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SCHEDULE 14A
(RULE 14a-101)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][ X ] Preliminary revised proxy statement.Proxy Statement
[ ] Confidential, for use of the Commission onlyOnly (as permitted by Rule
14a-6(e)(2)).
[ ] Definitive proxy statement.Proxy Statement
[ ] Definitive additional materials.Additional Materials
[ ] Soliciting material pursuant toMaterial Under Rule 14a-12
NEMATRON CORPORATION
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(Name of Registrant as Specified in Itsits Charter)
- --------------------------------------------------------------------------------________________________________________________________________________
(Name of Person(s) Filing Proxy Statement, ifIf Other Than the Registrant)
Payment of filing feeFiling Fee (check the appropriate box):
[X][ ] No fee required.required
[ X ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.0-11
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------_____________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------_____________________________________________________________________
(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):
- --------------------------------------------------------------------------------_____________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------transaction
$12,610,428 (total debt being assumed)
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(5) Total fee paid:
- --------------------------------------------------------------------------------$1,020.18
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[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the formForm or scheduleSchedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------_____________________________________________________________________
(2) Form, Schedule or Registration Statement No.:
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_____________________________________________________________________
(3) Filing Party:
- --------------------------------------------------------------------------------_____________________________________________________________________
(4) Date Filed:
- --------------------------------------------------------------------------------_____________________________________________________________________
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NEMATRON CORPORATION
5840 INTERFACE DRIVE
ANN ARBOR, MICHIGAN 48103
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER ___, 2003
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 Thursday, September 6, 2001November ___, 2003 at 10:00
a.m., local time, for the following purposes:
1. To approve a proposal to sell substantially all of the
Company's assets and liabilities to a purchaser whose owners
will be some or all of the Company's subordinated debt
holders;
2. To approve the purchase of 5,248,257 shares of the Company's
common stock by Dorman Industries, LLC;
3. To approve a five to one reverse stock split with respect to
the Company's Common Stock and an amendment to the Company's
Amended and Restated Articles of Incorporation ("Articles") to
effect the reverse stock split;
4. To amend the Company's Articles to change the Company's name
to Sandston Corporation;
5. If Proposals 1 and 2 are approved, to elect twoDaniel J. Dorman
and Lawrence De Fiore to the Company's Board of Directors, and
if Proposals 1 and 2 are not approved, to elect Ronald C.
Causley and Stephen E. Globus as directors of the Company; 2. To approve a proposal to amend the Articles of Incorporation to
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,
4. To approve the potential issuance of Common Stock upon conversion
of certain convertible notes recently issued pursuant to a
capital raising transaction, and
5.6. To vote upon such other matters as may properly come before
the meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on August 1, 2001__________,
2003 are entitled to notice of and to vote at the meeting and any adjournments
or postponements thereof.
You are invited to attend the Annual Meeting. Whether or not you expect
to attend the Annual Meeting, please complete, date and sign the enclosed proxy
and return it promptly in the enclosed postage-paid envelope. The proxy is
revocable and will not affect your right to vote in person if you attend the
Annual Meeting.
By Order of the Board of Directors,
David P. GienappJohn H. Dunlap
Corporate Secretary
Ann Arbor, Michigan
August 3, 2001October ___, 2003
THE VOTE OF EVERY SHAREHOLDER IS IMPORTANT, AND YOUR COOPERATION IN PROMPTLY
RETURNING YOUR MARKED, DATED AND SIGNED PROXY WILL BE APPRECIATED. THE PROXY IS
REVOCABLE AND WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ATTEND THE
ANNUAL MEETING. YOUR PROXY WILL, HOWEVER, HELP TO ASSURE A QUORUM AND AVOID
ADDITIONAL PROXY SOLICITATION COSTS.
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NEMATRON CORPORATION
5840 INTERFACE DRIVE
ANN ARBOR, MICHIGAN 48103
_____________________
PROXY STATEMENT
____________________
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 6, 2001
PROXY STATEMENTNOVEMBER ___, 2003
INFORMATION ABOUT THE MEETING, VOTING AND PROXIES
DATE, TIME AND PLACE OF MEETING
The accompanying proxy is solicited on behalf of the Board of Directors
(the "Board") 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 mainexecutive offices, located at 5840 Interface Drive, Ann Arbor,
Michigan 48103 on Thursday, September
6, 2001November ____, 2003 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 August 6, 2001.
Only holdersOctober ___, 2003.
RECORD DATE, OUTSTANDING SHARES AND QUORUM
Holders of record of common stock of the Company (the "Common Stock")
at the close of business on August 1, 2001_______ __, 2003 (the "Record Date") are entitled to
vote at the Annual Meeting or any adjournment thereof. OnAt the close of business
on the Record Date, 15,744,472 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.
In the event that a broker, bank, custodian, nominee or other record
holder of the Company's Common Stock indicates on a Proxy that it does not have
discretionary authority to vote certain shares on a particular matter (a "broker
non-vote"), then those shares will not be considered and entitled to vote with
respect to that matter, although they will be counted in determining the
presence of a quorum.
SOLICITATION AND VOTING OF PROXIES
Shares represented by a properly executed proxy in the accompanying
form, unless previously revoked, will be voted at the Annual Meeting in
accordance with the
specifications made ifyour instructions on the proxy properly executed,card as long as the card is
received by the Company before the close of business on September 5, 2001.November __, 2003.
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,UNLESS YOU GIVE
DIFFERENT INSTRUCTIONS ON THE PROXY CARD, THE SHARES REPRESENTED THEREBYBY THE PROXY
WILL BE VOTED FOR THE ELECTION OF THE NOMINEES FOR DIRECTOR
NAMED IN THIS PROXY STATEMENT AND FOR THE OTHER PROPOSALS LISTED IN THIS PROXY
STATEMENT.VOTED:
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- - to approve the sale and transfer of substantially all of the Company's
assets and liabilities to a purchaser whose owners will be some or all
of the Company's subordinated debt holders ("Purchaser");
- - to approve the sale to Dorman Industries, LLC of 5,248,257 shares of
the Company's Common Stock, which would result in Dorman Industries
owning, on a fully diluted basis, approximately 62.5% of the Company's
outstanding Common Stock following the proposed reverse stock split;
- - to approve a five to one reverse stock split with respect to the
Company's Common Stock and an amendment to the Company's Amended and
Restated Articles of Incorporation ("Articles") to effect the reverse
stock split;
- - to approve the amendment to the Company's articles changing the
Company's name to Sandston Corporation; and
- - to elect Daniel J. Dorman and Lawrence De Fiore to the Board of
Directors.
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 proxyADJOURNMENTS
In the event that sufficient votes in the accompanying form may revoke the proxy
at any time before it is exercised by giving written notice to the Secretaryfavor of the Company bearing a laterproposals are not
received by the date thanof the proxy, by submitting a later-dated
proxy,Annual Meeting, the persons named as Proxies may
propose one or by votingmore adjournments of the Annual Meeting to permit further
solicitations of Proxies. Any such adjournment would require the affirmative
vote of the majority of the shares present in person or represented by such proxy in personProxy at
the Annual Meeting.Meeting and entitled to vote.
PROXY EXPENSES
The costexpense of soliciting proxies will be bornepaid 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 employeespersons will not be additionally compensated,receive additional compensation, 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.
REVOCATION OF PROXIES
You may change your vote at any time before the proxy is exercised by
filing with the Secretary of the Company either a notice revoking the proxy or a
properly signed proxy that is dated later than the proxy card. If you attend the
Annual Meeting, the individuals named as proxy holders in the enclosed proxy
card will nevertheless have authority to vote your shares in accordance with
your instructions on the proxy card unless you indicate at the meeting that you
intend to vote your shares yourself.
Please note, however, that if your shares are held of record by a broker, bank
or other nominee and you wish to vote at the Annual Meeting, you must bring to
the Annual Meeting a letter from the broker, bank or other nominee, confirming
your beneficial ownership of the shares.
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4NO DISSENTER'S RIGHTS
Under Michigan law, the Company's shareholders are not entitled to
dissenter's rights as a result of any of the contemplated transactions or
proposals, and the Company's articles, bylaws and the resolution approving these
matters do not grant shareholders any dissenters' rights.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
IN THIS PROXY STATEMENT
This proxy statement and the documents incorporated by reference into
this proxy statement contain forward-looking statements about the asset sale and
the Company within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Statements containing the words "believes," "anticipates," "estimates,"
"expects," "intends," "plans," "seeks," "will," "may," "should," "would,"
"projects," "predicts," "continues," and similar expressions or the negative of
these terms constitute forward-looking statements that involve risks and
uncertainties. Other forward-looking statements include those concerning the
value of assets to be transferred to the seller pursuant to the asset sale, the
aggregate net consideration to be received by the Company in the asset sale, the
likelihood of shareholder value resulting from the sale of substantially all of
our operating assets, and the business operations of the Company following the
closing of, or, in the event the asset sale is not completed, in lieu of, the
asset sale.
We intend such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and are including this statement for
purposes of invoking these safe harbor provisions. Such statements are based on
current expectations and are subject to risks, uncertainties and changes in
condition, significance, value and effect, including those discussed in the
section entitled "Risk Factors" contained in our Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2002. Such risks, uncertainties and
changes in condition, significance, value and effect could cause the Company's
actual results to differ materially from those anticipated events. Except as may
be required under federal law, we undertake no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur.
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MATTERS TO COME BEFORE THE ANNUAL MEETING
PROPOSAL 1
ELECTIONTO APPROVE THE SALE OF DIRECTORSSUBSTANTIALLY ALL OF THE COMPANY'S ASSETS FOR TOTAL
CONSIDERATION EQUAL TO OR GREATER THAN ALL ITS LIABILITIES, INCLUDING THE SENIOR
DEBT, THE SUBORDINATED DEBT AND ALL OTHER LIABILITIES
SUMMARY OF THE PROPOSED SALE
The Board of Directors has approved and is recommending the sale of
substantially all of the Company's tangible and intangible assets, including its
real estate, accounts, equipment, intellectual property, inventory, goodwill,
and other intangibles (the "Net Asset Sale") to the Purchaser. The Net Asset
Sale will also include the assumption by Purchaser of all of the Company's
liabilities, including the Company's subordinated debt and convertible
subordinated notes.
The Net Asset Sale would be completed as soon as practical after
approval of the transaction by the Company's shareholders and the negotiation
and execution of a satisfactory Asset Purchase Agreement, but in any event, no
later than December 31, 2003 (the "Agreement").
The total consideration for the Net Asset Sale will be equal to or
greater than the total amount of all of the Company's liabilities. As of August
31, 2003, the Company's liabilities were in the amount of $12,610,428, which
includes $4,511,500 of subordinated debt. This price would exceed the total
value of the Company's assets, when valued at book value, by approximately $2.5
million. The Company had a deficit of shareholder's equity of approximately $2.5
million as of August 31, 2003.
If consummated, the Net Asset Sale will result in the Company remaining
a public company owned by its existing shareholders. The Company will not,
however, own any assets except the $30,000 in cash the Company expects to retain
and certain intangible assets consisting of the Company's net operating loss
carry forward and its value as a public shell entity. The Company will not,
however, have any liabilities, all of them will be assumed by the Purchaser. In
effect, the Company will become a public shell with no established business. It
is anticipated that all of the Company's employees will be hired by the
Purchaser to carry on the Company's existing businesses.
SUMMARY OF THE PROPOSED NET ASSET SALE
On July 10, 2003, our Board of Directors unanimously approved a motion
to direct management to use its best efforts to negotiate and close the sale of
substantially all of the Company's assets for a total purchase price of
approximately $12.6 million, to be paid by the Purchaser mostly or entirely with
debt assumption. The expected material terms of the proposed sale are summarized
below.
PARTIES TO THE SALE
The Company
The Company is seeking shareholder approval to consummate the Net Asset
Sale, at or above the proposed price, prior to the negotiation of definitive
transaction documents. The Company designs, manufactures, and markets factory
automation products, including computer hardware and software products. The
Company maintains its executive offices at 5840 Interface Drive, Ann Arbor,
Michigan 48103, telephone (734) 214-2000. The tangible assets anticipated to be
sold in
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the Net Asset Sale are all located at this address, and the Company's other
locations, namely A-OK Controls Engineering, Inc., located in Auburn Hills,
Michigan, Optimation, Inc., located in Huntsville, Alabama and Nematron Ltd.,
located in Waterlooville, Hampshire, UK.
Purchaser
It is anticipated that the Purchaser will be a corporation whose owners
will be some or all of the Company's subordinated debt holders. Discussions are
currently underway with North Coast Technology Investors, L.P. ("North Coast"),
the holder of a substantial majority of the Company's subordinated debt. North
Coast maintains its executive offices at: 206 South Fifth Avenue, Ann Arbor,
Michigan 48104, telephone number: (734) 662-7667.
ASSETS TO BE SOLD
The assets proposed to be sold to Controlpointe, referred to as "the
assets," consist of all of the assets currently used to operate the Company's
business, including:
- The Company's real estate and improvements thereon, namely the
Company's headquarters at 5840 Interface Drive, Ann Arbor,
Michigan;
- All accounts receivable and cash on hand, except for $30,000;
- All equipment, tools and machinery;
- All intellectual property, including (i) all patents, patent
applications, registered trademarks, service marks and trade
names and applications therefor,] and (ii) all unregistered
copyrights, trademarks, service marks, trade names and all
trade secrets and other intellectual property rights of any
kind owned or used by the Company, and any and all causes of
action or rights to damages or other remedies which the
Company may be entitled due to infringement or
misappropriation of any such intellectual property;
- all inventory;
- all of the stock and assets of the Company's subsidiaries,
including A-OK Controls Engineering, Inc., Optimation, Inc.,
and Nematron Ltd.;
- All contracts, including customer contracts, vendor agreements
and supply agreements; and
- All other goodwill and documents related to the Company.
ASSETS TO BE RETAINED
The only assets the Company is expected to have after the Net Asset
Sale are the $30,000 in cash that it is retaining, its net operating loss
carry-over, and its value as a public shell company.
ASSUMPTION OF THE COMPANY'S LIABILITIES
In the Net Asset Sale, the Purchaser will assume, and agree to
indemnify the Company from, all of the Company's liabilities, including all of
its liabilities with respect to the Company's senior and subordinated debt, debt
to trade creditors, other operating debt, and lease commitments.
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PURCHASE PRICE
The total estimated purchase price of $12.6 million will be paid
through the assumption of all of the Company's liabilities.
USE OF PROCEEDS FROM THE ASSET SALE
It is not expected that there will be any cash proceeds from the Net
Asset Sale. The $30,000 the Company is retaining will not be distributed to
shareholders, but will be retained by the Company for future operations.
RELEASE
As a condition of the Net Asset Sale, the Company's senior and
subordinated lenders will release the Company from any and all debts,
liabilities and obligations owed to them.
OTHER ANTICIPATED TERMS
It is expected that the Company will make representations and
warranties to the Purchaser, including regarding our corporate status, authority
to complete the asset sale, and outstanding litigation. It is also expected that
the Purchaser will make representations and warranties to the Company regarding
the Purchaser's corporate status and authority to complete the asset sale.
EMPLOYEES
It is our belief that the Purchaser will hire all of the Company's
current employees on substantially the same terms as they are currently
employed.
VOTING REQUIREMENTS TO APPROVE THE NET ASSET SALE
In order to complete the Net Asset Sale, a majority of the votes cast
at the meeting must approve the Net Asset Sale.
BACKGROUND AND PRINCIPAL REASONS FOR RECOMMENDING THE APPROVAL OF THE NET ASSET
SALE
In reaching its decision to approve the Net Asset Sale, the Board of
Directors considered several potential benefits and material factors pertaining
to the Net Asset Sale, including the following:
The Company has been in continuing default on its debt, and it does not
have the capital necessary to remedy the defaults. The Company had been
operating since June 2001 under a forbearance agreement with its then senior
lender, LaSalle Business Credit, Inc. ("LBCI"), and LBCI had placed increasingly
restrictive limits on the Company's borrowing capacity and increased the
Company's interest rates under the LBCI debt agreement. LBCI had retained the
right to immediately demand repayment of all outstanding borrowings and, if it
did so, the Company would not have had the resources to repay the debt. In July
2003, North Coast advanced funds to the Company that allowed the Company to
repay all debt due to LBCI. Upon repayment, the LBCI debt agreements were
cancelled and North Coast became the Company's senior lender. The Company
currently owes approximately $1.5 million on this secured line of credit, which
is due on demand.
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Because the Company is in default on its subordinated loans in the
principal amount of approximately $4.5 million, along with interest in the
approximate amount of $708,000, the debt holders have the right to call the debt
and to foreclose on all the assets of the Company, which would leave the
shareholders owning a company without assets, but with significant liabilities.
Total liabilities of the Company, including lines of credit, subordinated debt,
accrued interest and other liabilities, exceed $12 million.
As of August 31, 2003, the Company had assets with a book value of
approximately $10.1 million and liabilities of approximately $12.6 million,
resulting in a shareholders' deficit of approximately $2.5 million. Based on the
Company's recent operations and cash flow and internal forecasts, the Board
believes that it is unlikely that the Company could receive any offers for the
Company's net assets for a greater amount than the proposed price in the Net
Asset Sale. The proposed transfer price in the sale of the assets to the
Purchaser values the net assets at $2.5 million greater than the book value of
the net assets.
The Company has operated at a deficit for the last three years,
including losses of approximately $1.9 million, $7.1 million and $3.1 million
for the years ended December 31, 2000, 2001 and 2002, respectively. The Company
has required third party capital to fund its losses, and, unable to secure
necessary equity or debt capital from other sources, has sold convertible
subordinated promissory notes and warrants to North Coast and certain other
people.
The convertible subordinated promissory note agreements carry a
weighted average interest of 12.6%, and the subordinated notes and warrants
attached thereto are convertible into equity at exercise prices ranging from
$0.05 to $0.10 per share. Certain of the subordinated notes were initially
structured so that the exercise price of the conversion features was equal to
the then current market price of the underlying Common Stock, but with the
provision that if the market price of the underlying Common Stock fell below
such exercise price at the date of the note, and stayed below such price for
five consecutive trading days, then the revised exercise price would be the
lowest price during such subsequent period. A total of $2,912,500 of the
subordinated notes allow the holder, in lieu of conversion into Common Stock, to
convert the subordinated notes and accrued interest thereon into authorized but
unissued shares of Class A Preferred Stock at $0.10 per share. The lowest
closing price of the Company's Common Stock, as traded on the American Stock
Exchange during the period that the notes have been outstanding has been $0.05
per share for the trading days between March 17, and April 3, 2003. At this
conversion price, the subordinated debt, accrued and unpaid interest and
warrants issued in connection therewith would be convertible into an additional
105.5 million shares of Common Stock, representing, on a pro forma basis, 87.0%
of the then issued Common Stock of the Company. Currently, the noteholders own
24.0% of the currently outstanding Common Stock and all other shareholders own
76.0%. The effect of the conversion of existing subordinated debt, accrued and
unpaid interest and warrants would cause the percentage of control exercised by
the non-noteholders to decrease from 76.0% to 12.6%, representing an 83.4%
dilution of control. The conversion of subordinated notes, accrued and unpaid
interest and warrants, as described above, requires shareholder approval of an
amendment to the Company's Amended and Restated Articles of Incorporation, divideas
amended (the "Articles") since the Company has only 30 million shares of Common
Stock authorized, but would require in excess of 121 million authorized shares
if the subordinated notes, accrued and unpaid interest and warrants were
converted into Common Stock. If shareholder approval of the proposed amendment
was not obtained, then the noteholders could exercise their rights under their
note agreements to foreclose on all the assets of the Company. If the Net Asset
Sale is approved and an acceptable agreement is reached with all parties, the
convertible subordinated promissory notes will be cancelled.
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The near term financial projections prepared by management of the
Company, based on known trends, backlog, order rates and revenue and expense
projections, indicate that the Company will require additional capital infusions
for the foreseeable future until operations become cash positive, and the
Company will require continuing forbearance by all of its lenders to further
delay the repayment of the Company's debt. Though management is optimistic that
operations can become cash positive within the next twelve months, management
does not believe it is possible to project the exact timing of the Company's
cash needs. Despite the best efforts of the Company's management, no lender or
investor has been identified that is willing to fund the Company's ongoing cash
requirements within the current structure of the Company. The sole providers of
capital, other than senior debt, to the Company during the past three years have
been the holders of the Company's subordinated debt. The holders of the
Company's subordinated debt have indicated to the Company that they are not
willing to provide further financing to the Company within the current structure
of the Company.
To avoid dilution of the existing shareholders and the possible
foreclosure on the Company's assets, the Company would have to repay the
subordinated debt. Funds to make this payment would be required from other
equity or debt sources, but despite the Company's efforts over the last three
years, management has been unable to attract investor interest. All of the
capital that has been raised over the last three years has been secured solely
from the subordinated noteholders. The total amount of subordinated debt and
accrued interest thereon, on the two subordinated loans as of August 31, 2003 is
approximately $5,219,306. Management estimates that the Company will not
generate funds internally through operations in the foreseeable future to repay
the subordinated debt and accrued interest thereon.
The Board also believes that the representations and warranties
anticipated to be made by the Company as part of the Net Asset Sale will be
limited.
Based on the above situation and facts, the Board has determined that
it would be in the best interests of the Company's shareholders to divest the
assets and liabilities of the Company rather than incur up to an 82.6% dilution
resulting from the conversion of the subordinated notes and warrants into Common
Stock, or to incur a total loss of shareholder investment based on foreclosure
by the subordinated noteholders. The subordinated noteholders have not, however,
indicated any desire to foreclose on the Company's assets at this time, but
rather have indicated a desire to proceed with the proposed Net Asset Sale.
POSSIBLE DISADVANTAGES OF THE SALE
The Board of Directors also considered a number of potentially negative
factors in reaching its decision to approve the Asset Purchase Agreement and the
sale of the assets, including the following:
The Company could receive major program work from its customers that
would allow it to return to profitability and generate sufficient cash flows to
meet its operational and debt service cash requirements; however, management
does not believe this is likely.
A second possibility is that shareholders may be able to get a higher
price for its assets from another potential purchaser. However, the Company
believes that the likelihood that it could receive a better price for its assets
is unlikely because of the Company's continuing need for capital to fund
operations and the inability to state when it will reach a break-even revenue
volume. The Company has not, however, hired an investment banker or other party
to market or auction the Company or render a fairness opinion on the price
proposed for the Net Asset Sale.
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Other disadvantages of the sale are that it may not be consummated, and
the proposed sale may result in management and employee disruption, potentially
causing key personnel to leave.
The Board also considered the potential negative effect on the
Company's stock price as a result of the public announcement of the Net Asset
Sale.
Another factor the Board considered was the potential loss of its
American Stock Exchange ("AMEX") listing as a result of, or shortly after the
sale, which would make it very hard for shareholders to sell their shares.
After careful consideration of the issues, the Board did not believe
that the negative factors were sufficient, individually, or in the aggregate, to
outweigh the potential benefits of the asset sale.
With respect to the proposed Net Asset Sale, although it is expected
that the Purchaser will be assuming the Company's liabilities and obligations,
there is no guarantee the Purchaser will pay off all of these obligations, and
since the Company will not be receiving releases from any of its creditors other
than the subordinated debt holders, the Company may face collection actions and
related expenses from its creditors, and not have any assets to satisfy its
liabilities. The Company will then be forced to seek to enforce the Purchaser's
obligations under the Asset Purchase Agreement.
INTERESTS OF OUR DIRECTORS AND EXECUTIVE OFFICERS
Mr. Joseph J. Fitzsimmons, our Chairman of the Board, and Mr. Ronald C.
Causley, a director, may become shareholders of the Purchaser. This means that
some of our directors into three
classes,could have interests in the asset sale that are different
from, or in addition to, those of our shareholders generally. The Board is aware
of these interests. In addition, pursuant to the terms of the Company's option
plans, unvested options held by some of our officers and directors, will
immediately vest upon the change of control, but all of the options have
exercise prices in excess of the market price of the underlying common stock.
Furthermore, the agreement with Dorman Industries regarding their investment
calls for the termination of all of these options.
REGULATORY APPROVALS
No United States Federal or state regulatory requirements must be
complied with or approvals obtained as a condition of the proposed sale.
SHAREHOLDER APPROVAL
After careful consideration, the Board of Directors unanimously
believes that the proposed Net Asset Sale, combined with the transaction
described in Proposal 2, is in the best interest of the shareholders.
Accordingly, the Board unanimously approved the Net Asset Sale and recommends
that the shareholders vote FOR Proposal 1. If shareholder approval is not
received, management and the Company's Board will continue to review all options
for maximizing shareholder value. There can be no assurance, however, that an
Asset Purchase Agreement for the Net Asset Sale will be executed, or if it is
not, any alternative plan can be executed that will result in any value for the
shareholders. There can also be no assurance that the Company's subordinated
debt holders will not exercise their right to foreclose on the Company's assets.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE NET
ASSET SALE TO THE SUB DEBT INVESTOR GROUP.
11
PROPOSAL 2
PURCHASE OF SHARES BY DORMAN INDUSTRIES, LLC
OVERVIEW
If the sale of substantially all of the assets of the Company is
consummated and the Purchaser assumes all of the Company's liabilities, the
Company will be what is commonly referred to as a "public shell." Dorman
Industries, LLC ("Dorman Industries") has agreed to purchase 5,248,257 shares of
the Company's Common Stock (the "Purchase") from the Company for $50,000, which
expire as set forth below. At each annual meeting,would result in Dorman Industries owning, on a fully diluted basis,
approximately 62.5% of the outstanding Common Stock of the Company following the
reverse stock split described in Proposal 3.
TERMS AND STRUCTURE
The Company and Dorman Industries have entered into a stock purchase
agreement (the "Stock Purchase Agreement") pursuant to which Dorman Industries
will make the Purchase.
The closing of the Purchase will take place immediately after the
effective time of the reverse stock split discussed under Proposal 3. The
purchase will be conditioned upon the following:
1. The approval of the shareholders of the Net Asset Sale and the
closing thereof;
2. The approval by the shareholders of the reverse stock split as
provided in Proposal 3;
3. The approval by the shareholders of the amendment to the
Articles of Incorporation of the Company, electchanging the name of the Company to
three-yearSandston Corporation, as provided in Proposal 4;
4 The approval by the shareholders of the nominees for election
as the Directors of the Company set forth as the first alternative under
Proposal 5;
5. The "opting out" by the Company from the provisions of what is
commonly known as the Michigan Business Combination Act; and
6. In connection with the Net Asset Sale, the obtaining of the
release of the Company as to legal liability with respect to the obligations of
the Company for borrowed money and any other liabilities, contingent or
otherwise, including the elimination of the Company's convertible subordinated
notes.
Under the terms of the Stock Purchase Agreement, the Company has
committed as follows prior to the closing of the Purchase:
1. to operate in the ordinary course of business;
2. not to merge, consolidate or exchange shares with another
corporation or entity;
3. not to incur any debts, outside the ordinary course of
business;
4. not to issue any additional shares of capital stock; and
5. to cancel all existing stock options and warrants of the
Company.
12
FUTURE PLANS
While no assurances can be given that Dorman Industries will be
successful in connection with its future plans for the Company, Dorman
Industries intends to use the Company and its "public shell" as a platform to
build long-term shareholder value by acquiring and/or investing in, and
operating strategically positioned companies with above average operating
profits.
The Company is expected to target companies with solid operating
performance that are well managed and in several industry groups. The targeted
companies are generally expected to have the following characteristics: sales
volume of between $20 million and $250 million; value added manufacturing,
distribution and business services; fragmented industries; experienced
management; and consistent historical financial performance.
It is anticipated that under Dorman Industries' direction, the Company
will provide strategic and operational oversight, portfolio and financial
management, corporate development and corporate administrative services such as
banking, insurance, regulatory compliance and treasury functions to portfolio
businesses. In addition, add-on acquisitions will be identified for key industry
groups within the Company's family. The intent is that the Company will not
function merely as a provider of capital or as an investment fund, but will use
the knowledge, resources and connections of the principals of Dorman Industries
to actively manage and participate in the growth of any acquired underlying
portfolio businesses.
While it is Dorman Industries' objective to ultimately be able to use
the securities of the Company as a currency in the acquisition of portfolio
businesses, it is clear that the initial acquisitions of portfolio businesses
will require the Company to be infused with capital thereby diluting the
Company's shareholders, including Dorman Industries to the extent that it does
not participate in the capital infusion.
BACKGROUND OF MR. DORMAN OF DORMAN INDUSTRIES
Daniel J. Dorman has been the President of D.J. Dorman & Co., Inc. and
its predecessor since 1989. D.J. Dorman & Co., Inc. identifies, structures,
acquires and manages investments in private equity and buy-out opportunities on
behalf of several entities. Mr. Dorman is also Chairman and Chief Executive of
Dorman Industries, LLC, which was recently organized to hold and manage
interests in several operating companies. Mr. Dorman is a Director of Kux
Manufacturing Company, a Company that he purchased from Mitsubishi Corporation,
and which is a leader in building graphics, and is Chairman of The Rental
Equipment Group, LLC, an equipment rental company with operations in the
southeast and southwest United States.
FURTHER CONSIDERATIONS CONCERNING THE COMPANY
NO ASSURANCES OF PROFITABILITY, APPRECIATION OR CASH DISTRIBUTIONS.
There is no assurance that any acquired portfolio businesses of the Company will
be profitable. The expenses of the Company may exceed its income. Any return on
investment will depend upon the success of investments and operating decisions
of management.
LIMITED OPERATING HISTORY. Daniel J. Dorman has substantial investment
experience. However, the Company has not yet commenced acquiring portfolio
businesses and neither the Company nor Mr. Dorman has an operating history to
form the basis on which shareholders may evaluate the likely performance of the
Company. Mr. Dorman has not identified any potential portfolio businesses and
has no experience as an officer or director of a public company.
13
LONG TERM INVESTMENT; LIMITED RIGHT TO RECEIVE DIVIDENDS. A continued
investment in the Company is a long-term investment and there is no assurance of
any dividends to shareholders prior to the ultimate liquidation of the Company.
The right of shareholders to receive any dividends is subject to the discretion
of the Board of Directors.
CONTINUED LISTING ON THE AMERICAN STOCK EXCHANGE. While the Company's
shares of Common Stock are presently listed on the AMEX, the Company no longer
satisfies the continued listing requirements of the AMEX. No assurances can be
given that the Company will be able to bring itself into conformity with the
requirements of the AMEX prior to the time that the AMEX takes action to de-list
the Company. Furthermore, the Net Asset Sale will likely result in the AMEX
beginning de-listing proceedings against the Company. The Company will seek to
close an acquisition shortly after the Net Asset Sale to prevent a de-listing
and take the other actions necessary to prevent de-listing, but it is likely
that the Company may be de-listed from the AMEX. If the Company is de-listed
from the AMEX, no assurances can be given as to the development of a public
market for the Company's Common Stock.
RELIANCE ON INDIVIDUALS. The Company will be particularly dependent on
Daniel J. Dorman. The loss of the services of Daniel J. Dorman could have a
material adverse effect on the Company.
CONTROL BY DORMAN INDUSTRIES, LLC. In view of the fact that Dorman
Industries will own, on a fully diluted basis, in excess of approximately 62.5%
of the outstanding Common Stock of the Company, Dorman Industries will be able
to cause the election of Directors of its choosing. Furthermore, Mr. Dorman will
initially be the chief executive officer of the Company and one of its three
directors if the recommended proposals pass. Furthermore, shareholders will not
have an opportunity to replace
thoseevaluate potential portfolio businesses available to the
Company or the terms of any investment in such businesses.
POTENTIAL CONFLICTS OF INTEREST. Mr. Dorman and/or entities he controls
or is affiliated with may, from time to time, be subject to various conflicts of
interest because of his other investment and advisory activities. Mr. Dorman may
well be engaged in making his own investments or investments on behalf of other
entities in which he may have an interest and, subject to the requirements of
the Michigan Business Combination Act, will have no obligation to make available
any investment opportunity to the Company or otherwise report such investments
to the shareholders. However, it would be the intent of Mr. Dorman for the
Company to establish a conflict of interest policy which will minimize, but not
eliminate, the potential conflicts of interest.
LIMITED PROTECTION UNDER CERTAIN SECURITIES LAWS: EXEMPTION UNDER INVESTMENT
COMPANY ACT
The Company will not be registered as an investment company under the
Investment Company Act of 1940, as amended (the "Investment Company Act"), and
Mr. Dorman will not be registered as an investment adviser under the Investment
Advisers Act of 1940, as amended (the "Advisors Act"). As a result, shareholders
will not have the benefit of certain protections afforded by such laws,
including various substantive regulations of the Investment Company Act which
require investment companies to have disinterested directors, whose terms expire atregulate the
relationship between the investment company and its advisers and limit
transactions involving affiliated companies, and the substantive provisions of
the Advisers Act which restrict, among other things, the type and amount of
compensation that annual meeting.may be payable to an investment adviser.
14
It is believed that the nature of the Company will not subject it to
the registration requirements of the Investment Company Act. Companies which
are, or hold themselves out as being, engaged primarily in the business of
investing, re-investing or trading in securities are subject to regulation under
the Investment Company Act. The term of officeCompany plans to remain exempt from regulation
under the Investment Company Act by acquiring not less than a controlling
interest in portfolio businesses and actively participate in the management of
each director electedof its portfolio businesses. If the Company were to lose its claimed
exemption under the Investment Company Act, the performance of its investment
portfolio could be materially adversely affected.
AMERICAN STOCK EXCHANGE REQUIREMENTS
The AMEX Company Guide sets forth the rules and regulations of the
AMEX. The regulations of the AMEX require shareholder approval of most issuances
of Common Stock (other than a public offering) at this year's Annual Meeting will continue untila price less than the 2004
annual meetinggreater
of book value or market value which, together with sales by officers, directors
and until his successor has been elected and qualified,principal shareholders, equals 20% or until
his earlier resignationmore of the Common Stock or removal.voting
power outstanding before the transaction. Issuance and/or sale without obtaining
such approval could result in de-listing. Therefore, while under Michigan law
the Purchase could be made without shareholder approval, the Company is seeking
such approval in order to be in compliance with the AMEX rules.
FAIRNESS OPINION
The Board of Directors has not sought or obtained any independent third
party opinion as to the fairness of the acquisition by Dorman Industries, from a
financial point of view, for the benefit of the Company shareholders. In view of
the fact that the Company will have no assets or liabilities (other than
contingent liabilities with respect to accounts payable of the Company which
have been assumed by Controlpointe but for which the Company has not received a
release), it was felt that the comfort provided by a Fairness Opinion was not
sufficient to expend the Company's limited resources.
EFFECT OF TRANSACTION ON EXISTING SHAREHOLDERS
While the Purchase will not result in any change in the number or type
of shares owned by the existing holders of the Company's Common Stock, the
reverse stock split as provided in Proposal 3, which is a condition to the
acquisition by Dorman Industries, LLC, would result in such a change. Following
the consummation of the Purchase, Dorman Industries, LLC will own approximately
on a fully diluted basis approximately 62.5% of the outstanding Common Stock. As
a result, Dorman Industries, LLC will have the right to control the business and
operations of the Company to a significant extent, and will have the ability to
determine the outcome of any vote of the shareholders, including votes
concerning the election of directors and changes in control.
MICHIGAN LAW
Under the Michigan Business Combination Act, the Company is precluded
from entering into certain specified business combinations with, or proposed by,
or on behalf of, any "interested shareholder" or affiliated or associated
persons for at least five years after the shareholder acquires its 10% interest,
unless the Board issues an advisory statement and the business combination is
approved by a super majority of the shareholders. "Interested shareholder" means
a beneficial holder of at least 10% of the outstanding voting shares, or an
affiliate of the Corporation who, within the preceding four years, was a 10%
shareholder regardless of such person's present shareholdings.
15
For purposes of the statute, a business combination includes the
following transactions with an interested shareholder:
(i) Certain mergers of the Company or its subsidiaries,
statutory share exchanges or dispositions of substantial assets of the
Company or its securities;
(ii) Issuances or transfers by the Company or its
subsidiaries of substantial shares of the Company or its subsidiaries;
(iii) Plans of liquidation or dissolution in which anything
other than cash is received by an interested shareholder; and
(iv) Recapitalizations that increase the proportionate
voting power of the interested shareholder or affiliated or associated
persons.
As a condition to proceeding with the acquisition, Dorman Industries,
LLC has required that the Company's Board of Directors "opt out" of the
foregoing provisions of the Michigan Business Combination Act. The Board intends
to adopt such a resolution at an upcoming meeting. Upon the passage of such a
resolution, any business combination involving Dorman Industries or an affiliate
will be exempt and the advisory statement and super-majority vote will not be
required in connection with any business combination in the future between the
Company and Dorman Industries and/or its affiliates.
Dorman Industries has no present intention proposing a business
combination between Dorman Industries and/or its affiliates and the Company but
felt that imposing a condition on the "opting out" of the requisite provisions
of the Michigan Business Combination Act was the prudent thing to do if in the
unlikely event such a business combination became a necessary alternative.
Dorman Industries is making the acquisition in order to have available a "public
shell" to be used for future acquisitions and not for the purpose of entering a
transaction with itself.
USE OF PROCEEDS
The $50,000 purchase price being paid by Dorman Industries, LLC in
connection with the Purchase is nominal, but directly proportional to the
$30,000 in cash that will remain with the Company upon the closing of the Net
Asset Sale. However, other than the $30,000, the Company will have no assets or
liabilities at the time of the Purchase. The Company estimates that the net
proceeds resulting from the Purchase together with the cash on hand after the
Net Asset Sale and the payment of expenses relating to this proxy solicitation
will be approximately $80,000. Such cash will be used for general operating
expenses of the Company until such time as the Company is further infused with
cash in order to make a business acquisition.
VOTE REQUIRED: RECOMMENDATION OF THE BOARD OF DIRECTORS
The affirmative vote of a majority of the votes cast is required for
approval of this Proposal. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
"FOR" THE APPROVAL OF THE PURCHASE OF SHARES BY DORMAN INDUSTRIES, LLC.
16
PROPOSAL 3
PROPOSAL TO AUTHORIZE A REVERSE STOCK SPLIT
GENERAL
In order for the Company to have a sufficient number of shares of
Common Stock to issue to Dorman Industries, the Company could either seek an
amendment to its Articles increasing the number of authorized shares, or reduce
the number of outstanding shares by undergoing a reverse stock split. As of
September 30, 2003, the Company had 15,744,472 shares of the Company's Common
Stock outstanding, at a per share price of $0.27. Thus in order to have a more
appropriate capital structure, the Board of Directors has unanimously adopted a
resolution seeking shareholder approval of an amendment to the Articles to
effect a reverse stock split whereby five outstanding shares of Common Stock
would become one share of outstanding Common Stock.
PURPOSE
The purpose for the reverse stock split is two-fold:
(i) To create a sufficient number of authorized but unissued
shares of Common Stock in order to consummate the Purchase; and
(ii) While the Company following the Net Asset Sale would be a
shell corporation, the Board of Directors, upon the request of Dorman
Industries, LLC, determined that it would be in the best interest of all
shareholders of the Company to reduce the number of shares outstanding and
thereby attempt to proportionately raise the per share price of the Company's
Common Stock at such time as the Company has operations whose results would be
reflected in the per share price of the Company's Common Stock. Therefore, the
Board of Directors believes that it is in the best interest of the Company's
shareholders to authorize an amendment to the Articles implementing a reverse
stock split.
PRINCIPAL EFFECTS OF THE REVERSE STOCK SPLIT
CORPORATE MATTERS. If approved and effected, the reverse stock split
would have the following effects:
(a) The number of shares of the Company's Common Stock issued and
outstanding will be reduced to 3,148,894, which will immediately
increase to 8,397,051 after the sale to Dorman Industries of 5,248,157
shares;
(b) Based on the reverse stock split ratio of 5 shares to 1 share,
proportionate adjustments will be made to the per share exercise price
and number of shares issuable upon the exercise of all outstanding
options and warrants entitling the holders thereof to purchase shares
of the Company's Common Stock, which will result in approximately the
same aggregate price being required to be paid for such options or
warrants upon exercise of such options or warrants immediately
proceeding the reverse stock split;
(c) The reverse stock split will affect all of the Company's
shareholders uniformly and will not affect any shareholders percentage
ownership interest in the Company, except in connection with the
Purchase and except to the extent that the reverse stock split results
in any of the Company's shareholders owning a fractional share. As
described below,
17
shareholders holding fractional shares will be entitled to a cash
payment in lieu of such fractional shares;
(d) Common stock issued pursuant to the reverse stock split will
remain fully paid and non-accessible; and
(e) The Company will continue to be subject to the periodic
reporting requirements of the Securities and Exchange Act of 1934, as
amended.
FRACTIONAL SHARES. No script or fractional certificates will be issued
in connection with the reverse stock split. Shareholders who otherwise would be
entitled to receive fractional shares because they hold a number of shares not
evenly divisible by 5 will be entitled upon surrender of certificate(s)
representing such shares to a cash payment in lieu thereof. The cash payment
will equal the product obtained by multiplying (a) the fraction to which the
shareholder would otherwise be entitled by (b) the per share closing price of
the Company's Common Stock on the day immediately prior to the effective time of
the reverse stock split, as reported on the American Stock Exchange. The
ownership of a fractional interest will not give the holder thereof any voting,
dividend or other rights except to receive payment therefor as described above.
Shareholders should be aware that, under the escheat laws of the
various jurisdictions where shareholders reside, where the Company is
incorporated and where the funds will be deposited, sums due for fractional
interests that are not timely claimed after the effective time may be required
to be paid to the designated agent for each such jurisdiction. Thereafter,
shareholders otherwise entitled to receive such funds may have to seek to obtain
them directly from the state to which they were paid.
If approved and effected, the reverse stock split will result in some
shareholders owning "odd lots" of less than 100 shares of the Company's Common
Stock. Brokers' commissions and other costs of transactions in odd lots are
generally somewhat higher than costs of transactions in "round lots" of even
multiples of 100 shares.
AUTHORIZED SHARES. Upon the effectiveness of the reverse stock split,
the number of authorized shares of Common Stock that are not issued or
outstanding would increase due to the reduction in the number of shares of the
Company's Common Stock issued and outstanding based on the reverse stock split
ratio of 5 shares to 1 share. As of September 30, 2003, the Company had
30,000,000 shares of Common Stock authorized and 15,744,472 shares of Common
Stock issued and outstanding. As a result of the reverse stock split the number
of shares outstanding will be reduced to 3,148,894 shares of Common Stock, but
will then increase to 8,397,051 after taking into account the Purchase by Dorman
Industries of 5,248,257 shares of Common Stock and the number of authorized but
not issued or outstanding shares of Common Stock will increase to 26,851,106
shares, or 21,602,949 shares after taking into account the Purchase by Dorman
Industries. The Company will continue to have 30,000,000 authorized but unissued
shares of preferred stock. Authorized but unissued shares will be available for
issuance and the Company will issue 5,248,157 such shares in connection with the
Purchase.
PROCEDURES FOR AFFECTING THE REVERSE STOCK SPLIT
If the shareholders approve the Proposal to authorize the reverse stock
split, the Company will file an Amendment to the Articles in the form of Annex A
attached hereto, with the Michigan Department of Industry and Consumer Services.
The reverse stock split will become effective upon the filing of the Amendment,
which is referred to herein as "the effective time." Beginning at the
18
effective time, each existing certificate will be deemed for all corporate
purposes to evidence ownership of the post-split shares.
The Company's transfer agent, Registrar and Transfer Company, will act
as exchange agent for purposes of implementing the exchange of stock
certificates. Holders of pre-split shares will be asked to surrender to the
exchange agent certificates representing the existing shares in exchange for
certificates representing the post-split shares in accordance with the
procedures to be set forth in a letter of transmittal the Company sends to its
shareholders. No new certificates will be issued to a shareholder until such
shareholder has surrendered such shareholders' outstanding certificate(s),
together with the properly completed and executed letter of transmittal, to the
exchange agent. After the effective time, any existing certificates submitted
for transfer, whether pursuant to a sale, other disposition or otherwise, will
automatically be exchanged for post-split shares.
NO DISSENTERS' RIGHTS
Under the Michigan Business Combination Act, the Company's shareholders
are not entitled to dissenters' rights with respect to the reverse stock split,
and the Company will not independently provide shareholders with such right.
FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT
The following is a summary of certain material federal income tax
consequences of the reverse stock split. It does not purport to be a complete
discussion of all of the possible federal income tax consequences of the reverse
stock split and is included for general information only. Further, it does not
address any state, local or foreign income or other tax consequences. Also, it
does not address the tax consequences to holders that are subject to special tax
rules, such as banks, insurance companies, regulated investment companies,
personal holding companies, foreign entities, non-resident alien individuals,
brokers/dealers and tax exempt entities. This discussion is based on the
provisions of the United States Federal Income Tax Law as of the date hereof,
which is subject to change retroactively as well as prospectively. The summary
also assumes that existing shares were and post-split shares will be, held as a
"capital asset," as defined in the Internal Revenue Code of 1986, as amended
(i.e., generally property held for investment). The tax treatment of a
shareholder may vary depending upon the particular facts and circumstances of
such shareholder. Each shareholder is urged to consult with such shareholder's
own tax adviser with respect to the tax consequences of the reverse stock split.
Other than the cash payment for fractional shares discussed below, no
gain or loss should be recognized by a shareholder upon such shareholder's
exchange of a certificate representing existing shares for a certificate
representing post-split shares pursuant to the reverse stock split. The
aggregate tax basis of the post stock split shares received in the reverse stock
split (including any fraction deemed to have been received) will be the same as
the shareholder's aggregate tax basis in the existing shares exchanged therefor.
In general, shareholders who receive cash in exchange for their fractional share
interests in the post stock split shares as a result of the reverse stock split
will recognize gain or loss based on their adjusted basis in the fractional
share interests redeemed. The shareholder's holding period for the post stock
split shares will include the period during which the shareholder held the
existing shares surrendered in the reverse stock split.
The Company's view regarding the tax consequences of the reverse stock
split is not binding on the Internal Revenue Service or the courts. ACCORDINGLY,
EACH SHAREHOLDER SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISER WITH RESPECT TO
ALL OF THE POTENTIAL TAX CONSEQUENCES TO HIM OR HER OF THE REVERSE STOCK SPLIT.
19
VOTE REQUIRED; RECOMMENDATION OF BOARD OF DIRECTORS
The affirmative vote of a majority of all outstanding shares of the
Company's Common Stock entitled to vote will be required for approval of this
Proposal. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
PROPOSAL AUTHORIZING THE REVERSE STOCK SPLIT.
PROPOSAL 4
PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION
PROPOSED AMENDMENTS
Currently, the Company's Articles provide, among other things, that the
name of the Corporation is Nematron Corporation.
In order for Dorman Industries to proceed with the Purchase, it will be
necessary to amend the Articles to provide as follows:
The name of the Corporation will be changed from Nematron Corporation
to Sandston Corporation.
The text of the Amendments is set forth in Annex A to this Proxy
Statement.
PURPOSE OF PROPOSED AMENDMENTS
The proposed amendments are a condition to the consummation of the
Purchase. Without such an amendment, Dorman Industries would not be able to
operate the Company under the name of its choosing.
While approval of these amendments is necessary for the consummation of
the Purchase, the approval of the amendments does not in and of itself approve
the Purchase. Thus, the approval of these amendments is conditioned upon and
will only become effective simultaneously with the consummation of the Purchase.
VOTE REQUIRED; RECOMMENDATION OF BOARD OF DIRECTORS
The affirmative vote of holders of a majority of all outstanding shares
of the Company's Common Stock entitled to vote will be required for the approval
of the Proposal to change the name of the Company. THE BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PROPOSAL TO AMEND THE ARTICLES.
20
PROPOSAL 5
ELECTION OF DIRECTORS
If Proposals 1 and 2 are approved, the Board has nominated and
recommends that you vote FOR, Daniel J. Dorman and Lawrence De Fiore as the
Company's directors. Matthew S. Galvez, whose term expires in 2004, would also
remain a director. Each of the nominated directors have indicated that he would
serve, if elected, as a director. If Proposals 1 and 2 are approved, the Company
will have three directors, not its current four, with each director being in one
of the three classes of directors. Mr. Dorman's term will expire at the 2006
Annual Meeting of Shareholders, Lawrence De Fiore's term will expire at the 2005
Annual Meeting, and Mr. Galvez's term will continue to expire at the 2004 Annual
Meeting.
If Proposals 1 and 2 are not approved, the Company will continue to
have four directors. The Board of Directors will also continue to be divided
into three classes, consisting of two directors whose terms will expire in 2004,
one director whose term will expire in 2005, and one director whose term will
expire in 2006. If Proposals 1 and 2 are not approved, one director will be
elected to a three-year term expiring in 2006, and one director will be elected
to a two-year term expiring in 2005. The Board of Directors has nominated Ronald
C. Causley, for a new two-year term expiring in 2005, and Stephen E. Globus, for
a new three-year term expiring in 2006. Messrs. Causley and Globus are currently
serving as directors for the Company, and their current terms are expiring. Our
Board of Directors anticipates that each of Mr. Causley and Mr. Globus will
serve, if elected, as a director. However, if any person nominated by our Board
is unable to accept election, proxies will be voted for the election of such
other person or persons as our Board may recommend.
VOTE REQUIRED
The affirmative vote of a plurality of the total votes represented at
the meeting in person or by proxy and entitled to vote at the meeting is
required for the election of a director. Votes may be cast for, or withheld
from, any nominee. Votes cast for a nominee will count as "yes" votes.
Abstentions and broker-non votes will be excluded entirely from the vote and
will have no effect.
RECOMMENDATION OF BOARD OF DIRECTORS
If, and only if, Proposals 1 and 2 are not approved, the Board of
Directors unanimously recommends a vote FOR each ofits nominees, Ronald C. Causley and
Stephen E. Globus. If, and only if, Proposals 1 and 2 are not approved, proxies
solicited by the nominees for election. ProxiesBoard will be voted FORfor these nominees unless instructions to
withhold or to the election of the
nominee unless the specification is marked on the proxy indicating that
authority to do so is withheld. For purposes of determining the number of votes
castcontrary are given.
INFORMATION REGARDING THE NOMINEES AND OTHER DIRECTORS
The following biographical description contains information with
respect to the electionBoard nominees, Messrs. Dorman and Lawrence De Fiore. Mr.
Galvez's information is provided below in the section entitled "Directors Whose
Terms Expire in 2004."
21
DANIEL J. DORMAN
Mr. Dorman has been the President of directors, only those votes cast "for" are
included.D.J. Dorman & Co., Inc. and its
predecessor since 1989. D.J. Dorman & Co., Inc. identifies, structures, acquires
and manages investments in private equity and buyout opportunities on behalf of
several entities. Mr. Dorman is also Chairman and CEO of Dorman Industries, LLC
which was recently organized to hold and manage interests in several operating
companies. Mr. Dorman is a Director of Kux Manufacturing Company, a company he
acquired from Mitsubishi Corporation, and which is a leader in building graphics
and is Chairman of The election of directors requiresRental Equipment Group, LLC, an equipment rental company
with operations in the southeast and southwest United States.
LAWRENCE DE FIORE
Mr. De Fiore has been a pluralityCPA for over 18 years and is currently a
shareholder and officer of the votes cast.CPA firm of De Fiore & Hallmann, P.C. In
addition, Mr. De Fiore is a managing member of Spalding Capital, LLC, and serves
on the Board of The Rental Equipment Group, LLC and a private equity fund. Mr.
De Fiore has been active in over fifty transactions involving acquisitions and
private investment as a principal and as a senior advisor to various Midwest
based institutions and private families. Mr. De Fiore has extensive investment
experience in financial due diligence, business valuation, ongoing portfolio
management and strategic alliances. Mr. De Fiore graduated with honors from the
Business School at Michigan State University and is licensed as a CPA in the
state of Michigan.
The following sets forthbiographical descriptions contain information aswith
respect to each nomineethe nominees for election, atin the Annual Meetingevent that Proposals 1 and 2 are
not approved, or Messrs. Dorman or De Fiore are not elected. This information is
furnished to the Company by each director continuingor nominee.
NOMINEE FOR THE DIRECTOR WHOSE TERM WILL EXPIRE IN 2005
Ronald C. Causley, 60, became a director in office, including his age,
present principal occupation, other business experience duringFebruary 2002 when the
last five
years, directorshipsBoard appointed him to fill a vacancy on the Board. Mr. Causley is the President
of A-OK Control Engineering, Inc. ("A-OK Controls"), an industrial controls
design and application company and a wholly-owned subsidiary of Nematron. Mr.
Causley is the founder of A-OK Controls, which was incorporated in other publicly held companies1976, and periodhe
has served as its President since inception.
NOMINEE FOR THE DIRECTOR WHOSE TERM WILL EXPIRE IN 2006
Stephen E. Globus, 56, became a director in December 1998. He has been
Chairman of service asthe Board of Globus Growth Group, Inc., a New York City Business
development company since 1984. He is also a director of the Company. If, asPlasmaco, Inc., 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 nominee as the Board of Directors may select.
NOMINEES FOR ELECTION FOR A TERM EXPIRINGflat
computer screen manufacturer owned by Matsushita (Panasonic).
DIRECTORS WHOSE TERMS EXPIRE IN 2004
Matthew S. Galvez, 45,47, became a director in August 1998 upon his
joining the Company as its Chief Operating Officer. On October 1, 1998, Mr.
Galvez was appointed 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 productsstamped metal OEM parts to the automotive industry.
In 1994 he became Chief Executive Officer of that company as well. Prior to
1990, Mr. Galvez was Executive Vice President - Corporate Operations and General
Counsel to an industrial graphics translation software developer and served
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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.Canada.
Joseph J. Fitzsimmons, 66,68, became a director in March 1997. Mr.
Fitzsimmons is the President and Chiefserved as Executive Officer of Nonprofit Enterprise at Work, a
management support organization dedicated to assisting non-profit organizations.organizations,
until he retired in 2002. Mr. Fitzsimmons is also a retired executive of Bell &
Howell Company and of University Microfilms International ("UMI"), which has
been acquired by another company subsequent to his retirement. UMI was a leading
provider of technology services to libraries and other organizations regarding
acquiring, preserving and distributing literature and a subsidiary of Bell &
Howell. Mr. Fitzsimmons served as Corporate Vice President of Bell & Howell and
as Chairman or President and Chief Executive Officer of UMI from March 1987
until he retired in June 1995.
DIRECTORS WHOSE TERMS EXPIRE IN 2003
James A. Nichols, 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
April 1999, Mr. Nichols was the Chairman of the Board of Surgical Instrument
Repair Service, Inc., a partnership with Allegiance Healthcare Corporation, a
public company that engages in the repair and management of surgical instruments
and equipment at health care providers in North America. From 1993 to 1998, Mr.
Nichols served as corporate secretary and a director of Liberty BIDCO Investment
Corporation, a Michigan-based mezzanine finance company. Mr. Nichols was
president and sole owner of Sterilization Management Group, LLC, a provider of
reusable sterile products to hospitals, from 1997 to 1998 when the company was
sold to Teleflex Corporation, a public company.
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Stephen E. Globus, 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.
DIRECTORS 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 South America. Mr. Wicker
continues to serve 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
various technical support and sales management positions, and finished his
career at ABB as vice president of sales.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
Board of Directors. The Board of Directors met eight11 times during 2000.2002 and
took one action by written consent. 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 that period.period, except that Mr.
Globus missed four meetings of the Board. The Board has a standing Organization
and Compensation Committee, Nominating Committee and Audit Committee.
Organization and Compensation Committee. The Organization and
Compensation Committee met twicefour times during 2000.2002. The Organization and
Compensation Committee administers the Company's Long Term Incentive Plan and
the 1993 Stock Option Plan, determines compensation issues for officers,the Company's
president, and determines compensation issues for non-employee directors that do
not involve the Company's equity securities. The current members of the
Organization and Compensation Committee are Messrs. NicholsFitzsimmons (Chairman) and
Globus.
Nominating Committee. The Nominating Committee met oncetwice during 2000.2002.
The Nominating Committee identifies and reviews potential members of the Board
and nominates persons to the Board to serve as Board members. The members of the
Nominating Committee are Mr.Messrs. Globus (Chairman), Causley and Mr. Fitzsimmons. The
committee will consider board nominees recommended by shareholders and 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 20022004 Annual Meeting."
Audit Committee. The Audit Committee met sixfive times during 2000.2002. The
members of the Audit Committee are Messrs. BraunGlobus (Chairman), Nichols and 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 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.
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6AUDIT COMMITTEE REPORT
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) ofby the
American Stock Exchange.AMEX listing standards. 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, 2000.2002. 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,
20002002 for filing with the Securities and Exchange Commission.
AUDIT COMMITTEE: HUGOAudit Committee: Stephen E. BRAUN
JAMES A. NICHOLS
JOSEPHGlobus, Committee Chairman
Joseph J. FITZSIMMONSFitzsimmons, Executive Officers
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 OperatingExecutive Officer 45
David P. Gienapp47
John H. Dunlap Secretary and
Vice President - Finance and Administration,
Secretary and Treasurer 52Marketing, 47
See "Nominees for Election for a Term Expiring"Directors Whose Terms Expire in 2004" for information concerning
Mr. Galvez.
Mr. GienappDunlap has beenserved as the Company's Secretary since July 2003 and as
the Vice President - Finance and Administration
and Treasurer of the CompanyMarketing 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.June 2003. Prior to joining the Company in
October 2002, Mr. Gienapp spent over 20 years with Deloitte & Touche LLP,Dunlap was President of iAppliance LLC, 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 "BLANK CHECK"
PREFERRED STOCK
The Boardlocal technology
startup. From 1998 to 2000, Mr. Dunlap served as Vice-President of Directors has approved,Marketing at
Xycom Automation. Prior to Xycom Automation, Mr. Dunlap owned and is recommending that the
shareholders approve at the Annual Meeting, an amendmentoperated a
microbrewery from 1996 to the Articles of
Incorporation authorizing the future issuance1998. From 1989 to 1996, Mr. Dunlap was employed 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. The Board of Directors
recommends a vote FOR Proposal 2Rockwell Automation - Intelligent Sensing Division, where he was responsible for
the reasons described below.
PRINCIPAL REASONS FOR AUTHORIZATION
If the Preferred Stock Amendment is approved, the Board of Directors
would be entitled to authorize the issuance of up to 30,000,000 shares of
Preferred Stock. The Preferred Stock is considered "blank check preferred stock"
because the Board will be permitted to issue it at any time or from time to time
in one or more series, each with such designations, preferences, conversion
pricesmarketing and rights, dividend rates, cumulative, relative, participating,
optional, voting, redemption or other rights, qualifications, limitations or
restrictions as may be determined from time to time in the Board's sole
discretion, without further action by the Company's shareholders except as may
otherwise be required by applicable law or stock exchange rule.
The Board of Directors believes that the authorization of the Preferred
Stock is in the best interests of the Company and its 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 been unable to access the
public markets to raise cash. It has also had a difficult time attracting
institutional investors becausesales activities 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 for cash
proceeds of at least $5 million during the third quarter of 2001. The cash
proceeds will be used to repay $1.2 million principal amount of its convertible
subordinated notes and accrued interest (unless the holders of the notes choose
to convert the principal and interest into equity securities as described
below), and to increase the Company's working capital. The Company intends to
attempt to issue shares of non-convertible, non-voting Preferred Stock in such
offering, rather than Common Stock, in an effort to minimize the additional
dilution of voting rights of existing common shareholders that would result from
an issuance of Common Stock. The number and terms of the shares to be issued
will be determined by negotiation with the potential purchasers in the proposed
offering. The Company has not yet begun those negotiations. Although the Company
does not expect the Preferred Stock to have dividend or conversion rights or the
right to vote except where a class vote is required by applicable law, there can
be no assurance that the final terms of the Preferred Stock to be sold in such
offering will be as currently intended by the Company, or that Preferred Stock
will be issued at all.
If the terms of the Preferred Stock as finally negotiated include the
right of holders to convert such shares into Common Stock, the financial
interests of the Common Stock holders would be diluted if the Preferred Stock is
subsequently converted into Common Stock at a time when the fair market value of
the
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Common Stock is higher than the conversion price. In addition, a conversion
of the Preferred Stock into Common Stock would also dilute the voting rights of
the Common Stock holders.
Whether Preferred Stock or Common Stock is issued in the proposed
private placement or otherwise, the Company does not intend to seek further
approval from shareholders of the terms and conditions of such equity
securities. The Company has no current plans or proposals to issue Preferred
Stock convertible into Common Stock, nor any other plans, proposals, or
arrangements to issue Preferred Stock.
The terms of the convertible subordinated notes discussed above provide
that if Preferred Stock is issued in the proposed offering, the unpaid principal
and interest due on the convertible subordinated notes may be converted by the
holders into the same series of Preferred Stock sold in the offering at the
price per share paid by the purchasers in such offering. These non-transferable
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 are prepayable in cash at any time
without penalty upon prior written notice as provided in the notes. The Company
has no legal right to force holders to accept an exchange of Preferred Stock,
Common Stock or any other securities to repay the notes.
If the Company does not complete an equity financing pursuant to which
it receives gross proceeds of at least $5 million on or before August 31, 2001,
then 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
beginning September 1, 2001. If at any time before the notes are repaid by the
Company or converted by their holders, the closing price for five consecutive
days on which the Common Stock is traded is less than $0.30, the price at which
the notes may be converted after August 31, 2001 into Common Stock will be
adjusted downward each such time to the lowest closing price during those five
days.
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 holders of shares of Preferred Stock are given voting rights;
(iii) dilution of the equity interests and voting power if the Preferred Stock
is convertible into Common Stock; and (iv) restrictions upon any distribution of
assets to the holders of the Common Stock upon 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 Common Stock.
Shareholders will not have preemptive rights to subscribe for shares of
Preferred 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 shareholders and the Company. The
Board of Directors could 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 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 existence of the additional authorized
shares could have the effect of discouraging unsolicited takeover attempts.
THE AMENDMENT
The Preferred Stock Amendment would amend and restate Article III of
the Company's Articles of Incorporation in its entirety to read as follows:
1. The total authorized capital stock is:
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Common Stock: 30,000,000 shares
Preferred Stock: 30,000,000 shares
2. A statement of all or any of the relative rights, preferences and
limitations of the shares of each class is as follows:
A. Subject to the preferences 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 declared by the Board of Directors of the
corporation from time to time and, in the event of any
liquidation, dissolution or winding up of the corporation, the
holders of Common Stock will be entitled to receive pro rata all
of the remaining assets of the corporation available for
distribution. 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 stated 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 law, different
series of preferred stock shall not be construed to constitute
different classes of shares for the purpose of voting by classes.
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 convertible into stock of
any class whatsoever, whether now or hereafter authorized and
whether issued for cash or other consideration.
If Proposal 2 is approved, the Company intends to file an amendment to
its Articles of Incorporation with the Michigan Department of Commerce, upon
which filing the Preferred 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 27.7 % 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 2.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF PROPOSAL 2.
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PROPOSAL 3
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 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 2002
annual meeting (which will be held after the end of the Company's fiscal year
ending 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 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:
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
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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 3 is approved, the Company intends to file an amendment to
its Articles of Incorporation with the Michigan Department of 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 27.7 % 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 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
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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 August 31, 2001 or the date of the annual shareholders
meeting, whichever is later. 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 or until the date of the annual
shareholders meeting, whichever is later, 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,
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 26.5% 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
10
13
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 July 18, 2001 was $0.55. 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 August 31, 2001 or the date
of the annual shareholders meeting, whichever is later, 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 likelymachine vision, bar code and
RFID products. Prior to have
sufficient capital to continue operating on a long-term basisRockwell Automation, Mr. Dunlap worked for Motorola 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 NotesOwens-Illinois in various engineering 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.
The Company's directors and executive officers (who currently hold
Common Stock representing approximately 27.7% 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 BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF PROPOSAL 4.strategic marketing roles.
24
OTHER DISCLOSURES AND INFORMATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
11
14
The following table sets forth information as of August 1, 2001October __, 2003 with
respect to the beneficial ownership of Common Stock by each boarddirector and nominee
each
other currentfor director, each executive officer named in the Summary Compensation Table
under "Executive Compensation",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"). Beneficial ownership
includes shares that are directly owned or jointly owned, as well as shares over
which the individual or entity has sole or shared investment or voting
authority. Beneficial ownership also includes shares that the individual or
entity has the right to acquire through the exercise of options or warrants (or
any other right) within 60 days of October __, 2003. 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)
-(9)
---------------- --------------------
Name Beneficially Owned
---- ---------------- ---------------------------------------
Directors and Management:
James A. Nichols 2,047,822Ronald C. Causley 3,667,106 (1) 13.0%
Hugo E. Braun 1,701,44919.52%
Joseph J. Fitzsimmons 1,837,064 (2) 10.4%10.46%
Stephen E. Globus 1,283,7351,285,235 (3) 8.2%8.16%
Matthew S. Galvez 860,100 (4) 5.2%
David P. Gienapp 126,859 (5) *
Joseph J. Fitzsimmons 25,108 (6) *
James H. Wicker 4,000 (7) *5.18%
All directors and executive
officers as group (7(4 persons) 6,049,073 (8) 34.7%7,649,505 (5) 87.83%
5% Owners:
Hugo E. Braun 84,537,104 (6) 85.19%
James A. Nichols 4,489,222 (7) 24.59%
J. Eric May, Trustee Under
Declaration of Trust 1,493,425 (9) 9.5%
Dennis A. Sierk 1,415,620 (10) 9.0%(8) 9.49%
Nominees for Directors
Daniel J. Dorman 0 0%
Lawrence De Fiore 0 0%
- ----------------
* Less than one percent.
(1) The shares shown in the table for Mr. NicholsCausley include (i) 1,733,704624,086
shares of Common Stock owned outright, and (ii) 244,451 shares owned by an investment club of which Mr.
Nichols is a member, (iii) currently exercisable warrants to purchase 66,667
shares pursuant to the Notes described in Proposal 4 above, and (iv) options to
purchase 3,000 shares which are currently exercisable or are exercisable within
sixty days. Mr. Nichols' address is 3707 West Maple Road, Bloomfield Hills, MI
48301.
(2) The shares shown in the table for Mr. Braun include (i) 1,050,000 shares
owned by North Coast Technology Investors L.P. and Access Venture Fund L.P., of
which Mr. Braun is a partner, (ii) options to purchase 19,66430,000
shares of Common Stock, which are currently exercisable or are
exercisable within sixty days under the Long-Term Incentive Plan; (iii) currently
exercisable
warrants to purchase 500,000a maximum of 250,000 shares pursuant toof Common Stock issued
in March 2002 in connection with the Notes described
in Proposal 4 above,Company's issuance of subordinated
notes and warrants; and (iv) rights to convert the principal amount of
$125,000 of subordinated convertible notes and accrued interest thereon
to 2,763,020 shares of Common Stock at the lowest closing price per
share during the period that the note is outstanding ($0.05 in April
2003). Mr. Causley's address is 4375 Giddings Road, Auburn Hills, MI
48326.
25
(2) The shares shown in the table for Mr. Fitzsimmons include (i) 15,000
shares of Common Stock owned outright, (ii) options under the Directors
Option Plan to purchase 21,164 shares of Common Stock, which are
currently exercisable or are exercisable within sixty days; and (iii)
warrants to purchase 131,785a maximum of 150,000 shares pursuantof Common Stock issued
in March 2002 in connection with the Company's issuance of subordinated
notes and warrants, and (iv) rights to a Term Loanconvert the principal amount of
$75,000 of subordinated convertible notes and Warrant Purchase Agreement dated November 7,
1995 betweenaccrued interest thereon
to 1,650,900 shares of Common Stock at the Company and Onset BIDCO, Inc., of whichlowest closing price per
share during the period that the note is outstanding ($0.05 in April
2003). Mr. BraunFitzsimmons' address is an
officer. If such warrants were exercised, Mr. Braun would have sole voting
rights and shared investment power with respect to the underlying shares. The
address for Mr. Braun and North Coast Technology Investors L.P. is 206 South
Fifth Avenue, Suite 550,5840 Interface Drive, Ann Arbor, MI
48104.48103.
(3) The shares shown in the table for Mr. Globus include (i) 255,062 shares
of Common Stock owned outright by Mr. Globus, (ii) 672,358 shares of
Common Stock owned by companies and partnerships over which Mr. Globus
exercises voting and investment power, (iii) 343,315 shares of Common
Stock owned by certain relatives of Mr. Globus over which Mr. Globus
exercises beneficial ownership, and (iv) options under the Directors
Option Plan to purchase 3,0004,500 shares of Common Stock, which are
currently exercisable or are exercisable within sixty days. Mr. Globus'
address is 44 West 24th Street, New York, NY 10010.
(4) The shares shown in the table for Mr. Galvez include (i) 100 shares of
Common Stock owned outright, and (ii) options to purchase 860,000
shares of Common Stock, which 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 table 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. Mr. Gienapp's address is 5840
Interface Drive, Ann Arbor, MI 48103.
12
15
(6) The shares shown in the table for Mr. Fitzsimmons include (i) 10,000 shares
of Common Stock owned outright, and (ii) options to purchase 15,108 shares which
are currently exercisable or are exercisable within sixty days. Mr. Fitzsimmons'
address is 5840 Interface Drive, Ann Arbor, MI 48103.
(7) The shares shown in the table for Mr. Wicker include (i) 1,000 shares of
Common Stock owned outright, and (ii) options to purchase 3,000 shares which are
currently exercisable or are exercisable within sixty days. Mr. Wicker's address
is 7249 Hertfordshire Way, Victor, NY 14564.
(8) The shares shown in the table for all current directors and executive
officers as a group include the shares described in footnotes (1)
through (8)(5).
(9)(6) The shares shown in the table for Mr. Braun include (i) 1,050,000
shares of Common Stock owned by North Coast and Access Venture Fund
L.P. ("North Coast"), of which Mr. Braun is a partner, (ii) options
under the Directors Option Plan to purchase 21,164 shares of Common
Stock, which are currently exercisable or are exercisable within sixty
days, (iii) currently exercisable warrants to purchase 500,000 shares
of Common Stock pursuant to a warrant issued to North Coast in March
2001, (iv) currently exercisable warrants to purchase 5,825,000 shares
of Common Stock pursuant to a warrant issued to North Coast in
connection with issuances of subordinated debt and warrants under a $3
million borrowing arrangement between the Company and North Coast, (v)
rights to convert the principal amount of $750,000 of subordinated
convertible notes and accrued interest thereon to 18,382,200 shares of
Common Stock at the lowest closing price per share during the period
that the notes are outstanding ($0.05 in April 2003), and (vi) rights
to convert the principal amount of $2,912,500 of subordinated
convertible notes and accrued interest thereon to 64,583,740 shares of
Common Stock at the lowest closing price per share during the period
that the note is outstanding ($0.05 in April 2003) . If such warrants,
rights and options were exercised, Mr. Braun would have sole voting
rights and shared investment power with respect to the underlying
shares. Mr. Braun's address is 206 South Fifth Avenue, Suite 550, Ann
Arbor, MI 48104.
(7) The shares shown in the table for Mr. Nichols include (i) 1,733,704
shares of Common Stock owned outright, (ii) 244,451 shares of Common
Stock owned by an investment club of which Mr. Nichols is a member,
(iii) currently exercisable warrants to purchase 66,667 shares of
Common Stock, and (iv) rights to convert the principal amount of
$100,000 subordinated convertible notes and accrued interest thereon to
2,444,400 shares of Common Stock at the lowest closing price per share
during the period that the note is outstanding ($0.05 in April 2003).
Mr. Nichols' address is 3707 West Maple Road, Bloomfield Hills, MI
48301.
26
(8) The shares shown in the table for Mr. May, Trustee include 1,493,425
shares of Common Stock owned by J. Eric May, Trustee Under Declaration
of Trust. Mr. May's address is c/o Wilmington Trust Company, 1100 North
Market Street, Wilmington, DE 19890.
(10)(9) The number of shares shownand percentages have been determined as of October
___, 2003. At that date 15,744,472 shares of stock outstanding used 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.
(11) For purposes of
calculating the percentage ownership of Common Stock beneficially
owned by each person, the shares issuable upon exercise ofa beneficial owner assumes that
all options and warrants held by such person are considered outstanding and added to theacquire shares of Common Stock actually outstanding.held by such
beneficial owner (but not those held by any other person) that were
exercisable on, or become exercisable within 60 days of, November ___,
2003 are exercised.
In connection with the Purchase of the shares by Dorman Industries, all
existing options and warrants to purchase the Company's stock will be cancelled.
If Proposals 1 and 2 are approved by the shareholders, then
upon the Purchase of Common Stock by Dorman Industries, an entity controlled by
Mr. Dorman, Dorman Industries will own, on a fully diluted basis, in excess of
62.5% of the outstanding Common Stock of the Company. As noted, Dorman
Industries will be paying the Company $50,000 for its shares of Common Stock.
This will also enable Dorman Industries to cause the election of directors of
its own choosing.
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 President and Chief Executive, Officer and to its Executive Vice
President - Finance and Administration, the Company's only other executive
officer whose salary and bonus exceeded $100,000 in the year ended December 31,
2000 (the "Named Executives").2002.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------- AWARDS ALL
SECURITIES OTHER
NAME AND PRINCIPAL FISCAL BONUS UNDERLYING OPTIONS COMPENSATION
POSITION PERIOD SALARYLong Term
Compensation
Annual Compensation Awards All Other
Name and ------------------- ------ Compensation
Principal Position Year Salary ($) Bonus ($) Options (#) ($) (A)
- -------------------------- --------------- ---------------(1)
------------------ ---- ---------- --------- ----------- ---------------------- ---------------------
Matthew S. Galvez, Y/E 12-31-002002 $200,000 $-0- -0- $18,071$16,400
President and Chief --------------- --------------- ----------- ---------------------- --------------2001 $200,000 $-0- -0- $20,445
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 $13,5382000 $200,000 $-0- -0- $-0-
--------------- --------------- ----------- ---------------------- --------------
- -------------------------- --------------- --------------- ----------- ---------------------- --------------
David P. Gienapp, Y/E 12-31-00 $120,000 $-0- 25,000 $3,461
VP-Finance and --------------- --------------- ----------- ---------------------- --------------
Administration Y/E 12-31-99 $111,642 $8,477 70,000 $1,664
--------------- --------------- ----------- ---------------------- --------------
3 Months
12-31-98 $29,724 $-0- -0- $-0-
--------------- --------------- ----------- ---------------------- --------------
Y/E 9-30-98 $110,552 $-0- -0- $3,268
- -------------------------- --------------- --------------- ----------- ---------------------- --------------$18,071
(a)
All Other Compensation for the year ended December 31, 2000 includes,
for Mr. Galvez, $7,715 of housing allowance, $4,800 of automobile
allowance and $5,566 of 401(k) Plan matching contributions, and for Mr.
Gienapp, 401(k) Plan matching contributions.
13
16
(b) Mr. Galvez was appointed Chief Operating Officer on August 15, 1998 and
became President and Chief Executive Officer on October 1, 1998.
OPTIONS
The following table sets forth information concerning options granted
to the Named Executives in the year ended December 31, 2000.
OPTION GRANTS IN LAST FISCAL YEARtable above includes the following:
INDIVIDUAL GRANTS
- ----------------------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
NAME OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
GRANTED (#) FISCAL YEAR (A) ($/SHARE) DATE
- ------------------------ ---------------- ------------------- ------------------- ------------------------Housing Auto 401(k) Plan
Allowance Allowance Match Total
--------- --------- ------ ------
Matthew S.
Mr. Galvez -0- -0- --- ---
David P. Gienapp 25,000 (a) 5.53% $1.50 08-30-10
- ------------------------ ---------------- ------------------- ------------------- ------------------------2002 $8,600 $4,800 $3,000 $16,400
2001 $9,576 $4,800 $6,069 $20,445
2000 $7,715 $4,800 $5,556 $18,071
(a) These options, whichOPTION GRANTS DURING 2002
There were granted pursuant to the Company's Long-Term
Incentive Plan, become exercisable annually in increments of 33 1/3%
beginning on the day after the first anniversary of the date of the grant.
The ability to exercise these options may be accelerated in the event of a
change in control of the Company (as defined in theno option plan).
The Named Executives did not exercise any options in the year ended
December 31, 2000.grants during 2002.
27
The following table provides information with respect to unexercised
options held by the Named ExecutivesMr. Galvez as of December 31, 2000.2002.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
YEAR-END OPTION VALUES
---------------------------- ---------------------------------------- -----------------------------------
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT YEAR-END (#)DEC. 31, 2002 OPTIONS AT FY-ENDDEC. 31, 2002 ($)
(A)
---------------------------- ---------------------------------------------------------------------------- -----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------------- ------------------- -------------------- ---------------- ---------------------- ----------- ------------- ----------- -------------
Matthew S. Galvez 860,000 -0- $-0- $-0-
---------------------------- ------------------- -------------------- ---------------- ------------------
David P. Gienapp 53,333 71,667 $-0- $-0-
---------------------------- ------------------- -------------------- ---------------- -------------------0- -0-
(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 20002002 and
the option exercise price.
EMPLOYMENT AGREEMENT
Mr. Galvez isdid not exercise any options in the year ended December 31,
2002.
EMPLOYMENT CONTRACT
Mr. Galvez was 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 Companyprovided 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$200,000, 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 automobilehousing allowance and the right to participate in the Company's
employee benefit plansan automotive allowance. That employment agreement has
expired 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
14
17
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.not initiated a new agreement. By non-written
agreement, the Company has extended the salary and allowances of Mr. Galvez on
an annual basis since the expiration of the agreement.
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 director fee of $1,000 per meeting
attended and $500 for each committee meeting attended. Committee chairmen
receive an additional $250 for each committee meeting.meeting attended. The directors
waived the director fees for meetings held during quarterly periods during which
the Company reported a loss from operations, which for 2000, were all quarters.quarters of the last
three years. 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, theThe Company has a 1993 Directors Stock Option Plan for its outside
directors (the "Directors Plan"). Pursuant to the provisions of the Directors
Plan, each outside 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 option was granted. The
ability to exercise these options may be accelerated in the event of a change in
control of the Company (as defined in the Directors Plan). Options to purchase a total of 31,500No options were
granted under the Directors Plan to the Company's then seven non-employee
directors on May 23, 2000.during 2002.
28
CERTAIN RELATIONSHIPS WITH RELATED PARTIES AND RELATED TRANSACTIONS
As approved by shareholders at the 1999 annual meeting, in connection
with the Company's private placement of Common Stock, the Company sold
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 Mr. Globus
include transactions with Mr. Globus, his brother and 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 had,
at the date of sale of the convertible promissory notes, 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
15
18
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
10% CONVERTIBLE SUBORDINATED PROMISSORY NOTE - MR. HUGO BRAUN, A FORMER DIRECTOR
In March 2001, the Company completed a sale of $1.2 million principal
amount of convertible subordinated promissory notesConvertible Subordinated Promissory Notes and warrantsWarrants 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 Mr. Hugo E. Braun, a former director of the
Company, is a partner,partner. The Convertible Subordinated Promissory Notes, which are
secured by a lien on the Company's assets and (ii) James A.
Nichols,are subordinated in right of
payment to any bank lender of the Company, bear interest at 10% and were due on
August 31, 2001 (the "10% Notes"). The 10% Notes are currently due and payable.
The 10% Notes are pre-payable at any time without penalty upon prior written
notice as provided in the Notes.
The holders of the 10% Notes are not permitted to transfer them without
the Company's prior written consent. The holders of the 10% Notes could have
converted the principal and accrued interest thereon into shares of a planned
equity offering, if such offering was completed by August 31, 2001. After that,
the principal and accrued interest thereon may be converted into shares of
Common Stock. The number of shares of Common Stock issuable upon exercise of the
10% Notes is equal to (x) the sum of the principal and interest then due and
payable, divided by (y) the Common Stock Conversion Price. The Common Stock
Conversion Price was initially set at $0.30 and is adjusted to the lowest
closing price of the Common Stock as quoted on the AMEX. If the closing price
fell below $0.30 for five consecutive trading days. The lowest closing price of
the Common Stock s traded on the AMEX during the period the Convertible
Promissory Notes have been outstanding has been $0.05. Information concerning
the 10% Notes and Warrants sold to North Coast is as follows:
10% Notes purchased $ 750,000
Warrants purchased 500,000
Common Stock which may be obtained through
exercise of the Conversion Option - $0.05 per share 18,382,200
Interest accrued and unpaid - 2001 $57,123
Interest accrued and unpaid - 2002 $70,358
The proposed Net Asset Sale will result in the elimination of the 10% Notes.
14% CONVERTIBLE SUBORDINATED PROMISSORY NOTE - MR. HUGO BRAUN, A FORMER DIRECTOR
In March 2002, the Company executed a Convertible Subordinated
Promissory Note with North Coast, an entity in which Mr. Hugo Braun, a former
director of the Company, and a partnership of which Mr. Nichols is a partner. This note documented the terms of an
agreement that was informally in place beginning in October 2001. The agreement
has been modified through April 2003. The agreement provides for a maximum of
$3,000,000 to be available to the Company as funds are needed and not otherwise
available from the Company's senior bank lender or other sources. North Coast is
under no obligation to fund the Company's advance request. The Convertible
Subordinated Promissory Note, which is secured by a lien on the Company's assets
and is subordinated in right of payment to any bank lender of the Company, bear
interest at 14% and advances thereunder are due demand (the "14% Note").
Advances made under the 14% Note are pre-payable at any time, without penalty,
29
upon prior written notice as provided in the 14% Note. North Coast is not
permitted to transfer the 14% Note without the Company's prior written consent.
Pursuant to the terms of the 14% Note, because the Company did not complete an
equity financing pursuant to which it received gross proceeds of at least $1.5
million on or before August 31, 2002, the principal and interest due and payable
under this Note may be converted by North Coast, in whole or in part, into
shares of Common Stock or Series A Preferred Stock of the Company beginning on
September 1, 2002, upon at least three (3) business days prior written notice
from North Coast to the Company and prior to the payment of the 14% Notes in
full. The number of shares of Series A Preferred issuable upon exercise of the
14% Note's conversion option shall be equal to (x) the sum of the principal and
interest then due and payable under the 14% Notes, divided by (y) $0.10. The
number of shares of Common Stock issuable upon exercise of the conversion option
shall be equal to (x) the sum of the principal and interest then due and payable
under the 14% Note, divided by (y) the lowest price per share of the Company's
Common Stock as traded on the AMEX, if such AMEX closing price for five
consecutive trading days is below $0.18 per share.
A summary of the terms of the Series A Preferred into which the debt
and accrued interest thereon could be converted is as follows:
DIVIDENDS: No dividends will be required to be paid by the Company. If
any dividends are paid on the Company's Common Stock, the holders of the Series
A Preferred shall be entitled to receive dividends in preference to any dividend
on the Common Stock in an amount per share equal to or greater than any dividend
paid on the Common Stock.
LIQUIDATION PREFERENCE: In the event of any liquidation or winding up
of the Company, the holders of the Series A Preferred shall be entitled to
receive in preference to the holders of Common Stock an amount equal to the
original issue price for the Series A Preferred Stock. Thereafter, any remaining
liquidation proceeds will be distributed to the holders of the Series A
Preferred and the Common Stock on a pro rata basis. A merger, consolidation or
reorganization in which the shareholders of the Company own less than 50% of the
voting power of the surviving company and any transaction or series of related
transactions in which in excess of 50% of the Company's voting power is
transferred shall be treated as a liquidation.
CONVERSION: Each holder of Series A Preferred shall have the right to
convert its shares at any time into shares of Common Stock at the initial
conversion rate of 1:1. The conversion rates shall be subject from time to time
to anti-dilution adjustments as set forth below.
VOTING RIGHTS: The holder of each share of Series A Preferred shall
have the right to that number of votes equal to the number of shares of Common
Stock issuable upon conversion of the Series A Preferred. The Series A Preferred
shall vote with Common Stock on all matters except as specifically provided
herein or as otherwise required by law.
BOARD OF DIRECTORS: The holders of the Series A Preferred shall have
the right to elect one member to the Company's Board of Directors. If the
holders of the Series A Preferred choose not to exercise this right, the Series
A Preferred shall vote with Common Stock in the election of directors.
PROTECTIVE PROVISIONS: The consent of a majority in interest of the
Series A Preferred will be required to (a) purchase or redeem any Common Stock
or Preferred Stock, (b) authorize or issue any senior or parity securities, (c)
declare or pay dividends on or make any distribution on account of the Common
Stock, (d) merge, consolidate or sell or assign all or substantially all of the
Company's assets, (e) increase or decrease authorized Preferred Stock and (f)
amend the Company's Articles to change the rights, preferences, privileges or
limitations of any Preferred Stock.
30
ANTI-DILUTION: The conversion price for the Series A Preferred shall be
subject to proportional anti-dilution protection for stock splits, stock
dividends, etc. In the event that the Company issues additional shares of Common
Stock or Common Stock equivalents (other than shares issues to officers or
employees of the Company pursuant to plans approved by the Company's board of
directors) at a purchase price less than the applicable Series A Preferred
conversion price, the Series A Preferred conversion price shall be adjusted to
that same lower purchase price.
RIGHTS OF FIRST REFUSAL: Each holder of Series A Preferred shall have
the right to participate in any Company financing up to its pro-rata ownership.
INFORMATION RIGHTS: Holders of Series A Preferred Stock shall have the
right to receive annual and quarterly financial statements and an annual
business plan.
Information concerning the 14% Notes and Warrants sold to North Coast is as
follows:
Advances made under the 14% Note purchased through June 3003 $ 2,912,500
Warrants purchased through April 2003 5,825,000
Series A Preferred Stock issuable upon conversion of the 14% Note 70,408,740
Interest accrued and unpaid on Subordinated Promissory Notes:
In 2001 $ 5,370
In 2002 $ 72,058
The proposed Net Asset Sale will result in the elimination of the 14% Note.
8% CONVERTIBLE SUBORDINATED PROMISSORY NOTE - MR. RONALD C. CAUSLEY AND MR.
JOSEPH J. FITZSIMMONS, DIRECTORS
In March 2002, the Company completed a sale of $200,000 principal
amount of Convertible Subordinated Promissory Notes and Warrants to Ronald C.
Causley and Joseph J. Fitzsimmons, directors of the Company. The Convertible
Subordinated Promissory 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%8% and arewere due on AugustOctober 31, 2001.2002 (the "8% Notes").
The Company did not repay the 8% Notes will become
immediately due and payable in full if Proposal 4the agreement was amended and the
warrant conversion price and the conversion rights were modified to the same
terms as the 14% Notes to North Coast discussed above is not
approved on or before August 31, 2001 or the date of the annual shareholders
meeting, whichever is later.above. The 8% Notes are prepayablemay be
prepaid at any time without penalty upon prior written notice as provided in the Notes.notice. The holders of
the 8% Notes are not permitted to transfer them without the Company's prior
written consent. The amount of convertible subordinated promissory notesInformation concerning the 8% Notes and warrants
purchasedWarrants sold to related parties areMr.
Causley and Mr. Fitzsimmons is as follows:
31
Hugo E. James A.
Braun Nichols
----- -------Ronald C. Joseph J.
Causley Fitzsimmons
--------- -----------
Convertible Subordinated Promissory Notes purchased $750,000 $150,000$125,000 $ 75,000
Warrants purchased 500,000 100,000198,863 119,318
Series A Preferred Stock issuable upon conversion of
the Convertible Subordinated Promissory Notes
Interest accrued and unpaid on Convertible
Subordinated Promissory Notes in 2002 $ 8,192 $ 4,569
The proposed Net Asset Sale will result in the elimination of the 8% Notes.
ACQUISITION DEBT - MR. RONALD C. CAUSLEY, A DIRECTOR
Pursuant to the terms of a Purchase Agreement by and between the
Company, A-OK Controls Engineering, Inc. and Ronald C. Causley dated June 30,
2000 under which the Company purchased 100% of the equity of A-OK Controls
Engineering, Inc. from its sole shareholder, Mr. Causley on that date, Nematron
agreed to pay the final cash installment related to the purchase price within 60
days of closing. Such amount, totaling $351,867, was not paid and has accrued
interest at 9% per annum since that date. Interest accrued and unpaid during
2001 and 2002 was $34,521 and $37,759, respectively. Total accrued and unpaid
interest due to Mr. Causley as of December 31, 2002 is $88,414.
OPERATING LEASES - MR. RONALD C. CAUSLEY, A DIRECTOR
Pursuant to ten-year operating leases, the Company leases its Auburn
Hills and Saginaw, Michigan system integration offices from Mr. Ronald C.
Causley, the president of A-OK Controls Engineering, Inc. and a director of the
Company. Management believes that these leases, which were executed prior to the
Company's acquisition of A-OK Controls in 2000, represent fair market lease
rates. Lease expense on these related party leases totaled approximately
$398,000 in 2001 and approximately $493,000 in 2002. The lease on the Saginaw
facility requires monthly lease payments of $3,150 through January 2009, and the
lease on the Auburn Hills facility requires monthly lease payments of $30,000
through May 2008. Minimum lease payments through the expiration dates of the
leases total $2,210,000.
INTEREST OF HUGO BRAUN, A FORMER DIRECTOR, IN THE NET ASSET SALE
Mr. Hugo Braun, a former director of the Company and a partner in North
Coast, is expected to be a shareholder, directly or indirectly, in the
Purchaser.
INTEREST OF DANIEL J. DORMAN IN THE NET ASSET SALE
Daniel J. Dorman, a nominee for election as director, is the Chairman
and Chief Executive Officer of Dorman Industries, LLC, the entity seeking
approval to purchase, after the 5 for 1 reverse stock split, 5,248,157 million
shares of the Company's Common Stock, or approximately 62.5% of the Company's
outstanding Common Stock on a fully diluted basis for $50,000.
32
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 and changes in their ownership with the Securities and Exchange
Commission.Commission ("SEC"). 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 2000,the year ended December 31, 2002, all filing
requirements under Section 16(a) applicable to its executive officers, directors
and greater than ten percent beneficial owners were complied with all applicable filing
requirements under Section 16(a), except that Mr. Fitzsimmons, a director, did
not timely file one Form 4 report disclosing one transaction.
INDEPENDENT PUBLIC ACCOUNTANTS
GENERAL
Grant Thornton LLP, independent 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 for
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 for the 2000
audit and reviews of three quarterly reports on Form 10-QSB were $53,000.
16
19
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 A-OK Controls Engineering,
Inc. as of and for the year ended November 30, 1999, which were included in the
Company's Form 8-K field with the SEC, and $4,000 for sundry consulting services
during 2000.with.
SHAREHOLDER PROPOSALS FOR 20022004 ANNUAL MEETING
Shareholder proposals intended to be presented at the 20022004 annual
meeting of shareholders which are eligible for inclusion in the Company's Proxy
Statement for that meeting under the applicable rules of the Securities and
Exchange Commission must be received by the Company not later than February 28,
2002January 29,
2004 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
inclusion of shareholder proposals in the Company's Proxy Statement, the
Company's bylaws provide that, in order for a shareholder proposal or nomination
to be properly brought before the Annual Meeting, written notice of 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. 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 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 20022003
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 120-day period provided for in the Company's
Bylaws.
INDEPENDENT PUBLIC ACCOUNTANTS AND FEES
GENERAL
Grant Thornton LLP, independent public accountants, has audited the
consolidated financial statements of the Company and its subsidiaries since
1997. The Audit Committee has not yet completed its evaluation of the 2002 audit
process. As a result, the selection of the independent accountants to audit the
financial statements of the Company for 2003 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.
33
AUDIT FEES
Grant Thornton LLP billed the Company aggregate fees of $63,600 for
professional services rendered for the audit of the Company's 2002 financial
statements and for reviews of the three quarterly reports on Forms 10-QSB in
2002.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
Grant Thornton LLP did not render any services relating to financial
information design and implementation projects in 2002.
ALL OTHER FEES
Grant Thornton LLP billed the Company $25,000 relating to filing
several years of amended state tax returns and $4,000 for professional services
rendered for the audit of the Company's 401(k) plan. The Audit Committee of the
Board of Directors considered the services listed above to be compatible with
maintaining the independence of Grant Thornton LLP.
OTHER MATTERS
The Board of Directors is not aware of any matters to be presented for
action at the annual meeting other than those described in this proxy statement.
If any other matters are duly presented, proxies will be voted on those matters
in accordance with the judgment of the proxy holders.
ADDITIONAL INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended, and we file reports, proxy statements, and
other information with the SEC. You may read and copy any materials we file with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
Public filings are also available to the public from commercial
document retrieval services and at the Internet web site maintained by the SEC
at http:/www.sec.gov.
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED
DECEMBER 31, 2002, AS FILED WITH THE SEC, WILL BE SENT TO ANY SHAREHOLDER,
WITHOUT CHARGE, UPON WRITTEN REQUEST SENT TO THE COMPANY'S EXECUTIVE OFFICES:
NEMATRON CORPORATION, INVESTOR SERVICES, 5840 INTERFACE DRIVE, ANN ARBOR,
MICHIGAN 48103.
INFORMATION INCORPORATED BY REFERENCE
The information under the following items of the enclosedCompany's Form 10-KSB
for the year ended December 31, 20002002 is incorporated in this proxy statement by
reference: - - Item 6 - Management's Discussion and Analysis or Plan of Operation
- - Item 7 - Financial Statements
By Order of the Board of Directors,
David P. Gienapp, Secretary
August 3, 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.
1734
20
APPENDIXANNEX A
NEMATRON CORPORATION
AUDIT COMMITTEE CHARTERFORM OF
CERTIFICATE OF AMENDMENT TO THE AUDIT COMMITTEE ("THE COMMITTEE")ARTICLES OF INCORPORATION
1. The present name of the corporation is: Nematron Corporation.
2. The identification number assigned by the Bureau is: 333652.
3. Article I of the Articles of Incorporation is hereby amended and
restated to read in its entirety as follows:
ARTICLE 1
The name of the Corporation is Sandston Corporation.
4. The following language is hereby added to the end of Article III of the
Articles of Incorporation:
Effective at 5:00 p.m., 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 CommitteeDetroit, Michigan time on the date of filing of
this Certificate of Amendment with the State of Michigan, every five outstanding
shares of Common Stock will be comprisedcombined into and automatically become one share
of three or more directors as
determined by the Board. The membersoutstanding Common Stock of the CommitteeCorporation. The Corporation will meetnot issue
fractional shares on account of the independenceforegoing reverse stock split; all shares
that are held by a shareholder as of the effective date hereof shall be
aggregated and experience requirementseach fractional share resulting from the reverse stock split
after giving effect to such aggregation shall be cancelled.
In lieu of any interest in a fractional share to which a shareholder
would otherwise be entitled as a result of such reverse stock split, such
shareholder will be paid a cash amount for such fractional shares equal to the
product obtained by multiplying (a) the fraction to which the shareholder would
otherwise be entitled by (b) the per share closing price of the Corporation's
Common Stock on the day immediately prior to the effective time of the reverse
stock split, as such price is reported on the American Stock Exchange
(AMEX) or such other stock exchangeExchange.
5. The foregoing amendment to the Articles of Incorporation was duly
adopted on which the Company's equity
securities are traded from time to time. The members_____ day of the Committee
will be appointed annuallyNovember, 2003, at the organizationala meeting of the full
Board held immediately followingshareholders,
where the annual shareholders' meeting and
will be listednecessary votes were cast in the next annual report to shareholders. Onefavor of the membersamendment.
Signed this _______ day of the Committee will be appointed the Committee Chair by the
Board.
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 matters. All employees will be directed to cooperate
with respect thereto as requested by members of the Committee.
18November, 2003.
By: __________________________
Its: ___________________________
A-1
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 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, Independence Discussions with Audit
Committees.
6. Have a predetermined arrangement with the independent
accountants that they will advise the Committee through its
Chair and management of the Company of any matters identified
through procedures followed for interim quarterly financial
statements, and that such notification as required under
standards for communication with Audit Committees is to be
made prior to the related 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 management,
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 Company'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
published as an 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
independent accountants in the form of a Letter of Comments
and Recommendations to the Committee. The Committee should
review responses of management to the Letter of Comments and
Recommendations from the independent accountants and receive
follow-up reports on action taken concerning the
aforementioned recommendations.
11. Recommend to the Board the selection, retention or termination
of the Company's independent accountants.
20
23
12. Review the appointment and replacement of the senior internal
audit executive.
13. Review with management, the chief financial officer and the
independent accountants the methods used to establish and
monitor the Company's policies with respect to unethical or
illegal activities by Company employees that my have a
material impact on the financial statements.
14. Generally as part of the review of the annual 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
the 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 Board.
17. Monitor SEC and AMEX regulations concerning Audit Committees
and update its charter, activities, composition or its
structure to comply with such regulations.
This concludes the charter.
21
24
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 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 September 6, 2001November __, 2003 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 AUGUST 3, 2001 AND FOR EACH OF THE PROPOSALS SET FORTH
IN SUCH PROXY STATEMENT.STATEMENT, AND FOR DANIEL J. DORMAN AND LAWRENCE DE FIORE FOR
ELECTION AS DIRECTORS. 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 August 3,
2001________________, 2003 is unable to serve or, for good
cause, will not serve.
(TO BE SIGNED ON REVERSE SIDE)
22PROPOSAL 1: APPROVAL TO SELL ALL THE ASSETS OF THE CORPORATION FOR TOTAL
CONSIDERATION OF EQUAL TO OR GREATER THAN ALL THE LIABILITIES OF THE CORPORATION
INCLUDING THE SENIOR DEBT, THE SUB-DEBT AND THE ACCOUNTS PAYABLE:
FOR AGAINST ABSTAIN
PROPOSAL 2: APPROVAL TO SELL 5,248,257 SHARES TO DORMAN INDUSTRIES, LLC. THIS
PROPOSAL IS CONDITIONED ON THE APPROVAL OF PROPOSALS 1, 3, 4, AND THE FIRST
ALTERNATIVE OF PROPOSAL 5:
FOR AGAINST ABSTAIN
PROPOSAL 3: APPROVAL OF A FIVE TO ONE REVERSE STOCK SPLIT.
FOR AGAINST ABSTAIN
25
PROPOSAL 1.4: APPROVAL TO AMEND THE AMENDED AND RESTATED ARTICLES OF INCORPORATION
TO CHANGE THE COMPANY'S NAME TO SANDSTON CORPORATION.
FOR AGAINST ABSTAIN
PROPOSAL 5: ELECTION OF DIRECTORS:
Matthew S. Galvez
JosephAlternative 1: Daniel J. Fitzsimmons
| |Dorman and Lawrence De Fiore
FOR | | WITHHOLD | | FOR ALL EXCEPT
(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 AMENDMENT__________________________________________________________________________
Alternative 2: Ronald C. Causley and Steven E. Globus
FOR WITHHOLD FOR ALL EXCEPT
(INSTRUCTION: TO THE ARTICLES OF INCORPORATIONWITHHOLD AUTHORITY TO AUTHORIZE THE FUTURE ISSUANCE OF "BLANK CHECK" PREFERRED STOCK:
| |VOTE FOR | | AGAINST | | ABSTAIN
PROPOSAL 3. APPROVE AMENDMENT TO THE ARTICLES OF INCORPORATION TO
DECLASSIFY THE BOARD OF DIRECTORS AND REDUCE THE TERMSONE OR MORE OF THE DIRECTORS
FROM THREE YEARSINDIVIDUAL
NOMINEES, MARK "FOR ALL EXCEPT" AND WRITE THE NAME OF EACH SUCH NOMINEE ON THE
LINE BELOW.)
__________________________________________________________________________
YOU SHOULD VOTE WITH RESPECT TO ONE YEAR:
| |BOTH ALTERNATIVES SINCE WE WILL NOT KNOW AT THE
TIME YOU VOTE WHETHER PROPOSALS 1 AND 2 ARE APPROVED, BOTH OF WHICH MUST BE
APPROVED FOR | | AGAINST | | ABSTAIN
PROPOSAL 4. APPROVE THE POTENTIAL ISSUANCE OF SHARES OF COMMON STOCK
UPON CONVERSION OF CONVERTIBLE NOTES:
| | FOR | | AGAINST | | ABSTAINMESSRS. DORMAN AND DE FIORE TO AGREE TO SERVE AS DIRECTORS. PLEASE
NOTE, HOWEVER, THAT ALTERNATIVE 2 WILL ONLY BE CONSIDERED IF PROPOSALS 1 AND 2
ARE NOT APPROVED.
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Shareholders and the Proxy Statement dated August 3, 2001November __, 2003 and the 20002002 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 _____________
23
26
Exhibit Index
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Exhibit No. Description
- ----------- -----------
23.1 Consent of Independent Auditors
23_______________________________