U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee Required)
For the fiscal year ended December 31, 1995.
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)
For the transition period from _______________ to _______________.
Commission File No. 2-85984C
North Atlantic Technologies, Inc.
(Name of small business issuer in its charter)
Minnesota 41-1390785
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8120 Penn Avenue South, Suite 435, Bloomington, MN 55431
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (612) 888-8553.
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under to Section 12(g) of the Exchange Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year. $3,684,001.
Aggregate market value of the voting stock held by non-affiliates as
of February 15, 1996. $53,656
Number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. 3,292,689 common shares as of 2/15/96
INDEX
PART I.................................................................. 1
Item 1 - DESCRIPTION OF BUSINESS............................... 1
Item 2 - DESCRIPTION OF PROPERTY............................... 7
Item 3 - LEGAL PROCEEDINGS..................................... 8
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS... 8
PART II................................................................. 9
Item 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................... 9
Item 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS.................. 9
Item 7 - FINANCIAL STATEMENTS..................................13
Item 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................13
PART III................................................................13
Item 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT.........................................13
Item 10 - EXECUTIVE COMPENSATION...............................15
Item 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................16
Item 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......18
Item 13 - EXHIBITS AND REPORTS ON FORM 8-K.....................19
SIGNATURES..............................................................23
INDEX TO EXHIBITS.......................................................F-1
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
General
North Atlantic Technologies, Inc. (the "Company") is engaged primarily
in the business of developing, designing, manufacturing and marketing heat
recovery systems. These systems are used to heat air or other gases for the
purpose of increasing the efficiency of industrial furnaces, dryers, thermal
oxidizers, boilers, process heaters and environmental treatment systems. The
benefits derived by the use of heat recovery systems include reduced energy
costs, improved production rates, and more consistent process operation. Major
markets include utilities, chemical, petroleum, food, paper and metals
industries.
The principal component of the heat recovery system is the heat
exchanger, which is marketed by the Company under the trade name Open Channel
Air Preheater (the "OCAP"). The OCAP heat exchanger is based on a patented
design developed by two founders of the Company. The Company purchased these
patent rights from the two founders in 1990.
The Company was organized and incorporated in Minnesota on June 30,
1980, and began conducting business of a material nature in January 1981. Since
July 1982, when it sold its first OCAP heater exchanger unit, the Company has
shipped over 900 heat recovery systems to clients in the United States, Canada,
Europe, South America, Africa and the Pacific Rim.
On February 1, 1996 the Company filed a petition for reorganization
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court, District of Minnesota. The Company will act as debtor in
possession in the case and no trustee has been appointed. While current backlog
and cash flow where adequate for ongoing operations, funds were insufficient to
repay $1,993,000 in Subordinated Debentures that became due in November 1995.
The Company anticipates emergence from Chapter 11 during the second quarter of
1996. See "LEGAL PROCEEDINGS" and Notes 1 and 12 to the Company's Financial
Statements.
Heat Recovery Applications
Most industrial processes, such as those found in the production of
energy, chemicals, plastics, papers, metals and food products require the
heating of raw materials. The heat required in these processes is provided by
the combustion of hydrocarbons, such as natural gas, oil, coal, wood and common
refuse.
In order to sustain combustion, both the fuel and air must be
maintained at a "kindling temperature." Since the air used for combustion is
drawn into the process from the surrounding area and is at the ambient
temperature, it must be heated by the combustion process in order to reach this
"kindling temperature." The fuel that is consumed in order to bring this air up
to the kindling temperature is essentially wasted. Coincidentally, the exhaust
gases from combustion that exit the smoke stack are often quite hot. This "heat"
is not only "wasted," it may contribute to environmental hazards as well.
An air preheater is a heat exchanger which permits the exchange of heat
between the hot exhaust gases of the combustion process and the incoming
combustion air, without mixing the two fluids. In this manner, the incoming air
used in the combustion process is heated, reducing the amount of energy
necessary to bring the air up to kindling temperature, and stack gas temperature
is lowered.
Environmental Applications
Heat exchangers are often an integral part of processes to remove or
treat hazardous or toxic emissions. Heat exchangers may be used to preheat
hazardous or toxic fumes which are removed by a combustion process, which
reduces the amount of fuel needed to cause such combustion. In larger
applications, the process frequently requires the use of catalytic absorption of
the unwanted materials. Heat exchangers are used to maintain gas temperatures at
optimum levels and in the regeneration of the catalysts. Heat exchangers which
transfer heat from exhaust gases to a liquid (water to a boiler, crude oil to a
refinery heater, etc.) are referred to as "economizers," and those which
transfer heat between exhaust gases to air are known as "preheaters."
Various Heat Exchanger Designs
Some of the types of heat exchangers referred to herein are described
as follows:
A. Plate - Normally comprised of steel or cast iron plates bolted
or welded together to form channels. The heat from the exhaust
gas flowing through one channel is transferred to the fluid
(usually air) passing through an adjacent channel.
B. Tubular - A chamber containing many metal or glass tubes. The
exhaust gases pass through the tubes and heat the surrounding
fluid.
C. Heat Pipe - Similar to the tubular design except that the
tubes (pipes) contain a heat transfer medium such as water or
glycol which when vaporized by the heat from exhaust gas moves
through the section of the pipe housed in the exhaust gas
stream to the section of the pipe housed in the incoming air
stream.
D. Heat Wheel - A corrugated metal plate wheel which rotates
within a divided chamber. The metal plate absorbs heat from
the exhaust gas flowing out through one chamber and transfers
heat to the air flowing into the other chamber.
The OCAP Air Preheater
The OCAP heat exchanger is a plate type heat exchanger with rectangular
metal plates of stainless, carbon, specialty or enamel coated steel. They are
assembled in layers, similar to all other plate type heat exchangers, with the
exception that no bolts or welds are used to fasten the plates together. This
design also allows for thermal expansion and contraction under a wide
temperature range without plate deformation or seam cracking. Welding or bolting
of corrosion-resistant materials, such as stainless steel, often destroys the
ability of those materials to resist corrosion at the points of welding or
bolting. Since the plates are not connected with welds or bolts, they can be
constructed of various corrosion-resistant materials and reduce the number of
points for potential corrosion.
The OCAP heat exchanger is also significantly lighter in weight and
smaller in volume than many other heat exchanger designs of the same transfer
capacity. This reduces the amount (and cost) of structural materials (and
foundation) required to mount and support the unit. As an added benefit, the
lighter weight also permits the mounting of the OCAP heat exchanger in the
convection section of the stack, thereby reducing the duct work (and associated
cost) required for operation.
The Heat Exchanger Market
The market for industrial heat exchangers may best be understood if
segmented into three temperature categories.
A. Low Temperature - below 300(degree) F (150(degree)C). Usually
found on process dryers (commonly in the food industry).
At low temperatures, sulphur-bearing compounds in fuel combine
with water vapor to form corrosive sulfuric acid. The ability
to incorporate corrosive resistant steel in the design of the
OCAP heat exchanger allows the product to be used in low
temperature applications. However, this market segment is also
the most sensitive to energy cost volatility. Installations in
this segment also tend to be smaller in dollar value than
other market segments.
Approximately 5% the Company's sales were made in this market
in 1995 and 10% and 20% in 1994 and 1993, respectively.
B. Mid-temperature - 300(degree) to 1000(degree)F (540(degree)C).
Usually found on utility boilers, process heaters and furnaces
in the chemical, petrochemical and oil refining markets.
This segment of the market represented approximately 76%, 77%
and 58% of the Company's sales in 1995, 1994 and 1993,
respectively. The public utility market has been flat for
several years, and the petrochemical/oil refining market has
been faced with excess capacity world wide. In addition,
customers in this market segment tend to be more conservative
and see a wide choice of heat exchanger suppliers. However,
major plant renovations are now being undertaken in this
mid-temperature segment which offers the Company a significant
market potential.
C. High temperature - 100(degree)-2000(degree)F (1100(degree)C).
Used on smelters kilns, furnaces and incinerators.
Approximately 19%, 13% and 22% of the Company's sales in 1995,
1994 and 1993, respectively, were in this market. The OCAP
heat exchanger has been successfully applied to temperatures
of 1600(degree)F (870(degree)C), which is above the normal
high limits of the tubular type exchangers commonly utilized
in these applications. The Company continues its limited
research and development activities in an attempt to bring the
temperature limit to 2000(degree)F (1100(degree)C). The
Company's management believes that it is important to expand
the Company's business base in the fume incinerator industry
which serves the growing environmental market.
Marketing
MARKET STRATEGY
The Company directs its activities to the mid-range market with
emphasis on the petrochemicals/oil refining industry and utilities, both of
which have a longer range view of energy conservation. Specific attention is
being given to replacement and environmental applications.
ASSOCIATION PARTICIPATION
The Company attends certain relevant trade conferences and has been a
member of the American Boiler Manufacturers Association (ABMA), American
Petroleum Institute (API), the Minnesota Employers Association and the Minnesota
Chamber of Commerce.
ADVERTISING AND PROMOTIONAL MATERIALS
Marketing materials provided to customers for both business promotion
and technical documentation have been developed and are distributed on a regular
basis. Since most sales of the Company's products are conducted through a
limited number of identified engineering firms, the Company has not seen the
need to engage in media advertising. The Company has, in the past, engaged a
public relations firm to obtain media coverage on Company activity, and may
utilize such services from time to time in the future. The Company participates
in selected industrial trade shows and symposiums.
Sales Activity
The Company markets its products throughout the world, primarily
through its own sales personnel, licensees and 31 independent sales
representatives (see "Human Resources" below). Aside from generating sales
leads, the Company's sales personnel follow up on sales leads provided by
independent sales representatives, providing such representatives with designs
and bid proposals, and may assist such representatives in closing sales. The
Company operates a sales office in Houston, Texas to better serve the
petrochemical market. The Company's sales representatives are compensated on a
salary and incentive bonus basis. In 1993, 1994 and 1995, respectively,
approximately 90%, 83% and 67% of the Company's sales involved independent sales
representatives. A computerized design system and automated proposal system
generates bid proposals for customers.
The lead time between initial contact with a potential customer and the
receipt of an order for a heat recovery system may vary significantly, but
generally ranges from three to eighteen months. Heat recovery systems are highly
engineered products and sold on the basis of a proposal specific to the
customer's design requirements.
The cost of an OCAP heat exchanger varies substantially depending on
its size, materials of construction and labor requirements. In addition, the
Company is often called upon to supply auxiliary "metal work" as part of the
system. The selling price range of an OCAP heat exchanger can range from $20,000
to $1,000,000, with the average sale price of slightly more than $100,000.
During 1995, Ahlstrom Pyropower and Babcock & Wilcox accounted for 14%
and 10% of the Company's sales respectively. No other clients represented 10% or
more of the Company's revenues for the year. In 1994 Kinetics Technology
International and Lentjes accounted for 28% and 10% of the Company's business,
while in 1993 Wisconsin Electric Power accounted for 21% of the Company's sales.
In addition, 20% of the Company's sales in 1995 have been for international
destinations as compared to 35% in 1994, and 21% in 1993.
Backlog
As of December 31, 1995, the Company had orders for 11 heat recovery
systems totalling $1,721,000, all of which are expected to be delivered in 1996.
This compares with 16 unshipped systems totalling $2,227,000 at the end of 1994
and 18 unshipped systems totalling $2,476,000 at the end of 1993. As of February
10, 1996 the Company's backlog was $2,434,000.
Product Warranties, Guarantees and Product Liability Insurance
The Company ordinarily guarantees the performance of each heat recovery
system for a period of one year after start-up, or eighteen months after
shipment, whichever occurs first. During this warranty period, the Company will
fix or replace any defective parts of the heat recovery system it manufactures.
These guarantees present a continuing and contingent liability to the Company
for which the Company has established a reserve in the Company's financial
statements which is identified as "warranty reserve." In 1995, the Company
expended $43,000 to cure design problems in five OCAP heat exchangers, while
$633,000 and $58,000 was expended on warranty claims in 1994 and 1993,
respectively. The Company does not anticipate incurring any substantial warranty
costs in 1996, although such warranty costs could be incurred. The Company has a
warranty reserve of $200,000 as of December 31, 1995 for such purposes. The
Company maintains product liability insurance with respect to its heat recovery
systems. This insurance indemnifies the Company for up to $4,000,000 of
liability for damages resulting from the Company's product.
Licensing and Other Arrangements
The Company has entered into agreements licensing the following
organizations in the manufacturing and marketing of OCAP heat exchangers in the
territories specified:
<TABLE>
<CAPTION>
Licensee Term Territory Covered
-------- ---- -----------------
<S> <C> <C>
Lentjes/Lurgi October 1991 Exclusive right to manufacture and market
Gruppe AG through in Germany based on designs provided by
Dusseldorf, October 1996 the Company. Non-exclusive rights to
Germany market in the E.C./Euro-Asia markets with
exception of U.K.
Sumitomo Heavy September 1984 Exclusive right to manufacture and market
Industries, Ltd. through in Japan. Non-exclusive right to market
Tokyo, Japan September 1999 in all countries, but the United States, Canada,
Mexico, South Africa, Australia and Europe.
</TABLE>
The Company's agreement with Lentjes AG of Dusseldorf, Germany allows
Lentjes to sell, assemble and install OCAP heat exchangers based on system
designs provided by the Company. The Company receives a design fee for each
system and produces some key components for sale to Lentjes for those systems as
well. No sales or design fees were realized from the agreement in 1993. In 1994,
two systems sold by Lentjes accounted for $749,433 in sales and $372,234 in
design fees. In 1995, Lentjes purchased $130,000 in components for a 1994
project.
The agreement with Lentjes has an initial term of five years commencing
October 31, 1991, and thereafter is automatically renewed for additional one
year periods unless either party gives the other at least 60 days prior written
notice of termination. The agreement may be terminated prior to the expiration
of its term upon the occurrence of certain specified events.
During 1995, The Lentjes Group was sold for the second time in three
years, this time to Voest Alpine of Austria. The transitions have been
difficult, and relationships between all parties are strained. The Company is
negotiating with Lentjes on $239,000 of accounts receivables and insurance
claims, net of related accounts payable, which have been due and unpaid for
approximately one year. The Company does not anticipate future revenues under
the agreement.
The Company may not unreasonably withhold permission to permit the
marketing of the OCAP heat exchangers by Sumitomo Heavy Industries, Ltd.
("Sumitomo") throughout the world in territories outside of those specifically
permitted under its license agreement. The Company received royalties totaling
$10,000 from Sumitomo in 1995 and $ 22,720 and $5,036 in 1994 and 1993,
respectively. Sumitomo is obligated to pay a royalty to the Company based upon
the net sales price of OCAP heat exchangers sold by them. Depending upon such
factors as the year of a sale and the amount of previous sales in the year of
sale, the royalty due the Company may range from 3% to 6% of the net sales price
of an OCAP heat exchanger. There can be no assurance that significant sales of
the OCAP heat exchanger will be generated by Sumitomo in the future.
Competition
The Company competes with a large number of organizations which design,
manufacture and market heat exchangers, some of which are better known and have
significantly more capital than the Company and offer heat exchanger technology
which has an extended performance history. In the high temperature range market,
these competitors include Struthers Wells Corporation based in Warren,
Pennsylvania; Smith Engineering Co. based in Duarte, California; and American
Schack Co., Inc. based in Pittsburgh, Pennsylvania; all of which manufacture
primarily tubular type heat exchangers, GTE-Sylvania based in Towanda,
Pennsylvania, which manufactures a ceramic matrix-type heat exchanger and
Exothermics Division of Eclipse based in Toledo, Ohio which makes a welded plate
heat exchanger.
In the mid-temperature range market, the competitors include Combustion
Engineering, Inc. of Wellsville, New York; Balcke Durr (a subsidiary of Deutche
Babcock in Germany); and Bicast S.A., Brussels, Belgium; all of which
manufacture primarily cast iron plate, heat pipe or heat wheel-type heat
exchangers. The mid-temperature range is the largest market for the Company, and
presents the greatest competition. Where cast iron plate type heat exchangers
may be used, the Company is unable to compete on the basis of price. The utility
industry has traditionally used wheel-type heat exchangers, and although the
Company believes that its technology is superior in many instances to that
presented by the heat wheel, the heat wheel has been used reliably in the
utility industry for more than 50 years.
Finally, in the low temperature range market, the competitors include
CHX Corporation based in Latham, New York; Corning Glass Works, Inc. based in
Corning, New York; Anderson 2000 Inc. based in Atlanta, Georgia; and Air
Frohlich Energy Recovery, Inc. based in Minneapolis, Minnesota (United States
office); all of which manufacture primarily tubular type heat exchangers. While
the competitors named above are currently the only significant competing
organizations known to the Company's management, there may be other significant
competing organizations which are unknown to management.
The Company and its competitors compete in the global marketplace by
differentiating products in price, quality and service. The Company's share of
the heat recovery system market is less than 10%. Despite cyclical trends in the
industry, the Company has maintained its market share over the past several
years.
Manufacturing, Suppliers and Installation
The Company manufactures its OCAP heat exchanger at its fabrication and
assembly facility located in St. Paul, Minnesota. The manufacture of the OCAP
heat exchanger involves primarily the cutting and bending of sheet metal plates,
the fabrication of frame members, and the assembly of those plates in a stack
within a frame, supported and cushioned by springs. The OCAP heat exchanger
plates and other parts are fabricated from metals, such as carbon steels and
stainless steel. In addition, such plates and other parts may be coated to
prevent corrosion with such materials as vitreous enamel. The materials used in
the manufacture of the OCAP heat exchanger are currently available from a number
of sources. The filing of a plan of reorganization under Chapter 11 of the
United States Bankruptcy Code has not materially diminished the Company's
ability to obtain needed manufacturing materials. See "Item 3 - LEGAL
PROCEEDINGS." Although the Company has not experienced any difficulties or
delays in obtaining carbon steel and stainless steel from several local
suppliers, there can be no assurance that such materials required in the
manufacture of the OCAP heat exchanger will be readily available when required
in the future. The Company generally purchases manufacturing materials with
respect to each OCAP heat exchanger to be manufactured, and maintains only a
moderate inventory of such materials. The Company manufactures its OCAP heat
exchanger only on the basis of a firm customer order.
The installation of a heat recovery system requires the construction
and installation of items ancillary to the OCAP heat exchanger, including a
supporting structure, as well as ductwork and fans used to channel the air and
exhaust gases through the heat exchanger. This ancillary structure and equipment
is often more costly than the OCAP heat exchanger itself. The construction of
such ancillary structure and equipment is contracted for by either the Company
or by the customer. In addition, the customer contracts with a third party for
the on-site installation of the heat recovery system. The Company provides such
engineering or supervisory assistance as may be requested by the customer in
connection with an installation.
After receipt of an order for an OCAP heat exchanger, the Company
prepares and submits general arrangement drawings to the customer which are
normally approved by the customer within 30 days following receipt of the order.
Most OCAP heat exchangers can be manufactured and ready for delivery within 180
days following approval of such drawings, assuming there are no unusual delays
in obtaining needed materials. Large heat recovery systems may take a
substantially longer time to manufacture.
Environmental Regulation
The Company's operations are subject to various federal and state
environmental regulations. The Company complies with these regulations by
engaging certified waste disposal firms to dispose of paint solvents.
The cost of this disposal is minimal.
Patents
The OCAP heat exchanger design is covered by three patents; United
States Patents 4,308,915 issued January 5, 1982, 4,442,886 issued April 17,
1984, and 4,596,285 issued January 24, 1986. These patents cover several
features relating to the configuration of the heat exchanger and heat exchanger
plates, and relating to certain designs which provide seals between the plates
and at the corners of the heat exchanger. Based upon the April 17, 1984 United
States Patent, the Company has obtained patents in Canada, India, Australia,
Europe, Brazil, Taiwan, South Africa and Japan. Patent number 4,308,915 was
originally issued in the name of Horia Dinulescu, but was assigned to the
Company in June, 1990 when the Company exercised its option to purchase the
patent and all other rights to the OCAP heat exchanger. Patent number 4,308,915
expires in 1999. Patent numbers 4,442,886 and 4,956,285 were issued in the name
of the Company and expire in 2001 and 2003, respectively. There is no assurance
that any of the foregoing patents will provide the Company with any material
commercial protection preventing others from copying the Company's OCAP heat
exchanger design.
The Company has assigned each of these patents to Willis D. Heim, a
former Director, and beneficial owner of more than 5% of the Company's common
shares, as security pursuant to the terms of an accommodation security agreement
between Mr. Heim and the Company dated April 13, 1990.
Engineering/Research and Development
Each OCAP heat exchanger manufactured by the Company is custom designed
and manufactured. Prior to submitting a proposal for the sale of a heat
exchanger, the Company will engage in preliminary engineering design work to
ascertain the most appropriate design based upon the specifications given.
Design variables include, among others, the area, thickness and number of plates
to be included in the OCAP heat exchanger, and the width of the channel between
the plates. The ultimate design will depend on a significant number of
specification parameters, such as the volume, pressure and velocity of the
exhaust gases, and the temperature ranges of the gases which will flow through
the heat exchanger. Other engineering work, such as the preparation of general
arrangement and production drawings, will generally commence after a purchase
order has been received.
During the past three years the Company expended approximately $256,000
in research and development, approximately $90,000 of which was expended in
1995, $51,200 of which was expended in 1994 and $114,800 of which was expended
in 1993.
Human Resources
As of February 15, 1996 the Company employed 42 full time persons; four
executive officers); six in engineering, research and development; three in
sales and marketing, two in management and administration, and 27 in production.
Forward Looking Statements
The discussions regarding proposed Company developments and operations
included in this annual report on Form 10-KSB contain forward looking statements
that involve a number of risks and uncertainties. In addition to the factors
discussed, among the other factors that could cause actual results to differ
materially are the following: business conditions and growth in the heat
recovery industry and the general economy; existing and future development by
businesses in competition with the Company; regulatory matters; changes in
technologies which affect the Company; acquiring or generating funding necessary
to reduce indebtedness and continue operations; and other risks detailed from
time to time in the Company's reports filed with the Securities and Exchange
Commission.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company's principal offices consist of approximately 4,200 square
feet of office space in a five story building located at 8120 Penn Avenue South,
Bloomington, Minnesota. This space is leased from Southtown Office Park
("Southtown") at a monthly rental of $5,850 and will expire on April 30, 1997.
Willis D. Heim, a former director and beneficial owner of more than 5% of the
Company's common shares, is an affiliate of Southtown. The lease arrangements
with Southtown are on terms the Company believes are as favorable as could have
been obtained in negotiations with independent third parties.
The Company owns 48,000 square feet of manufacturing space plus a
21,000 square foot storage building, a 7,500 square foot office building and the
8.431 acres of land on which these buildings are situated in St. Paul,
Minnesota. The Company leases approximately 2,500 square feet of office space
and 7,000 square feet of excess warehouse space to approximately six tenants,
representing 12% of the total space owned, for $2,900 in monthly rent in the
aggregate. The lease agreements with these tenants vary as to duration and other
terms. In the opinion of management, the Company has obtained adequate insurance
coverage on the property. During the second quarter of 1995, the Company
received a loan in the amount of $500,000 from WDH Investments, a Company owned
by Willis D. Heim, a former director of the Company. The building was used as
collateral for this mortgage. The interest rate is fixed at 12% and payments are
based on a 15-year amortization. Monthly payments in the amount of $6000 are due
until June 19, 2000 when full payment of the principal amount is required. Under
the terms of the mortgage note executed by the Company, the note becomes payable
upon demand if the Company fails to pay any of the Company's indebtedness when
due. The note has been payable upon demand since November 15, 1995 as a result
of the Company's failure to meet its principal and interest payment obligations
arising from the maturation in November 1995 of outstanding subordinated
debentures. The building is depreciated over 20 years, except that leasehold
improvements will be depreciated over 10 years. Both are depreciated using the
straight line method. Property taxes paid in 1995 on the real estate were
$42,423.
ITEM 3 - LEGAL PROCEEDINGS
In June 1994, the Company was named as a third-party defendant in a
lawsuit commenced during July 1993 in the United States District Court, District
of Minnesota by MMT Environmental Services, Inc. ("MMT") against Webcraft
Technologies, Inc. ("Webcraft"). MMT is an original equipment manufacturer that
supplied to Webcraft thermal oxidizers which incorporated the Company's OCAP
heat exchanger. The heat exchanger failed and was replaced by MMT for Webcraft
at a cost of approximately $160,000. MMT has sued Webcraft to recover payment
for the replacement heat exchanger. Webcraft had refused to make such payment.
Webcraft asserted a counterclaim against MMT and instituted a third-party action
against the Company for actual and consequential damages in an amount in excess
of $50,000 resulting from the failure of the heat exchanger and thermal
oxidizers. Webcraft claimed it suffered actual and consequential damages in
excess of $2.4 million as a result of the failure of the thermal oxidizers
purchased from MMT. In the fourth quarter of 1995, the Company reached a
settlement agreement with Webcraft in which the Company provided a replacement
module for a system at a different Webcraft facility at no cost to Webcraft.
Estimated cost of the settlement to the Company, exclusive of amounts expended
to defend the claims, was $15,000. The case is now closed and no further action
is expected.
On February 1, 1996 the Company filed a petition for reorganization
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court, District of Minnesota. The Company will act as debtor in
possession in the case and no trustee has been appointed. While current backlog
and cash flow where adequate for ongoing operations, funds were insufficient to
repay $1,993,000 in Subordinated Debentures that became due in November 1995.
The plan filed with the Court specifies that Debenture holders would receive one
(1) share of common stock for each $1.50 of debenture debt, and one share of
preferred stock with a par value of $0.01 per share for each $100 of debenture
debt. The preferred stock holders will be entitled to receive dividends only if
and when declared by the Board of Directors of the Company. In the event the
Company is liquidated prior to June 30, 1999, the holders of the preferred
shares will be entitled to receive up to (but not more than) $25 per share out
of the assets available for distribution before the holders of common stock get
anything. After June 30, 1999, the preferred shares convert automatically to
shares of common stock. Existing shares of the Company stock will be "reverse
split" on a 1 for 3 basis. All other creditors are to be paid in full. Prior to
the filing, the Company reached agreement with the original underwriter of the
Debentures and the Debenture Trustee to support this plan. All major vendors
agreed to continue to conduct business with the Company on an open account basis
under normal selling terms. The Company anticipates emergence from Chapter 11
during the second quarter of 1996.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matter was submitted by the Company to a vote of its security
holders during the quarter ended December 31, 1995.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common shares are traded over-the-counter. However, the
Company's common shares are not quoted on any exchange or on the NASDAQ system,
and trading of the Company's common shares has been sporadic and limited in
volume. The high and low bid prices for the Company's common shares for each
quarterly period commencing with the quarterly period ended March 31, 1994, and
through December 31, 1995, as provided by Metro Data, a stock price quotation
information bureau in Minneapolis, Minnesota, were as follows:
1995 1994
Low High Low High
March 31 3/8 1/2 1/4 1/4
June 30 .03 13/32 1/8 1/4
September 30 .001 .03 1/4 1/2
December 31 .001 .005 1/8 3/8
The over-the-counter quotations reflect inter-dealer prices without
retail mark-up, mark-down or commissions, and may not necessarily represent
actual transactions. On March 20, 1996, the high bid and low asked prices of the
Company's common stock, as provided by a broker/dealer firm in Minneapolis,
Minnesota, were $0.02 and 3/32, respectively. There were approximately 208
shareholders owning the Company's common shares of record as of December 31,
1995. The Company has not paid any cash dividends with respect to its common
shares and anticipates retaining future earnings to finance operations of the
Company. The payment of dividends by the Company is restricted by the terms of
the indenture relating to the Company's outstanding Subordinated Convertible
Debentures in the face amount of $1,993,000, paying 12 1/2% interest
semi-annually, convertible into an aggregate of 398,600 common shares at $5.00
per share. The Company is currently in default of its repayment obligations
under the Subordinated Debentures. There were approximately 117 debenture
holders of record as of December 31, 1995.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
The Company's financial statements have been prepared on a
going-concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As a result of the
1993, 1994, and 1995 net losses, the Company's financial resources have been
strained. As of December 31, 1995, current liabilities exceed current assets by
$4,515,877 and the Company has a net capital deficiency of $3,667,351. In
addition, on November 15, 1995, the Company defaulted on the payment of
$1,993,000 of subordinated convertible debentures and on February 1, 1996,
(Petition Date) the Company filed a petition for reorganization under Chapter 11
of the United States Bankruptcy Code. These factors, among others, indicate that
the Company may be unable to continue as a going-concern for a reasonable period
of time. The Company's continuation as going-concern is dependent on its ability
to generate sufficient cash flow from operations, renegotiate the maturities of
its debt, obtain conversion of the subordinated debt or obtain additional
financing to meet its obligations on a timely basis, and obtain court approval
for its plan of reorganization. The Company's business is currently dependent on
large projects in the industrial sector. These projects involve long order
cycles, and exact order placement dates are beyond the control of the Company.
While the Company utilizes a progress billing procedure, there are periods of
net cash outflows when cash flow is of concern. During 1995, the Company was
able to manage its normal operating cash flow through the use of internally
generated funds and its established line of credit.
The Company's financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
On February 1, 1996, the Company filed a petition for reorganization
under Chapter 11 of the United States Bankruptcy Code. The Debtor's Plan of
Reorganization, which requires the approval of the Bankruptcy Court, provides
for secured claims (Bank Credit Agreement, Mortgage Note and other obligations)
to be confirmed with their outstanding balances as of February 1, 1996 according
to the same or modified terms of repayment. Unsecured trade creditors are
intended to be paid in full as agreed between the creditors and the Company. The
Plan also has the following provisions, which are subject to court approval:
1. Subordinated Debenture Holders will receive one share of
common stock for each $1.50 owed by the Company. In
addition, each debenture holder will receive one share
of convertible preferred stock at $0.01 par value, with
$25 redemption value for each $100 of debenture debt of
the Company, and
2. Each existing equity holder will be issued one share of
common stock in return for the cancellation of three
shares owned by the shareholder.
The Company's net working capital position decreased by $1,850,252 to a
working capital deficit of ($4,515,877) at December 31, 1995 from ($2,665,625)
at December 31, 1994. A significant factor accounting for the change was the
decrease in work in progress in the amount of $239,943 and a related increase in
customer deposits of $362,622. Also contributing to the change in net working
capital was an increase in the outstanding bank credit line in the amount of
$300,000. At December 31, 1995, the Company had $1,050,000 outstanding on its
line of credit plus approximately $100,000 in certain standby letters of credit
under its current available amount of $1,450,000. As of February 1, 1996, the
full amount available was drawn.
A principal stockholder of the Company has agreed to assist in the
renewal to January 31, 1997 of the line of credit which expired on January 2,
1996, by extending a guarantee of the Company's obligations under the line of
credit. Furthermore, as part of the Company's Plan of Reorganization, he has
agreed to guarantee an additional $200,000 under the line of credit.
There are no assurances that the Company's Plan of Reorganization will
be approved by the Bankruptcy Court or that any further funding will be
available from current sources, or that the current sources will be sufficient.
If these resources are insufficient, other sources of funding would need to be
developed. There are also no assurances that such funding would be available or
that the terms of such funding would be on terms acceptable to the Company.
The Company has also increased its allowance for doubtful accounts by
$249,000 to reflect the uncertain collection of amounts due from a German
customer which were expected to be paid in 1995, and are still under
negotiation.
The Company's accumulated net losses have created a deficiency in
stockholders' equity in the amount of $3,667,351. The Company believes that the
Plan of Reorganization, specifically the conversion of the debentures to equity
and the cancellation of the debenture interest, if such Plan is approved by the
Bankruptcy Court, and the improvement in the global marketplace for its products
will strengthen its position as a going concern.
The Company had no significant commitments for capital expenditures at
December 31, 1995.
Results of Operations
REVENUE AND COSTS
Revenues in 1995 decreased $3,503,554, or 49% to $3,684,001 compared to
$7,187,555 in 1994. Revenues in 1994 increased $2,542,410 or 55% from $4,645,145
in 1993. The growth experienced in the market and by the Company during 1994
resulted in a number of projects being planned for purchase and shipment in
1995. A market reversal beginning in the 4th quarter of 1994 and the first three
quarters of 1995 caused the delay of several million dollars of projects for
which the Company expected orders and revenues for 1995. As a result of this
market slowdown, order demand, and production for much of 1995, was drastically
reduced requiring cutbacks in the Company's manufacturing plant. During the
fourth quarter of 1995, and the first quarter of 1996, a number of these
projects were reactivated and several orders were received for shipment in 1996.
Due to increased order demand at the end of 1995 and teh beginning of 1996, the
Company's operations are now in full production. The increase in revenues in
1994 compared to 1993 was due in part to market growth and results of two
partnering arrangements that the Company had made. During 1995, both of these
partners where acquired by firms that maintained marketing strategies which were
contrary to those of the Company.
Foreign destination sales in 1995 were $729,000 compared to $2,544,799
in 1994 and $978,793 in 1993. As a percentage of total sales, exports
represented 20%, 35%, and 21% in 1995, 1994, and 1993, respectively.
Contributing to the revenue decrease in 1995 were the lack of sales of
heat exchanger components to Lentjes Anlagen, a large German engineering and
construction company with which the Company had a partnering arrangement which
included marketing and manufacturing licenses. Lentjes was acquired by an
Austrian firm, and relations between the Company and firm are strained. In 1995,
the Company realized $130,000 in revenues associated with its partnering
activities with Lentjes as compared to $1,121,656 in 1994.
Gross profit margins have declined from 24% in 1993, 21% in 1994, and
to 10% in 1995. The decline from 1993 to 1994 is attributed to competitive
market pricing encountered as a result of the down cycle in 1993, efforts by
competitors to gain market share and a significant increase in warranty expense.
In 1995, margins declined dramatically due principally to lower volume through
the plant causing increases in overhead rates to absorb fixed costs.
Warranty expenses in 1995 were $43,000 compared to $633,000 in 1994,
and $58,000 in 1993. In 1994, the Company suffered a large claim by a German
client in the amount of $534,000. Of this total, it is believed that
approximately $208,000 is covered by an insurance policy. To date, the Company
has not been successful in receiving payment on this claim despite the fact that
the insurance company in Germany agrees that the claim is valid, due to other
unresolved matters with the same customer. The Company has increased its
allowance for doubtful accounts to reduce the net receivables from this customer
to zero. Without the warranty claim in 1994, the gross margin would have been
27%.
As of December 31, 1995, the Company had a firm order backlog of
$1,791,000 compared to $2,227,000 in 1994, and $2,476,000 in 1993. By February
16, 1996, the Company's backlog had increased to $2,434,000.
OPERATING COSTS
Selling, general, and administrative expenses for 1995 were $1,836,000,
an increase of $177,000 or 11% compared to $1,659,000 in 1994. These same
expenses in 1994 increased $162,976 or 11% from $1,496,000 in 1993. The increase
in 1995 is primarily due to the increase in bad debt expense mentioned earlier.
Otherwise, selling, general, and administrative expenses would have decreased
due to cost cutting measures, and reductions in staff offset by increased legal
fees of approximately $160,000 resulting from the Company's defense of a product
liability claim.
In 1994, the Company was named as a third party defendant in a product
liability action. The Company had maintained that the claims were without merit,
but was forced to expend significant resources in 1995 to defend its position.
The Company reached a settlement with the plaintiff just prior to trial. A
replacement unit, at an approximate cost of $15,000, was provided to the
plaintiff free of charge in order to avoid substantial legal fees which would
have been incurred if the case went to trial. Part of the increase in 1994
expenses were due to the hiring of several engineers to expand the Company's
technical capabilities, and the cost of a bi-annual sales meeting held in
Minnesota.
No bonuses have been paid to salaried employees in 1993, 1994, or 1995.
Research and development costs increased $39,000, or 77% in 1995 to
$90,000 from $51,000 in 1994 and $115,000 in 1993. The Company continues to work
on additional heat exchanger products to expand its capabilities in different
process environments and to reduce overall costs of manufacture. In addition, in
1995, the Company agreed to jointly develop a technology with one of the
Company's major clients. This research is now completed, but the overall sales
potential is not yet established.
OTHER
Interest expense in 1995 increase by $81,000, or 21% from $395,000 in
1994. This is due in large part to the increase in the line of credit, and the
mortgaging of the Company's manufacturing facilities as a source of working
capital. Interest in 1993 was $302,000. The increase from 1993 to 1994 was due
to the short-term debt incurred to purchase the Company's manufacturing facility
and to increased interest rates in 1994 compared to 1993.
Royalties from the Company's licensee, Sumitomo Heavy Industries, Ltd.,
have fluctuated from $10,000 in 1995 to $22,700 in 1994 to $5,000 in 1993.
Sumitomo has gone through a number of restructuring programs over the past few
years, and encounters significant price competition from other Pacific Rim
sources. Services income is derived from providing engineering services to
Lentjes as part of the Company's partnering agreement as earlier discussed.
Rental and other income in 1995 included $44,000 of rent from tenants
at the Company's manufacturing facility and $17,000 in gains from transactions
denominated in foreign currency. In 1994, this category included $5,000 of net
expenses relating to a former joint venture, $6,000 in losses from transactions
denominated in a foreign currency and $43,000 in tenant rent payments. In 1993,
rental income was $5,000 and expenses of $20,000 related to joint venture
activities.
The Company utilizes the method of accounting for income taxes pursuant
to Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. There is no provision for income taxes for the years ended December 31,
1995, 1994, or 1993 because the Company incurred losses for which no benefit
could be recognized. At December 31, 1995, the Company had net operating loss
carryforwards of approximately $5,828,000 for federal tax reporting purposes.
These carryforwards expire in varying amounts between 2001 and 2010. In
addition, the Company has unused tax credits for capital investment and research
and development activities of approximately $85,000 which are available to
offset future income tax liabilities and expire between 1996 and 2001.
IMPACT OF NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which will be effective for the Company beginning
January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply APB
Opinion No. 25, which recognizes compensation cost-based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply APB Opinion
No. 25 to its stock-based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share.
With respect to stock-based arrangements with non-employees, the
Company was required to adopt the fair value measurement provisions of SFAS No.
123 for transactions entered into after December 15, 1995. Such adoption did not
have a material effect on the Company's financial position or results of
operations.
Inflation has had a negligible impact on the Company's operation during
the past three years.
ITEM 7 - FINANCIAL STATEMENTS
See "Index to Financial Statements" and the Financial Statements
attached.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's
principal independent accountant during the two most recent fiscal years.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information Concerning Directors and Executive Officers
The names, ages, business experience and respective positions of the
directors and executive officers of the Company as of the date hereof are set
forth below. Each director serves for a term of approximately one year or until
the Company's ensuing annual meeting of shareholders.
<TABLE>
<CAPTION>
Name, Position and Business Experience Age Director Since
- -------------------------------------- --- --------------
<S> <C> <C>
Louis R. Wagner - Director, Chairman of the Board 72 4/87
Mr. Wagner has been the Chairman of the Board since December 1988. Mr.
Wagner also served as the Chief Executive Officer of the Company from
December 1988 until March 1989. Mr. Wagner was employed by Honeywell,
Inc., Minneapolis, Minnesota, which is engaged in the design,
development, production and marketing of avionics systems, from 1949
until June 1987, when he retired from full-time employment. Mr. Wagner
served as Director of Special Projects, Avionics Systems Group of
Honeywell, Inc., from 1984 until his retirement, and was responsible
for the development and management of the Avionics Systems Group's
marketing plans in Japan, the United Kingdom and Germany.
Bruce A. Watson - Director, President, Chief Executive Officer and Chief 49 4/90
Financial Officer
Mr. Watson has been the President and Chief Executive Officer of the
Company since March 1989 and the Chief Financial Officer since February
1996. From August 1987 until December 1988, Mr. Watson was the Vice
President and General Manager of Tol-O-Matic, Inc., located in
Minneapolis, Minnesota, and engaged in the design, manufacture and
marketing of mechanical and pneumatic fluid power and power
transmission products for original equipment manufacturers. From August
1978 until August 1987, Mr. Watson was employed by Rosemount, Inc.,
located in Eden Prairie, Minnesota, and was its Director of
International Sales and Marketing from 1980 until August 1987.
Rosemount, Inc. is a manufacturer of measurement and control devices
for industry and the commercial and military aerospace industry.
John O. Goodwyne - Director 57 5/86
Mr. Goodwyne has been employed as President of J.N. Johnson Sales and
Service, Inc., of which he is the sole shareholder, since 1974. J.N.
Johnson Sales and Service, Inc., with offices in Minneapolis,
Minnesota, is engaged in the distribution and servicing of fire
extinguishing equipment primarily in the State of Minnesota.
Demetrius G. Jelatis - Director 78 3/87
Mr. Jelatis, a director, was employed by Central Research Laboratories,
Inc., as a Vice President and Director of Research from 1945 until
September 1984, when he retired from full-time employment. Central
Research Laboratories, Inc., is engaged in the design and manufacture
of specialized scientific instruments in Red Wing, Minnesota.
Stephen D. Banz - Vice President of Sales and Marketing 48 N/A
Mr. Banz has been the Vice President - Sales and Marketing of the
Company since January 1993. Mr. Banz was Manager of Sales and Marketing
of the Company from October 1989 until January 1993. From May 1987 to
August 1989, Mr. Banz was the Sales Manager of Enkotec, Inc., a
manufacturer of nail-making machines located in Middleburg, Ohio.
Michael L. Pringle - Vice President of Manufacturing 52 N/A
Mr. Pringle has been the Vice President of Manufacturing of the Company
since January 1993. From November 1986 until January 1993, Mr. Pringle
was Manager of Manufacturing of the Company. Mr. Pringle was a
principal shareholder and Vice President of North Atlantic Technologies
Engineering, Inc. ("NATE") from September 1983 until December 1985.
NATE, which terminated its business in December 1985, was located in
Calgary, Alberta, Canada and installed the OCAP(TM) heat exchanger. NATE
was not an affiliate of the Company.
James M. Froemming - Vice President of Engineering 42 N/A
Mr. Froemming has been the Company's Vice President of Engineering since
February 1995. Mr. Froemming was a principal in the engineering
consulting firm of HRSG Engineering, Inc., located in Minneapolis,
Minnesota, from April 1994 until February 1995. From August 1986 to
March 1994, Mr. Froemming served as the Marketing Manager of Deltak
Corporation, located in Minneapolis, Minnesota, and engaged in the design
and manufacture of waste heat boilers.
</TABLE>
REPORTING UNDER SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires executive officers and directors of the Company, and persons who
beneficially own more than 10 percent of the Company's outstanding common shares
to file initial reports of ownership and reports of changes in ownership of
securities of the Company with the Securities and Exchange Commission. Officers,
directors and greater than 10 percent shareholders are required by Securities
and Exchange Commission regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on a review of the copies of such reports furnished to or
obtained by the Company or written representations that no other reports were
required, the Company believes that during the fiscal year ended December 31,
1995, all filing requirements applicable to its directors, officers or
beneficial owners of more than 10 percent of the Company's outstanding shares of
Common Stock were complied with.
ITEM 10 - EXECUTIVE COMPENSATION
Summary Compensation of Named Executive Officer
The Summary Compensation Table below shows certain compensation
information for the Chief Executive Officer in 1994 (referred to as the "Named
Executive Officer"). Compensation data for other executive officers is not
presented in the charts because aggregate compensation for such executive
officers did not exceed $100,000 for services rendered in all capacities during
the fiscal year ended December 31, 1995. Compensation data is shown for the
fiscal years ended December 31, 1995, 1994 and 1993, and includes the dollar
value of base salaries, bonus awards, the number of options granted, and certain
other compensation, if any, whether paid or deferred.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
COMPENSATION
AWARDS
-----------------------------------------------------------------------------------
SHARES ALL
NAME AND UNDERLYING OTHER
PRINCIPAL SALARY BONUS OPTIONS/SARS COMPENSATION
POSITION YEAR ($) ($) (#) ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bruce A. Watson 1995 122,000 -0- -0- 2,943(1)
President and Chief 1994 115,333 -0- -0- 3,033(1)
Executive Officer 1993 111,333 -0- -0- 2,899(1)
</TABLE>
----------------------------------------
(1) 401(k) contributions by the Company during the fiscal years ended
December 31, 1995, 1994 and 1993, respectively.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End
Option/SAR Values
The following table provides certain information regarding the exercise
of stock options to purchase common shares of the Company during the year ended
December 31, 1995, by the Named Executive Officer and the fiscal year-end value
of stock options held by such officer.
<TABLE>
<CAPTION>
Number of Securities Underlying
Shares Unexercised Options/SARs at Value of Unexercised In-the-Money
Acquired on Fiscal Year End(#) Options/ SARs at Fiscal Year End ($)
Name Exercise (#) (Exercisable/Unexercisable) (Exercisable/Unexercisable)(1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bruce A. Watson None 80,000 60,000 -0- -0-
</TABLE>
(1) Based on a fiscal year end of December 31, 1995 and a per share price
of $0.0775 which is the average of the high bid and low asked per share
prices for common shares of the Company on December 29, 1995. The value
of in-the-money options is calculated as the difference between the
fair market value of the Common Stock underlying the options and the
exercise price of the options at fiscal year end. Exercisable options
refer to those options that are exercisable as of December 31, 1995,
while unexercisable options refer to those options that are not
exercisable as of December 31, 1995, but which will become exercisable
at various times in the future.
Compensation of Directors
During 1995, each Director of the Company, who is not a salaried
employee of the Company, was entitled to receive $300 in cash for each meeting
of the Board of Directors and $200 in cash for each meeting of a Committee
established by the Board of Directors attended by such Director. Messrs. Wagner,
Jelatis and Goodwyne received $3,900, $1,500 and $1,500, respectively, in cash
as director's fees for attendance at meetings of the Board of Directors and
Board committees. Willis D. Heim, who resigned from the Company's Board of
Directors on July 19, 1995, received $2,761.50 in cash as a director's fee for
attendance at meetings of the Board of Directors during 1995.
In February 1995 Messrs. Wagner, Goodwyne, Heim and Jelatis were each
granted an option to purchase 14,000 shares of the Company's common stock at an
exercise price of $1.125 per share. The options vest incrementally over a period
of five years and terminate April 30, 2000. The options become exercisable only
if the director is a member of the Board on the particular dates of vesting.
Mr. Wagner, who has served since December 1988 as the Company's
Chairman of the Board, received an aggregate of $16,710 in the year ended
December 31, 1995 for consulting services. Mr. Wagner's duties include preparing
for and conducting all Board of Director meetings and consulting with the
Company's officers from time to time.
Employment, Termination and Change-in-Control Arrangements
The Company has entered into an employment agreement with Bruce A.
Watson, the Company's President, Chief Executive and Chief Financial Officer,
which is terminable by either Mr. Watson or the Company on fourteen days' prior
written notice. Mr. Watson's employment agreement provides for an initial base
salary of $80,000, subject to increases as may be agreed upon between the
Company and Mr. Watson. The agreement also provides that he is entitled to
health insurance and other similar benefits generally accorded to all employees
of the Company and was granted an option to purchase up to 40,000 shares of the
Company's common stock at an exercise price of $1.50 per share which expired in
1994. The agreement includes non-competition and non-disclosure provisions.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables, based in part upon information supplied by
officers, directors and principal shareholders, contain information regarding
the ownership of the Company's common shares as of March 20, 1996 by: (i) all
persons known by the Company to be beneficial owners of more than five percent
of the Company's common shares; (ii) each director; (iii) the Named Executive
Officer (as defined in "EXECUTIVE COMPENSATION - Summary Compensation of Named
Executive Officer"); and (iv) all executive officers and directors of the
Company as a group. Unless otherwise indicated, each of the shareholders has
sole voting and investment power with respect to the shares beneficially owned,
subject to community property laws where applicable.
Security Ownership of Beneficial Owners
The following table sets forth certain information as of the date of
this Proxy Statement, with respect to the number of the Company's common shares
beneficially owned by each person beneficially owning more than 5% of the
Company's outstanding common shares, which has been taken from statements filed
with the Securities and Exchange Commission pursuant to Sections 13(d) and (g)
of the Exchange Act and information made known to the Company by beneficial
owners.
<TABLE>
<CAPTION>
COMMON PERCENTAGE
NAME AND ADDRESS SHARES OF
OF BENEFICIALLY OUTSTANDING
BENEFICIAL OWNER OWNED SHARES (4)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Graceann K. Deters............................................. 300,860 (1) 9.1%
2112 Springwood Road
Wayzata, MN 55391
Horia A. Dinulescu............................................. 194,880 (2) 5.9%
11217 Fetterly Road
Minnetonka, MN 55305
Willis D. Heim................................................. 910,957 (3) 27.5%
6604 Glen Arbor Way
Naples, FL 33999
</TABLE>
- ----------------------------------------
(1) Includes 5,000 common shares which Mrs. Deters' husband may acquire
upon the conversion of a $25,000 12 1/2% Subordinated Convertible
Debenture.
(2) Includes 300 shares owned jointly with Mr. Dinulescu's wife.
(3) Includes 5,000 common shares which Mr. Heim may acquire upon conversion
of a $25,000 12 1/2% Subordinated Convertible Debenture.
(4) The percentage of outstanding common shares owned as shown in the table
above is calculated based upon 3,292,689 common shares outstanding as
of the close of business on March 20, 1996 and assume that in each case
the person only converted his or her rights to acquire all common
shares under outstanding Convertible Subordinated Debentures.
Security Ownership of Management
The following table sets forth certain information as of March 20, 1996
with respect to the number of the Company's common shares beneficially owned by:
(i) each director; (ii) the Named Executive Officer; and (iii) all executive
officers and directors as a group.
<TABLE>
<CAPTION>
COMMON PERCENTAGE
NAME AND ADDRESS SHARES OF
OF BENEFICIALLY OUTSTANDING
BENEFICIAL OWNER OWNED SHARES (6)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bruce A. Watson................................................ 861,000 (1) 25.3%
8120 Penn Avenue
Suite 435
Minneapolis, MN 55431
Demetrius G. Jelatis........................................... 84,212 (2) 2.5%
1161 Oak Street
Red Wing, MN 55066
John O. Goodwyne............................................... 39,532 (3) 1.2%
3865 Fairhomes Road
Deephaven, MN 55391
Louis R. Wagner................................................ 39,008 (4) 1.2%
4175 County Road 11 N.E.
Alexandria, MN 56308
All executive officers and directors as a group
(6 persons).................................................... 1,154,540 (5) 31.8%
</TABLE>
----------------------------------------
(1) Includes 110,000 common shares which Mr. Watson has the right to
acquire under stock options exercisable as of June 10, 1996.
(2) Includes (i) 20,000 common shares which Mr. Jelatis may acquire through
the conversion of a $100,000 12 1/2% Subordinated Convertible
Debenture; and (ii) 12,000 shares which Mr. Jelatis has the right to
acquire under stock options exercisable as of June 10, 1996.
(3) Includes 12,000 common shares which Mr. Goodwyne has the right to
acquire under stock options exercisable as of June 10, 1996.
(4) Includes 12,000 common shares which Mr. Wagner has the right to acquire
under stock options exercisable as of June 10, 1996.
(5) Includes: (i) 320,000 common shares to which the six persons have the
right to acquire under stock options exercisable as of June 10, 1996;
and (ii) 20,000 common shares which one person may acquire through the
conversion of a Subordinated Convertible Debenture.
(6) The percentage of outstanding common shares owned as shown in the table
above is calculated based upon 3,292,689 common shares outstanding as
of the close of business on March 20, 1996 and assumes that in each
case the person only, or the group only, exercised his or its rights to
acquire all common shares under outstanding stock options exercisable
as of June 10, 1996 and conversion of Subordinated Convertible
Debentures.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Line of Credit Guaranteed by Principal Shareholder
Since 1987, Willis D. Heim, a principal shareholder and former director
of the Company, has irrevocably and unconditionally guaranteed the Company's
obligations under its line of credit with the First Bank, National Association,
Minneapolis, Minnesota (the "Bank") as well as granted the Bank a security
interest in certain municipal bonds to secure the payment of such obligations.
In consideration of Mr. Heim's guarantee and pledge, the Company issued a
warrant (the "Warrant") to Mr. Heim to purchase an aggregate of 380,000 common
shares of the Company which Mr. Heim fully exercised in December 1992. The
Company also provided additional compensation to Mr. Heim with respect to the
continuation of the Company's line of credit, including: (i) a fee due on the
first day of each month in cash equal to 30% of the amount of interest payable
on that date to the Bank under the line of credit, (ii) 140,000 common shares of
the Company, (iii) cash fees, and (iv) a security interest in certain assets of
the Company. In addition, the Company granted Mr. Heim the right to include the
140,000 common shares issued to him and the 380,000 common shares purchased
under the Warrant (collectively referred to as the "Shares") in a registration
statement filed by the Company with the Securities and Exchange Commission
before January 5, 1995, if any, and the right to demand that the Company prepare
and file a registration statement covering the sale to and by Mr. Heim of the
Shares, on a one time basis and at the sole expense of Mr. Heim, before January
2, 1995. Mr. Heim did not exercise any of his registration rights before they
expired. The Company has granted Mr. Heim a security interest in its inventory,
equipment, accounts receivable and certain intangibles to secure the guarantee
by Mr. Heim of the line of credit. The Company increased its line of credit with
the Bank in March 1995 from $1.2 to $1.45 million. The line of credit expired on
January 2, 1996.
During 1994 and 1995, the Company paid to Mr. Heim monthly cash
payments which equalled 30% of the interest paid to the Bank on the line of
credit. The total of these payments for 1994 and 1995 were $22,931 and $28,440,
respectively. The Company paid Mr. Heim $48,000 in January 1994 and $55,750 in
January 1995 as payment of a four percent annual commitment fee on the line of
credit.
Lease Agreement with Principal Shareholder
The Company entered into a Lease Agreement dated March 7, 1994, with
Southtown Office Park ("Southtown") for approximately 3,800 square feet of
office space in a five-story building located at 8120 Penn Avenue South,
Bloomington, Minnesota. On November 21, 1994, the Lease Agreement was amended to
cover additional office space expanding the total office space rented to
approximately 4,200 square feet. Willis D. Heim, a principal shareholder and
former director of the Company, is an affiliate of Southtown. The Lease
commenced on May 1, 1994, and expires on April 30, 1997. Under the terms of the
Lease, as amended, the Company pays a monthly rental of $5,850.
Grant of Mortgage to Principal Shareholder
The Company owns 48,000 square feet of manufacturing space plus a
21,000 square foot storage building, a 7,500 square foot office building and the
8.431 acres of land on which these buildings are situated in St. Paul,
Minnesota. In June 1995, the Company received a loan in the amount of $500,000
from WDH Investments, a company owned by Willis D. Heim, a principal shareholder
and former director of the Company. The mortgage note is secured by real
property and certain personal property related to the Company's manufacturing
facility located in St. Paul, Minnesota. See "Item 2 - DESCRIPTION OF PROPERTY."
In 1995 the Company paid to WDH Investments a total of $36,000 in interest due
under the mortgage.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
3(i)(a)(1) Restated Articles of Incorporation of Registrant filed July 14, 1982.
3(i)(b)(3) Articles of Amendment to Articles of Incorporation of Registrant filed July 2, 1987.
3(i)(c)(8) Articles of Amendment to Articles of Incorporation Registrant filed April 23, 1992.
3(ii)(a)(1) By-Laws of Registrant adopted June 6, 1983.
3(ii)(b)(6) Amendment to By-Laws of Registrant adopted April 23, 1990.
4.1(2) Indenture Agreement between Registrant and Marquette Bank, Minneapolis, N.A.
dated December 31, 1985.
4.2(2) Form of Debenture.
4.3(1) Form of Certificate for Common Stock.
10.1(5) * Employment agreement dated March 6, 1989 between Registrant and Bruce A.
Watson.
10.2(8) * 1991 Incentive Stock Option Plan
10.3(4) Credit Agreement dated December 21, 1987 between Registrant and First National
bank of Minneapolis.
10.4(6) First Amendment dated April 13, 1990 to Credit Agreement between the Registrant
and First Bank National Association amending Credit Agreement originally dated
December 21, 1987.
10.5(6) Promissory Note dated April 13, 1990 in the principal amount of $1,750,000 issued by
Registrant in favor of First Bank National Association.
10.6(7) Second Amendment dated June 18, 1991 to Credit Agreement between the Registrant
and First Bank National Association amending Credit Agreement originally dated
December 21, 1987.
10.7(7) Third Amendment dated September 25, 1991 to Credit Agreement between the
Registrant and First Bank National Association amending Credit Agreement originally
dated December 21, 1987.
10.8(7) Fourth Amendment dated December 30, 1991 to Credit Agreement between Registrant
and First Bank National Association amending Credit Agreement originally dated
December 21, 1987.
10.9(8) Fifth Amendment dated June 26, 1992 to Credit Agreement between the Registrant and
First Bank National Association amending Credit Agreement originally dated
December 21, 1987.
10.10(8) Sixth Amendment dated December 29, 1992 to Credit Agreement between the
Registrant and First Bank National Association amending Credit Agreement originally
dated December 21, 1987.
10.11(9) Seventh Amendment dated August 31, 1993 to Credit
Agreement between the Registrant and First Bank
National Association originally dated December 21,
1987.
10.12(9) Eighth Amendment dated October 25, 1993 to Credit
Agreement between the Registrant and First Bank
National Association originally dated December 21,
1987.
10.13(9) Agreement dated October 25, 1993 between Registrant and Willis D. Heim relating to
line of credit guaranty.
10.14(10) Fee Agreement dated January 3, 1995 between the Registrant and Willis D. Heim.
10.15(9) Fee Agreement dated January 13, 1994 between the Registrant and Willis D. Heim.
10.16(10) Ninth Amendment dated August 31, 1994 to Credit Agreement between the Registrant and First Bank
National Association originally dated December 21,
1987.
10.17(7) Manufacturing and Marketing Cooperation Agreement dated October 31, 1991 between
Registrant and Lentjes AG, Dusseldorf, Germany.
10.18(9) Joint Venture Agreement dated June 10, 1993 between the Registrant and RADCO,
Inc. to form Arrtech Environmental Systems, Inc.
10.19(9) License Agreement dated June 10, 1993 between Arrtech Environmental Systems,
Inc., North Atlantic Technologies, Inc. and RADCO, Inc.
10.20(2) License Agreement between Registrant as licensor and Sumitomo Heavy
Industries, Ltd. as licensee.
10.21(10) Stock Purchase Agreement between the Registrant, Radco, Inc., Arrtech
Environmental Systems, Inc. and Reed T. Melton dated November 18, 1994.
10.22(9) Purchase Agreement dated November 3, 1993 between the Registrant and Como
Foundry Partners relating to improved real property located in St. Paul, Minnesota.
10.23(10) Lease Agreement dated March 7, 1994 between Registrant and Southtown Office Park and
Addendum thereto dated March 7, 1994, November 21, 1994 and November 30, 1994.
10.24 Mortgage Note dated June 16, 1995, issued by the Registrant to WDH Investments
Co.
10.25 Combination Mortgage, Security Agreement, Fixture Financing Statement and
Assignment of Rents between Registrant and WDH Investments Co., dated June 16,
1995.
10.26 Tenth Amendment dated March 28, 1995 to Credit Agreement between the Registrant and
First Bank National Association originally dated December 21, 1987.
10.27 Eleventh Amendment (First) dated May 8, 1995 to Credit Agreement between the Registrant
and First Bank National Association originally dated December 21, 1987.
10.28 Eleventh Amendment (Second) dated August 31, 1995 to Credit Agreement between
the Registrant and First Bank National Association originally dated December 21, 1987.
10.29 Twelfth Amendment dated October 31, 1995 to Credit Agreement between the Registrant and First Bank
National Association originally dated December 21, 1987.
10.30 Security Agreement dated May 8, 1995 between the Registrant and First Bank
National Association.
27 Financial Data Schedule.
</TABLE>
* Indicates a management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the Company's registration statement on
Form S-18, commission file number 2-85984C.
(2) Incorporated by reference to the Company's registration statement on
Form S-1, commission file number 33-490.
(3) Incorporated by reference to the Company's Form 10-Q for the period
ended September 30, 1987.
(4) Incorporated by reference to the Company's Form 10-K for the period
ended December 31, 1987.
(5) Incorporated by reference to the Company's Form 10-K for the period
ended December 31, 1989.
(6) Incorporated by reference to the Company's Form 10-K for the period
ended December 31, 1990.
(7) Incorporated by reference to the Company's Form 10-K for the period
ended December 31, 1991.
(8) Incorporated by reference to the Company's Form 10-KSB for the period
ended December 31, 1992.
(9) Incorporated by reference to the Company's Form 10-KSB for the period
ended December 31, 1993.
(10) Incorporated by reference to the Company's Form 10-KSB for the year
ended December 31, 1994.
(b) Reports on Form 8-K
The Registrant filed one current report on Form 8-K during the quarter
ended December 31, 1995. The report dated December 12, 1995 reported
the maturation of subordinated debentures in principal amount of
$1,993,000 and the Registrant's inability to meet its principal and
interest payment obligations arising therefrom.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
North Atlantic Technologies, Inc.
By: /s/ Bruce A. Watson
Bruce A. Watson
Chief Executive Officer
Dated: March 26, 1996
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ Louis R. Wagner March 26, 1996
- ------------------------------------------------
Louis R. Wagner, Chairman of the Board
/s/ Bruce A. Watson March 26, 1996
- ------------------------------------------------
Bruce A. Watson, a director
Chief Executive Officer
(principal executive officer) and Chief
Financial Officer (principal financial
officer and principal accounting officer)
/s/ John O. Goodwyne March 26, 1996
- -----------------------------------------------
John O. Goodwyne, a director
- ------------------------------------------------ ________, 1996
Demetrius G. Jelatis, a director
INDEX TO FINANCIAL STATEMENTS
The following financial statements are included in response to Item 7.
Report of Independent Auditors
Balance Sheets as of December 31, 1995 and 1994
Statements of Operations for the three years ended December 31, 1995,
1994 and 1993
Statements of Stockholders' Deficit
Statements of Cash Flows for the three years ended December 31, 1995,
1994 and 1993
Notes to Financial Statements
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
North Atlantic Technologies, Inc.
Bloomington, Minnesota
We have audited the accompanying balance sheets of North Atlantic Technologies,
Inc. (the Company) as of December 31, 1995 and 1994 and the related statements
of operations, stockholders' deficit, and cash flows for each of the three years
in the period ended December 31, 1995. 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 that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of North Atlantic Technologies, Inc. as of
December 31, 1995 and 1994 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
As discussed in Note 12, subsequent to December 31, 1995, the Company filed for
reorganization under Chapter 11 of the United States Bankruptcy Code. The
accompanying financial statements do not purport to reflect or provide for the
consequences of the bankruptcy proceedings. In particular, such financial
statements do not purport to show (a) as to assets, their realizable value on a
liquidation basis or their availability to satisfy liabilities; (b) as to
prepetition liabilities, the amounts that may be allowed for claims or
contingencies, or the status and priority thereof; (c) as to stockholder
accounts, the effect of any changes that may be made in the capitalization of
the Company; or (d) as to operations, the effect of any changes that may be made
in its business.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going-concern. As discussed in Note 1 to the
financial statements, conditions exist which raise substantial doubt about the
Company's ability to continue as a going-concern. Management's plans concerning
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
February 16, 1996
Minneapolis, Minnesota
NORTH ATLANTIC TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
1995 1994
<S> <C> <C>
ASSETS (NOTE 4)
CURRENT ASSETS:
Cash and cash equivalents $ 44,607 $ 41,384
Trade receivables, net (Note 2) 818,887 1,118,676
Other receivables (Note 11) 171,404 200,933
Inventories 145,356 203,789
Costs and estimated earnings in excess of billings on uncompleted
contracts (Notes 1 and 3) 239,943
Other current assets 29,029 88,051
------------ ------------
Total current assets 1,209,283 1,892,776
PROPERTY AND EQUIPMENT (Note 4):
Land 92,510 92,510
Buildings and leasehold improvements 692,441 676,176
Machinery and equipment 1,211,914 1,195,553
Office furniture and equipment 153,945 168,012
Automobiles 11,666 11,666
------------ ------------
2,162,476 2,143,917
Less accumulated depreciation 1,305,351 1,160,040
------------ ------------
Net property and equipment 857,125 983,877
RESTRICTED CERTIFICATES OF DEPOSIT (Note 6) 39,500
OTHER ASSETS:
Patent rights, less accumulated amortization of $103,957 in 1994 196,043
Other assets 3,652 3,626
------------ ------------
Total other assets 3,652 199,669
------------ ------------
$ 2,070,060 $ 3,115,822
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 4) $ 3,547,622 $ 2,773,802
Trade accounts payable 878,422 1,013,067
Other accounts payable (Note 11) 393,428 409,765
Billings in excess of costs and estimated earnings on uncompleted
contracts (Notes 1 and 3) 477,893 115,271
Accrued liabilities:
Taxes other than income 15,219 23,732
Warranty reserve 200,000 175,000
Compensation and bonuses 42,198 11,494
Interest 170,378 36,213
Income taxes 57
------------ ------------
Total current liabilities 5,725,160 4,558,401
LEASE OBLIGATIONS -
Net of current maturities (Note 4) 12,251 23,030
------------ ------------
Total liabilities 5,737,411 4,581,431
COMMITMENTS AND CONTINGENCIES (Notes 6 and 11)
STOCKHOLDERS' DEFICIT (Notes 4 and 5):
Common stock, no par value; authorized 5,000,000 shares; issued
and outstanding 2,392,689 shares 3,047,804 3,047,804
Accumulated deficit (6,715,155) (4,513,413)
------------ ------------
Total stockholders' deficit (3,667,351) (1,465,609)
------------ ------------
$ 2,070,060 $ 3,115,822
============ ============
</TABLE>
See notes to financial statements.
NORTH ATLANTIC TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1995 1994 1993
<S> <C> <C> <C>
REVENUES (Note 7) $ 3,684,001 $ 7,187,555 $ 4,645,145
COST OF REVENUES 3,325,072 5,710,750 3,522,979
--------------- -------------- -----------
Gross profit 358,929 1,476,805 1,122,166
OPERATING COSTS:
Selling, general, and administrative 1,836,183 1,659,048 1,496,072
Research and development 90,496 51,205 114,847
Write-down of unamortized patent costs (Note 1) 184,505
--------------- -------------- -----------
2,111,184 1,710,253 1,610,919
--------------- -------------- -----------
OPERATING LOSS (1,752,255) (233,448) (488,753)
OTHER INCOME (EXPENSE):
Royalty income 10,161 22,720 5,036
Services income (Note 8) 372,233 2,989
Interest income 2,446 3,996 7,226
Interest expense (475,732) (394,547) (301,710)
Rental and other income (expense) 13,638 32,493 (14,885)
--------------- -------------- ---------
(449,487) 36,895 (301,344)
--------------- -------------- ----------
NET LOSS $ (2,201,742) $ (196,553) $ (790,097)
=============== =============== ==========
NET LOSS PER COMMON SHARE (Note 1) $ (.94) $ (.08) $ (.33)
=============== =============== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 2,392,689 2,392,689 2,392,689
=============== ============== ==========
</TABLE>
See notes to financial statements.
NORTH ATLANTIC TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' DEFICIT
COMMON STOCK ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 2,392,689 $ 3,047,804 $ (3,526,763) $ (478,959)
Net loss (790,097) (790,097)
------------ ------------ ------------- -----------
BALANCE AT DECEMBER 31, 1993 2,392,689 3,047,804 (4,316,860) (1,269,056)
Net loss (196,553) (196,553)
------------ ------------ ------------- -----------
BALANCE AT DECEMBER 31, 1994 2,392,689 3,047,804 (4,513,413) (1,465,609)
Net loss (2,201,742) (2,201,742)
------------ ------------ ------------- -----------
BALANCE AT DECEMBER 31, 1995 2,392,689 $ 3,047,804 $ (6,715,155) $(3,667,351)
============ ============ ============= ===========
</TABLE>
See notes to financial statements.
NORTH ATLANTIC TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (NOTE 1)
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 3,864,835 $ 6,942,810 $ 5,511,032
Cash paid to suppliers and employees (4,356,884) (6,177,650) (5,433,788)
Interest, rent, and royalties received 73,006 59,109 16,961
Interest paid (341,567) (395,188) (296,846)
Taxes paid (57) (801) (3,562)
------------ ----------- --------------
Net cash (used in) provided by operating activities (760,667) 428,280 (206,203)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from restricted cash 39,500 57,169 33,991
Capital expenditures (39,025) (197,391) (740,719)
Proceeds from disposal of fixed assets 400
(Additions) reductions of other assets (26) 56,925 10,144
------------ ----------- --------------
Net cash provided by (used in) investing activities 849 (83,297) (696,584)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,860,000 689,425 2,025,000
Payments of long-term debt (1,096,959) (1,042,912) (1,137,550)
------------ ----------- --------------
Net cash provided by (used in) financing activities 763,041 (353,487) 887,450
------------ ----------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,223 (8,504) (15,337)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 41,384 49,888 65,225
------------ ----------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 44,607 $ 41,384 $ 49,888
============ =========== ==============
RECONCILIATION OF NET LOSS TO NET CASH (USED IN)
PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (2,201,742) $ (196,553) $ (790,097)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 177,315 238,921 291,138
Write-down of patent 184,505
(Gain) loss on disposal of equipment (400) 7,626
Changes in assets and liabilities:
Receivables 329,318 (641,980) 923,195
Inventories 58,433 (23,615) (30,053)
Other current assets 59,022 (33,306) 35,978
Accounts payable and accrued liabilities 30,317 944,175 (262,442)
Net increase (decrease) in billings related to costs
and estimated earnings on uncompleted contracts 602,565 140,638 (381,548)
------------ ----------- ---------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (760,667) $ 428,280 $ (206,203)
============ =========== ===============
</TABLE>
See notes to financial statements.
NORTH ATLANTIC TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - North Atlantic Technologies, Inc. (the Company) develops and
utilizes advanced technology for the purpose of industrial energy
recovery. The Company designs, manufactures, and markets worldwide to
industrial companies a heat recovery system. The system utilizes a
patented heat recovery device called Open Channel Air Preheater (OCAP),
which is a design concept used by the Company in a broad range of
products for energy recovery and environmental control applications.
Basis of Presentation - The financial statements have been prepared on a
going-concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As a result
of the 1993, 1994, and 1995 net losses, the Company's financial resources
have been strained. As of December 31, 1995, current liabilities exceed
current assets by $4,515,877 and the Company has a net capital deficiency
of $3,667,351. In addition, on November 15, 1995, the Company defaulted
on the payment of $1,993,000 of subordinated convertible debentures (see
Note 4) and on February 1, 1996, (Petition Date) the Company filed a
petition for reorganization under Chapter 11 of the United States
Bankruptcy Code (see Note 12). These factors, among others, indicate that
the Company may be unable to continue as a going-concern for a reasonable
period of time. The Company's continuation as a going-concern is
dependent on its ability to generate sufficient cash flow from
operations, renegotiate the maturities of its debt, obtain conversion of
the subordinated debt or obtain additional financing to meet its
obligations on a timely basis, and obtain court approval for its plan of
reorganization. The Company's business is currently dependent on large
projects in the industrial sector. These projects involve long order
cycles, and exact order placement dates are beyond the control of the
Company. While the Company utilizes a progress billing procedure, there
are periods of net cash outflows when cash flow is of concern. During
1995, the Company was able to manage its normal operating cash flow
through the use of internally generated funds and its established line of
credit.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should
the Company be unable to continue in existence.
Management has filed a plan for reorganization with the Bankruptcy Court
(see Note 12). The accompanying financial statements do not purport to
reflect or provide for the consequences of the bankruptcy proceedings. In
particular, such financial statements do not purport to show (a) as to
assets, their realizable value on a liquidation basis or their
availability to satisfy liabilities; (b) as to prepetition liabilities,
the amounts that may be allowed for claims or contingencies, or the
status and priority thereof; (c) as to stockholder accounts, the effect
of any changes that may be made in the capitalization of the Company; or
(d) as to operations, the effect of any changes that may be made in its
business. It is management's belief that the postponement of prepetition
liabilities combined with improvement in the order backlog as of February
15, 1996 and cyclical demand for its products will enable the Company to
maintain sufficient cash flow and profitability to continue as a going
concern. In addition, the conversion of all subordinated convertible
debentures to preferred and common stock, as proposed in the Company's
plan of reorganization (see Note 12), will improve the working capital
position of the Company as well as reduce the stockholders' deficit.
Management also intends to investigate potential partnering relationships
and other diversification opportunities.
Revenue Recognition - Revenue earned and costs incurred on short-term
contracts are recorded when the contracts have been completed. Revenue
for large long-term contracts is recognized on the
percentage-of-completion method, measured by the percentage of labor
hours incurred to date to estimated total labor hours for each contract.
This method is used because management considers expended labor hours to
be the best available measure of progress on these contracts. Services
income is recognized at the time the service is provided.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of
amounts billed. The liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of
revenues recognized. Unbilled receivables result when a contract has been
completed but the final installment is not billed until a subsequent
period, normally due to delays in shipping the unit.
Adjustments to contract cost estimates are made in the periods in which
the facts which require such revisions become known. When the revised
estimates indicate losses, such losses are provided for currently.
Restricted Cash - Restricted cash represented deposits held for letters
of credit issued to customers as guarantees for job performance.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed on the straight-line method over the estimated
useful lives of the assets, which range from 2 to 20 years.
Patent Rights - Prior to June 1995, patent rights were being amortized on
a straight-line basis over 13 years, which was the remaining useful life
of the patent when the patent was acquired. During the second quarter of
1995, management determined that the value of the patent had been
impaired and the remaining carrying value was written off.
Impairment of Long-Lived Assets - Management of the Company periodically
reviews the carrying value of patents and other long-lived assets for
potential impairment by comparing the carrying value of these assets with
their related expected future net cash flows. Should the sum of the
related expected future net cash flows be less than the carrying value,
management would determine whether an impairment loss should be
recognized. An impairment loss would be measured by the amount by which
the carrying value of the asset exceeds the fair value of the asset.
During the second quarter of 1995, management determined that the value
of the patent had been impaired and the remaining carrying value was
written off.
Warranty Reserve - Warranty reserve amounts have been provided for
estimated potential costs of monitoring and adjusting OCAP heat exchanger
units installed.
Statement of Cash Flows - Cash and cash equivalents include cash on hand,
amounts due from banks, and highly liquid cash investments. Financing
transactions not affecting cash included capital lease obligations of
$26,210 which were incurred for the acquisition of equipment during the
year ended December 31, 1993.
Research and Development Costs - Research and development costs are
expensed as incurred.
Income Taxes - The Company utilizes the method of accounting for income
taxes pursuant to Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes.
Net Loss per Share - Net loss per share has been computed using the
weighted average number of common shares outstanding during each year.
The shares issuable under the provisions of stock options and warrants
and the shares issuable under the provisions of the convertible
debentures have been excluded from the computations because their
inclusion would be anti-dilutive in each of the years.
Business Risks - The Company is susceptible to various risks due to the
nature of its business. The Company operates in an industry which
requires long lead times on contracts, and the Company often expends
significant amounts of effort and cost in the proposal phase of a
project, which may not lead to the placement of an order by the customer.
Due to the significant cost to the customer of most projects that the
Company is contracted to build, customers are sensitive to the interest
rates they will have to pay to finance the project, exposing the Company
to risks of interest rate fluctuations. Once an order is obtained, the
Company manufactures a uniquely-designed product which must meet customer
specifications, exposing the Company to various risks related to product
performance. Also, the Company occasionally accepts orders denominated in
a foreign currency, as well as sells products at prices denominated in
dollars in foreign countries (see Note 7). Both of these situations
expose the Company to risk of currency fluctuations, either directly as
in the former case, or indirectly in the latter case by impacting the
ultimate cost to the customer and thereby affecting the Company's
competitiveness in foreign markets.
Use of Estimates - The preparation of 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 at the date of financial statements and the reported amounts
of revenues and expenses during the period. Actual results could differ
from those estimates.
Fair Value Disclosures of Financial Instruments - The estimated fair
value of cash and cash equivalents and accounts receivable approximates
their carrying value due to the relatively short-term nature of the
investments. The fair value of the line of credit borrowings approximates
their carrying value because the line carries a floating interest rate
and borrowings are guaranteed and collateralized by a security interest
in substantially all of the Company's assets. The fair value of the
mortgage note payable approximates its carrying value, as the note was
recently entered into and is collateralized by a security interest in a
portion of the Company's fixed assets. Because the subordinated
debentures are in default at December 31, 1995 and are unsecured, and
because the Company has filed a petition for reorganization under Chapter
11 of the Bankruptcy Code (see Note 12) and has a significant
stockholders' deficit at December 31, 1995, the Company estimates that
the fair value of the subordinated debentures is nominal.
2. TRADE RECEIVABLES
December 31
1995 1994
Completed contracts $ 1,015,065 $ 1,006,924
Contracts-in-progress 82,382 30,101
Unbilled receivables 40,600 84,065
Retentions 20,280 57,586
------------- -------------
1,158,327 1,178,676
Less allowance for doubtful accounts (339,440) (60,000)
------------- -------------
$ 818,887 $ 1,118,676
============= =============
Unbilled receivables become billable upon shipment of the completed
units, which occurred subsequent to year end. All outstanding retentions
at December 31, 1995 are expected to be collected during 1996.
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
December 31
1995 1994
Costs incurred on uncompleted contracts $ 87,489 $ 527,462
Estimated earnings 69,540
------------- -------------
87,489 597,002
Less billings to date 565,382 472,330
------------- -------------
$ (477,893) $ 124,672
============= =============
These amounts are included in the balance sheets as of December 31, 1995
and 1994 under the following captions:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 239,943
Billings in excess of costs and estimated earnings
on uncompleted contracts $ (477,893) (115,271)
------------ ----------------
$ (477,893) $ 124,672
============ ================
</TABLE>
4. DEBT
<TABLE>
<CAPTION>
December 31
1995 1994
<S> <C> <C>
Subordinated convertible debentures, due 1995; interest at
12.5%; payable semiannually $ 1,993,000 $ 1,993,000
Borrowings under bank credit agreement; interest at prime
rate (8.5% at December 31, 1995), secured by substantially
all assets (except real property) of the Company and
personal guarantee of a stockholder 1,050,000 750,000
Mortgage note, due 2000, interest at 12%; payable in monthly
installments of $6,000, with all unpaid principal due in
June 2000; secured by security interest in real property 493,843
Capitalized lease obligations payable monthly through
September 1998 23,030 53,832
------------ ------------
3,559,873 2,796,832
Less current maturities 3,547,622 2,773,802
------------ ------------
Net long-term debt $ 12,251 $ 23,030
============ ============
</TABLE>
The principal maturities of long-term debt at December 31, 1995 are as
follows:
Years ending December 31:
1996 $ 3,547,622
1997 5,960
1998 6,291
--------------
$ 3,559,873
==============
The subordinated convertible debentures are convertible into common stock
at $5.00 per share. Subject to certain conditions, the debentures are
redeemable at the face amount in whole or in part at the option of the
Company until maturity on November 15, 1995. The Indenture Agreement
restricts payment of dividends and the purchase or redemption of common
stock and warrants to purchase common stock. At December 31, 1995, the
Company was in default on these debentures (see Note 12).
During 1995, the Company obtained an amendment to the bank credit
agreement extending the maturity date to January 1, 1996. The maximum
borrowings available under the agreement are $1,450,000. At December 31,
1995, $312,882 was available for borrowing under the agreement after
taking into account outstanding advances and standby letters of credit.
The Company pays the stockholder who guarantees this debt an annual
commitment fee of 4% of the maximum borrowings available plus 30% of the
interest payable to the bank on a monthly basis and has granted this
stockholder a subordinated (except for real property) security interest
in substantially all assets of the Company. Guarantor payments to the
stockholder totaled $84,190, $70,931, and $10,119 during the years ended
December 31, 1995, 1994, and 1993, respectively. Due to cross-default
provisions within the credit agreement, the Company was in default of the
line of credit borrowings as of November 15, 1995 when it did not repay
the subordinated convertible debentures. Also, the credit agreement
expired on January 2, 1996 and the Company has not repaid the amounts
borrowed. The bank has made no demand for payment, nor has it commenced
any action against the guarantor as a result of these events (see Note
12).
During 1995, the Company obtained a $500,000 mortgage loan from a
stockholder. The loan is evidenced by a mortgage note, which provides the
stockholder a security interest in the land and building which comprise
the Company's manufacturing facility in St. Paul. Total principal and
interest payments made to the stockholder in 1995 were $36,005. The
mortgage note contains provisions which allow the stockholder to demand
payment if the Company is in default under any other borrowing
agreements. Because the Company is in default of the payment of the
subordinated convertible debt at December 31, 1995, the unpaid balance on
the mortgage note has been classified as a current liability.
5. STOCK OPTIONS AND WARRANTS
In 1992, the Company's stockholders approved the adoption of a qualified
stock option plan. Under the plan, as amended, 500,000 shares of the
Company's common stock have been reserved for granting of options at
exercise prices not less than the fair market value of the shares (110%
of fair market value for persons owning more than 10% of the outstanding
shares) at the date of the grant. Options granted under the plan may be
granted at terms which expire up to ten years from the date of the grant.
The following table summarizes stock option activity under the 1992 plan
and a prior plan:
<TABLE>
1995 1994 1993
<S> <C> <C> <C>
Options outstanding January 1 345,000 385,000 410,000
Granted ($1.50) 5,000
Canceled ($1.50) (5,000)
Canceled ($1.125) (60,000)
Canceled ($.75) (40,000) (30,000)
-------------- --------------- ---------------
Options outstanding at December 31 280,000 345,000 385,000
============== =============== ===============
Exercise prices of outstanding options
at December 31 $ 1.125 $ 1.125-$1.50 $ .75-$1.50
============== =============== ===============
Options exercisable at December 31 164,000 135,000 105,000
============== =============== ===============
Exercise prices of exercisable options
at December 31 $ 1.125 $ 1.125-$1.50 $ .75-$1.50
============== =============== ===============
</TABLE>
Nonqualified stock options have also been granted, exercisable on
approximately the same basis as the qualified options previously
described, as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Options outstanding January 1 40,000 40,000 40,000
Granted ($1.125) 56,000
Canceled ($1.125) (14,000)
Canceled ($1.75) (10,000)
-------------- ----------- ------------
Options outstanding at December 31 72,000 40,000 40,000
============== ========== ============
Exercise prices of outstanding options at December 31 $1.125-$1.75 $ 1.75 $ 1.75
============== ========== ============
Options exercisable at December 31 24,000 16,000 8,000
============== ========== ============
Exercise prices of exercisable options at December 31 $1.125-$1.75 $ 1.75 $ 1.75
============== ========== ============
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases office space and equipment and, until
November 1993, leased manufacturing space. A director of the Company is
part owner of the building in which the Company leases office space. Rent
expense aggregated $77,298, $78,444, and $192,547 during the years ended
December 31, 1995, 1994, and 1993, respectively, including payments made
on the manufacturing facility which was purchased by the Company in
November 1993. Future minimum operating lease commitments as of December
31, 1995 are as follows:
Years ending December 31:
1996 $ 74,466
1997 27,316
--------------
$ 101,782
==============
Postretirement Benefits - The Company does not have a plan to provide
postemployment or postretirement medical or other benefits to any of its
employees.
Litigation - The Company periodically is involved in legal actions
arising in the normal course of business. Management is of the opinion
that any judgment or settlement resulting from pending or threatened
litigation would not have a material adverse effect on the financial
position or results of operations of the Company.
Other - At December 31, 1994, the Company had outstanding standby letters
of credit totaling $39,500 which were secured by certificates of deposit
and were classified as restricted cash on the balance sheet, as well as
outstanding standby letters of credit totaling $86,910 and $63,877 at
December 31, 1995 and 1994, respectively, which reduced available
borrowings under the Company's line of credit.
7. REVENUES
The percentages of total revenue from sales to customers in excess of 10%
of the total in the years ended December 31 were as follows:
1995 1994 1993
Customer A 14%
Customer B 10
Customer C 28%
Customer D 10
Customer E 21%
Sales for the years ended December 31 were made within the following
geographic areas:
1995 1994 1993
United States $ 2,955,024 $ 4,642,756 $ 3,666,352
Europe 235,977 908,412 566,240
Canada 40,600 798,435 362,653
Far East 240,000 771,842 49,900
Other export 212,400 66,110
------------- ------------- -----------
$ 3,684,001 $ 7,187,555 $ 4,645,145
============= ============= ===========
8. SERVICES INCOME
The Company has a marketing and manufacturing agreement with a German
customer which allows that customer to sell, assemble, and install OCAP
heat exchangers based on system designs provided by the Company. The
Company receives a design fee, recorded as services income, for each
system and manufactures some key components for sale to the customer for
each system sold by this customer. During 1995, the Company sold $130,000
of components under the agreement. During 1994, the Company earned
$372,234 in design fees and sold $749,433 of components under the
agreement. There was no significant activity under the agreement during
1993.
9. INCOME TAXES
There is no provision for income taxes for the years ended December 31,
1995, 1994, or 1993 because the Company incurred a loss for which no
benefit could be recognized at this time.
Differences between the provision for income taxes at the federal
statutory rate and the recorded provisions for the years ended December
31, 1995, 1994, and 1993 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Benefit at statutory rates $ (771,000) $ (71,000) $ (277,000)
Other (17,000)
Change in valuation allowance resulting
primarily from net operating loss 788,000 71,000 277,000
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $5,828,000 for federal tax reporting purposes. These
carryforwards expire in varying amounts between 2001 and 2010. In
addition, the Company has unused tax credits for capital investment and
research and development activities of approximately $85,000 which are
available to offset future income tax liabilities and expire between 1996
and 2001.
Net deferred tax assets at December 31, 1995 and 1994 are comprised of
the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Current:
Warranty reserve $ 29,000 $ 20,000
Allowance for doubtful accounts 122,000 22,000
Accrual for medical claims 7,000
Inventory costs capitalized for income tax purposes 15,000
Less valuation allowance (151,000) (64,000)
-------------- -----------
Net current tax benefit of temporary differences $ - $ -
============== ===========
Noncurrent:
Excess of book over tax depreciation $ 103,000 $ 95,000
Net operating loss carryforwards 2,094,000 1,401,000
Tax credits 85,000 85,000
Less valuation allowance (2,282,000) (1,581,000)
-------------- ------------
Net noncurrent tax benefit of temporary differences $ - $ -
============== ============
</TABLE>
10. EMPLOYEE RETIREMENT PLAN
The Company's Board of Directors adopted a 401(k) plan effective July 1,
1991 covering substantially all of its employees. Eligible employees may
elect to defer a portion of their compensation, up to 15%, by making
contributions to the plan. Employer matching contributions, subject to
adjustment by the Board of Directors semiannually, are equal to 50% of
each employee's contribution, up to 2-1/2% of each employee's
compensation. Employer contributions totaled $24,437, $31,045, and
$32,821 for the years ended December 31, 1995, 1994, and 1993,
respectively.
11. OTHER RECEIVABLE AND PAYABLES
During 1994, the Company became aware of two heat exchangers sold through
the Company's German customer which were not performing up to
specifications and required rework to make them perform satisfactorily.
The cost of this rework has been accrued as an other accounts payable.
One of these units was sold during a time period when the Company had
coverage under a liability insurance policy covering design errors. The
Company has recognized a receivable of $171,404 and $200,933 at December
31, 1995 and 1994, net of a deductible of approximately $32,000, related
to the cost incurred on the unit covered by insurance.
In December 1995, the Company received notice from the insurance company
that it was prepared to settle the claim in an amount sufficient to cover
the receivable recorded by the Company. However, the Company has been
experiencing difficulties resolving this and other matters which arose
with the German customer during 1995. Therefore, the Company has
increased its allowance for doubtful accounts to effectively reduce the
net amount receivable from the customer to zero.
12. SUBSEQUENT EVENTS
On February 1, 1996, the Company (the Debtor) filed a petition for
reorganization under Chapter 11 of the United States Bankruptcy Code.
Under Chapter 11, certain claims against the Debtor in existence prior to
filing of the petition for reorganization are stayed while the Debtor
continues business operations as debtor-in-possession. Claims secured
against the Debtor's assets (secured claims) also are stayed, although
the holders of such claims have the right to move the court for relief
from the stay. Secured claims are secured by liens on substantially all
the assets of the Debtor.
It is the intention of management, as filed with the Bankruptcy Court in
the Plan of Reorganization, to 1) effect a debt for equity exchange with
all debenture holders, 2) revise the structure and term of the Company's
bank debt, and, 3) fully liquidate all unsecured liabilities of the
Company as of the Petition Date. The Plan of Reorganization is subject to
a vote of all impaired classes of creditors and equity security holders
and the approval of the Bankruptcy Court. Although the Company and the
Official Joint Committee of Unsecured Creditors are both proponents of
the plan, the timetable and ultimate structure for the reorganization
process is yet to be determined and finalized.
Under the terms of the Plan of Reorganization, $500,000 of the line of
credit borrowings would be converted to a five-year note bearing interest
at a rate of up to 12%, with the remainder, including an additional
$200,000 in financing which will become available upon approval of the
plan, being financed under a new line of credit at comparable rates with
required monthly reductions of $25,000 commencing May 1, 1996. The
subordinated debentures will be exchanged for a combination of common and
preferred stock. Noteholders will be issued one share of common stock for
each $1.50 owed by the Company. In addition, they will receive one share
of convertible preferred stock at $.01 par value with a $25 redemption
value per share for each $100 owed to them by the Company under the
debenture. Dividends will be paid on the preferred stock only at the
discretion of the Board of Directors. Any unredeemed preferred stock will
automatically become common stock on a share per share basis after three
years from the original date of issuance. The mortgage note will be
repaid in accordance with its original terms, and all other unsecured
claims will be paid 100% in the ordinary course of the Company's business
in accordance with their original terms. Common shareholders will receive
one share of common stock in return for the cancellation of three shares
presently owned.
In January 1996, 750,000 shares of common stock were issued to Bruce A.
Watson and 150,000 common stock shares were issued to Michael L. Pringle
in exchange for services. The common shares were issued at a value of
$.01 per share.
NORTH ATLANTIC TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-KSB
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Item Description Page
<S> <C> <C>
10.24 Mortgage Note dated June 16, 1995, issued by the Registrant _____
to WDH Investments Co.
10.25 Combination Mortgage, Security Agreement, Fixture Financing _____
Statement and Assignment of Rents between Registrant and WDH Investments Co., dated
June 16, 1995.
10.26 Tenth Amendment dated March 28, 1995 to Credit _____
Agreement between the Registrant and First Bank National Association originally dated
December 21, 1987.
10.27 Eleventh Amendment (First) dated May 8, 1995 to Credit _____
Agreement between the Registrant and First Bank National Association originally dated
December 21, 1987.
10.28 Eleventh Amendment (Second) dated August 31, 1995 to Credit _____
Agreement between the Registrant and First Bank National Association originally dated
December 21, 1987.
10.29 Twelfth Amendment dated October 31, 1995 to Credit _____
Agreement between the Registrant and First Bank National Association originally dated
December 21, 1987.
10.30 Security Agreement dated May 8, 1995 between the _____
Registrant and First Bank National Association.
27 Financial Data Schedule. _____
</TABLE>
EXHIBIT 10.24
MORTGAGE NOTE
$500,000.00 Due June 19, 2000
Minneapolis, Minnesota
June 16, 1995
The undersigned, for value received, promises to pay to the order of WDH
INVESTMENTS CO., (hereinafter called the Lender), at its office in Bloomington,
Minnesota in lawful money of the United States of America the principal sum of
Five Hundred Thousand and no/100 Dollars ($500,000.00), together with interest
(calculated on the basis of actual days elapsed and a 360-day year) on the
unpaid principal hereof, until this note is fully paid at an annual rate of 12%.
Principal and interest shall be payable in installments of $6,000.84 each,
beginning on July 19, 1995 and on the same day of each month thereafter until
June 19, 2000 when the entire unpaid principal and accrued and unpaid interest
shall become due and payable. Each such installment when paid shall be applied
first in payment of accrued interest and the balance thereof shall be applied in
reduction of principal.
This Note is secured by a Combination Mortgage, Security Agreement, Fixture
Financing Statement and Assignment of Rents dated June 16, 1995.
If principal or interest hereon is not paid when due, or if any other
indebtedness of the undersigned to the Lender is not paid when due, or if a
garnishment summons or a writ of attachment is issued against or served upon the
Lender for the attachment of any property of the undersigned in the Lender's
possession or any indebtedness owing to the undersigned, or if the undersigned
shall submit to the Lender any financial statement containing information which
shall prove to be incorrect in any respect when made, or if the undersigned
shall fail to pay when due any indebtedness the undersigned may owe for money
borrowed, then, in any such event, the holder hereof may, at its option, declare
this Note to be immediately payable, together with all unpaid interest accrued
hereon, without notice or demand; provided, however, that if this Note is
payable upon demand, nothing herein contained shall preclude or limit the holder
hereof from demanding payment of this Note at any time and for any reason,
without notice.
This Note shall also become automatically due and payable (including unpaid
interest accrued hereon) without notice or demand should a petition be filed by
or against the undersigned under the United States Bankruptcy Code, or if a
trustee, receiver or similar officer is appointed for the undersigned or for the
undersigned's property. If this Note is not paid on the due date, the Lender
shall have the right to set off the indebtedness evidenced by this Note against
any indebtedness of the Lender to the undersigned. The holder hereof may at
any time renew this note or extend its maturity date for any period and release
any security for, or any party to, this Note, all without notice to or consent
of and without releasing any accommodation maker, endorser or guarantor. The
undersigned agrees to pay all costs of collection, including attorneys' fees and
legal expenses, in the event this Note is not paid when due whether suit is
commenced or not, including costs and expenses in litigation, bankruptcy or
insolvency proceedings. Presentment or other demand for payment, notice of
dishonor and protest are hereby waived by the undersigned. This Note shall be
governed by the substantive laws of the State of Minnesota. The undersigned
hereby irrevocably submits to the jurisdiction of the Minnesota District Court,
Fourth District, and the Federal District Court, District of Minnesota, Fourth
Division, over any action or proceeding arising out of or relating to this Note
and agrees that all claims in respect of such action or proceeding may be heard
and determined in any such court.
NORTH ATLANTIC TECHNOLOGIES,
INC.
By /s/ Bruce A. Watson
Its President and CEO
EXHIBIT 10.25
COMBINATION MORTGAGE, SECURITY AGREEMENT,
FIXTURE FINANCING STATEMENT AND ASSIGNMENT OF RENTS
THIS INSTRUMENT Made as of the 16th day of June, 1995, between NORTH
ATLANTIC TECHNOLOGIES, INC., a Minnesota corporation (hereinafter referred to as
"Mortgagor"), whose address is 8120 Penn Avenue South, Suite 435, Bloomington,
MN 55431, party of the first part, and WDH INVESTMENTS, CO., a Minnesota
corporation (hereinafter referred to as "Mortgagee"), whose address is 8120 Penn
Avenue South, Suite 470, Bloomington, Minnesota 55431, party of the second part.
WHEREAS, Mortgagor is the owner of certain real property located in the
City of St. Paul, County of Ramsey, State of Minnesota, legally described on
Exhibit A attached hereto and hereby made a part hereof (hereinafter referred to
as "Premises"), which Premises are subject to certain Permitted Encumbrances
enumerated on said Exhibit A (hereinafter referred to as "Permitted
Encumbrances"); and
WHEREAS, there have been constructed upon, under and on the Premises
certain buildings, structures and other improvements (hereinafter referred to as
"Improvements"), which are owned by Mortgagor; and
WHEREAS, Mortgagor is justly indebted to Mortgagee in the principal
amount of Five Hundred Thousand and 00/100 Dollars ($500,000.00), as evidenced
by one (1) Promissory Note in said amount, made by Mortgagor, payable to the
order of Mortgagee, and dated of even date herewith (hereinafter referred to as
"Note"); and
WHEREAS, said principal amount, together with interest thereon at the
rate of twelve percent (12%) per annum (hereinafter the "Note Rate"), is payable
in accordance with the terms of said Note, with the entire unpaid principal
balance and any unpaid, accrued interest thereon maturing and being due and
payable in full not later than June , 2000; and
WHEREAS, there are now, or may in the future be, located on, within or
about the Premises and Improvements certain items of furniture, fixtures,
equipment, furnishings, machinery and personal property, owned by Mortgagor, and
now or hereafter attached or affixed to or installed, and used in connection
with the maintenance and operation of, the Premises and the Improvements,
whether attached or detached, including but not limited to any and all such
cranes; furniture; appliances; carpeting; floor coverings; draperies;
furnishings; fences; partitions; dynamos; doors; windows; millwork; overhead
doors; screens; storm windows and doors; locks; hardware; shades; awnings;
motors; engines; boilers; tanks; water heaters; pumps; furnaces; heat registers;
radiators; thermostats; plumbing; sinks; water closets; basins; faucets;
elevators; conveyors; switchboards; cleaning, call, vacuum and sprinkler
systems; fire extinguishing apparatus and equipment; water tanks; lighting,
heating, ventilating, air conditioning and air cooling units and equipment;
incinerating, communicating and refrigerating equipment; water, gas and electric
supply fixtures, machinery, ducts, piping, wiring, conduits, outlets,
appurtenances and equipment; burglar alarm and security systems; electronic
intercommunication system; maintenance and cleaning equipment and supplies;
parking lot lighting; and trees, bushes and shrubs, whether or not permanently
affixed to the real estate, together with all appurtenances, extensions,
additions, improvements, betterments, renewals, accessions, replacements,
proceeds, products and substitutions thereto, therefor and thereof (hereinafter
collectively referred to as "Property"). The Property is subject to certain
Permitted Encumbrances.
NOW, THEREFORE, in consideration of One Dollar ($1.00) and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged; in consideration of the loan evidenced by the Note; and to secure
the payment of principal, interest, late payment charges and any other charges
evidenced or provided for by the Note, the payment by Mortgagor to Mortgagee as
herein provided of all sums advanced by Mortgagee pursuant to any term hereof,
with interest thereon, and the performance and observance of all of the
covenants and agreements herein contained and contained in the Note, all of the
terms of which are hereby incorporated herein and made a part hereof by
reference as if fully set forth herein, Mortgagor does hereby grant, bargain,
sell, convey, warrant, mortgage, assign, pledge and confirm unto Mortgagee, its
successors and assigns, forever, all of Mortgagor's right, title and interest in
and to the Premises, including all rights, easements, privileges and
appurtenances thereunto belonging or in anywise appertaining, the Improvements,
the Property and all rents, issues, income and profits therefrom, including but
not limited to Mortgagor's interest in, to and under any leases thereof and all
right to collect any and all rents from tenants of the Premises and
Improvements; and all other rights, interests and property herein assigned by
Mortgagor to Mortgagee or in which a security interest is therein granted by
Mortgagor to Mortgagee (all of which property shall be hereinafter collectively
referred to as the "Mortgaged Property"). To have and to hold the Mortgaged
Property, together with all privileges, hereditaments and appurtenances
thereunto now or hereafter belonging, or in anywise appertaining, and the
proceeds and products of all Improvements and Property, unto Mortgagee, its
successors and assigns, forever; provided, nevertheless, that these presents are
upon the express condition that, if Mortgagor shall pay or cause to be paid in
full the Note, and if Mortgagor shall strictly observe and perform all of the
terms, covenants and conditions herein and therein set forth, then this
Combination Mortgage, Security Agreement, Fixture Financing Statement and
Assignment of Rents (hereinafter referred to as "Mortgage"), and the estate,
right and interest of Mortgagee in and to the Mortgaged Property created hereby,
shall cease and be and become void and of no force and effect and shall be
satisfied and released at Mortgagor's expense, otherwise to remain in full force
and effect.
Mortgagor further covenants with Mortgagee as follows:
ARTICLE I
GENERAL COVENANTS AND WARRANTIES
Section 1.1. Mortgagor shall duly and punctually and fully pay each and
every installment of principal and interest on the Note and all other
indebtedness secured hereby, as and when the same shall become due, and shall
duly, punctually and fully do and perform all things on its part to be done or
performed under the Note, under the Mortgage and under any other instrument
which refers to or secures the Note. Time is of the essence hereof.
Section 1.2. Mortgagor represents and warrants to Mortgagee, as
follows:
(a) Mortgagor is a corporation duly organized, existing and in
good standing under the laws of the State of Minnesota,.
(b) Mortgagor is the lawful owner of and has good and
marketable fee simple absolute title to the Mortgaged Property;
Mortgagor has good right and lawful authority to grant, bargain, sell,
convey, warrant, mortgage, assign, pledge and confirm the same as
provided herein; and the Mortgaged Property is free and clear of all
mortgages, liens, pledges, security interests, charges and
encumbrances, excepting only Permitted Encumbrances. Mortgagor warrants
and will defend the title to the Mortgaged Property against all claims
and demands whatsoever, except those made under Permitted Encumbrances.
(c) There is no provision in any indenture, contract or
agreement, to which Mortgagor is a party or by which it is bound, or
any law, statute, ordinance, governmental rule, regulation or
restriction, or any order of any court or administrative agency, to
which Mortgagor is subject or by which Mortgagor is bound, which
prohibits the execution and delivery by Mortgagor of this Mortgage, the
Note or any other instrument which refers to or secures the Note, or
the performance or observance by Mortgagor of any of the terms,
covenants or conditions of this Mortgage, the Note or any such other
instruments.
(d) Execution and delivery of this Mortgage, the Note and all
other instruments which refer to or secure the Note, have been duly and
validly authorized, and the Note, this Mortgage and said other
instruments have been duly and validly executed and delivered by and on
behalf of Mortgagor and are valid, binding and enforceable obligations
of Mortgagor in accordance with their terms.
(e) Except as separately disclosed to Mortgagee prior to
execution of this Mortgage, there are no actions, suits or, proceedings
pending or, to the knowledge of Mortgagor, threatened against Mortgagor
or the Mortgaged Property in any court or before any federal, state,
municipal or other governmental agency, which, if decided adversely to
any of them, would have a materially adverse effect upon this Mortgage,
upon the Mortgaged Property or upon the value thereof, including but
not limited to notices, demands for payment or compensation for injury
or damage to persons, the environment or, natural resources, actions,
suits, proceedings, or damage settlements relating to Hazardous Waste
(as that term is hereinafter defined), and Mortgagor is not in default
with respect to any order of any court or governmental agency.
(f) The financial statements of Mortgagor fairly present the
financial condition of Mortgagor on the dates thereof and the results
of operations of Mortgagor and the Mortgaged Property for the period or
periods indicated therein, all in conformity with generally accepted
accounting principles consistently followed. Except for ongoing
operating losses, there has been no material adverse change in the
condition, financial or otherwise, of Mortgagor since the latest
financial statement so furnished.
(g) Mortgagor is not in default in the payment of the
principal of or interest on any indebtedness for borrowed money and is
not in default under any instrument or agreement under and subject to
which any indebtedness for borrowed money has been incurred or is
secured, and no event has occurred under the provisions of any such
instrument or agreement which, with or without the lapse of time or the
giving of notice, or both, constitutes or would constitute a default or
an event of default thereunder.
(h) The Premises are neither agricultural property, property
in agricultural use, nor the homestead of Mortgagor, but rather are the
site of an owner occupied commercial building and appurtenances
thereto.
(i) All applicable building, zoning, occupational safety and
health, energy and environmental laws, ordinances and regulations
affecting the Mortgaged Property permit the use and occupancy thereof
for its intended purposes and have been complied with, and Mortgagor
has obtained the necessary consents, permits and licenses to operate
the Improvements for their intended purposes.
(j) Except as separately disclosed to Mortgagee prior to
execution of this Mortgage; (i) No dangerous, toxic or hazardous
pollutants, contaminants, chemicals, wastes, materials or substances,
as defined in or governed by the provisions of the Federal Resource
Conservation and Recovery Act of 1976, the Federal Comprehensive
Environmental Response Compensation and Liability Act of 1980, and/or
the Superfund Amendments and Reauthorization Act of 1986 (42 U.S.C.
6901 et seq. and 42 U.S.C. 9601 et seq.), as amended, or any other
federal, state or local hazardous substance, hazardous waste or
environmental laws, statutes, codes, ordinances, regulations,
directives, requirements or rules (hereinafter collectively referred to
as "Environmental Regulations"), and also including urea-formaldehyde,
polychlorinated biphenyls, dioxin, asbestos, asbestos containing
materials, nuclear fuel or waste, and petroleum, including but not
limited to crude oil or any fraction thereof, natural gas, natural gas
liquids, gasoline and synthetic gas or any other waste, substance,
pollutant or contaminant which would subject the owner of the Mortgaged
Property to any damages, penalties or liabilities under any applicable
Environmental Regulation (herein collectively referred to as "Hazardous
Substances") have ever been placed, located, produced, generated,
created, stored, treated, transported, incorporated, discharged,
emitted, spilled, released, deposited, disposed of or allowed to escape
in, upon, under, over or from the Mortgaged Property; (ii) no threat
exists of a spill, discharge, release or emission of a Hazardous
Substance upon or from the Mortgaged Property into the environment;
(iii) the Premises have not ever been used as or for a mine, a
landfill, a dump or other disposal facility, or a gasoline service
station; (iv) no underground storage tank is now located in the
Premises or has previously been located therein but has been removed
therefrom; (v) no violation of any Environmental Regulation now exists
or has ever existed in, upon, under, over or from the Mortgaged
Property; (vi) no notice of any violation or alleged violation in,
upon, under, over or from the Mortgaged Property of any Environmental
Regulation has been issued or given by any governmental entity or
agency responsible for administering or enforcing the same; (vii) no
person, party or private or governmental agency or entity has given any
notice of or asserted any claim, cause of action, penalty, cost or
demand for payment or compensation, whether or not involving any injury
or threatened injury to human health, the environment or natural
resources, resulting or allegedly resulting from any activity or event
described in (i) above; (viii) there are not now, nor have there ever
been, any actions, suits, proceedings or damage settlements relating in
any way to Hazardous Substances in, upon, under, over or from the
Mortgaged Property; (ix) there is no investigation or report involving
the Mortgaged Property by any governmental entity or agency which in
any way relates to Hazardous Substances; (x) the Mortgaged Property is
not listed in the United States Environmental Protection Agency's
National Priorities List of Hazardous Waste Sites or any other list,
Schedule, log, inventory or record of Hazardous Substance sites
maintained by any federal, state or local governmental agency; and (xi)
the Mortgaged Property is subject to no lien or claim for lien in favor
of any governmental entity or agency as a result of any presence,
release or threatened release of any Hazardous Substance in, on, under,
over or from the Mortgaged Property.
Section 1.3. Mortgagor covenants and agrees with Mortgagee, so long as
any amount secured hereby shall remain unpaid, to give to Mortgagee prompt
notice in writing of any condition or event which constitutes an event of
default under Section 3.1 hereof, or which, after notice or lapse of time, or
both, would constitute such an event of default. Mortgagor agrees to maintain
its existence as a corporation under the laws of the State of Minnesota and not
to dissolve, liquidate, wind-up, consolidate or merge during the term hereof,
without the prior written consent of Mortgagee.
Section 1.4. This Section intentionally left blank.
Section 1.5. Mortgagor shall, at its expense, procure, do, execute,
acknowledge and deliver each and every further act, deed, conveyance, transfer,
document and assurance necessary or proper for the carrying out more effectively
of the purposes of this Mortgage and, without limiting the foregoing, for
granting, bargaining, selling, conveying, warranting, mortgaging, assigning,
pledging and confirming unto Mortgagee all of the Mortgaged Property, or
property intended so to be, whether now owned or hereafter acquired by
Mortgagor, including, without limitation, the preparation, execution and filing
of any documents, such as financing statements and continuation statements,
deemed advisable by Mortgagee for perfecting and maintaining its lien on the
Mortgaged Property. This Mortgage shall further constitute and be deemed to be a
Security Agreement under the Minnesota Uniform Commercial Code, now in force and
as hereafter amended, and Mortgagor hereby grants to Mortgagee, subject only to
the Permitted Encumbrances, a first and only, present and continuing security
interest in any Property, and its leases and rents, and in all deposits made
pursuant to Section 1.7 hereof and all insurance policies and unearned premiums
prepaid thereon, insurance proceeds, and awards, payments or consideration for
the taking of the Mortgaged Property, or any portion thereof, by condemnation or
exercise of the power of eminent domain, or from any sale in lieu or in
anticipation thereof, assigned by Mortgagor to Mortgagee hereunder, to the
extent that a security interest may be granted therein under the terms of the
Minnesota Uniform Commercial Code. Mortgagor agrees to supply Mortgagee with an
inventory of all such property in a form acceptable to Mortgagee, from time to
time, upon receipt of a written request therefor from Mortgagee.
Section 1.6. Mortgagor shall not commit or permit waste upon the
Mortgaged Property and shall cause the Mortgaged Property and every part
thereof, including but not limited to parking areas, Improvements and all
ingress and egress easements, if any, to be continually maintained, preserved
and kept in safe and good repair, working order and condition, and will comply
with all present and future laws, statutes, ordinances, rules and regulations of
any governmental authority having or claiming jurisdiction with reference to the
Mortgaged Property and the manner of leasing, using, operating or maintaining
the same (hereinafter collectively referred to as "Governmental Requirements"),
as now existing or as hereafter amended, if applicable, and with all private
covenants and restrictions, if any, affecting the title to the Mortgaged
Property, or any thereof (hereinafter collectively referred to as "Private
Restrictions"), and will not commit, suffer or permit any violation thereof, and
will from time to time make all necessary and proper restorations, rebuildings,
repairs, renewals, replacements, additions and betterments to the Mortgaged
Property, whether required as the result of casualty or otherwise, and whether
or not insurance or condemnation proceeds are made available or are sufficient
therefor, in a good and workmanlike manner, so that the value and efficient use
thereof shall be fully preserved and maintained, and so that all Governmental
Requirements and Private Restrictions shall be complied with. Mortgagor shall
forthwith give Mortgagee written notice, if it receives notice of any violation
of any Governmental Requirements or Private Restrictions, or if any material
damage or destruction occurs to the Mortgaged Property. Mortgagor agrees not to
make any use of the Mortgaged Property, other than as a factory building and
appurtenances thereto; not to demolish or remove the Improvements, or make
additions to or structural alterations of the Improvements, without the prior
written consent of Mortgagee; not to remove from the Premises or Improvements
any of the Property, unless immediately replaced with like property of at least
equal value; and not to add any new Improvements or Property, unless all of such
replacements and additions shall be free of any vendor's lien, title reservation
or other security interest prior hereto, excepting only Permitted Encumbrances.
All such replacements and additions shall be subject to the lien hereof and the
security interest created hereby, which shall be prior to all other liens and
security interests thereon and therein, excepting Permitted Encumbrances.
Mortgagee or its agents may enter upon the Mortgaged Property at all reasonable
times to inspect the same and for the purpose of protecting its security and
preserving its rights hereunder, but shall not be liable to any person, party or
entity for failure to do so. Mortgagee covenants and agrees to promptly complete
with due diligence any buildings, Improvements and additions free and clear of
all liens, charges and encumbrances, except the lien hereof and Permitted
Encumbrances; and to keep, perform and comply with any state law applicable to
each and every term, condition and covenant of any and all leases upon the
Mortgaged Property or any portion thereof (hereinafter referred to as "Leases")
to be by Mortgagor kept and performed, so as to keep the Leases at all times in
full force and effect, and agrees not to anticipate or collect rents more than
one (1) month in advance under any Lease without, in each instance, the prior
written consent of Mortgagee. Mortgagee shall not be liable to either Mortgagor
or the tenants for the performance of any of the terms, covenants and conditions
of the Leases. Mortgagor shall not by any act or omission diminish or impair the
value of the Mortgaged Property and likewise shall not in any way weaken,
diminish or impair the security hereof. Mortgagor shall not seek, petition for,
make, consent to or acquiesce in any change in the Governmental Requirements and
Private Restrictions relating to the uses of the Mortgaged Property, including
but not limited to zoning and building codes and ordinances, without Mortgagee's
prior written consent.
Section 1.7. Mortgagor shall, at least ten (10) days before any penalty
or interest attaches thereto because of delinquency in payment, pay and
discharge, or cause to be paid and discharged, all taxes, assessments, levies
and governmental charges imposed upon or against the Mortgaged Property or upon
or against the Note or the indebtedness secured hereby or upon or against the
interest of Mortgagee in the Mortgaged Property or in the Note or the
indebtedness secured hereby (hereinafter referred to as "Impositions") and will
thereafter deliver the paid receipts therefor to Mortgagee within thirty (30)
days after payment of any such Imposition is due. Notwithstanding any of the
foregoing, in no event shall Mortgagor be obligated to satisfy any of the income
taxes of the Mortgagee. In the event of any legislative enactment or judicial
decision after the date of this Mortgage, imposing upon Mortgagee the obligation
to pay any such Imposition, or deducting the lien of this Mortgage from the
value of the Mortgaged Property for the purpose of taxation, or changing in any
way the laws now in force for the taxation of mortgages or debts secured
thereby, or the manner of the operation of any such Imposition, so as to affect
the interests of Mortgagee, then, and in such event, Mortgagor shall bear and
promptly pay the full amount of such Imposition of any such tax; provided,
however, that, if for any reason payment thereof by Mortgagor would be unlawful
or, unenforceable, or if payment thereof by Mortgagor would constitute usury or
would render the loan or indebtedness secured hereby wholly or partially
usurious under any of the terms or provisions of the Note or of this Mortgage,
or, otherwise, Mortgagee may declare the whole sum secured by this Mortgage,
with interest thereon, to be immediately due and payable. Mortgagor shall not
suffer to exist and shall promptly pay and discharge any mechanic's, statutory
or other lien or encumbrance on the Mortgaged Property or any part thereof
(hereinafter referred to as "Liens"), except for Permitted Encumbrances.
Mortgagor shall perform all of its obligations under the Permitted Encumbrances.
Notwithstanding the foregoing, Mortgagor shall not be in default
hereunder in respect to the payment of any Impositions or Liens which Mortgagor
shall be required by any provision hereof to pay, so long as Mortgagor shall
first notify Mortgagee, in writing, at least thirty (30) days prior to the due
date thereof, if any, or otherwise at least ten (10) days before commencement of
any contest thereof, of its intention to contest the amount, applicability
and/or validity of such Imposition or Lien and shall thereafter, in good faith,
in compliance with all applicable statutes, and with all possible promptness,
diligently contest the same, and Mortgagor may postpone or defer payment of a
portion of said Impositions or Liens, if, but only if, permitted by statute, and
if neither the Mortgaged Property, nor any portion thereof, would, by reason of
such postponement or deferment, be in danger of being forfeited or lost;
provided, however, that Mortgagor shall furnish to Mortgagee, prior to
commencing any such contest, cash or other security satisfactory to Mortgagee to
indemnify Mortgagee against any loss or liability by reason of any such contest
and to pay any such Imposition or Lien, together with interest and penalties
thereon, if any, if such contest should fail. Upon a final adjudication of any
such contest, and in any event, at least thirty (30) days prior to the date on
which the interest of Mortgagee in the Mortgaged Property would otherwise
forfeit by reason of the nonpayment of any such Impositions or Liens, Mortgagor
shall pay the amount thereof then due, including any penalties and interest
thereon.
Section 1.8. Mortgagor shall obtain, maintain and keep in full force
and effect during the term of this Mortgage, with all premiums paid thereon, the
following insurance:
(a) Insurance upon all Improvements and Property against loss
or damage by fire, lightning and other risks customarily covered by
standard "all risk" and extended coverage endorsements, together with
theft, vandalism, malicious mischief, replacement cost and agreed
amount endorsements, and restoration in conformance with applicable
laws and ordinances, endorsements, all in such amounts as may be from
time to time required by Mortgagee, but in no event less than the full
replacement cost of the Improvements now existing or hereafter erected
or placed upon the Premises, including the cost of debris removal, and
of all Property, and, in any event, in an amount not less than the
unpaid balance secured by this Mortgage;
(b) This subsection intentionally omitted;
(c) Comprehensive general public liability insurance against
claims for bodily injury, death and/or property damage occurring in, on
or about the Mortgaged Property, with coverage limits satisfactory to
Mortgagee (which shall initially be at least equal to $3 million with
respect to any one accident or occurrence) and including contractual
liability coverage for the tort liability assumed by Mortgagor
hereunder and under any other document which secures the Note;
(d) Flood insurance upon the Mortgaged Property in such form
and amount as may from time to time be required by Mortgagee, if the
Mortgaged Property is located in a designated flood plain area; and
(e) Insurance upon the Mortgaged Property against such other
casualties and contingencies as Mortgagee may from time to time
require, including but not limited to sprinkler insurance in amounts
acceptable to Mortgagee, all in such manner and form as may be
satisfactory to Mortgagee.
Mortgagor shall, at its sole cost and expense, from time to time and at
any time when Mortgagee shall so request, provide Mortgagee with evidence of the
full replacement cost of the Mortgaged Property in a form acceptable to
Mortgagee. Mortgagor shall promptly notify Mortgagee and the appropriate insurer
in writing of any loss covered by any of the above-mentioned types of insurance.
All insurance provided for in this Section 1.8 shall be effected under
a valid, enforceable and manually signed policy or policies of insurance in form
and substance approved by Mortgagee, shall be issued by insurers of recognized
responsibility, which are licensed to do business in the State of Minnesota,
which have a minimum rating of A and a financial class size of IX or better
according to Best's Key Rating Guide for Property-Liability, and which are
acceptable to Mortgagee, and shall be satisfactory to Mortgagee in all other
respects. All insurance provided for in this Section 1.8 may provide for a
deductible amount not to exceed $7500 per occurrence.
All policies maintained by Mortgagor pursuant to the foregoing
Subsections (a), (b), (d), and (e) shall (i) provide that any losses payable
thereunder shall (pursuant to a standard first mortgagee clause in favor of, and
acceptable to, Mortgagee, to be attached to each such policy) be payable to
Mortgagee and assigns, (ii) include effective waivers by the insurer of all
claims for insurance premiums against Mortgagee, (iii) provide that any losses
shall be payable notwithstanding a) any act of negligence by Mortgagor or
Mortgagee, b) any foreclosure or other proceedings or notice of sale relating to
the Mortgaged Property, c) the vacancy of the improvements, d) any waiver of
subrogation rights by the insured, and/or e) any change in the title to or
ownership of any of the Mortgaged Property, and (iv) be written in amounts
sufficient to prevent Mortgagor from becoming a co-insurer under said policies.
The liability insurance policies described in the foregoing Subsection (c) shall
name Mortgagee as an additional insured, shall contain a separation or
severability of interests clause and shall waive contribution from any other
insurance carried by Mortgagee in the event of loss. Mortgagor shall cause the
originals of the policies of all such insurance (or certified copies of blanket
policies, with certificates of insurance covering the Mortgaged Property) to be
deposited with Mortgagee or to be otherwise held as directed by Mortgagee. At
least fifteen (15) days prior to the date on which the premiums on each such
policy shall become due and payable, Mortgagor shall furnish Mortgagee with
proof reasonably satisfactory to Mortgagee of payment thereof. Each of such
policies shall contain an agreement by the insurer that the same shall not be
amended, modified, cancelled, reduced or terminated for any reason, including
but not limited to a failure to pay premiums and/or expiration by its terms,
without at least thirty (30) days prior written notice to Mortgagee. It this
Mortgage is foreclosed, the purchaser at the foreclosure sale shall, after the
expiration of any statutory period of redemption, become the sole and absolute
owner of any and all such policies, with the sole right to collect and retain
all unearned premiums thereon, and, for this purpose, Mortgagor hereby assigns
and grants a security interest in said policies and unearned premiums to
Mortgagee.
In the event of loss, Mortgagor shall immediately give written notice
thereof, and of any claims filed under insurance policies as a result thereof,
to Mortgagee, and (i) if any event of default then exists hereunder, or (ii) if
Mortgagor does not promptly and in good faith make proof of loss and settle,
adjust or compromise any claims for loss, damage or destruction under any
policies of insurance maintained pursuant to Subsections (a), (b), (d), and (e)
hereof, and collect the proceeds thereof, Mortgagee is authorized and empowered
(but not obligated or required) to make proof of loss; settle, adjust or
compromise said claims; and collect and receive all such proceeds. The amount of
any such settlement, adjustment or compromise of claims shall always be subject
to Mortgagee's approval. Mortgagor agrees to pay all costs and expenses incurred
by Mortgagee in connection therewith, including court costs and attorneys' fees
(prior to trial, at trial, or appeal), on demand, which costs and expenses shall
also be secured hereby and shall bear interest from the date paid at the Note
Rate , but Mortgagee shall not be liable to Mortgagor for any failure by
Mortgagee to collect or to exercise diligence in collecting any such proceeds.
All proceeds of such insurance are hereby assigned, and shall be paid, to
Mortgagee. Such proceeds shall, at Mortgagee's option, be applied first to the
payment of all costs and expenses incurred by Mortgagee in obtaining such
proceeds, and second, at Mortgagee's option, either to the reduction of the
indebtedness hereby secured in such order as Mortgagee may elect, whether then
due and payable or not, or to the restoration or repair of the Mortgaged
Property, without affecting the lien of this Mortgage or the obligations of
Mortgagor hereunder. Interest upon the entire indebtedness secured hereby shall
continue until any such proceeds are received and applied to such indebtedness
by Mortgagee. Pending a decision as to the proper use and application of any
insurance proceeds, and during any such restoration or repair, Mortgagee shall
not be liable for interest on such proceeds. If Mortgagee elects to apply any
such insurance proceeds to the restoration or repair of the Mortgaged Property,
it shall not be liable for supervising such restoration or repair or for
supervising the disbursement of such insurance proceeds therefor, but such
disbursement shall proceed in a manner acceptable to Mortgagee, which shall be
similar to the manner in which major national banks permit construction loan
advances, and which shall be designed to include reasonable controls to assure
that such restoration or repair will be promptly completed in a workmanlike
manner and paid for in full, free of mechanics' liens. In such event, Mortgagor
shall deposit with Mortgagee, prior to commencing any such restoration or
repair, the amount, if any, by which the cost of such restoration or repair
exceeds the amount of such insurance proceeds, which amount shall be disbursed
to pay costs of such restoration or repair prior to, and in the same manner as,
such insurance proceeds. Any surplus which may remain after payment of all costs
of restoration or repair may, at the option of Mortgagee, be applied to
reduction of the indebtedness hereby secured, in any order which Mortgagee may
determine, whether then matured or to mature in the future, or be paid to
Mortgagor, as its interest may appear, the choice of application to be solely at
the discretion of Mortgagee. In no event shall Mortgagee be held responsible for
failure to pay for any insurance required hereby or for any loss or damage
growing out of a defect in any policy thereof or growing out of any failure of
any insurance company to pay for any loss or damage insured against or for
failure by Mortgagee to obtain such insurance or to collect the proceeds
thereof.
Section 1.9. Mortgagor shall pay or cause to be paid promptly, when
due, all charges or fees for utilities or services, including but not limited to
electricity, water, gas, telephone, sanitary sewer, and trash and garbage
removal, supplied to the Mortgaged Property, and, upon request of Mortgagee,
shall furnish receipts to Mortgagee showing such payment.
Section 1.10. Mortgagor covenants and agrees with Mortgagee, as long as
any amount secured hereby remains unpaid, at Mortgagor's sole cost and expense,
to (a) at all times keep proper and accurate books of account in which full,
true and correct entries will be made of all transactions affecting the
Mortgaged Property in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods involved; (b) at all
reasonable times permit Mortgagee and its representatives to inspect such books
and records and to make copies thereof; (c) on a regular monthly basis, and at
such other times as Mortgagee may reasonably request, furnish Mortgagee with
monthly financial statements and cash flow projections in the form provided to
the Mortgagee's Board of Directors as of the date of this Mortgage, and such
additional information and statements as it may reasonably request concerning
the financial, business and operational status of Mortgagor and/or the Mortgaged
Property and concerning performance by Mortgagor of the covenants and agreements
contained in the Note and in this Mortgage; and (d) annually furnish to
Mortgagee, as soon as available, but in any event within ninety (90) days after
the close of each fiscal year of Mortgagor, at Mortgagor's sole cost and
expense, Mortgagor's annual financial statements and operating statements for
said fiscal year, all prepared in accordance with generally accepted accounting
principles consistently applied, and certified as true, correct and complete by
Mortgagor. If Mortgagor fails to supply to Mortgagee any financial and/or
operating statements which Mortgagor is hereby required to so supply, or at any
time Mortgagor is otherwise in default hereunder, Mortgagee or its authorized
representatives may have access to all of Mortgagor's books and records for the
purpose of auditing the same and/or itself obtaining such statements, at
Mortgagor's expense.
Mortgagee, by giving written notice to Mortgagor, at any time within
sixty (60) days after receiving the above-mentioned financial and operating
statements from Mortgagor, may elect to have a person or firm of its choice make
a confirmatory examination of Mortgagor's books and records pertaining to the
Mortgaged Property. Any such confirmatory examination shall be at Mortgagee's
sole cost and expense, unless said examination reveals significant errors or
discrepancies in the above-mentioned financial and operating statements, in
which event the confirmatory examination shall be at the sole cost and expense
of Mortgagor.
Section 1.11. If Mortgagor shall fail to observe, comply with, or
perform any of the terms, covenants and conditions herein with respect to the
procuring and delivery of insurance, the payment of Impositions or Liens, the
keeping of the Mortgaged Property in repair, the furnishing of financial and
operating statements, the removal and/or disposal of Hazardous Substances or any
other term, covenant or condition herein or in the Note contained, Mortgagee may
itself observe, comply with or perform the same, may make such advances to
observe, comply with and perform the same as Mortgagee shall deem appropriate,
and may enter the Mortgaged Property for the purpose of observing, complying
with and performing any such term, covenant or condition. Mortgagee may expend
such sums, including reasonable attorneys' fees (prior to trial, at trial and on
appeal), to sustain the lien of this Mortgage or its priority, or to protect or
enforce its rights hereunder, or to obtain the right to enforce its rights and
remedies hereunder, including the payment of any prior Liens, claims and
encumbrances, other than Permitted Encumbrances which are not in default, as it
may deem desirable. Mortgagor agrees to repay all sums so advanced or expended
upon demand, with interest thereon at the Note Rate from the date of advancement
or expenditure, and all sums so advanced or expended, with interest, shall be
secured hereby, but no such advance or expenditure shall be deemed to relieve
Mortgagor from any default hereunder. Mortgagee shall not be bound to inquire
into the validity of any Imposition or Lien which Mortgagor fails to pay as and
when required hereby and which Mortgagor has not given notice to Mortgagee of
its intention to contest in accordance with the terms hereof.
Section 1.12. In the event Mortgagor transfers, leases or conveys to
any other party any interest in the Mortgaged Property, or any portion thereof,
legal or equitable, voluntarily or by operation of law, without the prior
written consent of Mortgagee; in the event Mortgagor shall sell or otherwise
dispose of the Mortgaged Property, or any interest therein or portion thereof,
without the prior written consent of Mortgagee; Mortgagee may, at its election,
declare the entire indebtedness hereby secured to be immediately due and
payable, without notice to Mortgagor (which notice Mortgagor hereby expressly
waives), and upon such declaration the entire indebtedness hereby secured shall
be immediately due and payable, anything hereinabove or in the Note to the
contrary notwithstanding. This provision does not apply to the sale in the
ordinary course of business of finished goods manufactured at the Premises, or
to the leasing of a portion of the Premises consistent with past practices.
In the event Mortgagor shall request the consent of Mortgagee to a
conveyance or encumbrance, Mortgagor shall deliver a written request to
Mortgagee together with complete information regarding such conveyance or
encumbrance and shall allow Mortgagee thirty (30) days after delivery of all
required information for evaluation of such request. In the event that such
request is not approved within such thirty (30) day period, it shall be deemed
not approved. Mortgagee may charge Mortgagor for its costs and expenses,
including reasonable attorneys' fees to evaluate and process any such sale,
conveyance, transfer, mortgage or other encumbrance request, which costs and
expenses shall be secured hereby and shall bear interest from the date incurred
at the Note Rate. Such approval may be subject to such modifications of the loan
terms, interest rate, and maturity date as may be established by Mortgagee.
Consent as to any one transaction shall not be deemed to be a waiver of the
right to require consent to future or successive transactions. If the Mortgaged
Property should be transferred to a privately held corporation or to a
partnership pursuant to the terms of this Section 1.12 during the term of this
Mortgage, thereafter a subsequent transfer of a partnership interest or a
corporate ownership interest shall constitute a conveyance for purposes of this
Section 1.12 and the consent of Mortgagee shall be required.
No transfer, conveyance, lease, sale, change or other disposition shall
relieve Mortgagor from personal liability for its obligations hereunder or under
the Note, whether or not the transferee assumes this Mortgage. Mortgagee may,
without notice to Mortgagor, deal with any successor owner of all or any portion
of the Mortgaged Property in the same manner as with Mortgagor, without in any
way discharging the liability of Mortgagor hereunder or under the Note.
Mortgagor shall not mortgage, pledge or otherwise grant a security
interest in any of the Mortgaged Property as collateral security for any other
obligation, without the prior written consent of Mortgagee.
Section 1.13.
(a) As additional security for the indebtedness secured by
this Mortgage, Mortgagor does hereby bargain, sell, assign, transfer
and set over unto Mortgagee all the rents, issues, profits and other
income of any kind which, whether before or after foreclosure, or
during the full statutory period of redemption, if any, shall accrue
and be owing for the use or occupation of the Mortgaged Property or any
part thereof.
(b) Mortgagor agrees that upon or at any time after (i) the
occurrence of a default or an event of default hereunder, or under the
Note, or under any separate Assignment of Leases and Rents securing the
Note, or (ii) the first publication of notice of sale for the
foreclosure of this Mortgage, or (iii) the commencement of an action to
foreclose this Mortgage, or (iv) the commencement of any period of
redemption after foreclosure of this Mortgage, Mortgagee shall, in any
such event, and at any such time, upon application to the District
Court in the county where the Mortgaged Property or any part thereof is
located, by an action separate from the foreclosure, in the foreclosure
action, or by independent action (it being understood and agreed that
the existence of a foreclosure is not a prerequisite to any action for
a receiver hereunder), be entitled to the appointment of a receiver for
the rents, issues, profits and all other income of every kind which
shall accrue and be owing for the use or occupation of the Mortgaged
Property or any part thereof, whether before or after foreclosure, or
during the full statutory period of redemption, if any, upon a showing
that Mortgagor has breached any covenant contained in this Mortgage,
the Note or any such separate Assignment of Leases and Rents,
including, without limitation, any covenant relating to any of the
following:
(1) Repayment of tenant security deposits, with
interest thereon, as required by applicable state laws, if
any;
(2) payment when due of prior or current real estate
taxes or special assessments with respect to the Mortgaged
Property or the periodic escrow for payment of the same;
(3) payment when due of premiums for insurance of the
types required hereby, or the periodic escrow for payment of
the same; or
(4) keeping of the covenants required of a lessor or
licensor pursuant to applicable state laws, if any.
Mortgagee shall be entitled to the appointment of a receiver without
regard to waste, adequacy of the security or solvency of Mortgagor. The
court shall determine the amount of the bond to be posted by the
receiver. The receiver, who shall be an experienced property manager,
shall collect (until the indebtedness secured hereby is paid in full
and, in the case of a foreclosure sale, during the entire redemption
period, if any) the rents, issues, profits and all other income of any
kind from the Mortgaged Property, manage and operate the Mortgaged
Property, execute leases within or beyond the period of the
receivership, if approved by the court, make tenant finish improvements
required by Leases and apply all rents, issues, profits and other
income collected by him in the following order:
(1) to payment of all reasonable fees of the
receiver, if any, approved by the court;
(2) to the items listed in clauses (1) through (4)
above (to the extent applicable) in the priority as numbered;
(3) to expenses for normal maintenance, operation and
management of the Mortgaged Property and for construction of
tenant finish improvements required by Leases executed by the
receiver; and
(4) the balance to Mortgagee to be credited, prior to
commencement of foreclosure, against the indebtedness secured
hereby, in such order as Mortgagee may elect, or to be
credited, after commencement of foreclosure, to the amount
required to be paid to effect a reinstatement prior to
foreclosure sale, or to be credited, after a foreclosure sale,
to any deficiency and then to the amount required to be paid
to effect a redemption, pursuant to applicable state laws, or
their successors, as the case may be, with any excess to be
paid to Mortgagor; provided, however, that if this Mortgage is
not reinstated nor the Mortgaged Property redeemed, as and
during the times provided by said state laws, or their
successors, the entire amount received pursuant hereto, after
deducting therefrom the amounts applied by Mortgagee to any
deficiency, shall be the property of the purchaser of the
Mortgaged Property at the foreclosure sale, together with all
or any part of the Mortgaged Property acquired through
foreclosure.
The receiver shall file periodic accountings as the court determines
are necessary and a final accounting at the time of his discharge.
Mortgagee shall have the right, at any time and without limitation, to
advance money to the receiver to pay any part or all of the expenses
which the receiver should otherwise pay, if cash were available from
the Mortgaged Property, and all sums so advanced, with interest thereon
at the Note Rate from the date advanced, shall be a part of the sum
required to be paid to redeem from any foreclosure sale. Said sums
shall be proved by the affidavit of Mortgagee, its agent or attorney,
describing the expenses for which the same were advanced and describing
the Mortgaged Property, which must be filed for record in the office
where this Mortgage is recorded, and a copy thereof shall be furnished
to the sheriff and the receiver at least ten (10) days before the
expiration of any period of redemption.
(c) Upon the happening of any of the events set forth above,
or during any period of redemption after foreclosure sale, and prior to
the appointment of a receiver as hereinbefore provided, Mortgagee shall
have the right to collect the rents, issues, profits and other income
of every kind from the Mortgaged Property and apply the same in the
manner hereinbefore provided for the application thereof by a receiver.
The rights set forth in this Subsection (c) shall be binding upon the
occupiers of the Mortgaged Property from the date of filing by
Mortgagee in the office where this Mortgage is recorded, in the county
in which the Mortgaged Property is located, of a notice of default in
the terms and conditions of this Mortgage and service of a copy of the
notice upon the occupiers of the Mortgaged Property. Enforcement hereof
shall not cause Mortgagee to be deemed a mortgagee in possession,
unless it elects in writing to be so deemed. For the purpose aforesaid,
Mortgagee may enter and take possession of the Mortgaged Property,
manage and operate the same and take any action which, in Mortgagee's
judgment, is necessary or proper to conserve the value of the Mortgaged
Property. Mortgagee may also take possession of, and for these purposes
use, any and all of the Property contained in the Mortgaged Property.
(d) The costs and expenses (including any receiver's fees and
reasonable attorneys' fees) incurred by Mortgagee pursuant to the
powers herein contained shall be immediately reimbursed by Mortgagor to
Mortgagee on demand, shall be secured hereby and shall bear interest
from the date incurred at the Note Rate. Mortgagee shall not be liable
to account to Mortgagor for any action taken pursuant hereto, other
than to account for any rents actually received by Mortgagee.
Section 1.14. At any time and from time to time, within three (3)
business days after receipt from Mortgagee of a written request therefor,
Mortgagor shall prepare, execute and deliver to Mortgagee, and/or any other
party which Mortgagee may designate, an estoppel certificate stating: (a) the
amount of the unpaid principal balance and accrued interest secured by this
Mortgage on the date thereof; (b) the date upon which the last payment secured
by this Mortgage was made and the date the next payment secured by this Mortgage
is due; and (c) that the provisions of the Note, this Mortgage and the other
collateral security documents described in said request have not been amended or
changed in any manner, that there are no defaults or events of default then
existing under the terms of the Note, this Mortgage or the other collateral
security documents described in said request, and that Mortgagor has no
defenses, claims or offsets against full enforcement thereof according to their
terms, or listing and describing any such amendments, changes, defaults, events
of default, defenses, claims or offsets which do exist.
Section 1.15. Mortgagor shall not place, locate, produce, generate,
create, store, treat, handle, transport, incorporate, discharge, emit, spill,
release, deposit or dispose of any Hazardous Substance in, upon, under, over or
from the Mortgaged Property and shall not permit any Hazardous Substance to be
placed, located, produced, generated, created, stored, treated, handled,
transported, incorporated, discharged, emitted, spilled, released, deposited,
disposed of or to escape therein, thereupon, thereunder, thereover or therefrom;
and Mortgagor shall comply with all Environmental Regulations which are
applicable to the Mortgaged Property. Mortgagor agrees to properly remove and
dispose of any Hazardous Substance found on or in the Mortgaged Property, at
Mortgagor's sole cost and expense and in compliance with all applicable
Environmental Regulations. At any time, and from time to time, if Mortgagee
requests, Mortgagor shall have any environmental assessment, review, audit
and/or report relating to the Mortgaged Property heretofore provided by
Mortgagor to Mortgagee updated and/or amplified, at Mortgagor's sole cost and
expense, by an engineer or scientist acceptable to Mortgagee, or shall have such
an assessment, review, audit and/or report prepared for Mortgagee, at
Mortgagor's sole cost and expense, if none has previously been provided.
Mortgagor shall indemnify Mortgagee, its directors, officers, employees, agents,
contractors, licensees, invitees, successors and assigns (hereinafter
collectively referred to as "Indemnified Parties") against, shall hold the
Indemnified Parties harmless from, and shall reimburse the Indemnified Parties
for, any and all claims, demands, judgments, penalties, liabilities, costs,
damages and expenses incurred by the Indemnified Parties, including court costs
and attorney's fees (prior to trial, at trial and on appeal), in any action,
administrative proceeding or negotiations against or involving any of the
Indemnified Parties, resulting from any breach of the foregoing covenants, from
the untruthfulness or any warranty or representation set forth in Subsection
1.2(j) hereof, from a failure by Mortgagor to perform any of its obligations
hereunder with respect to any Hazardous Substance, from any costs associated
with any Hazardous Substance present on the date of this Mortgage or from the
discovery of any Hazardous Substance in, upon, under or over, or emanating from,
the Mortgaged Property, it being the intent of Mortgagor and Mortgagee that the
Indemnified Parties shall have no liability for damage or injury to human
health, the environment or natural resources caused by, for abatement, clean-up,
removal or disposal of, or otherwise with respect to Hazardous Substances by
virtue of the interest of Mortgagee in the Mortgaged Property created hereby or
as the result of Mortgagee exercising any of its rights or remedies with respect
thereto hereunder, including but not limited to becoming the owner thereby by
foreclosure or conveyance in lieu of foreclosure. The foregoing covenants,
representations and warranties of Subsection 1.2 (j) and of this Section 1.15
shall be deemed continuing covenants, representations and warranties for the
benefit of the Indemnified Parties, including but not limited to any purchaser
at a foreclosure sale, any transferee of the title of Mortgagee or any other
purchaser at a foreclosure sale, and any subsequent owner of the Mortgaged
Property claiming by, through or under Mortgagee, any foreclosure of this
Mortgage and/or acquisition of title to the Mortgaged Property or any part
thereof by Mortgagee, or by anyone claiming by, through or under Mortgagee, by
deed in lieu of foreclosure or otherwise. Any amounts covered by the foregoing
indemnification shall bear interest from the date paid at the Note Rate and
shall be secured hereby.
ARTICLE II
TAKING OF PROPERTY
Section 2.1. In case of a taking of or damage to all or any part of the
Mortgaged Property as a result of, or a sale thereof in lieu of or in
anticipation of, the exercise of the power of condemnation or eminent domain, or
the commencement of any proceedings or negotiations which might result in such a
taking, damage or sale, Mortgagor shall promptly give Mortgagee written notice
thereof, generally describing the nature of such taking, damage, sale,
proceedings or negotiations and the nature and extent of the taking, damage or
sale which has resulted or might result therefrom, as the case may be, and
Mortgagee shall have the right to participate in such proceedings or
negotiations. Should any of the Mortgaged Property be taken or damaged by
exercise of the power of condemnation or eminent domain, or be sold by private
sale in lieu or in anticipation thereof, Mortgagor does hereby irrevocably
assign, set over and transfer to Mortgagee any award, payment or other
consideration for the property so taken, damaged or sold. Such award, payment or
consideration shall, at Mortgagee's option, be applied first to the payment of
all costs and expenses incurred by Mortgagee in obtaining and preserving such
award, payment or consideration, and second, at Mortgagee's option, either to
the reduction of the indebtedness hereby secured by application thereof to said
indebtedness, in any order which Mortgagee may determine, whether then due and
payable or not, or to the restoration or repair of the Mortgaged Property,
without affecting the lien of this Mortgage or the obligations of Mortgagor
hereunder. If (a) an event of default then exists hereunder, or (b) Mortgagor
does not promptly and in good faith compromise, settle and collect all awards,
payments or consideration for the property so taken, damaged or sold, Mortgagee
is authorized, at its option, in the name of Mortgagor or in its own name, to
compromise, settle, collect and receipt for all awards, payments or
consideration for the property so taken, damaged or sold. The amount of any such
compromise or settlement shall always be subject to Mortgagee's approval.
Mortgagor agrees to pay all costs and expenses incurred by Mortgagee in
connection therewith, including court costs and attorney's fees (prior to trial,
at trial and on appeal), on demand, which costs and expenses shall also be
secured hereby and shall bear interest from the date paid at the Note Rate, but
Mortgagee shall not be liable to Mortgagor for any failure by Mortgagee to
collect or to exercise diligence in collecting any such award, payment or
consideration. Interest upon the entire indebtedness secured hereby shall
continue until any such award, payment or consideration is received and applied
by Mortgagee to said indebtedness, and, pending a decision as to the proper
application of said award, payment or consideration, and pending the completion
of any such repairs or restoration, Mortgagee shall not be liable for interest
thereon. Mortgagor will, in good faith and with due diligence, file and
prosecute what would, absent this assignment, be its claims for any such award,
payment or consideration and will cause the same to be collected and paid over
to Mortgagee. If Mortgagee elects to apply any such award, payment or
consideration to the restoration or repair of the Mortgaged Property, it shall
not be liable to supervise such restoration or repair or to supervise the
disbursement of such award, payment or consideration therefor, but such
disbursement shall proceed in a manner acceptable to Mortgagee, which shall be
similar to the manner in which major national banks permit construction loan
advances, and which shall be desired to include reasonable controls to assure
that such restoration or repair will be promptly completed in a workmanlike
manner and paid for in full, free of mechanics' liens. In such event, Mortgagor
shall deposit with Mortgagee, prior to commencing any such restoration or
repair, the amount, if any, by which the cost of such restoration or repair
exceeds the amount of such award, payment or consideration, which amount shall
be disbursed to pay costs of such restoration or repair prior to, and in the
same manner as, such award, payment or consideration. Any surplus which may
remain after payment of all costs of restoration or repair may, at the option of
Mortgagee, be applied in reduction of the indebtedness hereby secured, in any
order which Mortgagee may determine, whether then matured or to mature in the
future, or be paid to Mortgagor, as its interest may appear, the choice of
application to be solely at the discretion of Mortgagee.
ARTICLE III
DEFAULT AND REMEDIES THEREFOR
Section 3.1. If any one or more of the following events (herein
referred to as "events of default") shall occur:
(a) Default in the payment of any payment of principal,
interest and/or any other sum of money required to be paid by Mortgagor
pursuant to the Note, to this Mortgage, to any Lease or to any other
instrument securing the Note, as and when due,
(b) Mortgagor shall file a voluntary petition in a bankruptcy,
reorganization, composition, readjustment, arrangement, insolvency,
liquidation, dissolution or similar proceeding under any present or
future statute, law or regulation, shall consent to voluntary or
involuntary adjudication in bankruptcy or to reorganization, or shall
be adjudicated bankrupt or insolvent under any applicable law or laws,
or admits, in writing, to having become insolvent or to be unable to
pay its debts as they become due, or becomes unable to pay its debts as
they mature, or makes an assignment for the benefit of its creditors,
or is dissolved, liquidated, terminated or merged, or if it applies
for, or if it consents to, the appointment of a trustee or receiver for
the Mortgaged Property or for any portion of its assets,
(c) A trustee or receiver is appointed for the Mortgaged
Property, for Mortgagor, for any portion of any of Mortgagor's assets,
or an involuntary petition in bankruptcy or insolvency is filed against
Mortgagor, and is not discharged within sixty (60) days after such
appointment or filing,
(d) Default by Mortgagor under any term, covenant or condition
of this Mortgage, of the Note, of any Lease, of any other instrument
securing the Note other than a default described in Subsection (a)
above, which has not been cured within ten days of notice by Mortgagee
of the default given in accordance with paragraph 4.3 of this Mortgage,
(e) Any representation or warranty made by Mortgagor to
Mortgagee in connection with the loan secured hereby proves to be
untrue in any material respect, or
(f) Any judgment is entered in any court against Mortgagor and
is not satisfied in full within thirty (30) days after all rights to
appeal from the same have expired, or any writ of execution or
attachment or similar process is issued or levied against any part of
the Mortgaged Property or any interest therein,
then, in any such case, Mortgagee may, at its option, without notice, declare
the principal of and the accrued interest on the Note, and all sums advanced
hereunder, with interest thereon, to be forthwith due and payable, and thereupon
the Note and all other indebtedness secured hereby, including both principal and
all unpaid interest accrued thereon, including all applicable late payment
charges, and including all sums advanced hereunder and interest thereon, shall
be and become immediately due and payable without presentment, demand or notice
of any kind. Time is of the essence hereof.
Section 3.2. In the event of the happening of any event of default, or
in case the principal of the Note shall have become due and payable in full,
whether by lapse of time or by acceleration, then and in every such case the
holder of the Note may, at its option, (1) proceed to protect and enforce its
rights by a suit or suits in equity or at law for the specific performance of
any covenant or agreement contained herein, in the Note or in any other
instrument which refers to or secures the Note, or in aid of the execution of
any right, power or remedy herein or therein granted, or for the foreclosure of
this Mortgage, or for damages, or to collect the indebtedness secured hereby, or
for the enforcement of any other appropriate legal, equitable, statutory or
contractual remedy, and shall be entitled to the appointment of a receiver to
operate and protect the Mortgaged Property and to collect rents due under any
Lease, and/or (2) sell the Mortgaged Property at public auction in one or more
parcels, at Mortgagee's option, and convey the same to the purchaser in fee
simple, agreeably to the statute in such case made and provided, Mortgagor to
remain liable for any deficiency, if permitted by law. Further, the holder of
the Note, in exercising its rights hereunder, shall also have, without
limitation, all of the rights and remedies provided by the Minnesota Uniform
Commercial Code, including the right to proceed under the Minnesota Uniform
Commercial Code provisions governing default as to any fixtures, equipment,
instruments, general intangibles, accounts, contract rights, claims or personal
property which may be included in or related to the Mortgaged Property and as to
any deposits, policies, unearned premiums, proceeds, awards, payments or
consideration assigned to Mortgagee as further security hereunder, separately
from the real estate included in the Mortgaged Property, or to proceed as to any
or all of such property in accordance with its rights and remedies in respect of
said real estate. If Mortgagee should elect to proceed separately as to any such
property, Mortgagor agrees to make such property available to Mortgagee at a
place or places reasonably acceptable to Mortgagee, and any notification of
intended disposition of any of such property is required by law, such
notification shall be deemed commercially reasonable and reasonably and properly
given if mailed at least ten (10) days before such disposition in the manner
below provided.
Section 3.3. In case of any sale of any of the Mortgaged Property
pursuant to any judgment or decree of any court or otherwise in connection with
the enforcement of any of the terms of this Mortgage, Mortgagee, its successors
or assigns, may become the purchaser, and, for the purpose of making settlement
for or payment of the purchase price, shall be entitled to turn in and use the
Note and any claims for interest matured and unpaid thereon, together with
additions to the mortgage debt accrued, and interest thereon, if any, in order
that there may be credited as paid on the purchase price, at Mortgagee's option,
any sum then due hereunder and/or under the Note, including principal and
interest thereon, and any accrued additions to the mortgage debt and interest
thereon, or any portion thereof.
Section 3.4. Each and every right, power or remedy herein specifically
given shall be cumulative with and in addition to every other right, power or
remedy, express or implied, given or now or hereafter existing at law, in
equity, by statute, in the Note, herein or in any other document which secures
the Note, and each and every right, power and remedy herein specifically given
or otherwise so existing may be exercised concurrently or separately, from time
to time, as often and in such order as may be deemed expedient by Mortgagee or
the holder of the Note, and the exercise or the beginning of the exercise of one
right, power or remedy shall not be deemed a waiver of the right to exercise at
the same time or thereafter any other right, power or remedy. No delay or
omission of Mortgagee in the exercise of any such right, power or remedy shall
impair any such right, power or remedy or any other right, power or remedy of
Mortgagee or be construed to be a waiver of any default or acquiescence therein.
Mortgagee shall have all rights, powers and remedies available under the law in
effect now and/or at the time such rights, powers and remedies are sought to be
enforced, whether or not they are available under the law in effect on the date
hereof.
Section 3.5. The purchase money proceeds and avails of any foreclosure
sale of the Mortgaged Property, or any part thereof, and the proceeds and avails
of any other remedy hereunder unless to the contrary provided by Section 1.13
hereof, shall be paid and applied as follows:
(a) First to the payment of costs, charges and expenses of
foreclosure and of sale and of all proper expenses (including court
costs and maximum attorneys' fees permitted by law), liabilities and
advances incurred or made in connection therewith or otherwise incurred
or made hereunder by Mortgagee, and to reimburse Mortgagee for payment
of all Impositions, Liens and encumbrances superior to the lien of
these presents which have been paid by Mortgagee;
(b) Second to the payment to Mortgagee of the amount then
owing and unpaid under the Note and this Mortgage for principal,
interest, advances and interest thereon, and in case any such proceeds
shall be insufficient to pay the whole amount so due, then to the
payment of such items in any order determined by Mortgagee; and
(c) Third, any excess to be paid to Mortgagor, its successors
or assigns, or to whomsoever may be lawfully entitled to receive the
same.
Section 3.6. In case Mortgagee shall have proceeded to enforce any
right, remedy or power under this Mortgage by foreclosure, sale, entry or
otherwise, and such proceedings shall have been discontinued or abandoned for
any reason or shall have been determined adversely to Mortgagee, then and in
every such case Mortgagor and Mortgagee shall be restored to their former
positions and rights hereunder with respect to the Mortgaged Property, and all
rights, remedies and powers of Mortgagee shall continue in full force and effect
as if no such proceedings had been initiated.
Section 3.7. In the case of any receivership, insolvency, bankruptcy,
reorganization, arrangement, readjustment, composition, dissolution,
liquidation, termination or other judicial proceedings affecting Mortgagor, its
creditors or its property, Mortgagee, to the extent permitted by law, shall be
entitled to file such proofs of claim and other documents as may be necessary or
advisable in order to have its claims allowed in such proceedings for the entire
amount due and payable under the Note, this Mortgage and any other instrument
securing or referring to the Note, at the date of institution of such
proceedings, and for any additional amounts which may become due and payable
hereunder and thereunder after such date, including but not limited to
Mortgagee's costs, expenses and attorneys' fees incurred in connection
therewith.
Section 3.8. Mortgagor, for itself and on behalf of all persons,
parties and entities which may claim under Mortgagor, hereby waives all
requirements of law relating to the marshalling of assets, if any, which would
be applicable in connection with the enforcement by Mortgagee of its remedies
for an event of default hereunder, absent this waiver.
Section 3.9. No waiver of any provision hereof shall be implied from
the conduct of the parties. Any such waiver must be in writing and must be
signed by the party against which such waiver is sought to be enforced. The
waiver or release by Mortgagee of any breach of the provisions, covenants and
conditions set forth herein on the part of Mortgagor to be kept and performed
shall not be a waiver or release of any preceding, contemporaneous or subsequent
breach, of the same or any other provision, covenant or condition contained
herein. The subsequent acceptance of any sum in payment of any indebtedness
secured hereby or any other payment hereunder by Mortgagor to Mortgagee shall
not be construed to be a waiver or release of any preceding breach by Mortgagor
of any provision, covenant or condition of this Mortgage, other than the failure
of Mortgagor to pay the particular sum so accepted, regardless of Mortgagee's
knowledge of such preceding breach at the time of acceptance of such payment. No
payment by Mortgagor, or receipt by Mortgagee of a lesser amount than the full
amount secured hereby shall be deemed to be other than on account of the sums
due and payable hereunder, nor shall any endorsement or statement on any check
or any letter accompanying any check or payment be deemed an accord and
satisfaction, and Mortgagee may accept any check or payment without prejudice to
Mortgagee's right to recover the balance of such sums or to pursue any other
remedy provided in this Mortgage. The consent by Mortgagee to any matter or
event requiring such consent shall not constitute a waiver of the necessity for
such consent to any subsequent matter or event.
ARTICLE IV
MISCELLANEOUS
Section 4.1. Whenever any of the parties hereto is referred to, such
reference shall be deemed to include and apply to the successors and assigns of
such party, subject to the provisions of Section 1.12 hereof; and all covenants,
promises and agreements by or on behalf of Mortgagor in this Mortgage contained
shall bind Mortgagor and also its successors and assigns and shall inure to the
benefit of Mortgagee and its successors and assigns, whether elsewhere herein so
expressed or not. All representations and warranties contained herein or
otherwise heretofore made by Mortgagor to Mortgagee shall survive the execution
and delivery hereof. The singular of all terms used herein shall include the
plural, the plural shall include the singular, and the use of any gender herein
shall include all other genders, where the context so requires or permits.
Section 4.2. The unenforceability or invalidity of any provision or
provisions of this Mortgage as to any persons or circumstances shall not render
that provision nor any other provision or provisions herein contained
unenforceable or invalid as to any other persons or circumstances, and
provisions hereof, in all other respects, shall remain valid and enforceable.
Mortgagee shall be subrogated for further security to the lien, whether or not
released of record, of any and all encumbrances paid out of the proceeds of the
Note or out of any advances made by Mortgagee hereunder.
Section 4.3. All notices and elections provided for herein shall be in
writing and shall be deemed to have been given (unless otherwise required by the
specific provisions hereof or by law in respect to any matter) when deposited in
the United States mail, registered or certified, return receipt requested,
postage prepaid, to the address of Mortgagor or Mortgagee set forth in the first
paragraph of this Mortgage or to such other address as such party shall
hereafter furnish by written notice to the other party hereto, at least ten (10)
days prior to the effective date of said change in address.
Section 4.4. Mortgagor, at its sole cost and expense, shall appear in
and defend any dispute, action, suit or proceeding purporting to relate to or
affect the Note or the security therefor, including but not limited to this
Mortgage. If any action or proceeding relating to or affecting the Note, this
Mortgage or the Mortgaged Property is commenced or threatened, to which action
or proceeding Mortgagee is made a party, or in which it becomes necessary or
desirable, in Mortgagee's reasonable opinion, to defend or uphold, or to
consider defending or upholding, the lien of this Mortgage, or to protect the
Mortgaged Property or any part thereof, or to exercise, or to obtain the right
to exercise, any of Mortgagee's rights and remedies hereunder, including any
foreclosure or commencement of foreclosure proceedings or probate, bankruptcy,
insolvency, arrangement, reorganization or other debtor-relief proceedings, or
with respect to which Mortgagee otherwise incurs costs or expenses, all sums
paid by Mortgagee in order to determine the merits thereof, to establish or
defend the rights and liens of this Mortgage, to protect the Mortgaged Property
or any part thereof, and to exercise, or to obtain the right to exercise, any of
Mortgagee's rights and remedies hereunder, and/or otherwise incurred by
Mortgagee in connection therewith (including reasonable attorneys' fees and
costs and allowances prior to trial, at trial and on appeal), and whether suit
be brought or not, and whether or not Mortgagee prevails thereon, shall be paid
upon demand, to Mortgagee by Mortgagor, together with interest thereon at the
Note Rate from the date paid, and any such sum or sums shall be secured hereby.
Section 4.5. In the event Mortgagee (a) grants any extension of time or
forebearance with respect to the payment of any indebtedness secured by this
Mortgage; (b) takes other, or additional security for the payment thereof; (c)
waives or fails to exercise any right, power or remedy granted herein, in the
Note or in any other document which secures or refers to the Note; (d) grants
any release, with or without consideration, of the whole or any part of the
security for the payment of the indebtedness secured hereby or the release of
any person, party or entity liable for payment of said indebtedness; and/or (e)
amends or modifies in any respect any of the terms and provisions hereof, of the
Note (including substitution of another note) or of any other document which
secures or refers to the Note; then and in any such event, such act or omission
to act shall not release Mortgagor under any covenant of this Mortgage or of the
Note, nor preclude Mortgagee from exercising any right, power or privilege
herein or therein granted or intended to be granted, and shall not in any way
impair or affect the lien or priority of this Mortgage. In the event any
additional real property, Improvements, leases, fixtures or personal property
not herein specifically identified shall be or become a part of the Mortgaged
Property, then this Mortgage shall immediately attach to and constitute a lien
against or security interest in such additional items, as appropriate, without
further act or deed of either party hereto.
Section 4.6. This instrument shall be governed by and interpreted in
accordance with the laws of the State of Minnesota. Notwithstanding any
provision herein, in the Note or in any other instrument which secures or refers
to the Note contained, the total liability for payments in the nature of
interest hereunder and thereunder shall not exceed interest at the maximum rate
permitted by the laws of the State of Minnesota on the indebtedness secured
hereby, if any, and any amounts paid in excess of said maximum rate shall be
refunded to Mortgagor. This instrument shall be construed in accordance with its
intent and with the fair meaning of its provisions, and without regard to any
presumption or other rule of interpretation requiring construction thereof
against the party which caused the same to be drafted.
Section 4.7. This Mortgage may be executed simultaneously in two (2) or
more identical counterparts, each of which, standing alone, shall be an
original, but all of which shall constitute but one (1) agreement.
Section 4.8. This instrument shall be deemed to be a Fixture Financing
Statement within the meaning of the Minnesota Uniform Commercial Code:
(a) Name and address of North Atlantic Technologies, Inc.
Debtor: 8120 Penn Ave. So., Ste. 435
Bloomington, MN 55431
(b) Name and address of WDH Investments, Co.
Secured Party: 8120 Penn Ave. So., Ste. 470
Bloomington, Minnesota 55431
(c) Description of the types
(or items) of property
covered by this
Financing Statement: See pages 1 and 2 above.
(d) Description of real
estate to which the
collateral is attached
or upon which it is or
will be located: See Exhibit A hereto.
Some of the above-described collateral is or is to become fixtures upon the
above-described real estate, and this Financing Statement is to be filed for
record in the public real estate records.
IN WITNESS WHEREOF, The undersigned has caused this instrument to be duly
executed as of the day and year first above written.
MORTGAGOR:
NORTH ATLANTIC TECHNOLOGIES, INC.
By David Paulin
Its Vice-President
STATE OF Minnesota )
) ss.
COUNTY OF Hennepin )
The foregoing instrument was acknowledged before me on June 16, 1995, by
David R. Paulin, the Vice President of North Atlantic Technologies, Inc., a
corporation under the laws of Minnesota, on behalf of the corporation.
James A. Rubenstein
Notary Public
THIS INSTRUMENT DRAFTED BY: SEND TAX STATEMENTS TO:
James A. Rubenstein North Atlantic Technologies, Inc.
MOSS & BARNETT 500 Como Avenue
A Professional Association St. Paul, Minnesota 55103
4800 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402-4129
Telephone: (612) 347-0300
EXHIBIT A
TO COMBINATION MORTGAGE, SECURITY AGREEMENT
AND FIXTURE FINANCING STATEMENT
BETWEEN
NORTH ATLANTIC TECHNOLOGIES, INC., MORTGAGOR
AND
WDH INVESTMENTS CO., MORTGAGEE
Legal Description:
The following described land situated in Ramsey County, Minnesota, to wit:
Parcel 1:
Lot 3, Block 1, ROSENTHAL ADDITION, lying West of the North-South Quarter line
of Section 25, Township 29, Range 23 and except that part overlying Lots 3 and
4, Block 9, Foundry Addition to St. Paul.
Lot 1, Block 2, ROSENTHAL ADDITION.
Parcel 2:
Lot 3, Block 1, ROSENTHAL ADDITION, according to the recorded plat thereof, and
situated in Ramsey County, Minnesota, except that part lying West of the
North-South Quarter line of Section 25, Township 29, Range 23 and also except
that part overlying Lots 3 and 4, Block 9, Foundry Addition to St. Paul.
Permitted Encumbrances:
1. Accommodation Security Agreement dated April 13, 1990 between North
Atlantic Technologies, Inc., Debtor, and Willis Heim, Secured Party.
2. Security Agreement dated May 8, 1995 between North Atlantic
Technologies, Inc., Debtor, and First Bank National Association,
Secured Party.
3. Northern States Power Co. (light fixture and tubes)
4. Tenancy interests of the following lessees.
J & J Services
Alternative Sourcing
JEM Trucking
R & R Machinery Moving
Top All Roofing
Twin City Flame
Coats Rental
5. Special assessments for streets and sewers.
6. Utility and drainage easements as shown on recorded plat for Rosenthal
Addition.
7. Easements and rights set forth in Document No. 794787.
8. Easements for slopes, cuts and fills in grading as shown in Document
No. 621391.
9. Utility easements set forth in Document No. 1392360.
10. Railroad right of way easements set forth in Document No. 529764.
11. Railroad mortgage filed as Document No. 1769940.
EXHIBIT 10.26
TENTH AMENDMENT TO CREDIT AGREEMENT
THIS TENTH AMENDMENT dated as of March 28, 1995, by and between NORTH
ATLANTIC TECHNOLOGIES, INC. (the "Company"), a Minnesota corporation, and FIRST
BANK NATIONAL ASSOCIATION (the "Bank"), a national banking association.
1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement dated December
21, 1987, by and between the Company and the Bank, as amended (the "Credit
Agreement"), is hereby amended as follows:
(a) The definition of "Pledge Agreement" in Section 1 is
amended to read in its entirety as follows:
"Pledge Agreement": The Pledge Agreement by and between Willis
D. Heim and the Bank, substantially in the form of Exhibit C
hereto, as the same may be amended, restated, modified, or
supplemented from time to time with the written consent of the
Company, which consent shall not be unreasonably withheld.
(b) The definition of "Amount of the Commitment" in Section 1
is amended to read in its entirety as follows:
"Amount of the Commitment": $1,450,000 or such lesser amount
as the Company shall have advised the Bank from time to time
in a written notice executed by the Chief Executive Officer
and the Chief Financial Officer of the Company. Once reduced,
the Amount of the Commitment may not be increased.
(c) Section 2.01 is hereby amended as follows:
2.01 Commitment of the Bank. The Bank, upon the terms
and subject to the conditions hereof, will lend to the Company
during the period from the Effective Date to the Termination
Date, from time to time and in such amounts as the Company
shall request, in the form of loans and letters of credit
("Letters of Credit"), an aggregate principal amount at any
time outstanding up to but not in excess of the Amount of the
Commitment; provided, that the Bank shall not be obligated to
make an Advance which, when added to the Aggregate
Outstandings, would exceed the Amount of the Commitment.
(d) The first sentence in Section 2.02 of the Credit Agreement
is amended to read as follows:
The obligation to repay Advances made by the Bank, and to pay
interest thereon, shall be evidenced by the Company's
promissory note dated April 13, 1990, payable to the order of
the Bank in the principal amount of $1,450,000, and all
amendments, extensions, renewals, and replacements thereof
(the "Note"), which shall mature on the Termination Date.
(e) Section 2.09 is added as follows:
2.09 Letters of Credit. All Letters of Credit must be
in form and substance acceptable to the Bank. Prior to the
issuance, amendment, extension, renewal, or replacement of any
Letter of Credit, the Company shall execute and deliver to the
Bank such applications and agreements for the same as the Bank
may request, shall pay to the Bank a letter of credit fee and
an administrative fee in amounts to be determined by the Bank,
and shall comply with such other requirements as the Bank, in
its sole discretion, may request in connection with the same.
The Company shall pay to the Bank all amounts paid by the Bank
under any Letter of Credit immediately upon such payment by
the Bank, and the Bank is irrevocably authorized to receive
any such payment, without demand or notice of any kind, by
making an Advance in the form of a loan. In addition, in the
event that any Letters of Credit remain outstanding on the
Termination Date or at any time after the occurrence of an
Event of Default, the Bank is irrevocably authorized to make
one or more Advances in an amount equal to the aggregate
outstanding amount of such Letters of Credit, and the Company
grants the Bank a first lien and security interest in all such
funds, including without limitation all instruments evidencing
such funds, and all products and proceeds of the foregoing, as
security for all obligations, liabilities, and indebtedness of
the Company to the Bank, whether now existing or hereafter
arising.
(f) Section 6.01(f) is amended to read in its entirety as
follows:
Default by Willis D. Heim in the performance or observance of
any other of the terms, covenants, or conditions of the Pledge
Agreement, including failure at any time to pledge sufficient
Collateral pursuant to the terms of the Pledge Agreement such
that the sum of the market value of the Bonds (as determined
by the most recent published closing price published in the
Wall Street Journal multiplied by the number of such bonds
pledged to the Bank, or if such price quotation is
unavailable, such value as is determined by the Bank in its
sole discretion) multiplied by .8 and the market value of the
Stocks (as determined by the most recent published closing
price per share on the New York Stock Exchange multiplied by
the number of such shares pledged to the Bank) multiplied by
.75 equals or exceeds the Amount of the Commitment, which
default is not remedied within ten (10) days after the Bank
shall have given him notice of the occurrence thereof; or
(g) Section 6.02 is amended by adding the following:
In addition to the Bank's other rights and remedies, upon the
occurrence of an Event of Default and at any time thereafter,
the Bank may declare a sum equal to the then outstanding
amount of the Letters of Credit to be due and payable by the
Company to the Bank, whereupon the same shall be due and
payable, without presentment, demand, protest, or other notice
of any kind, all of which are hereby expressly waived by the
Company. The Company grants the Bank a first lien and security
interest in all such funds paid to the Bank, including without
limitation all instruments evidencing such funds, and all
products and proceeds of the foregoing, as security for all
obligations, liabilities, and indebtedness of the Company to
the Bank, whether now existing or hereafter arising.
2. AMENDMENT TO NOTE. The amount of the Company's promissory note dated
April 13, 1990, as amended, payable to the order of the Bank (the "Note"), is
changed to $1,450,000.
3. AMENDMENT TO GUARANTY. The second WHEREAS paragraph on the first
page of Heim's Guaranty dated December 21, 1987, in favor of the Bank with
respect to the Company (the "Guaranty"), is amended to read as follows:
WHEREAS, pursuant to the Credit Agreement, the Bank has
agreed, upon certain terms and conditions therein provided, to make
advances to the Company in an aggregate amount up to but not exceeding
the Amount of the Commitment (as such term is defined in the Credit
Agreement) to be evidenced by the Company's promissory note dated April
13, 1990, payable to the order of the Bank in the principal amount of
$1,450,000, and all amendments, extensions, renewals, and replacements
thereof (the "Note"); and
4. AMENDMENTS TO PLEDGE AGREEMENT. Willis D. Heim's Pledge Agreement
dated December 21, 1987, in favor of the Bank, as amended (the "Pledge
Agreement"), is hereby amended as follows:
(a) The second WHEREAS paragraph on the first page is amended
to read as follows:
WHEREAS, pursuant to the Credit Agreement, the
Pledgee has agreed, upon certain terms and conditions therein
provided, to make advances to the Company in an amount up to
but not exceeding the amount of the Commitment (as such term
is defined in the Credit Agreement) to be evidenced by a
promissory note of the Borrower to the Pledgee dated April 13,
1990, in the principal amount of $1,450,000, and all
amendments, extensions, renewals, and replacements thereof
(the "Note"); and
(b) Section 1(a) is amended to read in its entirety as
follows:
Certain bonds acceptable to the Pledgee which are owned by the
Pledgor (all of said bonds being hereinafter referred to as
the "Bonds"), certain common stocks acceptable to the Pledgee
that can be traded on the New York Stock Exchange and which
are owned by the Pledgor (all of said stocks being hereinafter
referred to as the "Stocks"), the certificates in negotiable
form and duly endorsed in blank representing the Bonds and the
Stocks (hereinafter collectively referred to as the
"Securities") and any coupons therefor, such that the sum of
the market value of the Bonds multiplied by .8 and the market
value of the Stocks multiplied by .75 equals or exceeds the
Amount of the Commitment; and
(c) Each reference to "Bonds" in the Pledge Agreement, other
than in Section 1(a) of the Pledge Agreement as amended above, is
deemed to be a reference to "Securities."
(d) The first sentence of Section 5 is amended to read in its
entirety as follows:
If an Event of Default as such term is defined in Section 6.01
of the Credit Agreement shall have occurred and be continuing,
including failure by the Pledgee at any time to pledge
sufficient Collateral such that the sum of the market value of
the Bonds (as determined by the most recent published closing
price published by the Wall Street Journal multiplied by the
number of such Bonds pledged to the Bank, or if such price
quotation is unavailable, such value as is determined by the
Bank in its sole discretion) multiplied by .8 and the market
value of the Stocks (as determined by the most recent
published closing price per share on the New York Stock
Exchange multiplied by the number of such shares pledged to
the Bank) multiplied by .75 equals or exceeds the Amount of
the Commitment, which failure is not remedied within ten (10)
days after the Pledgee shall have given the Pledgor notice
thereof, then the Pledgee shall be entitled to exercise all of
the rights and remedies available to a secured party under the
Uniform Commercial Code and all rights and remedies available
to it under the Secured Obligations and this Pledge Agreement,
including without limitation: (a) the right to exercise and
enforce its rights under subparagraph 3(b) hereof with respect
to the Collateral, and (b) the right to sell, assign,
transfer, endorse, and deliver the whole or, from time to
time, any part of the Collateral or any interest therein at
public or private sale or at any broker's board or on any
securities exchange, for cash, upon credit, or for other
property, for immediate or future delivery, and for such price
or prices and on such terms as the Pledgee in its sole
discretion shall deem appropriate.
5. Heim consents and agrees to the amendments set forth herein, and
agrees that the Guaranty guarantees payment of the Note and all amendments,
extensions, renewals, and replacements thereof and all other Guaranteed
Obligations as described in the Guaranty, and agrees that the Pledge Agreement
secures the Note and all amendments, extensions, renewals, and replacements
thereof and all other Secured Obligations as described in the Pledge Agreement,
and that all previous amendments to the Pledge Agreement are hereby ratified.
The Company consents and agrees to the amendments set forth herein.
6. Except as amended herein, all provisions of the Credit Agreement,
the Note, the Guaranty, and the Pledge Agreement remain in full force and
effect. No provision of this Amendment can be amended, modified, waived, or
terminated, except by a writing executed by all of the parties hereto. This
Amendment shall bind and benefit the parties and their respective heirs,
representatives, successors, and assigns; provided, neither the Company nor Heim
shall assign any of its or his rights or obligations hereunder without the
Bank's prior written consent, and any assignment in violation of this sentence
shall be null and void. This Amendment shall be governed by and construed in
accordance with the laws of the State of Minnesota.
Executed as of the date first above written.
NORTH ATLANTIC TECHNOLOGIES, INC.
By /s/ David Paulin
Title Vice President
FIRST BANK NATIONAL ASSOCIATION
By /s/ Paul R. Braun
Title Vice President
/s/ Willis D. Heim
WILLIS D. HEIM, individually
EXHIBIT 10.27
ELEVENTH AMENDMENT TO
CREDIT AGREEMENT
THIS ELEVENTH AMENDMENT TO CREDIT AGREEMENT dated as of May 8, 1995, by
and between North Atlantic Technologies, Inc. (the "Company"), a Minnesota
corporation, and First Bank National Association (the "Bank"), a national
banking association.
1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement dated December 21,
1987, by and between the Company and the Bank, as amended (the "Credit
Agreement") is hereby amended as follows:
a. Section 1 is hereby amended to add a definition for "Security
Agreement," as follows:
"Security Agreement": The Security Agreement by and
between the Company and the Bank, substantially in
the form of Exhibit ____ hereto, as the same may be
amended, restated, modified, or supplemented from
time to time with the written consent of the Company,
which consent shall not be unreasonably withheld.
b. The definition of "Collateral" in Section 1 is hereby amended
to read in its entirety as follows:
"Collateral": As such term is defined in Section 1 of
the Pledge Agreement, and Section 1 of the Security
Agreement.
c. Section 6.02 is amended by adding the following:
In addition to the Bank's other rights and remedies,
upon occurrence of an Event of Default and at any
time thereafter, the Bank may pursue the remedies
available to it under the terms of the Security
Agreement.
2. GUARANTY. Heim consents and agrees to the amendments set forth herein,
and agrees that the Guaranty guarantees payment of the Note and all
amendments, extensions, renewals, and replacements thereof, and all
other Guaranteed Obligations as described in the Guaranty, and agrees
that the Pledge Agreement secures the Note and all amendments,
extensions, renewals, and replacements thereof and all other Secured
Obligations as described in the Pledge Agreement. The Company consents
and agrees to the amendments set forth herein.
3. ALL OTHER TERMS RATIFIED. Except as herein amended, all provisions of
the Credit Agreement, the Note, the Guaranty, the Pledge Agreement, and
the Security Agreement remain in full force and effect. No provision of
this Amendment can be amended, modified, waived, or terminated, except
by a writing executed by all of the parties hereto. This Amendment
shall bind and benefit the parties and their respective heirs,
representatives, successors, and assigns; provided, however, that
neither the Company nor Heim shall assign any of its or his rights or
obligations hereunder without the Bank's prior written consent, and any
assignment in violation of this sentence shall be null and void. This
Amendment shall be governed by and construed in accordance with the
laws of the State of Minnesota.
Executed as of the date first written above.
NORTH ATLANTIC TECHNOLOGIES,
INC.
By /s/ David Paulin
Its Vice President
FIRST BANK NATIONAL ASSOCIATION
By /s/ Paul R. Braun
Its Vice President
-------------------------------
WILLIS D. HEIM
EXHIBIT 10.28
ELEVENTH AMENDMENT
THIS AMENDMENT is entered into as of August 31, 1995, by and among
NORTH ATLANTIC TECHNOLOGIES, INC., a Minnesota Corporation (the "Company"),
WILLIS D. HEIM ("HEIM"), and FIRST BANK NATIONAL ASSOCIATION, a national banking
association (the "Bank"). In consideration of the mutual agreements set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by all of the parties, the parties
agree as follows:
1. The Credit Agreement dated December 21, 1987, by and between the
Borrower and Bank, as amended (the "Credit Agreement"), is amended as follows:
The definition of Termination Date in Section 1 of the Credit
Agreement is amended to read as follows:
"Termination Date": October 31, 1995, or such earlier date on
which the Commitment is terminated pursuant to Section 6.02.
2. Heim consents and agrees to the amendment set forth herein, and
agrees that the Guaranty guarantees payment of the Note and all amendments,
extensions, renewals and replacements thereof and all other Guaranteed
Obligations as described in the Guaranty, and agrees that the Pledge Agreement
secures the Note and all amendments, extensions, renewals, and replacements
thereof and all other Secured Obligations as described in the Pledge Agreement.
The Company consents and agrees to the amendments set forth herein.
3. Except as amended herein, all provisions of the Credit Agreement,
the Note, the Guaranty, and the Pledge Agreement remain in full force and
effect. No provision of the Amendment can be amended, modified, waived, or
terminated, except by a writing executed by all of the parties hereto. This
Amendment shall bind and benefit the parties and their respective heirs,
representatives, successors and assigns; provided, neither the Company nor Heim
shall assign any of its or his rights or obligations hereunder without the
Bank's prior written consent, and any assignment in violation of this sentence
shall be null and void. The Amendment shall be governed by and construed in
accordance with the laws of the State of Minnesota.
Executed as of August 31, 1995.
NORTH ATLANTIC TECHNOLOGIES, INC.
By /s/ David Paulin
Title Vice President
FIRST BANK NATIONAL ASSOCIATION
By /s/ Paul R. Braun
Title Vice President
/s/ Willis D. Heim
Willis D. Heim, Individually
EXHIBIT 10.29
TWELFTH AMENDMENT
THIS AMENDMENT is entered into as of October 31, 1995, by and among
NORTH ATLANTIC TECHNOLOGIES, INC., a Minnesota Corporation (the "Company"),
WILLIS D. HEIM ("HEIM"), and FIRST BANK NATIONAL ASSOCIATION, a national banking
association (the "Bank"). In consideration of the mutual agreements set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by all of the parties, the parties
agree as follows:
1. The Credit Agreement dated December 21, 1987, by and between the
Borrower and Bank, as amended (the "Credit Agreement"), is amended as follows:
The definition of Termination Date in Section 1 of the Credit
Agreement is amended to read as follows:
"Termination Date": January 2, 1996, or such earlier date on
which the Commitment is terminated pursuant to Section 6.02.
2. Heim consents and agrees to the amendment set forth herein, and
agrees that the Guaranty guarantees payment of the Note and all amendments,
extensions, renewals and replacements thereof and all other Guaranteed
Obligations as described in the Guaranty, and agrees that the Pledge Agreement
secures the Note and all amendments, extensions, renewals, and replacements
thereof and all other Secured Obligations as described in the Pledge Agreement.
The Company consents and agrees to the amendments set forth herein.
3. Except as amended herein, all provisions of the Credit Agreement,
the Note, the Guaranty, and the Pledge Agreement remain in full force and
effect. No provision of the Amendment can be amended, modified, waived, or
terminated, except by a writing executed by all of the parties hereto. This
Amendment shall bind and benefit the parties and their respective heirs,
representatives, successors and assigns; provided, neither the Company nor Heim
shall assign any of its or his rights or obligations hereunder without the
Bank's prior written consent, and any assignment in violation of this sentence
shall be null and void. The Amendment shall be governed by and construed in
accordance with the laws of the State of Minnesota.
Executed as of October 31, 1995.
NORTH ATLANTIC TECHNOLOGIES, INC.
By /s/ David Paulin
Title Vice President
FIRST BANK NATIONAL ASSOCIATION
By /s/ Paul R. Braun
Title Vice President
/s/ Willis D. Heim
Willis D. Heim, Individually
EXHIBIT 10.30
SECURITY AGREEMENT
DATED: May 8, 1995
DEBTOR: SECURED PARTY:
North Atlantic Technologies, Inc. First Bank National
8120 Penn Avenue South Association
Suite 435 First Bank Place
Bloomington, MN 55431 Minneapolis, MN 55480
1. Security Interest and Collateral. To secure the payment and
performance of each and every debt, liability and obligation of every type and
description which Debtor may now or at any time hereafter owe to Secured Party
(whether such debt, liability or obligation now exists or is hereafter created
or incurred, and whether it is or may be direct or indirect, due or to become
due, absolute or contingent, primary or secondary, liquidated or unliquidated,
or joint, several or joint and several; all such debts, liabilities and
obligations being herein collectively referred to as the "Obligations") Debtor
hereby grants Secured Party a security interest (herein called the "Security
Interest") in the following property (herein called the "Collateral"):
(a) INVENTORY:
All inventory of Debtor, whether now owned or hereafter
acquired and wherever located;
(b) EQUIPMENT:
All equipment of Debtor, whether now owned or hereafter
acquired, including but not limited to all present and future
machinery, vehicles, furniture, fixtures, manufacturing equipment, shop
equipment, office and recordkeeping equipment, parts and tools, and the
goods described in any equipment schedule or list herewith or hereafter
furnished to Secured Party by Debtor (but no such schedule or list need
be furnished in order for the security interest granted herein to be
valid as to all of Debtor's equipment);
(c) ACCOUNTS AND OTHER RIGHTS TO PAYMENT:
Each and every right of Debtor to the payment of money,
whether such right to payment now exists or hereafter arises, whether
such right to payment arises out of a sale, lease or other disposition
of goods or other property by Debtor, out of a rendering of services by
Debtor, out of a loan by Debtor, out of the overpayment of taxes or
other liabilities of Debtor, or otherwise arises under any contract or
agreement, whether such right to payment is or is not already earned by
performance, and howsoever such right to payment may be evidenced,
together with all other rights and interests (including all liens and
security interests) which Debtor may at any time have by law or
agreement against any account debtor or other obligor obligated to make
any such payment or against any of the property of such account debtor
or other obligor; all including but not limited to all present and
future debt instruments, chattel papers, accounts, loans and
obligations receivable and tax refunds;
(d) GENERAL INTANGIBLES:
All general intangibles of Debtor, whether now owned or
hereafter acquired, including but not limited to, applications for
patents, patents, copyrights, trademarks, trade secrets, good will,
trade names, customers lists, permits and franchises, and the right to
use Debtor's name;
together with all substitutions and replacements for and products of any of the
foregoing property and together with proceeds of any and all of the foregoing
property and, in the case of all tangible Collateral, together with all
accessions and together with (i) all accessories, attachments, parts, equipment
and repairs now or hereafter attached or affixed to or used in connection with
any such goods, and (ii) all warehouse receipts, bills of lading and other
documents of title now or hereafter covering such goods.
2. Events of Default. Each of the following occurrences shall
constitute an event of default under this Agreement (herein called "Event of
Default"): (i) Debtor shall fail to pay any or all of the Obligations when due
or (if payable on demand) on demand, shall fail to observe or perform any
covenant or agreement herein binding on it or shall be in default under any loan
or credit agreement between it and the Secured Party; (ii) any representations
or warranty by Debtor set forth in this Agreement or made to Secured Party in
any financial statements or reports submitted to Secured Party by or on behalf
of Debtor shall prove materially false or misleading; (iii) a garnishment,
summons or a writ of attachment shall be issued against or served upon the
Secured Party for the attachment of any property of the Debtor or any
indebtedness owing to Debtor; (iv) Debtor or any guarantor of any Obligation
shall (A) be or become insolvent (however defined); or (B) voluntarily file, or
have filed against it involuntarily, a petition under the United States
Bankruptcy Code; or (C) be dissolved or liquidated; or (D) go out of business;
or (v) Secured Party shall in good faith believe that the prospect of due and
punctual payment of any or all of the Obligations is impaired.
3. Remedies upon Event of Default. Upon the occurrence of an Event of
Default under Section 2 and at any time thereafter, Secured Party may exercise
any one or more of the following rights and remedies: (i) declare all unmatured
Obligations to be immediately due and payable, and the same shall thereupon be
immediately due and payable, without presentment of other notice or demand; (ii)
exercise and enforce any or all rights and remedies available upon default to a
secured party under the Uniform Commercial Code, including but not limited to
the right to take possession of any Collateral, proceeding without judicial
process or by judicial process (without a prior hearing or notice thereof, which
Debtor hereby expressly waives), and the right to sell, lease or otherwise
dispose of any or all of the Collateral, and in connection therewith, Secured
Party may required Debtor to make the Collateral available to Secured Party at a
place to be designated by Secured Party which is reasonably convenient to both
parties, and if notice to Debtor of any intended disposition of Collateral or
any other intended action is required by law in a particular instance, such
notice shall be deemed commercially reasonable if given (in the manner specified
in Section 4) at least 10 calendar days prior to the date of intended
disposition or other action; (iii) exercise or enforce any or all other rights
or remedies available to Secured Party by law or agreement against the
Collateral, against Debtor or against any other person or property. Upon the
occurrence of the Event of Default described in Section 7(iv)(B), all
obligations shall be immediately due and payable without demand or notice
thereof. Secured Party is hereby granted a nonexclusive, worldwide and
royalty-free license to use or otherwise exploit all trademarks, trade secrets,
franchises, copyrights and patents of Debtor that Secured Party deems necessary
or appropriate to the disposition of any Collateral.
4. Miscellaneous. This Agreement can be waived, modified, amended,
terminated or discharged and the Security Interest can be released, only
explicitly in a writing signed by Secured Party. A waiver signed by Secured
Party shall be effective only in a specific instance and for the specific
purpose given. Mere delay or failure to act shall not preclude the exercise or
enforcement of any of Secured Party's rights or remedies. All rights and
remedies of Secured Party shall be cumulative and may be exercised singularly or
concurrently, at Secured Party's option, and the exercise or enforcement of any
one such right or remedy shall neither be a condition to nor bar the exercise or
enforcement of any other. All notices to be given to Debtor shall be deemed
sufficiently given if delivered or mailed by registered or certified mail,
postage prepaid, to Debtor at its address set forth above or at the most recent
address shown on Secured Party's records. Secured Party's duty of care with
respect to Collateral in its possession (as imposed by law) shall be deemed
fulfilled if Secured Party exercises reasonable care in physically safekeeping
such Collateral or, in the case of Collateral in the custody or possession of a
bailee or other third person, exercises reasonable care in the selection of the
bailee or other third person, and Secured Party need not otherwise preserve,
protect, insure or care for any Collateral. Secured Party shall not be obligated
to preserve any rights Debtor may have against prior parties, to realize on the
Collateral at all or in any particular manner or order, or to apply any cash
proceeds of Collateral in any particular order of application. This Agreement
shall be binding upon and inure to the benefit of Debtor and Secured Party and
their respective heirs, representatives, successors and assigns and shall take
effect when signed by Debtor and delivered to Secured Party, and Debtor waives
notice of Secured Party's acceptance hereof. Secured Party may execute this
Agreement if appropriate for the purpose of filing, but the failure of Secured
Party to execute this Agreement shall not affect or impair the validity or
effectiveness of this Agreement. A carbon, photographic or other reproduction of
this Agreement or of any financing statement signed by the Debtor shall have the
same force and effects as the original for all purposes of a financing
statement. This Agreement shall be governed by the internal laws of the State of
Minnesota.
First Bank National North Atlantic Technologies, Inc.
Association
By /s/ Paul R. Braun By /s/ David Paulin
Its Vice President Its Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 44,607
<SECURITIES> 0
<RECEIVABLES> 1,158,327
<ALLOWANCES> (339,440)
<INVENTORY> 145,356
<CURRENT-ASSETS> 1,209,283
<PP&E> 2,162,476
<DEPRECIATION> 1,305,351
<TOTAL-ASSETS> 2,070,060
<CURRENT-LIABILITIES> 5,725,160
<BONDS> 0
0
0
<COMMON> 3,047,804
<OTHER-SE> (6,715,155)
<TOTAL-LIABILITY-AND-EQUITY> 2,070,060
<SALES> 3,684,001
<TOTAL-REVENUES> 3,684,001
<CGS> 3,325,072
<TOTAL-COSTS> 1,831,744
<OTHER-EXPENSES> (26,245)
<LOSS-PROVISION> 279,440
<INTEREST-EXPENSE> 475,732
<INCOME-PRETAX> (2,201,742)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,201,742)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,201,742)
<EPS-PRIMARY> (.94)
<EPS-DILUTED> (.94)
</TABLE>
