SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE
ACT OF 1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Under Rule 14a-12
NEMATRON CORPORATION
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(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement, If Other Than the Registrant)
Payment of Filing Fee (check the appropriate box):
[ ] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction
applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
(4) Proposed maximum aggregate value of transaction
$12,610,428 (total debt being assumed)
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(5) Total fee paid:
$1,020.18
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[ X ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$1,020.18
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(2) Form, Schedule or Registration Statement No.
Preliminary Schedule 14A
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(3) Filing Party:
Nematron Corporation
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(4) Date Filed: October 20, 2003
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NEMATRON CORPORATION
5840 INTERFACE DRIVE
ANN ARBOR, MICHIGAN 48103
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 13, 2004
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 January 13, 2004 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 the
Company's senior and 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 Daniel 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; and
6. To vote upon such other matters as may properly come before the
meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on November 28,
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,
John H. Dunlap
Corporate Secretary
Ann Arbor, Michigan
December 19, 2003
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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
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PROXY STATEMENT
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ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 13, 2004
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 executive offices, located at 5840 Interface Drive, Ann Arbor,
Michigan 48103 on January 13, 2004 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 December 19, 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 November 28, 2003, (the "Record Date") are entitled
to vote at the Annual Meeting or any adjournment thereof. At 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 your instructions on the proxy card as long as the card is
received by the Company before the close of business on January 12, 2004. 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. UNLESS YOU GIVE DIFFERENT
INSTRUCTIONS ON THE PROXY CARD, THE SHARES REPRESENTED BY THE PROXY WILL BE
VOTED:
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o to approve the sale and transfer of substantially all of the Company's
assets and liabilities to a purchaser whose owners will be the Company's
senior and subordinated debt holders;
o 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;
o 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;
o to approve the amendment to the Company's articles changing the Company's
name to Sandston Corporation; and
o 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.
ADJOURNMENTS
In the event that sufficient votes in favor of the proposals are not
received by the date of the Annual Meeting, the persons named as Proxies may
propose one or more 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 Proxy at
the Annual Meeting and entitled to vote.
PROXY EXPENSES
The expense of soliciting proxies will be paid 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
persons will not 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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NO 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.
MATTERS TO COME BEFORE THE ANNUAL MEETING
PROPOSAL 1
TO APPROVE THE SALE OF SUBSTANTIALLY ALL OF THE COMPANY'S ASSETS IN
CONSIDERATION OF THE ASSUMPTION OF ALL ITS LIABILITIES, INCLUDING THE SENIOR
DEBT, THE SUBORDINATED DEBT AND ALL OTHER LIABILITIES
SUMMARY TERM SHEET
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 entirely with debt
assumption (the "Net Asset Sale"). The expected material terms of the proposed
sale are summarized below.
o The Company would sell all of its tangible and intangible assets,
including its real estate, accounts, equipment, intellectual
property, inventory, goodwill, and other intangibles. (Please see
pages 5-6, "Assets to be Sold".)
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o The purchaser, which is an entity that has not been formed, but is
anticipated to be comprised of the Company's senior and
subordinated debt holders ("Purchaser"), will also assume all of
the Company's debt and liabilities, including the Company's
subordinated debt. (Please see pages 4-5, "Purchaser".)
o The total consideration for the Net Asset Sale will be equal to
the total amount of all of the Company's liabilities. As of
September 31, 2003, the Company's liabilities were in the amount
of $12,611,024, 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 $2.7 million. (Please
see page 6 "Purchase Price" and pages 9-10, "Background and
Principal Reasons for Recommending the Approval of the Net Asset
Sale".)
o The Net Asset Sale will result in the Company not owning any
assets except $30,000 in cash the Company expects to retain and
certain intangible assets such as its value as a public shell
entity. The Company will not, however, have any liabilities (other
than contingent liabilities where the Company has not been
released by the creditor), all of them being assumed by the
Purchaser. (Please see page 6.)
o It is anticipated that all of the Company's employees will be
hired by the Purchaser to carry on the Company's existing
businesses on the same terms as they are currently employed.
(Please see page 8, "Employees".)
o The Net Asset Sale would be completed as soon as practical after
approval of the transaction by the Company's shareholders and the
execution of an Asset Purchase Agreement (the "Agreement"). No
Agreement or letter of intent has been executed. (Please see page
16, "No Agreement Has Been Reached".)
THE NET ASSET SALE
PARTIES TO THE SALE
The Company
The Company is seeking shareholder approval to consummate the Net Asset
Sale on substantially the terms described in this Proxy Statement, prior to the
completion 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 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
The Purchaser will be an entity, which has not been formed whose owners
will be the Company's senior and subordinated debt holders. Discussions are
currently underway with North Coast Technology Investors, L.P. ("North Coast"),
the holder of approximately 89.22% of the Company's senior and subordinated
debt. North Coast maintains its executive offices at: 206 South Fifth Avenue,
Ann Arbor, Michigan 48104, telephone number: (734) 662-7667. North Coast is
controlled by Hugo Braun, a former director of the Company, and Lindsay
Aspegrin. Messrs. Braun and Aspegren make all voting and buy/sell decisions
for North Coast, including with respect to the Net Asset Sale.
North Coast will be the only person who owns more than ten percent of
the Purchaser, but other expected owners of the Purchaser and their ownership
interests in the Purchaser are expected to be Ralph Miesel (4.98%), James
Nichols (1.66%), Ronald Causley (2.07%), Joe Fitzsimmons (1.24%), and
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the Stag Group (0.83%), an entity principally owned by Gregory Schwartz, Jr. and
James A. Nichols. All of these persons are subordinated debt holders.
Hugo Braun and Ronald Causley, a current director and executive
officer of the Company, will become executive officers of the Purchaser as well
as directors. Except for Messrs. Causley and Fitzsimmons, who are also
subordinated debt holders, none of the executive officers or directors of the
Company is expected to acquire an ownership interest in the Purchaser. It is
expected that Messrs. Causley and Fitzsimmons' ownership interest in the
Purchaser will be proportionate to the amount their subordinated debt represents
to the Company's senior and subordinated debt as a whole.
There is no affiliation or relationship between the Company and the
Purchaser other than that the Purchaser is comprised of the owners of all or
substantially all of the subordinated debt and all of the senior debt.
Furthermore, the owners of the Purchaser own a considerable amount of common
stock of the Company and two of whom are officers and directors of the Company.
See "Other Disclosures and Information--Security Ownership of Certain Beneficial
Owners and Management." See also, "Interests of our Directors and Executive
Officers."
ASSETS TO BE SOLD
The assets proposed to be sold to the Purchaser, referred to as "the
assets," consist of all of the assets currently used to operate the Company's
business, including:
o The Company's real estate and improvements thereon, namely the
Company's headquarters at 5840 Interface Drive, Ann Arbor,
Michigan;
o All accounts receivable and cash on hand, except for $30,000;
o All equipment, tools and machinery;
o 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;
o all inventory;
o all of the stock and assets of the Company's subsidiaries,
including A-OK Controls Engineering, Inc., Optimation, Inc., and
Nematron Ltd.;
o All contracts, including customer contracts, vendor agreements and
supply agreements; and
o 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, and its value as a public
shell company.
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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.
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
(including accrued interest) in the approximate amount of $6,893,626, debt to
trade creditors in the approximate amount of $1,115,318, mortgage note in the
amount of 2,536,044, other operating debt such as accrued liabilities in the
approximate amount of $1,615,104, and lease commitments in the approximate
amount of $431,840, all as of September 30, 2003.
PURPOSE OF THE TRANSACTION
The Company's goal in negotiating the Net Asset Sale was to negotiate
terms that would result in the Company's shareholders:
o receiving more value in this negotiated transaction than they
would receive if the Company's lenders foreclosed on the Company's
assets;
o obtaining an opportunity to profit from any future operations of
the Company going forward;
o retaining a "public shell" entity with some value and without the
Company's debt for borrowed money, trade creditor and other debt
(but see "Loss of Listing on the American Stock Exchange" on page
18 regarding the de-listing of the Company);
and,
o enticing the subordinated debt holders to assume all of the
Company's debt.
The starting point for the negotiations assumed that any purchaser
would have to satisfy all of the Company's senior and subordinated debt and
assume all of the Company's trade debt, and acquire all of its assets to
continue a revenue stream to pay the assumed debt. Given the fact that the
Company's debt exceeded its assets and that the Company suffers from substantial
operating losses and high cash needs, it was assumed that the Company's equity
would have little or no value in an attempted sale to a third party, other than
the Purchaser. The Company believes that the final terms of the Net Asset Sale
will be on terms equivalent or better than could be achieved on a totally arms
length basis, and the presence of Dorman Industries playing a role in the
negotiations (please see Proposal 2), should add to the arms length negotiation
process.
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, which as of September 30, 2003
amounted to $6,784,874. The Purchaser will assume the remaining $5,826,150 in
liabilities and indemnify the Company from non-payment of these liabilities, but
the Company will not be released from these liabilities, except for $894,757
owed to Ronald Causley, an officer, director and creditor of the Company. If the
Purchaser does not pay the debt it is assuming and for which the Company did not
obtain a release, the Company would be contingently liable and would have
limited funds and no longer
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have any assets to generate funds to pay these amounts or defend itself from
lawsuits. In such event, the Company would be forced to sue the Purchaser to
compel payment. Furthermore, the Purchaser may not have the funds to pay such
liabilities thus leaving the Company responsible for them
As a practical matter, however, the Company believes that if the
Purchaser defaults on the debt and is unable to repay the Company, the Company's
shareholders would be no worse off than they are today, since the Company
already owes the debt and the secured lenders would foreclose and receive the
Company's assets anyway.
Further, the Company believes that without the expense of maintaining a
public company, the continuous disclosure of operating results to much larger
competitors, certain operating expenses such as Director and Officer insurance
premiums and with reduced professional fees, and the need to make the existing
debt payments to the senior and subordinated debt holders, the Purchaser will be
in a better position to repay the trade debt than the Company is today. Please
see "Pro Forma Financial Information" for the pro forma financial statements of
the Company and the Purchaser after the Net Asset Sale.
It is expected that the Agreement will also require the Purchaser to
pay the debts it is assuming, before paying off new debts of the Purchaser.
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 offer to hire all of the
Company's current employees on substantially the same terms, and in the same
positions, as they are currently employed, including the Company's executive
officers. Compensation packages for the executive officers are not expected to
increase.
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.
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 $757,000, the debt holders have the right
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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 September 30, 2003, the Company had assets with a book value of
approximately $9.9 million and liabilities of approximately $12.6 million,
resulting in a shareholders' deficit of approximately $2.7 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 $2.7 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, as
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.
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
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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, as of September 30, 2003 is approximately $5,268,198.
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 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 the Company's 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.
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.
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
11
the senior and subordinated debt holders and Mr. Causley, 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 and officer of the Company (President of A-OK Controls, a
subsidiary of Nematron), will become shareholders of the Purchaser. Mr. Causley
is also a substantial shareholder in the Company (see "Other Disclosures and
Information--Security Ownership of Certain Beneficial Owners and Management"), a
subordinated debt holder ($125,000 is owed to him), and a creditor, where he is
owed $462,917 for accrued liabilities and $431,840 in rent for a facility in
Auburn Hills, Michigan that the Company subleases from him. This means that some
of our directors 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.
The agreement with Dorman Industries regarding their investment, however, calls
for the termination of all of these options, and release by Mr. Causley of his
trade debt. The other officers and directors of Nematron are not expected to be
provided with any future options or equity in the Purchaser, nor have they been
offered any investment opportunity in the Purchaser. Messrs. Causley and
Fitzsimmons have been offered the opportunity to invest solely as subordinated
debt holders and in a pro rata amount in proportion to their debt. They obtained
their subordinated debt in exchange for the cash investments they made in the
Company which were on the same terms as were negotiated by North Coast in an
arms length transaction.
12
PRO FORMA FINANCIAL STATEMENTS
The following table shows the Purchaser's balance sheet after giving
effect to the Net Asset Sale.
PURCHASER
Initial Pro Forma Pro Forma
Capitalization Adjustments (1)
Assets
Current Assets:
Cash $ 25,000 (1) $ 93,835 (2) $ 118,835
Accounts receivable 2,739,952 (2) 2,739,952
Inventories 1,528,500 (2) 1,528,500
Prepaid expenses and other current assets 223,260 (2) 223,260
-------- ---------- ----------
Total current assets 25,000 4,610,547
Property and equipment 1,315,601 (3) 1,315,601
-------- ----------
Total assets $ 25,000 $5,926,148
======== ==========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Advances under line of credit with bank 108,750 (4) $ 108,750
Accounts payable 1,547,156 (2) 1,622,156
75,000 (5)
Deferred revenue and other accrued expenses 1,615,104 (6) 1,615,104
Current maturities of long-term debt 172,479 (2) 172,479
-------- ---------- ----------
Total current liabilities - 3,518,489
Long-term debt 2,382,659 (2) 2,382,659
-------- ----------
Total liabilities - 5,901,148
Shareholders' equity 25,000 (1) 25,000
-------- ----------
$ 25,000 $5,926,148
======== ==========
Notes to Pro forma balance sheet:
(1) Estimated initial capitalization of the Purchaser with cash investment by
owners.
(2) Purchase of net assets and assumption of liabilities, at estimated fair
value equal to book value by Nematron.
(3) Purchase of property and equipment and software development costs, recorded
at estimated fair value.
(4) Assumption of line of credit advances from Compass Bank to Optimation.
(5) Estimated payments to third parties for direct costs of the acquisition.
(6) Assumption of liabilities to creditors and others; accrued interest on
subordinated debt is excluded.
13
The following table shows the Company's trade debt, senior debt and
subordinated debt before the Net Asset Sale and after giving effect to the Net
Asset Sale. The table does not take into account the proposed investment by
Dorman Industries described in Proposal 2.
NEMATRON CORPORATION
Historical at
September 30, Pro Forma Pro Forma
2003 Adjustments (1)
Assets
Current Assets:
Cash $ 123,835 $ (93,835) (1) $ 30,000
Accounts receivable, net of allowance 2,739,952 (2,739,952) (1) -
Inventories 1,528,500 (1,528,500) (1) -
Prepaid expenses and other current assets 223,260 (223,260) (1) -
--------------- -----------
Total current assets 4,615,547 30,000
Property and equipment, net 1,647,320 (1,647,320) (1) -
Goodwill 2,922,122 (2,922,122) (1) -
Software and related development costs, net 488,088 (488,088) (1) -
Other intangible assets, net 254,539 (254,539) (1) -
--------------- -----------
Total assets $ 9,927,616 $ 30,000
=============== ===========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Notes payable under lines of credit $ 1,625,426 (1,625,426) (1) -
Accounts payable 1,547,156 (1,547,156) (1) -
Deferred revenue and other accrued expenses 2,371,802 (2,371,802) (1) -
Subordinated debt 4,511,500 (4,511,500) (1) -
Current maturities of long-term debt 172,479 (172,479) (1) -
--------------- -----------
Total current liabilities 10,228,363
-
Long-term debt 2,382,659 (2,382,659) (1) -
--------------- -----------
Total liabilities 12,611,022
-
Shareholders' equity (2,683,406) 2,713,406 (1) 30,000
--------------- -----------
$ 9,927,616 $ 30,000
=============== ===========
(1) Pro forma after giving effect to the Net Asset Sale whereby the Purchaser
acquires all assets of the Company except for $30,000 of cash in return for
the forgiveness of senior and subordinated debt and accrued interest
thereon and the assumption by the Purchaser of all other liabilities.
FEDERAL INCOME TAX CONSEQUENCES OF THE NET ASSET SALE
The Net Asset Sale will be a taxable event to the Company. The Company
will reorganize gain or loss in the amount equal to the liabilities assumed in
exchange for the assets, less the Company's adjusted tax basis in the assets.
The Company may also incur cancellation of debt income. The Company's gain and
cancellation of debt income, if any, may be offset to the extent of current year
losses from operations plus available net operating loss carry forwards, subject
to applicable limitations under the ownership changes rules under Internal
Revenue Code Section 382 and the Alternative Minimum Tax rules. Under Code
Section 382, where an ownership change occurs, the annual utilization of the net
operating loss carry forwards may be restricted or unavailable. Additionally, to
the extent any gain in the sale of assets exceeds the current year loss from
operations, an alternative minimum tax may be due on the excess. Any tax
liabilities generated as a result of the Net Asset Sale are expected to be
immaterial, but the Company will likely lose its net operating loss carry
forwards going forward.
14
REGULATORY APPROVALS
No United States Federal or state regulatory requirements must be
complied with or approvals obtained as a condition of the proposed sale.
SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
1998 Through September 30, 2003
The following table sets forth selected financial data for the Company
OPERATING Nine Months Y/E Y/E Y/E Y/E Three Months Y/E
STATEMENT 9/30/03 12/31/02 12/31/01 12/31/00 12/31/99 12/31/98 9/30/98
DATA (5) (4) (2) (2) (3)
(1)
Net revenue 9,770,157 14,867,215 17,541,766 20,420,752 29,772,129 3,186,910 16,829,334
Cost of revenue 7,554,888 11,220,688 16,273,116 15,388,939 19,991,704 2,084,915 11,512,950
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit 2,215,269 3,646,527 1,268,650 5,031,813 9,780,425 1,101,995 5,316,384
Operating expenses
Software development 438,033 721,323 590,769 672,052 794,207 131,987 2,196,390
SG&A 3,190,783 5,101,003 6,071,447 6,456,709 6,471,046 1,323,945 10,521,663
Other charges 0 0 0 0 0 0 1,669,698
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total 3,628,816 5,822,326 6,662,216 7,128,761 7,265,253 1,455,932 14,387,751
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss) (1,413,547) (2,175,799) (5,393,566) (2,096,948) 2,515,172 (353,937) (9,071,367)
Interest and other (763,949) (937,147) (1,664,256) (113,589) (549,722) (3,160,012) (749,461)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income(loss) before tax (2,177,496) (3,112,946) (7,057,822) (2,210,537) 1,965,450 (3,513,949) (9,820,828)
Income tax credit 0 0 0 293,230 43,200 10,800 811,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) (2,177,496) (3,112,946) (7,057,822) (1,917,307) 2,008,650 (3,503,149) (9,009,828)
Net income loss per share
Basic (0.14) (0.20) (0.46) (0.15) 0.19 (0.65) (1.69)
Diluted (0.14) (0.20) (0.46) (0.15) 0.18 (0.65) (1.69)
Weighted aver shares O/S
Basic 15,744,472 15,744,472 15,259,188 12,921,207 10,753,844 5,353,316 5,345,889
Diluted 15,744,472 15,744,472 15,259,188 12,921,207 11,321,512 5,353,316 5,345,889
FINANCIAL POSITION 9/30/03 12/31/02 12/31/01 12/31/00 12/31/99 12/31/98 9/30/98
----------- ----------- ----------- ----------- ----------- ----------- -----------
Current assets 4,615,547 4,272,596 5,682,347 7,754,116 7,206,239 4,296,275 5,271,220
Property and equipment 1,647,320 1,850,392 2,190,104 2,544,041 2,397,472 3,344,140 3,623,860
Capitalized software, net 488,088 574,407 886,286 3,369,660 3,617,553 3,880,284 3,942,695
Other intangibles, net 3,176,661 3,326,281 8,758,737 13,667,817 13,221,264 11,520,699 12,837,775
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Assets 9,927,616 10,023,676 17,517,474 27,335,634 26,442,528 23,041,398 25,675,550
=========== =========== =========== =========== =========== =========== ===========
Current liabilities 10,228,363 8,077,124 10,029,625 9,667,090 4,271,368 9,212,953 10,173,530
Long-term liabilities 2,382,659 2,522,740 29,940 0 2,841,668 2,360,983 2,273,346
S/H's equity (deficit) (2,683,406) (576,188) 2,336,952 7,213,072 6,969,603 888,921 1,393,124
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Liabilities & Equity 9,927,616 10,023,676 12,396,517 16,880,162 14,082,639 12,462,857 13,840,000
=========== =========== =========== =========== =========== =========== ===========
(1) The Company changed its fiscal year in 1998 from September 30th to December
31st.
(2) The Company's acquisitions of the following entities may affect the
comparability of the data presented: Optimation, Inc. on March 30, 2001 and
A-OK Controls Engineering, Inc. on June 30, 2000. See Note 4 to the
financial statements for the year ended December 31, 2001 for a description
of the Optimation acquisition and Note 3 to the financial statements for
the year ended December 31, 2000 for a description of the A-OK Controls
Engineering acquisition.
(3) For the Transition Period October 1, 1998 to December 31, 1998, interest
expense includes $3 million related to the beneficial conversion feature of
convertible promissory notes issued during that period. See Note 7 to the
financial statements for the year ended December 31, 1999.
(4) The financial statements referred to herein are the financial statements
contained in the Company's Form 10-KSB for the year ended December 31,
2002, and incorporated herein by reference. Please see "Information
Incorporated by Reference.
(5) The financial statements referred to herein are the unaudited financial
statements contained in the Company's Form 10-QSB for the period ending
September 30, 2003.
15
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.
NO AGREEMENT HAS BEEN REACHED
The Company and the Purchaser have not executed any agreement, and,
even if the shareholders approve the Net Asset Sale, there can be no assurance
that the Agreement for the Net Asset Sale will be executed, particularly if a
material adverse change occurs with respect to the Company between now and the
time the shareholders approve the transaction. If the Agreement is not executed
or the Net Asset Sale does not occur, there is no assurance that 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 senior and 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.
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
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. Daniel J. Dorman, who is nominated
for election to the Company's Board if proposals 1 and 2 are approved, is the
sole owner of Dorman Industries and its Chairman and Chief Executive Officer.
Mr. Dorman and Dorman Industries have no other relationship or affiliation with
the Company.
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, changing the name of the Company to Sandston
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;
16
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 its senior and subordinated debt, the trade debt owed to Mr.
Causley, and the elimination of the Company's outstanding options and warrants.
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.
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. At this time,
neither the Company nor any of its officers and directors has had any
preliminary contact or discussions with, nor have they developed any plans or
proposals with, any companies regarding the possibility of a combination,
acquisition or merger. To the Company's knowledge, Dorman Industries and Daniel
J. Dorman have also not had any preliminary contacts, nor developed any plans
regarding any acquisition or merger.
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
17
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.
FURTHER CONSIDERATIONS CONCERNING THE COMPANY
LOSS OF LISTING ON THE AMERICAN STOCK EXCHANGE. While the Company's
shares of Common Stock are presently listed on the American Stock Exchange
("AMEX"), the Company no longer satisfies the continued listing requirements of
AMEX, and has not done so for a substantial period of time. On May 7, 2002, AMEX
notified the Company that it had fallen below AMEX's continued listing
standards, specifically it (a) did not have shareholders' equity of $4 million
and had suffered net losses in two of the three most recent fiscal years, and
(b) had suffered losses deemed by AMEX to be so substantial in relation to its
overall operations or existing financial resources that, in the opinion of AMEX,
it was questionable whether the Company would be able to continue operations
and/or meet its obligations as they mature. On June 5, 2002, the Company
submitted a business plan to AMEX outlining the changes the Company was planning
to improve its overall business position, including plans for additional equity
investments, which were critical for the Company to achieve its projections.
AMEX accepted the Company's compliance plan and granted the Company an extension
of time to regain compliance with the continued listing standards.
Unfortunately, the projected results outlined in the compliance plan were not
achieved, the Company was not able to raise any additional equity, and the
Company is still not in compliance with AMEX's continued listing standards. As a
result, earlier this month AMEX contacted the Company and informed it that AMEX
would be making a final determination regarding the Company's listing status at
the end of December. AMEX informed the Company that it will not be considering
the Net Asset Sale or the Purchase in making its decision to continue the
Company's listing. It is the Company's understanding that unless something
happens to bring the Company within compliance by the end of the month (December
2003), which will not occur, AMEX will likely begin de-listing the Company. If
the Company is de-listed from AMEX, no assurances can be given as to the
development of a public market for the Company's Common Stock.
Although the Company could again appeal a de-listing, it does not
believe that it has any basis to win such an appeal, and as a result, the
Company will not spend time or resources appealing the de-listing. Dorman
Industries has also informed the Company that it would not cause the Company to
file an appeal subsequent to the Purchase. Accordingly, the Company expects to
be de-listed from AMEX in 2004.
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.
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.
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 evaluate 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 INITIAL OPERATING FUNDS. If the Net Asset Sale occurs, and
Dorman Industries makes its investment, the Company will only have $80,000 in
funds to carry on its operations. Although the Company is not expected to have
any expenses other than for professional fees until and if, it makes an
acquisition, it will not have any assets to generate additional funds. The
Company will need to raise funds by selling additional equity, and no assurances
can be given that it will be able to do so.
18
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, regulate 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 may be payable to an investment adviser.
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 Company 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 of 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
Although the Company expects that it will be delisted from AMEX in
2004, it is still a listed Company at this time, and AMEX's regulations require
shareholder approval of most issuances of Common Stock (other than a public
offering) at a price less than the greater of book value or market value which,
together with sales by officers, directors and principal shareholders, equals
20% or more of the Common Stock or voting power outstanding before the
transaction. 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 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 the Purchaser 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.
19
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.
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.
20
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
the Record Date, the Company had 15,744,472 shares of the Company's Common
Stock outstanding, at a per share price of $.22. 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, shareholders holding fractional shares will be
entitled to a cash payment in lieu of such fractional shares;
21
(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 the Record Date, 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 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
22
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.
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
23
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.
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
24
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 its nominees, Ronald C. Causley and
Stephen E. Globus. If, and only if, Proposals 1 and 2 are not approved, proxies
solicited by the Board will be voted for these nominees unless instructions to
withhold or to the contrary are given.
INFORMATION REGARDING THE NOMINEES AND OTHER DIRECTORS
The following biographical description contains information with
respect to the Board nominees, Messrs. Dorman and Lawrence De Fiore. Mr.
Galvez's information is provided below in the section entitled "Directors Whose
Terms Expire in 2004."
DANIEL J. DORMAN
Mr. 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 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.
LAWRENCE DE FIORE
Mr. De Fiore has been a CPA for over 18 years and is currently a
shareholder and officer of the 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 biographical descriptions contain information with
respect to the nominees for election, in the event 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 or nominee.
NOMINEE FOR THE DIRECTOR WHOSE TERM WILL EXPIRE IN 2005
Ronald C. Causley, 60, became a director in February 2002 when the
Board 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 1976, and he
has served as its President since inception.
NOMINEE FOR THE DIRECTOR WHOSE TERM WILL EXPIRE IN 2006
25
Stephen E. Globus, 56, became a director in December 1998. He has been
Chairman of the Board of Globus Growth Group, Inc., a New York City Business
development company since 1984. He is also a director of Plasmaco, Inc., a flat
computer screen manufacturer owned by Matsushita (Panasonic).
DIRECTORS WHOSE TERMS EXPIRE IN 2004
Matthew S. Galvez, 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, a
position he held until November 7, 2003, when he resigned. 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
stamped 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 as an officer of
two acquisition funds. Mr. Galvez serves a Director of Waltec Plastics Co. in
Midland, Ontario, Canada.
Joseph J. Fitzsimmons, 68, became a director in March 1997. Mr.
Fitzsimmons served as Executive Officer of Nonprofit Enterprise at Work, a
management support organization dedicated to assisting non-profit 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.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
Board of Directors. The Board of Directors met 11 times during 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, 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 four times during 2002. The Organization and
Compensation Committee administers the Company's Long Term Incentive Plan and
the 1993 Stock Option Plan, determines compensation issues for 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. Fitzsimmons (Chairman) and
Globus.
Nominating Committee. The Nominating Committee met twice during 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 Messrs. Globus (Chairman), Causley and 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 2004 Annual Meeting."
Audit Committee. The Audit Committee met five times during 2002. The members of
the Audit Committee are Messrs. Globus (Chairman) and Fitzsimmons. The Audit
Committee is organized and conducts its business pursuant to a written charter
adopted by the Board of Directors. 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
26
communication between internal audit, the independent accountants, financial
management and the Board.
AUDIT 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 by the
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 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, 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,
2002 for filing with the Securities and Exchange Commission.
Audit Committee: Stephen E. Globus, Committee Chairman
Joseph J. Fitzsimmons, 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
- ---- ------- ---
Jeffrey K. Crowell President and Chief
Operating Officer 58
John H. Dunlap Secretary and
Vice President - Marketing, 47
See "Directors Whose Terms Expire in 2004" for information concerning
Mr. Galvez.
Mr. Crowell became President and Chief Operating Officer on November
14, 2003. He previously held the position of Vice President of Sales and
Distribution and other senior executive positions with the Company from May 2001
until he was elevated to the position of President and Chief Operating Officer.
Prior to working for the Company, he was a Managing Director for Computer
Sciences Corporation ("CSC") where he managed several different professional
services businesses focused on the manufacturing segment from 1995 to 2000.
Prior to CSC, Mr. Crowell was a Senior Manager for both PricewaterhouseCoopers
and Ernst & Young in their manufacturing practices. Mr. Crowell was a founding
partner for General CAD/CAM, a company focused on integrated engineering design
software and services. Mr. Crowell began his career with General Electric where
he held a variety of manufacturing and financial positions over a 15 year
period.
Mr. Dunlap has served as the Company's Secretary since July 2003 and as
the Vice President -- Marketing since June 2003. Prior to joining the Company in
October 2002, Mr. Dunlap was President of iAppliance LLC, a local technology
startup. From 1998 to 2000, Mr. Dunlap served as Vice-President of Marketing at
Xycom Automation. Prior to Xycom Automation, Mr. Dunlap owned and operated a
microbrewery from 1996 to 1998. From 1989 to 1996, Mr. Dunlap was employed by
Rockwell Automation - Intelligent Sensing Division, where he was responsible for
the marketing and sales activities of their line of machine vision, bar code and
RFID products. Prior to Rockwell Automation, Mr. Dunlap worked for Motorola and
Owens-Illinois in various engineering and strategic marketing roles.
27
OTHER DISCLOSURES AND INFORMATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of November 30, 2003 with
respect to the beneficial ownership of Common Stock by each director and nominee
for director, each executive officer named in the Summary Compensation Table
under "Executive Compensation," all current directors and executive officers as
a group and all other persons known by the Company to beneficially own more than
5% of its outstanding Common Stock (each, a "5% Owner"). 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 November 30, 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 (9)
Beneficially Owned
Directors and Management:
Ronald C. Causley 3,750,944(1) 19.88%
Joseph J. Fitzsimmons 1,887,369(2) 10.71%
Stephen E. Globus 1,285,235(3) 8.16%
Matthew S. Galvez 860,100(4) 5.18%
Jeffrey K. Crowell 0 0%
All directors and executive
officers as group (4 persons) 7,783,648(5) 36.02%
5% Owners:
Hugo E. Braun 100,736,599(6) 87.27%
James A. Nichols 4,573,041(7) 24.94%
J. Eric May, Trustee Under
Declaration of Trust 1,493,425(8) 9.49%
Nominees for Directors
Daniel J. Dorman 0 0%
Lawrence De Fiore 0 0%
(1) The shares shown in the table for Mr. Causley include (i) 624,086
shares of Common Stock owned outright, (ii) options to purchase 30,000
shares of Common Stock, which are currently exercisable or are
exercisable within sixty days under the Long-Term Incentive Plan; (iii)
warrants to purchase a maximum of 250,000 shares of Common Stock issued
in March 2002 in connection with the Company's issuance of subordinated
notes and warrants; and (iv) rights to convert the principal
28
amount of $125,000 of subordinated convertible notes and accrued
interest thereon to 2,846,858 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.
(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 a maximum of 150,000 shares of Common Stock issued
in March 2002 in connection with the Company's issuance of subordinated
notes and warrants, and (iv) rights to convert the principal amount of
$75,000 of subordinated convertible notes and accrued interest thereon
to 1,701,205 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. Fitzsimmons' address is 5840 Interface Drive, Ann Arbor, MI
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 4,500 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 all current directors and executive
officers as a group include the shares described in footnotes (1)
through (5).
(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) currently
exercisable warrants to purchase 500,000 shares of Common Stock
pursuant to a warrant issued to North Coast in March 2001, (iii)
currently exercisable warrants to purchase 7,723,000 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, (iv) rights
to convert the principal amount of $750,000 of subordinated convertible
notes and accrued interest thereon to 19,010,859 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 (v) rights to convert the
principal amount of $3,111,500 of subordinated convertible notes and
accrued interest thereon to 72,452,640 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
2,528,219 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.
29
(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.
(9) The number of shares and percentages have been determined as of
November 30, 2003. At that date 15,744,472 shares of stock outstanding
used in calculating the percentage ownership of a beneficial owner
assumes that all options and warrants to acquire shares of Common Stock
held by such beneficial owner (but not those held by any other person)
that were exercisable on, or become exercisable within 60 days of,
January 13, 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, the Company's only executive
officer whose salary and bonus exceeded $100,000 in the year ended December 31,
2002.
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation All Other
Name and -------------------------- Awards Compensation
Principal Position Year Salary ($) Bonus ($) Options (#) ($) (1)
- ------------------ ---- ---------- --------- ----------- -------
Matthew S. Galvez, 2002 $200,000 $-0- -0- $16,400
Chief 2001 $200,000 $-0- -0- $20,445
Executive Officer 2000 $200,000 $-0- -0- $18,071
All Other Compensation in the table above includes the following:
Housing Auto 401(k) Plan
Allowance Allowance Match Total
--------- --------- ----- -----
Mr. Galvez 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 $18,071
OPTION GRANTS DURING 2002
There were no option grants during 2002.
The following table provides information with respect to unexercised
options held by Mr. Galvez as of December 31, 2002.
30
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT DEC. 31, 2002 OPTIONS AT DEC. 31, 2002 ($)
------------------------------------ -----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Matthew S. 860,000 -0- -0- -0-
Galvez
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 2002 and
the option exercise price.
Mr. Galvez did 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
provided for an annual base salary through December 31, 2001 of $200,000, a
housing allowance and an automotive allowance. 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. This agreement terminated in connection
with Mr. Galvez's resignation on November 7, 2003.
COMPENSATION OF DIRECTORS
Each director who is not an officer or employee of the Company is
eligible to receive for his services as 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 attended. The directors
waived the director fees for meetings held during quarterly periods during which
the Company reported a loss from operations, which were all 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.
The 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). No options were
granted during 2002.
31
CERTAIN RELATIONSHIPS WITH RELATED PARTIES AND RELATED TRANSACTIONS
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 Notes and Warrants to purchase a
total of 800,000 shares of Common Stock to certain accredited investors,
including North Coast, of which Mr. Hugo Braun, a former director of the
Company, is a partner. The Convertible Subordinated Promissory Notes, which are
secured by a lien on the Company's assets and 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 AMEX. If the closing price fell
below $0.30 for five consecutive trading days. The lowest closing price of the
Common Stock traded on 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, 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,
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
32
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 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.
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.
33
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 September 2003 $ 3,111,500
Warrants purchased through September 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 8% and were due on October 31, 2002 (the "8% Notes").
The Company did not repay the 8% Notes and the 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. The 8% Notes may be
prepaid at any time without penalty upon prior written notice. The holders of
the 8% Notes are not permitted to transfer them without the Company's prior
written consent. Information concerning the 8% Notes and Warrants sold to Mr.
Causley and Mr. Fitzsimmons is as follows:
34
Ronald C. Joseph J.
Causley Fitzsimmons
--------- -----------
Convertible Subordinated Promissory Notes purchased $125,000 $ 75,000
Warrants purchased 198,863 119,318
Series A Preferred Stock issuable upon conversion of the Convertible
Subordinated Promissory Notes
Interest accrued and unpaid on Convertible Subordinated Promissory $ 8,192 $ 4,569
Notes in 2002
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, and one of its directors.
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.
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 ("SEC"). Executive officers, directors and greater than ten percent
shareholders are required
35
by SEC regulation to furnish the Company with copies of all Section 16(a)
reports they file. Specific due dates for these reports have been established
and the Company is required to report any delinquent filings and failures to
file such reports.
Based solely on its review of the copies of such reports received by it
and written representations of its executive officers and incumbent directors,
the Company believes that during the year ended 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.
SHAREHOLDER PROPOSALS FOR 2004 ANNUAL MEETING
Shareholder proposals intended to be presented at the 2004 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 January 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 2003
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.
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.
36
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 Company's Form 10-KSB
for the year ended December 31, 2002 is incorporated in this proxy statement by
reference:
Item 6 - Management's Discussion and Analysis or Plan of Operation
Item 7 - Financial Statements
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.
37
ANNEX A
FORM OF
CERTIFICATE OF AMENDMENT TO THE 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., Detroit, 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 combined into and automatically become one share
of outstanding Common Stock of the Corporation. The Corporation will not issue
fractional shares on account of the foregoing reverse stock split; all shares
that are held by a shareholder as of the effective date hereof shall be
aggregated and each 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.
5. The foregoing amendment to the Articles of Incorporation was duly
adopted on the _____ day of _________________, 200____, at a meeting of
the shareholders, where the necessary votes were cast in favor of the
amendment.
Signed this _______ day of __________________, 200___.
By: __________________________
Its: ___________________________
38
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 January 13 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 EACH OF THE PROPOSALS SET FORTH
IN SUCH PROXY 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 December 19, 2003, is unable to serve or, for good cause,
will not serve.
(TO BE SIGNED ON REVERSE SIDE)
PROPOSAL 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
39
PROPOSAL 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:
Alternative 1: Daniel J. 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.)
- ------------------------------------------------------------------------------
Alternative 2: Ronald C. Causley and Steven E. Globus
[ ] 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.)
- ------------------------------------------------------------------------------
YOU SHOULD VOTE WITH RESPECT TO 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 MESSRS. 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 December 19, 2003 and the 2002 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
------------------------------------ ---------------------
40