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, 1996.
[ ] 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 has 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. [ ]
There are 16,638 shares of preferred stock and 1,740,206 shares of common
stock currently held by non-affiliates. The issuer is not aware of any trading
of preferred or common shares of issue during the preceding 60 days. In March
1997, the issuer issued shares of common stock for cash and non-cash
consideration at a pershare value of approximately $0.0562.
Check whether the issuer has filed all documents and reports required to be
filed by Section 12,13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. YES [X] NO [ ]
Issuer's revenues for its most recent period (9 months) $4,226,525. Number
of shares outstanding of each of the issuer's classes of common equity, as of
the latest practicable date 3,154,843 common shares as of 3/25/97.
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INDEX
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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 ..........................................................................................................8
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................................................8
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS............................................................9
ITEM 7 - FINANCIAL STATEMENTS...........................................................................11
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.......................................................................12
PART III ........................................................................................................12
ITEMS 9-11..............................................................................................12
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................12
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K..............................................................13
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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 939 heat recovery systems to clients in the United States, Canada,
Europe, South America, Africa and the Pacific Rim.
The Company was unable to meet its principal and interest payment
obligations arising from the maturation in November 1995 of the outstanding
subordinate debentures. 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 acted as
debtor in possession in the case and no trustee had been appointed. The Plan of
Reorganization was approved on April 19,1996, and amended on May 7, 1996. The
financial statements of the reorganized entity are referred to herein as the
Successor Company and the financial statements up to the date the Plan was
implemented are referred to herein as the Predecessor Company. See "LEGAL
PROCEEDINGS" and Notes 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, sulfur-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 21% of the Successor
Company sales for the nine months ended December 31, 1996 and
11% and 5% of the Predecessor Company sales for the three
months ended March 31, 1996 and the twelve months ended
December 31, 1995 were in this market.
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.
Approximately 66% of the Successor Company sales for the nine
months ended December 31, 1996 and 89% and 76% of the
Predecessor Company sales for the three months ended March 31,
1996 and the twelve months ended December 31, 1995 were in
this market. 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 - 1000(Degree)to 2000(Degree)F
(1100(Degree)C). Used on smelters kilns, furnaces and
incinerators.
Approximately 13% of the Successor Company sales for the nine
months ended December 31, 1996 and 0% and 19% of the
Predecessor Company sales for the three months ended March 31,
1996 and the twelve months ended December 31, 1995 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 marketing efforts primarily 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 27 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 1995 and 1996, respectively, approximately
91% and 92% 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 the nine months ended December 31, 1996, Kellogg and Archer
Daniel Midland accounted for 29% and 16% of the Successor Company's sales
respectively. During the three months ended March 31, 1996, JCS and Kellogg
accounted for 49% and 33% of the Predecessor Company's sales respectively. No
other clients represented 10% or more of the Company's revenues for the year. In
1995, Ahlstrom Pyropower and Babcock & Wilcox accounted for 14% and 10% of the
Company's business. Approximately 44% of the Successor Company's sales for the
nine months ended December 31, 1996, and 87% and 20% of the Predecessor Company
sales for the three months ended March 31, 1996 and the twelve months ended
December 31, 1995 have been for international destinations.
Backlog
As of December 31, 1996, the Company had orders for 11 heat recovery
systems totaling $2,390,260, all of which are expected to be delivered in 1997.
This compares with 11 unshipped systems totaling $1,721,000 at the end of 1995.
As of March 4, 1997 the Company's backlog was 15 shipments totaling $3,386,260.
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." For the nine months ended
December 31, 1996 the Successor Company expended $102,000 to cure design
problems in five OCAP heat exchangers, while the Predecessor Company incurred no
warranty claims for the three months ended March 31, 1996 and $43,000 was
expended on warranty claims for the twelve months ended December 31, 1995. The
Company does not anticipate incurring any substantial warranty costs in 1997,
although such warranty costs could be incurred. The Company has a warranty
reserve of $250,000 as of December 31, 1996 for such purposes. The Company
maintains product liability insurance with respect to its heat recovery systems.
This insurance indemnifies the Company for up to $2,000,000 of liability for
damages resulting from the Company's product.
Licensing and Other Arrangements
The Company has a licensing agreement with Sumitomo Heavy Industries,
Ltd., in Tokyo, Japan to manufacture and market OCAP heat exchangers for the
period September 1984 through September 1999. Sumittomo Heavy Industries, Ltd.
("Sumitomo") has the exclusive right to manufacture and market in Japan and the
non-exclusive right to market in all countries, but the United States, Canada,
Mexico, South Africa, Australia and Europe.
The Company may not unreasonably withhold permission to permit the
marketing of the OCAP heat exchangers by Sumitomo throughout the world in
territories outside of those specifically permitted under its license agreement.
The Successor Company received royalties totaling $15,362 from Sumitomo for the
nine months ended December 31, 1996. and the Predecessor Company received $7,103
for the three months ended March 31, 1996 and $10,000 for the twelve months
ended March 31 1995. 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
ABB/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, 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 type heat exchangers may be
used, the Company is unable to compete on the basis of price.
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.
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. 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 usually contracted 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 150
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 composition, 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.
The Successor Company expended approximately $5,000 in research and
development for the nine months ended December 31, 1996 while the Predecessor
Company expended $0 and $90,000 for the three month period ended March 31, 1996
and the twelve month period ended December 31, 1995, respectively.
Human Resources
As of March 4, 1997 the Company employed 38 full time persons; two
executive officers; five in engineering, research and development; two 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 3,800 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 $5,333 and will expire on April 30, 1997. A
renewal of the lease is currently being negotiated. 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 $1,975 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, Co. an affillate
of Willis D. Heim, a former director of the Company. To secure repayment of the
loan, the Company granted to WDH Investments, Co., a mortgage on the Company's
St. Paul real estate. (See Certain Relationships and Related Transactions.)
ITEM 3 - LEGAL PROCEEDINGS
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 Plan of Reorganization was approved
on April 19,1996, and amended on May 7,1996. The plan specified that Debenture
holders would receive one (1) share of newly issued $0.01 par 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
are 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 receive any distributions. After June 30,
1999, the preferred shares convert automatically to shares of common stock.
Existing shares of the Company's no par common stock were canceled and replaced
with one share of newly issued $0.01 par common share for every 3 shares of
previously existing common stock. All other creditors were 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.
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, 1996.
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 there has been no trading of the Company's common shares during 1996.
There were approximately 264 shareholders owning the Company's common
shares of record as of December 31, 1996. The Company has not paid any cash
dividends with respect to its common or preferred shares and anticipates
retaining future earnings, if any, to finance operations of the Company.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
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. The Predecessor
Company incurred net losses for 1993, 1994, and 1995, and the Successor Company
incurred a loss for the nine months ended December 31, 1996. As a result,
financial resources have been strained. As of December 31, 1996, the Successor
Company's current liabilities exceed current assets by $1,753,465. While the
Company, through its Plan, which was confirmed by the United States Bankruptcy
Court, has significantly reduced its debt commitments, the Successor Company's
continuation as a going concern is dependent on its ability to generate
sufficient cash flow from operations, and obtain additional financing to meet
its obligations on a timely basis. The Successor 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
Successor Company. While the Successor Company utilizes a progress billing
procedure, there are periods of net cash outflows when cash flow is of concern.
Both the Company and the Successor Company have been able to manage normal
operating cash flow through the use of internally generated funds and an
established line of credit.
1. On February 1, 1996, the Company filed a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code. The Plan of Reorganization
was approved on April 19, 1996, and amended on May 7, 1996. The Plan of
Organization provided that:
a) Holders of the Company's 12.5% Subordinated Convertible
Debentures due in 1995 (the "Debentures") received one share
of common stock for each $1.50 owed by the Company. In
addition, each Debenture holder received one share of
convertible preferred stock at $0.01 par value for each $100
of debenture debt of the Company, and
b) Each existing stockholder was issued one share of $0.01 par
common stock in cancellation of three shares of no par common
stock owned by the shareholder, effective for shareholders of
record on May 21, 1996.
c) $500,000 of the line of credit borrowings was 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 becomes 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.
It has been subsequently agreed to defer reduction of the line
of credit in $25,000 increments until August 1, 1996 and to
lower the line of credit reduction for the months of October,
November, and December.
d) All other general creditors claims were settled in full
upon a schedule to be agreed upon between the Company and its
creditors.
Under the terms of the Plan of Reorganization, debenture holders
received 1,447,366 newly-issued common shares and 21,694 newly-issued
convertible preferred shares.
The 3,292,689 shares of no par common stock outstanding as of May 21, 1996 have
been canceled and replaced with 1,097,563 newly-issued common shares.
The total number of outstanding common shares following the above
common stock adjustments was 2,544,929. If the adjustments occurred on January
1, 1996, supplemental earnings per share for the first quarter of 1996 would
have been $1.44.
The Company's net working capital position increased by $2,762,412 to a
working capital deficit of ($1,753,465) at December 31, 1996 from ($4,515,877)
at December 31, 1995. A significant factor accounting for the change was the
cancellation of the subordinated convertible debentures and related interest in
exchange for common shares. At December 31, 1996, the Company had $625,000
outstanding on its line of credit compared to $1,050,000 at December 31, 1995.
During 1996, the Company obtained an amendment to the bank credit
agreement. The maximum borrowings available under the agreement are $1,045,000.
At December 31, 1996, $420,000 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. In March 1997, the Company issued a major shareholder 1,200,000 shares
of common stock in exchange for which the shareholder (i) paid to the Company
$50,000, (ii) waived his rights to receive the interest rate differential
payments with respect to payments made to the Bank in February through May 1997
(which interest rate differential payments were estimated to equal a total of
approximately $14,000) and (iii) agreed to consent to an increase in the line of
credit to $1,250,000 and an abatement of the $25,000 monthly reduction in the
line of credit until after June 1, 1997.
The Company had no significant commitments for capital expenditures at
December 31, 1996.
Results of Operations
The reporting periods are not comparable because of the bankruptcy and the fresh
start reporting.
REVENUE AND COSTS
Revenues in the three month period ended March 31 and 9 month period
ended December 31, 1996 increased over 1995 due to increased confidence of the
customers about the continued existence of the company. The backlog of firm
orders at the end of 1995 was strong at $1,791,000 which also contributed to the
increased sales in 1996. The backlog at the end of 1996 was also very strong
coming in at $2,390,000. By March 4, 1997, the Company's backlog had increased
to $3,386,000. Foreign destination sales in 1996 were also up in comparison to
1995. The Company has maintained good relationships with vendors and customers
during this reorganization period.
Gross profit margins have increased from 14% for the twelve month
period ending December 31, 1995, to 44% for the 3 month period ending March 31,
1996 and 23% for the nine months ended December 31, 1996. The 1996 margins have
increased substantially due to higher volume through the plant causing decreases
in overhead rates to absorb fixed costs.
The Successor Company warranty expenses for the nine months ended
December 31, 1996 were approximately $102,000 as compared to the Predecessor
Company of $0 and $43,000 for the 3 months ended March 31, 1996 and the twelve
months ended December 31, 1995 respectively. In 1996, the Company had expenses
related to one claim. An additional amount was reserved in 1996 to cover any
additional expenses that will be incurred in 1997 for sales recorded through
December 31, 1996. The Company has increased its allowances for doubtful
accounts to reduce the net receivables from this customer to zero.
OPERATING COSTS
Selling, general, and administrative expenses were fairly stable over
the past two years. 1995 included a $250,000 write off to bad debt expense to
reflect the uncertainty of collecting the net amount due from Lentjes, a large
German engineering and construction company with which the Company had a
partnering arrangement. The Company is continuing to look at ways to reduce
these expenses and expects to realize the benefits of its recent reorganization
during 1997.
No bonuses have been paid to salaried employees in 1995 or 1996.
The Successor Company expended approximately $5,000 in research and development
for the nine months ended December 31, 1996 while the Predecessor Company
expended $0 and $90,000 for the three month period ended March 31, 1996 and the
twelve month period ended December 31, 1995, respectively. The decrease in
spending was due to the shortage of cash during 1996.
OTHER
Interest expense decreased from 1995 to 1996. This is primarily due to
the cancellation of the subordinated debentures and related interest.
Royalties from the Company's licensee, Sumitomo Heavy Industries, Ltd.,
have increased from 1995 to 1996.
Rental and other income in 1996 included rent from tenants at the
Company's manufacturing facility. In 1995 this category also included tenant
rent payments along with $17,000 in gains from transactions denominated in
foreign currency and expenses of $47,000 related to miscellaneous non-operating
expenses.
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 year ended December 31,
1995 and the nine months ended 1996 because the Company incurred losses for
which no benefit could be recognized. Under the provision of the Internal
Revenue Code, the gain resulting from debt forgiveness in the three months ended
March 31, 1996 is not taxable; however the gain reduced the Company's net
operating loss carry forward. At December 31, 1996, the Company had net
operating loss carryforwards of approximately $3,036,000 for federal tax
reporting purposes. These carryforwards expire in varying amounts between 2005
and 2011. In addition, the Company has unused tax credits for capital investment
and research and development activities of approximately $84,000 which are
available to offset future income tax liabilities and expire between 1997 and
2001.
ITEM 7 - FINANCIAL STATEMENTS
See "Index to Financial Statements" and the Financial Statements
attached.
INDEX TO FINANCIAL STATEMENTS
The following financial statements are included in response to Item 7.
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors F-2
Successor Financial Statements:
Balance Sheet as of December 31, 1996 F-3
Statement of Operations for the nine months ended 12/31/96 F-4
Statement of Stockholders Deficit for the nine months ended 12/31/96 F-5
Statement of Cash Flow for the nine months ended 12/31/96 F-6
Predecessor Financial Statements
Balance Sheet as of December 31, 1995 F-3
Statement of Operations for the three months ended March 31, 1996
and the year ended December 31,1995 F-4
Statement of Stockholders Deficit for the three months ended March 31, 1996
and the year ended December 31,1995 F-5
Statement of Cash Flow for the three months ended March 31, 1996
and the year ended December 31,1995 F-6
Notes to Financial Statements F-7
</TABLE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
North Atlantic Technologies, Inc.
Bloomington, Minnesota
We have audited the accompanying balance sheet of North Atlantic Technologies,
Inc. as of December 31, 1996 and the related statements of operations,
stockholders' deficit, and cash flows for the nine months then ended (the
Successor Company's financial statements) and the accompanying balance sheet of
North Atlantic Technologies, Inc. as of December 31, 1995 and the related
statements of operations, stockholders' deficit, and cash flows for the three
months ended March 31, 1996 and the year ended December 31, 1995 (the
Predecessor Company's financial statements). 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, the Successor Company's financial statements present fairly, in
all material respects, the financial position of North Atlantic Technologies,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows for the nine months then ended, in conformity with generally accepted
accounting principles. Further, in our opinion, the Predecessor Company's
financial statements present fairly, in all material respects, the financial
position of North Atlantic Technologies, Inc. as of December 31, 1995 and its
results of operations and its cash flows for the three months ended March 31,
1996 and the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
As described in Note 2 to the financial statements, effective April 1, 1996, the
Company emerged from protection under Chapter 11 of the Federal Bankruptcy Code
and elected to prepare its financial statements on the basis of "Fresh Start"
reporting since the reorganization value, as defined, was less than the total of
all post-petition liabilities and pre-petition claims and the holders of voting
shares immediately before confirmation of the Plan received less than fifty
percent of the voting shares of the emerging entity. As a result of the adoption
of fresh start reporting, the financial information for the Successor Company is
presented on a different cost basis than that for the Predecessor Company and,
therefore, is not comparable.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 4 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 4. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
February 7, 1997
(March 13, 1997 as to Note 15)
Minneapolis, Minnesota
NORTH ATLANTIC TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
1996 1995
ASSETS (NOTE 5)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 199,982 $ 44,607
Trade receivables, net (Note 6) 563,650 818,887
Other receivables (Note 14) 171,404
Inventories 170,275 145,356
Costs and estimated earnings in excess of billings on
uncompleted contracts (Notes 5 and 7) 35,765
Other current assets 11,015 29,029
----------- -----------
Total current assets 980,687 1,209,283
PROPERTY AND EQUIPMENT:
Land 695,792 92,510
Buildings and leasehold improvements 504,209 692,441
Machinery and equipment 480,214 1,211,914
Office furniture and equipment 27,920 153,945
Automobiles 11,666
----------- -----------
1,708,135 2,162,476
Less accumulated depreciation 130,071 1,305,351
----------- -----------
Net property and equipment 1,578,064 857,125
OTHER ASSETS:
Patent rights, net of accumulated amortization of $7,500 92,500
Other assets 12,399 3,652
Reorganization value in excess of amounts allocated to identifiable assets,
net of accumulated amortization of $31,439 (Note 2) 389,447
----------- -----------
Total other assets 494,346 3,652
----------- -----------
$ 3,053,097 $ 2,070,060
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 8) $ 741,809 $ 3,547,622
Trade accounts payable 1,058,399 878,422
Other accounts payable (Note 14) 21,202 393,428
Billings in excess of costs and estimated earnings on
uncompleted contracts (Notes 5 and 7) 609,210 477,893
Accrued liabilities:
Taxes other than income 15,884 15,219
Warranty reserve 250,000 200,000
Compensation and bonuses 30,072 42,198
Interest 7,576 170,378
----------- -----------
Total current liabilities 2,734,152 5,725,160
LONG TERM DEBT -
Net of current maturities (Note 8) 826,570 12,251
----------- -----------
Total liabilities 3,560,722 5,737,411
COMMITMENTS AND CONTINGENCIES (Notes 10 and 14)
STOCKHOLDERS' DEFICIT (Notes 3 and 9):
Preferred stock, Series A Convertible, $.01 par value;
authorized 22,000 shares; issued and outstanding 21,694 shares,
total liquidation value, $542,350 216
Common stock, no par value; authorized 5,000,000 shares; issued
and outstanding 797,563 shares 3,047,804
Common stock, $.01 par; authorized 5,000,000 shares,
issued and outstanding, 2,253,011 shares 22,530
Accumulated deficit (530,371) (6,715,155)
----------- -----------
Total stockholders' deficit (507,625) (3,667,351)
----------- -----------
$ 3,053,097 $ 2,070,060
=========== ===========
See notes to financial statements.
</TABLE>
NORTH ATLANTIC TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY PREDECESSOR
NINE MONTHS THREE MONTHS COMPANY
ENDED ENDED YEAR ENDED
DECEMBER 31, MARCH 31, DECEMBER 31,
1996 1996 1995
<S> <C> <C> <C>
REVENUES (Note 11) $ 4,226,525 $ 1,394,512 $ 3,684,001
COST OF REVENUES 3,242,833 782,682 3,178,570
------------- ------------- --------------
Gross profit 983,692 611,830 505,431
OPERATING COSTS:
Selling, general, and administrative 1,374,572 411,931 1,982,685
Research and development 4,621 90,496
Write-down of unamortized patent costs (Note 5) 184,505
------------- ------------- --------------
1,379,193 411,931 2,257,686
------------- ------------- --------------
OPERATING (LOSS) PROFIT (395,501) 199,899 (1,752,255)
OTHER INCOME (EXPENSE):
Royalty income 16,220 6,245 10,161
Interest income 2,446
Interest expense (175,953) (82,372) (475,732)
Rental and other income 24,863 10,350 13,638
------------- ------------- --------------
(134,870) (65,777) (449,487)
------------- ------------- --------------
(LOSS) INCOME BEFORE REORGANIZATION
ITEMS AND EXTRAORDINARY ITEM (530,371) 134,122 (2,201,742)
REORGANIZATION ITEMS (Note 2) 1,380,468
------------- ------------- --------------
(LOSS) INCOME BEFORE
EXTRAORDINARY ITEM (530,371) 1,514,590 $ (2,201,742)
EXTRAORDINARY ITEM -
Gain on conversion of debt (Notes 2 and 3) 2,154,736
------------- ------------- --------------
NET (LOSS) INCOME $ (530,371) $ 3,669,326 $ (2,201,742)
============= ============= ==============
NET (LOSS) INCOME PER COMMON SHARE
Loss (income) before reorganization
items and extraordinary item $ (0.21) $ 0.13 $ (2.76)
Reorganization items 1.37
Extraordinary item 2.14
------------- ------------- --------------
Net (loss) income $ (0.21) $ 3.64 $ (2.76)
============= ============= ==============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,496,368 1,008,552 797,563
============= ============= ==============
See notes to financial statements.
</TABLE>
NORTH ATLANTIC TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK,
PREFERRED STOCK $.01 PAR
---------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
PREDECESSOR COMPANY
BALANCE AT DECEMBER 31, 1994
Net loss
BALANCE AT DECEMBER 31, 1995
Shares issued (Note 9)
Net income
Issuance of capital stock in connection
with subordinated debt discharge 21,694 216 1,447,366 14,474
Cancellation of no par common stock and
issuance of $.01 par common stock 1,097,563 10,975
--------- -------- ---------- ---------
SUCCESSOR COMPANY
BALANCE AT APRIL 1, 1996 21,694 216 2,544,929 25,449
Canceled shares (Note 9) (291,918) (2,919)
Net loss
--------- -------- ---------- ---------
BALANCE AT DECEMBER 31, 1996 21,694 $ 216 2,253,011 $ 22,530
========= ======== ========== =========
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
COMMON STOCK,
NO PAR ACCUMULATED
---------------------------
SHARES AMOUNT DEFICIT TOTAL
<S> <C> <C> <C> <C>
PREDECESSOR COMPANY
BALANCE AT DECEMBER 31, 1994 797,563 $ 3,047,804 $ (4,513,413) $(1,465,609)
Net loss (2,201,742) (2,201,742)
----------- ----------- ------------- -----------
BALANCE AT DECEMBER 31, 1995 797,563 3,047,804 (6,715,155) (3,667,351)
Shares issued (Note 9) 300,000 9,000 9,000
Net income 3,669,326 3,669,326
Issuance of capital stock in connection
with subordinated debt discharge 14,690
Cancellation of no par common stock and
issuance of $.01 par common stock (1,097,563) (3,056,804) 3,045,829
----------- ----------- ------------- -----------
SUCCESSOR COMPANY
BALANCE AT APRIL 1, 1996 25,665
Canceled shares (Note 9) (2,919)
Net loss (530,371) (530,371)
----------- ----------- ------------- -----------
BALANCE AT DECEMBER 31, 1996 $ - $ - $ (530,371) $ (507,625)
=========== =========== ============= ===========
</TABLE>
See notes to financial statements.
NORTH ATLANTIC TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS (NOTE 1)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY PREDECESSOR
NINE MONTHS THREE MONTHS COMPANY
ENDED ENDED YEAR ENDED
DECEMBER 31, MARCH 31, DECEMBER 31,
1996 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 5,403,814 $ 777,708 $ 3,864,835
Cash paid to suppliers and employees (4,799,631) (1,021,749) (4,356,884)
Interest, rent, and royalties received 37,695 17,453 73,006
Interest paid (186,087) (58,616) (341,567)
Taxes paid (57)
----------- ----------- -----------
Net cash provided by (used in) operating activities 455,791 (285,204) (760,667)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from restricted cash 39,500
Capital expenditures (3,840) (1,213) (39,025)
Proceeds from disposal of fixed assets 400
Additions of other assets (8,747) (26)
----------- ----------- -----------
Net cash (used in) provided by investing activities (3,840) (9,960) 849
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 800,000 300,000 1,860,000
Payments of long-term debt and capital leases (1,096,061) (5,351) (1,096,959)
----------- ----------- -----------
Net cash (used in) provided by financing activities (296,061) 294,649 763,041
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 155,890 (515) 3,223
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 44,092 44,607 41,384
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 199,982 $ 44,092 $ 44,607
=========== =========== ===========
RECONCILIATION OF NET (LOSS) INCOME TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net (loss) income $ (530,371) $ 3,669,326 $(2,201,742)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization 169,010 39,191 177,315
Gain on extinguishment of debt and affect of fresh
start reporting (3,560,770)
Write-down of patent 184,505
Loss (gain) on disposal of equipment (400)
Stock issued for compensation 2,250
Changes in assets and liabilities:
Receivables 693,984 (267,343) 329,318
Inventories (20,817) (4,102) 58,433
Other current assets 14,409 10,355 59,022
Accounts payable and accrued liabilities (571,520) 431,433 30,317
Net increase (decrease) in billings related to costs and
estimated earnings on uncompleted contracts 701,096 (605,544) 602,565
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES $ 455,791 $ (285,204) $ (760,667)
=========== =========== ===========
</TABLE>
See notes to financial statements.
NORTH ATLANTIC TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1996 (SUCCESSOR COMPANY),
THREE MONTHS ENDED MARCH 31, 1996 (PREDECESSOR COMPANY),
AND YEAR ENDED DECEMBER 31, 1995 (PREDECESSOR COMPANY)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
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 a
heat recovery system to industrial companies. 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 - On February 1, 1996, the Company filed a
petition for reorganization under Chapter 11 of the United States
Bankruptcy Code. The United States Bankruptcy Court for the District of
Minnesota approved the Company's Plan of Reorganization (Plan) on April
19, 1996, as amended on May 7, 1996. 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 and, where applicable, in conformity with Statement of Position
(SOP) No. 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER
THE BANKRUPTCY CODE, issued in November 1990, by the American Institute
of Certified Public Accountants. The financial statements are presented
as if the Plan of Reorganization was effective as of April 1, 1996.
2. FRESH START REPORTING
Under the provisions of SOP No. 90-7, the Company was required to apply
"fresh start" reporting since the reorganization value, as defined, was
less than the total of all postpetition liabilities and allowed claims,
and holders of voting shares immediately before confirmation of the Plan
received less than 50% of the voting shares of the emerging entity.
Under this concept, all assets and liabilities are restated to reflect
the reorganization value of the reorganized entity, which approximates
its fair value at the date of reorganization. The financial statements
of the reorganized entity are referred to herein as the Company or the
Successor Company, and the financial statements of the entity up to the
date the Plan was implemented are referred to herein as the Predecessor
Company.
To determine an estimate of its reorganization value, the Company
utilized a combination of the estimated proceeds and recovery it would
obtain from its assets and the value of its capital structure as
perceived by the Company and others. Based on these factors, the Company
established a reorganization value (total assets less liabilities) of
the reorganized entity of $25,665. The Company allocated the
reorganization value to the net book value of tangible assets as
follows:
Land $ 603,282
Machinery and equipment 268,759
Office furniture and equipment 13,107
Patent 100,000
-------------
$ 985,148
=============
Under the provisions of SOP No. 90-7, the difference between the
reorganization value of the assets and the fair value assigned to
specific tangible and identified intangible assets was reported as an
intangible asset identified as "reorganization value in excess of
amounts allocable to identifiable assets." This amount is being
amortized over ten years.
In addition, the accumulated deficit of the Company was eliminated, and
its capital structure was recast in conformity with the approved Plan.
As such, the balance sheet of the Company as of December 31, 1996
represents that of a Successor Company which, in effect, is a new entity
with assets, liabilities, and a capital structure having carrying values
not comparable with prior periods. The net effect of all fresh start
reporting adjustments resulted in income of $1,406,034 which is included
within the Reorganization Item in the statement of operations of the
Predecessor Company for the three months ended March 31, 1996, net of
legal costs of $25,556 relating to the bankruptcy proceedings.
The following table summarizes the adjustments required to record the
reorganization of the Company and the issuance of various securities in
connection with the implementation of the Plan. The presentation is
presented as if the Plan was effective as of April 1, 1996.
<TABLE>
<CAPTION>
Convertible
PRE- Subordinated Reverse SUCCESSOR
DECESSOR Debt Discharge Stock Split COMPANY'S
COMPANY and Related for Existing Reorganized
Pre- Issuance of Common "Fresh Start" Balance
Confirmation Capital Stock Shareholders Reporting Sheet
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS $ 1,733,549 $ 1,733,549
PROPERTY AND
EQUIPMENT, net 819,147 $ 885,148 1,704,295
OTHER ASSETS:
Patent 100,000 100,000
Reorganization value in
excess of amounts
allocable to identifiable
assets 420,886 420,886
Other 12,399 12,399
------------ ------------ ------------- ------------ -----------
$ 2,565,095 $ -- $ -- $ 1,406,034 $ 3,971,129
============ ============ ============= ============ ===========
LIABILITIES NOT
SUBJECT TO
COMPROMISE:
Current liabilities $ 3,930,507 $ 3,930,507
Lease obligations
(long-term) 14,957 14,957
------------ -----------
3,945,464 3,945,464
LIABILITIES SUBJECT
TO COMPROMISE -
Convertible subordinated
debentures and related
interest payable 2,169,426 $(2,169,426)
------------ ------------ -----------
Total liabilities 6,114,890 (2,169,426) 3,945,464
STOCKHOLDERS'
EQUITY (DEFICIT):
Preferred stock 216 216
Common stock (no par) 3,056,804 $ (3,056,804)
Common stock ($.01 par) 14,474 10,975 25,449
Accumulated deficit (6,606,599) 2,154,736 3,045,829 $ 1,406,034
------------ ------------ ------------- ------------ -----------
(3,549,795) 2,169,426 -- 1,406,034 25,665
------------ ------------ ------------- ------------ -----------
$ 2,565,095 $ -- $ -- $ 1,406,034 $ 3,971,129
============ ============ ============= ============ ===========
</TABLE>
3. PLAN OF REORGANIZATION
On February 1, 1996, the Company filed a petition for reorganization
under Chapter 11 of the United States Bankruptcy Code. The Plan of
Reorganization was approved on April 19, 1996 and amended on May 7,
1996. The financial statements for the nine months ended December 31,
1996 are presented as if the Plan was effective as of April 1, 1996. The
Plan provided that:
* Holders of the Company's 12.5% Subordinated Convertible Debentures
due in 1995 (the Debentures) received one share of common stock for
each $1.50 of Debenture debt owed by the Company. In addition, each
Debenture holder received one share of convertible preferred stock
at $0.01 par value for each $100 of Debenture debt of the Company.
* Each existing stockholder was issued one share of common stock in
cancellation of three shares owned by the shareholder, effective
for shareholders of record on May 21, 1996.
* $500,000 of the line of credit borrowings were converted in May
1996 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 became 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. (It was
subsequently agreed to defer reduction of the line of credit in
$25,000 increments until August 1, 1996 and in October 1996 it was
agreed that the reduction would be only $10,000 per month for the
remainder of 1996. (see Note 15).)
* All other general creditors' claims were settled in full upon a
schedule agreed upon between the Company and its creditors.
Under the terms of the Plan, subject to the delivery of Debentures to
the Company for cancellation, Debenture holders are entitled to receive
up to 1,447,366 newly issued common shares, and up to 21,600 newly
issued convertible preferred shares.
The 3,292,689 shares of no par common stock outstanding as of May 21,
1996 have been canceled and replaced with 1,097,563 newly issued common
shares. All share data within the report have been restated to reflect
this 3-for-1 reverse stock split.
The total outstanding common shares following the above common stock
adjustments were 2,544,929. If the adjustments occurred on January 1,
1996, supplemental earnings per share for the first quarter of 1996
would have been $1.44 in total.
4. GOING CONCERN
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. The Predecessor Company
(see Note 2) incurred net losses for the year ended December 31, 1995 of
$2,201,742, and the Successor Company incurred a loss for the nine
months ended December 31, 1996 of $530,371. As a result, financial
resources have been strained. As of December 31, 1996, the Successor
Company's current liabilities exceed current assets by $1,753,465. While
the Company, through its Plan, which was confirmed by the United States
Bankruptcy Court, has significantly reduced its debt commitments, the
Successor Company's continuation as a going concern is dependent on its
ability to generate sufficient cash flow from operations, and obtain
additional financing to meet its obligations on a timely basis. The
Successor 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 Successor
Company. While the Successor Company utilizes a progress billing
procedure, there are periods of net cash outflows when cash flow is of
concern. Both the Predecessor Company and the Successor Company have
been able to manage normal operating cash flow through the use of
internally generated funds and an established line of credit.
Management is attempting to obtain bridge financing from a major
investor. Management has also recently implemented a significant cost
reduction and cost containment program, and has revised the Company's
pricing strategy for its products.
The accompanying financial statements include adjustments related to the
implementation of the Plan of Reorganization and the adoption of fresh
start reporting. However, 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.
5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 that require such revisions become known. When the revised
estimates indicate losses, such losses are provided for currently.
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
(Predecessor Company) and estimated fair value at the time of approval
of the Plan of Reorganization (Successor Company). Depreciation is
computed on the straight-line method over the estimated useful lives of
the assets, which range from two to twenty years. In connection with
fresh start reporting (see Note 2), all tangible assets were recorded at
their estimated fair values and all accumulated depreciation previously
recorded was eliminated.
PATENT RIGHTS - Prior to June 1995, patent rights were being amortized
on a straight-line basis over thirteen years, which was the remaining
useful life of the patent when the patent was acquired. During the
second quarter of 1995, largely due to the impending maturity of its
subordinated debentures which the Predecessor Company did not have the
resources to pay, management determined that the value of the patent had
been impaired, and the remaining carrying value was written off. As a
result of the confirmation of the Plan and the related fresh start
reporting, the Successor Company determined an estimated fair value for
the patent rights, which is being amortized on a straight-line basis
over the remaining life of the patents.
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.
WARRANTY RESERVE - Warranty reserve amounts have been provided for
estimated potential costs of monitoring and adjusting OCAP heat
exchanger units installed.
CONVERTIBLE PREFERRED STOCK - Convertible preferred stock is convertible
at the option of the stockholder into one share of common stock through
June 1, 1999 and converts automatically after June 1, 1999. The
preferred stock carries the same voting rights as common stock. The
stock is nondividend; however, no dividends may be declared or paid to
common shareholders unless an equal per-share dividend is declared and
paid to preferred shareholders. The stock is redeemable at the option of
the Company at anytime prior to June 1, 1999 at $25 per share. Upon any
liquidation or sale of substantially all of the assets of the Company,
the holders of preferred shares are entitled to receive cash, property,
or securities having a fair value of up to $25 per share before any
distributions are made to common shareholders.
STOCK-BASED COMPENSATION - Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the
stock (see Note 9).
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on
hand, amounts due from banks, and highly liquid cash investments.
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 income (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 antidilutive in each of the periods.
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's revenues 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. The Company sells products in
foreign countries at prices denominated in U.S. dollars (see Note 11).
This situation exposes the Company to risk of currency fluctuations,
indirectly, 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 fair values of the
line of credit borrowings and term note approximate their carrying
values because the debt 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.
RECLASSIFICATIONS - Certain reclassifications have been made to the
prior-year amounts to conform with the current-year presentation. These
reclassifications had no effect on net income (loss) or accumulated
deficit as previously reported.
<TABLE>
<CAPTION>
6. TRADE RECEIVABLES
December 31
----------------------------
Successor Predecessor
Company Company
1996 1995
<S> <C> <C>
Completed contracts $ 60,789 $ 1,015,065
Contracts in progress 455,934 82,382
Unbilled receivables 146,927 40,600
Retentions 20,280
----------- -----------
663,650 1,158,327
Less allowance for doubtful accounts 100,000 339,440
----------- -----------
$ 563,650 $ 818,887
=========== ===========
</TABLE>
Unbilled receivables become billable upon shipment of the completed
units, which occurred subsequent to year-end. All outstanding retentions
at December 31, 1995 were collected during 1996.
7. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
December 31
----------------------------
Successor Predecessor
Company Company
1996 1995
<S> <C> <C>
Costs incurred on uncompleted contracts $ 1,638,385 $ 87,489
Estimated loss net of estimated earnings (38,713)
----------- -----------
1,599,672 87,489
Less billings to date 2,173,117 565,382
----------- -----------
$ (573,445) $ (477,893)
=========== ===========
</TABLE>
These amounts are included in the balance sheets as of December 31 under the
following captions:
<TABLE>
<CAPTION>
December 31
----------------------------
Successor Predecessor
Company Company
1996 1995
<S> <C> <C>
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 35,765
Billings in excess of costs and estimated earnings
on uncompleted contracts (609,210) (477,893)
----------- -----------
$ (573,445) $ (477,893)
=========== ===========
</TABLE>
8. DEBT
Debt at December 31, consists of the following:
<TABLE>
<CAPTION>
December 31
----------------------------
Successor Predecessor
Company Company
1996 1995
<S> <C> <C>
Note payable to bank; interest at bank's one-month reserve certificate
of deposit rate plus 1.75% (7.35% at December 31, 1996), secured by
substantially all assets (except real property) of the Company and the
personal guarantee of a stockholder $ 448,761
Subordinated convertible debentures, due 1995; interest at 12.5%,
payable semiannually $ 1,993,000
Borrowings under bank credit agreement; interest at bank's one-
month reserve certificate of deposit rate plus 1.75% (7.35% at
December 31, 1996), secured by substantially all assets (except real
property) of the Company and the personal guarantee
of a stockholder 625,000 1,050,000
Mortgage note, due 2000; interest at 12%, payable in monthly
installments of $6,000, with all unpaid principal due in June
2000, secured by real property 480,369 493,843
Capitalized lease obligations payable monthly through September 1998 14,249 23,030
----------- -----------
1,568,379 3,559,873
741,809 3,547,622
Less current maturities ----------- -----------
$ 826,570 $ 12,251
Net long-term debt =========== ===========
</TABLE>
Annual principal maturities of long-term debt for the next five years at
December 31, 1996 are as follows:
Years ending December 31:
1997 $ 741,809
1998 121,790
1999 125,170
2000 135,666
2001 61,166
During 1996, the Company obtained an amendment to the bank credit
agreement. The maximum borrowings available under the agreement are
$1,045,000. At December 31, 1996, $420,000 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. During the nine months ended December 31, 1996, the Company
made payments to the stockholder that is guarantor totaling $58,440. The
Predecessor Company made payments that totaled $19,480 and $84,190
during the three months ended March 31, 1996 and the year ended December
31, 1995, respectively.
The Company was in default on the subordinated debentures at December
31, 1995. Due to cross-default provisions within the credit agreement,
the Company was also in default of the line of credit borrowings as of
December 31, 1995. All these amounts were classified as current
liabilities at December 31, 1995. The subordinated debentures were
converted to preferred and common stock in connection with the approved
Plan of Reorganization (see Note 3).
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 during the nine
months ended December 31, were $54,010. The Predecessor Company made
payments of $18,000 and $36,005 during the three months ended March 31,
1996 and the year ended December 31, 1995, respectively. The mortgage
note contains provisions which allow the stockholder to demand payment
if the Company is in default under any other borrowing agreements.
9. STOCKHOLDERS' DEFICIT
STOCK OPTIONS AND WARRANTS - In 1992, the Company's stockholders
approved the adoption of a qualified stock option plan. Under the plan,
as amended, 166,667 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>
<CAPTION>
Successor Predecessor
Company Company Predecessor
Nine Months Three Months Company
Ended Ended Year Ended
December 31, March 31, December 31,
1996 1996 1995
<S> <C> <C> <C>
Options outstanding beginning of period 93,333 93,333 115,000
Granted ($0.10) 40,000
Canceled ($4.50) (93,333) (1,667)
Canceled ($3.375) (20,000)
Canceled ($0.10) (26,667)
----------- ------------- -----------
Options outstanding at end of period 13,333 93,333 93,333
=========== ============= ===========
Exercise prices of outstanding options
at end of period $ 0.10 $ 3.375 $ 3.375
=========== ============= ===========
Options exercisable at end of period 2,667 54,667 54,667
=========== ============= ===========
Exercise prices of exercisable options
at end of period $ 0.10 $ 3.375 $ 3.375
=========== ============= ===========
Nonqualified stock options have also been granted, exercisable on approximately
the same basis as the qualified options previously described, as follows:
Successor Predecessor
Company Company Predecessor
Nine Months Three Months Company
Ended Ended Year Ended
December 31, March 31, December 31,
1996 1996 1995
Options outstanding beginning of period 24,000 $ 24,000 13,333
Granted ($0.10) 15,000
Granted ($3.375) 18,667
Canceled ($3.375) (4,667) (4,667)
Canceled ($5.25) (3,333) (3,333)
Canceled ($0.10) (5,000)
----------- ------------- -----------
Options outstanding at end of period 26,000 24,000 24,000
=========== ============= ============
Exercise prices of outstanding options
at end of period $ 0.10-5.25 $ 3.375-5.25 $ 3.375-5.25
=========== ============= ============
Options exercisable at end of period 10,000 8,000 8,000
=========== ------------- ============
Exercise prices of exercisable options
at end of period $ 0.10-5.25 $ 3.375-5.25 $ 3.375-5.25
=========== ============= ============
</TABLE>
The Company accounts for the qualified and nonqualified plans in
accordance with Accounting Principles Board Opinion No. 25, under which
no compensation cost has been recognized for stock option awards. Had
compensation cost for these plans been determined consistent with
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK - BASED COMPENSATION, the Company's and the Predecessor's pro
forma net income for the nine months ended December 31, 1996, the three
months ended March 31, 1996 and the year ended December 31, 1995 would
not have been materially different and earnings per share for such
periods would have been unchanged.
ISSUANCE OF COMMON SHARES - On January 29, 1996, the Predecessor Company
issued 300,000 shares of common stock to certain members of management.
The shares were held in trust and were subject to forfeiture upon the
termination of employment of these individuals over a five-year period.
In the fourth quarter of 1996, both of these individuals left the
Company and 291,918 of the previously issued shares were canceled.
10. COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases office space and equipment. A shareholder of
the Company is part owner of the building in which the Company leases
office space. Rent expense of the Company was $58,037 for the nine
months ended December 31, 1996. Rent expense of the Predecessor Company
aggregated $19,346 and $77,298 during the three months ended March 31,
1996 and the year ended December 31, 1995, respectively. Rent paid to
related parties by the Successor Company totaled $52,646 for the nine
months ended December 31, 1996. Related party rent payments made by the
Predecessor Company were $17,548 and $70,194 for the three months ended
March 31, 1996 and the year ended December 31, 1995, respectively.
Future minimum operating lease commitments as of December 31, 1996 are
as follows:
Year ending December 31, 1997 $ 27,316
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 - The Company had outstanding standby letters of credit totaling
$3,500 and $86,910 at December 31, 1996 and 1995, respectively, which
reduced available borrowings under the Company's line of credit.
11. REVENUES
The percentages of total revenue from sales to customers in excess of
10% were as follows:
Successor Predecessor
Company Company Predecessor
Nine Months Three Months Company
Ended Ended Year Ended
December 31, March 31, December 31,
1996 1996 1995
Customer A 14%
Customer B 10
Customer C 33%
Customer D 49
Customer E 16%
Customer F 29
Sales were made within the following geographic areas:
Successor Predecessor
Company Company Predecessor
Nine Months Three Months Company
Ended Ended Year Ended
December 31, March 31, December 31,
1996 1996 1995
United States $2,383,554 $ 175,800 $2,955,024
Europe 81,000 235,977
Canada 206,915 465,000 40,600
Far East 179,068 753,712 240,000
South America 1,271,276
Other export 104,712 212,400
---------- ---------- ----------
$4,266,525 $1,394,512 $3,684,001
========== ========== ==========
12. INCOME TAXES
There is no provision for income taxes during the periods presented
because the Company incurred a loss for which no benefit could be
recognized at this time or the Company utilized net operating loss
carryforwards.
Differences between the provision for income taxes based on earnings
before extraordinary items at the federal statutory rate and the
recorded provisions are summarized as follows:
<TABLE>
<CAPTION>
Successor Predecessor
Company Company Predecessor
Nine Months Three Months Company
Ended Ended Year Ended
December 31, March 31, December 31,
1996 1996 1995
<S> <C> <C> <C>
(Benefit) expense at statutory rates $(185,000) $ 530,000 $(771,000)
Nondeductible depreciation and
amortization of fixed asset and
intangible assets 22,000
Nontaxable increase in fixed and
intangible assets (492,000)
Other 23,000 (17,000)
Change in valuation allowance resulting
primarily from increase in (utilization of)
net operating loss carryforwards 140,000 (38,000) 788,000
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
</TABLE>
The gain on conversion of the Predecessor Company's subordinated
debentures was not a taxable event. However, the net operating loss
carryforwards were reduced by the amount of the gain of $2,154,736, as
well as, by $768,136 in interest expense recorded on the debt for the
three years prior to its conversion to capital stock. As a result of
these decreases in the Company's net operating loss carryforwards, the
valuation allowance was reduced by approximately $1,030,000. The gain of
$1,406,034 recognized in accordance with fresh start reporting is also
not taxable as income; however, the future depreciation and amortization
of the increased bases of these assets will not be deductible for tax
purposes, and any gains on the sale of these assets will be increased
for tax purposes by the amount of the increase in the bases of these
assets.
At December 31, 1996, the Company had net operating loss carryforwards
of approximately $3,036,000 for federal tax reporting purposes. These
carryforwards expire in varying amounts between 2005 and 2011. In
addition, the Company has unused tax credits for capital investment and
research and development activities of approximately $84,000 which are
available to offset future income tax liabilities and expire between
1997 and 2001.
Deferred tax assets have been reduced by a valuation allowance because
the ultimate realization of the benefit for these deferred tax assets is
currently not anticipated. Net deferred tax assets at December 31 are
comprised of the following:
<TABLE>
<CAPTION>
December 31
----------------------------
Successor Predecessor
Company Company
1996 1995
<S> <C> <C>
Current:
Warranty reserve $ 47,000 $ 29,000
Allowance for doubtful accounts 36,000 122,000
Miscellaneous accrued expenses 60,000
Inventory costs capitalized for income tax purposes 9,000
Valuation allowance (152,000) (151,000)
----------- -----------
Net current tax benefit of temporary differences $ -- $ --
=========== ===========
Noncurrent:
Excess of book over tax depreciation and amortization $ 178,000 $ 103,000
Net operating loss carryforwards 1,091,000 2,094,000
Tax credits 84,000 85,000
Valuation allowance (1,353,000) (2,282,000)
----------- -----------
Net noncurrent tax benefit of temporary differences $ -- $ --
=========== ===========
</TABLE>
13. 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 $17,446 for the nine months
ended December 31, 1996. The Predecessor Company's contributions totaled
$5,815 and $24,437 for the three months ended March 31, 1996 and the
year ended December 31, 1995, respectively.
14. OTHER RECEIVABLE AND PAYABLES
During 1995, the Predecessor Company became aware of two heat exchangers
sold through the Predecessor Company's German customer which were not
performing up to specifications and required rework to make them perform
satisfactorily. The cost of this rework was accrued as an other accounts
payable. One of these units was sold during a time period when the
Predecessor Company had coverage under a liability insurance policy
covering design errors. In 1995, the Predecessor Company recognized a
receivable of $171,404, net of a deductible of approximately $32,000,
related to the cost incurred on the unit covered by insurance. Due to
the uncertainty of collecting this and certain other receivables, the
allowance for doubtful accounts was increased to effectively reduce the
net amount receivable from the German customer to zero at December 31,
1995. In 1996, the Company paid the customer a nominal amount and the
dispute was settled.
15. SUBSEQUENT EVENT
In March 1997, the Company issued a major shareholder 1,200,000 shares
of common stock in exchange for which the shareholder (i) paid to the
Company $50,000; (ii) waived his rights to receive the interest rate
differential payments with respect to payments made to the Bank in
February through May 1997 (which interest rate differential payments
were estimated to equal a total of approximately $14,000); and (iii)
agreed to consent to an increase in the line of credit to $1,250,000 and
an abatement of the $25,000 monthly reduction in the line of credit
until after June 1, 1997.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's
principal independent auditors during the two most recent fiscal years.
PART III
ITEMS 9-11
The discussions under the sections captioned "Directors, Executive Officers and
Control Persons and Compliance with Section 16(a) of the Exchange Act";
"Executive Compensation"; and "Security Ownership of Certain Beneficial Owners
and Management"; to be included in the Company's proxy statement to be filed
with the Securities Exchange Commission and delivered to the Company's
shareholders pursuant to Regulation 14A of the Securities Exchange Act of 1934
with respect to the 1997 annual meeting of shareholders of the Company are
incorporated by reference in response to Items 9,10,11 of Part III hereof.
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 guaranteed the Company's obligations under its
line of credit extended by First Bank, National Association, (the "Bank") and
pledged to the Bank investment securities owned by Mr. Heim to secure the
Company's obligations to the Bank. In consideration of such financing
arrangements, the Company has granted to Mr. Heim rights to acquire common stock
of the Company, made cash payments to Mr. Heim and granted to him security
interests in assets of the Company.
In May 1996, the Company and the Bank amended and restated the
Company's credit arrangements in connection with the implementation of the
Company's Plan of Reorganization. As amended, the Bank provided the Company (i)
a line of credit of $1,150,000 which was to be reduced in the amount of $25,000
each month beginning in July 1996 and terminate on June 1, 1997; and (ii) a term
loan in the amount of $500,000 to be repaid in monthly installments of
approximately $10,000 and is due in full on May 1, 2001. Both the line of credit
and term loan provide for payment of interest at a variable annual rate of 1.75
percent in excess of an index rate of the Bank. In October 1996, and in February
1997, the Bank agreed to amend the terms of the line of credit. As amended, the
line of credit currently is in the amount of $1,250,000 with the Company being
under no obligation to reduce that amount on a monthly basis prior to the June
1, 1997 due date of the line.
In May 1996, the Company and Mr. Heim renewed their agreements related
to Mr. Heim's guaranty of the Company's obligations due the Bank. As renewed,
the Company agreed to pay to Mr. Heim (i) a monthly payment equal to 30 percent
of the interest payable to the Bank with respect to the line of credit; (ii) in
August 1996, an origination fee for the line of credit of $46,000; and (iii) a
monthly payment, to the extent the annual interest payable under the term note
was less than 12 percent, equal to the difference between the actual interest
paid and what would be paid if the term loan was at an annual interest rate of
12 percent. The renewal of the arrangement recognized that Mr. Heim was not
obligated to seek to have the Bank renew the line of credit at its maturity in
June 1997, but that if he did, Mr. Heim would be entitled to a renewal fee in
the amount of 4 percent of the line of credit renewed. The Successor Company
expensed $49,760 for Mr. Heim for the nine months ended December 31, 1996 and
the Predecessor Company expensed $28,160 and $84,190 for the three months ended
March 31, 1996 and the twelve months ended December 31, 1995 respectively.
Issuance of Shares to Principal Shareholder
In March 1997, the Company issued to William D. Heim 1,200,000 share of
common stock in exchange for which Mr. Heim: (i) paid to the Company $50,000;
(ii) waived his rights to receive the interest rate differential payments with
respect to payments made to the Bank in February through May 1997 (which
interest rate differential payments were estimated to equal a total of
approximately $14,000); and (iii) agreed to consent to an increase in the line
of credit to $1,250,000 and an abatement of the $25,000 monthly reduction in the
line of credit until after June 1, 1997.
Mortgage Loan with Principal Shareholder
In June 1995, the Company borrowed $500,000 from WDH Investments, Co.
("WDH") and secured repayment of the loan with a mortgage upon the Company's
production facility in St. Paul, Minnesota. Willis D. Heim, a principal
shareholder and former director of the Company, is an affiliate of WDH. The loan
requires monthly repayments of $6,000 which include interest at an annual rate
of 12 percent, but is due in full in January 2000. In addition, the note is due
in full in the event the Company defaults upon the other indebtedness of the
Company.
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. On January 27, 1997 the Lease Agrement was
amended to decrease the total office space to approximately 3,800 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. A renewal of the lease is currently being negotiated. Under the
terms of the Lease, as amended, the Company pays a monthly rental of $5,333.
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
10.17(7) Manufacturing and Marketing Cooperation Agreement dated October 31, 1991 between
Registrant and Lentjes AG, Dusseldorf, Germany.
10.20(2) License Agreement between Registrant as licensor and Sumitomo Heavy Industries,
Ltd. as licensee.
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(11) Mortgage Note dated June 16, 1995, issued by the Registrant to WDH Investments Co.
10.25(11) Combination Mortgage, Security Agreement, Fixture Financing Statement and
Assignment of Rents between Registrant and WDH Investments Co., dated June 16, 1995.
10.31(12) Debtor's Amended Plan of Reorganization dated April 25, 1996.
10.32 Amended and Restated Credit Agreement dated May 9, 1996 between the registrant and
First Bank National Association.
10.33 $500,000 Term Promissory Note issued by registrant on May 9, 1996, in favor of First
Bank National Association.
10.34 $1,500,000 Revolving Credit Promissory Note issued by registrant on May 9, 1996, in
favor of First Bank National Association.
10.35 Amended and Restated Security Agreement dated May 9, 1996, or the registrant in favor
of First Bank National Association.
10.36 May 9, 1996, Agreement between registrant and Willis D. Heim concerning guaranty by Mr.
Heim of registrant's obligations to First Bank National Association.
27 Financial Data Schedule.
* 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.
(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.
(10) Incorporated by reference to the Company's Form 10-KSB for the year ended December 31, 1994.
(11) Incorporated by reference to the Company's Form 10-KSB for the year ended December 31, 1995.
(12) Incorporated by reference to the Company's Form 8-K for the event occurring on April 19, 1996.
</TABLE>
(b) Reports on Form 8-K
The Registrant filed no current reports on Form 8-K during the quarter
ended December 31, 1996.
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/ Allen R. Karson
Allen R. Karson
Chief Executive Officer
(principal executive officer) and
Chief Financial Officer
(principal financial officer and
principal accounting 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
Louis R. Wagner, Chairman of the Board
/s/ Allen R. Karson
Allen R. Karson, Chief Executive Officer
and Chief Financial Officer
/s/ John O. Goodwyne
John O. Goodwyne, a director
/s/ John Fowler
John Fowler, a director
AMENDED AND RESTATED
CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT ("Credit Agreement") is made and
entered into as of May 9, 1996, by and between NORTH ATLANTIC TECHNOLOGIES,
INC., a Minnesota corporation (the "Borrower"), whose address is 8120 Penn
Avenue South, Suite 435, Minneapolis, Minnesota 55431, and FIRST BANK NATIONAL
ASSOCIATION, a national banking association (the "Lender"), whose address is
First Bank Place, 601 Second Avenue South, Minneapolis, Minnesota 55402.
RECITALS
FIRST: North Atlantic Technologies, Inc., a Minnesota corporation ("Borrower")
and the Lender are parties to a credit agreement dated as of December 21, 1987
("Original Agreement"). Pursuant to the terms of the Original Agreement the
Lender agreed to extend on a revolving credit basis sums to Borrower. The
Original Agreement was amended by a First Amendment to Credit Agreement dated
April 13, 1990, a Second Amendment to Credit Agreement dated June 18, 1991, a
Third Amendment to Credit Agreement dated September 25, 1991, a Fourth Amendment
to Credit Agreement dated December 30, 1991, a Fifth Amendment to Credit
Agreement dated June 26, 1992, a Sixth Amendment dated as of December 29, 1992,
a Seventh Amendment dated as of August 31, 1993, an Eighth Amendment dated
October 25, 1993, a Ninth Amendment dated August 31, 1994, a Tenth Amendment to
Credit Agreement dated March 28, 1995, an Eleventh Amendment to Credit Agreement
dated May 8, 1995, an Eleventh Amendment dated August 31, 1995, and a Twelfth
Amendment dated October 31, 1995.
SECOND: Borrower's loans are secured by an attached and perfected security
interest in all of Borrower's inventory, accounts, equipment, general
intangibles, proceeds and products thereof. In addition, Willis D. Heim,
shareholder of the Borrower, has guaranteed all obligations of the Borrower
pursuant to a Guaranty dated December 21, 1987. In addition, the Borrower's
loans are secured pursuant to the terms of a Pledge Agreement dated December 21,
1987 by Willis D. Heim pledging certain financial assets including securities to
the Lender.
THIRD: On February 1, 1996 Borrower filed a petition for relief under Chapter 11
of Title 11 of the United States Code, and pursuant to an order confirming the
Borrower's Plan of Reorganization dated April 19, 1996, Borrower was restored to
its property and assets pursuant to 11 U.S.C. 1141. Borrower and Lender agreed
to amend and restate the terms of the Original Agreement as set forth in the
confirmed Plan and to extend new credit to Borrower pursuant to the Plan and
this Credit Agreement.
NOW, THEREFORE, for and in consideration of the loans and advances to be made by
the Lender to the Borrower hereunder, the mutual covenants, promises and
agreements contained herein, and other good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, the Borrower and the
Lender agree as follows:
DEFINITIONS
The following terms when used in this Credit Agreement shall, except where the
context otherwise requires, have the following meanings both in the singular and
plural forms thereof:
"Account" means any right of the Borrower to payment for goods sold or services
rendered.
"Advance" means any advance by the Lender made under the Revolving Credit
Commitment. (The face amount of any letter of credit, and the converted face
amount of any letter of credit issued in foreign currency using the conversion
rates applied by the Lender, issued by the Lender for the account of the
Borrower shall be deemed an Advance hereunder).
"Affiliate" means any corporation, association, partnership, joint venture or
other business entity directly or indirectly controlling or controlled by, or
under direct or indirect common control of, the Borrower or any of its
Subsidiaries.
"Borrower" means North Atlantic Technologies, Inc., a Minnesota corporation.
"Borrowing Base" means so many of the shares of the stock owned by Willis D.
Heim traded on the New York Stock Exchange which have an aggregate value as of
the date hereof equal to $2,357,142.85 (which stock shall be transferred to
Heim's account number 10-603730 as of the date hereof).
"Business Day" means any day on which the Lender is open for the transaction of
business of the kind contemplated by this Credit Agreement.
"Collateral" means all of the assets of the Borrower or any other party in which
the Lender holds a security interest pursuant to any of the Loan Documents.
"Credit Agreement" means this Credit Agreement, as originally executed and as
may be amended, modified, supplemented, or restated from time to time by written
agreement between the Borrower and the Lender.
"Current Assets" means, at any date, the aggregate amount of all assets of the
Borrower that are classified as current assets in accordance with GAAP.
"Current Liabilities" means, at any time, the aggregate amount of all
liabilities of the Borrower that are classified as current liabilities in
accordance with GAAP (including taxes and other proper accruals and the matured
portion of any indebtedness).
"Debt" means (i) all items of indebtedness or liability that, in accordance with
GAAP, would be included in determining total liabilities as shown on the
liabilities side of a balance sheet as of the date on which such Debt is to be
determined; (ii) indebtedness secured by any mortgage, pledge, lien or security
interest existing on property owned by the Person whose Debt is being
determined, whether or not the indebtedness secured thereby shall have been
assumed; and (iii) guaranties, endorsements (other than for purposes of
collection in the ordinary course of business) and other contingent obligations
in respect of, or to purchase or otherwise acquire, indebtedness of others.
"Default" means any event which if continued uncured would, with notice or lapse
of time or both, constitute an Event of Default.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended
and as may be further amended from time to time, and the rules and regulations
promulgated thereunder by any governmental agency or authority, as from time to
time in effect.
"Event of Default" means any event of default described in Section 8
hereof."GAAP" means the generally accepted accounting principles in the United
States in effect from time to time including, but not limited to, Financial
Accounting Standards Board (FASB) Standards and Interpretations, Accounting
Principles Board (APB) Opinions and Interpretations, Committee on Accounting
Procedure (CAP) Accounting Research Bulletins, and certain other accounting
principles which have substantial authoritative support.
"Guarantor" means Willis D. Heim.
"Guaranty" means the Restated Guaranty, of even date herewith, executed by the
Guarantor in favor of the Lender, as originally executed and as may be amended,
modified or supplemented from time to time by written agreement between the
Guarantor and the Lender.
"Index Rate" means the variable annual rate that will always be equal to the
rate calculated by the Lender from time to time as its One Month Reserve
Adjusted Certificate of Deposit Rate.
"Lender" means First Bank National Association, a national banking association,
its successors and assigns.
"Lien" means any lien, security interest, pledge, mortgage, statutory or tax
lien, or other encumbrance of any kind whatsoever (including without limitation,
the lien or retained security title of a conditional vendor), whether arising
under a security instrument or as a matter of law, judicial process or otherwise
or by an agreement of the Borrower to grant any lien or security interest or to
pledge, mortgage or otherwise encumber any of its assets.
"Loan Documents" means this Credit Agreement, the Revolving Credit Note, the
Term Note, the Security Agreement, the Pledge Agreement, and the Guaranty, and
such other documents as the Lender may reasonably require as security for, or
otherwise may be executed in connection with, any loan hereunder, all as
originally executed and as may be amended, modified or supplemented from time to
time by written agreement between the parties thereto.
"Material Adverse Occurrence" means any occurrence which materially adversely
affects the present or prospective financial condition or operations of the
Borrower, or which impairs the ability of the Borrower to perform its
obligations under the Loan Documents.
"Maturity" of the Revolving Credit Note means the earlier of (a) the date on
which the Revolving Credit Note becomes due and payable upon the occurrence of
an Event of Default; or (b) the Termination Date.
"Net Worth" means the aggregate of capital and surplus (and subordinated Debt)
of the Borrower, all determined in accordance with GAAP.
"Notes" means the Revolving Credit Note and Term Note.
"Person" means any natural person, corporation, firm, association, government,
governmental agency or any other entity, whether acting in an individual
fiduciary or other capacity.
"Pledge Agreement" means the Restated Pledge Agreement, of even date herewith,
executed by Willis D. Heim ("Pledgor") in favor of the Lender, as originally
executed and as may be amended, modified or supplemented by written agreement
between the Pledgor and the Lender.
"Regulatory Change" means any change after the date hereof in any (or the
adoption after the date hereof of any new) (a) Federal or state law or foreign
law applying to the Lender; or (b) regulation, interpretation, directive or
request (whether or not having the force of law) applying or in the reasonable
opinion of the Lender applicable to, the Lender of any court or governmental
authority charged with the interpretation or administration of any law referred
to in clause (a) of this definition or of any fiscal, monetary, or other
authority having jurisdiction over the Lender.
"Revolving Credit Commitment" means the sum of One Million One Hundred Fifty
Thousand and No/100 Dollars ($1,150,000.00), as reduced from time to time
pursuant to the terms of this Credit Agreement, or the Lender's obligation to
extend Advances to the Borrower under Section 2, as the context may
require.
"Revolving Credit Loan" means, at any date, the aggregate amount of all Advances
made by the Lender to the Borrower pursuant to Section 2 hereof.
"Revolving Credit Note" means the Revolving Credit Promissory Note of even date
herewith in the original principal amount of One Million One Hundred Fifty
Thousand and No/100 Dollars ($1,150,000.00) made by the Borrower payable to the
order of the Lender, together with all extensions, renewals, modifications,
substitutions and changes in form thereof effected by written agreement between
the Borrower and the Lender.
"Security Agreement" means the Amended and Restated Security Agreement, of even
date herewith, executed by Borrower in favor of the Lender, as originally
executed and as may be amended, modified or supplemented from time to time by
written agreement between Borrower and the Lender.
"Subsidiary" means any corporation of which more than fifty percent (50%) of the
outstanding capital stock having ordinary voting power to elect a majority of
the board of directors of such corporation (irrespective of whether, at the
time, stock of any other class or classes of such corporation shall have or
might have voting power by reason of the happening of any contingency) is at the
time, directly or indirectly, owned by the Borrower and/or one or more
Subsidiary or Affiliate.
"Termination Date" of the Revolving Credit Note means the earlier of (a) June 1,
1997; or (b) the date upon which the obligation of the Lender to make Advances
is terminated pursuant to Section 2.8.
"Term Loan" means the loan evidenced by the Term Note.
"Term Note" means the Term Promissory Note of even date herewith in the original
principal amount of Five Hundred Thousand and No/100 Dollars ($500,000.00), made
by the Borrower payable to the order of the Lender, together with all
extensions, renewals, modifications, substitutions and changes in form thereof
effected by written agreement between the Borrower and the Lender.
THE REVOLVING CREDIT LOAN
Commitment for Revolving Credit. The Revolving Credit Commitment shall initially
be in the amount of $1,150,000; provided however, that the Revolving Credit
Commitment shall be reduced from time to time as follows: (1) the Revolving
Credit Commitment automatically shall be reduced by $25,000 on the last day of
each calendar month beginning on July 31, 1996; and (2) in the event that the
Revolving Credit Commitment shall exceed on any given date an amount equal to
seventy percent (70%) of the Borrowing Base less the amount of all outstanding
principal and past-due interest owing under the Term Note, then the Revolving
Credit Commitment automatically shall be reduced to such amount. Subject to the
Conditions of Lending set forth in Section 4 hereof and as long as no Event of
Default has occurred hereunder, the Lender agrees to make Advances to the
Borrower from time to time from the date of this Credit Agreement through the
Termination Date, provided, however, that the Lender shall not be obligated to
make any Advance if, after giving effect to such Advance, the aggregate
outstanding principal amount of all Advances would exceed the Revolving Credit
Commitment as reduced from time to time. Within the limits set forth above, the
Borrower may borrow, repay and reborrow amounts under the Revolving Credit Note.
Purpose of Loan/Use of Proceeds. The Borrower will use the proceeds of any
Advance hereunder for general working capital.
The Revolving Credit Note. All Advances shall be evidenced by, and the Borrower
shall repay such Advances to the Lender in accordance with, the terms of the
Revolving Credit Note, including without limitation the provision of the
Revolving Credit Note that the principal amount payable thereunder at any time
shall not exceed the then unpaid principal amount of all Advances made by the
Lender.
Records of Advances and Payments. The Borrower hereby irrevocably authorizes the
Lender to make or cause to be made, at or about the time each Advance is made by
the Lender, an appropriate notation on the Lender's records of the principal
amount of such Advance; and the Lender shall make or cause to be made, on or
about the time a payment of any principal or interest of the Revolving Credit
Note is received, an appropriate notation of such payment on its records. The
aggregate amount of all unpaid Advances set forth on the records of the Lender
shall be rebuttable presumptive evidence of the principal amount owing and
unpaid on the Revolving Credit Note.
Interest on the Revolving Credit Note.
The Borrower agrees to pay interest on the outstanding principal amount of the
Revolving Credit Note at a variable rate from the date thereof until paid in
full at the Index Rate plus One and Three-Quarters percent (1.75%).
Interest accrued on the Revolving Credit Note through Maturity shall be payable
on the first day of each calendar month, commencing June 1, 1996 and at
Maturity. Interest accrued after Maturity shall be payable upon demand.
No provision of this Credit Agreement or the Revolving Credit Note shall require
the payment or permit the collection of interest in excess of the rate permitted
by applicable law.
All computation of interest on the outstanding principal amount of the Revolving
Credit Note shall be computed on the basis of a year comprised of 360 days, but
charged for the actual number of days elapsed. Each change in the interest rate
payable on the Revolving Credit Note due to a change in the Index Rate shall
take place simultaneously with the corresponding change in the Index Rate.
Whenever any payment to be made by or to the Lender or other holder(s) of the
Revolving Credit Note shall otherwise be due on a day which is not a Business
Day, such payment shall be made on the next succeeding Business Day, and such
extension of time shall be included in computing the fees or interest payable on
such next succeeding Business Day.
Manner of Borrowing. The Borrower shall give the Lender written or telephonic
notice of each requested Advance by not later than 1:00 p.m. (Minneapolis time)
on the date such Advance is to be made, provided that the Borrower shall forward
to the Lender within three (3) Business Days of any such telephone notice,
written confirmation thereof. Each Advance shall be deposited to the Borrower's
account no. 116401271246 with the Lender.
Payments. Any other provision of this Credit Agreement to the contrary
notwithstanding, the Borrower shall make all payments of interest on and
principal of the Revolving Credit Note in immediately available funds to the
Lender at its office shown on the first page hereof. The Borrower authorizes the
Lender to charge from time to time against the Borrower's account no.
116401271246 with the Lender any payments when due.
Termination. The obligation of the Lender to make Advances shall terminate:
Upon receipt by the Lender of thirty (30) days' written notice of termination
from the Borrower given at any time when no amount is outstanding under the
Revolving Credit Note; Immediately and without further action upon the
occurrence of an Event of Default of the nature referred to in Subsection
8.1(c); orImmediately when any Event of Default (other than one of the nature
specified in Subsection 8.1(c)) shall have occurred and be continuing and either
(i) the Lender shall have demanded payment of the Revolving Credit Note or (ii)
the Lender shall elect by giving notice to Borrower.
Mandatory Prepayment. In the event that the outstanding balance under the
Revolving Credit Note exceeds the Revolving Credit Commitment as reduced from
time to time, the Lender shall give the Borrower notice of such excess amount
and the Borrower shall immediately reduce the amount of outstanding Advances to
less than or equal to the Revolving Credit Commitment (or execute and deliver to
the Lender such documents necessary to pledge, assign, or grant the Lender a
security interest in, such additional Collateral acceptable to the Lender with a
collateral value equal to or greater than the amount of the excess of the
outstanding Advances over the Revolving Credit Commitment).
Security. The indebtedness, liabilities and other obligations of the Borrower to
the Lender under the Revolving Credit Note and this Credit Agreement are secured
by, inter alia, security interests granted pursuant to the Security Agreement
and Pledge Agreement.
THE TERM LOAN
Term Loan. Subject to the Conditions of Lending set forth in Section 4, the
Lender agrees to loan funds to the Borrower, in a single advance, in the maximum
principal amount of Five Hundred Thousand and No/100 Dollars ($500,000.00).
Purpose of Loan/Use of Funds. The Borrower shall use the Term Loan for general
working capital purposes.
The Term Note. To evidence the loan made by the Lender to the Borrower
hereunder, the Borrower has executed and delivered to the Lender the Term Note.
The Borrower agrees to pay to the Lender amounts outstanding under the Term Note
in installments as set forth in said note, with all outstanding principal and
accrued interest due and payable May 1, 2001.
Interest on the Term Note.
The Borrower agrees to pay interest on the unpaid principal balance of the Term
Note outstanding from time to time at a variable annual rate equal to the Index
Rate plus One and Three-Quarters percent (1.75%).
Payments of principal and interest on amounts outstanding under the Term Note
shall be payable according to the terms of the Term Note.
No provision of this Credit Agreement or the Term Note shall require the payment
or permit the collection of interest in excess of the rate permitted by
applicable law.
All computation of interest on the outstanding principal amount of the Term Note
shall be computed on the basis of a year comprised of 360 days, but charged for
the actual number of days elapsed. Each change in the interest rate payable on
the Term Note due to a change in the Index Rate shall take place simultaneously
with the corresponding change in the Index Rate. Whenever any payment to be made
by or to the Lender or other holder(s) of the Term Note shall otherwise be due
on a day which is not a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall be included in
computing the fees or interest payable on such next succeeding Business Day.
Voluntary Prepayments. The Borrower may prepay the principal of the Term Note in
whole or in part, at any time, without premium or penalty. Each such prepayment
shall be accompanied by the interest accrued on the amount so prepaid to the
date of the prepayment. Each principal prepayment shall be applied to the
payment of periodic installments on the Term Note in the inverse order of their
maturity.
Payments. Any other provision of this Credit Agreement to the contrary
notwithstanding, the Borrower shall make all payments of interest on and
principal of the Term Note in immediately available funds to the Lender at its
office shown on the first page hereof. The Borrower authorizes the Lender to
charge from time to time against the Borrower's account no. 116401271246 with
the Lender any payments when due.
Security. The indebtedness, liabilities and other obligations of the Borrower to
the Lender under the Term Note and this Credit Agreement are secured by, inter
alia, security interests granted pursuant to the Security Agreement and the
Pledge Agreement.
CONDITIONS OF LENDING
Conditions Precedent. This Credit Agreement and the Lender's obligations
hereunder are subject to receipt by the Lender of the following, each to be in
form and substance satisfactory to the Lender, unless the Lender waives receipt
of any of the following in writing: This Credit Agreement and the Notes each
appropriately completed and duly executed by the Borrower;
The Security Agreement and corresponding financing statement(s) appropriately
completed and duly executed by Borrower;
The Pledge Agreement appropriately completed and duly executed by Willis D.
Heim, together with the original certificates evidencing the pledge stock and a
stock power executed in blank for each such certificate;
The Guaranty appropriately completed and duly executed by the Guarantor;
A current UCC secured transaction search, federal and state tax lien search,
judgment and bankruptcy search, reflecting results satisfactory to the Lender,
on Borrower from the appropriate filing offices as required by the Lender;
A Certificate of Good Standing for the Borrower issued by the Secretary of State
in all states where the Borrower is qualified to do business;
A copy of the Borrower's Bylaws, together with all amendments, certified by the
Secretary of the Borrower to be a true and correct copy thereof;
A copy of the Articles of Incorporation of the Borrower, together with all
amendments, certified by the Secretary of State of the state of the Borrower's
incorporation to be a true and correct copy thereof;
A certified copy of the resolutions of the Board of Directors of the Borrower
authorizing or ratifying the transactions contemplated hereby, and the
execution, delivery and performance of the Loan Documents, and designating the
officers authorized to execute the Loan Documents to which the Borrower is a
party and to perform the obligations of the Borrower thereunder;
A certificate of the Secretary of the Borrower certifying the names of the
officers authorized to execute the Loan Documents, together with a sample of the
true signature
A favorable opinion of counsel for the Borrower, satisfactory to the Lender, as
to the matters set forth in Subsections 5.1, 5.2, and 5.3, and other matters as
requested by the Lender, satisfactory to the Lender and its counsel;
The Borrower shall have paid to the Lender all of the fees and expenses required
by the Lender pursuant to Section 9.3 of this Credit Agreement;
Policies or certificates of insurance evidencing insurance coverage required
under this Credit Agreement and any other of the Loan Documents; and
Such other documents, information and actions as the Lender may reasonably
request.
Conditions Precedent to all Loans and Advances. The obligation of the Lender to
make any loan or Advance hereunder, including the initial loans and Advances, is
subject to the satisfaction of each of the following, unless waived in writing
by the Lender:
The representations and warranties set forth in Section 5 are true and correct
in all material respects on the date hereof and on the date of any loan or
Advance.
No Default or Event of Default shall have occurred and be continuing.
No litigation, arbitration or governmental investigation or proceeding shall be
pending, or, to the knowledge of the Borrower, threatened, against the Borrower
or affecting the business or operations of the Borrower which was not previously
disclosed to the Lender and which, if determined adversely to the Borrower,
would have a material adverse effect on the operation or financial condition of
the Borrower.
No Default or Event of Default shall result from the making of any such loan or
Advance.
No Material Adverse Occurrence shall have occurred and be continuing.
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender as follows:
Organization, etc. The Borrower is a corporation validly organized and existing
and in good standing under the laws of the State of Minnesota, has full power
and authority to own its property and conduct its business substantially as
presently conducted by it and is duly qualified to do business and is in good
standing as a foreign corporation in each other jurisdiction where the nature of
its business makes such qualification necessary. The Borrower has full power and
authority to enter into and perform its obligations under the Loan Documents and
to obtain the loans and Advances hereunder.
Due Authorization. The execution, delivery and performance by the Borrower of
the Loan Documents (1) have been duly authorized by all necessary corporate
action, (2) do not require any approval or consent of, or any registration,
qualification or filing with, any governmental agency or authority or any
approval or consent of any other Person (including, without limitation, any
stockholder), (3) do not and will not conflict with, result in any violation of,
or constitute any default under, any provision of the Borrower's Articles of
Incorporation or bylaws, or any agreement binding on or applicable to the
Borrower or any of its property, or any law or governmental regulation or court
decree or order binding upon or applicable to the Borrower or of any of its
property, and (4) will not result in the creation or imposition of any Lien on
any of its property pursuant to the provisions of any agreement binding on or
applicable to the Borrower or any of its property except pursuant to the Loan
Documents.
Validity of the Loan Documents. The Loan Documents to which the Borrower is a
party are the legal, valid and binding obligations of the Borrower and are
enforceable in accordance with their terms, subject only to bankruptcy,
insolvency, reorganization, moratorium or similar laws, rulings or decisions at
the time in effect affecting the enforceability of rights of creditors generally
and to general equitable principles which may limit the right to obtain
equitable remedies.
Financial Information. The financial statements of the Borrower furnished to the
Lender have been and will be prepared in accordance with GAAP consistently
applied by the Borrower and present fairly the financial condition of the
Borrower as of the dates thereof and for the periods covered thereby. The
Borrower is not aware of any contingent liabilities or obligations which would,
upon becoming non-contingent liabilities or obligations, be a Material Adverse
Occurrence. Since the date of the most recent such statements, neither the
condition (financial or otherwise), the business nor the properties of the
Borrower have been materially and adversely affected in any way.
Litigation, Other Proceedings. Except as previously disclosed to and approved of
in writing by the Lender, there is no action, suit or proceeding at law or
equity, or before or by any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, pending, or to the knowledge of
the Borrower threatened, against the Borrower or any of its property, which, if
determined adversely would be a Material Adverse Occurrence; and the Borrower is
not in default with respect to any final judgment, writ, injunction, decree,
rule or regulation of any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, where such default would
be a Material Adverse Occurrence.
Title to Assets. Except for Liens permitted by Section 7.2, the Borrower has
good and marketable title to all of its assets, real and personal.
Lien Priority. The Liens created by the Security Agreement are attached and
first, perfected Liens on the Collateral.
Guarantees and Indebtedness. Except as disclosed on financial statements of the
Borrower furnished to the Lender, the Borrower is not a party to any contract of
guaranty or suretyship and none of its assets is subject to any contract of that
nature and the Borrower is not indebted to any other party, except the Lender.
Margin Stock. No part of any loan or Advance hereunder shall be used at any time
by the Borrower to purchase or carry margin stock (within the meaning of
Regulation U promulgated by the Board of Governors of the Federal Reserve
System) or to extend credit to others for the purpose of purchasing or carrying
any margin stock. The Borrower is not engaged principally, or as one of its
important activities, in the business of extending credit for the purposes of
purchasing or carrying any such margin stock. No part of the proceeds of any
loan or Advance hereunder will be used by the Borrower for any purpose which
violates, or which is inconsistent with, any regulations promulgated by the
Board of Governors of the Federal Reserve System. Taxes. The Borrower has filed
all federal, state and other income tax returns which are required to be filed
through the date of this Credit Agreement, and has paid all taxes as shown on
said returns, and all taxes due or payable without returns and all assessments
received to the extent such taxes and assessments have become due. All tax
liabilities of the Borrower are adequately provided for on its books, including
interest and penalties. No income tax liability of a material nature has been
asserted by taxing authorities for taxes in excess of those already paid. The
Borrower has made all required withholding deposits.
Accuracy of Information. All factual information furnished by or on behalf of
the Borrower to the Lender for purposes of or in connection with this Credit
Agreement or any transaction contemplated by this Credit Agreement is, and all
other such factual information furnished by or on behalf of the Borrower to the
Lender in the future, will be true and accurate in every material respect on the
date as of which such information is dated or certified. No such information
contains any material misstatement of fact or omits any material fact or any
fact necessary to prevent such information from being misleading.
Material Agreements. The Borrower is not a party to any agreement or instrument
or subject to any restriction that materially and adversely affects its
business, property or assets, operations or condition (financial or otherwise)
which are not reflected on the Borrower's Form 10-KSB for the period ended
December 31, 1995.
Defaults. Other than defaults preceding or relating to the Borrower's chapter 11
bankruptcy case, Bky No. 3-96-526, which defaults are addressed by the
Borrower's confirmed plan of reorganization, the Borrower is not in default in
the performance, observance or fulfillment of any of the obligations, covenants
or conditions contained in any: (a) agreement to which the Borrower is a party,
which default might have a material adverse effect on the business, properties
or assets, operations, or condition (financial or otherwise) of the Borrower; or
(b) instrument evidencing any indebtedness or under any agreement relating to
such indebtedness.
ERISA. (a) No Reportable Event has occurred and is continuing with respect to
any Plan; (b) the Pension Benefit Guaranty Corporation, or any successor entity,
has not instituted proceedings to terminate any Plan; and (c) each Plan of the
Borrower has been maintained and funded in all material respects in accordance
with its terms and with ERISA. All undefined capitalized terms used in this
Section shall have the meanings ascribed to them in ERISA.
Survival of Representations. All representations and warranties contained in
this Section 5 shall survive the delivery of the Notes and the making of the
loans and Advances evidenced thereby and any investigation at any time made by
or on behalf of Lender shall not diminish its rights to rely thereon.
AFFIRMATIVE COVENANTS
As long as there remains any amount outstanding under the Notes, or the Lender
has any obligation to make Advances under the Revolving Loan Commitment, the
Borrower shall, unless waived in writing by the Lender:
Financial Statements and Reports. Furnish to the Lender, at the times set forth
below, the following financial statements, reports and information:
As soon as available, but in any event within ninety (90) days after each fiscal
year end, audited financial statements of the Borrower including without
limitation a balance sheet, income statement and sources of income certified by
certified public accountants satisfactory to the Lender to have been prepared in
accordance with GAAP consistently applied;
As soon as available, but in any event within forty-five (45) days after the
last day of each quarterly fiscal period unaudited financial statements of the
Borrower consisting of a balance sheet and statement of income and surplus
statement dated as of the last Business Day of such quarterly fiscal period in
form and detail as reasonably required by the Lender certified by the chief
financial officer of the Borrower to have been prepared from the records of the
Borrower on the basis of accounting principles consistently applied by the
Borrower;
Promptly provide the Lender from time to time with personal financial statements
of the Guarantor, in form and substance acceptable to the Lender, at least once
every 12 months and as otherwise requested by the Lender; and provide the
Lender, in form and substance acceptable to the Lender, within 15 days after the
same are filed with the United States Internal Revenue Service, the annual
federal income tax return of the Guarantor, including all schedules,
attachments, and amendments thereto; and provide the Lender from time to time
with such other information respecting the condition (financial and otherwise),
business, and property of the Guarantor as the Lender may request, in form and
substance acceptable to the Lender;
As soon as available, copies of all regular and periodic financial reports and
statements which the Borrower shall file with the Securities and Exchange
Commission (or any governmental authority succeeding to any of its functions),
or provide to its stockholders or any national securities exchange;
Forthwith upon any officer of the Company obtaining knowledge of any condition
or event which constitutes an Event of Default or an unmatured Event of Default,
a certificate specifying the nature and period of existence thereof and what
action the Company has taken or is taking or proposes to take with respect
thereto; and
Such other information concerning the business, operations and condition
(financial or otherwise) of the Borrower and the Guarantor as the Lender may
reasonably request.
Maintenance of Corporate Existence. Maintain and preserve its corporate
existence.
Taxes. Pay and discharge as the same shall become due and payable, all taxes,
assessments and other governmental charges and levies against or on any of its
property, as well as claims of any kind which, if unpaid, might become a Lien
upon any of its properties, unless such tax, levy, charge assessment or Lien is
being contested in good faith by the Borrower and is supported by an adequate
book reserve. The Borrower shall make all required withholding deposits.
Notices. As soon as practicable, give notice to the Lender of:
The commencement of any litigation relating to the Borrower involving claimed
damages in excess of $25,000.00 or relating to the transactions contemplated by
this Credit Agreement;
The commencement of any material arbitration or governmental proceeding or
investigation not previously disclosed to the Lender which has been instituted
or, to the knowledge of the Borrower, is threatened against the Borrower or its
property which, if determined adversely to the Borrower, would have a material
adverse effect on the business, operations or condition (financial or otherwise)
of the Borrower;
Any Reportable Event or "prohibited transaction" or the imposition of a
Withdrawal Liability, all within the meaning of ERISA, in connection with any
Plan and, when known, any action taken by the Internal Revenue Service,
Department of Labor or Pension Benefit Guaranty Corporation with respect
thereto, and any adverse development which occurs in any litigation, arbitration
or governmental investigation or proceeding previously disclosed to the Lender
which if determined adversely to the Borrower would constitute a Material
Adverse Occurrence; and Any Default or Event of Default under this Credit
Agreement.
Compliance with Laws. Carry on its business activities in substantial compliance
with all applicable federal or state laws and all applicable rules, regulations
and orders of all governmental bodies and offices having power to regulate or
supervise its business activities. The Borrower shall maintain all material
rights, liens, franchises, permits, certificates of compliance or grants of
authority required in the conduct of its business.
Books and Records. Keep books and records reflecting all of its business affairs
and transactions in accordance with GAAP consistently applied and permit the
Lender, and its representatives, at reasonable times and intervals, to visit all
of its offices, discuss its financial matters with officers of the Borrower and
its independent public accountants (and by this provision the Borrower
authorizes its independent public accountants to participate in such
discussions) and examine any of its books and other corporate records.
Insurance. Procure and maintain with financially sound and reputable insurers,
insurance with respect to the Collateral and its other property against damage
and loss by theft, fire, collision (in the case of motor vehicles) and such
other risks as are required by the Lender in an amount equal to the fair market
value thereof and, in any event, in an amount sufficient to avoid the
application of any coinsurance provisions, and naming the Lender as loss payee.
The Borrower shall also procure and maintain other such insurance including
workers compensation insurance, liability and business interruption insurance,
and other insurance as the Lender may require and/or that may be required under
any of the Loan Documents, all in such amounts as may be required by the Lender.
Policies of all such insurance shall contain an agreement by the insurer to
provide the Lender thirty (30) days prior written notice of cancellation and an
agreement that the Lender's interest shall not be impaired or invalidated by any
act or neglect of the Borrower nor by the occupation of properties owned or
leased by the Borrower or other properties wherein the Collateral is located for
purposes more hazardous than those permitted by such policies. The Borrower
shall provide evidence of such insurance and the policies of insurance or copies
thereof to the Lender upon request.
Maintain Property. Maintain and keep its assets, property and equipment in good
repair, working order and condition and from time to time make or cause to be
made all needed renewals, replacements and repairs.
Conduct of Business. Continue to engage primarily in the business being
conducted on the date of this Credit Agreement.
Field Audits. Permit the Lender and its agents and representatives, to conduct
an annual business survey of the Borrower and audits of the Collateral from time
to time as the Lender deems necessary, all at the Borrower's expense.
Further Assurances. The Borrower agrees upon reasonable request by the Lender to
execute and deliver such further instruments, deeds and assurances, including
financing statements under the Uniform Commercial Code of Minnesota and/or any
other relevant states, and to do such further acts as may be necessary or proper
to carry out more effectively the purposes of this Credit Agreement and the Loan
Documents and, without limiting the foregoing, to make subject to the liens and
security interests of the Security Agreement and any other of the Loan Documents
any property agreed to be subjected, or intended to be subject, or covered by
the granting clauses of the Security Agreement or such other of the Loan
Documents.
ERISA Compliance. Comply at all times with all applicable provisions of ERISA
and the regulations and published interpretations thereunder.
NEGATIVE COVENANTS
As long as there remains any amount outstanding under the Notes or the Lender
has any obligation to make Advances under the Revolving Loan Commitment, the
Borrower shall not, unless waived in writing by the Lender:
Consolidation; Merger; Sale of Assets; Acquisitions. Consolidate with or merge
into or with any other entity; or sell (other than sales of inventory in the
ordinary course of business), transfer, lease or otherwise dispose of all or a
substantial part of its assets; or acquire a substantial interest in another
Person either through the purchase of all or substantially all of the assets of
that Person or the purchase of a controlling equity interest in that Person.
Liens. Create, incur, assume or suffer to exist any Lien on any of its property,
real or personal, except (a) Liens in favor of the Lender; (b) Liens disclosed
to and approved of in writing by the Lender, including the liens of Willis D.
Heim which are subordinate to the liens of the Lender pursuant to a
subordination agreement dated as of February 1, 1996, the liens of WDH
Investment Co. in real property and fixtures, and the liens represented by the
financing statements disclosed in part 1 of Exhibit A of the Security Agreement;
(c) Liens for current taxes and assessments which are not yet due and payable;
and (d) purchase money security interests.
Additional Indebtedness. Create, incur, assume or suffer to exist any
indebtedness except: (a) indebtedness in favor of the Lender; (b) current
liabilities incurred in the ordinary course of business; (c) indebtedness
existing on the date of this Credit Agreement and disclosed to and approved of
in writing by the Lender; and (d) purchase money indebtedness incurred in
connection with the acquisition of fixed assets.
Guaranties. Assume, guarantee, endorse or otherwise become liable in connection
with the indebtedness of any other person or entity except endorsements of
negotiable instruments for deposit or collection in the ordinary course of
business.
EVENTS OF DEFAULT AND REMEDIES
Events of Default. The term "Event of Default" shall mean any of the following
events: The Borrower shall default in the payment when due, or if payable on
demand, upon demand, of any principal or interest on the Notes; or
The Borrower shall default (other than a default in payment under subsection (a)
above) in the due performance and observance of any of the covenants contained
in any of the Loan Documents and such default shall continue unremedied for a
period of thirty (30) days after notice from the Lender to the Borrower thereof;
or
The Borrower or any Guarantor shall become insolvent or generally fail to pay or
admit in writing its inability to pay its debts as they become due; or the
Borrower or any Guarantor shall apply for, consent to, or acquiesce in the
appointment of a trustee, receiver or other custodian for itself or any of its
property, or make a general assignment for the benefit of its creditors; or a
trustee, receiver or other custodian shall otherwise be appointed for the
Borrower or any Guarantor or any assets of either; or any bankruptcy,
reorganization, debt arrangement, or other case or proceeding under any
bankruptcy or insolvency law, or any dissolution or liquidation proceeding shall
be commenced by or against the Borrower or any Guarantor; or the Borrower or any
Guarantor shall take any corporate action to authorize, or in furtherance of,
any of the foregoing; or
The Borrower shall default in the terms of its confirmed Plan of Reorganization;
or
Any judgments, writs, warrants of attachment, executions or similar process (not
undisputedly covered by insurance) in an aggregate amount in excess of
$100,000.00 shall be issued or levied against the Borrower or any Guarantor or
any assets of either and shall not be released, vacated or fully bonded prior to
any sale and in any event within thirty (30) days after its issue or levy; or
Any garnishment, summons, writ of attachment, or other legal paper referring to
the Borrower or any Guarantor shall be served on the Lender; or
The death of the Guarantor; or
Any representation or warranty set forth in this Credit Agreement or any other
Loan Document shall be untrue in any material respect on the date as of which
the facts set forth are stated or certified; or
The occurrence of any Material Adverse Occurrence; or
A Reportable Event (as defined under ERISA) shall have occurred.
Remedies. If an Event of Default described in Section 8.1(c) shall occur, the
full unpaid balance of the Notes (outstanding balance plus accrued interest) and
all other obligations of the Borrower to the Lender shall automatically be due
and payable without declaration, notice, presentment, protest or demand of any
kind (all of which are hereby expressly waived) and the obligation of the Lender
to make additional Advances shall automatically terminate. If any other Event of
Default shall occur and be continuing, the Lender may terminate its obligation
to make additional Advances and may declare the outstanding balance of the Notes
and all other obligations of the Borrower to the Lender to be due and payable
without further notice, presentment, protest or demand of any kind (all of which
are hereby expressly waived), whereupon the full unpaid amount of the Notes and
all other obligations of the Borrower to the Lender shall become immediately due
and payable. Upon any Event of Default, the Lender shall be entitled to exercise
any and all rights and remedies available under any of the Loan Documents or
otherwise available at law or in equity to collect the Notes and all other
obligations of the Borrower to the Lender and to realize upon or otherwise
pursue any and all Collateral and other security (including without limitation
any and all guarantees) for the loans under this Credit Agreement.
MISCELLANEOUS
Waivers, Amendments. The provisions of the Loan Documents may from time to time
be amended, modified, or waived, if such amendment, modification or waiver is in
writing and signed by the Lender. No failure or delay on the part of the Lender
or the holder(s) of the Notes in exercising any power or right under any of the
Loan Documents shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power or right preclude any other or further
exercise thereof or the exercise of any other power or right. No notice to or
demand on the Borrower in any case shall entitle it to any notice or demand in
similar or other circumstances.
Notices. All communications and notices provided under this Credit Agreement
shall be in writing and addressed or delivered to the Borrower or the Lender at
their respective addresses shown on the first page hereof, or to any party at
such other address as may be designated by such party in a written notice to the
other parties. Such notices shall be delivered by any of the following means:
(i) mailing through the United States Postal Service, postage prepaid, by
registered or certified mail, return receipt requested; (ii) delivery by
reputable overnight delivery service including without limitation, and by way of
example only: Federal Express, DHL, Airborne Express and Express Mail; or (iii)
delivery by reputable private personal delivery service. Notices delivered in
accordance with (i) above shall be deemed delivered the second Business Day
after deposit in the mail; notices delivered in accordance with (ii) above shall
be deemed delivered the first Business Day after delivery to the delivery
service; and notices delivered in accordance with (iii) above shall be deemed
delivered the same Business Day as that specified by the notifying party to the
delivery service.
Costs and Expenses. The Borrower agrees to pay all expenses for the preparation
of this Credit Agreement, including exhibits, and any amendments to this Credit
Agreement as may from time to time hereafter be required, and the reasonable
attorneys fees and legal expenses of counsel for the Lender, from time to time
incurred in connection with the preparation and execution of this Credit
Agreement and any document relevant to this Credit Agreement, any amendments
hereto or thereto, and the consideration of legal questions relevant hereto and
thereto. The Borrower agrees to reimburse Lender upon demand for, all reasonable
out-of-pocket expenses (including attorneys fees and legal expenses) in
connection with the Lender's enforcement of the obligations of the Borrower
hereunder or under the Notes or any other of the Loan Documents, whether or not
suit is commenced including, without limitation, attorneys fees, and legal
expenses in connection with any appeal of a lower court's order or judgment. The
obligations of the Borrower under this Section 9.3 shall survive any termination
of this Credit Agreement.
Interest Limitation. All agreements between the Borrower and the Lender are
hereby expressly limited so that in no contingency or event whatsoever, whether
by reason of acceleration of maturity of the indebtedness evidenced or secured
thereby or otherwise, shall the rate of interest charged or agreed to be charged
to the Lender for the use, forbearance, loaning or detention of such
indebtedness exceed the maximum permissible interest rate under applicable law
("Maximum Rate"). If for any reason or in any circumstance whatsoever
fulfillment of any provision of this Credit Agreement and/or the Notes, any
document securing or executed in connection herewith or therewith, or any other
agreement between the Borrower and the Lender, at any time shall require or
permit the interest rate applied thereunder to exceed the Maximum Rate, then the
interest rate shall automatically be reduced to the Maximum Rate, and if the
Lender should ever receive interest at a rate that would exceed the Maximum
Rate, the amount of interest received which would be in excess of the amount
receivable after applying the Maximum Rate to the balance of the outstanding
obligation shall be applied to the reduction of the principal balance of the
outstanding obligation for which the amount was paid and not to the payment of
interest thereunder. This provision shall control every other provision of any
and all agreements between the Borrower and the Lender and shall also be binding
upon and applicable to any subsequent holder of the Notes.
Severability. Any provision of this Credit Agreement or any other of the Loan
Documents executed pursuant hereto which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such portion or unenforceability without invalidating the remaining provisions
of this Credit Agreement or such Loan Document or affecting the validity or
enforceability of such provisions in any other jurisdiction.
Cross-References. References in this Credit Agreement or in any other of the
Loan Documents executed pursuant hereto to any Section are, unless otherwise
specified, to such Section of this Credit Agreement or such Loan Document, as
the case may be.
Headings. The various headings of this Credit Agreement or of any other of the
Loan Documents executed pursuant hereto are inserted for convenience only and
shall not affect the meaning or interpretation of this Credit Agreement or such
Loan Document or any provisions hereof or thereof.
Governing Law; Venue. Each of the Loan Documents shall be deemed to be a
contract made under and governed by the laws of the State of Minnesota. The
Borrower hereby consents to the personal jurisdiction of the state and federal
courts located in the State of Minnesota in connection with any controversy
related to this Credit Agreement and any other of the Loan Documents, waives any
argument that venue in such forums is not convenient, and agrees that any
litigation instigated by the Borrower against the Lender in connection herewith
or therewith shall be venued in the federal or state court that has jurisdiction
over matters arising in Minneapolis, Minnesota.
Successors and Assigns. This Credit Agreement shall be binding upon and shall
inure to the benefit of the parities hereto and their respective successors and
assigns, except that Borrower may not assign or transfer its rights hereunder
without the prior written consent of Lender.
Recitals Incorporated. The recitals to this Credit Agreement are incorporated
into and constitute an integral part of this Credit Agreement.
Multiple Counterparts. This Credit Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original and all of which
shall constitute one and the same instrument.
Prior Agreement Superseded. This Credit Agreement amends, restates, and
supersedes in its entirety the Original Agreement, dated December 21, 1987,
between the Borrower and the Lender and all obligations, liabilities and
indebtedness of the Borrower incurred or arising thereunder shall be deemed to
have been incurred and arising hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
NORTH ATLANTIC TECHNOLOGIES, INC., a Minnesota corporation
By:
Its:
FIRST BANK NATIONAL ASSOCIATION,
a national banking association
By:
Its:
ACKNOWLEDGMENTS
STATE OF MINNESOTA )
) ss.
COUNTY OF __________)
The foregoing instrument was acknowledged before me this _____ day of
____________, 1996, by __________________________________, the
________________________ of NORTH ATLANTIC TECHNOLOGIES, INC., a Minnesota
corporation.
Notary Public
STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this _____ day of
_____________, 1996, by _______________________________, the
______________________ of FIRST BANK NATIONAL ASSOCIATION, a national banking
association.
Notary Public
TERM PROMISSORY NOTE
$500,000.00 Minneapolis, Minnesota
Due: May 1, 2001 May 9, 1996
LOAN AMOUNT AND INTEREST RATE. FOR VALUE RECEIVED, NORTH ATLANTIC TECHNOLOGIES,
INC., a Minnesota corporation (collectively, the "Maker") promises to pay to the
order of, FIRST BANK NATIONAL ASSOCIATION a national banking association (the
"Lender"), its successors and assigns, at its office at First Bank Place, 601
Second Avenue South, Minneapolis, Minnesota 55402, or such other place as the
holder hereof may designate in writing from time to time, the principal sum of
Five Hundred Thousand and No/100 Dollars ($500, 000.00), in lawful money of the
United States, together with interest from the date hereof on the unpaid balance
hereof from time to time outstanding at One and Three-Quarters percent (1.75%)
in excess of the Index Rate as defined in the Amended and Restated Credit
Agreement of even date herewith ("Credit Agreement").
PAYMENT SCHEDULE. This Note shall be payable in the following manner:
Principal and interest shall be due and payable in consecutive monthly
installments in the amount of $10,100.00, each on the first day of each calendar
month, with the first such installment due June 1, 1996. The Lender reserves the
right to adjust such payment amount at its option to reflect any change to the
interest rate as set forth in paragraph 1, above. All outstanding principal and
accrued interest hereon shall be due and payable on May 1, 2001.
Each payment made under this Note shall be applied, first, to the amount then
due for any expenses, costs, or other expenditures incurred by the Lender in
connection with this Note and payable by the Maker, second, to any accrued
interest then due under this Note, and third, to any principal then due under
this Note, and any balance thereafter to principal.
Any payment due on any non-business day of the Lender shall be due upon (and
interest shall accrue to) the next business day.
LATE CHARGE. Any installment payment not made by the Maker within ten (10) days
of the due date thereof shall be subject to a late payment charge equal to five
percent (5%) of such installment. The late charge shall apply individually to
all payments past due with no daily adjustment and shall be used to defray the
costs incurred by the Lender in connection with the collection of such late
payment. This provision shall not be deemed to excuse a late payment or be
deemed a waiver of any other rights the Lender may have, including the right to
declare the entire unpaid principal and interest under this Note immediately due
and payable.
PREPAYMENT PRIVILEGE. The principal of this Note may be prepaid in full or in
part at any time, without premium or penalty. Each such prepayment shall be
accompanied by the interest accrued on the amount prepaid to the date of the
prepayment. All prepayments shall be applied to the payment of scheduled
installments of principal due hereunder in the reverse order of their maturity
except that if any advance made by the Lender to the Maker under any agreement
or document has not been repaid, or if any amount is then due under any other
obligation of the Maker to the Lender, the Lender may, at its option, apply any
payment made by the Maker to repay such unpaid advance or obligation and
interest thereon, and the balance, if any, shall be applied as a prepayment of
amounts not yet due under this Note.
DEFAULT INTEREST RATE. Upon the earlier to occur of (a) the acceleration of the
indebtedness evidenced hereby, or (b) the occurrence of a default in any payment
due hereunder which is not cured within thirty (30) days of the due date, the
interest rate shall thereafter increase and shall be payable on the whole of the
unpaid principal balance, interest and other charges, at a rate equal to the
lesser of (i) two percent (2%) per annum in excess of the rate of interest then
in effect under the terms of this Note or (ii) the highest rate permitted under
applicable law if such rate is lower (hereinafter referred to as the "Default
Rate"). The Default Rate shall continue until reinstatement of the loan, payment
in full of all indebtedness evidenced by this Note, or the completion of all
foreclosure proceedings and redemption periods, whichever shall occur first.
This provision shall not be deemed to excuse an Event of Default nor be deemed a
waiver of any other rights the Lender may have including the right to declare
the entire unpaid principal and interest under this Note immediately due and
payable.
CREDIT AGREEMENT. This Note is the Term Note issued pursuant to the terms and
provisions of the Credit Agreement dated of even date herewith between the Maker
and the Lender, as the same may be amended, modified, restated or replaced from
time to time as agreed upon in writing by the Lender, and this Note and the
holder hereof are entitled to all of the benefits provided for in the Credit
Agreement, or referred to therein. Reference is made to the Credit Agreement for
a statement of the terms and conditions under which this indebtedness was
incurred and is to be repaid and under which the due date of this Note may be
accelerated. The provisions of the Credit Agreement are hereby incorporated by
reference with the same force and effect as if fully set forth herein.
SECURITY. This Note is secured by, inter alia, a security interest in all assets
of Maker, a pledge agreement of Willis D. Heim, and the personal guaranty of
Willis D. Heim.
DEFAULT AND ACCELERATION. If an Event of Default, as defined in the Credit
Agreement or any other agreement made by any party in connection with this Note,
shall occur, or if any portion of the indebtedness evidenced hereby is not paid
when due, the Lender or other holder may, without notice, demand, presentment
for payment and/or notice of nonpayment, all of which Maker hereby expressly
waives, declare the indebtedness evidenced hereby and all other indebtedness and
obligations of the Maker to the Lender or holder hereof immediately due and
payable and the Lender or other holder hereof may, without notice, immediately
exercise any right of setoff and enforce any lien or security interest securing
payment hereof. The foregoing shall be in addition to the rights of acceleration
that may be provided in any loan agreement, security agreement, mortgage and/or
other writing relating to the indebtedness evidenced hereby. If this Note is
placed with any attorney(s) for collection upon any default, the Maker agrees to
pay to the Lender or holder, its reasonable attorneys fees and all lawful costs
and expenses of collection, whether or not a suit is commenced.
WAIVER. Time is of the essence. No delay or omission on the part of the Lender
or other holder hereof in exercising any right or remedy hereunder shall operate
as a waiver of such right or of any other right or remedy under this Note or any
other document or agreement executed in connection herewith. All waivers by the
Lender must be in writing to be effective and a waiver on any occasion shall not
be construed as a bar to or a waiver of any similar right or remedy on a future
occasion.
The makers, endorsers, sureties, guarantors and all other persons liable for all
or any part of the indebtedness evidenced by this Note jointly and severally
waive presentment for payment, protest and notice of nonpayment. Such parties
hereby consent without affecting their liability to any extension or alteration
of the time or terms of payment hereon, any renewal, any release of all or any
part of the security given for the payment hereof, any acceptance of additional
security of any kind, and any release of, or resort to any party liable for
payment hereof and such parties shall remain bound in the same capacities as
prior thereto upon each such event.
ADDITIONAL SECURITY. As additional security for this Note, the Maker and any
other party to this Note hereby grant to the Lender a security interest in any
deposits or other sums at any time credited by or due from the Lender to any
maker, endorser or guarantor hereof and any securities or other property of any
maker, endorser or guarantor hereof in the possession of the lender or other
holder of this Note. The Lender or other holder hereof may apply or set off such
property, deposits or other sums against the obligations hereunder at any time
in case of makers, but only with respect to matured liabilities in the case of
endorsers or guarantors.
JURISDICTION. This Note represents a loan negotiated, executed and to be
performed in the State of Minnesota and shall be construed, interpreted and
governed by the law of said state. The Maker hereby consents to the personal
jurisdiction of the state and federal courts located in the State of Minnesota
in connection with any controversy related to this Note, waives any argument
that venue in such forums is not convenient and agrees that any litigation
instigated by the Maker against the Lender in connection with this Note shall be
venued in the federal or state court that has jurisdiction over matters arising
in Minneapolis, Minnesota.
JOINT AND SEVERAL LIABILITY. If this Note is executed by more than one maker,
each maker agrees to be jointly and severally liable hereon, and the release by
the Lender or other holder hereof, of one or more of such maker shall not
release or diminish the liability of the remaining makers hereof.
INTEREST LIMITATION. All agreements between the Maker and the Lender are hereby
expressly limited so that in no contingency or event whatsoever, whether by
reason of acceleration of maturity of the indebtedness evidenced or secured
thereby or otherwise, shall the rate of interest charged or agreed to be charged
to the Lender for the use, forbearance, loaning or detention of such
indebtedness exceed the maximum permissible interest rate under applicable law
("Maximum Rate"). If for any reason or in any circumstance whatsoever
fulfillment of any provision of this Note, any document securing or executed in
connection with this Note, or any other agreement between the Maker and the
Lender, at any time shall require or permit the interest rate applied thereunder
to exceed the Maximum Rate, then the interest rate shall automatically be
reduced to the Maximum Rate, and if the Lender should ever receive interest at a
rate that would exceed the Maximum Rate, the amount of interest received which
would be in excess of the amount receivable after applying the Maximum Rate to
the balance of the outstanding obligation shall be applied to the reduction of
the principal balance of the outstanding obligation for which the amount was
paid and not to the payment of interest thereunder. This provision shall control
every other provision of any and all agreements between the Maker and the Lender
and shall also be binding upon and available to any subsequent holder of this
Note.
IN WITNESS WHEREOF, the Maker has executed and delivered this Note to the Lender
as of the day and year first above written.
NORTH ATLANTIC TECHNOLOGIES, INC., a Minnesota corporation
By
Its
Dated: May _____, 1996
ACKNOWLEDGMENT
STATE OF MINNESOTA )
)
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this _____ day
__________ 1996, by ______________________________, the
__________________________ of NORTH ATLANTIC TECHNOLOGIES, INC., a Minnesota
corporation.
Notary Public
REVOLVING CREDIT PROMISSORY NOTE
$1,150,000.00 Minneapolis, Minnesota
Due: June 1, 1997 May 9, 1996
LOAN AMOUNT AND INTEREST RATE. FOR VALUE RECEIVED, NORTH ATLANTIC
TECHNOLOGIES, INC., a Minnesota corporation, ("Maker") promises to pay to the
order of FIRST BANK NATIONAL ASSOCIATION, a national banking association
("Lender"), its successors and assigns, at its office at First Bank Place, 601
Second Avenue South, Minneapolis, Minnesota 55402, or such other place as the
holder hereof may designate in writing from time to time, the principal sum of
One Million One Hundred Fifty Thousand and No/100 Dollars ($1,150,000.00), or so
much thereof as may be advanced from time to time pursuant to that certain
Amended and Restated Credit Agreement ("Credit Agreement") dated of even date
herewith between the Maker and the Lender, as the same may be amended, modified,
restated or replaced from time to time as agreed upon in writing by the Lender,
in lawful money of the United States, together with interest from the date
hereof on the unpaid balance hereof from time to time outstanding at a variable
rate of One and Three-Quarters percent (1.75%) in excess of the Index Rate as
defined in the Credit Agreement.
PAYMENT SCHEDULE. This Note shall be payable in the following manner:
Accrued interest hereon shall be due and payable on the first day of each
calendar month, commencing June 1, 1996, until all indebtedness evidenced hereby
is paid in full. All outstanding principal and accrued and unpaid interest shall
be due and payable on June 1, 1997. The Revolving Credit Commitment (as defined
in the Credit Agreement) automatically shall be reduced by $25,000 on the last
day of each calendar month, commencing on July 31, 1996. To the extent that the
principal amount of all outstanding Advances (as defined in the Credit
Agreement) exceeds the Revolving Credit Commitment as so reduced, such excess
principal shall be due and payable on the first day of the following calendar
month.
In the event that the Revolving Credit Commitment (as defined in the Credit
Agreement) shall exceed on any given date an amount equal to seventy percent
(70%) of the Borrowing Base (as defined in the Credit Agreement) less the amount
of all outstanding principal and past-due interest owing under the Term Note (as
defined in the Credit Agreement), then the Revolving Credit Commitment
automatically shall be reduced to such amount. To the extent that the principal
amount of all Advances (as defined in the Credit Agreement) exceeds the
Revolving Credit Commitment as so reduced, such excess principal shall be
immediately due and payable. Each payment made under this Note shall be applied,
first, to the amount then due for any expenses, costs or other expenditures
incurred by the Lender in connection with this Note and payable by the Maker,
and then applied to any accrued interest then due under this Note, and any
balance thereafter to principal.
Any payment due on any non-business day of the Lender shall be due upon (and
interest shall accrue to) the next business day.
LATE CHARGE. Any payment not made by the Borrower within ten (10) days of the
due date thereof shall be subject to a late payment charge equal to five percent
(5%) of such payment. The late charge shall apply individually to all payments
past due with no daily adjustment and shall be used to defray the costs incurred
by the Lender in connection with the collection of such late payment. This
provision shall not be deemed to excuse a late payment or be deemed a waiver of
any other rights the Lender may have, including the right to declare the entire
unpaid principal and interest under this Note immediately due and payable.
DEFAULT INTEREST RATE. Upon the earlier to occur of (a) the acceleration of the
indebtedness evidenced hereby, or (b) the occurrence of a default in any payment
due hereunder which is not cured within thirty (30) days of the due date, the
interest rate shall thereafter increase and shall be payable on the whole of the
unpaid principal balance, interest and other charges at a rate equal to the
lesser of (i) two percent (2%) per annum in excess of the rate of interest then
in effect under the terms of this Note or (ii) the highest rate permitted under
applicable law if such rate is lower ("Default Rate"). The Default Rate shall
continue until reinstatement of the loan evidenced by this Note, payment in full
of all indebtedness evidenced by this Note, or the completion of all foreclosure
proceedings and redemption periods, whichever shall occur first. This provision
shall not be deemed to excuse an Event of Default not be deemed a waiver of any
other rights the Lender may have including the right to declare the entire
unpaid principal and interest under this Note immediately due and payable.
CREDIT AGREEMENT. This Note is the Revolving Credit Note issued pursuant to the
terms and provisions of the Credit Agreement and this Note and the holder hereof
are entitled to all of the benefits provided for in the Credit Agreement, or are
referred to therein. Reference is made to the Credit Agreement for a statement
of the terms and conditions under which this indebtedness was incurred and is to
be repaid and under which the due date of this Note may be accelerated. The
provisions of the Credit Agreement are hereby incorporated by reference with the
same force and effect as if fully set forth herein.
SECURITY. This Note is secured by, inter alia, a security interest in all assets
of Maker, a pledge agreement by Willis D. Heim, and the Guaranty of Willis D.
Heim.
DEFAULT AND ACCELERATION. If an Event of Default, as defined in the Credit
Agreement or any other agreement made by any party in connection with this Note,
shall occur, or if any portion of the indebtedness evidenced hereby is not paid
when due, the Lender or other holder of this Note may, without notice, demand,
presentment for payment and/or notice of nonpayment, all of which Maker hereby
expressly waives, declare the indebtedness evidenced hereby and all other
indebtedness and obligations of the Maker to the Lender or holder hereof
immediately due and payable and the Lender or other holder hereof may, without
notice, immediately exercise any right of setoff and enforce any lien or
security interest securing payment hereof. The foregoing shall be in addition to
the rights of acceleration that may be provided in any loan agreement, security
agreement, mortgage and/or other writing relating to the indebtedness evidenced
hereby. If this Note is placed with any attorney(s) for collection upon any
default, the Maker agrees to pay to the Lender or holder, its reasonable
attorneys fees and all lawful costs and expenses of collection, whether or not a
suit is commenced.
WAIVER. Time is of the essence. No delay or omission on the part of the Lender
or other holder hereof in exercising any right or remedy hereunder shall operate
as a waiver of such right or of any other right or remedy under this Note or any
other document or agreement executed in connection herewith. All waivers by the
Lender must be in writing to be effective and a waiver on any occasion shall not
be construed as a bar to or a waiver of any similar right or remedy on a future
occasion.
The makers, endorsers, sureties, guarantors and all other persons liable for all
or any part of the indebtedness evidenced by this Note jointly and severally
waive presentment for payment, protest and notice of nonpayment. Such parties
hereby consent without affecting their liability to any extension or alteration
of the time or terms of payment hereon, any renewal, any release of all or any
part of the security given for the payment hereof, any acceptance of additional
security of any kind, and any release of, or resort to any party liable for
payment hereof and such parties shall remain bound in the same capacities as
prior thereto upon each such event.
ADDITIONAL SECURITY. As additional security for this Note, the Maker and any
other party to this Note hereby grant to the Lender a security interest in any
deposits or other sums at any time credited by or due from the Lender to any
maker, endorser or guarantor hereof and any securities or other property of any
maker, endorser or guarantor hereof in the possession of the lender or other
holder of this Note. The Lender or other holder hereof may apply or set off such
property deposits or other sums against the obligations hereunder at any time in
case of makers, but only with respect to matured liabilities in the case of
endorsers or guarantors.
JURISDICTION. This Note represents a loan negotiated, executed and to be
performed in the State of Minnesota and shall be construed, interpreted and
governed by the law of said state. The Maker hereby consents to the personal
jurisdiction of the state and federal courts located in the State of Minnesota
in connection with any controversy related to this Note, waives any argument
that venue in such forums is not convenient and agrees that any litigation
instigated by the Maker against the Lender in connection with this Note shall be
venued in the federal or state court that has jurisdiction over matters arising
in Minneapolis, Minnesota.
JOINT AND SEVERAL LIABILITY. If this Note is executed by more than one maker,
each maker agrees to be jointly and severally liable hereon, and the release by
the Lender or other holder hereof, of one or more such makers shall not release
or diminish the liability of the remaining makers hereof.
INTEREST LIMITATION. All agreements between the Maker and the Lender are hereby
expressly limited so that in no contingency or event whatsoever, whether by
reason of acceleration of maturity of the indebtedness evidenced or secured
thereby or otherwise, shall the rate of interest charged or agreed to be charged
to the Lender for the use, forbearance, loaning or detention of such
indebtedness exceed the maximum permissible interest rate under applicable law
("Maximum Rate"). If for any reason or in any circumstance whatsoever
fulfillment of any provision of this Note, any document securing or executed in
connection with this Note, or any other agreement between the Maker and the
Lender, at any time shall require or permit the interest rate applied thereunder
to exceed the Maximum Rate, then the interest rate shall automatically be
reduced to the Maximum Rate, and if the Lender should ever receive interest at a
rate that would exceed the Maximum Rate, the amount of interest received which
would be in excess of the amount receivable after applying the Maximum Rate to
the balance of the outstanding obligation shall be applied to the reduction of
the principal balance of the outstanding obligation for which the amount was
paid and not to the payment of interest thereunder. This provision shall control
every other provision of any and all agreements between the Maker and the Lender
and shall also be binding upon and available to any subsequent holder of this
Note.
IN WITNESS WHEREOF, the Maker has executed and delivered this Note to the Lender
as of the day and year first above written.
NORTH ATLANTIC TECHNOLOGIES, INC., a Minnesota corporation
By
Its
Dated: May ______, 1996
ACKNOWLEDGMENT
STATE OF MINNESOTA )
)
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this _____ day of
____________, 1996, by ______________________________, the
________________________ of NORTH ATLANTIC TECHNOLOGIES, INC., a Minnesota
corporation.
Notary Public
AMENDED AND RESTATED SECURITY AGREEMENT
THIS AMENDED AND RESTATED SECURITY AGREEMENT (the "Security Agreement") is made
as of May 9, 1996, by NORTH ATLANTIC TECHNOLOGIES, INC., a Minnesota
corporation, with its chief executive office at 8120 Penn Avenue South, Suite
435, Minneapolis, Minnesota 55431 (whether one or more, the "Debtor"), in favor
of, FIRST BANK NATIONAL ASSOCIATION, a national banking association (the
"Secured Party").
RECITALS
FIRST: Debtor and Secured Party are parties to a credit agreement dated as of
December 21, 1987 ("Original Agreement"). Pursuant to the terms of the Original
Agreement the Lender agreed to extend on a revolving credit basis sums to
Debtor. The Original Agreement was amended by a First Amendment to Credit
Agreement dated April 13, 1990, a Second Amendment to Credit Agreement dated
June 18, 1991, a Third Amendment to Credit Agreement dated September 25, 1991, a
Fourth Amendment to Credit Agreement dated December 30, 1991, a Fifth Amendment
to Credit Agreement dated June 26, 1992, a Sixth Amendment dated as of December
29, 1992, a Seventh Amendment dated as of August 31, 1993, an Eighth Amendment
dated October 25, 1993, a Ninth Amendment dated August 31, 1994, a Tenth
Amendment to Credit Agreement dated March 28, 1995, an Eleventh Amendment to
Credit Agreement dated May 8, 1995, an Eleventh Amendment dated August 31, 1995,
and a Twelfth Amendment dated October 31, 1995.
SECOND: Debtor's loans are secured by an attached and perfected security
interest in all of Debtor's inventory, accounts, equipment, general intangibles,
proceeds and products thereof. In addition, Willis D. Heim, shareholder of the
Debtor, has guaranteed all obligations of the Debtor pursuant to a Guaranty
dated December 21, 1987. In addition, the Debtor's loans are secured pursuant to
the terms of a Pledge Agreement dated December 21, 1987 by Willis D. Heim
pledging certain financial assets including securities to the Secured Party.
THIRD: On February 1, 1996 Debtor filed for relief under Chapter 11 of Title 11
of the United States Code, and pursuant to an order confirming the Debtor's Plan
of Reorganization dated April 19, 1996, Debtor and Secured Party agree to amend
and restate the terms of the Original Agreement and other loan documents as set
forth in the confirmed Plan and to provide additional credit accommodations to
Debtor pursuant to an agreement between the parties of even date herewith
("Credit Agreement") and the confirmed Plan of Reorganization.
NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged by each of the parties hereto, it is agreed as
follows:
DEFINITIONS
As used herein, the following terms shall have the meaning set forth:
"Accounts" means the Debtor's right to the payment of money from the sale, lease
or other disposition of goods or other property by the Debtor, any franchise now
or hereafter at any time held by the Debtor, a rendering of services by the
Debtor, a loan by the Debtor, the overpayment of taxes or other liabilities of
the Debtor, or otherwise any contract or agreement, whether such right to
payment is 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) that the Debtor may at any time have by law or
agreement against any account debtor (as defined in the Minnesota Uniform
Commercial Code) or other obligor obligated to make any such payment or against
any of the property of such account debtor or other obligor, including, but not
limited to, all present and future debt instruments, chattel papers, insurance
proceeds and accounts of the Debtor.
"Chattel Paper" means any writing or writings which evidence both a monetary
obligation and a security interest in, or a lease of, specific Goods.
"Collateral" means all property in which a security interest is granted
hereunder wherever located.
"Controlled Property" means property of every kind and description in which
Debtor has or may acquire any interest, now or hereafter at any time in the
possession, custody or control of Secured Party for any reason and all dividends
and distributions on or other rights in connection with such property.
"Data Processing Records and Systems" means all of Debtor's now existing or
hereafter acquired electronic data processing and computer records, software,
systems, manuals procedures, disks, tapes and all other storage media and
memory.
"Default" means any event which, with the passage of time, the giving of notice,
or both, would constitute an Event of Default.
"Deposit Accounts" mean all deposit accounts now existing or hereafter arising,
maintained for or in Debtor's name and any and all funds at any time held
therein.
"Document" means any bill of lading, dock warrant, dock receipt, warehouse
receipt or order for the delivery of goods or any other document that is treated
in the regular course of business or financing as adequately evidencing that the
holder of such document is entitled to receive, hold and dispose of the document
and the Goods it covers or any receipt issued for Goods that are stored under a
statute requiring a bond against withdrawal or under a license for the issuance
of receipts in the nature of warehouse receipts.
"Equipment" means any Goods used or bought for use primarily in the Debtor's
business.
"Event of Default" has the meaning specified in Article VII hereof.
"Fixtures" means any Goods which have become so affixed to particular real
estate that an interest in them arises under real estate law.
"General Intangibles" means any personal property (including things in action)
other than Goods, Accounts, Chattel Paper, Documents, Instruments and money.
"Goods" means any tangible personal property or Fixtures, including all things
that are movable, but not including money, Documents, Instruments, Accounts,
Chattel Paper, General Intangibles or minerals or the like before extraction.
"Instruments" means any negotiable instrument or certificated or
non-certificated security or any other writing which evidences a right to the
payment of money and is not itself a security agreement or lease and is of a
type which is in the ordinary course of business transferred by delivery with
any necessary endorsement or assignment.
"Insurance Proceeds" means all proceeds of any and all insurance policies
payable to Debtor, or on behalf of Debtor's property, whether or not such
policies are issued to or owned by Debtor.
"Inventory" means any Goods held for sale or lease or furnished or to be
furnished under contracts of service, or raw materials, work in process or
materials used or consumed in a business.
"Liens" means any and all mortgages, pledges, security interests, tax and other
statutory liens, judgment liens, and other encumbrances of any nature
whatsoever, whether consensual or non-consensual.
"Obligations" means all indebtedness, obligations and liabilities of the Debtor
to the Secured Party, howsoever evidenced, now existing or hereafter arising or
incurred, direct or indirect, absolute or contingent, joint or several,
howsoever owned, held or acquired by the Secured Party, whether by discount,
direct loan, overdraft, purchase or otherwise.
"Permitted Liens" means the Liens described in Part 4 of Exhibit A attached
hereto and made a part hereof.
"Proceeds" means whatever is received upon the sale, exchange, collection or
other disposition of Collateral or Proceeds, including, but not limited to,
Insurance Proceeds and return premiums.
"Products" means any goods now or hereafter manufactured, processed, assembled
or commingled with any of the Collateral.
Other terms defined herein shall have the meaning ascribed to them herein. All
capitalized terms used herein not specifically defined herein shall have the
meaning ascribed to them in the Credit Agreement.
SECURITY INTERESTS
Collateral. As security for the payment of all Obligations, Debtor hereby grants
to Secured Party a security interest in all of Debtor's now owned or hereafter
acquired or arising:
Accounts;
Chattel Paper;
Controlled Property;
Data Processing Records and Systems;
Documents;
Equipment and Fixtures;
General Intangibles;
Goods;
Instruments;
Insurance Proceeds;
Inventory;
Proceeds (whether cash or non-cash Proceeds, including non-cash Proceeds of all
types including, but not limited to, Inventory, Equipment or Fixtures acquired
with cash Proceeds); and
Products of all the foregoing.
REPRESENTATIONS AND WARRANTIES OF DEBTOR
Debtor represents, warrants and covenants that:
Organization, etc. The Debtor is a corporation validly organized and existing
and in good standing under the laws of the state of Minnesota, has full power
and authority to own its property and conduct its business substantially as
presently conducted by it and is duly qualified to do business and is in good
standing as a corporation in Minnesota and in each other jurisdiction where the
nature of its business makes such qualification necessary. The Debtor has full
power and authority to enter into and perform its obligations under this
Security Agreement and grant the liens and security interests hereunder.
Due Authorization. The execution, delivery and performance by the Debtor of this
Security Agreement (1) have been duly authorized by all necessary corporate
action, (2) do not require any approval or consent of, or any registration,
qualification or filing with, any governmental agency or authority, or any
approval or consent of any other Person (including, without limitation, any
stockholder), (3) do not and will not conflict with, result in any violation of
or constitute any default under, any provision of the Debtor's By-Laws or its
Confirmed Plan of Reorganization or any agreement binding on or applicable to
the Debtor or any of its property, or any law or governmental regulation or
court decree or order binding upon or applicable to the Debtor or of any of its
property, and (4) will not result in the creation or imposition of any Lien on
any of its property pursuant to the provisions of any agreement binding on or
applicable to the Debtor or any of its property except pursuant to this Security
Agreement.
Validity of this Security Agreement. This Security Agreement represents a legal,
valid and binding obligation of the Debtor enforceable in accordance with its
terms, subject only to bankruptcy, insolvency, reorganization, moratorium or
similar laws, rulings or decisions at the time in effect affecting the
enforceability of rights of creditors generally and to general equitable
principles which may limit the right to obtain equitable remedies. This Security
Agreement grants to Secured Party a valid, first priority perfected and
enforceable lien on the Collateral.
Financial Information. The financial statements of the Debtor previously
furnished to the Secured Party have been prepared in accordance with generally
accepted accounting principles consistently applied by the Debtor and present
fairly the financial condition of the Debtor as of the dates thereof and for the
periods covered thereby.
Litigation, Other Proceedings. There is no action, suit or proceeding at law or
equity, or before or by any federal, state, local or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, pending or, to the knowledge of the Debtor, threatened, against the
Debtor or any of its property or any predecessor of the Debtor, which if
determined adversely would have a material adverse effect on the condition
(financial or otherwise), the business or properties of the Debtor or would
affect the ability of the Debtor to perform its obligations under this Security
Agreement; and the Debtor is not in default with respect to any final judgment,
writ, injunction, decree, rule or regulation of any court or federal, state,
local or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign where such default would have a material
adverse affect on the business, operations and condition (financial or
otherwise) of the Debtor.
Guarantees and Indebtedness. The Debtor is not a party to any contract of
guaranty or suretyship and none of its assets is subject to any contract of that
nature and the Debtor is not indebted to any other party, except the Secured
Party.
Title to Collateral. The Debtor is sole owner of, has rights in, and has good
and marketable title to all of the Collateral and none of the Collateral is
subject to any Lien except for Permitted Liens and the security interest created
pursuant to this Security Agreement.
Taxes. The Debtor has filed all federal, state and other income tax returns
which are required to be filed and have paid all taxes as shown on said returns,
and all taxes due or payable without returns and all assessments received to the
extent such taxes and assessments have become due. All tax liabilities of the
Debtor are adequately provided for on its books, including interest and
penalties. No income tax liability of a material nature has been asserted by
taxing authorities for taxes in excess of those already paid. The Debtor has
made all required withholding deposits.
Accuracy of Information. All factual information heretofore or herewith
furnished by or on behalf of the Debtor to the Secured Party for purposes of or
in connection with this Security Agreement or any transaction contemplated
hereby is, and all other such factual information hereafter furnished by or on
behalf of the Debtor to the Secured Party will be, true and accurate in every
material respect on the date as of which such information is dated or certified
and no such information contains any material misstatement of fact or omits to
state a material fact or any fact necessary to make the statements contained
therein not misleading.
Material Agreements. The Debtor is not a party to any agreement or instrument or
subject to any restriction that materially and adversely affects its business,
property or assets, operations or conditions, financial or otherwise.
Defaults. The Debtor is not in default in the performance, observance or
fulfillment of any of the obligations, covenants or conditions contained in any:
(a) agreement to which such entity is a party, which default might have a
material adverse effect on the business, properties or assets, operations, or
condition (financial or otherwise) of the Debtor; (b) instrument evidencing any
indebtedness or under any agreement relating thereto.
Survival of Representations. All representations and warranties contained in
this Section 3 shall survive the delivery of this Security Agreement and any
investigation at any time made by or on behalf of Secured Party shall not
diminish its rights to rely thereon.
COVENANTS OF THE DEBTOR
Disposition or Encumbrance of Collateral. Debtor will not encumber, sell or
otherwise transfer or dispose of the Collateral without the prior written
consent of Secured Party. Until a Default or Event of Default has occurred and
is continuing, Debtor may sell Inventory in the ordinary course of business and
may sell Equipment and Fixtures which in the judgment of Debtor have become
obsolete or unusable in the ordinary course of business, provided that all
Proceeds of such sales are delivered directly to Secured Party or used to
replace such Equipment and Fixtures which replacements or substitutions shall
constitute Collateral hereunder.
Validity of Accounts. The Debtor warrants that all Accounts, Chattel Paper and
Instruments will be bona fide existing obligations created by the sale and
actual delivery of Goods or the rendition of services to customers in the
ordinary course of business, which the Debtor then owns free and clear of any
Liens other than the security interest created by this Security Agreement and
Permitted Liens and which are then unconditionally owing to Debtor without
defenses, offset or counterclaim, and that all shipping or delivery receipts,
invoice copies and other documents furnished to Secured Party in connection
therewith will be genuine, and that the unpaid principal amount of any Chattel
Paper or Instrument and any security therefor is and will be as represented to
Secured Party on the date of the delivery thereof to the Secured Party. Upon the
request of the Secured Party, Debtor shall furnish to the Secured Party, from
time to time, a list of the Debtor's Accounts, including without limitation, the
name and address of each account debtor and the amount owed.
Maintenance of Equipment, Fixtures and Inventory; Location. Debtor will maintain
the Equipment, Fixtures and Inventory or cause the Equipment, Fixtures and
Inventory to be maintained in good condition and repair. At the time of
attachment and perfection of the security interest granted pursuant hereto and
thereafter, all Inventory, Equipment and Fixture Collateral will be located and
will be maintained only at the locations set forth on Exhibit A hereto. Such
Collateral will not be removed from such locations unless, prior to any such
removal, the Debtor has given written notice to Secured Party of the location or
locations to which the Debtor desires to remove the Collateral, Secured Party
has given its written consent to such removal, and the Debtor has delivered to
Secured Party acknowledgment copies of financing statements filed where
appropriate to continue the perfection of Secured Party's security interest as a
first priority security interest therein. Secured Party's security interest
attaches to all of the Collateral wherever located and Debtor's failure to
inform Secured Party of the location of any item or items of Collateral shall
not impair Secured Party's security interest therein.
Notation on Chattel Paper. For purposes of the security interest granted
pursuant to this Security Agreement, Secured Party has been granted a direct
security interest in all Chattel Paper and such Chattel Paper is not claimed
merely as Proceeds of Inventory. Upon Secured Party's request, Debtor will
deliver to Secured Party the originals of all Chattel Paper. Debtor will not
execute any copies of Chattel Paper other than those which are clearly marked as
a copy. Secured Party may stamp any such Chattel Paper with a legend reflecting
Secured Party's security interest therein.
Instruments as Proceeds. Notwithstanding any other provision in this Security
Agreement concerning Instruments, Debtor covenants that Instruments constituting
cash Proceeds (for example, money and checks) shall be deposited in deposit
accounts with Secured Party containing only Proceeds.
Protection of Collateral. All expenses of protecting, storing, warehousing,
insuring, handling and shipping of the Collateral, all costs of keeping the
Collateral free of any Liens prohibited by this Security Agreement and of
removing the same if they should arise, and any and all excise, property, sales
and use taxes imposed by any state, federal or local authority on any of the
Collateral or in respect of the sale thereof, shall be borne and paid by Debtor
and if Debtor fails to promptly pay any thereof when due, Secured Party may, at
its option, but shall not be required to, pay the same whereupon the same shall
constitute Obligations and shall bear interest at the highest annual rate
specified in the Obligations (the "Default Rate") and shall be secured by the
security interest granted hereunder.
Insurance. Debtor will procure and maintain, or cause to be procured and
maintained, insurance issued by responsible insurance companies insuring the
Collateral against damage and loss by theft, fire, collision (in the case of
motor vehicles), and such other risks as are usually carried by owners of
similar properties or as may be requested by the Secured Party in an amount
equal to the fair market value thereof and, in any event, in an amount
sufficient to avoid the application of any coinsurance provisions, and naming
the Secured Party as loss payee. All such insurance shall contain an agreement
by the insurer to provide the Secured Party with thirty (30) days' prior notice
of cancellation and an agreement that the interest of the Secured Party shall
not be impaired or invalidated by any act or neglect of the Debtor nor by the
occupation of the premises wherein such Collateral is located for purposes more
hazardous than are permitted by said policy. Debtor will maintain, with
financially sound and reputable insurers, insurance with respect to its
properties and business against such casualties and contingencies of such types
and in such amounts as may from time to time be required by the Secured Party.
Debtor will deliver evidence of such insurance and the policies of insurance or
copies thereof to the Secured Party upon request.
Compliance with Law. Debtor will not use the Collateral, or knowingly permit the
Collateral to be used, for any unlawful purpose or in violation of any federal,
state or municipal law.
Books and Records; Access.
Debtor will permit Secured Party to examine Debtor's books and records
(including Data Processing Records and Systems) with respect to the Collateral
and make extracts therefrom and copies thereof at any time and from time to
time, and Debtor will furnish such information and reports to Secured Party
regarding the Collateral as Secured Party may from time to time request. Debtor
will also permit Secured Party to inspect the Collateral at any time and from
time to time as Secured Party may reasonably request.
Secured Party shall have authority, at any time, to place, or require Debtor to
place, upon Debtor's books and records relating to Accounts, Chattel Paper,
Instruments and other rights to payment covered by the security interest granted
hereby a notation or legend stating that such Accounts, Chattel Paper,
Instruments and other rights to payment are subject to a security interest of
Secured Party.
Notice of Default. Immediately upon any officer of Debtor becoming aware of the
existence of any Default or Event of Default, Debtor will give notice to Secured
Party that such Default or Event of Default exists, stating the nature thereof,
the period of existence thereof, and what action Debtor proposes to take with
respect thereto.
Additional Documentation. Debtor will execute, from time to time, such financing
statements, assignments, and other documents covering the Collateral, including
Proceeds, as Secured Party may request in order to create, evidence, perfect,
maintain or continue its security interest in the Collateral (including
additional Collateral acquired by the Debtor after the date hereof), and Debtor
will pay the cost of filing the same in all public offices in which Secured
Party may deem filing to be appropriate; and will notify Secured Party promptly
upon acquiring any additional Collateral. Upon request, Debtor will deliver to
Secured Party all Debtor's Documents, Instruments and Chattel Paper.
Chief Executive Office. The location of the chief executive office of Debtor is
set forth in the preamble hereto and will not be changed without thirty (30)
days' prior written notice to Secured Party. Debtor warrants that its books and
records concerning its Accounts and Chattel Paper are located at its chief
executive office.
Name of Debtor. Debtor's true name is as set forth in the preamble hereto.
Debtor has not used any other name within the past five (5) years except those
described on Exhibit A attached hereto. Neither Debtor nor any predecessor in
title to any of the Collateral has executed any financing statements or security
agreements presently effective as to the Collateral except those described on
Exhibit A attached hereto. Debtor shall not change its name or use any trade or
assumed name without giving Secured Party fifteen (15) days prior written
notice.
Power of Attorney. The Debtor appoints Secured Party, or any other person, whom
Secured Party may from time to time designate, as Debtor's attorney with power
to endorse Debtor's name on any checks, notes, acceptances, drafts, or other
forms of payment or security that may come into Secured Party's possession, to
sign Debtor's name on any invoice or bill of lading relating to any Collateral,
on drafts against customers, on schedules and confirmatory assignments of
Accounts, Chattel Paper, Documents, Instruments or other Collateral, on notices
of assignment, financing statements under the Uniform Commercial Code (the
"Code") and other public records, on verifications of Accounts and on notices to
customers, to notify the post office authorities to change the address for
delivery of Debtor's mail to an address designated by Secured Party, to receive
and open all mail addressed to Debtor, to send requests for verification of
Accounts, Chattel Paper, Instruments or other Collateral to customers, make any
compromise or settlement, and take any action it deems advisable with respect to
the Collateral, and to do all things necessary to carry out this Security
Agreement. The Debtor ratifies and approves all acts of the attorney taken
within the scope of the authority granted. Neither Secured Party nor the
attorney will be liable for any acts of commission or omission nor for any error
in judgment or mistake of fact or law. This power, being coupled with an
interest, is irrevocable so long as any Obligation remains unpaid. The Debtor
waives presentment and protest of all instruments and notice thereof, notice of
default and dishonor and all other notices to which Debtor may otherwise be
entitled.
COLLECTIONS
Collection of Accounts. Except as otherwise provided in this Article 5, the
Debtor shall continue to collect at its own expense, all amounts due or to
become due to the Debtor, under the Accounts. In connection with such
collections, the Debtor may take (and, at the Secured Party's direction, shall
take) such action as the Debtor or the Secured Party may deem necessary or
advisable to enforce collection of the Accounts; provided, however, that the
Secured Party shall have the right, upon the occurrence of any Event of Default,
to notify the account debtors under any Accounts of the assignment of such
Accounts to the Secured Party and to direct such account debtors to make payment
of all amounts due or to become due to the Debtor thereunder directly to the
Secured Party. Upon the occurrence of any Event of Default, and after such
notification and at the expense of Debtor, the Secured Party shall have the
right to enforce collection of such Accounts and to adjust, settle, or
compromise the amount or payment thereof in the same manner and to the same
extent as the Debtor might have done. The Secured Party shall apply all
collections hereunder in accordance with Section 8.7.
Collection of Other Collateral Proceeds. The Debtor shall deposit into a
collection account (the "Collection Account") maintained with the Secured Party
immediately upon receipt all Proceeds of Collateral, other than accounts, in the
original form such payments are received, except for endorsement where
necessary. Upon the occurrence of an Event of Default, the Secured Party is
hereby authorized and directed to apply all such collected funds to the payment
of the Obligations in the manner and in the priority determined by the Secured
Party in the exercise of its sole discretion. Such funds shall be applied in
accordance with Section 8.7.
ASSIGNMENT OF INSURANCE
Debtor hereby assigns to the Secured Party, as additional security for payment
of the Obligations, any and all monies due or to become due under, and any and
all other rights of Debtor with respect to, any and all policies of insurance
covering the Collateral and Debtor hereby directs the issuer of any such policy
to pay any such monies directly to the Secured Party. After the occurrence and
during the continuation of a Default or Event of Default, the Secured Party may
(but need not) in its own name or in Debtor's name execute and deliver proofs of
claim, receive such monies, endorse checks and the instrument representing such
monies, and settle or litigate any claim against the issuer of any such policy.
EVENTS OF DEFAULT
The occurrence of any Event of Default as defined in the Credit Agreement shall
constitute an Event of Default hereunder ("Event of Default").
Any representation or warranty set forth in this Security Agreement or any other
document, agreement or instrument evidencing, securing or otherwise relating to
any of the Obligations shall be untrue in any material respect on the date as of
which the facts set forth are stated or certified.
RIGHTS AND REMEDIES ON DEFAULT
Upon the occurrence of an Event of Default, and at any time thereafter until
such Event of Default is cured to the satisfaction of Secured Party, and in
addition to the rights granted to Secured Party under Articles 5 and 6 hereof or
under any other document, agreement or other instrument evidencing, securing or
otherwise relating to any of the Obligations, Secured Party may exercise any one
or more of the following rights and remedies:
Acceleration of Obligations. Declare any and all Obligations to be immediately
due and payable, and the same shall thereupon become immediately due and payable
without further notice or demand.
Right of Offset. Offset any deposits, including unmatured time deposits, then
maintained by Debtor with Secured Party, whether or not then due, against any
indebtedness then owed by Debtor to Secured Party whether or not then due.
Deal with Collateral. In the name of Debtor or otherwise, demand, collect,
receive and receipt for, compound, compromise, settle and give acquittance for
and prosecute and discontinue any suits or proceedings in respect of any or all
of the Collateral.
Realize on Collateral. Take any action which Secured Party may deem necessary or
desirable in order to realize on the Collateral, including, without limitation,
the power to foreclose any security interest, to perform any contract, to
endorse in the name of Debtor any checks, drafts, notes, or other instruments or
documents received in payment of or on account of the Collateral.
Access to Property. Enter upon and into and take possession of all or such part
or parts of the properties of Debtor, including lands, plants, buildings,
machinery, equipment, Data Processing Records and Systems and other property as
may be necessary or appropriate in the judgment of Secured Party, to permit or
enable Secured Party to store, lease, sell or otherwise dispose of or collect
all or any part of the Collateral, and use and operate said properties for such
purposes and for such length of time as Secured Party may deem necessary or
appropriate for said purposes without the payment of any compensation to Debtor
therefor. Debtor shall provide Secured Party with all information and assistance
requested by Secured Party to facilitate the storage, leasing, assembly, sale or
other disposition or collection of the Collateral after an Event of Default, and
make such Collateral available to Secured Party on Secured Party's demand.
Other Rights. Exercise any and all other rights and remedies available to it by
law, in equity or by agreement, including rights and remedies under the
Minnesota Uniform Commercial Code or any other applicable law, or under the
Credit Agreement and, in connection therewith, Secured Party may require Debtor
to assemble the Collateral and make it available to Secured Party at a place to
be designated by Secured Party, and any notice of intended disposition of any of
the Collateral required by law shall be deemed reasonable if such notice is
mailed or delivered to Debtor at its address as shown on Secured Party's records
at least ten (10) days before the date of such disposition. The Secured Party
may sell or otherwise dispose of any or all of the Collateral in a single unit
or in multiple units and the Secured Party may be the purchaser at such sale or
other disposition. The Debtor shall remain liable for any deficiency remaining
after any such sale or other disposition of the Collateral.
Application of Proceeds. All proceeds of Collateral shall be applied in
accordance with Minnesota Statute Section 336.9-504 and such proceeds applied
toward the Obligations shall be applied in such order as the Secured Party may
elect.
MISCELLANEOUS
No Liability on Collateral. It is understood that Secured Party does not in any
way assume any of the Debtor's obligations under any of the Collateral and does
not intend to create any third party beneficiary rights by taking or omitting
any action herein. Debtor hereby agrees to indemnify Secured Party against all
liability arising in connection with or on account of any of the Collateral,
except for any such liabilities arising on account of Secured Party's gross
negligence or willful misconduct.
No Waiver. Secured Party shall not be deemed to have waived any of its rights
hereunder or under any other agreement, instrument or paper signed by Debtor
unless such waiver be in writing and signed by Secured Party. No delay or
omission on the part of Secured Party in exercising any right shall operate as a
waiver of such right or any other right. A waiver on any one occasion shall not
be construed as a bar to or waiver of any right or remedy on any future
occasion.
Remedies Cumulative. All rights and remedies of Secured Party shall be
cumulative and may be exercised singularly or concurrently, at its option, and
the exercise or enforcement of any one such right or remedy shall not bar or be
a condition to the exercise or enforcement of any other.
Governing Law/Jurisdiction. This Security Agreement shall be construed and
enforced in accordance with, and the rights of the parties shall be governed by,
the laws of the State of Minnesota. Debtor hereby consents to the personal
jurisdiction of the state and federal courts of the State of Minnesota in
connection with any controversy related to this Security Agreement, waives any
argument that venue in such forums is not convenient and agrees that any
litigation initiated by Debtor against Secured Party shall be venued in the
State or Federal District Courts of Minnesota.
Expenses. Debtor agrees to pay all costs, fees and expenses incurred by Secured
Party in the exercise of any right or remedy available to it under this Security
Agreement, whether or not suit is commenced, including, without limitation,
attorneys' fees and legal expenses of counsel for the Secured Party incurred in
connection with any appeal of a lower court's order or judgment, and any
appraisal or survey fees, completion costs, storage and transportation charges.
Successors and Assigns. This Security Agreement shall be binding upon and inure
to the benefit of the successors and assigns of Debtor and Secured Party.
Recitals. The above Recitals are true and correct as of the date hereof and
constitute a part of this Security Agreement.
Prior Security Agreements. The security interests granted by the Debtor to the
Secured Party under this Security Agreement are in addition to, and shall be
consolidated with, the liens and security interests granted by the Debtor to the
Secured Party under any prior security agreement, mortgage or other document
without affecting the lien, priority or effectiveness of those prior liens,
security interests and agreements.
Copy of Security Agreement as Financing Statement. The Secured Party may file a
reproduced copy or photostatic copy or other reproduction of this Security
Agreement as a Financing Statement.
Multiple Counterparts. This Security Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, and all of which
shall constitute one and the same agreement.
IN WITNESS WHEREOF, the Debtor has caused the execution of this Security
Agreement by its duly authorized representative as of the date and year first
above written.
NORTH ATLANTIC TECHNOLOGIES, INC., a Minnesota corporation
By
Its
EXHIBIT A
TO AMENDED AND RESTATED SECURITY AGREEMENT
DATED MAY 9, 1996
BETWEEN NORTH ATLANTIC TECHNOLOGIES, INC. a Minnesota corporation,
as Debtor and
FIRST BANK NATIONAL ASSOCIATION, national banking association,
as Secured Party
(1) Financing Statements on File Listing Debtor or Any Predecessor in Title as
Debtor: Financing statement nos. 1493993, 1620499, 1633780, 1692119, 1760055,
1760056, and 1771376, all filed with the Minnesota Secretary of State; financing
statement no. 1081993 filed with the Hennepin County Recorder's office; and
financing statement nos. 9201148 and 9501417 filed with the Ramsey County
Recorder's office.
(2) Location(s) of Equipment, Fixtures and Inventory: 8120 Penn Avenue South,
Suite 435, Bloomington, Minnesota; 500 Como Avenue, St. Paul, Minnesota.
(3) Prior Names: None
(4) Permitted Liens: Only those liens set forth in section 7.2 of the Credit
Agreement.
AGREEMENT
THIS AGREEMENT is entered into this 9th day of May, 1996 by and between
North Atlantic Technologies, Inc. ("NAT") and Willis D. Heim ("Heim").
R E C I T A L S
A. NAT and Heim are parties to an Agreement dated October 25, 1993, and
Accommodation Security Agreement dated April 13, 1990 and an Agreement dated
March 21, 1990.
B. NAT's obligations to Heim are secured by an attached and perfected
security interest in all of NAT's inventory, accounts, equipment, general
intangibles, certain patents, proceeds and products thereof.
C. On February 1, 1996, NAT filed a petition for relief under Chapter 11 of
Title 11 of the United States Code. Pursuant to an Order dated April 19, 1996
confirming NAT's Plan of Reorganization dated March 8, 1996, NAT was restored to
its property and assets pursuant to 11 U.S.C.U1141.
D. As of February 1, 1996 NAT was indebted to First Bank National
Association on a line of credit in the approximate amount of $1,450,000 which
includes $100,000 in certain letters of credit outstanding.
E. NAT's obligations to the bank under the line of credit are guaranteed by
Heim.
F. The confirmed NAT Plan of Reorganization restructures the debt to First
Bank. The claim is paid by a term note of $500,000 plus interest at a rate of
175 basis points above the Bank's One-Month Reserve Adjusted Certificate of
Deposit Rate amortized over five years (the "Term Note"). The balance will
remain as a line of credit which will be increased by $200,000 (the "Line of
Credit").
G. Heim has agreed to guarantee this restructured obligation with the Bank.
Heim and NAT have agreed to amend and restate the terms of their original
agreements to adapt to the terms of the confirmed Plan.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein the parties hereto agree as follows:
1. Credit extended by First Bank. For the purpose of this Agreement, the
First Bank Credit shall be the credit extended by the Bank under its Amended and
Restated Credit Agreement entered into following confirmation of NAT's Plan of
Reorganization consisting of a revolving line of credit in the initial amount of
$1,150,000 and a Term Note of $500,000. The Line of Credit extends to June 1,
1997 and the Term Note has a term of five years.
2. Guarantee by Heim. Heim will guarantee the First Bank Credit subject to
the terms and conditions of this Agreement. NAT agrees to reimburse Heim for any
amount he is required to pay on his guarantee, with interest at the rate or
rates provided in the First Bank Credit together with his costs and expenses,
including reasonable attorneys' fees.
3. Monthly Fee. On or before the due date of each monthly interest payment
owed to the Bank under the Bank Line of Credit NAT will pay Heim an amount equal
to 30% of the amount of interest payable to the Bank.
4. Initial Fee. Promptly following the date of establishment of the line of
credit NAT will pay to Heim a cash commitment fee of 4% of the maximum amount of
the commitment available on that date, $1,150,000. The amount of $46,000 will be
payable by a promissory note in the form annexed hereto as Exhibit A which shall
mature 90 days after the Effective Date of the Plan of Reorganization.
5. Term Note Interest Differential. In the event that the interest rate
under the Term Note is less than 12% per annum, NAT will pay to Heim at the end
of each month an amount equal to the difference between the interest payable to
the Bank for that month on the unpaid principal amount of the Term Note and 1%
of such unpaid balance. This fee will be paid so long as the Term Note, or any
extensions, modifications or renewals of it, remain outstanding.
6. Collateral. As collateral security for the guarantee to First Bank, NAT
continues and reaffirms its grant to Heim of a security interest in certain
assets of NAT under the terms of the Accommodation Security Agreement dated
April 13, 1990 and of the Patent Assignments dated November 7, 1990 regarding
Patent Nos. 4,596,285, 4,442,886 and 4,308,905, respectively.
7. Renewal of First Bank Line of Credit. Any renewals to the Line of Credit
which First Bank may grant in its discretion, which Heim may consent to
guarantee in his discretion, will be subject to an additional 4% annual fee
payable in cash at the time of the renewal or extension.
8. Financial Statements. NAT will furnish Heim with all financial
statements it furnishes to the Bank, a weekly cash flow projection report and
with all of its management reports to the Board of Directors at the time such
reports are furnished to the members of the Board. Heim acknowledges that this
information is confidential and proprietary to NAT and is not generally
available to persons other than NAT management, its Board of Directors, and
other selected representatives and agents of NAT. Accordingly, Heim agrees that
such information will not be (a) distributed in either the original or
reproduced form other than to his legal and financial advisers, (b) disclosed to
any other third party in whole or in part in any manner, or (c) used by Heim or
any other person for any purpose other than the relationship which is the
subject of this agreement. In any disclosures to Heim's legal or financial
advisers the advisers must similarly agree to maintain the confidentiality of
the information.
9. Legal Fees and Expenses. Upon establishment of the First Bank Credit,
NAT will reimburse Heim for all reasonable legal fees and expenses and for all
charges made by the Bank (including legal fees and expenses incurred by the
Bank) and incurred by Heim in connection with the negotiation and execution of
and the transactions contemplated by this Agreement as well as incurred in
connection with the Chapter 11 proceeding of NAT. Such reimbursement will be
made promptly upon the submission by Heim to NAT of reasonable evidence of legal
fees and expenses so incurred.
10. Miscellaneous. This Agreement is binding upon the parties hereto, their
respective assessors, assigns, heirs, and legal representatives. This Agreement
shall be governed by the laws of the State of Minnesota.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
NORTH ATLANTIC TECHNOLOGIES, INC.
By /s/Bruce A. Watson, Its President
/s/Willis D. Heim
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 199,982
<SECURITIES> 0
<RECEIVABLES> 663,650
<ALLOWANCES> (100,000)
<INVENTORY> 170,275
<CURRENT-ASSETS> 980,687
<PP&E> 1,708,135
<DEPRECIATION> 130,071
<TOTAL-ASSETS> 3,053,097
<CURRENT-LIABILITIES> 2,734,152
<BONDS> 0
0
216
<COMMON> 22,530
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<TOTAL-LIABILITY-AND-EQUITY> 3,053,097
<SALES> 4,226,525
<TOTAL-REVENUES> 4,226,525
<CGS> 3,242,833
<TOTAL-COSTS> 3,242,833
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<INCOME-PRETAX> (530,371)
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