-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AR8UxnP5yY5kU1Zp8VJI8kBQoMZoTDUP254CEE7ZNtsgZq728uFPq4JLY37M861q Ob9o65gx+VaMW51kgpg19Q== 0001047469-99-013903.txt : 19990408 0001047469-99-013903.hdr.sgml : 19990408 ACCESSION NUMBER: 0001047469-99-013903 CONFORMED SUBMISSION TYPE: 10SB12G PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19990407 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHROMALINE CORP CENTRAL INDEX KEY: 0001083301 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 410730027 FILING VALUES: FORM TYPE: 10SB12G SEC ACT: SEC FILE NUMBER: 000-25727 FILM NUMBER: 99589074 BUSINESS ADDRESS: STREET 1: 4832 GRAND AVENUE CITY: DULUTH STATE: MN ZIP: 55807 BUSINESS PHONE: 2186282217 MAIL ADDRESS: STREET 1: 4832 GRAND AVENUE CITY: DULUTH STATE: MN ZIP: 55807 10SB12G 1 FORM 10SB12G SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-SB GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 THE CHROMALINE CORPORATION - -------------------------------------------------------------------------------- (Exact name of Small Business Issuer as specified in its charter) Minnesota 41-0730027 - ------------------------------------------ ------------------------------- (State of incorporation or organization) (I.R.S. Employer Identification No.) 4832 Grand Avenue Duluth, Minnesota 55807 - ------------------------------------------ ------------------------------- (Address of principal executive offices) (Zip Code) Securities to be registered pursuant to Section 12(b) of the Act: None Securities to be registered pursuant to Section 12(g) of the Act: Common Stock, $.10 par value ---------------------------- (Title of Class) PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL The Chromaline Corporation ("Chromaline" or the "Company") was incorporated in Minnesota as Chroma-Glo, Inc. in 1952 and changed its name to The Chromaline Corporation in 1982. The Company develops, manufactures and sells light sensitive emulsions and films for commercial and industrial applications in the United States and abroad. The Company also markets ancillary chemicals and equipment to provide a full line of products and services to its customers. The Company's products serve the screen printing and decorative sand blasting markets. The screen printing products represent the Company's largest product line. These products are used by screen printers to create stencil images. These images produce basic designs for fabric decoration and product identification, as well as complex designs for compact discs and electronic circuits. The sand blasting products are used by many consumers to create architectural glass, art pieces and awards. Some of the Company's customers use both the screen printing and the sand blasting products. PRODUCTS Chromaline's core technology is photochemical imaging systems. This technology is similar to photographic film technology except that the Company uses organic polymers or natural protein rather than silver to make the product photo-reactive ("light sensitive"). The products Chromaline targets at the screen printing industry are light sensitive films and emulsions used by customers to create an image on a printing screen; the equivalent of a printing plate in other types of printing processes. In the sand blasting market, the Company's products are also films and emulsions. These products are used to create a stencil by decorators of glass and other hard surfaces including crystal, marble, metals, wood, stone and plastics. The stencil is applied directly to the article to be decorated by the sand blasting process through a self-adhesive feature or with a separate adhesive. The open areas of the stencil permit the sand blast grit to erode the surface while the closed areas of the stencil repel the sand blast grit, protecting areas of the surface being decorated. All of Chromaline's light sensitive products are sensitive to ultraviolet radiation. The Company uses different chemicals to create sensitivity to light including a molecule which it developed internally and patented. DISTRIBUTION Chromaline sells its products through non-exclusive distributors in certain markets, exclusive distributors in other markets and through direct sales to certain end users. The Company currently has approximately 140 domestic and international distributors. In addition, Chromaline markets and sells its products through magazine advertising, trade shows and the internet. Chromaline is engaged in international sales through three channels. The Company is a 19.5 percent owner of Chromaline Europe SA, a French corporation located in Saverne, France ("Chromaline Europe"). Chromaline Europe imports the Company's products and distributes them to dealers throughout Western and Eastern Europe and North Africa. The other owners of Chromaline Europe are Europeans involved in the screen printing industry, including several Chromaline distributors and dealers. The Company is also currently developing its business in India through an exclusive distributor in that country. It is the Company's intent that an entity to be formed by the Company and the Indian distributor will eventually become a licensed manufacturer of certain low cost products which have been developed by Chromaline expressly for distant markets where shipping costs and low market prices would otherwise preclude the Company's participation. The Company markets products to foreign areas not served by the European or Indian facilities from its corporate headquarters in Duluth, Minnesota. Chromaline has a diverse customer base both domestically and abroad and does not depend on one or a few customers for a material portion of its revenues. 2 QUALITY CONTROL IN MANUFACTURING In March 1994, Chromaline became the first firm in northern Minnesota to receive ISO 9001 certification. The Company was recertified in 1997 and 1999. The recertification process will occur every three years hereafter. Chromaline's quality function goal is to train all employees properly in both their work and in the importance of their work. Responsibility for efficient and correct work has meant that authority for proposing changes has been given to all employees. Internal records of quality related graphs and tables are reviewed regularly and discussions are held among management and employees regarding how improvements might be realized. The Company has rigorous materials selection procedures and also uses environmental testing and screen print equipment tailored to fit customers' needs. RESEARCH AND DEVELOPMENT/INTELLECTUAL PROPERTY Chromaline spent 7.3% of sales ($680,000) on research and development in 1998 and 6.8% ($604,000) in 1997. In its research program, Chromaline has developed unique light sensitive molecules which have received two U.S. patents. These patents expire in 2011 and 2014, respectively. The Company also has four United States patent applications pending. There can be no assurance that any patent granted to the Company will provide adequate protection to the Company's intellectual property. Within Chromaline, steps are taken to protect the Company's trade secrets, including physical security, confidentiality and non-competition agreements with employees and confidentiality agreements with vendors. In its product development program, Chromaline is fully equipped to simulate customer uses of its products. The Company's facilities include a walk-in environmental chamber which simulates customer uses and storage conditions of Chromaline products for different climatic zones. Chromaline has introduced the highest number of new products of any participant in its markets over the past ten years. In addition to its patents, the Company has various trademarks including the "Chromaline" and "PhotoBrasive" trademarks. RAW MATERIALS The Chromaline Corporation purchases raw materials from a variety of domestic and foreign sources with no one supplier being material to the Company. The purchasing staff at the Company's headquarters leads in the identification of both domestic and foreign sources for raw materials and negotiates price and terms for all domestic and foreign markets. Chromaline's involvement in foreign markets has given it the opportunity to become a global buyer of raw materials at lower overall cost than it had previously enjoyed. The Company has a number of suppliers and no one supplier is essential to the Company's operations. To date there have been no significant shortages of raw materials and alternative sources for nearly all raw materials are available. The Company believes it has good supplier relations. COMPETITION The Company competes in its markets based on product development capability, quality, reliability, availability, technical support and price. The screen printing market is much larger than the decorative sand blasting market, however, the sand blasting market is currently experiencing faster growth. Chromaline has two primary competitors in its screen printing film business. Both are larger than Chromaline and possess greater resources than the Company in many areas. One is a privately owned U.S. firm and the other is owned by a large British conglomerate. The Company has numerous competitors in the market for screen print emulsions many of whom are larger than Chromaline and possess greater resources. The market for the Company's sand blasting products has relatively few competitors, however, those in this market compete aggressively on price and in other areas. Chromaline considers itself to be a significant factor in this market. GOVERNMENT REGULATION The Company is subject to a variety of federal, state and local industrial laws and regulations, including those relating to the discharge of material into the environment and protection of the environment. These laws and regulations have not had a material effect upon the capital expenditures or competitive position of the Company. 3 EMPLOYEES As of March 19, 1999, the Company had 72 employees all of whom are located at the Company's headquarters in Duluth, Minnesota with the exception of several outside technical sales representatives in various locations around the United States. None of the Company's employees are subject to a collective bargaining agreement and the Company believes that its employee relations are good. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management discussion and analysis focuses on those factors that had a material effect on the Company's financial results of operations and financial condition during 1998 and 1997 and should be read in connection with the Company's audited financial statements and notes thereto for the years ending December 31, 1998 and 1997. FACTORS THAT MAY AFFECT FUTURE RESULTS Certain statements made in this Registration Statement on Form 10-SB, which are summarized below, are forward-looking statements that involve risks and uncertainties, and actual results may be materially different. Factors that could cause actual results to differ include, but are not limited to, those identified as follows: - THE BELIEF THAT THE COMPANY'S CURRENT FINANCIAL RESOURCES, CASH GENERATED FROM OPERATIONS AND THE COMPANY'S CAPACITY FOR DEBT AND/OR EQUITY FINANCING WILL BE SUFFICIENT TO FUND CURRENT AND ANTICIPATED BUSINESS OPERATIONS--Changes in anticipated operating results, credit availability and equity market conditions may further enhance or inhibit the Company's ability to maintain or raise appropriate levels of cash. - THE COMPANY'S PLANS TO EXPAND ITS RESEARCH AND DEVELOPMENT EFFORTS AND THE EXPECTED FOCUS AND RESULTS OF SUCH EFFORTS--These plans and expectations may be impacted by general market conditions, unanticipated changes in expenses or sales, delays in the development of new products, technological advances or other changes in competitive conditions. - THE COMPANY'S EFFORTS TO GROW ITS INTERNATIONAL BUSINESS--These efforts may be impacted by economic, political and social conditions in current and anticipated foreign markets, regulatory conditions in such markets, unanticipated changes in expenses or sales, changes in competitive conditions or other barriers to entry or expansion. - THE COMPANY'S BELIEF THAT EVALUATIONS AND MODIFICATIONS OF YEAR 2000 COMPLIANCE ISSUES, INCLUDING YEAR 2000 COMPLIANCE OF THIRD-PARTY SUPPLIERS, WILL NOT HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S OPERATIONS OR FINANCIAL POSITION--This belief may be impacted by presently unanticipated delays in assessment or remediation, unanticipated increases in costs or non-compliance by third parties. - THE EXPECTATION THAT THE COMPANY WILL HAVE A MANUFACTURER OF CERTAIN LOW COST PRODUCTS IN INDIA--This expectation may be impacted by economic, political and social conditions or regulatory changes in India, unanticipated delays or expenses, acceptance of the Company's products or changes in competitive conditions. RESULTS OF OPERATIONS SALES. The Company's sales increased by 4.4% to $9.3 million in 1998 from $8.9 million in 1997. This increase was primarily due to a 15.2% increase in international sales. 4 COST OF GOODS SOLD. The cost of goods sold was $4.2 million, or 45.1% of sales, in 1998 and $4.2 million, or 46.9% of sales, in 1997, gross margins improved as overhead and labor costs increased slightly and the cost of raw materials remained relatively flat. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $3.1 million, or 33.1% of sales, in 1998 from $2.7 million, or 30.0% of sales, in 1997. This increase was primarily due to approximately $240,000 of one-time costs associated with the retirement and replacement of two senior officers and increased sales and marketing expenses associated with the launch of new products. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased to $680,000, or 7.3% of sales, in 1998 from $604,000, or 6.8% of sales, in 1997. This increase was primarily due to expenses incurred to complete development of PHAT film, a film which utilizes new high density inks to create suede-like and 3-D images, and the MAX-R emulsion, an emulsion which has maximum resistance to breakdown thus improving screen printers' production efficiency. PHAT film and the MAX-R emulsion were launched at the Screenprinting and Graphics Imaging Association trade show in October 1998. PATENT LITIGATION EXPENSES. Recognized expenses related to the Company's patent litigation decreased to zero in 1998 from $445,000 in 1997. This decrease was due to the fact that all patent litigation costs incurred in 1998 were covered by the $250,000 accrual which was included in the $445,000 patent litigation expense incurred in 1997. INTEREST INCOME. Net interest income increased to $29,000 in 1998 from $10,000 in 1997. This increase was primarily due to the Company's purchase of certain interest-bearing securities in 1998. INCOME TAXES. While the Company's effective tax rate decreased to 35.8% in 1998 from 38.6% in 1997, federal and state income tax expense increased to $492,000 in 1998 from $371,000 in 1997. This increase in expense was due to the increase in the Company's pretax income for 1998. NET INCOME. Net income increased to $881,000 in 1998 from $638,375 in 1997. Net income in 1997 was negatively impacted by a total of $445,000 in patent litigation costs during the year, while 1998 saw $240,000 of one-time costs related to the retirement and replacement of two senior officers. Without these one-time costs, net income in 1998 increased by 12.6% over 1997. This increase was due to a 4.4% increase in sales and continuing efforts to improve operating efficiencies and reduce costs. LIQUIDITY AND CAPITAL RESOURCES Chromaline has financed its operations principally with funds generated from operations. These funds have been sufficient to cover the Company's normal operating expenditures and annual capital spending requirements, as well as research and development expenditures. A bank line of credit exists providing for borrowings of up to $1,250,000. Outstanding debt under this line of credit is collateralized by accounts receivable and bears interest at 2.5 percentage points over the 30-day LIBOR rate. The Company has not utilized this line of credit to a material extent and there was no debt outstanding under this line as of December 31, 1998. A possible second source of funding is Tax Increment Financing ("TIF"). The Company resides in one of several TIF districts in Duluth, Minnesota. TIF uses the increase in tax revenues that results from development to fund the costs of such development. This funding may be used to help facilitate improvements or additions to the Company's property and buildings. The Company believes that current financial resources, cash generated from operations and the Company's capacity for debt and/or equity financing will be sufficient to fund current and anticipated business operations. Future activities undertaken to expand the Company's business may include acquisitions, building expansion and additions, equipment additions, new product development and marketing opportunities. 5 CAPITAL EXPENDITURES In 1998, the Company purchased over an acre of additional land immediately adjacent to its manufacturing facility in Duluth at a cost of $64,000. In addition, the Company acquired the E-Z Mask patent at a cost of $109,000 to aid in the development of its decorative sand blasting business. Additional plant equipment, research and development instrumentation, and computers were purchased during the year to improve product quality and operating efficiency. INTERNATIONAL ACTIVITY The Company markets its products to over 50 countries in North America, Europe, Latin America, Asia and other parts of the world. Foreign sales were approximately 32% and 29% of total sales in 1998 and 1997. Recent weakening of certain foreign currencies has not significantly impacted the Company's operations, because the Company's foreign sales are not concentrated in any one region of the world. The Company believes its vulnerability to uncertainties due to foreign currency fluctuations and general economic conditions in foreign countries is not significant. Substantially all of the Company's foreign transactions are negotiated, invoiced and paid in U.S. dollars. Chromaline has not implemented a hedging strategy to reduce the risk of foreign currency translation exposures, which management does not believe to be significant based on the scope and geographic diversity of the Company's foreign operations as of December 31, 1998. Effective January 1, 1999, eleven states of the European Union began the conversion to a common currency, called the "euro." This action will most likely cause a portion of Chromaline's European transactions to be negotiated, invoiced and paid in "euros." The conversion will most likely add currency exchange costs and risks. Although such costs and risks are not quantifiable at this time, they are not expected to be significant. YEAR 2000 ISSUE The year 2000 issue is the result of certain computer systems that recognize the year using only the last two digits. Any system utilizing time-sensitive programming may recognize the date using "00" as the year 1900 rather than the year 2000. This could result in systems failures that may disrupt normal business operations. The Company has begun a comprehensive project to test and prepare its internal computer systems for the year 2000. This project will replace all non-compliant software and hardware with systems that are year 2000 compliant and is expected to be completed in the third quarter of 1999. If necessary conversions are not completed on a timely basis, the year 2000 could have a material adverse effect on Chromaline's operations. Overall, management believes the year 2000 will not have a significant impact on operations. At this time, the Company believes it is unnecessary to adopt a contingency plan covering the possibility that the year 2000 project will not be completed in a timely manner, but, as part of the overall project, the Company will continue to assess the need for a contingency plan based on its periodic evaluation of target dates for the completion of the year 2000 project. Chromaline faces risk to the extent that suppliers of products and services purchased by the Company and others with whom it transacts business on a world-wide basis do not have business products and services that comply with year 2000 requirements. The Company has solicited assurances from its major suppliers that their products and services are year 2000 compliant. In the event that a significant number of these third parties cannot, in a timely manner, provide the Company with products and services because of the year 2000 issue, Chromaline's operating results could be materially adversely affected. The costs associated with the year 2000 project are minimal and are not incremental to the Company, but include temporary reallocation of existing resources. Although Chromaline believes that the remaining cost of year 2000 modifications for internal-use systems are not material, there can be no assurances that various factors relating to year 2000 compliance issues will not have a material adverse effect on the Company's business, operating results, or financial position. 6 FUTURE OUTLOOK Chromaline has invested over 6% of sales dollars for the past several years on research and development. The Company plans to expand its efforts in this area and expedite internal product development as well as form technological alliances with outside experts to ensure the commercialization of new product opportunities. In addition to its film, emulsion and self-adhesive products, Chromaline's research and development efforts will also focus on improving the efficiency of its automated photo developers for the decorative sand blasting product line. The Company will also be looking at natural adjuncts to its product line if extremely reliable sources of supply can be obtained and resale margins are acceptable. In addition to its traditional emphasis on domestic markets, the Company will continue efforts to grow its business internationally by attempting to develop new markets and expanding its market share where it has already established a presence. In its search for new opportunities, Chromaline will actively investigate experimental technology sharing, joint ventures, and acquisitions to complement its core strengths of innovative technology and recognized market presence. ITEM 3. DESCRIPTION OF PROPERTY The Company conducts its entire operations in Duluth, Minnesota. The administrative, sales, research and development, quality and manufacturing activities are housed in a 60,000 square-foot four-story building, including a basement level. The building is approximately seventy years old and has been maintained in good condition. Shipping and distribution for the Company operates from a three-year old 5,625 square-foot warehouse adjacent to the existing plant building. These facilities are owned by the Company with no existing liens or leases. ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of March 19, 1999, the number of shares of Common Stock beneficially owned by each person who is a beneficial owner of more than 5% of the outstanding Common Stock of the Company, by each officer named in the Summary Compensation Table, by each director, and by all officers and directors as a group. All persons have sole voting and dispositive power over such shares unless otherwise indicated.
NAME AND ADDRESS NUMBER PERCENTAGE OF OF BENEFICIAL OWNER: OF SHARES OUTSTANDING SHARES - ----------------------------------------- ----------------------------------- ------------------------ Directors and executive officers: William C. Ulland 130,500(1) 11.0% Philip J. Hourican 5,500 * Charles H. Andresen 6,870(2) * Gerald W. Simonson 55,200 4.7 David O. Harris 42,817 3.6 Thomas L. Erickson (retired July 1998) 69,775(3) 5.9 All directors and executive officers as 329,112(4) 27.7 a group (9 persons, including those named above)
- ------------------ * Less than one percent. (1) Includes options to purchase 3,000 shares of Common Stock exercisable within 60 days of March 19, 1999. The address of Mr. Ulland is 740 East Superior Street, Duluth, Minnesota 55802. (2) Includes options to purchase 250 shares of Common Stock exercisable within 60 days of March 19, 1999. (3) Mr. Erickson held office as President and Chief Executive Officer, and as a Director, until his retirement, effective July 12, 1998. The address of Mr. Erickson is 20 South 26th Avenue East, Duluth, MN 55812. 7 (4) Includes options to purchase 9,750 shares of Common Stock exercisable within 60 days of March 19, 1999. ITEM 5. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE REGISTRANT The Directors, Executive Officers and Significant Employees of the Company are as follows:
Name Age Position ------------------------------- ---- ------------------------------------------------------ William C. Ulland 58 Chairman of the Board of Directors Philip J. Hourican 54 President, Chief Executive Officer and Director Jeffery A. Laabs 44 Vice President of Finance, Controller, Treasurer and Secretary Claude P. Piguet 41 Vice President of Operations Toshifumi Komatsu 44 Vice President of Technology Robert D. Banks, Jr. 47 Vice President of International Sales Charles H. Andresen 58 Director Gerald W. Simonson 68 Director David O. Harris 64 Director
WILLIAM C. ULLAND has been a director and Chairman of the Board of the Company since 1972. Since 1977, Mr. Ulland has been Managing Partner of American Shield Company, a mineral exploration and development company located in Duluth, Minnesota. PHILIP J. HOURICAN has been President and Chief Executive Officer of the Company since July 1998. He was elected to the Board of Directors shortly thereafter. Mr. Hourican came to the Company from Balchem Corporation of Slate Hill, New York. At Balchem, Mr. Hourican served as Vice President and General Manager from July 1996 to February 1998. Balchem is an international marketer of repackaged chemicals. From October 1994 to July 1996, Mr. Hourican was the Vice President of Sales and Marketing on a nationwide basis for Techalloy, a manufacturer of stainless steel and nickel wire located in Mahwah, New Jersey. Mr. Hourican was a senior manager for Crosfield Chemicals, a manufacturer of silicas, silicates, zeolites and catalysts located in Joliet, Illinois, from May 1988 to October 1994. Mr. Hourican received a B.S. in Chemical Engineering from the University of Pittsburgh in 1967 and an M.B.A. from the University of Akron in 1972. JEFFERY A. LAABS, CMA has been Vice President of Finance and Controller of the Company since May 1998. He was named Treasurer and Secretary of the Company shortly thereafter. Mr. Laabs was a Senior Financial Analyst for Lake Superior Paper Industries ("LSPI") in Duluth, Minnesota from September 1986 until he joined Chromaline in 1998. LSPI is a manufacturer of supercalendered paper for newspaper inserts and magazines. His prior experience includes various financial positions with Kimberly Clark Corporation, a manufacturer of paper products, from September 1981 until September 1986. Mr. Laabs received a Bachelor of Science degree in Accounting from Lake Superior State University in 1976. He earned the designation of Certified Management Accountant in 1996. CLAUDE P. PIGUET has been the Company's Vice President of Operations since May 1994. Previously, he was the Company's Director of Operations from January 1992 to May 1994. Mr. Piguet joined Chromaline in 1990 and holds a diploma of Engineer ETS/HTL from the Ecole D'Ingenieurs de l'Etat de Vaud in Switzerland. 8 TOSHIFUMI KOMATSU has been the Company's Vice President of Technology since September 1993. Previously, he served as Chromaline's Director of Research and Development for two years. Mr. Komatsu has been with Chromaline's Research and Development Department for 15 years. His prior experience includes positions in research and development at Alberta Gas Chemicals, a manufacturer of organic acids. He received a B.S. in Chemistry and Mathematics from the College of Saint Scholastica in 1980. ROBERT D. BANKS, JR. has been the Company's Vice President of International Sales since February 1997. Previously, he was the Company's Director of International Sales and Marketing from 1989 to 1997. CHARLES H. ANDRESEN was elected as a director of the Company in 1979. Mr. Andresen has been a shareholder in the law firm of Magie, Andresen, Haag, Paciotti, Butterworth & McCarthy, P.A., in Duluth, Minnesota for more than the past five years. GERALD W. SIMONSON was elected as a director of the Company in 1978. He has been the President of Omnetics Connector Corporation, a manufacturer of microminiature connectors for the electronics industry located in Minneapolis, Minnesota, for more than the past five years. Mr. Simonson is also a director of Medtronic, Inc., a manufacturer of medical devices, and Northwest Teleproductions, Inc., a film and video production company. DAVID O. HARRIS was elected a director of the Company in 1965. He has been President of David O. Harris, Inc., a manufacturer's representative firm in Minneapolis, Minnesota, for more than the past five years. ITEM 6. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table sets forth certain information regarding compensation earned by the individuals who served as Chief Executive Officer of the Company during the fiscal years ended December 31, 1998, 1997 and 1996. No other executive officers of the Company received remuneration exceeding $100,000 for the fiscal year ended December 31, 1998. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL ---------------- COMPENSATION SHARES ----------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS OPTIONS(2) COMPENSATION(3) - ---------------------------------- ------- -------- --------- ---------- ----------------- Philip J. Hourican 1998 $55,400 $2,990 20,526 $32,496 President and Chief Executive Officer Thomas L. Erickson, 1998 66,635 31,853 2,000 165,000 President and Chief Executive 1997 110,000 41,474 2,000 - Officer 1996 102,500 41,786 2,000 -
- --------------- (1) Mr. Hourican joined the Company as President and Chief Executive Officer on July 13, 1998. If he had been employed for all for 1998, his salary would have been $120,000. Mr. Erickson retired from the Company effective July 12, 1998. (2) Represents options to purchase Common Stock granted under the Company's 1995 Stock Incentive Plan. (3) Amounts reported for Mr. Hourican in 1998 represent payments made for reimbursement of moving and temporary living expenses. Amounts reported for Mr. Erickson in 1998 represent the following payments made in 9 connection with his retirement: a $65,000 severance payment, $80,000 in consulting fees and $20,000 paid pursuant to Mr. Erickson's agreement not to compete with the Company. The agreements governing the payments to Mr. Erickson are discussed below under "Employment Agreements and Termination of Employment and Change-in-Control Arrangements." OPTION GRANTS IN LAST FISCAL YEAR The following table summarizes option grants made during 1998 to the Chief Executive Officer of the Company.
INDIVIDUAL GRANTS --------------------------------------------------------- PERCENTAGE POTENTIAL REALIZABLE VALUE NUMBER OF OF TOTAL AT ASSUMED ANNUAL RATES SHARES OPTIONS OF STOCK APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM(1) OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------------- NAME GRANTED(2) FISCAL YEAR SHARE DATE 5% 10% - ------------------ ---------- ----------- --------- ---------- -------- -------- Philip J. Hourican 20,526 87.2% $9.50 7/13/05 $274,380 $379,991
- ------------- (1) The potential realizable value is based on a 7-year term of each option at the time of grant. Assumed stock price appreciation of 5% and 10% is mandated by rules of the Securities and Exchange Commission and is not intended to forecast actual future financial performance or possible future appreciation. The potential realizable value is calculated by assuming that the fair market value of the Company's Common Stock on the date of grant appreciates at the indicated rate for the entire term of the option and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. (2) Options granted pursuant to the Company's 1995 Stock Incentive Plan are exercisable at an exercise price equal to the fair market value on the date of grant. The 20,526 share option granted to Mr. Hourican at $9.50 per share vests in three equal increments on the day prior to the first, second and third anniversaries of the date of grant. This option has a maximum term of seven years, subject to earlier termination in the event of Mr. Hourican's cessation of service with the Company. AGGREGATED OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR-END OPTION VALUES The purpose of the following table is to report exercise of stock options by the Chief Executive Officers of the Company during 1998 and the value of his unexercised stock options as of December 31, 1998.
NUMBER OF SHARES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1) ACQUIRED VALUE ----------------------------- --------------------------- NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - -------------------- ----------- --------- ----------- ------------- ----------- ------------- Philip J. Hourican - - - 20,526 - $0
- ----------- (1) Value is based on the per share closing price of the Company's Common Stock on December 31, 1998, which was $7.50. 10 EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Thomas L. Erickson retired from his position as President and Chief Executive Officer of the Company on July 12, 1998 and entered into a Separation Agreement with the Company effective July 13, 1998. The Separation Agreement provides for severance compensation of $65,000 which was paid during 1998. Mr. Erickson also entered into an Agreement regarding Non-Disclosure of Confidential Information and Non-Competition with the Company dated July 22, 1998. Pursuant to this Agreement, Mr. Erickson has agreed not to compete with the Company prior to December 31, 2002 in exchange for payments totaling $123,500 over the term of the Agreement. Finally, Mr. Erickson agreed to act as a consultant to the Company until December 31, 1999 and entered into a Consulting Agreement with the Company dated July 22, 1998 providing for compensation of $80,000, all of which was paid in 1998. DIRECTOR COMPENSATION During 1998, each non-employee director of the Company who beneficially owns not more than 5% of the Company's outstanding Common Stock received a one-time grant of an option to purchase 3,000 shares of the Company's Common Stock under the 1995 Stock Incentive Plan. These options have an exercise price equal to the fair market value on the date of grant and will expire seven years from the date of grant. In addition, each non-employee director of the Company who beneficially owns not more than 5% of the Company's outstanding Common Stock receives a quarterly retainer of $1,000, plus per meeting fees of $700 for each meeting of the Board of Directors attended in person, $350 for each meeting of the Board of Directors attended by telephone, $300 for each committee meeting attended in person and $150 for each committee meeting attended by telephone. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. ITEM 8. DESCRIPTION OF SECURITIES GENERAL The Company's Restated Articles of Incorporation, as amended, authorize the issuance of up to 5,000,000 shares of capital stock. The shares are classified into two classes, consisting of 4,750,000 shares of Common Stock, $.10 par value, and 250,000 shares of Preferred Stock, $.10 par value. The Board of Directors is authorized to establish one or more series of Preferred Stock by resolution, set forth the designation of each such series and fix the relative rights and preferences of each such series, provided that certain voting, dividend and liquidation terms specified in the Restated Articles of Incorporation may not be altered by the Board. COMMON STOCK At March 19, 1999, there were 1,178,811 shares of Common Stock issued and outstanding and held by approximately 450 shareholders of record. Holders of Common Stock are entitled to one vote per share for the election of directors and on all matters submitted to a vote of shareholders, and there are no cumulative voting rights for the election of directors. Holders of Common Stock are entitled to receive dividends as and when declared by the Board of Directors out of funds legally available therefor. Holders of Common Stock are not entitled to preemptive rights. In the event of the liquidation, dissolution or winding up of the Company, the holder of each share of Common Stock is entitled to share equally in any balance of the Company's assets available for distribution to shareholders after the holders of any Preferred Stock have received the full distribution to which such holders are entitled. Outstanding shares of Common Stock are not subject to any further call or assessment. PREFERRED STOCK The Company does not currently have any issued and outstanding shares of Preferred Stock. Pursuant to the Company's Articles of Incorporation, the Board of Directors has the authority, without further action by the 11 shareholders, to issue up to 250,000 shares of Preferred Stock in one or more classes or series. The Board is authorized to determine the designation of and number of shares in each series and to fix the dividend, redemption, liquidation, retirement and conversion rights, if any, of such series, and any other rights and preferences thereof, subject to certain limitations in the Company's Restated Articles of Incorporation. These limitations state that holders of the Company's Preferred Stock shall not have any voting rights unless required by Minnesota law, shall be paid all accumulated or accrued dividends prior to a dividend being declared or paid on the Company's Common Stock and shall be entitled to receive the liquidation price of their Common Stock and any accrued dividends thereon prior to any distributions being made to the holders of Common Stock in the event of the liquidation, dissolution or winding up of the Company. Any shares of Preferred Stock which may be issued may have greater rights in many areas than the Common Stock, including preferences as to payment of dividends and upon liquidation, and may be convertible into shares of Common Stock. Preferred Stock could be issued quickly with terms calculated to delay or prevent a change in control of the Company or make removal of management more difficult. Additionally, the issuance of Preferred Stock may have the effect of decreasing the market price of the Common Stock, and may adversely affect the rights of the holders of Common Stock. The Company has no present plans to issue shares of Preferred Stock. OPTIONS At March 19, 1999, the Company had outstanding options to purchase up to an aggregate of 51,027 shares of Common Stock to directors, officers and employees of the Company at exercise prices ranging from $4.04 to $10.13 per share. ANTI-TAKEOVER PROVISIONS OF THE MINNESOTA BUSINESS CORPORATION ACT; RESTATED ARTICLES OF INCORPORATION Certain provisions of Minnesota law and the Company's Restated Articles of Incorporation described below could have an anti-takeover effect. These provisions are intended to provide management flexibility to enhance the likelihood of continuity and stability in the composition of the Company's Board of Directors and in the policies formulated by the Board and to discourage an unsolicited takeover of the Company, if the Board determines that such a takeover is not in the best interests of the Company and its shareholders. However, these provisions could have the effect of discouraging certain attempts to acquire the Company which could deprive the Company's shareholders of opportunities to sell their shares of Common Stock at prices higher than prevailing market prices. Section 302A.671 of the Minnesota Statutes applies, with certain exceptions, to any acquisitions of voting stock of the Company (from a person other than the Company, and other than in connection with certain mergers and exchanges to which the Company is a party) resulting in the beneficial ownership of 20% or more of the voting stock then outstanding. Section 302A.671 requires approval of the granting of voting rights for the shares received pursuant to any such acquisition by a majority vote of the shareholders of the Company. In general, shares acquired without such approval are denied voting rights and are redeemable at their then fair market value by the Company within 30 days after the acquiring person has failed to deliver a timely information statement to the Company or the date the shareholders voted not to grant voting rights to the acquiring person's shares. Section 302A.673 of the Minnesota Statutes generally prohibits any business combination by the Company, or any subsidiary of the Company, with any shareholder which purchases 10% or more of the Company's voting shares (an "interested shareholder") within four years following such interested shareholder's share acquisition date, unless the business combination is approved by a committee of all of the disinterested members of the Board of Directors of the Company before the interested shareholder's share acquisition date. In addition, the existence of undesignated Preferred Stock in the Restated Articles of Incorporation allows the Board of Directors of the Company, without further shareholder action, to issue Preferred Stock with certain rights and in amounts that could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of the Company. TRANSFER AGENT AND REGISTRAR Norwest Bank Minnesota, National Association, is the transfer agent and registrar for the Company's Common Stock. 12 PART II ITEM 1. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the local over-the-counter market in the Minneapolis-St. Paul area under the symbol CMLH. The following table sets forth, for the fiscal quarters indicated, the high and low bid prices for the Company's Common Stock as reported on the local over-the-counter market in the Minneapolis-St. Paul area. The quotations reflect inter-dealer prices without retail mark-up, mark-down or commission, and may not represent actual transactions.
HIGH LOW ------ ------- FISCAL YEAR ENDED DECEMBER 31, 1999: First Quarter............................................................ $7.75 $6.75 Second Quarter (through April 6, 1999)................................... 8.00 7.63 FISCAL YEAR ENDED DECEMBER 31, 1998: First Quarter............................................................ $8.88 $7.00 Second Quarter........................................................... 9.00 7.38 Third Quarter............................................................ 10.38 7.75 Fourth Quarter........................................................... 8.06 7.00 FISCAL YEAR ENDED DECEMBER 31, 1997: First Quarter............................................................ $6.67 $5.00 Second Quarter........................................................... 9.00 6.00 Third Quarter............................................................ 10.17 8.00 Fourth Quarter........................................................... 10.00 8.50
As of March 19, 1999, the Company had approximately 450 shareholders of record. The Company has never declared or paid any dividends on its Common Stock. The Company currently intends to retain any earnings for use in its business and therefore does not anticipate paying any dividends in the near future. ITEM 2. LEGAL PROCEEDINGS On October 22, 1996, Aicello North America, Inc., a Canadian corporation ("ANA"), filed suit against the Company in the United States District Court for the Western District of Washington, alleging infringement by the Company of U.S. Patent No. 5,427,890 (the "890 patent"). Later, ANA added U.S. Patent No. 5,629,132 (the "132 patent") to the lawsuit. The 890 patent and the 132 patent had been assigned to Aicello Chemical Co. Ltd. of Japan ("ACLJ") on October 22, 1996 and were licensed to ANA shortly before filing of the present infringement action. At Chromaline's request, ACLJ was joined to the suit. The subject of the patents and the allegedly infringing Chromaline products are three-layer photosensitive films used to engrave patterns or designs into hard surfaces such as metal, glass, stone and wood. The Company believes that: 1. The 890 and 132 patents are invalid. 2. The 890 and 132 patents are unenforceable. 3. The 890 and 132 patents are not being infringed by Chromaline. The Company and ANA attempted to settle the suit with two mediation sessions that did not result in a settlement. Following these mediations, Chromaline requested in August 1998 that the U.S. Patent and Trademark Office ("USPTO") reexamine the 890 patent and the 132 patent. This request was granted as to both patents in November 1998 and the lawsuit was stayed pending this review. The reexamination process will require approximately twelve to eighteen months to complete. A favorable ruling by the USPTO may result in the dismissal 13 of the case. In its initial action, the USPTO released documents showing that all claims for both patents "are rejected." These documents also state that ANA and ACLJ must respond within 60 days. The Company has made provisions to cover certain legal proceedings and related costs and expenses as described in note 2 to its audited financial statements included herein. However, the ultimate outcome and materiality of these matters cannot be determined. Accordingly, no provision for any liability that may result therefrom has been made in the audited financial statements. ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS Not applicable. ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES During the past three years the Company has sold the following securities pursuant to exemptions from registration under the Securities Act of 1933, as amended (the "Act"). The sales referred to below were all made in reliance upon the exemptions from registration provided by Rule 701 under the Act for securities sold pursuant to certain compensatory benefit plans and contracts relating to compensation, and related state securities laws. All shares were issued directly by the Company, no underwriters were involved, and no discount, commission or transaction-related remuneration was paid. 1. On February 18, 1997, the Company granted options to purchase an aggregate of 3,750 shares of the Company's Common Stock at $5.6667 per share to four of the Company's employees. 2. On June 15, 1998, the Company granted an option to purchase an aggregate of 3,000 shares of the Company's Common Stock at $8.625 per share to an executive officer of the Company. 3. On July 13, 1998, the Company granted an option to purchase an aggregate of 20,526 shares of the Company's Common Stock at $9.50 per share to an executive officer of the Company. 4. On August 19, 1998, the Company granted options to purchase an aggregate of 9,000 shares of the Company's Common Stock at $10.125 per share to three of the Company's directors. ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Article V, Sections 1 and 2 of the Company's By-Laws, as amended, and Article VIII, Section 8.5 of the Company's Restated Articles of Incorporation, as amended, the Company indemnifies its directors and officers and advances litigation expenses to the fullest extent required or permitted by Minnesota Statutes Section 302A.521. This indemnification is subject to the requirement in the case of legal judgments, that the individual seeking indemnification is not finally adjudged to have been guilty of willful misconduct detrimental to the best interests of the Company. Section 302A.521 requires the Company to indemnify a person made or threatened to be made a party to a proceeding, by reason of the former or present official capacity of the person with respect to the Company, against judgments, penalties, fines, including without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements, and reasonable expenses, including attorneys' fees and disbursements, if, with respect to the acts or omissions of the person complained of in the proceeding, such person (1) has not been indemnified by another organization or employee benefit plan for the same judgments, penalties, fines, including without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements, and reasonable expenses, including attorneys' fees and disbursements, incurred by the person in connection with the proceeding with respect to the same acts or omissions; (2) acted in good faith; (3) received no improper personal benefit, and statutory procedure has been followed in the case of any conflict of interest by a director; (4) in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and (5) in the case of acts or omissions occurring in the person's performance in the official capacity of director or, for a person not a director, in the official capacity of officer, committee member, employee or agent, reasonably believed that the conduct was in the best interests of the Company, or in the case of performance by a director, officer, employee or agent of the Company as a director, officer, partner, trustee, employee or agent of 14 another organization or employee benefit plan, reasonably believed that the conduct was not opposed to the best interests of the Company. In addition, Section 302A.521, subd. 3, requires payment by the Company upon written request, of reasonable expenses in advance of final disposition in certain instances. The Restated Articles of Incorporation of the Company, as amended, eliminate the personal liability of a director to the Company or its shareholders for monetary damages for breach of fiduciary duty as a director, except under certain circumstances involving any breach of the director's duty of loyalty to the Company or its shareholders, acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, or for any unlawful acts under Sections 302A.559 or 80A.23 of Minnesota Statutes. PART F/S INDEX TO AUDITED FINANCIAL STATEMENTS
Page Number ----------- Independent Auditors' Report 16 Balance Sheets as of December 31, 1998 and 1997 17 Statements of Earnings for the Years Ended December 31, 1998 and 1997 18 Statements of Stockholders' Equity for the Years Ended December 31, 1998 and 1997 19 Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 20 Notes to Financial Statements 21
15 INDEPENDENT AUDITORS' REPORT Stockholders and Board of Directors The Chromaline Corporation We have audited the accompanying balance sheets of The Chromaline Corporation (the Company) as of December 31, 1998 and 1997 and the related statements of earnings, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Chromaline Corporation as of December 31, 1998 and 1997 and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP January 15, 1999 Minneapolis, Minnesota 16 BALANCE SHEETS DECEMBER 31, 1998 AND 1997 - --------------------------------------------------------------------------------
1998 1997 ASSETS Current Assets: Cash and cash equivalents $ 274,757 $ 732,381 Trade receivables, less allowance for doubtful accounts of $14,400 and $14,700, respectively 1,128,568 1,201,146 Trade receivable from related party 271,443 235,116 Inventories 1,255,192 966,458 Prepaid expenses and other assets 97,409 41,338 Marketable securities 508,445 Income tax refund receivable 61,801 Deferred taxes (Note 3) 54,000 128,000 ----------- ----------- Total current assets 3,651,615 3,304,439 PROPERTY, PLANT, AND EQUIPMENT, at cost: Land and building 1,171,560 1,045,560 Machinery and equipment 1,991,566 1,856,700 Office equipment 516,935 463,350 Vehicles 199,335 165,678 ----------- ----------- 3,879,396 3,531,288 Less accumulated depreciation 2,455,816 2,109,752 ----------- ----------- 1,423,580 1,421,536 PATENTS, net of amortization of $5,752 103,715 OTHER 38,733 38,733 DEFERRED TAXES (Note 3) 43,000 17,000 ----------- ----------- $ 5,260,643 $ 4,781,708 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Note payable, bank $ 21,897 Accounts payable $ 207,813 228,808 Accrued expenses 129,673 281,752 Accrued legal costs (Note 2) 63,324 250,000 Income taxes payable 106,109 ----------- ----------- Total current liabilities 400,810 888,566 CONTINGENCIES (Note 2) STOCKHOLDERS' EQUITY: Preferred stock, par value $.10 per share; authorized 250,000 shares; issued none Common stock, par value $.10 per share; authorized 4,750,000 shares; issued and outstanding 1,178,311 and 1,161,061 shares, respectively 117,831 116,107 Additional paid-in capital 408,225 323,789 Retained earnings 4,333,777 3,453,246 ----------- ----------- Total stockholders' equity 4,859,833 3,893,142 ----------- ----------- $ 5,260,643 $ 4,781,708 ----------- ----------- ----------- -----------
See notes to financial statements. 17 STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1998 AND 1997 - --------------------------------------------------------------------------------
1998 1997 SALES $ 9,289,328 $ 8,899,849 COSTS AND EXPENSES: Cost of goods sold 4,193,050 4,178,797 Selling, general, and administrative 3,072,636 2,672,986 Research and development 679,734 603,521 Patent litigation costs (Note 2) 445,000 ------------- -------------- 7,945,420 7,900,304 INCOME FROM OPERATIONS 1,343,908 999,545 INTEREST INCOME, NET 28,623 9,830 ------------- -------------- INCOME BEFORE INCOME TAXES 1,372,531 1,009,375 FEDERAL AND STATE INCOME TAXES (Note 3) 492,000 371,000 ------------- -------------- NET INCOME $ 880,531 $ 638,375 ------------- -------------- ------------- -------------- BASIC EARNINGS PER COMMON SHARE $ 0.75 $ 0.55 ------------- -------------- ------------- -------------- DILUTED EARNINGS PER COMMON SHARE $ 0.75 $ 0.54 ------------- -------------- ------------- -------------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 1,169,689 1,160,297 ------------- -------------- ------------- -------------- WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 1,178,613 1,178,730 ------------- -------------- ------------- --------------
See notes to financial statements. 18 STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL COMMON PAID-IN RETAINED TOTAL STOCK CAPITAL EARNINGS EQUITY BALANCE AT DECEMBER 31, 1996 $ 116,007 $ 319,849 $ 2,814,871 $ 3,250,727 Net income 638,375 638,375 Issuance of 1,000 shares of common stock upon exercise of options 100 3,940 4,040 ---------- ----------- ------------ ------------ BALANCE AT DECEMBER 31, 1997 116,107 323,789 3,453,246 3,893,142 Net income 880,531 880,531 Issuance of 12,000 shares of common stock upon exercise of options 1,724 70,420 72,144 Tax benefit resulting from exercise of options 14,016 14,016 ---------- ----------- ------------ ------------ BALANCE AT DECEMBER 31, 1998 $ 117,831 $ 408,225 $ 4,333,777 $ 4,859,833 ---------- ----------- ------------ ------------ ---------- ----------- ------------ ------------
See notes to financial statements. 19 STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998 AND 1997 - --------------------------------------------------------------------------------
1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 880,531 $ 638,375 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 389,626 329,878 Loss on disposal of assets 11,452 5,079 Deferred income taxes 48,000 (100,000) Changes in working capital components: Decrease (increase) in: Trade receivables 36,251 (83,638) Prepaid expenses and other assets (56,071) 54,347 Inventories (288,734) 75,860 Income taxes refund receivable (47,785) (Decrease) increase in: Accounts payable (20,995) (147,438) Accrued expenses (152,079) 250,000 Accrued legal costs (186,676) 14,568 Income taxes payable (106,109) 80,109 -------------- -------------- Net cash provided by operating activities 507,411 1,117,140 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (399,209) (445,502) Proceeds on sale of property and equipment 1,839 24,556 Purchases of marketable securities (909,429) Proceeds from sale of marketable securities 400,984 Purchase of patents (109,467) ------------- -------------- Net cash used in investing activities (1,015,282) (420,946) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on note payable (21,897) (37,818) Proceeds from exercise of stock options 72,144 4,040 ------------- -------------- Net cash provided by (used in) financing activities 50,247 (33,778) ------------- -------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (457,624) 662,416 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 732,381 69,965 ------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 274,757 $ 732,381 ------------- -------------- ------------- -------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments for interest $ 55 $ 3,224 ------------- -------------- ------------- -------------- Cash payments for income taxes $ 598,000 $ 390,000 ------------- -------------- ------------- --------------
See notes to financial statements. 20 NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS - The Chromaline Corporation (the Company) develops and manufactures high-quality photochemical imaging systems for sale primarily to a wide range of printers and decorators of surfaces. Customers' applications include textiles, billboards, electronics, glassware, fine china, and many other industrial and commercial applications. The Company's principal markets are throughout the United States. In addition, the Company sells to Western Europe, Latin America, Asia, and other parts of the world. The Company extends credit to its customers, all on an unsecured basis, on terms that it establishes for individual customers. Fifty-one percent and 44%, respectively, of the Company's accounts receivable at December 31, 1998 and 1997 are due from foreign customers. The foreign receivables are composed primarily of open credit arrangements with terms ranging from 45 to 90 days. No receivable from a single unrelated customer exceeded 10% of total accounts receivable at December 31, 1998 and 1997. No single customer represented greater than 10% of total revenue. A summary of the Company's significant accounting policies follows: CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents consist of money market funds in which carrying value approximates market value because of the short maturity of these instruments. INVENTORIES - Inventories are stated at the lower of cost (last-in, first-out) or market. If the first-in, first-out cost method had been used, inventories would have been approximately $138,000 and $163,000 higher than reported at December 31, 1998 and 1997, respectively. DEPRECIATION - Depreciation of property and equipment is computed using the straight-line method over the following estimated useful lives:
YEARS Building 25 Machinery and equipment 5 Office equipment 5 Vehicles 3
IMPAIRMENT OF LONG-LIVED ASSETS - Management periodically reviews the carrying value of long-term assets for potential impairment by comparing the carrying value of these assets to the estimated undiscounted future cash flows expected to result from the use of these assets. Should the sum of the related, expected future net cash flows be less than the carrying value, an impairment loss would be measured. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset with fair value being determined using discounted cash flows. To date, management has determined that no impairment of these assets exists. 21 PATENTS - The Company purchased a patent in 1998 for $109,467. Amortization of the patent is computed using the straight-line method over its remaining estimated useful life of 13 years. REVENUE RECOGNITION - The Company recognizes revenue on products when title passes, which is usually upon shipment. INCOME TAXES - Deferred income taxes are provided on an asset and liability method. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rate on the date of enactment. EARNINGS PER COMMON SHARE (EPS) - Basic EPS is calculated using income available to common shareholders divided by the weighted average of common shares outstanding during the year. Diluted EPS is similar to Basic except that the weighted average of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares, such as options, had been issued. Shares used in the calculation of diluted earnings per share are summarized below:
1998 1997 Weighted Average Common Shares Outstanding 1,169,689 1,160,297 Dilutive Effect of Stock Options 8,924 18,433 ------------ ------------ Weighted Average Common and Common Equivalent Shares Outstanding 1,178,613 1,178,730 ------------ ------------ ------------ ------------
USE OF ESTIMATES - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. MARKETABLE SECURITIES - Marketable securities consist primarily of investments in municipal revenue bonds with maturities of three years or less. Marketable securities are recorded at market which approximates cost. STOCK OPTIONS - As described in Note 6, the Company has adopted only the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Stock options granted to employees and board members continue to be accounted for under Accounting Principles Board Opinion No. 25. FOREIGN OPERATIONS - The Company markets in Europe, Latin America, Asia, and other parts of the world. Foreign sales approximated 32% and 29% of total sales in 1998 and 1997, respectively. In December 1996, the Company purchased a 19.5% interest in Chromaline Europe, S.A., a French corporation. On January 2, 1997, the Company sold the assets of the French representative office to Chromaline Europe, S.A for an amount which approximated cost. In 1998 and 1997, less than 10% of total sales were made through Chromaline Europe, S.A. 22 NOTE PAYABLE, BANK - The Company has a bank line of credit that provides for working capital financing. This line of credit is subject to annual renewal, is collateralized by trade receivables, and bears interest at 2.5 percentage points over 30-day LIBOR. The outstanding balance at December 31, 1998 and 1997 was $0 and $21,897, respectively. RECLASSIFICATION - Certain reclassifications were made to the 1997 financial statements to conform to the 1998 presentation. These reclassifications had no impact on net income or stockholders' equity as previously reported. ACCOUNTING PRONOUNCEMENT - In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which changes the way public companies report information about operating segments. SFAS No. 131, which is based on the management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report entitywide disclosures about products and services, major customers, and material countries in which the entity holds assets and reports revenue. The Company adopted SFAS No. 131 as of December 31, 1998. The Company operates within a single operating segment. 2. CONTINGENCIES The Company is a defendant in a claim filed in the United States District Court, Western District of Washington at Seattle, in which the claimant alleges that certain of the Company's products infringe on a U.S. patent owned by the claimant. The Company has filed an answer denying infringement and further believes the claimant's patent to be invalid, and to have been procured through inequitable conduct. During 1997, the Company incurred $445,000 of legal costs for this matter, including a $250,000 accrual at December 31, 1997 to cover future legal costs. During 1998, the lawsuit was stayed after Chromaline filed a Request for Reexamination with the United States Patent and Trademark Office with respect to the patents involved in the suit. The request was granted and the reexamination is presently ongoing. The reexamination is not expected to be completed for 12 to 18 months. During 1998, the Company paid approximately $187,000 in legal and related costs in the defense of this matter. Such payments were applied against the accrual established at December 31, 1997. At December 31, 1998, the Company had a remaining accrual of $63,000 for expected future legal costs relating to this matter. 3. INCOME TAXES Income tax expense for the years ended December 31, 1998 and 1997 consists of the following:
1998 1997 Current: Federal $ 399,000 $ 427,000 State 45,000 44,000 ----------- ----------- 444,000 471,000 Deferred 48,000 (100,000) ----------- ----------- $ 492,000 $ 371,000 ----------- ----------- ----------- -----------
23 The expected provision for income taxes, computed by applying the U.S. federal income tax rate of 35% to income before taxes, is reconciled to income tax expense as follows:
1998 1997 Expected provision for federal income taxes $ 465,000 $ 346,000 State income taxes 30,000 44,000 Research tax credits (21,000) Foreign sales corporation (17,000) (12,000) Meals and entertainment 10,000 8,000 Other 4,000 6,000 ----------- ----------- $ 492,000 $ 371,000 ----------- ----------- ----------- -----------
Deferred tax assets consist of the following as of December 31, 1998 and 1997:
1998 1997 Property and equipment $ 43,000 $ 25,000 Accrued vacation 13,000 14,000 Inventory 10,000 9,000 Allowance for doubtful accounts 5,000 6,000 Allowance for sales returns 10,000 6,000 Accrued legal costs 23,000 95,000 Other (7,000) (10,000) ----------- ----------- $ 97,000 $ 145,000 ----------- ----------- ----------- -----------
4. PENSION PLAN The Company has a defined contribution pension plan which covers substantially all of its employees. The Company contributes an amount equal to 5% of a covered employee's compensation. Total pension expense for the years ended December 31, 1998 and 1997 was approximately $115,000 and $112,000, respectively. 5. GEOGRAPHIC INFORMATION The Company manages its business on the basis of one reportable segment. See Note 1 for a brief description of the Company's business. As of December 31, 1998, the Company had operations established in various countries throughout the world. The Company is exposed to the risk of changes in social, political, and economic conditions inherent in foreign operations and the Company's results of operations are affected by fluctuations in foreign currency exchange rates. In no single country did operations account for more than 10% of the Company's net sales for 1998 and 1997. Net sales by geographic area are presented by attributing revenues from external customers on the basis of where the products are sold.
1998 1997 Net sales by geographic area: United States $ 6,316,743 $ 6,318,893 International 2,972,585 2,580,956 -------------- ------------- $ 9,289,328 $ 8,899,849 -------------- ------------- -------------- -------------
24 6. STOCK OPTIONS During 1995, the Company adopted a stock incentive plan for the issuance of up to 35,000 shares of common stock. In 1997, the Company increased the number of shares reserved for issuance under this plan to 70,000 shares. The plan provides for granting eligible participants stock options or other stock awards, as described by the plan, at option prices ranging from 85% to 110% of fair market value at date of grant. Options granted expire up to ten years after the date of grant. Such options become exercisable over a three-year period. The Company has adopted the disclosure provisions of SFAS No. 123 and has continued to apply APB Opinion No. 25 and related interpretation in accounting for its plan. Accordingly, no compensation cost has been recognized for its plan. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates as calculated in accordance with SFAS No. 123, the Company's net income and earnings per share for the years ended December 31, 1998 and 1997 would have been reduced to the pro forma amounts indicated below:
1998 1997 Net income: As reported $ 880,531 $ 638,375 Pro forma 838,723 601,774 Net income per share (basic): As reported 0.75 0.55 Pro forma 0.72 0.52 Net income per share (diluted): As reported 0.75 0.54 Pro forma 0.71 0.51
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998 and 1997: dividend yields of 0.0%, expected volatility of 52.2% and 55.0% in 1998 and 1997, respectively, an expected risk-free interest rate of 5.5%, and average expected lives of 7 years. Based upon these assumptions, the weighted-average fair value at grant date of options granted during 1998 and 1997 was $5.76 and $3.69, respectively. 25 A summary of the status of the Company's stock option plan as of December 31, 1998 and 1997 and changes during the years ending on those dates is presented below:
1998 1997 ---------------------------- -------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price Outstanding at beginning of year 37,250 4.37 36,000 4.06 Granted 32,527 9.67 3,750 5.67 Exercised (17,250) 4.04 (1,000) 4.04 Expired (1,500) 4.04 (1,500) 4.04 --------- ---------- Outstanding at end of year 51,027 7.70 37,250 4.22 --------- ---------- --------- ----------
The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ------------------------------ ------------------------------ Number Average Weighted- Number Weighted- Range of Outstanding at Remaining Average Exercisable at Average Exercise December 31, Contractual Exercise December 31, Exercise Price 1998 Life Price 1998 Price $4.04 - $4.45 14,750 6.32 4.06 13,000 4.06 5.67 3,750 8.13 5.67 1,250 5.67 8.63 - 10.13 32,527 9.54 9.67 --------- ---------- 51,027 8.50 7.70 14,250 4.20 --------- ---------- --------- ----------
26 PART III ITEM 1. INDEX TO EXHIBITS
Exhibit No. Exhibit Description - ---------- ------------------------------------------------------------ 3.1 Restated Articles of Incorporation of the Company, as amended. 3.2 By-Laws of the Company, as amended. 10.1 The Chromaline Corporation 1995 Stock Incentive Plan, as amended. 10.2 Separation Agreement effective as of July 13,1998 between Thomas L. Erickson and the Company. 10.3 Consulting Agreement dated July 22, 1998 between Thomas L. Erickson and the Company. 10.4 Agreement regarding Non-Disclosure of Confidential Information and Non-Competition dated July 22, 1998 between Thomas L. Erickson and the Company. 10.5 Revolving Credit Agreement dated April 30, 1998 between the Company and M&I Bank. 27 Financial Data Schedule.
ITEM 2. DESCRIPTION OF EXHIBITS Not applicable. 27 SIGNATURES In accordance with Section 12 of the Securities Exchange Act of 1934, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. THE CHROMALINE CORPORATION Dated: April 7, 1999 By /s/ Philip J. Hourican ----------------------------------------- Philip J. Hourican President and Chief Executive Officer By /s/ Jeffery A. Laabs ----------------------------------------- Jeffery A. Laabs Vice President of Finance, Controller, Treasurer and Secretary 28 INDEX TO EXHIBITS
Method Exhibit Description of Filing ------ ----------- --------- 3.1 Restated Articles of Incorporation of the Company, as amended....................Filed Electronically 3.2 By-Laws of the Company, as amended...............................................Filed Electronically 10.1 The Chromaline Corporation 1995 Stock Incentive Plan, as amended.................Filed Electronically 10.2 Separation Agreement effective as of July 13,1998 between Thomas L. Erickson and the Company..................................................................Filed Electronically 10.3 Consulting Agreement dated July 22, 1998 between Thomas L. Erickson and the Company..........................................................................Filed Electronically 10.4 Agreement regarding Non-Disclosure of Confidential Information and Non-Competition dated July 22, 1998 between Thomas L. Erickson and the Company..................................................................Filed Electronically 10.5 Revolving Credit Agreement dated April 30, 1998 between the Company and M&I Bank.Filed Electronically 27 Financial Data Schedule..........................................................Filed Electronically
EX-3.1 2 EXHIBIT 3.1 EXHIBIT 3.1 THE CHROMALINE CORPORATION RESTATED ARTICLES OF INCORPORATION ARTICLE 1 NAME 1.1 The name of this corporation shall be The Chromaline Corporation. ARTICLE 2 PURPOSE 2.1 The purpose of this corporation shall be general business purposes including, but not limited to, the following: a. To acquire, and pay for in cash, stock or bonds of this corporation, or otherwise, the goodwill, rights, assets and property, and to undertake and assume the whole or any part of the obligations or liabilities of any person, firm, association or corporation. b. To acquire, by purchase or otherwise, and to own, hold, improve, lease, let, mortgage, pledge, plat, sell, assign, transfer, convey, manage and deal in and exercise all rights of ownership over any and all kinds of real and personal property whatsoever, wherever situated; to act as principal or agent in the rental and management of real estate and other property. c. To own, lease, operate, construct, build and erect structures and properties pertaining to the sale, purchase, brokerage, storage or manufacture of goods, wares, merchandise and personal property of every class and description. d. To become a party to any lawful agreement, for sharing profits or to any union of interest, cooperation or mutual arrangement with any person, firm or company carrying on or engaged in any business connected with or similar to the business of this corporation, or that is engaged in conducting any business or transaction capable of being conducted so as to directly or indirectly benefit this corporation. e. To engage in trade at wholesale or retain, or both, and the manufacturing of any types of articles and products, including components thereof. f. The foregoing clauses shall be construed liberally, both as to objects and powers. It is hereby expressly provided that the enumeration of specific powers in these Articles, including the following Articles, shall not be held to limit or restrict in any manner the powers of this corporation. ARTICLE 3 DURATION 3.1 The duration of this corporation shall be perpetual. ARTICLE 4 LOCATION 4.1 The location and post office address of the registered office of this corporation shall be 4832 Grand Avenue, Duluth, Minnesota 55807. ARTICLE 5 STATED CAPITAL 5.1 The amount of stated capital of this corporation shall not be less than $1,000 and shall be calculated in the manner provided by statute. ARTICLE 6 STOCK 6.1 The total authorized number of shares of the corporation shall be 5,000,000 shares, consisting of 4,750,000 shares of Common Stock with a par value of ten cents ($.10) per share, and 250,000 shares of Preferred Stock with a par value of ten cents ($.10) per share. 6.2 The Preferred Stock shall have the following rights, privileges and limitations: a. Holders of Preferred Stock shall not be entitled to vote at any time or under any circumstances except as may be required by the Statutes of the State of Minnesota. b. Unless all dividends accumulated or accrued upon outstanding shares of Preferred Stock shall have been paid or set apart from the surplus or net earnings of the corporation, no dividends (other than dividends payable solely in shares of Common Stock) shall be declared or paid upon Common Stock. Accrued dividends shall not bear interest. c. In the event of any liquidation, dissolution or winding up of the corporation, holders of Preferred Stock shall be entitled to receive the liquidation price thereof in full, plus any unpaid dividends accrued thereon to the date of distribution before any distributions shall be made on account of the Common Stock. If upon any liquidation, dissolution or winding up of the corporation, the assets available for distribution shall be insufficient to pay the holders of all outstanding shares of Preferred Stock the full amounts to which they respectively shall be entitled, 2 the holders of shares of Preferred Stock of all series shall share ratably in any distribution of assets according to the respective amounts which would be payable in respect of the shares of Preferred Stock held by them upon such distribution if all amounts payable in respect to the Preferred Stock of all amounts payable in full. After such payment to the holders of Preferred Stock, any remaining assets of the corporation available for distribution shall be distributed solely for the ratable benefit of the holders of Common Stock, and the holders of Preferred Stock shall have no further rights in respect of their shares to the assets of the corporation. Neither a statutory merger nor consolidation of the corporation into or with any other corporation, nor a statutory merger or consolidation of any other corporation into or with the corporation, nor a sale, transfer, exchange or lease of all or any part of the assets of the corporation, shall be deemed to be a liquidation, dissolution or winding up of the corporation within the meaning of Article 6. d. Preferred Stock may be issued in such series and with such relative rights, preferences and restrictions as may be determined by the Board of Directors pursuant to Section 6.4 and this Article 6. 6.3 The Board of Directors is authorized from time to time to accept subscriptions for, allot, issue, sell and deliver shares of stock of any class (and of any series of any class) of the corporation, including stock issued as a stock dividend, to such persons, at such times and upon such terms and conditions as the Board shall determine. 6.4 The Board of Directors is authorized from time to time to provide for the issuance of Preferred Stock in one or more series and, with respect to each series, to fix or alter from time to time, as to shares then unallotted: a. The designation of such series and the number of shares which shall constitute such series, which number may be increased (except where otherwise provided by the Board of Directors in crating such series) or decreased (but not below the number of shares then outstanding) from time to time by action of the Board of Directors; b. The dividend rate or rates to which shares of such series shall be entitled, the restrictions, conditions and limitations upon the payment of such dividends, whether such dividends shall be cumulative and, if cumulative, the date or dates from which such dividends shall be cumulative, and the dates on which such dividends, if declared, shall be payable; c. The redemption prices and terms; d. The amount payable on shares of such series in the event of any liquidation, dissolution or winding up of the corporation, which amount may vary at different dates and may vary depending upon whether such liquidation, dissolution or winding up is voluntary or involuntary; 3 e. The rights, if any, of the holders of shares of such series to convert such shares into shares of stock of the corporation of any class or of any series of any class and the price or prices or the rate or rates of such conversion and the other terms, provisions and conditions of such conversion; f. The obligation, if any, of the corporation to maintain a purchase, retirement or sinking fund for shares of such series, and the provisions with respect thereto; and g. Any other relative rights, preferences and restrictions not inconsistent with the Minnesota Business Corporation Act or these Articles of Incorporation. Shares shall not be issued hereunder until a certified copy of the resolutions duly adopted by the Board of Directors establishing any such series of Preferred Stock and the terms thereof shall have been filed for record in the manner provided by law. 6.5 The Board of Directors is further authorized from time to time to grant and issue options to purchase or subscribe for shares of stock of any class of the corporation, warrants t purchase such stock, rights to convert any stock or other securities of the corporation into such stock, and similar stock rights and privileges, to such persons at such time and upon such terms, provisions and conditions as the Board shall from time to time determine. 6.6 No holder of any class of stock of the corporation shall be entitled to subscribe for or purchase his proportionate share of stock of any class of the corporation, now or hereafter authorized or issued. 6.7 At such meeting of the shareholders of the corporation and with respect to any matter upon which the shareholders have a right to vote, each holder of record shares of Common Stock shall be entitled to one vote for each share of Common Stock so held. No shareholder shall be entitled to cumulate his votes for the election of Directors and there shall be no cumulative voting for any purpose whatsoever. ARTICLE 7 MANAGEMENT 7.1 The management of the corporation shall be vested in a Board of Directors. The number of Directors shall be fixed by the By-laws and may be altered by amending the By-laws, but shall never be less than three (3). The term of office of each Director shall be one (1) year, or until his successor has been elected and qualified. The Directors shall be elected at the annual meting of the shareholders. 7.2 The meetings of the shareholders and Directors may be held outside the State of Minnesota. Notice of the time, place and purpose of shareholders' meetings and 4 Directors' meetings, whether required by statute, the Articles or the By-laws, may be waived, in writing, by a shareholder or Director, as the case may be; such waiver may be given before, at, or after the meeting, and shall be filed wit the Secretary or entered upon the records of the meeting. Each Director, by his attendance and participation in the action taken at any Directors' meeting, shall be deemed to have waived notice of such meeting. 7.3 Regular meetings shall be held at such times, and such places within or without the state, as may be designated in the By-laws or the resolution of the Board of Directors or by written consent of all shareholders entitled to vote thereat. 7.4 Special meetings of shareholders may be held at such times, and such places within or without the state, as may be designated in the Notice of Meeting given as provided in the By-laws, or as designated in the written Waiver of Notice and Consent to the meeting signed by all of the holders of voting stock. 7.5 The following-named persons are the present Directors of this corporation: Robert Banks 1425 Tower Avenue Superior, Wisconsin 54880 George Barnum 613 Missabe Building Duluth, Minnesota 55802 Virgil Dock 4851 London Road Duluth, Minnesota 55804 Thomas L. Erickson 4832 Grand Avenue Duluth, Minnesota 55807 David Harris 470 Rice Creek Boulevard Minneapolis, Minnesota 55432 Lloyd K. Johnson 517 Torrey Building Duluth, Minnesota 55802 Gerald W. Simonson 5813 Jeff Place Edina, Minnesota 55436 William C. Ulland 740 East Superior Street Duluth, Minnesota 55802
5 ARTICLE 8 POWERS AND REGULATIONS 8.1 For the regulation of the business and for the conduct of the affairs of the corporation, and for the creation, definition and regulation of the powers of the corporation and of its Directors and shareholders, it is further provided: 8.2 In furtherance, and not in limitation of the powers conferred by statute or in these Articles, the corporation is expressly authorized: a. To accept or reject subscriptions for shares an to issue the shares of the Capital Stock of this corporation to the full amount and number of shares authorized by the Articles of Incorporation in such amounts and for such consideration as from time to time shall be determined by the Board, except as otherwise provided in these Articles. b. To acquire, hold, use, sell, assign, lease, grant licenses in respect of, mortgage, or otherwise dispose of Letters patent of the United States or any foreign country, patent rights, licenses and privileges, inventions, improvements and processes, copyrights, trademarks and trade names, relating to or useful in connection with any business of this corporation. c. To acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, or evidences of indebtedness of any domestic or foreign corporation, and while the owner thereof, to exercise all the rights, powers and privileges of ownership. d. To purchase, hold, sell and reissue the shares of its own capital stock. e. To enter into obligations or contracts of any kind or nature with any person, firm, association, corporation, municipality, county, state, body politic or government or colony or dependency thereof. f. To incur such indebtedness as its Directors may from time to time deem necessary or proper for the operation of this business and may issue any and all manner of secured or unsecured notes, bonds, or other written instruments in evidence of the obligations undertaken by the corporation. 8.3 In furtherance, and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized: a. To make and alter By-laws of this corporation, subject to the power of the shareholders, to change or repeal such By-laws, and subject to any other limitations on such authority provided by the Minnesota Business Corporation Act. 6 b. To fix the amount to be reserved as working capital over and above its capital stock paid in, to authorize and cause to be executed mortgages and liens upon the real and personal property of this corporation. c. When and as authorized by an affirmative assent of holders of shares entitling them to exercise a majority of the voting power on such proposal, the Board of Directors shall have power and authority by action taken at any meeting of the Board, to sell, lease, exchange or otherwise dispose of all or substantially all of the corporation's property and assets including its goodwill, upon such terms and conditions and for such considerations, which may be money, shares, bonds or other instruments for the payment of money or other property as the Board of Directors deems expedient. 8.4 In the absence of fraud, no contract or other transactions between the corporation and nay other corporation, and no act of the corporation shall in any way be invalidated or otherwise affected by the fact that any one or more of the Directors of the corporation are pecuniarily or otherwise interested in, or are Directors or officers of such other corporation. Any Director of the corporation individually, or any firm or association of which any Director may be a member, may be a party to, or may be pecuniarily or otherwise interested in any contract or transaction of the corporation, provided that the fact that he individually or such firm or association is no interested shall be disclosed or shall have been known to the Board of Directors of the corporation or a majority thereof; and any Director of the corporation who is also a Director or officer of such other corporation or who is so interested, may be counted in determining the existence of a quorum at any meting of the Board of Directors or of any committee of the corporation which shall authorize any such contract or transaction, with like force and effect as if he were not such Director or officer of such other corporation or not so interested. 8.5 Directors shall not have personal liability to either the corporation or its shareholders for monetary damages for breach of a Director's fiduciary duty to the corporation; except for any breach of the director's duty of loyalty to the corporation or its shareholders, for acts or omissions not in good faith, intentional misconduct o a knowing violation of law, or as for such other liability as may not be eliminated or limited under Minnesota Statutes, Section 302A.251. 8.6 Each Director and officer at any time serving the corporation shall, to the full extent allowed by law, be indemnified and held harmless by the corporation from and against all costs and expenses, including attorneys' fees, which may be imposed upon or reasonably incurred by him in connection with or arising out of the defense or settlement of any claim, action, suit or proceeding brought against him by reason of his being or having been a Director or officer of this corporation, whether or not he is a Director or officer at the time of incurring such expense. Furthermore, each such Director or officer shall, to the fullest extent allowed b law, be indemnified and held harmless by this corporation against any judgment that may be recovered against him in such action; provided, however, that no Director or officer shall be indemnified by this corporation with respect to matters as to 7 which he or she is finally adjudged in any such action, suit or proceeding to have been guilty of willful misconduct detrimental to the best interest of the corporation. ARTICLE 9 AMENDMENTS 9.1 The corporation reserves the right to amend, alter, change or repeal any provisions contained in these Articles of Incorporation, in the manner now or hereafter prescribed by statute and all rights conferred upon shareholders herein are granted subject to this reservation. 9.2 Any amendment may be adopted by the affirmative vote of the holders of a majority of the voting power of all shareholders entitled under these Articles to vote, except as may be otherwise prescribed by the laws of the State of Minnesota. (This space intentionally left blank.) 8 EX-3.2 3 EXHIBIT 3.2 EXHIBIT 3.2 BY-LAWS OF THE CHROMALINE CORPORATION ARTICLE I Offices, Corporate Seal Section 1. OFFICES. The registered office of the corporation shall be 4832 Grand Avenue, Duluth, Minnesota 55807, and the corporation shall have offices at such other places as the Board of Directors shall from time to time determine. Section 2. SEAL. The corporation shall have such corporate seal or no corporate seal as the Board of Directors shall from time to time determine. ARTICLE II Meeting of Shareholders Section 1. ANNUAL MEETING. An Annual Meeting of the shareholders of the corporation entitled to vote shall be held at such place in the City of Duluth, or in such other city within or without the State of Minnesota as is designated by the Board of Directors, as such time and on such day during the month of April of each year (other than a Saturday, Sunday or holiday), as shall be determined by the Board of Directors of the corporation. At the Annual Meeting, the shareholders, voting as provided in the Articles of Incorporation, shall elect the Board of Directors and shall transact such other business as may properly come before the meeting. Section 2. QUORUM. The holders of a majority of shares outstanding and entitled to vote for the election of Directors at said meeting, represented either in person or by proxy, shall constitute a quorum for the transaction of business. In case a quorum is not present at the Annual Meeting, those present may adjourn to such day as they shall agree upon. A notice of such adjournment shall be mailed to each shareholder entitled to vote at least five (5) days before such adjourned meeting, but if a quorum be present, they may adjourn from day to day as they see fit and no notice need be given. At such adjourned meetings at which the required amount of voting shares shall be represented, any business may be transacted which might have been transacted at the meeting as originally notified. Section 3. SPECIAL MEETINGS. Special meetings of the shareholders shall be called by the Secretary at any time upon request of the Chairman, President, a Vice President, a majority of the Board of Directors, or upon request by shareholders holding ten percent (10%) or more of the capital stock entitled to vote. Section 4. VOTING. At each meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote in person or by proxy duly appointed by an instrument in writing subscribed by such shareholder. Each shareholder shall have one vote for each share having voting power, standing in his name on the books of the corporation. Upon the demand of any shareholder, the vote for Directors, or the vote upon any question before the meeting shall be by ballot. All elections shall be had and all questions decided by a majority vote of the shares entitled to vote and represented at any meeting at which there is a quorum, except in such cases as shall otherwise be required or permitted by statute, the Articles of Incorporation, or these By-laws. Section 5. NOTICE OF MEETINGS. There shall be mailed to each shareholder, shown by the books of the corporation to be a holder of record voting shares, at his address as shown by the books of the corporation, a notice setting out the time and place of the annual meeting or any special meeting, which notice shall be mailed at least ten (10) days prior thereto. Every notice of any special meeting shall state the purpose or purposes of the proposed meeting, and the business transacted at all special meetings shall be confined to purposes stated in the call. Any shareholder who does not receive notice of the type specified above of an annual or special meeting shall, by his attendance at and participation in the action taken at any such meeting, be deemed to have waived notice thereof. Section 6. CLOSING OF BOOKS. The Board of Directors may fix a time, not exceeding sixty (60) days preceding the date of any meting of shareholders, as a record date for the determination of the shareholders entitled to notice of and to vote at such meeting, notwithstanding any transfer of any shares on the books of the corporation after any record date so fixed. The Board of Directors may close the books of the corporation after any record date so fixed. The Board of Directors may close the books of the corporation against transfer of sharers during the whole or any part of such period. ARTICLE III Directors Section 1. GENERAL POWERS. The business and property of the corporation shall be managed by a Board of Directors of not less than five or more than nine Directors who shall be elected by the stockholders. Section 2. QUORUM. A quorum for the transaction of business at any regular or special meeting of the Directors shall consist of 50% of the then existing Board if the number of Directors are even in number and shall consist of a majority of the then existing members of the Board if the Board of Directors consists of an odd number of Directors. Section 3. FIRST MEETING. As soon as practicable after each annual election of Directors, the Board of Directors shall meet for the purposes of organizing and choosing the officers of the corporation and for the transaction of other business at the place where the shareholders' meeting is held or at the place where regular meetings of the Board of Directors are held. No notice of such meeting need be given. Such first meeting of the Board of Directors may be held at any other time and place which shall be specified in a 2 notice given as hereinafter provided for special meetings or in consent and waive of notice signed by all the Directors. Section 4. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held from time to time at such time and place as may from time to time be fixed by resolution adopted by a majority of the whole Board of Directors. No notice need be given of any regular meeting. Section 5. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at such time and place as may from time to time be designated in the notice or the waiver of notice of the meeting. Special meetings of the Board of Directors may be called by the Chairman of the Board, President or by any two (2) Directors. Notice of such special meeting shall be given by the Secretary, who shall give at least four (4) days notice thereof to each Director if notice is given by mail or at least twenty-four (24) hours notice thereof to each Director if notice is given by telephone, telegraph, or in person, provided that no notice of any meeting need be given to any Director while he is in the Armed Forces of the United States. Each notice thereof may be waived either before, at, or after such meeting in writing, provided that a quorum be present at the meeting. Each Director, by his attendance and participation in the action taken at any Directors' meeting, shall be deemed to have waived notice of such meeting. Section 6. PARTICIPATION BY CONFERENCE TELEPHONE. Members of the Board of Directors or any committee designated by the Board may participate in a meeting of the Board of Directors or of such committee by means of conference telephone or similar communications equipment whereby all persons participating in the meeting can hear or communicate with each other, and participation in a meeting pursuant to this section shall constitute presence in person at such meeting. The place of the meeting shall be deemed to be the place of origination of the conference telephone call or similar communications equipment. Section 7. CHAIRMAN. The Directors of the corporation shall elect a Chairman from within their number who shall chair all meetings of the Directors, shall act as an advisor to the President of the Corporation with respect to matters of policy and shall regularly consult with the President relative to executive decisions to be made by the President. The compensation of the Chairman of the Board shall be determined from time to time by resolution of the Board of Directors and upon the basis determined by the Board of Directors. In the event of the absence or disability of the President, the Chairman shall succeed to his powers in a pro-tem capacity until the office shall be filled by the Board of Directors. Section 8. COMPENSATION. Directors and members of any committee of the corporation contemplated by these By-laws or otherwise provided for by resolution of the Board of Directors, who are not salaried officers of the corporation, shall receive such fixed sum for meetings attended, or such annual sum as shall be determined from time to time by resolution of the Board of Directors. All Directors and members of any such committee shall receive their expenses, if any, or attendance at meetings of the Board of Directors, or such 3 committee. Nothing herein contained shall be construed to preclude any Director from serving the corporation in any other capacity and receiving compensation therefor. Section 9. EXECUTIVE COMMITTEE. The Board of Directors may designate, by a majority of the Directors present at a meeting at which a quorum is present, two or more of their number to constitute an Executive Committee which shall have and exercise the authority of the Board of Directors in the management of the corporation to the extent set forth in the resolution creating such Executive Committee. Such Executive Committee shall act only in the interval between meetings of the Board of Directors and shall be subject at all times to the control and direction of the Board of Directors. Section 10. AUDIT COMMITTEE. The Directors may, by resolution, appoint members of the Board, who are independent of management and who are free of any relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment, as an Audit Committee with such powers and duties as the Board of Directors may deem appropriate. Section 11. COMPENSATION COMMITTEE. The Directors may, by resolution, appoint members of the Board, who are independent of management and who are free of any relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment, as a Compensation Committee with such powers and duties as the Board of Directors may deem appropriate. Section 12. VACANCIES. If any vacancies exist on the Board of Directors by reason of death, resignation or otherwise, the remaining Directors shall have authority to fill any such vacancies. A majority of the remaining Directors shall constitute a quorum for filling such vacancies. ARTICLE IV Officers Section 1. DESIGNATION. The officers of the corporation shall consist of the Chairman of the Board of Directors, a President, one or more Vice Presidents, a Secretary and a Treasurer, and such other officers and agents as may from to time be chosen. Any two (2) offices, except those of President and Secretary, may be held by one (1) person. Section 2. ELECTION AND TERM OF OFFICE. At the first meeting of the Board of Directors, the Board shall elect from their number a Chairman and a President and shall, from within or without their number, elect one or more Vice Presidents, a Secretary and a Treasurer, and such other officers as may be deemed advisable. Such officers shall hold office until the next first meeting or until their successors are elected and qualify; provided however, that any officer may be removed with or without cause by the affirmative vote of a majority of the whole Board of Directors. 4 Section 3. DUTIES. The President shall be the chief executive and chief operating officer of the Corporation and shall preside at all meetings of the shareholders. The President shall have such other duties as may be prescribed from time to time by the Board of Directors and by the statutes and laws of the State of Minnesota. Each Vice President shall have such powers and shall perform such duties as may be prescribed by the Board of Directors. The Secretary shall be secretary of and shall attend all meetings of the shareholders and the Board of Directors. He shall act as Clerk thereof and shall record all the proceedings of such meetings in the minute book of the corporation. He shall give proper notice of meetings of shareholders and Directors. He shall keep the seal of the corporation and shall affix the same to any instrument requiring it and shall attest the seal by his signature. He shall, with the President or any Vice President, sign all certificates for shares of the corporation and affix the corporate seal thereto, and shall perform such other duties as may be prescribed from time to time by the Board of Directors. The Treasurer shall keep accurate accounts of all moneys of the corporation received or disbursed. He shall deposit all moneys, drafts and checks in the name of and to the credit of the corporation in such banks and depositaries as a majority of the whole Board of Directors shall designate from time to time. He shall have power to endorse for deposit all notes, checks and drafts received by the corporation. He shall disburse the funds of the corporation as ordered by the Board of Directors, taking proper vouchers therefor. He shall render to the President and Directors, whenever required, an account of all his transactions as Treasurer and of the financial condition of the corporation and shall perform such duties as may be prescribed by the Board of Directors from time to time. Section 4. VACANCIES. If there be a vacancy in the officers of the corporation by reason of death, resignation or otherwise, such vacancy shall be filled, for the unexpired term, by the Board of Directors. ARTICLE V Indemnification of Directors, Officers, Employees and Agents Section 1. INDEMNIFICATION. The full extent permitted by Minnesota Statutes, Section 301.095, as amended from time to time, or by other provisions of law, each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, wherever brought, whether civil, criminal, administrative, or investigative by reason of the fact that such person is or was a Director, officer, employee or agent of the corporation or by reason of the fact that such person is or as serving at the request of the corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified by the corporation against expenses, including attorney's fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by such person in connection with such action, 5 suit or proceeding; provided, however, that the indemnification with respect to a person who is or was serving as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall apply only to the extent such person is not indemnified by such other corporation, partnership, joint venture, trust or other enterprise. The indemnification provided by this section shall continue as to a person who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. Section 2. ADVANCE PAYMENTS. To the full extent permitted by Minnesota Statutes, Section 301.095, as amended from time to time, or by other provisions of law, the corporation may pay in advance of final disposition expenses incurred in actions, suits and proceedings specified in Section 1 above. Section 3. INSURANCE. To the full extent permitted by Minnesota Statutes, Section 301.095, as amended from time to time, or by other provisions of law, the corporation may purchase and maintain insurance n behalf of any indemnified party against any liability asserted against such person in such capacity. ARTICLE VI Shares and Their Transfer Section 1. CERTIFICATE OF STOCK. Every owner of stock of the corporation shall b entitled to a certificate to be in such form as the Board of Directors prescribe, certifying the number and class of shares of stock of the corporation owned by him. The certificates for the respective classes of such stock shall be numbered in the order in which they shall be signed in the name of the corporation by the Chairman of the Board of Directors, the President, or any Vice President, and by the Secretary, as prescribed by the Board of Directors. A record shall be kept of the name of the person, firm or corporation owning the stock represented by such certificates, the number and class of shares represented by such certificates respectively, and the respective dates thereof, and in the case of cancellation, the respective dates of cancellation. Every certificate surrendered to the corporation for exchange or transfer shall be cancelled, and no new certificate or certificates shall be issued in exchange for any existing certificates until such existing certificate shall have been so cancelled and except in cases provided for in Section 4 of this Article VI. Section 2. ISSUANCE OF SHARES. The Board of Directors is authorized and directed to issue shares of the corporation to the full amount authorized by the Articles of Incorporation in such amounts and at such times as may be determined by the Board and as may be permitted by law. Section 3. TRANSFER OF SHARES. Transfer of shares shall be made on the books of the corporation only by the person named in the certificate or by his attorney thereunto authorized by Power of Attorney duly executed and filed with the corporation and upon surrender for cancellation of the certificate or certificates for such shares. The person in whose name shares of stock stand on the books of the corporation shall be deemed the owner 6 thereof for all purposes as regards the corporation; provided that when any transfer of shares shall be made as collateral security, and not absolutely such fact, if known to the Secretary of the corporation or to said transfer agent, shall be so expressed in the entry of transfer. Section 4. LOST CERTIFICATES. Any shareholder claiming a certificate of stock to be lost or destroyed shall make an affidavit or affirmation of that fact in such form as the Board of Directors may require, and shall, if the directors so require, give the corporation a bond of indemnity in form and with one or more sureties satisfactory to the Board but not exceeding double the value of the stock represented by such certificate, to indemnify the corporation against any claim that may be made against it on account of the alleged loss or destruction of such certificate, whereupon a new certificate may be issued in the same tenor and for the same number of shares as the one alleged to have been destroyed or lost. Section 5. TREASURY STOCK. Treasury stock shall be held by the corporation subject to the disposal of the Board of Directors, in accordance with these By-laws, and shall neither vote nor participate in dividends. Section 6. INDEBTEDNESS OF SHAREHOLDERS. The corporation shall have the first lien on all the shares of its capital stock and upon all dividends declared upon the same for any indebtedness of the respective holder thereof in the corporation. ARTICLE VII Amendments of By-Laws These By-laws may be amended or altered by the vote of a majority of the whole Board of Directors at any meeting, provided that a notice of such proposed amendment shall be given in the notice given to the Directors of such meeting. Such authority in the Board of Directors is subject to the power of the shareholders to change or repeal such By-laws by a majority vote of the shareholders present and represented at any annual meeting or at any special meeting called for such purpose. No provision of the By-laws changed, amended or repealed by the shareholders shall thereafter be restored to its prior form or to substantially its prior form or be readopted by the Board of Directors except and until the proposed restoration or readoption thereof shall have been approved by the shareholders by a majority vote of the shareholders present or represented at any annual meeting or at any special meeting called for that purpose. 7 EX-10.1 4 EXHIBIT 10.1 EXHIBIT 10.1 THE CHROMALINE CORPORATION 1995 STOCK INCENTIVE PLAN 1. PURPOSE OF PLAN. The purpose of The Chromaline Corporation 1995 Stock Incentive Plan (the "Plan") is to advance the interests of The Chromaline Corporation (the "Company") and its stockholders by enabling the company and its subsidiaries to attract and retain persons of ability to perform services for the Company and its subsidiaries by providing an incentive to such individuals through equity participation in the Company and by rewarding such individuals who contribute to the achievement by the Company of its economic objectives. 2. DEFINITIONS. The following terms will have the mean set forth below, unless the context clearly otherwise requires: 2.1 "BOARD" means the Board of Directors of the Company. 2.2 "BROKER EXERCISE NOTICE" means a written notice pursuant to which a Participant, upon exercise of an Option, irrevocably instructs a broker or dealer to sell a sufficient number of shares or loan a sufficient amount of money to pay all or a portion of the exercise price of the Option and/or any related withholding tax obligations and remit such sums to the Company and directs the Company or deliver stock certificates to be issued upon such exercise directly to such broker or dealer. 2.3 "CHANGE IN CONTROL" means an event described in Section 13.1 of the Plan. 2.4 "CODE" means the Internal Revenue Code of 1986, as amended. 2.5 "COMMITTEE" means the group of individuals administering the Plan, as provided in Section 3 of the Plan. 2.6 "COMMON STOCK" means the common stock of the Company's $.10 par value, or the number and kind of shares of stock or other securities into which such Common Stock may be changed in accordance with Section 4.3 of the Plan. 2.7 "DISABILITY" means the disability of the Participant such as would entitle the Participant to receive disability income benefits pursuant to the long-term disability plan of the Company or Subsidiary then covering the Participant or, if no such plan exists or is applicable to the Participant, the permanent and total disability of the Participant within the meaning of Section 22(e)(3) of the Code. 2.8 "ELIGIBLE RECIPIENTS" means all directors (including non-employee directors), officers and employees of the Company or any Subsidiary. 2.9 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 2.10 "FAIR MARKET VALUE" means, with respect to the Common Stock, as of any date (or, if no shares were traded or quoted on such date, s of the next preceding date on which there was such a trade or quote): a. If the Common Stock is listed (or admitted to unlisted trading privileges) on an exchange or reported on the NASDAQ National Market System or bid and asked prices are reported on the NASDAQ system or a comparable reporting service, the closing sale price or the mean of the closing bid and asked prices, as the case may be. b. If the Common Stock is not so listed or reported, such price as the Committee determines in good faith in the exercise of its reasonable discretion. 2.11 "INCENTIVE AWARD" means an Option, Stock Appreciation Right, Restricted Stock Award, Performance Unit or Stock Bonus granted to an Eligible Recipient pursuant to the Plan. 2.12 "INCENTIVE STOCK OPTION" means a right to purchase Common Stock granted to an Eligible Recipient pursuant to Section 6 of the Plan that qualifies as an "incentive stock option" within the meaning of Section 422 of the Code. 2.13 "NON-STATUTORY STOCK OPTION" means a right to purchase Common Stock granted to an Eligible Recipient pursuant to Section 6 of the Plan that does not qualify as a Incentive Stock Option. 2.14 "OPTION" means an Incentive Stock Option or a Non-Statutory Stock Option. 2.15 "PARTICIPANT" means an Eligible Recipient who receives one or more Incentive Awards under the Plan. 2.16 "PERFORMANCE UNIT" means a right granted to an Eligible Recipient pursuant to Section 9 of the Plan to receive a payment from the Company, in the form of stock, cash or a combination of both, upon the achievement of established performance goals. 2.17 "PREVIOUSLY ACQUIRED SHARES" means shares of Common Stock that are already owned by the Participant or, with respect to any Incentive Award, that are to be issued upon the grant, exercise or vesting of such Incentive Award. 2 2.18 "RESTRICTED STOCK AWARD" means an award of Common Stock ranted to an Eligible Recipient pursuant to Section 8 of the Plan that is subject to the restrictions on transferability and the risk of forfeiture imposed by the provisions of such Section 8. 2.19 "RETIREMENT" mans normal or approved early termination of employment or service pursuant to and in accordance with the regular retirement/pension plan or practice of the Company or Subsidiary then covering the Participant, provided that if the Participant is not covered by any such plan or practice, the Participant will be deemed to be covered by the Company's plan or practice for purposes of this determination. 2.20 "SECURITIES ACT" means the Securities Act of 1933, as amended. 2.21 "STOCK APPRECIATION RIGHT" means a right granted to an Eligible Recipient pursuant to Section 7 of the Plan to receive a payment from the Company, in the form of stock, cash or a combination of both, equal to the difference between the Fair Market Value of one or more shares of Common Stock and the exercise price of such shares under the terms of such Stock Appreciation Right. 2.22 "STOCK BONUS" means an award of Common Stock granted to an Eligible Recipient pursuant to Section 10 of the Plan. 2.23 "SUBSIDIARY" means any entity that is directly or indirectly controlled by the Company or any entity in which the Company has a significant equity interest, as determined by the Committee. 2.24 "TAX DATE" means the date any withholding tax obligation arises under the Code for a Participant with respect to an Incentive Award. 3. PLAN ADMINISTRATION. 3.1 THE COMMITTEE. The Plan will be administered by the Board or by a committee of the Board consisting of not less than two persons; provided, however, that from and after the date on which the Company first registers a class of its equity securities under Section 12 of the Exchange Act, the Plan will be administered by the Board, all of whom will be "disinterested persons" within the meaning of Rule 16b-3 under the Exchange Act, or by a committee consisting solely of not fewer than two members of the Board who are such "disinterested persons." As used in this Plan, the term "Committee" will refer to the Board or to such a committee, if established. To the extent consistent with corporate law, the Committee may delegate to any officers of the Company the duties, power and authority of the Committee under the Plan pursuant to such conditions or limitations as the Committee may establish; provided, however, that only the Committee may exercise such duties, power and authority with respect to Eligible Recipients who are subject to Section 16 of the Exchange Act. The Committee may exercise its duties, power and authority under the Plan in its sole and absolute discretion without the consent of any Participant or other party, unless 3 the Plan specifically provides otherwise. Each determination, interpretation or other action made or taken by the Committee pursuant to the provisions of the Plan will be conclusive and binding for all purposes and on all persons, and no member of the Committee will be liable for any action or determination made in good faith with respect to the Plan or any Incentive Award granted under the Plan. 3.2 AUTHORITY OF THE COMMITTEE. a. In accordance with and subject to the provisions of the Plan, the Committee will have the authority to determine all provisions of Incentive Awards as the Committee may deem necessary or desirable and as consistent with the terms of the Plan, including, without limitation, the following: (i) the Eligible Recipients to be selected as Participants; (ii) the nature and extent of the Incentive Awards to be made to each Participant (including the number of shares of Common Stock to be subject to each Incentive Award, any exercise price, the manner in which Incentive Awards will vest or become exercisable and whether Incentive Awards will be granted in tandem with other Incentive Awards) and the form of written agreement, if any, evidencing such Incentive Award; (iii) the time or times when Incentive Awards will be granted; (iv) the duration of each Incentive Award; and (v) the restrictions and other conditions to which the payment or vesting of Incentive Awards may be subject. In addition, the Committee will have the authority under the Plan to pay the economic value of any Incentive Award in the form of cash, Common Stock or any combination of both. b. The Committee will have the authority under the Plan to amend or modify the terms of any outstanding Incentive Award in any manner, including, without limitation, the authority to modify the number of shares or other terms and conditions of an Incentive Award, extend the term of an Incentive Award, accelerate the exercisability or vesting or otherwise terminate any restrictions relating to an Incentive Award, accept the surrender of any outstanding Incentive Award or, to the extent not previously exercised or vested, authorize the grant of new Incentive Awards in substitution for surrendered Incentive Awards; provided, however that the amended or modified terms are permitted by the Plan as then in effect and that any Participant adversely affected by such amended or modified terms has consented to such amendment or modification. No amendment or modification to an Incentive Award, however, whether pursuant to this Section 3.2 or any other provisions of the Plan, will be deemed to be a regrant of such Incentive Award for purposes of this Plan. c. In the event of (i) any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, extraordinary dividend or divestiture (including a spin-off) or any other change in corporate structure or shares, (ii) any purchase, acquisition, sale or disposition of a significant amount of assets or a significant business; (iii) any change in accounting principles or practices, or (iv) any other similar change, in each 4 case with respect to the Company or any other entity whose performance is relevant to the grant or vesting of an Incentive Award, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors f the surviving corporation) may, without the consent of any affected Participant, amend or modify the vesting criteria of any outstanding Incentive Award that is based in whole or in part on the financial performance of the Company (or any Subsidiary or division thereof) or such other entity so as equitably to reflect such event, with the desired result that the criteria for evaluating such financial performance of the Company or such other entity will be substantially the same (in the discretion of the Committee or the board of directors of the surviving corporation) following such event as prior to such event; provided, however, that the amended or modified terms are permitted by the Plan as then in effect. 4. SHARES AVAILABLE FOR ISSUANCE. 4.1 MAXIMUM NUMBER OF SHARES. Subject to adjustment as provided in Section 4.3 of the Plan, the maximum number of shares of Common Stock that will be available for issuance under the Plan will be 105,000 shares. Notwithstanding any other provision of the Plan to the contrary, no Participant in the Plan may be granted, during the term of the Plan, any Options or Stock Appreciation Rights, or any other Incentive Awards with a value based solely on an increase in the value of the Common Stock after the date of grant, relating to more than an aggregate of 35,000 shares of Common Stock (subject to adjustment as provided in Section 4.3 of the Plan). The shares available for issuance under the Plan may, at the election of the Committee, be either treasury shares or shares authorized but unissued, and, if treasury shares are used, all references in the Plan to the issuance of shares will, for corporate law purposes, be deemed to mean the transfer of shares from treasury. 4.2 ACCOUNTING FOR INCENTIVE AWARDS. Shares of Common Stock that are issued under the Plan or that are subject to outstanding Incentive Awards will be applied to reduce the maximum number of shares of Common Stock remaining available for issuance under the Plan. Any shares of Common Stock that are subject to an Incentive Award that lapses, expires, is forfeited or for any reason is terminated unexercised or unvested and any shares of Common Stock that are subject to an Incentive Award that is settled or paid in cash or any form other than shares of Common Stock will automatically again become available for issuance under the Plan. Any shares of Common Stock that constitute the forfeited portion of a Restricted Stock Award, however, will not become available for further issuance under the Plan. 4.3 ADJUSTMENTS TO SHARES OF INCENTIVE AWARDS. In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, divestiture or extraordinary dividend (including a spin-off) or any other change in the corporate structure or shares of the Company, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation) will make appropriate 5 adjustment (which determination will be conclusive) as to the number and kind of securities available for issuance under the Plan and, in order to prevent dilution or enlargement of the rights of Participants, the number, kind and, where applicable, exercise price of securities subject to outstanding Incentive Awards. 5. PARTICIPATION. Participants in the Plan will be those Eligible Recipients who, in the judgment of the Committee, have contributed, are contributing or are expected to contribute to the achievement of economic objectives of the Company or its subsidiaries. Eligible Recipients may be granted from time to time one or more Incentive Awards, singly or in combination or in tandem with other Incentive Awards, as may be determined by the Committee. Incentive Awards will be deemed to be granted as of the date specified in the grant resolution of the Committee, which date will be the date of any related agreements with the Participant. 6. OPTIONS. 6.1 GRANT. An Eligible Recipient may be granted one or more Options under the Plan, and such Options will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee. The Committee may designate whether an Option is to be considered an Incentive Stock Option or a Non-Statutory Stock Option. 6.2 EXERCISE PRICE. The per share price to be paid by a Participant upon exercise of an Option will be determined by the Committee in its discretion at the time of the Option grant, provided that (a) such price will not be less than 100% of the Fair Market Value of one share of Common Stock on the date of grant with respect to an Incentive Stock Option (110% of the Fair Market Value if, at the time the Incentive Stock Option is granted, the Participant owns, directly or indirectly, more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary corporation of the Company), and (b) such price will not be less than 85% of the Fair Market Value of one share of Common Stock on the date of grant with respect to a Non-Statutory Stock Option. 6.3 EXERCISABILITY AND DURATION. An Option will become exercisable at such times and in such installments as may be determined by the Committee at the time of grant; provided, however, that no Incentive Stock Option may be exercisable after 10 years from its date of grant (five years from its date of grant if, at the time the Incentive Stock Option is granted, the Participant owns, directly or indirectly, more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary corporation of the Company). 6.4 PAYMENT OF EXERCISE PRICE. The total purchase price of the shares to be purchased upon exercise of an Option will be paid entirely in cash (including check, bank draft or money order); provided, however, that the Committee may allow such payments to be made, in whole or in part and upon such terms and conditions as may be established by 6 the Committee, by tender of a Broker Exercise Notice, Previously Acquired Shares, a promissory note or by a combination of such methods. 6.5 MANNER OF EXERCISE. An Option may be exercised by a Participant in whole or in part from time to time, subject to the conditions contained in the Plan and in the agreement evidencing such Option, by delivery in person, by facsimile or electronic transmission or through the mail of written notice of exercise to the Company (Attention: Chief Financial Officer) at its principal executive office in Duluth, Minnesota and by paying in full the total exercise price for the shares of Common Stock to be purchased in accordance with Section 6.4 of the Plan. 6.6 AGGREGATE LIMITATION OF STOCK SUBJECT TO INCENTIVE STOCK OPTIONS. To the extent that the aggregate Fair Market Value (determined as of the date an Incentive Stock Option is granted) of the shares of Common Stock with respect to which incentive stock options (within the meaning of Section 422 of the Code) are exercisable for the first time by a Participant during any calendar year (under the Plan and any other incentive stock option plans of the Company or any subsidiary or parent corporation of the Company (within the meaning of the Code)) exceeds $100,000 (or such other amount as may be prescribed by the Code from time to time), such excess Options will be treated as Non-Statutory Stock Options. The determination will be made by taking incentive stock options into account in the order in which they were granted. If such excess only applies to a portion of an incentive stock option, the Committee will designate which shares will be treated as shares to be acquired upon exercise of an incentive stock option. 7. STOCK APPRECIATION RIGHTS. 7.1 GRANT. An Eligible Recipient may be granted one or more Stock Appreciation Rights under the Plan, and such Stock Appreciation Rights shall be subject to such terms and conditions, consistent with the other provisions of the Plan, as will be determined by the Committee. 7.2 EXERCISE PRICE. The exercise price of a Stock Appreciation Right will be determined by the Committee at the date of grant but will not be less than 85% of the Fair Market Value of one share of Common Stock on the date of grant. 7.3 EXERCISABILITY AND DURATION. A Stock Appreciation Right will become exercisable at such time and in such installments as may be determined by the Committee at the time of grant; provided, however, that no Stock Appreciation Right may be exercisable prior to six months or after 10 years from its date of grant. A Stock Appreciation Right will be exercised by giving notice in the same manner as for Options, as set forth in Section 6.5 of he Plan. 7 8. RESTRICTED STOCK AWARDS. 8.1 GRANT. An Eligible Recipient may be granted one or more Restricted Stock Awards under the Plan, and such Restricted Stock Awards will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee. The Committee may impose such restrictions or conditions, not inconsistent with the provisions of the Plan, to the vesting of such Restricted Stock Awards as it deems appropriate, including, without limitation, that the Participant remain in the continuous employ or service of the Company or a subsidiary for a certain period or that the Participant or the Company (or any subsidiary or division thereof) satisfy certain performance goals or criteria. 8.2 RIGHTS AS A SHAREHOLDER; TRANSFERABILITY. Except as provided in Sections 8.1, 8.3 and 14.3 of the Plan, a Participant will have all voting, dividend, liquidation and other rights with respect to shares of Common Stock issued to the Participant as a Restricted Stock Award under this Section 8 upon the Participant becoming the holder of record of such shares as if such Participant were a holder of record of shares of unrestricted Common Stock. 8.3 DIVIDENDS AND DISTRIBUTIONS. Unless the Committee determines otherwise (either in the agreement evidencing the Restricted Stock Award at the time of grant or at any time after the grant of the Restricted Stock Award), any dividends or distributions (including regular quarterly cash dividends) paid with respect to shares of Common Stock subject to the unvested portion of a Restricted Stock Award will be subject to the same restrictions as the shares to which such dividends or distributions relate. In the event the Committee determines not to pay such dividends or distributions currently, the Committee will determine whether any interest will be paid on such dividends or distributions. In addition, the Committee may require such dividends and distributions to be reinvested (and in such case the Participants consent to such reinvestment) in shares of Common Stock that will be subject to the same restrictions as the shares to which such dividends or distributions relate. 8.4 ENFORCEMENT OF RESTRICTIONS. To enforce the restrictions referred to in this Section 8, the Committee may place a legend on the stock certificates referring to such restrictions and may require the Participant, until the restrictions have lapsed, to keep the stock certificates, together with duly endorsed stock powers, in the custody of the Company or its transfer agent or to maintain evidence of stock ownership, together with duly endorsed stock powers, in a certificateless book-entry stock account with the Company's transfer agent. 9. PERFORMANCE UNITS. An Eligible Recipient may be granted one or more Performance Units under the Plan, and such Performance Units will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee. The Committee may impose such restrictions or conditions, not inconsistent with the provisions of the Plan, to the vesting of such Performance Units as it deems 8 appropriate, including, without limitation, that the Participant remain in the continuous employ or service of the Company or any subsidiary for a certain period or that the Participant or the Company (or any Subsidiary or division thereof) satisfy certain performance goals or criteria. The Committee will have the discretion either to determine the form in which payment of the economic value of vested Performance Units will be made to the Participant (i.e., cash, Common Stock or any combination thereof) or to consent to or disapprove the election by the Participant of the form of such payment. 10. STOCK BONUSES. An Eligible Recipient may be granted one or more Stock Bonuses under the Plan, and such Stock Bonuses will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee. The Participant will have all voting, dividend, liquidation and other rights with respect to the shares of Common Stock issued to a Participant as a Stock Bonus under this Section 10 upon the Participant becoming the holder of record of such shares; provided, however, that the Committee may impose such restrictions on the assignment or transfer of a Stock Bonus as it deems appropriate. 11. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE. 11.1 TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. In the event a Participant's employment or other service with the Company and all subsidiaries is terminated by reason of death, Disability or Retirement: a. All outstanding Options and Stock Appreciation Rights then held by the Participant will remain exercisable to the extent exercisable as of such termination for a period of 30 days after such termination (but in no event after the expiration date of any such Option or Stock Appreciation Right); b. All outstanding Restricted Stock Awards then held by the Participant that have not vested will be terminated and forfeited; and c. All outstanding Performance Units and Stock Bonuses then held by the Participant will vest and/or continue to vest in the manner determined by the Committee and set forth in the agreement evidencing such Performance Units or Stock Bonuses. 11.2 TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR RETIREMENT. a. In the event a Participant's employment or other service is termination with the Company and all subsidiaries for any reason other than death, Disability or Retirement, or a Participant is in the employ or service of a subsidiary and the subsidiary ceases to be a subsidiary of the Company (unless the Participant continues in the employ or service of the Company or another subsidiary), all rights of the 9 Participant under the Plan and any agreements evidencing an Incentive Award will immediately terminate without notice of any kind, and no Options or Stock Appreciation Rights then held by the Participant will thereafter be exercisable, all Restricted Stock Awards then held by the Participant that have not vested will be terminated and forfeited, and all Performance Units and Stock Bonuses then held by the Participant will vest and/or continue to vest in the manner determined by the Committee and set forth in the agreement evidencing such Performance Units or Stock Bonuses; provided, however, that if such termination is due to any reason other than termination by the Company or any subsidiary for "cause," all outstanding Options and Stock Appreciation Rights then held by such Participant will remain exercisable to the extent exercisable as of such termination for a period of 30 days after such termination (but in no event after the expiration date of any such Option or Stock Appreciation Right). b. For purposes of this Section 11.2, "cause" (as determined by the Committee) will be a defined in any employment or other agreement or policy applicable to the Participant or, if no such agreement or policy exists, will mean (i) dishonesty, fraud, misrepresentation, embezzlement or deliberate injury or attempted injury, in each case related to the Company or any subsidiary, (ii) any unlawful or criminal activity of a serious nature, (iii) any intentional and deliberate breach of a duty or duties that, individually or in the aggregate, are material in relation to the Participant's overall duties, or (iv) any material breach of any employment, service, confidentiality or non-compete agreement entered into with the Company or any subsidiary. 11.3 MODIFICATION OF RIGHTS UPON TERMINATION. Notwithstanding the other provisions of this Section 11, upon a Participant's termination of employment or other service with the Company and all subsidiaries, the Committee may in its discretion (which may be exercised at any time on or after the date of grant, including following such termination) cause Options and Stock Appreciation Rights (or any part thereof) then held by such Participant to become or continue to become exercisable and/or remain exercisable following such termination of employment or service and Restricted Stock Awards, Performance Units and Stock Bonuses then held by such Participant to vest and/or continue to vest or become free of transfer restrictions, as the case may be, following such termination of employment or service, in each casein the manner determined by the Committee; provided, however, that no Option or Stock Appreciation Right may remain exercisable beyond its expiration date. 11.4 BREACH OF CONFIDENTIALITY OR NON-COMPETE AGREEMENTS. Notwithstanding anything in this Plan to the contrary, in the event that a Participant materially breaches the terms of any confidentiality or non-compete agreement entered into with the Company or any subsidiary, whether such breach occurs before or after termination of such Participant's employment or other service with the Company or any subsidiary, the Committee may immediately terminate all rights of the Participant under the Plan and any 10 agreements evidencing an Incentive Award then held by the Participant without notice of any kind. 11.5 DATE OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE. Unless the Committee otherwise determines, a Participant's employment or other service will, for purposes of the Plan, be deemed to have terminated on the date recorded on the personnel or other records of the Company or the subsidiary for which the Participant provides employment or other service, as determined by the Committee based upon such records. 12. PAYMENT OF WITHHOLDING TAXES. 12.1 GENERAL RULES. The Company is entitled to (a) withhold and deduct from future wages of the Participant (or from other amounts that may be due and owing to the Participant from the Company or a subsidiary), or make other arrangements for the collection of, all legally required amounts necessary to satisfy any and all federal, state and local withholding and employment-related tax requirements attributable to an Incentive Award, including, without limitation, the grant, exercise or vesting of, or payment of dividends with respect t, an Incentive Stock Option, or (b) require the Participant promptly to remit the amount of such withholding to the Company before taking any action, including issuing any shares of Common Stock, with respect to an Incentive Award. 12.2 SPECIAL RULES. The Committee may, upon terms and conditions established by the Committee, permit or require a Participant to satisfy, in whole or in part, any withholding or employment-related tax obligation described in Section 12.1 of the Plan by electing to tender Previously Acquired Shares, a Broker Exercise Notice or a promissory note (on terms acceptable to the Committee in its sole discretion), or by a combination of such methods. 13. CHANGE IN CONTROL. 13.1 CHANGE IN CONTROL. For purposes of this Section 13.1, a "Change in Control" of the Company will mean the following: a. the sale, lease, exchange or other transfer, directly or indirectly, of substantially all of the assets of the Company (in one transaction or in a series of related transactions) to a person or entity that is not controlled by the Company; b. the approval by the stockholders of the Company of any plan or proposal for the liquidation or dissolution of the Company; c. a merger or consolidation to which the Company is a party if the stockholders of the Company immediately prior to the effective date of such merger or consolidation have "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act), immediately following the effective date of such merger or consolidation, of securities of the surviving corporation representing (i) more than 11 50%, but not more than 80% of the combined voting power of the surviving corporation's then outstanding securities ordinarily having the right to vote at elections of directors, unless such merger or consolidation has been approved in advance by the Incumbent Directors (as defined in Section 13.2 below), or (ii) 50% or less of the combined voting power of the surviving corporation's then outstanding securities ordinarily having the right to vote at elections of directors (regardless of any approval by the Incumbent Directors); d. any person becomes after the effective date of the Plan the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of (i) 20% or more, but not 50% or more, of the combined voting power of the Company's outstanding securities ordinarily having the right to vote at elections of directors, unless the transaction resulting in such ownership has been approved in advance by the Incumbent Directors, or (ii) 50% or more of the combined voting power of the Company's outstanding securities ordinarily having the right to vote at elections of directors (regardless of any approval by the Incumbent Directors); e. the Incumbent Directors cease for any reason to constitute at least a majority of the Board; or f. a change in control of the Company of a nature that would be required to be reported pursuant to Section 13 or 15(d) of the Exchange Act, whether or not the company is then subject to such reporting requirements. 13.2 INCUMBENT DIRECTORS. For purposes of this Section 13, "Incumbent Directors" of the Company means any individuals who are members of the Board on the effective date of the Plan and any individual who subsequently becomes a member of the Board whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the Incumbent Directors (either by specific vote or by approval of the Company's proxy statement in which such individual is named as a nominee for director without objection to such nomination). 13.3. ACCELERATION OF VESTING. Without limiting the authority of the Committee under Section 3.2 of the Plan, if a Change in Control of the Company occurs, then unless the Committee otherwise determines and sets forth in the agreement evidencing an Incentive Award at the time of grant of such Incentive Award, (a) all outstanding Options and Stock Appreciation Rights will become immediately exercisable in full and will remain exercisable for the remainder of their terms, regardless of whether the Participant to whom such Options or Stock Appreciation Rights have been granted remains in the employ or service of the Company or any Subsidiary; (b) all outstanding Restricted Stock Awards will become immediately fully vested and non-forfeitable; and (c) all outstanding Performance Units and Stock Bonuses then held by the Participant will vest and/or continue to vest in the manner determined by the Committee and set forth in the agreement evidencing such Performance Unites or Stock Bonuses. 12 13.4 CASH PAYMENT FOR OPTIONS. If a Change of Control of the Company occurs, then the Committee, if approved by the Committee either in an agreement evidencing an Incentive Award at the time of grant or at any time after the grant of an Incentive Award, may determine that some or all Participants holding outstanding Options will receive, with respect to some or all of the shares of Common Stock subject to such Options, as of the effective date of any such Change in Control of the Company, cash in an amount equal to the excess of the Fair Market Value of such shares immediately prior to the effective date of such Change in Control of the Company over the exercise price per share of such Options. 13.5 LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding anything in Section 13.3 or 13.4 of the Plan to the contrary, if, with respect to a Participant, the acceleration of the vesting of an Incentive Award as provided in Section 13.3 or the payment of cash in exchange for all or part of an Incentive Award as provided in Section 13.4 (which acceleration or payment could be deemed a "payment" within the meaning of Section 280G(b)(2) of the Code), together with any other payments which such Participant has the right to receive from the Company or any corporation that is a member of an "affiliate group" (as defined in Section 1504(a) of the Code without regarding to Section 1504(b) of the Code) of which the Company is a member, would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Code), then the payments to such Participant pursuant to Section 13.3 or 13.4 will be reduced to the largest amount as will result in no portion of such payments being subject to the excise tax imposed by Section 4999 of the Code; provided, however, that if such Participant is subject to a separate agreement with the Company or a subsidiary that specifically provides that payments attributable to one or more forms to employee stock incentives or to payments made in lieu of employee stock incentives will not reduce any other payments under such agreement, event if it would constitute an excess parachute payment, or provides that the Participant will have the discretion to determine which payment will be reduced in order to avoid an excess parachute payment, then the limitations of this Section 13.5 will, to that extent, not apply. 14. RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS; TRANSFERABILITY. 14.1 EMPLOYMENT OR SERVICE. Nothing in the Plan will interfere with or limit in any way the right of the Company or any Subsidiary to terminate the employment or service of any Eligible Recipient or Participant at any time, nor confer upon any Eligible Recipient or Participant any right to continue in the employ or service of the Company or any Subsidiary. 14.2 RIGHTS AS A STOCKHOLDER. As a holder of Incentive Awards (other than Restricted Stock Awards and Stock Bonuses), a Participant will have no rights as a stockholder unless and until such Incentive Awards are exercised for, or paid in the form of, shares of Common Stock and the Participant becomes the holder of record of such shares. Except as otherwise provided in the Plan, no adjustment will be made for dividends or distributions with respect to such Incentive Awards as to which there is a record date preceding the date the Participant becomes the holder of record of such shares, except as the Committee may determine. 13 14.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or the laws of descent and distribution or as otherwise expressly permitted by the Plan, no right or interest of any Participant in an Incentive Award prior to the exercise or vesting of such Incentive Award will be assignable or transferable, or subjected to any lien, during the lifetime of the Participant, either voluntarily or involuntarily, directly or indirectly, by operation of law or otherwise. A Participant will, however, be entitled to designate a beneficiary to receive an Incentive Award upon such Participant's death, and in the event of a Participant's death, payment of any amounts due under the Plan will be made to, and exercise of any Options (to the extent permitted pursuant to Section 11 of the Plan) may be made by, the Participant's legal representatives, heirs and legatees. 14.4 NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is intended to modify or rescind any previously approved compensation plans or programs of the Company or create any limitations on the power or authority of the Board to adopt such additional or other compensation arrangements as the Board may deem necessary or desirable. 15. SECURITIES LAW AND OTHER RESTRICTIONS. Notwithstanding any other provision of the Plan or any agreements entered into pursuant to the Plan, the Company will not be required to issue any shares of Common Stock under this Plan, and a Participant may not sell, assign, transfer or otherwise dispose of shares of Common Stock issued pursuant to Incentive Awards granted under the Plan, unless (a) there is in effect with respect to such shares a registration statement under the Securities Act and any applicable state securities laws or an exemption from such registration under the Securities Act and applicable state securities laws, and (b) there has been obtained any other consent, approval or permit from any other regulatory body which the Committee deems necessary or advisable. The Company may condition such issuance, sale or transfer upon the receipt of any representations or agreements from the parties involved, and the placement of any legends on certificates representing shares of Common Stock, as may be deemed necessary or advisable by the Company in order to comply with such securities law or other restrictions. 16. PLAN AMENDMENT, MODIFICATION AND TERMINATION. The Board may suspend or terminate the Plan or any portion thereof at any time, and may amend the Plan from time to time in such respects as the Board may deem advisable in order that Incentive Awards under the Plan will conform to any change in applicable laws or regulations or in any other respect the Board may deem to be in the best interests of the Company; provided, however, that no amendments to the Plan will be effective without approval of the stockholders of the Company if stockholder approval of the amendment is then required pursuant to Rule 16b-3 under the Exchange Act, Section 422 of the Code or the rules of the NASD or any stock exchange. No termination, suspension or amendment of the Plan may adversely affect any outstanding Incentive Award without the 14 consent of the affected Participant; provided, however, that this sentence will not impair the right of the Committee to take whatever action is deems appropriate under Sections 3.2(c), 4.3 and 13 of the Plan. 17. EFFECTIVE DATE AND DURATION OF THE PLAN The Plan is effective as of February 27, 1995, the date it was adopted by the Board. The Plan will terminate at midnight on February 26, 2005, and may be terminated prior to such time by Board action, and no Incentive Award will be granted after such termination. Incentive Awards outstanding upon termination of the Plan may continue to be exercised, or become free of restrictions, in accordance with their terms. 18. MISCELLANEOUS 18.1 GOVERNING LAW. The validity, construction, interpretation, administration and effect of the Plan and any rules, regulations and actions relating to the Plan will be governed by and construed exclusively in accordance with the laws of the State of Minnesota, notwithstanding the conflicts of laws principles of any jurisdictions. 18.2 SUCCESSORS AND ASSIGNS. The Plan will be binding upon and inure to the benefit of the successors and permitted assigns of the Company and the Participants. 15 EX-10.2 5 EXHIBIT 10.2 EXHIBIT 10.2 SEPARATION AGREEMENT This Separation Agreement is made and entered into this 22nd day of July, 1998 and effective the 13th day of July, 1998, between Thomas L. Erickson ("Employee") and The Chromaline Corporation ("Employer"). I. RECITALS A. Employee was employed by Chromaline from June 1, 1965 until July 12, 1998, when his employment with Chromaline ended. Employee served as President/CEO for Chromaline. B. The purpose of this Separation Agreement is to set forth the terms and conditions under which Employee and Employer will terminate their employment relationship. II. AGREEMENT For the consideration described below, the adequacy of which the parties acknowledge, the parties agree as follows: 1. RELEASE. Employee shall sign and deliver to Employer a separate release in the form attached hereto as Exhibit A on August 12, 1998. 2. CONDITIONS OF SPECIAL SEPARATION PAYMENT. Employer need not make the special separation payment described below in point 3 of this Separation Agreement unless and until the following conditions have been satisfied: a. Employee executes the release described in point 1 of Section II of this Separation Agreement and does not rescind it. b. After the expiration of the 15-day rescission period, Employee sends a letter to Employer confirming that Employee has not sought to rescind the release in the form attached hereto as Exhibit B. 3. SEPARATION PAY. Employee will receive $5,416.67 per pay period, which will be paid to him at Employer's normal payroll periods through the end of 1998. 4. NON-COMPETITION AGREEMENT. Employee will be paid $20,000 in 1998, $30,000 in 1999, $24,500 in 2000, $24,500 in 2001 and $24,500 in 2002 in accordance with a separate non-competition agreement attached to this document. Payment will be paid quarterly. 5. BONUS PLAN. Employee's share of 1998 bonus pool will be calculated through 4th quarter and paid in full as soon as can be determined. 6. STOCK OPTIONS. Employee will have 30 days after July 12, 1998 to exercise his stock options. 7. RETIREMENT PLANS. Employee is 100% vested in Chromaline's Money Purchase Plan. Pension contributions will continue through the end of 1998 based on the remaining severance pay of $65,000 and any bonus issued for 1998. 8. MEDICAL AND DENTAL INSURANCE. Employee will be eligible to remain in Chromaline's group medical and dental plans, continuing to pay to the Employee's share of premiums until December 31, 1999. Beginning January 1, 2000, Employee will be eligible to remain in Employer's group medical plan until age 65, with Employee paying 100% of the premium. Dental insurance will be available to be continued for an 18-month period through COBRA coverage beginning January 1, 2000. 9. COMPANY PROPERTY. Employee will be entitled to purchase the 1997 Chrysler Town and Country currently owned by Employer for $2,000. Employee will be entitled to use certain computer equipment currently owned by Employer as needed. 10. REMOVAL OF PROPERTY FROM THE BUILDING. Removal of anything from the building, other than employee's personal belongings, must have Employer's approval. 11. CONFIDENTIALITY. The terms of this Separation Agreement and the release referred to in paragraph 1 of this Separation Agreement shall be forever treated as confidential by Employee and will not be disclosed by him to anyone except his attorney, accountant, tax advisor, spouse, children or except as may be required by law or agreed to in writing by Employer. The terms of this Separation Agreement and the release also will be forever treated as confidential by Employer and will not be disclosed by Employer to anyone except its directors, officers, employees and other agents who have a legitimate need to know the terms of the settlement in the course of performing their duties for Employer or except as may be required by law or agreed t in writing by Employee. If either party is asked about the circumstances of Employee's separation, the party shall respond that a mutually-satisfactory agreement was reached. 12. NON-DISPARAGEMENT. The parties mutually agree that they shall not disparage or defame each other. This includes the Employer's officers, agents, directors and employees. 13. ENTIRE AGREEMENT. This Separation Agreement and the release referred to in paragraph 1 of this Separation Agreement constitute the entire agreement between the parties with respect to the termination of Employee's employment relations with Employer and the parties agree that there are no inducements or representations leading to the 2 execution of the Separation Agreement or the release except as stated in this Separation Agreement. 14. VOLUNTARY AND KNOWING ACTION. Employee represents that he has read and understands the terms of this Separation Agreement. Dated: July 22, 1998 By /s/ William C. Ulland ------------------------------------------------ William C. Ulland, Chairman of the Board Dated: July 22, 1998 By /s/ Charles H. Anderson ------------------------------------------------ Charles H. Andresen, Chairman of Compensation Committee Dated: July 22, 1998 By /s/ Thomas L. Erickson ------------------------------------------------ Thomas L. Erickson
3 EXHIBIT A GENERAL RELEASE DEFINITIONS. I intend all words used in this General Release to have their plain meanings in ordinary English. Technical legal words are not needed to describe what I mean. Specific terms that I use in this General Release have the following meanings: A. Words such as I, me and my, include both me and anyone who has or obtains any legal rights or claims through me. B. Company means The Chromaline Corporation and any company related to Chromaline in the past or present, including without limitation, its predecessors, successors, parents, subsidiaries and affiliates. C. Company means The Chromaline Corporation; the past or present officers, directors and employees of Chromaline; any company providing insurance to Chromaline in the past or present; and anyone who acted on behalf of Chromaline or on instructions from Chromaline. D. My Claims means all of my rights to any relief of any kind from the Company, whether or not I now know about the rights or claims, including without limitation: 1. all claims which arise out of or are based upon fact which have occurred as of this date arising out of or relating to my employment with The Chromaline Corporation or the termination of that employment including, but not limited to breach of contract, sexual harassment, defamation, infliction of emotional distress, wrongful discharge, violation of Age Discrimination in Employment Act, 29 U.S.C. 621 et seq., violation of the Minnesota Human Rights Act 363.01 et seq., assault, battery, negligence, violation of the Employee Retirement Income Security Act, violation of any other national, federal, state or local statute, law, ordinance, regulation or order; and other unlawful employment practices. 2. all claims which arise out of or are base upon facts which have occurred as of this date for any type of relief including, but not limited to, back pay, lost benefits, reinstatement, liquidated damages, punitive damages, interest and damages for any alleged personal injury; and 3. all claims for attorneys fees, costs and interest. AGREEMENT TO RELEASE MY CLAIMS. I am receiving a substantial amount of money from The Chromaline Corporation. In exchange for that payment, I agree to give up all my Claims against the Company as described above. I will not bring any lawsuits against the Company relating to the claims that I have released. The payment that I am receiving is full and fair compromise payment for the release of my Claims. CONFIDENTIALITY. I agree that I will not disclose the amount of money that was paid to me by the Company in exchange for this General Release or the facts underlying my Claims against the Company to anyone other than my attorney, spouse, children and tax advisors, except as required by laws. ADDITIONAL AGREEMENTS AND UNDERSTANDINGS. Even though the Company will pay me to settle and release my claims, the Company does not admit that it is responsible or legally obligated to me. In fact, the Company denies that it is responsible or legally obligated for My Claims. TWENTY-ONE DAY PERIOD TO CONSIDER THE GENERAL RELEASE. I understand that I have twenty-one (21) days from July 22, 1998, the day that I receive this General Release, not counting the day upon which I receive it, to consider whether I wish to sign this General Release. I acknowledge that if I sign this General Release before the end of the 21-day period, it will be my personal, voluntary decision to do so. MY RIGHT TO RESCIND THIS GENERAL RELEASE. I understand that I may rescind this General Release at any time within fifteen (15) days after I sign it, not counting the day upon which I sign it. This General Release shall not become effective or enforceable until the 15 day rescission period has expired. PROCEDURE FOR ACCEPTING OR RESCINDING THE GENERAL RELEASE. To accept the terms of this General Release, I must deliver the General Release, after it has been signed and dated by me to William Ulland by hand, by mail, or by facsimile within the 21 day period that I have to consider this General Release. To rescind my acceptance, I must deliver a written signed statement that I rescind my acceptance to William Ulland by hand, mail or facsimile within the 15 day rescission period. All Deliveries shall be made to William Ulland at the following address: The Chromaline Corporation 4832 Grand Avenue Duluth, Minnesota 55807 Facsimile: (218) 628-3245 If I choose to deliver my acceptance or the rescission of my acceptance by mail, it must be: 1. Postmarked within the period stated above; 2. Properly addressed to William Ulland at the address stated above; and 3. Sent by certified mail, return receipt requested. If I choose to deliver my acceptance or the rescission of my acceptance by facsimile addressed to William Ulland at the company, it will be effective when received by the Company, provided and i simultaneously mail an original in the manner described above. MY REPRESENTATION. I represent that I have not filed or been involved in any pending personal bankruptcy proceeding between any accrual of My Claims and the date of my 2 signature below. I am legally able and entitled to receive the sums of money being paid to me by the Company in settlement of My Claims. I have read this General Release carefully. I understand all of its terms. In agreeing to sign this General Release, I have not relied on any statements of explanations made by the Company or its attorneys, except as specifically set forth in this General Release or the Separation Agreement that I am also signing today. I am voluntarily releasing My Claims against the Company. Dated: July 23, 1998 /s/ Thomas L. Erickson ---------------------------- Thomas L. Erickson 3 EX-10.3 6 EXHIBIT 10.3 EXHIBIT 10.3 CONSULTING AGREEMENT WHEREAS, The Chromaline Corporation, 4832 Grand Avenue, Duluth, Minnesota, a Minnesota corporation ("Chromaline"), is desirous of retaining the services of Thomas L. Erickson, 20 S. 26th Avenue East, Duluth, Minnesota 55812 ("Consultant"), as a Consultant; and WHEREAS, the parties have agreed as to the terms and conditions of a consulting arrangement between Chromaline and Consultant; and WHEREAS, the terms and conditions of such consulting arrangement are to be set forth herein; NOW, THEREFORE, BE IT AGREED AS FOLLOWS: 1. Chromaline retains Consultant to consult with Chromaline, on an unrestricted basis, with respect to assisting Chromaline in any area Chromaline desires and is agreeable to by Consultant. Consultant will be compensated as set forth herein, and is an independent contractor, not an employee, of Chromaline. Consultant agrees to be personally responsible for any FICA or income taxes imposed upon the monies paid him hereunder. 2. Chromaline will compensate and reimburse the Consultant for expenses as follows: a. Consulting fees will be paid in the following way: $10,000 in third quarter 1998, $10,000 in fourth quarter 1998, and $60,000 in fourth quarter 1998 as prepayment for calendar 1999. b. Reasonable expenses, including travel and accommodations, appropriately documented, will be reimbursed to Consultant within 14 days of submission of these expenses. Travel and accommodations expenditures are to be authorized by Chromaline prior to being expended, and Chromaline will confirm each period of Consultant's activities hereunder prior to it being commenced. 3. The term of this contract is from July 13, 1998 through December 31, 1999. 4. Consultant, to induce Chromaline to enter into this Agreement, further represents and agrees with Chromaline as follows: a. Consultant's expertise has been acquired by him in a legal fashion, and h is under no specific written restriction or other legal restriction as a result of any prior or current employment or other activity which prohibits, limits or bars his availability to Chromaline as a Consultant within the terms of this Agreement. b. Consultant does not have access to or possession of any trade secrets of any competitor of Chromaline, and is free to divulge information to Chromaline without restriction and will be fully forthcoming with all information requested. c. Consultant will hold his relationship with Chromaline confidential for a period of no less than 4 years following the last date of Consultant's activity for Chromaline under this Agreement, any extension hereof, or any other agreement between him and Chromaline. d. Any and all information acquired by Consultant from Chromaline, if a trade secret, will be held confidential and not disclosed forever, and any other information will be held confidential for a period of at least 4 years following the conclusions of Consultant's activities hereunder, any extension hereof, or any other agreement between Consultant and Chromaline. e. Without written prior approval by Chromaline, Consultant will not, in a consulting capacity or otherwise, reveal or use any information provided by him to Chromaline or obtained by him from Chromaline for any other purpose other than communication to Chromaline. f. All inventions which Consultant may conceive or first reduce to practice in the performance of services for Chromaline, or which are based in whole or in part upon confidential information obtained from Chromaline shall be assigned to Chromaline without cost or charge of any kind. All such inventions shall be promptly and fully disclosed in writing to Chromaline. Also, Consultant agrees to cooperate with Chromaline and to execute such documents or do such other acts as he or they may lawfully do which may be necessary or desirable in the opinion of Chromaline to obtain and maintain Letters of Patent or other rights, and to vest the entire right, title and interest thereto in Chromaline (all without charge to Chromaline). The costs for filing any patent resulting from any such invention shall be paid for by Chromaline provided Chromaline has approved in writing such patent filing. 5. Consultant agrees to promptly disclose to Chromaline in writing any invention which is crated by him as a result of his activities hereunder and all such inventions shall be the exclusive property of Chromaline and are hereby assigned to Chromaline, except that if the invention does not relate to the existing or reasonably foreseeable business interests of Chromaline, Chromaline may in its sole discretion, release or license that information to the Consultant upon written request. No additional compensation, in any form, will be due Consultant as a result of such invention or inventions. Consultant will, at Chromaline's expense, give Chromaline all assistance it reasonably requires to perfect, protect and use its rights to inventions. In particular, but without limitation, Consultant will sign all documents, do all things, and supply all information that Chromaline may deem necessary or desirable to transfer or record the transfer of Consultant's entire right, title and 2 interest in the inventions to Chromaline and to enable Chromaline to obtain patent, copyright and/or trademark protection for inventions anywhere in the world. The obligations of this paragraph shall survive the conclusion of this Agreement with respect to inventions conceiving or made by Consultant as a result of or relating to his consultancy and shall be binding upon the heirs, executors, legal representatives or assigns of Consultant. 6. Confidential Information, as stated herein, includes all items set forth in Exhibit 1 hereto. 7. This Agreement may be modified only in writing. It will be governed by the laws of the State of Minnesota and is binding on the heirs, successors and assigns of the parties hereto. IN WITNESS WHEREOF, Chromaline and Consultant have executed this Agreement this 22nd day of July, 1998. THE CHROMALINE CORPORATION By /s/ William Ulland ------------------------------------- William Ulland, Chairman of the Board CONSULTANT By /s/ Thomas L. Erickson ------------------------------------ Thomas L. Erickson, Consultant 3 It is our policy that the subjects enumerated below be identified as containing "Confidential Information" of types contemplated in the Consulting Agreement between Chromaline and Consultant executed by July 13, 1998. Customer lists Budgets and forecasts Business plans and schedules Unpublished financial data All documents marked "Confidential" or similarly marked for limited access and all verbal disclosures identified as confidential or similarly described for limited access Confidential price lists Identities of raw and semi-finished materials and their sources Product formulations and compositions Our equipment and how it is laid out Manufacturing processes Employee lists Laboratory notebooks New product development plans and schedules Information gained about our customers which is not commonly known and would be reasonably thought to be helpful to our competitors if it were to become known to them Our compilations and interpretations of information about the marketplace Product costs Our marketing techniques, methods and operations It is the policy of Chromaline to define Confidential Information as: 1. information which is not generally known or readily ascertainable by proper means by others; and 2. accrues independent economic value from its secrecy In order to protect Confidential Information, Consultant agrees to observe these rules and practice these procedures: 1. Entry into manufacturing areas is prohibited except prior authorization of, and escort by, a reasonable authority. 2. Entry into laboratory areas is permitted only by prior authorization of a reasonable authority. 3. Discarded Confidential Information will be destroyed rather than merely thrown away. 4. Confidential Information will be kept in a central and/or locked location. 5. Publications will be screened for Confidential Information. 6. Documents will be clearly marked "Confidential" where appropriate. 7. When, with the prior agreement of Chromaline, trade secret disclosures are made, all such disclosures will be clearly marked "secret." 8. Employee access to documents and computer access codes will be restricted. 9. A policy statement will be issued to employees outlining what is considered to be Confidential Information. 10. Warn visitors of restricted areas and Confidential Information. Chromaline and Consultant's obligation of confidentiality shall not apply to Confidential Information that: 1. Was published or was part of the public knowledge prior to its receipt from Chromaline or Consultant; or 2. Became published or part of the public knowledge through no act or failure to act by either Chromaline or Consultant, or is disclosed without restriction to a third party by either party subsequent to the approval of the other party; or 3. Was known to Chromaline prior to its receipt from Consultant or was known to Consultant prior to its receipt from Chromaline. Exhibit 1-2 4. Notwithstanding the stipulations of this Section, Consultant shall not be permitted to justify any disregard of the obligations of confidentiality imposed by this Agreement by using information received from Chromaline or representatives to guide a search of publications and other publicly available sources of information, including persons, selecting a series of items of knowledge from unconnected sources and fitting them together by use of the integrated disclosure received from Chromaline. 5. If Consultant should be lawfully required by any court or government agency to disclose Confidential Information, Consultant will be permitted to disclose, provided Consultant provides Chromaline with appropriate notice and such disclosure includes written notice to the receiving party that the information disclosed is confidential to Chromaline and is not to be disclosed to others. 6. Nothing herein shall be construed to limit the rights of Chromaline to seek civil or criminal judgments in the event of disclosure of Confidential Information. Exhibit 1-3 EX-10.4 7 EXHIBIT 10.4 EXHIBIT 10.4 AGREEMENT REGARDING NON-DISCLOSURE OF CONFIDENTIAL INFORMATION AND NON-COMPETITION 1. INTRODUCTION. The Chromaline Corporation ("Chromaline") and the undersigned Employee acknowledge that the Employee has certain information as defined in Section 2. Employee recognizes that the Confidential Information is a business assets of Chromaline, the value of which can only be protected by maintaining the secrecy of the confidential information. Employee further acknowledges that in the course of his employment by Chromaline, Employee has established personal contacts and relationships with Chromaline's customers and that such personal contacts and relationships are valuable business assets of Chromaline. Employee, therefore, enters into this agreement in consideration of compensation to be paid to Employee in the following manner: $20,000 in 1998, $30,000 in 1999, $24,500 in 2000, $24,500 in 2001, and $24,500 in 2002. Payment will be made quarterly. Employee and Chromaline, intending to be legally bound, agree as follows: 2. DEFINITIONS a. CHROMALINE means The Chromaline Corporation, its successors in interest, and all of its parent, subsidiary or affiliate corporations and the operating divisions thereof. b. CONFIDENTIAL INFORMATION means any information that Employee learned or developed during the course of employment with Chromaline that derives independent economic value from not being generally known, or not being readily ascertainable by proper mans, by other persons who can obtain economic value from the disclosure or use of such information. Such information includes, but is not limited to, Chromaline's sales and marketing information, information about new or future products, lists of Chromaline's customers and information about customer purchases and preferences, information regarding research and development, manufacturing processes or management systems and any other information which provides Chromaline with a competitive advantage. c. CHROMALINE PRODUCT means any actual projected product, product line or service that has been designed, developed, manufactured, marketed or sold by Chromaline during Employee's employment with Chromaline or regarding which Chromaline has conducted or acquired research and development during Employee's employment with Chromaline. d. COMPETITIVE PRODUCT means any actual or projected product, product line or service that has been or is being designed, developed, manufactured, marketed or sold by anyone other than Chromaline which performs similar functions or is used for the same general purposes as a Chromaline product. e. SOLICITATION OF SALES includes providing information or conducting demonstrations in anticipation of sales as well as other acts of service including, but not limited to, delivery and maintenance. f. CHROMALINE CUSTOMER means any person or entity with whom Employee has contact of any sort for the purpose of selling, marketing, promoting or servicing any Chromaline Product during the time Employee was employed by Chromaline. 3. NON-COMPETITION. During the period of time from termination of employment through December 31, 2002, Employee will not directly or indirectly participate in or support the sale, solicitation of sale or marketing of any Competitive Product. Employee will not, for whatever reason, induce or attempt to induce any Chromaline employee for whom Employee had managerial or supervisory responsibilities to leave his or her employment with Chromaline. Such prohibition includes all acts of recruitment including offering employment, seeking expressions of an interest in employment or discussing employment opportunities. The restrictions contained in this Section 3 shall apply regardless of whether Employee acts directly or indirectly; or whether Employee acts personally or as an employee, agent, supervisor, manager or otherwise for another. 4. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. Employee agrees not to disclose, in any manner to any person not employed by Chromaline, any Confidential Information. Employee understands that such obligation is not only contractual, but is specified in Minnesota Statute 325C. Within 24 hours of termination of employment, Employee agrees to return to Chromaline all originals and copies of documents containing confidential information as well as all documents generated by Employee on behalf of Chromaline and all documents relating to the business of Chromaline from any source whatsoever. 5. INJUNCTIVE RELIEF. Employee agrees that Chromaline's remedy at law for breach of this Agreement is inadequate. Chromaline, therefore, shall be entitled to injunctive relief to enforce the terms of this Agreement, in addition to any other remedy Chromaline might have. 2 6. SEVERABILITY. The invalidity of any portion of this Agreement shall not impair or affect enforceability of the remainder. If any of these restrictions is determined to be unenforceable as to duration or extent, or for any reason whatsoever, such restriction shall be effective for such period of time and for such extent as it may be enforceable. 7. PRIOR AGREEMENTS. This Agreement and any prior non-compete and non-disclosure agreements signed by Employee in connection with his employment at Chromaline shall constitute a single agreement. In case of conflict between any provision of this Agreement and any provision of any other such agreement, the provisions of this Agreement shall control. If the provisions of this agreement are determined to be unenforceable as written, then they shall be interpreted in accordance with Section 6 (Severability) to make them enforceable to the maximum extent provided by law. If the provisions of this Agreement so selected are determined to be unenforceable in their entirety and cannot be revised pursuant to Section 6 (Severability) to make them enforceable, then such provisions shall give way to the most restrictive provision in any other such agreement which covers the same issues and which is enforceable. There are no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth in this Agreement and the prior non-compete and non-disclosure agreements (if any) signed by Employee. 8. NON-EMPLOYMENT AGREEMENT. This agreement is not an employment contract and does not give Employee any right to continued employment. 3 9. GOVERNING LAW/CONSENT TO PERSONAL JURISDICTION. This agreement will be construed and enforced in accordance with the laws of the State of Minnesota. Employee hereby consents to the exercise of personal jurisdictions over him by the courts of the State of Minnesota. Dated: July 22, 1998 THE CHROMALINE CORPORATION By /s/ William Ulland ----------------------------- Its Chairman Dated: July 22, 1998 /s/ Thomas L. Erickson ----------------------------- Employee 4 EX-10.5 8 EXHIBIT 10.5 EXHIBIT 10.5 BUSINESS Wisconsin Bankers Association 1995 Page 1 of 6 ACCT: 455 NOTE: 27247 Boxes not checked are inapplicable. REVOLVING CREDIT AGREEMENT (Business Loans) THE CHROMALINE CORPORATION (Name of Customer) The above named customer ("Customer", whether one or more) agrees with M&I BANK ("Lender") as follows: 1. REVOLVING LOANS. Customer requests that Lender lend to Customer from time to time such amounts as Customer may request in accordance with this Agreement (the "Loans"), and, subject to the terms of this Agreement, Lender agrees to lend such amounts up to the aggregate principal amount of $1,250,000.00 at any time outstanding (the "Credit Limit"). Within the Credit Limit, Customer may borrow, repay and reborrow under this Agreement. Lender is not obligated to but may make Loans in excess of the Credit Limit, and in any event Customer is liable for and agrees to pay all Loans. 2. / / BORROWING BASE. The aggregate amount of all Loans at any time outstanding under this Agreement shall never exceed the lesser of the Credit Limit or the Borrowing Base described on Exhibit A. 3. CONDITIONS FOR LOANS. Lender's obligation to make the initial Loan is subject to satisfaction of the following conditions: __________________________________ _______________________________________________________________________________ (a) /X/ Lender shall have received the following security documents and the additional security documents described on Exhibit B, if any (the "Security Documents"), all accompanied by the appropriate financing statements: ________________________________________________ ______________________________________________________________________ (b) Lender shall have received copies: /X/ certified by the Secretary of Customer of the articles of incorporation and bylaws of Customer, and resolutions of the Board of Directors authorizing the issuance, execution and delivery of this Agreement and the Security Documents, if any; / / certified by a general partner of Customer of the partnership agreement of Customer, and an authorization signed by all of the general partners of Customer authorizing the issuance, execution and delivery of this Agreement and the Security Documents, if any; / / certified by a member or manager of Customer, as appropriate, of the articles of organization and operating agreement of Customer, and an authorization signed by a member or manager of Customer, as appropriate, authorizing the issuance, execution and delivery of this Agreement and the Security Documents, if any; and a certification of the names and addresses of the representatives of Customer authorized to sign this Agreement and the Security Documents, if any, and request Loans under this Agreement, together with true signatures of such representatives. (c) / / Lender shall have received an affidavit of sole ownership executed by the sole proprietor. (d) / / Lender shall have received from counsel for Customer a favorable opinion satisfactory to Lender covering the matters described in sections 5(c) and 5(d) or 5(e) as applicable, and 5(h) of this Agreement and such other matters as Lender may reasonably request. (e) / / Lender shall have received a guaranty of payment of the Loans duly executed by ____________________________________________________ _____________________________________________________________________ ________________ on WBA form ________________________________________ (f) All proceedings taken by Customer in connection with the Loans, the Security Documents and other documents provided to Lender shall be satisfactory to Lender and Lender shall have received copies of all documents reasonably required by it. 4. LOAN PROCEDURES. Customer may obtain Loans under this Agreement as provided in (a), (b) or (c) below. (a) /X/ Customer shall give Lender / / at least __________ business days' prior notice or / /TELEPHONIC NOTICE FOLLOWED BY NEXT BUSINESS DAY WRITTEN CONFIRMATION of any Loan requested under this Agreement, specifying the date and amount of the Loan. Lender will make the Loan available to Customer /X/ by crediting the amount of the Loan to Customer's account (ACCT. NO. 1002280) with lender or / / _________________________________________________________________ _______________________________________________________________________________ Each Loan which is less than the full amount available to Customer under this Agreement shall be in an amount not less than $ 1000.00. (b) / / Lender will credit Customer's account (acct. no, _______________ ) with Lender whenever the ledger balance in the account is less than $_______ on any banking day (the "Target Amount'), far whatever reason. The Loan will be in an amount within the Credit Limit and Borrowing Base sufficient to increase the balance to the Target Amount. Lender may decline to make any Loan and may refuse to pay any check drawn on the account if the amount available to Customer under this Agreement would not be sufficient to increase the balance in the account to the Target Amount. (c) / / _____________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ / / Lender's obligation to make each Loan (including the initial Loan) is subject to the further condition that Lender shall have received a certificate signed by Customer, dated the date of the Loan request and stating that the representations and warranties in section 5 are true and correct as of the date of the request and that no event of default has occurred and is continuing or would result from such Loan. 5. REPRESENTATIONS. Customer represents and warrants to Lender that on the date of each Loan: (a) No part of any Loan will be used for personal, family, household or agricultural purposes. (b) Customer will not use any part of the proceeds of Loans to purchase any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System. (c) The execution and delivery of this Agreement and the Security Documents, and the performance by Customer of its obligations under this Agreement and the Security Documents, are within its power, have been duly authorized by proper action on the part of Customer, are not in violation of any existing law, rule or regulation, any order or decision of any court, the articles of incorporation, bylaws, articles of organization, operation agreement, partnership agreement or other governing documents of Customer, as applicable, or the terms of any agreement or restriction to which Customer is a party or by which it is bound, and do not require the approval or consent of any person or entity. This Agreement and the Security Documents, when executed and delivered, will constitute the valid and binding obligations of Customer enforceable in accordance with !heir terms. (d) / / Customer is a corporation validly existing and in good standing under the laws of the State of MINNESOTA and is duly qualified to do business and is in good standing in every jurisdiction in which the nature of its business or its ownership of properties requires such qualification. (e) / / Customer is a _____________ (general or limited) partnership legally organized and validly existing under the laws of the State of: ________________. (f) / / Customer is a limited liability company validly existing and in good standing under the laws of the State of ______________ and is duly qualified to do business and is in good standing in every jurisdiction in which the nature of its business or its ownership of property requires such qualification. (g) All financial statements of Customer furnished to Lender were prepared in accordance with generally accepted principles of accounting consistently applied throughout the periods involved and are correct and complete as of their dates. (h) (i) There is no substance which has been, is or will be present, used, stored, deposited, treated, recycled or disposed of on, under, in or about any real estate now or at any time owned or occupied by Customer ("Property") during the period of Customer's ownership or use of the Property in a form, quantity or manner which if known to be present on, under, in or about !he Property would require clean-up, removal or some other remedial action ("Hazardous Substance") under any federal, state or local laws, regulations, ordinances, codes or rules ("Environmental Laws"); (ii) Customer has no knowledge, after due inquiry, of any prior use or existence of any Hazardous Substance on the Property by any prior owner of or person using the Property; (iii) without limiting the generality of the foregoing, Customer has no knowledge, after due inquiry, that the Property contains asbestos, polychlorinated biphenyl (PCBs) or underground storage tanks; (iv) there are no conditions existing currently or likely to exist during the term of this Agreement which would subject Customer to any damages, penalties, injunctive relief or clean-up costs in any governmental or regulatory action or third-party claim relating to any Hazardous Substance; (v) Customer is not subject to any court or administrative proceeding, judgment, decree, order or citation relating to any Hazardous Substance; and (vi) Customer in the past has been, at the present is, and in the future will remain in compliance with all Environmental Laws. Customer shall indemnify and hold harmless Lender, its directors, officers, employees and agents from all loss, cost (including reasonable attorneys' fees and legal expenses), liability and damage whatsoever directly or indirectly resulting from, arising out of, or based upon (1) the presence, use, storage, deposit, treatment, recycling or disposal, at any time, of any Hazardous Substance described above on, under, in or about the Property, or the transportation of any Hazardous Substance to or from the Property, (2) the violation or alleged violation of any Environmental Law, permit, judgment or license relating to the presence, use, storage, deposit, treatment, recycling or disposal of any Hazardous Substance on, under, in or about the Property, or the transportation of any Hazardous Substance to or from the Property, (3) the imposition of any governmental lien for the recovery of environmental cleanup costs expended under any Environmental Law, or (4) breach of this representation or warranty. Customer shall immediately notify Lender in writing of any governmental or regulatory action or third-party claim instituted or threatened in connection with any Hazardous Substance on, in, under or about the Property. (i) There is no litigation or administrative proceeding pending or, to the knowledge of Customer, threatened against Customer which might result in any material adverse change in the business or condition of Customer. Credit Agreement Cent. ACCT: 455 NOTE: 27247 6. FEES. Customer agrees to pay the following nonrefundable fees as a condition of access to credit under this Agreement: (a) / / Commitment fee in the amount of $______________________. (b) / / Commitment fee in an amount equal to ______% per year of the average daily unused portion of the Credit Limit from the date of this Agreement until the Termination Date specified in section 15, payable / /at the times interest is payable under section 9 / /on the day of each (c) / / ______________________________________________________________________ 7. CAPITAL ADEQUACY. If Lender shall determine that any existing or future law, rule, regulation, directive, interpretation, treaty or guideline regarding capital adequacy (whether or not having the force of law) increases or would increase, from that required on the date of !his Agreement, the amount of capital required or expected to be maintained by the Lender, or any corporation controlling Lender, and if such increase is based upon the existence of Lender's obligations under this Agreement and other commitments of this type, then from time to time, within ten days after demand from Lender, the Customer shall pay to Lender such amount or amounts as will compensate Lender for expenses or costs required to meet such increased capital requirement. For purposes of calculating the amount of compensation required, Lender, or any corporation controlling Lender, may conclusively be deemed to have maintained the minimum amount of capital required on the date of this Agreement, and may base such compensation on the assumption that Lender (or such corporation) will need to increase its capital from such minimum amount to the new required amount. The determination of any amount to be paid by Customer under this section shall take into consideration policies of Lender, or any corporation controlling Lender, with respect to capital adequacy and shall be based upon any reasonable method of attribution. A certificate of Lender setting forth such amount or amounts as shall be necessary to compensate Lender as specified in this section shall be delivered to Customer and shall be conclusive absent manifest error. 8. INTEREST RATE AND OTHER CHARGES. Customer agrees to pay interest to Lender on the unpaid principal balance outstanding from time to time under this Agreement [Check (a) or (b); only one shall apply.]: (a) / / At the rate of ______% per year. (b) / / X At a rate per year equal to 2.500 percentage points over the 30 DAY LIBOR ("Index Rate"). The Index Rate may or may not be the lowest rate charged by Lender. Any change in the interest rate resulting from a change in the Index Rate shall become effective without notice to Customer as of the day on which such change in the Index Rate becomes effective. A change in the interest rate will apply both to the outstanding principal balance and to new Loans. If the Index Rate ceases to be made available to Lender during the term of this Agreement, Lender may substitute a comparable index. INITIAL NOTE RATE IS 8.188% Interest under (a) or (b) is computed on the basis of the actual number of days the principal balance s unpaid based upon a year of / /360 days, / / 365 days. If any payment (other than the final payment) is not made on or before the *** day after its due date, Lender may collect a delinquency charge of ***% of the unpaid amount. Unpaid principal and interest bear interest after maturity (whether by acceleration or lapse time) until paid at the rate / / which would otherwise be applicable plus 4 percentage points / /of _______% per year, computed on the same basis. 9. PAYMENT SCHEDULE. Customer agrees to pay to Lender the unpaid principal balance and interest as follows: [Check (a), (b), (c) or (d); only one shall apply.] (a) / / In one payment on the Termination Date specified in section 15. (b) /X/ In payments of interest, beginning 05/31/1998 ,and on the same day of each CONSECUTIVE month thereafter, plus a final payment of unpaid principal and interest due on the Termination Date specified in section 15. (c) / / In installments each equal to _______% of the unpaid principal balance, plus interest, beginning ________ and on the same day of each _______ month thereafter, plus a final payment of unpaid principal and interest due on the Termination Date specified in section 15. (d) / / ______________________________________________________________________ In addition, Customer shall immediately pay any amount by which the Loans exceed the Credit Limit or the Borrowing Base established under section 2, if any, and any prior unpaid payments. Lender is authorized to automatically charge payments due under this Agreement to any account of Customer with Lender, if payments are not automatically charged to Customer's account, payments must be made to the Lender at its address shown above and are not credited until received in Lender's office. Lender is authorized to make book entries evidencing Loans and payments under this Agreement and the aggregate unpaid amount of all Loans as evidenced by those entries is presumptive evidence that those amounts are outstanding and unpaid to Lender. *** See late charge clause on page 6 10. COVENANTS. Customer shall, so long as any amounts remain unpaid, or Lender has any commitment to make Loans under this Agreement: (a) Furnish to Lender, as soon as available, such financial information respecting Customer as Lender from time to time requests, and without request furnish to Lender: (i) Within 120 days after the end of each fiscal year of Customer a balance sheet of Customer as of the close of such fiscal year and related statements of income and retained earnings and cash flow for such year all in reasonable detail and satisfactory in scope to Lender, prepared in accordance with generally accepted principles of accounting applied on a consistent basis, certified by / / an independent certified public accountant acceptable to Lender / /the chief financial representative of Customer, and (ii) Within 30 days after the end of each THIRD month a balance sheet of Customer as of the end of such month and related statements of income and retained earnings and cash flow for the period from the beginning of the fiscal year to the end of such month, prepared in accordance with generally accepted principles of accounting applied on a consistent basis, certified, subject to normal year-end adjustments, by an officer or partner of Customer. (b) Keep complete and accurate books of records and accounts and permit any representatives of Lender to examine and copy any of the books and to visit and inspect any of Customer's tangible or intangible properties as often as desired. (c) Maintain insurance coverage in the forms (together with any lender's loss payee clause requested by Lender), amounts and with companies which would be carried by prudent management in connection with businesses engaged in similar activities in similar geographic areas. Without limiting this section or the requirements of any Security Document, Customer will [i] keep all its physical property insured against fire and extended coverage risks in amounts and with deductibles at least equal to those generally maintained by businesses engaged in similar activities in similar geographic areas, [ii] maintain all such workers' compensation and similar insurance as may be required by law and [iii] maintain, in amounts and with deductibles at least equal to those generally maintained by businesses engaged in similar activities in similar geographic areas, general public liability insurance against claims for bodily injury, death or property damage occurring on, in or about the properties of Customer, business interruption insurance and product liability insurance. (d) Pay and discharge all lawful taxes, assessments and governmental charges upon Customer or against its properties prior to the date on which penalties attach, unless and to the extent only that such taxes, assessments and charges are contested in good faith and by appropriate process by Customer. (e) Do all things necessary to maintain its existence, to preserve and keep in full force and effect its rights and franchises necessary to continue its business and comply with all applicable laws, regulations and ordinances. (f) Timely perform and observe the following financial covenants, all calculated in accordance with generally accepted principles of accounting applied on a consistent basis: (i) / / Maintain at all times an excess of current assets over current liabilities of not less than $___________________ (ii) / / Maintain at all times a tangible net worth of not less than $_____________________ (iii) / / Not make any expenditures for fixed or capital assets which would cause the aggregate of all such expenditures to exceed $ _________________ during any fiscal year. (iv) / / Maintain at all times a ratio of current assets to current liabilities of not less than to one. (v) / / Maintain at all times a ratio of total liabilities to tangible net worth of not greater than to one. (vi) / / ___________________________________________________________ (g) Furnish to Lender the Borrowing Base Certificates required under Exhibit A, if any. (h) Not create or permit to exist any lien or encumbrance with respect to Customer's properties, except liens in favor of Lender, liens for taxes if they are being contested in good faith by appropriate proceedings and for which appropriate reserves are maintained, liens or encumbrances permitted under any Security Document and (if left blank, to other permitted liens or encumbrances) (i) Not take any action or permit any event to occur which materially impairs Customer's ability to make payments under this Agreement when due. Such events include, without limitation, the fact that Customer, Customer's spouse or any surety for Customer's obligations under this Agreement ceases to exist, dies, changes marital status or domicile or becomes insolvent or the subject of bankruptcy or insolvency proceedings. (j) Timely perform all duties and responsibilities imposed on Customer under Section 5(h). (k) / / Unless otherwise consented to in writing by Lender, timely perform and observe all additional covenants described on Exhibit C. 11. SECURITY INTEREST. This Agreement is secured by all existing and future security agreements, assignments and mortgages from Customer to Lender, from any guarantor of this Agreement to Lender, and from any other person to Lender providing collateral security for Customer's obligations, and payment of the Loans may be accelerated according to any of them. However, if Customer is a natural person, and unless checked here / / Lender disclaims as security for this Agreement any existing or future first lien mortgage or equivalent security interest Lender may have on a 1-4 family dwelling used as Customer's principal place of residence. Unless a lien would be prohibited by law or would render a nontaxable account taxable, Customer also grants to Lender a security interest and lien in any deposit account Customer may at any time have with Lender. Lender may at any time after the occurrence of an event of default set-off any amount unpaid under this Agreement against any deposit balances or other money now or hereafter owed to Customer by Lender. 12. DEFAULT AND ACCELERATION. Upon the occurrence of any one or more of the following events of default: (a) Customer fails to pay any amount when due under this Agreement or under any other instrument evidencing any indebtedness of Customer, (b) any representation or warranty made under this Agreement or information provided by Customer in connection with this Agreement is or was false or fraudulent in any material respect, (c) a material adverse change occurs in Customer's financial condition, (d) Customer fails to timely observe or perform any of the covenants or duties contained in this Agreement, (a) any guaranty of Customer's obligations under this Agreement is revoked or becomes unenforceable far any reason or any such guarantor dies or ceases to exist, or (f) an event of default occurs under any Security Document; then, at Lender's option, and upon written or verbal notice to Customer, Lender's obligation to make Loans under this Agreement shall terminate and the total unpaid balance shall become immediately due and payable without presentment, demand, protest, or further notice of any kind. all of which are hereby expressly waived by Customer. Lender's obligation to make loans under this Agreement shall automatically terminate and the total unpaid balance shall automatically become due and payable in the event Customer becomes the subject of bankruptcy or other insolvency proceedings. Lender may waive any default without waiving any other subsequent or prior default. Customer agrees to pay Lender's costs of administration of this Agreement. Customer also agrees to pay all costs of collection before and after judgment, including reasonable attorneys' fees (including those incurred in successful defense or settlement of any counterclaim brought by Customer or incident to any action or proceeding involving Customer brought pursuant to the United States Bankruptcy Code). 13. INDEMNIFICATION. Customer agrees to defend, indemnify and hold harmless Lender, its directors, officers, employees and agents, from and against any and all loss, cost, expense, damage or liability (including reasonable attorneys' fees) incurred in connection with any claim, counterclaim or proceeding brought as a result of, arising out of or relating to any transaction financed or to be financed, in whole or in part, directly or indirectly, with the proceeds of any Loan or the entering into and performance of this Agreement or any document or instrument relating to this Agreement by Lender or the activities of Customer. This indemnity will survive termination of this Agreement, the repayment of all Loans and the discharge and release of any Security Documents. 14. VENUE. To the extent not prohibited by law, venue for any legal proceeding relating to enforcement of this Agreement shall be, at Lender's option, the county in which Lender has its principal office in this state, the county in which Customer resides, or the county in which this agreement was executed by Customer. 15. TERMINATION. Unless sooner terminated under section 12, Customer's right to obtain Loans and lender's obligation to extend credit under this Agreement shall terminate on APRIL 30, 1999 (the "Termination Date"). Customer may terminate Customer's right to obtain Loans under this Agreement at any time and for any reason by written notice to the lender. Such notice of termination signed by a Customer shall be binding on each Customer who signs this Agreement. Termination, for whatever reason, does not affect Lender's rights, powers and privileges, nor Customer's duties and liabilities, with regard to the then existing balance under this Agreement. 16. AMENDMENT. No amendment, modification, termination or waiver of any provision of this Agreement shall in any event be effective unless it is in writing and signed by Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purposes for which given. 17. ENTIRE AGREEMENT. This Agreement, including the Exhibits attached or referring to it, and the Security Documents, are intended by Customer and Lender as a final expression of their Agreement and as a complete and exclusive statement of its terms, there being no conditions to the full effectiveness of this Agreement except as set forth in this Agreement and the Security Documents. 18. NO WAIVER; REMEDIES. No failure on the part of Lender to exercise, and no delay in exercising, any right, power or remedy under this Agreement shall operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any right under this Agreement preclude any other or further exercise of the right or the exercise of any other right. The remedies provided in this Agreement are cumulative and not exclusive of any remedies provided by law. 19. MORE THAN ONE CUSTOMER. If more than one person signs this Agreement as Customer, Lender may at its option and without notice refuse any request for a Loan upon notice from any of the undersigned. Any of the undersigned Customers may request Loans under this Agreement. Each of the undersigned Customers is jointly and severally liable for all Loans and other obligations under this Agreement. 20. NOTICE. Except as otherwise provided in this Agreement, all notices required or provided for under this Agreement shall be in writing and mailed, sent or delivered, if to Customer, at any Customer's last known address as shown on the records of Lender, and if to Lender, at its address shown below, or, as to each party, at such other address as shall be designated by such party in a written notice to the other party. All such notices shall be deemed duly given when delivered by hand or courier, or three business days after being deposited in the mail (including any private mail service), postage prepaid, provided that notice to Lender pursuant to section 15 shall not be effective until received by Lender. 21. ADDRESS. Customer's address is shown below. Customer shall immediately notify Lender in writing of any change of address. 22. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of Lender and Customer and their respective heirs, personal representative, successors and assigns except that Customer may not assign or transfer any of Customer's rights under this Agreement without the prior written consent of Lender. 23. INTERPRETATION. The validity, construction and enforcement of this Agreement are governed by the internal laws of Wisconsin. Invalidity of any provision of this Agreement shall not effect the validity of any other provisions of this Agreement. 24. OTHER PROVISIONS. (If none stated, there are no other provisions.) Dated as of April 30, 1998 M&I BANK (SEAL) THE CHROMALINE CORPORATION (SEAL) - ----------------------------- ---------------------------------- (Name of Lender) (Name of Customer) By Todd Fedora RICHARD G. BOURMAN --------------------------------- ---------------------------------- VICE PRESIDENT (SEC/TREAS) - ------------------------------------ ---------------------------------- 1425 TOWER AVENUE 4832 GRAND AVE - ------------------------------------ ---------------------------------- SUPERIOR, WI 54880 DULUTH MN 55807 - ------------------------------------ ---------------------------------- (Address) (Address) LATE CHARGE If any payment is not paid on or before the 20th day after it is due, late payment charge of 2/10 of 1% of the note on the 20th day will be charged, but in no event shall such charge be less than $1. Any payment received after the 20th day after its due date shall be applied first to the late charge, then to interest, and the remainder, if any, to the outstanding principal balance of the note. ACCOUNT NUMBER: 455 NOTE NUMBER: 27247 JN EXHIBIT B TO REVOLVING CREDIT AGREEMENT (WBA 448R) DATED APRIL 30, 1998 SECURITY DOCUMENTS (SECTION 3 (A)) / / General Business Security Agreement. /X/ Selective Business Security Agreement covering INVENTORY AND ACCOUNTS RECEIVABLE / / Chattel Security Agreement covering ___________________________________ ______________________________________________________________________________ / / Collateral Pledge Agreement together with / / Certificates representing _____________ shares of the voting common stock of ____________________________ endorsed in blank or accompanied by signed stock powers. / / Other (specify) _________________________________________________ / / Agreement to Deliver __________________________________________________ ______________________________________________________________________________ / / Mortgage an real estate located at ____________________________________ ______________________________________________________________________________ / / Real Estate Security Agreement on real estate located at ______________ ______________________________________________________________________________ / / Fixtures Disclaimer(s) by _____________________________________________ ______________________________________________________________________________ / / Assignment of life insurance policy in the amount of $_____ on life of _________________________________________ by _________________________________ / / MVD-1 forms covering ________________________ accompanied by appropriate title certificates. / / Debt Subordination Agreement by _______________________________________ ______________________________________________________________________________ / / Real Estate Mortgage Subordination Agreement by _______________________ ______________________________________________________________________________ / / Security Interest Subordination Agreement by __________________________ ______________________________________________________________________________ / / Other (specify): ______________________________________________________ ______________________________________________________________________________ APPROVED For Lender by Todd Fedora VICE PRESIDENT For Customer by RICHARD G BOURMAN SEC/TREAS EX-27 9 EXHIBIT 27
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 274,757 508,445 1,414,411 14,400 1,255,192 3,651,615 3,879,396 2,455,816 5,260,643 400,810 0 0 0 117,831 4,742,002 5,260,643 9,289,328 9,317,951 4,193,050 7,945,420 0 0 0 1,372,531 492,000 880,531 0 0 0 880,531 0.75 0.75
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