-----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, KQhC0d7rMtRP1/He/r1TfKW7tikpkh/1uRAED7WuPCA1wu/Pgi8ptnqHOTuVp7Qd MBvje7/hnL6exe2Uta7Rvg== 0000897101-97-000343.txt : 19970401 0000897101-97-000343.hdr.sgml : 19970401 ACCESSION NUMBER: 0000897101-97-000343 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EAGLE PACIFIC INDUSTRIES INC/MN CENTRAL INDEX KEY: 0000852426 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PLASTIC PRODUCTS [3080] IRS NUMBER: 411642846 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18050 FILM NUMBER: 97568440 BUSINESS ADDRESS: STREET 1: 2430 METROPOLITAN CENTRE STREET 2: 333 S SEVENTH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 6123719650 MAIL ADDRESS: STREET 1: 2430 METROPOLITAN CENTRE STREET 2: 333 S SEVENTH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55402 FORMER COMPANY: FORMER CONFORMED NAME: BLACK HAWK HOLDINGS INC /MN/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BHH INC DATE OF NAME CHANGE: 19891019 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from __________ to ___________ Commission File Number 0-18050 EAGLE PACIFIC INDUSTRIES, INC. (Exact name of registrant as specified in its Charter) MINNESOTA 41-1642846 (State of incorporation) (I.R.S. Employer Identification No.) 333 South Seventh Street 2430 Metropolitan Centre Minneapolis, Minnesota 55402 (Address of principal executive offices) Registrant's telephone number, including area code: (612) 371-9650 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as of February 28, 1997 was approximately $14,719,000 (based on closing sale price of $3.13 per share as reported on the Nasdaq Small-Cap Market). The number of shares of the registrant's Common Stock, $.01 par value per share, outstanding as of February 28, 1997 was 6,443,237. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's 1996 Annual Meeting of Stockholders are incorporated by reference in Part III. PART I ITEM 1. BUSINESS GENERAL Eagle Pacific Industries, Inc., a Minnesota corporation (the "Company"), manufactures and distributes polyvinyl chloride ("PVC") pipe and polyethylene ("PE") tubing products with its primary markets West of the Mississippi River in the United States. These products are used for turf and water irrigation, natural gas, water wells, fiber optic lines, electronic and telephone lines, and commercial and industrial plumbing. Due to the Company's divergent background, a brief company history is provided. The Company was incorporated under the laws of the State of Iowa in 1891 under the name Rath Packing Company. Until suspension of its operations in 1984, Rath Packing Company was engaged primarily in the meat processing and packing business. Severe financial problems forced it to file a voluntary petition for reorganization under Chapter 11 of Title XI of the United States Bankruptcy Code on November 1, 1983. By the end of 1984 Rath Packing Company had ceased virtually all operations with a substantial amount of claims unsatisfied. In the spring of 1985, a group of investors, with no prior relationship to Rath Packing Company, proposed a reorganization which was approved by the Bankruptcy Court in November 1985. The Company (then known as Black Hawk Holdings, Inc.) emerged from the reorganization as a publicly traded corporation with approximately $42,000,000 of net operating loss carryforwards and no other material assets or liabilities. Following its reorganization in bankruptcy, the Company, and its newly formed subsidiary, Liberty Capital Corp. ("Liberty"), raised capital in a private offering completed on December 30, 1985, (the "Private Placement") in order to provide financing for acquisitions by Liberty. During 1988, the Company completed its first two acquisitions, both of which were specialty food distributors. At the end of 1989, the Company changed its strategic direction. The Company sold both of its food distribution businesses and established a new subsidiary, Black Hawk Financial Corp. This subsidiary was engaged in commercial finance secured lending activities. During 1991, the Company made an investment of $12,000 to acquire a 48% interest in International Commercial Services, Inc. ("ICS"). As a result of the operating losses sustained by ICS, the Company wrote off this investment. Additionally, the Company advanced $56,000 in loans to ICS. ICS was a start-up sales/marketing company specializing in the food industry and had no prior operating history. Also during the 1991 fiscal year, the Company experienced a management change with the departures of its acting chairman, chief executive officer, president, and a director. After such change in management, the business of the Company was conducted by its board of directors which later appointed a president. The Company attempted to conserve its assets and the board considered alternatives for the Company's future. It was determined that the Company should investigate the possibility of making acquisitions of other entities. In early January of 1992, the Company appointed four new members to the board of directors: William H. Spell, Harry W. Spell, Richard W. Perkins and Edward E. Strickland. Additionally, Harry W. Spell was elected Chairman of the Board and Chief Executive Officer of the Company. William H. Spell was elected president of Black Hawk Financial Corp. and subsequently became president of the Company. During March of 1992, Bruce A. Richard was also elected to the board of directors of the Company. The strategic plan of the Company was changed from commercial lending activities to attempting to acquire and own one or more profitable businesses with earnings and cash flow. During 1992, the Company took a number of steps to reposition itself to realize this new corporate strategy. The Company sold its loan portfolio and loans receivable and ended its commercial finance business. The Company also sold its equity investment in ICS to the majority shareholder of ICS and restructured the loans, which were subsequently repaid. In 1993, pursuant to its new strategic plan to acquire and own profitable businesses with earnings and cash flow, the Company entered into a Stock Purchase Agreement with the shareholders of Eagle Plastics, Inc. ("Eagle") to purchase 90.77% of the outstanding Common Stock of Eagle, none of the Eagle shareholders having had any prior affiliation with the Company prior to the acquisition. The acquisition of the Eagle Common Stock (the "Eagle Acquisition") was completed on December 17, 1993. The remaining Eagle Common Stock that was not purchased by the Company was retained by Larry D. Schnase and G. Peter Konen, officers and directors of Eagle and directors of the Company, who wished to maintain an equity interest in Eagle and continue to operate it. The purchase price for the Eagle Common Stock was $9,531,000 in cash and $2,075,000 in cash was used to defease Eagle's Industrial Revenue Bond. As a result of the Eagle Acquisition, Eagle became a 90.77% owned subsidiary of the Company and its financial performance is consolidated with the Company's for financial reporting purposes for the period subsequent to December 17, 1993 (date of acquisition). In 1995, the Company entered into a Stock Purchase Agreement with the shareholders of Pacific Plastics, Inc. ("Pacific") to purchase all of the outstanding Common Stock of Pacific, none of the Pacific shareholders having had any prior affiliation with the Company prior to the acquisition. The acquisition of the Pacific Common Stock (the "Pacific Acquisition") was completed on July 10, 1995. The total consideration for the Pacific Common Stock was $6,750,000: (i) $4,350,000 in cash; (ii) $1,700,000 in the form of a note to the sellers; and (iii) $700,000 worth of Company Common Stock. In addition, $750,000 in cash was paid to certain sellers in exchange for their agreement not to compete with the Company or Pacific. As a result of the Pacific Acquisition, Pacific became a 100% owned subsidiary of the Company and its financial performance is consolidated with the Company's for financial reporting purposes for the period subsequent to July 10, 1995 (date of acquisition). The Company's business focus is to be a holding company owning Eagle and Pacific Common Stock. It is anticipated that if any future acquisitions were made by the Company, they would be in an industry complementary to that of Eagle and Pacific. Eagle, a Nebraska corporation located in Hastings, Nebraska, was established in 1984. Pacific, an Oregon corporation, was established in 1967 with operations located in Hillsboro, Oregon and Midvale, Utah.. PRODUCTS PVC pipe has become widely accepted in the building and construction industry. A number of factors have caused this popularity including its low cost, easy installation, lower weight than metal pipe and longer life. As a result, PVC is replacing metal pipe in many construction situations. PE pipe is expanding in its application and market share because of its flexibility and strength. The Company's products consist of 1/2 inch to 15 inch PVC pipe and PE tubing for applications in the building and construction industry, turf and water irrigation, natural gas, water wells, fiber optic lines, and electronic and telephone lines. Although the manufacture and sale of PVC pipe and PE tubing is generally viewed as a commodity business with price being the only purchasing consideration, the Company has created brand name recognition for its products while competing on price. The Company also looks for niches to enter, such as PE tubing for turf irrigation, where it can establish itself as the primary supplier and command higher margins. It also adds features to pipes such as quick connect gaskets and longer pipe lengths that allow for easier installation, as well as proprietary marking for brand identification. The following comprise the Company's primary product lines: Pure Core(R) is the Company's highest quality PE tubing. It is recognizable by its white center made from virgin PE and its black, protective outer layer made from carbon black enhanced PE. The walls of this premium pipe are 25 percent thicker than called for by both the American Society for Testing and Materials ("ASTM") and National Sanitation Foundation International ("NSFI") standards. This product comes with a 50-year warranty and is pressure tested to 200 psi. Its primary markets and uses include municipal and domestic water service for homes and office, and transporting potable liquids for the chemical and food processing industries. Poly-Flo is an all-black PE tubing product which meets the high quality standards set by ASTM and NSFI, yet is offered at a lower price than Pure Core pipe. It is produced from medium-density PE. One of the Company's fastest growing products, green-striped Tough(R) Turf Pipe is included within the Poly-Flo product line. Green-striped Tough Turf Pipe is also available in medium density PE or high density 3408 PE. To the extent it is produced from medium density PE, it is included within the Poly-Flo product line. 3408 high-density pipe products are described below under 3408 Pipe. Green-striped Tough Turf Pipe is a popular PE pipe in the lawn irrigation industry. It is co-extruded with two green stripes to permanently identify it as Tough Turf Pipe. This distinct, recognizable marking is unique to Tough Turf Pipe. Part of its popularity is the Tough Lifetime Guarantee against defects in materials and workmanship, covering the replacement cost of the pipe and the related labor. The Company also serves its customers by providing pipe sizing other than the traditional 1 inch diameter -- all with the Tough Lifetime Guarantee, which is valid as long as the original purchaser owns his or her property where Tough Turf Pipe is installed. Tough Turf Pipe is a specialized pipe for the turf irrigation market, and its primary use is in sprinkler systems for homes, office buildings, golf courses, and industrial tracts. In addition to turf irrigation, primary markets and uses for Poly-Flo pipe include domestic and municipal water service, and limited applications for transporting potable fluids for the food and chemical industries. 3408 Pipe is made from high-density 3408 polyethylene. This product line includes both Tough Turf Main used for the mainline in irrigation systems and green-striped (high density PE) Tough Turf Pipe. Pipe derived from high-density 3408 PE can handle higher pressures than medium density PE tubing. Tough Turf Main is a specialized pipe for the turf irrigation market and its primary use is for the high pressure mainline in sprinkler systems for homes, office buildings, golf courses, and industrial tracts. The 3408 Pipe is also used for under slab heating systems and transporting hot potable liquids and chemicals. Utility grade Poly-Flex is a competitively priced utility-grade PE tubing. This product carries a one-year warranty and is tested to 100 psi. Other than transporting potable water, Poly-Flex is suitable for pressure installations. Primary markets and uses include farm water systems, including transporting water to outlying areas for livestock, plumbing/waste water and drainage applications, and irrigation, which is primarily used in home and other low pressure applications. Union Carbide has developed a unique PE resin for use in small and medium diameter pipe for gas distribution systems. Natural Gas Pipe is extruded from this special resin and is marked with yellow stripes for quick identification. This pipe is available in diameters up to 4 inches. The Company has concentrated its marketing of Natural Gas Pipe on the after-market side of the business, serving installers and contractors, instead of marketing directly to the utility companies. A major use of PVC pipe is transporting water under pressure. The Company has developed several PVC pipe products for application at various points in the water distribution system. A description of pressure pipe products follows. (i) PVC(R) WELL CASING. The Company offers a light-weight PVC pipe to be used as casing in water wells. The Well Casing pipe is manufactured out of high quality PVC and meets all NSFI and ASTM standards. As a companion to its Well Casing pipe, the Company also offers a threaded drop pipe for hanging submersible pumps. These heavy duty pipes are made from Schedule 80 PVC and weigh one-seventh of an equivalent metal pipe. (ii) PRESSURE PIPE. This versatile pipe is used extensively in water service lines, turf irrigation, water wells, and transporting crude oil and salt water. It comes in diameters from 1/2 inch to 15 inches and in lengths up to 40 feet. (iii) WHITE AND GREY SCHEDULE 80. The Company offers an extra strong PVC pipe for demanding industrial applications. Its thick, strong walls stand up to most chemicals, giving it distinct advantages over conventional metal pipe. (iv) GASKET JOINT PIPE. Gasket Joint Pipe has a Reiber gasket to assure leak-proof water mains and sewer pipe. Steel reinforced Reiber gaskets are pre-stressed and molded in place to offer a tight and dependable seal. The Company was one of the first in the industry to have the capability to mold the Reiber gasket in place in its PVC pipe producing the distinctive bell end on Gasket Joint Pipe. Drain, Waste and Vent Pipe is used inside the home in non-pressurized applications. It carries the NSFI approval, and therefore is a popular product for use as waste drains and vents in the home. Sewer Drain Pipe is used for the exterior transportation and storage of waste water. When waste water leaves the home or industrial building, it moves through Sewer Drain Pipe into a municipal sewer system or other reclamation system. Sewer Drain Pipe is available with different wall thicknesses. The thick-walled Sewer Drain Pipe is building code approved and easily identified by its light green color. For rural and non-building code applications, a thin-walled variety of Sewer Drain Pipe is available. These exterior pipes are available in 4 inch through 8 inch diameters and are belled at one end for easy joining. The Reiber gasket system is available on green Sewer Drain Pipe. For leach fields and other similar applications, Sewer Drain Pipe is available with two rows of 5/8 inch holes. Coex Cellular Core is a relatively new product. It is a lighter weight drain, waste and vent pipe for non-pressure applications. Coex Cellular Core is a co-extruded pipe, with air injected PVC sandwiched between two thin layers of solid PVC. Its lighter weight makes Coex Cellular Core easier to handle and more affordable than heavier, solid PVC drain, waste and vent pipe. Its insulating characteristics make Coex Cellular Core Pipe particularly desirable for all public buildings. The Company's first sales of Coex Cellular Core Pipe occurred in April 1990. Electric and telephone duct is used by utility companies. Electric duct is used for power lines, as well as electrical wiring both inside buildings and underground. Telephone duct is used by communications companies for insulating their telephone communication lines, which are still made of copper. Fiber optic pipe is used for protecting underground fiber optic cables. This tubing is purchased mainly by large communications companies such as AT&T, Sprint and MCI, or by railroad companies such as Southern Pacific which lay the pipe beside their railroad tracks, and then lease space on their own fiber optic lines to the communications companies. The remainder of PVC and PE products are made up of specialty products. These include snow poles, Fiber SenSys products used in security applications, and several new products designed for the consumer market such as plastic fencing and plastic lumber. MARKETING AND CUSTOMERS The Company markets it products through a combination of independent sales representative companies, factory salespersons, and inside sales/customer service representatives. Independent sales representative companies are primarily assigned geographic territories. Factory salespersons are primarily assigned to specific product lines and customers. The Company's primary markets are west of the Mississippi River in the continental United States. The Company offers a wide variety of warranty programs on its products, which have been provided ever since the particular product has been introduced by the Company. These warranties apply to failures in pipe due to defects in material or workmanship. Generally, warranties are for one year, however, the Pure Core product has a fifty year warranty while Tough Turf Pipe has its own unique lifetime warranty, which is valid as long as the original purchaser owns his or her property where Tough Turf Pipe is installed. These warranties extend in scope from replacement of the defective pipe to payment of all costs of replacing the defective pipe, including labor. The Company maintains product liability insurance to cover such warranty claims, but to date, warranty reserves have been sufficient to cover warranty claims. In addition to the warranty programs, the Company offers many of the industry-standard promotional sales programs, such as volume rebates and discounts. In addition, the Company offers a frequent buyer program, which is unique to the industry. The frequent buyer program allows customers to select products from a catalogue based on points earned from pipe purchases. The Company believes its officers' and managers' experience, reputation for high quality products and service, and unique promotional programs provide it with a strong position in the plastic pipe industry. The Company has a broad and diverse group of customers. There were no sales to a single customer in 1996, 1995, or 1994 which accounted for more than 10% of total net sales of the Company. COMPETITION The plastic pipe industry is estimated at $3.6 billion in annual sales. Although there are many PE tubing and PVC pipe manufacturers that are larger than the Company, most produce large diameter pipe (15 inch to 30 inch). Among producers of small and medium diameter pipe (1/2 inch to 15 inch) like the Company, the Company believes few have greater financial or other resources than the Company. Because of shipping costs, competition is usually regional, instead of national, in scope. Within its primary markets, the Company believes it is one of the largest producers of PE tubing and PVC pipe. However, because extrusion of plastic pipe is not a proprietary process, although equipment intensive, there can be no assurance that current or new competitors will not obtain financial resources sufficient to exceed those of the Company and thus intensify competition. Finally, although the Company believes it has reduced the commodity nature of its business, pricing pressure will continue and could affect the Company's margins. MANUFACTURING AND SOURCES OF SUPPLIES Extrusion is a common manufacturing process used in the production of plastic products. In the production of plastic pipe, PVC resin or PE pellets are placed in an extrusion machine. Once in the extrusion machine, the PVC or PE material is heated into molten plastic which is pulled through a sizing apparatus to produce pipe or tubing of the required diameter. The newly extruded pipe or tubing is moved through a water cooling trough, marked to indicate the identity of the pipe or tubing and cut to length. The products are then stored for shipping. All of the Company's manufacturing is performed at three of its facilities in Hastings, Nebraska, Hillsboro, Oregon and Midvale, Utah. It has 34 extrusion lines to produce its PE and PVC products. These extrusion lines are capable of producing pipe from 1/2 inch to 15 inches in diameter. In producing its pipe, the Company acquires its PVC and PE resins in bulk, mainly by rail car. All three of the Company's manufacturing facilities have compound centers for PVC resin. Compounding consists of precisely mixing various waxes, colorants, UV protectants and lubricants to the base PVC resin to create the appropriate compound resin for each extrusion application. By performing its own PVC compounding, the Company has been able to lower its raw material costs. PE material used by the Company is purchased in compounded form, ready for direct use in the extruder. Because of the different properties of PE plastic, it is not cost effective to acquire the technology to perform the Company's own PE compounding. Compounded resins are transported to the extrusion equipment directly by a conveyer feeding system. Once the pipe is produced it is automatically marked with the appropriate identification information and cut to the desired length. Multiple warehousing and outdoor storage facilities are used to store finished product. Inventory is shipped from such storage to customers by common carrier or by vehicles of the Company for orders close to a manufacturing facility. At each phase of the manufacturing process the Company pays great attention to quality and producing a consistent product. Every PE and PVC product is thoroughly examined for compliance with standards of ASTM. The Company has established a Quality Control Department and has its own testing lab for both resin and finished goods quality assurance. As a result of these steps, the Company believes very few defective finished products reach its customers. The Company acquires raw materials from various sources. During the years ended December 31, 1996, 1995 and 1994, purchases of such raw materials from two vendors totaled 61%, 72% and 74%, respectively, of total material purchases. The Company maintains strong relationships with its key raw material vendors to ensure the quality and availability of raw material. The PVC and polyethylene resin industries have maintained capacities well above demand, therefore, the Company is confident that its source of raw materials will be adequate for the foreseeable future. BUSINESS SEASONALITY Due to general weather constraints in the geographic markets that the Company operates in, the demand for the Company's products tends to be seasonal. In an effort to take some of the seasonality out of the business, the Company offers extended spring dating terms to its better paying customers in order to move product during the winter months. Notwithstanding spring dating, the Company experiences fluctuations in sales, accounts receivable, and inventory levels during the year. BACKLOG The Company strives to keep delivery lead times to a minimum in order to meet customer needs. However, due to the seasonality of the business, lead times can occasionally approach 30 days. The backlog on February 28, 1997 was 8,120,000 pounds compared to 8,505,000 pounds on February 29, 1996. EMPLOYEES The Company currently employs 331 employees of which 15 are in administration, 49 in sales and shipping and 267 in manufacturing. None of the Company's employees are represented by a labor union and the Company has never experienced any work stoppages. ITEM 2. PROPERTIES The Company's executive offices are located in leased office space in Minneapolis, Minnesota. This space is adequate for the operation of the Company's business. The Company's manufacturing and warehouse facilities are located in Hastings, Nebraska, Hillsboro, Oregon, Midvale, Utah, and Baker City, Oregon. The Company both owns and leases portions of its facilities in Hastings, Nebraska. The facilities in Hillsboro, Oregon are owned, while the Midvale, Utah and Baker City, Oregon facilities are leased. With the exception of the Midvale, Utah facility, the Company expects that the productive capacity of the owned and leased facilities are sufficient for business requirements in the foreseeable future. The Company is currently in the process of developing a new facility in the Salt Lake Valley area. The Midvale, Utah facility is not located on a rail spur and its size is not adequate to meet current and future demands. The manufacturing facilities, as currently equipped, are operating at approximately 80% of capacity. ITEM 3. LEGAL PROCEEDINGS The Company is not aware of any material legal proceedings against it or any of its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is currently traded on the Nasdaq Small Cap Market under the symbol "EPII." Prior to September 6, 1994, when the Company became listed on the Nasdaq Small Cap Market, the Company's Common Stock was traded on the National Association of Securities Dealers Over-the- Counter Bulletin Board. The Company's Series A Preferred Stock does not trade. The following table sets forth the high and low bid prices for each fiscal quarter in 1996 and 1995. High Low Year ended December 31, 1996: First quarter $3-1/2 $2-1/4 Second quarter 3-1/8 2 Third quarter 3-3/8 1-5/8 Fourth quarter 2-1/4 1-3/8 Year ended December 31, 1995: First quarter $3-1/2 $2-1/4 Second quarter 3-1/8 2 Third quarter 3-3/8 1-5/8 Fourth quarter 2-1/4 1-3/8 The bid quotations represent interdealer prices and do not include retail mark-ups, mark-downs, or commissions and may not necessarily represent actual transactions. At February 28, 1997, the Company had approximately 1,880 shareholders of record. The Company has never paid a cash dividend on its Common Stock. Payment of Common Stock dividends is at the discretion of the Board of Directors subject to the Company's lending arrangements. The Board of Directors plans to retain earnings, if any, for operations and does not intend to pay Common Stock dividends in the near future. However, dividends are paid by the Company on its Series A 7% Convertible Preferred Stock. RECENT SALES OF UNREGISTERED SECURITIES. On November 13, 1996 the Company issued 34,047 shares of common stock to a director in exchange for shares of common stock of Eagle Plastics, Inc. of equivalent value. As an exemption from registration for this transaction, the Company relied upon Section 4(2) of the Securities Act of 1933 as a transaction by an issuer not involving a public offering. ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS: Net sales $ 65,280,138 $ 51,330,127 $ 34,076,224 $ 602,466 $ -- Gross profit 15,173,356 9,391,883 9,608,859 112,361 -- Operating expenses 10,044,450 7,680,038 5,702,515 798,622 767,854 Operating income(loss) 5,128,906 1,711,845 3,906,344 (686,261) (767,854) Interest expense 2,637,341 2,932,563 2,242,757 73,483 -- Other income 46,533 136,597 22,504 18,138 51,879 Income(loss) from continuing operations 3,479,313 (864,824) 1,400,434 (682,839) (690,557) Extraordinary loss (1,728,353) -- -- (205,000) -- Net income(loss) 1,750,960 (864,824) 1,400,434 (887,839) (690,557) Net income(loss) applicable to common stock 1,660,169 (1,058,513) 1,207,145 (893,414) (690,557) Primary earnings(loss) per common and common equivalent share: Income(loss) from continuing operations $ 0.52 $ (0.27) $ 0.27 $ (0.21) $ (0.20) Extraordinary loss (0.26) -- -- (0.06) -- ------------ ------------ ------------ ------------ ------------ $ 0.26 $ (0.27) $ 0.27 $ (0.27) $ (0.20) ============ ============ ============ ============ ============ Fully diluted earnings(loss) per common and common equivalent share: Income(loss) from continuing operations $ 0.49 $ (0.27) $ 0.24 $ (0.21) $ (0.20) Extraordinary loss (0.24) -- -- (0.06) -- ------------ ------------ ------------ ------------ ------------ $ 0.25 $ (0.27) $ 0.24 $ (0.27) $ (0.20) ============ ============ ============ ============ ============ Weighted average number of common and common equivalent shares outstanding 6,607,124 3,899,587 4,507,321 3,349,693 3,369,206 DECEMBER 31, 1996 1995 1994 1993 1992 FINANCIAL POSITION: Working capital $ 1,126,244 $ 450,932 $ 3,975,553 $ 2,326,948 $ 608,122 Total assets 35,426,564 31,917,782 19,181,172 17,827,025 649,421 Long-term and subordinated debt 11,008,012 11,743,512 9,426,460 10,094,231 -- Deferred liabilities 72,384 263,595 806,705 135,677 -- Stockholders' equity 8,024,004 4,575,075 4,030,373 2,646,112 612,971
All share and per share information has been adjusted to reflect the four-for-one reverse stock split in 1991. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS. The following table sets forth items from the Company's Consolidated Statement of Operations as percentages of net revenues: 1996 1995 1994 ------ ------ ------ Net sales 100.0% 100.0% 100.0% Cost of goods sold 76.8 81.7 71.8 Gross Profit 23.2 18.3 28.2 Operating expenses 15.4 15.0 16.7 Operating income 7.9 3.3 11.5 Other income (expense) (4.1) (5.3) (6.8) Income (loss) before income taxes and extraordinary loss 3.8 (2.0) 4.7 Income tax (benefit) expense (1.5) (0.3) 0.6 Income (loss) before extraordinary loss 5.3 (1.7) 4.1 Extrordinary loss on debt prepayments 2.6 -- -- Net Income (loss) 2.7% (1.7)% 4.1% On July 10, 1995, the Company acquired all of the outstanding common stock of Pacific Plastics, Inc. and its wholly-owned subsidiary, Arrow Pacific Plastics, Inc. (Pacific). As Pacific was not acquired by the Company until July 1995, operating results may not be comparable with prior years. Pro forma results, reflecting operations as if the acquistion had occurred at the beginning of 1994 are provided in Note 2 of the financial statements. A discussion of the pro forma results is made whenever it is deemed to enhance the reader's understanding of the Company's operating results. Eagle Pacific Industries posted record net sales in 1996, rising 27% from 1995 to 1996 and by 51% from 1994 to 1995. Higher volumes, primarily due to the acquisition of Pacific, were responsible for the growth in revenues. The increase in volume in 1996 was partially offset by weak sales in the fourth quarter of 1996 due to severe winter weather in the Pacific Northwest. Pounds sold rose 40% from 1995 to 1996 and by 46% from 1994 to 1995. The discrepancies between sales in dollars and pounds is due to vastly different pricing situations that existed between the three years being analyzed. Prices in 1996 were at recent history lows, 1995 prices reached record high levels, and 1994 prices rose steadily throughout the year. On a pro forma basis, sales in dollars decreased 6% from 1995 to 1996 and increased 8% from 1994 to 1995, while sales in pounds increased 5% and 1%, respectively. The small pro forma sales increases in pounds are due to capacity constraints at the Company's three manufacturing facilities. The increase in the gross profit as a percentage of net sales from 1995 to 1996 is primarily due to the stabilization of polyvinyl chloride (PVC) and polyethylene (PE) raw material costs and selling prices during 1996. The primary reason for the decline in the gross profit as a percentage of net sales from 1994 to 1995 is fluctuating PVC and PE raw material prices and the reaction of the plastic pipe market to these price changes during 1995. During the first six months of 1995 raw material prices increased, partly due to higher foreign demand. Since part of the price increase was derived from foreign markets, the Company was not able to fully pass along the raw material price increases to its domestic customers. During the last six months of 1995, PVC and PE raw material prices decreased significantly due to an abrupt halt in foreign demand. To maintain its market share, the Company was required to lower its prices at the same rate as raw material price changes. As higher priced inventory was sold at the lower market prices, gross profits decreased significantly. During 1994, the Company enjoyed record gross profits as a percentage of net sales due to steadily rising prices throughout the year. The Company was able to fully pass along the raw material price increases to its customers since the increases were created from strong domestic demand. The increase in operating expenses as a percentage of net sales from 1995 to 1996 is primarily due to lower selling prices in 1996, partially offset by administrative efficiencies gained from the Pacific acquisition. The decrease in operating expenses as a percentage of net sales from 1994 to 1995 is due to higher selling prices in 1995 and administrative efficiencies gained from the Pacific acquisition. Operating expenses as a percentage of sales on a pro forma basis were 14.4% for 1994 and 1995. The increase in operating expenses from the 1994 and 1995 pro forma results to 1996 is due to lower selling prices in 1996 compared to 1994 and 1995. Interest expense decreased from 1995 to 1996 due to the debt refinancing, described below, and new common equity obtained in the spring of 1996, which allowed the Company to eliminate 40% of the high cost subordinated debt and related non-cash interest amortization. The increase in interest expense from 1994 to 1995 is due to the debt incurred from the Pacific acquisition. The income tax provisions for 1996, 1995 and 1994, were calculated based upon management's estimate of the annual effective rates, reduced by federal net operating loss (NOL) carryforwards utilized and state tax credits, as well as in 1996 NOL carryforwards expected to be used in future periods. Due to more profitable operations and future expected profits, an income tax benefit of $1,000,000 was recorded in 1996 representing a change in the deferred tax asset valuation allowance relating to a portion of the NOL carryforwards which are now expected to be utilized in the future. FINANCIAL CONDITION. The Company's financial condition improved due to the strong operating profits and the debt refinancing in 1996, partially offset by higher capital expenditures during the year. The debt refinancing included the payoff of $3.0 million of subordinated debt, resulting in a $1.7 million non-cash charge to operations, net of taxes, representing the write-off of unamortized finance costs and prepaid interest. In addition, the Company obtained $1.5 million of new common equity, converted a majority of its outstanding preferred stock to common stock and consolidated its credit facilities. The restructuring benefited the Company by reducing loan principal and interest payments and dividends, and by improving liquidity through increased borrowing capacity. Cash generated from operating activities was $5.8 million in 1996 compared to $6.2 million and $840,000 in 1995 and 1994, respectively. Profits and depreciation and amortization were the primary sources of cash generated from operating activities in 1996. Cash generated from operating activities in 1995 resulted from of a $4.9 million reduction of inventory acquired in the Pacific acquisition. The Company used $3.5 million, $6.0 million, and $735,000 for investing activities in 1996, 1995, and 1994, respectively. The primary uses of cash were capital expenditures in 1996 and 1994 and the purchase of Pacific in 1995. Capital expenditures increased substantially in 1996 due to the construction of a new polyethylene production facility in Hastings, Nebraska and related equipment additions. Cash used for financing activities was $2.6 million and $517,000 in 1996 and 1994, respectively. The Company generated $106,000 from financing activities in 1995. The primary uses of cash in 1996 and 1994 were repayments of long-term debt and the revolving credit loan. The Company has commitments for capital expenditures of approximately $400,000 for the purchase of equipment as of December 31, 1996. Sources of liquidity include future operating cashflows, the revolving credit line, additional long-term debt financing, and the sale of Company equity securities under either a private or public offering. The Company believes that it has the financial resources needed to meet business requirements in the foreseeable future, including capital expenditures for expanding manufacturing capacity and working capital requirements. OUTLOOK. The statements contained in this Outlook section are based on managements current expectations. These statements are forward looking and actual results may differ materially. The Company expects the demand for plastic pipe and tubing to grow as acceptance of plastic pipe over metal pipe continues and the overall economy continues to grow. Industry growth projections call for annual sales growth rates for plastic pipe and tubing of four percent or greater per year through 1998. The Company has historically been able, and expects in the future, to grow at rates substantially in excess of the industry averages due to its emphasis on customer satisfaction, product quality and differentiation and inovative promotional programs. The Company's strategy has been, and continues to be, to concentrate growth in the higher profit products and geographic regions. To fully implement its growth strategy, the Company will be required to look to external sources to fund future capital expenditures and/or acquisitions. The Company expects to spend approximately $5.0 million for capital additions in 1997, as the Company continues its efforts to increase capacities at all three manufacturing facilities to meet current and future demands. If the Company is unable to obtain the external funding needed, growth will be confined to a level that can be supported by internally generated capital. The Company's gross margin percentage is a sensitive function of PVC and PE raw material resin prices. In a rising or stable market, margins and sales volume have historically been higher and conversely, in falling markets sales volumes and margins have historically been lower. Due to the commodity nature of PVC and PE resin and the dynamic supply and demand factors worldwide, it is very dificult to predict gross margin percentages or assume that historical trends will continue. The Company's net operating loss carryforwards (NOLs) are available through the year 2010, however, the majority expire by the year 2000. The actual amount of available NOLs which will be utilized is dependent on future profits and based on current projections, it appears that a portion of the NOLs which expire in 1997-2000 will not be fully utilized. The Company's future results of operations and the other forward looking statements contained in this Outlook section, in particular the statements regarding growth in the plastic pipe industry, capital spending and resin prices, involve a number of risks and uncertainties. In addition to the factors discussed above, the other factors that could cause actual results to differ materially are the following: business conditions and the general economy, competitive factors, such as major capacity increases from competition, and weather factors. The Company believes that it has the product offerings, facilities, personnel, and competitive and financial resources for continued business success, but future revenues, costs, margins, and profits are all influenced by a number of factors, as discussed above. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements and Schedules. CONSOLIDATED FINANCIAL STATEMENTS PAGE NUMBER Independent Auditors' Report 14 Consolidated Statements of Operations 15 Consolidated Balance Sheets 16 Consolidated Statements of Stockholders' Equity 17 Consolidated Statements of Cash Flow 18 Notes to Consolidated Financial Statements 19 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders of Eagle Pacific Industries, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Eagle Pacific Industries, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the index at Item 14. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Eagle Pacific Industries, Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Deloitte & Touche LLP - -------------------------- Deloitte & Touche LLP Minneapolis, Minnesota February 14, 1997
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 - -------------------------------------------------------------------------------------------- 1996 1995 1994 NET SALES $ 65,280,138 $ 51,330,127 $ 34,076,224 COST OF GOODS SOLD 50,106,782 41,938,244 24,467,365 ------------ ------------ ------------ Gross profit 15,173,356 9,391,883 9,608,859 ------------ ------------ ------------ OPERATING EXPENSES: Selling expenses 7,113,184 5,335,754 3,856,345 General and administrative expenses 2,931,266 2,344,284 1,846,170 ------------ ------------ ------------ 10,044,450 7,680,038 5,702,515 ------------ ------------ ------------ OPERATING INCOME 5,128,906 1,711,845 3,906,344 ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense (2,637,341) (2,932,563) (2,242,757) Minority interest (68,470) 55,297 (95,657) Other income 46,533 136,597 22,504 ------------ ------------ ------------ (2,659,278) (2,740,669) (2,315,910) ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 2,469,628 (1,028,824) 1,590,434 INCOME TAX (BENEFIT) EXPENSE (NOTE 9) (1,009,685) (164,000) 190,000 ------------ ------------ ------------ INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 3,479,313 (864,824) 1,400,434 EXTRAORDINARY LOSS ON DEBT PREPAYMENTS, LESS INCOME TAX BENEFIT OF $80,500 (NOTE 5) 1,728,353 -- -- ------------ ------------ ------------ NET INCOME (LOSS) 1,750,960 (864,824) 1,400,434 PREFERRED STOCK DIVIDENDS (90,791) (193,689) (193,289) ------------ ------------ ------------ NET INCOME (LOSS) APPLICABLE TO COMMON $ 1,660,169 $ (1,058,513) $ 1,207,145 STOCK ============ ============ ============ NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE OUTSTANDING: Primary: Income (loss) before extraordinary loss $ 0.52 $ (0.27) $ 0.27 Extraordinary loss on debt prepayments (0.26) -- -- ------------ ------------ ------------ Net income (loss) $ 0.26 $ (0.27) $ 0.27 ============ ============ ============ Fully diluted: Income (loss) before extraordinary loss $ 0.49 $ (0.27) $ 0.24 Extraordinary loss on debt prepayments (0.24) -- -- ------------ ------------ ------------ Net income (loss) $ 0.25 $ (0.27) $ 0.24 ============ ============ ============ AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Primary 6,607,124 3,899,587 4,507,321 Fully diluted 7,332,050 3,899,587 5,890,821 See notes to consolidated financial statements.
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 - -------------------------------------------------------------------------------------------------------- ASSETS (NOTE 5) 1996 1995 CURRENT ASSETS: Cash and cash equivalents $ -- $ 303,043 Restricted cash -- 500,000 Accounts receivable, less allowance for doubtful accounts and sale discounts of $195,100 and $157,900, respectively 6,373,994 6,322,387 Inventories (Note 3) 10,279,169 8,174,957 Deferred income taxes (Note 9) 340,000 -- Other 196,482 153,118 ------------ ------------ Total current assets 17,189,645 15,453,505 PROPERTY AND EQUIPMENT, NET (Note 4) 11,486,019 9,354,748 OTHER ASSETS: Prepaid interest (Note 5) 1,388,688 2,907,880 Goodwill, less accumulated amortization of $262,500 and $172,100, respectively 3,650,298 3,202,631 Deferred financing costs, less accumulated amortization of $239,200 and $367,300, respectively 866,418 541,949 Deferred income taxes (Note 9) 660,000 -- Non-compete agreement, less accumulated amortization of $79,500 and $26,500, respectively (Note 2) 185,496 238,500 Other -- 218,569 ------------ ------------ Total other assets 6,750,900 7,109,529 ------------ ------------ $ 35,426,564 $ 31,917,782 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Note payable (Note 5) $ 4,649,102 $ 5,521,505 Accounts payable 8,020,368 5,252,683 Accrued liabilities 1,442,180 1,209,321 Current maturities of long-term debt (Note 5) 1,951,751 3,019,064 ------------ ------------ Total current liabilities 16,063,401 15,002,573 LONG-TERM DEBT, less current maturities (Note 5) 7,035,562 5,356,762 SUBORDINATED DEBT (Note 5) 3,972,450 6,386,750 DEFERRED COMPENSATION (Note 6) 72,384 263,595 MINORITY INTEREST 258,763 333,027 COMMITMENTS AND CONTINGENCIES (Note 7) -- -- STOCKHOLDERS' EQUITY (Note 8): Series A preferred stock, 7% cumulative dividend; convertible; $2 liquidation preference; no par value; authorized 2,000,000 shares; issued and outstanding 18,750 and 1,383,500 shares, respectively 37,500 2,767,000 Undesignated stock, $.01 per share; authorized 18,000,000 shares; none issued and outstanding -- -- Common stock, par value $.01 per share; authorized 30,000,000 shares; issued and outstanding 6,443,237 and 4,152,940 shares, respectively 64,432 41,529 Additional paid-in capital 37,211,090 32,757,381 Unearned compensation on stock options (96,241) (204,232) Notes receivable from officers and employees for purchase of common stock (66,343) -- Accumulated deficit (29,126,434) (30,786,603) ------------ ------------ Total stockholders' equity 8,024,004 4,575,075 ------------ ------------ $ 35,426,564 $ 31,917,782 ============ ============ See notes to consolidated financial statements
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Series A Additional Preferred Stock Common Stock Paid-in Shares Amount Shares Amount Capital ----------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 1,371,000 $ 2,742,000 3,566,563 $ 35,665 $ 30,803,682 Net income -- -- -- -- -- Dividends on preferred stock -- -- -- -- -- Issuance of preferred stock (Note 8) 12,500 25,000 -- -- -- Issuance of common stock (Note 8) -- -- 16,667 167 49,833 Common stock options granted (Note 8) -- -- -- -- 408,464 Common stock options vested (Note 8) -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1994 1,383,500 2,767,000 3,583,230 35,832 31,261,979 Net loss -- -- -- -- -- Dividends on preferred stock -- -- -- -- -- Issuance of common stock (Note 8) -- -- 569,710 5,697 1,495,402 Common stock options vested (Note 8) -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1995 1,383,500 2,767,000 4,152,940 41,529 32,757,381 Net income -- -- -- -- -- Dividends on preferred stock -- -- -- -- -- Issuance of common stock (Note 8) -- -- 730,547 7,305 1,604,807 Conversion of preferred stock (1,364,750) (2,729,500) 1,559,750 15,598 2,713,902 Common stock options vested (Note 8) -- -- -- -- -- Warrant issued in debt refinancing -- -- -- -- 135,000 Stock purchases (Note 8) -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1996 18,750 $ 37,500 6,443,237 $ 64,432 $ 37,211,090 ============ ============ ============ ============ ============ [WIDE TABLE CONTINUED FROM ABOVE] Notes Receivable from officers and Unearned employees for Compensation on purchase of Accumulated Stock Options common stock Deficit Total -------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 -- -- $(30,935,235) $ 2,646,112 Net income -- -- 1,400,434 1,400,434 Dividends on preferred stock -- -- (193,289) (193,289) Issuance of preferred stock (Note 8) -- -- -- 25,000 Issuance of common stock (Note 8) -- -- -- 50,000 Common stock options granted (Note 8) $ (408,464) -- -- Common stock options vested (Note 8) 102,116 -- -- 102,116 ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1994 (306,348) -- (29,728,090) 4,030,373 Net loss -- -- (864,824) (864,824) Dividends on preferred stock -- -- (193,689) (193,689) Issuance of common stock (Note 8) -- -- -- 1,501,099 Common stock options vested (Note 8) 102,116 -- -- 102,116 ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1995 (204,232) -- (30,786,603) 4,575,075 Net income -- -- 1,750,960 1,750,960 Dividends on preferred stock -- -- (90,791) (90,791) Issuance of common stock (Note 8) -- -- -- 1,612,112 Conversion of preferred stock -- -- -- -- Common stock options vested (Note 8) 107,991 -- -- 107,991 Warrant issued in debt refinancing -- -- -- 135,000 Stock purchases (Note 8) -- $ (66,343) -- (66,343) ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1996 $ (96,241) $ (66,343) $(29,126,434) $ 8,024,004 ============ ============ ============ ============ See notes to consolidated financial statements.
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995 1994 Net income (loss) $ 1,750,960 $ (864,824) $ 1,400,434 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary loss on debt prepayments 1,728,353 -- -- Minority interest 68,470 (55,297) 95,657 Increase in deferred interest payable -- -- 624,800 (Gain) loss on disposal of fixed assets (10,401) (544) 265 Depreciation and amortization 1,564,684 1,336,410 1,038,040 Loan discount amortization 329,724 345,170 234,000 Prepaid interest amortization 435,160 735,619 -- Deferred income taxes (1,078,000) -- -- Change in assets and liabilities, net of acquisition: Accounts receivable - (increase) decrease (51,607) 2,040,037 (1,004,214) Inventories - (increase) decrease (2,104,212) 4,883,583 (902,013) Other current assets - (increase) decrease (43,364) 129,341 (17,670) Accounts payable - increase (decrease) 2,767,685 (2,227,281) (599,700) Accrued liabilities - increase (decrease) 391,359 (111,644) (31,693) Other 8,622 (11,125) -- ------------ ------------ ------------ Net cash provided by operating activities 5,757,433 6,199,445 837,906 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Pacific Plastics, Inc., net of cash acquired -- (4,195,035) -- Purchases of property and equipment (3,451,076) (1,171,689) (748,806) Purchases of minority interest (519,749) -- -- Payment under noncompete agreement -- (750,000) -- Proceeds from restricted cash 500,000 -- -- Proceeds from property and equipment disposals 40,150 13,425 13,312 Decrease in other assets -- 100,000 -- Notes receivable from officers and employees for purchase of common stock (66,343) -- -- ------------ ------------ ------------ Net cash used in investing activities (3,497,018) (6,003,299) (735,494) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: (Payments) borrowings under note payable, net (872,403) 1,194,284 416,985 Proceeds from long-term debt 8,029,950 1,961,624 -- Payment for prepaid interest -- (1,500,000) -- Repayment of long-term debt (10,478,521) (1,399,072) (815,812) Payment of debt issuance costs (598,256) -- -- Issuance of common stock 1,446,563 43,750 50,000 Issuance of preferred stock, net of offering costs -- -- 25,000 Payment of preferred stock dividend (90,791) (193,689) (193,289) ------------ ------------ ------------ Net cash (used in) provided by financing activities (2,563,458) 106,897 (517,116) ------------ ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (303,043) 303,043 (414,704) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 303,043 -- 414,704 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ -- $ 303,043 $ -- ============ ============ ============ See notes to consolidated financial statements.
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES BASIS OF FINANCIAL STATEMENT PRESENTATION - The consolidated financial statements include the accounts of Eagle Pacific Industries, Inc. and its subsidiaries (the "Company"). At December 31, 1996 the Company owns 100% of Pacific Plastics, Inc. and its wholly-owned subsidiary, Arrow Pacific Plastics, Inc. ("Pacific"), and 96.0% of Eagle Plastics, Inc. ("Eagle"). All significant intercompany accounts and transactions have been eliminated. The minority interest shown in the consolidated financial statements represents the outside stockholders' 4.0% and 8.2% interest in the common equity of Eagle at December 31, 1996 and 1995, respectively. CASH AND CASH EQUIVALENTS - Cash equivalents consist principally of money market and short-term commercial paper investments with initial maturities of three months or less. INVENTORIES - Inventories are stated at the lower of cost, determined by the first-in, first-out (FIFO) method, or market. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and are depreciated over the estimated useful life of each asset using the straight-line method. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful lives of the improvements. The carrying value is evaluated for impairment based on historical and projected undiscounted cash flows of the Company. GOODWILL - Goodwill has been recorded for the excess of the purchase price over the fair value of the net assets acquired and is being amortized using the straight-line method over 40 years. The carrying value is evaluated for impairment based on historical and projected undiscounted cash flows of the Company. DEFERRED FINANCING COSTS - Deferred financing costs are amortized over the term of the related indebtedness using the effective interest method. FAIR VALUE OF FINANCIAL INSTRUMENTS - In accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", management estimates that the carrying value of outstanding debt obligations approximate fair value. The estimated fair value amounts have been determined through the use of discounted cash flow analysis using interest rates currently available to the Company for issuance of debt with similar terms and remaining maturities. PRODUCT WARRANTY - The Company's products are generally under warranty against defects in material and workmanship for a period of one year; however, one of the Company's products has a 50-year warranty and another has a lifetime warranty for as long as the original purchaser owns the property where this product is installed. The Company has established an accrual for these anticipated future warranty costs. SALES - Sales are recorded at the time of shipment of the product. INCOME TAXES - The Company utilizes the asset and liability method of accounting for income taxes as set forth in Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Deferred income tax assets and liabilities are computed annually for differences between the financial statement and income tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. NET INCOME (LOSS) PER COMMON SHARE - Primary income (loss) per common and common equivalent share was computed by dividing net income (loss) by the weighted average number of common and common equivalent shares outstanding. Common stock equivalents in 1996 and 1994 result from the assumed exercise of stock options and warrants using the modified treasury stock method. Such method assumes the exercise of all dilutive options and warrants and the application of the aggregate proceeds as if the funds were first applied to the repurchase of 20% of the outstanding common shares and the remaining balance of the funds were applied to reduce short- or long-term borrowings. Common stock equivalents were not used in 1995 as their effect would have been antidilutive because of the net loss. Fully diluted earnings per common and common equivalent share for the year ended December 31, 1996 and 1994, were computed based on the assumed exercise of stock options and warrants using the modified treasury stock method and the assumed conversion of the Series A Preferred Stock. ESTIMATES - The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. SIGNIFICANT VENDORS - The Company acquires raw materials from various sources. During the years ended December 31, 1996, 1995 and 1994, purchases of such raw materials from two vendors totaled 61%, 72% and 74%, respectively, of total material purchases. 2. ACQUISITION OF PACIFIC PLASTICS, INC. On July 10, 1995, the Company acquired all of the outstanding common stock of Pacific. Pacific extrudes polyvinyl chloride pipe and polyethylene tubing products which are marketed primarily in the northwestern United States. The purchase price of Pacific was $6,750,000, consisting of $4,350,000 in cash, $1,700,000 in the form of a note to the previous owners of Pacific (Sellers), and 262,210 shares of the Company's common stock valued at $700,000. Because 84,210 shares of the 262,210 shares issued were not registered for public sale by March 1, 1996 the holders have the right to require the Company to repurchase up to 84,210 shares at 80% of market price at the time of the repurchase request. In addition, the Company paid $750,000 in cash to two of the Sellers in exchange for their agreement not to compete with the Company for five years. The Company financed the cash portion of the purchase and noncompetition agreements from borrowings on a new revolving credit line (Revolver) and term loan (Term Loan) of $3,184,000 and $1,916,000, respectively. Additional proceeds from the Revolver were used to repay Pacific's existing line of credit. Both the Revolver and the Term Loan were paid off in May 1996 (Note 5). The $1,700,000 note payable to the Sellers requires the Company to make 36 monthly payments of principal and interest at a fixed rate of 9% per annum or aggregate payments of $54,059 per month. The Sellers' note is an obligation of Pacific, secured by the stock of Pacific acquired by the Company and is guaranteed by the Company. The Company also entered into a three-year and a two-year employment contract with two of the Sellers with whom the Company entered into noncompete agreements. Such contracts provide for base salary and standard benefits. In consideration for entering into such employment contracts, the Company granted each Seller stock options to purchase 100,000 shares of the Company's common stock at $3.125 per share. This acquisition was accounted for under the purchase method of accounting. The Company included the results of operations of Pacific subsequent to the acquisition. The fair value of the assets acquired less the liabilities assumed exceeded the purchase price by $5,316,000. This excess was recorded as a reduction to property and equipment and noncompete agreements of $4,831,000 and $485,000, respectively. The following unaudited pro forma condensed combined statements of operations data reflects the combined operations of the Company and Pacific during the years ended December 31, 1995 and 1994, as if the acquisition had occurred at the beginning of 1994. The unaudited pro forma condensed combined statements of operations data may not necessarily reflect the actual results of operations of the Company which would have resulted had the acquisition occurred as of the dates presented. The unaudited pro forma information is not necessarily indicative of future results of operations for the combined companies. YEAR ENDED DECEMBER 31, 1995 1994 Revenues $ 69,495,000 $ 64,106,000 Gross profit 12,302,000 16,249,000 Net (loss) income (505,000) 3,809,000 Net (loss) income applicable to common stock (699,000) 3,616,000 Net (loss) income per common share $ (0.18) $ 0.76 3. INVENTORIES 1996 1995 Raw materials $ 3,151,146 $ 2,485,546 Finished goods 7,128,022 5,689,411 ------------ ------------ $ 10,279,169 $ 8,174,957 ============ ============ 4. PROPERTY AND EQUIPMENT 1996 1995 Land $ 523,678 $ 495,664 Buildings and leasehold improvements 2,687,673 1,364,752 Machinery and equipment 10,586,322 7,955,641 Transportation equipment 327,613 341,447 Furniture and fixtures 399,622 405,748 Construction-in-progress -- 615,298 ------------ ------------ 14,524,908 11,178,550 Less accumulated depreciation 3,038,889 1,823,802 ------------ ------------ $ 11,486,019 $ 9,354,748 ============ ============ 5. DEBT At December 31, 1996, the Company had outstanding borrowings of $4,649,102 under the revolving credit loan agreement of $16,500,000, subject to borrowing base restrictions. The Company may borrow up to 85% of "eligible" accounts receivable, as defined, and 55% of "eligible" inventory, as defined. At December 31, 1996, the Company had additional borrowings available of approximately $4,300,000 which is based on available collateral. The revolving credit loan expires May 9, 2000. Interest is payable monthly at the bank's national base rate, plus .25% (8.5% at December 31, 1996). The agreement also includes a commitment fee of .5% of the unused portion of the credit loan, payable monthly. At December 31, 1995, the Company had outstanding borrowings of $5,521,505. The revolving credit loan is secured by substantially all assets of the Company. Until all obligations of the revolving credit loan and term note are paid in full, the Company must comply with certain covenants outlined in the loan agreement, including tangible net worth, net cash flow and senior interest coverage ratio. The weighted average interest rate on all short-term borrowings at December 31, 1996 and 1995 was 8.5% and 8.8%, respectively. In May 1996, the Company repaid $3.0 million of it's subordinated debt which generated an extraordinary loss of $1,728,353, net of income taxes. This loss consisted of unamortized prepaid interest of $1.5 million and deferred finance costs of $228,000. The Company issued a 22 month warrant to purchase 215,000 shares of the Company's common stock in connection with the subordinated debt prepayment. The $135,000 value assigned to the warrant is being amortized to interest expense over the term of the refinanced debt. In conjunction with the repayment, the Company obtained $1.5 million of new common equity and an additional $3.4 million of term notes, and the Company repurchased approximately one-half of the remaining Eagle minority interest. The additional term notes were obtained through a bank refinancing which consolidated the Eagle and Pacific term notes and revolving credit loans into a $8.0 million term note and a $16.5 million revolving credit loan. LONG-TERM DEBT AT DECEMBER 31 CONSISTED OF THE FOLLOWING: 1996 1995 Term promissory note (A) $ 7,332,900 $ -- Subordinated promissory note (B) 3,972,450 6,386,750 Term promissory note (C) 950,013 1,486,698 Various installment notes payable (D) 704,400 959,852 Term promissory note -- 3,278,334 Term promissory note -- 1,741,000 Note payable -- 909,942 ----------- ----------- 12,959,763 14,762,576 Less current maturities 1,951,751 3,019,064 ----------- ----------- $11,008,012 $11,743,512 =========== =========== (A) Payable $95,300 monthly, plus interest at LIBOR plus 2.75% (8.375% at December 31, 1996), with remaining principal due May 9, 1999;. Secured by substantially all assets of Eagle and subject to the terms and covenants of the credit loan agreement outlined above. (B) Due in full May 10, 1999, including interest at 10.4%. During 1996, $3.0 million of this debt was repaid. This promissory note is subordinated in payment to the Company's line of credit and term promissory notes. This agreement requires the Company to maintain the same covenants as the revolving credit loan. The original issue discount (OID) of $1,590,000 ($954,000 after the $3,000,000 prepayment in 1996) has been netted against the debt and is being accreted over the term of the debt using the effective interest method. This accretion is included in interest expense. At December 31, 1996 and 1995, unaccreted OID was $527,550 and $1,113,250, respectively. Pursuant to the terms of the Subordinated note, after January 1, 1999, the lender was entitled to receive one or more contingent interest payments based upon the profitability of Eagle. The maximum aggregate amount of the contingent interest payments was to be 87.5% of Eagle's earnings before interest, taxes, depreciation and amortization ("EBITDA") for any four consecutive quarters after January 1, 1998. The contingent interest was being accrued over the period the debt was to be outstanding under the interest method, using an estimate of the EBITDA calculation for the year ended December 31, 1998, based upon the current year's EBITDA. On March 16, 1995, the Company executed an agreement with the Lender whereby the contingent interest requirement was fixed in exchange for: (i) $1,500,000 in cash; (ii) $1,200,000 paid on September 1, 1995; (iii) $970,000 to be paid on September 1, 1996; (iv) the issuance of 210,000 shares of the Company's common stock; and (v) the issuance of a three year warrant to purchase 100,000 shares of the Company's common stock at $3.00 per share. The present value of the total consideration provided was recorded as prepaid interest on the consolidated balance sheets and is being amortized over the period the Subordinated note is outstanding using the interest method. The estimate of the total contingent interest payable used to accrue the contingent interest payable at December 31, 1994, approximated the present value of the total consideration provided pursuant to the March 16, 1995, agreement described above. (C) Due August 1, 1998; payable $54,059 monthly, including interest at 9%. Secured by the stock of Pacific and guaranteed by the Company. (D) Due dates ranging from March 1997 through July 2001, initially payable $26,092 monthly, including interest at 7.5 to 9.38%. Secured by land and equipment. These amounts are shown in the consolidated balance sheets under the following captions at December 31: 1996 1995 Current maturities of long-term debt $ 1,951,751 $ 3,019,064 Long-term debt, less current maturities 7,035,562 5,356,762 Subordinated debt 3,972,450 6,386,750 ----------- ----------- $12,959,763 $14,762,576 =========== =========== Aggregate annual maturities of long-term debt at December 31, 1996, are: 1997 $ 1,951,751 1998 1,747,712 1999 9,752,117 2000 21,999 2001 13,734 ----------- 13,487,313 Less unamortized original issue discount 527,550 ----------- $12,959,763 =========== 6. DEFERRED COMPENSATION The Company previously adopted a plan of deferred compensation for a former officer of the Company. Under this plan, the officer will receive $50,000 per year for three years commencing when the Company's annual net income per share equals or exceeds $1.00. The Company also has an unfunded deferred compensation agreement which provides upon retirement approximately $75,000. The present value at retirement of total estimated deferred compensation is being accrued over the remaining years of employment to the full eligibility date. 7. COMMITMENTS AND CONTINGENCIES LITIGATION - The Company is periodically involved in various legal actions arising in the normal course of business. At December 31, 1996, the Company was not aware of any material legal proceedings against it or its subsidiaries. LEASES - The Company has noncancelable operating leases for office space which expire in June 1998 and for certain operating facilities which expire in 1997 and 2010. The office lease requires payment of a proportionate share of real estate taxes and building operating expenses. The operating facility leases contain provisions for increasing the monthly rent for changes in the Consumer Price Index, and the lease expiring in 1997 includes two renewal options for a period from 1998 through 2005. Future minimum lease payments at December 31, 1996 were: 1997 $ 280,000 1998 158,000 1999 128,000 2000 128,000 2001 128,000 Thereafter 1,089,000 ---------- $1,911,000 ========== Rent expense under all operating leases was $285,000, $234,000 and $166,000 for the years ended December 31, 1996, 1995 and 1994, respectively. During 1996, 1995 and 1994, the Company received $5,400, $6,000 and $15,000, respectively, of sublease income. This sublease income has reduced the Company's rent expense. 8. STOCKHOLDERS' EQUITY The Company issued 12,500 shares of Series A convertible Preferred Stock at $2.00 per share during the year ended December 31, 1994. The preferred stock is convertible, at the option of the holder, to common stock at a current conversion ratio of one share of common stock for each share of preferred stock. The Company may force conversion of the preferred stock at any time after the Company's common stock trades in the public market for 20 consecutive days at an average bid and asked price greater than $4.00 per share. The preferred stock has voting rights based on the number of shares of common stock into which the preferred stock is then convertible and has a liquidation preference of $2 per share to common stock. During 1996, the Company issued the following numbers of shares of common stock for the following purposes: 600,000 for a private equity offering, 60,547 for the acquisition of additional shares of Eagle Plastics, Inc. stock, 1,559,750 for the conversion of 1,364,750 shares of preferred stock, and 70,000 for the exercise of stock options. During 1995, the Company issued the following numbers of shares of common stock for the following purposes: 262,210 for the purchase of Pacific, 210,000 to fix the Blair contingent interest, 72,500 for the acquisition of Eagle stock and 25,000 for the exercise of stock warrants. During 1994, the Company issued 16,667 shares of common stock in connection with the purchase of equipment. The Company's subsidiary, Eagle, has previously granted options to purchase 600,000 shares of Eagle's common stock at $.75 per share, which was $.75 below estimated market value at the grant date. The difference between the exercise price and the estimated market value is being amortized as compensation expense over the vesting period of the options, which is December 1994 through December 1997. If such options are exercised, the Company's ownership of Eagle would decrease to 88.2%. In 1996, the Company established a leverage equity purchase program (LEPP). Under the LEPP the Company may provide loans to board members and various members of management to purchase common stock of the Company. The loans are represented by five-year promisory notes, bear interest at a rate equal to the rate on the Company's revolver loan (8.50% at December 31, 1996), and are collateralized by the pledge of the purchased shares of common stock of the Company. 9. INCOME TAXES Deferred tax assets and liabilities represent temporary differences between the basis of assets and liabilities for financial reporting purposes and tax purposes. Deferred tax assets are primarily comprised of reserves which have been deducted for financial statement purposes, but have not been deducted for income tax purposes and the tax effect of net operating loss carryforwards. The Company annually estimates the amount of deferred tax assets which it expects to realize based on historical averages of pretax accounting income and estimates of future pretax accounting income. The Company has recorded a valuation allowance to reduce recorded deferred tax assets to the amount of deferred tax benefit expected to be realized. Deferred taxes as of December 31, 1996 and 1995, are summarized as follows: 1996 1995 Current deferred taxes: Warranty reserve $ 13,000 $ 15,000 Allowance for doubtful accounts 76,000 67,000 Accrued expenses 175,400 154,000 Prepaid expenses 10,000 12,000 Federal net operating loss carryforwards 340,000 -- Less valuation allowance (274,400) (248,000) ------------ ------------ Total $ 340,000 $ -- ============ ============ Long-term deferred taxes: LIFO inventory recapture $ (535,000) $ (599,000) Deferred compensation 160,000 207,000 Excess of book over tax depreciation (892,000) (951,000) Noncompete agreement 192,000 208,000 Federal net operating loss carryforwards 14,313,000 15,181,000 Federal capital loss carryforward -- 366,000 State net operating loss carryforward -- 51,000 Tax credit carryforward 684,000 488,000 AMT credit carryforward 86,000 52,000 Other 15,000 30,000 Less valuation allowance (13,363,000) (15,111,000) ------------ ------------ Total $ 660,000 $ (78,000) ============ ============ The extraordinary loss in 1996 resulted in an increase in the net operating loss carryforward and the valuation allowance of approximately $1.8 million and $700,000, respectively. Income tax expense for the years ended December 31, 1996, 1995 and 1994, consist of the following:
1996 1995 1994 Current Federal $ -- $ -- $ 50,000 State 68,315 (164,000) 140,000 Deferred - primarily federal (1,078,000) -- -- ----------- ----------- ----------- Income tax (benefit) expense before (1,009,685) (164,000) 190,000 extraordinary loss Income tax benefit from extraordinary loss on debt prepayments (80,500) -- -- ----------- ----------- ----------- $(1,090,185) $ (164,000) $ 190,000 Income tax (benefit) expense =========== =========== ===========
A reconciliation of the expected federal income taxes, using the effective statutory federal rate of 35%, with the (benefit) provision for income taxes is as follows:
1996 1995 1994 Expected federal expense (benefit) $ 864,000 $ (362,000) $ 560,000 State taxes, net of federal benefit and tax credit 46,000 (222,000) 180,000 Expiration of capital loss carryforward 366,000 -- -- Change in valuation allowance (2,413,000) 407,000 (570,000) AMT 69,000 -- -- Other 58,315 13,000 20,000 ----------- ----------- ----------- $(1,009,685) $ (164,000) $ 190,000 =========== =========== ===========
As of December 31, 1996, the Company had net operating loss carryforwards for federal tax purposes of approximately $43,100,000. Under the Tax Reform Act of 1986, certain future changes in ownership resulting from the sale or issuance of stock may limit the amount of net operating loss carryforwards which can be utilized on an anuual basis. These carryforwards expire if not utilized to reduce future taxable income: 1997 $ 8,800,000 1998 6,100,000 1999 11,600,000 2000 11,400,000 2001 300,000 2002 500,000 2003 500,000 2004 700,000 2005 1,600,000 2007 300,000 2008 900,000 2010 400,000 10. RETIREMENT PLAN The Company has a 401(k) plan covering substantially all employees. The Company's discretionary contributions to the plan are determined annually by the Board of Directors. The Company is also committed to matching a portion of employees' voluntary contributions. Participants are 100% vested in their own contributions and the Company's matching contribution immediately and in the Company's discretionary contribution at the end of three years. Total amounts contributed by the Company were $243,191, $58,999 and $112,942 for the years ended December 31, 1996, 1995 and 1994, respectively. 11. STOCK-BASED COMPENSATION PLANS The Company has 1991 and 1997 stock option plans (the "plans") which provide for the granting of incentive or nonqualified stock options to key employees. Generally, options outstanding under the plans: (i) are granted at prices equal to the market value of the stock on the date of grant, (ii) vest ratably over a three or four year vesting periods, and (iii) expire over a period not greater than ten years from the date of grant. In addition, the Company and its subsidiaries have outstanding stock options issued outside the plans, which contain terms and conditions similar to those described above. A summary of the status of the Company's stock options as of December 31, 1996, 1995, and 1994 and changes during the years ended on those dates is presented below (shares in thousands):
1996 1995 1994 Wgtd Avg Wgtd Avg Wgtd Avg Shares Exer Price Shares Exer Price Shares Exer Price ------ ---------- ------ ---------- ------ ---------- Outstanding at beginning of year 2,169 $ 1.57 1,668 $ 1.13 1,644 $ 1.10 Granted 30 2.75 512 2.99 54 1.75 Exercised (70) .34 -- -- -- -- Canceled (3) 1.75 (11) 1.69 (30) .84 ----- ------ ----- Outstanding at end of year 2,127 1.41 2,169 1.57 1,668 1.13 ===== ====== ===== Options exercisable at year end 1,773 1,575 842 ===== ====== ===== Options available for future grant 970 -- -- ===== ====== ===== Weighted average fair value of options granted during the year $ 1.49 $ 1.53 ======= =======
The Company applies Accounting Principles Board (APB) Opinion No. 25 and related Interpretations in accounting for the plans. No compensation cost has been recognized for options issued under the plans when the exercise price of the options granted are at least equal to the fair value of the common stock on the date of grant. If the exercise price is less than the fair value of the common stock, the difference is recorded as unearned compensation and is amortized over the vesting period of the option. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1996 and 1995, consistent with the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation", the Company's net income (loss) and per share amounts would have changed to the pro forma amounts indicated below:
1996 1995 Net income (loss) applicable to common stock, as reported $ 1,660,169 $ (1,058,513) Net income (loss) applicable to common stock, pro forma 1,615,169 (1,843,513) Net income (loss) per common share, as reported $ 0.25 $ (0.27) Net income (loss) per common share, pro forma $ 0.24 $ (0.47)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions and results: 1996 1995 Dividend yield -- -- Expected volatility 25% 50% Expected life of option 120 months 60 months Risk free interest rate 6.66% 6.38% Fair value of options on grant date $ 45,000 $ 785,000 The following table summarizes information about stock options outstanding at December 31, 1996 (shares in thousands):
Options Outstanding Options Exercisable -------------------------------------------- ---------------------- Range of Wgtd Avg Wgtd Avg Wgtd Avg Exercise Number Remaining Exercise Number Exercise Prices Outstanding Contractual Life(yr) Price Exercisable Price ------- ----------- -------------------- -------- ----------- -------- $ .34 295 1.8 $ .34 295 $ .34 .64 to .75 635 3.8 .74 485 .74 1.75 to 2.50 714 3.4 2.00 583 1.99 2.75 to 3.25 483 3.7 3.04 410 3.06 ----- ----- .34 to 3.25 2,127 3.4 1.63 1,773 1.62 ===== =====
12. ADDITIONAL CASH FLOW INFORMATION
1996 1995 1994 Noncash investing and financing activities: Issuance of notes payable in connection with the agreement extinguishing the contingent interest $ -- $1,985,325 $ -- Issuance of common stock in connection with the agreement extinguishing the contingent interest -- 642,600 -- Value of warrants issued in connection with the agreement extinguishing the contingent interest -- 6,000 -- Issuance of common stock in connection with the acquisition of Pacific -- 700,000 -- Issuance of notes payable in connection with the acquisition of Pacific -- 1,700,000 -- Issuance of common stock in exchange for Eagle stock 165,549 108,750 -- Issuance of common stock in exchange for Preferred stock 2,729,500 -- -- Additional cash flow information: Interest paid, including prepaid interest to extinguish contingent interest 1,839,443 3,311,987 1,664,371 Income taxes paid (refunded) 38,656 (121,400) 224,700
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 relating to directors is incorporated by reference to the section labeled "Election of Directors" and the information relating to section 16(a) of the Exchange Act is incorporated by reference to the section labeled "Compliance with section 16(a) of the Securities Exchange Act," which sections appear in the Registrant's definitive Proxy Statement. The names, ages and positions of the executive officers of the Company are as follows:
Name Age Position ---- --- -------- Harry W. Spell 73 Chairman of the Board William H. Spell 40 Chief Executive Officer and Director Bruce A. Richard 66 Vice Chairman of the Board, Secretary, Treasurer, and Director G. Peter Konen 47 President and Director Patrick M. Mertens 33 Chief Financial Officer
HARRY W. SPELL has been Chairman of the Board of the Company since January 1992. He was formerly Chief Executive Officer of the Company from January 1992 through December 1996. In addition, Mr. Spell is the Chairman of the Board of Peerless Industrial Group, which during 1995 completed the leveraged buyout of Peerless Chain, Inc. Peerless is a manufacturer of chain and wire form products with over $45 million of sales in 1995. Previously, Mr. Spell was involved with the acquisitions of a specialty food products company and a manufacturer of various clothing sportswear. He was employed by Northern States Power, a Fortune 500 company, from 1949 until August 1988 when he reached the mandatory retirement age of 65 and he retired from all positions at Northern States Power Company. Mr. Harry Spell was Senior Vice President, Finance and Chief Financial Officer of Northern States Power Company from May 1983 until April 1988. Mr. Harry Spell currently serves as a director of Appliance Recycling Centers of America, Inc. and Peerless Industrial Group, as well as several private organizations. WILLIAM H. SPELL has been President and a director of the Company since January 1992 and was named Chief Executive Officer of the Company in December 1996. He was formerly President of the Company from January 1992 through December 1996. In addition, Mr. Spell is the Chief Executive Officer and a Director of Peerless Industrial Group, which during 1995 completed the leveraged buyout of Peerless Chain, Inc. Peerless is a manufacturer of chain and wire form products with over $45 million of sales in 1995. Previously, Mr. Spell was involved with the acquisitions of a specialty food products company and a manufacturer of various clothing sportswear. From 1981 through 1988, Mr. Spell was vice president and director of corporate finance at John G. Kinnard & Company, Inc., a regional investment banking firm located in Minneapolis. Mr. Spell serves as a director of Peerless Industrial Group, as well as several private organizations. Mr. Spell has a B.S. and an M.B.A. degree from the University of Minnesota. BRUCE A. RICHARD has been a Director of the Company since March of 1992, Secretary, Treasurer since the Summer of 1993 and Vice Chairman since February 1996. He also served as Chief Financial Officer of the Company from mid-1993 to February 1996. In addition, Mr. Richard is the Chief Financial Officer of Peerless Industrial Group, which during 1995 completed the leveraged buyout of Peerless Chain, Inc. Peerless is a manufacturer of chain and wire form products with over $45 million of sales in 1995. As a member of the Spell Investment Group, Mr. Richard has been involved in numerous acquisitions and investment activities. He retired as President and Chief Operating Officer of Northern States Power Company, a Fortune 500 company, in July of 1986. He is a former member of the Board of Regents of St. John's University, and is actively involved in other philanthropic organizations. G. PETER KONEN has been a Director of the Company since December 1993. He has been Executive Vice President and Chief Operating Officer of Eagle since its inception in 1984 and was named President of the Company in December 1996. Prior to founding Eagle Plastics, he was Plant Manager with Western Plastics, a PVC pipe and PE tubing manufacturer. Mr. Konen has over 28 years of experience in the business of manufacturing and sales of plastic pipe. PATRICK M. MERTENS came to the Company in May 1995 as Controller and was promoted to Chief Financial Officer in December 1995. From 1986 to May of 1991, he was a Senior Auditor, specializing in manufacturing clients, for Baird, Kurtz & Dobson, CPA's. During his tenure at Baird, Kurtz & Dobson, Mr. Mertens was in charge of the annual audit for Eagle Plastics, Inc. for three years. From 1991 to May of 1995 he was Assistant Controller of ISCO, Inc., a public company that manufactures scientific and environmental instruments. Mr. Mertens has a B.S. degree from Peru, Nebraska State College and an M.B.A. degree from the University of Nebraska. Harry W. Spell is William H. Spell's father. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the Company's Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements See Part II, Item 8 hereof. 2. Financial Statement Schedule Title Schedule ----- -------- Valuation and Qualifying Accounts . . . . . . . . II All schedules omitted are inapplicable or the information required is shown in the Consolidated Financial Statements or notes thereto. 3. Exhibits Exhibit Description Number ----------- ------ 3.1 Articles of Incorporation of the Registrant, as amended to date (Incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 - File No. 0-18050) 3.2 Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-4 - File No. 33-29511) 10.1 Registrant's 1991 Stock Plan (Incorporated by reference to Exhibit 10.22 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992 - File No. 0-18050)* 10.2 Tax Sharing Agreement between Registrant and Eagle Plastics, Inc. dated December 17, 1993 (Incorporated by reference to Exhibit 10.7 to the Registrant's Form 8-K dated December 17, 1993 - File No. 0-18050) 10.3 Eagle Stock Agreement dated December 17, 1993 regarding Eagle Plastics, Inc. Common Stock held by minority shareholders and option holders (Incorporated by reference to Exhibit 10.16 to the Registrant's Form 8-K dated December 17, 1993 - File No. 0-18050) 10.4 Eagle Plastics, Inc. Stock Option Plan (Incorporated by reference to Exhibit 10.17 to the Registrant's Form 8-K dated December 17, 1993 - File No. 0-18050)* 10.5 Form of Agreement by and among the Registrant, Pacific Plastics, Inc., Pacific Acquisition Corp., Loyal Sorensen and Jarred Thompson. (Incorporated by reference to Exhibit 10.2 to Registrant's Form 8-K dated July 10, 1995 - File No. 0-18050) 10.6 Form of Acknowledgment of Closing by and among the Registrant, Pacific Plastics, Inc., Loyal Sorensen and Jarred Thompson (Incorporated by reference to Exhibit 10.3 to Registrant's Form 8-K dated July 10, 1995 File No. 0-18050) 10.7 Tax Sharing Agreement between Registrant and Pacific Plastics, Inc. dated July 10, 1995 (Incorporated by reference to Exhibit 10.7 to Registrant's Form 8-K dated July 10, 1995 - File No. 0-18050) 10.8 Promissory Note and Stock Pledge Agreement dated July 10, 1995 between Arrow Pacific Plastics, Inc., former shareholders, Registrant and Pacific Plastics, Inc. (Incorporated by reference to Exhibit 10.14 to Registrant's Form 8-K dated July 10, 1995 - File No. 0-18050) 10.9 Registration Rights Agreement dated July 10, 1995 between the Registrant and Loyal Sorensen, Zelda Sorensen, Jarred Thompson and Sharron Thompson (Incorporated by reference to Exhibit 10.15 to Registrant's Form 8-K dated July 10, 1995 - File No. 0-18050) 10.10 Plan of Recapitalization dated March 16, 1995 among Registrant, William Blair Mezzanine Capital Fund, L.P. ("Blair") and Eagle Plastics, Inc. ("Eagle") (Incorporated by reference to Exhibit 10.29 to the Registrant's Form 10-KSB for the fiscal year ended December 31, 1994 - File No. 0-18050) 10.11 Debenture Acquisition Agreement dated March 16, 1995 among Registrant, Blair and Eagle (Incorporated by reference to Exhibit 10.28 to the Registrant's Form 10-KSB for the fiscal year ended December 31, 1994 File No. 0-18050) 10.12 Senior Subordinated Debenture of the Registrant dated March 16, 1995, in the principal amount of $7,500.00 in favor of Blair (Incorporated by reference to Exhibit 10.17 to the Registrant's Form 10-KSB for the fiscal year ended December 31, 1994 - File No. 0-18050) 10.13 Registration Agreement dated March 16, 1995 between Registrant and Blair (Incorporated by reference to Exhibit 10.15 to the Registrant's Form 10-KSB for the fiscal year ended December 31, 1994 - File No. 0-18050) 10.14 Registrant's 1997 Stock Option Plan* 10.15 Loan and Security Agreement dated May 10, 1996 between Registrant, its subsidiaries and Fleet Capital Corporation 10.16 Employment Agreement between Patrick M. Mertens and Registrant dated January 1, 1997* 10.17 Amendment Agreement dated May 10, 1996 between Registrant, its subsidiaries and Blair 10.18 Warrant to purchase 215,000 shares of Common Stock of Registrant granted to Blair 10.19 Co-Sale Agreement dated May 10, 1996 between Registrant and Blair 10.20 Irrevocable Proxy agreement dated May 10, 1996 between Registrant and Blair 10.21 Amendment Agreement regarding registration rights dated May 10, 1996 between Registrant and Loyal Sorensen, Zelda Sorensen, Jarred Thompson and Sharron Thompson 10.22 Employment Agreement between William H. Spell and Registrant dated January 1, 1997* 10.23 Employment Agreement between G. Peter Konen and Registrant dated January 1, 1997* 10.24 Consulting Agreement and Release between Larry D. Schnase and Registrant dated January 1, 1997* 10.25 Registrant's EBITDA Bonus Plan* 10.26 Registrant's Leveraged Equity Purchase Plan* 11 Statement of earnings per share 21 Subsidiaries of Registrant Subsidiary State of Incorporation ---------- ---------------------- Eagle Plastics, Inc. Nebraska Pacific Plastics, Inc. Oregon Arrow Pacific Plastics, Inc. (a subsidiary of Pacific Plastics, Inc.) Utah 23 Consent of Independent Auditors 24 Power of Attorney from certain directors and officers - see "Signatures" on signature page of this Form 10-K 27 Financial Data Schedule * compensatory plan or arrangement (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the last quarter of 1996. (c) Exhibits See Item 14(a)3 above. 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. EAGLE PACIFIC INDUSTRIES, INC. Dated: March 28, 1997 By: /s/ William H. Spell ----------------------------------------- William H. Spell, Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints William H. Spell and Patrick M. Mertens his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. 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 in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ William H. Spell Chief Executive Officer and Director March 28, 1997 - ------------------------- (Principal Executive Officer) /s/ Patrick M. Mertens Chief Financial Officer March 28, 1997 - ------------------------- (Principal Financial and Accounting Officer) /s/ G. Peter Konen Director March 28, 1997 - ------------------------- /s/ George R. Long Director March 28, 1997 - ------------------------- /s/ Richard W. Perkins Director March 28, 1997 - ------------------------- /s/ Bruce A. Richard Director March 28, 1997 - ------------------------- /s/ Larry D. Schnase Director March 28, 1997 - ------------------------- /s/ Harry W. Spell Director March 28, 1997 - -------------------------
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS Balance at Balance at Beginning Additions- Deductions- End Description of Year Provisions Write-offs of Year ----------- ------- ---------- ---------- ------- Allowance for doubtful accounts and sales discounts Fiscal year ended December 31, 1996 $157,900 67,846 30,647 $195,100 Fiscal year ended December 31, 1995 $105,000 177,076 124,176 $157,900 Fiscal year ended December 31, 1994 $112,000 13,500 20,500 $105,000
EX-10.14 2 1997 STOCK OPTION PLAN EXHIBIT 10.14 EAGLE PACIFIC INDUSTRIES, INC. 1997 STOCK OPTION PLAN SECTION 1. DEFINITIONS As used herein, the following terms shall have the meanings indicated below: (a) "Affiliates" shall mean a Parent or Subsidiary of the Company. (b) "Committee" shall mean a Committee of two or more directors who shall be appointed by and serve at the pleasure of the Board. In the event the Company's securities are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, each of the members of the Committee shall be a "Non-Employee Director" within the meaning of Rule 16b-3, or any successor provision, as then in effect, of the General Rules and Regulations under the Securities Exchange Act of 1934 as amended. (c) The "Company" shall mean Eagle Pacific Industries, Inc., a Minnesota corporation. (d) "Fair Market Value" shall mean (i) if such stock is reported in the national market system or is listed upon an established stock exchange or exchanges, the reported closing price of such stock in such national market system or on such stock exchange or exchanges on the date the option is granted or, if no sale of such stock shall have occurred on that date, on the next preceding day on which there was a sale of stock; (ii) if such stock is not so reported in the national market system or listed upon an established stock exchange, the average of the closing "bid" and "asked" prices quoted by a recognized specialist in the Common Stock of the Company on the date the option is granted, or if there are no quoted "bid" and "asked" prices on such date, on the next preceding date for which there are such quotes; or (iii) if such stock is not publicly traded as of the date the option is granted, the per share value as determined by the Board, or the Committee, in its sole discretion by applying principles of valuation with respect to all such options. (e) The "Internal Revenue Code" is the Internal Revenue Code of 1986, as amended from time to time. (f) "Option Stock" shall mean Common Stock of the Company (subject to adjustment as described in Section 12) reserved for options pursuant to this Plan. (g) The "Optionee" means an employee of the Company or any Subsidiary to whom an incentive stock option has been granted pursuant to Section 9; or a consultant or advisor to or director, employee or officer of the Company or any Subsidiary to whom a nonqualified stock option has been granted pursuant to Section 10. (h) "Parent" shall mean any corporation which owns, directly or indirectly in an unbroken chain, fifty percent (50%) or more of the total voting power of the Company's outstanding stock. (i) The "Plan" means Eagle Pacific Industries, Inc. 1997 Stock Option Plan, as amended hereafter from time to time, including the form of Option Agreements as they may be modified by the Board from time to time. (j) A "Subsidiary" shall mean any corporation of which fifty percent (50%) or more of the total voting power of outstanding stock is owned, directly or indirectly in an unbroken chain, by the Company. SECTION 2. PURPOSE The purpose of the Plan is to promote the success of the Company and its Subsidiaries by facilitating the retention of competent personnel and by furnishing incentive to officers, directors, employees, consultants, and advisors upon whose efforts the success of the Company and its Subsidiaries will depend to a large degree. It is the intention of the Company to carry out the Plan through the granting of stock options which will qualify as "incentive stock options" under the provisions of Section 422 of the Internal Revenue Code, or any successor provision, pursuant to Section 9 of this Plan, and through the granting of "nonqualified stock options" pursuant to Section 10 of this Plan. Adoption of this Plan shall be and is expressly subject to the condition of approval by the shareholders of the Company within twelve (12) months before or after the adoption of the Plan by the Board of Directors. Any incentive stock options granted after adoption of the Plan by the Board of Directors shall be treated as nonqualified stock options if shareholder approval is not obtained within such twelve-month period. SECTION 3. EFFECTIVE DATE OF PLAN The Plan shall be effective as of the date of adoption by the Board of Directors, subject to approval by the shareholders of the Company as required in Section 2. SECTION 4. ADMINISTRATION The Plan shall be administered by the Board of Directors of the Company (hereinafter referred to as the "Board") or by a Committee which may be appointed by the Board from time to time (collectively referred to as the "Administrator"). The Administrator shall have all of the powers vested in it under the provisions of the Plan, including but not limited to exclusive authority (where applicable and within the limitations described herein) to determine, in its sole discretion, whether an incentive stock option or nonqualified stock option shall be granted, the individuals to whom, and the time or times at which, options shall be granted, the number of shares subject to each option and the option price and terms and conditions of each option. The Administrator shall have full power and authority to administer and interpret the Plan, to make and amend rules, regulations and guidelines for administering the Plan, to prescribe the form and conditions of the respective stock option agreements (which may vary from Optionee to Optionee) evidencing each option and to make all other determinations necessary or advisable for the administration of the Plan. The Administrator's interpretation of the Plan, and all actions taken and determinations made by the Administrator pursuant to the power vested in it hereunder, shall be conclusive and binding on all parties concerned. No member of the Board or the Committee shall be liable for any action taken or determination made in good faith in connection with the administration of the Plan. In the event the Board appoints a Committee as provided hereunder, any action of the Committee with respect to the administration of the Plan shall be taken pursuant to a majority vote of the Committee members or pursuant to the written resolution of all Committee members. SECTION 5. PARTICIPANTS The Administrator shall from time to time, at its discretion and without approval of the shareholders, designate those employees, officers, directors, consultants, and advisors of the Company or of any Subsidiary to whom nonqualified stock options shall be granted under this Plan; provided, however, that consultants or advisors shall not be eligible to receive stock options hereunder unless such consultant or advisor renders bona fide services to the Company or Subsidiary and such services are not in connection with the offer or sale of securities in a capital raising transaction. The Administrator shall, from time to time, at its discretion and without approval of the shareholders, designate those employees of the Company or any Subsidiary to whom incentive stock options shall be granted under this Plan. The Administrator may grant additional incentive stock options or nonqualified stock options under this Plan to some or all participants then holding options or may grant options solely or partially to new participants. In designating participants, the Administrator shall also determine the number of shares to be optioned to each such participant. The Board may from time to time designate individuals as being ineligible to participate in the Plan. SECTION 6. STOCK The Stock to be optioned under this Plan shall consist of authorized but unissued shares of Option Stock. One Million (1,000,000) shares of Option Stock shall be reserved and available for options under the Plan; provided, however, that the total number of shares of Option Stock reserved for options under this Plan shall be subject to adjustment as provided in Section 12 of the Plan. In the event that any outstanding option under the Plan for any reason expires or is terminated prior to the exercise thereof, the shares of Option Stock allocable to the unexercised portion of such option shall continue to be reserved for options under the Plan and may be optioned hereunder. SECTION 7. DURATION OF PLAN Incentive stock options may be granted pursuant to the Plan from time to time during a period of ten (10) years from the effective date as defined in Section 3. Nonqualified stock options may be granted pursuant to the Plan from time to time after the effective date of the Plan and until the Plan is discontinued or terminated by the Board. Any incentive stock option granted during such ten-year period and any nonqualified stock option granted prior to the termination of the Plan by the Board shall remain in full force and effect until the expiration of the option as specified in the written stock option agreement and shall remain subject to the terms and conditions of this Plan. SECTION 8. PAYMENT Optionees may pay for shares upon exercise of options granted pursuant to this Plan with cash, personal check, certified check or, if approved by the Administrator in its sole discretion, Common Stock of the Company valued at such Stock's then Fair Market Value, or such other form of payment as may be authorized by the Administrator. The Administrator may, in its sole discretion, limit the forms of payment available to the Optionee and may exercise such discretion any time prior to the termination of the option granted to the Optionee or upon any exercise of the option by the Optionee. With respect to payment in the form of Common Stock of the Company, the Administrator may require advance approval or adopt such rules as it deems necessary to assure compliance with Rule 16b-3, or any successor provision, as then in effect, of the General Rules and Regulations under the Securities Exchange Act of 1934, if applicable. SECTION 9. TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS Each incentive stock option granted pursuant to this Section 9 shall be evidenced by a written stock option agreement (the "Option Agreement"). The Option Agreement shall be in such form as may be approved from time to time by the Administrator and may vary from Optionee to Optionee; provided, however, that each Optionee and each Option Agreement shall comply with and be subject to the following terms and conditions: (a) Number of Shares and Option Price. The Option Agreement shall state the total number of shares covered by the incentive stock option. To the extent required to qualify the Option as an incentive stock option under Section 422 of the Internal Revenue Code, or any successor provision, the option price per share shall not be less than one hundred percent (100%) of the Fair Market Value of the Common Stock per share on the date the Administrator grants the option; provided, however, that if an Optionee owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of its parent or any Subsidiary, the option price per share of an incentive stock option granted to such Optionee shall not be less than one hundred ten percent (110%) of the Fair Market Value of the Common Stock per share on the date of the grant of the option. The Administrator shall have full authority and discretion in establishing the option price and shall be fully protected in so doing. (b) Term and Exercisability of Incentive Stock Option. The term during which any incentive stock option granted under the Plan may be exercised shall be established in each case by the Administrator. To the extent required to qualify the Option as an incentive stock option under Section 422 of the Internal Revenue Code, or any successor provision, in no event shall any incentive stock option be exercisable during a term of more than ten (10) years after the date on which it is granted; provided, however, that if an Optionee owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of its parent or any Subsidiary, the incentive stock option granted to such Optionee shall be exercisable during a term of not more than five (5) years after the date on which it is granted. The Option Agreement shall state when the incentive stock option becomes exercisable and shall also state the maximum term during which the option may be exercised. In the event an incentive stock option is exercisable immediately, the manner of exercise of the option in the event it is not exercised in full immediately shall be specified in the Option Agreement. The Administrator may accelerate the exercisability of any incentive stock option granted hereunder which is not immediately exercisable as of the date of grant. (c) Other Provisions. The Option Agreement authorized under this Section 9 shall contain such other provisions as the Administrator shall deem advisable. Any such Option Agreement shall contain such limitations and restrictions upon the exercise of the option as shall be necessary to ensure that such option will be considered an "incentive stock option" as defined in Section 422 of the Internal Revenue Code or to conform to any change therein. SECTION 10. TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS Each nonqualified stock option granted pursuant to this Section 10 shall be evidenced by a written Option Agreement. The Option Agreement shall be in such form as may be approved from time to time by the Administrator and may vary from Optionee to Optionee; provided, however, that each Optionee and each Option Agreement shall comply with and be subject to the following terms and conditions: (a) Number of Shares and Option Price. The Option Agreement shall state the total number of shares covered by the nonqualified stock option. Unless otherwise determined by the Administrator, the option price per share shall be one hundred percent (100%) of the Fair Market Value of the Common Stock per share on the date the Administrator grants the option. (b) Term and Exercisability of Nonqualified Stock Option. The term during which any nonqualified stock option granted under the Plan may be exercised shall be established in each case by the Administrator. The Option Agreement shall state when the nonqualified stock option becomes exercisable and shall also state the maximum term during which the option may be exercised. In the event a nonqualified stock option is exercisable immediately, the manner of exercise of the option in the event it is not exercised in full immediately shall be specified in the stock option agreement. The Administrator may accelerate the exercisability of any nonqualified stock option granted hereunder which is not immediately exercisable as of the date of grant. (c) Withholding. The Company or its Subsidiary shall be entitled to withhold and deduct from future wages of the Optionee all legally required amounts necessary to satisfy any and all withholding and employment-related taxes attributable to the Optionee's exercise of a nonqualified stock option. In the event the Optionee is required under the Option Agreement to pay the Company, or make arrangements satisfactory to the Company respecting payment of, such withholding and employment-related taxes, the Administrator may, in its discretion and pursuant to such rules as it may adopt, permit the Optionee to satisfy such obligation, in whole or in part, by electing to have the Company withhold shares of Common Stock otherwise issuable to the Optionee as a result of the option's exercise equal to the amount required to be withheld for tax purposes. Any stock elected to be withheld shall be valued at its Fair Market Value, as of the date the amount of tax to be withheld is determined under applicable tax law. The Optionee's election to have shares withheld for this purpose shall be made on or before the date the option is exercised or, if later, the date that the amount of tax to be withheld is determined under applicable tax law. Such election shall be approved by the Administrator and otherwise comply with such rules as the Administrator may adopt to assure compliance with Rule 16b-3, or any successor provision, as then in effect, of the General Rules and Regulations under the Securities Exchange Act of 1934, if applicable. (d) Other Provisions. The Option Agreement authorized under this Section 10 shall contain such other provisions as the Administrator shall deem advisable. SECTION 11. TRANSFER OF OPTION No incentive stock option shall be transferable, in whole or in part, by the Optionee other than by will or by the laws of descent and distribution and, during the Optionee's lifetime, the option may be exercised only by the Optionee. If the Optionee shall attempt any transfer of any incentive stock option granted under the Plan during the Optionee's lifetime, such transfer shall be void and the incentive stock option, to the extent not fully exercised, shall terminate. The Administrator may, in its sole discretion, permit the Optionee to transfer any or all nonqualified stock options to any member of the Optionee's "immediate family" as such term is defined in Rule 16a-1(e) promulgated under the Securities Exchange Act of 1934, or any successor provision, or to one or more trusts whose beneficiaries are members of such Optionee's "immediate family" or partnerships in which such family members are the only partners; provided, however, that the Optionee receives no consideration for the transfer and such transferred nonqualified stock option shall continue to be subject to the same terms and conditions as were applicable to such nonqualified stock option immediately prior to its transfer. SECTION 12. RECAPITALIZATION, SALE, MERGER, EXCHANGE OR LIQUIDATION In the event of an increase or decrease in the number of shares of Common Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company, the number of shares of Option Stock reserved under Section 6 hereof and the number of shares of Option Stock covered by each outstanding option and the price per share thereof shall be adjusted by the Board to reflect such change. Additional shares which may be credited pursuant to such adjustment shall be subject to the same restrictions as are applicable to the shares with respect to which the adjustment relates. Unless otherwise provided in the stock option agreement, in the event of an acquisition of the Company through the sale of substantially all of the Company's assets and the consequent discontinuance of its business or through a merger, consolidation, exchange, reorganization, reclassification, extraordinary dividend, divestiture or liquidation of the Company (collectively referred to as a "transaction"), all outstanding options shall become immediately exercisable, whether or not such options had become exercisable prior to the transaction; provided, however, that if the acquiring party seeks to have the transaction accounted for on a "pooling of interests" basis and, in the opinion of the Company's independent certified public accountants, accelerating the exercisability of such options would preclude a pooling of interests under generally accepted accounting principles, the exercisability of such options shall not accelerate. In addition to the foregoing, in the event of such a transaction, the Board may provide for one or more of the following: (a) the complete termination of this Plan and cancellation of outstanding options not exercised prior to a date specified by the Board (which date shall give Optionees a reasonable period of time in which to exercise the options prior to the effectiveness of such transaction); (b) that Optionees holding outstanding incentive or nonqualified options shall receive, with respect to each share of Option Stock subject to such options, as of the effective date of any such transaction, cash in an amount equal to the excess of the Fair Market Value of such Option Stock on the date immediately preceding the effective date of such transaction over the option price per share of such options; provided that the Board may, in lieu of such cash payment, distribute to such Optionees shares of stock of the Company or shares of stock of any corporation succeeding the Company by reason of such transaction, such shares having a value equal to the cash payment herein; or (c) the continuance of the Plan with respect to the exercise of options which were outstanding as of the date of adoption by the Board of such plan for such transaction and provide to Optionees holding such options the right to exercise their respective options as to an equivalent number of shares of stock of the corporation succeeding the Company by reason of such transaction. The Board may restrict the rights of or the applicability of this Section 12 to the extent necessary to comply with Section 16(b) of the Securities Exchange Act of 1934, the Internal Revenue Code or any other applicable law or regulation. The grant of an option pursuant to the Plan shall not limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, exchange or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. SECTION 13. SECURITIES LAW COMPLIANCE No shares of Common Stock shall be issued pursuant to the Plan unless and until there has been compliance, in the opinion of Company's counsel, with all applicable legal requirements, including without limitation, those relating to securities laws and stock exchange listing requirements. As a condition to the issuance of Option Stock to Optionee, the Administrator may require Optionee to (a) represent that the shares of Option Stock are being acquired for investment and not resale and to make such other representations as the Administrator shall deem necessary or appropriate to qualify the issuance of the shares as exempt from the Securities Act of 1933 and any other applicable securities laws, and (b) represent that Optionee shall not dispose of the shares of Option Stock in violation of the Securities Act of 1933 or any other applicable securities laws. As a further condition to the grant of any incentive or nonqualified stock option or the issuance of Option Stock to Optionee, Optionee agrees to the following: (a) In the event the Company advises Optionee that it plans an underwritten public offering of its Common Stock in compliance with the Securities Act of 1933, as amended, and the underwriter(s) seek to impose restrictions under which certain shareholders may not sell or contract to sell or grant any option to buy or otherwise dispose of part or all of their stock purchase rights of the underlying Common Stock, Optionee will not, for a period not to exceed 180 days from the prospectus, sell or contract to sell or grant an option to buy or otherwise dispose of any incentive or nonqualified stock option granted to Optionee pursuant to the Plan or any of the underlying shares of Common Stock without the prior written consent of the underwriter(s) or its representative(s). (b) In the event the Company makes any public offering of its securities and determines in its sole discretion that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any states securities or Blue Sky law limitations with respect thereto, the Board of Directors of the Company shall have the right (i) to accelerate the exercisability of any incentive or nonqualified stock option and the date on which such option must be exercised, provided that the Company gives Optionee prior written notice of such acceleration, and (ii) to cancel any options or portions thereof which Optionee does not exercise prior to or contemporaneously with such public offering. (c) In the event of a transaction (as defined in Section 12 of the Plan) which is treated as a "pooling of interests" under generally accepted accounting principles, Optionee will comply with Rule 145 of the Securities Act of 1933 and any other restrictions imposed under other applicable legal or accounting principles if Optionee is an "affiliate" (as defined in such applicable legal and accounting principles) at the time of the transaction, and Optionee will execute any documents necessary to ensure compliance with such rules. The Company reserves the right to place a legend on any stock certificate issued upon exercise of an option granted pursuant to the Plan to assure compliance with this Section 13. SECTION 14. RIGHTS AS A SHAREHOLDER An Optionee (or the Optionee's successor or successors) shall have no rights as a shareholder with respect to any shares covered by an option until the date of the issuance of a stock certificate evidencing such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date is prior to the date such stock certificate is actually issued (except as otherwise provided in Section 12 of the Plan). SECTION 15. AMENDMENT OF THE PLAN The Board may from time to time, insofar as permitted by law, suspend or discontinue the Plan or revise or amend it in any respect; provided, however, that no such revision or amendment, except as is authorized in Section 12, shall impair the terms and conditions of any option which is outstanding on the date of such revision or amendment to the material detriment of the Optionee without the consent of the Optionee. Notwithstanding the foregoing, no such revision or amendment shall (i) materially increase the number of shares subject to the Plan except as provided in Section 12 hereof, (ii) change the designation of the class of employees eligible to receive options, (iii) decrease the price at which options may be granted, or (iv) materially increase the benefits accruing to Optionees under the Plan without the approval of the shareholders of the Company if such approval is required for compliance with the requirements of any applicable law or regulation. Furthermore, the Plan may not, without the approval of the shareholders, be amended in any manner that will cause incentive stock options to fail to meet the requirements of Section 422 of the Internal Revenue Code. SECTION 16. NO OBLIGATION TO EXERCISE OPTION The granting of an option shall impose no obligation upon the Optionee to exercise such option. Further, the granting of an option hereunder shall not impose upon the Company or any Subsidiary any obligation to retain the Optionee in its employ for any period. INCENTIVE STOCK OPTION AGREEMENT EAGLE PACIFIC INDUSTRIES, INC. 1997 STOCK OPTION PLAN PARTIES: Eagle Pacific Industries, Inc. ("COMPANY") 2430 Metropolitan Centre 333 South Seventh Street Minneapolis, Minnesota 55402 ("OPTIONEE") _____________________________ _____________________________ _____________________________ DATE: December 31, 1996 RECITALS: A. The Company's Board of Directors (the "Board") has adopted a stock option plan providing for the grant of stock options known as the "Eagle Pacific Industries, Inc. 1997 Stock Option Plan" (the "Plan"). The Plan will be submitted to the Company's shareholders for approval at the next annual shareholder's meeting or, if earlier, within twelve (12) months of the Board's adoption of the Plan. The capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Plan. B. Optionee is an employee of the Company or one of its subsidiaries. C. This Incentive Stock Option Agreement is being entered into pursuant to the terms of the Plan. AGREEMENT: The parties hereto, each intending to be legally bound, agree as follows: 1. Grant of Option. The Company hereby grants to the Optionee, on the date of this Agreement, the option to purchase ________ shares of Common Stock of the Company (the "Option Stock") subject to the terms and conditions herein contained, and subject only to adjustment in such number of shares as provided in Section 12 of the Plan. This option is intended to be an incentive stock option within the meaning of Section 422, or any successor provision, of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder; provided, however, that if the Company's shareholders do not approve the Plan within twelve (12) months of the date the Plan was adopted by the Board, this option shall be treated as a nonqualified stock option. 2. Option Price. During the term of this option, the purchase price for the shares of Option Stock granted herein is $2.75 per share, subject only to adjustment of such price as provided in Section 12 of the Plan. 3. Term of Option. Unless terminated earlier under the provisions of Sections 10 or 11 of this Agreement or under Sections 12 or 13 of the Plan, this option shall terminate as of the close of business on December 30, 2006. This option shall not be exercisable until July 1, 1997. During the period from July 1, 1997, through December 30, 1997, this option shall be exercisable to the extent of twenty-five percent (25%) of the Option Stock. Thereafter, this option shall be exercisable to the extent of an additional twenty-five percent (25%) of the Option Stock on each anniversary of the date hereof until the earlier of the date on which this option shall have become exercisable to the extent of one hundred percent (100%) of the Option Stock or the date the option terminates as provided herein. Once the option becomes exercisable to the extent of one hundred percent (100%) of the Option Stock, Optionee may continue to exercise this option under the terms and conditions of this Agreement until the termination of the option as provided herein. If Optionee does not purchase upon an exercise of this option the full number of shares which Optionee is then entitled to purchase, Optionee may purchase upon any subsequent exercise prior to this option's termination such previously unpurchased shares in addition to those Optionee is otherwise entitled to purchase. 4. Personal Exercise by Optionee. This option shall, during the lifetime of the Optionee, be exercisable only by said Optionee and shall not be transferable by the Optionee, in whole or in part, other than by will or by the laws of descent and distribution. 5. Manner of Exercise of Option. a. This option may be exercised by the Optionee (or by the Optionee's successor or successors) by giving written notice to the Company of an election to exercise such option. Such notice shall specify the number of shares to be purchased hereunder and shall specify a date (not more than 30 calendar days from the date of delivery of the notice to the Company) on which the Optionee shall deliver payment of the full purchase price for the shares being purchased. Such notice shall be delivered to the Company at its principal place of business. The option shall be deemed exercised at the time the Company receives such notice. The option may be exercised with respect to any number or all of the shares as to which it can then be exercised and, if partially exercised, may be so exercised as to the unexercised shares any number of times during the option period as provided herein. b. Subject to approval by the Administrator, payment of the option price by Optionee shall be in the form of cash, personal check, certified check or previously acquired shares of Common Stock of the Company, or any combination thereof. Any stock so tendered as part of such payment shall be valued at its Fair Market Value as provided in the Plan. For purposes of this Agreement, "previously acquired shares of Common Stock" shall include shares of Common Stock that are already owned by Optionee at the time of exercise. As soon as practicable after the effective exercise of all or any part of the option, Optionee shall be recorded on the stock transfer books of the Company as the owner of the shares purchased, and the Company shall deliver to Optionee one or more duly issued stock certificates evidencing such ownership. All requisite original issue or transfer documentary stamp taxes shall be paid by the Company. 6. Rights as a Shareholder. The Optionee (or Optionee's successor or successors) shall have no rights as a shareholder with respect to any shares covered by this option until the date of the issuance of a stock certificate for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 12 of the Plan. 7. Employment. This Agreement shall not confer on Optionee any right with respect to continuance of employment by the Company or any of its Subsidiaries, nor will it interfere in any way with the right of the Company to terminate such employment, it being acknowledged and agreed that Optionee is an employee at will of the Company. 8. Stock Option Plan. This option is granted pursuant to the Plan, a copy of which has been made available to the Optionee and is hereby made a part of this Agreement. This Agreement is subject to and in all respects limited and conditioned as provided in the Plan. The Plan governs this option and the Optionee, and in the event of any question as to the construction of this Agreement or of a conflict between the Plan and this Agreement, the Plan shall govern, except as the Plan otherwise provides. 9. Withholding Taxes on Disqualifying Disposition. In the event of a disqualifying disposition of the shares acquired through the exercise of this option, Optionee hereby agrees to inform the Company of such disposition. Upon notice of a disqualifying disposition, the Company may take such action as it deems appropriate to insure that, if necessary to comply with all applicable federal or state income tax laws or regulations, all applicable federal and state payroll, income or other taxes are withheld from any amounts payable by the Company to Optionee. If the Company is unable to withhold such federal and state taxes, for whatever reason, Optionee hereby agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under federal or state law. Optionee may, subject to the approval and discretion of the Administrator or such administrative rules it may deem advisable, elect to have all or a portion of such tax withholding obligations satisfied by delivering shares of the Company's Common Stock having a fair market value equal to such obligations. 10. Termination of Employment. If Optionee ceases to be an employee of the Company or any Subsidiary for any reason, other than because of death or disability, this option shall completely terminate on the earlier of (i) the close of business 30 days after the date of such termination of employment, and (ii) the expiration date of this option stated in Section 3 above. In such period following such termination of employment, this option shall be exercisable only to the extent the option was exercisable on the date of Optionee's termination of employment, but had not previously been exercised. To the extent this option was not exercisable upon the date of such termination of employment, or if Optionee does not exercise the option within the time specified in this Section 10, all rights of Optionee under this option shall be forfeited. 11. Death or Disability of Optionee. If the Optionee dies or ceases to be an employee of the Company or any Subsidiary due to disability (as such term is defined in Code Section 22(e)(3), or any successor provision), this option shall terminate on the earlier of (i) the close of business six months after the date of the Optionee's death or termination of employment, and (ii) the expiration date of this option stated in Section 3 above. In such period following the date of Optionee's termination of employment or death, this option may be exercised by the Optionee, or by the person or persons to whom the Optionee's rights under this option shall have passed by the Optionee's will or by the laws of descent and distribution, only to the extent the option was exercisable on such date but had not previously been exercised. To the extent this option was not exercisable upon the date of Optionee's termination of employment or death, or if the option is not exercised within the time specified in this Section 11, all rights of Optionee under this option shall be forfeited. 12. Recapitalizations, Sales, Mergers, Exchanges, Consolidations, Liquidation. Pursuant to Section 12 of the Plan, certain changes in the number or character of the Company's Common Stock (through sale, merger, consolidation, exchange, reorganization, divestiture, liquidation, recapitalization, stock split, stock dividend or similar transactions), shall result in an adjustment to the number of shares of Option Stock and the option exercise price with respect to the unexercised portion of this option. Similarly, in the event of a sale, merger, consolidation, exchange, reorganization, divestiture, liquidation or similar transaction, this option shall be adjusted as provided in Section 12 of the Plan. 13. Shares Reserved. The Company shall at all times during the term of this option reserve and keep available such number of shares as will be sufficient to satisfy the requirements of this Agreement. 14. Securities Law Compliance. The exercise of all or any parts of this option shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of Common Stock pursuant to such exercise will not violate any state or federal securities or other laws. Optionee may be required by the Company, as a condition of the effectiveness of any exercise of this option, to agree in writing that all Common Stock to be acquired pursuant to such exercise shall be held, until such time that such Common Stock is registered and freely tradable under applicable state and federal securities laws, for Optionee's own account without a view to any further distribution thereof, that the certificates for such shares shall bear an appropriate legend to that effect and that such shares will be not transferred or disposed of except in compliance with applicable state and federal securities laws. 15. Lockup Period Limitation. Optionee agrees that in the event the Company advises Optionee that it plans an underwritten public offering of its Common Stock in compliance with the Securities Act of 1933, as amended, and that the underwriter(s) seek to impose restrictions under which certain shareholders may not sell or contract to sell or grant any option to buy or otherwise dispose of part or all of their stock purchase rights of the underlying Common Stock, Optionee hereby agrees that for a period not to exceed 180 days from the prospectus, Optionee will not sell or contract to sell or grant an option to buy or otherwise dispose of this option or any of the underlying shares of Common Stock without the prior written consent of the underwriter(s) or its representative(s). 16. Blue Sky Limitation. Notwithstanding anything in this Agreement to the contrary, in the event the Company makes any public offering of its securities and determines in its sole discretion that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any state securities or Blue Sky law limitations with respect thereto, the Board of Directors of the Company shall have the right (i) to accelerate the exercisability of this option and the date on which this option must be exercised, provided that the Company gives Optionee 15 days' prior written notice of such acceleration, and (ii) to cancel any portion of this option or any other option granted to Optionee pursuant to the Plan which is not exercised prior to or contemporaneously with such public offering. Notice shall be deemed given when delivered personally or when deposited in the United States mail, first class postage prepaid and addressed to Optionee at the address of Optionee on file with the Company. 17. Accounting Compliance. Optionee agrees that, in the event a "change of control transaction" (as defined in Paragraph 4(g) above) is treated as a "pooling of interests" under generally accepted accounting principles and Optionee is an "affiliate" of the Company or any Subsidiary (as defined in applicable legal and accounting principles) at the time of such change of control transaction, Optionee will comply with all requirements of Rule 145 of the Securities Act of 1933, as amended, and the requirements of such other legal or accounting principles, and will execute any documents necessary to ensure such compliance. 18. Stock Legend. The certificates for any shares of Common Stock purchased by Optionee (or, in the case of death, Optionee's successors) shall bear an appropriate legend to reflect the restrictions of Sections 14, 15, 16 and 17 of this Agreement. 19. Arbitration. Any dispute arising out of or relating to this Agreement or the alleged breach of it, or the making of this Agreement, including claims of fraud in the inducement, shall be discussed between the disputing parties in a good faith effort to arrive at a mutual settlement of any such controversy. If, notwithstanding, such dispute cannot be resolved, such dispute shall be settled by binding arbitration. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall be a retired state or federal judge or an attorney who has practiced securities or business litigation for at least 10 years. If the parties cannot agree on an arbitrator within 20 days, any party may request that the chief judge of the District Court for Hennepin County, Minnesota, select an arbitrator. Arbitration will be conducted pursuant to the provisions of this Agreement, and the commercial arbitration rules of the American Arbitration Association, unless such rules are inconsistent with the provisions of this Agreement. Limited civil discovery shall be permitted for the production of documents and taking of depositions. Unresolved discovery disputes may be brought to the attention of the arbitrator who may dispose of such dispute. The arbitrator shall have the authority to award any remedy or relief that a court of this state could order or grant; provided, however, that punitive or exemplary damages shall not be awarded. The arbitrator may award to the prevailing party, if any, as determined by the arbitrator, all of its costs and fees, including the arbitrator's fees, administrative fees, travel expenses, out-of-pocket expenses and reasonable attorneys' fees. Unless otherwise agreed by the parties, the place of any arbitration proceedings shall be Hennepin County, Minnesota. 20. Scope of Agreement. This Agreement shall bind and inure to the benefit of the Company and its successors and assigns and the Optionee and any successor or successors of the Optionee permitted by Section 4 above. IN WITNESS WHEREOF, the Company and the Optionee have executed this Agreement in the manner appropriate to each, as of the day and year first above written. "COMPANY" EAGLE PACIFIC INDUSTRIES, INC. By:______________________________________ Its:______________________________ "OPTIONEE" _________________________________________ NONQUALIFIED STOCK OPTION AGREEMENT EAGLE PACIFIC INDUSTRIES, INC. 1997 STOCK OPTION PLAN PARTIES: Eagle Pacific Industries, Inc. ("COMPANY") 2430 Metropolitan Centre 333 South Seventh Street Minneapolis, Minnesota 55402 ("OPTIONEE") ______________________________ ______________________________ ______________________________ DATE: ______________________________ RECITALS: A. The Company's Board of Directors (the "Board") has adopted a stock option plan providing for the grant of stock options known as the "Eagle Pacific Industries, Inc. 1997 Stock Option Plan" (the "Plan"). THE PLAN WILL BE SUBMITTED TO THE COMPANY'S SHAREHOLDERS FOR APPROVAL AT THE NEXT ANNUAL SHAREHOLDER'S MEETING OR, IF EARLIER, WITHIN TWELVE (12) MONTHS OF THE BOARD'S ADOPTION OF THE PLAN. The capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Plan. B. Optionee is an employee, consultant or director of or an advisor to the Company or one of its Subsidiaries. C. This Nonqualified Stock Option Agreement is being entered into pursuant to the terms of the Plan. AGREEMENT: The parties hereto, each intending to be legally bound, agree as follows: 1. Grant of Option. The Company hereby grants to the Optionee, on the date of this Agreement, the option to purchase ___________ shares of Common Stock of the Company (the "Option Stock") subject to the terms and conditions herein contained, and subject only to adjustment in such number of shares as provided in Section 12 of the Plan. This option is not intended to be an incentive stock option within the meaning of Section 422, or any successor provision, of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder. 2. Option Price. During the term of this option, the purchase price for the shares of Option Stock granted herein is $_________ per share, subject only to adjustment of such price as provided in Section 12 of the Plan. 3. Term of Option. Unless terminated earlier under the provisions of Sections 10 or 11 of this Agreement or under Sections 12 or 13 of the Plan, this option shall terminate as of the close of business on _____________. This option shall not be exercisable until _______________. During the period from______________ through _______________, this option shall be exercisable to the extent of _____ percent (___%) of the Option Stock. Thereafter, this option shall be exercisable to the extent of an additional ____ percent (___%) of the Option Stock on each anniversary of the date hereof until the earlier of the date on which this option shall have become exercisable to the extent of one hundred percent (100%) of the Option Stock or the date the option terminates as provided herein. Once the option becomes exercisable to the extent of one hundred percent (100%) of the Option Stock, Optionee may continue to exercise this option under the terms and conditions of this Agreement until the termination of the option as provided herein. If Optionee does not purchase upon an exercise of this option the full number of shares which Optionee is then entitled to purchase, Optionee may purchase upon any subsequent exercise prior to this option's termination such previously unpurchased shares in addition to those Optionee is otherwise entitled to purchase. 4. Personal Exercise by Optionee. This option shall, during the lifetime of the Optionee, be exercisable only by said Optionee and shall not be transferable by the Optionee, in whole or in part, other than by will or by the laws of descent and distribution. 5. Manner of Exercise of Option. a. This option may be exercised by the Optionee (or by the Optionee's successor or successors) by giving written notice to the Company of an election to exercise such option. Such notice shall specify the number of shares to be purchased hereunder and shall specify a date (not more than 30 calendar days from the date of delivery of the notice to the Company) on which the Optionee shall deliver payment of the full purchase price for the shares being purchased. Such notice shall be delivered to the Company at its principal place of business. The option shall be deemed exercised at the time the Company receives such notice. The option may be exercised with respect to any number or all of the shares as to which it can then be exercised and, if partially exercised, may be so exercised as to the unexercised shares any number of times during the option period as provided herein. b. Subject to approval by the Administrator, payment of the option price by Optionee shall be in the form of cash, personal check, certified check or previously acquired shares of Common Stock of the Company, or any combination thereof. Any stock so tendered as part of such payment shall be valued at its Fair Market Value as provided in the Plan. For purposes of this Agreement, "previously acquired shares of Common Stock" shall include shares of Common Stock that are already owned by Optionee at the time of exercise. As soon as practicable after the effective exercise of all or any part of the option, Optionee shall be recorded on the stock transfer books of the Company as the owner of the shares purchased, and the Company shall deliver to Optionee one or more duly issued stock certificates evidencing such ownership. All requisite original issue or transfer documentary stamp taxes shall be paid by the Company. 6. Rights as a Shareholder. The Optionee (or Optionee's successor or successors) shall have no rights as a shareholder with respect to any shares covered by this option until the date of the issuance of a stock certificate for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 12 of the Plan. 7. Employment. This Agreement shall not confer on Optionee any right with respect to continuance of employment by the Company or any of its Subsidiaries, nor will it interfere in any way with the right of the Company to terminate such employment, it being acknowledged and agreed that Optionee is an employee at will of the Company. 8. Stock Option Plan. This option is granted pursuant to the Plan, a copy of which has been made available to the Optionee and is hereby made a part of this Agreement. This Agreement is subject to and in all respects limited and conditioned as provided in the Plan. The Plan governs this option and the Optionee, and in the event of any question as to the construction of this Agreement or of a conflict between the Plan and this Agreement, the Plan shall govern, except as the Plan otherwise provides. 9. Withholding Taxes. Upon an exercise of this option, the Company may take such action as it deems appropriate to insure that, if necessary to comply with all applicable federal or state income tax laws or regulations, all applicable federal and state payroll, income or other taxes are withheld from any amounts payable by the Company to Optionee. If the Company is unable to withhold such federal and state taxes, for whatever reason, Optionee hereby agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under federal or state law. Optionee may, subject to the approval and discretion of the Administrator or such administrative rules it may deem advisable, elect to have all or a portion of such tax withholding obligations satisfied by delivering shares of the Company's Common Stock having a fair market value equal to such obligations. 10. Termination of Employment. If Optionee ceases to be an employee of the Company or any Subsidiary for any reason, other than because of death or disability, this option shall completely terminate on the earlier of (i) the close of business ______days after the date of such termination of employment, and (ii) the expiration date of this option stated in Section 3 above. In such period following such termination of employment, this option shall be exercisable only to the extent the option was exercisable on the date of Optionee's termination of employment, but had not previously been exercised. To the extent this option was not exercisable upon the date of such termination of employment, or if Optionee does not exercise the option within the time specified in this Section 10, all rights of Optionee under this option shall be forfeited. 11. Death or Disability of Optionee. If the Optionee dies or ceases to be an employee of the Company or any Subsidiary due to disability (as such term is defined in Code Section 22(e)(3), or any successor provision), this option shall terminate on the earlier of (i) the close of business ________ months after the date of the Optionee's death or termination of employment, and (ii) the expiration date of this option stated in Section 3 above. In such period following the date of Optionee's termination of employment or death, this option may be exercised by the Optionee, or by the person or persons to whom the Optionee's rights under this option shall have passed by the Optionee's will or by the laws of descent and distribution, only to the extent the option was exercisable on such date but had not previously been exercised. To the extent this option was not exercisable upon the date of Optionee's termination of employment or death, or if the option is not exercised within the time specified in this Section 11, all rights of Optionee under this option shall be forfeited. 12. Recapitalizations, Sales, Mergers, Exchanges, Consolidations, Liquidation. Pursuant to Section 12 of the Plan, certain changes in the number or character of the Company's Common Stock (through sale, merger, consolidation, exchange, reorganization, divestiture, liquidation, recapitalization, stock split, stock dividend or similar transactions), shall result in an adjustment to the number of shares of Option Stock and the option exercise price with respect to the unexercised portion of this option. Similarly, in the event of a sale, merger, consolidation, exchange, reorganization, divestiture, liquidation or similar transaction, this option shall be adjusted as provided in Section 12 of the Plan. 13. Shares Reserved. The Company shall at all times during the term of this option reserve and keep available such number of shares as will be sufficient to satisfy the requirements of this Agreement. 14. Securities Law Compliance. The exercise of all or any parts of this option shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of Common Stock pursuant to such exercise will not violate any state or federal securities or other laws. Optionee may be required by the Company, as a condition of the effectiveness of any exercise of this option, to agree in writing that all Common Stock to be acquired pursuant to such exercise shall be held, until such time that such Common Stock is registered and freely tradable under applicable state and federal securities laws, for Optionee's own account without a view to any further distribution thereof, that the certificates for such shares shall bear an appropriate legend to that effect and that such shares will be not transferred or disposed of except in compliance with applicable state and federal securities laws. 15. Lockup Period Limitation. Optionee agrees that in the event the Company advises Optionee that it plans an underwritten public offering of its Common Stock in compliance with the Securities Act of 1933, as amended, and that the underwriter(s) seek to impose restrictions under which certain shareholders may not sell or contract to sell or grant any option to buy or otherwise dispose of part or all of their stock purchase rights of the underlying Common Stock, Optionee hereby agrees that for a period not to exceed 180 days from the prospectus, Optionee will not sell or contract to sell or grant an option to buy or otherwise dispose of this option or any of the underlying shares of Common Stock without the prior written consent of the underwriter(s) or its representative(s). 16. Blue Sky Limitation. Notwithstanding anything in this Agreement to the contrary, in the event the Company makes any public offering of its securities and determines in its sole discretion that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any state securities or Blue Sky law limitations with respect thereto, the Board of Directors of the Company shall have the right (i) to accelerate the exercisability of this option and the date on which this option must be exercised, provided that the Company gives Optionee 15 days' prior written notice of such acceleration, and (ii) to cancel any portion of this option or any other option granted to Optionee pursuant to the Plan which is not exercised prior to or contemporaneously with such public offering. Notice shall be deemed given when delivered personally or when deposited in the United States mail, first class postage prepaid and addressed to Optionee at the address of Optionee on file with the Company. 17. Accounting Compliance. Optionee agrees that, in the event a "change of control transaction" (as defined in Paragraph 4(g) above) is treated as a "pooling of interests" under generally accepted accounting principles and Optionee is an "affiliate" of the Company or any Subsidiary (as defined in applicable legal and accounting principles) at the time of such change of control transaction, Optionee will comply with all requirements of Rule 145 of the Securities Act of 1933, as amended, and the requirements of such other legal or accounting principles, and will execute any documents necessary to ensure such compliance. 18. Stock Legend. The certificates for any shares of Common Stock purchased by Optionee (or, in the case of death, Optionee's successors) shall bear an appropriate legend to reflect the restrictions of Sections 14, 15, 16 and 17 of this Agreement. 19. Arbitration. Any dispute arising out of or relating to this Agreement or the alleged breach of it, or the making of this Agreement, including claims of fraud in the inducement, shall be discussed between the disputing parties in a good faith effort to arrive at a mutual settlement of any such controversy. If, notwithstanding, such dispute cannot be resolved, such dispute shall be settled by binding arbitration. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall be a retired state or federal judge or an attorney who has practiced securities or business litigation for at least 10 years. If the parties cannot agree on an arbitrator within 20 days, any party may request that the chief judge of the District Court for Hennepin County, Minnesota, select an arbitrator. Arbitration will be conducted pursuant to the provisions of this Agreement, and the commercial arbitration rules of the American Arbitration Association, unless such rules are inconsistent with the provisions of this Agreement. Limited civil discovery shall be permitted for the production of documents and taking of depositions. Unresolved discovery disputes may be brought to the attention of the arbitrator who may dispose of such dispute. The arbitrator shall have the authority to award any remedy or relief that a court of this state could order or grant; provided, however, that punitive or exemplary damages shall not be awarded. The arbitrator may award to the prevailing party, if any, as determined by the arbitrator, all of its costs and fees, including the arbitrator's fees, administrative fees, travel expenses, out-of-pocket expenses and reasonable attorneys' fees. Unless otherwise agreed by the parties, the place of any arbitration proceedings shall be Hennepin County, Minnesota. 20. Scope of Agreement. This Agreement shall bind and inure to the benefit of the Company and its successors and assigns and the Optionee and any successor or successors of the Optionee permitted by Section 4 above. IN WITNESS WHEREOF, the Company and the Optionee have executed this Agreement in the manner appropriate to each, as of the day and year first above written. "COMPANY" EAGLE PACIFIC INDUSTRIES, INC. By:______________________________________ Its:______________________________ "OPTIONEE" _________________________________________ EX-10.15 3 LOAN AND SECURITY AGREEMENT EXHIBIT 10.15 05/08/96 LOAN AND SECURITY AGREEMENT DATED: MAY 10, 1996 $24,500,000 BY AND BETWEEN FLEET CAPITAL CORPORATION, AS LENDER AND EAGLE PLASTICS, INC., PACIFIC PLASTICS, INC., AND ARROW PACIFIC PLASTICS, INC. AS BORROWERS WITH EAGLE PACIFIC INDUSTRIES, INC., AS GUARANTOR TABLE OF CONTENTS PAGE ----------------- ---- SECTION 1. CREDIT FACILITY.................................................. 1 1.1 Revolving Credit Loans.................................. 1 1.2 Term Loan............................................... 2 SECTION 2. INTEREST, FEES AND CHARGES....................................... 2 2.1 Interest................................................ 2 2.2 Computation of Interest and Fees........................ 5 2.3 Closing Fee............................................. 5 2.4 Unused Line Fee......................................... 5 2.5 Collection Charges...................................... 5 2.6 Audit and Appraisal Fees................................ 5 2.7 Reimbursement of Expenses............................... 5 2.8 Bank Charges............................................ 6 SECTION 3. LOAN ADMINISTRATION.............................................. 6 3.1 Manner of Borrowing Revolving Credit Loans.............. 6 3.2 Payments................................................ 7 3.3 Mandatory Prepayments................................... 8 3.4 Application of Payments and Collections................. 8 3.5 All Loans to Constitute One Obligation.................. 9 3.6 Loan Account............................................ 9 3.7 Statements of Account................................... 9 SECTION 4. TERM AND TERMINATION.............................................. 9 4.1 Term of Agreement....................................... 9 4.2 Termination............................................. 9 SECTION 5. SECURITY INTERESTS...............................................11 5.1 Security Interest in Collateral.........................11 5.2 Lien Perfection; Further Assurances.....................11 5.3 Lien on Realty..........................................12 SECTION 6. COLLATERAL ADMINISTRATION........................................12 6.1 General.................................................12 6.2 Administration of Accounts..............................13 6.3 Administration of Inventory.............................15 6.4 Administration of Equipment.............................15 6.5 Payment of Charges......................................16 SECTION 7. REPRESENTATIONS AND WARRANTIES...................................16 7.1 General Representations and Warranties..................16 7.2 Continuous Nature of Representations and Warranties.....22 7.3 Survival of Representations and Warranties..............22 SECTION 8. COVENANTS AND CONTINUING AGREEMENTS..............................22 8.1 Affirmative Covenants...................................22 8.2 Negative Covenants......................................24 8.3 Specific Financial Covenants............................29 SECTION 9. CONDITIONS PRECEDENT.............................................31 9.1 Documentation...........................................32 9.2 No Default..............................................32 9.3 Other Loan Documents....................................32 9.4 Equity..................................................32 9.5 Subordinated Debt.......................................32 9.6 Availability............................................32 9.7 No Litigation...........................................32 9.8 Net Operating Carry Forward.............................32 SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT...............33 10.1 Events of Default.......................................33 10.2 Acceleration of the Obligations.........................35 10.3 Other Remedies..........................................35 10.4 Remedies Cumulative; No Waiver..........................36 SECTION 11. MISCELLANEOUS...................................................37 11.1 Power of Attorney.......................................37 11.2 Indemnity...............................................38 11.3 Modification of Agreement; Sale of Interest.............38 11.4 Severability............................................38 11.5 Successors and Assigns..................................39 11.6 Cumulative Effect; Conflict of Terms....................39 11.7 Execution in Counterparts...............................39 11.8 Notice..................................................39 11.9 Lender's Consent........................................40 11.10 Credit Inquiries........................................40 11.11 Time of Essence.........................................40 11.12 Entire Agreement........................................40 11.13 Interpretation..........................................41 11.14 GOVERNING LAW; CONSENT TO FORUM.........................41 11.15 WAIVERS BY BORROWER.....................................42 11.16 Publicity...............................................42 11.17 Reimbursement...........................................42 LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT is made this 10th day of May 1996, by and between FLEET CAPITAL CORPORATION ("Lender"), a Rhode Island corporation with an office at 200 West Madison Street, Chicago, Illinois 60606; and EAGLE PLASTICS, INC. ("EPI"), a Nebraska corporation with its chief executive office and principal place of business at 146 North Maple Street, Hastings, Nebraska 68902 and PACIFIC PLASTICS, INC. ("PPI"), an Oregon corporation with its chief executive office and principal place of business at 21500 Northwest Plastics Drive, Hillsboro, Oregon 97124 and ARROW PACIFIC PLASTICS ("APP"), a Utah corporation with its chief executive office and principal place of business at 44 East 8th Avenue, Midvale, Utah 84047. EPI, PPI and APP are hereinafter sometimes referred to individually as "Borrower" and collectively as "Borrowers." Capitalized terms used in this Agreement have the meanings assigned to them in Appendix A, General Definitions. Accounting terms not otherwise specifically defined herein shall be construed in accordance with GAAP consistently applied. SECTION 1. CREDIT FACILITY Subject to the terms and conditions of, and in reliance upon the representations and warranties made in, this Agreement and the other Loan Documents, Lender agrees to make a Total Credit Facility of up to Twenty-Four Million Five Hundred Thousand Dollars ($24,500,000) available upon Borrowers' request therefor, as follows: 1.1 Revolving Credit Loans. 1.1.1 Loans and Reserves. Lender agrees, for so long as no Default or Event of Default exists, to make Revolving Credit Loans to EPI from time to time, as requested by EPI in the manner set forth in subsection 3.1.1 hereof, up to a maximum principal amount at any time outstanding equal to the EPI Borrowing Base at such time. Lender agrees, for so long as no Default or Event of Default exists, to make Revolving Credit Loans to PPI from time to time, as requested by PPI in the manner set forth in Section 3.1.1 hereof, up to a maximum principal amount at any time outstanding equal to the PPI Borrowing Base at such time. Lender agrees, for so long as no Default or Event of Default exists, to make Revolving Credit Loans to APP from time to time, as requested by APP in the manner set forth in subsection 3.1.1 hereof up to a maximum principal amount at any time outstanding equal to the APP Borrowing Base at such time. Lender shall have the right to establish reserves in such amounts, and with respect to such matters, as Lender shall deem necessary or appropriate, against the amount of Revolving Credit Loans which Borrowers may otherwise request under this subsection 1.1.1, including, without limitation, with respect to (i) other sums chargeable against Borrowers' Loan Account as Revolving Credit Loans under any section of this Agreement; (ii) amounts owing by any Borrower to any Person to the extent secured by a Lien on, or trust over, any Property of any Borrower and Borrowers have not already established funded reserves over which Lender has a security interest; and (iii) such other matters, events, conditions or contingencies as to which Lender, in its sole credit judgment, determines reserves should be established from time to time hereunder. 1.1.2 Use of Proceeds. The Revolving Credit Loans shall be used solely for the satisfaction of existing Indebtedness of EPI to FirsTier Bank, National Association, for the satisfaction of existing Indebtedness of PPI and/or APP to Bank of America Oregon, for the purpose of paying transaction costs related to this transaction in an amount not to exceed $700,000, for the purpose of paying a dividend to Company to permit Company to repay a portion of its Indebtedness for Money Borrowed owed to Blair, to permit Company to purchase shares of stock of EPI and to permit Company to pay professional fees, and for Borrowers' general operating capital needs in a manner consistent with the provisions of this Agreement and all applicable laws. 1.2 Term Loan. 1.2.1 Term Loan. Lender agrees to make (i) a term loan to EPI on the Closing Date in the principal amount of Three Million Two Hundred Seventy-Five Thousand Dollars ($3,275,000) which shall be repayable in accordance with the terms hereof and the terms of the EPI Term Note and shall be secured by all of the Collateral, (ii) a term loan to PPI on the Closing Date in the principal amount of Three Million Seven Hundred Seventy-Five Thousand Dollars ($3,775,000) which shall be repayable in accordance with the terms hereof and the PPI Term Note and shall be secured by all of the Collateral, and (iii) a term loan to APP on the Closing Date in the principal amount of Nine Hundred Fifty Thousand Dollars ($950,000) which shall be repayable in accordance with the terms hereof and the APP Term Note and shall be secured by all of the Collateral. The proceeds of the EPI Term Loan, the PPI Term Loan and the APP Term Loan shall be used solely for purposes for which the proceeds of the Revolving Credit Loans are authorized to be used. SECTION 2. INTEREST, FEES AND CHARGES 2.1 Interest. 2.1.1 Rates of Interest. (A) Interest. (i) Interest shall accrue on the Prime Portion outstanding at the end of each day (computed on the basis of a calendar year of 360 days and actual days elapsed) at a fluctuating rate per annum equal to the sum of one-quarter of one percent (1/4%) plus the Base Rate. After the date hereof, the foregoing rate of interest shall be increased or decreased, as the case may be, by an amount equal to any increase or decrease in the Base Rate, with such adjustments to be effective as of the opening of business on the day that any such change in the Base Rate becomes effective. The Base Rate in effect on the date hereof shall be the Base Rate effective on the opening of business on the date hereof, but if this Agreement is executed on a day that is not a Business Day, the Base Rate in effect on the date hereof shall be the Base Rate effective as of the opening of business on the last Business Day immediately preceding the date hereof. (ii) Interest shall accrue on each LIBOR Revolving Loan Portion outstanding at the end of each day (computed on the basis of a calendar year of 360 days and actual days elapsed) at rates equal to the sum of the LIBOR Rate applicable to each such LIBOR Revolving Loan Portion plus two and one-half percent (2 1/2%). (iii) Interest shall accrue on each LIBOR Term Portion outstanding at the end of each day (computed on the basis of a calendar year of 360 days and actual days elapsed) at rates equal to the sum of the LIBOR Rate applicable to each such LIBOR Term Portion plus two and three-quarters percent (2 3/4%). (B) LIBOR Option. (i) Conditions for Basing Interest on the LIBOR Rate. Upon the condition that: (a) Lender shall have received a LIBOR Request from EPI (in respect to the Term Loan and Revolving Credit Loan made to EPI) or PPI (in respect to Revolving Credit Loans made to PPI and APP) at least 3 Business Days prior to the first day of the LIBOR Period requested: (_)(b) There shall have occurred no change in applicable law which would make it unlawful for Lender to obtain deposits of U.S. dollars in the London interbank foreign currency deposits market; (c) As of the date of the LIBOR Request and the first day of the LIBOR Period, there shall exist no Default or Event of Default which has not been waived by Lender; and (d) Lender shall have determined in good faith that it is able to determine the LIBOR Rate in respect of the requested LIBOR Period and that Lender is able to obtain deposits of U.S. dollars in the London interbank foreign currency deposits market in the applicable amounts and for the requested LIBOR Period; then interest on the LIBOR Portion requested during the LIBOR Period requested will be based on the applicable LIBOR Rate. The foregoing notwithstanding, Borrowers acknowledge that there may not be more than three LIBOR Portions outstanding at any one time. (ii) Indemnification for Funding and Other Losses. Each LIBOR Request shall be irrevocable and binding on Borrowers. Borrowers shall indemnify Lender against any expense or loss suffered by Lender as a result of any failure on the part of Borrowers to fulfill, on or before the date specified in any LIBOR Request, the applicable conditions set forth in this Agreement or as a result of the prepayment of the applicable LIBOR Portion prior to the last day of the applicable LIBOR Period, including, without limitation, any loss (including loss of anticipated profits) or expense incurred by reason of the liquidation or redeployment of deposits or other funds acquired by Lender to fund or maintain the requested LIBOR Portion, when, as a result of such failure on the part of Borrowers or prepayment by Borrowers, interest on such LIBOR Portion is not based on the applicable LIBOR Rate for the requested LIBOR Period. (iii) Change in Applicable Laws, Regulations, etc. If any Legal Requirement shall make it unlawful for Lender to fund through the purchase of U.S. dollar deposits any LIBOR Portion, or otherwise to give effect to its obligations as contemplated under this Section 2.1.1(B), or shall impose on Lender any costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of Lender which includes deposits by reference to which the LIBOR Rate is determined as provided herein or a category of extensions of credit or other assets of Lender which includes any LIBOR Portion, or shall impose on Lender any restrictions on the amount of such a category of liabilities or assets which Lender may hold, (i) Lender may by notice thereof to Borrowers terminate the LIBOR Option, with respect to the Term Loan and the Revolving Credit Loans made or to be made by Lender, (ii) any LIBOR Portion subject thereto shall immediately bear interest thereafter at the rate provided for in Section 2.1.1(A) payable on the dates provided for in Section 3.2.2 and (iii) Borrowers shall indemnify Lender against any out-of-pocket loss, penalty or expense incurred by Lender by reason of the liquidation or redeployment of deposits or other funds acquired by Lender to fund or maintain such LIBOR Portion. (iv) Taxes. It is the understanding of Borrowers and Lender that Lender shall receive payments of amounts of principal of and interest on the Revolving Credit Loans and the Term Loan with respect to the LIBOR Portions from time to time subject to a LIBOR Option free and clear of, and without deduction for, any Taxes. If (i) Lender shall be subject to any such Tax in respect of any such LIBOR Portion or any part thereof or (ii) Borrowers shall be required to withhold or deduct any such Tax from any such amount, the LIBOR Rate applicable to such LIBOR Portion shall be adjusted by Lender to reflect all additional costs incurred by Lender in connection with the payments by Lender or the withholding by Borrowers of such Tax and Borrowers shall provide Lender with a statement detailing the amount of any such Tax actually paid by Borrowers. Determination by Lender of the amount of such costs shall, in the absence of manifest error, be conclusive, and at Borrowers' request, Lender shall demonstrate the basis of such determination. If after any such adjustment, any part of any Tax paid by Lender is subsequently recovered by Lender, Lender shall reimburse Borrowers to the extent of the amount so recovered. A certificate of an officer of Lender setting forth the amount of such recovery and the basis therefor shall, in the absence of manifest error, be conclusive. 2.1.2 Default Rate of Interest. Upon and during the continuance of an Event of Default, and during the continuation thereof, the principal amount of all Loans shall bear interest at a rate per annum equal to two percent (2%) above the interest rate otherwise applicable thereto (the "Default Rate"). 2.1.3 Maximum Interest. In no event whatsoever shall the aggregate of all amounts deemed interest hereunder or under the Term Note and charged or collected pursuant to the terms of this Agreement or pursuant to the Term Note exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. If any provisions of this Agreement, or the Term Note are in contravention of any such law, such provisions shall be deemed amended to conform thereto. 2.2 Computation of Interest and Fees. Interest, unused line fees and collection charges hereunder shall be calculated daily and shall be computed on the actual number of days elapsed over a year of 360 days. For the purpose of computing interest hereunder, all items of payment received by Lender shall be deemed applied by Lender on account of the Obligations (subject to final payment of such items) on the first Business Day after receipt by Lender of such items in Lender's account located in Chicago, Illinois. 2.3 Closing Fee. Borrowers shall pay to Lender a closing fee of One Hundred Twenty-Five Thousand Dollars ($125,000), which shall be fully earned and nonrefundable on the Closing Date and shall be paid concurrently with the initial Loan hereunder. 2.4 Unused Line Fee. Borrowers shall pay to Lender a fee equal to one-half of one percent (1/2%) per annum of the average monthly amount by which Sixteen Million Five Hundred Thousand Dollars ($16,500,000) exceeds the sum of the outstanding principal balance of the Revolving Credit Loans. The unused line fee shall be payable monthly in arrears on the first day of each calendar month hereafter. 2.5 Collection Charges. If items of payment are received by Lender at a time when there are no Revolving Credit Loans outstanding, such items of payment shall be subject to a collection charge equal to one days' interest on the amount thereof at the rate then applicable to Revolving Credit Loans, which collection charges shall be payable by Borrowers to Lender on the first Business Day of each month. 2.6 Audit and Appraisal Fees. Borrowers shall pay to Lender audit and appraisal fees in the amount of $2,500 for each calendar quarter or portion thereof within the Original Term hereof plus all out-of-pocket expenses incurred by Lender in connection with such audits and appraisals. Such fees shall be payable on the first day of the month following the date of issuance by Lender of a request for payment thereof to Borrower which request shall itemize such fees and expenses in reasonable detail. 2.7 Reimbursement of Expenses. If, at any time or times regardless of whether or not an Event of Default then exists, Lender incurs legal or accounting expenses or any other costs or out-of-pocket expenses in connection with (i) the negotiation and preparation of this Agreement or any of the other Loan Documents, any amendment of or modification of this Agreement or any of the other Loan Documents; (ii) the administration of this Agreement or any of the other Loan Documents and the transactions contemplated hereby and thereby; (iii) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Lender, Borrowers or any other Person) in any way relating to the Collateral, this Agreement or any of the other Loan Documents or Borrowers' affairs; (iv) any attempt to enforce any rights of Lender or any Participating Lender against Borrowers or any other Person which may be obligated to Lender by virtue of this Agreement or any of the other Loan Documents, including, without limitation, the Account Debtors provided that Borrowers shall not be required to reimburse Participating Lenders for the cost of more than one counsel in connection with any such enforcement action; or (v) any attempt to inspect, verify, protect, preserve, restore, collect, sell, liquidate or otherwise dispose of or realize upon the Collateral; then all such reasonable legal and accounting expenses, other costs and out of pocket expenses of Lender shall be charged to Borrowers. All amounts chargeable to Borrowers under this Section 2.7 shall be Obligations secured by all of the Collateral, shall be payable on demand to Lender or to such Participating Lender, as the case may be, and shall bear interest from the date such demand is made until paid in full at the rate applicable to Revolving Credit Loans from time to time. Borrowers shall also reimburse Lender for expenses incurred by Lender in its administration of the Collateral to the extent and in the manner provided in Section 6 hereof. The foregoing notwithstanding, (i) Lender agrees that Borrowers shall not be required to reimburse Lender for legal fees and out-of-pocket expenses incurred in connection with the preparation and negotiation of this Loan Agreement and the other Loan Documents executed on or about the Closing Date in excess of $60,000, and (ii) Borrowers shall not be required to reimburse Lender or any Participating Lender for any costs or expenses incurred in any action in which Borrowers, pursuant to a final non-appealable court order, are the prevailing party. Lender acknowledge prior receipt of Seventy-Five Thousand Dollars ($75,000) from Company or Borrowers. Said amount shall be applied towards expenses owed Lender pursuant to this Section 2.7 and any excess shall be refunded to Borrowers. 2.8 Bank Charges. Borrowers shall pay to Lender, on demand, any and all fees, costs or expenses which Lender pays to a bank or other similar institution arising out of or in connection with (i) the forwarding to Borrowers or any other Person on behalf of Borrowers, by Lender, of proceeds of loans made by Lender to Borrowers pursuant to this Agreement and (ii) the depositing for collection, by Lender, of any check or item of payment received or delivered to Lender on account of the Obligations. SECTION 3. LOAN ADMINISTRATION. 3.1 Manner of Borrowing Revolving Credit Loans. Borrowings under the credit facility established pursuant to Section 1 hereof shall be as follows: 3.1.1 Loan Requests. A request for a Revolving Credit Loan shall be made, or shall be deemed to be made, in the following manner: (i) EPI on behalf of itself, PPI on behalf of itself or APP on behalf of itself, may give Lender notice of its intention to borrow, in which notice EPI, PPI or APP, as applicable, shall specify the amount of the proposed borrowing and the proposed borrowing date, no later than 11:00 a.m. Chicago time on the proposed borrowing date, provided, however, that no such request may be made at a time when there exists a Default or an Event of Default; and (ii) the becoming due of any amount required to be paid under this Agreement or the Term Note, whether as interest or for any other Obligation, shall be deemed irrevocably to be a request for a Revolving Credit Loan on the due date in the amount required to pay such interest or other Obligation. As an accommodation to Borrowers, Lender may permit telephonic requests for loans and electronic transmittal of instructions, authorizations, agreements or reports to Lender by EPI, PPI or APP. Unless EPI, PPI or APP, as applicable, specifically directs Lender in writing not to accept or act upon telephonic or electronic communications from either EPI, PPI or APP, Lender shall have no liability to Borrowers for any loss or damage suffered by any Borrower as a result of Lender's honoring of any requests, execution of any instructions, authorizations or agreements or reliance on any reports communicated to it telephonically or electronically and purporting to have been sent to Lender by Borrowers and Lender shall have no duty to verify the origin of any such communication or the authority of the person sending it. 3.1.2 Disbursement. Borrowers hereby irrevocably authorize Lender to disburse the proceeds of each Revolving Credit Loan requested, or deemed to be requested, pursuant to this subsection 3.1.2 as follows: (i) the proceeds of each Revolving Credit Loan requested under subsection 3.1.1(i) shall be disbursed by Lender in lawful money of the United States of America in immediately available funds, in the case of the initial borrowing, in accordance with the terms of the written disbursement letter from Borrowers, and in the case of each subsequent borrowing, by wire transfer to such bank account as may be agreed upon by EPI, PPI or APP, as applicable, and Lender from time to time or elsewhere if pursuant to a written direction from EPI, PPI or APP, as applicable; and (ii) the proceeds of each Revolving Credit Loan requested under subsection 3.1.1(ii) shall be disbursed by Lender by way of direct payment of the relevant interest or other Obligation. 3.1.3 Authorization. Borrowers hereby irrevocably authorize Lender, in Lender's sole discretion, to advance to Borrowers, and to charge to Borrowers' Loan Account hereunder as a Revolving Credit Loan, a sum sufficient to pay all interest accrued on the Obligations during the immediately preceding month and to pay all costs, fees and expenses at any time owed by Borrower to Lender hereunder. Lender shall promptly give Borrowers notice of such advance. 3.2 Payments. Except where evidenced by notes or other instruments issued or made by Borrowers to Lender specifically containing payment provisions which are in conflict with this Section 3.2 (in which event the conflicting provisions of said notes or other instruments shall govern and control), the Obligations shall be payable as follows: 3.2.1 Principal. Principal payable on account of Revolving Credit Loans shall be payable by Borrowers to Lender immediately upon the earliest of (i) the receipt by Lender or any Borrower of any proceeds of any of the Collateral other than Equipment or real Property, to the extent of said proceeds, (ii) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the maturity and payment of the Obligations, or (iii) termination of this Agreement pursuant to Section 4 hereof; provided, however, that if an Overadvance shall exist at any time, Borrowers shall, on demand, repay the Overadvance. Principal payable on account of the Term Loan shall be payable by Borrowers to Lender in accordance with the terms and conditions of the Term Note and the provisions of this Agreement. 3.2.2 Interest. Interest accrued on the Prime Portion and the LIBOR Portions shall be due on the earliest of (i) the first day of each month (for the immediately preceding month), computed through the last calendar day of the preceding month, (ii) the occurrence of an Event of Default in the consequence of which Lender elects to accelerate the maturity and payment of the Obligations or (iii) termination of this Agreement pursuant to Section 4 hereof; provided, however, the Borrowers hereby irrevocably authorize Lender, in Lender's sole discretion, to advance to Borrowers and to charge to Borrowers' Loan Account hereunder as a Revolving Credit Loan, a sum sufficient each month to pay all interest accrued on the Prime Portion and the LIBOR Portions during the immediately preceding month. Lender shall promptly give Borrowers notice of such advance. 3.2.3 Costs, Fees and Charges. Costs, fees and charges payable pursuant to this Agreement shall be payable by Borrowers as and when provided in Section 2 hereof, to Lender or to any other Person designated by Lender in writing. 3.2.4 Other Obligations. The balance of the Obligations requiring the payment of money, if any, shall be payable by Borrowers to Lender as and when provided in this Agreement, the Other Agreements or the Security Documents, or on demand, whichever is later. 3.3 Mandatory Prepayments. 3.3.1 Proceeds /of Sale, Loss, Destruction or Condemnation of Collateral. Except as provided in subsection 6.4.2 hereof, if any Borrower sells any of the Equipment or real Property, or if any of the Collateral is lost or destroyed or taken by condemnation, Borrowers shall pay to Lender, unless otherwise agreed by Lender, as and when received by Borrowers and as a mandatory prepayment of the Term Loan, a sum equal to the proceeds (including insurance payments) received by any Borrower from such sale, loss, destruction or condemnation. Any such mandatory prepayment of the Term Loan shall be applied against regularly scheduled installment payments due under the Term Note in inverse order maturity, and shall be applied, pro rata, to the outstanding principal balance of the EPI Term Note, the PPI Term Note and the PPI Term Note. 3.4 Application of Payments and Collections. All items of payment received by Lender by 12:00 noon, Chicago time, on any Business Day shall be deemed received on that Business Day. All items of payment received after 12:00 noon, Chicago time, on any Business Day shall be deemed received on the following Business Day. For the purpose of computing interest hereunder, all items of payment received by Lender shall be deemed applied by Lender on account of the Obligations (subject to final payment of such items) on the first Business Day after receipt of such item in immediately good funds. Borrowers irrevocably waive the right to direct the application of any and all payments and collections at any time or times hereafter received by Lender from or on behalf of Borrowers, and after the occurrence and during the continuation of an Event of Default, Borrowers do hereby irrevocably agree that Lender shall have the continuing exclusive right to apply and reapply any and all such payments and collections received at any time or times hereafter by Lender or its agent against the Obligations, in such manner as Lender may deem advisable, notwithstanding any entry by Lender upon any of its books and records. If as the result of collections of Accounts as authorized by subsection 6.2.6 hereof a credit balance exists in the Loan Account, such credit balance shall not accrue interest in favor of Borrowers, but shall be available to Borrowers at any time or times for so long as no Default or Event of Default exists. Such credit balance shall not be applied or be deemed to have been applied as a prepayment of the Term Loan, except that Lender may, at its option, offset such credit balance against any of the Obligations upon and during the continuation of an Event of Default. 3.5 All Loans to Constitute One Obligation. The Loans shall constitute one general Obligation of Borrowers, and shall be secured by Lender's Lien upon all of the Collateral. 3.6 Loan Account. Lender shall enter all Loans as debits to the Loan Account and shall also record in the Loan Account all payments made by Borrowers on any Obligations and all proceeds of Collateral which are finally paid to Lender, and may record therein, in accordance with customary accounting practice, other debits and credits, including interest and all charges and expenses properly chargeable to Borrowers. 3.7 Statements of Account. Lender will account to Borrowers monthly with a statement of Loans, charges and payments made pursuant to this Agreement, and such account rendered by Lender shall be deemed final, binding and conclusive upon Borrowers unless Lender is notified by Borrowers in writing to the contrary within 30 days of the date each accounting is mailed to Borrowers. Such notice shall only be deemed an objection to those items specifically objected to therein. SECTION 4. TERM AND TERMINATION 4.1 Term of Agreement. Subject to Lender's right to cease making Loans to Borrowers upon or during the continuation of any Default or Event of Default, this Agreement shall be in effect for a period of three (3) years from the date hereof, through and including May 9, 1999 (the "Original Term"), unless terminated as provided in Section 4.2 hereof. 4.2 Termination. 4.2.1 Termination by Lender. Upon at least 90 days prior written notice to Borrowers, Lender may terminate this Agreement as of the last day of the Original Term and Lender may terminate this Agreement without notice upon or during the continuation of an Event of Default. 4.2.2 Termination by Borrower. Upon at least 90 days prior written notice to Lender, Borrowers may, at their option, terminate this Agreement; provided, however, no such termination (either pursuant to Section 4.2.1 above or this Section 4.2.2) shall be effective until Borrowers have paid all of the Obligations in immediately available funds. Any notice of termination given by Borrowers shall be irrevocable unless Lender otherwise agrees in writing, and Lender shall have no obligation to make any Loans on or after the termination date stated in any such termination notice given pursuant to this Section 4.2.2 or pursuant to Section 4.2.1 above. Borrowers may elect to terminate this Agreement in its entirety only. No section of this Agreement or type of Loan available hereunder may be terminated singly. 4.2.3 Termination Charges. At the effective date of termination of this Agreement for any reason, Borrowers shall pay to Lender (in addition to the then outstanding principal, accrued interest and other charges owing under the terms of this Agreement and any of the other Loan Documents) as liquidated damages for the loss of the bargain and not as a penalty, an amount equal to (i) the sum of one percent of the lesser of the principal balance of the Term Loan or Four Million Dollars ($4,000,000) less the amount of any prior prepayments of the Term Loan plus three percent (3%) of the remaining portion of the Total Credit Facility less the amount of principal paid on the Term Loan as of such date, if termination occurs during the first twelve-month period of the Original Term (May 10, 1996 through May 9, 1997); (ii) the sum of one percent (1%) of the lesser of the principal balance of the Term Loan or Four Million Dollars ($4,000,000) less the amount of any prior prepayments of the Term Loan plus two percent (2%) of the remaining portion of the Total Credit Facility less the amount of principal paid on the Term Loan as of such date, if termination occurs during the second 12-month period of the Original Term (May 10, 1997 through May 9, 1998); and one percent (1%) of the Total Credit Facility less the amount of principal paid on the Term Loan as of such date if termination occurs during the third 12-month period of the Original Term (May 10, 1998 through May 8, 1999). If termination occurs on the last day of the Original Term, no termination charge shall be payable. Any other prepayment of the Term Loan shall be subject to a prepayment fee equal to (i) the sum of (x) one percent of the lesser of the amount of the prepayment or Four Million Dollars ($4,000,000) less the amount of any prior prepayments of the Term Loan plus (y) three percent (3%) of the remainder (if any) of the prepayment, if the prepayment occurs during the first twelve-month period of the Original Term; the sum of (x) one percent (1%) of the lesser of the amount of the prepayment or ($4,000,000) less the amount of any prior prepayments of the Term Loan, plus (y) two percent (2%) of the remainder (if any) of the prepayment if the prepayment occurs within the second twelve month period of the Original Term; and one percent of the amount of the prepayment, if the prepayment occurs during the third 12-month period of the Original Term. No prepayment fee shall be due in respect to any prepayment made after May 8, 1999. 4.2.4 Effect of Termination. All of the Obligations shall be immediately due and payable upon the termination date stated in any notice of termination of this Agreement. All undertakings, agreements, covenants, warranties and representations of Borrowers contained in the Loan Documents shall survive any such termination and Lender shall retain its Liens in the Collateral and all of its rights and remedies under the Loan Documents notwithstanding such termination until Borrowers have paid the Obligations to Lender, in full, in immediately available funds, together with the applicable termination charge, if any. Notwithstanding the payment in full of the Obligations, Lender shall not be required to terminate its security interests in the Collateral unless, with respect to any loss or damage Lender may incur as a result of dishonored checks or other items of payment received by Lender from Borrowers or any Account Debtor and applied to the Obligations, Lender shall, at its option, (i) have received a written agreement, executed by Borrowers and by any Person whose loans or other advances to Borrowers are used in whole or in part to satisfy the Obligations, indemnifying Lender from any such loss or damage; or (ii) have retained such monetary reserves and Liens on the Collateral for such period of time as Lender, in its reasonable discretion, may deem necessary to protect Lender from any such loss or damage. SECTION 5. SECURITY INTERESTS 5.1 Security Interest in Collateral. To secure the prompt payment and performance to Lender of the Obligations, Borrowers hereby grant to Lender a continuing Lien upon all of Borrowers' assets, including all of the following Property and interests in Property of Borrowers, whether now owned or existing or hereafter created, acquired or arising and wheresoever located: (i) Accounts; (ii) Inventory; (iii) Equipment; (iv) General Intangibles; (v) Investment Property; (vi) All monies and other Property of any kind now or at any time or times hereafter in the possession or under the control of Lender or a bailee or Affiliate of Lender; (vii) All accessions to, substitutions for and all replacements, products and cash and non-cash proceeds of (i) through (vi) above, including, without limitation, proceeds of and unearned premiums with respect to insurance policies insuring any of the Collateral; and (viii) All books and records (including, without limitation, customer lists, credit files, computer programs, print-outs, and other computer materials and records) of Borrower pertaining to any of (i) through (vii) above. 5.2 Lien Perfection; Further Assurances. Borrowers shall execute such UCC-1 financing statements as are required by the Code and such other instruments, assignments or documents as are necessary to perfect Lender's Lien upon any of the Collateral and shall take such other action as may be required to perfect or to continue the perfection of Lender's Lien upon the Collateral. Unless prohibited by applicable law, Borrowers hereby authorize Lender to execute and file any such financing statement on Borrowers' behalf. The parties agree that a carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement and may be filed in any appropriate office in lieu thereof. At Lender's request, Borrowers shall also promptly execute or cause to be executed and shall deliver to Lender any and all documents, instruments and agreements reasonably deemed necessary by Lender to give effect to or carry out the terms or intent of the Loan Documents. 5.3 Lien on Realty. The due and punctual payment and performance of the Obligations shall also be secured by the Lien created by the Mortgages. If any Borrower shall acquire at any time or times hereafter any interest in other real Property (other than leasehold interests in sales offices), such Borrower agrees promptly to execute and deliver to Lender, as additional security and Collateral for the Obligations, deeds of trust, security deeds, mortgages or other collateral assignments satisfactory in form and substance to Lender and its counsel (herein collectively referred to as "New Mortgages") covering such real Property. The Mortgages and each New Mortgage shall be duly recorded (at Borrowers' expense) in each office where such recording is required to constitute a valid Lien on the real Property covered thereby. In respect to each Mortgage and each New Mortgage, such Borrower shall deliver to Lender, at Borrowers' expense, mortgagee title insurance policies issued by a title insurance company satisfactory to Lender insuring Lender, as mortgagee; such policies shall be in form and substance satisfactory to Lender and shall insure a valid first Lien in favor of Lender on the Property covered thereby, subject only to those exceptions acceptable to Lender and its counsel. Said policies shall be in form and substance satisfactory to Lender. Such Borrower shall also deliver to Lender such other documents, including, without limitation, ALTA Surveys of the real Property, as Lender and its counsel may reasonably request relating to the real Property subject to any such New Mortgage. SECTION 6. COLLATERAL ADMINISTRATION 6.1 General 6.1.1 Location of Collateral. All Collateral, other than Inventory in transit and motor vehicles, will at all times be kept by Borrowers and their respective Subsidiaries at one or more of the business locations set forth in Exhibit B hereto and shall not, without the prior written approval of Lender, be moved therefrom except, prior to an Event of Default and Lender's acceleration of the maturity of the Obligations in consequence thereof, for (i) sales of Inventory in the ordinary course of business; and (ii) removals in connection with dispositions of Equipment that are authorized by subsection 6.4.2 hereof. 6.1.2 Insurance of Collateral. Borrowers shall maintain and pay for insurance upon all Collateral wherever located and with respect to Borrowers' business, covering casualty, hazard, public liability and such other risks in such amounts and with such insurance companies as are reasonably satisfactory to Lender. Borrowers shall deliver the originals of such policies to Lender with satisfactory lender's loss payable endorsements, naming Lender as sole loss payee, assignee or additional insured, as appropriate. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days prior written notice to Lender in the event of cancellation of the policy for any reason whatsoever and a clause specifying that the interest of Lender shall not be impaired or invalidated by any act or neglect of Borrowers or the owner of the Property or by the occupation of the premises for purposes more hazardous than are permitted by said policy. If Borrowers fail to provide and pay for such insurance, Lender may, at its option, but shall not be required to, procure the same and charge Borrowers therefor. Borrowers agree to deliver to Lender, promptly as rendered, true copies of all reports made in any reporting forms to insurance companies. 6.1.3 Protection of Collateral. All expenses of protecting, storing, warehousing, insuring, handling, maintaining and shipping the Collateral, any and all excise, property, sales, and use taxes imposed by any state, federal, or local authority on any of the Collateral or in respect of the sale thereof shall be borne and paid by Borrowers. If Borrowers fail to promptly pay any portion thereof when due, Lender may, at its option, but shall not be required to, pay the same and charge Borrowers therefor. Lender shall not be liable or responsible in any way for the safekeeping of any of the Collateral or for any loss or damage thereto (except for reasonable care in the custody thereof while any Collateral is in Lender's actual possession) or for any diminution in the value thereof, or for any act or default of any warehouseman, carrier, forwarding agency, or other person whomsoever, but the same shall be at Borrowers' sole risk. 6.2 Administration of Accounts. 6.2.1 Records, Schedules and Assignments of Accounts. EPI shall execute and deliver to Lender a Borrowing Base Certificate in the form attached hereto as Exhibit C on a monthly basis or, if requested by Lender, more frequently. PPI and APP shall execute and deliver to Lender a Borrowing Base Certificate in the form attached hereto as Exhibit C-1 on a monthly basis or, if requested by Lender, more frequently. Each Borrower shall keep accurate and complete records of their Accounts and all payments and collections thereon and shall submit to Lender on such periodic basis as Lender shall request a sales and collections report for the preceding period, in form satisfactory to Lender. On or before the fifteenth day of each month from and after the date hereof, each Borrower shall deliver to Lender, in form acceptable to Lender, a detailed aged trial balance of all of its Accounts existing as of the last day of the preceding month, specifying the names, addresses, face value, dates of invoices and due dates for each Account Debtor obligated on an Account so listed ("Schedule of Accounts"), and, upon Lender's request therefor, copies of proof of delivery and the original copy of all documents, including, without limitation, repayment histories and present status reports relating to the Accounts so scheduled and such other matters and information relating to the status of then existing Accounts as Lender shall reasonably request. If requested by Lender, each Borrower shall execute and deliver to Lender formal written assignments of all of its Accounts weekly or daily, which shall include all Accounts that have been created since the date of the last assignment, together with copies of invoices or invoice registers related thereto. 6.2.2 Discounts, Allowances, Disputes. If any Borrower grants any discounts, allowances or credits that are not shown on the face of the invoice for the Account involved, Borrowers shall report such discounts, allowances or credits, as the case may be, to Lender as part of the next required Schedule of Accounts. If any amounts due and owing in excess of $25,000 are in dispute between any Borrower and any Account Debtor, Borrowers shall provide Lender with written notice thereof at the time of submission of the next Schedule of Accounts, explaining in detail the reason for the dispute, all claims related thereto and the amount in controversy. Upon and during the continuation of an Event of Default, Lender shall have the right to settle or adjust all disputes and claims directly with the Account Debtor and to compromise the amount or extend the time for payment of the Accounts upon such terms and conditions as Lender may deem advisable, and to charge the deficiencies, costs and expenses thereof, including reasonable attorney's fees, to Borrowers. 6.2.3 Taxes. If an Account includes a charge for any tax payable to any governmental taxing authority, Lender is authorized, in its sole discretion, to pay the amount thereof to the proper taxing authority for the account of Borrowers and to charge Borrowers therefor, provided, however, that Lender shall not be liable for any taxes to any governmental taxing authority that may be due by any Borrower. Borrowers will be given notice of, and will be consulted with respect to, such payment if no Event of Default has occurred and is continuing. 6.2.4 Account Verification. Whether or not a Default or an Event of Default has occurred, any of Lender's officers, employees or agents shall have the right, at any time or times hereafter, in the name of Lender, any designee of Lender or Borrowers, to verify the validity, amount or any other matter relating to any Accounts by mail, telephone, telegraph or otherwise. Borrowers shall cooperate fully with Lender in an effort to facilitate and promptly conclude any such verification process. So long as no Event of Default has occurred and is continuing, the Lender will verify accounts using an anonymous name or some third party service. 6.2.5 Maintenance of Dominion Account. Borrowers shall maintain a Dominion Account(s) pursuant to a lockbox arrangement acceptable to Lender with such banks as may be selected by Borrowers and be acceptable to Lender. Borrowers shall issue to any such banks an irrevocable letter of instruction directing such banks to deposit all payments or other remittances received in the lockbox to the Dominion Account for application on account of the Obligations. All funds deposited in the Dominion Account shall immediately become the property of Lender and Borrowers shall obtain the agreement by such banks in favor of Lender to waive any offset rights against the funds so deposited. Lender assumes no responsibility for such lockbox arrangement, including, without limitation, any claim of accord and satisfaction or release with respect to deposits accepted by any bank thereunder. 6.2.6 Collection of Accounts, Proceeds of Collateral. To expedite collection, Borrowers shall endeavor in the first instance to make collection of their respective Accounts for Lender. All remittances received by such Borrower on account of Accounts, together with the proceeds of any other Collateral, shall be held as Lender's property by Borrowers as trustee of an express trust for Lender's benefit and Borrowers shall immediately deposit same in kind in the Dominion Account. Lender retains the right at all times during the continuance of a Default or an Event of Default to notify Account Debtors that Accounts have been assigned to Lender and to collect Accounts directly in its own name and to charge the collection costs and expenses, including attorneys' fees to Borrowers. 6.3 Administration of Inventory. 6.3.1 Records and Reports of Inventory. Borrowers shall keep accurate and complete records of its Inventory. Each Borrower shall furnish Lender Inventory reports in form and detail satisfactory to Lender at such times as Lender may request, but at least once each month, not later than the fifteen day of such month. Borrowers shall conduct a physical inventory no less frequently than annually and shall provide to Lender a report based on each such physical inventory promptly thereafter, together with such supporting information as Lender shall request. 6.3.2 Returns of Inventory. If at any time or times hereafter any Account Debtor returns any Inventory to Borrowers the shipment of which generated an Account on which such Account Debtor is obligated in excess of $35,000, Borrowers shall immediately notify Lender of the same, specifying the reason for such return and the location, condition and intended disposition of the returned Inventory. 6.4 Administration of Equipment. 6.4.1 Records and Schedules of Equipment. Borrowers shall keep accurate records itemizing and describing the kind, type, quality, quantity and value of its Equipment and all dispositions made in accordance with subsection 6.4.2 hereof, and shall furnish Lender with a current schedule containing the foregoing information on at least an annual basis and more often if requested by Lender. Immediately on request therefor by Lender, Borrowers shall deliver to Lender any and all evidence of ownership, if any, of any of the Equipment. 6.4.2 Dispositions of Equipment. No Borrower will sell, lease or otherwise dispose of or transfer any of the Equipment or any part thereof without the prior written consent of Lender; provided, however, that the foregoing restriction shall not apply, for so long as no Default or Event of Default exists, to (i) dispositions of Equipment which, in the aggregate during any consecutive twelve-month period, has a fair market value or book value, whichever is less, of $250,000 or less, provided that all proceeds thereof are remitted to Lender for application to the outstanding principal balance of the Term Loan (which proceeds shall be applied to regularly schedule installments of principal in inverse order of maturity), or (ii) replacements of Equipment that is substantially worn, damaged or obsolete with Equipment of like kind, function and value, provided that the replacement Equipment shall be acquired prior to or concurrently with any disposition of the Equipment that is to be replaced, the replacement Equipment shall be free and clear of Liens other than Permitted Liens that are not Purchase Money Liens, and Borrowers shall have given Lender at least 5 days prior written notice of such disposition. 6.5 Payment of Charges. All amounts chargeable to Borrowers under Section 6 hereof shall be Obligations secured by all of the Collateral, shall be payable on demand and shall bear interest from the date such advance was made until paid in full at the rate applicable to Revolving Credit Loans from time to time. SECTION 7. REPRESENTATIONS AND WARRANTIES 7.1 General Representations and Warranties. To induce Lender to enter into this Agreement and to make advances hereunder, Borrowers warrant, represent and covenant to Lender that: 7.1.1 Organization and Qualification. Each Borrower and each of their respective Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Each Borrower and each of their respective Subsidiaries is duly qualified and is authorized to do business and is in good standing as a foreign corporation in each state or jurisdiction listed on Exhibit D hereto and in all other states and jurisdictions in which the failure of such Borrower or such Subsidiaries to be so qualified would have a material adverse effect on the financial condition, business or Properties of such Borrower or such Subsidiaries. 7.1.2 Corporate Power and Authority. Each Borrower and each of their respective Subsidiaries is duly authorized and empowered to enter into, execute, deliver and perform this Agreement and each of the other Loan Documents to which it is a party. The execution, delivery and performance of this Agreement and each of the other Loan Documents have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of the shareholders of any Borrower or any of their respective Subsidiaries; (ii) contravene any Borrower's or any of their respective Subsidiaries' charter, articles or certificate of incorporation or by-laws; (iii) violate, or cause any Borrower or any of their respective Subsidiaries to be in default under, any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award in effect having applicability to any Borrower or any of their respective Subsidiaries; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which any Borrower or any of their respective Subsidiaries is a party or by which any such Borrower of Subsidiary or its Properties may be bound or affected; or (v) result in, or require, the creation or imposition of any Lien (other than Permitted Liens) upon or with respect to any of the Properties now owned or hereafter acquired by any Borrower or any of their respective Subsidiaries. 7.1.3 Legally Enforceable Agreement. This Agreement is, and each of the other Loan Documents when delivered under this Agreement will be, a legal, valid and binding obligation of each Borrower and each of their respective Subsidiaries (to the extent a party thereto) enforceable against each of them in accordance with its respective terms. 7.1.4 Capital Structure. Exhibit E hereto states (i) the correct name of each of the Subsidiaries of each Borrower, its jurisdiction of incorporation and the percentage of its Voting Stock owned by each Borrower, (ii) the name of each Borrower's corporate or joint venture Affiliates and the nature of the affiliation, (iii) the number, nature and holder of all outstanding Securities of each Borrower and each Subsidiary of each Borrower and (iv) the number of authorized, issued and treasury shares of each Borrower and each Subsidiary of each Borrower. Each Borrower has good title to all of the shares it purports to own of the stock of each of its Subsidiaries, free and clear in each case of any Lien other than Permitted Liens. All such shares have been duly issued and are fully paid and non-assessable. Except as disclosed on Exhibit E hereto, there are no outstanding options to purchase, or any rights or warrants to subscribe for, or any commitments or agreements to issue or sell, or any Securities or obligations convertible into, or any powers of attorney relating to, shares of the capital stock of any Borrower or any of their respective Subsidiaries. There are no outstanding agreements or instruments binding upon any of Borrower's shareholders relating to the ownership of its shares of capital stock. 7.1.5 Corporate Names. No Borrower or any of Borrowers' respective Subsidiaries has been known as or used any corporate, fictitious or trade names except those listed on Exhibit F hereto. Except as set forth on Exhibit F, no Borrower or any of Borrowers' Subsidiaries has been the surviving corporation of a merger or consolidation or acquired all or substantially all of the assets of any Person. 7.1.6 Business Locations; Agent for Process. Each Borrower's and each of their respective Subsidiaries' chief executive office and other places of business are as listed on Exhibit B hereto. During the preceding one-year period, neither Borrowers nor any of their respective Subsidiaries has had an office, place of business or agent for service of process other than as listed on Exhibit B. Except as shown on Exhibit B, no inventory is stored with a bailee, warehouseman or similar party, nor is any Inventory consigned to any Person. 7.1.7 Title to Properties; Priority of Liens. Each Borrower and each of their respective Subsidiaries has good, indefeasible and marketable title to and fee simple ownership of, or valid and subsisting leasehold interests in, all of its real Property, and good title to all of the Collateral and all of its other Property, in each case, free and clear of all Liens except Permitted Liens. Borrowers have paid or discharged all lawful claims which, if unpaid, might become a Lien against any of Borrower's Properties that is not a Permitted Lien. The Liens granted to Lender under Section 5 hereof are first priority Liens, subject only to Permitted Liens. 7.1.8 Accounts. Lender may rely, in determining which Accounts are Eligible Accounts, on all statements and representations made by Borrowers with respect to any Account or Accounts. Unless otherwise indicated in writing to Lender, with respect to each Account: (i) It is genuine and in all respects what it purports to be, and it is not evidenced by a judgment; (ii) It arises out of a completed, bona fide sale and delivery of goods or rendition of services by a Borrower in the ordinary course of its business and in accordance with the terms and conditions of all purchase orders, contracts or other documents relating thereto and forming a part of the contract between such Borrower and the Account Debtor; (iii) It is for a liquidated amount maturing as stated in the duplicate invoice covering such sale or rendition of services, a copy of which has been furnished or is available to Lender; (iv) Such Account, and Lender's security interest therein, is not, and will not (by voluntary act or omission of any Borrower) be in the future, subject to any offset, Lien, deduction, defense, dispute, counterclaim or any other adverse condition except for disputes resulting in returned goods where the amount in controversy is deemed by Lender to be immaterial, and each such Account is absolutely owing to such Borrower and is not contingent in any respect or for any reason; (v) Borrowers have made no agreement with any Account Debtor thereunder for any extension, compromise, settlement or modification of any such Account or any deduction therefrom, except discounts or allowances which are granted by a Borrower in the ordinary course of its business for prompt payment and which are reflected in the calculation of the net amount of each respective invoice related thereto and are reflected in the Schedules of Accounts submitted to Lender pursuant to subsection 6.2.1 hereof; (vi) There are no facts, events or occurrences which in any way impair the validity or enforceability of any Accounts or tend to reduce the amount payable thereunder from the face amount of the invoice and statements delivered to Lender with respect thereto; (vii) To the best of each Borrower's knowledge, the Account Debtor thereunder (1) had the capacity to contract at the time any contract or other document giving rise to the Account was executed and (2) such Account Debtor is Solvent; and (viii) To the best of each Borrower's knowledge, there are no proceedings or actions which are threatened or pending against any Account Debtor thereunder which might result in any material adverse change in such Account Debtor's financial condition or the collectibility of such Account. 7.1.9 Equipment. The Equipment is in good operating condition and repair, and all necessary replacements of and repairs thereto shall be made so that the value and operating efficiency of the Equipment shall be maintained and preserved, reasonable wear and tear excepted. Borrowers will not permit any of the Equipment to become affixed to any real Property leased to any Borrower so that an interest arises therein under the real estate laws of the applicable jurisdiction unless the landlord of such real Property has executed a landlord waiver or leasehold mortgage in favor of and in form acceptable to Lender, and no Borrower will permit any of the Equipment to become an accession to any personal Property other than Equipment that is subject to first priority (except for Permitted Liens) Liens in favor of Lender. 7.1.10 Financial Statements; Fiscal Year. The Consolidated and consolidating balance sheets of Company and such other Persons described therein (including the accounts of all Subsidiaries of Company for the respective periods during which a Subsidiary relationship existed) as of December 31, 1995, and the related statements of income, changes in stockholder's equity, and changes in financial position for the periods ended on such dates, have been prepared in accordance with GAAP, and present fairly the financial positions of Company and such Persons at such dates and the results of Company's operations for such periods. Since December 31, 1995, there has been no material change in the condition, financial or otherwise, of Company and such other Persons as shown on the Consolidated balance sheet as of such date and no change in the aggregate value of Equipment and real Property owned by Borrowers or such other Persons, except changes in the ordinary course of business, none of which individually or in the aggregate has been materially adverse. The fiscal year of Company, Borrowers and each of their respective Subsidiaries ends on December 31st of each year. 7.1.11 Full Disclosure. The financial statements referred to in subsection 7.1.10 hereof do not, nor does this Agreement or any other written statement of any Borrower to Lender, contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein or herein not misleading. There is no fact which any Borrower has failed to disclose to Lender in writing which materially affects adversely or, so far as any Borrower can now foresee, will materially affect adversely the Properties, business, prospects, profits or condition (financial or otherwise) of any Borrower or any of their respective Subsidiaries or the ability of any Borrower or any of their respective Subsidiaries to perform this Agreement or the other Loan Documents. 7.1.12 Solvent Financial Condition. Each Borrower and each of their respective Subsidiaries is now and, after giving effect to the Loans and the provisions of Section 11.17 of this Agreement and the applicable reimbursement provisions of the Subordinated Debt Documents, at all times will be, Solvent. 7.1.13 Surety Obligations. No Borrower or any of such Borrower's respective Subsidiaries is obligated as surety or indemnitor under any surety or similar bond or other contract issued or entered into any agreement to assure payment, performance or completion of performance of any undertaking or obligation of any Person. 7.1.14 Taxes. Company's federal tax identification number is 41-1642846. EPI's federal tax identification number is 47-0675821. PPI's federal tax identification number is 93-0814642. APP's federal tax identification number is 87-0463461. The federal tax identification number of each of Borrowers' Subsidiaries is shown on Exhibit G hereto. Company, Borrowers and each of their respective Subsidiaries have filed all federal, state and local tax returns and other reports any of them is required by law to file and has paid, or made provision for the payment of, all taxes, assessments, fees, levies and other governmental charges upon any of them, any of their income and Properties as and when such taxes, assessments, fees, levies and charges that are due and payable, unless and to the extent any thereof are being actively contested in good faith and by appropriate proceedings and Company and Borrowers maintains reasonable reserves on their books therefor. The provision for taxes on the books of Company and Borrowers and their respective Subsidiaries are adequate for all years not closed by applicable statutes, and for its current fiscal year. 7.1.15 Brokers. Except for fees payable to BA Securities, Inc. in an amount not to exceed $345,000, there are no claims for brokerage commissions, finder's fees or investment banking fees in connection with the transactions contemplated by this Agreement. 7.1.16 Patents, Trademarks, Copyrights and Licenses. Each Borrower and each of their respective Subsidiaries owns or possesses all the patents, trademarks, service marks, trade names, copyrights and licenses necessary for the present and planned future conduct of its business without any known conflict with the rights of others. All such patents, trademarks, service marks, tradenames, copyrights, licenses and other similar rights are listed on Exhibit H hereto. 7.1.17 Governmental Consents. Each Borrower and each of their respective Subsidiaries has, and is in good standing with respect to, all governmental consents, approvals, licenses, authorizations, permits, certificates, inspections and franchises necessary to continue to conduct its business as heretofore or proposed to be conducted by it and to own or lease and operate its Properties as now owned or leased by it. 7.1.18 Compliance with Laws. Each Borrower and each of their respective Subsidiaries has duly complied with, and its Properties, business operations and leaseholds are in compliance in all material respects with, the provisions of all federal, state and local laws, rules and regulations applicable to such Borrower or such Subsidiary, as applicable, its Properties or the conduct of its business and there have been no citations, notices or orders of noncompliance issued to such Borrower or any of their respective Subsidiaries under any such law, rule or regulation. Each Borrower and each of their respective Subsidiaries has established and maintains an adequate monitoring system to insure that it remains in compliance with all federal, state and local laws, rules and regulations applicable to it. No Inventory has been produced in violation of the Fair Labor Standards Act (29 U.S.C. ss 201 et seq.) as amended. 7.1.19 Restrictions. No Borrower or any of Borrowers' Subsidiaries are or is a party or subject to any contract, agreement, or charter or other corporate restriction, which materially and adversely affects its business or the use or ownership of any of its Properties. No Borrower or any of their respective Subsidiaries are or is a party or subject to any contract or agreement which restricts its right or ability to incur Indebtedness, other than as set forth on Exhibit I hereto, none of which prohibit the execution of or compliance with this Agreement or the other Loan Documents by Borrowers or any of their respective Subsidiaries, as applicable. 7.1.20 Litigation. Except as set forth on Exhibit J hereto, there are no actions, suits, proceedings or investigations pending, or to the knowledge of any Borrower, threatened, against or affecting any Borrower or any of their respective Subsidiaries, or the business, operations, Properties, prospects, profits or condition of any Borrower or any of their respective Subsidiaries. No Borrower or any of Borrowers' respective Subsidiaries are or is in default with respect to any order, writ, injunction, judgment, decree or rule of any court, governmental authority or arbitration board or tribunal. 7.1.21 No Defaults. No event has occurred and no condition exists which would, upon or after the execution and delivery of this Agreement or Borrowers' performance hereunder, constitute a Default or an Event of Default. No Borrower or any of Borrowers' respective Subsidiaries are or is in default, and no event has occurred and no condition exists which constitutes, or which with the passage of time or the giving of notice or both would constitute, a default in the payment of any Indebtedness to any Person for Money Borrowed. 7.1.22 Leases. Exhibit K hereto is a complete listing of all capitalized leases of Borrowers and their respective Subsidiaries and Exhibit L hereto is a complete listing of all operating leases of Borrowers and their respective Subsidiaries. Each Borrower and each of their respective Subsidiaries is in full compliance with all of the terms of each of its respective capitalized and operating leases. 7.1.23 Pension Plans. Except as disclosed on Exhibit M hereto, no Borrower or any of Borrowers' Subsidiaries has any Plan. Each Borrower and each of their respective Subsidiaries is in full compliance with the requirements of ERISA and the regulations promulgated thereunder with respect to each Plan. No fact or situation that could result in a material adverse change in the financial condition of Borrowers or any of their respective Subsidiaries exists in connection with any Plan. No Borrower or any of Borrowers' respective Subsidiaries has any withdrawal liability in connection with a Multiemployer Plan. 7.1.24 Trade Relations. There exists no actual or threatened termination, cancellation or limitation of, or any modification or change in, the business relationship between any Borrower or any of their respective Subsidiaries and any customer or any group of customers whose purchases individually or in the aggregate are material to the business of any Borrower or any of their respective Subsidiaries, or with any material supplier, and there exists no present condition or state of facts or circumstances which would materially affect adversely any Borrower or any of their respective Subsidiaries or prevent any Borrower or any of their respective Subsidiaries from conducting such business after the consummation of the transaction contemplated by this Agreement in substantially the same manner in which it has heretofore been conducted. 7.1.25 Labor Relations. Except as described on Exhibit N hereto, neither Borrowers nor any of their respective Subsidiaries are or is a party to any collective bargaining agreement. There are no material grievances, disputes or controversies with any union or any other organization of Borrowers' or any of their respective Subsidiaries' employees, or threats of strikes, work stoppages or any asserted pending demands for collective bargaining by any union or organization. 7.2 Continuous Nature of Representations and Warranties. Each representation and warranty contained in this Agreement and the other Loan Documents shall be continuous in nature and shall remain accurate, complete and not misleading at all times during the term of this Agreement, except for changes in the nature of Borrowers' or their respective Subsidiaries' business or operations that would render the information in any exhibit attached hereto either inaccurate, incomplete or misleading, so long as Lender has consented to such changes or such changes are expressly permitted by this Agreement. 7.3 Survival of Representations and Warranties. All representations and warranties of Borrowers contained in this Agreement or any of the other Loan Documents shall survive the execution, delivery and acceptance thereof by Lender and the parties thereto and the closing of the transactions described therein or related thereto. SECTION 8. COVENANTS AND CONTINUING AGREEMENTS 8.1 Affirmative Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, Borrowers covenant that, unless otherwise consented to by Lender in writing, they each shall: 8.1.1 Visits and Inspections. Permit representatives of Lender, from time to time, as often as may be reasonably requested, but only during normal business hours, to visit and inspect the Properties of Borrowers and each of their respective Subsidiaries, inspect, audit and make extracts from its books and records, and discuss with its officers, its employees and its independent accountants, Borrowers' and each of their respective Subsidiaries' business, assets, liabilities, financial condition, business prospects and results of operations. 8.1.2 Notices. Promptly notify Lender in writing of the occurrence of any event or the existence of any fact which renders any representation or warranty in this Agreement or any of the other Loan Documents inaccurate, incomplete or misleading. 8.1.3 Financial Statements. Keep, and cause each of their respective Subsidiaries to keep, adequate records and books of account with respect to its business activities in which proper entries are made in accordance with GAAP reflecting all its financial transactions; and cause to be prepared and furnished to Lender the following (all to be prepared in accordance with GAAP applied on a consistent basis, unless Company's or Borrowers' certified public accountants concur in any change therein and such change is disclosed to Lender and is consistent with GAAP): (i) not later than 105 days after the close of each fiscal year of Company, unqualified audited (in respect to the Consolidated financial statements only) financial statements of Company and its Subsidiaries (including, without limitation, EPI PPI and APP) as of the end of such year, on a Consolidated and consolidating basis, certified (in respect to the Consolidated financial statements only) by a firm of independent certified public accountants of recognized standing selected by Company but acceptable to Lender (except for a qualification for a change in accounting principles with which the accountant concurs); (ii) not later than 30 days after the end of each month hereafter, including the last month of Company's fiscal year, unaudited interim financial statements of Company and its respective Subsidiaries (including, without limitation, EPI, PPI and APP) as of the end of such month and of the portion of Company's financial year then elapsed, on a Consolidated and consolidating basis, certified by the principal financial officer of Company as prepared in accordance with GAAP and fairly presenting the Consolidated financial position and results of operations of Company and its Subsidiaries (including, without limitation, EPI, PPI and APP) for such month and period subject only to changes from audit and year-end adjustments and except that such statements need not contain notes; (iii) promptly after the sending or filing thereof, as the case may be, copies of any proxy statements, financial statements or reports which Company or Borrowers has or have made available to its shareholders and copies of any regular, periodic and special reports or registration statements which Company or Borrowers files or file with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or any national securities exchange; (iv) promptly after the filing thereof, copies of any annual report to be filed with ERISA in connection with each Plan; and (v) such other data and information (financial and otherwise) as Lender, from time to time, may reasonably request, bearing upon or related to the Collateral or Borrowers' and each of their respective Subsidiaries' financial condition or results of operations. Concurrently with the delivery of the financial statements described in clause (i) of this subsection 8.1.3, Borrowers shall forward to Lender a copy of the accountants' letter to Borrowers' or Company's management that is prepared in connection with such financial statements and also shall cause to be prepared and shall furnish to Lender a certificate of the aforesaid certified public accountants certifying to Lender that, based upon their examination of the financial statements of Company and its Subsidiaries performed in connection with their examination of said financial statements, they are not aware of any Default or Event of Default, or, if they are aware of such Default or Event of Default, specifying the nature thereof, and acknowledging, in a manner satisfactory to Lender, that they are aware that Lender is relying on such financial statements in making its decisions with respect to the Loans. Concurrently with the delivery of the financial statements described in clauses (i) and (ii) of this subsection 8.1.3, or more frequently if requested by Lender, Borrowers shall cause to be prepared and furnished to Lender a Compliance Certificate in the form of Exhibit O hereto executed by the Chief Financial Officer of Company. Borrowers authorize Lender or its designated representatives to communicate directly with their independent certified public accountants and authorize those accountants to disclose to Lender any and all financial statements and other supporting financial documents and schedules. At or before the initial Closing Date, Borrowers' shall cause Company to deliver a letter addressed to such accountants instructing them to comply with the provisions of this Section 8.1.3. Further within five (5) days after the earlier of the last day of each fiscal year of Company and the date Company engaged independent certified public accountants to audit Company's financial statements, Borrowers shall cause Company to deliver to such independent certified public accountants a letter from Company addressed to such independent certified public accountants indicating that it is a primary intention of Company in engaging such accountants that Lender relies upon such financial statements of Company and its Subsidiaries, including without limitation, EPI, PPI and APP. 8.1.4 Landlord and Storage Agreements. Provide Lender with copies of all agreements between any Borrower or any of their respective Subsidiaries and any landlord or warehouseman which owns any premises at which any Inventory may, from time to time, be kept. 8.1.5 Projections. No later than 30 days prior to the end of each fiscal year of Borrowers, deliver to Lender Projections of Company and each Borrower on a Consolidated and unconsolidated basis for the forthcoming 3 years, year by year, and for the forthcoming fiscal year, month by month. 8.2 Negative Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, Borrowers covenant that, unless Lender has first consented thereto in writing, they will not: 8.2.1 Mergers; Consolidations; Acquisitions. Merge or consolidate, or permit any Subsidiary of any Borrower to merge or consolidate, with any Person; nor acquire, nor permit any of its Subsidiaries to acquire, all or any substantial part of the Properties of any Person, unless prior to the consummation of any such merger, consolidation or acquisition, Lender has consented in writing to such transaction, which consent shall not be unreasonably withheld or delayed. 8.2.2 Loans. Except as provided in Section 8.2.7 hereof, make, or permit any Subsidiary of any Borrower to make, any loans or other advances of money (other than for salary, travel advances, advances against commissions and other similar advances in the ordinary course of business) to any Person, except that if after giving effect to any such loan or advance, there is no existing and continuing Default or Event of Default and Availability exceeds One Million Dollars ($1,000,000), then EPI may make loans and advances to PPI and/or APP and PPI and/or APP may make loans and advances to EPI. 8.2.3 Total Indebtedness. Create, incur, assume, or suffer to exist, or permit any Subsidiary of any Borrower to create, incur or suffer to exist, any Indebtedness, except: (i) Obligations owing to Lender; (ii) Subordinated Debt outstanding in respect to and the Subordinated Debt Documents; (iii) Indebtedness of any Subsidiary of any Borrower to such Borrower; (iv) accounts payable to trade creditors and current operating expenses (other than for Money Borrowed) which are not aged more than 30 days from the due date, in each case incurred in the ordinary course of business and paid within such time period, unless the same are being actively contested in good faith and by appropriate and lawful proceedings; and the applicable Borrowers or such Subsidiary shall have set aside such reserves, if any, with respect thereto as are required by GAAP and deemed adequate by the applicable Borrower or such Subsidiary and its independent accountants; (v) Obligations to pay Rentals permitted by subsection 8.2.13; (vi) Permitted Purchase Money Indebtedness; (vii) contingent liabilities arising out of endorsements of checks and other negotiable instruments for deposit or collection in the ordinary course of business; (viii) Indebtedness of EPI to PPI and/or APP or Indebtedness of PPI and/or APP to EPI, to the extent any such Borrower was permitted to make such loan or advance pursuant to Section 8.2.2. above; (ix) Indebtedness outstanding under the Hastings Documents; (x) Indebtedness outstanding under the Promissory Note and Stock Pledge Agreement; (xi) Indebtedness under Capitalized Leases listed on Exhibit K; (xii) Indebtedness incurred in connection with the acquisition of approximately 30 acres of vacant land in Hembree, Oregon, in a principal amount not to exceed One Hundred Three Thousand Dollars ($103,000); and (xiii) Indebtedness not included in paragraphs (i) through (xii) above which does not exceed at any time, in the aggregate, the sum of $250,000. 8.2.4 Affiliate Transactions. Enter into, or be a party to, or permit any Subsidiary of any Borrower to enter into or be a party to, any transaction with any Affiliate of any Borrower or stockholder, except in the ordinary course of and pursuant to the reasonable requirements of such Borrower's or such Subsidiary's business and upon fair and reasonable terms which are fully disclosed to Lender and are no less favorable to such Borrower than what would be obtainable in a comparable arm's length transaction with a Person not an Affiliate or stockholder of any Borrower or such Subsidiary. 8.2.5 Limitation on Liens. Create or suffer to exist, or permit any Subsidiary of any Borrower to create or suffer to exist, any Lien upon any of its Property, income or profits, whether now owned or hereafter acquired, except: (i) Liens at any time granted in favor of Lender; (ii) Liens for taxes (excluding any Lien imposed pursuant to any of the provisions of ERISA) not yet due, or being contested in the manner described in subsection 7.1.14 hereto, but only if in Lender's judgment such Lien does not adversely affect Lender's rights or the priority of Lender's Lien in the Collateral; (iii) Liens arising in the ordinary course of any Borrower's business by operation of law or regulation, but only if payment in respect of any such Lien is not at the time required and such Liens do not, in the aggregate, materially detract from the value of the Property of any Borrower or materially impair the use thereof in the operation of any Borrower's business; (iv) Purchase Money Liens securing Permitted Purchase Money Indebtedness; (v) Liens securing Indebtedness of one of the Borrowers' Subsidiaries to any Borrower or another such Subsidiary; (vi) such other Liens as appear on Exhibit P hereto; (vii) Liens on approximately 30 acres of vacant land in Hembree, Oregon, securing the Indebtedness described in Section 8.2.3(xii); (viii) Liens securing Indebtedness outstanding under that certain Redevelopment Contract between the City of Hastings, Nebraska and EPI and related notes, documents and agreements; and (ix) such other Liens as Lender may hereafter approve in writing. 8.2.6 Subordinated Debt and Other Indebtedness. Make, or permit any Subsidiary of any Borrower to make, any payment or repurchase of any part or all of any Subordinated Debt or take any other action or omit to take any other action in respect of any Subordinated Debt, except in accordance with the Intercreditor and Subordination Agreement relative thereto or other subordination agreement relative thereto. Except for regularly scheduled (as of the Closing Date) payments of principal and interest, make or permit any Subsidiary of any Borrower to make any payment or repurchase of any part or all of any of the Indebtedness outstanding under the Hastings Documents or the Promissory Note and Stock Pledge Agreement. Amend or modify any of the Subordinated Debt Documents, the Hastings Documents or the Promissory Note and Stock Pledge Agreement in any manner adverse to Borrower or Lender. The foregoing notwithstanding: (i) Borrower may prepay or repurchase up to Two Million Dollars ($2,000,000) of the principal amount of the Indebtedness outstanding under the Subordinated Debt Documents if, (x) after giving effect to any such prepayment or repurchase, there would exist and be continuing no Default or Event of Default, (y) immediately prior to such repayment or repurchase and immediately after such prepayment or repurchase the outstanding principal balance of the Revolving Credit Loan is $0, and (z) the funds used to effect such prepayment or repurchase are not the proceeds of Revolving Credit Loans; and (ii) after effecting the prepayment or repurchase provided for in clause (i) above, Borrowers may prepay or repurchase up to an additional One Million Five Hundred Thousand Dollars ($1,500,000) of the principal amount of the Indebtedness outstanding under the Subordinated Debt Documents if (x) after giving effect to any such prepayment or repurchase, there would exist and be continuing no Default or Event of Default, (y) immediately prior to such prepayment or repurchase the outstanding principal balance of the Revolving Credit Loan is $0, (z) the funds used to effect such prepayment or repurchase are not the proceeds of Revolving Credit Loans, and (aa) Lender has elected in writing not to have the funds to be used to effect such prepayment or repurchase applied to a prepayment of the outstanding principal balance of the Term Loan. If Lender does elect to have such funds be applied to a prepayment of the Term Loan such prepayment shall be accompanied by the prepayment fee provided for in Section 4.2.3, shall be applied to installments of principal in inverse order of maturity, and shall be applied, pro rata, to the outstanding principal balance of the EPI Term Note, the PPI Term Note and the APP Term Note. 8.2.7 Distributions. Declare or make, or permit any Subsidiary of any Borrower to declare or make, any Distributions; provided, however, that: (a) immediately after the closing of the transactions contemplated hereby, Borrowers may make Distributions to Company in an amount not to exceed Four Million Twenty Thousand Dollars ($4,020,000) in order to permit Company to repay Four Million Twenty Thousand Dollars ($4,020,000) of Indebtedness owed under the Subordinated Debt Documents; (b) EPI may make distributions to Company to permit Company to purchase or redeem shares of EPI's common stock, $0.01, par value, if (i) the aggregate purchase price for all such shares of common stock does not exceed (x) Five Hundred Seventy-Five Thousand Dollars ($575,000) for the period ending December 31, 1996 and (y) the lesser of the purchase price per share of such common stock multiplied by 157,000 shares of such common stock or $1,000,000 for each of the periods ending December 31, 1997 and December 31, 1998; and (ii) after giving effect to any such purchase there exists and is continuing no Default or Event of Default; (c) Borrowers may make Distributions to the Company to allow the Company to pay dividends on the Company's preferred stock if after giving effect to any such Distribution there exists and is continuing no Default or Event of Default; (d) APP may make Distributions to PPI; (e) Borrowers may make Distributions or loans to the Company to (i) pay general operating expenses, provided such Distributions do not exceed $300,000 on an annual basis, and (ii) pay costs and expenses incurred by Blair in completing the transactions contemplated hereunder; (f) If after giving effect to any such Distribution there would exist no Default or Event of Default, EPI and PPI may make Distributions to Company in amounts sufficient to permit Company to pay interest due on Company's Indebtedness outstanding pursuant to the Indebtedness outstanding pursuant to the Subordinated Debt Documents; and (g) Any Borrower may make Distributions to Company to permit Company to prepay or repurchase Indebtedness outstanding under the Subordinated Debt Documents if such repurchase or prepayment is permitted pursuant to Section 8.2.6 above. 8.2.8 Capital Expenditures. Make Capital Expenditures (including, without limitation, by way of capitalized leases) which, in the aggregate, as to Borrowers and their respective Subsidiaries during any fiscal year of Borrowers exceeds the amount set forth opposite such fiscal year in the following schedule: Fiscal Year Ending Permitted Capital Expenditure ------------------ ----------------------------- December 31, 1996 $2,600,000 December 31, 1997 $1,500,000 December 31, 1998 and each $1,500,000 subsequent fiscal year 8.2.9 Disposition of Assets. Sell, lease or otherwise dispose of any of, or permit any Subsidiary of any Borrower to sell, lease or otherwise dispose any of, its Properties, including any disposition of Property as part of a sale and leaseback transaction, to or in favor of any Person, except (i) sales of Inventory in the ordinary course of business for so long as no Event of Default exists hereunder, (ii) a transfer of Property to any Borrower by a Subsidiary of such Borrower or (iii) dispositions expressly authorized by this Agreement. 8.2.10 Stock of Subsidiaries. Permit any of their respective Subsidiaries to issue any additional shares of its capital stock except director's qualifying shares. 8.2.11 Bill-and-Hold Sales, Etc. Make a sale to any customer on a bill-and-hold, guaranteed sale, sale and return, sale on approval or consignment basis, or any sale on a repurchase or return basis. 8.2.12 Restricted Investment. Except as otherwise permitted by Section 8.2.2, make or have, or permit any Subsidiary of any Borrower to make or have, any Restricted Investment. 8.2.13 Leases. Become, or permit any of their respective Subsidiaries to become, a lessee under any operating lease (other than a lease under which any Borrower or any of their respective Subsidiaries is lessor) of Property if the aggregate Rentals payable during any current or future period of 12 consecutive months under the lease in question and all other leases under which Borrowers or any of their respective Subsidiaries is then lessee would exceed $500,000. The term "Rentals" means, as of the date of determination, all payments which the lessee is required to make by the terms of any lease. 8.2.14 Tax Consolidation. File or consent to the filing of any consolidated income tax return with any Person other than a Subsidiary of any Borrower or Company. 8.3 Specific Financial Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, Borrower covenants that, unless otherwise consented to by Lender in writing, it shall: 8.3.1 Minimum Consolidated Adjusted Tangible Net Worth. Maintain at all times within each of the following periods, a Consolidated Adjusted Tangible Net Worth of not less than the amount shown below for the period corresponding thereto: Period Amount - ------ ------ June 30, 1996 through and including September 29, 1996 ($1,000,000) September 30, 1996 through and including December 30, 1996 ($100,000) December 31, 1996 through and including March 30, 1997 $200,000 March 31, 1997 through and including June 29, 1997 $300,000 June 30, 1997 through and including September 29, 1997 $1,300,000 September 30, 1997 through and including December 30, 1997 $2,200,000 December 31, 1997 through and including March 30, 1998 $2,500,000 March 31, 1998 through and including June 29, 1998 $2,600,000 June 30, 1998 through and including September 29, 1998 $3,600,000 September 30, 1998 through and including December 30, 1998 $4,500,000 December 31, 1998 through and including March 30, 1999 $4,800,000 March 31, 1999 through and including each fiscal quarter thereafter $4,900,000 8.3.2 Consolidated Net Cash Flow. Achieve Consolidated Net Cash Flow for each of the periods listed below equal to or greater than the amount set forth opposite such period: Net Cash Flow Amount - ------------- ------ January 1, 1996 through and including June 30, 1996 $150,000 January 1, 1996 through and including September 30, 1996 $650,000 January 1, 1996 through and including December 31, 1996 $500,000 January 1, 1997 through and including March 31, 1997 ($500,000) January 1, 1997 through and including June 30, 1997 $150,000 January 1, 1997 through and including September 30, 1997 $650,000 January 1, 1997 through and including December 31, 1997 $500,000 January 1, 1998 through and including March 31, 1998 ($500,000) January 1, 1998 through and including June 30, 1998 $150,000 January 1, 1998 through and including September 30, 1998 $650,000 January 1, 1998 through and including December 31, 1998 $500,000 January 1, 1999 through and including March 31, 1999 ($500,000) 8.3.3 Senior Interest Coverage Ratio. Achieve, at the end of each fiscal quarter within the term hereof a Senior Interest Coverage Ratio equal to or greater than the ratio shown below for the quarter corresponding thereto: Each Fiscal Quarter Ending Ratio - -------------------------- ----- March 31 1.65 to 1 June 30 3.50 to 1 September 30 4.50 to 1 December 31 2.40 to 1 SECTION 9. CONDITIONS PRECEDENT Notwithstanding any other provision of this Agreement or any of the other Loan Documents, and without affecting in any manner the rights of Lender under the other sections of this Agreement, Lender shall not be required to make any Loan under this Agreement unless and until each of the following conditions has been and continues to be satisfied: 9.1 Documentation. Lender shall have received, in form and substance satisfactory to Lender and its counsel, a duly executed copy of this Agreement and the other Loan Documents, together with such additional documents, instruments and certificates as Lender and its counsel shall require in connection therewith from time to time, including all documents, instruments, agreements and schedules listed in the Schedule of Documents attached hereto and incorporated herein as Exhibit Q, all in form and substance satisfactory to Lender and its counsel. 9.2 No Default. No Default or Event of Default shall exist. 9.3 Other Loan Documents. Each of the conditions precedent set forth in the other Loan Documents shall have been satisfied. 9.4 Equity. Lender shall have received evidence satisfactory to it that not less than One Million Five Hundred Thousand Dollars ($1,500,000) in cash has been contributed as common equity to the capital of Company. 9.5 Subordinated Debt. Lender shall have received evidence satisfactory to it that Blair, Company and Borrowers have executed and delivered the Amendment Agreement and that the Amendment Agreement will be in full force and effect upon the payment contemplated by Section 8.2.7 hereof. The terms and conditions of the Amendment Agreement shall be acceptable to Lender. Lender shall have received evidence satisfactory to it that, as of the Closing Date, at least Four Million Five Hundred Thousand Dollars ($4,500,000) shall remain outstanding under the Subordinated Debt Documents. 9.6 Availability. Lender shall have determined that immediately after Lender has made the initial Loans contemplated hereby, and paid all closing costs incurred in connection with the transactions contemplated hereby, Availability shall not be less than Two Million Dollars ($2,000,000). 9.7 No Litigation. No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of this Agreement or the consummation of the transactions contemplated hereby. 9.8 Net Operating Carry Forward. Lender shall have received evidence satisfactory to it from the Company and its counsel that Company's net operating loss carry forward shall be available to be applied against Company's and Borrowers' consolidated taxable income for each tax year within the term hereof in a manner consistent with projections provided to Lender prior to the Closing. SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT 10.1 Events of Default. The occurrence of one or more of the following events shall constitute an "Event of Default": 10.1.1 Payment of Interest, Principal and Fees. Borrowers shall fail to pay any interest or principal due in respect to outstanding Revolving Credit Loans, the Term Loan or any fees payable in respect to unused Revolving Credit Loans on the due date thereof (whether due at stated maturity, on demand, upon acceleration or otherwise). 10.1.2 Payment of Other Obligations. Borrowers shall fail to pay any of the Obligations (other than interest and principal due in respect to outstanding Revolving Credit Loans, the Term Loan or any fees payable in respect to unused Revolving Credit Loans) on or within five (5) days after the due date for such Obligation (whether due at stated maturity, on demand, upon acceleration or otherwise). 10.1.3 Misrepresentations. Any representation, warranty or other statement made or furnished to Lender by or on behalf of Company, Borrowers, any Subsidiary of any Borrower in this Agreement, any of the other Loan Documents or any instrument, certificate or financial statement furnished in compliance with or in reference thereto proves to have been false or misleading in any material respect when made or furnished or when reaffirmed pursuant to Section 7.2 hereof. 10.1.4 Breach of Specific Covenants. Borrowers shall fail or neglect to perform, keep or observe any covenant contained in Sections 5.2, 5.3, 6.1.1, 6.2, 8.1.1, 8.1.3, 8.2 or 8.3 hereof on the date that Borrowers are required to perform, keep or observe such covenant. 10.1.5 Breach of Other Covenants. Borrowers shall fail or neglect to perform, keep or observe any covenant contained in this Agreement (other than a covenant which is dealt with specifically elsewhere in Section 10.1 hereof) and the breach of such other covenant is not cured to Lender's satisfaction within five (5) days after the sooner to occur of any Borrower's receipt of notice of such breach from Lender or the date on which such failure or neglect first becomes known to any officer of any Borrower; provided, however, that if a cure cannot be effected within such five (5) day period, Borrowers shall have ten (10) additional days to effect such cure if during such ten-day period Borrowers are diligent in pursuing such a cure. 10.1.6 Default Under Security Documents/Other Agreements. Any event of default shall occur under, or any Borrower shall default in the performance or observance of any term, covenant, condition or agreement contained in, any of the Security Documents or the Other Agreements and such default shall continue beyond any applicable grace period. 10.1.7 Other Defaults. There shall occur any default or event of default on the part of any Borrower under any agreement, document or instrument to which any Borrower is a party or by which any Borrower or any of its Property is bound, creating or relating to any Indebtedness (other than the Obligations) if the payment or maturity of such Indebtedness is accelerated in consequence of such event of default or demand for payment of such Indebtedness is made. 10.1.8 Uninsured Losses. Any material loss, theft, damage or destruction of any of the Collateral not fully covered (subject to such deductibles as Lender shall have permitted) by insurance. 10.1.9 Intentionally Omitted. 10.1.10 Insolvency and Related Proceedings. Any Borrower or Company shall cease to be Solvent or shall suffer the appointment of a receiver, trustee, custodian or similar fiduciary, or shall make an assignment for the benefit of creditors, or any petition for an order for relief shall be filed by or against any Borrower or Company under the Bankruptcy Code (if against any Borrower or Company, the continuation of such proceeding for more than 30 days), or any Borrower or Company shall make any offer of settlement, extension or composition to their respective unsecured creditors generally. 10.1.11 Business Disruption: Condemnation. There shall occur a cessation of a substantial part of the business of any Borrower, any Subsidiary of any Borrower or Company for a period which significantly affects any Borrower's or Company's capacity to continue its business, on a profitable basis; or any Borrower, any Subsidiary of any Borrower or Company shall suffer the loss or revocation of any license or permit now held or hereafter acquired by any Borrower or Company which is necessary to the continued or lawful operation of its business; or any Borrower or Company shall be enjoined, restrained or in any way prevented by court, governmental or administrative order from conducting all or any material part of its business affairs; or any material lease or agreement pursuant to which any Borrower or Company leases, uses or occupies any Property shall be canceled or terminated prior to the expiration of its stated term; or any part of the Collateral shall be taken through condemnation or the value of such Property shall be impaired through condemnation. 10.1.12 Change of Ownership. PPI shall cease to own and control, beneficially and of record, all of the issued and outstanding capital stock of APP; Company shall cease to own and control, beneficially and of record, all of the issued and outstanding capital stock of PPI and at least ninety-two percent (92%) of the issued and common stock of EPI; or The Spell Group shall cease to own and control, beneficially and of record, at least ten percent (10%) of the issued and outstanding capital stock of Company, on a fully diluted basis after giving effect to the exercise of all options and warrants and the conversion of the common stock of EPP and warrants and options for the common stock of EPI into common stock of the Company. 10.1.13 ERISA. A Reportable Event shall occur which Lender, in its sole discretion, shall determine in good faith constitutes grounds for the termination by the Pension Benefit Guaranty Corporation of any Plan or for the appointment by the appropriate United States district court of a trustee for any Plan, or if any Plan shall be terminated or any such trustee shall be requested or appointed, or if any Borrower, any Subsidiary of any Borrower or Company is in "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan resulting from any Borrower's, such Subsidiary's or Company complete or partial withdrawal from such Plan. 10.1.14 Challenge to Agreement. Any Borrower, any Subsidiary of any Borrower or Company, or any Affiliate of any of them, shall challenge or contest in any action, suit or proceeding the validity or enforceability of this Agreement, or any of the other Loan Documents, the legality or enforceability of any of the Obligations or the perfection or priority of any Lien granted to Lender. 10.1.15 Criminal Forfeiture. Any Borrower, any Subsidiary of any Borrower or Company shall be criminally indicted or convicted under any law that could lead to a forfeiture of any Property of any Borrower, any Subsidiary of any Borrower or Company. 10.1.16 Judgments. Final judgment or judgments (after the expiration of all times to appeal therefrom) for the payment of money in excess of $50,000 in the aggregate shall be rendered against any Borrower or Company and the same shall not (i) be fully covered by insurance or other comparable bond, or (ii) within thirty days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall not have been discharged within five days after the expiration of any such stay. 10.2 Acceleration of the Obligations. Without in any way limiting the right of Lender to demand payment of any portion of the Obligations payable on demand in accordance with Section 3.2 hereof, upon or at any time during the continuance of an Event of Default, all or any portion of the Obligations shall, at the option of Lender and without presentment, demand protest or further notice by Lender, become at once due and payable and Borrowers shall forthwith pay to Lender, the full amount of such Obligations, provided, that upon the occurrence of an Event of Default specified in subsection 10.1.10 hereof, all of the Obligations shall become automatically due and payable without declaration, notice or demand by Lender. 10.3 Other Remedies. Upon and during the continuance of an Event of Default, Lender shall have and may exercise from time to time the following rights and remedies: 10.3.1 All of the rights and remedies of a secured party under the Code or under other applicable law, and all other legal and equitable rights to which Lender may be entitled, all of which rights and remedies shall be cumulative and shall be in addition to any other rights or remedies contained in this Agreement or any of the other Loan Documents, and none of which shall be exclusive. 10.3.2 The right to take immediate possession of the Collateral, and to (i) require Borrower to assemble the Collateral, at Borrowers' expense, and make it available to Lender at a place designated by Lender which is reasonably convenient to both parties, and (ii) enter any premises where any of the Collateral shall be located and to keep and store the Collateral on said premises until sold (and if said premises be the Property of any Borrower, Borrowers agree not to charge Lender for storage thereof). 10.3.3 The right to sell or otherwise dispose of all or any Collateral in its then condition, or after any further manufacturing or processing thereof, at public or private sale or sales, with such notice as may be required by law, in lots or in bulk, for cash or on credit, all in a commercially reasonable manner. Borrowers agree that 10 days written notice to Borrowers of any public or private sale or other disposition of Collateral shall be reasonable notice thereof, and such sale shall be at such locations as Lender may designate in said notice. Lender shall have the right to conduct such sales on any Borrower's premises, without charge therefor, and such sales may be adjourned from time to time in accordance with applicable law. Lender shall have the right to sell, lease or otherwise dispose of the Collateral, or any part thereof, for cash, credit or any combination thereof, and Lender may purchase all or any part of the Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may set off the amount of such price against the Obligations. The proceeds realized from the sale of any Collateral may be applied, after allowing 2 Business Days for collection, first to the costs, expenses and attorneys' fees incurred by Lender in collecting the Obligations, in enforcing the rights of Lender under the Loan Documents and in collecting, retaking, completing, protecting, removing, storing, advertising for sale, selling and delivering any Collateral, second to the interest due upon any of the Obligations; third, to the principal of the Obligations; and fourth to the Borrowers or as otherwise directed by a court of competent jurisdiction. If any deficiency shall arise, Borrowers shall remain liable to Lender therefor. 10.3.4 Lender is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, tradenames, trademarks and advertising matter, or any Property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to Lender's benefit. 10.4 Remedies Cumulative; No Waiver. All covenants, conditions, provisions, warranties, guaranties, indemnities, and other undertakings of Borrowers contained in this Agreement and the other Loan Documents, or in any document referred to herein or contained in any agreement supplementary hereto or in any schedule or in any Guaranty Agreement given to Lender or contained in any other agreement between Lender and Borrowers, heretofore, concurrently, or hereafter entered into, shall be deemed cumulative to and not in derogation or substitution of any of the terms, covenants, conditions, or agreements of Borrowers herein contained. The failure or delay of Lender to require strict performance by Borrowers of any provision of this Agreement or to exercise or enforce any rights, Liens, powers, or remedies hereunder or under any of the aforesaid agreements or other documents or security or Collateral shall not operate as a waiver of such performance, Liens, rights, powers and remedies, but all such requirements, Liens, rights, powers, and remedies shall continue in full force and effect until all Loans and all other Obligations owing or to become owing from Borrowers to Lender shall have been fully satisfied. None of the undertakings, agreements, warranties, covenants and representations of Borrowers contained in this Agreement or any of the other Loan Documents and no Event of Default by Borrowers under this Agreement or any other Loan Documents shall be deemed to have been suspended or waived by Lender, unless such suspension or waiver is by an instrument in writing specifying such suspension or waiver and is signed by a duly authorized representative of Lender and directed to Borrower. SECTION 11. MISCELLANEOUS 11.1 Power of Attorney. Borrowers hereby irrevocably designate, make, constitute and appoint Lender (and all Persons designated by Lender) as Borrowers' true and lawful attorney (and agent-in-fact) and Lender, or Lender's agent, may, without notice to Borrowers and in any Borrowers' or Lender's name, but at the cost and expense of Borrowers: 11.1.1 At such time or times upon or during the continuation of a Default or an Event of Default as Lender or said agent, in its sole discretion, may determine, endorse Borrowers' name on any checks, notes, acceptances, drafts, money orders or any other evidence of payment or proceeds of the Collateral which come into the possession of Lender or under Lender's control; provided that Lender may at any time endorse any Borrower's name on any checks, notes, acceptance, drafts, money orders or other evidence of payment in order to effect the deposit of such items in a Dominion Account. 11.1.2 At such time or times upon or during the continuation of an Event of Default as Lender or its agent in its sole discretion may determine: (i) demand payment of the Accounts from the Account Debtors, enforce payment of the Accounts by legal proceedings or otherwise, and generally exercise all of Borrowers' rights and remedies with respect to the collection of the Accounts; (ii) settle, adjust, compromise, discharge or release any of the Accounts or other Collateral or any legal proceedings brought to collect any of the Accounts or other Collateral; (iii) sell or assign any of the Accounts and other Collateral upon such terms, for such amounts and at such time or times as Lender deems advisable; (iv) take control, in any manner, of any item of payment or proceeds relating to any Collateral; (v) prepare, file and sign Borrowers' name to a proof of claim in bankruptcy or similar document against any Account Debtor or to any notice of lien, assignment or satisfaction of lien or similar document in connection with any of the Collateral; (vi) receive, open and deal with all mail addressed to Borrowers and to notify postal authorities to change the address for delivery thereof to such address as Lender may designate; (vii) endorse the name of Borrowers upon any of the items of payment or proceeds relating to any Collateral and deposit the same to the account of Lender on account of the Obligations; (viii) endorse the name of Borrowers upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to the Accounts, Inventory and any other Collateral; (ix) use any Borrower's stationery and sign the name of any Borrower to verifications of the Accounts and notices thereof to Account Debtors; (x) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Accounts, Inventory, Equipment and any other Collateral; (xi) make and adjust claims under policies of insurance; and (xii) do all other acts and things necessary, in Lender's determination, to fulfill Borrowers' obligations under this Agreement. 11.2 Indemnity. Borrowers hereby agree to indemnify Lender and hold Lender harmless from and against any liability, loss, damage, suit, action or proceeding ever suffered or incurred by Lender (including reasonable attorneys fees and legal expenses) as the result of Borrowers' failure to observe, perform or discharge Borrowers' duties hereunder; provided, however, Borrowers shall have no obligation to indemnify Lender for any losses, costs, damages, penalties, forfeitures, claims or expenses arising from Lender's gross negligence or wilful misconduct. In addition, Borrowers shall defend Lender against and save it harmless from all claims of any Person with respect to the Collateral. Without limiting the generality of the foregoing, these indemnities shall extend to any claims asserted against Lender by any Person under any Environmental Laws or similar laws by reason of Borrowers' or any other Person's failure to comply with laws applicable to solid or hazardous waste materials or other toxic substances. Notwithstanding any contrary provision in this Agreement, the obligation of Borrowers under this Section 11.2 shall survive the payment in full of the Obligations and the termination of this Agreement. 11.3 Modification of Agreement; Sale of Interest. This Agreement may not be modified, altered or amended, except by an agreement in writing signed by Borrowers and Lender. Borrowers may not sell, assign or transfer any interest in this Agreement, any of the other Loan Documents, or any of the Obligations, or any portion thereof, including, without limitation, Borrowers' rights, title, interests, remedies, powers, and duties hereunder or thereunder. Borrowers hereby consent to Lender's participation, sale, assignment, transfer or other disposition, at any time or times hereafter, of this Agreement and any of the other Loan Documents, or of any portion hereof or thereof, including, without limitation, Lender's rights, title, interests, remedies, powers, and duties hereunder or thereunder [and any such participation, sale, assignment, transfer or other disposition shall be at Lender's sole cost and expense.] In the case of an assignment, the assignee shall have, to the extent of such assignment, the same rights, benefits and obligations as it would if it were "Lender" hereunder and Lender shall be relieved of all obligations hereunder upon any such assignments. Borrowers agree that they will use their best efforts to assist and cooperate with Lender in any manner reasonably requested by Lender to effect the sale of participations in or assignments of any of the Loan Documents or any portion thereof or interest therein, including, without limitation, assisting in the preparation of appropriate disclosure documents at no out-of-pocket cost to Borrowers. Borrowers further agree that Lender may disclose credit information regarding Borrowers and their respective Subsidiaries to any potential participant or assignee. 11.4 Severability. 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. 11.5 Successors and Assigns. This Agreement, the Other Agreements and the Security Documents shall be binding upon and inure to the benefit of the successors and assigns of Borrowers and Lender permitted under Section 11.3 hereof. 11.6 Cumulative Effect; Conflict of Terms. The provisions of the Other Agreements and the Security Documents are hereby made cumulative with the provisions of this Agreement. Except as otherwise provided in Section 3.2 hereof and except as otherwise provided in any of the other Loan Documents by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in direct conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. 11.7 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate 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. 11.8 Notice. Except as otherwise provided herein, all notices, requests and demands to or upon a party hereto, to be effective, shall be in writing and shall be sent by certified or registered mail, return receipt requested, by personal delivery against receipt, by overnight courier or by facsimile and, unless otherwise expressly provided herein, shall be deemed to have been validly served, given or delivered immediately when delivered against receipt, one Business Day after deposit in the mail, postage prepaid, or with an overnight courier or, in the case of facsimile notice, when sent, addressed as follows: If to Lender: Fleet Capital Corporation 20800 Swenson Drive Suite 350 Waukesha, WI 53186 Attention: Sandra Evans Facsimile No.: (414) 798-4882 With a copy to: Vedder, Price, Kaufman & Kammholz 222 North LaSalle Street Suite 2600 Chicago, IL 60601 Attention: John T. McEnroe Facsimile No.: (312) 609-5005 If to Borrowers: Eagle Pacific Industries, Inc. 2430 Lincoln Centre 333 South Seventh Street Minneapolis, MN 55402 Attention: William Spell, President and COO Facsimile No.: (612) 371-9651 With a copies to: Eagle Plastics, Inc. 146 North Maple Hastings, Nebraska 68902 Attention: Pat Mertens Facsimile No.: (402) 461-3343 and Fredrickson & Byron, P.A. 900 Second Avenue South 1100 International Centre Minneapolis, MN 55402 Attention: Dobson West and Lynn Gardin Facsimile No.: (612) 347-7077 or to such other address as each party may designate for itself by notice given in accordance with this Section 11.8; provided, however, that any notice, request or demand to or upon Lender pursuant to subsection 3.1.1 or 4.2.2 hereof shall not be effective until received by Lender. 11.9 Lender's Consent. Except as may be otherwise expressly provided, whenever Lender's consent is required to be obtained under this Agreement, any of the Other Agreements or any of the Security Documents as a condition to any action, inaction, condition or event, Lender shall be authorized to give or withhold such consent in its sole and absolute discretion and to condition its consent upon the giving of additional collateral security for the Obligations, the payment of money or any other matter. 11.10 Credit Inquiries. Borrowers hereby authorize and permit Lender to respond to usual and customary credit inquiries from third parties concerning Borrowers or any of its Subsidiaries. 11.11 Time of Essence. Time is of the essence of this Agreement, the Other Agreements and the Security Documents. 11.12 Entire Agreement. This Agreement and other Loan Documents, together with all other instruments, agreements and certificates executed by the parties in connection therewith or with reference thereto, embody the entire understanding and agreement between the parties hereto and thereto with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and inducements, whether express or implied, oral and written. 11.13 Interpretation. No provision of this Agreement or any of the other Loan Documents shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision. 11.14 GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN CHICAGO, ILLINOIS. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS: PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN ILLINOIS, THE LAWS OF SUCH JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE AND FORECLOSURE OF LENDER'S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF LENDER'S OTHER REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF ILLINOIS. AS PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF BORROWERS OR LENDER, BORROWERS HEREBY CONSENT AND AGREE THAT THE CIRCUIT COURT OF COOK COUNTY, ILLINOIS, OR, AT LENDER'S OPTION, THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWERS AND LENDER PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT. BORROWERS EXPRESSLY SUBMIT AND CONSENT IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND BORROWERS HEREBY WAIVE ANY OBJECTION WHICH BORROWERS MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENT TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. BORROWERS HEREBY WAIVE PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREE THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWERS AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE ACTUAL RECEIPT THEREOF. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION. 11.15 WAIVERS BY BORROWER. BORROWERS WAIVE (i) THE RIGHT TO TRIAL BY JURY (WHICH LENDER HEREBY ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL: (ii) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON PAYMENT, MATURITY, RELEASE, COMPROMISE SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY LENDER ON WHICH BORROWERS MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS WHATEVER LENDER MAY DO IN THIS REGARD (OTHER THAN IN RESPECT OF LENDER'S ACTS OF GROSS NEGLIGENCE OR WILFUL MISCONDUCT); (iii) NOTICE PRIOR TO TAKING POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING LENDER TO EXERCISE ANY OF LENDER'S REMEDIES; (iv) THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS; AND (v) NOTICE OF ACCEPTANCE HEREOF. BORROWERS ACKNOWLEDGE THAT THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND THAT LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH BORROWERS. BORROWERS WARRANT AND REPRESENT THAT THEY HAVE REVIEWED THE FOREGOING WAIVERS WITH THEIR LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 11.16 Publicity. Borrowers hereby consent to Lender's use of the name or tradestyle of Borrowers in any announcements or advertisements relating to the completion of the transactions contemplated hereby and the role played by Lender in providing financing to Borrowers hereunder in such media and in such manner as Lender, in its sole discretion, determines. 11.17 Reimbursement. The undertaking by Borrowers to repay the Obligations and each representation, warranty or covenant of Borrowers are and shall be joint and several. To the extent that any Borrower shall be required to pay a portion of the Obligations which shall exceed the amount of loans, advances or other extensions of credit received by any such Borrower and all interest, costs, fees and expenses attributable to such loans, advances or other extensions of credit, then such Borrower shall be reimbursed by the other Borrower for the amount of such excess pro rata, based on their respective net worths as of the date hereof. This Section 11.17 is intended only to define the relative rights of the Borrowers, and nothing set forth in Section 11.17 is intended or shall impair the obligations of each Borrower, jointly and severally, to pay Lender the Obligations as and when the same shall become due and payable in accordance with the terms hereof. IN WITNESS WHEREOF, this Agreement has been duly executed in Chicago, Illinois, on the day and year specified at the beginning of this Agreement. EAGLE PLASTICS, INC. By: Name: Title: PACIFIC PLASTICS, INC. By: Name: Title: ARROW PACIFIC PLASTICS, INC. By: Name: Title: ACCEPTED IN CHICAGO, ILLINOIS: FLEET CAPITAL CORPORATION ("Lender") By: Name: Brian L. Tornow Title: Vice President APPENDIX A GENERAL DEFINITIONS When used in the Loan and Security Agreement dated as of May 10, 1996, by and among Fleet Capital Corporation and Eagle Plastics, Inc., Pacific Plastics, Inc. and Arrow Pacific Plastics, Inc., the following terms shall have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa): Account Debtor - any Person who is or may become obligated under or on account of an Account. Accounts - all accounts, contract rights, chattel paper, instruments and documents, whether now owned or hereafter created or acquired by any Borrower or in which any Borrower now has or hereafter acquired any interest. Affiliate - a Person (other than a Subsidiary): (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, a Person; (ii) which beneficially owns or holds 5% or more of any class of the Voting Stock of a Person; or (iii) 5% or more of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by a Person or a Subsidiary of a Person. Agreement - the Loan and Security Agreement referred to in the first sentence of this Appendix A, all Exhibits thereto and this Appendix A. ALTA Survey - a survey prepared in accordance with the standards adopted by the American Land Title Association and the American Congress on Surveying and Mapping in 1986, known as the "Minimum Standard Detail Requirements of Land Title Surveys". The ALTA Survey shall be in sufficient form to satisfy the requirements of Chicago Title Insurance Company to provide extended coverage over survey defects and shall also show the location of all easements, utilities, and covenants of record, dimensions of all improvements, encroachments from any adjoining property, and certify as to the location of any flood plain area affecting the subject real estate. The ALTA Survey shall contain the following certification: "To [Name of Applicable Borrower], Fleet Capital Corporation and Chicago Title Insurance Company. This is to certify that this map of plat and the survey on which it is based were made in accordance with the "Minimum Standard Detail Requirements for Land Title Surveys" jointly established and adopted by ALTA and ACSM in 1986. (signed (SEAL) License No. __________". Amendment Agreement - shall have the meaning contained in the definition of Subordinated Debt Documents. APP Borrowing Base - as at any date of determination thereof, an amount equal to the lesser of: (i) the remainder of Sixteen Million Five Hundred Thousand Dollars ($16,500,000) minus the outstanding principal balance of Revolving Credit Loans made to EPI and PPI; or (ii) an amount equal to: (a) up to eighty-five percent 85%, of the net amount of Eligible Accounts of APP outstanding at such date; PLUS (b) the lesser of (1) Eight Million Dollars ($8,000,000) minus the outstanding principal amount of Revolving Credit Loans made to EPI and PPI based on EPI's and PPI's Eligible Inventory; or (2) up to fifty-five percent (55%), of the value of Eligible Inventory of APP at such date calculated on the basis of the lower of cost or market with the cost of raw materials and finished goods calculated on a first-in, first-out basis. For purposes hereof, the net amount of Eligible Accounts of APP at any time shall be the face amount of such Eligible Accounts less any and all returns, rebates, discounts (which may, at Lender's option, be calculated on shortest terms), credits, allowances or excise taxes of any nature at any time issued, owing, claimed by Account Debtors, granted, outstanding or payable in connection with such Accounts at such time. APP Term Loan - shall have the meaning contained in Section 1.2.1 of the Agreement. APP Term Note - the Secured Promissory Note to be executed by APP on or about the Closing Date in favor of Lender to evidence the APP Term Loan, which shall be in the form of Exhibit A-3 to the Agreement. Availability - the aggregate amount of money which Borrowers are entitled to borrow from time to time as Revolving Credit Loans, such amount being the difference derived when the sum of the principal amount of Revolving Credit Loans then outstanding (including any amounts which Lender may have paid for the account of Borrowers pursuant to any of the Loan Documents and which have not been reimbursed by Borrowers) is subtracted from the sum of (x) the EPI Borrowing Base plus (y) and the PPI Borrowing Base plus (z) the APP Borrowing Base. If the amount outstanding is equal to or greater than the sum of (x) the EPI Borrowing Base plus (y) the PPI Borrowing Base plus (z) the APP Borrowing Base, Availability is 0. Bank - Fleet National Bank. Base Rate - the rate of interest announced or quoted by Bank from time to time as its prime rate for commercial loans, whether or not such rate is the lowest rate charged by Bank to its most preferred borrowers; and, if such prime rate for commercial loans is discontinued by Bank as a standard, a comparable reference rate designated by Bank as a substitute therefor shall be the Base Rate. Blair - William Blair Mezzanine Capital Fund, L.P. Board - the Board of Governors of the Federal Reserve System of the United States of America. Borrower Guaranties - The Continuing Guaranty Agreements which are to be executed by each Borrower in form and substance satisfactory to Lender. Business Day - (i) when used with respect to the LIBOR Option, shall mean a day on which dealings may be effected in deposits of United States dollars in the London interbank foreign currency deposits market and on which the Lender is conducting business and on which banks may conduct business in London, England, Chicago, Illinois, and New York, New York and (ii) when used with respect to the other provisions of this Agreement, shall mean any day that is not a Saturday, a Sunday or a day on which banks are required or permitted to be closed either in the State of Illinois or in the State of Wisconsin. Capital Expenditures - expenditures made or liabilities incurred for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one year, including the total principal portion of Capitalized Lease Obligations. Capitalized Lease Obligation - any Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. Closing Date - the date on which all of the conditions precedent in Section 9 of the Agreement are satisfied and the initial Loan is made under the Agreement. Code - the Uniform Commercial Code as adopted and in force in the State of Illinois, as from time to time in effect. Collateral - all of the Property and interests in Property described in Section 5 of the Agreement, and all other Property and interests in Property that now or hereafter secure the payment and performance of any of the Obligations. Commitment Termination Date - the earliest of (i) May 9, 1999; (ii) the date of termination of the Commitment to make further Revolving Credit Loan pursuant to Section 4.2.1 or 4.2.2 hereof; and (iii) the date of termination of the Commitment to make further Revolving Credit Loans pursuant to Section 10.2 hereof. Company - Eagle Pacific Industries, Inc., a Minnesota corporation. Consolidated - the consolidation in accordance with GAAP of the accounts or other items as to which such term applies. Consolidated Adjusted Net Earnings From Operations - with respect to any fiscal period, means the Consolidated net earnings (or loss) after provision for income taxes for such fiscal period of Company as reflected on the financial statement of Company supplied to Lender pursuant to subsection 8.1.3 of the Agreement, but excluding: (i) any gain or loss arising from the sale of capital assets; (ii) any gain arising from any write-up of assets; (iii) earnings of any Subsidiary of Company or any Borrower accrued prior to the date it became a Subsidiary; (iv) earnings of any corporation, substantially all the assets of which have been acquired in any manner by Company or any Borrower, realized by such corporation prior to the date of such acquisition; (v) net earnings of any business entity (other than a Subsidiary of any Borrower) in which Company or any Borrower has an ownership interest unless such net earnings shall have actually been received by Company or any Borrower in the form of cash distributions; (vi) any portion of the net earnings of any Subsidiary of Company or any Borrower which for any reason is unavailable for payment of dividends to Company or any Borrower; (vii) the earnings of any Person to which any assets of Company or any Borrower shall have been sold, transferred of disposed of, or into which any Borrower shall have merged, or been a party to any consolidation or other form of reorganization, prior to the date of such transaction; (viii) any gain arising from the acquisition or disposition of any Securities of Company or any Borrower; and (ix) any gain arising from extraordinary or non-recurring items. Consolidated Adjusted Tangible Assets - all Consolidated assets of Company except: (i) any surplus resulting from any write-up of assets subsequent to December 31, 1995; (ii) deferred assets, including all prepaid expenses; (iii) patents, copyrights, trademarks, trade names, non-compete agreements, franchises and other similar intangibles; (iv) goodwill, including any amounts, however designated on a Consolidated balance sheet of a Person or its Subsidiaries, representing the excess of the purchase price paid for assets or stock over the value assigned thereto on the books of such Person; (v) Restricted Investments; (vi) unamortized debt discount and expense; (vii) assets located outside the United States of America or Mexico and notes and receivables due from obligors outside of the United States of America; and (viii) Accounts, notes and other receivables due from Affiliates or employees. Consolidated Adjusted Tangible Net Worth - at any date means a sum equal to: (i) the net book value (after deducting related depreciation, obsolescence, amortization, valuation, and other proper reserves) at which the Consolidated Adjusted Tangible Assets of Company would be shown on a balance sheet at such date in accordance with GAAP, minus (ii) the amount at which Company's Consolidated liabilities (other than capital stock and surplus) would be shown on such balance sheet in accordance with GAAP, and including as liabilities all reserves for contingencies and other potential liabilities. Current Assets - at any date means the amount at which all of the current assets of a Person would be properly classified as current assets shown on a balance sheet at such date in accordance with GAAP except that amounts due from Affiliates and investments in Affiliates shall be excluded therefrom. Current Liabilities - at any date means the amount at which all of the current liabilities of a Person would be properly classified as current liabilities on a balance sheet at such date in accordance with GAAP excluding the Loans and current maturities of any long-term Indebtedness. Default - an event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, become an Event of Default. Default Rate - as defined in subsection 2.1.2 of the Agreement. Distribution - in respect of any corporation means and includes: (i) the payment of any dividends or other distributions on capital stock of the corporation (except distributions in such stock) and (ii) the redemption or acquisition of Securities unless made contemporaneously from the net proceeds of the sale of Securities. Dominion Account - a special account of Lender established by Borrowers pursuant to the Agreement at a bank selected by Borrowers, but acceptable to Lender in its reasonable discretion, and over which Lender shall have sole and exclusive access and control for withdrawal purposes. EBIT - with respect to any fiscal period, the sum of Company's Consolidated net earnings (or loss) before interest expense and taxes for said period as determined in accordance with GAAP. Eligible Account - an Account arising in the ordinary course of Borrowers' business from the sale of goods or rendition of services which Lender, in its reasonable credit judgment, deems to be an Eligible Account. Without limiting the generality of the foregoing, no Account shall be an Eligible Account if: (i) it arises out of a sale made by a Borrower to a Subsidiary or an Affiliate of Borrower or to a Person controlled by an Affiliate of a Borrower; or (ii) it is unpaid for more than 30 days after the original due date shown on the invoice; or (iii) it is due or unpaid more than 210 days after the original invoice date; or (iv) 25% or more of the Accounts from the Account Debtor are not deemed Eligible Accounts hereunder; or (v) the total unpaid Accounts of the Account Debtor exceed 20% of the net amount of all Eligible Accounts, to the extent of such excess; or (vi) any covenant, representation or warranty contained in the Agreement with respect to such Account has been breached; or (vii) the Account Debtor is also a Borrower's creditor or supplier, or the Account Debtor has disputed liability with respect to such Account, or the Account Debtor has made any claim with respect to any other Account due from such Account Debtor to any Borrower, or the Account otherwise is or may become subject to any right of setoff by the Account Debtor; or (viii) the Account Debtor has commenced a voluntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or made an assignment for the benefit of creditors, or a decree or order for relief has been entered by a court having jurisdiction in the premises in respect of the Account Debtor in an involuntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or any other petition or other application for relief under the federal bankruptcy laws has been filed against the Account Debtor, or if the Account Debtor has failed, suspended business, ceased to be Solvent, or consented to or suffered a receiver, trustee, liquidator or custodian to be appointed for it or for all or a significant portion of its assets or affairs; or (ix) it arises from a sale to an Account Debtor outside the United States or Canada (other than Quebec), unless the sale is on letter of credit, guaranty or acceptance terms in each case acceptable to Lender in its sole discretion; or (x) it arises from a sale to the Account Debtor on a bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval, consignment or any other repurchase or return basis; or (xi) the Account Debtor is the United States of America or any department, agency or instrumentality thereof, unless Borrower assigns its right to payment of such Account to Lender, in a manner satisfactory to Lender so as to comply with the Assignment of Claims Act of 1940 (31 U.S.C. '203 et seq., as amended); or (xii) the Account is subject to a Lien other than a Permitted Lien; or (xiii) the goods giving rise to such Account have not been delivered to and accepted by the Account Debtor or the services giving rise to such Account have not been performed by the applicable Borrower and accepted by the Account Debtor or the Account otherwise does not represent a final sale; or (xiv) the Account is evidenced by chattel paper or an instrument of any kind, or has been reduced to judgment; or (xv) Any Borrower has made any agreement with the Account Debtor for any deduction therefrom, except for discounts or allowances which are made in the ordinary course of business for prompt payment and which discounts or allowances are reflected in the calculation of the face value of each invoice related to such Account; or (xvi) Any Borrower has made an agreement with the Account Debtor to extend the time of payment thereof. Eligible Inventory - such Inventory of Borrowers (other than packaging materials and supplies) which Lender, in its reasonable credit judgments deems to be Eligible Inventory. Without limiting the generality of the foregoing, no Inventory shall be Eligible Inventory if: (i) it is not raw materials or finished goods that is, in Lender's opinion, readily marketable in its current form; or (ii) it is not in good, new and saleable condition; or (iii) it is slow-moving, obsolete or unmerchantable; or (iv) it does not meet all standards imposed by any governmental agency or authority; or (v) it does not conform in all respects to the warranties and representations set forth in the Agreement, (vi) it is not at all times subject to Lender's duly perfected, first priority security interest and no other Lien except a Permitted Lien; (vii) it is not situated at a location in compliance with the Agreement or is in transit; or (viii) is not situated at a location in the United States of America. Environmental Laws - all federal, state and local laws, rules, regulations, ordinances, programs, permits, guidances, orders and consent decrees relating to health, safety and environmental matters. EPI Borrowing Base - as at any date of determination thereof, an amount equal to the lesser of: (i) the remainder of Sixteen Million Five Hundred Thousand Dollars ($16,500,000) minus the outstanding principal balance of the Revolving Credit Loans made to PPI and APP; or (ii) an amount equal to: (a) up to eighty-five percent 85%, of the net amount of Eligible Accounts of EPI outstanding at such date; PLUS (b) the lesser of (1) the remainder of Eight Million Dollars ($8,000,000) minus the outstanding principal of Revolving Credit Loans made to PPI and APP based on PPI's and APP's Eligible Inventory; or (2) up to fifty-five percent (55%), of the value of Eligible Inventory at such date calculated on the basis of the lower of cost or market with the cost of raw materials and finished goods calculated on a first-in, first-out basis. For purposes hereof, the net amount of Eligible Accounts of EPI at any time shall be the face amount of such Eligible Accounts less any and all returns, rebates, discounts (which may, at Lender's option, be calculated on shortest terms), credits, allowances or excise taxes of any nature at any time issued, owing, claimed by Account Debtors, granted, outstanding or payable in connection with such Accounts at such time. Equipment - all machinery, apparatus, equipment, fittings, furniture, fixtures, motor vehicles and other tangible personal Property (other than Inventory) of every kind and description used in Borrowers' operations or owned by Borrowers or in which any Borrower has an interest, whether now owned or hereafter acquired by any Borrower and wherever located, and all parts, accessories and special tools and all increases and accessions thereto and substitutions and replacements therefor. EPI Term Loan - shall have the meaning contained in Section 1.2.1 of the Agreement. EPI Term Note - the Secured Promissory Note to be executed by EPI on or about the Closing Date in favor of Lender to evidence the EPI Term Loan, which shall be in the form of Exhibit A-1 to the Agreement. ERISA - the Employee Retirement Income Security Act of 1974, as amended, and all rules and regulations from time to time promulgated thereunder. Event of Default - as defined in Section 10.1 of the Agreement. GAAP - generally accepted accounting principles in the United States of America in effect from time to time. General Intangibles - all general intangibles of Borrowers, whether now owned or hereafter created or acquired by Borrowers, including, without limitation, all choses in action, causes of action, corporate or other business records, deposit accounts, inventions, designs, patents, patent applications, trademarks, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, tax refund claims, computer programs, all claims under guaranties, security interests or other security held by or granted to Borrowers to secure payment of any of the Accounts by an Account Debtor, all rights to indemnification and all other intangible property of every kind and nature (other than Accounts). Guaranty - the Continuing Guaranty Agreement which is to be executed by Company in form and substance satisfactory to Lender. Hastings Documents - that certain Redevelopment Contract between the City of Hastings, Nebraska, and EPI and related Promissory Notes. Indebtedness - as applied to a Person means, without duplication (i) all items which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Indebtedness is to be determined, including, without limitation, Capitalized Lease Obligations, (ii) all obligations of other Persons which such Person has guaranteed, (iii) all reimbursement obligations in connection with letters of credit or letter of credit guaranties issued for the account of such Person, and (iv) in the case of Borrowers (without duplication), the Obligations. Intercreditor and Subordination Agreement - the Intercreditor and Subordination Agreement to be dated on or about the Closing Date by and between Lender and Blair and acknowledged by Company and Borrowers in respect to the Indebtedness evidenced by the Subordinated Debt Documents. Inventory - all of Borrowers' inventory, whether now owned or hereafter acquired including, but not limited to, all goods intended for sale or lease by Borrowers, or for display or demonstration; all work in process; all raw materials and other materials and supplies of every nature and description used or which might be used in connection with the manufacture, printing, packing, shipping, advertising, selling, leasing or furnishing of such goods or otherwise used or consumed in Borrowers' business; and all documents evidencing and General Intangibles relating to any of the foregoing, whether now owned or hereafter acquired by Borrowers. Investment Property - all of Borrowers' investment property, whether now owned or hereinafter acquired by Borrowers, including, without limitation, all securities (certificated or uncertificated), securities accounts, securities entitlements, commodity accounts and contracts. Legal Requirement - any requirement imposed upon Lender or any Participating Lender by any law of the United States of America or the United Kingdom or by any regulation, order, interpretation, ruling of official directive (whether or not having the force of law) of the Board, the bank of England or any other board, central bank or governmental or administrative agency, institution or authority of the United States of America, the United Kingdom or any political subdivision of either thereof. LIBOR Interest Payment Date - with respect to any LIBOR Portion, the last day of the applicable LIBOR Period. LIBOR Option - the option granted pursuant to Section 3.1(B) to have the interest on all or any portion of the principal amount of the Term Loan or Revolving Credit Loans based on a LIBOR Rate. LIBOR Period - any period, selected as provided in Section 3.1(B) of 1 month, 2 months or 3 months, commencing on any Business Day, subject to the provisions of Section 3.1(B); provided, however, that no LIBOR Period shall extend beyond the last day of the Original Term, unless Borrowers and Lender have agreed to an extension of the Original Term beyond the expiration of the LIBOR Period in question. If any LIBOR Period so elected shall end on a date that is not a Business Day, such LIBOR Period shall instead end on the next preceding or succeeding Business Day as determined by Lender in accordance with the then current banking practice in London. Each determination by the Lender of LIBOR Period shall, in the absence of manifest error, be conclusive, and at Borrower's request, Lender shall demonstrate the basis for such determination. LIBOR Portion - that portion of the Revolving Credit Loans or of the Term Loan specified in a LIBOR Request (including any portion of Revolving Credit Loans which is being borrowed by Borrower concurrently with such LIBOR Request) which is not less than $1,000,000, which does not exceed the outstanding balance of Revolving Credit Loan and/or Term Loan not already subject to a LIBOR Option and, which, as of the date of the LIBOR Request specifying such LIBOR Portion, has met the conditions for basing interest on the LIBOR Rate in Section 2.1.1(B) hereof and the LIBOR Period of which was commenced and not terminated. LIBOR Rate - with respect to any LIBOR Portion for the related LIBOR Period, an interest rate per annum (rounded upwards, if necessary, to the next higher 1/8 of 1%) equal to the product of (a) the Base LIBOR Rate ( as hereinafter defined) and (b) Statutory Reserves. For purposes of this definition, the term "Base LIBOR Rate" shall mean the rate (rounded to the nearest 1/8 of 1% or, if there is no nearest 1/8 of 1%, the next higher 1/8 of 1%) at which deposits of U.S. dollars approximately equal in principal amount to the LIBOR Portion specified in the applicable LIBOR Request are offered to Bank, in the London interbank foreign currency deposits market at approximately 11:00 a.m., London time, two (2) Business Days prior to the commencement of such LIBOR Period, for delivery on the first day of such LIBOR Period. Each determination by Lender of any LIBOR Rate shall in the absence of manifest error, be conclusive, and at Borrower's request, Lender shall demonstrate the basis of such determination. LIBOR Request - a notice in writing (or by telephonic communication confirmed by telex, telecopy or other facsimile transmission on the same day as the telephone request) from Borrower to Lender requesting that interest on all or a portion of the Revolving Credit Loan and/or Term Loan be based on the LIBOR Rate, specifying: (i) the first day of the LIBOR Period, (ii) the length of the LIBOR Period consistent with the definition of that term, and (iii) a dollar amount of the LIBOR Portion consistent with the definition of such term. LIBOR Revolving Loan Portion - that portion of the Revolving Credit Loans specified in a LIBOR Request (including any portion of Revolving Credit Loans which is being borrowed by Borrower concurrently with such LIBOR Request) which is not less than $1,000,000, which does not exceed the outstanding balance of Revolving Credit Loan not already subject to a LIBOR Option and, which, as of the date of the LIBOR Request specifying such LIBOR Portion, has met the conditions for basing interest on the LIBOR Rate in Section 2.1.1(B) hereof and the LIBOR Period of which was commenced and not terminated. LIBOR Term Portion - that portion of the Term Loan specified in a LIBOR Request which is not less than $1,000,000, which does not exceed the outstanding balance of Term Loan not already subject to a LIBOR Option and, which, as of the date of the LIBOR Request specifying such LIBOR Portion, has met the conditions for basing interest on the LIBOR Rate in Section 2.1.1(B) hereof and the LIBOR Period of which was commenced and not terminated. Lien - any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on common law, statute or contract. The term "Lien" shall also include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purpose of the Agreement, Borrower shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. Loan Account - the loan account established on the books of Lender pursuant to Section 3.6 of the Agreement. Loan Documents - the Agreement, the Other Agreements and the Security Documents. Loans - all loans and advances of any kind made by Lender pursuant to the Agreement. Money Borrowed - means (i) Indebtedness arising from the lending of money by any Person to Borrowers or any one of them; (ii) Indebtedness, whether or not in any such case arising from the lending by any Person of money to Borrowers or any one of them, (A) which is represented by notes payable or drafts accepted that evidence extensions of credit, (B) which constitutes obligations evidenced by bonds, debentures, notes or similar instruments, or (C) upon which interest charges are customarily paid (other than accounts payable) or that was issued or assumed as full or partial payment for Property; (iii) Indebtedness that constitutes a Capitalized Lease Obligation; (iv) reimbursement obligations with respect to letters of credit or guaranties of letters of credit and (v) Indebtedness of Borrowers under any guaranty of obligations that would constitute Indebtedness for Money Borrowed under clauses (i) through (iii) hereof, if owed directly by Borrowers. Mortgages - the mortgages, deeds of trust, security deeds and/or leasehold mortgages to be executed by a Borrower on or about the Closing Date in favor of Lender and by which a Borrower shall grant and convey to Lender, as security for the Obligations, a Lien upon the real Property of Borrowers located in or at (i) Hastings, Nebraska and (ii) 21500 Northwest Plastics Drive, Hillsboro, Oregon. Multiemployer Plan - has the meaning set forth in Section 4001(a)(3) of ERISA. Net Cash Flow - for any period, means Company's (i) Consolidated Adjusted Net Earnings from Operations for such period, plus (ii) Consolidated depreciation and amortization expenses for such period, plus (iii) Consolidated deferred taxes for such period, all as determined in accordance with GAAP minus (iv) Consolidated Capital Expenditure minus (v) all principal payments (other than principal payments made in respect to the Revolving Credit Loans and in respect to Indebtedness for Money Borrowed owed to FirsTier Bank, National Association, Bank of America, Oregon or payments made in respect to outstanding Indebtedness under the Subordinated Loan Debt Documents on the Closing Date to the extent permitted by Section 8.2.7(a) of the Agreement) made within such period in respect of Indebtedness for Money Borrowed. New Mortgages - as defined in Section 5.3 of the Agreement. Obligations - all Loans and all other advances, debts, liabilities, obligations, covenants and duties, together with all interest, fees and other charges thereon, owing, arising, due or payable from Borrowers to Lender of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, whether arising under the Agreement or any of the other Loan Documents or otherwise whether direct or indirect (including those acquired by assignment), absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising and however acquired. Original Term - as defined in Section 4.1 of the Agreement. Other Agreements - any and all agreements, instruments and documents (other than the Agreement and the Security Documents), heretofore, now or hereafter executed by any Borrower, any Subsidiary of any Borrower or any other third party and delivered to Lender in respect of the transactions contemplated by the Agreement. Overadvance - the amount, if any, by which the outstanding principal amount of Revolving Credit Loans exceeds the sum of the EPI Borrowing Base, the PPI Borrowing Base and the APP Borrowing Base. Participating Lender - each Person who shall be granted the right by Lender to participate in any of the Loans described in the Agreement and who shall have entered into a participation agreement in form and substance satisfactory to Lender. Permitted Liens - any Lien of a kind specified in subsection 8.2.5 of the Agreement. Permitted Purchase Money Indebtedness - Purchase Money Indebtedness of any Borrower incurred after the date hereof which is secured by a Purchase Money Lien and which, when aggregated with the principal amount of all other such Indebtedness and Capitalized Lease Obligations of Borrower at the time outstanding, does not exceed One Million Two Hundred Fifty Thousand Dollars ($1,250,000). For the purposes of this definition, the principal amount of any Purchase Money Indebtedness consisting of capitalized leases shall be computed as a Capitalized Lease Obligation. Person - an individual, partnership, corporation, limited liability company, joint stock company, land trust, business trust, or unincorporated organization, or a government or agency or political subdivision thereof. Plan - an employee benefit plan now or hereafter maintained for employees of Borrower that is covered by Title IV of ERISA. PPI Borrowing Base - as at any date of determination thereof, an amount equal to the lesser of: (i) the remainder of Sixteen Million Five Hundred Thousand Dollars ($16,500,000) minus the outstanding principal balance of Revolving Credit Loans made to EPI and APP; or (ii) an amount equal to: (a) up to eighty-five percent 85%, of the net amount of Eligible Accounts of PPI outstanding at such date; PLUS (b) the lesser of (1) Eight Million Dollars ($8,000,000) minus the outstanding principal amount of Revolving Credit Loans made to EPI and APP based on EPI's and APP's Eligible Inventory; or (2) up to fifty-five percent (55%), of the value of Eligible Inventory of PPI at such date calculated on the basis of the lower of cost or market with the cost of raw materials and finished goods calculated on a first-in, first-out basis. For purposes hereof, the net amount of Eligible Accounts of PPI at any time shall be the face amount of such Eligible Accounts less any and all returns, rebates, discounts (which may, at Lender's option, be calculated on shortest terms), credits, allowances or excise taxes of any nature at any time issued, owing, claimed by Account Debtors, granted, outstanding or payable in connection with such Accounts at such time. PPI Term Loan - shall have the meaning contained in Section 1.2.1 of the Agreement. PPI Term Note - the Secured Promissory Note to be executed by PPI on or about the Closing Date in favor of Lender to evidence the PPI Term Loan, which shall be in the form of Exhibit A-2 to the Agreement. Prime Portion - that portion of the Revolving Credit Loans and the Term Loan not subject to a LIBOR Option. Projections - Company's forecasted Consolidated and consolidating (a) balance sheets, (b) profit and loss statements, (c) cash flow statements, and (d) capitalization statements, all prepared on a consistent basis with Company's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. Promissory Note and Stock Pledge Agreement - that certain Promissory Note and Stock Pledge Agreement dated as of July 10, 1995 between Company, Pacific Acquisition Corp., PPI and the selling shareholder signatories thereto, as in effect on the Closing Date. Property - any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. Purchase Money Indebtedness - means and includes (i) Indebtedness (other than the Obligations) for the payment of all or any part of the purchase price of any fixed assets, (ii) any Indebtedness (other than the Obligations) incurred at the time of or within 10 days prior to or after the acquisition of any fixed assets for the purpose of financing all or any part of the purchase price thereof, and (iii) any renewals, extensions or refinancings thereof, but not any increases in the principal amounts thereof outstanding at the time. Purchase Money Lien - a Lien upon fixed assets which secures Purchase Money Indebtedness, but only if such Lien shall at all times be confined solely to the fixed assets the purchase price of which was financed through the incurrence of the Purchase Money Indebtedness secured by such Lien. Rentals - as defined in subsection 8.2.12 of the Agreement. Reportable Event - any of the events set forth in Section 4043(b) of ERISA. Restricted Investment - any investment made in cash or by delivery of Property to any Person, whether by acquisition of stock, Indebtedness or other obligation or Security, or by loan, advance or capital contribution, or otherwise, or in any Property except the following: (i) investments in one or more Subsidiaries of Borrowers to the extent existing on the Closing Date; (ii) Property to be used in the ordinary course of business; (iii) Current Assets arising from the sale of goods and services in the ordinary course of business of Borrowers and their respective Subsidiaries; (iv) investments in direct obligations of the United States of America, or any agency thereof or obligations guaranteed by the United States of America, provided that such obligations mature within one year from the date of acquisition thereof; (v) investments in certificates of deposit maturing within one year from the date of acquisition issued by a bank or trust company organized under the laws of the United States or any state thereof having capital surplus and undivided profits aggregating at least $100,000,000; and (vi) investments in commercial paper given the highest rating by a national credit rating agency and maturing not more than 270 days from the date of creation thereof. Revolving Credit Loan - a Loan made by Lender as provided in Section 2.1 of the Agreement. Schedule of Accounts - as defined in subsection 6.4.1 of the Agreement. Security - shall have the same meaning as in Section 2(1) of the Securities Act of 1933, as amended. Security Documents - the Mortgages, any New Mortgage, the Patent Assignment, the Trademark Assignments and all other instruments and agreements now or at any time hereafter securing the whole or any part of the Obligations. Senior Interest Coverage Ratio - with respect to any period of determination, the ratio of Consolidated (i) EBIT for such period to (ii) Senior Interest Expense for such period, all as determined in accordance with GAAP. Senior Interest Expense - with respect to any fiscal period, the interest expense incurred by Borrowers for such period in respect to all Indebtedness for Money Borrowed (other than Indebtedness outstanding pursuant to the Subordinated Debt Documents) as determined in accordance with GAAP owing by Borrowers to Lender for such period. Solvent - as to any Person, such Person (i) owns Property whose fair saleable value is greater than the amount required to pay all of such Person's Indebtedness (including contingent debts), (ii) is able to pay all of its Indebtedness as such Indebtedness matures and (iii) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage. Spell Group - shall mean collectively William H. Spell, Harry W. Spell, Richard W. Perkins, Bruce A. Richard, any of their spouses or any family trust which is controlled by any of the foregoing. Statutory Reserves - a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including, without limitation, any marginal, special, emergency or supplemental reserves), expressed as a decimal, established by the Board and any other banking authority to which Bank or Lender is subject for Eurocurrency Liabilities (as defined in Regulation D of the Board or any successor thereto). Such reserve percentages shall include, without limitation, those imposed under such Regulation D. LIBOR Portions shall be deemed to constitute Eurocurrency Liabilities and as such shall be deemed to be subject to such reserve requirements without benefit of or credit for proration, exceptions or offsets which may be available from time to time to bank or Lender under such Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage, provided that no adjustment shall reduce Statutory Reserves below the amount in effect on the Closing Date. At the Borrower's request, the Lender shall provide Borrowers with Lender's calculations of Statutory Reserves. Subordinated Loan Agreement - shall mean the Debenture Acquisition Agreement (as defined in the definition of Subordinated Debt Documents) together with all amendments and modifications thereto, including without limitation, the Amendment Agreement. Subordinated Debt Documents - that certain Debenture Acquisition Agreement ("Debenture Acquisition Agreement") dated as of March 16, 1995 by and among Blair, EPI and Company with any notes, documents, instruments, agreements, guaranties, exhibits or schedules executed and/or delivered in connection therewith, and all amendments and modifications thereto, including without, limitation, that certain Amendment Agreement ("Amendment Agreement") of even date herewith by and among Blair, EPI, PPI, APP and Company. Subordinated Debt - Indebtedness of Borrowers that is subordinated to the Obligations in a manner satisfactory to Lender, including, without limitation, Indebtedness outstanding pursuant to the Subordinated Debt Documents. Subsidiary - any corporation of which a Person owns, directly or indirectly through one or more intermediaries, more than 50% of the Voting Stock at the time of determination. Tax - in relation to any LIBOR Portion and the applicable LIBOR Rate, any tax, levy, impost, duty, deduction, withholding or charges of whatever nature required by any Legal Requirement (i) to be paid by Lender and/or (ii) to be withheld or deducted from any payment otherwise required hereby to be made by Borrowers to Lender; provided, that the term "Tax" shall not include any taxes imposed upon the net income of Lender. Term Loan - collectively, the EPI Term Loan, the PPI Term Loan and the APP Term Loan. Term Note - collectively, the EPI Term Note, the PPI Term Note and the APP Term Note. Trademark Assignment - the Trademark Security Agreement to be executed by Borrowers on or about the Closing Date in favor of Lender and by which Borrowers shall assign to Lender, and grant to Lender a security interest in, as security for the Obligations all of Borrowers' right, title and interest in and to all of its trademarks. Total Credit Facility - Twenty-Four Million Five Hundred Thousand Dollars ($24,500,000). Voting Stock - Securities of any class or classes of a corporation the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). Warrants - shall have the meaning contained in the Amendment Agreement. OTHER TERMS. All other terms contained in the Agreement shall have, when the context so indicates, the meanings provided for by the Code to the extent the same are used or defined therein. CERTAIN MATTERS OF CONSTRUCTION. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to the Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. The section titles, table of contents and list of exhibits appear as a matter of convenience only and shall not affect the interpretation of the Agreement. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. All references to any of the Loan Documents shall include any and all modifications thereto and any and all extensions or renewals thereof. Any accounting term used in this Agreement shall have, unless otherwise specifically provided herein, the meaning customarily given such term in accordance with GAAP, and all financial computations hereunder shall be computed, unless otherwise specifically provided herein, in accordance with GAAP consistently applied. That certain terms or computations are explicitly modified by the phrase "in accordance with GAAP" shall in no way be construed to limit the foregoing. EXHIBIT A-1 SECURED PROMISSORY NOTE $3,275,000 May 10, 1996 Chicago, Illinois FOR VALUE RECEIVED, the undersigned (hereinafter "Borrower"), hereby promises to pay to the order of FLEET CAPITAL CORPORATION, a Connecticut corporation (hereinafter "Lender"), in such coin or currency of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, the principal sum of Three Million Two Hundred Seventy-Five Thousand Dollars ($3,275,000), together with interest from and after the date hereof on the unpaid principal balance outstanding from time to time. This Secured Promissory Note (the "Note") is the EPI Term Note referred to in, and is issued pursuant to, that certain Loan and Security Agreement between Borrower, Pacific Plastics, Inc. ("PPI") and Arrow Pacific Plastics, Inc. ("APP") and Lender dated the date hereof (hereinafter, as amended from time to time, the "Loan Agreement"), and is entitled to all of the benefits and security of the Loan Agreement. All of the terms, covenants and conditions of the Loan Agreement and the Security Documents are hereby made a part of this Note and are deemed incorporated herein in full. All capitalized terms used herein, unless otherwise specifically defined in this Note, shall have the meanings ascribed to them in the Loan Agreement. For so long as no Event of Default shall have occurred the principal amount and accrued interest of this Note shall be due and payable on the dates and in the manner hereinafter set forth: (a) Interest on the unpaid principal balance outstanding from time to time shall be paid at such interest rates and at such times as are specified in the Loan Agreement; (b) Principal shall be due and payable monthly commencing on June 1, 1996, and continuing on the first day of each month thereafter to and including the first day of the month in which the Commitment Termination occurs, in installments of Thirty-Nine Thousand Dollars ($39,000) each; and (c) The entire remaining principal amount then outstanding, together with any and all other amounts due hereunder, shall be due and payable on the Commitment Termination Date. Notwithstanding the foregoing, the entire unpaid principal balance and accrued interest on this Note shall be due and payable immediately upon any termination of the Loan Agreement pursuant to Section 4 thereof. This Note shall be subject to mandatory prepayment in accordance with the provisions of Section 3.3 of the Loan Agreement. Borrower, PPI and APP may also terminate the Loan Agreement and, in connection with such termination, prepay this Note in the manner provided in Section 4 of the Loan Agreement. Upon the occurrence of an Event of Default, Lender shall have all of the rights and remedies set forth in Section 10 of the Loan Agreement. Time is of the essence of this Note. To the fullest extent permitted by applicable law, Borrower, for itself and its legal representatives, successors and assigns, expressly waive presentment, demand, protest, notice of dishonor, notice of non-payment, notice of maturity, notice of protest, presentment for the purpose of accelerating maturity, diligence in collection, and the benefit of any exemption or insolvency laws. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or remaining provisions of this Note. No delay or failure on the part of Lender in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise by Lender of any right or remedy preclude any other right or remedy. Lender, at its option, may enforce its rights against any collateral securing this Note without enforcing its rights against Borrower, any guarantor of the indebtedness evidenced hereby or any other property or indebtedness due or to become due to Borrower. Borrower agrees that, without releasing or impairing Borrower's liability hereunder, Lender may at any time release, surrender, substitute or exchange any collateral securing this Note and may at any time release any party primarily or secondarily liable for the indebtedness evidenced by this Note. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of Illinois. IN WITNESS WHEREOF, Borrowers have caused this Note to be duly executed and delivered in Chicago, Illinois, on the date first above written. EAGLE PLASTICS, INC., a Nebraska corporation ("Borrower") By: Name: Title: EXHIBIT A-2 SECURED PROMISSORY NOTE $3,775,000 May 10, 1996 Chicago, Illinois FOR VALUE RECEIVED, the undersigned (hereinafter "Borrower"), hereby promises to pay to the order of FLEET CAPITAL CORPORATION, a Connecticut corporation (hereinafter "Lender"), in such coin or currency of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, the principal sum of Three Million Seven Hundred Seventy-Five Thousand Dollars ($3,775,000), together with interest from and after the date hereof on the unpaid principal balance outstanding from time to time. This Secured Promissory Note (the "Note") is the PPI Term Note referred to in, and is issued pursuant to, that certain Loan and Security Agreement between Borrower, Eagle Plastics, Inc. ("EPI") and Arrow Pacific Plastics, Inc. ("APP") and Lender dated the date hereof (hereinafter, as amended from time to time, the "Loan Agreement"), and is entitled to all of the benefits and security of the Loan Agreement. All of the terms, covenants and conditions of the Loan Agreement and the Security Documents are hereby made a part of this Note and are deemed incorporated herein in full. All capitalized terms used herein, unless otherwise specifically defined in this Note, shall have the meanings ascribed to them in the Loan Agreement. For so long as no Event of Default shall have occurred the principal amount and accrued interest of this Note shall be due and payable on the dates and in the manner hereinafter set forth: (a) Interest on the unpaid principal balance outstanding from time to time shall be paid at such interest rates and at such times as are specified in the Loan Agreement; (b) Principal shall be due and payable monthly commencing on June 1, 1996, and continuing on the first day of each month thereafter to and including the first day of the month in which the Commitment Termination occurs, in installments of Forty-Five Thousand Dollars ($45,000) each; and (c) The entire remaining principal amount then outstanding, together with any and all other amounts due hereunder, shall be due and payable on the Commitment Termination Date. Notwithstanding the foregoing, the entire unpaid principal balance and accrued interest on this Note shall be due and payable immediately upon any termination of the Loan Agreement pursuant to Section 4 thereof. This Note shall be subject to mandatory prepayment in accordance with the provisions of Section 3.3 of the Loan Agreement. Borrower, EPI and APP may also terminate the Loan Agreement and, in connection with such termination, prepay this Note in the manner provided in Section 4 of the Loan Agreement. Upon the occurrence of an Event of Default, Lender shall have all of the rights and remedies set forth in Section 10 of the Loan Agreement. Time is of the essence of this Note. To the fullest extent permitted by applicable law, Borrower, for itself and its legal representatives, successors and assigns, expressly waive presentment, demand, protest, notice of dishonor, notice of non-payment, notice of maturity, notice of protest, presentment for the purpose of accelerating maturity, diligence in collection, and the benefit of any exemption or insolvency laws. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or remaining provisions of this Note. No delay or failure on the part of Lender in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise by Lender of any right or remedy preclude any other right or remedy. Lender, at its option, may enforce its rights against any collateral securing this Note without enforcing its rights against Borrower, any guarantor of the indebtedness evidenced hereby or any other property or indebtedness due or to become due to Borrower. Borrower agrees that, without releasing or impairing Borrower's liability hereunder, Lender may at any time release, surrender, substitute or exchange any collateral securing this Note and may at any time release any party primarily or secondarily liable for the indebtedness evidenced by this Note. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of Illinois. IN WITNESS WHEREOF, Borrowers have caused this Note to be duly executed and delivered in Chicago, Illinois, on the date first above written. PACIFIC PLASTICS, INC., an Oregon corporation ("Borrower") By: Name: Title: EXHIBIT A-3 SECURED PROMISSORY NOTE $950,000 May 10, 1996 Chicago, Illinois FOR VALUE RECEIVED, the undersigned (hereinafter "Borrower"), hereby promises to pay to the order of FLEET CAPITAL CORPORATION, a Connecticut corporation (hereinafter "Lender"), in such coin or currency of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, the principal sum of Nine Hundred Fifty Thousand Dollars ($950,000), together with interest from and after the date hereof on the unpaid principal balance outstanding from time to time. This Secured Promissory Note (the "Note") is the APP Term Note referred to in, and is issued pursuant to, that certain Loan and Security Agreement between Borrower, Eagle Plastics, Inc. ("EPI") and Pacific Plastics, Inc. ("PPI") and Lender dated the date hereof (hereinafter, as amended from time to time, the "Loan Agreement"), and is entitled to all of the benefits and security of the Loan Agreement. All of the terms, covenants and conditions of the Loan Agreement and the Security Documents are hereby made a part of this Note and are deemed incorporated herein in full. All capitalized terms used herein, unless otherwise specifically defined in this Note, shall have the meanings ascribed to them in the Loan Agreement. For so long as no Event of Default shall have occurred the principal amount and accrued interest of this Note shall be due and payable on the dates and in the manner hereinafter set forth: (a) Interest on the unpaid principal balance outstanding from time to time shall be paid at such interest rates and at such times as are specified in the Loan Agreement; (b) Principal shall be due and payable monthly commencing on June 1, 1996, and continuing on the first day of each month thereafter to and including the first day of the month in which the Commitment Termination occurs, in installments of Eleven Thousand Three Hundred Dollars ($11,300) each; and (c) The entire remaining principal amount then outstanding, together with any and all other amounts due hereunder, shall be due and payable on the Commitment Termination Date. Notwithstanding the foregoing, the entire unpaid principal balance and accrued interest on this Note shall be due and payable immediately upon any termination of the Loan Agreement pursuant to Section 4 thereof. This Note shall be subject to mandatory prepayment in accordance with the provisions of Section 3.3 of the Loan Agreement. Borrower, EPI and PPI may also terminate the Loan Agreement and, in connection with such termination, prepay this Note in the manner provided in Section 4 of the Loan Agreement. Upon the occurrence of an Event of Default, Lender shall have all of the rights and remedies set forth in Section 10 of the Loan Agreement. Time is of the essence of this Note. To the fullest extent permitted by applicable law, Borrower, for itself and its legal representatives, successors and assigns, expressly waive presentment, demand, protest, notice of dishonor, notice of non-payment, notice of maturity, notice of protest, presentment for the purpose of accelerating maturity, diligence in collection, and the benefit of any exemption or insolvency laws. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or remaining provisions of this Note. No delay or failure on the part of Lender in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise by Lender of any right or remedy preclude any other right or remedy. Lender, at its option, may enforce its rights against any collateral securing this Note without enforcing its rights against Borrower, any guarantor of the indebtedness evidenced hereby or any other property or indebtedness due or to become due to Borrower. Borrower agrees that, without releasing or impairing Borrower's liability hereunder, Lender may at any time release, surrender, substitute or exchange any collateral securing this Note and may at any time release any party primarily or secondarily liable for the indebtedness evidenced by this Note. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of Illinois. IN WITNESS WHEREOF, Borrowers have caused this Note to be duly executed and delivered in Chicago, Illinois, on the date first above written. ARROW PACIFIC PLASTICS, INC., a Utah corporation ("Borrower") By: Name: Title: EX-10.16 4 EMPLOYMENT AGREEMENT EXHIBIT 10.16 EMPLOYMENT AGREEMENT THIS AGREEMENT effective as of January 1, 1997, between Eagle Pacific Industries, Inc., a Minnesota corporation (the "Company"), and Patrick M. Mertens, a resident of Hastings, Nebraska ("Executive"). A. Executive has been and desires to remain employed as Chief Financial Officer of the Company. B. The Company desires to continue to retain the benefit of Executive's experience and loyalty, and to continue to employ Executive as Chief Financial Officer of the Company. C. This Agreement replaces and supersedes any other employment arrangements that Executive has with the Company or any of its subsidiaries. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. Definitions The terms used in this Agreement shall be defined as follows: (a) "Agreement" shall mean this Agreement as amended from time to time. (b) "Base Salary" shall mean the annual base salary payable to Executive pursuant to Section 4(a) hereof. (c) "Board" shall mean the Board of Directors of the Company. (d) "Cause" shall mean termination of the Executive's employment with the Company by the Board because of (1) gross misconduct; (2) material breach of this Agreement by Executive; (3) conviction or entry of a plea of guilty or nolo contendere to any felony or misdemeanor or the entry of any final civil judgment in connection with any allegation of fraud, misrepresentation, misappropriation or any other intentional tort or statute violation; (4) insubordination; or (5) sexual harassment of fellow employees. (e) "Committee" shall mean the Compensation Committee of the Board, if one exists and, if not, shall mean the Board. (f) "Company" shall mean Eagle Pacific Industries, Inc., a Minnesota corporation, its successors or assigns. (g) "Executive" shall mean Patrick M. Mertens, a resident of Hastings, Nebraska. (h) "Executive Benefit Plans" shall mean any plans within the meaning of Sections 4(c) and (d) of this Agreement. (i) "Period" shall mean the three year period commencing on the date hereof. If the parties agree to any extension of the Period, the term "Period" shall include all such extensions thereof. (j) "Permanently Disabled" shall mean permanently prevented from performing his obligations hereunder as a result of his physical or mental health, as evaluated by sufficient documentation including doctors' statements. (k) "Stock Options" shall mean any options held by Executive granting him the right to acquire shares of common stock of the Company. (l) "Substantial Breach" shall mean (1) a substantial reduction in the nature or status of Executive's responsibilities hereunder; provided, that it shall not be deemed to be a Substantial Breach if Executive's duties are revised so that he remains an officer but is removed or not reelected as Chief Financial Officer; (2) a reduction by the Company in the Base Salary of Executive except to the extent permitted under Section 4(a) hereof; (3) the failure by the Company to allow Executive to participate to the full extent in all plans, programs or benefits in accordance with Sections 4(b) to (d), inclusive, thereof; and (4) the failure by the Company to pay, distribute or grant any amounts of cash, stock or other compensation to Executive to which he is entitled. A Substantial Breach shall be deemed to occur only if such Substantial Breach has not been corrected by the Company within two weeks of receipt of notice from Executive of the occurrence of such Substantial Breach, which notice shall specifically set forth the nature of the Substantial Breach. 2. Employment and Duties. (a) General. The Company hereby employs Executive, and Executive agrees upon the terms and conditions herein set forth to serve as an officer of the Company and in such capacity, shall perform duties substantially the same as normally performed by persons in like positions in similar companies. Executive may be transferred, promoted or changed to another position, and any such transfer, promotion or change shall not affect the enforcement of this Agreement. (b) No Other Employment. Throughout the time that Executive is employed by the Company, Executive shall, except as may from time to time be otherwise agreed in writing by the Company and unless prevented by ill health, devote his full-time working hours to his duties hereunder and Executive shall not, directly or indirectly, render services to any other person or organization for which he receives compensation (excluding volunteer services or outside Board activities with modest time commitments) without the consent of the Board or otherwise engage in activities which would interfere significantly with the performance of his duties hereunder. 3. Term of Employment. Subject to earlier termination of employment pursuant to Sections 5, 6, 7 or 8 of this Agreement, the Company shall retain Executive during the Period; and Executive shall serve in the employ of the Company for the Period. 4. Compensation and Other Benefits. Subject to the provisions of this Agreement, the Company shall pay and provide the following compensation and other benefits to Executive during the term of his employment as compensation for services rendered hereunder: (a) Base Salary. The Company shall pay to Executive a Base Salary at the rate of $90,000 per annum, payable in accordance with the Company's standard payroll policies. The Company shall be entitled to deduct or withhold all taxes and charges which the Company may be required to deduct or withhold therefrom. The Base Salary will be reviewed not less than annually by the Committee. (b) Incentive Compensation. At all times during the Period, Executive shall be entitled to participate in all incentive compensation plans and programs of the Company, existing from time to time including the EBITDA bonus plan established by the Committee and described in Exhibit A attached hereto. For calendar year 1997, Executive's maximum bonus under the EBITDA bonus plan shall be twenty one thousand dollars ($21,000) and shall be based entirely on the Company's EBITDA. (c) Stock Options. Executive shall be entitled to participate in all stock option plans and programs of the Company existing from time to time other than plans that exclude executive employees generally. (d) Other Executive Benefit Plans. Executive shall be eligible to participate in all pension and welfare plans and programs of the Company for executive employees, existing from time to time, including, without limitation, the following: (i) All qualified benefit plans and programs (e.g., defined contribution, supplemental retirement and Section 401(k) plans, long-term disability and life insurance plans and programs); (ii) All hospitalization and medical plans and programs; and (iii) All retirement plans and programs. 5. Termination of Employment for Cause. (a) Compensation and Benefits. If, prior to the expiration of the Period, (i) Executive's employment is terminated by the Company for Cause, or (ii) Executive resigns from his employment hereunder other than under circumstances covered by Section 6 below, Executive shall not be eligible to receive any compensation or benefits or to participate in any plans or programs under Section 4 hereof with respect to the Period after the date of such termination except for the right to receive benefits under any plan or program, to the extent vested, in accordance with the terms of such plan or program and except for benefits provided in accordance with customary practices of the Company at Executive's expense (e.g., hospitalization and medical insurance). (b) Date of Termination. The date of termination of Executive's employment by the Company under this Section 5 shall be two (2) weeks after receipt by Executive of written notice of termination for Cause or after receipt by the Company of written notice of Executive's resignation. 6. Termination of Employment Without Cause or Resignation After Substantial Breach. (a) Compensation and Benefits. If, prior to the expiration of the Period, Executive 's employment is terminated by the Company without Cause, or if, prior to the expiration of the Period Executive resigns from his employment hereunder following a Substantial Breach, the Company shall pay Executive an amount equal to Executive's then current Base Salary in twenty-four (24) equal monthly installments beginning one month after Executive's termination of employment. (b) Date of Termination. The date of termination of Executive's employment by the Company under this Section 6 shall be the date specified in the written notice of termination to Executive, or if no such date is specified therein, the date on which such notice is given to Executive. The date of resignation by Executive under this Section 6 shall be two weeks after receipt by the Company of written notice of resignation, provided that the Substantial Breach specified in such notice shall not have been corrected by the Company during such two week period. 7. Termination of Employment by Disability. (a) Compensation and Benefits. If Executive becomes Permanently Disabled prior to the expiration of the Period, the Company shall be entitled to terminate Executive's employment at the later of (x) six months from the date Executive becomes Permanently Disabled but not beyond the end of the Period or (y) the date the Company could terminate Executive in accordance with the Company's normal policies in such matters as applied to all other salaried employees. In the event of such termination of Executive's employment, Executive shall be entitled to receive from the Company the following: (i) Executive shall be entitled to continued participation in hospital and medical plans and programs of the Company in accordance with Company policy as it pertains to disabled salaried employees; that is for the period of said disability or until normal retirement age subject to the rules and practice of the plan(s). (ii) Executive shall be entitled to received benefits under any other Company plan or program (to the extent Executive is vested) in accordance with the terms of such plan or program. (b) Date of Termination. The date of termination of Executive's employment under Section 7 shall be the date determined pursuant to Section 7(a) above. 8. Termination of Employment by Death. (a) Compensation and Benefits. If Executive dies prior to the expiration of the Period, the Executive's estate or his beneficiary as appropriate shall be entitled to receive benefits under the Company's plan(s) or program(s) in accordance with the terms of such plan(s) or program(s). 9. Termination of Employment by Nonrenewal of This Agreement. If Executive is employed by the Company at the end of the Period (and the Period is not extended by mutual agreement of Executive and the Company), the Company shall pay Executive an amount equal to Executive's then current Base Salary in twenty-four (24) equal monthly installments beginning one month after Executive's termination of employment. 10. Noncompetition. During the terms of Executive's employment with the Company and for twelve (12) months thereafter, Executive shall refrain from directly or indirectly, on his own behalf or on behalf of any other person or entity, compete with the Company or any of its subsidiaries, anywhere in the continental United States, including but not limited to directly or indirectly rendering any services, advice or counsel in any capacity whatsoever, for any entity or person that engages in or is in the process of or anticipates engaging in any business which in any manner competes with the Company or any of its subsidiaries. In the event that Executive violates the terms of this Article 10, the term of this covenant not to compete shall be extended for a period of time equal to the period of time that Executive was violating the terms of this Section 10. 11. Nondisclosure of Confidential Information. a. Definition. For purposes of this Agreement "Confidential Information" means any information or compilation of information, not generally known, which is proprietary to the Company and relates to the Company's existing or reasonably foreseeable business, including, but not limited to, trade secrets and information relating to the Company's services, marketing plans or proposals and customer information. All information which the Company identifies as being "confidential" or "trade secret" shall be presumed to be Confidential Information. Confidential Information shall also include any confidential information of a parent, subsidiary or sister corporation of the Company and any information disclosed by a third party under contract with the Company which contract requires such disclosed information be kept confidential. Confidential Information shall not include information that is in or enters the public domain other than through a breach of confidentiality owed to the Company. b. Nondisclosure. During the Period and at all times thereafter, Executive shall hold in strictest of confidence and will never disclose, furnish, transfer, communicate, make assessable to any person or use in any way Confidential Information for Executive's own or another's benefit or permit the same to be used in competition with the Company, nor will Executive accept any employment which would, by the nature of the position, inherently involve the use or disclosure by Executive of Confidential Information. 12. Injunctive Relief. The parties acknowledge that the Company and/or its subsidiaries will suffer irreparable harm if Executive breaches Sections 10 or 11 of this Agreement. Accordingly, the Company shall be entitled, in addition to any other rights and remedies that it may have, at law or at equity, to an injunction, without the parting of a bond or other security, enjoining or restraining Executive from any violation of Sections 10 or 11 of this Agreement. Executive hereby consents to the Company's right to the issuance of such injunction. 13. Binding Agreement. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, any Successor to or assigns of the Company, and Executive's heirs and the personal representative of Executive's estate. 14. Severability. If the final determination of a court of competent jurisdiction declares, after the expiration of the time within which judicial review (if permitted) of such determination may be perfected, that any term of provision hereof is invalid or unenforceable, (a) the remaining terms and provisions hereof shall be unimpaired and (b) the invalid or unenforceable term or provision shall be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. 15. Amendment; Waiver. This Agreement may not be modified, amended or waived in any manner except by an instrument in writing signed by both parties hereto. The waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. 16. Governing Law. All matters affecting this Agreement, including the validity thereof, are to be governed by, interpreted and construed in accordance with the laws of the State of Minnesota. 17. Notices. Any notice hereunder by either party to the other shall be given in writing by personal delivery or certified mail, return receipt requested. If addressed to Executive, the notice shall be delivered or mailed to Executive at the address specified under Executive's signature hereto or such other address which Executive has advised the Company to send notice to, or if addressed to the Company, the notice shall be delivered or mailed to the Company at its executive offices and to the attention of each member of the Board of Directors of the Company at their respective business addresses. A notice shall be deemed given, if by personal delivery, on the date of such delivery or, if by certified mail, on the date shown on the applicable return receipt. IN WITNESS WHEREOF, the Company has caused the Agreement to be signed by its officer pursuant to the authority of its Board, and Executive has executed this Agreement, as of the day and year first written above. EAGLE PACIFIC INDUSTRIES, INC. By _________________________________ William H. Spell, CEO ____________________________________ Patrick M. Mertens EXHIBIT A EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES EBITDA BONUS PLAN The following is a summary of the Eagle Pacific Industries, Inc. and Subsidiaries EBITDA Bonus Plan. "EBITDA" shall mean the earnings before interest, taxes, depreciation and amortization for the particular company determined by the auditors for Eagle Pacific Industries, Inc. ("EPII") in accordance with GAAP for each fiscal year of EPII. At or before the beginning of each fiscal year, the Board of Directors of EPII shall establish three levels of EBITDA for EPII and for each of its subsidiaries. If the lowest level is achieved, each employee participating in the EBITDA Bonus Plan will receive one-third of his/her maximum bonus. If the second highest level of EBITDA is achieved, each employee participating in the EBITDA Bonus Plan will receive two-thirds of his/her maximum bonus. If the highest level of EBITDA is achieved, each employee participating in the EBITDA Bonus Plan will receive his/her maximum bonus. At the same time the Board of Directors of EPII shall establish the eligible employees, the maximum amount of their bonuses and the company or companies on which the bonus will be based for that year. An employee must be employed by the Company or one of its subsidiaries on the last day of the fiscal year in order to be entitled to receive any EBITDA bonus for that year. EX-10.17 5 AMENDMENT AGREEMENT EXHIBIT 10.17 AMENDMENT AGREEMENT This AMENDMENT AGREEMENT ("Agreement") is made and entered into as of May 10, 1996 by and between WILLIAM BLAIR MEZZANINE CAPITAL FUND, L.P., an Illinois limited partnership ("Blair"); and EAGLE PLASTICS, INC., a Nebraska corporation ("Eagle"), PACIFIC PLASTICS, INC., an Oregon corporation ("Pacific"), ARROW PACIFIC PLASTICS, INC., a Utah corporation ("Arrow"), and EAGLE PACIFIC INDUSTRIES, INC., a Minnesota corporation ("EPII") (Eagle, Pacific, Arrow and EPII are sometimes referred to herein collectively as the "Company"). R E C I T A L S A. Pursuant to that certain Plan of Recapitalization dated as of March 16, 1995 by and among Blair, Eagle and EPII (f/k/a Black Hawk Holdings, Inc.), (1) the parties entered into a Debenture Acquisition Agreement of even date therewith (the "Debenture Acquisition Agreement"), (2) Blair was issued (a) a senior subordinated debenture of Eagle having a principal amount of $7,500,000 (the "Debenture"), the obligations of which were guaranteed by EPII pursuant to a guarantee of even date therewith from EPII (the "Guarantee"), (b) a warrant to purchase 100,000 shares of the common stock of EPII at $3.00 per share (the "Warrant") and (c) 210,000 shares of the common stock of EPII and (3) Blair was granted, among other things, the right to receive certain cash payments, $970,000 of which remains outstanding and is due to be paid on or before September 1, 1996 (the "Deferred Cash Payment"). B. As an inducement for Blair's consent to a refinancing of the Company's senior indebtedness by Fleet Capital Corporation (the "New Senior Lender") to be consummated on the date hereof, the parties hereto desire to amend selected terms of the Debenture Acquisition Agreement and the Debenture in exchange for certain financial accommodations to Blair (including, without limitation, the prepayment of the Deferred Cash Payment and a partial prepayment of amounts due under the Debenture), all as hereinafter set forth. A G R E E M E N T S NOW, THEREFORE, in consideration of the agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Incorporation of Recitals. The foregoing recitals are incorporated herein by reference and made a part of this Agreement. 2. Amendment of the Debenture Acquisition Agreement and the Debenture. Subject to the Company's performance of its obligations to Blair hereunder on the date hereof, Blair hereby consents to the consummation of the refinancing transaction contemplated by that certain Loan and Security Agreement of even date herewith (the "Credit Agreement") by and between the New Senior Lender and the Company. To facilitate the consummation of such transaction, the parties hereto agree to amend the terms of the Debenture Acquisition Agreement and the Debenture as follows: (a) The Debenture Acquisition Agreement shall be amended as follows: (i) The following (and only the following) definitions contained in Section 1.1 of the Debenture Acquisition Agreement shall be deleted in their entirety and replaced with the following: "New Guarantee shall mean (a) the guarantee dated as of March 16, 1995, executed by one of the Guarantors in favor of Purchaser in the form of Exhibit D hereto, and (b) the guarantee dated as of May 10, 1996, executed by the other Guarantors in favor of Purchaser. Purchase Agreement shall mean (a) that certain agreement dated September 16, 1993 among Acquisition Corp., Eagle Pacific Industries, Inc. and, prior to the merger, Eagle Plastics, Incorporated, and the individual sellers named therein, and (b) exclusively for purposes of Section 5.1(q) and 5.2(v) hereof, any other agreement hereafter entered into by Borrower or any Guarantor (with Purchaser's prior consent, as applicable, hereunder) to acquire any interest in any business (whether by a purchase of assets, purchase of stock, merger or otherwise) or enter into any joint venture with any Person. Registration Rights Agreement shall mean the registration rights agreement between Eagle Pacific Industries, Inc. and Purchaser of even date herewith in the form of Exhibit E hereto, as hereafter amended from time to time. Related Transactions Documents shall mean the Plan of Recapitalization, this Agreement, the Senior Subordinated Debenture, the New Guarantee, the Registration Rights Agreement, the Common Stock Warrant, the Subordinated Loan Documents, the Purchase Agreement, the Senior Loan Agreement and any and all other documents, agreements, certificates and instruments executed or delivered to Purchaser in connection herewith or therewith (including, without limitation, any amendments or modifications thereto). Restricted Investments shall mean all Investments in any Person or in any property, except (a) Investments in one or more subsidiaries of a Guarantor to the extent existing on May 10, 1996, (b) Investments constituting Senior Indebtedness, (c) Investments that constitute loans or advances (which are permitted by the terms of the Senior Loan Agreement) by Borrower to any Guarantor or by any Guarantor to Borrower or any other Guarantor, (d) Investments resulting from the acquisition of shares of capital stock in Borrower by Eagle Pacific Industries, Inc. pursuant to that certain Eagle Stock Agreement dated December 17, 1993 by and among Eagle Pacific Industries, Inc. (f/k/a Black Hawk Holdings, Inc.), Borrower, Larry D. Schnase, George Peter Konen and David Schnase (the "Eagle Stock Agreement") as in effect on May 10, 1996, (e) property acquired for the business use of Borrower or any Guarantor and not for investment in other businesses, (f) current assets arising from the purchase or sale of goods and services in the ordinary course of business, (g) securities issued or fully guaranteed or insured by the United States of America or any agency thereof (supported by the full faith and credit of the United States of America) and maturing within one year, (h) time deposits and certificates of deposits of a commercial bank organized under the laws of the United States of America having capital and surplus in excess of $100,000,000 (or up to the Federal Deposit Insurance Corporation's insured amount) and maturing within one year, (i) commercial paper of any United States' corporation rated at least A-1 by Standard & Poor's Corporation or at least P-1 by Moody's Investors Service, Inc. and maturing within one year, and (j) Investments in money market funds substantially all of whose assets are comprised of securities of the type described in (g) through (i) above. Senior Indebtedness shall mean any and all obligations, indebtedness and liabilities now or hereafter owing or due from Borrower and Guarantors to Senior Lender under the Senior Loan Agreement; provided, however, that Senior Indebtedness shall not include: (a) increases in the principal amount of the indebtedness of Borrower to Senior Lender in excess of Twenty-Eight Million Seven Hundred Fifty Thousand Dollars ($28,750,000) minus all principal payments made in respect of the Term Loan (as defined in the Senior Loan Agreement); (b) increases in the portion of interest that accrues in respect of the indebtedness of Borrower to the Senior Lender at a rate in excess of the otherwise applicable interest rate (or default rate) (including any adjustable rate or rate to be reset pursuant to the terms of the Senior Loan Agreement) provided for under the Senior Loan Agreement as in effect on May 10, 1996; or (c) increases in the fees, charges or expenses (regardless of when incurred) provided for under the Senior Loan Agreement as in effect on May 10, 1996, which increases exceed in the aggregate Two Hundred Fifty Thousand Dollars ($250,000). Senior Lender shall mean Fleet Capital Corporation or any successor thereto. Senior Loan Agreement shall mean the Loan and Security Agreement dated May 10, 1996 by and between Senior Lender, Borrower and Guarantors. The Senior Loan Agreement shall include all other documents, agreements, certificates and instruments attached thereto, referred to therein or delivered in connection therewith as any or all of the foregoing may be supplemented or amended from time to time in accordance with the provisions hereof." (ii) Section 2.2 of the Debenture Acquisition Agreement shall be deleted in its entirety and replaced with the following: "Subject to Section 2.4 hereof, on May 10, 1999, Borrower shall repay the principal amount of the Senior Subordinated Debenture in full, together with all Fixed Interest." (iii) The following sentence shall be inserted at the end of Section 2.4(c): "In connection with any prepayments, Purchaser shall, and is hereby authorized by Borrower to, endorse on the schedules annexed to the Senior Subordinated Debenture appropriate notations regarding the Senior Subordinated Debenture as specifically provided therein, which notations shall be presumed correct until the contrary is established." (iv) Sections 5.1(i), 5.1(j) and 5.2(t) of the Debenture Acquisition Agreement shall be deleted in their entirety. (v) The following shall be inserted at the end of Section 5.1 of the Debenture Acquisition Agreement as new subsections (t) through (v) thereof: "(t) Consolidated Adjusted Tangible Net Worth. Borrower and Guarantors shall maintain at all times within each of the following periods, a Consolidated Adjustable Tangible Net Worth (as defined in the Senior Loan Agreement) of not less than the amount shown below for the period corresponding thereto: Period Amount ------ ------ June 30, 1996 through and ($1,200,000) including September 29, 1996 September 30, 1996 through and ($300,000) including December 30, 1996 December 31, 1996 through and $0 including March 30, 1997 March 31, 1997 through and $100,000 including June 29, 1997 June 30, 1997 through and $1,100,000 including September 29, 1997 September 30, 1997 through and $2,000,000 including December 30, 1997 December 31, 1997 through and $2,300,000 including March 30, 1998 March 31, 1998 through and $2,400,000 including June 29, 1998 June 30, 1998 through and $3,400,000 including September 29, 1998 September 30, 1998 through and $4,300,000 including December 30, 1998 December 31, 1998 through and $4,600,000 including March 30, 1999 March 31, 1999 through and $4,700,000 including each fiscal quarter thereafter (u) Consolidated Net Cash Flow. Borrower and Guarantors shall achieve Consolidated Net Cash Flow (as defined in the Senior Loan Agreement) for each of the periods listed below equal to or greater than the amount set forth opposite such period: Period Amount ------ ------ January 1, 1996 through and $135,000 including June 30, 1996 January 1, 1996 through and $585,000 including September 30, 1996 January 1, 1996 through and $450,000 including December 31, 1996 January 1, 1997 through and ($550,000) including March 31, 1997 January 1, 1997 through and $135,000 including June 30, 1997 January 1, 1997 through and $585,000 including September 30, 1997 January 1, 1997 through and $450,000 including December 31, 1997 January 1, 1998 through and ($550,000) including March 31, 1998 January 1, 1998 through and $135,000 including June 30, 1998 January 1, 1998 through and $585,000 including September 30, 1998 January 1, 1998 through and $450,000 including December 31, 1998 January 1, 1999 through and ($550,000) including March 31, 1999 (v) Senior Interest Coverage Ratio. Borrower and Guarantors shall achieve, at the end of each fiscal quarter within the term hereof, a Senior Interest Coverage Ratio (as defined in the Senior Loan Agreement) equal to or greater than the ratio shown below for the quarter corresponding thereto: Fiscal Quarter Ending Ratio --------------------- ----- March 31 1.45 to 1 June 30 3.15 to 1 September 30 4.05 to 1 December 31 2.15 to 1" (vi) The following shall be inserted at the end of Section 5.2(a) of the Debenture Acquisition Agreement as new subsections (iv) through (viii) thereof: "(iv) Indebtedness for assets purchased which is secured by a purchase money lien and which, when aggregated with the principal amount of all other such Indebtedness and Capitalized Lease Obligations at the time outstanding, does not exceed (i) $1,250,000 until the capitalized leases listed on Exhibit K to the Senior Loan Agreement are retired and (ii) $400,000 thereafter; (v) Indebtedness outstanding under that certain Redevelopment Contract between the City of Hastings, Nebraska, and Guarantor, and related promissory notes as in effect on May 10, 1996; (vi) Indebtedness incurred in connection with the acquisition of approximately 30 acres of vacant land in Hembree, Oregon, in a principal amount not to exceed $103,000; (vii) Indebtedness outstanding under that certain Promissory Note and Stock Pledge Agreement dated as of July 10, 1995 between Eagle Pacific Industries, Inc., Pacific Acquisition Corp., Pacific Plastics, Inc. and the selling shareholder signatories thereto, as in effect on May 10, 1996; and (viii) Indebtedness not included in subsections (i) through (vii) above which does not exceed at any time, in the aggregate, the sum of $250,000." (vii) The clause "its fiscal year does not exceed $175,000" at the end of Section 5.2(d) of the Debenture Acquisition Agreement shall be deleted and replaced with "any current or future period of 12 consecutive months does not exceed $500,000". (viii) The first two sentences of Section 5.2(g) of the Debenture Acquisition Agreement shall be deleted in their entirety and replaced with the following: "Neither Borrower nor any Guarantor shall directly or indirectly (i) declare or pay any Dividends on its capital stock, (ii) make or incur any liability to make any Stock Purchase or (iii) make any Restricted Investments. Notwithstanding the foregoing and provided that, in any of the following cases, no Event of Default has then occurred and is continuing or would result from the taking of such action, Borrower and/or Guarantor may: (A) pay up to $195,000 in annual Dividends on Eagle Pacific Industries, Inc.'s convertible preferred stock outstanding on May 10, 1996 (the "EPII Preferred"), until such time as the EPII Preferred is converted as provided herein; (B) convert all or a portion of the shares of EPII Preferred into common stock of Eagle Pacific Industries, Inc. at a conversion price which is not less than $1.75 per share; and (C) acquire the shares of capital stock of Borrower held by Larry D. Schnase and George Peter Konen as of May 10, 1996 pursuant to the Eagle Stock Agreement as in effect on May 10, 1996, provided that the aggregate purchase price for such shares does not exceed (x) $575,000 for the calendar year ending December 31, 1996, and (y) the lesser of (1) the purchase price per share of such common stock multiplied by 157,000 shares, or (2) $1,000,000, for each calendar year ending December 31, 1997 and December 31, 1998." (ix) The following paragraph shall be inserted at the end of Section 5.2 of the Debenture Acquisition Agreement as Section 5.2(w) thereof: "(w) Capital Expenditures. Neither Borrower nor any Guarantor shall, unless otherwise consented to by Purchaser in writing, make Capital Expenditures (as defined in the Senior Loan Agreement) which, in the aggregate, as to Borrower and Guarantors during any fiscal year of Borrower, exceeds the amount set forth opposite such fiscal year in the following schedule: Fiscal Year Ending Capital Expenditure ------------------ ------------------- December 31, 1996 $2,850,000 December 31, 1997 $1,650,000 December 31, 1998 and each subsequent fiscal year $1,650,000" (x) The clause "or any other agreement to which Purchaser and either Borrower or Guarantor are parties" shall be inserted following the term "Senior Subordinated Debenture" in subsection (iii) of Section 6.1(a) of the Debenture Acquisition Agreement. (xi) Section 6.4 of the Debenture Acquisition Agreement shall be deleted in its entirety and replaced with the following: "Subordination. This Agreement (including, without limitation, exercise of the rights set forth in Section 6.2 hereof) and the Senior Subordinated Debenture are subject to certain subordination provisions set forth in that certain Intercreditor and Subordination Agreement dated as of May 10, 1996 by and between Purchaser and the Senior Lender and all of the terms and provisions thereof are incorporated by reference into this Agreement and made a part hereof." (xii) All references in the Debenture Acquisition Agreement to the defined term "Guarantor" shall be construed as a reference to EPII, Pacific and Arrow collectively or, as the context may require, any one or more of EPII, Pacific and Arrow. (b) The Debenture shall be amended as follows: (i) The first sentence of Section 3 of the Debenture shall be deleted in its entirety and replaced with the following: "The aggregate principal of this Debenture shall be payable on May 10, 1999 together with all Fixed Interest." (ii) Section 6 of the Debenture shall be deleted in its entirety and replaced with the following: "Subordination. This Debenture shall be subject to the terms and provisions of that certain Intercreditor and Subordination Agreement dated as of May 10, 1996 by and between Payee and Senior Lender." 3. Performance of the Company's Obligations. On the date hereof: (a) Eagle and EPII shall pay to Blair in cash, by wire transfer to the account specified in Section 2.5 of the Debenture Acquisition Agreement, $970,000 as a prepayment in full of the Deferred Cash Payment; (b) Eagle shall pay to Blair in cash, by wire transfer to the account specified in Section 2.5 of the Debenture Acquisition Agreement the following: (i) all accrued Fixed Interest as defined in and payable pursuant to the Debenture through and including the date hereof; and (ii) $3,000,000, to be treated as a partial prepayment against the outstanding principal amount of the Debenture; (c) that certain Registration Agreement dated March 16, 1995 (the "Registration Agreement") by and between EPII and Blair shall be amended as set forth in Section 5 hereof; (d) the Warrant shall be amended as set forth in Section 6 hereof; (e) the applicable parties shall concurrently herewith execute and deliver the following agreements and instruments (the form and substance of which are satisfactory to Blair and its counsel): (i) a Guarantee executed by Pacific and Arrow in favor of Blair, pursuant to which Pacific and Arrow guarantee Eagle's obligations under the Debenture Acquisition Agreement and the Debenture; (ii) a Warrant in favor of Blair, exercisable for 215,000 shares of common stock of EPII at an exercise price of $3.25 per share (the "New Common Stock Warrant"); (iii) an Intercreditor and Subordination Agreement by and between Blair and the New Senior Lender; (iv) a Co-sale Agreement by and between Blair and Richard W. Perkins, Bruce A. Richards, Harry W. Spell, William H. Spell and the Spell Family Foundation; (v) an Irrevocable Proxy by Blair in favor of EPII; (vi) the written opinion of Fredrikson & Byron, P.A., counsel to the Company; (vii) certified copies of all documents evidencing corporate action taken by the Company with respect to this Agreement and the other matters contemplated hereby; and (viii) a certificate, signed by the secretary or an assistant secretary of EPII, certifying as to (A) the names of the officers of the Company authorized to sign the above-referenced agreements and instruments and all other documents and instruments executed and/or delivered in connection herewith or therewith, (B) specimens of the true signatures of such officers, on which Blair may conclusively rely, (C) the truth and correctness of that certain Eagle Stock Agreement dated December 17, 1993, between Eagle Pacific Industries, Inc., Borrower, Larry D. Schnase, George Peter Konen and David Schnase as in effect on the date hereof and (D) the truth and completeness of documents and instruments executed and/or delivered in connection with (1) the refinancing of the senior indebtedness by the New Senior Lender, (2) the sale of common stock of EPII to Okabena Partnership K ("Okabena"), (3) the sale of the common stock of EPII to Kennedy Capital Management and (4) the amendment to the registration and stock repurchase rights of Loyal Sorensen, Zelda Sorensen, Jarred Thompson and Sharron Thompson. 4. Affirmation of Guarantee. EPII hereby acknowledges that the Debenture Acquisition Agreement is being amended hereby and hereby also acknowledges and affirms that (a) the Guarantee is in full force and effect and the liability of EPII as Guarantor under the Guarantee continues in accordance with the terms of the Guarantee and is in no way affected or impaired by such amendment to the Debenture Acquisition Agreement, (b) Blair's agreement to such amendment is in Blair's sole discretion, (c) Blair is not required to provide notice to anyone of such amendment and (d) Blair's provision of such notice to EPII, as guarantor, shall not operate as a waiver of Blair's right to agree to further amendments in its sole discretion without notice to EPII or any other person that is or shall be a guarantor of the Company's obligations under the Debenture Acquisition Agreement. 5. Amendment of the Registration Agreement. The parties hereto agree to amend the terms of the Registration Agreement as follows: (a) Section 1(c) of the Registration Agreement shall be deleted in its entirety and replaced with the following: "REGISTRABLE SHARES" shall mean (i) the 210,000 Shares of Company Common Stock issued to the Investor under the Plan of Recapitalization, (ii) the 225,000 Shares of Company Common Stock issued to the Investor under that certain Subordinated Loan Agreement dated December 17, 1993 by and among the Investor, the Company and Eagle Plastics, Inc., (iii) up to 100,000 Shares of Company Common Stock that may be issued to the Investor upon exercise of the Warrant, (iv) up to 215,000 Shares of Company Common Stock that may be issued to the Investor upon exercise of that certain Warrant issued to the Investor under that certain Amendment Agreement dated as of May 10, 1996 by and between the Investor, the Company and certain other parties thereto (the "New Warrant") and (v) any further securities issued with respect thereto upon any stock split, stock dividend, recapitalization or similar event, so long as such shares or other securities are owned by the Investor or any other person to whom the Investor shall assign all or a portion of its rights hereunder. (b) Section 3(a) of the Registration Agreement shall be amended by deleting the clause "On a one-time basis only," in the first sentence thereof and replacing it with the clause "On no more than two occasions,". (c) Clause (1) of Section 3(b) of the Registration Agreement shall amended by deleting the words "of the issuance of the Investor's Shares" and replacing them with the date "May 10, 1996". (d) The following Clause (3) of Section 3(b) of the Registration Agreement shall be inserted at the end of Section 3(b) before the ".": "; and (3) three years from the earlier of complete exercise or termination of the New Warrant with respect to the Shares of Common Stock issuable upon exercise of the New Warrant" 6. Amendment of the Warrant. The parties hereto agree to amend the terms of the Warrant as follows: (a) Section 5(a) of the Warrant shall be amended by inserting the parenthetical "(including the maximum number of shares of Common Stock issuable in respect of any securities convertible into Common Stock)" immediately after the phrase "prior to such event" in the fourth line following clause (iii). (b) Section 5(b) of the Warrant shall be amended by adding the following at the end of Section 5(b) before the ".": "; provided, however, that no such adjustment in the Warrant Exercise Price shall be made upon the issuance of shares of Common Stock pursuant to (i) options, warrants, convertible securities and other rights to acquire shares listed on Schedule 1 to that certain Amendment Agreement dated May 10, 1996 by and between Blair, the Company, Eagle Plastics, Inc., Pacific Plastics, Inc. and Arrow Pacific Plastics, Inc. or (ii) the conversion or exercise into shares, and related issuance, of Common Stock pursuant to any warrant, option or other right to acquire shares of Common Stock that, upon the issuance of such warrant, option or other right did not require an adjustment to the Warrant Exercise Price pursuant hereto." 7. Representations and Warranties of the Company. As a further inducement for Blair to consent to the refinancing of the Company's senior indebtedness by the New Senior Lender, the Company hereby represents and warrants to Blair that: (a) The Company (and each of them) has the requisite corporate power and authority to execute, deliver and carry out this Agreement, all other agreements and instruments contemplated or required by the provisions thereof and to be executed, delivered or carried out by the Company (or any of them) (collectively, the "Ancillary Agreements") and the transactions contemplated hereby and thereby. (b) The execution and delivery of this Agreement and the Ancillary Agreements, and the consummation by the Company of the transactions contemplated hereby or thereby has been duly authorized by all necessary corporate action and other consents, approvals and the like required on the part of the Company. (c) Neither the execution and delivery by the Company (or any of them) of this Agreement or any of the Ancillary Agreements, nor the consummation of the transactions contemplated hereby or thereby, nor compliance by the Company with the terms, conditions and provisions hereof or thereof, shall (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a default under, (iii) result in the creation of any lien, security interest, charge or encumbrance upon its capital stock or assets pursuant to, (iv) give any third party the right to accelerate any obligation under, (v) result in a violation of or (vi) require any authorization, consent, approval, exemption or other action by or notice to any court or administrative or governmental body pursuant to, the articles of incorporation or bylaws of the Company (or any of them) or any law, statute, rule or regulation to which the Company (or any of them) is subject, or any agreement, instrument, order, judgment or decree to which the Company (or any of them) is subject. (d) This Agreement and each of the Ancillary Agreements to which the Company (or any of them) is a party have been duly and validly executed and delivered by Eagle, Pacific, Arrow and/or EPII (as the case may be) and constitute legal, valid and binding obligations, and all such obligations of the Company (or any of them) are enforceable in accordance with their respective terms. (e) Except for fees payable to BA Securities, Inc. in an amount not to exceed $345,000, there are no claims for brokerage commissions, finders' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement binding upon the Company (or any of them). (f) At the time of their issuance, the shares issuable pursuant to the New Common Stock Warrant and the Warrant (the "Warrant Shares") shall be validly issued, fully paid and nonassessable and free and clear of any and all liens, claims, encumbrances and the like. (g) The issuance of the Warrant Shares has been duly authorized by all necessary corporate action on the part of the Company and no vote, g) The issuance of the Warrant Shares has been duly authorized by all necessary corporate action on the part of the Company and no vote, authorization, consent or approval of the shareholders of the Company (or any of them) is necessary for the issuance of the Warrant Shares. (h) (i) All of the outstanding shares of capital stock of EPII, as of the date hereof, are validly issued, fully paid and nonassessable. Except as set forth on Schedule 1 attached hereto, there are not outstanding any shares of stock, securities, rights or options convertible or exchangeable into or exercisable for any shares of EPII's capital stock, stock appreciation rights or phantom stock, nor is or was EPII under any obligation (contingent or otherwise) to redeem or otherwise acquire any shares of its capital stock or any securities, rights or options to acquire such capital stock, stock appreciation rights or phantom stock. To the best of the Company's knowledge, Schedule 1 hereto sets forth a complete and accurate list as of the date hereof of the names of, and the respective ownership of any person or group of persons holding 5% or more of such capital stock of EPII other than Blair. (ii) There are no statutory or contractual stockholders' preemptive rights with respect to the issuance of the New Common Stock Warrant, EPII has not violated any applicable federal or state securities laws in connection with the offer, sale or issuance of any of its capital stock or warrants (which, in the case of EPII for periods prior to January 1, 1986, could result in a material adverse effect on its business, operations, properties, financial condition, operating results or business prospects) and, assuming the truth and accuracy of Blair's representations and warranties under Section 9(b) hereof, the issuance of the New Common Stock Warrant does not require registration under the Securities Act of 1933, as amended from time to time (together with any rules and regulations thereunder)(the "Securities Act") or any applicable state securities laws. Except as set forth on Schedule 1 hereto, there are no agreements between EPII's stockholders with respect to the voting or transfer of EPII's capital stock or with respect to any other aspect of EPII's affairs (it being understood that, unless the contrary is known by EPII on the date hereof, the representation and warranty in this sentence shall not apply to any person or group of persons holding less than 5% of EPII's common stock). (iii) EPII has filed all forms, statements, schedules, exhibits, reports and other documents with the SEC required by it pursuant to the federal securities laws and the SEC rules and regulations thereunder, all of which have complied as of their respective filing dates with all applicable requirements of the Securities Act and the Securities Exchange Act of 1934, as amended from time to time (the "Exchange Act"), and any rules or regulations promulgated thereunder. The representation and warranty in the immediately preceding sentence shall not apply to EPII for periods prior to January 1, 1986, unless its failure to so file or comply could result in a material adverse effect on its business, operations, properties, financial condition, operating results or business prospects. (i) Neither this Agreement nor any of the Ancillary Agreements contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact known to the Company (or any of them) (other than general conditions which are a matter of public knowledge) which materially adversely affects the business, operations, properties, financial condition, operating results or business prospects of the Company (or any of them). All documents filed by EPII pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act contain all statements that are required by the Exchange Act and do not contain any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not misleading. 8. Waiver of Breach. Blair hereby waives any and all breaches of the terms of the Debenture Acquisition Agreement and the Debenture resulting from (a) the execution and delivery by the Company of this Agreement and the other agreements and instruments to be executed and delivered hereunder, (b) the refinancing transaction contemplated by the Credit Agreement and the use of proceeds permitted thereby, (c) the sale of common stock of EPII to Okabena, (d) the sale of common stock of EPII to Kennedy Capital Management and (e) the consummation of the transactions contemplated hereby including, without limitation, the payments contained in Section 3 hereof. 9. Transfer. (a) Transfer of Restricted Securities. (i) Restricted Securities (as herein defined) are transferable pursuant to (A) public offerings registered under the Securities Act, (B) Rule 144 of the Securities Act (or any similar rule then in force) if such rule is available and (C) subject to the conditions specified in Section 9(a)(ii) hereof, any other legally available means of transfer. (ii) In connection with the transfer of any Restricted Securities (other than a transfer described in clause (A) or (B) of Section 9(a)(i) hereof), the holder thereof shall deliver written notice to EPII describing in reasonable detail the transfer or proposed transfer, together with information as to such holder's compliance with applicable securities laws as reasonably may be requested by EPII, and such transfer only shall be made in compliance with the Securities Act and any applicable state securities laws. EPII shall cooperate in connection with any such transfer, including providing such information to any holder of Restricted Securities or such holder's proposed transferee as may be necessary to satisfy the requirements of Rule 144A of the Securities Act in connection with any transfer to a "Qualified Institutional Buyer" under such rule. Upon any transfer, the transferee shall, to the extent of such transfer, be entitled to exercise the rights hereunder of the person making such transfer. To the extent the holder of the Restricted Securities complies with the first sentence of this Section 9(a)(ii), EPII shall promptly upon such contemplated transfer deliver new certificates for such Restricted Securities which do not bear the Securities Act legend set forth in Section 9(b) hereof unless such legend is still required. If EPII is not required to deliver new certificates for such Restricted Securities not bearing such legend, the holder thereof shall not transfer the same until the prospective transferee has confirmed to EPII in writing its agreement to be bound by the conditions contained in this paragraph and Section 9(b) hereof. (iii) "Restricted Securities" means (x) the New Common Stock Warrant, (y) any securities issued pursuant to the New Common Stock Warrant and (z) any securities issued with respect to the securities referred to in clauses (x) or (y) above by way of a stock dividend or stock split or in connection with a combination of shares, modification, merger, consolidation or other reorganization. As to any particular Restricted Securities, such securities shall cease to be Restricted Securities when they have (A) been effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them, (B) become eligible for sale pursuant to Rule 144 (or any similar provision then in force) under the Securities Act or (C) been otherwise transferred and new certificates for them not bearing the Securities Act legend set forth in Section 9(b) hereof have been delivered by EPII in accordance with Section 9(b) hereof. Whenever any particular securities cease to be Restricted Securities, the holder thereof shall be entitled to receive from EPII, without expense, new securities of like tenor not bearing a Securities Act legend of the character set forth in Section 9(b) hereof. (b) Blair hereby represents that it is (a) an "accredited investor" within the meaning of Rule 501(a) of Regulation D under the Securities Act and (b) acquiring the Restricted Securities acquired pursuant hereto for its own account with the present intention of holding such securities for purposes of investment and that it has no intention of selling such securities in a public distribution in violation of the federal securities laws or any applicable state securities laws; provided that nothing contained herein will prevent Blair and any subsequent holders of Restricted Securities from transferring such securities in compliance with the provisions of Section 9(a) hereof. Each certificate for shares will be imprinted with a legend in substantially the following form: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or any state securities laws. The transfer of the securities represented by this certificate is subject to the conditions specified in that certain Amendment Agreement dated as of May 10, 1996 by and among William Blair Mezzanine Capital Fund, L.P., Eagle Plastics, Inc. Pacific Plastics, Inc., Arrow Pacific Plastics, Inc. and Eagle Pacific Industries, Inc. (f/k/a Black Hawk Holdings, Inc.) ("EPII"), and EPII reserves the right to refuse the transfer of such securities until such conditions have been fulfilled with respect to such transfer. A copy of such conditions will be furnished by EPII to the holder hereof upon written request and without charge." 10. Miscellaneous. (a) Further Assurances. The Company shall, from time to time at the request of Blair, do all further acts and things as may in the opinion of Blair be necessary or advisable to effectuate the transaction and other matters contemplated hereby, including, without limitation, the modification of or amendment to any other agreements, certificates or instruments to which the Company is a party. (b) Joint and Several. The Company's obligations hereunder shall be joint and several. (c) Successors. This Agreement and the agreements and obligations contained herein shall, as applicable, be binding upon and inure to the benefit of the Company and Blair and their respective successors and permitted assigns. (d) Costs and Expenses. The Company agrees to pay all costs and expenses, including, without limitation, attorney's fees and expenses, expended or incurred by Blair in connection with (i) the preparation and structuring of this Agreement and the Ancillary Agreements, (ii) the enforcement of this Agreement or any of the Ancillary Agreements, (iii) the collection of any amounts due hereunder and (iv) any actions for declaratory relief in any way related to this Agreement or the agreements, certificates and instruments described herein or contemplated hereby (including, without limitation, the Ancillary Agreements), or the protection or preservation of any rights of Blair hereunder. (e) Notices. All notices and other communications given to or made upon any party hereto in connection with this Agreement shall, except as otherwise expressly herein provided, be in writing (including telexed or telecopied communication) and mailed, telexed, telecopied or delivered by hand or by reputable overnight courier service to the respective parties, as follows: If to Blair, to: William Blair Mezzanine Capital Fund, L.P. 222 West Adams Street Chicago, Illinois 60606 Attention: Terrance M. Shipp Telecopy: (312) 236-8075 with copy to: Altheimer & Gray 10 S. Wacker Drive Suite 4000 Chicago, Illinois 60606 Attention: Robert L. Schlossberg, Esq. Telecopy: (312) 715-4800 If to the Company to: c/o Eagle Pacific Industries, Inc. 2430 Lincoln Center 333 S. 7th Street Minneapolis, Minnesota 55402 Attention: William H. Spell Telecopy: (612) 371-9651 with copy to: Fredrikson & Byron, P.A. 1100 International Centre 900 Second Avenue South Minneapolis, Minnesota 55402-3397 Attention: Dobson West, Esq. Telecopy: (612) 347-7077 or in accordance with any subsequent written direction from the recipient party to the sending party. All such notices and other communications shall, except as otherwise expressly herein provided, be effective upon delivery if delivered by hand; when deposited with a reputable courier service, delivery charges prepaid; when deposited in the mail, postage prepaid; or in the case of telex or telecopy, when received. (f) Survival. All representations, warranties, covenants and agreements contained herein or made in writing in connection herewith shall survive indefinitely the execution and delivery of this Agreement. (g) Assignability. This Agreement shall not be assignable by either party without the prior written consent of the other party. (h) Entire Agreement. This Agreement and the instruments to be delivered by the parties pursuant to the provisions hereof constitute the entire agreement between the parties hereto with respect to the subject matter hereof. Any amendments or alternative or supplementary provisions to this Agreement must be made in writing and duly executed by an authorized representative of each of the parties hereto. (i) Counterparts. This Agreement may be executed in any number of counterparts and by any party hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one and the same instrument. (j) Captions. Section captions used in this Agreement are for convenience only, and shall not affect the construction of this Agreement. (k) No Further Amendments. Except as specifically amended hereby, the terms and provisions of the Debenture Acquisition Agreement, the Debenture, the Registration Agreement and the Warrant shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officers as of the day and year first above written. EAGLE PLASTICS, INC. By:________________________________________________ Title:_____________________________________________ EAGLE PACIFIC INDUSTRIES, INC. By:________________________________________________ Title:_____________________________________________ PACIFIC PLASTICS, INC. By:________________________________________________ Title:_____________________________________________ ARROW PACIFIC PLASTICS, INC. By:________________________________________________ Title:_____________________________________________ WILLIAM BLAIR MEZZANINE CAPITAL FUND, L.P. By: William Blair Mezzanine Capital Partners, L.P., its general partner By:_______________________________________ Title: a general partner SCHEDULE 1 AMENDMENT AGREEMENT 1,383,500 shares of Preferred Stock of EPII convertible into 1,383,500 shares of Common Stock of EPII. It is the intention of EPII to offer the holders of the 1,383,500 shares of Preferred Stock of EPII to convert such shares into 1,581,143 shares of Common Stock of EPII if done within a designated time. Attached hereto are the following lists: Warrants to purchase shares of EPII Common Stock Nonqualified Stock Options Granted Outside the 1991 Stock Option Plan to acquire shares of EPII Common Stock Nonqualified Stock Options Granted Pursuant to the 1991 Stock Option Plan to acquire shares of EPII Common Stock Incentive Stock Options Granted Pursuant to the 1991 Stock Option Plan to acquire shares of common stock of Eagle Plastics, Inc. By agreement dated December 17, 1993 by and among EPII, Eagle Plastics, Inc., Larry D. Schnase, George Peter Konen and David Schnase, EPII may from time to time be obligated to acquire shares of Eagle Plastics, Inc. for cash or by issuing shares of Common Stock of EPII. The section of EPII's Proxy Statement for Annual Meeting of Shareholders to be held April 30, 1996 entitled "Security Ownership of Principal Shareholders and Management" is incorporated herein by reference. Eagle Pacific Industries, Inc. List of Warrants 1. Warrant dated March 16, 1995 to purchase 100,000 shares of Common Stock to William Blair Mezzanine Capital Fund LP. 2. Warrant dated December 17, 1993 to purchase 2,500 shares of Common Stock to Mathews, Holmquist & Associates. 3. Warrant dated December 17,1993 to purchase 625 shares of Common Stock to Askar Corporation. 4. Warrant dated December 17, 1993 to purchase 1,625 shares of Common Stock to R.J. Steichen & Company. 5. Warrant dated December 17, 1993 to purchase 625 shares of Common Stock to Jack P. Helms. 6. Warrant dated December 17, 1993 to purchase 313 shares of Common Stock to Gerald R. Caruso. 7. Warrant dated December 17, 1993 to purchase 3,125 shares of Common Stock to Terry A. Lynner. 8. Warrant dated December 17, 1993 to purchase 3,500 shares of Common Stock to Charles Deckas. 9. Warrant dated December 17, 1993 to purchase 625 shares of Common Stock to Steven M. Goldsmith. Total number of shares of Common Stock granted pursuant to Warrants = 112,313 shares
EAGLE PACIFIC INDUSTRIES, INC. 8/22/96 NONQUALIFIED STOCK OPTIONS GRANTED OUTSIDE OF THE 1991 STOCK OPTION PLAN Shares Expiration Remaining of Grant Total Shares to be Exercise Date and Shares Name Date Granted Exercised Price Vesting Date Period Exercised ---- ------ ------- --------- ----- ------------ -------- --------- PETER J. BRUSTKERN 2/01/93 5,000 5,000 $2.00 Full 2/01/98 CHARLES E. GRAY, JR. 7/06/95 24,000 24,000 $3.125 6,000 shares - 7/06/96 7/06/00 6,000 shares - 7/06/97 7/06/00 6,000 shares - 7/06/98 7/06/00 6,000 shares - 7/06/99 7/06/00 GEORGE PETER KONEN 12/17/93 50,000 50,000 $2.00 12,500 shares - 12/17/94 12/17/00 12,500 shares - 12/17/95** 12/17/00 12,500 shares - 12/17/96** 12/17/00 12,500 shares - 12/17/97** 12/17/00 12/17/93 45,000 45,000 $1.75 11,250 shares - 12/17/94 12/17/98 11,250 shares - 12/17/95** 12/17/98 11,250 shares - 12/17/96** 12/17/98 11,250 shares - 12/17/97** 12/17/98 1/01/95 40,000 40,000 $2.50 10,000 shares - 12/31/95 12/31/99 10,000 shares - 12/31/96 10,000 shares - 12/31/97 10,000 shares - 12/31/98 2/27/95 35,000 35,000 $3.00 Full 2/27/00 GEORGE R. LONG 2/01/93 15,000 15,000 $2.00 5,000 shares - 2/01/93 2/01/98 5,000 shares - 2/01/94* 2/01/98 5,000 shares - 2/01/95* 2/01/98 2/27/95 15,000 15,000 $3.00 Full 2/27/00 DAVID L. OWEN 3/04/89 10,000 0 $1.00 Fully vested on 3/04/92 3/03/94 Terminated (RESIGNED 10/93) 3/3/94 2/01/93 15,000 5,000 $2.00 5,000 shares - 2/01/93 2/01/98 5,000 shares - 2/01/94* 2/01/98 Terminated 10/93 5,000 shares - 2/01/95* 2/01/98 Terminated 10/93 RICHARD W. PERKINS 5/06/92 30,000 30,000 $0.34375 7,500 shares - 5/06/92 3/31/97 7,500 shares - 6/15/93* 3/31/97 7,500 shares - 6/15/94* 3/31/97 7,500 shares - 6/15/95* 3/31/97 2/01/93 15,000 15,000 $2.00 5,000 shares - 2/01/93 2/1/98 5,000 shares - 2/01/94* 2/1/98 5,000 shares - 2/01/95* 2/1/98 2/27/95 15,000 15,000 $3.00 Full 2/27/00 BRUCE A. RICHARD 2/01/93 15,000 15,000 $2.00 5,000 shares - 2/01/93 2/01/98 5,000 shares - 2/01/94* 2/01/98 5,000 shares - 2/01/95* 2/01/98 12/17/93 20,000 20,000 $1.75 5,000 shares - 12/17/94 12/17/98 5,000 shares - 12/17/95 12/17/98 5,000 shares - 12/17/96 12/17/98 5,000 shares - 12/17/97 12/17/98 2/27/95 15,000 15,000 $3.00 Full 2/27/00 DAVID SCHNASE 12/17/93 45,000 45,000 $1.75 11,250 shares - 12/17/94 12/17/98 11,250 shares - 12/17/95** 12/17/98 11,250 shares - 12/17/96** 12/17/98 11,250 shares - 12/17/97** 12/17/98 1/01/95 20,000 20,000 $2.50 5,000 shares - 12/31/95 12/31/99 5,000 shares - 12/31/96 12/31/99 5,000 shares - 12/31/97 12/31/99 5,000 shares - 12/31/98 12/31/99 2/27/95 10,000 10,000 $3.00 Full 2/27/00 LARRY D. SCHNASE 12/17/93 150,000 150,000 $2.00 37,500 shares - 12/17/94 12/17/00 37,500 shraes - 12/17/95** 12/17/00 37,500 shares - 12/17/96** 12/17/00 37,500 shares - 12/17/97** 12/17/00 12/17/93 45,000 45,000 $1.75 11,250 shares - 12/17/94 12/17/98 11,250 shares - 12/17/95 12/17/98 11,250 shares - 12/17/96 12/17/98 11,250 shares - 12/17/97 12/17/98 2/27/95 35,000 35,000 $3.00 Full 2/27/00 LOYAL SORENSEN 7/10/95 100,000 100,000 $3.125 Full 7/10/00 HARRY W. SPELL 1/10/92 125,000 125,000 $0.34375 Full on 1/10/97* 1/10/99 (vesting accelerates when Board determines) 5/6/92 35,000 0 $0.34375 12,500 shares - 5/06/92 3/31/97 Exercised 7,500 shares - 6/15/93* 7,500 3/31/97 35,000 on shares - 3/31/97 6/18/96 6/15/94* 3/31/97 7,500 shares - 6/15/95* 2/1/93 15,000 15,000 $2.00 5,000 shares - 2/1/93 2/1/98 5,000 shares - 2/1/94* 2/1/98 5,000 shares - 2/1/95* 2/1/98 2/27/95 15,000 15,000 $3.00 Full 2/27/00 WILLIAM H. SPELL 1/10/92 125,000 125,000 $0.34375 Full as of 1/10/97* 1/10/99 (vesting accelerates when Board determines) 5/06/92 35,000 0 $.34375 12,500 shares - 5/06/92 3/31/97 Exercised 7,500 shares - 6/15/93* 3/31/97 35,000 on 7,500 shares - 6/15/94* 3/31/97 6/18/96 7,500 shares - 6/15/95* 3/31/97 2/01/93 15,000 15,000 $2.00 5,000 shares - 2/01/93 2/01/98 5,000 shares - 2/01/94* 2/01/98 5,000 shares - 2/01/95* 2/01/98 2/27/95 50,000 50,000 $3.00 Full 2/27/00 EDWARD E. STRICKLAND 5/06/92 30,000 15,000 $0.34375 7,500 shares - 5/06/92 3/31/97 (RESIGNED BETWEEN MARCH 7,500 shares - 6/15/93* 3/31/97 AND MAY 12, 1994) 7,500 shares - 6/15/94* 3/31/97 Terminated 5/94 7,500 shares - 6/15/95* 3/31/97 Terminated 5/94 2/01/93 15,000 10,000 $2.00 5,000 shares - 2/01/93 2/01/98 5,000 shares - 2/01/94* 2/01/98 5,000 shares - 2/01/95* 2/01/98 Terminated 5/94 LYLE D. TAYLOR 2/01/93 15,000 10,000 $2.00 5,000 shares - 2/01/93 2/01/98 5,000 shares - 2/01/94* 2/01/98 5,000 shares - 2/01/95* 2/01/98 Terminated JARRED THOMPSON 7/10/95 100,000 100,000 $3.125 FULL 7/10/00 GARY M. WENGLER 2/27/95 16,000 16,000 $3.00 4,000 shares - 2/27/95 2/27/00 4,000 shares - 2/27/96 2/27/00 4,000 shares - 2/27/97 2/27/00 4,000 shares - 2/27/98 2/27/00 TOTAL SHARES GRANTED: 1,360,000 TOTAL SHARES REMAINING TO BE 70,000 EXERCISED: 1,245,000 TOTAL EXERCISED SHARES:
- ----------------------------- * must be a director as of the date the shares become exercisable ** must be an employee or director of Eagle as of the date the shares become exercisable cc: Nonqualified Stock Option Agreements File (29340.0.83) Stock Transfer Matters File (29340.0.34) Dobson West
EAGLE PACIFIC INDUSTRIES, INC. 8/22/96 NONQUALIFIED STOCK OPTIONS GRANTED PURSUANT TO 1991 STOCK OPTION PLAN Shares Expiration Remaining of Date and Shares Grant Total Shares to be Exercise Exercised Name Date Granted Exercised Price Vesting Date Period --------------- ---- ------ ------- --------- ----- ------------ -------- PETER J. BRUSTKERN 4/25/91 5,000 5,000 $0.64 Fully vested on 10/25/91 4/24/01 S. ALBERT DIEZ HANSER 4/25/91 5,000 5,000 $0.64 Fully vested on 10/25/91 4/24/01 JAMES I. LAURSEN 4/10/92 5,000 0 $2.25 Full vested on 4/11/92 4/09/95 Expired 4/9/95 4/10/92 5,000 5,000 $0.64 Fully vested on 4/11/92 4/09/97 GEORGE R. LONG 4/25/91 5,000 5,000 $0.64 Fully vested on 10/25/91 4/24/01 4/08/93 5,000 5,000 $2.125 Fully vested on 10/8/93 4/07/03 5/12/94 5,000 5,000 $1.75 Fully vested on 11/12/94 5/11/04 DAVID L. OWEN 4/25/91 5,000 5,000 $0.64 Fully vested on 10/25/91 4/24/01 (RESIGNED 10/93) 4/08/93 5,000 5,000 $2.125 Fully vested on 10/8/93 4/07/03 RICHARD W. PERKINS 4/08/93 5,000 5,000 $2.125 Fully vested on 10/8/93 4/07/03 5/12/94 5,000 5,000 $1.75 Fully vested on 11/12/94 5/11/04 HERMAN J. RATELLE 4/25/91 5,000 5,000 $0.64 Fully vested on 10/25/91 4/24/01 BRUCE A. RICHARD 5/06/92 20,000 20,000 $2.50 5,000 shares - 5/06/92 5/06/97 5,000 shares - 5/06/93 5/06/97 5,000 shares - 5/06/94 5/06/97 5,000 shares - 5/06/95 5/06/97 4/08/93 5,000 5,000 $2.125 Fully vested on 10/8/93 04/07/03 5/12/94 5,000 5,000 $1.75 Fully vested on 11/12/94 05/11/04 HARRY W. SPELL 7/22/93 30,000 30,000 $2.0625 10,000 shares - 7/22/97 7/21/03 10,000 shares - 7/22/98* 7/21/03 10,000 shares - 7/22/99* 7/21/03 (vesting schedule accelerates to vest 1/3 as of closing date of acquisition, 1/3 the next year and 1/3 the third year) WILLIAM H. SPELL 7/22/93 60,000 60,000 $2.0625 20,000 shares - 7/22/97 7/21/03 20,000 shares - 7/22/98* 7/21/03 20,000 shares - 7/22/99* 7/21/03 (vesting schedule accelerates to vest 1/3 as of closing date of acquisition, 1/3 the next year and 1/3 the third year) EDWARD E. STRICKLAND 4/08/93 5,000 5,000 $2.125 Fully vested on 10/08/93 4/07/03 (RESIGNED BETWEEN MARCH AND MAY 12, 1994) LYLE D. TAYLOR 4/25/91 5,000 5,000 $0.64 Fully vested on 10/25/91 4/24/01 4/08/93 5,000 5,000 $2.125 Fully vested on 10/08/93 4/07/03 SHERREE L. TIPTON 7/22/93 3,000 3,000 $2.0625 1,000 shares - 7/22/93 7/21/00 1,000 shares - 7/22/94 7/21/00 1,000 shares - 7/22/95 7/21/00 5/12/94 3,000 3,000 $1.75 1,000 shares - 5/12/95 5/11/01 1,000 shares - 5/12/96 5/11/01 1,000 shares - 5/12/97 5/11/01 7/24/95 2,400 2,400 $3.0625 800 shares - 7/24/96 7/23/00 ----- 800 shares - 7/24/97 7/23/00 800 shares - 7/24/98 7/23/00 TOTAL SHARES GRANTED: 203,400 ======= TOTAL SHARES REMAINING TO BE 198,400 EXERCISED: ======= TOTAL EXERCISED SHARES: O
- ----------------------------- * must be a director as of the date the shares become exercisable ** must be an employee or director of Eagle as of the date the shares become exercisable
EAGLE PACIFIC INDUSTRIES, INC. INCENTIVE STOCK OPTIONS GRANTED PURSUANT TO 1991 STOCK OPTION PLAN Shares Expiration Remaining of Date and Shares Grant Total Shares to be Exercise Exercised Name Date Granted Exercised Price Vesting Date Period --------------- ---- ------ ------- --------- ----- ------------ ------ LYLE D. TAYLOR 3/14/90 6,250 0 $1.25 3,125 shares - 3/14/90 5/01/95 Expired 3,125 shares - 4/01/91 TOTAL SHARES GRANTED: 6,250 TOTAL SHARES REMAINING TO BE 0 EXERCISED: TOTAL EXERCISED SHARES: O
TOTAL RESERVED SHARES Total shares reserved 1,500,000 LESS total NQSO shares granted (203,400) LESS total ISO shares granted ( 6,250) --------- Plus shares which were granted but not exercised and exercise period expired: James I. Laursen - 5,000 shares (NQSO grant date 4/10/92) + 11,250 --------- Lyle D. Taylor - 6,250 shares (ISO grant date 3/14/90) TOTAL REMAINING RESERVED SHARES TO BE GRANTED 1,301,600 ========= TOTAL EXERCISED SHARES Shares exercised by: 0 --------- TOTAL EXERCISED SHARES 0 --------- TOTAL OUTSTANDING SHARES FOR ISSUANCE UPON EXERCISE OF OPTIONS Total NQSO and ISO Shares Granted 209,650 LESS Total Exercised Shares - 0 LESS Granted Shares that have expired or been terminated: (11,250) --------- TOTAL OUTSTANDING SHARES FOR ISSUANCE UPON EXERCISE 198,400 =========
cc: Incentive Stock Option Plan File (29340.29) Nonqualified Stock Option Agreements File (29340.0.83) Stock Transfer Matters (29340.0.34) Dobson West EX-10.18 6 WARRANT EXHIBIT 10.18 The Warrant represented by this certificate has not been registered, under either the Securities Act of 1933, as amended, or applicable state securities laws. It may not be sold, offered for sale or transferred in the absence of an effective registration under the Securities Act of 1933, as amended, and the applicable state securities laws or an opinion of counsel satisfactory in form and substance to counsel for the Company that such transaction will not result in a prohibited transaction under the Securities Act of 1933, as amended, or the applicable state securities laws. WARRANT To Purchase 215,000 Shares of Common Stock of Eagle Pacific Industries, Inc. THIS CERTIFIES THAT, for good and valuable consideration, William Blair Mezzanine Capital Fund, L.P. ( "Blair"), or its registered assigns, is entitled to subscribe for and purchase from Eagle Pacific Industries, Inc., a Minnesota corporation (the "Company"), at any time up to and including March 16, 1998, Two Hundred Fifteen Thousand (215,000) fully paid and nonassessable shares of the Common Stock of the Company at the price of $3.25 per share (the "Warrant Exercise Price"), subject to the antidilution provisions of this Warrant. The shares which may be acquired upon exercise of this Warrant are referred to herein as the "Warrant Shares." As used herein, the term "Holder" means Blair, any party who acquires all or a part of this Warrant as a registered transferee of Blair, or any record holder or holders of the Warrant Shares issued upon exercise, whether in whole or in part, of the Warrant; the term "Common Stock" means and includes the Company's presently authorized common stock, no par value, and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution, or winding up of the Company; and the term "Convertible Securities" means any stock or other securities convertible into, or exchangeable for, Common Stock. This Warrant is subject to the following provisions, terms and conditions: 1. Exercise; Transferability. (a) The rights represented by this Warrant may be exercised by the Holder hereof, in whole or in part (but not as to a fractional share of Common Stock), by written notice of exercise (in the form attached hereto) delivered to the Company at the principal office of the Company prior to the expiration of this Warrant and accompanied or preceded by the surrender of this Warrant along with one of the following methods of payment in the amount of the Warrant Exercise Price for such shares: (i) if the Company or any Company subsidiary owes Blair any funds pursuant to loans, promissory notes or otherwise, Blair may provide appropriate documentation to reflect the reduction of such indebtedness owed to Blair from the Company or Company subsidiary by the amount of the Warrant Exercise Price; (ii) in the event there is insufficient indebtedness to allow all or part of the offset provided in (i), then Blair may pay the Warrant Exercise Price of such shares by assigning and transferring to the Company a number of shares of Common Stock which when multiplied by the then Fair Market Value (as defined in Section 9 below) of a share of the Company's Common Stock (as in effect immediately prior to the time of exercise) is at least equal to the Warrant Exercise Price for such shares (the shares of Common Stock so assigned and transferred may be a portion of the shares of Common Stock acquired in such exercise of this Warrant); or (iii) a check or other form of cash payment. (b) This Warrant is transferable in whole or in part, subject to applicable federal and state securities laws and regulations. This Warrant may not be sold, transferred, assigned, hypothecated or divided into two or more Warrants of smaller denominations, nor may any Warrant Shares issued pursuant to exercise of this Warrant be transferred, except as provided in Section 7 hereof. 2. Exchange and Replacement. Subject to Sections l and 7 hereof, this Warrant is exchangeable upon the surrender hereof by the Holder to the Company at its office for new Warrants of like tenor and date representing in the aggregate the right to purchase the number of Warrant Shares purchasable hereunder, each of such new Warrants to represent the right to purchase such number of Warrant Shares (not to exceed the aggregate total number purchasable hereunder) as shall be designated by the Holder at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant; provided, however, that if Blair shall be such Holder, an agreement of indemnity by such Holder shall be sufficient for all purposes of this Section 2. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange or replacement. The Company shall pay all expenses, taxes (other than stock transfer taxes), and other charges payable in connection with the preparation, execution, and delivery of Warrants, exercise of Warrants and issuance of the Warrant Shares pursuant to this Section 2. 3. Issuance of the Warrant Shares. (a) The Company agrees that the shares of Common Stock purchased hereby shall be and are deemed to be issued to the Holder as of the close of business on the date on which this Warrant shall have been surrendered and the payment made for such Warrant Shares as aforesaid. Subject to the provisions of the next section, certificates for the Warrant Shares so purchased shall be delivered to the Holder within a reasonable time, not exceeding fifteen (15) days after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the right to purchase the number of Warrant Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the Holder within such time. (b) Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificate for Warrant Shares upon exercise of this Warrant except in accordance with exemptions from the applicable securities registration requirements or registrations under applicable securities laws. Nothing herein, however, shall obligate the Company to effect registrations under federal or state securities laws. If registrations are not in effect and if exemptions are not available when the Holder seeks to exercise the Warrant, the Warrant exercise period will be extended, if need be, to prevent the Warrant from expiring, until such time as either registrations become effective or exemptions are available, and the Warrant shall then remain exercisable for a period of at least 30 calendar days from the date the Company delivers to the Holder written notice of the availability of such registrations or exemptions. The Holder agrees to execute such documents and make such representations, warranties, and agreements as may be reasonably required solely to comply with the exemptions relied upon by the Company, or the registrations made, for the issuance of the Warrant Shares. 4. Covenants of the Company. The Company covenants and agrees that all Warrant Shares will, upon issuance, be duly authorized and issued, fully paid, nonassessable, and free from all taxes, liens, charges and preemptive or similar rights with respect to the issue thereof. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. 5. Antidilution Adjustments. The provisions of this Warrant are subject to adjustment as provided in this Section 5. (a) The Warrant Exercise Price shall be adjusted from time to time such that in case the Company shall hereafter: (i) pay any dividends on any class of stock of the Company payable in Common Stock or securities convertible into Common Stock; (ii) subdivide its then outstanding shares of Common Stock into a greater number of shares; or (iii) combine outstanding shares of Common Stock, by reclassification or otherwise; then, in any such event, the Warrant Exercise Price in effect immediately prior to such event shall (until adjusted again pursuant hereto) be adjusted immediately after such event to a price (calculated to the nearest full cent) determined by dividing (a) the number of shares of Common Stock outstanding immediately prior to such event (including the maximum number of shares of Common Stock issuable in respect of any securities convertible into Common Stock), multiplied by the then existing Warrant Exercise Price, by (b) the total number of shares of Common Stock outstanding immediately after such event (including the maximum number of shares of Common Stock issuable in respect of any securities convertible into Common Stock), and the resulting quotient shall be the adjusted Warrant Exercise Price per share. An adjustment made pursuant to this Subsection shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this Subsection, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors shall determine the allocation of the adjusted Warrant Exercise Price between or among shares of such classes of capital stock or shares of Common Stock and other capital stock. All calculations under this Subsection shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be. In the event that at any time as a result of an adjustment made pursuant to this Subsection, the holder of any Warrant thereafter surrendered for exercise shall become entitled to receive any shares of the Company other than shares of Common Stock, thereafter the Warrant Exercise Price of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this Section. (b) If and whenever the Company shall (1) issue or sell any shares of its Common Stock for a consideration per share less than the Fair Market Value of the Company's Common Stock (as adjusted for appropriate discounts due to the restricted nature of the securities) in effect immediately prior to the time of such issuance or sale, (2) issue or sell any warrants, options or other rights to acquire shares of its Common Stock at a purchase price less than the Fair Market Value of the Company's Common Stock (as adjusted for appropriate discounts due to the restricted nature of the securities) in effect immediately prior to the time of such issuance or sale, or (3) issue or sell any other securities that are convertible into shares of its Common Stock for a purchase or exchange price less than the Fair Market Value of the Company's Common Stock (as adjusted for appropriate discounts due to the restricted nature of the securities) in effect immediately prior to the time of such issuance or sale (except for the issuance of options or warrants approved by the Board of Directors of the Company to employees, director and consultants), then, upon such issuance or sale, the Warrant Exercise Price shall be reduced to the price at which such shares of Common Stock are being issued or sold by the Company or the price at which such other securities are exercisable or convertible into shares of the Company's Common Stock; provided, however, that no such adjustment in the Warrant Exercise Price shall be made upon the issuance of shares of Common Stock pursuant to (i) options, warrants, convertible securities and other rights to acquire shares listed on Schedule 1 to that certain Amendment Agreement dated May 10, 1996 by and between Blair, the Company, Eagle Plastics, Inc., Pacific Plastics, Inc. and Arrow Pacific Plastics, Inc. or (ii) the conversion or exercise into shares, and related issuance, of Common Stock pursuant to any warrant, option or other right to acquire shares of Common Stock that, upon the issuance of such warrant, option or other right did not require an adjustment to the Warrant Exercise Price pursuant hereto. (c) Upon each adjustment of the Warrant Exercise Price pursuant to Section 5(a) above, the Holder of each Warrant shall thereafter (until another such adjustment) be entitled to purchase at the adjusted Warrant Exercise Price the number of shares, calculated to the nearest full share, obtained by multiplying the number of shares specified in such Warrant (as adjusted as a result of all adjustments in the Warrant Exercise Price in effect prior to such adjustment) by the Warrant Exercise Price in effect prior to such adjustment and dividing the product so obtained by the adjusted Warrant Exercise Price. (d) In case of any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), there shall be no adjustment under Subsection (a) of this Section above but the Holder of each Warrant then outstanding shall have the right thereafter to convert such Warrant into the kind and amount of shares of stock and other securities and property which he would have owned or have been entitled to receive immediately after such consolidation, merger, statutory exchange, sale, or conveyance had such Warrant been converted immediately prior to the effective date of such consolidation, merger, statutory exchange, sale, or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section with respect to the rights and interests thereafter of any Holders of the Warrant, to the end that the provisions set forth in this Section shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock and other securities and property thereafter deliverable on the exercise of the Warrant. The provisions of this Subsection shall similarly apply to successive consolidations, mergers, statutory exchanges, sales or conveyances. (e) Upon any adjustment of the Warrant Exercise Price, then and in each such case, the Company shall give written notice thereof, by first-class mail, postage prepaid, addressed to the Holder as shown on the books of the Company, which notice shall state the Warrant Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares of Common Stock purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (f) In case at any time: (i) The Company shall pay any dividend upon its Common Stock payable in stock or make any distribution (other than cash dividends) to the holders of its Common Stock; or (ii) The Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or any other rights; or (iii) There shall be any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with, or sale, conveyance, lease or other transfer of all or substantially all of its assets to, another corporation; or (iv) There shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then in any one or more of such cases, the Company shall give prior written notice, by first class mail, postage prepaid, addressed to each registered Holder at the address of such Holder as shown on the books of the Company, of the date on which (a) the books of the Company shall close or a record shall be taken for such stock dividend, distribution or subscription rights or (b) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of the Common Stock of record shall participate in said dividend, distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least twenty (20) days prior to the action in question and not less than twenty (20) days prior to the record date or the date on which the Company's transfer books are closed in respect thereto. 6. No Voting Rights. This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company. 7. Notice of Transfer of Warrant or Resale of the Warrant Shares. (a) Subject to the sale, assignment, hypothecation, or other transfer restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof, agrees to give written notice to the Company before transferring this Warrant or transferring any Warrant Shares of such Holder's intention to do so, describing briefly the manner of any proposed transfer. Promptly upon receiving such written notice, the Company shall present copies thereof to the Company's counsel and to counsel to the original purchaser of this Warrant. If in the reasonable opinion of each such counsel the proposed transfer may be effected without registration or qualification (under any federal or state securities laws), the Company, as promptly as practicable, shall notify the Holder of such opinion, whereupon the Holder shall be entitled to transfer this Warrant or to dispose of Warrant Shares received upon the previous exercise of this Warrant, all in accordance with the terms of the notice delivered by the Holder to the Company; provided that an appropriate legend may be endorsed on this Warrant or the certificates for such Warrant Shares respecting restrictions upon transfer thereof necessary or advisable in the opinion of counsel and satisfactory to the Company to prevent further transfers which would be in violation of Section 5 of the 1933 Act and applicable state securities laws; and provided further that the prospective transferee or purchaser shall execute such documents and make such representations, warranties, and agreements as may be reasonably required solely to comply with the exemptions relied upon by the Company for the transfer or disposition of the Warrant or Warrant Shares. (b) If in the opinion of either of the counsel referred to in this Section 7, the proposed transfer or disposition of this Warrant or such Warrant Shares described in the written notice given pursuant to this Section 7 may not be effected without registration or qualification of this Warrant or such Warrant Shares the Company shall promptly give written notice thereof to the Holder, and the Holder will limit its activities in respect to such as, in the opinion of both such counsel, are permitted by law. 8. Fractional Shares. Fractional shares shall not be issued upon the exercise of this Warrant, but in any case where the holder would, except for the provisions of this Section, be entitled under the terms hereof to receive a fractional share, the Company shall, upon the exercise of this Warrant for the largest number of whole shares then called for, pay a sum in cash equal to the sum of (a) the excess, if any, of the Fair Market Value (as defined in Section 9 below) of such fractional share over the proportional part of the Warrant Exercise Price represented by such fractional share, plus (b) the proportional part of the Warrant Exercise Price represented by such fractional share. 9. For purposes of this Agreement, "Fair Market Value" of a share of the Company's Common Stock as of a particular date (the "Determination Date") shall mean: (a) If the Company's Common Stock is traded on an exchange or is quoted on the Nasdaq National Market, then the average closing or last sale prices, respectively, reported for the thirty (30) business days immediately preceding the Determination Date, and (b) If the Common Stock is not traded on an exchange or on the Nasdaq National Market but is traded on the Nasdaq SmallCap Market or other over-the-counter market, then the average (arithmetic mean) closing bid and asked prices reported for the thirty (30) business days immediately preceding the Determination Date. IN WITNESS WHEREOF, Eagle Pacific Industries, Inc. has caused this Warrant to be signed by its duly authorized officer and this Warrant to be dated May 10, 1996. "Company" EAGLE PACIFIC INDUSTRIES, INC. ------------------------------ William H. Spell, President To: Eagle Pacific Industries, Inc. NOTICE OF EXERCISE OF WARRANT -- To Be Executed by the Registered Holder in Order to Exercise the Warrant The undersigned hereby irrevocably elects to exercise the attached Warrant to purchase for cash, _________________ of the shares issuable upon the exercise of such Warrant, and requests that certificates for such shares (together with a new Warrant to purchase the number of shares, if any, with respect to which this Warrant is not exercised) shall be issued in the name of ______________________________ (Print Name) Please insert social security or other identifying number of registered holder of certificate (______________) Address: ______________________________ ______________________________ Date: _________, 19__ ______________________________ Signature* *The signature on the Notice of Exercise of Warrant must correspond to the name as written upon the face of the Warrant in every particular without alteration or enlargement or any change whatsoever. When signing on behalf of a corporation, partnership, trust or other entity, PLEASE indicate your position(s) and title(s) with such entity. ASSIGNMENT FORM To be signed only upon authorized transfer of Warrants. FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto _____________________________ the right to purchase the securities of Eagle Pacific Industries, Inc. to which the within Warrant relates and appoints _____________, attorney, to transfer said right on the books of Eagle Pacific Industries, Inc. with full power of substitution in the premises. Dated:________________ ______________________________ (Signature) Address: ------------------------------ ------------------------------ EX-10.19 7 CO-SALE AGREEMENT EXHIBIT 10.19 CO-SALE AGREEMENT DATE: May 10, 1996 PARTIES: Harry W. Spell ("H. Spell") William H. Spell ("W. Spell") Spell Family Foundation ("Foundation") Bruce A. Richard ("Richard") Richard W. Perkins ("Perkins") William Blair Mezzanine Capital Fund, L.P. ("Blair") RECITALS: A. As of the date hereof the parties hereto are the owners of the shares of capital stock of Eagle Pacific Industries, Inc. ("EPII") and the options, warrants and other rights to acquire shares of common stock of EPII as set forth on Exhibit A attached hereto. B. The parties hereto desire to provide for certain co-sale rights in the event of certain significant sales by other parties hereto. AGREEMENT: 1. For the purposes of this Agreement the following terms shall have the meanings indicated below: (a) "Management Group" shall refer to H. Spell, W. Spell, Foundation, Richard and Perkins or any two or more of them acting together. (b) "Shares" shall mean the shares of capital stock of EPII listed on Exhibit A hereto and any shares of common stock of EPII acquired by a party hereto pursuant to the exercise of any option, warrant or other right to acquire shares of common stock of EPII listed on Exhibit A hereto. (c) "Selling Transaction" shall mean the sale, assignment, transfer or other disposition of more than 500,000 Shares in a single transaction or series of related transactions that is not otherwise exempted from the provisions of this Agreement by Section 4 below. 2. During the term hereof, the Management Group shall not enter into a Selling Transaction without permitting Blair to participate as a seller in such transaction(s) on a pro rata basis according to the common share holdings of EPII listed on Exhibit A assuming all options, warrants and other rights to acquire shares of common stock of EPII have been exercised. 3. The Management Group shall give prompt written notice to Blair in the event that it has the present intention to enter into a Selling Transaction. Such notice shall disclose the terms and conditions of such Selling Transaction. Blair shall advise the Management Group in writing within thirty days of receipt of such notice whether or not it desires to be a seller in such Selling Transaction on the terms and conditions set forth in the notice from the Management Group and pursuant to Section 2 above. If Blair does not provide such written response to the notice from the Management Group within such time period, Blair shall be deemed to have waived its rights hereunder with respect to such Selling Transaction and the Management Group may proceed with such Selling Transaction on substantially the terms set forth in the notice to Blair. 4. The following sales, assignments, transfers or other dispositions by the Management Group shall not be considered Selling Transactions and shall be exempt from the provisions of this Agreement: (a) sales of Shares by the Management Group in a bona fide underwritten public offering pursuant to a registration statement filed by EPII pursuant to the Securities Act of 1933, as now or hereafter amended (the "Act"); (b) sales of Shares by the Management Group in a market transaction in a bona fide public market, pursuant to a registration statement, pursuant to Rule 144 promulgated under the Act or pursuant to some other exemption from registration under the Act; and (c) any transfer of Shares by gift or testamentary disposition to any person. 5. This Agreement shall terminate on May 31, 1999 or upon such earlier date as Blair shall dispose of any Shares such that after all such dispositions Blair owns less than 25% of the Shares shown on Exhibit A as being owned by Blair. 6. All notices and other communications required or permitted hereunder shall be in writing and shall be delivered in person, by facsimile transmission, by a recognized courier service or by the United States Postal Service to party at its/his address or facsimile number listed on Exhibit A hereto, or at such other address or facsimile number as such party may specify by written notice to the other parties hereto. All such notices shall be deemed to be effective when received at such address or facsimile number. 7. This Agreement and the rights of the parties hereunder shall be construed and governed by the laws of the State of Minnesota. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. __________________________________________ Harry W. Spell __________________________________________ William H. Spell SPELL FAMILY FOUNDATION By:_______________________________________ Its:_________________________________ __________________________________________ Bruce A. Richard __________________________________________ Richard W. Perkins WILLIAM BLAIR MEZZANINE CAPITAL FUND, L.P. By:_______________________________________ Its:_________________________________ EXHIBIT A EAGLE PACIFIC INDUSTRIES, INC. CO-SALE AGREEMENT Harry W. Spell 26,384 shares of Common Stock 2430 Metropolitan Centre 50,000 shares of Preferred Stock Minneapolis, MN 55402 Options for 220,000 shares of Common Stock (612) 371-9651 William H. Spell 33,864 shares of Common Stock 2430 Metropolitan Centre 25,000 shares of Preferred Stock Minneapolis, MN 55402 Options for 285,000 shares of Common Stock (612) 371-9651 Spell Family Foundation 22,500 shares of Common Stock 2430 Metropolitan Centre Minneapolis, MN 55402 (612) 371-9651 Bruce A. Richard 25,000 shares of Preferred Stock 2458 Farrington Circle Options for 70,000 shares of Common Stock Roseville, MN 55113 (612) 483-1359 Richard W. Perkins 72,727 shares of Common Stock 730 East Lake Street 22,500 shares of Preferred Stock Wayzata, MN 55391 Options for 70,000 shares of Common Stock (612) 473-4701 William Blair Mezzanine 435,000 shares of Common Stock Capital Fund, L.P. Options for 315,000 shares of Common Stock 222 West Adams Street Chicago, IL 60606 Attention: Terrence M. Shipp (312) 236-8075 EX-10.20 8 IRREVOCABLE PROXY EXHIBIT 10.20 IRREVOCABLE PROXY The undersigned, William Blair Mezzanine Capital Fund, L.P., hereby irrevocably appoints Eagle Pacific Industries, Inc., acting through its Board of Directors, with full power of substitution, its proxy to represent and vote all shares of common stock of Eagle Pacific Industries, Inc. owned by it or registered in its name from time to time or owned by its Affiliates (as defined by the rules and regulations promulgated under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended) or registered in such Affiliate(s) name from time to time as a result of a transfer of such shares from the undersigned to such Affiliate(s) at any meeting of the shareholders of Eagle Pacific Industries, Inc. This proxy shall terminate immediately and without any other action on the part of the undersigned with respect to any shares of common stock of Eagle Pacific Industries, Inc. transferred by the undersigned to a party that is not an Affiliate of the undersigned at such time as such transfer is made. This proxy shall terminate immediately and without any other action on the part of the undersigned upon the occurrence of any Event of Default described in Section 6.1 of that certain debenture acquisition agreement dated as of March 16, 1995 by and among the undersigned, Eagle Plastics, Inc. and Eagle Pacific Industries, Inc., as amended. This proxy is being granted to Eagle Pacific Industries, Inc. in connection with that certain amendment agreement by and among the undersigned, Eagle Plastic, Inc., Eagle Pacific Industries, Inc., Pacific Plastics, Inc. and Arrow Pacific Plastics, Inc. of even date herewith. WILLIAM BLAIR MEZZANINE CAPITAL FUND, L.P. By: William Blair Mezzanine Capital Management, L.P., its general partner By:________________________________________ A General Partner Date: May 10, 1996 EX-10.21 9 AMENDMENT AGREEMENT EXHIBIT 10.21 AMENDMENT AGREEMENT DATE: May ___, 1996 PARTIES: Loyal and Zelda Sorensen ("Sorensen") 7215 N.E. Parlane Vancouver, Washington 98662 Jarred and Sharron Thompson ("Thompson") 7220 N.E. Parlane Vancouver, Washington 98662 Eagle Pacific Industries, Inc. ("EPII") (formerly Black Hawk Holdings, Inc.) 2430 Metropolitan Center 333 South Seventh Street Minneapolis, Minnesota 55402 RECITALS: A. The parties hereto are all of the parties to that certain registration rights agreement dated as of July 10, 1995 (the "Registration Rights Agreement"). B. The parties hereto are also all parties to that certain agreement by and among the parties hereto, Pacific Plastic, Inc. and Pacific Acquisition Corp. dated as of July 10, 1995 (the "Stock Agreement"). C. The Registration Rights agreement provides for certain registration rights with respect to shares of stock of EPII obtained by Sorensen and Thompson pursuant to that stock purchase agreement by and among the parties hereto and Pacific Plastics, Inc. dated July 6, 1995 (the "Purchase Agreement") but does not cover the shares of stock of EPII obtained by Sorensen and Thompson pursuant to the Stock Agreement. D. The parties hereto desire to amend both the Registration Rights Agreement and the Stock Agreement. AGREEMENT: The parties hereto, each intending to be legally bound, agree as follows: 1. The Registration Rights Agreement is amended by amending the definition of "Shareholder's Shares" in Article 1 thereof to read as follows: "Shareholder's Shares" means the shares of Common Stock issued to the Shareholder pursuant to the Purchase Agreement and issued to the Shareholder pursuant to that certain agreement dated as of July 10, 1995 by and among Black Hawk, the Shareholders and certain other parties pursuant to which the Shareholders acquired in the aggregate 84,210 shares of Common Stock, or any other shares of Common Stock of Black Hawk issued in respect of such shares in connection with any stock split, stock dividend, reclassification, recapitalization, or similar event. 2. The Stock Agreement is amended by deleting therefrom the provisions of Section 3 thereof. IN WITNESS WHEREOF, the undersigned have executed this agreement as of the day and year first above written. EAGLE PACIFIC INDUSTRIES, INC. (formerly Black Hawk Holdings, Inc.) By:___________________________________ William H. Spell, President ______________________________________ Loyal Sorensen ______________________________________ Zelda Sorensen ______________________________________ Jarred Thompson ______________________________________ Sharron Thompson EX-10.22 10 EMPLOYMENT AGREEMENT EXHIBIT 10.22 EMPLOYMENT AGREEMENT THIS AGREEMENT effective as of January 1, 1997, between Eagle Pacific Industries, Inc., a Minnesota corporation (the "Company"), and William H. Spell, a resident of Edina, Minnesota ("Executive"). A. Executive has been and desires to remain employed as Chief Executive Officer of the Company. B. The Company desires to continue to retain the benefit of Executive's experience and loyalty, and to continue to employ Executive as Chief Executive Officer of the Company. C. This Agreement replaces and supersedes Executive's restated employment agreement effective as of January 1, 1995 with the Company. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. Definitions The terms used in this Agreement shall be defined as follows: (a) "Agreement" shall mean this Agreement as amended from time to time. (b) "Base Salary" shall mean the annual base salary payable to Executive pursuant to Section 4(a) hereof. (c) "Board" shall mean the Board of Directors of the Company. (d) "Cause" shall mean termination of the Executive's employment with the Company by the Board because of (1) gross misconduct; (2) material breach of this Agreement by Executive; (3) conviction or entry of a plea of guilty or nolo contendere to any felony or misdemeanor or the entry of any final civil judgment in connection with any allegation of fraud, misrepresentation, misappropriation or any other intentional tort or statute violation; (4) insubordination; or (5) sexual harassment of fellow employees. (e) "Committee" shall mean the Compensation Committee of the Board, if one exists and, if not, shall mean the Board. (f) "Company" shall mean Eagle Pacific Industries, Inc., a Minnesota corporation, its successors or assigns. (g) "Executive" shall mean William H. Spell, a resident of Edina, Minnesota. (h) "Executive Benefit Plans" shall mean any plans within the meaning of Sections 4(c) and (d) of this Agreement. (i) "Period" shall mean the three year period commencing on the date hereof. If the parties agree to any extension of the Period, the term "Period" shall include all such extensions thereof. (j) "Permanently Disabled" shall mean permanently prevented from performing his obligations hereunder as a result of his physical or mental health, as evaluated by sufficient documentation including doctors' statements. (k) "Stock Options" shall mean any options held by Executive granting him the right to acquire shares of common stock of the Company. (l) "Substantial Breach" shall mean (1) a substantial reduction in the nature or status of Executive's responsibilities hereunder; provided, that it shall not be deemed to be a Substantial Breach if Executive's duties are revised so that he remains an officer but is removed or not reelected as Chief Executive Officer; (2) a reduction by the Company in the Base Salary of Executive except to the extent permitted under Section 4(a) hereof; (3) the failure by the Company to allow Executive to participate to the full extent in all plans, programs or benefits in accordance with Sections 4(b) to (e), inclusive, thereof; and (4) the failure by the Company to pay, distribute or grant any amounts of cash, stock or other compensation to Executive to which he is entitled. A Substantial Breach shall be deemed to occur only if such Substantial Breach has not been corrected by the Company within two weeks of receipt of notice from Executive of the occurrence of such Substantial Breach, which notice shall specifically set forth the nature of the Substantial Breach. 2. Employment and Duties. (a) General. The Company hereby employs Executive, and Executive agrees upon the terms and conditions herein set forth to serve as an officer of the Company and in such capacity, shall perform duties substantially the same as normally performed by persons in like positions in similar companies except to the extent set forth in Section 2(b) below. Executive may be transferred, promoted or changed to another position, and any such transfer, promotion or change shall not affect the enforcement of this Agreement. (b) Other Employment. The parties hereto acknowledge that Executive is engaged in other business pursuits in which he renders services to other organizations for which he receives compensation. While Executive is expected to devote an appropriate amount of time to his duties for the Company, Executive may pursue other business interests during the Period so long as he does not violate Section 10 below. 3. Term of Employment. Subject to earlier termination of employment pursuant to Sections 5, 6, 7 or 8 of this Agreement, the Company shall retain Executive during the Period; and Executive shall serve in the employ of the Company for the Period. 4. Compensation and Other Benefits. Subject to the provisions of this Agreement, the Company shall pay and provide the following compensation and other benefits to Executive during the term of his employment as compensation for services rendered hereunder: (a) Base Salary. The Company shall pay to Executive a Base Salary at the rate of $108,000 per annum, payable in accordance with the Company's standard payroll policies. The Company shall be entitled to deduct or withhold all taxes and charges which the Company may be required to deduct or withhold therefrom. The Base Salary will be reviewed not less than annually by the Committee. (b) Incentive Compensation. At all times during the Period, Executive shall be entitled to participate in all incentive compensation plans and programs of the Company, existing from time to time including the EBITDA bonus plan established by the Committee and described in Exhibit A attached hereto. For calendar year 1997, Executive's maximum bonus under the EBITDA bonus plan shall be fifty one thousand dollars ($51,000) and shall be based entirely on the Company's EBITDA. (c) Stock Options. Executive shall be entitled to participate in all stock option plans and programs of the Company existing from time to time other than plans that exclude executive employees generally. (d) Other Executive Benefit Plans. Executive shall be eligible to participate in all pension and welfare plans and programs of the Company for executive employees, existing from time to time, including, without limitation, the following: (i) All qualified benefit plans and programs (e.g., defined contribution, supplemental retirement and Section 401(k) plans, long-term disability and life insurance plans and programs); (ii) All hospitalization and medical plans and programs; and (iii) All retirement plans and programs. (e) Annuity. The Company shall continue to pay the premiums on the annuities that are currently in effect for the benefit of Executive. (f) Office Space. The Company shall continue to provide Executive with office space and support staff consistent with the past. (g) Car Allowance. The Company shall pay Executive a car allowance of six hundred dollars ($600.00) per month. 5. Termination of Employment for Cause. (a) Compensation and Benefits. If, prior to the expiration of the Period, (i) Executive's employment is terminated by the Company for Cause, or (ii) Executive resigns from his employment hereunder other than under circumstances covered by Section 6 below, Executive shall not be eligible to receive any compensation or benefits or to participate in any plans or programs under Section 4 hereof with respect to the Period after the date of such termination except for the right to receive benefits under any plan or program, to the extent vested, in accordance with the terms of such plan or program and except for benefits provided in accordance with customary practices of the Company at Executive's expense (e.g., hospitalization and medical insurance). (b) Date of Termination. The date of termination of Executive's employment by the Company under this Section 5 shall be two (2) weeks after receipt by Executive of written notice of termination for Cause or after receipt by the Company of written notice of Executive's resignation. 6. Termination of Employment Without Cause or Resignation After Substantial Breach. (a) Compensation and Benefits. If, prior to the expiration of the Period, Executive 's employment is terminated by the Company without Cause, or if, prior to the expiration of the Period Executive resigns from his employment hereunder following a Substantial Breach, the Company shall pay Executive an amount equal to Executive's then current Base Salary in twenty-four (24) equal monthly installments beginning one month after Executive's termination of employment. (b) Date of Termination. The date of termination of Executive's employment by the Company under this Section 6 shall be the date specified in the written notice of termination to Executive, or if no such date is specified therein, the date on which such notice is given to Executive. The date of resignation by Executive under this Section 6 shall be two weeks after receipt by the Company of written notice of resignation, provided that the Substantial Breach specified in such notice shall not have been corrected by the Company during such two week period. 7. Termination of Employment by Disability. (a) Compensation and Benefits. If Executive becomes Permanently Disabled prior to the expiration of the Period, the Company shall be entitled to terminate Executive's employment at the later of (x) six months from the date Executive becomes Permanently Disabled but not beyond the end of the Period or (y) the date the Company could terminate Executive in accordance with the Company's normal policies in such matters as applied to all other salaried employees. In the event of such termination of Executive's employment, Executive shall be entitled to receive from the Company the following: (i) Executive shall be entitled to continued participation in hospital and medical plans and programs of the Company in accordance with Company policy as it pertains to disabled salaried employees; that is for the period of said disability or until normal retirement age subject to the rules and practice of the plan(s). (ii) Executive shall be entitled to received benefits under any other Company plan or program (to the extent Executive is vested) in accordance with the terms of such plan or program. (b) Date of Termination. The date of termination of Executive's employment under Section 7 shall be the date determined pursuant to Section 7(a) above. 8. Termination of Employment by Death. (a) Compensation and Benefits. If Executive dies prior to the expiration of the Period, the Executive's estate or his beneficiary as appropriate shall be entitled to receive benefits under the Company's plan(s) or program(s) in accordance with the terms of such plan(s) or program(s). 9. Termination of Employment by Nonrenewal of This Agreement. If Executive is employed by the Company at the end of the Period (and the Period is not extended by mutual agreement of Executive and the Company), the Company shall pay Executive an amount equal to Executive's then current Base Salary in twenty-four (24) equal monthly installments beginning one month after Executive's termination of employment. 10. Noncompetition. During the terms of Executive's employment with the Company and for twenty-four (24) months thereafter, Executive shall refrain from directly or indirectly, on his own behalf or on behalf of any other person or entity, compete with the Company or any of its subsidiaries, anywhere in the continental United States, including but not limited to directly or indirectly rendering any services, advice or counsel in any capacity whatsoever, for any entity or person that engages in or is in the process of or anticipates engaging in any business which in any manner competes with the Company or any of its subsidiaries. At the option of the Company, the Company may extend the term of this covenant not to compete for two (2) additional one (1) year periods provided that the Company exercises its options six (6) months prior to the first day such option period would take effect and pays Executive an amount equal to one-twelfth (1/12) of the Base Salary in effect on the date of Executive's termination of employment each month during the extended term of this covenant not to compete. In the event that the Company does not exercise its final option to extend this covenant not to compete into the third year after termination, it shall no longer have the right to exercise its final option for year four (4). In the event that Executive violates the terms of this Article 10, the term of this covenant not to compete shall be extended for a period of time equal to the period of time that Executive was violating the terms of this Section 10. 11. Nondisclosure of Confidential Information. a. Definition. For purposes of this Agreement "Confidential Information" means any information or compilation of information, not generally known, which is proprietary to the Company and relates to the Company's existing or reasonably foreseeable business, including, but not limited to, trade secrets and information relating to the Company's services, marketing plans or proposals and customer information. All information which the Company identifies as being "confidential" or "trade secret" shall be presumed to be Confidential Information. Confidential Information shall also include any confidential information of a parent, subsidiary or sister corporation of the Company and any information disclosed by a third party under contract with the Company which contract requires such disclosed information be kept confidential. Confidential Information shall not include information that is in or enters the public domain other than through a breach of confidentiality owed to the Company. b. Nondisclosure. During the Period and at all times thereafter, Executive shall hold in strictest of confidence and will never disclose, furnish, transfer, communicate, make assessable to any person or use in any way Confidential Information for Executive's own or another's benefit or permit the same to be used in competition with the Company, nor will Executive accept any employment which would, by the nature of the position, inherently involve the use or disclosure by Executive of Confidential Information. 12. Injunctive Relief. The parties acknowledge that the Company and/or its subsidiaries will suffer irreparable harm if Executive breaches Sections 10 or 11 of this Agreement. Accordingly, the Company shall be entitled, in addition to any other rights and remedies that it may have, at law or at equity, to an injunction, without the parting of a bond or other security, enjoining or restraining Executive from any violation of Sections 10 or 11 of this Agreement. Executive hereby consents to the Company's right to the issuance of such injunction. 13. Binding Agreement. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, any Successor to or assigns of the Company, and Executive's heirs and the personal representative of Executive's estate. 14. Severability. If the final determination of a court of competent jurisdiction declares, after the expiration of the time within which judicial review (if permitted) of such determination may be perfected, that any term of provision hereof is invalid or unenforceable, (a) the remaining terms and provisions hereof shall be unimpaired and (b) the invalid or unenforceable term or provision shall be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. 15. Amendment; Waiver. This Agreement may not be modified, amended or waived in any manner except by an instrument in writing signed by both parties hereto. The waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. 16. Governing Law. All matters affecting this Agreement, including the validity thereof, are to be governed by, interpreted and construed in accordance with the laws of the State of Minnesota. 17. Notices. Any notice hereunder by either party to the other shall be given in writing by personal delivery or certified mail, return receipt requested. If addressed to Executive, the notice shall be delivered or mailed to Executive at the address specified under Executive's signature hereto or such other address which Executive has advised the Company to send notice to, or if addressed to the Company, the notice shall be delivered or mailed to the Company at its executive offices and to the attention of each member of the Board of Directors of the Company at their respective business addresses. A notice shall be deemed given, if by personal delivery, on the date of such delivery or, if by certified mail, on the date shown on the applicable return receipt. IN WITNESS WHEREOF, the Company has caused the Agreement to be signed by its officer pursuant to the authority of its Board, and Executive has executed this Agreement, as of the day and year first written above. EAGLE PACIFIC INDUSTRIES, INC. By___________________________________ G. Peter Konen, President _____________________________________ William H. Spell EXHIBIT A EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES EBITDA BONUS PLAN The following is a summary of the Eagle Pacific Industries, Inc. and Subsidiaries EBITDA Bonus Plan. "EBITDA" shall mean the earnings before interest, taxes, depreciation and amortization for the particular company determined by the auditors for Eagle Pacific Industries, Inc. ("EPII") in accordance with GAAP for each fiscal year of EPII. At or before the beginning of each fiscal year, the Board of Directors of EPII shall establish three levels of EBITDA for EPII and for each of its subsidiaries. If the lowest level is achieved, each employee participating in the EBITDA Bonus Plan will receive one-third of his/her maximum bonus. If the second highest level of EBITDA is achieved, each employee participating in the EBITDA Bonus Plan will receive two-thirds of his/her maximum bonus. If the highest level of EBITDA is achieved, each employee participating in the EBITDA Bonus Plan will receive his/her maximum bonus. At the same time the Board of Directors of EPII shall establish the eligible employees, the maximum amount of their bonuses and the company or companies on which the bonus will be based for that year. An employee must be employed by the Company or one of its subsidiaries on the last day of the fiscal year in order to be entitled to receive any EBITDA bonus for that year. EX-10.23 11 EMPLOYMENT AGREEMENT EXHIBIT 10.23 EMPLOYMENT AGREEMENT THIS AGREEMENT effective as of January 1, 1997, between Eagle Pacific Industries, Inc., a Minnesota corporation (the "Company"), and G. Peter Konen, a resident of Hastings, Nebraska ("Executive"). A. Executive has been and desires to remain employed as President of the Company. B. The Company desires to continue to retain the benefit of Executive's experience and loyalty, and to continue to employ Executive as President of the Company. C. This Agreement replaces and supersedes Executive's restated employment agreement effective as of January 1, 1995 with Eagle Plastics, Inc., a subsidiary of the Company. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. Definitions The terms used in this Agreement shall be defined as follows: (a) "Agreement" shall mean this Agreement as amended from time to time. (b) "Base Salary" shall mean the annual base salary payable to Executive pursuant to Section 4(a) hereof. (c) "Board" shall mean the Board of Directors of the Company. (d) "Cause" shall mean termination of the Executive's employment with the Company by the Board because of (1) gross misconduct; (2) material breach of this Agreement by Executive; (3) conviction or entry of a plea of guilty or nolo contendere to any felony or misdemeanor or the entry of any final civil judgment in connection with any allegation of fraud, misrepresentation, misappropriation or any other intentional tort or statute violation; (4) insubordination; or (5) sexual harassment of fellow employees. (e) "Committee" shall mean the Compensation Committee of the Board, if one exists and, if not, shall mean the Board. (f) "Company" shall mean Eagle Pacific Industries, Inc., a Minnesota corporation, its successors or assigns. (g) "Executive" shall mean G. Peter Konen, a resident of Hastings, Nebraska. (h) "Executive Benefit Plans" shall mean any plans within the meaning of Sections 4(c) and (d) of this Agreement. (i) "Period" shall mean the three year period commencing on the date hereof. If the parties agree to any extension of the Period, the term "Period" shall include all such extensions thereof. (j) "Permanently Disabled" shall mean permanently prevented from performing his obligations hereunder as a result of his physical or mental health, as evaluated by sufficient documentation including doctors' statements. (k) "Stock Options" shall mean any options held by Executive granting him the right to acquire shares of common stock of the Company. (l) "Substantial Breach" shall mean (1) a substantial reduction in the nature or status of Executive's responsibilities hereunder; provided, that it shall not be deemed to be a Substantial Breach if Executive's duties are revised so that he remains an officer but is removed or not reelected as President; (2) a reduction by the Company in the Base Salary of Executive except to the extent permitted under Section 4(a) hereof; (3) the failure by the Company to allow Executive to participate to the full extent in all plans, programs or benefits in accordance with Sections 4(b) to (e), inclusive, thereof; and (4) the failure by the Company to pay, distribute or grant any amounts of cash, stock or other compensation to Executive to which he is entitled. A Substantial Breach shall be deemed to occur only if such Substantial Breach has not been corrected by the Company within two weeks of receipt of notice from Executive of the occurrence of such Substantial Breach, which notice shall specifically set forth the nature of the Substantial Breach. 2. Employment and Duties. (a) General. The Company hereby employs Executive, and Executive agrees upon the terms and conditions herein set forth to serve as an officer of the Company and in such capacity, shall perform duties substantially the same as normally performed by persons in like positions in similar companies. Executive may be transferred, promoted or changed to another position, and any such transfer, promotion or change shall not affect the enforcement of this Agreement. (b) No Other Employment. Throughout the time that Executive is employed by the Company, Executive shall, except as may from time to time be otherwise agreed in writing by the Company and unless prevented by ill health, devote his full-time working hours to his duties hereunder and Executive shall not, directly or indirectly, render services to any other person or organization for which he receives compensation (excluding volunteer services or outside Board activities with modest time commitments) without the consent of the Board or otherwise engage in activities which would interfere significantly with the performance of his duties hereunder. 3. Term of Employment. Subject to earlier termination of employment pursuant to Sections 5, 6, 7 or 8 of this Agreement, the Company shall retain Executive during the Period; and Executive shall serve in the employ of the Company for the Period. 4. Compensation and Other Benefits. Subject to the provisions of this Agreement, the Company shall pay and provide the following compensation and other benefits to Executive during the term of his employment as compensation for services rendered hereunder: (a) Base Salary. The Company shall pay to Executive a Base Salary at the rate of $175,000 per annum, payable in accordance with the Company's standard payroll policies. The Company shall be entitled to deduct or withhold all taxes and charges which the Company may be required to deduct or withhold therefrom. The Base Salary will be reviewed not less than annually by the Committee. (b) Incentive Compensation. At all times during the Period, Executive shall be entitled to participate in all incentive compensation plans and programs of the Company, existing from time to time including the EBITDA bonus plan established by the Committee and described in Exhibit A attached hereto. For calendar year 1997, Executive's maximum bonus under the EBITDA bonus plan shall be eighty one thousand dollars ($81,000) and shall be based entirely on the Company's EBITDA. (c) Stock Options. Executive shall be entitled to participate in all stock option plans and programs of the Company existing from time to time other than plans that exclude executive employees generally. (d) Other Executive Benefit Plans. Executive shall be eligible to participate in all pension and welfare plans and programs of the Company for executive employees, existing from time to time, including, without limitation, the following: (i) All qualified benefit plans and programs (e.g., defined contribution, supplemental retirement and Section 401(k) plans, long-term disability and life insurance plans and programs); (ii) All hospitalization and medical plans and programs; and (iii) All retirement plans and programs. (e) Life Insurance. The Company agrees to continue paying premium payments on Northwestern Mutual Life Policy #10760100 and Northwestern Mutual Life Policy #10216427, both on the life of Executive. Such payment of premiums shall continue until termination of this or any further employment agreement with Executive. Upon Executives termination of employment with the Company, the ownership of the above policies shall be transferred to Executive with no reimbursement from Executive. The foregoing policies shall provide that in the event of Executive's death during the term of this Agreement, the proceeds from such policies shall be divided equally between the Company and Executive's spouse (or if she predeceases Executive, then Executive's estate). (f) Car Allowance. The Company shall pay Executive a car allowance of six hundred dollars ($600.00) per month. 5. Termination of Employment for Cause. (a) Compensation and Benefits. If, prior to the expiration of the Period, (i) Executive's employment is terminated by the Company for Cause, or (ii) Executive resigns from his employment hereunder other than under circumstances covered by Section 6 below, Executive shall not be eligible to receive any compensation or benefits or to participate in any plans or programs under Section 4 hereof with respect to the Period after the date of such termination except for the right to receive benefits under any plan or program, to the extent vested, in accordance with the terms of such plan or program and except for benefits provided in accordance with customary practices of the Company at Executive's expense (e.g., hospitalization and medical insurance). (b) Date of Termination. The date of termination of Executive's employment by the Company under this Section 5 shall be two (2) weeks after receipt by Executive of written notice of termination for Cause or after receipt by the Company of written notice of Executive's resignation. 6. Termination of Employment Without Cause or Resignation After Substantial Breach. (a) Compensation and Benefits. If, prior to the expiration of the Period, Executive 's employment is terminated by the Company without Cause, or if, prior to the expiration of the Period Executive resigns from his employment hereunder following a Substantial Breach, the Company shall pay Executive an amount equal to Executive's then current Base Salary in twenty-four (24) equal monthly installments beginning one month after Executive's termination of employment. (b) Date of Termination. The date of termination of Executive's employment by the Company under this Section 6 shall be the date specified in the written notice of termination to Executive, or if no such date is specified therein, the date on which such notice is given to Executive. The date of resignation by Executive under this Section 6 shall be two weeks after receipt by the Company of written notice of resignation, provided that the Substantial Breach specified in such notice shall not have been corrected by the Company during such two week period. 7. Termination of Employment by Disability. (a) Compensation and Benefits. If Executive becomes Permanently Disabled prior to the expiration of the Period, the Company shall be entitled to terminate Executive's employment at the later of (x) six months from the date Executive becomes Permanently Disabled but not beyond the end of the Period or (y) the date the Company could terminate Executive in accordance with the Company's normal policies in such matters as applied to all other salaried employees. In the event of such termination of Executive's employment, Executive shall be entitled to receive from the Company the following: (i) Executive shall be entitled to continued participation in hospital and medical plans and programs of the Company in accordance with Company policy as it pertains to disabled salaried employees; that is for the period of said disability or until normal retirement age subject to the rules and practice of the plan(s). (ii) Executive shall be entitled to received benefits under any other Company plan or program (to the extent Executive is vested) in accordance with the terms of such plan or program. (b) Date of Termination. The date of termination of Executive's employment under Section 7 shall be the date determined pursuant to Section 7(a) above. 8. Termination of Employment by Death. (a) Compensation and Benefits. If Executive dies prior to the expiration of the Period, the Executive's estate or his beneficiary as appropriate shall be entitled to receive benefits under the Company's plan(s) or program(s) in accordance with the terms of such plan(s) or program(s). 9. Termination of Employment by Nonrenewal of This Agreement. If Executive is employed by the Company at the end of the Period (and the Period is not extended by mutual agreement of Executive and the Company), the Company shall pay Executive an amount equal to Executive's then current Base Salary in twenty-four (24) equal monthly installments beginning one month after Executive's termination of employment. 10. Noncompetition. During the terms of Executive's employment with the Company and for twenty-four (24) months thereafter, Executive shall refrain from directly or indirectly, on his own behalf or on behalf of any other person or entity, compete with the Company or any of its subsidiaries, anywhere in the continental United States, including but not limited to directly or indirectly rendering any services, advice or counsel in any capacity whatsoever, for any entity or person that engages in or is in the process of or anticipates engaging in any business which in any manner competes with the Company or any of its subsidiaries. At the option of the Company, the Company may extend the term of this covenant not to compete for two (2) additional one (1) year periods provided that the Company exercises its options six (6) months prior to the first day such option period would take effect and pays Executive an amount equal to one-twelfth (1/12) of the Base Salary in effect on the date of Executive's termination of employment each month during the extended term of this covenant not to compete. In the event that the Company does not exercise its final option to extend this covenant not to compete into the third year after termination, it shall no longer have the right to exercise its final option for year four (4). In the event that Executive violates the terms of this Article 10, the term of this covenant not to compete shall be extended for a period of time equal to the period of time that Executive was violating the terms of this Section 10. 11. Nondisclosure of Confidential Information. a. Definition. For purposes of this Agreement "Confidential Information" means any information or compilation of information, not generally known, which is proprietary to the Company and relates to the Company's existing or reasonably foreseeable business, including, but not limited to, trade secrets and information relating to the Company's services, marketing plans or proposals and customer information. All information which the Company identifies as being "confidential" or "trade secret" shall be presumed to be Confidential Information. Confidential Information shall also include any confidential information of a parent, subsidiary or sister corporation of the Company and any information disclosed by a third party under contract with the Company which contract requires such disclosed information be kept confidential. Confidential Information shall not include information that is in or enters the public domain other than through a breach of confidentiality owed to the Company. b. Nondisclosure. During the Period and at all times thereafter, Executive shall hold in strictest of confidence and will never disclose, furnish, transfer, communicate, make assessable to any person or use in any way Confidential Information for Executive's own or another's benefit or permit the same to be used in competition with the Company, nor will Executive accept any employment which would, by the nature of the position, inherently involve the use or disclosure by Executive of Confidential Information. 12. Injunctive Relief. The parties acknowledge that the Company and/or its subsidiaries will suffer irreparable harm if Executive breaches Sections 10 or 11 of this Agreement. Accordingly, the Company shall be entitled, in addition to any other rights and remedies that it may have, at law or at equity, to an injunction, without the parting of a bond or other security, enjoining or restraining Executive from any violation of Sections 10 or 11 of this Agreement. Executive hereby consents to the Company's right to the issuance of such injunction. 13. Binding Agreement. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, any Successor to or assigns of the Company, and Executive's heirs and the personal representative of Executive's estate. 14. Severability. If the final determination of a court of competent jurisdiction declares, after the expiration of the time within which judicial review (if permitted) of such determination may be perfected, that any term of provision hereof is invalid or unenforceable, (a) the remaining terms and provisions hereof shall be unimpaired and (b) the invalid or unenforceable term or provision shall be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. 15. Amendment; Waiver. This Agreement may not be modified, amended or waived in any manner except by an instrument in writing signed by both parties hereto. The waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. 16. Governing Law. All matters affecting this Agreement, including the validity thereof, are to be governed by, interpreted and construed in accordance with the laws of the State of Minnesota. 17. Notices. Any notice hereunder by either party to the other shall be given in writing by personal delivery or certified mail, return receipt requested. If addressed to Executive, the notice shall be delivered or mailed to Executive at the address specified under Executive's signature hereto or such other address which Executive has advised the Company to send notice to, or if addressed to the Company, the notice shall be delivered or mailed to the Company at its executive offices and to the attention of each member of the Board of Directors of the Company at their respective business addresses. A notice shall be deemed given, if by personal delivery, on the date of such delivery or, if by certified mail, on the date shown on the applicable return receipt. IN WITNESS WHEREOF, the Company has caused the Agreement to be signed by its officer pursuant to the authority of its Board, and Executive has executed this Agreement, as of the day and year first written above. EAGLE PACIFIC INDUSTRIES, INC. By___________________________________ William H. Spell, CEO _____________________________________ G. Peter Konen EXHIBIT A EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES EBITDA BONUS PLAN The following is a summary of the Eagle Pacific Industries, Inc. and Subsidiaries EBITDA Bonus Plan. "EBITDA" shall mean the earnings before interest, taxes, depreciation and amortization for the particular company determined by the auditors for Eagle Pacific Industries, Inc. ("EPII") in accordance with GAAP for each fiscal year of EPII. At or before the beginning of each fiscal year, the Board of Directors of EPII shall establish three levels of EBITDA for EPII and for each of its subsidiaries. If the lowest level is achieved, each employee participating in the EBITDA Bonus Plan will receive one-third of his/her maximum bonus. If the second highest level of EBITDA is achieved, each employee participating in the EBITDA Bonus Plan will receive two-thirds of his/her maximum bonus. If the highest level of EBITDA is achieved, each employee participating in the EBITDA Bonus Plan will receive his/her maximum bonus. At the same time the Board of Directors of EPII shall establish the eligible employees, the maximum amount of their bonuses and the company or companies on which the bonus will be based for that year. An employee must be employed by the Company or one of its subsidiaries on the last day of the fiscal year in order to be entitled to receive any EBITDA bonus for that year. EX-10.24 12 CONSULTING AGREEMENT AND RELEASE EXHIBIT 10.24 CONSULTING AGREEMENT AND RELEASE EFFECTIVE DATE: January 1, 1997 PARTIES: Eagle Pacific Industries, Inc. ("EPII") 2430 Metropolitan Centre 333 South 7th Street Minneapolis, Minnesota 55402 Eagle Plastics, Inc. ("Eagle") 146 North Maple Hastings, Nebraska 68901 Larry D. Schnase ("Schnase") 426 South Shore Drive Hastings, Nebraska 68901 RECITALS: A. Prior to the Effective Date hereof, Schnase was employed by EPII and its subsidiaries as an officer. The terms and conditions of Schnase's employment was set forth in that certain Restated Employment Agreement by and between Schnase and Eagle effective as of January 1, 1995 (the "Employment Agreement"). Schnase and Eagle are also all of the parties to that certain Deferred Compensation Agreement effective as of December 17, 1993 (the "Deferred Compensation Agreement"). B. Schnase is a member of the Boards of Directors of EPII and its subsidiaries and is not resigning those positions. C. Schnase desires to terminate his employment with EPII and EPII desires to keep Schnase available to provide consulting services to EPII and its subsidiaries as specified herein. AGREEMENT: The parties, each intending to be legally bound, agree as follows: 1. Resignation as Employee. Schnase hereby resigns as an officer and employee of EPII and each of its subsidiaries, including without limitation Eagle. The parties hereto agree that the Employment Agreement is terminated and that all obligations of the parties under the Employment Agreement are void. Notwithstanding such termination of employment, the stock option agreements by and between EPII and Schnase and between Eagle and Schnase (the "Stock Option Agreements") and the Deferred Compensation Agreement are hereby amended to provide that so long as Schnase remains a consultant to EPII under the terms of this Agreement or any successor to this Agreement, he shall be deemed for the purposes of these Stock Option Agreements and the Deferred Compensation Agreement to have been an employee of EPII and Eagle. The Deferred Compensation Agreement is further amended to provide that the amount of seventy-five thousand dollars ($75,000) referred to in Article 1 thereof shall be increased at the rate of 7% per annum from the date hereof to the date that the first payment is made pursuant to Article 1 of the Deferred Compensation Agreement. 2. Release. For the purposes of this Section 2, EPII shall mean EPII, its subsidiaries, successors and assigns, its affiliated and predecessor companies, their successors and assigns, their affiliated and predecessor companies and the present or former directors, officers, employees, shareholders and agents of any of them, whether in their individual or official capacities, and the current and former trustees or administrators of any pension or other benefit plan applicable to the employees or former employees of EPII or its subsidiaries in their official and individual capacities. a. Notification of Rights Pursuant to the Federal Age Discrimination in Employment Act, (29 U.S.C. (beta) 621 et seq.) Schnase is hereby notified of his right to rescind the release of claims with regard to his rights under the federal Age Discrimination in Employment Act, 29 U.S.C. (beta) 621, et seq. ("ADEA"), within seven (7) days after the signing of this Consulting Agreement and Release. In order to be effective, the rescission must be in writing and delivered to William H. Spell at EPII at the address set forth above, by hand or mail. If delivered by mail, the rescission must be postmarked within the required period, properly addressed to William H. Spell, as set forth above, and sent by certified mail, return receipt requested. It is further understood that if Schnase rescinds the release of claims, in accordance with this Section 2.a. that this entire Consulting and Release Agreement is null and void. Schnase agrees to repay any payments or benefits he received under this Agreement prior to his rescission. b. Acknowledgement of Reading and Understanding Consultation With Counsel: Period to Consider Agreement. Schnase, by his signature to this Agreement, acknowledges and agrees that he has carefully read and understood all provisions of this Agreement, and that he has entered into this Agreement knowingly and voluntarily. Schnase further acknowledges that EPII has advised him to consult with counsel prior to signing this Agreement, and Schnase acknowledges that he has consulted with or had the opportunity to consult with legal counsel. c. Time to Consider. Schnase shall have at least twenty-one (21) days to consider whether the terms of this Consulting Agreement and Release are acceptable to him after he has received a copy of this Consulting Agreement and Release, and before he must sign this Consulting Agreement and Release. d. Denial of Liability. EPII specifically denies any liability to Schnase for any and all claims which could be or have been asserted by Schnase against EPII and neither this Consulting Agreement and Release, nor anything contained herein, shall be construed as an admission by EPII of any liability of unlawful conduct whatsoever. e. Release. Schnase, for himself and his heirs, legal representatives, estates and successors in interest, hereby releases and forever discharges EPII of and from any and all actions or causes of action, suits, debts, claims, complaints, contracts, controversies, agreements, promises, damages, claims for attorneys fees, judgments, costs, disbursements, severance benefits, deferred compensation and demands whatsoever, in law or entity, he ever had, now has, or shall have as of the date of this Consulting Agreement and Release, including, but not limited to, any alleged violation of any federal, state or local law, regulation or ordinance prohibiting discrimination or other unlawful activity on the basis of race, color, creed, marital status, sex, age, religion, national origin, handicap, sexual harassment, disability or any other basis, or any alleged obligation created by statute (including but not limited to any claims under Title VII of the Civil Rights Act of 1964, as amended, and the Age Discrimination in Employment Act) or by common law contract or tort theory, that he ever had, now has or shall have as of the date of this Consulting Agreement and Release; provided, however, this release shall not include any and all obligations which EPII has to Schnase under the Deferred Compensation Agreement and the Stock Option Agreements. f. Claims by Others. Schnase agrees to release and discharge EPII not only from any and all claims which he could make on his own behalf, but also those which may or could be brought by any other person or organization in her behalf, and he specifically waives any right to become, and promises not to become, a member of any class in any proceeding or case in which a claim or claims against EPII arise, in whole or in part, from any event which occurred as of the date of this Consulting Agreement and Release. g. No Charges, Complaints or Actions. Schnase affirms that he has not caused or permitted to be filed any charge, complaint or action against EPII. In the event that there is outstanding any such charge, complaint, or action, Schnase agrees to seek its immediate withdrawal and dismissal with prejudice. In the event that for any reason said charge, complaint, or action is not withdrawn, Schnase agrees not to voluntarily testify, provide documents, or otherwise participate, or to permit others to voluntarily participate on his behalf, in any investigation or litigation arising therefrom or associated therewith and to execute such other papers or documents as EPII's counsel determines may be necessary to have said charge, complaint or action dismissed with prejudice. h. Confidentiality. Schnase promises and agrees not to disclose, either directly or indirectly, in any manner whatsoever, any information of any kind regarding either (a) the substance or the existence of any belief he or any other person may have that EPII engaged in any unlawful or tortious conduct towards him, or breached any contract, or (b) the terms of this Consulting Agreement and Release, to any person or organization, including, but not limited to, representatives of local, state or federal agencies, members of the press and media, present and former officers, employees and agents of EPII, and other members of the public. In the event of a breach by Schnase of the terms of this Section 2.h., EPII may commence an action at law for damages to pursue its available legal or equitable remedies. In the event that EPII takes steps to seek relief from an alleged breach of this Section 2.h. all of the remaining provisions of this Consulting Agreement and Release shall remain in full force and effect. Notwithstanding anything in this Consulting Agreement and Release to the contrary, nothing in this Consulting Agreement and Release shall prohibit Schnase from (i) discussing the consideration being provided him pursuant thereto with his attorneys or tax advisors, (ii) discussing the underlying dispute or the terms of this Consulting Agreement and Release with his attorneys, his immediate family members or his medical doctors, (iii) advising a governmental taxing authority of the said consideration or of the existence of this Consulting Agreement and Release, in response to a question or questions posed by such taxing authority, (iv) testifying pursuant to a court order or a subpoena issued by a governmental agency, Court of law or their duly authorized agent, which appears valid on its face, (v) revealing the terms of this Consulting Agreement and Release as required by and in accordance with any law, regulation or ordinance, or Court order or proceeding, (vi) revealing the terms of this Consulting Agreement and Release in order to enforce its terms, or (vii) stating "the matter has been resolved and the terms of the resolution are confidential" in response to an inquiry. 3. Term. This Agreement shall commence as of the effective date set forth above and shall remain in force until December 31, 1998, unless sooner terminated pursuant to the provisions of Section 11 below. 4. Schnase's Duties. Schnase agrees to perform the following duties at his own expense: a. Consulting Services. Schnase shall consult with and advise EPII and its subsidiaries as to the operations of the business of EPII and its subsidiaries from time to time as requested by EPII. b. Company Policies. Schnase shall abide by all policies of EPII as such policies may be amended from time to time by EPII. c. Use of EPII's Name. Schnase shall not use the name of EPII or any of its subsidiaries or any other similar name or any trademark, tradename or service mark of EPII or its subsidiaries which may in any way result in confusion or lead a third party to believe that EPII and Schnase are not separate and distinct entities. d. Noncompetition. During the term of this Agreement and for five (5) years thereafter, Schnase shall refrain from directly or indirectly developing, selling, promoting or brokering any items which are in competition with the products of EPII and its subsidiaries. Without limiting the generality of the foregoing sentence, this provision shall be deemed to be breached if Schnase acts as an employee, agent or consultant of, independent contractor, distributor or broker for, or shareholder, director, officer or owner of any capital interest in, any person or entity developing, manufacturing or selling such competitive items. e. Laws and Regulations. Schnase shall conform to all applicable laws and regulations and to the highest business ethics in performing his obligations in accordance with the terms of this Agreement. 5. Schnase's Compensation. a. Monthly Compensation. During the term of this Agreement, EPII shall pay Schnase at the rate of ten thousand dollars ($10,000) per month during 1997 and at the rate of eight thousand three hundred thirty three dollars ($8,333) per month during 1998. Such payments shall be made monthly in arrears during the term of this Agreement. b. EBITDA Bonus. During the term of this Agreement, Consultant is eligible to earn a maximum EBITDA bonus of thirty thousand dollars ($30,000) for 1997 and a maximum EBITDA bonus of thirty thousand dollars ($30,000) for 1998. For 1997, Schnase will earn a ten thousand dollar ($10,000) EBITDA bonus if the earnings before interest, taxes, depreciation and amortization for EPII ("EBITDA") are at least $6,500,000; an additional ten thousand dollars ($10,000) if the EBITDA for 1997 is at least $6,825,000 and the full thirty thousand dollar ($30,000) EBITDA bonus for 1997 if the EBITDA for 1997 is at least $7,150,000. The EBITDA levels for Schnase to earn his EBITDA bonus for 1998 will be based on the same levels as the officers of EPII who are eligible to receive EBITDA bonuses. c. Expense Reimbursement. EPII will reimburse Schnase for any reasonable and customary business expenses incurred by Schnase in connection with the performance of his duties hereunder at the request of EPII. d. Directors' Fees and Options. During the term of this Agreement, Schnase waives his rights to any fees or stock options to which he might be entitled as a result of his being a nonemployee director of EPII. e. Life Insurance. Eagle will continue to pay the premiums on Northwestern Mutual Life Policy #10154964 and Northwestern Mutual Life Policy #10089934 on the life of Schnase (the "Policies") through April 2, 1997. On April 2, 1997, Eagle will assign and transfer its entire interest in the Policies to Schnase solely as additional consideration for the services rendered by Schnase hereunder. f. Office Facilities. During the term of this Agreement, EPII will provide Schnase with an office. g. Health and Dental Insurance. During the term of this Agreement, EPII will provide health and dental insurance coverage to Schnase comparable to the health and dental insurance coverage provided to the executive officers of EPII. 6. Nondisclosure of Confidential Information. a. Definition. For purposes of this Agreement "Confidential Information" means any information or compilation of information, not generally known, which is proprietary to EPII and relates to EPII's existing or reasonably foreseeable business which is not readily disclosed by inspection of EPII's products, including, but not limited to, trade secrets, inventions and information contained in or relating to EPII's product designs, tolerances, manufacturing methods, processes, techniques, treatment or chemical composition of material, plant layout, tooling, marketing plans or proposals, and customer information. All information which EPII identifies as being "confidential" or "trade secret" shall be presumed to be Confidential Information. Confidential Information shall also include any confidential information of a parent, subsidiary or sister corporation of EPII and any information disclosed by a third party under contract with EPII which contract requires such disclosed information be kept confidential. Confidential Information shall not include information that is in or enters the public domain other than through a breach of confidentiality owed to EPII. b. Nondisclosure. During the term of this Agreement and at all times thereafter, Schnase shall hold in strictest of confidence and will never disclose, furnish, transfer, communicate, make assessable to any person or use in any way Confidential Information for Schnase's own or another's benefit or permit the same to be used in competition with EPII, nor will Schnase accept any employment which would, by the nature of the position, inherently involve the use or disclosure by Schnase of Confidential Information. The term "any person" as used above includes any individual who does not have written authorization from EPII to have access to Confidential Information, including EPII employees and other EPII consultants. Schnase will refrain from such acts and omissions which would reduce the value of the Confidential Information to EPII. 7. Documents and Tangible Property. All tangible evidence of Confidential Information, including, without limitation, working models, records, drawings, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, calculations or copies thereof shall be and remain the exclusive property of EPII, and Schnase agrees to return all such tangible evidence of Confidential Information to EPII upon termination of this Agreement or at such earlier time as EPII may request. 8. Independent Contractor. Schnase acknowledges that he is an independent contractor and is not and shall not be deemed to be an employee, joint venturer, partner, franchisee or legal representative of EPII for any purpose whatsoever. Accordingly, Schnase shall be exclusively responsible for the manner in which he performs, and for the profitability or lack thereof of, his activities under this Agreement. Schnase does not have, and shall not represent himself as having, any right or authority to obligate or bind EPII in any manner whatsoever. 9. Schnase's Name. Schnase consents to the use of Schnase's name in appropriate EPII materials such as, but not limited to, annual reports, proxy statements and filings with government agencies. 10. No Conflicts. Schnase represents and warrants to EPII that neither the entering into this Agreement nor the performance of any of the Schnase's obligations hereunder will conflict with or constitute a breach under any obligation of Schnase under any agreement or contract to which Schnase is bound. Without limiting the foregoing, Schnase agrees that at no time will Schnase utilize any trade secrets of any third party. 11. Termination. This Agreement may be terminated prior to the end of its term pursuant to any of the following provisions: a. Mutual Agreement. By mutual agreement. b. Default. By either party, effective immediately upon delivery of written notice to the other party, if the other party breaches any of its obligations under this Agreement; provided that if such breach is curable, such notice shall not be effective until the breaching party fails to correct such breach or default within a period of thirty (30) days after delivery of such written notice. If such breach is not curable, the Agreement shall terminate immediately upon delivery of such notice of breach. c. Adverse Activity. By EPII effective immediately upon delivery of written notice (i) upon gross misconduct or insubordination on the part of Schnase, (ii) if Schnase is convicted of or enters a plea of guilty or nolo contendere to any felony or misdemeanor or the entry of final judgment in connection with any allegation of fraud, misrepresentation, misappropriation or any other intentional tort or statute violation, (iii) upon the sexual harassment of any employees of EPII or any of its subsidiaries, (iv) if Schnase takes any action which impairs the goodwill associated with EPII's trademark, trade name or service mark, or (v) if Schnase makes any unauthorized use or disclosure of any Confidential Information. 12. Obligations Upon Termination. Following termination of this Agreement for any reason, the following provisions shall apply: a. Payment of Compensation. EPII's sole obligation to Schnase upon expiration or proper termination of this Agreement shall be to pay compensation determined in accordance with the provisions of Section 5 hereof for services rendered prior to the expiration or termination of this Agreement and pursuant to the Deferred Compensation Agreement. Schnase hereby acknowledges that he has no right to and waives any such implied rights to any reimbursement for lost profits or income or any other loss, cost or expense resulting from expiration or termination of this Agreement in accordance with its terms. b. Continuing Obligations. The provisions of Sections 1, 2, 4.c. and d., 6, 7 and 9 herein shall survive the termination of this Agreement and shall continue in full force and effect. 13. General Provisions. a. Severability and Interpretation. In the event that a provision of this Agreement is held invalid, the remaining provisions shall nonetheless be enforced in accordance with their terms. Further, in the event that any provision is held to be overbroad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and shall be enforced as amended. b. Notices. Any notice required or permitted to be given under this Agreement shall be deemed effective when received if delivered by hand, telecopy, telex or telegram or three (3) days after depositing if placed in the U.S. mail for delivery by registered or certified mail, return receipt requested, postage prepaid and addressed to the appropriate party at the address set forth on the first page of this Agreement. Such addresses may be changed by giving written notice to the other party of such different address pursuant to the provisions of this section. c. Nonassignment. Schnase shall not assign, transfer or sell all or any part of his rights or obligations hereunder without the prior written consent of EPII. This Agreement shall be binding upon and inure to the benefit of any successor or assignee of EPII and Eagle and of any permitted successors and assigns of Schnase as provided above. d. Controlling Law and Arbitration. This Agreement shall be governed by and construed in accordance with the law of the State of Minnesota without regard to the conflicts of laws and rules thereof. All disputes, controversies or differences arising out of or in connection with this Agreement or the making thereof, including claims of fraud in the inducement, which cannot be settled by mutual agreement shall be finally settled by binding arbitration pursuant to the Rules of Commercial Arbitration of the American Arbitration Association then in effect, except as specified herein and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Any arbitration hereunder shall be held in Minneapolis, Minnesota. The arbitration shall be conducted by a single arbitrator selected by the parties. The arbitrator shall be a retired state or federal judge or an attorney who has practiced business litigation for at least 10 years. In the event that the parties are unable to agree on an arbitrator, the arbitrator shall be selected by the American Arbitration Association. The hearings shall be conducted on an expedited schedule. They shall commence no later than 20 days after initiation of proceedings and shall be completed within 20 days, and the arbitrator shall make the award within 20 days of the close of the hearings. The arbitrator shall have the authority to award any remedy or relief that a court of the State of Minnesota could order or grant, including, without limitation, equitable remedies, specific performance of any obligation created under this Agreement, the awarding of punitive damages, the issuance of an injunction or the imposition of sanctions for abuse or frustration of the arbitration process. e. Entire Agreement. This Agreement constitutes the entire Agreement between the parties and supersedes any and all prior and contemporaneous oral or written understandings between the parties relating to the subject matter hereof, except for the Stock Option Agreements and Deferred Compensation Agreement referred to herein. IN WITNESS WHEREOF, the parties have hereunto set their hands as of the date indicated but effective as of January 1, 1997. January ___, 1997 ___________________________________ Larry D. Schnase STATE OF NEBRASKA ) ) ss: COUNTY OF ) I , a Notary Public, do hereby certify that Larry D. Schnase, personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that he signed and delivered the said instrument as his free and voluntary act, for the uses and purposes therein set forth. Given under my hand and official seal this _____ day of January, 1997. NOTARY PUBLIC My Commission Expires: Date January ___, 1997 Eagle Pacific Industries, Inc. ___________________________________ William H. Spell, CEO STATE OF MINNESOTA ) )ss: COUNTY OF HENNEPIN ) Before me, a notary public for and within the county of Hennepin, State of Minnesota, this day of January 1997 personally appeared William H. Spell, to me known, and, who after being first duly sworn deposed and stated that he is the Chief Executive Officer of Eagle Pacific Industries, Inc., and that he is duly authorized by Eagle Pacific Industries, Inc., to execute and acknowledge the foregoing Consulting Agreement and Release and that said William H. Spell did acknowledge to me that he executed the same as his own free act and deed on behalf of Eagle Pacific Industries, Inc. Given under my hand and official seal this _____ day of January, 1997. NOTARY PUBLIC My Commission Expires: Date January ___, 1997 Eagle Plastics, Inc. ___________________________________ William H. Spell, CEO STATE OF MINNESOTA ) )ss: COUNTY OF HENNEPIN ) Before me, a notary public for and within the county of Hennepin, State of Minnesota, this day of January 1997 personally appeared William H. Spell, to me known, and, who after being first duly sworn deposed and stated that he is the Chief Executive Officer of Eagle Plastics, Inc., and that he is duly authorized by Eagle Plastics, Inc., to execute and acknowledge the foregoing Consulting Agreement and Release and that said William H. Spell did acknowledge to me that he executed the same as his own free act and deed on behalf of Eagle Plastics, Inc. Given under my hand and official seal this _____ day of January, 1997. NOTARY PUBLIC My Commission Expires: Date EX-10.25 13 EBITDA BONUS PLAN EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES EBITDA BONUS PLAN The following is a summary of the Eagle Pacific Industries, Inc. and Subsidiaries EBITDA Bonus Plan. "EBITDA" shall mean the earnings before interest, taxes, depreciation and amortization for the particular company determined by the auditors for Eagle Pacific Industries, Inc. ("EPII") in accordance with GAAP for each fiscal year of EPII. At or before the beginning of each fiscal year, the Board of Directors of EPII shall establish three levels of EBITDA for EPII and for each of its subsidiaries. If the lowest level is achieved, each employee participating in the EBITDA Bonus Plan will receive one-third of his/her maximum bonus. If the second highest level of EBITDA is achieved, each employee participating in the EBITDA Bonus Plan will receive two-thirds of his/her maximum bonus. If the highest level of EBITDA is achieved, each employee participating in the EBITDA Bonus Plan will receive his/her maximum bonus. At the same time the Board of Directors of EPII shall establish the eligible employees, the maximum amount of their bonuses and in the company or companies on which the bonus will be based for that year. An employee must be employed by the Company or one of its subsidiaries on the last day of the fiscal year in order to be entitled to receive any EBITDA bonus for that year. EX-10.26 14 LEVERAGED EQUITY PURCHASE PLAN THE EAGLE PACIFIC INDUSTRIES, INC. LEVERAGED EQUITY PURCHASE PLAN PURPOSE: The purpose of The Eagle Pacific Industries, Inc. Leveraged Equity Purchase Plan ("LEPP") is to more closely align the goals and motivation of management with those of other Eagle Pacific shareholders and to provide key personnel with a long-term capital accumulation opportunity. This purpose is accomplished by providing selected management employees with loans to permit them to acquire and retain Eagle Pacific Common Stock. DEFINITIONS: "Common Stock" shall mean the common stock of Eagle Pacific, par value $.50 per share. "Compensation Committee" shall mean the compensation committee of the Board of Directors of Eagle Pacific as constituted from time to time; provided, however, each member of the Compensation Committee shall be a "disinterested" person within the meaning of Rule 16b-3, as then in effect, under the Securities Exchange Act of 1934. "Determination Date" shall mean the date on which the Compensation Committee determined that an Employee was an Eligible Employee. "Eligible Employee" shall mean an Employee that the Compensation Committee has determined may be granted a loan pursuant to the LEPP. "Employee" shall mean each person who is an employee of Eagle Pacific which term shall include both full and part-time employees but shall not include independent contractors providing services to Eagle Pacific. "I.R.C." shall mean the Internal Revenue Code of 1986, as amended. "LEPP" or the "Plan" shall mean The Eagle Pacific Industries, Inc. Leveraged Equity Purchase Plan as described herein. "Loan" shall mean a loan made to a Participant pursuant to this Plan and evidenced by a Promissory Note. "Participant" shall refer to an Eligible Employee that has a Loan outstanding. "Plan Administrator" shall mean the person or persons designated as such by the Compensation Committee. If no person has been designated, the Plan Administrator shall be the Secretary of Eagle Pacific. "Promissory Note" shall mean a promissory note evidencing a loan made to a Participant by Eagle Pacific pursuant to the terms of this Plan. "Purchased Shares" shall mean all of the shares of Common Stock purchased by a Participant at the time a Loan was made to such Participant hereunder. "Eagle Pacific" shall mean Eagle Pacific Industries, Inc., a Minnesota corporation, with its principal office in Minneapolis, Minnesota. PLAN: 1. Selection of Eligible Employees. From time to time, the Compensation Committee shall determine the Employees who may be granted Loans hereunder and the maximum amount of the Loans. As soon as possible after the determination by the Compensation Committee, the Plan Administrator will notify each Eligible Employee in writing of his/her eligibility and the maximum amount of the Loans that he/she may receive. An Eligible Employee shall cease being an Eligible Employee on the earlier to occur of (i) the date on which he/she ceases to be an Employee or (ii) the date six months after his/her Determination Date. The rights of an Eligible Employee to borrow money hereunder are not transferable and may not be exercised by any person other than the Eligible Employee. 2. The Loan. An Eligible Employee may borrow from Eagle Pacific 90% of the cost of purchasing the number of shares of Common Stock up to the Loan amount authorized by the Compensation Committee. The Eligible Employee may only borrow the funds from Eagle Pacific if they are used to acquire Common Stock pursuant to the LEPP. The Loan will be evidenced by a Promissory Note. The terms of the Promissory Note will be: a. The unpaid principal balance will accrue simple interest at the prime rate in effect at Fleet National Bank plus one-quarter of one percent (1/4%) which shall be paid annually on the yearly anniversaries of the date of the Promissory Note. b. The payment of the unpaid principal balance shall be due in full on the earlier to occur of i. the date determined by the Compensation Committee, which date shall not be later than the fifth anniversary of the Determination Date, ii. the Participant's termination of employment with Eagle Pacific for any reason other than death, disability or termination of employment after the age of 60 years, or iii. the Participant sells or otherwise disposes or attempts to dispose of any of the Purchased Shares. c. The Promissory Note will be secured by a pledge of all of the Purchased Shares. d. The Promissory Note will be non-recourse to the Participant and payment may be satisfied by voluntary surrender of all of the Purchased Shares or by foreclosure by the holder of the Promissory Note on the Purchased Shares. e. Any cash dividends paid with respect to the Purchased Shares will be applied by Eagle Pacific, in payment on the Promissory Note. Any non-cash dividends, distributions or stock splits made with respect to the Purchased Shares shall be retained by Eagle Pacific as additional security for the Loan. f. The proceeds of any special bonus arrangement provided by Eagle Pacific to the Participant for the purpose of repaying the Loan shall not be paid to the Participant but shall be applied directly by Eagle Pacific in payment on the Promissory Note. g. Sections 415 and 401(a)(17) of the I.R.C. may restrict the ability of certain highly compensated Employees from receiving their full benefits under certain employee benefit plans sponsored by Eagle Pacific. As a result, amounts equal to the value of the number of shares or dollars the Participant would have been allocated under any and all employee benefit plans sponsored by Eagle Pacific but for the limitations under Section 415 and Section 401(a)(17) of the I.R.C. will be applied by Eagle Pacific in payment on the Promissory Note at the time such allocations would have been made to the Participant. h. The Participant may prepay the Loan in whole or in part at any time without penalty. i. All payments made or applied on the Promissory Note shall be used first to pay the accrued but unpaid interest and then to reduce the unpaid principal balance. 3. Purchase of Common Stock. During the six month period following the Determination Date, an Eligible Employee may borrow funds as set forth above to purchase shares of Common Stock on the following terms: a. All purchases by the Eligible Employee will be made on the open market through a licensed broker-dealer selected by the Plan Administrator. b. The broker-dealer shall follow all guidelines for purchasing shares determined by the Plan Administrator. c. Eagle Pacific will pay the fees and commissions of the broker-dealer executing the purchase of the Common Stock. d. The Plan Administrator may prohibit Eligible Employees from trading in Common Stock purchased or to be purchased with a Loan at times that Eagle Pacific is aware of material non-public information about its business. e. An Eligible Employee that wishes to borrow funds pursuant to this Plan to acquire Common Stock may do so by giving written notice to the Plan Administrator indicating the Eligible Employee's name, social security number, date of birth, home address, the number of shares of Common Stock he/she desires to acquire hereunder and any other information reasonably requested by the Plan Administrator. f. As soon as the purchase of Common Stock requested by the Eligible Employee has been executed by the broker-dealer, the Eligible Employee will (i) execute and deliver the Promissory Note to the Plan Administrator who will forward the proceeds of the Loan to the Broker-dealer and (ii) deliver his/her check or other funds directly to the broker-dealer in an amount equal to 10% of the purchase price of the Purchased Shares. g. The certificate representing the Purchased Shares will be registered in the name of the Participant, but it will be held by Eagle Pacific and pledged to Eagle Pacific to secure payment of the Promissory Note. So long as the Participant owns the Purchased Shares and is not in default under the Loan, he/she shall retain the right to vote the Purchased Shares. 4. Miscellaneous. a. The Board of Directors of Eagle Pacific may amend or terminate this Plan at any time; provided, however, no such termination or amendment shall affect any Loan or Promissory Note outstanding at the time the LEPP is amended by the Board of Directors of Eagle Pacific. b. The Compensation Committee may, without further action by the Board of Directors or shareholders of Eagle Pacific, make Loans hereunder up to an aggregate amount of $600,000 upon a finding that Eagle Pacific can reasonably expect to benefit from each such Loan. c. A Participant may not sell, transfer or otherwise dispose of the Purchased Shares within six months of their acquisition except in the case of the Participant's death or disability. APPROVALS: The foregoing plan was adopted by the Board of Directors of Eagle Pacific at its meeting on October 28, 1996. _________________________________ Secretary THE EAGLE PACIFIC INDUSTRIES, INC. LEVERAGED EQUITY PURCHASE PLAN AGREEMENT PURPOSE: The purpose of The Eagle Pacific Industries, Inc. Leveraged Equity Purchase Plan ("LEPP") is to more closely align the goals and motivation of management with those of other Eagle Pacific shareholders and to provide key personnel with a long-term capital accumulation opportunity. This purpose is accomplished by providing selected management employees with loans to permit them to acquire and retain Eagle Pacific Common Stock. Pursuant to the provisions of the LEPP, and by specific action of the Compensation Committee, Eagle Pacific hereby grants ____________ ("Eligible Employee") the right to obtain a loan of ___________ dollars ($__________) from Eagle Pacific Industries, Inc. to purchase shares of Eagle Pacific Common Stock on the open market, with a determination date of November 13, 1996 and expiration date of May 13, 1996 in accordance with and subject to the following terms and conditions. Capitalized terms used herein shall have the meanings ascribed to them in the LEPP. 1. The Loan The Eligible Employee may borrow from Eagle Pacific 90% of the cost of purchasing shares of Common Stock up to the Loan amount authorized by the Compensation Committee. The Eligible Employee may only borrow the funds from Eagle Pacific if they are used to acquire Common Stock pursuant to the LEPP. The Loan will be evidenced by a Promissory Note. The terms of the Promissory Note will be: a. The unpaid principal balance will accrue simple interest at the prime rate in effect at Fleet National Bank plus one-quarter of one percent (1/4%) which shall be paid annually on the yearly anniversaries of the date of the Promissory Note. b. The payment of the unpaid principal balance shall be due in full on the earlier to occur of i. the fifth anniversary of the date of this Agreement, ii. the Participant's termination of employment with Eagle Pacific for any reason other than death, disability or termination of employment after the age of 60 years, or iii. the Participant sells or otherwise disposes or attempts to dispose of any of the Purchased Shares. c. The Promissory Note will be secured by a pledge of all of the Purchased Shares. d. The Promissory Note will be non-recourse to the Participant and payment may be satisfied by voluntary surrender of all of the Purchased Shares or by foreclosure by the holder of the Promissory Note on the Purchased Shares. e. Any cash dividends paid with respect to the Purchased Shares will be applied by Eagle Pacific in payment on the Promissory Note. Any non-cash dividends, distributions, or stock splits made with respect to the Purchased Shares shall be retained by Eagle Pacific as additional security for the Loan. f. The proceeds of any special bonus arrangement provided by Eagle Pacific to the Participant for the purpose of repaying the Loan shall not be paid to the Participant but shall be applied directly by Eagle Pacific in payment on the Promissory Note. g. Sections 415 and 401(a)(17) may restrict the ability of certain highly compensated Employees from receiving their full benefits under certain employee benefit plans sponsored by Eagle Pacific. As a result, amounts equal to the value of the number of shares or dollars the Participant would have been allocated under any and all employee benefit plans sponsored by Eagle Pacific but for the limitations under Section 415 and Section 401(a)(17) of the Internal Revenue Code will be applied by Eagle Pacific in payment on the Promissory Note at the time such allocations would have been made to the Participant. h. The Participant may prepay the Loan in whole or in part at any time without penalty. i. All payments made or applied on the Promissory Note shall be used first to pay the accrued but unpaid interest and then to reduce the unpaid principal balance. 2. Purchase of Common Stock During the six-month period following the Determination Date, the Eligible Employee may borrow funds as set forth above to purchase shares of Common Stock on the following terms: a. All purchases by the Eligible Employee will be made on the open market through a licensed broker-dealer selected by the Plan Administrator. b. The broker-dealer shall follow all guidelines for purchasing shares determined by the Plan Administrator; c. Eagle Pacific will pay the fees and commissions of the broker-dealer executing the purchase of the Common Stock; d. The Plan Administrator may prohibit the Eligible Employee from trading in Common Stock purchased or to be purchased with a Loan at times that Eagle Pacific is aware of material non-public information about its business; e. Eligible Employee that wishes to borrow funds pursuant to this Plan to acquire Common Stock may do so by giving written notice to the Plan Administrator (Corporate Secretary) indicating the Eligible Employee's name, social security number, date of birth, home address, the number of shares of Common Stock he/she desires to acquire hereunder and any other information reasonably requested by the Plan Administrator; f. As soon as the purchase of Common Stock requested by Eligible Employee has been executed by the broker-dealer, Eligible Employee will (i) execute and deliver the Promissory Note to the Plan Administrator who will forward the proceeds of the Loan to the broker-dealer and (ii) deliver his/her check or other funds directly to the broker-dealer in an amount equal to 10% of the purchase price of the Purchased Shares. g. The certificate representing the Purchased Shares will be registered in the name of the Participant, but it will be held by Eagle Pacific and pledged to Eagle Pacific to secure payment of the Promissory Note. So long as the Participant owns the Purchased Shares and is not in default under the Loan, he/she shall retain the right to vote the Purchased Shares. 3. Conditions a. An Eligible Employee shall cease being an Eligible Employee on the earlier to occur of (i) the date on which he/she ceases to be an Employee or (ii) the date six months after his/her Determination Date. The rights of an Eligible Employee to borrow money hereunder are not transferable and may not be exercised by any person other than the Eligible Employee. b. The Board of Directors of Eagle Pacific may amend or terminate this Plan at any time provided, however, no such termination or amendment shall affect any Loan or Promissory Note outstanding at the time the LEPP is amended by the Board of Directors of Eagle Pacific. c. A Participant may not sell, transfer, or otherwise dispose of the Purchased Shares within six months of their acquisition except in the case of the Participant's death or disability. Date: ------------------------- EAGLE PACIFIC INDUSTRIES, INC. By --------------------------- Its Chairman --------------------------- Accepted and Confirmed as of the above date: By --------------------------- EX-11 15 EARNINGS PER SHARE SCHEDULE
EXHIBIT 11 EARNINGS PER SHARE SCHEDULE Calculation of net income under the modified treasury stock method: 1996 1995 1994 ---- ---- ---- Primary Average common stock outstanding 5,444,683 3,899,587 4,507,321 Common stock equivalents 1,162,441 -- -- ----------- ----------- ----------- 6,607,124 3,899,587 4,507,321 =========== =========== =========== Net income (loss) applicable to common stock $ 1,660,169 $(1,058,513) $ 1,207,145 Assumed interest expense reduction 81,776 -- 20,567 ----------- ----------- ----------- $ 1,741,945 $(1,058,513) $ 1,227,712 =========== =========== =========== Net income per share $ .26 $ .27 $ .27 =========== =========== =========== Fully diluted Average common stock outstanding 6,150,859 3,899,587 4,507,321 Preferred stock 18,750 -- 1,383,500 Common stock equivalents 1,162,441 -- -- ----------- ----------- ----------- 7,332,050 3,899,587 5,890,821 =========== =========== =========== Net income applicable to common stock $ 1,660,169 $(1,058,513) $ 1,207,145 Preferred stock dividends 90,791 -- 193,289 Assumed interest expense reduction 81,776 -- 20,567 ----------- ----------- ----------- $ 1,832,736 $(1,058,513) $ 1,421,001 =========== =========== =========== Net income per share $ .25 $ (.27) $ -- =========== =========== ===========
EX-23 16 CONSENTS OF EXPERTS AND COUNSEL EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS' We consent to the incorporation by reference in Registration Statements Nos. 333-17205 and 333-17207 of Eagle Pacific Industries, Inc. on Form S-8 and Registration Statement No. 33-79098 of Eagle Pacific Industries, Inc. on Form S-3 of our report dated February 14, 1997, appearing in this Annual Report on Form 10-K of Eagle Pacific Industries, Inc. for the year ended December 31, 1996. /s/ Deloitte & Touche LLP - ----------------------------------------- Deloitte & Touche LLP Minneapolis, Minnesota March 26, 1997 EX-27 17 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 0 0 6,569,094 195,100 10,279,169 17,189,645 14,524,908 3,038,889 35,426,564 16,063,401 12,959,763 37,500 0 64,432 7,922,072 35,426,564 65,280,138 65,280,138 50,106,782 50,106,782 9,976,604 67,846 2,637,341 2,469,628 (1,009,685) 3,479,313 0 (1,728,353) 0 1,750,960 .26 .25
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