SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ to_____________
Commission file number: 0-16159
LECTEC CORPORATION
(Exact name of Registrant as specified in its charter)
Minnesota 41-1301878
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10701 Red Circle Drive, Minnetonka, Minnesota 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 933-2291
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value
$0.01 per share.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 _______
[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein; and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 16, 1996 was $34,523,901.
The number of shares outstanding of the registrant's common stock as of
September 16, 1996 was 3,835,989 shares.
Documents Incorporated by Reference 10-K Parts Where Incorporated
----------------------------------- -----------------------------
1. Definitive Proxy Statement for Annual
Meeting of Shareholders of the Registrant
to be held November 18, 1996. Part III
PART I
Item 1. BUSINESS
GENERAL
LecTec Corporation (the "Company") designs, manufactures and markets
diagnostic and monitoring ECG electrodes, conductive and non-conductive adhesive
hydrogels, medical tapes, drug delivery patches and therapeutic products. The
Company markets its products to original equipment manufacturers, medical
products distributors, clinic and hospital purchasing groups, individual clinics
and hospitals as well as electronic retailing and direct selling groups. All of
the products manufactured by the Company are designed to be highly compatible
with skin, the largest organ of the human body.
The Company developed one of the first solid gel disposable ECG
electrodes, which did not require the use of messy liquid, aqueous conductive
gels in order to maintain contact with the skin. The Company has since continued
to develop, manufacture and market electrodes, hydrogels, medical tapes, drug
delivery systems, patches and therapeutic products. The Company holds domestic
and foreign patents on various products.
The Company, through its research and development efforts, is
developing new systems for drug delivery patches, new conductive-adhesive
hydrogel polymers, medical tapes and therapeutic drugs, and refining existing
technologies for new markets.
The Company was organized in 1977 as a Minnesota corporation. Its
principal executive office is located at 10701 Red Circle Drive, Minnetonka,
Minnesota 55343, and its telephone number is (612) 933-2291.
PRODUCTS
The Company applies its patented conductive and non-conductive adhesive
hydrogels technology to cardiac diagnostic and cardiac monitoring electrodes.
The Company's patented natural and synthetic-based polymers are self-adhesive
and can be made electrically conductive. Using natural-based polymers, the
Company developed one of the first solid gel disposable ECG electrodes. All of
the Company's electrodes are electrically and chemically stable.
All of the Company's "skin-like" hydrogels are chemically compatible
with human skin, thereby reducing or eliminating causative agents of skin
irritation and reducing both damage to the skin and the risk of infection. The
electrical and adhesive properties and the dimensions of the Company's products
are highly consistent and reproducible from product to product because the
conductive polymer is in a solid form, unlike some of the conductive gels used
on competitive products. As a result of its proprietary technology the Company
does not use toxic solvents in the manufacturing of its products. Solvents can
cause dehydration of the skin, thereby causing damage to the skin as well as
pain and discomfort to the patient. In addition, the use of this proprietary
technology enables the Company to avoid certain environmental concerns
associated with the use of harmful solvents in the manufacturing process.
Conductive Products
The Company's conductive products include diagnostic electrodes,
monitoring electrodes, and electrically conductive and non-conductive adhesive
hydrogels.
The Company's "Tracets"(R) diagnostic electrodes are snapless,
disposable electrodes designed to replace reusable suction cups (Welsh bulbs)
and conductive gels applied during routine electrocardiographs. Because Tracets
electrodes are disposable, they pose less risk of cross infection than reusable
suction cups. The solid gel and snapless design of the Tracets electrodes
provide more consistent electrical performance and offer shorter procedure and
clean-up time than Welsh bulbs. Currently the Company has three different types
of Tracets diagnostic electrodes: T1000 Plus, a snapless disposable tab
electrode made of natural polymer solid gel with gentle adhesion; MP 3000, a
synthetic solid gel electrode with aggressive adhesion which meets all AAMI
standards including defibrillation recovery; and AG 4000, a synthetic solid gel,
silver substrate electrode which meets all AAMI standards including
defibrillation recovery.
The Company's SynCor(R) monitoring electrodes are used for heart
monitoring applications. These applications include surgical patients and
hospitalized patients attached to bedside cardiac monitors. The SynCor product
line consists of a specialized short term surgical electrode and a neo-natal
product. The Company's short-term and neo-natal electrodes adhere without the
use of tape. The Company introduced a new monitoring snap-type electrode in
1995, VitaTrace(TM) VT-10, composed of a synthetic solid state gel that meets
all AAMI standards for adult use in bedside cardiac monitoring.
The Company manufactures synthetic and naturally-based hydrogels. The
Company pioneered hydrogel technology and developed alternatives to competitors'
hydrogels that are resistant to dehydration and evaporation problems and changes
in their electrical and physical properties. The Company regulates the adhesive
qualities of its hydrogels so that they can be used for attaching devices to the
body. The hydrogels can be developed to deliver specific medications to the skin
for topical use, or into or through the skin for localized or systemic
application. Also, the hydrogels can be manufactured to have various levels of
conductivity, with or without self-adhesive properties, for diagnostic and
monitoring electrodes, electrosurgical grounding pads, external pacing and
defibrillation electrodes, ultra-sonic gel pads, TENS products and iontophoretic
return electrodes. Sales of conductive products accounted for approximately 61%,
52% and 58% of the Company's sales during its fiscal years ended June 30, 1996,
1995 and 1994.
Medical Tape Products
The Company manufactures and markets medical tape products of various
types and configurations for the world market. The Company's medical tape
business includes the U.S. healthcare market (hospitals and alternate care), the
U.S. consumer market and the international healthcare market. Medical tape
products manufactured and marketed by the Company are configured in both
self-wound finished rolls and semi-finished master rolls. The Company's medical
tape product line is comprised of the standard paper, plastic and cloth products
widely used in the medical industry. The Company's trademarked products include
"Superpore(R)" Porous Paper Tape, "Isosilk(TM)" Cloth Tape and "Isoclear(TM)"
Transparent Tape. All of the Company's tapes are hypoallergenic and utilize
solvent-free adhesives.
The Company offers private label and converter alliance (selling of
semi-finished goods to a manufacturer who then converts the goods into a
finished product) programs. These programs offer customers quality products to
compete successfully against established brand names. Private labeling tape
products allows major medical marketers to penetrate markets offering
significant volume potential with their own custom brand of medical tapes.
The Converter Alliance Program increases profitability and marketing
opportunities for the Company's partners abroad. This program involves exporting
semi-finished master rolls of medical tape to partners who convert the material
into finished product, package the product and market it in a specific country.
When product labeling and packaging is completed in the country where the
product is sold, language and cultural barriers are reduced and packaging costs
are often significantly lowered. Manufacturing partners benefit from using
quality raw materials, market-oriented packaging, local labor content,
established distribution channels, and connections with local Ministries of
Health and other healthcare decision makers. Sales of medical tapes accounted
for approximately 24%, 26% and 36% of the Company's sales in its fiscal years
ended June 30, 1996, 1995 and 1994.
Therapeutic Products
The Company manufactures and markets drug delivery patches. The
hydrogel-based patch products use a monolithic system that delivers drugs
topically onto the skin. Products currently manufactured using the
adhesive-based patch technology are wart removers, analgesic patches for
localized pain relief and a corn and callus remover. These products are marketed
as OTC (over-ther-counter) products. The Company, through its subsidiary,
Pharmadyne Corporation (formerly Natus Corporation), markets the analgesic pain
patches manufactured by the Company through a variety of distribution channels.
Effective April 1, 1994, the Company consolidated Pharmadyne and its results of
operations. Sales of therapeutic products accounted for approximately 15%, 22%
and 6% of the Company's sales in each of the fiscal years ended June 30, 1996,
1995 and 1994.
CUSTOMERS
Burdick Corporation, ("Burdick") accounted for 17.0%, 14.6% and 17.4%
of the Company's total sales during fiscal years 1996, 1995 and 1994,
respectively. The Company sold its products to approximately 150 active
customers during the fiscal years 1996 and 1995, down from approximately 240
active customers during fiscal year 1994. The decrease in active customers was
the result of a marketing strategy to consolidate low volume customers with
higher volume dealers and distributors in an effort to reduce total costs
associated with order processing and shipping. The Company's backlog orders
(purchase orders received from customers for future shipment) as of August 12,
1996 totaled approximately $1,318,500 (all of which the Company expects to
fill), compared with approximately $2,184,800 and $1,807,900 on August 12, 1995
and 1994. The decrease in backlog at August 12, 1996 was primarily the result of
a change in customer ordering patterns from placing standing purchase orders for
multiple periods to placing individual purchase orders as needed.
GOVERNMENTAL REGULATION
Clinical testing, manufacturing, packaging, labeling and distribution
of the Company's products are subject to FDA (Food and Drug Administration)
regulation. Comparable agencies in some states and certain foreign countries
also regulate the Company's activities. The Company's electrodes under current
FDA policy are marketed pursuant to Section 510(k) notifications, which are
simplified means of obtaining FDA approval to market a medical device. The
Company's topical drug products are marketed under OTC monographs. The Company's
`new drug' and transdermal `new drug' developments, may be marketed only after
approval of a New Drug Application (NDA) containing full reports of extensive
laboratory and clinical investigations on animals and humans.
The Company does not use toxic solvents in the manufacturing of its
products and thus environmental concerns are reduced for the Company's
manufacturing processes as compared with its competitors. The Company does not
anticipate any major expenditures for environmental controls during the next
year.
COMPETITION
The markets for electrodes, hydrogels, tapes, drug delivery patches and
therapeutic products are highly competitive. Firms in the medical supply
industry compete on the basis of product performance, pricing, distribution and
service. Many of the Company's major competitors, including Minnesota Mining and
Manufacturing Company (3M), have significantly greater financial, marketing and
technological resources than the Company. Competitors of the Company most often
rely on pricing, distribution or brand-name recognition to obtain sales. The
Company believes that it competes successfully on the basis of product
performance, cost savings in the use of patented technology and its ability to
manufacture private label products for distributors and OEMs (Original Equipment
Manufacturers).
Over the past several years there has been a number of mergers within
the electrode and hydrogel industries, resulting in fewer but larger
competitors. The Company believes its proprietary technology and manufacturing
capabilities position it competitively in this market.
In recent years the Company has noted a reduction in the number of
manufacturers of medical tapes. The Company believes this is due, in part, to
the competitors' inability to satisfy increasingly stringent environmental
requirements and market price pressures. This provides the Company an
opportunity to increase its market share. The Company believes that it is one of
the first medical tape companies manufacturing medical tapes without the use of
harmful solvent-based adhesives or processing aids.
Schering-Plough (Dr. Scholl's) is the major competitor of two of the
Company's therapeutic products, an OTC corn and callous remover and an OTC wart
remover. Dr. Scholl's holds in excess of 85% market share for both products. The
Company's OTC analgesic patch competes with ointments, lotions and creams
manufactured by various competitors.
PATENTS AND TRADEMARKS
The Company has U.S. and foreign patents on adhesive membranes,
electrode designs, transdermal and dermal delivery systems and tape structures.
In the last year the Company was allowed four new U.S. patents. The first
covered cotinine's utility in aiding smoke cessation and the second covered
cotinine for weight management purposes. The third patent allowance covered a
new non-occlusive adhesive patch for applying medication. The fourth covered a
solid multi-purpose ultrasonic biomedical gel for diagnostic use. Eighteen U.S.
and foreign patent applications are pending; additionally the Company has
exclusive license for eight other patents. The patents most pertinent to the
Company's major products have been issued and have a remaining duration in
excess of eight years.
The Company expects that its products will be subject to continual
modifications due to improvements in materials and rapid technological advances
in the market for medical devices. Therefore, the Company's continued success
does not depend only upon ownership of patents, but also upon technical
expertise, creative skills and the ability to forge these talents into the
timely release of new products into the marketplace.
The Company uses its best efforts to protect its proprietary property
and information. In addition, the Company monitors competitive products and
patent publications to be aware of potential infringement of its rights.
The Company has registered the following trademarks in the United
States Patent and Trademark Office: LecPads, SPARE, Tracets, Superpore,
Tree-Skin, ResTest II, VitaTrace, SME, LecTec and SynCor. The Company has filed
for the registration of the tradenames UltraEase and Isoclear. The Company uses,
but has not registered, the following tradenames: LecTrode, Isosilk, Isotex,
Isopore, SME-5000, infiniti, Exten 238, DermaPhyl and "The Best ... Next to
Skin.".
The Company's subsidiary, Pharmadyne Corporation, has registered the
following tradenames in the United States Patent and Trademark Office:
TheraPatch, Thermal Patch, HydroGesic Patch and ThermoGesic Patch.
RESEARCH AND DEVELOPMENT
The Company's research and development staff consists of professionals
drawn from the business and academic communities with experience in the
biological, chemical, pharmaceutical and engineering sciences. The research and
development staff is responsible for the investigation, development and
implementation of new technologies.
The Company may develop products jointly with corporations and/or with
inventors from the academic world via research and development contracts or
other forms of working alliances. Resulting products may then be marketed by the
Company, by sponsoring partners or through a marketing arrangement with an
appropriate distributor. R&D contract opportunities are evaluated on an
individual basis.
Pilot clinical studies performed in previous years demonstrated
encouraging results for our cotinine drug product used in smoking cessation for
which the Company has exclusive license. The Addiction Research Center of the
National Institute of Health (NIH) completed a study to determine if cotinine is
addictive. The data was presented in June, 1996 at the CPDD (College on Problems
of Drug Dependence) National Meeting. This data lends support to the notion that
cotinine is behaviorally active and could mediate certain of the behavorial
effects attributed to nicotine dependence. Minimal abuse potential (addiction
potential) was detected. The encouraging clinical data gathered to date and the
Company's positive patent developments have propelled this project out of the
research phase and into the development phase which begins with a corporate
sponsored IND (Investigational New Drug) application. Work on this submission
continued throughout fiscal 1996 and the Company expects to file the IND in
October 1996.
Research and development efforts are underway to complete the
development of a new polymer-based reusable hydrogel. A 510(k) was awarded for
the new UltraEase ultrasonic hydrogel couplant pad product.
The Company has developed a new proprietary coating process for the
manufacture of porous medical tape products. The recently acquired and developed
pressure sensitive adhesive coating and slitting production equipment, for the
manufacturing of medical tapes employs two patent pending processes. Each of
these two patent pending processes are used to manufacture LecTec's medical tape
products.
R&D resources are also being used to fund development of new analgesic
pain patch products, conductive products and specialized medical tapes.
In the fiscal years ended June 30, 1996, 1995 and 1994, the Company
spent, approximately, $1,975,000, $1,877,000 and $1,380,000, respectively, on
research and development.
MARKETING AND MARKETING STRATEGY
The Company markets and sells its products to original equipment
manufacturers (OEM), medical product distributors, clinic and hospital
purchasing groups, individual clinics and hospitals as well as electronic
retailing and direct selling groups. The Company has focused on OEM accounts to
build strategic partnerships with medical equipment and disposable supply
manufacturers. Additionally, joint venture and marketing contracts are used to
promote the Company's growth in therapeutic markets.
The Company has not experienced any significant seasonality in sales of
its products.
The Company sells its products in the U.S., Canada, Europe, Asia, and
portions of Latin America. Export sales totaled $2,425,904 (19% of total sales)
in the fiscal year ended June 30, 1996, $2,603,349 (18% of total sales) in the
fiscal year ended June 30, 1995 and $2,349,007 (22% of total sales) in the
fiscal year ended June 30, 1994. The Company intends to continue to market its
products internationally and expects international sales to remain approximately
the same as a percent of total sales.
The Company's international sales are made by the Company's corporate
sales force and the Company does not maintain a separate international marketing
staff or operations. The following table sets forth export sales by geographic
area (See Note J to the Financial Statements):
Export Sales Years ended June 30
-----------------------------------------
1996 1995 1994
---- ---- ----
Canada $ 80,746 $ 113,597 $ 122,208
Europe 1,652,941 1,171,910 943,250
Asia 466,777 1,122,179 1,114,928
Latin America 225,440 195,663 168,621
------------ ----------- -----------
Total Export Sales $2,425,904 $ 2,603,349 $ 2,349,007
============ =========== ===========
MANUFACTURING
The Company manufactures its conductive and therapeutic membranes at
the Company's Minnetonka, Minnesota facility. The Minnetonka facility also
manufactures and packages the Company's therapeutic products and conducts raw
material processing operations. The Company's second manufacturing facility in
Edina, Minnesota is the primary site for the manufacturing and packaging of
medical tape and medical electrodes. The Edina location also provides the
majority of the Company's warehouse capacity.
The Company believes that the raw materials used in manufacturing its
products are generally available from multiple suppliers.
EMPLOYEES
As of June 30, 1996, the Company employed 76 full-time employees. None
of the Company's employees are represented by any labor unions or other
collective bargaining units. The Company believes its relations with its
employees are good.
ACQUISITION OF PHARMADYNE CORPORATION (Formerly Natus Corporation)
During 1993, the Company invested $175,000 in Pharmadyne Corporation,
which represented a 19.5% ownership interest in Pharmadyne. This investment was
recorded at cost. In addition to this equity investment, the Company made cash
advances to Pharmadyne during fiscal 1993 and 1994.
On April 1, 1994, the Company exercised an option to purchase 182,822
shares of Pharmadyne common stock at $1 per share increasing the ownership in
Pharmadyne to 51%. This acquisition was accounted for as a stock purchase. The
acquired goodwill of approximately $590,000 is being amortized on a
straight-line basis over three years.
Effective April 1, 1994, the Company consolidated Pharmadyne in its
results of operations.
During 1996 the Company made additional advances to Pharmadyne and
received a warrant to purchase 227,959 additional shares of Pharmadyne at $1 per
share. On September 5, 1996, the Company exercised the warrant and increased its
ownership interest in Pharmadyne to 61%.
DISPOSITION OF DIRECT MARKETING RELATED ASSETS
On March 12, 1996, the Company contributed the direct marketing related
assets of Pharmadyne to Natus L.L.C. (an Arizona limited liability company) in
exchange for a 15% interest in Natus L.L.C. The direct marketing related assets
contributed consisted of the following:
Accounts receivable $ 32,791
Inventory 384,730
Prepaid expenses and other 135,708
Property and equipment, net 79,938
Other (27,000)
--------
$606,167
========
Item 2. PROPERTIES
The Company owns a building located in Minnetonka, Minnesota,
containing 18,000 square feet of office and laboratory space and 12,000 square
feet of manufacturing and warehouse space. In addition, the Company leases a
building in Edina, Minnesota containing 29,000 square feet.
Item.3. LEGAL PROCEEDINGS
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Company has been listed on the NASDAQ since December 17, 1986 and
on the National Market System since June 7, 1988 under the trading symbol LECT.
The following table sets forth for the periods indicated the high and
low prices of the Company's Common Stock. The figures reflect the high and low
bid prices on the NASDAQ National Market System. Such prices reflect interdealer
prices, without retail mark-up, mark-down, or commission, and may not
necessarily represent actual transactions.
Years ended June 30, 1996 1995
----- ----
High Low High Low
---- --- ---- ---
First Quarter $12.250 $8.500 $10.500 $7.000
Second Quarter 12.500 8.750 10.000 6.750
Third Quarter 12.000 9.875 11.000 7.250
Fourth Quarter 15.375 9.875 14.250 10.750
As of September 16, 1996 the Company had 3,835,989 shares of Common
Stock outstanding and 399 shareholders of record.
The Company has not declared or paid cash dividends on its Common Stock
since its inception, and intends to retain all earnings for use in its business
for the foreseeable future.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Years ended June 30, 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $13,100,754 $14,138,290 $10,715,490 $9,224,005 $8,101,954
Gross profit 4,969,659 5,697,562 4,041,853 3,434,128 3,290,005
Operating profit (loss) (724,074) 69,761 837,161 750,335 1,153,802
Earnings (loss) before equity in losses
of unconsolidated subsidiary (632,193) 153,863 768,974 745,282 964,026
Equity in losses of
unconsolidated subsidiary --- --- (133,639) (163,442) ---
Net earnings (loss) (632,193) 153,863 635,335 581,840 964,026
Net earnings (loss) per share (.17) .04 .17 .15 .26
BALANCE SHEET DATA
At June 30, 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Cash, cash equivalents and
short-term investments $ 800,693 $ 839,942 $ 2,182,570 $ 3,469,632 $2,736,361
Current assets 5,449,682 5,764,363 6,124,640 6,082,934 5,480,921
Working capital 4,240,024 4,490,796 4,737,567 5,471,894 5,013,766
Property, plant and equipment, net 5,112,975 5,559,807 4,705,602 3,016,761 2,961,711
Long-term investments 574,806 568,156 585,855 3,016,761 1,143,605
Total assets 12,319,003 12,646,745 12,363,075 10,876,068 9,885,809
Long-term obligations 174,000 167,000 139,000 64,000 ---
Shareholders' equity 10,935,345 11,206,178 10,837,002 10,201,028 9,418,654
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Earnings Summary
The Company reported a net loss of $632,000 or $.17 per share in fiscal
1996, a decrease from net earnings of $154,000 or $.04 per share in 1995 and
down from net earnings of $635,000 or $.17 per share in 1994. The largest
component of the net loss for 1996 was the losses associated with the direct
marketing related operations of the Company's former Natus Corporation
subsidiary. The 1996 net loss was also affected by increased R&D expenditures
and decreased medical tape and therapeutic product sales which more than offset
increased conductive product sales.
Results Of Operations
Sales
Sales totaled $13,101,000 in fiscal 1996, a decrease of 7% from
$14,138,000 in 1995 and up from $10,715,000 in 1994. The reduction in sales in
1996 was primarily attributable to decreased therapeutic product sales resulting
from the disposition of the direct marketing related assets of the Pharmadyne
subsidiary as well as decreased medical tape sales which more than offset
increased conductive product sales. The increase in sales from 1994 to 1995 was
primarily attributable to increases in volume of all products sold.
Sales of conductive products (medical electrodes and conductive
hydrogels) grew by 8% in fiscal 1996 to $7,940,000 from $7,334,000 in fiscal
1995. Conductive product sales were $6,015,000 in fiscal 1994. These increases
were primarily attributable to unit volume increases.
Sales of medical tapes decreased by 14% in fiscal 1996 to $3,180,000
from $3,688,000 in fiscal 1995. Medical tape sales were $3,790,000 in fiscal
1994. The 1996 decrease was primarily attributable to reduced volume to a major
international customer as compared to the prior year which more than offset the
increased sales volume associated with new product offerings. The 1995 decrease
was primarily attributable to a temporary slowdown in the purchasing volume of
domestic self-wound finished roll medical tape customers in anticipation of new
product offerings introduced during fiscal 1996.
Sales of therapeutic products decreased 36% in fiscal 1996 to
$1,981,000 from $3,116,000 in fiscal 1995. Therapeutic product sales were
$880,000 in fiscal 1994. The decrease in 1996 was primarily attributable to the
decrease in the third quarter and the absence in the fourth quarter of the
Pharmadyne Corporation (formerly Natus Corporation) direct marketing related
sales due to the divestiture of the direct marketing related assets. The
increase in 1995 was primarily attributable to increased sales of the
over-the-counter analgesic patch products and the full year inclusion of
Pharmadyne Corporation therapeutic product sales. Management believes the
anticipated growth of the analgesic pain patch program will account for an
increased proportion of the Company's sales mix during fiscal 1997.
International sales, consisting primarily of semi-finished conductive
and medical tape products sold to overseas converters for final processing,
packaging and marketing, were 19% of total sales in fiscal 1996, 18% in 1995 and
22% in 1994. The Company intends to continue to market its products
internationally and expects international sales to remain approximately the same
as a percent of total sales.
Gross Profit
The Company's gross profit totaled $4,970,000 in fiscal 1996, down from
$5,698,000 in 1995. Gross profit was $4,042,000 in 1994. As a percentage of
sales, gross profit was 37.9% in fiscal 1996, 40.3% in 1995 and 37.7% in 1994.
In 1996, the decrease in the gross profit percent was primarily attributable to
decreased sales of higher margin therapeutic products and increased overhead
costs. In 1995, the increased gross profit percent was primarily attributable to
increased sales of higher-margin therapeutic products. The 1994 gross profit was
affected by relatively high sales of lower-margin medical tape products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $3,718,000 or
28.4% of sales in fiscal 1996, compared to $3,751,000 or 26.5% in 1995, and
$1,825,000 or 17.0% in 1994. The 1996 decrease in expense was primarily the
result of the absence of costs in the fourth quarter from the Pharmadyne
Corporation direct marketing related operations which was partially offset by
increases in other selling, general and administrative expenses. The 1995
increase was due primarily to the full year impact of the consolidation of
Pharmadyne with the Company for fiscal 1995; the higher selling costs associated
with the Pharmadyne direct selling organization; and the inclusion of goodwill
amortization related to the acquisition of Pharmadyne.
Research and Product Development Expenses (R&D)
Research and product development expenses totaled $1,975,000 or 15.1%
of sales in fiscal 1996, compared to $1,877,000 or 13.3% in 1995, and $1,380,000
or 12.9% in 1994. The high levels of R&D expenditures over this three-year
period reflect the utilization of internally-generated funds to develop
therapeutic products. Substantially all of the dollar increase in R&D during
fiscal 1996 was associated with the clinical studies for the non-nicotine
smoking cessation product. R&D resources are also being used to fund development
of new analgesic pain patch products, conductive products and specialized
medical tapes. Management believes that R&D expenditures, as a percentage of net
sales, will remain in the range of 10% to 15% for the immediate future.
Other Income (Expense)
Other income totaled $54,000 in fiscal 1996, down from $73,000 in 1995
and $109,000 in 1994. In 1996 the decline resulted primarily from a reduction of
interest income due to the prior year liquidation of short-term investments. In
1995 the decline resulted from the liquidation of short-term investments to
finance research and product development efforts, the acquisition of a new
therapeutic products production line plus increases in receivables and inventory
necessary to support the growing business.
Income Tax Expense
The Company had income tax benefits of $38,000 in fiscal 1996 and
$11,000 in 1995, compared to income tax expense of $177,000 in 1994. The tax
benefit in 1996 resulted from losses incurred in the current year reduced by the
effect of the subsidiary losses which cannot be utilized by the Company at this
time and the effect of goodwill amortization. The tax benefit in 1995 was
primarily attributable to R&D tax credits and alternative minimum tax credits.
Equity in Losses of Unconsolidated Subsidiary
On April 1, 1994, the Company acquired an additional 31.5% interest in
Pharmadyne Corporation (formerly known as Natus Corporation) and began
consolidating Pharmadyne's results of operations on that date. During the first
nine months of fiscal 1994, the Company's pro-rata share of Pharmadyne's net
loss (based on a 19.5% equity ownership position through March 31, 1994),
together with goodwill amortization during the first nine months of the fiscal
year, totaled $134,000.
Effect of Inflation
Inflation has not had a significant impact on the Company as it has
generally been able to adjust its selling prices as the costs of materials and
other expenses have changed
Liquidity and Capital Resources
Cash and cash equivalents decreased by $39,000 to $801,000 at June 30,
1996. Long-term investments increased by $7,000 to $575,000 at June 30, 1996.
Capital spending for various equipment totaled $431,000 in 1996. There were no
material commitments for capital expenditures at June 30, 1996.
Working capital totaled $4,240,000 at June 30, 1996, compared to
$4,491,000 at the end of fiscal 1995. The Company's current ratio stood at 4.5
at the end of both fiscal 1996 and 1995.
Net property, plant and equipment decreased by $447,000 to $5,113,000
at June 30, 1996, reflecting the excess of depreciation expense over additions.
Of this decrease, $80,000 was related to the disposition of the direct marketing
related assets of Pharmadyne Corporation.
The Company is free of long-term debt, and has a $1,000,000 annually
renewable revolving line of credit for meeting current operating requirements.
There were no outstanding amounts on this short-term facility at the end of
fiscal 1996. Shareholders' equity decreased by $271,000 to $10,935,000 at June
30, 1996.
Management believes that internally-generated cash and the existing
short-term credit line will be sufficient for supporting anticipated growth and
capital spending requirements in fiscal 1997.
Statements about the fiscal 1997 outlook are forward-looking and,
therefore, involve certain risks and uncertainties, including but not limited
to: buying patterns of customers, competitive forces and other factors detailed
from time to time in filings with the Securities and Exchange Commission.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LecTec Corporation and Subsidiaries Financial Statements Furnished Pursuant to
the Requirements of Form 10-K
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and
Board of Directors
LecTec Corporation
We have audited the accompanying consolidated balance sheets of LecTec
Corporation and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of LecTec
Corporation and subsidiaries as of June 30, 1996 and 1995, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles.
Grant Thornton LLP
Minneapolis, Minnesota
August 26, 1996
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
ASSETS 1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (note A) $ 800,693 $ 839,942
Receivables
Trade, net of allowances of $74,208
in 1996 and $90,401 in 1995 1,847,736 1,955,584
Refundable income taxes 55,580 119,540
Other 182,247 268,247
----------- -----------
2,085,563 2,343,371
Inventories (note A) 2,011,327 2,097,254
Prepaid expenses and other 123,099 229,796
Deferred income taxes (note E) 429,000 254,000
----------- -----------
Total current assets 5,449,682 5,764,363
PROPERTY, PLANT AND EQUIPMENT --
AT COST (note A)
Building and improvements 1,629,630 1,603,447
Equipment 6,414,132 5,517,101
Furniture and fixtures 354,985 422,265
----------- -----------
8,398,747 7,542,813
Less accumulated depreciation 3,533,503 2,813,760
----------- -----------
4,865,244 4,729,053
Construction in progress -- 583,023
Land 247,731 247,731
----------- -----------
5,112,975 5,559,807
OTHER ASSETS
Patents and trademarks, less accumulated amortization
of $687,871 in 1996 and $554,286 in 1995 (note A) 417,681 386,470
Goodwill, less accumulated amortization of $442,503
in 1996 and $245,835 in 1995 (notes A and H) 147,497 344,165
Long-term investments (note B) 574,806 568,156
Investment in limited liability company (note I) 606,167 --
Other 10,195 23,784
----------- -----------
1,756,346 1,322,575
----------- -----------
$12,319,003 $12,646,745
=========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
JUNE 30,
LIABILITIES AND
SHAREHOLDERS' EQUITY 1996 1995
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 894,846 $ 771,471
Accrued expenses
Payroll related 304,527 375,282
Distributor bonuses -- 71,384
Other 10,285 55,430
------------ ------------
Total current liabilities 1,209,658 1,273,567
DEFERRED INCOME TAXES (note E) 174,000 167,000
COMMITMENTS AND CONTINGENCIES
(notes D, F and G) -- --
SHAREHOLDERS' EQUITY (note G)
Common stock, $.01 par value; 15,000,000 shares
authorized; issued and outstanding: 3,835,800 shares
in 1996 and 3,786,500 shares in 1995 38,358 37,865
Additional paid-in capital 10,368,166 10,013,949
Unrealized losses on securities available-for-
sale (note B) (44,166) (50,816)
Retained earnings 572,987 1,205,180
------------ ------------
10,935,345 11,206,178
------------ ------------
$ 12,319,003 $ 12,646,745
============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales (notes A and J) $ 13,100,754 $ 14,138,290 $ 10,715,490
Cost of goods sold 8,131,095 8,440,728 6,673,637
------------ ------------ ------------
Gross profit 4,969,659 5,697,562 4,041,853
Operating expenses
Selling, general and administrative 3,718,496 3,751,194 1,825,121
Research and development 1,975,237 1,876,607 1,379,571
------------ ------------ ------------
5,693,733 5,627,801 3,204,692
------------ ------------ ------------
Earnings (loss) from operations (724,074) 69,761 837,161
Other income (expense)
Interest income 26,554 35,846 89,498
Dividend income 38,029 38,487 60,433
Other (10,702) (1,231) (41,118)
------------ ------------ ------------
53,881 73,102 108,813
------------ ------------ ------------
Earnings (loss) before income taxes and
equity in losses of unconsolidated
subsidiary (670,193) 142,863 945,974
Income tax expense (benefit) (note E) (38,000) (11,000) 177,000
------------ ------------ ------------
Earnings (loss) before equity in losses
of unconsolidated subsidiary (632,193) 153,863 768,974
Equity in losses of unconsolidated subsidiary
(note H) -- -- (133,639)
------------ ------------ ------------
Net earnings (loss) $ (632,193) $ 153,863 $ 635,335
============ ============ ============
Net earnings (loss) per common and common
equivalent share (note A) $ (.17) $ .04 $ .17
============ ============ ============
Weighted average number of common and
common equivalent shares outstanding
during the year 3,801,155 3,826,905 3,803,439
============ ============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
Additional
Common stock paid-in
Shares Amount capital
------ ------ ----------
<S> <C> <C> <C>
Balance, July 1, 1993 3,563,845 $ 35,638 $ 7,867,675
Net earnings -- -- --
Cost of shares retired (3,883) (39) (43,874)
Common stock issued upon exercise of options (note G) 18,366 184 68,768
Net unrealized loss on long-term marketable securities -- -- --
(note B)
Stock dividend 178,721 1,787 1,871,042
Tax benefit from exercise of stock options -- -- 45,468
Other (49) -- --
------------ ------------ ------------
Balance, June 30, 1994 3,757,000 37,570 9,809,079
Net earnings -- -- --
Cost of shares retired (2,102) (21) (17,330)
Common stock issued upon exercise of options (note G) 31,602 316 162,200
Unrealized gain on securities available-for-sale -- -- --
(note B)
Tax benefit from exercise of stock options -- -- 60,000
------------ ------------ ------------
Balance, June 30, 1995 3,786,500 37,865 10,013,949
Net loss -- -- --
Cost of shares retired (16,281) (163) (184,319)
Common stock issued upon exercise of options (note G) 65,581 656 450,536
Unrealized gain on securities available-for-sale -- -- --
(note B)
Tax benefit from exercise of stock options -- -- 88,000
------------ ------------ ------------
Balance, June 30, 1996 3,835,800 $ 38,358 $ 10,368,166
============ ============ ============
[WIDE TABLE CONTINUED FROM ABOVE]
Unrealized
losses on
securities Total
available- Retained shareholders'
for-sale earnings equity
------------ ------------ ------------
Balance, July 1, 1993 $ (58,745) $ 2,356,460 $ 10,201,028
Net earnings -- 635,335 635,335
Cost of shares retired -- -- (43,913)
Common stock issued upon exercise of options (note G) -- -- 68,952
Net unrealized loss on long-term marketable securities (2,219) -- (2,219)
(note B)
Stock dividend -- (1,872,829) --
Tax benefit from exercise of stock options -- -- 45,468
Other -- (67,649) (67,649)
------------ ------------ ------------
Balance, June 30, 1994 (60,964) 1,051,317 10,837,002
Net earnings -- 153,863 153,863
Cost of shares retired -- -- (17,351)
Common stock issued upon exercise of options (note G) -- -- 162,516
Unrealized gain on securities available-for-sale 10,148 -- 10,148
(note B)
Tax benefit from exercise of stock options -- -- 60,000
------------ ------------ ------------
Balance, June 30, 1995 (50,816) 1,205,180 11,206,178
Net loss -- (632,193) (632,193)
Cost of shares retired -- -- (184,482)
Common stock issued upon exercise of options (note G) -- -- 451,192
Unrealized gain on securities available-for-sale 6,650 -- 6,650
(note B)
Tax benefit from exercise of stock options -- -- 88,000
------------ ------------ ------------
Balance, June 30, 1996 $ (44,166) $ 572,987 $ 10,935,345
============ ============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (632,193) $ 153,863 $ 635,335
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,128,103 932,051 584,362
Deferred income taxes (80,000) (149,000) 76,000
Equity in losses of unconsolidated subsidiary -- -- 133,639
Changes in operating assets and liabilities:
Trade and other receivables 161,057 (410,006) (297,085)
Refundable income taxes 63,960 109,714 (101,762)
Inventories (298,803) (325,219) (811,246)
Prepaid expenses and other (29,011) (128,059) (33,149)
Accounts payable 123,375 (189,057) 185,234
Accrued expenses (187,284) 83,770 (19,109)
----------- ----------- -----------
Net cash provided by operating activities 249,204 78,057 352,219
Cash flows from investing activities:
Purchase of property, plant and equipment (430,956) (1,471,427) (2,091,228)
Investment in patents and trademarks (164,796) (141,665) (119,325)
Purchase of investments -- (249,603) (3,003,396)
Sale of investments -- 1,674,250 5,285,873
Acquisition of business, net of cash acquired -- -- (182,822)
Other 40,589 19,395 85,656
----------- ----------- -----------
Net cash used in investing activities (555,163) (169,050) (25,242)
Cash flows from financing activities:
Issuance of common stock 451,192 162,516 68,952
Retirement of common stock (184,482) (17,351) (43,913)
----------- ----------- -----------
Net cash provided by financing activities 266,710 145,165 25,039
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (39,249) 54,172 352,016
Cash and cash equivalents at beginning of year 839,942 785,770 433,754
----------- ----------- -----------
Cash and cash equivalents at end of year $ 800,693 $ 839,942 $ 785,770
=========== =========== ===========
Cash paid during the year for income taxes $ 33,199 $ 137,922 $ 178,316
=========== =========== ===========
The accompanying notes are an integral part of these statements
</TABLE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES
LecTec Corporation (the Company) is primarily engaged in the research,
design, manufacture and sale of diagnostic and monitoring electrodes,
membranes, medical tapes and therapeutic products. The Company sells and
extends credit without collateral to customers located throughout the United
States as well as Canada, Europe, Asia and Latin America. A summary of the
Company's significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
1. Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of LecTec
Corporation ("LecTec"), LecTec International Corporation, a wholly-owned
subsidiary, and Pharmadyne Corporation ("Pharmadyne," formerly known as Natus
Corporation), a fifty-one percent owned subsidiary (note H). The Company has
consolidated Pharmadyne's results of operations since April 1, 1994. All
material intercompany accounts and transactions have been eliminated.
2. Cash and Cash Equivalents
The Company considers all highly liquid temporary investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist primarily of money market accounts.
3. Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market and consist of the following:
June 30,
--------------------------
1996 1995
---------- ---------
Raw materials $1,144,078 $1,162,559
Work in process 229,974 218,351
Finished goods 637,275 716,344
---------- ----------
$2,011,327 $2,097,254
========== ==========
4. Depreciation and Amortization
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives. The
straight-line method of depreciation is followed for financial reporting
purposes, and accelerated methods are used for tax purposes. Estimated useful
lives used in the calculation of depreciation for financial statement
purposes are:
Buildings and improvements 5 - 39 years
Equipment 5 - 15 years
Furniture and fixtures 7 years
The investment in patents and trademarks consists primarily of the cost of
applying for patents and trademarks. Patents and trademarks are amortized on
a straight-line basis over the estimated useful life of the asset, generally
three to five years.
Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized on a straight-line basis over three years.
5. Revenue Recognition
Sales are recognized at the time of shipment of product against a confirmed
sales order.
6. Net Earnings (Loss) Per Common and Common Equivalent Share
Net earnings (loss) per common and common equivalent share have been computed
by dividing net earnings (loss) by the weighted average number of common and
common equivalent shares outstanding during the years. Common equivalent
shares included in the computation represent shares issuable upon the assumed
exercise of stock options, when dilutive.
7. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
8. Reclassifications
Certain 1995 and 1994 amounts have been reclassified to conform with the
financial statement presentation used in 1996.
9. New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) 123, "Accounting for Stock-Based Compensation,"
which establishes financial accounting and reporting standards for
stock-based employee compensation plans. This Statement defines and
encourages the use of a fair value based method of accounting for an employee
stock option or similar equity instrument. The Statement allows the use of
the intrinsic value based method of accounting as prescribed by current
existing accounting standards for options issued to employees; however, there
is a requirement to disclose the pro forma net income as if the fair value
based method had been used. SFAS 123 is effective for fiscal years beginning
after December 15, 1995. Management believes the adoption of SFAS 123 will
not have a material effect on the Company's financial position or results of
operations.
The FASB also issued SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," which establishes
guidance for when to recognize and how to measure impairment losses of
long-lived assets and certain identifiable intangibles, and how to value
long-lived assets to be disposed of. SFAS 121 is effective for fiscal years
beginning after December 15, 1995. Management believes the adoption of SFAS
121 will not have a material effect on the Company's financial position or
results of operations.
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE B - INVESTMENTS
The Company's long-term investments are classified as available-for-sale and
consist primarily of a preferred stock fund at June 30, 1996 and 1995. These
investments are reported at fair value, with the net unrealized loss of
$44,166 and $50,816 included in shareholders' equity at June 30, 1996 and
1995.
The Company utilizes the specific identification method in computing realized
gains and losses.
NOTE C - LINE OF CREDIT
The Company has an unsecured $1,000,000 working capital line of credit
through January 1, 1997 with interest at the bank's reference rate (effective
rates of 8.25% and 9.0% at June 30, 1996 and 1995). There were no borrowings
outstanding on the line at June 30, 1996 or 1995. The credit agreement
contains certain restrictive covenants which require the Company to maintain,
among other things, specified levels of working capital and net worth and
certain financial ratios. At June 30, 1996, the Company was in compliance
with these covenants. Management believes the Company will be able to renew
its line of credit under similar terms and conditions.
NOTE D - COMMITMENTS AND CONTINGENCIES
The Company conducts portions of its operations in a leased facility. The
lease provides for payment of a portion of taxes and other operating expenses
by the Company. This lease expires in 1997; however, management believes the
Company will be able to renew this lease under similar terms and conditions.
The minimum rental commitments under all operating leases are as follows for
the years ending June 30:
1997 $210,408
1998 7,910
--------
$218,318
========
Total rent expense for operating leases was $219,095, $223,147 and $218,375
for the years ended June 30, 1996, 1995 and 1994.
The Company is subject to various legal proceedings in the normal course of
business. Management believes these proceedings will not have a material
adverse effect on the Company's financial position or results of operations.
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE E - INCOME TAXES
Deferred tax assets and liabilities represent the tax effects, based upon
current tax law, of future deductible or taxable items that have been
recognized in the financial statements.
The provision for income tax expense (benefit) consists of the following:
Years ended June 30,
------------------------------------------
1996 1995 1994
---- ---- ----
Current
Federal $ 40,000 $ 136,000 $ 99,000
State 2,000 2,000 2,000
-------- --------- --------
42,000 138,000 101,000
Deferred
Federal (80,000) (149,000) 76,000
State - - -
-------- --------- -------
(80,000) (149,000) 76,000
-------- --------- --------
$(38,000) $ (11,000) $177,000
======== ========= ========
Deferred tax assets (liabilities) represent the tax effects of cumulative
temporary differences as follows at June 30:
1996 1995
---- ----
Deferred current assets and liabilities:
Net operating loss carryforwards $ 538,200 $ 309,000
Tax credit carryforwards 161,100 141,100
Stock option exercise 88,000 -
Inventory capitalization and reserve 79,200 78,700
Vacation pay accrual 36,100 28,200
Other 7,400 6,000
--------- ---------
910,000 563,000
Valuation allowance (481,000) (309,000)
--------- ---------
Net current asset $ 429,000 $ 254,000
========= =========
Deferred long-term assets and liabilities:
1996 1995
---- ----
Tax depreciation in excess of book depreciation $(278,300) $(256,900)
Charitable contribution carryforwards 57,100 51,700
Other 47,200 38,200
--------- ---------
Net long-term liability $(174,000) $(167,000)
========= =========
At June 30, 1996, Pharmadyne has available net operating loss carryforwards
of approximately $1,400,000 which can be used to reduce future taxable
income. These carryforwards begin to expire in 2009 and cannot be utilized to
offset taxable income of LecTec. The utilization of these net operating loss
carryforwards by Pharmadyne is restricted under Section 382 of the Internal
Revenue Code due to past ownership changes. A valuation allowance has been
recorded for these net operating loss carryforwards as they may not be
realizable.
At June 30, 1996, LecTec has available tax credit carryforwards of
approximately $161,000 which can be used to reduce future tax liabilities.
These carryforwards begin to expire in 2010. LecTec also has available a net
operating loss carryforward of approximately $168,000, which can be used to
reduce future taxable income of LecTec. This carryforward expires in 2011.
Differences between income tax expense (benefit) and the statutory federal
income tax rate of 34% are as follows:
1996 1995 1994
---- ---- ----
Federal statutory income tax rate (34.0)% 34.0% 34.0%
State income taxes, net of federal benefit 0.2 0.1 0.1
Tax credit carryforwards - (74.7) (4.0)
Foreign sales corporation (5.5) (24.9) (3.9)
Subsidiary loss producing no benefit 25.7 29.9 -
Tax exempt investment income (0.8) (14.7) (5.1)
Goodwill amortization 10.0 46.8 1.8
Prior years' overaccruals - (4.8) -
Other (1.3) .6 (4.2)
----- ---- ----
(5.7)% (7.7)% 18.7%
===== ===== ====
During the fourth quarter of the year ended June 30, 1995, the Company
recorded a $131,000 reduction of income tax expense to adjust to the
Company's annual effective tax rate. The effect of this adjustment was to
increase net earnings per share by $.03 for the year.
NOTE F - EMPLOYEE BENEFIT PLANS
The Company has a profit sharing benefit plan covering substantially all
employees who have completed one year of service. The Company's contributions
are discretionary as determined by the Board of Directors, subject to certain
limitations under the Internal Revenue Code. Pension expense under this plan
was $55,585 and $46,918 for the years ended June 30, 1995 and 1994. No
contributions were made to the plan during 1996.
The Company has a profit sharing bonus plan covering substantially all
employees who have completed two calendar quarters of employment. The
quarterly bonuses are paid from a pool equal to a maximum of 9% of pretax
income net of certain reductions, including the profit sharing distribution,
and a reserve based on the preceding quarter's net earnings. Profit sharing
bonus expense under this plan was $2,820, $18,534 and $56,978 for the years
ended June 30, 1996, 1995 and 1994.
The Company maintains a contributory 401(k) profit sharing benefit plan
covering substantially all employees who have completed one year of service.
The Company matches 50 percent of voluntary employee contributions to the
plan not to exceed 50% of a maximum 5% of a participant's compensation. The
Company's contributions under this plan were $44,549, $37,230 and $36,785 for
the years ended June 30, 1996, 1995 and 1994.
NOTE G - STOCK OPTIONS
The Company's 1989 Stock Option Plan (the "Plan") provides for the grant of
options to officers and other key employees of the Company. A total of
557,287 shares of common stock are reserved for issuance under the Plan. The
ten-year options are exercisable at such times as set forth in the individual
option agreements, generally vesting 100% after four years. The exercise
price of the options granted is the fair market value of the Company's common
stock at the date of grant. Option transactions under the Plan during the
three years ended June 30, 1996 are summarized as follows:
Number of shares Option price of share
---------------- ---------------------
Outstanding at July 1, 1993 289,015 $3.34 - $ 9.07
Granted 132,914 8.62 - 9.52
Exercised (16,391) 3.34 - 7.77
Canceled (10,438) 3.34 - 9.52
------- ----------------
Outstanding at June 30, 1994 395,100 3.34 - 9.52
Granted 107,000 9.00 - 13.00
Exercised (31,492) 3.34 - 9.52
Canceled (33,316) 3.34 - 9.52
------- ----------------
Outstanding at June 30, 1995 437,292 3.34 - 13.00
Granted 121,500 9.00 - 13.50
Exercised (65,663) 3.34 - 9.52
Canceled (20,938) 3.34 - 9.52
------- ----------------
Outstanding at June 30, 1996 472,191 $3.34 - $13.50
======= ================
Under the Plan, options to purchase an aggregate of 212,441 shares were
exercisable at June 30, 1996.
The Company's 1991 Directors' Stock Option Plan (the "Directors' Plan")
provides for the grant of options to members of the Board of Directors of the
Company. A total of 115,762 shares of common stock are reserved for issuance
under the Directors' Plan. The ten-year options are exercisable at the date
of the grant. The exercise price of the options granted is the fair market
value of the Company's common stock at the date of grant. Option transactions
under the Directors' Plan during the three years ended June 30, 1996 are
summarized as follows:
Number of shares Option price of share
---------------- ---------------------
Outstanding at July 1, 1993 25,634 $3.34 - $9.06
Granted 7,875 9.52
Exercised (2,895) 3.34
------ --------------
Outstanding at June 30, 1994 30,614 3.34 - 9.52
Granted 10,000 9.00
Exercised (110) 7.77
------ --------------
Outstanding at June 30, 1995 40,504 3.34 - 9.52
Granted 12,000 9.00
------ --------------
Outstanding at June 30, 1996 52,504 $3.34 - $9.52
====== ==============
During the year ended June 30, 1996, the Company earned a tax benefit of
$88,000 related to the exercise of stock options. As the benefit was not able
to be utilized currently, the Company recorded a deferred tax asset and an
increase in additional paid-in capital.
NOTE H - ACQUISITION OF PHARMADYNE CORPORATION
On June 30, 1992, the Company entered into a Research, Development and
Marketing Agreement with Pharmadyne and contract research revenues of
$125,000 and $75,000 were recognized in 1993 and 1992.
During 1993, the Company invested $175,000 in Pharmadyne, which represented a
19.5% ownership interest in Pharmadyne. This investment was recorded at cost.
In addition to this equity investment, during 1993, the Company also made an
advance of $50,000 to Pharmadyne. Effective March 28, 1994, the Company
entered into a stock option agreement with Pharmadyne which provided the
Company the right and option to purchase a number of shares of common stock
of Pharmadyne that, when combined with the common stock already owned, would
equal, at the date of exercise, 51% of the issued, outstanding and
potentially issuable shares of common stock.
On April 1, 1994, the Company exercised their option to purchase 182,822
shares of Pharmadyne common stock at $1 per share. The Company paid cash of
$132,525 and reduced their note receivable from Pharmadyne by $50,000 and
interest receivable by $297 to acquire the shares. This acquisition was
accounted for as a purchase. The acquired goodwill of approximately $590,000
is being amortized on a straight-line basis over 3 years.
The following unaudited pro forma consolidated results of operations for the
year ended June 30, 1994 give effect to the acquisition of Pharmadyne as
though it had occurred on July 1, 1993:
1994
----
Net sales $11,501,000
Earnings before income taxes 347,000
Net earnings 178,000
Net earnings per common and
common equivalent share .05
During 1996 the Company made additional advances to Pharmadyne and received a
warrant to purchase 227,959 additional shares of Pharmadyne at $1 per share.
On September 5, 1996 the Company exercised the warrant and increased its
ownership interest in Pharmadyne to 61%.
NOTE I - DISPOSITION OF DIRECT MARKETING RELATED ASSETS
On March 12, 1996, the Company contributed the direct marketing related
assets of Pharmadyne to Natus L.L.C. (an Arizona limited liability company)
in exchange for a 15% interest in Natus L.L.C. The direct marketing related
assets contributed consisted of the following:
Accounts receivable $ 32,791
Inventory 384,730
Prepaid expenses and other 135,708
Property and equipment, net 79,938
Other (27,000)
--------
$606,167
========
NOTE J - MAJOR CUSTOMERS AND EXPORT SALES
One customer accounted for 17.0%, 14.6% and 17.4% of total sales for the
years ended June 30, 1996, 1995 and 1994. The accounts receivable from this
customer represented 24% of trade receivables at June 30, 1996. The accounts
receivable from one other customer represented 15% of trade receivables at
June 30, 1996. One additional customer accounted for 10.1% of total sales
during the year ended June 30, 1994. Export sales accounted for approximately
19%, 18% and 22% of total sales during the years ended June 30, 1996, 1995
and 1994. Export sales by geographic area were as follows:
Years ended June 30,
---------------------------------------------
1996 1995 1994
---- ---- ----
Canada $ 80,746 $ 113,597 $ 122,208
Europe 1,652,941 1,171,910 943,250
Asia 466,777 1,122,179 1,114,928
Latin America 225,440 195,663 168,621
---------- ---------- ----------
$2,425,904 $2,603,349 $2,349,007
========== ========== ==========
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item with respect to directors will
be included under the heading "Election of Directors" in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held
November 18, 1996, and is incorporated herein by reference.
NON DIRECTOR, EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Title
- ---- --- -----
Erwin W. Templin II 43 Executive Vice President, Chief Financial
Officer, Secretary and Treasurer
David A. Montecalvo 31 Vice President, Operations
Erwin W. Templin II is Executive Vice President, Chief Financial
Officer, Secretary and Treasurer. Mr. Templin joined the Company in July, 1993
as a Vice President of the Company and served as a director from 1990 to 1995.
From 1991 to 1993, he was Senior Vice President and Chief Financial Officer of
Aviation Services Holdings, Inc., a privately held general aviation investment
company. From 1988 to 1990, Mr. Templin was Senior Vice President and Chief
Financial Officer of Van Dusen Airport Services Company. Prior to 1988, he
served in various financial management positions with H.B. Fuller Company and
Jostens, Inc.
David A. Montecalvo is Vice President, Operations. Mr. Montecalvo
joined the Company in 1986 and held the position of Director, Corporate Science
and Technology prior to July 1995, when he became the Vice President,
Operations.
Item 11. EXECUTIVE COMPENSATION
The information required under this item will be included under the
heading "Executive Compensation" in the Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be held November 18, 1996, and is
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item will be included under the
heading "Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held November 18, 1996, and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item with respect to certain
relationships and related transactions will be included under the heading
"Certain Relationships and Related Transactions" in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held on November
18, 1996, and is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Financial Statements, Schedules and Exhibits
1. Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries are filed as a part of this Form 10-K in Part II, Item 8:
(i) Report of Independent Certified Public Accountants
(ii) Consolidated Balance Sheets at June 30, 1996 and 1995
(iii) Consolidated Statements of Operations for the years
ended June 30, 1996, 1995 and 1994
(iv) Consolidated Statements of Shareholders' Equity for
the years ended June 30, 1996, 1995 and 1994
(v) Consolidated Statements of Cash Flows for the years
ended June 30, 1996, 1995 and 1994
(vi) Notes to the Consoldiated Financial Statements
2. Financial Statement Schedules :
All schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements or the notes thereto.
<TABLE>
<CAPTION>
3. Exhibits Method of Filing
-------- ----------------
<S> <C> <C>
3.01 Articles of Incorporation of Registrant, as amended (1)
3.02 By-laws of Registrant (1)
10.01 Service Agreement dated July 1, 1986, between LecTec (1)
International, Inc., a U.S. Virgin Islands
corporation, and LecTec Corporation, relating to the
sale, lease or rental of certain property outside the
United States.
10.02 Distribution and Commission Agreement dated July 1, (1)
1986, between LecTec International, Inc., a U.S.
Virgin Islands corporation, and LecTec Corporation,
relating to the sale, lease or rental of certain
property outside the United States.
10.03 1986 Incentive Stock Option Plan (1)
10.04 Agreement dated June 1, 1983, between LecTec (1)
Corporation and George Ingebrand, relating to the
grant of stock-equivalent units.
10.05 Certificate of Secretary pertaining to Resolution of (1)
Board of Directors of LecTec Corporation, dated
October 30, 1986, implementing a Profit Sharing Bonus
Plan.
10.06 Research Agreement dated December 31, 1991, between (2)
LecTec Corporation and the University of Minnesota,
whereby LecTec Corporation received exclusive rights
to market and sell a non-nicotine compound to be
mutually developed for smoking cessation.
10.07 Assignment and Mutual Release Agreement dated March (2)
9, 1993 between Pharmaco Behavioral Associates, Inc.,
Robert M. Keenan, Ph.D., M.D. and the University of
Minnesota, whereby the University assigned title,
royalty and patent rights associated with the
technology to alleviate symptoms of tobacco
withdrawal to Pharmaco Behavioral Associates, Inc.
and Dr. Keenan. Also included is a mutual release of
all parties on all past title, royalty and patent
rights.
10.08 License Agreement dated March 9, 1993 between (2)
Pharmaco Behavioral Associates, Inc. and LecTec
Corporation, whereby the Company received an
exclusive, worldwide license to market, make and
sublicense product associated with the technology to
alleviate symptoms of tobacco withdrawal.
10.09 Consultant Contract and Invention Assignment dated (2)
March 9, 1993 between Robert Keenan, Ph.D., M.D. and
LecTec Corporation, whereby the Company received
assignment of patent and invention rights associated
with the technology to alleviate symptoms of tobacco
withdrawal including provisions that the Company
enter into a consulting agreement with Dr. Keenan.
10.10 Research Agreement dated June 30, 1992, between (2)
LecTec Corporation and Natus Corporation, whereby
Natus will fund the the development of an analgesic
patch for exclusive rights to sell the the product.
10.11 Stock Investment and Repurchase Agreement dated July (2)
1, 1992, between LecTec Corporation and Natus
Corporation, whereby LecTec purchased Common Stock of
Natus Corporation.
10.12 Amendments dated March 18, 1993 to the original (2)
Research Agreement dated June 30, 1992, between
LecTec Corporation and Natus Corporation.
10.13 Subscription Agreement dated June 17, 1993 between (2)
LecTec Corporation and Natus Corporation.
10.14 A Promissory Note dated June 17, 1993 between LecTec (2)
Corporation and Natus Corporation. Included in the
note is an option for LecTec to receive common stock
of Natus in lieu of payment.
10.15 Amended and Restated Stock Option Agreement between (3)
LecTec Corporation and Natus Corporation, whereby
LecTec has obtained the option to acquire the
additional shares required to equal 51% of the Common
Stock of Natus.
10.16 Contribution Agreement dated March 12, 1996 between (4)
Natus Corporation and ACM Investments, L.L.C.
regarding the acquisition of an equity interest in
Natus L.L.C
*10.17 Distribution Agreement dated March 12, 1996 between (4)
LecTec Corporation, Natus Corporation and Natus
L.L.C.
10.18 Operating Agreement dated March 12, 1996 between (4)
Natus L.L.C., ACM Investments, L.L.C., Natus
Corporation and Natus Management, Inc.
*10.19 Marketing and Distribution Agreement dated January (4)
11, 1996 between LecTec Corporation, Natus
Corporation and CNS, Inc. regarding an analgesic pain
patch
10.20 Credit Agreement dated May 1, 1996 between LecTec (4)
Corporation and The First National Bank of Saint
Paul, a national banking association, whereby LecTec
Corporation has an unsecured $1 million working
capital line of credit
10.21 Revolving Credit Note dated May 1, 1996 between (4)
LecTec Corporation and The First National Bank of
Saint Paul, a national banking association
10.22 Working Capital Loan Agreement dated September 5, (4)
1995 between LecTec Corporation and Natus Corporation
relating to a loan from LecTec to Natus Corporation
10.23 Form of Working Capital Loan Agreement dated (4)
September 5, 1995; between Natus Corporation and
various shareholders relating to loans to Natus
Corporation
21.01 Subsidiaries of the Company (3)
23.01 Consent of Grant Thornton LLP (4)
27.01 Financial Data Schedule (4)
- -----------------------
</TABLE>
* Confidential treatment requested for portions of this Exhibit
pursuant to Rule 24b-2 under the Securities Exchange Act of
1934 as amended, the confidential portions have been deleted
and filed separately with the Securities and Exchange
Commission together with a confidential treatment request
(1) Incorporated herein by reference to the Company's Form S-18
Registration Statement (file number 33-9774C) filed on October
31, 1986 and amended on December 12, 1986.
(2) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1993.
(3) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1994.
(4) Filed herewith.
(b) 1. Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 27th day of
September, 1996.
LECTEC CORPORATION
/s/Rodney A. Young
------------------
Rodney A. Young
Chief Executive Officer, President
and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/Rodney A. Young September 27, 1996
- -------------------------------------------
Rodney A. Young
Chief Executive Officer, President
Director
(Principal Executive Officer)
/s/Erwin W. Templin II September 27, 1996
- -------------------------------------------
Erwin W. Templin II
Executive Vice President, Chief Financial
Officer, Secretary, Treasurer
(Principal Financial Officer)
/s/Justin W. Shireman September 27, 1996
- -------------------------------------------
Justin W. Shireman
Controller
(Principal Accounting Officer)
/s/Thomas E. Brunelle September 27, 1996
- -------------------------------------------
Thomas E. Brunelle
Chairman
Director
/s/Alan C. Hymes September 27, 1996
- -------------------------------------------
Alan C. Hymes
Director
/s/Lee M. Berlin September 27, 1996
- -------------------------------------------
Lee M. Berlin
Director
/s/Paul Johnson September 27, 1996
- -------------------------------------------
Paul Johnson
Director
/s/Alan J. Wilensky September 27, 1996
- -------------------------------------------
Alan J. Wilensky
Director
EXHIBIT INDEX
-------------
Exhibits Page
-------- ----
3.01 Articles of Incorporation of Registrant, as amended (Note 1)
3.02 By-laws of Registrant (Note 1)
10.01 Service Agreement dated July 1, 1986, between LecTec
International, Inc., a U.S. Virgin Islands corporation, and
LecTec Corporation, relating to the sale, lease or rental of
certain property outside the United States (Note 1).
10.02 Distribution and Commission Agreement dated July 1, 1986,
between LecTec International, Inc., a U.S. Virgin Islands
corporation, and LecTec Corporation, relating to the sale,
lease or rental of certain property outside the United States
(Note 1).
10.03 1986 Incentive Stock Option Plan (Note 1).
10.04 Agreement dated June 1, 1983, between LecTec Corporation and
George Ingebrand, relating to the grant of stock-equivalent
units (Note 1).
10.05 Certificate of Secretary pertaining to Resolution of Board of
Directors of LecTec Corporation, dated October 30, 1986,
implementing a Profit Sharing Bonus Plan (Note 1).
10.06 Research Agreement dated December 31, 1991, between LecTec
Corporation and the University of Minnesota, whereby LecTec
Corporation received exclusive rights to market and sell a
non-nicotine compound to be mutually developed for smoking
cessation (Note 2).
10.07 Assignment and Mutual Release Agreement dated March 9, 1993
between Pharmaco Behavioral Associates, Inc., Robert M.
Keenan, Ph.D., M.D. and the University of Minnesota, whereby
the University assigned title, royalty and patent rights
associated with the technology to alleviate symptoms of
tobacco withdrawal to Pharmaco Behavioral Associates, Inc. and
Dr. Keenan. Also included is a mutual release of all parties
on all past title, royalty and patent rights (Note 2).
10.08 License Agreement dated March 9, 1993 between Pharmaco
Behavioral Associates, Inc. and LecTec Corporation, whereby
the Company received an exclusive, worldwide license to
market, make and sublicense product associated with the
technology to alleviate symptoms of tobacco withdrawal
(Note 2).
10.09 Consultant Contract and Invention Assignment dated March 9,
1993 between Robert Keenan, Ph.D., M.D. and LecTec
Corporation, whereby the Company received assignment of
patent and invention rights associated with the technology to
alleviate symptoms of tobacco withdrawal, including provisions
that the Company enter into a consulting agreement with Dr.
Keenan.
10.10 Research Agreement dated June 30, 1992, between LecTec
Corporation and Natus Corporation, whereby Natus will fund the
the development of an analgesic patch for exclusive rights to
sell the the product (Note 2).
10.11 Stock Investment and Repurchase Agreement dated July 1, 1992,
between LecTec Corporation and Natus Corporation, whereby
LecTec purchased Common Stock of Natus Corporation (Note 2).
10.12 Amendments dated March 18, 1993 to the original Research
Agreement dated June 30, 1992 between LecTec Corporation and
Natus Corporation (Note 2).
10.13 Subscription Agreement dated June 17, 1993 between LecTec
Corporation and Natus Corporation (Note 2).
10.14 Promissory Note dated June 17, 1993 between LecTec Corporation
and Natus Corporation. Included in the note is an option for
LecTec to receive common stock of Natus in lieu of payment
(Note 2).
10.15 Amended and Restated Stock Option Agreement between LecTec
Corporation and Natus Corporation, whereby LecTec obtained the
option to acquire the additional shares required to equal 51%
of the Common Stock of Natus (Note 3).
10.16 Contribution Agreement dated March 12, 1996 between Natus
Corporation and ACM Investments, L.L.C.regarding the
acquisition of an equity interest in Natus L.L.C
*10.17 Distribution Agreement dated March 12, 1996 between LecTec
Corporation, Natus Corporation and Natus L.L.C
10.18 Operating Agreement dated March 12, 1996 between Natus L.L.C.,
ACM Investments, L.L.C., Natus Corporation and Natus
Management, Inc.
*10.19 Marketing and Distribution Agreement dated January 11, 1996
between LecTec Corporation, Natus Corporation and CNS, Inc.
regarding an analgesic pain patch
10.20 Credit Agreement dated May 1, 1996 between LecTec Corporation
and The First National Bank of Saint Paul, a national banking
association, whereby LecTec Corporation has an unsecured $1
million working capital line of credit
10.21 Revolving Credit Note dated May 1, 1996 between LecTec
Corporation and The First National Bank of Saint Paul, a
national banking association
10.22 Working Capital Loan Agreement dated September 5, 1995 between
LecTec Corporation and Natus Corporation relating to a loan
from LecTec to Natus Corporation
10.23 Form of Working Capital Loan Agreement dated September 5,
1995; between Natus Corporation and various shareholders
relating to loans to Natus Corporation
21.01 Subsidiaries of the Company (Note 3)
23.01 Consent of Grant Thornton LLP
27.01 Financial Data Schedule
Notes:
* Confidential treatment requested for portions of this Exhibit
pursuant to Rule 24b-2 under the Securities Exchange Act of
1934 as amended, the confidential portions have been deleted
and filed separately with the Securities and Exchange
Commission together with a confidential treatment request
(1) Incorporated herein by reference to the Company's Form S-18
Registration Statement (file number 33-9774C) filed on October
31, 1986 and amended on December 12, 1986.
(2) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1993.
(3) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1994.
CONTRIBUTION AGREEMENT
by and among
NATUS CORPORATION, a Minnesota corporation
and
ACM INVESTMENTS, L.L.C., an Arizona limited liability company
Dated March 12, 1996
CONTRIBUTION AGREEMENT
THIS CONTRIBUTION AGREEMENT is entered into by and between Natus
Corporation, a Minnesota corporation ("Old Natus"), and ACM Investments, L.L.C.,
an Arizona limited liability company ("ACM"). This Agreement and the Operating
Agreement are entered into and shall be effective simultaneously with each other
as of this, the 12th day of March, 1996 ("Contribution Date").
RECITALS
A. Old Natus is engaged in the Business (as defined below).
B. Old Natus desires to obtain additional capital and financing with
respect to the Business.
C. ACM desires to provide additional capital and financing with respect to
the Business, and to acquire an interest in the Business.
In consideration of the foregoing and the mutual representations,
warranties, covenants, and agreements herein contained, Old Natus and ACM agree
as follows:
Article 1
DEFINITIONS
Unless otherwise defined herein, capitalized terms used in this
Agreement that are defined in the Operating Agreement are used herein as so
defined. For the purpose of this Agreement, the following terms have the
following meanings:
"ACM" means ACM Investments, L.L.C., an Arizona limited liability
company.
"Affiliate" shall have the meaning set forth in Section 1.7 of the
Operating Agreement.
"Agreement" means this Contribution Agreement, as it may be amended
from time to time, complete with all Schedules hereto.
"Balance Sheet" shall have the meaning set forth in Section 6.6 of this
Agreement.
"Balance Sheet Date" shall have the meaning set forth in Section 6.6 of
this Agreement.
"Business" shall mean the business of Old Natus in (i) direct selling
(by virtue of multi-level marketing or otherwise) and distribution of skin-care
products, vitamins and related products, and (ii) the marketing and distribution
of Patches in the Exclusive Market, as such terms are defined in the
Distribution Agreement.
"Business Assets" shall have the meaning set forth in Section 3.1 of
this Agreement.
"Capital Contribution" shall mean the Capital Contributions of Old
Natus and ACM as set forth in Sections 2.2 and 2.3 of this Agreement.
"Claims" shall have the meaning set forth in Section 3.1(d) of this
Agreement.
"Code" means the Internal Revenue Code of 1986, as amended.
"Contribution Date" shall have the meaning set forth in the Preamble to
this Agreement.
"Conveyance Instruments" shall have the meaning set forth in Section
4.2 of this Agreement.
"Co-Sale Notice" shall have the meaning set forth in Section 9.2 of
this Agreement.
"Distribution Agreement" means that certain Distribution Agreement of
even date by and among Old Natus, New Natus and LecTec Corporation, a Minnesota
corporation, as it may be amended from time to time, complete with Schedules
thereto.
"Encumbrances" shall have the meaning set forth in Section 4.1 of this
Agreement.
"Equipment" shall have the meaning set forth in Section 3.1(a) of this
Agreement.
"Exercise Notice" shall have the meaning set forth in Section 9.2 of
this Agreement.
"Exercise Period" shall have the meaning set forth in Section 9.2 of
this Agreement.
"Indemnitee" shall have the meaning set forth in Section 8.1(b) of this
Agreement.
"Indemnitor" shall have the meaning set forth in Section 8.1(b) of this
Agreement.
"Intangible Property" shall have the meaning set forth in Section
3.1(c) of this Agreement.
"Inventory" shall have the meaning set forth in Section 3.1(b) of this
Agreement.
"Law" or "Laws" shall have the meaning set forth in Section 6.15 of
this Agreement.
"Merchant Account" shall have the meaning set forth in Section 4.3 of
this Agreement.
"Mishkin" shall mean Alan R. Mishkin.
"Mishkin Affiliate" shall mean:
(a) Mishkin;
(b) any Affiliate of Mishkin;
(c) any member of Mishkin's immediate family; or
(d) any trust established by Mishkin for the benefit of any
other Mishkin Affiliate.
"Mishkin Interests" shall have the meaning set forth in Section 9.1.
"New Natus" means Natus, L.L.C., a limited liability company to be
formed pursuant to the laws of the state of Arizona.
"Old Natus" means Natus Corporation, a Minnesota corporation.
"Operating Agreement" means the Operating Agreement of New Natus.
"Pre-Contribution Tax Period" means any tax period ending on or before
the close of business on the Contribution Date, or, in the case of any tax
period which includes, but does not end on, the Contribution Date, the portion
of such period up to and including the Contribution Date.
"Receivables" shall have the meaning set forth in Section 3.1(f).
"Restricted Sale" shall have the meaning set forth in Section 9.1.
"Returns" shall have the meaning set forth in Section 6.8(a)(i).
"Tax" means (i) any net income, alternative or add-on minimum tax,
gross income, gross receipts, sales, use, ad valorem, franchise, capital,
paid-up capital, profits, greenmail, license, withholding, payroll, employment,
excise, severance, stamp, occupation, premium, property, environmental or
windfall profit tax, custom, duty, or other tax, governmental fee, or other like
assessment or charge of any kind whatsoever, together with any interest or any
penalty, addition to tax, or additional amount imposed by any governmental
authority responsible for the imposition of any such tax (domestic or foreign),
and (ii) liability for the payment of any amounts of the type described in (i)
as a result of any express obligations to indemnify any other Person.
Article 2
FORMATION OF NEW NATUS
2.1 Formation of New Natus. ACM shall form New Natus, on behalf of
ACM and Old Natus.
2.2 Capital Contribution of Old Natus. Old Natus shall contribute,
as a contribution to the capital of New Natus, the Business, pursuant to the
terms of this Agreement, in exchange for a fifteen percent (15%) interest in the
profits and losses of New Natus, and an interest in the distributions and
capital of New Natus as set forth in Section 2.6 of this Agreement. The net
value of Old Natus's capital contribution (as reflected on the Balance Sheet) is
________________ Dollars ($______________), which amount shall be adjusted to
reflect changes in the components of the Balance Sheet as of the Contribution
Date made in the ordinary course of business.
2.3 Capital Contribution of ACM. ACM shall contribute an amount not
to exceed the sum of One Million and No/100ths Dollars ($1,000,000.00) in cash
to the capital of New Natus on an "if and as needed basis," provided, however,
that within six (6) months, Natus Manager (as defined in Section 2.5 hereof)
shall prepare a business plan and budget ("Budget") reflecting the intent of the
parties hereto to increase the business of New Natus, and thereafter, ACM shall
contribute such amounts to the capital of New Natus as required by the Budget of
New Natus (provided New Natus achieves the anticipated results set forth in the
Budget) in exchange for an eighty-five percent (85%) interest in the profits and
losses of New Natus, and an interest in the distributions and capital of New
Natus as set forth in Section 2.6 of this Agreement.
2.4 Change of Name. Old Natus shall, simultaneously with the closing
of the transactions contemplated by this Agreement, change its name to a name
not using the tradename "Natus" or any other tradename transferred to New Natus
pursuant to the terms of this Agreement.
2.5 Management of New Natus. New Natus shall be a manager-managed
limited liability company. The manager of New Natus shall be a new Arizona
corporation to be formed ("Natus Manager"), which will be owned eighty-five
percent (85%) by ACM and fifteen percent (15%) by Old Natus. The initial Board
of Directors of Natus Manager will be comprised of four members, at least three
of whom shall be elected by ACM. For such time as (a) the aggregate amount of
cash and the aggregate Gross Asset Value of any New Natus property distributed
to Old Natus pursuant to any provision of the Operating Agreement is less than
the Capital Contributions of Old Natus, or (b) the Distribution Agreement
remains in full force and effect as to Old Natus and New Natus, Old Natus shall
have the right to elect one member to the Board of Directors of Natus Manager,
subject to the approval of such proposed member by the majority shareholder of
Natus Manager. Alan R. Mishkin shall be the Chairman of the Board of Directors
of Natus Manager. New Natus shall have the following officers:
Officer Office
Alan R. Mishkin Chief Executive Officer
Richard J. Bennetts President
Kathleen Billings Vice President--Marketing and Products
Development
Ryan Wuerch Vice President--Sales
Stanley Lumpp Vice President--Distribution
2.6 New Natus Distributions.
(a) ACM and Old Natus anticipate that in the first years
of operation, net cash flow of New Natus may not be distributed, but
instead may be reinvested in the Business. To the extent cash from
operations is available for distribution, such cash shall be
distributed to the Members in accordance with their Membership
Interests.
(b) If New Natus sells all or substantially all of the
Business or its assets, or upon a liquidation of New Natus, the net
proceeds from such sale or liquidation shall be distributed in
accordance with Section 9.3 of the Operating Agreement.
Article 3
BUSINESS ASSETS AND LIABILITIES
3.1 Assets Included. The "Business Assets" shall consist of all
right, title and interest of Old Natus as of the Contribution Date in and to the
following specifically identified assets:
(a) all equipment, furniture, and other tangible property
used in connection with the Business as listed in Schedule 3.1(a) of this
Agreement (collectively, "Equipment");
(b) the raw materials, finished goods, work-in-process,
supplies, and inventories of Old Natus as described in Schedule 3.1(b) hereto
(collectively, "Inventory");
(c) those patents, copyrights, trademarks, trade names,
technology, know-how, processes, trade secrets, inventions, proprietary data,
formulae, research and development data, computer software programs, and other
intangible property, and any applications for the same, used by Old Natus in the
Business as described in Schedule 3.1(c) of this Agreement, and all goodwill
associated with such intangible property (collectively, "Intangible Property");
(d) all of Old Natus's rights, claims, credits, causes of
action, or rights of setoff against third parties relating to the Business,
including, without limitation, unliquidated rights under manufacturers' and
vendors' warranties as described in Schedule 3.1(d) hereto (collectively,
"Claims");
(e) those contracts, agreements, leases, licenses, and
other instruments, arrangements, and commitments being assumed by New Natus with
respect to the Business Assets, including without limitation all distributors of
the Business, as set forth on Schedule 3.1(e) of this Agreement;
(f) all accounts receivable arising out of sales in the
ordinary and usual course of the operation of the Business prior to the close of
business on the Contribution Date (collectively, "Receivables"), as set forth in
Schedule 3.1(f) of this Agreement;
(g) all prepaid expenses arising from payments made by
Old Natus in the ordinary and usual course of the operation of the Business
prior to the close of business on the Contribution Date for goods or services,
as set forth in Schedule 3.1(g) of this Agreement;
(h) all payments received by Old Natus with respect to
products of the Business that have not been shipped as of the Contribution Date,
as set forth in Schedule 3.1(h) of this Agreement;
(i) originals or copies of all books, records, files, and
papers, whether in hard copy or computer format, used in the Business, including
without limitation, manuals and data, sales and advertising materials, sales and
purchase correspondence, lists of present and former suppliers, and personnel
and employment records and, with respect to information relating to Tax, any
information that is necessary for the preparation of any Tax returns to be filed
by New Natus after the Contribution Date or the determination of the Tax basis
of the Business Assets; and
(j) all lists of present, and, to the extent available,
future distributors, customers and suppliers associated with the Business
Assets, as set forth in Schedule 3.1(j) of this Agreement.
3.2 Liabilities of Old Natus. New Natus shall not assume any
liabilities whatsoever of Old Natus other than the obligations of Old Natus with
respect to the outstanding and unfilled purchase orders described in Schedule
3.2 hereto. Old Natus shall pay all of its liabilities not assumed by New Natus
and not contested in good faith.
Article 4
CONTRIBUTION OF ASSETS BY OLD NATUS
4.1 Contribution of the Business Assets. Subject to the terms and
conditions of this Agreement, on the Contribution Date, Old Natus shall assign,
transfer, and deliver to New Natus, as a Capital Contribution, free and clear of
all title defects, objections, liens, pledges, claims, rights of first refusal,
options, charges, security interests, mortgages, or other encumbrances of any
nature whatsoever (collectively, "Encumbrances"), but on an "as is, where is"
basis (except as otherwise set forth in Sections 6.2, 6.7, 6.8, 6.9, 6.10, 6.11,
6.12, 6.16, 6.17, 6.18, and 8.2 herein and the Schedules hereto) all of the
Business Assets.
4.2 Conveyance Instruments. To effectuate the contribution of the
Business Assets as contemplated by this Article 4, Old Natus will hereafter,
execute and deliver, or cause to be executed and delivered, all such documents
or instruments of assignment, transfer, or conveyance, in each case dated the
Contribution Date (collectively, "Conveyance Instruments"), as the parties and
their respective counsel shall reasonably deem necessary or appropriate to vest
in or confirm title to the Business Assets to New Natus.
Article 5
EVENTS OCCURRING ON THE CONTRIBUTION DATE
5.1 Deliveries by Old Natus. On the Contribution Date, Old Natus
shall deliver to ACM and New Natus the following:
(a) the Conveyance Instruments to effect the contribution
of the Business Assets to New Natus, such Conveyance Instruments to be those
reasonably deemed necessary by, and to be in form and substance reasonably
satisfactory to, counsel to the parties;
(b) a copy of the resolution of the Board of Directors of
Old Natus, certified by its Secretary, approving the transfer of the Business
Assets to New Natus;
(c) a certificate from Old Natus stating that, to the
best of its information and belief, its representations and warranties are true,
complete, and accurate in all material respects at and as of the Contribution
Date;
(d) an executed copy of the Operating Agreement;
(e) a copy of the Distribution Agreement executed by
LecTec Corporation and Old Natus;
(f) the executed counterpart copies of all consents,
approvals, authorizations, and permits, if any, from third parties required to
be obtained to effectuate the conveyance of the Business Assets;
(g) the opinions of counsel for Old Natus as described in
Schedule 5.1(g) hereto, dated the Contribution Date, in form and substance
reasonably satisfactory to counsel for ACM;
(h) all other previously undelivered items required to be
delivered by Old Natus at or prior to the Contribution Date pursuant to the
terms of this Agreement and the Operating Agreement.
5.2 Deliveries by ACM. On the Contribution Date, ACM shall deliver
to Old Natus and New Natus the following:
(a) an executed copy of the Operating Agreement;
(b) an executed copy of the Distribution Agreement;
(c) a copy of the Articles of Organization of ACM;
(d) a copy of the Articles of Organization of New Natus;
(e) the opinions of counsel for New Natus as described in
Schedule 5.2(d) hereto, dated the Contribution Date, in form and substance
reasonably satisfactory to counsel for Old Natus;
(f)a copy of the Articles of Incorporation and Bylaws of
Natus Manager; and
Article 6
REPRESENTATIONS AND WARRANTIES OF OLD NATUS
6.1 Due Authorization. Old Natus is a corporation duly formed and
organized, validly existing and in good standing under the laws of the State of
Minnesota, and has the requisite corporate power and authority to own its assets
and carry on its business as such business has been conducted.
6.2 Title to the Business Assets. As of the Contribution Date, Old
Natus will have good and marketable title to the Business Assets free and clear
of all Encumbrances.
6.3 Qualification. Old Natus is licensed or qualified to do business
as a foreign corporation and is in good standing in the jurisdictions in which
it conducted its business (except where the failure to so qualify would not have
a material adverse effect on the business or financial condition of the Business
taken as a whole).
6.4 Valid, Binding and Enforceable. This Agreement constitutes, and
each other agreement or instrument to be executed and delivered by Old Natus
pursuant to the terms of this Agreement, when executed by ACM, will constitute,
the legal, valid and binding obligation of Old Natus, enforceable against Old
Natus in accordance with its terms, except as limited by applicable bankruptcy,
reorganization, arrangement, insolvency, moratorium or similar laws affecting
the enforcement of creditors' rights.
6.5 No Violations. Neither the execution or delivery of this
Agreement or the Operating Agreement nor the consummation of the transactions
contemplated hereby or thereby:
(a) requires any filing or registration with, or consent,
authorization, approval, or permit of, any governmental or regulatory authority
on the part of Old Natus;
(b) violates or will violate (i) any order, writ,
injunction, judgment, decree, or award of any court or governmental or
regulatory authority or (ii) to the knowledge of Old Natus, violates or will
violate any Law of any governmental or regulatory authority to which Old Natus,
or any of its properties or assets are subject;
(c) violates or will violate, or conflicts with or will
conflict with, any provision of, or constitutes a default under, the Certificate
of Incorporation or Bylaws of Old Natus; or
(d) (i) violates or breaches or constitutes a default (or
an event which, with notice or lapse of time or both, would constitute a
default) under, or give rise to a right to terminate, any mortgage, contract,
agreement, deed of trust, license, lease, or other instrument, arrangement,
commitment, obligation, understanding, or restriction of any kind to which Old
Natus is a party and which affects the Business, or (ii) will cause, or give any
person grounds to cause, to be accelerated (with notice or lapse of time or
both) the maturity of, or will increase, any liability or obligation of Old
Natus which violation, breach, default, liability, or obligation, individually
or in the aggregate, is or would be material to the business or financial
condition of the Business taken as a whole.
6.6 Financial Statements. Old Natus has heretofore delivered to ACM
a pro forma balance sheet ("Balance Sheet") for Old Natus as of [December 31,
1995] ("Balance Sheet Date"), and the related statements of operations for Old
Natus for the year ended June 30, 1995 and for the six month period and ending
December 31, 1995. The financial statements referred to in the preceding
sentence are hereinafter collectively referred to as the "Natus Financial
Statements," and copies of the Natus Financial Statements are annexed hereto as
Schedule 6.6. Each of the Natus Financial Statements was prepared from the books
and records of Old Natus in conformity with generally accepted accounting
principles (as such principles apply in the context of the financial statements
of a subsidiary included within the consolidated financial statements of its
parent) consistently applied and fairly present the financial condition and
results of operations of Old Natus and the Business for the periods and as of
the dates stated therein.
6.7 Absence of Certain Changes or Events. Since the Balance Sheet
Date, Old Natus has operated the Business in the ordinary course consistent with
past practice, and Old Natus has not, except as contemplated herein or as set
forth in Schedule 6.7:
(a) suffered any material adverse change in the Business
or any event or condition of any character, which, individually or in the
aggregate, has had or might reasonably be expected to have a material adverse
effect on the financial condition of the Business taken as a whole;
(b) incurred any obligations or liabilities (absolute,
accrued, contingent, or otherwise) or entered into any transactions related to
the Business, other than in the ordinary course of business consistent with past
practices;
(c) paid, discharged, or satisfied any claims,
obligations, or liabilities (absolute, accrued, contingent, or otherwise)
related to the Business, except the payment, discharge, or satisfaction in the
ordinary course of business and consistent with past practice of any claims,
obligations, and liabilities (i) which are reflected or reserved against in the
Natus Financial Statements or (ii) which were incurred in the ordinary course of
business and consistent with past practice since the Balance Sheet Date;
(d) permitted or allowed any of the Business Assets to be
subjected to any Encumbrances or other liabilities and obligations, except in
the ordinary course of business;
(e) written off as uncollectible, or canceled or waived,
any of the Receivables or any portion thereof, or any debts or claims, except in
the ordinary course of business and consistent with past practice;
(f) sold, conveyed, or otherwise disposed of any Business
Assets, except for fair consideration in the ordinary course of business and
consistent with past practice;
(g) disposed of or permitted to lapse any item of
Intangible Property, or any license, permit, or other form of authorization to
use any Intangible Property; or
(h) terminated or suffered a termination of (excluding a
termination in accordance with its terms) or amended, any material contract,
agreement or license, relating to the Business.
6.8 Certain Tax Matters.
(a) Except as set forth in Schedule 6.8, Old Natus:
(i) has filed or will file or furnish when due in
accordance with all applicable Laws all Tax returns, statements, reports, and
forms (including information returns and reports) required to be filed or
furnished with respect to any Pre-Contribution Tax Period (collectively,
"Returns");
(ii)has correctly reflected in all material
respects on the Returns (and, as to any Returns not filed as of the date hereof,
will correctly reflect) the facts regarding its income and sales and status of
any other information required to be shown therein;
(iii) has timely paid, withheld, or made adequate
provision for all sales taxes shown as due and payable on the Returns that have
been filed;
(iv)is not subject to any liens for Taxes on the
Business Assets;
(b) Old Natus is not aware of any state of facts which
could give rise to any claim, audit, action, suit, proceeding, or investigation
with respect to any sales or employment Tax or assessment for which New Natus
could be liable.
(c) Schedule 6.8(c) hereto contains a list of states and
other jurisdictions to which any sales tax is currently being paid by Old Natus.
6.9 Inventory; Receivables.
(a) Substantially all items of Inventory are in good
condition. As of the Contribution Date, the amount of Inventory shall be not
less than $385,000.
(b) The Receivables represent bona fide obligations owed
to Old Natus as to which there are no disputes, claims or offsets, except as set
forth on Schedule 6.9(b).
6.10 Intellectual Property.
(a) (i) Schedule 3.1(c) contains a list of all Intangible
Property owned by Old Natus and all licenses and other agreements relating to
use of any such Intangible Property by third parties in connection with any
business which currently competes or, to the knowledge of Old Natus, is
reasonably likely to compete with the Business; and
(ii)Schedule 6.10(a)(ii) contains a list of all
licenses and other agreements relating to Intangible Property which Old Natus is
licensed or authorized to use by others.
(b) Except as set forth in Schedule 6.10(b),
(i) Old Natus (as of the Contribution Date), has or
will have the sole and exclusive right to use the Intangible Property which is
referred to in Schedules 3.1(c) and 6.10(a)(ii), and the consummation of the
transactions contemplated by this Agreement and the Operating Agreement will not
alter or impair any such rights and will result in New Natus having the sole and
exclusive right to use all such Intangible Property to the same extent it is
currently used by Old Natus;
(ii)no claims have been asserted by any person or
entity for the use of any such Intangible Property or challenging or questioning
the validity or effectiveness of any such license or agreement, and Old Natus
has no knowledge of any valid basis for any such claim; and
(iii) to the knowledge of Old Natus, the use of such
Intangible Property by Old Natus does not infringe on the rights of any person
or entity, and Old Natus has not been notified of any potential claim of
infringement.
6.11 Documents; Commitments.
(a) Old Natus has delivered to New Natus the following
documents, each of which is true and complete:
(i) copies of all documents in Schedule 6.11(a),
which is a listing of every material contract, agreement, or other commitment,
written or oral, relating to the Business, to which Old Natus is a party or has
succeeded to a party by assumption or assignment or in which it has a beneficial
interest and excluding documents listed in any other Schedule hereto (any
contract or agreement shall, for the purposes of this Agreement, be deemed
material (A) if the Business taken as a whole is substantially dependent upon
it, (B) if it involves a financial obligation of or benefit to the Business in
excess of $10,000, (C) if the contract is not made in the ordinary course, or
(D) if it constitutes a management contract or employment contract (excluding
oral agreements and agreements that arise by operation of law)); and
(ii)copies of all product bulletins, technical
bulletins, or other advertising or sales materials currently used in connection
with the Business.
(b) Old Natus does not have (i) any outstanding sales
contracts or commitments that are reasonably expected to result in any loss to
the Business upon completion of performance thereof or (ii) any outstanding bids
or sales or service proposals quoting prices that are not reasonably expected to
result in a profit consistent with past practice.
(c) Old Natus is not restricted by agreement from
carrying on the Business anywhere in the world.
6.12 No Breach.
(a) Each permit, contract, agreement, deed of trust,
lease, policy, license, plan, commitment, arrangement, and understanding
(whether evidenced by a written document or otherwise) referred to in this
Agreement or in any Schedule hereto, under which Old Natus has any right,
interest, or obligation (i) is in full force and effect, and (ii) is not subject
to any threatened amendment, cancellation, or outstanding dispute.
(b) Old Natus is not in breach of any contract or
agreement, and there does not exist any default or event which, with the giving
of notice or the lapse of time or both, would become a breach or default, and
there is no basis for any valid claim of a default in any respect, under any
thereof, and Old Natus has used its best efforts to secure the consents (where
such consents are necessary) of the other parties thereto to the consummation of
the transactions contemplated by this Agreement and the Operating Agreement.
6.13 Consents, Permits, Etc. Except as set forth in Schedule 6.13,
no consent, approval, governmental filing, authorization, or permit from any
person or entity is necessary for the consummation of the transactions
contemplated by this Agreement or the Operating Agreement.
6.14 Litigation. Except as set forth in Schedule 6.14, there are no
suits, claims, litigation or other actions pending or, to the knowledge of Old
Natus, threatened by or against, or involving Old Natus or any directors,
officers, or employees thereof in their capacity as such or which question or
challenge the validity of this Agreement or the Operating Agreement or any
action taken or to be taken by Old Natus pursuant to this Agreement or the
Operating Agreement or in connection with the transactions contemplated hereby
or thereby, and to the knowledge of Old Natus, there is no valid basis for any
such suits, claims, litigation or other action. It is expressly understood and
agreed that New Natus is not assuming any obligations or liabilities arising
from or in any way relating to the matters set forth in Schedule 6.14.
6.15 Compliance With Applicable Law; Adverse Restrictions. Except as
and to the extent set forth in Schedule 6.15, the operations of Old Natus are
being conducted in material compliance with (a) all applicable permits, orders,
writs, injunctions, judgments, decrees, or awards of all courts and governmental
and regulatory authorities, and (b) to the knowledge of Old Natus, all laws
(statutory or otherwise), ordinances, rules, regulations, bylaws, and codes of
all governmental and regulatory authorities, whether federal, state, or local
(individually, a "Law" and collectively, "Laws"), which are applicable to the
Business Assets (including, without limitation, those related to public or
occupational safety, pollution and protection of the environment, and hazardous
or other waste disposal). Except as and to the extent set forth in Schedule
6.15, Old Natus has not received any written notification of any asserted
present failure to comply with any Law, except for failures which in the
aggregate are not and were not material to the conduct of the Business as a
whole and which Old Natus has taken steps to correct or contest in good faith.
6.16 Assets Necessary to Business. As a result of the transactions
effected hereby, New Natus (a) will have title to, or a valid leasehold interest
in, all tangible and intangible assets and properties relating to the Business
as described on the Schedules hereto, and (b) will be a party to all agreements,
in each case necessary to permit New Natus to continue to carry on the Business
substantially as presently conducted.
6.17 Consents, Authorizations, etc., Relating to the Business.
Schedule 6.17 sets forth all consents, authorizations, approvals and permits
required in connection with the Business.
6.18 Distributors, Customers and Suppliers.
(a) Schedule 6.18(a) sets forth a complete and accurate
list of the distributors of the Business and their genealogy in the terms of
revenue during the calendar year ended December 31, 1995, showing the
approximate total revenue received by Old Natus from each such distributor
during such fiscal year.
(b) Schedule 6.18(b) sets forth a list of the ten (10)
largest suppliers to the Business, in terms of purchases during the calendar
year ended December 31, 1995, showing the approximate total purchases by Old
Natus from each supplier during such fiscal year.
(c) Except as set forth in Schedule 6.18(c), since
January 1, 1996, there has not been any adverse change in the business
relationship of Old Natus with any distributor or supplier which is material to
the business or financial condition of the Business taken as a whole.
Article 7
REPRESENTATIONS AND WARRANTIES OF ACM
7.1 Due Authorization. ACM is a limited liability company duly
formed and organized, validly existing and in good standing under the laws of
the State of Arizona, and has the requisite limited liability company power and
authority to own its assets and carry on its business as such business has been
conducted. New Natus is a limited liability company duly formed and organized,
validly existing and in good standing under the laws of the State of Arizona,
and has the requisite limited liability company power and authority to own the
Business Assets and carry on the Business.
7.2 Valid, Binding and Enforceable. This Agreement constitutes, and
each other agreement or instrument to be executed and delivered by ACM pursuant
to the terms of this Agreement, when duly executed by Old Natus, will
constitute, the legal, valid and binding obligation of ACM, enforceable against
ACM in accordance with its terms, except as limited by applicable bankruptcy,
reorganization, arrangement, insolvency, moratorium or similar laws affecting
the enforcement of creditors' rights.
7.3 No Violations. Neither the execution or delivery of this
Agreement or the Operating Agreement nor the consummation of the transactions
contemplated hereby or thereby:
(a) requires any filing or registration with, or consent,
authorization, approval, or permit of, any governmental or regulatory authority
on the part of ACM;
(b) violates or will violate (i) any order, writ,
injunction, judgment, decree, or award of any court or governmental or
regulatory authority or (ii) to the knowledge of ACM, violates or will violate
any Law of any governmental or regulatory authority to which ACM, or any of its
properties or assets are subject;
(c) violates or will violate, or conflicts with or will
conflict with, any provision of, or constitutes a default under, the Articles of
Organization or Operating Agreement of ACM; or
(d) violates or breaches or constitutes a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, or give rise to a right to terminate, any mortgage, contract, agreement,
deed of trust, license, lease, or other instrument, arrangement, commitment,
obligation, understanding, or restriction of any kind to which ACM is a party or
by which its properties may be bound.
Article 8
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
8.1 Survival; Indemnification.
(a) The covenants, agreements, representations, and
warranties of the parties hereto contained herein or in any certificate or other
writing delivered pursuant hereto or in connection herewith shall survive the
Contribution Date for a period of two (2) years, except that any covenants,
agreements, representations, or warranties relating to Tax matters shall extend
until the expiration of the applicable statutory period of limitations (giving
effect to any waiver or extension thereof). Notwithstanding the preceding
sentence, any covenant, agreement, representation, or warranty in respect of
which indemnity may be sought under this Section 8.1 shall survive the time at
which it would otherwise terminate pursuant to such sentence, if notice of the
inaccuracy or breach thereof giving rise to such indemnity shall have been given
to the party against whom such indemnity may be sought, prior to such time.
(b) Each party ("Indemnitor") shall protect, defend,
indemnify and hold harmless each other party ("Indemnitee") from and against any
losses, damages (including, without limitation, consequential damages and
penalties) and expenses (including, without limitation, reasonable counsel fees,
costs and expenses incurred in investigating and defending against the assertion
of such liabilities) which may be sustained, suffered or incurred by the
Indemnitee and which are related to any breach by Indemnitor of its
representations and warranties or obligations pursuant to this Agreement.
(c) If any actions, suit or proceeding shall be
commenced, or any claim or demand shall be asserted, in respect of which the
Indemnitee proposes to demand indemnification under Section 8.1 of this
Agreement, the Indemnitor shall be notified to that effect with reasonable
promptness and shall have the right to assume the entire control of (including
the selection of counsel), subject to the right of the Indemnitee to participate
(with counsel of its choice) in, the defense, compromise or settlement thereof,
but the fees and expenses of such counsel shall be at the expense of the
Indemnitee unless (i) the employment of such counsel by the Indemnitee has been
specifically authorized by the Indemnitor, or (ii) the named parties to any such
action (including any impleaded parties) include both the Indemnitee and the
Indemnitor and the Indemnitee shall have been advised by its counsel that there
may be one or more legal defenses available to it which are different from or
additional to those available to the Indemnitor. The Indemnitee shall cooperate
fully in all respects with the Indemnitor in any such defense, compromise or
settlement, including, without limitation, by making available all pertinent
information under its control to the Indemnitor. The Indemnitor will not
compromise or settle any such action, suit, proceeding, claim or demand without
the prior written consent of the Indemnitee, provided, however that in the event
the approval described above is withheld, then the liabilities of the Indemnitor
shall be limited to the total sum representing the amount of the proposed
compromise or settlement and the amount of counsel fees accumulated at the time
such approval is withheld.
8.2 Transfer Taxes. Old Natus shall pay, or cause to be paid, all
Taxes or recording fees imposed on any transfers by Old Natus of intangible
personal property, including without limitation Intellectual Property,
applicable to the transfers of the Business Assets contemplated by this
Agreement and all sales and use Taxes applicable to transfers by Old Natus of
the Business Assets contemplated by this Agreement.
8.3 Tax Clearance Certificate. Old Natus shall provide to New Natus
either any other tax clearance certificate required by any applicable Law as a
result of the transactions effected thereby or an indemnity of New Natus for any
loss incurred by reason of the failure to provide such certificates.
Article 9
RIGHT OF CO-SALE
9.1 Restricted Sales. By executing a copy of this Agreement, Mishkin
agrees that he will not sell, transfer, assign or otherwise dispose of any
interest in ACM or New Natus, other than to a Mishkin Affiliate, if immediately
following such sale, the aggregate share of Membership Interests in New Natus
held directly or indirectly, whether through ownership of Membership Interests
in ACM or otherwise, by Mishkin Affiliates (the "Mishkin Interests") will be
less than twenty percent of all Membership Interests outstanding (such sale a
"Restricted Sale"), except in accordance with the terms of Sections 9.2 or 9.3
hereof.
9.2 Right of Co-Sale. If Mishkin shall propose to sell, exchange or
otherwise dispose of any interest in ACM or New Natus through a Restricted Sale,
Mishkin shall promptly deliver to Old Natus a written notice (the "Co-Sale
Notice") setting forth the name and address of the proposed transferee, the
percentage of Membership Interest involved and the proposed consideration for
the transfer. Old Natus shall have the right and option to participate in the
proposed Restricted Sale described in the Co-Sale Notice in the manner described
in this Section 9.2 by delivering written notice to that effect (the "Exercise
Notice") to Mishkin within ten (10) business days after delivery of the Co-Sale
Notice (the "Exercise Period"). If Old Natus delivers an Exercise Notice within
the Exercise Period, Mishkin shall not sell any interest in ACM or New Natus to
the proposed transferee unless such proposed transferee also agrees to purchase
a sufficient portion of Old Natus' Membership Interest such that the proportion
of the Membership Interests so sold by Old Natus to all Mishkin Interests
purchased by the proposed transferee is at least equal to the ratio which the
Membership Interests held by Old Natus bear to the total of all Mishkin
Interests. If Old Natus does not deliver an Exercise Notice within Exercise
Period, Mishkin may transfer his interest upon the terms set forth in the
Co-Sale Notice.
9.3 Certain Permitted Transfers. Notwithstanding anything to the
contrary herein, this Section 9 shall have no application to any of the
following:
(a) the sale of all or any portion of the Mishkin
Interests through an underwritten public offering pursuant to a registration
under the Securities Act of 1933; or
(b) any transfer of all or any part of the Mishkin
Interests by Mishkin during his lifetime, or upon his death by will or
intestacy, to or for the benefit of himself, his spouse, or other members of his
family, whether by sale, exchange, gift, will or intestacy, or otherwise, in
trust or otherwise; provided, however, that Section 9.1 of this Agreement shall
continue to apply to such transferred Mishkin Interests.
Article 10
MISCELLANEOUS PROVISIONS
10.1 Amendment and Modification. This Agreement may be amended,
modified, or supplemented only by written agreement of the parties hereto.
10.2 Waiver of Compliance; Consents. Any failure of a party to
comply with any obligation, covenant, agreement, or condition herein may be
waived by the other party; provided, however, that any such waiver may be made
only by a written instrument signed by the party granting such waiver, but such
waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement, or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure. Whenever this Agreement
requires or permits consent by or on behalf of any party hereto, such consent
shall be given in writing in a manner consistent with the requirements for a
waiver of compliance as set forth in this Section 10.2 with appropriate notice
in accordance with Section 10.8 of this Agreement.
10.3 Successors and Assigns. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. Nothing in this
Agreement, expressed or implied, is intended or shall be construed to confer
upon any person other than the parties, any successors and permitted assigns,
any rights, remedy, or claim under or by reason of this Agreement or any
provisions herein contained.
10.4 Expenses. Except as otherwise contemplated by Section 8.1
hereof, whether or not the transactions contemplated by this Agreement shall be
consummated, all fees and expenses (including all fees of counsel, actuaries,
and accountants) incurred by any party in connection with the negotiation and
execution of this Agreement and the Operating Agreement shall be borne by such
party.
10.5 Further Assurances. From time to time, at the request of a
party and without further consideration, the other party, at its own expense,
will execute and deliver such other documents, and take such other action, as
the first party may reasonably request in order to consummate more effectively
the transactions contemplated hereby and to vest in New Natus good and valid
title to the Business Assets.
10.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the Laws of the State of Arizona (without regard to
its conflicts of law doctrines). Any legal action or proceeding arising out of
or relating to this Agreement or any transactions contemplated hereby shall be
brought in the courts of the state of Arizona or of the United States of America
for the District of Arizona. Each party hereto expressly waives any claim of
improper venue and any claim that such courts are an inconvenient forum, and
consents to the service of process of any of the foregoing courts in any such
legal action or proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid, to the address set forth in Section 10.8 of
this Agreement, such service to be effective 10 days after mailing.
10.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument and shall become a binding
Agreement when one or more of the counterparts have been signed by each of the
parties and delivered to the other party.
10.8 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if delivered by hand
or mailed by registered or certified mail (return receipt requested) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
If to Old Natus:
c/o LecTec Corporation
10701 Red Circle Drive
Minnetonka, Minnesota 55343
Attention:
If to New Natus:
c/o Great Western Development
3001 E. Camelback Road
Phoenix, Arizona 85016
Attention: President
10.9 Specific Performance. Each of the parties acknowledge that
money damages would not be a sufficient remedy for any breach of this Agreement
and that irreparable harm would result if this Agreement were not specifically
enforced. Therefore, the rights and obligations of the parties under this
Agreement shall be enforceable by a decree of specific performance issued by any
court of competent jurisdiction, and appropriate injunctive relief may be
applied for and granted in connection therewith. A party's right to specific
performance shall be in addition to all other legal or equitable remedies
available to such party.
10.10 Headings. The article and section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
10.11 Entire Agreement. This Agreement, including the exhibits,
schedules, and other documents and instruments referred to herein, together with
the Operating Agreement and the Distribution Agreement, embody the entire
agreement and understanding of the parties hereto in respect of the subject
matter contained herein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter.
10.12 Severability. If any one or more provisions contained in this
Agreement shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision of this Agreement, but this Agreement shall
be construed as if such invalid, illegal, or unenforceable provision had never
been contained herein.
10.13 Inconsistency or Conflict. In the event of any inconsistency
or conflict between any provision of this Agreement and any provision of the
Operating Agreement, the provisions of the Operating Agreement shall govern.
10.14 Schedules. All Schedules attached hereto are hereby
incorporated in and made a part as if set forth in full herein.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
"ACM" "OLD NATUS"
ACM Investments, L.L.C., an Natus Corporation, a Minnesota
Arizona limited company corporation
By: Great Western Development
Corporation, an Arizona
corporation, Manager /s/Kathleen A. Billings
By: Kathlen A. Billings
Its: President
/s/Alan R. Mishkin
By: Alan R. Mishkin, President
The undersigned, Alan R. Mishkin, acting in his individual capacity
and dealing with his sole and separate property hereby guarantees the
obligations of ACM Investments, L.L.C., contained in Section 2.3 of this
Agreement, and agrees to be bound by the provisions of Section 9 of this
Agreement.
/s/Alan R. Mishkin
Alan R. Mishkin
THE FOLLOWING CONTRIBUTION AGREEMENT SCHEDULES HAVE BEEN OMMITTED:
SCHEDULE 3.1(A)
EQUIPMENT, FURNITURE AND OTHER TANGIBLE PROPERTY
SCHEDULE 3.1(B)
RAW MATERIALS, FINISHED GOODS, WORK-IN-PROCESS
SCHEDULE 3.1(C)
PATENTS, COPYRIGHTS, INTANGIBLE PROPERTY
SCHEDULE 3.1(D)
RIGHTS, CLAIMS, CAUSES OF ACTION
SCHEDULE 3.1(E)
CONTRACTS, AGREEMENTS, LEASES, AND LICENSES
SCHEDULE 3.1(F)
RECEIVABLES
SCHEDULE 3.1(G)
PREPAID EXPENSES
SCHEDULE 3.1(H)
PAYMENTS RECEIVED FOR PRODUCTS NOT YET SHIPPED
SCHEDULE 3.1(J)
DISTRIBUTORS, CUSTOMERS AND SUPPLIERS
SCHEDULE 3.2
OUTSTANDING PURCHASE ORDERS ASSUMED
SCHEDULE 5.1(G)
OLD NATUS OPINIONS OF COUNSEL
SCHEDULE 5.2(D)
NEW NATUS OPINIONS OF COUNSEL
SCHEDULE 6.6
BALANCE SHEET
THE FOLLOWING CONTRIBUTION AGREEMENT SCHEDULES HAVE BEEN OMMITTED:
SCHEDULE 6.7
BALANCE SHEET CHANGES
SCHEDULE 6.8
TAX MATTERS
SCHEDULE 6.8(C)
SALES TAX JURISDICTIONS
SCHEDULE 6.9(B)
UNCOLLECTIBLE RECEIVABLES
SCHEDULE 6.10(A)(II)
INTANGIBLE PROPERTY LICENSES AND AGREEMENTS
SCHEDULE 6.10(B)
INTANGIBLE PROPERTY EXCEPTIONS
SCHEDULE 6.11(A)
MATERIAL AGREEMENTS
SCHEDULE 6.13
EXCEPTIONS TO CONSENTS
SCHEDULE 6.14
LITIGATION
SCHEDULE 6.15
EXCEPTIONS TO COMPLIANCE WITH LAWS
SCHEDULE 6.17
CONSENTS, AUTHORIZATIONS AND APPROVALS
SCHEDULE 6.18(A)
DISTRIBUTORS
SCHEDULE 6.18(B)
SUPPLIERS
SCHEDULE 6.18(C)
MATERIAL CHANGES
DISTRIBUTION AGREEMENT
This Distribution Agreement ("Agreement") is entered into and is
effective this 12th day of March, 1996, by and among LecTec Corporation, a
Minnesota corporation having its principal place of business at 10701 Red Circle
Drive, Minnetonka, Minnesota ("LecTec"), Natus Corporation, a Minnesota
corporation having its principal place of business at 10701 Red Circle Drive,
Minnetonka, Minnesota ("Old Natus") and Natus, L.L.C., an Arizona limited
liability company having its principal place of business at 3001 East Camelback
Road, Suite 200, Phoenix, Arizona 85016 ("New Natus").
WHEREAS, LecTec is in the business of manufacturing Patches (as defined
below) for marketing, distribution and sale to the general public; and
WHEREAS, Old Natus is in the business of distributing Patches
manufactured by LecTec through means other than multi-level (network) direct
sales marketing and distribution; and
WHEREAS, LecTec owns a majority of the outstanding shares of Old Natus;
and
WHEREAS, New Natus is in the business of multi-level (network) direct
sales marketing and distribution of products such as the Patches and desires to
purchase the Patches for resale to in its multi-level (network) direct sales
marketing and distribution business under Natus trademarks, utilizing Natus
packaging and Natus promotional material; and
WHEREAS, LecTec has the capacity to manufacture or have manufactured
New Natus's requirements of such products; and
WHEREAS LecTec is willing to sell the Patches to Old Natus for
distribution to New Natus, and Old Natus is willing to distribute the Patches to
New Natus, for the multi-level (network) direct sales marketing and distribution
in the Exclusive Market (as defined below);
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and promises expressed herein, LecTec and New Natus agree as follows:
1. Definitions. As used herein, the following terms shall have the
following meanings:
1.1 "Agreement" shall mean this Distribution Agreement,
including any future written amendments, modifications, or supplements made in
accordance herewith.
1.2 "Effective Date" shall have the meaning set forth in
Section 3.
1.3 "Exclusive Market" shall mean the world-wide
person-to-person multi-level network marketing and distribution of Patches, and
specifically does not include institutional, retail, direct response infomercial
or commercial spots, electronic retailing (such as HSN or QVC), marketing and
distribution of Patches. It is expressly understood that this Agreement does not
grant marketing and distribution rights outside the Exclusive Market.
1.4 "FDA" shall have the meaning set forth in Section 13.1(B).
1.5 "LecTec" shall mean LecTec Corporation, a Minnesota
corporation.
1.6 "Old Natus" shall mean Natus Corporation, a Minnesota
corporation.
1.7 "Monthly Forecast" shall have the meaning set forth in
Section 9.2.
1.8 "New Natus" shall mean Natus, L.L.C., an Arizona limited
liability company.
1.9 "Patches" shall mean analgesic patches which meet the
criteria set forth in the United States Food and Drug Administration monograph
on external analgesic drug products for over-the-counter human use which contain
the active ingredients methyl salicylate, menthol and camphor.
1.10 "Re-Commencing Party" shall have the meaning set forth in
Section 19.5.
1.11 "Restricted Period" shall have the meaning set forth in
Section 19.5.
1.12 "Termination Notice" shall have the meaning set forth in
Section 19.4.
2. Engagement. Old Natus hereby engages New Natus, and New Natus hereby
accepts such engagement, to act as the distributor for Old Natus in the
Exclusive Market on the terms and conditions as set forth in this Agreement.
3. Term. The initial term of this Agreement shall begin on the date
first set forth above ("Effective Date") and shall end on February 28, 2001.
This Agreement shall be renewable for successive five (5) year terms thereafter
provided that the parties have, prior to the end of each preceding term, reached
an agreement on the price per Patch and minimum annual purchase amounts
applicable to such renewal term. The parties shall, beginning not later than one
year prior to the expiration of the initial term and each renewal term
thereafter, negotiate in good faith with the object of reaching agreement on the
price per Patch and the minimum annual purchase amount to be applied to the
subsequent renewal term.
4. Limited Exclusivity. New Natus shall be the exclusive distributor of
Patches in the Exclusive Market during the term of this Agreement, including any
renewals hereof. New Natus shall not market Patches in or for resale in any
other markets except the Exclusive Market. Neither LecTec nor Old Natus shall
sell Patches to any other person or entity in or for resale in the Exclusive
Market.
5. Right of First Offer for Other Analgesic Patches. Neither LecTec nor
Old Natus may offer analgesic patches other than the Patches for distribution,
sale or resale, whether directly or through a distributor, in the Exclusive
Market unless LecTec or Old Natus, as the case may be, first offers the right to
distribute such other analgesic patches to New Natus, specifying the terms of
such distribution relationship, and New Natus does not accept such offer. If New
Natus does not accept such offer to distribute such other analgesic patches on
the terms so offered within thirty (30) days of such offer, LecTec or Old Natus,
as the case may be, may offer such other analgesic patches for distribution,
sale or resale in the Exclusive Market, but only through a distributor and only
on such terms as are no more favorable to such distributor than the terms
offered to New Natus pursuant to this Section 5.
6. Order; Minimum Purchase. New Natus shall order Patches by submitting
a purchase order for the quantity of Patches desired to Old Natus. New Natus may
order and purchase Patches in any quantity so long as the quantity equals or
exceeds (Confidential Treatment Has Been Requested) Patches per order, and so
long as the aggregate of all orders purchased exceeds the minimum annual
purchase amounts as set forth on Schedule A, attached hereto and incorporated by
this reference, for each year set forth in Schedule A. For the purposes of
calculating the aggregate orders purchased by New Natus within the first year of
this Agreement, all Patches contributed by Old Natus to New Natus pursuant to
the Contribution Agreement dated March 12th, 1996, shall be deemed to have been
purchased by New Natus pursuant to this Agreement.
7. Price. The purchase price to New Natus for the Patches meeting the
specifications set forth in Schedule B, attached hereto and incorporated by this
reference, shall be (Confidential Treatment Has Been Requested) per Patch
purchased (other than those Patches deemed to have been purchased pursuant to
the last sentence of Section 6). In the event that New Natus desires to purchase
Patches other than Patches meeting the specifications set forth in Schedule B,
New Natus and Old Natus will negotiate in good faith in an attempt to agree on a
price for such Patches. In no event shall Old Natus's charges to New Natus for
Patches, whether meeting the specifications set forth in Schedule B or
otherwise, be in excess of LecTec's or Old Natus' usual and customary charges
for Patches of the same specifications to distributors in markets other than the
Exclusive Market, and if LecTec or Old Natus offers a distributor in another
market a lower price per Patch of the same specifications, New Natus shall be
permitted to purchase Patches on the same terms as such other distributor.
8. Payment for Orders. New Natus shall pay to Old Natus the purchase
price for Patches ordered from Old Natus within 30 days after such order is
received by New Natus by payment to Old Natus.
9. Duties of New Natus.
9.1 New Natus shall devote the amount of time and effort on
the part of its personnel required to promote, market and distribute the
Patches.
9.2 On or before April 1, 1996, and at the beginning of each
calendar month thereafter during the term hereof, New Natus shall provide Old
Natus with an estimate of New Natus' requirements for Patches for the next
ninety (90) days (the "Monthly Forecast").
9.3 New Natus shall comply with all United States Food and
Drug Administration regulations applicable to New Natus' distribution of the
Patches, including but not limited to storage, distribution and the handling of
customer complaints. New Natus shall not misrepresent the nature of indications
for use of the Patches and will not alter the Patches.
9.4 New Natus shall take such reasonable actions as are
reasonably necessary (including cutting off supplies of Patches to or
terminating distributors) to prevent any domestic or foreign entity from
distributing or selling, directly or indirectly, outside the Exclusive Market
any Patches sold to New Natus hereunder.
10. Duties of LecTec.
10.1 LecTec shall devote the amount of time and effort on the
part of its personnel required to manufacture, produce and timely deliver all
Patches ordered by New Natus. LecTec shall fill and ship all orders placed by
New Natus within thirty (30) days after receipt of the corresponding purchase
order provided that the quantity of Patches in such order does not exceed the
estimate of New Natus' requirements for Patches contained in the Monthly
Forecast. Any orders for quantities of Patches in excess of the foregoing limits
shall be filled and shipped (i) to the extent of the foregoing limits, within
thirty (30) days after receipt of the corresponding purchase order and, (ii) to
the extent in excess of the foregoing limits, within sixty (60) days after
receipt of the corresponding purchase order.
10.2 LecTec and Old Natus shall notify New Natus of any
applications made or proposed (unless such notification is expressly prohibited
by the third party, if any, making or proposing such application) for regulatory
approval in any country or territory for the marketing or sale to the public of
the Patch and any other analgesic patch for which New Natus is the distributor
in the Exclusive Market, promptly upon LecTec or Old Natus obtaining knowledge
of such applications. LecTec and Old Natus will, on a quarterly basis, notify
New Natus of the status of any such applications made or proposed, unless such
notification is expressly prohibited by the third party, if any, making or
proposing such application. At the request of New Natus, LecTec and Old Natus
shall cooperate with New Natus to the extent necessary to include in such
applications a request for regulatory approval for the distribution and
marketing within the Exclusive Market of Patches and any other analgesic patches
for which New Natus is the distributor in the Exclusive Market unless such
inclusion is expressly prohibited by the third party, if any, making such
application. New Natus shall reimburse LecTec and Old Natus for any additional
cost to LecTec and Old Natus directly associated with, and reasonably incurred
as a result of, securing such additional regulatory approval for distribution
and marketing in the Exclusive Market, if such additional regulatory approval is
requested by New Natus.
11. Duties of Old Natus. Old Natus will timely forward any or all
purchase orders and Monthly Forecasts received by it to LecTec. The failure of
Old Natus to timely forward any or all purchase orders or Monthly Forecasts to
LecTec shall not excuse LecTec from the timely performance of its obligations
hereunder, including, without limitation, the obligation to timely fill and ship
orders pursuant to Section 10 hereof.
12. Shipping. All shipping and handling costs; demurrage; storage
costs; transportation insurance; sales or use taxes; and/or duties associated
with any order placed by New Natus shall be paid by New Natus; provided,
however, that any such costs associated with replacement shipments for defective
products shipped by LecTec shall be paid by LecTec. The method and route of
shipment shall be at New Natus's discretion.
13. Representations and Warranties of LecTec and Old Natus.
13.1 LecTec and Old Natus represent and warrant that:
(A) All Patches, their formulations and the
methodology used in their manufacture are owned or controlled by LecTec or Old
Natus and do not infringe upon any formulations or methodology not owned or
controlled by LecTec or Old Natus.
(B) All Patches are produced in conformity
with the United States Food and Drug Administration ("FDA") Tentative Final
Monograph on External Analgesic Drug Products and are permitted to be marketed
in the United States under a deferral letter from the FDA. It is expressly
understood, however, that no representations or warranties are made as to the
existence or likelihood of obtaining final regulatory approval for the marketing
of the Patches in the United States or regulatory approval in any country
outside of the United States for marketing of the Patches.
(C) Old Natus is the authorized distributor
of the Patches in the Exclusive Market and has the right to enter into this
Agreement relating to the distribution of the Patches in the Exclusive Market
pursuant to the terms hereof.
13.2 LecTec represents and warrants that all Patches will meet
LecTec's written quality and quantity specifications and are free from defects
in materials and workmanship.
14. Indemnification of New Natus. LecTec and Old Natus, jointly and
severally, shall indemnify, defend and hold New Natus harmless from and against
any and all demands, penalties, liabilities, claims and expenses, including
without limitation any attorneys' fees and costs, arising out of or relating to
(1) any breach by LecTec or Old Natus of the representations and warranties
contained in Section 13 hereof, or (2) any defects in the formulation,
ingredients, materials, packaging, labeling or printed materials supplied by
LecTec (including, but not limited to, instructions or indications for use) with
respect to the Patches, provided such defect is not directly caused by
negligence on the part of New Natus.
15. Indemnification of LecTec and Old Natus. New Natus shall indemnify,
defend and hold LecTec and Old Natus harmless from and against any and all
demands, penalties, liabilities, claims and expenses, including without
limitation any attorneys' fees and costs, arising out of or relating to any
claims by distributors or customers of New Natus with respect to the Patches,
including, without limitation, false or deceptive advertising or claims of the
Patches, except as set forth in Section 14 hereof, or the breach by New Natus of
Section 9.3 hereof.
16. Insurance. LecTec and New Natus shall each secure and maintain
product liability insurance in the amount of not less than $1,000,000.00 and
will cause the other and Old Natus to be named as an additional insured party as
its interest bears under their respective policies. LecTec and New Natus shall
each provide the other and Old Natus with a certificate of insurance evidencing
the requisite coverage as well as any revisions or changes subsequently made
thereto.
17. Force Majeure. Neither LecTec nor Old Natus shall be responsible or
liable for any loss, damage, detention or delay caused by fire, civil or
military authority, insurrection, riot, or railroad, air or port embargoes.
18. Survival. The covenants and agreements of the parties contained in
Sections 9.3, 14, 15 and 16 hereof shall survive the termination of this
Agreement and for a period of three (3) years following the termination.
Notwithstanding the foregoing, in the event that any party has given notice of a
claim for indemnification within the foregoing time limit, specifying in
reasonable detail the nature and, to the extent then known, the amount of the
claim, such claim shall survive until resolved.
19. Termination.
19.1 Either LecTec and Old Natus, jointly, or New Natus may
terminate this Agreement for cause during its term in the event of a material
default by the other party in its performance of any of the terms and conditions
or covenants of this Agreement, which material default is not cured within
thirty (30) days after receipt of a written notice to the defaulting party from
the nondefaulting party specifying the nature of such default.
19.2 If New Natus fails to make payments in accordance with
Section 8 hereof for Patches delivered to it by LecTec or Old Natus, LecTec and
Old Natus may cease production and delivery of Patches against any then current
and outstanding purchase order placed by New Natus with Old Natus under this
Agreement until New Natus's account is brought current and such action by LecTec
or Old Natus shall not constitute a breach under this Agreement.
19.3 Either LecTec and Old Natus, jointly, or New Natus may
terminate this Agreement at any time if the other party, or (solely with respect
to New Natus' right to terminate) Old Natus, initiates any voluntary proceeding
or becomes the subject of any voluntary proceeding under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, receivership,
dissolution, or liquidation law or statute of any jurisdiction, whether now or
hereafter in effect; is adjudicated insolvent or bankrupt by a decree of a court
of competent jurisdiction; petitions or applies for, acquiesces in or consents
to, the appointment of any receiver or trustee of such party or for all or a
substantial part of the property of the party; makes an assignment for the
benefit of creditors; or admits in writing its inability to pay its debts as
they mature.
19.4 New Natus may terminate this Agreement upon ninety (90)
days notice (the "Termination Notice") to LecTec and Old Natus if it determines
it is not in its best interests to continue to distribute the Patches. If New
Natus wishes to obtain Patches for sale in the Exclusive Market within the
period beginning on the date of the termination of this Agreement pursuant to
this Section 19.4 and ending on the earlier of (i) two (2) years from the date
of termination of this Agreement pursuant to this Section 19.4, or (ii) the date
upon which this Agreement would otherwise have expired pursuant to Section 3
hereof, New Natus shall offer to obtain such Patches from LecTec and Old Natus,
specifying the terms upon which New Natus proposes to obtain such Patches. If
LecTec and Old Natus do not accept such offer on the terms so offered within
thirty (30) days of such offer, New Natus may obtain such Patches from any other
supplier or suppliers, provided New Natus obtains such Patches only on such
terms as are no less favorable to New Natus than those terms offered to LecTec
and Old Natus. Upon the termination of this Agreement pursuant to this Section
19.4, New Natus shall purchase, upon the terms and conditions set forth herein,
all unpurchased Patches manufactured prior to receipt by LecTec of the
Termination Notice in reasonable reliance upon the Monthly Forecast and shall
purchase (at LecTec's actual cost) all unused packaging materials ordered by
LecTec prior to the Termination Notice in reasonable reliance on the Monthly
Forecast.
19.5 LecTec and Old Natus, jointly, may terminate this
Agreement upon ninety (90) days notice to New Natus if they determine it is not
in their best interests to continue to manufacture the Patches. Under such a
termination, neither LecTec nor Old Natus may supply Patches to any other
distributor in the Exclusive Market or any other market during the period (the
"Restricted Period") beginning on the date of the termination of this Agreement
pursuant to this Section 19.5 and ending on the earlier of (i) two (2) years
from the date of termination of this Agreement pursuant to this Section 19.5 or
(ii) the date upon which this Agreement would otherwise have expired pursuant to
Section 3 hereof. If LecTec or Old Natus wishes to supply Patches to any other
distributor in the Exclusive Market or any other market during the Restricted
Period, LecTec or Old Natus, as the case may be, (the "Re-Commencing Party")
shall first offer to New Natus the right to distribute such Patches, specifying
the terms of such distribution relationship. If New Natus does not accept such
offer on the terms so offered within thirty (30) days of such offer, the
Re-Commencing Party may offer such Patches for distribution, sale or resale, but
only through a distributor and only on such terms as are no more favorable to
such distributor than the terms offered to New Natus pursuant to this Section
19.5.
19.6 LecTec and Old Natus, jointly, may terminate this
Agreement within the notice period permitted by the FDA if the United States
Food and Drug Administration forbids production or distribution of the Patches.
19.7 Notwithstanding anything in any agreement between Old
Natus and LecTec to the contrary, in the event of the termination of Old Natus'
right to distribute the Patches for any reason, this Agreement shall not thereby
be terminated. In the event of any such termination, this Agreement shall
continue in full force and effect and New Natus shall continue to be the
distributor of Patches in the Exclusive Market.
20. Miscellaneous.
20.1 At all times during the term of this Agreement, LecTec,
Old Natus and New Natus shall be deemed to be independent parties, and neither
shall have any right or authority to (a) act for the other; (b) incur, assume or
create any obligation, liability or responsibility, express or impled, in the
name or on behalf of the other; or (c) bind the other in any manner whatsoever.
No agency, joint venture, partnership or other representative or fiduciary
relationship between or among any of New Natus, LecTec and Old Natus is created
by, or may be inferred from, this Agreement or the parties' performance
hereunder.
20.2 Neither this Agreement nor any right or obligation
hereunder shall be assigned or otherwise transferred, in whole or in part, by
any party hereto (whether by operation of law or otherwise, without the prior
written consent of each other party. Any assignment or transfer contrary to the
terms hereof shall be null and void and of no force or effect.
20.3 This Agreement is to be governed by and construed and
enforced in accordance with the laws of the State of Arizona without regard to
its internal laws respecting conflicts. The venue for any dispute arising
hereunder shall be Maricopa County, Arizona.
20.4 The prevailing party in any legal proceedings arising out
of this Agreement shall be entitled to recover, in addition to all other legal
or equitable remedies available to it, reasonable attorneys' fees and costs from
the other party.
20.5 All notices, requests, demands and other communications
pursuant to this Agreement shall be in writing and shall be delivered personally
or sent by certified or registered mail, return receipt requested, or by
telefacsimile, with receipt confirmed by telephone and hard copy mailed, to the
parties at the addresses set forth below:
LecTec Corporation
10701 Red Circle Drive
Minnetonka, Minnesota 55343
Fax: (612) 933-1068
Attention:
Natus Corporation
10701 Red Circle Drive
Minnetonka, Minnesota 55343
Fax: (612) 933-1068
Attention:
Natus, L.L.C.
2777 East Camelback Road
Phoenix, Arizona 85016
Fax: (602) 954-9851
Attention: President
Any such notice, request, demand or other communication shall be deemed
to have been given as of the date delivered or sent by telefacsimile, or three
(3) days after deposit in the U.S. mails. A party may change the address to
which notices, requests, demands and other communications hereunder are sent, by
giving written notice of said change of address to the other parties in the
manner above stated.
20.6 Section headings of this Agreement are solely for
convenience and shall not be used in any way in the interpretation of this
Agreement or otherwise be given any legal effect.
20.7 This Agreement, including all of the schedules attached
hereto, together with the Operating Agreement of New Natus dated March 12th,
1996, and the Contribution Agreement by and among Old Natus and ACM Investments,
L.L.C., dated March 12th, 1996, constitute the entire understanding and
agreement between the parties and supersede all previous negotiations,
representations and agreements made by the parties with respect to the subject
matter hereof. There are no understandings or agreements relative hereto which
are not fully expressed herein; no amendments hereof shall be valid unless in
writing and signed by all parties; no waiver or discharge thereof shall be valid
unless in writing and signed by the party or parties whose rights are adversely
affected thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
duplicate, each of which shall for all purposes be deemed an original, effective
as of the Effective Date.
"LECTEC" "NEW NATUS"
LECTEC CORPORATION Natus, L.L.C.
/s/Thomas E. Brunelle /s/ Richard J. Bennetts
President and CEO Richard J. Bennetts, President
"OLD NATUS"
NATUS CORPORATION
/s/Kathleen A. Billings
President
SCHEDULE A--MINIMUM ANNUAL PURCHASE
Year Minimum Number of Patches
March 1, 1996 to February 28, 1997 (Confidential Treatment Has
Been Requested)
March 1, 1997 to February 28, 1998 (Confidential Treatment Has
Been Requested)
March 1, 1998 to February 28, 1999 (Confidential Treatment Has
Been Requested)
March 1, 1999 to February 29, 2000 (Confidential Treatment Has
Been Requested)
March 1, 2000 to February 28, 2001 (Confidential Treatment Has
Been Requested)
SCHEDULE B--PATCH SPECIFICATIONS
(Confidential Treatment Has Been Requested).
OPERATING AGREEMENT
OF
NATUS, L.L.C.,
an Arizona limited liability company,
among
ACM INVESTMENTS, L.L.C.,
an Arizona limited liability company,
NATUS CORPORATION,
a Minnesota corporation,
and
NATUS MANAGEMENT, INC.,
an Arizona corporation,
March 12, 1996
TABLE OF CONTENTS
Page
SECTION 1
FORMATION OF THE COMPANY
1.1 Formation and Name.................................................. 1
1.2 Place of Business................................................... 1
1.3 Purpose............................................................. 1
1.4 Term................................................................ 1
1.5 Agent for Service of Process........................................ 1
1.6 Manager............................................................. 2
1.7 Definitions......................................................... 2
SECTION 2
CAPITAL CONTRIBUTIONS; MEMBERSHIP INTERESTS
2.1 Capital Contribution of Old Natus................................... 6
2.2 Capital Contribution of ACM......................................... 7
2.3 Capital Contribution of Manager..................................... 7
2.4 Additional Capital Contributions.................................... 7
2.5 Temporary Loans..................................................... 8
2.6 Membership Interests................................................ 8
2.7 Investment of Proceeds and Reserves................................. 9
2.8 Priority and Return of Capital...................................... 9
2.9 Payments of Individual Obligations.................................. 9
2.10 Limitation of Liability............................................. 9
SECTION 3
THE MANAGER
3.1 Management.......................................................... 9
3.2 Fees and Compensation to the Manager and Its Affiliates............. 11
3.3 Duties and Obligations of the Manager............................... 11
3.4 Confirmation of Authority........................................... 12
3.5 Liability and Indemnification of the Manager........................ 12
3.6 Withdrawal of the Manager........................................... 12
SECTION 4
OFFICERS OF THE COMPANY
4.1 Required Officers....................................................13
4.2 Appointment of Officers............................................. 13
4.3 Salaries............................................................ 13
4.4 Term of Office...................................................... 13
4.5 Chief Executive Officer............................................. 13
4.6 President........................................................... 13
4.7 Vice Presidents..................................................... 14
4.8 Liability and Indemnification of the Officers....................... 14
SECTION 5
THE MEMBERS
5.1 Members' Right to Vote.............................................. 14
5.2 Meetings............................................................ 15
5.3 Place of Meetings................................................... 15
5.4 Notice of Meetings.................................................. 15
5.5 Proxies............................................................. 15
5.6 Action by Members Without a Meeting................................. 15
5.7 Other Activities of the Members..................................... 15
5.8 Indemnification of the Members...................................... 16
SECTION 6
DISTRIBUTIONS
6.1 Amount and Time of Distribution..................................... 16
6.2 General Rule for Distributions...................................... 16
6.3 No Distribution upon Withdrawal..................................... 17
SECTION 7
ALLOCATION OF PROFITS AND LOSSES
7.1 Allocation of Profits............................................... 17
7.2 Allocation of Losses................................................ 17
7.3 Special Allocations................................................. 17
7.4 Curative Allocations................................................ 19
7.5 Other Allocations Rules............................................. 19
7.6 Capital Account..................................................... 20
SECTION 8
TRANSFERS OF MEMBERSHIP INTERESTS
8.1 Restrictions on Transfer of Membership Interests.................... 21
8.2 Termination of the Company for Tax Purposes......................... 21
8.3 Requirements for Transferee Becoming a Substituted Member........... 21
SECTION 9
DISSOLUTION, WINDING UP AND LIQUIDATION OF THE COMPANY
9.1 Dissolution......................................................... 21
9.2 Effect of Filing of Dissolving Statement............................ 22
9.3 Winding Up, Liquidation and Distribution of Assets.................. 23
9.4 Return of Contribution Nonrecourse to Other Members................. 23
SECTION 10
BOOKS AND RECORDS OF THE COMPANY; ACCOUNTING AND TAX MATTERS
10.1 Nature of Books and Records......................................... 24
10.2 Review; Audit....................................................... 24
10.3 Elections by Company as to Optional Adjustment to Basis............. 24
10.4 Election With Respect to Taxation as Company........................ 24
10.5 Names and Addresses of Members...................................... 24
10.6 Fiscal Year......................................................... 24
10.7 Tax Returns......................................................... 24
10.8 Financial Information............................................... 24
10.9 Records............................................................. 25
10.10 Access to Records................................................... 25
SECTION 11
MISCELLANEOUS PROVISIONS
11.1 Notices............................................................. 25
11.2 Successors and Assigns.............................................. 25
11.3 Controlling Law..................................................... 25
11.4 Provisions Severable................................................ 26
11.5 Indulgences Not Waivers............................................. 26
11.6 Titles Not to Affect Interpretation................................. 26
11.7 Gender.............................................................. 26
11.8 Execution In Counterpart............................................ 26
11.9 Statutory Provisions................................................ 26
11.10 Waiver of Action for Partition...................................... 26
OPERATING AGREEMENT
OF
NATUS, L.L.C.,
an Arizona limited liability company
THIS OPERATING AGREEMENT is made and entered into this 12th day of
March, 1996, by and among (i) Natus Management, Inc., an Arizona corporation
("Manager"), as the Manager and a Member, and (ii) ACM Investments, L.L.C., an
Arizona limited liability company ("ACM") and Natus Corporation, a Minnesota
corporation ("Old Natus"), as Members.
SECTION 1
FORMATION OF THE COMPANY
1.1 Formation and Name. ACM has formed a limited liability company
under the name "NATUS, L.L.C." ("Company") pursuant to the Arizona Limited
Liability Company Act, Arizona Revised Statutes ss.ss. 29-601 et seq. ("LLC
Act")
1.2 Place of Business. The principal place of business of the Company
shall be at 2777 E. Camelback Road, Phoenix, Arizona 85016, or such other place
as the Manager shall determine.
1.3 Purpose. The Company was formed (a) to acquire from Old Natus a
direct selling and multi-level marketing and product distribution business
formerly operated by Old Natus under the tradename of "Natus" (the "Business"),
and (b) to own, operate and expand the Business to maximize the value of the
Company, and may engage in any activities and perform all acts required in
connection with, or incidental to, its business, it being the intention of the
parties hereto to operate the Business through the Company for at least one
year. Except as specifically permitted herein, the Company may not engage in any
other activity or business and no Member shall have any authority to hold
himself out as an agent of another Member in any other business or activity.
1.4 Term. The term of the Company commenced on the date the Articles of
Organization were filed with the Arizona Corporation Commission and shall
continue until December 31, 2050, unless sooner dissolved pursuant to the terms
of Section 9.1.
1.5 Agent for Service of Process. The name and business address of the
agent for service of process for the Company is Richard F. Ross, Esq., 40 N.
Central Avenue, Suite 2700, Phoenix, Arizona 85004. The Manager may change the
agent for service of process from time to time.
1.6 Manager. The Company shall be managed by a manager, who shall be
Natus Management, Inc., unless changed in accordance with the terms of this
Agreement. The Manager may, but need not be, a Member of the Company.
1.7 Definitions. Whenever used in this Agreement, the following terms
shall have the following meanings:
"ACM." ACM Investments, L.L.C., an Arizona limited liability company.
"ADDITIONAL ASSESSMENT." As defined in Section 2.4(b).
"ADJUSTED CAPITAL ACCOUNT DEFICIT." With respect to any Member, the
deficit balance, if any, in such Member's Capital Account as of the end of the
relevant fiscal year, after giving effect to the following adjustments:
(a) Credit to such Capital Account any amounts which such
Member is obligated to restore pursuant to any provision of this Agreement or is
deemed to be obligated to restore pursuant to the penultimate sentences of
Regulations ss.ss. 1.704-2(g)(1) and 1.704-2(i)(5); and
(b) Debit to such Capital Account the items described in
Regulations ss.ss. 1.704-l(b)(2)(ii) (D) (4), (5), and (6).
The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Regulations ss. 1.704-l(b)(2)(ii)(D) and shall be
interpreted consistently therewith.
"AFFILIATE." A Person that:
(a) directly or indirectly controls, is controlled by or is
under common control with another Person;
(b) owns or controls ten percent (10%) or more of the voting
securities of such other Person;
(c) is an officer, director or partner of such other Person
(or member, if such other Person is a limited liability company); or
(d) if such other Person is an officer, director, partner or
member of a limited liability company, any Person for which such other Person
acts in any such capacity.
For purposes of this definition, the terms "controls", "is controlled
by", or "is under common control with" shall mean the possession, direct or
indirect, of the power to direct or cause the direction of the management and
policies of a person or entity, whether through the ownership of voting
securities, by contract, or otherwise.
"AGREEMENT." This Operating Agreement.
"BUSINESS." As defined in Section 1.3.
"BUSINESS PLAN AND BUDGET." As defined in Section 3.3(b).
"CAPITAL ACCOUNT." The Capital Account established and maintained for
each Member pursuant to Section 7.6 hereof.
"CAPITAL CONTRIBUTION(S)." The amount of money and initial Gross Asset
Value of any property (other than money) contributed to the Company with respect
to the interest in the Company held by a Member. Any reference in this Agreement
to the Capital Contribution of a Member shall include a Capital Contribution
previously made by a predecessor of the Member with respect to the interest held
by such Member.
"CODE." The Internal Revenue Code of 1986, as amended from time to time
(or corresponding provision of succeeding law).
"COMPANY." Natus, L.L.C., an Arizona limited liability company.
"COMPANY MINIMUM GAIN." As defined in Regulations ss.ss. 1.704-2(b) (2)
and 1.704-2(d).
"CONTRIBUTION AGREEMENT." The Contribution Agreement dated March 12,
1996, between Old Natus and ACM.
"DEFAULT AMOUNT." As defined in Section 2.4(c)(i).
"DEPRECIATION." For each fiscal year or other period, an amount equal
to the depreciation, amortization or other cost recovery deduction allowable
with respect to an asset for such year or other period, except that if the Gross
Asset Value of an asset differs from its adjusted basis for federal income tax
purposes at the beginning of such year or other period, Depreciation shall be an
amount which bears the same ratio to such beginning Gross Asset Value as the
federal income tax depreciation, amortization or other cost recovery deduction
for such year or other period bears to such beginning adjusted tax basis;
provided, however, that if the federal income tax depreciation, amortization, or
other cost recovery deduction for such year or other period is zero,
Depreciation shall be determined with reference to such beginning Gross Asset
Value using any reasonable method selected by the Manager.
"DISTRIBUTION(S)." All distributions of cash or property by the Company
to the Members in accordance with this Agreement.
"GROSS ASSET VALUE." With respect to any asset, the asset's adjusted
basis for federal income tax purposes, except as follows:
(a) the initial Gross Asset Value of any asset contributed by
a Member to the Company shall be the gross fair market value of such asset as of
the date of contribution, as determined by the contributing Member and the
Manager or, in the case of Old Natus, in Section 2.1;
(b) the Gross Asset Value of all Company assets shall be
adjusted to equal their respective gross fair market values, as determined by
the Manager, as of the following times: (i) the acquisition of an additional
interest in the Company (other than the Capital Contributions pursuant to
Sections 2.2 and 2.3 of the Contribution Agreement) by any new or existing
Member in exchange for more than a de minimis Capital Contribution; (ii) the
distribution by the Company to a Member of more than a de minimis amount of
assets of the Company as consideration for any interest in the Company; and
(iii) the liquidation of the Company within the meaning of Regulations ss.
1.704-1 (b)(2)(ii)(G); provided, however, that adjustments pursuant to clauses
(i) and (ii) above shall be made only if the Manager reasonably determines that
such adjustments are necessary or appropriate to reflect the relative economic
interests of the Members in the Company;
(c) the Gross Asset Value of any Company asset distributed to
any Member shall be the gross fair market value of such asset on the date of
distribution as determined by the distributee and the Manager; and
(d) the Gross Asset Values of Company assets shall be
increased (or decreased) to reflect any adjustment to the adjusted basis of such
assets pursuant to Code ss. 734(b) or Code ss. 743(b), but only to the extent
that such adjustments are taken into account in determining Capital Accounts
pursuant to Regulations ss. 1.704-1(b)(2)(iv)(M) and Section 7.3(g) hereof;
provided, however that Gross Asset Values shall not be adjusted pursuant to this
subsection (d) to the extent the Manager determines that an adjustment pursuant
to subsection (b) hereof is necessary or appropriate in connection with a
transaction that would otherwise result in an adjustment pursuant to this
subsection (d).
If the Gross Asset Value of an asset has been determined or adjusted
pursuant to (a), (b), or (d) above, such Gross Asset Value shall thereafter be
adjusted by the Depreciation taken into account with respect to such asset for
the purposes of computing Profits and Losses.
"LLC ACT." The Arizona Limited Liability Company Act, Arizona Revised
Statutes ss.ss. 29-601 et seq., as amended.
"MANAGER." Natus Management, Inc., an Arizona corporation.
"MAXIMUM CONTRIBUTION." As defined in Section 2.2.
"MEMBER." Each of the Members named in this Agreement and any other
Person that becomes a Member pursuant to this Agreement.
"MEMBER NONRECOURSE DEBT." As defined in Regulations ss. 1.704-2(b)(4).
"MEMBER NONRECOURSE DEBT MINIMUM GAIN." An amount which, with respect
to each Member Nonrecourse Debt, is equal to the Company Minimum Gain that would
result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability
determined in accordance with Regulations ss. 1.704-2(i)(3).
"MEMBER NONRECOURSE DEDUCTIONS." As defined in Regulations ss.ss.
1.704-2(i)(1) and 1.704-2(i)(2).
"MEMBERSHIP INTEREST." The interest of a Member in the Profits, Losses
and Distributions (except as otherwise provided in this Agreement) of the
Company.
"NONRECOURSE DEDUCTION." As defined in Regulations ss. 1.704-2(b)(1).
"NONRECOURSE LIABILITY." As defined in Regulations ss. 1.704-2(b)(3).
"OFFICER." With respect to the Company, any Person appointed an officer
of the Company pursuant to Section 4.
"OLD NATUS." Natus Corporation, a Minnesota corporation.
"PERSON." An individual, firm, partnership, corporation, limited
liability company, estate, trust or other entity.
"PROFITS AND LOSSES." With respect to any fiscal year or other period,
an amount equal to the Company's taxable income or loss for such year or period,
determined in accordance with Code ss. 703(a) (for this purpose, all items of
income, gain, loss or deductions required to be stated separately pursuant to
Code ss. 703(a)(1) shall be included in taxable income or loss), with the
following adjustments:
(a) any income of the Company that is exempt from federal
income tax and not otherwise taken into account in computing Profits or Losses
pursuant to this definition shall be added to such taxable income or loss;
(b) any expenditures of the Company described in Code ss.
705(a)(2)(B) or treated as Code ss. 705(a)(2)(B) expenditures pursuant to
Regulations ss. 1.704-l(b)(2)(iv)(I), and not otherwise taken into account in
computing Profits or Losses hereunder shall be subtracted from such taxable
income or loss;
(c) if the Gross Asset Value of any Company asset is adjusted
pursuant to subsections (b) or (c) of the definition of Gross Asset Value
herein, the amount of such adjustment shall be taken into account as gain or
loss from the disposition of such asset for purposes of computing Profits or
Losses;
(d) gain or loss resulting from any disposition of Company
property with respect to which gain or loss, if any, would be recognized for
federal income tax purposes shall be computed by reference to the Gross Asset
Value of the Company assets disposed of, notwithstanding that the adjusted tax
basis of such Company assets may differ from its Gross Asset Value;
(e) in lieu of the depreciation, amortization and other cost
recovery deductions taken into account in computing such taxable income or loss,
there shall be taken into account Depreciation for such fiscal year or other
period, computed in accordance with the definition set forth herein;
(f) to the extent an adjustment to the adjusted tax basis of
any Company asset pursuant to Code ss. 734(b) or Code ss. 743(b) is required
pursuant to Regulations ss. 1.704-l(b)(2)(iv)(M)(4) to be taken into account in
determining Capital Accounts as a result of a distribution other than in
complete liquidation of a Member's Membership Interest in the Company, the
amount of such adjustment shall be treated as an item of gain (if the adjustment
increases the basis of the asset) or loss (if the adjustment decreases the basis
of the asset) from the disposition of the asset and shall be taken into account
for purposes of computing Profits or Losses; and
(g) notwithstanding any other provision of this definition,
any item which is specially allocated pursuant to Sections 7.3 or 7.4 of this
Agreement shall not be taken into account in computing Profits and Losses.
The amounts of the items of Company income, gain, loss or deduction
available to be specially allocated pursuant to Sections 7.3 or 7.4 hereof shall
be determined by applying rules analogous to those set forth in this definition
of Profits and Losses.
"REGULATIONS." The temporary and final Treasury Regulations promulgated
under the Code, as such regulations may be amended from time to time (including
corresponding provisions of succeeding regulations).
"REGULATORY ALLOCATIONS." As defined in Section 7.4.
"TRANSFER." To sell, assign, transfer, give, donate, pledge, deposit,
alienate, bequeath, devise or otherwise dispose of or encumber to any Person
other than the Company.
SECTION 2
CAPITAL CONTRIBUTIONS; MEMBERSHIP INTERESTS
2.1 Capital Contribution of Old Natus. Old Natus shall contribute, as a
contribution to the capital of the Company, assets of the Business pursuant to
the terms of the Contribution Agreement. The Gross Asset Value of Old Natus's
Capital Contribution (as reflected on the Balance Sheet (as such term is defined
in the Contribution Agreement)) is ________________ Dollars ($______________),
which amount shall be adjusted to reflect changes in the components of the
Balance Sheet as of the Contribution Date (as such term is defined in the
Contribution Agreement) made in the ordinary course of business. As set forth in
the Contribution Agreement, the Company shall not assume, nor acquire any assets
subject to, any liabilities, of Old Natus, whether or not related to the
Business, other than as specifically set forth in the Contribution Agreement.
2.2 Capital Contribution of ACM. ACM shall contribute an amount not to
exceed the sum of One Million and No/100ths Dollars ($1,000,000.00) in cash to
the capital of the Company ("Maximum Contribution") on an "as and if needed
basis," provided, however, that at such time as the Manager has prepared the
Business Plan and Budget pursuant to Section 3.3(b) of this Agreement, ACM shall
contribute such amounts (up to an aggregate of the Maximum Contribution) as
required from time to time by the Business Plan and Budget (provided the Company
achieves the anticipated results set forth in the Business Plan and Budget). In
no event shall ACM be required to contribute more than the Maximum Contribution
to the Company, nor shall ACM be required to contribute capital to the Company
to fund, directly or indirectly, distributions to the Members. Notwithstanding
the foregoing, (i) if Old Natus shall become in material default under this
Agreement, the Distribution Agreement or the Contribution Agreement, and such
default is not cured within sixty (60) after written notice thereof to Old Natus
of the default, or (ii) four (4) years after the date of this Agreement, the
obligation of ACM to continue to contribute cash to the capital of the Company
(up to the Maximum Contribution) shall terminate and expire and be of no further
force and effect.
2.3 Capital Contribution of Manager. The Manager shall not be required
to contribute any amounts to the capital of the Company.
2.4 Additional Capital Contributions. l Contributions.
(a) Discretionary. The Members may make additional Capital
Contributions from time to time in such amounts and proportions as are
unanimously agreed.
(b) Required. The Manager may make a capital call on ACM from
time to time in accordance with Section 2.2 of this Agreement if and to the
extent that the Company requires additional capital; provided, however, that if
the Manager has prepared the Business Plan and Budget required pursuant to
Section 3.3(b) of this Agreement, such additional capital calls may be made by
the Manager only in accordance with such Business Plan and Budget, and only if
the Company achieves the anticipated results set forth in the Business Plan and
Budget ("Additional Assessment"). The Manager shall provide written notice of
the requirement for such Additional Assessments to ACM at least thirty (30) days
prior to the date on which such Additional Assessments are required to be made.
If ACM fails to make payment when due of its share of any Additional
Assessments, ACM shall be in default, and the Company, the Manager and the other
Members may exercise any and all remedies to which they may be entitled.
(c) Remedies. In addition to any remedies otherwise available
at law or in equity, and in the alternative, the Manager in its sole discretion
may, in the event of a default by ACM in paying any Additional Assessment:
(i) suspend all rights (including the right to
vote) and benefits attributable to ACM's Membership
Interests and apply all Distributions otherwise owing
to ACM against the Additional Assessments that ACM
failed to make plus any expenses of the Company
resulting from such failure ("Default Amount"), until
the amount of such Distributions, together with any
other payments made by ACM, have cured such default
by paying to the Company the Default Amount; or
(ii) pay the Default Amount, and receive a
Membership Interest in the Company in proportion to
the ratio the Default Amount bears to the Capital
Contributions paid by all of the Members, and reduce
the Membership Interest of ACM by a corresponding
amount.
(d) Reasonableness of Remedies. ACM acknowledges and agrees
that its failure to make a payment owing by reason of any Additional Assessments
will subject the Company to substantial damage. ACM acknowledges and agrees that
it is extremely difficult and impractical to ascertain the extent of such
damages to the Company, the other Members and the Manager, and ACM acknowledges
and agrees that the remedies set forth in this Section 2.4 are reasonable and do
not constitute invalid penalty provisions.
2.5 Temporary Loans. The Manager may cause the Company to borrow funds
(i) in the ordinary course of business from third parties, (ii) if ACM has made
the Maximum Contribution (or the obligation of ACM to make the Maximum
Contribution has expired pursuant to Section 2.2 of this Agreement) and the
Capital Contributions, including the Maximum Contribution, operating income and
other Company funds are insufficient to finance Company activities, or (iii),
after the twelve (12) month period commencing on the date of this Agreement, out
of the ordinary course of business from any party that is not an Affiliate of a
Member. Any such loans shall be on such terms and conditions as the Manager
shall determine, which terms and conditions shall be substantially the same as
those upon which the Company could obtain such a loan from an unrelated third
party financial institution doing business in Arizona. The inability of the
Company to obtain such a loan on more favorable terms from such an unrelated
third party financial institution shall be conclusive evidence that such terms
and conditions satisfy the requirements hereof.
2.6 Membership Interests. The respective Membership Interests of the
Members shall be as follows:
Manager Membership Interest
ACM 84.15%
Old Natus 14.85%
Manager 1.00%
-------
100.00%
2.7 Investment of Proceeds and Reserves. The cash reserves of the
Company may be temporarily invested in short-term highly liquid investments
where there is appropriate safety of principal.
2.8 Priority and Return of Capital. Except as expressly set forth in
this Agreement, no Member shall have priority over any other Member, either as
to the return of Capital Contributions or as to Profits, Losses or
Distributions; provided, however, that this Section shall not apply to advances
or loans which a Member has made to the Company. No Member shall receive any
interest, salary or other return with respect to his Capital Contributions,
Capital Account or for services rendered on behalf of the Company or otherwise
in his capacity as a Member, except with respect to (a) such Member's service as
an Officer of the Company, or (b) loans made to the Company, or except as
otherwise specifically set forth in this Agreement.
2.9 Payments of Individual Obligations. The Company's credit and assets
shall be used solely for the benefit of the Company, and no asset of the Company
shall be transferred or encumbered for or in payment of any individual
obligation of a Member.
2.10 Limitation of Liability. Each Member's liability for the debts and
obligations of the Company shall be limited as set forth in the Act.
2.11 Return of Certain Capital Contributions. If, prior to the earlier
to occur of the first (1st) anniversary of the date of this Operating Agreement
or the contribution of at least the Maximum Contribution by ACM, the Company is
dissolved, sells all or substantially all of its assets, or ceases operations,
all rights to use the registered trademark "NatusPatch" and all rights acquired
from Old Natus to distribute analgesic patches shall be returned to Old Natus.
SECTION 3
THE MANAGER
3.1 Management. The Manager shall have the exclusive right to manage
the affairs of the Company and shall have all rights, powers and authority
afforded to the Manager of a Company under the LLC Act. Without limiting the
generality of the foregoing, the Manager shall have full power and authority to
do the following:
(a) to hold, operate, maintain, otherwise deal with the assets
of the Company;
(b) to engage, on behalf of the Company all employees, agents,
architects, engineers, contractors, attorneys, accountants, consultants or any
other Persons (including Affiliates of the Manager) as the Manager, in its sole
discretion, deems appropriate for the performance of legal and accounting
services or otherwise in connection with the conduct, operation and management
of the Company's business and affairs, all on such terms and for such
compensation as the Manager, in its sole discretion, deems proper; provided,
however, that if the Manager engages Affiliates of the Manager, such engagement
shall be on terms no less favorable to the Company than the terms on which such
services would be available from non-affiliated third-parties;
(c) to prosecute, defend, settle or compromise, at the
Company's expense, any suits, actions or claims at law or in equity to which the
Company is a party or by which it is affected as may be necessary or proper in
the Manager's sole discretion, to enforce or protect the Company's interests,
and to satisfy out of Company funds any judgment, decree or decision of any
court, board, agency or authority having jurisdiction or any settlement of any
suit, action or claim prior to judgment or final decision thereon;
(d) to pay the expenses of the Company from the funds of the
Company; provided that all of the Company's expenses shall, to the extent
feasible, be billed directly to and paid by the Company;
(e) to dissolve and liquidate the Company;
(f) to make loans to the Company and charge a reasonable rate
of interest on such loans;
(g) to admit as Members any Persons to whom Transfers of
Membership Interests are properly made pursuant to Section 8 of this Agreement;
(h) to vote at any election or meeting of any corporation in
person, or by proxy, and to appoint agents to do so in its place and stead;
(i) to file, on behalf of the Company, all required local,
state and federal tax returns relating to the Company or its assets and
properties, and to make or determine not to make any and all elections with
respect thereto, subject to the provisions of Section 7 of this Agreement;
(j) to invest and reinvest the funds of the Company and to
establish bank, money market and other accounts for the deposit of the Company's
funds and permit withdrawals therefrom upon such signatures as the Manager
designates:
(k) to obtain casualty and liability insurance on behalf of
and for the protection of the Company and the Members;
(l) to execute and deliver any and all instruments and
documents, and to do any and all other things necessary or appropriate, in the
Manager's sole discretion, for the accomplishment of the business and purposes
of the Company or necessary or incidental to the protection and benefit of the
Company;
(m) to establish and maintain a working capital reserve for
operating expenses, capital expenditures, normal repairs, replacements,
contingencies, and other anticipated costs relating to the assets of the Company
by retaining a percentage of revenues of the Company as determined from time to
time by the Manager to be reasonable under the then-existing circumstances;
(n) to appoint Officers pursuant to Section 4.2 and to
delegate any of the Manager's rights, powers and authority to any one or more of
such Officers;
(o) to amend this Agreement, provided that such amendment is
of an inconsequential nature and does not adversely affect the Members in any
material respect, or is necessary or desirable to comply with any applicable law
or governmental regulation or is required or contemplated by this Agreement.
3.2 Fees and Compensation to the Manager and Its Affiliates. The
Manager shall not be entitled to receive any compensation for its services to
the Company in its capacity as a Manager, but shall be entitled to reimbursement
for its expenses incurred in connection with the Company.
3.3 Duties and Obligations of the Manager.ns of the Manager.
(a) The Manager shall take action which may be necessary or
appropriate (i) for the continuation of the Company's valid existence as a
limited liability company under the laws of the state of Arizona; (ii) for the
qualification of the Company to do business in any jurisdiction in which such
qualification is necessary to conduct the Company's business; and (iii) for the
acquisition, development, maintenance, preservation and operation of all of the
Company's business in accordance with the provisions of this Agreement and
applicable laws and regulations.
(b) Within six (6) months after the date of this Agreement
with respect to the first year of operations, and thereafter within sixty (60)
days after the end of the preceding fiscal year, for all subsequent years of
operation, the Manager shall develop and prepare a business plan and operating
budget (the "Business Plan and Budget") for the fiscal year, consistent with the
purposes of the Company as set forth in Section 1.3 hereof, which Business Plan
and Budget shall set forth the anticipated capital needs of the Company and the
anticipated results of business of the Company. The Manager shall promptly
deliver a copy of each year's Business Plan and Budget, when prepared, and any
amendments thereto, to each Member.
(c) The Manager shall devote to the Company such time as may
be necessary for the proper performance of its duties hereunder, but shall not
be required to devote its full time to the performance of such duties.
(d) The Manager shall be under a fiduciary duty to conduct the
affairs of the Company in the best interests of the Company and of the Members,
including the safekeeping and use of all Company funds and assets for the
exclusive benefit of the Company. Neither the Manager nor any Affiliate of the
Manager shall enter into any transaction with the Company which may
significantly benefit the Manager or any such Affiliate in its independent
capacity unless the transaction is expressly permitted hereunder or is entered
into principally for the benefit of the Company in the ordinary course of the
Company's business.
3.4 Confirmation of Authority. Any documents to be executed on behalf
of the Company, including, but not limited to, agreements, leases, deeds,
mortgages, deeds of trust, notes, bonds, assignments, stock powers and other
forms of contracts, and all amendments, modifications or rescissions of the
same, shall be binding upon and considered as authorized for the Company when
signed on its behalf by the Manager, by any Officer so authorized pursuant to
this Agreement or by such other Person as the Manager shall specify in writing.
3.5 Liability and Indemnification of the Manager. The Manager, its
officers, directors, shareholders and agents, shall not be liable, responsible
or accountable in damages or otherwise to the Company or to any of the Members
for any act or omission performed or omitted by it, its officers, directors,
shareholders or agents in good faith pursuant to the authority granted to the
Manager by this Agreement in a manner reasonably believed by the Manager, such
officers, directors or agents, to be within the scope of the authority granted
to Manager by this Agreement and in or not opposed to the best interest of the
Company or the Members; provided, however, that neither the Manager, its
officers, directors, nor its agents, shall be relieved of liability in respect
of any claim, issue or matter as to which the Manager, its officers, directors
or agents shall have been adjudged to be liable for gross negligence or willful
misconduct in the performance of its fiduciary duty to the Company or to the
Members; and, subject to such limitation in the case of any such judgment of
liability, the Company shall indemnify, defend and hold the Manager, its
officers, directors, shareholders and agents harmless against any loss or damage
incurred by them including but not limited to any loss or damage resulting
solely by reason of serving as Manager or as an officer, director, shareholder
or agent thereof, and against expenses (including attorneys' fees and costs)
actually and reasonably incurred by Manager, its officers, directors,
shareholders and agents in connection with the defense or settlement of any
threatened, pending or completed action or suit by any Member in connection
therewith. The satisfaction of any indemnification and any saving harmless shall
be from and limited to Company assets, and no Member shall have any personal
liability on account thereof except as otherwise set forth in this Agreement.
3.6 Withdrawal of the Manager. The Manager shall not resign as Manager
without the approval of the Members holding at least a majority of the
Membership Interests. Upon a two-thirds vote of all Members, the Members may
remove the Manager as Manager and designate another person or entity as Manager.
SECTION 4
OFFICERS OF THE COMPANY
4.1 Required Officers. The Officers of the Company shall be a Chief
Executive Officer, a President, and one or more Vice-Presidents. The Manager may
also designate such other offices as the Manager, in its sole discretion, deems
proper or appropriate, and the persons filing such offices shall be deemed
"Officers" for the purposes of this Agreement, and they shall hold their offices
for such terms, exercise such powers and perform such duties as shall be
determined from time to time by the Manager.
4.2 Appointment of Officers. The Officers of the Company shall be
selected by the Manager and shall be natural persons. Any number of offices may
be held by the same person, unless this Agreement provides otherwise. The
initial Officers of the Company shall be as follows:
Officer Office
Alan R. Mishkin Chief Executive Officer
Richard J. Bennetts President
Kathleen Billings Vice President--Marketing and
Products Development
Ryan Wuerch Vice President--Sales
Stanley Lumpp Vice President--Distribution
4.3 Salaries. The salaries of the Officers shall be fixed from time to
time by the Manager, and no Officer shall be prevented from receiving such
salary by reason of the fact that he is also an Affiliate of a Member or the
Manager.
4.4 Term of Office. The Officers shall hold office until their
successors are chosen and qualified. Any Officer may be removed at any time by
the Manager. Any vacancy occurring in any office because of death, resignation,
removal, disqualification or otherwise shall be filled by the Manager.
4.5 Chief Executive Officer. The Chief Executive Officer, if one shall
have been appointed and be serving, shall preside at all meetings of the
Members. The Chief Executive Officer shall act as directing head of the Company
and shall be responsible for the development of the overall business strategies
and goals of the Company, in a manner consistent with the purpose of the Company
set forth in Section 1.3 and the decisions of the Manager.
4.6 President. If a Chief Executive Officer shall not have been
appointed or, having been appointed, shall not be serving or be absent, the
President shall preside at all meetings of the Members. The President shall
possess the power and may perform the duties of the Chief Executive Officer in
his absence or disability and shall perform such other duties as may be
prescribed from time to time by the Manager or the Chief Executive Officer. He
shall have general and active management of the day to day business and affairs
of the Company and shall see that all decisions of the Manager and the Chief
Executive Officer are carried into effect. The President shall sign, unless he
or the Manager designates in writing someone to sign on his or her behalf, all
deeds and conveyances, all contracts and agreements, and all other instruments
requiring execution on behalf of the Company.
4.7 Vice Presidents. There shall be as many Vice Presidents as shall be
determined by the Manager from time to time, and they shall perform such duties
as from time to time may be assigned to them. Any one of the Vice Presidents, as
authorized by the Manager or Chief Executive Officer, shall have all the powers
and perform all the duties of the President in case of the temporary absence of
the President, or in the case of his or her temporary inability to act. In case
of the permanent absence or inability of the President to act, the office shall
be declared vacant by the Manager and a successor shall be chosen by the
Manager.
4.8 Liability and Indemnification of the Officers. No Officer shall be
liable, responsible or accountable in damages or otherwise to the Company or to
any of the Members for any act or omission performed or omitted by him in good
faith pursuant to the authority granted to him by this Agreement in a manner
reasonably believed by him to be within the scope of the authority granted to
him by this Agreement and in or not opposed to the best interest of the Company
or the Members; provided, however, that no Officer shall be relieved of
liability in respect of any claim, issue or matter as to which such Officer
shall have been adjudged to be liable for gross negligence or willful misconduct
in the performance of his fiduciary duty to the Company or to the Members; and,
subject to such limitation in the case of any such judgment of liability, the
Company shall indemnify, defend and hold each Officer harmless against any loss
or damage incurred by him including but not limited to any loss or damage
resulting solely by reason of serving as an Officer and against expenses
(including attorneys' fees and costs) actually and reasonably incurred by him in
connection with the defense or settlement of any threatened, pending or
completed action or suit by any Member in connection therewith. The satisfaction
of any indemnification and any saving harmless shall be from and limited to
Company assets, and no Member shall have any personal liability on account
thereof except as otherwise set forth in this Agreement.
SECTION 5
THE MEMBERS
5.1 Members' Right to Vote. Except as set forth in Section 3.6 hereof,
the Members shall not have the right to vote on any matters with respect to the
business or affairs of the Company except the following matters, as to which the
vote of Members holding a majority-in-interest of the Membership Interests shall
be obtained before the Manager undertakes any such action:
(a) any change in the purpose of the Company;
(b) any amendment to the Operating Agreement that reduces any
Member's Membership Interest; or
(c) any sale or lease of substantially all of the assets of
the Company to the Manager or any Affiliate thereof.
5.2 Meetings. The Manager shall call a meeting of the Members at least
once each year, on such date and at such time as the Manager deems desirable.
Special meetings of the Members may be called by the Manager from time to time
to obtain the vote of the Members on the matters set forth in Sections 3.6 or
5.1, or for any other purpose or purposes. Each Member shall pay its own
expenses incurred in connection with any meeting of the Members of the Company.
5.3 Place of Meetings. The Manager may designate any place, either
within or outside the State of Arizona, as the place of meeting for any meeting
of the Members. If no designation is made, or if a special meeting be otherwise
called, the place of meeting shall be held at the principal place of business of
the Company, as set forth in Section 1.2.
5.4 Notice of Meetings. Written notice stating the place, day and hour
of the meeting and the purpose or purposes for which the meeting is called shall
be delivered not less than three (3) nor more than fifty (50) days before the
date of the meeting, either personally or by mail, by or at the direction of the
Manager, to each Member entitled to vote at such meeting, unless notice is
waived in writing by each Member.
5.5 Proxies. At all meetings of the Members, a Member may vote in
person or by proxy executed in writing by the Member or by a duly authorized
attorney-in-fact. Such proxy shall be filed with the Company before or at the
time of the meeting. No proxy shall be valid after eleven months from the date
of its execution, unless otherwise provided in the proxy.
5.6 Action by Members Without a Meeting. Any action required or
permitted to be taken at a meeting of Members may be taken without a meeting if
the action is evidenced by one or more written consents describing the action
taken, signed by Members holding the proportion of Membership Interests as is
required by this Agreement to take such action, and delivered to the Company for
inclusion in the minutes or for filing with the Company records. Prior to the
Members taking an action under this Section on any matter identified in Sections
5.1(a) through 5.1(c), the Manager shall notify all Members of the proposed
action in writing. An action taken under this Section is effective when the
required number of Members have signed the consent, unless the consent specifies
a different effective date. The Manager shall notify all Members of any action
taken under this Section.
5.7 Other Activities of the Members. The Members and their Affiliates
may engage in other businesses and activities of every nature and description,
independently and with others, provided, however, that except as set forth in
this Section 5.7, no Member nor its Affiliates shall engage in, own, directly or
indirectly or be employed (whether as an employee or consultant) by, any entity
engaged in the multi-level (direct sales) marketing business in any of its
current aspects, and neither the Company nor any Member shall by reason of this
Agreement have any rights in any such venture or in the income or profits
derived therefrom. The Members acknowledge that Alan R. Mishkin, an Affiliate of
ACM and Manager, indirectly owns an interest in Red Rock Collections, Inc., a
corporation that does or may engage in the business of multi-level (direct
sales) marketing and product distribution and acknowledge that such ownership
interest shall not be deemed to be in violation of this Section 5.7.
5.8 Indemnification of the Members. The Company shall protect, defend,
indemnify and hold harmless each Member from and against any losses, damages
(including, without limitation, consequential damages and penalties) and
expenses (including, without limitation, reasonable counsel fees, costs and
expenses incurred in investigating and defending against the assertion of such
liabilities) which may be sustained, suffered or incurred by such Member in
connection any claims asserted by third-parties against such Member arising from
the operation of the Business by the Company.
SECTION 6
DISTRIBUTIONS
6.1 Amount and Time of Distribution. The portion, if any, of the
Company's cash funds and other property, after payment of expenses and the
making of all other required expenditures shall be distributed:
(a) on or before April 15, June 15 and September 15 of each
fiscal year of the Company and January 15 and April 15 of the year following
such fiscal year, an amount of cash with respect to each Member's income tax
liability attributable to allocations of Profits to each Member for such fiscal
year and prior fiscal years of the Company. The amount of each such distribution
shall be equal to (i) 35% of the excess of (A) the cumulative Profits allocated
to the Member pursuant to this Agreement for the fiscal year and all prior
fiscal years of the Company (including a reasonable estimate of the Member's
allocable share of Profits for the fiscal year as of the end of the month
preceding the distribution) over (B) cumulative Losses allocated to the Member
pursuant to this Agreement for all prior fiscal years of the Company minus (ii)
the sum of all prior distributions to such Member; and
(b) to the Members from time to time as the Manager deems
proper.
6.2 General Rule for Distributions. Except as otherwise provided in
this Agreement, all Distributions (other than those pursuant to Section 6.1(a))
shall be made to the Members in accordance with their respective Membership
Interests. Upon liquidation, or in the event of a sale of substantially all of
the assets of the Company in a single transaction, regardless of whether such
sale of the Company causes a dissolution pursuant to Section 9.1 of this
Agreement, liquidation or sales proceeds, as the case may be, shall be
distributed to the Members in accordance with Section 9.3.
6.3 No Distribution upon Withdrawal. No withdrawing Member shall be
entitled to receive any Distribution or the value of such Member's Membership
Interest as the result of such withdrawal prior to the liquidation of the
Company.
SECTION 7
ALLOCATION OF PROFITS AND LOSSES
7.1 Allocation of Profits. After taking into account the special
allocations provided in Sections 7.3 and 7.4, Profits, if any, of the Company
shall be allocated as follows:
(a) first, 100% to the Members until the aggregate Profits
allocated to the Members pursuant to this Section 7.1(a) for such fiscal year
and all previous years is equal to the aggregate Losses allocated to the Members
pursuant to the last sentence of Section 7.2 of this Agreement for all previous
years; and
(b) second, the balance, if any, shall be allocated to the
Members in accordance with their respective Membership Interests.
7.2 Allocation of Losses. After taking into account the special
allocations provided in Sections 7.3 and 7.4, Losses, if any, of the Company
shall be allocated to the Members in accordance with their respective Membership
Interests; provided, however, that the Losses allocated pursuant to this Section
7.2 to any Member shall not exceed the maximum amount of Losses that can be so
allocated without causing any Member to have an Adjusted Capital Account Deficit
at the end of any fiscal year. If an allocation of Losses pursuant to this
Section 7.2 would cause one, but not all, of the Members to have an Adjusted
Capital Account Deficit as a result of such allocation, the limitation set forth
in this Section 7.2 shall be applied on a Member by Member basis so as to
allocate the maximum permissible Losses to each Member under Regulations ss.
1.704-l(b)(2)(ii)(D).
7.3 Special Allocations. The following special allocations shall be
made in the following order:
(a) Except as otherwise provided in Regulations ss.
1.704-2(f), notwithstanding any other provision of this Section 7, if there is a
net decrease in Company Minimum Gain during any fiscal year, each Member shall
be specially allocated items of Company income and gain for such fiscal year
(and, if necessary, subsequent fiscal years) in an amount equal to such Member's
share of the net decrease in Company Minimum Gain, determined in accordance with
Regulations ss. 1.704-2(g). Allocations pursuant to the previous sentence shall
be made in proportion to the respective amounts required to be allocated to each
Member pursuant thereto. The items so to be allocated shall be determined in
accordance with Regulations ss.ss. 1.704-2(f)(6) and 1.704-2(j)(2). This Section
7.3(a) is intended to comply with the minimum gain chargeback requirement in
Regulations ss. 1.704-2(f) and shall be interpreted consistently therewith.
(b) Except as otherwise provided in Regulations ss.
1.704-2(i)(4), notwithstanding any other provision of this Section 7, if there
is a net decrease in Member Nonrecourse Debt Minimum Gain attributable to a
Member Nonrecourse Debt during any fiscal year, each Member who has a share of
the Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse
Debt, determined in accordance with Regulations ss. 1.704-2(i)(5), shall be
specially allocated items of Company income and gain for such year (and, if
necessary, subsequent fiscal years) in an amount equal to such Member's share of
the net decrease in Member Nonrecourse Debt Minimum Gain attributable to such
Member Nonrecourse Debt, determined in accordance with Regulations ss.
1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to each Member
pursuant thereto. The items to be so allocated shall be determined in accordance
with Regulations ss.ss. 1.704-2(i)(4) and 1.704-2(j)(2). This Section 7.3(b) is
intended to comply with the minimum gain chargeback requirement in Regulations
ss. 1.704-2(i)(4) and shall be interpreted consistently therewith.
(c) If any Member unexpectedly receives any adjustments,
allocations or distributions described in Regulation ss.ss. 1.704-l(b)(2)(ii)
(D) (4), (5), or (6), items of Company income and gain shall be specially
allocated to such Member in an amount and a manner sufficient to eliminate, to
the extent required by the Regulations, the Adjusted Capital Account Deficit of
such Member as quickly as possible; provided that an allocation pursuant to this
Section 7.3(c) shall be made only if and to the extent that such Member would
have an Adjusted Capital Account Deficit after all other allocations provided
for in this Section 7 have been tentatively made as if this Section 7.3(c) were
not in this Agreement.
(d) If any Member has a deficit Capital Account at the end of
any fiscal year which is in excess of the sum of (i) the amount such Member is
obligated to restore pursuant to any provision of this Agreement, and (ii) the
amount such Member is deemed to be obligated to restore pursuant to the
penultimate sentences of Regulations ss.ss. 1.704-2(g)(1) and 1.704-2(i)(5),
each such Member shall be specially allocated items of Company income and gain
in the amount of such excess as quickly as possible; provided that an allocation
pursuant to this Section 7.3(d) shall be made only if and to the extent that
such Member would have a deficit Capital Account in excess of such sum after all
other allocations provided in this Section 7.3 have been made as if Section
7.3(c) hereof and this Section 7.3(d) were not in this Agreement.
(e) Nonrecourse Deductions for any fiscal year shall be
specially allocated to the Members in accordance with their Membership
Interests.
(f) Any Member Nonrecourse Deductions for any fiscal year
shall be specially allocated to the Member who bears the economic risk of loss
with respect to the Member Nonrecourse Debt to which such Member Nonrecourse
Deductions are attributable in accordance with Regulations ss. 1.704-2(i)(1).
(g) To the extent an adjustment to the adjusted tax basis of
any Company asset pursuant to Code ss. 734 (b) or Code ss. 743 (b) is required
to be taken into account pursuant to Regulations ss.ss. 1.704-1 (b)
(2)(iv)(M)(2) or 1.704-1 (b) (2)(iv)(M)(4) in determining Capital Accounts as
the result of a distribution to a Member in complete liquidation of his interest
in the Company, the amount of such adjustment to Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the asset)
or loss (if the adjustment decreases such basis) and such gain or loss shall be
specially allocated to the Members in accordance with their interests in the
Company if Regulations ss. 1.704-1 (b) (2)(iv)(M)(2) applies, or to the Member
to whom such distribution was made if Regulations ss. 1.704-1(b)(iv)(M)(4)
applies.
7.4 Curative Allocations. The allocations set forth in Section 7.3
hereof ("Regulatory Allocations") are intended to comply with certain
requirements of the Regulations. It is the intent of the Members that, to the
extent possible, all Regulatory Allocations will be offset with special
allocations of other items of Company income, gain, loss and deduction pursuant
to this Section 7.4. Therefore, notwithstanding any other provision of this
Section 7 (other than the Regulatory Allocations) the Manager shall make
offsetting special allocations of Company income, gain, loss or deduction in
whatever manner it determines appropriate so that, after such offsetting
allocations are made, each Member's Capital Account balance is, to the extent
possible, equal to the Capital Account balance such Member would have had if the
Regulatory Allocations were not part of the Agreement and all Company items were
allocated pursuant to Sections 7.1 and 7.2 hereof.
7.5 Other Allocations Rules.
(a) In accordance with Code ss. 704(c) and the applicable
Regulations issued thereunder, income, gain, loss and deduction with respect to
any property contributed to the capital of the Company, shall, solely for tax
purposes, be allocated among the Members so as to take account of any variation
between the adjusted basis of such property to the Company for federal income
tax purposes and its initial Gross Asset Value. In the event the Gross Asset
Value of any Company property is adjusted pursuant to this Agreement, subsequent
allocations of income, gain, loss, and deduction with respect to such asset
shall take into account any variation between the adjusted basis of such asset
for federal income tax purposes and its Gross Asset Value in the same manner as
under Code ss. 704(c) and the Regulations thereunder. Any elections or other
decisions relating to such allocations shall be made by the Members in any
manner that reasonably reflects the purpose of this Agreement. Allocations made
pursuant to this Section 7.5(a) are solely for purposes of federal, state, and
local taxes and shall not affect, or in any way be taken into account in
computing, any Member's Capital Account or share of Profits, Losses, other
items, or Distributions pursuant to any provision of this Agreement.
(b) The Members shall make such other special allocations as
are required, from time to time, in order to comply with any mandatory provision
of the Regulations or to reflect a Member's economic interest in the Company
determined with reference to such Member's right to receive Distributions from
this Company and such Member's obligation, if any, to pay its expenses and
liabilities.
(c) The Members are aware of the income tax consequences of
the allocations made by this Section 7 and hereby agree to be bound by the
provisions of this Section 7 in reporting their share of Company income and loss
for income tax purposes.
7.6 Capital Account. The Company shall maintain a Capital Account for
each Member in accordance with the following provisions:
(a) To each Member's Capital Account there shall be credited
such Member's Capital Contributions, such Member's distributive share of Profits
and any items in the nature of income or gain which are specifically allocated
pursuant to Sections 7.3 and 7.4 hereof, and the amount of any Company
liabilities assumed by such Member or which are secured by any Company property
distributed to such Member.
(b) To each Member's Capital Account there shall be debited
the amount of cash and the Gross Asset Value of any Company property distributed
to such Member pursuant to any provision of this Agreement, such Member's
distributive share of Losses and any items in the nature of expenses or losses
which are specially allocated pursuant to Sections 7.3 and 7.4 hereof and the
amount of any liabilities of such Member assumed by the Company or which are
secured by any property contributed by such Member to the Company.
(c) In the event that any interest in the Company is
transferred in accordance with the terms of this Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it relates to the
transferred interest.
(d) In determining the amount of any liability for purposes of
Subsections (a) and (b) above, there shall be taken into account Code ss. 752(c)
and any other applicable provisions of the Code and Regulations.
The foregoing provisions and other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations ss. 1.704-l(b), and shall be interpreted and applied in a manner
consistent with such Regulations. In the event the Manager determines that it is
prudent to modify the manner in which the Capital Accounts, or any debits or
credits thereto (including, without limitation, debits or credits relating to
liabilities that are secured by contributed or distributed property or that are
assumed by the Company or the Members), are computed in order to comply with
such Regulations, the Manager may make such modification provided it does not
affect the amounts distributable to any Member upon the dissolution of the
Company. The Manager also shall make any appropriate modifications in the event
unanticipated events (for example, the acquisition by the Company of oil or gas
properties) might otherwise cause this Agreement not to comply with Regulations
ss. 1.704-l(b).
SECTION 8
TRANSFERS OF MEMBERSHIP INTERESTS
8.1 Restrictions on Transfer of Membership Interests. No Member shall
make a Transfer of any Membership Interest or any portion thereof (including,
without limitation, a Transfer of a right to Profits, Losses, or Distributions
to a transferee who does not become a substituted Member) unless approved by the
Manager in its sole discretion and in compliance with the requirements of this
Section 8.
8.2 Termination of the Company for Tax Purposes. The Transfer of all or
any part of a Membership Interest may not be made (and will be invalid) if the
interests sought to be transferred, when added to all other interests in the
Company's capital and/or profits transferred within the twelve consecutive month
period ending on the date of such proposed transfer, would cause the termination
of the Company for federal income tax purposes, provided, however, that a
Transfer causing such a termination may occur if the Manager consents to that
Transfer and acknowledges in writing that the Transfer may cause a termination
of the Company for federal income tax purposes.
8.3 Requirements for Transferee Becoming a Substituted Member. No
transferee shall become a substituted Member in the Company unless the Transfer
is in compliance with Section 8.2 hereof, and the following conditions are
satisfied:
(a) the Person to whom the Transfer is to be made shall
undertake in writing all of the obligations under this Agreement with respect to
the Membership Interest to which the Transfer relates;
(b) all reasonable fees and expenses required in connection
with the Transfer shall have been paid by or for the account of the Person to
whom the Transfer is to be made; and
(c) all agreements and all other documents shall have been
executed and filed and all other acts shall have been performed which the
Manager deems necessary to make the Person to whom the Transfer is to be made a
substituted Member in the Company and to preserve the status of the Company.
SECTION 9
DISSOLUTION, WINDING UP AND LIQUIDATION OF THE COMPANY
9.1 Dissolution.
(a) The Company shall be dissolved upon the occurrence of any
of the following events:
(i) the expiration of its term, as set forth
in Section 1.4;
(ii) the written agreement of Members
holding a majority-in- interest of the Membership Interests;
(iii) the entry of a decree of dissolution
under LLC Act 29-785;
(iv) the acquisition by one Member of all of
the outstanding Membership Interests;
(v) the sale of substantially all of the
assets of the Company in a single transaction and the
collection of all net sales proceeds related thereto; or
(vi) upon the occurrence of any event
described in LLC Act ss. 29-733 to the Manager, unless the
business of the Company is continued by the specific consent
of Members holding a majority (in both capital and profits) of
the Membership Interests given within 90 days after such event
and there are at least two remaining Members.
(b) As soon as possible following the occurrence of any event
causing dissolution of the Company if the Company is not continued, the Manager
shall execute and file a notice of winding up with the Arizona Corporation
Commission. When all debts, liabilities and obligations have been paid and
discharged or adequate provisions have been made therefor and all of the
remaining property and assets have been distributed to the Members, Articles of
Termination shall be executed and filed with the Arizona Corporation Commission.
(c) Notwithstanding any provisions of this Section 9 to the
contrary, if the Company is liquidated within the meaning of Regulations ss.
1.705-2(b)(ii)(G) but none of the events described in Section 9.1(a) hereof have
occurred, the Company shall not be liquidated, the Company's liabilities shall
not be paid or discharged, and the Company's affairs shall not be wound up.
Instead, solely for federal income tax purposes, the Company shall be deemed to
have distributed its assets in kind to the Members, who shall be deemed to have
assumed and taken subject to all Company liabilities, all in accordance with
their respective Capital Accounts and, immediately thereafter the Members shall
be deemed to have recontributed all of such assets in kind to the Company, which
shall be deemed to have assumed and taken subject to all liabilities.
9.2 Effect of Filing of Dissolving Statement. Upon the dissolution of
the Company, the Company shall cease to carry on its business except as may be
necessary for the winding up of its business, but its separate existence shall
continue until the Articles of Termination have been filed with the Arizona
Corporation Commission or until a decree dissolving the Company has been entered
by a court of competent jurisdiction.
9.3 Winding Up, Liquidation and Distribution of Assets.f Assets.
(a) Upon dissolution, an accounting shall be made by the
Company's independent accountants of the accounts of the Company and of the
Company's assets, liabilities and operations, from the date of the last previous
accounting until the date of dissolution. The Members shall immediately proceed
to wind up the affairs of the Company.
(b) If the Company is dissolved and its affairs are to be
wound up, the Manager shall (i) sell or otherwise liquidate all of the Company's
assets as promptly as practicable (except to the extent the Manager may
determine to distribute any assets to the Members in kind), (ii) allocate any
Profits or Losses resulting from such sales to the Members' Capital Accounts in
accordance with Section 7 hereof, (iii) discharge all liabilities of the
Company, including all costs relating to the dissolution, winding up, and
liquidation and distribution of assets, (iv) establish such reserves as may be
reasonably necessary to provide for contingent liabilities of the Company, and
(v) distribute all remaining cash and assets of the Company to the Members in
accordance with their Capital Accounts. Any amounts withheld as reserves but not
ultimately required to discharge liabilities of the Company shall be distributed
to the Members as promptly as possible. Distributions to the Members shall be
made in accordance with the time requirements set forth in Regulations ss.
1.704-1(b)(2)(ii)(B)(2).
(c) Notwithstanding anything to the contrary in this
Agreement, upon a liquidation within the meaning of Regulations ss.
1.704-1(b)(2)(ii)(G), if any Member has a negative deficit Capital Account
balance (after giving effect to all contributions, distributions, allocations
and other Capital Account adjustments for all taxable years, including the year
during which such liquidation occurs), such Member shall have no obligation to
make any contribution to the capital of the Company, and the negative balance of
such Member's Capital Account shall not be considered a debt owed by such Member
to the Company or to any other person for any purpose whatsoever.
(d) Upon completion of the winding up, liquidation and
distribution of the assets and filing of the Articles of Termination, the
Company shall be deemed terminated.
9.4 Return of Contribution Nonrecourse to Other Members. Except as
provided by law, upon dissolution, each Member shall look solely to the assets
of the Company for the return of his Capital Contributions. If the Company
property remaining after the payment or discharge of the debts and liabilities
of the Company is insufficient to return the Capital Contributions of one or
more Members, such Member or Members shall have no recourse against any other
Member.
SECTION 10
BOOKS AND RECORDS OF THE COMPANY; ACCOUNTING AND TAX MATTERS
10.1 Nature of Books and Records. The Manager shall maintain or cause
to be maintained complete and accurate records and books of account appropriate
for the Company's business and affairs. Such books and records shall be kept on
a basis consistent with the accounting methods followed by the Company for
federal income tax purposes.
10.2 Review; Audit. At the discretion of the Manager, the books of the
Company may be reviewed or audited annually at Company expense by such national
independent public accounting firm as the Manager shall designate.
10.3 Elections by Company as to Optional Adjustment to Basis. In the
case of a distribution of property within the provisions of Code ss. 734 or in
the case of a Transfer of a Membership Interest permitted by this Agreement made
within the provisions of Code ss. 743, the Manager on behalf of the Company may,
at its option, file an election under Code ss. 754 in accordance with the
procedures set forth in the applicable Regulations. If such an election is
filed, the Manager shall provide any additional accounting or tax information
with respect to any adjustment to basis for any Member.
10.4 Election With Respect to Taxation as Company. No election shall be
made under Code ss. 761 to exclude the Company from the application of any of
the provisions of Subchapter K, Chapter 1 of the Code.
10.5 Names and Addresses of Members. The Manager shall maintain a
current alphabetical list of the full names and last known business addresses of
all Members at the principal office of the Company. Such list shall be made
available for the review of any Member or his representative at reasonable times
and, upon request either in person or by mail, the Manager shall furnish a copy
of such list to any Member or his representative for the cost of reproduction
and mailing.
10.6 Fiscal Year. The fiscal year of the Company shall end on December
31 of each year.
10.7 Tax Returns. Within ninety (90) days after the end of each fiscal
year of the Company, the Manager shall cause a nationally certified audit firm
to prepare a U.S. partnership return of income and any applicable state or local
returns of income for the Company and, in connection therewith, shall make any
available or necessary elections. Within such ninety (90) day period, the
Company shall furnish to the Members information required to be set forth in
each Member's individual federal income tax return. The Company's U.S.
partnership returns of income, and any applicable state or local returns of
income, for the three most recent fiscal years of the Company shall be kept at
the Company's principal office.
10.8 Financial Information. The Manager shall furnish to each Member
from time to time or upon reasonable demand true and full information regarding
the business and financial condition of the Company. Such financial information
for the three most recent fiscal years of the Company shall be kept at the
Company's principal office.
10.9 Records. The Manager shall keep or cause to be kept at the
Company's principal office (a) full and accurate records of all transactions of
the Company for the three most recent fiscal years, (b) a copy of the Articles
of Organization and all Articles of Amendment thereto together with executed
copies of any powers of attorney pursuant to which any such document has been
executed, (c) copies of the then effective Agreement and (d) copies of any
financial statements of the Company for its three most recent fiscal years.
10.10 Access to Records. Each Member and its designated representatives
shall be permitted access to all records of the Company at the principal office
of the Company during ordinary business hours and shall have the right to make
copies thereof at their own expense. Upon written request, after payment of the
reasonable expenses of duplication, a Member shall be provided with a copy of
the Articles of Organization and any Articles of Amendment thereto. The Company
shall not otherwise be required to deliver or mail a copy of the Articles of
Organization or any Articles of Amendment thereto. The Members shall have the
further right to obtain from the Manager from time to time upon reasonable
demand (i) true and full information regarding the state of the business and
financial condition of the Company, (ii) promptly after becoming available, a
copy of the Company's federal, state and local income tax returns for such year
and (iii) such other information regarding the affairs of the Company as is just
and reasonable within the meaning of the LLC Act.
SECTION 11
MISCELLANEOUS PROVISIONS
11.1 Notices. All notices and other communications required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be deemed to have been duly given, made and received only when delivered against
receipt or when deposited in the United States mails, first class, postage
prepaid, return receipt requested, addressed to the addressee at his address as
shown from time to time in the records of the Company. Any Member may alter the
address to which communications are to be sent by giving written notice of such
change of address to the Manager in conformity with the provisions of this
Section.
11.2 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors,
heirs, personal representatives and assigns.
11.3 Controlling Law. This Agreement shall be governed by and construed
in accordance with the laws of the state of Arizona without respect to its
internal laws governing conflicts. The venue for any dispute arising hereunder
shall be Maricopa County, Arizona
11.4 Provisions Severable. If any provision of this Agreement shall be
or shall become illegal or unenforceable in whole or in part, for any reason,
the remaining provisions shall be nevertheless be deemed valid, binding and
subsisting.
11.5 Indulgences Not Waivers. Neither the failure nor any delay on the
part of any party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of any other right, remedy, power or privilege nor with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any subsequent occurrence.
11.6 Titles Not to Affect Interpretation. The titles of sections,
paragraphs and subparagraphs contained in this Agreement are inserted for the
convenience of reference only, and they neither form a part of this Agreement
nor are they to be used in the construction or interpretation thereof.
11.7 Gender. Words used herein, regardless of the number or gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
11.8 Execution In Counterpart. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument, and any persons signatory hereto may execute this Agreement by
signing any such counterpart.
11.9 Statutory Provisions. Any statutory references in this Agreement
shall include a reference to any successor to such statute.
11.10 Waiver of Action for Partition. Each Member irrevocably waives
during the term of the Company any right that such Member have to maintain any
action for partition with respect to the property of the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the day and year first above written.
"ACM" "OLD NATUS"
ACM Investments, L.L.C., an Natus Corporation, a Minnesota
Arizona limited company corporation
By: Great Western Development
Corporation, an Arizona
corporation, Manager /s/Kathleen A. Billings
By: Kathleen A. Billings
Its: President
/s/Alan R, Mishkin
By: Alan R. Mishkin, President
"MANAGER"
Natus Management, Inc., an Arizona corporation
/s/Richard J. Bennetts
By: Richard J. Bennetts
Its: President
CONFIDENTIAL
MARKETING AND
DISTRIBUTION AGREEMENT
THIS AGREEMENT is made and entered into as of the 11th day of January,
1996 between CNS, Inc., a Delaware corporation ("Distributor"), Natus
Corporation, a Minnesota corporation ("Natus"), and LecTec Corporation, a
Minnesota corporation ("LecTec") (Natus and LecTec are collectively referred
to herein as "Manufacturer").
BACKGROUND
LecTec manufactures the Product (as defined below) and Natus has
rights to the Product. Manufacturer is the owner of the Product. Distributor is
in the business of manufacturing and marketing consumer medical products and has
established sales channels for such products. Manufacturer desires to enter into
a marketing and distribution agreement for the Product on the terms and
conditions set forth in this Agreement
TERMS AND CONDITIONS
NOW THEREFORE, in consideration of the mutual promises contained
herein, the parties hereto agree as follows:
1. Definitions. For purposes of this Agreement, the following terms
shall be defined in the manner set forth below:
1.1 "Product" shall mean Manufacturer's topical analgesic
pain relief patch containing any of the active ingredients methyl salicylate,
menthol and camphor, and all alterations of and improvements to such Product;
provided, however, that Manufacturer may not alter the Product without
Distributor's approval which approval shall not be unreasonably withheld.
1.2 "Territory" shall mean the United States of America and
Canada, and all of their possessions and territories.
1.3 "Exclusive Market" shall mean all retail stores in the
Territory and all wholesalers serving those retail stores.
1.4 "Non-Exclusive Market" shall mean those retail channels
in the Territory other than the channels in the Exclusive Market; provided,
however, that the Non-Exclusive Market shall not include (i) direct response
infommericals and electronic retailing through television-based shopping
programs such as (but not limited to) QVC and HSN, or (ii) direct person to
person marketing, including multi-level distributorships.
1.5 "Growth Factor" for any one calendar year shall mean the
product of Distributor's minimum purchase obligation for the prior year and the
total growth in the United States' retail topical analgesic market for such
prior year as measured by Information Resources, Inc. ("IRI") or Nielson Rating
Services ("Nielson") scanner data.
2. APPOINTMENT OF DISTRIBUTOR.
2.1 Subject to the terms and conditions contained herein,
Manufacturer grants to the Distributor, and the Distributor hereby accepts, the
rights and responsibilities of (i) an exclusive distributor of the Product in
the Exclusive Market in the Territory and (ii) a non-exclusive distributor of
the Product in the Non-Exclusive Market in the Territory. Distributor is
prohibited from selling the Product outside the Exclusive Market or
Non-Exclusive Market or to any customer who is not in the Territory. In
addition, Distributor is hereby granted a right of first refusal to act as
exclusive distributor in the Exclusive Market of any analgesic patch developed
by the Manufacturer other than the Product. Such right of first refusal shall
expire on the first anniversary of the commencement of test marketing of the
Product hereunder.
2.2 Beginning on January 1, 1996 and during the Term of this
Agreement, Manufacturer shall maintain Distributor's exclusivity in the
Exclusive Market in the Territory by not appointing any sales representatives or
distributors, or selling directly through other outlets in the Exclusive Market
in the Territory. Nothing contained herein shall in any manner restrict or limit
Manufacturer in regard to appointing another distributor for the Product or in
regard to selling directly or through other outlets in the Non-Exclusive Market.
Distributor acknowledges that Manufacturer has granted to a third party certain
rights to sell the Product in the Exclusive Market under the trademark "Natus
Patch," which rights are terminable by Manufacturer, and that on January 1, 1996
Manufacturer will give notice to such party to terminate such third party's
rights to sell the Product in the Exclusive Market effective January 30, 1996.
2.3. Each of the parties is an independent contractor and
nothing contained herein shall be deemed or construed to create the relationship
of an agency, partnership, joint venture, franchise or any other association or
relationship between the parties except that of a marketing and distributor
relationship. Distributor is not granted any right or authority to assume or
create any obligations or responsibilities, express or implied, on behalf or in
the name of, Manufacturer or to bind Manufacturer in any manner or thing
whatsoever, without the prior written approval and acceptance by Manufacturer in
each instance.
3. PURCHASE ORDERS.
3.1 No purchase orders of Distributor shall be binding upon
Manufacturer until accepted by Manufacturer in writing. Except as otherwise
agreed in writing by Manufacturer, an order may not be canceled by Distributor
after it has been accepted.
3.2 All sales of Product by Manufacturer to Distributor
hereunder shall be subject to the provisions of this Agreement and shall not be
subject to the terms and conditions contained in any purchase order of
Distributor or confirmation of Manufacturer, except insofar as any such purchase
order or confirmation establishes (i) the quantity of Product to be sold or (ii)
the shipment date of Product.
4. SHIPMENT OF PRODUCT.
4.1 Subject to delay due to force majeure, Manufacturer will
ship Product on the date indicated in Distributor's purchase order if such order
is within the then current sales projection of Distributor. If such order is
beyond the projection, Manufacturer will use commercially reasonable efforts to
meet such order and will not unreasonably withhold or delay its acceptance of
the order.
4.2 All Product sold by Manufacturer to Distributor
hereunder will be shipped by Manufacturer F.O.B. LecTec's loading dock
("Shipping Point").
4.3 Distributor shall assume all risk of loss for Product
upon delivery by Manufacturer of the Product to the Shipping Point.
4.4 Distributor will pay all loading, freight, shipping,
insurance, forwarding and handling charges, taxes, storage, and all other
charges applicable to the Product after it is delivered by Manufacturer to the
Shipping Point.
5. PRICE AND PAYMENT.
5.1 Manufacturer agrees to sell the Product to Distributor
F.O.B. Shipping Point at the price set forth on Exhibit A. Prices may not be
changed without Distributor's prior approval and changes will be based on the
national consumer price index.
5.2 The parties agree to renegotiate in good faith the price
paid by Distributor for the Product in the following situations: (i) for
specified packout configurations, for which different prices will be based on
any cost savings or increases that Manufacturer incurs as a result of such
packout changes, (ii)) in the event price elasticity or competitive pricing
pressures impact Distributor's ability to effectively penetrate the market, in
which case the new prices will be negotiated in good faith; and (iii) to share
manufacturing cost reductions with Distributor in the event that unit sales of
the Product reach sufficient sustainable volume to generate manufacturing
economies of scale, in which case the new prices will be negotiated in good
faith with the understanding that the parties will take into consideration any
cost saving experienced by Distributor in connection with its marketing efforts.
5.3 Manufacturer agrees that it will not (i)) sell
comparably-sized Product to any other party in the Non-Exclusive Market at a
price less than the price paid by Distributor or (ii) sell comparably-sized
Product to any other party at a price less than the price paid for the Product
by Distributor. The restriction in Section 5.3(ii) shall not apply to sales
under (a) agreements existing as of the date of this Agreement or (b) agreements
for sales through direct person to person marketing, including multi-level
distributorships.
5.4 Except as otherwise provided in this Agreement,
Distributor shall pay Manufacturer for each shipment of Product within thirty
(30) days of the date of the invoice issued by Manufacturer in conjunction with
such shipment.
6. RETURNED GOODS POLICY. Distributor may return Product to
Manufacturer upon Manufacturer's prior written approval if such Product deviated
from Distributor's packaging specifications or if the Product or packaging does
not meet the warranties contained in Section 13.1. Complaints concerning
conditions of any Product or packaging must be made within fifteen (15) days of
receipt by Distributor of such Product. Manufacturer shall pay all freight
charges incurred in connection with any return of Product pursuant to this
returned goods policy.
7. MANUFACTURER'S RESPONSIBILITIES.
7.1 In support of Distributor's sales efforts to promote
Product in the Territory, Manufacturer will furnish, at no cost to Distributor,
(i) to the extent known and available to Manufacturer, medical literature
regarding or relating to the Product, including abstracts of clinical studies
and medical journal articles, (ii) sales and promotional materials as may be
developed by Manufacturer, limited to technical data and technical journal
reprints, and (iii) samples of Product in reasonable quantities, as requested by
Distributor and agreed to by Manufacturer, each acting in good faith.
Manufacturer will furnish information to aid in the orientation and training of
Distributor's service and sales personnel.
7.2 Manufacturer will package the Product in conformance
with the packaging specifications provided by Distributor. Distributor will
provide camera-ready artwork for labels and packaging.
7.3 Manufacturer shall take such actions as are necessary
(such as cutting off supply of Product) to prevent any domestic or foreign
entity from distributing or selling, directly or indirectly, the Product in the
Exclusive Market in the Territory.
7.4 Manufacturer shall, with the exception of an IND,
underwrite the cost of any clinical studies necessary to support the Citizens
Petition or other similar FDA filings. Distributor and Manufacturer shall
jointly underwrite the cost of any mutually agreed upon clinical studies
intended to broaden Product claims beyond the monograph. Neither party shall be
obligated to file an IND or perform any clinical studies with respect to the
Product.
7.5 Manufacturer shall give Distributor 180 days' written
notice prior to discontinuing the manufacture of the Product and shall not
discontinue manufacturing the Product prior to December 31, 1997 without
Distributor's written approval, unless the Food and Drug Administration forbids
production or distribution of the Product.
7.6 Manufacturer shall maintain a 30-day inventory of
Product to meet Distributor's forecasted volume requirements provided to
Manufacturer pursuant to Section 8.2.
8. DISTRIBUTOR'S RESPONSIBILITIES. In addition to the duties and
responsibilities outlined elsewhere in this Agreement, Distributor agrees as
follows:
8.1 Distributor will vigorously promote the sale and
acceptance of Product throughout the Territory. Distributor shall provide its
customers with all necessary and appropriate training and support regarding the
use of the Product.
8.2 Distributor shall furnish to Manufacturer a written
four-month rolling forecast for the Product, which forecast shall be given to
Manufacturer on or before the 10th day of each month.
8.3 Distributor shall underwrite the cost of any comparative
clinical studies for the Product. Distributor and Manufacturer shall jointly
underwrite the cost of any clinical studies intended to broaden Product claims
beyond the monograph, which are mutually agreed upon by the parties.
8.4 Claims language in all advertising or promotional
materials utilized by Distributor, its agents or employees in conjunction with
the sale of Product, other than such sales literature as is furnished to
Distributor by Manufacturer, shall be approved, in writing, by Manufacturer
prior to their use or dissemination.
8.5 Distributor shall cooperate fully with Manufacturer in
dealing with customer complaints concerning the Product and shall take such
action to resolve such complaints as may be requested by Manufacturer.
8.6 Distributor agrees, during the term of this Agreement,
to comply with all FDA regulations applicable to the Product. Distributor shall
not, in any way, misrepresent the nature or indications for use of the Product
or, except by prior written approval of Manufacturer, alter the Product.
9. MINIMUM PURCHASE OBLIGATIONS AND RETAIL STORE PLACEMENTS.
9.1 During the term of this Agreement, Distributor shall
purchase a minimum number of Product from Manufacturer per calendar year and
shall have the Product placed in a minimum number of retail stores as of
December 31 of each year, as set forth below.
9.1.1 Year Number of Patches
1996 (Confiidential Treatment Has Been Requested)
1997 (Confiidential Treatment Has Been Requested)
1998 (Confiidential Treatment Has Been Requested)
Thereafter (Confiidential Treatment Has Been Requested)
9.1.2 Year Number of Stores
1996 (Confiidential Treatment Has Been Requested)
1997 (Confiidential Treatment Has Been Requested)
Thereafter (Confiidential Treatment Has Been Requested)
The above minimums assume that test marketing of the Product will begin by May
1, 1996. If test marketing begins later, the parties shall renegotiate the
minimums in good faith.
9.2 The minimum purchase obligation for 1997 may be satisfied
by achieving a combined volume of (Confidential Treatment Has Been Requested)
patches during 1996 and 1997.
9.3 During years 1996, 1997 and 1998, Distributor's
obligations under this Section 9 may be satisfied by achieving either the
Product minimums or retail store minimums determined through IRI or Nielson data
and store purchase data, records of which may be reviewed by Manufacturer.
9.4 In the event that Manufacturer loses its Product deferral
with the FDA and, as a consequence, Distributor is prohibited from selling the
Product, the minimum requirements set forth above shall be waived.
9.5 In the event Distributor shall fail to meet any minimum
requirements as set forth in this Section 9, Distributor shall have defaulted
under this Agreement, and Manufacturer's exclusive remedy is to terminate this
Agreement pursuant to Section 10; provided, however, that after 1998,
Distributor shall not be in breach of this Section 9 and Manufacturer may not
terminate this Agreement until (i) Distributor shall have failed to meet any of
its minimum requirements, (ii) Manufacturer has given Distributor a 30-day
written notice of such failure, and (iii) Distributor fails to meet the minimum
requirements after an additional six-month period to cure.
9.6 The minimums stated above will be appropriately reduced by
good faith negotiation of the parties (i) if Manufacturer does not use
reasonable efforts to defend its patents, (ii) if Manufacturer does not obtain
or maintain the necessary governmental or regulatory approvals to sell the
Product or (iii) where the parties are unable to agree on the price of the
Product pursuant to in paragraph 5.2(ii) hereof.
10. TERM OF AGREEMENT: TERMINATION.
10.1 This Agreement shall commence on the date hereof and
terminate on the later of (i) expiration of the last of Manufacturer's United
States patents on the Product issued or pending as of the date of this Agreement
and (ii) any other patent issued or pending or application filed on the Product
after the date hereof
10.2 Either party may terminate this Agreement by giving
thirty (30) days' written notice to the other party of any material breach
provided that as of the expiration of said thirty (30) day notice period and an
additional sixty (60) days' cure period such breach remains uncured (other than
as set forth in Section 9.5)(iii).
10.3 Either party may terminate this Agreement immediately
upon written notice to the other party if the other party shall: (i) file a
voluntary petition in bankruptcy or be the subject of an involuntary petition in
bankruptcy which is not dismissed within thirty (30) days of the date of filing;
(ii) be voluntarily or involuntarily dissolved; or (iii) have a receiver,
trustee or other court officer appointed for its property in connection with any
such bankruptcy proceeding, liquidation or insolvency proceeding.
10.4 Termination of this Agreement shall not relieve
Manufacturer of its obligations to deliver all Product ordered by Distributor
and accepted by Manufacturer prior to such termination; nor will such
termination relieve Distributor of its obligation to accept and pay for all
Product ordered by Distributor under purchase orders issued by Distributor and
accepted by Manufacturer prior to the date of such termination. Termination
shall not relieve or release either party from its obligation to make any other
payments which may be owing to the other party under the terms of this Agreement
or from any other liability which either party may have to the other arising out
of this Agreement or the breach of this Agreement. Following notice of
termination, Manufacturer shall have no obligation to accept any orders for
Product from Distributor.
10.5 Upon termination of this Agreement for breach by
Manufacturer or for breach by Distributor of its minimum purchase obligations or
minimum store placements hereunder, Distributor shall have the right, but not
the obligation, to cause Manufacturer to repurchase all Product having at least
50% of its original shelf life in possession of Distributor, at the lower of
Distributor's original invoice purchase price or the then current invoice price,
provided, that such Product is new, unused and not materially damaged.
Manufacturer agrees to buy said Product from Distributor for said price should
Distributor exercise this right.
10.6 Upon termination of this Agreement for breach by
Distributor (other than a breach by Distributor of its minimum purchase
obligations or minimum store placements hereunder), Manufacturer shall have no
obligation to repurchase Distributor's inventory of Product, and shall have the
right, but not the obligation, to cause Distributor to purchase, at the then
current price, Manufacturer's 30 day inventory of Product as required to be held
by Manufacturer pursuant to Section 7.6, having at least 50% of its original
shelf life in Manufacturer's possession, provided, that such Product is new,
unused and not materially damaged. Distributor agrees to buy said Product from
Manufacturer for said price should Manufacturer exercise this right.
10.7 Notwithstanding anything contained herein to the
contrary, Sections 12, 13 and 19 of this Agreement shall survive termination of
this Agreement and shall remain in full force and effect.
11. Waiver of Breach. The waiver or failure of either party to
enforce the terms of this Agreement in one instance shall not constitute a
waiver of said party's rights under this Agreement with respect to other
violations.
12. MANUFACTURER'S WARRANTIES AND REPRESENTATIONS: INDEMNIFICATION.
12.1 Manufacturer warrants that the Product and its
packaging (i) are free from defects in material and manufacture, (ii) are fit to
be used as indicated in the Product labeling, (iii) meet all specifications and
performance claims, and (iv) are not adulterated or misbranded (as defined by
the FDA). If a Product or the packaging does not meet its warranty, Manufacturer
shall replace such Product or packaging or refund Distributor's purchase price.
In case of a recall, Manufacturer shall reimburse Distributor for its reasonable
costs in assisting in the recall.
THE WARRANTIES SET FORTH ABOVE ARE IN LIEU OF ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, WHICH ARE HEREBY DISCLAIMED AND EXCLUDED BY
MANUFACTURER, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF USE, EXCEPT AS
EXPRESSED ABOVE IN PARAGRAPH 12.1.
12.2 Manufacturer will comply with all material laws and
regulations, including FDA GMPs with respect to the manufacturing, packaging and
labeling of the Products. Distributor may periodically audit procedures,
processes, process controls and manufacturing records of Manufacturer.
12.3 Each of LecTec and Natus has been duly incorporated and
is validly existing as a corporation in good standing under the laws of the
State of Minnesota and the undersigned has been duly authorized to execute this
Agreement on behalf of the Manufacturer, and when so executed, this Agreement
will constitute the valid and binding obligation of Manufacturer, enforceable in
accordance with its terms.
12.4 Manufacturer has the exclusive right, under the
applicable patents related to the Product, to manufacture the Product, for the
duration of such patents, in the United States and Canada and Manufacturer has
obtained clearance to market the Product in the United States from the FDA. It
will use commercially reasonable efforts to obtain clearance from the Ministry
of Health to market the Product in Canada taking into account the costs of
obtaining such clearance and the anticipated market for the Products in Canada.
12.5 LecTec and Natus shall jointly and severally save
Distributor, its directors, officers and employees from and against and
indemnify them from any and all claims, liabilities, costs and expenses of any
nature (including attorney's fees) caused by reason of claim that the Product
caused personal injury or property damage; provided, however, that
Manufacturer's indemnification obligations are conditioned upon Distributor
giving Manufacturer prompt written notice of any such claims and allowing
Manufacturer to participate in its own defense with its own counsel.
12.6 Manufacturer shall maintain product liability insurance
coverage in the amount of $2 million per occurrence which will be renewed
annually and which shall name Distributor as an additional named insured.
12.7 No party shall be liable to another party for any
consequential damages (e.g., lost profits, business opportunities or
investments) that arise as a result of this Agreement or its termination.
13. DISTRIBUTOR'S REPRESENTATIONS: INDEMNIFICATION.
13.1 Distributor shall not make any statements concerning
the Product which are not approved by Manufacturer, and any such statements by
Distributor shall be the sole responsibility of Distributor and Distributor
shall save Manufacturer, its directors, officers and employees harmless against
and indemnify them from the liability, costs, and expenses of any nature
(including attorneys' fees) which Manufacturer may incur as the result of any
such statements; provided, however, that Distributor's indemnification
obligations are conditioned upon Manufacturer giving Distributor prompt written
notice of any such claims and allowing Distributor to participate in its own
defense with its own counsel.
13.2 Distributor has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware and the undersigned has been duly authorized to execute this Agreement
on behalf of the Distributor, and when so executed, this Agreement will
constitute the valid and binding obligation of Distributor, enforceable in
accordance with its terms.
14. TRADEMARKS AND TRADE NAMES.
14.1 Manufacturer hereby grants to Distributor the exclusive
license to use the "TheraPatch(TM)" trade name for use in the Territory in
connection with the advertising and sale of the Product. If at any time
Distributor markets the Product under a trade name other than "TheraPatch," the
exclusive license granted pursuant to this Section 14.1 shall terminate.
Distributor will discontinue the use of such trade name at the end of this
Agreement. If Distributor uses the TheraPatch name in connection with the
advertising and sale of the Product, Distributor shall indicate on package
labeling of the Product that the product is manufactured by LecTec and that
"TheraPatch" is a trademark of the Manufacturer."
14.2 Distributor is hereby granted the first right of
negotiation to acquire the trade name "TheraPatch." Such right of negotiation
shall expire on the first anniversary of the commencement of test marketing of
the Product hereunder.
14.3 Distributor shall not remove, cover, change, or add to
the labels affixed by Manufacturer to Product without first receiving
Manufacturer's written approval.
15. PATENT OR TRADEMARK INFRINGEMENT.
15.1 If a patent infringement action is commenced or
threatened against Manufacturer as to any Product and Manufacturer elects to, as
a result, discontinue the sale of the Product in any part or all of the
Territory, Distributor shall discontinue its efforts to sell said Product in any
such part or all of the Territory immediately upon receipt of written notice
thereof from Manufacturer. LecTec and Natus shall jointly and severally save
Distributor, its directors, officers and employees harmless from and against and
indemnify them from any and all claims, liabilities, costs and expenses of any
nature (including attorney's fees) caused by reason of claims that the Product
infringes the intellectual property rights of others (e.g., patent, copyright,
trademark, trade name, etc.); provided, however, that Manufacturer's
indemnification obligations are conditioned upon Distributor giving Manufacturer
prompt written notice of any such claims and giving the defense of the claim to
Manufacturer and reasonably cooperating with Manufacturer in the defense.
Distributor shall have a right to cooperate in its own defense with its own
counsel.
15.2 Distributor shall promptly notify Manufacturer in the
event Distributor becomes aware of any activities of a third party that may
constitute infringement of the Manufacturer's patents or pending patents on the
Product or trademarks.
16. Recall. Distributor shall maintain complete and accurate records
of all Product sold by Distributor, its agents or employees (including without
limitation a complete and current list of all customers who have purchased, the
date of such purchases and the lot numbers of the units purchased). In the event
of a recall of any of the Product, Distributor will cooperate fully with
Manufacturer in effecting such recall, including without limitation, promptly
contacting any purchasers Manufacturer desires be contacted during the course of
any such recall, and promptly communicating to such purchasers such information
or instructions as Manufacturer may desire be transmitted to such purchasers.
17. Traceability . Distributor agrees to comply with all traceability
programs in effect at any time as initiated by Manufacturer. Manufacturer may
examine and make transcripts of any records required as part of a traceability
program at reasonable times during business hours.
18. Appointment of Subdistributors. In the event Distributor appoints
any subdistributors or sales representatives in the Territory in connection with
the performance of this Agreement, such appointment shall be made only in the
name and for the account of Distributor and shall be for a term no greater than
the term of this Agreement. Distributor shall not grant to the subdistributors
and/or sales representatives any rights greater than those which are granted by
Manufacturer to Distributor under this Agreement. Distributor shall also impose
on the subdistributors and/or sales representatives the same obligations as
Manufacturer has imposed on Distributor under this Agreement.
19. Confidential Information. Manufacturer and Distributor may
exchange information each considers confidential ("Confidential Information").
"Confidential Information" shall include any information that is not generally
known, including trade secrets, outside of that disclosing party and that is
proprietary to that party, relating to any phase of that party's existing or
reasonably foreseeable business which is disclosed to the receiving parties
during the term of this Agreement. "Confidential Information" does not include
information that (i) is or becomes publicly available through no fault of the
receiving parties, (ii) is in the possession of the receiving parties prior to
the receipt from the disclosing party, (iii) is developed by the receiving party
independently of the Confidential Information, or (iv) is given to the receiving
party by someone else who has the right to do so. Each party hereto specifically
agrees to keep confidential and not to disclose to others any and all
Confidential Information. Upon the request of the disclosing party, or in the
event of the expiration or other termination of this Agreement, the receiving
parties shall promptly return all such Confidential Information to the
disclosing party. Each party hereto agrees not to use any such Confidential
Information except in conjunction with the purposes of this Agreement. The duty
not to disclose or use (other than in conjunction with the performance of this
Agreement) such Confidential information shall survive the termination of this
Agreement.
20. Force Majeure. Neither Manufacturer nor Distributor shall be in
breach of this Agreement for a failure to perform or be liable to the other for
any failure to perform under this Agreement if such failure is caused, in whole
or in part, directly or indirectly, by strikes, lockouts, or any other labor
troubles, fires, floods, acts of God, accidents, embargoes, war, riots, act or
order of any government or governmental agency, delay in the delivery of raw
material parts, or completed merchandise by the supplier thereof or any other
cause beyond the control of, or occurring without the fault of, such party.
21. Notice. All notices under this Agreement shall be in writing, and
may be delivered by hand or sent by mail or facsimile transaction. Notices sent
by mail shall be sent by registered mail return receipt requested, and shall be
deemed received on the date of receipt indicated by the receipt verification
provided by the United States postal service. Notices delivered by hand or
facsimile transaction shall be effective upon receipt. Notices shad be given,
mailed, or sent to the parties at the following addresses:
If to LecTec: With a copy to:
LecTec Corporation Dorsey & Whitney P.L.L.P.
10701 Red Circle Drive Pillsbury Center South
Minnetonka, MN 55343 220 South 6th Street
Attn: Thomas E. Brunelle, Ph.D. Minneapolis, MN 55402
Phone: (612) 933-2291 Attn: Karin Keitel
Fax: (612) 933-1068 Phone: (612) 340-8809
Fax: (612) 340-8738
If to Natus: With a copy to:
Natus Corporation Dorsey & Whitney P.L.L.P.
4550 W. 77th Street Pillsbury Center South
Edina, MN 55435 220 South 6th Street
Attn: Kathleen A. Billings Minneapolis, MN 55402
Phone: (612) 835-4626 Attn: Karin Keitel
Fax: (612) 835-2317 Phone: (612) 340-8809
Fax: (612) 340-8738
If to Distributor: With a copy to:
CNS, Inc. Lindquist & Vennum P.L.L.P.
P.O. Box 39802 4200 MS Center
Minneapolis, MN 55439 80 South 8th Street
Attn: Richard E. Jahnke Minneapolis, MN 55402
Phone: (612) 820-6696 Attn: Patrick Delaney
Fax: (612) 820-6697 Phone: (612) 371-3281
Fax: (612) 371-3207
Any party hereto may designate any other address for notices given it
hereunder for written notice to the other party given at least ten (10) days
prior to the effective date of such change.
22. ENTIRE CONTRACT There are no oral or other agreements or
understandings between the parties affecting this Agreement or relating to the
selling or purchase of Product. This Agreement supersedes all previous oral and
written arrangements between the parties, including their letter of intent dated
October 10, 1995, and is intended as a complete and exclusive statement of the
terms of their understanding.
23. AMENDMENTS. Amendments, if any, shall be in writing and valid
only when signed by all parties.
24. ASSIGNABILITV. No party may assign this Agreement without the
written consent of the other parties; provided, however, that either party may
assign this Agreement without such consent to any majority-owned or controlled
affiliate or subsidiary.
25. SEVERABILITY. In the event that any provision of this Agreement
is held invalid by the final judgment of any court of competent jurisdiction,
the remaining provisions shall remain in full force and effect as if such
invalid provision had not been included herein.
26. REMEDIES. The parties acknowledge that money damages may not be
an adequate remedy for any breach of the provisions of this Agreement and that,
in addition to any other relief afforded by law, an injunction against such
violation may be issued against it and every other person concerned thereby, it
being understood that both damages and an injunction shall be proper modes of
relief and are not to be considered mutually exclusive remedies. In the event of
any such violation, the parties agrees to pay, in addition to the actual damages
sustained by the other parties as a result thereof, the reasonable attorneys'
fees incurred by such party in pursuing any of its rights under this Agreement.
27. ACTION FOR BREACH. The time within which Manufacturer or
Distributor may bring an action for breach of this Agreement shall be one year
from the date of knowledge of such breach. No action may be commenced after that
one-year period.
28. DISPUTES: APPLICABLE LAW AND FORUM SELECTION. Except as altered
or expanded by this Agreement, the substantive law (and not the law of
conflicts) of the State of Minnesota shall govern this Agreement in all respects
as to the validity, interpretation, construction and enforcement of this
Agreement and all aspects of the relationship between the parties hereto. Any
disputes between the parties hereto relating to any provision hereof shall be
settled by submission for arbitration at the Minneapolis, Minnesota office of
the American Arbitration Association under the then current rules of the
American Arbitration Association. Notwithstanding the foregoing, nothing herein
shall prevent a party from seeking and obtaining equitable relief in a court of
competent jurisdiction solely for the purpose of protecting such party's rights,
pending a final decree of the arbitrator.
IN WITNESS WHEREOF, the parties have herunto set their hands ^I as of the day
and year first above written
LECTEC CORPORATION NATUS CORPORATION
By: /s/Thomas E. Brunelle By: /s/Kathleen A. Billings
Thomas E. Brunelle, Ph.D Kathleen A. Billings, President and CEO
Chairman, President and CEO
CNS, INC.
By: /s/Richard J. Jahnke
Richard J. Jahnke, President and COO
Exhibit A
PRICES
(Confidential Treatment Has Been Requested)
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is made and entered into as of May 1, 1996, by
and between LECTEC CORPORATION, a Minnesota corporation (the "Borrower"), whose
address is 10701 Red Circle Drive, Minnetonka, Minnesota 55343, and FIRST BANK
NATIONAL ASSOCIATION, a national banking association (the "Lender"), whose
address is 300 Prairie Center Drive, Eden Prairie, Minnesota 55344.
RECITALS
FIRST: Pursuant to one or more agreements ("Prior Loan Agreements"),
the Lender has made available to the Borrower a revolving line of credit ("Line
of Credit") in the maximum principal amount of One Million and No/100 Dollars
($1,000,000.00) evidenced by a promissory note dated January 2, 1996 made by the
Borrower payable to the order of the Lender ("Prior Revolver").
SECOND: The Borrower has requested that the Lender extend the
maturity date of the Line of Credit and revise the rate at which interest
accrues thereon and the Lender has indicated its willingness to accommodate such
request, subject, however, to certain terms and conditions.
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:
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:
1. DEFINITIONS
"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 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 LecTec Corporation, a Minnesota corporation.
"Business Day" means any day (other than a Saturday, Sunday or legal
holiday in the State of Minnesota) on which national banks are permitted to be
open in Minneapolis, Minnesota and, with respect to Advances to bear interest at
the Eurodollar Rate, a day on which dealings in United States dollars may be
carried on by the Lender in the interbank eurodollar market.
"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).
"Current Ratio" means, at any date, the ratio of the Borrower's
Current Assets to its Current Liabilities.
"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 at the date of which 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.
"ERISA Affiliate" means, with respect to any person, any entity
(whether or not incorporated) which is a member of a Controlled Group, within
the meaning of Section 412(n) of the Internal Revenue Code, as amended from time
to time, and the regulations promulgated and ruling issued thereunder, of which
such person is a member.
"ERISA Event" means (i) a "reportable event," as such term is
described in Section 4043 of ERISA (other than a "reportable event" not subject
to the provision for a thirty (30) day notice to the PBGC), or an event
described in Section 4068(f) of ERISA, or (ii) the withdrawal of Borrower or any
ERISA Affiliate thereof from a multiple employer plan during a plan year in
which it was a "substantial employer," as such term is defined in Section
4001(a)(2) of ERISA, or the incurrence of liability by Borrower or any ERISA
Affiliate thereof under Section 4064 of ERISA upon the termination of a multiple
employer plan, or (iii) the distribution of a notice of intent to terminate a
Plan pursuant to Section 4041 (a)(2) of ERISA or the treatment of a plan
amendment as a termination under Section 4041 of ERISA, or (iv) the institution
of proceedings to terminate a Plan by the PBGC under Section 4042 of ERISA, or
(v) any other event or condition which is reasonably likely to constitute
grounds under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Plan.
"Eurodollar Interbank Rate" means, for each Business Day, the offered
rate for deposits in United States Dollars (rounded upwards, if necessary, to
the nearest 1/16th of one percent), as reported on the Reuters Screen LIBO Page
for such Business Day for delivery of such deposits two (2) Business Days later
for an Interest Period of one (1) month. If at least two rates appear on the
Reuters Screen LIBO Page, the rate for such Interest Period shall be the
arithmetic mean of such rates (rounded as provided above). If fewer than two
rates appear, the Lender may, at its discretion, determine the rate based on
rates offered to the Lender for United States Dollar deposits in the interbank
Eurodollar market.
"Reuters Screen LIBO Page" means the display designated as page
"LIBO" on the Reuter Monitor Money Rates Service (or such other page as may
replace the LIBO Page on that service for the purpose of displaying London
interbank offered rates of major banks for United States Dollar deposits).
"Eurodollar Rate" means a per annum rate of interest equal to the
Eurodollar Rate (Reserve Adjusted) plus two and one-half percent (2.5011/o).
"Eurodollar Rate (Reserved Adjusted)": A rate per annum (rounded
upward, if necessary, to the nearest 1/16th of one percent) calculated for each
Business Day in accordance with the following formula, which shall continue in
effect until the next succeeding Business Day:
ERRA = Eurodollar Interbank Rate
1.00 - ERR
In such formula, "ERR" means "Eurodollar Reserve Rate" and "ERRA" means
"Eurodollar Rate (Reserve Adjusted)," in each instance determined by the Lender
for the applicable Interest Period. The Lender's determination of all such rates
for any Interest Period shall be conclusive in the absence of manifest error.
"Eurodollar Reserve Rate": A percentage, determined for each Business
Day, equal to the daily average during such Interest Period of the aggregate
maximum reserve requirements (including all basic, supplemental, marginal, and
other reserves), as specified under Regulation D of the Federal Reserve Board,
or any other applicable regulation that prescribes reserve requirements
applicable to Eurocurrency liabilities (as presently defined in Regulation D) or
applicable to extensions of credit by the Lender the rate of interest on which
is determined with regard to rates applicable to Eurocurrency liabilities.
Without limiting the generality of the foregoing, the Eurocurrency Reserve
Requirement shall reflect any reserves required to be maintained by the Lender
against (i) any category of liabilities that includes deposits by reference to
which the Eurodollar Rate is to be determined, or (ii) any category of
extensions of credit or other assets that includes the Revolving Credit Loan.
"Event of Default" means any event of default described in Section
8.1 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.
"Interest Period": Except as otherwise indicated, a period commencing
on a Business Day and continuing until the following Business Day but not to
extend beyond the Maturity of the Revolving Credit Note.
"Lender" means First Bank National Association, a national banking
association, its successors and assigns:
"Letter of Credit" means any letter of credit issued by the Lender for
the account of the Borrower, together with all amendments, modifications,
replacements or restatements thereof.
"Lein" 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 Notes and such other
documents as the Lender may reasonably require as security for, or otherwise
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, or may impair 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.
"Note(s)" means the Revolving Credit Note and any and all promissory
notes and other evidences of indebtedness and repayment obligations of the
Borrower to the Lender delivered in connection with a Letter of Credit, in each
case as originally executed and as may be amended, modified, restated or
replaced pursuant to written agreement signed by the Lender.
"Person" means any natural person, corporation, firm, association,
government, governmental agency or any other entity, whether acting in an
individual fiduciary or other capacity.
"Reference Rate" means the rate of interest established and publicly
announced by the Lender from time to time as its "reference rate". The Lender
may lend to its customers at rates that are at, above or below the Reference
Rate.
"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 and No/100
Dollars ($1,000,000.00) 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 Note of even date
herewith in the original principal amount of One Million and No/100 Dollars
($1,000,000.00) 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.
"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.
"Tangible Net Worth" shall have the meaning ascribed to such term
under GAAP (and shall be reduced by all proper reserves) except that in no event
shall it include any receivables due from officers, directors, shareholders,
partners, or entities affiliated with the Borrower, any leasehold improvements,
patents, copyrights, or trademarks, any goodwill, or any organizational costs,
nor shall it include any prepaid expenses or any investment by the Borrower in
Natus, LLC.
"Termination Date" means the earlier of (a) January 1, 1997; or (b)
the date upon which the obligation of the Lender to make Advances is terminated
pursuant to Section 2.8.
"Working Capital" means, as of any date of determination the
Borrower's Current Assets minus its Current Liabilities.
2. THE REVOLVING CREDIT LOAN
2.1. Commitment for Revolving Credit. 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. Within the
limits set forth above, the Borrower may borrow, repay and reborrow amounts
under the Revolving Credit Note.
2.2. Purpose of Loan/Use of Proceeds. The Borrower will use the
proceeds of any Advance hereunder for the Borrower's general corporate purposes.
2.3. 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.
2.4. Records of Advances and Proceeds. 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.
2.5. Interest on the Revolving Credit Note.
(a) The Borrower agrees to pay interest on the outstanding
principal amount of the Revolving Credit Note from the
date thereof until paid in full at the Eurodollar Rate,
adjusted each Business Day; provided, however, that upon
the occurrence and during the continuation of an Event of
Default the Borrower agrees to pay interest on the
outstanding principal amount of the Revolving Credit Note
at a rate per annum equal to the greater of (a) two
percent (2.00%) in excess of the rate applicable to the
unpaid principal amount immediately before such Event of
Default; or (b) two percent (2.00%) in excess of the
Reference Rate in effect from time to time.
(b) 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.
(c) 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.
(d) 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 Eurodollar Interbank Rate shall take place
simultaneously with the corresponding change in such rate.
2.6. 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. Each Advance shall be
deposited to the Borrower's account no. 1-801-2060-0150 with the Lender.
2.7. Payments. Payments and prepayments of principal of, and interest
on, the Revolving Credit Note and all fees, expenses and other obligations under
this Credit Agreement and the other Loan Documents shall be made without set-off
or counterclaim in immediately available funds not later than 3:00 p.m.,
Minneapolis time, on the dates due at the office of the Lender in Minneapolis,
Minnesota indicated on the first page of this Credit Agreement. Funds received
on any day after such time shall be deemed to have been received on the next
Business Day. Whenever any payment to be made hereunder or on the Revolving
Credit Note shall be stated to 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 the computation of any interest or fees.
Notwithstanding the foregoing, the Borrower authorizes the Lender to charge from
time to time against the Borrower's account no. 1-801-2060-0150 with the Lender
any payments when due.
2.8. Termination. The obligation of the Lender to make Advances shall
terminate:
(a) Upon receipt by the Lender of three (3) days' written
notice of termination from the Borrower given at any time
when no amount is outstanding under the Revolving Credit
Note;
(b) Immediately and without further action upon the occurrence
of an Event of Default of the nature referred to in
Subsection 8.1(c) or
(c) Immediately when any Event of Default (other than of the
nature specified in Subsection 8.I 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 so elect to terminate its obligation to make
Advances by giving notice to Borrower.
3. ADDITIONAL PROVISIONS REGARDING EURODOLLAR RATE
3.1. Increased Costs. If, as a result of any law, rule, regulation,
treaty or directive, or any change therein or in the interpretation or
administration thereof or compliance by the Lender with any request or directive
(whether or not having the force of law) from any court, central bank,
governmental authority, agency or instrumentality, or comparable agency:
(a) any tax, duty or other charge with respect to any of the
loans under this Credit Agreement ("Loans"), the Notes or
the Revolving Credit Commitment is imposed, modified or
deemed applicable, or the basis of taxation of payments to
the Lender of interest or principal of the Loans or of any
fees with respect to the Revolving Credit Commitment
("Commitment Fees") (other than taxes imposed on the
overall net income of the Lender by the jurisdiction in
which the Lender has its principal office) is changed;
(b) any reserve, special deposit, special assessment or
similar requirement against assets of, deposits with or
for the account of, or credit extended by, the Lender is
imposed, modified or deemed applicable;
(c) any increase in the amount of capital required or expected
to be maintained by the Lender or any Person controlling
the Lender is imposed, modified or deemed applicable; or
(d) any other condition affecting this Credit Agreement or the
Revolving Credit Commitment is imposed on the Lender or
the relevant funding markets;
and the Lender determines that, by reason thereof, the cost to the Lender of
making or maintaining the Loans or the Revolving Credit Commitment is increased,
or the amount of any sum receivable by the Lender hereunder or under a Note in
respect of any Loan is reduced;
then, the Company shall pay to the Lender upon demand such additional amount or
amounts as will compensate the Lender (or the controlling Person in the instance
of (c) above) for such additional costs or reduction (provided that the Lender
has not been compensated for such additional cost or reduction in the
calculation of the Eurodollar Reserve Rate). Determinations by the Lender for
purposes of this section of the additional amounts required to compensate the
Lender shall be conclusive in the absence of manifest error. In determining such
amounts, the Lender may use any reasonable averaging, attribution and allocation
methods.
3.2. Deposits Unavailable or Interest Rate Unascertainable or
Inadequate: Impracticability. If the Lender determines (which determination
shall be conclusive and binding on the parties hereto) that:
(a) deposits of the necessary amount for the relevant Interest
Period for any Advance are not available to the Lender in
the relevant markets or that, by reason of circumstances
affecting such market, adequate and reasonable means do
not exist for ascertaining the Eurodollar Rate for such
Interest Period;
(b) the Eurodollar Rate (Reserve Adjusted) will not adequately
and fairly reflect the cost to the Lender of making or
funding Advances for a relevant Interest Period; or
(c) the making or funding of Advances to bear interest at the
Eurodollar Rate has become impracticable as a result of
any event occurring after the date of this Credit
Agreement which, in the opinion of the Lender, materially
and adversely affects such Advances or the Lender's
commitment to make such Advances or the relevant market;
the Lender shall promptly give notice of such determination to the Company, and
from and after such notice interest shall accrue on all then-outstanding and
future Advances at one or more alternate rates of interest reasonably determined
by the Lender.
3.3. Changes in Law Rendering Use of Eurodollar Rate Unlawful. If at
any time due to the adoption of any law, rule, regulation, treaty or directive,
or any change therein or in the-interpretation -or administration thereof by any
court, central bank, governmental authority, agency or instrumentality, or
comparable agency charged with the interpretation or administration thereof, or
for any other reason arising subsequent to the date of this Credit Agreement, it
shall become unlawful or impossible for the Lender to apply the Eurodollar Rate
to obligations of the Company, the obligation of the Lender to apply such rate
shall, upon the happening of such event, forthwith be suspended for the duration
of such illegality or impossibility and, from and after such time interest shall
accrue on then-outstanding and future Advances at one or more alternate rates of
interest reasonably determined by the Lender.
3.4. Discretion of the Lender as to Manner of Funding.
Notwithstanding any provision of this Credit Agreement to the contrary, the
Lender shall be entitled to fund and maintain its funding of all or any part of
the Loans in any manner it elects; it being understood, however, that for
purposes of this Credit Agreement, all determinations hereunder shall be made as
if the Lender had actually funded and maintained each Advance through the
purchase of deposits having a term corresponding to such Interest Period and
bearing an interest rate equal to the Eurodollar Interbank Rate for such
Interest period (whether or not the Lender shall have granted any participations
in such Advances).
4. CONDITIONS OF LENDING
4.1. 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:
(a) This Credit Agreement and the Revolving Credit Note each
appropriately completed and duly executed by the Borrower;
(b) A current UCC secured transaction search, federal and
state tax lien search, judgment and bankruptcy search,
reflecting results satisfactory to the Lender, on the
Borrower from the appropriate filing offices as required
by the Lender,
(c) A Certificate of Good Standing for the Borrower issued by
the Secretary of State of Minnesota;
(d) 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;
(e) 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;
(f) A 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,
(g) 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 of
each such officer; and
(h) Such other documents, information and actions as the
Lender may reasonably request.
4.2. Conditions Precedent to all Advances. The obligation of the
Lender to make any Advance hereunder, including the initial Advance, is subject
to the satisfaction of each of the following, unless waived in writing by the
Lender:
(a) 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 Advance.
(b) No Default or Event of Default shall have occurred and be
continuing.
(c) 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.
(d) No Default or Event of Default shall result from the
making of any such Advance.
(e) No Material Adverse Occurrence shall have occurred and be
continuing.
5. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender as follows:
5.1. Organization, etc. The Borrower is 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.
5.2. Due Authorization. The execution, delivery and performance by
the Borrower of the Loan Documents have been duly authorized by all necessary
corporate action, 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), 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, 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
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.
5.3. 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.
5.4. 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.
5.5. 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.
5.6. 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.
5.7. 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.
5.8. 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.
5.9. 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.
5.10. 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.
5.11. 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).
5.12. Defaults. 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 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 Borrower, or (b)
instrument evidencing any indebtedness or under any agreement relating to such
indebtedness.
5.13. 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.
5.14. Financial Status. The Borrower is not insolvent (as such term
is defined in Section 101(29) of the United States Bankruptcy Code of 1978, as
amended or Minnesota Statutes Section 513.42, as amended) and will not be
rendered insolvent (as such term is defined in Section 10 1(29) of the United
States Bankruptcy Code of 1978, as amended or Minnesota Statutes Section 513.42,
as amended) by execution of this Credit Agreement or any other of the Loan
Documents, or consummation of the transactions contemplated thereby.
5.15. 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.
6. 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:
6.1. Financial Statements and Reports. Furnish to the Lender, at the
times set forth below, the following financial statements, reports and
information:
(a) As soon as available, but in any event within one hundred
twenty (120) 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;
(b) As soon as available but in any event within one hundred
twenty (120) days after each fiscal year end a copy of the
form IOK Report filed for such year by the Borrower with the
Securities and Exchange Commission or other governmental
entity;
(c) As soon as available, but in any event within sixty (60) days
after the last day of each quarterly fiscal period a copy of
the form IO-Q Report for such quarter filed by the Borrower
with the Securities and Exchange Commission or other
governmental entity; and
(d) Such other information concerning the business, operations and
condition (financial or otherwise) of the Borrower as the
Lender may reasonably request.
6.2. Maintenance of Corporate Existence. Maintain and preserve its
corporate existence.
6.3. 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.
6.4. Notices. As soon as practicable, give notice to the Lender of:
(a) The commencement of any litigation relating to the Borrower
involving claimed damages in excess of $100,000.00 or
relating to the transactions contemplated by this Credit
Agreement;
(b) 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,
(c) Any Reportable Event or "prohibited transaction" or the
imposition of a Withdrawal Liability, 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
(d) Any Default or Event of Default under this Credit Agreement.
6.5. 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 maintian all material rights, liens, franchises, permits, certificates of
compliance or grants of authority required in the conduct of its business.
6.6. 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.
6.7. Insurance. The Borrower shall keep its business adequately
insured and maintain the insurance coverages required under any document
securing the Notes or this Credit Agreement.
6.8. Conduct of Business. Continue to engage primarily in the
business being conducted on the date of this Credit Agreement.
6.9. Working Capital. Maintain at all times Working Capital of not
less than Two Million and No/I00 Dollars ($2,000,000.00).
6.10. Tangible Net Worth. Maintain at all times Tangible Net Worth in
an amount not less than Eight Million Eight Hundred Fifty Thousand and No/100
Dollars ($8,850,000.00).
6.11. Current Ratio. Maintain at all times a Current Ratio of not
less than 2.5 to 1.0
6.12. Debt to Tangible Net Worth Ratio:. Maintain at all times a
ratio of its Debt to its Tangible Net Worth of not more than .70 to 1.0
6.13. Zero Balance. Maintain a zero balance under the Revolving
Credit Note for at least thirty (30) days during the term thereof.
6.14. Further Assurances. The Borrower agrees upon reasonable request
by the Lender to execute and deliver such further instruments, deeds and
assurances, and do such further acts as may be necessary or proper to carry out
more effectively the purposes of this Credit Agreement and the other Loan
Documents.
6.15. ERISA Compliance. Comply at all times with all applicable
provisions of ERISA and the regulations and published interpretations
thereunder.
6.16. Letters of Credit. The Borrower agrees that if it wishes from
time to time to have the Lender issue for the Borrower's account one or more
Letters of Credit, the Lender shall only be obligated to issue any such Letter
of Credit upon completion of all applications, agreements for repayment and
other documentation deemed necessary by the Lender for such Letter of Credit in
accordance with its standard practices. The Borrower further agrees that (i) any
repayment agreement or other evidence of the Borrower's obligation to repay
amounts outstanding under a Letter of Credit will be deemed one of the "Notes"
for purposes of this Credit Agreement; (ii) the Borrower will pay to the Lender
in connection with Letters of Credit all fees and costs in accordance with the
Lender's customary and standard practices for letters of credit of the same type
and amount and interest accrued on amounts advanced thereunder at the rate or
rates described in the documents executed in connection with each such Letter of
Credit; and (iii) no Letter of Credit shall expire later than the maturity date
of the Revolving Credit Note stated thereon.
7. 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:
7.1. 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.
7.2. Liens. Create, incur, assume or suffer to exist any Lien or 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, (c) Liens for
current taxes and assessments which are not yet due and payable; and (d)
purchase money security interests to secure the indebtedness permitted under
Section 7.3(d) below.
7.3. 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 not to exceed
$250,000.00 in the aggregate during any fiscal year of the Borrower.
7.4. 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.
7.5. Change in Ownership. Permit a material change in the ownership
or management of the Borrower as in effect on the date of this Credit Agreement.
8. EVENTS OF DEFAULT AND REMEDIES
8.1. Events of Default. The term "Event of Default" shall mean any of
the following events:
(a) The Borrower shall default in the payment when due, or if
payable on demand, upon demand, of any principal or interest
on any of the Notes; or
(b) 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 fifteen (I5) days after notice from the Lender to
the Borrower thereof; or
(c) The Borrower 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 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
trustee, receiver or other custodian shall otherwise be
appointed for the Borrower or any of its assets; 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 the Borrower shall take any corporate
action to authorize, or in furtherance of, any of the
foregoing; or
(d) Any judgments, writs, warrants of attachment, executions or
similar process (not undisputedly covered by insurance) in an
aggregate amount in excess of $25,000.00 shall be issued or
levied against the Borrower or any of its assets and shall not
be released, vacated or fully bonded prior to any sale and in
any event within forty-five (45) days after its issue or levy;
or
(e) Any garnishment summons, writ of attachment, or other legal
paper referring to the Borrower or any Guarantor shall be
served on the Lender, or
(f) 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
(g) The occurrence of any Material Adverse Occurrence; or
(h) A Reportable Event (as defined under ERISA) shall have
occurred.
8.2. 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 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 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
9. MISCELLANEOUS
9.1. 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.
9.2. 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.
9.3. 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, and
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 Note 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.
9.4. 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 paid 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.
9.5. 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.
9.6. 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.
9.7. 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.
9.8. 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.
9.9. 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.
9.10. Recitals Incorporated. The recitals to this Credit Agreement
are incorporated into and constitute an integral part of this Credit Agreement
9.11. 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.
9.12. Prior Loan Agreements Superseded, This Credit Agreement amends,
restates, and supersedes in their entirety the Prior Loan Agreements 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.
LECTEC CORPORATION,
a Minnesota corporation
By: /s/Erwin Templin
Its: Excecutve Vice President
FIRST BANK NATIONAL ASSOCIATION,
a national banking association
By: /s/Terri A. Deveau
Its: Vice President
ACKNOWLEDGMENTS
STATE OF MINNESOTA )
)
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 6th day of
May 1996, by Erwin Templin, the Executive Vice President of LECTEC CORPORATION,
a Minnesota corporation, on behalf of the corporation.
/s/Terri A. Deveau
Notary Public
Terri A. DeVeau
HENNEPIN COUNTY
My Commission Expires Jan. 31, 2000
STATE OF MINNESOTA )
)
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 6th day of
May, 1996, by Terry A. DeVeau, the Vice President of FIRST BANK NATIONAL
ASSOCIATION a national banking association, on behalf of the association.
/s/ Dawn M. Riegert
Notary Public
Dawn M. Reigert
Hennipin County
My Commission Expires Jan. 31. 2000
$1,000,000.00 Minneapolis, Minnesota
Due: January 1, 1997 May 1, 1996
REVOLVING CREDIT NOTE
1. LOAN AMOUNT AND INTEREST RATE. FOR VALUE RECEIVED, LECTEC
CORPORATION, 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 300 Prairie Center Drive, Eden Prairie,
Minnesota 55344, or such other place as the holder hereof may designate in
writing from time to time, the principal sum of One Million and No/100 Dollars
(S 1,000,000.00), or so much thereof as may be advanced from time to time
pursuant to that certain 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 ("Credit
Agreement"), 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
rates per annum which shall be determined in accordance with the provisions of
the Credit Agreement.
2. PAYMENT SCHEDULE. This Note shall be payable in the following manner
2.1 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 January 1, 1997.
2.2 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 remaining shall be applied against principal
outstanding under this Note.
2.3 Any payment due on any non-business day of the Lender shall
be due upon (and interest shall accrue to) the next business
day.
3. DEFAULT INTEREST RATE. Upon the occurrence and during the
continuation of an Event of Default as defined in the Credit Agreement, 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 (2.00%) per annum in excess of the rate of interest
then in effect under the terms of this Note or (ii) two percent (2.00%) per
annum plus the Reference Rate (as defined in the Credit Agreement) in effect
from time to time. 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.
4. 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 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.
5. 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, and/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.
6. 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.
7. SECURITY. As 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.
8. 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.
9. EXTENSION AND RENEWAL. This Note is issued in substitution for,
but not in payment of, that certain promissory note of Maker dated January 2,
1996 in the original principal amount. of $1,000,000.00 payable to the order of
the Lender and amounts outstanding thereunder shall hereafter be deemed
outstanding hereunder.
10. 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 paid 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.
LECTEC CORPORATION,
a Minnesota corporation
By /s/Erwin W. Templin
Its ExecutiveVice President
ACKNOWLEDGMENT
STATE OF MINNESOTA )
) SS.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 6th day of May 1996, by
Erwin Templin, the Ex. Vice President of LECTEC CORPORATION, a Minnesota
corporation on behalf of the corporation.
/s/Terri DeVeau
Notary Public
WORKING CAPITAL LOAN AGREEMENT
THIS WORKING CAPITAL LOAN AGREEMENT ("Agreement") is dated as of the 5th day of
September, 1995 and is by and between ______________ ("Shareholder"), and Natus
Corporation ("Natus"), a Minnesota Corporation, whose address is 4550 West 77th
Street, Suite 300, Minneapolis, Minnesota 55435.
ARTICLE 1
SECTION 1.1. Subject to the terms of this Agreement, Shareholder agrees to loan
to Natus (defined as "Loan") the amount $_____ Dollars ($_____). Natus shall
execute and deliver to Shareholder a promissory note ("Note") in the amount of
the Loan in a form substantially similar to the form attached hereto and labeled
as Exhibit A. The Note shall mature on the Maturity Date.
SECTION 1.2. The principal balance of the Loan shall be paid in full no later
than one year from the date hereof (defined as the "Maturity Date,'); provided,
however, that the Loan may be paid in full or in part at any time prior to the
Maturity Date.
SECTION 1.3. Interest on the Loan shall accrue at the rate of seven percent (7%)
per annum from the date of the Loan. Interest on the Loan shall accrue on the
basis of actual days lapsed in a year of 365 days and shall be paid on the
Maturity Date.
SECTION 1.4. Unless otherwise agreed to by Shareholder, all payments of
principal and interest required hereunder or under the Loan shall be made to
Shareholder without offset deduction or counterclaim of any kind whatsoever on
the date on which such payment is due. Interest on the principal amount of the
Loan shall abate upon receipt of such amount by Shareholder. If payment under
the Loan becomes due and payable on a day other than a business day, the due
date thereof shall be extended to the next succeeding business day, and interest
thereon shall be payable at the applicable rate during such extension.
SECTION 1.5. Natus may at any time, at its option, prepay the Loan, in whole or
in part, without premium or penalty. All prepayments shall be applied first to
accrued and unpaid interest under the Loan, then to principal.
SECTION 1.6. For purposes of this Agreement, the Maturity Date is September 5,
1996.
ARTICLE 2
SECTION 2.1. Any of the following events shall be an "Event of Default" under
this Agreement:
a. If Natus shall default in the payment when due of principal or
interest on the Loan or any other obligation payable by Natus hereunder
as and when such payment or obligation is due and payable, provided
that such default shall continue for a period of thirty (30) days from
the date on which such payment was due; or
b. If Natus shall default in the due observance or performance of any
other covenant, condition or agreement contained in this Agreement; or
c. If Natus shall:
i. Make an assignment for the benefit of creditors, or file a
voluntary petition under any bankruptcy, reorganization or
receivership laws, or if proceedings under any bankruptcy,
reorganization or receivership law shall be instituted against
Natus and not dismissed within thirty (30) days after its
commencement; or
ii. Generally not pay its debts as such debts become due, or
admit in writing its inability to pay its debts as they
mature: or
iii. Become "insolvent, " as such term is defined in the
Bankruptcy Code, 11 U.S.C. Section 101 (3 1) .
SECTION 2.2. Upon the occurrence of an Event of Default and at any time
thereafter, Shareholder may, at its option, and without notice, take any or all
of the following actions:
a. Declare the Loan, and all other obligations of Natus to Shareholder
to be forthwith due and payable in full, without presentment, demand,
protest or other notice of any kind, all of which, to the extent
permitted by applicable law, are hereby expressly waived; or
b. Take any and all action and pursue any and all remedies as may be
permitted by this Agreement or by applicable law. In the event the Loan
is referred to an attorney-at-law for collection after an Event of
Default, then in addition to the principal and interest, Shareholder
shall be entitled to collect all costs of collection, including but not
limited to actual attorney's fees, incurred in connection with any of
Shareholder's collection efforts, whether or not suit on this Loan is
filed, and all such costs and expenses shall be payable on demand.
SECTION 2.3. The powers conferred on Shareholder by this Article 2 are solely to
protect the interest of Shareholder, and shall not impose any duties on
Shareholder to exercise any powers. The remedies herein provided are cumulative
and not exclusive of any remedies provided by law.
ARTICLE 3
SECTION 3.1. Unless otherwise specified herein, all notices, requests, demands
or other communications to or from the parties hereto shall be addressed to the
address set forth herein. Any notice, demand or request so delivered shall
constitute valid notice under this Agreement and shall be deemed to have been
received (a) on the day of actual delivery in the case of personal delivery, (b)
on the next business day after the date when sent in the case of delivery by a
nationally-recognized overnight courier, (c) on the third business day after the
date of deposit in the U.S. mail in the case of mailing or (d) in the case of a
facsimile transmission on the day sent, if on a business day, or if not sent on
a business day, on the next business day after the day sent. Any party hereto
may from time to time by notice in writing served upon the other as aforesaid
designate a different mailing address to which all such notices, demands or
requests thereafter are to be addressed.
SECTION 3.2. None of the Shareholder's rights or interests under or in this
Agreement, in the Note, or in the Stock Warrant Agreement described in Article 4
of this Agreement may be assigned.
SECTION 3.3. This Agreement may be executed in two or more counterparts, each of
which shall constitute an original, but all of which taken together shall
constitute one contract. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Minnesota.
SECTION 3.4. Neither any failure nor any delay on the part of Shareholder in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall a single or partial exercise thereof preclude any other or
further exercise, or the exercise of any other right, power or privilege.
SECTION 3.5. No modification, amendment or waiver of any provision of this
Agreement, nor consent to any departure by Natus therefrom, shall in any event
be effective unless the same shall be in writing and signed by Shareholder, and
then such waiver or consent shall be effective only in the specified instance
and for the purpose for which given. No notice to or demand on Natus in any case
shall entitle Natus to any other or further notice or demand in the same,
similar or other circumstances.
SECTION 3.6. This Agreement shall become effective when it shall have been
executed by Natus and Shareholder. In case one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein and therein shall not in any way be affected or impaired
thereby.
SECTION 3.7. Article headings in this Agreement are included herein for
convenience of reference only, and shall not constitute a part of this Agreement
for any other purpose.
SECTION 3.8. This is not a third-party beneficiary contract and nothing herein,
express or implied, is intended or shall be construed to confer upon or to give
to any person or corporation, other than the parties hereto, any right, remedy
or claim under or by reason of this Agreement, and the covenants, stipulations
and agreement contained herein are and shall be for the sole and exclusive
benefit of the parties hereto, their successors and assigns.
SECTION 3.9. NATUS HEREBY REPRESENTS AND WARRANTS TO SHAREHOLDER THAT THE
OBLIGATIONS EVIDENCED BY THIS AGREEMENT ARE STRICTLY AND EXCLUSIVELY FOR WORKING
CAPITAL PURPOSES ONLY.
ARTICLE 4
SECTION 4.1. Subject to the terms of a Stock Warrant Agreement ("Warrant") in a
form substantially similar to the form attached hereto and labeled as Exhibit B,
Natus agrees to issue, for each full dollar of the Loan, a warrant to purchase
one share of Natus Corporation common stock at the purchase price of one dollar
($1.00) per share of common stock.
SECTION 4.2. Unless otherwise sooner terminated, the term of the Warrant shall
automatically expire on the Maturity Date of the Loan (defined as "Warrant
Term").
SECTION 4.3. The Warrant may be exercised in full or in part at any time during
the Warrant Term; provided, however, it is acknowledged and understood by the
parties hereto that no fractional shares will be issued under the Warrant.
ACCORDINGLY, the parties hereto have caused this Agreement to be executed as of
the date first written above.
NATUS CORPORATION SHAREHOLDER
BY: Kathleen A. Billings _____________________________
(Signature)
ITS: President _____________________________
(Print Name)
DATE: September 5, 1995 _____________________________
Address
_____________________________
City State Zip
Exhibit A
$ Minneapolis, Minnesota
September 5, 1995
NON-NEGOTIABLE PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned, Natus Corporation (hereinafter "Payor") ,
promises to pay to the order of _____________ (hereinafter the "Holder") , in
lawful money of the United States of America, the principal sum of $ Dollars
($_____________) , together with interest on the unpaid balance of such amount
at the rate of seven percent (7%) per annum.
This Note is referred to in that certain Working Capital Loan Agreement (the
"Agreement") dated September 5, 1995 between the Payor and Holder. This Note is
issued, is to be repaid, and may be accelerated under the terms and provisions
of the Agreement. The Holder is entitled to all the benefits provided for in the
Agreement, or referred to therein. The provisions of the Agreement are
incorporated by reference herein with the same force and effect as if fully set
forth herein.
On September 5 1996, all principal and interest hereunder shall be immediately
due and payable in full. All or any part of the balance due hereunder may be
prepaid at any time without penalty. All payments on this Note shall be applied
first to the payment of accrued interest, and the balance shall be applied to
principal.
The Holder may, at its option, record on this Note by appropriate notation the
date and amount of each payment of principal made by the Payor. Each such entry
shall be prima facie evidence of the amount outstanding hereunder; provided,
however, that the failure by the Holder to make any such endorsement shall not
affect the obligations of the Payor hereunder. Absent manifest error, this Note
shall be conclusive evidence of the principal and interest due hereunder.
The Payor hereby waives presentment and demand for payment, notice of dishonor,
protest and notice of protest, and agrees to pay all reasonable costs of
collection, including reasonable attorneys, fees.
No failure to accelerate the debt evidenced hereby by reason of a default
hereunder shall be construed to be a waiver of the right to insist upon prompt
payment thereafter, or shall be deemed to be a novation of this Note, or as a
reinstatement of the debt evidenced hereby, or as a waiver of such right of
acceleration or any other right, or be construed so as to preclude the exercise
of any right which the Holder may have, whether by the laws of the state
governing this Note, by agreement, or otherwise.
This Note may not be changed orally, but only by an agreement in writing signed
by the party against whom such agreement is sought to be enforced. This Note
shall be governed by and construed in accordance with the laws of the State of
Minnesota.
NATUS CORPORATION
By: _____________
Its: _____________
Exhibit B
WARRANT TO PURCHASE SHARES OF COMMON STOCK
OF NATUS CORPORATION
For value received, _____________("Investor"), is entitled to subscribe to and
purchase from Natus Corporation, a Minnesota corporation (the "Company") , up to
_______ ( ) fully paid and nonassessable shares of the Company's common stock at
the price of One Dollar ($1.00) per share (the "warrant exercise price").
This warrant may be exercised by Investor at any time or from time to time after
September 5, 1995 and prior to September 5, 1996. This warrant is subject to the
following provisions, terms and conditions:
1. The rights represented by this warrant may be exercised by the
holder hereof, in whole or in part, by written notice of exercise
delivered to the Company at least twenty (20) days prior to the
intended date of exercise and by the surrender of this warrant
(properly endorsed if required) at the principal office of the Company
and upon payment to it by cash, certified check or bank draft of the
purchase price for such shares. The shares so purchased shall be deemed
to be issued as of the close of business on the date on which this
warrant has been so exercised by payment to the Company of the warrant
exercise price. Certificates for the shares of stock so purchased shall
be delivered to the holder within fifteen (15) days after the rights
represented by this warrant shall have been so exercised, and, unless
this warrant has expired, a new warrant representing the number of
shares, if any, with respect to which this warrant has not been
exercised shall also be delivered to the holder hereof within such
time. No fractional shares shall be issued upon the exercise of this
warrant.
2. The Company covenants and agrees that all shares that may be issued
upon the exercise of the rights represented by this warrant shall, upon
issuance, be duly authorized and issued, fully paid and nonassessable
shares. The Company further covenants and agrees that during the period
within which the rights represented by this warrant may be exercised,
the Company will at all times have authorized, and reserved for the
purpose of issue or transfer upon exercise of the subscription rights
evidenced by this warrant, a sufficient number of shares of its common
stock to provide for the exercise of the rights represented by this
warrant.
3. This warrant shall not entitle the holder hereof to any voting
rights or other rights as a shareholder of the Company.
4. This warrant and all rights hereunder are not transferable, in whole
or in part, without the express prior written consent of the Company,
which consent may be withheld for any reason.
5. Neither this warrant nor any term hereof may be changed, waived,
discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
IN WITNESS WHEREOF, the Company has caused this warrant to be signed and
delivered by a duly authorized officer as of the 5th day of September 5, 1995
Natus Corporation
By: ____________________
Its: ____________________
WARRANT EXERCISE
(To be signed only upon exercise of warrant)
The undersigned, the holder of the foregoing warrant, hereby irrevocably elects
to exercise the purchase right represented by such warrant for, and to purchase
thereunder, the shares of common stock of Natus Corporation, to which such
warrant relates and herewith makes payment of $ ** therefor in cash or by check
and requests that the certificates for such shares be issued in the name of, and
be delivered to whose address is set forth below the signature of the
undersigned.
Dated: __________________________
______________________________
(Signature)
______________________________
(Address)
WORKING CAPITAL LOAN AGREEMENT
THIS WORKING CAPITAL LOAN AGREEMENT (Agreement) is dated as of the 5th day of
September, 1995 and is by and between LecTec Corporation ("Shareholder"), and
Natus Corporation ("Natus"), a Minnesota Corporation, whose address is 4550 West
77th Street, Suite 300, Minneapolis, Minnesota 55435.
ARTICLE 1
SECTION 1.1. Subject to the terms of this Agreement, Shareholder agrees to loan
to Natus (defined as "Loan") the amount $227,959.00 Dollars ($ 227,959.00 ) .
Natus shall execute and deliver to Shareholder a promissory note ("Note") in the
amount of the Loan in a form substantially similar to the form attached hereto
and labeled as Exhibit A. The Note shall mature on the Maturity Date.
SECTION 1.2. The principal balance of the Loan shall be paid in full no later
than one year from the date hereof (defined as the "Maturity Date,'); provided,
however, that the Loan may be paid in full or in part at any time prior to the
Maturity Date.
SECTION 1.3. Interest on the Loan shall accrue at the rate of seven percent (7%)
per annum from the date of the Loan. Interest on the Loan shall accrue on the
basis of actual days lapsed in a year of 365 days and shall be paid on the
Maturity Date.
SECTION 1.4. Unless otherwise agreed to by Shareholder, all payments of
principal and interest required hereunder or under the Loan shall be made to
Shareholder without offset deduction or counterclaim of any kind whatsoever on
the date on which such payment is due. Interest on the principal amount of the
Loan shall abate upon receipt of such amount by Shareholder. If payment under
the Loan becomes due and payable on a day other than a business day, the due
date thereof shall be extended to the next succeeding business day, and interest
thereon shall be payable at the applicable rate during such extension.
SECTION 1.5. Natus may at any time, at its option, prepay the Loan, in whole or
in part, without premium or penalty. All prepayments shall be applied first to
accrued and unpaid interest under the Loan, then to principal.
SECTION 1.6. For purposes of this Agreement, the Maturity Date is September 5,
1996.
ARTICLE 2
SECTION 2.1. Any of the following events shall be an "Event of Default" under
this Agreement:
a. If Natus shall default in the payment when due of principal or
interest on the Loan or any other obligation payable by Natus hereunder
as and when such payment or obligation is due and payable, provided
that such default shall continue for a period of thirty (30) days from
the date on which such payment was due; or
b. If Natus shall default in the due observance or performance of any
other covenant, condition or agreement contained in this Agreement; or
c. If Natus shall:
i. Make an assignment for the benefit of creditors, or file a
voluntary petition under any bankruptcy, reorganization or
receivership laws, or if proceedings under any bankruptcy,
reorganization or receivership law shall be instituted against
Natus and not dismissed within thirty (30) days after its
commencement; or
ii. Generally not pay its debts as such debts become due, or
admit in writing its inability to pay its debts as they
mature: or
iii. Become "insolvent, " as such term is defined in the
Bankruptcy Code, 11 U.S.C. Section 101 (3 1).
SECTION 2.2. Upon the occurrence of an Event of Default and at any time
thereafter, Shareholder may, at its option, and without notice, take any or all
of the following actions:
a. Declare the Loan, and all other obligations of Natus to Shareholder
to be forthwith due and payable in full, without presentment, demand,
protest or other notice of any kind, all of which, to the extent
permitted by applicable law, are hereby expressly waived; or
b. Take any and all action and pursue any and all remedies as may be
permitted by this Agreement or by applicable law. In the event the Loan
is referred to an attorney-at-law for collection after an Event of
Default, then in addition to the principal and interest, Shareholder
shall be entitled to collect all costs of collection, including but not
limited to actual attorney's fees, incurred in connection with any of
Shareholder's collection efforts, whether or not suit on this Loan is
filed, and all such costs and expenses shall be payable on demand.
SECTION 2.3. The powers conferred on Shareholder by this Article 2 are solely to
protect the interest of Shareholder, and shall not impose any duties on
Shareholder to exercise any powers. The remedies herein provided are cumulative
and not exclusive of any remedies provided by law.
ARTICLE 3
SECTION 3.1. Unless otherwise specified herein, all notices, requests, demands
or other communications to or from the parties hereto shall be addressed to the
address set forth herein. Any notice, demand or request so delivered shall
constitute valid notice under this Agreement and shall be deemed to have been
received (a) on the day of actual delivery in the case of personal delivery, (b)
on the next business day after the date when sent in the case of delivery by a
nationally-recognized overnight courier, (c) on the third business day after the
date of deposit in the U.S. mail in the case of mailing or (d) in the case of a
facsimile transmission on the day sent, if on a business day, or if not sent on
a business day, on the next business day after the day sent. Any party hereto
may from time to time by notice in writing served upon the other as aforesaid
designate a different mailing address to which all such notices, demands or
requests thereafter are to be addressed.
SECTION 3.2. None of the Shareholder's rights or interests under or in this
Agreement, in the Note, or in the Stock Warrant Agreement described in Article 4
of this Agreement may be assigned.
SECTION 3.3. This Agreement may be executed in two or more counterparts, each of
which shall constitute an original, but all of which taken together shall
constitute one contract. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Minnesota.
SECTION 3.4. Neither any failure nor any delay on the part of Shareholder in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall a single or partial exercise thereof preclude any other or
further exercise, or the exercise of any other right, power or privilege.
SECTION 3.5. No modification, amendment or waiver of any provision of this
Agreement, nor consent to any departure by Natus therefrom, shall in any event
be effective unless the same shall be in writing and signed by Shareholder, and
then such waiver or consent shall be effective only in the specified instance
and for the purpose for which given. No notice to or demand on Natus in any case
shall entitle Natus to any other or further notice or demand in the same,
similar or other circumstances.
SECTION 3.6. This Agreement shall become effective when it shall have been
executed by Natus and Shareholder. In case one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein and therein shall not in any way be affected or impaired
thereby.
SECTION 3.7. Article headings in this Agreement are included herein for
convenience of reference only, and shall not constitute a part of this Agreement
for any other purpose.
SECTION 3.8. This is not a third-party beneficiary contract and nothing herein,
express or implied, is intended or shall be construed to confer upon or to give
to any person or corporation, other than the parties hereto, any right, remedy
or claim under or by reason of this Agreement, and the covenants, stipulations
and agreement contained herein are and shall be for the sole and exclusive
benefit of the parties hereto, their successors and assigns.
SECTION 3.9. NATUS HEREBY REPRESENTS AND WARRANTS TO SHAREHOLDER THAT THE
OBLIGATIONS EVIDENCED BY THIS AGREEMENT ARE STRICTLY AND EXCLUSIVELY FOR WORKING
CAPITAL PURPOSES ONLY.
ARTICLE 4
SECTION 4.1. Subject to the terms of a Stock Warrant Agreement ("Warrant") in a
form substantially similar to the form attached hereto and labeled as Exhibit B,
Natus agrees to issue, for each full dollar of the Loan, a warrant to purchase
one share of Natus Corporation common stock at the purchase price of one dollar
($1.00) per share of common stock.
SECTION 4.2. Unless otherwise sooner terminated, the term of the Warrant shall
automatically expire on the Maturity Date of the Loan (defined as "Warrant
Term").
SECTION 4.3. The Warrant may be exercised in full or in part at any time during
the Warrant Term; provided, however, it is acknowledged and understood by the
parties hereto that no fractional shares will be issued under the Warrant.
ACCORDINGLY, the parties hereto have caused this Agreement to be executed as of
the date first written above.
NATUS CORPORATION SHAREHOLDER
BY: /s/Kathleen A. Billings /s/Thomas E. Brunelle
(Signature)
ITS: President Thomas E. Brunelle
(Print Name)
DATE: September 5, 1995 10701 Red Circle Drive
Address
Minnetonka MN 55343
City State Zip
Exhibit A
$ 227,959.00** Minneapolis, Minnesota
September 5, 1995
NON-NEGOTIABLE PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned, Natus Corporation (hereinafter "Payor") ,
promises to pay to the order of Lectec Corporation (hereinafter the "Holder") ,
in lawful money of the United States of America, the principal sum of $227,959**
Dollars ($ 227,959.00** ) , together with interest on the unpaid balance of such
amount at the rate of seven percent (7%) per annum.
This Note is referred to in that certain Working Capital Loan Agreement (the
"Agreement") dated September 5, 1995 between the Payor and Holder. This Note is
issued, is to be repaid, and may be accelerated under the terms and provisions
of the Agreement. The Holder is entitled to all the benefits provided for in the
Agreement, or referred to therein. The provisions of the Agreement are
incorporated by reference herein with the same force and effect as if fully set
forth herein.
On September 5 1996, all principal and interest hereunder shall be immediately
due and payable in full. All or any part of the balance due hereunder may be
prepaid at any time without penalty. All payments on this Note shall be applied
first to the payment of accrued interest, and the balance shall be applied to
principal.
The Holder may, at its option, record on this Note by appropriate notation the
date and amount of each payment of principal made by the Payor. Each such entry
shall be prima facie evidence of the amount outstanding hereunder; provided,
however, that the failure by the Holder to make any such endorsement shall not
affect the obligations of the Payor hereunder. Absent manifest error, this Note
shall be conclusive evidence of the principal and interest due hereunder.
The Payor hereby waives presentment and demand for payment, notice of dishonor,
protest and notice of protest, and agrees to pay all reasonable costs of
collection, including reasonable attorneys, fees.
No failure to accelerate the debt evidenced hereby by reason of a default
hereunder shall be construed to be a waiver of the right to insist upon prompt
payment thereafter, or shall be deemed to be a novation of this Note, or as a
reinstatement of the debt evidenced hereby, or as a waiver of such right of
acceleration or any other right, or be construed so as to preclude the exercise
of any right which the Holder may have, whether by the laws of the state
governing this Note, by agreement, or otherwise.
This Note may not be changed orally, but only by an agreement in writing signed
by the party against whom such agreement is sought to be enforced. This Note
shall be governed by and construed in accordance with the laws of the State of
Minnesota.
NATUS CORPORATION
By: /s/Kathleen A. Billings
Its: President
Exhibit B
WARRANT TO PURCHASE SHARES OF COMMON STOCK
OF NATUS CORPORATION
For value received, LecTec Corporation ("Investor"), is entitled to subscribe to
and purchase from Natus Corporation, a Minnesota corporation (the "Company") ,
up to 277,959 (227,959 ) fully paid and nonassessable shares of the Company's
common stock at the price of One Dollar ($1.00) per share (the "warrant exercise
price").
This warrant may be exercised by Investor at any time or from time to time after
September 5, 1995 and prior to September 5, 1996. This warrant is subject to the
following provisions, terms and conditions:
1. The rights represented by this warrant may be exercised by the
holder hereof, in whole or in part, by written notice of exercise
delivered to the Company at least twenty (20) days prior to the
intended date of exercise and by the surrender of this warrant
(properly endorsed if required) at the principal office of the Company
and upon payment to it by cash, certified check or bank draft of the
purchase price for such shares. The shares so purchased shall be deemed
to be issued as of the close of business on the date on which this
warrant has been so exercised by payment to the Company of the warrant
exercise price. Certificates for the shares of stock so purchased shall
be delivered to the holder within fifteen (15) days after the rights
represented by this warrant shall have been so exercised, and, unless
this warrant has expired, a new warrant representing the number of
shares, if any, with respect to which this warrant has not been
exercised shall also be delivered to the holder hereof within such
time. No fractional shares shall be issued upon the exercise of this
warrant.
2. The Company covenants and agrees that all shares that may be issued
upon the exercise of the rights represented by this warrant shall, upon
issuance, be duly authorized and issued, fully paid and nonassessable
shares. The Company further covenants and agrees that during the period
within which the rights represented by this warrant may be exercised,
the Company will at all times have authorized, and reserved for the
purpose of issue or transfer upon exercise of the subscription rights
evidenced by this warrant, a sufficient number of shares of its common
stock to provide for the exercise of the rights represented by this
warrant.
3. This warrant shall not entitle the holder hereof to any voting
rights or other rights as a shareholder of the Company.
4. This warrant and all rights hereunder are not transferable, in whole
or in part, without the express prior written consent of the Company,
which consent may be withheld for any reason.
5. Neither this warrant nor any term hereof may be changed, waived,
discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
IN WITNESS WHEREOF, the Company has caused this warrant to be signed and
delivered by a duly authorized officer as of the 5th day of September 5, 1995
Natus Corporation
By: /s/Kathleen A. Billings
Its: President
WARRANT EXERCISE
(To be signed only upon exercise of warrant)
The undersigned, the holder of the foregoing warrant, hereby irrevocably elects
to exercise the purchase right represented by such warrant for, and to purchase
thereunder, the shares of common stock of Natus Corporation, to which such
warrant relates and herewith makes payment of $277,959.00** therefor in cash or
by check and requests that the certificates for such shares be issued in the
name of, and be delivered to whose address is set forth below the signature of
the undersigned.
Dated: ________________________
___________________________
(Signature)
___________________________
(Address)
EXHIBIT 23.01
AUDITORS' CONSENT
We have issued our report dated August 26, 1996 accompanying the
consolidated financial statements included in the Annual Report of LecTec
Corporation on Form 10-K for the year ended June 30, 1996. We hereby consent to
the incorporation by reference of said report in the Registration Statements of
LecTec Corporation on Forms S-8 (File No. 33-121780, effective April 21, 1987
and No. 33-45931, effective February 21, 1992).
Grant Thornton LLP
Minneapolis, Minnesota
September 23, 1996
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 800,693
<SECURITIES> 0
<RECEIVABLES> 2,159,771
<ALLOWANCES> 74,208
<INVENTORY> 2,011,327
<CURRENT-ASSETS> 5,449,682
<PP&E> 8,646,478
<DEPRECIATION> 3,533,503
<TOTAL-ASSETS> 12,319,003
<CURRENT-LIABILITIES> 1,209,658
<BONDS> 0
0
0
<COMMON> 38,358
<OTHER-SE> 10,896,987
<TOTAL-LIABILITY-AND-EQUITY> 12,319,003
<SALES> 13,100,754
<TOTAL-REVENUES> 13,100,754
<CGS> 8,131,095
<TOTAL-COSTS> 8,131,095
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (670,193)
<INCOME-TAX> (38,000)
<INCOME-CONTINUING> (632,193)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (632,193)
<EPS-PRIMARY> (.17)
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