Document:

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                                                                    EXHIBIT 10.4

                              AMENDED AND RESTATED
                              EMPLOYMENT AGREEMENT

         THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT, made as of the 13th day
of February, 2002, by and between MECHANICAL DYNAMICS, INC., a Michigan
corporation (the "Company"), having offices located at 2300 Traverwood Drive,
Ann Arbor, Michigan 48105, and DOUGLAS M. PETERSON, of Canton, Michigan
("Employee").

                                   WITNESSETH:

         WHEREAS, the Company desires to employ the Employee to devote his full
time and attention to the business of the Company and Employee desires to be so
employed.

         NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants herein contained, the parties hereto agree as follows:

         1. EMPLOYMENT. The Company hereby agrees to employ Employee in the
capacity of Vice President - Product Development and Chief Technical Officer.
Employee hereby accepts this employment and agrees to diligently and
conscientiously devote his full and exclusive time and attention to the affairs
of the Company. In his capacity as Vice President - Product Development and
Chief Technical Officer, Employee shall perform such duties of an executive
nature as shall be assigned to him from time to time by the President or the
Board of Directors, and Employee shall at all times discharge his duties in
consultation with and under the supervision of the President and the Board of
Directors.

         2. TERM. The term of this Agreement shall commence on the date hereof
and shall terminate on March 31, 2003. At the option of the Company, this
Agreement may be extended for an additional one (1) year term, upon such terms
as may be mutually agreed between Employee and the Company.

         3. COMPENSATION. Employee's compensation, including base salary, bonus,
vacation and other fringe benefits, for calendar year 2002 have been agreed and
approved by the Company's Board of Directors. The Company and Employee shall
negotiate in good faith regarding Employee's compensation for the remaining term
of this Agreement. The Company and Employee agree that during the term of this
Agreement the fringe benefits offered to Employee shall be roughly equivalent to
the other Vice Presidents and shall include life insurance in an amount not less
than twice Employee's base salary, if available.

         4. DISABILITY. In the event that Employee is absent from his employment
by reason of illness or other incapacity for a period of six (6) consecutive
months, Employee shall nevertheless be entitled to receive his

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full base salary hereunder as well as his pro-rata bonus (calculated as though
earned "at plan" under Employee's then current compensation plan), vacation
accruals and all fringe benefits during said six (6) month period. Thereafter,
during the continued period of his illness or incapacity in excess of six (6)
months, Employee shall be entitled to receive such long-term disability benefits
as are payable under the Company's then long-term disability insurance program.
He shall also receive continued health and life insurance benefits for the
remaining term of this Agreement. Except as provided above, all bonus accruals,
vacation accruals and other fringe benefits shall cease at the end of said six
(6) month period. Notwithstanding the foregoing, Employee's salary, bonus,
vacation and other fringe benefits shall be fully reinstated upon his complete
return to employment and the full discharge of his duties hereunder.

         5. DEATH. In the event that Employee dies during the term of this
Agreement while still employed hereunder and drawing his full base salary, then
the Company shall continue to pay an amount equal to one hundred percent (100%)
of Employee's monthly base salary (as of the date of his death) to his
designated beneficiary for a period of two (2) months subsequent to the date of
his death. Such payments shall be in addition to any other death benefits
payable to Employee's designated beneficiary from life insurance or otherwise.

         6. CHANGE OF DUTIES; RELOCATION. In the event that during the term of
this Agreement the Board of Directors chooses to change the Employee's title
and/or his duties hereunder, this Agreement shall nevertheless remain in full
force and effect in accordance with its terms and no such change shall
constitute grounds upon which Employee may terminate this Agreement. In the
event that the President or the Board of Directors directs Employee to relocate
away from Ann Arbor, Michigan, then Employee shall be entitled to resign and to
receive as severance compensation for the twelve (12) month period following
such resignation, the base salary, pro-rata bonus and fringe benefits provided
in said Section 7.1.

         7. TERMINATION.

         7.1 Without Cause. In the event Employee is discharged from his
employment during the term of this Agreement without "Cause", then the Company
shall continue to pay Employee's base salary and provide all fringe benefits and
pro rata bonus (calculated as though earned "at plan" under Employee's then
current compensation plan), in each case as in effect at the date of Employee's
termination, for a period of twelve (12) months from the date of such
termination. Such payments and benefits shall be in lieu of all other payments
and benefits to which Employee might otherwise be entitled under the Company's
employee policies and procedures and/or under this Agreement.

                                       2
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         7.2 For Cause; Resignation; Retirement. In the event that Employee is
discharged from his employment during the term of this Agreement for "Cause" (as
hereinafter defined), or Employee voluntarily resigns or retires, then Employee
shall be entitled to receive only such payments and/or benefits as would be
provided to other employees of the Company under similar circumstances in
accordance with the Company's employee policies and procedures then in effect.

         7.3 Definition. For purposes of this Agreement, the term "Cause" shall
mean:

         (a)      Intentional misrepresentation to or concealment of a material
                  fact regarding the operations of the Company from the
                  President or the Board of Directors by Employee; or

         (b)      A material breach of this Agreement by Employee; or

         (c)      Conviction of a crime involving moral turpitude.

         Except in the case of (c) above, termination of this Agreement for
"Cause" shall only become effective thirty (30) days after Employee has received
written notice of such termination from the Company specifying the details of
such "Cause". During such thirty (30) day period, Employee shall be entitled to
a formal meeting with the President or the Board of Directors for the purpose of
presenting reasons why the Agreement should not be terminated.

         7.4 Change of Control. In the event of a change in control (as
hereinafter defined) of the Company, if the remaining term of this Agreement is
less than one (1) year from the effective date of such change of control, then
the term of this Agreement shall be automatically extended through a date one
(1) year from such effective date. For purposes of this Section 7.4, the term
"change of control" shall mean the sale or exchange of fifty percent (50%) or
more of the Company's outstanding capital stock or the sale of fifty percent
(50%) or more of the assets of the Company.

         7.5 Release. Anything contained in this Section 7 to the contrary
notwithstanding, the payment of any sums to Employee under subsections 7.1, 7.2
or 7.4 hereof, shall be conditioned upon (a) Employee executing and delivering
to the Company the Full And Final Release attached hereto as Attachment I (the
"Release") and (b) in the event Employee is over forty (40) years of age on the
date of execution of the Release, upon Employee not exercising his right to
revoke said Release after having executed it.

         8. RESTRICTIVE COVENANT. Employee agrees that during the term of this
Agreement and for a period of two (2) years after the termination or expiration
of this Agreement, he will not directly or indirectly, for his own benefit, or
for or with any other person, firm, or corporation (a) own, manage, engage in,
be employed by, or consult

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for, any business in the United States (other than as a holder of less then 5%
of the outstanding capital stock of a publicly traded corporation) which
competes directly with the business presently conducted by the Company, or (b)
encourage, solicit, attempt to hire as an employee or consultant or otherwise
attempt to persuade any other employee of the Company to leave the employ of the
Company. For purposes of this Agreement, the "business presently conducted by
the Company" shall mean the development, manufacture, marketing or licensing of
computer programs or software for mechanical systems simulation (often referred
to as "multi-body system analysis"). Employee further agrees that the Company's
remedy at law for any breach of this restrictive covenant is inadequate and that
the Company shall be entitled to injunctive relief with respect to any breach of
this covenant.

         9. NOTICE. Any notice to be delivered under this Agreement shall be
given in writing and delivered, personally or by certified mail, postage
prepaid, addressed to the Company or Employee at their last known addresses.

         10. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding of the parties hereto regarding the subject matter hereof, and
there are no other agreements, conditions or representations, oral or written,
express or implied, with regard thereto. This Agreement may be amended only in
writing, signed by both parties. Notwithstanding anything in this Agreement to
the contrary, nothing in this Agreement is intended to or shall in any way
affect the rights and obligations of the parties set forth in that certain
Noncompetition Agreement dated October 31, 1997, between the Company and
Employee.

         11. BINDING EFFECT. The provisions of this Agreement shall be binding
upon and shall inure to the benefit of both of the parties hereto and their
respective successors and assigns.

         12. GOVERNING LAW. This Agreement shall be governed by and construed
under in accordance with the laws of the State of Michigan.

         IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and date first above written.

WITNESS:                                                 COMPANY

                                               MECHANICAL DYNAMICS, INC.

/s/ Brenda A. Duquette                         By: /s/ Robert R. Ryan
--------------------------------------            ------------------------------
                                                    Robert R. Ryan, President

                                                         EMPLOYEE

/s/ Brenda A. Duquette                         /s/ Douglas M. Peterson
--------------------------------------         ---------------------------------
                                               Douglas M. Peterson

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                                  ATTACHMENT I

                             FULL AND FINAL RELEASE

         In consideration of the termination benefits provided to me by
MECHANICAL DYNAMICS, INC., a Michigan corporation ("MDI"), as set out in Section
7 of the attached Amended And Restated Employment Agreement, as amended
(Attachment A), I hereby agree as follows:

         1. MECHANICAL DYNAMICS, INC. When used herein, "MDI" includes any
parent, subsidiary, associated and affiliated companies of Mechanical Dynamics,
Inc., and its and their successors, assigns, officers, directors, agents,
employees and attorneys, past, present or future, jointly and individually.

         2. RELEASE OF CLAIMS. I release and forever discharge MDI, from any and
all claims, disputes, causes of action, administrative proceedings, legal
actions, whether arising out of statutory law, common law or equity, and
damages, known or unknown, which I have or may have against MDI, however
denominated, including, but not limited to, claims related to my employment, the
conduct of MDI during my employment, any claims of discrimination under any
federal, state or local law, rule or regulation (including claims under the Age
Discrimination in Employment Act (ADEA)), any claims under ERISA, any claim for
violation of any other federal, state or local law, rule or regulation, any
claim for wrongful termination of employment, wrongful layoff, failure to recall
to work, breach of contract, violation of any policy, practice or procedure of
MDI, denial of any employment benefit, constructive discharge, retaliatory
discharge, breach of the covenant of good faith and fair dealing, detrimental
reliance, termination in violation of public policy, violation of any
whistleblower statute, negligent supervision, negligent conducting of
performance appraisals, libel, slander, defamation, fraud, misrepresentation,
sexual or any other type of harassment, intentional or negligent infliction of
emotional distress, tortious interference with business relations or prospective
employers, providing false references, any claim to reinstatement or future
employment, any claim for damages, attorney fees or costs and any claims
occurring or existing through the date of this Release. I understand and agree
that I waived my right in the preceding sentence to file a lawsuit or to
commence an administrative action against MDI. If I later file a lawsuit or
administrative action, I shall be liable for the actual attorney fees and costs
incurred by MDI in defending any such legal action.

         3. SCOPE OF RELEASE. This Release covers all issues arising from or in
connection with my employment with MDI as well as any issues, disputes or claims
occurring or existing through the date of this Release.

         4. PRIOR CLAIMS. I have not filed any claim, administrative proceeding
or legal action against MDI.

         5. SUBSEQUENT LEGAL ACTION. I will not initiate, assist or cooperate in
any charge, claim, complaint or legal action against MDI with any federal, state
or local administrative agency or court, or with any other person (the term
"person" shall mean and include an individual, a

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partnership, a joint venture, a corporation, a limited liability, a trust, an
unincorporated organization, and a government or any department or agency
thereof), unless so ordered by a duly authorized court, legislative committee or
grand jury.

         6. DEROGATORY COMMENTS. I shall not make any negative or derogatory
statements of any kind about MDI, MDI's products and services, or MDI's
employee's, past, present or future.

         7. RESIGNATION AS OFFICER. Effective with the date of my separation
from employment with MDI, I resign any corporate office I hold.

         8. RETURN OF PROPERTY. I have returned all MDI property as defined in
and required by the Confidentiality Agreement signed by me in favor of MDI
(hereinafter the "Confidentiality Agreement").

         9. INJUNCTIVE RELIEF. In the event of a breach or threatened breach by
me of this Release, it is agreed that money damages would not adequately
compensate MDI and that injunctive relief would be essential for its protection.
Such relief shall be without prejudice to any other remedy which MDI may have or
be entitled to receive at law or in equity.

         10. NON-ADMISSION. Nothing contained herein shall be construed as an
admission of liability by MDI in connection with my employment with and
separation from MDI as well as through the date of this Release.

         11. FINALITY OF RELEASE. I recognize that I may be mistaken as to the
facts and/or law upon which I may be relying in executing this Release or that
additional facts may exist of which I am not presently aware. Nonetheless, I
have been fully advised and understand the finality of this Release and intend
to be bound by it.

         12. REVIEW OF DOCUMENT. I have had the opportunity to read and discuss
this Release with MDI, and I have had an opportunity to review this Release with
outside legal counsel.

         13. REVIEW AND REVOCATION PERIODS. I have been given twenty-one (21)
days within which to consider this Release before executing it, I have been
advised that I may revoke this Release for a period of seven (7) calendar days
following the execution of this Release and that the Release is not effective
until the revocation period has expired and I have notified MDI in writing that
I did not revoke the Release. Notice of revocation and/or non-revocation should
be provided in writing by me to MDI at 2300 Traverwood Drive, Ann Arbor,
Michigan 48105, Attn: Michael E. Korybalski, CEO.

SECTION 13 IS APPLICABLE ONLY IF THE UNDERSIGNED IS 40 YEARS OF AGE OR OLDER ON
DATE OF TERMINATION.

         14. AUTHORITY TO RELEASE. I have the authority to release the claims
which are released herein and no claims have been previously assigned to or are
owned by any other person or entity.

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         15. ENTIRE AGREEMENT. No other written or oral promises, inducements or
agreements have been made by MDI to me. I understand that this Release may not
be modified, altered or changed in any respect except upon the express prior
written consent by me and MDI.

         16. SEVERABILITY. If after the date of execution of this Release, any
provision of this Release is held to be illegal, invalid, or unenforceable, such
provision shall be fully severable. In lieu thereof, there shall be added a
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.

         17. GOVERNING LAW. This Release shall be construed in accordance with
and shall be governed by the laws of the State of Michigan.

         18. HEADINGS. All headings in this Release are inserted for convenience
of reference only and shall not be deemed to affect the meaning or
interpretation of this Release.

         19. USAGE. Wherever applicable, the masculine gender, when used herein
shall include the feminine gender, and the singular shall include the plural.

         IN WITNESS WHEREOF, I have executed this Release as of the date noted
below.

-----------------------------                  ------------------------------
Witness                                        Douglas M. Peterson

DATE: _______________________                  DATE: ________________________

                                       3<PAGE>
                                                                   EXHIBIT 10(c)

                         SOUTHERN MICHIGAN BANCORP, INC.
                         SOUTHERN MICHIGAN BANK & TRUST

                              EMPLOYMENT AGREEMENT

         This Agreement, made effective as of the 1st day of January, 2002, by
and between SOUTHERN MICHIGAN BANCORP, INC., a Michigan corporation, and
SOUTHERN MICHIGAN BANK & TRUST, a Michigan banking corporation (collectively
"Employer"), and JAMES T. GROHALSKI ("Employee").

         WITNESSETH:

         WHEREAS, the Board of Directors of Southern Michigan Bancorp, Inc. (the
"Board of Directors") recognizes that, as is the case with publicly held
corporations generally, the possibility of a change in control of Employer may
exist and that such possibility, and the uncertainty and questions which it may
raise among management, may result in the departure or distraction of key
management personnel to the detriment of Employer, its subsidiaries and its
stockholders; and

         WHEREAS, the Board of Directors believes it is in the best interests of
Employer to enter into this Agreement with Employee in order to reinforce and
encourage the continued attention and dedication of Employee to his assigned
duties without distraction in the face of potentially disruptive circumstances
arising from the possibility of a change in control of Employer, although no
such change is now contemplated; and

         WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement; and

         WHEREAS, Employee acknowledges that this Agreement shall supersede,
terminate and replace any and all employment contracts, severance agreements,
change in control agreements or any other compensation or benefit type
arrangement between Employee and Employer or any of its subsidiaries; and

         WHEREAS, Employer desires to employ Employee and Employee desires to be
employed by Employer upon the terms and conditions set forth herein.

         NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is agreed as
follows:

         1. Employment. Employer hereby employs Employee as President and Chief
Executive Officer (CEO) of Southern Michigan Bancorp, Inc. and as President and
Chief Executive Officer (CEO) of Southern Michigan Bank & Trust, and Employee
hereby accepts employment by Employer upon the terms and conditions herein set
forth. The primary place of employment shall be at Employer's principal offices
in Coldwater, Michigan, or at such other location as Employer may designate.

         2. Term. The term of this Agreement shall commence as of January 1,
2002 for a term of one (1) year ending on December 31, 2002, unless sooner
terminated as hereinafter set forth. This Agreement may be renewed for
additional one (1) year periods upon the written agreement of Employer and
Employee.

         3. Duties. Employee will, during the term hereof:

                  (A) Faithfully and diligently do and perform all such acts and
duties and furnish such services as the Board of Directors shall direct, and do
and perform all acts in the ordinary course of Employer's

                             Exhibit 10(c) - Page 1
<PAGE>

business, with such limits as the Board of Directors may prescribe, necessary
and conducive to Employer's best interests; and

                  (B) Devote his full time, energy, and skill to the business of
Employer and to the promotion of Employer's best interests, except for vacations
and absences made necessary because of illness. Employee may not be an employee,
consultant, director or other agent of any other person, firm or corporation
(other than affiliates of Employer) without the prior signed written approval of
the Chairman of the Board of Directors. Employee may engage in passive business
activities which do not interfere with his employment under this Agreement and
which do not conflict with Employer's interests. Employee may engage in
professional, civic and charitable activities which do not interfere with his
employment under this Agreement and which do not conflict with Employer's
interests.

         4. Compensation.

                  (A) Subject to the provisions of paragraphs 6 and 7 hereof,
Employer shall pay to Employee for all services to be performed by Employee
during the term of this Agreement:

                           (i) a salary at the rate of One Hundred Sixty-Seven
         Thousand Dollars ($167,000) per annum, payable in periodic payments in
         accordance with Employer's practices for other executive, managerial,
         and supervisory employees, as such practices may be determined from
         time to time. The Board of Directors will review such fixed salary
         annually and, in its discretion, may grant increases or decreases
         thereof based upon Employee's performance; and

                           (ii) any additional or special compensation, such as
         incentive pay or bonuses, based upon Employee's performance, as the
         Board of Directors in its discretion, may from time to time determine.

All such payments will be subject to such deductions as may be required to be
made pursuant to law, government regulation or order, or by agreement with, or
consent of, Employee.

                  (B) In addition to the salary payments set forth above,
Employer agrees that during the term of this Agreement:

                           (i) Employee shall be entitled to reimbursement by
         Employer for all reasonable expenses actually and necessarily incurred
         by him on its behalf in the course of his employment hereunder, for
         which he shall submit vouchers in a form satisfactory to Employer and
         which are approved by Employer in its sole discretion; and

                           (ii) Employer shall reimburse Employee for automobile
         expenses incurred by Employee on behalf of Employer pursuant to
         Employer's standard policies, as amended from time to time.

         5. Benefits. Employee shall be entitled to participate in such life
insurance, medical, pension, retirement, and stock option plans and other
programs, including sick leave, as may be approved from time to time by Employer
for the benefit of its employees. Employee also shall be entitled to Four (4)
weeks of vacation under Employer's current policy, as amended. The said vacation
shall not be carried over from year to year.

                             Exhibit 10(c) - Page 2
<PAGE>

         6. Termination.

                  (A) Employee's employment with Employer shall terminate by
reason of Employee's death or Total Disability (subject to the terms of
paragraph 6(C) below). In the event of a termination of employment described in
the immediately preceding sentence or Employee's voluntary termination of
employment (other than for Good Reason), all obligations of Employer hereunder
shall terminate (except obligations under paragraphs 6(B) and 7 arising after a
voluntary termination with Good Reason).

                  (B) In addition to the foregoing, the Board of Directors may
terminate Employee's employment at any time, but any termination by the Board of
Directors other than termination for Cause, shall not prejudice Employee's right
to compensation or other benefits under this contract. Employee shall have no
right to receive compensation or other benefits for any period after termination
for Cause. In the event the Board of Directors terminates Employee's employment,
other than for Cause, or in the event of Employee's voluntary termination of
Employment for Good Reason, in addition to receiving the compensation and
benefits under this contract, Employer shall, upon expiration of the term of
this Agreement, pay to Employee monthly installments of 1/12th of Employee's
annual salary described in paragraph 4(A) above commencing thirty (30) days
after the expiration of the term of this Agreement and continuing on the same
date of each month thereafter until the earlier of: the date of Employee's
death; the date Employee attains the age of 65; or Employee receives twelve (12)
monthly installments under this subsection 6(B).

                  (C) In the event Employee is determined to be disabled (by a
doctor selected as set forth below) and is unable to perform the essential
functions of his job ("Total Disability"), the following shall apply:

                           (i) Employee shall, upon written request, be granted
         a leave of absence for up to ninety (90) calendar days (which leave
         shall run concurrently with any leave for which Employee is eligible
         under the Family Medical Leave Act). This leave of absence shall be
         with compensation and benefits under this Agreement and all other
         provisions of this Agreement shall remain in full force and effect.

                           (ii) Upon expiration of the leave of absence (not
         exceeding ninety (90) calendar days), if Employee is unable to perform
         the essential functions of his job with or without reasonable
         accommodation (and with a written release from the doctor setting forth
         any restrictions), this Agreement shall automatically terminate and
         Employer shall have no further obligations under this Agreement except
         as required by applicable law.

                           (iii) The determination of Total Disability of
         Employee shall be made by a doctor selected by Employer's disability
         insurance carrier or the Board of Directors (if no such carrier exists)
         and such doctor may be assisted in his or her determination by such
         other doctors as he or she believes should examine Employee. Either the
         Chairman of the Board of Directors, Employee or Employee's guardian or
         legal representative may request that a determination of Total
         Disability be made. The cost of the doctor(s)' services shall be borne
         equally by Employer.

                           (iv) If Total Disability of Employee is determined as
         set forth above, then for purposes of this Agreement, the period of
         disability shall be deemed to commence on the day of such
         determination.

         7. Change In Control and Definitions. If within three (3) years after a
Change in Control (as defined in this Agreement) Employer shall terminate
Employee without Cause (as defined in this Agreement) or Employee shall
voluntarily terminate such employment with Good Reason (as defined in this
Agreement) Employer shall, within ninety (90) days of the termination make a
lump sum cash payment to him equal to two

                             Exhibit 10(c) - Page 3

<PAGE>

(2) year's salary in accordance with Internal Revenue Code Section 280(G), as
amended. If it is mutually in the best interest of Employer and Employee,
Employee shall have the right to elect by written request to the Board of
Directors to receive a cash payment equal to one year's salary and the remaining
one (1) years' salary on an installment basis in accordance with Internal
Revenue Code Section 280(G). Employee shall not be paid any compensation under
this Agreement other than that specified in this paragraph.

         For purposes of this Agreement:

                  (A) "Cause" shall include in its meaning:

                           (i) Employee's conviction of any criminal violation
         involving dishonesty, fraud, or breach of trust;

                           (ii) Employee's willful engagement in any misconduct
         in the performance of his duty that materially injures Employer or any
         of its subsidiaries;

                           (iii) Employee's performance of any act which, if
         known to the customers, clients or stockholders of Employer or any of
         its subsidiaries would materially and adversely impact on the business
         of Employer or any of its subsidiaries;

                           (iv) Employee's willful and substantial
         nonperformance of his duties and such nonperformance continues more
         than ten (10) days after Employer has given written notice of such
         nonperformance and of its intention to terminate Employee's employment
         because of such nonperformance;

                           (v) Employee's willful violation of paragraphs 8 or 9
         herein; or

                           (vi) Employee is suspended and/or temporarily
         prohibited (or is removed and/or permanently prohibited) from
         participating in the conduct of Employer's (or any of its affiliates')
         affairs by a notice, order, ruling or other finding of any state or
         federal agency (including, but not limited to, any federal reserve
         bank, the Federal Deposit Insurance Corporation, or Office of Financial
         and Insurance Services of the State of Michigan) or any such federal or
         state regulatory agency makes any determination or takes any action
         that the Board of Directors of Employer, in its sole discretion,
         determines to reflect adversely on Employer and to be related to the
         duties of Employee under this Agreement.

                  (B) "Good Reason" shall exist if, without Employee's express
written consent:

                           (i) Employer shall assign to Employee duties of a
         nonexecutive nature or for which Employee is not reasonably equipped by
         his skills and experience;

                           (ii) Employer, without reasonable justification,
         shall reduce the salary of Employee, or materially reduce the amount of
         paid vacations to which he is entitled, or his fringe benefits and
         perquisites;

                           (iii) Employer shall require Employee to relocate his
         principal business office or his principal place of residence outside a
         sixty (60) mile radius from Coldwater, Michigan (the "Area"), or assign
         to Employee duties that would reasonably require such relocation;

                             Exhibit 10(c) - Page 4

<PAGE>

                           (iv) Employer shall require Employee, or assign
         duties to Employee which would reasonably require him to spend more
         than ninety (90) normal working days away from the Area during any
         consecutive twelve (12) month period;

                           (v) Employer shall fail to provide office facilities,
         secretarial services, and other administrative services to Employee
         which are substantially equivalent to the facilities and services
         provided to Employee on the date hereof; or
                           (vi) Employer shall terminate incentive and benefit
         plans or arrangements, or reduce or limit Employee's participation
         therein relative to the level of participation of other executives of
         similar rank, to such an extent as to materially reduce the aggregate
         value of Employee's incentive compensation and benefits below their
         aggregate value as of the date hereof.

                  (C) "Change in Control" shall be deemed to occur on the
earliest of:

                           (i) The acquisition by any entity, person, or group
         of beneficial ownership, as that term is defined in Rule 13d-3 under
         the Securities Exchange Act of 1934, of more than fifty percent (50%)
         of the outstanding capital stock of Employer entitled to vote for the
         election of directors ("Voting Stock");

                           (ii) The commencement by any entity, person, or group
         (other than Employer or a subsidiary of Employer) of a tender offer or
         an exchange offer for more than twenty-five percent (25 %) of the
         outstanding Voting Stock of Employer;

                           (iii) The effective time of (1) a merger or
         consolidation of Employer with one or more other corporations as a
         result of which the holders of the outstanding Voting Stock of Employer
         immediately prior to such merger hold less than fifty percent (50%) of
         the Voting Stock of the surviving or resulting corporation, or (2) a
         transfer of substantially all of the assets of Employer other than to
         an entity of which Employer owns at least eighty percent (80%) of the
         Voting Stock; or

                           (iv) The election to the Board of Directors of
         Employer without the recommendation or approval of the incumbent Board
         of Directors of Employer, of the lesser of three directors or directors
         constituting a majority of the number of Directors of Employer then in
         office.

         8. Restrictive Covenant. During the term of this Agreement, and for a
period of one (1) year following the termination of Employee's employment with
Employer pursuant to this Agreement including termination occasioned by the
expiration of this Agreement, Employee shall not:

                  (A) Within a geographic radius of seventy-five (75) miles from
Coldwater, Michigan, engage in, or work for, manage, operate, control or
participate in the ownership, management, operation or control of, or be
connected with, or have any financial interest in, any individual, partnership,
firm corporation or institution engaged in the same or similar activities to
those now or hereafter carried on by Employer;

                  (B) Interfere with the relationship of Employer and any of its
employees, agents or representatives; and

                  (C) Directly or indirectly divert or attempt to divert from
Employer any business in which Employer has been actively engaged during the
term hereof, nor interfere with the relationships of Employer with its dealers,
distributors, sources of supply or customers.

                             Exhibit 10(c) - Page 5

<PAGE>

         Any breach of the covenant not to compete by Employee will, in addition
to any other remedies Employer may have, result in the forfeiture by Employee
and all other persons of any and all rights to unpaid benefits and payments at
the time of breach and in such event Employer shall have no further obligation
to pay any amounts related thereto.

         9. Nondisclosure of Confidential Information. Employee acknowledges
that Employer may disclose certain Confidential Information (as defined in this
Agreement) to Employee during the term of this Agreement to enable him to
perform his duties hereunder. Employee hereby covenants and agrees that he will
not, without the prior written consent of Employer, during the term of this
Agreement or at any time thereafter, disclose or permit to be disclosed to any
third party by any method whatsoever any of the Confidential Information of
Employer. For purposes of this Agreement, "Confidential Information" shall
include, but not be limited to, any and all records, notes, memoranda, data,
ideas, techniques, programs, computer software, writings, research, personnel
information, customer information, Employer's financial information, plans, or
any other information of whatever nature in the possession or control of
Employer which has not been published or disclosed to the general public, or
which gives to Employer an opportunity to obtain an advantage over competitors
who do not know of or use it. Employee further agrees that if his employment
hereunder is terminated for any reason, he will leave with Employer and will not
take originals or copies of any and all records, papers, programs, computer
software and documents and all matter of whatever nature which bears secret or
confidential information of Employer.

         The foregoing paragraph shall not be applicable if and to the extent
Employee is required to testify in a judicial or regulatory proceeding pursuant
to an order of a judge or administrative law judge issued after Employee and his
legal counsel urge that the aforementioned confidentiality be preserved.

         Both during the term of his employment by Employer and at all times
thereafter, Employee shall not remove from Employer offices or premises any
documents, records, notebooks, files, correspondence, reports, memoranda and
similar materials or property of any kind unless necessary in accordance with
the duties and responsibilities of his employment (and, in the event that any
such material or property is removed, it shall be returned to its proper file or
place of safekeeping as promptly as possible) nor shall Employee make, retain,
remove or distribute any copies, or divulge to any third person the nature or
contents of any of the foregoing or of any other oral or written information to
which he may have access or with which for any reason he may have access or with
which for any reason he may become familiar, except as disclosure shall be
necessary in the performance of his assigned duties. Upon the termination of his
employment with Employer, Employee shall leave with or return to Employer all
originals and copies of the foregoing then in his possession or subject to his
control, whether prepared by Employee or by others.

         The covenants set forth in this paragraph which are made by Employee
are in consideration of the employment, or continuing employment of, and the
compensation paid to, Employee during his employment by Employer. The foregoing
covenants will not prohibit Employee from disclosing confidential or other
information to other employees of Employer or to third parties to the extent
that such disclosure is necessary to the performance of his duties under this
Agreement.

         10. Additional Remedies. It is expressly understood and agreed that
although Employee and Employer consider the restrictions contained in this
Agreement to be reasonable for the purpose of preserving the going business
value and goodwill of Employer, if a final judicial determination is made by a
court having jurisdiction at the time or territory or any other restriction
contained in this Agreement is an unenforceable restriction against Employee,
provisions of such restrictions shall not be rendered void but shall be deemed
amended to apply as to such maximum time and territory and to such other extent
as such court may judicially determine or indicate to be reasonable.
Alternatively, if the court referred to above finds that any restriction

                             Exhibit 10(c) - Page 6

<PAGE>
contained in this Agreement is unenforceable, and such restriction cannot be
amended so as to make it enforceable, such findings shall not affect the
enforceability of any of the other restrictions contained herein.

         Employee acknowledges and agrees that Employer's remedy at law for a
breach or threatened breach of any of the provisions of this Agreement would be
inadequate and, in recognition of this fact, in the event of a breach or a
threatened breach by Employee of any of the provisions, it is agreed that, in
addition to its remedy at law, Employer shall be entitled, without posting any
bond, to obtain equitable relief, and Employee agrees not to oppose Employer's
request for equitable relief in the form of specific performance, temporary
restraining order, temporary or permanent injunction, or any other equitable
remedy which may then be available. Employee acknowledges that the granting of a
temporary injunction, temporary restraining order or permanent injunction merely
prohibiting a breach or threatened breach would not be an adequate remedy, and
consequently agrees upon any such breach or threatened breach to the granting of
injunctive relief. Nothing herein contained shall be construed as prohibiting
Employer from pursuing any other remedies available to it for such breach or
threatened breach. In any action successfully brought by Employer against
Employee to enforce the rights of Employer under this Agreement, Employer shall
also be entitled to recover from Employee its reasonable attorneys' fees and
costs of the action. The terms of paragraphs 8, 9 and 10 shall survive
termination of this Agreement.

         11. Nonassignment. This Agreement is personal to Employee and shall not
be assigned by him. Employee shall not delegate, encumber, alienate, transfer or
otherwise dispose of his rights and duties hereunder. Employer may assign this
Agreement without Employee's consent to any other entity who, in connection with
such assignment, acquires all or substantially all of Employer's assets or into
or with which Employer is merged or consolidated.

         12. No Implied Waivers. Failure of either party to insist upon strict
performance of any part of this Agreement shall not be considered a waiver of
such performance and shall not prevent either party from subsequently insisting
upon strict performance.

         13. Severability. If any clause, phrase, provision or portion of this
Agreement or the application thereof to any person or circumstance shall be
invalid or unenforceable under any applicable law, such event shall not affect
or render invalid or unenforceable the remainder of this Agreement and shall not
affect the application of any clause, provision, or portion hereof to other
persons or circumstances.

         14. Benefit. The provisions of this Agreement shall inure to the
benefit of Employer, its successors and assigns, and shall be binding upon
Employer and Employee, its and his heirs, personal representatives and
successors, including without limitation Employee's estate and the executors,
administrators, or trustees of such estate.

         15. Governing Law and Choice of Forum. Michigan law shall govern the
construction and enforceability of this Agreement. Any and all actions
concerning any dispute arising hereunder shall be filed and maintained only in a
state or federal court sitting in the State of Michigan.

         16. Notices. All notices, requests, demands and other communications in
connection with this Agreement shall be made in writing and shall be deemed to
have been given when delivered by hand or 48 hours after mailing at any general
or branch United States Post Office, by registered or certified mail, postage
prepaid, addressed as follows, or to such other address as shall have been
designated in writing by the addressee:

                             Exhibit 10(c) - Page 7
<PAGE>

         (A)      If to Employer:

                           Southern Michigan Bancorp, Inc.
                           Attn: Chairman of the Board
                           51 West Pearl Street
                           Coldwater, Michigan 49036

         (B)      If to Employee:

                           James T. Grohalski
                           1147 South Road
                           Union City, Michigan 49094

         17. Entire Agreement. This Agreement sets forth the entire
understanding of the parties and supersedes all prior agreements, arrangements,
and communications, whether oral or written, pertaining to the subject matter
hereof; and this Agreement shall not be modified or amended except by written
agreement of Employer and Employee.

         18. Limitation. Employee agrees not to commence any action or suit
relating to Employee's employment with Employer more than twelve (12) months
after the date of termination of this Agreement and agrees to waive any statute
of limitations to the contrary.

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first set forth above.

            Employer: SOUTHERN MICHIGAN BANCORP, INC.

                      By:  /s/ James J. Morrison
                           -----------------------------------------------------

                      Its: Chairman of the Board of Directors
                           -----------------------------------------------------

                      SOUTHERN MICHIGAN BANK & TRUST

                      By:  /s/ Jaylen T. Johnson
                           -----------------------------------------------------

                      Its: Executive Vice President and Chief Operations Officer
                           -----------------------------------------------------

            Employee: /s/ James T. Grohalski
                      ----------------------------------------------------------
                      James T. Grohalski, President & Chief Executive Officer

                             Exhibit 10(c) - Page 8

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