SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1997.
/ / 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 Common Stock held by non-affiliates
of the Registrant as of September 19, 1997 was $17,558,896 based upon the last
reported sale price of the Common Stock at that date by the Nasdaq Stock Market.
The number of shares outstanding of the Registrant's Common Stock as of
September 19, 1997 was 3,842,818 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information from the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held November 20, 1997 (1997 Proxy Statement).
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
LecTec Corporation (the "Company") designs, manufactures and markets
resting diagnostic (ECG or "electrocardiograph") electrodes, conductive and
non-conductive adhesive hydrogels, medical tapes and patches for the topical
application of drugs or other therapeutic compounds. The Company markets its
products to medical products distributors, physician clinics, hospital
purchasing groups, hospitals, consumers through retail distribution channels,
original equipment manufacturers (OEMs) 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 aqueous conductive gels in order to
maintain contact with the skin. The Company has since continued to develop,
manufacture and market electrodes as well as hydrogels, medical tapes, topical
drug delivery systems, patches and therapeutic products. A hydrogel is a polymer
network having an affinity for water and similar materials which is ideal for
electrical conductivity and skin compatibility. The Company holds domestic and
foreign patents on several products.
The Company, through its research and development efforts, is
investigating new systems and products for topical drug delivery, new conductive
adhesive hydrogel polymers, medical tapes and wound care treatments, as well as
a smoking cessation pill. In addition, existing technologies are being refined
for product line extensions and 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, skin compatible, adhesive
hydrogels technology to cardiac diagnostic electrodes. The Company's patented
natural and synthetic-based polymers are self-adherent and are capable of being
made electrically conductive. Using natural-based polymers, the Company
developed one of the first solid gel disposable resting diagnostic ECG
electrodes. All of the Company's electrodes are electrically and chemically
stable.
All of the Company's skin interface technologies are chemically
compatible with human skin, thereby reducing or eliminating skin irritation,
reducing damage to the skin as well as 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, different from some of the conductive gels used in
competitive products. An integral part of the Company's proprietary technology
is the use of environmentally responsible substances and processes in the
manufacturing of its products.
CONDUCTIVE PRODUCTS
The Company's conductive products include diagnostic electrodes and
electrically conductive and non-conductive adhesive hydrogels.
The solid gel design of the Company's electrodes provides more
consistent electrical performance and eliminates clean-up time. Currently the
Company has three different types of diagnostic electrodes: T-1000 Plus, a
disposable electrode made of natural polymer solid gel with gentle adhesion;
MP-3000, a synthetic solid gel electrode with aggressive adhesion which meets
all AAMI (American Association For Medical Instrumentation) standards including
defibrillation recovery; and AG4000, a synthetic solid gel, silver substrate
electrode which also meets all AAMI standards including defibrillation recovery.
The Company manufactures synthetic and natural-based hydrogels. The
Company pioneered hydrogel technology and developed alternatives to competitors'
hydrogels that are resistant to dehydration, evaporation problems and changes in
their electrical and physical properties. The Company
<PAGE>
also manufactures high quality adhesives used for attaching devices to the body.
The hydrogels can be modified to deliver specific medications to the skin for
topical use or through the skin for localized and systemic application. The
hydrogels also can be manufactured to have various levels of conductivity, with
or without self-adhesive properties, for diagnostic electrodes, electrosurgical
grounding pads, external pacing and defibrillation electrodes, TENS
(Transcutaneous Electronic Nerve Stimulation) products and iontophoretic return
electrodes. Sales of conductive products accounted for approximately 63%, 61%
and 52% of the Company's total sales for the fiscal years 1997, 1996 and 1995.
MEDICAL TAPE PRODUCTS
The Company manufactures and markets hypo-allergenic medical tape
products in various individual slit roll widths and in large jumbo rolls for the
world market. The Company's medical tape business includes the U.S. healthcare
market (hospitals and alternate care segments), the U.S. consumer market and the
international healthcare market. Medical tape products manufactured and marketed
by the Company are configured in both 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 healthcare industry.
The Company offers branded, private label and converter alliance
(selling of semi-finished goods to a manufacturer who then converts the goods
into a finished product) programs. The Company recently finalized a new LecTec
brand strategy which it believes will allow access to several new markets that
are not currently being served by the Company through private label distribution
channels.
Sales of medical tapes accounted for approximately 25%, 24% and 26% of
the Company's total sales for the fiscal years 1997, 1996 and 1995.
THERAPEUTIC PRODUCTS
The Company manufactures and markets topical drug delivery patches. The
hydrogel-based patch products use a monolithic (single structure adhesive)
system that delivers drugs and other therapeutic compounds onto and into the
skin. Products currently manufactured using the adhesive-based patch technology
are analgesic patches for localized pain relief, wart removers, and a corn and
callus remover. These products are marketed as OTC (over-the-counter) products.
Analgesic patches are marketed under the LecTec brand TheraPatch(TM) and through
several other marketing partners. Sales of therapeutic products accounted for
approximately 12%, 15% and 22% of the Company's total sales for the fiscal years
1997, 1996 and 1995 (see further discussion of therapeutic product sales under
Part II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, of this Form 10-K).
CUSTOMERS
Burdick Corporation accounted for 19%, 17% and 15% of the Company's
total sales for the fiscal years 1997, 1996 and 1995. The Company sold its
products to approximately 140 active customers in 1997 and 150 active customers
during 1996 and 1995. The Company's backlog orders (purchase orders received
from customers for future shipment) as of August 12, 1997 totaled $1,663,000
(all of which the Company expects to fill in fiscal 1998), compared with
approximately $1,319,000 on August 12, 1996.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
Design development planning, clinical testing, manufacturing,
packaging, labeling and distribution of the Company's products are subject to
federal (FDA - Food and Drug Administration), state, local and foreign
regulation. The Company's electrodes under current FDA policy are marketed
pursuant to Section 510(k) notification, which is a means of obtaining FDA
clearance to market a medical device. The Company's topical drug products are
marketed under the OTC monographs (submission requirements). Any new drug and
transdermal new drug development is marketed after approval of a New Drug
Application (NDA) containing full reports of detailed laboratory and clinical
investigations on laboratory animals and human patients.
<PAGE>
The Company does not use solvents in the manufacturing of its products
and thus maintains environmental responsibility. The Company does not anticipate
any major expenditures for environmental controls during the next fiscal year.
COMPETITION
The markets for electrodes, hydrogels, medical tapes, topical 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 have
significantly greater financial, marketing and technological resources than the
Company. However, the Company believes that it competes on the basis of
proprietary technology and its ability to manufacture and market its products to
multiple healthcare market segments.
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 has also noted a consolidation of customers and
reduction in the number of manufacturers of medical tapes.
The Company's OTC analgesic patch competes with ointments, lotions and
creams manufactured by various competitors. Schering Plough (Dr. Scholl's), the
major competitor of two of the Company's therapeutic products, an OTC corn and
callous remover and an OTC wart remover, holds in excess of 85% U.S. market
share for both products.
The Company believes its proprietary technology, customer focus and
flexible manufacturing capabilities position it competitively in the U.S. and
international markets.
PATENTS AND TRADEMARKS
The Company has U.S. and foreign patents on adhesive membranes,
electrodes, transdermal and topical delivery systems and tape structures.
Twenty-two U.S. patents and fourteen international patents are currently
assigned or licensed to the Company. Three U.S. patents were issued to the
Company during fiscal 1997. The first two patents cover cotinine's use in aiding
smoking cessation. The third patent covers a synthesis or method of producing
cotinine. Thirteen U.S. and foreign applications are pending and the Company has
an exclusive license to seven other pending applications. The patents most
pertinent to the Company's major products have been issued and have a remaining
duration in excess of seven years.
Two registrations of trademarks were received in fiscal 1997. Five
other trademark registrations are pending, three of which were filed in fiscal
1997.
The Company expects that its products will be subject to continuous
modifications due to improvements in materials and rapid technological advances
in the market for medical products. Therefore, the Company's continued success
does not depend solely upon ownership of patents, but 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 both patents and trade secrets 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.
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 and approved products and new technologies.
The Company may develop products jointly with corporations and/or with
inventors from outside the Company 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
<PAGE>
arrangement with an appropriate distributor. Research and development contract
opportunities are evaluated on an individual basis.
Research and development resources are being used to fund development
of new analgesic patch products, conductive products, medical tapes, specialty
wound management products and a cotinine based smoking cessation product.
In November 1996, the Company was informed that the FDA had accepted
its IND (Investigational New Drug) submission for cotinine. The Company believes
that cotinine is a promising non-nicotine drug for use in treating tobacco
withdrawal symptoms. Because of the additional cost associated with the
remaining clinical work on cotinine, the Company is actively seeking outside
partners to help fund and move this non-nicotine program to completion.
In fiscal years 1997, 1996 and 1995, the Company spent approximately
$1,515,000, $1,975,000 and $1,877,000 on research and development.
MARKETING AND MARKETING STRATEGY
The Company markets and sells its products to medical products
distributors, physician clinic, hospital purchasing organizations, hospitals,
consumers through retail partners, original equipment manufacturers (OEMs) and
direct selling groups.
The Company recently implemented a proactive marketing and sales
strategy to expand its existing customer business relationships and to develop a
base of new customers. The Company also recently formalized a balanced
distribution strategy, consisting of traditional private label distribution and
a new LecTec brand strategy. This balanced approach is designed to increase
penetration of current markets, while allowing the Company to move into several
highly promising new healthcare markets for its electrode, medical tape and
analgesic patch products.
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 accounted for 19% of total sales during
each of the years ended June 30, 1997 and 1996, and 18% of total sales during
the year ended June 30, 1995.
The Company's international sales are made by the Company's corporate
sales force. The Company does not maintain a separate international marketing
staff or operations. The following table sets forth export sales by geographic
area:
Years ended June 30
------------------------------------------
1997 1996 1995
---------- ---------- ----------
Canada $ 117,966 $ 80,746 $ 113,597
Europe 1,456,141 1,652,941 1,171,910
Asia 229,506 466,777 1,122,179
Latin America 484,319 225,440 195,663
---------- ---------- ----------
Total Export Sales $2,287,932 $2,425,904 $2,603,349
========== ========== ==========
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 diagnostic 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.
<PAGE>
EMPLOYEES
As of June 30, 1997, the Company employed 72 full-time employees. None
of the Company's employees are represented by any labor unions or other
collective bargaining units. The Company believes relations with its employees
are good.
PHARMADYNE CORPORATION AND RESTRUCTURING CHARGE
During 1993, the Company invested $175,000 in Pharmadyne Corporation,
which represented a 19.5% ownership interest in Pharmadyne. The investment was
recorded at cost. During 1994, the Company purchased additional shares of
Pharmadyne common stock for $183,000 and increased the Company's ownership to
51%. The acquisition was accounted for as a purchase and the acquired goodwill
of approximately $590,000 was fully amortized on a straight-line basis over
three years.
During 1996 the Company made 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%.
During 1997, the Company adopted a plan for eliminating the Pharmadyne
subsidiary and recorded a nonrecurring restructuring charge of $2,180,000. The
restructuring charge included approximately $1,369,000 for the planned
acquisition of the minority interests in Pharmadyne in exchange for newly issued
shares of LecTec Corporation common stock, $480,000 for the write-off of
Pharmadyne's 15% interest in Natus, L.L.C., an Arizona-based direct marketing
company, and $331,000 for completion of restructuring activities, consisting
primarily of fees for professional services. The Pharmadyne restructuring plan
is expected to enable the Company to execute a broad-based, strategic marketing
plan to increase pain patch sales by reaching end-users through multiple
channels of distribution including retail outlets, clinics, nursing homes,
hospitals and other healthcare providers. Going forward the Company should also
benefit from a more efficient and lower-cost distribution system. The Company
expects to complete the restructuring during fiscal 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Title
- ---- --- -----
Rodney A. Young 42 Chairman, Chief Executive Officer and President
Deborah L. Moore 40 Chief Financial Officer and Secretary
Jane M. Nichols 51 Vice President, Marketing and New Business
Development
Daniel M. McWhorter 57 Vice President, Research and Development
Robert A. Eno 42 Vice President, Operations
Rodney A. Young is Chairman, Chief Executive Officer and President. He
joined the Company in August, 1996. Mr. Young has 19 years of medical industry
experience in sales and marketing for Upjohn Company and 3M and was most
recently Vice President and General Manager of the Specialized Distribution
Division of Baxter International, Inc.
Deborah L. Moore is Chief Financial Officer and Secretary. She joined
the Company in February, 1997. Ms. Moore's 20-year professional background
includes public accounting with the big six firms of Ernst & Young LLP and
Deloitte & Touche LLP and was most recently the Vice President of Corporate
Development for Varitronic Systems, Inc.
Jane M. Nichols is Vice President, Marketing and New Business
Development. She joined the Company in April, 1997. Ms. Nichol's 25-year career
includes clinical, technical and management roles at Methodist Hospital and Park
Nicollet Medical Centers, and senior marketing positions at 3M and Ecolab.
Daniel M. McWhorter is Vice President, Research and Development. He
joined the Company in January, 1997. Mr. McWhorter has more than 25 years of
experience in the medical products industry
<PAGE>
including both technical and general management positions at The Kendall Company
and Pharmacia Deltec and senior technical positions at Abbott Laboratories and
Mentor Corporation.
Robert A. Eno is Vice President, Operations. He joined the Company in
September, 1997. Mr. Eno has had 19 years of industrial and manufacturing
engineering and operations management experience at St. Jude Medical Inc., ADC
Telecommunications Inc., Paco Corporation and Eaton Corporation.
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
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market ("Nasdaq") under the symbol LECT.
The following table sets forth the high and low daily trade price
information for the Company's common stock for each quarter of fiscal 1997 and
1996. Such prices reflect interdealer prices, without retail mark-up, mark-down,
or commission, and may not necessarily represent actual transactions.
YEARS ENDED JUNE 30, 1997 1996
---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $13.500 $8.500 $12.250 $8.500
Second Quarter 9.500 5.500 13.250 8.750
Third Quarter 8.500 5.000 12.000 9.750
Fourth Quarter 7.000 4.875 16.000 9.875
As of September 19, 1997 the Company had 3,842,818 shares of
common stock outstanding, and 377 common shareholders of record which does not
include beneficial owners whose shares were held of record by nominees or broker
dealers.
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.
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA
Years ended June 30, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $12,256,327 $13,100,754 $14,138,290 $10,715,490 $ 9,224,005
Gross profit 4,324,180 4,969,659 5,697,562 4,041,853 3,434,128
Earnings (loss) from operations (2,215,951) * (724,074) 69,761 837,161 750,335
Earnings (loss) before equity in
losses of unconsolidated
subsidiary (2,140,660) * (632,193) 153,863 768,974 745,282
Equity in losses of unconsoli-
dated subsidiary 126,067 -- -- 133,639 163,442
Net earnings (loss) (2,266,727) * (632,193) 153,863 635,335 581,840
Net earnings (loss) per common
and common equivalent share (.59) * (.17) .04 .17 .15
BALANCE SHEET DATA
At June 30, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Cash, cash equivalents and
short-term investments $ 1,242,777 $ 800,693 $ 839,942 $ 2,182,570 $ 3,469,632
Current assets 6,873,696 5,624,682 5,764,363 6,124,640 6,082,934
Working capital 4,035,084 4,240,024 4,490,796 4,737,567 5,471,894
Property, plant and equipment, net 4,592,304 5,112,975 5,559,807 4,705,602 3,016,761
Long-term investments 8,013 574,806 568,156 585,855 1,195,922
Total assets 11,837,356 12,494,003 12,646,745 12,363,075 10,876,068
Long-term liabilities 211,000 174,000 167,000 139,000 64,000
Shareholders' equity 8,787,744 10,935,345 11,206,178 10,837,002 10,201,028
</TABLE>
* Includes a nonrecurring restructuring charge of $2,180,353 or $.57 per share.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES
Net sales were $12,256,000 in 1997, a decrease of 6% from net
sales of $13,101,000 in 1996. Net sales were $14,138,000 in 1995. The decrease
in 1997 net sales was due primarily to the absence of direct marketing sales for
the entire 1997 fiscal year. While there were no direct marketing sales in
fiscal 1997, such sales totaled $1,410,000 or 10.8% of total net sales in fiscal
1996. The Company's Pharmadyne Corporation subsidiary divested of its direct
marketing related assets near the end of the third quarter of fiscal 1996. In
1997, the absence of direct marketing therapeutic product sales was partially
offset by an increase in the volume of therapeutic products sold through
indirect distribution channels. Net sales of conductive products and medical
tape products each decreased by 3% in 1997 from the prior year.
The decrease in net sales for 1996 from 1995 was primarily
attributable to decreased therapeutic product sales resulting from the
divestiture of direct marketing related assets in the third quarter of fiscal
1996. Additionally, medical tape sales decreased by $508,000 offset by an
increase of $606,000 in conductive product sales.
Net sales of conductive products (medical electrodes and
conductive hydrogels) decreased by 3% in 1997 to $7,714,000 from $7,940,000 in
1996. Conductive product net sales were $7,334,000 in 1995. These fluctuations
in sales were primarily volume-related. The Company expects to maintain or
increase fiscal 1997 levels of conductive sales in fiscal 1998.
Net sales of medical tapes decreased by 3% in 1997 to $3,093,000
from $3,180,000 in 1996. Medical tape net sales were $3,688,000 in 1995. The
decrease in 1997 was primarily attributable to the absence of an order from an
international customer whose business fluctuates annually. Excluding sales to
this international customer, medical tape sales to all other customers increased
by 7% in 1997. This increase was primarily the result of increased sales volume.
The decrease in 1996 from 1995 was primarily attributable to reduced sales
volume to the international customer which more than offset the increased sales
volume associated with new product offerings. The Company expects to maintain or
increase fiscal 1997 levels of medical tape product sales in fiscal 1998.
Net sales of therapeutic products decreased 27% in 1997 to
$1,449,000 from $1,981,000 in 1996. Therapeutic product net sales were
$3,116,000 in fiscal 1995. The decrease in 1997 was primarily due to the absence
of Pharmadyne direct marketing sales for the entire 1997 fiscal year as compared
to the inclusion of direct marketing sales for the first three quarters of
fiscal 1996 which totaled $1,410,000. The absence of direct marketing sales
beginning in the fourth quarter of 1996 resulted from the divestiture of
Pharmadyne's direct marketing related assets near the end of the third quarter
of 1996. The decrease in 1996 net sales compared to 1995 net sales was primarily
attributable to the decrease in the third quarter and the absence in the fourth
quarter of the Pharmadyne direct marketing related sales. Management believes
that sales of the Company's therapeutic pain patch product will represent an
increased percentage of total net sales during fiscal 1998 due to the addition
of professional sales management personnel and increased marketing activities.
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 net sales in 1997 and
1996, and 18% in 1995. The Company expects fiscal 1998 international sales to be
comparable to fiscal 1997 sales levels.
GROSS PROFIT
The Company's gross profit was $4,324,000 in 1997, down from
$4,970,000 in 1996. Gross profit was $5,698,000 in 1995. As a percentage of net
sales, gross profit was 35.3% in 1997, 37.9% in 1996 and 40.3% in 1995. In 1997,
the decrease in the gross profit percent resulted primarily from the absence of
higher margin direct marketing related sales and increased inventory
obsolescence costs which were partially offset by decreased material and labor
costs for conductive products. In 1996, the decrease in the gross profit percent
was primarily attributable to decreased sales of higher margin therapeutic
products and increased overhead costs.
<PAGE>
While direct marketing sales carried higher gross margins than
sales made through the Company's indirect distribution channels, the selling,
general and administrative costs associated with the direct marketing operation
were substantially greater than the costs required to support sales through
indirect distribution. The higher operating expenses of the direct marketing
organization more than offset the higher gross margins associated with those
sales.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES
Selling, general and administrative expenses totaled $2,845,000 or
23.2% of net sales in 1997, compared to $3,718,000 or 28.4% of net sales in
1996, and $3,751,000 or 26.5% of net sales in 1995. The 1997 decrease was
primarily due to the absence of the direct marketing expenses of the Pharmadyne
subsidiary during all of 1997 as compared to 1996 which included direct
marketing expenses for the first three quarters. The 1997 decrease was partially
offset by increased administrative expenses associated with hiring a new
executive staff, and separation costs associated with former executives. The
1996 decrease was primarily due to the absence of costs in the fourth quarter
from direct marketing related operations. The Company anticipates SG&A expenses
in fiscal 1998 will be comparable to fiscal 1997.
RESEARCH AND DEVELOPMENT (R&D) EXPENSES
Research and development expenses totaled $1,515,000 or 12.4% of
net sales in 1997, compared to $1,975,000 or 15.1% of net sales in 1996, and
$1,877,000 or 13.3% of net sales in 1995. The high levels of R&D expenditures
over this three-year period reflect the utilization of internally-generated
funds to develop additional therapeutic products and a new cotinine-based
product. The decrease in 1997 R&D expense was primarily due to decreased labor
costs and decreased cotinine related expenses. Substantially all of the dollar
increase in R&D during fiscal 1996 was associated with clinical studies for a
non-nicotine cotinine-based smoking cessation product. R&D resources are also
being used to fund development of new analgesic patch products, conductive
products and specialized medical tapes. Management believes that R&D
expenditures, as a percentage of net sales, will be in the range of 10% to 12%
for the immediate future.
RESTRUCTURING CHARGE
During 1997 the Company recorded a nonrecurring restructuring
charge of $2,180,000 related to its plan for eliminating the Pharmadyne
Corporation subsidiary. The restructuring charge included approximately
$1,369,000 for the planned acquisition of the minority interests in Pharmadyne
in exchange for newly issued shares of LecTec Corporation common stock, $480,000
for the write-off of Pharmadyne's 15% interest in Natus, L.L.C., an
Arizona-based direct marketing company, and $331,000 for the completion of
restructuring activities, consisting primarily of fees for professional
services. The Company expects to complete the restructuring during fiscal 1998.
OTHER INCOME (EXPENSE)
Other income totaled $75,000 in 1997, up from $54,000 in 1996 and
$73,000 in 1995. The increase in 1997 resulted primarily from a gain on the sale
of equipment. In 1996 the decline resulted primarily from a reduction of
interest income due to the liquidation of short-term investments during 1995.
INCOME TAX
The Company recorded no income tax expense or benefit in 1997,
compared to an income tax benefit of $38,000 in 1996 and a benefit of $11,000 in
1995. There was no income tax benefit recorded during 1997 due primarily to the
effect of the non-deductible restructuring charge. The tax benefit in 1996
resulted from losses incurred in 1996 reduced by the effect of the subsidiary
losses which could not be utilized by the Company at that 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 March 12, 1996, the Company contributed the direct
marketing related assets of the Pharmadyne Corporation to Natus L.L.C. (an
Arizona limited liability company) in exchange for a 15%
<PAGE>
interest in Natus L.L.C. This investment was accounted for using the equity
method. During 1997 the Company recorded $126,000 of equity in the losses of
Natus L.L.C. The remaining investment in Natus L.L.C. of $480,100 was fully
written off in 1997 as part of the $2,180,000 restructuring charge.
EARNINGS SUMMARY
The restructuring charge of $2,180,000 or $.57 per share was the
primary component of the total net loss in 1997 of $2,267,000 or $.59 per share.
Excluding the impact of this one-time charge, the loss for 1997 was $87,000 or
$.02 per share. The net loss in 1996 was $632,000 or $.17 per share compared to
net earnings of $154,000 or $.04 per share in 1995. The largest components of
the net loss for fiscal 1996 were the losses associated with the direct
marketing related operations of the Pharmadyne Corporation subsidiary and
increased R&D expense.
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 $136,000 to $665,000 at
June 30, 1997 from $801,000 at June 30, 1996. Short and long-term investments
increased by $11,000 to $586,000 at June 30, 1997 from $575,000 at June 30,
1996. Capital spending for various equipment totaled $187,000 in 1997. There
were no material commitments for capital expenditures at June 30, 1997.
Working capital totaled $4,035,000 at June 30, 1997, compared to
$4,240,000 at the end of fiscal 1996. The Company's current ratio was 2.4 at
June 30, 1997 compared to 4.1 at June 30, 1996. Excluding the accrued
restructuring charge, the Company's current ratio at June 30, 1997 was 5.2.
Increased raw material inventory levels due to increased supplier purchase
quantity requirements and investments reclassified as short-term were
significant factors impacting the current ratio at June 30, 1997 as well.
Net property, plant and equipment decreased by $521,000 to
$4,592,000 at June 30, 1997 from $5,113,000 at June 30, 1996, reflecting the
excess of depreciation expense over additions.
The Company has no short or long-term debt. During August 1997 the
Company obtained an unsecured $1,000,000 working capital line of credit which
expires in September 1998. The previous working capital line of credit expired
January 1, 1997. There were no borrowings outstanding under the previous line of
credit as of June 30, 1996, nor during fiscal year 1997. Shareholders' equity
decreased by $2,147,000 to $8,788,000 as of June 30, 1997 from $10,935,000 as of
June 30, 1996, primarily due to the impact of the $2,180,000 restructuring
charge.
Management believes that internally-generated cash-flow and the
existing short-term line of credit will be sufficient to support anticipated
operating and capital spending requirements during fiscal 1998.
FORWARD-LOOKING STATEMENTS
From time to time, in reports filed with the Securities and
Exchange Commission, in press releases, and in other communications to
shareholders or the investment community, the Company may provide
forward-looking statements concerning possible or anticipated future results of
operations or business developments which are typically preceded by the words
"believes", "expects", "anticipates", "intends", "will", "may", "should" or
similar expressions. Such forward-looking statements are subject to risks and
uncertainties which could cause results or developments to differ materially
from those indicated in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the buying patterns of major
customers; competitive forces including new products or pricing pressures; costs
associated with and acceptance of the Company's new brand strategy; impact of
interruptions to production; dependence on key personnel; need for regulatory
approvals; changes in governmental regulatory requirements or accounting
pronouncements; and ability to satisfy funding requirements for operating needs,
expansion or capital expenditures.
<PAGE>
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, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1997. 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, 1997 and 1996, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Minneapolis, Minnesota
August 22, 1997
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30
-------------------------
ASSETS 1997 1996
----------- -----------
CURRENT ASSETS
Cash and cash equivalents (note A) $ 665,190 $ 800,693
Short-term investments (note A) 577,587 --
Receivables
Trade, net of allowances of $67,126
in 1997 and $74,208 in 1996 2,178,984 1,847,736
Refundable income taxes 401,263 375,580
Other 22,780 182,247
----------- -----------
2,603,027 2,405,563
Inventories (note A) 2,577,021 2,011,327
Prepaid expenses and other 84,871 123,099
Deferred income taxes (note D) 366,000 284,000
----------- -----------
Total current assets 6,873,696 5,624,682
PROPERTY, PLANT AND EQUIPMENT - AT COST
(note A)
Building and improvements 1,635,157 1,629,630
Equipment 6,578,960 6,414,132
Furniture and fixtures 371,670 354,985
----------- -----------
8,585,787 8,398,747
Less accumulated depreciation 4,241,214 3,533,503
----------- -----------
4,344,573 4,865,244
Land 247,731 247,731
----------- -----------
4,592,304 5,112,975
OTHER ASSETS
Patents and trademarks, less accumulated
amortization of $846,914 in 1997 and
$687,871 in 1996 (note A) 363,343 417,681
Goodwill, less accumulated amortization
of $590,000 in 1997 and $442,503 in 1996
(notes A and G) -- 147,497
Long-term investments (note A) 8,013 574,806
Investment in limited liability company (note H) -- 606,167
Other -- 10,195
----------- -----------
371,356 1,756,346
----------- -----------
$11,837,356 $12,494,003
=========== ===========
The accompanying notes are an integral part of these statements.
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
June 30
--------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
----------- -----------
CURRENT LIABILITIES
Accounts payable $ 779,699 $ 894,846
Accrued expenses
Payroll related 324,381 304,527
Restructuring charge (note G) 1,521,107 --
Other 213,425 185,285
----------- -----------
Total current liabilities 2,838,612 1,384,658
DEFERRED INCOME TAXES (note D) 211,000 174,000
COMMITMENTS AND CONTINGENCIES
(notes C and E) -- --
SHAREHOLDERS' EQUITY (note F)
Common stock, $.01 par value;
15,000,000 shares authorized;
issued and outstanding:
3,842,800 shares in 1997 and
3,835,800 shares in 1996 38,428 38,358
Additional paid-in capital 10,476,428 10,368,166
Unrealized losses on securities
available-for-sale (note A) (33,372) (44,166)
Retained earnings (deficit) (1,693,740) 572,987
----------- -----------
8,787,744 10,935,345
----------- -----------
$11,837,356 $12,494,003
=========== ===========
The accompanying notes are an integral part of these statements.
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended June 30
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales (notes A and I) $ 12,256,327 $ 13,100,754 $ 14,138,290
Cost of goods sold 7,932,147 8,131,095 8,440,728
------------ ------------ ------------
Gross profit 4,324,180 4,969,659 5,697,562
Operating expenses
Selling, general and administrative 2,844,618 3,718,496 3,751,194
Research and development 1,515,160 1,975,237 1,876,607
Restructuring charge (note G) 2,180,353 -- --
------------ ------------ ------------
6,540,131 5,693,733 5,627,801
------------ ------------ ------------
Earnings (loss) from operations (2,215,951) (724,074) 69,761
Other income (expense)
Interest income 22,150 26,554 35,846
Dividend income 37,610 38,029 38,487
Other 15,531 (10,702) (1,231)
------------ ------------ ------------
75,291 53,881 73,102
------------ ------------ ------------
Earnings (loss) before income
taxes and equity in losses
of unconsolidated subsidiary (2,140,660) (670,193) 142,863
Income tax benefit (note D) -- (38,000) (11,000)
------------ ------------ ------------
Earnings (loss) before equity in
losses of unconsolidated subsidiary (2,140,660) (632,193) 153,863
Equity in losses of unconsolidated
subsidiary (note H) 126,067 -- --
------------ ------------ ------------
Net earnings (loss) $ (2,266,727) $ (632,193) $ 153,863
============ ============ ============
Net earnings (loss) per common and
common equivalent share (note A) $ (.59) $ (.17) $ .04
============ ============ ============
Weighted average number of common and
common equivalent shares outstanding
during the year 3,836,618 3,801,155 3,826,905
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Unrealized
losses on
Common stock Additional securities Retained Total
----------------------- paid-in available- earnings shareholders'
Shares Amount capital for-sale (deficit) equity
---------- -------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 3,757,000 $ 37,570 $ 9,809,079 $(60,964) $ 1,051,317 $ 10,837,002
Net earnings -- -- -- -- 153,863 153,863
Cost of shares retired (2,102) (21) (17,330) -- -- (17,351)
Common stock issued upon
exercise of options (note F) 31,602 316 162,200 -- -- 162,516
Unrealized gain on securities
available-for-sale (note A) -- -- -- 10,148 -- 10,148
Tax benefit from exercise of
stock options -- -- 60,000 -- -- 60,000
---------- -------- ------------ -------- ----------- ------------
Balance, June 30, 1995 3,786,500 37,865 10,013,949 (50,816) 1,205,180 11,206,178
Net loss -- -- -- -- (632,193) (632,193)
Cost of shares retired (16,281) (163) (184,319) -- -- (184,482)
Common stock issued upon
exercise of options (note F) 65,581 656 450,536 -- -- 451,192
Unrealized gain on securities
available-for-sale (note A) -- -- -- 6,650 -- 6,650
Tax benefit from exercise of
stock options -- -- 88,000 -- -- 88,000
---------- -------- ------------ -------- ----------- ------------
Balance, June 30, 1996 3,835,800 38,358 10,368,166 (44,166) 572,987 10,935,345
Net loss -- -- -- -- (2,266,727) (2,266,727)
Cost of shares retired (8,278) (83) (54,023) -- -- (54,106)
Common stock issued upon
exercise of options (note F) 15,278 153 51,690 -- -- 51,843
Unrealized gain on securities
available-for-sale (note A) -- -- -- 10,794 -- 10,794
Investment by Pharmadyne
minority shareholders -- -- 83,595 -- -- 83,595
Tax benefit from exercise of
stock options -- -- 27,000 -- -- 27,000
---------- -------- ------------ -------- ----------- ------------
Balance, June 30, 1997 3,842,800 $ 38,428 $ 10,476,428 $(33,372) $(1,693,740) $ 8,787,744
========== ======== ============ ======== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended June 30
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(2,266,727) $ (632,193) $ 153,863
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Restructuring charge 2,180,353 -- --
Depreciation and amortization 1,014,251 1,128,103 932,051
Deferred income taxes (45,000) 65,000 (149,000)
Equity in losses of unconsolidated
subsidiary 126,067 -- --
Changes in operating assets and
liabilities:
Trade and other receivables (171,781) 161,057 (410,006)
Refundable income taxes (25,683) (256,040) 109,714
Inventories (565,694) (298,803) (325,219)
Prepaid expenses and other 38,228 (29,011) (128,059)
Accounts payable (31,552) 123,375 (189,057)
Accrued expenses (104,152) (12,284) 83,770
----------- ----------- -----------
Net cash provided by
operating activities 148,310 249,204 78,057
Cash flows from investing activities:
Purchase of property, plant and
equipment (187,040) (430,956) (1,471,427)
Investment in patents and trademarks (104,705) (164,796) (141,665)
Purchase of investments -- -- (249,603)
Sale of investments -- -- 1,674,250
Other 10,195 40,589 19,395
----------- ----------- -----------
Net cash used in investing
activities (281,550) (555,163) (169,050)
Cash flows from financing activities:
Issuance of common stock 51,843 451,192 162,516
Retirement of common stock (54,106) (184,482) (17,351)
----------- ----------- -----------
Net cash provided by (used
in) financing activities (2,263) 266,710 145,165
----------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents (135,503) (39,249) 54,172
Cash and cash equivalents at
beginning of year 800,693 839,942 785,770
----------- ----------- -----------
Cash and cash equivalents at
end of year $ 665,190 $ 800,693 $ 839,942
=========== =========== ===========
Supplemental disclosures:
Cash paid during the year
for interest $ 6,189 $ -- $ --
=========== =========== ===========
Cash paid during the year
for income taxes $ 6,000 $ 33,199 $ 137,922
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES
LecTec Corporation (the Company) is primarily engaged in the research, design,
manufacture and sale of diagnostic electrodes, conductive hydrogels, 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, a 61% owned subsidiary (note G). All material
intercompany accounts and transactions have been eliminated. The Company also
has a 15% investment in an unconsolidated subsidiary (note H).
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. Investments
The Company's investments are classified as available-for-sale, consist
primarily of a preferred stock fund classified as short-term at June 30, 1997
and long-term at June 30, 1996 and are reported at fair value. The Company
utilizes the specific identification method in computing realized gains and
losses.
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
4. 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
---------------------------
1997 1996
---------- ----------
Raw materials $1,655,924 $1,144,078
Work in process 184,208 229,974
Finished goods 736,889 637,275
---------- ----------
$2,577,021 $2,011,327
========== ==========
5. 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 - 40 years
Equipment 4 - 15 years
Furniture and fixtures 5 - 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 was amortized on a straight-line basis over three years.
6. Revenue Recognition
Sales are recognized at the time of shipment of product against a confirmed
sales order.
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
7. 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.
8. 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.
9. Reclassifications
Certain 1996 amounts have been reclassified to conform to the 1997 financial
statement presentation.
10. New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) 128, "Earnings Per Share," which is effective for
financial statements issued after December 15, 1997. Early adoption of the new
standard is not permitted. The new standard eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings per
share together with disclosure of how the per share amounts were computed.
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income," and
SFAS 131, "Disclosures about Segments of an Enterprise and Related Information,"
which are effective for fiscal year 1999. SFAS 130 will require the Company to
display an amount representing total comprehensive income, as defined by the
statement, as part of the Company's basic financial statements. Comprehensive
income will include items such as unrealized gains or losses on certain
investment securities. SFAS 131 will require the Company to disclose financial
and other information about its business segments, their products and services,
geographic areas, major customers, sales, profits, assets and other information.
The adoption of these statements is not expected to have a material effect on
the consolidated financial statements of the Company.
NOTE B - LINE OF CREDIT
The Company's unsecured $1,000,000 working capital line of credit expired on
January 1, 1997 and during August 1997 the Company entered into an unsecured
$1,000,000 working capital line of credit which expires September 1998. Interest
is at the bank's reference rate (effective rate of 8.5% at June 30, 1997). There
were no borrowings outstanding on the previous line of credit as of June 30,
1996, nor during fiscal 1997. The new 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.
NOTE C - 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.
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE C - COMMITMENTS AND CONTINGENCIES - Continued
The minimum rental commitments under all operating leases are as follows for the
years ending June 30:
1998 $ 239,230
1999 222,576
2000 228,439
2001 233,140
2002 240,209
Thereafter -
----------
$1,163,594
==========
Total rent expense for operating leases was $224,849, $219,095 and $223,147 for
the years ended June 30, 1997, 1996 and 1995.
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.
NOTE D - INCOME TAXES
The provision for income tax expense (benefit) consists of the following:
Years ended June 30
-------------------------------------------
1997 1996 1995
-------- -------- ---------
Current
Federal $ 43,000 $(17,000) $ 136,000
State 2,000 2,000 2,000
-------- -------- ---------
45,000 (15,000) 138,000
Deferred
Federal (45,000) (23,000) (149,000)
State - - -
-------- -------- ---------
(45,000) (23,000) (149,000)
-------- -------- ---------
$ - $(38,000) $ (11,000)
======== ======== =========
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE D - INCOME TAXES - Continued
Deferred tax assets and liabilities represent the tax effects, based upon
current tax law, of cumulative future deductible or taxable items that have been
recognized in the financial statements as follows:
June 30
-------------------------
1997 1996
--------- ---------
Deferred current assets and liabilities:
Net operating loss carryforwards $ 848,800 $ 481,200
Tax credit carryforwards 260,000 207,100
Inventory capitalization and reserve 124,800 79,200
Vacation pay accrual 37,800 36,100
Other 4,400 7,400
--------- ---------
1,275,800 811,000
Valuation allowance (909,800) (527,000)
--------- ---------
Net current asset $ 366,000 $ 284,000
========= =========
Deferred long-term assets and liabilities:
Tax depreciation in excess of book depreciation $(293,100) $(278,300)
Charitable contribution carryforwards 64,400 57,100
Other 46,400 47,200
--------- ---------
(182,300) (174,000)
Valuation allowance (28,700) -
--------- ---------
Net long-term liability $(211,000) $(174,000)
========= =========
At June 30, 1997, Pharmadyne has available net operating loss carryforwards of
approximately $1,900,000 which can be used to reduce future taxable income.
These carryforwards begin to expire in 2007 and cannot be utilized to offset
taxable income of LecTec. The utilization of a portion 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.
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE D - INCOME TAXES - Continued
At June 30, 1997, LecTec has available tax credit carryforwards of approximately
$260,000 which can be used to reduce future tax liabilities. These carryforwards
begin to expire in 2008. LecTec also has available a net operating loss
carryforward of approximately $594,000, which can be used to reduce future
taxable income of LecTec. This carryforward expires in 2011.
A valuation allowance has also been recorded for a portion of LecTec's deferred
tax assets as they may not be fully realizable.
Differences between income tax expense (benefit) and the statutory federal
income tax rate of 34% are as follows:
1997 1996 1995
---- ---- ----
Federal statutory income tax rate (34.0)% (34.0)% 34.0 %
State income taxes, net of federal benefit 0.1 0.2 0.1
Nondeductible restructuring charge 34.6 - -
Tax credits - - (74.7)
Foreign sales corporation (2.1) (5.5) (24.9)
Subsidiary loss producing no benefit .6 25.7 29.9
Tax exempt investment income (0.8) (0.8) (14.7)
Goodwill amortization 2.3 10.0 46.8
Prior years' overaccruals - - (4.8)
Other (.7) (1.3) .6
----- ----- -----
- % (5.7)% (7.7)%
===== ===== =====
NOTE E - 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 for the year ended June 30, 1995. No contributions were made to the plan
for the years ended June 30, 1997 and 1996.
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE E - EMPLOYEE BENEFIT PLANS - Continued
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 and $18,534 for the years ended June 30, 1996 and 1995. There
was no bonus expense for the year ended June 30, 1997.
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% 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 $37,936, $44,549 and $37,230 for the years ended June 30, 1997,
1996 and 1995.
NOTE F - STOCK OPTIONS
The Company has stock option plans for the benefit of selected officers,
employees and directors of the Company. A total of 973,049 shares of common
stock are reserved for issuance under the plans. Options under the Company's
plans are granted at fair market value and expire ten years from the grant date.
Options given to directors are exercisable at the date of grant. Options given
to selected officers and employees are exercisable at such times as set forth in
the individual option agreements, generally vesting 100% after four years.
A summary of the Company's stock option transactions for the years ended June
30, 1997, 1996 and 1995 is as follows:
Weighted average
Number of shares exercise price
---------------- ----------------
Outstanding at June 30, 1994 425,714 $ 7.38
Granted 117,000 9.45
Exercised (31,602) 5.17
Canceled (33,316) 7.85
-------
Outstanding at June 30, 1995 477,796 7.99
Granted 133,500 10.18
Exercised (65,581) 6.87
Canceled (21,020) 8.92
-------
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE F - STOCK OPTIONS - Continued
Weighted average
Number of shares exercise price
---------------- ----------------
Outstanding at June 30, 1996 524,695 $8.65
Granted 343,350 8.26
Exercised (15,278) 3.39
Canceled (129,934) 9.30
-------- -----
Outstanding at June 30, 1997 722,833 $8.46
======== =====
A total of 371,946, 264,945 and 217,749 options were exercisable at June 30,
1997, 1996 and 1995, with a weighted average price of $8.30, $7.50 and $6.57.
The following information applies to grants that are outstanding at June 30,
1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------- ------------------------
Weighted Weighted Weighted
average average average
Range of Number remaining exercise Number exercise
exercise prices outstanding contractual life price exercisable price
- --------------- ----------- ---------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$3.34 - $ 4.43 46,036 .75 years $3.54 46,036 $3.54
6.00 - 8.62 292,773 4.25 years 7.32 99,923 8.04
9.00 - 13.50 384,024 3.50 years 9.92 225,987 9.39
</TABLE>
The weighted average fair value of the options granted during 1997 and 1996 is
$4.45 and $5.23. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for all grants in 1997 and 1996: zero dividend
yield, expected volatility of 54% and 59%, risk-free interest rate of 6.22% and
6.04% and expected lives of 5.09 and 4.52 years.
The Financial Accounting Standards Board issued Statement No. 123 (SFAS 123),
"Accounting for Stock Based Compensation," which introduced an alternative
method for recognizing compensation costs based upon the fair value of the
awards on the date they are granted. SFAS 123 allows entities to continue to
account for employee stock option plans using the intrinsic value method, which
exists under current accounting literature, provided pro forma net earnings and
net earnings per share, as if the fair value based method had been used, are
disclosed. The Company has elected to continue using the intrinsic value based
method for its employee options.
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE F - STOCK OPTIONS - Continued
The Company's net loss and net loss per share for 1997 and 1996 would have been
increased to the pro forma amounts indicated below had the fair value method
been used for options granted to employees and directors. These effects may not
be representative of the future effects of applying this statement.
1997 1996
--------------------------- ------------------------
As reported Pro forma As reported Pro forma
----------- ---------- ----------- ----------
Net loss $(2,266,727) $(2,620,449) $(632,193) $(781,467)
Net loss per share $(.59) $(.68) $(.17) $(.21)
NOTE G - PHARMADYNE CORPORATION AND RESTRUCTURING CHARGE
During 1993, the Company invested $175,000 in Pharmadyne Corporation, which
represented a 19.5% ownership interest in Pharmadyne. The investment was
recorded at cost. During 1994, the Company purchased additional shares of
Pharmadyne common stock for $183,000 and increased the Company's ownership to
51%. The acquisition was accounted for as a purchase and the acquired goodwill
of approximately $590,000 was fully amortized on a straight-line basis over
three years.
During 1996 the Company made 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%.
During the third quarter of 1997, the Company adopted a plan for eliminating the
Pharmadyne subsidiary and recorded a nonrecurring restructuring charge of
$1,500,000. The restructuring charge included approximately $780,000 for the
planned acquisition of the minority interests in Pharmadyne in exchange for
newly issued shares of LecTec Corporation common stock, $480,000 for the
write-off of Pharmadyne's 15% interest in Natus, L.L.C., an Arizona-based direct
marketing company, and $240,000 for completion of restructuring activities,
consisting primarily of fees for professional services. During the fourth
quarter of 1997, an additional charge of $680,000 was recorded as a result of an
increase in the cost to acquire the minority interests in Pharmadyne of $589,000
and an increase in estimated remaining costs associated with the restructuring
of $91,000. The total charge of $2,180,353 increased the 1997 net loss by $.57
per share. The Company expects to complete the restructuring during fiscal 1998.
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE H - 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. This investment has been accounted for using
the equity method. 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
========
During 1997 the Company recorded $126,067 of equity in the losses of Natus
L.L.C. The investment in Natus L.L.C. of $480,100 was fully written off in 1997
as part of the restructuring charge of $2,180,353 (note G).
NOTE I - MAJOR CUSTOMERS AND EXPORT SALES
One customer accounted for 19%, 17% and 15% of total sales for the years ended
June 30, 1997, 1996 and 1995. The accounts receivable from this customer
represented 27% and 24% of trade receivables at June 30, 1997 and 1996 and the
accounts receivable from another customer represented 12% and 15% of trade
receivables at June 30, 1997 and 1996. Export sales accounted for approximately
19% of total sales during each of the years ended June 30, 1997 and 1996, and
18% of total sales during the year ended June 30, 1995. Export sales by
geographic area were as follows:
Years ended June 30
-------------------------------------------
1997 1996 1995
---------- ---------- ----------
Canada $ 117,966 $ 80,746 $ 113,597
Europe 1,456,141 1,652,941 1,171,910
Asia 229,506 466,777 1,122,179
Latin America 484,319 225,440 195,663
---------- ---------- ----------
$2,287,932 $2,425,904 $2,603,349
========== ========== ==========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
<PAGE>
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 20, 1997, and is incorporated herein by reference.
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 20, 1997, 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 20, 1997, 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
20, 1997, and is incorporated herein by reference.
<PAGE>
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, 1997 and 1996
(iii) Consolidated Statements of Operations for the years
ended June 30, 1997, 1996 and 1995
(iv) Consolidated Statements of Shareholders' Equity for
the years ended June 30, 1997, 1996 and 1995
(v) Consolidated Statements of Cash Flows for the years
ended June 30, 1997, 1996 and 1995
(vi) Notes to the Consolidated 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.
3. Exhibits
<TABLE>
<CAPTION>
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
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. (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. (1)
10.03 Certificate of Secretary pertaining to Resolution of
Board of Directors of LecTec Corporation, dated
October 30, 1986, implementing a Profit Sharing Bonus
Plan. (1)
10.04 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. (2)
<PAGE>
10.05 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. (2)
10.06 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. (2)
10.07 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. (2)
10.08 Research Agreement dated June 30, 1992, between
LecTec Corporation and Pharmadyne Corporation
(formerly Natus Corporation), whereby Pharmadyne will
fund the development of an analgesic patch for
exclusive rights to sell the product. (2)
10.09 Stock Investment and Repurchase Agreement dated July
1, 1992, between LecTec Corporation and Pharmadyne
Corporation (formerly Natus Corporation), whereby
LecTec purchased Common Stock of Pharmadyne
Corporation. (2)
10.10 Amendments dated March 18, 1993 to the original
Research Agreement dated June 30, 1992, between
LecTec Corporation and Pharmadyne Corporation
(formerly Natus Corporation). (2)
10.11 Subscription Agreement dated June 17, 1993 between
LecTec Corporation and Pharmadyne Corporation
(formerly Natus Corporation). (2)
10.12 A Promissory Note dated June 17, 1993 between LecTec
Corporation and Pharmadyne Corporation (formerly
Natus Corporation). Included in the note is an option
for LecTec to receive common stock of Pharmadyne in
lieu of payment. (2)
10.13 Amended and Restated Stock Option Agreement between
LecTec Corporation and Pharmadyne Corporation
(formerly Natus Corporation), whereby LecTec has
obtained the option to acquire the additional shares
required to equal 51% of the Common Stock of
Pharmadyne. (3)
10.14 Contribution Agreement dated March 12, 1996 between
Pharmadyne Corporation (formerly Natus Corporation)
and ACM
<PAGE>
Investments, L.L.C. regarding the acquisition
of an equity interest in Natus L.L.C. (4)
10.15 Distribution Agreement dated March 12, 1996 between
LecTec Corporation, Pharmadyne Corporation (formerly
Natus Corporation) and Natus L.L.C. (4)
10.16 Operating Agreement dated March 12, 1996 between
Natus L.L.C., ACM Investments, L.L.C., Pharmadyne
Coporation (formerly Natus Corporation) and Natus
Management, Inc. (4)
10.17 Marketing and Distribution Agreement dated January
11, 1996 between LecTec Corporation, Pharmadyne
Corporation (formerly Natus Corporation) and CNS,
Inc. regarding an analgesic pain patch (4)
10.18 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 (4)
10.19 Revolving Credit Note dated May 1, 1996 between
LecTec Corporation and The First National Bank of
Saint Paul, a national banking association (4)
10.20 Working Capital Loan Agreement dated September 5,
1995 between LecTec Corporation and Pharmadyne
Corporation (formerly Natus Corporation) relating to
a loan from LecTec to Pharmadyne Corporation (4)
10.21 Form of Working Capital Loan Agreement dated
September 5, 1995, between Pharmadyne Corporation
(formerly Natus Corporation) and various shareholders
relating to loans to Pharmadyne Corporation (4)
10.22 LecTec Corporation 1989 Stock Option Plan (5)
10.23 LecTec Corporation 1991 Directors' Stock Option Plan (5)
10.24 Building lease dated May 24, 1991 between LecTec
Corporation and Sierra Development Co. for the lease
of the manufacturing and warehouse facility located
in Edina, Minnesota (5)
10.25 First amendment dated May 5, 1997 between LecTec
Corporation and Rushmore Plaza Partners Limited
Partnership for the extension of the previous lease
of the manufacturing and warehouse facility located
in Edina, Minnesota (5)
10.26 Credit Agreement dated August 22, 1997 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 (5)
<PAGE>
10.27 Revolving Credit Note dated August 22, 1997 between
LecTec Corporation and The First National Bank of
Saint Paul, a national banking association (5)
21.01 Subsidiaries of the Company (3)
23.01 Consent of Grant Thornton LLP (5)
27.01 Financial Data Schedule (5)
</TABLE>
- ----------------
(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) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended June 30, 1996.
(5) Filed herewith.
(b) 1. Reports on Form 8-K.
None.
<PAGE>
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 26th day of
September, 1997.
LECTEC CORPORATION
/s/Rodney A. Young
Rodney A. Young
Chairman, Chief Executive Officer and President
(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 26, 1997
Rodney A. Young
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
/s/Deborah L. Moore September 26, 1997
Deborah L. Moore
Chief Financial Officer and Secretary
(Principal Financial Officer and Accounting Officer)
/s/Alan C. Hymes September 26, 1997
Alan C. Hymes
Director
/s/Lee M. Berlin September 26, 1997
Lee M. Berlin
Director
/s/Paul O. Johnson September 26, 1997
Paul O. Johnson
Director
/s/Donald C. Wegmiller September 26, 1997
Donald C. Wegmiller
Director
/s/Alan J. Wilensky September 26, 1997
Alan J. Wilensky
Director
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibits Page
- -------- ----
<S> <C>
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 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).
10.04 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).
10.05 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).
10.06 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).
10.07 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 (Note 2).
10.08 Research Agreement dated June 30, 1992, between LecTec Corporation
and Pharmadyne Corporation (formerly Natus Corporation), whereby
Pharmadyne will fund the development of an analgesic patch for
exclusive rights to sell the product (Note 2).
10.09 Stock Investment and Repurchase Agreement dated July 1, 1992,
between LecTec Corporation and Pharmadyne Corporation (formerly
Natus Corporation), whereby LecTec purchased Common Stock of
Pharmadyne Corporation (Note 2).
<PAGE>
10.10 Amendments dated March 18, 1993 to the original Research Agreement
dated June 30, 1992 between LecTec Corporation and Pharmadyne
Corporation (formerly Natus Corporation) (Note 2).
10.11 Subscription Agreement dated June 17, 1993 between LecTec
Corporation and Pharmadyne Corporation (formerly Natus Corporation)
(Note 2).
10.12 Promissory Note dated June 17, 1993 between LecTec Corporation and
Pharmadyne Corporation (formerly Natus Corporation). Included in
the note is an option for LecTec to receive common stock of
Pharmadyne in lieu of payment (Note 2).
10.13 Amended and Restated Stock Option Agreement between LecTec
Corporation and Pharmadyne Corporation (formerly Natus
Corporation), whereby LecTec obtained the option to acquire the
additional shares required to equal 51% of the Common Stock of
Pharmadyne (Note 3).
10.14 Contribution Agreement dated March 12, 1996 between Pharmadyne
Corporation (formerly Natus Corporation) and ACM Investments,
L.L.C. regarding the acquisition of an equity interest in Natus
L.L.C. (Note 4).
10.15 Distribution Agreement dated March 12, 1996 between LecTec
Corporation, Pharmadyne Corporation (formerly Natus Corporation)
and Natus L.L.C. (Note 4).
10.16 Operating Agreement dated March 12, 1996 between Natus L.L.C., ACM
Investments, L.L.C., Pharmadyne Corporation (formerly Natus
Corporation) and Natus Management, Inc. (Note 4).
10.17 Marketing and Distribution Agreement dated January 11, 1996 between
LecTec Corporation, Pharmadyne Corporation (formerly Natus
Corporation) and CNS, Inc. regarding an analgesic pain patch. (Note
4).
10.18 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 (Note 4).
10.19 Revolving Credit Note dated May 1, 1996 between LecTec Corporation
and The First National Bank of Saint Paul, a national banking
association (Note 4).
10.20 Working Capital Loan Agreement dated September 5, 1995 between
LecTec Corporation and Pharmadyne Corporation (formerly Natus
Corporation) relating to a loan from LecTec to Pharmadyne
Corporation (Note 4).
10.21 Form of Working Capital Loan Agreement dated September 5, 1995;
between Pharmadyne Corporation (formerly Natus Corporation) and
various shareholders relating to loans to Pharmadyne Corporation
(Note 4).
10.22 LecTec Corporation 1989 Stock Option Plan . . . . . . . . . . . . .
10.23 LecTec Corporation 1991 Directors' Stock Option Plan. . . . . . . .
10.24 Building lease dated May 24, 1991 between LecTec Corporation and
Sierra Development Co. for the lease of the manufacturing and
warehouse facility located in Edina, Minnesota. . . . . . . . . . .
<PAGE>
10.25 First amendment dated May 5, 1997 between LecTec Corporation and
Rushmore Plaza Partners Limited Partnership for the extension of
the previous lease of the manufacturing and warehouse facility
located in Edina, Minnesota. . . . . . . . . . . . . . . . . . . .
10.26 Credit Agreement dated August 22, 1997 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 . . . . . . . . . . . . . . . . . .
10.27 Revolving Credit Note dated August 22, 1997 between LecTec
Corporation and The First National Bank of Saint Paul, a national
banking association . . . . . . . . . . . . . . .
21.01 Subsidiaries of the Company (Note 3)
23.01 Consent of Grant Thornton LLP. . . . . . . . . . . . . . . . . . .
27.01 Financial Data Schedule. . . . . . . . . . . . . . . . . . . . . .
</TABLE>
NOTES:
(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) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended June 30, 1996.
EXHIBIT 10.22
LECTEC CORPORATION 1989 STOCK OPTION PLAN
SECTION 1. ESTABLISHMENT, PURPOSE, AND EFFECTIVE DATE OF PLAN.
1.1 Establishment. LecTec Corporation, a Minnesota corporation, hereby
establishes the "LECTEC CORPORATION 1989 STOCK OPTION PLAN" (the "Plan") for key
employees. The Plan permits the grant of stock options which do not qualify as
incentive stock options within the meaning of Section 422A of the Internal
Revenue Code of 1986, as amended (the "Code"), and Stock Indemnification Rights.
1.2 Purpose. The purpose of the Plan is to advance the interests of the
Company and its shareholders by encouraging and providing for the acquisition of
an equity interest in the success of the Company by key employees, by providing
additional incentives and motivation toward superior performance of the Company,
and by enabling the Company to attract and retain the services of key employees
upon whose judgment, interest, and special effort the successful conduct of its
operations is largely dependent.
1.3 Effective Date. The Plan shall become effective immediately upon
adoption by the Board of the Company and shall be subject to ratification by the
shareholders of the Company. Any Award made prior to shareholder ratification
shall be subject to such ratification.
SECTION 2. DEFINITIONS.
2.1 Definitions. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "Award" means any Option and/or Stock Indemnification Right
under this Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Committee" means the committee appointed by the Board
pursuant to Section 4.1. The Board shall have the sole
continuing authority to appoint members of the Committee both
in substitution for members appointed and to fill vacancies,
however caused.
(d) "Company" means LecTec Corporation, a Minnesota
corporation.
(e) "Disability" means disability as defined in Section
22(e)(3) of the Code.
(f) "Employee" means a salaried employee (including directors
who are also employees) of the Company or its domestic or
international Subsidiaries or any branch or division thereof.
(g) "Fair Market Value" of the stock means (i) the closing
price of the Stock as reported for composite transactions, if
the Stock is then traded on a national securities exchange,
(ii) the last sale price if the Stock is then quoted on the
NASDAQ National Market System or (iii) the average of the
closing representative bid and asked prices of the Stock as
reported on NASDAQ on the date as of which fair market value is
being determined. If on the date of grant of any option granted
under the Plan, the Stock is not publicly traded, the Committee
shall make a good faith attempt to satisfy the option price
requirement and in connection therewith shall take such action
as it deems necessary or advisable.
(h) "Option" means the right to purchase Stock at a stated
price for a specified period of time. For purposes of the Plan,
Option means an option that does not qualify as an Incentive
Stock Option within the meaning of Section 422A of the Code.
(i) "Participant" means any Employee designated by the Board to
participate in the Plan.
(j) "Retirement" (including "Early Retirement" and "Normal
Retirement") means termination of employment under the terms of
the LecTec Corporation Retirement Plan.
(k) "Stock" means the Common Stock of the Company.
<PAGE>
(l) "Stock Indemnification Right" and "SIR" mean the right to
receive a payment from the Company equal to the decline in
value of a specified number of shares of Stock acquired upon
exercise of a related Option hereunder and sold during a
specified period of time.
(m) "Subsidiary" means any entity of which, at the time such
Subsidiary status is to be determined, more than 50% of the
combined voting power of such entity is directly or indirectly
owned by the Company.
2.2 Gender and Number. Except when otherwise indicated by the context,
words in the masculine gender when used in the Plan shall include the feminine
gender, the singular shall include the plural, and the plural shall include the
singular.
SECTION 3. ELIGIBILITY AND PARTICIPATION
3.1 Eligibility and Participation. Participants in the Plan shall be
selected by the Committee from among Employees who, in the opinion of the Board,
are key employees.
SECTION 4. ADMINISTRATION.
4.1 Administration. The Committee shall be responsible for the general
administration of the Plan. The Committee shall consist of three or more
persons, none all of whom shall be "disinterested persons" with respect to the
Plan within the meaning of Rule 16b-3(d) (3) under the Securities Exchange Act
of 1934, as amended. The members of the Committee shall not be eligible to
receive options under the Plan. The members of the Committee shall be appointed
by and serve at the pleasure of the Board. The authority to grant Awards shall
be vested in the Committee. Subject to the provisions of the Plan, the
Committee, from time to time, shall determine the individuals to whom and the
time or times at which an Award shall be granted, and the number of shares to be
subject to each Option or SIR, the Option price per share, the period of each
Option, and the other terms and provisions of Awards, which may or may not be
identical. The Committee may also interpret the Plan, prescribe, amend and
rescind rules and regulations relating to the Plan, and make all other
determinations necessary or advisable for the administration of the Plan. The
determinations of the Committee shall be made in accordance with its judgment as
to the best interests of the Company and its shareholders and in accordance with
the purpose of the Plan. The Committee's determination shall be in all cases
conclusive. A majority of the members of the Committee shall constitute a
quorum, and all determinations of the Committee shall be made by a majority of
its members. Any determination of the Committee may be made, without notice or
meeting, and may be evidenced by a writing signed by a majority of the Committee
members.
SECTION 5. STOCK SUBJECT TO THE PLAN.
5.1 Number. The total number of shares of Stock subject to Options
under the Plan may not exceed 200,000 subject to adjustment upon occurrence of
any of the events indicated in Section 5.3. The shares to be delivered under the
Plan may consist, in whole or in part, of authorized but unissued Stock or
treasury Stock, not reserved for any other purpose.
5.2 Lapsed Options. If any Option granted under the Plan terminates,
expires or lapses for any reason, any shares subject to such Option again shall
be available for the grant of an Option.
5.3 Adjustment in Capitalization. If there shall be any change in the
Stock through merger, consolidation, reorganization, recapitalization, stock
dividend (of whatever amount), stock split or other change in the corporate
structure, appropriate adjustments in the Plan and outstanding options and SIRs
shall be made by the Committee. In the event of any such changes, adjustments
shall include, where appropriate, changes in the aggregate number of shares
subject to the Plan, the number of shares and the price per share subject to
outstanding Options and SIRs, in order to prevent dilution or enlargement of
Option or SIR rights.
SECTION 6. DURATION OF PLAN
<PAGE>
6.1 Duration of Plan. The Plan shall remain in effect, subject to the
Board's right to earlier terminate the Plan pursuant to Section 11.2 hereof,
until all Stock subject to it shall have been purchased or acquired pursuant to
the provisions hereof. Notwithstanding the foregoing, no Award may be granted
under the Plan on or after the tenth (10th) anniversary of the Plan's effective
date.
SECTION 7. STOCK OPTIONS.
7.1 Grant of Options. Subject to the provisions of Sections 5 and 6,
Options may be granted to Participants at any time and from time to time as
shall be determined by the Committee. The Committee shall have complete
discretion in determining the number of Options granted to each Participant.
7.2 Option Agreement. Each Option shall be evidenced by an Option
agreement that shall specify the Option price, the duration of the Option, the
number of shares of Stock to which the Option pertains, and such other
provisions as the Committee shall determine.
7.3 Option Price. Options granted pursuant to the Plan shall have an
Option price that is equal to the Fair Market Value of the Stock on the date the
Option is granted.
7.4 Duration of Options. Each Option shall expire at such time as the
Committee shall determine at the time it is granted.
7.5 Exercise of Option. Options granted under the Plan shall be
exercisable in whole or in part at such times and be subject to such
restrictions and conditions as the Committee shall in each instance approve,
which need not be the same for all Participants, by the delivery of written
notice of exercise to the Company.
7.6 Payment. Except as allowed in the next sentence, payment in full,
in cash or other means satisfactory to the Committee, shall be made for all
Stock purchased at the time written notice of exercise of an option is given to
the Company. The Committee may, in its sole discretion, allow the Optionee, at
the time an Option is exercised, to pay the total purchase price of the Stock,
or any portion thereof, by means of transfer from the Optionee to the Company of
previously acquired shares of the Company's common stock having a then current
aggregate Fair Market Value, determined as of the close of business on the day
preceding the transfer, equal to such total purchase price, or any portion
thereof, or by a combination of cash and such previously acquired shares of the
Company's Stock. Shares of Stock owned through employee benefit plans of the
Company may be used if no adverse tax consequence to either the Participant or
the Company would result.
7.7 Restrictions on Stock Transferability. The Board shall impose such
restrictions on any shares of Stock acquired pursuant to the exercise of an
option under the Plan as it may deem advisable, including, without limitation,
restrictions under applicable Federal securities law, under the requirements of
any stock exchange upon which such shares of Stock are then listed and under any
blue sky or state securities laws applicable to such shares.
7.8 Termination of Employment Due to Death, Disability, or Retirement.
In the event the employment of a Participant is terminated by reason of death,
Disability, or Retirement, any outstanding Options then exercisable may be
exercised at any time prior to the expiration date of the Options or within
twelve (12) months after such date of termination of employment, whichever
period is the shorter, except in the case of Retirement or Disability, a three
(3) year period shall be substituted for the twelve (12) month period.
7.9 Termination of Employment Other than for Death, Disability, or
Retirement. Except as otherwise set forth in the Option agreement, if the
employment of the Participant shall terminate for any reason other than death,
Disability, Retirement, or involuntarily for cause, the rights under any then
outstanding Option granted pursuant to the Plan shall terminate upon the
expiration date of the Option or three months after such date of termination of
employment, whichever first occurs. Where termination of employment is
involuntary for cause, rights under all Options shall terminate immediately upon
termination of employment.
7.10 Nontransferability of Options. No Option granted under the Plan
may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, otherwise than by will or by the laws of descent and
<PAGE>
distribution. Further, all Options granted to a Participant under the Plan shall
be exercisable during his lifetime only by such Participant.
7.11 Optionee Transfer or Leave of Absence. For Plan purposes:
(a) A transfer of an Optionee from the Company to a Subsidiary
or vice versa, or from one Subsidiary to another; or
(b) A leave of absence, duly authorized by the Company: shall
not be deemed a termination of employment.
SECTION 8. STOCK INDEMNIFICATION RIGHTS.
8.1 Grant of Stock Indemnification Rights. Stock Indemnification
Rights may be granted to Participants at any time and from time to time as shall
be determined by the Committee. SIRs may be granted only to persons on whom the
Company or the Securities and Exchange Commission places a holding period
restriction on Stock acquired upon the exercise of an Option, and shall be
granted only in connection with Options, including already existing Options.
8.2 Term of SIR. Except as provided in Section 8.3 hereof, the term of
an SIR shall begin on the date the related Option is exercised, and shall end on
the last day of the seventh calendar month following such exercise date.
8.3 Lapse of SIRs. In the event that a holding period restriction shall
no longer be applicable to a Participant, any SIR granted to such Participant
shall lapse 30 days after the receipt of notice by the Participant from the
Company of such fact. Notwithstanding anything contained herein to the contrary,
in the event that a Participant holding an SIR dies within six months of his
exercise of a related Option, the SIR shall expire, and the SIR shall lapse, on
the earlier of (i) a date that is 30 days after the Participant's executor or
personal representative is duly appointed and qualified or (ii) the last day of
the seventh calendar month after the date such Option was exercised.
8.4 Payment of SIRs. Upon the sale of Stock acquired by exercise of an
Option accompanied by an SIR at any time during the seventh calendar month
following the date such Option is exercised, the Company shall make a payment to
the holder of the SIR equal to the difference between (a) the Fair Market Value
on the date of exercise of each share of Stock acquired upon exercise of the
Option accompanied by the SIR and (b) the Fair Market Value on the date of sale
of each share of the Stock acquired upon exercise of the Option, sold by the
Participant during the seventh month of the period, if the Fair Market Value of
the Stock sold is less than the Fair Market Value of the Stock subject to the
Option on the date such Option is exercised.
8.5 Termination of Employment. Termination of employment shall not
affect the payment of an SIR, except as provided in Section 8.3 with respect to
lapse of an SIR. If recipient dies before receiving payment, any payout due will
be paid to the recipient's designated beneficiary or, in the absence thereof, to
the recipient's estate.
8.6 Form and Timing of Payment. Payment of an SIR shall be made as soon
as practicable after notice by the Participant to the Company of the sale, in
cash.
8.7 Nontransferability of SIRs. No SIR granted under the Plan may be
sold, transferred, pledged, assigned or otherwise alienated or hypothecated.
8.8 SIR Agreement. Each SIR shall be evidenced by an SIR agreement
(which may be included in any agreement with respect to a related Option)
specifying the Option to which the SIR relates and containing such other
provisions as the Committee shall determine.
SECTION 9. BENEFICIARY DESIGNATION.
9.1 Beneficiary Designation. Each Participant under the Plan may name,
from time to time, any beneficiary or beneficiaries (who may be named
contingently or successively) to whom any benefit under the Plan is to be paid
in case of his death before he receives any or all of such benefit. Each
designation will revoke all prior designations by the same Participant, shall be
in a form prescribed by the Committee, and will be effective only when filed by
the Participant in writing with the Committee during his lifetime. In the
absence of any such designation, benefits remaining unpaid at the Participant's
death shall be paid to his estate.
<PAGE>
SECTION 10. RIGHTS OF EMPLOYEES.
10.1 Employment. Nothing in the Plan or in any Option Agreement shall
interfere with or limit in any way the right of the Company or any of its
Subsidiaries to terminate any Employee's employment at any time, nor confer on
any Employee any right to continue in the employ of the Company or any of its
Subsidiaries.
10.2 Participation. No Employee shall have a right to be selected as a
Participant, or, having been so selected, to be selected again as a Participant.
SECTION 11. MISCELLANEOUS.
11.1 Securities Matters. The exercise of an Option shall only be
effective at such time as counsel to the Company shall have determined that the
issuance and delivery of Stock pursuant to such exercise will not violate any
state or federal securities or other laws. The Optionee desiring to exercise an
Option may be required by the Company, as a condition of the effectiveness of
any exercise of Option, to agree in writing that all shares of Stock to be
acquired pursuant to such exercise shall be held for his or her own account
without a view to any further distribution thereof, that the certificates for
such shares shall bear an appropriate legend to that effect and that such shares
will not be transferred or disposed of except in compliance with applicable
federal and state laws. The Company may, in its sole discretion, defer the
effectiveness of any exercise of an Option in order to allow the issuance of
Stock pursuant thereto to be made pursuant to registration or an exemption from
registration or other methods for compliance available under the federal or
state securities laws. The Company shall inform the Optionee in writing of its
decision to defer the effectiveness of the exercise of an Option. During the
period that the effectiveness of the exercise of an option has been deferred,
the Optionee may, by written notice, withdraw such exercise and obtain the
refund of any amount paid with respect thereto. The Company shall be under no
obligation to effect the registration pursuant to the Securities Act of 1933 of
any Stock to be issued hereunder or to effect similar compliance under any state
laws.
11.2 Amendment, Modification, and Termination of Plan. The Board at any
time may terminate, and from time to time may amend or modify the Plan. No
amendment, modification, or termination of the Plan shall in any manner
adversely affect any Award theretofore granted under the Plan, without the
consent of the Participant.
11.3 Status of Option. In no event shall Options granted hereunder be
deemed to be Incentive Stock Options meeting the requirements of Section 422A of
the Code.
SECTION 12. TAX WITHHOLDING.
12.1 Tax Withholding. The Company shall have the power to withhold from
compensation and other amounts owing to a Participant, or require a Participant
to remit to the company, an amount sufficient to satisfy federal, state, and
local withholding tax requirements on any Award under the Plan.
12.2 Use of Stock for Tax Withholding. In order to assist Participants
in paying federal and state income taxes required to be withheld upon the
exercise of an Option, the Committee, in its discretion and subject to such
additional terms and conditions as it may adopt, may permit the Participant to
elect to satisfy such income tax withholding obligation by having the Company
withhold a portion of the Stock otherwise to be delivered upon exercise of such
Option with a fair market value equal to the taxes required to be withheld. If a
Participant makes an election to use Stock to pay income tax withholding
obligations and the Participant's tax date is deferred for six months from the
date of exercise of the Option, the optionee will initially receive the full
amount of shares, but will be unconditionally obligated to surrender to the
Company on the tax date the proper number of shares to satisfy the withholding
obligation, plus cash for any remainder of the withholding obligation, including
any fractional share withholding amount. Participants who are "officers" or
"directors" of the Company, as those terms are used in Section 16(b) of the
Securities Exchange Act of 1934, as amended ("Section 16(b)"), may only elect to
use Stock to satisfy income tax withholding obligations in compliance with the
rules established by the Committee to comply with Section 16(b).
SECTION 13. REQUIREMENTS OF LAW.
<PAGE>
13.1 Requirements of Law. The granting of Awards and the issuance of
shares of Stock upon the exercise of an Option shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.
13.2 Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Minnesota.
<PAGE>
AMENDMENT 1
LecTec Corporation, during a meeting of its Board of Directors on
February 26, 1991, approved a resolution to increase the number of shares
available for issue to 300,000 from 200,000 as originally stated in Section 5.1
of the 1989 Stock Option Plan.
The Company then proposed and received Shareholder approval for this
Amendment during the Regular Shareholders' Meeting convened on November 26,
1991.
AMENDMENT 2
LecTec Corporation, during a meeting of its Board of Directors on May
7, 1993, approved a resolution to amend Paragraph 7.8 of Section 7 of the LecTec
1989 Stock Option Plan as follows:
"Termination of employment due to death, disability or retirement. In
the event the employment of a participant is terminated by reason of
death, disability or retirement, any outstanding options [Note: the
words 'then exercisable' have been removed] may be exercised at any
time prior to the expiration date of the options or within twelve (12)
months after such date of termination of employment, whichever is
shorter, except in the case of Retirement or Disability, a three (3)
year period shall be substituted for the twelve (12) month period."
The Company then proposed and received Shareholder approval for this
Amendment during the Regular Shareholders' Meeting convened on November 19,
1993.
AMENDMENT 3
LecTec Corporation, during a meeting of its Board of Directors on July
23, 1993, approved a resolution to increase the number of shares available for
issue to 500,000 from 300,000 as previously stated in AMENDMENT 1 of the 1989
LecTec Stock Option Plan.
The Company then proposed and received Shareholder approval for this
Amendment during the Regular Shareholders' Meeting convened on November 19,
1993.
AMENDMENT 4
LecTec Corporation, during a meeting of its Board of Directors on March
15, 1996, approved a resolution to increase the number of shares available for
issue to 800,000 from 500,000 as previously stated in AMENDMENT 3 of the 1989
LecTec Corporation Stock Option Plan.
The Company then proposed and received Shareholder approval for this
Amendment during the Regular Shareholders' Meeting convened on November 18,
1996.
AMENDMENT 5
LecTec Corporation, during a meeting of its Board of Directors on March
15, 1996, approved a resolution to amend Paragraph 7.10 of Section 7 of the
LecTec Corporation 1989 Stock Option Plan as follows:
"Nontransferability of Options. No option granted under the Plan may be
sold, pledged, or otherwise alienated or hypothecated, otherwise than by will or
by the laws of descent and distribution, excepting the transfer or assignment of
fully vested and exercisable options for gifting purposes."
The Company then proposed and received Shareholder approval for this
amendment during the Regular Shareholders' Meeting convened on November 18,
1996.
EXHIBIT 10.23
LECTEC CORPORATION 1991 DIRECTORS' STOCK OPTION PLAN
SECTION 1. ESTABLISHMENT, PURPOSE, AND EFFECTIVE DATE OF PLAN.
1.1 Establishment. LecTec Corporation, a Minnesota Corporation, hereby
establishes the "LECTEC CORPORATION 1991 DIRECTORS' STOCK OPTION PLAN" (the
"Directors' Plan") for LecTec's Board of Directors who are not full time or part
time employees of the company. The Directors' Plan permits the grant of stock
options which do not qualify as incentive stock options within the meaning of
Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"), and
Stock Indemnification Rights.
1.2 Purpose. The purpose of the Directors' Plan is to advance the
interests of the Company and its shareholders by encouraging and providing for
the acquisition of an equity interest in the success of the Company by
Non-Employee Directors, by providing additional incentives and motivation toward
superior performance of the Company, and by enabling the Company to attract and
retain the services of Non-Employee Directors upon whose judgment, interest, and
special effort the successful conduct of its operations is dependent.
1.3 Effective Date. The Directors' Plan shall become effective
immediately upon adoption by the Board of the Company and shall be subject to
ratification by the shareholders of the Company. Any Award made prior to
shareholder ratification shall be subject to such ratification.
SECTION 2. DEFINITIONS.
2.1 Definitions. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "Award" means any Option and/or Stock Indemnification
Right under this Directors' Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Committee" means the committee appointed by the Board
pursuant to Section 4.1. The Board shall have the sole continuing
authority to appoint members of the Committee both in substitution for
members appointed and to fill vacancies, however caused.
(d) "Company" means LecTec Corporation, a Minnesota
corporation.
(e) "Disability" means disability as defined in Section 22(e)
(3) of the Code.
(f) "Non-Employee Directors" means a Director of the Company
who is not a full-time employee of the Company or its domestic or
international Subsidiaries or any branch or division thereof.
(g) "Fair Market Value" of the stock means (i) the closing
price of the Stock as reported for composite transactions, if the
Stock is then traded on a national securities exchange, (ii) the last
sale price if the Stock is then quoted on the NASDAQ National Market
System or (iii) the average of the closing representative bid and
asked prices of the Stock as reported on NASDAQ on the date as of
which fair market value is being determined. If on the date of grant
of any option granted under the Directors' Plan, the Stock is not
publicly traded, the committee shall make a good faith attempt to
satisfy the option price requirement and in connection therewith shall
take such action as it deems necessary or advisable.
(h) "Option" means the right to purchase Stock at a stated
price for a specified period of time. For purposes of the Directors'
Plan, Option means an option that does not qualify as an Incentive
Stock Option within the meaning of Section 422A of the Code.
(i) "Participant" means any Non -Employee Director designated
by the Committee to participate in the Directors' Plan.
(j) "Stock" means the Common Stock of the Company.
<PAGE>
(k) "Stock Indemnification Right" and "SIR" mean the right to
receive a payment from the Company equal to the decline in value of a
specified number of shares of Stock acquired upon exercise of a
related Option hereunder and sold during a specified period of time.
(i) "Subsidiary" means any entity of which, at the time such
Subsidiary status is to be determined, more than 50% of the combined
voting power of such entity is directly or indirectly owned by the
Company.
2.2 Gender and Number. Except when otherwise indicated by the context,
words in the masculine gender when used in the Directors' Plan shall include the
feminine gender, the singular shall include the plural, and the plural shall
include the singular.
SECTION 3. ELIGIBILITY AND PARTICIPATION.
3.1 Eligibility and Participation. Participants in the Directors' Plan
shall be selected by the Committee from among Non-Employee Directors.
SECTION 4. ADMINISTRATION.
4.1 Administration. The Committee shall be responsible for the general
administration of the Directors' Plan. The Committee shall consist of three or
more persons, all of whom shall be "disinterested persons" with respect to the
Directors' Plan within the meaning of Rule 16b-3(d) (3) under the Securities
Exchange Act of 1934, as amended. The members of the Committee shall not be
eligible to receive options under the Directors' Plan. The members of the
Committee shall be appointed by and serve at the pleasure of the Board. The
authority to grant Awards shall be vested in the Committee. Subject to the
provisions of the Directors' Plan, the Committee, from time to time, shall
determine the individuals to whom and the time or times at which an Award shall
be granted, and the number of shares to be subject to each Option or SIR, the
Option price per share, the period of each Option, and the other terms and
provisions of Awards, which may or may not be identical. The Committee may also
interpret the Directors' Plan, prescribe, amend and rescind rules and
regulations relating to the Directors' Plan, and make all other determinations
necessary or advisable for the administration of the Directors' Plan. 'The
determinations of the Committee shall be made in accordance with its judgment as
to the best interests of the Company and its shareholders and in accordance with
the purpose of the Directors' Plan. The Committee's determination shall be in
all cases conclusive. A majority of the members of the Committee shall
constitute a quorum, and all determinations of the Committee shall be made by a
majority of its members. Any determination of the Committee may be made, without
notice or meeting, and may be evidenced by a writing signed by a majority of the
Committee members.
SECTION 5. STOCK SUBJECT TO THE DIRECTORS' PLAN.
5.1 Number. The total number of shares of Stock subject to Options
under the Directors' Plan may not exceed 50,000 subject to adjustment upon
occurrence of any of the events indicated in Section 5.3. The shares to be
delivered under the Directors' Plan may consist, in whole or in part, of
authorized but unissued Stock or treasury Stock, not reserved for any other
purpose.
5.2 Lapsed Options. If any Option granted under the Directors' Plan
terminates, expires or lapses for any reason, any shares subject to such Option
again shall be available for the grant of any Option.
5.3 Adjustment in Capitalization. If there shall be any change in the
Stock through merger, consolidation, reorganization, recapitalization, stock
dividend (of whatever amount), stock split or other change in the corporate
structure, appropriate adjustments in the Directors' Plan and outstanding
options and SIRs shall be made by the Committee. In the event of any such
changes, adjustments shall include, where appropriate, changes in the aggregate
number of shares subject to the Directors' Plan, the number of shares and the
price per share subject to outstanding Options and SIRs, in order to prevent
dilution or enlargement of Option or SIR rights.
SECTION 6. DURATION OF DIRECTORS' PLAN.
6.1 Duration of Directors' Plan. The Directors' Plan shall remain in
effect, subject to the Board's right to earlier terminate the Directors' Plan
pursuant to Section 11.2 hereof, until all Stock subject to it shall have been
<PAGE>
purchased or acquired pursuant to the provisions hereof. Notwithstanding the
foregoing, no Award may be granted under the Directors' Plan on or after the
tenth (10th) anniversary of the Directors' Plan's effective date.
SECTION 7. STOCK OPTIONS.
7.1 Grant of Options. Subject to the provisions of Sections 5 and 6,
Options may be granted to Participants at any time and from time to time as
shall be determined by the Committee. The Committee shall have complete
discretion in determining the number of Options granted to each Participant.
7.2 Option Agreement. Each Option shall be evidenced by an Option
agreement that shall specify the Option price, the duration of the Option, the
number of shares of Stock to which the Option pertains, and such other
provisions as the Committee shall determine.
7.3 Option Price. Options granted pursuant to the Directors' Plan shall
have an Option price that is equal to the Fair Market Value of the Stock on the
date the Option is granted.
7.4. Duration of Options. Each Option shall expire at such time as the
Committee shall determine at the time it is granted.
7.5 Exercise of Option. Options granted under the Directors' Plan shall
be exercisable in whole or in part at such times and be subject to such
restrictions and conditions as the Committee shall in each instance approve,
which need not be the same for all Participants, by the delivery of written
notice of exercise to the Company.
7.6 Payment. Except as allowed in the next sentence, payment in full,
in cash or other means satisfactory to the Committee, shall be made for all
Stock purchased at the time written notice of exercise of an Option is given to
the Company. The Committee may, in its sole discretion, allow the Optionee, at
the time an Option is exercised, to pay the total purchase price of the Stock,
or any portion thereof, by means of transfer from the Optionee to the Company of
previously acquired shares of the Company's common stock having a then current
aggregate Fair Market Value, determined as of the close of business on the day
preceding the transfer, equal to such total purchase price, or any portion
thereof, or by a combination of cash and such previously acquired shares of the
Company's Stock. Shares of Stock owned through employee benefit plans of the
Company may be used if no adverse tax consequence to either the Participant or
the Company would result.
7.7 Restrictions on Stock Transferability. The Committee may impose
such restrictions on any shares of Stock acquired pursuant to the exercise of an
Option under the Directors' Plan as it may deem advisable, including, without
limitation, restrictions under applicable Federal securities law, under the
requirements of any stock exchange upon which such shares of Stock are then
listed and under any blue sky or state securities laws applicable to such
shares.
7.8 Termination of Directorship. A Participant's rights hereunder or
under any outstanding Option, shall not terminate because that Participant
ceases to be a Director.
7.9 Nontransferabilitv of Options. No Option granted under the
Directors' Plan may be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated, otherwise than by will or by the laws of descent and
distribution. Further, all Options granted to a Participant under the Directors'
Plan shall be exercisable during his lifetime only by such participant.
SECTION 8. STOCK INDEMNIFICATION RIGHT.
8.1 Grant of Stock Indemnification Right. Stock Indemnification Rights
may be granted to Participants at any time and from time to time as shall be
determined by the Committee. SIRs may be granted only to persons on whom the
Company or the Securities and Exchange Commission places a holding period
restriction on Stock acquired upon the exercise of an Option, and shall be
granted only in connection with Options, including already existing Options.
<PAGE>
8.2 Term of SIR, Except as provided in Section 8.3 hereof, the term of
an SIR shall begin on the date the related Option is exercised, and shall end on
the last day of the seventh calendar month following such exercise date.
8.3 Lapse of SIRs. In the event that a holding period restriction shall
no longer be applicable to a Participant, any SIR granted to such participant
shall lapse 30 days after the receipt of notice by the Participant from the
Company of such fact. Notwithstanding anything contained herein to the contrary,
in the event that a Participant holding an SIR dies within six months of his
exercise of a related Option, the SIR shall expire, and the SIR shall lapse, on
the earlier of (i) a date that is 30 days after the Participants executor or
personal representative is duly appointed and qualified or (ii) the last day of
the seventh calendar month after the date such Option was exercised.
8.4 Payment of SIRs. Upon the sale of Stock acquired by exercise of an
Option accompanied by an SIR at any time during the seventh calendar month
following the date such Option is exercised, the Company shall make a payment to
the holder of the SIR equal to the difference between (a) the Fair Market Value
on the date of exercise of each share of Stock acquired upon exercise of the
Option accompanied by the SIR and (b) the Fair Market Value on the date of sale
of each share of the Stock acquired upon exercise of the Option, sold by the
Participant during the seventh month of the period, if the Fair Market Value of
the Stock sold is less than the Fair Market Value of the Stock subject to the
Option on the date such Option is exercised.
8.5 Form and Timing of Payment. Payment of an SIR shall be made as soon
as practicable after notice by the Participant to the company of the sale, in
cash.
8.6 Nontransferabilitv of SIRs. No SIR granted under the Plan may be
sold, transferred, pledged, assigned or otherwise alienated or hypothecated.
8.7 SIR Agreement. Each SIR shall be evidenced by an SIR agreement
(which may be included in any agreement with respect to a related Option)
specifying the Option to which the SIR relates and containing such other
provisions as the Committee shall determine.
SECTION 9. BENEFICIARY DESIGNATION.
9.1 Beneficiary Designation. Each participant under the Directors' Plan
may name, from time to time, any beneficiary or beneficiaries (who may be named
contingently or successively) to whom any benefit under the Directors' Plan is
to be paid in case of his death before he receives any or all of such benefit.
Each designation will revoke all prior designations by the same participant,
shall be in a form prescribed by the Committee, and will be effective only when
filed by the Participant in writing with the Committee during his lifetime. In
the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to his estate.
SECTION 10. RIGHTS OF DIRECTORS.
10.1 Service on Board. Nothing in the Directors' Plan or in any Option
Agreement shall interfere with or limit in any way the right of the Company or
any of its Subsidiaries to terminate any Director's service on the Board at any
time, nor confer on any Director any right to service on the Board of the
Company or any of its Subsidiaries.
10.2 Participation. No Director shall have a right to be selected as a
Participant, or, having been so selected, to be selected again as a Participant.
SECTION 11. MISCELLANEOUS.
11.1 Securities Matters. The exercise of an Option shall only be
effective at such time as counsel to the Company shall have determined that the
issuance and delivery of Stock pursuant to such exercise will not violate any
state or federal securities or other laws. The Optionee desiring to exercise an
Option may be required by the Company, as a condition of the effectiveness of
any exercise of Option, to agree in writing that all shares of Stock to be
acquired pursuant to such exercise shall be held for his or her own account
without a view to any further distribution thereof, that the certificates for
such shares shall bear an appropriate legend-end to that effect and that such
shares will not be transferred or disposed of except in compliance with
applicable federal and state laws. The Company may, in its sole discretion,
defer the effectiveness of any exercise of an Option in order to allow the
issuance of Stock pursuant thereto to be made pursuant to registration or an
exemption from registration or other
<PAGE>
methods for compliance available under the federal or state securities laws. The
Company shall inform the Optionee in writing of its decision to defer the
effectiveness of the exercise of an Option. During the period that the
effectiveness of the exercise of an Option has been deferred, the Optionee may,
by written notice, withdraw such exercise and obtain the refund of any amount
paid with respect thereto. The Company shall be under no obligation to effect
the registration pursuant to the Securities Act of 1933 of any Stock to be
issued hereunder or to effect similar compliance under any state laws.
11.2 Amendment, Modification, and Termination of Directors' Plan. The
Board at any time may terminate, and from time to time may amend or modify the
Directors' Plan. No amendment, modification, or termination of the Directors'
Plan shall in any manner adversely affect any Award theretofore granted under
the Directors' Plan, without the consent of the Participant.
11.3 Status of Option. In no event shall Options granted hereunder be
deemed to be Incentive Stock Options meeting the requirements of Section 422A of
the Code.
SECTION 12. TAX WITHHOLDING.
12.1 Tax Withholding . The Company shall have the power to withhold
from Director fees and other amounts owing to a Participant, or require a
Participant to remit to the company, an amount sufficient to satisfy federal,
state, and local withholding tax requirements on any Award under the Directors'
Plan.
12.2 Use of Stock for Tax Withholding. In order to assist participants
in paying federal and state income taxes required to be withheld upon the
exercise of an Option, the Committee, in its discretion and subject to such
additional terms and conditions as it may adopt, may permit the Participant to
elect to satisfy such income tax withholding obligation by having the company
withhold a portion of the Stock otherwise to be delivered upon exercise of such
Option with a fair market value equal to the taxes required to be withheld. If a
Participant makes an election to use Stock to pay income tax withholding
obligations and the Participants tax date is deferred for six months from the
date of exercise of the Option, the optionee will initially receive the full
amount of shares, but will be unconditionally obligated to surrender to the
Company on the tax date the proper number of shares to satisfy the withholding
obligation, plus cash for any remainder of the withholding obligation, including
any fractional share withholding amount. Participants who are "officers" or
"directors" of the Company, as those terms are used in Section 16(b) of the
Securities Exchange Act of 1934, as amended ("Section 16(b)"), may only elect to
use Stock to satisfy income tax withholding obligations in compliance with the
rules established by the Committee to comply with Section 16(b).
SECTION 13. REQUIREMENTS OF LAW.
13.1 Requirements of Law. The granting of Awards and the issuance of
shares of Stock upon the exercise of an Option shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.
13.2 Governing Law. The Directors' Plan, and all agreements hereunder,
shall be construed in accordance with and governed by the laws of the State of
Minnesota.
AMENDMENT 1
LecTec Corporation, during a meeting of its Board of Directors on February 26,
1991, approved a resolution to increase the number of shares available for issue
to 100,000 from 50,000 as originally stated in Section 5.1 of the 1991
Directors' Stock Option Plan.
AMENDMENT 2
<PAGE>
LecTec Corporation, during a meeting of its Board of Directors on March
15, 1996, approved a resolution to amend Paragraph 7.9 of Section 7 of the
LecTec Corporation 1991 Directors' Stock Option Plan as follows:
"Nontransferability of Options. No option granted under the Directors'
Plan may be sold, pledged, or otherwise alienated or hypothecated, otherwise
than by will or by the laws of descent and distribution, excepting the transfer
or assignment of fully vested and exercisable options for gifting purposes."
The Company then proposed and received Shareholder approval for this
Amendment during the Regular Shareholders' Meeting convened on November 18,
1996.
OFFICE/WAREHOUSE LEASE
This Indenture of lease, dated this 24th day of May 1991 by and between Sierra
Development (A Minnesota General Partnership) hereinafter referred to as
"Lessor", and LecTec Corporation (A Minnesota Corporation) hereinafter referred
to as "Lessee".
DEFINITIONS:
"Premises' -That certain real property located in the City of Edina, County
of Hennepin and State of Minnesota and legally described on Exhibit 'A" attached
hereto and made a part hereof, including all buildings and site improvements
located thereon.
"Building" -That certain office/warehouse building containing approximately
45,800-square feet located upon the Premises and commonly described as 7401-7415
Cahill Road, Edina, Minnesota 55435
"Demised Premises" -That certain portion of the Building located at 7401
Cahill Road and designated as Bays - - - through - - - , consisting of
approximately 29,187 - square feet ( 2,629 square feet of office space and
26,558 square feet of warehouse space), as measured from the outside walls of
the Demised Premises to the center of the partition wall, as shown on the floor
plan attached hereto as Exhibit 'B" and made a part hereof. The Demised Premises
include a non-exclusive easement for access to common areas, as hereinafter
defined, and all licenses and easements appurtenant to the Demised Premises.
"Common Areas" -The term "common area" means the entire areas to be used
for the non-exclusive use by Lessee and other lessees in the Building,
including, but not limited to, corridors, lavatories, driveways, truck docks,
parking lots and landscaped areas. Subject to reasonable rules and regulations
to the promulgated by Lessor, the common areas are hereby made available to
Lessee and its employees, agents, customers, and invitees for reasonable use in
common with other lessees, their employees, agents, customers and invitees.
WITNESSETH:
TERM: See Article 42, 45
1. For and in consideration of the rents, additional rents, terms, provisions
and covenants herein contained, Lessor hereby lets, leases and demises to Lessee
the Demised Premises for the term of 72 months commencing on the first day of
July, 1991 (sometimes called 'the Commencement Date") and expiring the last day
of June 1997 (sometimes called 'Expiration Date"), unless sooner terminated as
hereinafter provided.
BASE RENT:
2. Lessor reserves and Lessee shall pay Lessor, a total rental of Seven Hundred
Forty-four Thousand Nine Hundred Eighty-five & 20/100 dollars ($ 744,985.20),
payable in advance, in equal monthly installments of See Article 43 Dollars ($
See Art. 43 ), commencing on the Commencement Date and continuing on the first
day of each and every month thereafter for the next succeeding months during the
balance of the term (sometimes called 'Base Rent'). In the event the
Commencement Date falls on a date other than the first of a month the rental for
that month shall be prorated and adjusted accordingly
ADDITIONAL RENT.- See Articles 43 & 48
3. Lessee shall pay to Lessor throughout the term of this Lease the following:
a. Lessee shall pay a sum equal to sixty-three and 73/100 percent ( 63.73%)
of the Real Estate taxes. The term 'Real Estate Taxes' shall mean all real
estate taxes, all assessments and any taxes in lieu
<PAGE>
thereof which may be levied upon or assessed against the Premises of which the
Demised Premises are a part. Lessee, in addition to all other payments to Lessor
by Lessee required hereunder shall pay to Lessor, in each year during the term
of this Lease and any extension or renewal thereof, Lessee's proportionate share
of such real estate taxes and assessments paid in the first instance by Lessor.
Any tax year commencing during any lease year shall be deemed to correspond
to such lease year. In the event the taxing authorities include in such real
estate taxes and assessments the value of any improvements made by Lessee, or of
machinery, equipment, fixtures, inventory or other personal property or assets
of Lessee, then Lessee shall pay all the taxes attributable to such items in
addition to its proportionate share of said aforementioned real estate taxes and
assessments. A photostatic copy of the tax statement submitted by Lessor to
Lessee shall be sufficient evidence of the amount of taxes and assessments
assessed or levied against the Premises of which the Demised Premises are a
part, as well as the items taxed.
b. A sum equal to sixty-three and 73/100 percent (63.73 %) of the annual
aggregate operating expenses incurred by Lessor in the operation, maintenance
and repair of the Premises. The term 'Operating Expenses' shall include but not
be limited to maintenance, repair, replacement and care of all common area
lighting, common area plumbing and roofs, parking and landscaped areas signs,
snow removal, non-structural repair and maintenance of the exterior of the
Building, insurance premiums, management fee, wages and fringe benefits of
personnel employed for such work, costs of equipment purchased and used for such
purposes, and the cost or portion thereof properly allocable to the Premises
(amortized over such reasonable period as lessor shall determine together with
the interest at the rate of 12 % per annum on the unamortized balance) of any
capital improvements made to the Building by Lessor after the Base Year which
result in a reduction of Operating Expenses or made to the Building by Lessor
after the date of this Lease that are required under any governmental law or
regulation that was not applicable to the Building at the time it was
constructed.
c. In no event shall the total adjusted monthly rent be less than See
Article 43 Dollars ($ See Art 43 ) per month during the term of this Lease.
The payment of the sums set forth in this Article 3 shall be in addition to
the Base Rent payable pursuant to Article 2 of this Lease. All sums due
hereunder shall be due and payable within thirty (30) days of delivery of
written certification by Lessor setting forth the computation of the amount due
from Lessee. In the event the lease term shall begin or expire at any time
during the calendar year, the Lessee shall be responsible for his prorate share
of Additional Rent under subdivisions a. and b. during the Lease and/or
occupancy time.
Prior to commencement of this Lease, and prior to the commencement of each
calendar year thereafter commencing during the term of this Lease or any renewal
or extension thereof, Lessor may estimate for each calendar year (i) the total
amount of Real Estate Taxes; (ii) the total amount of Operating Expenses; (iii)
Lessee's share of Real Estate Taxes for such calendar year; (iv) Lessee's share
of Operating Expenses for such calendar year; and (v) the computation of the
annual and monthly rental payable during such calendar year as a result of
increases or decreases in Lessee's share of Real Estate Taxes, and Operating
Expenses. Said estimates will be in writing and will be delivered or mailed to
Lessee at the Premises.
The amount of Lessee's share of Real Estate Taxes, and Operating Expenses
for each calendar year, so estimated, shall be payable as Additional Rent, in
equal monthly installments, in advance, on the first day of each month during
such calendar year at the option of Lessor. In the event that such estimate is
delivered to Lessee before the first day of January of such calendar year, said
amount, so estimated, shall be payable as additional rent in equal monthly
installments, in advance, on the first day of each month during such calendar
year. In the event that such estimate is delivered to Lessee after the first day
of January of such calendar year, said amount, so estimated, shall be payable as
additional rent in equal monthly installments, in advance, on the first day of
each month over the balance of such calendar year, with the number of
installments being equal to the number of full calendar months remaining in such
calendar year.
Upon completion of each calendar year during the term of this Lease or any
renewal or extension thereof, Lessor shall cause its accountants to determine
the actual amount of the Real Estate Taxes, and Operating Expenses payable in
such calendar year and Lessee's share thereof and deliver a written
certification of the amounts thereof to Lessee. If Lessee has underpaid its
share of Real Estate Taxes, or Operating Expenses for such calendar year, Lessee
shall pay the balance of its share of same within ten
<PAGE>
(10) days after the receipt of such statement. If Lessee has overpaid its share
of Real Estate Taxes, or Operating Expenses for such calendar year, Lessor shall
either (I) refund such excess, or (ii) credit such excess against the most
current monthly installment or installments due Lessor for its estimate of
Lessees share of Real Estate Taxes, and Operating Expenses for the next
following calendar year. A prorata adjustment shall be made for a fractional
calendar year occurring during the term of this Lease or any renewal or
extension thereof based upon the number of days of the term of the Lease during
said calendar year as compared to three hundred sixty-five (365) days and all
additional sums payable by Lessee or credits due Lessee as a result of the
provisions of this Article 3 shall be adjusted accordingly.
COVENANT TO PAY RENT:
4. The covenants of Lessee to pay the Base Rent and the Additional Rent are each
independent of any other covenant, condition, provision or agreement contained
in this Lease. All rents are payable to Lessor at Welsh Companies, Inc., 11200
West 78th Street, Eden Prairie, Minnesota 55344
UTILITIES:
5. Lessor shall provide mains and conduits to supply water, gas, electricity and
sanitary sewage to the Premises. Lessee shall pay, when due, all charges for
sewer usage or rental, garbage, disposal, refuse removal, water, electricity,
gas, fuel oil, L.P. gas, telephone and/or other utility services or energy
source furnished to the Demised Premises during the term of this Lease, or any
renewal or extension thereof. In Lessor elects to furnish any of the foregoing
utility services or other services furnished or caused to be furnished to
Lessee, then the rate charged by Lessor shall not exceed the rate Lessee would
be required to pay to a utility company or service company furnishing any of the
foregoing utilities or services. The charges thereof shall be deemed additional
rent in accordance with Article 3.
CARE AND REPAIR OF DEMISED PREMISES:
6. Lessee shall, at all times throughout the term of this Lease, including
renewals and extension, and at its sole expense, keep and maintain the Demised
Premises in a clean, safe, sanitary and first class condition and in compliance
with all applicable laws, codes, ordinances, rules and regulations. Lessee's
obligations hereunder shall include but not be limited to the maintenance,
repair and replacement, if necessary, of heating, air conditioning fixtures,
equipment, and systems, all lighting and plumbing fixtures and equipment,
fixtures, motors and machinery, all interior walls, partitions, doors and
windows, including the regular painting thereof, all exterior entrances,
windows, doors and docks and the replacement of all broken glass. When used in
this provision, the term 'repairs' shall include replacements or renewals when
necessary, and all such repairs made by the Lessee shall be equal in quality and
class to the original work. The Lessee shall keep and maintain all portions of
the Demised Premises and the sidewalk and areas adjoining the same in a clean
and orderly condition, free of accumulation of dirt, rubbish, snow and ice.
If Lessee falls, refuses or neglects to maintain or repair the Demised
Premises as required in this Lease after notice shall have been given Lessee, in
accordance with Article 33 of this Lease, Lessor may make such repairs without
liability to Lessee for any loss or damage that may accrue to Lessees
merchandise, fixtures or other property or to Lessee's business by reason
thereof, and upon completion thereof, Lessee shall pay to Lessor all costs plus
15% for overhead incurred by Lessor in making such repairs upon presentation to
Lessee of bill therefor.
Lessor shall repair, at its expense, the structural portions of the
Building, provided however where structural repairs are required to be made by
reason of the acts of Lessee, the costs thereof shall be borne by Lessee and
payable by Lessee to Lessor upon demand.
The Lessor shall be responsible for all outside maintenance of the Demised
Premises, including grounds and parking areas. All such maintenance which is the
responsibility of the Lessor shall be provided as reasonably necessary to the
comfortable use and occupancy of Demised Premises during business hours, except
Saturdays, Sundays and holidays, upon the condition that the Lessor shall not be
liable for damages for failure to do so due to causes beyond its control.
<PAGE>
SIGNS: See Exhibit "C"
7. Any sign, lettering, picture, notice or advertisement installed on or in any
part of the Premises and visible from the exterior of the Building, or visible
from the exterior of the Demised Premises, shall be approved and installed by
Lessor at Lessee's expense. In the event of a violation of the foregoing by
Lessee, Lessor may remove the same without any liability and may charge the
expense incurred by such removal to Lessee.
ALTERATIONS, INSTALLATION, FIXTURES:
8. Except as hereinafter provided, Lessee shall not make any alteration,
additions, or improvements in or to the Demised Premises or add, disturb or in
any way change any plumbing or wiring therein without the prior written consent
of the Lessor. In the event alterations are required by any governmental agency
by reason of the use and occupancy of the Demised Premises by Lessee, Lessee
shall make such alterations at its own cost and expense after first obtaining
Lessor's approval of plans and specifications therefor and furnishing such
indemnification as Lessor may reasonably require against liens, costs, damages
and expenses arising out of such alterations. Alterations or additions Lessee
must be built in compliance with all laws, ordinances and governmental
regulations affecting the Premises and Lessee shall warrant to Lessor that all
such alterations, additions, or improvements shall be in strict compliance with
all relevant laws, ordinances, governmental regulations, and insurance
requirements. Construction of such alterations or additions shall commence only
upon Lessee obtaining and exhibiting to Lessor the requisite approvals, licenses
and permits and indemnification against liens. All alterations, installations,
physical additions or improvements to the Demised Premises made by Lessee shall
at once become the property of Lessor and shall be surrendered to Lessor upon
the termination of this Lease; provided, however, this clause shall not apply to
movable equipment or furniture owned by Lessee which may be removed by Lessee at
the end of the term of this Lease if Lessee is not then in default.
POSSESSION: See Article 43
9. Except as hereinafter provided Lessor shall deliver possession of the Demised
Premises to Lessee in the condition required by this Lease on or before the
Commencement Date, but delivery of possession prior to or later than such
Commencement Date shall not affect the expiration date of this Lease. The
rentals herein reserved shall commence on the date when possession of the
Demised Premises is delivered by Lessor to Lessee. Any occupancy by Lessee prior
to the beginning of the term shall in all respects be the same as that of a
Lessee under this Lease. Lessor shall have no responsibility or liability for
loss or damage to fixtures, facilities or equipment installed or left on the
Demised Premises. If Demised Premises are not ready for occupancy by
Commencement Date and possession is later than Commencement Date, rent shall
begin on date of possession.
SECURITY AND DAMAGE DEPOSIT-
10. Lessee contemporaneously with the execution of this Lease, has deposited
with Lessor the sum of Eleven Thousand Five Hundred Forty-eight and 70/100
Dollars ($ 11,548.70 ), receipt of which is acknowledged hereby by Lessor, which
deposit is to be held by Lessor, without liability for interest, as a security
and damage deposit for the faithful performance by Lessee during the term hereof
or any extension hereof. Prior to the time when Lessee shall be entitled to the
return of this security deposit, Lessor may commingle such deposit with Lessor's
own funds and to use such security deposit for such purpose as Lessor may
determine. In the event of the failure of Lessee to keep and perform any of the
terms, covenants and conditions of this Lease to be kept and performed by Lessee
during the term hereof or any extension hereof, then Lessor, either with or
without terminating this Lease, may (but shall not be required to) apply such
portion of said deposit as may be necessary to compensate or repay Lessor for
all losses or damages sustained or to be sustained by Lessor due to such breach
on the part of Lessee, including, but not limited to overdue and unpaid rent,
any other sum payable by Lessee to Lessor pursuant to the provisions of this
Lease, damages or-deficiencies in the reletting of Demised Premises, and
<PAGE>
reasonable attorney's fees incurred by Lessor. Should the entire deposit or any
portion thereof, be appropriated and applied by Lessor, in accordance with the
provisions of this paragraph, Lessee upon written demand by Lessor, shall remit
forthwith to Lessor a sufficient amount of cash to restore said security deposit
to the original sum deposited, and Lessee's failure to do so within five (5)
days after receipt of such demand shall constitute a breach of this Lease. Said
security deposit shall be returned to Lessee, less any depletion thereof as the
result of the provisions of this paragraph, at the end of the term of this Lease
or any renewal thereof, or upon the earlier termination of this Lease. Lessee
shall have no right to anticipate return of said deposit by withholding any
amount required to be paid pursuant to the provision of this Lease or otherwise.
In the event Lessor shall sell the Premises, or shall otherwise convey or
dispose of its interest in this Lease, Lessor may assign said security deposit
or any balance thereof to Lessor's assignee, whereupon Lessor shall be released
from all liability for the return or repayment of such security deposit and
Lessee shall look solely to the said assignee for the return and repayment of
said security deposit. Said security deposit shall not be assigned or encumbered
by Lessee without such consent of Lessor, and any assignment or encumbrance
without such consent shall not bind Lessor. In the event of any rightful and
permitted assignment or this Lease by Lessee, said security deposit shall be
deemed-to be held by Lessor as a deposit made by the assignee, and Lessor shall
have no further liability with respect to the return of said security deposit to
the Lessee.
USE:
11. The Demised Premises shall be used and occupied by Lessee solely for the
purposes of office, production, and storage of medical products so long as such
use is in compliance with all applicable laws, ordinances and governmental
regulations affecting the Building and Premises. The Demised Premises shall not
be used in such manner that, in accordance with any requirement of law or of any
public authority, Lessor shall be obliged on account of the purpose or manner of
said use to make any addition or alteration to or in the Building. The Demised
Premises shall not be used in any manner which will increase the rates required
to be paid for public liability or for fire and extended coverage insurance
covering the Premises. Lessee shall occupy the Demised Premises conduct its
business and control its agents, employees, invitees and visitors in such a way
as is lawful and reputable and will not permit or create any nuisance,
unreasonable noise for a manufacturing company, odor, or otherwise interfere
with annoy or disturb any other Lessee in the Building in its normal business
operations or Lessor in its management of the Building. Lessee's use of the
Demised Premises shall conform to all the Lessor's rules and regulations
relating to the use of the Premises. Outside storage on the Premises of any type
of equipment, property or materials owned or used on the Premise by Lessee or
its customers and suppliers shall not be premitted.
ACCESS TO DEMISED PREMISES:
12. The Lessee agrees to permit the Lessor and the authorized representatives of
the Lessor to enter the Demised Premises at all times during usual business
hours for the purpose of inspecting the same and making any necessary repairs to
the Demised Premises and performing any work therein that may be necessary to
comply with any laws, ordinances, rules, regulations or requirements of any
public authority or of the Board of Fire Underwriters or any similar body or
that the Lessor may deem necessary to prevent waste or deterioration in
connection with the Demised Premises. Nothing herein shall imply any duty upon
the part of the Lessor to do any such work which, under any provision of this
Lease, the Lessee may be required to perform and the performance thereof by the
Lessor shall not constitute a waiver of the Lessee's default in failing to
perform the same. The Lessor may, during the progress of any work in the Demised
Premises, keep and store upon the Demised Premises all necessary materials,
tools and equipment. The Lessor shall not in any event be liable for
inconvenience, annoyance, disturbance, loss of business, or other damage of the
Lessee by reason of making repairs or the performance or any work in the Demised
Premises, or on account of bringing materials, supplies and equipment into or
through the Demised Premises during the course thereof and the obligations of
the Lessee under this Lease shall not thereby be affected in any manner
whatsoever.
<PAGE>
Lessor reserves the right to enter upon the Demised Premises at any time in
the event of an emergency and at reasonable hours to exhibit the Demised
Premises to prospective purchasers or others; and to exhibit the Demised
Premises to prospective Lessees and to the display "For Rent' or similar signs
on windows or doors in the Demised Premises during the last ninety (90) days of
the term of this Lease, all without hindrance or molestation by Lessee. however
such access may require a security escort.
EMINENT DOMAIN
13. In the event of any eminent domain or condemnation proceeding or private
sale in lieu thereof in respect to the Premises during the term thereof, the
following provisions shall apply:
a. If the whole of the Premises shall be acquired or condemned by eminent
domain for any public or quasipublic use or purpose, then the term of this Lease
shall cease and terminate as of the date shall be taken in such proceeding and
all rentals shall be paid up to that date.
b. If any part constituting less than the whole of the Premises shall be
acquired or condemned as aforesaid, and in the event that such partial taking or
condemnation shall materially affect the Demised Premises so as to render the
Demised Premises unsuitable for the business of the Lessee, in the reasonable
opinion of Lessor and Lessee, then the term of this Lease shall cease and
terminate as of the date possession shall be taken by the condemning authority
and rent shall be paid to the date of such termination.
In the event of a partial taking or condemnation of the Premises which
shall not materially affect the Demised Premises so as to render the Demised
Premises unsuitable for the business of the Lessee, the reasonable opinion of
the Lessor and Lessee, this Lease shall continue in full force and effect but
with a proportionate abatement of the Base Rent and Additional Rent based on the
portion, if any, of the Demised Premises taken. Lessor reserves the right, at
its option, to restore the Building and the Demised Premises to substantially
the same condition as they were prior to such condemnation. In such event,
Lessor shall give written notice to Lessee, within thirty (30) days following
the date possession shall be taken by the condemning authority, of Lessor's
intention to restore. Upon Lessor's notice of election to restore, Lessor shall
commence restoration and shall restore the Building and the Demised Premises
with reasonable promptness, subject to delays beyond Lessor's control and delays
in the making of condemnation or sale proceeds adjustments by Lessor; and Lessee
shall have no right to terminate this Lease except as herein provided. Upon
completion of such restoration, the rent shall be adjusted based upon the
portion, if any, of the Demised Premises restored.
c. In the event of any condemnation or taking as aforesaid, whether whole
or partial, the Lessee shall not be entitled to any part of the award paid for
such condemnation and Lessor is to receive the full amount of such award, the
Lessee hereby expressly waiving any right to claim to any part thereof.
d. Although all damages in the event of any condemnation shall belong to
the Lessor whether such damages are awarded as compensation for diminution in
value of the leasehold or to the fee of the Demised Premises, Lessee shall have
the right to claim and recover from the condemning authority, but not from
Lessor, such compensation as may be separately awarded or recoverable by Lessee
in Lessee's own right on account of any and all damage to Lessee's business by
reason of the condemnation and for or on account of any cost or loss to which
Lessee might be put in removing Lessees merchandise, furniture, fixtures,
leasehold improvements and equipment. However, Lessee shall have no claim
against Lessor or make any claim with the condemning authority for the loss of
its leasehold estate, any unexpired term or loss of any possible renewal or
extension of said lease or loss of any possible value of said lease, any
unexpired term, renewal or extension of said Lease.
DAMAGE OR DESTRUCTION:
14. In the event of any damage or destruction to the Premises by fire or other
cause during the term hereof, the following provisions shall apply:
a. If the Building is damaged by fire or any other cause to such extent
that the cost of restoration, as reasonably estimated by Lessor, will equal or
exceed thirty percent (30%) of the replacement value of the Building (exclusive
of foundations) just prior to the occurrence of the damage, then Lessor may, no
later than the sixtieth (60th) day following the damage, give Lessee written
notice of Lessor's election to terminate this Lease.
<PAGE>
b. If the cost of restoration as estimated by Lessor will equal or exceed
fifty percent (50%) of said replacement value of the Building and if the Demised
Premises are not suitable as a result of said damage-for the purposes for which
they are demised hereunder, in the reasonable opinion of Lessee, then Lessee
may, no later than the sixtieth (60th) day following the damage, give Lessor a
written notice of election to terminate this Lease.
c. If the cost of restoration as estimated by Lessor shall amount to less
than thirty percent (30%) of said replacement value of the Building, or if,
despite the cost, Lessor does not elect to terminate this Lease, Lessor shall
restore the Building and the Demised Premises with reasonable promptness,
subject to delays beyond Lessor's control and delays in the making of insurance
adjustments by Lessor; and Lessee shall have no right to terminate this Lease
except as herein provided. Lessor shall not be responsible for restoring or
repairing leasehold improvements of this Lessee
d. In the event of either of the elections to terminate, this Lease shall
be deemed to terminate on the date of the receipt of the notice of election and
all rentals shall be paid up to that date. Lessee shall have no claim against
Lessor for the value of any unexpired term of this Lease.
e. In any case where damage to the Building shall materially affect the
Demised Premises so as to render them unsuitable in whole or in part for the
purposes for which they are demised hereunder, then, unless such destruction was
wholly or partially caused by the negligence or breach of the terms of this
Lease by Lessee, its employees, contractors or licensees, a portion of the rent
based upon the amount of the extent to which the Demised Premises are rendered
unsuitable shall be abated until repaired or restored. If the destruction or
damage was wholly or partially caused by negligence or breach of the terms this
Lease by Lessee as aforesaid and if Lessor shall elect to rebuild, the rent
shall not abate and the Lessee shall remain liable for the same.
CASUALTY INSURANCE:
15. a. Lessor shall at all times during the term of this Lease, at its expense,
maintain a policy or policies of insurance with premiums paid in advance issued
by an insurance company licensed to do business in the State of Minnesota
insuring the Building against loss or damage by fire, explosion or other
insurable hazards and contingencies for the full replacement value, provided
that Lessor shall not be obligated to insure any furniture, equipment,
machinery, goods or supplies not covered by this Lease which Lessee may bring
upon the Demised Premises or any additional improvements which Lessee may
construct or install on the Demised Premises.
b. Lessee shall not carry any stock of goods or do anything in or about the
Demised Premises which will in any way impair or invalidate the obligation of
the insurer under any policy of insurance required by this Lease.
c. Lessor hereby waives and releases all claims, liabilities and causes of
action against Lessee and its agents, servants and employees for loss or damage
to, or destruction of, the Premises or any portion thereof, including the
buildings and other improvements situated thereon, resulting from fire,
explosion and other perils included in standard extended coverage insurance,
whether caused by the negligence of any of said persons or otherwise. Likewise,
Lessee hereby waives and releases all claims, liabilities and causes of action
against Lessor and its agents, servants and employees for loss or damage to, or
destruction of, any of the improvements, fixtures, equipment, supplies,
merchandise and other property, whether that of Lessee or of others in, upon or
about the Premises resulting from fire, explosion or the other perils included
in standard extended coverage insurance, whether caused by the negligence of any
of said persons or otherwise. The waiver shall remain in force whether or not
the Lessee's insurer shall consent thereto.
d. In the event that the use of the Demised Premises by Lessee increases
the premium rate for insurance carried by Lessor on the improvements of which
the Demised Premises are a part, Lessee shall pay Lessor, upon demand, the
amount of such premium increase. If Lessee installs any electrical equipment
that overloads the power lines to the building or its wiring, Lessee shall, at
its own expense, make whatever changes are necessary to comply with the
requirements of the insurance underwriter, insurance rating bureau and
governmental authorities having jurisdiction.
PUBLIC LIABILITY INSURANCE:
<PAGE>
16. Lessee shall during the term hereof keep in full force and effect at its
expense a policy or policies of public liability insurance with respect to the
Demised Premises and the business of Lessee, on terms with companies approved in
writing by Lessor, in which both Lessee and Lessor shall be covered by being
named as insured parties under reasonable limits of liability not less than:
$500,000 for injury/death to any one person; $1,000,000 for injury/death to more
than one person, and $500,000 with respect to damage to property. Such policy or
policies shall provide that ten (10) days written notice must be given to Lessor
prior to cancellation thereof. Lessee shall furnish evidence satisfactory to
Lessor at the time this Lease is executed that such coverage is in full force
and effect.
DEFAULT OF LESSEE:
17. a. In the event of any failure of Lessee to pay any rental due hereunder
within ten (10) days after the same shall be due, or any failure to perform any
other of the terms, conditions or covenants of this Lease to be observed or
performed by Lessee for more than thirty (30) days after written notice of such
failure shall have been given to Lessee, or if Lessee or an agent of Lessee
shall falsity any report required to be furnished to Lessor pursuant to the
terms of this Lease, or if Lessee or any guarantor of this Lease shall become
bankrupt or insolvent, or file any debtor proceedings or any person shall take
or have against Lessee or any guarantor of this Lease in any court pursuant to
any statute either of the United States or of any state a petition in bankruptcy
or insolvency or for reorganization or for the appointment of a receiver or
trustee of all or a portion of Lessee's or any such guarantor's property, or if
Lessee or any such guarantor makes an assignment for the benefit of creditors,
or petitions for or enters into an arrangement, or if Lessee shall abandon the
Demised Premises or suffer this Lease to be taken under any writ of execution,
then in any such event Lessee shall be in default hereunder, and Lessor, in
addition to other rights of remedies it may have, shall have the immediate right
of re-entry and may remove all persons and property from the Demised Premises
and such property may be removed and stored in a public warehouse or elsewhere
at the cost of, and for the account of Lessee, all without service of notice or
resort to legal process and without being guilty of trespass, or becoming liable
for any loss or damage which may be occasioned thereby.
b. Should Lessor elect to re-enter the Demised Premises, as herein
provided, or should it take possession of the Demised Premises pursuant to legal
proceedings or pursuant to any notice provided for by law, it may either
terminate this Lease or it may from time to time, without terminating this
Lease, make such alterations and repairs as may be necessary in order to relet
the Demised Premises, and relet the Demised Premises or any part thereof such
term or terms (which may be for a term extending beyond the term of this Lease)
and at such rental or rentals and upon such other terms and conditions as Lessor
in its sole discretion may deem advisable. Upon each such subletting all rentals
received by the Lessor from such reletting shall be applied first to the payment
of any indebtedness other than rent due hereunder from Lessee to Lessor; second,
to the payment of any costs and expenses of such reletting, including brokerage
fees and attorney's fees and costs of such alterations and repairs; third, to
the payment of the rent due and unpin payment of future rent as the same may
become due and payable hereunder. If such rentals received from such reletting
during any month be less than that to be paid during that month by Lessee
hereunder, Lessee, upon demand, shall pay tiny such deficiency to Lessor. No
such re-entry or taking possession of the Demised Premises by Lessor shall be
construed as an election on its part to terminate this Lease unless a written
notice of such intention be given to Lessee or unless the termination thereof be
decreed by a court of competent jurisdiction. Notwithstanding any such reletting
without termination, Lessor may at any time after such re-entry and reletting
elect to terminate this Lease for any such breach, in addition to any other
remedies it may have, it may recover from Lessee all damages it may incur by
reason of such breach, including the cost of recovering the Demised Premises,
reasonable attorney's fees, and including the worth at the time of such
termination of the excess, if any, of the amount of rent and charges equivalent
to rent reserved in this Lease for the remainder of the stated term over the
then reasonable rental value of the Demised Premises for the remainder of the
stated term, all of which amounts shall be immediately due and payable from
Lessee to Lessor.
c. Lessor may, at its option, instead of exercising any other rights or
remedies available to it in this Lease or otherwise by law, statute or equity,
spend such money as is reasonably necessary to cure any default of Lessee herein
and the amount so spent, and costs incurred, including attorney's fees in curing
such default, shall be paid by Lessee, as additional rent, upon demand.
<PAGE>
d. In the event suit shall be brought for recovery of possession of the
Demised Premises, for the recovery of rent or any other amount due under the
provisions of this Lease, or because of the breach of any other covenant herein
contained on the part of Lessee to be kept or performed, and a breach shall be
established, Lessee shall pay to Lessor all expenses incurred therefor,
including a reasonable attorney's fee, together with interest on all such
expenses at the rate of twelve percent (12%) per annum from the date of such
breach of the covenants of this Lease.
e. Lessee hereby expressly waives any and all rights of redemption granted
by or under any present or future laws in the event of Lessee being evicted or
dispossessed for any cause, or in the event of Lessor obtaining possession of
the Demised Premises, by reason of the violation by Lessee of any of the
covenants or conditions of this Lease, or otherwise. Lessee also waives any
demand for possession of the Demised Premises, and any demand for payment of
rent and any notice of intent to re-enter the Demised Premises, or of intent to
terminate this Lease, other than the notices above provided in this Article, and
waives any and every other notice or demand prescribed by any applicable
statutes or laws.
f. No remedy herein or elsewhere in this Lease or otherwise by law, statute
or equity, conferred upon or reserved to Lessor or Lessee shall be exclusive of
any other remedy, but shall be cumulative, and may be exercised from time to
time and as often as the occasion may arise.
COVENANTS TO HOLD HARMLESS:
18. Unless the liability for damage or loss is caused by the negligence of
Lessor, its agents or employees. Lessee shall hold harmless Lessor from any
liability for damages to any person or property in or upon the Demised Premises
and the Premises, including the person and the property of Lessee and its
employees and all persons in the Building at its or their invitation or
sufferance, and from all damages resulting from Lessee's failure to perform the
covenants of this Lease. All property kept, maintained or stored on the Demised
Premises shall be so kept, maintained or stored at the sole risk of Lessee.
Lessee agrees to pay all sums of money in respect of any labor, service,
materials, supplies or equipment furnished or alleged to have been furnished to
Lessee in or about the Premises, and not furnished on order of Lessor, which may
be secured by any Mechanic's Materialmen's or other lien to be discharged at the
time performance of any obligation secured thereby matures, provided that Lessee
may contest such lien, but if such lien is reduced to final judgment and if such
judgment or process thereon is not stayed, or if stayed and said stay expires,
then and in each such event, Lessee shall forthwith pay and discharge said
judgment. Lessor shall have the right to post and maintain on the Demised
Premises, of non-responsibility under the laws of the State of Minnesota.
NON-LIABILITY:
19. Subject to the terms and conditions of Article 14 hereof, Lessor shall not
be liable for damage to any property of Lessee or of others located on the
Premises, nor for the loss of or damage to any property of Lessee or of others
by theft or otherwise. Lessor shall not be liable for any injury or damage to
persons or property resulting from fire, explosion, falling plaster, steam, gas,
electricity, water, rain or snow or leaks from any part of the Premises or from
the pipes, appliances, or plumbing works or from the roof, street or subsurface
or from any other place or by dampness or by any other cause of whatsoever
nature. Lessor shall not be liable for any such damage caused by other Lessees
or persons in the Premises, occupants of adjacent property, of the buildings, or
the public or caused by operations in construction of any private, public or
quasipublic work. All property of Lessee kept or stored on the Demised Premises
shall be so kept or stored at the risk of Lessee only and Lessee shall hold
Lessor harmless from any claims arising out of damage to the same, including
subrogation claims by Lessee's insurance carrier.
SUBORDINATION:
20. This Lease shall be subordinated to any mortgages that may now exist or that
may hereafter be placed upon the Demised Premises and to any and all advances
made thereunder, and to the interest upon the indebtedness evidenced by such
mortgages, and to all renewals, replacements and extensions thereof . In the
event of execution by Lessor after the date of this Lease of any such mortgage,
renewal,
<PAGE>
replacement or extension, Lessee agrees to execute a subordination agreement
with the holder thereof which agreement shall provide that:
a. Such holder shall not disturb the possession and other rights of Lessee
under this Lease so long as Lessee is not in default hereunder,
b. In the event of acquisition of title to the Demised Premises by such
holder, such holder shall accept the Lessee as Lessee of the Demised Premises
under the terms and conditions of this Lease and shall perform all the
obligations of Lessor hereunder, and
c. The Lessee shall recognize such holder as Lessor hereunder. Lessee
shall, upon receipt of a request from Lessor therefor, execute and deliver to
Lessor or to any proposed holder of a mortgage or trust deed or to any proposed
purchaser of the Premises, a certificate in recordable form, certifying that
this Lease is in full force and effect, and that there are no offsets against
rent nor defenses to Lessee's performance under this Lease, or setting forth any
such offsets or defenses claimed by Lessee, as the case may be.
ASSIGNMENT OR SUBLETTING:
21. Lessee agrees to use and occupy the Demised Premises throughout the entire
term hereof for the purpose of purposes herein specified and for no other
purposes, in the manner and to substantially the extent now intended, and not to
transfer or assign this Lease or sublet said Demised Premises, or any part
thereof, whether by voluntary act, operation of law, or otherwise, without
obtaining the prior consent of Lessor in each instance. Lessee shall seek such
consent of Lessor by a written request therefor, setting forth such information
as Lessor may deem necessary. Lessor agrees not to withhold consent
unreasonably. Consent by Lessor to any assignment of this Lease or to any
subletting of the Demised Premises shall not be a waiver of Lessor's rights
under this Article as to any subsequent assignment or subletting. Lessor's
rights to assign this Lease are and shall remain unqualified. No such assignment
or subleasing shall relieve the Lessee from any of Lessee's obligations in this
Lease contained, nor shall any assignment or sublease or other transfer of this
Lease be effective unless the assignee, sublessee or transferee shall at the
time of such assignment, sublease or transfer, assume in writing for the benefit
of Lessor, its successors or assigns, all of the terms, covenants and conditions
of this Lease thereafter to be performed by Lessee and shall agree in writing to
be bound thereby. Should Lessee sublease in accordance with the terms of this
Lease, fifty percent (50%) of any increase in rental received by Lessee over the
per square foot rental rate which is being paid by Lessee shall be forwarded to
and retained by Lessor, which increase shall be in addition to the Base Rent and
Additional Rent due Lessor under this Lease.
ATTORNMENT:
22. In the event of a sale or assignment of Lessor's interest, in the Premises,
or the Building in which the Demised Premises are located, or this Lease, or if
the Premises come into custody or possession of a mortgagee or any other party
whether because of a mortgage foreclosure, or otherwise, Lessee shall attorn to
such assignee or other party a) and recognize such party as Lessor hereunder;
provided, however, Lessee's peaceable possession will not be disturbed so long
as Lessee faithfully performs its obligations under this Lease. Lessee shall
execute, on demand, any attornment agreement required by any such party to be
executed, containing such provisions and such other provisions as such party may
require.
NOVATION IN THE EVENT OF SALE: See Article 49
23. In the event of the sale of the Demised Premises, Lessor shall be and hereby
is relieved of all of the covenants and obligations created hereby accruing from
and after the date of sale, and such sale shall result automatically in the
purchaser assuming and agreeing to carry out all the covenants and obligations
of Lessor herein. Notwithstanding the foregoing provisions of this Article,
Lessor, in the event of a sale of
<PAGE>
the Demised Premises, shall cause to be included in this agreement of sale and
purchase a covenant whereby the purchaser of the Demised Premises assumes and
agrees to carry out all of the covenants and obligations of Lessor herein.
The Lessee agrees at any time and from time to time upon not less than ten
(10) days prior written request by the Lessor to execute, acknowledge and
deliver to the Lessor a statement in writing certifying that this Lease is
unmodified and in full force and effect as modified and stating the
modifications, and the dates to which the basic rent and other charges have been
paid in advance, if any, it being intended that such statement delivered
pursuant to this paragraph may be relied upon by any prospective purchaser of
the fee or mortgagee or assignee of any mortgage upon the fee of the Demised
Premises.
SUCCESSORS AND ASSIGNS:
24. The terms, covenants and conditions hereof shall be binding upon and inure
to the successors and assigns of the parties hereto.
REMOVAL OF FIXTURES:
25. Notwithstanding anything contained in Article 8, 29 or elsewhere in this
Lease, if Lessor requests then Lessee will promptly remove at the sole cost and
expense of Lessee all fixtures, equipment and alterations made by Lessee
simultaneously with vacating the Demised Premises and Lessee will promptly
restore said Demised Premises to the condition that existed immediately prior to
said fixtures, equipment and alterations having been made all at the sole cost
and expense of Lessee.
QUIET ENJOYMENT:
26. Lessor warrants that it has full right to execute and to Lease and to grant
the estate demised, and that Lessee, upon payment of the rents and other amounts
due and the performance of all the terms, conditions, covenants and agreements
on Lessee's part to be observed and performed under this Lease, may peaceably
and quietly enjoy the Demised Premises for the business uses permitted
hereunder, subject, nevertheless, to the terms and conditions of this Lease.
RECORDING:
27. Lessee shall not record this Lease without the written consent of Lessor.
However, upon the request of either party hereto, the other party shall join in
the execution of the Memorandum lease for the purposes of recordation. Said
Memorandum lease shall describe the parties, the Demised Premises and the term
of the Lease and shall incorporate this Lease by reference. This Article 27
shall not be construed to limit Lessor's right to file this Lease under Article
22 of this Lease.
OVERDUE PAYMENTS:
28. All monies due under this Lease from Lessee to Lessor shall be due on
demand, unless otherwise specified and if not paid when due, shall result in the
imposition of a service charge for such late payment in the amount of ten
percent (10%) of the amount due.
SURRENDER:
29. On the Expiration Date or upon the termination hereof upon a day other than
the Expiration Date, Lessee shall peaceably surrender the Demised remises
broom-clean in good order, condition and repair, reasonable wear and tear only
excepted. On or before the Expiration Date or upon termination of this Lease on
a day other than the Expiration Date, Lessee shall, at its expense, remove all
trade fixtures, personal property and equipment and signs from the Demised
Premises and any property not removed shall be deemed to have been abandoned.
Any damage caused in the removal of such items shall be
<PAGE>
repaired by Lessee and at its expense. All alterations, additions, improvements
and fixtures (other than trade fixtures) which shall have been made or installed
by Lessor or Lessee upon the Demised Premises and all floor covering so
installed shall remain upon and be surrendered with the Demised Premises as a
part thereof, without disturbance, molestation or injury, and without charge, at
the expiration or termination of this Lease. If the Demised Premises are not
surrendered on the Expiration Date or the date of termination, Lessee shall
indemnify Lessor against loss or liability, claims, without limitation, made by
any succeeding Lessee founded on such delay. Lessee shall promptly surrender all
keys for the Demised Premises to Lessor at the place then fixed for payment of
rent and shall inform Lessor of combinations of any locks and safes on the
Demised Premises.
HOLDING OVER:
30. In the event of a holding over by Lessee after expiration or termination of
this Lease without the consent in writing of Lessor, Lessee shall be deemed a
lessee at sufferance and shall pay rent for such occupancy at the rate of 150%
the last-current aggregate Base and Additional Rent, prorated for the entire
holdover period, plus all attorney's fees and expenses incurred by Lessor in
enforcing its rights hereunder, plus any other damages occasioned by such
holding over. Except as otherwise agreed, any holding over with the written
consent of Lessor shall constitute Lessee a month-to-month lessee.
ABANDONMENT:
31. In the event Lessee shall remove its fixtures, equipment or machinery or
shall vacate the Demised Premises or any part thereof prior to the Expiration
Date of this Lease, or shall discontinue or suspend the operation of its
business conducted on the Demised Premises for a period of more than thirty (30)
consecutive days (except during any time when the Demised Premises may be
rendered untenantable by reason of fire or other casualty), then in any such
event Lessee shall be deemed to have abandoned the Demised Premises and Lessee
shall be in default under the terms of this Lease. However, Lessee shall not be
deemed to have abandoned the Demised Premises or to be in default under the
terms of this Lease if the Lessee makes the rental payments as required herein
not withstanding the other provisions of this section.
CONSENTS BY LESSOR:
32. Whenever provision is made under this Lease for Lessee securing the consent
or approval by Lessor, such consent or approval shall only be in writing. and
such consent or approval shall not be unreasonably withheld.
NOTICES:
33. Any notice required or permitted under this Lease shall be deemed
sufficiently given or secured if sent be registered or certified return receipt
mail to Lessee at 10701 Red Circle Drive, Minnetonka, Minnesota 55343 and to
Lessor at the address then fixed for the payment of rent as provided in Article
4 of this Lease, and either party may by like written notice at any time
designate a different address to which notices shall subsequently be sent or
rent to be paid.
RULES AND REGULATIONS:
34. Lessee shall observe and comply with the rules and regulations hereinafter
set forth in "Exhibit C", and with such further reasonable rules and regulations
as Lessor may prescribe, on written notice to Lessee for the safety, care and
cleanliness of the Building.
INTENT OF PARTIES:
35. Except as otherwise provided herein, the Lessee covenants and agrees that if
it shall any time fail to pay any such cost or expense, or fail to take out, pay
for, maintain or deliver any of the insurance policies
<PAGE>
above required, or fail to make any other payment or perform any other act on
its part to be made or performed as in this Lease provided, then the Lessor may,
but shall not be obligated so to do, and without notice to or demand upon the
Lessee and without waiving or releasing the Lessee from any obligations of the
Lessee in this Lease contained, pay any such cost or expense, effect any such
insurance coverage and pay premiums therefor, and may make any other payment or
perform any other act on the part of the Lessee to be made and performed as in
this Lease provided, in such manner and to such extent as the Lessor may deem
desirable, and in exercising any such right, to also pay all necessary and
incidental costs and expenses, employ counsel and incur and pay reasonable
attorneys' fees. All sums so paid by Lessor and all necessary and incidental
costs and expenses in connection with the performance of any such act by the
Lessor, together with interest thereon at the rate of twelve percent (12%) per
annum from the date of making of such expenditure, by Lessor, shall be deemed
additional rent hereunder, and shall be payable to Lessor on demand. Lessee
covenants to pay any such sum or sums with interest as aforesaid and the Lessor
shall have the same rights and remedies in the event of the non-payment thereof
by Lessee as in the case of default by Lessee in the payment of the Base Rent
payable under this Lease.
GENERAL:
36. The Lease does not create the relationship of principal and agent or of
partnership or of joint venture or of any association between Lessor and Lessee,
the sole relationship between the parties hereto being that of Lessor and
Lessee. No waiver of any default of Lessee hereunder shall be implied from any
omission by Lessor to take any action on account of such default if such default
persists or is repeated, and no express waiver shall affect any default other
than the default specified in the express waiver and that only for the time and
to the extent therein stated. One or more waivers by Lessor shall not then be
construed as a waiver of a subsequent breach of the same covenant, term or
condition. The consent to or approval by Lessor of any act by Lessee requiring
Lessor's consent or approval shall not waive or render unnecessary Lessor's
consent to or approval of any subsequent similar act by Lessee shall be
construed to be both a convenant and a condition. No action required or
permitted to be taken by or on behalf of Lessor under the terms or provisions of
this Lease shall be deemed to constitute an eviction or disturbance of Lessee's
possession of the Demised Premises. All preliminary negotiations are, rnerged
into and incorporated in this Lease. The laws of the State of Minnesota shall
govern the validity, performance and enforcement of this Lease.
a. This Lease and the exhibits, if any, attached hereto and forming a part
hereof, constitute the entire agreement between Lessor and Lessee affecting the
Demised Premises and there are no other agreements, either oral or written,
between them other than are herein set forth. No subsequent alteration,
amendment, change or addition to this Lease shall be binding upon Lessor or
Lessee unless reduced to writing and executed in the same form and manner in
which this Lease is executed.
b. If any agreement, covenant or condition of this Lease or the application
thereof to any person or circumstances shall, to any extent, be invalid or
unenforceable, the remainder of this Lease, or the application of such
agreement, covenant or condition to persons or circumstances other than those as
to which it is held invalid or unenforceable, shall not be affected thereby and
each agreement, covenant or condition of this Lease shall be valid and be
enforced to the fullest extent permitted by law.
HAZARDOUS MATERIAL: See Article 50
37. a. The Premises hereby leased shall be used by and/or at the sufferance of
Lessee only for the purpose set forth in Article 11 above and for no other
purposes. Lessee shall not use or permit the use of the Premises in any manner
that will tend to create waste or a nuisance, or will tend to unreasonably
disturb other Lessees in the Building or the Project. Lessee, its employees and
all persons visiting or doing business with Lessee in the Premises shall be
bound by and shall observe the Building Rules and Regulations attached to this
Lease as Exhibit 'C", and such further and other reasonable rules and
regulations made hereafter by Lessor relating to the Premises, the Building or
the Project of which notice in writing shall be given to the Lessee, and all
such rules and regulations shall be deemed to be incorporated into and form a
part of this Lease.
b. Lessee covenants throughout the Lease Term, at Lessee's sole cost and
expense, promptly to comply with all laws and ordinances and the orders, rules
and regulations and requirements of all federal,
<PAGE>
state and municipal governments and appropriate departments, commissions,
boards, and officers thereof, and the orders, rules and regulations of the Board
of Fire Underwriters where the Premises are situated, or any other body now or
hereafter well as extraordinary, and whether or not the same require structural
repairs or alterations, which may be applicable to the Premises, or the use or
manner of use of the Premises. Lessee will likewise observe and comply with the
requirements of all policies of public liability, fire and all other policies of
insurance at any time in force with respect to the buildings and improvements on
the Premises and the equipment thereof.
c. In the event any Hazardous Material (hereinafter defined) is brought or
caused to be brought into or onto the Premises, the Building or the Project by
Lessee, Lessee shall handle any such material in compliance with all applicable
federal, state and/or local regulations. For purposes of this Article,
'Hazardous Material' means and includes any hazardous, toxic or dangerous waste,
substance or material defined as such in (or for purposes of) the Comprehensive
Environmental Response, Compensation, and Liability Act, any so-called
'Superfund" or 'Superlien' law, or any federal, state or local statute, law,
ordinance, code, rule, regulation, order decree regulating, relating to, or
imposing liability or standards of conduct concerning, any hazardous, toxic or
dangerous waste, substance or material, as now or at any time hereafter in
effect. Lessee shall submit to Lessor on an annual basis copies of its approved
hazardous materials communication plan, OSHA monitoring plan, and permits
required by the Resource Recovery and Conservation Act of 1976, if Lessee is
required to prepare, file or obtain any such plans or permits. Lessee will
indemnify and hold harmless Lessor from any losses, liabilities, damages, costs
or expenses (including reasonable attorneys' fees) which Lessor may suffer or
incur as a result of Lessee's introduction into or onto the Premises of any
Hazardous Material. This Article shall survive the expiration or sooner
termination of this Lease.
CAPTIONS:
38. The captions are inserted only as a matter of convenience and for reference,
and in no way define, limit or describe the scope of this Lease nor the intent
or any provision thereof.
EXHIBITS:
39. Reference is made to Exhibits A through D, inclusive, which Exhibits are
attached hereto and made a part hereof.
EXHIBIT DESCRIPTION
------- -----------
Exhibit A Legal Description
Exhibit B Demised Premises
Exhibit C Building Rules and Regulations
Exhibit D Improvements
40. Submission of this instrument to Lessee or proposed Lessee or his agents or
attorneys for examination, review, consideration or signature does not
constitute or imply an offer to lease, reservation of space, or option to lease,
and this instrument shall have no binding legal effect until execution hereof by
both Lessor/Owner and Lessee or its agents.
41. It is agreed and understood that Scott Frederiksen agent or broker with
Welsh Companies, Inc. is representing Sierra Development, Lessor, and Mike
Smith/Steve Faber, agent or broker with Towle Real Estate is representing LecTec
Corporation (A Minnesota Corporation) Lessee.
SEE ALSO THE RIDER ATTACHED HERETO AND MADE A PART HEREOF, AND CONTAINING
ARTICLES 42 THROUGH 50, INCLUSIVE
IN WITNESS WHEREOF, the Lessor and the Lessee have caused these presents to be
executed in form and manner sufficient to bind them at law, as of the day and
year first above written.
<PAGE>
Lessee: Lessor:
LecTec Corporation Sierra Development
(A Minnesota Corporation) (A Minnesota General Partnership)
By: /s/ George B. Ingebrand By: /s/ Dennis J. Doyle
----------------------------- -----------------------------
George B. Ingebrand Dennis J. Doyle
Its President and CEO Its Partner
REV 6/89
Printed in U.S.A.
<PAGE>
RIDER TO LEASE
DATED MAY 24,1991
BY AND BETWEEN
SIERRA DEVELOPMENT (A MINNESOTA GENERAL PARTNERSHIP), LESSOR
AND
LECTEC CORPORATION (A MINNESOTA CORPORATION), LESSEE
Article 42 - Early Occupancy:
In the event the Premises become available and ready for occupancy
prior to the Commencement Date, Lessor may elect to permit Lessee to
take occupancy of all or part of the Premises prior to such date. In
such event, it is agreed that all the terms and conditions of this
Lease shall be in full force and effect except Base Rent and Additional
Rent shall be abated until the Commencement Date.
Article 43 - Base Rent:
The following is hereby added to and made a part of Article 2, Base
Rent, and Article 3, Additional Rent of this Lease:
Monthly Total Period
Period Base Rent Base Rent
July 1, 1991 through and
including October 31, 1991 $0.00 $0.00
November 1, 1991 through and
including June 30, 1994 $10,288.50 $329,232.00
July 1, 1994 through and
including June 30, 1997 $11,548.70 $415,753.20
TOTAL $744,985.20
All other terms and conditions of this Lease, including Article 3,
Additional Rent, shall be in full force and effect July 1, 1991.
Article 44 - Improvements:
The Lessor agrees, at no expense to the Lessee, to provide all of the
improvements detailed in Exhibit "D". Any additional improvements shall
be approved by the Lessor and completed at the sole cost and expense of
the Lessee.
Rider To Lease
LecTec Corporation
Page Two
Article 45 - Right To Terminate:
Provided the Lessee is not in default and performed all of its
obligations hereunder it shall have the one time right to terminate
this Agreement on July 1, 1996. To exercise this Right To Terminate the
Lessee shall notify the Lessor in writing of its intent no later than
120 days prior to
<PAGE>
July 1, 1996. Such notification shall also be accompanied by a
termination fee of $11,548.70. This Right To Terminate is personal to
LecTec Corporation and is not transferable; and in the event of any
assignment or subletting shall automatically terminate and shall
thereafter become null and void.
Article 46 - Parking:
The Lessor agrees to provide the Lessee with 65 parking stalls. In the
event the balance of the Building is leased and parking becomes a
problem, the Lessor agrees to use its commercially reasonable best
efforts to correct such parking problems.
Article 47 - First Opportunity to Lease Additional Space:
A. Provided Lessee is not in default and has performed all of its
obligations hereunder, Lessee shall have the first opportunity
to lease such other contiguous space in their entirety, or at
Lessor's direction, some portion thereof, as they become
available for leasing during the first four (4) years of the
Term ("First Opportunity") for a term coterminous with this
Lease and, at the same square foot rental rates and upon such
other terms and conditions, as are then being paid by Lessee
for the Demised Premises.
B. Upon notification in writing by Lessor that such space is
available, Lessee shall have three (3) business days in which
to elect in writing so to lease such space, in which event the
lease for same shall commence not more than thirty (30) days
after such space becomes vacant and shall be coterminous with
this Lease.
C. In the event Lessee declines or fails to elect so to lease such
space, then the First Opportunity hereby granted so at to such
space shall automatically terminate and shall thereafter be null
and void as to such space.
D. It is understood that this First Opportunity shall not be
construed to prevent any other lessee in the Building from
extending or renewing its lease.
Rider To Lease
LecTec Corporation
Page Three
E. The First Opportunity hereby granted is personal to LecTec
Corporation and is not transferable; in the event of any
assignment or subletting under this Lease, this First
Opportunity shall automatically terminate and shall thereafter
be null and void.
Article 48 - Additional Rent:
The following is hereby added to and made a part of Article 3,
Additional Rent of this Lease:
A. The Lessee shall not be responsible for paying delinquency
penalties imposed upon Lessor for Lessor's late payment of
real estate taxes.
B. The Lessee shall have the right to inspect Lessor's records
relating to the operating costs on the building which are
billed back to the Lessee as Additional Rent.
Article 49 - Lessee's Approval of Sale:
In the event that Lessor shall elect to sell, assign or transfer its
interest in the Building to a "Competitor" (as hereinafter defined)
Lessor shall disclose the identity of the Competitor in writing
<PAGE>
to Lessee (the "Notice of Intended Sale"). If Lessee reasonably
determines that leasing by the Lessee of the Demised Premises from the
Competitor would (i) cause material harm to the Lessee's business or
(ii) violate any law, rule or regulation applicable to Lessee, Lessee
shall have thirty (30) days after receipt of the Notice of Intended
Sale to elect to terminate this Lease effective ninety (90) days from
the date of such election. Election to terminate shall be made by
written notice to Lessor as provided herein. Such election to terminate
shall be accompanied by (i) an affidavit from an officer of Lessee
setting forth the factual basis justifying termination and (ii) payment
of a termination premium in an amount equal to fifty percent (50%) of
the then present value (using a 10% interest rate assumption) of the
remaining base rental obligation of Lessee under the lease term. For
purposes hereof, a "Competitor" shall be any entity which derives more
than fifty percent (50%) of its revenues from the sale or manufacture
of products which are substantially the same as, and in direct
competition with, products sold or manufactured by Lessee as of the
date hereof.
Article 50 - Hazardous Material:
Lessor warrants and covenants that it did not, and will not in the
future, install, use, generate, store or dispose of on or about the
Premises (or the Building) any hazardous substances, toxic chemicals,
pollutants or other materials regulated
Rider To Lease
LecTec Corporation
Page Four
pursuant to the Federal Comprehensive Environmental Response
Compensation and Liability Act ("CERCLA!'), the Federal Resource
Conservation and Recovery Act ("RCRA") and the Minnesota Environmental
Response and Liability Act ("MERLA"), or any similar statutes or
regulations, including without limitation any materials containing
asbestos, polychlorinated biphenyls ("PCB's"), petroleum, crude oil or
natural gas (collectively, "Hazardous Substances"), except for
immaterial quantities of any Hazardous Substances customarily used in
the construction and maintenance of like properties which have been
used in accordance with applicable laws, statutes, regulations and
ordinances then in effect. Lessor further agrees to indemnify and hold
Lessee harmless from and against any claim, damage, fine or any other
expense (including court costs, attorney's fees and any other cost of
defense) arising out of Lessor's installation, use, generation, storage
or disposal of any Hazardous Substances in or about the Premises (or
the Building).
Lessor has not, and to the best of its knowledge without independent
verification, no prior owner or occupant has installed in, on or about
the Premises any underground storage tank containing Hazardous
Substances (as defined elsewhere in Lease), including, but not limited
to, petroleum, crude oil or by-products of petroleum or crude oil.
Lessor hereby warrants that, to the best of its knowledge without
independent verification, no asbestos containing materials have been
used or installed upon the Premises, or, if at any time asbestos
containing materials were located on the Premises, such materials have
been removed prior to the date of this Lease.
LESSEE: LESSOR:
LECTEC CORPORATION SIERRA DEVELOPMENT
(A MINNESOTA CORPORATION) (A MINNESOTA GENERAL PARTNERSHIP)
BY: /s/ George B. Ingebrand BY: /s/ Dennis J. Doyle
------------------------------- -------------------------------
George B. Ingebrand Dennis J. Doyle
ITS: President and CEO ITS: Partner
DATE: May 24, 1991 DATE: May 24, 1991
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION
Lot 1, Block 1, Edina Interchange Center, Fifth Addition
<PAGE>
EXHIBIT "B"
Floor Plan
Exhibit "B" (which is a schematic of the leased building and grounds) has been
omitted from this electronic filing.
<PAGE>
EXHIBIT "C"
Rules and Regulations
THESE RULES ARE FOR THE MUTUAL BENEFIT OF ALL USERS
PLEASE COOPERATE
Tenant agrees to be bound by and comply with the Rules and Regulations, as
follows:
(a) Trash. Each Tenant shall provide its own dumpster for trash and agrees not
to leave or store any materials, litter or trash on the grounds or parking
areas.
(b) Parking. Parking shall fully comply with the City of Edina ordinances.
(c) Signs. No sign, advertisement, or other lettering shall be painted, affixed,
or exposed on the windows or doors or any part of the outside of the building or
property without the prior written consent of the Landlord, which consent shall
not be unreasonably withheld. All identification signs shall be per the building
standards and fully comply with the City of Edina ordinances.
(d) Fixture Movement. Tenant agrees that any and all furniture, fixtures and
goods will be moved by the Tenant whenever such moving is necessary for purpose
of building repair and/or maintenance by Landlord.
(e) Access. Landlord or authorized agent, has the right to enter the Leased
Premises at any reasonable time to inspect, make repairs or alterations as
needed, and three (3) months prior to the termination of this Agreement to
display the Leased Premises to prospective tenants, and to place on doors and
windows appropriate notice that the premises are for rent.
(f) Locks. No additional locks will be placed on any of the doors in the
building without Landlord's prior written approval, which approval shall not be
unreasonably withheld, and unless Landlord receives an access key to such locks.
(g) Storage. Storage and installation of any machinery, parts, materials,
equipment, shelving or furniture of any type whatsoever, constitutes occupancy.
Tenant has read and agrees to abide by all Landlord's Rules and Regulations and
acknowledges that violation of any provision of this Agreement or Rules
constitutes a breach of this Lease Agreement.
Edina Facility Lease
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE ("First Amendment") is made as of May 5, 1997, by
and between Rushmore Plaza Partners Limited partnership, a South Dakota limited
partnership ("Lessor"), and LecTec Corporation, a Minnesota Corporation
("Lessee").
RECITALS:
A. Pursuant to Office/Warehouse Lease dated May 24, 1991 (the "Lease"),
Sierra Development Co., also known as Sierra Development, a Minnesota general
partnership, leased certain premises (the "Demised Premises") located in the
building (the "Building") at 7401 Cahill Road, Edina, Minnesota, to Lessee for a
lease term expiring June 30, 1997.
B. Lessor purchased the Premises described in the Lease from Sierra
Development Co., on December 20, 1994 through a third-party intermediary,
namely, Eberhardt Properties, Inc., which subsequently assigned and conveyed the
Premises to Lessor. As part of the purchase and assignment, Lessor was assigned
the landlord's interest in the Lease, and is now the owner of the Premises and
Building in which the Demised Premises are located, and it is now also the
Lessor under the Lease.
C. Lessor and Lessee desire to amend the Lease so as to extend the term
thereof, and so as to make certain other amendments thereto as are hereinafter
set forth.
NOW, THEREFORE, Lessor and Lessee agree, for valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, as follows:
1 Term. Article I of the Lease is hereby amended to provide for an
additional five (5) year term (the "Extension Term"). The Extension Term shall
commerce July 1, 1997 and shall expire June 30, 2002. Accordingly, the
definition of "Expiration Date" is hereby amended to mean July 30, 2002, and the
term of the Lease shall mean and include the Extension Term. All of the terms
and provisions of the Lease shall apply to the Extension Term, except as the
same may be modified, supplemented or otherwise amended by this First Amendment.
<PAGE>
2. BaseRent. Effective July 1, 1997, Article 2 of the Lease shall be deleted in
its entirety, and the following inserted in place thereof:
BASE RENT:
2. Lessee shall pay Lessor, in advance, monthly Base Rent in the
following installments, commencing on July 1, 1997, and continuing on the first
day of each and every month thereafter during the balance of the Extension Term
(the "Base Rent"):
Extension Term Annual Rate Per Sq. Foot Monthly Base Rate
-------------- ------------------------ -----------------
7/l/97 - 6/30/99 $5.08 $12,355.83
7/l/99 - 6/30/00 $5.40 $13,134.15
7/l/00 - 6/30/01 $5.60 $13,620.60
7/l/01 - 6/30/02 $5.85 $14,228.66
3. Address for Payment of Rent. Article 4 of the Lease is hereby
amended to provide that all rents are payable to the Lessor at c/o Northcrest
Corporation, 3914 IDS Center, 80 South 8th Street, Minneapolis, Minnesota 55402,
or such other address as Lessor may designate in writing from time to time.
4. Use. Article 11 of the Lease is hereby amended by deleting the word "medical"
in that sentence thereof which reads: "The Demised Premises shall be used and
occupied by Lessee solely for the purpose of office, production, and storage of
medical products so long as such use is in compliance with all applicable laws,
ordinances and government regulations affecting the Building and Premises."
5. Public Liability Insurance. Article 16 of the Lease is hereby
amended by deleting the entirety thereof, and by inserting in place thereof the
following:
16. Lessee shall during the term hereof keep in full force and
effect at its expense a policy or policies of public liability
insurance with respect to the Demised Premises and the
business of Lessee, on terms and with companies approved in
writing by Lessor, in which policy or policies Lessee, Lessor
and the additional parties named below shall be covered by
being named as insured parties, and which policy or policies
shall have a minimum combined single limit of liability of at
least $2,000,000 per occurrence and a general aggregate limit
of at least $3,000,000. All such policies shall be written to
apply to all bodily injury, property damage and personal
injury losses and shall be endorsed to include Lessor and its
partners, directors, officers, agents, employees and any
mortgagee of Lessor or any ground lessor of the Premises as
additional insureds. Such liability insurance shall be written
as primary policies, not excess, or contributing with, or
secondary to, any other insurance as may be available to the
Lessor or the additional insureds. Such policy or policies
shall provide that Thirty (30) days written notice must be
given to Lessor prior to cancellation thereof. Lessee shall
furnish evidence satisfactory to Lessor within thirty (30)
days of the date hereof that such coverage is in full force
and effect.
<PAGE>
6. Assignment or Subletting. Article 21 of the Lease is hereby amended
by deleting that sentence thereof which reads: "Lessor agrees not to withhold
consent unreasonably.", and by inserting in place thereof the following:
Lessor's consent shall not be unreasonably withheld, but, in
addition to any other grounds for denial, Lessor's consent
shall be deemed reasonably withheld if, in Lessor's judgment:
(i) the net worth of the assignee/subtenant is reasonably
determined to be inadequate; (ii) the proposed use of the
Demised Premises is incompatible with the use clause in the
Lease; or (iii) such assignment or sublease relieves Tenant of
any of its obligations under this Lease.
7. Brokers. Article 41 of the Lease is hereby deleted in its entirety.
Each party represents to the other party that no broker has participated in this
First Amendment.
8. Rider to Lease. The Rider appended to the Lease is hereby amended by
deleting Articles 42 through 47 and Article 49 thereof. Articles 48 and 50 shall
be the sole remaining Articles of the Rider.
9. Affirmation. Except as specifically amended by this First Amendment,
the terms and conditions of the Lease shall remain in full force and effect
throughout the Extension Term, and the same are hereby ratified and confirmed by
Lessor and Lessee.
IN AGREEMENT, the parties hereto have signed this First Amendment as of
the date first set forth above.
LESSOR: LESSEE:
Rushmore Plaza Partners Limited LecTec Corporation
Partnership
By: Churchill Rushmore Plaza Civic By /s/ Rodney A Young
Center, Inc., its General Partner ------------------------
Its Chairman, CEO
By /s/ James Phelps
----------------------------
Its Vice President
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is made and entered into as of August 22, 1997,
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 May 1, 1996 made by the
Borrower payable to the order of the Lender ("Prior Revolver").
SECOND: The Prior Revolver has expired by its terms and has been
terminated by the Lender. The Borrower has requested that the Lender reinstate
the Line of Credit and make certain modifications thereto, 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.
<PAGE>
"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.
"Daily Eurodollar Advance" means an Advance designated as such in a
notice of borrowing under Section 2.5(a) or a notice of continuation or
conversion under Section 2.5(b).
"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.
"Eurocurrency Reserve Percentage" means the aggregate maximum reserve
requirements, including all basic, supplemental, marginal and other reserves
(expressed as a decimal) for such interest determination date prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining reserve requirements applicable to "Eurocurrency liabilities"
pursuant to Regulation D or any other applicable regulation of the Board of
Governors which prescribes such reserve requirements or is applicable to
extensions of credit by the Lender, the rate of interest on which is determined
with regard to rates applicable to "Eurocurrency liabilities," and the amount
outstanding under the Revolving Credit Note shall be deemed to be a
"Eurocurrency liability" as defined in Regulation D. Without limiting the
generality of the foregoing, the Eurocurrency Reserve Percentage 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 Eurodollar advances. The Eurocurrency Reserve Percentage shall be
the reserve requirement percentage for the "computation period" in which the
interest determination date
<PAGE>
falls, as reflected in a publication of the Board of Governors of the Federal
Reserve System (or any successor thereto).
"Eurodollar Advance" means an Advance designated as such in a notice of
borrowing under Section 2.5(a) or a notice of continuation or conversion under
Section 2.5(b).
"Eurodollar Interbank Rate" means the offered rate for deposits in
United States Dollars (rounded upward, if necessary, to the nearest 1/16 of 1%)
for delivery of such deposits on the first day of an Interest Period of a
Eurodollar Advance, for the number of days comprised therein which appears on
the Reuters Screen LIBO Page as of 11:00 a.m. London time, on a day that is two
Business Days preceding the first day of the Interest Period of such Eurodollar
Advance. 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 rate for each Interest
Period shall be determined by the Lender based on rates offered to the Lender
for United States Dollar deposits in the interbank eurodollar market.
"Eurodollar Rate" means a rate per annum (rounded upward, if necessary,
to the nearest 1/16 of 1%) determined on each interest determination date
pursuant to the following formula:
Eurodollar Rate = [ LIBOR Rate ]
[------------------------------------]
[ 1.00 - Eurocurrency Reserve]
Percentage
In such formula, capitalized terms have the meanings provided in the
other definitions in this Agreement.
"Eurodollar Rate (Reserve Adjusted)" means a rate per annum (rounded
upward, if necessary, to the nearest 1/16 of 1%) calculated for the Interest
Period of a Eurodollar Advance in accordance with the following formula:
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 as 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" means a percentage equal to the daily average
during such Interest Period for 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 applying generally to all banks of the same type and classification
as the Lender or any Person controlling the Lender 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 Eurodollar
Reserve Rate 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 LIBOR Rate is to be determined, or (ii) any category of extensions of
credit or other assets that includes Daily Eurodollar Advances.
"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
<PAGE>
Accounting Procedure (CAP) Accounting Research Bulletins, and certain other
accounting principles which have substantial authoritative support.
"Interest Period" means, for any Eurodollar Advance, the period
commencing on the borrowing date of such Eurodollar Advance or the date a
Reference Rate Advance or Daily Eurodollar Advance is converted into such
Eurodollar Advance, or the last day of the preceding Interest Period for such
Eurodollar Advance as the case may be and ending on the numerically
corresponding day which is thirty (30), sixty (60) or ninety (90) days
thereafter, as selected by the Borrower pursuant to Section 2.5(a) or Section
2.5(b), provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Business Day shall end on the next succeeding Business
Day unless such next succeeding Business Day falls in another calendar
month, in which case such Interest Period shall end on the next
preceding Business Day; and
(b) any Interest Period which begins on the last Business Day
of a calendar month (or a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of the calendar month at the
end of such Interest Period; and
(c) no Interest Period shall 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.
"LIBOR Rate" means a rate per annum (rounded upwards, if necessary, to
the nearest 1/16 of 1%), on the interest determination date for a period of one
month, as such offered rate appears on the Reuters Screen LIBO Page as of 11:00
a.m., London time, on the interest determination date. If at least two rates
appear on the Reuters Screen LIBO Page, the rate for the interest determination
date shall be the arithmetic mean of such rates (rounded as provided above). If
fewer than two rates appear, the rate for such interest determination date shall
be determined by the Lender based on rates offered to the Lender for United
States Dollar deposits in the interbank eurodollar market.
"Lien" means any lien, security interest, pledge, mortgage, statutory
or tax lien, or other encumbrance of any kind whatsoever (including without
limitation, the lien or retained security title of a conditional vendor),
whether arising under a security instrument or as a matter of law, judicial
process or otherwise or by an agreement of the Borrower to grant any lien or
security interest or to pledge, mortgage or otherwise encumber any of its
assets.
"Loan Documents" means this Credit Agreement, the 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.
<PAGE>
"Net Worth" means the aggregate of capital and surplus (and
Subordinated Debt) of the Borrower, all determined in accordance with GAAP.
"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.
"Reference Rate Advance" means an Advance designated as such in a
notice of borrowing under Section 2.5(a) or a notice of continuation or
conversion under Section 2.5(b).
"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.
"Resetting Eurodollar Rate" means, for each day that any amount is
outstanding under the Revolving Credit Note (each such day being an "interest
determination date"), a rate per annum at all times equal to the Eurodollar Rate
for such interest determination date, plus two hundred fifty (250) basis points.
The Resetting Eurodollar Rate shall be adjusted automatically each Business Day.
"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).
"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,
<PAGE>
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) September 1, 1998; 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 and any Letters of Credit issued 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 Payments. The Borrower hereby irrevocably
authorizes the Lender to make or cause to be made, at or about the time each
Advance is made by the Lender, an appropriate notation on the Lender's records
of the principal amount of such Advance and the Lender shall make or cause to be
made, on or about the time a payment of any principal or interest of the
Revolving Credit Note is received an appropriate notation of such payment on its
records. The aggregate amount of all unpaid Advances set forth on the records of
the Lender shall be rebuttable presumptive evidence of the principal amount
owing and unpaid on the Revolving Credit Note.
2.5. Interest on the Revolving Credit Note. The Borrower agrees to pay
interest on the unpaid balance of the Revolving Credit Note outstanding from
time to time at the following rates: (i) the Reference Rate as to all Reference
Rate Advances; (ii) the Resetting Eurodollar Rate, as to all Daily Eurodollar
Advances; and (iii) the Eurodollar Rate (Reserve Adjusted) plus 250 basis points
as to all Eurodollar Advances, all in accordance with the terms of this Credit
Agreement. All Advances outstanding under the Revolving Credit Note shall be
deemed Daily Eurodollar Advances, unless the Borrower elects to designate,
continue or convert such Advances to Reference Rate Advances or Eurodollar
Advances pursuant to procedures outlined in Section 2.6 below. Upon the
occurrence and continuation of an Event of Default interest shall accrue on all
amounts outstanding under the Revolving Credit Note at an annual rate equal to
the greater of (i) the rate applicable prior to such Event of Default plus two
hundred (200) basis points, or (ii) the Reference Rate plus two hundred (200)
basis points.
2.6. Borrowing, Continuing or Converting Advances.
(a) Manner of Borrowing. Any request by the Borrower for an
Advance shall be by telephone (or, in the case of all Eurodollar
Advances, in writing or by telephone promptly confirmed in writing) and
must be given so as to be received by the Lender not later than:
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(1) 1:00 p.m. (Minneapolis time) on the date of the
requested Advance if the Advance shall be a Reference
Rate Advance or Daily Eurodollar Advance; or
(2) 9:30 a.m. (Minneapolis time) two (2) Business Days
prior to the date of the requested Advance, if the
Advance shall be a Eurodollar Advance.
Each request for an Advance shall specify: (i) the borrowing date
(which shall be a Business Day), (ii) the amount of the Advance and the
type of Advance, subject to the limitations elsewhere in this Credit
Agreement, and (iii) if the Advance is to be a Eurodollar Advance, the
Interest Period for such Advance. Unless the Lender determines that
conditions set forth in this Credit Agreement have not been satisfied,
each Advance shall be deposited into the Borrower's account number
1-801-2060-0150 with the Lender.
(b) Manner of Continuation or Conversion. The Borrower may
elect to (i) continue any outstanding Eurodollar Advance from one
Interest Period into a subsequent Interest Period to begin on the last
day of the earlier Interest Period, or (ii) convert any outstanding
Advance into another type of Advance (on the last day of an Interest
Period only, in the instance of a Eurodollar Advance), by giving the
Lender notice by telephone (or, in the case of continuations of or
conversions to Eurodollar Advances, in writing or by telephone promptly
confirmed in writing) given so as to be received by the Lender not
later than:
(1) 1:00 p.m. (Minneapolis time) on the date of the
requested continuation or conversion if the continuing or
converted shall be a Reference Rate Advance or Daily
Eurodollar Advance; or
(2) 9:30 a.m. (Minneapolis time) two (2) Business
Days prior to the date of the requested continuation or
conversion, if the continuing or converted Advance shall be a
Eurodollar Advance.
Each notice of continuation or conversion of an Advance shall specify:
(i) the effective date of the continuation or conversion (which shall
be a Business Day), (ii) the amount and the type or types of Advances
following such continuation or conversion (subject to limitations
contained elsewhere in this Credit Agreement), and (iii) for
continuation as, or conversion into, Eurodollar Advances, the Interest
Periods for such Advances. Absent timely notice of continuation or
conversion, each Eurodollar Advance shall automatically convert into a
Daily Eurodollar Advance on the last day of an applicable Interest
Period, unless paid in full on such last day. No Advance shall be
continued as, or converted into, a Eurodollar Advance if the shortest
Interest Period for such Advance may not transpire prior to the
Maturity of the Revolving Credit Note or if a Default or Event of
Default shall exist.
2.7. Payments. All principal outstanding under the Revolving Credit
Note shall be due and payable on the Maturity thereof. The Borrower shall pay
interest accrued on amounts outstanding under the Revolving Credit Note as
follows:
(a) as to Reference Rate Advances and Daily Eurodollar
Advances, accrued interest shall be due and payable on the first day of
each month, beginning September 1, 1997, and at Maturity; and
(b) as to Eurodollar Advances, accrued interest shall be due
and payable on the last day of each Interest Period.
Any other provision of this Credit Agreement to the contrary notwithstanding,
the Borrower shall make all payments of interest on and principal of the
Revolving Credit Note in immediately available funds to the Lender at its office
shown on the first page hereof. The Borrower authorizes the Lender to charge
from
<PAGE>
time to time against the Borrower's account no. 1-801-2060-0150 with the Lender
any payments on the Revolving Credit Note 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 8.1(c) shall have occurred and be
continuing and either (i) the Lender shall have demanded payment of the
Revolving Credit Note or (ii) the Lender shall so elect to terminate
its obligation to make Advances by giving notice to Borrower.
2.9. Additional Terms Regarding Eurodollar Advances. No portion of the
principal outstanding under the Revolving Credit Note may be designated as,
converted into, or continued as, a Eurodollar Advance unless such portion is in
increments of $100,000.00. No Advance to be designated as, converted into, or
continued as, a Eurodollar Advance shall include principal to be paid under the
terms of the Revolving Credit Note during the Interest Period applicable to such
Advance. Notwithstanding anything to the contrary contained in this Credit
Agreement, the Borrower may only designate, convert to or continue Eurodollar
Advances for Interest Periods of thirty (30), sixty (60) or ninety (90) days.
2.10. Voluntary Repayments of Reference Rate Advances and Daily
Eurodollar Advances. The Borrower may, at any time, repay all or any part of any
Reference Rate Advance or Daily Eurodollar Advance. The Borrower may also, upon
at least two (2) Business Days prior written or telephonic notice received by
the Lender, repay the total outstanding principal of one or more Eurodollar
Advances, subject to the provisions of Section 2.11 of this Credit Agreement.
Any repayment of principal outstanding under the Revolving Credit Loan shall be
accompanied by the interest accrued thereon through such date, together with any
additional amounts due under Section 2.11.
2.11. Funding Losses. The Borrower will indemnify the Lender upon
demand against any loss or expense which the Lender may sustain or incur
(including, without limitation, any loss or expense sustained or incurred in
obtaining, liquidating or employing deposits or other funds acquired to effect,
fund or maintain any Advance) as a consequence of (i) any failure of the
Borrower to make any payment when due of any amount due hereunder or under the
Revolving Credit Note, (ii) any failure by the Borrower to borrow, continue or
convert an Advance on a date specified therefor in a notice thereof, or (iii)
any payment (including without limitation any payment pursuant to Section 2.10),
prepayment or conversion of any Eurodollar Advance on a date other than the last
day of the Interest Period for such Advance. Determinations by the Lender for
purposes of this Section 2.11 of the amount required to indemnify the Lender
shall be conclusive in the absence of manifest error.
3. ADDITIONAL PROVISIONS REGARDING EURODOLLAR ADVANCES
3.1. Funding.
(a) Discretion of the Bank as to Manner of Funding.
Notwithstanding any provision of this Credit Agreement to the contrary,
the Bank shall be entitled to fund and maintain its funding of all or
any part of the Advances 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 Bank had actually funded and
maintained each Eurodollar Advances during the Interest Period
applicable to such 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 Bank shall have granted any participations in any
such Advances).
<PAGE>
(b) Funding Through the Sale of Participations.
Notwithstanding any provision of this Credit Agreement to the contrary,
the Company acknowledges that the Bank may fund all or any part of the
Advances by sales of participations to various participants and agrees
that the Bank may, in invoking its rights under Article 2 and
specifically including Section 2.11, demand and receive payment for
costs and other amounts incurred by, or allocable to, any such
participant, or take any other action arising from circumstances
applicable to any such participant, to the same extent that such
participant could demand and receive payments or take any other action
under such Section 2.11 or otherwise under Article 2 if such
participant were the Bank under this Credit Agreement.
(c) Funding Through Branch or Affiliate. At the Bank's sole
option it may fulfill its commitment to make Eurodollar Advances by
causing a foreign branch or an affiliate to make or continue such
Eurodollar Advances; provided, that in such instance such Eurodollar
Advances shall be deemed for purposes of this Credit Agreement to have
been made by the Bank and the obligation of the Company to repay such
Eurodollar Advances shall be to the Bank and shall be deemed held by
the Bank for the account of such branch or affiliate.
3.2. 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 Bank 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 Advance,
the Revolving Credit Note, or the Revolving Credit Commitment is
imposed, modified or deemed applicable, or the basis of taxation of
payments to the Bank of interest or principal of the Advances or any
fees with respect to the Revolving Credit Commitment (other than taxes
imposed on the overall net income of the Bank by any applicable
governmental authority) 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 Bank is imposed, modified or deemed
applicable;
(c) any increase in the amount of capital required or expected
to be maintained by the Bank or any Person controlling the Bank is
imposed, modified or deemed applicable; or
(d) any other condition affecting this Credit Agreement or the
Revolving Credit Commitment is imposed on the Bank or the relevant
funding markets;
and the Bank determines that, by reason thereof, the cost to the Bank of making
or maintaining the Advances or the Revolving Credit Commitments is increased, or
the amount of any sum receivable by the Bank hereunder or under the Revolving
Credit Note is reduced; then the Company shall pay to the Bank upon demand such
additional amount or amounts as will compensate the Bank (or the controlling
Person in the instance of (c) above) for such additional costs or reduction
(provided that the Bank has not been compensated for such additional cost ore
reduction in the calculation of the Eurodollar Reserve Rate or the Eurocurrency
Reserve percentage). Determinations by the Bank for purposes of this Section of
the additional amounts required to compensate the Bank shall be conclusive in
the absence of manifest error. In determining such amounts, the Bank may use any
reasonable averaging, attribution and allocation methods.
3.3. Changes in Law Rendering Eurodollar Advances 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 Bank to fund any Daily Eurodollar
Advance or Eurodollar Advance, the obligation of the Bank to make any Advance
for Daily Eurodollar Advances or Eurodollar Advances to provide such Advance
shall, upon the
<PAGE>
happening of such event, forthwith be suspended for the duration of such
illegality or impossibility. If any such event shall make it unlawful or
impossible for the Bank to continue any Daily Eurodollar Advance or Eurodollar
Advance previously made by it hereunder the Bank shall, upon the happening of
such event, notify the Company thereof in writing, and the Company shall, at the
time notified by the Bank, either convert such unlawful Advance to an Advance of
another type or repay such Advance in full, together with accrued interest
thereon, subject to the provisions of Section 2.11.
3.4. Interest Rate Not Ascertainable, Etc. If the Bank 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 Eurodollar Advance are not available to the Bank in the
relevant markets or that, by reason of circumstances affecting such
market, adequate and reasonable means do not exist for ascertaining the
Eurodollar Interbank Rate or the LIBOR Rate, as the case may be, for
such Interest Period;
(b) The Eurodollar Rate (Reserve Adjusted) or Eurodollar Rate,
as the case may be, will not adequately and fairly reflect the cost to
the Bank of making or funding the Eurodollar Advances or Daily
Eurodollar Advances, as the case may be, for a relevant Interest
Period; or
(c) The making or funding of Eurodollar Advances or Daily
Eurodollar Advances, as the case may be, has become impracticable as a
result of any event occurring after the date of this Credit Agreement
which, in the opinion of the Bank, materially and adversely affects
such Advances or the Bank's Commitment to make such Advances or the
relevant market;
then the Bank shall promptly give notice of such determination to the Company
and (i) any notice of a new Eurodollar Advance or Daily Eurodollar Advance, as
the case may be, previously given by the Company and not yet borrowed or
converted shall be deemed to be a notice to make an Advance of another type, as
selected by the Company, and (ii) the Company shall be obligated to either
prepay in full any outstanding Eurodollar Advances or Daily Eurodollar Advances,
as the case may be, without premium or penalty on the last day of the current
Interest Period with respect thereto, or convert any such Advance to an Advance
of another type, as selected by the Company, on such last day.
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, reflecting
results satisfactory to the Lender, on the Borrower from the
appropriate filing offices as required by the Lender;
(c) Certification by the Borrower's corporate secretary that
copies of the Borrower's Bylaws and Articles of Incorporation, and all
amendments to both, have been previously delivered by the Borrower to
the Lender and that neither has been further amended since such time
and that the most recent incumbency certificate delivered by the
Borrower to the Lender remains in full force and effect and the
officers listed therein remain in the offices listed and remain
authorized to execute this Credit Agreement, the Notes and all related
documents and agreements on behalf of the Borrower;
(d) 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
<PAGE>
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; and
(e) 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
<PAGE>
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.
<PAGE>
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 101(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 10K
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 10-Q Report for such quarter filed by the Borrower with the
Securities and Exchange Commission or other governmental entity;
(d) With the year-end report delivered pursuant to 6.1(b)
above and with the quarterly financial report delivered pursuant to
6.1(c) above, a compliance certificate executed by the Chief Financial
Officer of the Borrower in the form of Exhibit A hereto, whereby the
Borrower demonstrates its compliance with its covenants and
undertakings under this Credit Agreement;
(e) With the year-end report delivered pursuant to 6.1(b)
above and with the quarterly financial report delivered pursuant to
6.1(c) above, a copy of any and all shareholder reports delivered in
connection therewith; and
(f) 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
<PAGE>
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 maintain 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 Three Million and No/100 Dollars ($3,000,000.00).
6.10. Tangible Net Worth; Net Worth. Maintain at all times Tangible Net
Worth in an amount not less than Eight Million Dollars ($8,000,000) and maintain
at all times Net Worth in an amount not less than Eight Million Five Hundred
Thousand Dollars ($8,500,000).
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 .50 to 1.0.
<PAGE>
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 on any of
its property, real or personal, except (a) Liens in favor of the Lender; (b)
Liens disclosed to and approved of in writing by the Lender; (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 $350,000.00 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.
<PAGE>
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 (15) 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
<PAGE>
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, any
amendments hereto or thereto, and the consideration of legal questions relevant
hereto and thereto. The Borrower agrees to reimburse Lender upon demand for, all
reasonable out-of-pocket expenses (including attorneys fees and legal expenses)
in connection with the Lender's enforcement of the obligations of the Borrower
hereunder or under the 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.
<PAGE>
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/Deborah L. Moore
---------------------------------
Its: Chief Financial Officer
---------------------------------
FIRST BANK NATIONAL ASSOCIATION,
A NATIONAL BANKING ASSOCIATION
By: /s/Jason Wandersee
---------------------------------
Its: Assistant Vice President
---------------------------------
$1,000,000.00 MINNEAPOLIS, MINNESOTA
Due: SEPTEMBER 1, 1998 AUGUST 22, 1997
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
($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
one of the following rates to be selected from time to time by the Maker in
accordance with and subject to the terms of the Credit Agreement: (i) a variable
annual rate at all times equal to the prevailing Reference Rate of interest
established and announced by the Lender as the same may change from time to
time, as to all Reference Rate Advances; or (ii) the Resetting Eurodollar Rate,
as defined in the Credit Agreement, as to all Daily Eurodollar Advances; or
(iii) the Eurodollar Rate (Reserve Adjusted) as defined in the Credit Agreement,
plus 250 basis points, as to all Eurodollar Advances. The Lender may make loans
to its customers or any other person or entity at, above or below the Reference
Rate. In the event that the Lender ceases to establish and announce a Reference
Rate at any time during the term of this Note, the Lender shall be entitled to
designate a reasonably comparable substitute index for the calculation of the
interest rate hereon so long as any amount remains outstanding hereunder. All
changes in the rate of interest applicable hereto shall become effective on the
same day that the change in said Reference Rate is announced.
2. PAYMENT SCHEDULE. This Note shall be payable in the following
manner:
2.1 As to Reference Rate Advances and Daily Eurodollar Advances,
accrued interest shall be due and payable on the first day of
each month, beginning September 1, 1997, and at Maturity, and
as to Eurodollar Advances, accrued interest shall be due and
payable on the last day of each Interest Period, until all
indebtedness evidenced hereby is paid in full. All outstanding
principal and accrued and unpaid interest shall be due and
payable on September 1, 1998.
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
greater of (i) two percent (2.00%) per annum in excess of the rate of interest
then in effect under the terms
<PAGE>
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. 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.
8. 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
<PAGE>
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/Deborah L. Moore
------------------------------------
Its Chief Financial Officer
------------------------------------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated August 22, 1997 accompanying the
consolidated financial statements included in the Annual Report of LecTec
Corporation on Form 10-K for the year ended June 30, 1997. 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 THONRTON LLP
Minneapolis, Minnesota
September 23, 1997
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 665,190
<SECURITIES> 577,587
<RECEIVABLES> 2,670,153
<ALLOWANCES> 67,126
<INVENTORY> 2,577,021
<CURRENT-ASSETS> 6,873,696
<PP&E> 8,833,518
<DEPRECIATION> 4,241,214
<TOTAL-ASSETS> 11,837,356
<CURRENT-LIABILITIES> 2,838,612
<BONDS> 0
0
0
<COMMON> 38,428
<OTHER-SE> 8,749,316
<TOTAL-LIABILITY-AND-EQUITY> 11,837,356
<SALES> 12,256,327
<TOTAL-REVENUES> 12,256,327
<CGS> 7,932,147
<TOTAL-COSTS> 7,932,147
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,140,660)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,266,727)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,266,727)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> (.59)
</TABLE>