9. EDSR 08-14-2006 - Laserfiche WebLink

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Pagelofl From: Steve Pederson [stevep@knetica.com] Sent: Monday, July 24, 2006 7:54 AM To: Mehelich, Catherine Cc: Joe Roushar; Jeff Saunders; Jeff Gongoll; Gary Puffett; Harlan Jacobs Subject: K-Netica issues Cathy: I received the letter from the City of Elk River notifying us they were to exercise their put clause. We lived within the intent and the explicit language of the contract, but were still unable to find adequate space in Elk River. A few thoughts: 1. Keep in mind that it was never our intent to "leave" Elk River this year. 2. We lost our lease early this year and had a little under 3 months to find a new location. 3. During this time, the City chose to discontinue the Incubator program. 4. As outlined in my letter to Jeff Gongol (attached), we were unable to find affordable, suitable space in Elk River after agood-faith effort on our part in concert with Heidi, the City, and the Chamber of Commerce. 5. You mentioned to me in a phone call that Bixby Energy also lost their lease when they were in the City's incubator program. Because Bixby was unable to find a suitable replacement, the City waived the put option So...for the City to demand a 2X put option, (with no available space or an incubator program), it will trigger a number of things: 1. It will negatively impact our ability (from a cash flow standpoint) to stay whole and to hire the necessary engineers to meet the needs of our current client commitment. 2. It could create a precedent where others with convertible loans may question the viability of our company given the action of the City and contemplate similar options As you may know, the (Foundation has decided that the investment in K-Netica is a "win" and they have agreed to convert their loan when our internal securities audit is complete. I believe we lived within the spirit and intent of the agreement. Without new, affordable space and the loss of the incubator program, I seriously question why the City is taking this action, given the precedent with Bixby Energy. My hope is that the board will reconsider their action in this matter. Regards, Steve Pederson (w) 763-274-1000 x101 (c)612-840-6888 K-Netica Corporation -CEO 6120 Earle Brown Drive, Suite 502 Brooklyn Center, MN 55430-4112 Confidentiality Note: This message is intended only for the named recipient and may contain confidential, proprietary or legally privileged information. Unauthorized individuals or entities are not permitted access to this information. Any dissemination, distribution, or copying of this information is strictly prohibited. If you have received this message in error, please advise the sender byreply e-mail, and delete this message and any attachments. file://S:\EDA\Incubator\K-Netica\Letters\IC-Netica issues.htm 8/10/2006