<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-5492-1
CERION TECHNOLOGIES INC.
(Exact name of registrant as specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 02-0485458
(State of or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
</TABLE>
1401 INTERSTATE DRIVE
CHAMPAIGN, ILLINOIS 61821
(217) 359-3700
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
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 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. (X)
On February 28, 1997, the aggregate market value of the voting stock held
by nonaffiliates totaled approximately $29,828,000 based on the closing stock
price as reported by The Nasdaq Stock Market.
On February 28, 1997, there were 7,018,406 shares of common stock, $.01 par
value, of the registrant issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the definitive Proxy Statement to be delivered to Shareholders
in connection with the Annual Meeting of Shareholders to be held May 7, 1997
are incorporated by reference herein.
2. Portions of the 1996 Annual Report to Shareholders are incorporated by
reference herein.
3. Portions of the registrant's Registration Statement on Form S-1
(Registration No. 333-2590) are incorporated by reference herein.
================================================================================
<PAGE> 2
CERION TECHNOLOGIES INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business..................................................................... 3
Item 2. Facilities and Properties.................................................... 10
Item 3. Legal Proceedings............................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders.......................... 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........ 11
Item 6. Selected Financial Data...................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 12
Item 8. Financial Statements and Supplementary Data.................................. 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................... 16
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 16
Item 11. Executive Compensation....................................................... 18
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 18
Item 13. Certain Relationships and Related Transactions............................... 18
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K............. 18
Signatures.............................................................................. 21
</TABLE>
This Report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties, including without limitation those discussed in
the Company's 1996 Annual Report to Shareholders in the section titled "Outlook"
(which section is hereby incorporated by reference herein). Such forward-looking
statements speak only as of the date on which they are made, and the Company
cautions not to place undue reliance on such statements. The Company disclaims
any duty to update any such statements.
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Cerion Technologies Inc. ("Cerion" or "the Company") manufactures
precision-machined aluminum disk substrates, which are the metallic platforms of
magnetic thin film disks used in the hard disk drives of portable and desktop
computers, network servers, add-on storage devices and storage upgrades. The
Company's manufacturing and engineering expertise, together with its proprietary
manufacturing processes and equipment, enable it to supply customers with high
product volumes and consistent quality while meeting increasingly stringent
product tolerances. The Company believes that its ability to develop and
manufacture high quality aluminum substrates helps thin film disk manufacturers
meet the rapidly evolving technological requirements of the hard disk drive
market. The Company has used its core competencies in precision machining to
produce aluminum organic photo conductor ("OPC") drum substrates for laser
printer cartridges and maintains this manufacturing capability. See "Factors
That Affect Future Results" hereunder for discussion regarding matters that may
affect the Company's future performance.
INDUSTRY BACKGROUND
Fluctuating Market Conditions. The markets in which the Company sells its
aluminum disk substrates have shown rapid growth in demand, but increased demand
has also generated a rapid growth in production. Periods of shortage have
alternated recently with periods of oversupply. During the latter half of 1996,
and continuing since then, the market appears to have been dominated by
oversupply, and consequently, pricing pressures. Although the Company's strategy
during 1996 was to compete on quality more than on price, during the latter half
of 1996 the Company was nevertheless forced to compete increasingly on price,
even on those products meeting the tightest specifications. These changing
market forces had a significant impact on the Company's sales and margins.
Growth in Demand. The introduction of increasingly powerful
microprocessors and more memory intensive software, combined with the
development and growth of multimedia computing applications and Internet usage,
have stimulated demand for PCs in both the home and business markets. In
addition, the applications currently being developed for PCs require greater
storage capacity, sharply increasing the demand for high-capacity disk drives.
According to International Data Corporation, mean storage capacity per desktop
disk drive has increased from 170 megabytes in 1993 to 540 megabytes in 1995.
The market demand for aluminum substrates used for thin film disks in disk
drives has been growing rapidly, stimulated by demand for PCs, storage upgrades
and add-ons to existing computers and the growing use of sophisticated network
servers. According to TrendFOCUS in 1996, an industry publication, the number of
thin film disks produced worldwide in 1993, 1994, 1995, and 1996 was 134
million, 186 million, 256 million, and 344 million, respectively, and projected
at 426 million in 1997, which would represent a compound annual growth rate of
approximately 34 percent over this five-year period.
Although the average storage capacity per disk drive has increased
significantly, the average number of disks per drive has remained relatively
constant, primarily as a result of significant advances in technology and in the
storage capacity of thin film disks. The Company believes that success in the
disk drive industry will continue to depend on the ability of the disk drive
manufacturers, together with their suppliers of critical components, such as
thin film disks and disk substrates, to keep pace with these advances. As a
result, thin film disk manufacturers are likely to continue to require more
stringent smoothness and flatness tolerances and higher quality levels from
their aluminum disk substrate suppliers.
Growth in Supply. Aluminum disk substrates are produced by vertically
integrated thin-film disk manufacturers and by independent producers, including
the Company and Kobe Steel, Ltd. ("Kobe") through its subsidiaries. Cerion's
primary independent aluminum disk substrate competitor is Kobe, which the
Company believes has production capacity that is substantially greater than that
of the Company. In addition, vertically integrated companies produce substrates,
such as Seagate Technologies, Inc. ("Seagate"), Akashic Memories Corporation
("Akashic") and Komag, Inc. ("Komag"). In addition, during 1996, two other major
3
<PAGE> 4
companies began to move towards vertically-integrated production, as StorMedia
Incorporated ("StorMedia") announced that it will produce aluminum disk
substrates at a new manufacturing facility in Singapore, and HMT Technology
Corporation ("HMT") acquired a facility in Oregon for aluminum disk substrate
production. While Cerion has been able to sell substrates to certain of these
vertically integrated companies, it has lost revenues from others, including a
significant amount of revenues lost from one vertically integrated company, HMT.
Even as the demand has increased for smoothness, flatness and uniformity,
pricing pressures have also increased substantially during the latter half of
1996, even for disks meeting the most stringent specifications.
Changes in Aluminum Disk Substrate Performance Characteristics. A thin
film disk is composed of a substrate, generally aluminum, which must be flat,
smooth and free of surface defects. This base substrate is then coated with very
thin layers of nickel and magnetic material, which create the disk's magnetic
properties. Minor deviations in the tolerance or qualities of the aluminum
substrate can cause significant numbers of disks to be rejected, creating
significant yield loss to thin film disk manufacturers.
The increased demand for high-performance disk drives has resulted in
increased pressures for aluminum substrate manufacturers to tighten their
specifications for smoothness, flatness and uniformity. These qualities
contribute to improved disk performance in the following ways: (i) the flatter
the disk, the less risk that the recording head will "crash" against the surface
of the disk, thus increasing the performance and reliability of the finished
product; (ii) with a smoother original substrate, thin film disk manufacturers
are able to spend less time and use less material on the smoothing of the nickel
plating layer that is applied on the aluminum substrate, resulting in cost
efficiencies; and (iii) a smoother disk facilitates storage of information at
higher densities, thus increasing the disk's memory capability.
THE CERION STRATEGY
Cerion focuses on providing value-added engineering and technological
solutions that meet the demands of markets requiring precision finishing of
aluminum. The Company's strategy is to combine engineering expertise, innovative
manufacturing techniques and proprietary equipment to provide a high volume of
advanced, precision-machined products of consistent, high quality at competitive
prices. This strategy has been heavily influenced by the teachings of Dr. W.
Edwards Deming, a consultant to the Company from 1986 until his death in 1993.
The Company adopted many of his management principles.
In the latter half of 1996, market conditions forced the Company to pursue
"commodity," or "low-end" products for most of its aluminum disk substrate
production to maintain market share, and the Company expects that a dominant
portion of its 1997 revenue will also be derived from the low-end of this
market. Nevertheless, the Company believes that if it is to be successful over
the longer term it must shift the dominant portion of its sales to the "high
end" of the market, in which products must meet more demanding specifications of
flatness, smoothness and uniformity. The Company succeeded in achieving this
goal during the latter half of 1995 and the first half of 1996. Despite the
quality of the Company's products, it was unable to sustain this sales mix
during the latter half of 1996 because it was faced with backwards integration
by its largest customer and cancellation of orders by its second largest
customer due to excess supply. As noted above, the Company expects the impact of
these developments to make it unlikely that it will be able to shift sales back
to the "high end" of its market during 1997.
The Company has sought to be a supplier to the "high end" of the disk
market for the following reasons: (i) those customers that demand the highest
quality and most stringent tolerances have the greatest ability to benefit from
the value added by the Company's core competencies -- its engineering skills,
proprietary manufacturing processes and proprietary equipment; and (ii) the
Company believes that, unlike the "lower end", less exacting segment of the disk
market, suppliers in the "high end" of the market compete substantially on
quality as well as on price, thereby permitting higher average selling prices.
The key elements of the Company's strategy are as follows:
- Focus on Manufacturing Cost Improvement. The reduction in market demand
for the Company's products in the second half of 1996, driven by
backwards integration by its largest customer, and
4
<PAGE> 5
cancellation of orders by its second largest customer, required the
Company to pursue "commodity", "low-end" products to maintain market
share. The Company expects that a dominant portion of its 1997 revenue
will be derived from this "low-end" substrate. Thus, Cerion is focused on
bringing manufacturing costs in line with new pricing standards in the
industry. This focus requires innovative manufacturing process changes
designed to increase output from existing labor and equipment resources.
One element of the strategy is the automation of processing steps which
is currently under evaluation.
- Development of "High-End" Products. The Company believes it is a leader
in developing new products exceeding current industry requirements. For
example, the Company's innovations in proprietary processes, such as
chemical etching, resulted in the manufacture of substrates capable of
meeting increasingly stringent tolerance requirements. In addition,
Cerion's proprietary grinding technology has led to the development of
the Company's newest product, its FFX Super Smooth ("FFX") disk, which is
substantially smoother than aluminum disk substrates commercially
available. The FFX disk is being sold to one customer in small
quantities. The Company focuses on developing products ahead of market
requirements, increasing the likelihood that the Company's products will
be designed into new disk media for higher-capacity disk drives.
- Continue to Improve Proprietary Manufacturing Processes and Production
Equipment. The Company seeks to continue to improve its manufacturing
processes and equipment to increase efficiency and production capacity
and to improve product quality. The Company believes its proprietary
equipment enables Cerion to achieve significant cost savings and reduces
the capital required to expand capacity. In addition, the Company
believes that continuing advances in these areas have helped Cerion to
develop manufacturing expertise that may give it a competitive advantage.
- Maintain Strict Control of Manufacturing Process. The Company's
real-time statistical monitoring of its manufacturing processes results
in greater product uniformity and higher production yields, and provides
its customers with more detailed statistical information regarding
product consistency, which can improve Cerion's customers' production
yields relative to competing substrates. In addition, product uniformity
is an essential factor in the supplier qualification process of disk
drive manufacturers. The Company's quality system is ISO 9001 registered.
PRODUCTS
The Company currently manufactures products within two categories: aluminum
disk substrates, which represented at least 95 percent of net sales for the last
three years, and OPC drum substrates. Cerion's aluminum disks are the base, or
substrate, for the memory disk in a hard disk drive. The Company's current
aluminum disk substrate products consist of 130mm (5 1/4 inch), 95mm (3 1/2
inch) and 65mm (2 1/2 inch) diameter disks. The 95mm product, which accounts for
the large majority of the Company's current disk substrate sales, is used
primarily in the hard disk drives of desktop computers, network servers and
add-on storage devices. The 65mm diameter product is used primarily in laptop
computers. The Company's aluminum disk substrates have evolved significantly
over time. For example, the Company's 95mm product, which the Company has been
selling since 1987 for thin film disk applications, has been enhanced over time
to incorporate greatly improved characteristics for smoothness, flatness, and
dimensional variations.
Most laser printers and certain office copiers contain an organic
photoconductor ("OPC") imaging drum which accepts an electric charge that
attracts toner for transfer to paper. These OPC drums use a precision-machined
aluminum substrate onto which a photo-reactive coating is applied. OPC drums are
incorporated into laser printer cartridges that are consumed during operation
and replaced on a regular basis. The Company has produced and maintains
manufacturing capabilities for OPC drum substrates in 30mm and 40mm diameters
for use in desktop laser printer cartridges. The Company also is developing OPC
drum substrates and magnetic roller substrates for use in office copiers and
laser printer cartridges, respectively.
The Company currently is exploring other offerings to expand on its core
product lines. The Company has developed its FFX disk, which is designed to be a
"high-end" 95mm product and which has only one-quarter of the surface roughness
of the Company's standard product. Cerion's FFX disk is being sold to one
customer
5
<PAGE> 6
in small quantities. In addition, the Company is investigating the application
of its precision-machining capabilities for other products, materials and
industries.
MANUFACTURING PROCESSES AND PROPRIETARY EQUIPMENT
The Company's manufacturing methods are derived from careful attention to
the practice of continuous improvement and statistical methods of data analysis.
Together with its engineering expertise and internally developed proprietary
equipment, the Company believes its manufacturing and processing methods provide
it with lower capital equipment costs relative to certain of its competitors, as
well as superior yields and product quality. In the application of these
processes, the Company has arranged its manufacturing operation in a cellular
manner. The Company staffs each cell with a team of cross-trained employees.
These teams monitor the productivity of their individual cells and are trained
to prevent and, if necessary, correct quality problems within their cells. In
addition, teams are encouraged to suggest process improvements. These individual
manufacturing cells are built around equipment necessary for most process steps,
thus allowing each cell to operate, in many respects, as a mini-factory. This
cellular approach substantially reduces in-process inventory, facilitates more
effective communication, and improves both quality and productivity.
The following diagram summarizes the stages in the Company's aluminum disk
substrate manufacturing process:
<TABLE>
<CAPTION>
STAGE DESCRIPTION
- ------------------------------------- ---------------------------------------------------
<C> <S>
- ------------------------------------- Raw aluminum blanks are received by the Company and
Thickness Sorting sorted by individual thickness to a resolution of
- ------------------------------------- .0001 of an inch.
- ------------------------------------- Blanks are chemically etched to reduce thickness
Chemical Etching variation and remove the hard oxide layer on the
- ------------------------------------- surface, making the disks easier to grind.
- ------------------------------------- The inner and outer diameters of the disks are
Edge and Chamfer Machining machined to exacting tolerances and are finished to
- ------------------------------------- specific chamfer angles.
- ------------------------------------- The disks are subjected to high temperatures to
Annealing release stresses built up during the preceding
- ------------------------------------- machining step.
- ------------------------------------- A very fine abrasive grinding stone is applied to
Grinding the disk to produce the final surface finish,
- ------------------------------------- thickness and flatness.
</TABLE>
Even though there are extensive quality checks throughout the process, some
parameters can be checked only after the grinding stage. Those parameters
include visual quality, surface finish, thickness and flatness.
The Company's real-time statistical monitoring of its processes results in
greater product uniformity and higher production yields, and provides its
customers with more detailed statistical information regarding product
consistency.
The greater uniformity of the Company's products can improve the customers'
individual production yields relative to competing aluminum disk substrates.
Proprietary real-time tracking systems allow the Company to pinpoint where in
the manufacturing process a defect may have occurred, so that any disks affected
may be isolated and removed. It also provides for feedback to the operators in
order to eliminate the source of the defect immediately.
The Company's study of its customers' manufacturing processes has led to
the adoption of certain manufacturing and processing methods that the Company
believes to be unique. For instance, Cerion has pioneered the use of chemical
etching in the manufacture of aluminum disk substrates. This process was
developed in collaboration with the University of Illinois chemical engineering
department and certain of the Company's suppliers. Today, the majority of the
aluminum disk substrates produced by the Company are chemically etched.
6
<PAGE> 7
Proprietary Equipment and Processes
The Company has developed proprietary equipment and processes that allow it
to produce aluminum disk substrates within narrow specifications of smoothness,
flatness and uniformity. For example, the Company has internally developed and
built proprietary grinding machines for its own use, which the Company believes
provide it with both a cost advantage and superior substrate over that produced
by commercially available grinders. The capital cost of the Company's
custom-built proprietary grinding machine is less than 25 percent of the list
price of comparable grinders from a leading manufacturer.
The Company's internally developed and manufactured proprietary abrasive
stones used in the grinding process are significantly less expensive than
typical commercially available alternatives. In-house control of grinding stone
fabrication enables the Company to produce superior products with less machining
time and allows for the custom fabrication of grinding stones for specific
products. Custom fabrication of grinding stones has enabled Cerion to pioneer
its new FFX product, which has a mirror-like surface with an average surface
roughness of less than 20 angstroms (a unit of length equal to one ten-millionth
of a millimeter), as opposed to the 80 angstrom average of the current disk
substrates sold by the Company.
Employee Participation
Cerion believes that a critical component of its program of continuous
process improvements and quality control is the active participation of its
employees in these efforts. Employee teams are aware of production targets and
meet regularly to discuss and evaluate process improvements. As incentive to
such involvement, the Company in the first half of 1996 distributed 4 percent of
its pretax earnings to its employees (other than executive officers) as profit
sharing when the Company had positive operating performance.
To facilitate process improvements, the Company encourages employees to
pursue their own ideas by providing a procedure in which an employee writes a
detailed description of a process improvement that is then reviewed by key
engineering, manufacturing, training, maintenance and safety personnel. If
approved, the Company provides support, such as process or safety engineering,
to the employee, who is then responsible for implementation of his or her
suggestion on a trial basis. At the end of the trial period, the employee
prepares a report, including results and recommendations, and, if the trial has
been successful, a change notification document is issued. Upon approval of key
areas, the change is implemented system-wide. The Company assigns a process
engineer full time to facilitate employee team meetings to review process
improvement issues.
The Company places significant emphasis on training and education. Cerion
provides a tuition payment benefit available to all employees. In addition, the
Company's hourly pay system works on a pay-for-skills basis. Employees are
certified to pre-set standards in various skills relating to their job
assignments. As the employees earn additional certifications, their pay
increases. Classroom training in statistics, decision-making, business basics,
teamwork and systems-thinking are being added to this skill certification
system. The Company believes these practices foster a Company-wide dedication,
sense of common ownership and increased skills which contribute to higher
product quality and manufacturing yields.
CUSTOMERS AND MARKETING
Aluminum disk substrates represented over 95% of the Company's sales in
1995 and 1996. During 1996, Cerion shipped the majority of its aluminum disk
substrates to four companies, HMT, StorMedia, Trace Storage Technologies Inc.
("Trace") and Seagate, representing approximately 45%, 30%, 11%, and 6%,
respectively, of the Company's net sales of disk substrates. During the fourth
quarter of 1996, the Company shipped its aluminum disk substrates to six
companies, Trace, StorMedia, Akashic, Seagate, HMT, and International Business
Machines ("IBM"), representing approximately 20%, 19%, 18%, 17%, 13%, and 12%,
respectively. In its OPC drum substrate product line, the Company primarily
shipped products in 1995 and 1996 to two companies, Nashua Corporation
("Nashua") and Xerox Corporation ("Xerox"). Cerion's customer base, and each
customer's relative importance, has fluctuated significantly and the Company
believes it will continue to do so. In addition, as is customary in the
industry, Cerion's sales generally are made pursuant to purchase orders which
are subject to cancellation, modification or rescheduling generally without
7
<PAGE> 8
penalties and, in the past, certain orders have been canceled or deferred, as
evidenced by the cancellation of all orders by StorMedia in the third quarter of
1996 and a reduction in orders to zero by HMT in the fourth quarter of 1996.
The Company, which has produced aluminum disk substrates since 1982,
emerged in 1994 from a primarily captive supplier relationship with Nashua's
Computer Products Divisions. Since the sale by Nashua of that division in 1994,
Cerion has expanded its customer and product base in response to growth in
market demand for substrates, and it continues its efforts to broaden this
customer base, both in the aluminum disk substrate and OPC drum substrate
markets. Nevertheless, the Company believes that its dependence on a small
number of customers will continue. Consequently, the loss of, or reduction in
demand from, one or more aluminum disk substrate customers through backwards
integration, consolidation, adverse financial circumstances, production
disruptions or otherwise does from time to time have a material adverse effect
on the Company's business, results of operations and financial condition.
Cerion, like other suppliers to the thin film disk industry, is required to
work closely with thin film disk manufacturers in order to meet their
specifications and to become qualified as a supplier. Qualifying aluminum disk
substrates requires the Company to work extensively with the customer to meet
product specifications. Therefore, customers often require a significant number
of product presentations and demonstrations as well as substantial interaction
with the Company's senior management before making a purchasing decision.
Accordingly, Cerion's products typically have a lengthy sales cycle during which
the Company may expend substantial financial resources and management time and
effort with no assurance that a sale will result.
To meet these demands, the Company uses a system of multi-tiered
communication for sales, marketing and customer service. Senior management of
the Company, as well as production, operation and engineering personnel,
directly market and interact with their counterparts at the Company's customers.
The Company believes that this multi-tiered approach has resulted in strong,
active relationships with both customers and suppliers and has helped Cerion
pursue close technical collaboration with its customers during the design phase
of new products and throughout the products' subsequent life cycle.
SOURCES OF SUPPLY
The Company relies on Alcoa Memory Products, Inc., a subsidiary of Aluminum
Company of America, Incorporated ("Alcoa") as its sole source of supply for the
aluminum disk blanks used in producing substrates. The Company also relies on
VAW of America, Inc. ("VAW") as its sole source of supply for the aluminum drum
blanks used in producing OPC drum substrates. A limited number of suppliers
provide certain chemicals used in the Company's manufacturing processes. These
chemicals often are customized to meet the Company's needs. Cerion has no
long-term supply agreement with Alcoa, VAW or any of its other suppliers. The
Company's reliance on Alcoa, VAW and its chemical suppliers therefore entails
risk. If their products were to become unavailable or available in significantly
reduced quantities or increased prices, it would have a significant impact on
the Company's operating results. Locating and qualifying a substitute supplier
could be a time-consuming and uncertain process. Changing suppliers for certain
materials could require that the product be requalified with the customer.
Moreover, a substitute supplier might be reluctant to undertake such a project
without a significant commitment by the Company to higher prices or future
purchases.
Cerion believes, however, that the advantage of working closely with these
suppliers may offset the foregoing risks. For example, Alcoa works closely with
the Company to optimize Alcoa's production processes to meet Cerion's
specifications.
COMPETITION
The aluminum disk substrate industry and the OPC drum substrate industry
are both characterized by intense competition. The Company believes that the
principal competitive factors affecting these industries are product
availability, quality, and price. Cerion's primary independent aluminum disk
substrate competitor is Kobe, which the Company believes has production capacity
that is substantially greater than that of the
8
<PAGE> 9
Company's. The Company further believes that Kobe has significantly greater
financial, technical and marketing resources. In addition, Kobe has the
advantage of being supplied by an affiliated company with the aluminum blanks
used for its aluminum disk substrates. In 1996, StorMedia announced that it
would produce aluminum disk substrates, as part of the production of nickel
plated and polished substrates, at a new manufacturing facility in Singapore. In
addition, HMT acquired a facility in 1996 in Oregon for aluminum disk substrate
production, as well as for nickel plating and polishing. HMT expanded the
capacity of this facility and as a result regular shipments to HMT were reduced
to zero in December 1996. Several other disk drive and thin film disk
manufacturers, including Seagate, Akashic and Komag produce aluminum disk
substrates internally for their own use. Moreover, backwards integrated
companies could make their aluminum disk substrates available for distribution
in the market as direct competitors of the Company. Any of these changes would
reduce the already small number of current and potential customers and increase
competition for the remaining market. Such competition could materially
adversely affect the Company's business, results of operations and financial
condition. In addition, because of the limited number of potential customers in
the disk drive industry, the loss of one or more of its customers through
backwards integration, consolidations, adverse financial circumstances or
otherwise, has during 1996 and could again have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company believes that Kobe and certain vertically-integrated disk drive
manufacturers currently are attempting to increase aluminum disk substrate
manufacturing capacity. These efforts, together with the Company's own efforts
in 1996 to increase production, have resulted in significant additional capacity
in the aluminum disk substrate industry. This additional capacity has resulted
in industry capacity in excess of demand, and Cerion has experienced increased
competition which has materially adversely affected the Company's business,
results of operations and financial condition.
The Company believes that a majority of the machined aluminum disk
substrates in the U.S. market is supplied by vertically integrated thin film
media and disk drive manufacturers, such as Seagate, Komag, and HMT, and that
the balance is supplied by independent aluminum disk substrate manufacturers
such as Cerion. Shortage of supply in the past has influenced disk drive
manufacturers and thin film disk manufacturers to vertically integrate substrate
manufacturing into their own operations.
BACKLOG
Cerion's sales generally are made pursuant to supply agreements, purchase
orders and releases which are subject to cancellation, modification or
rescheduling, generally without penalty. The Company's backlog of supply
agreements and purchase orders requesting delivery in the following quarter was
approximately $3.7 million as of December 31, 1996, $7.9 million as of December
31, 1995, and $2.5 million as of December 31, 1994. Because these purchase
orders may be canceled, modified or rescheduled by customers on short notice and
generally without penalty, the Company does not believe that its backlog as of
any particular date should be considered indicative of sales for any future
period.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards elements of its manufacturing processes, product
designs and internally developed equipment as proprietary and seeks to protect
its proprietary rights through a combination of employee and third-party
non-disclosure agreements, internal security procedures and trade secret laws.
Because patent protection requires public disclosure of a process or design,
which gives potentially valuable knowledge to a competitor even if the patent is
issued, Cerion evaluates the advantages and disadvantages of seeking patent
protection for its proprietary processes and designs versus continuing to rely
on trade secret protections. To date, the Company has generally opted to protect
its proprietary rights as trade secrets but may file patent applications in the
future.
Although Cerion intends to defend its proprietary interests, there can be
no assurance that these measures will be successful. The Company believes,
however, that because of the rapid pace of change in manufacturing processes and
product design in the aluminum disk substrate and OPC drum substrate industries,
legal protections of its proprietary rights are less significant factors in the
Company's success than the innovative skills, experience and technical
competence of its employees.
9
<PAGE> 10
The Company attempts to ensure that its products and processes do not
infringe patents and other proprietary rights of third parties. Nevertheless,
there can be no assurance that such a claim will not arise at some future date.
If a patent claim were to arise, the Company may be required to seek a patent
license from a third party. Although patent holders commonly offer such
licenses, no assurance can be given that licenses would be offered or that the
terms of any offered licenses would be acceptable to the Company. If a patent
license were to become necessary, the failure to obtain such a license could
cause Cerion to incur substantial liabilities and possibly suspend use of the
process or equipment utilizing the patented invention.
EMPLOYEES
As of February 12, 1997, Cerion had 418 full-time employees located at its
facility in Champaign, Illinois, with approximately 391 in manufacturing and
research, development and engineering, and the remainder in administration and
marketing. None of Cerion's employees is represented by a labor union. The
Company believes that attracting and motivating skilled technical talent, and
managing turnover, is vital to its success.
ENVIRONMENTAL REGULATION
The Company's operations and manufacturing processes are subject to certain
federal, state and local environmental protection laws and regulations relating
to Cerion's use, handling, storage, discharge and disposal of certain hazardous
materials and hazardous and non-hazardous wastes. The Company has not suffered
any material adverse effect in complying with applicable environmental
regulations. However, environmental laws and regulations, especially those
relating to the use of hazardous materials or generation of hazardous wastes,
may become more stringent over time. There can be no assurance that Cerion has
complied or will comply in all respects with environmental laws and regulations,
nor can there be any assurance that the Company will be able to obtain all
necessary permits that will be required under such laws and regulations. Any
modified environmental regulations, and any failure by the Company with respect
to any of the other matters described above, might subject Cerion to significant
penalties, compliance expenses, or production suspensions or delays, and might
require the Company to acquire costly equipment.
ITEM 2. FACILITIES AND PROPERTIES
The Company's headquarters and manufacturing facility are located in one
49,000 square foot building in Champaign, Illinois. At this Company-owned
facility, Cerion operates twenty manufacturing cells for aluminum disk
substrates and four for OPC drum substrates.
Cerion also has an option to purchase 3.1 acres of land adjacent to its
headquarters. In addition, the Company leases 12,000 square feet in Urbana,
Illinois for cleaning shipping containers and for storage of finished goods and
raw materials.
The Company's existing facility is operating three shifts per day, five
days per week and is using all remaining manufacturing space at this facility.
Any significant expansion of capacity would require Cerion to return to a seven
days per week manufacturing schedule, or if that was insufficient, to build,
purchase or lease a new facility.
ITEM 3. LEGAL PROCEEDINGS
On August 8, 1996, an individual plaintiff, Joshua Tietelbaum, initiated a
lawsuit against the Company, Nashua, William Blair & Co., David A. Peterson,
Paul A. Harter, Richard A. Clark and Gerald G. Garbacz in the Circuit Court of
Cook County, Illinois. The action purports to be on behalf of a class consisting
of all persons (other than the defendants) who purchased the common stock of
Cerion between May 24, 1996 and July 9, 1996. The complaint alleges that, in
connection with the Cerion initial public offering, the defendants issued
certain materially false and misleading statements and omitted the disclosure of
material facts regarding, in particular, certain significant customer
relationships. The complaint alleges that the defendants violated sections 11,
12, and 15 of the 1993 Securities Act and sections 12 and 13 of the Illinois
Blue Sky Law. The complaint seeks a declaration that the case may proceed as a
class action, damages, rescission of the sale of Cerion common stock by Cerion
and Nashua, costs, attorneys fees, and other relief on behalf of the
10
<PAGE> 11
individual plaintiff and the class. The Company believes the lawsuit to be
without merit and intends to vigorously defend against this action.
On September 4, 1996, an individual plaintiff, Philippe Olczyk, initiated a
lawsuit against the Company, Nashua, William Blair & Co., David A. Peterson,
Daniel M. Junius and Gerald G. Garbacz in the Circuit Court of Cook County,
Illinois. The action purports to be on behalf of a class consisting of all
persons (other than the defendants) who purchased the common stock of Cerion
between May 24, 1996 and July 9, 1996. The complaint alleges that, in connection
with the Cerion initial public offering, the defendants issued certain
materially false and misleading statements and omitted the disclosure of
material facts regarding, in particular, certain significant customer
relationships. The complaint alleges that the defendants violated the Illinois
Blue Sky Law and the Illinois Consumer Fraud and Deceptive Practices Act. The
complaint seeks declarations that the case may be maintained as a class action
and that the defendants violated the Illinois Consumer Fraud Act, actual and
punitive damages, costs, attorneys fees, appointment of a trustee, and other
relief. The Company believes the lawsuit to be without merit and intends to
vigorously defend against this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
December 31, 1996 to a vote of the Company's security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market and
prices are quoted on The Nasdaq National Stock Market under the symbol "CEON".
The following table sets forth the high and low bid prices as reported by The
Nasdaq Stock Market for the periods indicated beginning on May 24, 1996, the
first day of trading, after the Company completed its initial public offering:
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
1996
Second Quarter............................................. $19.50 $8.00
Third Quarter.............................................. 11.25 2.25
Fourth Quarter............................................. 9.19 2.75
</TABLE>
On March 24, 1997, the closing price of the Company's common stock as
reported by The Nasdaq National Stock Market was $3.63 per share. There were
approximately 3,800 shareholders of the common stock of the Company as of such
date. Cerion has not paid cash dividends on its Common Stock and does not intend
to do so in the foreseeable future.
11
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data for each of
the five years in the period ended December 31, 1996. The information presented
should be read in conjunction with the financial statements included elsewhere
in this report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
PRO FORMA
1992 1993 1994 1995 1995(1) 1996
------- ------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.......................... $16,542 $14,612 $14,553 $28,175 $28,175 $36,540
Cost of sales...................... 13,544 12,306 12,995 19,668 19,668 26,729
------- ------- ------- ------- ------- -------
Gross profit.................. 2,998 2,306 1,558 8,507 8,507 9,811
Selling, general & administrative
expenses......................... 1,321 1,651 1,731 2,537 3,510 5,561
------- ------- ------- ------- ------- -------
Operating income (loss)....... 1,677 655 (173) 5,970 4,997 4,250
Interest income (expense).......... (89) (94) (115) (316) (1,129) 169
------- ------- ------- ------- ------- -------
Income (loss) before provision
(benefit) for income
taxes....................... 1,588 561 (288) 5,654 3,868 4,419
Provision (benefit) for income
taxes............................ 612 222 (105) 2,210 1,512 1,914
------- ------- ------- ------- ------- -------
Net income (loss).................. $ 976 $ 339 $ (183) $ 3,444 $ 2,356 $ 2,505
======= ======= ======= ======= ======= =======
Net income per share............... $ .44 $ .39
Average common shares
outstanding...................... 5,400(2) 6,379
</TABLE>
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ (139) $ (27) $ 2,645 $ 3,436 $10,248
Total assets....................... 3,428 4,629 7,546 11,874 23,333
Short-term debt.................... 21 23 26 -- --
Long-term debt..................... 365 342 316 -- --
Stockholders' equity(3)............ 1,987 3,182 6,121 8,458 19,366
</TABLE>
- ---------------
(1) The pro forma statement of operations data presents the results of the
Company after giving effect to the following, as if each had occurred as of
January 1, 1995: (i) interest expense of $1.1 million (less $304,000
allocated interest expense to the Company) related to dividends to Nashua in
the form of certain promissory notes payable to Nashua in the aggregate
original principal amount of approximately $11.1 million; (ii) the
elimination of a $227,000 corporate charge paid to Nashua; and (iii) the
inclusion of $1.2 million in estimated selling, general and administrative
expenses that would have been incurred if the Company were an independent
public company during 1995.
(2) Reflects shares outstanding as of December 31, 1995, giving effect to a
stock split. See Stockholders' Equity and Parent Company Investment Notes to
the Financial Statements.
(3) Represents parent company investment at December 31, 1992, 1993, 1994 and
1995 and stockholders' equity at December 31, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information required not included hereunder by this item may be found in
the section captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing in the 1996 Annual Report to
Shareholders, and is incorporated herein by reference. (1)
MATTERS AFFECTING FUTURE RESULTS
This Report contains certain forward-looking statements, including the
statement below regarding the possible impact of cancellation of orders by a
major customer and backwards integration within the industry towards the
manufacture of aluminum disk substrates. Moreover, from time to time in both
written releases and reports and oral statements, the Company and its Senior
Management may express expectations regarding
12
<PAGE> 13
future performance of the Company. All of these "forward-looking statements" are
inherently uncertain, and investors must recognize that actual events could
cause actual results to differ materially from Senior Management's expectations.
Key risk factors that could, in particular, have an adverse impact on current
and future performance include the Company's dependence on a small number of
customers, as witnessed by the cancellation of orders in July 1996 by one of the
Company's two largest customers, a trend toward vertical integration among
thin-film disk manufacturers that may reduce demand for the Company's products,
as evidenced by the Company's largest customer in 1996, dependence on the
intensely competitive and cyclical hard-disk drive industry, absence of
long-term purchase commitments from the Company's customers and risk of excess
industry capacity.
With respect to forward-looking statements contained herein, we urge our
shareholders to read Cerion's Annual Report and other reports filed with the
Securities and Exchange Commission, including forms 10-Q and the Company's
Prospectus dated May 24, 1996.
FACTORS THAT AFFECT FUTURE RESULTS
Dependence on a Small Number of Customers. Aluminum disk substrates, all
sales of which were to thin film disk manufacturers, represented over 95% of the
Company's sales in 1996 and 1995. The Company's aluminum disk substrate
customers in 1996 were primarily HMT, StorMedia, Trace and Seagate which
represented approximately 45%, 30%, 11% and 6%, respectively, of the Company's
aluminum disk substrate sales. There are a relatively small number of thin film
disk manufacturers worldwide. Because many of these thin film disk manufacturers
supply all or part of their aluminum disk substrate needs either through captive
suppliers or vertically integrated operations, the Company believes that its
dependence in this business on a few customers will continue in the future. The
Company's customer base, and each customer's relative importance, fluctuated
significantly during 1996 and may continue to fluctuate. The loss of one or more
of the Company's customers or potential customers through consolidations,
adverse financial circumstances or otherwise, could have a material adverse
effect on the Company's business, results of operations and financial condition.
In 1996, StorMedia announced that it would produce aluminum disk substrates, as
part of the production of nickel plated and polished substrates, at a new
manufacturing facility in Singapore. Subsequent to this announcement, in July
the Company announced the cancellation of subsequent orders from StorMedia
because of a loss of orders from StorMedia's largest customer, not because of
StorMedia's internal capability to manufacture aluminum disk substrates in
Singapore. In addition, HMT acquired a facility in Oregon for aluminum disk
substrate production, as well as for nickel plating and polishing. HMT expanded
the capacity of this facility and regular shipments to HMT ceased in December
1996. The internal production of aluminum disk substrates by the Company's
principal customers resulted in 1996 in the reduction or elimination of
purchases from the Company and could result in the future in further reduction
or elimination of purchases from the Company or the sale by such customers of
aluminum disk substrates in competition with the Company. Moreover, the decision
by one or more of the Company's customers to move to a single supply source
could materially adversely affect the Company if the Company were not chosen as
the single supply source. Similarly, a decision by one or more of the Company's
customers to expand its base of suppliers could result in that customer reducing
its purchases from the Company and materially adversely affect the Company's
business, results of operations and financial condition. For example, in 1994
StorMedia shifted a significant portion of its demand to a competitor of the
Company to eliminate the Company's sole-supplier status, which significantly
affected the Company's results of operations.
There also has been a trend toward consolidation in the disk drive
industry, which the Company expects to continue. For example, in 1995 two
leading disk drive manufacturers, Seagate and Conner, merged to form the world's
largest disk drive manufacturing company. If any of the Company's customers or
competitors were to combine, it would result, among other things, in a reduction
of the number of their suppliers or increased pricing pressures, which could
materially adversely affect the Company's business, operating results and
financial condition.
There can be no assurance that the Company's current customers will
continue to place orders with the Company, that orders by existing customers
will continue at the levels of previous periods or that customers will not
cancel existing orders (which they did in 1996 and may generally do without
penalty), nor can there be any assurance that the Company will be able to obtain
orders from new customers. The level of orders for
13
<PAGE> 14
aluminum disk substrates also depends on the production levels of thin film disk
manufacturers, which may be subject to disruptions and delays as well as
fluctuations in market demand. The loss of one or more of the Company's current
customers or a significant reduction in the level of their orders could
materially adversely affect the Company's business, operating results and
financial condition.
Dependence on Intensely Competitive and Cyclical Hard Disk Drive Industry;
Price Reductions. The demand for the Company's aluminum substrates for thin
film disks depends solely upon the demand for hard disk drives, which in turn
depends on the demand for new personal computers, storage upgrades and add-ons
to existing computers and the growing use of sophisticated network servers. The
disk drive industry is cyclical and historically has experienced periods of
oversupply and reduced production levels, resulting in significantly reduced
demand for thin film disks, as well as pricing pressures, as evidenced by recent
market price reductions as much as 20 percent in the third and fourth quarters
of 1996. The effect of these cycles on suppliers, including manufacturers of
thin film disks and aluminum disk substrates, has been magnified by the hard
disk manufacturers' practice of ordering components, including thin film disks,
in excess of their current needs during periods of rapid growth. In recent
years, the disk drive industry has experienced significant growth, and the
Company has expanded its capacity. There can be no assurance that growth in the
disk industry will continue at recent rates or at all, that the level of demand
for disk drives will not decline, or that future demand will be sufficient to
support existing and future capacity. In addition, the growth rate of personal
computer unit sales may decline, which may adversely affect the demand for hard
disk drives. A decline in demand for hard disk drives could reduce the Company's
sales of its primary product line and have a material adverse effect on the
Company's business, operating results and financial condition.
Absence of Long-Term Purchase Commitments. As is customary in this
industry, the Company's sales are usually made pursuant to purchase orders which
are subject to cancellation, modification or rescheduling generally without
penalties. Customers typically provide the Company with forecasts of expected
requirements for the next three- to six-month period and submit purchase orders
or releases 14 to 60 days in advance of shipment dates. In the past, certain
forecasts of the Company's customers have failed to materialize or have been
altered and delivery schedules have been deferred. For instance, in 1994 and
1996, sharp reductions in two large customers' orders adversely affected the
Company's results of operations. Changes in forecasts, rescheduling and quantity
reductions may result in inventory losses and under-utilization of production
capacity. From time to time, customers have changed certain specifications or
standards for their products, resulting in lower production yields, higher
manufacturing costs and lower productivity and margins than anticipated by the
Company.
Risk of Excess Industry Capacity. The Company believes that Kobe
Precision, Inc., a subsidiary of Kobe Steel, Ltd., is attempting to increase
aluminum substrate manufacturing capacity. Kobe is the Company's primary
competitor among independent aluminum disk substrate manufacturers. The Company
increased its own manufacturing capacity in 1996, and some or most of the
vertically integrated, thin film disk or hard drive manufacturers did the same
in 1996 and are expected to continue in the future, including the Company's two
largest customers in 1996: HMT and StorMedia. These efforts may result in
significant additional capacity in the industry within the next one to two
years. The Company has already faced increased pricing pressures in the latter
half of 1996, with price reductions as much as 20 percent. To the extent the
efforts described above result in industry capacity in excess of levels of
demand, the Company could experience increased levels of competition and
increased pricing pressures, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
Intense Competition Among Manufacturers of Aluminum Disk Substrates. The
Company believes that Kobe is its primary competitor among independent aluminum
disk substrate manufacturers. Kobe has significantly greater financial,
technical and marketing resources than the Company. In addition, Kobe has an
advantage in that it is supplied by an affiliated company with the aluminum
blanks from which its aluminum disk substrates are manufactured. Moreover,
Seagate, HMT and several other industry participants currently produce aluminum
disk substrates internally for their own use, and the Company believes that a
majority of the thin film disk market currently is supplied by such vertically
integrated manufacturers. These companies could make their products available
for distribution into the market as direct competitors of the Company.
Additionally, the Company's principal current aluminum disk substrate customer
announced in 1996 that they
14
<PAGE> 15
will produce aluminum disk substrates for internal use. Any of these changes
could reduce the already small number of current and potential customers for the
Company's products and increase competition for the remaining market.
Moreover, the aluminum disk substrate industry is characterized by intense
price competition. Although the Company's products compete on the basis of
availability and quality, price also is an important competitive factor as
evidenced by recent market price reductions as much as 20 percent in the second
half of 1996. Any increase in price competition will have a material adverse
effect on the Company's gross margins and on its business, operating results and
financial condition. There can be no assurance that the Company will be able to
continue to compete successfully with existing or new competitors.
Although the Company believes its products are competitive, the Company
also believes that certain factors have had a negative impact on its products'
competitiveness. The Company currently lacks the capability to nickel plate and
polish its substrates, a capability considered important by certain customers.
Moreover, the Company's manufacturing facility in Illinois is a significant
distance from its principal customers. The Company's manufacturing process also
is more labor intensive than a number of its competitors and, as a result, may
be more adversely affected by rising labor costs.
Lengthy Qualification Process for New Products and Changes in Manufacturing
Processes. The Company is required to work closely with manufacturers in the
thin film disk industry in order to become qualified as a supplier. In addition,
changes in products or, in certain cases, manufacturing processes, also may
require additional customer qualification. Qualifying aluminum disk substrates
requires the Company to work extensively with the customer to meet product
specifications. Therefore, customers often require a significant number of
product presentations and demonstrations as well as substantial interaction with
the Company's senior management before making a purchasing decision.
Accordingly, the Company's products typically have a lengthy sales cycle during
which the Company may expend substantial financial resources and management time
and effort with no assurance that a sale will result. In the event the Company's
products do not become qualified for a particular product development program on
a timely basis, the Company could be excluded as a supplier of aluminum disk
substrates for such program entirely or could become a secondary source of
supply for such program, which typically results in lower sales. In addition,
the Company may be prevented or delayed from making certain manufacturing
process improvements due to the qualification process. Such failure to become
qualified or timely qualified could have a material adverse effect on the
Company's business, operating results and financial condition.
Dependence on Suppliers. The Company relies on Alcoa as its sole supplier
of the aluminum blanks used by it for producing aluminum disk substrates. It
also relies on a sole supplier for the aluminum drum blanks used for its OPC
drum substrates, and on a limited number of suppliers for certain materials used
in its aluminum disk and OPC drum substrate manufacturing processes, including
etching chemicals and coolants. The Company does not have any long-term supply
contracts with Alcoa or any of its other major suppliers. Changing suppliers for
certain materials would be expensive and require long lead times. For certain
materials, a change in supplier could result in the Company being required to
requalify its products with certain of its customers. Any significant
limitations on the supply of raw materials could disrupt, limit or halt the
Company's production of aluminum disk substrates or OPC drum substrates and
could have a material adverse effect on the Company's business, operating
results and financial condition. Further, a significant increase in the price of
one or more of these components also could materially adversely affect the
Company's business, results of operations and financial condition.
Future Capital Needs. Based upon anticipated cash flows from operating
activities, remaining proceeds from the initial public offering completed in
1996 and credit availability, the Company believes that it has the liquidity and
capital resources needed to meet its financial commitments through 1997. Unless
the Company achieves substantial cost improvements, increased demand and no
further price reductions beyond year end levels, the Company expects it will
continue to incur net losses and negative cash flows from operating activities.
Without such cost improvements and increased demand, at present cost levels and
planned capital expenditures of approximately $4.0 million annually, the Company
over an extended period of time will exhaust all or substantially all of its
cash resources and borrowing availability under its credit facility. In such
15
<PAGE> 16
event, the Company would be required to pursue other alternatives to improve
liquidity, including further cost reductions, sales of assets, the deferral of
certain capital expenditures and obtaining additional sources of funds. No
assurance can be given that the Company will be able to successfully pursue such
alternatives.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item may be found in the Financial section
of the 1996 Annual Report to Shareholders on pages 7 through 23, and is
incorporated herein by reference. (1)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
- ---------------
(1) The Company's 1996 Annual Report to Shareholders is not to be deemed
filed as part of this report except for those parts thereof specifically
incorporated by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required not included hereunder with respect to Directors and
compliance with Section 16(a) of the Securities Exchange Act may be found in the
sections captioned "Proposal No. 1 -- Election of Directors" and "Executive
Compensation and Other Information Concerning Directors and Executive Officers"
appearing in the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held on May 7, 1997.
Such information is incorporated herein by reference.
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ------------------------------------- --- -------------------------------------------------
<S> <C> <C>
David A. Peterson.................... 57 Chief Executive Officer, President and Director
Michael F. Brown..................... 38 Vice President-Marketing
Richard A. Clark..................... 32 Chief Financial Officer, Vice President-Finance
and Treasurer
Paul A. Harter....................... 31 Vice President-Operations
William A. Hughes.................... 34 Vice President-Product Development
Gerald G. Garbacz (2)................ 59 Chairman of the Board of Directors
Joseph A. Baute (2).................. 69 Director
Sheldon A. Buckler (1)............... 66 Director
Daniel M. Junius (1)................. 44 Director
Ross W. Manire (2)................... 45 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
The following is a biographical summary of the experience of the executive
officers, key employees and existing directors of the Company.
David A. Peterson is a co-founder of the original operations of the Company
and has served as Chief Executive Officer, President and a director of the
Company since its incorporation on December 31, 1995. From December 1991 through
December 1995, Mr. Peterson served as General Manager of the Precision
Technologies division of Nashua, the predecessor of the Company. From April 1991
until December 1991 he served as Vice President-Operations of the Thin Film unit
of the Computer Products Division of Nashua. From July 1986 until April 1991,
Mr. Peterson served as Vice President-Manufacturing of Disk-Tec (acquired
16
<PAGE> 17
by Nashua in July 1986 and became the Precision Technologies division of
Nashua). From June 1982 until July 1986 he served as Director of Operations of
Disk-Tec.
Michael F. Brown has served as Vice President-Marketing of the Company
since February 1996. From December 1995 until February 1996, Mr. Brown served as
Market Development Manager of the Company. From September 1991 to December 1995,
Mr. Brown was the Director of Sales and Marketing for Frisby Manufacturing Co.,
a precision-component manufacturer for the automotive and home appliance
industries. From January 1986 to August 1991, Mr. Brown served as Manufacturer's
Representative of J.A. Shoemaker & Associates, a manufacturing company.
Richard A. Clark has served as Chief Financial Officer, Vice
President-Finance and Treasurer of the Company since March 1996. From May 1995
through March 1996, Mr. Clark served as Director of Internal Audit of Nashua.
From January 1992 to May 1995, Mr. Clark served as Manager within the Business
Assurance practice of the accounting firm of Coopers & Lybrand L.L.P. From July
1988 to January 1992, Mr. Clark was a Senior Associate with Coopers and Lybrand
L.L.P. Mr. Clark is a certified public accountant.
Paul A. Harter has served as Vice President-Operations of the Company since
February 1996. From August 1994 until February 1996 Mr. Harter served as
Director of Operations of the Company. From July 1987 to August 1994, Mr. Harter
served the Company in various management and staff positions.
William A. Hughes has served as Vice President-Product Development of the
Company since February 1996. Mr. Hughes has served the Company as Director of
Product Development from September 1995 until February 1996, Product Development
Manager from December 1993 to September 1995, Technical Supervisor from June
1989 until December 1993, and in a variety of other management and staff
positions from June 1983 until June 1989.
Gerald G. Garbacz has served as director of the Company since January 1996,
and has been President and Chief Executive Officer since January 1996 and became
Chairman in March 1996 of Nashua Corporation. From 1994 through 1995, Mr.
Garbacz was a private investor. He was Chairman and Chief Executive Officer of
Baker & Taylor Inc., an information distribution company from 1992 to 1994 and
Executive Vice President of W.R. Grace & Co. from 1990 to 1992. He is also a
Director of Handy & Harman Inc.
Joseph A. Baute has served as a director of the Company since March 1996.
Mr. Baute served as a Director of Nashua from 1984 through June 1996, as
Chairman of its Board of Directors from April 1995 through June 1996, and in an
interim capacity as its President and Chief Executive Officer from November 1995
through December 1995. From 1979 until his retirement in 1993, Mr. Baute served
as Chairman and Chief Executive Officer of Markem Corporation, an information
application systems company. Mr. Baute is director of Houghton Mifflin Company,
State Street Boston Corporation, INSO Corporation and several private
corporations. He also is a former director and Chairman of the Federal Reserve
Bank of Boston and a former director and past Chairman of the Board of Directors
of the The New England Council for Economic Development.
Sheldon A. Buckler has served as a director of the Company since March
1996. Mr. Buckler has been Chairman of the Board of Commonwealth Energy System
since May 1995. He was Vice Chairman of the Board of Polaroid Corporation from
1990 until his retirement in 1994. He is also a Director of Nashua Corporation,
ASECO Corporation, PARLEX Corporation and Spectrum Information Technologies,
Inc.
Daniel M. Junius has served as a director of the Company since January
1996. Mr. Junius has served as Vice President-Finance and Treasurer of Nashua
since September 1995 and as Treasurer of Nashua since 1985.
Ross W. Manire has served as a director since February 1997. Mr. Manire has
served as Senior Vice President and General Manager of the Networks Products
Division of U.S. Robotics, Inc. since May 1995 and served as its Senior Vice
President-Operations and Chief Financial Officer from early 1993 through May
1995.
17
<PAGE> 18
U.S. Robotics, Inc. is an international designer, manufacturer and marketer of
high performance information access products. Mr. Manire is a director of Seaton
Corporation and the Machaira Group.
The executive officers of the Company are Messrs. Peterson, Harter, Clark,
Hughes and Brown. Officers are elected on an annual basis to serve at the
discretion of the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The information required with respect to this item may be found in the
sections captioned "Executive Compensation and Other Information Concerning
Directors and Executive Officers" appearing in the definitive Proxy Statement to
be delivered to shareholders in connection with the Annual Meeting of the
Stockholders to be held on May 7, 1997. Such information is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required with respect to this item may be found in the
section captioned "Security Ownership of Management and Directors" and "Security
Ownership of Certain Beneficial Owners and Management" appearing in the
definitive Proxy Statement to be delivered to shareholders in connection with
the Annual Meeting of Shareholders to be held on May 7, 1997. Such information
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required with respect to this item may be found in the
section captioned "Certain Transactions" appearing in the definitive Proxy
Statement to be delivered to shareholders in connection with the Annual Meeting
of Shareholders to be held on May 7, 1997. Such information is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF FORM 10-K
1. FINANCIAL STATEMENTS.
The following financial statements and supplementary data are included in
Part II Item 8 filed as part of this report:
- Balance Sheets as of December 31, 1996 and 1995
- Statements of Operations for the years ended December 31, 1996, 1995
and 1994
- Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994
- Notes to Financial Statements
- Quarterly Financial Information (unaudited)
- Report of Independent Accountants
2. FINANCIAL STATEMENT SCHEDULE.
- Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not applicable,
not required or the information required is shown in the financial statements or
the notes thereto.
18
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
--------------------------------
To the Board of Directors of
Cerion Technologies Inc.
Our audits of the financial statements referred to in our report dated February
3, 1997 (except as to the "Revolving Credit Facility" note, which is as of March
7, 1997) appearing in the 1996 Annual Report to Shareholders of Cerion
Technologies Inc. (which report and financial statements are incorporated by
reference in this Annual Report on Form 10-K) also included an audit of the
Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our
opinion, this Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements.
PRICE WATERHOUSE LLP
Chicago, Illinois
February 3, 1997, except as to the
"Revolving Credit Facility" note,
which is as of March 7, 1997
19
<PAGE> 20
3. LIST OF EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------
<C> <S>
2.1(a) Capital Contribution Agreement.
3.1(a) Amended and Restated Certificate of Incorporation of the Registrant.
3.2(a) Amended and Restated By-Laws of Cerion Technologies Inc.
4.1(a) Specimen Certificate for shares of Cerion Technologies Inc.'s Common Stock.
10.1(a) Form of Tax Allocation Agreement between Cerion Technologies Inc. and Nashua
Corporation.
10.2(a) Form of Registration Rights Agreement between Cerion Technologies Inc. and Nashua
Corporation.
10.3(a) Form of Intercompany Agreement between Cerion Technologies Inc. and Nashua
Corporation.
10.4(a) 1996 Stock Incentive Plan.
10.5(a) Form of One-Year Vesting Option Agreement.
10.6(a) Form of Performance-Accelerated Option Agreement.
10.7 Financing Agreement, dated as of March 7, 1997 between Cerion Technologies Inc.,
and The CIT Group/Business Credit, Inc.
10.8 Mortgage, Security Agreement, Financing Statement and Assignment of Rents and
Leases by and between Cerion Technologies Inc. and The CIT Group/Business Credit,
Inc..
10.9(b) Employment Contract between Cerion Technologies Inc. and David Peterson as
President and Chief Executive Officer.
10.10(b) Form of Employment Contract between Cerion Technologies Inc. and the four
remaining executive officers of the Company.
11.1 Computation of net income per common share.
27. Financial Data Schedule (EDGAR version only).
99.1 Financial Section of the 1996 Annual Report to Shareholders, pages 11 through 23.
</TABLE>
- ---------------
(a) Incorporated by Reference to Form S-1 filed on March 21, 1996 amended on
April 25, 1996, File No. 333-2590.
(b) Incorporated by Reference to Form 10-Q filed for the quarter ended September
27, 1996 (Exhibits 10.9, and 10.10 originally filed as Exhibits 10.1 and
10.2, respectively).
(B) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended December
31, 1996.
20
<PAGE> 21
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.
CERION TECHNOLOGIES INC.
By: /s/ RICHARD A. CLARK
----------------------------------
RICHARD A. CLARK
VICE PRESIDENT-FINANCE, CHIEF
FINANCIAL OFFICER AND TREASURER
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------ --------------------------------- ---------------
<C> <S> <C>
/s/ DAVID A. PETERSON President and Chief Executive March 24, 1997
- ------------------------------------------ Officer (Principal Executive
DAVID A. PETERSON Officer) and Director
/s/ RICHARD A. CLARK Chief Financial Officer, Vice March 24, 1997
- ------------------------------------------ President-Finance, and Treasurer
RICHARD A. CLARK (Principal Financial and
Accounting Officer)
/s/ JOSEPH A. BAUTE* Director
- ------------------------------------------
JOSEPH A. BAUTE
/s/ SHELDON A. BUCKLER* Director
- ------------------------------------------
SHELDON A. BUCKLER
/s/ GERALD G. GARBACZ* Director
- ------------------------------------------
GERALD G. GARBACZ
/s/ DANIEL M. JUNIUS* Director
- ------------------------------------------
DANIEL M. JUNIUS
/s/ ROSS W. MANIRE* Director
- ------------------------------------------
ROSS W. MANIRE
By /s/ RICHARD A. CLARK March 24, 1997
- ------------------------------------------
*RICHARD A. CLARK
AS ATTORNEY-IN-FACT
</TABLE>
21
<PAGE> 22
SCHEDULE II
CERION TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN C - ADDITIONS
COLUMN B -----------------------------
------------ PROVISION COLUMN D
COLUMN A BALANCE AT FOR RECOVERIES FOR ------------- COLUMN E
- ----------------------------------- BENGINNING BAD DEBTS ACCOUNTS UNCOLLECTIBLE -------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF AND CUSTOMER PREVIOUSLY ACCOUNTS BALANCE AT
AND CUSTOMER RETURNS PERIOD RETURNS WRITTEN-OFF WRITTEN-OFF END OF PERIOD
- ----------------------------------- ------------ ------------ -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996....... $ 51 $187 0 $ 4 $ 234
Year ended December 31, 1995....... 36 21 0 6 51
Year ended December 31, 1994....... 15 21 0 0 36
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT PROVISION RECOVERIES FOR
BENGINNING FOR INVENTORY UNCOLLECTIBLE
OF INVENTORY PREVIOUSLY INVENTORY BALANCE AT
INVENTORY VALUATION RESERVE PERIOD VALUATION WRITTEN-OFF WRITTEN-OFF END OF PERIOD
- ----------------------------------- ------------ ------------ -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996....... $ 50 $419 0 0 $ 469
Year ended December 31, 1995....... 19 31 0 0 50
Year ended December 31, 1994....... 50 0 0 31 19
</TABLE>
<TABLE>
<CAPTION>
RECOVERIES FOR
BALANCE AT PROVISION DEFERRED TAX
BENGINNING FOR ASSET DEFERRED TAX
DEFERRED TAX ASSET OF DEFERRED PREVIOUSLY ASSET BALANCE AT
VALUATION ALLOWANCE PERIOD TAX ASSET WRITTEN-OFF WRITTEN-OFF END OF PERIOD
- ----------------------------------- ------------ ------------ -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996....... 0 $147 0 0 $ 147
Year ended December 31, 1995....... 0 0 0 0 0
Year ended December 31, 1994....... 0 0 0 0 0
</TABLE>
22
<PAGE> 1
Exhibit 10.7
FINANCING AGREEMENT
-------------------
THE CIT GROUP/BUSINESS CREDIT, INC.
(AS LENDER)
AND
CERION TECHNOLOGIES INC.
(AS BORROWER)
DATED: MARCH 7, 1997
<PAGE> 2
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
SECTION 1. Definitions . . . . . . . . . . . . . . . . . . 2
SECTION 2. Conditions Precedent . . . . . . . . . . . . . 8
SECTION 3. Revolving Loans . . . . . . . . . . . . . . . . 12
SECTION 4. [Reserved] . . . . . . . . . . . . . . . . . . . 15
SECTION 5. Letters of Credit . . . . . . . . . . . . . . . 15
SECTION 6. Collateral . . . . . . . . . . . . . . . . . . . 18
SECTION 7. Representations, Warranties and Covenants . . . 21
SECTION 8. Interest, Fees and Expenses . .. . . . . . . . . 28
SECTION 9. Powers. . . .. .. .. . . . . . . . . . . . . . . 29
SECTION 10. Events of Default and Remedies. . . . . . . . . 30
SECTION 11. Termination . . . . . . . . . . . . . . . . . 32
SECTION 12. Miscellaneous . . . . . . . . . . . . . . . . . 35
</TABLE>
EXHIBITS
- --------
NONE
<PAGE> 3
THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation,
(hereinafter, "CITBC") with offices located at 10 South LaSalle Street, 22nd
Floor, Chicago, Illinois 60603, is pleased to confirm the terms and conditions
under which CITBC shall make revolving loans, advances and other financial
accommodations to CERION TECHNOLOGIES INC. (hereinafter, the "Company"), a
Delaware corporation with a principal place of business at 1401 Interstate
Drive, Champaign, Illinois 61821.
SECTION 1. DEFINITIONS
-----------
ACCOUNTS shall mean all of the Company's now existing and future: (A) accounts
receivable, (whether or not specifically listed on schedules furnished to
CITBC), and any and all instruments, documents, contract rights, chattel paper,
general intangibles, including, without limitation, all accounts created by or
arising from all of the Company's sales of goods or rendition of services to its
customers, and all accounts arising from sales or rendition of services made
under any of the Company's trade names or styles, or through any of the
Company's divisions; (B) unpaid seller's rights (including rescission, replevin,
reclamation and stoppage in transit) relating to the foregoing or arising
therefrom; (C) rights to any goods represented by any of the foregoing,
including rights to returned or repossessed goods; (D) reserves and credit
balances arising hereunder; (E) guarantees or collateral for any of the
foregoing; (F) insurance policies or rights relating to any of the foregoing;
and (G) cash and non-cash proceeds of any and all the foregoing.
ANNIVERSARY DATE shall mean the date occurring one year from the date hereof and
the same date in every year thereafter.
AVAILABILITY shall mean at any time of determination, the excess of (A) the
Borrowing Base at such time, over (B) the sum at such time of I) the outstanding
aggregate amount of all Obligations, II) the Availability Reserve and III) after
the occurrence of an Event of Default, all payments of the Company to CITBC
coming due within sixty (60) days from the date of computation.
AVAILABILITY RESERVE shall mean, at any time of determination, the sum of (A)
the then outstanding amount of all Letters of Credit, (B) unless and until the
Company provides CITBC with evidence of credit insurance covering the Trace
Receivable in form and substance satisfactory to CITBC and the Company assigns
to CITBC the Company's right to receive the proceeds of such credit insurance,
an amount equal to $500,000.00, (C) the sum of three (3) months rental payments
on all of the Company's leased premises for which the Company has not delivered
to CITBC a landlord's waiver in form and substance satisfactory to CITBC, and
(D) such other reserves as CITBC, in its sole discretion, deems necessary from
time to time.
BORROWING BASE shall mean the lesser of (A) the Line of Credit or
(B) the sum of I) Eligible Accounts Receivable multiplied by
<PAGE> 4
eighty-five percent (85%), and II) the lesser of x) Eligible Inventory
multiplied by fifty percent (50%) or y) $500,000.
BUSINESS DAY shall mean any day on which both CITBC and Chase Manhattan Bank are
open for business.
CAPITAL EXPENDITURES for any period shall mean the aggregate of all expenditures
of the Company during such period that in conformity with GAAP are required to
be included in or reflected by the property, plant or equipment or similar fixed
asset account reflected in the consolidated balance sheet of the Company.
CAPITAL LEASE shall mean any lease of property (whether real, personal or mixed)
which, in conformity with GAAP, is accounted for as a capital lease or a Capital
Expenditure on the balance sheet of the Company.
CHASE MANHATTAN RATE shall mean the rate of interest per annum announced by
Chase Manhattan Bank from time to time as its prime rate in effect at its
principal office in the City of New York. (The prime rate is not intended to be
the lowest rate of interest charged by Chase Manhattan Bank to its borrowers).
COLLATERAL shall mean all real and personal property in which the Company has or
obtains rights, wherever located, including, without limitation, present and
future Accounts, Equipment, Inventory, Documents of Title, General Intangibles,
Investment Property, Other Collateral and Real Estate of the Company.
COLLATERAL MANAGEMENT FEE shall mean the sum of $10,000.00 per annum which shall
be paid to CITBC in accordance with paragraph 8 of Section 8 hereof to offset
the expenses and costs of CITBC in connection with record keeping, periodic
examinations and analyzing and evaluating the Collateral.
COMMITMENT LETTER shall have the meaning provided for in paragraph (l) of
Section 2 of this Financing Agreement.
CONSOLIDATED BALANCE SHEET shall mean a consolidated balance sheet for the
Company and the consolidated subsidiaries of the Company, if any, eliminating
all inter-company transactions and prepared in accordance with GAAP.
CUSTOMARILY PERMITTED LIENS shall mean: (A) liens of local or state authorities
for franchise or other like taxes provided the aggregate amount of such liens
shall not exceed $100,000.00 at any one time; (B) statutory liens of landlords
and liens of carriers, warehousemen, mechanics, materialmen and other like liens
imposed by law, created in the ordinary course of business and for amounts not
yet due (or which are being contested in good faith by appropriate proceedings
or other appropriate actions which are sufficient to prevent imminent
foreclosure of such liens) and with
2
<PAGE> 5
respect to which adequate reserves or other appropriate provisions are being
maintained in accordance with GAAP; (C) deposits made (and the liens thereon) in
the ordinary course of business (including, without limitation, security
deposits for leases, surety bonds and appeal bonds) in connection with workers'
compensation, unemployment insurance and other types of social security benefits
or to secure the performance of tenders, bids, contracts (other than for the
repayment or guarantee of borrowed money or purchase money obligations),
statutory obligations and other similar obligations arising as a result of
progress payments under government contracts; and (D) easements (including,
without limitation, reciprocal easement agreements and utility agreements),
encroachments, minor defects or irregularities in title, variation and other
restrictions, charges or encumbrances (whether or not recorded) affecting the
Real Estate and which are listed in Schedule B of the title insurance policy
delivered to CITBC herewith; and
DEFAULT shall mean any event specified in Section 10 hereof, whether or not any
requirement for the giving of notice, the lapse of time, or both, or any other
condition, event or act, has been satisfied.
DEFAULT RATE OF INTEREST shall mean a rate of interest per annum equal to the
sum of: (A) two and one-quarter percent (2.25%) and (B) the Chase Manhattan
Rate, which CITBC shall be entitled to charge the Company on all Obligations due
CITBC by the Company to the extent provided in paragraph 2 of Section 10 of this
Financing Agreement.
DEPOSITORY ACCOUNT shall mean those accounts owned by CITBC and designated for
the deposit of proceeds of Collateral.
DOCUMENTATION FEE shall mean CITBC's standard fees relating to any and all
modifications, waivers, releases, amendments or additional collateral with
respect to this Financing Agreement, the Collateral and/or the Obligations.
DOCUMENTS OF TITLE shall mean all present and future warehouse receipts, bills
of lading, shipping documents, chattel paper, instruments and similar documents,
all whether negotiable or not and all goods and inventory relating thereto and
all cash and non-cash proceeds of the foregoing.
EARLY TERMINATION DATE shall mean the date on which the Company terminates this
Financing Agreement or the Line of Credit which date is prior to the third (3rd)
Anniversary Date.
EARLY TERMINATION FEE shall: (A) mean the fee CITBC is entitled to charge the
Company in the event the Company terminates the Line of Credit or this Financing
Agreement on a date prior to the third Anniversary Date; and (B) be the product
obtained by multiplying I)
3
<PAGE> 6
the lesser of x) $7,500,000 or y) the Borrowing Base as of the Early
Termination Date, times II) either x) two percent (2%), if the Early
Termination Date occurs on or prior to the first Anniversary Date, or y)
one percent (1%), if the Early Termination Date occurs after the first
Anniversary Date but prior to the third Anniversary Date.
ELIGIBLE ACCOUNTS RECEIVABLE shall mean the gross amount of the Company's
accounts receivable that conform to the warranties contained herein and at all
times continue to be acceptable to CITBC in its sole discretion, LESS, without
duplication, the sum of (A) any returns, discounts, claims, credits and
allowances of any nature (whether issued, owing, granted or outstanding) and (B)
reserves for: I) sales to the United States of America or to any agency,
department or division thereof; II) foreign sales, other than that portion of
foreign sales not exceeding $2,500,000 in the aggregate at any one time x)
secured by stand-by letters of credit (in form and substance satisfactory to
CITBC) issued or confirmed by, and payable at, banks having a place of business
in the United States of America and payable in United States currency, and which
sales otherwise comply with all other criteria for eligibility hereunder or y)
for which the Company has procured credit insurance in form and substance
satisfactory to CITBC and has assigned to CITBC the Company's right to receive
the proceeds of such credit insurance; III) accounts that remain unpaid more
than ninety (90) days from invoice date; IV) contras; V) sales to any subsidiary
of the Company, or to any other company affiliated with the Company in any way;
VI) bill and hold (deferred shipment) or consignment sales; VII) sales to any
customer which is w) insolvent, x) the debtor in any bankruptcy, insolvency,
arrangement, reorganization, receivership or similar proceedings under any
federal or state law, y) negotiating, or has called a meeting of its creditors
for purposes of negotiating, a compromise of its debts or z) financially
unacceptable to CITBC or has a credit rating unacceptable to CITBC; VIII) all
sales to any customer if fifty percent (50%) or more of either x) all
outstanding invoices or y) the aggregate dollar amount of all outstanding
invoices, are unpaid more than ninety (90) days from invoice date; IX) any other
reason deemed necessary by CITBC in its sole discretion.
ELIGIBLE INVENTORY shall mean the gross amount of the Company's inventory of raw
materials, valued at the lower of cost or market on a first-in, first-out
("FIFO") basis in accordance with GAAP, which (A) conform to the warranties
contained herein and (B) at all times continue to be acceptable to CITBC in its
sole discretion, LESS the value of goods not present in the United States of
America, goods to be returned to the Company's suppliers and goods in transit to
third parties (other than the Company's agents or warehouses), and LESS the
value of any reserves with respect to the Inventory deemed necessary by CITBC in
its sole discretion.
4
<PAGE> 7
EQUIPMENT shall mean all present and hereafter acquired machinery, equipment,
furnishings and fixtures, and all additions, substitutions and replacements
thereof, wherever located, together with all attachments, components, parts,
equipment and accessories installed thereon or affixed thereto and all proceeds
of whatever sort.
ERISA shall mean the Employee Retirement Income Security Act or 1974, as amended
from time to time and the rules and regulations promulgated thereunder from time
to time.
EVENT(S) OF DEFAULT shall have the meaning provided for in Section 10 of this
Financing Agreement.
GAAP shall mean generally accepted accounting principles in the United States of
America as in effect from time to time and for the period as to which such
accounting principles are to apply.
GENERAL INTANGIBLES shall have the meaning set forth in the Uniform Commercial
Code as in effect in the State of Illinois and shall include, without
limitation, all present and future right, title and interest in and to all
tradenames, trademarks (together with the goodwill associated therewith),
patents, licenses, customer lists, distribution agreements, supply agreements
and tax refunds, together with all monies and claims for monies now or hereafter
due and payable in connection with any of the foregoing or otherwise, and all
cash and non-cash proceeds thereof.
INDEBTEDNESS shall mean, without duplication, all liabilities, contingent or
otherwise, which are any of the following: (A) obligations in respect of
borrowed money or for the deferred purchase price of property, services or
assets (other than Inventory), or (B) lease obligations which, in accordance
with GAAP, have been, or which should be capitalized.
INVENTORY shall mean all of the Company's present and hereafter acquired
merchandise, inventory and goods, and all additions, substitutions and
replacements thereof, wherever located, together with all goods and materials
used or usable in manufacturing, processing, packaging or shipping same; in all
stages of production - from raw materials through work-in-process to finished
goods and all proceeds thereof of whatever sort.
INVESTMENT PROPERTY shall mean all of the Company's present and hereafter
acquired securities, securities entitlements, securities accounts and other
investment property, as such terms are defined in the Uniform Commercial Code as
in effect in the State of Illinois.
ISSUING BANK shall mean the bank issuing Letters of Credit for the Company.
5
<PAGE> 8
LETTERS OF CREDIT shall mean all letters of credit issued with the assistance of
CITBC by the Issuing Bank for or on behalf of the Company.
LETTER OF CREDIT GUARANTY shall mean the guaranty delivered by CITBC to the
Issuing Bank of the Company's reimbursement obligation under the Issuing Bank's
Reimbursement Agreement, Application for Letter of Credit or other like
document.
LETTER OF CREDIT GUARANTY FEE shall mean the fee CITBC may charge the Company
under paragraph 3 of Section 8 of this Financing Agreement for (A) issuing the
Letter of Credit Guaranty or (B) otherwise aiding the Company in obtaining
Letters of Credit.
LINE OF CREDIT shall mean the commitment of CITBC to make loans and advances
pursuant to Section 3 of this Financing Agreement and to assist the Company in
obtaining Letters of Credit under Section 5 of this Financing Agreement in the
aggregate amount equal to $7,500,000.
LINE OF CREDIT FEE shall: (A) mean the fee due CITBC at the end of each month
for the Line of Credit, and (B) be determined by multiplying the difference
between I) the Line of Credit and II) the average daily amount of Revolving
Loans and Letters of Credit outstanding for said month, by three-eighths of one
percent (0.375%) per annum for the number of days in said month.
LOAN FACILITY FEE shall mean the fee payable to CITBC in accordance with, and
pursuant to, the provisions of paragraph 7 of Section 8 of this Financing
Agreement.
OBLIGATIONS shall mean all loans and advances made or to be made by CITBC to the
Company or to others for the Company's account; any and all indebtedness and
obligations which may at any time be owing by the Company to CITBC howsoever
arising, whether now in existence or incurred by the Company from time to time
hereafter; whether secured by pledge, lien upon or security interest in any of
the Company's assets or property or the assets or property of any other person,
firm, entity or corporation; whether such indebtedness is absolute or
contingent, joint or several, matured or unmatured, direct or indirect and
whether the Company is liable to CITBC for such indebtedness as principal,
surety, endorser, guarantor or otherwise. Obligations shall also include
indebtedness owing to CITBC by the Company under this Financing Agreement or
under any other agreement or arrangement now or hereafter entered into between
the Company and CITBC; indebtedness or obligations incurred by, or imposed on,
CITBC as a result of environmental claims arising out of the Company's
operation, premises or waste disposal practices or sites; the Company's
liability to CITBC as maker or endorser on any promissory note or other
instrument for the payment of money; the Company's liability to CITBC under any
instrument of guaranty or indemnity, or arising under any guaranty, endorsement
6
<PAGE> 9
or undertaking which CITBC may make or issue to others for the Company's
account, including any accommodation extended with respect to applications for
Letters of Credit, CITBC's acceptance of drafts or CITBC's endorsement of notes
or other instruments for the Company's account and benefit.
OPERATING LEASES shall mean all leases of property (whether real, personal or
mixed) other than Capital Leases.
OTHER COLLATERAL shall mean: (A) all now owned and hereafter acquired deposit
accounts maintained by or on behalf of the Company with any bank or financial
institution; (B) all of the Company's cash and other monies and property in the
possession or control of CITBC; (C) all of the Company's book's, ledger cards,
disks and related data processing software at any time evidencing or containing
information relating to any of the Collateral described herein or otherwise
necessary or helpful in the collection thereof or realization thereon, and all
cash and non-cash proceeds of the foregoing.
OUT-OF-POCKET EXPENSES shall mean all of CITBC's present and future expenses
incurred relative to this Financing Agreement, whether incurred heretofore or
hereafter, which expenses shall include, without being limited to, the cost of
record searches, all costs and expenses incurred by CITBC in opening bank
accounts, depositing checks, receiving and transferring funds, and any charges
imposed on CITBC due to "insufficient funds" of deposited checks and CITBC's
standard fees relating thereto, any amounts paid by, incurred by or charged to,
CITBC by the Issuing Bank under the Letter of Credit Guaranty or the Company's
Reimbursement Agreement, Application for Letter of Credit or other like document
which pertain either directly or indirectly to such Letters of Credit, and
CITBC's standard fees relating to the Letters of Credit and any drafts
thereunder, local counsel fees, title insurance premiums, real estate survey
costs, the Georgia General Intangible Tax, fees and taxes relative to the filing
of financing statements, costs of preparing and recording mortgages/deeds of
trust against the Real Estate and all expenses, costs and fees set forth in
paragraph 3 of Section 10 of this Financing Agreement.
PERMITTED ENCUMBRANCES shall mean: (A) liens expressly permitted, or consented
to, by CITBC; (B) Purchase Money Liens; (C) Customarily Permitted Liens; (D)
liens granted CITBC by the Company; (E) liens of judgment creditors provided
such liens do not exceed, in the aggregate, at any time, $50,000.00 (other than
liens bonded or insured to the reasonable satisfaction of CITBC); and (F) liens
for taxes not yet due and payable or which are being diligently contested in
good faith by the Company by appropriate proceedings and which liens are not I)
other than with respect to Real Estate, senior to the liens of CITBC or II) for
taxes due the United States of America.
7
<PAGE> 10
PERMITTED INDEBTEDNESS shall mean: (A) current indebtedness maturing in less
than one year and incurred in the ordinary course of business for raw materials,
supplies, equipment, services, taxes or labor; (B) the indebtedness secured by
the Purchase Money Liens; (C) indebtedness arising under the Letters of Credit
and this Financing Agreement; (D) deferred taxes and other expenses incurred in
the ordinary course of business; and (E) other indebtedness existing on the date
of execution of this Financing Agreement and listed in the most recent financial
statement delivered to CITBC or otherwise disclosed to CITBC in writing.
PURCHASE MONEY LIENS shall mean liens on any item of Equipment acquired after
the date of this Financing Agreement provided that (A) each such lien shall
attach only to the property to be acquired, (B) a description of the property so
acquired is furnished to CITBC, and (C) the debt incurred in connection with
such acquisitions shall not exceed in the aggregate $10,000 in any fiscal year.
REAL ESTATE shall mean the Company's fee and/or leasehold interests in the real
property which has been, or will be, encumbered, mortgaged, pledged or assigned
to CITBC or its designee.
REVOLVING LOANS shall mean the loans and advances made, from time to time, to or
for the account of the Company by CITBC pursuant to Section 3 of this Financing
Agreement.
TANGIBLE NET WORTH shall mean the the excess of (A) total assets less intangible
assets, over (B) total liabilities net of subordinated debt, all determined in
accordance with GAAP on a basis consistent with the latest audited statements.
TRACE RECEIVABLE shall mean any and all existing and future Accounts from Trace
Storage Technologies Inc. or any affiliate thereof.
SECTION 2. CONDITIONS PRECEDENT
--------------------
The obligation of CITBC to execute this Financing Agreement and to make
loans hereunder is subject to the satisfaction of, or waiver of, immediately
prior to or concurrently with the making of such loans, the following conditions
precedent:
(A) LIEN SEARCHES - CITBC shall have received tax, judgment and Uniform
Commercial Code searches satisfactory to CITBC for all locations presently
occupied or used by the Company.
(B) CASUALTY INSURANCE - The Company shall have delivered to CITBC evidence
satisfactory to CITBC that casualty insurance policies listing CITBC as loss
payee or mortgagee, as the case may be, are in full force and effect, all as set
forth in Section 7, paragraph 5 of this Financing Agreement.
8
<PAGE> 11
(C) MORTGAGES/DEEDS OF TRUST - The Company shall have executed and delivered to
either CITBC or an agent of CITBC or of a title insurance company acceptable to
CITBC such mortgages and deeds of trust as CITBC may reasonably require to
obtain first liens on the Real Estate.
(D) UCC FILINGS - Any documents (including without limitation, financing
statements) required to be filed in order to create, in favor of CITBC, a first
and exclusive perfected security interest in the Collateral with respect to
which a security interest may be perfected by a filing under the Uniform
Commercial Code shall have been properly filed in each office in each
jurisdiction required in order to create in favor of CITBC a perfected lien on
the Collateral. CITBC shall have received acknowledgement copies of all such
filings (or, in lieu thereof, CITBC shall have received other evidence
satisfactory to CITBC that all such filings have been made); and CITBC shall
have received evidence that all necessary filing fees and all taxes or other
expenses related to such filings have been paid in full.
(E) TITLE INSURANCE POLICIES - CITBC shall have received, in respect of each
mortgage or deed of trust, a mortgagee's title policy or marked-up unconditional
binder for such insurance. Each such policy shall (I) be in an amount
satisfactory to CITBC; (II) insure that the mortgage or deed of trust insured
thereby creates a valid first lien on the property covered by such mortgage or
deed of trust, free and clear of all defects and encumbrances except those
acceptable to CITBC; (III) name CITBC as the insured thereunder; and (IV)
contain such endorsements and effective coverage as CITBC may reasonably
request, including without limitation the revolving line of credit endorsement.
CITBC shall also have received evidence that all premiums in respect of such
policies have been paid and that all charges for mortgage recording taxes, if
any, shall have been paid.
(F) SURVEYS - CITBC and the title insurance company issuing each policy referred
to in the immediately preceding paragraph (each, a "TITLE INSURANCE COMPANY")
shall have received maps or plats of a perimeter or boundary of the site of each
of the properties covered by the mortgages or deeds of trust, dated a date
satisfactory to CITBC and the relevant Title Insurance Company prepared by an
independent professional licensed land surveyor satisfactory to CITBC and the
relevant Title Insurance Company, which maps or plats and the surveys on which
they are based shall be made in accordance with the Minimum Standard Detail
Requirements for Land Title Surveys jointly established and adopted by the
American Land Title Association and the American Congress on Surveying and
Mapping; and, without limiting the generality of the foregoing, there shall be
surveyed and shown on the maps or plats or surveys the following: I) the
locations on such sites of all the buildings, structures and other improvements
and the established building setback lines insofar as the foregoing affect the
perimeter or
9
<PAGE> 12
boundary of such property; II) the lines of streets abutting the sites and width
thereof; III) all access and other easements appurtenant to the sites or
necessary or desirable to use the sites; IV) all roadways, paths, driveways,
easements, encroachments and overhanging projections and similar encumbrances
affecting the sites, whether recorded, apparent from a physical inspection of
the sites or otherwise known to the surveyor; V) any encroachments on any
adjoining property by the building structures and improvements on the sites; and
VI) if the site is designated as being on a filed map, a legend relating the
survey to said map. Further, the survey shall be certified to CITBC and the
Title Insurance Company and contain a legend reciting as to whether or not the
site is located in a flood zone.
(G) EXAMINATION & VERIFICATION- CITBC shall have completed to the satisfaction
of CITBC an examination and verification of the Accounts, Inventory, books and
records of the Company.
(H) OPINIONS - Counsel for the Company shall have delivered to CITBC opinions
satisfactory to CITBC opining, inter alia, that, subject to I) the filing,
priority and remedies provisions of the Uniform Commercial Code, II) the
provisions of the Bankruptcy Code, insolvency statutes or other like laws, III)
the equity powers of a court of law and IV) such other matters as may be agreed
upon with CITBC, all documents of the Company are x) valid, binding and
enforceable according to their terms, y) are duly authorized and z) do not
violate any terms, provisions, representations or covenants in the charter or
by-laws of the Company or, to the best knowledge of such counsel, of any loan
agreement, mortgage, deed of trust, note, security or pledge agreement or
indenture to which the Company is a signatory or by which the Company or its
assets are bound.
(I) ADDITIONAL DOCUMENTS - The Company shall have executed and delivered to
CITBC all loan documents necessary to consummate the lending arrangement
contemplated between the Company and CITBC.
(J) MINIMUM AVAILABILITY AND CASH BALANCE - The Company shall provide CITBC with
documentation evidencing that, as of the date hereof, I) the Company has not
less than $5,000,000 in cash (or cash equivalents) on its consolidated balance
sheet, and II) the Availability is not less than the greater of x) $3,000,000.00
less 85% of the face amount of the Trace Receivable then outstanding or y)
$2,100,000.
(K) CONTROL AGREEMENT WITH BROKER - The Company, CITBC and the Company's
stockbroker shall have entered into an agreement, in form and substance
satisfactory to CITBC, regarding the control of the Company's investment
account(s).
(L) CITBC COMMITMENT LETTER - The Company has fully complied, to the
satisfaction of CITBC, with all of the terms and conditions of
10
<PAGE> 13
the commitment letter, dated February 5, 1997 (the "Commitment Letter"), issued
by CITBC to, and accepted by, the Company.
(M) ENVIRONMENTAL REPORT - CITBC shall have received environmental audit reports
on I) all of the Company's fee interests, and II) the Company's waste disposal
practices. The reports must be satisfactory to CITBC and not disclose or
indicate any liability (real or potential) stemming from the Company's premises,
its operations, its waste disposal practices or waste disposal sites used by
Company.
(N) BOARD RESOLUTION - CITBC shall have received a copy of the resolutions of
the Board of Directors of the Company authorizing the execution, delivery and
performance of I) this Financing Agreement, and II) any related agreements, in
each case certified by the Secretary or Assistant Secretary of the Company as of
the date hereof, together with a certificate of the Secretary or Assistant
Secretary of the Company as to the incumbency and signature of the officers of
the Company executing this Financing Agreement and any certificate or other
documents to be delivered by it pursuant hereto, together with evidence of the
incumbency of such Secretary or Assistant Secretary.
(O) CORPORATE ORGANIZATION - CITBC shall have received I) a copy of the
Certificate of Incorporation of the Company certified by the Secretary of State
of its incorporation, II) a copy of the By-Laws (as amended through the date
hereof) of the Company and certified by the Secretary or Assistant Secretary of
the Company, and III) an original good standing certificate (or equivalent
document) issued by the Secretary of State of Illinois.
(P) OFFICER'S CERTIFICATE - CITBC shall have received an executed Officer's
Certificate of the Company, satisfactory in form and substance to CITBC,
certifying that I) the representations and warranties contained herein are true
and correct in all material respects on and as of the date hereof, II) the
Company is in compliance with all of the terms and provisions set forth herein,
and (III) no Event of Default or Default has occurred.
(Q) ABSENCE OF DEFAULT - No Default, Event of Default or material adverse change
in the financial condition, business, prospects, profits, operations or assets
of the Company shall have occurred.
(R) LEGAL RESTRAINTS/LITIGATION - At the date of execution of this Financing
Agreement, there shall be no I) litigation, investigation or proceeding
(judicial or administrative) pending or threatened against the Company or its
assets, by any agency, division or department of any county, city, state or
federal government, II) injunction, writ or restraining order restraining or
prohibiting the consummation of the financing arrangements contemplated under
this Financing Agreement, or III) suit, action, investigation or proceeding
(judicial or administrative) pending or threatened
11
<PAGE> 14
against the Company or its assets, which, in the opinion of CITBC, if adversely
determined could have a material adverse effect on the business, operation,
assets, or financial condition of the Company or any of the Collateral.
(S) DISBURSEMENT AUTHORIZATION - The Company shall have delivered to CITBC all
information necessary for CITBC to issue wire transfer instructions on behalf of
the Company for the initial and subsequent loans and/or advances to be made
under this Agreement including, but not limited to, disbursement authorizations
in form acceptable to CITBC.
(T) COLLECTION ACCOUNTS; PAYMENT DIRECTION - CITBC shall have established a
lockbox and opened a bank account in its name for the collection of the
Company's Accounts and the deposit of the proceeds of the Collateral, and CITBC,
the Company and the depository bank shall have entered into an agreement in form
and substance satisfactory to CITBC regarding the administration and control of
such lockbox and bank account. In addition, the Company shall have provided
CITBC with satisfactory evidence that the Company has directed its account
debtors to send payments on all Accounts directly to such lockbox.
(U) CREDIT INSURANCE FOR TRACE RECEIVABLE - As a condition precedent to the
making of any Revolving Loan or the issuance of any Letter of Credit Guaranty by
CITBC under this Financing Agreement (but not the execution of this Financing
Agreement by CITBC), the Company shall obtain credit insurance covering the
Trace Receivable in form and substance satisfactory to CITBC, and all proceeds
thereof shall be assigned to CITBC.
Upon the execution of this Financing Agreement and the initial disbursement of
loans hereunder, all of the above Conditions Precedent shall have been deemed
satisfied except as the Company and CITBC shall otherwise agree herein or in a
separate writing.
SECTION 3. REVOLVING LOANS
---------------
1. Subject to the terms and conditions of this Financing Agreement, and subject
to CITBC's right to make "overadvances", CIT agrees to make loans and advances
to the Company on a revolving basis from time to time (i.e. subject to the
limitations set forth herein, the Company may borrow, repay and re-borrow
Revolving Loans) in the aggregate principal amount not exceeding at any one time
the Borrowing Base. All requests for loans and advances must be received by an
officer of CITBC no later than 1:00 p.m., New York time, of the Business Day on
which such loans and advances are required. In no event shall CITBC have an
obligation to make any loans or advances to the Company which would exceed the
Availability as of the date such request is made. Should CITBC for any reason
honor requests for advances in excess of the limitations set forth herein, such
advances shall be considered "overadvances" and shall
12
<PAGE> 15
be made in CITBC's sole discretion, subject to any additional terms CITBC deems
necessary.
2. In furtherance of the continuing assignment and security interest in the
Company's Accounts, the Company will, upon the creation of Accounts, execute and
deliver to CITBC in such form and manner as CITBC may reasonably require, solely
for CITBC's convenience in maintaining records of collateral, such confirmatory
schedules of Accounts as CITBC may reasonably request, and such other
appropriate reports designating, identifying and describing the Accounts as
CITBC may reasonably require. In addition, upon CITBC's request the Company
shall provide CITBC with copies of agreements with, or purchase orders from, the
Company's customers, and copies of invoices to customers, proof of shipment or
delivery and such other documentation and information relating to said Accounts
and other collateral as CITBC may reasonably require. Failure to provide CITBC
with any of the foregoing shall in no way affect, diminish, modify or otherwise
limit the security interests granted herein. The Company hereby authorizes CITBC
to regard the Company's printed name or rubber stamp signature on assignment
schedules or invoices as the equivalent of a manual signature by one of the
Company's authorized officers or agents.
3. The Company hereby represents and warrants that: (A) each Account is based on
an actual and bona fide sale and delivery of goods or rendition of services to
customers, made by the Company in the ordinary course of its business; (B) the
Inventory being sold and the Accounts created are the exclusive property of the
Company and are not and shall not be subject to any lien, consignment
arrangement, encumbrance, security interest or financing statement whatsoever,
other than the Permitted Encumbrances; (C) the invoices evidencing such Accounts
are in the name of the Company; and (D) the customers of the Company have
accepted the goods or services, owe and are obligated to pay the full amounts
stated in the invoices according to their terms, without dispute, offset,
defense, counterclaim or contra, except for disputes and other matters arising
in the ordinary course of business of which the Company has advised CITBC
pursuant to paragraph 5 of this Section 3. The Company confirms to CITBC that
any and all taxes or fees relating to its business, its sales, the Accounts or
goods relating thereto, are its sole responsibility and that same will be paid
by the Company when due and that none of said taxes or fees represent a lien on
or claim against the Accounts. The Company also warrants and represents that it
is a duly and validly existing corporation and is qualified in all states where
the failure to so qualify would have an adverse effect on the business of the
Company or the ability of the Company to enforce collection of Accounts due from
customers residing in that state. The Company agrees to maintain such books and
records regarding Accounts as CITBC may reasonably require and agrees that the
books and records of the Company will reflect CITBC's interest in the Accounts.
All of the books and records of the Company will be available to CITBC at normal
13
<PAGE> 16
business hours, including any records handled or maintained for the Company by
any other company or entity.
4. The Company may and will enforce, collect and receive all amounts owing on
the Accounts for CITBC's benefit and on CITBC's behalf, but at the Company's
expense, however, such privilege shall (A) terminate automatically upon the
institution by or against the Company of any proceeding under any bankruptcy or
insolvency law or, (B) at the election of CITBC, terminate upon written notice
from CITBC to the Company. Any checks, cash, notes or other instruments or
property received by the Company with respect to any Accounts shall be held by
the Company in trust for CITBC, separate from the Company's own property and
funds, and immediately turned over to CITBC with proper assignments or
endorsements by deposit to the Depository Accounts. All amounts received by
CITBC in payment of Accounts will be credited to the Company's accounts upon
CITBC's receipt of "collected funds" at CITBC's bank account in New York, New
York on the Business Day of receipt if received no later than 1:00 pm or on the
next succeeding Business Day if received after 1:00 pm. No checks, drafts or
other instrument received by CITBC shall constitute final payment to CITBC
unless and until such instruments have actually been collected.
5. The Company agrees to notify CITBC promptly of any matters materially
affecting the value, enforceability or collectibility of any Account and of all
material customer disputes, offsets, defenses, counterclaims, returns,
rejections and all reclaimed or repossessed merchandise or goods. The Company
agrees to issue credit memoranda promptly (with duplicates to CITBC upon request
after the occurrence of an Event of Default) upon accepting returns or granting
allowances, and may continue to do so until CITBC has notified the Company that
(A) an Event of Default has occurred, (B) CITBC has declared all outstanding
Obligations immediately due and payable and (C) all future credits or allowances
are to be made only after CITBC's prior written approval. Upon the occurrence of
an Event of Default and until such time as such Event of Default is waived and
on notice from CITBC, the Company agrees that all returned, reclaimed or
repossessed merchandise or goods shall be set aside by the Company, marked with
CITBC's name and held by the Company for CITBC's account as owner and assignee.
6. CITBC shall maintain a separate account on its books in the Company's name in
which the Company will be charged with loans and advances made by CITBC to it or
for its account, and with any other Obligations, including any and all costs,
expenses and reasonable attorney's fees which CITBC may incur in connection with
the exercise by or for CITBC of any of the rights or powers herein conferred
upon CITBC, or in the prosecution or defense of any action or proceeding to
enforce or protect any rights of CITBC in connection with this Financing
Agreement or the Collateral assigned hereunder, or any Obligations owing to
CITBC by the Company. The Company will be credited with all amounts received by
CITBC from
14
<PAGE> 17
the Company or from others for the Company's account, including, as above set
forth, all amounts received by CITBC in payment of assigned Accounts and such
amounts will be applied to payment of the Obligations. In no event shall prior
recourse to any Accounts or other security granted to or by the Company be a
prerequisite to CITBC's right to demand payment of any Obligation. Further, it
is understood that CITBC shall have no obligation whatsoever to perform in any
respect any of the Company's contracts or obligations relating to the Accounts.
7. After the end of each month, CITBC shall promptly send the Company a
statement showing the accounting for the charges, loans, advances and other
transactions occurring between CITBC and the Company during that month. The
monthly statements shall be deemed correct and binding upon the Company and
shall constitute an account stated between the Company and CITBC unless CITBC
receives a written statement of the exceptions within thirty (30) days of the
date of the monthly statement.
8. In the event that either (A) the aggregate amount of all Obligations and
Letters of Credit outstanding at any time exceeds the Borrowing Base, or (B) the
Availability is ever less than zero, the Company shall immediately prepay the
Revolving Loans by an amount equal to such excess, in the case of (A), or by an
amount sufficient to cause the Availability to exceed zero, in the case of (B).
SECTION 4. [RESERVED]
SECTION 5. LETTERS OF CREDIT
-----------------
In order to assist the Company in establishing or opening Letters of
Credit with an Issuing Bank to cover the purchase of imported Inventory,
Equipment or for any other reason acceptable to CITBC, the Company has requested
CITBC to join in the applications for such Letters of Credit, and/or guarantee
payment or performance of such Letters of Credit and any drafts or acceptances
thereunder through the issuance of the Letters of Credit Guaranty, thereby
lending CITBC's credit to the Company and CITBC has agreed to do so. These
arrangements shall be handled by CITBC subject to the terms and conditions set
forth below.
1. The amount, purpose and extent of the Letters of Credit and changes or
modifications thereof by the Company and/or the Issuing Bank of the terms and
conditions thereof shall in all respects be subject to the prior approval of
CITBC, PROVIDED, HOWEVER, that (A) in no event may the aggregate amount of all
such outstanding Letters of Credit exceed, in the aggregate, at any one time
$1,000,000, (B) the amount of any Letter of Credit to be issued shall not exceed
the Availability as of the date of the issuance thereof, (C) the Letter of
Credit and all documentation in connection therewith shall be in form and
substance satisfactory to
15
<PAGE> 18
the Company, CITBC and the Issuing Bank, and (D) the initial expiration date of
any Letter of Credit shall not be more than one year from the date of the
issuance thereof.
2. CITBC shall have the right, without notice to the Company, to charge the
Company's account on CITBC's books with the amount of any and all indebtedness,
liability or obligation of any kind incurred by CITBC under the Letters of
Credit Guaranty at the earlier of (A) payment by CITBC under the Letters of
Credit Guaranty, or (B) the declaration by CITBC, after the occurrence of an
Event of Default, that all outstanding Obligations are immediately due and
payable. Any amount charged to Company's loan account shall be deemed a
Revolving Loan hereunder and shall incur interest at the rate provided in
Section 8, paragraph 1 of this Financing Agreement.
3. The Company unconditionally indemnifies CITBC and holds CITBC harmless from
any and all loss, claim or liability incurred by CITBC arising from any
transactions or occurrences relating to Letters of Credit established or opened
for the Company's account, the collateral relating thereto and any drafts or
acceptances thereunder, and all Obligations thereunder, including any such loss
or claim due to any action taken by any Issuing Bank, other than for any such
loss, claim or liability arising out of the gross negligence or willful
misconduct by CITBC under the Letters of Credit Guaranty. The Company further
agrees to hold CITBC harmless from any errors or omission, negligence or
misconduct by the Issuing Bank. The Company's unconditional obligation to CITBC
hereunder shall not be modified or diminished for any reason or in any manner
whatsoever, other than as a result of CITBC's gross negligence or willful
misconduct. The Company agrees that any charges incurred by CITBC for the
Company's account by the Issuing Bank shall be conclusive on CITBC and may be
charged to the Company's account.
4. CITBC shall not be responsible for: (A) the existence, character, quality,
quantity, condition, packing, value or delivery of the goods purporting to be
represented by any documents; (B) any difference or variation in the character,
quality, quantity, condition, packing, value or delivery of the goods from that
expressed in the documents; (C) the validity, sufficiency or genuineness of any
documents or of any endorsements thereon, even if such documents should in fact
prove to be in any or all respects invalid, insufficient, fraudulent or forged;
(D) the time, place, manner or order in which shipment is made; (E) partial or
incomplete shipment, or failure or omission to ship any or all of the goods
referred to in the Letters of Credit or documents; (F) any deviation from
instructions; (G) delay, default, or fraud by the shipper and/or anyone else in
connection with the Collateral or the shipping thereof; or (H) any breach of
contract between the shipper or vendors and the Company. Furthermore, without
being limited by the foregoing, CITBC shall not be responsible for any
16
<PAGE> 19
act or omission with respect to or in connection with any Collateral.
5. The Company agrees that any action taken by CITBC, if taken in good faith, or
any action taken by any Issuing Bank, under or in connection with the Letters of
Credit, the guarantees, the drafts or acceptances, or the Collateral, shall be
binding on the Company and shall not put CITBC in any resulting liability to the
Company. In furtherance thereof but subject to paragraph 6 below, CITBC shall
have the full right and authority to clear and resolve any questions of
non-compliance of documents; to give any instructions as to acceptance or
rejection of any documents or goods; to execute any and all steamship or airways
guaranties (and applications therefore), indemnities or delivery orders; to
grant any extensions of the maturity of, time of payment for, or time of
presentation of, any drafts, acceptances, or documents; and to agree to any
amendments, renewals, extensions, modifications, changes or cancellations of any
of the terms or conditions of any of the applications, Letters of Credit, drafts
or acceptances; all in CITBC's sole name, and the Issuing Bank shall be entitled
to comply with and honor any and all such documents or instruments executed by
or received solely from CITBC, all without any notice to or any consent from the
Company.
6. Without CITBC's express consent and endorsement in writing, the Company
agrees: (A) not to execute any and all applications for steamship or airway
guaranties, indemnities or delivery orders; to grant any extensions of the
maturity of, time of payment for, or time of presentation of, any drafts,
acceptances or documents; or to agree to any amendments, renewals, extensions,
modifications, changes or cancellations of any of the terms or conditions of any
of the applications, Letters of Credit, drafts or acceptances; and (B) after the
occurrence of an Event of Default which is not waived by CITBC, not to I) clear
and resolve any questions of non-compliance of documents, or II) give any
instructions as to acceptances or rejection of any documents or goods.
7. The Company agrees that any necessary import, export or other licenses or
certificates for the import or handling of the Collateral will have been
promptly procured; all foreign and domestic governmental laws and regulations in
regard to the shipment and importation of the Collateral, or the financing
thereof will have been promptly and full complied with; and any certificates in
that regard that CITBC may at any time request will be promptly furnished. In
this connection, the Company warrants and represents that all shipments made
under any such Letters of Credit are in accordance with the laws and regulations
of the countries in which the shipments originate and terminate, and are not
prohibited by any such laws and regulations. The Company assumes all risk,
liability and responsibility for, and agrees to pay and discharge, all present
and future local, state, federal or foreign taxes, duties, or levies. Any
embargo, restriction, laws,
17
<PAGE> 20
customs or regulations of any country, state, city, or other political
subdivision, where the Collateral is or may be located, or wherein payments are
to be made, or wherein drafts may be drawn, negotiated, accepted, or paid, shall
be solely the Company's risk, liability and responsibility.
8. Upon any payments made to the Issuing Bank under the Letter of Credit
Guaranty, CITBC shall acquire by subrogation, any rights, remedies, duties or
obligations granted or undertaken by the Company to the Issuing Bank in any
application for Letters of Credit, any standing agreement relating to Letters of
Credit or otherwise, all of which shall be deemed to have been granted to CITBC
and apply in all respects to CITBC and shall be in addition to any rights,
remedies, duties or obligations contained herein.
SECTION 6. COLLATERAL
----------
1. As security for the prompt payment in full of all loans and advances made and
to be made to the Company from time to time by CITBC pursuant hereto, as well as
to secure the payment in full of the other Obligations, the Company hereby
pledges and grants to CITBC a continuing general lien upon and security interest
in all of the Collateral, including, without limitation, all of its:
(A) present and hereafter acquired Inventory;
(B) present and hereafter acquired Equipment;
(C) present and future Accounts;
(D) present and future Documents of Title;
(E) present and future General Intangibles;
(F) present and future Investment Property;
(G) present and future Other Collateral; and
(H) Real Estate.
2. The security interests granted hereunder shall extend and
attach to:
(A) All Collateral which is presently in existence and which is owned by the
Company or in which the Company has any interest, whether held by the Company or
others for its account, and, if any Collateral is Equipment, whether the
Company's interest in such Equipment is as owner or lessee or conditional
vendee;
(B) All Equipment whether the same constitutes personal property or fixtures,
including, but without limiting the generality of the foregoing, all dies, jigs,
tools, benches, tables, accretions,
18
<PAGE> 21
component parts thereof and additions thereto, as well as all accessories,
motors, engines and auxiliary parts used in connection with or attached to the
Equipment; and
(C) All Inventory and any portion thereof which may be returned, rejected,
reclaimed or repossessed by either CITBC or the Company from the Company's
customers, as well as to all supplies, goods, incidentals, packaging materials,
labels and any other items which contribute to the finished goods or products
manufactured or processed by the Company, or to the sale, promotion or shipment
thereof.
3. The Company agrees to safeguard, protect and hold all Inventory for CITBC's
account and make no disposition thereof except in the regular course of the
business of the Company as herein provided. Inventory may only be sold and
shipped by the Company to its customers in the ordinary course of the Company's
business, on open account and on terms currently being extended by the Company
to its customers, provided that all proceeds of all sales (including cash,
accounts receivable, checks, notes, instruments for the payment of money and
similar proceeds) are forthwith transferred, endorsed, and turned over and
delivered to CITBC by deposit in the Depository Accounts. Cash sales or sales of
Inventory in which a lien upon, or security interest in, Inventory is retained
by the Company shall be made by the Company only with the approval of CITBC, and
the proceeds of such sales or sales of Inventory for cash shall not be
commingled with the Company's other property, but shall be segregated, held by
the Company in trust for CITBC as CITBC's exclusive property, and shall be
delivered immediately by the Company to CITBC in the identical form received by
the Company by deposit to the Depository Accounts. Upon the sale, exchange, or
other disposition of Inventory, as herein provided, the security interest in the
Company's Inventory provided for herein shall, without break in continuity and
without further formality or act, continue in, and attach to, all proceeds,
including any instruments for the payment of money, accounts receivable,
contract rights, documents of title, shipping documents, chattel paper and all
other cash and non-cash proceeds of such sale, exchange or disposition. As to
any such sale, exchange or other disposition, CITBC shall have all of the rights
of an unpaid seller, including stoppage in transit, replevin, rescission and
reclamation.
4. The Company agrees at its own cost and expense to keep the Equipment in as
good and substantial repair and condition as the same is now or at the time the
lien and security interest granted herein shall attach thereto, reasonable wear
and tear excepted, making any and all repairs and replacements when and where
necessary. The Company also agrees to safeguard, protect and hold all Equipment
for CITBC's account and make no disposition thereof unless the Company first
obtains the prior written approval of CITBC. Any sale, exchange or other
disposition of any Equipment
19
<PAGE> 22
shall only be made by the Company with the prior written approval of CITBC, and
the proceeds of any such sales shall not be commingled with the Company's other
property, but shall be segregated, held by the Company in trust for CITBC as
CITBC's exclusive property, and shall be delivered immediately by the Company to
CITBC in the identical form received by the Company by deposit to the Depository
Accounts. Upon the sale, exchange, or other disposition of the Equipment, as
herein provided, the security interest provided for herein shall, without break
in continuity and without further formality or act, continue in, and attach to,
all proceeds, including any instruments for the payment of money, accounts
receivable, contract rights, documents of title, shipping documents, chattel
paper and all other cash and non-cash proceeds of such sales, exchange or
disposition. As to any such sale, exchange or other disposition, CITBC shall
have all of the rights of an unpaid seller, including stoppage in transit,
replevin, rescission and reclamation. Notwithstanding anything hereinabove
contained to the contrary, the Company may sell, exchange or otherwise dispose
of obsolete Equipment or Equipment no longer needed in the Company's operations,
PROVIDED, HOWEVER, that (A) the then book value of the Equipment so disposed of
does not exceed $250,000 in the aggregate in any fiscal year and $500,000 in the
aggregate during the term of this Financing Agreement, (B) the proceeds of such
sales or dispositions are delivered to CITBC in accordance with the foregoing
provisions of this paragraph, except that the Company may retain and use such
proceeds to purchase forthwith replacement Equipment which the Company
determines in its reasonable business judgment to have a collateral value at
least equal to the Equipment so disposed of or sold, PROVIDED, HOWEVER, that the
aforesaid right shall automatically cease upon the occurrence of an Event of
Default which is not waived.
5. The rights and security interests granted to CITBC hereunder are to continue
in full force and effect, notwithstanding the termination of this Financing
Agreement or the fact that the account maintained in the Company's name on the
books of CITBC may from time to time be temporarily in a credit position, until
the final payment in full to CITBC of all Obligations and the termination of
this Financing Agreement. Any delay, or omission by CITBC to exercise any right
hereunder, shall not be deemed a waiver thereof, or be deemed a waiver of any
other right, unless such waiver be in writing and signed by CITBC. A waiver on
any one occasion shall not be construed as a bar to or waiver of any right or
remedy on any future occasion.
6. To the extent that the Obligations are now or hereafter secured by any assets
or property other than the Collateral or by the guarantee, endorsement, assets
or property of any other person, then CITBC shall have the right in its sole
discretion to determine which rights, security, liens, security interests or
remedies CITBC shall at any time pursue, foreclose upon, relinquish,
subordinate, modify or take any other action with respect to, without in any way
20
<PAGE> 23
modifying or affecting any of them, or any of CITBC's rights hereunder.
7. Any reserves or balances to the credit of the Company and any other property
or assets of the Company in the possession of CITBC may be held by CITBC as
security for any Obligations and applied in whole or partial satisfaction of
such Obligations when due. The liens and security interests granted herein and
any other lien or security interest CITBC may have in any other assets of the
Company, shall secure payment and performance of all now existing and future
Obligations. CITBC may in its discretion charge any or all of the Obligations to
the account of the Company when due.
8. This Financing Agreement and the obligation of the Company to perform all of
its covenants and obligations hereunder are further secured by a mortgage, deed
of trust or assignment on the Real Estate.
9. The Company shall give to CITBC from time to time such mortgage, deed of
trust or assignment on the Real Estate or real estate acquired after the date
hereof as CITBC shall require to obtain a valid first lien thereon subject only
to those exceptions of title as set forth in future title insurance policies
that are satisfactory to CITBC.
10. The Company shall give to CITBC from time to time such pledge or security
agreements with respect to General Intangibles and capital stock of any
subsidiary of the Company as CITBC shall require to obtain valid first liens
thereon.
SECTION 7. REPRESENTATIONS, WARRANTIES AND COVENANTS
-----------------------------------------
1. The Company hereby warrants and represents and/or covenants that: (A) the
fair value of the Company's assets exceeds the book value of the Company's
liabilities; (B) the Company is generally able to pay its debts as they become
due and payable; and (C) the Company does not have unreasonably small capital to
carry on its business as it is currently conducted absent extraordinary and
unforeseen circumstances. The Company further warrants and represents that
except for the Permitted Encumbrances, the security interests granted herein
constitute and shall at all times constitute the first and only liens on the
Collateral; that, except for the Permitted Encumbrances, the Company is or will
be at the time additional Collateral is acquired by it, the absolute owner of
the Collateral with full right to pledge, sell, consign, transfer and create a
security interest therein, free and clear of any and all claims or liens in
favor of others; that the Company will at its expense forever warrant and, at
CITBC's request, defend the same from any and all claims and demands of any
other person other than the Permitted Encumbrances; that the Company will not
grant, create or permit to exist, any lien upon or security interest in the
Collateral, or any proceeds thereof, in favor of any other
21
<PAGE> 24
person other than the holders of the Permitted Encumbrances; and that the
Equipment does not comprise a part of the Inventory of the Company and that the
Equipment is and will only be used by the Company in its business and will not
be held for sale or lease, or removed from its premises, or otherwise disposed
of by the Company without the prior written approval of CITBC except as
otherwise permitted in paragraph 4 of Section 6 of this Financing Agreement.
2. The Company agrees to maintain books and records pertaining to the Collateral
in such detail, form and scope as CITBC shall reasonably require. The Company
agrees that CITBC or its agents may enter upon the Company's premises at any
time during normal business hours, and from time to time, for the purpose of
inspecting the Collateral, and any and all records pertaining thereto. The
Company agrees to afford CITBC prior written notice of any change in the
location of any Collateral, other than to locations, that as of the date hereof,
are known to CITBC and at which CITBC has filed financing statements and
otherwise fully perfected its liens thereon. The Company is also to advise CITBC
promptly, in sufficient detail, of any material adverse change relating to the
type, quantity or quality of the Collateral or on the security interests granted
to CITBC therein.
3. The Company agrees to execute and deliver to CITBC, from time to time, solely
for CITBC's convenience in maintaining a record of the Collateral, such written
statements, and schedules as CITBC may reasonably require, designating,
identifying or describing the Collateral pledged to CITBC hereunder. The
Company's failure, however, to promptly give CITBC such statements or schedules
shall not affect, diminish, modify or otherwise limit CITBC's security interests
in the Collateral.
4. The Company agrees to comply with the requirements of all state and federal
laws in order to grant to CITBC valid and perfected first security interests in
the Collateral, subject only to the Permitted Encumbrances. CITBC is hereby
authorized by the Company to file any financing statements covering the
Collateral whether or not the Company's signature appears thereon. The Company
agrees to do whatever CITBC may reasonably request, from time to time, by way
of: (A) filing notices of liens, financing statements, amendments, renewals and
continuations thereof; (B) cooperating with CITBC's agents and employees; (C)
keeping Collateral records; (D) transferring proceeds of Collateral to CITBC's
possession; and (E) performing such further acts as CITBC may reasonably require
in order to effect the purposes of this Financing Agreement.
5. (A) The Company agrees to maintain insurance on the Real Estate, Equipment
and Inventory under such policies of insurance, with such insurance companies,
in such reasonable amounts and covering such insurable risks as are at all times
reasonably satisfactory to CITBC. All policies covering the Real Estate,
22
<PAGE> 25
Equipment and Inventory are, subject to the rights of any holders of Permitted
Encumbrances holding claims senior to CITBC, to be made payable to CITBC, in
case of loss, under a standard non-contributory "mortgagee", "lender" or
"secured party" clause and are to contain such other provisions as CITBC may
require to fully protect CITBC's interest in the Real Estate, Inventory and
Equipment and to any payments to be made under such policies. All original
policies or true copies thereof are to be delivered to CITBC with the loss
payable endorsement in CITBC's favor, and shall provide for not less than thirty
(30) days prior written notice to CITBC of the exercise of any right of
cancellation. At the Company's request, or if the Company fails to maintain such
insurance, CITBC may arrange for such insurance, but at the Company's expense
and without any responsibility on CITBC's part for: obtaining the insurance, the
solvency of the insurance companies, the adequacy of the coverage, or the
collection of claims. Upon the occurrence of an Event of Default which is not
waived, CITBC shall, subject to the rights of any holders of Permitted
Encumbrances holding claims senior to CITBC, have the sole right, in the name of
CITBC or the Company, to file claims under any insurance policies, to receive,
receipt and give acquittance for any payments that may be payable thereunder,
and to execute any and all endorsements, receipts, releases, assignments,
reassignments or other documents that may be necessary to effect the collection,
compromise or settlement of any claims under any such insurance policies.
(B) I) In the event of any loss or damage by fire or other casualty, insurance
proceeds relating to Inventory shall first reduce the Company's Revolving Loan
and then reduce any of the other Obligations.
II) In the event any part of the Company's Real Estate or Equipment is damaged
by fire or other casualty and the insurance proceeds for such damage or other
casualty (the "Proceeds") is less than or equal to $250,000.00, CITBC shall
promptly apply such Proceeds to reduce the Company's outstanding balances under
the Revolving Loan account.
III) As long as an Event of Default has not occurred (which is not waived), the
Company has sufficient business interruption insurance to replace the lost
profits of any of the Company's facilities, and the Proceeds are in excess of
$250,000.00, the Company may elect (by delivering written notice to CITBC) to
replace, repair or restore such Real Estate or Equipment to substantially the
equivalent condition prior to such fire or other casualty as set forth herein.
If the Company does not, or cannot, elect to use the Proceeds as set forth
above, CITBC may, subject to the rights of any holders of Permitted Encumbrances
holding claims senior to CITBC, apply the Proceeds to the payment of the
Obligations in such manner and in such order as CITBC may reasonably elect.
23
<PAGE> 26
IV) If the Company elects to use the Proceeds for the repair, replacement or
restoration of any Real Estate or Equipment, and there is then no Event of
Default, x) proceeds of insurance on Equipment and Real Estate in excess of
$250,000.00 will be applied to the reduction of the Revolving Loans of the
Company and y) CITBC may set up a reserve against Availability for an amount
equal to the proceeds referred to in clause x) hereof. The reserve will be
reduced dollar-for-dollar upon receipt of non-cancelable executed purchase
orders, delivery receipts or contracts for the replacement, repair or
restoration of Equipment or the Real Estate and disbursements in connection
therewith. Prior to the commencement of any restoration, repair or replacement
of Real Estate, the Company shall provide CITBC with a restoration plan and a
total budget certified by an independent third party experienced in construction
costing. If there are insufficient Proceeds to cover the cost of restoration as
so determined, the Company shall be responsible for the amount of any such
insufficiency, prior to the commencement of restoration and shall demonstrate
evidence of such before the reserve will be reduced. Completion of restoration
shall be evidenced by a final, unqualified certification of the design architect
employed, if any; an unconditional Certificate of Occupancy, if applicable; such
other certification as may be required by law; or if none of the above is
applicable, a written good faith determination of completion by the Company
(herein collectively the "Completion"). Upon Completion, any remaining reserve
as established hereunder will be automatically released.
6. The Company agrees to pay, when due, all taxes, assessments, claims and other
charges (herein "taxes") lawfully levied or assessed upon the Company or the
Collateral and if such taxes remain unpaid after the date fixed for the payment
thereof unless such taxes are being diligently contested in good faith by the
Company by appropriate proceedings or if any lien shall be claimed thereunder
(A) for taxes due the United States of America or (B) which in CITBC's opinion
might create a valid obligation having priority over the rights granted to CITBC
herein, CITBC may, on the Company's behalf, pay such taxes, and the amount
thereof shall be an Obligation secured hereby and due to CITBC on demand.
7. The Company: (A) agrees to comply with all acts, rules, regulations and
orders of any legislative, administrative or judicial body or official, which
the failure to comply with would have a material and adverse impact on the
Collateral, or any material part thereof, or on the operation of the Company's
business, provided that the Company may contest any acts, rules, regulations,
orders and directions of such bodies or officials in any reasonable manner which
will not, in CITBC's reasonable opinion, materially and adversely effect CITBC's
rights or priority in the Collateral; and (B) agrees to comply with all
environmental statutes, acts, rules, regulations or orders as presently existing
or as adopted or amended in the future, applicable to the ownership and/or use
of its real property and operation of its business,
24
<PAGE> 27
which the failure to comply with would have a material and adverse impact on the
Collateral, or any material part thereof, or on the operation of the business of
the Company. The Company hereby indemnifies CITBC and agrees to defend and hold
CITBC harmless from and against any and all loss, damage, claim, liability,
injury or expense which CITBC may sustain or incur in connection with: any claim
or expense asserted against CITBC as a result of any environmental pollution,
hazardous material or environmental clean-up of the Company's real property; or
any claim or expense which results from the Company's operations (including, but
not limited to, the Company's off-site disposal practices) and the Company
further agrees that this indemnification shall survive termination of this
Financing Agreement as well as the payment of all Obligations or amounts payable
hereunder. The Company shall not be deemed to have breached any provision of
this paragraph 7 if I) the failure to comply with the requirements of this
paragraph 7 resulted from good faith error or innocent omission, II) the Company
promptly commences and diligently pursues a cure of such breach and III) such
failure is cured within ten (10) Business Days following the Company's receipt
of notice of such failure.
8. Until termination of the Financing Agreement and payment and satisfaction of
all Obligations due hereunder, the Company agrees that, unless CITBC shall have
otherwise consented in writing, the Company will furnish to CITBC: (A) within
ninety (90) days after the end of each fiscal year of the Company, I) a
Consolidated Balance Sheet as at the close of such year, and statements of
profit and loss, cash flow and reconciliation of surplus of the Company and all
subsidiaries of the Company (if any) for such year, audited by independent
public accountants selected by the Company and satisfactory to CITBC, and II) a
copy of the Company's Form 10- K annual report for such fiscal year which the
Company files with the Securities Exchange Commission; (B) within sixty (60)
days after the end of each fiscal quarter, I) a Consolidated Balance Sheet as at
the end of such period and statements of profit and loss, cash flow and surplus
of the Company and all subsidiaries of the Company (if any) for such period,
certified by an authorized financial or accounting officer of the Company, and
II) a copy of the Company's Form 10-Q quarterly report for such period which the
Company files with the Securities Exchange Commission; (C) within thirty (30)
days after the end of each month, a Consolidated Balance Sheet as at the end of
such period and statements of profit and loss, cash flow and surplus of the
Company and all subsidiaries of the Company (if any) for such period, certified
by an authorized financial or accounting officer of the Company; and (D) from
time to time, such further information regarding the business affairs and
financial condition of the Company as CITBC may reasonably request, including
without limitation annual cash flow projections in form satisfactory to CITBC.
Each financial statement which the Company is required to submit hereunder must
be accompanied by an officer's certificate, signed by the President, Vice
President, Controller, or Treasurer, pursuant to which any one such officer
25
<PAGE> 28
must certify that: (A) the financial statement(s) fairly and accurately
represent(s) the Company's financial condition at the end of the particular
accounting period, as well as the Company's operating results during such
accounting period, subject to year-end audit adjustments; (B) during the
particular accounting period I) there has been no default or condition which,
with the passage of time or notice, or both, would constitute a Default or Event
of Default under this Financing Agreement (PROVIDED, HOWEVER, that if any such
officer has knowledge that any such Default or Event of Default has occurred
during such period, the existence of and a detailed description of same shall be
set forth in such officer's certificate), and II) the Company has not received
any notice of cancellation with respect to its property insurance policies; and
(C) the exhibits attached to such financial statement(s) constitute detailed
calculations showing compliance with all financial covenants contained in this
Financing Agreement.
9. The Company shall maintain at all times during the periods below, determined
as of the end of each calendar month during such period, a Tangible Net Worth of
not less than:
APPLICABLE PERIOD MINIMUM NET WORTH
----------------- -----------------
From the date hereof through
March 31, 1997 $15,000,000.00
For the month of April, 1997 $14,500,000.00
For the month of May, 1997 $14,250,000.00
For the month of June, 1997 $14,000,000.00
From July 1, 1997 though
August 31, 1997 $13,500,000.00
For the month of September, 1997 $13,000,000.00
For the month of October, 1997 $12,500,000.00
For the month of November, 1997 $12,250,000.00
For the month of December, 1997
and each calendar month thereafter $12,000,000.00
10. Until termination of the Financing Agreement and payment and satisfaction of
all Obligations due hereunder, the Company agrees that, without the prior
written consent of CITBC, except as otherwise herein provided, the Company will
not:
(A) Mortgage, assign, pledge, transfer or otherwise permit any lien, charge,
security interest, encumbrance or judgment, (whether as a result of a purchase
money or title retention transaction, or other security interest, or otherwise)
to exist on any of its assets or goods, whether real, personal or mixed, whether
now owned or hereafter acquired, except for the Permitted Encumbrances;
(B) Incur or create any Indebtedness other than the Permitted Indebtedness;
26
<PAGE> 29
(C) Borrow any money on the security of the Company's Collateral from sources
other than CITBC;
(D) Sell, lease, assign, transfer or otherwise dispose of I) Collateral, except
in the ordinary course of the Company's business and as otherwise specifically
permitted by this Financing Agreement, or II) either all or substantially all of
the Company's assets, which do not constitute Collateral;
(E) Merge, consolidate or otherwise alter or modify its corporate name,
principal place of business, structure, status or existence, or enter into or
engage in any operation or activity materially different from that presently
being conducted by the Company;
(F) Assume, guarantee, endorse, or otherwise become liable upon the obligations
of any person, firm, entity or corporation, except by the endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business;
(G) Declare or pay any dividend of any kind on, or purchase, acquire, redeem or
retire, any of the capital stock or equity interest of the Company, of any class
whatsoever, whether now or hereafter outstanding; or
(H) Make advances or loans to, or investments in, any firm, entity, person or
corporation in excess of $20,000 in the aggregate outstanding at any time.
11. Without the prior written consent of CITBC, the Company will not: (A) enter
into any Operating Lease if after giving effect thereto the aggregate
obligations with respect to Operating Leases of the Company during any fiscal
year would exceed $80,000; or (B) contract for, purchase, make expenditures for,
lease pursuant to a Capital Lease or otherwise incur obligations with respect to
Capital Expenditures (whether subject to a security interest or otherwise)
during any fiscal year in the aggregate amount in excess of:
(A) $5,285,000.00 for the fiscal year ending December 31, 1997;
(B) $4,000,000.00 for the fiscal year ending December 31, 1998; and
(C) $3,600,000.00 for the fiscal year ending December 31, 1999 and for each
fiscal year thereafter.
12. The Company agrees to advise CITBC in writing of: (A) all expenditures
(actual or anticipated) in excess of $25,000.00 for I) environmental clean-up,
II) environmental compliance or III) environmental testing and the impact of
said expenses on the Company's Working Capital; and B) any notices the Company
receives
27
<PAGE> 30
from any local, state or federal authority advising the Company of any
environmental liability (real or potential) stemming from the Company's
operations, its premises, its waste disposal practices, or waste disposal sites
used by the Company and to provide CITBC with copies of all such notices if so
required.
13. Without the prior written consent of CITBC, the Company agrees that it will
not enter into any transaction, including, without limitation, any purchase,
sale, lease, loan or exchange of property with any subsidiary or affiliate of
the Company.
SECTION 8. INTEREST, FEES AND EXPENSES
---------------------------
1. Interest on the Revolving Loan shall be payable monthly as of the end of each
month and shall be an amount equal to eight and one-half percent (8.50%) per
annum on the average of the net balances owing by the Company to CITBC in the
Company's account at the close of each day during such month. This rate of
interest is based on the eight and one-quarter percent (8.25%) per annum Chase
Manhattan Rate as of March 6, 1997. In the event of any change in said Chase
Manhattan Rate, the rate hereunder shall change, as of the first of the month
following any change, so as to remain one-quarter of one percent (0.25%) above
the Chase Manhattan Rate. The rate hereunder shall be calculated based on a
360-day year. CITBC shall be entitled to charge the Company's account at the
rate provided for herein when due until all Obligations have been paid in full.
2. [RESERVED]
3. In consideration of the Letter of Credit Guaranty of CITBC, the Company shall
pay CITBC the Letter of Credit Guaranty Fee which shall be an amount equal to
one and one-half percent (1.50%) per annum, payable monthly, on the face amount
of each Letter of Credit less the amount of any and all amounts previously drawn
under the Letter of Credit. The rate hereunder shall be calculated based on a
360-day year.
4. Any charges, fees, commissions, costs and expenses charged to CITBC for the
Company's account by any Issuing Bank in connection with or arising out of
Letters of Credit issued pursuant to this Financing Agreement or out of
transactions relating thereto will be charged to the Company's account in full
when charged to or paid by CITBC and when made by any such Issuing Bank shall be
conclusive on CITBC.
5. The Company shall reimburse or pay CITBC, as the case may be, for (A) all
Out-of-Pocket Expenses of CITBC and (B) any applicable Documentation Fee.
6. Upon the last Business Day of each month, commencing with March 31, 1997, the
Company shall pay CITBC the Line of Credit Fee.
28
<PAGE> 31
7. To induce CITBC to enter into this Financing Agreement and to extend to the
Company the Revolving Loan, the Company shall pay to CITBC a Loan Facility Fee
in the amount of $75,000, $37,500 of which was paid to CITBC by the Company in
connection with the Company's acceptance of the Commitment Letter and the
balance of which is due and payable upon execution of this Financing Agreement.
8. Upon the execution of this Financing Agreement and on each Anniversary Date
thereafter, the Company shall pay to CITBC the Collateral Management Fee.
9. Upon the occurrence of an Event of Default, the Company shall pay CITBC's
standard charges for, and the fees and expenses of, the CITBC personnel used by
CITBC for reviewing the books and records of the Company and for verifying,
testing, protecting, safeguarding, preserving or disposing of all or any part of
the Collateral which shall be in addition to the Collateral Management Fee.
10. The Company hereby authorizes CITBC to charge the Company's accounts with
CITBC with the amount of all payments due hereunder as such payments become due.
The Company confirms that any charges which CITBC may so make to the Company's
account as herein provided will be made as an accommodation to the Company and
solely at CITBC's discretion.
SECTION 9. POWERS
------
The Company hereby constitutes CITBC or any person or agent CITBC may
designate as its attorney-in-fact, at the Company's cost and expense, to
exercise all of the following powers, which being coupled with an interest,
shall be irrevocable until all of the Company's Obligations to CITBC have been
paid in full:
(A) To receive, take, endorse, sign, assign and deliver, all in the name of
CITBC or the Company, any and all checks, notes, drafts, and other documents or
instruments relating to the Collateral;
(B) To receive, open and dispose of all mail addressed to the Company and to
notify postal authorities to change the address for delivery thereof to such
address as CITBC may designate;
(C) To request from customers indebted on Accounts at any time, in the name of
CITBC or the Company or that of CITBC's designee, information concerning the
amounts owing on the Accounts;
(D) To transmit to customers indebted on Accounts notice of CITBC's interest
therein and to notify customers indebted on Accounts to make payment directly to
CITBC for the Company's account; and
29
<PAGE> 32
(E) To take or bring, in the name of CITBC or the Company, all steps, actions,
suits or proceedings deemed by CITBC necessary or desirable to enforce or effect
collection of the Accounts.
Notwithstanding anything hereinabove contained to the contrary, the powers set
forth in (B), (D) and (E) above may only be exercised after the occurrence of an
Event of Default and until such time as such Event of Default is waived.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES
------------------------------
1. Notwithstanding anything hereinabove to the contrary, CITBC may terminate
this Financing Agreement immediately upon the occurrence of any of the following
(herein "Events of Default"):
(A) cessation of the business of the Company or the calling of a meeting of the
creditors of the Company for purposes of compromising the debts and obligations
of the Company;
(B) the failure of the Company to generally meet debts as they mature;
(C) the commencement by or against the Company of any bankruptcy, insolvency,
arrangement, reorganization, receivership or similar proceedings under any
federal or state law;
(D) breach by the Company of any warranty, representation or covenant contained
herein (other than those referred to in sub-paragraph (e) below) or in any other
written agreement between the Company or CITBC, provided that such Default by
the Company of any of the warranties, representations or covenants referred in
this sub-paragraph (d) shall not be deemed to be an Event of Default unless and
until such Default shall remain unremedied to CITBC's satisfaction for a period
of ten (10) Business Days from the date of such Default;
(E) breach by the Company of any warranty, representation or covenant of Section
3, Paragraphs 3 (other than the third sentence of paragraph 3) and 4; Section 6,
Paragraphs 3 and 4 (other than the first sentence of paragraph 4); Section 7,
Paragraphs 1,5,6, 9, 10, 11 and 13;
(F) failure of the Company to pay any of the Obligations on the due date
thereof, provided that nothing contained herein shall prohibit CITBC from
charging such amounts to the Company's account on the due date thereof; or
(G) the Company shall I) engage in any "prohibited transaction" as defined in
ERISA, II) have any "accumulated funding deficiency" as defined in ERISA, III)
have any "reportable event" enumerated in subsection c(1), c(5), c(6) or c(13)
of Section 4303 of ERISA, or have any other "reportable event" and fail to give
CITBC prompt
30
<PAGE> 33
written notice thereof, IV) terminate any Plan, as defined in ERISA or V) be
engaged in any proceeding in which the Pension Benefit Guaranty Corporation
shall seek appointment, or is appointed, as trustee or administrator of any
Plan, as defined in ERISA; and with respect to this sub-paragraph (g) such event
or condition x) remains uncured for a period of thirty (30) Business Days from
date of occurrence and y) could, in the reasonable opinion of CITBC, subject the
Company to any tax, penalty or other liability material to the business,
operations or financial condition of the Company.
2. Upon the occurrence of a Default and/or an Event of Default, at the option of
CITBC, all loans and advances provided for in paragraph 1 of Section 3 of this
Financing Agreement shall be thereafter in CITBC's sole discretion and the
obligation of CITBC to make revolving loans and/or open Letters of Credit shall
cease unless such Default is cured to CITBC's reasonable satisfaction within the
applicable grace period or Event of Default is waived by CITBC and at the option
of CITBC upon the occurrence of an Event of Default: (A) all Obligations shall
become immediately due and payable; (B) CITBC may charge the Company the Default
Rate of Interest on all then outstanding or thereafter incurred Obligations in
lieu of the interest provided for in paragraphs one and two of Section 8 of this
Financing Agreement provided I) CITBC has given the Company written notice of
the Event of Default, provided, however, that no notice is required if the Event
of Default is the Event listed in paragraph 1(c) of this Section 10 and II) the
Company has failed to cure the Event of Default within ten (10) Business Days
after x) CITBC deposited such notice in the United States mail or y) the
occurrence of the Event of Default listed in paragraph 1(c) of this Section 10;
and (C) CITBC may immediately terminate this Financing Agreement upon notice to
the Company, PROVIDED, HOWEVER, that no notice of termination is required if the
Event of Default is the Event listed in paragraph 1(c) of this Section 10. The
exercise of any option is not exclusive of any other option which may be
exercised at any time by CITBC.
3. Immediately upon the occurrence of any Event of Default, CITBC may to the
extent permitted by law: (A) remove from any premises where same may be located
any and all documents, instruments, files and records, and any receptacles or
cabinets containing same, relating to the Accounts, or CITBC may use, at the
Company's expense, such of the Company's personnel, supplies or space at the
Company's places of business or otherwise, as may be necessary to properly
administer and control the Accounts or the handling of collections and
realizations thereon; (B) bring suit, in the name of the Company or CITBC, and
generally shall have all other rights respecting said Accounts, including
without limitation the right to I) accelerate or extend the time of payment, II)
settle, compromise, release in whole or in part any amounts owing on any
Accounts and III) issue credits in the name of the Company or CITBC; (C) sell,
assign and deliver the Collateral and any returned, reclaimed or repossessed
merchandise, with or without
31
<PAGE> 34
advertisement, at public or private sale, for cash, on credit or otherwise, at
CITBC's sole option and discretion, and CITBC may bid or become a purchaser at
any such sale, free from any right of redemption, which right is hereby
expressly waived by the Company; (D) foreclose the security interests created
herein by any available judicial procedure, or to take possession of any or all
of the Inventory and Equipment without judicial process, and to enter any
premises where any Inventory and Equipment may be located for the purpose of
taking possession of or removing the same and (E) exercise any other rights and
remedies provided in law, in equity, by contract or otherwise. CITBC shall have
the right, without notice or advertisement, to sell, lease, or otherwise dispose
of all or any part of the Collateral whether in its then condition or after
further preparation or processing, in the name of the Company or CITBC, or in
the name of such other party as CITBC may designate, either at public or private
sale or at any broker's board, in lots or in bulk, for cash or for credit, with
or without warranties or representations, and upon such other terms and
conditions as CITBC in its sole discretion may deem advisable, and CITBC shall
have the right to purchase at any such sale. If any Inventory and Equipment
shall require rebuilding, repairing, maintenance or preparation, CITBC shall
have the right, at its option, to do such of the aforesaid as is necessary, for
the purpose of putting the Inventory and Equipment in such saleable form as
CITBC shall deem appropriate. The Company agrees, at the request of CITBC, to
assemble the Inventory and Equipment and to make it available to CITBC at
premises of the Company or elsewhere and to make available to CITBC the premises
and facilities of the Company for the purpose of CITBC's taking possession of,
removing or putting the Inventory and Equipment in saleable form. However, if
notice of intended disposition of any Collateral is required by law, it is
agreed that ten (10) Business Days notice shall constitute reasonable
notification and full compliance with the law. The net cash proceeds resulting
from CITBC's exercise of any of the foregoing rights, (after deducting all
charges, costs and expenses, including reasonable attorneys' fees) shall be
applied by CITBC to the payment of the Company's Obligations, whether due or to
become due, in such order as CITBC may elect, and the Company shall remain
liable to CITBC for any deficiencies, and CITBC in turn agrees to remit to the
Company or its successors or assigns, any surplus resulting therefrom. The
enumeration of the foregoing rights is not intended to be exhaustive and the
exercise of any right shall not preclude the exercise of any other rights, all
of which shall be cumulative. The mortgage, deed of trust or assignment on the
Real Estate shall govern the rights and remedies of CITBC thereto.
SECTION 11. TERMINATION
-----------
Except as otherwise permitted herein, CITBC may terminate this Financing
Agreement and the Line of Credit only as of the third or any subsequent
Anniversary Date and then only by giving the Company
32
<PAGE> 35
at least sixty (60) days prior written notice of termination. Notwithstanding
the foregoing CITBC may terminate the Financing Agreement immediately upon the
occurrence of an Event of Default, PROVIDED, HOWEVER, that if the Event of
Default is an event listed in paragraph 1(c) of Section 10 of this Financing
Agreement, CITBC may regard the Financing Agreement as terminated and notice to
that effect is not required. This Financing Agreement, unless terminated as
herein provided, shall automatically continue from Anniversary Date to
Anniversary Date. The Company may terminate this Financing Agreement and the
Line of Credit at any time upon at least sixty (60) days' prior written notice
to CITBC; PROVIDED, HOWEVER, that if such termination is on a date other than
the third Anniversary Date or any subsequent Anniversary Date, the Company shall
pay to CITBC, immediately on demand, the Early Termination Fee, unless such
termination occurs in connection with a sale of all or substantially all of the
capital stock or assets of the Company which results in the repayment in full of
all Obligations, in which case no Early Termination Fee shall be owed by the
Company to CITBC. All Obligations shall become due and payable as of any
termination hereunder or under Section 10 hereof and, pending a final
accounting, CITBC may withhold any balances in the Company's account (unless
supplied with an indemnity satisfactory to CITBC) to cover all of the Company's
Obligations, whether absolute or contingent, including contingent Obligations
with respect to Letters of Credit outstanding at the time of termination. All of
CITBC's rights, liens and security interests shall continue after any
termination until all Obligations have been paid and satisfied in full.
SECTION 12. MISCELLANEOUS
-------------
1. The Company hereby waives diligence, demand, presentment and protest and any
notices thereof as well as notice of nonpayment. No delay or omission of CITBC
or the Company to exercise any right or remedy hereunder, whether before or
after the happening of any Event of Default, shall impair any such right or
shall operate as a waiver thereof or as a waiver of any such Event of Default.
No single or partial exercise by CITBC of any right or remedy precludes any
other or further exercise thereof, or precludes any other right or remedy.
2. This Financing Agreement and the documents executed and delivered in
connection therewith constitute the entire agreement between the Company and
CITBC; supersede any prior agreements; can be changed only by a writing signed
by both the Company and CITBC; and shall bind and benefit the Company and CITBC
and their respective successors and assigns.
3. In no event shall the Company, upon demand by CITBC for payment of any
indebtedness relating hereto, by acceleration of the maturity thereof, or
otherwise, be obligated to pay interest and fees in excess of the amount
permitted by law. Regardless of any
33
<PAGE> 36
provision herein or in any agreement made in connection herewith, CITBC shall
never be entitled to receive, charge or apply, as interest on any indebtedness
relating hereto, any amount in excess of the maximum amount of interest
permissible under applicable law. If CITBC ever receives, collects or applies
any such excess, it shall be deemed a partial repayment of principal and treated
as such; and if principal is paid in full, any remaining excess shall be
refunded to the Company. This paragraph shall control every other provision
hereof and of any other agreement made in connection herewith.
4. If any provision hereof or of any other agreement made in connection herewith
is held to be illegal or unenforceable, such provision shall be fully severable,
and the remaining provisions of the applicable agreement shall remain in full
force and effect and shall not be affected by such provision's severance.
Furthermore, in lieu of any such provision, there shall be added automatically
as a part of the applicable agreement a legal and enforceable provision as
similar in terms to the severed provision as may be possible.
5. THE COMPANY AND CITBC EACH HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY
ACTION OR PROCEEDING ARISING OUT OF THIS FINANCING AGREEMENT. THE COMPANY HEREBY
IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO SERVICE OF
PROCESS BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED.
6. Except as otherwise herein provided, any notice or other communication
required hereunder shall be in writing, and shall be deemed to have been validly
served, given or delivered when hand delivered or sent by facsimile, or three
Business Days after deposit in the United State mails, with proper first class
postage prepaid and addressed to the party to be notified as follows:
(A) if to CITBC, at:
The CIT Group/Business Credit, Inc.
10 South LaSalle Street, 22nd Floor
Chicago, Illinois 60603
Attn: Regional Manager
Telecopier No. (312) 443-0139
(B) if to the Company at:
1401 Interstate Drive
Champaign, Illinois 61821
Attn: Richard A. Clark, Vice
President-Finance and CFO
Telecopier No. (217) 359-3702
with a copy to:
34
<PAGE> 37
Erwin, Martinkus, Cole & Ansel
411 W. University Avenue
Champaign, Illinois 61820
Attn: Sam Erwin, Esq.
Telecopier No. (217) 351-4314
or to such other address as any party may designate for itself by
like notice.
7. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS FINANCING AGREEMENT
SHALL BE GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS.
IN WITNESS WHEREOF, the parties hereto have caused this Financing Agreement to
be executed, agreed to, accepted and delivered in Chicago, Illinois by their
proper and duly authorized officers as of the date set forth above.
THE CIT GROUP/BUSINESS CREDIT, INC.
By:/s/ Jim Anderson
-------------------------------
Title: Vice President
CERION TECHNOLOGIES INC.
By:/s/Richard A. Clark
-------------------------------
Title: Vice President/Finance
35
<PAGE> 1
Exhibit 10.8
Illinois
MORTGAGE, SECURITY AGREEMENT,
FINANCING STATEMENT AND
ASSIGNMENT OF RENTS AND LEASES
------------------------------
THIS MORTGAGE, SECURITY AGREEMENT, FINANCING STATEMENT AND ASSIGNMENT OF
RENTS AND LEASES ("Mortgage") entered into as of the 7th day of March, 1997 by
CERION TECHNOLOGIES INC., a Delaware corporation ("Mortgagor"), having its
principal place of business at 1401 Interstate Drive, Champaign, Illinois 61821
to THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation with an office
located at 10 South LaSalle Street, Chicago, Illinois 60603 ("Mortgagee").
Except as otherwise provided herein, all capitalized terms used but not defined
herein shall have the respective meanings given to them in the Loan Agreement
(as hereinafter defined).
WITNESSETH:
WHEREAS, pursuant to and upon satisfaction of the conditions set forth in
that certain Financing Agreement, dated March 7, 1997, between Mortgagor and
Mortgagee (the Financing Agreement and any and all renewals, extensions for any
period, increases or rearrangements thereof is referred to as the "Loan
Agreement"), Mortgagee has agreed to make certain Revolving Loans and Mortgagee
has also agreed to guaranty the Mortgagor's reimbursement obligations to the
Issuing Bank for its issuance of Letters of Credit and Mortgagee has further
agreed to extend certain other financial accommodations from time to time to
Mortgagor, all in an aggregate principal amount not to exceed Seven Million Five
Hundred Thousand and no/100 Dollars ($7,500,000.00); and
<PAGE> 2
WHEREAS, as a condition to Mortgagee's extension of certain financial
accommodations to Mortgagor including, without limitation, the extension of
credit pursuant to the Loan Agreement, Mortgagee has required that Mortgagor
enter into this Mortgage and grant to Mortgagee the liens and security interests
referred to herein to secure (i) payment of the principal amount, together with
interest thereon, of all present and future advances of money made by Mortgagee
to Mortgagor, including without limitation, the reborrowing of principal
previously repaid pursuant to the Loan Agreement, as well as all other
Obligations (all as defined and provided in the Loan Agreement) of Mortgagor to
Mortgagee; (ii) repayment of all reimbursement obligations due the Issuing Bank
from time to time, (iii) other payment and performance obligations related to
this Mortgage (the aforesaid Obligations of Mortgagor to Mortgagee, together
with the other payment and performance obligations being hereinafter referred to
collectively as the "Liabilities"); and
WHEREAS, the Liabilities secured hereby shall not exceed an aggregate
principal amount, at any one time outstanding of Twenty Five Million and no/100
Dollars ($25,000,000.00), PROVIDED, that the foregoing limitation shall apply
only to the lien upon the real property created by this Mortgage, and it shall
not in any manner limit, affect or impair any grant of a security interest or
other right in favor of the Mortgagee under the provisions of the Loan Agreement
or under any other security agreement at any time executed by Mortgagor;
NOW, THEREFORE, in consideration of the premises contained herein and to
secure payment of the Liabilities and in consideration of One Dollar ($1.00) in
hand paid, the receipt and sufficiency whereof are hereby acknowledged,
Mortgagor does hereby grant, remise, release, alien, convey, mortgage and
warrant to Mortgagee, its successors and assigns, the following described real
estate (the "Land") in Champaign County, Illinois, and does further grant a
security interest to Mortgagee in all Personal Property (as defined below) as
well as all Mortgaged Property (as defined below) as may be secured under the
Uniform Commercial Code (the "Code") in effect in the State of Illinois (the
"State"):
See Exhibit A attached hereto and by this reference made a part hereof for
the legal description of the Land
which Land, together with all right, title and interest, if any, which Mortgagor
may now have or hereafter acquire in and to all improvements, buildings and
structures now or hereafter located
-2-
<PAGE> 3
thereon of every nature whatsoever, is herein called the "Premises".
TOGETHER WITH all right, title and interest, if any, including any
after-acquired right, title and interest, and including any right of use or
occupancy, which Mortgagor may now have or hereafter acquire in and to (a) all
easements, rights of way, gores of land or any lands occupied by streets, ways,
alleys, passages, sewer rights, water courses, water rights and powers, and
public places adjoining said Land, and any other interests in property
constituting appurtenances to the Premises, or which hereafter shall in any way
belong, relate or be appurtenant thereto, and (b) all hereditaments, gas, oil,
minerals (with the right to extract, sever and remove such gas, oil and
minerals), and easements, of every nature whatsoever, located in or on the
Premises and all other rights and privileges thereunto belonging or appertaining
and all extensions, additions, improvements, betterments, renewals,
substitutions and replacements to or of any of the rights and interests
described in subparagraphs (a) and (b) above (hereinafter the "Property
Rights").
TOGETHER WITH all right, title and interest, if any, including any
after-acquired right, title and interest, and including any right of use or
occupancy, which Mortgagor may now or hereafter acquire in and to all fixtures
and appurtenances of every nature whatsoever now or hereafter located in, on or
attached to, and used or intended to be used in connection with, or with the
operation of, the Premises, including, but not limited to (a) all apparatus,
machinery and equipment of Mortgagor and (b) all extensions, additions,
improvements, betterments, renewals, substitutions and replacements to or of any
of the foregoing (the items described in the foregoing clauses (a) and (b) being
the "Fixtures"); as well as all personal property and equipment of every nature
whatsoever now or hereafter located in or on the Premises, including but not
limited to (c) accounts, contract rights, general intangibles, tax refunds,
chattel paper, instruments, notes, letters of credit, documents, documents of
title; (d) inventory; (e) equipment; (f) all of Mortgagor's deposit accounts
(general or special) with and credits and other claims against Mortgagee, or any
other financial institution with which Mortgagor maintains deposits; (g) all of
Mortgagor's now owned or hereafter acquired monies, and any and all other
property and interests in property of Mortgagor now or hereafter coming into the
actual possession, custody or control of Mortgagee or any agent or affiliate of
Mortgagee in any way or for any purpose (whether for safekeeping, deposit,
custody, pledge, transmission, collection or otherwise);
-3-
<PAGE> 4
(h) all insurance proceeds of or relating to any of the foregoing; (i) all
insurance proceeds relating to any key man life insurance policy covering the
life of any officer or director of Mortgagor; (j) all of Mortgagor's books and
records relating to any of the foregoing; and (k) all accessions and additions
to, substitutions for, and replacements, products and proceeds of any of the
foregoing clauses (c) through (j) (the items described in the foregoing clauses
(c) through (k) and any other personal property referred to in this paragraph
being the "Personal Property"). It is mutually agreed, intended and declared
that the Premises and all of the Property Rights and Fixtures owned by Mortgagor
(referred to collectively herein as the "Real Property") shall, so far as
permitted by law, be deemed to form a part and parcel of the Land and for the
purpose of this Mortgage to be real estate and covered by this Mortgage. It is
also agreed that if any of the property herein mortgaged is of a nature so that
a security interest therein can be perfected under the Code in effect in the
State, this instrument shall constitute a security agreement, fixture filing and
financing statement, and Mortgagor agrees to execute, deliver and file or refile
any financing statement, continuation statement, or other instruments Mortgagee
may reasonably require from time to time to perfect or renew such security
interest under the Code. To the extent permitted by law, (i) all of the Fixtures
are or are to become fixtures on the Land and (ii) this instrument, upon
recording or registration in the real estate records of the proper office, shall
constitute a "fixture-filing" within the meaning of Sections 9-313 and 9-402 of
the Code. Subject to the terms and conditions of the Loan Agreement, the
remedies for any violation of the covenants, terms and conditions of the
agreements herein contained shall be as prescribed herein or by general law, or,
as to that part of the security in which a security interest may be perfected
under the Code, by the specific statutory consequences now or hereafter enacted
and specified in the Code, all at Mortgagee's sole election.
TOGETHER WITH all the estate, right, title and interest of the Mortgagor in
and to (i) all judgments, insurance proceeds, awards of damages and settlements
resulting from condemnation proceedings or the taking of the Real Property, or
any part thereof, under the power of eminent domain or for any damage (whether
caused by such taking or otherwise) to the Real Property, or any part thereof,
or to any rights appurtenant thereto, and all proceeds of any sales or other
dispositions of the Real Property or any part thereof; and (except as otherwise
provided herein or in the Loan Agreement) the Mortgagee is hereby authorized to
collect and receive said awards and proceeds and to give proper receipts and
acquittances therefor, and to apply the
-4-
<PAGE> 5
same as provided in the Loan Agreement; and (ii) all contract rights, general
intangibles, actions and rights in action relating to the Real Property or the
Personal Property including, without limitation, all rights to insurance
proceeds and unearned premiums arising from or relating to damage to the Real
Property or the Personal Property; and (iii) all proceeds, products,
replacements, additions, substitutions, renewals and accessions of and to the
Real Property and the Personal Property. (The rights and interests described in
this paragraph shall hereinafter be called the "Intangibles".)
As additional security for the Liabilities secured hereby, Mortgagor (i)
does hereby pledge and assign to Mortgagee from and after the date hereof
(including any period of redemption), primarily and on a parity with the Real
Property, and not secondarily, all the rents, issues and profits of the Real
Property and all rents, issues, profits, revenues, royalties, bonuses, rights
and benefits due, payable or accruing (including all deposits of money as
advance rent, for security or as earnest money or as down payment for the
purchase of all or any part of the Real Property) (the "Rents") under any and
all present and future leases, contracts or other agreements relative to the
ownership or occupancy of all or any portion of the Real Property, and (ii)
except to the extent such a transfer or assignment is not permitted by the terms
thereof, does hereby transfer and assign to Mortgagee all such leases and
agreements (including all Mortgagor's rights under any contracts for the sale of
any portion of the Mortgaged Property and all revenues and royalties under any
oil, gas and mineral leases relating to the Real Property) (the "Leases").
Mortgagee hereby grants to Mortgagor the right to collect and use the Rents as
they become due and payable under the Leases, but not more than one (1) month in
advance thereof, unless an Event of Default shall have occurred PROVIDED that
the existence of such right shall not operate to subordinate this assignment to
any subsequent assignment, in whole or in part, by Mortgagor, and any such
subsequent assignment shall be subject to the rights of the Mortgagee under this
Mortgage. Mortgagor further agrees to execute and deliver such assignments of
leases or assignments of land sale contracts as Mortgagee may from time to time
request. In the event of an Event of Default (1) the Mortgagor agrees, upon
demand, to deliver to the Mortgagee all of the Leases with such additional
assignments thereof as the Mortgagee may request and agrees that the Mortgagee
may assume the management of the Real Property and collect the Rents, applying
the same upon the Liabilities in the manner provided in the Loan Agreement, and
(2) the Mortgagor hereby authorizes and directs all tenants, purchasers or
other persons occupying or otherwise acquiring any
-5-
<PAGE> 6
interest in any part of the Real Property to pay the Rents due under the Leases
to the Mortgagee upon request of the Mortgagee. Mortgagor hereby appoints
Mortgagee as its true and lawful attorney in fact to manage said property and
collect the Rents, with full power to bring suit for collection of the Rents and
possession of the Real Property, giving and granting unto said Mortgagee and
unto its agent or attorney full power and authority to do and perform all and
every act and thing whatsoever requisite and necessary to be done in the
protection of the security hereby conveyed; PROVIDED, HOWEVER, that (i) this
power of attorney and assignment of rents shall not be construed as an
obligation upon said Mortgagee to make or cause to be made any repairs that may
be needful or necessary and (ii) Mortgagee agrees that until such Event of
Default as aforesaid, Mortgagee shall permit Mortgagor to perform the
aforementioned management responsibilities. Upon Mortgagee's receipt of the
Rents, at Mortgagee's option, it may use the proceeds of the Rents to pay: (1)
reasonable charges for collection thereof, costs of necessary repairs and other
costs requisite and necessary during the continuance of this power of attorney
and assignment of rents, (2) general and special taxes, insurance premiums, and
(3) any or all of the Liabilities pursuant to the provisions of the Loan
Agreement. This power of attorney and assignment of rents shall be irrevocable
until this Mortgage shall have been satisfied and released of record and the
releasing of this Mortgage shall act as a revocation of this power of attorney
and assignment of rents. Mortgagee shall have and hereby expressly reserves the
right and privilege (but assumes no obligation) to demand, collect, sue for,
receive and recover the Rents, or any part thereof, now existing or hereafter
made, and apply the same in accordance with the provisions of the Loan
Agreement.
All of the property described above, and each item of property therein
described, not limited to but including the Land, the Premises, the Property
Rights, the Fixtures, the Personal Property, the Real Property, the Intangibles,
the Rents and the Leases, is herein referred to as the "Mortgaged Property."
Nothing herein contained shall be construed as constituting the Mortgagee a
mortgagee-in-possession in the absence of the taking of actual possession of the
Mortgaged Property by the Mortgagee. Nothing contained in this Mortgage shall be
construed as imposing on Mortgagee any of the obligations of the lessor under
any Lease of the Mortgaged Property in the absence of an explicit assumption
thereof by Mortgagee. In the exercise of the powers herein granted the
Mortgagee, except as provided in the Loan Agreement, no liability
-6-
<PAGE> 7
shall be asserted or enforced against the Mortgagee, all such liability being
expressly waived and released by Mortgagor.
TO HAVE AND TO HOLD the Mortgaged Property, properties, rights and
privileges hereby conveyed or assigned, or intended so to be, unto Mortgagee,
its beneficiaries, successors and assigns, forever for the uses and purposes
herein set forth. Mortgagor hereby releases and waives all rights under and by
virtue of the Homestead Exemption Laws, if any, of the State and Mortgagor
hereby covenants, represents and warrants that, at the time of the ensealing and
delivery of these presents, Mortgagor is well seised of the Mortgaged Property
in fee simple and with lawful authority to sell, assign, convey and mortgage the
Mortgaged Property, and that the title to the Mortgaged Property is free and
clear of all encumbrances, except as described on Exhibit B attached hereto and
made a part hereof, and that, except for the encumbrances set forth on Exhibit
B, Mortgagor will forever defend the same against all lawful claims.
The following provisions shall also constitute an integral part of this
Mortgage:
1. PAYMENT OF TAXES ON THE MORTGAGE. Without limiting any of the provisions
of the Loan Agreement, Mortgagor agrees that, if the United States or any
department, agency or bureau thereof or if the State or any of its subdivisions
having jurisdiction shall at any time require documentary stamps to be affixed
to this Mortgage or shall levy, assess, or charge any tax, assessment or
imposition upon this Mortgage or the credit or indebtedness secured hereby or
the interest of Mortgagee in the Premises or upon Mortgagee by reason of or as
holder of any of the foregoing then, Mortgagor shall pay for such documentary
stamps in the required amount and deliver them to Mortgagee or pay (or reimburse
Mortgagee for) such taxes, assessments or impositions. Mortgagor agrees to
exhibit to Mortgagee, at any time upon request, official receipts showing
payment of all taxes, assessments and charges which Mortgagor is required or
elects to pay under this paragraph. Mortgagor agrees to indemnify Mortgagee
against liability on account of such documentary stamps, taxes, assessments or
impositions, whether such liability arises before or after payment of the
Liabilities and regardless of whether this Mortgage shall have been released.
2. LEASES AFFECTING THE REAL PROPERTY. Mortgagor agrees faithfully to
perform all of its obligations under all present and future Leases at any time
assigned to Mortgagee as additional security, and to refrain from any action or
inaction which would result in termination of any such Leases or in the
-7-
<PAGE> 8
diminution of the value thereof or of the Rents due thereunder. All future
lessees under any Lease made after the date of recording of this Mortgage shall,
at Mortgagee's option and without any further documentation, attorn to Mortgagee
as lessor if for any reason Mortgagee becomes lessor thereunder, and, upon
demand, pay rent to Mortgagee, and Mortgagee shall not be responsible under such
Lease for matters arising prior to Mortgagee becoming lessor thereunder.
3. USE OF THE REAL PROPERTY. Mortgagor agrees that it shall not permit the
public to use the Real Property in any manner that might tend, in Mortgagee's
reasonable judgment, to impair Mortgagor's title to such property or any portion
thereof, or to make possible any claim or claims of easement by prescription or
of implied dedication to public use.
4. INDEMNIFICATION. Mortgagor shall not use or permit the use of any part
of the Real Property for an illegal purpose, including, without limitation, the
violation of any environmental laws, statutes, codes, regulations or practices.
Without limiting any indemnification Mortgagor has granted in the Loan
Agreement, Mortgagor agrees to indemnify and hold harmless Mortgagee from and
against any and all losses, suits, liabilities, fines, damages, judgments,
penalties, claims, charges, costs and expenses (including reasonable attorneys'
and paralegals' fees, court costs and disbursements) which may be imposed on,
incurred or paid by or asserted against the Real Property by reason or on
account of or in connection with (i) the construction, reconstruction or
alteration of the Real Property, (ii) any negligence or misconduct of Mortgagor,
any lessee of the Real Property, or any of their respective agents, contractors,
subcontractors, servants, employees, licensees or invitees, (iii) any accident,
injury, death or damage to any person or property occurring in, on or about the
Real Property or any street, drive, sidewalk, curb or passageway adjacent
thereto, or (iv) any other transaction arising out of or in any way connected
with the Mortgaged Property.
5. INSURANCE. Mortgagor shall, at its sole expense, obtain for, deliver to,
assign and maintain for the benefit of Mortgagee, until the Liabilities are paid
in full, insurance policies as specified in the Loan Agreement. In the event of
a casualty loss, the net insurance proceeds from such insurance policies shall
be paid and applied as specified in the Loan Agreement.
6. CONDEMNATION AWARDS. Mortgagor hereby assigns to Mortgagee, as
additional security, all awards of damage resulting
-8-
<PAGE> 9
from condemnation proceedings or the taking of or injury to the Real Property
for public use, and Mortgagor agrees that the proceeds of all such awards shall
be paid and applied as specified in the Loan Agreement.
7. REMEDIES. Subject to the provisions of the Loan Agreement, upon the
occurrence of an Event of Default under the terms of the Loan Agreement, in
addition to any rights and remedies provided for in the Loan Agreement, and to
the extent permitted by applicable law, the following provisions shall apply:
(a) MORTGAGEE'S POWER OF ENFORCEMENT. It shall be lawful for Mortgagee to
(i) immediately sell the Mortgaged Property either in whole or in separate
parcels, as prescribed by the State law, under power of sale, which power is
hereby granted to Mortgagee to the full extent permitted by the State law, and
thereupon, to make and execute to any purchaser(s) thereof deeds of conveyance
pursuant to applicable law or (ii) immediately foreclose this Mortgage by
judicial action. The court in which any proceeding is pending for the purpose of
foreclosure of this Mortgage may, at once or at any time thereafter, either
before or after sale, without notice and without requiring bond, and without
regard to the solvency or insolvency of any person liable for payment of the
Liabilities secured hereby, and without regard to the then value of the
Mortgaged Property or the occupancy thereof as a homestead, appoint a receiver
(the provisions for the appointment of a receiver and assignment of rents being
an express condition upon which the Loan hereby secured is made) for the benefit
of Mortgagee, with power to collect the Rents, due and to become due, during
such foreclosure suit and the full statutory period of redemption
notwithstanding any redemption. The receiver, out of the Rents when collected,
may pay costs incurred in the management and operation of the Real Property,
prior and subordinate liens, if any, and taxes, assessments, water and other
utilities and insurance, then due or thereafter accruing, and may make and pay
for any necessary repairs to the Real Property, and may pay all or any part of
the Liabilities or other sums secured hereby or any deficiency decree entered in
such foreclosure proceedings. Upon or at any time after the filing of a suit to
foreclose this Mortgage, the court in which such suit is filed shall have full
power to enter an order placing Mortgagee in possession of the Real Property
with the same power granted to a receiver pursuant to this subparagraph and with
all other rights and privileges of a mortgagee-in- possession under applicable
law.
-9-
<PAGE> 10
(b) MORTGAGEE'S RIGHT TO ENTER AND TAKE POSSESSION, OPERATE AND APPLY
INCOME. Mortgagee shall, at its option, have the right, acting through its
agents or attorneys, either with or without process of law, forcibly or
otherwise, to enter upon and take possession of the Real Property, expel and
remove any persons, goods, or chattels occupying or upon the same, to collect or
receive all the Rents, and to manage and control the same, and to lease the same
or any part thereof, from time to time, and, after deducting all reasonable
attorneys' fees and expenses, and all reasonable expenses incurred in the
protection, care, maintenance, management and operation of the Real Property,
distribute and apply the remaining net income in accordance with the terms of
the Loan Agreement or upon any deficiency decree entered in any foreclosure
proceedings.
8. APPLICATION OF THE RENTS OR PROCEEDS FROM FORECLOSURE OR SALE. In any
foreclosure of this Mortgage by judicial action, or any sale of the Mortgaged
Property by advertisement, in addition to any of the terms and provisions of the
Loan Agreement, there shall be allowed (and included in the decree for sale in
the event of a foreclosure by judicial action) to be paid out of the Rents or
the proceeds of such foreclosure proceeding and/or sale:
(a) LIABILITIES. All of the Liabilities and other sums secured hereby which
then remain unpaid; and
(b) OTHER ADVANCES. All other items advanced or paid by Mortgagee pursuant
to this Mortgage; and
(c) COSTS, FEES AND OTHER EXPENSES. All court costs, reasonable attorneys'
and paralegals' fees and expenses, appraiser's fees, advertising costs, filing
fees and transfer taxes, notice expenses, expenditures for documentary and
expert evidence, stenographer's charges, publication costs, and costs (which may
be estimated as to items to be expended after entry of the decree) of procuring
all abstracts of title, title searches and examinations, title guarantees, title
insurance policies, Torrens certificates and similar data with respect to title
which Mortgagee in the reasonable exercise of its judgment may deem necessary.
All such expenses shall become additional Liabilities secured hereby when paid
or incurred by Mortgagee in connection with any proceedings, including but not
limited to probate and bankruptcy proceedings, to which Mortgagee shall be a
party, either as plaintiff, claimant or defendant, by reason of this Mortgage or
any indebtedness hereby secured or in connection with the preparations for the
commencement of any suit for the fore closure, whether or not actually
commenced, or sale by
-10-
<PAGE> 11
advertisement. The proceeds of any sale (whether through a foreclosure
proceeding or Mortgagee's exercise of the power of sale) shall be distributed
and applied in accordance with the terms of the Loan Agreement.
9. CUMULATIVE REMEDIES; DELAY OR OMISSION NOT A WAIVER. Each remedy or
right of Mortgagee shall not be exclusive of but shall be in addition to every
other remedy or right now or hereafter existing at law or in equity. No delay in
the exercise or omission to exercise any remedy or right accruing on the
occurrence or existence of any Event of Default shall impair any such remedy or
right or be construed to be a waiver of any such Event of Default or
acquiescence therein, nor shall it affect any subsequent Event of Default of the
same or different nature. Every such remedy or right may be exercised
concurrently or independently and when and as often as may be deemed expedient
by Mortgagee.
10. MORTGAGEE'S REMEDIES AGAINST MULTIPLE PARCELS. If more than one
property, lot or parcel is covered by this Mortgage, and if this Mortgage is
foreclosed upon, or judgment is entered upon any Liabilities secured hereby, or
if Mortgagee exercises its power of sale, execution may be made upon or
Mortgagee may exercise its power of sale against any one or more of the
properties, lots or parcels and not upon the others, or upon all of such
properties or parcels, either together or separately, and at different times or
at the same time, and execution sales or sales by advertisement may likewise be
conducted separately or concurrently, in each case at Mortgagee's election.
11. NO MERGER. In the event of a foreclosure of this Mortgage or any other
mortgage or deed of trust securing the Liabilities, the Liabilities then due the
Mortgagee shall not be merged into any decree of foreclosure entered by the
court, and Mortgagee may concurrently or subsequently seek to foreclose one or
more mortgages or deeds of trust which also secure said Liabilities.
12. NOTICES. Except as otherwise provided herein, any notices, demands,
consents, requests, approvals, undertakings or other instruments required or
permitted to be given in connection with this Mortgage (and all copies of such
notices or other instruments as set forth below) shall be in writing, and shall
be deemed to have been validly served, given or delivered if hand-delivered, or
if sent by facsimile, or if sent by a nationally recognized overnight delivery
service, charges prepaid, or if mailed (effective three (3) business days
following deposit
-11-
<PAGE> 12
thereof at any main or branch United States Post Office) by United States mail,
postage prepaid, addressed to the party so notified as follows:
if to Mortgagor:
Cerion Technologies Inc.
1401 Interstate Drive
Champaign, Illinois 61821
Attn: Richard A. Clark, Vice
President-Finance and CFO
Telecopier No.: (217) 359-3702
with a copy to:
Erwin, Martinkus, Cole & Ansel
411 W. University Avenue
Champaign, Illinois 61820
Attn: Sam Erwin
Telecopier No.: (217) 351-4314
if to Mortgagee:
The CIT Group/Business Credit, Inc.
10 South LaSalle Street, 22nd Floor
Chicago, Illinois 60603
Attn: Regional Manager
Telecopier No.: (312) 443-0139
with a copy to:
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
Attn: James L. Marovitz
Telecopier No.: (312) 853-7036
Mortgagor or Mortgagee shall, from time to time, have the right to specify as
the proper addressee and/or address for the purposes of this Mortgage any other
party or address in the United States upon giving five (5) days' written notice
thereof.
13. EXTENSION OF PAYMENTS. Mortgagor agrees that, without affecting the
liability of any person for payment of the Liabilities secured hereby or
affecting the lien of this Mortgage upon the Mortgaged Property or any part
thereof (other than persons or property explicitly released as a result of the
exercise by Mortgagee of its rights and privileges hereunder),
-12-
<PAGE> 13
Mortgagee may at any time and from time to time, on request of the Mortgagor,
without notice to any person liable for payment of any Liabilities secured
hereby, but otherwise subject to the provisions of the Loan Agreement, extend
the time, or agree to alter or amend the terms of payment of such Liabilities.
Mortgagor further agrees that any part of the security herein described may be
released with or without consideration without affecting the remainder of the
Liabilities or the remainder of the security.
14. GOVERNING LAW. Mortgagor agrees that this Mortgage is to be construed,
governed and enforced in accordance with the laws of the State. Wherever
possible, each provision of this Mortgage shall be interpreted in such manner as
to be effective and valid under applicable law, but if any provision of this
Mortgage 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 Mortgage.
15. SATISFACTION OF MORTGAGE. Upon full payment of all the Liabilities, at
the time and in the manner provided in the Loan Agreement, or upon satisfaction
of the conditions set forth in the Loan Agreement for release of the Mortgaged
Property from this Mortgage, this conveyance or lien shall be null and void and,
upon demand therefor following such payment or satisfaction of the conditions
set forth in the Loan Agreement for release of the Mortgaged Property, as the
case may be, a satisfaction of mortgage or reconveyance of the Mortgaged
Property shall promptly be provided by Mortgagee to Mortgagor.
16. SUCCESSORS AND ASSIGNS INCLUDED IN PARTIES. This Mortgage shall be
binding upon the Mortgagor and upon the successors, assigns and vendees of the
Mortgagor and shall inure to the benefit of the Mortgagee's successors and
assigns; all references herein to the Mortgagor and to the Mortgagee shall be
deemed to include their respective successors and assigns. Mortgagor's
successors and assigns shall include, without limitation, a receiver, trustee or
debtor in possession of or for the Mortgagor. Wherever used, the singular
number shall include the plural, the plural shall include the singular, and the
use of any gender shall be applicable to all genders.
17. WAIVER OF APPRAISEMENT, VALUATION, STAY, EXTENSION AND REDEMPTION LAWS.
Mortgagor agrees, to the full extent permitted by law, that at all times
following an Event of Default, neither Mortgagor nor anyone claiming through or
under
-13-
<PAGE> 14
it shall or will set up, claim or seek to take advantage of any appraisement,
valuation, stay, or extension laws now or hereafter in force, in order to
prevent or hinder the enforcement or foreclosure of this Mortgage or the
absolute sale of the Mortgaged Property or the final and absolute putting into
possession thereof, immediately after such sale, of the purchaser thereat; and
Mortgagor, for itself and all who may at any time claim through or under it,
hereby waives, to the full extent that it may lawfully so do, the benefit of all
such laws and any and all right to have the assets comprising the Mortgaged
Property marshaled upon any foreclosure of the lien hereof and agrees that
Mortgagee or any court having jurisdiction to foreclose such lien may sell the
Mortgaged Property in part or as an entirety. To the full extent permitted by
law, Mortgagor hereby waives any and all statutory or other rights of redemption
from sale under any order or decree of foreclosure of this Mortgage, on its own
behalf and on behalf of each and every person acquiring any interest in or title
to the Mortgaged Property subsequent to the date hereof.
18. INTERPRETATION WITH OTHER DOCUMENTS. Notwithstanding anything in this
Mortgage to the contrary, in the event of a conflict or inconsistency between
the Mortgage and the Loan Agreement, the provisions of the Loan Agreement shall
govern.
19. FUTURE ADVANCES. This Mortgage is given for the purpose of securing
loan advances which the Mortgagee may make to or for Mortgagor pursuant and
subject to the terms and provisions of the Loan Agreement. The parties hereto
intend that, in addition to any other debt or obligation secured hereby, this
Mortgage shall secure unpaid balances of loan advances made after this Mortgage
is delivered to the Recorder of Deeds, Champaign County, Illinois, whether made
pursuant to an obligation of Mortgagee or otherwise, provided that such advances
are within twenty (20) years from the date hereof and in such event, such
advances shall be secured to the same extent as if such future advances were
made on the date hereof, although there may be no advance made at the time of
execution hereof and although there may be no indebtedness outstanding at the
time any advance is made. Such loan advances may or may not be evidenced by
notes executed pursuant to the Loan Agreement.
20. INVALID PROVISIONS TO AFFECT NO OTHERS. In the event that any of the
covenants, agreements, terms or provisions contained in this Mortgage shall be
invalid, illegal or unenforceable in any respect, the validity of the remaining
covenants, agreements, terms or provisions contained herein or in the Loan
Agreement shall not be in any way affected, prejudiced
-14-
<PAGE> 15
or disturbed thereby. In the event that the application of any of the covenants,
agreements, terms or provisions of this Mortgage is held to be invalid, illegal
or unenforceable, those covenants, agreements, terms and provisions shall not be
in any way affected, prejudiced or disturbed when otherwise applied.
21. CHANGES. Neither this Mortgage nor any term hereof may be changed,
waived, discharged or terminated orally, or by any action or inaction, but only
by an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought. To the extent permitted by
law, any agreement hereafter made by Mortgagor and Mortgagee relating to this
Mortgage shall be superior to the rights of the holder of any intervening lien
or encumbrance.
22. TIME OF ESSENCE. Time is of the essence with respect to the provisions
of this Mortgage.
23. NO STRICT CONSTRUCTION. The parties hereto have participated jointly in
the negotiation and drafting of this Mortgage. In the event an ambiguity or
question of intent or interpretation arises, this Mortgage shall be construed as
if drafted jointly by the parties hereto and no presumption or burden of proof
shall arise favoring or disfavoring any party by virtue of the authorship of any
provisions of this Mortgage.
IN WITNESS WHEREOF, this instrument is executed as of the day and year
first above written by the person or persons identified below on behalf of
Mortgagor (and said person or persons hereby represent that they possess full
power and authority to execute this instrument).
THE MORTGAGOR HEREBY DECLARES AND ACKNOWLEDGES THAT THE MORTGAGOR HAS
RECEIVED, WITHOUT CHARGE, A TRUE COPY OF THIS MORTGAGE.
MORTGAGOR:
CERION TECHNOLOGIES INC.
By /s/Richard A. Clark
----------------------
Richard A. Clark
Vice President-Finance
-15-
<PAGE> 16
STATE OF ILLINOIS )
) SS.
COUNTY OF Champaign )
I, the undersigned, a Notary Public in and for said County, in said State,
hereby certify that Richard A. Clark, whose name as Vice President-Finance of
Cerion Technologies Inc., a Delaware corporation, is signed to the foregoing
instrument, and who is known to me, acknowledged before me on this day that,
being informed of the contents of the instrument, he, as such officer and with
full authority, executed the same voluntarily for and as the act of said
corporation.
Given under my hand and Official seal this 7th
day of March, 1997.
/s/ Cheri L. Baker
-----------------------------
Notary Public
(Seal)
My Commission Expires: ______
7-5-97
------------------------------
Notary Public in and for the
State of Illinois
-------------------------------------
OFFICIAL SEAL
Cheri L. Baker
Notary Public, State of Illinois
My Commission Expires 7/5/97
-------------------------------------
<PAGE> 17
EXHIBIT A
LEGAL DESCRIPTION OF THE PREMISES
---------------------------------
PARCEL 1:
LOT 18 OF INTERSTATE RESEARCH PARK LOTS 17 AND 18 SUBDIVISION, AS PER PLAT
RECORDED IN PLAT BOOK "Z" AT PAGE 229 AS DOCUMENT 82 R 13954, SITUATED IN THE
CITY OF CHAMPAIGN, IN CHAMPAIGN COUNTY ILLINOIS.
PARCEL 2:
LOT 2 OF "REPLAT OF LOT 2 OF A REPLAT OF LOT 17 OF INTERSTATE RESEARCH PARK
LOTS NO. 17 AND 18 SUBDIVISION" AS PER PLAT RECORDED IN PLAT BOOK "BB" AT PAGE
93 AS DOCUMENT 90 R 21180, SITUATED IN THE CITY OF CHAMPAIGN COUNTY, ILLINOIS.
PARCEL 3:
LOT 2 OF CERION REPLAT INTERSTATE RESEARCH PARK AS PER PLAT RECORDED IN PLAT
BOOK "CC" AT PAGE 182 AS DOCUMENT 96 R 16342, IN CHAMPAIGN COUNTY, ILLINOIS;
FORMERLY KNOWN AS:
THE EAST 65 FEET OF LOT 1 OF "REPLAT OF LOT 2 OF A REPLAT OF LOT 17 OF
INTERSTATE RESEARCH PARK LOTS NO. 17 AND 18 SUBDIVISION" AS PER PLAT RECORDED
IN PLAT BOOK "BB" AT PAGE 93 AS DOCUMENT 90 R 21180, SITUATED IN THE CITY OF
CHAMPAIGN, IN CHAMPAIGN COUNTY, ILLINOIS.
<PAGE> 18
EXHIBIT B
PERMITTED EXCEPTIONS TO TITLE
-----------------------------
Those title exceptions listed on title commitment 01-01-158,
dated March 7, 1997, issued by Chicago Title Insurance Company for the property
described on Exhibit A hereto.
<PAGE> 1
EXHIBIT 11.1
CERION TECHNOLOGIES INC.
COMPUTATION OF NET INCOME
PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996
----
Net income $2,505
======
Shares:
Weighted average common shares outstanding during the period 6,379
Common equivalent shares --
-------
6,379
Net income per common share: $ .39
------
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 9,300
<SECURITIES> 0
<RECEIVABLES> 3,162
<ALLOWANCES> 234
<INVENTORY> 1,046
<CURRENT-ASSETS> 13,942
<PP&E> 13,927
<DEPRECIATION> 4,536
<TOTAL-ASSETS> 23,333
<CURRENT-LIABILITIES> 3,694
<BONDS> 0
0
0
<COMMON> 70
<OTHER-SE> 19,296
<TOTAL-LIABILITY-AND-EQUITY> 23,333
<SALES> 36,540
<TOTAL-REVENUES> 36,540
<CGS> 26,729
<TOTAL-COSTS> 26,729
<OTHER-EXPENSES> 5,561
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (169)
<INCOME-PRETAX> 4,419
<INCOME-TAX> 1,914
<INCOME-CONTINUING> 2,505
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,505
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
</TABLE>
<PAGE> 1
EXHIBIT 99.1
Cerion Technologies Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Nashua Corporation ("Nashua") operated the business from the time of its
acquisition in 1986 either as a division or wholly owned subsidiary until May
24, 1996, the date of Cerion Technologies Inc.'s ("Cerion" or "the Company")
initial public offering that reduced Nashua's ownership to approximately 37
percent.
RESULTS OF OPERATIONS - 1996 COMPARED TO 1995
NET SALES: Net sales grew 29.4 percent to $36.5 million in 1996 compared to
$28.2 million in 1995. The growth experienced during the first six months of
1996 was attributable primarily to growth in the market for aluminum substrates,
growth of net sales to the Company's existing customers and the addition of a
significant new customer in the beginning of 1996. The second half of 1996
demonstrated the volatility within the market when, in July, Cerion announced a
major customer had canceled all of its outstanding purchase orders with the
Company, following a significant loss of orders by that customer. Furthermore,
the Company's largest customer gradually began decreasing orders to zero in the
second half of 1996 as it expanded its internal manufacturing capacity for
aluminum disk substrates. Revenue in the third and fourth quarters of 1996
equaled only 45 percent of revenue in the first and second quarters of 1996.
Average sales prices decreased significantly during the second half of 1996
resulting in an average sales price that in the second half of 1996 was
approximately 13 percent lower than the second haft of 1995.
GROSS PROFIT: Gross profit increased 15.3 percent, or $1.3 million, to $9.8
million in 1996 from $8.5 million in 1995. The increase in gross profit was due
to increases in volume, improved utilization of existing manufacturing capacity
and the spreading of fixed costs over a substantially higher sales volume during
the first six months of 1996, offset by a dramatic decrease in unit volume and
average selling prices in the second half of 1996, from the comparable 1995
period. Gross profit as a percentage of sales decreased to 26.9 percent in 1996
compared to 30.2 percent in 1995. The decrease in gross margin was attributable
to the under utilization of existing capacity that was expanded in the first
half of 1996 and the spreading of higher fixed costs attributable to larger
available production capacity over a substantially lower sales volume in the
second half of 1996. Gross profit also decreased from lower average selling
prices of the Company's products in the second half of 1996.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES: Selling, general and administrative
expenses increased approximately $3.1 million in 1996 to $5.6 million, compared
to $2.5 million in 1995, representing 15.2 percent and 9.0 percent of net sales
in such years, respectively. This increase primarily was due to the costs of
additional personnel to support the Company's growth experienced in the first
six months of 1996 (including the addition of two executive officers), the costs
associated with the Company becoming a stand-alone entity, increased
profit-sharing and performance-based bonus expenses during the first six months
of 1996. The increase in the percentage results from both growth in absolute
spending and a lower revenue base during the third and fourth quarters of 1996.
INTEREST (INCOME ) EXPENSE: Interest income consists of interest income from
short-term investments. Interest expense consists primarily of interest expense
allocated to the Company by Nashua through May 24, 1996 (at which time the
Company was a division or subsidiary of Nashua). See Related Party Transactions
and Allocations in the Notes to the Financial Statements.
PROVISION FOR (INCOME) TAXES: Provision far income taxes was $1.9 million in
1996 compared to $2.2 million in 1995. The Company's effective tax rate was 43.3
percent in 1996 compared to 39.1 percent in 1995 primarily because of an
increase in nondeductible items as a percentage of income before provision for
income taxes and the establishment of a valuation reserve for the Company's
deferred tax assets.
<PAGE> 2
RESULTS OF OPERATIONS - 1995 COMPARED TO 1994
NET SALES: Net sales increased 93.6 percent, or $13.6 million, to $28.2 million
in 1995 from $14.6 million in 1994. This growth was attributable to growth in
the market for aluminum disk substrates, the Company's emergence in May 1994
from its primarily captive integrated supplier relationship with a unit of
Nashua which Nashua said at that time, to become an independent supplier of
aluminum disk substrates and the absence in 1995 of certain disruptions in the
Company's business that occurred in 1994. As a result, the Company was able to
grow its net sales significantly to other customers, such as HMT Technology
Corporation ("HMT") and Conner Peripherals, Inc. The increase in net sales was
primarily in the Company's disk substrate business, which represented
approximately $13.1 million of the increase. This increase resulted primarily
from growth in unit volume and, to a lesser extent, higher average selling
prices. Improved utilization of existing production capacity, productivity
gains and additional capacity from capital expenditures contributed to growth in
unit production. The Company shifted its sales mix in 1995 away from
commodity-level aluminum disk substrates with lower average selling prices to
high-end products requiring more stringent product tolerances and higher average
selling prices. The remainder of the net sales increase in 1995 resulted from
increased sales of: the Company's aluminum drum substrates, which had higher
unit volumes and higher average selling prices.
GROSS PROFIT: Gross profit increased $6.9 million to $8.5 million in 1995 from
$1.6 million in 1994. Gross profit as a percentage of net sales increased to
30.2 percent in 1995 compared to 10.7 percent in 1994. The increase in gross
profit was due partly to higher net sales while the gross margin increase was
due to higher volume, improved utilization of existing manufacturing capacity
and the spreading of fixed costs over a substantially higher sales volume. Gross
profit and gross margin also increased from higher average selling prices of the
Company's products in 1995.
SELLING, GENERAL & ADMINISTRATIVE EXPENSE: Selling, general and administrative
expenses increased 46.6 percent, or $806,000, to $2.5 million in 1995 from $1.7
million in 1994. This increase primarily was due to increased profit-sharing and
performance-based bonus expenses, associated costs of increased personnel to
support the Company's growth, higher research, development and engineering
costs, and an increase in the overhead allocated to the Company by Nashua
relating in part to the higher sales of the Company. Selling, general and
administrative expenses as a percentage of net sales decreased to 9.0 percent in
1995 compared to 11.9 percent in 1994. This decrease primarily was due to
expenses being spread over a substantially higher sales volume.
INTEREST EXPENSE: Interest expense in both years consisted primarily of
interest expense allocated to the Company by Nashua. Interest expense increased
$201,000 to $316,000 in 1995 from $115,000 in 1994. See Related Party
Transactions and Allocations in the Notes to the Financial Statements.
PROVISION (BENEFIT) FOR INCOME TAXES: Provision for income taxes increased to
$2.2 million in 1995 from a benefit of $105,000 in 1994. The Company's effective
tax rate was 39.1 percent in 1995 compared to 36.5 percent in 1994, primarily
because of a decrease in nondeductible items as a percentage of income (loss)
before provision (benefit} for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements in 1996 were to fund working
capital needs, manufacturing capacity expansion, and capital expenditures
related to manufacturing process automation. During the periods presented, these
capital requirements generally were satisfied by cash flows from operations
except in the last two quarters of 1996 during which the Company reported
operating losses. These operating losses and capital expenditures were funded
from proceeds from the Company's initial public offering.
<PAGE> 3
Nashua Corporation (which previously owned 100 percent of Cerion until the
initial public offering in May 1996 which reduced Nashua's ownership to
approximately 37 percent) historically had performed cash management services
for the Company. The Company's cash flow was directed to Nashua, and Nashua in
turn provided cash to the Company to fund operating expenses and capital
expenditures. On May 31, 1996, this arrangement ceased. Shortly thereafter, the
Company and Nashua determined the respective cash flows from the Company to
Nashua and from Nashua to the Company, during the period from January 1, 1996
through May 30, 1996, and settled a net amount due from Cerion to Nashua of
approximately $200,000.
Net cash provided by (used in) operating activities was $6.8 million, $4.0
million and $(2.0) million in 1996, 1995 and 1994, respectively. The increase in
cash provided by operating activities from 1994 to 1996 primarily was due to
increases in net income and accounts payable as the Company experienced strong
growth in net sales. The continued increase from 1995 to 1996 was attributable
to a reduction in accounts receivable offset by increased inventories due to
significantly lower revenues in the last half of 1996 combined with increased
depreciation from capital equipment additions in 1995 and 1996. The increase in
accounts payable from December 31, 1994 to December 31, 1995 consisted of
increased trade payables associated with the growth in the business and capital
projects undertaken by the Company in connection with its expansion of available
capacity. The increase in accounts payable from 1995 to 1996 consisted of trade
payables associated with the overall growth in the business.
Net cash used in investing activities was $6.1 million, $2.5 million and
1.1 million in 1996, 1995 and 1994, respectively. Cash used in investing
activities was primarily for capital expenditures related to modifications of
existing equipment and purchases of new equipment. The newly purchased equipment
increased both manufacturing capacities and efficiencies. The Company's
short-term investments are comprised of investment grade commercial paper.
Net cash provided by (used in) financing activities was $8.4 million,
$(1.4) million and $3.1 million in 1996, 1995 and 1994, respectively. Net cash
provided by financing activities increased in 1996 due to proceeds from the
initial public offering partially offset by the repayment of indebtedness.
On May 30, 1996, the Company closed its initial public offering with the
sale of 4,416,000 shares of its Common Stock. Of the 4,416,000 shares of Common
Stock said, 1,615,000 shares were said by the Company and 2,801,000 were said by
Nashua Corporation. Nashua Corporation continues to own approximately 37 percent
of the Company's outstanding Common Stock. The shares were sold to the public at
$13.00 per share. The net proceeds to the Company after the Underwriting
Discount was $19,525,350.
On May 31, 1996, the Company repaid the two outstanding Promissory Notes
issued to Nashua Corporation in March 1996 having a combined principal sum of
$11,142,000. The prepayments were made without penalty.
Based upon anticipated cash flows from operating activities, remaining
proceeds from the initial public offering completed in 1996 and credit
availability, the Company believes that it has the liquidity and capital
resources needed to meet its financial commitments through 1997. Unless the
Company achieves substantial cost improvements, increased demand and no further
price reductions beyond year-end levels, the Company will continue to incur net
losses and negative cash flows from operating activities. Without such cost
improvements and increased demand, at present cost levels and planned capital
expenditures of approximately $4.0 million annually, the Company over an
extended period of time will exhaust all or substantially all of its cash
resources and borrowing availability under its credit facility. In such event,
the Company would be required to pursue other alternatives to improve liquidity,
including further cost reductions, sales of assets, the deferral of certain
capital expenditures and obtaining additional sources of funds. No assurance can
be given that the Company will be able to pursue such alternatives successfully.
INFLATION
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
<PAGE> 4
MATTERS AFFECTING FUTURE RESULTS
This Report contains certain "forward-looking" statements, including, but not
limited to the statements regarding the possible impact of cancellation of
orders by a major customer and backwards integration within the industry towards
the manufacture of aluminum disk substrates. Moreover, from time to time in
both written releases and reports and oral statements, the Company and its
senior management may express expectations regarding future performance of the
Company. All of these forward-looking statements are inherently uncertain, and
investors must recognize that actual events could cause actual results to differ
materially from senior management's expectations. Key risk factors that could,
in particular, have an adverse impact on current and future performance include
the Company's dependence on a small number of customers, as witnessed by the
cancellation of orders in July 1996 by one of the Company's two largest
customers, and subsequent loss of orders from one of the Company's largest
customers evidencing a trend toward backwards integration among thin-film disk
manufacturers that may continue to reduce demand for the Company's products,
dependence on the intensely competitive and cyclical hard disk drive industry,
absence of long-term purchase commitments from the Company's customers and risk
of excess industry capacity. See "Factors that Affect Future Results" included
in the Company's Form 10-K dated March 31, 1997 for a more detailed discussion
of factors that could affect the Company's performance and the value of its
Common Stock.
With respect to forward-looking statements contained herein, we urge our
shareholders to read Cerion's Form 10-K filed with the Securities and Exchange
Commission.
OUTLOOK
Cerion does not provide forecasts of future financial performance. The
statements contained in this Outlook are based upon current expectations. These
statements are forward-looking; actual events could cause actual results to
differ materially.
Adverse industry conditions during the second half of 1996, in which
available market supply exceeded demand and significant pricing reductions
caused the Company to incur net losses in each of the last two quarters of 1996,
are continuing. The Company expects it will incur operating losses for at least
each of the first two quarters of 1997. Such losses have and will impair the
Company"s liquidity and available sources of liquidity and will continue to
affect the Company adversely until significant product cost improvements are
achieved combined with increased sales volumes to return to profitability. See
"Liquidity and Capital Resources."
The Company does not believe current market conditions will support
substantial price increases. Thus, any improvement in operating performance will
require cost improvements to occur. Unless the Company achieves substantial cost
improvements, increased demand and no further price reductions beyond year-end
levels, the Company will continue to incur net operating losses and negative
cash flows from operating activities. Without such cost improvements and
increased demand, at present cost levels and planned capital expenditures of
approximately $4.0 million annually, the Company over an extended period of time
will exhaust all or substantially all of its cash resources and borrowing
availability under its credit facility. In such event, the Company would be
required to pursue other alternatives to improve liquidity, including further
cost reductions, sales of assets, the deferral of certain capital expenditures
and obtaining additional sources of funds. No assurances can be given that the
Company will be able to pursue such alternatives successfully.
The Company's gross margin percentage is largely a function of product mix
sold in any period. Various other factors, including unit volumes, costs and
yield issues associated with initiating production on new processes also will
continue to affect the amount of cost of sales and the variability of the gross
margin percentage in future quarters. Additionally, increased depreciation
resulting from the significant capital spending in 1996 and 1995, and planned
capital spending in 1997 will negatively impact gross margins in future periods.
The planned 1997 capital spending is focused in the area of manufacturing
process changes to reduce product cost.
Reduction in demand from either a reduction in market demand, further
backwards integration by thin-film media manufacturers or a sudden loss of one
or more customers will significantly impact the Company's operating performance.
Volatility in demand for the Company's products will have a substantial impact
to the Company's operating performance because of the fixed cost element of the
Company's product manufacturing relative to total costs.
<PAGE> 5
CERION TECHNOLOGIES INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
(In thousands, except per share data) 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $36,540 $ 28,175 $ 14,553
Cost of sales 26,729 19,668 12,995
------------------------------------
Gross profit 9,811 8,507 1,558
Selling, general & administrative expenses 5,561 2,537 1,731
------------------------------------
Operating income (loss) 4,250 5,970 (173)
Interest income (expense) 169 (316) (115)
------------------------------------
Income (loss) before provision
(benefit) for income taxes 4,419 5,654 (288)
Provision (benefit) for income taxes 1,914 2,210 (105)
------------------------------------
Net income (loss) $ 2,505 $ 3,444 $ (183)
------------------------------------
Net income per share $ .39 -- --
Average shares outstanding 6,379 -- --
------------------------------------
</TABLE>
The notes are an integral part of the financial statements.
11
<PAGE> 6
CERION TECHNOLOGIES INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------
(In thousands, except share and per share data) 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 9,300 $ 173
Accounts receivable, net of allowances for doubtful
accounts and customer returns of $234 and $51, respectively 2,928 5,930
Inventories 1,046 312
Prepaid expenses and other assets 395 --
Deferred income taxes 273 94
--------------------
Total current assets 13,942 6,509
Property, plant and equipment, net 9,391 5,365
--------------------
$23,333 $11,874
====================
Liabilities, Parent Company Investment and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 3,694 $ 3,073
--------------------
Total current liabilities 3,694 3,073
Deferred income taxes 273 343
Commitments and contingencies (see notes)
Parent company investment -- 8,458
Stockholders' equity:
Preferred Stock, par value $.01 per share, 100,000
shares authorized, none issued
Common Stock, par value $.01 per share, 20,000,000
shares authorized; 7,016,184 shares issued and outstanding 70 --
Additional paid-in capital 18,639 --
Retained earnings 657 --
--------------------
Total stockholders' equity 19,366 --
--------------------
$23,333 $11,874
====================
</TABLE>
The notes are an integral part of the financial statements.
12
<PAGE> 7
CERION TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ 2,505 $ 3,444 $ (183)
Adjustments to reconcile net income (loss) to cash provided by (used in)
operating activities:
Depreciation 2,099 1,035 876
Deferred income taxes (249) 158 55
Changes in operating assets and liabilities:
Accounts receivable 3,002 (2,956) (2,867)
Inventories (734) 109 163
Accounts payable and accrued expenses 621 2,152 (25)
Prepaid expenses and other assets (413) 31 --
-----------------------------------
Cash flows provided by (used in) operating activities 6,831 3,973 (1,981)
-----------------------------------
Cash flows provided by (used in) investing activities:
Additions to property, plant and equipment (6,107) (2,564) (1,148)
Proceeds from sale of assets -- 114 4
Purchase of short-term investments (4,496) -- --
Proceeds from redemption of short-term investments 4,496 -- --
-----------------------------------
Cash flows used in investing activities (6,107) (2,450) (1,144)
-----------------------------------
Cash flows provided by (used in) financing activities:
Investment by (payments to) parent company -- (1,107) 3,121
Repayment of borrowings (11,142) (342) (22)
Proceeds from shares issued 19,545 -- --
-----------------------------------
Cash flows provided by (used in) financing activities 8,403 (1,449) 3,099
-----------------------------------
Increase (decrease) in cash 9,127 74 (26)
Cash at beginning of year 173 99 125
-----------------------------------
Cash at end of year $ 9,300 $ 173 $ 99
===================================
Supplemental disclosure of cash flow information:
Interest paid $ 14 $ 316 $ 115
Income taxes paid 226 -- --
-----------------------------------
</TABLE>
The notes are an integral part of the financial statements.
13
<PAGE> 8
CERION TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
DESCRIPTION OF BUSINESS
Business Definition: Until its initial public offering in May 1996, the business
of Cerion Technologies Inc. ("the Company") had been operated by Nashua
Corporation ("Nashua" or "the Parent") since its acquisition in 1986 by Nashua.
As of December 31, 1995, Nashua converted the Company into a wholly owned
subsidiary of Nashua and contributed to it the business of the Nashua Precision
Technologies Division in return for the Company's stock and its assumption of
the liabilities of the business. The Company was renamed Cerion Technologies
Inc. on March 4, 1996.
The Company develops, manufactures and markets precision-machined aluminum
disk substrates that are used in the production of magnetic thin-film disks for
the hard disk drives of portable and desktop computers, network servers, add-on
storage devices and storage upgrades. The Company also produces organic
photoconductor drum substrates for laser printer cartridges. The Company
operates in one business segment. All sales are denominated in U.S. dollars.
Basis of Presentation: The accompanying financial statements for the years ended
December 31, 1995 and 1994 and the period January 1, 1996 through May 24, 1996,
have been prepared as if the Company had operated as an independent, stand-alone
entity for all periods presented. Such financial statements have been prepared
using the historical basis of accounting and include all of the assets,
liabilities, revenues and expenses of the Company previously included in
Nashua's consolidated financial statements; however, certain adjustments have
been made to reflect the operations of the Company on a stand-alone basis.
Consequently, these statements include balances for other assets and liabilities
related to the Company that were previously included in Nashua's consolidated
financial statements except that there is no allocation to the Company of
Nashua's borrowings. However, an allocation of Nashua's interest expense has
been recorded as determined based upon the Company's net assets as a proportion
of Nashua's consolidated net assets. Management believes that the basis for such
allocations is reasonable. The Company's results of operations were included in
Nashua's Federal, state and local income tax returns through May 24, 1996. See
"Parent Company Investment" in the following notes. In accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 55 ("SAB 55"),
these statements have been adjusted to include certain corporate expenses
incurred by the Parent on the Company's behalf. The financial statements may not
necessarily present the Company's financial position and results of operations
as if the Company were a stand-alone entity. As of May 24, 1996, the Company's
financial statements have been presented on a stand-alone basis.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories: The Company values all of its inventories at the lower of cost or
market on a first-in, first-out basis (FIFO).
Property, Plant and Equipment, Net: Property, plant and equipment is recorded at
cost. Expenditures for maintenance and repairs are charged to expense while the
costs of significant improvements are capitalized. Depreciation is provided
using the straight-line method. Upon retirement or sale, the cost of assets
disposed and the related accumulated depreciation are eliminated and related
gains or losses reflected in the statement of operations. The estimated useful
lives of the assets are as follows:
<TABLE>
<S> <C>
Buildings and improvements 10 to 40 years
Machinery and equipment 4 to 10 years
Furniture and fixtures 3 to 10 years
Shipping containers 2 years
</TABLE>
14
<PAGE> 9
Revenue Recognition: Sales of products are recognized based on product shipment
to customers.
Research, Development and Engineering: Included in selling, general and
administrative expenses are research, development and engineering expenditures
of $1,302,000, $809,000 and $787,000 for the years ended December 31, 1996, 1995
and 1994, respectively. Research, development and engineering expenditures are
charged to operations as incurred.
Income Taxes: The results of the Company's operations have been included in the
Federal and state consolidated income tax returns of the Parent for the years
ended December 31, 1995 and 1994. The provisions (benefit) for income taxes
included in these financial statements have been calculated as if the Company
were a stand-alone taxpayer.
Prepaid or deferred income taxes result principally from the use of different
methods of depreciation for income tax and financial reporting purposes, the
recognition of expenses for financial reporting purposes in years different from
those in which the expenses are deductible for income tax purposes and the
recognition of the tax benefit of net operating losses.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at December 31, 1996 and 1995
and the reported amounts of net sales and expenses during the three years in the
period ended December 31, 1996. Actual results could differ from those
estimates.
Cash Equivalents: The Company considers all highly liquid investment instruments
purchased with an original maturity of three months or less to be cash
equivalents. At December 31, 1996, the Company held $7.4 million of various
commercial paper instruments carried at cost, which approximated market.
Accounting for Stock-Based Compensation: In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company has
decided to adopt SFAS 123 through disclosure only.
Impairment of Long-Lived Assets: In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"). The adoption of SFAS 121 had no impact on the
Company's financial statements.
Net Income Per Share: Net income per share for the period presented is
determined by dividing net income applicable to Common Stock by the weighted
average number of common shares outstanding during the period.
RELATED PARTY TRANSACTIONS AND ALLOCATIONS
Cash: The Company utilized Nashua's centralized cash management services until
May 30, 1996. Under arrangements with Nashua, excess cash generated by the
Company was retained by Nashua until May 24, 1996.
Product Sales: During the years ended December 31, 1996, 1995 and 1994, the
Company had sales of approximately $208,000, $645,000 and $5,541,000,
respectively, to divisions of Nashua. The amounts due from these divisions have
been included in the Parent Company Investment and were approximately $643,000
at December 31, 1995. The Company believes that the product prices for such
sales were substantially at market prices.
15
<PAGE> 10
Corporate Services: In accordance with SAB 55, Nashua has allocated a portion of
its domestic corporate expenses and charges to its divisions, including to the
Company through May 24, 1996. These expenses have included management and
corporate overhead; benefit administration; risk management/insurance
administration; tax and treasury/cash management services; environmental
services; litigation administration services; and other support and executive
functions. Allocations and charges for services were based on either a direct
cost pass-through or a percentage allocation based on factors such as net sales,
management time or headcount. Such allocations and corporate charges totaled
$147,000, $227,000 and $88,000 for the years ended December 31, 1996, 1995 and
1994, respectively. The allocation and charges ceased on May 24, 1996.
Domestic research and development expenses of the Parent related to the
Company's business and allocated to the Company in accordance with SAB 55
totaled $70,000, $69,000 and $48,000 for the years ended December 31, 1996, 1995
and 1994, respectively, which are included in selling, general and
administrative expenses.
Management believes that the basis used for allocating corporate services was
reasonable. However, the terms of these transactions may have differed from
those that would have resulted from transactions among unrelated parties.
Management believes that related expenses that would have been incurred during
the year ended December 31, 1995 had the Company operated on a stand-alone basis
would have approximated $784,000 (unaudited).
Employee fringe benefit expenses were allocated to the Company based on
Nashua's total benefits costs and the proportion of Nashua's total salaries and
wages represented by the Company's salaries and wages. Fringe benefit costs,
which are reflected in cost of sales and selling, general and administrative
expenses, include employer FICA and unemployment taxes, medical insurance and
annual accruals or contributions made for the Nashua Corporation Retirement Plan
for Salaried Employees, the Nashua Corporation Hourly Employees Retirement Plan
and the Nashua Corporation Employees' Savings Plan. See "Employee Retirement
Plans" in the following notes. The Company was allocated $168,000, $290,000 and
$259,000 for the years ended December 31, 1996, 1995 and 1994, respectively, for
these expenses. Management believes the allocation method for fringe benefit
costs was reasonable. Such allocation ceased on May 24, 1996.
INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 442,000 $258,000
Work in progress 19,000 6,000
Finished goods 585,000 48,000
-----------------------------
$1,046,000 $312,000
=============================
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Land $ 260,000 $ 185,000
Buildings and improvements 3,908,000 2,629,000
Machinery and equipment 7,571,000 3,250,000
Furniture and fixtures 302,000 113,000
Construction in progress 4,000 888,000
Containers 1,882,000 730,000
-----------------------------
13,927,000 7,795,000
Less: accumulated depreciation (4,536,000) (2,430,000)
-----------------------------
$ 9,391,000 $ 5,365,000
-----------------------------
</TABLE>
16
<PAGE> 11
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Accounts payable - trade $1,802,000 $1,319,000
Container deposits 585,000 710,000
Accrued payroll and benefits 661,000 574,000
Bank overdraft - 380,000
Other 646,000 90,000
----------------------------
$3,694,000 $3,073,000
============================
</TABLE>
EMPLOYEE RETIREMENT PLANS
The Company has not adopted any defined benefit plans, but adopted the Cerion
Technologies Inc. Employees Savings Plan ("Savings Plan") in 1996. The Savings
Plan allows full-time employees to become eligible in the month following
employment to make certain tax-deferred voluntary contributions which the
Company generally matches with a 50 percent contribution, limited to three
percent of an employee's base pay.
Retirement benefits were provided to the Company's employees through the
Nashua Corporation Employees' Savings Plan ("Nashua Savings Plan"), the Nashua
Corporation Hourly Employees' Retirement Plan and the Nashua Corporation
Retirement Plan for Salaried Employees ("Retirement Plans") until May 24, 1996.
The Retirement Plans were defined benefit plans. Guaranteed retirement income
levels were determined based on years of service and salary levels as integrated
with Social Security benefits. Employees were eligible under the Retirement
Plans after one year of continuous service and were 100 percent vested after
five years of service. Nashua's Retirement Plans are subject to Internal Revenue
Service and ERISA funding limitations. Assets of the plans were invested in
interest-bearing cash equivalents, fixed-income securities and common stocks.
Total expense under the Nashua Savings and Retirement Plans for the years
presented through May 24, 1996 is included in the Company's financial statements
through the fringe benefit allocations discussed in a prior note: "Summary of
Significant Accounting Policies." Nashua has not performed a separate actuarial
calculation of the status of the Retirement Plans for the Company and the
Company's employees were terminated from future participation in the plan as of
May 24, 1996. Nashua's Savings Plan had similar terms and limitations as
Cerion's Savings Plan.
LEASES
Lease agreements cover warehouse space, office equipment and an automobile under
operating lease arrangements. These leases have expiration dates through 1999.
Rental expense was approximately $92,000 in 1996, $78,000 in 1995 and $72,000 in
1994. Future minimum rents payable under noncancelable leases with initial terms
exceeding one year are as follows: $53,000 in 1997, $9,000 in 1998 and $6,000 in
1999.
17
<PAGE> 12
INCOME TAXES
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,783,000 $1,736,000 $(137,000)
State 380,000 316,000 (23,000)
---------------------------------------------
Total current 2,163,000 2,052,000 (160,000)
Deferred:
Federal (171,000) 134,000 47,000
State (78,000) 24,000 8,000
---------------------------------------------
Total deferred (249,000) 158,000 55,000
---------------------------------------------
Provision (benefit) for income taxes $1,914,000 $2,210,000 $(105,000)
=============================================
</TABLE>
Deferred tax liabilities and assets are comprised of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ 273,000 $ 343,000
---------------------------
Deferred tax assets:
Accrued vacation $ 63,000 $ 36,000
Inventory reserve 187,000 20,000
Bad debt reserve 54,000 20,000
Other 116,000 18,000
---------------------------
420,000 94,000
Deferred tax asset valuation allowance (147,000) -
---------------------------
$ 273,000 $ 94,000
===========================
</TABLE>
Reconciliation between income taxes computed using the Federal statutory income
tax rate and the Company's effective tax rate are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% (35.0)%
State and local income taxes, net of Federal tax benefit 4.7% 3.9% (3.4)%
Tax asset valuation reserve 3.3% - -
Other, net 0.3% 0.2% 1.9 %
----------------------------------------
Effective tax rate 43.3% 39.1% (36.5)%
========================================
</TABLE>
18
<PAGE> 13
STOCKHOLDERS' EQUITY
The Company, on December 31, 1995 initially issued 5,400,000 shares of Common
Stock, $.01 par value per share, to Nashua. In exchange, Nashua contributed to
the Company the business of the Nashua Precision Technologies Division,
including the liabilities of the business.
<TABLE>
<CAPTION>
Parent Company Common Paid-in Retained
Investment Stock Capital Earnings
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, December 31, 1995 $ 8,458,000 $ - $ - $ -
Issuance of Common Stock (8,458,000) 54,000 8,404,000 -
Nashua Notes - - (9,294,000) (1,848,000)
Proceeds from initial public offering
and selling of 1,615,000 shares - 16,000 19,509,000 -
Issuance of Common Stock in lieu
of cash payment of directors' fees - - 20,000 -
Net income - - - 2,505,000
-------------------------------------------------------------------
Balances, December 31, 1996 $ - $ 70,000 $ 18,639,000 $ 657,000
===================================================================
</TABLE>
Issuance of Notes Payable to the Parent: As of March 1, 1996, Cerion distributed
a dividend to Nashua in the form of a Promissory Note (the "First Nashua Note")
payable to Nashua in the principal sum of $10,000,000. The First Nashua Note had
an annual interest rate of 7.32 percent from March 1, 1996 to September 30,
1996.
As of March 29, 1996, the Company distributed a second dividend to Nashua in
the form of a Promissory Note (the "Second Nashua Note") payable to Nashua in
the principal amount of $1,142,000. The Second Nashua Note had an annual
interest rate of 7.32 percent. On May 31, 1996, the Company repaid the two
outstanding Promissory Notes having a combined principal sum of $11,142,000.
Stock Split: During March 1996, the Company effected a 1,800-for-one stock
split. All share data in the accompanying financial statements have been
retroactively restated to reflect the stock split.
On May 30, 1996, the Company closed its initial public offering of its stock
with the sale of 4,416,000 shares of its Common Stock. Of the 4,416,000 shares
of Common Stock sold, 1,615,000 shares were sold by the Company and 2,801,000
were sold by Nashua. Nashua continues to own approximately 37 percent of the
Company's outstanding Common Stock. The shares were sold to the public at $13.00
per share. The net proceeds to the Company after the underwriting discount were
$19,525,350.
PARENT COMPANY INVESTMENTS
Because the Company operated at various times as a division and as part of a
wholly owned subsidiary of Nashua, its equity accounts have been combined and
presented as Parent Company Investment as of December 31, 1995 and 1994. Parent
Company Investment also includes balances related to intercompany transactions
and other charges and credits as more fully described in a prior note: "Summary
of Significant Accounting Policies." No interest has been charged on Parent
Company Investment. A summary of changes in Parent Company Investment is as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 8,458,000 $ 6,121,000 $ 3,183,000
Net income (loss) -- 3,444,000 (183,000)
Issuance of Common Stock (8,458,000) -- --
Advances from (payments to) Parent, net -- (1,107,000) 3,121,000
------------------------------------------------
Ending balance $ -- $ 8,458,000 $ 6,121,000
================================================
</TABLE>
19
<PAGE> 14
CONCENTRATION OF BUSINESS ACTIVITIES
Customer Concentration: During the years ended December 31, 1996 and 1995, the
Company shipped the majority of its aluminum disk substrates to two customers.
These two customers represented approximately 45 percent and 41 percent, in the
year ended December 31, 1995 and approximately 29 percent and 44 percent in the
year ended December 31, 1996, respectively, of net sales.
Concentration of Credit Risk: The Company sells substantially all of its
production to customers in the U.S., with approximately 11 percent of 1996 sales
being made to companies located in the Pacific Rim. The Company performs
periodic credit evaluations of its customers. The Company does not require
collateral for its receivables and maintains an allowance for potential credit
losses.
Dependence on Supplier: The Company relies solely on one supplier for aluminum
blanks used in the manufacture of aluminum disk substrates. Aluminum blank
purchases were approximately $8,536,000, $5,729,000 and $3,252,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
1996 STOCK INCENTIVE PLAN
In February 1996, the Board of Directors adopted the 1996 Stock Incentive Plan
(the "Plan") and reserved 701,500 shares of Common Stock, of which options for
370,180 shares of Common Stock have been granted by the Company to certain
employees and directors effective upon completion of the initial public offering
and remain outstanding, and 1,184 shares have been granted to two directors. The
Plan provides for grants of incentive stock options to employees and directors
of the Company and grants of stock to non-employee directors of the Company.
The options are separated into two categories with different vesting
provisions. The first category, one-year vesting options, will become
exercisable on the first anniversary date of the option grant if the optionee
remains an employee or director of the Company on such date. The second
category, performance-accelerated options, will become exercisable in tranches
of 25 percent each based upon the Common Stock trading, for a period of 20
consecutive trading days, at an average premium of 25 percent, 50 percent, 75
percent and 100 percent, respectively, above the initial public offering price,
if the optionee remains an employee of the Company on such date. However, if any
such performance goals are met prior to the first anniversary of the grant date,
the shares that would otherwise become exercisable thereby only become
exercisable on the first anniversary date of the grant date, if the optionee
remains an employee of the Company on such date. On the eighth anniversary of
the grant date, any remaining shares subject to a "performance-accelerated"
option will become exercisable, if the optionee remains an employee of the
Company on such date.
In the event of a merger, consolidation, reverse merger or reorganization, or
certain other events constituting a "Change in Corporate Control" as defined in
the Plan, options outstanding under the Plan automatically will become fully
vested and will terminate if not exercised prior to such event.
No option granted under the Plan may be exercised after the expiration of ten
years from the date it was granted. The exercise price of options under the Plan
will equal the fair market value of the Common Stock on the date prior to the
grant. The Plan will terminate in January 2006, unless earlier terminated by the
Board of Directors.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), by electing to continue to apply the intrinsic value-based method of
accounting for stock-based compensation. Had compensation cost been determined
on the basis of fair value pursuant to SFAS 123, net income and net income per
share for 1996 would have been $1,139,000 and $0.18. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
grants: dividend yield of zero percent for all years, expected volatility of 64
percent, risk-free interest rate of 6.2 percent and expected lives of 5.8 years.
20
<PAGE> 15
A summary of the status of the Company's stock options under the incentive plan
follows:
<TABLE>
<CAPTION>
Outstanding Options Price Exercisable
Options per share Options
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1995 0 - -
Options granted 422,680 $13.00 None
Options forfeited 52,500 $13.00 None
-------------------------------------------
December 31, 1996 370,180 $13.00 None
===========================================
</TABLE>
REVOLVING CREDIT FACILITY
The Company secured on March 7, 1997 a $7.5 million revolving credit facility
("facility") that matures March 7, 2000. The facility is collateralized by all
the Company's assets and the Company may borrow against the facility based upon
prescribed advance rates applied to the Company's accounts receivable and
inventories.
The facility bears interest at the bank's prime rate plus 1/4 percent. The
facility's terms include a fee for the unused portion of the credit facility
equal to 3/8 percent, payable monthly. The facility contains certain covenants
including the maintenance of certain financial ratios.
In connection with the obtaining of the facility, the Company paid a
commitment fee equal to 100 basis points of the total facility and other costs
totaling approximately $100,000 in 1997. These costs will be amortized over the
term of the facility.
LEGAL PROCEEDINGS
In August and September 1996, two individual plaintiffs initiated lawsuits
against the Company, Nashua, certain directors and officers of the Company, and
the Company's underwriter, on behalf of classes consisting of all persons who
purchased the Common Stock of the Company between May 24, 1996 and July 9, 1996.
The complaints allege that, in connection with the Company's initial public
offering, the defendants issued certain materially false and misleading
statements and omitted the disclosure of material facts, in particular, certain
matters concerning significant customer relationships. The complaints seek
damages and injunctive relief. The Company believes these lawsuits are without
merit and it has substantial defenses and intends to defend vigorously against
these actions.
LIQUIDITY MATTERS
During the second half of 1996, industry market supply exceeded demand resulting
in significant pricing and volume reductions and net losses for each of the last
two quarters of 1996. No assurance can be given that further backwards
integration by thin-film media manufacturers or other industry factors will not
result in canceled orders or further volume reductions beyond levels experienced
in the second half of 1996. Additionally, the Company does not believe current
market conditions will support price increases in the foreseeable future. Unless
the Company achieves substantial cost improvements, experiences increased demand
for its products and/or stabilizes pricing, the Company will continue to incur
operating net losses and negative cash flows from operating activities. Without
such cost improvements, increased demand and/or pricing stabilization, the
Company could, over an extended period of time, exhaust substantially all of its
cash resources and borrowing availability. In such event, the Company would be
required to pursue other alternatives to improve liquidity, including initiating
plans for further cost reductions, selling assets, deferring certain capital
expenditures and obtaining additional funding sources. No assurance can be given
that the Company will be able to successfully pursue such alternatives.
21
<PAGE> 16
QUARTERLY OPERATING RESULTS AND COMMON STOCK INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Net sales $11,774 $13,440 $5,521 $ 5,805 $36,540
Gross profit (loss) 4,676 4,984 560 (409) 9,811
Operating income (loss) 3,200 3,592 (879) (1,663) 4,250
Net income (loss) 1,848 2,204 (467) (1,080) 2,505
Net income (loss) per common share .34 .36 (.07) (.15) .39
Market bid price:
High N/A 19.50 11.25 9.19 19.50
Low N/A 8.00 2.25 2.75 2.25
1995
Net sales $ 5,028 $ 5,890 $7,232 $ 10,025 $28,175
Gross profit 1,148 1,607 2,131 3,621 8,507
Operating income 640 1,123 1,478 2,729 5,970
Net income 338 636 854 1,616 3,444
</TABLE>
N/A - information not applicable as the Company's stock began trading on NASDAQ
on May 24, 1996.
The Company's stock is traded on the Nasdaq National Market. At March 24, 1997,
there were approximately 3,800 record holders of Cerion's Common Stock.
22
<PAGE> 17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Cerion Technologies Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations and of cash flows present fairly, in all material respects, the
financial position of Cerion Technologies Inc. at December 31, 1996 and 1995,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in the "Liquidity Matters" note to the financial statements,
industry market supply exceeded demand during the second half of 1996 resulting
in significant pricing and volume reductions and net losses for each of the last
two quarters of 1996.
Price Waterhouse LLP
Chicago, Illinois
February 3, 1997,
except as to the "Revolving Credit Facility" note,
which is as of March 7, 1997
23
