-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VGQTK5aEC5cG85IGDD0I/sHw+/MSH2RStCCrMYz2KuhfILKuNLA1SlI7kgdC4iwO 2xQAgmhQhXOz8PfkskZ/mw== 0000892832-02-000049.txt : 20021112 0000892832-02-000049.hdr.sgml : 20021111 20021112113933 ACCESSION NUMBER: 0000892832-02-000049 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEMATRON CORP CENTRAL INDEX KEY: 0000892832 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 382483796 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-15481 FILM NUMBER: 02816044 BUSINESS ADDRESS: STREET 1: 5840 INTEFACE DRIVE CITY: ANN ARBOR STATE: MI ZIP: 48103 BUSINESS PHONE: 7342142000 MAIL ADDRESS: STREET 1: 5840 INTERFACE DR CITY: ANN ARBOR STATE: MI ZIP: 48103 10QSB 1 form10qsb_093002.txt FORM 10-QSB FOR PERIOD ENDED SEPTEMBER 30, 2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to ____ Commission File Number: 0-21142 NEMATRON CORPORATION (Exact name of small business issuer as specified in its charter) Michigan 38-2483796 38-2483796 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5840 Interface Drive, Ann Arbor, Michigan 48103 (Address of principal executive offices) (Zip Code) (734) 214-2000 (Issuer's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ]YES [ ] No State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: No par value Common Stock: 15,744,625 outstanding as of November 11, 2002 Transitional Small Business Disclosure Format: [ ] YES [X] NO ================================================================================ 1 PART I -- FINANCIAL INFORMATION Item 1. Financial Statements Nematron Corporation and Subsidiaries Consolidated Condensed Balance Sheets September 30, 2002 and December 31, 2001 September 30, 2002 December 31, (Unaudited) 2001 ----------- ----------- Assets ------ Current assets: Cash and cash equivalents $157,093 $ 291,726 Accounts receivable, net of allowance for doubtful accounts of $76,526 at September 30, 2002 and $70,000 at December 31, 2001 2,627,221 3,284,376 Inventories (Note3) 1,753,620 1,916,235 Prepaid expenses and other current assets 195,992 190,010 ----------- ----------- Total current assets 4,733,926 5,682,347 Property and equipment, net of accumulated depreciation of $7,478,564 at September 30, 2002 and $7,192,705 at December 31, 2001 1,935,994 2,190,104 Goodwill, net of amortization (Note 3,072,122 3,072,122 Intangible assets (Note 5): Software and related development costs, net of amortization 652,376 886,286 Other intangible assets, net of amortization 454,686 564,658 ----------- ----------- Total assets $10,849,104 $12,395,517 =========== =========== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Notes payable to banks (Note 6) $ 1,582,029 $ 2,262,475 Accounts payable 1,499,114 1,452,658 Deferred revenue and other accrued expenses 1,553,625 1,851,956 Subordinated debt (Note 7) 2,924,000 1,500,000 Current maturities of long-term debt (Note 8) 235,986 2,962,536 ----------- ----------- Total current liabilities 7,794,754 10,029,625 Long-term debt, less current maturities (Note 8) 2,496,023 28,940 ----------- ----------- Total liabilities 10,290,777 10,058,565 Shareholders' equity: Common stock, no par value, 30,000,000 shares authorized; 15,744,625 shares issued and outstanding 33,246,346 33,054,089 Accumulated comprehensive income 38,639 18,096 Accumulated deficit (32,726,658) (30,735,233) ----------- ----------- Total shareholders' equity 558,327 2,336,952 ----------- ----------- Total liabilities and shareholders' equity $10,849,104 $12,395,517 =========== =========== 2 Item 1. Financial Statements - Continued Nematron Corporation and Subsidiaries Consolidated Condensed Statements of Operations For The Three-and Nine-Month Periods Ended September 30, 2002 and 2001 Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2002 2001 2002 2001 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ---------- ---------- ---------- ---------- Net Revenues $3,450,069 $4,358,366 $11,586,507 $13,908,192 Cost of Revenues 2,628,741 3,389,194 8,545,049 11,107,185 ---------- ---------- ----------- ----------- Gross Profit 821,328 969,172 3,041,458 2,801,007 Operating Expenses: Software development costs 190,176 191,812 546,692 429,932 Selling, general and administrative expenses 1,229,776 1,485,509 3,774,827 4,775,351 ---------- ---------- ----------- ----------- Total Operating Expenses 1,419,952 1,677,321 4,321,519 5,205,283 ---------- ---------- ----------- ----------- Operating Loss (598,624) (708,149) (1,280,061) (2,404,276) Other Income, net: Interest expense (233,437) (310,802) (731,215) (878,320) Sundry income (expense) (5,254) 2,685 19,851 10,376 ---------- ---------- ----------- ----------- Total Other, Net (238,691) (308,117) (711,364) (867,944) ---------- ---------- ----------- ----------- Loss Before Income Taxes (837,315) (1,016,266) (1,991,425) (3,272,220) Income Tax Benefit (Expense) (Note 7) -- -- -- -- ---------- ---------- ----------- ----------- Net Loss $(837,315)$(1,016,266) $(1,991,425) $(3,272,220) ========== ========== =========== =========== Per share amounts (Note 8): Basic and diluted $(0.05) $(0.06) $(0.13) $(0.22) ====== ====== ====== ====== Weighted average shares outstanding (Note 8): Basic and diluted 15,744,625 15,744,625 15,744,625 15,095,650 ========== ========== ========== ========== Nematron Corporation and Subsidiaries Consolidated Condensed Statements of Comprehensive Loss For The Three-and Nine-Month Periods Ended September 30, 2002 and 2001 Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2002 2001 2002 2001 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ---------- ---------- ---------- ---------- Net loss $(837,315)$(1,016,266) $(1,991,425) $(3,272,220) Other comprehensive income - equity adjustment from foreign translation 6,046 18,848 20,543 14,351 ---------- ---------- ----------- ----------- Comprehensive loss $(831,269) $(997,418) (1,970,882) $(3,257,869) ========= ========= =========== =========== 3 Item 1. Financial Statements - Continued Nematron Corporation and Subsidiaries Consolidated Condensed Statements of Cash Flows For The Nine-Month Periods Ended September 30, 2002 and 2001 Nine Months Ended September 30, ------------- 2002 2001 (Unaudited) (Unaudited) ----------- ----------- Cash Flows From Operating Activities: Net loss $(1,991,425) $(3,272,220) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation 326,671 397,956 Amortization (Notes 4 and 5) 377,169 1,161,066 Non-cash interest expense for beneficial conversion feature of warrants (Note 7) 192,257 342,000 Loss on disposal of property 17,514 3,754 Changes in assets and liabilities that provided (used) cash, net of effects of acquisition: Accounts receivable 657,155 1,403,413 Inventories 162,615 1,169,869 Prepaid expenses and other current assets (5,982) 65,463 Accounts payable 147,985 (240,939) Deferred revenue and other accrued expenses (399,858) (384,413) ----------- ---------- Net Cash Provided By (Used In) Operating Activities (515,899) 645,949 Cash Flows From Investing Activities: Purchases of property and equipment (91,328) (111,517) Proceeds from disposals of property and equipment 1,253 50 Acquisition of Optimation, Inc., net of cash acquired (Note 2) -- (278,877) Additions to capitalized software development costs -- (402,995) ----------- ---------- Net Cash Used In Investing Activities (90,075) (793,339) Cash Flows From Financing Activities: Proceeds from long-term debt agreement 2,700,000 -- Proceeds from issuance of subordinated notes and warrants (Note7) 1,424,000 1,200,000 Proceeds from issuance of common stock -- 278,000 Repayments of long-term debt (2,959,469) (813,549) Decrease in notes payable to banks (680,446) (397,821) Payments of deferred financing fees (33,287) (61,440) ----------- ---------- Net Cash Provided By Financing Activities 450,798 205,190 Foreign Currency Translation Effect on Cash 20,543 14,351 ----------- ---------- Net Increase (Decrease) In Cash (134,633) 72,151 Cash at Beginning of Period 291,726 74,712 ----------- ---------- Cash at End of Period $157,093 $146,863 =========== ========== Non-cash financing and investing activities: Fair value of assets acquired from Optimation, Inc., including goodwill -- $2,459,727 Less liabilities assumed -- (1,180,850) Less common stock issued -- (1,000,000) ----------- ---------- Net cash paid for Optimation, Inc. (Note 2) -- $ 278,877 =========== ========== Supplemental disclosures of cash flow information: Cash paid for interest $341,973 $485,895 Cash paid for income taxes -- -- 4 Item 1. Financial Statements - Continued Nematron Corporation and Subsidiaries Notes To Consolidated Condensed Financial Statements For The Three-and Nine-Month Periods Ended September 30, 2002 and 2001 Note 1 - Basis of Presentation The accompanying consolidated financial statements include the accounts of Nematron Corporation (the "Company") and its wholly-owned subsidiaries, Nematron Limited, a United Kingdom corporation, Nematron Canada Inc., a Canadian corporation, A-OK Controls Engineering, Inc. ("A-OK Controls"), a Michigan corporation, and Optimation, Inc. ("Optimation"), an Alabama corporation. All significant intercompany transactions and balances have been eliminated in consolidation. The Company acquired 100% of the equity of Optimation effective at the close of business on March 30, 2001. Accordingly, the financial state- ments include the operations of Optimation since the date of its acquisition. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial statements for the interim periods have been included. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's latest annual report on Form 10-KSB. The results of operations for the three- and nine-month periods ended September 30, 2001 and 2000 are not necessarily indicative of the results to be expected for the full year. Note 2 - Acquisition of Optimation, Inc. On March 30, 2001, the Company completed its acquisition of Optimation, Inc., a Huntsville, Alabama-based company that develops, produces and markets industrial communications and display products for industrial automation. The Company recorded this transaction using the purchase method of accounting. The purchase price was approximately $1,660,000, including expenses of approximately $60,000. Under the terms of the related Stock Purchase Agreement, the Company issued 1,483,680 shares of its Common Stock to the former Optimation shareholders in exchange for 100% of the outstanding equity of Optimation. Additionally, the Company paid the former Optimation shareholders $300,000 upon closing and paid an additional $300,000 subsequent thereto. In connection with the Stock Purchase Agreement, the Company also entered into three-year employment agreements and three-year agreements not to compete with Optimation's president and vice-president, both of who were Optimation shareholders. The allocation of the purchase price to assets acquired and liabilities assumed at the acquisition date are as follows: Cash $ 21,000 Other current assets 1,605,000 Equipment 19,000 Intangible assets, including goodwill 835,000 Current notes payable (640,000) Other current liabilities (137,000) Long-term debt (43,000) ---------- Total purchase price $1,660,000 ========== The following unaudited pro forma summary presents the consolidated results of operations for the three and nine-month periods ended September 30, 2001 as if the acquisition of Optimation had occurred on January 1, 2001, the earliest period presented in this Form 10-QSB. The pro forma summary does not purport to be indicative of either what would have occurred had the acquisition of Optimation actually been consummated at that date or the Company's future results of operations: 5 Three Months Nine Months Ended Ended Sept. 30, 2001 Sept. 30, 2001 -------------- -------------- Revenues $4,358,000 $14,319,000 Net loss $(1,016,000) $(3,277,000) Loss per share - basic and diluted $(0.06) $(0.21) Note 3 - Inventories Inventories consist of the following at September 30, 2002 and December 31, 2001: September 30, December 31, 2002 2001 ---- ---- Purchased parts and accessories 1,170,701 $1,402,209 Work in process 291,438 219,765 Finished goods, demo units and service stock 291,481 294,260 ----------- ---------- Total inventory $1,753,620 $1,916,235 =========== ========== Note 4 - Goodwill Effective January 1, 2002, the Company adopted the provisions of Statement No. 142, Goodwill and Other Intangible Assets ("FASB-142") that was issued by the Financial Accounting Standards Board in July 2001. FASB-142, which is effective for years beginning after December 15, 2001, addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. FASB-142 also specifies that intangible assets must be amortized over their useful lives unless such lives are indefinite, in which case the intangible assets are not subject to amortization. FASB-142 further specifies that goodwill is not subject to amortization but is subject to impairment tests at least annually. Under FASB-142, the Company was required to test all existing goodwill for impairment as of January 1, 2002, on a "reporting unit" basis. A reporting unit is the operating segment unless, at businesses one level below that operating segment (the "component" level), discrete financial information is prepared and regularly reviewed by management, in which case such component is the reporting unit. A fair value approach is used to test goodwill for impairment. An impairment charge is recognized for the amount, if any, by which the carrying amount of goodwill exceeds its fair value. Fair values were established using discounted cash flows. The result of testing goodwill for impairment in accordance with FASB-142, as of January 1, 2002, resulted in no impairment. The Company recorded goodwill in connection with its acquisition A-OK Controls in June 2000 and its acquisition of Optimation in March 2001. In connection with the Company's acquisition of Intec Controls Corp. in March 1997, the Company recorded intangible assets related to an acquired workforce and a distribution network that, pursuant to FASB-142, have been reclassified to goodwill as of January 1, 2002 and which are no longer subject to periodic amortization. After the reclassification, recorded goodwill totals $5,469,356 and accumulated amortization is $2,397,234 as of January 1, 2002. The net amount of goodwill, $3,072,122 as of January 1, 2002, will not be amortized but is subject to certain impairment tests at least annually. 6 A reconciliation of loss reported in the consolidated statement of operations to the loss adjusted for the effect of goodwill amortization for all periods presented is as follows: Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2002 2001 2002 2001 ---- ---- ---- ---- Net loss: Reported net loss $(837,315)$(1,016,266) $(1,991,425) $(3,272,220) Goodwill amortization -- 42,657 -- 115,916 Workforce and distribution network amortization -- 3,052 -- 69,156 --------- --------- ----------- ---------- Adjusted net loss $(837,315) $(950,557) $(1,991,425 $(3,087,148) ========= ========= =========== =========== Basic and diluted loss per share: Reported net loss $(0.05) $(0.06) $(0.13) $(0.22) Goodwill amortization -- -- -- .01 Workforce and distribution network amortization -- -- -- .01 ------ ------ ------ ------ Adjusted net loss $(0.05) $(0.06) $(0.13) $(0.20) ====== ====== ====== ====== Note 5 - Other Intangible Assets Other intangible assets consists of the following at September 30, 2002: Amortization Gross Net Period Carrying Accumulated Carrying (Years) Amount Amortization Amount Amortizable intangible assets: Software development costs 5.7 $6,661,735 $(6,009,359) $652,376 ========== =========== ======== Other: Acquired non-compete agreement 5.0 300,000 (135,000) 165,000 Acquired patent costs 10.0 590,000 (413,000) 177,000 Internally developed patent costs 6.0 75,589 (57,321) 18,268 Deferred financing fees 4.0 296,898 (202,480) 94,418 ---------- --------- -------- Total other intangible assets $1,262,487 $(807,801) $454,686 ========== ========= ======== Amortization expense for other intangible assets for the periods presented is as follows: Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2002 2001 2002 2001 ---- ---- ---- ---- Software development costs $77,970 $267,465 $233,910 $741,654 Other amortizable assets 47,757 61,751 143,259 234,340 -------- -------- -------- -------- Total $125,727 $329,216 $377,169 $975,994 ======== ======== ======== ======== Estimated amortization expense for other intangible assets for the five years ending December 31, 2006 is as follows: Software Other Development Intangible Costs Assets Total Year Ending December 31, ----- ------ ----- 2002 $311,880 $179,012 $490,892 2003 155,898 175,150 331,048 2004 139,502 123,894 263,396 2005 139,502 74,604 214,106 2006 139,503 -- 139,503 7 Note 6 - Notes Payable to Banks The Company and its A-OK Controls subsidiary are parties to two loan and security agreements (the "Agreements") with LaSalle Business Credit, Inc., a Wisconsin bank ("LBCI"). The Agreements, which have been amended through October 17, 2002, provide for a total of $2.5 million in two lines of credit. The Agreements provide for credit facilities through November 2003, and may be extended for an additional one-year period at the option of the Company, unless the lender gives prior notice of termination. The amount available under the lines of credit are limited by a borrowing form- ula that allows for advances up to a maximum of the sum of specified percentages of eligible accounts receivable, less the amount, if any, of outstanding letters of credit issued by the Company. Based upon such borrowing formula, approximate- ly $152,000 of the available lines is eligible for advance at September 30, 2002. Amounts borrowed under the lines of credit facility total $1,247,000 at September 30, 2002, and such borrowings bear interest at the prime rate plus 4.5% (9.25% effective rate at September 30, 2002). The lines of credit are collateralized by substantially all assets of the Company and a second mortgage position on the Company's Ann Arbor facility. The Agreements contain several financial covenants, including specified levels of tangible net worth, interest coverage and debt service coverage. The terms of the Agreements also prohibit the payment of dividends, limit the amount of annual capital expenditures and include other restrictive covenants. Although the Company is not in compliance with the tangible net worth, interest coverage and debt service coverage covenants as of September 30, 2002, the bank issued a forbearance letter concerning these covenant violations to the Company in February 2002 and it reconfirmed the forbearance in October 2002. In such letters, the bank has specifically reserved its right to take any action permitted under the Agreements in the future without any notice to the Company. Additionally, the bank agreed to allow the company to proceed under the terms of the Agreements until further notice to the Company provided: a) that there occurs no additional event of default, as defined in the Agreement; b) that there occurs no material adverse change (as determined by the bank in its sole discretion) in the Company or its business; and c) that the Company use its continuing best to refinance its bank liabilities with another lender as soon as possible. Management has begun discussions with other potential lenders to replace LBCI as the Company's primary bank lender and, further, is in discussion with other funding sources to achieve a private placement of additional debt and/or equity capital. The Company's wholly owned subsidiary, Optimation, is party to a loan and security agreement (the "Compass Agreement") with Compass Bank, an Alabama bank. The Compass Agreement, as amended through October 4, 2002, provides for a line of credit of $335,000 limited by a borrowing formula that allows for advances up to a maximum of the sum of 80% of eligible accounts receivable and a maximum of $225,000 against inventory. Amounts borrowed under the line of credit facility total $335,000 at September 30, 2002, and such borrowings bear interest at the prime rate plus one-half percent (5.25% effective rate at September 30, 2002), but not less than 5.0% per annum. The Compass Agreement required a reduction of $35,000 on October 31, 2002 and requires a payment of $15,000 per month thereafter. The payments made to Compass also reduce the amount available for borrowing. The line of credit is collateralized by substantially all assets of Optimation and prohibits the payment of funds to the parent company except for reimbursements of direct expenses incurred by the parent company on behalf of Optimation. The credit facility, which has been on a short-term rolling basis since June 2001, expires by its terms on January 3, 2003, at which time management believes the Compass Agreement will be renewed on essentially the same terms and conditions for another ninety-day period at the amount then outstanding, which, if payments are made according to the terms of the Compass Agreement, will be $270,000. 8 Note 7 -Subordinated Debt Subordinated debt consists of the following: September 30, December 31, 2002 2001 ---- ---- Convertible subordinated promissory notes, interest at 10% per annum, due August 31, 2001. Accrued and unpaid interest and the principal of the note may be converted into common stock at the lower of $0.30 per share or the lowest closing price of the underlying common stock during the period the notes are outstanding. $1,200,000 $1,200,000 Subordinated promissory notes, interest at 14% per annum, due on demand. The notes are callable by the Company at any time, and the notes may be converted into common or preferred stock if the Company issues such equity during the period the notes are outstanding. Detachable warrants with an exercise price of $0.10 -$0.18 per share were sold with the notes. 1,524,000 300,000 Subordinated promissory notes, interest at 8% per annum, due October 15, 2002. The notes are callable by the Company at any time. The face amount of the notes is $285,000, and $6,477 of the proceeds to the Company was ascribed to the detachable warrants sold with the notes, and such amount is being charged to interest expense, with a corresponding increase in the recorded value amount of the notes, over the term of the notes. 200,000 -- ---------- ---------- Total $2,924,000 $1,500,000 ========== ========== The convertible subordinated notes due August 31, 2001 (the "10% Convertible Notes") included detachable warrants. The warrants, which are non-assignable, allowed the holders to purchase the Company's common stock at $0.30 per share (the "Per Share Warrant Price") at any time until March 31, 2006 (the "2006 Warrants"). If at any time prior to the exercise of the 2006 Warrants the daily closing price of the Company's common stock, as traded on the American Stock Exchange ("AMEX"), falls below the Per Share Warrant Price for five consecutive days, the Per Share Warrant Price will be adjusted downward to the lowest price during such five trading day period. In the event that the Company completes an equity offering at less than the Per Share Warrant Price, the holders have the option to exchange the 2006 Warrants for other warrants to purchase a greater number of shares based on the difference between the Per Share Warrant Price and the proposed equity offering price per share. Because the Per Share Warrant Price was less than the closing price of the common stock, as traded on the AMEX, on the dates the notes were sold, the 2006 Warrants were ascribed a value of $342,000 and such amount was credited to shareholders equity, and the 10% Convertible Notes were ascribed a value of $858,000. The $342,000 was charged to interest over the term of the 10% Convertible Notes, resulting in a total non-cash charge to interest expense of $342,000 between April 1, 2001 and August 31, 2001, with the 10% Convertible Notes increasing in recorded amount to $1,200,000 by August 31, 2001. The 14% Subordinated Notes due on demand (the "14% Subordinated Notes") were issued pursuant to a $1.5 million master promissory note with North Coast Technology Investors L.P. ("North Coast"), an affiliate of Mr. Hugo Braun, a member of the Company's Board of Directors. Requests for advances under the master promissory note shall be funded at the option of North Coast. In the event of an equity offering by the Company, North Coast, at its option, may convert any or all of the outstanding principal of and accrued interest on the 14% Subordinated Notes into securities offered in such financing, at the offering price per share of such financing. Because the Company did not complete an equity financing pursuant to which it receives proceeds of at least $1.5 million on or before August 31, 2002, the principal and interest due and payable under the master promissory note may be converted at the option of North Coast into shares of common stock of the Company at $0.10 per share. The 14% Subordinated Notes were issued with immediately exercisable detachable warrants. The warrants, which are non-assignable, allow the holder to purchase the Company's common stock at $0.18 per share for 607,777 shares and $0.10 for 1,954,000 shares at any time until October 31, 2007. The detachable warrants issued in 2002 have been ascribed a value of $185,780, and such amount has been charged to interest expense, including $36,700 in the three-month period ended September 30, 2002. 9 The subordinated notes due October 15, 2002 (the "8% Subordinated Notes") included detachable warrants. The warrants, which are non-assignable, allow the holders to purchase the Company's common stock at $0.22 per share at any time until March 31, 2007 (the "2007 Warrants"). Because the $0.22 per share exercise price was less than the closing price of the common stock, as traded on the American Stock Exchange, on the dates the notes were sold, the 2007 Warrants have been ascribed a value of $6,477 and such amount was credited to shareholders equity, and the 8% Subordinated Notes were ascribed a value of $193,523. The $6,477 was charged to interest over the period that such warrants were earned, resulting in a total non-cash charge to interest expense of $2,841 and $6,477, respectively, for the three- and nine-month periods ended September 30, 2002. All of the subordinated promissory notes in the above table are subordinated to the debt due to the Company's senior bank lender, and such notes are collateralized by a second mortgage on the Company's Ann Arbor facility. The agreements underlying the notes provide for detachable warrants that allow the Noteholders to purchase common stock at specified exercise prices for a five-year period from the date of issuance of the notes. A total of $750,000 of the 10% Convertible Notes, all of the 14% and 8% Subordinated Notes were issued to certain members of the Company's Board of Directors or their affiliates. At September 30, 2002 and December 31, 2001, accrued interest on the subordinated notes described above total $276,423 and $96,795, respectively, including $208,464 and $62,493, respectively, due to related parties. Note 8 - Long-Term Debt Long-term debt includes the following debt instruments at September 30, 2002 and December 31, 2001: September 30, December 31, 2002 2001 ---- ---- Variable rate term note payable to a bank, interest at prime plus 3.5% (8.25% effective rate as of September 30, 2002), payable in monthly installments of $31,0000 beginning October 2002 through October 2005, at which time any remaining principal and interest is due. The term loan is collateralized by a mortgage on the Ann Arbor facility. $2,700,000 -- Term note payable to a bank, interest at prime plus 4.50% payable in monthly installments of $62,500 beginning June 2002 through August 2003, at which time any remaining principal and interest was due. The term note was repaid on September 30, 2002. -- $2,561,667 Term note payable to a bank, interest at prime plus 6.0%, payable in monthly installments of $78,611 through May 2002. The term note was repaid in May 2002. -- 389,166 Capitalized lease obligations and other notes, secured by specific equipment being financed. 32,009 40,643 ---------- ---------- Total long-term debt 2,732,009 2,991,476 Less current maturities (2,496,023) (2,962,536) ---------- ---------- Long-term debt, less current maturities $235,986 $28,940 ========== ========== The variable rate term loan due to a bank was closed on September 30, 2002 in the amount of $2,700,000. Proceeds of the notes were used to repay a term note to a bank approximately $2,500,000 and the remainder of the proceeds were added to working capital. The $2,700,000 variable rate term loan requires monthly payments of $31,000 including interest at the prime rate plus 3.50% through August 31, 2005, plus a balloon payment of the balance of the note on September 30, 2005. The variable rate term loan is secured by a mortgage of the Company's Ann Arbor, Michigan headquarters facility. 10 Note 9 - Taxes on Income The Company has net operating loss carryforwards ("NOLs") of approximately $24 million as of December 31, 2001 that may be applied against future taxable income. The NOLs expire in varying amounts from 2004 and through 2021. Utilization of certain of these NOLs is subject to annual limitations under current Internal Revenue Service regulations. The Company has established a valuation allowance for the estimated amount of the total limitation on the utilization of the NOLs. Realization of net deferred tax assets associated with the NOLs is dependent upon generating sufficient taxable income prior to their expiration. Note 10 - Earnings Per Share Basic earnings per share ("EPS") are based on the weighted average number of shares outstanding for each period presented because common stock equivalents are anti-dilutive. Diluted earnings per share is the same as basic earnings per share for all periods presented because the inclusion of options and warrants would have an antidilutive effect on loss per share during all periods presented. Information as to options and warrants outstanding that have been excluded from the computation of diluted earnings per share is as follows: Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2002 2001 2002 2001 ---- ---- ---- ---- Options: Number 2,018,528 2,183,692 2,018,528 2,183,692 Expiration dates 2003-2011 2003-2011 2003-2011 2003-2011 Warrants: Number 3,200,928 997,678 3,200,928 997,678 Expiration dates 2002-2007 2002-2006 2002-2007 2002-2006 11 Item 2. Management's Discussion and Analysis of Operations The Company acquired 100% of the equity of A-OK Controls effective at the close of business on June 30, 2000, and acquired 100% of the equity of Optimation effective at the close of business on March 30, 2001. The consolidated condensed financial statements include the results of operations of A-OK Controls and Optimation (the "acquired companies") since June 30, 2000 and March 31, 2001, respectively. Three- and Nine-Month Periods Ended September 30, 2002 Compared with the - ------------------------------------------------------------------------ Three- and Nine-Month Periods Ended September 30, 2001 - ------------------------------------------------------ Net revenues for the three- and nine-month periods ended September 30, 2002 decreased $908,000 (20.8%) and $2,322,000 (16.7%), respectively, to $3,450,000 and $11,587,000, respectively, compared to the same periods last year. The revenue decreases are primarily attributable to decreases in sales of hardware products and bundled Industrial Control Computers, including those sold in 2001 under a major supply program with a major automotive company, as well as declines in application engineering services supplied to one major automotive customer. Management expects that net revenues for the last quarter of 2002 will be consistent with the current quarter, based on existing scheduled production releases and scheduled and anticipated services. Gross profit for the three- and nine-month periods ended September 30, 2002 decreased $148,000 (15.3%) and increased $240,000 (8.6%), respectively, to $821,000 and $3,041,000, respectively, compared to the same periods last year. Gross profit as a percentage of net revenues for the three- and nine-month periods ended September 30, 2002 was 23.8% and 26.2% respectively, compared to 22.2% and 20.1% in the same periods last year. The changes in gross profit percentage resulted from the effect of fixed cost on lower revenues in the current periods offset by product mix. Product mix in the current quarter was less favorable than the comparable quarter last year, whereas product mix in the current nine-month period was more favorable than the comparable period last year. Management expects that gross profit margins will remain relatively constant for the last quarter of 2002 as the mix of sales in that period is expected to be similar to the sales mix experienced in the first nine months of the year, based on the current backlog and forecasts. Software product development expenses for the three- and nine-month periods ended September 30, 2002 decreased $2,000 (0.9%) and increased $117,000 (27.2%), respectively, to $190,000 and $547,000, respectively, compared to the same periods last year. The increase in the year-to-date period results from the Company expensing 100% of its software development costs in the current period whereas in the comparable prior period, $403,000 of costs were capitalized. As a result of the Company writing down the carrying value of its capitalized soft- ware at year-end 2001, all costs subsequent thereto have been expensed in order that the carrying value of the asset not exceed its estimated net realizable value. Management expects that product development expenses will remain relatively constant with the level of expenses incurred in the first three quarters of the year based on current staff levels and planned software development efforts. Selling, general and administrative expenses for the three- and nine- month periods ended September 30, 2002 decreased $256,000 (17.2%) and $1,001,000 (21.0%) to $1,230,000 and $3,745,000, respectively, compared to the comparable periods last year. The decreases resulted primarily from reductions of sales, marketing, travel and sundry other expenses to more closely align administrative expenses with current revenue levels. Management expects that selling, general and administrative expenses for the last quarter of 2002 will remain consistent with the level of expenses incurred in the first three quarters of the year. Interest expense for the three- and nine-month periods ended September 30, 2002 decreased $77,000 (24.9%) and $147,000 (16.7%), respectively, to $233,000 and $731,000, respectively, compared the same periods last year. The Company has recorded non-cash interest expense related to the beneficial conversion feature of warrants issued in connection with subordinated notes sold during each period; such non-cash interest expense for the three-month periods ended September 30, 2002 and 2001 was $38,000 and $137,000, respectively, and for the nine-month periods then ended was $192,000 and $342,000, respectively. Non-cash interest charges result because the conversion price of the warrants issued was below the market price of the common stock, into which the warrants may be converted, on the date of the sale of the warrants and convertible subordinated debt. Absent the non-cash charge for the beneficial conversion feature described above, the increase in interest expense for the three- and 12 nine-month periods ended September 30, 2002 increased $21,000 and $2,000, respectively, compared to the comparable 2001 periods. These increases result primarily from increased borrowing levels during each period. Sundry income (expense) was not significant for any period presented. Liquidity and Capital Resources - ------------------------------- Primary sources of liquidity are cash generated from operations, short term subordinated debt and the Company's secured lines of credit that total $3,500,000 as of June 30, 2002 from LaSalle Business Credit ("LBCI") and $335,000 from Compass Bank. As of September 30, 2002, the Company had $1,247,000 outstanding under the lines of credit and approximately $152,000 of additional borrowing capacity available under such credit lines. The Company's operations used $516,000 in cash during the nine-month period ended September 30, 2002 as a result of the $1,991,000 net loss, the effects of changes in working capital (providing $562,000) and the noncash depreciation, amortization, loss on disposal of equipment and interest charges (totaling $914,000). During the nine-month period ended September 30, 2002, the Company used $91,000 of cash for purchases of equipment and $3,673,000 of cash for repayments of the lines of credit and long term debt and the payment of deferred bank fees. The primary sources of cash in the nine-month period ended September 30, 2002 were $2,700,000 from proceeds of a term loan secured by a mortgage and $1,424,000 from the proceeds from sales of subordinated promissory notes and warrants. Based upon current estimates, operations for the next two quarters will also result in net cash losses unless sales improve over forecasted levels or costs and expenditures can be further reduced. Management estimates that it will require approximately $150,000 through the remainder of 2002 and approximately $100,000 in order to sustain operations at their current levels. Management has included in these projections an assumption that the borrowings from LBCI and Compass Bank will be refinanced with LBCI and Compass Bank, respectively, or with other lenders on substantially the same terms as the current agreements. The Company is in compliance with the terms of its Compass Bank financing agreement. However, since mid-2001, the Company has not been in compliance with the certain financial covenants contained in the financing agreement with LBCI financing agreement under which it has two lines of credit totaling $3.5 million. LBCI has issued a forbearance letter to the Company concerning these covenant violations. However, in such letter LBCI has specifically reserved its right to take any action permitted under the agreement without any notice to the Company. LBCI and Company management are discussing management plans to cure the defaults, including, without limitation, a capital infusion. This capital infusion, if successful, may cure the tangible net worth covenant, but it will not cure operating covenants that were not met beginning in 2001. Management is hopeful, however, that a successful capital infusion will cause LBCI to continue its forbearance. In view of the continuing default, the Company has classified all indebtedness to LBCI as current liabilities. In the short term, in addition to having to fund its projected net cash losses over the next two quarters, the Company will be required to make payments on term debt of approximately $33,000 per month, including interest. Additionally, of the total principal amount of subordinated debt, $2,924,000 plus accrued interest thereon is due currently. Management is attempting to complete as soon as practical a private placement of preferred stock to accredited investors whereby the Company would raise a minimum of $3,000,000, a portion of the proceeds of which would be applied to the repayment of current liabilities, liabilities arising from operations over the next two quarters and subordinated debt. The Company anticipates sustaining operations through the issuance of subordinated debt with warrants in the range of $250,000 to $400,000 until such time as it can close a private placement of common or preferred stock. 13 Management can offer no assurance that the private placements of sub- ordinated notes or of preferred or common stock will be successful, or that if the private placement of subordinated notes or preferred or common stock should occur, that the funds raised will be sufficient to persuade LBCI to continue its forbearance on demanding repayment of the LBCI debt because of the continuing covenant violations. If the private placements are not successful, the Company will not have sufficient liquidity to satisfy its liabilities and obligations as they become due and it may be forced to curtail its operations, sell product lines, spin off operations of subsidiaries or sell the Company to a third party. Based upon the Company's existing financial position, forecasted revenue and expense levels and forecasted lines of credit availability, and assuming the conversion of the subordinated notes to common or preferred stock, the Company believes it has sufficient liquidity to satisfy its liabilities as they become due. The Company believes that its long-term liquidity needs will be satisfied through the proceeds of the private equity offering it expects to complete on or prior to year-end 2002. Uncertainties Relating to Forward Looking Statements - ---------------------------------------------------- "Item 2. Management's Discussion and Analysis of Results of Operation" and other parts of this Form 10-QSB contain certain "forward-looking statements" within the meaning of the Securities Act of 1934, as amended. While the Company believes any forward-looking statements it has made are reasonable, actual results could differ materially since the statements are based on current management expectations and are subject to risks and uncertainties. These risks and uncertainties include, but are not limited to the following: o Uncertainties discussed elsewhere in "Management's Discussion and Analysis of Operation" above; o The potential inability to raise additional equity or debt financing in a sufficient amount to sustain operations and allow management to execute its strategies; o The potential inability to modify bank covenants as it may be necessary from time to time or continue the lender's forbearance exercising its remedies; o A further decline of economic conditions in general and conditions in the automotive manufacturing industry in particular; o Delays in introduction of planned new product offerings and product enhancements; o Changes in customer requirements or reductions in demand for the Company's products and services; o The inability of the Company to successfully implement its strategy to lead the industrial automation market migration from closed architecture PLCs to open architecture PC-based solutions or changes in corporate strategy to capitalize on market changes; o Competitive factors, including the introduction or enhancement of products by the Company's competitors; o Product pricing decreases and/or component price increases that may result in materially reduced selling prices and/or reduced gross profit margins from sale of the Company's products; o Software defects and latent technological deficiencies in existing and new hardware products and enhancements thereto; o Unforeseen increases in operating expenses or adverse fluctuations in foreign exchange rates; o The inability to attract or retain management personnel and sales and engineering staff; o Evolving industrial automation industry standards that may cause the Company's current or proposed product portfolio to become obsolete. 14 PART II - OTHER INFORMATION Item 4. Controls and Procedures Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days of the filing date of this report, that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits included herewith are set forth on the Index to Exhibits, which is incorporated herein by reference. (b) During the quarter ended September 30, 2002, the Company did not file any current reports on Form 8-K. 15 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Nematron Corporation By: November 11, 2001 /s/ Matthew S. Galvez - -------------------- --------------------------------- Date Matthew S. Galvez, President & CEO (Duly Authorized Officer) November 11, 2001 /s/ David P. Gienapp - -------------------- --------------------------------- Date David P. Gienapp, Executive Vice President - Finance & Administration (Chief Accounting Officer) 16 CERTIFICATION Pursuant to Section 302 of the Sarbanes Oxley Act of 2002 I, Matthew S. Galvez, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Nematron Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I (herein the "Certifying Officers") are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such internal controls to ensure that material information relating to the registrant, including its consolidated subsidiaries, (collectively the "Company") is made known to the Certifying Officers by others within the Company, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's internal controls as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report the conclusions of the Certifying Officers about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's Certifying Officers have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors: a) all significant deficiencies (if any) in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's Certifying Officers have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 11, 2002 /s/ Matthew S. Galvez - --------------------- Matthew S. Galvez Chief Executive Officer See also the certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002, which is also attached to this report. 17 CERTIFICATION Pursuant to Section 302 of the Sarbanes Oxley Act of 2002 I, David P. Gienapp, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Nematron Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I (herein the "Certifying Officers") are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such internal controls to ensure that material information relating to the registrant, including its consolidated subsidiaries, (collectively the "Company") is made known to the Certifying Officers by others within the Company, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's internal controls as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report the conclusions of the Certifying Officers about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's Certifying Officers have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors: a) all significant deficiencies (if any) in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's Certifying Officers have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 11, 2002 /s/ David P. Gienapp - -------------------- David P. Gienapp Chief Financial Officer See also the certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002, which is also attached to this report. 18 INDEX TO EXHIBITS Exhibit Number Description of Exhibit 4.0 Variable Rate Term Note in the amount of $2,700,000 between Chelsea State Bank and the Registrant dated September 30, 2002 4.1 Amended and Restated Promissory Note in the amount of $335,000 between Compass Bank and Optimation, Inc. dated October 4, 2002 4.2 Loan Modification Agreement and Amendment to Loan Documents between Compass Bank and Optimation, Inc. dated October 4, 2002 4.3 Amendment to Amended and Restated Loan and Security Agreement between LaSalle Business Credit, Inc. and the Registrant dated October 17, 2002 4.4 Amendment to Amended and Restated Loan and Security Agreement between LaSalle Business Credit, Inc. and A-OK Controls Engineering, Inc. dated October 17, 2002 4.5 Amended Subordinated Promissory Note between North Coast Technology Investors, L.P. and the Registrant dated October 28, 2002 99.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 19 EX-4 3 exhibit-chelsea_note.txt TERM NOTE - CHELSEA STATE BANK 9-30-02 EXHIBIT 4.0 ----------- Variable Rate Term Note ----------------------- BORROWER'S NAME AND ADDRESS: NEMATRON CORPORATION 5840 INTERFACE DRIVE ANN ARBOR, MI 48103 LENDER'S NAME AND ADDRESS: CHELSEA STATE BANK 1010 SOUTH MAIN STREET CHELSEA, MI 48118 CODES 22-RO-MLP (3) Loan Number: 777664 Date: 09-30-2002 Maturity Date: 09-30-2005 Loan Amount: $2,700,000.00 "You" means the lender, its successors and assigns. For value received, I promise to pay you, or your order, at your address listed above the PRINCIPAL sum of TWO MILLION SEVEN HUNDRED THOUSAND AND NO/100 Dollars $2,700,000.00. Single Advance: I will receive all of this principal sum on 09-30-2002. No additional advances are contemplated under this note. INTEREST: I agree to pay interest on the outstanding principal balance from 09-30-2002 at the rate of 8.250% per year until 10-01-2002. Variable Rate: This rate may then change as stated below. Index Rate: The future rate will be 3.500 PERCENT ABOVE the following index rate: THE HIGHEST RATE ON CORPORATE LOANS POSTED BY AT LEAST 75% OF THE USA'S THIRTY LARGEST BANKS KNOWN AS THE WALL STREET JOURNAL PRIME RATE. Frequency and Timing: The rate on this note may change as often as EVERY DAY BEGINNING 10-01-2002. A change in the interest rate will take effect ON THE SAME DAY. Effect of Variable Rate: A change in the interest rate will have the following effect on the payments: The amount of each scheduled payment will change. ACCRUAL METHOD: Interest will be calculated on a ACTUAL / 360 basis. POST MATURITY RATE: I agree to pay interest on the unpaid balance of this note owing after maturity, and until paid in full, as stated below: At a rate equal to 3% OVER STATED NOTE RATE. LATE CHARGE: If a payment is made more than 10 days after it is due, I agree to pay a late charge of 2.000% OF THE LATE AMOUNT WITH A MINIMUM OF $10.00 AND A MAXIMUM OF $100.00. ADDITIONAL CHARGES: In addition to interest, I agree to pay the following charges which are not included in the principal amount above: $30,0000.00 FEE, WITH $10,000.00 DUE AT CLOSING AN $20,000.00 DUE AT MATURITY OF NOTE OR PAYOFF. PAYMENTS: I agree to pay this note as follows: 35 MONTHLY PAYMENTS OF $31,000.00 BEGINNING 10-30-2002 AND 1 BALLOON PAYMENT OF $2,235038.63 ON 09-30-2005. THIS IS A VARIABLE RATE LOAN AND THE PAYMENT AMOUNTS MAY CHANGE AFTER THE 1ST PAYMENT AND EVERY PAYMENT THEREAFTER. ADDITIONAL TERMS: PAYMENT IS SET AT $31,000.00 WITH A VARIABLE RATE OPTION. NEGATIVE AMORTIZATION IS NOT ALLOWED AND PAYMENT MAY BE ADJUSTED AT THE BANKS OPTION TO PROHIBIT THIS (ALSO NOTED ABOVE) BALLOON BALANCE MAY CHANGE BASED ON THE INTEREST RATE FLUCTUATIONS. THIS LOAN CAN BE PREPAID WITHOUT PENALTY SECURITY: This note is separately secured by a MORTGAGE ON PROPERTY DATED SEPTEMBER 30, .2002. PURPOSE: The purpose of this loan is BUILDING REFINANCE SIGNATURES: I agree to the terms of this note (including those on page 2). I have received a copy on today's date. NEMATRON CORPORATION /s/ David P. Gienapp -------------------- DAVID P. GIENAPP, Vice President CHELSEA STATE BANK /s/ Mary Lee Penny ------------------ MARY LEE PENNY, LOAN OFFICER 1 "I, " "me" or "my" means each Borrower who signs this note and each other person or legal entity (including guarantors, endorsers, and sureties) who agrees to pay this note (together referred to as "us"). "You" or "your" means the Lender and its successors and assigns. APPLICABLE LAW: The law of the state in which you are located will govern this note. Any term of this note which is contrary to applicable law will not be effective, unless the law permits you and me to agree to such a variation. If any provision of this agreement cannot be enforced according to its terms, this fact will not affect the enforceability of the remainder of this agreement. No modification of this agreement may be made without your express written consent. Time is of the essence in this agreement. PAYMENTS: Each payment I make on this note will first reduce the amount I owe you for charges which are neither interest nor principal. The remainder of each payment will then reduce accrued unpaid interest, and then unpaid principal. If you and I agree to a different application of payments, we will describe our agreement on this note. I may prepay a part of , or the entire balance of this loan without penalty, unless we specify to the contrary on this note. Any partial prepayment will not excuse or reduce any later scheduled payment until this note is paid in full (unless, when I make the prepayment, you and I agree in writing to the contrary). INTEREST: Interest accrues on the principal remaining unpaid from time to time, until paid in full. If I receive the principal in more than one advance, each advance will start to earn interest only when I receive the advance. The interest rate in effect on this note at any given time will apply to the entire principal advanced at that time. Notwithstanding anything to the contrary, I do not agree to pay and you do not intend to charge any rate of interest that is higher than the maximum rate of interest you could charge under applicable law for the extension of credit that is agreed to here (either before of after maturity). If any notice of interest accrual is sent and is in error, we mutually agree to correct it, and if you actually collect more interest than allowed by law and this agreement, you agree to refund it to me. INDEX RATE: The index will serve only as a device for setting the rate on this note. You do not guarantee by selecting this index, or the margin, that the rate on this note will be the same rate you charge on any other loans or class of loans to me or other borrowers. ACCRUAL METHOD: The amount of interest that I will pay on this loan will be calculated using the interest rate and accrual method stated on page 1 of this note. For the purpose of interest calculation, the accrual method will determine the number of days in a "year". If no accrual method is stated, then you may use any reasonable accrual method for calculating interest. POST MATURITY RATE: For purposes of deciding when the "Post Maturity Rate" (shown on page 1) applies, the term "maturity" means the date of the last scheduled payment indicated on page 1 of this note or the date you accelerate payment on the note, whichever is earlier. SINGLE ADVANCE LOANS: If this is a single advance loan, you and I expect that you will make only one advance of principal. However, you may add other amounts to the principal if you make any payments described in the "PAYMENTS BY LENDER" paragraph below. MULTIPLE ADVANCE LOANS: If this is a multiple advance loan, you and I expect that you will make more than one advance of principal. If this is closed end credit, repaying a part of the principal will not entitle me to additional credit. PAYMENTS BY LENDER: If you are authorized to pay, on my behalf, charges I am obligated to pay (such as property insurance premiums), then you may treat those payments made by you as advances and add them to the unpaid principal under this note, or you may demand immediate payment of the charges. SET-OFF: I agree that you may set off any amount due and payable under this note against any right I have to receive money from you. "Right to receive money from you" means: (1) any deposit account balance I have with you; (2) any money owed to me on an item presented to you or in your possession for collection or exchange; and (3) any repurchase agreement or other non-deposit obligation. "Any amount due and payable under this note" means the total amount of which you are entitled to demand payment under the terms of this note at the time you set off. This total includes any balance the due date for which you properly accelerate under this note. If my right to receive money from you is also owned by someone who has not agreed to pay this note, your right of set-off will apply to my interest in the obligation and to any other amounts I could withdraw on my sole request or endorsement. Your right of set-off does not apply to an account or other obligation where my rights are only as a representative. It also does not apply to any Individual Retirement Account or other tax-deferred retirement account. You will not be liable for the dishonor of any check when the dishonor occurs because you set off this debt against any of my accounts. I agree to hold you harmless from any such claims arising as a result of your exercise of your right of set-off. REAL ESTATE OR RESIDENCE SECURITY: If this note is secured by real estate or a residence that is personal property, the existence of a default and your remedies for such a default will be determined by applicable law, by the terms of any separate instrument creating the security interest and, to the extent not prohibited by law and not contrary to the terms of the separate security instrument, by the "Default" and "Remedies" paragraphs herein. 2 DEFAULT: I will be in default if any one or more of the following occur: (1) I fail to make a payment on time or in the amount due; (2) I fail to keep the property insured, if required; (3) I fail to pay, or keep any promise, on any debt or agreement I have with you; (4) any other creditor of mine attempts to collect any debt I owe him through court proceedings; (5) I die, am declared incompetent, make an assignment for the benefit of creditors, or become insolvent (either because my liabilities exceed my assets or I am unable to pay my debts as they become due); (6) I make any written statement or provide any financial information that is untrue or inaccurate at the time it was provided; (7) I do or fail to do something which causes you to believe that you will have difficulty collecting the amount I owe you; (8) any collateral securing this note is used in a manner or for an purpose which threatens confiscation by a legal authority (9) I change my name or assume an additional name without first notifying you before making such a change; (10) I fail to plant, cultivate and harvest crops in due season if I am a producer of crops; (11) any loan proceeds are used for a purpose that will contribute to excessive erosion of highly erodible land or to the conversion of wetlands to produce an agricultural commodity, as further explained in 7 C.F.R. Part 1940, Subpart G, Exhibit M. REMEDIES: If I am in default on this note you have, but are not limited to, the following remedies: (1) You man demand immediate payment of all I owe you under this note (principal, accrued unpaid interest and other accrued charges). (2) You may set off this debt against any right I have to the payment of money from you, subject to the terms of the "Set-Off" paragraph herein. (3) You may demand security, additional security, or additional parties to be obligated to pay this note as a condition for not using any other remedy. (4) You may refuse to make advances to me or allow purchases on credit by me. (5) You may use any remedy you have under state or federal law. By selecting any one or more of these remedies you do not give up your right to later use any other remedy. By waiving your right to declare an event to be a default, you do not waive your right to later consider the event as a default if it continues or happens again. COLLECTION COSTS AND ATTORNEY'S FEES: I agree to pay all costs of collection, replevin or any other or similar type of cost if I am in default. In addition, if you hire an attorney to collect this note, I also agree to pay any fee you incur with such attorney plus court costs (except where prohibited by law). To the extent permitted by the United States Bankruptcy Code, I also agree to pay the reasonable attorney's fees and costs you incur to collect this debt as awarded by any court exercising jurisdiction under the Bankruptcy Code. WAIVER: I give up my rights to require you to do certain things. I will not require you to: (1) demand payment of amounts due (presentment); (2) obtain official certification of nonpayment (protest); or (3) give notice that amounts due have not been paid (notice of dishonor). I waive any defenses I have based on suretyship or impairment of collateral. OBLIGATIONS INDEPENDENT: I understand that I must pay this note even if someone else has also agreed to pay it (by, example, signing this form or a separate guarantee or endorsement). You may sue me alone, or anyone else who is obligated on this note, or any number of us together, to collect this note. You may do so without any notice that it has not been paid (notice of dishonor). You may without notice release any party to this agreement without releasing any other party. If you give up any of your rights, with or without notice, it will not affect my duty to pay this note. Any extension of new credit to any of us, or renewal of this note by all or less than all of us will not release me from my duty to pay it. (Of course, you are entitled to only one payment in full.) I agree that you may at your option extend this note or the debt represented by this note, or any portion of the note or debt, from time to time without limit or notice and for any term without affecting my liability for payment of the note. I will not assign my obligation under this agreement without our prior written approval. CREDIT INFORMATION: I agree and authorize you to obtain credit information about me from time to time (for example, by requesting a credit report) and to report to others your credit experience with me (such as a credit reporting agency). I agree to provide you, upon request, any financial statement or information you may deem necessary. I warrant that the financial statements and information I provide to you are or will be accurate, correct and complete. NOTICE: Unless otherwise required by law, any notice to me shall be given by delivering it or by mailing it by first class mail addressed to me at my last know address. My current address is on page 1. I agree to inform you in writing of any change in my address. I will give any notice to you by mailing it first class to your address stated on page 1 of this agreement, or to any other address that you have designated. 3 EX-4 4 amended_note-opt100102.txt AMENDMENT TO OPTIMATION NOTE WITH COMPASS BANK EXHIBIT 4.1 ------------ THIS AMENDED AND RESTATED PROMISSORY NOTE AMENDS, RESTATES AND REPLACES IN ITS ENTIRETY THAT CERTAIN REVOLVING CREDIT COMMERCIAL NOTE FROM BORROWER TO COMPASS BANK IN THE ORIGINAL PRINCIPAL AMOUNT OF $450,000.00 DATED JUNE 26, 1998, AS AMENDED BY THAT CERTAIN REVOLVING CREDIT COMMERCIAL NOTE FROM BORROWER TO COMPASS BANK IN THE ORIGINAL PRINCIPAL AMOUNT OF $650,000.00 DATED JULY 9, 1999, AS AMENDED BY THAT CERTAIN REVOLVING CREDIT COMMERCIAL NOTE FROM BORROWER TO COMPASS BANK IN THE ORIGINAL PRINCIPAL AMOUNT OF $650,000.00 DATED JULY 19, 2000, AS AMENDED BY THAT CERTAIN REVOLVING CREDIT COMMERCIAL NOTE FROM BORROWER TO COMPASS BANK IN THE ORIGINAL PRINCIPAL AMOUNT OF $620,000.00 DATED JUNE 8, 2001, AS AMENDED BY THAT CERTAIN REVOLVING CREDIT COMMERCIAL NOTE FROM BORROWER TO COMPASS BANK IN THE ORIGINAL PRINCIPAL AMOUNT OF $465,000.00 DATED NOVEMBER 27, 2001, AS AMENDED BY THAT CERTAIN EXTENSION AND AMENDMENT TO PROMISSORY NOTE FROM BORROWER TO COMPASS BANK IN THE ORIGINAL PRINCIPAL AMOUNT OF $405,000.00 DATED FEBRUARY 25, 2002, AS AMENDED BY THAT CERTAIN EXTENSION AND AMENDMENT TO PROMISSORY NOTE FROM BORROWER TO COMPASS BANK IN THE ORIGINAL PRINCIPAL AMOUNT OF $385,000.00 DATED MAY 5, 2002, AS AMENDED BY THAT CERTAIN EXTENSION AND AMENDMENT TO PROMISSORY NOTE FFROM BORROWER TO COMPASS BANK IN THE ORIGINAL PRINCIPAL AMOUNT OF $385,000.00 DATED JULY 5, 2002. AMENDED AND RESTATED PROMISSORY NOTE $335,000.00 October 4, 2002 Huntsville, Alabama FOR VALUE RECEIVED, the undersigned OPTIMATION, INC., an Alabama corporation (the "Borrower"), hereby promises to pay to the order of COMPASS BANK (the "Lender"), at its office at 114 Governors Drive, Huntsville, Alabama, or at such other place as Lender may direct, in lawful money of the United States of America constituting legal tender in payment of all debts and dues, public and private, together with interest thereon calculated at the rate and in the manner set forth herein, the principal amount of THREE HUNDRED THIRTY FIVE THOUSAND NO/100 DOLLARS ($335,000.00). Payment of principal, interest charges and expenses shall be made in accordance with the following provisions: 1. Payments. Borrower promises to pay principal and interest monthly, in the amount of Fifteen Thousand and No/100 Dollars ($15,000.00) per month principal, plus interest thereon, on or before the thirtieth (30) day of each month; the first such payment shall be due and payable on the thirtieth (30) day of October, 2002. Any scheduled payment which is not paid within ten (10) days from the due date shall be subject to a late charge of five percent (5.0%) of the amount of such scheduled payment. The applicable interest rate hereunder shall be Compass Bank Prime (defined herein) plus one-half percentage points (.5%) per annum, floating throughout the term of this Note; provided, however, the applicable rate hereunder shall at no time be less than five percent (5%). The principal remaining unpaid hereunder, and all accrued interest on and all other charges hereunder, shall be due and payable in full on January 3, 2003. 2. Additional Provisions Regarding Interest. Interest on all principal amounts outstanding from time to time hereunder shall be calculated on the basis of a 360-day year applied to the actual number of days upon which principal is outstanding, by multiplying the product of the principal amount and the applicable rate set forth herein by the actual number of days elapsed, and dividing by 360. In no event shall the rate of interest calculated hereunder exceed the maximum rate allowed by law. Any principal amounts outstanding hereunder after maturity shall continue to bear interest at the rate of two percentage points in excess of "Compass Bank Prime", and calculated in the manner set forth herein, provided, however, that in no event shall the applicable interest rate be less than five percent (5%) at any time. Any change in said rate due to a change in Compass Bank Prime shall take effect on the day of such change in Compass Bank Prime occurs. "Compass Bank Prime", as used herein, is a reference rate established by the Lender for use in computing and adjusting interest, is subject to increase, decrease or change at the Lender's discretion, and is only one of the reference rates or indices that the Lender uses. The Lender may lend to others at rates of interest at, or greater or less than, Compass Bank Prime or the rate provided herein. In no event shall the rate of interest calculated hereunder exceed the maximum amount allowed by law and automatically shall be reduced to such maximum amount. Any scheduled payment of principal and/or interest which is not paid within ten (10) days of the date due shall be subject to a late charge in the amount of five percent (5.0%) of the amount of such payment. 1 3. Prepayment. There shall be no prepayment fee associated herewith. 4. Loan Documents. The indebtedness evidenced hereby is secured by, inter alia: (a) that certain Revolving Credit and Security Agreement executed between Borrower and Lender dated June 26, 1998, as amended by that certain Modification Agreement and Amendment to Loan Documents dated December 15, 1998, as amended by that certain Revolving Credit and Security Agreement dated July 9, 1999, as amended by that certain Modification Agreement and Amendment to Loan Documents dated July 19, 2000, as amended by that certain Modification Agreement and Amendment to Loan Documents dated June 8, 2001, as amended by that certain Modification Agreement and Amendment to Loan Documents dated November 27, 2001, as amended by that certain Modification Agreement and Amendment to Loan Documents dated May 5, 2002, as amended by that certain Modification Agreement and Amendment to Loan Documents dated February 25, 2002, as amended by that certain Modification Agreement and Amendment to Loan Documents dated July 5, 2002, as amended by that certain Modification Agreement and Amendment to Loan Documents dated as of the date hereof; and (b) Continuing Guaranty Agreements executed by (i) Dennis Sierk and Sheila Sierk dated as of the date hereof, and (ii) Nematron Corporation dated as of March 20, 2001; (c) UCC-1 financing statements executed by Borrower in favor of Lender; (d) any and all other documents executed in connection herewith (collectively, the "Loan Documents"). This note is included in the indebtedness referred to in the Loan Documents and is entitled to the benefits of those documents, but neither this reference to those documents nor any provisions thereof shall affect or impair the absolute and unconditional obligations of the Borrower to pay the principal of and interest of this Note when due. 5. Events of Default. Upon the occurrence of any one or more of the following events ("Events of Default"): (a) Default in the payment of the principal of or interest on this Note, as and when due and payable; (b) Failure by the Borrower or any other person or entity to observe any covenant or obligation contained in any Loan Document or in any other instrument executed in connection with or securing this Note; (c) The occurrence of any default or event of default specified in the Loan Documents, or in any other instrument executed in connection with or securing this Note; then, or at any time thereafter during the continuance of any such event, the holder may, with or without notice to the Borrower, declare this Note and indebtedness evidenced hereby to be forthwith due and payable, whereupon this Note and the indebtedness evidenced hereby shall become forthwith due and payable, both as to principal and interest, without presentment, demand, protest, or other notice of any kind, all of which are hereby expressly waived, anything contained herein or in of the Loan Documents or in any other instrument executed in connection with or securing this Note to the contrary notwithstanding. 6. Waivers. Borrower hereby waives demand, presentment for payment, notice of dishonor, protest, and notice of protest and diligence in collection or bringing suit and agrees that the holder hereof may accept partial payment, or release or exchange security or collateral, without discharging or releasing any unreleased collateral or the obligations evidenced hereby. Borrower further waives any and all rights of exemption, both as to personal and real property, under the constitution or laws of the United States, the State of Alabama or any other state. 2 7. Attorney's Fees. Borrower agrees to pay attorneys' fees and costs incurred by the holder hereof in collecting or attempting to collect this Note, whether by suit or otherwise. 8. Covenant Violation Fee. Lender reserves the right to assess and collect a fee in connection with any agreement by Lender to waive the violation of any covenant contained in this Note or any other document or agreement signed in connection with the Note or to waive or forego its rights and remedies upon the occurrence of an event of default. The foregoing statement shall not in any respect obligate Lender to waive the violation of any covenant or to forego its rights and remedies upon the occurrence of an event of default, which it may or may not do in its sole discretion, and which waiver must be in writing. 9. Miscellaneous. As used herein, the terms "Borrower", "Lender" and "holder" shall be deemed to include their respective successors, legal representatives and assigns, whether by voluntary action of the parties or by operation of law. This Note is given under the seal of all parties hereto, and it is intended that this Note is and shall constitute and have the effect of a sealed instrument according to law. This Note has been negotiated, and is being executed and delivered in Huntsville, in the State of Alabama, or if executed elsewhere, shall become effective upon the Lender's receipt and acceptance of the executed original of this Note in the State of Alabama; provided, however, that the Lender shall have no obligation to give, nor shall Borrower be entitled to receive, any notice of such acceptance for this Note to become a binding obligation of Borrower. Borrower hereby submits to jurisdiction in the State of Alabama. This Note shall be governed by and be construed in accordance with the laws of the State of Alabama. It is intended, and the Borrower and the holder hereof specifically agree, that the laws of the State of Alabama governing interest shall apply to this Note and to this transaction. This Note may not be modified except by written agreement signed by the Borrower and the holder hereof, or by their respective successors or assigns. [remainder of page left blank intentionally] 3 IN WITNESS WHEREOF, Borrower has caused this Note to be executed, sealed and delivered as of the date first set forth above. BORROWER: ATTEST: OPTIMATION, INC. By: /s/ David P. Gienapp By: /s/ Dennis Sierk --------------------------------- -------------------- David P. Gienapp, Its Secretary Dennis Sierk, Its President STATE OF ALABAMA ) COUNTY OF MADISON ) I, the undersigned, Notary Public in and for said County in said State, hereby certify that Dennis Sierk, whose name as President of OPTIMATION, INC., an Alabama corporation, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of such instrument, he, as such officer and with full authority, executed the same voluntarily for and as the act of said corporation. Given under my hand this the 30th day of October 2002. /s/ Arlene Stackhouse Notary Public My commission expires: 5-19-03 [S E A L] STATE OF MICHIGAN ) COUNTY OF WASHTENAW ) I, the undersigned, Notary Public in and for said County in said State, hereby certify that David P. Gienapp, whose name as Secretary of OPTIMATION, INC., an Alabama corporation, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of such instrument, he, as such officer and with full authority, executed the same voluntarily for and as the act of said corporation. Given under my hand this the 31st day of October 2002. /s/ Christine M. Herriman Notary Public My commission expires: 10-17-05 [S E A L] 4 EX-4 5 lasalle-nmn_amendment.txt AMENDMENT TO LASALLE LOAN AGREEMENT WITH NEMATRON EXHIBIT 4.3 ----------- October 17, 2002 CERTIFIED MAIL RETURN RECEIPT REQUESTED Nematron Corporation 5840 Interface Drive Ann Arbor, Michigan 48103 Attn: Matthew S. Galvez, President and CEO Re: Loans by LaSalle Business Credit, Inc. Dear Mr. Galvez: Reference is made to that certain Amended and Restated Loan and Security Agreement dated as of June 30, 2000, as heretofore and hereafter amended, amended and restated or otherwise modified from time to time (the "Agreement"), by and between Nematron Corporation ("Borrower") and LaSalle Business Credit, Inc. ("Lender"). Each term set out herein and not otherwise defined shall have the meaning ascribed to such term in the Agreement. By our letters to you dated October 3, 2001 and February 18, 2002, we notified you that Borrower is and remains in default (collectively, the "Defaults") under the Agreement. The Defaults have not been cured or waived. The terms of the Agreement provide that Lender may, as a result of any Event of Default, including any Default, accelerate the payment of all Liabilities. Borrower acknowledges the existence of each Default. Lender has requested that Borrower obtain alternative financing, and Borrower hereby agrees to use its best efforts to obtain such alternate financing. Borrower has therefore requested that Lender not immediately accelerate the payment of the Liabilities, and that Lender, for the moment, allow both parties to the Agreement to proceed under the terms of the Agreement. In the event Borrower and each guarantor set forth herein executes this letter and returns same to Lender on or before October 25, 2002, Lender hereby agrees to allow both parties to proceed under the terms of the Agreement (as such terms are amended herein) until further notice to Borrower, provided as follows: 1 (a) That there occurs no additional Event of Default; (b) That there occurs no material adverse change (as determined by Lender in its sole discretion) in Borrower or in its business; (c) That Borrower shall use its continuing best efforts to refinance all of the Liabilities with another lender as soon as practicable; and (d) That Borrower agrees that the Agreement is hereby amended as follows: (i) The definition of "Revolving Loan Commitment" is hereby amended and restated to read in its entirety as follows: ""Revolving Loan Commitment" shall mean One Million Five Hundred Thousand Dollars ($1,500,000)." (ii) The definition of "Total Commitment" is hereby amended and restated to read in its entirety as follows: ""Total Commitment" shall mean One Million Five Hundred Thousand Dollars ($1,500,000)." (iii)Paragraph 4 of the Agreement is hereby amended by deleting the amount "Two Million Five Hundred Thousand Dollars ($2,500,000)" and inserting the amount "Two Hundred Fifty Thousand Dollars ($250,000)" in lieu thereof. Borrower hereby (a) ratifies and affirms its obligations under the Agreement; (b) denies and waives the existence of any defenses relating to its obligations under the Agreement; and (c) waives and releases any claims or causes or action against Lender which may now or hereafter be available to it arising out of (i) the administration of the Agreement or the Other Agreements, (ii) the negotiation and execution of this letter, or (iii) any other matter pertaining to the Agreement or the Other Agreements. Each of the undersigned guarantors hereby (a) ratifies and affirms its individual and several obligations under its respective Continuing Unconditional Guaranty executed by each guarantor in favor of Lender; (b) acknowledges and confirms that each Continuing Unconditional Guaranty continues in full force and effect notwithstanding this letter; (c) denies and waives the existence of any defenses relating to any of such Continuing Unconditional Guaranties; and (d) waives and releases any claims or causes or action against Lender which may now or hereafter be available to any guarantor arising out of (i) the administration of the Agreement or the Other Agreements, (ii) negotiation and execution of this letter, or (iii) any other matter pertaining to the Agreement or the Other Agreements; provided, however, that the failure of any guarantor to execute this letter shall not release such guarantor or any other guarantor of its respective obligations under any of the Continuing Unconditional Guaranties. By this letter Lender does not waive any Default, nor any previous Events of Default about which you have been notified. This letter is being written with Lender reserving all of its rights to exercise any and all of Lender's remedies, as provided in the Agreement and in all the Other Agreements, at such time and in such manner as provided therein. Nothing herein shall be construed or interpreted as being a waiver of any of Lender's rights or remedies (as provided to Lender under the terms of the Other Agreements, the Uniform Commercial Code or otherwise), by virtue of its forbearance to date (it being understood that Lender has no obligation to continue to forbear) or extension with respect thereto. Very truly yours, LASALLE BUSINESS CREDIT, INC. By /s/ Dale P. Grzenia Dale P. Grzenia, First Vice President Accepted and agreed to this day of October, 2002. NEMATRON CORPORATION By s/s David P. Gienapp - ----------------------- Its Secretary 2 Consented and agreed to by the following guarantors of the obligations of Nematron Corporation to LaSalle Business Credit, Inc. A-OK CONTROLS ENGINEERING, INC. OPTIMATION, INC. By /s/ David P. Gienapp By /s/ David P. Gienapp Its Secretary Its Secretary Date: October 24, 2002 Date: October 24, 2002 3 EX-4 6 lasalle-aok_amendment.txt AMENDMENT TO LASALLE LOAN AGREEMENT TO A-OK EXHIBIT 4.4 ----------- October 17, 2002 CERTIFIED MAIL RETURN RECEIPT REQUESTED A-OK Controls Engineering, Inc. 4375 Giddings Road Auburn Hills, Michigan 48326 Attn: Matthew S. Galvez, President and CEO Re: Loans by LaSalle Business Credit, Inc. Dear Mr. Galvez: Reference is made to that certain Loan and Security Agreement dated as of June 30, 2000, as heretofore and hereafter amended, amended and restated or otherwise modified from time to time (the "Agreement"), by and between A-OK Controls Engineering, Inc. ("Borrower") and LaSalle Business Credit, Inc. ("Lender"). Each term set out herein and not otherwise defined shall have the meaning ascribed to such term in the Agreement. By our letters to you dated October 3, 2001 and February 18, 2002, we notified you that Borrower is and remains in default (collectively, the "Defaults") under the Agreement. The Defaults have not been cured or waived. The terms of the Agreement provide that Lender may, as a result of any Event of Default, including any Default, accelerate the payment of all Liabilities. Borrower acknowledges the existence of each Default. Lender has requested that Borrower obtain alternative financing, and Borrower hereby agrees to use its best efforts to obtain such alternate financing. Borrower has therefore requested that Lender not immediately accelerate the payment of the Liabilities, and that Lender, for the moment, allow both parties to the Agreement to proceed under the terms of the Agreement. In the event Borrower and each guarantor set forth herein executes this letter and returns same to Lender on or before October 25, 2002, Lender hereby agrees to allow both parties to proceed under the terms of the Agreement (as such terms are amended herein) until further notice to Borrower, provided as follows: 1 (a) That there occurs no additional Event of Default; (b) That there occurs no material adverse change (as determined by Lender in its sole discretion) in Borrower or in its business; (c) That Borrower shall use its continuing best efforts to refinance all of the Liabilities with another lender as soon as practicable; and (d) That Borrower agrees that the definition of "Loan Commitment" appearing in the Agreement is hereby amended and restated to read in its entirety as follows: ""Loan Commitment" shall mean One Million Dollars ($1,000,000)." Borrower hereby (a) ratifies and affirms its obligations under the Agreement; (b) denies and waives the existence of any defenses relating to its obligations under the Agreement; and (c) waives and releases any claims or causes or action against Lender which may now or hereafter be available to it arising out of (i) the administration of the Agreement or the Other Agreements, (ii) the negotiation and execution of this letter, or (iii) any other matter pertaining to the Agreement or the Other Agreements. Each of the undersigned guarantors hereby (a) ratifies and affirms its individual and several obligations under its respective Continuing Unconditional Guaranty executed by each guarantor in favor of Lender; (b) acknowledges and confirms that each Continuing Unconditional Guaranty continues in full force and effect notwithstanding this letter; (c) denies and waives the existence of any defenses relating to any of such Continuing Unconditional Guaranties; and (d) waives and releases any claims or causes or action against Lender which may now or hereafter be available to any guarantor arising out of (i) the administration of the Agreement or the Other Agreements, (ii) negotiation and execution of this letter, or (iii) any other matter pertaining to the Agreement or the Other Agreements; provided, however, that the failure of any guarantor to execute this letter shall not release such guarantor or any other guarantor of its respective obligations under any of the Continuing Unconditional Guaranties. By this letter Lender does not waive any Default, nor any previous Events of Default about which you have been notified. This letter is being written with Lender reserving all of its rights to exercise any and all of Lender's remedies, as provided in the Agreement and in all the Other Agreements, at such time and in such manner as provided therein. Nothing herein shall be construed or interpreted as being a waiver of any of Lender's rights or remedies (as provided to Lender under the terms of the Other Agreements, the Uniform Commercial Code or otherwise), by virtue of its forbearance to date (it being understood that Lender has no obligation to continue to forbear) or extension with respect thereto. Very truly yours, LASALLE BUSINESS CREDIT, INC. By s/s Dale P. Grzenia ---------------------- Dale P. Grzenia, First Vice President Accepted and agreed to this day of October, 2002. A-OK CONTROLS ENGINEERING, INC. By s/s David P. Gienapp - ----------------------- Its Secretary Consented and agreed to by the following guarantors of the obligations of A-OK Controls Engineering, Inc. to LaSalle Business Credit, Inc. NEMATRON CORPORATION OPTIMATION, INC. By /s/ David P. Gienapp By /s/ David P. Gienapp - ----------------------- ----------------------- David P. Gienapp David P. Gienapp Its Secretary Its Secretary Date: October 24, 2002 Date: October 24, 2002 2 EX-4 7 northcoast_subdebt-amend.txt AMENDMENT TO SUB DEBT AGREEMENT WITH NORTH COAST EXHIBIT 4.5 ----------- $2,000,000 ---------- As of October 28, 2002, (the "Amendment Date"), this Subordinated Promissory Note amends and restates in its entirety that certain Subordinated Promissory Note dated October 1, 2001 and that Subordinated Promissory Note dated May 3, 2002 between Nematron Corporation and North Coast Technology Investors L.P. (the "Former Note"). The Former Note shall be of no force or effect as of October 28, 2002. THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY OTHER SECURITIES LAWS. IT MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER THE SECURITIES ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO NEMATRON THAT SUCH REGISTRATION IS NOT REQUIRED. SUBORDINATED PROMISSORY NOTE $2,000,000 October 28, 2002 Ann Arbor, Michigan For value received, NEMATRON CORPORATION, a Michigan corporation (the "Company"), promises to pay to the order of NORTH COAST TECHNOLOGY INVESTORS, L.P., at 206 S. Fifth Avenue, Ann Arbor, Michigan 48104 ("North Coast"), or its permitted assigns, the principal sum of TWO MILLION DOLLARS ($2,000,000), or so much thereof as is advanced hereunder from time to time. Interest shall be payable on the unpaid principal balance of this Note, computed on the basis of actual number of days elapsed, from the date hereof at the rate of fourteen percent (14%) per annum. The principal and interest on this Note shall be paid in lawful money of the United States upon demand by the holder hereof. All payments received shall be applied first to accrued interest and the balance shall be applied to principal. North Coast shall advance to the Company up to the principal amount set forth above, from time to time upon the request of the Company, provided that each and every advance shall be made or declined in the sole discretion of North Coast, and North Coast shall have no liability to the Company for its failure or refusal to make any advance. The Company and North Coast acknowledge that all amounts due and payable are hereby expressly subordinated in right of payment to the prior payment in full of the indebtedness referenced in the Subordination Agreement, dated March 23, 2001, between North Coast and LaSalle Business Credit, Inc. Amounts borrowed under this Note may be prepaid at any time and from time to time, in whole or in part, without penalty or premium, upon at least five (5) business days prior written notice from the Company to North Coast, unless, prior to such repayment, North Coast provides notice to the Company of its intent to exercise its conversion rights provided in the sixth or seventh paragraphs of this Note. North Coast's notice of intent to exercise its conversion rights shall be effective notwithstanding the Company's notice of intent to repay. This Note shall be payable in cash or equivalent immediately available funds. 1 As security for the payment of this Note, the Company grants North Coast, its successors and assigns, a continuing security interest in all assets of the Company. In the event of an equity financing by the Company, North Coast, at North Coast's option, may convert any or all of the outstanding principal of and interest accrued on this Note into the securities offered in such financing, at the offering price per share of such financing. For purposes of this paragraph, "equity financing" means the issuance by the Company of capital stock or securities convertible into capital stock, in one or more related closings. "Equity financing" does not include options to purchase common stock issued to employees, officers or directors of, or consultants or advisors to the Company or any subsidiary pursuant to any bona fide incentive stock option plan, as may be adopted by the Company from time to time, and any stock issued upon exercise of such options. No fractional securities shall be issued upon the exercise of this conversion right and any fractional amount shall be paid in cash. Subject to the other terms and conditions of this Note, if Nematron does not complete an equity financing pursuant to which it receives 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 Series A Preferred Stock of Nematron with term and conditions consistent with those listed in Schedule A ("Series A Preferred") beginning on September 1, 2002, upon at least three (3) business days prior written notice from North Coast to Nematron and prior to the payment of this Note in full (the "Preferred Stock Conversion Option"). Nematron shall provide to North Coast at least five (5) business days prior written notice before making any payments under the Note. The number of shares of Series A Preferred issuable upon exercise of the Preferred Stock Conversion Option shall be equal to (x) the sum of the principal and interest then due and payable under this Note, divided by (y) $0.10. The proceeds of advances to the Company shall be used only for product development, expansion of marketing and sales activities and to fund working capital (including the repayment of the Company's operating line of credit). Upon the Company's draw down of amounts under this Note, North Coast is entitled to receive warrants to purchase shares of the Company's Common Stock, no par value, in an amount and at a price to be determined by mutual agreement between the parties and under the same terms as set forth in a certain Warrant Agreement between the Company and North Coast dated March 23, 2001. The warrant exercise price shall be $0.10 per share and the number of shares shall equal 20% of the amount advanced under this note divided by $0.10. THE COMPANY AND THE NORTH COAST, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT EITHER OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF THIS NOTE, OR ANY COURSE OF CONDUCT, DEALING, STATEMENT (WHETHER ORAL OR WRITTEN) OR ACTIONS OF EITHER OF THEM. NEITHER THE COMPANY NOR THE NORTH COAST SHALL SEEK TO CONSOLIDATE, BY COUNTERCLAIM OR OTHERWISE, ANY ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. Nematron hereby waives demand, presentment, protest, dishonor and notice of dishonor in connection with this Note. In the event any action is taken to collect or enforce the indebtedness evidenced by this Note or any part thereof, the undersigned agrees to pay, in addition to the principal and interest due and payable hereon, all reasonable costs of collecting this Note, including reasonable attorneys' fees and expenses. 2 This Note may not be sold, assigned or otherwise transferred without the prior written consent of the Company, which consent shall not be unreasonably withheld. This Note is made under, and shall be governed by and construed in accordance with, the laws of the State of Michigan as to notes made and performed entirely within such State and without giving effect to choice of law principles of such State. Notwithstanding any provision in this Note to the contrary, the Company shall not be required to issue any other securities if such issuance would constitute a violation of any applicable Federal or state securities law or any other law or regulation. NEMATRON CORPORATION ACCEPTED AND AGREED: /s/ David P. Gienapp North Coast Technology Investors, LP -------------------- ------------------------------------ By: David P. Gienapp, Secretary By: /s/ Hugo Braun ------------------ Name: Hugo Braun Principal Business Addresses, Telephone and Fax Numbers: 5840 Interface Drive 206 South Fifth Avenue, Suite 550 Ann Arbor, Michigan 48103 Ann Arbor, MI 48404 (734) 214-2128 (telephone) (734) 662-7667 (telephone) (734) 994-8170 (fax) (734) 662-6261 (fax) 3 Summary of Terms Nematron Series A Preferred Stock Dividends: No dividends will be required to be paid by Nematron (the "Company"). If any dividends are paid on the Company's common stock ("Common"), the holders of the Series A Preferred shall be entitled to receive dividends in preference to any dividend on the Common in an amount per share equal to or greater than any dividend paid on the Common. 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 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 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 at the initial conversion rate of 1:1. The conversion rates shall be subject from time to time to antidilution adjustments as set forth below. Voting Rights: The holder of each share of Series A Preferred shall have the right to that number votes equal to the number of shares of Common issuable upon conversion of the Series A Preferred. The Series A Preferred shall vote with Common 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 in the election of directors. Protective Provisions: Consent of a majority in interest of the Series A Preferred will be required to (a) purchase or redeem any Common 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, (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 Articles or Incorporation to change the rights, preferences, privileges or limitations of any Preferred Stock. Antidilution: The conversion price for the Series A Preferred shall be subject to proportional antidilution protection for stock splits, stock dividends, etc. In the event that the Company issues additional shares of Common or Common equivalents (other than shares issues to officers or employees of the Company pursuant to plans approved by the Company's board of directors) at a purchase price less than the applicable Series A Preferred conversion price, the Series A Preferred conversion price shall be adjusted to that same lower purchase price. Rights of First Refusal: Each holder of Series A Preferred shall have the right to participate in any Company financing up to its pro-rata ownership. Information Rights: Holders of Series A Preferred Stock shall have the right to receive annual and quarterly financial statements and an annual business plan. 4 EX-99 8 officer_certifications.txt CEO AND CFO CERTIFICATIONS EXHIBIT 99.1 ------------ Nematron Corporation Certification of CEO and CFO Pursuant to 18 U.S.C.Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-QSB of Nematron Corporation (the "Company") for the quarterly period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Matthew S. Galvez, as Chief Executive Officer of the Company, and David P. Gienapp, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Matthew S. Galvez - --------------------- Name: Matthew S. Galvez Title: Chief Executive Officer Date: November 12, 2002 /s/ David P. Gienapp - -------------------- Name: David P. Gienapp Title: Executive Vice President, Finance and Chief Financial Officer Date: November 12, 2002 This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----