-----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, OYdAqdQSRMSFaU1J8hPbJnoxz9mNCwvTncS6DsaCok5Wq2X85/oIX20jv3DVCLyt DrqBl0mVtbmGHu8p/L/bDQ== 0000897101-97-000469.txt : 19970501 0000897101-97-000469.hdr.sgml : 19970501 ACCESSION NUMBER: 0000897101-97-000469 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970430 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ULTRA PAC INC CENTRAL INDEX KEY: 0000813134 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 411581031 STATE OF INCORPORATION: MN FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-18252 FILM NUMBER: 97590743 BUSINESS ADDRESS: STREET 1: 21925 INDUSTRIAL BLVD CITY: ROGERS STATE: MN ZIP: 55374 BUSINESS PHONE: 6124288340 MAIL ADDRESS: STREET 1: 21925 INDUSTRIAL BLVD CITY: ROGERS STATE: MN ZIP: 55374 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES __X__ EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 1997 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES _____ EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transaction period from _______ to_______ Commission File Number: 0-18252 ULTRA PAC, INC. (Exact name of Registrant as specified in its charter) Minnesota 41-1581031 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 21925 Industrial Boulevard Rogers, Minnesota 55374 (Address of Principal executive offices) (612) 428-8340 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, no par value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. __X__ YES ____ NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __X__ As of March 31, 1997, 3,834,815 shares of Common Stock, no par value per share, were outstanding, and the aggregate market value of the shares of Common Stock (based upon the closing sales price on such date reported by NASDAQ) held by nonaffiliates of the Registrant was approximately $23,011,590. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Definitive Proxy Statement for its Annual Meeting of Shareholders to be held June 19, 1997, are incorporated by reference into Part III. PART I. ITEM 1 - BUSINESS Products Ultra Pac, Inc., designs, manufactures, markets and sells plastic containers and packaging for the food industry, including supermarkets, distributors of food packaging, wholesale bakery companies, fruit and vegetable growers, delicatessens, processors and retailers of prepared foods, and foodservice providers. The Company's packaging is primarily made from virgin or recycled polyethylene terephthalate ("PETE") which the Company extrudes into plastic sheet and thermoforms into various shapes. Generally, food industry packaging buyers select plastic packaging as an alternative to paper or other materials in order to achieve marketing and merchandising objectives. Plastic packaging generally allows food to be more attractively displayed than alternative packaging materials, and provides more efficient use of shelf space. Also, plastic packaging often helps preserve food's freshness and decreases spoilage by allowing more complete sealing of the package to minimize the effects of outside air and moisture. Products The largest users of the Company's products are bakery and deli departments of supermarkets; wholesale bakeries (both fresh and frozen); and growers of fresh fruit and produce. Food packaging has accounted for almost all of the Company's net sales during the past three fiscal years. During February 1997, the Company introduced its Reservations(TM) series of plastic food containers for the rapidly expanding home meal replacement and other food service markets. The Company strives to serve as a single source of plastic packaging for its customers by offering a wide variety of shapes, styles and sizes of containers. The Company's products may be made from clear or colored plastic or a combination of both. The Company's current product offerings include both products manufactured and stocked in inventory, enabling timely shipment to customers, and special products that require a minimum order quantity and production lead time. A significant majority of the Company's sales are from products manufactured for inventory. The Company's current product strategy is to design, market and manufacture products in sizes and shapes that will permit its products to be used in multiple applications, rather than custom products for single customers or limited markets. Even designs specially made for niche uses, such as muffin containers and cake domes, generally have multiple potential uses and/or customers. Most designs, like clamshells and rectangular designs, may be used for a broad range of applications such as cookies and mini-muffins by a bakery or salads and cold cuts by a delicatessen. From time to time, when significant volume is involved, on a non-exclusive basis, the Company will create inserts to existing molds in order to satisfy individual customer requirements. For example, the Company may create an insert for a mold that would allow a rectangular clamshell container to have two compartments, rather than one. The Company produces most of its plastic products from PETE with the exception of some cake and pie bases, and deli trays which are made from either polystyrene or PETE. The Company believes that packaging produced from PETE is preferable to packaging produced from polystyrene or other more rigid plastics, because PETE has superior flexibility and is not prone to crack or chip like other plastic materials. The Company also believes that PETE's distinctive characteristics benefit customers economically through improved sales and lower food spoilage than alternative packaging materials. PETE has also become the most widely recycled form of plastic packaging in the United States, primarily as a result of its widespread use in plastic beverage bottles. The Company offers a wide variety of bakery and deli containers. These containers are of both the hinged-clamshell style, as well as two-piece designs with separate domes and bases. Clamshells are most commonly used for pies, muffins, cookies, donuts, rolls, salads, fruits, sandwiches, candies and nuts. The two-piece container designs are typically used for cakes and pies, as well as cookies, donuts, vegetables, fruit and snacks. While some of the Company's bakery and deli containers are product-specific, the generic shapes of others make them suitable for a wide variety of bakery and deli products. In fiscal 1993, the Company introduced a line of produce containers, made from recycled PETE, which are used by growers and distributors for shipping and displaying products such as strawberries, blueberries, raspberries, tomatoes and other fruits and vegetables. With continuing public concern over environmental issues and recycling, the Company believes that its use of recycled PETE in produce containers appeals to customers, producers and sellers of fresh fruit. During April 1994, the Company introduced its line of C-PET containers, suitable for baking in either conventional or microwave ovens, which are primarily intended for use by commercial bakeries. This C-PET material is extruded in-house in a rigid form similar to the process used for other PETE products. Compared to aluminum foil containers, these C-PET bakery containers offer superior shape retention and durability. They also allow bakers and other food processors to perform a detection process for metal contaminants not possible with aluminum containers. Currently, wholesale bakeries and other food processors use these containers for both baking and packaging angel food cakes, pizzas, cookies and muffins. The Company routinely modifies existing container designs and develops new designs. Such product development is based upon input from its customers and distributors, as well as from ideas developed by Company staff. In certain cases, customers may fund the cost of tooling or inserts related to the new designs. The Company's development of new designs and marketing of existing designs for new applications is an ongoing process. The Company can produce various types of containers by using inserts of different sizes and shapes in a particular mold. This technique minimizes the time and expense of designing and producing tooling for new containers, where applicable. In fiscal 1993, the Company began custom printing on certain of its products and labeling certain produce containers with customer names and UPC codes as a value-added service. The Company believes that its printing of certain containers, and to a lesser extent, its customer labeling and UPC codes distinguish it from competitors and provide customers with additional value. The Company continues to focus its primary product development and marketing efforts on bakery, deli and produce packaging. Manufacturing and Supply of Raw Materials The Company's products are manufactured from rolled plastic sheet, principally PETE plastic sheet, using a thermoforming process. The rolls of plastic sheet are made by an extrusion process that involves melting petroleum-based resin pellets and then forcing the material under pressure through a die to form a flat sheet which is wound onto a large roll and stored for later production. At March 31, 1997, the Company had 6 extrusion lines in operation. To produce the Company's products, the plastic sheet is unwound from the large roll at the beginning of the 60-foot thermoforming production line. The sheet is first heated to approximately 300(degree) Fahrenheit and then molded into the desired shape using vacuum and air pressure. The molds are multiple-cavity and product specific, with the number of cavities determined by the size and shape of the container specific to that mold. The plastic retains the desired rigid shape as the mold cavities are cooled by water. The plastic sheet which has been formed into containers continues down the production line to a trim press which cuts and stacks the product in preparation for packing into corrugated shipping cartons. The trim scrap is then ground up for reuse in the extrusion process. At March 31, 1997, the Company had 32 thermoforming lines in operation. The Company manufactures its own PETE sheet from both virgin resin material and recycled material. During fiscal 1996 and 1997 the Company was able to extrude approximately 85% and 100% of its PETE sheet requirements. With its current extrusion capacity, the Company expects to be able to supply all its PETE sheet needs for fiscal 1998. In fact, at certain times during the year, the Company anticipates it will be extruding PETE sheet at less than its full production capacity and on occasion, may extrude plastic sheet for other manufacturers. The PETE resin pellets used to make plastic sheet may be purchased from several large suppliers, including Eastman Chemical Company, Shell Chemical Company, and E I Dupont DeNemours & Co. While the available supply of PETE has historically been considered adequate, supplies of resin did tighten during fiscal 1996 and the Company experienced significant increases in raw material costs from its suppliers of virgin and recycled PETE resin. Among other factors, these prices reflect increasing demand for PETE resin by apparel manufacturers and soft drink bottlers worldwide. However, in fiscal 1997, the Company experienced significant reductions in the cost of these raw materials as capacity was being added by refiners. The Company believes that as refiners continue to expand capacity during the next few years, the supply of PETE will exceed the increase in demand and there will be a more stable pricing environment. Furthermore, worldwide changes in oil prices and availability may affect the cost and availability of resins and plastic sheet. While the Company was not dependent on any one supplier of resin, during fiscal 1996, the Company executed a three-year supply agreement, subject to minimum purchase requirements, for a major portion of its virgin resin needs with a major PETE resin supplier. During fiscal 1997, the Company and such supplier amended this agreement to allow pricing to float with market conditions subject to limits on the amount of price increases but with no limits on price decreases. Marketing and Sales In promoting its products, the Company relies primarily on direct sales contacts and the displaying of its products at industry trade shows, rather than extensive print advertising. The Company markets and sells its products through 5 regional sales managers and approximately 40 independent manufacturers' representatives or "brokers." The regional sales managers have territorial and/or product line sales responsibility. The sales managers supervise the brokers' activities and make selected direct sales calls with certain key customers. Typically, brokers have responsibility for calling on existing and potential customers, such as grocery store chains, food processors and distributors within a specific assigned sales territory. Although the market for the Company's food packaging is generally nationwide, some product sales are concentrated in certain geographic areas, such as blueberry packaging in certain northern tier states and strawberry packaging in California and Florida. During the past three years, the Company has shipped to a small but growing number of customers in other countries. In addition, the Company has ownership interest in two joint ventures and one product licensing agreement which involve marketing or manufacturing, or both, outside the United States. The Company primarily uses common carriers to ship its products. The Company, like many other packaging manufacturers, generally sells products at a price that includes shipment to the customer's location. However, the Company also sells produce containers to certain customers with the customer responsible for bearing the shipment costs. Recycling and Recycled Products Several factors, including regulation, general consumer awareness of the benefits of recycling plastics and other natural resources, and consumer habits, have influenced the popularity of recycling. These factors, combined with increasing demand, have encouraged the growth of a recycling industry that collects, reprocesses and markets PETE and other recycled materials. Accordingly, commodity markets have developed for these recycled materials, including PETE. The Company's cost of purchasing recycled PETE has, and will continue to be, influenced by such commodity market pricing. In October 1992, the Company purchased a 21,500 square foot facility, adjacent to its manufacturing facilities, to house its recycling equipment which was installed in March 1993. In August 1995, the Company shut down this recycling facility having experienced increasing difficulty in finding reliable sources of post-consumer PETE for reprocessing. During fiscal 1997, the Company wrote down this equipment to its estimated net realizable value. The Company continues to search for a buyer of this equipment but currently has no ongoing substantive discussions with any potential purchasers. Government Regulation The United States Food and Drug Administration ("FDA") regulates packaging that comes into contact with food, including packaging made from recycled material. The Company sought, and subsequently obtained, the FDA staff's acknowledgment that it does not object to the use of recycled PETE in the line of produce containers manufactured by the Company. In addition, the Company also sought and obtained the FDA staff's acknowledgment that it does not object to the use of co-extruded PETE (Petewich(R)) which has a layer of recycled PETE laminated between layers of virgin PETE. The plastic packaging industry (including the Company) is subject to existing federal, state and local regulations and potential regulations in connection with legislation designed to reduce solid waste. Proposed regulations have ranged from requiring plastics to be degradable in landfills to banning specific products altogether. Current regulations, however, include simple labeling requirements that aid in the recycling process; banning certain materials unless subject to specified recycling/reuse programs; and imposing taxes or advance disposal fees on all containers on a per-unit basis, with the fees being used to fund recycling programs. At the present time, the Company believes it is in substantial compliance with all local, state and federal laws designed to reduce solid waste entering landfills. Customer Base The Company has over 750 active customers located throughout the United States as well as Canada, Australia, South America, Mexico and other countries. Only one customer, Kroger, accounted for more than 10% of the Company's sales during fiscal 1997. The loss of this customer may have a material adverse effect on the Company's operations. With time and subject to additional growth of its business, the Company expects its dependence on any single customer or small number of customers will diminish. Backlog Although from time to time the Company receives advance orders for certain of its produce containers, the Company does not believe that backlog is a material aspect of its business. Competition The Company's products compete with non-plastic packaging alternatives, including paper, aluminum and paper pulp or wood (as often used in produce packaging), as well as with packaging products made from polystyrene, PETE and other plastics. The Company believes that its primary competitive advantages include its ability to rapidly develop and produce innovative packaging designs to meet customer needs; its ability to rapidly fill most customer orders; and the functional, environmental and merchandising advantages of the Company's predominantly PETE based product line. The Company competes with packaging manufacturers with substantially greater financial resources, marketing and development resources. Primary competitors in plastic packaging include Tenneco Packaging, IVEX Packaging Corporation and InLine Packaging. These competitors may be able to sell products similar to those of the Company's at a lower price than the Company, because a significant portion of their plastic products are manufactured using polystyrene plastic material which is lower in cost than PETE. The Company believes that the price advantage of competitors using non-PETE resins is, in part, offset by the higher quality, greater versatility and superior utility of products made from PETE. However, the degree to which this price advantage may benefit competitors has and will vary over time, depending on the cost disparity between polystyrene and PETE resin prices. Patents and Trademarks The Company currently holds a number of design patents related to bakery and produce containers. As the Company develops new and innovative container designs, it applies for design patents where possible. Also, the Company has obtained federal trademark registrations on the marks "Ultra Fresh,(R)" "Ultra Tub,(R)" "Ultra Clam,(R)" "Show-bowls,(R)" "Snack Clam,(R)" and "Petewich(R)" from the United States Patent and Trademark Office. The Company believes that the loss of its right to use one or more of its trademarks would not have a material adverse effect on the Company's business. The Company believes that its continued success will depend primarily on its level of customer service, product design and the management abilities of its officers, directors, key employees and sales representatives, rather than on ownership of patents or trademarks. Employees As of March 28, 1997, the Company had 49 salaried employees and 223 hourly employees, none of whom were represented by labor unions or subject to collective bargaining agreements. Also at March 28, 1997, the Company had contracted the services of approximately 47 production workers through temporary agencies. Because the unemployment rate is currently low, from time to time, the Company may have difficulty in attracting and retaining qualified employees. The Company generally believes its relations with its employees are good. ITEM 2 - PROPERTIES The Company utilizes approximately 454,000 square feet of space for its manufacturing, warehousing and office facilities located in Rogers, Minnesota. The Company owns approximately 109,000 square feet of this space and leases the remaining facilities under four separate operating lease agreements. The square feet covered under each lease and the respective expiration date is as follows: Lease Square Feet Expiration Date ----- ----------- --------------- 1 166,000 December 1, 2008 2 65,000 March 1, 2010 3 56,000 March 1, 2010 4 58,000 December 1, 2002 All of these leases provide renewal and purchase options during the lease term. ITEM 3 - LEGAL PROCEEDINGS The Company is a party to various litigation matters arising in the normal course of its business. Management believes that the ultimate resolution of these matters will not have a material adverse impact on the Company's financial condition. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters which were submitted to a vote of security holders during the fourth quarter of the fiscal year ended January 31, 1997. ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock has been traded on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol "UPAC" since January 7, 1992. The following table sets forth, as reported by Nasdaq for the periods indicated, the range of high and low sale prices of the Company's common stock. HIGH LOW ---- --- FISCAL YEAR ENDED JANUARY 31, 1997 First Quarter $3-3/8 $2-1/2 Second Quarter 4-3/8 2-3/4 Third Quarter 4-1/4 2-3/8 Fourth Quarter 4-7/16 2-5/8 HIGH LOW ---- --- FISCAL YEAR ENDED JANUARY 31, 1996 First Quarter $7-1/8 $5-3/8 Second Quarter 7-1/4 5-5/8 Third Quarter 6-1/8 3-7/8 Fourth Quarter 4-1/8 3-1/8 As of April 17, 1997, there were approximately 600 holders of record, plus approximately an additional 1,000 beneficial owners of the Company's common stock. The Company has never paid cash dividends on its common stock. The Company currently intends to retain any earnings for use in its operations and does not anticipate payment of cash dividends in the foreseeable future. In addition, one of the Company's current loan agreements prohibits the payment of dividends. ITEM 6 - SELECTED FINANCIAL DATA
Years ended January 31, ------------------------------------------------- 1997 1996 1995 1994 1993 ------- -------- ------- ------- ------- (in thousands, except for Earnings per Common Share) Statements of Earnings Data Net sales $61,719 $ 66,129 $57,250 $41,189 $27,572 Cost of products sold 42,156 54,187 41,625 30,521 19,688 ------- -------- ------- ------- ------- Gross profit 19,563 11,942 15,625 10,668 7,884 Operating expenses Marketing and sales 10,647 11,481 10,066 8,202 5,287 Administrative 2,750 2,760 2,347 1,549 1,728 ------- -------- ------- ------- ------- 13,397 14,241 12,413 9,751 7,015 ------- -------- ------- ------- ------- Operating profit (loss) 6,166 (2,299) 3,212 917 869 Interest expense and other 3,223 2,581 1,507 842 413 ------- -------- ------- ------- ------- Earnings (loss) before income tax 2,943 (4,880) 1,705 75 456 Income tax provision (benefit) 1,144 (1,721) 654 16 186 ------- -------- ------- ------- ------- NET EARNINGS (LOSS) $ 1,799 $ (3,159) $ 1,051 $ 59 $ 270 ======= ======== ======= ======= ======= Earnings (loss) per common share $ .47 $ (.84) $ .28 $ .02 $ .08 ======= ======== ======= ======= ======= Weighted average number of shares outstanding 3,792 3,766 3,766 3,768 3,587 ======= ======== ======= ======= ======= January 31, ------------------------------------------------- 1997 1996 1995 1994 1993 ------- -------- ------- ------- ------- Balance Sheet Data Working capital $ 270 $ 2,685 $ 6,771 $ 5,632 $ 5,084 Total assets 41,736 50,581 44,322 32,801 23,503 Long-term obligations 15,978 27,235 20,227 13,652 6,564 Shareholders' equity 11,528 9,427 12,587 11,533 11,474
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Information THE FOLLOWING DISCUSSION CONTAINS CERTAIN STATEMENTS WHICH REFLECT THE COMPANY'S CURRENT EXPECTATIONS REGARDING THE FUTURE RESULTS OF OPERATIONS AND PERFORMANCE OF THE COMPANY. WHEN USED IN THIS REPORT, THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS" AND OTHER SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER SIGNIFICANTLY FROM THOSE SET FORTH IN SUCH STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO THOSE DISCUSSED BELOW AS WELL AS ELSEWHERE IN THIS DOCUMENT. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY IS NOT OBLIGATED TO UPDATE OR REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT NEW EVENTS OR CIRCUMSTANCES. Background Ultra Pac, Inc., designs, manufactures, markets and sells plastic containers and packaging to the food industry, including supermarkets, distributors of food packaging, wholesale bakery companies, fruit and vegetable growers, delicatessens, processors and retailers of prepared foods, and foodservice providers. The Company's packaging is primarily made from virgin and recycled polyethylene terephthalate ("PETE") which the Company extrudes into plastic sheet and thermoforms into various shapes. Management believes that future sales and earnings could be affected by various factors. These include: supply and demand for PETE raw material, (including both virgin resin and recycled material), and the resulting impact on the Company's raw material costs; competitive pressures in the marketplace for the Company's products both from existing competitors and new entrants into the market place and from competitors who use lower-cost non PETE resins such as OPS (oriented polystyrene); weather conditions during the growing season of fresh produce and the resulting impact on the demand for plastic packaging, principally during the Company's first, second and third fiscal quarters; the Company's ability to estimate future sales and react to any significant unforeseen increases or decreases in sales and the impact on its fixed overhead cost structure including the possible need for significant captial expenditures; and the cost, availability and amount of the Company's debt financing. Results of Operations The following table sets forth, for the periods indicated, information derived from the Statements of Operations of the Company expressed as a percentage of net sales.
Fiscal years ended January 31, ------------------------------ 1997 1996 1995 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of products sold 68.3 81.9 72.7 ----- ----- ----- Gross profit 31.7 18.1 27.3 Operating expenses Marketing and sales expense 17.2 17.4 17.6 Administrative expense 4.5 4.2 4.1 ----- ----- ----- 21.7 21.6 21.7 ----- ----- ----- Operating profit (loss) 10.0 (3.5) 5.6 Other income (expense) Write down of recycling equipment ( .8) - - Interest expense and other (4.4) (3.9) (2.6) ----- ----- ----- (5.2) (3.9) (2.6) ----- ----- ----- Earnings (loss) before income taxes 4.8 (7.4) 3.0 Income tax provision (benefit) 1.9 (2.6) 1.2 ----- ----- ----- NET EARNINGS (LOSS) 2.9% (4.8)% 1.8% ===== ===== =====
Fiscal 1997 Compared To Fiscal 1996 Net Sales: Net sales decreased 6.7% from $66,128,723 to $61,718,514 for the year ended January 31, 1997 ("fiscal 1997"), as compared to the year ended January 31, 1996 ("fiscal 1996"). The decrease in net sales during fiscal 1997 was due in part to the Company's focus on margin improvement rather than on sales growth. The Company also believes that competitive pressures resulted in a decline in bakery and produce container sales due to new entrants into the markets served and pricing pressures from competitors using lower-cost, non-PETE resins such as oriented polystyrene. The decrease in bakery and produce container sales was offset in part by an increase in sales of the Company's line of Ultra Lite Bakeable products and its line of food service products. The Company expects to see continued sales growth in both these product lines in the fiscal year ending January 31, 1998 ("fiscal 1998") and believes that these markets will continue to provide opportunities for continued growth beyond fiscal 1998. The Company also anticipates, in fiscal 1998, a reversal of the fiscal 1997 sales decline of its bakery and produce containers. In addition, the Company will be introducing, in the second quarter, its Reservations series of plastic food containers for the rapidly expanding home meal replacement and other food service markets. While the cost disparity between oriented polystyrene and PETE had increased significantly during fiscal 1996, the Company has seen a narrowing of this disparity during the second half of fiscal 1997. As result, the Company believes it can be more competitive in some markets in which it lost sales in fiscal 1997 including bakery and produce containers. Management continues its efforts to identify and analyze long term market trends, competitive strategies, and other factors that influence market conditions or result in competitive pressures. Management believes that this activity will assist the Company in developing future markets, and product and price strategies, as well as improving its production planning process. In connection with its efforts in this area, the Company hired a Director of Sales and Marketing in August 1996 and has also expanded its sales and marketing support staff. Gross Profit: Gross profit margins increased from 18.1% during fiscal 1996 to 31.7% during fiscal 1997. The improvement in gross profit margins is primarily attributable to lower prices of PETE resin and of other raw materials, and to a lesser extent, to the Company's ability to supply all PETE sheet needs from in-house extrusion facilities and to a decline in production labor costs coupled with improved manufacturing efficiencies. During fiscal 1996, the Company experienced significant increases in raw material costs from its suppliers of virgin PETE resin and recycled PETE material. These prices remained high during the early part of fiscal 1997. However, prices for virgin PETE resin and recycled material declined dramatically during the second and third quarters of fiscal 1997 due in part to increased capacity of refiners and lower market prices for of paraxylene, a major component of PETE resins. These prices remained relatively flat during the fourth quarter and the Company does not anticipate any significant increases in the foreseeable future for virgin PETE resins. This decline in the cost of PETE resin and recycled material in fiscal 1997 was significantly greater than the increase experienced in fiscal 1996. During fiscal 1997, the Company amended its three-year resin supply agreement, entered into in fiscal 1996, to allow for pricing to float with market conditions subject to limits on the amount by which prices may increase (approximately 10% from the Company's current price) with no limit on price decreases. Under this agreement, the Company is required to purchase minimum resin quantities which will supply a major portion of its virgin PETE resin needs. With the installation of its fifth and sixth extrusion lines in fiscal 1996, the Company was able to supply all its PETE sheet needs for fiscal 1997 and expects to be able to do so during fiscal 1998. In fact, at various times, the Company extrudes PETE sheet at less than its full production capacity and on occasion, extrudes plastic sheet for other manufacturers. The cost of plastic sheet extruded by the Company has been significantly lower than the cost of plastic sheet purchased from outside sources. The Company's workforce was dramatically lower in fiscal 1997 as compared to fiscal 1996. On average during fiscal 1997, the Company employed approximately 319 people as compared to 468 during fiscal 1996. Almost all of the reduction in staffing levels was in the Company's manufacturing operations reflecting improved productivity. The Company expects productivity improvements to continue in fiscal 1998, although at a slower rate, and also expects that the number of people employed may increase to support the anticipated increase in sales during fiscal 1998. The Company expects its gross margin percentage for fiscal 1998 to improve from fiscal 1997 reflecting the continued impact of the factors discussed above, however at a slower rate than was achieved in fiscal 1997. The Company expects to realize the positive impact of lower resin prices for the full year as compared to only the second half of fiscal 1997. However, this impact is expected to be offset to some degree by the continuing competitiveness of the price-sensitive food packaging marketplace. Operating Expenses: Marketing and sales expense decreased from $11,481,007 or 17.4% of net sales, to $10,647,163 or 17.2% of net sales during fiscal 1997, as compared to fiscal 1996. The decrease in marketing and sales expense was primarily due to lower sales levels resulting in a reduction in freight and commission expense. The commission expense decrease, in dollars and as a percentage of sales, was partially due to a reduction in the commission rate. The Company expects its marketing and sales expenses to increase in fiscal 1998 in both dollars and as a percentage of sales reflecting in part the anticipated increase in sales and an increase in its commission rate structure for fiscal 1998. The Company has also expanded its sales and marketing staff with the addition of another regional sales manager in the fourth quarter of fiscal 1997 and recent additions to the sales and marketing support staff. Administrative expenses of $2,759,614 or 4.2% of net sales in fiscal 1996 and $2,749,693 or 4.5% of net sales in fiscal 1997, remained relatively unchanged. However, fiscal 1997 expenses included costs associated with the May 1996 hiring and subsequent October 1996 separation of a Chief Operating Officer, as well as the addition of a Director of Management Information Systems in August 1996. Although the Company saw an increase in legal costs associated with certain litigation matters arising in the normal conduct of the Company's business, almost all of those legal costs, which were associated with the Company's claim for patent infringement, were reclassified during the fourth quarter ended January 31, 1997 into "Other Income and Expense" to offset the proceeds received, in January 1997, from the settlement of such litigation. Interest Expense and Other: Interest expense increased from $2,516,672 or 3.8% of net sales, to $2,584,498 or 4.2% of net sales, for fiscal 1997, as compared to fiscal 1996. During the second half of fiscal 1997, the Company significantly lowered its debt levels primarily through improved earnings and cash flow performance during such time. The interest savings from these lower debt levels was offset by an increase in interest rates resulting from the refinancing of its bank debt in June 1996 as discussed under Liquidity and Capital Resources. The Company anticipates that interest expense for fiscal 1998 will decline from fiscal 1997 for several reasons including significantly lower debt levels resulting from improved cash flow. In addition, no significant capital expenditures are planned for fiscal 1998 and interest rate differentials are lower as a result of the February 1997 refinancing of its bank debt. Other income and expense increased from $65,180 or .1% of net sales, to $637,921 or 1.0% of net sales for fiscal 1997, as compared to fiscal 1996. During the second and third quarters of fiscal 1997, the Company recorded charges of $50,000 and $459,638 respectively from the writedown to the estimated net realizable value of the Company's recycling equipment. The Company continues to search for a buyer of this equipment, but currently has no ongoing substantive discussions with any potential purchasers. Income Taxes: The Company has recorded deferred tax assets of $3,590,000, primarily resulting from the benefit of net operating loss carryforwards, which expire in varying amounts between the years ending January 31, 2008 and 2011. These deferred tax assets are offset by deferred tax liabilities of $3,543,000 resulting primarily from accelerated depreciation. Management believes existing deferred tax assets will be realized in subsequent years. Fiscal 1996 Compared To Fiscal 1995 Net Sales: Net sales increased 15.5% from $57,249,979 to $66,128,723 for the year ended January 31, 1996 as compared to the year ended January 31, 1995 ("fiscal 1995"). The rate of sales growth during fiscal 1996 was significantly lower than historical growth rates. The increase in net sales during fiscal 1996 reflected increased unit volume of the Company's produce containers and line of Ultra Lite Bakeables(TM) (which the Company first introduced during the summer of 1994) in combination with several price increases the Company implemented between October 1994 and April 1995. While sales dollars had continued to grow in each product category, unit volume of bakery and deli containers declined by approximately 6% during fiscal 1996 as compared to fiscal 1995. The Company believes that the decline in unit volume of its bakery containers and deli containers which may be used in bakery applications occurred primarily due to the increasingly competitive nature of the marketplace that has been caused by aggressive pricing practices by competitors. The Company believes this is particularly the case with competitors who use lower-cost, non-PETE resins such as oriented polystyrene. This cost disparity increased significantly during fiscal 1996, creating additional competitive pressure on pricing of the Company's products. The Company has also seen an increase in the number of packaging manufacturers serving the bakery/deli market. To a lesser degree, the Company also believes that changing consumer buying habits, including a shift from high-fat to low or non-fat products, may have accounted for lower unit volume of certain bakery/deli containers. However, the Company believes that its line of bakery and deli containers can accommodate bakery products which satisfy shifting consumer preferences. Gross Profit: Gross profit margins decreased from 27.3% during fiscal 1995 to 18.1% during fiscal 1996. The decrease in gross profit margins during fiscal 1996 was primarily due to the following three factors: higher raw material costs; higher fixed overhead costs that the Company incurred to support a significant anticipated increase in sales that did not materialize; and higher labor costs. The higher costs related to these three factors were not fully offset by price increases to its customers. The Company experienced significant increases in raw material costs from its suppliers of virgin PETE resin and recycled PETE material. The purchase of resin material represents more than 50% of the Company's product cost. Among other factors, these PETE raw material costs reflected increasing demand for PETE resin by apparel manufacturers, soft drink bottlers and other users, worldwide. While the Company increased its prices to customers, such increases did not fully offset these increases in raw material costs. Higher fixed overhead costs resulted primarily from the addition of thermoforming and extrusion equipment, molds, and leased facilities to increase manufacturing capacity based on anticipated sales. However, the Company experienced lower than anticipated sales of bakery and deli containers, and, as described below, it also experienced significantly lower than anticipated sales of produce containers during fiscal 1996. At the beginning of the 1995 California berry season (i.e., during fiscal 1996), the Company began expanding its capacity to meet an anticipated increase in demand for the Company's berry containers based on a significant anticipated increase in the overall berry harvest. Despite heavy rains in California earlier in the year, indications were that berry production might be delayed, but would still meet the Company's earlier expectations. In mid-summer, however, berry growers also suffered an extended period of 100 degree-plus heat which compounded the effect of the excessive rainfall earlier in the year. These factors reduced the overall size of the berry crop and caused a higher than normal percentage of the crop to be used for frozen and other applications. This led to a reduction in the demand for the Company's packaging. In July 1995, as a result of this reduction in demand, management significantly reduced its temporary workforce. The Company incurred higher labor costs due to the combined effect of a wage increase plan the Company implemented in February 1995 and the fact that production efficiencies did not increase at the same rate as the increase in wages. Because the Company had experienced an excessive level of employee turnover which it believes was related to low wage rates, it implemented the wage increase plan to become more competitive in the local labor market. The Company had taken a number of actions intended to improve gross profit margins on a long-term basis. The most significant actions were the installation of a fifth extrusion line in May 1995 and a sixth extrusion line in September 1995. The cost of plastic sheet which is extruded by the Company has been significantly lower than the cost of plastic sheet purchased from outside sources. The Company continued to purchase polystyrene sheet from outside suppliers as it has in the past. The Company negotiated a three-year supply agreement for a major portion of its virgin PETE resin needs. Minimum resin quantities are required to be purchased at a fixed price (adjusted annually) that is favorable to the Company under current market conditions. During fiscal 1996, the Company's workforce declined from approximately 620 in June 1995, to approximately 355 in March 1996. This reduction primarily resulted from the Company's layoff of personnel in production-related jobs in July 1995 and January 1996. Operating Expenses: Marketing and sales expense increased from $10,066,119, or 17.6% of net sales, to $11,481,007 or 17.4% of net sales, during fiscal 1996, as compared to fiscal 1995. The increase in marketing and sales expense during fiscal 1996 was due in part to the increase in net sales, resulting in an increase in freight and commission expense. Also, the Company incurred additional labor and facilities costs to support its distribution operations. The decrease in marketing and sales expense as a percentage of net sales is primarily the result of sales growing at a faster rate than marketing and sales expense. Administrative expense increased from $2,347,558, or 4.1% of net sales, to $2,759,614 or 4.2% of net sales, during fiscal 1996, as compared to fiscal 1995. The increase in administrative expense was to support the increase in net sales and legal costs associated with certain litigation matters arising in the normal conduct of its business. The Company believes that ultimate resolution of such litigation will not have a material adverse impact on the Company's financial condition. Interest Expense and Other: Interest expense and other increased from $1,506,820, or 2.6% of net sales, to $2,581,852, or 3.9% of net sales, for fiscal 1996, as compared to fiscal 1995. The increase was primarily due to higher debt levels and increases in the average rate of interest paid by the Company. The increase in interest rates is primarily due to an increase in base rates and an increase in the differentials charged over the base rates. Income Taxes: The Company recognized an income tax benefit of $1,721,000 for operating losses incurred during the fiscal year ended January 31, 1996. As of January 31, 1996, the Company has approximately $986,000 of net deferred tax assets primarily resulting from net operating loss and other tax credit carryforwards of $3,728,000. Realization of these tax carryforwards is dependent on generating sufficient taxable income prior to expiration of the net operating loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Liquidity and Capital Resources Because the Company's business is highly capital intensive, it has traditionally relied heavily on bank and other debt financing to fund its capital requirements. While the Company expects to continue to rely on bank and other debt financing, the Company, in fiscal 1997, dramatically reduced its level of debt financing due to its improved operating performance and significantly lower capital expenditures. As of January 31, 1997, the Company had borrowed $2,828,061 under its amended $8,000,000 revolving credit facility, leaving $5,171,939 potentially available. Under the Company's borrowing base, $2,140,605 of the $5,171,939 was available at January 31, 1997. As of January 31, 1996, and during the first quarter of fiscal 1997, the Company was in default on virtually all of its long-term obligations due to financial covenant violations and failure to make certain required payments, including repayment of excess borrowings under its revolving credit facility. In April 1996, the Company received waivers for the existing defaults from such lenders and commitments to amend certain financial covenants. In June 1996, the Company received from its principal lender an additional $2,600,000 pursuant to a new term note. The proceeds were used to pay down its existing revolving credit facility, including excess borrowings under such facility. The term note had an interest rate at 3% over the bank's base rate with monthly installments of $75,000 plus interest with the remaining balance of $1,281,453 due May 31, 1997. The balance of this note was paid in full on January 31, 1997 in connection with the February 1997 amendment with its bank as discussed below. Additionally, the terms of its existing credit facility and its existing term note with its principal lender were modified to increase the interest rate differentials on both the facility and existing term note by 1% and .875%, respectively, to reduce the Company's borrowing base under the facility by $1,000,000, and to amend certain financial covenants. In June 1996, certain of the Company's equipment lenders amended their equipment notes to defer approximately $2,250,000 in principal payments due during fiscal 1997. Pursuant to the amendments, the deferred principal payments are due with the last payment of each respective equipment notes. Additionally, the Company may be required, subject to certain restrictions, to repay a portion of the deferred principal over the next two fiscal years to the extent there is availability under the Company's revolving credit facility as determined on January 31 and April 30, 1997 and 1998. The Company has included an estimated additional $300,000 in current maturities of long-term obligations based upon payments to be required under this amendment. In connection with the June 1996 refinancing discussed above, the Company issued warrants to certain lenders to purchase 185,000 shares of the Company's common stock. Such warrants are exercisable at $3.00 per share, representing the market price existing at time of issuance, and will expire June 2006. The issuance of these warrants resulted in $147,334 of additional interest to be recognized over the term of the respective credit facilities and notes. In February 1997, the Company amended its credit facility and term note with its principal lender to reduce the interest rate differentials on both by 1%, to extend the maturity date to May 31, 1999 and to reduce the amount available under the revolving credit facility by $1,500,000 to $8,000,000 reflecting the Company's decreased credit needs. The Company believes its existing revolving credit facility is adequate to support its operations through the term of such facility. Working capital decreased from $2,685,374 on January 31, 1996 to $270,438 on January 31, 1997. This decrease is primarily attributable to reductions in accounts receivable, inventories and refundable sales and income taxes offset in part by a decrease in accounts payable. Accounts receivable decreased from $4,706,477 on January 31, 1996 to $3,129,968 on January 31, 1997. This decrease is due in part to a decrease in receivables outstanding from the Company's joint venture in Chile and a decrease in receivables from the Company's partner in such joint venture as compared to last year because of revised payment terms used in fiscal 1997. This foreign receivable represented approximately 8.5% of trade receivables as of January 31, 1997 as compared to 19% of trade receivables at January 31, 1996. Inventories declined from $9,599,515 on January 31, 1996 to $6,872,430 on January 31, 1997. This decrease is due to a reduction in inventory levels of raw materials and work in process as well as lower costs of inventories due to lower raw material prices and lower manufacturing costs due to improved manufacturing efficiencies and lower labor costs as previously discussed. Accounts payable decreased from $10,437,204 on January 31, 1996 to $5,838,416 on January 31, 1997 primarily as the result of lower balances due to certain vendors to whom the Company had delayed its payments in late fiscal 1996 and early fiscal 1997. For fiscal 1997, $9,057,924 of cash was provided by operating activities as compared to $3,563,404 for fiscal 1996. This reflects an decrease in accounts receivable, refundable income and sales taxes and inventories, and other funds generated through operations, offset in part by the decrease in accounts payable. Property, equipment and improvements decreased from $32,067,808 on January 31, 1996 to $27,678,610 on January 31, 1997. The decrease is principally due to depreciation. Given that the Company's level of production equipment and facilities was sufficient to meet its fiscal 1997 requirements, capital expenditures in fiscal 1997 were significantly lower than in the past two fiscal years. The Company purchased $569,325 of property and equipment in fiscal 1997 as compared to $9,611,266 and $8,881,457 in fiscal 1996 and fiscal 1995 respectively. As of January 31, 1997, the Company had approximately $100,000 outstanding in capital commitments and was reviewing only minimal expenditures related to improving manufacturing efficiencies and expenditures on molds for new products. Because the Company believes that its current level of production equipment and facilities is sufficient to meet anticipated fiscal 1998 requirements, its capital expenditures for fiscal 1998 are anticipated to be less than $1,500,000 which the Company expects will be financed from funds available through the Company's credit facilities and funds generated from operations. Seasonality of Sales and Earnings Historically, the Company's sales were highest during the third quarter and declined during the fourth quarter. Since the introduction of its line of produce containers during 1992, the percentage of the Company's sales occurring during the first two quarters has progressively increased and the Company expects this trend to continue. Because the Company's sales have historically declined during the fourth quarter while its fixed overhead costs have remained relatively constant, the Company's gross margins and operating profit have generally been lowest during the fourth quarter. Since the introduction of the Company's line of produce containers, this has also impacted the third quarter gross margins and operating profit. However, given the significant increases in prices for virgin PETE resin and recycled material during fiscal 1996, and the significant declines in PETE prices during the second and third quarters of fiscal 1997, the Company's gross margin (both in dollars and as a percentage of sales) was actually lower during the first two quarters of fiscal 1997 than in the third quarter and fourth quarters. The Company believes that as refiners continue to expand capacity, the supply of PETE will exceed the increase in demand and there will be a more stable pricing environment. As a result, the relationship of gross margins from quarter to quarter should be more consistent with historic results. The relationship of gross margins from quarter to quarter during fiscal 1997 is not expected to re-occur. Recently Issued Accounting Standard During February 1997 the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share." This pronouncement provides a different method of calculating earnings per share than is currently used in accordance with APB No. 15, "Earnings per Share." SFAS No. 128 provides for the calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share. SFAS 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997 and early adoption is not permitted. When adopted, the statement will require restatement of prior years' earnings per share. The Company will adopt this statement for its fourth quarter and year ending January 31, 1998. Assuming that SFAS 128 had been implemented, basic earnings per share would have been $.48 per share for the year ended January 31, 1997 versus $.47 per share as reported, and would have been the same as previously reported primary earnings per share for the years ended January 31, 1996 and 1995. Dilutive earnings per share would have been the same as previously reported primary earnings per share for the years ended January 31, 1997, 1996 and 1995. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Identified at Item 14 hereof and incorporated herein by reference are the financial statements and schedules following Item 14 of this report. ITEM 9 - CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III. Items 10, 11, 12, and 13 of Part III are omitted because the Company intends to file with the Securities and Exchange Commission within 120 days of the close of the year ended January 31, 1997, a definitive proxy statement containing information pursuant to Regulation 14A of the Securities Exchange Act of 1934, and that such information shall be deemed to be incorporated herein by reference from the date of filing such document. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K 1. Financial Statements The following financial statements of Ultra Pac, Inc. are included herein at the indicated page numbers: Page No. -------- Report of Independent Certified Public Accountants F-1 Balance Sheets at January 31, 1997 and 1996 F-2 Statements of Operations - Years ended January 31, 1997, 1996 and 1995 F-4 Statement of Shareholders' Equity - Years ended January 31, 1997, 1996 and 1995 F-5 Statements of Cash Flows - Years ended January 31, 1997, 1996 and 1995 F-6 Notes to Financial Statements - January 31, 1997, 1996 and 1995 F-7 2. Financial Statement Schedule The following financial statement schedule of Ultra Pac, Inc. is included herein at the indicated page number: Page No. -------- Report of Independent Certified Public Accountants on Schedule E-1 II. Valuation of Qualifying Accounts - Years ended January 31, 1997, 1996 and 1995 E-2 All other schedules of Ultra Pac, Inc. have been omitted since the required information is not present or not present in an amount sufficient to require submission of the schedule, or because the information required is included in the financial statements or the notes thereto. 3. (a) Exhibits The exhibits required to be a part of this Report are listed in the Index to Exhibits which follows the Financial Statement Schedules. A copy of these Exhibits will be furnished at a reasonable cost to any person who is a shareholder of the Company as of May 16, 1997 upon receipt from any such person of a written request for any such Exhibit. Such request should be sent to Ultra Pac, Inc., 21925 Industrial Blvd., Rogers, Minnesota 55374, Attention: Chief Financial Officer. (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the fourth quarter of the year ended January 31, 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ULTRA PAC, INC. Dated: April 22, 1997 By: /s/ Calvin Krupa ---------------- Calvin Krupa Its: President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date - --------- ----- ---- /s/ Calvin Krupa President, Chief April 22, 1997 - ------------------------ Executive Officer and Calvin Krupa Director /s/ William J. Howard Chief Operating Officer April 22, 1997 - ------------------------ William J. Howard /s/ Brad C. Yopp Chief Financial April 22, 1997 - ------------------------ Officer (Principal Brad C. Yopp Accounting Officer) /s/ James A. Thole Secretary and April 22, 1997 - ------------------------ Director James A. Thole /s/ John F. DeBoer Director April 22, 1997 - ------------------------ John F. DeBoer /s/ Thomas F. Rains Director April 22, 1997 - ------------------------ Thomas F. Rains /s/ Frank I. Harvey Director April 22, 1997 - ------------------------ Frank I. Harvey No annual report or proxy materials have been sent to security holders. An annual report for the Company's fiscal year ended January 31, 1997, will be forwarded to shareholders. Report of Independent Certified Public Accountants Board of Directors and Shareholders Ultra Pac, Inc. We have audited the accompanying balance sheets of Ultra Pac, Inc. (a Minnesota corporation) as of January 31, 1997 and 1996 and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended January 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ultra Pac, Inc. as of January 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 1997, in conformity with generally accepted accounting principles. /s/ DIVINE, SCHERZER & BRODY, LTD. St. Paul, Minnesota March 14, 1997 F-1 Ultra Pac, Inc. BALANCE SHEETS January 31, 1997 and 1996
ASSETS (Note E) 1997 1996 ----------- ----------- CURRENT ASSETS Cash (note C) $ 663,072 $ 345,906 Accounts receivable Principally trade, less allowance for doubtful receivables and sales discounts of $312,854 and $305,000 at January 31, 1997 and 1996, respectively (notes C and D) 3,129,968 4,706,477 Refundable income and sales taxes 22,335 1,534,500 Inventories (notes A1 and B) Raw materials 1,783,640 2,089,444 Work in process 1,379,856 2,077,652 Finished goods 3,708,934 5,432,419 Deferred income taxes (notes A1, A2, A5 and J) 1,822,000 264,000 Other current assets (note A7) 216,086 153,803 ----------- ----------- Total current assets 12,725,891 16,604,201 PROPERTY, EQUIPMENT AND IMPROVEMENTS - AT COST Buildings and improvements (note K) 3,492,768 3,491,268 Manufacturing equipment and tooling (notes A7, F and K) 21,957,017 22,592,367 Extrusion equipment 12,355,550 12,270,044 Other equipment and furnishings (note A7) 1,029,281 1,868,806 Leasehold improvements (note F) 957,738 945,219 ----------- ----------- 39,792,354 41,167,704 Less accumulated depreciation and amortization (note A2) 12,851,061 9,837,213 ----------- ----------- 26,941,293 31,330,491 Land (note K) 737,317 737,317 ----------- ----------- 27,678,610 32,067,808 OTHER Security deposits 499,186 495,956 Leasehold costs, less accumulated amortization of $48,667 and $24,333 at January 31, 1997 and 1996, respectively (notes A2 and K) 316,333 340,667 Investments in affiliates (notes A3 and D) 232,350 143,215 Deferred income taxes (notes A1, A2, A5 and J) -- 722,000 Other 283,215 207,391 ----------- ----------- 1,331,084 1,909,229 ----------- ----------- $41,735,585 $50,581,238 =========== ===========
The accompanying notes are an integral part of these statements. F-2
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996 ----------- ----------- CURRENT LIABILITIES Current maturities of long-term obligations $ 4,819,961 $ 1,900,220 Accounts payable - principally trade 5,838,416 10,437,204 Accrued liabilities Compensation 1,140,975 843,922 Interest and other 590,636 737,481 Income taxes payable 65,465 -- ----------- ----------- Total current liabilities 12,455,453 13,918,827 LONG-TERM OBLIGATIONS, less current maturities (note E) 15,977,599 27,235,076 DEFERRED INCOME TAXES (notes A1, A2, A5 and J) 1,775,000 -- COMMITMENTS AND CONTINGENCIES (notes E and G) -- -- SHAREHOLDERS' EQUITY Common stock - authorized, 10,000,000 shares of no par value; issued and outstanding, 3,814,015 and 3,766,215 shares at January 31, 1997 and 1996, respectively (notes E and H) 7,784,972 7,631,572 Additional contributed capital 1,360,334 1,213,000 Retained earnings 2,382,227 582,763 ----------- ----------- 11,527,533 9,427,335 ----------- ----------- $41,735,585 $50,581,238 =========== ===========
F-3 Ultra Pac, Inc. STATEMENTS OF OPERATIONS Years ended January 31, 1997, 1996 and 1995
1997 1996 1995 ------------ ------------ ------------ Net sales (notes A4, C and D) $ 61,718,514 $ 66,128,723 $ 57,249,979 Cost of products sold (notes B and K) 42,155,775 54,186,647 41,624,598 ------------ ------------ ------------ Gross profit 19,562,739 11,942,076 15,625,381 Operating expenses (note K) Marketing and sales 10,647,163 11,481,007 10,066,119 Administrative 2,749,693 2,759,614 2,347,558 ------------ ------------ ------------ 13,396,856 14,240,621 12,413,677 ------------ ------------ ------------ Operating profit (loss) 6,165,883 (2,298,545) 3,211,704 Other income (expense) Interest expense (2,584,498) (2,516,672) (1,507,495) Write down of recycling equipment (note A7) (509,638) -- -- Equity in net loss of affiliates (notes A3 and D) (49,429) (8,585) -- Other (78,854) (56,595) 675 ------------ ------------ ------------ (3,222,419) (2,581,852) (1,506,820) ------------ ------------ ------------ Earnings (loss) before income taxes 2,943,464 (4,880,397) 1,704,884 Income tax provision (benefit) (notes A1, A2, A5 and J) 1,144,000 (1,721,000) 654,000 ------------ ------------ ------------ NET EARNINGS (LOSS) $ 1,799,464 $ (3,159,397) $ 1,050,884 ============ ============ ============ Earnings (loss) per common share (note A8) $ .47 $ (.84) .28 ============ ============ ============ Weighted average number of shares outstanding (note A8) 3,791,886 3,766,215 3,766,144 ============ ============ ============
The accompanying notes are an integral part of these statements. F-4 Ultra Pac, Inc. STATEMENT OF SHAREHOLDERS' EQUITY (Notes E and H) Years ended January 31, 1997, 1996 and 1995
Common Stock Additional ---------------------- contributed Retained Shares Amount capital earnings --------- ---------- ---------- ----------- Balance - January 31, 1994 3,765,715 $7,628,322 $1,213,000 $ 2,691,276 Common stock issued for services 500 3,250 -- -- Net earnings for the year ended January 31, 1995 -- -- -- 1,050,884 --------- ---------- ---------- ----------- Balance - January 31, 1995 3,766,215 7,631,572 1,213,000 3,742,160 Net loss for the year ended January 31, 1996 -- -- -- (3,159,397) --------- ---------- ---------- ----------- Balance - January 31, 1996 3,766,215 7,631,572 1,213,000 582,763 Common stock issued to employees 17,800 54,325 -- -- Common stock issued upon exercise of options 30,000 99,075 -- -- Warrants issued in connection with financing -- -- 147,334 -- Net earnings for the year ended January 31, 1997 -- -- -- 1,799,464 --------- ---------- ---------- ----------- Balance - January 31, 1997 3,814,015 $7,784,972 $1,360,334 $ 2,382,227 ========= ========== ========== ===========
The accompanying notes are an integral part of this statement. F-5 Ultra Pac, Inc. STATEMENTS OF CASH FLOWS (Note L) Years ended January 31, 1997, 1996 and 1995
1997 1996 1995 ------------ ----------- ------------ Increase (Decrease) in Cash Cash flows provided by operating activities Net earnings (loss) $ 1,799,464 $(3,159,397) $ 1,050,884 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization (notes A2 and B) Property, equipment and improvements 4,165,425 3,896,560 2,777,982 Leasehold costs 24,334 24,333 -- Warrants 77,488 -- -- Provision for doubtful receivables 7,854 60,000 (12,833) Non cash compensation to employees 66,881 38,700 -- Net (gain) loss on asset disposal and write down 478,098 16,971 (24,824) Equity in undistributed net loss of affiliates 49,429 4,800 -- Net deferred income taxes 939,000 (1,299,400) 306,300 Common stock issued for services -- -- 3,250 Change in operating assets and liabilities: Accounts receivable 3,080,820 (1,183,025) (1,420,130) Inventories 2,727,085 741,385 (2,640,451) Other current assets 37,717 16,804 (64,161) Accounts payable (4,598,788) 4,549,640 1,210,020 Accrued liabilities 137,652 178,087 396,948 Income taxes payable 65,465 (322,054) 320,354 ------------ ----------- ------------ Net cash provided by operating activities 9,057,924 3,563,404 1,903,339 Cash flows from investment activities Capital expenditures (569,325) (9,611,266) (8,881,457) Proceeds from sale of equipment 215,000 206,800 141,625 Leasehold costs -- -- (365,000) Investments in affiliates (138,564) (143,215) (4,800) Security deposits and other (9,208) (198,256) (137,656) ------------ ----------- ------------ Net cash used in investing activities (502,097) (9,745,937) (9,247,288) Cash flows from financing activities Proceeds from long-term obligations 2,600,000 9,388,449 11,791,194 Principal payments under long-term obligations (10,937,736) (3,005,741) (4,746,801) Exercise of stock options 99,075 -- -- ------------ ----------- ------------ Net cash provided by (used in) financing activities (8,238,661) 6,382,708 7,044,393 ------------ ----------- ------------ Net increase (decrease) in cash 317,166 200,175 (299,556) Cash at February 1 345,906 145,731 445,287 ------------ ----------- ------------ Cash at January 31 $ 663,072 $ 345,906 $ 145,731 ============ =========== ============
The accompanying notes are an integral part of these statements. F-6 Ultra Pac, Inc. NOTES TO FINANCIAL STATEMENTS January 31, 1997, 1996 and 1995 NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business The Company designs and markets plastic containers in a wide range of sizes and designs for use primarily in the food industry. In addition, the Company had nominal sales to the floral industry through January 31, 1995; however, the Company has stopped manufacturing for the floral industry and sold its related tooling during the year ended January 31, 1997 (see note A7). The Company's products are primarily manufactured by the Company in its vertically integrated production facilities, located in Rogers, Minnesota, using both virgin and recycled materials. However, during August 1995, the Company shut down its recycling center and listed the related equipment for sale (see note A7). Additionally, certain products are manufactured in Chile by Ultra Pac SudAmerica S.A., a joint venture owned 49% by Ultra Pac, Inc. Although sales are primarily within the continental United States, the Company has international sales, principally in Canada, South America, Australia and Europe. A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows: 1. Inventories Inventories are stated at the lower of cost or market; cost is determined using the first-in, first-out method. Certain costs are expensed for financial reporting purposes and capitalized for income tax reporting purposes; deferred income taxes are provided for these timing differences. Inventory categories consist of the following: Raw materials which include virgin and recycled materials used in the recycling and extrusion process, and packaging and shipping supplies. Work in process which includes both purchased and internally extruded plastic sheet used in the production of finished goods. Finished goods which include completed, packaged products available for shipment. F-7 2. Depreciation and Amortization For financial reporting purposes, depreciation of property and equipment is provided using the straight-line method over the estimated useful lives of the applicable assets while amortization of leasehold improvements is provided over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Expenditures for maintenance and repairs are charged to expense as incurred, whereas expenditures for renewals and betterments are capitalized. The estimated useful lives used to compute depreciation and amortization of property, equipment and improvements are fifteen years for buildings and improvements and ten years for all other depreciable property, equipment and improvements. Leasehold costs are amortized over 15 years, the term of the lease. For income tax reporting purposes, other lives and methods may be used; deferred income taxes are provided for these temporary differences. 3. Investments in Affiliates Investments in the common stock of Ultra Pac SudAmerica, S.A. and Ultra Pac Middle East EC are stated at cost plus equity in undistributed net earnings (loss) since dates of acquisition. 4. Revenue Recognition The Company recognizes revenue upon shipment of products. 5. Income Taxes The Company provides for income taxes based on income reported for financial reporting purposes. Certain charges to earnings differ as to timing from those deducted for tax reporting purposes; these relate primarily to accelerated depreciation, the writedown of the recycling center and to net operating loss and alternative minimum tax credit carryforwards. The tax effects of these differences are recorded as deferred income taxes. 6. Accounting for Stock Based Compensation During 1997, the Company implemented the disclosure requirements of Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Under SFAS 123, the Company will continue to account for stock-based compensation under the intrinsic value method prescribed by Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees," (APB 25) and will provide pro forma disclosures of net income or loss and income or loss per share as if the fair value basis method prescribed in SFAS 123 had been applied in measuring compensation expense. F-8 Pursuant to APB 25, no accounting recognition is given to employee stock options issued at fair market value or greater until they are exercised, at which time the proceeds are credited to the capital accounts. With respect to non-statutory compensatory options, the Company may recognize a tax benefit upon exercise of these options in an amount equal to the excess of the fair market value of the common stock over the option price on the day of the exercise. With respect to incentive stock options, tax benefits arising from disqualifying dispositions are recognized at the time of disposition. Tax benefits related to stock options are credited to additional contributed capital. 7. Accounting for the Impairment of Long-Lived Assets On November 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" (SFAS 121), which requires the Company to review for impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In certain situations, an impairment loss would be recognized. See note B for discussion of the writedown of certain assets to their estimated net realizable value pursuant to SFAS 121. 8. Earnings (Loss) Per Common Share Earnings (loss) per common share are based upon the weighted average number of common and dilutive common equivalent shares outstanding. During February 1997 the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share" (SFAS 128). This pronouncement provides a different method of calculating earnings per share than is currently used in accordance with APB No. 15, "Earnings per Share." SFAS 128 provides for the calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share. SFAS 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997 and early adoption is not permitted. When adopted, the statement will require restatement of prior years' earnings per share. The Company will adopt this statement for its quarter and year ending January 31, 1998. Assuming that SFAS 128 had been implemented, basic earnings per share would have been $.48 per share for the year ended January 31, 1997 versus $.47 per share as reported, and would have been the same as previously reported primary earnings per share for the years ended January 31, 1996 and 1995. Dilutive earnings per share would have been the same as previously reported primary earnings per share for the years ended January 31, 1997, 1996 and 1995. F-9 NOTE B - USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the allowance for doubtful receivables and sales discounts, provision for excess and obsolete inventories and depreciation, valuation of inventory regrind, and realization of deferred income tax assets. Actual results could differ from those estimates. The Company's manufacturing processes (thermoforming and extrusion) produce trim and other scrap material that may be ground into flake for reuse by the Company. Most of the scrap material ("regrind") is reused by the Company in the ordinary course of business. However, some of the Company regrind is not reusable due to the color, composition or quantity of the material and is disposed of through sale or other means. Regrind in inventory is reported by the Company in its balance sheet as raw material and is valued at its estimated net realizable value. During the years ended January 31, 1997, 1996 and 1995, the Company adjusted its estimated net realizable value of regrind material downward by approximately $84,000, $250,000, and $100,000, respectively. In addition, writedowns of approximately $479,000 and $140,000 were made for excess and obsolete inventories during the years ended January 31, 1997 and 1996, respectively. In connection with the Company's decision to dispose of its tooling related to the floral industry, the Company wrote down tooling by approximately $64,000 and $100,000 during the years ended January 31, 1997 and 1996, respectively. In addition, writedowns of approximately $174,000, $200,000 and $69,000 were made for other tooling during the years ended January 31, 1997, 1996 and 1995, respectively. The impact of these writedowns was included in cost of products sold in the accompanying statements of operations. Management believes that the undepreciated value of these assets as of January 31, 1997 is realizable. In addition, the Company wrote down its recycling center during the year ended January 31, 1997 by $509,638 in connection with its decision to dispose of it. This write down was based on the estimated net realizable value by management and is included in other income (expense) in the accompanying statements of operations. The estimated net realizable value of $100,000 has been reclassified to other current assets as of January 31, 1997. See note J for discussion of deferred tax asset realization. F-10 NOTE C - CONCENTRATIONS OF CREDIT RISK AND SALES Trade receivables have significant concentrations of credit risk in the retail packaged food sector. As of January 31, 1997, substantially all trade receivables relate to this sector. The Company had sales to one customer which accounted for 12.9%, 12.3% and 10.9% of net sales during the years ended January 31, 1997, 1996 and 1995, respectively. Included in trade receivables as of January 31, 1997 are $473,688 of receivables from foreign customers, most of which are backed by letters of credit. The Company maintains its cash balances in one financial institution located in Minneapolis, Minnesota. These balances are insured by the Federal Deposit Insurance Corporation up to $100,000. Investments in affiliates as of January 31, are as follows: 1997 1996 -------- -------- Ultra Pac SudAmerica, S.A. ("UPSA") Common stock, 147,107 shares (49%) $232,350 $143,215 Ultra Pac Middle East EC Common stock, 800 shares (40%) -- -- -------- -------- $232,350 $143,215 ======== ======== NOTE D - INVESTMENTS IN AND TRANSACTIONS WITH AFFILIATES Equity in undistributed net earnings (loss) of Ultra Pac SudAmerica, S.A., and Ultra Pac Middle East PC since acquisition amounted to ($53,214) and $(53,079), respectively, as of January 31, 1997. Net sales to affiliates and to UPSA's majority shareholder were $423,389 and $565,723, respectively, during the year ended January 31, 1997, and $569,502 and $490,966, respectively, during the year ended January 31, 1996. As of January 31, 1997 and 1996, $265,710 and $936,897, respectively were receivable from UPSA and UPSA's majority shareholder. F-11 NOTE E - LONG-TERM OBLIGATIONS Long-term obligations as of January 31, are as follows:
1997 1996 ----------- ----------- Facility A Interest payable monthly at 2.375% above the three month LIBOR rate (effective rate of 8.00% as of January 31, 1996) $ -- $ 5,000,000 Interest payable at 1.5% and .5% above bank's base rate as of January 31, 1997 and 1996, respectively (effective rate of 9.75% and 9% as of January 31, 1997 and 1996, respectively) 2,828,061 4,037,676 Facility B; interest payable monthly at 1.75% and .875% above bank's base rate as of January 31, 1997 and 1996, respectively, (effective rate of 10.00% and 9.375% as of January 31, 1997 and 1996, respectively) 3,955,704 4,899,683 Facility D; $7,073,666 non-revolving equipment loan; interest payable monthly at 2.5% above the three month LIBOR rate (effective rate of 8.00% and 8.125% as of January 31, 1997 and 1996, respectively) subject to prepayment penalty prior to October 31, 1997 6,344,392 6,445,313 Equipment notes payable in monthly installments, including interest from 8.00% to 10.87%; subject to prepayment penalties 6,034,191 6,756,564 Real estate mortgage payable in monthly installments, including interest to be adjusted each three year anniversary to a rate equal to 3% over the three year U.S. Treasury Securities Yield (effective rate of 9.29% and 8.00% as of January 31, 1997 and 1996, respectively) 862,764 949,907 Contracts for deed payable in monthly installments, including interest from 8.00% to 9.00% 353,418 377,456 Capitalized leases (note F) 419,030 668,697 ----------- ----------- 20,797,560 29,135,296 Less current maturities 4,819,961 1,900,220 ----------- ----------- $15,977,599 $27,235,076 =========== ===========
During February 1997, the Company entered into an amended and restated credit and security agreement with its primary lender. The terms of the Company's credit and security agreement under Facilities A, B and C include the following: Facility A: $8,000,000 revolving note. The agreement provides for issuance of up to $1,000,000 of letters of credit ($100,000 outstanding as of January 31, 1997 and none outstanding as of January 31, 1996). Borrowings are limited to a borrowing base of eligible accounts receivable and inventory, less outstanding letters of credit. A commitment fee of .25% per year is payable on the unused portion of the revolving credit. Interest is payable monthly. A prepayment penalty of 2% is provided for under certain circumstances. The note is due on May 31, 1999. F-12 Facility B: non-revolving term note payable in monthly installments of $64,817, plus interest through May 1999 with any unpaid balance under the agreement due and payable on May 31, 1999. Facility C: $1,000,000 non-revolving capital expenditure loan payable in monthly installments, including interest, to amortize advances under the agreement over a thirty-six month period, with any unpaid balance under the agreement due and payable on May 31, 1999. The interest rate on Facility A borrowings ranges from .25% below to 1.5% above the bank's base rate. The interest rates on Facility B and C borrowings range from the bank's base rate to 2% above the bank's base rate. The interest rate differentials are based on the Company's debt to equity ratio at the end of each quarter. Additionally, during February 1997 the primary lender purchased the Company's real estate mortgage payable. The interest rate has been adjusted to the rate charged on Facility B and C borrowings. The note is payable in monthly installments of $13,750 plus interest with any unpaid balance under the agreement due and payable on May 31, 1999. As of January 31, 1996, or subsequently, the Company was in default on substantially all of its long-term obligations due to covenant violations and its failure to make certain required payments under the terms of the agreements. During April 1996, the Company received waivers of the defaults from each of the respective lenders and commitments from its lenders to modify the terms of their respective loan agreements. In June 1996, the agreements were amended as follows: 1. Approximately $2,250,000 of principal payments on Facility D and certain equipment notes were deferred from the year ended January 31, 1997 to later years. 2. Approximately $750,000 of principal payments on the equipment notes were accelerated from the year ending January 31, 2004 to the year ending January 31, 1998. 3. An additional $2,600,000 term note was provided by the Company's bank. The term note was due in monthly principal payments of $75,000 plus interest at 3% above the banks' base rate. The term note was paid in full during January 1997. 4. The Company reduced its borrowing base under Facility A by $1,000,000. 5. The rate of interest was increased on borrowings based on the bank's base rate under Facilities A and B by 1% and .875%, respectively. 6. The Company is to repay, to the extent available, as defined, up to an additional $600,000 to an equipment note holder during each of the years ending January 31, 1997 and 1998. An additional $300,000 has been included in current maturities of long-term obligations for estimated payments required under this provision as of January 31, 1997. 7. The Company issued the lenders warrants to purchase 185,000 shares of the Company's common stock (see note H). F-13 8. The Company agreed to pay $75,000 in agent and origination fees. 9. The prepayment penalty for Facilities A and B was modified to 2%, as defined. The long-term obligations are collateralized by substantially all assets of the Company and life insurance on the president of the Company. Certain agreements contain covenants relating to financial performance, limitations on payment of dividends, acquisitions, mergers, change in control, investments, additional debt, capital expenditures, disposition of assets and other matters. In addition, under the commitments, the respective lending institutions have been provided cross defaults. Aggregate maturities of long-term obligations adjusted for the impact of the above amendments for the four years following January 31, 1998 are as follows: 1999, $5,004,780; 2000, $7,598,414; 2001, $1,166,319; and 2002, $1,515,065. NOTE F - CAPITALIZED LEASES For financial reporting purposes, minimum lease rentals relating to certain equipment and leasehold improvements have been capitalized. The related assets and obligations have been recorded using the Company's incremental borrowing rate at the inception of the leases. The leases, which are noncancelable, expire at various dates through February 1999. The following is a schedule of leased property under capital leases: January 31, ----------------------- 1997 1996 ---------- ---------- Manufacturing equipment $ 744,808 $ 744,808 Leasehold improvements 301,756 301,756 ---------- ---------- 1,046,564 1,046,564 Less accumulated depreciation (note A4) 316,463 211,808 ---------- ---------- $ 730,101 $ 834,756 ========== ========== F-14 The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments at January 31, 1997. Year ending January 31, ----------------------- 1998 $ 284,053 1999 159,371 2000 9,085 ---------- Total minimum lease payments 452,509 Less amount representing interest 33,479 ---------- Present value of net minimum lease payments $ 419,030 ========== NOTE G - COMMITMENTS AND CONTINGENCIES The Company conducts a substantial portion of its operations in leased facilities under noncancelable operating leases expiring at various dates through 2010. At the end of the lease terms, substantially all of the leases are renewable at the then fair rental value for periods of 3 to 15 years. Each of the leases provide that the Company pay property taxes, maintenance, insurance and other occupancy expense applicable to leased premises. Certain of the rents are subject to increases in proportion to the increase in the Consumer Price Index and substantially all of the leases contain purchase options. Portions of one facility are subleased under subleases which expire in 1998 and 2000, respectively. Total future minimum sublease rentals amount to $100,208 as of January 31, 1997. Minimum rental commitments of non-cancelable operating leases are approximately as follows: Year ending January 31, ----------------------- 1998 $ 1,652,946 1999 1,579,551 2000 1,469,487 2001 1,381,727 2002 1,356,012 2003 and thereafter 7,652,256 ----------- $15,091,979 =========== Rental expense for all operating leases for the years ended January 31 is as follows: 1997 1996 1995 ----------- ---------- ---------- Minimum rentals $ 1,950,435 $2,294,579 $1,707,343 Sublease rentals (29,948) -- -- ----------- ---------- ---------- $ 1,920,487 $2,294,579 $1,707,343 =========== ========== ========== F-15 The Company has commitments to purchase equipment aggregating approximately $100,000 at January 31, 1997. The Company has entered into two material supply agreements which will fulfill a significant portion of its virgin and post consumer plastic resin needs. The agreements are for two and five year periods and call for annual minimum purchase requirements. Pricing is reviewed and negotiated quarterly in one of the agreements and pricing in the other is negotiated monthly, and therefore fluctuates with market prices. The Company is subject to certain lawsuits and other claims arising out of the conduct of its business. In the opinion of management, such matters are without merit or are of such a kind or involve such amounts that they would not have a material effect on the financial position or results of operations of the Company. The Company is required to make payments to certain officers and employees in the event of a change in control and termination, as defined. The aggregate amount of such commitment approximates $2,152,000 as of January 31, 1997. NOTE H - COMMON STOCK Options On March 14, 1996, the Company adopted the 1996 Ultra Pac, Inc. Stock Option Plan ("1996 Plan") which reserves 200,000 shares of common stock for future issuance. Under the terms of the 1996 Plan, the Company may grant to its employees and consultants options to purchase shares with a term not to exceed ten years. The 1991 Stock Option Plan ("1991 Plan"), reserves 100,000 shares of the Company's authorized common stock for future issuance. Under the terms of the 1991 Plan, the Company may grant to its employees and consultants options to purchase shares with a term not to exceed ten years. The Outside Directors' Option Plan ("Directors' Plan"), reserves 100,000 shares of the Company's authorized common stock for future issuance. Under the terms of the Outside Directors' Option Plan, the Company will grant to its outside directors options to purchase shares with a term not to exceed five years. F-16 The following table summarizes option activity for the period from February 1, 1994 through January 31, 1997:
Number of Shares ------------------------------------------ 1991 1996 Directors' Range of Wtd. Avg. Plan Plan Plan Non-Plan Exercise Exercise Options Options Options Options Prices Price ------- ------- --------- -------- ----------- -------- Balance as of February 1, 1994 43,500 -- 14,000 90,000 $7.50-12.69 $9.38 Granted 30,000 -- 4,000 20,000 5.13-8.00 7.22 Exercised -- -- -- -- -- -- Expired or canceled (4,000) -- -- -- 7.50 7.50 ------- -------- ------- -------- ----------- ----- Balance as of January 31, 1995 69,500 -- 18,000 110,000 5.13-12.69 8.82 Granted 15,000 -- 5,500 20,000 5.75-6.00 5.97 Exercised -- -- -- -- -- -- Expired or canceled (2,000) -- (4,500) (50,000) 7.25-12.69 8.97 ------- -------- ------- -------- ----------- ----- Balance as of January 31, 1996 82,500 -- 19,000 80,000 5.13-12.69 8.14 Granted 35,000 244,500 5,500 75,000 2.75-4.25 3.47 Exercised (25,000) (5,000) -- -- 2.94-3.38 3.30 Expired or canceled (26,000) (94,000) (10,000) (20,000) 2.94-12.69 5.56 ------- -------- ------- -------- ----------- ----- Balance as of January 31, 1997 66,500 145,500 14,500 135,000 $2.75-12.69 $4.96 ======= ======== ======= ======== =========== ===== Available for grant as of January 31, 1997 8,500 49,500 85,500 -- ======= ======== ======= ========
The weighted average fair value of all options granted during the year ended January 31, 1997 was $1.70. Additional information regarding the options outstanding as of January 31, 1997 follows:
Wtd. Wtd. Wtd. Number Avg. Avg. Avg. Range of of Exercise Remaining Number Exercise Exercise Prices Options Price Life Exercisable Price --------------- ------- -------- --------- ----------- -------- $ 2.75-4.25 236,000 $ 3.57 4.69 years 151,000 $ 3.21 5.75-7.50 89,500 6.86 3.08 89,500 6.86 8.75-12.69 36,000 9.41 2.34 36,000 9.41
F-17 The following proforma information regarding net earnings (loss) and net earnings (loss) per share has been determined as if the Company had accounted for its stock options (all of which are to employees and directors) under the fair value method prescribed by SFAS 123 (see note A6). Years ended January 31, ------------------------------- 1997 1996 ------------- ------------- Net income (loss) As reported $ 1,799,464 $ (3,159,397) Proforma 1,605,243 (3,228,311) Income (loss) per share As reported .47 (.84) Proforma .42 (.86) The fair value of each employee and director option grant is estimated on the date of grant using the Black-Sholes options pricing model with the following weighted average assumptions used for grants in 1997 and 1996: (a) no dividends; (b) expected volatility of 58%; (c) risk free interest rates of 6.3%; and (d) expected lives of four years. Warrants The Company issued warrants to purchase 30,000 shares of its common stock to an Underwriter and certain of its employees in connection with the public offering of the Company's common stock in May 1992. The warrants are exercisable at prices ranging from $11.50 to $13.76 per share, depending upon time of exercise. These warrants expire during the year ending January 31, 1998 and remain outstanding at January 31, 1997. In connection with closing the debt restructuring (see note E), the Company issued warrants for 185,000 shares of its common stock. The warrants are exercisable at $3.00 per share, the market price at date of grant, and expire June 2006. The estimated fair value of the warrants of $147,000 is being amortized over the terms of the respective debt agreements. As of January 31, 1997, $77,448 of such amount has been recognized as additional interest expense. The warrant agreement provides for adjusting both the exercise price and the number of shares purchasable based on various criteria, including the Company's issuing shares of common stock, or options exercisable at less than market price or the warrant exercise price. F-18 Other Effective December 1996 and April 1996, respectively, the Company accrued compensation to be distributed in the form of 13,800 and 12,800 shares of its common stock to its employees. The shares were issued in February 1997 and May 1996, respectively. During 1996, the Company amended its articles of incorporation to increase the number of authorized shares of capital stock from 5,000,000 to 10,000,000. All such shares of capital stock have initially been designated as common stock. NOTE I - PROFIT-SHARING PLAN AND TRUST During the year ended January 31, 1993, the Company implemented The Ultra Pac, Inc. 401(k) Profit Sharing Plan and Trust which covers substantially all of its employees. Participants may elect to enter into salary reduction agreements with the Company for a portion of their compensation. The plan authorizes the Board of Directors of the Company to annually authorize contributions, out of earnings and profits, up to 50% of each participant's contribution, not to exceed 2% of that participant's total compensation. For the years ended January 31, 1997, 1996 and 1995, contributions to the plan totaled $223,250, $321,296 and $219,135, respectively, of which $0, $78,262 and $54,975, respectively, were contributed by the Company. During the year ended January 31, 1997, the Company suspended its contribution to the plan. Effective February 1, 1997, the Company reinstated its contributions to the plan. NOTE J - INCOME TAXES The components of the income tax provision (benefit) are as follows: Year ended January 31, -------------------------------------- 1997 1996 1995 ----------- ----------- -------- Current Federal $ 196,000 $ (421,600) $312,600 State 9,000 -- 35,100 ----------- ----------- -------- 205,000 (421,600) 347,700 Deferred Federal 833,000 (1,119,400) 275,000 State 106,000 (180,000) 31,300 ----------- ----------- -------- 939,000 (1,299,400) 306,300 ----------- ----------- -------- $ 1,144,000 $(1,721,000) $654,000 =========== =========== ======== F-19 A reconciliation of the difference between income tax expense and the amount computed by applying the statutory federal income tax rates to earnings (loss) before income taxes is as follows:
Year ended January 31, ------------------------------------ 1997 1996 1995 ---------- ----------- -------- Income tax expense (benefit) at federal statutory rate $1,001,000 $(1,659,000) $580,000 State taxes, less federal tax benefit 73,000 (117,000) 44,000 Tax effect of permanent financial statement/ tax differences 9,000 19,000 17,000 Other 61,000 36,000 13,000 ---------- ----------- -------- Income tax expense (benefit) $1,144,000 $(1,721,000) $654,000 ========== =========== ========
Deferred income taxes are the result of temporary differences in recognition of income and expense for financial statement and tax reporting. The major sources of these differences and the tax effect of each are as follows:
Year ended January 31, ------------------------------------- 1997 1996 1995 ---------- ----------- --------- Tax depreciation in excess of financial statement depreciation $ 541,000 $ 717,000 $ 799,000 Recycling center writedown (186,000) -- -- Net operating loss carryforwards 794,000 (2,399,000) (113,000) Alternative minimum tax credit carryforwards (191,000) 439,000 (349,000) Allowance for doubtful receivables 44,000 (22,000) 3,000 Inventories 2,000 35,000 17,000 Compensation related (74,000) (31,000) (26,000) Other 9,000 (38,400) (24,700) ---------- ----------- --------- $ 939,000 $(1,299,400) $ 306,300 ========== =========== =========
Deferred tax assets and liabilities consist of the following: January 31, --------------------- 1997 1996 ---------- -------- Deferred tax assets - current Allowance for doubtful receivables $ 67,000 $111,000 Inventories 59,000 61,000 Compensation related 131,000 57,000 Recycling center writedown 186,000 -- Deferred gain 17,000 22,000 Net operating loss carryforwards 1,357,000 -- Other 5,000 13,000 ---------- -------- $1,822,000 $264,000 ========== ======== F-20
January 31, -------------------------- 1997 1996 ----------- ----------- Deferred tax assets (liabilities) - long-term Depreciation of property, equipment and improvements $(3,543,000) $(3,002,000) Net operating loss carryforwards 1,538,000 3,689,000 Alternative minimum tax credit carryforwards 230,000 39,000 Other -- (4,000) ----------- ----------- $(1,775,000) $ 722,000 =========== ===========
As of January 31, 1997, the Company has net operating loss carryforwards which expire as follows: Federal State ------------ ------------ Year ending January 31, ----------------------- 2008 $ -- $ 236,000 2009 1,034,000 624,000 2010 133,000 33,000 2011 6,717,000 2,427,000 ------------ ------------ $ 7,884,000 $ 3,320,000 ============ ============ The Company has recorded deferred tax assets of $3,590,000, primarily resulting from the benefit of net operating loss carryforwards. These deferred tax assets are offset by deferred tax liabilities of $3,543,000 resulting principally from accelerated depreciation. The Company is not required to record valuation allowances for deferred tax assets where management believes it is more likely than not that the tax benefit will be realized. Valuation allowances were not established against deferred tax assets as they are offset by existing taxable temporary differences, principally depreciation, reversing within the carryforward period, and future taxable income. NOTE K - RELATED PARTY TRANSACTIONS The Company conducts a portion of its operations from facilities leased (see note G) and purchased from an individual who was a director of the Company through July 14, 1995. In addition, during the year ended January 31, 1995, the Company reimbursed this former director $365,000 for his costs of moving and business interruption in connection with an expansion of the Company's manufacturing facilities which are leased from this former director. The Company also purchases certain tooling and services from a company owned in part by this former director. F-21 The following is a summary of rent expense, building and land acquisition costs, leasehold costs and tooling and services purchased from this individual while he was a director during the years ended January 31, 1996 and 1995:
Year ended January 31, ------------------------ 1996 1995 ---------- ---------- Lease obligations $ 388,000 $ 464,000 Building, land and land acquisition costs 16,000 4,000 Leasehold costs (note A2) -- 365,000 Tooling and services 63,000 312,000 ---------- ---------- $ 467,000 $1,145,000 ========== ==========
Sales to a customer whose chief executive officer was a director of the Company were $531,000 from July 14, 1995, when such person became a director of the Company, through January 31, 1996 and $407,744 from February 1, 1996 through July 16, 1996, when such person resigned as a director of the Company. See note D for transactions with affiliates. NOTE L - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest and income taxes is as follows: Income Year ended January 31, Interest taxes ---------------------- ------------- ----------- 1997 $ 2,475,799 $ 120,770 1996 2,403,587 421,438 1995 1,489,918 59,017 During the year ended January 31, 1997, the Company issued warrants valued at $147,334 to acquire its common stock (see note E). During the year ended January 31, 1995, the Company acquired $745,930 of manufacturing equipment and leasehold improvements under capitalized leases. NOTE M - FINANCIAL INSTRUMENTS The following information about estimated fair values as of January 31, 1997 and 1996 is required by FASB Statement 107 and pertains to the Company's financial instruments. This information is based on the requirements set forth in that Statement and does not purport to represent the aggregate net fair value of the Company. F-22 The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value: CASH: The carrying amount approximates fair value based on the demand nature of the deposits. RECEIVABLES: The carrying amount approximates fair value based on the short maturity of these instruments. LONG-TERM OBLIGATIONS: The carrying amount approximates fair value, where significant, because the interest rates are indexed to market value, or, due to the short maturity of these instruments. NOTE N - RECLASSIFICATIONS Certain amounts for the year ended January 31, 1996 have been reclassified to conform with the financial statement presentation used for the year ended January 31, 1997. These reclassifications had no effect on previously reported net earnings or stockholders' equity. F-23 Report of Independent Certified Public Accountants on Schedule Board of Directors Ultra Pac, Inc. In connection with our audit of the financial statements of Ultra Pac, Inc. referred to in our report dated March 14, 1997 which is included in Part II of this Form 10-K, we have also audited Schedule II for the years ended January 31, 1997, 1996 and 1995. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. /s/ DIVINE, SCHERZER & BRODY, LTD. St. Paul, Minnesota March 14, 1997 E-1 Ultra Pac, Inc. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years ended January 31, 1997, 1996 and 1995
Col. A Col. B Col. C Col. D Col. E Col. F - -------------------------------------------------------------------------------------------------------------------------------- Additions --------------------------- Balance at Charged to Charged to Balance at beginning costs and other accounts - Deductions - End of Description of period expenses Retirement Describe(1) Period - -------------------------------------------------------------------------------------------------------------------------------- Allowance deducted from asset to which it applies: Allowance for doubtful receivables, sales discounts and returns: 1997 $ 305,000 $ 214,540 $ $ 206,686 $ 312,854 1996 $ 245,000 $ 123,000 $ -- $ 63,000 $ 305,000 1995 $ 257,833 $ 130,339 $ -- $ 143,172 $ 245,000
(1) Uncollected receivables written off. E-2 Exhibit Index 3.1 Restated Articles of Incorporation (Exhibit No. 3.1) (3) 3.2 Bylaws (Exhibit No. 3.2) (1) 10.2 Employment Agreement with Calvin Krupa, dated June 20, 1989 (Exhibit No. 10.2) (2) 10.3 First Amendment to Employment Agreement, dated March 31, 1990, with Calvin Krupa (Exhibit No. 10.17) (4) 10.4 Second Amendment to Employment Agreement, dated January 3, 1992, with Calvin Krupa (Exhibit No. 10.4) (9) 10.9 1991 Stock Option Plan (exhibit No. 10.3) (7) 10.15 Lease Agreement with Charles J. Van Heel for 21925 Industrial Boulevard, Rogers, Minnesota dated July 23, 1991 (Exhibit No. 10.2) (8) 10.16 Amendment dated July 23, 1991, to Lease Agreement with Charles J. Van Heel for 21925 Industrial Boulevard, Rogers, Minnesota, dated July 23, 1991 (Exhibit No. 10.3) (8) 10.17 Outside Directors' Option Plan (Exhibit No. 10.17) (9) 10.19 Purchase Agreement and Contract For Deed with Clement L. Sharp dated October 29, 1992 (Exhibit 10.2) (10) 10.20 Purchase Agreement with Mr. Chuck Van Heel dated December 7, 1992 (Exhibit No. 10.3) (10) 10.22 Equipment Note Agreement with Norwest Equipment Finance, Inc., dated March 22, 1993 (Exhibit No. 10.22) (11) 10.23 Lease Agreement with MLH Partners, dated April 8, 1992 (Exhibit 10.23) (11) 10.24 Equipment Note Agreement with Norwest Equipment Finance Inc., dated April 14, 1993 (Exhibit 10.24) (11) 10.25 Letter of Intent for real estate mortgage agreement with AmeriBank dated March 17, 1993 (Exhibit 10.25) (11) 10.26 Amendment dated June 1, 1993, to Lease Agreement with Charles J. Van Heel for 21925 Industrial Boulevard, Rogers, Minnesota, N.A. dated May 26, 1992 (Exhibit No. 10.1) (12) 10.27 Real Estate Mortgage Agreement with AmeriBank dated June 1, 1993 (Exhibit No. 10.2) (12) 10.29 Assumption Agreement between Ultra Pac, Inc. and Charles J. Van Heel and Marilyn Van Heel, dated June 3, 1993 and the Mortgage Note between Charles J. Van Heel and W.J.D. & Co. (Exhibit No. 10.2) (13) 10.30 Equipment Lease Agreement with the CIT Group dated August 30, 1993 (Exhibit No. 10.1) (14) 10.31 Equipment Note Agreement with Norwest Equipment Finance, Inc., dated October 19, 1993 (Exhibit No. 10.2) (14) 10.32 Equipment Note Agreement with Norwest Equipment Finance, Inc., Dated November 8, 1993 (Exhibit No. 10.3) (14) 10.33 Amendment dated December 1, 1993 to Lease Agreement with ML Limited Partnership dated April 8, 1993 (Exhibit 10.33) (15) 10.34 Patent, Technical Information and Technical Assistance Agreement with Shell Oil Company dated May 28, 1993 (Exhibit 10.34) (15) 10.35 Interim Funding Agreement with Norwest Equipment Finance dated February 3, 1994 (Exhibit 10.35) (15) 10.37 Equipment Note Agreement with Norwest Equipment Finance, Inc. dated May 24, 1994 (Exhibit 10.1) (16) 10.38 Equipment Lease Agreement with the CIT Group dated February 1, 1994. (Exhibit 10.2) (16) 10.39 Credit and Security Agreement with Norwest Bank, Minnesota N.A. dated June 13, 1994. (Exhibit 10-3) (16) 10.40 Equipment Note Agreement with Norwest Equipment Finance, Inc. dated October 17, 1994 (Exhibit 10.1) (17) 10.41 Leasehold Lease Agreement with Linmark Financial Group, Inc. dated October 20, 1994 (Exhibit 10.2) (17) 10.42 Lease Agreement with Charles J. Van Heel, dated November 20, 1994, for 22101 Industrial Blvd., Rogers, Minnesota (Exhibit 10.3) (17) 10.43 Lease Agreement with Charles J. Van Heel, dated November 20, 1994, for 22101 Industrial Blvd., Rogers, Minnesota (Exhibit 10.4) (17) 10.44 Second Amendment dated November 2, 1994, to Lease Agreement with Charles J. Van Heel for 21925 Industrial Blvd., Rogers, Minnesota (Exhibit 10.5) (17) 10.45 Waiver dated December 14, 1994, related to Credit and Security Agreement with Norwest Bank, Minnesota N.A. dated June 13, 1994 (Exhibit 10.6) (17) 10.46 Loan and Security Agreement with the CIT Group/Equipment Financing, Inc., dated March 10, 1995 (Exhibit 10.46) (18) 10.47 Amendment dated July 1, 1994 to the Credit and Security Agreement with Norwest Bank, Minnesota, N.A. dated June 13, 1994 (Exhibit 10.47) (18) 10.48 Amendment dated March 7, 1995 to the Credit and Security Agreement with Norwest Bank, Minnesota, N.A. dated June 13, 1994. (Exhibit 10.48) (18) 10.49 Waiver dated March 2, 1995, related to Credit and Security Agreement with Norwest Bank, Minnesota N.A. dated June 13, 1994 (Exhibit 10.49) (18) 10.50 Waiver dated March 3, 1995, related to Real Estate Mortgage Agreement with AmeriBank, dated June 1, 1993 (Exhibit 10.50) (18) 10.51 Amendment dated June 1, 1995 to the Credit and Security Agreement with Norwest Bank, Minnesota N.A., dated June 13, 1994. (Exhibit 10.1) (19) 10.52 Amendment dated June 30, 1995 to the Credit and Security Agreement with Norwest Bank, Minnesota N.A., dated June 13, 1994. (Exhibit 10.1) (20) In prior filings, three exhibit numbers (10.51, 10.52 and 10.53) were used twice. Only one of such exhibits, 10.53, filed with Form 10-K/A for the year ended January 31, 1995 remains in force. 10.53a Change in Control Termination Agreement between Ultra Pac, Inc. and Bradley C. Yopp dated February 25, 1995 (Exhibit 10.53)(24) 10.53b Waiver dated September 7, 1995, related to the Credit and Security Agreement with Norwest Bank, Minnesota N.A., dated June 13, 1994. (Exhibit 10.2) (20) 10.54 Amendment dated October 8, 1995 to the Credit and Security Agreement with Norwest Bank, Minnesota N.A., dated June 13, 1994. (Exhibit 10.1) (21) 10.55 Waiver dated December 12, 1995 related to the Credit and Security Agreement with Norwest Bank, Minnesota N.A., dated June 13, 1994. (Exhibit 10.2) (21) 10.56 Material supply agreement with Eastman Chemical Company, dated January 2, 1996 (confidential treatment has been requested with respect to selected portions of this exhibit). (Exhibit 10.56) (22) 10.57 Equipment note agreement with Wentworth Capital Corporation dated December 7, 1995. (Exhibit 10.57) (22) 10.58 Financing Commitment with Norwest Credit, Inc. dated April 25, 1996. (Exhibit 10.58) (22) 10.59 Financing Commitment with Norwest Bank Minnesota N.A. dated April 25, 1996. (Exhibit 10.59) (22) 10.60 Commitment Letter, dated April 25, 1996, to Amend the Security Agreement on Promissory Note with USL Capital Corporation dated December 20, 1994. (Exhibit 10.60) (22) 10.61 Commitment Letter, dated April 25, 1996, to Amend the Loan and Security Agreement with The CIT Group/Equipment Financing, Inc. dated March 10, 1995. (Exhibit 10.61) (22) 10.62 Commitment letter, dated April 25, 1996, to Amend the Equipment Note Agreement with Norwest Equipment Finance dated May 24, 1994. (Exhibit 10.62) (22) 10.63 Commitment letter, dated April 26, 1996, to Amend the Equipment Note Agreements with Norwest Equipment Finance dated March 22, 1993, April 14, 1993, October 19, 1993, November 8, 1993 and October 17, 1994 respectively. (Exhibit 10.63) (22) 10.64 Waiver dated April 24, 1996, related to the Credit and Security Agreement with Norwest Bank, Minnesota N.A. dated June 13, 1994. (Exhibit 10.64) (22) 10.65 Waiver dated April 26, 1996, related to Real Estate Mortgage Agreement with AmeriBank, dated June 1, 1993. (Exhibit 10.65) (22) 10.66 Amended and Restated Credit and Security Agreement by and between Ultra Pac, Inc. and Norwest Credit Inc. dated June 21, 1996. (Exhibit 10.1) (23) 10.67 Credit and Security Agreement by and between Ultra Pac, Inc. and Norwest Bank Minneapolis, N.A., dated June 21, 1996. (Exhibit 10.2) (23) 10.68 First Amendment, dated June 21, 1996, to Loan and Security Agreement between The CIT Group/Equipment Financing Inc. and Ultra Pac, Inc. dated March 10, 1995. (Exhibit 10.3) (23) 10.69 Forbearance and Amendment Agreement between Ultra Pac, Inc. and Norwest Equipment Finance, Inc. dated June 21, 1996. (Exhibit 10.4) (23) 10.70 Loan Modification Agreement, dated June 21, 1996, to Security Agreement between Ultra Pac, Inc. and USL Capital Corporation, dated December 20, 1994. (Exhibit 10.5) (23) 10.71 Loan Modification Agreement, dated June 21, 1996, between Ultra Pac, Inc. and Concord Commercial to Equipment Noted Agreement with Norwest Equipment Finance, Inc. dated May 24, 1994. (Exhibit 10.6) (23) 10.72 Warrant Agreement between Ultra Pac, Inc. and Norwest Credit Inc., dated June 21, 1996. (Exhibit 10.7) (23) 10.73 Warrant Agreement between Ultra Pac, Inc. and Norwest Bank Minneapolis, N.A., dated June 21, 1996. (Exhibit 10.8) (23) 10.74 Warrant Agreement between Ultra Pac, Inc. and The CIT Group/Equipment Financing, Inc., dated June 21, 1996. (Exhibit 10.9) (23) 10.75 Warrant Agreement between Ultra Pac, Inc. and Norwest Equipment Finance Inc., dated June 21, 1996. (Exhibit 10.10) (23) 10.76 Warrant Agreement between Ultra Pac, Inc. and USL Capital Corporation, dated June 21, 1996. (Exhibit 10.11) (23) *10.77 Second Amendment, dated February 7, 1997, to the Restated Credit and Security Agreement by and between Ultra Pac, Inc. and Norwest Credit Inc. dated June 21, 1996. *10.78 First Amendment, dated August 2, 1996, to the Material supply agreement with Eastman Chemical Company, dated January 2, 1996 (confidential treatment has been requested with respect to selected portions of this exhibit). *10.79 Change in Control Termination Agreement between Ultra Pac, Inc. and William J. Howard dated January 31, 1997. *10.80 Change in Control Termination Agreement between Ultra Pac, Inc. and Dan Erikstrup dated February 28, 1997. *10.81 Change in Control Agreement between Ultra Pac, Inc. and Gregory L. Nelson dated March 3, 1997. *10.82 Change in Control and Termination Agreement between Ultra Pac, Inc. and Brian Gaggin dated March 3, 1997. *23.1 Consent of Independent Certified Public Accountants. *27 Financial Data Schedule. - ------------------------------------------------------------------------------- * Filed herewith (1) Incorporated by reference to the specified exhibit to the Form S-18 Registration Statement, dated August 15, 1988, Registration No. 33-23631C. (2) Incorporated by reference to the specified exhibit to the Form 10-Q for the quarter ended July 31, 1989. (3) Incorporated by reference to the specified exhibit to the Form 10-Q for the quarter ended October 31, 1989. (4) Incorporated by reference to the specified exhibit to the Form 10-Q for the quarter ended January 31, 1990. (5) Incorporated by reference to the specified exhibit to the Form 10-Q for the quarter ended July 31, 1990. (6) Incorporated by reference to the specified exhibit to the Form 10-Q for the quarter ended April 30, 1991. (7) Incorporated by reference to the specified exhibit to the Form 10-Q for the quarter ended July 31, 1991. (8) Incorporated by reference to the specified exhibit to the Registration Statement on Form S-2 dated April 3, 1992, Registration No. 33-46937. (9) Incorporated by reference to the specified exhibit to the Form 10-Q for the quarter ended April 30, 1992. (10) Incorporated by reference to the specified exhibit to the Form 10-Q for the quarter ended October 31, 1992. (11) Incorporated by reference to the specified exhibit to the Form 10-K for the year ended January 31, 1993. (12) Incorporated by reference to the specified exhibit to the Form 10-Q for the quarter ended April 30, 1993. (13) Incorporated by reference to the specified exhibit to the Form 10-Q for the quarter ended July 31, 1993. (14) Incorporated by reference to the specified exhibit to the Form 10-Q for the quarter ended October 31, 1993. (15) Incorporated by reference to the specified exhibit to the Form 10-K for the year ended January 31, 1994. (16) Incorporated by reference to the specified exhibit to the Form 10-Q for the quarter ended April 30, 1994. (17) Incorporated by reference to the specified exhibit to the Form 10-Q for the quarter ended October 31, 1994. (18) Incorporated by reference to the specified exhibit to the Form 10-K for the year ended January 31, 1995. (19) Incorporated by reference to the specified exhibit to the Form 10-Q for the quarter ended April 30, 1995. (20) Incorporated by reference to the specified exhibit to the Form 10-Q for the quarter ended July 31, 1995. (21) Incorporated by reference to the specified exhibit to the Form 10-Q for the quarter ended October 31, 1995. (22) Incorporated by reference to the specified exhibit to the Form 10-K for the year ended January 31, 1996. (23) Incorporated by reference to the specified exhibit to the Form 10-Q for the quarter ended July 31, 1997. (24) Incorporated by reference to the specified exhibit to the Form 10-K/A for the year ended January 31, 1995. EX-10.77 2 AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT ---------------------------------------------- ---------------------------------------------- SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT BY AND BETWEEN ULTRA PAC, INC. AND NORWEST CREDIT, INC. FEBRUARY 7, 1997 [LOGO] NORWEST ---------------------------------------------- ----------------------------------------------
Table of Contents ARTICLE I DEFINITIONS.........................................................................1 Section 1.1 Definitions....................................................................1 Section 1.2 Cross References..............................................................13 ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY...........................................13 Section 2.1 Existing Advances.............................................................13 Section 2.2 Revolving Advances............................................................13 Section 2.3 Existing Letter of Credit.....................................................14 Section 2.4 Letters of Credit.............................................................14 Section 2.5 Payment of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement................................................................15 Section 2.6 Special Account...............................................................16 Section 2.7 Obligations Absolute..........................................................16 Section 2.8 Working Capital Term Advances.................................................17 Section 2.9 Real Estate Term Advance......................................................17 Section 2.10 Capex Term Advances..........................................................17 Section 2.11 Payment of Term Notes........................................................18 Section 2.12 Interest; Default Interest; Participations; Usury............................19 Section 2.13 Interest Rate Spreads.......................................................19 Section 2.14 Fees.........................................................................21 Section 2.15 Computation of Interest and Fees; When Interest Due and Payable..............22 Section 2.16 Capital Adequacy; Increased Costs and Reduced Return.........................22 Section 2.17 Voluntary Prepayment; Termination of Credit Facility by the Borrower; Permanent Reduction of the Maximum Line; Prepayment of the Term Notes; Waiver of Reduction and Prepayment Fees.....................................23 Section 2.18 Mandatory Prepayment.........................................................25 Section 2.19 Payment......................................................................25 Section 2.20 Payment on Non-Banking Days..................................................25 Section 2.21 Use of Proceeds..............................................................26 Section 2.22 Liability Records............................................................26 ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF.............................................26 Section 3.1 Grant of Security Interest....................................................26 Section 3.2 Notification of Account Debtors and Other Obligors............................26 Section 3.3 Assignment of Insurance.......................................................26 Section 3.4 Occupancy.....................................................................27 Section 3.5 License.......................................................................27 Section 3.6 Financing Statement...........................................................28 Section 3.7 Setoff........................................................................28 ARTICLE IV CONDITIONS OF LENDING.............................................................28 Section 4.1 Conditions Precedent to the Initial Revolving and Term Advances and the Initial Letter of Credit.....................................................28 Section 4.2 Conditions Precedent to All Advances and Letters of Credit....................30 ARTICLE V REPRESENTATIONS AND WARRANTIES.....................................................31 Section 5.1 Corporate Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations; Tax Identification Number...............................31 Section 5.2 Authorization of Borrowing; No Conflict as to Law or Agreements...............31 Section 5.3 Legal Agreements..............................................................32 Section 5.4 Subsidiaries..................................................................32 Section 5.5 Financial Condition; No Adverse Change........................................32 Section 5.6 Litigation....................................................................32 Section 5.7 Regulation U..................................................................33 Section 5.8 Taxes.........................................................................33 Section 5.9 Titles and Liens..............................................................33 Section 5.10 Plans........................................................................33 Section 5.11 Default......................................................................33 Section 5.12 Environmental Matters........................................................34 Section 5.13 Submissions to Lender........................................................35 Section 5.14 Financing Statements.........................................................35 Section 5.15 Rights to Payment............................................................35 ARTICLE VI BORROWER'S AFFIRMATIVE COVENANTS..................................................35 Section 6.1 Reporting Requirements........................................................35 Section 6.2 Books and Records; Inspection and Examination.................................38 Section 6.3 Account Verification..........................................................38 Section 6.4 Compliance with Laws..........................................................39 Section 6.5 Payment of Taxes and Other Claims.............................................39 Section 6.6 Maintenance of Properties.....................................................39 Section 6.7 Insurance.....................................................................40 Section 6.8 Preservation of Existence.....................................................40 Section 6.9 Delivery of Instruments, etc..................................................40 Section 6.10 Collateral Account...........................................................40 Section 6.11 Key Person Life Insurance....................................................41 Section 6.12 Performance by the Lender....................................................41 Section 6.13 Maximum Debt to Tangible Net Worth Ratio.....................................41 Section 6.14 Minimum EBT..................................................................42 Section 6.15 Maximum Inventory Days.......................................................43 Section 6.16 New Covenants................................................................43 ARTICLE VII NEGATIVE COVENANTS...............................................................43 Section 7.1 Liens.........................................................................43 Section 7.2 Indebtedness..................................................................44 Section 7.3 Guaranties....................................................................44 Section 7.4 Investments and Subsidiaries..................................................44 Section 7.5 Dividends.....................................................................45 Section 7.7 Consolidation and Merger; Asset Acquisitions..................................45 Section 7.8 Sale and Leaseback............................................................45 Section 7.9 Restrictions on Nature of Business............................................46 Section 7.10 Capital Expenditures.........................................................46 Section 7.11 Operating Leases.............................................................46 Section 7.12 Accounting...................................................................46 Section 7.13 Discounts, etc...............................................................46 Section 7.14 Defined Benefit Pension Plans................................................46 Section 7.15 Other Defaults...............................................................46 Section 7.16 Place of Business; Name......................................................46 Section 7.17 Organizational Documents; S Corporation Status...............................47 Section 7.18 Salaries.....................................................................47 ARTICLE VIII EVENTS OF DEFAULT, RIGHTS AND REMEDIES..........................................47 Section 8.1 Events of Default.............................................................47 Section 8.2 Rights and Remedies...........................................................49 Section 8.3 Certain Notices...............................................................50 ARTICLE IX MISCELLANEOUS.....................................................................50 Section 9.1 Restatement of Prior Credit Agreement.........................................50 Section 9.2 Release.......................................................................51 Section 9.3 No Waiver; Cumulative Remedies................................................51 Section 9.4 Amendments, Etc...............................................................51 Section 9.5 Addresses for Notices, Etc....................................................51 Section 9.6 Servicing of Credit Facility..................................................52 Section 9.7 Further Documents.............................................................53 Section 9.8 Collateral....................................................................53 Section 9.9 Costs and Expenses............................................................53 Section 9.10 Indemnity....................................................................54 Section 9.11 Participants.................................................................55 Section 9.12 Execution in Counterparts....................................................55 Section 9.13 Binding Effect; Assignment; Complete Agreement; Sharing of Information.......55 Section 9.14 Severability of Provisions...................................................55 Section 9.15 Headings.....................................................................55 Section 9.16 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial.....................55
SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT Dated as of February 7, 1997 This Agreement is made by ULTRA PAC, INC., a Minnesota corporation (the "Borrower"), and NORWEST CREDIT, INC., a Minnesota corporation (the "Lender"). Recitals The Borrower and the Lender are parties to the Prior Credit Agreement and Norwest Bank and the Borrower are parties to the Prior Norwest Bank Credit Agreement. (Capitalized terms used in these recitals shall have the meanings given in Section 1.1.) The Borrower and Norwest Bank, as successor to Ameribank, are also parties to the Mortgage Loan Documents. Pursuant to the Assignment of Mortgage Loan Documents, Norwest Bank has assigned all of its right, title and interest in the Mortgage Loan Documents to the Lender. The Lender and the Borrower now desire to amend and restate the Prior Credit Agreement and the Old Real Estate Term Note in their entirety and to amend the Original Mortgage and the Original Assignment of Rents. The Borrower shall use some of the proceeds of the Credit Facility to retire all of its obligations to Norwest Bank under the Prior Norwest Bank Credit Agreement. Accordingly, the Borrower and the Lender hereby agree as follows: ARTICLE I Definitions Section 1.1 Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; and (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP. "Accounts" means the aggregate unpaid obligations of customers and other account debtors to the Borrower arising out of the sale or lease of goods or rendition of services by the Borrower on an open account or deferred payment basis. "Advance" means a Revolving Advance or a Term Advance. "Affiliate" or "Affiliates" means any Person controlled by, controlling or under common control with the Borrower, including (without limitation) any Subsidiary of the Borrower. For purposes of this definition, "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Second Amended and Restated Credit and Security Agreement, as amended, supplemented or restated from time to time. "Assignment of Mortgage Loan Documents" means collectively, the Lender's Certificate and Assignment of Loan Documents and the Assignment of Combination Mortgage, Security Agreement, Assignment of Rents and Fixture Financing Statement, and of Assignment of Leases and Rents, each of even date herewith, by Norwest Bank in favor of the Lender, pursuant to which Norwest Bank assigns to the Lender all of its right, title and interest in the indebtedness evidenced by the Old Real Estate Term Note and in the Mortgage Loan Documents. "Assignment of Rents" means the Original Assignment of Rents as amended by the First Amendment to Mortgage Documents. "Banking Day" means a day other than a Saturday, Sunday or other day on which banks are generally not open for business in Minneapolis, Minnesota. "Base Rate" means the rate of interest publicly announced from time to time by Norwest Bank as its "base rate" or, if such bank ceases to announce a rate so designated, any similar successor rate designated by the Lender. "Borrowing Base" means, at any time the lesser of: (a) the Maximum Line; or (b) subject to change from time to time in the Lender's reasonable discretion, the sum of: (i) 80% of Eligible Accounts; plus (ii) the lesser of (A) 50% of Eligible Inventory or (B) $5,000,000; less (iii) $1,000,000 until the Lender shall have received the Borrower's audited financial statements for the Borrower's fiscal year ending January 31, 1997 showing that no Default Period then exists. "Capex Term Advance" has the meaning given in Section 2.10. "Capex Term Note" means the Borrower's promissory note, payable to the order of the Lender in substantially the form of Exhibit C hereto and any note or notes issued in substitution therefor, as the same may hereafter be amended, supplemented or restated from time to time. "Capital Expenditures" for a period means any expenditure of money for the capitalized lease, purchase or other acquisition of any capital asset. "Collateral" means the Personal Property Collateral and the Mortgaged Property. "Collateral Account" has the meaning given in the Collateral Account Agreement. "Collateral Account Agreement" means the Collateral Account Agreement dated as of June 21, 1996 by and among the Borrower, Norwest Bank and the Lender. "Commitment" means the Lender's commitment to make Advances and to cause the Issuer to issue Letters of Credit to or for the Borrower's account pursuant to Article II. "Credit Facility" means the credit facility being made available to the Borrower by the Lender pursuant to Article II. "Debt" of any Person means all items of indebtedness or liability which in accordance with GAAP would be included in determining total liabilities as shown on the liabilities side of a balance sheet of that Person as at the date as of which Debt is to be determined. For purposes of determining a Person's aggregate Debt at any time, "Debt" shall also include the aggregate payments required to be made by such Person at any time under any lease that is considered a capitalized lease under GAAP. "Debt to Tangible Net Worth Ratio" as of a given date means the ratio of the Borrower's Debt less deferred tax liabilities to the Borrower's Tangible Net Worth. "Default" means an event that, with giving of notice or passage of time or both, would constitute an Event of Default. "Default Period" means any period of time beginning on the first day of any month during which a Default or Event of Default has occurred and ending on the date the Lender notifies the Borrower in writing that such Default or Event of Default has been cured or waived. "Default Rate" means, with respect to the Revolving Advances, an annual rate equal to two and one half percent (2.5%) over the Revolving Floating Rate, which rate shall change when and as the Revolving Floating Rate changes, and with respect to the Term Advances, an annual rate equal to two and one half percent (2.5%) over the Term Floating Rate, which rate shall change when and as the Term Floating Rate changes. "EBT" for a period means, pretax earnings from continuing operations before (i) special extraordinary gains (ii) minority interests, and (iii) miscellaneous gains and losses unless approved by the Lender, in each case for such period. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Eligible Accounts" means all unpaid Accounts, net of any credits, except the following shall not in any event be deemed Eligible Accounts: (i) That portion of Accounts over 90 days past invoice date unless such Account is backed by a letter of credit; (ii) That portion of Accounts that are disputed or subject to a claim of offset or a contra account; (iii) That portion of Accounts not yet earned by the final delivery of goods or rendition of services, as applicable, by the Borrower to the customer; (iv) Accounts owed by any unit of government, whether foreign or domestic (provided, however, that there shall be included in Eligible Accounts that portion of Accounts owed by such units of government for which the Borrower has provided evidence satisfactory to the Lender that (A) the Lender has a first priority perfected security interest and (B) such Accounts may be enforced by the Lender directly against such unit of government under all applicable laws); (v) Accounts owed by an account debtor located outside the United States which are not backed by a bank letter of credit assigned to the Lender, in the Lender's possession and acceptable to the Lender in all respects, in its sole discretion or credit insurance acceptable to the Lender in its sole discretion; (vi) Accounts owed by an account debtor that is the subject of bankruptcy proceedings or has gone out of business; (vii) Accounts owed by a shareholder, Subsidiary, Affiliate, officer or employee of the Borrower which are not backed by a bank letter of credit assigned to the Lender, in the Lender's possession and acceptable to the Lender in all respects, in its sole discretion or credit insurance acceptable to the Lender in its sole discretion; (viii) Accounts not subject to a duly perfected security interest in the Lender's favor or which are subject to any lien, security interest or claim in favor of any Person other than the Lender unless such Person is acceptable to the Lender in its sole discretion; (ix) That portion of Accounts that have been restructured, extended, amended or modified; (x) That portion of Accounts that constitutes finance charges, service charges or sales or excise taxes; (xi) Accounts owed by an account debtor, regardless of whether otherwise eligible, if 10% or more of the total amount due under Accounts from such debtor is ineligible under clauses (i), (ii) or (ix) above; and (xii) Accounts, or portions thereof, otherwise deemed ineligible by the Lender in its sole discretion. "Eligible Inventory" means all Inventory of the Borrower, at the lower of cost or market value as determined in accordance with GAAP; provided, however, that the following shall not in any event be deemed Eligible Inventory: (i) Inventory that is: in-transit; located at any warehouse, job site or other premises not approved by the Lender in writing; located outside of the states, or localities, as applicable, in which the Lender has filed financing statements to perfect a first priority security interest in such Inventory; covered by any negotiable or non-negotiable warehouse receipt, bill of lading or other document of title; on consignment from or to any Person or subject to any bailment; (ii) Supplies, packaging, parts or sample Inventory; (iii) Inventory that is damaged, slow moving, obsolete or not currently saleable in the normal course of the Borrower's operations; (iv) Inventory that the Borrower has returned, has attempted to return, is in the process of returning or intends to return to the vendor thereof; (v) Inventory that is perishable or live; (vi) Inventory manufactured by the Borrower pursuant to a license unless the applicable licensor has agreed in writing to permit the Lender to exercise its rights and remedies against such Inventory or the Lender has received evidence satisfactory to it in its sole discretion that it can exercise its rights and remedies against such Inventory; (vii) Inventory that is subject to a security interest in favor of any Person other than the Lender unless such Person is acceptable to the Lender in its sole discretion; and (viii) Inventory otherwise deemed ineligible by the Lender in its sole discretion. "Environmental Laws" has the meaning specified in Section 5.12. "Equipment" means all of the Borrower's equipment, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all present and future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office and recordkeeping equipment, parts, tools, supplies, and including specifically (without limitation) the goods described in any equipment schedule or list herewith or hereafter furnished to the Lender by the Borrower. "Event of Default" has the meaning specified in Section 8.1. "Existing Letter of Credit" has the meaning specified in Section 2.3. "Existing Revolving Advances" has the meaning specified in Section 2.1. "First Amendment to Mortgage Documents" means that certain First Amendment to Combination Mortgage, Security Agreement, Assignment of Rents and Fixture Financing Statement, to Assignment of Leases and Rents and to Indemnification Agreement, of even date herewith, by and between the Borrower and the Lender. "GAAP" means generally accepted accounting principles, applied on a basis consistent with the accounting practices applied in the financial statements described in Section 5.5, except for any change in accounting practices to the extent that, due to a promulgation of the Financial Accounting Standards Board changing or implementing any new accounting standard, the Borrower either (i) is required to implement such change, or (ii) for future periods will be required to and for the current period may in accordance with generally accepted accounting principles implement such change, for its financial statements to be in conformity with generally accepted accounting principles (any such change is hereinafter referred to as a "Required GAAP Change"), provided that (1) the Borrower shall fully disclose in such financial statements any such Required GAAP Change and the effects of the Required GAAP Change on the Borrower's income, retained earnings or other accounts, as applicable, and (2) the Borrower's financial covenants set forth in Sections 6.13, 6.14, 6.15, 7.10 and 7.11 shall be adjusted as necessary to reflect the effects of such Required GAAP Change. "General Intangibles" means all of the Borrower's general intangibles, as such term is defined in the UCC, whether now owned or hereafter acquired, including (without limitation) all present and future patents, patent applications, copyrights, trademarks, trade names, trade secrets, customer or supplier lists and contracts, manuals, operating instructions, permits, franchises, the right to use the Borrower's name, and the goodwill of the Borrower's business. "Hazardous Substance" has the meaning given in Section 5.12. "Inventory" means all of the Borrower's inventory, as such term is defined in the UCC, whether now owned or hereafter acquired, whether consisting of whole goods, spare parts or components, supplies or materials, whether acquired, held or furnished for sale, for lease or under service contracts or for manufacture or processing, and wherever located. "Inventory Days" as of any date means ratio of (i) Inventory as of such date to (ii) the average daily cost of goods sold during the three month period ending on such date. "Issuer" means the issuer of any Letter of Credit. "L/C Amount" means the sum of (i) the aggregate face amount of any issued and outstanding Letters of Credit and (ii) the unpaid amount of the Obligation of Reimbursement. "L/C Application" means an application and agreement for letters of credit in a form acceptable to the Issuer and the Lender. "Letter of Credit" has the meaning specified in Section 2.4. "Life Insurance Assignment" means an Assignment of Life Insurance Policy as Collateral to be executed by the owner and the beneficiary thereof, in form and substance satisfactory to the Lender, granting the Lender a lien on the Life Insurance Policy to secure payment of the Obligations. "Life Insurance Policy" has the meaning given in Section 6.11. "Loan Documents" means this Agreement, the Notes, and the Security Documents. "Lockbox" has the meaning given in the Lockbox Agreement. "Lockbox Agreement" means the Lockbox Agreement by and among the Borrower, Norwest Bank and, the Lender, dated as of June 21, 1996. "Maturity Date" means May 31, 1999. "Maximum Line" means $8,000,000, unless said amount is reduced pursuant to Section 2.17, in which event it means the amount to which said amount is reduced. "Mortgage" means the Original Mortgage as amended by the First Amendment to Mortgage Documents. "Mortgaged Property" has the meaning given to the term "Mortgaged Premises" in the Mortgage. "Mortgage Loan Documents" means the Old Real Estate Term Note, the Original Mortgage, the Original Assignment of Rents and other related documents. "Norwest Bank" means Norwest Bank Minnesota, National Association. "Note" means the Revolving Note or a Term Note, and "Notes" means the Revolving Note and the Term Notes. "Obligations" means the Notes and each and every other debt, liability and obligation of every type and description which the Borrower may now or at any time hereafter owe to the Lender, whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it arises in a transaction involving the Lender alone or in a transaction involving other creditors of the Borrower, and whether it is direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several, and including specifically, but not limited to, the Obligation of Reimbursement and all indebtedness of the Borrower arising under this Agreement, the Notes, any L/C Application completed by the Borrower, or any other loan or credit agreement or guaranty between the Borrower and the Lender, whether now in effect or hereafter entered into. "Obligation of Reimbursement" has the meaning given in Section 2.5(a). "Old Financing Statements" means financing statement No. 1344270, filed on July 16, 1990 and No. 1505853, filed on June 1, 1992. "Old Real Estate Term Note" means the Borrower's promissory note dated as of May 28, 1993, payable to the order of Ameribank in the original principal amount of $1,155,000, as amended by the Waiver and Modification Agreement. "Old Revolving Note" means the Borrower's Revolving Note dated as of June 21, 1996, payable to the order of the Lender in the original principal amount of $9,500,000. "Operating Lease" means any lease of any asset whether payable currently or in the future but excluding Capital Expenditures. "Original Assignment of Rents" means that certain Assignment of Leases and Rents by the Borrower in favor of Ameribank dated as of May 28, 1993, and recorded in the office of the County Recorder in and for Hennepin County, Minnesota on June 9, 1993 as Document No. 6092804. "Original Mortgage" means the Combination Mortgage, Security Agreement, Assignment of Rents and Fixture Financing Statement by the Borrower in favor of Ameribank dated as of May 28, 1993, and recorded in the office of the County Recorder in and for Hennepin County, Minnesota on June 9, 1993 as Document No. 6092803, as amended by the Waiver and Modification Agreement. "Patent and Trademark Security Agreement" means the Patent and Trademark Security Agreement dated as of June 21, 1996, by the Borrower in favor of the Lender and Norwest Bank. "Permitted Lien" has the meaning given in Section 7.1. "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Personal Property Collateral" means all of the Borrower's Equipment, General Intangibles, Inventory, Receivables, all sums on deposit in any Collateral Account, and any items in any Lockbox, together with (i) all substitutions and replacements for and products of any of the foregoing, (ii) proceeds of any and all of the foregoing, (iii) in the case of all tangible goods, all accessions, (iv) all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with any tangible goods, (v) all warehouse receipts, bills of lading and other documents of title now or hereafter covering such goods; (vi) all sums on deposit in the Special Account; and (vii) the Life Insurance Policy. "Plan" means an employee benefit plan or other plan maintained for the Borrower's employees and covered by Title IV of ERISA. "Premises" means all premises where the Borrower conducts its business and has any rights of possession, including (without limitation) the premises legally described in Exhibit E attached hereto. "Prior Credit Agreement" means the Amended and Restated Credit and Security Agreement dated as of June 21, 1996, by and between the Borrower and the Lender. "Prior Norwest Bank Credit Agreement" means the Credit and Security Agreement dated as of June 21, 1996, by and between the Borrower and Norwest Bank. "Real Estate Term Advance" has the meaning given in Section 2.9. "Real Estate Term Note" means the Borrower's promissory note, payable to the order of the Lender in substantially the form of Exhibit B hereto and any note or notes issued in substitution therefor, as the same may hereafter be amended, supplemented or restated from time to time. "Receivables" means each and every right of the Borrower to the payment of money, whether such right to payment now exists or hereafter arises, whether such right to payment arises out of a sale, lease or other disposition of goods or other property, out of a rendering of services, out of a loan, out of the overpayment of taxes or other liabilities, or otherwise arises under any contract or agreement, whether such right to payment is created, generated or earned by the Borrower or by some other person who subsequently transfers such person's interest to the Borrower, whether such right to payment is or is not already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all liens and security interests) which the Borrower may at any time have by law or agreement against any account debtor or other obligor obligated to make any such payment or against any property of such account debtor or other obligor; all including but not limited to all present and future accounts, contract rights, loans and obligations receivable, chattel papers, bonds, notes and other debt instruments, tax refunds and rights to payment in the nature of general intangibles. "Reportable Event" shall have the meaning assigned to that term in Title IV of ERISA. "Revolving Advance" has the meaning given in Section 2.2. "Revolving Floating Rate" means an annual rate equal to the sum of the Base Rate plus the Revolving Rate Spread, which annual rate shall change when and as the Base Rate changes. "Revolving Note" means the Borrower's revolving promissory note, payable to the order of the Lender in substantially the form of Exhibit A hereto. "Revolving Rate Spread" means a percentage as determined pursuant to Section 2.13. "Second Funding Date" has the meaning given in Section 2.2. "Security Documents" means this Agreement, the Collateral Account Agreement, the Lockbox Agreement, the Life Insurance Assignment, the Patent and Trademark Security Agreement, the Old Financing Statements, the Assignment of Rents and the Mortgage. "Security Interest" has the meaning given in Section 3.1. "Servicer" means Norwest Business Credit, Inc., a Minnesota corporation, or such other person as the Lender may from time to time designate. "Special Account" means a specified cash collateral account maintained by a financial institution acceptable to the Lender in connection with Letters of Credit, as contemplated by Section 2.6. "Subsidiary" means any corporation of which more than 50% of the outstanding shares of capital stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such corporation, irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency, is at the time directly or indirectly owned by the Borrower, by the Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries. "Tangible Net Worth" means the difference between (i) the tangible assets of the Borrower, which, in accordance with GAAP are tangible assets, after deducting adequate reserves in each case where, in accordance with GAAP, a reserve is proper and (ii) all Debt of the Borrower other than deferred tax liabilities; provided, however, that notwithstanding the foregoing in no event shall there be included as such tangible assets patents, trademarks, trade names, copyrights, licenses, goodwill, investments in Ultra Pac Sud America, S.A. and Ultra Pac Middle East, receivables from or investments in Affiliates, directors, officers or employees, prepaid expenses, deferred tax assets, deposits, deferred charges or treasury stock or any securities or Debt of the Borrower or any other securities unless the same are readily marketable in the United States of America or entitled to be used as a credit against federal income tax liabilities, and any other assets designated from time to time by the Lender, in its sole discretion. "Term Advance" means a Working Capital Term Advance, a Real Estate Term Advance or a Capex Term Advance, and "Term Advances" means the Working Capital Term Advances, the Real Estate Term Advances and the Capex Term Advances. "Term Floating Rate" means an annual rate equal to the sum of the Base Rate plus the Term Rate Spread, which annual rate shall change when and as the Base Rate changes. "Term Notes" means the Working Capital Term Note, the Real Estate Term Note and the Capex Term Note collectively, and "Term Note" means any of such notes individually. "Term Rate Spread" means a percentage as determined pursuant to Section 2.13. "Termination Date" means the Maturity Date, or the earlier date of termination in whole of the Commitment pursuant to Sections 2.17(a) or 8.2. "UCC" means the Uniform Commercial Code as in effect from time to time in the state designated in Section 9.16 as the state whose laws shall govern this Agreement, or in any other state whose laws are held to govern this Agreement or any portion hereof. Waiver and Modification Agreement means that certain Waiver and Modification Agreement dated as of April 26, 1996 by and between the Borrower and Ameribank. "Working Capital Term Advance" has the meaning specified in Section 2.8. "Working Capital Term Note" means the Borrower's $4,527,372.88 Term Promissory Note dated as of June 21, 1996. Section 1.2 Cross References. All references in this Agreement to Articles, Sections and Subsections, shall be to Articles, Sections and Subsections of this Agreement unless otherwise explicitly specified. ARTICLE II Amount and Terms of the Credit Facility Section 2.1 Existing Advances. The Lender has made various advances to the Borrower (the "Existing Revolving Advances") pursuant to the Prior Credit Agreement. As of the date hereof, the outstanding principal balance of the Existing Revolving Advances was $1,859,589.59. Upon execution and delivery of this Agreement, the Existing Revolving Advances shall be deemed to be Revolving Advances made pursuant to Section 2.2 and repayable in accordance with the Revolving Note. To the extent the Revolving Note evidences the Existing Revolving Advances, the Revolving Note shall be issued in substitution for and replacement of but not in payment of the Old Revolving Note. Section 2.2 Revolving Advances. The Lender agrees, on the terms and subject to the conditions herein set forth, to make advances to the Borrower from time to time from the date all of the conditions set forth in Section 4.1 are satisfied (the "Second Funding Date") to the Termination Date, on the terms and subject to the conditions herein set forth (the "Revolving Advances"). The Lender shall have no obligation to make a Revolving Advance if, after giving effect to such requested Revolving Advance, the sum of the outstanding and unpaid Revolving Advances under this Section 2.2 or otherwise would exceed the Borrowing Base less the L/C Amount. The Borrower's obligation to pay the Revolving Advances shall be evidenced by the Revolving Note and shall be secured by the Personal Property Collateral as provided in Article III. Within the limits set forth in this Section 2.2, the Borrower may borrow, prepay pursuant to Section 2.17 and reborrow. The Borrower agrees to comply with the following procedures in requesting Revolving Advances under this Section 2.2: (a) The Borrower shall make each request for a Revolving Advance to the Lender before 1:00 p.m. (Minneapolis time) of the day of the requested Revolving Advance. Requests may be made in writing or by telephone, specifying the date of the requested Revolving Advance and the amount thereof. Each request shall be by (i) any officer of the Borrower; or (ii) any person designated as the Borrower's agent by any officer of the Borrower in a writing delivered to the Lender; or (iii) any person whom the Lender reasonably believes to be an officer of the Borrower or such a designated agent. (b) Upon fulfillment of the applicable conditions set forth in Article IV, the Lender shall disburse the proceeds of the requested Revolving Advance by crediting the same to the Borrower's demand deposit account maintained with Norwest Bank unless the Lender and the Borrower shall agree in writing to another manner of disbursement. Upon the Lender's request, the Borrower shall promptly confirm each telephonic request for an Advance by executing and delivering an appropriate confirmation certificate to the Lender. The Borrower shall repay all Advances even if the Lender does not receive such confirmation and even if the person requesting an Advance was not in fact authorized to do so. Any request for an Advance, whether written or telephonic, shall be deemed to be a representation by the Borrower that the conditions set forth in Section 4.2 have been satisfied as of the time of the request. Section 2.3 Existing Letter of Credit. The Lender has caused the Issuer to issue one letter of credit which is presently outstanding (the "Existing Letter of Credit"). The Borrower's obligations with respect to the Existing Letters of Credit are evidenced by the Prior Credit Agreement. As of the date of this Agreement, the aggregate amount available to be drawn under the Existing Letter of Credit was $100,000. Upon execution and delivery of this Agreement, the Existing Letters of Credit shall be deemed to be Letters of Credit issued pursuant to Section 2.4. Section 2.4 Letters of Credit. (a) The Lender agrees, on the terms and subject to the conditions herein set forth, to cause an Issuer to issue, from the Second Funding Date to the Termination Date, one or more irrevocable standby or documentary letters of credit (each, a "Letter of Credit") for the Borrower's account. The Lender shall have no obligation to cause an Issuer to issue any Letter of Credit if the face amount of the Letter of Credit to be issued would exceed the lesser of: (i) $1,000,000 less the L/C Amount, or (ii) the Borrowing Base less the sum of (A) all outstanding and unpaid Revolving Advances and (B) the L/C Amount. Each Letter of Credit, if any, shall be issued pursuant to a separate L/C Application entered into between the Borrower and the Lender, completed in a manner satisfactory to the Lender and the Issuer. The terms and conditions set forth in each such L/C Application shall supplement the terms and conditions hereof, but if the terms of any such L/C Application and the terms of this Agreement are inconsistent, the terms hereof shall control. (b) No Letter of Credit shall be issued with an expiry date later than the Termination Date in effect as of the date of issuance. (c) Any request for the Lender to cause an Issuer to issue a Letter of Credit under this Section 2.4 shall be deemed to be a representation by the Borrower that the conditions set forth in Section 4.2 have been satisfied as of the date of the request. Section 2.5 Payment of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement. The Borrower acknowledges that the Lender, as co-applicant, will be liable to the Issuer for reimbursement of any and all draws under Letters of Credit and for all other amounts required to be paid under the applicable L/C Application. Accordingly, the Borrower agrees to pay to the Lender any and all amounts required to be paid under the applicable L/C Application, when and as required to be paid thereby, and the amounts designated below, when and as designated: (a) The Borrower hereby agrees to pay the Lender on the day a draft is honored under any Letter of Credit a sum equal to all amounts drawn under such Letter of Credit plus any and all reasonable charges and expenses that the Issuer or the Lender may pay or incur relative to such draw and the applicable L/C Application, plus interest on all such amounts, charges and expenses as set forth below (the Borrower's obligation to pay all such amounts is hereinafter referred to as the "Obligation of Reimbursement"). (b) Whenever a draft is submitted under a Letter of Credit, the Lender shall make a Revolving Advance in the amount of the Obligation of Reimbursement and shall apply the proceeds of such Revolving Advance thereto. Such Revolving Advance shall be repayable in accordance with and be treated in all other respects as a Revolving Advance hereunder. (c) If a draft is submitted under a Letter of Credit when the Borrower is unable, because a Default Period then exists or for any other reason, to obtain a Revolving Advance to pay the Obligation of Reimbursement, the Borrower shall pay to the Lender on demand and in immediately available funds, the amount of the Obligation of Reimbursement together with interest, accrued from the date of the draft until payment in full at the Default Rate applicable to Revolving Advances. Notwithstanding the Borrower's inability to obtain a Revolving Advance for any reason, the Lender is irrevocably authorized, in its sole discretion, to make a Revolving Advance in an amount sufficient to discharge the Obligation of Reimbursement and all accrued but unpaid interest thereon. (d) The Borrower's obligation to pay any Revolving Advance made under this Section 2.5, shall be evidenced by Revolving Note and shall bear interest as provided in Section 2.12. Section 2.6 Special Account. If the Commitment is terminated for any reason whatsoever, while any Letter of Credit is outstanding, the Borrower shall thereupon pay the Lender in immediately available funds for deposit in the Special Account an amount equal to the L/C Amount. The Special Account shall be an interest bearing account maintained for the Lender by any financial institution acceptable to the Lender. Any interest earned on amounts deposited in the Special Account shall be credited to the Special Account. Amounts on deposit in the Special Account may be applied by the Lender at any time or from time to time to the Obligations in the Lender's sole discretion, and shall not be subject to withdrawal by the Borrower so long as the Lender maintains a security interest therein. The Lender agrees to transfer any balance in the Special Account to the Borrower at such time as the Lender is required to release its security interest in the Special Account under applicable law. Section 2.7 Obligations Absolute. The Borrower's obligations arising under this Agreement shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including (without limitation) the following circumstances: (a) any lack of validity or enforceability of any Letter of Credit or any other agreement or instrument relating to any Letter of Credit (collectively the "Related Documents"); (b) any amendment or waiver of or any consent to departure from all or any of the Related Documents; (c) the existence of any claim, setoff, defense or other right which the Borrower may have at any time, against any beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such beneficiary or any such transferee may be acting), or other person or entity, whether in connection with this Agreement, the transactions contemplated herein or in the Related Documents or any unrelated transactions; (d) any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (e) payment by or on behalf of the Issuer or the Lender under any Letter of Credit against presentation of a draft or certificate which does not strictly comply with the terms of such Letter of Credit; or (f) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. Section 2.8 Working Capital Term Advances. The Lender's predecessors in interest have made various advances to the Borrower (the "Working Capital Term Advances"), the Borrower's obligation to pay which is evidenced by the Working Capital Term Note. As of the date hereof, the outstanding principal balance of the Working Capital Term Note was $3,889,036.88. Section 2.9 Real Estate Term Advance. Pursuant to the Mortgage Loan Documents, Ameribank made a single advance to the Borrower in the amount of $1,155,000 (the "Real Estate Term Advance"), the Borrower's obligation to pay which is evidenced by the Old Real Estate Term Note and secured by the Original Mortgage and the Original Assignment of Rents. As of the date hereof, the outstanding principal balance of the Old Real Estate Term Note was $855,655.49. Upon execution and delivery of this Agreement, (a) the Borrower shall reduce the outstanding principal balance of the Real Estate Term Advance to $825,000, (b) the Borrower shall issue the Real Estate Term Note in substitution for and replacement of, but not in payment of, the Old Real Estate Term Note, (c) the Real Estate Term Advance shall be deemed to have been made pursuant to this Agreement and shall be subject to and repayable in accordance with this Agreement and the Real Estate Term Note, (d) the Borrower and the Lender shall execute and deliver the First Amendment to Mortgage Documents, and (e) the Real Estate Term Note shall be secured by the Personal Property Collateral as provided in Article III and pursuant to the Mortgage and the Assignment of Rents. Section 2.10 Capex Term Advances. The Lender agrees, on the terms and subject to the conditions herein set forth, to make advances to the Borrower from time to time from the Second Funding Date to the Termination Date (the "Capex Term Advances"). The Lender shall have no obligation to make a Capex Term Advance if, after giving effect to such requested Capex Term Advance, the outstanding principal balance of the Capex Term Advances would exceed (a) the lesser of (i) $1,000,000 or (ii) 75% of the hard costs of new or used Equipment, acceptable to the Lender in its sole discretion, that the Borrower may acquire after the date of this Agreement, reduced by (b) the aggregate amount of the scheduled principal payments described in Section 2.11. The Borrower's obligation to pay the Capex Term Advances shall be evidenced by the Capex Term Note and shall be secured by the Personal Property Collateral as provided in Article III. (c) The Borrower agrees to comply with the following procedures in requesting Capex Term Advances: (i) The Borrower shall make each request for a Capex Term Advance to the Lender before 11:00 a.m. (Minneapolis time) five (5) Banking Days before the day of the requested Capex Term Advance. Requests may be made in writing or by telephone, specifying the date of the requested Capex Term Advance and the amount thereof. (ii) Each Capex Term Advance shall be in a minimum amount of $100,000 and for any advances over $100,000, in minimum increments of $10,000. (iii) Each request shall be by an individual authorized pursuant to Section 2.2(a). (d) Upon fulfillment of the applicable conditions set forth in Article IV, the Lender shall deposit the proceeds of the requested Capex Term Advance by crediting the same to the Borrower's demand deposit account specified in Section 2.2(b) unless the Lender and the Borrower shall agree in writing to another manner of disbursement. Upon the Lender's request, the Borrower shall promptly confirm each telephonic request for a Capex Term Advance by executing and delivering an appropriate confirmation certificate to the Lender. The Borrower shall be obligated to repay all Capex Term Advances notwithstanding the Lender's failure to receive such confirmation and notwithstanding the fact that the person requesting the same was not in fact authorized to do so. Any request for a Capex Term Advance, whether written or telephonic, shall be deemed to be a representation by the Borrower that the conditions set forth in Section 4.2 have been satisfied as of the time of the request. Section 2.11 Payment of Term Notes. The outstanding principal balance of the Term Notes shall be due and payable as follows: (a) WORKING CAPITAL TERM NOTE. The Working Capital Term Note shall be due and payable in equal monthly installments of $64,817.28, beginning on March 1, 1997, and on the first day of each month thereafter until the Termination Date when the entire unpaid principal balance of the Working Capital Term Note, and all unpaid interest accrued thereon, shall in any event be due and payable. (b) REAL ESTATE TERM NOTE. The Real Estate Term Note shall be due and payable in equal monthly installments of $13,750, beginning on March 1, 1997, and on the first day of each month thereafter until the Termination Date when the entire unpaid principal balance of the Real Estate Term Note, and all unpaid interest accrued thereon, shall in any event be due and payable. (c) CAPEX TERM NOTE. The Capex Term Note shall be due and payable in monthly installments beginning on the first day of the first month after the initial Capex Term Advance is made, and on the first day of each month thereafter until the Termination Date when the entire unpaid principal balance of the Capex Term Note, and all unpaid interest accrued thereon, shall in any event be due and payable. The amount of each installment on the Capex Term Note before the Termination Date shall be equal to the amount which would be sufficient to amortize fully each Capex Term Advance in 36 equal monthly installments; i.e., after each Capex Term Advance is made, the amount of each installment on the Capex Term Note will be increased by the amount which would be sufficient to amortize fully such Capex Term Advance in 36 equal monthly payments. Section 2.12 Interest; Default Interest; Participations; Usury. Interest accruing on the Notes shall be due and payable in arrears on the first day of each month. (a) REVOLVING NOTE. Except as set forth in Sections 2.12(c) and 2.12(e), the outstanding principal balance of the Revolving Note shall bear interest at the Revolving Floating Rate. (b) TERM NOTES. Except as set forth in Sections 2.12(c) and 2.12(e), the outstanding principal balance of the Term Notes shall bear interest at the Term Floating Rate. (c) DEFAULT INTEREST RATE. At any time during any Default Period, in the Lender's sole discretion and without waiving any of its other rights and remedies, the principal of the Advances outstanding from time to time shall bear interest at the Default Rate, effective for any periods designated by the Lender from time to time during that Default Period. (d) PARTICIPATIONS. If any Person shall acquire a participation in the Advances under this Agreement, the Borrower shall be obligated to the Lender to pay the full amount of all interest calculated under Sections 2.12(a) and 2.12(b), along with all other fees, charges and other amounts due under this Agreement, regardless if such Person elects to accept interest with respect to its participation at a lower rate than the Revolving Floating Rate or the Term Floating Rate, or otherwise elects to accept less than its prorata share of such fees, charges and other amounts due under this Agreement. (e) USURY. In any event no rate change shall be put into effect which would result in a rate greater than the highest rate permitted by law. Section 2.13 Interest Rate Spreads. (a) The Revolving Rate Spread and the Term Rate Spread used in calculating the Revolving Floating Rate and the Term Floating Rate at any time shall be determined in accordance with paragraphs (b) and (c) below. (b) The Revolving Rate Spread through and including February 28, 1997 shall be one half of one percent (0.5%). The Term Rate Spread through and including February 28, 1997 shall be three-quarters of one percent (0.75%). (c) Beginning March 1, 1997, the Revolving Rate Spread and the Term Rate Spread shall be adjusted on the basis of the Borrower's Debt to Tangible Net Worth Ratio as at the end of each fiscal quarter. (i) Until May 31, 1997, or if an Event of Default occurs on or before April 30, 1997, the Revolving Rate Spread and the Term Rate Spread shall be as set forth below opposite the applicable Debt to Tangible Net Worth Ratio:
Debt to Tangible Net Revolving Rate Term Rate Worth Ratio Spread Spread --------------------------- -------------- ----------- 3.51 to 1 or more 1.50% 2.00% 2.76 to 1 or more, but less 0.50% 0.75% than 3.51 to 1 2.01 to 1 or more, but less 0.25% 0.50% than 2.76 to 1 1.01 to 1 or more, but less 0.00% 0.25% than 2.01 to 1 1.00 to 1 or less (0.25%) 0.00%
( ii) Provided no Event of Default occurs on or before April 30, 1997, effective June 1, 1997, the Revolving Rate Spread and the Term Rate Spread shall be as set forth below opposite the applicable Debt to Tangible Net Worth Ratio:
Debt to Tangible Net Revolving Rate Term Rate Worth Ratio Spread Spread --------------------------- -------------- ----------- 3.51 to 1 or more 1.25% 1.75 2.76 to 1 or more, but less 0.25% 0.50% than 3.51 to 1 2.01 to 1 or more, but less 0.00% 0.25% than 2.76 to 1 1.01 to 1 or more, but less 0.00% 0.25% than 2.01 to 1 1.00 to 1 or less (0.50%) (0.25%)
Reductions and increases in the Revolving Rate Spread and the Term Rate Spread will be made effective on the first day of the second month after the end of each fiscal quarter of the Borrower (e.g., March 1 for the fiscal quarter ending January 31); provided, however, that if the Borrower fails to deliver any financial statements or compliance certificates when required under Section 6.1 for more than five days after receiving written notice of such non-delivery, the Lender may, without limiting its other rights and remedies, increase the Revolving Rate Spread and/or the Term Rate Spread to the highest rates set forth above until such time as the Lender has received all such financial statements and compliance certificates. Notwithstanding the foregoing, no reduction in the Revolving Rate Spread or the Term Rate Spread will be made if a Default Period exists at the time that such reduction would otherwise be made. Section 2.14 Fees. (a) AMENDMENT FEE. The Borrower shall pay the Lender on the Second Funding Date, the amendment fee of $50,000 due pursuant to the Prior Credit Agreement. (b) UNUSED LINE FEE. For the purposes of this Section 2.14(b), "Unused Amount" means the Maximum Line reduced by (i) outstanding Revolving Advances and (ii) the L/C Amount. The Borrower agrees to pay to the Lender an unused line fee at the rate of one-quarter of one percent (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 quarterly in arrears on the first day of the month and on the Termination Date. (c) LETTER OF CREDIT FEES. The Borrower agrees to pay the Lender a fee with respect to each Letter of Credit, if any, accruing on a daily basis and computed at the annual rate of two percent (2.0%) of the aggregate amount that may then be drawn on all issued and outstanding Letters of Credit, assuming compliance with all conditions for drawing thereunder from and including the date of issuance of such Letter of Credit until such date as such Letter of Credit shall terminate by its terms or be returned to the Lender, due and payable annually in advance. The foregoing fee shall be in addition to any and all fees, commissions and charges of any Issuer of a Letter of Credit with respect to or in connection with such Letter of Credit. (d) LETTER OF CREDIT ADMINISTRATIVE FEES. The Borrower agrees to pay the Lender, on written demand, the administrative fees charged by the Issuer in connection with the honoring of drafts under any Letter of Credit, amendments thereto, transfers thereof and all other activity with respect to the Letters of Credit at the then-current rates published by the Issuer for such services rendered on behalf of customers of the Issuer generally. (e) AUDIT FEES. The Borrower hereby agrees to pay the Lender, on demand, audit fees in connection with any audits or inspections conducted by the Lender of any Collateral or the Borrower's operations or business at the standard rate or rates established from time to time by the Lender as its audit fees (which fees are currently $400 per day per auditor), together with all actual out-of-pocket costs and expenses incurred in conducting any such audit or inspection; provided, however, that except during Default Periods, the Borrower shall not have to reimburse the Lender in connection with more than three audits per year. Section 2.15 Computation of Interest and Fees; When Interest Due and Payable. Interest accruing on the outstanding principal balance of the Advances and fees hereunder outstanding from time to time shall be computed on the basis of actual number of days elapsed in a year of 360 days. Interest shall be payable in arrears on the first day of each month and on the Termination Date. Section 2.16 Capital Adequacy; Increased Costs and Reduced Return. If any Related Lender determines at any time that its Return has been reduced as a result of any Rule Change, such Related Lender may require the Borrower to pay it the amount necessary to restore its Return to what it would have been had there been no Rule Change. For purposes of this Section 2.16: (a) "Capital Adequacy Rule" means any law, rule, regulation, guideline, directive, requirement or request regarding capital adequacy, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender. Such rules include rules requiring financial institutions to maintain total capital in amounts based upon percentages of outstanding loans, binding loan commitments and letters of credit. (b) "L/C Rule" means any law, rule, regulation, guideline, directive, requirement or request regarding letters of credit, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender. Such rules include rules imposing taxes, duties or other similar charges, or mandating reserves, special deposits or similar requirements against assets of, deposits with or for the account of, or credit extended by any Related Lender, on letters of credit. (c) "Return", for any period, means the return as determined by such Related Lender on the Advances and Letters of Credit based upon its total capital requirements and a reasonable attribution formula that takes account of the Capital Adequacy Rules then in effect and costs of issuing or maintaining any Letter of Credit. Return may be calculated for each calendar quarter and for the shorter period between the end of a calendar quarter and the date of termination in whole of this Agreement. (d) "Rule Change" means any change in any Capital Adequacy Rule or L/C Rule occurring after the date of this Agreement, but the term does not include any changes in applicable requirements that at the Closing Date are scheduled to take place under the existing Capital Adequacy Rules or L/C Rules or any increases in the capital that any Related Lender is required to maintain to the extent that the increases are required due to a regulatory authority's assessment of the financial condition of such Related Lender. (e) "Related Lender" includes (but is not limited to) the Lender, the Issuer, any parent corporation of the Lender or the Issuer and any assignee of any interest of the Lender hereunder and any participant in the loans made hereunder. Certificates of any Related Lender sent to the Borrower from time to time claiming compensation under this Section 2.16, stating the reason therefor and setting forth in reasonable detail the calculation of the additional amount or amounts to be paid to the Related Lender hereunder to restore its Return shall be conclusive absent manifest error. In determining such amounts, the Related Lender may use any reasonable averaging and attribution methods. Section 2.17 Voluntary Prepayment; Termination of Credit Facility by the Borrower; Permanent Reduction of the Maximum Line; Prepayment of the Term Notes; Waiver of Reduction and Prepayment Fees. Except as otherwise provided herein, the Borrower may terminate the Credit Facility or prepay the Advances in whole at any time or from time to time in part. (a) TERMINATION BY BORROWER. The Borrower may terminate the Credit Facility at any time so long as no Letter of Credit has been issued and is outstanding with an expiration date after such date, and, subject to payment and performance of all Obligations, may obtain any release or termination of the Security Interest and the Security Documents to which the Borrower is otherwise entitled by law by (i) giving at least 30 days' prior written notice to the Lender of the Borrower's intention to terminate the Credit Facility; and (ii) paying the Lender reduction, termination and prepayment fees in accordance with subsections (b) and (c) if the Borrower reduces the Maximum Line, terminates the Credit Facility or prepays the Term Advances effective as of any date other than the Maturity Date. (b) PERMANENT REDUCTION OF MAXIMUM LINE. The Borrower may at any time and from time to time, upon at least 30 days' prior written notice to the Lender, permanently reduce in part or completely the Maximum Line or terminate the Credit Facility in accordance with the following provisions: (i) The Borrower may not reduce the Maximum Line to an amount less than the then-aggregate outstanding balance of the Revolving Advances plus the L/C Amount. (ii) If a reduction of the Maximum Line occurs at any time on or before May 31, 1998, the Borrower shall pay to the Lender a premium in an amount equal to two percent (2%) of the reduction. If a reduction of the Maximum Line occurs at any time after May 31, 1998 but before the Maturity Date, the Borrower shall pay to the Lender a premium in an amount equal to one percent (1%) of the reduction. (iii) If the Borrower reduces the Maximum Line to zero, all Obligations shall be immediately due and payable. (c) PREPAYMENT OF THE TERM NOTES. The Borrower may at any time and from time to time, upon at least 30 days' prior written notice to the Lender, prepay in part or in whole the outstanding principal balance of any Term Note in accordance with the following provisions: (i) If such prepayment occurs at any time on or before May 31, 1998, the Borrower shall pay to the Lender a premium in an amount equal to two percent (2%) of the amount prepaid. If such prepayment occurs at any time after May 31, 1998 but before the Maturity Date, the Borrower shall pay to the Lender a premium in an amount equal to one percent (1%) of the amount prepaid. (ii) Any partial prepayments of any Term Note shall be applied to principal payments due and owing in inverse order of their maturities and must be in a minimum amount of $100,000. (d) WAIVER OF REDUCTION, TERMINATION AND PREPAYMENT FEES. The Borrower will not be required to pay the reduction, termination or prepayment fees otherwise due under subsections (b) or (c) if the Borrower requests such reduction or makes such prepayment (i) because of increased cash flow generated from the Borrower's operations, (ii) in connection with refinancing by an affiliate of the Lender, (iii) promptly after the sale of Collateral (other than Inventory) from time to time and the Lender agrees to waive such fees, or (iv) within 120 days after the Lender delivers a notice pursuant to Section 2.16 Section 2.18 Mandatory Prepayment. Without notice or demand, if the sum of the outstanding principal balance of the Revolving Advances plus the L/C Amount shall at any time exceed the Borrowing Base, the Borrower shall (i) first, immediately prepay the Revolving Advances to the extent necessary to eliminate such excess; and (ii) if prepayment in full of the Revolving Advances is insufficient to eliminate such excess, pay to the Lender in immediately available funds for deposit in the Special Account an amount equal to the remaining excess. Any payment received by the Lender under this Section 2.18 or under Section 2.17 may be applied to the Obligations, in such order and in such amounts as the Lender, in its discretion, may from time to time determine; provided that any prepayment under Section 2.17 which the Borrower designates as a partial prepayment of the Term Note shall be applied to principal installments of the Term Note in inverse order of maturity. Section 2.19 Payment. All payments to be applied to the Obligations shall be made to the Lender in immediately available funds. The Lender may hold all payments not constituting immediately available funds for three (3) days before applying them to the Obligations. Notwithstanding anything in Section 2.2, the Borrower hereby authorizes the Lender, in its discretion at any time or from time to time without the Borrower's request and even if the conditions set forth in Section 4.2 would not be satisfied, to make a Revolving Advance in an amount equal to the portion of the Obligations from time to time due and payable. Section 2.20 Payment on Non-Banking Days. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Banking Day, such payment may be made on the next succeeding Banking Day, and such extension of time shall in such case be included in the computation of interest on the Advances or the fees hereunder, as the case may be. Section 2.21 Use of Proceeds. The Borrower shall use the proceeds of Advances, and each Letter of Credit, if any, to retire a portion of its obligations to Norwest Bank as set forth in Schedule 2.21 and for ordinary working capital purposes, and shall not use such proceeds for any speculative purpose. Section 2.22 Liability Records. The Lender may maintain from time to time, at its discretion, liability records as to the Obligations. All entries made on any such record shall be presumed correct until the Borrower establishes the contrary. Upon the Lender's demand, the Borrower will admit and certify in writing the exact principal balance of the Obligations that the Borrower then asserts to be outstanding. Any billing statement or accounting rendered by the Lender shall be conclusive and fully binding on the Borrower unless the Borrower gives the Lender specific written notice of exception within 30 days after receipt. ARTICLE III Security Interest; Occupancy; Setoff Section 3.1 Grant of Security Interest. The Borrower hereby pledges, assigns and grants to the Lender a security interest (collectively referred to as the "Security Interest") in the Personal Property Collateral, as security for the payment and performance of the Obligations. Section 3.2 Notification of Account Debtors and Other Obligors. The Lender may at any time (whether or not a Default Period then exists) notify any account debtor or other person obligated to pay the amount due that such right to payment has been assigned or transferred to the Lender for security and shall be paid directly to the Lender. The Borrower will join in giving such notice if the Lender so requests. At any time after the Borrower or the Lender gives such notice to an account debtor or other obligor, the Lender may, but need not, in the Lender's name or in the Borrower's name, (a) demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such right to payment, or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligations (including collateral obligations) of any such account debtor or other obligor; and (b) as the Borrower's agent and attorney-in-fact, notify the United States Postal Service to change the address for delivery of the Borrower's mail to any address designated by the Lender, otherwise intercept the Borrower's mail, and receive, open and dispose of the Borrower's mail, applying all Collateral as permitted under the Security Documents and holding all other mail for the Borrower's account or forwarding such mail to the Borrower's last known address. Section 3.3 Assignment of Insurance. As additional security for the payment and performance of the Obligations, the Borrower hereby assigns to the Lender any and all monies (including, without limitation, proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of the Borrower with respect to, any and all policies of insurance now or at any time hereafter covering the Collateral or any evidence thereof or any business records or valuable papers pertaining thereto, and the Borrower hereby directs the issuer of any such policy to pay all such monies directly to the Lender. At any time, whether or not a Default Period then exists, the Lender may (but need not), in the Lender's name or in the Borrower's name, execute and deliver proof of claim, receive all such monies, endorse checks and other instruments representing payment of such monies, and adjust, litigate, compromise or release any claim against the issuer of any such policy. Section 3.4 Occupancy. (a) The Borrower hereby irrevocably grants to the Lender the right to take possession of the Premises at any time during a Default Period. (b) The Lender may use the Premises only to hold, process, manufacture, sell, use, store, liquidate, realize upon or otherwise dispose of goods that are Personal Property Collateral and for other purposes that the Lender may in good faith deem to be related or incidental purposes. (c) The Lender's right to hold the Premises shall cease and terminate upon the earlier of (i) payment in full and discharge of all Obligations and termination of the Commitment, and ( ii) final sale or disposition of all goods constituting Personal Property Collateral and delivery of all such goods to purchasers. (d) The Lender shall not be obligated to pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises; provided, however, that if the Lender does pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises, the Borrower shall reimburse the Lender promptly for the full amount thereof. In addition, the Borrower will pay, or reimburse the Lender for, all taxes, fees, duties, imposts, charges and expenses at any time incurred by or imposed upon the Lender by reason of the execution, delivery, existence, recordation, performance or enforcement of this Agreement or the provisions of this Section 3.4. Section 3.5 License. Without limiting the generality of the Patent and Trademark Security Agreement, the Borrower hereby grants to the Lender a non-exclusive, worldwide and royalty-free license to use or otherwise exploit all trademarks, franchises, trade names, copyrights and patents of the Borrower for the purpose of selling, leasing or otherwise disposing of any or all Personal Property Collateral during any Default Period. Section 3.6 Financing Statement. A carbon, photographic or other reproduction of this Agreement or of any financing statements signed by the Borrower is sufficient as a financing statement and may be filed as a financing statement in any state to perfect the security interests granted hereby. For this purpose, the following information is set forth: Name and address of Debtor: Ultra Pac, Inc. 21925 Industrial Boulevard Rogers, Minnesota 55374-9575 Federal Tax Identification No. 41-1581031 Name and address of Secured Party: Norwest Credit, Inc. Norwest Center Sixth Street and Marquette Avenue Minneapolis, Minnesota 55479-0152 Federal Tax Identification No. 41-1712687 Section 3.7 Setoff. The Borrower agrees that the Lender may at any time or from time to time, at its sole discretion and without demand and without notice to anyone, setoff any liability owed to the Borrower by the Lender, whether or not due, against any Obligation, whether or not due. In addition, each other Person holding a participating interest in any Obligations shall have the right to appropriate or setoff any deposit or other liability then owed by such Person to the Borrower, whether or not due, and apply the same to the payment of said participating interest, as fully as if such Person had lent directly to the Borrower the amount of such participating interest. ARTICLE IV Conditions of Lending Section 4.1 Conditions Precedent to the Initial Revolving and Term Advances and the Initial Letter of Credit. The Lender's obligation to make the initial Revolving Advance and Term Advance or to cause to be issued the initial Letter of Credit hereunder shall be subject to the condition precedent that the Lender shall have received all of the following, each in form and substance satisfactory to the Lender: (a) The Assignment of Mortgage Loan Documents, properly executed by Norwest Bank. (b) An amendment to financing statement No. 1596789 filed with the Minnesota Secretary of State to name Norwest Bank as secured party, properly executed by the Borrower and Norwest Bank. (c) A UCC-3 assignment naming the Lender as secured party for financing statement No. 1596789 filed with the Minnesota Secretary of State, properly executed by Norwest Bank. (d) The Old Real Estate Term Note, properly endorsed by Norwest Bank in favor of the Lender. (e) Releases by Norwest Bank of its interests in any Collateral not otherwise assigned to the Lender, properly executed by Norwest Bank. (f) The First Amendment to Mortgage Documents, properly executed by the Borrower. (g) Copies of the Mortgage Loan Documents. (h) This Agreement, properly executed by the Borrower. (i) The Revolving Note, the Real Estate Term Note and the Capex Term Note, properly executed by the Borrower. (j) An endorsement or commitment to issue an endorsement to Title Insurance Policy No. C2424925 issued by Chicago Title Insurance Company which will "down date" such policy, identify the Lender as the mortgagee under such policy and insure that the Mortgage constitutes a first and valid lien on the Mortgaged Property, subject only to such encumbrances and matters as the Lender may approve. (k) Current searches of appropriate filing offices showing that (i) no state or federal tax liens have been filed and remain in effect against the Borrower; (ii) the Borrower has not assigned any of the patents or trademarks subject to the Patent and Trademark Security Agreement; (iii) no financing statements have been filed and remain in effect against the Borrower except those financing statements relating to Permitted Liens or to liens held by Persons who have agreed in writing that upon receipt of proceeds of the Advances, they will deliver UCC releases and/or terminations satisfactory to the Lender; and (iv) the Lender has duly filed all financing statements necessary to perfect the Security Interest, to the extent the Security Interest is capable of being perfected by filing. (l) A certificate of the Borrower's Secretary or Assistant Secretary certifying as to (i) the resolutions of the Borrower's directors and, if required, shareholders, authorizing the execution, delivery and performance of the Loan Documents, (ii) the fact that the Articles of Incorporation and Bylaws of the Borrower, which were certified and delivered to the Lender pursuant to the Certificate of Authority of the Borrower's Secretary dated as of June 21, 1996 continue in full force and effect and have not been amended or otherwise modified except as set forth in the Certificate to be delivered, and (iii) certifying that the officers and agents of the Borrower who have been certified to the Lender, pursuant to the Certificate of Authority of the Borrower's Secretary dated as of June 21, 1996 as being authorized to sign and to act on behalf of the Borrower continue to be so authorized or setting forth the sample signatures of each of the officers and agents of the Borrower authorized to execute and deliver this Amendment and all other documents, agreements and certificates on behalf of the Borrower. (m) A current certificate issued by the Secretary of State of Minnesota, certifying that the Borrower is in compliance with all applicable organizational requirements of the State of Minnesota. (n) Evidence that the Borrower is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. (o) An opinion of counsel to the Borrower, addressed to the Lender. (p) Certificates of the insurance required hereunder, with all hazard insurance containing a lender's loss payable endorsement in the Lender's favor and with all liability insurance naming the Lender as mortgagee and additional insured. (q) Payment of the fees and commissions due through the date of the initial Advance or Letter of Credit under Section 2.14 and expenses incurred by the Lender through such date and required to be paid by the Borrower under Section 9.9, including all reasonable legal expenses incurred through the date of this Agreement. (r) Such other documents as the Lender in its sole discretion may require. Section 4.2 Conditions Precedent to All Advances and Letters of Credit. The Lender's obligation to make each Advance or to issue any Letter of Credit shall be subject to the further conditions precedent that on such date: (a) the representations and warranties contained in Article V are correct on and as of the date of such Advance or issuance of Letter of Credit as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; and (b) no event has occurred and is continuing, or would result from such Advance or the issuance of such Letter of Credit, as the case may be, which constitutes a Default or an Event of Default. ARTICLE V Representations and Warranties The Borrower represents and warrants to the Lender as follows: Section 5.1 Corporate Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations; Tax Identification Number. The Borrower is a corporation, duly organized, validly existing and in good standing under the laws of the State of Minnesota and is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary, except the Borrower is not presently qualified in California and New Jersey, but shall be so qualified within 60 days of the date hereof. The Borrower has all requisite power and authority, corporate or otherwise, to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under, the Loan Documents. During its existence, the Borrower has done business solely under the names set forth in Schedule 5.1 hereto. The Borrower's chief executive office and principal place of business is located at the address set forth in Schedule 5.1 hereto, and all of the Borrower's records relating to its business or the Collateral are kept at that location. All Inventory and Equipment is located at that location or at one of the other locations set forth in Schedule 5.1 hereto. The Borrower's tax identification number is correctly set forth in Section 3.6 hereto. Section 5.2 Authorization of Borrowing; No Conflict as to Law or Agreements. The execution, delivery and performance by the Borrower of the Loan Documents and the borrowings from time to time hereunder have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of the Borrower's stockholders; (ii) require any authorization, consent or approval by, or registration, declaration or filing with, or notice to, any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or any third party, except such authorization, consent, approval, registration, declaration, filing or notice as has been obtained, accomplished or given prior to the date hereof; (iii) violate any provision of any law, rule or regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or of any order, writ, injunction or decree presently in effect having applicability to the Borrower or of the Borrower's articles of incorporation or bylaws; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected; or (v) result in, or require, the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature (other than the Security Interest) upon or with respect to any of the properties now owned or hereafter acquired by the Borrower. Section 5.3 Legal Agreements. (a) The Prior Credit Agreement, the Old Revolving Note, and the Mortgage Loan Documents, constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms. The Borrower has no claim, defense or offset to enforcement of such documents. (b) This Agreement constitutes and, upon due execution by the Borrower, the other Loan Documents will constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms. Section 5.4 Subsidiaries. The Borrower has no Subsidiaries. The Borrower does, however have minority investments in Ultra Pac SudAmerica, S.A. and Ultra Pac Middle East. Section 5.5 Financial Condition; No Adverse Change. The Borrower has heretofore furnished to the Lender audited financial statements of the Borrower for its fiscal year ended January 31, 1996, and unaudited financial statements of the Borrower for the months ended December 31, 1996, and those statements fairly present the Borrower's financial condition on the dates thereof and the results of its operations and cash flows for the periods then ended and were prepared in accordance with generally accepted accounting principles. Since the date of the most recent financial statements, there has been no material adverse change in the Borrower's business, properties or condition (financial or otherwise). Section 5.6 Litigation. Except as described in the letter to the Borrower's auditors by the Borrower's attorneys, there are no actions, suits or proceedings pending or, to the Borrower's knowledge, threatened against or affecting the Borrower or any of its Affiliates or the properties of the Borrower or any of its Affiliates before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to the Borrower or any of its Affiliates, would have a material adverse effect on the financial condition, properties or operations of the Borrower or any of its Affiliates. Section 5.7 Regulation U. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. Section 5.8 Taxes. The Borrower and its Affiliates have paid or caused to be paid to the proper authorities when due all federal, state and local taxes required to be withheld by each of them. The Borrower and its Affiliates have filed all federal, state and local tax returns which to the knowledge of the officers of the Borrower or any Affiliate, as the case may be, are required to be filed, and the Borrower and its Affiliates have paid or caused to be paid to the respective taxing authorities all taxes as shown on said returns or on any assessment received by any of them to the extent such taxes have become due. Section 5.9 Titles and Liens. The Borrower has good and absolute title to all Collateral described in the collateral reports provided to the Lender and all other collateral, properties and assets reflected in the latest balance sheet referred to in Section 5.5 and all proceeds thereof, free and clear of all mortgages, security interests, liens and encumbrances, except for Permitted Liens. No financing statement naming the Borrower as debtor is on file in any office except to perfect only Permitted Liens. Section 5.10 Plans. Except as disclosed to the Lender in writing prior to the date hereof, neither the Borrower nor any of its Affiliates maintains or has maintained any Plan. Neither the Borrower nor any Affiliate has received any notice or has any knowledge to the effect that it is not in full compliance with any of the requirements of ERISA. No Reportable Event or other fact or circumstance which may have an adverse effect on the Plan's tax qualified status exists in connection with any Plan. Neither the Borrower nor any of its Affiliates has: (a) Any accumulated funding deficiency within the meaning of ERISA; or (b) Any liability or knows of any fact or circumstances which could result in any liability to the Pension Benefit Guaranty Corporation, the Internal Revenue Service, the Department of Labor or any participant in connection with any Plan (other than accrued benefits which or which may become payable to participants or beneficiaries of any such Plan). Section 5.11 Default. The Borrower is in compliance with all provisions of all agreements, instruments, decrees and orders to which it is a party or by which it or its property is bound or affected, the breach or default of which could have a material adverse effect on the Borrower's financial condition, properties or operations. Section 5.12 Environmental Matters. (a) Definitions. As used in this Agreement, the following terms shall have the following meanings: (i) "Environmental Law" means any federal, state, local or other governmental statute, regulation, law or ordinance dealing with the protection of human health and the environment. (ii) "Hazardous Substances" means pollutants, contaminants, hazardous substances, hazardous wastes, petroleum and fractions thereof, and all other chemicals, wastes, substances and materials listed in, regulated by or identified in any Environmental Law. (b) To the Borrower's best knowledge, there are not present in, on or under the Premises any Hazardous Substances in such form or quantity as to create any liability or obligation for either the Borrower or the Lender under common law of any jurisdiction or under any Environmental Law, and no Hazardous Substances have ever been stored, buried, spilled, leaked, discharged, emitted or released in, on or under the Premises in such a way as to create any such liability. (c) To the Borrower's best knowledge, the Borrower has not disposed of Hazardous Substances in such a manner as to create any liability under any Environmental Law. (d) There are not and there never have been any requests, claims, notices, investigations, demands, administrative proceedings, hearings or litigation, relating in any way to the Premises or the Borrower, alleging liability under, violation of, or noncompliance with any Environmental Law or any license, permit or other authorization issued pursuant thereto. To the Borrower's best knowledge, no such matter is threatened or impending. (e) To the Borrower's best knowledge, the Borrower's businesses are and have in the past always been conducted in accordance with all Environmental Laws and all licenses, permits and other authorizations required pursuant to any Environmental Law and necessary for the lawful and efficient operation of such businesses are in the Borrower's possession and are in full force and effect. No permit required under any Environmental Law is scheduled to expire within 12 months and there is no threat that any such permit will be withdrawn, terminated, limited or materially changed. (f) To the Borrower's best knowledge, the Premises are not and never have been listed on the National Priorities List, the Comprehensive Environmental Response, Compensation and Liability Information System or any similar federal, state or local list, schedule, log, inventory or database. (g) The Borrower has delivered to Lender all environmental assessments, audits, reports, permits, licenses and other documents describing or relating in any way to the Premises or Borrower's businesses. Section 5.13 Submissions to Lender. All financial and other information provided to the Lender by or on behalf of the Borrower in connection with the Borrower's request for the credit facilities contemplated hereby is true and correct in all material respects and, as to projections, valuations or proforma financial statements, present a good faith opinion as to such projections, valuations and proforma condition and results. Section 5.14 Financing Statements. The Borrower has provided to the Lender signed financing statements sufficient when filed to perfect the Security Interest and the other security interests created by the Security Documents. When such financing statements are filed in the offices noted therein, the Lender will have a valid and perfected security interest in all Collateral and all other collateral described in the Security Documents which is capable of being perfected by filing financing statements. None of the Collateral or other collateral covered by the Security Documents is or will become a fixture on real estate, unless a sufficient fixture filing is in effect with respect thereto. Section 5.15 Rights to Payment. Each right to payment and each instrument, document, chattel paper and other agreement constituting or evidencing Collateral or other collateral covered by the Security Documents is (or, in the case of all future Collateral or such other collateral, will be when arising or issued) the valid, genuine and legally enforceable obligation, subject to no defense, setoff or counterclaim, of the account debtor or other obligor named therein or in the Borrower's records pertaining thereto as being obligated to pay such obligation. ARTICLE VI Borrower's Affirmative Covenants So long as the Obligations shall remain unpaid, or the Credit Facility shall remain outstanding, the Borrower will comply with the following requirements, unless the Lender shall otherwise consent in writing: Section 6.1 Reporting Requirements. The Borrower will deliver, or cause to be delivered, to the Lender each of the following, which shall be in form and detail acceptable to the Lender: (a) as soon as available, and in any event within 92 days after the end of each fiscal year of the Borrower, the Borrower's audited financial statements with the unqualified opinion of independent certified public accountants selected by the Borrower and acceptable to the Lender, which annual financial statements shall include the Borrower's balance sheet as at the end of such fiscal year and the related statements of the Borrower's income, retained earnings and cash flows for the fiscal year then ended, prepared, if the Lender so requests, on a consolidating and consolidated basis to include any Affiliates, all in reasonable detail and prepared in accordance with GAAP, together with (i) copies of all management letters prepared by such accountants; (ii) a report signed by such accountants stating that in making the investigations necessary for said opinion they obtained no knowledge, except as specifically stated, of any Default or Event of Default hereunder and all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the requirements set forth in Sections 6.13, 6.14, 6.15, 7.10 and 7.11; and (iii) a certificate of the Borrower's chief financial officer stating that such financial statements have been prepared in accordance with GAAP and whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder and, if so, stating in reasonable detail the facts with respect thereto; (b) as soon as available and in any event within 20 days after the end of each month, an unaudited/internal balance sheet and statements of income and retained earnings of the Borrower as at the end of and for such month and for the year to date period then ended, prepared, if the Lender so requests, on a consolidating and consolidated basis to include any Affiliates, in reasonable detail and stating in comparative form the figures for the corresponding date and periods in the previous year, all prepared in accordance with GAAP, subject to year-end audit adjustments; and accompanied by a certificate of the Borrower's chief financial officer, substantially in the form of Exhibit D hereto stating (i) that such financial statements have been prepared in accordance with GAAP, subject to year-end audit adjustments, (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder not theretofore reported and remedied and, if so, stating in reasonable detail the facts with respect thereto, and (iii) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the requirements set forth in Sections 6.13, 6.14, 6.15, 7.10 and 7.11; (c) within 15 days after the end of each month, agings of the Borrower's accounts receivable and its accounts payable and an inventory and accounts receivable certification report as at the end of such month setting forth in form acceptable to the Lender the Borrower's Accounts, Eligible Accounts, Inventory and Eligible Inventory; (d) at least 30 days before the beginning of each fiscal year of the Borrower, the projected balance sheets and income statements for each month of such year, each in reasonable detail, representing the Borrower's good faith projections and certified by the Borrower's chief financial officer as being the most accurate projections available and identical to the projections used by the Borrower for internal planning purposes, together with such supporting schedules and information as the Lender may in its discretion require; (e) immediately after the commencement thereof, notice in writing of all litigation and of all proceedings before any governmental or regulatory agency affecting the Borrower of the type described in Section 5.12 or which seek a monetary recovery against the Borrower in excess of $100,000 and not previously disclosed pursuant to Section 5.6; (f) as promptly as practicable (but in any event not later than five business days) after an officer of the Borrower obtains knowledge of the occurrence of any breach, default or event of default under any Security Document or any event which constitutes a Default or Event of Default hereunder, notice of such occurrence, together with a detailed statement by a responsible officer of the Borrower of the steps being taken by the Borrower to cure the effect of such breach, default or event; (g) as soon as possible and in any event within 30 days after the Borrower knows or has reason to know that any Reportable Event with respect to any Plan has occurred, the statement of the Borrower's chief financial officer setting forth details as to such Reportable Event and the action which the Borrower proposes to take with respect thereto, together with a copy of the notice of such Reportable Event to the Pension Benefit Guaranty Corporation; (h) as soon as possible, and in any event within 10 days after the Borrower fails to make any quarterly contribution required with respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended, the statement of the Borrower's chief financial officer setting forth details as to such failure and the action which the Borrower proposes to take with respect thereto, together with a copy of any notice of such failure required to be provided to the Pension Benefit Guaranty Corporation; (i) promptly upon knowledge thereof, notice of (i) any disputes or claims by the Borrower's customers exceeding $25,000 individually; and (ii) any change in the persons constituting the Borrower's officers and directors; (j) promptly upon knowledge thereof, notice of any loss of or material damage to any Collateral or other collateral covered by the Security Documents or of any substantial adverse change in any Collateral or such other collateral or the prospect of payment thereof; (k) promptly upon their distribution, copies of all financial statements, reports and proxy statements which the Borrower shall have sent to its stockholders; (l) promptly after the sending or filing thereof, copies of all regular and periodic financial reports which the Borrower shall file with the Securities and Exchange Commission or any national securities exchange; (m) promptly upon knowledge thereof, notice of the Borrower's violation of any law, rule or regulation, the non-compliance with which could materially and adversely affect the Borrower's business or its financial condition; and (n) from time to time, with reasonable promptness, any and all receivables schedules, collection reports, deposit records, equipment schedules, copies of invoices to account debtors, shipment documents and delivery receipts for goods sold, and such other material, reports, records or information as the Lender may request. The Borrower shall also send to the Lender's participants such copies of the foregoing information as the Lender shall request from time to time. Section 6.2 Books and Records; Inspection and Examination. The Borrower will keep accurate books of record and account for itself pertaining to the Collateral and pertaining to the Borrower's business and financial condition and such other matters as the Lender may from time to time request in which true and complete entries will be made in accordance with GAAP and, upon the Lender's request, will permit any officer, employee, attorney or accountant for the Lender to audit, review, make extracts from or copy any and all corporate and financial books and records of the Borrower at all times during ordinary business hours, to send and discuss with account debtors and other obligors requests for verification of amounts owed to the Borrower, and to discuss the Borrower's affairs with any of its directors, officers, employees or agents. The Borrower will permit the Lender, or its employees, accountants, attorneys or agents, to examine and inspect any Collateral, other collateral covered by the Security Documents or any other property of the Borrower at any time during ordinary business hours. Section 6.3 Account Verification. The Lender may at any time and from time to time send or require the Borrower to send requests for, verification of accounts or notices of assignment to account debtors and other obligors. The Lender may also at any time and from time to time after notice to the Borrower telephone account debtors and other obligors to verify accounts. Section 6.4 Compliance with Laws. (a) The Borrower will (i) comply with the requirements of applicable laws and regulations, the non-compliance with which would materially and adversely affect its business or its financial condition and (ii) use and keep the Collateral, and require that others use and keep the Collateral, only for lawful purposes, without violation of any federal, state or local law, statute or ordinance. (b) Without limiting the foregoing undertakings, the Borrower specifically agrees that it will comply with all applicable Environmental Laws and obtain and comply with all permits, licenses and similar approvals required by any Environmental Laws, and will not generate, use, transport, treat, store or dispose of any Hazardous Substances in such a manner as to create any liability or obligation under the common law of any jurisdiction or any Environmental Law. Section 6.5 Payment of Taxes and Other Claims. The Borrower will pay or discharge, when due, (a) all taxes, assessments and governmental charges levied or imposed upon it or upon its income or profits, upon any properties belonging to it (including, without limitation, the Collateral) or upon or against the creation, perfection or continuance of the Security Interest, prior to the date on which penalties attach thereto, (b) all federal, state and local taxes required to be withheld by it, and (c) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien or charge upon any properties of the Borrower; provided, that the Borrower shall not be required to pay any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which proper reserves have been made. Section 6.6 Maintenance of Properties. (a) The Borrower will keep and maintain the Collateral, the other collateral covered by the Security Documents and all of its other properties necessary or useful in its business in good condition, repair and working order (normal wear and tear excepted) and will from time to time replace or repair any worn, defective or broken parts; provided, however, that nothing in this Section 6.6 shall prevent the Borrower from discontinuing the operation and maintenance of any of its properties if such discontinuance is, in the Lender's judgment, desirable in the conduct of the Borrower's business and not disadvantageous in any material respect to the Lender. (b) The Borrower will defend the Collateral against all claims or demands of all persons (other than the Lender) claiming the Collateral or any interest therein. (c) The Borrower will keep all Collateral and other collateral covered by the Security Documents free and clear of all security interests, liens and encumbrances except Permitted Liens. Section 6.7 Insurance. The Borrower will obtain and at all times maintain insurance with insurers believed by the Borrower to be responsible and reputable, in such amounts and against such risks as may from time to time be required by the Lender, but in all events in such amounts and against such risks as is usually carried by companies engaged in similar business and owning similar properties in the same general areas in which the Borrower operates. Without limiting the generality of the foregoing, the Borrower will at all times keep all tangible Collateral insured against risks of fire (including so-called extended coverage), theft, collision (for Collateral consisting of motor vehicles) and such other risks and in such amounts as the Lender may reasonably request, with any loss payable to the Lender to the extent of its interest, and all policies of such insurance shall contain a mortgagee's and lender's loss payable endorsement for the Lender's benefit. All policies of liability insurance required hereunder shall name the Lender as an additional insured. Section 6.8 Preservation of Existence. The Borrower will preserve and maintain its existence and all of its rights, privileges and franchises necessary or desirable in the normal conduct of its business and shall conduct its business in an orderly, efficient and regular manner. Section 6.9 Delivery of Instruments, etc. Upon request by the Lender, the Borrower will promptly deliver to the Lender in pledge all instruments, documents and chattel papers constituting Collateral, duly endorsed or assigned by the Borrower. Section 6.10 Collateral Account. If, notwithstanding the instructions to debtors to make payments to the Lockbox, the Borrower receives any payments on Receivables, the Borrower shall deposit such payments into the Collateral Account. Until so deposited, the Borrower shall hold all such payments in trust for and as the property of the Lender and shall not commingle such payments with any of its other funds or property. (a) Amounts deposited in the Collateral Account shall not bear interest and shall not be subject to withdrawal by the Borrower, except after full payment and discharge of all Obligations. (b) All deposits in the Collateral Account shall constitute proceeds of Collateral and shall not constitute payment of the Obligations. The Lender from time to time at its discretion may, after allowing two (2) Banking Days, apply deposited funds in the Collateral Account to the payment of the Obligations, in any order or manner of application satisfactory to the Lender. (c) All items deposited in the Collateral Account shall be subject to final payment. If any such item is returned uncollected, the Borrower will immediately pay the Lender, or, for items deposited in the Collateral Account, the bank maintaining such account, the amount of that item, or such bank at its discretion may charge any uncollected item to the Borrower's commercial account or other account. The Borrower shall be liable as an endorser on all items deposited in the Collateral Account, whether or not in fact endorsed by the Borrower. Section 6.11 Key Person Life Insurance. The Borrower shall maintain insurance upon the life of Calvin S. Krupa, its president, with the death benefit thereunder in an amount not less than $3,500,000 (the "Life Insurance Policy"). The right to receive the proceeds of the Life Insurance Policy shall be assigned to the Lender. Section 6.12 Performance by the Lender. If the Borrower at any time fails to perform or observe any of the foregoing covenants contained in this Article VI or elsewhere herein, and if such failure shall continue for a period of ten calendar days after the Lender gives the Borrower written notice thereof (or in the case of the agreements contained in Sections 6.5 and 6.7, immediately upon the occurrence of such failure, without notice or lapse of time), the Lender may, but need not, perform or observe such covenant on behalf and in the name, place and stead of the Borrower (or, at the Lender's option, in the Lender's name) and may, but need not, take any and all other actions which the Lender may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens or encumbrances, the performance of obligations owed to account debtors or other obligors, the procurement and maintenance of insurance, the execution of assignments, security agreements and financing statements, and the endorsement of instruments); and the Borrower shall thereupon pay to the Lender on demand the amount of all monies expended and all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by the Lender in connection with or as a result of the performance or observance of such agreements or the taking of such action by the Lender, together with interest thereon from the date expended or incurred at the Floating Rate. To facilitate the Lender's performance or observance of such covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender, or the Lender's delegate, acting alone, as the Borrower's attorney in fact (which appointment is coupled with an interest) with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file in the name and on behalf of the Borrower any and all instruments, documents, assignments, security agreements, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by the Borrower under this Section 6.12. Section 6.13 Maximum Debt to Tangible Net Worth Ratio. The Borrower will maintain as of the last day of each month for each month or during each period listed below, its Debt to its Tangible Net Worth Ratio at not more than the ratio set forth opposite such month or period: Month/Period Maximum Debt to Tangible ------------ ------------------------ Net Worth Ratio --------------- January 1997 4.50 to 1.00 February 1997 through May 1997 3.50 to 1.00 June 1997 3.25 to 1.00 July 1997 3.00 to 1.00 August 1997 through April 1998 2.75 to 1.00 Section 6.14 Minimum EBT. The Borrower will achieve during each year-to-date period ending on the last day of each month listed below, EBT of not less than the amount set forth opposite such month: Month Minimum EBT ----- ----------- January 1997 ($220,000) February 1997 $75,000 March 1997 $200,000 April 1997 $550,000 May 1997 $1,125,000 June 1997 $1,500,000 July 1997 $1,700,000 August 1997 $1,900,000 September 1997 $2,000,000 October 1997 $2,000,000 November 1997 $2,150,000 December 1997 $2,300,000 January 1998 $2,320,000 February 1998 $75,000 March 1998 $200,000 April 1998 $550,000 Section 6.15 Maximum Inventory Days. As of the end of each month for each month or during each period listed below, the Borrower shall achieve a turnover rate for its Inventory of not more than the number of Inventory Days set forth opposite such month: Month/Period Inventory Days ------------ -------------- January 1997 75 February 1997 85 March 1997 through 75 April 1997 May 1997 through 70 April 1998 Section 6.16 New Covenants. On or before February 28, 1998, the Borrower and the Lender shall agree on new covenant levels for Sections 6.13, 6.14, 6.15, 7.10 and 7.11 for periods after April 1998. The new covenant levels will be based on the Borrower's projections for such periods and shall be no less stringent than the present levels. ARTICLE VII Negative Covenants So long as the Obligations shall remain unpaid, or the Credit Facility shall remain outstanding, the Borrower agrees that, without the Lender's prior written consent: Section 7.1 Liens. The Borrower will not create, incur or suffer to exist any mortgage, deed of trust, pledge, lien, security interest, assignment or transfer upon or of any of its assets, now owned or hereafter acquired, to secure any indebtedness; excluding, however, from the operation of the foregoing the following (collectively, "Permitted Liens"): (a) in the case of any of the Borrower's property which is not Collateral or other collateral described in the Security Documents, covenants, restrictions, rights, easements and minor irregularities in title which do not materially interfere with the Borrower's business or operations as presently conducted; (b) mortgages, deeds of trust, pledges, liens, security interests and assignments in existence on the date hereof and listed in Schedule 7.1 hereto, securing indebtedness for borrowed money permitted under Section 7.2; (c) encumbrances listed on Schedule B to Title Insurance Policy No. C2424925 issued by Chicago Title Insurance Company; (d) the Security Interest and liens and security interests created by the Security Documents; and (e) purchase money security interests relating to the acquisition of machinery and equipment of the Borrower and so long as no Default Period is then in existence and no Default or Event of Default would exist immediately after such acquisition. Section 7.2 Indebtedness. The Borrower will not incur, create, assume or permit to exist any indebtedness or liability on account of deposits, advances, any indebtedness for borrowed money, or any other indebtedness or liability, in each case evidenced by notes, bonds, debentures or similar obligations, except: (a) indebtedness arising hereunder; (b) indebtedness of the Borrower in existence on the date hereof and listed in Schedule 7.2 hereto; and (c) indebtedness relating to liens permitted in accordance with Section 7.1. Section 7.3 Guaranties. The Borrower will not assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except: (a) the endorsement of negotiable instruments by the Borrower for deposit or collection or similar transactions in the ordinary course of business; and (b) guaranties, endorsements and other direct or contingent liabilities in connection with the obligations of other Persons in existence on the date hereof and listed in Schedule 7.2 hereto. Section 7.4 Investments and Subsidiaries. (a) The Borrower will not purchase or hold beneficially any stock or other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, including specifically but without limitation any partnership or joint venture, except: (i) investments in direct obligations of the United States of America or any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America having a maturity of one year or less, commercial paper issued by U.S. corporations rated "A-1" or "A-2" by Standard & Poors Corporation or "P-1" or "P-2" by Moody's Investors Service or certificates of deposit or bankers' acceptances having a maturity of one year or less issued by members of the Federal Reserve System having deposits in excess of $100,000,000 (which certificates of deposit or bankers' acceptances are fully insured by the Federal Deposit Insurance Corporation); (ii) investment in certain companies as set forth in Section 5.4, provided that the Borrower shall make no further cash investments in such companies other than up to $50,000 in any twelve month period in Ultra Pac SudAmerica S.A.; (iii) travel advances or loans to the Borrower's officers and employees not exceeding at any one time an aggregate of $10,000; (iv) advances in the form of progress payments, prepaid rent not exceeding two months or security deposits; and (v) a promissory note by Maine Fresh Pack having an outstanding balance of approximately $9,502.30 as of the date hereof. (b) The Borrower will not create or permit to exist any Subsidiary. Section 7.5 Dividends. The Borrower will not declare or pay any dividends (other than dividends payable solely in stock of the Borrower) on any class of its stock or make any payment on account of the purchase, redemption or other retirement of any shares of such stock or make any distribution in respect thereof, either directly or indirectly. Section 7.6 Sale or Transfer of Assets; Suspension of Business Operations. The Borrower will not sell, lease, assign, transfer or otherwise dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of its assets, or (iii) any Collateral or any interest therein (whether in one transaction or in a series of transactions) to any other Person other than the sale of Inventory in the ordinary course of business and will not liquidate, dissolve or suspend business operations. The Borrower will not in any manner transfer any property without prior or present receipt of full and adequate consideration. Section 7.7 Consolidation and Merger; Asset Acquisitions. The Borrower will not consolidate with or merge into any Person, or permit any other Person to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all the assets of any other Person. Section 7.8 Sale and Leaseback. The Borrower will not enter into any arrangement, directly or indirectly, with any other Person whereby the Borrower shall sell or transfer any real or personal property, whether now owned or hereafter acquired, and then or thereafter rent or lease as lessee such property or any part thereof or any other property which the Borrower intends to use for substantially the same purpose or purposes as the property being sold or transferred. Section 7.9 Restrictions on Nature of Business. The Borrower will not engage in any line of business materially different from that presently engaged in by the Borrower and will not purchase, lease or otherwise acquire assets not related to its business. Section 7.10 Capital Expenditures. The Borrower will not incur or contract to incur Capital Expenditures exceeding $1,000,000 in the aggregate during any fiscal year. Section 7.11 Operating Leases. The Borrower will not incur or contract to incur any new Operating Lease having a monthly payment exceeding $5,000 except to replace existing Equipment or in connection with upgrading the Borrower's computer system. Section 7.12 Accounting. The Borrower will not adopt any material change in accounting principles other than as required by GAAP. The Borrower will not adopt, permit or consent to any change in its fiscal year. Section 7.13 Discounts, etc. The Borrower will not grant any discount, credit or allowance to any customer of the Borrower or accept any return of goods sold, or modify, amend, subordinate, cancel or terminate the obligation of any account debtor or other obligor of the Borrower except in the ordinary course of business and until the Lender directs it to cease such activity. Section 7.14 Defined Benefit Pension Plans. The Borrower will not adopt, create, assume or become a party to any defined benefit pension plan, unless disclosed to the Lender pursuant to Section 5.10. Section 7.15 Other Defaults. The Borrower will not permit any breach, default or event of default to occur under any note, loan agreement, indenture, lease, mortgage, contract for deed, security agreement or other contractual obligation binding upon the Borrower. Section 7.16 Place of Business; Name. The Borrower will not transfer its chief executive office or principal place of business, or move, relocate, close or sell any business location. The Borrower will not permit any tangible Collateral or any records pertaining to the Collateral to be located in any state or area in which, in the event of such location, a financing statement covering such Collateral would be required to be, but has not in fact been, filed in order to perfect the Security Interest. The Borrower will not change its name. Section 7.17 Organizational Documents; S Corporation Status. The Borrower will not amend its certificate of incorporation, articles of incorporation or bylaws. The Borrower will not become an S Corporation within the meaning of the Internal Revenue Code of 1986, as amended. Section 7.18 Salaries. The Borrower will not pay excessive or unreasonable salaries, bonuses, commissions, consultant fees or other compensation. ARTICLE VIII Events of Default, Rights and Remedies Section 8.1 Events of Default. "Event of Default", wherever used herein, means any one of the following events: (a) Default in the payment of any interest on or principal of the Notes when it becomes due and payable; (b) Failure to pay when due any amount specified in Section 2.5 relating to the Borrower's Obligation of Reimbursement, or failure to pay immediately when due or upon termination of the Credit Facility any amounts required to be paid for deposit in the Special Account under Section 2.6 or; (c) Default in the payment of any fees, commissions, costs or expenses required to be paid by the Borrower under this Agreement which continues for more than five days after the Borrower receives written notice from the Lender; (d) Default in the performance, or breach, of any covenant or agreement of the Borrower contained in this Agreement; (e) The Borrower shall be or become insolvent, or admit in writing its inability to pay its debts as they mature, or make an assignment for the benefit of creditors; or the Borrower shall apply for or consent to the appointment of any receiver, trustee, or similar officer for it or for all or any substantial part of its property; or such receiver, trustee or similar officer shall be appointed without the application or consent of the Borrower, as the case may be; or the Borrower shall institute (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition, application or otherwise) against the Borrower; or any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against a substantial part of the property of the Borrower; (f) A petition shall be filed by or against the Borrower under the United States Bankruptcy Code naming the Borrower as debtor; (g) (i) The Life Insurance Policy shall be terminated, by the Borrower or otherwise, (ii) or the Life Insurance Policy shall be scheduled to terminate within 30 days and the Borrower shall not have delivered a satisfactory renewal thereof to the Lender, or ( iii) the Borrower shall fail to pay any premium on the Life Insurance Policy when due, or (iv) the Borrower shall continue any other action that impairs the value of the Life Insurance Policy, and the Borrower shall fail to remedy such situation within five days after receiving written notice from the Lender. (h) Any representation or warranty made by the Borrower in this Agreement, or by the Borrower (or any of its officers) in any agreement, certificate, instrument or financial statement or other statement contemplated by or made or delivered pursuant to or in connection with this Agreement shall prove to have been incorrect in any material respect when deemed to be effective; (i) The rendering against the Borrower of a final judgment, decree or order for the payment of money in excess of $50,000 and the continuance of such judgment, decree or order unsatisfied and in effect for any period of 30 consecutive days without a stay of execution, unless the Borrower's liability therefore is fully insured, less any deductible, provided such deductible is less than $50,000; (j) A default under any bond, debenture, note or other evidence of indebtedness of the Borrower owed to any Person other than the Lender, or under any indenture or other instrument under which any such evidence of indebtedness has been issued or by which it is governed, or under any lease of any of the Premises, and the expiration of the applicable period of grace, if any, specified in such evidence of indebtedness, indenture, other instrument or lease; (k) Any Reportable Event, which the Lender determines in good faith might constitute grounds for the termination of any Plan or for the appointment by the appropriate United States District Court of a trustee to administer any Plan, shall have occurred and be continuing 30 days after written notice to such effect shall have been given to the Borrower by the Lender; or a trustee shall have been appointed by an appropriate United States District Court to administer any Plan; or the Pension Benefit Guaranty Corporation shall have instituted proceedings to terminate any Plan or to appoint a trustee to administer any Plan; or the Borrower shall have filed for a distress termination of any Plan under Title IV of ERISA; or the Borrower shall have failed to make any quarterly contribution required with respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended, which the Lender determines in good faith may by itself, or in combination with any such failures that the Lender may determine are likely to occur in the future, result in the imposition of a lien on the Borrower's assets in favor of the Plan; (l) An event of default shall occur under any Security Document; (m) An event of default shall occur under any other security agreement, mortgage, deed of trust, assignment or other instrument or agreement securing any obligations of the Borrower hereunder or under any note, and shall continue for more than five days after the Borrower receives written notice thereof from the Lender; (n) The Borrower shall liquidate, dissolve, terminate or suspend its business operations or otherwise fail to operate its business in the ordinary course, or sell all or substantially all of its assets, without the Lender's prior written consent; (o) The Borrower shall fail to pay, withhold, collect or remit any tax or tax deficiency when assessed or due (other than any tax deficiency which is being contested in good faith and by proper proceedings and for which it shall have set aside on its books adequate reserves therefor) or notice of any state or federal tax liens shall be filed or issued, and such failure shall continue for five days after the Borrower receives written notice thereof from the Lender; (p) Default in the payment of any amount owed by the Borrower to the Lender other than any indebtedness arising hereunder; (q) Any breach, default or event of default by or attributable to any Affiliate under any agreement between such Affiliate and the Lender, and such breach, default or event of default shall continue for five days after the Borrower receives written notice thereof from the Lender;. Section 8.2 Rights and Remedies. During any Default Period, the Lender may exercise any or all of the following rights and remedies: (a) The Lender may, by notice to the Borrower, declare the Commitment to be terminated, whereupon the same shall forthwith terminate; (b) The Lender may, by notice to the Borrower, declare the Obligations to be forthwith due and payable, whereupon all Obligations shall become and be forthwith due and payable, without presentment, notice of dishonor, protest or further notice of any kind, all of which the Borrower hereby expressly waives; (c) The Lender may, without notice to the Borrower and without further action, apply any and all money owing by the Lender to the Borrower to the payment of the Obligations; (d) The Lender may make demand upon the Borrower and, forthwith upon such demand, the Borrower will pay to the Lender in immediately available funds for deposit in the Special Account pursuant to Section 2.18 an amount equal to the maximum aggregate amount available to be drawn under all Letters of Credit then outstanding, assuming compliance with all conditions for drawing thereunder; (e) The Lender may exercise and enforce any and all rights and remedies available upon default to a secured party under the UCC, including, without limitation, the right to take possession of Collateral, or any evidence thereof, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which the Borrower hereby expressly waives) and the right to sell, lease or otherwise dispose of any or all of the Collateral, and, in connection therewith, the Borrower will on demand assemble the Collateral and make it available to the Lender at a place to be designated by the Lender which is reasonably convenient to both parties; (f) the Lender may exercise and enforce its rights and remedies under the Loan Documents; and (g) the Lender may exercise any other rights and remedies available to it by law or agreement. Notwithstanding the foregoing, upon the occurrence of an Event of Default described in Section 8.1(f), the Obligations shall be immediately due and payable automatically without presentment, demand, protest or notice of any kind. Section 8.3 Certain Notices. If notice to the Borrower of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Section 9.5) at least ten calendar days before the date of intended disposition or other action. ARTICLE IX Miscellaneous Section 9.1 Restatement of Prior Credit Agreement. This Agreement is executed for the purpose of amending and restating the Prior Credit Agreement. Section 9.2 Release. The Borrower, hereby absolutely and unconditionally releases and forever discharges the Lender, any participants and any and all parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Agreement, whether such claims, demands and causes of action are matured or unmatured or known or unknown. Section 9.3 No Waiver; Cumulative Remedies. No failure or delay by the Lender in exercising any right, power or remedy under the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy under the Loan Documents. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law. Section 9.4 Amendments, Etc. No amendment, modification, termination or waiver of any provision of any Loan Document or consent to any departure by the Borrower therefrom or any release of a Security Interest shall be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Section 9.5 Addresses for Notices, Etc. Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for under the Loan Documents shall be in writing and shall be (a) personally delivered, (b) sent by first class United States mail, (c) sent by overnight courier of national reputation, or (d) transmitted by telecopy, in each case addressed or telecopied to the party to whom notice is being given at its address or telecopier number as set forth below: If to the Borrower: Ultra Pac, Inc. 21925 Industrial Boulevard Rogers, Minnesota 55374-9575 Telecopier: 612/428-8344 Attention: Brad C. Yopp If to the Lender: Norwest Credit, Inc. Norwest Center Sixth Street and Marquette Avenue Minneapolis, Minnesota 55479-0152 Telecopier: 612/341-2472 Attention: Ken J. Timboe or, as to each party, at such other address or telecopier number as may hereafter be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall be deemed to have been given on (a) the date received if personally delivered, (b) when deposited in the mail if delivered by mail, (c) the date sent if sent by overnight courier, or (d) the date of transmission if delivered by telecopy, except that notices or requests to the Lender pursuant to any of the provisions of Article II shall not be effective until received by the Lender. Section 9.6 Servicing of Credit Facility. (a) The Lender has entered into a servicing agreement (the "Servicing Agreement") with the Servicer to service and enforce the Loan Documents and collect the Obligations on the Lender's behalf. Pursuant to the Servicing Agreement, the Lender has authorized the Servicer to take certain actions, perform certain duties and exercise certain powers on the Lender's behalf under the provisions of the Loan Documents and any other instruments and agreements referred to in this Agreement. (b) The Servicer shall have no duties or responsibilities to the Borrower, but only to the Lender and then only as expressly set forth in the Servicing Agreement. Without limiting the generality of the foregoing, the Servicer shall have no obligation to make any loans or advances to the Borrower. Neither the Servicer nor any of its officers, directors, employees or agents shall be liable for any action taken or omitted by them hereunder or in connection herewith, unless caused by its or their willful misconduct. The Servicer's duties shall be mechanical and administrative in nature; nothing in this Agreement, express or implied, is intended to or shall be so construed as to impose upon the Servicer any obligations with respect to the Loan Documents except as expressly set forth herein. The Borrower shall not in any way be construed to be a third party beneficiary of any relationship between the Servicer and the Lender. (c) The Servicer shall be entitled to rely, and shall be fully protected in relying, upon any communication whether written or oral believed by it to be genuine and correct and to have been signed, sent or made by the proper Person, and, with respect to all legal matters pertaining to this Agreement and its duties hereunder, upon advice of counsel selected by it. (d) The Borrower shall be entitled to rely upon any communication whether written or oral sent or made by the Servicer for and on behalf of the Lender with respect to all matters pertaining to the Loan Documents and the Borrower's duties and obligations hereunder, unless and until the Borrower receives written notice from the Lender that the Servicer is no longer servicing the Credit Facility. (e) The Servicer shall hold and be the custodian of the Loan Documents on the Lender's behalf for so long as the Servicer is servicing the Credit Facility. (f) The Servicing Agreement may be terminated at any time without prior notice to or consent of the Borrower. Upon termination of the Servicing Agreement and failure to replace the Servicing Agreement with a new servicing agreement, all references herein to the Servicer shall thereafter mean and refer to the Lender. Section 9.7 Further Documents. The Borrower will from time to time execute and deliver or endorse any and all instruments, documents, conveyances, assignments, security agreements, financing statements and other agreements and writings that the Lender may reasonably request in order to secure, protect, perfect or enforce the Security Interest or the Lender's rights under the Loan Documents (but any failure to request or assure that the Borrower executes, delivers or endorses any such item shall not affect or impair the validity, sufficiency or enforceability of the Loan Documents and the Security Interest, regardless of whether any such item was or was not executed, delivered or endorsed in a similar context or on a prior occasion). Section 9.8 Collateral. This Agreement does not contemplate a sale of accounts, contract rights or chattel paper, and, as provided by law, the Borrower is entitled to any surplus and shall remain liable for any deficiency. The Lender's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if it exercises reasonable care in physically keeping such Collateral, or in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and the Lender need not otherwise preserve, protect, insure or care for any Collateral. The Lender shall not be obligated to preserve any rights the Borrower may have against prior parties, to realize on the Collateral at all or in any particular manner or order or to apply any cash proceeds of the Collateral in any particular order of application. Section 9.9 Costs and Expenses. The Borrower agrees to pay on demand all reasonable costs and expenses, including (without limitation), title insurance costs, recording fees and reasonable attorneys' fees, incurred by the Lender in connection with the Obligations, this Agreement, the Loan Documents, any Letters of Credit, and any other document or agreement related hereto or thereto, and the transactions contemplated hereby, including without limitation all such costs, expenses and fees incurred in connection with the negotiation, preparation, execution, amendment, administration, performance, collection and enforcement of the Obligations and all such documents and agreements and the creation, perfection, protection, satisfaction, foreclosure or enforcement of the Security Interest. Section 9.10 Indemnity. In addition to the payment of expenses pursuant to Section 9.9, the Borrower agrees to indemnify, defend and hold harmless the Lender, and any of its participants, parent corporations, subsidiary corporations, affiliated corporations, successor corporations, and all present and future officers, directors, employees, attorneys and agents of the foregoing (the "Indemnitees") from and against any of the following (collectively, "Indemnified Liabilities"): (i) any and all transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of the Loan Documents or the making of the Advances; (ii) any claims, loss or damage to which any Indemnitee may be subjected if any representation or warranty contained in Section 5.12 proves to be incorrect in any respect or as a result of any violation of the covenant contained in Section 6.4(b); and (iii) any and all other liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel) in connection with the foregoing and any other investigative, administrative or judicial proceedings, whether or not such Indemnitee shall be designated a party thereto, which may be imposed on, incurred by or asserted against any such Indemnitee, in any manner related to or arising out of or in connection with the making of the Advances and the Loan Documents or the use or intended use of the proceeds of the Advances. If any investigative, judicial or administrative proceeding arising from any of the foregoing is brought against any Indemnitee, upon such Indemnitee's request, the Borrower, or counsel designated by the Borrower and satisfactory to the Indemnitee, will resist and defend such action, suit or proceeding to the extent and in the manner directed by the Indemnitee, at the Borrower's sole costs and expense. Each Indemnitee will use its best efforts to cooperate in the defense of any such action, suit or proceeding. If the foregoing undertaking to indemnify, defend and hold harmless may be held to be unenforceable because it violates any law or public policy, the Borrower shall nevertheless make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The Borrower's obligation under this Section 9.10 shall survive the termination of this Agreement and the discharge of the Borrower's other obligations hereunder. Section 9.11 Participants. The Lender and its participants, if any, are not partners or joint venturers, and the Lender shall not have any liability or responsibility for any obligation, act or omission of any of its participants. All rights and powers specifically conferred upon the Lender may be transferred or delegated to any of the Lender's participants, successors or assigns. Section 9.12 Execution in Counterparts. This Agreement and other Loan Documents may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same instrument. Section 9.13 Binding Effect; Assignment; Complete Agreement; Sharing of Information. The Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights thereunder or any interest therein without the Lender's prior written consent. This Agreement, together with the Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof. Without limiting the Lender's right to share information regarding the Borrower and its Affiliates with the Lender's participants, accountants, lawyers and other advisors, the Lender may share at any time with Norwest Corporation, and all direct and indirect subsidiaries of Norwest Corporation, any and all information the Lender may have in its possession regarding the Borrower and its Affiliates, and the Borrower waives any right of confidentiality it may have with respect to such sharing of such information. Section 9.14 Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Section 9.15 Headings. Article and Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. Section 9.16 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. The Loan Documents shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of Minnesota. This Agreement shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of Minnesota. The parties hereto hereby (i) consents to the personal jurisdiction of the state and federal courts located in the State of Minnesota in connection with any controversy related to this Agreement; (ii) waives any argument that venue in any such forum is not convenient, (iii) agrees that any litigation initiated by the Lender or the Borrower in connection with this Agreement or the other Loan Documents shall be venued in either the District Court of Hennepin County, Minnesota, or the United States District Court, District of Minnesota, Fourth Division; and (iv) agrees that a final judgment in any such suit, action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. NORWEST CREDIT, INC. ULTRA PAC, INC. By /s/ Ken J. Timboe By /s/ Brad C. Yopp -------------------------------- -------------------------------- Ken J. Timboe Brad C. Yopp Its Vice President Its Chief Financial Officer EX-10.78 3 CONTRACT Supercedes Agreement Dated [text deleted due to confidential treatment] C O N T R A C T Dated [text deleted due to confidential treatment] Between EASTMAN CHEMICAL COMPANY "Seller" Kingsport, Tennessee, USA 37662 and BUYER - Ultra Pac, Inc. 21925 Industrial Boulevard Rogers, Minnesota 55374-9474 Attention Mr. Dan Erikstrup Seller agrees to sell to Buyer and Buyer agrees to purchase from Seller the materials herein described during the period beginning July 1, 1996, and ending December 31, 1997, and according to the further provisions hereof: MATERIALS - EASTAPAK(R) PET 9921 Thermoplastic Polyester (APET) EASTAPAK(R) PET 12822 Thermoplastic Polyester (CPET) PACKAGING AND DELIVERIES - Delivered in Bulk Rail QUANTITY - Buyer agrees to purchase during the following periods the minimum quantities specified below. Seller agrees to sell during the following periods the minimum quantities specified below, plus such additional quantities as may be requested by Buyer prorated for fractions of a calendar year. August 2, 1996, to December 31, 1997 - [text deleted due to confidential treatment] Pounds Per Calendar Year Combined of PET 12822 and PET 9921 Buyer shall give Seller reasonable notice covering shipments and Seller, at its election, may limit the quantity shipped in any [text deleted due to confidential treatment] to the minimum contract quantity divided by [text deleted due to confidential treatment] in the contract period. Buyer will forecast material requirements by product each quarter so negotiating between Buyer and Seller can be concluded 60 days prior to the beginning of any [text deleted due to confidential treatment]. PRICE AND TERMS OF PAYMENT - The price and terms are negotiated between Buyer and Seller to be agreed upon by the parties from time to time and is maintained in the competitive price document files separate from this agreement. If agreement on price is not reached, this contract will terminate [text deleted due to confidential treatment] days after notice in writing by either party to the other. During the term of this agreement, a maximum price shall be in effect for EASTAPAK(R) PET 12822 at [text deleted due to confidential treatment] per pound for railcar quantities and, for EASTAPAK(R) PET 9921, a maximum price of [text deleted due to confidential treatment] per pound for railcar quantities shall be in effect. [text deleted due to confidential treatment], by mailing Buyer written notice thereof at least thirty (30) days before the [text deleted due to confidential treatment] becomes effective; and the [text deleted due to confidential treatment] shall continue in effect unless and until [text deleted due to confidential treatment] by Seller or again [text deleted due to confidential treatment] in the same manner. However, on orders acknowledged before the date of announcement of a [text deleted due to confidential treatment] and shipped within thirty (30) days after acknowledgment, the price in effect on date of acknowledgment will apply. On any order or any part of an order shipped thirty (30) days or more after the date of acknowledgment, whether in accordance with the terms of the order or any other cause whatever, the price in effect on date of shipment will apply. Buyer shall have the right to cancel the undelivered portion of the material to which the [text deleted due to confidential treatment] applies by mailing Seller written notice of cancellation before the [text deleted due to confidential treatment] becomes effective unless Seller shall, within ten (10) days after receipt of such cancellation notice, mail Buyer written notice rescinding the [text deleted due to confidential treatment] price [text deleted due to confidential treatment]. If any law, governmental order, regulation or rule [text deleted due to confidential treatment] Seller from making a price [text deleted due to confidential treatment] or requires any price [text deleted due to confidential treatment], Seller, by mailing written notice to Buyer, shall have the right immediately to terminate this contract. CONDITIONS OF SALE 1. Prices Prices for the materials sold under this agreement shall be Eastman's prices in effect on the date of shipment, unless otherwise agreed in writing. Buyer will also pay any applicable taxes. If payments are not made when due, or if Eastman has reason to believe that Buyer has unsatisfactory financial responsibility, Eastman may require cash in advance or other payment terms, suspend shipments, or cancel this agreement. 2. Limited Warranty Eastman warrants that the materials will meet its written specifications and were produced in compliance with the requirements of the Fair Labor Standards Act of 1938, as amended, and all other federal and state laws and regulations applicable to the materials and Eastman's sale of them under this agreement. Eastman also warrants that it has good and free title to the materials and that the materials will not infringe any valid claim of any United States' patent covering the materials themselves, but Eastman does not warrant against infringement by reason of the use of the materials in combination with other products or in the operation of any process. Eastman may discontinue deliveries of any materials, the manufacture, sale or use of which in its opinion would involve patent infringement. EASTMAN MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THOSE OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. 3. Inspection; Limitation of Liability; Buyer's Remedy Buyer must promptly inspect the materials upon their delivery and must notify Eastman in writing of any claims within 45 days of their date of delivery. Eastman's maximum liability and Buyer's sole remedy in the event of delivery of materials that fail to comply with the terms of this agreement, or for any other breach by Eastman under this agreement, is a refund of the purchase price or, at Buyer's option and subject to availability, supply of replacement materials, freight charges to be borne by Eastman. IN NO EVENT SHALL EITHER EASTMAN OR BUYER BE LIABLE FOR ANY CONSEQUENTIAL OR OTHER INCIDENTAL DAMAGES UNDER THIS AGREEMENT, WHETHER OR NOT CAUSED BY SUCH PARTY'S NEGLIGENCE. 4. Technical Information; Hazards and Precautionary Procedures Any technical information or assistance Eastman or any of its affiliates provides is given and accepted at Buyer's risk and is not a warranty or a specification. Buyer agrees that it will familiarize itself with all hazards and precautionary procedures with respect to the handling, transportation or use of the materials or products made in whole or in part from the materials, and the containers in which such materials or products are shipped, and will manage the materials, products and containers accordingly. Buyer will forward any product safety information provided by Eastman or its affiliates to Buyer's employees, to all others who handle the materials, and to its customers. Buyer agrees, notwithstanding anything herein to the contrary, to indemnify Eastman and its affiliates for any claims made against Eastman or its affiliates and for associated damages and expenses (including reasonable attorneys' fees and expenses), to the extent caused by Buyer's failure to familiarize itself with such hazards and precautionary procedures, to manage accordingly, or to forward such information. 5. Quantity On bulk marine vessel shipments, claims may not be made for shortages of less than [text deleted due to confidential treatment] of the net weight. On bulk tank trucks, bulk tank cars, or packaged shipments, claims may not be made for shortages of less than [text deleted due to confidential treatment] of net weight. Delivery of within [text deleted due to confidential treatment] of the quantity requested shall be accepted by Buyer as complying with the order, although Buyer must pay for only the quantity actually delivered. 6. Force Majeure; Governmental Actions Neither Buyer nor Eastman shall be liable for failure of such party to perform where such failure is caused by war, fire, accident, strike, labor trouble or shortages, equipment breakdown, governmental laws, regulations, orders or decrees (including those relating to environmental matters), unavailability of materials, containers or transportation, or acts of God or other causes beyond such party's control, and upon the occurrence of any such event pertaining to Eastman, [text deleted due to confidential treatment]. If a governmental action substantially affects Eastman's right to establish prices or transportation terms, Eastman may terminate this agreement on 30 days' notice. 7. Title; Containers and Railcars Unless it is otherwise indicated elsewhere in this agreement, delivery and sales terms are [text deleted due to confidential treatment]. Buyer is responsible for protecting and returning in good condition any returnable drums or other containers, or railcars provided by Eastman, which will at all times remain Eastman's property. Buyer is responsible for ensuring that such drums, containers or railcars are "empty" before return. Railcars for bulk shipments will be furnished to Buyer without charge for a period prescribed by Eastman. Such railcars may be retained thereafter only with Eastman's prior consent and subject to Eastman's current daily charges. 8. Miscellaneous This agreement consists only of the terms on both sides of this document and any attachments hereto. Any modifications must be in writing and signed by both parties. A waiver by Eastman with respect to any breach by Buyer shall not constitute a waiver of any other breach. This agreement shall be deemed to have been entered into in Kingsport, Tennessee and the laws of the State of Tennessee shall apply. TRANSPORTATION - [text deleted due to confidential treatment]. Seller reserves right to select route and method of shipment. If Buyer requests and Seller agrees to a route or method involving higher than lowest rate, Buyer shall pay the excess transportation costs. CONDITIONS - The conditions set forth on the reverse side hereof are a part of this contract. ULTRA PAC, INC. EASTMAN CHEMICAL COMPANY By /s/ Dan Erikstrup By /s/ ----------------------------------- ----------------------------------- Title Director of Operations Title Vice President & General Manager ------------------------------- -------------------------------- EX-10.79 4 CHANGE OF CONTROL TERMINATION AGREEMENT CHANGE OF CONTROL TERMINATION AGREEMENT THIS AGREEMENT is entered into this 31st day of January, 1997, by and between ULTRA PAC, INC., a Minnesota corporation ("Ultra Pac"), and WILLIAM J. HOWARD, an individual residing in the State of Minnesota (the "Executive"). RECITALS A. It is expressly recognized by the parties that the Executive's employment with Ultra Pac and agreement to be bound by the terms of this Agreement represent a substantial commitment to Ultra Pac in terms of the Executive's personal and professional career and a foregoing of present and future career options by the Executive, for all of which Ultra Pac receives substantial value. B. The parties recognize that a Change of Control, as defined herein, is likely to result in material alteration or diminishment of the Executive's position and responsibilities and substantially frustrate the purpose of the Executive's commitment to Ultra Pac and forbearance of other career options. C. The parties recognize that in light of the above-described commitment and forbearance of other career options, it is essential that, for the benefit of Ultra Pac and its stockholders, provision be made for a Change in Control Termination, as defined herein, in order to enable the Executive to effectively continue in the Executive's position in the face of inherently disruptive circumstances arising from the possibility of a Change of Control of Ultra Pac, although no such change is now contemplated or foreseen. NOW, THEREFORE, in consideration of the foregoing recitals, the Executive's employment with and by Ultra Pac, and the mutual benefits to be gained by the performance hereof, the parties hereto agree as follows: 1.) Definitions. For purposes of this Agreement, the following definitions shall be applied: (a) "Base Salary" shall mean regular cash compensation paid on a periodic basis, exclusive of any and all benefits, bonuses or incentive payments. (b) "Board" or "Board of Directors" shall mean the board of directors of Ultra Pac. (c) "Change of Control" shall mean any merger, combination, sale, transfer, exchange, reorganization or other transaction whereby: (1) any "person" (as such term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), entity, or group of associated persons or entities acting in concert becomes the "beneficial owner" (as defined in Rule 13d-3 under such Act), directly or indirectly, of securities of Ultra Pac representing fifty percent (50%) or more of the voting control of Ultra Pac's then issued and outstanding securities, which person, entity or group is not affiliated (within the meaning of the Securities Act of 1933) with Ultra Pac as of the date of this Agreement; or (2) any "person" (as such term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), entity, or group of associated persons or entities acting in concert becomes the "beneficial owner" (as defined in Rule 13d-3 under such Act), directly or indirectly, of securities of Ultra Pac representing thirty percent (30%) or more of the voting control of Ultra Pac's then issued and outstanding securities, which person, entity or group is not affiliated (within the meaning of the Securities Act of 1933) with Ultra Pac as of the date of this Agreement coupled with a change in the composition of the Board of fifty percent (50%) or more of the membership of the Board. (d) "Change of Control Payments" shall mean any payment (including any benefit or transfer of property) in the nature of compensation, to or for the benefit of the Executive, under any arrangement which is partially or entirely contingent on a Change of Control, or is deemed to be contingent on a change of control or ownership of Ultra Pac for purposes of Section 280G of the Internal Revenue Code. As used in this definition, the term "arrangement" includes any agreement between the Executive and Ultra Pac and any and all of Ultra Pac's salary, bonus, incentive, compensation or benefit plans, programs or arrangements, and shall include this Agreement. (e) "Change of Control Termination" shall mean, with respect to the Executive, any of the following events occurring within one (1) year after a Change of Control: (1) Termination of the Executive's employment by Ultra Pac or its successors; or (2) Termination of employment with Ultra Pac by the Executive pursuant to Section 2 of this Agreement, provided, however, that "Change of Control Termination" shall not include termination by reason of death, disability or retirement. (f) "Code" shall mean the Internal Revenue Code of 1986, as amended, and any reference to a section of the Code shall mean that section of the Internal Revenue Code of 1986, as amended, or the corresponding section of such Code as hereafter amended. (g) "Good Reason" shall mean a good faith determination by the Executive in the Executive's sole and absolute judgment, that any one or more of the following events has occurred, without the Executive's express written consent, after a Change of Control: (1) A change in the Executive's reporting responsibilities, titles or offices as in effect immediately prior to the Change of Control, or any removal of the Executive from, or any failure to re-elect the Executive to, any position which has the effect of diminishing Executive's responsibility or authority; (2) A reduction by Ultra Pac in the Executive's Base Salary as in effect immediately prior to the Change of Control, or a change in the eligibility requirements or performance criteria under any bonus, incentive or compensation plan, program or arrangement under which the Executive is covered immediately prior to the Change of Control, which adversely affects the Executive; (3) Without replacement by a plan providing benefits to the Executive equal to or greater than those discontinued, the failure by Ultra Pac to continue in effect, within its maximum stated term, any pension, bonus, incentive, stock ownership, purchase, option, life insurance, health insurance, accident and disability insurance, or any other employee benefit plan, program, or arrangement in which the Executive is participating at the time of the Change of Control, or the taking of any action by Ultra Pac that would adversely affect the Executive's participation or materially reduce the Executive's benefits under any of such plans or benefits as such participation or benefits may exist at the time of the Change of Control; (4) The taking of any action by Ultra Pac that would materially adversely affect the physical conditions existing at the time of the Change of Control in or under which the Executive performs his or her employment duties; (5) The failure by Ultra Pac to obtain a binding and enforceable agreement, signed by any successor to Ultra Pac, providing for the assumption by such successor of the obligations of Ultra Pac under this Agreement, and the agreement of such successor to perform all obligations of Ultra Pac under this Agreement; or (6) Any purported termination by Ultra Pac of this Agreement or the employment of the Executive by Ultra Pac which is not expressly authorized by this Agreement or any breach of this Agreement by Ultra Pac. 2.) Change of Control Termination Right and Compensation. For a period of one (1) year following a Change of Control, the Executive shall have the right, at any time and within the Executive's sole discretion, to terminate employment with Ultra Pac for Good Reason. Such termination shall be accomplished by, and effective upon, the Executive giving written notice to Ultra Pac of the Executive's decision to terminate such employment. In the event of a Change of Control Termination, and subject to the "Limitation on Change of Control Compensation" contained in Section 3 herein, then, and without further action by the Board or otherwise, Ultra Pac shall, within thirty (30) days of such termination, make a lump sum payment to the Executive in an amount equal to two times the Executive's "annualized includible compensation for the base period," as defined in Section 280G(d)(1) of the Code. 3.) Limitation on Change of Control Compensation. In the event that the Executive is a "disqualified individual" within the meaning of Section 280G of the Code, the parties hereto expressly agree that the payments described in Section 2 above shall be considered together with all Change of Control Payments so that, with respect to the Executive, all Change of Control Payments are collectively subject to an overall maximum limit which shall be One Dollar ($1.00) less than the largest amount under which no portion of the Change of Control Payments is considered a "parachute payment" within the meaning of Section 280G of the Code. Accordingly, to the extent that the Change of Control Payments would be considered a "parachute payment" with respect to the Executive, the portions of such Change of Control Payments shall be reduced or eliminated in the following order until the remaining Change of Control Payments with respect to the Executive are One Dollar ($1.00) less than the maximum allowable which would not be considered a "parachute payment" under Section 280G of the Code: (a) First, any cash payment to the Executive; (b) Second, any Change of Control Payments not described herein; and (c) Third, any forgiveness of indebtedness of the Executive to Ultra Pac. The Executive expressly and irrevocably waives any and all rights to receive any Change of Control Payments which would be considered a "parachute payment" under the Code. 4.) Attorneys' Fees. In the event the Executive incurs any legal expense to enforce or defend his or her rights under this Agreement, or to recover damages for breach thereof, the Executive shall be entitled to recover from Ultra Pac any actual expenses for attorneys' fees and disbursements incurred. 5.) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of Ultra Pac, whether by way of merger, consolidation, operation of law, assignment, purchase or other acquisition of substantially all of the assets or business of Ultra Pac, and any such successors or assigns shall absolutely and unconditionally assume all of Ultra Pac's obligations hereunder. 6.) Notices. All notices, requests and demands given to or made pursuant hereto shall, except as otherwise specified herein, be in writing and be delivered personally or mailed by certified mail, return receipt requested, to any such party at its address which: (a) In the case of Ultra Pac shall be: Ultra Pac, Inc. 21925 Industrial Boulevard Rogers, Minnesota 55374 With a copy to: Larkin, Hoffman, Daly & Lindgren, Ltd. 1500 Norwest Financial Center 7900 Xerxes Avenue South Bloomington, Minnesota 55431 Attn: Frank I. Harvey, Esq. (b) In the case of the Executive shall be: William J. Howard 11447 Anderson Lake Parkway Eden Prairie, Minnesota 55433 Either party may, by notice hereunder, designate a changed address. Any notice, if delivered or mailed properly, shall be deemed dispatched on the registered date or that stamped on the certified mail receipt, and shall be deemed received within the second business day thereafter or when it is actually received, whichever is sooner. 7.) Captions. The various headings or captions in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. 8.) Governing Law. The validity, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota, and any and every legal proceeding arising out of or in connection with this Agreement shall be brought in the appropriate courts of the State of Minnesota, each of the parties hereby consenting to the exclusive jurisdiction of said courts for this purpose. 9.) Construction. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 10.) Waivers. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by any related document or by law. 11.) Modification. This Agreement may not be and shall not be modified or amended except by written instrument signed by the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. EXECUTIVE ULTRA PAC, INC. /s/ William J. Howard By: /s/ Calvin S. Krupa - ------------------------------------ --------------------------------- William J. Howard Calvin S. Krupa Its: President EX-10.80 5 CHANGE OF CONTROL TERMINATION AGREEMENT CHANGE OF CONTROL TERMINATION AGREEMENT THIS AGREEMENT (the "Agreement") is entered into this 28th day of February, 1997, by and between ULTRA PAC, INC., a Minnesota corporation ("Ultra Pac"), and DAN ERIKSTRUP, an individual residing in the State of Minnesota (the "Executive"). RECITALS A. The parties recognize that the Executive's contribution to the growth and success of Ultra Pac has been substantial. The Board of Directors of Ultra Pac (the "Board") desires to provide for the continued employment of the Executive and to make certain changes in the Executive's employment arrangements with Ultra Pac which the Board has determined will reinforce and encourage the continued attention and dedication of the Executive as a member of the management of Ultra Pac. B. It is expressly recognized by the parties that the Executive's employment with Ultra Pac and agreement to be bound by the terms of this Agreement represent a substantial commitment to Ultra Pac in terms of the Executive's personal and professional career and a foregoing of present and future career options by the Executive, for all of which Ultra Pac receives substantial value. C. The parties recognize that a Change of Control, as defined herein, is likely to result in material alteration or diminishment of the Executive's position and responsibilities and substantially frustrate the purpose of the Executive's commitment to Ultra Pac and forbearance of other career options. D. The parties recognize that in light of the above-described commitment and forbearance of other career options, it is essential that, for the benefit of Ultra Pac and its stockholders, provision be made for a Change in Control Termination, as defined herein, in order to enable the Executive to effectively continue in the Executive's position in the face of inherently disruptive circumstances arising from the possibility of a Change of Control of Ultra Pac, although no such change is now contemplated or foreseen. E. The parties have previously entered into agreements and undertakings with respect to the Executive's employment and compensation, and the parties wish to supplement such previous agreements and undertakings. NOW, THEREFORE, in consideration of the foregoing recitals, the Executive's continued employment with and by Ultra Pac, and the mutual benefits to be gained by the performance hereof, the parties hereto agree as follows: 1.) Definitions. For purposes of this Agreement, the following definitions shall be applied: (a) "Base Salary" shall mean regular cash compensation paid on a periodic basis exclusive of benefits, bonuses or incentive payments, if any. (b) "Board" or "Board of Directors" shall mean the board of directors of Ultra Pac. (c) "Change of Control" shall mean any merger, combination, sale, transfer, exchange, reorganization, or other transaction whereby: (1) any "person" (as such term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), entity, or group of associated persons or entities acting in concert becomes the "beneficial owner" (as defined in Rule 13d-3 under such Act), directly or indirectly, of securities of Ultra Pac representing fifty percent (50%) or more of the voting control of Ultra Pac's then issued and outstanding securities, which person, entity or group is not affiliated (within the meaning of the Securities Act of 1933) with Ultra Pac as of the date of this Agreement; or (2) any "person" (as such term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), entity, or group of associated persons or entities acting in concert becomes the "beneficial owner" (as defined in Rule 13d-3 under such Act), directly or indirectly, of securities of Ultra Pac representing thirty percent (30%) or more of the voting control of Ultra Pac's then issued and outstanding securities, which person, entity or group is not affiliated (within the meaning of the Securities Act of 1933) with Ultra Pac as of the date of this Agreement, coupled with a change in the composition of the Board of fifty percent (50%) or more of the membership of the Board. (d) "Change of Control Payments" shall mean any payment (including any benefit or transfer of property) in the nature of compensation, to or for the benefit of the Executive under any arrangement which is partially or entirely contingent on a Change of Control, or is deemed to be contingent on a change of control or ownership of Ultra Pac for purposes of Section 280G of the Code. As used in this definition, the term "arrangement" includes any agreement between the Executive and Ultra Pac and any and all of Ultra Pac's salary, bonus, incentive, compensation or benefit plans, programs or arrangements, and shall include this Agreement. (e) "Change of Control Termination" shall mean, with respect to the Executive, any of the following events occurring within one (1) year after a Change of Control. (1) Termination of the Executive's employment by Ultra Pac or its successors; or (2) Termination of employment with Ultra Pac by the Executive pursuant to Section 2. A Change of Control Termination by the Executive shall not, however, include termination by reason of death, disability or retirement. (f) "Code" shall mean the Internal Revenue Code of 1986, as amended, and any reference to a section of the Code shall mean that section of the Internal Revenue Code of 1986, as amended, or the corresponding section of such Code as hereafter amended. (g) "Good Reason" shall mean a good faith determination by the Executive, in the Executive's sole and absolute judgment, that any one or more of the following events has occurred, without the Executive's express written consent, after a Change of Control: (1) A change in the Executive's reporting responsibilities, titles or offices as in effect immediately prior to the Change of Control, or any removal of the Executive from, or any failure to re-elect the Executive to, any position which has the effect of diminishing Executive's responsibility or authority; (2) A reduction by Ultra Pac in the Executive's Base Salary as in effect immediately prior to the Change of Control or as the same may be increased from time to time, or a change in the eligibility requirements or performance criteria under any bonus, incentive or compensation plan, program or arrangement under which the Executive is covered immediately prior to the Change of Control, which adversely affects the Executive; (3) Without replacement by a plan providing benefits to the Executive equal to or greater than those discontinued, the failure by Ultra Pac to continue in effect, within its maximum stated term, any pension, bonus, incentive, stock ownership, purchase, option, life insurance, health insurance, accident and disability insurance, or any other employee benefit plan, program, or arrangement in which the Executive is participating at the time of the Change of Control, or the taking of any action by Ultra Pac that would adversely affect the Executive's participation or materially reduce the Executive's benefits under any of such plans or benefits as such participation or benefits may exist at the time of the Change of Control; (4) The taking of any action by Ultra Pac that would materially adversely affect the physical conditions existing at the time of the Change of Control in or under which the Executive performs his or her employment duties; (5) The failure by Ultra Pac to obtain a binding and enforceable agreement, signed by any successor to Ultra Pac, providing for the assumption by such successor of the obligations of Ultra Pac under this Agreement, and the agreement of such successor to perform all obligations of Ultra Pac under this Agreement; or (6) Any purported termination by Ultra Pac of this Agreement or the employment of the Executive by Ultra Pac which is not expressly authorized by this Agreement or any breach of this Agreement by Ultra Pac. 2.) Change of Control Termination Right and Compensation. For a period of one (1) year following a Change of Control, the Executive shall have the right, at any time and within the Executive's sole discretion, to terminate employment with Ultra Pac for Good Reason. Such termination shall be accomplished by, and effective upon, the Executive giving written notice to Ultra Pac of the Executive's decision to terminate such employment. In the event of a Change of Control Termination, and subject to the "Limitation on Change of Control Compensation" contained in Section 3 herein, then, and without further action by the Board or otherwise, Ultra Pac shall, within the thirty (30) days of such termination, make a lump sum payment to the Executive in an amount equal to two times the Executive's "annualized includible compensation for the base period," as defined in Section 280G(d)(1) of the Code. 3.) Limitation on Change of Control Compensation. In the event that the Executive is a "disqualified individual" within the meaning of Section 280G of the Code, the parties hereto expressly agree that the payments described in Section 2 above shall be considered together with all other Change of Control Payments so that, with respect to the Executive, all Change of Control Payments are collectively subject to an overall maximum limit. Such maximum limit shall be One Dollar ($1.00) less than the largest amount under which no portion of the Change of Control Payments is considered a "parachute payment" within the meaning of Section 280G of the Code. Accordingly, to the extent that the Change of Control Payments would be considered a "parachute payment" with respect to the Executive, the portions of such Change of Control Payments shall be reduced or eliminated in the following order until the remaining Change of Control Payments with respect to the Executive is One Dollar ($1.00) less than the maximum allowable which would not be considered a "parachute payment" under Section 280G of the Code: (a) First, any cash payment to the Executive; (b) Second, any Change of Control Payments not described herein; and (c) Third, any forgiveness of indebtedness of the Executive to Ultra Pac. The Executive expressly and irrevocably waives any and all rights to receive any Change of Control Payments which would be considered a "parachute payment" under the Code. 4.) Attorneys' Fees. In the event the Executive incurs any legal expense to enforce or defend his or her rights under this Agreement, or to recover damages for breach thereof, the Executive shall be entitled to recover from Ultra Pac any actual expenses for attorneys' fees and disbursements incurred. 5.) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of Ultra Pac, whether by way of merger, consolidation, operation of law, assignment, purchase or other acquisition of substantially all of the assets or business of Ultra Pac, and any such successors or assigns shall absolutely and unconditionally assume all of Ultra Pac's obligations hereunder. 6.) Notices. All notices, requests and demands given to or made pursuant hereto shall, except as otherwise specified herein, be in writing and be delivered personally or mailed by certified mail, return receipt requested, to any such party at its address which: (a) In the case of Ultra Pac shall be: Ultra Pac, Inc. 21925 Industrial Boulevard Rogers, Minnesota 55374 With a copy to: Larkin, Hoffman, Daly & Lindgren, Ltd. 1500 Norwest Financial Center 7900 Xerxes Avenue South Bloomington, Minnesota 55431 Attn: Frank I. Harvey, Esq. (b) In the case of the Executive shall be: Dan Erikstrup ____________________________________ ____________________________________ Either party may, by notice hereunder, designate a changed address. Any notice, if delivered or mailed properly, shall be deemed dispatched on the registered date or that stamped on the certified mail receipt, and shall be deemed received within the second business day thereafter or when it is actually received, whichever is sooner. 7.) Captions. The various headings or captions in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. 8.) Governing Law. The validity, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota, and any and every legal proceeding arising out of or in connection with this Agreement shall be brought in the appropriate courts of the State of Minnesota. Each of the parties hereby consenting to the exclusive jurisdiction of said courts for this purpose. 9.) Construction. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 10.) Waivers. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by any related document or by law. 11.) Modification. This Agreement may not be and shall not be modified or amended except by written instrument signed by the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. EXECUTIVE ULTRA PAC, INC. /s/ Dan Erikstrup By: /s/ Calvin S. Krupa - ------------------------------------ ----------------------------------- Dan Erikstrup Calvin S. Krupa Its: President EX-10.81 6 CHANGE OF CONTROL TERMINATION AGREEMENT CHANGE OF CONTROL TERMINATION AGREEMENT THIS AGREEMENT (the "Agreement") is entered into this 3 day of March, 1997, by and between ULTRA PAC, INC., a Minnesota corporation ("Ultra Pac"), and GREGORY L. NELSON, an individual residing in the State of Minnesota (the "Executive"). RECITALS A. The parties recognize that the Executive's contribution to the growth and success of Ultra Pac has been substantial. The Board of Directors of Ultra Pac (the "Board") desires to provide for the continued employment of the Executive and to make certain changes in the Executive's employment arrangements with Ultra Pac which the Board has determined will reinforce and encourage the continued attention and dedication of the Executive as a member of the management of Ultra Pac. B. It is expressly recognized by the parties that the Executive's employment with Ultra Pac and agreement to be bound by the terms of this Agreement represent a substantial commitment to Ultra Pac in terms of the Executive's personal and professional career and a foregoing of present and future career options by the Executive, for all of which Ultra Pac receives substantial value. C. The parties recognize that a Change of Control, as defined herein, is likely to result in material alteration or diminishment of the Executive's position and responsibilities and substantially frustrate the purpose of the Executive's commitment to Ultra Pac and forbearance of other career options. D. The parties recognize that in light of the above-described commitment and forbearance of other career options, it is essential that, for the benefit of Ultra Pac and its stockholders, provision be made for a Change in Control Termination, as defined herein, in order to enable the Executive to effectively continue in the Executive's position in the face of inherently disruptive circumstances arising from the possibility of a Change of Control of Ultra Pac, although no such change is now contemplated or foreseen. E. The parties have previously entered into agreements and undertakings with respect to the Executive's employment and compensation, and the parties wish to supplement such previous agreements and undertakings. NOW, THEREFORE, in consideration of the foregoing recitals, the Executive's continued employment with and by Ultra Pac, and the mutual benefits to be gained by the performance hereof, the parties hereto agree as follows: 1.) Definitions. For purposes of this Agreement, the following definitions shall be applied: (a) "Base Salary" shall mean regular cash compensation paid on a periodic basis exclusive of benefits, bonuses or incentive payments, if any. (b) "Board" or "Board of Directors" shall mean the board of directors of Ultra Pac. (c) "Change of Control" shall mean any merger, combination, sale, transfer, exchange, reorganization, or other transaction whereby: (1) any "person" (as such term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), entity, or group of associated persons or entities acting in concert becomes the "beneficial owner" (as defined in Rule 13d-3 under such Act), directly or indirectly, of securities of Ultra Pac representing fifty percent (50%) or more of the voting control of Ultra Pac's then issued and outstanding securities, which person, entity or group is not affiliated (within the meaning of the Securities Act of 1933) with Ultra Pac as of the date of this Agreement; or (2) any "person" (as such term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), entity, or group of associated persons or entities acting in concert becomes the "beneficial owner" (as defined in Rule 13d-3 under such Act), directly or indirectly, of securities of Ultra Pac representing thirty percent (30%) or more of the voting control of Ultra Pac's then issued and outstanding securities, which person, entity or group is not affiliated (within the meaning of the Securities Act of 1933) with Ultra Pac as of the date of this Agreement, coupled with a change in the composition of the Board of fifty percent (50%) or more of the membership of the Board. (d) "Change of Control Payments" shall mean any payment (including any benefit or transfer of property) in the nature of compensation, to or for the benefit of the Executive under any arrangement which is partially or entirely contingent on a Change of Control, or is deemed to be contingent on a change of control or ownership of Ultra Pac for purposes of Section 280G of the Code. As used in this definition, the term "arrangement" includes any agreement between the Executive and Ultra Pac and any and all of Ultra Pac's salary, bonus, incentive, compensation or benefit plans, programs or arrangements, and shall include this Agreement. (e) "Change of Control Termination" shall mean, with respect to the Executive, any of the following events occurring within one (1) year after a Change of Control. (1) Termination of the Executive's employment by Ultra Pac or its successors; or (2) Termination of employment with Ultra Pac by the Executive pursuant to Section 2. A Change of Control Termination by the Executive shall not, however, include termination by reason of death, disability or retirement. (f) "Code" shall mean the Internal Revenue Code of 1986, as amended, and any reference to a section of the Code shall mean that section of the Internal Revenue Code of 1986, as amended, or the corresponding section of such Code as hereafter amended. (g) "Good Reason" shall mean a good faith determination by the Executive, in the Executive's sole and absolute judgment, that any one or more of the following events has occurred, without the Executive's express written consent, after a Change of Control: (1) A change in the Executive's reporting responsibilities, titles or offices as in effect immediately prior to the Change of Control, or any removal of the Executive from, or any failure to re-elect the Executive to, any position which has the effect of diminishing Executive's responsibility or authority; (2) A reduction by Ultra Pac in the Executive's Base Salary as in effect immediately prior to the Change of Control or as the same may be increased from time to time, or a change in the eligibility requirements or performance criteria under any bonus, incentive or compensation plan, program or arrangement under which the Executive is covered immediately prior to the Change of Control, which adversely affects the Executive; (3) Without replacement by a plan providing benefits to the Executive equal to or greater than those discontinued, the failure by Ultra Pac to continue in effect, within its maximum stated term, any pension, bonus, incentive, stock ownership, purchase, option, life insurance, health insurance, accident and disability insurance, or any other employee benefit plan, program, or arrangement in which the Executive is participating at the time of the Change of Control, or the taking of any action by Ultra Pac that would adversely affect the Executive's participation or materially reduce the Executive's benefits under any of such plans or benefits as such participation or benefits may exist at the time of the Change of Control; (4) The taking of any action by Ultra Pac that would materially adversely affect the physical conditions existing at the time of the Change of Control in or under which the Executive performs his or her employment duties; (5) The failure by Ultra Pac to obtain a binding and enforceable agreement, signed by any successor to Ultra Pac, providing for the assumption by such successor of the obligations of Ultra Pac under this Agreement, and the agreement of such successor to perform all obligations of Ultra Pac under this Agreement; or (6) Any purported termination by Ultra Pac of this Agreement or the employment of the Executive by Ultra Pac which is not expressly authorized by this Agreement or any breach of this Agreement by Ultra Pac. 2.) Change of Control Termination Right and Compensation. For a period of one (1) year following a Change of Control, the Executive shall have the right, at any time and within the Executive's sole discretion, to terminate employment with Ultra Pac for Good Reason. Such termination shall be accomplished by, and effective upon, the Executive giving written notice to Ultra Pac of the Executive's decision to terminate such employment. In the event of a Change of Control Termination, and subject to the "Limitation on Change of Control Compensation" contained in Section 3 herein, then, and without further action by the Board or otherwise, Ultra Pac shall, within the thirty (30) days of such termination, make a lump sum payment to the Executive in an amount equal to two times the Executive's "annualized includible compensation for the base period," as defined in Section 280G(d)(1) of the Code. 3.) Limitation on Change of Control Compensation. In the event that the Executive is a "disqualified individual" within the meaning of Section 280G of the Code, the parties hereto expressly agree that the payments described in Section 2 above shall be considered together with all other Change of Control Payments so that, with respect to the Executive, all Change of Control Payments are collectively subject to an overall maximum limit. Such maximum limit shall be One Dollar ($1.00) less than the largest amount under which no portion of the Change of Control Payments is considered a "parachute payment" within the meaning of Section 280G of the Code. Accordingly, to the extent that the Change of Control Payments would be considered a "parachute payment" with respect to the Executive, the portions of such Change of Control Payments shall be reduced or eliminated in the following order until the remaining Change of Control Payments with respect to the Executive is One Dollar ($1.00) less than the maximum allowable which would not be considered a "parachute payment" under Section 280G of the Code: (a) First, any cash payment to the Executive; (b) Second, any Change of Control Payments not described herein; and (c) Third, any forgiveness of indebtedness of the Executive to Ultra Pac. The Executive expressly and irrevocably waives any and all rights to receive any Change of Control Payments which would be considered a "parachute payment" under the Code. 4.) Attorneys' Fees. In the event the Executive incurs any legal expense to enforce or defend his or her rights under this Agreement, or to recover damages for breach thereof, the Executive shall be entitled to recover from Ultra Pac any actual expenses for attorneys' fees and disbursements incurred. 5.) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of Ultra Pac, whether by way of merger, consolidation, operation of law, assignment, purchase or other acquisition of substantially all of the assets or business of Ultra Pac, and any such successors or assigns shall absolutely and unconditionally assume all of Ultra Pac's obligations hereunder. 6.) Notices. All notices, requests and demands given to or made pursuant hereto shall, except as otherwise specified herein, be in writing and be delivered personally or mailed by certified mail, return receipt requested, to any such party at its address which: (a) In the case of Ultra Pac shall be: Ultra Pac, Inc. 21925 Industrial Boulevard Rogers, Minnesota 55374 With a copy to: Larkin, Hoffman, Daly & Lindgren, Ltd. 1500 Norwest Financial Center 7900 Xerxes Avenue South Bloomington, Minnesota 55431 Attn: Frank I. Harvey, Esq. (b) In the case of the Executive shall be: Gregory L. Nelson 1061 Delaware Ave. Mendota Heights, MN 55118 Either party may, by notice hereunder, designate a changed address. Any notice, if delivered or mailed properly, shall be deemed dispatched on the registered date or that stamped on the certified mail receipt, and shall be deemed received within the second business day thereafter or when it is actually received, whichever is sooner. 7.) Captions. The various headings or captions in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. 8.) Governing Law. The validity, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota, and any and every legal proceeding arising out of or in connection with this Agreement shall be brought in the appropriate courts of the State of Minnesota. Each of the parties hereby consenting to the exclusive jurisdiction of said courts for this purpose. 9.) Construction. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 10.) Waivers. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by any related document or by law. 11.) Modification. This Agreement may not be and shall not be modified or amended except by written instrument signed by the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. EXECUTIVE ULTRA PAC, INC. /s/ Gregory L. Nelson By: /s/ Calvin S. Krupa - ------------------------------------ ----------------------------------- Gregory L. Nelson Calvin S. Krupa Its: President EX-10.82 7 CHANGE OF CONTROL TERMINATION AGREEMENT CHANGE OF CONTROL TERMINATION AGREEMENT THIS AGREEMENT (the "Agreement") is entered into this 3rd day of March, 1997, by and between ULTRA PAC, INC., a Minnesota corporation ("Ultra Pac"), and BRIAN GAGGIN, an individual residing in the State of Minnesota (the "Executive"). RECITALS A. The parties recognize that the Executive's contribution to the growth and success of Ultra Pac has been substantial. The Board of Directors of Ultra Pac (the "Board") desires to provide for the continued employment of the Executive and to make certain changes in the Executive's employment arrangements with Ultra Pac which the Board has determined will reinforce and encourage the continued attention and dedication of the Executive as a member of the management of Ultra Pac. B. It is expressly recognized by the parties that the Executive's employment with Ultra Pac and agreement to be bound by the terms of this Agreement represent a substantial commitment to Ultra Pac in terms of the Executive's personal and professional career and a foregoing of present and future career options by the Executive, for all of which Ultra Pac receives substantial value. C. The parties recognize that a Change of Control, as defined herein, is likely to result in material alteration or diminishment of the Executive's position and responsibilities and substantially frustrate the purpose of the Executive's commitment to Ultra Pac and forbearance of other career options. D. The parties recognize that in light of the above-described commitment and forbearance of other career options, it is essential that, for the benefit of Ultra Pac and its stockholders, provision be made for a Change in Control Termination, as defined herein, in order to enable the Executive to effectively continue in the Executive's position in the face of inherently disruptive circumstances arising from the possibility of a Change of Control of Ultra Pac, although no such change is now contemplated or foreseen. E. The parties have previously entered into agreements and undertakings with respect to the Executive's employment and compensation, and the parties wish to supplement such previous agreements and undertakings. NOW, THEREFORE, in consideration of the foregoing recitals, the Executive's continued employment with and by Ultra Pac, and the mutual benefits to be gained by the performance hereof, the parties hereto agree as follows: 1.) Definitions. For purposes of this Agreement, the following definitions shall be applied: (a) "Base Salary" shall mean regular cash compensation paid on a periodic basis exclusive of benefits, bonuses or incentive payments, if any. (b) "Board" or "Board of Directors" shall mean the board of directors of Ultra Pac. (c) "Change of Control" shall mean any merger, combination, sale, transfer, exchange, reorganization, or other transaction whereby: (1) any "person" (as such term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), entity, or group of associated persons or entities acting in concert becomes the "beneficial owner" (as defined in Rule 13d-3 under such Act), directly or indirectly, of securities of Ultra Pac representing fifty percent (50%) or more of the voting control of Ultra Pac's then issued and outstanding securities, which person, entity or group is not affiliated (within the meaning of the Securities Act of 1933) with Ultra Pac as of the date of this Agreement; or (2) any "person" (as such term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), entity, or group of associated persons or entities acting in concert becomes the "beneficial owner" (as defined in Rule 13d-3 under such Act), directly or indirectly, of securities of Ultra Pac representing thirty percent (30%) or more of the voting control of Ultra Pac's then issued and outstanding securities, which person, entity or group is not affiliated (within the meaning of the Securities Act of 1933) with Ultra Pac as of the date of this Agreement, coupled with a change in the composition of the Board of fifty percent (50%) or more of the membership of the Board. (d) "Change of Control Payments" shall mean any payment (including any benefit or transfer of property) in the nature of compensation, to or for the benefit of the Executive under any arrangement which is partially or entirely contingent on a Change of Control, or is deemed to be contingent on a change of control or ownership of Ultra Pac for purposes of Section 280G of the Code. As used in this definition, the term "arrangement" includes any agreement between the Executive and Ultra Pac and any and all of Ultra Pac's salary, bonus, incentive, compensation or benefit plans, programs or arrangements, and shall include this Agreement. (e) "Change of Control Termination" shall mean, with respect to the Executive, any of the following events occurring within one (1) year after a Change of Control. (1) Termination of the Executive's employment by Ultra Pac or its successors; or (2) Termination of employment with Ultra Pac by the Executive pursuant to Section 2. A Change of Control Termination by the Executive shall not, however, include termination by reason of death, disability or retirement. (f) "Code" shall mean the Internal Revenue Code of 1986, as amended, and any reference to a section of the Code shall mean that section of the Internal Revenue Code of 1986, as amended, or the corresponding section of such Code as hereafter amended. (g) "Good Reason" shall mean a good faith determination by the Executive, in the Executive's sole and absolute judgment, that any one or more of the following events has occurred, without the Executive's express written consent, after a Change of Control: (1) A change in the Executive's reporting responsibilities, titles or offices as in effect immediately prior to the Change of Control, or any removal of the Executive from, or any failure to re-elect the Executive to, any position which has the effect of diminishing Executive's responsibility or authority; (2) A reduction by Ultra Pac in the Executive's Base Salary as in effect immediately prior to the Change of Control or as the same may be increased from time to time, or a change in the eligibility requirements or performance criteria under any bonus, incentive or compensation plan, program or arrangement under which the Executive is covered immediately prior to the Change of Control, which adversely affects the Executive; (3) Without replacement by a plan providing benefits to the Executive equal to or greater than those discontinued, the failure by Ultra Pac to continue in effect, within its maximum stated term, any pension, bonus, incentive, stock ownership, purchase, option, life insurance, health insurance, accident and disability insurance, or any other employee benefit plan, program, or arrangement in which the Executive is participating at the time of the Change of Control, or the taking of any action by Ultra Pac that would adversely affect the Executive's participation or materially reduce the Executive's benefits under any of such plans or benefits as such participation or benefits may exist at the time of the Change of Control; (4) The taking of any action by Ultra Pac that would materially adversely affect the physical conditions existing at the time of the Change of Control in or under which the Executive performs his or her employment duties; (5) The failure by Ultra Pac to obtain a binding and enforceable agreement, signed by any successor to Ultra Pac, providing for the assumption by such successor of the obligations of Ultra Pac under this Agreement, and the agreement of such successor to perform all obligations of Ultra Pac under this Agreement; or (6) Any purported termination by Ultra Pac of this Agreement or the employment of the Executive by Ultra Pac which is not expressly authorized by this Agreement or any breach of this Agreement by Ultra Pac. 2.) Change of Control Termination Right and Compensation. For a period of one (1) year following a Change of Control, the Executive shall have the right, at any time and within the Executive's sole discretion, to terminate employment with Ultra Pac for Good Reason. Such termination shall be accomplished by, and effective upon, the Executive giving written notice to Ultra Pac of the Executive's decision to terminate such employment. In the event of a Change of Control Termination, and subject to the "Limitation on Change of Control Compensation" contained in Section 3 herein, then, and without further action by the Board or otherwise, Ultra Pac shall, within the thirty (30) days of such termination, make a lump sum payment to the Executive in an amount equal to two times the Executive's "annualized includible compensation for the base period," as defined in Section 280G(d)(1) of the Code. 3.) Limitation on Change of Control Compensation. In the event that the Executive is a "disqualified individual" within the meaning of Section 280G of the Code, the parties hereto expressly agree that the payments described in Section 2 above shall be considered together with all other Change of Control Payments so that, with respect to the Executive, all Change of Control Payments are collectively subject to an overall maximum limit. Such maximum limit shall be One Dollar ($1.00) less than the largest amount under which no portion of the Change of Control Payments is considered a "parachute payment" within the meaning of Section 280G of the Code. Accordingly, to the extent that the Change of Control Payments would be considered a "parachute payment" with respect to the Executive, the portions of such Change of Control Payments shall be reduced or eliminated in the following order until the remaining Change of Control Payments with respect to the Executive is One Dollar ($1.00) less than the maximum allowable which would not be considered a "parachute payment" under Section 280G of the Code: (a) First, any cash payment to the Executive; (b) Second, any Change of Control Payments not described herein; and (c) Third, any forgiveness of indebtedness of the Executive to Ultra Pac. The Executive expressly and irrevocably waives any and all rights to receive any Change of Control Payments which would be considered a "parachute payment" under the Code. 4.) Attorneys' Fees. In the event the Executive incurs any legal expense to enforce or defend his or her rights under this Agreement, or to recover damages for breach thereof, the Executive shall be entitled to recover from Ultra Pac any actual expenses for attorneys' fees and disbursements incurred. 5.) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of Ultra Pac, whether by way of merger, consolidation, operation of law, assignment, purchase or other acquisition of substantially all of the assets or business of Ultra Pac, and any such successors or assigns shall absolutely and unconditionally assume all of Ultra Pac's obligations hereunder. 6.) Notices. All notices, requests and demands given to or made pursuant hereto shall, except as otherwise specified herein, be in writing and be delivered personally or mailed by certified mail, return receipt requested, to any such party at its address which: (a) In the case of Ultra Pac shall be: Ultra Pac, Inc. 21925 Industrial Boulevard Rogers, Minnesota 55374 With a copy to: Larkin, Hoffman, Daly & Lindgren, Ltd. 1500 Norwest Financial Center 7900 Xerxes Avenue South Bloomington, Minnesota 55431 Attn: Frank I. Harvey, Esq. (b) In the case of the Executive shall be: Brian Gaggin 4501 Wooddale Avenue Edina, MN 55424 Either party may, by notice hereunder, designate a changed address. Any notice, if delivered or mailed properly, shall be deemed dispatched on the registered date or that stamped on the certified mail receipt, and shall be deemed received within the second business day thereafter or when it is actually received, whichever is sooner. 7.) Captions. The various headings or captions in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. 8.) Governing Law. The validity, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota, and any and every legal proceeding arising out of or in connection with this Agreement shall be brought in the appropriate courts of the State of Minnesota. Each of the parties hereby consenting to the exclusive jurisdiction of said courts for this purpose. 9.) Construction. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 10.) Waivers. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by any related document or by law. 11.) Modification. This Agreement may not be and shall not be modified or amended except by written instrument signed by the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. EXECUTIVE ULTRA PAC, INC. /s/ Brian Gaggin By: /s/ Calvin S. Krupa - ------------------------------------- ----------------------------------- Brian Gaggin Calvin S. Krupa Its: President EX-23.1 8 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our reports dated March 14, 1997 accompanying the financial statements and the financial schedule of Ultra Pac, Inc. included in the Annual Report on Form 10-K for the year ended January 31, 1997. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Ultra Pac, Inc. on Forms S-3 (File No. 333-03479, 333-03481, 333- 03483, 333-03485 and 333-03487, each effective May 10, 1996; and File No. 333-18415, effective December 20, 1996). /s/ DIVINE, SCHERZER & BRODY, LTD. St. Paul, Minnesota March 14, 1997 EX-27 9 FINANCIAL DATA SCHEDULE
5 YEAR JAN-31-1997 JAN-31-1997 663,072 0 3,101,674 312,854 6,872,430 12,725,891 40,529,671 12,851,061 41,735,585 12,455,453 15,977,599 0 0 7,784,972 3,742,561 41,735,585 61,718,514 61,718,514 42,155,775 42,155,775 13,396,856 155,774 2,584,498 2,943,464 1,144,000 1,799,464 0 0 0 1,799,464 .47 .47
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