-----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, HyrJERUF7bNySzvohdKUnU6F1/E4tz/eCru0IH7RYr7GAYftrbTYdX98NVPy/RuO U5uG8wA2g6dyKVX6aGLuXQ== 0000892832-03-000045.txt : 20031113 0000892832-03-000045.hdr.sgml : 20031113 20031113170847 ACCESSION NUMBER: 0000892832-03-000045 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 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: 03999019 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_09302003.txt FORM 10-QSB AS OF 09-30-03 ================================================================================ 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, 2003 [ ] 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 (State or other jurisdiction (I.R.S. Employer Identification No.) of 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: 15,744,472 outstanding as of November 12, 2003 Transitional Small Business Disclosure Format: [ ] YES [X] NO ================================================================================ PART I -- FINANCIAL INFORMATION Item 1. Financial Statements Nematron Corporation and Subsidiaries Consolidated Condensed Balance Sheets September 30, 2003 and December 31, 2002 September 30, 2003 December 31, (Unaudited) 2002 ----------- ------------ Assets ------ Current assets: Cash and cash equivalents $123,835 $103,802 Accounts receivable, net of allowance for doubtful accounts of $80,000 at September 30, 2003 and $75,000 at at December 31, 2002 2,739,952 2,342,400 Inventories (Note3) 1,528,500 1,653,844 Prepaid expenses and other current assets 223,260 172,550 ---------- ----------- Total current assets 4,615,547 4,272,596 Property and equipment, net of accumulated depreciation of $7,768,202 at September 30, 2003 and $7,563,474 at December 31, 2002 1,647,320 1,850,392 Goodwill, net of amortization (Note 4) 2,922,122 2,922,122 Intangible assets (Note 5): Software and related development costs, net of amortization 488,088 574,407 Other intangible assets, net of amortization 254,539 404,159 ---------- ----------- Total assets $9,927,616 $10,023,676 ========== =========== Liabilities and Shareholders' Deficit Current liabilities: Notes payable under lines of credit (Note 6) $ 1,625,426 $ 1,397,317 Accounts payable 1,547,156 1,582,958 Deferred revenue and other accrued expenses 2,371,802 1,748,594 Subordinated debt (Note 7) 4,511,500 3,179,000 Current maturities of long-term debt (Note 8) 172,479 169,255 ---------- ----------- Total current liabilities 10,228,363 8,077,124 Long-term debt, less current maturities (Note 8) 2,382,659 2,522,740 ---------- ----------- Total liabilities 12,611,022 10,599,864 Shareholders' deficit: Common stock, no par value, 30,000,000 shares authorized, 15,744,472 shares outstanding 33,343,288 33,246,346 Accumulated comprehensive income (1,013) 25,645 Accumulated deficit (36,025,681) (33,848,179) ---------- ----------- Total shareholders' deficit (2,683,406) (576,188) ---------- ----------- Total liabilities and shareholders deficit $9,927,616 $10,023,676 ========== =========== 2 Nematron Corporation and Subsidiaries Consolidated Condensed Statements of Operations For The Three-and Nine-Month Periods Ended September 30, 2003 and 2002
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ---------------------------- --------------------------- 2003 2002 2003 2002 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ----------- ----------- ----------- ----------- Net revenues $3,347,276 $3,450,069 $9,770,157 $11,586,507 Cost of revenues 2,535,259 2,628,741 7,554,888 8,545,049 --------- --------- ----------- ----------- Gross profit 812,017 821,328 2,215,269 3,041,458 Operating expenses: Software development costs 143,609 190,176 438,033 546,692 Selling, general and administrative 1,076,424 1,229,776 3,190,783 3,774,827 --------- --------- ----------- ----------- Total operating expenses 1,220,033 1,419,952 3,628,816 4,321,519 --------- --------- ----------- ----------- Operating loss (408,016) (598,624) (1,413,547) (1,280,061) Other income (expense): Interest expense (303,362) (233,437) (779,459) (731,215) Sundry income 4,611 (5,254) 15,510 19,851 --------- --------- ----------- ----------- Total other income (expense) (298,751) (238,691) (763,949) (711,364) --------- --------- ----------- ----------- Loss before income taxes (706,767) (837,315) (2,177,496) (1,991,425) Income taxes (Note 7) -0- -0- -0- -0- --------- --------- ----------- ----------- Net loss $(706,767) $(837,315) $(2,177,496) $(1,991,425) ========= ========= =========== =========== Per share amounts (Note 8): Basic and diluted $(0.04) $(0.05) $(0.14) $(0.13) ========= ========= =========== =========== Weighted average shares outstanding (Note 8): Basic and diluted 15,744,472 15,744,472 15,744,472 15,744,472 ========== ========== ========== ==========
Nematron Corporation and Subsidiaries Consolidated Condensed Statements of Comprehensive Loss For The Three-and Nine-Month Periods Ended September 30, 2003 and 2002
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ---------------------------- --------------------------- 2003 2002 2003 2002 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ----------- ----------- ----------- ----------- Net loss $(706,767) $(837,315) $(2,177,496) $(1,991,425) Other comprehensive income (loss) - equity adjustment from foreign translation 5,501) 6,046 (26,658) 20,543 --------- --------- ----------- ----------- Comprehensive loss $(712,268) $(831,269) $(2,204,154) $(1,970,882) ========= ========= =========== ===========
3 Nematron Corporation and Subsidiaries Consolidated Condensed Statements of Cash Flows For The Nine-Month Periods Ended September 30, 2003 and 2002 Nine Months Ended Sept. 30, --------------------------- 2003 2002 (Unaudited) (Unaudited) ----------- ----------- Cash flows from operating activities: Net loss $(2,177,496) $(1,991,425) Adjustments to reconcile net loss to net cash flows used in operating activities: Depreciation 215,241 326,671 Amortization (Notes 4 and 5) 235,939 377,169 Non-cash interest expense for beneficial conversion feature (Note 7) 96,942 192,257 Loss (gain) on disposal of equipment (948) 17,514 Changes in assets and liabilities that provided (used) cash: Accounts receivable (397,552) 657,155 Inventories 125,344 162,615 Prepaid expenses and other current assets (50,710) (5,982) Accounts payable (35,798) 147,985 Deferred revenue and accrued expenses 623,204 (399,858) --------- -------- Net cash used in operating activities (1,365,834) (515,899) Cash flows from investing activities: Additions to property and equipment (14,051) (91,328) Proceeds from disposals of property and equipment 2,824 1,253 --------- -------- Net cash used in investing activities (11,227) (90,075) Cash flows from financing activities: Proceeds from long-term debt agreement - 2,700,000 Proceeds from issuance of subordinated notes and warrants (Note 7) 1,332,500 1,424,000 Increase (decrease) in notes payable under lines of credit 228,109 (680,446) Payments of long-term debt (136,857) (2,959,469) Payment of deferred financing fees - (33,287) --------- -------- Net cash provided by (used in) financing activities 1,423,752 450,798 Foreign currency translation effect (26,658) 20,543 --------- -------- Net increase (decrease) in cash 20,033 (134,633) Cash at beginning of period 103,802 291,726 --------- -------- Cash at end of period $ 123,835 $157,093 ========= ======== Supplemental disclosures of cash flow information: Cash paid for interest $272,811 $341,973 Cash paid for income taxes - - 4 Nematron Corporation and Subsidiaries Notes To Consolidated Condensed Financial Statements For The Three- and Nine-Month Periods Ended September 30, 2003 and 2002 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. 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 Commissio'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-month and nine month periods ended September 30, 2003 and 2002 are not necessarily indicative of the results to be expected for the full year. Recent Accounting Pronouncements - -------------------------------- In May 2003, the Financial Accounting Standards Board (FASB) issued Statement 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not impact the Company's financial position. Note 2 - Inventories Inventories consist of the following at September 30, 2003 and December 31, 2002: September 30, December 31, 2003 2002 ----------- ----------- Purchased parts and accessories $1,012,654 $1,085,811 Work in process 243,873 247,730 Finished goods, demo units and service stock 271,973 320,303 ---------- ---------- Total Inventories $1,528,500 $1,653,844 ========== ========== 5 Note 3 - Goodwill Goodwill was recorded in connection with the Companys acquisition of other entities during the years 1995 through 2001, and prior to January 1, 2002, the Company was amortizing goodwill over periods ranging from fifteen to twenty years. Effective with the adoption of FASB Statement No. 142, Goodwill and Other Intangible Assets, that the Company adopted on January 1, 2002, the Company ceased amortizing goodwill in accordance with provisions of the pronouncement. However, goodwill is subject to certain impairment tests at least annually. Note 4 - Software and Related Development Costs Certain computer software development costs, primarily salaries, wages and other payroll costs, and purchased software technology had been capitalized prior to January 1, 2002. Capitalization of computer software development costs began upon establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized computer software development costs required considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future gross revenues, estimated economic life, and changes in software and hardware technology. The Company annually reviews the recoverability of capitalized software costs based on estimated cash flows. Software costs are written off at the time a determination has been made that the amounts are not recoverable. Amortization of capitalized computer software development costs is provided on a product-by-product basis using the greater of the amount computed using (a) the ratio that current gross revenues for each product bear to the total of current and anticipated future gross revenues for that product, or (b) the straight-line method over the remaining estimated economic lives of the respective products, ranging from two to five years. A summary of capitalized software and related development costs as of September 30, 2003 is as follows: Balance, January 1, 2003 $574,407 Additions -- Amortization (86,319) -------- Total Capitalized Software $488,088 ======== Note 5 - Other Intangible Assets Intangible assets, which consist primarily of acquired intangible assets, patent costs and deferred financing charges, are carried at cost less accumulated amortization, which is calculated on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives of the assets range from three to ten years. The carrying value of intangible assets is periodically reviewed, and impairments are recognized when the expected future cash flows derived from such intangible assets are less than their carrying value. A summary of activity in the intangible asset account as of September 30, 2003 is as follows: Balance, January 1, 2003 $404,159 Additions -- Amortization (149,620) -------- Total Other Intangible Assets $254,539 ======== 6 Note 6 - Notes Payable Under Credit Lines The Company and its subsidiary, A-OK Controls, were parties to two loan and security agreements (the "Agreements") with LaSalle Business Credit, Inc. a Wisconsin-based bank ("LBCI"). The Agreements, as amended through July 15 2003, provided for a total of $1,225,000 as of June 30, 2003 and $900,000 beginning July 15 through July 31, 2003 when the facility was terminated. Nematron repaid a total of $500,000 of the amounts it had borrowed under the line of credit facilities as of July 15, 2003 and repaid the remaining amounts on July 31, 2003. These funds were borrowed under a promissory note from North Coast Technology Investors, LLP (the "Promissory Note"). Mr. Hugo Braun, a former director of the Company, is a partner of North Coast. Terms of the Promissory Note, under which the Company began borrowing on July 15, 2003, provide for a maximum facility of $1,700,000 payable on demand. The interest rate on amounts borrowed funds is 9.0% per annum. Borrowings under the Promissory Note, which total $1,516,676 as of September 30, 2003, are collateralized by substantially all assets of the Company and a second position on the mortgage on the Company's Ann Arbor facility. The Company's wholly owned subsidiary, Optimation, is party to a loan and security agreement with Compass Bank, an Alabama-based bank (the "Optimation Loan Agreement"). The Company and Compass Bank have been renewing the Optimation Loan Agreement on consecutive 90 to 180 day revolving bases since the Company acquired Optimation in March 2001. The Optimation Loan Agreement, last amended as of October 3, 2003, provides for a total line of credit of $108,750 that reduces in amount with all principal repayments made (the "Optimation credit facility"). The amount available under the Optimation credit facility is limited by a borrowing formula that allows for advances up to a maximum of the sum of a specified percentage of eligible accounts receivable and a specified amount of inventory. Amounts borrowed under the Optimation line of credit facility total $108,750 at September 30, 2003, and such borrowings bear interest at the prime rate plus .50% (5.0% effective rate at September 30, 2003), but not less than 5.0% per annum. The Optimation Loan Agreement requires monthly repayments of $15,000 from October 2003 to March 2004 and a final payment of $18,750 on April 30, 2004 at which time the loan will be repaid in its entirety. The Optimation Loan Agreement prohibits the transfer of funds from Optimation to the parent company except for customary inter-company cost reimbursements. The Optimation line of credit is collateralized by substantially all assets of Optimation and a guaranty by Nematron. 7 Note 7 - Subordinated Debt Subordinated debt consists of the following:
September 30, December 31, 2003 2002 ---- ---- Convertible subordinated promissory notes, interest at 10% per annum, due August 31, 2001. Accrued interest and the principal of the note may be converted into common stock at the lower of $0.09 per share or the lowest price of the underlying common stock during the period the notes are outstanding. $1,200,000 $1,200,000 Convertible subordinated promissory notes, interest at 8% per annum, due October 15, 2002. The notes may be converted into preferred stock during the period the notes are outstanding, and the terms of the preferred stock, if issued, would allow the holders to convert the preferred stock into common stock on a one-for-one basis. 200,000 200,000 Convertible subordinated promissory notes, interest at 14% per annum, due on demand. The notes may be converted into preferred stock during the period the notes are outstanding, and the terms of the preferred stock, if issued, would allow the holders to convert the preferred stock into common stock on a one-for-one basis. 3,111,500 1,779,000 ---------- ---------- Total $4,511,500 $3,179,000 ========== ==========
The 10% Convertible Subordinated Promissory Notes - ------------------------------------------------- The 10% convertible subordinated notes due August 31, 2001 (the "10% Notes") included detachable warrants. The warrants, which are non-assignable, initially allowed the holders to purchase Common Stock at $0.30 per share (the "Per Share Warrant Price") at any time until March 31, 2006 (the "Warrants"). If at any time prior to the exercise of the Warrants the daily closing price of the Common Stock, as traded on the American Stock Exchange, 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. As the lowest price per share has been $0.05, the Per Share Warrant Price has been adjusted to that amount. The 8% Subordinated Promissory Notes - ------------------------------------ The 8% subordinated promissory notes due October 15, 2002 (the "8% Notes") included detachable warrants. The warrants, which are non-assignable, initially allowed the 8% Notes holders to purchase Common Stock at $0.22 per share (the "Per Share Warrant Price) at any time until March 31, 2007 (the "Warrants"). The Company did not repay the 8% Notes when due and in connection with the noteholders' forbearance, the conversion feature was modified to allow conversion into the same securities and at the same price as that set forth in the 14% Notes described below. The 14% Subordinated Promissory Notes - ------------------------------------- The 14% subordinated promissory notes due on demand (the "14% Notes") were issued pursuant to an agreement initially dated in October 2001 and modified in March and October 2002. The modified agreement allows the Company to draw up to $3 million upon request and upon approval by the 14% Note holder upon its sole discretion. In the event of any equity financing by the Company, the 14% Note holder may convert any or all of the outstanding principal of the 14% Note and accrued interest thereon into the securities offered in such financing at the offering price per share. The modified agreement further provides that the 8 principal and accrued interest payable under the 14% Note may be converted in whole or part into either shares of Common Stock or shares of Series A Preferred Shares beginning on September 1, 2002 at $0.10 per share. Provisions of the Series A Preferred Shares include: a) participation in dividends, if any, with the Common Stock shareholders; b) a liquidation preference up to the initial purchase price of the Series A Preferred Shares; c) a conversion feature allowing conversion into Common Stock on a one-to-one basis; d) full voting powers; e) the right to elect one person to the Board of Directors; f) the consent of a majority in interest of the Series A Preferred will be required to (i) purchase or redeem any Common or Preferred Stock, (ii) authorize or issue any senior or parity securities, (iii) declare or pay dividends on or make any distribution on account of the Common Stock, (iv) merge, consolidate or sell or assign all or substantially all of the Company's assets, (v) increase or decrease authorized Preferred Stock and (vi) amend Articles or Incorporation to change the rights, preferences, privileges or limitations of any Preferred Stock; g) the conversion price for the Series A Preferred shall be subject to proportional antidilution protection for stock splits, stock dividends, etc. and in the event that the Company issues additional shares of Common Stock or Common Stock equivalents (other than shares issues to officers or employees of the Company pursuant to plans approved by the Company's board of directors) at a purchase price less than the applicable Series A Preferred conversion price, the Series A Preferred Stock conversion price shall be adjusted to that same lower purchase price; and h) each holder of Series A Preferred Stock shall have the right to participate in any Company financing up to its pro-rata ownership. The 14% Notes sold included detachable warrants. The warrants, which are non-assignable, initially allowed the holders to purchase Common Stock at $0.10 per share (the "Per Share Warrant Price") in an amount of 20% of the principal of the 14% Notes and accrued interest thereon for a period of five years from the date of the advance (the "Warrants"). If at any time prior to the exercise of the Warrants the daily closing price of the Common Stock, as traded on the American Stock Exchange, 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. As the lowest price per share has been $0.05, the Per Share Warrant Price has been adjusted to that amount. In connection with the October 2002 modification the securities into which the Warrants could be converted were allowed to be converted into either Series A Preferred Stock as described above in addition to Common Stock. Related Party Notes and Accrued Interest - ---------------------------------------- A total of $750,000 of the 10% Notes and all of the 8% Notes and 14% Notes were issued to individuals or affiliates who were members of the Board of Directors at the date of issuance. On July 31, 2003, Mr. Hugo Braun, a partner of North Coast, resigned as a Board member. At September 30, 2003, a total of $756,698 of interest has been accrued for convertible subordinated promissory notes, including $643,739 related to notes due to related parties. Note 8 - Long-Term Debt Long-term debt includes the following debt instruments at September 30, 2003 and December 31, 2002: September 30, December 31, 2003 2002 ---- ---- Variable rate term loan payable to a bank, interest at prime plus 3.5% per annum (7.5% effective rate at September 30, 2003), payable in monthly installments of $31,000 through October 2005, at which time the remaining principal and interest is due. The term loan is collateralized by a mortgage on the Ann Arbor facility. $2,536,044 $2,663,056 Other notes, secured by equipment 19,094 28,939 Total long-term debt 2,555,138 2,691,995 Less current maturities (172,479) (169,255) ---------- ---------- Long-term debt, less current maturities $2,382,659 $2,522,740 ========== ========== 9 Note 9 - Income Taxes The Company has net operating loss carryforwards ("NOLs") of approximately $26.9 million as of December 31, 2002 that may be applied against future taxable income. The NOLs expire in varying amounts from 2004 and through 2022. 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 - Stock Based Compensation The Company has stock-based employee and director compensation plans, which are described more fully in Note 11 to the Company's December 31, 2002 financial statements. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net loss, as all options granted under those plans had an exercise price greater than or equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. Three Months Ended Sept. 30, ---------------------------- 2003 2002 ---- ---- Net loss, as reported $(706,767) $(837,315) Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of tax (26,714) (54,787) --------- --------- Pro forma net loss $(733,481) $(892,102) ========= ========= Loss per share: Basic and diluted, as reported $(0.04) $(0.05) Basic and diluted, pro forma $(0.05) $(0.06) Nine Months Ended Sept. 30, --------------------------- 2003 2002 ---- ---- Net loss, as reported $(2,177,496) $(1,991,425) Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of tax (126,671) (188,540) ----------- ----------- Pro forma net loss $(2,304,167) $(2,179,965) =========== =========== Loss per share: Basic and diluted, as reported $(0.14) $(0.13) Basic and diluted, pro forma $(0.15) $(0.14) Note 11 - Loss Per Share The weighted average shares outstanding used in computing loss per share were 15,744,472 for the three- and nine-month periods ended September 30, 2003 and 2002. 10 For the three- and nine-month periods ended September 30, 2003 and 2002, outstanding options and warrants were not included in the computation of diluted loss per share because the inclusion of such securities is antidilutive. Information relative to the excluded options and warrants is as follows: Outstanding Options Outstanding Warrants ------------------- -------------------- Expiration Expiration Quarter Ended Amount Dates Amount Dates ------------- ------ ----- ------ ----- September 30, 2003 1,795,850 2005 to 2011 7,423,000 2006 to 2008 September 30, 2002 2,162,942 2003 to 2011 2,286,882 2002 to 2006 Nine Months Ended ----------------- September 30, 2003 1,795,850 2005 to 2011 7,423,000 2006 to 2008 September 30, 2002 2,162,942 2003 to 2011 1,887,822 2002 to 2006 11 Item 2. Management's Discussion and Analysis of Results of Operations Three- and Nine Month Periods Ended September 30, 2003 Compared With The Three- and Nine-Month Periods Ended September 30, 2002 - ------------------------------------------------------ Net revenues for the three- and nine-month periods ended September 30, 2003 decreased $103,000 (3.0%) and $1,816,000 (15.7%), respectively, to $3,347,000 and $9,770,000, respectively, compared to the same periods last year. The net revenue decrease in the three-month period ended September 30, 2003 compared to the prior year period results from lower sales of all product lines except bundled Industrial Control Computers ("ICCs"), which increased 416.6% and application services which increased 12.0%. The net revenue decrease in the nine-month period ended September 30, 2003 compared to the prior year period results from lower sales of all product lines except bundled ICCs, which increased 229.9%. Generally, revenues from non-bundled ICCs and other hardware control products, system integration services, repair services and software licenses for the current periods ended September 30, 2003 were below the prior year periods as customers have continued to restrict their capital spending. In addition, revenues from software licenses in the nine-month period ended September 30, 2002 included a significant sale of software licenses to one customer/end user pursuant to a program that was not extended by the customer beyond 2002. Finally, revenues from system integration services in the nine-month period ended September 30, 2002 included revenue recognized from one customer for certain application services performed in 2001 and 2000, the revenue from which was previously not recorded pending certainty of collection. Management expects that net revenues for the last three months of 2003 will be comparable to the year earlier period based on the current order rate and scheduled deliveries. Gross profit for the three- and nine-month periods ended September 30, 2003 decreased $9,000 (1.1%) and $826,000 (27.2%), respectively, to $812,000 and $2,215,000, 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, 2003 was 24.3% and 22.7% respectively, compared to 23.8% and 26.2% in the same periods last year. The increase in gross profit percentage in the three-month period ended September 30, 2003 results from lower material costs, lower software amortization costs and lower personnel costs in the current period compared to the year ago period. The decrease in gross profit percentage in the nine-month period ended September 30, 2003 results primarily from the effect of the profit margin on the FloPro license sold in the 2002 nine-month period and the profit margin from the revenue recorded from the system integration services for which the costs were incurred in 2001 and prior periods, as discussed in the first paragraph above. Management expects that gross profit margins will remain relatively constant with the margin realized in the third quarter of 2003 as the mix of sales in the remaining quarter of 2003 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 development costs for the three- and nine-month periods ended September 30, 2003 decreased $47,000 (24.5%) and $109,000 (19.9%), respectively, to $144,000 and $438,000, respectively, compared to the same periods last year. The decreases are attributable to smaller development staffs and lower overhead and other fixed costs. Management expects that product development expenses will not increase in the remaining quarter of 2003. Selling, general and administrative expenses for the three- and nine-month periods ended September 30, 2003 decreased $153,000 (12.5%) and $584,000 (15.5%) to $1,076,000 and $3,191,000, respectively, compared to the comparable periods last year. The decreases result primarily from more efficient marketing and sales initiatives during the current periods compared to the comparable periods last year and the effects of cost reduction initiatives implemented over the last two years. Management expects that selling, general and administrative expenses will increase moderately in the remaining quarter of 2003 because of an expansion of its marketing and sales initiatives compared to current activities. Interest expense for the three- and nine-month periods ended September 30, 2003 increased $70,000 (30.0%) and $48,000 (6.6%), respectively, to $303,000 and $779,000, respectively, compared to the comparable periods last year. Interest expense for the three- and nine-month periods ended September 30, 2003 includes 12 $60,000 and $97,000, respectively, of non-cash interest expense related to the beneficial conversion feature of warrants sold in 2003 wherein the exercise price of the warrants was below the market price of the common stock into which the warrants may be converted. The sale of the warrants and convertible subordinated debt raised $1,322,500. Interest expense for the three- and nine-month periods ended September 30, 2002 includes $39,000 and $192,000, respectively, of non-cash interest expense related to the beneficial conversion feature of warrants sold in 2002. Absent the non-cash charges for the beneficial conversion features described above, interest expense for the three- and nine-month periods ended September 30, 2003 would have increased $49,000 and $143,000, respectively, compared to the comparable 2002 periods, resulting from higher borrowing levels in 2003 compared to 2002. Management expects that interest expense will increase in the remaining quarter of 2003 because of projected higher borrowing levels. Sundry income was not significant in any of the periods reported herein. Liquidity and Capital Resources - ------------------------------- Primary sources of liquidity are advances under subordinated debt agreements, the Optimation line of credit and the North Coast Promissory Note. As of September 30, 2003, the Company had borrowed $108,750 under its Optimation line of credit and $1,516,676 under the $1,700,000 Promissory Note to North Coast. Subsequent to the end of the quarter, the maximum amount of borrowings under the North Coast Promissory Note was increased to $1,800,000. The Company has additional borrowing capacity under the North Coast Promissory Note, as amended through October 30, 2003, of approximately $283,000. The Company's operations used $1,366,000 in cash during the first nine months of 2003 as a result of the net loss and the effects of changes in working capital and the noncash depreciation, amortization and interest charges. During the first nine months of 2003, the Company also used $14,000 for property additions, $137,000 for payments of long-term debt and increased its borrowings under its lines of credit by $228,000. Primary sources of cash in the period were $1,332,500 from proceeds from sales of subordinated promissory notes and warrants. Management believes that the Company will incur net cash losses during the last quarter even if it continues to defer payment of the principal amount of subordinated debt and the accrued interest thereon. Based upon this projection, management believes that the Company will need to borrow additional amounts on its North Coast line of credit to sustain operations. In the short term, in addition to having to fund its projected net cash losses over the next quarter, the Company will be required to repay term debt of approximately $18,000 per month, plus interest. Additionally, all of the subordinated debt, $4,311,500 as of September 30, 2003, plus accrued interest thereon is due currently. The Company has filed a preliminary proxy statement with the Securities and Exchange Commission seeking shareholder approval to sell substantially all of the assets of the Company to its subordinated debt lenders (the "Purchaser') who will also assume the Company's liabilities. The Board of Directors has approved and is recommending the sale of substantially all of the Company's tangible and intangible assets, including its real estate, accounts, equipment, intellectual property, inventory, goodwill, and other intangibles (the "Net Asset Sale") to the Purchaser. The Net Asset Sale will also include the assumption by Purchaser of all of the Company's liabilities, including the Company's subordinated debt and convertible subordinated notes. The Net Asset Sale would be completed as soon as practical after approval of the transaction by the Company's shareholders and the negotiation and execution of a satisfactory Asset Purchase Agreement, but in any event, no later than December 31, 2003 (the "Agreement"). The total consideration for the Net Asset Sale will be equal to or greater than the total amount of all of the Company's liabilities. As of September 30, 2003, the Company's liabilities were in the amount of $12,611,000, which includes $4,511,500 of subordinated debt. This price would exceed the total value of the Company's assets, when valued at book value, by approximately $2,683,000 which is equal to the Company's shareholder's deficit as of September 30, 2003. If consummated, the Net Asset Sale will result in the Company remaining a public company owned by its existing shareholders. The Company will not, however, own any assets except the $30,000 in cash the Company expects to retain and certain intangible assets consisting of the Company's net operating loss carry forward and its value as a public shell entity. The Company will not, however, have any liabilities, all of them will be assumed by the Purchaser. In effect, the 13 Company will become a public shell with no established business. It is anticipated that all of the Company's employees will be hired by the Purchaser to carry on the Company's existing businesses. The near term financial projections prepared by management of the Company, based on known trends, backlog, order rates and revenue and expense projections, indicate that the Company will require additional capital infusions for the foreseeable future until operations become cash positive, and the Company will require continuing forbearance by all of its lenders to further delay the repayment of the Company's debt. Though management is optimistic that operations can become cash positive within the next twelve months, management does not believe it is possible to project the exact timing of the Company's cash needs. Despite the best efforts of the Company's management, no lender or investor has been identified that is willing to fund the Company's ongoing cash requirements within the current structure of the Company. The sole providers of capital, other than senior debt, to the Company during the past three years have been the holders of the Company's subordinated debt. The holders of the Company's subordinated debt have indicated to the Company that they are not willing to provide further financing to the Company within the current structure of the Company. To avoid dilution of the existing shareholders and the possible foreclosure on the Company's assets, the Company would have to repay the subordinated debt. Funds to make this payment would be required from other equity or debt sources, but despite the Company's efforts over the last three years, management has been unable to attract investor interest. All of the capital that has been raised over the last three years has been secured solely from the subordinated noteholders. Management estimates that the Company will not generate funds internally through operations in the foreseeable future to repay the subordinated debt and accrued interest thereon. Management can offer no assurance that the shareholders will approve the Net Asset Sale. If the efforts to finalize the Net Asset Sale 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 operations, sell product lines or sell the Company to a third party. Uncertainties Relating to Forward Looking Statements - ---------------------------------------------------- "Item 2. Management's Discussion and Analysis 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: |X| Uncertainties discussed elsewhere in "Management's Discussion and Analysis of Operation" above; |X| The approval by the shareholders of the Net Asset Sale and the ability of the Company to finalize the Net Asset Sale; |X| The potential inability to raise additional equity or debt financing in a sufficient amount to sustain operations and allow management to execute its strategies; |X| Continued forbearance by the subordinated debt holders in exercising their right to demand immediate payment of all subordinated debt and accrued interest thereon; |X| Continued cooperation of the Company's vendors in accepting payment beyond such vendors' normal payment terms; |X| A further decline of economic conditions in general and conditions in the automotive manufacturing industry in particular; |X| Delays in introduction of planned hardware and software product offerings; |X| Reductions in product life cycles; 14 |X| Changes in customer requirements or reductions in demand for the Company's products and services; |X| The inability of the Company to successfully implement its strategy to participate effectively in the industrial automation market migration from closed architecture PLCs to open architecture PC-based solutions or to effectively change its corporate strategy to capitalize on market changes. Item 3. Controls and Procedures Our Chief Executive Officer and Chief Accounting 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. PART II - OTHER INFORMATION 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, 2003, the Company filed a report on Form 8-K concerning its press release dated August 19, 2003 concerning its second quarter ended June 30, 2003 operating results. 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 November 13, 2003 /s/ Matthew S. Galvez - ----------------- ------------------------------------------ Date Matthew S. Galvez, Chief Executive Officer November 13, 2003 /s/ Tina M. Raiford - ----------------- ------------------------------------------ Date Tina M. Raiford, Controller 15 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 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 report; 3. Based on my knowledge, the financial statements and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 Date: November 13, 2003 /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 as an exhibit. 16 CERTIFICATION Pursuant to Section 302 of the Sarbanes Oxley Act of 2002 I, Tina M. Raiford, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Nematron Corporation; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 Date: November 13, 2003 /s/ Tina M. Raiford - --------------------------------------- Tina M. Raiford Controller and Chief Accounting Officer See also the certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002, which is also attached to this report as an exhibit. 17 INDEX TO EXHIBITS Exhibit Number Description of Exhibit - ------ ---------------------- 4.1 Loan Modification Agreement and Amendment to Loan Documents between Compass Bank and Optimation, Inc. dated October 3, 2003. 4.2 Security Agreement between North Coast Technology Investors, L.P. ("NCTI") and Nematron Corporation dated July 31, 2003 pursuant to which Nematron grants to NCTI a continuing security interest in Collateral to secure payment of the liabilities. 4.3 Mortgage between North Coast Technology Investors, L.P. and Nematron Corporation dated July 31, 2003. 4.4 Promissory Note between North Coast Technology Investors, L.P. and Nematron Corporation dated July 16, 2003 in the amount of $1,700,000 payable on demand with interest at 9.0% per annum. 99.1 Certification of Chief Executive Officer and Chief Accounting Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 18 EX-4 3 exhibit4-01_093003.txt EXHIBIT 4.01 - COMPASS BANK MODIFICATION Exhibit 4.01 ------------ LOAN MODIFICATION AGREEMENT AND AMENDMENT TO LOAN DOCUMENTS THIS LOAN MODIFICATION AGREEMENT AND AMENDMENT TO LOAN DOCUMENTS (this "Agreement") is being entered into as of the 3rd day of October, 2003, by and between COMPASS BANK, an Alabama state banking corporation (the "Bank") and OPTIMATION, INC., an Alabama corporation (the "Borrower"), and NEMATRON CORPORATION, a Michigan corporation. P R E A M B L E --------------- The Borrower is the maker of a certain Revolving Credit Commercial Note 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 from Borrower to Compass Bank in the original principal amount of $385,000.00 dated July 5, 2002, as amended by that certain Amended and Restated Promissory Note from Borrower to Compass Bank in the original principal amount of $335,000.00 dated October 4, 2002, as amended by that certain Amended and Restated Promissory Note from Borrower to Compass Bank in the original principal amount of $270,000.00 dated as of January 3, 2003, as amended by that certain Amended and Restated Promissory Note from Borrower to Compass Bank in the original principal amount of $225,000.00 dated as April 3, 2003, as amended by that certain Amended and Restated Promissory Note in the original principal amount of $108,750.00 dated as of the date hereof (as amended from time to time, the "Note"), which evidences a certain term loan from the Bank to the Borrower (the "Loan"). The Loan was extended pursuant to 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 February 25, 2002, 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 July 5, 2002, as amended by that certain Modification Agreement and Amendment to Loan Documents dated October 4, 2002, as amended by that certain Modification Agreement and Amendment to Loan Documents dated as of January 3, 2003, as amended by that certain Modification Agreement and Amendment to Loan Documents dated as of April 3, 2003 (as amended, the "Loan Agreement"), and is secured by, among other things, the Loan Agreement, Continuing Guaranty Agreement executed by Nematron Corporation dated as of March 20, 2001, and UCC-1 financing statements executed by Borrower in favor of Lender. 1 The Bank and the Borrower have agreed to renew and modify the Loan, and to amend the documents and instruments evidencing, securing, relating to, guaranteeing or executed or delivered in connection with the Loan (collectively, the "Loan Documents"). Accordingly, the Bank and the Borrower have agreed that the Loan shall be modified and renewed, and that the Loan Documents shall be amended as set forth below. A G R E E M E N T ----------------- NOW, THEREFORE, in consideration of the premises, the mutual agreements of the parties as set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to induce Bank to renew and modify the Loan, the parties, intending to be legally bound hereby, agree as follows: A. Modification Fee. The Borrower shall pay to Bank in consideration of the Bank's commitment to modify the Loan, a non-refundable modification fee in the amount of $250.00, which shall be deemed earned as of the date of Bank's commitment, and shall be paid on or before the date hereof. B. Modification of Loan. The amount of the Loan shall be changed to $108,750.00. The Maturity Date of the Loan shall be changed to April 30, 2004. C. Amendment of Loan Agreement. The Loan Agreement shall be and the same hereby is amended as follows: (i) Section 3.1 shall be and hereby is deleted in its entirety and the following inserted in place thereof: "3.1 At no time shall the outstanding principal amount of the Loan exceed the Borrowing Base. In the event the outstanding principal balance of the Loan exceeds the Borrowing Base, Borrower shall promptly make such principal reduction payment in immediately available funds as is necessary to bring the outstanding principal balance of the Loan to an amount which is equal to or less than the Borrowing Base. The "Borrowing Base" shall be calculated pursuant to the following formula: eighty percent (80%) of Borrower's Eligible Accounts Receivable, not to exceed $108,750.00 at any one time outstanding, plus fifty percent (50%) of the value of Borrower's Eligible Inventory, not to exceed the amount of $50,000.00 at any one time outstanding. Notwithstanding the foregoing, advances under the Loan shall not be revolving and no future advances of principal will be allowed." (ii) Section 7.4 shall be and hereby is deleted in its entirety and the following inserted in place thereof: "7.4 Borrower shall maintain a minimum Tangible Net Worth of not less than $965,000.00 between the date hereof and December 30, 2003 and to increase by fifty percent (50%) of Borrower's net profit on and after December 31, 2003." 2 (iii) Section 8.7 is hereby deleted in its entirety and the following inserted in place thereof: "8.7 Borrower shall not make any payments or distribute any funds to Nematron Corporation, Nematron, Ltd., or any other subsidiaries or affiliates thereof, in excess of One Thousand Dollars ($1,000.00) per month, with the exception of the following: (a) Payment to Nematron Corporation for Dennis Sierk's salary and benefits in monthly payments not to exceed the aggregate amount of $11,343.00 per month; (b) Payment to Nematron Corporation for Charles Garrett's salary and benefits, in monthly payments not to exceed the aggregate amount of $9,578.00 per month." (iv) Section 8 is hereby amended by inserting the following provisions 8.9, 8.10, 8.11, 8.12 and 8.13: "8.9 Borrower shall maintain, serve and invoice directly all of Borrower's customers, with the exceptions, however of: (a) with respect to that certain product known as "Pointe Controller," which may be sold and invoiced by Nematron Corporation; provided, however, that Borrower shall be paid by Nematron Corporation for at least Borrower's direct material costs for such product, plus twenty percent (20%), within ten (10) days from the date Nematron Corporation, Nematron, Ltd., or any other subsidiaries or affiliates thereof receive payment for such product from their respective customers, and in no event later than 45 days from the date of invoice from Borrower, which invoice Borrower agrees to promptly issue; and (b) with respect to those certain products known as the "Legacy" products, orders for which may be received and invoiced by Nematron Corporation for joint customers of Nematron Corporation and Borrower; provided, however, that Borrower shall be paid by Nematron Corporation for at least Borrower's bill of material costs plus unreimbursed shipping costs for such product, plus twenty percent (20%), within ten (10) days from the date Nematron Corporation, Nematron, Ltd., or any other subsidiaries or affiliates thereof receive payment for such product from the customers, and in no event later than 45 days from the date of invoice from Borrower, which invoice Borrower agrees to promptly issue. 8.10 There shall be no co-mingling of any assets, including without limitation, cash, Accounts Receivables, Inventory and equipment, between Borrower and Nematron Corporation, Nematron, Ltd., or any other subsidiaries or affiliates thereof. 8.11 All of the Collateral shall remain at 2800 Bob Wallace Avenue, Suite L-3, Huntsville, Alabama 35805. 8.12 Borrower shall provide to Bank any and all amendments to its Articles of Organization and/or Bylaws within ten (10) days of the execution thereof. 8.13 Borrower shall furnish weekly to Bank its invoice register, sales register, and cash receipts register for the immediately preceding week." 3 D. Effect on Loan Documents. Each of the Loan Documents shall be deemed amended as set forth hereinabove and to the extent necessary to carry out the intent of this Agreement. Without limiting the generality of the foregoing, each reference in the Loan Documents to the "Note", the "Loan Agreement", or any other "Loan Documents" shall be deemed to be references to said documents, as amended hereby, each reference to the amount of the Loan shall be changed to $108,750.00 and each reference to the Maturity Date shall be changed to April 30, 2004. Except as is expressly set forth herein, all of the Loan Documents shall remain in full force and effect in accordance with their respective terms and shall continue to evidence, secure, guarantee or relate to, as the case may be, the Loan. E. Representations and Warranties. Each representation and warranty contained in the Loan Documents is hereby reaffirmed as of the date hereof. The Borrower hereby represents, warrants and certifies to Bank that no Event of Default nor any condition or event that with notice or lapse of time or both would constitute an Event of Default, has occurred and is continuing under any of the Loan Documents or the Loan, and that Borrower has no offsets or claims against Bank arising under, related to, or connected with the Loan, the Loan Agreement or any of the other Loan Documents. Borrower expressly understands and agrees that this Agreement is subject to Borrower's strict and literal compliance with the terms, covenants and provisions set forth herein, and further, Borrower expressly understands and agrees that this Agreement shall not estop Lender from taking any action permitted under the Note in the event of default, which may hereafter occur or exist under the terms of said Note, Loan Agreement or by reason of failure of Borrower to pay to Lender any one or more of payments on said Note. Each individual executing this Agreement represents and warrants that he or she is duly authorized to execute and deliver this Agreement. F. Additional Documentation; Expenses. Borrower shall provide to Bank (i) if Borrower or any Guarantor is a business organization, certified resolutions properly authorizing the transactions contemplated hereby and the execution of this Agreement and all other documents and instruments being executed in connection herewith; and (ii) all other documents and instruments required by Bank; all in form and substance satisfactory to Bank. Borrower shall pay any recording and all other expenses incurred by Bank and Borrower in connection with the modification of the Loan and any other transactions contemplated hereby, including without limitation, title or other insurance premiums, survey costs, legal expenses, recording fees and taxes. G. Execution by Guarantor. Guarantor has executed this Agreement to evidence its consent to the modification and amendments as described herein, and to acknowledge the continuing effect of its Guaranty and the obligations contained therein. [remainder of page left blank intentionally] 4 IN WITNESS WHEREOF, the undersigned have caused this instrument to be duly executed as of the date first set forth above. BORROWER: ATTEST: OPTIMATION, INC., an Alabama corporation By: /s/ John H. Dunlap By: /s/ Dennis A. Sierk ------------------------ -------------------------- John Dunlap Dennis A. Sierk Its: Secretary Its: President [CORPORATE SEAL] BANK: WITNESS: COMPASS BANK /s/Tina M. Raiford By: /s/ Arlene Stackhouse - -------------------------- -------------------------- Arlene Stackhouse Its: Senior Vice President GUARANTOR: ATTEST: NEMATRON CORPORATION, a Michigan corporation By: /s/ John H. Dunlap By: /s/ Matthew S. Galvez ----------------------- -------------------------- John Dunlap Matthew S. Galvez Its: Secretary Its: President [CORPORATE SEAL] 5 EX-4 4 exhibit4-02_093003.txt EXHIBIT 4.02 - NCTI SECURITY AGREEMENT Exhibit 4.02 ------------ SECURITY AGREEMENT ------------------ THIS AGREEMENT is made as of July 31, 2003, by and between the Grantor, as herein defined, and North Coast Technology Investors, L.P., a Michigan limited partnership ("NCTI"), whose address is 206 South Fifth Avenue, Ann Arbor, Michigan 48104. IN CONSIDERATION of loans, advances or other financial accommodations from NCTI to the Grantor, the Grantor agrees as follows: 1. Definitions. The following terms shall have the following meanings when used in this Agreement: a. "Collateral" means the property and interests in property described in Section 3 below. b. "Grantor" means NEMATRON CORPORATION, a Michigan corporation, whose chief executive offices are located at 103. c. "Liabilities" means all loans, advances or other financial accommodations, including any renewals or extensions thereof, from NCTI to Grantor, now or hereafter in effect, and any and all liabilities and obligations of any and every kind and nature heretofore, now or hereafter owing from Grantor to NCTI, however incurred or evidenced, whether primary, secondary, contingent or otherwise, whether arising under this Agreement, under any other security agreement(s), promissory note(s), guaranty(s), mortgage(s), lease(s), instrument(s), document(s), contract(s), letter(s) of credit or similar agreement(s) heretofore, heretofore, now or hereafter executed by Grantor and delivered to NCTI, or by oral agreement or by operation of law plus all interest, costs, expenses and reasonable attorney fees which may be made or incurred by NCTI in the disbursement, administration or collection of such liabilities and obligations and in the protection, maintenance and liquidation of the Collateral. 2. Grant of Security Interest. Grantor hereby grants to NCTI a continuing security interest in the Collateral to secure the payment of the Liabilities. 3. Collateral. The Collateral covered by this Agreement is all the Grantor's property described below which it now owns or shall hereafter acquire or create immediately upon the acquisition or creation thereof: a. All Assets. All personal property of the Grantor, wherever located, and now owned or hereafter acquired, including accounts; as-extracted collateral; chattel paper (both tangible and electronic); deposit accounts; documents; equipment; fixtures; general intangibles, including payment intangibles; goods; instruments, including promissory notes; inventory; investment property, including certificated securities, uncertificated securities, security entitlements, securities accounts, commodity contracts and commodity accounts; letters of credit; letter of credit rights; money; software; supporting obligations; and vehicles. Together with: b. All Proceeds (whether Cash Proceeds or Noncash Proceeds) of the foregoing property, including without limitation proceeds of insurance payable by reason of loss or damage to the foregoing property and of eminent domain or condemnation awards. c. All products of, additions and accessions to, and substitutions, betterments and replacements for the foregoing property. d. All sums at any time credited by or due from NCTI to Grantor. e. All property in which the Grantor has an interest now or at any time hereafter coming into the possession or under the control of NCTI or in transit by mail or carrier to or from NCTI or in possession of or under the control of any third party acting on NCTI's behalf without regard to whether NCTI received the same in pledge, for safekeeping, as agent for collection or transmission or otherwise or whether NCTI has conditionally released the same (excluding, nevertheless, any of the foregoing property of the Grantor which now or any time hereafter is in possession or control of NCTI under any written trust agreement wherein NCTI is trustee and Grantor is trustor). Terms used and not otherwise defined in this Agreement shall have the meaning given such terms in the Michigan Uniform Commercial Code. In the event the meaning of any term defined in the Michigan Uniform Code is amended after the date of this Agreement, the meaning of such term as used in this Agreement shall be that of the more encompassing of: (i) the definition contained in the Michigan Uniform Commercial Code prior to the amendment, and (ii) the definition contained in the Michigan Uniform Commercial Code after the amendment. 4. Perfection of Security Interest. Grantor hereby irrevocably authorizes NCTI to file financing statement(s) describing the Collateral in all public offices deemed necessary by NCTI, and to take any and all actions, including, without limitation, filing all financing statements, continuation financing statements and all other documents that NCTI may reasonably determine to be necessary to perfect and maintain NCTI's security interests in the Collateral. Grantor shall have possession of the Collateral, except where expressly otherwise provided in this Agreement or where NCTI chooses to perfect its security interest by possession, whether or not in addition to the filing of a financing statement. Where Collateral is in the possession of a third party, Grantor will join with NCTI in notifying the third party of NCTI's security interest and obtaining an acknowledgement from the third party that it is holding the Collateral for the benefit of NCTI. Grantor shall pay the cost of filing or recording all financing statement(s) and other documents. Grantor agrees to promptly execute and deliver to NCTI all financing statements, continuation financing statements, assignments, certificates of title, applications for vehicle titles, affidavits, reports, notices, letters of authority and all other documents that NCTI may reasonably request in form satisfactory to NCTI to perfect and maintain NCTI's security interests in the Collateral. In order to fully consummate all of the transactions contemplated hereunder, Grantor shall make appropriate entries on its books and records disclosing NCTI's security interests in the Collateral. 5. Warranties and Representations. Grantor warrants and represents: (a) except as may be otherwise disclosed in an attachment to this Agreement, Grantor has rights in or the power to transfer the Collateral and its title to the Collateral is free and clear of all liens or security interests, except NCTI's security interests, (b) no financing statements, other than that of NCTI, are on file covering the Collateral or any of it, (c) the Grantor's exact legal name and the address of the Grantor's chief executive office are as set forth in the first paragraph of this Agreement; (d) the form of Grantor's organization and the State under which it is organized are as set forth in the first paragraph of this Agreement; (e) all Collateral consisting of Goods is located in the State where the Grantor's chief executive office is located except as otherwise disclosed in a schedule attached to this Agreement; (f) the Collateral, wherever located, is covered by this Agreement; (g) the execution and delivery of this Agreement and any instruments evidencing Liabilities will not violate nor constitute a breach of Grantor's Articles of Incorporation, By-Laws, or any agreement or restriction of any type whatsoever to which Grantor is a party or is subject; (h) all financial statements and information relating to Grantor delivered or to be delivered by Grantor to NCTI are true and correct and prepared in accordance with generally accepted accounting principles, and there has been no material adverse change in the financial condition of Grantor since the submission of any such financial information to NCTI; (i) there are no actions or proceedings which are threatened or pending against Grantor which might result in any material adverse change in Grantor's financial condition or which might materially affect any of Grantor's assets; and (j) Grantor has duly filed all federal, state, and other governmental tax returns which Grantor is required by law to file, and will continue to file same during such time as any of the Liabilities hereunder remain owing to NCTI, and all such taxes required to be paid have been paid, in full. 6. Covenants. Grantor covenants and agrees that while any of the Liabilities remain unperformed and unpaid it will: (a) preserve its legal existence and not, in one transaction or a series of related transactions, merge into or consolidate with any other entity, or sell all or substantially all of its assets; (b) not change the state where it is located; (c) neither change its name, form of business entity nor address of its chief executive office without giving written notice to NCTI thereof at least thirty (30) days prior to the effective date of such change, and Grantor agrees that all documents, instruments, and agreements demanded by NCTI in response to such change shall be prepared, filed, and recorded at Grantor's expense prior to the effective date of such change; (d) not use the Collateral, nor permit the Collateral to be used, for any unlawful purpose, whatever; (e) maintain the Collateral in first-class condition and repair; and (f) indemnify and hold NCTI harmless against claims of any persons or entities not a party to this Agreement concerning disputes arising over the Collateral. 7. Insurance, Taxes, Etc. Grantor has the risk of loss of the Collateral. Grantor shall: (a) pay promptly all taxes, levies, assessments, judgments, and charges of any kind upon or relating to the Collateral, to Grantor's business, and to Grantor's ownership or use of any of its assets, income, or gross receipts; (b) at its own expense, keep and maintain all of the Collateral fully insured against loss or damage by fire, theft, explosion and other risks in such amounts, with such companies, under such policies and in such form as shall be satisfactory to NCTI, which policies shall expressly provide that loss thereunder shall be payable to NCTI as its interest may appear (and NCTI shall have a security interest in the proceeds of such insurance and may apply any such proceeds which may be received by it toward payment of the Liabilities, whether or not due, in such order of application as NCTI may determine); and (c) maintain at its own expense public liability and property damage insurance in such amounts, with such companies, under such policies and in such form as shall be satisfactory to NCTI, and, upon NCTI's request, shall furnish NCTI with such policies and evidence of payment of premiums thereon. If Grantor at any time hereafter should fail to obtain or maintain any of the policies required above or pay any premium in whole or in part relating thereto, or shall fail to pay any such tax, assessment, levy, or charge or to discharge any such lien, claim, or encumbrance, then NCTI, without waiving or releasing any obligation or default of Grantor hereunder, may at any time hereafter (but shall be under no obligation to do so) make such payment or obtain such discharge or obtain and maintain such policies of insurance and pay such premiums, and take such action with respect thereto as NCTI deems advisable. All sums so disbursed by NCTI, including reasonable attorney fees, court costs, expenses, and other charges relating thereto, shall be part of the Liabilities, secured hereby, and payable upon demand together with interest at the highest rate payable in connection with any of the Liabilities from the date when advanced until paid. 8. Care, Custody, and Dealings with Collateral. NCTI shall have no liability to Grantor with respect to NCTI's care and custody of any Collateral in NCTI's possession and shall have no duty to sell, surrender, collect or protect the same or to preserve rights against prior parties or to take any action with respect thereto beyond the custody thereof, exercising that reasonable custodial care which it would exercise in holding similar interests for its own account. NCTI shall only be liable for its acts of gross negligence. NCTI is hereby authorized and empowered to take the following steps, either prior or subsequent to default hereunder: (a) to deal directly with issuers, entities, owners, transfer agents and custodians to effect changes in the registered name of any such Collateral, to effect substitutions and replacements thereof necessitated by any reason (including by reason of recapitalization, merger, acquisition, debt restructuring or otherwise), to execute and deliver receipts therefor and to take possession thereof; (b) to communicate and deal directly with payors of instruments (including securities, promissory notes, letters of credit, certificates of deposits and other instruments), which may be payable to or for the benefit of Grantor at any time, with respect to the terms of payment thereof; (c) in the Grantor's name, to agree to any extension of payment, any substitution of Collateral or any other action or event with respect to the Collateral; (d) to notify parties who have an obligation to pay or deliver anything of value (including money or securities) with respect to the Collateral to pay or deliver the same directly to NCTI on behalf of Grantor and to receive and receipt for any such payment or delivery in Grantor's name as an addition to the Collateral; (e) to surrender renewable certificates or any other instruments or securities forming a portion of the Collateral which may permit or require reissuance, renewal or substitution at any time and to immediately take possession of and receive directly from the issuer, maker or other obligor, the substituted instrument or securities; (f) to exercise any right which Grantor may have with respect to any portion of the Collateral, including rights to seek and receive information with respect thereto; and (g) to do or perform any other act and to enjoy all other benefits with respect to the Collateral as Grantor could in its own name. 9. Disposition of Collateral. NCTI does not authorize, and Grantor agrees not to make any sales or leases of any of the Collateral or license any of the Collateral, or grant any other security interest in any of the Collateral; provided, however, that until such time as NCTI shall give notice of revocation of such authorization, Grantor may sell or lease its Inventory and grant licenses of its software to its customers in the ordinary course of its business. 10. Information. Grantor shall permit NCTI or its agents upon reasonable request to have access to, and to inspect, all the Collateral (and Grantor's other assets, if any) and may from time to time inspect, check, make copies of, or extracts from the books, records, and files of Grantor, and Grantor will make same available at any time for such purposes. In addition, Grantor shall promptly supply NCTI with such other financial or other information concerning its affairs and assets as NCTI may request from time to time. 11. Remedies Upon Default. Immediately upon the occurrence of an event of default under any of the Liabilities or any default in the payment or performance of any of the covenants, conditions and agreements contained in this Agreement (an "Event of Default"), NCTI may, in addition to and not in lieu of or substitution for, all other rights and remedies provided by law, without notice, except as expressly required by law, declare the entire unpaid and outstanding principal balance of the Liabilities, and all accrued interest, together will all other indebtedness of the Grantor to NCTI, to be due and payable in full forthwith and NCTI may exercise from time to time any rights and remedies including the right to immediate possession of the Collateral available to it under applicable law. NCTI may directly contact third parties and enforce against them all rights which arise with respect to the Collateral and to which Grantor or NCTI would be entitled. Grantor waives any right it may have to require NCTI to pursue any third person for any of the Liabilities. NCTI shall have the right to hold any property then in, upon or in any way affiliated to said Collateral at the time of repossession even though not covered by this Agreement until return is demanded in writing by the Grantor. Grantor agrees, upon the occurrence of an Event of Default, to assemble at its expense all the Collateral and make it available to NCTI at a convenient place acceptable to NCTI. Grantor agrees to pay all costs of NCTI of collection of the Liabilities, and enforcement of rights hereunder, including reasonable attorney fees and legal expenses, including participation in Bankruptcy proceedings, and expense of locating the Collateral and expenses of any repairs to any realty or other property to which any of the Collateral may be affixed or be a part. If any notification of intended disposition of any of the Collateral is required by law, such notification, if mailed, shall be deemed reasonably and properly given if sent at least ten (10) days before such disposition, postage pre-paid, addressed to the Grantor either at the address shown above or at any other address of the Grantor appearing on the records of NCTI and to such other parties as may be required by the Michigan Uniform Commercial Code. Grantor acknowledges that NCTI may be unable to effect a public sale of all or any portion of the Collateral because of certain legal and/or practical restrictions and provisions which may be applicable to the Collateral and, therefore, may be compelled to resort to one or more private sales to a restricted group of offerees and purchasers. Grantor consents to any such private sale so made even though at places and upon terms less favorable than if the Collateral were sold at public sale. NCTI shall have no obligation to clean-up or otherwise prepare the Collateral for sale. NCTI may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered to adversely affect the commercial reasonableness of any sale of the Collateral. NCTI may specifically disclaim any warranties as to the Collateral. If NCTI sells any of the Collateral upon credit, Grantor will be credited only with payments actually made by the purchaser, received by NCTI and applied to the indebtedness of the purchaser. In the event the purchaser fails to pay for the Collateral, NCTI may resell the Collateral and the Grantor shall be credited with the proceeds of sale. NCTI shall have no obligation to marshal any assets in favor of the Grantor. Grantor waives the right to jury trial in any proceeding instituted with respect to the Collateral. Out of the net proceeds from sale or disposition of the Collateral, NCTI shall retain all the Liabilities then owing to it and the actual cost of collection (including reasonable attorney fees) and shall tender any excess to Grantor or its successors or assigns. If the Collateral shall be insufficient to pay the entire Liabilities, Grantor shall pay to NCTI the resulting deficiency upon demand. Grantor expressly waives any and all claims of any nature, kind or description which it has or may hereafter have against NCTI or its representatives, by reason of taking, selling or collecting any portion of the Collateral. Grantor consents to releases of the Collateral at any time (including prior to default) and to sales of the Collateral in groups, parcels or portions, or as an entirety, as NCTI shall deem appropriate. Grantor expressly absolves NCTI from any loss or decline in market value of any Collateral by reason of delay in the enforcement or assertion or nonenforcement of any rights or remedies under this Agreement. Grantor agrees that NCTI shall, upon the occurrence of an Event of Default, have the right to peacefully retake any of the collateral. Grantor waives any right it may have in such instance to a judicial hearing prior to such retaking. 12. General. Time shall be deemed of the very essence of this Agreement. NCTI shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if it takes such action for that purpose as Grantor requests in writing, but failure of NCTI to comply with any such request shall not of itself be deemed a failure to exercise reasonable care, and failure of NCTI to preserve or protect any rights with respect to such Collateral against any prior parties or to do any act with respect to the preservation of such Collateral not so requested by Grantor shall not be deemed a failure to exercise reasonable care in the custody and preservation of such Collateral. This Agreement has been delivered in Michigan and shall be construed in accordance with the laws of the State of Michigan. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. The rights and privileges of NCTI hereunder shall inure to the benefit of its successors and assigns, and this Agreement shall be binding on all heirs, personal representatives, assigns and successors of Grantor and all persons who become bound as a debtor to this Agreement. Grantor hereby expressly authorizes and appoints NCTI to act as its attorney-in-fact for the sole purpose of executing any and all financing statements or other documents deemed necessary to perfect the security interest herein contemplated. 13. No Waiver. Any delay on the part of NCTI in exercising any power, privilege or right hereunder, or under any other instrument executed by Grantor to NCTI in connection herewith shall not operate as a waiver thereof, and no single or partial exercise thereof, or the exercise of any other power, privilege or right shall preclude other or further exercise thereof, or the exercise of any other power, privilege or right. The waiver of NCTI of any default by Grantor shall not constitute a waiver of any subsequent defaults, but shall be restricted to the default so waived. All rights, remedies and powers of NCTI hereunder are irrevocable and cumulative, and not alternative or exclusive, and shall be in addition to all rights, remedies, and powers given hereunder or in or by any other instruments, or by the Michigan Uniform Commercial Code, or any laws now existing or hereafter enacted. The Grantor acknowledges that this is the entire agreement between the parties except to the extent that writings signed by the party to be charged are specifically incorporated herein by reference either in this Agreement or in such writings, and acknowledges receipt of a true and complete copy of this Agreement. IN WITNESS WHEREOF, this Security Agreement was executed and delivered by the undersigned on the date stated in the first paragraph above. Grantor: NEMATRON CORPORATION By: /s/ Matthew S. Galvez ----------------------- Its: President EX-4 5 exhibit4-03_093003.txt EXHIBIT 4.03 - NCTI MORTGAGE AGREEMENT Exhibit 4.03 ------------ MORTGAGE -------- THIS IS A FUTURE ADVANCE MORTGAGE THIS MORTGAGE is made on July 31, 2003, by and between NEMATRON CORPORATION, a Michigan corporation, whose address is 5840 Interface Drive, Ann Arbor, Michigan 48103 ("Grantor"), and NORTH COAST TECHNOLOGY INVESTORS, LP, a Michigan Limited Partnership ("Lender"), whose address is 206 South Fifth Avenue, Ann Arbor, Michigan 48104. IN CONSIDERATION of loans, advances or other financial accommodations from Lender to Grantor, Grantor does hereby covenant, promise and agree to and with the Lender, which covenants, promises and agreements shall, to the extent permitted by law, be deemed to run with the land, as follows: 1. Definitions. The following terms shall have the following meanings when used in this Mortgage: a. "Lease(s)" means and includes all leases and rental agreements, written or unwritten, now or hereafter demising the Property in whole or in any part, and all amendments, modifications, extensions, renewals, substitutions and replacements for any of the foregoing. b. "Liabilities" means all loans, advances or other financial accommodations, including any renewals or extensions thereof, from the Lender to Grantor and any and all liabilities and obligations of any and every kind and nature heretofore, now or hereafter owing from Grantor to the Lender, however incurred or evidenced, whether primary, secondary, contingent or otherwise, whether arising under the Note, and any and all extensions and renewals thereof, this Mortgage, under any other security agreement, promissory note, guaranty, mortgage, lease, instrument, document, contract, letter of credit or similar agreement heretofore, now or hereafter executed by Grantor and delivered to the Lender, or by oral agreement or by operation of law plus all interest, costs, expenses and reasonable attorney fees which may be made or incurred by the Lender in the disbursement, administration or collection of such liabilities and obligations and in the protection, maintenance and liquidation of the Property and the performance of the covenants and conditions of this Mortgage, and ANY FUTURE ADVANCES, WITH INTEREST THEREON, made to Grantor by the Lender which are secured by this Mortgage pursuant to the provisions hereof. c. "Note" means a promissory note from Grantor to Lender in the principal amount of $1,700,000 dated July 16, 2003, a promissory note from Grantor to Lender in the principal amount of $750,000 dated March 23, 2001; and a promissory note from Grantor to Lender in the principal amount of $3,000,000 dated April 14, 2003. d. "Property" means the premises situated in the State of Michigan described in Exhibit "A" attached hereto, together with (1) all the estate, title, interest and rights of Grantor in such premises and all buildings and improvements of every kind and description now or hereafter placed on such premises, (2) all of the rents, profits, and leases of such premises, and the tenements, hereditaments, easements, privileges and appurtenances with respect to such premises, including heretofore or hereafter vacated alleys and streets abutting the premises, and (3) all goods (including furniture, fixtures, equipment and appliances), accounts and general intangibles now owned or hereafter acquired by Grantor and now or at any time hereafter related to, affixed to, attached to, placed upon or used in any way in connection with the use, occupancy or operation of such premises, including, but not limited to, all lighting, heating, cooling, ventilating, air conditioning, plumbing, sprinkling, communicating and electrical systems, and machinery, appliances, fixtures and equipment pertaining thereto, awnings, stoves, refrigerators, dishwashers, disposals, incinerators, carpeting and drapes, and all other furniture, fixtures, equipment and appliances of every type, nature and description. 1 2. Grant of Mortgage. Grantor does hereby MORTGAGE and WARRANT to the Lender and its successors and assigns forever the Property and grants to the Lender and its successors and assigns a continuing security interest in the Property to secure the timely repayment and performance of the Liabilities, to have and to hold the Property, with all of the tenements, hereditaments, easements, appurtenances and other rights and privileges thereunto belonging or in any manner now or hereafter appertaining thereto, for the use and benefit of the Lender upon the conditions hereinafter set forth. 3. Future Advances. Upon request of Grantor, the Lender at the Lender's option prior to release of this Mortgage, may make future advances to Grantor. Such future advances, with interest thereon, shall be secured by this Mortgage when evidenced by promissory notes stating that they are secured hereby. 4. Covenant to Pay Liabilities. Grantor shall promptly pay and perform all Liabilities for which it is liable or obligated in accordance with the terms thereof. Grantor acknowledges and agrees that this Mortgage shall not be extinguished and the priority of this Mortgage shall not be altered in any way until a Mortgage discharge has been executed by the Lender and recorded in the proper county, even if the Liabilities are reduced to a balance of zero at any time or from time to time. 5. Covenant of Title. At the time of the execution and delivery of this Mortgage, Grantor is the owner of the Property in fee simple, free of all easements, liens and encumbrances whatever (other than those easements of record as of the date hereof, the rights of the public in any part of the Property used or taken for road purposes, a mortgage dated September 30, 2002, in favor of Chelsea State Bank (the "First Mortgage"), and any other mortgages, liens or encumbrances to which the Lender has consented in writing), and will forever warrant and defend the same against any and all other claims whatever, and the lien created hereby is and will be kept as a valid lien upon the Property and every part thereof, subject only to the foregoing exceptions. 6. Maintenance of Property. Grantor shall at all times preserve and maintain the Property in good repair, working order and condition and shall make all necessary improvements and repairs so the value and efficiency of the Property is at all times maintained and Lender's security is not impaired. Lender shall have the right to enter upon and inspect the Property at all reasonable times and if, upon inspection of the Property, Lender determines the Property or any part thereof requires repair, maintenance, or care of any kind which the Grantor, after notice from Lender, fails to perform, Lender may declare Grantor to be in default under this Mortgage and may, at Lender's option, by its agent, enter, repair and care for the Property, paying such amount therefor as the Lender deems appropriate, and all costs incurred by Lender shall be added to the Liabilities secured by this Mortgage. 2 7. Payment of Taxes, Liens and Insurance. Grantor shall pay when due all taxes, assessments, and governmental charges levied upon the Property and all claims, liens, encumbrances, levies, judgments and charges which are at any time levied, recorded, placed upon, or assessed against the Property, and shall promptly deliver to Lender receipts evidencing such payment; provided, however, that Grantor will not be required to pay any tax, assessment, governmental charge, claim, lien, encumbrance, levy, judgment or charge if Grantor is in good faith contesting the validity thereof and has provided for payment of the entire amount of any such contested tax, assessment, governmental charge, claim, lien, encumbrance, levy, judgment or charge in a cash reserve deposited with Lender or in such other manner as is satisfactory to Lender. 8. Insurance. Until the Liabilities are fully satisfied, Grantor will keep the Property continuously insured against loss by fire, windstorm and other hazards, casualties and contingencies, including vandalism and malicious mischief, in such amounts and for such periods as may be required by the Lender. Grantor shall pay promptly when due all premiums for such insurance and deliver to the Lender, upon request, receipts showing such payment. All insurance shall be carried in companies approved by the Lender and the policies and renewals thereof shall be held by, and pledged to, the Lender (unless the Lender shall direct or permit otherwise) as additional security hereunder, and shall have attached thereto a mortgagee clause acceptable to the Lender, making all loss or losses under such policies payable to the Lender, its successors and assigns, as its or their interest may appear. In the event of loss or damage to the Property, Grantor shall give immediate notice in writing by mail to the Lender, who may make proof of loss if not made promptly by Grantor. In the event the amount of the loss is an amount equal to $100,000 or less, the insurance proceeds shall be released to the Grantor, upon request by the Grantor. Grantor shall be obligated to use such proceeds to restore or repair the Property unless the Lender otherwise specifies in writing. In the event the amount of the loss is greater than $100,000, each insurance company concerned is hereby authorized and directed upon request by the Lender, to make payment for such loss, to the extent of the Liabilities, directly to the Lender instead of to Grantor and the Lender jointly. Provided there has occurred no Event of Default hereunder nor any event which with notice or the passage of time or both would become an Event of Default hereunder and further provided that the Lender shall reasonably determine that sufficient funds are available from insurance proceeds and any funds to be provided by Grantor to repair or restore the Property within a reasonable time and that such repair or restoration is economically feasible, the Lender agrees, upon request by the Grantor, to apply the insurance proceeds to repair or restore the Property, after reimbursement of all costs and expenses of the Lender in collecting such proceeds, subject to the following terms and conditions: 3 a. The Lender shall retain all insurance proceeds in a non-interest bearing escrow account to be disbursed to pay the costs of repair or restoration in accordance with procedures reasonably established by the Lender. b. All plans and specifications for repair or restoration shall be approved by the Lender prior to the commencement of any repair or restoration. c. All repair or restoration shall be done by or under the direction of Grantor, shall be in accordance with the approved plans and specifications, shall be in a workmanlike manner free from all defects, shall be in compliance with all statutes, ordinances, rules and regulations applicable thereto and shall be completed free of all construction liens except those being contested in good faith by appropriate proceedings and with respect to which Grantor shall have provided the Lender satisfactory security. d. The Lender shall have the right, at Grantor's expense, to inspect all repairs and restoration and, if the Lender reasonably determines that any work or materials are not in conformity with the approved plans and specifications or other requirements of sub-paragraph (c) above, to stop the work and order replacement or correction thereof by Grantor. e. The Lender shall not be obligated to make disbursements more frequently than monthly and the remaining undisbursed proceeds shall always be sufficient to meet the total estimated remaining costs to complete the repair or restoration. f. All insurance proceeds in excess of the amounts necessary to repair or restore the Property may be applied, at the Lender's option, to the Liabilities (without penalty for prepayment), to fulfill any other covenant herein or any other obligation of Grantor to the Lender, or released to Grantor. In the event all of the conditions to the use of the insurance proceeds to repair or restore the Property which are outlined above are not satisfied, the Lender, at its option, may apply the insurance proceeds or any part thereof, first, toward reimbursement of all costs and expenses of the Lender in collecting such proceeds, and then, to the Liabilities (without any penalty for prepayment), to fulfill any other covenant herein or any other obligation of Grantor to the Lender, or to the restoration or repair of the Property. Application by the Lender of any insurance proceeds to the Liabilities shall not excuse, extend or reduce the regularly scheduled payments due thereunder. In the event of foreclosure of this Mortgage or other transfer of title to the Property in extinguishment of the Liabilities, all right, title and interest of Grantor in and to any insurance policies then in force shall pass to the purchaser or grantee and Grantor hereby appoints the Lender its attorney-in-fact, in Grantor's name, to assign and transfer all such policies and proceeds to such purchaser or grantee. 9. Eminent Domain. In the event the entire Property is taken under the power of eminent domain, the entire award or payment in lieu of condemnation, to the full extent of the Liabilities, shall be paid to the Lender. The Lender shall apply such award or payment, first, toward reimbursement of all of the Lender's costs and expenses incurred in connection with collecting such award or payment, and then, at the Lender's option, to the Liabilities (without any penalty for prepayment), to fulfill any other covenant herein or to any other obligation of Grantor to the Lender. In the event of a partial taking of the Property under the power of eminent domain, the entire award or payment in lieu of condemnation, to the full extent of the Liabilities, shall be paid over to the Lender. Provided there has occurred no Event of Default hereunder, nor any event which with notice or the passage of time or both would become an Event of Default hereunder, and the Lender shall reasonably determine that sufficient funds are available from the award or payment and any funds to be provided by Grantor to repair or restore the remaining portion of the Property within a reasonable time and that such repair or restoration is economically feasible, the Lender agrees, upon request by the Grantor, to apply the award or payment to repair or restore the remaining portion of the Property, after reimbursement of all costs and expenses of the Lender in collecting the award or payment, subject to the following terms and conditions: 4 a. The Lender shall retain the award or payment in a non-interest bearing escrow account to be disbursed to pay the costs of repair or restoration in accordance with procedures reasonably established by the Lender. b. All plans and specifications for repair or restoration shall be approved by the Lender prior to the commencement of any repair or restoration. c. All repair or restoration shall be done by or under the direction of Grantor, shall be in accordance with the approved plans and specifications, shall be in a workmanlike manner free from all defects, shall be in compliance with all statutes, ordinances, rules and regulations applicable thereto and shall be completed free of all construction liens except those being contested in good faith by appropriate proceedings and with respect to which Grantor shall have provided the Lender satisfactory security. d. The Lender shall have the right, at Grantor's expense, to inspect all repairs and restoration and, if the Lender reasonably determines that any work or materials are not in conformity with the approved plans and specifications or other requirements of sub-paragraph (c) above, to stop the work and order replacement or correction thereof by Grantor. e. The Lender shall not be obligated to make disbursements more frequently than monthly and the remaining undisbursed proceeds shall always be sufficient to meet the total estimated remaining costs to complete the repair or restoration. f. All proceeds of the award or payment in excess of the amounts necessary to repair or restore the Property may be applied, at the Lender's option, to the Liabilities (without penalty for prepayment), to fulfill any other covenant herein or any other obligation of Grantor to the Lender, or released to Grantor. In the event all of the conditions to the use of the award or payment to repair or restore the Property which are outlined above are not satisfied, the Lender, at its option, may apply the award or payment or any part thereof, first, toward reimbursement of all costs and expenses of the Lender in collecting such award or payment, and then, to the Liabilities (without any penalty for prepayment), to fulfill any other covenant herein or any other obligation of Grantor to the Lender, or to the restoration or repair of the Property. Application by the Lender of any condemnation award or payment or portion thereof to the Liabilities shall not excuse, extend or reduce the regularly scheduled payments due thereunder. The Lender is hereby empowered in the name of Grantor to receive, and give acquittance for, any such award or payment, whether it is joint or several; provided, however, that the Lender shall not be held responsible for failure to collect any such award or payment, regardless of the cause of such failure. 10. Removal of Improvements. Except for replacement, maintenance, and relocation in the ordinary course of business, Grantor shall not remove from the Property any improvement, accessions, fixtures, machinery, or equipment pertaining to or forming a part of the Property without Lender's prior written consent. All replacements shall be with improvements, fixtures, machinery and equipment of the same or better quality than those replaced. 5 11. Lender's Right to Make Expenditures. Should an Event of Default occur hereunder as a result of Grantor's failure to pay any taxes or assessments or procure and maintain insurance or make necessary repairs to the Property, the Lender may pay such taxes and assessments, effect such insurance and make such repairs, and the monies so paid by it shall be a further lien on the Property, payable forthwith, with interest at the highest rate applicable to the Liabilities. The Lender may make advances without curing the Event of Default and without waiving the Lender's right of foreclosure or any other right or remedy of the Lender under this Mortgage. The exercise of the right to make advances pursuant to this paragraph shall be optional with the Lender and not obligatory and the Lender shall not be liable in any case for failure to exercise such right or for failure to continue exercising such right once having exercised it. 12. Compliance with Law. Grantor will comply promptly with all laws, ordinances, regulations and orders of all public authorities having jurisdiction over the Property relating to the use, occupancy and maintenance thereof, and shall upon request promptly submit to the Lender evidence of such compliance. Nothing herein shall be deemed to prohibit Grantor from contesting the enforceability or applicability of any law, ordinance, regulation or order; provided, however, that the Lender, in its sole discretion, may require that Grantor comply with any such law, ordinance, regulation or order during the pendency of any such contest and all appeals therefrom. Grantor will not permit the Property or any portion thereof to be used for any unlawful purpose. 13. Environmental Warranties, Compliance, and Indemnification. Grantor represents and warrants to Lender that neither Grantor nor any prior lessee, owner or operator of the Property has violated any Environmental Laws (as subsequently defined) which concern or affect the Property or any part thereof. Grantor agrees to at all times strictly observe and promptly comply with all Environmental Laws. Grantor agrees to notify the Lender, not later than ten (10) after Grantor's receipt, of any letter, notice, summons, complaint, citation, investigation, or other communication issued by or on behalf of any governmental agency or department, or private person, regarding any complaint or alleged violation of any Environmental Law concerning the Property. Grantor agrees to indemnify and hold the Lender harmless from any and all losses, costs, suits, harm, liability, and damages of any and every kind, including reasonable attorney fees, which result from or are related to any violation(s) by Grantor or Grantor's predecessors in title to the Property of any Environmental Laws, and agrees that such indemnity shall survive the foreclosure or discharge of this Mortgage and shall continue so long as Lender has any interest in or liability for the Property. Grantor agrees to allow the Lender or its agent access to the Property to confirm Grantor's compliance with all Environmental Laws and Lender may at any time, at Grantor's sole cost and expense, hire, or require Grantor to hire, an environmental consultant to inspect, test and audit the Property and advise the Lender concerning Grantor's compliance with Environmental Laws. Any costs paid by Lender for violations of Environmental Laws or to hire an environmental consultant shall be added to the Liabilities secured by this Mortgage. If Grantor shall lease the Property or any part thereof, Grantor agrees to specifically provide in any such lease(s) that Lender or its agent shall have access to the leased premises to insure the lessee's full compliance with all Environmental Laws and any lessee violation of any Environmental Law shall constitute a violation of Grantor's environmental warranties and agreements under this Mortgage. The term "Environmental Laws" shall mean all laws, regulations and rules of the United States of America, State of Michigan, local authorities and their respective agencies and departments which pertain to the environment including, but without limitation, the Clean Air Act (42 USC 7401 et seq.), Clean Water Act (33 USC 1251 et seq.), Resource Conservation and Recovery Act of 1976 (42 USC 6901 et seq.), Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 USC 9601 et seq.), Hazardous Materials Transportation Act (49 USC 1801 et seq.), Solid Waste Disposal Act (42 USC 6901 et seq.), Toxic 6 Substances Control Act (15 USC 2601 et seq.), and the Michigan Natural Resources and Environmental Protection Act (MCL 324.101 et seq.), as each of such laws have been or are hereafter amended, together with all rules and regulations promulgated by the U.S. Environmental Protection Agency or the Michigan Departments of Natural Resources or of Environmental Quality, and all additional environmental laws, rules and regulations in effect on the date of this Mortgage and as are hereafter enacted. 14. Assignment of Rents and Leases. As additional security for the Liabilities and performance of the covenants and agreements set forth herein, pursuant to Michigan Compiled Laws 565.81 et seq. and Michigan Compiled Laws 554.231 et seq., each as amended, Grantor hereby assigns to the Lender, and grants Lender a security interest in, any oil and gas located in, on or under the Property, any and all Leases of the Property, and all rents, issues, income and profits derived from the use of the Property or any portion thereof, whether due or to become due. These assignments shall run with the land and shall be good and valid against Grantor and all persons claiming by, under, or through Grantor from the date of recording of this Mortgage and shall continue to be operative during foreclosure or any other proceedings taken to enforce this Mortgage. If any foreclosure sale results in a deficiency, the assignments shall continue as security during the foreclosure redemption period. Grantor covenants with and warrants to Lender that as of the date of this Mortgage: a. Each Lease is in full force and effect and there are no defaults existing thereunder; and b. Grantor has not, except as provided in the First Mortgage: (1) executed or granted any prior assignment, encumbrance, or security interest in any Lease or the rentals thereunder; (2) performed any acts or executed any other instruments or agreements which would limit or prevent Lender from obtaining the benefit of and exercising its rights conferred by this Mortgage; or (3) executed or granted any modification of any Lease, either orally or in writing; and, as of the date of this Mortgage and for so long as any of the Liabilities remains unpaid or unperformed: c. Grantor shall promptly inform Lender of, assign, and deliver, any subsequent Lease of the Property or any part thereof, and make, execute and deliver to the Lender, upon demand, any and all documents, agreements and instruments as may, in Lender's opinion, be necessary to protect the Lender's rights under this Mortgage; provided, that Grantor's failure to do so will not impair Lender's interest in or rights with respect to any subsequent Lease, nor in any way affect the applicability of this Mortgage to such Lease and the unpaid rents due or to become due thereunder; and d. Grantor shall not, without the prior written consent of Lender: (1) Cancel or accept surrender of a Lease; (2) modify or alter a Lease in any way, either orally or in writing; (3) reduce the amount of or postpone payment of any Lease rents; (4) consent to any assignment of the lessee's interest in a Lease, or any subletting thereunder; (5) collect or accept payment of rents under a Lease for more than one (1) month in advance; (6) make any other assignment, pledge, encumbrance, or other disposition of a Lease or any Lease rents, issues, income or profits. Any of the above acts, if done without the Lender's prior written consent, shall be null and void; and 7 e. Grantor shall perform and discharge each and every obligation, covenant, and agreement required to be performed by the landlord under any Lease and should Grantor fail to do so the Lender, at Lender's sole option and without releasing Grantor from any such obligation, may make or do the same in such manner and to such extent as the Lender deems necessary to protect its rights and interests under this Mortgage. Any and all costs, expenses and sums paid by the Lender in performing under any Lease, including reasonable attorney fees, shall be added to the Liabilities secured by this Mortgage. This assignment of rents is given as collateral security only and will not be construed as obligating Lender to perform any of the covenants or undertakings required to be performed by Grantor under any Lease. 15. Assignment of Contracts and Agreements. Grantor hereby assigns to the Lender, as further security for the Liabilities, Grantor's interest in all agreements, contracts (including contracts for the lease or sale of the Property or any portion thereof), licenses and permits affecting the Property. Such assignment shall not be construed as a consent by the Lender to any agreement, contract, license, or permit so assigned, or to impose upon the Lender any obligations with respect thereto. Grantor shall not cancel or amend any of the agreements, contracts, licenses and permits hereby assigned (nor permit any of the same to terminate if they are necessary or desirable for the operation of the Property), except in the ordinary course of business, without first obtaining, on each occasion, the written approval of the Lender. This paragraph shall not be applicable to any agreement, contract, license or permit that terminates if it is assigned without the consent of any party thereto (other than Grantor) or issuer thereof, unless such consent has been obtained or this assignment is ratified by such party or issuer; nor shall this paragraph be construed as a present assignment of any agreement, contract, license or permit that Grantor is required by law to hold in order to operate the Property for the purposes intended. 16. Due on Sale. The Lender in making the loan secured by this Mortgage is relying upon the integrity of Grantor and its undertaking to maintain the Property. If Grantor should (a) sell, transfer, convey or assign the Property, or any right, title or interest therein, whether legal or equitable, whether voluntarily or involuntarily, by outright sale, deed, installment sale contract, land contract, contract for deed, leasehold interest (other than leases to tenants) with a term greater than three years, lease option contract or any other method of conveyance of real property interests; or (b) cause, permit or suffer any change in control or management of the Grantor; or (c) cause, permit or suffer any change in the current management and control of the Property or in the degree of control Grantor exercises or is empowered to exercise over the decisions affecting the ownership and operation of the Property as of the date hereof, then, and in any such event, the Lender shall have the right at its sole option thereafter to declare all sums secured hereby and then unpaid to be due and payable forthwith although the period limited for the payment thereof shall not then have expired, anything contained to the contrary hereinbefore notwithstanding, and thereupon to exercise all of its rights and remedies under this Mortgage. If the ownership of the Property, or any part thereof, becomes vested in a person other than the Grantor (with or without the Lender's consent), the Lender may deal with such successor or successors in interest with reference to this Mortgage, and the Liabilities, in the same manner as with the Grantor, without in any manner vitiating, releasing or discharging the Grantor's liability hereunder or upon the Liabilities. No sale of the Property and no forbearance or extensions by the Lender of the 8 time for payment of the Liabilities or the performance of the covenants and agreements herein provided shall in any way operate to release, discharge, modify, change or affect the lien of this Mortgage or the liability of Grantor, if any, on the Liabilities or for the performance hereof, either in whole or in part. 17. Secondary Financing. Grantor will not, without the prior written consent of the Lender, mortgage or pledge the Property or any part thereof as security for any other loan or obligation of Grantor. If any such mortgage or pledge is entered into without the prior written consent of the Lender, the entire Liabilities, may, at the option of the Lender, be declared immediately due and payable without notice. Further, Grantor also shall pay any and all other obligations, liabilities or debts which may become liens, security interests, or encumbrances upon or charges against the Property for any repairs or improvements that are now or may hereafter be made thereon, and shall not, without the Lender's prior written consent, permit any lien, security interest, encumbrance or charge of any kind to accrue and remain outstanding against the Property or any part thereof, or any improvements thereon, irrespective of whether such lien, security interest, encumbrance or charge is junior to the lien of this Mortgage. Notwithstanding the foregoing, if any personal property by way of additions, replacements or substitutions is hereafter purchased and installed, affixed or placed by Grantor on the Property under a security agreement, the lien or title of which is superior to the lien created by this Mortgage, all the right, title and interest of Grantor in and to any and all such personal property, together with the benefit of any deposits or payments made thereon by Grantor, shall nevertheless be and are hereby assigned to the Lender and are covered by the lien of this Mortgage. 18. Waste. Grantor's failure, refusal or neglect to pay any taxes or assessments levied against the Property or any insurance premiums due upon policies of insurance covering the Property will constitute waste under Michigan Compiled Laws 600.2927, and the Lender shall have a right to appointment of a receiver of the Property and of the rents and income from the Property, with such powers as the Court making such appointment confers. Grantor hereby irrevocably consents to such appointment in such event, and agrees that Lender's costs and expenses, including reasonable attorney fees, incurred in such proceeding shall be added to the Liabilities secured by this Mortgage. Payment by the Lender for and on behalf of Grantor of any delinquent taxes, assessments, or insurance premiums payable by Grantor under the terms of this Mortgage will not cure the default herein described nor in any manner impair the Lender's right to appointment of a receiver as set forth herein. 19. Remedies Upon Default. Immediately upon the occurrence of an event of default under any of the Liabilities or any default in the performance of any of the covenants, conditions and agreements contained in this Mortgage (an "Event of Default"), the Lender may, in addition to and not in lieu of or substitution for, all other rights and remedies provided by law: a. Accelerate Liabilities. Without notice, except as expressly required by law, declare the entire unpaid and outstanding principal balance of the Liabilities, and all accrued interest, to be due and payable in full forthwith, and at the Lender's option, to bring suit therefor and to take any and all steps and institute any and all other proceedings that the Lender deems necessary to enforce the Liabilities and to protect the lien of this Mortgage. 9 b. Advance Sums for Other Liens. Upon the occurrence of any Event of Default arising out of the existence of any lien upon the Property, the Lender shall have the right (without being obligated to do so or to continue to do so), without notice to Grantor, to advance on and for the account of Grantor such sums as the Lender in its sole discretion deems necessary to cure such Event of Default or to induce the holder of any such lien to forbear from exercising its rights thereunder. The repayment of all such advances, with interest thereon at the highest rate applicable to the Liabilities from the date of each such advance, shall be secured hereby and shall be immediately due and payable without demand. c. Mortgage Foreclosure. To foreclose this Mortgage and sell the Property at public auction or venue pursuant to Michigan Compiled Laws 600.3201 et seq. or judicially foreclose this Mortgage under the provisions of Michigan Compiled Laws 600.3101 et seq., and Grantor agrees to pay all of Lender's costs and expenses, including reasonable attorney fees, which shall be added to the Liabilities secured by this Mortgage. At any foreclosure sale held under the foregoing Michigan statutes, Grantor agrees that in its foreclosure sale bid price the Lender shall be allowed to deduct from the appraised value of the Property: (i) the unpaid balance of any mortgage or other liens which have priority over the lien of this Mortgage; and (ii) the sum of all unpaid property taxes and assessments and insurance premiums due and to become due on the Property through the date upon which the foreclosure redemption period shall expire. Any foreclosure sale may, at the sole option of the Lender, be made en masse or in parcels, any law to the contrary notwithstanding, and Grantor hereby knowingly, voluntarily and intelligently waives any right to require any such foreclosure sale to be made in parcels or any right to select which parcels shall be sold. The proceeds of any foreclosure sale shall be applied, as the Lender elects, to the payment of Lender's collection and other expenses, including reasonable attorney fees, and/or payment of the Liabilities, with the surplus, if any, to Grantor or Grantor's successor in interest. Commencement of proceedings to foreclose this Mortgage in any manner authorized by law shall be deemed an exercise of the Lender's option to accelerate the Liabilities. After the date upon which the maturity of the Liabilities secured by this Mortgage has been accelerated, Lender's acceptance of any amount(s) paid by Grantor less than the full unpaid principal balance of the Liabilities plus accrued interest, late charges and Lender's costs and expenses in this Mortgage described, shall not waive the default or acceleration, but shall only be credited upon the unpaid balance of the Liabilities unless the Lender specifically agrees in writing to waive any such default and/or acceleration. d. This Mortgage contains a power of sale and upon default may be foreclosed by advertisement. In a foreclosure by advertisement, no hearing is involved and the only notice required is publication of a foreclosure notice in a local newspaper and posting a copy of the notice upon the Property. If this Mortgage is foreclosed by advertisement under the provisions of Michigan Compiled Laws 600.3201 et seq., Grantor hereby knowingly, voluntarily, and intelligently waives all rights under the Constitution and laws of the State of Michigan and the Constitution and laws of the United States of America to any notice or hearing in connection with a foreclosure by advertisement except as set forth in the Michigan statute. 10 e. Collection of Rents. Enter into peaceful possession of the Property and/or to collect and receive all rents, issues, income and profits from the Property, terminate any tenancy, maintain proceedings to recover rents or possession of any of the Property from any tenant or trespasser, rent or lease the Property or any portion thereof upon such terms as the Lender deems best, and have the right to all oil and gas royalties and any other income from the Property. Lender, in such order as Lender in its sole discretion elects, may apply the proceeds of any rents, issues, profits and income to: (i) preservation, maintenance or operation of the Property, (ii) payment of taxes due on the Property; and (iii) payment of the Liabilities. Grantor irrevocably consents and agrees that the lessee(s) under any Lease, upon demand and notice from Lender of Grantor's default, shall be required to pay all rents, issues, profits and income to Lender, without any obligation upon such lessee(s) to determine the actual existence of any default by Grantor. Lender may enter upon the Property or any part thereof, by its officers, agents, or employees, for the collection of the rents, issues and profits and for the operation and maintenance of the Property, and Grantor hereby authorizes Lender in general to perform all acts necessary for the operation and maintenance of the Property in the same manner and to the same extent that the Grantor might so act. Such entry and taking possession of the Property or any part thereof by Lender, may be made by actual entry and possession or by written notice served personally upon or sent by certified mail to the last owner of the Property appearing on the records of the Lender, as the Lender elects, without further authorization or notice. In connection with the Lender's right to possession of the Property upon the occurrence of an Event of Default, as specified in the foregoing paragraph, Grantor acknowledges that it has been advised that there is a significant body of case law in Michigan which purportedly provides that in the absence of a showing of waste of a character sufficient to endanger the value of the Property, or other special factors, a mortgagor is entitled to remain in possession of the Property, and to enjoy the income, rents and profits therefrom, during the pendency of foreclosure proceedings and until the expiration of the redemption period, even if the mortgage documents expressly provide to the contrary. Grantor further acknowledges that it has been advised that the Lender recognizes the value of the security covered hereby is inextricably intertwined with the effectiveness of the management, maintenance and general operation of the Property, and that the Lender would not make the loan secured hereby unless it could be assured that it would have the right to take possession of the Property in order to manage or to control management thereof, and to enjoy the income, rents and profits therefrom, immediately upon the occurrence of an Event of Default hereunder, notwithstanding that foreclosure proceedings may not have been instituted, or are pending, or the redemption period may not have expired. Accordingly, Grantor hereby knowingly, intelligently and voluntarily waives all right to possession of the Property from and after the occurrence of an Event of Default hereunder, upon demand for possession by the Lender, and Grantor agrees not to assert any objection or defense to the Lender's request or petition to a court for possession. The rights hereby conferred upon the Lender have been agreed upon prior to the occurrence of an Event of Default hereunder and the exercise by the Lender of any such rights shall not be deemed to put the Lender in the status of a "mortgagee in possession". Grantor acknowledges that this provision is material to this transaction and that the Lender would not make the loan secured hereby but for this paragraph. 11 f. Title Reports. Procure mortgage foreclosure or title reports. Grantor covenants to pay forthwith to the Lender all sums paid for such purposes with interest at the highest rate applicable to the Liabilities, and such sums and the interest thereon shall constitute a further lien upon the Property. g. Appraisals and Audits. Procure appraisals, environmental audits and such other investigations or analyses of the Property as the Lender may determine to be required by regulatory or accounting rules, procedures or practices or to otherwise be prudent or necessary. Grantor shall grant the Lender free and unrestricted access to the Property for such purposes. Grantor covenants to pay forthwith to the Lender all sums paid for such purposes with interest at the highest rate applicable to the Liabilities, and such sums and the interest thereon shall constitute a further lien upon the Property. 20. Costs of Legal Proceedings. The Grantor shall pay the Lender a reasonable attorney's fee in addition to all other legal costs in case the Lender shall become a party, either as plaintiff or defendant, to any legal proceedings in relation to the Property or the lien created hereby, which sums shall be secured hereby and shall be payable forthwith at the highest rate applicable to the Liabilities. 21. Books and Records. The Grantor covenants and agrees to furnish to the Lender promptly certificates of occupancy and such other books, records, documents, information and statements pertaining to the Grantor, the Property and its operations and any guarantor(s) as the Lender may request. All books, records and other information provided by Grantor hereunder shall be in a form that is acceptable to the Lender and all costs of providing the same shall be borne entirely by Grantor. 22. Security Agreement and Financing Statements. Grantor shall execute, acknowledge and deliver any and all such further conveyances, documents, mortgages and assurances as the Lender may reasonably require for accomplishing the purposes hereof, including financing statements required by the Lender to protect its interest under the provisions of the Michigan Uniform Commercial Code, as amended, forthwith upon the written request of the Lender. Upon any failure of Grantor to do so, the Lender may execute, record, file, re-record and refile any and all such documents for and in the name of Grantor, and Grantor hereby irrevocably appoints the Lender as agent and attorney-in-fact of Grantor for the foregoing purposes. This instrument is intended by the parties to be, and shall be construed as, a security agreement, as that term is defined and used in Article Nine of the Michigan Uniform Commercial Code, as amended, and shall grant to the Lender a security interest in that portion of the Property with respect to which a security interest can be granted under Article Nine of the Michigan Uniform Commercial Code, as amended, which security interest shall include a security interest in all personalty owned by Grantor, whether now owned or subsequently acquired, which is or in the future may be physically located on or affixed to the Property described in Exhibit "A" hereto, regardless of whether such personalty consists of fixtures under Michigan law, a security interest in the proceeds and products of the proceeds of all insurance policies now or hereafter covering all or any part of such collateral. For purposes of Article Nine of the Michigan Uniform Commercial Code, (a) Grantor herein is the "debtor", (b) the Lender herein is the "secured party", (c) information concerning the security interest created hereby may be obtained from the Lender at its address set forth on page 1 hereof, and (d) Grantor's mailing address is that set forth on page 1 hereof. 12 23. Non-Lender Liens, Insolvency Proceedings. If any non-Lender mortgage foreclosure proceeding or any Federal, State or local tax lien, seizure, levy, forfeiture, or any other lien or proceeding shall be instituted, recorded, or filed against the Property which is not discontinued, reserved for in cash in an amount and manner satisfactory to Lender, or bonded by a company satisfactory to Lender within thirty (30) days after initiation, recording or filing, or if any insolvency or receivership proceedings, either voluntary or involuntary, are instituted by or against Grantor for the liquidation or rehabilitation of Grantor's assets and affairs, or if any criminal proceedings are initiated wherein forfeiture of the Property is a potential penalty, the Lender may, at its option and without notice, declare the entire Liabilities to be immediately due and payable and may institute all such proceedings, including foreclosure of this Mortgage, as the Lender deems necessary to protect its interest in the Property. 24. First Mortgage. Grantor expressly covenants and agrees that Grantor shall not borrow any additional sum nor incur any additional indebtedness or other obligation secured by the First Mortgage, shall promptly pay the First Mortgage indebtedness in accordance with the terms of the note or obligation secured by the First Mortgage, shall fully and promptly keep and perform all of the terms, conditions, and covenants of the First Mortgage, and other agreements pertaining thereto, and any default by Grantor thereunder shall constitute a default by Grantor under this Mortgage. The Lender may, at Lender's sole option but without obligation to do so, cure any default by Grantor in any indebtedness or other agreement secured by the First Mortgage, as the Lender deems necessary to protect Lender's mortgage lien, assignments and security interests under this Mortgage, and all moneys advanced by Lender and all costs incurred in effecting any such cure, including reasonable attorney fees, shall be added to the Liabilities secured by this Mortgage. Grantor hereby consents and agrees that Lender may contact the holder of the First Mortgage and any or other lienor at any time to obtain the payment status, unpaid balance, copies of any documents and agreements pertaining to Grantor or the Property, and such other information as Lender deems advisable. 25. Binding Effect. Until this Mortgage is discharged in full, all of the covenants and conditions hereof shall run with the land and shall be binding upon the successors and assigns of Grantor, and shall inure to the benefit of the successors and assigns of the Lender. Any reference herein to "Grantor" or the "Lender" shall include their respective successors and assigns. 26. Notices. All notices, demands and requests required or permitted to be given to Grantor hereunder or by law shall be deemed delivered when deposited in the United States mail, with full postage prepaid thereon, addressed to Grantor at the last address of Grantor on the records of the Lender. 27. No Waiver. No waiver by the Lender of any right or remedy granted hereunder shall affect or extend to any other right or remedy of the Lender hereunder, nor affect the subsequent exercise of the same right or remedy by the Lender for any further or subsequent Event of Default by Grantor hereunder, and all such rights and remedies of the Lender hereunder are cumulative. Time is of the essence. 13 28. Severability. If any provision(s) hereof are in conflict with any statute or rule of law of the State of Michigan or are otherwise unenforceable for any reason whatever, then such provision(s) shall be deemed null and void to the extent of such conflict or unenforceability, but shall be deemed separable from and shall not invalidate any other provisions of this Mortgage. 29. Pronouns. If more than one person joins in the execution hereof, or is of the feminine sex, or a corporation, the pronoun and relative words herein used shall be read as if in plural, feminine or neuter, respectively. IN WITNESS WHEREOF, this Mortgage was executed and delivered by the undersigned on the date stated in the first paragraph above. Grantor: NEMATRON CORPORATION By: /s/ Matthew S. Galvez --------------------- Its: President STATE OF MICHIGAN COUNTY OF WASHTENAW The foregoing instrument was acknowledged before me on October 15, 2003 by Matthew S. Galvez, who is the President of NEMATRON CORPORATION, a Michigan corporation, on behalf of the corporation. /s/ Christine M. Herriman ------------------------- Notary Public, Washtenaw County, MI My commission expires: October 15, 2005 ---------------- DRAFTED BY: WHEN RECORDED RETURN TO: Michael J. Sauer, Esq. Michael J. Sauer, Esq. Braun Kendrick Finkbeiner P.L.C. Braun Kendrick Finkbeiner P.L.C. 4301 Fashion Square Boulevard 4301 Fashion Square Boulevard Saginaw, MI 48603 Saginaw, MI 48603 14 EXHIBIT A Land in Scio Township, County of Washtenaw, of Michigan, described as: COMMENCING AT THE SOUTH 1/4 CORNER OF SECTION 21, TOWN 2 SOUTH, RANGE 5 EAST, SCIO TOWNSHIP, WASHTENAW COUNTY, MICHIGAN, THENCE NORTH 00 DEGREES 14 MINUTES 00 SECONDS WEST 1322.45 FEET ALONG THE NORTH AND SOUTH 1/4 LINE OF SAID SECTION; THENCE NORTH 56 DEGREES 08 MINUTES 00 SECONDS EAST 219.04 FEET TO THE POINT OF BEGINNING; THENCE CONTINUING NORTH 56 DEGREES 08 MINUTES 00 SECONDS EAST 103.69 FEET, THENCE NORTH 39 DEGREES 59 MINUTES 50 SECONDS EAST 31.08 FEET ALONG THE CENTER LINE OF HONEY CREEK; THENCE SOUTH 78 DEGREES 54 MINUTES 40 SECONDS EAST 661.22 FEET; THENCE SOUTH 13 DEGREES 42 MINUTES 20 SECONDS WEST 218.54 FEET ALONG THE WESTERLY RIGHT-OF-WAY LINE OF JACKSON INDUSTRIAL DRIVE; THENCE ALONG THE NORTHERLY RIGHT-OF-WAY LINE OF JACKSON INDUSTRIAL COURT WESTERLY 461.67 FEET ALONG THE ARC OF A 495.28 FOOT RADIUS CIRCULAR CURVE TO THE LEFT THROUGH A CENTRAL ANGLE OF 53 DEGREES 24 MINUTES 25 SECONDS HAVING A CHORD WHICH BEARS SOUTH 73 DEGREES 10 MINUTES 55 SECONDS WEST 445.13 FEET; THENCE NORTH 35 DEGREES 37 MINUTES 15 SECONDS WEST 475.71 FEET TO THE POINT OF BEGINNING, BEING PART OF THE WEST HALF OF THE SOUTHEAST QUARTER, SECTION 21, TOWN 2 SOUTH, RANGE 5 EAST, SCIO TOWNSHIP, WASHTENAW COUNTY, MICHIGAN. 15 EX-4 6 exhibit4-04_093003.txt EXHIBIT 4.04 - NCTI PROMISSORY NOTE Exhibit 4.04 ------------ NEMATRON CORPORATION PROMISSORY NOTE $1,700,000 July 16, 2003 For value received, NEMATRON CORPORATION, a Michigan corporation (the "Company"), promises to pay to the order of NORTH COAST TECHNOLOGY INVESTORS, LP., at 206 S. Fifth Avenue, Ann Arbor, Michigan 48104 ("North Coast"), or its permitted assigns, the principal sum of ONE MILLION SEVEN HUNDRED THOUSAND DOLLARS ($1,700,000), or so much thereof as is advanced hereunder from time to time. Interest hall 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 nine percent (9%) per annum. The principal of and interest on this Note shall be paid in lawful money of the United States upon demand therefore 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. Notwithstanding the foregoing, the Company shall pay interest on demand at the rate of fourteen percent (14%) per annum on the outstanding principal amount of the Promissory Note, all accrued and unpaid interest, and all other amounts due under this Note which are not paid in full when due for the period commencing on the due date thereof until the same are paid in full. The Company acknowledges that this Note matures upon issuance, and that the holder of this Note, at any time, without reason, may demand that this Note be immediately paid in full. This Note may be paid prior to demand, without penalty, in whole or in part at any time and from time to time after issue at the option of the Company. 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. 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). The Company shall pay all expenses, court costs and reasonable attorneys' fees which may be incurred by or on behalf of this Note in connection with the collection of or attempts to collect any amounts due under this Note. The Company and each endorser hereof waive demand, presentment, protest, diligence, notice of dishonor, and any other formality in connection with this Note. This Note shall be governed by the laws of the State of Michigan. NEMATRON CORPORATION By: /s/ Tina M. Raiford ------------------- Its: Controller EX-99.CERT 7 exhibit99-01_09302003.txt EXHIBIT 99.01 - CERTIFICATION OF CEO AND CAO Exhibit 99.1 ------------ Nematron Corporation Certification of Chief Executive Officer and Chief Accounting Officer 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, 2003 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 Tina M. Raiford, as Controller 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. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Nematron Corporation and will be retained by Nematron Corporation and furnished to the Securities and Exchange Commission or its staff upon request. /s/ Matthew S. Galvez - --------------------- Name: Matthew S. Galvez Title: Chief Executive Officer Date: November 13, 2003 /s/ Tina M. Raiford - ------------------- Name: Tina M. Raiford Title: Controller Date: November 13, 2003 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 Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----