SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999.
[ ] 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
incorporation or organization) Identification No.)
10701 Red Circle Drive, Minnetonka, Minnesota 55343
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 933-2291
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 [ ]
The number of shares outstanding of the registrant's common stock as of February
10, 2000 was 3,890,494 shares.
<PAGE>
LECTEC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements and Notes to Financial Statements............. I-1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. I-7
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... I-11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. II-1
Item 2. Changes in Securities and Use of Proceeds.......................... II-1
Item 3. Defaults Upon Senior Securities.................................... II-1
Item 4. Submission of Matters to a Vote of Security Holders................ II-1
Item 5. Other Information.................................................. II-1
Item 6. Exhibits and Reports on Form 8-K................................... II-2
Signature Page..................................................... II-3
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS AND NOTES TO FINANCIAL STATEMENTS
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 20,491 $ 1,022,025
Receivables
Trade, net of allowances of $115,035 (unaudited) and $101,751
at December 31, 1999 and June 30, 1999 1,960,300 2,335,314
Refundable income taxes -- 7,544
Other 5,965 8,687
----------- -----------
1,966,265 2,351,545
Inventories
Raw materials 1,728,921 1,324,973
Work-in-process 2,190 69,324
Finished goods 416,752 602,227
----------- -----------
Total inventories 2,147,863 1,996,524
Prepaid expenses and other 245,260 174,674
Deferred income taxes 354,000 354,000
----------- -----------
Total current assets 4,733,879 5,898,768
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 247,731 247,731
Building and improvements 1,937,568 1,841,742
Equipment 7,308,394 7,157,016
Furniture and fixtures 413,013 413,013
----------- -----------
9,906,706 9,659,502
Less accumulated depreciation 6,031,174 5,631,011
----------- -----------
3,875,532 4,028,491
OTHER ASSETS
Patents and trademarks, less accumulated amortization of $1,228,437
(unaudited) and $1,154,698 at December 31, 1999 and June 30, 1999 170,267 199,971
Other 5,343 5,343
----------- -----------
175,610 205,314
----------- -----------
$ 8,785,021 $10,132,573
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
I-1
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,678,195 $ 1,676,776
Accrued expenses
Payroll related 392,075 403,075
Retail support programs 208,303 165,472
Other 172,562 181,730
------------ ------------
Total current liabilities 2,451,135 2,427,053
DEFERRED INCOME TAXES 197,000 197,000
SHAREHOLDERS' EQUITY
Common stock, $.01 par value: 15,000,000 shares authorized;
3,890,494 shares (unaudited) and 3,876,476 shares issued
and outstanding at December 31, 1999 and June 30, 1999 38,905 38,765
Additional paid-in capital 11,289,329 11,262,654
Accumulated other comprehensive loss (11,841) (11,841)
Deficit in retained earnings (5,179,507) (3,781,058)
------------ ------------
6,136,886 7,508,520
------------ ------------
$ 8,785,021 $ 10,132,573
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
I-2
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 3,299,705 $ 3,103,277 $ 6,308,457 $ 6,006,334
Cost of goods sold 2,236,691 2,177,539 4,306,162 4,063,343
----------- ----------- ----------- -----------
Gross profit 1,063,014 925,738 2,002,295 1,942,991
Operating expenses
Sales and marketing 863,655 545,938 1,598,700 879,471
General and administrative 688,783 781,630 1,247,873 1,368,091
Research and development 310,202 286,025 579,964 566,038
----------- ----------- ----------- -----------
1,862,640 1,613,593 3,426,537 2,813,600
----------- ----------- ----------- -----------
Loss from operations (799,626) (687,855) (1,424,242) (870,609)
Other income, net 4,459 26,987 25,793 58,788
----------- ----------- ----------- -----------
Loss before income taxes (795,167) (660,868) (1,398,449) (811,821)
Income tax expense -- 348 -- 1,612
----------- ----------- ----------- -----------
Net loss $ (795,167) $ (661,216) $(1,398,449) $ (813,433)
=========== =========== =========== ===========
Net loss per share - basic and diluted $ (0.20) $ (0.17) $ (0.36) $ (0.21)
=========== =========== =========== ===========
Weighted average shares outstanding - basic and diluted 3,881,352 3,907,995 3,878,914 3,945,599
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
I-3
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended December 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,398,449) $ (813,433)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 473,902 451,861
Changes in operating assets and liabilities:
Trade and other receivables 385,280 (424,723)
Refundable income taxes -- 52,000
Inventories (151,339) (166,901)
Prepaid expenses and other (70,586) (125,614)
Accounts payable 1,419 608,632
Accrued expenses 22,663 (50,539)
----------- -----------
Net cash used in operating activities (737,110) (468,717)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (247,204) (177,038)
Investment in patents and trademarks (44,035) (53,448)
----------- -----------
Net cash used in investing activities (291,239) (230,486)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 26,815 --
Repurchases and retirement of common stock -- (464,874)
----------- -----------
Net cash provided by (used) in financing activities 26,815 (464,874)
----------- -----------
Net decrease in cash and cash equivalents (1,001,534) (1,164,077)
Cash and cash equivalents at beginning of period 1,022,025 2,186,532
----------- -----------
Cash and cash equivalents at end of period $ 20,491 $ 1,022,455
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense $ 2,137 $ --
Income taxes -- 22,010
</TABLE>
See accompanying notes to the consolidated financial statements.
I-4
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
(1) GENERAL
The accompanying consolidated financial statements include the accounts
of LecTec Corporation (the "Company") and LecTec International Corporation, a
wholly-owned subsidiary which was dissolved and merged into LecTec Corporation
on December 31, 1999. All significant intercompany balances and transactions
have been eliminated in consolidation. The Company's financial statements for
the three months and six months ended December 31, 1999 should be read in
conjunction with its Annual Report on Form 10-K and its Annual Report to
Shareholders for the fiscal year ended June 30, 1999. The interim financial
statements are unaudited and in the opinion of management, reflect all
adjustments necessary for a fair presentation of results for the periods
presented. Results for interim periods are not necessarily indicative of results
for the year.
(2) NET LOSS
The Company's basic net loss per share amounts have been computed by
dividing net loss by the weighted average number of outstanding common shares.
The Company's diluted net loss per share amounts have been computed by dividing
net loss by the weighted average number of outstanding common shares and common
share equivalents, when dilutive. Options and warrants to purchase 1,044,003 and
873,066 shares of common stock with a weighted average exercise price of $6.20
and $7.70 were outstanding during the three months ended December 31, 1999 and
1998, but were excluded because they were antidilutive. Options and warrants to
purchase 1,093,443 and 870,323 shares of common stock with a weighted average
exercise price of $6.35 and $7.72 were outstanding during the six months ended
December 31, 1999 and 1998, but were excluded because they were antidilutive.
(3) COMPREHENSIVE LOSS
For the quarter and six months ended December 31, 1999 and 1998, there
were no items which the Company is required to recognize as components of
comprehensive income (loss), therefore comprehensive loss was the same as net
loss.
(4) SEGMENTS
The Company operates its business in one reportable segment - the
manufacture and sale of products based on advanced skin interface technologies.
Each of the Company's major product lines has similar economic characteristics,
technology, manufacturing processes, and regulatory environments. Customers and
distribution and marketing strategies vary within major product lines as well as
overlap between major product lines. The Company's executive decision makers
evaluate sales performance based on the total sales of each major product line
and profitability on a total company basis, due to shared infrastructures, to
make operating and strategic decisions. Net sales by major product line were as
follows:
Three months ended December 31, 1999 1998
---------- ----------
Conductive products $1,927,578 $1,955,025
Medical tape products 452,572 718,537
Therapeutic consumer products 919,555 429,715
---------- ----------
$3,299,705 $3,103,277
========== ==========
I-5
<PAGE>
Six months ended December 31, 1999 1998
---------- ----------
Conductive products $3,504,361 $3,929,571
Medical tape products 1,021,362 1,466,420
Therapeutic consumer products 1,782,734 610,343
---------- ----------
$6,308,457 $6,006,334
========== ==========
(5) LINE OF CREDIT AND LIQUIDITY
In November 1999, the Company finalized a $2,000,000 line of credit
which expires in November 2001. The line of credit is secured by the Company's
receivables, inventory and equipment, and bears interest at the lending bank's
prime rate plus three percentage points. There were no borrowings outstanding on
the line of credit as of December 31, 1999, nor during the three months then
ending. The credit agreement contains certain restrictive covenants which
require the Company to maintain, among other things, specified levels of net
worth and not to exceed specified cumulative losses. Defaults by the Company on
certain financial covenants as of November 30 and December 31, 1999 were waived
by the bank in February 2000 and the line of credit agreement was amended to
adjust specified levels of these covenants for the months ending January 31 and
February 29, 2000.
The Company experienced negative cash flow from operations of $737,110
for the six months ending December 31, 1999. This cash requirement was satisfied
principally from existing cash balances. Management believes that internally
generated cash flow and the new line of credit will be sufficient to support
operating requirements in the near term.
(6) STOCK REPURCHASE PROGRAM
In April 1998, the Company's Board of Directors authorized a stock
repurchase program pursuant to which up to 500,000 shares, or approximately
12.4% of the Company's outstanding common stock, may be repurchased. The shares
may be purchased from time to time through open market transactions, block
purchases, tender offers, or in privately negotiated transactions. The total
consideration for all shares repurchased under this program cannot exceed
$2,000,000. During the quarter ended December 31, 1999 no shares were
repurchased and during the quarter ended December 31, 1998, 74,800 shares were
repurchased for $223,663. During the six months ended December 31, 1999 no
shares were repurchased and during the six months ended December 31, 1998,
165,650 shares were repurchased for $524,338. Through December 31, 1999 the
Company has repurchased a total of 205,150 shares at a cost of $667,963 under
this program.
(7) EMPLOYEE STOCK PURCHASE PLAN
The Company's employee stock purchase plan, adopted November 19, 1998,
allows eligible employees to purchase shares of the Company's common stock
through payroll deductions. The purchase price is the lower of 85% of the fair
market value of the stock on the first or last day of each six-month period
during which an employee participated in the plan. The Company has reserved
200,000 shares under the plan of which 14,018 shares were purchased by employees
for $26,815 during the first six months of fiscal 2000. As of December 31, 1999
employees have purchased a total of 29,144 shares for $59,821.
I-6
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
QUARTERS AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
RESULTS OF OPERATIONS
Net sales for the second quarter of fiscal 2000 were $3,299,705
compared to net sales of $3,103,277 for the second quarter of fiscal 1999, an
increase of 6.3%. The increase was primarily the result of increased therapeutic
consumer product sales which more than offset decreased medical tape and
conductive product sales. Therapeutic consumer product sales increased by 114.0%
from $429,715 to $919,555 while conductive product sales, the Company's largest
product group, decreased slightly by 1.4% and medical tape product sales
decreased by 37.0%. The therapeutic consumer product sales increase was
primarily the result of increased TheraPatch(R) sales volume, especially
TheraPatch Vapor products. The decrease in medical tape product sales was
primarily due to the absence of sales to a former low-margin slit roll tape
customer and decreases in sales volume to several other low-margin medical tape
customers.
Net sales for the first six months of fiscal 2000 were $6,308,457
compared to net sales of $6,006,334 for the first six months of fiscal 1999, an
increase of 5.0%. The increase was primarily the result of increased therapeutic
consumer product sales which more than offset decreased medical tape and
conductive product sales. Therapeutic consumer product sales increased by 192.1%
from $610,343 to $1,782,734 while conductive product sales, the Company's
largest product group, decreased by 10.8% and medical tape product sales
decreased by 30.4%. The therapeutic consumer product sales increase was
primarily the result of increased TheraPatch sales volume, especially TheraPatch
Vapor products. The conductive product sales decrease was primarily the result
of the absence of sales to a former customer who began manufacturing their own
product in the fourth quarter of fiscal 1999. Sales to the former customer in
the first six months of fiscal 1999 were approximately $338,000. Medical tape
product sales decreased primarily due to reduced sales to a low-margin slit roll
tape customer and decreases in sales volume to several other low-margin medical
tape customers.
Gross profit for the second quarter of fiscal 2000 was $1,063,014
compared to $925,738 for the second quarter of fiscal 1999, an increase of
14.8%. Gross profit as a percent of net sales for the second quarter of fiscal
2000 was 32.2% compared to 29.8% for the second quarter of fiscal 1999. The
increase in gross profit for the quarter resulted primarily from the favorable
impact of a change in the sales mix toward higher-margin therapeutic consumer
products and increased sales volume which more than offset increased labor
costs. Labor costs were higher in the current quarter primarily due to an
increase in staffing levels and overtime related to the production of
therapeutic patch products.
Gross profit for the first six months of fiscal 2000 was $2,002,295
compared to $1,942,991 for the first six months of fiscal 1999, an increase of
3.1%. Gross profit as a percent of net sales for the first six months of fiscal
2000 was 31.7% compared to 32.3% for the first six months of fiscal 1999. The
increase in gross profit dollars for the six months resulted primarily from the
favorable impact of a change in the sales mix toward higher-margin therapeutic
consumer products which more than offset increased labor, depreciation, and
repairs and maintenance expense. Labor costs were higher in the current six
months primarily due to an increase in staffing levels and overtime related to
the production of therapeutic patch products.
Sales and marketing expenses were $863,655 and $545,938 during the
second quarters of fiscal 2000 and 1999, and as a percentage of net sales, were
26.2% and 17.6%. The increase in sales and marketing expense for the quarter was
primarily due to increased cooperative and media advertising expenses and retail
slotting fees related to sales of the TheraPatch product line. The Company
anticipates that sales and marketing expenses as a percent of sales for the
remainder of fiscal 2000 will
I-7
<PAGE>
be comparable to the second quarter of fiscal 2000 due to marketing programs
associated with the TheraPatch product line.
Sales and marketing expenses were $1,598,700 and $879,471 during the
first six months of fiscal 2000 and 1999, and as a percentage of net sales, were
25.3% and 14.6%. The increase in sales and marketing expense for the first six
months was primarily due to increased retail slotting fees and advertising
expenses related to the TheraPatch product line.
General and administrative expenses were $688,783 and $781,630 during
the second quarters of fiscal 2000 and 1999, and as a percentage of net sales,
were 20.9% and 25.2%. The decrease in general and administrative expenses for
the quarter was primarily due to decreased legal expenses. Legal expenses in the
prior year quarter included approximately $126,000 of expenses associated with
the re-negotiation and modification of the license agreement for the development
and commercialization of cotinine.
General and administrative expenses were $1,247,873 and $1,368,091
during the first six months of fiscal 2000 and 1999, and as a percentage of net
sales, were 19.8% and 22.8%. The decrease in general and administrative expenses
for the first six months of fiscal 2000 was primarily due to decreased legal
expenses.
Research and development expenses for the second quarters of fiscal
2000 and 1999 were $310,202 and $286,025, and as a percentage of net sales, were
9.4% and 9.2%. The increase in research and development expense for the current
quarter primarily reflects increased labor costs of personnel working on
therapeutic consumer products under development.
Research and development expenses for the first six months of fiscal
2000 and 1999 were $579,964 and $566,038, and as a percentage of net sales, were
9.2% and 9.4%. The increase in research and development expense for the first
six months of fiscal 2000 primarily reflects increased labor costs which were
partially offset by a decrease in test-run production costs.
Other income, net, decreased in the second quarter of fiscal 2000 to
$4,459 from $26,987 in the second quarter of fiscal 1999. Other income, net,
decreased in the first six months of fiscal 2000 to $25,793 from $58,788 in the
first six months of fiscal 1999. Both of the fiscal 2000 decreases were
primarily the result of decreased interest income due to lower cash and cash
equivalent balances.
The Company recorded a loss before income taxes of $795,167 in the
second quarter of fiscal 2000 compared to a loss before income taxes of $660,868
for the second quarter of fiscal 1999. The Company recorded a loss before income
taxes of $1,398,449 in the first six months of fiscal 2000 compared to a loss
before income taxes of $811,821 for the first six months of fiscal 1999. The
increased loss in the current year second quarter and first six months was
primarily the result of increased sales and marketing expenses related to retail
sales of the Company's TheraPatch products. The increased sales and marketing
expenses more than offset an increase in gross profit that resulted from a shift
in the sales mix toward higher-margin therapeutic consumer products. The Company
expects to incur similar losses for the remainder of fiscal 2000 as it continues
to incur increased sales and marketing expenses related to retail sales of
TheraPatch consumer products.
The Company recorded no income tax expense or benefit in the second
quarter and first six months of fiscal 2000 compared to nominal income tax
expense in the second quarter and first six months of the prior year. There was
no income tax benefit recorded during the second quarter and first six months of
fiscal 2000 since the loss benefit may not be realizable by the Company. Income
tax expense in the second quarter and first six months of fiscal 1999 reflects
minimal tax expense associated with the Company's foreign sales corporation
subsidiary.
Inflation has not had a significant impact on the Company's operations
or cash flow.
I-8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1,001,534 to $20,491 during the
first six months of fiscal 2000. Accounts receivable decreased by $385,280 to
$1,966,265 primarily due to a reduction in accounts more than 60 days old.
Inventories increased by $151,339 to $2,147,863 primarily due to increased raw
materials inventory related to therapeutic products which was partially offset
by decreased finished goods inventory of medical tape. Accounts payable of
$1,678,195 at December 31, 1999 were virtually unchanged during the first six
months of fiscal 2000. Capital spending for manufacturing equipment and plant
improvements totaled $247,204 during the first six months of fiscal 2000. There
were no material commitments for capital expenditures at December 31, 1999.
The Company had working capital of $2,282,744 and a current ratio of
1.9 at December 31, 1999 compared to working capital of $3,471,715 and a current
ratio of 2.4 at June 30, 1999.
There was no short or long-term debt outstanding at December 31, 1999
or June 30, 1999. The Company finalized a $2,000,000 asset-based line of credit
on November 22, 1999. There were no advances under this line of credit during
the period from November 22, 1999 through December 31, 1999. As of January 31,
2000, the Company had total borrowings outstanding on the line of credit of
$180,021. Defaults by the Company on certain financial covenants as of November
30 and December 31, 1999 were waived by the bank in February 2000 and the line
of credit agreement was amended to adjust specified levels of financial
covenants 6.12 and 6.13 for the months ending January 31 and February 29, 2000.
Management believes that internally-generated cash flow and the new
secured line of credit will be sufficient to support anticipated operating
requirements during the remainder of fiscal 2000. Management is currently
evaluating additional sources of capital that may be required to support
longer-term growth and expansion of the business. Maintaining adequate levels of
working capital depends in part upon the success of the Company's products in
the marketplace, the relative profitability of those products and the Company's
ability to control operating expenses. Funding of the Company's operations in
future periods may require additional investments in the Company in the form of
equity or debt. There can be no assurance that the Company will achieve desired
levels of sales or profitability, or that future capital infusions will be
available.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 ("Y2K") issue is the result of computer systems using a
two-digit format, as opposed to four digits, to indicate the year. Such computer
systems may be unable to interpret dates beyond the year 1999, which could cause
a system failure or other computer errors, leading to disruptions in operations.
A number of other date issues (e.g., incorrect handling of leap years) may also
cause problems. All of these issues are collectively referred to as Y2K. In
fiscal 1998, the Company developed a comprehensive program for Y2K compliance
consisting of two parts: internal systems compliance and third party compliance.
This program was described in the Company's Form 10-K for fiscal 1999 and Form
10-Q for the first quarter of fiscal 2000. All phases of the Y2K compliance
program were completed prior to December 31, 1999.
The Company has not experienced any Y2K related problems with its
internal systems nor has there been any disruption of supplies or services from
third parties. However, because the Company's continued Y2K compliance in
calendar 2000 is in part dependent on the continued Y2K compliance of third
parties, there can be no assurance that the Company's efforts alone have
resolved all Y2K issues or that key third parties will not experience Y2K
compliance failures as calendar year 2000 progresses.
All costs for Y2K compliance have been expensed in the period incurred
and have been paid from operating funds. The Company does not specifically track
internal staff time spent on the Y2K issue, however, it has included an estimate
of the cost of this time in the estimated total costs. The Company
I-9
<PAGE>
estimates the total costs for both the internal systems compliance program and
the third party compliance program through December 31, 1999 were approximately
$25,000 and does not expect to incur additional costs.
Development of unforseen Y2K complications and the Company's ability to
deal with them continue to pose some risk and uncertainty which could result in,
among other things, business disruption, operation problems, financial loss,
legal liability and similar adverse consequences.
FORWARD-LOOKING STATEMENTS
From time to time, in reports filed with the Securities and Exchange
Commission (including this Form 10-Q), 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 TheraPatch brand strategy;
impact of interruptions to production; dependence on key personnel; need for
regulatory approvals; changes in governmental regulatory requirements or
accounting pronouncements, unforeseen Y2K complications and third party
disruptions; and ability to satisfy funding requirements for operating needs,
expansion or capital expenditures.
I-10
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no history of, and does not anticipate in the future,
investing in derivative financial instruments, derivative commodity instruments
or other such financial instruments. Transactions with international customers
are entered into in U.S. dollars, precluding the need for foreign currency
hedges. Additionally, the Company invests in money market funds and short-term
commercial paper, which experience minimal volatility. Thus, the exposure to
market risk is not material.
I-11
<PAGE>
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Regular Annual Meeting of Shareholders of the Company was held on
November 11, 1999. The following matters were voted on by Shareholders:
1. The election of seven directors to serve on the Board of
Directors for a term of one year and until their successors
are duly elected and qualified.
2. The ratification of the appointment of Grant Thornton LLP as
the Company's independent auditor for the Company's current
fiscal year.
The results of the voting on these matters were as follows:
1. Board of Directors:
Withhold
For Authority Total
--------- --------- ---------
Lee M. Berlin 3,326,767 37,450 3,364,217
Alan C. Hymes, M.D. 3,315,769 48,448 3,364,217
Bert J. McKasy 3,326,767 37,450 3,364,217
Marilyn K. Speedie, Ph.D. 3,326,867 37,350 3,364,217
Donald C. Wegmiller 3,325,611 38,606 3,364,217
Rodney A. Young 3,319,604 44,613 3,364,217
Sheldon L. Zimbler 3,326,867 37,350 3,364,217
2. Appointment of Grant Thornton LLP as independent auditor for
the Company:
For Against Abstain Non-Vote Total
--------- ------- ------- -------- ---------
3,324,142 8,220 31,855 -- 3,364,217
Item 5. OTHER INFORMATION
None.
II-1
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Item No. Item Method of Filing
-------- ---- ----------------
10.01 Credit and Security Agreement By and
Between LecTec Corporation and Wells
Fargo Business Credit, Inc. dated
November 22, 1999 and First Amendment
To Credit and Security Agreement and
Waiver of Defaults dated February 9,
2000 ................................ Filed herewith.
27 Financial data schedule ............. Filed herewith.
(b) REPORTS ON FORM 8-K
None.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
LECTEC CORPORATION
Date February 10, 2000 /s/ Rodney A. Young
------------------- ----------------------------------------------------
Rodney A. Young, Chief Executive Officer & President
Date February 10, 2000 /s/ Deborah L. Moore
------------------- ----------------------------------------------------
Deborah L. Moore, Chief Financial Officer
II-3
EXHIBIT 10.01
----------------------------------------------
----------------------------------------------
CREDIT AND SECURITY AGREEMENT
BY AND BETWEEN
LECTEC CORPORATION
AND
WELLS FARGO BUSINESS CREDIT, INC.
Dated as of: November 22, 1999
----------------------------------------------
----------------------------------------------
<PAGE>
Table of Contents
<TABLE>
<S> <C>
ARTICLE I - Definitions.............................................................................1
Section 1.1 Definitions........................................................................1
Section 1.2 Cross References...................................................................9
ARTICLE II - Amount and Terms of the Credit Facility................................................9
Section 2.1 Revolving Advances................................................................10
Section 2.2 Letters of Credit.................................................................11
Section 2.3 Payment of Amounts Drawn Under Letters of Credit; Obligation of
Reimbursement..........................................................................11
Section 2.4 Special Account...................................................................11
Section 2.5 Obligations Absolute..............................................................12
Section 2.6 Interest; Minimum Interest Charge; Default Interest; Participations;
Usury..................................................................................12
Section 2.7 Fees..............................................................................13
Section 2.8 Computation of Interest and Fees; When Interest Due and Payable...................14
Section 2.9 Capital Adequacy; Increased Costs and Reduced Return..............................14
Section 2.10 Voluntary Prepayment; Reduction of the Maximum Line; Termination of
the Credit Facility by the Borrower; Automatic Renewal.................................15
Section 2.11 Termination and Line Reduction Fees; Waiver of Termination an Line
Reduction Fees.........................................................................16
Section 2.12 Mandatory Prepayment..............................................................16
Section 2.13 Payment...........................................................................16
Section 2.14 Payment on Non-Banking Days.......................................................16
Section 2.15 Use of Proceeds...................................................................17
Section 2.16 Liability Records.................................................................17
ARTICLE III - Security Interest; Occupancy; Setoff.................................................17
Section 3.1 Grant of Security Interest........................................................17
Section 3.2 Notification of Account Debtors and Other Obligors................................17
Section 3.3 Assignment of Insurance...........................................................17
Section 3.4 Occupancy.........................................................................18
Section 3.5 License...........................................................................18
Section 3.6 Financing Statement...............................................................18
Section 3.7 Setoff............................................................................19
ARTICLE IV - Conditions of Lending.................................................................19
Section 4.1 Conditions Precedent to the Initial Revolving Advance and the Initial Letter
of Credit..............................................................................19
Section 4.2 Conditions Precedent to All Advances and Letters of Credit........................21
</TABLE>
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<TABLE>
<S> <C>
ARTICLE V - Representations and Warranties.........................................................22
Section 5.1 Corporate Existence and Power; Name; Chief Executive Office; Inventory
and Equipment Locations; Tax Identification Number.....................................22
Section 5.2 Authorization of Borrowing; No Conflict as to Law or Agreements...................22
Section 5.3 Legal Agreements..................................................................22
Section 5.4 Subsidiaries......................................................................23
Section 5.5 Financial Condition; No Adverse Change............................................23
Section 5.6 Litigation........................................................................23
Section 5.7 Regulation U......................................................................23
Section 5.8 Taxes.............................................................................23
Section 5.9 Titles and Liens..................................................................23
Section 5.10 Plans.............................................................................24
Section 5.11 Default...........................................................................24
Section 5.12 Environmental Matters.............................................................24
Section 5.13 Submissions to Lender.............................................................25
Section 5.14 Financing Statements..............................................................25
Section 5.15 Rights to Payment.................................................................26
ARTICLE VI - Borrower's Affirmative Covenants......................................................26
Section 6.1 Reporting Requirements............................................................26
Section 6.2 Books and Records; Inspection and Examination.....................................28
Section 6.3 Account Verification..............................................................29
Section 6.4 Compliance with Laws..............................................................29
Section 6.5 Payment of Taxes and Other Claims.................................................29
Section 6.6 Maintenance of Properties.........................................................29
Section 6.7 Insurance.........................................................................30
Section 6.8 Preservation of Existence.........................................................30
Section 6.9 Delivery of Instruments, etc......................................................30
Section 6.10 Collateral Account................................................................30
Section 6.11 Performance by the Lender.........................................................31
Section 6.12 Minimum Book Net Worth............................................................31
Section 6.13 Minimum Earnings Before Taxes.....................................................32
Section 6.14 New Covenants.....................................................................32
ARTICLE VII - Negative Covenants...................................................................32
Section 7.1 Liens.............................................................................32
Section 7.2 Indebtedness......................................................................33
Section 7.3 Guaranties........................................................................34
Section 7.4 Investments and Subsidiaries......................................................34
Section 7.5 Dividends.........................................................................35
Section 7.6 Sale or Transfer of Assets; Suspension of Business Operations.....................35
Section 7.7 Consolidation and Merger; Asset Acquisitions......................................35
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Section 7.8 Sale and Leaseback................................................................35
Section 7.9 Restrictions on Nature of Business................................................35
Section 7.10 Capital Expenditures..............................................................35
Section 7.11 Accounting........................................................................35
Section 7.12 Discounts, etc....................................................................35
Section 7.13 Defined Benefit Pension Plans.....................................................36
Section 7.14 Other Defaults....................................................................36
Section 7.15 Place of Business; Name...........................................................36
Section 7.16 Organizational Documents; S Corporation Status....................................36
Section 7.17 Salaries..........................................................................36
ARTICLE VIII - Events of Default, Rights and Remedies..............................................36
Section 8.1 Events of Default.................................................................36
Section 8.2 Rights and Remedies...............................................................38
Section 8.3 Certain Notices...................................................................39
ARTICLE IX - Miscellaneous.........................................................................40
Section 9.1 No Waiver; Cumulative Remedies....................................................40
Section 9.2 Amendments, Etc...................................................................40
Section 9.3 Addresses for Notices, Etc........................................................40
Section 9.4 Further Documents ................................................................41
Section 9.5 Collateral .......................................................................41
Section 9.6 Costs and Expenses ...............................................................41
Section 9.7 Indemnity ........................................................................41
Section 9.8 Participants .....................................................................43
Section 9.9 Execution in Counterparts ........................................................43
Section 9.10 Binding Effect; Assignment; Complete Agreement;
Exchanging Information ................................................................43
Section 9.11 Severability of Provisions .......................................................43
Section 9.12 Headings .........................................................................43
Section 9.13 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial..........................43
Section 9.14 Confidentiality ..................................................................44
</TABLE>
iii
<PAGE>
CREDIT AND SECURITY AGREEMENT
Dated as of November 22, 1999
LECTEC CORPORATION, a corporation (the "Borrower"), and WELLS FARGO
BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), hereby agree as
follows:
ARTICLE I
Definitions
Section 1.1 Definitions. For all purposes of this Agreement, except
as otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP.
"Accounts" means all of the Borrower's accounts, as such term is
defined in the UCC, including without limitation the aggregate unpaid
obligations of customers and other account debtors to the Borrower arising
out of the sale or lease of goods or rendition of services by the Borrower
on an open account or deferred payment basis.
"Advance" means a Revolving Advance.
"Affiliate" or "Affiliates" means LecTec International Corporation,
a corporation organized under the laws of the U.S. Virgin Islands, and any
other Person controlled by, controlling or under common control with the
Borrower, including (without limitation) any Subsidiary of the Borrower.
For purposes of this definition, "control," when used with respect to any
specified Person, means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of
voting securities, by contract or otherwise.
"Agreement" means this Credit and Security Agreement, as amended,
supplemented or restated from time to time.
"Availability" means the difference of (i) the Borrowing Base and
(ii) the sum of (A) the outstanding principal balance of the Revolving
Note and (B) the L/C Amount.
"Banking Day" means a day other than a Saturday, Sunday or other day
on which banks are generally not open for business in Minneapolis,
Minnesota.
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"Book Net Worth" means the aggregate of the common and preferred
stockholders' equity in the Borrower, determined in accordance with GAAP.
"Borrowing Base" means, at any time the lesser of:
(a) the Maximum Line; or
(b) subject to change from time to time in the Lender's sole
discretion, the sum of:
(i) 80% of Eligible Accounts, plus
(ii) the lesser of (A) 50% of Eligible Finished Goods
Inventory plus 25% of Eligible Raw Materials Inventory
or (B) $750,000; provided that the Inventory component
of the Borrowing Base shall not exceed 33% of the
Advances at any calendar month-end.
"Capital Expenditures" for a period means any expenditure of money
for the lease, purchase or other acquisition of any capital asset, or for
the lease of any other asset whether payable currently or in the future.
"Collateral" means all of the Borrower's Equipment, General
Intangibles, Inventory, Receivables, Investment Property, all sums on
deposit in any Collateral Account, and any items in any Lockbox; together
with (i) all substitutions and replacements for and products of any of the
foregoing; (ii) proceeds of any and all of the foregoing; (iii) in the
case of all tangible goods, all accessions; (iv) all accessories,
attachments, parts, equipment and repairs now or hereafter attached or
affixed to or used in connection with any tangible goods; (v) all
warehouse receipts, bills of lading and other documents of title now or
hereafter covering such goods; and all sums on deposit in the Special
Account.
"Collateral Account" has the meaning given in the Collateral Account
Agreement.
"Collateral Account Agreement" means the Collateral Account
Agreement of even date herewith by and among the Borrower, Norwest Bank
Minnesota and the Lender.
"Commitment" means the Lender's commitment to make Advances and to
cause the Issuer to issue Letters of Credit to or for the Borrower's
account pursuant to Article II.
"Credit Facility" means the credit facility being made available to
the Borrower by the Lender pursuant to Article II.
"Debt" of any Person means all items of indebtedness or liability
which in accordance with GAAP would be included in determining total
liabilities as shown on the liabilities side
2
<PAGE>
of a balance sheet of that Person as at the date as of which Debt is to be
determined. For purposes of determining a Person's aggregate Debt at any
time, "Debt" shall also include the aggregate payments required to be made
by such Person at any time under any lease that is considered a
capitalized lease under GAAP.
"Default" means an event that, with giving of notice or passage of
time or both, would constitute an Event of Default.
"Default Period" means any period of time beginning on the first day
of any month during which a Default or Event of Default has occurred and
ending on the date the Lender notifies the Borrower in writing that such
Default or Event of Default has been cured or waived.
"Default Rate" means an annual rate equal to two percent (2%) over
the Floating Rate, which rate shall change when and as the Floating Rate
changes.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"Earnings Before Taxes" or "Loss Before Taxes" for a period means,
pretax earnings or loss, as the case may be, from continuing operations
before (i) special extraordinary gains, (ii) minority interests, and (iii)
miscellaneous gains and losses, in each case for such period.
"Eligible Accounts" means all unpaid Accounts, net of any credits,
except the following shall not in any event be deemed Eligible Accounts:
(i) That portion of Accounts unpaid 90 days or more after the
invoice date or, if the Lender in its discretion has determined that
a particular dated Account may be eligible, that portion of such
Account which is unpaid more than 30 days past the stated due date
or more than 120 days past the invoice date;
(ii) That portion of Accounts that is disputed or subject to a
claim of offset or a contra account, including slotting fees or
cooperative advertising;
(iii) That portion of Accounts not yet earned by the final
delivery of goods or rendition of services, as applicable, by the
Borrower to the customer;
(iv) Accounts owed by any unit of government, whether foreign
or domestic (provided, however, that there shall be included in
Eligible Accounts that portion of Accounts owed by such units of
government for which the Borrower has provided evidence satisfactory
to the Lender that (A) the Lender has a first priority perfected
security interest and (B) such Accounts may be enforced by the
Lender directly against such unit of government under all applicable
laws);
3
<PAGE>
(v) Accounts owed by an account debtor located outside the
United States or, at the Lender's discretion, Canada, which are not
(A) backed by a bank letter of credit naming the Lender as
beneficiary or assigned to the Lender, in the Lender's possession
and acceptable to the Lender in all respects, in its sole
discretion, (B) covered by a foreign receivables insurance policy
acceptable to the Lender in its sole discretion;
(vi) Accounts owed by an account debtor that is insolvent, the
subject of bankruptcy proceedings or has gone out of business;
(vii) Accounts owed by a shareholder, Subsidiary, Affiliate,
officer or employee of the Borrower;
(viii) Accounts not subject to a duly perfected security
interest in the Lender's favor or which are subject to any lien,
security interest or claim in favor of any Person other than the
Lender including without limitation any payment or performance bond;
(ix) That portion of Accounts that has been restructured,
extended, amended or modified;
(x) That portion of Accounts that constitutes advertising,
finance charges, service charges, sales or excise taxes or slotting
fees due to retailers;
(xi) Accounts owed by an account debtor, regardless of whether
otherwise eligible, if 10% or more of the total amount due under
Accounts from such debtor is ineligible under clauses (i), (ii)or
(ix) above; and
(xii) Accounts, or portions thereof, otherwise deemed
ineligible by the Lender in its sole discretion.
"Eligible Finished Goods Inventory" means all Eligible Inventory of
the Borrower consisting of finished goods.
"Eligible Inventory" means all Inventory of the Borrower, at the
lower of cost or market value as determined in accordance with GAAP;
provided, however, that the following shall not in any event be deemed
Eligible Inventory:
(i) Inventory that is: in-transit; located at any warehouse,
job site or other premises not approved by the Lender in writing;
located outside of the states, or localities, as applicable, in
which the Lender has filed financing statements to perfect a first
priority security interest in such Inventory; covered by any
negotiable or non-negotiable warehouse receipt, bill of lading or
other document of title; on
4
<PAGE>
consignment from any Person; on consignment to any Person or subject
to any bailment unless such consignee or bailee has executed an
agreement with the Lender;
(ii) Supplies, packaging, parts or sample Inventory;
(iii) Work-in-process Inventory and material burden included
in cost of Inventory;
(iv) Inventory that is damaged, obsolete or included in an
obsolescence reserve, past its shelf-life expiration date, slow
moving or not currently saleable in the normal course of the
Borrower's operations;
(v) Inventory that the Borrower has returned, has attempted to
return, is in the process of returning or intends to return to the
vendor thereof;
(vi) Inventory that is perishable or live;
(vii) Inventory manufactured by the Borrower pursuant to a
license unless the applicable licensor has agreed in writing to
permit the Lender to exercise its rights and remedies against such
Inventory;
(viii) Inventory that is subject to a security interest in
favor of any Person other than the Lender; and
(ix) Inventory otherwise deemed ineligible by the Lender in
its sole discretion.
"Eligible Raw Materials Inventory" means all Eligible Inventory of
the Borrower consisting of raw materials.
"Environmental Laws" has the meaning specified in Section 5.12.
"Equipment" means all of the Borrower's equipment, as such term is
defined in the UCC, whether now owned or hereafter acquired, including but
not limited to all present and future machinery, vehicles, furniture,
fixtures, manufacturing equipment, shop equipment, office and
recordkeeping equipment, parts, tools, supplies, and including
specifically (without limitation) the goods described in any equipment
schedule or list herewith or hereafter furnished to the Lender by the
Borrower.
"Event of Default" has the meaning specified in Section 8.1.
"Floating Rate" means an annual rate equal to the sum of the Prime
Rate plus three percent (3%), which annual rate shall change when and as
the Prime Rate changes.
5
<PAGE>
"Funding Date" has the meaning given in Section 2.1.
"GAAP" means generally accepted accounting principles, applied on a
basis consistent with the accounting practices applied in the financial
statements described in Section 5.5.
"Guarantor(s)" means any party who may hereafter deliver a guaranty
(a "Guaranty") of the Obligations.
"General Intangibles" means all of the Borrower's general
intangibles, as such term is defined in the UCC, whether now owned or
hereafter acquired, including (without limitation) all present and future
patents, patent applications, copyrights, trademarks, trade names, trade
secrets, customer or supplier lists and contracts, manuals, operating
instructions, permits, franchises, the right to use the Borrower's name,
and the goodwill of the Borrower's business.
"Hazardous Substance" has the meaning given in Section 5.12.
"Inventory" means all of the Borrower's inventory, as such term is
defined in the UCC, whether now owned or hereafter acquired, whether
consisting of whole goods, spare parts or components, supplies or
materials, whether acquired, held or furnished for sale, for lease or
under service contracts or for manufacture or processing, and wherever
located.
"Investment Property" means all of the Borrower's investment
property, as such term is defined in the UCC, whether now owned or
hereafter acquired, including but not limited to all securities, security
entitlements, securities accounts, commodity contracts, commodity
accounts, stocks, bonds, mutual fund shares, money market shares and U.S.
Government securities.
"Issuer" mans the issuer of any Letter of Credit.
"L/C Amount" means the sum of (i) the aggregate face amount of any
issued and outstanding Letters of Credit and (ii) the unpaid amount of the
Obligation of Reimbursement.
"L/C Application" means an application and agreement for letters of
credit in a form acceptable to the Issuer and the Lender.
"Letter of Credit" has the meaning specified in Section 2.2.
"Loan Documents" means this Agreement, the Note and the Security
Documents.
"Lockbox" has the meaning given in the Lockbox Agreement.
6
<PAGE>
"Lockbox Agreement" means the Lockbox Agreement by and among the
Borrower, Norwest Bank Minnesota and, the Lender, of even date herewith.
"Maximum Line" means $2,000,000, unless said amount is reduced
pursuant to Section 2.10, in which event it means the amount to which said
amount is reduced.
"Minimum Interest Charge" has the meaning given in Section 2.6(b).
"Net Income" means fiscal year-to-date after-tax net income,
decreased by the sum of any extraordinary, non-operating or non-cash
income recorded by the Borrower and increased by any extraordinary,
non-cash or non-operating expense or loss recorded by the Borrower, as
determined in accordance with GAAP.
"Norwest Bank Minnesota" means Norwest Bank Minnesota, National
Association.
"Note" means the Revolving Note.
"Obligations" means the Note and each and every other debt,
liability and obligation of every type and description which the Borrower
may now or at any time hereafter owe to the Lender, whether such debt,
liability or obligation now exists or is hereafter created or incurred,
whether it arises in a transaction involving the Lender alone or in a
transaction involving other creditors of the Borrower, and whether it is
direct or indirect, due or to become due, absolute or contingent, primary
or secondary, liquidated or unliquidated, or sole, joint, several or joint
and several, and including specifically, but not limited to, the
Obligation of Reimbursement and all indebtedness of the Borrower arising
under this Agreement, the Note, any L/C Application completed by the
Borrower or any other loan or credit agreement or guaranty between the
Borrower and the Lender, whether now in effect or hereafter entered into.
"Original Maturity Date" means November 22, 2001.
"Patent and Trademark Security Agreement" means the Patent and
Trademark Security Agreement by the Borrower in favor of the Lender of
even date herewith.
"Permitted Lien" has the meaning given in Section 7.1.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company,
trust, unincorporated organization or government or any agency or
political subdivision thereof.
"Plan" means an employee benefit plan or other plan maintained for
the Borrower's employees and covered by Title IV of ERISA.
7
<PAGE>
"Premises" means all premises where the Borrower conducts its
business and has any rights of possession, including (without limitation)
the premises legally described on Exhibit C.
"Prime Rate" means the rate of interest publicly announced from time
to time by Wells Fargo Bank, N.A. as its "prime rate" or, if such bank
ceases to announce a rate so designated, any similar successor rate
designated by the Lender.
"Receivables" means each and every right of the Borrower to the
payment of money, whether such right to payment now exists or hereafter
arises, whether such right to payment arises out of a sale, lease or other
disposition of goods or other property, out of a rendering of services,
out of a loan, out of the overpayment of taxes or other liabilities, or
otherwise arises under any contract or agreement, whether such right to
payment is created, generated or earned by the Borrower or by some other
person who subsequently transfers such person's interest to the Borrower,
whether such right to payment is or is not already earned by performance,
and howsoever such right to payment may be evidenced, together with all
other rights and interests (including all liens and security interests)
which the Borrower may at any time have by law or agreement against any
account debtor or other obligor obligated to make any such payment or
against any property of such account debtor or other obligor; all
including but not limited to all present and future accounts, contract
rights, loans and obligations receivable, chattel papers, bonds, notes and
other debt instruments, tax refunds and rights to payment in the nature of
general intangibles.
"Reportable Event" shall have the meaning assigned to that term in
Title IV of ERISA.
"Revolving Advance" has the meaning given in Section 2.1.
"Revolving Note" means the Borrower's revolving promissory note,
payable to the order of the Lender in substantially the form of Exhibit A
hereto, as the same may hereafter be amended, supplemented or restated
from time to time, and any note or notes issued in substitution therefor,
as the same may hereafter be amended, supplemented or restated from time
to time and any note or notes issued in substitution therefor.
"Security Documents" means this Agreement, the Collateral Account
Agreement, the Lockbox Agreement, the Patent and Trademark Security
Agreement and any other document delivered to the Lender from time to time
to secure the Obligations, as the same may hereafter be amended,
supplemented or restated from time to time.
"Security Interest" has the meaning given in Section 3.1.
8
<PAGE>
"Special Account" means a specified cash collateral account
maintained by a financial institution acceptable to the Lender in
connection with Letters of Credit, as contemplated by Section 2.4.
"Subordination Agreement" means any subordination agreement accepted
by the Lender from time to time, as the same may hereafter be amended,
supplemented or restated from time to time.
"Subsidiary" means any corporation of which more than 50% of the
outstanding shares of capital stock having general voting power under
ordinary circumstances to elect a majority of the board of directors of
such corporation, irrespective of whether or not at the time stock of any
other class or classes 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, by the Borrower and one or more other Subsidiaries,
or by one or more other Subsidiaries.
"Termination Date" means the earliest of (i) the Maturity Date, (ii)
the date the Borrower terminates the Credit Facility, or (iii) the date
the Lender demands payment of the Obligations after an Event of Default
pursuant to Section 8.2.
"UCC" means the Uniform Commercial Code as in effect from time to
time in the state designated in Section 9.14 as the state whose laws shall
govern this Agreement, or in any other state whose laws are held to govern
this Agreement or any portion hereof.
Section 1.2 Cross References. All references in this Agreement to
Articles, Sections and subsections, shall be to Articles, Sections and
subsections of this Agreement unless otherwise explicitly specified.
ARTICLE II
Amount and Terms of the Credit Facility
Section 2.1 Revolving Advances. The Lender agrees, on the terms and
subject to the conditions herein set forth, to make advances to the Borrower
from time to time from the date all of the conditions set forth in Section 4.1
are satisfied (the "Funding Date") to the Termination Date, on the terms and
subject to the conditions herein set forth (the "Revolving Advances"). The
Lender shall have no obligation to make a Revolving Advance if, after giving
effect to such requested Revolving Advance, the sum of the outstanding and
unpaid Revolving Advances under this Section 2.1 or otherwise would exceed the
Borrowing Base less the L/C Amount. The Borrower's obligation to pay the
Revolving Advances shall be evidenced by the Revolving Note and shall be secured
by the Collateral as provided in Article III. Within the limits set forth in
this Section 2.1, the Borrower may borrow, prepay pursuant to Section 2.10 and
reborrow. The Borrower agrees to comply with the following procedures in
requesting Revolving Advances under this Section 2.1:
9
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(a) The Borrower shall make each request for a Revolving Advance to
the Lender before 11:00 a.m. (Minneapolis time) of the day of the
requested Revolving Advance. Requests may be made in writing or by
telephone, specifying the date of the requested Revolving Advance and the
amount thereof. Each request shall be by (i) any officer of the Borrower;
or (ii) any person designated as the Borrower's agent by any officer of
the Borrower in a writing delivered to the Lender; or (iii) any person
whom the Lender reasonably believes to be an officer of the Borrower or
such a designated agent.
(b) Upon fulfillment of the applicable conditions set forth in
Article IV, the Lender shall disburse the proceeds of the requested
Revolving Advance by crediting the same to the Borrower's demand deposit
account maintained with Norwest Bank unless the Lender and the Borrower
shall agree in writing to another manner of disbursement. Upon the
Lender's request, the Borrower shall promptly confirm each telephonic
request for an Advance by executing and delivering an appropriate
confirmation certificate to the Lender. The Borrower shall repay all
Advances even if the Lender does not receive such confirmation and even if
the person requesting an Advance was not in fact authorized to do so. Any
request for an Advance, whether written or telephonic, shall be deemed to
be a representation by the Borrower that the conditions set forth in
Section 4.2 have been satisfied as of the time of the request.
Section 2.2 Letters of Credit.
(a) The Lender agrees, on the terms and subject to the conditions
herein set forth, to cause an Issuer to issue, from the Funding Date to
the Termination Date, one or more irrevocable standby or documentary
letters of credit (each, a "Letter of Credit") for the Borrower's account.
The Lender shall have no obligation to cause an Issuer to issue any Letter
of Credit if the face amount of the Letter of Credit to be issued would
exceed the lessor of:
(i) $250,000 less the L/C Amount, or
(ii) the Borrowing Base less the sum of (A) all outstanding
and unpaid Revolving Advances and (B) the L/C Amount.
Each Letter of Credit, if any, shall be issued pursuant to a separate L/C
Application entered into by the Borrower and the Lender for the benefit of
the Issuer, completed in a manner satisfactory to the Lender and the
Issuer. The terms and conditions set forth in each such L/C Application
shall supplement the terms and conditions hereof, but if the terms of any
such L/C Application and the terms of this Agreement are inconsistent, the
terms hereof shall control.
(b) No Letter of Credit shall be issued with an expiry date later
than the Termination Date in effect as of the date of issuance.
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(c) Any request to cause an Issuer to issue a Letter of Credit under
this Section 2.2 shall be deemed to be a representation by the Borrower
that the conditions set forth in Section 4.2 have been satisfied as of the
date of the request.
Section 2.3 Payment of Amounts Drawn Under Letters of Credit;
Obligation of Reimbursement.
The Borrower acknowledges that the Lender, as co-applicant, will be
liable to the Issuer for reimbursement of any and all draws under Letters of
Credit and for all other amounts required to be paid under the applicable L/C
Application. Accordingly, the Borrower agrees to pay to the Lender any and all
amounts required to be paid under the applicable L/C Application, when and as
required to be paid thereby, and the amounts designated below, when and as
designated:
(a) The Borrower hereby agrees to pay the Lender on the day a draft
is honored under any Letter of Credit a sum equal to all amounts drawn
under such Letter of Credit plus any and all reasonable charges and
expenses that the Issuer or the Lender may pay or incur relative to such
draw and the applicable L/C Application, plus interest on all such
amounts, charges and expenses as set forth below (the Borrower's
obligation to pay all such amounts is herein referred to as the
"Obligation of Reimbursement").
(b) Whenever a draft is submitted under a Letter of Credit, the
Lender shall make a Revolving Advance in the amount of the Obligation of
Reimbursement and shall apply the proceeds of such Revolving Advance
thereto. Such Revolving Advance shall be repayable in accordance with and
be treated in all other respects as a Revolving Advance hereunder.
(c) If a draft is submitted under a Letter of Credit when the
Borrower is unable, because a Default Period then exists or for any other
reason, to obtain a Revolving Advance to pay the Obligation of
Reimbursement, the Borrower shall pay to the Lender on demand and in
immediately available funds, the amount of the Obligation of Reimbursement
together with interest, accrued from the date of the draft until payment
in full at the Default Rate. Notwithstanding the Borrower's inability to
obtain a Revolving Advance for any reason, the Lender is irrevocably
authorized, in its sole discretion, to make a Revolving Advance in an
amount sufficient to discharge the Obligation of Reimbursement and all
accrued but unpaid interest thereon.
(d) The Borrower's obligation to pay any Revolving Advance made
under this Section 2.3, shall be evidenced by Revolving Note and shall
bear interest as provided in Section 2.6.
Section 2.4 Special Account. If the Credit Facility is terminated
for any reason whatsoever while any Letter of Credit is outstanding, the
Borrower shall thereupon pay the Lender in immediately available funds for
deposit in the Special Account an amount equal to the L/C Amount. The Special
Account shall be an interest bearing account maintained for the Lender by any
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financial institution acceptable to the Lender. Any interest earned on amounts
deposited in the Special Account shall be credited to the Special Account.
Amounts on deposit in the Special Account may be applied by the Lender at any
time or from time to time to the Obligations in the Lender's sole discretion,
and shall not be subject to withdrawal by the Borrower so long as the Lender
maintains a security interest therein. The Lender agrees to transfer any balance
in the Special Account to the Borrower at such time as the Lender is required to
release its security interest in the Special Account under applicable law.
Section 2.5 Obligations Absolute. The Borrower's obligations arising
under Section 2.3 shall be absolute, unconditional and irrevocable, and shall be
paid strictly in accordance with the terms of Section 2.3, under all
circumstances whatsoever, including (without limitation) the following
circumstances:
(a) any lack of validity or enforceability of any Letter of Credit
or any other agreement or instrument relating to any Letter of Credit
(collectively the "Related Documents");
(b) any amendment or waiver of or any consent to departure from all
or any of the Related Documents;
(c) the existence of any claim, setoff, defense or other right which
the Borrower may have at any time, against any beneficiary or any
transferee of any Letter of Credit (or any persons or entities for whom
any such beneficiary or any such transferee may be acting), or other
person or entity, whether in connection with this Agreement, the
transactions contemplated herein or in the Related Documents or any
unrelated transactions;
(d) any statement or any other document presented under any Letter
of Credit proving to be forged, fraudulent, invalid or insufficient in any
respect or any statement therein being untrue or inaccurate in any respect
whatsoever;
(e) payment by or on behalf of the Issuer or the Lender under any
Letter of Credit against presentation of a draft or certificate which does
not strictly comply with the terms of such Letter of Credit; or
(f) any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing.
Section 2.6 Interest; Minimum Interest Charge; Default Interest;
Participations; Usury. Interest accruing on the Note shall be due and payable in
arrears on the first day of each month.
(a) REVOLVING NOTE. Except as set forth in Sections 2.2(c) and
2.2(f), the outstanding principal balance of the Revolving Note shall bear
interest at the Floating Rate.
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(b) MINIMUM INTEREST CHARGE. Notwithstanding the interest payable
pursuant to Section 2.2(a), the Borrower shall pay to the Lender interest
of not less than the applicable amount shown below per year of this
Agreement (the "Minimum Interest Charge") during the term of this
Agreement, and the Borrower shall pay any deficiency between the Minimum
Interest Charge and the amount of interest otherwise calculated under
Sections 2.6(a) and 2.6(c) on the date and in the manner provided in
Section 2.8:
Period Minimum Annual Interest
------ -----------------------
Year One of Agreement $80,000
Year Two of Agreement and thereafter $95,000
(c) DEFAULT INTEREST RATE. At any time during any Default Period, in
the Lender's sole discretion and without waiving any of its other rights
and remedies, the principal of the Advances outstanding from time to time
shall bear interest at the Default Rate, effective for any periods
designated by the Lender from time to time during that Default Period.
(d) PARTICIPATIONS. If any Person shall acquire a participation in
the Advances under this Agreement, the Borrower shall be obligated to the
Lender to pay the full amount of all interest calculated under Section
2.6(a), along with all other fees, charges and other amounts due under
this Agreement, regardless if such Person elects to accept interest with
respect to its participation at a lower rate than the Floating Rate, or
otherwise elects to accept less than its prorata share of such fees,
charges and other amounts due under this Agreement.
(e) USURY. In any event no rate change shall be put into effect
which would result in a rate greater than the highest rate permitted by
law.
Section 2.7 Fees.
(a) ORIGINATION FEE. The Borrower hereby agrees to pay the Lender a
fully earned and non-refundable origination fee of $20,000 due and payable
upon the execution of this Agreement. The Lender acknowledges receipt of
$8,500 toward payment of this fee and the fees, costs and expenses
described in Sections 2.7(c) and 9.7.
(b) UNUSED LINE FEE. For the purposes of this Section 2.7(b),
"Unused Amount" means the Maximum Line reduced by outstanding Revolving
Advances plus the L/C Amount. The Borrower agrees to pay to the Lender an
unused line fee at the rate of one- quarter of one percent (.25%) per
annum on the average daily Unused Amount from the date of this Agreement
to and including the Termination Date, due and payable monthly in arrears
on the first day of the month and on the Termination Date.
(c) LETTER OF CREDIT FEES. The Borrower agrees to pay the Lender a
fee with respect to each Letter of Credit, if any, accruing on a daily
basis and computed at the annual
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rate of two percent (2%) of the aggregate amount that may then be drawn on
all issued and outstanding Letters of Credit assuming compliance with all
conditions for drawing thereunder (the "Aggregate Face Amount"), from and
including the date of issuance of such Letter of Credit until such date as
such Letter of Credit shall terminate by its terms or be returned to the
Lender, due and payable monthly in arrears on the first day of each month
and on the Termination Date; provided, however that during Default
Periods, in the Lender's sole discretion and without waiving any of its
other rights and remedies, such fee shall increase to four percent (4%) of
the Aggregate Face Amount. The foregoing fee shall be in addition to any
and all fees, commissions and charges of any Issuer of a Letter of Credit
with respect to or in connection with such Letter of Credit.
(d) LETTER OF CREDIT ADMINISTRATIVE FEES. The Borrower agrees to pay
the Lender, on written demand, the administrative fees charged by the
Issuer in connection with the honoring of drafts under any Letter of
Credit, amendments thereto, transfers thereof and all other activity with
respect to the Letters of Credit at the then-current rates published by
the Issuer for such services rendered on behalf of customers of the Issuer
generally.
(e) AUDIT FEES. The Borrower hereby agrees to pay the Lender, on
demand, audit fees in connection with any audits or inspections conducted
by the Lender of any Collateral or the Borrower's operations or business
at the rates established from time to time by the Lender as its audit fees
(which fees are currently $62.50 per hour per auditor), together with all
actual out-of-pocket costs and expenses incurred in conducting any such
audit or inspection.
Section 2.8 Computation of Interest and Fees; When Interest Due and
Payable. Interest accruing on the outstanding principal balance of the Advances
and fees hereunder outstanding from time to time shall be computed on the basis
of actual number of days elapsed in a year of 360 days. Interest shall be
payable in arrears on the first day of each month and on the Termination Date,
except that minimum interest pursuant to Section 2.6(b) shall be payable in
arrears annually on each anniversary date and on the Termination Date.
Section 2.9 Capital Adequacy; Increased Costs and Reduced Return. If
any Related Lender determines at any time that its Return has been reduced as a
result of any Rule Change, such Related Lender may require the Borrower to pay
it the amount necessary to restore its Return to what it would have been had
there been no Rule Change. For purposes of this Section 2.5:
(a) "Capital Adequacy Rule" means any law, rule, regulation,
guideline, directive, requirement or request regarding capital adequacy,
or the interpretation or administration thereof by any governmental or
regulatory authority, central bank or comparable agency, whether or not
having the force of law, that applies to any Related Lender. Such rules
include rules requiring financial institutions to maintain total capital
in amounts based upon percentages of outstanding loans, binding loan
commitments and letters of credit.
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(b) "L/C Rule" means any law, rule, regulation, guideline,
directive, requirement or request regarding letters of credit, or the
interpretation or administration thereof by any governmental or regulatory
authority, central bank or comparable agency, whether or not having the
force of law, that applies to any Related Lender. Such rules include rules
imposing taxes, duties or other similar charges, or mandating reserves,
special deposits or similar requirements against assets of, deposits with
or for the account of, or credit extended by any Related Lender, on
letters of credit.
(c) "Return", for any period, means the return as determined by such
Related Lender on the Advances and Letters of Credit based upon its total
capital requirements and a reasonable attribution formula that takes
account of the Capital Adequacy Rules then in effect and costs of issuing
or maintaining any Letter of Credit. Return may be calculated for each
calendar quarter and for the shorter period between the end of a calendar
quarter and the date of termination in whole of this Agreement.
(d) "Rule Change" means any change in any Capital Adequacy Rule or
L/C Rule occurring after the date of this Agreement, but the term does not
include any changes in applicable requirements that at the Closing Date
are scheduled to take place under the existing Capital Adequacy Rules or
L/C Rules or any increases in the capital that any Related Lender is
required to maintain to the extent that the increases are required due to
a regulatory authority's assessment of the financial condition of such
Related Lender.
(e) "Related Lender" includes (but is not limited to) the Lender,
the Issuer, any parent corporation of the Lender or the Issuer and any
assignee of any interest of the Lender hereunder and any participant in
the loans made hereunder.
Certificates of any Related Lender sent to the Borrower from time to time
claiming compensation under this Section 2.9, stating the reason therefor and
setting forth in reasonable detail the calculation of the additional amount or
amounts to be paid to the Related Lender hereunder to restore its Return shall
be conclusive absent manifest error. In determining such amounts, the Related
Lender may use any reasonable averaging and attribution methods.
Section 2.10 Voluntary Prepayment; Reduction of the Maximum Line;
Termination of the Credit Facility by the Borrower; Automatic Renewal. Except as
otherwise provided herein, the Borrower may prepay the Advances in whole at any
time or from time to time in part. The Borrower may terminate the Credit
Facility or reduce the Maximum Line at any time if it (i) gives the Lender at
least 30 days' prior written notice and (ii) pays the Lender termination or line
reduction fees in accordance with Section 2.11. Any reduction in the Maximum
Line must be in an amount not less than $100,000 or an integral multiple
thereof. If the Borrower reduces the Maximum Line to zero, all Obligations shall
be immediately due and payable. Upon termination of the Credit Facility and
payment and performance of all Obligations, the Lender shall release or
terminate the Security Interest and the Security Documents to which the Borrower
is entitled by law. Unless terminated by the Lender at any time or by the
Borrower pursuant to Section 2.11, the Credit Facility shall
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remain in effect until the Original Maturity Date and, thereafter, shall
automatically renew for successive one year periods (the Original Maturity Date
and each anniversary date thereof to which the Credit Facility has been
automatically renewed, is herein referred to as a "Maturity Date").
Section 2.11 Termination and Line Reduction Fees; Waiver of
Termination an Line Reduction Fees.
(a) TERMINATION AND LINE REDUCTION FEES. If the Credit Facility is
terminated for any reason as of a date other than the Maturity Date, or
the Borrower reduces the Maximum Line, the Borrower shall pay to the
Lender a fee in an amount equal to a percentage of the Maximum Line (or
the reduction, as the case may be) as follows: (A) two percent (2%) if the
termination or reduction occurs on or before the first anniversary of the
Funding Date and (B) one percent (1%) if the termination or reduction
occurs after the first anniversary of the Funding Date.
(b) WAIVER OF TERMINATION AND LINE REDUCTION FEES. The Borrower will
not be required to pay the termination or line reduction fees otherwise
due under this Section 2.11 if such termination or line reduction is made
because of cash flow generated from the Borrower's operations or
refinancing by an affiliate of the Lender.
Section 2.12 Mandatory Prepayment. Without notice or demand, if the
sum of the outstanding principal balance of the Revolving Advances plus the L/C
Amount shall at any time exceed the Borrowing Base, the Borrower shall
immediately prepay the Revolving Advances to the extent necessary to eliminate
such excess; and (ii) if prepayment in full of the Revolving Advances is
insufficient to eliminate such excess, pay the Lender in immediately available
funds for deposit in the Special Account an amount equal to the remaining
excess. Any payment received by the Lender under this Section 2.12 or under
Section 2.10 may be applied to the Obligations, in such order and in such
amounts as the Lender, in its discretion, may from time to time determine.
Section 2.13 Payment. All payments to the Lender shall be made in
immediately available funds and shall be applied to the Obligations upon receipt
by the Lender. The Lender may hold all payments not constituting immediately
available funds for two (2) days before applying them to the Obligations.
Notwithstanding anything in Section 2.1, the Borrower hereby authorizes the
Lender, in its discretion at any time or from time to time without the
Borrower's request and even if the conditions set forth in Section 4.2 would not
be satisfied, to make a Revolving Advance in an amount equal to the portion of
the Obligations from time to time due and payable.
Section 2.14 Payment on Non-Banking Days. Whenever any payment to be
made hereunder shall be stated to be due on a day which is not a Banking Day,
such payment may be made on the next succeeding Banking Day, and such extension
of time shall in such case be included in the computation of interest on the
Advances or the fees hereunder, as the case may be.
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Section 2.15 Use of Proceeds. The Borrower shall use the proceeds of
Advances for ordinary working capital purposes.
Section 2.16 Liability Records. The Lender may maintain from time to
time, at its discretion, liability records as to the Obligations. All entries
made on any such record shall be presumed correct until the Borrower establishes
the contrary. Upon the Lender's demand, the Borrower will admit and certify in
writing the exact principal balance of the Obligations that the Borrower then
asserts to be outstanding. Any billing statement or accounting rendered by the
Lender shall be conclusive and fully binding on the Borrower unless the Borrower
gives the Lender specific written notice of exception within 30 days after
receipt.
ARTICLE III
Security Interest; Occupancy; Setoff
Section 3.1 Grant of Security Interest. The Borrower hereby pledges,
assigns and grants to the Lender a security interest (collectively referred to
as the "Security Interest") in the Collateral, as security for the payment and
performance of the Obligations.
Section 3.2 Notification of Account Debtors and Other Obligors. The
Lender may at any time (whether or not a Default Period then exists) notify any
account debtor or other person obligated to pay the amount due that such right
to payment has been assigned or transferred to the Lender for security and shall
be paid directly to the Lender. The Borrower will join in giving such notice if
the Lender so requests. At any time after the Borrower or the Lender gives such
notice to an account debtor or other obligor, the Lender may, but need not, in
the Lender's name or in the Borrower's name, (a) demand, sue for, collect or
receive any money or property at any time payable or receivable on account of,
or securing, any such right to payment, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such account
debtor or other obligor; and (b) as the Borrower's agent and attorney-in-fact,
notify the United States Postal Service to change the address for delivery of
the Borrower's mail to any address designated by the Lender, otherwise intercept
the Borrower's mail, and receive, open and dispose of the Borrower's mail,
applying all Collateral as permitted under this Agreement and holding all other
mail for the Borrower's account or forwarding such mail to the Borrower's last
known address.
Section 3.3 Assignment of Insurance. As additional security for the
payment and performance of the Obligations, the Borrower hereby assigns to the
Lender any and all monies (including, without limitation, proceeds of insurance
and refunds of unearned premiums) due or to become due under, and all other
rights of the Borrower with respect to, any and all policies of insurance now or
at any time hereafter covering the Collateral or any evidence thereof or any
business records or valuable papers pertaining thereto, and the Borrower hereby
directs the issuer of any such policy to pay all such monies directly to the
Lender. At any time, whether or not a Default Period then exists, the Lender may
(but need not), in the Lender's name or in the Borrower's
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name, execute and deliver proof of claim, receive all such monies, endorse
checks and other instruments representing payment of such monies, and adjust,
litigate, compromise or release any claim against the issuer of any such policy.
Section 3.4 Occupancy.
(a) The Borrower hereby irrevocably grants to the Lender the right
to take possession of the Premises at any time during a Default Period.
(b) The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise
dispose of goods that are Collateral and for other purposes that the
Lender may in good faith deem to be related or incidental purposes.
(c) The Lender's right to hold the Premises shall cease and
terminate upon the earlier of (i) payment in full and discharge of all
Obligations and termination of the Commitment, and (ii) final sale or
disposition of all goods constituting Collateral and delivery of all such
goods to purchasers.
(d) The Lender shall not be obligated to pay or account for any rent
or other compensation for the possession, occupancy or use of any of the
Premises; provided, however, that if the Lender does pay or account for
any rent or other compensation for the possession, occupancy or use of any
of the Premises, the Borrower shall reimburse the Lender promptly for the
full amount thereof. In addition, the Borrower will pay, or reimburse the
Lender for, all taxes, fees, duties, imposts, charges and expenses at any
time incurred by or imposed upon the Lender by reason of the execution,
delivery, existence, recordation, performance or enforcement of this
Agreement or the provisions of this Section 3.4.
Section 3.5 License. Without limiting the generality of the Patent
Security Agreement, Copyright Security Agreement, Trademark Security Agreement,
the Borrower hereby grants to the Lender a non-exclusive, worldwide and
royalty-free license to use or otherwise exploit all trademarks, franchises,
trade names, copyrights and patents of the Borrower for the purpose of selling,
leasing or otherwise disposing of any or all Collateral during any Default
Period.
Section 3.6 Financing Statement. A carbon, photographic or other
reproduction of this Agreement or of any financing statements signed by the
Borrower is sufficient as a financing statement and may be filed as a financing
statement in any state to perfect the security interests granted hereby. For
this purpose, the following information is set forth:
Name and address of Debtor:
LecTec Corporation
10701 Red Circle Drive
Minnetonka, MN 55343
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Federal Tax Identification No. 41-1301878
Name and address of Secured Party:
Wells Fargo Business Credit, Inc.
Norwest Center, N9312-040
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479
Federal Tax Identification No. 41-1237652
Section 3.7 Setoff. The Borrower agrees that the Lender may at any
time or from time to time, at its sole discretion and without demand and without
notice to anyone, setoff any liability owed to the Borrower by the Lender,
whether or not due, against any Obligation, whether or not due. In addition,
each other Person holding a participating interest in any Obligations shall have
the right to appropriate or setoff any deposit or other liability then owed by
such Person to the Borrower, whether or not due, and apply the same to the
payment of said participating interest, as fully as if such Person had lent
directly to the Borrower the amount of such participating interest.
ARTICLE IV
Conditions of Lending
Section 4.1 Conditions Precedent to the Initial Revolving Advance
and the Initial Letter of Credit. The Lender's obligation to make the initial
Revolving Advance or to cause to be issued the initial Letter of Credit
hereunder shall be subject to the condition precedent that the Lender shall have
received all of the following, each in form and substance satisfactory to the
Lender:
(a) This Agreement, properly executed by the Borrower.
(b) The Note, properly executed by the Borrower.
(c) A true and correct copy of any and all leases pursuant to which
the Borrower is leasing the Premises, together with a landlord's
disclaimer and consent with respect to each such lease.
(d) A true and correct copy of any and all agreements pursuant to
which the Borrower's property is in the possession of any Person other
than the Borrower, together with, in the case of any goods held by such
Person for resale, (i) a consignee's acknowledgment and waiver of liens,
(ii) UCC financing statements sufficient to protect the Borrower's and the
Lender's interests in such goods, and (iii) UCC searches showing that no
other secured party has filed a financing statement against such Person
and covering property similar to the Borrower's other than the Borrower,
or if there exists any such
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secured party, evidence that each such secured party has received notice
from the Borrower and the Lender sufficient to protect the Borrower's and
the Lender's interests in the Borrower's goods from any claim by such
secured party.
(e) An acknowledgment and waiver of liens from each warehouse in
which the Borrower is storing Inventory.
(f) A true and correct copy of any and all agreements pursuant to
which the Borrower's property is in the possession of any Person other
than the Borrower, together with, (i) an acknowledgment and waiver of
liens from each subcontractor who has possession of the Borrower's goods
from time to time, (ii) UCC financing statements sufficient to protect the
Borrower's and the Lender's interests in such goods, and (iii) UCC
searches showing that no other secured party has filed a financing
statement covering such Person's property other than the Borrower, or if
there exists any such secured party, evidence that each such secured party
has received notice from the Borrower and the Lender sufficient to protect
the Borrower's and the Lender's interests in the Borrower's goods from any
claim by such secured party.
(g) Intentionally omitted.
(h) The Collateral Account Agreement, properly executed by the
Borrower and Norwest Bank Minnesota.
(i) The Lockbox Agreement, properly executed by the Borrower and
Norwest Bank Minnesota.
(j) The Patent and Trademark Security Agreement, properly executed
by the Borrower.
(k) Current searches of appropriate filing offices showing that (i)
no state or federal tax liens have been filed and remain in effect against
the Borrower, (ii) no financing statements or assignments of patents,
trademarks or copyrights have been filed and remain in effect against the
Borrower except those financing statements and assignments of patents,
trademarks or copyrights relating to Permitted Liens or to liens held by
Persons who have agreed in writing that upon receipt of proceeds of the
Advances, they will deliver UCC releases and/or terminations and releases
of such assignments of patents, trademarks or copyrights satisfactory to
the Lender, and (iii) the Lender has duly filed all financing statements
necessary to perfect the Security Interest, to the extent the Security
Interest is capable of being perfected by filing.
(l) A certificate of the Borrower's Secretary or Assistant Secretary
certifying as to (i) the resolutions of the Borrower's directors and, if
required, shareholders, authorizing the execution, delivery and
performance of the Loan Documents, (ii) the Borrower's articles
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of incorporation and bylaws, and (iii) the signatures of the Borrower's
officers or agents authorized to execute and deliver the Loan Documents
and other instruments, agreements and certificates, including Advance
requests, on the Borrower's behalf.
(m) A current certificate issued by the Secretary of State of
Minnesota, certifying that the Borrower is in compliance with all
applicable organizational requirements of the State of Minnesota.
(n) Evidence that the Borrower is duly licensed or qualified to
transact business in all jurisdictions where the character of the property
owned or leased or the nature of the business transacted by it makes such
licensing or qualification necessary.
(o) A certificate of an officer of the Borrower confirming, in his
personal capacity, the representations and warranties set forth in Article
V.
(p) An opinion of counsel to the Borrower, addressed to the Lender.
(q) Certificates of the insurance required hereunder, with all
hazard insurance containing a lender's loss payable endorsement in the
Lender's favor and with all liability insurance naming the Lender as an
additional insured.
(r) Payment of the fees and commissions due through the date of the
initial Advance or Letter of Credit under Section 2.7 and expenses
incurred by the Lender through such date and required to be paid by the
Borrower under Section 9.7, including all legal expenses incurred through
the date of this Agreement.
(s) Such other documents as the Lender in its sole discretion may
require.
Section 4.2 Conditions Precedent to All Advances and Letters of
Credit. The Lender's obligation to make each Advance or to cause the Issuer to
issue any Letter of Credit shall be subject to the further conditions precedent
that on such date:
(a) the representations and warranties contained in Article V are
correct on and as of the date of such Advance or issuance of Letter of
Credit as though made on and as of such date, except to the extent that
such representations and warranties relate solely to an earlier date; and
(b) no event has occurred and is continuing, or would result from
such Advance or the issuance of such Letter of Credit, as the case may be,
which constitutes a Default or an Event of Default.
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ARTICLE V
Representations and Warranties
The Borrower represents and warrants to the Lender as follows:
Section 5.1 Corporate Existence and Power; Name; Chief Executive
Office; Inventory and Equipment Locations; Tax Identification Number. The
Borrower is a corporation, duly organized, validly existing and in good standing
under the laws of the State of Minnesota and is duly licensed or qualified to
transact business in all jurisdictions where the character of the property owned
or leased or the nature of the business transacted by it makes such licensing or
qualification necessary. The Borrower has all requisite power and authority,
corporate or otherwise, to conduct its business, to own its properties and to
execute and deliver, and to perform all of its obligations under, the Loan
Documents. During its existence, the Borrower has done business solely under the
names set forth in Schedule 5.1 hereto. The Borrower's chief executive office
and principal place of business is located at the address set forth in Schedule
5.1 hereto, and all of the Borrower's records relating to its business or the
Collateral are kept at that location. All Inventory and Equipment is located at
that location or at one of the other locations set forth in Schedule 5.1 hereto.
The Borrower's tax identification number is correctly set forth in Section 3.6
hereto.
Section 5.2 Authorization of Borrowing; No Conflict as to Law or
Agreements. The execution, delivery and performance by the Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i) require
any consent or approval of the Borrower's stockholders; (ii) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except such
authorization, consent, approval, registration, declaration, filing or notice as
has been obtained, accomplished or given prior to the date hereof; (iii) violate
any provision of any law, rule or regulation (including, without limitation,
Regulation X of the Board of Governors of the Federal Reserve System) or of any
order, writ, injunction or decree presently in effect having applicability to
the Borrower or of the Borrower's articles of incorporation or bylaws; (iv)
result in a breach of or constitute a default under any indenture or loan or
credit agreement or any other material agreement, lease or instrument to which
the Borrower is a party or by which it or its properties may be bound or
affected; or (v) result in, or require, the creation or imposition of any
mortgage, deed of trust, pledge, lien, security interest or other charge or
encumbrance of any nature (other than the Security Interest) upon or with
respect to any of the properties now owned or hereafter acquired by the
Borrower.
Section 5.3 Legal Agreements. This Agreement constitutes and, upon
due execution by the Borrower, the other Loan Documents will constitute the
legal, valid and binding obligations of the Borrower, enforceable against the
Borrower in accordance with their respective terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, fraudulent conveyance,
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reorganization, moratorium or similar laws affecting the enforcement of
creditors rights generally, and by general equitable principles.
Section 5.4 Subsidiaries. Except as set forth in Schedule 5.4, the
Borrower has no Subsidiaries.
Section 5.5 Financial Condition; No Adverse Change. The Borrower has
heretofore furnished to the Lender audited financial statements of the Borrower
for its fiscal year ended June 30, 1999 and unaudited financial statements of
the Borrower for the fiscal year-to-date period ended September 30, 1999, and
those statements fairly present the Borrower's financial condition on the dates
thereof and the results of its operations and cash flows for the periods then
ended and were prepared in accordance with generally accepted accounting
principles. Since the date of the most recent financial statements, there has
been no material adverse change in the Borrower's business, properties or
condition (financial or otherwise).
Section 5.6 Litigation. There are no actions, suits or proceedings
pending or, to the Borrower's knowledge, threatened against or affecting the
Borrower or any of its Affiliates or the properties of the Borrower or any of
its Affiliates before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which, if determined
adversely to the Borrower or any of its Affiliates, would have a material
adverse effect on the financial condition, properties or operations of the
Borrower or any of its Affiliates.
Section 5.7 Regulation U. The Borrower is not engaged in the
business of extending credit for the purpose of purchasing or carrying margin
stock (within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System), and no part of the proceeds of any Advance will be used
to purchase or carry any margin stock or to extend credit to others for the
purpose of purchasing or carrying any margin stock.
Section 5.8 Taxes. The Borrower and its Affiliates have paid or
caused to be paid to the proper authorities when due all federal, state and
local taxes required to be withheld by each of them. The Borrower and its
Affiliates have filed all federal, state and local tax returns which to the
knowledge of the officers of the Borrower or any Affiliate, as the case may be,
are required to be filed, and the Borrower and its Affiliates have paid or
caused to be paid to the respective taxing authorities all taxes as shown on
said returns or on any assessment received by any of them to the extent such
taxes have become due.
Section 5.9 Titles and Liens. The Borrower has good and absolute
title to all Collateral described in the collateral reports provided to the
Lender and all other Collateral, properties and assets reflected in the latest
financial statements referred to in Section 5.5 and all proceeds thereof, free
and clear of all mortgages, security interests, liens and encumbrances, except
for Permitted Liens. No financing statement naming the Borrower as debtor is on
file in any office except to perfect only Permitted Liens.
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Section 5.10 Plans. Except as disclosed to the Lender in writing
prior to the date hereof, neither the Borrower nor any of its Affiliates
maintains or has maintained any Plan. Neither the Borrower nor any Affiliate has
received any notice or has any knowledge to the effect that it is not in full
compliance with any of the requirements of ERISA. No Reportable Event or other
fact or circumstance which may have an adverse effect on the Plan's tax
qualified status exists in connection with any Plan. Neither the Borrower nor
any of its Affiliates has:
(a) Any accumulated funding deficiency within the meaning of ERISA;
or
(b) Any liability or knows of any fact or circumstances which could
result in any liability to the Pension Benefit Guaranty Corporation, the
Internal Revenue Service, the Department of Labor or any participant in
connection with any Plan (other than accrued benefits which or which may
become payable to participants or beneficiaries of any such Plan).
Section 5.11 Default. The Borrower is in compliance with all
provisions of all agreements, instruments, decrees and orders to which it is a
party or by which it or its property is bound or affected, the breach or default
of which could have a material adverse effect on the Borrower's financial
condition, properties or operations.
Section 5.12 Environmental Matters.
(a) Definitions. As used in this Agreement, the following terms
shall have the following meanings:
(i) "Environmental Law" means any federal, state, local or
other governmental statute, regulation, law or ordinance dealing
with the protection of human health and the environment.
(ii) "Hazardous Substances" means pollutants, contaminants,
hazardous substances, hazardous wastes, petroleum and fractions
thereof, and all other chemicals, wastes, substances and materials
listed in, regulated by or identified in any Environmental Law.
(b) To the Borrower's best knowledge, there are not present in, on
or under the Premises any Hazardous Substances in such form or quantity as
to create any liability or obligation for either the Borrower or the
Lender under common law of any jurisdiction or under any Environmental
Law, and no Hazardous Substances have ever been stored, buried, spilled,
leaked, discharged, emitted or released in, on or under the Premises in
such a way as to create any such liability.
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(c) To the Borrower's best knowledge, the Borrower has not disposed
of Hazardous Substances in such a manner as to create any liability under
any Environmental Law.
(d) There are not and there never have been any requests, claims,
notices, investigations, demands, administrative proceedings, hearings or
litigation, relating in any way to the Premises or the Borrower, alleging
liability under, violation of, or noncompliance with any Environmental Law
or any license, permit or other authorization issued pursuant thereto. To
the Borrower's best knowledge, no such matter is threatened or impending.
(e) To the Borrower's best knowledge, the Borrower's businesses are
and have in the past always been conducted in accordance with all
Environmental Laws and all licenses, permits and other authorizations
required pursuant to any Environmental Law and necessary for the lawful
and efficient operation of such businesses are in the Borrower's
possession and are in full force and effect. No permit required under any
Environmental Law is scheduled to expire within 12 months and there is no
threat that any such permit will be withdrawn, terminated, limited or
materially changed.
(f) To the Borrower's best knowledge, the Premises are not and never
have been listed on the National Priorities List, the Comprehensive
Environmental Response, Compensation and Liability Information System or
any similar federal, state or local list, schedule, log, inventory or
database.
(g) The Borrower has delivered to Lender all environmental
assessments, audits, reports, permits, licenses and other documents
describing or relating in any way to the Premises or Borrower's
businesses.
Section 5.13 Submissions to Lender. All financial and other
information provided to the Lender by or on behalf of the Borrower in connection
with the Borrower's request for the credit facilities contemplated hereby is
true and correct in all material respects and, as to projections, valuations or
proforma financial statements, present a good faith opinion as to such
projections, valuations and proforma condition and results.
Section 5.14 Financing Statements. The Borrower has provided to the
Lender signed financing statements sufficient when filed to perfect the Security
Interest and the other security interests created by the Security Documents.
When such financing statements are filed in the offices noted therein, the
Lender will have a valid and perfected security interest in all Collateral and
all other collateral described in the Security Documents which is capable of
being perfected by filing financing statements. None of the Collateral or other
collateral covered by the Security Documents is or will become a fixture on real
estate, unless a sufficient fixture filing is in effect with respect thereto.
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Section 5.15 Rights to Payment. Each right to payment and each
instrument, document, chattel paper and other agreement constituting or
evidencing Collateral or other collateral covered by the Security Documents is
(or, in the case of all future Collateral or such other collateral, will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower's records pertaining thereto as being
obligated to pay such obligation.
ARTICLE VI
Borrower's Affirmative Covenants
So long as the Obligations shall remain unpaid, or the Credit
Facility shall remain outstanding, the Borrower will comply with the following
requirements, unless the Lender shall otherwise consent in writing:
Section 6.1 Reporting Requirements. The Borrower will deliver, or
cause to be delivered, to the Lender each of the following, which shall be in
form and detail acceptable to the Lender:
(a) as soon as available, and in any event within 120 days after the
end of each fiscal year of the Borrower, the Borrower's audited financial
statements with the unqualified opinion of independent certified public
accountants selected by the Borrower and acceptable to the Lender, which
annual financial statements shall include the Borrower's balance sheet as
at the end of such fiscal year and the related statements of the
Borrower's income, retained earnings and cash flows for the fiscal year
then ended, prepared, if the Lender so requests, on a consolidating and
consolidated basis to include any Affiliates, all in reasonable detail and
prepared in accordance with GAAP, together with (i) copies of all
management letters prepared by such accountants; (ii) a report signed by
such accountants stating that in making the investigations necessary for
said opinion they obtained no knowledge, except as specifically stated, of
any Default or Event of Default hereunder and all relevant facts in
reasonable detail to evidence, and the computations as to, whether or not
the Borrower is in compliance with the requirements set forth in Sections
6.12, 6.13 and 7.10; and (iii) a certificate of the Borrower's chief
financial officer stating that such financial statements have been
prepared in accordance with GAAP and whether or not such officer has
knowledge of the occurrence of any Default or Event of Default hereunder
and, if so, stating in reasonable detail the facts with respect thereto;
(b) as soon as available and in any event within 30 days after the
end of each month, an unaudited/internal balance sheet and statements of
income and retained earnings of the Borrower as at the end of and for such
month and for the year to date period then ended, prepared, if the Lender
so requests, on a consolidating and consolidated basis to include any
Affiliates, in reasonable detail and stating in comparative form the
figures for
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the corresponding date and periods in the previous year, all prepared in
accordance with GAAP, subject to year-end audit adjustments; and
accompanied by a certificate of the Borrower's chief financial officer,
substantially in the form of Exhibit B hereto stating (i) that such
financial statements have been prepared in accordance with GAAP, subject
to year-end audit adjustments, (ii) whether or not such officer has
knowledge of the occurrence of any Default or Event of Default hereunder
not theretofore reported and remedied and, if so, stating in reasonable
detail the facts with respect thereto, and (iii) all relevant facts in
reasonable detail to evidence, and the computations as to, whether or not
the Borrower is in compliance with the requirements set forth in Sections
6.12, 6.13 and 7.10;
(c) within 25 days after the end of each month or more frequently if
the Lender so requires, agings of the Borrower's accounts receivable and
its accounts payable, an inventory certification report, and a calculation
of the Borrower's Accounts, Eligible Accounts, Inventory and Eligible
Inventory as at the end of such month or shorter time period;
(d) at least 30 days after the beginning of each fiscal year of the
Borrower, the projected balance sheets and income statements for each
month of such year, each in reasonable detail, representing the Borrower's
good faith projections and certified by the Borrower's chief financial
officer as being the most accurate projections available and identical to
the projections used by the Borrower for internal planning purposes,
together with such supporting schedules and information as the Lender may
in its discretion require;
(e) immediately after the commencement thereof, notice in writing of
all litigation and of all proceedings before any governmental or
regulatory agency affecting the Borrower of the type described in Section
5.12 or which seek a monetary recovery against the Borrower in excess of
$50,000;
(f) as promptly as practicable (but in any event not later than five
business days) after an officer of the Borrower obtains knowledge of the
occurrence of any breach, default or event of default under any Security
Document or any event which constitutes a Default or Event of Default
hereunder, notice of such occurrence, together with a detailed statement
by a responsible officer of the Borrower of the steps being taken by the
Borrower to cure the effect of such breach, default or event;
(g) as soon as possible and in any event within 30 days after the
Borrower knows or has reason to know that any Reportable Event with
respect to any Plan has occurred, the statement of the Borrower's chief
financial officer setting forth details as to such Reportable Event and
the action which the Borrower proposes to take with respect thereto,
together with a copy of the notice of such Reportable Event to the Pension
Benefit Guaranty Corporation;
(h) as soon as possible, and in any event within 10 days after the
Borrower fails to make any quarterly contribution required with respect to
any Plan under Section 412(m)
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of the Internal Revenue Code of 1986, as amended, the statement of the
Borrower's chief financial officer setting forth details as to such
failure and the action which the Borrower proposes to take with respect
thereto, together with a copy of any notice of such failure required to be
provided to the Pension Benefit Guaranty Corporation;
(i) promptly upon knowledge thereof, notice of (A) any of the
following items exceeding $50,000 individually (i) any disputes or claims
by the Borrower's customers; (ii) credit memos; (iii) any goods returned
to or recovered by the Borrower; and (B) any change in the persons
constituting the Borrower's officers and directors;
(j) promptly upon knowledge thereof, notice of any loss of or
material damage to any Collateral or other collateral covered by the
Security Documents or of any substantial adverse change in any Collateral
or such other collateral or the prospect of payment thereof;
(k) promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrower shall have
sent to its stockholders;
(l) promptly after the sending or filing thereof, copies of all
regular and periodic reports which the Borrower shall file with the
Securities and Exchange Commission or any national securities exchange;
(m) promptly upon knowledge thereof, notice of the Borrower's
violation of any law, rule or regulation, the non-compliance with which
could materially and adversely affect the Borrower's business or its
financial condition; and
(n) from time to time, with reasonable promptness, any and all
receivables schedules, collection reports, deposit records, equipment
schedules, copies of invoices to account debtors, shipment documents and
delivery receipts for goods sold, and such other material, reports,
records or information as the Lender may request.
Section 6.2 Books and Records; Inspection and Examination. The
Borrower will keep accurate books of record and account for itself pertaining to
the Collateral and pertaining to the Borrower's business and financial condition
and such other matters as the Lender may from time to time request in which true
and complete entries will be made in accordance with GAAP and, upon the Lender's
request, will permit any officer, employee, attorney or accountant for the
Lender to audit, review, make extracts from or copy any and all corporate and
financial books and records of the Borrower at all times during ordinary
business hours, to send and discuss with account debtors and other obligors
requests for verification of amounts owed to the Borrower, and to discuss the
Borrower's affairs with any of its directors, officers, employees or agents. The
Borrower will permit the Lender, or its employees, accountants, attorneys or
agents, to examine and inspect any Collateral, other collateral covered by the
Security Documents or any other property of the Borrower at any time during
ordinary business hours.
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Section 6.3 Account Verification. The Lender may at any time and
from time to time send or require the Borrower to send requests for verification
of accounts or notices of assignment to account debtors and other obligors. The
Lender may also at any time and from time to time telephone account debtors and
other obligors to verify accounts.
Section 6.4 Compliance with Laws.
(a) The Borrower will (i) comply with the requirements of applicable
laws and regulations, the non-compliance with which would materially and
adversely affect its business or its financial condition and (ii) use and
keep the Collateral, and require that others use and keep the Collateral,
only for lawful purposes, without violation of any federal, state or local
law, statute or ordinance.
(b) Without limiting the foregoing undertakings, the Borrower
specifically agrees that it will comply with all applicable Environmental
Laws and obtain and comply with all permits, licenses and similar
approvals required by any Environmental Laws, and will not generate, use,
transport, treat, store or dispose of any Hazardous Substances in such a
manner as to create any liability or obligation under the common law of
any jurisdiction or any Environmental Law.
Section 6.5 Payment of Taxes and Other Claims. The Borrower will pay
or discharge, when due, (a) all taxes, assessments and governmental charges
levied or imposed upon it or upon its income or profits, upon any properties
belonging to it (including, without limitation, the Collateral) or upon or
against the creation, perfection or continuance of the Security Interest, prior
to the date on which penalties attach thereto, (b) all federal, state and local
taxes required to be withheld by it, and (c) all lawful claims for labor,
materials and supplies which, if unpaid, might by law become a lien or charge
upon any properties of the Borrower; provided, that the Borrower shall not be
required to pay any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and for which proper reserves have been made.
Section 6.6 Maintenance of Properties.
(a) The Borrower will keep and maintain the Collateral, the other
collateral covered by the Security Documents and all of its other
properties necessary or useful in its business in good condition, repair
and working order (normal wear and tear excepted) and will from time to
time replace or repair any worn, defective or broken parts; provided,
however, that nothing in this Section 6.6 shall prevent the Borrower from
discontinuing the operation and maintenance of any of its properties if
such discontinuance is, in the Lender's judgment, desirable in the conduct
of the Borrower's business and not disadvantageous in any material respect
to the Lender.
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(b) The Borrower will defend the Collateral against all claims or
demands of all persons (other than the Lender) claiming the Collateral or
any interest therein.
(c) The Borrower will keep all Collateral and other collateral
covered by the Security Documents free and clear of all security
interests, liens and encumbrances except Permitted Liens.
Section 6.7 Insurance. The Borrower will obtain and at all times
maintain insurance with insurers believed by the Borrower to be responsible and
reputable, in such amounts and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in similar business and owning
similar properties in the same general areas in which the Borrower operates.
Without limiting the generality of the foregoing, the Borrower will at all times
keep all tangible Collateral insured against risks of fire (including so-called
extended coverage), theft, collision (for Collateral consisting of motor
vehicles) and such other risks and in such amounts as the Lender may reasonably
request, with any loss payable to the Lender to the extent of its interest, and
all policies of such insurance shall contain a lender's loss payable endorsement
for the Lender's benefit acceptable to the Lender. All policies of liability
insurance required hereunder shall name the Lender as an additional insured.
Section 6.8 Preservation of Existence. The Borrower will preserve
and maintain its existence and all of its rights, privileges and franchises
necessary or desirable in the normal conduct of its business and shall conduct
its business in an orderly, efficient and regular manner.
Section 6.9 Delivery of Instruments, etc. Upon request by the
Lender, the Borrower will promptly deliver to the Lender in pledge all
instruments, documents and chattel papers constituting Collateral, duly endorsed
or assigned by the Borrower.
Section 6.10 Collateral Account.
(a) If, notwithstanding the instructions to debtors to make payments
to the Lockbox, the Borrower receives any payments on Receivables, the
Borrower shall deposit such payments into the Collateral Account. Until so
deposited, the Borrower shall hold all such payments in trust for and as
the property of the Lender and shall not commingle such payments with any
of its other funds or property.
(b) Amounts deposited in the Collateral Account shall not bear
interest and shall not be subject to withdrawal by the Borrower, except
after full payment and discharge of all Obligations.
(c) All deposits in the Collateral Account shall constitute proceeds
of Collateral and shall not constitute payment of the Obligations. The
Lender from time to time at its discretion may, after allowing two (2)
Banking Days, apply deposited funds in the Collateral
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Account to the payment of the Obligations, in any order or manner of
application satisfactory to the Lender, by transferring such funds to the
Lender's general account.
(d) All items deposited in the Collateral Account shall be subject
to final payment. If any such item is returned uncollected, the Borrower
will immediately pay the Lender, or, for items deposited in the Collateral
Account, the bank maintaining such account, the amount of that item, or
such bank at its discretion may charge any uncollected item to the
Borrower's commercial account or other account. The Borrower shall be
liable as an endorser on all items deposited in the Collateral Account,
whether or not in fact endorsed by the Borrower.
Section 6.11 Performance by the Lender. If the Borrower at any time
fails to perform or observe any of the foregoing covenants contained in this
Article VI or elsewhere herein, and if such failure shall continue for a period
of ten calendar days after the Lender gives the Borrower written notice thereof
(or in the case of the agreements contained in Sections 6.5, 6.7 and 6.10,
immediately upon the occurrence of such failure, without notice or lapse of
time), the Lender may, but need not, perform or observe such covenant on behalf
and in the name, place and stead of the Borrower (or, at the Lender's option, in
the Lender's name) and may, but need not, take any and all other actions which
the Lender may reasonably deem necessary to cure or correct such failure
(including, without limitation, the payment of taxes, the satisfaction of
security interests, liens or encumbrances, the performance of obligations owed
to account debtors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments); and the Borrower shall
thereupon pay to the Lender on demand the amount of all monies expended and all
costs and expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Lender in connection with or as a result of the performance or
observance of such agreements or the taking of such action by the Lender,
together with interest thereon from the date expended or incurred at the
Floating Rate. To facilitate the Lender's performance or observance of such
covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender,
or the Lender's delegate, acting alone, as the Borrower's attorney in fact
(which appointment is coupled with an interest) with the right (but not the
duty) from time to time to create, prepare, complete, execute, deliver, endorse
or file in the name and on behalf of the Borrower any and all instruments,
documents, assignments, security agreements, financing statements, applications
for insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by the Borrower under this Section 6.11.
Section 6.12 Minimum Book Net Worth. The Borrower will maintain,
during each period described below, its Book Net Worth, determined as at the end
of each month, at an amount not less than the amount set forth opposite such
period:
Period Ended Minimum Book Net Worth
------------ ----------------------
November 30, 1999 $6,378,000
December 31, 1999 $6,128,000
January 31, 2000 $5,778,000
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Period Ended Minimum Book Net Worth
------------ ----------------------
February 29, 2000 $5,528,000
March 31, 2000 $5,428,000
April 30, 2000 $5,178,000
May 31, 2000 $4,978,000
June 30, 2000 $4,808,000
Section 6.13 Minimum Earnings/Maximum Loss Before Taxes. The
Borrower will achieve during each period described below, year-to-date Earnings
or Loss Before Taxes, of not less than/greater than the amount set forth
opposite such period (bracketed amounts indicate maximum Loss Before Taxes):
Period Ended Minimum
------------ Earnings/Maximus Loss
Before Taxes
------------
November 30, 1999 ($1,130,000)
December 31, 1999 ($1,380,000)
January 31, 2000 ($1,730,000)
February 29, 2000 ($1,980,000)
March 31, 2000 ($2,080,000)
April 30, 2000 ($2,330,000)
May 31, 2000 ($2,530,000)
June 30, 2000 ($2,700,000)
Section 6.14 New Covenants. On or before July 31, 2000, The Borrower
and the Lender shall agree on new covenant levels for Sections 6.13, 6.14 and
7.10 for periods after such date. The new covenant levels will be based on the
Borrower's projections for such periods and shall be no less stringent than the
present levels.
ARTICLE VII
Negative Covenants
So long as the Obligations shall remain unpaid, or the Credit
Facility shall remain outstanding, the Borrower agrees that, without the
Lender's prior written consent:
Section 7.1 Liens. The Borrower will not create, incur or suffer to
exist any mortgage, deed of trust, pledge, lien, security interest, assignment
or transfer upon or of any of its assets, now owned or hereafter acquired, to
secure any indebtedness; excluding, however, from the operation of the
foregoing, the following (collectively, "Permitted Liens"):
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(a) in the case of any of the Borrower's property which is not
Collateral or other collateral described in the Security Documents,
covenants, restrictions, rights, easements and minor irregularities in
title which do not materially interfere with the Borrower's business or
operations as presently conducted, provided, however, that the Borrower
expressly agrees that it will not mortgage its real estate locally known
as 10701 Red Circle Drive, Minnetonka, Minnesota;
(b) mortgages, deeds of trust, pledges, liens, security interests
and assignments in existence on the date hereof and listed in Schedule 7.1
hereto, securing indebtedness for borrowed money permitted under Section
7.2;
(c) the Security Interest and liens and security interests created
by the Security Documents;
(d) purchase money security interests relating to the acquisition of
machinery and equipment of the Borrower not exceeding the lower of cost or
fair market value thereof and so long as no Default Period is then in
existence and none would exist immediately after such acquisition;
(e) liens of carriers, warehousemen, mechanics and materialmen, and
other like liens arising in the ordinary course of business for sums not
due;
(f) deposits or pledges, or liens incurred, to secure payment of
worker's compensation, unemployment insurance, old age pension or other
social security obligations, in the ordinary course of business of the
Borrower;
(g) liens incurred or deposits or pledges made or given in
connection with or to secure payment of indemnity, performance or other
similar bonds;
(h) liens for taxes, fees, assessments and governmental charges not
delinquent or to the extent that payment therefor shall not at the time be
required if the same are being contested in good faith by appropriate
proceedings, and adequate reserves with respect thereto have been set
aside on the Borrower's books in accordance with GAAP;
(i) banker's liens, rights of setoff and similar liens incurred on
deposits made in the ordinary course of business; and
(j) judgment, attachment or similar liens, unless the judgment it
secures has not been discharged or execution thereof effectively stayed
and bonded against pending appeal with 30 days after the entry thereof.
Section 7.2 Indebtedness. The Borrower will not incur, create,
assume or permit to exist any indebtedness or liability on account of deposits
or advances or any indebtedness for
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borrowed money or letters of credit issued on the Borrower's behalf, or any
other indebtedness or liability evidenced by notes, bonds, debentures or similar
obligations, except:
(a) indebtedness arising hereunder;
(b) indebtedness of the Borrower in existence on the date hereof and
listed in Schedule 7.2 hereto; and
(c) indebtedness relating to liens permitted in accordance with
Section 7.1.
Section 7.3 Guaranties. The Borrower will not assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except:
(a) the endorsement of negotiable instruments by the Borrower for
deposit or collection or similar transactions in the ordinary course of
business; and
(b) guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons, in
existence on the date hereof and listed in Schedule 7.2 hereto.
Section 7.4 Investments and Subsidiaries.
(a) The Borrower will not purchase or hold beneficially any stock or
other securities or evidences of indebtedness of, make or permit to exist
any loans or advances to, or make any investment or acquire any interest
whatsoever in, any other Person, including specifically but without
limitation any partnership or joint venture, except:
(i) investments in direct obligations of the United States of
America or any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States of
America having a maturity of one year or less, commercial paper
issued by U.S. corporations rated "A-1" or "A-2" by Standard & Poors
Corporation or "P-1" or "P-2" by Moody's Investors Service or
certificates of deposit or bankers' acceptances having a maturity of
one year or less issued by members of the Federal Reserve System
having deposits in excess of $100,000,000 (which certificates of
deposit or bankers' acceptances are fully insured by the Federal
Deposit Insurance Corporation);
(ii) travel advances or loans to the Borrower's officers and
employees not exceeding at any one time an aggregate of $25,000; and
(iii) advances in the form of progress payments, prepaid rent
not exceeding three months or security deposits.
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(b) The Borrower will not create or permit to exist any new
Subsidiary.
Section 7.5 Dividends. Except as set forth below, the Borrower will
not declare or pay any dividends (other than dividends payable solely in stock
of the Borrower) on any class of its stock or make any payment on account of the
purchase, redemption or other retirement of any shares of such stock or make any
distribution in respect thereof, either directly or indirectly.
Section 7.6 Sale or Transfer of Assets; Suspension of Business
Operations. The Borrower will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of
its assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any other Person other than the
sale of Inventory in the ordinary course of business and will not liquidate,
dissolve or suspend business operations. The Borrower will not in any manner
transfer any property without prior or present receipt of full and adequate
consideration.
Section 7.7 Consolidation and Merger; Asset Acquisitions. The
Borrower will not consolidate with or merge into any Person, or permit any other
Person to merge into it, or acquire (in a transaction analogous in purpose or
effect to a consolidation or merger) all or substantially all the assets of any
other Person.
Section 7.8 Sale and Leaseback. The Borrower will not enter into any
arrangement, directly or indirectly, with any other Person whereby the Borrower
shall sell or transfer any real or personal property, whether now owned or
hereafter acquired, and then or thereafter rent or lease as lessee such property
or any part thereof or any other property which the Borrower intends to use for
substantially the same purpose or purposes as the property being sold or
transferred.
Section 7.9 Restrictions on Nature of Business. The Borrower will
not engage in any line of business materially different from that presently
engaged in by the Borrower and will not purchase, lease or otherwise acquire
assets not related to its business.
Section 7.10 Capital Expenditures. The Borrower will not incur or
contract to incur Capital Expenditures of more than $600,000 in the aggregate
during any fiscal year, or more than $250,000 in any one transaction.
Section 7.11 Accounting. The Borrower will not adopt any material
change in accounting principles other than as required by GAAP. The Borrower
will not adopt, permit or consent to any change in its fiscal year.
Section 7.12 Discounts, etc. The Borrower will not, after notice
from the Lender, grant any discount, credit or allowance to any customer of the
Borrower or accept any return of goods sold, or at any time (whether before or
after notice from the Lender) modify, amend, subordinate, cancel or terminate
the obligation of any account debtor or other obligor of the Borrower.
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Section 7.13 Defined Benefit Pension Plans. The Borrower will not
adopt, create, assume or become a party to any defined benefit pension plan,
unless disclosed to the Lender pursuant to Section 5.10.
Section 7.14 Other Defaults. The Borrower will not permit any
breach, default or event of default to occur under any note, loan agreement,
indenture, lease, mortgage, contract for deed, security agreement or other
contractual obligation binding upon the Borrower.
Section 7.15 Place of Business; Name. The Borrower will not transfer
its chief executive office or principal place of business, or move, relocate,
close or sell any business location. The Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interest. The Borrower will not change
its name.
Section 7.16 Organizational Documents; S Corporation Status. The
Borrower will not amend its certificate of incorporation, articles of
incorporation or bylaws. The Borrower will not become an S Corporation.
Section 7.17 Salaries. The Borrower will not pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation; or increase the salary, bonus, commissions, consultant fees or
other compensation of any director, officer or consultant, or any member of
their families, by more than 15% in any one year, either individually or for all
such persons in the aggregate, or pay any such increase from any source other
than profits earned in the year of payment.
ARTICLE VIII
Events of Default, Rights and Remedies
Section 8.1 Events of Default. "Event of Default", wherever used
herein, means any one of the following events:
(a) Default in the payment of the Obligations when they become due
and payable;
(b) Failure to pay when due any amount specified in Section 2.3
relating to the Borrower's Obligation of Reimbursement, or failure to pay
immediately when due or upon termination of the Credit Facility any
amounts required to be paid for deposit in the Special Account under
Section 2.4;
(c) Default in the payment of any fees, commissions, costs or
expenses required to be paid by the Borrower under this Agreement;
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(d) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in this Agreement;
(e) The Borrower or any Guarantor shall be or become insolvent, or
admit in writing its or his inability to pay its or his debts as they
mature, or make an assignment for the benefit of creditors; or the
Borrower or any Guarantor shall apply for or consent to the appointment of
any receiver, trustee, or similar officer for it or him or for all or any
substantial part of its or his property; or such receiver, trustee or
similar officer shall be appointed without the application or consent of
the Borrower or such Guarantor, as the case may be; or the Borrower or any
Guarantor shall institute (by petition, application, answer, consent or
otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding
relating to it or him under the laws of any jurisdiction; or any such
proceeding shall be instituted (by petition, application or otherwise)
against the Borrower or any such Guarantor; or any judgment, writ, warrant
of attachment or execution or similar process shall be issued or levied
against a substantial part of the property of the Borrower or any
Guarantor;
(f) A petition shall be filed by or against the Borrower or any
Guarantor under the United States Bankruptcy Code naming the Borrower or
such Guarantor as debtor;
(g) Any material representation or warranty made by the Borrower in
this Agreement, by any Guarantor in any guaranty delivered to the Lender,
or by the Borrower (or any of its officers) or any Guarantor in any
agreement, certificate, instrument or financial statement or other
statement contemplated by or made or delivered pursuant to or in
connection with this Agreement or any such guaranty shall prove to have
been incorrect in any material respect when deemed to be effective;
(h) The rendering against the Borrower of a final judgment, decree
or order for the payment of money in excess of $75,000 and the continuance
of such judgment, decree or order unsatisfied and in effect for any period
of 30 consecutive days without a stay of execution;
(i) A default under any bond, debenture, note or other evidence of
indebtedness of the Borrower owed to any Person other than the Lender, or
under any indenture or other instrument under which any such evidence of
indebtedness has been issued or by which it is governed, or under any
lease of any of the Premises, and the expiration of the applicable period
of grace, if any, specified in such evidence of indebtedness, indenture,
other instrument or lease;
(j) Any Reportable Event, which the Lender determines in good faith
might constitute grounds for the termination of any Plan or for the
appointment by the appropriate United States District Court of a trustee
to administer any Plan, shall have occurred and be continuing 30 days
after written notice to such effect shall have been given to the Borrower
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by the Lender; or a trustee shall have been appointed by an appropriate
United States District Court to administer any Plan; or the Pension
Benefit Guaranty Corporation shall have instituted proceedings to
terminate any Plan or to appoint a trustee to administer any Plan; or the
Borrower shall have filed for a distress termination of any Plan under
Title IV of ERISA; or the Borrower shall have failed to make any quarterly
contribution required with respect to any Plan under Section 412(m) of the
Internal Revenue Code of 1986, as amended, which the Lender determines in
good faith may by itself, or in combination with any such failures that
the Lender may determine are likely to occur in the future, result in the
imposition of a lien on the Borrower's assets in favor of the Plan;
(k) An event of default shall occur under any Security Document or
under any other security agreement, mortgage, deed of trust, assignment or
other instrument or agreement securing any obligations of the Borrower
hereunder or under any note;
(l) The Borrower shall liquidate, dissolve, terminate or suspend its
business operations or otherwise fail to operate its business in the
ordinary course, or sell all or substantially all of its assets, without
the Lender's prior written consent;
(m) The Borrower shall fail to pay, withhold, collect or remit any
tax or tax deficiency when assessed or due (other than any tax deficiency
which is being contested in good faith and by proper proceedings and for
which it shall have set aside on its books adequate reserves therefor) or
notice of any state or federal tax liens shall be filed or issued;
(n) Default in the payment of any amount owed by the Borrower to the
Lender other than any indebtedness arising hereunder;
(o) Any Guarantor shall repudiate, purport to revoke or fail to
perform any such Guarantor's obligations under such guarantor's guaranty
in favor of the Lender, any individual Guarantor shall die or any other
Guarantor shall cease to exist;
(p) The Borrower shall take or participate in any action which would
be prohibited under the provisions of any Subordination Agreement or make
any payment on the Subordinated Indebtedness (as defined in the
Subordination Agreement) that any Person was not entitled to receive under
the provisions of the Subordination Agreement;
(q) Any breach, default or event of default by or attributable to
any Affiliate under any agreement between such Affiliate and the Lender.
Section 8.2 Rights and Remedies. During any Default Period, the
Lender may exercise any or all of the following rights and remedies:
(a) the Lender may, by notice to the Borrower, declare the
Commitment to be terminated, whereupon the same shall forthwith terminate;
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(b) the Lender may, by notice to the Borrower, declare the
Obligations to be forthwith due and payable, whereupon all Obligations
shall become and be forthwith due and payable, without presentment, notice
of dishonor, protest or further notice of any kind, all of which the
Borrower hereby expressly waives;
(c) the Lender may, without notice to the Borrower and without
further action, apply any and all money owing by the Lender to the
Borrower to the payment of the Obligations;
(d) the Lender may make demand upon the Borrower and, forthwith upon
such demand, the Borrower will pay to the Lender in immediately available
funds for deposit in the Special Account pursuant to Section 2.4 an amount
equal to the aggregate maximum amount available to be drawn under all
Letters of Credit then outstanding, assuming compliance with all
conditions for drawing thereunder;
(e) the Lender may exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC,
including, without limitation, the right to take possession of Collateral,
or any evidence thereof, proceeding without judicial process or by
judicial process (without a prior hearing or notice thereof, which the
Borrower hereby expressly waives) and the right to sell, lease or
otherwise dispose of any or all of the Collateral, and, in connection
therewith, the Borrower will on demand assemble the Collateral and make it
available to the Lender at a place to be designated by the Lender which is
reasonably convenient to both parties;
(f) the Lender may exercise and enforce its rights and remedies
under the Loan Documents; and
(g) the Lender may exercise any other rights and remedies available
to it by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in subsections (e) or (f) of Section 8.1, the Obligations shall be
immediately due and payable automatically without presentment, demand, protest
or notice of any kind.
Section 8.3 Certain Notices. If notice to the Borrower of any
intended disposition of Collateral or any other intended action is required by
law in a particular instance, such notice shall be deemed commercially
reasonable if given (in the manner specified in Section 9.3) at least ten
calendar days before the date of intended disposition or other action.
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ARTICLE IX
Miscellaneous
Section 9.1 No Waiver; Cumulative Remedies. No failure or delay by
the Lender in exercising any right, power or remedy under the Loan Documents
shall operate as a waiver thereof; nor shall any single or partial exercise of
any such right, power or remedy preclude any other or further exercise thereof
or the exercise of any other right, power or remedy under the Loan Documents.
The remedies provided in the Loan Documents are cumulative and not exclusive of
any remedies provided by law.
Section 9.2 Amendments, Etc. No amendment, modification, termination
or waiver of any provision of any Loan Document or consent to any departure by
the Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.
Section 9.3 Addresses for Notices, Etc. Except as otherwise
expressly provided herein, all notices, requests, demands and other
communications provided for under the Loan Documents shall be in writing and
shall be (a) personally delivered, (b) sent by first class United States mail,
(c) sent by overnight courier of national reputation, or (d) transmitted by
telecopy, in each case addressed or telecopied to the party to whom notice is
being given at its address or telecopier number as set forth below:
If to the Borrower:
LecTec Corporation
10701 Red Circle Drive
Minnetonka, MN 55343
Telecopier: (612) 933-4808
Attention: Rodney A. Young
If to the Lender:
Wells Fargo Business Credit, Inc.
Norwest Center, N9312-040
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479
Telecopier: 612/341-2472
Attention: Diane G. Conley
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or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of Article II shall not be
effective until received by the Lender.
Section 9.4 Further Documents. The Borrower will from time to time
execute and deliver or endorse any and all instruments, documents, conveyances,
assignments, security agreements, financing statements and other agreements and
writings that the Lender may reasonably request in order to secure, protect,
perfect or enforce the Security Interest or the Lender's rights under the Loan
Documents (but any failure to request or assure that the Borrower executes,
delivers or endorses any such item shall not affect or impair the validity,
sufficiency or enforceability of the Loan Documents and the Security Interest,
regardless of whether any such item was or was not executed, delivered or
endorsed in a similar context or on a prior occasion).
Section 9.5 Collateral. This Agreement does not contemplate a sale
of accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender's duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third person, exercises reasonable care in
the selection of the bailee or other third person, and the Lender need not
otherwise preserve, protect, insure or care for any Collateral. The Lender shall
not be obligated to preserve any rights the Borrower may have against prior
parties, to realize on the Collateral at all or in any particular manner or
order or to apply any cash proceeds of the Collateral in any particular order of
application.
Section 9.6 Costs and Expenses. The Borrower agrees to pay on demand
all costs and expenses, including (without limitation) reasonable attorneys'
fees, incurred by the Lender in connection with the Obligations, this Agreement,
the Loan Documents, any Letters of Credit, and any other document or agreement
related hereto or thereto, and the transactions contemplated hereby, including
without limitation all such costs, expenses and fees incurred in connection with
the negotiation, preparation, execution, amendment, administration, performance,
collection and enforcement of the Obligations and all such documents and
agreements and the creation, perfection, protection, satisfaction, foreclosure
or enforcement of the Security Interest.
Section 9.7 Indemnity. In addition to the payment of expenses
pursuant to Section 9.7, the Borrower agrees to indemnify, defend and hold
harmless the Lender, and any of its participants, parent corporations,
subsidiary corporations, affiliated corporations, successor corporations, and
all present and future officers, directors, employees, attorneys and agents of
the foregoing (the "Indemnitees") from and against any of the following
(collectively, "Indemnified Liabilities"):
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(i) any and all transfer taxes, documentary taxes, assessments
or charges made by any governmental authority by reason of the
execution and delivery of the Loan Documents or the making of the
Advances;
(ii) any claims, loss or damage to which any Indemnitee may be
subjected if any representation or warranty contained in Section
5.12 proves to be incorrect in any respect or as a result of any
violation of the covenant contained in Section 6.4(b); and
(iii) any and all other liabilities, losses, damages,
penalties, judgments, suits, claims, costs and expenses of any kind
or nature whatsoever (including, without limitation, the reasonable
fees and disbursements of counsel) in connection with the foregoing
and any other investigative, administrative or judicial proceedings,
whether or not such Indemnitee shall be designated a party thereto,
which may be imposed on, incurred by or asserted against any such
Indemnitee, in any manner related to or arising out of or in
connection with the making of the Advances and the Loan Documents or
the use or intended use of the proceeds of the Advances.
If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon such Indemnitee's request,
the Borrower, or counsel designated by the Borrower and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrower's sole costs and
expense. Each Indemnitee will use its best efforts to cooperate in the defense
of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrower shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The Borrower's obligation
under this Section 9.7 shall survive the termination of this Agreement and the
discharge of the Borrower's other obligations hereunder.
An Indemnitee seeking indemnification under this Section 9.7 will notify
the Borrower of any event requiring indemnification within a reasonable amount
of time following such Indemnitee's receipt of notice of commencement of any
action or proceeding, or such Indemnitee's obtaining knowledge of the occurrence
of any other event, giving rise to a claim for indemnification hereunder. The
Borrower will be entitled (but not obligated ) to assume the defense or
settlement of any such action or proceeding or to participate in any
negotiations to settle or otherwise resolve any claim using counsel of its
choice; provided that such counsel is reasonably satisfactory to such
Indemnitee. If the Borrower elects to assume the defense or settlement of any
such action or proceeding, such Indemnitee (and its counsel) may continue to
participate at its own expense in such action or proceeding.
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Section 9.8 Participants. The Lender and its participants, if any,
are not partners or joint venturers, and the Lender shall not have any liability
or responsibility for any obligation, act or omission of any of its
participants. All rights and powers specifically conferred upon the Lender may
be transferred or delegated to any of the Lender's participants, successors or
assigns.
Section 9.9 Execution in Counterparts. This Agreement and other Loan
Documents may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same instrument.
Section 9.10 Binding Effect; Assignment; Complete Agreement;
Exchanging Information. The Loan Documents shall be binding upon and inure to
the benefit of the Borrower and the Lender and their respective successors and
assigns, except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the Lender's prior written consent.
This Agreement, together with the Loan Documents, comprises the complete and
integrated agreement of the parties on the subject matter hereof and supersedes
all prior agreements, written or oral, on the subject matter hereof. Without
limiting the Lender's right to share information regarding the Borrower and its
Affiliates with the Lender's participants, accountants, lawyers and other
advisors, the Lender, Wells Fargo Corporation, and all direct and indirect
subsidiaries of Wells Fargo Corporation, may exchange any and all information
they may have in their possession regarding the Borrower and its Affiliates, and
the Borrower waives any right of confidentiality it may have with respect to
such exchange of such information.
Section 9.11 Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
Section 9.12 Headings. Article and Section headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
Section 9.13 Governing Law; Jurisdiction, Venue; Waiver of Jury
Trial. The Loan Documents shall be governed by and construed in accordance with
the substantive laws (other than conflict laws) of the State of Minnesota. This
Agreement shall be governed by and construed in accordance with the substantive
laws (other than conflict laws) of the State of Minnesota. The parties hereto
hereby (i) 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 Agreement; (ii) waives any argument that venue in any such forum is not
convenient, (iii) agrees that any litigation initiated by the Lender or the
Borrower in connection with this Agreement or the other Loan Documents shall be
venued in either the District Court of Hennepin County, Minnesota, or the United
States District Court, District of Minnesota, Fourth Division; and (iv) agrees
that a final judgment in any such suit, action or proceeding shall be conclusive
and may be enforced in other jurisdictions by suit on the
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judgment or in any other manner provided by law. THE PARTIES WAIVE ANY RIGHT TO
TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS
AGREEMENT.
Section 9.14 Confidentiality. The Lender agrees to exercise due care
to maintain the confidentiality of all information relating to the Borrower
which has been provided to the Lender, and neither the Lender nor any of its
affiliates shall use any such information for any purpose in any manner other
than pursuant to the terms contemplated by the Loan Documents, except to the
extent such information (a) was or becomes generally available to the public,
other than as result of a disclosure by the Lender, or (b) was or becomes
available on a nonconfidential basis from a source other than the Borrower,
provided that such source is not bound by a confidentiality agreement with the
Borrower that is known to the Lender; provided further, however, that the Lender
may disclose such information (i) at the request of or pursuant to any
requirement of any governmental authority to which the Lender is subject to or
in connection with the examination of the Lender by any such authority, (ii)
pursuant to a subpoena or other court process; (iii) when required to do so in
accordance with the provisions of any applicable law, (iv) to the Lender's
independent auditors and other professional advisors, and (v) to any person or
entity and in any proceeding necessary in the Lender's reasonable judgment to
protect the Lender's interest in connection with any claim or dispute involving
the Lender. The Borrower authorizes the Lender to disclose to any prospective
transferee such financial and other information in the Lender's possession,
provided that, prior to such disclosure, such prospective transferee agrees in
writing to be bound by the provisions of this Section 9.14.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized as of the
date first above written.
WELLS FARGO BUSINESS CREDIT, INC. LECTEC CORPORATION
By /s/ Diane G. Conley By /s/ Deborah L. Moore
--------------------------------- ---------------------------------
Diane G. Conley Deborah L. Moore
An Officer Its Chief Financial Officer
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Table of Exhibits and Schedules
Exhibit A Form of Revolving Note
Exhibit B Compliance Certificate
Exhibit C Premises
-------------------
Schedule 5.1 Trade Names, Chief Executive Office, Principal
Place of Business, and Locations of Collateral
Schedule 7.1 Permitted Liens
Schedule 7.2 Permitted Indebtedness and Guaranties
45
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Exhibit A to Credit and Security Agreement
REVOLVING NOTE
$2,000,000.00 Minneapolis, Minnesota
November 22, 1999
For value received, the undersigned, LECTEC CORPORATION, a Minnesota
corporation (the "Borrower"), hereby promises to pay on the Termination Date
under the Credit Agreement (defined below), to the order of WELLS FARGO BUSINESS
CREDIT, INC., a Minnesota corporation (the "Lender"), at its main office in
Minneapolis, Minnesota, or at any other place designated at any time by the
holder hereof, in lawful money of the United States of America and in
immediately available funds, the principal sum of Two Million and 00/100 Dollars
($2,000,000.00) or, if less, the aggregate unpaid principal amount of all
Revolving Advances made by the Lender to the Borrower under the Credit Agreement
(defined below) together with interest on the principal amount hereunder
remaining unpaid from time to time, computed on the basis of the actual number
of days elapsed and a 360-day year, from the date hereof until this Note is
fully paid at the rate from time to time in effect under the Credit and Security
Agreement of even date herewith (as the same may hereafter be amended,
supplemented or restated from time to time, the "Credit Agreement") by and
between the Lender and the Borrower. The principal hereof and interest accruing
thereon shall be due and payable as provided in the Credit Agreement. This Note
may be prepaid only in accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit
Agreement, which provides, among other things, for acceleration hereof. This
Note is the Revolving Note referred to in the Credit Agreement. This Note is
secured, among other things, pursuant to the Credit Agreement and the Security
Documents as therein defined, and may now or hereafter be secured by one or more
other security agreements, mortgages, deeds of trust, assignments or other
instruments or agreements.
The Borrower hereby agrees to pay all costs of collection, including
attorneys' fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and
protest are expressly waived.
LECTEC CORPORATION
By
--------------------------------------
Deborah L. Moore
Its Chief Financial Officer
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Exhibit B to Credit and Security Agreement
COMPLIANCE CERTIFICATE
To: Diane G. Conley
Wells Fargo Business Credit, Inc.
Date: __________________, _______
Subject: LecTec Corporation
Financial Statements
In accordance with our Credit and Security Agreement dated as of
November 22, 1999 (the "Credit Agreement"), attached are the financial
statements of LecTec Corporation (the "Borrower") as of and for ______________,
_________ (the "Reporting Date") and the year-to-date period then ended (the
"Current Financials"). All terms used in this certificate have the meanings
given in the Credit Agreement.
I certify that the Current Financials have been prepared in
accordance with GAAP, subject to year-end audit adjustments, and fairly present
the Borrower's financial condition and the results of its operations as of the
date thereof.
Events of Default. (Check one):
[ ] The undersigned does not have knowledge of the occurrence of a
Default or Event of Default under the Credit Agreement.
[ ] The undersigned has knowledge of the occurrence of a Default or
Event of Default under the Credit Agreement and attached hereto is a
statement of the facts with respect to thereto.
I hereby certify to the Lender as follows:
Financial Covenants. I further hereby certify as follows:
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1. Minimum Book Net Worth. Pursuant to Section 6.12 of the Credit
Agreement, as of the Reporting Date, the Borrower's Book Net Worth was
$____________ which [ ] satisfies [ ] does not satisfy the requirement
that such amount be not less than $_____________ on the Reporting Date[ as
set forth in table below:
Period Minimum Book Net Worth
------ ----------------------
November 30, 1999 $6,378,000
December 31, 1999 $6,128,000
January 31, 2000 $5,778,000
February 29, 2000 $5,528,000
March 31, 2000 $5,428,000
April 30, 2000 $5,178,000
May 31, 2000 $4,978,000
June 30, 2000 $4,808,000
2. Minimum Earnings/Maximum Loss Before Taxes. Pursuant to Section
6.13 of the Credit Agreement, the Borrower's Earnings/Loss Before Taxes
for the period ending on the Reporting Date, was $____________, which [ ]
satisfies [ ] does not satisfy the requirement that such amount be not
less than/greater than $_____________ during such period as set forth in
table below (bracketed amounts indicate maximum Loss Before Taxes):
Period Ending Minimum Earnings Before
------------- Taxes
-----
November 30, 1999 ($1,130,000)
December 31, 1999 ($1,380,000)
January 31, 2000 ($1,730,000)
February 29, 2000 ($1,980,000)
March 31, 2000 ($2,080,000)
April 30, 2000 ($2,330,000)
May 31, 2000 ($2,530,000)
June 30, 2000 ($2,700,000)
3. Capital Expenditures. Pursuant to Section 7.10 of the Credit
Agreement, for the year-to-date period ending on the Reporting Date, the
Borrower has expended or contracted to expend during the fiscal year ended
______________, ______, for Capital Expenditures, $__________________ in
the aggregate and at most $______________ in any one transaction, which
[ ] satisfies [ ] does not satisfy the requirement that such expenditures
not exceed $600,000 in the aggregate and $250,000 for any one transaction
during such year.
2
<PAGE>
4. Salaries. As of the Reporting Date, the Borrower [ ] is [ ] is
not in compliance with Section 7.17 of the Credit Agreement concerning
salaries.
Attached hereto are all relevant facts in reasonable detail to
evidence, and the computations of the financial covenants referred to above.
These computations were made in accordance with GAAP.
LECTEC CORPORATION
By
--------------------------------------
Deborah L. Moore
Its Chief Financial Officer
3
<PAGE>
Exhibit C to Credit and Security Agreement
PREMISES
The Premises referred to in the Credit and Security Agreement are
legally described as follows:
Lot 2, Block 11, Opus 2, Fourth Addition, Hennepin County, Minnesota
AND
Lot 1, Block 1, Edina Interchange Center, Fifth Addition, Hennepin County,
Minnesota
1
<PAGE>
Schedule 5.1 to Credit and Security Agreement
Trade Names, Chief Executive Office, Principal Place of Business,
and Locations of Collateral
TRADE NAMES
NONE
CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS
10701 Red Circle Drive
Minnetonka, MN 55343
OTHER INVENTORY AND EQUIPMENT LOCATIONS
7401 Cahill Road, Edina MN
38 Hope Street, Niantic, CT
6090 White Hart Lane, Mississauga, Ontario, Canada
725-B-22nd Avenue, Honolulu, HI
Hwy. 56 and I-26, Clinton, SC
1060 Clyde Drive, Hammond, WI
220 East Marie Ave., West St. Paul, Minnesota
490 Vandenberg Street, Baldwin, WI
1284 Corporate Center Drive #150, Eagan, MN
1903 N. Oxford Ave., Eau Claire, WI
1
<PAGE>
Schedule 7.1 to Credit and Security Agreement
PERMITTED LIENS
Creditor Collateral Jurisdiction Filing Date Filing No.
-------- ---------- ------------ ----------- ----------
Loffler Specific Equipment MN Sec. of State 3/30/98 2023866
Bankvest Specific Equipment MN Sec. of State 4/6/99 2119892
Capital Corp.
1
<PAGE>
Schedule 7.2 to Credit and Security Agreement
PERMITTED INDEBTEDNESS AND GUARANTIES
Indebtedness
NONE
Guaranties
NONE
1
<PAGE>
FIRST AMENDMENT TO CREDIT AND SECURITY
AGREEMENT AND WAIVER OF DEFAULTS
This Amendment, dated as of February 9, 2000, is made by and
between LECTEC CORPORATION, a Minnesota corporation (the "Borrower"), and WELLS
FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender").
Recitals
The Borrower and the Lender have entered into a Credit and
Security Agreement dated as of November 22, 1999 (the "Credit Agreement").
Capitalized terms used in these recitals have the meanings given to them in the
Credit Agreement unless otherwise specified.
The Borrower has requested that certain amendments be made to
the Credit Agreement, which the Lender is willing to make pursuant to the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements herein contained, it is agreed as follows:
1. Defined Terms. Capitalized terms used in this Amendment
which are defined in the Credit Agreement shall have the same meanings as
defined therein, unless otherwise defined herein.
2. Minimum Book Net Worth. Section 6.12 of the Credit
Agreement is hereby deleted its entirety and replaced with the following:
Section 6.12 Minimum Book Net Worth. The Borrower
will maintain, during each period described below, its Book Net Worth,
determined as at the end of each month, at an amount not less than the
amount set forth opposite such period:
Period Ended Minimum Book Net Worth
- - ------------------------------------- --------------------------------------
January 31, 2000 $5,428,000
February 29, 2000 $5,428,000
March 31, 2000 $5,428,000
April 30, 2000 $5,178,000
May 31, 2000 $4,978,000
June 30, 2000 $4,808,000
3. Minimum Earnings/Maximum Loss Before Taxes. Section 6.13 of
the Credit Agreement is hereby deleted in its entirety and replaced with the
following:
1
<PAGE>
Section 6.13 Minimum Earnings/Maximum Loss Before
Taxes. The Borrower will achieve during each period described below,
year-to-date Earnings or Loss Before Taxes, of not less than/greater
than the amount set forth opposite such period (bracketed amounts
indicate maximum Loss Before Taxes):
Period Ended Minimum Earnings/Maximus Loss
Before Taxes
- - --------------------------------------- ----------------------------------
January 31, 2000 ($2,080,000)
February 29, 2000 ($2,080,000)
March 31, 2000 ($2,080,000)
April 30, 2000 ($2,330,000)
May 31, 2000 ($2,530,000)
June 30, 2000 ($2,700,000)
4. No Other Changes. Except as explicitly amended by this
Amendment, all of the terms and conditions of the Credit Agreement shall remain
in full force and effect and shall apply to any advance or letter of credit
thereunder.
5. Waiver of Defaults. The Borrower is in default of the
following provisions of the Credit Agreement (collectively, the "Defaults"):
(a) the Minimum Book Net Worth covenant set forth in
Section 6.12 as of November 30, 1999; and
(b) the Minimum Earnings/Maximum Loss Before Taxes
covenant set forth in Section 6.13 as of November 30, 1999 and December
31, 1999.
Upon the terms and subject to the conditions set forth in this Amendment, the
Lender hereby waives the Defaults. This waiver shall be effective only in this
specific instance and for the specific purpose for which it is given, and this
waiver shall not entitle the Borrower to any other or further waiver in any
similar or other circumstances.
6. Conditions Precedent. This Amendment, and the waiver set
forth in Paragraph 5 hereof, shall be effective when the Lender shall have
received an executed original hereof.
7. Representations and Warranties. The Borrower hereby
represents and warrants to the Lender as follows:
2
<PAGE>
(a) The Borrower has all requisite power and authority to
execute this Amendment and to perform all of its obligations hereunder,
and this Amendment has been duly executed and delivered by the Borrower
and constitutes the legal, valid and binding obligation of the
Borrower, enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrower of
this Amendment have been duly authorized by all necessary corporate
action and do not (i) require any authorization, consent or approval by
any governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree
presently in effect, having applicability to the Borrower, or the
articles of incorporation or by-laws of the Borrower, or (iii) result
in a breach of or constitute a default under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which
the Borrower is a party or by which it or its properties may be bound
or affected.
(c) All of the representations and warranties contained in
Article V of the Credit Agreement are correct on and as of the date
hereof as though made on and as of such date, except to the extent that
such representations and warranties relate solely to an earlier date.
8. References. All references in the Credit Agreement to "this
Agreement" shall be deemed to refer to the Credit Agreement as amended hereby;
and any and all references in the Security Documents to the Credit Agreement
shall be deemed to refer to the Credit Agreement as amended hereby.
9. No Other Waiver. Except as set forth in Paragraph 5 hereof,
the execution of this Amendment and acceptance of any documents related hereto
shall not be deemed to be a waiver of any Default or Event of Default under the
Credit Agreement or breach, default or event of default under any Security
Document or other document held by the Lender, whether or not known to the
Lender and whether or not existing on the date of this Amendment.
10. Release. The Borrower hereby absolutely and
unconditionally releases and forever discharges the Lender, and any and all
participants, parent corporations, subsidiary corporations, affiliated
corporations, insurers, indemnitors, successors and assigns thereof, together
with all of the present and former directors, officers, agents and employees of
any of the foregoing, from any and all claims, demands or causes of action of
any kind, nature or description, whether arising in law or equity or upon
contract or tort or under any state or federal law or otherwise, which the
Borrower has had, now has or has made claim to have against any such person for
or by reason of any act, omission, matter, cause or thing whatsoever arising
from the beginning of time to and including the date of this Amendment, whether
such claims, demands and causes of action are matured or unmatured or known or
unknown.
3
<PAGE>
11. Costs and Expenses. The Borrower hereby reaffirms its
agreement under the Credit Agreement to pay or reimburse the Lender on demand
for all costs and expenses incurred by the Lender in connection with the Credit
Agreement, the Security Documents and all other documents contemplated thereby,
including without limitation all reasonable fees and disbursements of legal
counsel. Without limiting the generality of the foregoing, the Borrower
specifically agrees to pay all fees and disbursements of counsel to the Lender
for the services performed by such counsel in connection with the preparation of
this Amendment and the documents and instruments incidental hereto. The Borrower
hereby agrees that the Lender may, at any time or from time to time in its sole
discretion and without further authorization by the Borrower, make a loan to the
Borrower under the Credit Agreement, or apply the proceeds of any loan, for the
purpose of paying any such fees, disbursements, costs and expenses.
12. Miscellaneous. This Amendment may be executed in any
number of counterparts, each of which when so executed and delivered shall be
deemed an original and all of which counterparts, taken together, shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed as of the date first written above.
WELLS FARGO BUSINESS CREDIT, INC. LECTEC CORPORATION
By /s/ Diane G. Conley By /s/ Deborah L. Moore
--------------------------------- ---------------------------------
Diane G. Conley Deborah L. Moore
An Officer Its Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 20,491
<SECURITIES> 0
<RECEIVABLES> 2,081,300
<ALLOWANCES> 115,035
<INVENTORY> 2,147,863
<CURRENT-ASSETS> 4,733,879
<PP&E> 9,906,706
<DEPRECIATION> 6,031,174
<TOTAL-ASSETS> 8,785,021
<CURRENT-LIABILITIES> 2,451,135
<BONDS> 0
0
0
<COMMON> 38,905
<OTHER-SE> 6,097,981
<TOTAL-LIABILITY-AND-EQUITY> 8,785,021
<SALES> 6,308,457
<TOTAL-REVENUES> 6,308,457
<CGS> 4,306,162
<TOTAL-COSTS> 7,732,699
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 24,000
<INTEREST-EXPENSE> 2,076
<INCOME-PRETAX> (1,398,449)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,398,449)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,398,449)
<EPS-BASIC> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
