<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR 12(g)
OF THE SECURITIES EXCHANGE ACT OF 1934
THE CHROMALINE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Small Business Issuer as specified in its charter)
Minnesota 41-0730027
- ------------------------------------------ -------------------------------
(State of incorporation or organization) (I.R.S. Employer Identification
No.)
4832 Grand Avenue
Duluth, Minnesota 55807
- ------------------------------------------ -------------------------------
(Address of principal executive offices) (Zip Code)
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
----------------------------
(Title of Class)
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Chromaline Corporation ("Chromaline" or the "Company") was
incorporated in Minnesota as Chroma-Glo, Inc. in 1952 and changed its name to
The Chromaline Corporation in 1982. The Company develops, manufactures and sells
light sensitive emulsions and films for commercial and industrial applications
in the United States and abroad. The Company also markets ancillary chemicals
and equipment to provide a full line of products and services to its customers.
The Company's products serve the screen printing and decorative sand blasting
markets. The screen printing products represent the Company's largest product
line. These products are used by screen printers to create stencil images. These
images produce basic designs for fabric decoration and product identification,
as well as complex designs for compact discs and electronic circuits. The sand
blasting products are used by many consumers to create architectural glass, art
pieces and awards. Some of the Company's customers use both the screen printing
and the sand blasting products.
PRODUCTS
Chromaline's core technology is photochemical imaging systems. This
technology is similar to photographic film technology except that the Company
uses organic polymers or natural protein rather than silver to make the product
photo-reactive ("light sensitive"). The products Chromaline targets at the
screen printing industry are light sensitive films and emulsions used by
customers to create an image on a printing screen; the equivalent of a printing
plate in other types of printing processes. In the sand blasting market, the
Company's products are also films and emulsions. These products are used to
create a stencil by decorators of glass and other hard surfaces including
crystal, marble, metals, wood, stone and plastics. The stencil is applied
directly to the article to be decorated by the sand blasting process through a
self-adhesive feature or with a separate adhesive. The open areas of the stencil
permit the sand blast grit to erode the surface while the closed areas of the
stencil repel the sand blast grit, protecting areas of the surface being
decorated.
All of Chromaline's light sensitive products are sensitive to
ultraviolet radiation. The Company uses different chemicals to create
sensitivity to light including a molecule which it developed internally and
patented.
DISTRIBUTION
Chromaline sells its products through non-exclusive distributors in
certain markets, exclusive distributors in other markets and through direct
sales to certain end users. The Company currently has approximately 140 domestic
and international distributors. In addition, Chromaline markets and sells its
products through magazine advertising, trade shows and the internet.
Chromaline is engaged in international sales through three channels.
The Company is a 19.5 percent owner of Chromaline Europe SA, a French
corporation located in Saverne, France ("Chromaline Europe"). Chromaline Europe
imports the Company's products and distributes them to dealers throughout
Western and Eastern Europe and North Africa. The other owners of Chromaline
Europe are Europeans involved in the screen printing industry, including several
Chromaline distributors and dealers. The Company is also currently developing
its business in India through an exclusive distributor in that country. It is
the Company's intent that an entity to be formed by the Company and the Indian
distributor will eventually become a licensed manufacturer of certain low cost
products which have been developed by Chromaline expressly for distant markets
where shipping costs and low market prices would otherwise preclude the
Company's participation. The Company markets products to foreign areas not
served by the European or Indian facilities from its corporate headquarters in
Duluth, Minnesota.
Chromaline has a diverse customer base both domestically and abroad and
does not depend on one or a few customers for a material portion of its
revenues.
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QUALITY CONTROL IN MANUFACTURING
In March 1994, Chromaline became the first firm in northern Minnesota
to receive ISO 9001 certification. The Company was recertified in 1997 and 1999.
The recertification process will occur every three years hereafter. Chromaline's
quality function goal is to train all employees properly in both their work and
in the importance of their work. Responsibility for efficient and correct work
has meant that authority for proposing changes has been given to all employees.
Internal records of quality related graphs and tables are reviewed regularly and
discussions are held among management and employees regarding how improvements
might be realized. The Company has rigorous materials selection procedures and
also uses environmental testing and screen print equipment tailored to fit
customers' needs.
RESEARCH AND DEVELOPMENT/INTELLECTUAL PROPERTY
Chromaline spent 7.3% of sales ($680,000) on research and development
in 1998 and 6.8% ($604,000) in 1997. In its research program, Chromaline has
developed unique light sensitive molecules which have received two U.S. patents.
These patents expire in 2011 and 2014, respectively. The Company also has four
United States patent applications pending. There can be no assurance that any
patent granted to the Company will provide adequate protection to the Company's
intellectual property. Within Chromaline, steps are taken to protect the
Company's trade secrets, including physical security, confidentiality and
non-competition agreements with employees and confidentiality agreements with
vendors. In its product development program, Chromaline is fully equipped to
simulate customer uses of its products. The Company's facilities include a
walk-in environmental chamber which simulates customer uses and storage
conditions of Chromaline products for different climatic zones. Chromaline has
introduced the highest number of new products of any participant in its markets
over the past ten years.
In addition to its patents, the Company has various trademarks
including the "Chromaline" and "PhotoBrasive" trademarks.
RAW MATERIALS
The Chromaline Corporation purchases raw materials from a variety of
domestic and foreign sources with no one supplier being material to the Company.
The purchasing staff at the Company's headquarters leads in the identification
of both domestic and foreign sources for raw materials and negotiates price and
terms for all domestic and foreign markets. Chromaline's involvement in foreign
markets has given it the opportunity to become a global buyer of raw materials
at lower overall cost than it had previously enjoyed. The Company has a number
of suppliers and no one supplier is essential to the Company's operations. To
date there have been no significant shortages of raw materials and alternative
sources for nearly all raw materials are available. The Company believes it has
good supplier relations.
COMPETITION
The Company competes in its markets based on product development
capability, quality, reliability, availability, technical support and price. The
screen printing market is much larger than the decorative sand blasting market,
however, the sand blasting market is currently experiencing faster growth.
Chromaline has two primary competitors in its screen printing film business.
Both are larger than Chromaline and possess greater resources than the Company
in many areas. One is a privately owned U.S. firm and the other is owned by a
large British conglomerate. The Company has numerous competitors in the market
for screen print emulsions many of whom are larger than Chromaline and possess
greater resources. The market for the Company's sand blasting products has
relatively few competitors, however, those in this market compete aggressively
on price and in other areas. Chromaline considers itself to be a significant
factor in this market.
GOVERNMENT REGULATION
The Company is subject to a variety of federal, state and local
industrial laws and regulations, including those relating to the discharge of
material into the environment and protection of the environment. These laws and
regulations have not had a material effect upon the capital expenditures or
competitive position of the Company.
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EMPLOYEES
As of March 19, 1999, the Company had 72 employees all of whom are
located at the Company's headquarters in Duluth, Minnesota with the exception of
several outside technical sales representatives in various locations around the
United States. None of the Company's employees are subject to a collective
bargaining agreement and the Company believes that its employee relations are
good.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management discussion and analysis focuses on those
factors that had a material effect on the Company's financial results of
operations and financial condition during 1998 and 1997 and should be read in
connection with the Company's audited financial statements and notes thereto for
the years ending December 31, 1998 and 1997.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements made in this Registration Statement on Form 10-SB,
which are summarized below, are forward-looking statements that involve risks
and uncertainties, and actual results may be materially different. Factors that
could cause actual results to differ include, but are not limited to, those
identified as follows:
- THE BELIEF THAT THE COMPANY'S CURRENT FINANCIAL RESOURCES, CASH
GENERATED FROM OPERATIONS AND THE COMPANY'S CAPACITY FOR DEBT
AND/OR EQUITY FINANCING WILL BE SUFFICIENT TO FUND CURRENT AND
ANTICIPATED BUSINESS OPERATIONS--Changes in anticipated operating
results, credit availability and equity market conditions may
further enhance or inhibit the Company's ability to maintain or
raise appropriate levels of cash.
- THE COMPANY'S PLANS TO EXPAND ITS RESEARCH AND DEVELOPMENT EFFORTS
AND THE EXPECTED FOCUS AND RESULTS OF SUCH EFFORTS--These plans
and expectations may be impacted by general market conditions,
unanticipated changes in expenses or sales, delays in the
development of new products, technological advances or other
changes in competitive conditions.
- THE COMPANY'S EFFORTS TO GROW ITS INTERNATIONAL BUSINESS--These
efforts may be impacted by economic, political and social
conditions in current and anticipated foreign markets, regulatory
conditions in such markets, unanticipated changes in expenses or
sales, changes in competitive conditions or other barriers to
entry or expansion.
- THE COMPANY'S BELIEF THAT EVALUATIONS AND MODIFICATIONS OF YEAR
2000 COMPLIANCE ISSUES, INCLUDING YEAR 2000 COMPLIANCE OF
THIRD-PARTY SUPPLIERS, WILL NOT HAVE A MATERIAL ADVERSE EFFECT ON
THE COMPANY'S OPERATIONS OR FINANCIAL POSITION--This belief may be
impacted by presently unanticipated delays in assessment or
remediation, unanticipated increases in costs or non-compliance by
third parties.
- THE EXPECTATION THAT THE COMPANY WILL HAVE A MANUFACTURER OF
CERTAIN LOW COST PRODUCTS IN INDIA--This expectation may be
impacted by economic, political and social conditions or
regulatory changes in India, unanticipated delays or expenses,
acceptance of the Company's products or changes in competitive
conditions.
RESULTS OF OPERATIONS
SALES. The Company's sales increased by 4.4% to $9.3 million in 1998
from $8.9 million in 1997. This increase was primarily due to a 15.2% increase
in international sales.
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COST OF GOODS SOLD. The cost of goods sold was $4.2 million, or 45.1%
of sales, in 1998 and $4.2 million, or 46.9% of sales, in 1997, gross margins
improved as overhead and labor costs increased slightly and the cost of raw
materials remained relatively flat.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $3.1 million, or 33.1% of sales, in 1998
from $2.7 million, or 30.0% of sales, in 1997. This increase was primarily due
to approximately $240,000 of one-time costs associated with the retirement and
replacement of two senior officers and increased sales and marketing expenses
associated with the launch of new products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $680,000, or 7.3% of sales, in 1998 from $604,000, or 6.8% of
sales, in 1997. This increase was primarily due to expenses incurred to complete
development of PHAT film, a film which utilizes new high density inks to create
suede-like and 3-D images, and the MAX-R emulsion, an emulsion which has maximum
resistance to breakdown thus improving screen printers' production efficiency.
PHAT film and the MAX-R emulsion were launched at the Screenprinting and
Graphics Imaging Association trade show in October 1998.
PATENT LITIGATION EXPENSES. Recognized expenses related to the
Company's patent litigation decreased to zero in 1998 from $445,000 in 1997.
This decrease was due to the fact that all patent litigation costs incurred in
1998 were covered by the $250,000 accrual which was included in the $445,000
patent litigation expense incurred in 1997.
INTEREST INCOME. Net interest income increased to $29,000 in 1998 from
$10,000 in 1997. This increase was primarily due to the Company's purchase of
certain interest-bearing securities in 1998.
INCOME TAXES. While the Company's effective tax rate decreased to 35.8%
in 1998 from 38.6% in 1997, federal and state income tax expense increased to
$492,000 in 1998 from $371,000 in 1997. This increase in expense was due to the
increase in the Company's pretax income for 1998.
NET INCOME. Net income increased to $881,000 in 1998 from $638,375 in
1997. Net income in 1997 was negatively impacted by a total of $445,000 in
patent litigation costs during the year, while 1998 saw $240,000 of one-time
costs related to the retirement and replacement of two senior officers. Without
these one-time costs, net income in 1998 increased by 12.6% over 1997. This
increase was due to a 4.4% increase in sales and continuing efforts to improve
operating efficiencies and reduce costs.
LIQUIDITY AND CAPITAL RESOURCES
Chromaline has financed its operations principally with funds generated
from operations. These funds have been sufficient to cover the Company's normal
operating expenditures and annual capital spending requirements, as well as
research and development expenditures.
A bank line of credit exists providing for borrowings of up to
$1,250,000. Outstanding debt under this line of credit is collateralized by
accounts receivable and bears interest at 2.5 percentage points over the 30-day
LIBOR rate. The Company has not utilized this line of credit to a material
extent and there was no debt outstanding under this line as of December 31,
1998. A possible second source of funding is Tax Increment Financing ("TIF").
The Company resides in one of several TIF districts in Duluth, Minnesota. TIF
uses the increase in tax revenues that results from development to fund the
costs of such development. This funding may be used to help facilitate
improvements or additions to the Company's property and buildings.
The Company believes that current financial resources, cash generated
from operations and the Company's capacity for debt and/or equity financing will
be sufficient to fund current and anticipated business operations. Future
activities undertaken to expand the Company's business may include acquisitions,
building expansion and additions, equipment additions, new product development
and marketing opportunities.
5
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CAPITAL EXPENDITURES
In 1998, the Company purchased over an acre of additional land
immediately adjacent to its manufacturing facility in Duluth at a cost of
$64,000. In addition, the Company acquired the E-Z Mask patent at a cost of
$109,000 to aid in the development of its decorative sand blasting business.
Additional plant equipment, research and development instrumentation, and
computers were purchased during the year to improve product quality and
operating efficiency.
INTERNATIONAL ACTIVITY
The Company markets its products to over 50 countries in North America,
Europe, Latin America, Asia and other parts of the world. Foreign sales were
approximately 32% and 29% of total sales in 1998 and 1997. Recent weakening of
certain foreign currencies has not significantly impacted the Company's
operations, because the Company's foreign sales are not concentrated in any one
region of the world. The Company believes its vulnerability to uncertainties due
to foreign currency fluctuations and general economic conditions in foreign
countries is not significant.
Substantially all of the Company's foreign transactions are negotiated,
invoiced and paid in U.S. dollars. Chromaline has not implemented a hedging
strategy to reduce the risk of foreign currency translation exposures, which
management does not believe to be significant based on the scope and geographic
diversity of the Company's foreign operations as of December 31, 1998.
Effective January 1, 1999, eleven states of the European Union began
the conversion to a common currency, called the "euro." This action will most
likely cause a portion of Chromaline's European transactions to be negotiated,
invoiced and paid in "euros." The conversion will most likely add currency
exchange costs and risks. Although such costs and risks are not quantifiable at
this time, they are not expected to be significant.
YEAR 2000 ISSUE
The year 2000 issue is the result of certain computer systems that
recognize the year using only the last two digits. Any system utilizing
time-sensitive programming may recognize the date using "00" as the year 1900
rather than the year 2000. This could result in systems failures that may
disrupt normal business operations. The Company has begun a comprehensive
project to test and prepare its internal computer systems for the year 2000.
This project will replace all non-compliant software and hardware with systems
that are year 2000 compliant and is expected to be completed in the third
quarter of 1999. If necessary conversions are not completed on a timely basis,
the year 2000 could have a material adverse effect on Chromaline's operations.
Overall, management believes the year 2000 will not have a significant impact on
operations.
At this time, the Company believes it is unnecessary to adopt a
contingency plan covering the possibility that the year 2000 project will not be
completed in a timely manner, but, as part of the overall project, the Company
will continue to assess the need for a contingency plan based on its periodic
evaluation of target dates for the completion of the year 2000 project.
Chromaline faces risk to the extent that suppliers of products and
services purchased by the Company and others with whom it transacts business on
a world-wide basis do not have business products and services that comply with
year 2000 requirements. The Company has solicited assurances from its major
suppliers that their products and services are year 2000 compliant. In the event
that a significant number of these third parties cannot, in a timely manner,
provide the Company with products and services because of the year 2000 issue,
Chromaline's operating results could be materially adversely affected.
The costs associated with the year 2000 project are minimal and are not
incremental to the Company, but include temporary reallocation of existing
resources. Although Chromaline believes that the remaining cost of year 2000
modifications for internal-use systems are not material, there can be no
assurances that various factors relating to year 2000 compliance issues will not
have a material adverse effect on the Company's business, operating results, or
financial position.
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FUTURE OUTLOOK
Chromaline has invested over 6% of sales dollars for the past several
years on research and development. The Company plans to expand its efforts in
this area and expedite internal product development as well as form
technological alliances with outside experts to ensure the commercialization of
new product opportunities. In addition to its film, emulsion and self-adhesive
products, Chromaline's research and development efforts will also focus on
improving the efficiency of its automated photo developers for the decorative
sand blasting product line. The Company will also be looking at natural adjuncts
to its product line if extremely reliable sources of supply can be obtained and
resale margins are acceptable.
In addition to its traditional emphasis on domestic markets, the
Company will continue efforts to grow its business internationally by attempting
to develop new markets and expanding its market share where it has already
established a presence.
In its search for new opportunities, Chromaline will actively
investigate experimental technology sharing, joint ventures, and acquisitions to
complement its core strengths of innovative technology and recognized market
presence.
ITEM 3. DESCRIPTION OF PROPERTY
The Company conducts its entire operations in Duluth, Minnesota. The
administrative, sales, research and development, quality and manufacturing
activities are housed in a 60,000 square-foot four-story building, including a
basement level. The building is approximately seventy years old and has been
maintained in good condition. Shipping and distribution for the Company operates
from a three-year old 5,625 square-foot warehouse adjacent to the existing plant
building. These facilities are owned by the Company with no existing liens or
leases.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 19, 1999, the number of
shares of Common Stock beneficially owned by each person who is a beneficial
owner of more than 5% of the outstanding Common Stock of the Company, by each
officer named in the Summary Compensation Table, by each director, and by all
officers and directors as a group. All persons have sole voting and dispositive
power over such shares unless otherwise indicated.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER PERCENTAGE OF
OF BENEFICIAL OWNER: OF SHARES OUTSTANDING SHARES
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<S> <C> <C>
Directors and executive officers:
William C. Ulland 130,500(1) 11.0%
Philip J. Hourican 5,500 *
Charles H. Andresen 6,870(2) *
Gerald W. Simonson 55,200 4.7
David O. Harris 42,817 3.6
Thomas L. Erickson (retired July 1998) 69,775(3) 5.9
All directors and executive officers as 329,112(4) 27.7
a group (9 persons, including those
named above)
</TABLE>
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* Less than one percent.
(1) Includes options to purchase 3,000 shares of Common Stock exercisable
within 60 days of March 19, 1999. The address of Mr. Ulland is 740 East
Superior Street, Duluth, Minnesota 55802.
(2) Includes options to purchase 250 shares of Common Stock exercisable within
60 days of March 19, 1999.
(3) Mr. Erickson held office as President and Chief Executive Officer, and as a
Director, until his retirement, effective July 12, 1998. The address of
Mr. Erickson is 20 South 26th Avenue East, Duluth, MN 55812.
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(4) Includes options to purchase 9,750 shares of Common Stock exercisable
within 60 days of March 19, 1999.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE
REGISTRANT
The Directors, Executive Officers and Significant Employees of the
Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
------------------------------- ---- ------------------------------------------------------
<S> <C> <C>
William C. Ulland 58 Chairman of the Board of Directors
Philip J. Hourican 54 President, Chief Executive Officer and Director
Jeffery A. Laabs 44 Vice President of Finance, Controller, Treasurer and
Secretary
Claude P. Piguet 41 Vice President of Operations
Toshifumi Komatsu 44 Vice President of Technology
Robert D. Banks, Jr. 47 Vice President of International Sales
Charles H. Andresen 58 Director
Gerald W. Simonson 68 Director
David O. Harris 64 Director
</TABLE>
WILLIAM C. ULLAND has been a director and Chairman of the Board of the
Company since 1972. Since 1977, Mr. Ulland has been Managing Partner of American
Shield Company, a mineral exploration and development company located in Duluth,
Minnesota.
PHILIP J. HOURICAN has been President and Chief Executive Officer of
the Company since July 1998. He was elected to the Board of Directors shortly
thereafter. Mr. Hourican came to the Company from Balchem Corporation of Slate
Hill, New York. At Balchem, Mr. Hourican served as Vice President and General
Manager from July 1996 to February 1998. Balchem is an international marketer of
repackaged chemicals. From October 1994 to July 1996, Mr. Hourican was the Vice
President of Sales and Marketing on a nationwide basis for Techalloy, a
manufacturer of stainless steel and nickel wire located in Mahwah, New Jersey.
Mr. Hourican was a senior manager for Crosfield Chemicals, a manufacturer of
silicas, silicates, zeolites and catalysts located in Joliet, Illinois, from May
1988 to October 1994. Mr. Hourican received a B.S. in Chemical Engineering from
the University of Pittsburgh in 1967 and an M.B.A. from the University of Akron
in 1972.
JEFFERY A. LAABS, CMA has been Vice President of Finance and Controller
of the Company since May 1998. He was named Treasurer and Secretary of the
Company shortly thereafter. Mr. Laabs was a Senior Financial Analyst for Lake
Superior Paper Industries ("LSPI") in Duluth, Minnesota from September 1986
until he joined Chromaline in 1998. LSPI is a manufacturer of supercalendered
paper for newspaper inserts and magazines. His prior experience includes various
financial positions with Kimberly Clark Corporation, a manufacturer of paper
products, from September 1981 until September 1986. Mr. Laabs received a
Bachelor of Science degree in Accounting from Lake Superior State University in
1976. He earned the designation of Certified Management Accountant in 1996.
CLAUDE P. PIGUET has been the Company's Vice President of Operations
since May 1994. Previously, he was the Company's Director of Operations from
January 1992 to May 1994. Mr. Piguet joined Chromaline in 1990 and holds a
diploma of Engineer ETS/HTL from the Ecole D'Ingenieurs de l'Etat de Vaud in
Switzerland.
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TOSHIFUMI KOMATSU has been the Company's Vice President of Technology
since September 1993. Previously, he served as Chromaline's Director of Research
and Development for two years. Mr. Komatsu has been with Chromaline's Research
and Development Department for 15 years. His prior experience includes positions
in research and development at Alberta Gas Chemicals, a manufacturer of organic
acids. He received a B.S. in Chemistry and Mathematics from the College of Saint
Scholastica in 1980.
ROBERT D. BANKS, JR. has been the Company's Vice President of
International Sales since February 1997. Previously, he was the Company's
Director of International Sales and Marketing from 1989 to 1997.
CHARLES H. ANDRESEN was elected as a director of the Company in 1979.
Mr. Andresen has been a shareholder in the law firm of Magie, Andresen, Haag,
Paciotti, Butterworth & McCarthy, P.A., in Duluth, Minnesota for more than the
past five years.
GERALD W. SIMONSON was elected as a director of the Company in 1978. He
has been the President of Omnetics Connector Corporation, a manufacturer of
microminiature connectors for the electronics industry located in Minneapolis,
Minnesota, for more than the past five years. Mr. Simonson is also a director of
Medtronic, Inc., a manufacturer of medical devices, and Northwest
Teleproductions, Inc., a film and video production company.
DAVID O. HARRIS was elected a director of the Company in 1965. He has
been President of David O. Harris, Inc., a manufacturer's representative firm in
Minneapolis, Minnesota, for more than the past five years.
ITEM 6. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation earned by the individuals who served as Chief Executive Officer of
the Company during the fiscal years ended December 31, 1998, 1997 and 1996. No
other executive officers of the Company received remuneration exceeding $100,000
for the fiscal year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ----------------
COMPENSATION SHARES
----------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS OPTIONS(2) COMPENSATION(3)
- ---------------------------------- ------- -------- --------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Philip J. Hourican 1998 $55,400 $2,990 20,526 $32,496
President and Chief Executive
Officer
Thomas L. Erickson, 1998 66,635 31,853 2,000 165,000
President and Chief Executive 1997 110,000 41,474 2,000 -
Officer 1996 102,500 41,786 2,000 -
</TABLE>
- ---------------
(1) Mr. Hourican joined the Company as President and Chief Executive Officer on
July 13, 1998. If he had been employed for all for 1998, his salary would
have been $120,000. Mr. Erickson retired from the Company effective July
12, 1998.
(2) Represents options to purchase Common Stock granted under the Company's 1995
Stock Incentive Plan.
(3) Amounts reported for Mr. Hourican in 1998 represent payments made for
reimbursement of moving and temporary living expenses. Amounts reported for
Mr. Erickson in 1998 represent the following payments made in
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connection with his retirement: a $65,000 severance payment, $80,000 in
consulting fees and $20,000 paid pursuant to Mr. Erickson's agreement
not to compete with the Company. The agreements governing the payments
to Mr. Erickson are discussed below under "Employment Agreements and
Termination of Employment and Change-in-Control Arrangements."
OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes option grants made during 1998 to the
Chief Executive Officer of the Company.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------
PERCENTAGE POTENTIAL REALIZABLE VALUE
NUMBER OF OF TOTAL AT ASSUMED ANNUAL RATES
SHARES OPTIONS OF STOCK APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------------
NAME GRANTED(2) FISCAL YEAR SHARE DATE 5% 10%
- ------------------ ---------- ----------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Philip J. Hourican 20,526 87.2% $9.50 7/13/05 $274,380 $379,991
</TABLE>
- -------------
(1) The potential realizable value is based on a 7-year term of each option at
the time of grant. Assumed stock price appreciation of 5% and 10% is
mandated by rules of the Securities and Exchange Commission and is not
intended to forecast actual future financial performance or possible future
appreciation. The potential realizable value is calculated by assuming that
the fair market value of the Company's Common Stock on the date of grant
appreciates at the indicated rate for the entire term of the option and
that the option is exercised at the exercise price and sold on the last day
of its term at the appreciated price.
(2) Options granted pursuant to the Company's 1995 Stock Incentive Plan are
exercisable at an exercise price equal to the fair market value on the date
of grant. The 20,526 share option granted to Mr. Hourican at $9.50 per
share vests in three equal increments on the day prior to the first, second
and third anniversaries of the date of grant. This option has a maximum
term of seven years, subject to earlier termination in the event of Mr.
Hourican's cessation of service with the Company.
AGGREGATED OPTION
EXERCISES IN FISCAL 1998
AND FISCAL YEAR-END OPTION VALUES
The purpose of the following table is to report exercise of stock
options by the Chief Executive Officers of the Company during 1998 and the value
of his unexercised stock options as of December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
ACQUIRED VALUE ----------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Philip J. Hourican - - - 20,526 - $0
</TABLE>
- -----------
(1) Value is based on the per share closing price of the Company's Common Stock
on December 31, 1998, which was $7.50.
10
<PAGE>
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Thomas L. Erickson retired from his position as President and Chief
Executive Officer of the Company on July 12, 1998 and entered into a Separation
Agreement with the Company effective July 13, 1998. The Separation Agreement
provides for severance compensation of $65,000 which was paid during 1998. Mr.
Erickson also entered into an Agreement regarding Non-Disclosure of Confidential
Information and Non-Competition with the Company dated July 22, 1998. Pursuant
to this Agreement, Mr. Erickson has agreed not to compete with the Company prior
to December 31, 2002 in exchange for payments totaling $123,500 over the term of
the Agreement. Finally, Mr. Erickson agreed to act as a consultant to the
Company until December 31, 1999 and entered into a Consulting Agreement with the
Company dated July 22, 1998 providing for compensation of $80,000, all of which
was paid in 1998.
DIRECTOR COMPENSATION
During 1998, each non-employee director of the Company who beneficially
owns not more than 5% of the Company's outstanding Common Stock received a
one-time grant of an option to purchase 3,000 shares of the Company's Common
Stock under the 1995 Stock Incentive Plan. These options have an exercise price
equal to the fair market value on the date of grant and will expire seven years
from the date of grant. In addition, each non-employee director of the Company
who beneficially owns not more than 5% of the Company's outstanding Common Stock
receives a quarterly retainer of $1,000, plus per meeting fees of $700 for each
meeting of the Board of Directors attended in person, $350 for each meeting of
the Board of Directors attended by telephone, $300 for each committee meeting
attended in person and $150 for each committee meeting attended by telephone.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 8. DESCRIPTION OF SECURITIES
GENERAL
The Company's Restated Articles of Incorporation, as amended, authorize
the issuance of up to 5,000,000 shares of capital stock. The shares are
classified into two classes, consisting of 4,750,000 shares of Common Stock,
$.10 par value, and 250,000 shares of Preferred Stock, $.10 par value.
The Board of Directors is authorized to establish one or more series of
Preferred Stock by resolution, set forth the designation of each such series and
fix the relative rights and preferences of each such series, provided that
certain voting, dividend and liquidation terms specified in the Restated
Articles of Incorporation may not be altered by the Board.
COMMON STOCK
At March 19, 1999, there were 1,178,811 shares of Common Stock issued
and outstanding and held by approximately 450 shareholders of record. Holders of
Common Stock are entitled to one vote per share for the election of directors
and on all matters submitted to a vote of shareholders, and there are no
cumulative voting rights for the election of directors. Holders of Common Stock
are entitled to receive dividends as and when declared by the Board of Directors
out of funds legally available therefor. Holders of Common Stock are not
entitled to preemptive rights. In the event of the liquidation, dissolution or
winding up of the Company, the holder of each share of Common Stock is entitled
to share equally in any balance of the Company's assets available for
distribution to shareholders after the holders of any Preferred Stock have
received the full distribution to which such holders are entitled. Outstanding
shares of Common Stock are not subject to any further call or assessment.
PREFERRED STOCK
The Company does not currently have any issued and outstanding shares
of Preferred Stock. Pursuant to the Company's Articles of Incorporation, the
Board of Directors has the authority, without further action by the
11
<PAGE>
shareholders, to issue up to 250,000 shares of Preferred Stock in one or more
classes or series. The Board is authorized to determine the designation of and
number of shares in each series and to fix the dividend, redemption,
liquidation, retirement and conversion rights, if any, of such series, and any
other rights and preferences thereof, subject to certain limitations in the
Company's Restated Articles of Incorporation. These limitations state that
holders of the Company's Preferred Stock shall not have any voting rights unless
required by Minnesota law, shall be paid all accumulated or accrued dividends
prior to a dividend being declared or paid on the Company's Common Stock and
shall be entitled to receive the liquidation price of their Common Stock and any
accrued dividends thereon prior to any distributions being made to the holders
of Common Stock in the event of the liquidation, dissolution or winding up of
the Company. Any shares of Preferred Stock which may be issued may have greater
rights in many areas than the Common Stock, including preferences as to payment
of dividends and upon liquidation, and may be convertible into shares of Common
Stock. Preferred Stock could be issued quickly with terms calculated to delay or
prevent a change in control of the Company or make removal of management more
difficult. Additionally, the issuance of Preferred Stock may have the effect of
decreasing the market price of the Common Stock, and may adversely affect the
rights of the holders of Common Stock. The Company has no present plans to issue
shares of Preferred Stock.
OPTIONS
At March 19, 1999, the Company had outstanding options to purchase up
to an aggregate of 51,027 shares of Common Stock to directors, officers and
employees of the Company at exercise prices ranging from $4.04 to $10.13 per
share.
ANTI-TAKEOVER PROVISIONS OF THE MINNESOTA BUSINESS CORPORATION ACT; RESTATED
ARTICLES OF INCORPORATION
Certain provisions of Minnesota law and the Company's Restated Articles
of Incorporation described below could have an anti-takeover effect. These
provisions are intended to provide management flexibility to enhance the
likelihood of continuity and stability in the composition of the Company's Board
of Directors and in the policies formulated by the Board and to discourage an
unsolicited takeover of the Company, if the Board determines that such a
takeover is not in the best interests of the Company and its shareholders.
However, these provisions could have the effect of discouraging certain attempts
to acquire the Company which could deprive the Company's shareholders of
opportunities to sell their shares of Common Stock at prices higher than
prevailing market prices.
Section 302A.671 of the Minnesota Statutes applies, with certain
exceptions, to any acquisitions of voting stock of the Company (from a person
other than the Company, and other than in connection with certain mergers and
exchanges to which the Company is a party) resulting in the beneficial ownership
of 20% or more of the voting stock then outstanding. Section 302A.671 requires
approval of the granting of voting rights for the shares received pursuant to
any such acquisition by a majority vote of the shareholders of the Company. In
general, shares acquired without such approval are denied voting rights and are
redeemable at their then fair market value by the Company within 30 days after
the acquiring person has failed to deliver a timely information statement to the
Company or the date the shareholders voted not to grant voting rights to the
acquiring person's shares.
Section 302A.673 of the Minnesota Statutes generally prohibits any
business combination by the Company, or any subsidiary of the Company, with any
shareholder which purchases 10% or more of the Company's voting shares (an
"interested shareholder") within four years following such interested
shareholder's share acquisition date, unless the business combination is
approved by a committee of all of the disinterested members of the Board of
Directors of the Company before the interested shareholder's share acquisition
date.
In addition, the existence of undesignated Preferred Stock in the
Restated Articles of Incorporation allows the Board of Directors of the Company,
without further shareholder action, to issue Preferred Stock with certain rights
and in amounts that could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, control
of the Company.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, National Association, is the transfer agent and
registrar for the Company's Common Stock.
12
<PAGE>
PART II
ITEM 1. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the local over-the-counter
market in the Minneapolis-St. Paul area under the symbol CMLH. The following
table sets forth, for the fiscal quarters indicated, the high and low bid prices
for the Company's Common Stock as reported on the local over-the-counter market
in the Minneapolis-St. Paul area. The quotations reflect inter-dealer prices
without retail mark-up, mark-down or commission, and may not represent actual
transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ -------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1999:
First Quarter............................................................ $7.75 $6.75
Second Quarter (through April 6, 1999)................................... 8.00 7.63
FISCAL YEAR ENDED DECEMBER 31, 1998:
First Quarter............................................................ $8.88 $7.00
Second Quarter........................................................... 9.00 7.38
Third Quarter............................................................ 10.38 7.75
Fourth Quarter........................................................... 8.06 7.00
FISCAL YEAR ENDED DECEMBER 31, 1997:
First Quarter............................................................ $6.67 $5.00
Second Quarter........................................................... 9.00 6.00
Third Quarter............................................................ 10.17 8.00
Fourth Quarter........................................................... 10.00 8.50
</TABLE>
As of March 19, 1999, the Company had approximately 450 shareholders
of record. The Company has never declared or paid any dividends on its Common
Stock. The Company currently intends to retain any earnings for use in its
business and therefore does not anticipate paying any dividends in the near
future.
ITEM 2. LEGAL PROCEEDINGS
On October 22, 1996, Aicello North America, Inc., a Canadian
corporation ("ANA"), filed suit against the Company in the United States
District Court for the Western District of Washington, alleging infringement
by the Company of U.S. Patent No. 5,427,890 (the "890 patent"). Later, ANA
added U.S. Patent No. 5,629,132 (the "132 patent") to the lawsuit. The 890
patent and the 132 patent had been assigned to Aicello Chemical Co. Ltd. of
Japan ("ACLJ") on October 22, 1996 and were licensed to ANA shortly before
filing of the present infringement action. At Chromaline's request, ACLJ was
joined to the suit.
The subject of the patents and the allegedly infringing Chromaline
products are three-layer photosensitive films used to engrave patterns or
designs into hard surfaces such as metal, glass, stone and wood. The Company
believes that:
1. The 890 and 132 patents are invalid.
2. The 890 and 132 patents are unenforceable.
3. The 890 and 132 patents are not being infringed by Chromaline.
The Company and ANA attempted to settle the suit with two mediation
sessions that did not result in a settlement. Following these mediations,
Chromaline requested in August 1998 that the U.S. Patent and Trademark Office
("USPTO") reexamine the 890 patent and the 132 patent. This request was granted
as to both patents in November 1998 and the lawsuit was stayed pending this
review. The reexamination process will require approximately twelve to eighteen
months to complete. A favorable ruling by the USPTO may result in the dismissal
13
<PAGE>
of the case. In its initial action, the USPTO released documents showing that
all claims for both patents "are rejected." These documents also state that ANA
and ACLJ must respond within 60 days.
The Company has made provisions to cover certain legal proceedings and
related costs and expenses as described in note 2 to its audited financial
statements included herein. However, the ultimate outcome and materiality of
these matters cannot be determined. Accordingly, no provision for any liability
that may result therefrom has been made in the audited financial statements.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years the Company has sold the following
securities pursuant to exemptions from registration under the Securities Act of
1933, as amended (the "Act"). The sales referred to below were all made in
reliance upon the exemptions from registration provided by Rule 701 under the
Act for securities sold pursuant to certain compensatory benefit plans and
contracts relating to compensation, and related state securities laws. All
shares were issued directly by the Company, no underwriters were involved, and
no discount, commission or transaction-related remuneration was paid.
1. On February 18, 1997, the Company granted options to purchase an
aggregate of 3,750 shares of the Company's Common Stock at
$5.6667 per share to four of the Company's employees.
2. On June 15, 1998, the Company granted an option to purchase an
aggregate of 3,000 shares of the Company's Common Stock at
$8.625 per share to an executive officer of the Company.
3. On July 13, 1998, the Company granted an option to purchase an
aggregate of 20,526 shares of the Company's Common Stock at
$9.50 per share to an executive officer of the Company.
4. On August 19, 1998, the Company granted options to purchase an
aggregate of 9,000 shares of the Company's Common Stock at
$10.125 per share to three of the Company's directors.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Article V, Sections 1 and 2 of the Company's By-Laws, as amended,
and Article VIII, Section 8.5 of the Company's Restated Articles of
Incorporation, as amended, the Company indemnifies its directors and officers
and advances litigation expenses to the fullest extent required or permitted by
Minnesota Statutes Section 302A.521. This indemnification is subject to the
requirement in the case of legal judgments, that the individual seeking
indemnification is not finally adjudged to have been guilty of willful
misconduct detrimental to the best interests of the Company. Section 302A.521
requires the Company to indemnify a person made or threatened to be made a party
to a proceeding, by reason of the former or present official capacity of the
person with respect to the Company, against judgments, penalties, fines,
including without limitation, excise taxes assessed against the person with
respect to an employee benefit plan, settlements, and reasonable expenses,
including attorneys' fees and disbursements, if, with respect to the acts or
omissions of the person complained of in the proceeding, such person (1) has not
been indemnified by another organization or employee benefit plan for the same
judgments, penalties, fines, including without limitation, excise taxes assessed
against the person with respect to an employee benefit plan, settlements, and
reasonable expenses, including attorneys' fees and disbursements, incurred by
the person in connection with the proceeding with respect to the same acts or
omissions; (2) acted in good faith; (3) received no improper personal benefit,
and statutory procedure has been followed in the case of any conflict of
interest by a director; (4) in the case of a criminal proceeding, had no
reasonable cause to believe the conduct was unlawful; and (5) in the case of
acts or omissions occurring in the person's performance in the official capacity
of director or, for a person not a director, in the official capacity of
officer, committee member, employee or agent, reasonably believed that the
conduct was in the best interests of the Company, or in the case of performance
by a director, officer, employee or agent of the Company as a director, officer,
partner, trustee, employee or agent of
14
<PAGE>
another organization or employee benefit plan, reasonably believed that the
conduct was not opposed to the best interests of the Company. In addition,
Section 302A.521, subd. 3, requires payment by the Company upon written
request, of reasonable expenses in advance of final disposition in certain
instances.
The Restated Articles of Incorporation of the Company, as amended,
eliminate the personal liability of a director to the Company or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except under certain circumstances involving any breach of the director's duty
of loyalty to the Company or its shareholders, acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law, or
for any unlawful acts under Sections 302A.559 or 80A.23 of Minnesota Statutes.
PART F/S
INDEX TO AUDITED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Independent Auditors' Report 16
Balance Sheets as of December 31, 1998 and 1997 17
Statements of Earnings for the Years Ended December 31, 1998 and 1997 18
Statements of Stockholders' Equity for the Years Ended
December 31, 1998 and 1997 19
Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997 20
Notes to Financial Statements 21
</TABLE>
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
The Chromaline Corporation
We have audited the accompanying balance sheets of The Chromaline Corporation
(the Company) as of December 31, 1998 and 1997 and the related statements of
earnings, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Chromaline Corporation as
of December 31, 1998 and 1997 and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
January 15, 1999
Minneapolis, Minnesota
16
<PAGE>
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 274,757 $ 732,381
Trade receivables, less allowance for doubtful accounts of $14,400 and
$14,700, respectively 1,128,568 1,201,146
Trade receivable from related party 271,443 235,116
Inventories 1,255,192 966,458
Prepaid expenses and other assets 97,409 41,338
Marketable securities 508,445
Income tax refund receivable 61,801
Deferred taxes (Note 3) 54,000 128,000
----------- -----------
Total current assets 3,651,615 3,304,439
PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land and building 1,171,560 1,045,560
Machinery and equipment 1,991,566 1,856,700
Office equipment 516,935 463,350
Vehicles 199,335 165,678
----------- -----------
3,879,396 3,531,288
Less accumulated depreciation 2,455,816 2,109,752
----------- -----------
1,423,580 1,421,536
PATENTS, net of amortization of $5,752 103,715
OTHER 38,733 38,733
DEFERRED TAXES (Note 3) 43,000 17,000
----------- -----------
$ 5,260,643 $ 4,781,708
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable, bank $ 21,897
Accounts payable $ 207,813 228,808
Accrued expenses 129,673 281,752
Accrued legal costs (Note 2) 63,324 250,000
Income taxes payable 106,109
----------- -----------
Total current liabilities 400,810 888,566
CONTINGENCIES (Note 2)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.10 per share; authorized 250,000 shares;
issued none
Common stock, par value $.10 per share; authorized 4,750,000 shares;
issued and outstanding 1,178,311 and 1,161,061 shares, respectively 117,831 116,107
Additional paid-in capital 408,225 323,789
Retained earnings 4,333,777 3,453,246
----------- -----------
Total stockholders' equity 4,859,833 3,893,142
----------- -----------
$ 5,260,643 $ 4,781,708
----------- -----------
----------- -----------
</TABLE>
See notes to financial statements.
17
<PAGE>
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
SALES $ 9,289,328 $ 8,899,849
COSTS AND EXPENSES:
Cost of goods sold 4,193,050 4,178,797
Selling, general, and administrative 3,072,636 2,672,986
Research and development 679,734 603,521
Patent litigation costs (Note 2) 445,000
------------- --------------
7,945,420 7,900,304
INCOME FROM OPERATIONS 1,343,908 999,545
INTEREST INCOME, NET 28,623 9,830
------------- --------------
INCOME BEFORE INCOME TAXES 1,372,531 1,009,375
FEDERAL AND STATE INCOME TAXES (Note 3) 492,000 371,000
------------- --------------
NET INCOME $ 880,531 $ 638,375
------------- --------------
------------- --------------
BASIC EARNINGS PER COMMON SHARE $ 0.75 $ 0.55
------------- --------------
------------- --------------
DILUTED EARNINGS PER COMMON SHARE $ 0.75 $ 0.54
------------- --------------
------------- --------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 1,169,689 1,160,297
------------- --------------
------------- --------------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 1,178,613 1,178,730
------------- --------------
------------- --------------
</TABLE>
See notes to financial statements.
18
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TOTAL
STOCK CAPITAL EARNINGS EQUITY
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 $ 116,007 $ 319,849 $ 2,814,871 $ 3,250,727
Net income 638,375 638,375
Issuance of 1,000 shares of common stock
upon exercise of options 100 3,940 4,040
---------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 1997 116,107 323,789 3,453,246 3,893,142
Net income 880,531 880,531
Issuance of 12,000 shares of common stock
upon exercise of options 1,724 70,420 72,144
Tax benefit resulting from exercise of options 14,016 14,016
---------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 1998 $ 117,831 $ 408,225 $ 4,333,777 $ 4,859,833
---------- ----------- ------------ ------------
---------- ----------- ------------ ------------
</TABLE>
See notes to financial statements.
19
<PAGE>
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 880,531 $ 638,375
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 389,626 329,878
Loss on disposal of assets 11,452 5,079
Deferred income taxes 48,000 (100,000)
Changes in working capital components:
Decrease (increase) in:
Trade receivables 36,251 (83,638)
Prepaid expenses and other assets (56,071) 54,347
Inventories (288,734) 75,860
Income taxes refund receivable (47,785)
(Decrease) increase in:
Accounts payable (20,995) (147,438)
Accrued expenses (152,079) 250,000
Accrued legal costs (186,676) 14,568
Income taxes payable (106,109) 80,109
-------------- --------------
Net cash provided by operating activities 507,411 1,117,140
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (399,209) (445,502)
Proceeds on sale of property and equipment 1,839 24,556
Purchases of marketable securities (909,429)
Proceeds from sale of marketable securities 400,984
Purchase of patents (109,467)
------------- --------------
Net cash used in investing activities (1,015,282) (420,946)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payable (21,897) (37,818)
Proceeds from exercise of stock options 72,144 4,040
------------- --------------
Net cash provided by (used in) financing activities 50,247 (33,778)
------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (457,624) 662,416
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 732,381 69,965
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 274,757 $ 732,381
------------- --------------
------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest $ 55 $ 3,224
------------- --------------
------------- --------------
Cash payments for income taxes $ 598,000 $ 390,000
------------- --------------
------------- --------------
</TABLE>
See notes to financial statements.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - The Chromaline Corporation (the Company)
develops and manufactures high-quality photochemical imaging systems for
sale primarily to a wide range of printers and decorators of surfaces.
Customers' applications include textiles, billboards, electronics,
glassware, fine china, and many other industrial and commercial
applications. The Company's principal markets are throughout the United
States. In addition, the Company sells to Western Europe, Latin America,
Asia, and other parts of the world. The Company extends credit to its
customers, all on an unsecured basis, on terms that it establishes for
individual customers.
Fifty-one percent and 44%, respectively, of the Company's accounts
receivable at December 31, 1998 and 1997 are due from foreign customers.
The foreign receivables are composed primarily of open credit
arrangements with terms ranging from 45 to 90 days. No receivable from a
single unrelated customer exceeded 10% of total accounts receivable at
December 31, 1998 and 1997. No single customer represented greater than
10% of total revenue.
A summary of the Company's significant accounting policies follows:
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. Cash equivalents consist of money market funds in which
carrying value approximates market value because of the short maturity
of these instruments.
INVENTORIES - Inventories are stated at the lower of cost (last-in,
first-out) or market. If the first-in, first-out cost method had been
used, inventories would have been approximately $138,000 and $163,000
higher than reported at December 31, 1998 and 1997, respectively.
DEPRECIATION - Depreciation of property and equipment is computed using
the straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
<S> <C>
Building 25
Machinery and equipment 5
Office equipment 5
Vehicles 3
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS - Management periodically reviews the
carrying value of long-term assets for potential impairment by comparing
the carrying value of these assets to the estimated undiscounted future
cash flows expected to result from the use of these assets. Should the
sum of the related, expected future net cash flows be less than the
carrying value, an impairment loss would be measured. An impairment loss
would be measured by the amount by which the carrying value of the asset
exceeds the fair value of the asset with fair value being determined
using discounted cash flows. To date, management has determined that no
impairment of these assets exists.
21
<PAGE>
PATENTS - The Company purchased a patent in 1998 for $109,467.
Amortization of the patent is computed using the straight-line method
over its remaining estimated useful life of 13 years.
REVENUE RECOGNITION - The Company recognizes revenue on products when
title passes, which is usually upon shipment.
INCOME TAXES - Deferred income taxes are provided on an asset and
liability method. Deferred tax assets and liabilities are adjusted for
the effects of changes in tax laws and rate on the date of enactment.
EARNINGS PER COMMON SHARE (EPS) - Basic EPS is calculated using income
available to common shareholders divided by the weighted average of
common shares outstanding during the year. Diluted EPS is similar to
Basic except that the weighted average of common shares outstanding is
increased to include the number of additional common shares that would
have been outstanding if the dilutive potential common shares, such as
options, had been issued.
Shares used in the calculation of diluted earnings per share are
summarized below:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Weighted Average Common Shares Outstanding 1,169,689 1,160,297
Dilutive Effect of Stock Options 8,924 18,433
------------ ------------
Weighted Average Common and Common Equivalent Shares
Outstanding 1,178,613 1,178,730
------------ ------------
------------ ------------
</TABLE>
USE OF ESTIMATES - The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
MARKETABLE SECURITIES - Marketable securities consist primarily of
investments in municipal revenue bonds with maturities of three years or
less. Marketable securities are recorded at market which approximates
cost.
STOCK OPTIONS - As described in Note 6, the Company has adopted only the
disclosure requirements of Statement of Financial Accounting Standards
(SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Stock options
granted to employees and board members continue to be accounted for
under Accounting Principles Board Opinion No. 25.
FOREIGN OPERATIONS - The Company markets in Europe, Latin America, Asia,
and other parts of the world. Foreign sales approximated 32% and 29% of
total sales in 1998 and 1997, respectively.
In December 1996, the Company purchased a 19.5% interest in Chromaline
Europe, S.A., a French corporation. On January 2, 1997, the Company sold
the assets of the French representative office to Chromaline Europe, S.A
for an amount which approximated cost. In 1998 and 1997, less than 10%
of total sales were made through Chromaline Europe, S.A.
22
<PAGE>
NOTE PAYABLE, BANK - The Company has a bank line of credit that provides
for working capital financing. This line of credit is subject to annual
renewal, is collateralized by trade receivables, and bears interest at
2.5 percentage points over 30-day LIBOR. The outstanding balance at
December 31, 1998 and 1997 was $0 and $21,897, respectively.
RECLASSIFICATION - Certain reclassifications were made to the 1997
financial statements to conform to the 1998 presentation. These
reclassifications had no impact on net income or stockholders' equity as
previously reported.
ACCOUNTING PRONOUNCEMENT - In June 1997, the Financial Accounting
Standards Board issued SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which changes the way public
companies report information about operating segments. SFAS No. 131,
which is based on the management approach to segment reporting,
establishes requirements to report selected segment information quarterly
and to report entitywide disclosures about products and services, major
customers, and material countries in which the entity holds assets and
reports revenue. The Company adopted SFAS No. 131 as of December 31,
1998. The Company operates within a single operating segment.
2. CONTINGENCIES
The Company is a defendant in a claim filed in the United States
District Court, Western District of Washington at Seattle, in which the
claimant alleges that certain of the Company's products infringe on a
U.S. patent owned by the claimant. The Company has filed an answer
denying infringement and further believes the claimant's patent to be
invalid, and to have been procured through inequitable conduct. During
1997, the Company incurred $445,000 of legal costs for this matter,
including a $250,000 accrual at December 31, 1997 to cover future legal
costs.
During 1998, the lawsuit was stayed after Chromaline filed a Request for
Reexamination with the United States Patent and Trademark Office with
respect to the patents involved in the suit. The request was granted and
the reexamination is presently ongoing. The reexamination is not
expected to be completed for 12 to 18 months. During 1998, the Company
paid approximately $187,000 in legal and related costs in the defense of
this matter. Such payments were applied against the accrual established
at December 31, 1997. At December 31, 1998, the Company had a remaining
accrual of $63,000 for expected future legal costs relating to this
matter.
3. INCOME TAXES
Income tax expense for the years ended December 31, 1998 and 1997
consists of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current:
Federal $ 399,000 $ 427,000
State 45,000 44,000
----------- -----------
444,000 471,000
Deferred 48,000 (100,000)
----------- -----------
$ 492,000 $ 371,000
----------- -----------
----------- -----------
</TABLE>
23
<PAGE>
The expected provision for income taxes, computed by applying the U.S.
federal income tax rate of 35% to income before taxes, is reconciled to
income tax expense as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
Expected provision for federal income taxes $ 465,000 $ 346,000
State income taxes 30,000 44,000
Research tax credits (21,000)
Foreign sales corporation (17,000) (12,000)
Meals and entertainment 10,000 8,000
Other 4,000 6,000
----------- -----------
$ 492,000 $ 371,000
----------- -----------
----------- -----------
</TABLE>
Deferred tax assets consist of the following as of December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Property and equipment $ 43,000 $ 25,000
Accrued vacation 13,000 14,000
Inventory 10,000 9,000
Allowance for doubtful accounts 5,000 6,000
Allowance for sales returns 10,000 6,000
Accrued legal costs 23,000 95,000
Other (7,000) (10,000)
----------- -----------
$ 97,000 $ 145,000
----------- -----------
----------- -----------
</TABLE>
4. PENSION PLAN
The Company has a defined contribution pension plan which covers
substantially all of its employees. The Company contributes an amount
equal to 5% of a covered employee's compensation. Total pension expense
for the years ended December 31, 1998 and 1997 was approximately
$115,000 and $112,000, respectively.
5. GEOGRAPHIC INFORMATION
The Company manages its business on the basis of one reportable segment.
See Note 1 for a brief description of the Company's business. As of
December 31, 1998, the Company had operations established in various
countries throughout the world. The Company is exposed to the risk of
changes in social, political, and economic conditions inherent in
foreign operations and the Company's results of operations are affected
by fluctuations in foreign currency exchange rates. In no single country
did operations account for more than 10% of the Company's net sales for
1998 and 1997. Net sales by geographic area are presented by attributing
revenues from external customers on the basis of where the products are
sold.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net sales by geographic area:
United States $ 6,316,743 $ 6,318,893
International 2,972,585 2,580,956
-------------- -------------
$ 9,289,328 $ 8,899,849
-------------- -------------
-------------- -------------
</TABLE>
24
<PAGE>
6. STOCK OPTIONS
During 1995, the Company adopted a stock incentive plan for the issuance
of up to 35,000 shares of common stock. In 1997, the Company increased
the number of shares reserved for issuance under this plan to 70,000
shares. The plan provides for granting eligible participants stock
options or other stock awards, as described by the plan, at option
prices ranging from 85% to 110% of fair market value at date of grant.
Options granted expire up to ten years after the date of grant. Such
options become exercisable over a three-year period.
The Company has adopted the disclosure provisions of SFAS No. 123 and
has continued to apply APB Opinion No. 25 and related interpretation in
accounting for its plan. Accordingly, no compensation cost has been
recognized for its plan. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value
at the grant dates as calculated in accordance with SFAS No. 123, the
Company's net income and earnings per share for the years ended December
31, 1998 and 1997 would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net income:
As reported $ 880,531 $ 638,375
Pro forma 838,723 601,774
Net income per share (basic):
As reported 0.75 0.55
Pro forma 0.72 0.52
Net income per share (diluted):
As reported 0.75 0.54
Pro forma 0.71 0.51
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998 and 1997: dividend
yields of 0.0%, expected volatility of 52.2% and 55.0% in 1998 and 1997,
respectively, an expected risk-free interest rate of 5.5%, and average
expected lives of 7 years. Based upon these assumptions, the
weighted-average fair value at grant date of options granted during 1998
and 1997 was $5.76 and $3.69, respectively.
25
<PAGE>
A summary of the status of the Company's stock option plan as of
December 31, 1998 and 1997 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1998 1997
---------------------------- --------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 37,250 4.37 36,000 4.06
Granted 32,527 9.67 3,750 5.67
Exercised (17,250) 4.04 (1,000) 4.04
Expired (1,500) 4.04 (1,500) 4.04
--------- ----------
Outstanding at end of year 51,027 7.70 37,250 4.22
--------- ----------
--------- ----------
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------ ------------------------------
Number Average Weighted- Number Weighted-
Range of Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 1998 Life Price 1998 Price
<S> <C> <C> <C> <C> <C>
$4.04 - $4.45 14,750 6.32 4.06 13,000 4.06
5.67 3,750 8.13 5.67 1,250 5.67
8.63 - 10.13 32,527 9.54 9.67
--------- ----------
51,027 8.50 7.70 14,250 4.20
--------- ----------
--------- ----------
</TABLE>
26
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description
- ---------- ------------------------------------------------------------
<S> <C>
3.1 Restated Articles of Incorporation of the Company, as
amended.
3.2 By-Laws of the Company, as amended.
10.1 The Chromaline Corporation 1995 Stock Incentive Plan, as
amended.
10.2 Separation Agreement effective as of July 13,1998 between
Thomas L. Erickson and the Company.
10.3 Consulting Agreement dated July 22, 1998 between Thomas L.
Erickson and the Company.
10.4 Agreement regarding Non-Disclosure of Confidential
Information and Non-Competition dated July 22, 1998 between
Thomas L. Erickson and the Company.
10.5 Revolving Credit Agreement dated April 30, 1998 between the
Company and M&I Bank.
27 Financial Data Schedule.
</TABLE>
ITEM 2. DESCRIPTION OF EXHIBITS
Not applicable.
27
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE CHROMALINE CORPORATION
Dated: April 7, 1999 By /s/ Philip J. Hourican
-----------------------------------------
Philip J. Hourican
President and Chief Executive Officer
By /s/ Jeffery A. Laabs
-----------------------------------------
Jeffery A. Laabs
Vice President of Finance, Controller,
Treasurer and Secretary
28
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Method
Exhibit Description of Filing
------ ----------- ---------
<S> <C> <C>
3.1 Restated Articles of Incorporation of the Company, as amended....................Filed Electronically
3.2 By-Laws of the Company, as amended...............................................Filed Electronically
10.1 The Chromaline Corporation 1995 Stock Incentive Plan, as amended.................Filed Electronically
10.2 Separation Agreement effective as of July 13,1998 between Thomas L. Erickson
and the Company..................................................................Filed Electronically
10.3 Consulting Agreement dated July 22, 1998 between Thomas L. Erickson and the
Company..........................................................................Filed Electronically
10.4 Agreement regarding Non-Disclosure of Confidential Information
and Non-Competition dated July 22, 1998 between Thomas L. Erickson
and the Company..................................................................Filed Electronically
10.5 Revolving Credit Agreement dated April 30, 1998 between the Company and M&I Bank.Filed Electronically
27 Financial Data Schedule..........................................................Filed Electronically
</TABLE>
<PAGE>
EXHIBIT 3.1
THE CHROMALINE CORPORATION
RESTATED ARTICLES OF INCORPORATION
ARTICLE 1
NAME
1.1 The name of this corporation shall be The Chromaline
Corporation.
ARTICLE 2
PURPOSE
2.1 The purpose of this corporation shall be general business
purposes including, but not limited to, the following:
a. To acquire, and pay for in cash, stock or bonds of this
corporation, or otherwise, the goodwill, rights, assets and property,
and to undertake and assume the whole or any part of the obligations or
liabilities of any person, firm, association or corporation.
b. To acquire, by purchase or otherwise, and to own, hold,
improve, lease, let, mortgage, pledge, plat, sell, assign, transfer,
convey, manage and deal in and exercise all rights of ownership over
any and all kinds of real and personal property whatsoever, wherever
situated; to act as principal or agent in the rental and management of
real estate and other property.
c. To own, lease, operate, construct, build and erect
structures and properties pertaining to the sale, purchase, brokerage,
storage or manufacture of goods, wares, merchandise and personal
property of every class and description.
d. To become a party to any lawful agreement, for sharing
profits or to any union of interest, cooperation or mutual arrangement
with any person, firm or company carrying on or engaged in any business
connected with or similar to the business of this corporation, or that
is engaged in conducting any business or transaction capable of being
conducted so as to directly or indirectly benefit this corporation.
e. To engage in trade at wholesale or retain, or both, and the
manufacturing of any types of articles and products, including
components thereof.
f. The foregoing clauses shall be construed liberally, both as
to objects and powers. It is hereby expressly provided that the
enumeration of specific powers in these Articles, including the
following Articles, shall not be held to limit or restrict in any
manner the powers of this corporation.
<PAGE>
ARTICLE 3
DURATION
3.1 The duration of this corporation shall be perpetual.
ARTICLE 4
LOCATION
4.1 The location and post office address of the registered
office of this corporation shall be 4832 Grand Avenue, Duluth, Minnesota 55807.
ARTICLE 5
STATED CAPITAL
5.1 The amount of stated capital of this corporation shall not
be less than $1,000 and shall be calculated in the manner provided by statute.
ARTICLE 6
STOCK
6.1 The total authorized number of shares of the corporation
shall be 5,000,000 shares, consisting of 4,750,000 shares of Common Stock with a
par value of ten cents ($.10) per share, and 250,000 shares of Preferred Stock
with a par value of ten cents ($.10) per share.
6.2 The Preferred Stock shall have the following rights,
privileges and limitations:
a. Holders of Preferred Stock shall not be entitled to vote at
any time or under any circumstances except as may be required by the
Statutes of the State of Minnesota.
b. Unless all dividends accumulated or accrued upon
outstanding shares of Preferred Stock shall have been paid or set apart
from the surplus or net earnings of the corporation, no dividends
(other than dividends payable solely in shares of Common Stock) shall
be declared or paid upon Common Stock. Accrued dividends shall not bear
interest.
c. In the event of any liquidation, dissolution or winding up
of the corporation, holders of Preferred Stock shall be entitled to
receive the liquidation price thereof in full, plus any unpaid
dividends accrued thereon to the date of distribution before any
distributions shall be made on account of the Common Stock. If upon any
liquidation, dissolution or winding up of the corporation, the assets
available for distribution shall be insufficient to pay the holders of
all outstanding shares of Preferred Stock the full amounts to which
they respectively shall be entitled,
2
<PAGE>
the holders of shares of Preferred Stock of all series shall share
ratably in any distribution of assets according to the respective
amounts which would be payable in respect of the shares of Preferred
Stock held by them upon such distribution if all amounts payable in
respect to the Preferred Stock of all amounts payable in full. After
such payment to the holders of Preferred Stock, any remaining assets of
the corporation available for distribution shall be distributed solely
for the ratable benefit of the holders of Common Stock, and the holders
of Preferred Stock shall have no further rights in respect of their
shares to the assets of the corporation. Neither a statutory merger nor
consolidation of the corporation into or with any other corporation,
nor a statutory merger or consolidation of any other corporation into
or with the corporation, nor a sale, transfer, exchange or lease of all
or any part of the assets of the corporation, shall be deemed to be a
liquidation, dissolution or winding up of the corporation within the
meaning of Article 6.
d. Preferred Stock may be issued in such series and with such
relative rights, preferences and restrictions as may be determined by
the Board of Directors pursuant to Section 6.4 and this Article 6.
6.3 The Board of Directors is authorized from time to time to
accept subscriptions for, allot, issue, sell and deliver shares of stock of any
class (and of any series of any class) of the corporation, including stock
issued as a stock dividend, to such persons, at such times and upon such terms
and conditions as the Board shall determine.
6.4 The Board of Directors is authorized from time to time to
provide for the issuance of Preferred Stock in one or more series and, with
respect to each series, to fix or alter from time to time, as to shares then
unallotted:
a. The designation of such series and the number of shares
which shall constitute such series, which number may be increased
(except where otherwise provided by the Board of Directors in crating
such series) or decreased (but not below the number of shares then
outstanding) from time to time by action of the Board of Directors;
b. The dividend rate or rates to which shares of such series
shall be entitled, the restrictions, conditions and limitations upon
the payment of such dividends, whether such dividends shall be
cumulative and, if cumulative, the date or dates from which such
dividends shall be cumulative, and the dates on which such dividends,
if declared, shall be payable;
c. The redemption prices and terms;
d. The amount payable on shares of such series in the event of
any liquidation, dissolution or winding up of the corporation, which
amount may vary at different dates and may vary depending upon whether
such liquidation, dissolution or winding up is voluntary or
involuntary;
3
<PAGE>
e. The rights, if any, of the holders of shares of such series
to convert such shares into shares of stock of the corporation of any
class or of any series of any class and the price or prices or the rate
or rates of such conversion and the other terms, provisions and
conditions of such conversion;
f. The obligation, if any, of the corporation to maintain a
purchase, retirement or sinking fund for shares of such series, and the
provisions with respect thereto; and
g. Any other relative rights, preferences and restrictions not
inconsistent with the Minnesota Business Corporation Act or these
Articles of Incorporation.
Shares shall not be issued hereunder until a certified copy of the resolutions
duly adopted by the Board of Directors establishing any such series of Preferred
Stock and the terms thereof shall have been filed for record in the manner
provided by law.
6.5 The Board of Directors is further authorized from time to
time to grant and issue options to purchase or subscribe for shares of stock of
any class of the corporation, warrants t purchase such stock, rights to convert
any stock or other securities of the corporation into such stock, and similar
stock rights and privileges, to such persons at such time and upon such terms,
provisions and conditions as the Board shall from time to time determine.
6.6 No holder of any class of stock of the corporation shall
be entitled to subscribe for or purchase his proportionate share of stock of any
class of the corporation, now or hereafter authorized or issued.
6.7 At such meeting of the shareholders of the corporation and
with respect to any matter upon which the shareholders have a right to vote,
each holder of record shares of Common Stock shall be entitled to one vote for
each share of Common Stock so held. No shareholder shall be entitled to cumulate
his votes for the election of Directors and there shall be no cumulative voting
for any purpose whatsoever.
ARTICLE 7
MANAGEMENT
7.1 The management of the corporation shall be vested in a
Board of Directors. The number of Directors shall be fixed by the By-laws and
may be altered by amending the By-laws, but shall never be less than three (3).
The term of office of each Director shall be one (1) year, or until his
successor has been elected and qualified. The Directors shall be elected at the
annual meting of the shareholders.
7.2 The meetings of the shareholders and Directors may be held
outside the State of Minnesota. Notice of the time, place and purpose of
shareholders' meetings and
4
<PAGE>
Directors' meetings, whether required by statute, the Articles or the
By-laws, may be waived, in writing, by a shareholder or Director, as the case
may be; such waiver may be given before, at, or after the meeting, and shall
be filed wit the Secretary or entered upon the records of the meeting. Each
Director, by his attendance and participation in the action taken at any
Directors' meeting, shall be deemed to have waived notice of such meeting.
7.3 Regular meetings shall be held at such times, and such
places within or without the state, as may be designated in the By-laws or the
resolution of the Board of Directors or by written consent of all shareholders
entitled to vote thereat.
7.4 Special meetings of shareholders may be held at such
times, and such places within or without the state, as may be designated in the
Notice of Meeting given as provided in the By-laws, or as designated in the
written Waiver of Notice and Consent to the meeting signed by all of the holders
of voting stock.
7.5 The following-named persons are the present
Directors of this corporation:
<TABLE>
<S> <C>
Robert Banks 1425 Tower Avenue
Superior, Wisconsin 54880
George Barnum 613 Missabe Building
Duluth, Minnesota 55802
Virgil Dock 4851 London Road
Duluth, Minnesota 55804
Thomas L. Erickson 4832 Grand Avenue
Duluth, Minnesota 55807
David Harris 470 Rice Creek Boulevard
Minneapolis, Minnesota 55432
Lloyd K. Johnson 517 Torrey Building
Duluth, Minnesota 55802
Gerald W. Simonson 5813 Jeff Place
Edina, Minnesota 55436
William C. Ulland 740 East Superior Street
Duluth, Minnesota 55802
</TABLE>
5
<PAGE>
ARTICLE 8
POWERS AND REGULATIONS
8.1 For the regulation of the business and for the conduct of
the affairs of the corporation, and for the creation, definition and regulation
of the powers of the corporation and of its Directors and shareholders, it is
further provided:
8.2 In furtherance, and not in limitation of the powers
conferred by statute or in these Articles, the corporation is expressly
authorized:
a. To accept or reject subscriptions for shares an to issue
the shares of the Capital Stock of this corporation to the full amount
and number of shares authorized by the Articles of Incorporation in
such amounts and for such consideration as from time to time shall be
determined by the Board, except as otherwise provided in these
Articles.
b. To acquire, hold, use, sell, assign, lease, grant licenses
in respect of, mortgage, or otherwise dispose of Letters patent of the
United States or any foreign country, patent rights, licenses and
privileges, inventions, improvements and processes, copyrights,
trademarks and trade names, relating to or useful in connection with
any business of this corporation.
c. To acquire, hold, mortgage, pledge or dispose of shares,
bonds, securities, or evidences of indebtedness of any domestic or
foreign corporation, and while the owner thereof, to exercise all the
rights, powers and privileges of ownership.
d. To purchase, hold, sell and reissue the shares of its own
capital stock.
e. To enter into obligations or contracts of any kind or
nature with any person, firm, association, corporation, municipality,
county, state, body politic or government or colony or dependency
thereof.
f. To incur such indebtedness as its Directors may from time
to time deem necessary or proper for the operation of this business and
may issue any and all manner of secured or unsecured notes, bonds, or
other written instruments in evidence of the obligations undertaken by
the corporation.
8.3 In furtherance, and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized:
a. To make and alter By-laws of this corporation, subject to
the power of the shareholders, to change or repeal such By-laws, and
subject to any other limitations on such authority provided by the
Minnesota Business Corporation Act.
6
<PAGE>
b. To fix the amount to be reserved as working capital over
and above its capital stock paid in, to authorize and cause to be
executed mortgages and liens upon the real and personal property of
this corporation.
c. When and as authorized by an affirmative assent of holders
of shares entitling them to exercise a majority of the voting power on
such proposal, the Board of Directors shall have power and authority by
action taken at any meeting of the Board, to sell, lease, exchange or
otherwise dispose of all or substantially all of the corporation's
property and assets including its goodwill, upon such terms and
conditions and for such considerations, which may be money, shares,
bonds or other instruments for the payment of money or other property
as the Board of Directors deems expedient.
8.4 In the absence of fraud, no contract or other transactions
between the corporation and nay other corporation, and no act of the corporation
shall in any way be invalidated or otherwise affected by the fact that any one
or more of the Directors of the corporation are pecuniarily or otherwise
interested in, or are Directors or officers of such other corporation. Any
Director of the corporation individually, or any firm or association of which
any Director may be a member, may be a party to, or may be pecuniarily or
otherwise interested in any contract or transaction of the corporation, provided
that the fact that he individually or such firm or association is no interested
shall be disclosed or shall have been known to the Board of Directors of the
corporation or a majority thereof; and any Director of the corporation who is
also a Director or officer of such other corporation or who is so interested,
may be counted in determining the existence of a quorum at any meting of the
Board of Directors or of any committee of the corporation which shall authorize
any such contract or transaction, with like force and effect as if he were not
such Director or officer of such other corporation or not so interested.
8.5 Directors shall not have personal liability to either the
corporation or its shareholders for monetary damages for breach of a Director's
fiduciary duty to the corporation; except for any breach of the director's duty
of loyalty to the corporation or its shareholders, for acts or omissions not in
good faith, intentional misconduct o a knowing violation of law, or as for such
other liability as may not be eliminated or limited under Minnesota Statutes,
Section 302A.251.
8.6 Each Director and officer at any time serving the
corporation shall, to the full extent allowed by law, be indemnified and held
harmless by the corporation from and against all costs and expenses, including
attorneys' fees, which may be imposed upon or reasonably incurred by him in
connection with or arising out of the defense or settlement of any claim,
action, suit or proceeding brought against him by reason of his being or having
been a Director or officer of this corporation, whether or not he is a Director
or officer at the time of incurring such expense. Furthermore, each such
Director or officer shall, to the fullest extent allowed b law, be indemnified
and held harmless by this corporation against any judgment that may be recovered
against him in such action; provided, however, that no Director or officer shall
be indemnified by this corporation with respect to matters as to
7
<PAGE>
which he or she is finally adjudged in any such action, suit or proceeding to
have been guilty of willful misconduct detrimental to the best interest of
the corporation.
ARTICLE 9
AMENDMENTS
9.1 The corporation reserves the right to amend, alter, change
or repeal any provisions contained in these Articles of Incorporation, in the
manner now or hereafter prescribed by statute and all rights conferred upon
shareholders herein are granted subject to this reservation.
9.2 Any amendment may be adopted by the affirmative vote of
the holders of a majority of the voting power of all shareholders entitled under
these Articles to vote, except as may be otherwise prescribed by the laws of the
State of Minnesota.
(This space intentionally left blank.)
8
<PAGE>
EXHIBIT 3.2
BY-LAWS
OF
THE CHROMALINE CORPORATION
ARTICLE I
Offices, Corporate Seal
Section 1. OFFICES. The registered office of the corporation
shall be 4832 Grand Avenue, Duluth, Minnesota 55807, and the corporation shall
have offices at such other places as the Board of Directors shall from time to
time determine.
Section 2. SEAL. The corporation shall have such corporate
seal or no corporate seal as the Board of Directors shall from time to time
determine.
ARTICLE II
Meeting of Shareholders
Section 1. ANNUAL MEETING. An Annual Meeting of the
shareholders of the corporation entitled to vote shall be held at such place in
the City of Duluth, or in such other city within or without the State of
Minnesota as is designated by the Board of Directors, as such time and on such
day during the month of April of each year (other than a Saturday, Sunday or
holiday), as shall be determined by the Board of Directors of the corporation.
At the Annual Meeting, the shareholders, voting as provided in the Articles of
Incorporation, shall elect the Board of Directors and shall transact such other
business as may properly come before the meeting.
Section 2. QUORUM. The holders of a majority of shares
outstanding and entitled to vote for the election of Directors at said meeting,
represented either in person or by proxy, shall constitute a quorum for the
transaction of business. In case a quorum is not present at the Annual Meeting,
those present may adjourn to such day as they shall agree upon. A notice of such
adjournment shall be mailed to each shareholder entitled to vote at least five
(5) days before such adjourned meeting, but if a quorum be present, they may
adjourn from day to day as they see fit and no notice need be given. At such
adjourned meetings at which the required amount of voting shares shall be
represented, any business may be transacted which might have been transacted at
the meeting as originally notified.
Section 3. SPECIAL MEETINGS. Special meetings of the
shareholders shall be called by the Secretary at any time upon request of the
Chairman, President, a Vice President, a majority of the Board of Directors, or
upon request by shareholders holding ten percent (10%) or more of the capital
stock entitled to vote.
Section 4. VOTING. At each meeting of the shareholders, every
shareholder having the right to vote shall be entitled to vote in person or by
proxy duly appointed by an
<PAGE>
instrument in writing subscribed by such shareholder. Each shareholder shall
have one vote for each share having voting power, standing in his name on the
books of the corporation. Upon the demand of any shareholder, the vote for
Directors, or the vote upon any question before the meeting shall be by
ballot. All elections shall be had and all questions decided by a majority
vote of the shares entitled to vote and represented at any meeting at which
there is a quorum, except in such cases as shall otherwise be required or
permitted by statute, the Articles of Incorporation, or these By-laws.
Section 5. NOTICE OF MEETINGS. There shall be mailed to each
shareholder, shown by the books of the corporation to be a holder of record
voting shares, at his address as shown by the books of the corporation, a notice
setting out the time and place of the annual meeting or any special meeting,
which notice shall be mailed at least ten (10) days prior thereto. Every notice
of any special meeting shall state the purpose or purposes of the proposed
meeting, and the business transacted at all special meetings shall be confined
to purposes stated in the call. Any shareholder who does not receive notice of
the type specified above of an annual or special meeting shall, by his
attendance at and participation in the action taken at any such meeting, be
deemed to have waived notice thereof.
Section 6. CLOSING OF BOOKS. The Board of Directors may fix
a time, not exceeding sixty (60) days preceding the date of any meting of
shareholders, as a record date for the determination of the shareholders
entitled to notice of and to vote at such meeting, notwithstanding any
transfer of any shares on the books of the corporation after any record date
so fixed. The Board of Directors may close the books of the corporation after
any record date so fixed. The Board of Directors may close the books of the
corporation against transfer of sharers during the whole or any part of such
period.
ARTICLE III
Directors
Section 1. GENERAL POWERS. The business and property of the
corporation shall be managed by a Board of Directors of not less than five or
more than nine Directors who shall be elected by the stockholders.
Section 2. QUORUM. A quorum for the transaction of business at
any regular or special meeting of the Directors shall consist of 50% of the then
existing Board if the number of Directors are even in number and shall consist
of a majority of the then existing members of the Board if the Board of
Directors consists of an odd number of Directors.
Section 3. FIRST MEETING. As soon as practicable after each
annual election of Directors, the Board of Directors shall meet for the purposes
of organizing and choosing the officers of the corporation and for the
transaction of other business at the place where the shareholders' meeting is
held or at the place where regular meetings of the Board of Directors are held.
No notice of such meeting need be given. Such first meeting of the Board of
Directors may be held at any other time and place which shall be specified in a
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notice given as hereinafter provided for special meetings or in consent and
waive of notice signed by all the Directors.
Section 4. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held from time to time at such time and place as may from
time to time be fixed by resolution adopted by a majority of the whole Board of
Directors. No notice need be given of any regular meeting.
Section 5. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be held at such time and place as may from time to time be
designated in the notice or the waiver of notice of the meeting. Special
meetings of the Board of Directors may be called by the Chairman of the Board,
President or by any two (2) Directors. Notice of such special meeting shall be
given by the Secretary, who shall give at least four (4) days notice thereof to
each Director if notice is given by mail or at least twenty-four (24) hours
notice thereof to each Director if notice is given by telephone, telegraph, or
in person, provided that no notice of any meeting need be given to any Director
while he is in the Armed Forces of the United States. Each notice thereof may be
waived either before, at, or after such meeting in writing, provided that a
quorum be present at the meeting. Each Director, by his attendance and
participation in the action taken at any Directors' meeting, shall be deemed to
have waived notice of such meeting.
Section 6. PARTICIPATION BY CONFERENCE TELEPHONE. Members of
the Board of Directors or any committee designated by the Board may participate
in a meeting of the Board of Directors or of such committee by means of
conference telephone or similar communications equipment whereby all persons
participating in the meeting can hear or communicate with each other, and
participation in a meeting pursuant to this section shall constitute presence in
person at such meeting. The place of the meeting shall be deemed to be the place
of origination of the conference telephone call or similar communications
equipment.
Section 7. CHAIRMAN. The Directors of the corporation shall
elect a Chairman from within their number who shall chair all meetings of the
Directors, shall act as an advisor to the President of the Corporation with
respect to matters of policy and shall regularly consult with the President
relative to executive decisions to be made by the President. The compensation of
the Chairman of the Board shall be determined from time to time by resolution of
the Board of Directors and upon the basis determined by the Board of Directors.
In the event of the absence or disability of the President, the Chairman shall
succeed to his powers in a pro-tem capacity until the office shall be filled by
the Board of Directors.
Section 8. COMPENSATION. Directors and members of any
committee of the corporation contemplated by these By-laws or otherwise provided
for by resolution of the Board of Directors, who are not salaried officers of
the corporation, shall receive such fixed sum for meetings attended, or such
annual sum as shall be determined from time to time by resolution of the Board
of Directors. All Directors and members of any such committee shall receive
their expenses, if any, or attendance at meetings of the Board of Directors, or
such
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committee. Nothing herein contained shall be construed to preclude any
Director from serving the corporation in any other capacity and receiving
compensation therefor.
Section 9. EXECUTIVE COMMITTEE. The Board of Directors may
designate, by a majority of the Directors present at a meeting at which a quorum
is present, two or more of their number to constitute an Executive Committee
which shall have and exercise the authority of the Board of Directors in the
management of the corporation to the extent set forth in the resolution creating
such Executive Committee. Such Executive Committee shall act only in the
interval between meetings of the Board of Directors and shall be subject at all
times to the control and direction of the Board of Directors.
Section 10. AUDIT COMMITTEE. The Directors may, by resolution,
appoint members of the Board, who are independent of management and who are free
of any relationship which, in the opinion of the Board, would interfere with the
exercise of independent judgment, as an Audit Committee with such powers and
duties as the Board of Directors may deem appropriate.
Section 11. COMPENSATION COMMITTEE. The Directors may, by
resolution, appoint members of the Board, who are independent of management and
who are free of any relationship which, in the opinion of the Board, would
interfere with the exercise of independent judgment, as a Compensation Committee
with such powers and duties as the Board of Directors may deem appropriate.
Section 12. VACANCIES. If any vacancies exist on the Board of
Directors by reason of death, resignation or otherwise, the remaining Directors
shall have authority to fill any such vacancies. A majority of the remaining
Directors shall constitute a quorum for filling such vacancies.
ARTICLE IV
Officers
Section 1. DESIGNATION. The officers of the corporation shall
consist of the Chairman of the Board of Directors, a President, one or more Vice
Presidents, a Secretary and a Treasurer, and such other officers and agents as
may from to time be chosen. Any two (2) offices, except those of President and
Secretary, may be held by one (1) person.
Section 2. ELECTION AND TERM OF OFFICE. At the first meeting
of the Board of Directors, the Board shall elect from their number a Chairman
and a President and shall, from within or without their number, elect one or
more Vice Presidents, a Secretary and a Treasurer, and such other officers as
may be deemed advisable. Such officers shall hold office until the next first
meeting or until their successors are elected and qualify; provided however,
that any officer may be removed with or without cause by the affirmative vote of
a majority of the whole Board of Directors.
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Section 3. DUTIES. The President shall be the chief executive
and chief operating officer of the Corporation and shall preside at all meetings
of the shareholders. The President shall have such other duties as may be
prescribed from time to time by the Board of Directors and by the statutes and
laws of the State of Minnesota.
Each Vice President shall have such powers and shall perform
such duties as may be prescribed by the Board of Directors.
The Secretary shall be secretary of and shall attend all
meetings of the shareholders and the Board of Directors. He shall act as Clerk
thereof and shall record all the proceedings of such meetings in the minute book
of the corporation. He shall give proper notice of meetings of shareholders and
Directors. He shall keep the seal of the corporation and shall affix the same to
any instrument requiring it and shall attest the seal by his signature. He
shall, with the President or any Vice President, sign all certificates for
shares of the corporation and affix the corporate seal thereto, and shall
perform such other duties as may be prescribed from time to time by the Board of
Directors.
The Treasurer shall keep accurate accounts of all moneys of
the corporation received or disbursed. He shall deposit all moneys, drafts and
checks in the name of and to the credit of the corporation in such banks and
depositaries as a majority of the whole Board of Directors shall designate from
time to time. He shall have power to endorse for deposit all notes, checks and
drafts received by the corporation. He shall disburse the funds of the
corporation as ordered by the Board of Directors, taking proper vouchers
therefor. He shall render to the President and Directors, whenever required, an
account of all his transactions as Treasurer and of the financial condition of
the corporation and shall perform such duties as may be prescribed by the Board
of Directors from time to time.
Section 4. VACANCIES. If there be a vacancy in the officers of
the corporation by reason of death, resignation or otherwise, such vacancy shall
be filled, for the unexpired term, by the Board of Directors.
ARTICLE V
Indemnification of Directors,
Officers, Employees and Agents
Section 1. INDEMNIFICATION. The full extent permitted by
Minnesota Statutes, Section 301.095, as amended from time to time, or by other
provisions of law, each person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
wherever brought, whether civil, criminal, administrative, or investigative by
reason of the fact that such person is or was a Director, officer, employee or
agent of the corporation or by reason of the fact that such person is or as
serving at the request of the corporation as a Director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified by the corporation against expenses, including
attorney's fees, judgments, fines and amounts paid in settlement, actually and
reasonably incurred by such person in connection with such action,
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suit or proceeding; provided, however, that the indemnification with respect
to a person who is or was serving as a Director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise
shall apply only to the extent such person is not indemnified by such other
corporation, partnership, joint venture, trust or other enterprise. The
indemnification provided by this section shall continue as to a person who
has ceased to be a Director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such person.
Section 2. ADVANCE PAYMENTS. To the full extent permitted by
Minnesota Statutes, Section 301.095, as amended from time to time, or by other
provisions of law, the corporation may pay in advance of final disposition
expenses incurred in actions, suits and proceedings specified in Section 1
above.
Section 3. INSURANCE. To the full extent permitted by
Minnesota Statutes, Section 301.095, as amended from time to time, or by other
provisions of law, the corporation may purchase and maintain insurance n behalf
of any indemnified party against any liability asserted against such person in
such capacity.
ARTICLE VI
Shares and Their Transfer
Section 1. CERTIFICATE OF STOCK. Every owner of stock of the
corporation shall b entitled to a certificate to be in such form as the Board of
Directors prescribe, certifying the number and class of shares of stock of the
corporation owned by him. The certificates for the respective classes of such
stock shall be numbered in the order in which they shall be signed in the name
of the corporation by the Chairman of the Board of Directors, the President, or
any Vice President, and by the Secretary, as prescribed by the Board of
Directors. A record shall be kept of the name of the person, firm or corporation
owning the stock represented by such certificates, the number and class of
shares represented by such certificates respectively, and the respective dates
thereof, and in the case of cancellation, the respective dates of cancellation.
Every certificate surrendered to the corporation for exchange or transfer shall
be cancelled, and no new certificate or certificates shall be issued in exchange
for any existing certificates until such existing certificate shall have been so
cancelled and except in cases provided for in Section 4 of this Article VI.
Section 2. ISSUANCE OF SHARES. The Board of Directors is
authorized and directed to issue shares of the corporation to the full amount
authorized by the Articles of Incorporation in such amounts and at such times as
may be determined by the Board and as may be permitted by law.
Section 3. TRANSFER OF SHARES. Transfer of shares shall be
made on the books of the corporation only by the person named in the certificate
or by his attorney thereunto authorized by Power of Attorney duly executed and
filed with the corporation and upon surrender for cancellation of the
certificate or certificates for such shares. The person in whose name shares of
stock stand on the books of the corporation shall be deemed the owner
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thereof for all purposes as regards the corporation; provided that when any
transfer of shares shall be made as collateral security, and not absolutely
such fact, if known to the Secretary of the corporation or to said transfer
agent, shall be so expressed in the entry of transfer.
Section 4. LOST CERTIFICATES. Any shareholder claiming a
certificate of stock to be lost or destroyed shall make an affidavit or
affirmation of that fact in such form as the Board of Directors may require, and
shall, if the directors so require, give the corporation a bond of indemnity in
form and with one or more sureties satisfactory to the Board but not exceeding
double the value of the stock represented by such certificate, to indemnify the
corporation against any claim that may be made against it on account of the
alleged loss or destruction of such certificate, whereupon a new certificate may
be issued in the same tenor and for the same number of shares as the one alleged
to have been destroyed or lost.
Section 5. TREASURY STOCK. Treasury stock shall be held by the
corporation subject to the disposal of the Board of Directors, in accordance
with these By-laws, and shall neither vote nor participate in dividends.
Section 6. INDEBTEDNESS OF SHAREHOLDERS. The corporation shall
have the first lien on all the shares of its capital stock and upon all
dividends declared upon the same for any indebtedness of the respective holder
thereof in the corporation.
ARTICLE VII
Amendments of By-Laws
These By-laws may be amended or altered by the vote of a
majority of the whole Board of Directors at any meeting, provided that a notice
of such proposed amendment shall be given in the notice given to the Directors
of such meeting. Such authority in the Board of Directors is subject to the
power of the shareholders to change or repeal such By-laws by a majority vote of
the shareholders present and represented at any annual meeting or at any special
meeting called for such purpose. No provision of the By-laws changed, amended or
repealed by the shareholders shall thereafter be restored to its prior form or
to substantially its prior form or be readopted by the Board of Directors except
and until the proposed restoration or readoption thereof shall have been
approved by the shareholders by a majority vote of the shareholders present or
represented at any annual meeting or at any special meeting called for that
purpose.
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EXHIBIT 10.1
THE CHROMALINE CORPORATION
1995 STOCK INCENTIVE PLAN
1. PURPOSE OF PLAN.
The purpose of The Chromaline Corporation 1995 Stock Incentive
Plan (the "Plan") is to advance the interests of The Chromaline Corporation (the
"Company") and its stockholders by enabling the company and its subsidiaries to
attract and retain persons of ability to perform services for the Company and
its subsidiaries by providing an incentive to such individuals through equity
participation in the Company and by rewarding such individuals who contribute to
the achievement by the Company of its economic objectives.
2. DEFINITIONS.
The following terms will have the mean set forth below, unless
the context clearly otherwise requires:
2.1 "BOARD" means the Board of Directors of the Company.
2.2 "BROKER EXERCISE NOTICE" means a written notice pursuant
to which a Participant, upon exercise of an Option, irrevocably instructs a
broker or dealer to sell a sufficient number of shares or loan a sufficient
amount of money to pay all or a portion of the exercise price of the Option
and/or any related withholding tax obligations and remit such sums to the
Company and directs the Company or deliver stock certificates to be issued upon
such exercise directly to such broker or dealer.
2.3 "CHANGE IN CONTROL" means an event described in
Section 13.1 of the Plan.
2.4 "CODE" means the Internal Revenue Code of 1986, as
amended.
2.5 "COMMITTEE" means the group of individuals administering
the Plan, as provided in Section 3 of the Plan.
2.6 "COMMON STOCK" means the common stock of the Company's
$.10 par value, or the number and kind of shares of stock or other securities
into which such Common Stock may be changed in accordance with Section 4.3 of
the Plan.
2.7 "DISABILITY" means the disability of the Participant such
as would entitle the Participant to receive disability income benefits pursuant
to the long-term disability plan of the Company or Subsidiary then covering the
Participant or, if no such plan exists or is applicable to the Participant, the
permanent and total disability of the Participant within the meaning of Section
22(e)(3) of the Code.
<PAGE>
2.8 "ELIGIBLE RECIPIENTS" means all directors (including
non-employee directors), officers and employees of the Company or any
Subsidiary.
2.9 "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
2.10 "FAIR MARKET VALUE" means, with respect to the Common
Stock, as of any date (or, if no shares were traded or quoted on such date, s of
the next preceding date on which there was such a trade or quote):
a. If the Common Stock is listed (or admitted to unlisted
trading privileges) on an exchange or reported on the NASDAQ National
Market System or bid and asked prices are reported on the NASDAQ system
or a comparable reporting service, the closing sale price or the mean
of the closing bid and asked prices, as the case may be.
b. If the Common Stock is not so listed or reported, such
price as the Committee determines in good faith in the exercise of its
reasonable discretion.
2.11 "INCENTIVE AWARD" means an Option, Stock Appreciation
Right, Restricted Stock Award, Performance Unit or Stock Bonus granted to an
Eligible Recipient pursuant to the Plan.
2.12 "INCENTIVE STOCK OPTION" means a right to purchase Common
Stock granted to an Eligible Recipient pursuant to Section 6 of the Plan that
qualifies as an "incentive stock option" within the meaning of Section 422 of
the Code.
2.13 "NON-STATUTORY STOCK OPTION" means a right to purchase
Common Stock granted to an Eligible Recipient pursuant to Section 6 of the Plan
that does not qualify as a Incentive Stock Option.
2.14 "OPTION" means an Incentive Stock Option or a
Non-Statutory Stock Option.
2.15 "PARTICIPANT" means an Eligible Recipient who receives
one or more Incentive Awards under the Plan.
2.16 "PERFORMANCE UNIT" means a right granted to an Eligible
Recipient pursuant to Section 9 of the Plan to receive a payment from the
Company, in the form of stock, cash or a combination of both, upon the
achievement of established performance goals.
2.17 "PREVIOUSLY ACQUIRED SHARES" means shares of Common Stock
that are already owned by the Participant or, with respect to any Incentive
Award, that are to be issued upon the grant, exercise or vesting of such
Incentive Award.
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2.18 "RESTRICTED STOCK AWARD" means an award of Common Stock
ranted to an Eligible Recipient pursuant to Section 8 of the Plan that is
subject to the restrictions on transferability and the risk of forfeiture
imposed by the provisions of such Section 8.
2.19 "RETIREMENT" mans normal or approved early termination of
employment or service pursuant to and in accordance with the regular
retirement/pension plan or practice of the Company or Subsidiary then covering
the Participant, provided that if the Participant is not covered by any such
plan or practice, the Participant will be deemed to be covered by the Company's
plan or practice for purposes of this determination.
2.20 "SECURITIES ACT" means the Securities Act of 1933, as
amended.
2.21 "STOCK APPRECIATION RIGHT" means a right granted to an
Eligible Recipient pursuant to Section 7 of the Plan to receive a payment from
the Company, in the form of stock, cash or a combination of both, equal to the
difference between the Fair Market Value of one or more shares of Common Stock
and the exercise price of such shares under the terms of such Stock Appreciation
Right.
2.22 "STOCK BONUS" means an award of Common Stock granted to
an Eligible Recipient pursuant to Section 10 of the Plan.
2.23 "SUBSIDIARY" means any entity that is directly or
indirectly controlled by the Company or any entity in which the Company has a
significant equity interest, as determined by the Committee.
2.24 "TAX DATE" means the date any withholding tax obligation
arises under the Code for a Participant with respect to an Incentive Award.
3. PLAN ADMINISTRATION.
3.1 THE COMMITTEE. The Plan will be administered by the Board
or by a committee of the Board consisting of not less than two persons;
provided, however, that from and after the date on which the Company first
registers a class of its equity securities under Section 12 of the Exchange Act,
the Plan will be administered by the Board, all of whom will be "disinterested
persons" within the meaning of Rule 16b-3 under the Exchange Act, or by a
committee consisting solely of not fewer than two members of the Board who are
such "disinterested persons." As used in this Plan, the term "Committee" will
refer to the Board or to such a committee, if established. To the extent
consistent with corporate law, the Committee may delegate to any officers of the
Company the duties, power and authority of the Committee under the Plan pursuant
to such conditions or limitations as the Committee may establish; provided,
however, that only the Committee may exercise such duties, power and authority
with respect to Eligible Recipients who are subject to Section 16 of the
Exchange Act. The Committee may exercise its duties, power and authority under
the Plan in its sole and absolute discretion without the consent of any
Participant or other party, unless
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the Plan specifically provides otherwise. Each determination, interpretation
or other action made or taken by the Committee pursuant to the provisions of
the Plan will be conclusive and binding for all purposes and on all persons,
and no member of the Committee will be liable for any action or determination
made in good faith with respect to the Plan or any Incentive Award granted
under the Plan.
3.2 AUTHORITY OF THE COMMITTEE.
a. In accordance with and subject to the provisions of the
Plan, the Committee will have the authority to determine all provisions
of Incentive Awards as the Committee may deem necessary or desirable
and as consistent with the terms of the Plan, including, without
limitation, the following: (i) the Eligible Recipients to be selected
as Participants; (ii) the nature and extent of the Incentive Awards to
be made to each Participant (including the number of shares of Common
Stock to be subject to each Incentive Award, any exercise price, the
manner in which Incentive Awards will vest or become exercisable and
whether Incentive Awards will be granted in tandem with other Incentive
Awards) and the form of written agreement, if any, evidencing such
Incentive Award; (iii) the time or times when Incentive Awards will be
granted; (iv) the duration of each Incentive Award; and (v) the
restrictions and other conditions to which the payment or vesting of
Incentive Awards may be subject. In addition, the Committee will have
the authority under the Plan to pay the economic value of any Incentive
Award in the form of cash, Common Stock or any combination of both.
b. The Committee will have the authority under the Plan to
amend or modify the terms of any outstanding Incentive Award in any
manner, including, without limitation, the authority to modify the
number of shares or other terms and conditions of an Incentive Award,
extend the term of an Incentive Award, accelerate the exercisability or
vesting or otherwise terminate any restrictions relating to an
Incentive Award, accept the surrender of any outstanding Incentive
Award or, to the extent not previously exercised or vested, authorize
the grant of new Incentive Awards in substitution for surrendered
Incentive Awards; provided, however that the amended or modified terms
are permitted by the Plan as then in effect and that any Participant
adversely affected by such amended or modified terms has consented to
such amendment or modification. No amendment or modification to an
Incentive Award, however, whether pursuant to this Section 3.2 or any
other provisions of the Plan, will be deemed to be a regrant of such
Incentive Award for purposes of this Plan.
c. In the event of (i) any reorganization, merger,
consolidation, recapitalization, liquidation, reclassification, stock
dividend, stock split, combination of shares, rights offering,
extraordinary dividend or divestiture (including a spin-off) or any
other change in corporate structure or shares, (ii) any purchase,
acquisition, sale or disposition of a significant amount of assets or a
significant business; (iii) any change in accounting principles or
practices, or (iv) any other similar change, in each
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case with respect to the Company or any other entity whose performance
is relevant to the grant or vesting of an Incentive Award, the
Committee (or, if the Company is not the surviving corporation in any
such transaction, the board of directors f the surviving corporation)
may, without the consent of any affected Participant, amend or modify
the vesting criteria of any outstanding Incentive Award that is based
in whole or in part on the financial performance of the Company (or any
Subsidiary or division thereof) or such other entity so as equitably to
reflect such event, with the desired result that the criteria for
evaluating such financial performance of the Company or such other
entity will be substantially the same (in the discretion of the
Committee or the board of directors of the surviving corporation)
following such event as prior to such event; provided, however, that
the amended or modified terms are permitted by the Plan as then in
effect.
4. SHARES AVAILABLE FOR ISSUANCE.
4.1 MAXIMUM NUMBER OF SHARES. Subject to adjustment as
provided in Section 4.3 of the Plan, the maximum number of shares of Common
Stock that will be available for issuance under the Plan will be 105,000 shares.
Notwithstanding any other provision of the Plan to the contrary, no Participant
in the Plan may be granted, during the term of the Plan, any Options or Stock
Appreciation Rights, or any other Incentive Awards with a value based solely on
an increase in the value of the Common Stock after the date of grant, relating
to more than an aggregate of 35,000 shares of Common Stock (subject to
adjustment as provided in Section 4.3 of the Plan). The shares available for
issuance under the Plan may, at the election of the Committee, be either
treasury shares or shares authorized but unissued, and, if treasury shares are
used, all references in the Plan to the issuance of shares will, for corporate
law purposes, be deemed to mean the transfer of shares from treasury.
4.2 ACCOUNTING FOR INCENTIVE AWARDS. Shares of Common Stock
that are issued under the Plan or that are subject to outstanding Incentive
Awards will be applied to reduce the maximum number of shares of Common Stock
remaining available for issuance under the Plan. Any shares of Common Stock that
are subject to an Incentive Award that lapses, expires, is forfeited or for any
reason is terminated unexercised or unvested and any shares of Common Stock that
are subject to an Incentive Award that is settled or paid in cash or any form
other than shares of Common Stock will automatically again become available for
issuance under the Plan. Any shares of Common Stock that constitute the
forfeited portion of a Restricted Stock Award, however, will not become
available for further issuance under the Plan.
4.3 ADJUSTMENTS TO SHARES OF INCENTIVE AWARDS. In the event of
any reorganization, merger, consolidation, recapitalization, liquidation,
reclassification, stock dividend, stock split, combination of shares, rights
offering, divestiture or extraordinary dividend (including a spin-off) or any
other change in the corporate structure or shares of the Company, the Committee
(or, if the Company is not the surviving corporation in any such transaction,
the board of directors of the surviving corporation) will make appropriate
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adjustment (which determination will be conclusive) as to the number and kind
of securities available for issuance under the Plan and, in order to prevent
dilution or enlargement of the rights of Participants, the number, kind and,
where applicable, exercise price of securities subject to outstanding
Incentive Awards.
5. PARTICIPATION.
Participants in the Plan will be those Eligible Recipients
who, in the judgment of the Committee, have contributed, are contributing or are
expected to contribute to the achievement of economic objectives of the Company
or its subsidiaries. Eligible Recipients may be granted from time to time one or
more Incentive Awards, singly or in combination or in tandem with other
Incentive Awards, as may be determined by the Committee. Incentive Awards will
be deemed to be granted as of the date specified in the grant resolution of the
Committee, which date will be the date of any related agreements with the
Participant.
6. OPTIONS.
6.1 GRANT. An Eligible Recipient may be granted one or more
Options under the Plan, and such Options will be subject to such terms and
conditions, consistent with the other provisions of the Plan, as may be
determined by the Committee. The Committee may designate whether an Option is to
be considered an Incentive Stock Option or a Non-Statutory Stock Option.
6.2 EXERCISE PRICE. The per share price to be paid by a
Participant upon exercise of an Option will be determined by the Committee in
its discretion at the time of the Option grant, provided that (a) such price
will not be less than 100% of the Fair Market Value of one share of Common Stock
on the date of grant with respect to an Incentive Stock Option (110% of the Fair
Market Value if, at the time the Incentive Stock Option is granted, the
Participant owns, directly or indirectly, more than 10% of the total combined
voting power of all classes of stock of the Company or any parent or subsidiary
corporation of the Company), and (b) such price will not be less than 85% of the
Fair Market Value of one share of Common Stock on the date of grant with respect
to a Non-Statutory Stock Option.
6.3 EXERCISABILITY AND DURATION. An Option will become
exercisable at such times and in such installments as may be determined by the
Committee at the time of grant; provided, however, that no Incentive Stock
Option may be exercisable after 10 years from its date of grant (five years from
its date of grant if, at the time the Incentive Stock Option is granted, the
Participant owns, directly or indirectly, more than 10% of the total combined
voting power of all classes of stock of the Company or any parent or subsidiary
corporation of the Company).
6.4 PAYMENT OF EXERCISE PRICE. The total purchase price of the
shares to be purchased upon exercise of an Option will be paid entirely in cash
(including check, bank draft or money order); provided, however, that the
Committee may allow such payments to be made, in whole or in part and upon such
terms and conditions as may be established by
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the Committee, by tender of a Broker Exercise Notice, Previously Acquired
Shares, a promissory note or by a combination of such methods.
6.5 MANNER OF EXERCISE. An Option may be exercised by a
Participant in whole or in part from time to time, subject to the conditions
contained in the Plan and in the agreement evidencing such Option, by delivery
in person, by facsimile or electronic transmission or through the mail of
written notice of exercise to the Company (Attention: Chief Financial Officer)
at its principal executive office in Duluth, Minnesota and by paying in full the
total exercise price for the shares of Common Stock to be purchased in
accordance with Section 6.4 of the Plan.
6.6 AGGREGATE LIMITATION OF STOCK SUBJECT TO INCENTIVE STOCK
OPTIONS. To the extent that the aggregate Fair Market Value (determined as of
the date an Incentive Stock Option is granted) of the shares of Common Stock
with respect to which incentive stock options (within the meaning of Section 422
of the Code) are exercisable for the first time by a Participant during any
calendar year (under the Plan and any other incentive stock option plans of the
Company or any subsidiary or parent corporation of the Company (within the
meaning of the Code)) exceeds $100,000 (or such other amount as may be
prescribed by the Code from time to time), such excess Options will be treated
as Non-Statutory Stock Options. The determination will be made by taking
incentive stock options into account in the order in which they were granted. If
such excess only applies to a portion of an incentive stock option, the
Committee will designate which shares will be treated as shares to be acquired
upon exercise of an incentive stock option.
7. STOCK APPRECIATION RIGHTS.
7.1 GRANT. An Eligible Recipient may be granted one or more
Stock Appreciation Rights under the Plan, and such Stock Appreciation Rights
shall be subject to such terms and conditions, consistent with the other
provisions of the Plan, as will be determined by the Committee.
7.2 EXERCISE PRICE. The exercise price of a Stock Appreciation
Right will be determined by the Committee at the date of grant but will not be
less than 85% of the Fair Market Value of one share of Common Stock on the date
of grant.
7.3 EXERCISABILITY AND DURATION. A Stock Appreciation Right
will become exercisable at such time and in such installments as may be
determined by the Committee at the time of grant; provided, however, that no
Stock Appreciation Right may be exercisable prior to six months or after 10
years from its date of grant. A Stock Appreciation Right will be exercised by
giving notice in the same manner as for Options, as set forth in Section 6.5 of
he Plan.
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8. RESTRICTED STOCK AWARDS.
8.1 GRANT. An Eligible Recipient may be granted one or more
Restricted Stock Awards under the Plan, and such Restricted Stock Awards will be
subject to such terms and conditions, consistent with the other provisions of
the Plan, as may be determined by the Committee. The Committee may impose such
restrictions or conditions, not inconsistent with the provisions of the Plan, to
the vesting of such Restricted Stock Awards as it deems appropriate, including,
without limitation, that the Participant remain in the continuous employ or
service of the Company or a subsidiary for a certain period or that the
Participant or the Company (or any subsidiary or division thereof) satisfy
certain performance goals or criteria.
8.2 RIGHTS AS A SHAREHOLDER; TRANSFERABILITY. Except as
provided in Sections 8.1, 8.3 and 14.3 of the Plan, a Participant will have all
voting, dividend, liquidation and other rights with respect to shares of Common
Stock issued to the Participant as a Restricted Stock Award under this Section 8
upon the Participant becoming the holder of record of such shares as if such
Participant were a holder of record of shares of unrestricted Common Stock.
8.3 DIVIDENDS AND DISTRIBUTIONS. Unless the Committee
determines otherwise (either in the agreement evidencing the Restricted Stock
Award at the time of grant or at any time after the grant of the Restricted
Stock Award), any dividends or distributions (including regular quarterly cash
dividends) paid with respect to shares of Common Stock subject to the unvested
portion of a Restricted Stock Award will be subject to the same restrictions as
the shares to which such dividends or distributions relate. In the event the
Committee determines not to pay such dividends or distributions currently, the
Committee will determine whether any interest will be paid on such dividends or
distributions. In addition, the Committee may require such dividends and
distributions to be reinvested (and in such case the Participants consent to
such reinvestment) in shares of Common Stock that will be subject to the same
restrictions as the shares to which such dividends or distributions relate.
8.4 ENFORCEMENT OF RESTRICTIONS. To enforce the restrictions
referred to in this Section 8, the Committee may place a legend on the stock
certificates referring to such restrictions and may require the Participant,
until the restrictions have lapsed, to keep the stock certificates, together
with duly endorsed stock powers, in the custody of the Company or its transfer
agent or to maintain evidence of stock ownership, together with duly endorsed
stock powers, in a certificateless book-entry stock account with the Company's
transfer agent.
9. PERFORMANCE UNITS. An Eligible Recipient may be granted one or more
Performance Units under the Plan, and such Performance Units will be subject to
such terms and conditions, consistent with the other provisions of the Plan, as
may be determined by the Committee. The Committee may impose such restrictions
or conditions, not inconsistent with the provisions of the Plan, to the vesting
of such Performance Units as it deems
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appropriate, including, without limitation, that the Participant remain in
the continuous employ or service of the Company or any subsidiary for a
certain period or that the Participant or the Company (or any Subsidiary or
division thereof) satisfy certain performance goals or criteria. The
Committee will have the discretion either to determine the form in which
payment of the economic value of vested Performance Units will be made to the
Participant (i.e., cash, Common Stock or any combination thereof) or to
consent to or disapprove the election by the Participant of the form of such
payment.
10. STOCK BONUSES.
An Eligible Recipient may be granted one or more Stock Bonuses
under the Plan, and such Stock Bonuses will be subject to such terms and
conditions, consistent with the other provisions of the Plan, as may be
determined by the Committee. The Participant will have all voting, dividend,
liquidation and other rights with respect to the shares of Common Stock issued
to a Participant as a Stock Bonus under this Section 10 upon the Participant
becoming the holder of record of such shares; provided, however, that the
Committee may impose such restrictions on the assignment or transfer of a Stock
Bonus as it deems appropriate.
11. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE.
11.1 TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. In
the event a Participant's employment or other service with the Company and all
subsidiaries is terminated by reason of death, Disability or Retirement:
a. All outstanding Options and Stock Appreciation Rights then
held by the Participant will remain exercisable to the extent
exercisable as of such termination for a period of 30 days after such
termination (but in no event after the expiration date of any such
Option or Stock Appreciation Right);
b. All outstanding Restricted Stock Awards then held by the
Participant that have not vested will be terminated and forfeited; and
c. All outstanding Performance Units and Stock Bonuses then
held by the Participant will vest and/or continue to vest in the manner
determined by the Committee and set forth in the agreement evidencing
such Performance Units or Stock Bonuses.
11.2 TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR
RETIREMENT.
a. In the event a Participant's employment or other service is
termination with the Company and all subsidiaries for any reason other
than death, Disability or Retirement, or a Participant is in the employ
or service of a subsidiary and the subsidiary ceases to be a subsidiary
of the Company (unless the Participant continues in the employ or
service of the Company or another subsidiary), all rights of the
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Participant under the Plan and any agreements evidencing an Incentive
Award will immediately terminate without notice of any kind, and no
Options or Stock Appreciation Rights then held by the Participant will
thereafter be exercisable, all Restricted Stock Awards then held by the
Participant that have not vested will be terminated and forfeited, and
all Performance Units and Stock Bonuses then held by the Participant
will vest and/or continue to vest in the manner determined by the
Committee and set forth in the agreement evidencing such Performance
Units or Stock Bonuses; provided, however, that if such termination is
due to any reason other than termination by the Company or any
subsidiary for "cause," all outstanding Options and Stock Appreciation
Rights then held by such Participant will remain exercisable to the
extent exercisable as of such termination for a period of 30 days after
such termination (but in no event after the expiration date of any such
Option or Stock Appreciation Right).
b. For purposes of this Section 11.2, "cause" (as determined
by the Committee) will be a defined in any employment or other
agreement or policy applicable to the Participant or, if no such
agreement or policy exists, will mean (i) dishonesty, fraud,
misrepresentation, embezzlement or deliberate injury or attempted
injury, in each case related to the Company or any subsidiary, (ii) any
unlawful or criminal activity of a serious nature, (iii) any
intentional and deliberate breach of a duty or duties that,
individually or in the aggregate, are material in relation to the
Participant's overall duties, or (iv) any material breach of any
employment, service, confidentiality or non-compete agreement entered
into with the Company or any subsidiary.
11.3 MODIFICATION OF RIGHTS UPON TERMINATION. Notwithstanding
the other provisions of this Section 11, upon a Participant's termination of
employment or other service with the Company and all subsidiaries, the Committee
may in its discretion (which may be exercised at any time on or after the date
of grant, including following such termination) cause Options and Stock
Appreciation Rights (or any part thereof) then held by such Participant to
become or continue to become exercisable and/or remain exercisable following
such termination of employment or service and Restricted Stock Awards,
Performance Units and Stock Bonuses then held by such Participant to vest and/or
continue to vest or become free of transfer restrictions, as the case may be,
following such termination of employment or service, in each casein the manner
determined by the Committee; provided, however, that no Option or Stock
Appreciation Right may remain exercisable beyond its expiration date.
11.4 BREACH OF CONFIDENTIALITY OR NON-COMPETE AGREEMENTS.
Notwithstanding anything in this Plan to the contrary, in the event that a
Participant materially breaches the terms of any confidentiality or non-compete
agreement entered into with the Company or any subsidiary, whether such breach
occurs before or after termination of such Participant's employment or other
service with the Company or any subsidiary, the Committee may immediately
terminate all rights of the Participant under the Plan and any
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agreements evidencing an Incentive Award then held by the Participant without
notice of any kind.
11.5 DATE OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE.
Unless the Committee otherwise determines, a Participant's employment or other
service will, for purposes of the Plan, be deemed to have terminated on the date
recorded on the personnel or other records of the Company or the subsidiary for
which the Participant provides employment or other service, as determined by the
Committee based upon such records.
12. PAYMENT OF WITHHOLDING TAXES.
12.1 GENERAL RULES. The Company is entitled to (a) withhold
and deduct from future wages of the Participant (or from other amounts that may
be due and owing to the Participant from the Company or a subsidiary), or make
other arrangements for the collection of, all legally required amounts necessary
to satisfy any and all federal, state and local withholding and
employment-related tax requirements attributable to an Incentive Award,
including, without limitation, the grant, exercise or vesting of, or payment of
dividends with respect t, an Incentive Stock Option, or (b) require the
Participant promptly to remit the amount of such withholding to the Company
before taking any action, including issuing any shares of Common Stock, with
respect to an Incentive Award.
12.2 SPECIAL RULES. The Committee may, upon terms and
conditions established by the Committee, permit or require a Participant to
satisfy, in whole or in part, any withholding or employment-related tax
obligation described in Section 12.1 of the Plan by electing to tender
Previously Acquired Shares, a Broker Exercise Notice or a promissory note (on
terms acceptable to the Committee in its sole discretion), or by a combination
of such methods.
13. CHANGE IN CONTROL.
13.1 CHANGE IN CONTROL. For purposes of this Section 13.1, a
"Change in Control" of the Company will mean the following:
a. the sale, lease, exchange or other transfer, directly or
indirectly, of substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to a person or
entity that is not controlled by the Company;
b. the approval by the stockholders of the Company of any
plan or proposal for the liquidation or dissolution of the Company;
c. a merger or consolidation to which the Company is a party
if the stockholders of the Company immediately prior to the effective
date of such merger or consolidation have "beneficial ownership" (as
defined in Rule 13d-3 under the Exchange Act), immediately following
the effective date of such merger or consolidation, of securities of
the surviving corporation representing (i) more than
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50%, but not more than 80% of the combined voting power of the
surviving corporation's then outstanding securities ordinarily having
the right to vote at elections of directors, unless such merger or
consolidation has been approved in advance by the Incumbent Directors
(as defined in Section 13.2 below), or (ii) 50% or less of the combined
voting power of the surviving corporation's then outstanding securities
ordinarily having the right to vote at elections of directors
(regardless of any approval by the Incumbent Directors);
d. any person becomes after the effective date of the Plan the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of (i) 20% or more, but not 50% or more, of the
combined voting power of the Company's outstanding securities
ordinarily having the right to vote at elections of directors, unless
the transaction resulting in such ownership has been approved in
advance by the Incumbent Directors, or (ii) 50% or more of the combined
voting power of the Company's outstanding securities ordinarily having
the right to vote at elections of directors (regardless of any approval
by the Incumbent Directors);
e. the Incumbent Directors cease for any reason to constitute
at least a majority of the Board; or
f. a change in control of the Company of a nature that would
be required to be reported pursuant to Section 13 or 15(d) of the
Exchange Act, whether or not the company is then subject to such
reporting requirements.
13.2 INCUMBENT DIRECTORS. For purposes of this Section 13,
"Incumbent Directors" of the Company means any individuals who are members of
the Board on the effective date of the Plan and any individual who subsequently
becomes a member of the Board whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
Incumbent Directors (either by specific vote or by approval of the Company's
proxy statement in which such individual is named as a nominee for director
without objection to such nomination).
13.3. ACCELERATION OF VESTING. Without limiting the authority
of the Committee under Section 3.2 of the Plan, if a Change in Control of the
Company occurs, then unless the Committee otherwise determines and sets forth in
the agreement evidencing an Incentive Award at the time of grant of such
Incentive Award, (a) all outstanding Options and Stock Appreciation Rights will
become immediately exercisable in full and will remain exercisable for the
remainder of their terms, regardless of whether the Participant to whom such
Options or Stock Appreciation Rights have been granted remains in the employ or
service of the Company or any Subsidiary; (b) all outstanding Restricted Stock
Awards will become immediately fully vested and non-forfeitable; and (c) all
outstanding Performance Units and Stock Bonuses then held by the Participant
will vest and/or continue to vest in the manner determined by the Committee and
set forth in the agreement evidencing such Performance Unites or Stock Bonuses.
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13.4 CASH PAYMENT FOR OPTIONS. If a Change of Control of the
Company occurs, then the Committee, if approved by the Committee either in an
agreement evidencing an Incentive Award at the time of grant or at any time
after the grant of an Incentive Award, may determine that some or all
Participants holding outstanding Options will receive, with respect to some or
all of the shares of Common Stock subject to such Options, as of the effective
date of any such Change in Control of the Company, cash in an amount equal to
the excess of the Fair Market Value of such shares immediately prior to the
effective date of such Change in Control of the Company over the exercise price
per share of such Options.
13.5 LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding
anything in Section 13.3 or 13.4 of the Plan to the contrary, if, with respect
to a Participant, the acceleration of the vesting of an Incentive Award as
provided in Section 13.3 or the payment of cash in exchange for all or part of
an Incentive Award as provided in Section 13.4 (which acceleration or payment
could be deemed a "payment" within the meaning of Section 280G(b)(2) of the
Code), together with any other payments which such Participant has the right to
receive from the Company or any corporation that is a member of an "affiliate
group" (as defined in Section 1504(a) of the Code without regarding to Section
1504(b) of the Code) of which the Company is a member, would constitute a
"parachute payment" (as defined in Section 280G(b)(2) of the Code), then the
payments to such Participant pursuant to Section 13.3 or 13.4 will be reduced to
the largest amount as will result in no portion of such payments being subject
to the excise tax imposed by Section 4999 of the Code; provided, however, that
if such Participant is subject to a separate agreement with the Company or a
subsidiary that specifically provides that payments attributable to one or more
forms to employee stock incentives or to payments made in lieu of employee stock
incentives will not reduce any other payments under such agreement, event if it
would constitute an excess parachute payment, or provides that the Participant
will have the discretion to determine which payment will be reduced in order to
avoid an excess parachute payment, then the limitations of this Section 13.5
will, to that extent, not apply.
14. RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS; TRANSFERABILITY.
14.1 EMPLOYMENT OR SERVICE. Nothing in the Plan will interfere
with or limit in any way the right of the Company or any Subsidiary to terminate
the employment or service of any Eligible Recipient or Participant at any time,
nor confer upon any Eligible Recipient or Participant any right to continue in
the employ or service of the Company or any Subsidiary.
14.2 RIGHTS AS A STOCKHOLDER. As a holder of Incentive Awards
(other than Restricted Stock Awards and Stock Bonuses), a Participant will have
no rights as a stockholder unless and until such Incentive Awards are exercised
for, or paid in the form of, shares of Common Stock and the Participant becomes
the holder of record of such shares. Except as otherwise provided in the Plan,
no adjustment will be made for dividends or distributions with respect to such
Incentive Awards as to which there is a record date preceding the date the
Participant becomes the holder of record of such shares, except as the Committee
may determine.
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14.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary
will or the laws of descent and distribution or as otherwise expressly permitted
by the Plan, no right or interest of any Participant in an Incentive Award prior
to the exercise or vesting of such Incentive Award will be assignable or
transferable, or subjected to any lien, during the lifetime of the Participant,
either voluntarily or involuntarily, directly or indirectly, by operation of law
or otherwise. A Participant will, however, be entitled to designate a
beneficiary to receive an Incentive Award upon such Participant's death, and in
the event of a Participant's death, payment of any amounts due under the Plan
will be made to, and exercise of any Options (to the extent permitted pursuant
to Section 11 of the Plan) may be made by, the Participant's legal
representatives, heirs and legatees.
14.4 NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the
Plan is intended to modify or rescind any previously approved compensation plans
or programs of the Company or create any limitations on the power or authority
of the Board to adopt such additional or other compensation arrangements as the
Board may deem necessary or desirable.
15. SECURITIES LAW AND OTHER RESTRICTIONS.
Notwithstanding any other provision of the Plan or any
agreements entered into pursuant to the Plan, the Company will not be required
to issue any shares of Common Stock under this Plan, and a Participant may not
sell, assign, transfer or otherwise dispose of shares of Common Stock issued
pursuant to Incentive Awards granted under the Plan, unless (a) there is in
effect with respect to such shares a registration statement under the Securities
Act and any applicable state securities laws or an exemption from such
registration under the Securities Act and applicable state securities laws, and
(b) there has been obtained any other consent, approval or permit from any other
regulatory body which the Committee deems necessary or advisable. The Company
may condition such issuance, sale or transfer upon the receipt of any
representations or agreements from the parties involved, and the placement of
any legends on certificates representing shares of Common Stock, as may be
deemed necessary or advisable by the Company in order to comply with such
securities law or other restrictions.
16. PLAN AMENDMENT, MODIFICATION AND TERMINATION.
The Board may suspend or terminate the Plan or any portion
thereof at any time, and may amend the Plan from time to time in such respects
as the Board may deem advisable in order that Incentive Awards under the Plan
will conform to any change in applicable laws or regulations or in any other
respect the Board may deem to be in the best interests of the Company; provided,
however, that no amendments to the Plan will be effective without approval of
the stockholders of the Company if stockholder approval of the amendment is then
required pursuant to Rule 16b-3 under the Exchange Act, Section 422 of the Code
or the rules of the NASD or any stock exchange. No termination, suspension or
amendment of the Plan may adversely affect any outstanding Incentive Award
without the
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consent of the affected Participant; provided, however, that this sentence
will not impair the right of the Committee to take whatever action is deems
appropriate under Sections 3.2(c), 4.3 and 13 of the Plan.
17. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan is effective as of February 27, 1995, the date it was
adopted by the Board. The Plan will terminate at midnight on February 26, 2005,
and may be terminated prior to such time by Board action, and no Incentive Award
will be granted after such termination. Incentive Awards outstanding upon
termination of the Plan may continue to be exercised, or become free of
restrictions, in accordance with their terms.
18. MISCELLANEOUS
18.1 GOVERNING LAW. The validity, construction,
interpretation, administration and effect of the Plan and any rules, regulations
and actions relating to the Plan will be governed by and construed exclusively
in accordance with the laws of the State of Minnesota, notwithstanding the
conflicts of laws principles of any jurisdictions.
18.2 SUCCESSORS AND ASSIGNS. The Plan will be binding upon and
inure to the benefit of the successors and permitted assigns of the Company and
the Participants.
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EXHIBIT 10.2
SEPARATION AGREEMENT
This Separation Agreement is made and entered into this 22nd
day of July, 1998 and effective the 13th day of July, 1998, between Thomas L.
Erickson ("Employee") and The Chromaline Corporation ("Employer").
I. RECITALS
A. Employee was employed by Chromaline from June 1, 1965 until
July 12, 1998, when his employment with Chromaline ended. Employee served as
President/CEO for Chromaline.
B. The purpose of this Separation Agreement is to set forth
the terms and conditions under which Employee and Employer will terminate their
employment relationship.
II. AGREEMENT
For the consideration described below, the adequacy of which
the parties acknowledge, the parties agree as follows:
1. RELEASE. Employee shall sign and deliver to Employer a
separate release in the form attached hereto as Exhibit A on August 12, 1998.
2. CONDITIONS OF SPECIAL SEPARATION PAYMENT. Employer need not
make the special separation payment described below in point 3 of this
Separation Agreement unless and until the following conditions have been
satisfied:
a. Employee executes the release described in point 1 of
Section II of this Separation Agreement and does not rescind it.
b. After the expiration of the 15-day rescission period,
Employee sends a letter to Employer confirming that Employee has not
sought to rescind the release in the form attached hereto as Exhibit B.
3. SEPARATION PAY. Employee will receive $5,416.67 per pay
period, which will be paid to him at Employer's normal payroll periods through
the end of 1998.
4. NON-COMPETITION AGREEMENT. Employee will be paid $20,000 in
1998, $30,000 in 1999, $24,500 in 2000, $24,500 in 2001 and $24,500 in 2002 in
accordance with a separate non-competition agreement attached to this document.
Payment will be paid quarterly.
<PAGE>
5. BONUS PLAN. Employee's share of 1998 bonus pool will be
calculated through 4th quarter and paid in full as soon as can be determined.
6. STOCK OPTIONS. Employee will have 30 days after
July 12, 1998 to exercise his stock options.
7. RETIREMENT PLANS. Employee is 100% vested in Chromaline's
Money Purchase Plan. Pension contributions will continue through the end of 1998
based on the remaining severance pay of $65,000 and any bonus issued for 1998.
8. MEDICAL AND DENTAL INSURANCE. Employee will be eligible to
remain in Chromaline's group medical and dental plans, continuing to pay to the
Employee's share of premiums until December 31, 1999. Beginning January 1, 2000,
Employee will be eligible to remain in Employer's group medical plan until age
65, with Employee paying 100% of the premium. Dental insurance will be available
to be continued for an 18-month period through COBRA coverage beginning
January 1, 2000.
9. COMPANY PROPERTY. Employee will be entitled to purchase the
1997 Chrysler Town and Country currently owned by Employer for $2,000. Employee
will be entitled to use certain computer equipment currently owned by Employer
as needed.
10. REMOVAL OF PROPERTY FROM THE BUILDING. Removal of anything
from the building, other than employee's personal belongings, must have
Employer's approval.
11. CONFIDENTIALITY. The terms of this Separation Agreement
and the release referred to in paragraph 1 of this Separation Agreement shall be
forever treated as confidential by Employee and will not be disclosed by him to
anyone except his attorney, accountant, tax advisor, spouse, children or except
as may be required by law or agreed to in writing by Employer. The terms of this
Separation Agreement and the release also will be forever treated as
confidential by Employer and will not be disclosed by Employer to anyone except
its directors, officers, employees and other agents who have a legitimate need
to know the terms of the settlement in the course of performing their duties for
Employer or except as may be required by law or agreed t in writing by Employee.
If either party is asked about the circumstances of Employee's separation, the
party shall respond that a mutually-satisfactory agreement was reached.
12. NON-DISPARAGEMENT. The parties mutually agree that they
shall not disparage or defame each other. This includes the Employer's officers,
agents, directors and employees.
13. ENTIRE AGREEMENT. This Separation Agreement and the
release referred to in paragraph 1 of this Separation Agreement constitute the
entire agreement between the parties with respect to the termination of
Employee's employment relations with Employer and the parties agree that there
are no inducements or representations leading to the
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execution of the Separation Agreement or the release except as stated in this
Separation Agreement.
14. VOLUNTARY AND KNOWING ACTION. Employee represents that he
has read and understands the terms of this Separation Agreement.
<TABLE>
<S> <C>
Dated: July 22, 1998 By /s/ William C. Ulland
------------------------------------------------
William C. Ulland, Chairman of the Board
Dated: July 22, 1998 By /s/ Charles H. Anderson
------------------------------------------------
Charles H. Andresen,
Chairman of Compensation Committee
Dated: July 22, 1998 By /s/ Thomas L. Erickson
------------------------------------------------
Thomas L. Erickson
</TABLE>
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EXHIBIT A
GENERAL RELEASE
DEFINITIONS. I intend all words used in this General Release to have
their plain meanings in ordinary English. Technical legal words are not needed
to describe what I mean. Specific terms that I use in this General Release have
the following meanings:
A. Words such as I, me and my, include both me and anyone who
has or obtains any legal rights or claims through me.
B. Company means The Chromaline Corporation and any company
related to Chromaline in the past or present, including without limitation, its
predecessors, successors, parents, subsidiaries and affiliates.
C. Company means The Chromaline Corporation; the past or present
officers, directors and employees of Chromaline; any company providing insurance
to Chromaline in the past or present; and anyone who acted on behalf of
Chromaline or on instructions from Chromaline.
D. My Claims means all of my rights to any relief of any kind
from the Company, whether or not I now know about the rights or claims,
including without limitation:
1. all claims which arise out of or are based upon fact which have
occurred as of this date arising out of or relating to my employment
with The Chromaline Corporation or the termination of that employment
including, but not limited to breach of contract, sexual harassment,
defamation, infliction of emotional distress, wrongful discharge,
violation of Age Discrimination in Employment Act, 29 U.S.C. 621 et
seq., violation of the Minnesota Human Rights Act 363.01 et seq.,
assault, battery, negligence, violation of the Employee Retirement
Income Security Act, violation of any other national, federal, state
or local statute, law, ordinance, regulation or order; and other
unlawful employment practices.
2. all claims which arise out of or are base upon facts which
have occurred as of this date for any type of relief including, but not
limited to, back pay, lost benefits, reinstatement, liquidated damages,
punitive damages, interest and damages for any alleged personal injury;
and
3. all claims for attorneys fees, costs and interest.
AGREEMENT TO RELEASE MY CLAIMS. I am receiving a substantial
amount of money from The Chromaline Corporation. In exchange for that payment, I
agree to give up all my Claims against the Company as described above. I will
not bring any lawsuits against the Company relating to the claims that I have
released. The payment that I am receiving is full and fair compromise payment
for the release of my Claims.
<PAGE>
CONFIDENTIALITY. I agree that I will not disclose the amount
of money that was paid to me by the Company in exchange for this General Release
or the facts underlying my Claims against the Company to anyone other than my
attorney, spouse, children and tax advisors, except as required by laws.
ADDITIONAL AGREEMENTS AND UNDERSTANDINGS. Even though the
Company will pay me to settle and release my claims, the Company does not admit
that it is responsible or legally obligated to me. In fact, the Company denies
that it is responsible or legally obligated for My Claims.
TWENTY-ONE DAY PERIOD TO CONSIDER THE GENERAL RELEASE. I
understand that I have twenty-one (21) days from July 22, 1998, the day that I
receive this General Release, not counting the day upon which I receive it, to
consider whether I wish to sign this General Release. I acknowledge that if I
sign this General Release before the end of the 21-day period, it will be my
personal, voluntary decision to do so.
MY RIGHT TO RESCIND THIS GENERAL RELEASE. I understand that I
may rescind this General Release at any time within fifteen (15) days after I
sign it, not counting the day upon which I sign it. This General Release shall
not become effective or enforceable until the 15 day rescission period has
expired.
PROCEDURE FOR ACCEPTING OR RESCINDING THE GENERAL RELEASE. To
accept the terms of this General Release, I must deliver the General Release,
after it has been signed and dated by me to William Ulland by hand, by mail, or
by facsimile within the 21 day period that I have to consider this General
Release. To rescind my acceptance, I must deliver a written signed statement
that I rescind my acceptance to William Ulland by hand, mail or facsimile within
the 15 day rescission period. All Deliveries shall be made to William Ulland at
the following address:
The Chromaline Corporation
4832 Grand Avenue
Duluth, Minnesota 55807
Facsimile: (218) 628-3245
If I choose to deliver my acceptance or the rescission of my acceptance by mail,
it must be:
1. Postmarked within the period stated above;
2. Properly addressed to William Ulland at the address stated above;
and
3. Sent by certified mail, return receipt requested.
If I choose to deliver my acceptance or the rescission of my acceptance by
facsimile addressed to William Ulland at the company, it will be effective when
received by the Company, provided and i simultaneously mail an original in the
manner described above.
MY REPRESENTATION. I represent that I have not filed or been
involved in any pending personal bankruptcy proceeding between any accrual of My
Claims and the date of my
2
<PAGE>
signature below. I am legally able and entitled to receive the sums of money
being paid to me by the Company in settlement of My Claims. I have read this
General Release carefully. I understand all of its terms. In agreeing to sign
this General Release, I have not relied on any statements of explanations
made by the Company or its attorneys, except as specifically set forth in
this General Release or the Separation Agreement that I am also signing
today. I am voluntarily releasing My Claims against the Company.
Dated: July 23, 1998 /s/ Thomas L. Erickson
----------------------------
Thomas L. Erickson
3
<PAGE>
EXHIBIT 10.3
CONSULTING AGREEMENT
WHEREAS, The Chromaline Corporation, 4832 Grand Avenue,
Duluth, Minnesota, a Minnesota corporation ("Chromaline"), is desirous of
retaining the services of Thomas L. Erickson, 20 S. 26th Avenue East, Duluth,
Minnesota 55812 ("Consultant"), as a Consultant; and
WHEREAS, the parties have agreed as to the terms and
conditions of a consulting arrangement between Chromaline and Consultant; and
WHEREAS, the terms and conditions of such consulting
arrangement are to be set forth herein;
NOW, THEREFORE, BE IT AGREED AS FOLLOWS:
1. Chromaline retains Consultant to consult with Chromaline,
on an unrestricted basis, with respect to assisting Chromaline in any area
Chromaline desires and is agreeable to by Consultant. Consultant will be
compensated as set forth herein, and is an independent contractor, not an
employee, of Chromaline. Consultant agrees to be personally responsible for any
FICA or income taxes imposed upon the monies paid him hereunder.
2. Chromaline will compensate and reimburse the Consultant for
expenses as follows:
a. Consulting fees will be paid in the following way: $10,000
in third quarter 1998, $10,000 in fourth quarter 1998, and $60,000 in
fourth quarter 1998 as prepayment for calendar 1999.
b. Reasonable expenses, including travel and accommodations,
appropriately documented, will be reimbursed to Consultant within 14
days of submission of these expenses. Travel and accommodations
expenditures are to be authorized by Chromaline prior to being
expended, and Chromaline will confirm each period of Consultant's
activities hereunder prior to it being commenced.
3. The term of this contract is from July 13, 1998 through
December 31, 1999.
4. Consultant, to induce Chromaline to enter into this
Agreement, further represents and agrees with Chromaline as follows:
a. Consultant's expertise has been acquired by him in a legal
fashion, and h is under no specific written restriction or other legal
restriction as a result of any prior or current employment or other
activity which prohibits, limits or bars his availability to Chromaline
as a Consultant within the terms of this Agreement.
<PAGE>
b. Consultant does not have access to or possession of any
trade secrets of any competitor of Chromaline, and is free to divulge
information to Chromaline without restriction and will be fully
forthcoming with all information requested.
c. Consultant will hold his relationship with Chromaline
confidential for a period of no less than 4 years following the last
date of Consultant's activity for Chromaline under this Agreement, any
extension hereof, or any other agreement between him and Chromaline.
d. Any and all information acquired by Consultant from
Chromaline, if a trade secret, will be held confidential and not
disclosed forever, and any other information will be held confidential
for a period of at least 4 years following the conclusions of
Consultant's activities hereunder, any extension hereof, or any other
agreement between Consultant and Chromaline.
e. Without written prior approval by Chromaline, Consultant
will not, in a consulting capacity or otherwise, reveal or use any
information provided by him to Chromaline or obtained by him from
Chromaline for any other purpose other than communication to
Chromaline.
f. All inventions which Consultant may conceive or first
reduce to practice in the performance of services for Chromaline, or
which are based in whole or in part upon confidential information
obtained from Chromaline shall be assigned to Chromaline without cost
or charge of any kind. All such inventions shall be promptly and fully
disclosed in writing to Chromaline. Also, Consultant agrees to
cooperate with Chromaline and to execute such documents or do such
other acts as he or they may lawfully do which may be necessary or
desirable in the opinion of Chromaline to obtain and maintain Letters
of Patent or other rights, and to vest the entire right, title and
interest thereto in Chromaline (all without charge to Chromaline). The
costs for filing any patent resulting from any such invention shall be
paid for by Chromaline provided Chromaline has approved in writing such
patent filing.
5. Consultant agrees to promptly disclose to Chromaline in
writing any invention which is crated by him as a result of his activities
hereunder and all such inventions shall be the exclusive property of Chromaline
and are hereby assigned to Chromaline, except that if the invention does not
relate to the existing or reasonably foreseeable business interests of
Chromaline, Chromaline may in its sole discretion, release or license that
information to the Consultant upon written request. No additional compensation,
in any form, will be due Consultant as a result of such invention or inventions.
Consultant will, at Chromaline's expense, give Chromaline all assistance it
reasonably requires to perfect, protect and use its rights to inventions. In
particular, but without limitation, Consultant will sign all documents, do all
things, and supply all information that Chromaline may deem necessary or
desirable to transfer or record the transfer of Consultant's entire right, title
and
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<PAGE>
interest in the inventions to Chromaline and to enable Chromaline to obtain
patent, copyright and/or trademark protection for inventions anywhere in the
world. The obligations of this paragraph shall survive the conclusion of this
Agreement with respect to inventions conceiving or made by Consultant as a
result of or relating to his consultancy and shall be binding upon the heirs,
executors, legal representatives or assigns of Consultant.
6. Confidential Information, as stated herein, includes all
items set forth in Exhibit 1 hereto.
7. This Agreement may be modified only in writing. It will be
governed by the laws of the State of Minnesota and is binding on the heirs,
successors and assigns of the parties hereto.
IN WITNESS WHEREOF, Chromaline and Consultant have executed
this Agreement this 22nd day of July, 1998.
THE CHROMALINE CORPORATION
By /s/ William Ulland
-------------------------------------
William Ulland, Chairman of the Board
CONSULTANT
By /s/ Thomas L. Erickson
------------------------------------
Thomas L. Erickson, Consultant
3
<PAGE>
It is our policy that the subjects enumerated below be
identified as containing "Confidential Information" of types contemplated in the
Consulting Agreement between Chromaline and Consultant executed by July 13,
1998.
Customer lists
Budgets and forecasts
Business plans and schedules
Unpublished financial data
All documents marked "Confidential" or similarly marked for
limited access and all verbal disclosures identified as
confidential or similarly described for limited access
Confidential price lists
Identities of raw and semi-finished materials and their
sources
Product formulations and compositions
Our equipment and how it is laid out
Manufacturing processes
Employee lists
Laboratory notebooks
New product development plans and schedules
Information gained about our customers which is not commonly
known and would be reasonably thought to be helpful to our
competitors if it were to become known to them
Our compilations and interpretations of information about
the marketplace
Product costs
Our marketing techniques, methods and operations
It is the policy of Chromaline to define Confidential
Information as:
1. information which is not generally known or readily
ascertainable by proper means by others; and
<PAGE>
2. accrues independent economic value from its secrecy
In order to protect Confidential Information, Consultant
agrees to observe these rules and practice these procedures:
1. Entry into manufacturing areas is prohibited except prior
authorization of, and escort by, a reasonable authority.
2. Entry into laboratory areas is permitted only by prior
authorization of a reasonable authority.
3. Discarded Confidential Information will be destroyed rather
than merely thrown away.
4. Confidential Information will be kept in a central and/or
locked location.
5. Publications will be screened for Confidential Information.
6. Documents will be clearly marked "Confidential" where
appropriate.
7. When, with the prior agreement of Chromaline, trade secret
disclosures are made, all such disclosures will be clearly marked
"secret."
8. Employee access to documents and computer access codes will
be restricted.
9. A policy statement will be issued to employees outlining
what is considered to be Confidential Information.
10. Warn visitors of restricted areas and Confidential
Information.
Chromaline and Consultant's obligation of confidentiality
shall not apply to Confidential Information that:
1. Was published or was part of the public knowledge prior to
its receipt from Chromaline or Consultant; or
2. Became published or part of the public knowledge through no
act or failure to act by either Chromaline or Consultant, or is
disclosed without restriction to a third party by either party
subsequent to the approval of the other party; or
3. Was known to Chromaline prior to its receipt from
Consultant or was known to Consultant prior to its receipt from
Chromaline.
Exhibit 1-2
<PAGE>
4. Notwithstanding the stipulations of this Section,
Consultant shall not be permitted to justify any disregard of the
obligations of confidentiality imposed by this Agreement by using
information received from Chromaline or representatives to guide a
search of publications and other publicly available sources of
information, including persons, selecting a series of items of
knowledge from unconnected sources and fitting them together by use of
the integrated disclosure received from Chromaline.
5. If Consultant should be lawfully required by any court or
government agency to disclose Confidential Information, Consultant will
be permitted to disclose, provided Consultant provides Chromaline with
appropriate notice and such disclosure includes written notice to the
receiving party that the information disclosed is confidential to
Chromaline and is not to be disclosed to others.
6. Nothing herein shall be construed to limit the rights of
Chromaline to seek civil or criminal judgments in the event of
disclosure of Confidential Information.
Exhibit 1-3
<PAGE>
EXHIBIT 10.4
AGREEMENT REGARDING NON-DISCLOSURE
OF CONFIDENTIAL INFORMATION
AND NON-COMPETITION
1. INTRODUCTION.
The Chromaline Corporation ("Chromaline") and the undersigned
Employee acknowledge that the Employee has certain information as defined in
Section 2. Employee recognizes that the Confidential Information is a business
assets of Chromaline, the value of which can only be protected by maintaining
the secrecy of the confidential information. Employee further acknowledges that
in the course of his employment by Chromaline, Employee has established personal
contacts and relationships with Chromaline's customers and that such personal
contacts and relationships are valuable business assets of Chromaline.
Employee, therefore, enters into this agreement in
consideration of compensation to be paid to Employee in the following manner:
$20,000 in 1998, $30,000 in 1999, $24,500 in 2000, $24,500 in 2001, and $24,500
in 2002. Payment will be made quarterly. Employee and Chromaline, intending to
be legally bound, agree as follows:
2. DEFINITIONS
a. CHROMALINE means The Chromaline Corporation, its successors
in interest, and all of its parent, subsidiary or affiliate
corporations and the operating divisions thereof.
b. CONFIDENTIAL INFORMATION means any information that
Employee learned or developed during the course of employment with
Chromaline that derives independent economic value from not being
generally known, or not being readily ascertainable by proper mans, by
other persons who can obtain economic value from the disclosure or use
of such information. Such information includes, but is not limited to,
Chromaline's sales and marketing information, information about new or
future products, lists of Chromaline's customers and information about
customer purchases and preferences, information regarding research and
development, manufacturing processes or management systems and any
other information which provides Chromaline with a competitive
advantage.
c. CHROMALINE PRODUCT means any actual projected product,
product line or service that has been designed, developed,
manufactured, marketed or sold by Chromaline during Employee's
employment with Chromaline or regarding which Chromaline has conducted
or acquired research and development during Employee's employment with
Chromaline.
d. COMPETITIVE PRODUCT means any actual or projected product,
product line or service that has been or is being designed, developed,
manufactured, marketed
<PAGE>
or sold by anyone other than Chromaline which performs similar
functions or is used for the same general purposes as a Chromaline
product.
e. SOLICITATION OF SALES includes providing information or
conducting demonstrations in anticipation of sales as well as other
acts of service including, but not limited to, delivery and
maintenance.
f. CHROMALINE CUSTOMER means any person or entity with whom
Employee has contact of any sort for the purpose of selling, marketing,
promoting or servicing any Chromaline Product during the time Employee
was employed by Chromaline.
3. NON-COMPETITION.
During the period of time from termination of employment
through December 31, 2002, Employee will not directly or indirectly participate
in or support the sale, solicitation of sale or marketing of any Competitive
Product.
Employee will not, for whatever reason, induce or attempt to
induce any Chromaline employee for whom Employee had managerial or supervisory
responsibilities to leave his or her employment with Chromaline. Such
prohibition includes all acts of recruitment including offering employment,
seeking expressions of an interest in employment or discussing employment
opportunities.
The restrictions contained in this Section 3 shall apply
regardless of whether Employee acts directly or indirectly; or whether Employee
acts personally or as an employee, agent, supervisor, manager or otherwise for
another.
4. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION.
Employee agrees not to disclose, in any manner to any person
not employed by Chromaline, any Confidential Information. Employee understands
that such obligation is not only contractual, but is specified in Minnesota
Statute 325C. Within 24 hours of termination of employment, Employee agrees to
return to Chromaline all originals and copies of documents containing
confidential information as well as all documents generated by Employee on
behalf of Chromaline and all documents relating to the business of Chromaline
from any source whatsoever.
5. INJUNCTIVE RELIEF.
Employee agrees that Chromaline's remedy at law for breach of
this Agreement is inadequate. Chromaline, therefore, shall be entitled to
injunctive relief to enforce the terms of this Agreement, in addition to any
other remedy Chromaline might have.
2
<PAGE>
6. SEVERABILITY.
The invalidity of any portion of this Agreement shall not
impair or affect enforceability of the remainder. If any of these restrictions
is determined to be unenforceable as to duration or extent, or for any reason
whatsoever, such restriction shall be effective for such period of time and for
such extent as it may be enforceable.
7. PRIOR AGREEMENTS.
This Agreement and any prior non-compete and non-disclosure
agreements signed by Employee in connection with his employment at Chromaline
shall constitute a single agreement. In case of conflict between any provision
of this Agreement and any provision of any other such agreement, the provisions
of this Agreement shall control. If the provisions of this agreement are
determined to be unenforceable as written, then they shall be interpreted in
accordance with Section 6 (Severability) to make them enforceable to the maximum
extent provided by law. If the provisions of this Agreement so selected are
determined to be unenforceable in their entirety and cannot be revised pursuant
to Section 6 (Severability) to make them enforceable, then such provisions shall
give way to the most restrictive provision in any other such agreement which
covers the same issues and which is enforceable. There are no agreements,
representations or warranties relating to the subject matter of this Agreement
which are not set forth in this Agreement and the prior non-compete and
non-disclosure agreements (if any) signed by Employee.
8. NON-EMPLOYMENT AGREEMENT.
This agreement is not an employment contract and does not give
Employee any right to continued employment.
3
<PAGE>
9. GOVERNING LAW/CONSENT TO PERSONAL JURISDICTION.
This agreement will be construed and enforced in accordance
with the laws of the State of Minnesota. Employee hereby consents to the
exercise of personal jurisdictions over him by the courts of the State of
Minnesota.
Dated: July 22, 1998 THE CHROMALINE CORPORATION
By /s/ William Ulland
-----------------------------
Its Chairman
Dated: July 22, 1998 /s/ Thomas L. Erickson
-----------------------------
Employee
4
<PAGE>
EXHIBIT 10.5
BUSINESS Wisconsin Bankers Association 1995 Page 1 of 6
ACCT: 455 NOTE: 27247 Boxes not checked
are inapplicable.
REVOLVING CREDIT AGREEMENT
(Business Loans)
THE CHROMALINE CORPORATION
(Name of Customer)
The above named customer ("Customer", whether one or more) agrees with M&I BANK
("Lender") as follows:
1. REVOLVING LOANS. Customer requests that Lender lend to Customer from time
to time such amounts as Customer may request in accordance with this
Agreement (the "Loans"), and, subject to the terms of this Agreement, Lender
agrees to lend such amounts up to the aggregate principal amount of
$1,250,000.00 at any time outstanding (the "Credit Limit"). Within the Credit
Limit, Customer may borrow, repay and reborrow under this Agreement. Lender
is not obligated to but may make Loans in excess of the Credit Limit, and in
any event Customer is liable for and agrees to pay all Loans.
2. / / BORROWING BASE. The aggregate amount of all Loans at any time outstanding
under this Agreement shall never exceed the lesser of the Credit Limit or the
Borrowing Base described on Exhibit A.
3. CONDITIONS FOR LOANS. Lender's obligation to make the initial Loan is subject
to satisfaction of the following conditions: __________________________________
_______________________________________________________________________________
(a) /X/ Lender shall have received the following security documents
and the additional security documents described on Exhibit B, if any
(the "Security Documents"), all accompanied by the appropriate
financing statements: ________________________________________________
______________________________________________________________________
(b) Lender shall have received copies:
/X/ certified by the Secretary of Customer of the articles of
incorporation and bylaws of Customer, and resolutions of the Board of
Directors authorizing the issuance, execution and delivery of this
Agreement and the Security Documents, if any;
/ / certified by a general partner of Customer of the partnership
agreement of Customer, and an authorization signed by all of the
general partners of Customer authorizing the issuance, execution and
delivery of this Agreement and the Security Documents, if any;
/ / certified by a member or manager of Customer, as appropriate, of
the articles of organization and operating agreement of Customer, and
an authorization signed by a member or manager of Customer, as
appropriate, authorizing the issuance, execution and delivery of this
Agreement and the Security Documents, if any;
and a certification of the names and addresses of the representatives of
Customer authorized to sign this Agreement and the Security Documents, if any,
and request Loans under this Agreement, together with true signatures of such
representatives.
(c) / / Lender shall have received an affidavit of sole ownership
executed by the sole proprietor.
(d) / / Lender shall have received from counsel for Customer a
favorable opinion satisfactory to Lender covering the matters
described in sections 5(c) and 5(d) or 5(e) as applicable, and
5(h) of this Agreement and such other matters as Lender may
reasonably request.
(e) / / Lender shall have received a guaranty of payment of the Loans
duly executed by ____________________________________________________
_____________________________________________________________________
________________ on WBA form ________________________________________
(f) All proceedings taken by Customer in connection with the Loans, the
Security Documents and other documents provided to Lender shall be
satisfactory to Lender and Lender shall have received copies of all
documents reasonably required by it.
4. LOAN PROCEDURES. Customer may obtain Loans under this Agreement as provided
in (a), (b) or (c) below.
(a) /X/ Customer shall give Lender / / at least __________ business days' prior
notice or / /TELEPHONIC NOTICE FOLLOWED BY NEXT BUSINESS DAY WRITTEN
CONFIRMATION of any Loan requested under this Agreement, specifying the date and
amount of the Loan. Lender will make the Loan available to Customer /X/ by
crediting the amount of the Loan to Customer's account (ACCT. NO. 1002280) with
lender or / / _________________________________________________________________
_______________________________________________________________________________
Each Loan which is less than the full amount available to Customer under this
Agreement shall be in an amount not less than $ 1000.00.
(b) / / Lender will credit Customer's account (acct. no, _______________ ) with
Lender whenever the ledger balance in the account is less than $_______ on any
banking day (the "Target Amount'), far whatever reason. The Loan will be in an
amount within the Credit Limit and Borrowing Base sufficient to increase the
balance to the Target Amount. Lender may decline to make any Loan and may refuse
to pay any check drawn on the account if the amount available to Customer under
this Agreement would not be sufficient to increase the balance in the account to
the Target Amount.
(c) / / _____________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
/ / Lender's obligation to make each Loan (including the initial Loan) is
subject to the further condition that Lender shall have received a certificate
signed by Customer, dated the date of the Loan request and stating that the
representations and warranties in section 5 are true and correct as of the date
of the request and that no event of default has occurred and is continuing or
would result from such Loan.
<PAGE>
5. REPRESENTATIONS. Customer represents and warrants to Lender that on the date
of each Loan:
(a) No part of any Loan will be used for personal, family, household or
agricultural purposes.
(b) Customer will not use any part of the proceeds of Loans to purchase any
margin stock within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System.
(c) The execution and delivery of this Agreement and the Security Documents, and
the performance by Customer of its obligations under this Agreement and the
Security Documents, are within its power, have been duly authorized by proper
action on the part of Customer, are not in violation of any existing law, rule
or regulation, any order or decision of any court, the articles of
incorporation, bylaws, articles of organization, operation agreement,
partnership agreement or other governing documents of Customer, as applicable,
or the terms of any agreement or restriction to which Customer is a party or by
which it is bound, and do not require the approval or consent of any person or
entity. This Agreement and the Security Documents, when executed and delivered,
will constitute the valid and binding obligations of Customer enforceable in
accordance with !heir terms.
(d) / / Customer is a corporation validly existing and in good standing under
the laws of the State of MINNESOTA and is duly qualified to do business and is
in good standing in every jurisdiction in which the nature of its business or
its ownership of properties requires such qualification.
(e) / / Customer is a _____________ (general or limited) partnership legally
organized and validly existing under the laws of the State of: ________________.
(f) / / Customer is a limited liability company validly existing and in good
standing under the laws of the State of ______________ and is duly qualified
to do business and is in good standing in every jurisdiction in which the
nature of its business or its ownership of property requires such
qualification.
(g) All financial statements of Customer furnished to Lender were prepared in
accordance with generally accepted principles of accounting consistently applied
throughout the periods involved and are correct and complete as of their dates.
(h) (i) There is no substance which has been, is or will be present, used,
stored, deposited, treated, recycled or disposed of on, under, in or about any
real estate now or at any time owned or occupied by Customer ("Property") during
the period of Customer's ownership or use of the Property in a form, quantity or
manner which if known to be present on, under, in or about !he Property would
require clean-up, removal or some other remedial action ("Hazardous Substance")
under any federal, state or local laws, regulations, ordinances, codes or rules
("Environmental Laws"); (ii) Customer has no knowledge, after due inquiry, of
any prior use or existence of any Hazardous Substance on the Property by any
prior owner of or person using the Property; (iii) without limiting the
generality of the foregoing, Customer has no knowledge, after due inquiry, that
the Property contains asbestos, polychlorinated biphenyl (PCBs) or underground
storage tanks; (iv) there are no conditions existing currently or likely to
exist during the term of this Agreement which would subject Customer to any
damages, penalties, injunctive relief or clean-up costs in any governmental or
regulatory action or third-party claim relating to any Hazardous Substance; (v)
Customer is not subject to any court or administrative proceeding, judgment,
decree, order or citation relating to any Hazardous Substance; and (vi) Customer
in the past has been, at the present is, and in the future will remain in
compliance with all Environmental Laws. Customer shall indemnify and hold
harmless Lender, its directors, officers, employees and agents from all loss,
cost (including reasonable attorneys' fees and legal expenses), liability and
damage whatsoever directly or indirectly resulting from, arising out of, or
based upon (1) the presence, use, storage, deposit, treatment, recycling or
disposal, at any time, of any Hazardous Substance described above on, under, in
or about the Property, or the transportation of any Hazardous Substance to or
from the Property, (2) the violation or alleged violation of any Environmental
Law, permit, judgment or license relating to the presence, use, storage,
deposit, treatment, recycling or disposal of any Hazardous Substance on, under,
in or about the Property, or the transportation of any Hazardous Substance to or
from the Property, (3) the imposition of any governmental lien for the recovery
of environmental cleanup costs expended under any Environmental Law, or (4)
breach of this representation or warranty. Customer shall immediately notify
Lender in writing of any governmental or regulatory action or third-party claim
instituted or threatened in connection with any Hazardous Substance on, in,
under or about the Property.
(i) There is no litigation or administrative proceeding pending or, to the
knowledge of Customer, threatened against Customer which might result in any
material adverse change in the business or condition of Customer.
Credit Agreement Cent. ACCT: 455 NOTE: 27247
6. FEES. Customer agrees to pay the following nonrefundable fees as a
condition of access to credit under this Agreement:
(a) / / Commitment fee in the amount of $______________________.
(b) / / Commitment fee in an amount equal to ______% per year of the average
daily unused portion of the Credit Limit from the date of this Agreement
until the Termination Date specified in section 15, payable / /at the
times interest is payable under section 9 / /on the day of each
(c) / / ______________________________________________________________________
7. CAPITAL ADEQUACY. If Lender shall determine that any existing or future law,
rule, regulation, directive, interpretation, treaty or guideline regarding
capital adequacy (whether or not having the force of law) increases or would
increase, from that required on the date of !his Agreement, the amount of
capital required or expected to be maintained by the Lender, or any corporation
controlling Lender, and if such increase is based upon the existence of Lender's
obligations under this Agreement and other commitments of this type, then from
time to time, within ten days after demand from Lender, the Customer shall pay
to Lender such amount or amounts as will compensate Lender for expenses or costs
required to meet such increased capital requirement. For purposes of calculating
the amount of compensation required, Lender, or any corporation controlling
Lender, may conclusively be deemed to have maintained the minimum amount of
capital required on the date of this Agreement, and may base such compensation
on the assumption that Lender (or such corporation) will need to increase its
capital from such minimum amount to the new required amount. The determination
of any amount to be paid by Customer under this section shall take into
<PAGE>
consideration policies of Lender, or any corporation controlling Lender, with
respect to capital adequacy and shall be based upon any reasonable method of
attribution. A certificate of Lender setting forth such amount or amounts as
shall be necessary to compensate Lender as specified in this section shall be
delivered to Customer and shall be conclusive absent manifest error.
8. INTEREST RATE AND OTHER CHARGES. Customer agrees to pay interest to Lender on
the unpaid principal balance outstanding from time to time under this Agreement
[Check (a) or (b); only one shall apply.]:
(a) / / At the rate of ______% per year.
(b) / / X At a rate per year equal to 2.500 percentage points over the 30 DAY
LIBOR ("Index Rate"). The Index Rate may or may not be the lowest rate
charged by Lender. Any change in the interest rate resulting from a change in
the Index Rate shall become effective without notice to Customer as of the
day on which such change in the Index Rate becomes effective. A change in the
interest rate will apply both to the outstanding principal balance and to new
Loans. If the Index Rate ceases to be made available to Lender during the
term of this Agreement, Lender may substitute a comparable index. INITIAL
NOTE RATE IS 8.188%
Interest under (a) or (b) is computed on the basis of the actual number of days
the principal balance s unpaid based upon a year of / /360 days, / / 365 days.
If any payment (other than the final payment) is not made on or before the ***
day after its due date, Lender may collect a delinquency charge of ***% of the
unpaid amount. Unpaid principal and interest bear interest after maturity
(whether by acceleration or lapse time) until paid at the rate / / which would
otherwise be applicable plus 4 percentage points / /of _______% per year,
computed on the same basis.
9. PAYMENT SCHEDULE. Customer agrees to pay to Lender the unpaid principal
balance and interest as follows: [Check (a), (b), (c) or (d); only one shall
apply.]
(a) / / In one payment on the Termination Date specified in section 15.
(b) /X/ In payments of interest, beginning 05/31/1998 ,and on the same day of
each CONSECUTIVE month thereafter, plus a final payment of unpaid principal and
interest due on the Termination Date specified in section 15.
(c) / / In installments each equal to _______% of the unpaid principal
balance, plus interest, beginning ________ and on the same day of each
_______ month thereafter, plus a final payment of unpaid principal and
interest due on the Termination Date specified in section 15.
(d) / / ______________________________________________________________________
In addition, Customer shall immediately pay any amount by which the Loans exceed
the Credit Limit or the Borrowing Base established under section 2, if any, and
any prior unpaid payments. Lender is authorized to automatically charge payments
due under this Agreement to any account of Customer with Lender, if payments are
not automatically charged to Customer's account, payments must be made to the
Lender at its address shown above and are not credited until received in
Lender's office. Lender is authorized to make book entries evidencing Loans and
payments under this Agreement and the aggregate unpaid amount of all Loans as
evidenced by those entries is presumptive evidence that those amounts are
outstanding and unpaid to Lender.
*** See late charge clause on page 6
10. COVENANTS. Customer shall, so long as any amounts remain unpaid, or Lender
has any commitment to make Loans under this Agreement:
(a) Furnish to Lender, as soon as available, such financial information
respecting Customer as Lender from time to time requests, and without request
furnish to Lender:
(i) Within 120 days after the end of each fiscal year of Customer a balance
sheet of Customer as of the close of such fiscal year and related statements of
income and retained earnings and cash flow for such year all in reasonable
detail and satisfactory in scope to Lender, prepared in accordance with
generally accepted principles of accounting applied on a consistent basis,
certified by / / an independent certified public accountant acceptable to Lender
/ /the chief financial representative of Customer, and
(ii) Within 30 days after the end of each THIRD month a balance sheet of
Customer as of the end of such month and related statements of income and
retained earnings and cash flow for the period from the beginning of the fiscal
year to the end of such month, prepared in accordance with generally accepted
principles of accounting applied on a consistent basis, certified, subject to
normal year-end adjustments, by an officer or partner of Customer.
(b) Keep complete and accurate books of records and accounts and permit any
representatives of Lender to examine and copy any of the books and to visit and
inspect any of Customer's tangible or intangible properties as often as desired.
(c) Maintain insurance coverage in the forms (together with any lender's loss
payee clause requested by Lender), amounts and with companies which would be
carried by prudent management in connection with businesses engaged in similar
activities in similar geographic areas. Without limiting this section or the
requirements of any Security Document, Customer will [i] keep all its physical
property insured against fire and extended coverage risks in amounts and with
deductibles at least equal to those generally maintained by businesses engaged
in similar activities in similar geographic areas, [ii] maintain all such
workers' compensation and similar insurance as may be required by law and [iii]
maintain, in amounts and with deductibles at least equal to those generally
maintained by businesses engaged in similar activities in similar geographic
areas, general public liability insurance against claims for bodily injury,
death or property damage occurring on, in or about the properties of Customer,
business interruption insurance and product liability insurance.
<PAGE>
(d) Pay and discharge all lawful taxes, assessments and governmental charges
upon Customer or against its properties prior to the date on which penalties
attach, unless and to the extent only that such taxes, assessments and charges
are contested in good faith and by appropriate process by Customer.
(e) Do all things necessary to maintain its existence, to preserve and keep in
full force and effect its rights and franchises necessary to continue its
business and comply with all applicable laws, regulations and ordinances.
(f) Timely perform and observe the following financial covenants, all calculated
in accordance with generally accepted principles of accounting applied on a
consistent basis:
(i) / / Maintain at all times an excess of current assets over
current liabilities of not less than $___________________
(ii) / / Maintain at all times a tangible net worth of not less
than $_____________________
(iii) / / Not make any expenditures for fixed or capital assets which
would cause the aggregate of all such expenditures to
exceed $ _________________ during any fiscal year.
(iv) / / Maintain at all times a ratio of current assets to current
liabilities of not less than to one.
(v) / / Maintain at all times a ratio of total liabilities to
tangible net worth of not greater than to one.
(vi) / / ___________________________________________________________
(g) Furnish to Lender the Borrowing Base Certificates required under Exhibit A,
if any.
(h) Not create or permit to exist any lien or encumbrance with respect to
Customer's properties, except liens in favor of Lender, liens for taxes if they
are being contested in good faith by appropriate proceedings and for which
appropriate reserves are maintained, liens or encumbrances permitted under any
Security Document and
(if left blank, to other permitted liens or encumbrances)
(i) Not take any action or permit any event to occur which materially impairs
Customer's ability to make payments under this Agreement when due. Such events
include, without limitation, the fact that Customer, Customer's spouse or any
surety for Customer's obligations under this Agreement ceases to exist, dies,
changes marital status or domicile or becomes insolvent or the subject of
bankruptcy or insolvency proceedings.
(j) Timely perform all duties and responsibilities imposed on Customer under
Section 5(h).
(k) / / Unless otherwise consented to in writing by Lender, timely perform and
observe all additional covenants described on Exhibit C.
11. SECURITY INTEREST. This Agreement is secured by all existing and future
security agreements, assignments and mortgages from Customer to Lender, from any
guarantor of this Agreement to Lender, and from any other person to Lender
providing collateral security for Customer's obligations, and payment of the
Loans may be accelerated according to any of them. However, if Customer is a
natural person, and unless checked here / / Lender disclaims as security for
this Agreement any existing or future first lien mortgage or equivalent security
interest Lender may have on a 1-4 family dwelling used as Customer's principal
place of residence. Unless a lien would be prohibited by law or would render a
nontaxable account taxable, Customer also grants to Lender a security interest
and lien in any deposit account Customer may at any time have with Lender.
Lender may at any time after the occurrence of an event of default set-off any
amount unpaid under this Agreement against any deposit balances or other money
now or hereafter owed to Customer by Lender.
12. DEFAULT AND ACCELERATION. Upon the occurrence of any one or more of the
following events of default: (a) Customer fails to pay any amount when due under
this Agreement or under any other instrument evidencing any indebtedness of
Customer, (b) any representation or warranty made under this Agreement or
information provided by Customer in connection with this Agreement is or was
false or fraudulent in any material respect, (c) a material adverse change
occurs in Customer's financial condition, (d) Customer fails to timely observe
or perform any of the covenants or duties contained in this Agreement, (a) any
guaranty of Customer's obligations under this Agreement is revoked or becomes
unenforceable far any reason or any such guarantor dies or ceases to exist, or
(f) an event of default occurs under any Security Document;
then, at Lender's option, and upon written or verbal notice to Customer,
Lender's obligation to make Loans under this Agreement shall terminate and the
total unpaid balance shall become immediately due and payable without
presentment, demand, protest, or further notice of any kind. all of which are
hereby expressly waived by Customer. Lender's obligation to make loans under
this Agreement shall automatically terminate and the total unpaid balance shall
automatically become due and payable in the event Customer becomes the subject
of bankruptcy or other insolvency proceedings. Lender may waive any default
without waiving any other subsequent or prior default. Customer agrees to pay
Lender's costs of administration of this Agreement. Customer also agrees to pay
all costs of collection before and after judgment, including reasonable
attorneys' fees (including those incurred in successful defense or settlement of
any counterclaim brought by Customer or incident to any action or proceeding
involving Customer brought pursuant to the United States Bankruptcy Code).
13. INDEMNIFICATION. Customer agrees to defend, indemnify and hold harmless
Lender, its directors, officers, employees and agents, from and against any and
all loss, cost, expense, damage or liability (including reasonable attorneys'
fees) incurred in connection with any claim, counterclaim or proceeding brought
as a result of, arising out of or relating to any transaction financed or to be
financed, in whole or in part, directly or indirectly, with the proceeds of any
Loan or the entering into and performance of this Agreement or any document or
instrument relating to this Agreement by Lender or the activities of Customer.
This indemnity will survive termination of this Agreement, the repayment of all
Loans and the discharge and release of any Security Documents.
14. VENUE. To the extent not prohibited by law, venue for any legal proceeding
relating to enforcement of this Agreement shall be, at Lender's option, the
county in which Lender has its principal office in this state, the county in
which Customer resides, or the county in which this agreement was executed by
Customer.
15. TERMINATION. Unless sooner terminated under section 12, Customer's right to
obtain Loans and lender's obligation to extend credit under this Agreement shall
terminate on APRIL 30, 1999 (the "Termination Date"). Customer may terminate
Customer's right to obtain Loans under
<PAGE>
this Agreement at any time and for any reason by written notice to the
lender. Such notice of termination signed by a Customer shall be binding on
each Customer who signs this Agreement. Termination, for whatever reason,
does not affect Lender's rights, powers and privileges, nor Customer's duties
and liabilities, with regard to the then existing balance under this
Agreement.
16. AMENDMENT. No amendment, modification, termination or waiver of any
provision of this Agreement shall in any event be effective unless it is in
writing and signed by Lender, and then such waiver or consent shall be
effective only in the specific instance and for the specific purposes for
which given.
17. ENTIRE AGREEMENT. This Agreement, including the Exhibits attached or
referring to it, and the Security Documents, are intended by Customer and
Lender as a final expression of their Agreement and as a complete and
exclusive statement of its terms, there being no conditions to the full
effectiveness of this Agreement except as set forth in this Agreement and the
Security Documents.
18. NO WAIVER; REMEDIES. No failure on the part of Lender to exercise, and no
delay in exercising, any right, power or remedy under this Agreement shall
operate as a waiver of such right, power or remedy; nor shall any single or
partial exercise of any right under this Agreement preclude any other or
further exercise of the right or the exercise of any other right. The
remedies provided in this Agreement are cumulative and not exclusive of any
remedies provided by law.
19. MORE THAN ONE CUSTOMER. If more than one person signs this Agreement as
Customer, Lender may at its option and without notice refuse any request for
a Loan upon notice from any of the undersigned. Any of the undersigned
Customers may request Loans under this Agreement. Each of the undersigned
Customers is jointly and severally liable for all Loans and other obligations
under this Agreement.
20. NOTICE. Except as otherwise provided in this Agreement, all notices
required or provided for under this Agreement shall be in writing and mailed,
sent or delivered, if to Customer, at any Customer's last known address as
shown on the records of Lender, and if to Lender, at its address shown below,
or, as to each party, at such other address as shall be designated by such
party in a written notice to the other party. All such notices shall be
deemed duly given when delivered by hand or courier, or three business days
after being deposited in the mail (including any private mail service),
postage prepaid, provided that notice to Lender pursuant to section 15 shall
not be effective until received by Lender.
21. ADDRESS. Customer's address is shown below. Customer shall immediately
notify Lender in writing of any change of address.
22. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to
the benefit of Lender and Customer and their respective heirs, personal
representative, successors and assigns except that Customer may not assign or
transfer any of Customer's rights under this Agreement without the prior
written consent of Lender.
23. INTERPRETATION. The validity, construction and enforcement of this
Agreement are governed by the internal laws of Wisconsin. Invalidity of any
provision of this Agreement shall not effect the validity of any other
provisions of this Agreement.
24. OTHER PROVISIONS. (If none stated, there are no other provisions.)
Dated as of April 30, 1998
M&I BANK (SEAL) THE CHROMALINE CORPORATION (SEAL)
- ----------------------------- ----------------------------------
(Name of Lender) (Name of Customer)
By Todd Fedora RICHARD G. BOURMAN
--------------------------------- ----------------------------------
VICE PRESIDENT (SEC/TREAS)
- ------------------------------------ ----------------------------------
1425 TOWER AVENUE 4832 GRAND AVE
- ------------------------------------ ----------------------------------
SUPERIOR, WI 54880 DULUTH MN 55807
- ------------------------------------ ----------------------------------
(Address) (Address)
LATE CHARGE
If any payment is not paid on or before the 20th day after it is due, late
payment charge of 2/10 of 1% of the note on the 20th day will be charged, but in
no event shall such charge be less than $1. Any payment received after the 20th
day after its due date shall be applied first to the late charge, then to
interest, and the remainder, if any, to the outstanding principal balance of the
note.
ACCOUNT NUMBER: 455
NOTE NUMBER: 27247
JN
<PAGE>
EXHIBIT B
TO
REVOLVING CREDIT AGREEMENT (WBA 448R)
DATED APRIL 30, 1998
SECURITY DOCUMENTS (SECTION 3 (A))
/ / General Business Security Agreement.
/X/ Selective Business Security Agreement covering INVENTORY AND ACCOUNTS
RECEIVABLE
/ / Chattel Security Agreement covering ___________________________________
______________________________________________________________________________
/ / Collateral Pledge Agreement together with
/ / Certificates representing _____________ shares of the voting
common stock of ____________________________ endorsed in blank or
accompanied by signed stock powers.
/ / Other (specify) _________________________________________________
/ / Agreement to Deliver __________________________________________________
______________________________________________________________________________
/ / Mortgage an real estate located at ____________________________________
______________________________________________________________________________
/ / Real Estate Security Agreement on real estate located at ______________
______________________________________________________________________________
/ / Fixtures Disclaimer(s) by _____________________________________________
______________________________________________________________________________
/ / Assignment of life insurance policy in the amount of $_____ on life of
_________________________________________ by _________________________________
/ / MVD-1 forms covering ________________________ accompanied by
appropriate title certificates.
/ / Debt Subordination Agreement by _______________________________________
______________________________________________________________________________
/ / Real Estate Mortgage Subordination Agreement by _______________________
______________________________________________________________________________
/ / Security Interest Subordination Agreement by __________________________
______________________________________________________________________________
/ / Other (specify): ______________________________________________________
______________________________________________________________________________
APPROVED
For Lender by Todd Fedora VICE PRESIDENT
For Customer by RICHARD G BOURMAN SEC/TREAS
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 274,757
<SECURITIES> 508,445
<RECEIVABLES> 1,414,411
<ALLOWANCES> 14,400
<INVENTORY> 1,255,192
<CURRENT-ASSETS> 3,651,615
<PP&E> 3,879,396
<DEPRECIATION> 2,455,816
<TOTAL-ASSETS> 5,260,643
<CURRENT-LIABILITIES> 400,810
<BONDS> 0
0
0
<COMMON> 117,831
<OTHER-SE> 4,742,002
<TOTAL-LIABILITY-AND-EQUITY> 5,260,643
<SALES> 9,289,328
<TOTAL-REVENUES> 9,317,951
<CGS> 4,193,050
<TOTAL-COSTS> 7,945,420
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,372,531
<INCOME-TAX> 492,000
<INCOME-CONTINUING> 880,531
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 880,531
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.75
</TABLE>
