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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO 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: 5,353,316 SHARES OUTSTANDING AS OF
FEBRUARY 5, 1998
Transitional Small Business Disclosure Format: [ ] YES [X] NO
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 106,730 $ 357,724
Accounts receivable, net of allowance for doubtful
accounts of $368,000 at December 31, 1998, and
$381,000 at September 30, 1998 1,999,900 2,514,741
Inventories (Note 2) 1,884,335 2,103,434
Prepaid expenses and other current assets 305,310 295,321
------------ ------------
Total Current Assets 4,296,275 5,271,220
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $5,685,402 at December 31, 1998 and $5,475,815 at
September 30, 1998 3,344,140 3,942,695
OTHER ASSETS:
Software and related development costs, net of amortization
of $2,557,639 at December 31,1998, and $2,314,845 at
September 30, 1998 3,880,284 1,002,225
Other intangible assets, net of amortization of $2,225,842 at
December 31, 1998 and $2,165,775 at September 30,1998 942,158 3,008,547
------------ ------------
Net Other Assets 4,822,442 4,944,920
------------ ------------
TOTAL ASSETS $ 12,462,857 $ 13,840,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank $ 2,715,457 $ 3,514,000
Accounts payable 1,409,645 1,414,417
Trade notes payable 1,123,956 1,545,956
Other accrued expenses 1,387,403 1,866,366
Convertible promissory notes payable 1,000,000 -0-
Current maturities of long-term debt (Note 3) 1,576,492 1,832,791
------------ ------------
Total Current Liabilities 9,212,953 10,173,530
LONG-TERM DEBT, less current maturities (Note 3) 2,182,783 2,084,346
DEFERRED TAX LIABILITY 178,200 189,000
------------ ------------
Total Liabilities 11,573,936 12,446,876
STOCKHOLDERS' EQUITY:
Common stock, no par value, 15,000,000 shares authorized;
5,353,316 shares issued and outstanding
at December 31, 1998 and September 30, 1998 21,664,809 21,664,809
Foreign currency translation adjustment (7,134) (6,080)
Accumulated deficit (20,768,754) (20,265,605)
------------ ------------
Total Stockholders' Equity 888,921 1,393,124
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,462,857 $ 13,840,000
============ ============
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
QUARTER QUARTER
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
(RECLASSIFIED)
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
NET REVENUES $ 3,186,910 $ 4,351,308
COST OF REVENUES 2,084,915 3,037,120
------------ ----------
Gross Profit 1,101,995 1,314,188
OPERATING EXPENSES:
Product development costs 131,987 209,212
Selling, general and administrative expenses 1,323,945 2,300,862
------------ ------------
Total Operating Expenses 1,455,932 2,510,074
------------ -----------
Operating Loss (353,937) (1,195,886)
OTHER INCOME (EXPENSE):
Interest expense (158,804) (143,487)
Sundry income (expense), net (1,208) 1,154
------------ -----------
Total Other Income (Expense) (160,012) (142,333)
------------ -----------
LOSS BEFORE INCOME TAXES (513,948) (1,338,219)
INCOME TAXES BENEFIT (NOTE 4) 10,800 -0-
------------ -----------
NET LOSS $ (503,149) $ (1,338,219)
============ ============
BASIC LOSS PER SHARE (NOTE 5) $ (0.09) $ (0.25)
============ ===========
DILUTED LOSS PER SHARE (NOTE 5) $ (0.09) $ (0.25)
============ ===========
Weighted average shares outstanding - basic 5,353,316 5,335,168
============ ===========
Weighted average shares outstanding - diluted 5,353,316 5,335,168
============ ===========
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (503,149) $ (1,338,219)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization 544,013 547,968
Deferred income tax benefit (10,800) -0-
Changes in assets and liabilities that provided (used) cash:
Accounts receivable 514,841 (98,142)
Inventories 219,099 (243,645)
Prepaid expenses and other current assets (9,989) (65,151)
Accounts payable (4,772) (161,000)
Accrued expenses (444,468) (188,560)
---------- ------------
Net Cash Provided By (Used In) Operating Activities 304,775 (1,546,749)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to capitalized software development costs (180,382) (638,214)
Additions to property and equipment, net of minor disposals (8,723) (224,474)
---------- ------------
Net Cash Used In Investing Activities (189,105) (862,688)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible promissory notes 1,000,000 -0-
Proceess from disposals of property and equipment 12,795 -0-
Increase (decrease) in note payable to bank (798,543) 1,736,000
Payment of trade notes payable (422,000) -0-
Increase in other notes payable -0- 109,613
Proceeds from exercise of options and warrants -0- 41,491
Payments of long-term debt (157,862) (165,306)
---------- ------------
Net Cash Provided By (Used In) Financing Activities (356,610) 1,721,798
---------- ------------
FOREIGN CURRENCY TRANSLATION EFFECT (1,054) (584)
---------- ------------
Net Decrease In Cash and Cash Equivalents (250,994) (688,223)
Cash and Cash Equivalents at Beginning of Period 357,724 1,142,988
---------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 106,730 $ 454,765
========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 142,255 $ 149,026
Cash paid for income taxes -0- -0-
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Nematron Corporation (the "Company") and its wholly-owned subsidiaries, Nematron
Ltd., a United Kingdom corporation; Nematron Europa BV, an inactive Netherlands
corporation, and NemaSoft, Inc. ("NemaSoft") and Imagination Systems, Inc.,
("ISI") both Michigan corporations. 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 S.E.C. 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 and amendments thereto
Certain reclassifications have been made to the fiscal 1998 presentation to
conform to classifications used in fiscal 1999.
The results of operations for the three-month periods ended December 31, 1998
and 1997 are not necessarily indicative of the results to be expected for the
full year.
NOTE 2 - INVENTORIES
Inventories consist of the following at December 31, 1998, and September 30,
1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1998
<S> <C> <C>
Purchased parts and accessories $ 1,142,431 $ 1,100,202
Work in process 307,762 370,840
Finished goods, demo units and service stock 434,142 632,392
----------- -----------
Total Inventory $ 1,884,335 $ 2,103,434
=========== ===========
</TABLE>
NOTE 3 - SHORT-TERM AND LONG-TERM DEBT
On September 28, 1998, December 1, 1998 and January 31, 1999, the Company
entered into amendments to the loan agreements and into a Repayment Agreement
with the bank which provided, among other things, for a modification of certain
terms of the Term Note, two Equipment Notes and the Revolving Credit Note. The
Revolving Credit Note, as amended contains various affirmative and negative
covenants. The Company is in violation of these covenants.
Under the terms of the amended agreements, the amount available under the
Revolving Credit Note is $5,000,000 and is limited by a borrowing formula which
allows for advances up to a maximum of the sum of 80% of eligible domestic and
foreign accounts, plus 35% of inventory, plus a Permitted Overadvance of
$1,000,000 through April 15, 1999 . The interest rate on the credit line
borrowings is at the bank's prime interest rate plus 2% (10.25% effective rate
at December 31, 1998). Amounts borrowed under the line of credit are due in full
on October 31, 1999.
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ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NOTE 3 - SHORT-TERM AND LONG-TERM DEBT - CONTINUED
Long-term debt includes the following debt instruments at December 31, 1998, and
September 30, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1998
<S> <C> <C>
Mortgage loan payable to bank $ 1,956,474 $ 1,998,509
Term note payable 1,170,000 1,230,000
Capitalized lease obligations and other notes 632,801 688,628
----------- -----------
Total long-term debt 3,759,275 3,917,137
Less current maturities (1,576,492) (1,832,791)
----------- -----------
Long-term debt, less current maturities $ 2,182,783 $ 2,084,346
=========== ===========
</TABLE>
The mortgage loan agreement contains covenants that require the Company to
maintain a minimum tangible net worth and a minimum debt-to-equity ratio. The
Company was not in compliance with these covenants; however, the Company's
lender has waived these defaults through October 1, 1999.
The loan agreement with the bank regarding the term note and two equipment notes
includes various affirmative and negative covenants, the most restrictive of
which are (1) the prohibition of dividend payments, and (2) requirements to
maintain (a) a specified ratio of current assets to current liabilities, (b) a
specified ratio of liabilities to tangible net worth, (c) a specified debt
coverage ratio, and (d) a specified level of tangible worth. These borrowings
are due October 31, 1999 and as such these notes totaling $1,487,017 and
$1,579,781 at December 31, 1998 and September 30, 1998, respectively, are
included in current maturities of long-term debt.
NOTE 4 - TAXES ON INCOME
The current tax benefit computed for the three month period ended December 31,
1998 reflect the tax benefit associated with the amortization of non-deductible
goodwill and other intangible assets during the same periods.
There was no current tax benefit computed for the three month period ended
December 31,1997 because of the uncertainty that the associated deferred tax
asset could not be realized through future taxable income.
The Company has NOLs of approximately $19,400,000, which may be applied against
future taxable income. The NOLs expire beginning 2003 and run through 2013.
Utilization of these carryforwards 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 net operating loss carryforwards.
NOTE 5 - LOSS PER SHARE
Basic earnings per share is based on the weighted average number of shares
outstanding for each period presented because common stock equivalents are
anti-dilutive. The weighted average number of shares outstanding for the
three-month periods are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
<S> <C> <C>
Weighted average shares outstanding 5,353,267 5,343,886
Diluted earnings per share is not presented because the amounts are anti-dilutive.
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NOTE 6 - CONTINGENCIES
On May 8, 1998, a lawsuit was filed against the Company in the District
Court for the Southern District of New York. The lawsuit names as defendants the
Company, certain of its officers and directors, its former independent auditor
and the underwriter for the Company's initial public offering. The plaintiff
seeks to represent a class of shareholders who purchased the Company's common
stock from January 31, 1996 through April 28, 1998. An amended complaint filed
by the plaintiff in October 1998 claims violations of securities laws and common
law based on allegations that defendants made untrue statements of material
facts and that they omitted material facts necessary in order to make the
statements not misleading. The complaint seeks unspecified damages and costs. In
December 1998, the case was transferred to the United States District Court for
the Eastern District of Michigan. In January 1999, the Company filed a motion
for the dismissal of the lawsuit. Management believes that the outcome of this
case will not have a material adverse effect on the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 1997
Net revenues for the first quarter of fiscal 1999 decreased $1,164,000
(26.8%) to $3,187,000 compared to the same period last year. The decrease is
attributable to decreases in sales of Industrial Workstations and Industrial
Control Computers caused by component parts shortages due to the Company's
working capital deficiency. Management expects that net revenues for the second
quarter of fiscal 1998 will approximate second quarter fiscal 1998 net revenues
and that net revenues will increase in the last two quarters of fiscal 1999
compared to year earlier periods. These net revenue changes are expected due to
anticipated customer response to the Company's increases in sales and marketing
efforts, existing scheduled production releases and expected shipments under
existing contracts.
Gross profit for the first quarter of fiscal 1999 decreased $212,000
(16.1%) to $1,102,000 compared to the same period last year. Gross profit as a
percentage of sales in the first quarter of fiscal 1999 was 34.6% compared to
30.2% in the same period last year. The improvement in gross profit percentage
is due primarily to a higher percentage of sales of higher margin bundled
hardware/software products in the current period compared to the same period
last year. Management expects that gross profit margins will remain relatively
constant throughout the year as the mix of sales in the remaining quarters of
fiscal 1999 is expected to be similar to the sales mix experienced in the first
quarter of the period.
Product development expenses for the first quarter of fiscal 1999
decreased $77,000 (36.9%) to $132,000 compared to the same period last year. The
decrease is due primarily to a decreased staff level and less development
efforts in the current period compared to a year ago. Management expects that
product development efforts will remain relatively constant in the remaining
quarters of fiscal 1999.
Selling, general and administrative expenses for the first quarter of
fiscal 1999 decreased $977,000 (42.5%) to $1,324,000 compared to the comparable
period of last year and decreased as a percentage of net revenue to 41.5% in the
first quarter of fiscal 1999 from 52.9% in the comparable period of fiscal 1998.
The decrease was primarily a result of lower staff levels, the effects of
closing of satellite offices during the first quarter of fiscal 1999 and the
effects of cost controls initiated during the current period. Management expects
that selling, general and administrative expenses will increase marginally in
the remaining quarters of fiscal 1999 due to expanded marketing and sales
activities, and that such expenses will decrease as a percentage of net revenues
as net revenues are expected to increase by a greater amount in the remaining
quarters of fiscal 1999.
Interest expense for the first quarter of fiscal 1999 increased $15,000
(10.7%) to $159,000 compared to $143,000 for the comparable period last year due
to higher average borrowing levels.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS -
CONTINUED
YEAR 2000 ISSUE
The Year 2000 Issue ("Y2K") is the result of certain computer programs
being written using two digits rather than four digits to define the applicable
year. Computer systems with a Y2K problem will be unable to interpret dates
beyond the years 1999, which could cause a system failure or other computer
errors, leading to disruptions in operations. In 1997, the Company began to
assess its Y2K readiness and adopted a three-phase program for Y2K information
systems compliance. Phase I is the identification of systems and products with
which the Company has exposures to Y2K issues. Phase II encompasses the
development and implementation of action plans to be Y2K compliant in all areas
by mid-1999. Phase III includes final testing of each major area of exposure to
ensure compliance. The Company has identified four major areas determined to be
critical for successful Y2K compliance: (1) financial and information system
applications; (2) software products currently sold; (3) third-party
relationships and 4) non-information technology areas such as security,
telephone systems and climate control systems.
The Company is finishing Phase I of its program. The Company has
contacted all significant software suppliers and, due to recent implementation
of its major financial and operational software, believes that its financial and
operational software is Y2K compliant. The Company has also reviewed for Y2K
compliance its hardware and software products, including the firmware imbedded
in certain hardware products, marketed and sold to third parties. The Company
has used its employee engineers and others in its review and testing procedures.
The Company has identified one older software product, used for
monitoring and testing in a test cell environment (not related to machine
control) which needs to be modified to correct a Y2K problem. The Company
estimates that the cost to modify the product is approximately $50,000, all of
which relates to the salary and benefits of software development employees of
the Company, none of which has been expended to date. The Company intends to fix
this Y2K issue and notify its customers when a solution is available. The
Company intends to make the Y2K compliant software available to its customers
for purchase. The Company intends to fund the costs of this effort out of
operating funds in fiscal 1999. If the product cannot be remedied in a cost
efficient manner, the Company may determine to cease marketing and production of
the product; such action, however, is not expected to have a material adverse
effect on the Company's results of operations.
The Company has relationships with, and is to varying degrees dependent
upon, various third parties that provide funds, information, goods and services
to the Company. These include the Company's bank lender, utility providers,
stock transfer agent, and suppliers of components. The Company is attempting,
through informal contacts, to assess the compliance of these third parties.
While not all parties have informed the Company as to their status, the most
significant of these third parties have represented that their systems and
products are Y2K compliant. The Company will continue with this assessment in
fiscal 1999. The Y2K compliance of the systems of these third parties is outside
the Company's control and there can be no assurance that any of these third
parties will not experience a systems failure due to Y2K.
Because the Company expects that the systems within its control will be
Y2K compliant before the end of 1999, the Company believes that the most
reasonably likely worst case scenario is a compliance failure by one or more of
the third parties described above. Such a failure would likely have an effect on
the Company's business, financial condition and results of operations. The
magnitude of that effect, however, cannot be quantified at this time because of
variables such as the type and importance of the third party, the possible
effect on the Company's operations and the Company's ability to respond. Thus,
there can be no assurance that there will not be a material adverse effect on
the Company if such third parties do not remediate their systems in a timely
manner and in a way that is compatible with the Company's systems.
As a result, the Company will develop contingency plans that assume
some estimated level of noncompliance by, or business disruption to, these third
parties. The Company intends to have contingency plans developed by the end of
its third quarter of fiscal 1999 for third parties determined to be at high risk
of noncompliance or business disruption or whose noncompliance or disruption,
while not high
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS - CONTINUED
YEAR 2000 ISSUE - CONTINUED
risk, is considered likely to materially affect the Company. The contingency
plans will be developed on a case-by-case basis, and may include plans for
switching to Y2K compliant suppliers.
Judgments regarding contingency plans are subject to many uncertainties
and there can be no assurance that the Company will correctly anticipate the
level, impact or duration of noncompliance or that its contingency plans will be
sufficient to mitigate the impact of any noncompliance. Some material adverse
effect to the Company may result despite such contingency plans.
To date, the Company has expended approximately $10,000 incremental
costs to remediate Y2K problems, in that all efforts have been expended by
existing engineering and application support and other personnel These costs
have been expensed as incurred. The Company estimates total Y2K remediation
costs at $65,000 incrementally over the next three quarters. Estimates of time,
cost and risks are based on currently available information. Developments that
could affect estimates include, without limitation, the availability of trained
personnel, the ability to locate and correct all noncompliant systems,
cooperation and remediation success of third parties material to the Company,
and the ability to correctly anticipate risks and implement suitable contingency
plans in the event of system failures at the Company or third parties.
LIQUIDITY AND CAPITAL RESOURCES
By the end of October 1998, the Company was overadvanced on its
revolving credit facility, and was facing imminent foreclosure by the Company's
lenders. In early November 1998, after unsuccessful attempts to sell the
business or solicit working capital through other means, and when the Company
was faced with imminent closing of its business, the Company negotiated an
arrangement with a group of creditors that provided essential working capital to
permit the Company to continue operations. The proposal was submitted to the
bank, and precipitated a forbearance agreement from the Company's bank.
Following receipt of support from the bank, the management and Board of
Directors agreed to support the arrangement as an offer of last resort. It was
the opinion of management and the Board of Directors that preserving the
Company's ability to operate at the expense of diluting existing shareholders'
interest was preferable to ceasing operations in view of the Company's
significant backlog and the risk of losing its existing customers if it were to
cease operations. As a result, the Company determined to enter into the capital
transaction described below (the "Capital Transaction").
As of December 1, 1998, the Company executed and delivered convertible
promissory notes (the "Notes") in the aggregate principal amount of $1 million
to 18 investors in a private placement (collectively, the "Note Holders") as the
first stage of the Capital Transaction. The Notes bear interest at the rate of
seven percent (7%) per annum, are due and payable, with accrued interest, on
March 31, 1999 (except as described below) and are not transferable without the
Company's consent. The Notes may be paid by the Company, subject to the
limitation described in the next sentence, with Common Stock valued at $.25 per
share and are convertible by the Note Holders into Common Stock at $.25 per
share (the "Conversion Price"). The Company is not required to issue more than
1,070,000 shares in connection with the payment and/or conversion of the Notes
unless the issuance of any additional shares has been approved by the Company's.
If the entire principal and accrued interest amount of the Notes is converted
into or paid with Common Stock, the Company would be required to issue 4,093,333
million shares of Common Stock. Amounts due under the Notes which are not paid
with or converted into Common Stock must be paid in cash on or before their due
date. The Company intends to pay all of its obligations under the Notes with
Common Stock if the Company receives shareholder approval.
Page 8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS -
CONTINUED
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
In contemplation of the second stage of the Capital Transaction in
which the Company was to raise an additional $3 million, five of the Note
Holders, including Mr. Nichols, Mr. Globus and two of his affiliates and Mr.
Hershey (on behalf of J. Eric May), expressed a willingness to invest additional
funds in the Company's Common Stock and were granted, in connection with their
purchase of Notes as of December 1, 1999, options to acquire additional Notes
with an aggregate principal amount of $1,250,000 on or before January 31, 1999
(the "Options"). As of January 12, 1999, the terms of the Options were amended
to provide that (i) the Options expire on the earlier of April 30, 1999 and the
fifth business day after receipt of shareholder approval of the issuance of the
shares, (ii) the Option holders together have the right to purchase a total of
1,250,000 shares of Common Stock, rather than Notes convertible into Common
Stock (subject to receipt of the shareholder approval) and (iii) the exercise
price of the Options is $1.00 per share, rather than $.25. The Notes held by
these five investors were also amended to extend the maturity of the Notes from
March 31, 1999 to coincide with the termination of the Options -- the earlier of
April 30, 1999 and the fifth business day after receipt of shareholder approval.
The Option holders have indicated that they intend to exercise the Options in
full if shareholder approval is received.
The Company is also in the process of receiving subscription agreements
from other accredited investors to purchase an additional 1,750,000 shares as
part of the second stage of the Capital Transaction at $1.00 per share, subject
to receipt of shareholder approval. As consideration for its efforts as
placement agent in connection with the sale of such shares and the sale of
$250,000 principal amount of the Notes, the Company will issue to Gregory J.
Schwartz & Co. ("Schwartz") upon the sale of the shares in the second stage of
the Capital Transaction an option to purchase 80,000 shares at $.25 per share
and 140,000 shares at $1.00 per share (the "Schwartz Option"). The Schwartz
Option expires on June 30, 1999.
The Company is party to a bank line of credit which permits borrowing
up to $5,000,000, subject to an availability formula based upon a percentage of
eligible accounts receivable and inventory and a permitted overadvance. At
December 31, 1998, $2,715,457 was outstanding on the line. The expiration date
of the underlying Agreement has been extended to October 31, 1999. Amounts
borrowed under the facility bear interest at prime plus 2.0% (10.25% effective
rate at December 31, 1998).
Prior to the expiration of the line of credit on October 31, 1999, the
Company plans to negotiate an extension of the expiration date of the line of
credit. Additionally, the Company plans to reduce borrowings on the credit line
with a portion of the proceeds from the Capital Transaction described above.
Although management believes that by the set expiration date of the credit line
the receivable and inventory levels, upon which the borrowing base is
calculated, will increase, and the amount of over-advance from the bank will
decrease, there can be no assurance that the credit line will be extended.
Consequently, if negotiations to extend the credit line fail, management will
seek financing from other financing sources, which may not materialize, or if
such sources are available, the cost of such arrangement may be significantly
higher than the current bank agreement.
The Company also successfully negotiated the conversion of $1.7 million
of trade accounts payable into short-term trade notes payable. Although the
Company was delinquent on the terms of these notes at September 30, 1998, the
Company has paid or received extensions of all past due payments as of December
31, 1998, and is current with the revised terms of such trade notes payable.
In order for the Company to have sufficient short-term liquidity to
continue operations for the remainder of fiscal 1999, the line of credit must be
renewed or replaced, the Company must receive the remaining proceeds from the
Capital Transaction described above and the Company must be able to pay the
principal and interest under all of its convertible notes with Common Stock as
described above. If the Company is not successful in accomplishing these goals,
the Company would be forced to curtail its operations and either sell the
Company to a third party or seek protection under federal bankruptcy laws.
Page 9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS -
CONTINUED
UNCERTAINTIES RELATING TO FORWARD LOOKING STATEMENTS
"Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations" includes "forward-looking statements" (as defined in
the federal securities laws) based on current management expectations. Factors
that could cause future results to differ from these expectations include the
failure of the bank to renew its line of credit agreement when borrowings
thereunder become due, the failure of the Company to complete the second stage
of the Capital Transaction, the inability of the Company to pay the principal
and interest of the Notes with common stock at their maturity dates, the decline
of economic conditions in general and conditions in the automotive manufacturing
industry in particular, a reduction in demand for the Company's products and
services, decreases in orders under existing contracts, the inability of the
Company to successfully implement its strategy to lead the industrial automation
market migration from closed architecture PLCs to open architecture PC-based
solutions, changes in Company strategy, reductions in product life cycles,
competitive factors (including the introduction or enhancement of competitive
products), pricing pressures which result in materially reduced selling prices
for the Company's products, shifts in sales mix to less profitable productsraw
material price increases or unavailability, delays in introduction of planned
hardware and software products, software defects and latent technological
deficiencies in new products, changes in operating expenses, fluctuations in
foreign exchange rates, the inability to attract or retain sales, marketing and
engineering talent, changes in customer requirements, unexpected Y2K issues in
the Company's products or systems, evolving industry standards, and any
additional factors described in the Company's other reports filed with the
Securities and Exchange Commission.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 8, 1998, a lawsuit was filed against the Company in the District
Court for the Southern District of New York. The lawsuit names as defendants the
Company, certain of its officers and directors, its former independent auditor
and the underwriter for the Company's initial public offering. The plaintiff
seeks to represent a class of shareholder who purchased the Company's common
stock from January 31, 1996 through April 28, 1998. An amended complaint filed
by the plaintiff in October 1998 claims violations of securities laws and common
law based on allegations that defendants made untrue statements of material
facts and that they omitted material facts necessary in order to make the
statements not misleading. The complaint seeks unspecified damages and costs. In
December 1998, the case was transferred to the United States District Court for
the Eastern District of Michigan. In January 1999, the Company filed a motion
for dismissal of the lawsuit. Management believes that the outcome of this case
will not have a material adverse effect on the Company.
On October 14, 1998, a former employee filed a complaint in the
District Court in Virginia against the Company alleging that she was terminated
illegally and in retaliation for her complaints regarding sexual harassment in
the workplace. Plaintiff sought damages of $500,000. The same plaintiff had
filed an EEOC complaint in May 1998 alleging improper dismissal relating to
sexual harassment, and the EEOC complaint was denied in June 1998. In January
1999, plaintiff's lawsuit was dismissed with prejudice.
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.
(b) The Company filed no reports on Form 8-K during the quarter ended December
31, 1998.
ALL OTHER ITEMS OMITTED ARE NOT APPLICABLE OR THE ANSWERS THERETO ARE NEGATIVE.
Page 10
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEMATRON CORPORATION
BY:
FEBRUARY 12, 1999 /S/ MATTHEW S. GALVEZ
- ---------------------- -----------------------------------------------------
DATE MATTHEW S. GALVEZ, PRESIDENT & COO
(DULY AUTHORIZED OFFICER)
FEBRUARY 12, 1999 /S/ DAVID P. GIENAPP
- ---------------------- -----------------------------------------------------
DATE DAVID P. GIENAPP, EXECUTIVE VICE PRESIDENT -
FINANCE & ADMINISTRATION
(CHIEF ACCOUNTING OFFICER)
Page 11
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
<S> <C>
10.1 Second Amendment to Repayment Agreement and Fifth Amendment to Loan
Ageement dated as of January 31, 1999 by and between KeyBank National
Association and the Company
27 Financial Data Schedule
</TABLE>
Page 12
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT TO REPAYMENT AGREEMENT
AND FIFTH AMENDMENT TO LOAN AGREEMENT
This Second Amendment to Repayment Agreement and Fifth Amendment to
Loan Agreement ("Second Amendment") is made as of the 31st day of January, 1999,
by and among KEYBANK NATIONAL ASSOCIATION, f/k/a Society Bank, Michigan, a
national banking association located at 127 Public Square, Cleveland, Ohio 44114
("KeyBank" or "Bank"), NEMATRON CORPORATION, a Michigan corporation located at
5840 Interface Drive, Ann Arbor, Michigan 48103 ("Borrower") and NEMASOFT, INC.,
a Michigan corporation located at 5840 Interface Drive, Ann Arbor, Michigan
48103 ("Guarantor"; Borrower and Guarantor together referred to as "Interested
Parties").
RECITALS
WHEREAS, Bank and the Interested Parties executed a certain Repayment
Agreement dated as of September 28, 1998 ("Repayment Agreement"); and
WHEREAS, Bank and the Interested Parties executed a certain First
Amendment to Repayment Agreement and Fourth Amendment to Loan Agreement dated as
of December 1, 1998 ("First Amendment"); and
WHEREAS, capitalized terms not otherwise defined herein shall have the
meanings ascribed thereto in the Repayment Agreement; and
WHEREAS, the Line of Credit will terminate, and the Amended Notes
mature on January 31, 1999, and have not been repaid; and
WHEREAS, the Interested Parties have asked that Bank extend Borrower's
Line of Credit on the terms described herein, to enable Borrower to obtain a new
equity infusion of not less than Three Million Dollars ($3,000,000.00), and
continue Borrower's efforts to return to profitability, to which request Bank
has acquiesced.
I. AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and the agreements
and covenants herein, the parties agree as follows:
1. Recitals. The Recitals are incorporated herein by reference.
2. Restructure and Amendment of Loan Documents. Certain of the Loan
Documents shall be amended as follows:
i) Section 1 of
the Repayment Agreement is
amended by deleting the
definitions of "Amended
Notes",
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<PAGE> 2
"Obligations",
"Original Loan Documents",
"Second Line Note" and
"Second Term Note" and
inserting the following in
lieu thereof:
"Amended Notes" means the Third Line Note and the
Third Term Note.
"Obligations" shall mean every liability now or
hereafter owing by Interested Parties to Bank or KCCI whether
owing by Borrower alone or by one or more others in a several,
joint or joint and several capacity, whether owing absolutely
or contingently, whether created by loan, overdraft, guaranty
of payment or other contract or by quasi contract, tort,
statute or other operation of law, whether incurred directly
to the Bank or KCCI or acquired by Bank or KCCI by purchase,
assignment, pledge or otherwise and whether participated to or
from Bank or KCCI in whole or in part and specifically
includes all debt created or evidenced by the Loan Documents.
"Original Loan Documents" means all documents
heretofore executed in connection with the Original Notes, as
well as all documents evidencing leases of equipment by KCCI
to any Interested Party, and "Loan Documents" means the
Repayment Agreement, any amendment thereto and each of the
documents required to be executed and delivered to Bank in
connection therewith, together with all of the Original Loan
Documents.
"Third Line Note" shall mean the Third Amended and
Restated Revolving Credit Note referred to in subsection
3(a) of this Repayment Agreement and attached hereto as
Exhibit B.
"Third Term Note" shall mean the Second Amended and
Restated Term Note referred to in subsection 3(c) of this
Repayment Agreement and attached hereto as Exhibit C.
ii) Section 1 of the Repayment Agreement is further
amended by adding, in appropriate alphabetical order, the following
definitions:
"Adjusted Net Income" means earnings before taxes,
plus depreciation and amortization, minus capital expenditures
including capital expenditures for software development, all
determined in accordance with GAAP consistently applied.
"Equity Infusion" means an infusion of cash or cash
equivalents into Borrower in the form of equity and in an
amount of not less than $3,000,000.
"KCCI" means Key Corporate Capital, Inc., a
subsidiary of KeyBank, and successor by merger to KeyCorp
Leasing, Ltd.
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<PAGE> 3
iii) The Repayment Agreement is amended by deeming
all references to the Second Line Note and the Second Term Note to be
references to the Third Line Note and the Third Term Note,
respectively.
iv) Section 2 of the Repayment Agreement is amended
by adding a new subsection (z) as follows:
"(z) Neither the Borrower nor the Guarantor owns nor
holds any federally registered copyrights."
v) The prefatory paragraph, and subsections (a),
(b), (c), (e) and (g) of Section 3 of the
Repayment Agreement are deleted, the following
are inserted in lieu thereof:
"3. Restructure and Amendment of Loan Documents. The
Obligations evidenced by the Original Notes, as same
may have been amended and/or amended and restated
from time to time, shall be restructured pursuant to
the terms of the Third Amended and Restated Revolving
Credit Note and the Third Amended and Restated Term
Note. The Amended Notes do not constitute repayment
or cancellation of all or any portion of the
Indebtedness evidenced by the Original Notes. The
Original Notes, and any amendment and/or restatement
thereof, shall remain in full force and effect only
for the purpose of evidencing any amounts due in
connection with the Original Notes and any of the
Loan Documents which for any reason in fact or in
law, do not become Obligations of Borrower under the
Amended Notes, as intended by the parties hereto. In
connection with the restructure of the Obligations,
the following amendments are hereby made to the Loan
Agreement:
a) Subsection 1.1.1 of the Loan Agreement is deleted in its entirety,
and the following inserted in lieu thereof:
`1.1.1 Upon the request of Borrower, made at
any time or from time to time between
September 28, 1998 and October 31, 1998,
inclusive, and between December 1, 1998 and
October 31, 1999, inclusive, and so long as
no Event of Default under this Agreement has
occurred or is continuing, Bank shall make
cash advances to Borrower in an amount up
to:
(a) eighty percent (80%) of the
aggregate outstanding amount of
Eligible Domestic Accounts;
PLUS
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<PAGE> 4
(b) at Borrower's option, eighty percent
(80%) of the aggregate outstanding
amount of Eligible Foreign Accounts;
PLUS
(c) thirty five percent (35%) of the
aggregate sum (not to exceed
$2,500,000) of (i) Eligible Raw
Inventory (valued at the lower of
Borrower's and NemaSoft's cost, or
market) and (ii) Eligible Finished
Inventory (valued at Borrower's and
NemaSoft's cost of production):
PLUS
(d) only until the earlier of the
occurrence of the Equity Infusion or
April 15, 1999, the Permitted
Overadvance;
LESS
(e) the aggregate outstanding amountof
any issued and outstanding Letters
of Credit;
PROVIDED, HOWEVER, that in no event shall
the aggregate amount of outstanding cash
advances made pursuant to this Section 1.1.1
("BORROWING FORMULA") be, at any time,
greater than the sum of (i) Five Million and
00/100 Dollars ($5,000,000.00) until the
occurrence of the earlier of the Equity
Infusion or April 15, 1999, and (ii) Four
Million Dollars ($4,000,000) thereafter. The
amount outstanding under the Line of Credit
shall be evidenced by a Third Amended and
Restated Revolving Credit Note dated as of
January 31, 1999 ("NOTE"). The terms of the
Note, and all renewals, modifications and
amendments thereto, are hereby incorporated
herein specifically by reference. Subject to
the foregoing limitations Borrower may
borrow, repay and reborrow under the Line of
Credit. During the period between October
31, 1998 and December 1, 1998, the Line of
Credit shall be suspended, and all funds
received by Bank through the mechanism
established by the Cash Collateral Agreement
executed in connection with the Repayment
Agreement may be, at Bank's option, applied
to reduce the indebtedness evidenced by the
Note.'
b) The Loan Agreement is amended by deleting existing subsection 1.2.8
and inserting in lieu thereof the following:
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<PAGE> 5
`1.2.8 "Permitted Overadvance" means an
amount of up to (i) Seven Hundred
Fifty-Three Thousand Three Hundred
Forty-Five Dollars ($753,345) during the
period between September 28, 1998 and
October 31, 1998, (ii) Zero Dollars ($0)
during the period October 31, 1998 through
November 30, 1998, and (iii) One Million One
Hundred Thousand Dollars ($1,100,000) during
the period between December 1, 1998 and the
earlier of the occurrence of the Equity
Infusion or April 15, 1999.'
c) Subsection 1.7 of the Loan Agreement is deleted and the following
inserted in lieu thereof:
`1.7 Term Loan. Bank agrees to lend Borrower
the sum of One Million One Hundred Seventy
Thousand and 00/100 Dollars ($1,170,000.00)
("Term Loan"). The Term Loan shall be
evidenced by a Third Amended and Restated
Term Note dated as of January 31, 1999
("Term Note") maturing on October 31, 1999,
and containing other terms as set forth
therein.'
e) Article VI of the Loan Agreement is amended by deleting subsections
6.10 and 6.11, and inserting in lieu thereof the following:
6.10 Borrower shall fail to obtain the
Equity Infusion (as defined in
the Repayment Agreement) on or
before April 15, 1999.
6.11 [Intentionally Omitted]
g) Subsection 3.5.10 of the Loan Agreement is
renumbered as 3.5.11, and a new subsection
3.5.10 is inserted as follows:
`3.5.10 Until the occurrence of the Equity
Infusion, by the second business day of each
week, a rolling eight week projection,
acceptable to Bank in the exercise of its
reasonable business judgment, of anticipated
cash receipts and disbursements, and showing
that Borrower will at all times be in
compliance with the Borrowing Formula, as
well as an actual statement of cash receipts
and disbursements for the immediately
preceding week.'"
vi) Section 3 of the Repayment Agreement is
further amended by deleting subsection (h)
and inserting new subsections (h), (i) and
(j) as follows:
h) The Loan Agreement is amended by adding a
new subsection 3.17 as follows:
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<PAGE> 6
3.17 Commencing on January 1, 1999,
Borrower's Adjusted Net Income shall not be
less than the following amounts during the
periods commencing January 1, 1999, and
ending on the last day of each of the
following months:
<TABLE>
<CAPTION>
Amount Period
------ ------
<S> <C>
($150,000) January 1999
($100,000) February 1999
- 0 - March 1999
$125,000 April 1999
$250,000 May 1999
$400,000 June 1999
$560,000 July 1999
$640,000 August 1999
$720,000 September 1999
</TABLE>
i) The Loan Agreement is amended by adding a
new subsection 3.18 as follows:
3.18 On or before the earlier to occur of
the Equity Infusion or April 15, 1999,
Borrower shall pay to Bank a restructure fee
of $30,000, plus a risk fee of $1,000 per
day for each day on and after April 1, 1999,
through the date on which the Equity
Infusion occurs.
j) The Loan Agreement is amended by deleting
the monetary reference "$6,000,000" (whether
such reference is expressed numerically or
is written out) wherever it occurs, and
inserting in lieu thereof a monetary
reference of "$5,000,000" until the earlier
of the occurrence of the Equity Infusion or
April 15, 1999, at which time the references
to $5,000,000 in the Loan Agreement shall be
deemed to be $4,000,000, unless the context
clearly indicates otherwise."
vii) The Repayment Agreement is hereby
amended by deleting subsection 5(b) in its
entirety and inserting the following in lieu
thereof:
"b) Amendment to Mortgage. On or before
January 31, 1999, Borrower shall execute and
deliver to Bank a Third Amendment to
Mortgage in the form of Exhibit D attached
hereto."
viii) The Repayment Agreement is amended by
adding a new subsection 5(j) as follows:
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<PAGE> 7
"j) KCCI Security Documents. On or before
January 31, 1999, Borrower shall deliver, or
cause to be delivered to KeyBank all in form
and substance acceptable to Bank, (i) a
Security Agreement executed by Borrower and
a Security Agreement executed by Guarantor
granting a security interest in the
Interested Parties' assets to KCCI, (ii) a
Guaranty of Payment of Debt executed by
Guarantor with respect to Borrower's lease
obligations to KCCI, and (iii) UCC-1
financing statements executed by Guarantor
in favor of KCCI."
ix) The Repayment Agreement is amended by
deleting all references therein to "Ohio
law", and inserting a reference in lieu
thereof to "Michigan law".
x) The Repayment Agreement is amended by
deleting Exhibits B, C and D, and replacing
them with Exhibits B, C and D in the form of
Annexes 1 through 3, respectively, attached
hereto.
3. Effective Date. The provisions of this Second Amendment shall be
effective on January 31, 1999 ("Effective Date"), provided that (i) a fully
executed copy of this Second Amendment, the Third Amended and Restated Revolving
Credit Note, the Third Amended and Restated Term Note, the Third Amendment to
Mortgage, the documents referenced in new subsection 5(j) of the Repayment
Agreement and Borrower's corporate resolution authorizing the execution of each
of the foregoing are delivered to Bank on or before 12:00 p.m. on January 31,
1999, and (ii) that all accrued interest on the Second Amended and Restated Term
Note dated December 1, 1998, is paid on January 31, 1999.
4. Loan Documents. Any reference in any of the Loan Documents to the
Repayment Agreement or the Loan Agreement shall, from and after the Effective
Date, be deemed to refer to the Repayment Agreement and the Loan Agreement as
modified by this Second Amendment. Any and all references to the Amended Notes
in the Repayment Agreement, the Loan Documents and this Second Amendment shall
hereafter refer to the Amended Notes in the forms of the new Exhibits B and C,
copies of which are attached hereto as Annexes 1 and 2.
5. Conflicting Terms; No Other Modification. To the extent that any of
the terms and conditions of this Second Amendment are inconsistent with the
terms of the Repayment Agreement, the conditions of this Second Amendment shall
prevail. Otherwise, unless expressly modified or superseded herein, all of the
terms and conditions of the Repayment Agreement are ratified and confirmed and
shall remain unaffected and in full force and effect.
6. Course of Dealing. Interested Parties understand that the Loan
Documents will be strictly enforced going forward, and that Bank's failure to
insist on strict
Page 19
<PAGE> 8
performance to date shall not be interposed as a defense to Bank's exercise of
its legal rights, nor shall it constitute a waiver of any thereof.
7. Release. Effective as of the date of the delivery of a fully
executed copy or original of this Second Amendment, the Interested Parties
jointly and severally agree to release and hereby do release and discharge, Bank
and KCCI, their respective shareholders, agents, servants, employees, directors,
officers, attorneys, affiliates, subsidiaries, successors and assigns and all
persons, firms, corporations, and organizations acting on their behalf ("Bank
Parties") of and from all damages, losses, claims, demands, liabilities,
obligations, actions and causes of action whatsoever that each Interested Party
has or claims to have against any Bank Party as of the date hereof and whether
known or unknown at the time of this release, and of every nature and extent
whatsoever on account of or in any way, directly or indirectly, touching,
concerning, arising out of or founded upon the Loan Documents, or the
relationship respecting any agreement between any Interested Party and any Bank
Party.
8. Third-Party Beneficiaries/Entire Agreement. All the conditions and
obligations hereunder are imposed solely and exclusively for the benefit of the
parties hereto and their successors and assigns. No other person or entity shall
obtain any interest herein or require satisfaction of such conditions in
accordance with the terms hereof or be entitled to assume that any of the
parties hereto will enforce such conditions and obligations and no other person
shall, under any circumstances, be a beneficiary of such conditions. This Second
Amendment embodies the entire agreement and understanding between the parties
hereto with respect to the subject matter of this Second Amendment and
supersedes all prior and contemporaneous negotiations, agreements and
understandings relative to such subject matter.
9. Binding Effect; Governing Law. This Second Amendment shall bind and
inure to the benefit of the parties hereto and their respective successors and
assigns and shall be governed by and construed in accordance with the laws of
the State of Michigan without regard to principles of conflict of laws.
10. Counterparts. This Second Amendment may be executed in any number
of counterparts, each of which, when so executed and delivered, shall be an
original and all of which counterparts together shall constitute one and the
same fully executed instrument.
11. Consent and Reaffirmation of Guaranty. Guarantor, being guarantor
of the Obligations of Borrower pursuant to a Continuing Guaranty dated October
6, 1995, joins in and consents to the within Second Amendment and agrees that
the provisions of such guaranty are ratified and confirmed and that the guaranty
remains in full force and effect.
12. Corporate Authority. Borrower and Guarantor hereby represent and
warrant to Bank that (a) Borrower and Guarantor have the legal power and
authority to execute and deliver this Second Amendment; (b) the officials
executing this Second Amendment have been duly authorized to execute and deliver
the same and bind Borrower and Guarantor with respect to the provisions hereof;
(c) the execution and delivery hereof by Borrower and Guarantor and the
performance and observance by Borrower and Guarantor of the provisions hereof do
not violate or conflict with the
Page 20
<PAGE> 9
organizational agreements of Borrower or Guarantor or any law applicable to
Borrower or Guarantor or result in a breach of any provision of or constitute a
default under any other agreement, instrument or document binding upon or
enforceable against Borrower or Guarantor; (d) this Second Amendment constitutes
a valid and binding obligation of Borrower and Guarantor in every respect,
enforceable in accordance with its terms.
IN WITNESS WHEREOF, Interested Parties and Bank have caused this Second
Amendment to be executed by their duly authorized officers as of the date first
written above.
Address: NEMATRON CORPORATION
5840 Interface Drive By:________________________________________
Ann Arbor, Michigan 48103 Its:_______________________________________
Address: NEMASOFT, INC., Guarantor
5840 Interface Drive By:________________________________________
Ann Arbor, Michigan 48103 Its:_______________________________________
Address: KEYBANK NATIONAL ASSOCIATION
202 S. Michigan Street By:________________________________________
P.O. Box 6
South Bend, Indiana 46601 Its:_______________________________________
Page 21
<PAGE> 10
EXHIBIT
A. THIRD AMENDED AND RESTATED REVOLVING CREDIT NOTE
B. THIRD AMENDED AND RESTATED TERM NOTE
C. THIRD AMENDMENT TO MORTGAGE
D. SECURITY AGREEMENT
E. GUARANTY
Page 22
<PAGE> 11
EXHIBIT A - BANK AGREEMENT
THIRD AMENDED AND RESTATED REVOLVING CREDIT NOTE
$5,000,000.00 Dated as of January 31, 1999
Ann Arbor, Michigan
On October 31, 1999, for value received, the undersigned (herein called the
"Borrower") promises to pay to the order of KEYBANK NATIONAL ASSOCIATION, a
national banking association (herein called the "Bank"), at its main office, in
good and collected funds, the principal sum of Five Million and 00/100 Dollars
($5,000,000.00), or such lesser amount as shall be outstanding hereon at
maturity, with interest from the date of the Note until October 31, 1999, at a
floating rate per annum of two percent (2%) in excess of the Prime Rate of the
Bank in effect from time to time, but not to exceed the maximum rate permitted
by law, payable on the first day of each month, and at maturity, computed on the
principal sum hereof remaining from time to time unpaid. In the event of any
change in the Prime Rate of Bank, the interest rate on this Amended Note shall
be immediately and correspondingly adjusted, but in no event shall the interest
rate on this Amended Note prior to maturity exceed the highest rate permitted by
law on the date of this Amended Note. The Prime Rate of Bank is defined as that
rate established from time to time by Bank as Bank's Prime Rate, whether or not
such rate is publicly announced; the Prime Rate may not be the lowest interest
rate charged by Bank for commercial or other extensions of credit. After
maturity or the occurrence of an Event of Default, the unpaid principal and
accrued interest on this Amended Note shall, until paid, bear interest at a rate
per annum equal to the greater of four percent (4%) in excess of the Prime Rate,
which rate shall be immediately and correspondingly adjusted with each change in
the Prime Rate, or sixteen percent (16%); but in no event shall the interest
rate on this Amended Note after maturity exceed the highest rate permitted by
law on the date of maturity.
Borrower may prepay this Amended Note, in whole or in part, without the
payment of any premium, but all such payments shall be applied to the principal
installments of this Amended Note in the inverse order of their maturity.
This Amended Note is issued pursuant to a certain Repayment Agreement
executed on September 28, 1998, as amended by a First Amendment to Repayment
Agreement and Fourth Amendment to Loan Agreement dated as of December 1, 1998,
and as further amended by a Second Amendment to Repayment Agreement and Fifth
Amendment to Loan Agreement of even date herewith by and between Borrower and
Bank, among others (said Repayment Agreement as it may be from time to time
amended, restated or otherwise modified being herein called the "Repayment
Agreement") to which reference is hereby made for a statement of the rights of
Bank and the duties and obligations of Borrower in relation thereto, but neither
this reference to the Repayment Agreement nor any provision thereof shall affect
or impair the absolute and unconditional obligation of Borrower to pay the
principal of and interest on this Amended Note when due. This Amended Note
amends and restates in its entirety the Amended and Restated Revolving Credit
Note dated September 28, 1998 in the principal amount of
Page 23
<PAGE> 12
$6,000,000.00, and the Second Amended and Restated Revolving Credit Note dated
December 1, 1998, in the principal amount of $5,000000, including any amendments
or modifications thereto, and referred to in the Repayment Agreement and does
not represent evidence of new indebtedness, or repayment of any indebtedness.
The notes which formerly evidenced the debt now evidenced by this Amended Note
shall remain in full force and effect only for the purpose of evidencing any
amounts due thereunder which for any reason, in fact or in law, that do not
become obligations of the Borrower under this Amended Note as intended by the
Borrower. Capitalized terms used herein and not defined shall have the meaning
given to them in the Repayment Agreement. The headings of paragraphs of the
Repayment Agreement and the titles of any and all documents executed in
conjunction therewith, including this Amended Note, are for the convenience of
reference only, and are not to be considered as limiting or otherwise affecting
any of the terms hereof or thereof.
This Amended Note and every other obligation, indebtedness, and liability
of Borrower to Bank, whether joint or several, absolute or contingent, due or to
become due, and whether heretofore or hereafter contracted or existing and in
whatsoever manner acquired by or accruing to Bank, whether before or after
maturity and whether the same may have been or shall be participated, in whole
or in part to others, and including all amendments, extensions, and renewals
thereof (all herein called "Obligations"), are secured as set forth in the
Repayment Agreement.
Borrower represents and warrants that it is a duly-organized and existing
corporation under the laws of the State of Michigan that the execution and
delivery hereof have been duly authorized by appropriate corporate action, that
there is no prohibition either in law, in its articles of incorporation,
by-laws, or regulations, or in any agreement to which it is a party which in any
way restricts or prevents the execution of this Amended Note and performance of
the Obligations herein in any respect, and that this Amended Note has been duly
executed and is a valid and binding Obligation of Borrower.
Borrower shall be in default hereunder if there shall occur an Event of
Default as set forth in the Repayment Agreement. If there shall occur any Event
of Default, Bank, by notice given to Borrower (only if and to the extent such
notice is required by the Repayment Agreement), may declare the unpaid principal
of and accrued interest owing upon this Amended Note and all other Obligations
to be immediately due and payable and upon any such declaration such principal
and interest shall become and be forthwith due and payable without any further
notice, presentment, or demand of any kind, all of which are hereby expressly
waived by Borrower. Further as provided in the Repayment Agreement for specific
Events of Default, the unpaid principal and accrued interest owing upon this
Amended Note and all other Obligations shall become and be forthwith due and
payable without declaration, notice, presentment, or demand of any kind, all of
which are hereby expressly waived by Borrower.
Wherever used in this Amended Note, the term "Bank" shall include any
holder or assignee of this Amended Note. Except for notice expressly required by
the Repayment Agreement, if any, Borrower and each endorser, guarantor, and
surety hereof waives presentment, demand for payment, protest, notice of
protest, and notice of nonpayment, and further agrees and consents that, without
notice and without affecting their liability
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<PAGE> 13
hereon, the holder hereof at any time or times is authorized to: (a) correct
patent errors and fill blanks herein; (b) cause or permit the signature of one
or more additional makers, co-makers, sureties, guarantors and/or endorsers to
be added hereto; (c) extend the time of payment of this Amended Note in whole or
in part; (d) sell, exchange, surrender, substitute or otherwise deal with any
collateral now or hereafter securing this Amended Note; (e) add or release any
other person primarily or secondarily liable on this Amended Note; and (f)
modify, waive, supplement or otherwise change the terms of any security
agreement pertaining to this Amended Note.
Borrower understands and agrees that this Amended Note is subject to and
shall be construed according to the laws of the State of Michigan, without
regard to principles of conflict of laws. Bank's rights, remedies, and powers
that are expressly specified in this Amended Note are in addition to Bank's
rights, remedies, and powers under any other instrument or agreement or under
applicable law.
Any deposits or sums at any time credited by or due from Bank to Borrower
and any securities or other personal property of Borrower in the possession of
Bank may at all times be held and treated as additional security for the payment
of the Obligations. After the occurrence of any Event of Default, Bank may apply
or set off such deposits or other sums against the Obligations at any time and
without further notice.
Any waiver of Bank's rights hereunder must be in writing and signed by
Bank. A waiver on any one or more occasions shall not be construed as a bar to
or waiver of any such right or remedy on a future occasion, nor as the
establishment of a course of dealing with respect to such waiver(s) or any other
action or inaction of Bank referred to in this paragraph. Delay or failure by
Bank to exercise its powers, rights, or remedies, in whole or in part, shall not
be deemed a waiver of any such power, right, or remedy; no single or partial
exercise of any right, power, or remedy hereunder shall preclude the exercise of
any other right, power, or remedy. All agreements, representations, and
warranties made herein will survive the making of the loan evidenced by this
Amended Note and will bind and inure to the benefit of Borrower and its
successors and assigns and Bank and its successors and assigns.
Any notice required or authorized to be given to Borrower pursuant to the
provisions of this Amended Note shall be sufficiently given when such notice is
either delivered, sent by telegram, or mailed (deposited for delivery, postage
prepaid, by U.S. mail) to Borrower either at the address set forth below (as
modified by any change therein which Borrower has supplied in writing to Bank)
or at any other address at which Bank customarily communicates with Borrower.
If any provision of this Amended Note, or any covenant, stipulation,
obligation, agreement, act, or action, or part thereof made, assumed, entered
into, or taken hereunder or any application thereof, is for any reason held to
be illegal or invalid, such illegality or invalidity shall not affect any other
provision or any other covenant, stipulation, obligation, agreement, act, or
action or part thereof, made, assumed, entered into, or taken, each of which
shall be construed and enforced as if such illegal or invalid portion were not
contained herein. Such illegality or invalidity of any application of any
provision hereof shall not affect any legal and valid application thereof, and
each such provision, covenant, stipulation, obligation, agreement, act, or
action, or part shall be
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<PAGE> 14
deemed to be effective, operative, made, entered into, or taken in the manner
and to the full extent permitted by law.
The relationship between Borrower and Bank with respect to this Amended
Note and any writing executed or delivered in connection herewith is and shall
be solely that of debtor and creditor, respectively, and Bank has no fiduciary
obligation toward Borrower with respect to any such document or the transactions
contemplated thereby.
This Amended Note and any agreement, document or instrument referred to
herein or executed between Bank and Borrower on or as of the date hereof
integrate all of the terms and conditions mentioned herein or incidental hereto
and supersede all oral representations and negotiations and prior writings with
respect to the subject matter hereof.
Borrower agrees to promptly reimburse Bank for all costs and expenses,
including attorney's fees of Bank's in-house or outside counsel incurred by Bank
in connection with any restructurings of this Amended Note or any documents
executed and delivered in connection herewith and in connection with any
collection proceedings as a result of nonpayment of this Amended Note, as and
when due and payable.
Borrower has received consideration which is the reasonable equivalent
value of the obligations and liabilities that Borrower has incurred to Bank.
Borrower is not insolvent as defined in any applicable state or federal statute,
nor will Borrower be rendered insolvent by the execution and delivery of this
Amended Note to Bank. Borrower is not engaged or about to engage in any business
or transaction for which the assets retained by it shall be an unreasonably
small capital, taking into consideration the obligations to Bank incurred
hereunder. Borrower does not intend to, nor does it believe that it will, incur
debts beyond its ability to pay them as they mature.
Borrower, to the extent permitted by law, waives any right to have a jury
participate in resolving any dispute, whether sounding in contract, tort, or
otherwise, between Bank and Borrower arising out of, in connection with, related
to, or incidental to the relationship established between Borrower and Bank in
connection with this Amended Note or any other agreement, instrument or document
executed or delivered in connection therewith or the transactions related
thereto.
Address: NEMATRON CORPORATION
5840 Interface Drive
Ann Arbor, Michigan 48103 By:___________________________________________
Title:________________________________________
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<PAGE> 15
EXHIBIT B - BANK AGREEMENT
THIRD AMENDED AND RESTATED TERM NOTE
$1,170,000.00 Dated as of January 31, 1999
Ann Arbor, Michigan
For value received, the undersigned (herein called "Borrower") promises to
pay to the order of KEYBANK NATIONAL ASSOCIATION, Cleveland, Ohio (herein called
"Bank"), in good and collected funds, at its main office, the principal sum of
One Million One Hundred Seventy Thousand and 00/100 Dollars ($1,170,000.00) in
ten (10) installments commencing February 1, 1999, and on the same day of each
successive calendar month thereafter through October 1999, each of the first
nine installments to be in the amount of Thirty Thousand Dollars ($30,000) plus
accrued interest on the principal balance hereof, and the tenth installment
being due on October 31, 1999 in an amount equal to all remaining principal and
interest outstanding hereon Interest on the principal balance of this Amended
Note shall be payable at a floating rate per annum of two percent (2%) in excess
of the Prime Rate of Bank, computed on a 360 day year basis. In the event of any
change in the Prime Rate of Bank, the interest rate on this Amended Note shall
be immediately and correspondingly adjusted, but in no event shall the interest
rate on this Amended Note prior to maturity exceed the highest rate permitted by
law on the date of this Amended Note. The Prime Rate of Bank is defined as that
rate established from time to time by Bank as Bank's Prime Rate, whether or not
such rate is publicly announced; the Prime Rate may not be the lowest interest
rate charged by Bank for commercial or other extensions of credit. After
maturity or the occurrence of an Event of Default, the unpaid principal and
accrued interest on this Amended Note shall, until paid, bear interest at a rate
per annum equal to the greater of four percent (4%) in excess of the Prime Rate,
which rate shall be immediately and correspondingly adjusted with each change in
the Prime Rate, or sixteen percent (16%); but in no event shall the interest
rate on this Amended Note after maturity exceed the highest rate permitted by
law on the date of maturity.
Borrower may prepay this Amended Note, in whole or in part, without the
payment of any premium, but all such payments shall be applied to the principal
installments of this Amended Note in the inverse order of their maturity.
This Amended Note is issued pursuant to a certain Repayment Agreement
executed on September 28, 1998, as amended by a First Amendment to Repayment
Agreement and Fourth Amendment to Loan Agreement dated as of December 1, 1998,
and as further amended by a Second Amendment to Repayment Agreement and Fifth
Amendment to Loan Agreement of even date herewith and between Borrower and Bank,
among others (said Repayment Agreement as it may be from time to time amended,
restated or otherwise modified being herein called the "Repayment Agreement") to
which reference is hereby made for a statement of the rights of Bank and the
duties and obligations of Borrower in relation thereto, but neither this
reference to the Repayment Agreement nor any provision thereof shall affect or
impair the absolute and unconditional obligation of Borrower to pay the
principal of and interest on this Amended Note when
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<PAGE> 16
due. This Amended Note amends and restates in its entirety the Amended and
Restated Term Note dated September 28, 1998 in the principal amount of
$1,230,000.00, and the Second Amended and Restated Term Note dated December 1,
1998, in the principal amount of $1,170,000, including any amendments or
modifications thereto, and referred to in the Repayment Agreement and does not
represent evidence of new indebtedness, or repayment of any indebtedness. The
notes which formerly evidenced the debt now evidenced by this Amended Note shall
remain in full force and effect only for the purpose of evidencing any amounts
due thereunder which for any reason, in fact or in law, that do not become
obligations of the Borrower under this Amended Note as intended by the Borrower.
Capitalized terms used herein and not defined shall have the meaning given to
them in the Repayment Agreement. The headings of paragraphs of the Repayment
Agreement and the titles of any and all documents executed in conjunction
therewith, including this Amended Note, are for the convenience of reference
only, and are not to be considered as limiting or otherwise affecting any of the
terms hereof or thereof.
This Amended Note and every other obligation, indebtedness, and liability
of Borrower to Bank, whether joint or several, absolute or contingent, due or to
become due, and whether heretofore or hereafter contracted or existing and in
whatsoever manner acquired by or accruing to Bank, whether before or after
maturity and whether the same may have been or shall be participated, in whole
or in part to others, and including all amendments, extensions, and renewals
thereof (all herein called "Obligations"), are secured as set forth in the
Repayment Agreement.
Borrower represents and warrants that it is a duly-organized and existing
corporation under the laws of the State of Michigan that the execution and
delivery hereof have been duly authorized by appropriate corporate action, that
there is no prohibition either in law, in its articles of incorporation,
by-laws, or regulations, or in any agreement to which it is a party which in any
way restricts or prevents the execution of this Amended Note and performance of
the Obligations herein in any respect, and that this Amended Note has been duly
executed and is a valid and binding Obligation of Borrower.
Borrower shall be in default hereunder if there shall occur an Event of
Default as set forth in the Repayment Agreement. If there shall occur any Event
of Default, Bank, by notice given to Borrower (only if and to the extent such
notice is required by the Repayment Agreement), may declare the unpaid principal
of and accrued interest owing upon this Amended Note and all other Obligations
to be immediately due and payable and upon any such declaration such principal
and interest shall become and be forthwith due and payable without any further
notice, presentment, or demand of any kind, all of which are hereby expressly
waived by Borrower. Further as provided in the Repayment Agreement for specific
Events of Default, the unpaid principal and accrued interest owing upon this
Amended Note and all other Obligations shall become and be forthwith due and
payable without declaration, notice, presentment, or demand of any kind, all of
which are hereby expressly waived by Borrower.
Wherever used in this Amended Note, the term "Bank" shall include any
holder or assignee of this Amended Note. Except for notice expressly required by
the Repayment Agreement, if any, Borrower and each endorser, guarantor, and
surety hereof waives presentment, demand for payment, protest, notice of
protest, and notice of nonpayment,
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<PAGE> 17
and further agrees and consents that, without notice and without affecting their
liability hereon, the holder hereof at any time or times is authorized to: (a)
correct patent errors and fill blanks herein; (b) cause or permit the signature
of one or more additional makers, co-makers, sureties, guarantors and/or
endorsers to be added hereto; (c) extend the time of payment of this Amended
Note in whole or in part; (d) sell, exchange, surrender, substitute or otherwise
deal with any collateral now or hereafter securing this Amended Note; (e) add or
release any other person primarily or secondarily liable on this Amended Note;
and (f) modify, waive, supplement or otherwise change the terms of any security
agreement pertaining to this Amended Note.
Borrower understands and agrees that this Amended Note is subject to and
shall be construed according to the laws of the State of Michigan, without
regard to principles of conflict of laws. Bank's rights, remedies, and powers
that are expressly specified in this Amended Note are in addition to Bank's
rights, remedies, and powers under any other instrument or agreement or under
applicable law.
Any deposits or sums at any time credited by or due from Bank to Borrower
and any securities or other personal property of Borrower in the possession of
Bank may at all times be held and treated as additional security for the payment
of the Obligations. After the occurrence of any Event of Default, Bank may apply
or set off such deposits or other sums against the Obligations at any time and
without further notice.
Any waiver of Bank's rights hereunder must be in writing and signed by
Bank. A waiver on any one or more occasions shall not be construed as a bar to
or waiver of any such right or remedy on a future occasion, nor as the
establishment of a course of dealing with respect to such waiver(s) or any other
action or inaction of Bank referred to in this paragraph. Delay or failure by
Bank to exercise its powers, rights, or remedies, in whole or in part, shall not
be deemed a waiver of any such power, right, or remedy; no single or partial
exercise of any right, power, or remedy hereunder shall preclude the exercise of
any other right, power, or remedy. All agreements, representations, and
warranties made herein will survive the making of the loan evidenced by this
Amended Note and will bind and inure to the benefit of Borrower and its
successors and assigns and Bank and its successors and assigns.
Any notice required or authorized to be given to Borrower pursuant to the
provisions of this Amended Note shall be sufficiently given when such notice is
either delivered, sent by telegram, or mailed (deposited for delivery, postage
prepaid, by U.S. mail) to Borrower either at the address set forth below (as
modified by any change therein which Borrower has supplied in writing to Bank)
or at any other address at which Bank customarily communicates with Borrower.
If any provision of this Amended Note, or any covenant, stipulation,
obligation, agreement, act, or action, or part thereof made, assumed, entered
into, or taken hereunder or any application thereof, is for any reason held to
be illegal or invalid, such illegality or invalidity shall not affect any other
provision or any other covenant, stipulation, obligation, agreement, act, or
action or part thereof, made, assumed, entered into, or taken, each of which
shall be construed and enforced as if such illegal or invalid portion were not
contained herein. Such illegality or invalidity of any application of any
provision hereof shall not affect any legal and valid application thereof, and
each such
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<PAGE> 18
provision, covenant, stipulation, obligation, agreement, act, or action, or part
shall be deemed to be effective, operative, made, entered into, or taken in the
manner and to the full extent permitted by law.
The relationship between Borrower and Bank with respect to this Amended
Note and any writing executed or delivered in connection herewith is and shall
be solely that of debtor and creditor, respectively, and Bank has no fiduciary
obligation toward Borrower with respect to any such document or the transactions
contemplated thereby.
This Amended Note and any agreement, document or instrument referred to
herein or executed between Bank and Borrower on or as of the date hereof
integrate all of the terms and conditions mentioned herein or incidental hereto
and supersede all oral representations and negotiations and prior writings with
respect to the subject matter hereof.
Borrower agrees to promptly reimburse Bank for all costs and expenses,
including attorney's fees of Bank's in-house or outside counsel incurred by Bank
in connection with any restructurings of this Amended Note or any documents
executed and delivered in connection herewith and in connection with any
collection proceedings as a result of nonpayment of this Amended Note, as and
when due and payable.
Borrower has received consideration which is the reasonable equivalent
value of the obligations and liabilities that Borrower has incurred to Bank.
Borrower is not insolvent as defined in any applicable state or federal statute,
nor will Borrower be rendered insolvent by the execution and delivery of this
Amended Note to Bank. Borrower is not engaged or about to engage in any business
or transaction for which the assets retained by it shall be an unreasonably
small capital, taking into consideration the obligations to Bank incurred
hereunder. Borrower does not intend to, nor does it believe that it will, incur
debts beyond its ability to pay them as they mature.
Borrower, to the extent permitted by law, waives any right to have a jury
participate in resolving any dispute, whether sounding in contract, tort, or
otherwise, between Bank and Borrower arising out of, in connection with, related
to, or incidental to the relationship established between Borrower and Bank in
connection with this Amended Note or any other agreement, instrument or document
executed or delivered in connection therewith or the transactions related
thereto.
Address: NEMATRON CORPORATION
5840 Interface Drive By:______________________
Ann Arbor, Michigan 48103 Title:___________________
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<PAGE> 19
EXHIBIT C - BANK AGREEMENT
THIRD AMENDMENT TO MORTGAGE
WHEREAS, to secure a promissory note, and any renewals, modifications
or extensions thereof, in the original principal amount of $2,450,000 and dated
November 14, 1994 ("Note") executed by NEMATRON CORPORATION ("Mortgagor") in
favor of KEYBANK NATIONAL ASSOCIATION, fka Society Bank, Michigan ("Mortgagee"),
pursuant to the terms of an Amended and Restated Loan Agreement dated November
18, 1994 ("Loan Agreement"), Mortgagor executed and delivered to Mortgagee a
Mortgage and Security Agreement dated December 27, 1994 and recorded on February
7, 1995 in Liber 3078, Pages 519-523 of the Washtenaw County Records, as amended
by an Amendment to Mortgage dated September 28, 1998, and a Second Amendment to
Mortgage dated December 1, 1998 (the "Mortgage");
WHEREAS, to clarify what obligations of Mortgagor to Mortgagee are
secured by the Mortgage, Mortgagor and Mortgagee have agreed to further amend
the Mortgage;
WHEREAS, capitalized terms not defined herein shall have the meanings
given to them in the Mortgage;
NOW, THEREFORE, for valuable consideration received to their
satisfaction, Mortgagor and Mortgagee mutually agree as follows:
1. The Recitals are true, accurate and incorporated herein by
reference.
2. The Mortgage is hereby amended by deleting the first paragraph on
page one of the Mortgage in its entirety and substituting the following in lieu
thereof:
"THIS MORTGAGE made and entered this 27th day of December, 1994,
by and BETWEEN NEMATRON CORPORATION, a Michigan corporation, of
5840 Interface Drive, Ann Arbor, Michigan 48103 (hereafter
referred to as "Mortgagor"), and KEYBANK NATIONAL ASSOCIATION, fka
Society Bank, Michigan, a national banking association, of 100
South Main Street, Ann Arbor, Michigan 48104 (hereinafter referred
to as "Mortgagee"), in order to secure the payment of the
indebtedness evidenced by (i) that certain Third Amended and
Restated Revolving Credit Note given by Mortgagor to the Mortgagee
dated as of January 31, 1999, in the principal amount of Five
Million Dollars ($5,000,000), which note amends and restates that
certain Second Amended and Restated Revolving Credit Note given by
Mortgagor to the Mortgagee dated as of December 1, 1998, in the
principal amount of Five Million Dollars ($5,000,000) (which
through a series of intervening notes amends and restates a
promissory note in the original principal amount of $2,450,000
dated November 14, 1994 executed by Mortgagor in favor of
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Mortgagee), together with interest and any other payment
obligations as provided therein, and any renewals, modifications,
extensions, amendments and/or restatements thereto or thereof (the
"Line Note"), and (ii) that certain Third Amended and Restated
Term Note given by Mortgagor to Mortgagee dated January 31, 1999
in the principal amount of One Million One Hundred Seventy
Thousand Dollars ($1,170,000), which note amends and restates that
certain Second Amended and Restated Term Note given by Mortgagor
to Mortgagee dated as of December 1, 1998, in the principal amount
of One Million One Hundred Seventy Thousand Dollars ($1,170,000),
together with interest and any other payment obligations as
provided therein, and any renewals, modifications, extensions,
amendments and/or restatements thereto or thereof (the "Term
Note," and together with the Line Note, the "Notes"), as well as
securing the performance of the covenants and obligations of the
of the Mortgagor contained herein, the Mortgagor hereby mortgages
and warrants to Mortgagee the real estate premises described
below, subject to any easements, covenants and restrictions
disclosed in the mortgage title policy insuring the Mortgagee's
interest in the property, together with all rents, leases and
profits; all improvements now or hereafter placed on said
property; all building materials of any kind or nature, fixtures,
machinery, equipment, hereafter acquired and/or now or hereafter
located on the premises in connection with the operation of any
and all improvements on the premises; and all easements,
appurtenances, rights and privileges appertaining to such real
estate (all such real and personal property being hereafter
collectively referred to as the "Property"). The legal description
of said real estate premises is attached hereto as Exhibit A."
3. Except as amended by this instrument, all provisions of the
Mortgage are ratified and confirmed and shall remain in full force and effect.
4. Mortgagor hereby represents and warrants to Mortgagee that (a)
Mortgagor has the legal power and authority to execute and deliver the within
amendment; (b) the officials executing the within amendment have been duly
authorized to execute and deliver the same and bind Mortgagor with respect to
the provisions hereof; (c) the execution and delivery hereof by Mortgagor and
the performance and observance by Mortgagor of the provisions hereof do not
violate or conflict with the organizational agreements of Mortgagor or any law
applicable to Mortgagor or result in a breach of any provisions of or constitute
a default under any other agreement, instrument or document binding upon or
enforceable against Mortgagor; and (d) this amendment agreement constitutes a
valid and binding obligation upon Mortgagor in every respect.
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<PAGE> 21
IN WITNESS WHEREOF, Mortgagor and Mortgagee have caused this instrument
to be executed by their duly authorized officers as of January 31, 1999.
Signed in the presence of: MORTGAGOR:
____________________________ NEMATRON CORPORATION
Print name:_________________
By:_______________________________________
____________________________
Print name:_________________ Title:____________________________________
Signed in the presence of: MORTGAGEE:
____________________________ KEYBANK NATIONAL ASSOCIATION
Print name:_________________
By:_______________________________________
____________________________ Nancy Terrill, Senior Vice President
Print name:_________________
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<PAGE> 22
EXHIBIT D - BANK AGREEMENT
SECURITY AGREEMENT
This SECURITY AGREEMENT dated as of the 31st day of January, 1999, by
and between NEMASOFT, INC. (herein called the "Grantor") and KEY CORPORATE
CAPITAL INC. (herein called "KCCI"), successor by merger to KeyCorp Leasing Ltd.
WITNESSETH:
In consideration of the mutual covenants herein contained, and other
good and valuable consideration, the parties here to agree as follows:
SECTION ONE
DEFINITIONS
"ACCOUNT", "CHATTEL PAPER", "CONSUMER GOODS", "DEPOSIT ACCOUNT", "DOCUMENT",
"FARM PRODUCTS", "GENERAL INTANGIBLE", "GOODS", "INSTRUMENT", and "PROCEEDS"
have the meanings as set forth in the Uniform Commercial Code as enacted in the
State of Michigan, including any amendments thereof and any substitutions
therefor, which definitions are hereby incorporated by reference as though fully
rewritten herein.
"ACCOUNT RECEIVABLE" means:
(a) any account receivable, Account, Chattel Paper, General
Intangible, Document, or Instrument owned, acquired, or
received by a Person,
(b) any other indebtedness owed to or receivable owned, acquired,
or received by a Person of whatever kind and however
evidenced, and
(c) any right, title, and interest in a Person's Goods which were
sold, leased, or furnished by that Person and gave rise to
either (a) or (b) above, or both of them. This includes,
without limitation,
(1) any rights of stoppage in transit of a Person's sold,
leased, or furnished Goods,
(2) any rights to reclaim a Person's sold, leased, or
furnished Goods, and
(3) any rights a Person has in such sold, leased, or furnished
Goods that have been returned to or repossessed by that
Person.
"CASH SECURITY" means all cash, Instruments, Deposit Accounts, and other cash
equivalent, whether matured or unmatured, whether collected or in the process of
collection, upon which Grantor presently has or may hereafter have any claim,
that are presently or may hereafter be existing or maintained with, issued by,
drawn upon, or in the possession of Bank.
"COLLATERAL" means:
(a) all of Grantor's Accounts Receivable, whether now owned or
hereafter acquired or received by Grantor,
(b) all of Grantor's Inventory, whether now owned or hereafter
acquired by Grantor,
(c) all of Grantor's Equipment, whether now owned or hereafter
acquired by Grantor,
(d) all of Grantor's Cash Security, and
(e) all of the Proceeds, products, profits, and rents of each
Grantor's Accounts Receivable, Inventory, Equipment, and Cash
Security.
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<PAGE> 23
"EQUIPMENT" means:
(a) any equipment, including without limitation, machinery, office
furniture and furnishings, tools, dies, jigs, and molds,
(b) all Goods that are used or bought for use primarily in a
Person's business,
(c) all Goods that are not Consumer Goods, Farm Products, or
Inventory, and
(d) all substitutes or replacements for, and all parts,
accessories, additions, attachments, or accessions to (a) to
(c) above.
"INVENTORY" means:
(a) any inventory,
(b) all Goods that are raw materials,
(c) all Goods that are work in process,
(d) all Goods that are materials used or consumed in the ordinary
course of a Person's business,
(e) all Goods that are, in the ordinary course of a Person's
business, held for sale or lease or furnished or to be
furnished under contracts of service, and
(f) all substitutes and replacements for, and parts, accessories,
additions, attachments, or accessions to (a) to (e) above.
"PERSON" shall mean any natural person, corporation (which shall be deemed to
include business trust), association, partnership, joint venture, political
entity, or political subdivision thereof.
SECTION TWO
THE SECURITY INTEREST
The Grantor hereby grants to KCCI, as the Secured Party hereunder, a
security interest in the Collateral to secure the following (herein called the
"Liabilities"):
(a) certain equipment leasing transactions evidenced by a Master
Equipment Lease Agreement dated March 25, 1997, by and between Nematron
Corporation ("Lessee") and KCCI, and any and all Schedules attached thereto,
including, but not limited to, Equipment Schedule No. 01 dated March 25, 1997
and Equipment Schedule No. 02 dated April 4, 1997, and including any amendments
and/or modifications thereto (the "Lease Agreements"), the terms and conditions
of which Lease Agreements are incorporated herein by reference and made a part
hereof; and
(b) all liabilities or obligations of the Grantor or Lessee to KCCI,
howsoever evidenced, of every kind and description, including those indirect,
contingent, to become due, or hereafter arising.
SECTION THREE
COVENANTS AND REPRESENTATIONS
The Grantor covenants and represents as follows:
Section 2.1. Ownership. The Grantor is and shall continue to be the
owner of the Collateral free of any lien or encumbrance (except those of KCCI)
and will defend same against all adverse claims and demands.
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Section 2.2. Possession. Unless KCCI demands possession or agrees
otherwise, the Grantor shall have possession of the Collateral in trust for KCCI
and shall not sell, lease, encumber or dispose of the Collateral, except for
inventory sold or leased in the ordinary course of the Grantor's business.
Section 2.3. Maintenance. Grantor, at its own cost and expense, shall
keep each tangible item of Collateral in good repair, condition and working
order and shall furnish any and all parts, mechanisms and devices required to
keep each tangible item of Collateral in good mechanical and working order.
Section 2.4. Insurance. Grantor shall keep the Collateral insured
against all risks of loss, theft or damage from every cause whatsoever and shall
carry public liability and property damage insurance on the Collateral in
coverage, form and amount satisfactory to KCCI and with companies approved by
KCCI. Such insurance shall be in the name of Grantor and shall name KCCI as an
additional insured and as a loss payee. Grantor shall pay all premiums thereon
and shall deliver such policies or certificates of insurance thereof to KCCI.
Grantor shall cause each insurer to agree, by endorsement upon the policy or
policies or certificates of insurance issued by it or by independent instrument
furnished to KCCI, that such insurer will give thirty (30) days written notice
to KCCI before such policy or policies will be altered or canceled. The Grantor
shall provide written notification to KCCI of any changes in the insurance
coverage. The proceeds of any insurance resulting from loss, theft or damage to
the Collateral shall at KCCI's option be applied toward (i) the repair,
restoration or replacement of such Collateral, or (ii) toward payment of
Lessee's obligations under the Lease, or (iii) Grantor's obligations, if any, to
KCCI. Grantor appoints KCCI as Grantor's attorney-in-fact to make any claim for,
to receive payment for and to execute and endorse any documents, checks or other
instruments in payment for loss, theft or damage under such insurance policy;
provided, however, that such appointment by Grantor shall not be effective
unless and until an event of default hereunder has occurred and is continuing.
Section 2.5. Financial Statements of Grantor. Grantor shall provide
KCCI, within 120 days of Grantor's fiscal year end, a copy of the balance sheet
as of the end of such fiscal year and related statements of income and retained
earnings for such fiscal year certified by an independent public accountant
acceptable to KCCI. In addition, Grantor shall provide KCCI, within 90 days of
Grantor's fiscal quarter-end, a copy of the balance sheet as of the end of such
quarter-end and related statements of income and retained earnings for such
fiscal quarter-end certified by an authorized officer (or partner) of the
Grantor, if KCCI shall so request.
Section 2.6. Sale or Lease of Collateral. If any part of the Collateral
is sold or leased other than in the ordinary course of the Grantor's business,
the Grantor agrees to keep the proceeds thereof separate from all other funds of
Grantor; and KCCI is hereby granted a security interest in any sales agreement
or lease and all amounts due and to become due thereunder, which amounts the
Grantor agrees to assign to KCCI by separate instrument at KCCI's request. If
the Grantor collects any amount due under any such lease, such amounts shall be
kept separate from all other funds of Grantor and shall be remitted by the
Grantor to KCCI on demand. All proceeds received by KCCI shall be applied
against the Liabilities in such order and at such times as KCCI shall determine.
Section 2.7. Collection of Accounts Receivable. If Collateral includes
accounts receivable, the Grantor agrees to collect all such accounts receivable
as they become due, unless otherwise directed by KCCI upon the occurrence of a
continuing Event of Default and, upon the occurrence of such Event of Default,
KCCI shall have the right to notify any and all account debtors to make all
payments due the Grantor directly to KCCI.
SECTION FOUR
EVENTS OF DEFAULT AND REMEDIES
Section 3.1. Events of Default. Any of the following events or
conditions shall constitute an event of default hereunder: (i) The occurrence of
an event of default under the Lease Agreements; (ii) Failure by Grantor to
observe or perform any provision of this Agreement or of any other instrument
pertaining to the Liabilities; (iii) KCCI shall deem itself insecure, in good
faith believing that the prospect of payment of the Liabilities or performance
of the Lease Agreements is impaired.
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<PAGE> 25
Section 3.2. Rights After Default. Upon occurrence of any event of
default, all the Liabilities, at the option of KCCI, shall become due and
payable immediately upon notice to Grantor. Upon the occurrence of any such
event of default and at all times thereafter, KCCI shall have the rights and
remedies of a secured party under the Michigan Uniform Commercial Code in
addition to the rights and remedies provided elsewhere within the Security
Agreement or in any other writing executed by Grantor. KCCI may require Grantor
to assemble the Collateral and make it available to KCCI at a reasonably
convenient place to be designated by KCCI. At any time or times after the
Liabilities become due, KCCI is empowered to collect, sell, assign, transfer,
set over and deliver the whole or any part of the Collateral, as may be
appropriate, at public or private sale, either for cash or on credit or for
future delivery, without assumption of credit risk, without demand,
advertisement or notice, which are hereby expressly waived, unless prohibited by
law, and at any such sale KCCI may become the purchaser of the whole or any part
of the Collateral, discharged from any right of redemption. Unless the
Collateral is perishable, threatens to decline speedily in value, or is of a
type customarily sold on a recognized market, KCCI will give Grantor reasonable
notice of the time and place of any public sale of the Collateral or of the time
after which any private sale or other intended disposition thereof is to be
made. The requirement of reasonable notice shall be met if such notice is mailed
(deposited for delivery, postage prepaid, by U.S. mail) to either, at KCCI's
option, (1) Grantor's address set forth herein (as modified by any change
therein which Grantor has supplied in writing to KCCI) or (2) Grantor's address
at which KCCI customarily communicates with Grantor, at least ten (10) days
before the time of the public sale or the time after which any private sale or
other intended disposition thereof is to be made. At any such public or private
sale, KCCI may purchase the Collateral. After deduction for KCCI's related
expenses, the net proceeds of any such sale shall be applied in satisfaction of
the Liabilities in such order of preference as KCCI may determine. Any excess,
to the extent permitted by law, shall be paid to Grantor, and Grantor shall
remain liable for any deficiency.
SECTION FIVE
MISCELLANEOUS
Section 4.1. Waiver. KCCI shall not be deemed to have waived any of its
rights hereunder or in the Collateral (or any part thereof) unless such waiver
is in writing, and no delay or omission by KCCI in exercising any right shall
operate as a waiver thereof or of any other right. KCCI may permit the Grantor
to remedy any default without waiving the default so remedied and KCCI may waive
any default without waiving any other subsequent or prior default by the
Grantor.
Section 4.2. Expenses and Application of Proceeds. The Grantor shall
reimburse KCCI for any expense incurred by KCCI in protecting or enforcing its
rights under this Agreement including, without limitation, attorneys' fees and
legal expenses and all expenses of taking possession, holding, preparing for
disposition or disposing of the Collateral. After deduction of such expenses,
KCCI may apply the proceeds from disposition to the Liabilities in such order
and amounts as it elects.
Section 4.3. Authority to Complete and Perform. KCCI is authorized to
fill in any blank space herein, to correct patent errors herein, to complete or
correct the description of the Collateral and to date this Agreement. If the
Grantor fails to act as required by this Agreement or the Liabilities, KCCI is
authorized, in the Grantor's name or otherwise, to take any such action
including, without limitation, signing the Grantor's name or paying any amount
so required and the cost of taking such action shall be one of the Liabilities
secured hereby from the date of payment by KCCI.
Section 4.4. Parties Bound. Each person signing this Agreement, other
than KCCI, is a Grantor, and the Liabilities hereunder of all the Grantors are
joint and several. This Agreement benefits KCCI, its successors and assigns, and
binds the Grantors and their respective heirs, personal representatives,
successors and assigns.
Section 4.5. Notices. Written notice, when required by law, sent to the
address of the Grantor at least 10 calendar days (counting the day of sending)
before the date of a proposed disposition of the Collateral is reasonable
notice.
Section 4.6. Term. This Agreement and the security interest in the
collateral created hereby shall terminate when the Liabilities have been paid in
full and all other agreements between the Grantor and
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<PAGE> 26
KCCI relating to the Liabilities have terminated, and prior to such payment and
termination, this shall be a continuing agreement.
Section 4.7. Execution of Documents. The Grantor will execute all
necessary documents to accomplish the purpose hereof, including financing
statements required to perfect and continue the validity of the security
interest of KCCI hereunder.
Section 4.8. Governing Law. This Agreement shall be deemed to be a
contract made under and shall be construed in accordance with the governed by
the laws of the State of Michigan.
IN WITNESS WHEREOF, the parties have caused this Security Agreement to
be executed on the date first above written.
SECURED PARTY GRANTOR
KEY CORPORATE CAPITAL INC. NEMASOFT, INC.
127 Public Square 5840 Interface Drive
Cleveland, Ohio 44114 Ann Arbor, Michigan 48103
By:_______________________________ By:__________________________________
Title:____________________________ Title:_______________________________
Page 38
<PAGE> 27
EXHIBIT E - BANK AGREMENT
KEY CORPORATE CAPITAL INC.
127 Public Square, 6th Floor
Cleveland, Ohio 44114-1306
GUARANTY
For valuable consideration received to the full satisfaction of the undersigned,
and in order to induce KEY CORPORATE CAPITAL INC. (the "Lessor") to extend
credit to, to continue to extend credit to and/or to purchase or assume
obligations of NEMATRON CORPORATION (the "Lessee"), the undersigned
unconditionally and absolutely guarantees to Lessor the prompt payment when due,
whether by acceleration or otherwise, of all obligations, direct or indirect,
now existing or hereafter created or acquired and however evidenced or secured,
of any kind or nature of Lessee to Lessor, and the full and prompt performance
by Lessee of all of the terms, provisions and conditions contained in any lease,
promissory note, draft, agreement or other instrument evidencing, securing or
pertaining to any of said obligations (hereafter, the "Obligations").
The undersigned hereby acknowledges that there exists and will hereafter exist
economic and business contacts and activities between Lessee and the undersigned
which will be of benefit to the undersigned and the guaranty by the undersigned
of the Obligations hereunder will result in direct financial benefit to the
undersigned.
The undersigned waives (i) notice of acceptance of this Guaranty, (ii)
presentment, demand, protest or other notice of any kind, (iii) all defenses
based on suretyship or the impairment of collateral, and (iv) any defenses which
Lessee may assert against the Obligations including, but not limited to, failure
of consideration, breach of warranty, statute of frauds, lack of legal capacity
and accord and satisfaction. The undersigned agrees that no act or omission of
any kind on the part of Lessor or its successors and assigns shall adversely
affect or impair this Guaranty. Lessor may, without notice to the undersigned,
extend the time for any payment under any note, lease, draft or instrument,
extend the term of, modify or amend any note, lease, draft or instrument, and
otherwise agree in any manner with Lessee, and Lessor may release, exchange,
enforce and otherwise deal with the equipment subject to any lease and any
collateral or security relating to the Obligations without affecting the
unconditional obligation of the undersigned under this Guaranty. The undersigned
hereby waives all rights it may have at law or in equity, including, without
limitation, rights under any law subrogating the undersigned to the rights of
Lessor, to seek contribution, indemnification, or any other form of
reimbursement from Lessee, and any other guarantor or any other person or entity
now or hereafter primarily or secondarily liable for any obligations of Lessee
to Lessor, for any payment or disbursement made by the undersigned under or in
connection with this Guaranty.
The undersigned agrees that it shall not be necessary for Lessor to resort to or
exhaust any of its remedies against the Lessee or any collateral or security
held by Lessor prior to requesting payment or performance by the undersigned of
any of the Obligations.
This Guaranty shall be binding upon the undersigned and its heirs, executors,
administrators, successors and assigns of the undersigned and shall inure to the
benefit of Lessor and its successors and assigns.
IN WITNESS WHEREOF, the undersigned has executed this Guaranty this 31st day of
January, 1999.
GUARANTOR:
In the Presence of: NEMASOFT, INC.
_____________________________ By:____________________________________
_____________________________ Title:_________________________________
Address: ______________________________
______________________________
Page 39
<TABLE> <S> <C>
<ARTICLE> 5
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 106730
<SECURITIES> 0
<RECEIVABLES> 1999900
<ALLOWANCES> 368000
<INVENTORY> 1884335
<CURRENT-ASSETS> 4296275
<PP&E> 9029542
<DEPRECIATION> (5685402)
<TOTAL-ASSETS> 12462857
<CURRENT-LIABILITIES> 9212953
<BONDS> 2182783
0
21,664,809
<COMMON> 0
<OTHER-SE> (7134)
<TOTAL-LIABILITY-AND-EQUITY> 12462857
<SALES> 3186910
<TOTAL-REVENUES> 3186910
<CGS> 2084915
<TOTAL-COSTS> 1455932
<OTHER-EXPENSES> 1208
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 158804
<INCOME-PRETAX> (513948)
<INCOME-TAX> 10800
<INCOME-CONTINUING> (503149)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (503149)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
