the methods used to establish and monitor the Company's
policies with respect to unethical or Performance Share Award.
7.8 EFFECT ON EMPLOYMENT. Neitherillegal activities by Company
employees that my have a material impact on the adoptionfinancial statements.
14. Generally as part of the Plan norreview of the grantingannual financial statements,
receive an oral report(s), at least annually, from the Company's
general counsel concerning legal and regulatory matters that may have a
material impact on the financial statements.
15. As the Committee may deem appropriate, obtain, weigh and consider
expert advice as the Audit Committee related rules of any Option, Restricted Stock or Performance Share Award pursuantthe AMEX,
Statements on Auditing Standards and other accounting, legal and
regulatory provisions.
16. Provide periodic reports of the Committee's activities, findings and
recommendations to the Plan shall be deemedBoard.
17. Monitor SEC and AMEX regulations concerning Audit Committees and update
its charter, activities, composition or its structure to create any right in any individual to be retained
or continued as an Employee.
7.9 USE OF PROCEEDS. The proceeds received fromcomply with
such regulations.
This concludes the sale of
Common Stock pursuant to the Plan shall be used for general corporate purposes
of the Corporation.
7.10 APPROVAL OF PLAN. The Plan shall be subject to the approval
of the holders of at least a majority of the shares of Common Stock of the
Corporation present and entitled to vote at a meeting of shareholders of the
Corporation held within 12 months after adoption of the Plan by the Board. Any
Option, Restricted Stock or Performance Share Award granted under the Plan on or
after January 12, 1999 prior to such stockholder approval shall be conditioned
upon receipt of such approval and may not be exercised in whole or in part
unless the Plan has been approved by the shareholders as provided herein. If not
approved by shareholders within 12 months after approval by the Board, the Plan
shall be rescinded and any Options, Restricted Stock grants and Performance
Share Awards granted under the Plan shall be void retroactive to the Grant Date.
BOARD APPROVAL: 1/12/99
STOCKHOLDER APPROVAL: / /99
-- --
11charter.
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APPENDIX B24
PROXY
NEMATRON CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF NEMATRON CORPORATION
The undersigned hereby constitutes and appoints Matthew S. Galvez and
Joseph J. Fitzsimmons,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 Annual Meeting of Shareholders of the Company, to be held at Nematron
Corporation, 5840 Interface Drive, Ann Arbor, Michigan on March 30,
1999May 22, 2001 at 10:00
a.m., local time, and at any adjournments thereof, upon the matters set forth
below, all of which are proposed by the Company.
This Proxy, when properly executed, will be voted in the manner
directed; IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR ALL NOMINEES FOR
ELECTION AS DIRECTORS NAMED IN THE ACCOMPANYING PROXY STATEMENT DATED APRIL 20,
2001 AND FOR EACH PROPOSAL INCLUDEDOF THE PROPOSALS SET FORTH IN THESUCH PROXY STATEMENT
DATED FEBRUARY 24, 1999.STATEMENT. In their
discretion, the persons named herein as proxies are also hereby authorized to
vote, to the extent permitted by applicable law, upon such other matters as may
properly come before the meeting, including the election of any person to the
Board of Directors where a nominee named in the Proxy Statement dated February
24, 1999April 20,
2001 is unable to serve or, for good cause, will not serve.
(TO BE SIGNED ON REVERSE SIDE)
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PROPOSAL 1. Election of Directors:
[ ]ELECTION OF DIRECTORS:
Matthew S. Galvez
Garnel F. Graber
| | FOR [ ]| | WITHHOLD [ ]| | FOR ALL EXCEPT
Hugo E. Braun
Matthew S. Galvez
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ONE OR MORE OF THE INDIVIDUAL
NOMINEES, MARK "FOR ALL EXCEPT" AND WRITE THE NAME OF EACH SUCH NOMINEE ON THE
LINE BELOW.)
- ---------------------------------------------------------------------------------------------------------------------------------------
PROPOSAL 2. Approve the potential issuance of approximately 7,313,333 shares of Common
Stock pursuant to a capital raising transaction in accordance with Nasdaq
rules:
[ ]APPROVE AMENDMENT TO THE ARTICLES OF INCORPORATION TO AUTHORIZE THE
FUTURE ISSUANCE OF "BLANK CHECK" PREFERRED STOCK:
| | FOR [ ]| | AGAINST [ ]| | ABSTAIN
PROPOSAL 3. Approve a proposal to amend the Articles of Incorporation to increase the
number of authorized shares of Common Stock to 30,000,000:
[ ]APPROVE AMENDMENT TO THE ARTICLES OF INCORPORATION TO DECLASSIFY THE
BOARD OF DIRECTORS AND REDUCE THE TERMS OF THE DIRECTORS FROM THREE YEARS TO ONE
YEAR:
| | FOR [ ]| | AGAINST [ ]| | ABSTAIN
PROPOSAL 4. Approve a proposal to amend the Articles of Incorporation to declassify the
Board of Directors and reduce the terms of the directors from three years
to one year:
[ ]APPROVE THE POTENTIAL ISSUANCE OF SHARES OF COMMON STOCK UPON
CONVERSION OF CONVERTIBLE NOTES:
| | FOR [ ]| | AGAINST [ ] ABSTAIN
5. Approve the Nematron Corporation Long-Term Incentive Plan:
[ ] FOR [ ] AGAINST [ ]| | ABSTAIN
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Shareholders and the Proxy Statement dated February 24, 1999April 20, 2001 and the 19982000 Annual
Report to Shareholders and ratifies all that the proxies or either of them or
their substitutes may lawfully do or cause to be done by virtue hereof and
revokes all former proxies.
Please sign this Proxy exactly as your name(s) appear(s) on this Proxy.
If the stock is registered in the names of two or more persons, each must sign.
Executors, administrators, trustees, guardians, attorneys and corporate officers
should add their titles.
PLEASE BE SURE TO SIGN AND DATE THIS PROXY IN THE SPACE BELOW.
SIGNATURE(S) _____________________________________________ DATE -------------------------------------------------- -----------_____________
SIGNATURE(S) _____________________________________________ DATE -------------------------------------------------- -----------
_____________
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