-----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, IQM4SBW5J0rDqw7P9rmxRQy5sz0NgKK6d7DkQPczOdEACUTlX8iXe+Hef9pDKsjj pci6mCWCXZti8p20a2ElXw== 0001047469-98-002393.txt : 19980129 0001047469-98-002393.hdr.sgml : 19980129 ACCESSION NUMBER: 0001047469-98-002393 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980128 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIFECORE BIOMEDICAL INC CENTRAL INDEX KEY: 0000028626 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 410948334 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-04136 FILM NUMBER: 98515688 BUSINESS ADDRESS: STREET 1: 3515 LYMAN BLVD CITY: CHASKA STATE: MN ZIP: 55318-3051 BUSINESS PHONE: 6123684300 FORMER COMPANY: FORMER CONFORMED NAME: DIAGNOSTIC INC DATE OF NAME CHANGE: 19861214 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN MEDICAL RESEARCH INC DATE OF NAME CHANGE: 19691118 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 1997 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to _____________ Commission File Number O-4136 Lifecore Biomedical, Inc. ----------------------------------------------- (Exact name of Registrant as specified in its charter) Minnesota 41-0948334 ------------------------------ ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 3515 Lyman Boulevard Chaska, Minnesota 55318 -------------------------- ------------------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: 612-368-4300 Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the registrant's Common Stock, $.01 per value, as of January 15, 1998 was 12,256,928 shares. LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES FORM 10-Q INDEX Page PART I. Financial Information Item 1. Financial Statements Consolidated Condensed Balance Sheets at December 31, 1997 and June 30, 1997 3 Consolidated Condensed Statements of Operations for Three Months and Six Months Ended December 31, 1997 and 1996 4 Consolidated Condensed Statements of Cash Flows for Six Months Ended December 31, 1997 and 1996 5 Notes to Consolidated Condensed Financial Statements 6-10 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11-13 PART II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K 14-15 SIGNATURES 16 2 PART 1. FINANCIAL INFORMATION LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) December 31, June 30, 1997 1997 ------------ ----------- ASSETS Current assets Cash and cash equivalents $ 2,040,000 $ 1,371,000 Short-term investments 11,915,000 16,630,000 Accounts receivable 3,830,000 4,792,000 Inventories 10,738,000 8,440,000 Prepaid expenses 899,000 1,432,000 ------------- ------------ 29,422,000 32,665,000 Property, plant and equipment Land, building and equipment 20,150,000 19,228,000 Less accumulated depreciation (6,226,000) (5,483,000) ------------ ------------ 13,924,000 13,745,000 Construction-in-progress and advance deposits 10,298,000 5,265,000 ------------- ------------- 24,222,000 19,010,000 Other assets Intangibles 6,049,000 6,306,000 Long-term investments -- 3,960,000 Security deposits 809,000 786,000 Inventory 2,058,000 1,839,000 Other 727,000 943,000 ------------ ------------ 9,643,000 13,834,000 ----------- ------------ $ 63,287,000 $ 65,509,000 ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term obligations $ 923,000 $ 918,000 Accounts payable 2,046,000 3,613,000 Accrued compensation 873,000 638,000 Accrued expenses 606,000 648,000 ------------- ------------- 4,448,000 5,817,000 Long-term obligations 7,529,000 7,596,000 Shareholders' equity 51,310,000 52,096,000 ------------- ------------- $ 63,287,000 $ 65,509,000 ------------- ------------- ------------- ------------- See accompanying notes to consolidated condensed financial statements. 3 LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended December 31, Six months ended December 31, ------------------------------ ----------------------------- 1997 1996 1997 1996 ---------- ---------- ------------ ------------ Net sales $ 6,258,000 $ 4,684,000 $ 11,472,000 $ 8,252,000 Cost of goods sold 2,838,000 2,511,000 5,365,000 4,609,000 ---------- ---------- ------------ ------------ Gross profit 3,420,000 2,173,000 6,107,000 3,643,000 Operating expenses Research and development 1,140,000 850,000 2,484,000 1,536,000 Marketing and sales 1,852,000 1,465,000 3,582,000 2,577,000 General and administrative 849,000 759,000 1,606,000 1,484,000 ---------- ---------- ------------ ------------ 3,841,000 3,074,000 7,672,000 5,597,000 ---------- ---------- ------------ ------------ Loss from operations (421,000) (901,000) (1,565,000) (1,954,000) Other income (expense) Interest income 253,000 537,000 548,000 1,092,000 Interest expense (7,000) (179,000) (61,000) (335,000) ---------- ---------- ------------ ------------ 246,000 358,000 487,000 757,000 ---------- ---------- ------------ ------------ Net loss $ (175,000) $ (543,000) $ (1,078,000) $ (1,197,000) ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------ Net loss per share Basic $ (.01) $ (.04) $ (.09) $ (.10) ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------ Diluted $ (.01) $ (.04) $ (.09) $ (.10) ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------ Weighted average shares outstanding Basic 12,239,438 12,180,372 12,232,232 12,153,791 ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------ Diluted 12,239,438 12,180,372 12,232,232 12,153,791 ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------
See accompanying notes to consolidated condensed financial statements 4 LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended December 31, --------------------------------- 1997 1996 ------------ ------------ Net cash used in operating activities $ (2,457,000) $ (3,286,000) Cash flows from investing activities: Purchases of property, plant and equipment (5,956,000) (836,000) Purchases of investments (2,984,000) (7,756,000) Maturities of investments 11,652,000 9,934,000 Purchases of intangibles (24,000) (5,000) Other 207,000 76,000 ----------- ----------- Net cash provided from investing activities 2,895,000 1,413,000 Cash flows from financing activities: Payment of deposit to bond trustee (40,000) (38,000) Payments of long-term obligations (21,000) (86,000) Proceeds from stock issuance 292,000 173,000 ----------- ----------- Net cash provided from financing activities 231,000 49,000 ----------- ----------- Net increase (decrease) in cash and cash equivalents 669,000 (1,824,000) Cash and cash equivalents at beginning of period 1,371,000 3,264,000 ----------- ----------- Cash and cash equivalents at end of period $ 2,040,000 $ 1,440,000 ----------- ----------- ----------- ----------- Supplemental disclosure of cash flow information: Cash paid during the period: Interest $ 353,000 $ 356,000
See accompanying notes to consolidated condensed financial statements. 5 LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS December 31, 1997 NOTE A - FINANCIAL INFORMATION Lifecore Biomedical, Inc. ("the Company"), develops, manufactures, and markets surgically implantable materials and devices through two divisions, the Hyaluronate Division and the Oral Restorative Division. The Hyaluronate Division's manufacturing facility is located in Chaska, Minnesota and markets products through OEM and contract manufacturing alliances in the fields of ophthalmology, veterinary and wound care management. The Oral Restorative Division markets products through direct sales in the United States and Italy and through distributors in other foreign countries. The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of December 31, 1997, and the results of operations and cash flows for the three-and six-month periods ended December 31, 1997 and 1996. The results of operations for the six months ended December 31, 1997, are not necessarily indicative of the results for the full year or of the results for any future periods. In preparation of the Company's consolidated financial statements, management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses. Actual results could differ from the estimates used by management. 6 LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES NOTE B - INVESTMENTS The Company has invested excess cash in commercial paper, government agencies and medium term corporate notes. These investments are classified as held-to-maturity given the Company's intent and ability to hold the securities to maturity and are carried at amortized cost. Investments that have maturities of less than one year have been classified as short-term investments. At December 31, 1997, and June 30, 1997, amortized cost approximates fair value of held-to-maturity investments which consist of the following: December 31, June 30, 1997 1997 -------------- ------------- (Unaudited) Short-term investments: Medium term corporate notes $ 11,915,000 $ 12,800,000 Commercial paper --- 2,627,000 U.S. Government Agencies --- 1,203,000 ------------- ------------- $ 11,915,000 $ 16,630,000 Long-term investments: Medium term corporate notes --- 3,960,000 ------------- ------------- --- 3,960,000 ------------- ------------- $ 11,915,000 $ 20,590,000 ------------- ------------- ------------- ------------- NOTE C - INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventory not expected to be consumed within one year is classified as a long-term asset. Inventories consist of the following: December 31, June 30, 1997 1997 ------------- ------------- (Unaudited) Raw materials $ 3,455,000 $ 2,819,000 Work in progress 149,000 205,000 Finished goods 9,192,000 7,255,000 ------------- ------------- $ 12,796,000 $ 10,279,000 ------------- ------------ ------------- ------------ 7 LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES NOTE D - AGREEMENTS In 1994, Lifecore and Ethicon, Inc. ("Ethicon"), a subsidiary of Johnson & Johnson, Inc., entered into a Conveyance, License, Development and Supply Agreement (the "Ethicon Agreement"). Under the terms of the Ethicon Agreement, Ethicon transferred to Lifecore its ownership in certain technology related to research and development previously conducted on the Company's sodium hyaluronate material. The technology transferred to Lifecore includes written technical documents related to Ethicon's research and development of a product to inhibit the formation of surgical adhesions. These documents include product specifications, methods and techniques, technology, know-how and certain patent applications which have subsequently become issued patents. Lifecore has assumed responsibility for continuing the anti-adhesion development project, including conducting human clinical trials on INTERGEL-TM- Adhesion Prevention Solution (formerly known as LUBRICOAT Gel), a second generation hyaluronate-based product. Lifecore has granted Ethicon exclusive worldwide marketing rights through 2008 to the products developed by Lifecore within defined fields of use. The Company has made and continues to make a significant investment in the development and testing of INTERGEL-TM- Adhesion Prevention Solution, a product designed to reduce the incidence of postsurgical adhesions. The product is currently undergoing human clinical trials to develop the data necessary to apply to the United States Food and Drug Administration ("FDA") for clearance to market the product for commercial application. However, even if the product is successfully developed and the Company receives clearance from the FDA, there can be no assurance that it will receive market acceptance. Failure to achieve significant sales of the product could have a material adverse effect on future prospects for the Company's operations. NOTE E - COMMITMENTS The Company is in the process of expanding its manufacturing and distribution capabilities at its Chaska, Minnesota location. This expansion includes building and equipment expenditures for warehouse and distribution capabilities and to expand aseptic-packaging facilities for finished products. Construction-in-progress and advance deposits relating to the expansion of approximately $10,298,000 were incurred through December 31, 1997. The Company has signed contracts with an architect, a process engineering firm and a construction company for the expansion project. The contracts provide for the expansion to be completed in phases. The contracts may be terminated at any time at minimal cost to the Company. At December 31, 1997 and June 30, 1997, firm purchase commitments of approximately $969,000 and $2,161,000, respectively, have been recorded in accounts payable. 8 LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES NOTE F - CAPITALIZED INTEREST During the six months ended December 31, 1997, $345,000 of interest has been capitalized in conjunction with the facility expansion project. NOTE G - LINE OF CREDIT On January 15, 1998, the Company entered into a $5,000,000 Credit Agreement and Revolving Credit Note with a bank. The agreement allows for advances against eligible securities and eligible accounts receivable, subject to a borrowing base certificate. Interest is accrued at either the prime rate or the Eurodollar Rate plus a basis point adjustment as defined in the Credit Agreement. The Revolving Credit Note matures on October 31, 1998. NOTE H - NET LOSS PER SHARE On December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 - "Earnings per Share". As required by Statement No. 128, all current and prior year loss per share data have been restated to conform to the provisions of Statement No. 128. The Company's basic net loss per share amounts have been computed by dividing net loss by the weighted average number of outstanding common shares. For the three and six months ended December 31, 1997 and 1996, the Company reported net losses and as such, no common share equivalents were included in the computation of diluted net loss per share. However, if the Company would have reported net earnings in the three and six months ended December 31, 1997 and 1996, the common share equivalents that would have been included in the computation of diluted net earnings per share are set forth below. 9 LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES NOTE H - NET LOSS PER SHARE (continued) Three Months Ended Six Months Ended December 31, December 31, 1997 1996 1997 1996 -------- ------- -------- ------- Common Stock Equivalents 473,425 288,128 321,410 299,150 Options to purchase 233,500 and 46,500 shares of common stock with a weighted average exercise price of $20.24 and $18.72 were outstanding at December 31, 1997 and 1996, respectively, but were excluded from the computation of common share equivalents because their exercise prices were greater than the average market price of the common shares. NOTE I - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 130 "Reporting Comprehensive Income" and Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information" which are effective for fiscal year 1999. Statement No. 130 will require the Company to display an amount representing comprehensive income, as defined by the statement, as part of the Company's basic financial statements. Comprehensive income will include items such as unrealized gains or losses on certain investment securities and foreign currency items. Statement No. 131 will require the Company to disclose financial and other information about its business segments, their products and services, geographic areas, major customers, revenues, profits, assets and other information. The adoption of these statements is not expected to have a material effect on the consolidated financial statements of the Company. 10 LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE AND SIX MONTHS ENDED DECEMBER 31, 1996 Net sales for the three-and six-month periods ended December 31, 1997 increased $1,574,000 and $3,220,000, respectively, an increase of 34% and 39%, respectively, compared with the same periods of last fiscal year. Hyaluronate product sales increased 27% and 40% for the three-month and six-month periods ended December 31, 1997 as compared to the periods of last fiscal year primarily from increased sales to ophthalmic and veterinary customers. The increased sales to ophthalmic and veterinary customers were partially offset by a decrease in revenues from development projects compared to the same quarter of last fiscal year. Oral restorative product sales for the three-month and six-month periods ended December 31, 1997 increased 38% for both periods compared to the same periods of last fiscal year. This increase is a result of the introduction of new tissue regeneration products, increased market awareness in the domestic market and expanded distribution networks in international markets. Cost of goods sold as a percentage of net sales decreased to 45% and 47%, respectively, for the three-month and six-month periods ended December 31, 1997 from 54% and 56% for the same periods last fiscal year. The decrease resulted from spreading fixed expenses over increased product sales and from production efficiencies gained in hyaluronate and aseptic production. Research and development expenses increased $290,000, or 34%, for the current quarter as compared to the same quarter of last fiscal year and $948,000, or 62%, for the six months ended December 31, 1997 as compared with the same period of last fiscal year. The increase is principally attributed to costs associated with human clinical trials for INTERGEL-TM- Adhesion Prevention Solution and to a lesser extent, higher personnel costs due to increased headcount. Marketing and sales expenses increased $387,000, or 26%, for the current quarter as compared to the same quarter of last fiscal year and $1,005,000, or 39%, for the six months ended December 31, 1997. The increase is principally attributed to the expansion of the oral restorative domestic sales force and to a lesser extent, increased marketing efforts in conjunction with the new tissue regeneration products. 11 LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.) General and administrative expenses increased $90,000, or 12%, for the current quarter as compared to the same quarter of last fiscal year and $122,000, or 8%, for the six months ended December 31, 1997. The increase was primarily caused by amortization of goodwill associated with the TefGen product line which was purchased in May 1997. Other income (expense) for the three and six months ended December 31, 1997 decreased $112,000 and $270,000, respectively, compared with the same periods of last fiscal year. The decrease in interest income is primarily a result of the utilization of cash and investments to fund current operations and the facility expansion. The decrease in interest expense is a result of the capitalization of interest expense associated with the facility expansion. On December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 - "Earnings per Share". As required by Statement No. 128, all current and prior year loss per share data have been restated to conform to the provisions of Statement No. 128. For the three-and six-month periods ended December 31, 1997 and 1996, the application of Statement No. 128 had no dilutive effect due to the reporting of net losses. LIQUIDITY AND CAPITAL RESOURCES The Lifecore Annual Report on Form 10-K for the year ended June 30, 1997 contains a detailed discussion of the Company's liquidity and capital resources. In conjunction with this Quarterly Report on Form 10-Q, investors should read the 1997 Form 10-K. The Company has had significant operating cash flow deficits for the last three fiscal years. As the Hyaluronate Division's production increases, its related production efficiencies increase. However, research and development costs for INTERGEL-TM- Adhesion Prevention Solution, marketing and sales expenses for the oral restorative products, and personnel costs have increased. The Company is in the process of expanding its manufacturing and distribution capabilities at its Chaska, Minnesota location. This facility expansion includes building and equipment expenditures for warehouse and distribution capabilities and to scale-up aseptic-packaging facilities for finished products. Construction-in-progress and advance deposits related to the facility expansion of approximately $10,298,000 were incurred through December 31, 1997. The Company has signed contracts with an architect, a process engineering firm and a construction company for the 12 LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.) expansion project. The contracts provide for the expansion to be completed in phases. The contracts may be terminated at any time at minimal cost to the Company. Lifecore anticipates that approximately $8-10 million will be expended in the remainder of fiscal year 1998 to complete the expansion project. Funding will result from the redemption of investments, which at December 31, 1997 aggregate approximately $12 million. On January 15, 1998, the Company entered into a $5,000,000 Credit Agreement and Revolving Credit Note with a bank. The agreement allows for advances against eligible securities and eligible accounts receivable, subject to a borrowing base certificate. Interest is accrued at either the prime rate or the Eurodollar Rate plus a basis point adjustment as defined in the Credit Agreement. The Revolving Credit Note matures on October 31, 1998. Certain statements in this Form 10-Q are forward-looking statements as defined in the private Securities Litigation Reform Act of 1995. Such statements imply continued financial improvement. Because of numerous risks and uncertainties in Lifecore's business activity, actual results may differ materially from those implied. Investors are referred to more detailed discussions of those risks presented in the Company's Annual Report on Form 10-K. 13 LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders On November 13, 1997, the Company held its Annual Meeting of Shareholders. At the meeting, the shareholders elected as directors Orwin L. Carter (with 9,392,539 affirmative votes and 35,150 negative votes) and Donald W. Larson (with 9,322,691 affirmative votes, and 104,998 negative votes). The shareholders also ratified the appointment of Grant Thornton LLP as the Company's independent public accountants for fiscal year 1998 with 9,390,042 affirmative votes, 24,743 negative votes and 12,904 votes abstained). Item 6. Exhibits and Reports on Form 8-K a. Exhibits and Exhibit Index Exhibit Description Number ----------- - ------ 10.1 Employment Agreement dated June 1, 1991 with James W. Bracke (incorporated by reference to Exhibit 10.11 to 1991 S-2 Registration Statement [File No. 33-41291]), as amended by letter agreement dated August 15, 1995 (incorporated by reference to Exhibit 10.6 to Form 10-K for the year ended June 30, 1995), as amended by letter agreement dated November 14, 1996, filed herewith 10.2 Credit Agreement dated January 15, 1998 between the Company and First Bank National Association, filed herewith 10.3 Revolving Credit Note dated January 15, 1998 between the Company and First Bank National Association, filed herewith 10.4 Security Agreement dated January 15, 1998 by the Company in favor of First Bank National Association, filed herewith 14 LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES PART II OTHER INFORMATION (CONTINUED) 10.5 Custodial Pledge and Security Agreement dated January 15, 1998 by and between the Company, Norwest Investment Services, Inc., and First Bank National Association, filed herewith 27 Financial Data Schedule b. Reports on Form 8-K On December 15, 1997, the Company filed a report on Form 8-K to report the completion of the initial analysis of the data obtained from its pivotal clinical trial evaluating the use of Intergel Adhesion Prevention Solution in female abdominal surgery patients. 15 LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LIFECORE BIOMEDICAL, INC. Dated: January 28, 1998 /s/ James W. Bracke ------------------------- James W. Bracke President & Chief Executive Officer Dated: January 28, 1998 /s/ Dennis J. Allingham ------------------------- Dennis J. Allingham Executive Vice President & Chief Financial Officer Principal Financial Officer) 16 EX-10.1 2 EXHIBIT 10.1 Exhibit 10.1 LIFECORE BIOMEDICAL, INC. 3515 Lyman Boulevard Chaska, MN 55318 November 14, 1996 James W. Bracke, Ph.D. 3947 Huntington Drive Minnetonka, MN 55343 Dear Jim: Reference is made to the Employment Agreement as of June 1, 1991, between Lifecore Biomedical, Inc. (the "Company"), a Minnesota corporation, and James W. Bracke ("Employee"). The Company and Employee hereby agree to amend the Agreement as follows: A. Paragraph 3 of the Agreement is hereby amended and restated as follows: 3. Term. The term of this agreement shall extend through November 14, 2000, subject to the provisions of Section 5 and Section 16 hereof. B. Paragraph 5 of the Agreement is hereby amended and restated as follows: 5. Renewal. If Employee remains in the employment of Company after the expiration of the term of this Agreement specified in Section 3, the term of this Agreement shall automatically be extended for successive one-year terms, unless either party to this Agreement gives written notice to the other party at least 30 days prior to the end of such term of such party's intention not to renew the term of this Agreement. If these terms are acceptable to you, please indicate by signing this letter in the space indicated below. Very truly yours, LIFECORE BIOMEDICAL, INC. By /s/ Richard W. Perkins -------------------------------- Richard W. Perkins Chairman, Compensation Committee Agreed and accepted this 14th day of November, 1996 /s/ James W. Bracke - ---------------------------- James W. Bracke, Ph.D. EX-10.2 3 EXHIBIT 10.2 EXHIBIT 10.2 CREDIT AGREEMENT THIS CREDIT AGREEMENT is made and entered into as of January 15, 1998, by and between LIFECORE BIOMEDICAL, INC., a Minnesota corporation (the "Borrower"), whose address is 3515 Lyman Boulevard, Chaska, Minnesota 55318, and FIRST BANK NATIONAL ASSOCIATION, national banking association (the "Lender"), whose address is 300 Prairie Center Drive, Eden Prairie, Minnesota 55344. RECITALS WHEREAS, Borrower has applied to Lender for a revolving credit facility in the principal amount of $5,000,000, and Lender is willing to extend financial accommodations to the Borrower, subject to the terms, conditions and agreement set forth herein. NOW, THEREFORE, for and in consideration of the loans and advances to be made by the Lender to the Borrower hereunder, the mutual covenants, promises and agreements contained herein, and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the Borrower and the Lender agree as follows: The following terms when used in this Credit Agreement shall, except where the context otherwise requires, have the following meanings both in the singular and plural forms thereof: 1. DEFINITIONS "ACCOUNT" means any right of the Borrower to payment for goods sold or services rendered. "ADVANCE" means any advance by the Lender made under the Revolving Credit Commitment. "AFFILIATE" means any corporation, association, partnership, joint venture or other business entity directly or indirectly controlling or controlled by, or under direct or indirect common control of, the Borrower or any of its Subsidiaries. "BORROWER" means Lifecore Biomedical, Inc., a Minnesota corporation. "BORROWING BASE" means, at any time, the lesser of (a) Five Million Dollars ($5,000,000) or (b) seventy-five to ninety percent (75%-90%) of the Borrower's Eligible Securities, as determined by Lender based on the type of Eligible Securities as detailed in EXHIBIT A hereto, plus, after June 30, 1998, eighty percent (80%) of the Borrower's Eligible Accounts. "BORROWING BASE CERTIFICATE" means the Borrowing Base Certificate in the form attached hereto as EXHIBIT A. "BUSINESS DAY" means any day (other than a Saturday, Sunday or legal holiday in the State of Minnesota) on which national banks are permitted to be open in Minneapolis, Minnesota and, with respect to obligations of the Borrower to bear interest at the Eurodollar Rate, a day on which dealings in United States dollars may be carried on by the Lender in the interbank eurodollar market. "COLLATERAL" means all of the assets of the Borrower or any other party in which the Lender holds a security interest pursuant to any of the Loan Documents. "COMPLIANCE CERTIFICATE" means the Compliance Certificate in the form of EXHIBIT B hereto whereby the Borrower certifies, in accordance with SECTION 5.1((f)) that it is in compliance with its covenants and obligations under this Credit Agreement. "CREDIT AGREEMENT" means this Credit Agreement, as originally executed and as may be amended, modified, supplemented, or restated from time to time by written agreement between the Borrower and the Lender. "CURRENT ASSETS" means, at any date, the aggregate amount of all assets of the Borrower that are classified as current assets in accordance with GAAP. "CURRENT LIABILITIES" means, at any time, the aggregate amount of all liabilities of the Borrower that are classified as current liabilities in accordance with GAAP (including taxes and other proper accruals and the matured portion of any indebtedness). "CUSTODIAN" means Norwest Investment Services, Inc., a Minnesota corporation and custodian under the Pledge Agreement. "DEBT" means (i) all items of indebtedness or liability that, in accordance with GAAP, would be included in determining total liabilities as shown on the liabilities side of a balance sheet as at the date of which Debt is to be determined; (ii) indebtedness secured by any mortgage, pledge, lien or security interest existing on property owned by the Person whose Debt is being determined, whether or not the indebtedness secured thereby shall have been assumed; and (iii) guaranties, endorsements (other than for purposes of collection in the ordinary course of business) and other contingent obligations in respect of, or to purchase or otherwise acquire indebtedness of others, provided that, in computing the amount of any contingent obligation at any time, it is intended that such obligation will be computed at the amount which, in light of the facts and circumstances existing at such time, represents the amount that is reasonably determined to be an actual or matured liability as determined in accordance with GAAP. "DEBT SERVICE COVERAGE RATIO" means the ratio of the Borrower's net profit before taxes plus depreciation, amortization, operating lease and interest expenses and less dividends and distributions in respect of its capital stock, to its combined annual payments of principal and interest and other amounts due and payable on the Borrower's Debt, including without limitation operating lease expense. "DEFAULT" means any event which if continued uncured would, with notice or lapse of time or both, constitute an Event of Default. "ELIGIBLE ACCOUNTS" means earned and undisputed Accounts of the Borrower, excluding all of the following: (i) Accounts from any Person which is a parent corporation or a Subsidiary of the Borrower or which is under common control or ownership with the Borrower or which is otherwise affiliated with the Borrower or due from any employee, officer, director or shareholder of the Borrower; (ii) Accounts which are more than sixty (60) days past the due date set forth in the related invoice; 2 (iii) Accounts from any unit of local, state or United States government, or any agency or subdivision thereof, unless the Lender has valid, first priority lien in such Accounts pursuant to an assignment of government contracts acceptable to Lender; (iv) Accounts from an Account debtor which has filed, or had filed against it, a petition in bankruptcy which has not been dismissed; or which has currently made an assignment for the benefit of its creditors; or which has a receiver currently appointed for it or its assets; (v) Accounts subject to a written claim of setoff, credit, allowance or adjustment, except for discount allowed for prompt payment, or subject to any Lien other than Liens in favor of the Lender; (vi) Accounts receivable from any Account debtor ten percent (10%) or more of whose accounts payable to the Borrower are more than sixty (60) days past the due date set forth in the related invoices; (vii) Accounts from any Account debtor organized under laws other than those of the United States or the individual states or territories thereof or whose chief executive office or principal place of business is not located in the United States or the territories thereof unless supported by letters of credit or foreign credit insurance acceptable to Lender; (viii) Any and all notes receivable not pledged and delivered to the Lender and not due and payable within ninety (90) days; (ix) Accounts representing progress billings or retainages or for work covered by any payment or performance bond unless acceptable to the Lender in its sole discretion; and (x) All other Accounts reasonably deemed ineligible by the Lender for its lending purposes as necessitated by changes in Borrower's business or business practices. "ELIGIBLE SECURITIES" means those securities owned by the Borrower shown on Schedule I to the Pledge Agreement and pledged to the Lender pursuant to the Pledge Agreement, and such other marketable securities owned by the Borrower, validly pledged to Lender and deemed "Eligible Securities" by Lender in its reasonable discretion. "EURODOLLAR ADVANCE" means an Advance designated as such in a notice of borrowing under SECTION 2.5((a)) or a notice of conversion under SECTION 2.5((c)). "EURODOLLAR INTERBANK RATE" means, for each Business Day, the offered rate for deposits in United States Dollars (rounded upward, if necessary, to the nearest 1/16 of 1%) as reported on the Reuters Screen LIBO Page for such Business Day for delivery of such deposits two (2) Business Days later for an Interest Period of one (1) month. If at least two rates appear on the Reuters Screen LIBO Page, the rate for such Interest Period shall be the arithmetic mean of such rates (rounded as provided above). If fewer than two rates appear, the Lender may, at its discretion, determine the rate based on rates offered to the Lender for United States Dollar deposits in the interbank eurodollar market. "EURODOLLAR RATE (RESERVE ADJUSTED)" means a rate per annum (rounded upward, if necessary to the nearest 1/16 of 1%) calculated for each Business Day in accordance with the following formula which shall continue in effect until the next succeeding Business Day: 3 ERRA = EURODOLLAR INTERBANK RATE ------------------------- 1.00 - ERR in such formula, "ERR" means "Eurodollar Reserve Rate" and "ERRA" means "Eurodollar Rate (Reserve Adjusted)", in each instance as determined by the Lender for the applicable Interest Period. The Lender's determination of all such rates for any Interest Period shall be conclusive in the absence of manifest error. "EURODOLLAR RESERVE RATE" means a percentage, determined for each Business Day, equal to the daily average during such Interest Period of the aggregate maximum reserve requirements (including all basic, supplemental, marginal and other reserves), as specified under Regulation D of the Federal Reserve Board or any other applicable regulation that prescribes reserve requirements applicable to Eurocurrency liabilities (as presently defined in Regulation D) or applicable to extensions of credit by the Lender the rate of interest on which is determined with regard to rates applicable to Eurocurrency liabilities. Without limiting the generality of the foregoing, the Eurodollar Reserve Rate shall reflect any reserves required to be maintained by the Lender against (i) any category of liabilities that includes deposits by reference to which the Eurodollar Rate is to be determined, or (ii) any category of extensions of credit or other assets that includes Eurodollar Advances. "EVENT OF DEFAULT" means any event of default described in SECTION 7 hereof. "FINANCING STATEMENTS" means the UCC-1 financing statements naming Borrower as Debtor and Lender as Secured Party to be filed with the Secretary of State of Minnesota and such other jurisdictions as are necessary to perfect Lender's security interest in the Collateral. "GAAP" means the generally accepted accounting principles in the United States in effect from time to time including, but not limited to, Financial Accounting Standards Board (FASB) Standards and Interpretations, Accounting Principles Board (APB) Opinions and Interpretations, Committee on Accounting Procedure (CAP) Accounting Research Bulletins, and certain other accounting principles which have substantial authoritative support. "INTEREST PERIOD" shall mean, except as otherwise indicated, a period commencing on a Business Day and continuing until the following Business Day. "LENDER" means First Bank National Association, a national banking association, its successors and assigns. "LIABILITIES" means (i) all items of indebtedness or liability that, in accordance with GAAP, would be included in determining total liabilities as shown on the liabilities side of a balance sheet as at the date of which Liabilities are to be determined; (ii) indebtedness secured by any mortgage, pledge, lien or security interest existing on property owned by the Person whose Liabilities are being determined, whether or not the indebtedness secured thereby shall have been assumed; and (iii) guaranties, endorsements (other than for purposes of collection in the ordinary course of business) and other contingent obligations in respect of, or to purchase or otherwise acquire, indebtedness of others, provided that, in computing the amount of any contingent obligation at any time, it is intended that such obligation will be computed at the amount which, in light of the facts and circumstances existing at such time, represents the amount that is reasonably determined to be an actual or matured liability as determined in accordance with GAAP. 4 "LIEN" means any lien, security interest, pledge, mortgage, statutory or tax lien, or other encumbrance of any kind whatsoever (including without limitation, the lien or retained security title of a conditional vendor), whether arising under a security instrument or as a matter of law, judicial process or otherwise or by an agreement of the Borrower to grant any lien or security interest or to pledge, mortgage or otherwise encumber any of its assets. "LOAN DOCUMENTS" means this Credit Agreement, the Revolving Credit Note, the Security Agreement, the Financing Statements and the Pledge Agreement and such other documents as the Lender may reasonably require as security for, or otherwise executed in connection with, any loan hereunder, all as originally executed and as may be amended, modified or supplemented from time to time by written agreement between the parties thereto. "MATERIAL ADVERSE OCCURRENCE" means any occurrence which materially adversely affects the present or prospective financial condition or operations of the Borrower, or which materially impairs, or may materially impair, in the Lender's reasonable judgment, the ability of the Borrower to perform its obligations under the Loan Documents. "MATURITY" of the Revolving Credit Note means the earlier of (a) the date on which the Revolving Credit Note becomes due and payable upon the occurrence of an Event of Default; or (b) the Termination Date. "NET WORTH" means the aggregate of capital and surplus (and Subordinated Debt) of the Borrower, all determined in accordance with GAAP. "NOTE" means the Revolving Credit Note and any note or notes issued in substitution or replacement thereof. "PERSON" means any natural person, corporation, firm, association, government, governmental agency or any other entity, whether acting in an individual fiduciary or other capacity. "PLEDGE AGREEMENT" means the Custodial Pledge and Security Agreement, of even date herewith, executed by Borrower," the Lender and the Custodian, as originally executed and as may be amended, modified or supplemented by written agreement between the Borrower and the Lender. "QUICK RATIO" means the ratio of the Borrower's Current Assets, less all inventory, to its Current Liabilities. "REFERENCE RATE" means the rate of interest established and publicly announced by the Lender from time to time as its "reference rate". The Lender may lend to its customers at rates that are at, above or below the Reference Rate. "REFERENCE RATE ADVANCE" means an Advance designated as such in a notice of borrowing under SECTION 2.5((a)) or a notice of continuation or conversion under SECTION 2.5((c)). "REGULATORY CHANGE" means any change after the date hereof in any (or the adoption after the date hereof of any new) (a) Federal or state law or foreign law applying generally to all banks of the same type and classification as the Lender or any Person controlling the Lender; or (b) regulation, interpretation, directive or request (whether or not having the force of law) applying or in the reasonable opinion of the Lender applicable generally to all banks of the same type and classification as the Lender or any Person controlling the Lender or to any court or governmental authority charged with the 5 interpretation or administration of any law referred to in clause (a) of this definition or to any fiscal, monetary, or other authority having jurisdiction over the Lender or any Person controlling the Lender. "REUTERS SCREEN LIBO PAGE" means the display designated as page "LIBO" on the Reuter Monitor Money Rates Service (or such other page as may replace the LIBO Page on that service for the purpose of displaying London interbank offered rates of major banks for United States dollar deposits). "REVOLVING CREDIT COMMITMENT" means the sum of Five Million Dollars ($5,000,000) or the Lender's obligation to extend Advances to the Borrower under SECTION 2, as the context may require. "REVOLVING CREDIT LOAN" means, at any date, the aggregate amount of all Advances made by the Lender to the Borrower pursuant to SECTION 2 hereof. "REVOLVING CREDIT NOTE" means the Revolving Credit Note of even date herewith in the original principal amount of Five Million and no/100 Dollars ($5,000,000) made by the Borrower payable to the order of the Lender, together with all extensions, renewals, modifications, substitutions and changes in form thereof effected by written agreement between the Borrower and the Lender. "SALE PROCEEDS" has the meaning given in SECTION 5.5 hereof. "SECURITY AGREEMENT" means the Security Agreement, of even date herewith, executed by Borrower in favor of the Lender, as originally executed and as may be amended, modified or supplemented from time to time by written agreement between Borrower and the Lender. "SUBORDINATED DEBT" means any Liability of the Borrower, now existing or hereafter created, incurred or arising, which is subordinated in right of payment to the payment of the obligations of the Borrower to the Lender. "SUBSIDIARY" means any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned by the Borrower and/or one or more Subsidiary or Affiliate. "TANGIBLE NET WORTH" means, at any date, (a) the par value (or value stated on the books) of the capital stock of all classes of the Borrower plus (or minus in the case of deficit) the amount of surplus or additional paid-in capital, and the retained earnings of the Borrower, minus (b) the aggregate amount carried as assets on the books of the Borrower for goodwill, licenses, patents, trademarks, trade names treasury stock, unamortized debt discount and expenses, leasehold improvements, copyrights, franchises, organization costs, write-ups in the book value of the assets of the Borrower resulting from a revaluation thereof, and any other intangible assets, all as determined in accordance with GAAP. "TERMINATION DATE" means the earlier of (a) October 31, 1998; or (b) the date upon which the obligation of the Lender to make Advances is terminated pursuant to SECTION 2. 2. THE REVOLVING CREDIT LOAN 2.1. COMMITMENT FOR REVOLVING CREDIT. Subject to the Conditions of Lending set forth in SECTION 3 hereof and as long as no Event of Default has occurred and is continuing hereunder, the Lender agrees to make Advances to the Borrower from time to time from the date of this Credit Agreement through the Termination Date, provided, however, that the Lender shall not be obligated to make any 6 Advance, if after giving effect to such Advance, the aggregate outstanding principal amount of all Advances would exceed the Borrowing Base. Within the limits set forth above, the Borrower may borrow, repay and reborrow amounts under the Revolving Credit Note. 2.2. PURPOSE OF LOAN/USE OF PROCEEDS. The Borrower will use the proceeds of any Advance hereunder for general working capital. 2.3. THE REVOLVING CREDIT NOTE. All Advances shall be evidenced by, and the Borrower shall repay such Advances to the Lender, in accordance with, the terms of the Revolving Credit Note; including without limitation the provision of the Revolving Credit Note that the principal amount payable thereunder at any time shall not exceed the then unpaid principal amount of all Advances made by the Lender. 2.4. RECORDS OF ADVANCES AND PAYMENTS. The Borrower hereby irrevocably authorizes the Lender to make or cause to be made, at or about the time each Advance is made by the Lender, an appropriate notation on the Lender's records of the principal amount of such Advance and the Lender shall make or cause to be made, on or about the time a payment of any principal or interest of the Revolving Credit Note is received an appropriate notation of such payment on its records. The aggregate amount of all unpaid Advances set forth on the records of the Lender shall be rebuttable presumptive evidence of the principal amount owing and unpaid on the Revolving Credit Note. 2.5. INTEREST ON THE REVOLVING CREDIT NOTE. (a) The Borrower agrees to pay interest on the outstanding principal amount of the Revolving Credit Note from the date hereof until paid in full at the following rates as designated by the Borrower: (i) the Reference Rate, as to all Reference Rate Advances and (ii) the Eurodollar Rate (Reserve Adjusted) plus (x) 200 basis points as to all Eurodollar Advances supported by Eligible Securities, or (y) 275 basis points as to all Eurodollar Advances supported by Eligible Accounts, all in accordance with the terms of this Credit Agreement. All advances outstanding under the Revolving Credit Note shall be deemed Eurodollar Advances, unless the Borrower elects to designate, continue or convert such Advances to Reference Rate Advances pursuant to procedures outlined in SECTION 2.6 below. (b) To the extent Eligible Securities are sold by the Borrower or redeemed, and the proceeds of such sale or redemption are not applied to reduce the amount outstanding under the Revolving Credit Note pursuant to SECTION 5.5 hereof, the interest rate applicable to any amounts outstanding under the Revolving Credit Note which were supported by such sold or redeemed Eligible Securities shall automatically increase to the rate applicable to Advances supported by Eligible Accounts. (c) Interest accrued on the Revolving Credit Note through Maturity shall be payable on the first day of each calendar month, commencing February 1, 1998 and at Maturity. Interest accrued after Maturity shall be payable upon demand. (d) No provision of this Credit Agreement or the Revolving Credit Note shall require the payment or permit the collection of interest in excess of the rate permitted by applicable law. (e) All computation of interest on the outstanding principal amount of the Revolving Credit Note shall be computed on the basis of a year comprised of 360 days, but charged for the 7 actual number of days elapsed. Each change in the interest rate payable on the Revolving Credit Note due to a change in the Reference Rate shall take place simultaneously with the corresponding change in the Reference Rate. Whenever any payment to be made by or to the Lender or other holder(s) of the Revolving Credit Note shall otherwise be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in computing the fees or interest payable on such next succeeding Business Day. 2.6. BORROWING OR CONVERTING ADVANCES. (a) MANNER OF BORROWING. Any request by the Borrower for an Advance shall be by telephone (or, in the case of all Eurodollar Advances, in writing, including by telefax, or by telephone promptly confirmed in writing) and must be given so as to be received by the Lender not later than 1:00 p.m. (Minneapolis time) on the date of the requested Advance. Each request for an Advance shall specify: (i) the borrowing date (which shall be a Business Day) and (ii) the amount of the Advance and the type of Advance, subject to the limitations elsewhere in this Credit Agreement. Unless the Lender determines that conditions set forth in this Credit Agreement have not been satisfied, each Advance shall be deposited into the Borrower's account number 104755223831 with the Lender. (b) MANNER OF CONVERSION. The Borrower may elect to convert any outstanding Advance into another type of Advance by giving the Lender notice by telephone (or, in the case of conversions to Eurodollar Advances, in writing or by telephone promptly confirmed in writing) given so as to be received by the Lender not later than 1:00 p.m. (Minneapolis time) on the date of the requested continuation or conversion. Each notice of conversion of an Advance shall specify: (i) the effective date of the conversion (which shall be a Business Day) and (ii) the amount and the type of Advances following such conversion (subject to limitations contained elsewhere in this Credit Agreement). 2.7. PAYMENTS. Any other provision of this Credit Agreement to the contrary notwithstanding, the Borrower shall make all payments of interest on and principal of the Revolving Credit Note in immediately available funds to the Lender at its office shown on the first page hereof. The Borrower authorizes the Lender to charge from time to time against the Borrower's account no. 104755223831 with the Lender any payments when due. 2.8. TERMINATION. The obligation of the Lender to make Advances shall terminate: (a) Upon receipt by the Lender of five (5) days' written notice of termination from the Borrower given at any time when no amount is outstanding under the Revolving Credit Note; (b) Immediately and without further action upon the occurrence of an Event of Default of the nature referred to in SUBSECTION 7.1((d)) or (c) Immediately when any Event of Default (other than of the nature specified in SUBSECTION 7.1((d)) shall have occurred and be continuing and either (i) the Lender shall 8 have demanded payment of the Revolving Credit Note in writing or (ii) the Lender shall elect by giving written notice to Borrower. 2.9. MANDATORY PREPAYMENT. In the event that the outstanding balance under the Revolving Credit Note exceeds the Borrowing Base then in effect, the Lender shall give the Borrower written notice of such excess amount and the Borrower shall reduce the amount of outstanding Advances to less than or equal to the Borrowing Base (or execute and deliver to the Lender such documents necessary to pledge, assign, or grant the Lender a security interest in, such additional Collateral acceptable to the Lender with a collateral value equal to or greater than the amount of the excess of the outstanding Advances over the Borrowing Base). 2.10. UNUSED LINE FEE. For the purposes of this SECTION 2.10, "Unused Amount" means the Revolving Credit Commitment reduced by outstanding Advances. The Borrower agrees to pay to the Lender an unused line fee at the rate of one quarter of one percent (0.25%) per annum on the average daily Unused Amount from the date of this Agreement to and including the Termination Date, due and payable monthly in arrears on the first day of the month and on the Termination Date. 2.11. SECURITY. The indebtedness, liabilities and other obligations of the Borrower to the Lender under the Revolving Credit Note and this Credit Agreement are secured by, inter alia, security interests granted pursuant to the Security Agreement and the Pledge Agreement. 3. CONDITIONS OF LENDING 3.1. CONDITIONS PRECEDENT. This Credit Agreement and the Lender's obligations hereunder are subject to receipt by the Lender of the following, each to be in form and substance satisfactory to the Lender, unless the Lender waives receipt of any of the following in writing: (a) This Credit Agreement and the Revolving Credit Note each appropriately completed and duly executed by the Borrower; (b) The Security Agreement and corresponding financing statement(s) appropriately completed and duly executed by the Borrower; (c) The Pledge Agreement appropriately completed and duly executed by all parties thereto; (d) A current UCC secured transaction search, federal and state tax lien search, judgment and bankruptcy search, reflecting results satisfactory to the Lender, on Borrower from the appropriate filing offices as required by the Lender; (e) A Certificate of Good Standing for the Borrower issued by the Secretary of State of Minnesota and in all states where the Borrower is qualified to do business; (f) A copy of the Borrower's Bylaws, together with all amendments, certified by the Secretary of the Borrower to be a true and correct copy thereof; (g) A copy of the Articles of Incorporation of the Borrower, together with all amendments, certified by the Secretary of State of the state of Minnesota to be a true and correct copy thereof; (h) A certified copy of the resolutions of the Board of Directors of the Borrower authorizing or ratifying the transactions contemplated hereby, and the execution, delivery and 9 performance of the Loan Documents, and designating the officers authorized to execute the Loan Documents to which the Borrower is a party and to perform the obligations of the Borrower thereunder; (i) A certificate of the Secretary of the Borrower certifying the names of the officers authorized to execute the Loan Documents, together with a sample of the true signature of each such officer; (j) A favorable opinion of counsel for the Borrower, satisfactory to the Lender, as to the matters set forth in SUBSECTIONS 4.1, 4.2, 4.3 AND 4.5, and other matters as requested by the Lender, satisfactory to the Lender and its counsel; (k) The Borrower shall have reimbursed Lender for all of its expenses pursuant to SECTION 8.3 of this Credit Agreement; (l) Policies or certificates of insurance evidencing insurance coverage required under this Credit Agreement and any other of the Loan Documents; (m) Such other documents, information and actions as the Lender may reasonably request. 3.2. CONDITIONS PRECEDENT TO ALL LOANS AND ADVANCES. The obligation of the Lender to make any loan or Advance hereunder, including the initial loans and Advances, is subject to the satisfaction of each of the following, unless waived in writing by the Lender: (a) The representations and warranties set forth in SECTION 4 are true and correct in all material respects on the date hereof and on the date of any loan or Advance, other than exceptions to such representations and warranties thereto which have been disclosed in writing to the Lender and which have been approved in writing by the Lender. (b) No Default or Event of Default shall have occurred and be continuing. (c) No litigation, arbitration or governmental investigation or proceeding shall be pending, or, to the knowledge of the Borrower, threatened, against the Borrower or affecting the business or operations of the Borrower which was not previously disclosed to the Lender and which, if determined adversely to the Borrower, would have a material adverse effect on the operation or financial condition of the Borrower. (d) No Default or Event of Default shall result from the making of any such loan or Advance. (e) No Material Adverse Occurrence shall have occurred and be continuing. 4. REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lender as follows: 4.1. ORGANIZATION, ETC. The Borrower is a corporation validly organized and existing and in good standing under the laws of the State of Minnesota, has full power and authority to own its property and conduct its business substantially as presently conducted by it and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the nature of its business makes such qualification necessary and the failure to do so would cause a Material Adverse Occurrence. 10 The Borrower has full power and authority to enter into and perform its obligations under the Loan Documents and to obtain the loans and Advances hereunder. 4.2. DUE AUTHORIZATION. The execution, delivery and performance by the Borrower of the Loan Documents have been duly authorized by all necessary corporate action, do not require any approval or consent of, or any registration, qualification or filing with, any governmental agency or authority or any approval or consent of any other Person (including, without limitation, any stockholder), do not and will not conflict with, result in any violation of or constitute any default under, any provision of the Borrower's certificate of incorporation, or where such violation or default would cause a Material Adverse Occurrence, under any agreement binding on or applicable to the Borrower or any of its property, or any law or governmental regulation or court decree or order, binding upon or applicable to the Borrower or of any of its property and will not result in the creation or imposition of any Lien on any of its property pursuant to the provisions of any agreement binding on or applicable to the Borrower or any of its property except pursuant to the Loan Documents. 4.3. VALIDITY OF THE LOAN DOCUMENTS. The Loan Documents to which the Borrower is a party are the legal, valid and binding obligations of the Borrower and are enforceable in accordance with their terms, subject only to bankruptcy, insolvency, reorganization, moratorium or similar laws, rulings or decisions at the time in effect affecting the enforceability of rights of creditors generally and to general equitable principles which may limit the right to obtain equitable remedies. 4.4. FINANCIAL INFORMATION. The financial statements of the Borrower furnished to the Lender have been and will be prepared in accordance with GAAP consistently applied by the Borrower and present fairly the financial condition of the Borrower as of the dates thereof and for the periods covered thereby. The Borrower is not aware of any contingent liabilities or obligations which would, upon becoming non-contingent liabilities or obligations, be a Material Adverse Occurrence. Since the date of the most recent such statements, neither the condition (financial or otherwise), the business nor the properties of the Borrower have been materially and adversely affected in any way. 4.5. LITIGATION, OTHER PROCEEDINGS. Except as previously disclosed to and approved of in writing by the Lender, there is no action, suit or proceeding at law or equity, or before or by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, pending or, to the knowledge of the Borrower, threatened, against the Borrower or any of its property, which, if determined adversely would be a Material Adverse Occurrence; and the Borrower is not in default with respect to any final judgment, writ, injunction, decree, rule or regulation of any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, where such default would be a Material Adverse Occurrence. 4.6. TITLE TO ASSETS. Except for Liens permitted by SECTION 6.2, the Borrower has good and marketable title to all of its assets, real and personal. 4.7. LIEN PRIORITY. The Liens created by the Security Agreement and the Pledge Agreement are attached and first, perfected Liens on the Collateral. 4.8. GUARANTEES AND INDEBTEDNESS. Except as disclosed on financial statements of the Borrower furnished to the Lender or on SCHEDULE 6.3, the Borrower is not a party to any contract of guaranty or suretyship and none of its assets is subject to any contract of that nature and the Borrower is not indebted to any other party, except the Lender. 11 4.9. MARGIN STOCK. No part of any loan or Advance hereunder shall be used at any time by the Borrower to purchase or carry margin stock (within the meaning of Regulation U promulgated by the Board of Governors of the Federal Reserve System) or to extend credit to others for the purpose of purchasing or carrying any margin stock. The Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purposes of purchasing or carrying any such margin stock. No part of the proceeds of any loan or Advance hereunder will be used by the Borrower for any purpose which violates, or which is inconsistent with, any regulations promulgated by the Board of Governors of the Federal Reserve System. 4.10. TAXES. The Borrower has filed all federal, state and other income tax returns which are required to be filed through the date of this Credit Agreement and has paid all taxes as shown on said returns, and all taxes due or payable without returns and all assessments received to the extent such taxes and assessments have become due, other than such taxes or assessments which are being contested in good faith by the Borrower and are supported by adequate book reserves. All tax liabilities of the Borrower are adequately provided for on its books, including interest and penalties. No income tax liability of a material nature has been asserted by taxing authorities for taxes in excess of those already paid, other than such tax liabilities which are being contested in good faith by the Borrower and are supported by adequate book reserves. The Borrower has made all required withholding deposits. 4.11. ACCURACY OF INFORMATION. All factual information furnished by or on behalf of the Borrower to the Lender in writing for purposes of or in connection with this Credit Agreement or any transaction contemplated by this Credit Agreement is, and all other such factual information furnished by or on behalf of the Borrower to the Lender in the future, will be true and accurate in every material respect on the date as of which such information is dated or certified. No such information contains any material misstatement of fact or omits any material fact or any fact necessary to prevent such information from being misleading. 4.12. MATERIAL AGREEMENTS. The Borrower is not a party to any agreement or instrument or subject to any restriction that materially and adversely affects its business, property or assets, operations or condition (financial or otherwise). 4.13. DEFAULTS. The Borrower is not in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any: (a) agreement to which such entity is a party, which default would constitute a Material Adverse Occurrence; or (b) instrument evidencing any indebtedness or under any agreement relating to such indebtedness would constitute a Material Adverse Occurrence. 4.14. ERISA. (a) No Reportable Event has occurred and is continuing with respect to any Plan; (b) the Pension Benefit Guaranty Corporation or any successor entity has not instituted proceedings to terminate any Plan; and (c) each Plan of the Borrower has been maintained and funded in all material respects in accordance with its terms and with ERISA. All undefined capitalized terms used in this Section shall have the meanings ascribed to them in ERISA. 4.15. FINANCIAL STATUS. The Borrower, as a going concern, is not insolvent (as such term is defined in Section 101(32) of the United States Bankruptcy Code of 1978, as amended or Minnesota Statutes Section 513.42, as amended) and, as a going concern, will not be rendered insolvent (as such term is defined in Section 101(32) of the United States Bankruptcy Code of 1978, as amended or Minnesota Statutes Section 513.42, as amended) by execution of this Credit Agreement or any other of the Loan Documents, or consummation of the transactions contemplated thereby. 12 4.16. SURVIVAL OF REPRESENTATIONS. All representations and warranties contained in this SECTION 4 shall survive the delivery of the Revolving Credit Note and the making of the loans and Advances evidenced thereby and any investigation at any time made by or on behalf of Lender shall not diminish its rights to rely thereon. 5. AFFIRMATIVE COVENANTS As long as there remains any amount outstanding under the Revolving Credit Note or the Lender has any obligation to make Advances under the Revolving Loan Commitment, the Borrower shall, unless waived in writing by the Lender: 5.1. FINANCIAL STATEMENTS AND REPORTS. Furnish to the Lender, at the times set forth below, the following financial statements, reports and information: (a) As soon as available, but in any event within one hundred twenty (120) days after each fiscal year end, the Borrower's Annual Report on Form 10-K (together with all Exhibits thereto, other than Exhibits incorporated by reference) as submitted to the United States Securities and Exchange Commission; (b) As soon as available, but in any event within forty-five (45) days after each fiscal year-end, the Borrower's internally prepared preliminary financial statements, including without limitation a balance sheet, income statement and sources of income to have been prepared in accordance with GAAP consistently applied, subject to year end adjustments in the Borrower's annual audited financial statements, together with a preliminary Compliance Certificate for such period; (c) As soon as available, but in any event within forty-five (45) days after the last day of each quarterly fiscal period the Borrower's Quarterly Report on Form 10-Q as submitted to the United States Securities and Exchange Commission; (d) At any time there are Advances outstanding which are supported by Eligible Accounts, as soon as available, but in any event within forty-five (45) days after the last day of each month, unaudited financial statements of the Borrower consisting of a balance sheet and statement of income and surplus statement dated as of the last Business Day of such month in form and detail reasonably required by Lender certified by the Chief Financial Officer of the Borrower to have been prepared from the records of the Borrower in accordance with GAAP consistently applied by the Borrower, subject to year end adjustments in the Borrower's annual audited financial statements; (e) As soon as available, but in any event within forty-five (45) days after the last day of each quarterly fiscal period of the Borrower, an aging of accounts receivable of the Borrower setting forth the name and address for each account debtor, the amount owed by each such account debtor and the number of days past due; (f) As soon as available, but in any event within thirty (30) days after the last day of each calendar month and within five (5) days of the sale or redemption of any Eligible Securities, a Borrowing Base Certificate appropriately completed and duly executed by the Borrower; 13 (g) As soon as available, but in any event within forty-five (45) days after the last day of each quarterly fiscal period of the Borrower, a Compliance Certificate completed and duly executed by the Borrower and certified by the Borrower's Chief Financial Officer; (h) As soon as available, but in any event within fifteen (15) days prior to the last day of each fiscal year of Borrower, a projected monthly budget for the next fiscal year, in form and with such detail as is acceptable to Lender; and (i) Such other information concerning the business, operations and condition (financial or otherwise) of the Borrower as the Lender may reasonably request. 5.2. MAINTENANCE OF CORPORATE EXISTENCE. Maintain and preserve its corporate existence. 5.3. TAXES. Pay and discharge as the same shall become due and payable, all taxes, assessments and other governmental charges and levies against or on any of its property, as well as claims of any kind which, if unpaid, might become a Lien upon any of its properties, unless such tax, levy, charge, assessment or Lien is being contested in good faith by the Borrower and is supported by an adequate book reserve. The Borrower shall make all required withholding deposits. 5.4. NOTICES. As soon as practicable, give notice to the Lender of: (a) The commencement of any litigation relating to the Borrower involving claimed damages in excess of $50,000.00 in excess of insurance coverage, or relating to the transactions contemplated by this Credit Agreement; (b) The commencement of any material arbitration or governmental proceeding or investigation not previously disclosed to the Lender which has been instituted or, to the knowledge of the Borrower, is threatened against the Borrower or its property which, if determined adversely to the Borrower, would cause a Material Adverse Occurrence; (c) Any Reportable Event or "prohibited transaction" or the imposition of a Withdrawal Liability, within the meaning of ERISA, in connection with any Plan and, when known, any action taken by the Internal Revenue Service, Department of Labor or Pension Benefit Guaranty Corporation with respect thereto, and any adverse development which occurs in any litigation, arbitration or governmental investigation or proceeding previously disclosed to the Lender which if determined adversely to the Borrower would constitute a Material Adverse Occurrence; and (d) Any Default or Event of Default under this Credit Agreement. 5.5. PROCEEDS OF SALES AND REDEMPTIONS OF ELIGIBLE SECURITIES. So long as there are amounts outstanding under the Revolving Credit Note, the Borrower shall direct the Custodian to pay to Lender for application to the amount outstanding under the Revolving Credit Note all proceeds of any sales or redemptions of Eligible Securities net of costs, commissions and fees incurred in connection with such sales or redemptions (the "Sale Proceeds"), immediately upon receipt thereof, unless (i) after giving effect to such sale or redemption, and assuming the Sale Proceeds will not be applied to reduce the amount outstanding under the Revolving Credit Note, the amount outstanding under the Revolving Credit Note does not exceed the Borrowing Base, or (ii) the Sale Proceeds are used to purchase securities of equal or greater value, in which Lender is granted a perfected, first priority lien pursuant to the Pledge Agreement and which are held by the Custodian pursuant to the terms of the Control Agreement. 14 5.6. COMPLIANCE WITH LAWS. Carry on its business activities in substantial compliance with all applicable federal or state laws and all applicable rules, regulations and orders of all governmental bodies and offices having power to regulate or supervise its business activities, where failure to do so would constitute a Material Adverse Occurrence. The Borrower shall maintain all material rights, liens, franchises, permits, certificates of compliance or grants of authority required in the conduct of its business, where failure to do so would constitute a Material Adverse Occurrence. 5.7. BOOKS AND RECORDS. Keep books and records reflecting all of its business affairs and transactions in accordance with GAAP consistently applied and permit the Lender, and its representatives, at reasonable times and intervals, to visit all of its offices, discuss its financial matters with officers of the Borrower and its independent public accountants (and by this provision the Borrower authorizes its independent public accountants to participate in such discussions) and examine any of its books and other corporate records. 5.8. INSURANCE. Procure and maintain insurance with financially sound and reputable insurers, insurance with respect to its property against damage and loss by theft, fire, collision (in the case of motor vehicles) and such other risks as are reasonably required by the Lender in an amount equal to the fair market value thereof and, in any event, in an amount sufficient to avoid the application of any coinsurance provisions other than customary deductible amounts. The Borrower shall also procure and maintain other such insurance including workers compensation insurance, liability and business interruption insurance, and other insurance as the Lender may reasonably require and/or that may be required under any of the Loan Documents, all in such amounts as may be reasonably required by the Lender. The Borrower shall provide evidence of such insurance and the policies of insurance or copies thereof to the Lender upon written request. 5.9. MAINTAIN PROPERTY. Maintain and keep its assets, property and equipment, other than such assets, property or equipment which have become obsolete or worn out, in good repair, working order and condition and from time to time make or cause to be made all needed renewals, replacements and repairs. 5.10. CONDUCT OF BUSINESS. Continue to engage primarily in the business being conducted on the date of this Credit Agreement. 5.11. MINIMUM PRE-TAX NET INCOME. For the fiscal year ending June 30, 1998, achieve pre-tax net income, less interest income and extraordinary income, of not less than $1,000,000, as determined in accordance with GAAP. 5.12. LIABILITIES TO TANGIBLE NET WORTH. Maintain at all times, measured at the end of each quarterly fiscal period, a ratio of its Liabilities to Tangible Net Worth of not more than .50 to 1.0. The Borrower agrees that if it should assume, guarantee, endorse or otherwise become liable in connection with the indebtedness of any other person or entity in an aggregate amount exceeding $25,000, except for endorsements of negotiable instruments for deposit or collection in the ordinary course of business, all such amounts in excess of $25,000 and reasonably classified, in light of the facts and circumstances existing at such time, as actual or matured liabilities determined in accordance with GAAP, shall be included within the term "Liabilities" for purposes of determining compliance with this covenant. 5.13. QUICK RATIO. Maintain, at all times, measured at the end of each quarterly fiscal period, a Quick Ratio of not less than 1.75 to 1.00. 15 5.14. DEBT SERVICE COVERAGE. Maintain, as of the end of each fiscal year, a Debt Service Coverage Ratio of not less than 1.75 to 1.0. 5.15. FIELD AUDITS. Permit the Lender and its agents and representatives, to conduct an annual business survey of the Borrower and audits of the Collateral from time to time as the Lender deems necessary, all at the Borrower's expense; provided, however, that so long as no Event of Default shall have occurred and be continuing, Borrower shall only be required to reimburse Lender for one field audit per fiscal year, and the expense of each such field audit shall not exceed $2,000 so long as Accounts and Eligible Securities are the primary items of Collateral hereunder. 5.16. FURTHER ASSURANCES. The Borrower agrees upon reasonable request by the Lender to execute and deliver such further instruments, deeds and assurances, including financing statements under the Uniform Commercial Code of Minnesota and/or any other relevant states, and to do such further acts as may be reasonably necessary or proper to carry out more effectively the purposes of this Credit Agreement and the Loan Documents and, without limiting the foregoing, to make subject to the liens and security interests of the Security Agreement and any other of the Loan Documents any property agreed to be subjected, or intended to be subject, or covered by the granting clauses of the Security Agreement or such other of the Loan Documents. 5.17. ERISA COMPLIANCE. Comply at all times with all applicable provisions of ERISA and the regulations and published interpretations thereunder. 6. NEGATIVE COVENANTS As long as there remains any amount outstanding under the Revolving Credit Note or the Lender has any obligation to make Advances under the Revolving Loan Commitment, the Borrower shall not, unless waived in writing by the Lender: 6.1. CONSOLIDATION; MERGER; SALE OF ASSETS; ACQUISITIONS. Consolidate with or merge into or with any other entity; or sell (other than sales of inventory in the ordinary course of business), transfer, lease or otherwise dispose of all or a substantial part of its assets; or acquire a substantial interest in another Person either through the purchase of all or substantially all of the assets of that Person or the purchase of a controlling equity interest in that Person. 6.2. LIENS. Create, incur, assume or suffer to exist any Lien or any of its property, real or personal, except (a) Liens in favor of the Lender; (b) Liens disclosed to and approved of in writing by the Lender or as shown on SCHEDULE 6.2(b) hereto; and (c) Liens for current taxes and assessments which are not yet due and payable. 6.3. ADDITIONAL INDEBTEDNESS. Create, incur, assume or suffer to exist any indebtedness except: (a) indebtedness in favor of the Lender; (b) current liabilities incurred in the ordinary course of business; (c) indebtedness disclosed on SCHEDULE 6.3 hereto and all refinancings thereof in amounts not to exceed the principal amount thereof; (d) indebtedness consisting of purchase money financing and capitalized lease obligations in an aggregate principal amount not to exceed $250,000 at any time; and (e) indebtedness secured by any lien permitted under SECTION 6.2. 6.4. GUARANTIES. Assume, guarantee, endorse or otherwise become liable in connection with the indebtedness of any other person or entity except endorsements of negotiable instruments for deposit or collection in the ordinary course of business. 16 6.5. DIVIDENDS. Declare or pay any cash dividends, purchase, redeem, retire or otherwise acquire for value any of its capital stock now or hereafter outstanding, other than in shares of the capital stock of the Borrower, return any capital to its stockholders as such, or make any distribution of assets to its stockholders as such, other than in shares of the capital stock of the Borrower. 7. EVENTS OF DEFAULT AND REMEDIES 7.1. EVENTS OF DEFAULT. The term "Event of Default" shall mean any of the following events: (a) The Borrower shall default in the payment when due, or if payable on demand, upon demand, of any principal or interest on the Revolving Credit Note; or (b) The Borrower shall default (other than a default in payment under subsection (a) above) in the due performance and observance of any of the covenants contained in any of the Loan Documents and such default shall continue unremedied for a period of fifteen (15) days after notice from the Lender to the Borrower thereof; or (c) A default under any bond, debenture, note or other evidence of indebtedness in excess of $50,000 of the Borrower owed to any Person other than the Lender (including without limitation, those certain industrial development revenue bonds, and any indenture or loan agreement executed in connection therewith, issued by the Borrower to finance the acquisition and construction of Borrower's facility in Chaska, Minnesota), or under any indenture or other instrument under which any such evidence of indebtedness has been issued or by which it is governed, or under any lease of any of the Premises, and the expiration of the applicable period of grace, if any, specified in such evidence of indebtedness, indenture, other instrument or lease; or (d) The Borrower shall become insolvent or generally fail to pay or admit in writing its inability to pay its debts as they become due; or the Borrower shall apply for, consent to, or acquiesce in the appointment of a trustee, receiver or other custodian for itself or any of its property, or make a general assignment for the benefit of its creditors; or a trustee, receiver or other custodian shall otherwise be appointed for the Borrower or any of its assets and such appointment is not rescinded within thirty (30) days; or any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding shall be commenced by or against the Borrower and, if commenced against the Borrower, is not dismissed within thirty (30) days; or the Borrower shall take any corporate action to authorize, or in furtherance of, any of the foregoing; or (e) Any judgments, writs, warrants of attachment, executions or similar process (not undisputedly covered by insurance) in an aggregate amount in excess of $50,000.00 shall be issued or levied against the Borrower or any of its assets and shall not be released, vacated or fully bonded prior to any sale and in any event within twenty (20) days after its issue or levy; or (f) Any garnishment summons, writ of attachment, or other legal paper referring to the Borrower shall be served on the Lender; or (g) Any representation or warranty set forth in this Credit Agreement or any other Loan Document shall be untrue in any material respect on the date as of which the facts set forth are stated or certified; or 17 (h) The occurrence of any Material Adverse Occurrence; or (i) Failure by the Borrower to make any mandatory prepayment as required under SECTION 2.9 of this Credit Agreement; or (j) A Reportable Event (as defined under ERISA) shall have occurred. 7.2. REMEDIES. If an Event of Default described in SECTION 7.1((d)) shall occur, the full unpaid balance of the Revolving Credit Note (outstanding balance plus accrued interest) and all other obligations of the Borrower to the Lender shall automatically be due and payable without declaration, notice, presentment, protest or demand of any kind (all of which are hereby expressly waived) and the obligation of the Lender to make additional Advances shall automatically terminate. If any other Event of Default shall occur and be continuing, the Lender may by written notice to the Borrower terminate its obligation to make additional Advances and may declare the outstanding balance of the Revolving Credit Note and all other obligations of the Borrower to the Lender to be due and payable without other further notice, presentment, protest or demand of any kind (all of which are hereby expressly waived), whereupon the full unpaid amount of the Revolving Credit Note and all other obligations of the Borrower to the Lender shall become immediately due and payable. Upon any Event of Default, the Lender shall be entitled to exercise any and all rights and remedies available under any of the Loan Documents or otherwise available at law or in equity to collect the Revolving Credit Note and all other obligations of the Borrower to the Lender and to realize upon or otherwise pursue any and all Collateral and other security (including without limitation any and all guarantees) for the loans under this Credit Agreement. 8. MISCELLANEOUS 8.1. WAIVERS, AMENDMENTS. The provisions of the Loan Documents may from time to time be amended, modified, or waived, if such amendment, modification or waiver is in writing and signed by the Lender and, as to amendments and modifications by the Borrower. No failure or delay on the part of the Lender or the holder(s) of the Revolving Credit Note in exercising any power or right under any of the Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Borrower in any case shall entitle it to any notice or demand in similar or other circumstances. 8.2. NOTICES. All communications and notices provided under this Credit Agreement shall be in writing and addressed or delivered to the Borrower or the Lender at their respective addresses shown on the first page hereof, or to any party at such other address as may be designated by such party in a written notice to the other parties. Such notices shall be delivered by any of the following means: (i) mailing through the United States Postal Service, postage prepaid, by registered or certified mail, return receipt requested; (ii) delivery by reputable overnight delivery service including without limitation, and by way of example only: Federal Express, DHL, Airborne Express and Express Mail; or (iii) delivery by reputable private personal delivery service. Notices delivered in accordance with (i) above shall be deemed delivered the second Business Day after deposit in the mail; notices delivered in accordance with (ii) above shall be deemed delivered the first Business Day after delivery to the delivery service; and notices delivered in accordance with (iii) above shall be deemed delivered the same Business Day as that specified by the notifying party to the delivery service. 8.3. COSTS AND EXPENSES. The Borrower agrees to pay all expenses for the preparation of this Credit Agreement, including exhibits, and any amendments to this Credit Agreement as may from time 18 to time hereafter be required, and the reasonable attorneys fees and legal expenses of counsel for the Lender, from time to time incurred in connection with the preparation and execution of this Credit Agreement and any document relevant to this Credit Agreement, any amendments hereto or thereto, and the consideration of legal questions relevant hereto and thereto, provided that the amount of such expenses incurred by the Lender in connection with the preparation and execution of the Loan Documents shall not exceed $6,500 for legal fees and expenses, and $1,800 for the Lender's collateral audits and related activities through the date of this Agreement. The Borrower agrees to reimburse Lender upon demand for, all reasonable out-of-pocket expenses (including attorneys fees and legal expenses) in connection with the Lender's enforcement of the obligations of the Borrower hereunder or under the Note or any other of the Loan Documents, whether or not suit is commenced including, without limitation, attorneys fees, and legal expenses in connection with any appeal of a lower court's order or judgment. The obligations of the Borrower under this SECTION 8.3 shall survive any termination of this Credit Agreement. 8.4. INTEREST LIMITATION. All agreements between the Borrower and the Lender are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of the indebtedness evidenced or secured thereby or otherwise, shall the rate of interest charged or agreed to be paid to the Lender for the use, forbearance, loaning or detention of such indebtedness exceed the maximum permissible interest rate under applicable law ("Maximum Rate"). If for any reason or in any circumstance whatsoever fulfillment of any provision of this Credit Agreement and/or the Revolving Credit Note, any document securing or executed in connection herewith or therewith, or any other agreement between the Borrower and the Lender, at any time shall require or permit the interest rate applied thereunder to exceed the Maximum Rate, then the interest rate shall automatically be reduced to the Maximum Rate, and if the Lender should ever receive interest at a rate that would exceed the Maximum Rate, the amount of interest received which would be in excess of the amount receivable after applying the Maximum Rate to the balance of the outstanding obligation shall be applied to the reduction of the principal balance of the outstanding obligation for which the amount was paid and not to the payment of interest thereunder. This provision shall control every other provision of any and all agreements between the Borrower and the Lender and shall also be binding upon and applicable to any subsequent holder of this Revolving Credit Note. 8.5. SEVERABILITY. Any provision of this Credit Agreement or any other of the Loan Documents executed pursuant hereto which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such portion or unenforceability without invalidating the remaining provisions of this Credit Agreement or such Loan Document or affecting the validity or enforceability of such provisions in any other jurisdiction. 8.6. CROSS-REFERENCES. References in this Credit Agreement or in any other of the Loan Documents executed pursuant hereto to any Section are, unless otherwise specified, to such Section of this Credit Agreement or such Loan Document, as the case may be. 8.7. HEADINGS. The various headings of this Credit Agreement or of any other of the Loan Documents executed pursuant hereto are inserted for convenience only and shall not affect the meaning or interpretation of this Credit Agreement or such Loan Document or any provisions hereof or thereof. 8.8. GOVERNING LAW; VENUE. Each of the Loan Documents shall be deemed to be a contract made under and governed by the laws of the State of Minnesota. The Borrower hereby consents to the personal jurisdiction of the state and federal courts located in the State of Minnesota in connection with any controversy related to this Credit Agreement and any other of the Loan Documents, waives any argument that venue in any such forum is not convenient and agrees that any litigation instigated by the 19 Borrower against the Lender in connection herewith or therewith shall be venued in the federal or state court that has jurisdiction over matters arising in Minneapolis, Minnesota. 8.9. SUCCESSORS AND ASSIGNS. This Credit Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, except that Borrower may not assign or transfer its rights hereunder without the prior written consent of Lender; provided that the Lender shall, in all such cases in which the Lender transfers any interest hereunder pursuant to a participation agreement or other syndication arrangement, remain as the Lender hereunder and shall be solely responsible for administering the obligations and enforcing the rights of the Lender under the Loan Documents. 8.10. RECITALS INCORPORATED. The recitals to this Credit Agreement are incorporated into and constitute an integral part of this Credit Agreement. 8.11. MULTIPLE COUNTERPARTS. This Credit Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which shall constitute one and the same instrument. 8.12. CONFIDENTIALITY. The Lender agrees to exercise reasonable care to maintain the confidentiality of all information relating to the Borrower which has been provided to the Lender by the Borrower, and neither the Lender nor any of its affiliates shall use any such information for any purpose in any manner other than pursuant to the terms contemplated by the Loan Documents, except to the extent such information (a) was or becomes generally available to the public, other than as a result of a disclosure by the Lender, or (b) was or becomes available on a non-confidential basis from a source other than the Borrower, provided that such source is not bound by a confidentiality agreement with the Borrower which is known to the Lender; provided further, however, that the Lender may disclose such information (i) at the request of or pursuant to any requirement of any governmental authority to which the Lender is subject or in connection with the examination of the Lender by any such authority, (ii) pursuant to a subpoena or other court process, (iii) when required to do so in accordance with the provisions of any applicable law, (iv) to the Lender's independent auditors and other professional advisors, and (v) to any person or entity and in any proceeding necessary in the Lender's reasonable judgment to protect the Lender's interests in connection with any claim or dispute involving the Lender. The Borrower authorizes the Lender to disclose to any prospective transferee such financial and other information in the Lender's possession concerning the Borrower which has been delivered to the Lender in connection with the Loan Documents; provided that, unless otherwise agreed by the Borrower, the transferee has agreed in writing to keep such information confidential to the same extent required of the Lender under this Section. 20 IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written. LIFECORE BIOMEDICAL, INC., a Minnesota corporation By: /s/ Dennis J. Allingham -------------------------------------- Name: Dennis J. Allingham Title: Executive Vice President and Chief Financial Officer FIRST BANK NATIONAL ASSOCIATION, a national banking association By: /s/ Therese L. Knutson -------------------------------------- Name: Therese L. Knutson Title: Vice President 21 SCHEDULE 6.2(b) LIENS 1. Liens of carriers, warehousemen, mechanics and materialmen, landlord's and other like liens arising in the ordinary course of business for sums not due or which are being diligently contested in good faith. 2. Liens incurred or deposits or pledges made or given in connection with or to secure payment of indemnity, performance or other similar bonds. 3. Banker's Liens, rights of setoff and similar Liens incurred on deposits made in the ordinary course of business. 4. Judgment, attachment or similar Liens, unless the judgment it secures has not been discharged or execution thereof effectively stayed and bonded against pending appeal within 30 days after the entry thereof. 5. Liens in the nature of easements, rights of way, restrictions and other similar encumbrances on title to, or restrictions on the use of real property which are not substantial in amount and do not materially detract from the value of the property subject thereto. 6. Liens securing the indebtedness described in items 2 and 3 of Schedule 6.3. 7. Liens securing indebtedness described in Section 6.3(d). SCHEDULE 6.3 INDEBTEDNESS 1. Letter agreement of Borrower in favor of Credito Italiano-Verona Branch, dated June 12, 1997, relating to an Italian lira credit facility for Lifecore Biomedical SpA in the aggregate amount of approximately US$131,000, by which the Borrower agreed to maintain its investment in Lifecore Biomedical SpA, and to provide to Lifecore Biomedical SpA, if the above-referenced credit facility Credito Italiano-Verona Branch becomes past due, the capital necessary to settle such credit facility or to make a direct payment to Credito Italiano-Verona Branch in an amount sufficient to pay such credit facility. 2. $1,600,000 promissory note in favor of Bridger Biomed, Inc. Such note bears interest at 6% per annum, with principal payments of $800,000, plus interest, due in May, 1998 and May, 1999. Principal payments may be made in cash or the Borrower's common stock, at the Borrower's option. The Borrower's obligations under such note are secured by the assets which the Borrower acquired from Bridger Biomed, Inc., consisting of technology and regulatory rights in the TefGen product line. 3. $7,000,000 Industrial Development Revenue Bonds, bearing interest at 10.25% per annum. The bonds are secured by a first mortgage on the Borrower's manufacturing and administrative facility. The Borrower is required to make debt service payments on the bonds of approximately $775,000 per year for the fiscal years 1996 through 2021. As of December 31, 1997, the outstanding principal balance of the Industrial Development Revenue Bonds is $6,704,000. EX-10.3 4 EXHIBIT 10.3 EXHIBIT 10.3 REVOLVING CREDIT NOTE $5,000,000 MINNEAPOLIS, MINNESOTA DUE: OCTOBER 31, 1998 JANUARY 15, 1998 LOAN AMOUNT AND INTEREST RATE. FOR VALUE RECEIVED, LIFECORE BIOMEDICAL, INC., a Minnesota corporation ("Maker") promises to pay to the order of FIRST BANK NATIONAL ASSOCIATION, a national banking association ("Lender"), its successors and assigns, at its office at 300 Prairie Center Drive, Eden Prairie, Minnesota 55344, or such other place as the holder hereof may designate in writing from time to time, the principal sum of Five Million and no/100 Dollars ($5,000,000), or so much thereof as may be advanced from time to time pursuant to that certain Credit Agreement dated of even date herewith between the Maker and the Lender, as the same may be amended, modified, restated or replaced from time to time as agreed upon in writing by the Lender ("Credit Agreement"), in lawful money of the United States, together with interest from the date hereof on the unpaid balance hereof from time to time outstanding at the variable rate of interest established from time to time pursuant to the Credit Agreement. Interest hereon shall be computed on the actual number of days elapsed and a 360-day year. 1. PAYMENT SCHEDULE. This Note shall be payable in the following manner: 1.1 Accrued interest hereon shall be due and payable on the first day of each calendar month, commencing February 1, 1998, until all indebtedness evidenced hereby is paid in full. All outstanding principal and accrued and unpaid interest shall be due and payable on October 31, 1998. 1.2 Each payment made under this Note shall be applied, first, to the amount then due for any expenses, costs or other expenditures incurred by the Lender in connection with this Note and payable by the Maker, and then applied to any accrued interest then due under this Note, and any balance thereafter remaining shall be applied against principal outstanding hereunder. 1.3 Any payment due on any non-Business Day of the Lender shall be due upon (and interest shall accrue to) the next Business Day. 2. CREDIT AGREEMENT. This Note is the Revolving Credit Note issued pursuant to the terms and provisions of the Credit Agreement and this Note and the holder hereof are entitled to all of the benefits provided for in the Credit Agreement, or referred to therein. Reference is made to the Credit Agreement for a statement of the terms and conditions under which this indebtedness was incurred and is to be repaid and under which the due date of this Note may be accelerated. The provisions of the Credit Agreement are hereby incorporated by reference with the same force and effect as if fully set forth herein.) 3. SECURITY. This Note is secured by, INTER ALIA, security interests granted by Maker in favor of Lender pursuant to the Security Agreement and the Pledge Agreement (as defined in the Credit Agreement). 4. DEFAULT AND ACCELERATION. If an Event of Default, as defined in the Credit Agreement or any other agreement made by any party in connection with this Note, shall occur, or if any portion of the indebtedness evidenced hereby is not paid when due, the Lender or other holder of this Note may, as provided in the Credit Agreement, declare the indebtedness evidenced hereby and all other indebtedness and obligations of the Maker to the Lender or holder hereof immediately due and payable and the Lender or other holder hereof may, without notice, immediately exercise any right of setoff and enforce any lien or security interest securing payment hereof. The foregoing shall be in addition to the rights of acceleration that may be provided in any loan agreement, security agreement, mortgage and/or other writing relating to the indebtedness evidenced hereby. If this Note is placed with any attorney(s) for collection upon any default, the Maker agrees to pay to the Lender or holder, its reasonable attorneys' fees and all lawful costs and expenses of collection, whether or not a suit is commenced. 5. WAIVER. Time is of the essence. No delay or omission on the part of the Lender or other holder hereof in exercising any right or remedy hereunder shall operate as a waiver of such right or of any other right or remedy under this Note or any other document or agreement executed in connection herewith. All waivers by the Lender must be in writing to be effective and a waiver on any occasion shall not be construed as a bar to or a waiver of any similar right or remedy on a future occasion. The makers, endorsers, sureties, guarantors and all other persons liable for all or any part of the indebtedness evidenced by this Note jointly and severally waive presentment for payment, protest and notice of nonpayment. Such parties hereby consent without affecting their liability to any extension or alteration of the time or terms of payment hereon, any renewal, any release of all or any part of the security given for the payment hereof, any acceptance of additional security of any kind, and any release of, or resort to any party liable for payment hereof and such parties shall remain bound in the same capacities as prior thereto upon each such event. 6. ADDITIONAL SECURITY. As additional security for this Note, the Maker and any other party to this Note hereby grant to the Lender a security interest in any deposits or other sums at any time credited by or due from the Lender to any maker, endorser or guarantor hereof and any securities or other property of any maker, endorser or guarantor hereof in the possession of the lender or other holder of this Note. The Lender or other holder hereof may apply or set off such property deposits or other sums against the obligations hereunder at any time in case of makers, but only with respect to matured liabilities in the case of endorsers or guarantors. 7. JURISDICTION. This Note represents a loan negotiated, executed and to be performed in the State of Minnesota and shall be construed, interpreted and governed by the law of said state. The Maker hereby consents to the personal jurisdiction of the state and federal courts located in the State of Minnesota in connection with any controversy related to this Note, waives any argument that venue in such forums is not convenient and agrees that any litigation instigated by the Maker against the Lender in connection with this Note shall be venued in the federal or state court that has jurisdiction over matters arising in Minneapolis, Minnesota. 8. INTEREST LIMITATION. All agreements between the Maker and the Lender are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of the indebtedness evidenced or secured thereby or otherwise, shall the rate of interest charged or agreed to be paid the Lender for the use, forbearance, loaning or detention of such indebtedness exceed the maximum permissible interest rate under applicable law ("Maximum Rate"). If for any reason or in any circumstance whatsoever fulfillment of any provision of this Note, any document securing or executed in connection with this Note, or any other agreement between the Maker and the Lender, at any time shall require or permit the interest rate applied thereunder to exceed the Maximum Rate, then the interest rate shall automatically be reduced to the Maximum Rate, and if the 2 Lender should ever receive interest at a rate that would exceed the Maximum Rate, the amount of interest received which would be in excess of the amount receivable after applying the Maximum Rate to the balance of the outstanding obligation shall be applied to the reduction of the principal balance of the outstanding obligation for which the amount was paid and not to the payment of interest thereunder. This provision shall control every other provision of any and all agreements between the Maker and the Lender and shall also be binding upon and available to any subsequent holder of this Note. IN WITNESS WHEREOF, the Maker has executed and delivered this Note to the Lender as of the day and year first above written. LIFECORE BIOMEDICAL, INC., a Minnesota corporation By: /s/ Dennis J. Allingham ------------------------------------- Name: Dennis J. Allingham Title: Executive Vice President and Chief Financial Officer 3 EX-10.4 5 EXHIBIT 10.4 EXHIBIT 10.4 SECURITY AGREEMENT THIS SECURITY AGREEMENT (the "Security Agreement") is made as of January 15, 1998, by LIFECORE BIOMEDICAL, INC., a Minnesota corporation, with its chief executive office at 3515 Lyman Boulevard, Chaska, Minnesota 55318 (whether one or more, the "Debtor"), in favor of FIRST BANK NATIONAL ASSOCIATION, a national banking association (the "Secured Party"). RECITALS WHEREAS, the Debtor and the Secured Party have entered into that certain credit agreement dated the date hereof (as may be amended from time to time hereafter, the "Credit Agreement") and the Debtor has agreed to secure all of its debts, obligations and duties arising under the Credit Agreement to the Secured Party pursuant to this Security Agreement and the grant of Collateral hereunder. NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by each of the parties hereto, it is agreed as follows: 1. DEFINITIONS As used herein, the following terms shall have the meaning set forth: "ACCOUNTS" means the Debtor's right to the payment of money from the sale, lease or other disposition of goods or other property by the Debtor, any franchise now or hereafter at any time held by the Debtor, a rendering of services by the Debtor, a loan by the Debtor, the overpayment of taxes or other liabilities of the Debtor, or otherwise any contract or agreement, whether such right to payment is already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all liens and security interests) that the Debtor may at any time have by law or agreement against any account debtor (as defined in the Minnesota Uniform Commercial Code) or other obligor obligated to make any such payment or against any of the property of such account debtor or other obligor, including, but not limited to, all present and future debt instruments, chattel papers, insurance proceeds and accounts of the Debtor. "CHATTEL PAPER" means any writing or writings which evidence both a monetary obligation and a security interest in, or a lease of, specific goods. "COLLATERAL" means all property in which a security interest is granted hereunder wherever located. "DATA PROCESSING RECORDS AND SYSTEMS" means all of Debtor's now existing or hereafter acquired electronic data processing and computer records, software, systems, manuals, procedures, disks, tapes and all other storage media and memory used by Debtor with respect to Accounts, Chattel Paper and Instruments, but excluding all software, systems, manuals and other storage media and memory which restricts Debtor's ability to transfer an interest therein. "DEFAULT" means any event which, with the passage of time, the giving of notice, or both, would constitute an Event of Default. 1 "DEPOSIT ACCOUNTS" mean all deposit accounts now existing or hereafter arising, maintained for or in Debtor's name and any and all funds at any time held therein. "EVENT OF DEFAULT" has the meaning specified in SECTION 6 hereof. "GOODS" means any tangible personal property or fixtures, including all things that are movable, but not including money, documents, Instruments, Accounts, Chattel Paper, general intangibles or minerals or the like before extraction. "INSTRUMENTS" means any negotiable instrument or certificated or non-certificated security or any other writing which evidences a right to the payment of money and is not itself a security agreement or lease and is of a type which is in the ordinary course of business transferred by delivery with any necessary endorsement or assignment. "LIENS" means any and all mortgages, pledges, security interests, tax and other statutory liens, judgment liens, and other encumbrances of any nature whatsoever, whether consensual or non-consensual. "OBLIGATIONS" means: a. That certain Promissory Note dated of even date herewith in the original principal amount of Five Million Dollars ($5,000,000) executed by Debtor and payable to the order of Secured Party, together with each extension, renewal, modification, substitution and change in form thereof which may be from time to time and for any term or terms effected between the holder(s) and any party primarily obligated thereon without notice to other parties; b. All of Debtor's indebtedness, obligations and liabilities under the Credit Agreement between, and all other indebtedness, obligations and liabilities of the Debtor to Secured Party, including all future loans and advances, whether direct or indirect, absolute or contingent, joint or several, howsoever owned, held or acquired by the Secured Party and howsoever evidenced, presently existing and hereafter arising; and c. All amounts expended or incurred by the Secured Party in exercising any rights or remedies consequent on any default, including without limitation, court costs, attorneys, fees and expenses in connection with the enforcement of this Security Agreement whether or not suit has been filed. "PERMITTED LIENS" means the Liens permitted pursuant to Section 6.2 of the Credit Agreement. "PROCEEDS" means whatever is received upon the sale, exchange, collection or other disposition of Collateral or Proceeds. Other terms defined herein shall have the meaning ascribed to them herein. All capitalized terms used herein not specifically defined herein shall have the meaning ascribed to them in the Credit Agreement. 2. SECURITY INTERESTS 2.1 COLLATERAL. As security for the payment of all Obligations, Debtor hereby grants to Secured Party a security interest in all of Debtor's now owned or hereafter acquired or arising: 2 a. Accounts; b. Chattel Paper; c. Data Processing Records and Systems; d. Instruments; and e. Proceeds (whether cash or non-cash Proceeds, including non-cash Proceeds of all types including, but not limited to, tangible personal property acquired with cash Proceeds). 3. REPRESENTATIONS AND WARRANTIES OF DEBTOR Debtor represents, warrants and covenants that: 3.1 ORGANIZATION, ETC. The Debtor is a corporation validly organized and existing and in good standing under the laws of the state of Minnesota, has full power and authority to own its property and conduct its business substantially as presently conducted by it and is duly qualified to do business and is in good standing as a corporation in each jurisdiction where the nature of its business makes such qualification necessary. The Debtor has full power and authority to enter into and perform its obligations under this Security Agreement and grant the liens and security interests hereunder. 3.2 DUE AUTHORIZATION. The execution, delivery and performance by the Debtor of this Security Agreement have been duly authorized by all necessary corporate action, do not require any approval or consent of, or any registration, qualification or filing with, any governmental agency or authority or any approval or consent of any other Person (including, without limitation, any stockholder), do not and will not conflict with, result in any violation of or constitute any default under, any provision of the Debtor's certificate of incorporation, any agreement binding on or applicable to the Debtor or any of its property, or any law or governmental regulation or court decree or order, binding upon or applicable to the Debtor or of any of its property and will not result in the creation or imposition of any Lien on any of its property pursuant to the provisions of any agreement binding on or applicable to the Debtor or any of its property except pursuant to this Security Agreement. 3.3 VALIDITY OF THIS SECURITY AGREEMENT. This Security Agreement represents a legal, valid and binding obligation of the Debtor enforceable in accordance with its terms, subject only to bankruptcy, insolvency, reorganization, moratorium or similar laws, rulings or decisions at the time in effect affecting the enforceability of rights of creditors generally and to general equitable principles which may limit the right to obtain equitable remedies. This Security Agreement grants to Secured Party a valid, first priority perfected and enforceable lien on the Collateral. 3.4 TITLE TO COLLATERAL. The Debtor is sole owner of, has rights in, and has good and marketable title to all of the Collateral and none of the Collateral is subject to any Lien except for Permitted Liens and the security interest created pursuant to this Security Agreement. 3.5 SURVIVAL OF REPRESENTATIONS. All representations and warranties contained in this SECTION 3 shall survive the delivery of this Security Agreement and any investigation at any time made by or on behalf of Secured Party shall not diminish its rights to rely thereon. 3 4. COVENANTS OF THE DEBTOR 4.1 DISPOSITION OR ENCUMBRANCE OF COLLATERAL. Debtor will not encumber, sell or otherwise transfer or dispose of the Collateral without the prior written consent of Secured Party. 4.2 VALIDITY OF ACCOUNTS. The Debtor warrants that all Accounts, Chattel Paper and Instruments will be bona fide existing obligations created by the sale and actual delivery of Goods or the rendition of services to customers in the ordinary course of business, which the Debtor then owns free and clear of any Liens other than the security interest created by this Security Agreement and Permitted Liens and which are then unconditionally owing to Debtor without defenses, offset or counterclaim known to Borrower, and that all shipping or delivery receipts, invoice copies and other documents furnished to Secured Party in connection therewith will be genuine, and that the unpaid principal amount of any Chattel Paper or Instrument and any security therefor is and will be as represented to Secured Party on the date of the delivery thereof to the Secured Party. Upon the request of the Secured Party, Debtor shall furnish to the Secured Party, from time to time, a list of the Debtor's Accounts, including without limitation, the name and address of each account debtor and the amount owed. 4.3 NOTATION ON CHATTEL PAPER. For purposes of the security interest granted pursuant to this Security Agreement, Secured Party has been granted a direct security interest in all Chattel Paper and such Chattel Paper is not claimed merely as Proceeds of inventory. Upon Secured Party's request, Debtor will deliver to Secured Party the originals of all Chattel Paper. Debtor will not execute any copies of Chattel Paper other than those which are clearly marked as a copy. Secured Party may stamp any such Chattel Paper with a legend reflecting Secured Party's security interest therein. 4.4 INSTRUMENTS AS PROCEEDS. Notwithstanding any other provision in this Security Agreement concerning Instruments, Debtor covenants that Instruments constituting cash Proceeds (for example, money and checks) shall be deposited in deposit accounts with Secured Party containing only Proceeds to the extent required under SECTION 5.2. 4.5 PROTECTION OF COLLATERAL. All costs of keeping the Collateral free of any Liens prohibited by this Security Agreement and of removing the same if they should arise, and any and all excise, property, sales and use taxes imposed by any state, federal or local authority on any of the Collateral or in respect of the sale thereof, shall be borne and paid by Debtor and if Debtor fails to promptly pay any thereof when due, Secured Party may, at its option, but shall not be required to, pay the same whereupon the same shall constitute Obligations and shall bear interest at the highest annual rate specified in the Obligations (the "Default Rate") and shall be secured by the security interest granted hereunder. 4.6 COMPLIANCE WITH LAW. Debtor will not use the Collateral, or knowingly permit the Collateral to be used, for any unlawful purpose or in violation of any federal, state or municipal law. 4.7 BOOKS AND RECORDS; ACCESS. a. Debtor will permit Secured Party, upon reasonable notice to Debtor, to examine Debtor's books and records (including Data Processing Records and Systems) with respect to the Collateral and make extracts therefrom and copies thereof at any time and from time to time, and Debtor will furnish such information and reports to Secured Party regarding the Collateral as Secured Party may from time to time request. Debtor will also permit Secured Party, upon reasonable notice to Debtor, to inspect the Collateral at any time and from time to time as Secured Party may reasonably request. 4 b. Secured Party shall have authority, at any time, to place, or require Debtor to place, upon Debtor's books and records relating to Accounts, Chattel Paper, Instruments and other rights to payment covered by the security interest granted hereby a notation or legend stating that such Accounts, Chattel Paper, Instruments and other rights to payment are subject to a security interest of Secured Party. 4.8 ADDITIONAL DOCUMENTATION. Debtor will execute, from time to time, such financing statements, assignments, and other documents covering the Collateral, including Proceeds, as Secured Party may reasonably request in order to create, evidence, perfect, maintain or continue its security interest in the Collateral (including additional Collateral acquired by the Debtor after the date hereof), and Debtor will pay the cost of filing the same in all public offices in which Secured Party may deem filing to be appropriate. Upon request, Debtor will deliver to Secured Party all Debtor's Instruments and Chattel Paper. 4.9 CHIEF EXECUTIVE OFFICE. The location of the chief executive office of Debtor is set forth in the preamble hereto and will not be changed without thirty (30) days' prior written notice to Secured Party. Debtor warrants that its books and records concerning its Accounts and Chattel Paper are located at its chief executive office. 4.10 NAME OF DEBTOR. Debtor's true name is as set forth in the preamble hereto. Debtor has not used any other name within the past five (5) years. Neither Debtor nor any predecessor in title to any of the Collateral has executed any financing statements or security agreements presently effective as to the Collateral except those permitted under the Credit Agreement. Debtor shall not change its name or use any trade or assumed name without giving Secured Party thirty (30) days prior written notice. 4.11 POWER OF ATTORNEY. The Debtor appoints Secured Party, or any other person, whom Secured Party may from time to time designate, as Debtor's attorney with power, after the occurrence and during the continuance of an Event of Default, to endorse Debtor's name on any checks, notes, acceptances, drafts, or other forms of payment or security that may come into Secured Party's possession, to sign Debtor's name on any invoice or bill of lading relating to any Collateral, on drafts against customers, on schedules and confirmatory assignments of Accounts, Chattel Paper, Instruments or other Collateral, on notices of assignment, financing statements under the Uniform Commercial Code (the "Code") and other public records, on verifications of Accounts and on notices to customers, to notify the post office authorities to change the address for delivery of Debtor's mail to an address designated by Secured Party, to receive and open all mail addressed to Debtor, to send requests for verification of Accounts, Chattel Paper, Instruments or other Collateral to customers, make any compromise or settlement, and take any action it deems advisable with respect to the Collateral, and to do all things necessary to carry out this Security Agreement. The Debtor ratifies and approves all acts of the attorney taken within the scope of the authority granted. Neither Secured Party nor the attorney will be liable for any acts of commission or omission nor for any error in judgment or mistake of fact or law other than those acts, errors or mistakes arising from gross negligence or willful misconduct by Secured Party. This power, being coupled with an interest, is irrevocable so long as any Obligation remains unpaid. The Debtor waives presentment and protest of all instruments and notice thereof, notice of default and dishonor and all other notices to which Debtor may otherwise be entitled, except as otherwise provided herein or in any other Loan Document. 5. COLLECTIONS 5.1 COLLECTION OF ACCOUNTS. Except as otherwise provided in this SECTION 5, the Debtor shall continue to collect at its own expense, all amounts due or to become due to the Debtor, under the 5 Accounts. In connection with such collections, the Debtor may take (and, at the Secured Party's direction, shall take) such action as the Debtor or the Secured Party, after the occurrence and during the continuance of an Event of Default, may deem necessary or advisable to enforce collection of the Accounts; provided, however, that the Secured Party, after the occurrence and during the continuance of an Event of Default, shall have the right to notify the account debtors under any Accounts of the assignment of such Accounts to the Secured Party and to direct such account debtors to make payment of all amounts due or to become due to the Debtor thereunder directly to the Secured Party. Upon such notification and at the expense of Debtor, the Secured Party shall have the right to enforce collection of such Accounts and to adjust, settle, or compromise the amount or payment thereof in the same manner and to the same extent as the Debtor might have done. The Secured Party shall apply all collections hereunder in accordance with SECTION 7.7. 5.2 COLLECTION OF OTHER COLLATERAL PROCEEDS. Upon request of Lender, following and during the continuance of an Event of Default, the Debtor shall deposit into a collection account (the "Collection Account") maintained with the Secured Party immediately upon receipt all Proceeds of Collateral, other than accounts, in the original form such payments are received, except for endorsement where necessary. The Secured Party is hereby authorized and directed promptly to apply all such collected funds to the payment of the Obligations in the manner and in the priority determined by the Secured Party in the exercise of its discretion. Such funds shall be applied in accordance with SECTION 7.7. 6. EVENTS OF DEFAULT The occurrence of any Event of Default as defined in the Credit Agreement shall constitute an Event of Default hereunder ("Event of Default") 7. RIGHTS AND REMEDIES ON DEFAULT Upon the occurrence of an Event of Default, and at any time thereafter until such Event of Default is cured to the satisfaction of Secured Party or waived by the Secured Party, and in addition to the rights granted to Secured Party under SECTION 5 hereof or under any other document, agreement or other instrument evidencing, securing or otherwise relating to any of the Obligations, Secured Party may exercise any one or more of the following rights and remedies: 7.1 ACCELERATION OF OBLIGATIONS. Declare any and all Obligations to be immediately due and payable as provided in the Credit Agreement, and the same shall thereupon become immediately due and payable without further notice or demand. 7.2 RIGHT OF OFFSET. Offset any deposits, including unmatured time deposits, then maintained by Debtor with Secured Party, whether or not then due, against any indebtedness then owed by Debtor to Secured Party whether or not then due. 7.3 DEAL WITH COLLATERAL. In the name of Debtor or otherwise, demand, collect, receive and receipt for, compound, compromise, settle and give acquittance for and prosecute and discontinue any suits or proceedings in respect of any or all of the Collateral. 7.4 REALIZE ON COLLATERAL. Take any action which Secured Party may deem necessary or desirable in order to realize on the Collateral, including, without limitation, the power to foreclose any security interest, to perform any contract, to endorse in the name of Debtor any checks, drafts, notes, or other instruments or documents received in payment of or on account of the Collateral. 6 7.5 ACCESS TO PROPERTY. Enter upon and into and take possession of all or such part or parts of the properties of Debtor, including lands, plants, buildings, machinery, equipment, Data Processing Records and Systems and other property as may be necessary or appropriate in the judgment of Secured Party, to permit or enable Secured Party to store, lease, sell or otherwise dispose of or collect all or any part of the Collateral, and use and operate said properties for such purposes and for such length of time as Secured Party may deem necessary or appropriate for said purposes without the payment of any compensation to Debtor therefor. Debtor shall provide Secured Party with all information and assistance requested by Secured Party to facilitate the storage, leasing, assembly, sale or other disposition or collection of the Collateral after an Event of Default, and make such Collateral available to Secured Party on Secured Party's demand. 7.6 OTHER RIGHTS. Exercise any and all other rights and remedies available to it by law, in equity or by agreement, including rights and remedies under the Minnesota Uniform Commercial Code or any other applicable law, or under the Credit Agreement and, in connection therewith, Secured Party may require Debtor to assemble the Collateral and make it available to Secured Party at a place to be designated by Secured Party, and any notice of intended disposition of any of the Collateral required by law shall be deemed reasonable if such notice is mailed or delivered to Debtor at its address as shown on Secured Party's records at least ten (10) days before the date of such disposition. The Secured Party may sell or otherwise dispose of any or all of the Collateral in a single unit or in multiple units and the Secured Party may be the purchaser at such sale or other disposition. The Debtor shall remain liable for any deficiency remaining after any such sale or other disposition of the Collateral. 7.7 APPLICATION OF PROCEEDS. All proceeds of Collateral shall be applied in accordance with Minnesota Statute Section 336.9-504 and such proceeds applied toward the Obligations shall be applied in such order as the Secured Party may elect. 8. MISCELLANEOUS 8.1 NO LIABILITY ON COLLATERAL. It is understood that Secured Party does not in any way assume any of the Debtor's obligations under any of the Collateral and does not intend to create any third party beneficiary rights by taking or omitting any action herein. Debtor hereby agrees to indemnify Secured Party against all liability arising in connection with or on account of any of the Collateral, except for any such liabilities arising on account of Secured Party's gross negligence or willful misconduct. 8.2 NO WAIVER. Secured Party shall not be deemed to have waived any of its rights hereunder or under any other agreement, instrument or paper signed by Debtor unless such waiver be in writing and signed by Secured Party. No delay or omission on the part of Secured Party in exercising any right shall operate as a waiver of such right or any other right. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. 8.3 REMEDIES CUMULATIVE. All rights and remedies of Secured Party shall be cumulative and may be exercised singularly or concurrently, at its option, and the exercise or enforcement of any one such right or remedy shall not bar or be a condition to the exercise or enforcement of any other. 8.4 GOVERNING LAW/JURISDICTION. This Security Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Minnesota. Debtor hereby consents to the personal jurisdiction of the state and federal courts of the State of Minnesota in connection with any controversy related to this Security Agreement, waives any argument 7 that venue in any such forum is not convenient and agrees that any litigation initiated by Debtor against Secured Party shall be venued in the State or Federal District Courts of Minnesota. 8.5 EXPENSES. Debtor agrees to pay all costs, fees and expenses incurred by Secured Party in the exercise of any right or remedy available to it under this Security Agreement, whether or not suit is commenced, including, without limitation, attorneys' fees and legal expenses of counsel for the Secured Party incurred in connection with any appeal of a lower court's order or judgment, and any appraisal or survey fees, completion costs, storage and transportation charges. 8.6 SUCCESSORS AND ASSIGNS. This Security Agreement shall be binding upon and inure to the benefit of the successors and assigns of Debtor and Secured Party. 8.7 RECITALS. The above Recitals are true and correct as of the date hereof and constitute a part of this Security Agreement. 8.8 COPY OF SECURITY AGREEMENT AS FINANCING STATEMENT. The Secured Party may file a reproduced copy or photostatic copy or other reproduction of this Security Agreement as a Financing Statement. 8.9 MULTIPLE COUNTERPARTS. This Security Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, and all of which shall constitute one and the same agreement. IN WITNESS WHEREOF, the Debtor has caused the execution of this Security Agreement by its duly authorized representative as of the date and year first above written. LIFECORE BIOMEDICAL, INC., a Minnesota corporation By: /s/ Dennis J. Allingham -------------------------------------- Name: Dennis J. Allingham Title: Executive Vice President and Chief Financial Officer 8 EX-10.5 6 EXHIBIT 10.5 EXHIBIT 10.5 CUSTODIAL PLEDGE AND SECURITY AGREEMENT THIS PLEDGE AGREEMENT AND SECURITY AGREEMENT (the "Pledge Agreement") dated January 15, 1998, by and between LIFECORE BIOMEDICAL, INC., a Minnesota corporation (the "Pledgor"), NORWEST INVESTMENT SERVICES, INC., a Minnesota corporation (the "Custodian") and FIRST BANK NATIONAL ASSOCIATION, a national banking association ("Secured Party"). RECITALS WHEREAS, the Pledgor and the Secured Party have executed and delivered that certain credit agreement dated the date hereof ("Credit Agreement") pursuant to which the Secured Party has agreed to lend to the Pledgor the principal amount of $5,000,000, or such lesser amount as is advanced pursuant to the terms of the Credit Agreement, and the Pledgor has agreed to secure its obligations under the Credit Agreement to the Secured Party pursuant to the terms of this Pledge Agreement. NOW, THEREFORE, for and in consideration of the above premises, the mutual promises and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Pledgor, the Custodian and the Lender agree as follows: 1. THE PLEDGE. The Pledgor does hereby pledge, hypothecate, assign, transfer to the Secured Party and grant the Secured Party a continuous and continuing security interest in and to all of its right, title and interest, now owned and hereinafter acquired, in and to the property described on SCHEDULE I attached hereto and made a part hereof, now or hereafter held by the Custodian pursuant to any agreement or account (the "Custodial Accounts"): a. All stocks, bonds, debentures, certificates of deposit, commercial paper, letters of credit, securities, whether certificated or uncertificated, United States Treasury bills and securities and other documents, instruments and obligations described on SCHEDULE I attached hereto, howsoever evidenced and where and howsoever held, whether by book entry, certificate or otherwise, in the physical possession of the Secured Party or the Custodian or in a Depository Trust Company or a Federal Reserve Bank in the name of or for the account of the Pledgor, Secured Party or Custodian or otherwise; b. All securities, instruments, and other property, rights or interests of any description at any time issued or issuable as an addition to, in substitution or exchange for or with respect to the items described in subsection (a) above, including, without limitation, shares issued as dividends or as the result of any reclassification, split-up, or other corporate reorganization; c. All cash, proceeds, revenues, profits, dividends, interest or other income or property, accrued and hereafter accruing, received, receivable or otherwise distributed in respect of, in exchange for or upon the sale or other disposition of any or all of the property described in subsections (a) and (b) above; d. Property of every kind and description in which the Pledgor has or may acquire an interest, now or hereafter in the control of the Secured Party for any reason, including, without limitation, instruments, money, documents or other property deposited with or delivered to the Secured Party as collateral, for safekeeping or for collection or exchange for other property, and all dividends and distributions on, or other rights in connection with such property; and all general intangibles (as defined in the Minnesota Uniform Commercial Code), now owned or hereafter acquired by the Pledgor; and e. All records, books, ledgers, computer tapes, disks, printouts and other information in whatsoever form with respect to any of the collateral described in subsections (a), (b), (c) and (d) above. All of the above-described property shall be referred to herein as "Collateral". 2. SECURITY INTEREST PARAMOUNT. The Pledgor hereby directs the Custodian to recognize, and the Custodian hereby recognizes, that the pledge and security interest and the rights in the Collateral granted to the Secured Party hereunder are paramount and shall modify and supersede any obligations or agreements regarding the Collateral between the Pledgor and the Custodian. 3. SECURED OBLIGATION. The pledge and security interest granted herein is given to secure payment and performance of all and singular of the following (all of which are referred to collectively herein as the "Secured Obligation"): a. That certain Promissory Note dated of even date herewith in the original principal amount of Five Million Dollars ($5,000,000) executed by Pledgor and payable to the order of Secured Party, together with each extension, renewal, modification, substitution and change in form thereof which may be from time to time and for any term or terms effected between the holder(s) and any party primarily obligated thereon without notice to other parties; b. All of Pledgor's indebtedness, obligations and liabilities under that certain Credit Agreement (the "Credit Agreement") dated the date hereof between the Pledgor and the Secured Party, and all other indebtedness, obligations and liabilities of the Pledgor to Secured Party, including all future loans and advances, whether direct or indirect, absolute or contingent, joint or several, howsoever owned, held or acquired by the Secured Party and howsoever evidenced, presently existing and hereafter arising; and c. All amounts expended or incurred by the Secured Party in exercising any rights or remedies consequent on any default, including without limitation, court costs, attorneys' fees and expenses in connection with the enforcement of this Pledge Agreement whether or not suit has been filed. 4. DELIVERY OF SUBSTITUTE COLLATERAL. The Pledgor shall deliver promptly to the Secured Party, in the exact form received, all securities and other property which comes into the possession, custody or control of such party or an agent thereof which has been issued as an addition to, substitution or exchange for, proceeds of or with respect to the Collateral, provided that all profits, dividends, interest and other income (but not principal or proceeds, which shall be paid to Secured Party pursuant to the terms of the Credit Agreement) distributed in respect of the Collateral may be received and retained by Pledgor unless an Event of Default has occurred and is continuing. 5. PROXIES, STOCK POWERS, OTHER ENDORSEMENTS. Upon demand by Secured Party, the Pledgor shall execute, assign, and endorse all proxies, applications, acceptances, stock powers, chattel paper, documents, instruments or other evidences of payment or writing constituting or relating to any of the Collateral. All such assignments and endorsements shall be in form and substance satisfactory to the Secured Party and its counsel. 6. ACTIONS NOT AFFECTING PLEDGE. The Secured Party may (and the Secured Party is hereby authorized to make from time to time, without notice to anyone) without impairing or affecting the pledge and security interest granted hereby: 2 a. Sell, pledge, surrender, compromise, settle, release, renew, extend, grant an indulgence, alter, substitute, change, modify, or otherwise dispose of any of the Secured Obligation or any contract evidencing the same or any part thereof or any security therefor; b. Accept additional security for or additional parties or other guarantors upon any of the Secured Obligation or release any portion of the Collateral or any maker, endorser, security or guarantor or other party liable on any portion of the Secured Obligation; and c. Apply any and all payments it receives on account of the Secured Obligation and the proceeds of the Collateral or any other security therefor against any item or items of Secured Obligation as the Secured Party, in its sole discretion, may determine, whether the same shall then be due or not. 7. WARRANTIES AND REPRESENTATIONS OF PLEDGOR. a. POWER AND AUTHORITY TO PLEDGE. Pledgor has full power and authority to execute and deliver this Pledge Agreement and to perform its obligations hereunder. b. ENFORCEABILITY. This Pledge Agreement is the legal, valid and binding obligation of Pledgor, enforceable against Pledgor according to its terms, subject only to bankruptcy, insolvency, moratorium, reorganization or similar laws, rulings or decisions at the time in effect affecting the enforceability of rights of creditors generally and to applicable equitable principles. c. TITLE TO COLLATERAL. Pledgor warrants and represents to Secured Party that it holds title to the Collateral free and clear of any liens, pledges or encumbrances, except liens or encumbrances in favor of Secured Party, and no financing statement or registration of pledge covering all or any part of the Collateral is on file in any public office or private office, except those in favor of Secured Party. d. NO RESTRICTIONS. Except as disclosed to the Secured Party in writing, the Collateral is not subject to a stockholder agreement, option agreement, buy-sell agreement or other restriction of any kind upon the sale thereof. If all or any portion of the Collateral is subject to any stockholder agreement, buy-sell agreement, option agreement or other agreement of any kind, Pledgor shall furnish to Secured Party copies of all such agreements and any amendments, modifications, or supplements thereto. e. SECURITY INTEREST IS CONTINUING. The Pledgor agrees and acknowledges that the pledge and security interest granted hereby is a continuing security interest and shall continue in full force and effect notwithstanding that from time to time no Secured Obligation may exist. Except as expressly provided herein, the Secured Party shall release its interest in the Collateral only upon payment in full of all Secured Obligation and termination of any and all obligations of the Secured Party to make advances to or on behalf of the Pledgor under the Credit Agreement or any other document. 8. EVENTS OF DEFAULT. An Event of Default as defined in the Credit Agreement shall constitute an "Event of Default" hereunder. 9. SECURED PARTY'S RIGHT TO SELL COLLATERAL. Upon the occurrence and during the continuance of an Event of Default, the Secured Party shall be entitled to sell any or all of the Collateral, without prior demand or notice and without notice of the time or place of sale, all of which are hereby expressly waived to the extent allowed by law. Such sale(s) may be made, at the Secured Party's sole and exclusive discretion, on any Exchange or other market where such business is then transacted, or at public auction or private sale, with or without advertising. The Pledgor hereby expressly authorizes the 3 Secured Party, after the occurrence of and during the continuance of an Event of Default, to sell any or all of the Collateral through one or more of the Custodial Accounts without first registering the Collateral in the Secured Party's name, provided, however, that the Secured Party may, in its sole discretion, after the occurrence of and during the continuance of an Event of Default, cause all or any portion of the Collateral to be registered in its name and to receive all dividends, interest and other distributions thereon and apply the same to the Secured Obligation in such order as it shall deem appropriate. The Secured Party may limit such sales to purchasers who are acquiring for investment and not with any view to distribution and may condition any such sale or sales upon restrictions against future transfers to the extent that the Secured Party or counsel for the Secured Party shall deem necessary to protect the Lender from any liability under the Securities Act of 1933, the Securities Exchange Act of 1934, the Minnesota securities laws, and any like or similar laws now or hereafter in effect. Upon the occurrence and during the continuance of an Event of Default under the Credit Agreement and exercise of the Secured Party's rights under this SECTION 9, all of the Pledgor's rights, title and interest in and to the Custodial Accounts with respect to the Collateral shall terminate and any agreements between the Pledgor and the Custodian with respect thereto shall be null and void. 10. WAIVER OF REDEMPTION; NO LIABILITY FOR VALUE DECLINE. Any and all sale(s) of Collateral held by the Secured Party pursuant to SECTION 9 above shall be free from any right of redemption, which is hereby expressly waived by the Pledgor. In addition, the Secured Party shall have no liability for any increase or decrease in the value of any of the Collateral at any time. 11. APPLICATION OF SALES PROCEEDS. The proceeds of the sale(s) of the Collateral under SECTION 9 above shall be applied as follows: a. First, to the payment of all expenses incurred by the Secured Party hereunder, including all costs and expenses of collection, whether or not a suit has been filed, including but not limited to, all sales commissions, brokers' fees and reasonable attorneys' fees; b. Second, to the satisfaction of the Secured Obligation in such order as the Secured Party in its sole discretion shall determine; c. Third, to the payment of any other amounts required by applicable law (including, but without limitation, Section 336.9-504(1)(c) of the Minnesota Uniform Commercial Code); and d. Fourth, any balance then remaining shall be paid to the Pledgor, unless it is the subject of tax lien or levy, attachment, restraining order, injunction or other such distraint. 12. DEFICIENCY. If the Secured Obligation is not satisfied in full by the proceeds of the sale(s) of any or all of the Collateral, the Pledgor shall remain liable thereon and the Secured Party may recover any deficiency therefrom. 13. RIGHTS CUMULATIVE. All remedies of the Secured Party hereunder are in addition to any remedies afforded the Secured Party under the Note, the Credit Agreement or any other document or under law. All remedies are cumulative and may be exercised by the Secured Party concurrently or consecutively. No failure or omission of the Secured Party to exercise any such right or remedy shall constitute a waiver thereof. 14. CUSTODIAN AS AGENT FOR SECURED PARTY. By delivery of this fully executed Pledge Agreement to the Custodian, the Pledgor notifies the Custodian that the Collateral in the Custodial Accounts described in SECTION 1 hereof is subject to the pledge and security interest of the Secured Party granted hereby in the Collateral is now and shall be held by the Custodian as agent for the Secured Party for the purposes of perfecting and enforcing the pledge and security interests granted to the Secured Party hereunder and disposing of the Collateral pursuant to the terms hereof. 4 15. DUTY OF CARE. The Custodian shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral by accounting for all money and things of value received by it upon or in respect thereof. In addition, the Secured Party shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties or to protect, preserve or maintain any security interest given to secure the Collateral. Further, neither the Custodian nor the Secured Party shall be obligated to take any action to exercise any rights, warrants, puts, calls or other options in respect of any Collateral, to present any coupons for payment to effect redemption of, or make any presentment, protest, notice of protest, notice of dishonor upon any Collateral or otherwise protect any optional right or rights thereon. 16. PLEDGE AGREEMENT GOVERNS. The provisions of any custodial or brokerage agreement between the Custodian and the Pledgor which are not consistent with the terms and provisions of this Pledge Agreement and the rights and interests of the Secured Party granted hereunder with respect to the Collateral shall be suspended and be of no force and effect so long as this Pledge Agreement remains in effect. 17. ACCOUNT FEES; INDEMNIFICATION OF SECURED PARTY. All fees, costs and expenses due or to become due in connection with the maintenance of the Custodial Accounts shall at all times remain the responsibility of the Pledgor, without charge to the Secured Party, and the Secured Party shall have no liability whatsoever in the event of a dispute or claim by the Custodian against the Pledgor upon any matter arising out of, or related to, any of the Custodial Accounts. 18. INDEMNIFICATION. The Pledgor indemnifies and holds the Secured Party harmless from any and all claims, causes of action, suits, controversies, executions and demands whatsoever, in law or equity, by or on behalf of each of them or any third party, arising from or in connection with the Collateral or the Custodial Accounts by virtue of the pledge and security interest granted to the Secured Party hereunder. 19. NO RIGHT TO TERMINATE OR MODIFY. The Pledgor and Custodian shall not be entitled to amend, modify, terminate or otherwise change the terms of the Custodial Agreements with respect to the Collateral except as expressly set forth herein without the prior written consent of the Secured Party to the specific change or modification requested which consent shall be limited to that specific request only. 20. NO OTHER PLEDGE, SET-OFF OR ASSIGNMENT. The Custodian shall not allow any assignment, pledge or security interest in favor of itself or any other party to attach to any of the Collateral, except those in favor of the Secured Party without the express written consent of the Secured Party nor shall it exercise any right of set-off it may have or debit any of the Collateral in respect of any claim it may assert against the Pledgor. 21. ATTORNEY-IN-FACT. The Secured Party is authorized and is hereby appointed as attorney-in-fact for the Pledgor for the purpose of executing all stock certificates, stock or bond powers, coupons, releases, notifications of transfer or other evidence of redemption or transfer which may be required of the Pledgor to sell any or all of the Collateral at any time after an Event of Default has occurred and is continuing. The Custodian is hereby empowered to guarantee any and all such signatures by the Secured Party as if made by the Pledgor. 22. INDEMNIFICATION OF CUSTODIAN. The Pledgor, jointly and severally if more than one, indemnifies, holds and saves the Custodian harmless of and from all claims, causes of action, suits, controversies, executions and demands whatsoever, in law or equity, by or on behalf of each of them or any third party arising from or in connection with Custodian's compliance with the terms of this Pledge Agreement, other than arising out of Custodian's gross negligence or willful misconduct. 5 23. CUSTODIAL ACCOUNT REPORTS AND INFORMATION; CONTENTS OF ACCOUNT; NOTATION ON ACCOUNT. The Pledgor hereby irrevocably authorizes and directs the Custodian to provide Secured Party with monthly information regarding Collateral in the Custodial Accounts through written or oral reports or direct computer access, as the Secured Party, in its sole discretion, shall request. In addition, the Custodian is authorized and directed to furnish Secured Party with a copy of the monthly asset analysis it prepares with regard to Collateral in each of the Custodial Accounts as soon as the same shall become available, together with all other information and reports supplied to the Pledgor in connection with Collateral in each Custodial Account at the same time such information is furnished to such party. Custodian warrants to Secured Party that all assets listed on SCHEDULE I are held in the Custodial Accounts as of the date of this Agreement. Custodian further warrants that it has marked its records to show the security interest in the Collateral in the Custodial Accounts in favor of Secured Party. 24. DELIVERY OF COLLATERAL TO SECURED PARTY. Upon notice from the Secured Party that it is exercising its rights under SECTION 9 of this Pledge Agreement, the Custodian shall (and is hereby irrevocably authorized and directed by the Pledgor) deliver to the Secured Party all of the Collateral together with all appropriate assignments and endorsements in blank or to the order of the Secured Party, whereupon the Custodial Agreements and the rights of the parties thereunder with respect to the Collateral shall terminate and be of no further effect; provided, however, that the Pledgor shall have sole liability for all fees and expenses in connection with the Custodial Accounts remaining unpaid as of the date of such termination. 25. HOLDING OF COLLATERAL. All Collateral shall be held by the Custodian in one of these ways: a. As a physical certificate in the Custodian's possession. It shall either be a bearer certificate or shall be in the name of or endorsed to the Custodian or its nominee. b. As an uncertificated or book-entry security registered on the books of the issuer of the security or of a Federal Reserve Bank in the name or nominee name of the Custodian for the benefit of its customers. c. As an asset in an account of the Custodian with a clearing corporation containing only customer securities. d. As an asset held in the Custodian's name with a bank, trust company or registered broker-dealer that has delivered to the Custodian a written confirmation of the Custodian's ownership of that asset. 26. TREATMENT OF FINANCIAL ASSETS. The Custodian and Pledgor agree that each asset consisting of Collateral now or later held in the Custodial Account(s) shall be treated as a "financial asset" under the Uniform Commercial Code. That agreement is made for the benefit of the Secured Party, and cannot be canceled or changed without the written consent of the Secured Party. 27. MISCELLANEOUS. a. WAIVERS, AMENDMENTS. The provisions of this Pledge Agreement may from time to time be amended, modified, or waived, if such amendment, modification or waiver is in writing and signed by the Secured Party, and as to amendments and modifications by Pledgor and Custodian. No failure or delay on the part of the Secured Party in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Pledgor in any case shall entitle it to any notice or demand in similar or other circumstances. 6 b. NOTICES. All communications and notices provided under this Pledge Agreement shall be in writing and addressed or delivered to the parties hereto at their respective addresses set forth below, or to any party at such other address as may be designated by such party in a notice to the other parties. Any notice shall be deemed given upon the first Business Day after the placing thereof in the United States mail, postage prepaid, if addressed as follows: Pledgor: Lifecore Biomedical, Inc. 3515 Lyman Boulevard Chaska, Minnesota 55318 Secured Party: First Bank National Association 300 Prairie Center Drive Eden Prairie, Minnesota 55344 Custodian: Norwest Investment Services, Inc. 608 Second Avenue South Minneapolis, Minnesota 55479 c. COSTS AND EXPENSES. The Pledgor agrees to reimburse the Secured Party upon demand for, all reasonable out-of-pocket expenses (including attorneys fees and legal expenses) in connection with the Secured Party's enforcement of the obligations of the Pledgor hereunder, whether or not suit is commenced including, without limitation, attorneys fees, and legal expenses in connection with any appeal of a lower court's order or judgment. The obligations of the Pledgor under this SECTION 25c shall survive any termination of this Pledge Agreement. d. SEVERABILITY. Any provision of this Pledge Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such portion or unenforceability without invalidating the remaining provisions of this Pledge Agreement or affecting the validity or enforceability of such provisions in any other jurisdiction. e. CROSS-REFERENCES. References in this Pledge Agreement or in any document executed in connection herewith to any Section are, unless otherwise specified, to such Section of this Pledge Agreement. f. HEADINGS. The various headings of this Pledge Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Pledge Agreement or any provisions hereof. g. GOVERNING LAW; VENUE. This Pledge Agreement shall be deemed to be a contract made under and governed by the laws of the State of Minnesota. The parties hereto each consents to the personal jurisdiction of the state and federal courts located in the State of Minnesota in connection with any controversy related to this Pledge Agreement, waives any argument that venue in such forums is not convenient and agrees that any litigation instigated by any party hereto against the Secured Party in connection herewith shall be venued in either the State or Federal District Courts for the District of Minnesota. h. RECITALS INCORPORATED. The recitals to this Pledge Agreement are incorporated into and constitute an integral part of this Pledge Agreement. 7 i. MULTIPLE COUNTERPARTS. This Pledge Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which shall constitute one and the same instrument. j. AGREEMENT BINDING. This Pledge Agreement shall be binding upon the beneficiaries, heirs, estates, personal representatives, successors and assigns of the Pledgor and the death, insolvency, bankruptcy, release of the Pledgor shall not release or discharge any other borrower, endorser, or guarantor from liability hereunder; provided, however, that the rights of the Pledgor hereunder may not be assigned without the prior written consent of the Secured Party. k. SURVIVAL OF REPRESENTATIONS. All covenants, agreements, representations and warranties made herein shall survive the execution and delivery of this Pledge Agreement. [Signature page follows] 8 IN WITNESS WHEREOF, the parties hereto have executed this Pledge Agreement on the day and year first above written. PLEDGOR: LIFECORE BIOMEDICAL, INC. By: /s/ Dennis J. Allingham --------------------------------------- Name: Dennis J. Allingham Title: Executive Vice President and Chief Financial Officer SECURED PARTY: FIRST BANK NATIONAL ASSOCIATION By: /s/ Therese L. Knutson ---------------------------------------- Name: Therese L. Knutson Title: Vice President CUSTODIAN: NORWEST INVESTMENT SERVICES, INC. By: /s/ BeBe Gersbach ---------------------------------------- Name: BeBe Gersbach ------------------------------------- Title: Vice President ------------------------------------- 9 SCHEDULE I The Collateral consists of the following investment securities held at Norwest Investment Services, Inc. in account number 02142396: MATURITY PAR SECURITY CUSIP DATE VALUE CIT GROUP HOLDINGS INC 125569DH3 4/30/98 1,000,000 INTL LEASE FINANCE MED TERM 45974VPA0 5/1/98 1,000,000 ASSOC CORP N.A. 046003FH7 8/15/98 1,000,000 FORD MTR CR MTN BE 345402BG5 9/8/97 2,000,000 INTL LEASE FIN CORP 459745AK1 10/1/98 1,000,000 EX-27 7 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS JUN-30-1998 JUL-01-1997 DEC-31-1997 2,040,000 11,915,000 4,144,000 314,000 12,797,000 29,422,000 30,448,000 6,226,000 63,287,000 4,448,000 7,529,000 0 0 123,000 51,187,000 63,287,000 11,472,000 11,472,000 5,365,000 13,037,000 0 0 61,000 (1,078,000) 0 (1,078,000) 0 0 0 (1,078,000) (.09) (.09)
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